You have joined the meeting as an attendee and will be muted throughout the meeting.
The projects that Walker & Dunlop and Dominion have worked on together. Peter, a lot has happened. The last three weeks have been incredibly tumultuous in the real estate capital markets. My phone has been inundated with Walker & Dunlop customers calling me and saying, "Can we get you on a call with our team to figure out where are rates going? Where's the market going? Should I be running to refinance a property today? Should I be selling a property?
Should I be concerned about being able to get out of this property a year or two from now?" My feeling, Peter, has been that for the last three years, we've been in what I've called the hope trade, the waiting and hoping that inflation would come out of the system, that the president would replace the Fed chair with a potentially new Fed chair who would start to cut rates in line with what the president has been calling for quite some time, that we would be sitting in a sort of a 4% 10-year, maybe even best wishes three basis points out of 5% 10-year. You were very straightforward in saying at the beginning of 2026, the inflation print's looking good.
If you strip out a lot of various things such as housing from the CPI, other inflation rates, that we should start to see cuts. You predicted that we would see two rate cuts by the Federal Reserve in 2026. You made that prediction not knowing we would invade Iran. You made that prediction thinking that oil would be somewhere between $60 and $70 a barrel rather than $90 and $110 a barrel. Other than the Iran war, what did you get wrong?
Well, that was the main one. Really, that was absolutely the main one. When did the 10-year start really moving? It was as the Iran conflict began and picked up speed. Anybody who has not told you, Willy, I think, has called me and asked the same questions. They probably called me because your phone was busy, so I was the second choice to ask those questions. I can tell you the spirit of what I am answering people. We are at the highest 10-year in now 25 years. That is an abnormal situation. A lot of the people who are saying it is going to stay high forever were the same people in 2000. Not you, but the same people that were in 2018 and 2019 saying, "Yeah, negative interest rates make sense." They do not. Negative interest rates make total sense. This does not make sense.
I think a lot of people, in my view, real estate is an 8- 12-year investment horizon. That is why the research I have done tends to focus on its performance over a longer period. You have to be around and allow adjustments. People are judging it after sort of 2- 4 years. That is like judging who won the NCAA championships this past year based on the halftime score. It was not the New York Knicks that won based on halftime scores. By the way, take another example. The Philadelphia Eagles were winning with 4.5 minutes to go. Unfortunately, they played 4.5 more minutes. That is why they play the full game, and they lost. What you have to do with real estate, I think, is play the whole game. Do not judge it at halftime.
Do not judge it at middle of the second quarter.
Peter, let me jump in there for a second. First of all, so everyone knows, my password to access the online copy, the PDF of this Corey Lindon letter is GoBirds2, which killed me as a Washington Commanders fan and not a Philadelphia Eagles fan. So I appreciate the fact that you push those birds all the time. The issue here is this, many people's game on a specific asset ends in 2026 or ends in 2027. They have a refinancing coming up. They have an investor who wants to recycle capital.
While I get your analogy of, hey, this is an 8- 10-year game, unfortunately for many people, they don't have another 4.5 minutes to play as it relates to what to do with a specific asset, whether to sell right now, whether to refi right now, because the clock is running out on it. To them, what do you counsel them to do now that their game is coming to an end on that specific asset?
Don't sell if you don't have to in a bearish market. Therefore, talk to you and see about arranging a two-year or some such product, a three-year. By the way, as you know, I'm generally a person that says 7- 12-year financing on these things. But I play the slope a little bit here right now. Are you exposed as a result of that? Yeah, but you're dead the other way. Better to be dead two years from now than to be dead today. I'd rather have the alive today and the option value of it improves. That's what my advice is.
You would go on shorter-term floating rate financing to refi your property today than go and bring in either pref equity or new equity if you can find it and put longer-term financing on.
Even though that would obviously cost you something.
Yeah.
With your ownership of that asset.
Yes. By the way, that's very contrary to my normal view.
You say that because you think rates are coming down?
I don't see them going up. They're at a 25-year high. Let's take a look at inflation, why I say that. Inflation for the 30 years average inflation prior to COVID, which totally reshaped the deck, right? That's why I'm taking prior to COVID, was 2.2% for the things people actually purchase. For the two years prior to the Iranian situation beginning. By situation, I mean bombings, et cetera. Right, March. Okay?
Sure.
For the two years prior to that, it was 2.3% for those same items. Okay? We had kind of stabilized. We then add the oil situation. The oil situation has increased inflation. You go from 60 a barrel to 100 a barrel, let's say 118 a barrel, it's due to mathematics, and you get a higher inflation rate. It doesn't stay inflated. Why? Let's suppose oil stays at 100, right? Let's just suppose for the next two years, assuming oil stays at 100. What's the inflationary impact of oil over the next two years if it stays at 100? Zero. What will that do to measured inflation? Pull it down.
Well-
Right?
Yeah.
It's just a waiting game.
It is. Except for the fact is, as you and I have discussed, of the 41,000 goods that are on the CPI print, 70% of them are impacted by the price of oil. What you're saying is-
It's not showing there.
