During his last appearance on the Walker Webcast in June 2024, economist Peter Linneman predicted that there would be three rate cuts by the end of the year, despite no signs of a decrease in the Effective Federal Fund Rate (EFFR) at 5.25%. However, when he returned as a guest on October 2nd after the Fed had reduced EFFR by 50 basis points, Linneman confidently stated that there would be two more cuts before year-end.
His prediction was proven right and led to a discussion between him and webcast host Willy Walker about inflation rates and their impact on various sectors such as single-family housing, auto manufacturing, and commercial real estate. Linneman argued that these sectors were not above trend when the Fed began raising rates in 2022 and therefore did not need cooling off. He also criticized their hesitation to lower rates again.
Linneman explained how this cautious approach from the Fed has affected capital markets for commercial real estate investments. When capital disappears due to uncertainty or lack of investment opportunities, it can have negative consequences for this industry. On the other hand, once confidence returns among investors with decreasing inflation rates and interest rates going down further still looking for long-term investments will lead to an increase in dry powder returning back into market which will eventually result into cap rate falling down.
However,Linemenan noted that he overestimated how quickly dry powder would return back into market during his previous appearance but now predicts multifamily caprates could fall while office caprates may increase due its current problematic situation compared with other CRE options available out there.However,Linemenan is hopeful about office sector too saying those who are able get financing done can see massive reduction over entire hold period.At some point numbers do revert themselves if you wait long enough .
With potential additional EFFR cuts expected ,Linenman offered advice especially those financing floating debt “Make sure the lender is actually lowering your payment and that it’s not on cruise control, where you’re sending in the same amount as last month,” he said.
For those who missed his appearance on October 2nd ,the Walker Webcast can be found on YouTube, Spotify and Apple. Subscribe to get invites for new episodes every week.
