Walker & Dunlop, Inc. (WD) Earnings Call Transcript & Summary

Good afternoon. I'm Susan Weber. And joining Walker & Dunlop's CEO, Willy Walker, today is Dr. Peter Linneman. With the war in Ukraine, rising interest rates and skyrocketing oil prices, we are at a crossroads. Today, Willy and Peter will discuss his latest predictions. Thank you for joining us today, and now over to Willy.

Thank you, Susan, and good afternoon to everyone on the East Coast, and good morning to those in Western time zones. It's an incredible joy to have my friend and incredibly talented and insightful economist, professor, researcher, Peter Linneman, on the Walker Webcast, once again. The 2 of us have created quite the, if you will, pattern on a quarterly basis of sitting down and talking about Peter's great research and what we're going to see coming ahead. And I'm grateful that Peter is once again joining me on the webcast. Before I turn to Peter and my lengthy list of questions, and I would add, we got hundreds of pre-webcast questions from people from across the country. We read them. I use them in formulating my questions. And so to all of you who take the time to write those, thank you. They're super insightful and helpful and help guide my questions and conversations with those who I'm fortunate enough to have on to the Walker Webcast. A couple of quick things before I turn over to Peter. We had an all-company meeting here in Denver last week for Walker & Dunlop. We brought 1,000 people together. I would put forth that, first of all, the sense of camaraderie and culture and shared culture was palpable. And I know many, many companies and organizations have held off from having gatherings over the last 2 years during the pandemic. I would only underscore how incredible it was to get together face-to-face and person to person with my colleagues at Walker & Dunlop. The second thing on that is that we had something of a COVID spreader event post all company meeting. To date, I think we have 64 tested COVID cases out of 1,000 people who came. And I'm assuming that there's at least 2x that of people who came down with it and didn't get tested and have a positive test. I don't say that because I'm proud of that. I would just say that COVID is becoming more and more part of our lives. And the other thing is that we only invited our vaccinated colleagues at Walker & Dunlop to the all company. And one of the things that has been very clear post all company meeting, and what has happened with those people is that we have had no severe illness. The people who came here were all vaccinated. And while some people have felt like they've got a bad bug and been home and down and out for a couple of days, which I obviously think about them and hope that they get better soon. But we haven't anyone who has had to seek major medical treatment because of it. And that's because we did restrict it to only vaccinated people. The efficacy of the vaccine in cutting down illnesses is known and wildly, wildly studied and conclusive. And so COVID is here to stay for a while as we all know, and I would just encourage those who are not vaccinated yet to really think about doing so. When I got up on stage on Thursday, my wife, as I was walking out the door, had mentioned that she had made dinner reservations for last night for my 55th birthday, and she said in passing halfway to 110. And I laughed and I made that comment to my colleagues at Walker & Dunlop and everyone in the crowd laughed. And I said, you all think I'm stupid enough that I think I actually might live until I'm 110. I raised that because Peter Linneman and Michael Roizen, who is on the Walker Webcast back in January, have a book that's coming out in September called The Great Age Reboot. And it talks about longevity and it talks about things we can do to take care of ourselves. And one of the things that I've been thinking about since I stated that is I've never thought about living to 110 years old, until I said it on Thursday. And every day, subsequently, I've had a mindset of what am I doing today to keep myself either physically or mentally capable to live to 110 years old. And so what I'll only say to Peter and to Dr. Michael Roizen is thank you for getting me in a mindset that, who knows, maybe I get hit by a bus tomorrow. But being mindful about that and thinking about it every day is absolutely fantastic. Final thing on mindfulness and then I'm going to move on. My wife also is big on mindfulness, and she encouraged me to have a word a day to focus on good things and that when you think about one word a day that is a positive word, it can have great things happen. And so my word on Monday was joy. And I had a lot of joy on Monday. My word yesterday was grateful, and I was grateful for friends writing me on my birthday and other things. And my word today is peace. And so given the conflict in Ukraine and lots of concerns that people have about the economy in our world, I would just wish everyone on this webcast a peaceful, joyous and grateful day. Finally, my guest next week is Amor Towles. If you have not read either Gentleman in Moscow or the Lincoln Highway, I would strongly encourage it. And if you have read them, you would know that Amor Towles is to the written word today what Peter Linneman is to economic forecasting. Amor is an old friend, and I very much look forward to talking to him next week about his 2 fantastic novels and how he pulls it all together and how he does the writing that he so effectively does.