Those 70% move up, and then once they move up, you're flat.
Then you're flat. That's all I'm saying. I'm just reminding people of mathematics. Even if oil stays up, it will become non-inflationary. Okay? And much less if some reasonable solution occurs and it falls. Why is that relevant? What do I think happens when it stops being inflationary? The Fed will, at some point, lower the rate. When they lower the short rate, we saw what it looked like in March, excuse me, in February. You, if you started that in your summary. In February, people thought, "Yep, it's at 4%. Short rate stays the same or falls, and that loan rate was at 4%." What happens if there's no inflation that the Fed says they have to tame? I think you go back down. Much less if oil prices fall, because that will really pull down inflation.
The Fed will declare success, even though they had nothing to do with success because they don't control the Strait of Hormuz. At least last time I checked. By the way, did anyone notice, you got a big audience, did anyone in the audience notice that immediately after the Fed increased rate by 25 bps, the Iranians immediately said, "Oh, we're repudiating any attempt to go nuclear. We're destroying all our weapons. The Republican Guard is being disbanded. We're opening the Strait of Hormuz, and we're sending lollipops and marshmallows to all American's children on their birthdays." Of course not. They have no effect on those things. Yet they pretended as they did. That has roiled the market. There's no doubt. It's confused me, it's confused everybody. So it is not Rip Van Winkle. There's an important thing to make here.
You and I talk about the federal deficit for years and outstanding debt. There is this silly narrative that for the last 40, 50, 60 years, the investor has been asleep to the fact that the deficit occurs and that the debt outstanding rose, and suddenly, like Rip Van Winkle, they awakened and saw the deficit and scrambled and said, "Oh, we've got to increase the rate we demand." That's silly. It's just intellectually silly. If it were true, why is it that every country has about the same increase in the long rate, rather than being very nuanced depending on their own fiscal situation? That's why I want to go short. I don't want to go short. Let me clarify that. You know what it's like? I don't want to give rent concessions. I really don't.
The reason I give rent concessions is to get me from here to there.
Let me-
That is the same thing on the people who have to finance.
If I had listened to the Walker Webcast in June, when you said they are going to do two rate cuts in the subsequent two meetings, you actually said that they were not going to cut in July, they were going to come back and cut in September. So if I listened to you then, I said, "Great, I am going to float because Peter Linneman says that rates are going down, short end of the curve is going to go down. I can play a SOFR plus 200 loan and I am going to do well." Well, if I followed you, though, then it has cost me 100 basis points between that point and today to have floated rather than have fixed in a long-term option at that point. My only question to you is, what confidence should we have?
I am asking you to try and predict rates, and nobody can predict rates. Why is it do you think that we are at the all-time high, when if I listened to you four months ago, I probably would have made the wrong move?
Well, because of how dramatically it has moved since then, right? I do not know how else to say it more obvious.
Yeah, I hear you.
I do not think there is anybody, I do not know of anybody. I am sure there is some hedge fund somewhere. I do not think anybody, when we talked in June, would have ever predicted, I do not know we are at today, 5.35 for a 10-year.
Yeah.
I don't think anybody would have picked it. You might have had a few people saying, "Oh, upper fours and five." The fact is it's just run to a point that's not justified by the economics. That's the simplest way to say it. I think even the Fed, and I stress even, can figure that out.
As you look forward, you just talked about if you will, a normalized, we get out of Iran, oil comes down, rates come down, the Fed doesn't see inflation pushing rates, and therefore they can cut. Do you think that there's a scenario where something breaks? If you think that something breaks to get them to cut, what do you think breaks?
Well, obviously something dramatic in Iran. It's interesting, you're seeing the same stuff I did. In the first few months, every little announcement, every head fake on, looks like we made progress, oil would drop like $7, $8, and then it would go back up, and the rate was kind of bouncing with it. There's almost, people have gotten desensitized to that information, and it's kind of staying at $100, or a little above $100 a barrel, and the rate's saying, "I don't want to screw around and figure this out. I'm insuring myself against the Fed being stupid.
I think it's actually come down to the low 90s in the last couple of days because of the release of the G7 oil reserves, which I would underscore the fact that China has released so much of their reserves and lowered their oil consumption since the beginning of the Iranian conflict, and now the release of the reserves on the G7 is a big reason why we actually have $90 a barrel oil and not $120 a barrel on oil, and not something that is sustainable, at least on the G7 side of releasing reserves. The Chinese very clearly seem to have built up enough reserves and lowered their demand for oil to be able to stay in their current demand situation for quite some time. It's kind of ironic that we can look to thank the Chinese for what they've done to keeping oil prices.
Last night, I filled up on Sunday, and I was $4.10 a gallon. I'm not at $4.10 a gallon in Denver, Colorado, if the Chinese haven't pulled back their oil consumption on a global basis as significantly as they have. Peter, let's switch for a moment to unemployment, because I think that a lot of what you're focused on is GDP growth and the overall acceleration of the economy. GDP growth, you're actually looking at 2026 GDP growth higher than what you'd predicted it would be in 2025. On the unemployment side, your unemployment calculation is almost 2X what the official unemployment numbers are.
