2025 has not gone according to plan.
Real estate has been bandied about by headwinds of economic, policy and fundamental changes. Interest rate reductions and rising deal flow has the industry feeling better, but stability is a pipe dream these days, especially when federal data is missing and CRE research can conflict.
But forget about the data, economist Peter Linneman said on this week’s show — how is it really going in your apartments or your office building?
He said CRE has gotten hooked on data analysis and has forgotten that what really matters are the fundamentals on the ground.
And while he agrees that uncertainty is the new normal, and that’s trouble for CRE, “people adjust.”
He foresees a meaningful return to transactions in 2026.
“There are people out there with courage, but they don’t have capital. And there are others out there whose short investment horizons have made them understandably and correctly not courageous,” he said.
“But when everybody else starts jumping, it’ll be like the wildebeests crossing the river. They all jump in.”
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Mark Bonner (00:08):
Okay. Welcome to First Draft Live. I'm Mark
Bonner, Biznail's editor inchief coming to you live from
New York. It's Friday, November21. Let's be honest about the
kind of year we've been livingthrough.
2025 hasn't just beenunpredictable. It's been
unrecognizable. As we all know,the forty three day federal
shutdown didn't just closeWashington. It blacked out the
(00:30):
nation's economic dashboard,halting permits, freezing HUD
pipelines, and left every lenderand investor navigating without
CPI, jobs, or inflation data. Wecovered all of that last week,
so go check it out.
But at the same time, US tariffsclimbed to their highest
sustained level since thenineteen thirties, pushing up
(00:53):
cost on metals, machinery, andcore construction inputs. Rate
cut expectations have flippedback and forth all year as
inflation ease, thenreaccelerated, then eased again.
Who knows what we'll see in afew weeks, from the central
bank. And the capital markets,they've thawed barely. SEER
(01:13):
reinvestment activities aremodestly from 2024, but still
far below pre pandemic norms.
And deals are clearing onlyafter heavier scrutiny and wider
spreads. On the fundamentalside, the picture is just a
split. Industrial and datacenters remain red hot. Retail
has held its footing.Multifamily strength depends
(01:34):
entirely on local supply andinsurance pressure.
And office, at least nationally,is still sitting near record
high vacancy levels around 20%with values still searching for
a floor. So in other words, thesignals we've relied on for
decades didn't just flicker thisyear, they have failed. And
that's exactly why today's showmatters. Few people understand
(01:56):
this moment better than PeterLeniman. He's not just an
economist.
He literally wrote the book oncommercial real estate. And on a
personal note, his BizNow videoeducation series trained an
entire generation of CREprofessionals, myself included.
So thank you, Peter. And hespent his career studying how
markets behave when claritydisappears and discipline
(02:19):
becomes the only real compass.Peter, welcome to First Draft
Live.
Peter Linneman (02:24):
Thank you for having me, Mark. Great pleasure
to be here.
Mark Bonner (02:27):
Pleasure's all mine. So Peter, before we get
tactical, I wanna pull the lensback a bit. For years, I've
heard the most seasoned peoplein this industry say, I've been
through this before. We alwayscome out on top. And sure,
experience matters.
Discipline matters. Longmemories matter. But tough
(02:48):
periods also separate the field.Some players rise above it, some
disappear, sometimesspectacularly as we've seen. But
this year feels different.
The shutdown blacked out thedata we rely on, tariffs spiked
to levels we haven't seen ingenerations, rate expectations
continue to royal, fundamentalscontradicted each other. The
(03:11):
usual signals just broke. So letme ask you this. Have you ever
seen a moment quite like this inyour career? And if not, is
there a far off chapter ineconomic history, maybe one most
of us have forgotten, that youthink is actually instructive to
this moment?
Peter Linneman (03:28):
I think it's a great question. I think that
every moment I've lived through,I'm 74, I've been in the
business a long time isdifferent. Right? Everyone's
different. There's craziness inan odd way.
You talk about the absence ofdata to analyze. When I began in
this business, no one analyzeddata, and there wasn't data
(03:54):
there to analyze. And yet therewas still an industry. Right?
And I'm not saying it was asefficient, but there was still
an industry.
And as an analogy, before BlackScholes formulas existed, people
traded options. Right? BlackScholes made it easier. So in a
(04:16):
way, it's not so unusual to havefoggy data. It's not so unusual
to have limited data.
One of the things that I didduring this blackout of some
data I'd always viewed trying tofigure out the economy the real
(04:37):
estate framework etcetera likelooking at, I don't know, a
Monet painting. No brush strokemeans anything in and of itself.
None. All of them taken togetherwhen viewed from an appropriate
distance matter a lot. Okay?
I can't tell it's a cathedral ifI'm too close. I can't tell it's
(05:01):
a cathedral if I just look at abrush stroke. And I think one of
the things I do that a lot ofpeople don't do is look at a lot
more brush strokes. So whathappened, and you're right, it
was frustrating not to getemployment data and it was
frustrating. I still had a lotof brush strokes.
So you can imagine some of mybrush strokes disappeared. And I
(05:24):
then tried to squint. You knowhow you kind of squint to try to
see what the picture is. Could Isee it as clearly? No.
I'll give you this actually iscoincidental, but it's true.
Yesterday, the employment datacame out and everybody was
holding their breath and Ihappened to be on the phone with
a very close friend and he saysthe data just came out literally
(05:45):
said the data just came out howmany jobs were added last month
and I said 120. I didn't knowthe answer And I said 120,000.
And he said, you're wrong. It's119,000.
Now, it's not that I'm thatprecise. But yeah, I lost some
brush strokes, but there werestill enough there. When you
(06:08):
don't have when you do haveuncertainty, it becomes more
important to go beyond the norm.What's going beyond the norm? I
talk to more people about how'sit going?
I mean, how's it really going atyour apartments? Forget the
data. Right? How's it reallygoing in your apartments? How's
it really going in your officebuilding?
Reading the public company'searnings reports, listening to
(06:32):
their earnings. Because allthose are just little
brushstrokes. Right and youcan't just rely on the BLS set
right and so it is uncertain.You mentioned the tariffs. I've
never seen anything like this inmy lifetime on the tariffs
(06:56):
either in terms of the magnitudeor the uncertainty.
Either one would be challenging,right? The magnitude would be
challenging And the uncertaintywould be challenging, but we got
both of them on tariffs. Andimports are roughly 10% of the
economy. So one of the thingsand I'm just trying to give you
a framework for people listeninghow to think about this. So why
(07:20):
wasn't the economy more slowed?
It has been slowed, but theeconomy basically shouldn't be
growing if the tariff impact wasas high as you can simulate it
to be. That is things comingfrom China like this or tax like
that and so forth. So I went anddid a very simple analysis last
(07:43):
week. Just this is real timelast week. I took the actual
tariffs collected by the USgovernment over the last six
months and divided it by theactual imports recorded.
You can think of that as anaverage tariff. Right? You're
collecting how much on whatbase. All the simulations say
(08:07):
the tariff rate should be aboutsixteen to eighteen dollars per
100. When you divide the actualtariffs paid by the actual
imports, it's about 6 and a halfdollars.
And that's up from $3, so it'sup. It's up from $3 to 6 and a
half, but it's not 18. Andthat's why the impact is not as
(08:32):
big. And you say, well, how canthe simulated be 16% to 18% in
the actual? And that's becausepeople adjust.