So Peter, a year ago, you started the Linneman Letter with a quote from Teddy Roosevelt. "In any moment of decision, the best thing you can do is the right thing. The next best thing is the wrong thing. And the worst thing you can do is nothing." And man, oh man, were you right on that with regard to putting capital to work in commercial real estate. So now you start this quarter with do not bet against the U.S. economy. Even GameStop?

No. So first of all -- yes, right, great point. First of all, I was going to surprise your listeners by asking you the question, what is the significance of 4, 5, 6, 7.

That's good. That's good.

Which if you're not paying attention to the listeners is April 5, 1967 was when Willy was born. So it's a 4, 5, 6, 7. You'd have gotten the answer, no one else would have. So I was going to surprise you with that. Happy birthday.

I appreciate it. Thanks, Peter.

Second, on the -- I can't go without commenting on your 110. I was just -- with an amazing woman, and she's a staggering person who's 100 years and a quarter, and I was with her and she came to an event with me. You're going to make it to 110 as long as you take care of yourself. And Mike and I will talk about that later this year. So -- and all your listeners are going to have more -- when she was born, her expected life expectancy was something like 54 years. And so we're all going to get that. So now don't bet against the U.S. economy. I was reflecting on the U.S. economy. And I'll give you a little -- I was having lunch about a month ago with a friend. They say, you know, I read your stuff. I follow your stuff, I listen to you. And you're always pretty much optimistic about the U.S. economy, although not at every moment. He said but this time, we've got a divided Congress. We've got all kinds of horrible things. We've got still the pandemic. We got the war in the Ukraine and high interest rates are going to rise. We've got inflation blah, blah, blah. And therefore, I don't think the economy can make it. I said, Bob, if you're listening, Bob, I'm talking to you. I said, Bob, at every year, in my 71 years, you could have made a list of 7 or 8 really difficult things in facing the economy. And I won't go back, but you know it, I know it, whole bunch. And it's not that the list isn't real. But you know what the next word is, Bob, it's not therefore, it's and yet. And yes, the economy basically carries forward. Yes, it could go down for a quarter, even 2, even 3. It prevails. Don't bet against U.S. economy. So now let's assume, Willy, we had done this interview end of February 2020, right? So before the pandemic has entered our frame of reference. And you would have said to me, we're going to have a pandemic. It's going to kill hundreds of thousands of Americans. It's going to make many, many more seriously ill, come near to overwhelming our medical system, lots of absenteeisms. We're going to shut 1/3 of the economy down, truly shut it down. And another 1/3, we're going to shut down partially. By the way, the rest of the world is going to do the same thing. And we're going to have an extraordinary divisive election and we're going to have civil unrest. And by the way, if that's not enough, we're going to have a rise in gun violence. And our schools are going to be closed for the better part of the year. What would you expect to happen? And yet -- and yet, today, real GDP is probably 3.5% higher than it was if we had talked in February 2020. And yet, in spite of all that, employment is only down about 1%. And yet in spite of that, industrial output is only down 1%. And yet asset values are high. And yet consumer balance sheets are in good shape. And yet business is up. And so Willy, when you think about what we just went through, it's like the trials of Job. What else can we do? And yet. And yet. So if I have one message to take home today and the real estate industry serves the economy, and yet. Doesn't mean every day is going to be great. Doesn't mean every month is going to be great. You're in the and yet business. You're in the long term. So just bear in mind when you get pain of heart about the U.S. economy, if someone had told you in February 2020 everything that actually happened, would you have guessed it would still grow by about 3.5%? That's staggering. And that really is the message of the day from my point.

So let's go to rates then because we're in a rising rate environment and you stated in the letter "We're amused by the hair-on-fire pundits who warn of an economic meltdown when interest rates rise." And you go on to remind us that even if the Fed raises rates by 150 basis points in 2022, they will remain well below pre-pandemic levels. So that's clearly true. But isn't it the adjustment to that rate environment that causes the pain and the potential economic losses? So to say, yes, we were there beforehand, but we were there in a stabilized economy. We're now moving back to that, Peter, in somewhat of an accelerated rate given the reasons that we're projecting ahead. So isn't it that adjustment that's going to cause the pain and the potential economic losses rather than just sort of being copasetic about the fact that it's happening?

