Podcast – What’s Ahead For The Recovery?

Marcia Cuenca
September 8, 2021
Podcast – What’s Ahead For The Recovery?


On the road to economic recovery with Dr. Peter Linneman founding principle of Linnemann Associates and the founding chairman of The Wharton Real Estate Department. On this episode Peter discusses the health of the economy, what real estate sectors to look into, and the economic data he's tracking.

About Linneman Associates
Linneman Associates, LLC is a premier consulting and research firm, specializing in commercial real estate investment strategy. Their clients represent a wide range of industries and countries, but primarily include institutional investors, REITs, developers, and opportunistic private equity firms seeking to implement thoughtful and disciplined investment strategies. Their clients value their market insights and analyses as well as their ability to assess and simplify the ever-changing macroeconomic, political, and capital market environments, particularly as they relate to commercial real estate investing.

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Transcript

Adam Hooper (00:03) Hello and welcome, I’m RealCrowd CEO Adam Hooper, and this is the Real Estate Investing For Your Future podcast. Here we explore the latest in commercial real estate trends, insights and investment strategies that passive investors can use to build real estate portfolios that last

Disclaimer (00:21) All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of real crowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions to gain a better understanding of the risks associated with commercial real estate investing. Please consult your advisors.

Adam Hooper (00:55) Our guest today is Peter Linneman, founding principle of Linnemann Associates and the founding chairman of The Wharton Real Estate Department. Yes, that Wharton. In today's conversation, Peter discusses the health of the economy and what's happening in the real estate space today. We also went over some of the calls that he made early in the pandemic, as well as the factors he's tracking to see how far along we are in this economic recovery. We hope you enjoy today's episode with Peter Linneman.

Adam Hooper (01:49) Well, Peter, thank you so much for joining us again here today. It's always a pleasure to have you on the show and thank you again so much for taking the time out of we know your busy day to come share your thoughts with us.

Dr. Peter Linneman (02:00) Thank you for having me back.

Adam Hooper (02:02) So it's been, I guess, a little over a year since we spoke, um, things have changed. Some things haven't changed, some things have started again. So why don't you take us through just a, a snapshot of maybe how things are a little bit different this year than when we spoke, uh, late summer, last year of 2020?

Dr. Peter Linneman (02:22) Well, it's interesting. Um, obviously the economy has made great strides forward, although it still has some distance to go. The economy, uh, in real GDP is basically equal to where it was at the end of, uh, December in 2019. So in that sense, the economy is back. However, remember in the intervening months, the economy probably would have grown. You got to have a long discussion, three to 4%. So in that sense, we're about three to 4% short of where we quote should be. Uh, but it's good news that we're back to where we were. If you look at employment, another metric of where we're at, uh, we are about, uh, 6 million jobs short of where we were before all this began. And just to give a rough order of magnitude, think we were at, I'm doing off the top of my head. We were at 158 million jobs. So we're 6 million short of where we were. So the good news is if you thought of GDP per workers, same GDP, fewer workers were doing a bit higher out. From those that are working the bad news is a whole lot of people could still be contributing. And in fact, if you think about in those intervening months, you would have guessed that employment would have grown by 3 million, roughly.

Dr. Peter Linneman (04:14) So we're three to 4% of where we could have been or should have been, or might've been in GDP and some number like a 6 million, excuse me, a 9 million job short of where we would have been. The interesting thing is in terms of jobs, job openings, at least as formally measured are at an all time high. And of course, even in a perfect economy, you're going to have job openings, right.

Dr. Peter Linneman (04:48) Somebody died and you're replacing them, you're growing and you're looking for someone. But we're in abnormally high job openings and probably three to 4 million, maybe even as high as 5 million of those job openings are attributable to the fact that because of well-intended, but not perfectly designed unemployment benefits at the federal level, basically people making less than $25 an hour have been better off, not working than working. If you lost your job, if you lost your job because you don't get unemployment benefits, unless you were previously employed, that distinction is important because think of somebody who just graduated from high school in May, well, they don't qualify for unemployment benefits. And in fact, their employment rate is above normal and there have been more of those 16 to 19 year old’s drawn into the labor force, the normal, and what's happening.

Dr. Peter Linneman (06:07) There is some of the normal people who would be over the age of 19 that had a job lost a job, uh, were making less than $25 an hour are not working and are some of those jobs are being filled by teenagers who can't qualify for unemployment benefits, but probably three to 4 million jobs are just going unfilled.

Dr. Peter Linneman (06:37) And, you know, simply by looking around the people, making 10 to $25 an hour, just tons of those jobs everywhere, right? Every supermarket, every restaurant. Every retail store is understaffed in that regard. That ends September six. And my guess is within the two months after September 6th, you'll see most, not all, most of that, three to 4 million come back.

Dr. Peter Linneman (07:13) That'll be a notable boost to the economy because right now those people have income, but they're not producing. And what they will have is income and producing. And all of us are better off when people are producing then not producing. So that will be a big boost to the economy I look to set in. And the last thing I'd say about here we are, and the economy is, uh, when we talked a year ago, we were hopeful.