And so what I'm trying to do isanalyze people adjust. The
impact's not as big as it mightfirst appear because people,
when it rains, you put up anumbrella. When it rains really
(08:55):
hard, you try to get under anawning. When it rains really,
really hard, you go inside.That's the difference between
the 16 and a half 16 to 18 andthe six and a half percent.
So your point is brilliantly ontarget uncertainty, but you
gotta try to go and do somedifferent things than you might
normally do to get a littlebetter clarity.
Mark Bonner (09:17):
Yeah. I mean, look, to take, your metaphor of Monet
brushstrokes, I would say wehave had brushstrokes. There
haven't been from Claude Monet.They've been from Jackson
Pollock. Right?
And that is and that and thathas introduced chaos into the
overall thinking here. And thereason why I go back to the
history is because try as Imight, Peter, I cannot I'm not
(09:41):
smart enough to know what periodin economic history this most
resembles and whether or notthat period in time can tell us
something about this moment. ButI'm kind of hoping that you can
instruct us on what this momentmeans in the grand arc of your
career.
Peter Linneman (09:56):
So what drives home are fundamentals. Look at
fundamentals. Don't get caughtup in what are fundamentals.
There are incentives not toimport. Right.
And people respond toincentives. So yes it's going to
drag the economy but not asmuch. Capital markets. The Fed
(10:20):
has been crazy any number oftimes over history sometimes too
high sometimes too low alwaystoo late. But but the economy
goes on.
So when the Fed had interestrates too low the economy went
on. And when the Fed hadinterest rates too high over my
(10:42):
career, economies go on, and itadjusts. Doesn't perfectly
adjust. It adjusts. The key iswatching the adjustments.
And by what are the adjustmentsalways revolve? Think of taxes.
People respond to tax rates. AndI think what people forget is to
(11:02):
look at the responses people aremaking. That's far more
interesting than what they'reresponding to.
We can't solve the Fed keepinginterest rates too high. We
can't solve the Fed be uncertainabout three weeks before two and
a half weeks before they'regonna make a rate decision.
(11:23):
They're still, you know, mealymouthing. Right? We can't change
that.
We can adjust to it and watchthe adjustments. What are the
adjustments people are making?The adjustments people are
making are borrowing less.Right? Because you don't know
what your cost of capital isgoing to be.
(11:46):
Is this a moment to lock in longor lock in short when you don't
know borrow a little less andand so those are the things I
think to focus on are theadjustments more than the
impediments. Talked about officeuncertainty. Look at how people
(12:09):
are adjusting more than theimpediment, which is nobody
knows how much space they need.
Mark Bonner (12:16):
Right. And then meanwhile, with all of this
uncertainty that we're talkingabout here, there's mispricing,
right? Some industrial marketsare trading at pre pandemic
pricing while office values toyour point in several major
metros continue to slide. Retaillooks stable. Data centers look
unstoppable.
We'll talk about data centers ina second. Multifamily is turning
to a tale of two Americasdepending on supply pipelines
(12:37):
and insurance costs. Where iswhere do you think commercial
real estate is clearlyoverpricing this fear and
uncertainty?
Peter Linneman (12:46):
Overpricing. I don't think there's a lot of
sector where real estate isoverpriced. Certainly not
office. Certainly not goodoffice is overpriced. I don't
think multifamily is overpricedquite the opposite.
I think most multifamily isunderpriced compared to its
performance. Industrial, more orless correctly priced. I think
(13:14):
hotels are being underpriced andthat people are waiting for the
next shoe to drop. Theuncertainty phenomena, they're
kind of they're overweightingthe uncertainty in the pricing,
And there's a lot of short termmoney. So when there's a lot of
short term money thatuncertainty weighs more heavily.
Retail, around right pricing, Ithink retail has the advantage
(13:43):
right now. Good retail in thatfive years ago everybody thought
nobody would go to a physicalplace right. Was it was all
going be done online by now.Yeah. And Covid proved that's
not going to happen.
And so people now look at goodretail as a good cash stream.
(14:03):
And then as you say, datacenters are a whole new game,
whole new game.
Mark Bonner (14:08):
Well, let's talk about data centers, because I
mean, you want to talk aboutuncertainty, Right? There it is
right there. On one hand, you'vegot a turbocharged, situation
where trillions of dollars areanticipated to go into this over
the next five to six years.Billions upon billions have have
already flowed in. It's red hot,but it's also red hot on the
(14:30):
other side, in terms of thefear, worries about a bubble,
the local politics thatcontinues to be a headwind, the
power supply issues.
And so this bubble thingcontinues to bubble. I mean,
even within twenty four hours orless of NVIDIA punching way
above its weight class, which isthe biggest weight class there
(14:53):
is in in the financial world.Then the stock market did its
thing the next day because itstill has fear. Let's get to a
question from our audience onthis front, Peter. Can you
address all the noisesurrounding whether we are in a
data center development bubble?
What is your take on this?
Peter Linneman (15:10):
Okay. So let's take the the supply side. Right
now, the margins for developingdata centers, because there is a
lot of money out there, andthere's not a lot of supply.
Right now, the margins areprobably four times normal. Now
(15:32):
in my career, anytime marginsare four times normal, there's
gonna be a lot of supply sooneror later.
Right? So somebody's gonna getcaught out. So right now, it's
terrific. If you can come upwith the capital, there are
tenants that wanna be there.Even if you do it spec, there
are tenants who wanna be there.
(15:53):
So if you can get over thehurdle of power, you can get
over the zoning and so forth.There are tenants out there, and
they'll pay up. I'm not worriedso much about now. I'm worried
about the supply that bringsabout. And that supply, I just
don't normally see things withfour times normal margins.
Mark Bonner (16:13):
When do you think that moment's going to come?
Peter Linneman (16:17):
It will take probably three to five years,
and partly because the amount ofmoney that's associated with the
data set. It's not like you'rebuilding a $12,000,000
warehouse. So you have to tapsome enormous pools of data,
assuming of dollars to to do it.And a tap, as you know, and your
(16:42):
listeners know, tapping is oneit's hard enough to get
$12,000,000. Now try to get$2,000,000,000.
That's hard. And just think ofsomething as simple. Here's
what's going to make it slower.And here's why the margins are
big right now. The margins arebig right now.
Let's suppose you have a$2,000,000,000 project. And
(17:04):
let's suppose you can find bankswho are willing to do a billion
dollar. A billion dollar banksyndication is a huge load. It's
not easy, especially if it'sspec. You have no lead tenants.
And I still need a billion ofequity. That's not easy to come
(17:25):
up with a billion of equity fora spec project. The fact that
it's hard to raise that capitalis gonna make it slow, but the
capital is going to respond tothe margins. But it's not gonna
respond overnight. It is gonnatake several years.
People are gonna make a lot ofmoney on the development over
(17:45):
those years. Yeah. But watch themusical chairs when the supply
finally gets there.
Mark Bonner (17:52):
Is the institutional lending on this
gonna be the signal to thenoise? I mean, if they begin to
pull back a bit on the capitalstack to limit their downside
risk, I mean, is that reallywhat we're looking for here?
Peter Linneman (18:04):
That's where it'll be. That's that's clearly
where it'll be. My guess isyou're going to get one more
fit. Right now you have banksyndicates kind of leading it.
They're gonna run intolimitations on their balance
sheet.
What are they then gonna do?They're going to securitize it.
Right? Once they securitize it,because that's a bigger
(18:27):
syndicate than just eight banks.Right?