So if we could have adjusted -- if we've adjusted everything I just went through over the last 2 years, I think we can adjust to the interest rate going up a little on the short end. I think we can adjust to the interest rate going back on the long end. And as you note, basically, a year from now, hopefully, interest rates will be about where they were in 2019. If we'd have had a conversation -- we did have a conversation, in 2019, about the interest rate environment, and it was how low interest rates are, how low the interest rate environment was in 2019. That's what we're going to go back to. We had this extraordinary period of money being given away for free. And yes, if you were on the borrower side of money being given away for free, like a highly leveraged borrower, that was great, like the U.S. government, which is the biggest borrower of ours. Is it surprising that the federal government has spent money like it's free when it's free for God's sake, right? I mean it's 0 interest rate. So higher interest rates will benefit the lender, will benefit the saver. So when it's all said and done, it's kind of a wash except that what it does is say to people, money isn't free. And when something that's not free is made free, we tend to overuse it. So we're going to go back to 2019 interest rate environment. And I would urge listeners to say, not many of you were committing suicide over interest rates in 2019. Therefore, Willy, your point's right, I would tell listeners assume that a year from now, you're back in 2019's interest rate environment, start preparing for it, emotionally, financially. Now we could be wrong, maybe slower than that. But I don't see 2019 interest rate environment as so horrible.

So you point out in the letter, Peter, that the only people that you see potentially having difficulty in this transformation is highly levered, either borrowers or providers of capital. And I noted that last week, Gabe Poggi from BTIG, wrote a note pointing out that a number of the CLO issuers right now are kind of on watch list because they're getting margin calls on that. Do you see that potentially having a contagion effect on the rest of the lending community?

Could. I don't think it's big enough and I think the Fed is quite sensitized to that after the 2008, 2009 episode and the late March 2020 episode. I think they're far more sensitized to that. And if anything slows their rates rising pace, it will be sensitivity to that kind of environment. As you know, not only do you have to be heavily leveraged for that to matter, you have to be kind of callable and you have to be mismatched, right? You got long assets and short liabilities. So there is some -- but the typical corporation, the typical -- that is the typical people who fill our buildings, the typical people who fill our apartments. And the typical owner of those aren't so sensitive to short rates. Developers, a bit, but come on developers, you had money kind of for free for 2 years. You can't -- that was a nice gift from the government, but you can't expect that gift forever.

I just want to be really clear that was you poking at our developer clients, not me, okay? So let's just make sure that you said that, not me.

Absolutely.

Peter, you also referenced a Deutsche Bank research piece. They focused on 13 previous Fed tightening cycles since 1955. And in it, they basically summarized that from the first rate hike to when a recession kicks in is between 3 and 3.5 years. Do you know what the range was on them on those 13 as it relates? There was one a year in and was the other one 5 years in? It sounds like the average is 3 to 3.5, which I do think is an incredibly important time frame for all of us to keep in mind. In the sense, it's really helpful for you to point that out because it's not just 3.5 years. It's the summer of 2025. I mean there's a ton that's going to happen between now and the summer of 2025. I can barely plan the summer of 2022, much less 2025. So -- but is there a range there? And is there a chance that it's much quicker than that?

Look, anything can happen as we found out from COVID, right? Anything can happen. However, having said that, if history holds any lessons, we've got legs on this thing. This thing being the recovery. This -- look, in a normal recovery, I was saying how amazing it is we've grown 3.5% GDP, which it is. But in a normal 2 years, we'd have grown almost 5.5%. So we've undergrown. We have potential just to catch up and then normal growth. So I think over the next few years, that's what's going to happen. Now I think [ the best set-up ]. But when you go to the Deutsche Bank research, basically, you're right. The early side, the early side would be 2025. The late side is like 2030, right? And so you have to have some perspective, I think. And by the way, the things that will happen between now and then are going to have a lot more to do with profitability and viability than when that downturn comes 1 year or the other.

So when the pandemic set in, you, if you will, coined a phrase, a butterfly recovery. And I thought it was a fantastic way of thinking we're going to have some stops and starts, and we're going to kind of float around, but we will, generally speaking, float up, but we might lose some elevation and fuel as we go. You state in this letter, the butterfly recovery has ended! And you're projecting real GDP growth, as you just said, of 3.5% in 2022, 3.5% in '23 and 2.5% in '24. So this means no stops and starts from here, just bottom left, upper right?