Talk about that latency or that underemployment in the economy and whether that is people who have permanently retired, so they're a 55-year-old person who's just removed himself or herself from the labor force, and therefore, generally speaking, is just going to be a drag on the economy going forward. No criticism to someone who's my age who's decided to step out of the labor force. Or is someone who is 22 years old, living with mom and dad, and sitting there not employed, but has the ability to come off the sidelines and enter the labor force that actually could give us lift from a GDP standpoint.
The reason my number, so to speak, is higher is all it is saying, look, just to remind people, the unemployment rate comes from a survey that says, are you employed? If you answer yes, fine. If you answer no, they ask you the next question, are you actively looking for work? That's it. The numerator is those who say they're not employed but actively looking for work. The denominator is the sum of employed and those who say they're actively looking. It's that simple. What it misses are I'm not employed, and I'm not actively looking, and that is still fairly high. It's a bit abnormally high.
There's a whole field discussing why that is the case, ranging from rank entitlement to parents that spoil their kids, to there are no opportunities, to there's a lot of labor out there, and it's not working. This is not unemployed. It's not because of wages not occurring. There's a lot of wage activity that's occurred. I don't think anyone, including me, fully understands why it's the size it is. But it is. It's a drag on the economy. It is a drag on the economy.
It is a drag, not a potential catalyzer of significant economic growth.
Could be, but you have to wonder why are they not there after such a prolonged period? Because as you know, it has been up there for some time.
Yeah.
The recovery has occurred. We went through a very hot period. Wages have been up in real terms, et cetera. It probably is much more a drag. Now, it is interesting, unemployment. Unemployment, the numbers are really strong if you look at people getting fired because nobody is getting fired. If you look at unemployment insurance claims, new unemployment insurance claims, nobody is getting fired. That is great. That is a strong labor market. If you look at new jobs created, it appears fairly mediocre, kind of a run rate of about 900,000 this year, which is not terrific.
It is actually-
Here's why-
Super slow. In comparison to the last, since ChatGPT was launched in November of 2022, we've added 4.6 million jobs, I believe, and that goes to 2.1, 1.8 in 2023 and 2024, and then 2025 is somewhere around 700,000 or 800,000. If you add up all jobs in Trump 2, it's a whopping 700,000 jobs.
Let's go wide. Let's assume it's going to end this year around 800,000. Not a great number. Not a great cover number. We're down probably 2- 2.5 million legal and illegal immigrants that came in in a particular year. If you say half of those would have gotten a job, which is not wildly off, that would have been another 1 million workers. If you add the 1 million workers to the 800,000, you say 1.8 million. Not spectacular, not bad. But absent the immigration, there's a whole bunch of people not looking for work. Just not looking for work. You say, "Well, why doesn't that?" Remember, immigrants get jobs, and they take jobs, but that also increases the demand for jobs. Why? They buy sweaters, shoes. They buy Brooks 9.5 shoes, for example.
The people say, "Oh, immigrants come in, and it's an additional supply of labor that destroys and takes away opportunity." What they forget, and what the research shows is, they also get jobs, and they do what everybody else does when they get a job. They add to the U.S. economy's productivity. They buy sweaters, shoes, food, et cetera.
But you would see all that show up, Peter.
That creates jobs.
But yeah, I get that, but that would show up then in inflationary pressure on wages.
No. Because roughly, there's a positive net effect, but it's not huge. And the reason is, supply creates its own demand. Just think of immigrants as a new country of 2.5 million people. Okay? New country comes in, the 2.5 million people go to work. The 2.5 million people get hired because they make stuff that they want. There's a circularity to it, and we're not getting them. So we drop them out, right? And you're right, we lose the labor side, but we also lose the labor demand side because they're not buying as many shoes, and they're not buying as many Just go through the list. So the demand is also down. That's why you don't see the spikes.
You made this great point very articulately, I think at your MIT presentation, I am doing this from memory, that you get asked everywhere, are there labor shortages? Basically, the answer, and it is the same answer the hotel people give, not terribly. A little here, a little there, not terribly. That is because, yes, the supply got reduced, but the demand got reduced because those immigrants were getting jobs and working and buying stuff, and that coursed through the economy. So we have dropped the demand, and we dropped the supply.
Let us switch then to a sector that is using a lot of labor right now, which is data centers. If we back up to January of 2025, you and I were together at the Constitution Center in Philadelphia, and I said to you, "What is the best sector for you to invest in?" You said, "Well, if I want to stay rich, I would invest in multifamily." I then said to you, "Well, what is the get rich asset class?" You said, "Office." Then I said, "Well, what is the get poor asset class?" You said, "Data centers." So in this quarterly letter, for the first time ever, Peter has these canaries in a coal mine to anyone in the room who does not read the Linneman Letter on a quarterly basis.