Dr. Peter Linneman (07:49) That vaccines would change the landscape and not just vaccines, right? Treatments would change the landscape. And, uh, we got part of our wish, right? The vaccines have changed the landscape, uh, massively for the better treatments have improved, not as much as you might've hoped for, but the vaccines have notably changed the landscape. Except as we sit here today, we have two big issues still hanging over us from an economy point of view about vaccinations. One is what, if anything do you do with the people who refuse to get vaccinated, who are not only affecting themselves, but they're affecting my restaurant. They're affecting my employees in the supermarket. They're affecting my hospital. Et cetera. So it's not just their decision. It's the impact. There's a decision is making on many other businesses and individuals. So that's one thing. And the second thing vis-a-vis the vaccine is it appears to have waning effectiveness. They appear to have waning effectiveness as time goes by, particularly among older and hence the booster so-called booster, um, effort.

Dr. Peter Linneman (09:20) And the funny thing is we're sitting here now, still wondering what do we do about COVID, but in a way it's different. Why we're wondering it, where we're still wondering, we know it works, but how long we're not sure of, and it doesn't work at all if people don't use it and that's important to the economy. And if you don't believe. Just to ask a restaurant owner, a theater owner, an airline owner, et cetera. It's important to the economy.

Adam Hooper Okay. There's a lot to unpack there. I think it's a great, great overview. Um, and so maybe let's go back to the, the beginning of that. So GDP we're at where we pretty much we're at the end of 2019. So there's kind of like this last year a notion, right? We, we, could've had a little bit of, you know, three, 4% growth, but we are now back at least to where we started, um, combining that with six actual numbers of jobs, but potentially up to 9 million jobs less. So this, something similar happened back in the global financial crisis of this notion of efficiency, right.

Adam Hooper (10:29) You're able to get the same amount of production out of far fewer workers. And, and I think it just took, it took a long time for those jobs to come back. Right. Employers just kind of learned how to be more efficient with less of a labor force, right. It sounds like you're seeing maybe a little bit more of a quicker spike back to some of those jobs to be filled. How would you contrast that maybe?

Dr. Peter Linneman (10:53) Here’ why? Yeah. The reason I see something like a spike is because we had such an artificial dampening. If you think about the discussions over my life, you're like, my life is much longer about unemployment benefits. It has always been around how much, what percent of their previous wage income should we give. So they've got an incentive to go back to work, right? And, and there's no magic answer to that, but the answer has never been a hundred to 130%. The answer has never been, you lose your job and you do better. And day to day income, right? That's never been the answer, but it has been the answer pretty much for the last 18 months.

Dr. Peter Linneman (11:54) And that's why I see a spike as we go back to the normal question. Do I know everybody goes back to work? Um, that was on unemployment as their unemployment drops them from getting 120% of their former income to a 50%. I don't think everybody will, some are still going to stay home and try to homeschool with their children or whatever or whatever, but I know some of them are, and that's why I think you'll see a pretty quick jump. And then we get back to what you were saying, the kind of slower thereafter, uh, job growth, real growth, but a more long game, a long time.

Adam Hooper (12:44) And then, so I guess further onto that of you, your comment of, of the newly entering to the job market unemployment, you're not eligible for unemployment there. So where, where is that job loss mostly occurring? Right? On a prior podcast, we had a conversation and there's, I think there was almost a, I forget the exact number, the top of my head, but you know, hundreds of thousands of manufacturing jobs that are still vacant and available right now for hiring, you mentioned job wanted, you know, hiring is a highest level right now.

Dr. Peter Linneman (13:14) Yeah, I think. I'm doing this from the top of my head. Yeah. I think it's like 11 million, right? 11 million quote, formal job openings. Now that doesn't count the fact you're thinking about hiring somebody, if you could find them. Right. But 11 million, it's a big number. And I think I'm doing from memory. It was like 6 million or 5 million. Uh, at the end of 2019. So that's a big jump. That's a big jump right there. It's like a a hundred percent increase in the number of openings. The mass of those openings are concentrated in the, um, $25 an hour and less. And, um, when the money for nothing. And, uh, you're just going to see a lot of people say, I need to make more. I just need to make more in the only way I can make more is to go to work, which is the traditional, what, for lack of a better phrase, it's true. Traditional. So I think over the next two months, you'll see the job openings tapered down a little as people take jobs and the employment. Spike up a bit as normalcy returns, but it's not going to happen in a day.

Adam Hooper (14:41) Yeah. And this is something we've talked about a few times on the show of this, this, uh, kind of transient nature of these, these metrics looking really good, right. GDP in Q2 was up 12% year over year. Well, of course, because it's relative to a really terrible quarter the year before. Um, so seeing again, this spike that you're, you're calling for here in the next couple months of, of job growth and employment increase, uh, w w what are the, the numbers underneath that, right? Like what are the underlying trends, if you, if you accommodate for the fact that some of these numbers just look so fantastic because they're, they're compared to such a horrific baseline.

Dr. Peter Linneman (15:18)  So I wrote, um, uh, first of all, those three to 4 million jobs, they should have already returned by. Had it not been for the aberrant unemployment incentive, right. They would have already been here for several months by now. Um, we distinct ensure to the previous peak, but we'd have been a lot closer. The other is I wrote in late about a year ago. Actually, I wrote that next year, hopefully all year over year comparisons are meaningless, right? For the reason you say, you know, a baby doubled its weight.