I think more or less, yes, more or less, I think, yes, it goes from here. Now the wild cards. Okay, and why? Because we've got this pent up. We have enormous pent up still. We have enormous resources still. We certainly have capital to fund expansion. What could be the stops and starts? I think COVID hospitalizations and absentee from work are at the lowest they've been since the pandemic began, okay? So that's amazing. And we're heading into the summer. So we probably get some break that way. I heard what you were saying, but by and large, the experience your people had when they were ill with COVID was similar to mine as a vaccinated person and my wife's, which was a nasty day or 2, and my -- but wasn't devastating. And so absent a variant that's devastating, which obviously could change anything. Second, the biggest wildcard, I think we may have talked about it last time, is price control. The thing that worries me most that would stop from left to right upward kind of recovery is price controls. And I'm old enough, not many people on this are. I remember in 1971 when Nixon, a Republican, put in wage and price controls. And I remember the disaster that ensued. And yet, by the way, the U.S. economy kind of grew over the 5 years. But it was a mess. It was an absolute mess because one -- it's like fooling with Mother Nature, right? Once you do this price, there's a knock-on effect on another. That's what we found out during the shutdown. You shut down one thing, but you also shut down a lot of other things. So the biggest risk to the recovery is not interest rates, it's not inflation, it's wage and price controls.

I have to go to a quote that you put in the letter, which I thought was fantastic, where you quote Swedish economist and you point out socialists, Assar Lindbeck, who asserts, "In many cases, rent control appears to be the most efficient technique presently known to destroy a city, except the bombing of it." Which I appreciate you going and pulling that out.

And by the way, he was an avowed socialist. He was kind of the prototype. And by the way, the other, I think, we quote John Kenneth Galbraith, who was another kind of very left wing socialist kind of famous economist. And his quote essentially says that wage and price controls, he was in the Wage and Price Control Board, as I recall. And he says something to the effect of, everybody's got a special case. Everybody has got an argument why their wage or price shouldn't be controlled, but all the others should. And he then basically said, that's all we did. And the real point is you don't want to mess with the market. We found that out when we shut the market down during the pandemic. And we're still seeing knock-on effects from shutting the economy down. They're going to reverberate for some time. That's what the inflation we're seeing is due to and many other things, the lag in people coming back to work, et cetera.

So Peter, you outlined in the letter, I think, extremely eloquently and insightfully sort of the challenge the Fed has, and you underscore that inflation today is not due to booming GDP. Inflation today is due to lagging supply and supply chains. And you go on to point out that they're raising rates not to slow down that growth because GDP at 3.5% is great. But it's not 5%, it's not 6%. It's not what's heated the economy. And so you point to the fact that as they raise rates, they're actually trying to slow down an economy as at the same time, the real issue is on supply chain. So are they going to be able to sit there, raise rates to try and cool off the economy a little bit and not, if you will, push it over the edge into recession because the supply chain is the real issue and not a booming GDP?

Yes. I mean I'm an old Milton Friedman student, and I'm a big believer in "excess money can create inflation." But what -- and people quote Milton all the time that way. But what they also failed to quote is that Milton focused on the fact that real factors matter. That was what he spent most of his time. By real factors, I mean, I'll give you the 3 numbers. You know them. I put them in Linneman Letters. Over 2 years, real GDP a crude measure of demand in the economy, is up 3.5%. Industrial output, a crude measure of industrial goods capacity, is down 1%. And employment, a crude measure of service sector supply down 1%. Now Willy, when you went to college and you never took an economics class, and as I said, supply is down 1%, demand's up 3.5%. What do you think happens to prices, right? You kind of said, they'll go up. I don't know how much. I don't know which prices. That takes more study. That's all that's happened. And what happened was demand and supply both crashed in 2020. And in 2021, demand came back faster than supply. They both came back, demand came back faster than supply for both technical reasons like harbors being closed and so forth and companies going out of business. And by the way, do you really expect supply to lead demand out of a deep recession? I mean that makes no sense. I want proven demand before I expand, right? So we're in a situation where prices have gone up for the numbers I gave, you can do more subtle, and your point is dead on. If I told you real GDP over the last 2 years was up 10%, I say we can't grow that fast. That's way beyond what we can grow. That's not what we've grown. We've grown 3.5%, and we would have normally grown almost 5.5%. It's not overheated demand. Therefore, what can the Fed do to get ships unloaded faster? What can the Fed do to get Shanghai opened? What can the Fed do to get a bankrupt company that's no longer open to open? By raising interest rates. And I think the Fed realizes this, but they also live in Washington and feel extraordinary political pressure -- extraordinary political pressure to do something. We're in the do something kind of range and...