He goes through and typically has 55 different opportunities for a canary to be dead as sort of a leading indicator of trouble. I think the lowest it has ever been since I have been reading the letter, Peter, is two or three canaries. I do not think you have ever had zero canaries.
No, I have never had zero. No.
But over the last three years, it has gone from 12- 16- 18 in the most current Linneman Letter. 18 out of 55 potential dead canaries. But this is the first time you have had data centers as a dead canary. And on each one of these sectors, if you will, there can be a potential of five canaries. So Peter is just starting to feel the, if you will, the vapors coming out of the coal mine of the canary. It has not shown that we have got a real issue down in the coal mine yet, but it is coming along. Peter, the growth in data centers. In the last five months, we have gone from 570 data centers in the U.S. to something like 1,300. We have got 2,000 data centers planned to be built.
So with that amount of capital, and the hyperscalers are putting $800 billion into data centers in 2026. So with that amount of capital going to it, A, do you think something breaks as it relates to just there is defaults, there is not demand. Something happens in the data center AI construct that breaks. And then the follow-up to that is, if all that capital continues to flow there and you do not have anything break there, what is suffering from the amount of capital that is going to data centers that would, in a traditional way, be flowing to other asset classes?
Remember how good apartment demand was rent occupancy wise in what? 2021 first half 2022, something like that?
Boy, do I remember it fondly.
No supply, because COVID had shut it off, right? Demand, pretty robust demand from credit tenants, namely residents. Pretty credit, right? They pay their rent mostly. How did that end? That ended by a huge supply spurt for a lot of reasons. You still have demand, and the supply spurt overwhelmed. What is my concern on data centers? You see anything that gives that good a yield, sooner or later, it is going to get overbuilt. I do not know when. How do I know something? If you look at what is happening in data centers, this is overly broad. Everybody says these hyperscalers are credit. Credit tenants, credit. By the way, you are old enough to remember, just barely, when people were building shopping centers saying Sears and Kmart were credit tenants.
By the time they opened or a year or two after they opened, one is dead and the other is almost dead, right? Credit erodes for a lot of reasons, competitive and otherwise. Here, if one of the hyperscalers came to one of our developer friends and said, "Build me an office building or build me a warehouse," what kind of yield on cost would they negotiate it down to on a 15-year lease? 6?
Six.
Seven?
7.5.
Yeah. Let us just say 6%-7% yield on cost because they are who they are, right? They are going to negotiate it down, maybe even a little lower. Okay? On a data center, what are they doing it for? 10. By the way,
That's low.
It could be a 9. They get a 9.
10, 12.
What does that tell you? It tells you they're desperate for that product, and they're doing something they normally would not do. No credit tenant would normally do it. Why? They view they're in a race that challenges their existence, which means they're afraid they go out of business if they don't win. Okay? That's why they're doing it. They want to get it, and we know they're paying a premium. By the way, let's go to the other capital part. Let's go to the capital part. Lenders. Lenders are lending 90%, 85%-90% first mortgages. Okay? Why? Because, oh, they're a credit tenant, even though the tenants are worried about their existence. That's why they're willing to pay that rent. And you go, "T hat's interesting." So the lenders are viewing it as no risk. How has that generally turned out in history?
That when lenders view something as having no risk, it turns out well when they provide 90% debt or 85% debt. Why are they doing it? They have no exposure to it currently in their portfolio. They got a lot of apartment exposure, got a lot of warehouse exposure, they have a lot of office exposure, a lot of this. They all say, "Okay, we're going to go get it, and we're going to get it while the getting is good." They're flooding into it, and they're doing something we don't. We see tenants doing something we don't normally see. We're seeing lenders do it. Then we see equity providers saying, " I got crushed in real estate in the last 3.5 years on everything else.
Let me try there, especially with 90% leverage." By the way, the developer makes the development fee. They have to work hard for it. I'm not taking anything away from it. But the developer's development fee with 90% leverage, they can't lose as the developer. I think it gets overdeveloped in a strange way. Remember the office market in the 1980s. You had very good demand growth, and yet somehow vacancy got to 18% in spite of great demand growth. That's because unbelievable lending.
Right.
That's why I have concerns. If the tenants are worried about, just think of this for a second. The tenants are worried about their existence. Okay? Why aren't the rest of the capital stack worried about their existence?
Well, they also, though, they have multi-trillion-dollar market caps. I hear you about they're, quote unquote, "worried about their existence." By the way, your concerns as it relates to the hyperscalers, if you listen to the All-In podcast, which I listen to on a weekly basis, so I'm just stealing from the guys from All-In. This is not my own research, but I listened very intently last week, and in their discussion last week, they talked about a couple things that concern me on exactly this topic, Peter. The first one was they looked at frontier models versus open models. 90 days ago, frontier models were 80% of AI usage in the United States, and open models were 20% of AI usage in the United States. 90 days ago. Today, it's the inverse. It's 20% frontier models and 80% open models. At Walker & Dunlop-
Do you think that has anything to do with why they're now saying, "Oh, let us get together with the government and regulate and set up barriers." Who do you think they're going to set up barriers against?