They're going to securitize it.Once they securitize it, you
know the next things are goingto cut it up into triple A,
double A, single, etcetera.
Mark Bonner (18:38):
Yeah.
Peter Linneman (18:39):
You know that in the beginning that will be
tightly underwritten and youknow at the end that will be
loosely underwritten. And that'swhere the music ultimately will
end because the banks will goonly so far on their balance
sheets. They'll go broader by bydoing it as securitization.
(19:00):
It'll be well securitized in thebeginning and poorly securitized
at the end. And I think that'sabout a four year journey.
Mark Bonner (19:10):
If you're just joining us, this is First Draft
Live. I'm here with PeterLindeman, the guy who literally
wrote the book on commercialreal estate, talking about the
word of the year, uncertainty.Peter, let's go to another
question from our audience. Isthe new normal in CRE, at least
for the foreseeable future, aperiod of prolonged uncertainty
driven by several factors, mostnotably the policy direction
(19:33):
coming out of Washington?
Peter Linneman (19:36):
And I would include the Fed when you say the
policy direction. I wouldn'tlimit it to simply the White
House in Congress.
Mark Bonner (19:43):
I mean, the White House is trying to dictate Fed
Right. Federal Reserve policy,as we all know.
Peter Linneman (19:48):
I would include the whole thing. And by the way,
I'd go even one step further. Asyou know, there's a number of
court I'm not a legal expert.There's a number of court cases
about tariffs in front ofdifferent courts that will
presumably end up in the SupremeCourt. So there's the
uncertainty of what the WhiteHouse will do.
(20:09):
There's the uncertainty of whatCongress is gonna do in reaction
to that. We've got electionscoming up next year that will
maybe change the balance there.You've got a Fed that's kind of
been not the most transparentand the most on target. And we
have all these court casesswinging around. Take something
(20:31):
as simple as not simplesomething as basic as
immigration.
I had a friend I made a commentabout four months ago that
you're gonna see some verypublicly prosecuted immigration
case right and it will slowimmigration and I had a friend
who said, especially if we'regonna do a one court case at a
(20:53):
time and that's not quite whatwe're doing, but you tell me the
transparency on whereimmigration law comes out on.
I'm not a legal expert. Many ofthese things have never been
litigated in this way. Staytuned. And yet that has a big
impact on inflow of labor,inflow of people.
(21:16):
What will that do to labormarkets? So I'd say most of the
uncertainty we have comes out ofWashington, which is legal.
Judicial legislativeadministrative and the Fed. Lots
of uncertainty coming out ofthere and what we're doing is
(21:38):
reacting to it. Now, here's thegood news if people can react if
Turkey, the country, can growamid all the uncertainty that
economy constantly has, we'll dookay because we're more
resilient, more transparent.
Would we do better without allthis uncertainty? Absolutely.
(22:01):
Absolutely.
Mark Bonner (22:03):
So, I mean, is uncertainty the new certainty? I
mean, can you bake in this ideathat we're gonna be on this
bumpily, wobbly Jackson Pollockcanvas? Can is that a loan
because that's something thatyou can actually bake into your
thinking?
Peter Linneman (22:21):
Well and that was kinda my point about Turkey.
Turkey has baked it in. Theirbusinesses are baked in. We
don't know what the hell thegovernment's gonna do right. We
really don't we have alwaysbaked in some degree of that
right we we've always baked insome degree of that.
We just have a lot more of itnow than normal. We bake it in.
(22:45):
Businesses operate. They givethemselves bigger margin
cushions, but it does slow theeconomy down. It is the new
world.
It'll probably go on and atleast until after the election.
At least until after theelection.
Mark Bonner (23:00):
After the midterms?
Peter Linneman (23:01):
The midterms. Yeah.
Mark Bonner (23:02):
Got it. Mean,
Peter Linneman (23:05):
tell me what happens in the midterms. Let's
suppose Trumpism gets totallydefeated in the midterms one one
path is gonna happen. You tellme Trumpism gets totally
reinforced at the midterms adifferent path will occur And I
don't know which.
Mark Bonner (23:26):
Let's go to another question from the audience. Why
are apartments underpriced whenmost rents are flat or declining
and expenses are increasing,especially for insurance?
Peter Linneman (23:38):
I think capital markets have gotten there's a
false narrative that's hurtingthe capital markets. There was
remember, like seven years ago,the false narrative was no one
will ever shop in a shoppingcenter. And you go, that's not
true, and it hurt the capitalmarkets. The false narrative for
(23:59):
apartments is that since rentsare flat and occupancy is a bit
soft, demand for apartments musthave weakened. And that's, you
know, that's not the case.
Demand has stayed just fine.It's just that it got spread
over a bigger supply. And that'swhat made things that's what
(24:21):
swung things from being veryrobust to very weak. And I don't
think the capital markets havefully figured out that it wasn't
demand. It was all supply.
Demand has stayed strong. Singlefamily housing is way under
produced. That's the best thingthat could ever happen to multi.
(24:44):
That's not gonna go away. And assupply pipelines and as you
know, in every market supplypipelines are getting shrunk.
We still grow. We still havemore people. We still have more
income and we have single familygetting more and more expensive
because we have a shortage. Ithink what you're gonna see is
(25:06):
that narrative change in 2027,2028, and you'll see a rebound
in pricing, not unlike what yousaw in retail as people
realized, oh, a public'sanchored shopping center's not
going to become a ghost town.
Mark Bonner (25:28):
So what's your outlook on multifamily? Ten
years. I know that's a big it'sa it's a big question.
Peter Linneman (25:33):
Ten years, you'll do an unlevered return on
a portfolio of multifamilyaround 9%, nine and a half
percent. That's my prediction.How you get there? Unlevered.
Let's because the leverage makesit a different game, but you're
gonna get there and that you'regonna get a 5% yield coming out.
(25:59):
You'll get growth of severalpercent a year from inflation.
You get growth of 1% or sobeyond inflation in values
because construction costs go upfaster than inflation. And you
sit down and you do the math,and you get nine to nine and a
half percent over a ten yearperiod with uncertainty and
(26:21):
volatility in between. Okay? Youlever that up, and depending on
how much, you're gonna convertthat nine to 9.5 into, at low
leverage, 10 to 11.5%.
At 60% leverage, you're gonnatake it up to something like 12
(26:41):
to 14%. Hard to get a lot higherleverage than that, but you can.
And of course, as you push theleverage higher, you run the
risk that you get squeezed on amoment and you won't be around
to realize that return. Whoeveris gonna come in and grave dance
on you is gonna realize it. Sothere's no free lunch.
(27:05):
But, yeah, that I have prettyclear transparency on that as a
pricing and as a return onmulti.
Mark Bonner (27:13):
So let's talk capital just for a second.
Capital has not disappeared thisyear, but it has gotten pretty
cautious. The quiet story isthat it's not wait and see for
some players. The mostsophisticated capital has
probably already startedpositioning for 2026 and maybe
even beyond. Peter, where iscapital actually flowing?
(27:36):
Not talking about where it'sflowing, but where is it
actually being deployed rightnow?
Peter Linneman (27:41):
So it's doing the same thing it's done in
every cycle, capital cycle I'vewitnessed. It pulls back. Each
time it pulls back for adifferent reason. It may have
been the war in The Middle Eastin the seventies, and it could
be a terrible economic crisis inthe early eighties. So whatever
09/11, each time it pulls back,when it comes back, it has the
(28:04):
same DNA.