Which is back to your price control issue, which is back to your concern about price controls.

That's my concern. Let's -- you got to do something. And I think the Fed is going to raise rates. Now I actually think raising rates will be a good thing for the economy for the reasons we said. It's going to make something that's free not be free, but it shouldn't be free. And that will better allocate resources. So I think raising interest rates for a while will actually help resource allocation. But I don't know how it does anything about inflation at this moment, very different than in the 70s or some other situations. It's very different. So if you really -- by the way, 2 scenarios. You know how you could have gotten rid of inflation? If real GDP was down 1% versus pre-pandemic. If real GDP was down 1% and goods output was down 1% and labor was down 1%, do you think we'd have much inflation?

Right.

No. No. Would we be better off as an economy if real GDP was 4.5% lower than it is? Of course, not. Of course, not. So we're better off and we're just adjusting, if you really had government policies, I'm making them up as opposed to endorsing them. You want to get more capacity back? Anybody who puts a new line of production this year, you get to write it off in a year. Anybody who hires somebody who hasn't been employed for longer than 6 months, you get a $3,000 tax spread. Anybody who goes to work who hasn't worked for 6 months, you get a $3,000 grant, onetime grant. That would bring labor back. That would bring goods back. That would bring services back. That would push inflation down. That's the spirit of the problem.

So one final point on that, and then I want to move to oil. And that is in the letter you point out that you would never trade out 1% of GDP growth for 2% inflation. And I just think it was -- it's so well stated, and I think it's super important for people to keep in mind. You would never give up that 1 percentage of growth for, if you will, normalized inflation.

No. I mean just think about the size of the pie, right? The size of the pie, we could have gotten -- we have no inflation now if the pie was 4.5% lower, right? Namely it fits the industrial output and it fits the service sector. We'd have no inflation, and we'd all have 4.5 smaller pie. How are we better off by that? Yes, inflation will be down. It's all about real activity. It's all it being the economy. Now inflation can be damaging -- but right now, inflation is not damaging. Yes, it's hurting some individuals. I don't mean it that way. Right now, this is inflation that's sending up signals, big flares, saying bring capacity here. Right here, where the price is skyrocketing. Oil. Oil, for example, what people forget is 2 years ago, Willy, in April, 2 years ago, the price of oil was between 0 and $20 a barrel.

Our mutual friend, Barry Sternlicht, tried to literally buy a tanker to go buy a tanker and just put it offshore and hold on to oil. It was so cheap. So right.

Exactly. So you think about, okay, fracking. Fracking has -- it depends on which one, breakeven at something like $30 to $35 a barrel. The price is $10, Willy. How much are you pulling out of the ground? And everything you pull out of the ground, you're losing money because you have to ship it and store it and so forth. And by the way, you're going to do a lot of exploration when you're going to lose $20 or $30 a barrel? No. So what happened to capacity? Got shut down. What happened to planned capacity expansion? Got shut down. What happened to production? Got shut down. Now let's go to a world -- that's why oil is volatile, commodities tend to be volatile. Go to a world where the price is $100 a barrel, and the extraction cost is $30 to $35, guess what they're doing. And they can't do it overnight, but they're going to do more. And by the...

I was just going to say, but you -- I mean, look, you pointed out a year ago, you wrote extensively about the fact that government policy and the new green policy was going to create an imbalance between the carbon economy and a green economy. And that you were going to have a push into renewables at a time when there was still the demand for fossil fuels and that, that was going to set up an imbalance. And one of the things we're finding right now, as you accurately point out, is that the exploration and refining companies are not investing because 5 and 10 years from now, they don't think there's a return on going out and putting new rigs out there and going and drilling. And so you accurately point out that the supply is down 10% and the demand is up 5%. And accurately to you, I didn't take a lot of accounting courses or economics courses undergrad, that's why I didn't get into Wharton and I got into Harvard, just as an aside. But the issue with it is, Peter, you pointed that out, and that the policy was going to create this supply-demand imbalance. And so if the exploration companies aren't going to go invest because they don't see a return 5 or 10 years from now, what bridges that gap?