1,000%. It's called regulatory capture. It's, let's put up barriers so that we can create a whatever monopoly, duopoly, triopoly you want to put together. Let me keep going on this for two seconds because at Walker & Dunlop, we use ChatGPT. We have a closed environment of ChatGPT that makes it so that we can keep all of our data, run all of our analysis inside of our own environment. It's protected, and I love it.
Except for the fact that we spend a tremendous amount of money on tokens with ChatGPT, and my CTO is going to come to me sometime in the next 6- 12 months and say, "If we moved from ChatGPT to an open model, we pulled a server and put all of this on our own servers, we would drop our token usage from X to Y, and we would save Walker & Dunlop X millions of dollars a year." By the way, we don't need to be using frontier models at Walker & Dunlop. I'm trying to process mortgages for everyone in this room. If I were trying to solve cancer, I got to stay on ChatGPT or Anthropic and keep on that frontier model. But for W&D, my big issue right now is not necessarily the capabilities of the technology.
It's the implementation challenges I have of taking the technology and putting it into our work streams to make it so I can process loans for all of you quicker, more efficiently, and more cheaply. As I think about that shift in just the last 90 days of the frontier models, you listen to the All-In hosts talk about it, and they sit there and they talk about if these frontier models don't stay six months in front of the rest, their value goes to zero.
Yeah.
That's their words, not mine. That's their words.
That's the existence concerns.
That's the existence concern. That's exactly what you're talking about. I don't know. I don't like, personally, if you said to me, Walker & Dunlop's future is based on, and I know Peter is here from Wells Fargo, so let me just use him as an example. Walker & Dunlop's existence is based off of staying six months in front of Wells Fargo on everything that you do as it relates to loan origination and loan processing, I might be running for the exits pretty quick. I just think about that change in the amount of capital that's gone to these data centers. But the one conflicting point, Peter, in your quarterly letter that I want to have you discuss is this. After all of that doubt you have about data centers, you state that demand will exceed supply in data centers between now and 2030.
If you think we have another 3.5 , 4 years of demand exceeding supply, why are you concerned about a crisis?
Well, because when it ends, it will end. I mean, just play out. I do not know if the scenario you say is what happens, but play out what you said. There are so many variations. One variation. The five hyperscalers, one of them wins and the other four lose. Anybody who has the winner on their data center wins. But the ones who had the losers, what are they going to do? You say, well, they will repurpose it by selling it, by releasing it to the winner. Do you think the winner is going to pay as much rent when they are not desperate, when they are not in existential mode? The rent gets negotiated down if it does get reused. Or the Chinese win or somebody comes up with a whole leapfrog on the technology.
I just look, I am old, and when I see unusual things, when I see one unusual thing, I say, "Well, that is nice." When you see a whole bunch of unusual things happening at once, it generally does not end that well. It does not mean it does not end forever, right? It just, it has got a kind of too much, too much too soon. I am not anti-AI. I am not saying, et cetera. It just seems like too much too soon. The fact that the tenants are saying, "I am willing to give you almost double the yield on that product that I give you on any other real estate product I would ask you to do," tells you how desperate they are.
Let us switch to other real estate products. Last call, we talked about multifamily. You were really excited on the last call about the fact that starts were down by 40%-60%. In this quarterly letter, you say we are going to start seeing rent spikes, your words, rent spikes in 2026 and 2027. First of all, I would say to you, I do not think I have a single client at Walker & Dunlop who has said, I see spiking rents right now, and we are in October of 2026, so we only got 2.5 more months to get spikes into the system for 2026. Do you really think we are going to see rent spikes in 2027 in multifamily? If so, where are you predicting they come?
How many have gone from eight weeks concession to zero to three weeks? Not everybody.
I am not going to say not anybody, but I am not hearing that right now.
We-
That is the one. Just double-click on that for a second, Peter, because I think that that is a super important point right here. A lot of people are sitting there saying, "Oh, we need to get back to annualized 2%, 3%, 4% rent growth for me to make this pro forma go." They are forgetting about the fact that if you go from three months concessions to two months concessions to one month concessions, you are picking up 10% NOI on each one of those months going away.
That is my point. For example, we have got a project. I am not saying this is typical. We have got projects where we have not made inroads on concession. But on actually two of our projects, in the last three months, we have gone from two months to zero. All right? Now, I view that as a notable spike. By the way, did we raise the rent? No. We did not raise rent.
Right.
Thanks. But that is a notable spike. I think that is what you are going to see in 2027. You are going to see a little bit more of it at the end of this year. By the way, our portfolio is not perfectly represented. I have in Boston and I have other places. We are seeing By the way, the dynamics of how it happens is interesting. I have forgotten. When you have 15 new buildings, all very cool, all very neat, all in the same basic sub-market, and all 20 does 70% lease. A tenant can walk in and get whatever floor they want, whatever unit size they want, whatever view they want, whatever direction they want. Now, when those buildings get to 85%- 90%, the owner still sucks. It is still not wonderful at 85.
