Peter Linneman
Where is Real Estate At?
Where is it Headed? (Take 2)
Posted: 03 Dec 2010 06:03 AM PST

Wednesday morning I had the pleasure of hearing Peter Linneman express his thoughts on the real estate economy. Dr. Linneman is one of my favorite speakers, he has this keen ability to to make complex topics easy to understand.

His speech last year focused on job loss, consumer confidence and the recovery.

This years speech covered much of the same, but had a much greater focus on the effect government actions have on the recovery. Excuse the lack of order of these notes, Dr. Linneman himself admitted that he tends to rant.

Job Loss

▪ In 2008 rent and occupancy levels were pretty good
▪ However, from there we lost 8.4M jobs
▪ The pipeline of construction completed effectively added another 1.5M worth of jobs to that number
▪ Therefore, we need to add 10M jobs to get back to pretty good
▪ The supply side is not changing so the 10M is a fixed target
▪ In a normal year we add 3M people to the population resulting in 1.7M jobs
▪ It'll take 6 years to get to 10M if it's normal population growth
▪ For a reference point, the most jobs we've ever added was 9M over 2 years during the tech boom

Where are we from the bottom?

▪ We've added 1.3M jobs so far (target 10M)
▪ To reference a baseball game, we've just completed the 1st inning
▪ However, like a baseball game, every inning varies. The first inning was slow (it had a lot of foul balls)
▪ Why? Our economy had no rules -> If you lose all your money, you go out of business. We decided those rules are no longer fun, but we didn't explain the new rules
▪ We need a stable and predictable set of rules
▪ Economies without rules don't function (think Venezuela or Zimbabwe)▪ Baseball has a crazy set of rules, but they're known. If the rules kept changing, people would stop playing -> that's what happened in the economy
▪ It's not about individuals, it's about predictability and centrality
▪ If we have this, the innings will go by quickly
▪ For unemployment to remain at 9%, we need to add 1.7M jobs per year
▪ We'll add way more than that when we have predictability
What's going to happen to the 8.4M?

▪ Not all of the 8.4M are unproductive workers. If half are productive and get back to work, that's 4.2M. Say it takes 3 years, that's 1.4M per year
▪ 1.4M per year + 1.7M from population growth = 3.1M per year
▪ If we sustain this growth for 3 year we're basically back at the 10M
RecoveryFirst to recover will be apartments, then hotels, retail, warehouses and last office:

▪ Apartments will be the first to recover
▪ 2.2M households did not form that normally would
▪ Therefore, it's 6.6 new population for every new household, normally it's 2.3
▪ The first thing young people do when they get a job is move into their own apartment
▪ Apartments are the single best barometer for what's going on
▪ Hotels will be next with a lag. Some corporate decisions are involved
▪ 3rd is retail. The next things kids will do when they move out is buy things for their apartment
▪ The demand in stores will pick up before the demand for stores picks up -> corporate decisions
▪ Office will be last to recover. It's expensive and there are long-term leases involved

Corporate Profits

▪ Non-financial corporate profits are at all-time highs
▪ Stimulus will not come from the government -> if the government deploys capital less productively than we would ourselves, the economy will fall
▪ Non-financial corporations have 2.3 Trillion sitting in banks -> it's going to dribble out, once they feel good about the economy they'll pass it out
▪ Financial sector will simply pay out bonuses with their profits which are near record levels Capital Markets

▪ Real estate is a pink sheet business -> live on the cash flow, cash in on the flow of funds
▪ Flow of funds comes from banks -> banks are good at raising money not because they're good investors, but because they're FDIC insured
▪ They do real well for a while, then they give it all back. This has repeated itself in history
▪ We've re-capitalized the banking system just so they can give it all back again
▪ The 10-year Treasury is at 2.5% while inflation is expected to be 2.7% over the next 10 years -> The Treasury yield is an artificial rate
▪ The historical real expected return of 200 bps suggest an annual inflation rate of 5%, this is not the case
▪ If you distort short money it affects long money

Top Cities

▪ New York, DC, LA, San Francisco and Boston are the best markets -> best product or nothing
▪ I'd look at A product everywhere else and not A product in these top 5 cities
Dr. Linneman left the audience with one thought, the innings will go faster than we think if we get stability.

What do you think?