So what bridges that gap is remember, I was just talking about $30 to $35 a barrel? Let's say, the regulatory policies and all the uncertainties [ that makes this situation ] so as long as it pushes it up to $50 a barrel. With all those headaches and all the regulations, and you got to get your money faster, let's say it makes it $50 a barrel instead of $30 a barrel, just to stay on oil. It's $100 Willy, it's $100. Now do they have as big of an incentive to do it at $100 when the breakeven is $50? No, but they got a lot of incentives. So you're right, and I was right that the regulatory environment went too far. I think I -- somebody told me this morning, I was talking to them. I didn't really know the person and they said, you know I read -- I was listening to one of the Walker & Dunlop's. I think it was the last one and you said, don't get cataract surgery until you need it. And I think we were talking about environmental regulation, right, which is we're probably going to need but not until we need. I think if you recall, right? So we rushed this stuff and cataract surgery got real expensive. And so now you say, well, we don't need it that fast, right? Let's do it more slowly. We're going to get more energy, we are and we're going to get it from traditional sources primarily over the next 5 years. Yes, there'll be a push for green. But Germany has got to have electricity. Natural gas is going to be where it's going to come from, and a lot of that natural gas is going to come from here because it's not going to come from Russia. And their system is set up to process natural gas for at least the next 4 or 5 years.

So I want to focus on one other kind of element of the macro and then I want to dive into a little bit more kind of sector-specific discussion. But labor, you have an incredible amount of data in the letter on the labor markets and what's happening in the labor markets and real unemployment versus the Bureau of Labor Statistics, numbers, et cetera, et cetera. But net-net, Peter, 2 broad questions. What's -- we're still a little bit underemployed from where we were back in 2019. You keep going back to that as a reference point, and that's a good one, and it's a good summary one. We're still a little bit underemployed. But relatively speaking, after the pandemic, we're in a fantastic place. But wages continue to increase. And I guess the easiest way to -- the question mark that a lot of people have asked me about is the unionization at Amazon. Amazon employs 1.6 million people. Does that kind of, if you will, lock in these wage increases going forward and not allow for any type of backing up on labor?

Okay. So let's go to the wage part then the union part. The wage part is, if I told you, employment was the same as it was 2 years ago, that's pretty good. It's down 1%, but that's pretty good. Remember all those people who weren't going to come back to work, Willy, then that last summer, people were saying and I kept saying they're going to come back to work. Of course, they're going to come back to work. And we've seen a huge surge back to work. The problem is that we've got 2 years of population growth. So we would have not only had all the employment we normally had. We'd have 2 years of normal employment growth. So we're not only the 1% below where we started from, but because the population's grown, we've got a whole bench sitting there. It's like everybody who was already there, 1% fewer were working and nobody who came in has a job, okay? So we've -- and they're not working. That's why wages are up. 3.5% real GDP growth and supply is still down 1%. Now demand -- the labor coming back, coming back, coming back. It's coming back, takes a little time. The union part, I think, is a really dead on point. One of the big differences between the 70s and today is -- I'm doing from memory, I think in the '70s when we got the big surge of inflation, something like 35% of the economy was unionized. And the important point is not that they were unionized, they had multiyear contracts, okay? Multi-year contracts, 3-, 4-, 5-year contracts. That created a rigidity. Namely, you and I are negotiating, you don't know what inflation is going to be. You don't want to look bad as the union negotiator. And so you agree to a bump and a bump and a bump today. And I agree to a bump and a bump and a bump today. It kind of locked it in the system, right? Artificially, 3 and 4 and 5 years ahead, got locked into the system because unions tended to be multiyear contracts rather than annual contracts because they're so difficult to negotiate. Well, we're down now to what is it, 8.5% of the economy is unionized? Most of that is in the government sector. And therefore, multiyear contracts in the private sector are rare. I mean you don't have a lot of multiyear contracts from the top to the bottom, you don't have a lot of multi-year contracts out there. Therefore, you -- what that means is we're going to sort it out when we get there next year. We're going to sort it out when we see what it is. Big difference. Big, big difference in the economy. Otherwise, you could imagine multiyear contracts right now would be saying, I want a 5% bump this year. I want a 5% bump next year. I want a 5% bump the year after that. That starts locking in a lot of stuff. That's not being locked in, in the same way.

