During his previous 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, during his recent guest appearance on Oct. 2 after a reduction of 50 basis points by the Fed, Linneman confidently stated that there would be two more cuts before year-end.
His prediction was supported by his belief that delaying rate increases and then rushing to lower them again is an embarrassing mistake for the Fed. This led to a brief disagreement between Linneman and webcast host Willy Walker about how to address high inflation rates.
Linneman explained that post-COVID supply chain issues were causing inflation rather than an overall strong economy as typically seen when short-term rates are increased. He pointed out that historically, one or more sectors such as single-family housing or manufacturing are above trend before rate hikes begin; however this was not true for any sector when they began in 2022.
While acknowledging some need for higher interest rates instead of keeping them near zero indefinitely, Linneman argued that if they had been raised gradually instead of aggressively from zero initially it could have resulted in a healthier economic recovery with stronger employment growth and continued investor demand for commercial real estate.
He also discussed how capital flows play into real estate cycles and noted how quickly capital can disappear but also return once others start investing again. Despite expecting dry powder (unused investment funds) sitting on sidelines to enter market sooner than it has so far since June’s webcast due partly because banks & private equity firms don’t want risk alone without others investing too – he believes money will eventually flow back into CRE especially with falling inflation & short-term interest rates making long-range investments attractive again which should lead cap-rate compression across property types except office where he expects cap rates to rise.
Linneman advised listeners, especially those with floating rate debt, to ensure their lenders are actually lowering payments instead of just keeping them the same as before. On-demand replays of this webcast and future ones can be found on YouTube, Spotify or Apple by subscribing for invites & articles about new episodes released weekly.