It starts with the safest assetsin the most liquid markets with
relatively low leverage, and itflows into that. And then you
can almost think about it as awaterfall and those markets get
back to normal. Those those realliquid real transparent high
(28:29):
quality get filled up and noteven like a waterfall. What is
this where they do champagneglasses you know and it keeps
flowing down the think of itthat way you know you start with
the top champagne glass and thenit flows to the next level. Yes.
Some drips to the third and somedrips to fourth. It then gets to
(28:50):
the highest quality and thesecondary less transparent
markets, and then it gets to thesecondary assets in the most
transparent markets and and andand it finally gets and we've
seen this every time it finallygets to the run of the mill. I
don't mean that in a bad sensethe run of the mill assets and
(29:12):
run of the mill submarkets itfinally gets to and they're
always the last to realize it.So where's the money going now
to the best ask think of office.It's pretty transparent if you
wanted to get money for officeright now, you would want to
have the best buildings best interms of occupancy, right, and
(29:34):
tenancy and lease up.
You'd want to have the bestbuildings in New York, in the
best submarket of New York. Andif you had the best building in
New York, the best submarket inNew York, you can get capital.
It's flowing there now move downthe food chain, not so much If
you have apartments in the goodsubmarkets, it's flowing there.
(29:58):
It's down to the second andthird levels of the champagne
glasses for multifamily, but notall the way down. Industrial, if
you've got Amazon as yourtenant, you're doing just fine
from a capital market point ofview.
It's as you move down and youhave a 50,000 square foot. So
(30:19):
just think of that champagnewhat do they call it? Like tree.
I don't know what they call it,but you know what I'm talking
about.
Mark Bonner (30:25):
I know you're talking about. But Peter, not
everybody operates with thecream of the crop. Right? Not
everybody's playing in New YorkCity in the in in, you know, in
the Financial District orMidtown, where the strength of
The US office market rests, atleast historically, not
everybody's able to play in thetop asset classes. And even if
they are playing in the topasset classes, they're not maybe
(30:47):
they're not playing on on themap, where where where it's the
hottest.
You know? As you've taught usthrough your videos, there's a
thing called class b and classc, and I know that's eye of the
beholder. But, I mean, what doyou do if you're not able to
play in those very Tony cornersof The US real estate market?
Peter Linneman (31:08):
So and most of us don't play in that. Right? I
mean
Mark Bonner (31:11):
Right.
Peter Linneman (31:12):
Most of us don't play. I think the most critical
thing if you're going to be aninvestor or an operator in the
normal levels, You know thethere are many more glasses on
those bottom two rungs thanthere are in the upper rungs
right. It's another way ofsaying it you have to have
patience. You gotta wait till itgets down to you. That means
(31:35):
you've got to go in with lessleverage.
You've got to go in with astrategy of longer hold if
you're in those not top quality.One of the things being the top
quality affords you is theluxury of, if you want, higher
leverage and, if you want ashorter hold period, but I think
(32:03):
you're 100% right now. Counseleda lot of people over the years
if you're in these lower rung, Idon't mean lower and in a bad
sense just think of it in theflowing down of the capital. You
just have to have strategicallya longer hold and you have to
have strategically moreimpregnable capital structure,
(32:25):
which means you have to havemore equity because that's the
only way you and longer debt.Right.
More equity.
Mark Bonner (32:33):
Right. And you and you're touching on I I wanna end
on this last night. I know we'relittle over, but this has been a
wonderful conversation.Uncertainty doesn't just break
models. It breaks decisionmaking.
Committees freeze, timelinesslow, everyone waits for
certainty that never arrives. Ifeel like this has been the
story every year since thepandemic began.
Peter Linneman (32:51):
And
Mark Bonner (32:51):
yet, historically, the investors who outperform in
certain periods aren't the oneswho wait. They're the ones who
act with discipline while othershesitate. But Peter, there's a
lot of fear and it's been builtup over the last five years
since we've been in thispandemic. Do I move now or do I
wait? This quarter or nextquarter?
(33:13):
Survive to '25, bliss to '26,heaven in '27. You know, all
these ridiculous, things thathave been said by the industry,
it's a lot of wait and see.Right? No one wants to be the
first one through the wallnecessarily. How do you get past
that psychology when you'redealing with all of these things
that are happening that you'retalking about?
Peter Linneman (33:35):
One of the challenges is the horizon, the
investment horizon of more andmore capital has gotten shorter
and shorter. Just think ofprivate equity funds, They're
kind of three to five yearmodels, not all of them, but
they're sort of three to fiveyear models. You better be able
to time to get a three to fiveyear model working. People are
(34:03):
not paid to take risk whenothers aren't taking it. And
that's one of the reasons somuch money is sitting aside.
You say, oh, they're paid totake risk. No. They're paid to
take risk when others are takingrisk, not just to take risk. And
when no one's doing anythingeverybody sits. That's when the
(34:25):
opportunities are greatest.
I'll give you a I think this isa good thing for people to end.
I think it's a good time to actif you can hold. If you can
hold. I think it's not a greattime to act because of all the
uncertainty if you have a threeto five year window because you
(34:45):
could get caught out on it.Think of it this way and and
I'll and I'll give you a backupto this if you're going to hold
a property for thirty years,think of an apartment building,
you're going to hold it forthirty years and you think the
first year it's gonna give you a6.2 yield on cost.
Okay? And it comes out of theground. And because the market's
(35:09):
weak, you only get a 5.7 yieldon cost. If you're trying to
hold that three years, you'redead. You're dead on that
difference.
If you hold it for twenty years,the performance of that asset
over twenty years has almostnothing to do with whether it
was a 5.7 in the first year or a6.2. It's about all the things
(35:33):
that happened in the othernineteen years in the capital
markets and so forth. And youneed capital and courage. You
need both. You need capital andyou need courage.
Short investment horizons makeyou not courageous they just by
they should make you notcourageous and I was at an event
(35:55):
that I kind of host. And we aretalking about development in
June with a big group of peopleand most of the three to five
year investment money was sayingno, I'm not invest. I'm not
developing. I'm not developing.I'm not develop Very
interesting.
Five ultra ultra wealth familieswere in that group, though. All
(36:18):
five of them were developing.All five of them said basically
what I just did. We're gonna ownthis for twenty years. We think
it's a great location.
Think construction costs are youknow reasonable. We don't know
whether it's gonna be a 6.2coming out of the ground or a
5.7. We would prefer it to be a6.2. We have low enough
(36:42):
leverage. We're gonna slide andit was very interesting.
All five ultra high wealthfamilies were developing now why
they happen to have courage andthey have capital. The there are
people out there with courage,but they don't have capital. And
there are others out there whoseshort investment horizons have
(37:05):
understandably and correctlymade them not courageous. But
when everybody else startsjumping, it'll be like the
wildebeest in the crossing theriver. They all jump in.
And I land by saying I was I I Ihave a charity effort over in
Kenya and I go every year and wesee the wildebeest crossing the
(37:25):
Mara River and I was there aboutfifteen years ago with someone
who was a major major banker, amajor major banker and the
wildebeest to and fro to and frodon't cross don't cross don't
cross and then they go like helllike you see in the movie. And
she looks at me and says they'regoddamn bankers. Sooner or later
(37:48):
the wildebeest will grow.
Mark Bonner (37:52):
Bold prediction for 2026.
Peter Linneman (37:55):
The will the beast will start jumping.