So one aside on that point, and then I want to go to risks, is we're really lucky, I think, to have Major League Baseball having a season and there was a chance there that we weren't going to have a baseball season. And major metros like Denver, like San Diego, like Seattle, have the downtown in our core has not come back to the degree that many would like to. We're going to talk about office in a moment. And as a result of that, the streets are still filled with people who are both homeless, and in many instances, are drug dependent. And it's made some of the urban cores across the country still relatively dangerous places to be. And when we had our old company meeting here in Denver last week, I got a lot of comments about on the 16th Street Mall, there's still quite a bit of crime and it's a sense of a lack of safety. And one of the issues is that baseball coming back this summer will bring people to the downtown core. And we're talking about labor. It's a great thing that the Major League Baseball Players Association and the league came to an agreement to have a baseball season because I think that those 82 home games per city is going to have a big impact on getting revitalization, getting retail back up and going and getting cities like Denver and San Diego and Seattle back up and going.

Well, think about where your stadium is at or where Cleveland's is at or Baltimore, even if they only get 20,000 people a night and most of them average about 20,000 -- 25,000 a night, 82 nights over what, they play 2 out of every 3 days, so over 120 days or however the math works, right? The greatest defense is a lot of people, right? That's the greatest -- we know that. The greatest defense is a lot of people. It's a great substitute for police, in a funny way, is if you have a lot of peaceable people there. There's an alcohol element that can screw that up, in general. And let's face it, we all -- when you're in that big crowd in a center of the city when all that activity is happening, you have a sense of peace back to your comment about peace. If you're there alone, and there's nobody there -- and even if there's nobody there, there's a sense of oh. And so I think you're right. Having that back, people coming back to the office, et cetera. Yes, I mean, I think it's all good.

So let me jump to one thing before we get out of macro, and that is that your canaries analysis, which I love. A year ago, it had one canary. A quarter ago, it had 2 canaries. And today, it has 4 canaries. Now they're individual canaries in the sense that they're at the end of the 5 canary tipping chart. So we're not at one of these things house 4 out of 5 dead canaries and it's a real pending threat. So let's be careful here. It's at the end of the canary line. But with that said, therefore in one of them, noticeably, is you have a dead canary on speculative real estate development. Where do you see that happening?

Well, it's primarily happening in industrial, right? I mean it doesn't take a genius to figure that out. Now I do believe the demand fundamentals are there. But you have to believe, right? You really have to believe that the demand fundamentals are. And the reason I believe the demand fundamentals are there for industrial is the kind of 3 to 1 amount of space that an online sale needs versus a store sale and increasing online sales. So it's not 2.5% GDP growth generates about 4% of industrial demand, and we're not creating 4%. However, most of that industrial, you have to admit, is speculative. Now it's a little odd because all multifamily and all hotel are speculative, right? I mean you don't have tenants. Hotels, you don't see much construction going on there. And apartments, you have the best pulse of that of anybody in the industry, it's rebounding. It's coming back. But higher construction costs are kind of tamping it down a bit, not letting it go through the roof. But I think industrial is -- you don't see much office construction going on. There's projects finishing but not new ones starting. It's pretty much in the industrial. And it's not that I think it's unwarranted. if I thought it was unwarranted, then I'd have killed all the canaries, right? It's just -- I mean, the canary boxes are nonstatistical efforts of more money than brains. You could have a lot of brains, but you could still have more money than brains and the belief that trees grow to the sky. And you have to believe in growth to be in the real estate business, but you can get crazy in that regard. So all I'm saying is in the trees grow to the sky, we're moving out there a little farther, particularly in industrial, not so much the other sectors.

So you also list 23 red hot cities. And then based on employment rates and growth in the cities, and then you have another 19 hot ones. Are you -- is smart capital going after those 23 red hot cities, whether it's from multi or retail or office? Or is the real opportunity looking at the hotter the actually still kind of cold space as it relates to opportunity to buy at any kind of a discount? And we'll talk about cap rates in a second, but as you think about the strategy today and you've got these 23 red-hot metros, are you focusing on those metros to invest in? Or are you trying to look somewhere else?

