In the previous appearance of economist Peter Linneman on the Walker Webcast in June 2024, he predicted that there would be three rate cuts by year-end despite the Federal Reserve’s reluctance to lower the Effective Federal Fund Rate (EFFR). However, during his recent guest appearance on Oct. 2 after a 50 basis point reduction in EFFR, Linneman confidently stated that there would be two more cuts before the end of this year.
He also criticized Fed’s hesitation to raise rates and its slow response in lowering them again. This led to a disagreement between Linneman and webcast host Willy Walker regarding high inflation rates. While Walker argued for taking action against it, Linneman explained that post-COVID supply chain issues were responsible for inflation rather than an overall above-trend economy.
Linneman further elaborated on how historically short-term rate increases are justified when certain sectors such as single-family housing, auto industry or manufacturing are performing well above their trend levels. But none of these sectors showed signs of overheating when Fed started raising rates back in 2022. He acknowledged that keeping EFFR at zero was not feasible but believes if Fed had been more cautious with its hikes then we could have seen a faster economic recovery with healthier employment growth and continued investor demand for commercial real estate.
However, due to rapid rate increases by Fed which caught capital markets off guard resulted in capital disappearing from commercial real estate investments leading to problems regardless of why it happened according to Linnemann.
On current market conditions he said although dry powder is returning slowly but still slower than expected while private equity firms and banks remain hesitant until others start investing first creating self-reinforcing cycle where money will flow back into market once investors see opportunities arising from falling inflation rates and short-term interest rates along with long-range investment prospects being sought out again resulting cap-rate compression especially within multifamily sector whereas office sector is expected to face challenges for a longer period due to other investment options being available.
Linneman advised those with floating rate debt financing to ensure that their lenders are actually lowering their payments instead of keeping them on cruise control and sending in the same amount as last month. The Oct. 2 Walker Webcast can be accessed through various channels such as YouTube, Spotify and Apple where replays are also available along with articles for new episodes every week.
