Economist Peter Linneman used a recent Walker Webcast with Walker & Dunlop CEO Willy Walker to update his interest rate outlook and highlight growing risks in parts of commercial real estate, with a particular warning for the data center sector.
Linneman still expects inflation to moderate over time, but he has pulled back from earlier predictions that the Federal Reserve would move quickly to cut the federal funds rate. He said the conflict in Iran and related volatility in oil prices disrupted his call for two to three rate cuts in 2026. In his revised view, policy rates are unlikely to fall soon, yet he also does not expect additional increases.
He noted that oil prices should eventually stabilize, even if at a higher level, which would reduce their contribution to measured inflation. Once oil is no longer an inflationary force, Linneman believes the Fed will ultimately lower rates, though he questioned both the central bank’s timing and its responsiveness to changing conditions. He characterized the Fed as a major short-term economic risk, arguing that its policy stance is moving in the wrong direction and will affect the economy with a lag.
Higher benchmark rates are already pressuring commercial real estate borrowers facing refinancing deadlines. Linneman advised owners to avoid selling if they can and instead consider shorter two- or three-year loans as a bridge to potential improvement in capital markets conditions. He acknowledged that this runs counter to his usual preference for long-term financing and introduces more risk, but said it may be a rational trade-off in the current environment.
He also pointed to a scarcity of equity for new projects, observing that strong stock market performance can keep capital sidelined from commercial real estate. Some investors, he suggested, may prefer to hold dry powder for distressed opportunities rather than commit equity to new construction, even when fundamentals indicate new supply could be justified.
While he sees multifamily in high-growth, supply-constrained markets as his favored real estate investment, Linneman reserved his sharpest caution for data centers. He recently added the asset class to his personal list of “canaries in the coal mine” and warned that, despite strong demand and a rapid expansion of supply, returns may come under pressure if the sector becomes overbuilt. He is particularly concerned that lenders are offering leverage of up to 90% on first mortgages and appear to be treating the segment as virtually risk-free.
Linneman said hyperscale tenants are currently so eager for data center capacity that they are willing to pay rent premiums, which is reinforcing bullish assumptions among owners and lenders. At the same time, he sees a wave of inexperienced developers chasing the sector, often relying on others for technical expertise. In his view, these dynamics raise the odds that capital will be misallocated, projects will stall, and investors could see money spent without commensurate progress.
Looking ahead, Linneman said he would prioritize multifamily assets in markets with tight supply and durable demand, while viewing data centers as a viable but riskier option over the next several years given the amount of capital already committed. He expects inflation and interest rates to eventually drift lower but stressed that the path and timing remain highly uncertain.
