CrowdStreet’s Darren Powderly is joined by Dr. Peter Linneman, Professor Emeritus at the Wharton School of Business, Principal of Linneman Associates, and world-renowned real estate industry economist, to discuss how today’s recession is unlike even The Great Depression, where there might be opportunities for real estate investors, and why you shouldn’t bet against the U.S. economy in the long-run.
Darren Powderly, Co-Founder & VP Capital Markets
CrowdStreet
CrowdStreet
Darren founded CrowdStreet in 2012 after identifying the need to radically improve people's access to commercial real estate investments via technology. Over his 20+ year career, Darren has transacted billions of dollars’ worth of commercial real estate investments and enterprise software contracts. Darren is a driven leader who loves building relationships based on mutual success. In addition to building businesses, leading teams and advising a prestigious list of national clients, Darren has personally owned commercial real estate, syndicated investment groups and developed properties from the ground up.
00:00:06 Hello everybody, this is Darren Powderly. Welcome to StreetBeats. This is CrowdStreets, uh, series on keeping you informed on insights and data, what's happening in real time in the market today. It is my great pleasure to have Dr. Peter Linneman, uh, renowned real estate expert. Tell us a little bit about yourself and, uh, your bio and your work at Linneman Associates, please.
00:00:29 Sure. Happy to do so. Philadelphia based, I'm an economist by training. I was on Wharton's faculty, headed their real estate program for a while and founded the program, was on their faculty until about nine years ago when I retired from teaching. I have served on about 20 public company boards over the years. I'm on four public company boards now. I have had lineman associates, which is a boutique advisory firm that does high wealth individuals, REITs private equity funds, some sovereign funds on all types of things, from strategy to acquisitions to, uh, uh, disposition to, to, um, general economic advice for many years. I continue to do that. That's sort of me,
00:01:23 You know, as a, uh, shameless plug for Peter. Uh, you know, he is one of the most renowned professors and participants in the commercial real estate industry, and I have actually studied some of his materials, uh, both his video series as well as textbook, and we use some of his materials at CrowdStreet to train new employees. So let's jump into a couple of topics here. Peter. You know, you do a lot of research and I know you publish a lot of that research. Uh, what is the current research telling you about, you know, the depth and shape of the recession, specifically how it, you know, pertains to commercial real estate values and how long do you think that this is going to sort of take to work itself out?
00:02:06 Yeah, two things. One, were an uncharted territory. Even during the Great Depression in the early 1930s, 31, 32, 33, the drop did not happen this fast.
00:02:20 Mm-hmm.
00:02:21 <affirmative>. So as we sit here, I estimate about a 25% unemployment rate. The data won't come out for weeks. Right. All recessions say some industries don't go down very much at all. Some industries or companies go down 1%, some go down 5%, and the hyper reactors might go down 10, 15, 20% inactivity.
00:02:47 Mm-hmm.
00:02:48 <affirmative>, this is where probably what would you guess, uh, 40% of the economy is basically at zero now for two months.
00:02:58 Right.
00:02:59 That's a very different scenario where you've got 40% at basically zero. I know it's not literally zero, but for all intents and purposes. So coming out of that, we just have never seen, and I use the analogy that when I was young, you'll probably find it hard to believe, but I used to be able to dunk a basketball reasonably easy with a running start. But if I stood under the basket and jump straight up, I could get above the rim. But I never could quite dump that way because you have to go higher. You don't have the running start. Most recoveries have the running start. They're not from zero. Even a hard hit firm is at 30%, uh, uh, at 70 or 80%, and a lot of firms are at 99% or a hundred percent. This has huge swaths of the economy starting from zero.
00:04:04 So having said all that, nobody knows, including me, there are no models for this. Mm-hmm. <affirmative> and to the extent the models are ever useful, to answer your question, you have to actually think about reality. And there's two realities. One is what the political system will allow us to do. When are you allowed? And the other is when will you allow yourself to do? And I think so far the political system has been the entire constraint. I think restaurants, Sweden is the best example. Switzerland, people continue to go to restaurants, not as much. People continue to travel, not as much. So once the government says we're allowed to, I think you'll see something like Sweden pretty quickly. That's not a model that's just thinking about reality of how things might adjust.
00:05:06 Absolutely. You know, we, uh, we've been talking to a lot of people, of course, and, uh, some of our individual investors are, you know, I think they're looking for that first mover advantage. And because real estate changes slowly unlike the stock market, you know, it's, uh, it's still undetermined if the people investing today, you know, are, um, not catching a fan, a falling knife. Right. That's what the fear is, is that that's the challenge. The challenge is that you do not want to be the first mover advantage, uh, you know, mover investor and catch the falling knife, assuming there's, they have liquidity, uh, access to, you know, debt and equity. And I know debt is difficult right now, to say the least. Um, where do you think some of the first opportunities are going to emerge for private real estate firms?
00:05:54 One of the, the things that distinguishes legendary investors is that when these times occur, they don't just play defense and try to survive and deal with all their problems, but they also uses it an opportunity to move forward.
00:06:17 Well, Peter, any, uh, closing thoughts for us? I know there's so much we could talk about, including, you know, your thoughts on restarting the economy and phases of that. But any closing thoughts for us today?
