ULI Philadelphia welcomed local economist, Peter Linneman, founding Principal of Linneman Associates, to discuss his insights and review of the ULI Real Estate Economic Forecast. Released by ULI’s global Real Estate Economics and Capital Markets each spring, the ULI Real Estate Economic Forecast report surveys leading real estate economists and analysts around the country. The results of the report summarized findings on the three-year forecast (‘22–’24) for broad economic indicators, real estate capital markets, housing starts and prices, vacancy rates and rents, as well as property investment returns for industrial, apartment, office, and retail property types.

Mr. Linneman started us off by discussing shut down expectations as a result of the now 2-year pandemic stretch. As a result of these conditions, we have seen demand climb by over 3% while supply has lagged behind as suppliers do not appear eager to rush and meet market demands when there is profit to be reaped from the imbalance. He cautions that should supply quickly return to pre-pandemic rates, systemic delation may follow indicated by the fall of assets, wages, and rents. This paints the current state of our presently high inflation in a better light, as it signals a supply shortage that will motivate an increased capacity over time. He differentiates the inflation we are experiencing now from economic precedents set in the 1970’s, where supply and demand was relatively balanced in most markets throughout periods of astronomical inflation fed by over-printing money despite having capacity. Mr. Linneman maintained that we can consider the current state of the market a “cost of COVID” that can be strategically recovered.

But how could we have avoided this inflation? Peter Linneman suggests that had we made a recovery from the conditions prompted by the pandemic we would likely not being seeing the high levels of inflation that we are today – but at what cost? He estimates nearly $4 trillion of cash reserves from the last 2 years are stagnant in checking & saving accounts across the nation as a result of the nearly $6 trillion funneled into the economy by the Federal Reserve. We are seeing the results of a country sitting on years of cash yet to be invested or funneled back into the economy. Linneman suggests the Federal Reserve’s recent efforts at raising interest rates should welcomed as consumers seek some semblance of market-equilibrium and continued economic growth.

Inflation and changing interest rates aren’t the only factors unsettling the market sentiment. Linneman highlight two large concerns: wage & price controls, and stock market trends. Should wage and price controls be imposed, Linneman warns, results would be economically disastrous and relatively long-term. He also warns about the trend of non-startup type companies (think Spotify and Netflix) failing to provide substantive returns over the last 3 years, likening it to the tech bubble in 2001. However, by and large, the stock market will continue to rise despite volatility and strategic investors may be wise to maintain a long-term horizon and avoid being phased by short-term market fluctuations.

Although low rates can never last forever (COVID-19 being the exception), there’s no saying how high rates will go from here. But one thing Linneman says need not be cause for concern is any potential that this market shifts into a state of stagflation. With high demand workforce demand, the creation of over 1 million new jobs, increased industrial output by over 3% in the first quarter, retail sales near record highs, and growth in nearly every major market– GDP growth is expected to continue despite market constraints and disruptors, and we are not yet reaching the thresholds necessary to predict a recession. Despite all the challenges (pandemic, insurrection, George Floyd’s murder, climate disasters) Linneman concludes that you’ll do well to bet on the GDP’s long-term growth, even if it is less than expectations.