The tenant can't walk in and say, "But I want an east view on the 13th floor," because there aren't that many units. That's why the concessions start going away, is at that very micro level. That is starting to happen. Depends on the market. That's starting to happen. Let me be clear. I don't think you're going to see in the first half of 2027, 10% face rent increases. I do think you're going to see a month or two of concessions kind of fall by the wayside as things lease. That would be huge.
If this is the beginning of the multifamily trade that we've been waiting three years for, do rates kill it?
Well, it's a two-edged sword, right? Let's take it in three parts. One, you financed me on a 10-year note in 2022. I don't give a shit about any of that. About any of the rate stuff. You're my hero. You financed me in 2021, 2022. I was going to do a five-year, you convinced me to do a 10-year. Ta-da. That's one group of people.
Pause for two seconds on that. There is a huge amount of paper outstanding that was a 10-year loan with five years IO written in 2021 and 2022 that are coming to the end of their IO period and going to amortizing loans in 2026 and 2027. That could be a pressure point for many borrowers. I just point out that Peter's saying you did that 2022 loan, it was a 10-year loan, but it likely had half-term IO, and then all of a sudden becomes an amortizing loan. That could put some pressure into the system in 2027.
I do not worry about the interest rate part. I worry about a lot of things. That is one group. Second group is, do I have a higher interest rate because my construction loan, or I did put a five-year or a three-year, or I was repositioning. Yeah, that is a sincere problem. As you know, the debt will be there. The debt market is working, I think. It is just working more sensibly.
A loan that would have been a 65% loan now only pencils as a, you know the math probably better than I do, 58% loan, which means I got to come up with 7% more equity. The one thing that has been scarce over the last year and a half is not the debt, it is the equity. Now when equity is still scarce, I got to go out and find more equity. That is a challenge.
That is the interest rate challenge that it raises on debt. On the other hand, people are getting more income on their fixed income instruments. So they will actually get a little boost in spending power. It is just redistributive. It is a two-edged sword. By the way, how much development occurs in the next 12 months? More or less than you thought three months ago? Less.
You answered the question for me, but yes, I would say less. Which is interesting because the numbers are telling you that now is a great time to be putting the shovel in the ground. The issue is putting the capital together to do it. The other question is, does someone want to go into a construction loan right now, or do they want to go into having equity on the sidelines to buy distressed assets that are existing, have good occupancy in them, but the capital structure is upside down, so someone is going to throw the keys back and you can step in and buy that asset. I would think that a lot of the dry powder is waiting for that rather than getting into this next development cycle for a 2- 3-year return.
Our friend Jon Gray has said this type of thing several times, which is a lot of investors with a bad taste in their mouth over the last 3 years. Think more institutional or big family office, and they went into things three years ago, 3.5 years ago, and it may not have been catastrophic what they did in real estate, but it is not great. So you come to them and say, "Now is the time. Three years from now, there is going to be nothing new coming online." Or, "Right now is the time. Let us go in and buy something." And they are going, "I do not know. I just do not know. Stock market is going up, up. Why do I just stay in the stock market? I am okay there. Maybe I do data centers." Think about it.
Somebody's got a highly leveraged development that they're offering them the equity slice of. Maybe I do that instead. It doesn't mean all the capital's going there, but it's a challenge to come up with equity these days still.
Yeah.
In some markets, if I had a really nice property and I had a, I don't know, a six cap on it in Austin. I said, "Willy, you guys are the best. I know Wells Fargo's there. I'll let you both have the assignment.
PNC is, and a bunch of other people. I got a lot of competitors in the room. It's all good.
Yeah. I'll give you guys the split assignment. Go out and raise 35% equity for me. You're going to tell me, "I don't think I can do it.
Right.
I got better things to do with my time.
Right.
That is a challenge. There may be opportunities, but there is no money for it. There is kind of debt for it, but there is no equity for it, and the interest rate being up means you need even more equity at a time when the equity was already short.
Two quick things to round out on multifamily, and then I want to go to office for a moment. On multifamily, just a couple things that Peter Linneman said that I would underscore. First of all, it has been too quick since this rate move to really see an adjustment in debt yields on debt funds and other providers of capital. The agency, you have clearly seen them move up on their expected debt yields on their lending. But on debt funds, so far, we are still seeing them stay in the sort of 7%-8% debt yield range and not move up to the sort of 8%-9%. If debt yields stay down that low, they obviously will be preferred in the marketplace. The question I have on that is, where are they on the health of their existing book? There is $232 billion of non-agency multifamily debt maturing in 2027.
$232 billion, and it stays actually pretty consistent for the next four years at $230 billion-$250 billion of non-agency multifamily debt outstanding. If those portfolios on bank balance sheets, at debt funds, at life insurance companies stay relatively healthy, I think the ability for capital to come from those sources of capital is almost unlimited. But if they start to see cracks in their existing book, what do they need to do on both a debt yield standpoint as it relates to also deployment of capital to be able to deal with their books. So far, it is way too early to tell whether there are fissures on the credit side of things. Those will start to show up in this higher interest rate environment. The one other thing that we have clearly seen is the agencies have almost no refinancings in 2026. They have very low refinancings in 2027.