00:06:28 One is betting against the US economy in the long term has always been a bad bet. And so I would remind listeners that while you're doing defense and while you're being frightened and while you're, and a lot of you have anxiety, we all have anxiety. When you get ready to go to bed at night, you're worried. Or when you wake up in the morning, say, betting against the US economy over any prolonged period of time has been a bad bet. Bet on the US economy bet smart betting against US economy for a year or two has been a good bet sometimes, but not over any prolonged period of time. And real estate is generally about the over a prolonged period of time. With that, I thank you a lot and wish everybody all the best. Thank you for the opportunity.
00:07:22 Peter, thank you so much for joining us and sharing your insights and wisdom with us. Uh, it's been an absolute pleasure. Our audience members thank you as well and we look forward to seeing you again sometime soon. Stay healthy, stay strong out there in Philly, and uh, look forward to seeing you again in person.
00:00:29 Sure. Happy to do so. Philadelphia based, I'm an economist by training. I was on Wharton's faculty, headed their real estate program for a while and founded the program, was on their faculty until about nine years ago when I retired from teaching. I have served on about 20 public company boards over the years. I'm on four public company boards now. I have had lineman associates, which is a boutique advisory firm that does high wealth individuals, REITs private equity funds, some sovereign funds on all types of things, from strategy to acquisitions to, uh, uh, disposition to, to, um, general economic advice for many years. I continue to do that. That's sort of me,
00:01:23 You know, as a, uh, shameless plug for Peter. Uh, you know, he is one of the most renowned professors and participants in the commercial real estate industry, and I have actually studied some of his materials, uh, both his video series as well as textbook, and we use some of his materials at CrowdStreet to train new employees. So let's jump into a couple of topics here. Peter. You know, you do a lot of research and I know you publish a lot of that research. Uh, what is the current research telling you about, you know, the depth and shape of the recession, specifically how it, you know, pertains to commercial real estate values and how long do you think that this is going to sort of take to work itself out?
00:02:06 Yeah, two things. One, were an uncharted territory. Even during the Great Depression in the early 1930s, 31, 32, 33, the drop did not happen this fast.
00:02:20 Mm-hmm.
00:02:21 <affirmative>. So as we sit here, I estimate about a 25% unemployment rate. The data won't come out for weeks. Right. All recessions say some industries don't go down very much at all. Some industries or companies go down 1%, some go down 5%, and the hyper reactors might go down 10, 15, 20% inactivity.
00:02:47 Mm-hmm.
00:02:48 <affirmative>, this is where probably what would you guess, uh, 40% of the economy is basically at zero now for two months.
00:02:58 Right.
00:02:59 That's a very different scenario where you've got 40% at basically zero. I know it's not literally zero, but for all intents and purposes. So coming out of that, we just have never seen, and I use the analogy that when I was young, you'll probably find it hard to believe, but I used to be able to dunk a basketball reasonably easy with a running start. But if I stood under the basket and jump straight up, I could get above the rim. But I never could quite dump that way because you have to go higher. You don't have the running start. Most recoveries have the running start. They're not from zero. Even a hard hit firm is at 30%, uh, uh, at 70 or 80%, and a lot of firms are at 99% or a hundred percent. This has huge swaths of the economy starting from zero.
00:04:04 So having said all that, nobody knows, including me, there are no models for this. Mm-hmm. <affirmative> and to the extent the models are ever useful, to answer your question, you have to actually think about reality. And there's two realities. One is what the political system will allow us to do. When are you allowed? And the other is when will you allow yourself to do? And I think so far the political system has been the entire constraint. I think restaurants, Sweden is the best example. Switzerland, people continue to go to restaurants, not as much. People continue to travel, not as much. So once the government says we're allowed to, I think you'll see something like Sweden pretty quickly. That's not a model that's just thinking about reality of how things might adjust.
00:05:06 Absolutely. You know, we, uh, we've been talking to a lot of people, of course, and, uh, some of our individual investors are, you know, I think they're looking for that first mover advantage. And because real estate changes slowly unlike the stock market, you know, it's, uh, it's still undetermined if the people investing today, you know, are, um, not catching a fan, a falling knife. Right. That's what the fear is, is that that's the challenge. The challenge is that you do not want to be the first mover advantage, uh, you know, mover investor and catch the falling knife, assuming there's, they have liquidity, uh, access to, you know, debt and equity. And I know debt is difficult right now, to say the least. Um, where do you think some of the first opportunities are going to emerge for private real estate firms?
00:05:54 One of the, the things that distinguishes legendary investors is that when these times occur, they don't just play defense and try to survive and deal with all their problems, but they also uses it an opportunity to move forward.
00:06:17 Well, Peter, any, uh, closing thoughts for us? I know there's so much we could talk about, including, you know, your thoughts on restarting the economy and phases of that. But any closing thoughts for us today?
00:06:28 One is betting against the US economy in the long term has always been a bad bet. And so I would remind listeners that while you're doing defense and while you're being frightened and while you're, and a lot of you have anxiety, we all have anxiety. When you get ready to go to bed at night, you're worried. Or when you wake up in the morning, say, betting against the US economy over any prolonged period of time has been a bad bet. Bet on the US economy bet smart betting against US economy for a year or two has been a good bet sometimes, but not over any prolonged period of time. And real estate is generally about the over a prolonged period of time. With that, I thank you a lot and wish everybody all the best. Thank you for the opportunity.
00:07:22 Peter, thank you so much for joining us and sharing your insights and wisdom with us. Uh, it's been an absolute pleasure. Our audience members thank you as well and we look forward to seeing you again sometime soon. Stay healthy, stay strong out there in Philly, and uh, look forward to seeing you again in person.