Dr. Peter Linneman (15:58) Well, the baby's not going to double its weight forever. Right? It went from being an infant to, and it's that type of phenomenon. And I'll tell you where it shows up most dramatically is an inflation numbers, headline, inflation numbers, consumer price index, kind of inflation numbers year over year. Which has like been the last three months or something like I'm doing it again from memory 4.6% year over year. And then it was like 5.2. And then it's like 5.8 year over year. Well, let's go back and talk about a year ago. That is to say, is the rise about how high prices are today or is it about how low they were then? And I point out to people that in April late April last year, the price of oil was negative. It wasn't even a dollar a barrel. It was negative. Well, that's not normal. If it goes from bizarre. To even half of normal, it's huge inflation. And of course, you can imagine oil rippled through resins, it rippled through plastics, it rippled through all kinds of other sectors in that regard. So that's one thing to bear in mind that year over year is kind of meaningless.

Dr. Peter Linneman (17:27) I'll give you another example. There are a lot of them, which is, um, year over year, uh, hotel rates are up by 150% room rates. You go, wow, that's inflationary. And you don't know. At the end of 2019, they were a hundred a year ago. They were at 20 and they're back to, uh, they're back to 50, not remotely recovered, but up off the floor.

Dr. Peter Linneman (17:59) So that's not inflation. Third, I'll give you another one makes a lot of headline. You get the used car headline, you know, how much used car prices have gone up? That's all about two phenomena, which is an April, May last year, the car rental companies were going bankrupt. If you were going bankrupt, what would you do to generate cash? If you were a rental car company, so your fleet, so you sold your fleet and got cash. They sold about 80% of their fleet that flooded the used car market with used cars a year ago. At the same time demand was non-existent right? Because who was buying a car last April, may nobody. So a year ago you had an, an unparalleled spurt of used cars onto the market. At the same time, you had very little demand and the prices. Flash forward a year. Well, now the auto company, the used car, excuse me, the car rental companies, which are a regular source of used cars. They're not selling any cars. They need every car. They've got to have their rental fleet. So you've dried up a source of used cars.

Dr. Peter Linneman (19:21) And at the same time demands back to 2019 level because GDPs back to 2019 level, and guess what? You get a big spike in used car prices. Economics works. In other words of the 5.8% increase year over year and CP and consumer prices. 20% of that entire increase is attributable to the fact that used car prices went up.

Dr. Peter Linneman (19:54) Well, that's just bizarre, right? That's not normal. That's what you were saying. It's just bizarre year over year comparison. Right? So that makes all these numbers you're seeing year over year kind of strange. And when you add to it, one more thing on inflation, who raised prices last year, nobody, even if you could, you didn't raise prices. Did, did the toilet paper manufacturers raise toilet paper prices a year ago when there was huge demand and there were shortages? No. Why didn't they raise prices? Because if they had raised prices they'd have been crucified. Right. They would have been crucified literally. So what they did was not raise prices. So essentially 2020 was a year where anybody who could have raised prices, kept them the same. And anybody else saw price decreases? Well, what do you think 2021 is going to look like if we're fortunate enough to have recovered and you get two years of price increases happening in a year, hence these high, uh, inflation prices you see.

Adam Hooper (21:12) So I take it, you're more in the transitory camp for inflation. And if so, how long until we get back to a baseline where we can get a better feel for what the, again, what the actual underlying trends are with that.

Dr. Peter Linneman (21:25) that. So I think the best way to view the underlying trend takes a little math, which do the two year annualized inflation rate. And suddenly you come up with numbers like 2.3%, especially then you need to say to get a sense of real what's going on. Take out used cars, which was aberrant take out oil, which was aberrant or anything close to oil. Right. Um, I mean, I have to pay you to take a barrel of oil from me. Come on. That's not normal. So take out these extreme abnormalities and then you also have to be aware. Lumber got a lot of press lumber prices skyrocketed. Why? Because lumber like many other industries last April and May slash capacity, all the PR. And I was in some of these boardrooms saying, you know, hoard your cash, shut down investments, shut down expansion, send people home because it's safe. Shut down capacity, et cetera. Well, if you shut down capacity and depending on the sector of the economy, it, it shrunk by anywhere from 4 to 40%. If capacity, shrunk four to 40% and GDP is back. You're going to have price spikes in areas that shut back capacity. And what you saw on lumber, I think is pretty typical of what will happen. You saw a big spike and from that spike peak lumbers down by 50% still above where it started, that is to say capacity, isn't all the way back, but it's coming and you're going to see that in a lot of sectors. Do you really think used cars are going to go up at that rate? Forever? Of course not. So to take a year to two more years, to get everything normalized.

Dr. Peter Linneman (23:28) And when you look back at the data, you can imagine you're working on your PhD 35 years from now, and you go back and look at this data, you know, nothing about it. You're going go. What the heck? Happened to these things, right. They're just off the charts.

Adam Hooper (23:45) Right. So I guess maybe transitioning that a little bit more into the real estate side of things. We talked about migration trends and this, this urban Exodus, um, and some of the migration patterns. Have you seen those materialize? What, what have you seen in terms of just people movement throughout this year?