They've only got $47 billion of refinancings in 2027, so very low. Then they start to step up pretty dramatically. In 2028, 2029, and 2030, the agencies get into really big numbers. If you add up non-agency and agency debt, multifamily debt outstanding that matures in the next four years, it's $1.5 trillion. It is an enormous amount of debt that needs to get rolled in the next four years. Two things on that. One, how does the credit perform between now and then? Then how much of that non-multifamily debt gets refinanced by the agencies? Remember, if they only have $47 billion of refinancings in 2027, and they've got a cap from the regulator of $160 billion, they got to go out and find $100, $110 billion of loans not in their portfolios today to go finance next year.
That's a huge amount of capital coming from the agencies that is trying to find solutions for those loans that a bank, a debt fund, or a life insurance company may or may not want to refinance. I just put that out there as it relates to state of multifamily financing and what's coming up in 2027. Let me go to office for a second with you, Peter, because when I went back and referenced that conversation you and I had in January of 2025, and you said, "Stay rich multifamily, get rich office." If you'd listened to Peter in January of 2025 and gone and bought office in San Francisco or New York, you have absolutely crushed it over the last 18 months. I mean, crushed it. That was exactly at the beginning of this cycle for office.
You were clearly directionally right, Peter, as it relates to office as an asset class, but you had to be pretty picky because if you bought office in Denver, you're flat on your rear end right now. So you had to pick the right city. But if you picked office in San Francisco or New York, off the charts returns. You make a point in the letter that in 2026 into 2027, we're only delivering 9 million square feet of office in the United States, which is about 10% of normal annual deliveries of new office. Is office an asset class today where you can basically close your eyes and throw a dart at the dartboard and win?
No, because the quality is so varied. I think I saw a piece in the Financial Times Monday that a hedge fund signed and Related this new building on Madison Avenue for some number like, what was it? $300 a foot or-
Yeah, $380. When I was in New York three weeks ago, I had someone say to me directly, "We will see a $400 per square foot lease signed in Manhattan in the next year.
You couldn't have done that. I'm not being cute. You couldn't have done that blindfolded, right? You really couldn't have done that blindfolded. On the other hand, there are parts, Charlotte, suburban Charlotte is doing quite well right now. Capital's returning, rent and occupancy is doing okay. You're right about Silicon, San Francisco doing okay. Parts of L.A. suck. Downtown L.A. really sucks. So it varies. Chicago's still weak. The interesting thing to me about office is I don't think you can just throw a dart, but if you have any degree of taste, let's put it that way, okay? Two years ago, if you had taste, you couldn't get capital. You couldn't get capital. You might have had good taste, you might have picked all the right places two, 2.5 years ago.
Debt would have said no, equity would have said no, except for the odd family office or somebody doing it with their own money, like Neil Bluhm or a high wealth family or Steve Ross or somebody like that. Today, if you've got good taste, there's a capital market out there. It's not the greatest capital market in the history of office, but it's there. But I don't think you could show up with any old thing.
I mentioned previously on data centers, that you have 18 canaries. What canary scares you the most right now?
In the short term, the Fed, which it's interesting, it doesn't normally scare me the most because I expect so little from them over the years. Not unique to this Fed, by the way, not unique to the current people, not unique to the people before them. I just, I was kind of Milton Friedman trained to don't expect much help from the Fed and expect more opposition to a good economy than otherwise from the Fed. And they've kind of lived up to that. I don't normally, but I think they're dangerous right now. I think they're going the wrong way, and it's just really obvious it's the wrong way, and there's going to be a lag. It's not going to take effect instantly. The Fed worries me much more than normal.
The AI stuff, the data center and the money going into it, doesn't worry me in a two-year, three-year kind of context, because it's going to occur. They do have that money. They make money off of their advertising company part, and they're just putting it into that. Think about it. Most of the money going into data centers as an equity or into AI in general is coming. Think of Meta. What is Meta? It's an advertising company, right? What's Google? It's an advertising company. They're advertising companies. These are advertising companies who are going big into that. But in the next few years, they have the cash flow to do it. That doesn't worry me. I don't think the geopolitical could get much worse. Think about it. But seriously, we shrugged off, we, the U.S. economy, shrugged off Ukraine, right?
We shrugged off Iran at the economy level. We shrugged off the Iranian, we shrugged off the Israeli Gaza. We shrugged off. I made this comment. I don't know if you know who Jack Reacher is. He's this 6'5", 255, muscle-bound genius who has judgment and is kind. And there's a Prime show on his books. And Jack Reacher gets hit in the head with a pipe and you think, well, that's the end of Jack Reacher. But two minutes later, he's dealing justice. And then he gets stabbed five minutes later, but six minutes after that, he's dealing justice because he's 6'5", all muscle, brilliant, and he's just a force. That's the U.S. economy. And so you can damage it. The Fed has damaged it, tariffs have damaged it, taxes damaged it in the past, et cetera. But it's like Jack Reacher, just keeps getting up.