Mark Bonner (37:59):
Well said. Okay. Peter, thanks for taking the
time. We really appreciate you.
Peter Linneman (38:05):
My pleasure. Thanks for having me.
Mark Bonner (38:08):
If you missed any part of this conversation or
wanna catch our earlierepisodes, you'll find every show
on biznow.com or in yourfavorite podcast feed. Just
search First Draft Live. We'llbe back next week. Until then,
this is First Draft Live. Have agreat weekend y'all.
Okay. Welcome to First Draft Live. I'm Mark
Bonner, Biznail's editor inchief coming to you live from
New York. It's Friday, November21. Let's be honest about the
kind of year we've been livingthrough.
2025 hasn't just beenunpredictable. It's been
unrecognizable. As we all know,the forty three day federal
shutdown didn't just closeWashington. It blacked out the
(00:30):
nation's economic dashboard,halting permits, freezing HUD
pipelines, and left every lenderand investor navigating without
CPI, jobs, or inflation data. Wecovered all of that last week,
so go check it out.
But at the same time, US tariffsclimbed to their highest
sustained level since thenineteen thirties, pushing up
(00:53):
cost on metals, machinery, andcore construction inputs. Rate
cut expectations have flippedback and forth all year as
inflation ease, thenreaccelerated, then eased again.
Who knows what we'll see in afew weeks, from the central
bank. And the capital markets,they've thawed barely. SEER
(01:13):
reinvestment activities aremodestly from 2024, but still
far below pre pandemic norms.
And deals are clearing onlyafter heavier scrutiny and wider
spreads. On the fundamentalside, the picture is just a
split. Industrial and datacenters remain red hot. Retail
has held its footing.Multifamily strength depends
(01:34):
entirely on local supply andinsurance pressure.
And office, at least nationally,is still sitting near record
high vacancy levels around 20%with values still searching for
a floor. So in other words, thesignals we've relied on for
decades didn't just flicker thisyear, they have failed. And
that's exactly why today's showmatters. Few people understand
(01:56):
this moment better than PeterLeniman. He's not just an
economist.
He literally wrote the book oncommercial real estate. And on a
personal note, his BizNow videoeducation series trained an
entire generation of CREprofessionals, myself included.
So thank you, Peter. And hespent his career studying how
markets behave when claritydisappears and discipline
(02:19):
becomes the only real compass.Peter, welcome to First Draft
Live.
Peter Linneman (02:24):
Thank you for having me, Mark. Great pleasure
to be here.
Mark Bonner (02:27):
Pleasure's all mine. So Peter, before we get
tactical, I wanna pull the lensback a bit. For years, I've
heard the most seasoned peoplein this industry say, I've been
through this before. We alwayscome out on top. And sure,
experience matters.
Discipline matters. Longmemories matter. But tough
(02:48):
periods also separate the field.Some players rise above it, some
disappear, sometimesspectacularly as we've seen. But
this year feels different.
The shutdown blacked out thedata we rely on, tariffs spiked
to levels we haven't seen ingenerations, rate expectations
continue to royal, fundamentalscontradicted each other. The
(03:11):
usual signals just broke. So letme ask you this. Have you ever
seen a moment quite like this inyour career? And if not, is
there a far off chapter ineconomic history, maybe one most
of us have forgotten, that youthink is actually instructive to
this moment?
Peter Linneman (03:28):
I think it's a great question. I think that
every moment I've lived through,I'm 74, I've been in the
business a long time isdifferent. Right? Everyone's
different. There's craziness inan odd way.
You talk about the absence ofdata to analyze. When I began in
this business, no one analyzeddata, and there wasn't data
(03:54):
there to analyze. And yet therewas still an industry. Right?
And I'm not saying it was asefficient, but there was still
an industry.
And as an analogy, before BlackScholes formulas existed, people
traded options. Right? BlackScholes made it easier. So in a
(04:16):
way, it's not so unusual to havefoggy data. It's not so unusual
to have limited data.
One of the things that I didduring this blackout of some
data I'd always viewed trying tofigure out the economy the real
(04:37):
estate framework etcetera likelooking at, I don't know, a
Monet painting. No brush strokemeans anything in and of itself.
None. All of them taken togetherwhen viewed from an appropriate
distance matter a lot. Okay?
I can't tell it's a cathedral ifI'm too close. I can't tell it's
(05:01):
a cathedral if I just look at abrush stroke. And I think one of
the things I do that a lot ofpeople don't do is look at a lot
more brush strokes. So whathappened, and you're right, it
was frustrating not to getemployment data and it was
frustrating. I still had a lotof brush strokes.
So you can imagine some of mybrush strokes disappeared. And I
(05:24):
then tried to squint. You knowhow you kind of squint to try to
see what the picture is. Could Isee it as clearly? No.
I'll give you this actually iscoincidental, but it's true.
Yesterday, the employment datacame out and everybody was
holding their breath and Ihappened to be on the phone with
a very close friend and he saysthe data just came out literally
(05:45):
said the data just came out howmany jobs were added last month
and I said 120. I didn't knowthe answer And I said 120,000.
And he said, you're wrong. It's119,000.
Now, it's not that I'm thatprecise. But yeah, I lost some
brush strokes, but there werestill enough there. When you
(06:08):
don't have when you do haveuncertainty, it becomes more
important to go beyond the norm.What's going beyond the norm? I
talk to more people about how'sit going?
I mean, how's it really going atyour apartments? Forget the
data. Right? How's it reallygoing in your apartments? How's
it really going in your officebuilding?
Reading the public company'searnings reports, listening to
(06:32):
their earnings. Because allthose are just little
brushstrokes. Right and youcan't just rely on the BLS set
right and so it is uncertain.You mentioned the tariffs. I've
never seen anything like this inmy lifetime on the tariffs
(06:56):
either in terms of the magnitudeor the uncertainty.
Either one would be challenging,right? The magnitude would be
challenging And the uncertaintywould be challenging, but we got
both of them on tariffs. Andimports are roughly 10% of the
economy. So one of the thingsand I'm just trying to give you
a framework for people listeninghow to think about this. So why
(07:20):
wasn't the economy more slowed?
It has been slowed, but theeconomy basically shouldn't be
growing if the tariff impact wasas high as you can simulate it
to be. That is things comingfrom China like this or tax like
that and so forth. So I went anddid a very simple analysis last
(07:43):
week. Just this is real timelast week. I took the actual
tariffs collected by the USgovernment over the last six
months and divided it by theactual imports recorded.
You can think of that as anaverage tariff. Right? You're
collecting how much on whatbase. All the simulations say
(08:07):
the tariff rate should be aboutsixteen to eighteen dollars per
100. When you divide the actualtariffs paid by the actual
imports, it's about 6 and a halfdollars.
And that's up from $3, so it'sup. It's up from $3 to 6 and a
half, but it's not 18. Andthat's why the impact is not as
(08:32):
big. And you say, well, how canthe simulated be 16% to 18% in
the actual? And that's becausepeople adjust.
And so what I'm trying to do isanalyze people adjust. The
impact's not as big as it mightfirst appear because people,
when it rains, you put up anumbrella. When it rains really
(08:55):
hard, you try to get under anawning. When it rains really,
really hard, you go inside.That's the difference between
the 16 and a half 16 to 18 andthe six and a half percent.
So your point is brilliantly ontarget uncertainty, but you
gotta try to go and do somedifferent things than you might
normally do to get a littlebetter clarity.