Dr. Peter Linneman (24:03): I think I got that one pretty right. I think I got, by the way, there are things I got wrong, but I think I got that one pretty right. One of the things I was saying a year ago is the balance between amenity and disseminates in the urban area. Urban let's just think urban, suburban, right. To kind of contrast the two. And if you think about a scale, which on the one hand are the good things that on the other hand are the bad things. What happened in the urban area is most of the good things like eating out, going to the ball game, going to the theater, getting together, a two minute walk with my friends, short commute to work, all those good things got wiped off the scale, but all the negatives were still there. And with a bit more with the increasing crime, et cetera, right. And the risk in subways or whatever on, at the same time, the suburbs had all the good things of the suburbs were sort of the same and the bad things were sort of the same. So they looked relatively more attractive. And I said a year ago or little, actually over a year ago, that what you to have happened is all the people that were planning to leave the city pre COVID. They were planning to leave the city in 2021 or 2020, 2021, 2022. You know, my child's four years old, I can't afford private schools, or I don't want to bring my kid up in the city or we've had enough of the city we're going to stay here another year or two, all those people left in 2020. So you got essentially three years worth of people leaving in 2020.

Dr. Peter Linneman (25:59) That was the bad news for the city. Good news for the suburbs. The flip side of that is they've all left. When you get to 2021, 2022, they've already left. They can't leave twice. And what you would get is a reversal in the data. You'd see people coming in per normal, but nobody leaving that's because the people were going to leave already left

Adam Hooper (26:23) And it's already had the flushed out. Yeah.

Dr. Peter Linneman (26:26) So that's pretty much is what's happened. And the urban areas seem to have hit bottom. Around January to why say urban core areas hit bottom, January, February in terms of apartment activity, people movement, migration, et cetera. Now the suburbs have always grown faster than the city that will continue. but that one time phenomena kind of what has reversed and some of those people are going to come back to the city. When they're you have to go to work again.

Adam Hooper (27:09) Yeah, I think that's the, one of those unknowns is how much will this remote work environment still persist past this? Right? I mean, we've seen some of the bigger companies just indefinitely continue this remote first. And then we've seen some say, you're coming back to the office and then some capitulation around that. I still don't know that we have an answer yet in terms of what the long-term nature of the workforce looks like from a remote perspective, any, any insights there, anything you've been seeing, that's indicated sure.

Dr. Peter Linneman (27:38) There isn’t insights. I can give you a couple of what I think are insights. The listener can decide. One is it's very interesting to hear people talk about their experience with online learning, right? Whether it's a college student, high school student grade school with the parents, et cetera, and generically, what you hear about online education is it's anywhere from 30 to 60% less effective, right?

Dr. Peter Linneman (28:10) And I'm not trying to put a sharp pencil on it, but it's less effective for all the reasons. Right? Why do you think online working suddenly is 120% more efficient. It's got all the same limitations. Yes, you're dealing with adults, but let's face it. A lot of those adults have short attention spans and eruptions, you know, bad discipline, et cetera, et cetera, et cetera. One of the things I'm on a number of, uh, audit committees, uh, for companies and one of the things I've done casually, I don't want to overstate. This is all ask our audit teams, both internal and external. You're getting the job done. Yep. We're getting the job done. Great. Same amount of time, more time, less time. And the general answer is maybe 20% more. Probably the first quarter or two. It was 25 to 30% more time. Now it's down to 20%, more time, 15% more time. That is to say it is less efficient and those are process jobs. They have to be dealt with care. And most of what occurred. In those office buildings is process.

Dr. Peter Linneman (29:28) It's not the flash of creative genius, most of it's process. Right? Just, I mean that in a good sense, right? It's process and process benefits from being close to those you're processing with and being able to interact in real time with those you interact with. So, I think, I think we come back to the office and there are also social and sociological reasons.

Dr. Peter Linneman (29:59) Um, I want my boss to see me. I want my coworkers to see me. I want to virtue signal all those things. I want to win in the office politics. I think all of those exist. So I think people come back. Having said that I think employers myself included are being pretty wise by not forcing it until we have pretty good transparency on safety and that a 10% value gain. Let's just say it's 10% more efficient, which I think is I don't want to put my workers to risk over a 10% gain, especially if we think we sort this out in another three months or a year or something like that.

Adam Hooper (30:49) So then broad strokes, I guess let's go broad strokes health of the real estate industry. Now, obviously we can peel it apart a little bit more sector by sector, but generally, how would you say the health of the real estate space is currently and how has it responded I guess, to the, to the pandemic. And did it, were you surprised by anything or did anything, um, kind of seem unexpected in how we've reacted so far?

Dr. Peter Linneman (31:14) Let's take the income so-called income producing sectors, office, hotel apartments. Nothing there in those sectors terribly surprise me. Um, what did surprise me a little bit was how apartment construction starts and plunged that didn't surprise me, but that they came back a bit faster than I thought they would not massively faster, but maybe a half a year, six months, three months faster then I thought, um, but on the demand side, it was clear senior housing demand was going to depend on COVID getting it under control, vaccines, vaccinated, other protocols. And I'd still say that's true of senior demand. It's still that way, uh, hotels and travel same way. Right. And it's pretty much mapped where we are in terms of COVID safety international lagging in that region. Um, because of restrictions, um, apartment demand has been pretty much what we thought it would be solid, strong, um, um, office. It's hard to say what the demand is because nobody wants to commit if they don't have to industrial demand, uh, has been quite strong. Um, so I think from a supply and demand point of view, it's pretty much what we expected.