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From: A Student of the Real Estate Game <Joe.Stampone@gmail.com>

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Date: Fri, 03 Dec 2010 17:21:59 +0000

To: <e_chrisis@YAHOO.com>

Subject: A Student of the Real Estate Game

A Student of the Real Estate Game

Peter Linneman Where is Real Estate At? Where is it Headed? (Take 2)

Posted: 03 Dec 2010 06:03 AM PST

Wednesday morning I had the pleasure of hearing Peter Linneman express his thoughts on the real estate economy. Dr. Linneman is one of my favorite speakers, he has this keen ability to to make complex topics easy to understand. His speech last year focused on job loss, consumer confidence and the recovery.

This years speech covered much of the same, but had a much greater focus on the effect government actions have on the recovery. Excuse the lack of order of these notes, Dr. Linneman himself admitted that he tends to rant.

Job Loss

In 2008 rent and occupancy levels were pretty good
However, from there we lost 8.4M jobs
The pipeline of construction completed effectively added another 1.5M worth of jobs to that number
Therefore, we need to add 10M jobs to get back to pretty good
The supply side is not changing so the 10M is a fixed target
In a normal year we add 3M people to the population resulting in 1.7M jobs
It’ll take 6 years to get to 10M if it’s normal population growth
For a reference point, the most jobs we’ve ever added was 9M over 2 years during the tech boom

Where are we from the bottom?

We’ve added 1.3M jobs so far (target 10M)
To reference a baseball game, we’ve just completed the 1st inning
However, like a baseball game, every inning varies. The first inning was slow (it had a lot of foul balls)
Why? Our economy had no rules -> If you lose all your money, you go out of business. We decided those rules are no longer fun, but we didn’t explain the new rules
We need a stable and predictable set of rules
Economies without rules don’t function (think Venezuela or Zimbabwe)
Baseball has a crazy set of rules, but they’re known. If the rules kept changing, people would stop playing -> that’s what happened in the economy
It’s not about individuals, it’s about predictability and centrality
If we have this, the innings will go by quickly
For unemployment to remain at 9%, we need to add 1.7M jobs per year
We’ll add way more than that when we have predictability

What’s going to happen to the 8.4M?

Not all of the 8.4M are unproductive workers. If half are productive and get back to work, that’s 4.2M. Say it takes 3 years, that’s 1.4M per year
1.4M per year + 1.7M from population growth = 3.1M per year
If we sustain this growth for 3 year we’re basically back at the 10M

Recovery
First to recover will be apartments, then hotels, retail, warehouses and last office:

Apartments will be the first to recover
2.2M households did not form that normally would
Therefore, it’s 6.6 new population for every new household, normally it’s 2.3
The first thing young people do when they get a job is move into their own apartment
Apartments are the single best barometer for what’s going on
Hotels will be next with a lag. Some corporate decisions are involved
3rd is retail. The next things kids will do when they move out is buy things for their apartment
The demand in stores will pick up before the demand for stores picks up -> corporate decisions
Office will be last to recover. It’s expensive and there are long-term leases involved

Corporate Profits

Non-financial corporate profits are at all-time highs
Stimulus will not come from the government -> if the government deploys capital less productively than we would ourselves, the economy will fall
Non-financial corporations have 2.3 Trillion sitting in banks -> it’s going to dribble out, once they feel good about the economy they’ll pass it out
Financial sector will simply pay out bonuses with their profits which are near record levels

Capital Markets

Real estate is a pink sheet business -> live on the cash flow, cash in on the flow of funds
Flow of funds comes from banks -> banks are good at raising money not because they’re good investors, but because they’re FDIC insured
They do real well for a while, then they give it all back. This has repeated itself in history
We’ve re-capitalized the banking system just so they can give it all back again
The 10-year Treasury is at 2.5% while inflation is expected to be 2.7% over the next 10 years -> The Treasury yield is an artificial rate
The historical real expected return of 200 bps suggest an annual inflation rate of 5%, this is not the case
If you distort short money it affects long money

Top Cities

New York, DC, LA, San Francisco and Boston are the best markets -> best product or nothing
I’d look at A product everywhere else and not A product in these top 5 cities

Dr. Linneman left the audience with one thought, the innings will go faster than we think if we get stability.

What do you think?