Mark Bonner (09:17):
Yeah. I mean, look, to take, your metaphor of Monet
brushstrokes, I would say wehave had brushstrokes. There
haven't been from Claude Monet.They've been from Jackson
Pollock. Right?
And that is and that and thathas introduced chaos into the
overall thinking here. And thereason why I go back to the
history is because try as Imight, Peter, I cannot I'm not
(09:41):
smart enough to know what periodin economic history this most
resembles and whether or notthat period in time can tell us
something about this moment. ButI'm kind of hoping that you can
instruct us on what this momentmeans in the grand arc of your
career.
Peter Linneman (09:56):
So what drives home are fundamentals. Look at
fundamentals. Don't get caughtup in what are fundamentals.
There are incentives not toimport. Right.
And people respond toincentives. So yes it's going to
drag the economy but not asmuch. Capital markets. The Fed
(10:20):
has been crazy any number oftimes over history sometimes too
high sometimes too low alwaystoo late. But but the economy
goes on.
So when the Fed had interestrates too low the economy went
on. And when the Fed hadinterest rates too high over my
(10:42):
career, economies go on, and itadjusts. Doesn't perfectly
adjust. It adjusts. The key iswatching the adjustments.
And by what are the adjustmentsalways revolve? Think of taxes.
People respond to tax rates. AndI think what people forget is to
(11:02):
look at the responses people aremaking. That's far more
interesting than what they'reresponding to.
We can't solve the Fed keepinginterest rates too high. We
can't solve the Fed be uncertainabout three weeks before two and
a half weeks before they'regonna make a rate decision.
(11:23):
They're still, you know, mealymouthing. Right? We can't change
that.
We can adjust to it and watchthe adjustments. What are the
adjustments people are making?The adjustments people are
making are borrowing less.Right? Because you don't know
what your cost of capital isgoing to be.
(11:46):
Is this a moment to lock in longor lock in short when you don't
know borrow a little less andand so those are the things I
think to focus on are theadjustments more than the
impediments. Talked about officeuncertainty. Look at how people
(12:09):
are adjusting more than theimpediment, which is nobody
knows how much space they need.
Mark Bonner (12:16):
Right. And then meanwhile, with all of this
uncertainty that we're talkingabout here, there's mispricing,
right? Some industrial marketsare trading at pre pandemic
pricing while office values toyour point in several major
metros continue to slide. Retaillooks stable. Data centers look
unstoppable.
We'll talk about data centers ina second. Multifamily is turning
to a tale of two Americasdepending on supply pipelines
(12:37):
and insurance costs. Where iswhere do you think commercial
real estate is clearlyoverpricing this fear and
uncertainty?
Peter Linneman (12:46):
Overpricing. I don't think there's a lot of
sector where real estate isoverpriced. Certainly not
office. Certainly not goodoffice is overpriced. I don't
think multifamily is overpricedquite the opposite.
I think most multifamily isunderpriced compared to its
performance. Industrial, more orless correctly priced. I think
(13:14):
hotels are being underpriced andthat people are waiting for the
next shoe to drop. Theuncertainty phenomena, they're
kind of they're overweightingthe uncertainty in the pricing,
And there's a lot of short termmoney. So when there's a lot of
short term money thatuncertainty weighs more heavily.
Retail, around right pricing, Ithink retail has the advantage
(13:43):
right now. Good retail in thatfive years ago everybody thought
nobody would go to a physicalplace right. Was it was all
going be done online by now.Yeah. And Covid proved that's
not going to happen.
And so people now look at goodretail as a good cash stream.
(14:03):
And then as you say, datacenters are a whole new game,
whole new game.
Mark Bonner (14:08):
Well, let's talk about data centers, because I
mean, you want to talk aboutuncertainty, Right? There it is
right there. On one hand, you'vegot a turbocharged, situation
where trillions of dollars areanticipated to go into this over
the next five to six years.Billions upon billions have have
already flowed in. It's red hot,but it's also red hot on the
(14:30):
other side, in terms of thefear, worries about a bubble,
the local politics thatcontinues to be a headwind, the
power supply issues.
And so this bubble thingcontinues to bubble. I mean,
even within twenty four hours orless of NVIDIA punching way
above its weight class, which isthe biggest weight class there
(14:53):
is in in the financial world.Then the stock market did its
thing the next day because itstill has fear. Let's get to a
question from our audience onthis front, Peter. Can you
address all the noisesurrounding whether we are in a
data center development bubble?
What is your take on this?
Peter Linneman (15:10):
Okay. So let's take the the supply side. Right
now, the margins for developingdata centers, because there is a
lot of money out there, andthere's not a lot of supply.
Right now, the margins areprobably four times normal. Now
(15:32):
in my career, anytime marginsare four times normal, there's
gonna be a lot of supply sooneror later.
Right? So somebody's gonna getcaught out. So right now, it's
terrific. If you can come upwith the capital, there are
tenants that wanna be there.Even if you do it spec, there
are tenants who wanna be there.
(15:53):
So if you can get over thehurdle of power, you can get
over the zoning and so forth.There are tenants out there, and
they'll pay up. I'm not worriedso much about now. I'm worried
about the supply that bringsabout. And that supply, I just
don't normally see things withfour times normal margins.
Mark Bonner (16:13):
When do you think that moment's going to come?
Peter Linneman (16:17):
It will take probably three to five years,
and partly because the amount ofmoney that's associated with the
data set. It's not like you'rebuilding a $12,000,000
warehouse. So you have to tapsome enormous pools of data,
assuming of dollars to to do it.And a tap, as you know, and your
(16:42):
listeners know, tapping is oneit's hard enough to get
$12,000,000. Now try to get$2,000,000,000.
That's hard. And just think ofsomething as simple. Here's
what's going to make it slower.And here's why the margins are
big right now. The margins arebig right now.
Let's suppose you have a$2,000,000,000 project. And
(17:04):
let's suppose you can find bankswho are willing to do a billion
dollar. A billion dollar banksyndication is a huge load. It's
not easy, especially if it'sspec. You have no lead tenants.
And I still need a billion ofequity. That's not easy to come
(17:25):
up with a billion of equity fora spec project. The fact that
it's hard to raise that capitalis gonna make it slow, but the
capital is going to respond tothe margins. But it's not gonna
respond overnight. It is gonnatake several years.
People are gonna make a lot ofmoney on the development over
(17:45):
those years. Yeah. But watch themusical chairs when the supply
finally gets there.
Mark Bonner (17:52):
Is the institutional lending on this
gonna be the signal to thenoise? I mean, if they begin to
pull back a bit on the capitalstack to limit their downside
risk, I mean, is that reallywhat we're looking for here?
Peter Linneman (18:04):
That's where it'll be. That's that's clearly
where it'll be. My guess isyou're going to get one more
fit. Right now you have banksyndicates kind of leading it.
They're gonna run intolimitations on their balance
sheet.
What are they then gonna do?They're going to securitize it.
Right? Once they securitize it,because that's a bigger
(18:27):
syndicate than just eight banks.Right?
They're going to securitize it.Once they securitize it, you
know the next things are goingto cut it up into triple A,
double A, single, etcetera.
Mark Bonner (18:38):
Yeah.
Peter Linneman (18:39):
You know that in the beginning that will be
tightly underwritten and youknow at the end that will be
loosely underwritten. And that'swhere the music ultimately will
end because the banks will goonly so far on their balance
sheets. They'll go broader by bydoing it as securitization.