Dr. Peter Linneman (32:48) Capital there's there's debt has not abandoned real estate. Debt is still there. It's not aggressively pursuing, but there is debt still there. Borrowers are not seeing lenders trying to get them to pre-pay as has happened in the past or foreclose on a technicality. So debt capital is still there and there's plenty of equity.

Dr. Peter Linneman (33:17) So pricing has held pricing is not about interest rates. It's about available valuability of capital. So pricing has held because by and large availability of capital. So hell the biggest surprise to me, the biggest mistake I made, um, going back to March last year, April last year, I thought single family housing would get killed. I just thought it would get killed. And the reason was, uh, I knew a lot of people were going to lose their jobs and had lost their jobs who buys a home when you've lost the job, you don't have any income, you don't have any money. And the last thing you want to do is commit now to buy a home and who lends to somebody without a job. And so I thought they would get absolutely killed. Well, as you know, It got killed for about three months, right? April, may, June were bad months and then came back full steam, right? Really strong. Why two things? Uh, the one everybody says is low interest rates. It's not low interest rates. We've had low interest rates and that doesn't affect, uh, you don't find much relationship between low interest rates and people buying homes.

Dr. Peter Linneman (34:46) They gotta make a monthly somewhere, whether they're renting or owning where you saw it, roar back was because of down payments and you need a down payment to buy a home. I can have the monthly, but if I don't have a down payment, I can't buy a home. Right. I need a down payment. And, uh, that's the biggest issue. And what happened. Unprecedented was that as the shutdown occurred and the downturn occurred, we had very generous unemployment benefits where people were making more unemployed than employed, and they were going to make that for a year or more. So lenders were still willing to lend because they knew they had income, but more importantly, they got down payment.

Dr. Peter Linneman (35:43) Where did they get the down payment? They got the down payment because instead of taking a vacation to Florida or to Europe, or going to a 13 game season ticket package or going to the theater or going to restaurants, they had nothing to spend their money on. They had involuntary savings and the savings rate went from about 8% to 33% suddenly. In a matter of months, saved more than they had saved in years towards a down payment. Add to that. The terrible fact is a lot of people 70 and over died, um, 2, 3, 4, 6, 8, 10 years sooner than they would have normally died because of COVID those people left inheritances and I've estimated that probably 300,000 people, 300,000 people probably got something like 30, 40, 50, 60, 80,000 or more inheritance years before they expected to get it.

Dr. Peter Linneman (37:06) What did they do with that? Unexpected inheritance bought it off. They suddenly had the down payment. And so that I missed, I think I understand it, but I missed it. I, who would have guessed that people would be better off unemployed that employed that they'd have nothing to spend their money on. So their savings would go up during a downturn. But remember what normally happens during a downturn is you have to eat into your savings. And instead here, your savings are going to go, are going up and then add to that, the federal disbursements. And then on top of that, their beloved grandmother or mother died and it's horrible, but at least I had enough money now to, um, to, uh, have a down payment.

Adam Hooper (38:02)  Hmm. So, and again, that's, that's a fascinating take on it. Again, those, all those nuances that went into it, I think there was certainly even we were speaking last year, there was, um, an unknown, or I guess maybe an expectation that there was going to be distress across more of the property sectors that with the small exception of maybe a few retail projects, some, some hospitality distress really hasn't materialized yet. Do you think we're, do you think we're out of the woods of that or is there still a chance for some of that to occur? I mean, what is your take on why that distress or, you know, tons of capital that was raised for opportunistic and distressed opportunities that never really materialized? Are we out of the clear there?

Dr. Peter Linneman (38:48)  So I just told you the one I really got wrong. Right? The single family one, the one I really got right was I had written in 20 17, 18, 19. That the next downturn would see massively fewer distressed opportunities because of all the money that had been injected as reserves into the banking system, by the federal reserve. And as a result, banks had enormous and unprecedented reserves so that if somebody didn't pay them, by the way, historically, if I couldn't pay my loan, the first thing the bank needed was more reserves. But since they ran on zero extra reserves, they didn't have them. And so they had to reduce their lending. They had to get rid of assets. They were under real pressure to sell it. So it didn't require more reserves, et cetera. Well, the fed intentionally created massive amounts of additional reserves and those additional reserves meant that the stress to sell was not going to be as big this time as last. And I got that one, right?

Dr. Peter Linneman (40:02) Add to that, that it was clear by the end of March, 2020, the fed was putting in even more reserves with QE infinity. And so once you knew the banks who are the primary lenders in our society, once you knew the banks had massive excess reserves as a result of the government, giving them those reserves, and you knew the government was telling the banks for bear for bear, for bear. I knew there wouldn't be a lot of distressed opportunities. And in fact, if you go back the distressed opportunities, as you say, there were some, but most of that distress was bad real estate, right? It was more bad, real estate then good real estate at distress prices. Most of it was distressing real estate. So I wasn't surprised at that. I don't, you're always going to see some distress, but with low interest rates, um, and the amount of reserves banks have, they can roll over loans. They can just roll over loans.