If you don't know Reacher, you got to watch it. Just watch one episode, you'll get it. Or read one book, you get it. That's the U.S. economy. It's not Germany's economy, it's not England's economy, it's not France's economy. It's not the Japanese economy. They're all powerful, but they go down for the count sometimes, like for a decade or more.
You pointed to the Fed, and that that's your biggest concern right now. Does the House and the Senate flipping Democrat at the beginning of November concern you?
Not so much in the economy. As you know, I seriously try to distinguish between social issues and economic issues. I'm not trying to say the economics is more important. It's just what I have more comparative advantage. Once you get to social, I just have opinions.
I'm not looking for it from a social standpoint, I'm also not trying to have you predict the election. I'm trying to go to something that a lot of people are trying to build into their calculus as it relates to what are the back two years of a Trump administration look like if the House and the Senate both flip. I-
What'll happen is they'll try to impeach. They'll have so much fun trying to impeach that they'll leave us alone.
Well, the one thing that I've said on that question, Peter, numerous times is how many times has the Trump administration gone to Congress in the first two years of its administration to ask for it to approve anything that it has done? And the answer to that is basically nothing. If you thought that they had no impact on the first two years, why do you think they'll have any impact on the back two years?
My gut is it will be strangely good for the economy, mainly because a full Democratic Congress will spend at least a year trying to impeach. Not just him. They'll try to impeach. That'll give the kids candy and a screen to keep them busy when you're babysitting.
Right. We're going to pull that clip out and put that as the clip out of this one. I got to do-
Impeachment will be like candy and screens for kids.
Yeah. I got it.
That will be impeachment for them, and they'll kind of leave us alone.
If I gave you $100 million of equity, and you said that we're in an equity-starved world right now. If I gave you $100 million of equity to put into commercial real estate right now, where are you putting it?
I do it with a long-term view, 7- 12 years, and I'd be buying in the markets where nothing is being built, and I know there's big demand. I would capitalize myself to say, "I don't know when I'm going to get 20% rent increase. I don't know if it occurs in two years or four years, but it's going to happen." I would do apartments in those markets. Who are those markets? Austin, Nashville, Charlotte. I'm not trying to be exclusive, but you get the point. They're markets where I have high confidence of growth and nothing's going to get built because they were so overbuilt, everybody has been burned on building there. But you're going to get growth. But I wouldn't bet on the timing of getting the rent spike.
I'd bet on getting the rent spikes, but I wouldn't bet it's going to happen in 6 months. I would try to give myself a four-year window, five-year window for that to occur, and I think I'd win.
If I asked you to pair that long trade with a short trade, what would you short?
If you said short in the current, where you got to cash it in, I've already answered data centers if I have to cash it in in five years, six years, four, five, six years. But I don't think data centers are a lose in the next 4 or five years. four years because there's just so much money already committed. With one exception. Here's what I'd say. I'd say you don't know what you're doing, and you try to develop a data center because you think you can get 90% loans, you think you can get the community to go along, you think you can get electricity, you think you can get, and you haven't been to those wars, and those are tough contracts, development-wise, of timelines and so forth.
If I were to short, I don't think I'd short the big, I don't know, what, 4 or 5 that do data centers, because they know what they're doing. Will they make mistakes? Of course, we all make mistakes. But they'll get it. It's the guys rushing in behind them saying, and I know several such people saying, "I'll get $900 million in debt. I'll scrape together $100 million in equity. I'll do a data center for $1 billion." They've not built one before. They've built warehouses. They've just not dealt with what's. That would be the short, is going into that. That's the short. Why it's a short, because I think what you're going to find is after a year or more, nothing will have occurred except they burned through a lot of your money.
Final one, Peter, for you is this. What's the single forecast in this most recent Linneman Letter that you have the least confidence in?
I have high confidence in the inflation discussion. I don't have as high confidence in the interest rate following the inflation part. Back to what we were talking about earlier, because my discussion was the inflation part occurs as oil prices stabilize and/or fall, and therefore, shortly thereafter, the interest rate falls. That would probably be the first part of that I have high confidence in, the oil part, and therefore, the inflation part. I don't have as high a confidence on the, and therefore, in a reasonable timeline, the Fed follows suit, because they tend to be late and arrogant and so forth.
I would remind you that we have a president who's been focused on that for quite some time. I think the moment he sees the light of day on that one, he's going to put some serious pressure on it. Peter, as always, a wonderful discussion. Your data is as good as it gets. Thanks for the time. Thanks for the candor. See you next time.
I have one question for you, Willy.
Oh, yeah. Yeah, sure.
What color shoe do you want?
That's a great question. We'll take white. It's all good. I get them dirty pretty quick.
Good.
Thanks, my friend.
I just want it on record. That's all.
It's all great. Thanks, everyone, for joining us this week and this quarter for the quarterly Linneman discussion, and we'll see you again next week. Thanks.