(19:00):
It'll be well securitized in thebeginning and poorly securitized
at the end. And I think that'sabout a four year journey.
Mark Bonner (19:10):
If you're just joining us, this is First Draft
Live. I'm here with PeterLindeman, the guy who literally
wrote the book on commercialreal estate, talking about the
word of the year, uncertainty.Peter, let's go to another
question from our audience. Isthe new normal in CRE, at least
for the foreseeable future, aperiod of prolonged uncertainty
driven by several factors, mostnotably the policy direction
(19:33):
coming out of Washington?
Peter Linneman (19:36):
And I would include the Fed when you say the
policy direction. I wouldn'tlimit it to simply the White
House in Congress.
Mark Bonner (19:43):
I mean, the White House is trying to dictate Fed
Right. Federal Reserve policy,as we all know.
Peter Linneman (19:48):
I would include the whole thing. And by the way,
I'd go even one step further. Asyou know, there's a number of
court I'm not a legal expert.There's a number of court cases
about tariffs in front ofdifferent courts that will
presumably end up in the SupremeCourt. So there's the
uncertainty of what the WhiteHouse will do.
(20:09):
There's the uncertainty of whatCongress is gonna do in reaction
to that. We've got electionscoming up next year that will
maybe change the balance there.You've got a Fed that's kind of
been not the most transparentand the most on target. And we
have all these court casesswinging around. Take something
(20:31):
as simple as not simplesomething as basic as
immigration.
I had a friend I made a commentabout four months ago that
you're gonna see some verypublicly prosecuted immigration
case right and it will slowimmigration and I had a friend
who said, especially if we'regonna do a one court case at a
(20:53):
time and that's not quite whatwe're doing, but you tell me the
transparency on whereimmigration law comes out on.
I'm not a legal expert. Many ofthese things have never been
litigated in this way. Staytuned. And yet that has a big
impact on inflow of labor,inflow of people.
(21:16):
What will that do to labormarkets? So I'd say most of the
uncertainty we have comes out ofWashington, which is legal.
Judicial legislativeadministrative and the Fed. Lots
of uncertainty coming out ofthere and what we're doing is
(21:38):
reacting to it. Now, here's thegood news if people can react if
Turkey, the country, can growamid all the uncertainty that
economy constantly has, we'll dookay because we're more
resilient, more transparent.
Would we do better without allthis uncertainty? Absolutely.
(22:01):
Absolutely.
Mark Bonner (22:03):
So, I mean, is uncertainty the new certainty? I
mean, can you bake in this ideathat we're gonna be on this
bumpily, wobbly Jackson Pollockcanvas? Can is that a loan
because that's something thatyou can actually bake into your
thinking?
Peter Linneman (22:21):
Well and that was kinda my point about Turkey.
Turkey has baked it in. Theirbusinesses are baked in. We
don't know what the hell thegovernment's gonna do right. We
really don't we have alwaysbaked in some degree of that
right we we've always baked insome degree of that.
We just have a lot more of itnow than normal. We bake it in.
(22:45):
Businesses operate. They givethemselves bigger margin
cushions, but it does slow theeconomy down. It is the new
world.
It'll probably go on and atleast until after the election.
At least until after theelection.
Mark Bonner (23:00):
After the midterms?
Peter Linneman (23:01):
The midterms. Yeah.
Mark Bonner (23:02):
Got it. Mean,
Peter Linneman (23:05):
tell me what happens in the midterms. Let's
suppose Trumpism gets totallydefeated in the midterms one one
path is gonna happen. You tellme Trumpism gets totally
reinforced at the midterms adifferent path will occur And I
don't know which.
Mark Bonner (23:26):
Let's go to another question from the audience. Why
are apartments underpriced whenmost rents are flat or declining
and expenses are increasing,especially for insurance?
Peter Linneman (23:38):
I think capital markets have gotten there's a
false narrative that's hurtingthe capital markets. There was
remember, like seven years ago,the false narrative was no one
will ever shop in a shoppingcenter. And you go, that's not
true, and it hurt the capitalmarkets. The false narrative for
(23:59):
apartments is that since rentsare flat and occupancy is a bit
soft, demand for apartments musthave weakened. And that's, you
know, that's not the case.
Demand has stayed just fine.It's just that it got spread
over a bigger supply. And that'swhat made things that's what
(24:21):
swung things from being veryrobust to very weak. And I don't
think the capital markets havefully figured out that it wasn't
demand. It was all supply.
Demand has stayed strong. Singlefamily housing is way under
produced. That's the best thingthat could ever happen to multi.
(24:44):
That's not gonna go away. And assupply pipelines and as you
know, in every market supplypipelines are getting shrunk.
We still grow. We still havemore people. We still have more
income and we have single familygetting more and more expensive
because we have a shortage. Ithink what you're gonna see is
(25:06):
that narrative change in 2027,2028, and you'll see a rebound
in pricing, not unlike what yousaw in retail as people
realized, oh, a public'sanchored shopping center's not
going to become a ghost town.
Mark Bonner (25:28):
So what's your outlook on multifamily? Ten
years. I know that's a big it'sa it's a big question.
Peter Linneman (25:33):
Ten years, you'll do an unlevered return on
a portfolio of multifamilyaround 9%, nine and a half
percent. That's my prediction.How you get there? Unlevered.
Let's because the leverage makesit a different game, but you're
gonna get there and that you'regonna get a 5% yield coming out.
(25:59):
You'll get growth of severalpercent a year from inflation.
You get growth of 1% or sobeyond inflation in values
because construction costs go upfaster than inflation. And you
sit down and you do the math,and you get nine to nine and a
half percent over a ten yearperiod with uncertainty and
(26:21):
volatility in between. Okay? Youlever that up, and depending on
how much, you're gonna convertthat nine to 9.5 into, at low
leverage, 10 to 11.5%.
At 60% leverage, you're gonnatake it up to something like 12
(26:41):
to 14%. Hard to get a lot higherleverage than that, but you can.
And of course, as you push theleverage higher, you run the
risk that you get squeezed on amoment and you won't be around
to realize that return. Whoeveris gonna come in and grave dance
on you is gonna realize it. Sothere's no free lunch.
(27:05):
But, yeah, that I have prettyclear transparency on that as a
pricing and as a return onmulti.
Mark Bonner (27:13):
So let's talk capital just for a second.
Capital has not disappeared thisyear, but it has gotten pretty
cautious. The quiet story isthat it's not wait and see for
some players. The mostsophisticated capital has
probably already startedpositioning for 2026 and maybe
even beyond. Peter, where iscapital actually flowing?
(27:36):
Not talking about where it'sflowing, but where is it
actually being deployed rightnow?
Peter Linneman (27:41):
So it's doing the same thing it's done in
every cycle, capital cycle I'vewitnessed. It pulls back. Each
time it pulls back for adifferent reason. It may have
been the war in The Middle Eastin the seventies, and it could
be a terrible economic crisis inthe early eighties. So whatever
09/11, each time it pulls back,when it comes back, it has the
(28:04):
same DNA.
It starts with the safest assetsin the most liquid markets with
relatively low leverage, and itflows into that. And then you
can almost think about it as awaterfall and those markets get
back to normal. Those those realliquid real transparent high
(28:29):
quality get filled up and noteven like a waterfall. What is
this where they do champagneglasses you know and it keeps
flowing down the think of itthat way you know you start with
the top champagne glass and thenit flows to the next level. Yes.