Adam Hooper (41:21) Much more willingness from the lending side to work things out. Then what we saw clearly in the financial crisis of, of having to, to get them off balance sheet and spiraled out of there. So what are you seeing, I guess, in terms of. Property types that are maybe looking stronger in recovery or something that may be lagging, or is it pretty, pretty even keel across the board? And you mentioned hotel rates right? Still below, well below where they were going into it up quite a bit from where they were last year, but still haven't quite recovered yet. Are there any sectors that you have concerns with for recovery here in the next 6 to 12 months?

Dr. Peter Linneman (41:59) Well, office is either the greatest buy in my lifetime or the worst buy, in my lifetime, depending on what happens if I told you Delta is a mild variant, wait until you see Zeta or Gama or whatever, you know, some other variant, and it's going to blow through all the vaccines and it's going to be 10 times more virulent. And so where, so if you believe that. It gets worse instead of better. Um, hotels are  I mean, a hotels, um, office buildings, way over priced, right way over price. If on the other hand, you believe we've found our way. This MRNA is an amazing breakthrough. Yep. Still issues, but we're going to work this out in the next couple of years, offices are a screaming buy, and the problem is I have no insight about which of those is true because it's epidemiological, not economic. Right. And it's nature. Um, but I tell you anybody who buys offices today, if it turns out to be getting, this is the tip of the iceberg there, they got murdered. They get murdered on their purchases. And if it turns out this is the beginning of the Dawn, then this is a great purchase and it's not clear hotel a bit that way, not quite as extreme.

Dr. Peter Linneman (43:45) I was with the CEO of Braemar the other day and you know, their resorts are doing terrific. Um, uh, they're, they're actually doing very well. Their business, convention, business is not great. I think that captures it. So convention, business, convention type of stuff is still weak. Uh, senior is still struggling with the fact that I can vaccinate grandma, but if the workers don't get vaccinated, it's still a somewhat dangerous environment. Right. And that still is an impediment there. Um, but Multifamily, industrial, those sectors, both look quite good. People need a place to live. People need a place to store their boxes. Those look quite good and retail looks like it is seen the worst in that,  people, people are going to shop and they're going to shop online. Yes. But some of that's going to be fulfilled through brick and they're going to shop in brick. And I always thought that was the case, but it does seem to be the case. So those sectors look quite good.

Adam Hooper (45:11) And again, it was just your, one of your earlier comments of, you know, we, we know a lot more than we knew. Earlier last year and about this time last year, but as you said with these variants, there's still a lot that we don't know. Right. I mean, we're Delta is, is certainly on a huge surge right now. And, and the unknowns around that. Um, one of the things that you had mentioned before as a sign of, of what to look for was, uh, audience sizes at sporting events. Right. And I'm just curious as we look at again, knowing what we know about, about the virus, about the health side of this, we've learned a lot in the last 18 months, but we don't necessarily know still how to forecast some of these things. Like you just mentioned with the office comment. Um, what are, what are some of the things that you're looking at? I guess, knowing what we know now, are those different from what you were looking at before? Or how has your view on, on what factors you're, you're paying attention to, um, as indicators of what the recovery might continue to look like?

Dr. Peter Linneman (46:10) Yeah. And I think the audience, uh, barometer turned out to be amazingly accurate, amazingly accurate, not perfect, but amazingly accurate. And it's still something to watch because there's still a chance that you're not going to be allowed to have events in doors, right. That is not beyond the realm of possibility, or if you are, everybody has to be vaccinated and I'm not sure. I, we, everybody is going to go, if they're vaccinated, I'm not sure what the economics of that are or, you know, et cetera. So I still think that's a pretty good simplistic barometer. Um, I think back to office is a barometer that kind of, uh, yes, I watched GDP and all the normal stuff, but I think you're asking beyond that. I'm watching that. I watched foot traffic at a brick shop. Right foot traffic. Um, I'm looking for how comfortable are people to live their life. So if I could, for example, I would track, uh, attendance at fitness centers, gyms, right. And my wife and I just stopped going to the gym this week. Right.

Dr. Peter Linneman (47:43) And by the way, I don't know if we're right or wrong, but we decided to just pause, we can't be the only ones in America that decided that. Right. And it's like, do I really need that for the next month? Or so while I see what happens, I've got some handmaids. So I'm trying to track those types of things. Most of which are sort of imperfect, but they're helpful.

Adam Hooper (48:14) Yeah, that's an interesting one. Again, the, the, the comfort of that return to normalcy, right? And that's a debate still of what is, have we even seen what the new normal is? Is this the new normal? Are we still in some mode of trying to figure out what the heck normal even means anymore? Some of those, those metrics that you just said, or maybe indicators of, of what that return might look like.

Dr. Peter Linneman (48:36)  If you and I were speaking, uh, five weeks ago, seven weeks ago, something like that. And you said, oh, I'm getting married in October. And we've got 200 people coming to the event. I just said, have a wonderful wedding. Right. And we then talked about where you're going for your honeymoon. If you say that to me today.

Adam Hooper (49:01) Totally different conversation

Dr. Peter Linneman (49:02) Totally different conversation. Are you going to require people to be vaccinated? Have you reduced the invitation, I don't know what your answers are going to be, but it's a different conversation? Right? And we're at a point where I think most of us are trying to feel our way through whether we're an employer and employee, a shopper, a traveler, um, I've got a trip planned to Germany in October. Uh, I've got an event in person that I'm convening, uh, next month in a county in Ohio where the vaccination rate is 28%. I don't know if I want to convene that. Right. And so I'm not saying I'm particularly good at figuring it out. There's a whole bunch of people trying to figure out a whole bunch of those type of things. Right. None of them are speeding the economy up, right? The at best they're neutral, by the way, at best you tell me, Nope, we're going to go ahead. Unchanged plans for the wedding dress, just grade on at best it's neutral. And it could be anywhere to minor, negative to more than minor negative. Right? And so, it's kind of uncertain, but in a way I always knew it would be uncertain. Um, you know, one of the things I got wrong is I thought that therapeutics would be faster based on some of the medical type side. Can these high level medical types I interfaced. If you go back to March, April, may, June last year, it appeared the better hope was therapeutics than vaccination. Well, it turned out therapeutics have improved, but slowly compared to vaccinations. Right. And so we're still in early innings on this thing.

Adam Hooper (51:14) We shall see only time will tell.

Dr. Peter Linneman (51:18) I think about the following though, if you would add them, imagine you went to an economics class and you had an instructor, you know, in, in 2019, and you had an instructor that is known for their willingness to talk about, what's really driving the economy, right. What's really going on. Okay. And you talked about all sorts of tax rates. You talked about entrepreneurship, you had to talk to all kinds of stuff, right? Imagine you took that same class today with the same professor who talks about things about the economy in a way that really matters. Half the class is going to be taken up on therapeutics and, and vaccinations and masks and, and you know, requirements.

Dr. Peter Linneman (52:11) And you'd be like, wow, that's what economics to some degree is become. And the one thing I'm really thankful for is I was writing this book with the head of wellness at Cleveland clinic, a book related to longevity for the last couple of years. And as a result, I was in a little circle with him on what's going on, medically as all this was evolving with Mike Roizen.

Dr. Peter Linneman (52:41) And then also I fell into as social media circle where everybody took the pledge. There'll be no politics, no politics. You get kicked out. If you do any politics at all, it's all pharmaceutical, it's all epidemiological share information. And as a result, I retooled as an economist as best an economist could to realize this is the biggest driver of the economy right now.

Adam Hooper (53:14) Yeah. It's interesting. It is a total change. Right. And, and that's, um, it's so apparent to everybody it's so in, you know, it's in everybody's lives, but not necessarily to that extent that you're speaking of as one of the major drivers, right?

Dr. Peter Linneman (53:30) Oh yeah. I start all my formal presentations for the last year and a half. If I do slides, my first slide is deaths associated with COVID because that's the number, that's the number one thing. It's not the only thing, right? I'm not saying it's the only thing taxes still matter. We just talked about unemployment insurance policy matters, et cetera, a whole lot of things. But that's the one I'd start with.

Adam Hooper (54:02) Yeah. Okay. Well, on that note, we'll, um, you know, we'll continue to see how that plays out. And, and obviously, again, everything with the health side is still, as you mentioned, influx of, of what those case counts look like, what the vaccination rates look like. I think treatments have become a lot better obviously than they were early days, which is, which is positive. But with hospital systems getting crushed as they are, and these last couple of weeks, it's going to be, um, you know, scary to see how that all unfolds, but, um, you know, you've been so, so grateful with your time today, Peter, uh, if, if you're okay, just a couple closing questions we'd like to ask, um, which is what, what is of the things that we've discussed and maybe a couple others. what is it that's keeping you up at night and then what has you most optimistic about the recovery going forward?

Dr. Peter Linneman (54:54) Let me do the, what keeps me up at night. What keeps me up at night is probably what keeps a lot of people up, which is I have people I care about at a human level. Um, and I don't want to endanger them and I don't want them to endanger me and yet I want that social connection, that real social connection. And how do you balance that off? And I'm just one little chip, if you will, and a huge pool of people. I can't be the only one wondering about that and worrying about that. And so I don't mean to just personalize it. What I'm saying is my thing that keeps me awake has it's gotta be keeping a lot of other awake and it has an effect on the economy. So it keeps me awake in two ways, right? One personally. And as it affects the economy. Okay. Um, what makes me most optimistic? Um, two things they're the same, really, which is our species has been amazingly creative and resourceful and all of the, he all the people, mouth is who says, we're going to run out of resources or we're not going to solve this problem. Or horse manure is going to overrun us in 1900. And you have to just go through it, including diseases, right? This is not the first disease we've had. This is, we had cholera and we had polio and we ha we've had horrible things. Right. The good news is we have a system that tends and a species that tend. To figure it out in perfectly how to move forward more often than not. And I still believe that's true and it's not per chance that we have been so involved in the United States in these vaccines, vis-a-vis the rest of the world. Um, something about our system uniquely, uh, propagates that, um, so, and I'll give you the, I'm going to be off slightly.

Dr. Peter Linneman (57:18) These are public record. What I'm about to say in that regard, don't hold me to the dates, but the spirit of what I'm saying in early January or mid January, it was announced that there is this virus in China. Um, something like four days later, the genome is mapped and something like four days later, The mRNA vaccines are ready, you know, they're not fully vetted. Ready. Right? They're solved if you will. Right. The, think about it like a math equation, right. They were solved. So they had, we had the mRNA  solution within something like eight days after finding out are part of the world finding out it existed. That's gotta make you optimistic.