Some drips to the third and somedrips to fourth. It then gets to
(28:50):
the highest quality and thesecondary less transparent
markets, and then it gets to thesecondary assets in the most
transparent markets and and andand it finally gets and we've
seen this every time it finallygets to the run of the mill. I
don't mean that in a bad sensethe run of the mill assets and
(29:12):
run of the mill submarkets itfinally gets to and they're
always the last to realize it.So where's the money going now
to the best ask think of office.It's pretty transparent if you
wanted to get money for officeright now, you would want to
have the best buildings best interms of occupancy, right, and
(29:34):
tenancy and lease up.
You'd want to have the bestbuildings in New York, in the
best submarket of New York. Andif you had the best building in
New York, the best submarket inNew York, you can get capital.
It's flowing there now move downthe food chain, not so much If
you have apartments in the goodsubmarkets, it's flowing there.
(29:58):
It's down to the second andthird levels of the champagne
glasses for multifamily, but notall the way down. Industrial, if
you've got Amazon as yourtenant, you're doing just fine
from a capital market point ofview.
It's as you move down and youhave a 50,000 square foot. So
(30:19):
just think of that champagnewhat do they call it? Like tree.
I don't know what they call it,but you know what I'm talking
about.
Mark Bonner (30:25):
I know you're talking about. But Peter, not
everybody operates with thecream of the crop. Right? Not
everybody's playing in New YorkCity in the in in, you know, in
the Financial District orMidtown, where the strength of
The US office market rests, atleast historically, not
everybody's able to play in thetop asset classes. And even if
they are playing in the topasset classes, they're not maybe
(30:47):
they're not playing on on themap, where where where it's the
hottest.
You know? As you've taught usthrough your videos, there's a
thing called class b and classc, and I know that's eye of the
beholder. But, I mean, what doyou do if you're not able to
play in those very Tony cornersof The US real estate market?
Peter Linneman (31:08):
So and most of us don't play in that. Right? I
mean
Mark Bonner (31:11):
Right.
Peter Linneman (31:12):
Most of us don't play. I think the most critical
thing if you're going to be aninvestor or an operator in the
normal levels, You know thethere are many more glasses on
those bottom two rungs thanthere are in the upper rungs
right. It's another way ofsaying it you have to have
patience. You gotta wait till itgets down to you. That means
(31:35):
you've got to go in with lessleverage.
You've got to go in with astrategy of longer hold if
you're in those not top quality.One of the things being the top
quality affords you is theluxury of, if you want, higher
leverage and, if you want ashorter hold period, but I think
(32:03):
you're 100% right now. Counseleda lot of people over the years
if you're in these lower rung, Idon't mean lower and in a bad
sense just think of it in theflowing down of the capital. You
just have to have strategicallya longer hold and you have to
have strategically moreimpregnable capital structure,
(32:25):
which means you have to havemore equity because that's the
only way you and longer debt.Right.
More equity.
Mark Bonner (32:33):
Right. And you and you're touching on I I wanna end
on this last night. I know we'relittle over, but this has been a
wonderful conversation.Uncertainty doesn't just break
models. It breaks decisionmaking.
Committees freeze, timelinesslow, everyone waits for
certainty that never arrives. Ifeel like this has been the
story every year since thepandemic began.
Peter Linneman (32:51):
And
Mark Bonner (32:51):
yet, historically, the investors who outperform in
certain periods aren't the oneswho wait. They're the ones who
act with discipline while othershesitate. But Peter, there's a
lot of fear and it's been builtup over the last five years
since we've been in thispandemic. Do I move now or do I
wait? This quarter or nextquarter?
(33:13):
Survive to '25, bliss to '26,heaven in '27. You know, all
these ridiculous, things thathave been said by the industry,
it's a lot of wait and see.Right? No one wants to be the
first one through the wallnecessarily. How do you get past
that psychology when you'redealing with all of these things
that are happening that you'retalking about?
Peter Linneman (33:35):
One of the challenges is the horizon, the
investment horizon of more andmore capital has gotten shorter
and shorter. Just think ofprivate equity funds, They're
kind of three to five yearmodels, not all of them, but
they're sort of three to fiveyear models. You better be able
to time to get a three to fiveyear model working. People are
(34:03):
not paid to take risk whenothers aren't taking it. And
that's one of the reasons somuch money is sitting aside.
You say, oh, they're paid totake risk. No. They're paid to
take risk when others are takingrisk, not just to take risk. And
when no one's doing anythingeverybody sits. That's when the
(34:25):
opportunities are greatest.
I'll give you a I think this isa good thing for people to end.
I think it's a good time to actif you can hold. If you can
hold. I think it's not a greattime to act because of all the
uncertainty if you have a threeto five year window because you
(34:45):
could get caught out on it.Think of it this way and and
I'll and I'll give you a backupto this if you're going to hold
a property for thirty years,think of an apartment building,
you're going to hold it forthirty years and you think the
first year it's gonna give you a6.2 yield on cost.
Okay? And it comes out of theground. And because the market's
(35:09):
weak, you only get a 5.7 yieldon cost. If you're trying to
hold that three years, you'redead. You're dead on that
difference.
If you hold it for twenty years,the performance of that asset
over twenty years has almostnothing to do with whether it
was a 5.7 in the first year or a6.2. It's about all the things
(35:33):
that happened in the othernineteen years in the capital
markets and so forth. And youneed capital and courage. You
need both. You need capital andyou need courage.
Short investment horizons makeyou not courageous they just by
they should make you notcourageous and I was at an event
(35:55):
that I kind of host. And we aretalking about development in
June with a big group of peopleand most of the three to five
year investment money was sayingno, I'm not invest. I'm not
developing. I'm not developing.I'm not develop Very
interesting.
Five ultra ultra wealth familieswere in that group, though. All
(36:18):
five of them were developing.All five of them said basically
what I just did. We're gonna ownthis for twenty years. We think
it's a great location.
Think construction costs are youknow reasonable. We don't know
whether it's gonna be a 6.2coming out of the ground or a
5.7. We would prefer it to be a6.2. We have low enough
(36:42):
leverage. We're gonna slide andit was very interesting.
All five ultra high wealthfamilies were developing now why
they happen to have courage andthey have capital. The there are
people out there with courage,but they don't have capital. And
there are others out there whoseshort investment horizons have
(37:05):
understandably and correctlymade them not courageous. But
when everybody else startsjumping, it'll be like the
wildebeest in the crossing theriver. They all jump in.
And I land by saying I was I I Ihave a charity effort over in
Kenya and I go every year and wesee the wildebeest crossing the
(37:25):
Mara River and I was there aboutfifteen years ago with someone
who was a major major banker, amajor major banker and the
wildebeest to and fro to and frodon't cross don't cross don't
cross and then they go like helllike you see in the movie. And
she looks at me and says they'regoddamn bankers. Sooner or later
(37:48):
the wildebeest will grow.
Mark Bonner (37:52):
Bold prediction for 2026.
Peter Linneman (37:55):
The will the beast will start jumping.
Mark Bonner (37:59):
Well said. Okay. Peter, thanks for taking the
time. We really appreciate you.
Peter Linneman (38:05):
My pleasure. Thanks for having me.
Mark Bonner (38:08):
If you missed any part of this conversation or
wanna catch our earlierepisodes, you'll find every show
on biznow.com or in yourfavorite podcast feed. Just
search First Draft Live. We'llbe back next week. Until then,
this is First Draft Live. Have agreat weekend y'all.
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