Dr. Peter Linneman (58:23) Does it? I don't mean to be Pollyanna. That's got to make you optimistic. You say, well, why did it take so long? Well, you had to test it. You had to find the best way you had to make sure it doesn't have horrible side effects. What's the best way to deliver it to the body. So, but you can't know that history that it was something like eight days. After with this part of the world knew it existed that the mRNA’s of Moderna, Pfizer Biogen had been mapped. If you will, that's got to make you enormously optimistic. And by the way, for anybody who knows the precise facts, please don't hold me to when I say it's a days, maybe it was 12, maybe it was a seven. The spirit of it was the solution was there. It just took a long, not a long time. It then had to go through vetting and production. And so that makes me enormously optimistic, just enormously. And as I say, it's really the first thing I said, which is we are creative. We are problem solvers. Um, and, uh, and by the way, the private sector did it. The public sector deserves a lot of credit for assistance. In that process of getting things approved rapidly and produced and distributed and so forth. So it's not a matter of private or public. It is species and system.

Adam Hooper (01:00) Perfect. I think that's a good, that's a good thing to be optimistic about. Um, anything that's you’ve got upcoming and your research, we should be keeping an eye on anything. Listeners should be paying attention to that. You've got coming out here in the works. You mentioned a book. What's a, what's the latest with that?

Dr. Peter Linneman (01:15) Well, the book, um, the book is called the great age reboot, um, with Michael Roizen and Albert Ratner. Those who are in the real estate industry may know Albert from forest city. It's um, uh, it talks about in short, what it is is for Albert's I think 94 years old. And when he was born, his life expectancy was 57 for children born that year. Obviously he's outlived that. And by the way, I've outlived my life expectancy. On, on the day I was born in 1951, because lives get longer. We have breakthroughs, we make medical advances, we make lifestyle advances.

Dr. Peter Linneman (01:59) So it's about, we've had this positive trend and for 120 years and living longer and better, we don't just live our extra years on the edge of death. Right. So we're like a modern tires. Don't just go those extra miles, ready to blow out there. They're vibrant. Right? So the book is about that trend. Secondly, that that trend is about to explode because of things it's like mRNA and, um, uh, genetic engineering. And I mean, without, you know, they have all sorts of things. The book discusses a lot of these. Wow. Genetic things. The third is people say, well, but if you live longer, your life will just be miserable longer than you go. No, it's not like you're going to live the worst year of your life for another 30 years, you're going to live the best years of your life for another 30 years. And your worst year is still probably not going to be that great. Your last year is still not going to be that great, but you got a lot more great years and of course we can afford it.

Dr. Peter Linneman (01:02:08) Of course we can afford it. We can't afford, we can't afford not to do it because it's a great source of productivity, both economic productivity, human productivity. And the one I say is, imagine a LeBron James could maintain his level of athleticism and performance for another 15 years. We couldn't afford not to take advantage of that. Right. You'd want that. And so of course we could afford it. And you say, yeah, but he's 50 years old. He should be on retirement. You know, he's still vibrant and so forth. And then the fourth part says, um, you've got to try to stay healthy until the cavalry comes because these great breakthroughs are coming, but you don't know when they're going to get there. And so try to maintain some degree of health and wellness until you get there. So that's what that book's about. It's comes out in December. I believe it is national geographic is the publisher. We're very excited about it. Okay. The other thing is I continue to do Linneman Letter and all the associated things.

Dr. Peter Linneman (01:03:19) Um, you can find out about Linneman Letter, which is why following it in the industry. You can go to linnemanassociates.com or you can reach out to my brother, Doug Linneman, dlinneman@linnemanassociates.com And, um, you can follow what we do. You can follow Linneman Letter, uh, et cetera. This is the 20th anniversary of Lennoman, 20th year anniversary of Linneman Letter. Overnight success, overnight success, right.

Adam Hooper (01:03:51) Only took you 20 years to be an overnight success. Exactly, exactly. Perfect. Well, Peter, we'll put show notes. We'll put links in the show notes for all those resources. Um, again for listeners out there, just Google Peter Linneman and you'll find a ton of resources. Um, he has been a pioneer in our industry and has put out phenomenal work over those years. So again, we really appreciate you sharing your thoughts with us today and look forward to, um, you know, many more of these conversations going forward.

Dr. Peter Linneman (01:04:20) Thank you very much. Been my pleasure Adam

Adam Hooper (01:04:23) All right, everybody. That's all we've got for today. If you have any comments or questions, please send us a note to podcast@realcrowd.com. And with that, we'll catch you on the next one.

For over 40 years, Dr. Peter Linneman's unique blend of scholarly rigor and practical business insight has won him accolades from around the world, including PREA's prestigious Graaskamp Award for Real Estate Research, Wharton's Zell-Lurie Real Estate Center's Lifetime Achievement Award, Realty Stock Magazine's Special Achievement Award, being named "One of the 25 Most Influential People in Real Estate" by Realtor Magazine and inclusion in The New York Observer's "100 Most Powerful People in New York Real Estate". After receiving both his Masters and Doctorate in Economics under the tutelage of Nobel Prize winners Milton Friedman, Gary Becker, George Stigler, Ted Schultz and Jim Heckman, Peter had a distinguished academic career at both The University of Chicago and the Wharton School of Business at the University of Pennsylvania.

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