Although one of the things I think I write about in this issue is, demand growth is only half of the equation. Supply growth also matters. So Houston's problem has rarely been a lack of demand growth or Dallas' problem has rarely been a lack of demand growth. It tends to be -- supply grows even faster. And it's not like San Francisco grows that fast, or Los Angeles grows that fast. Look at their population growth, it doesn't grow that fast. What happens there is supply grows even slower, right?

Slower. Correct.

And so you do have to remember when you're considering investment, you have to look at both. It's the relative, what's the relative of demand growth versus supply? And generally, over a 3- to 5-year period, supply and demand are going to grow about the same. If you're a developer, you want to be where demand is growing, right, period. Because you're in the business of servicing growth with your fees and creating product and so forth. If you're a hold investor, you care about supply and demand. So the red hot city, certainly, in industrial, people are looking at them pretty attractively for investing. And in the red hot cities, they're looking at them certainly for multifamily. The cold cities are starting to get a relook for the San Franciscos, the New York, the Chicago are starting to get a look. But I still think, certainly, compared to pre-pandemic, they are still a bit out of favor.

So moving to housing. You state the Household Affordability Index showed that only 54.2% of families earning the national median income could afford to purchase a new or used home in America this past quarter, 54%. That's off of an average over the last, I can't remember when you start on this, but 62% is the long-term average. And the height of household affordability was in 2012 right after the GFC, makes perfect sense, and that peaked at 79%. 79% of the housing stock was affordable to the average national median income. So we clearly have an affordability issue. Does that issue, Peter, give additional legs to the golden era for multifamily that you've talked about previously?

Absolutely. People are going to live somewhere. And yes, they may double up for a year or 2. They're going to live somewhere. And if you handicap one of the competitors, namely single-family housing, it makes the other look more attractive, and that's multifamily. So yes, that gives it legs. That golden era that I wrote about in December 2022 for multifamily, the first 15 months have been really golden, as you well know. NOIs up, capital flows are up, et cetera. It is still a golden era in multifamily versus when I wrote that. But some of the gold has been mined. There's still gold left in the mine. But let's face it, you've taken a fair amount of the gold. Cap rates have compressed and the lives have gone up. But multifamily still looks good on a fundamental basis. And single-family is really challenged in lots of markets. Now the only thing to remember about the affordability is -- if you took out California, Oregon, Washington, Eastern New York, Boston, and DC, the nation's affordability improves a lot, right, improves a tremendous amount. Now you say, well, that's cheating. There's a lot of people who live there. No doubt, right? But if you're in Columbus, Ohio, affordability is pretty good. If you're in Dallas, affordability is pretty good. Maybe not as good as it's ever been, but it's still pretty good, right? So we have to kind of understand there's a lot of variability there.

I would add to those 5 that you just named. If you pulled them out as well, you do away it with most rent control in America. But I'll -- that's just a little aside on those 5 markets that you happened to have just mentioned. One ding potentially on multi that I just wanted to ask you about, you spent a bunch of time about student loan forgiveness. And you bring up the fact that $15 billion of student loan debt was forgiven in 5 rounds so far under the Biden administration. Does student loan forgiveness, similar to the point you made during the pandemic, Peter, about the tragic acceleration of death of some people and that, that capital, if you will, moving from one generation to the next prematurely allowed people to go and make a down payment for a single-family home and that, that was one of the drivers in the growth in the single-family market during the pandemic. Is student loan forgiveness something that owners of multifamily ought to be focusing on very closely because that debt burden on younger residents of multifamily, if that is forgiven, allows them to go make that down payment similar to someone inheriting money, if you will, in an accelerated manner?

It certainly is worth monitoring more than the industry does. And that's why I put it in Linneman Letter, right? It's not -- I would have put it in one issue and not every issue if it was a one-off kind of I'm curious about. That's why I put it in. And that the sentiment out there politically, remember, most of that debt ultimately is owed to the federal government, I mean, by guarantees and such. And the federal government doesn't appear to want to collect it. And by the way, Willy, I think if you were a House of Representative member and I was a senator, I'm not sure I'd want to go collect it either given the demographics of the voters, right? That it's not a terribly popular policy saying, yes, let's crack down on that. Because those student loans are, by and large, guaranteed by parents or grandparents. And I'm not sure I want to take on that number of parents and grandparents. Remember, the typical loan balance is only $20,000, $30,000. And to get to the $1.5 trillion, that's a lot of $30,000, that's a lot of $10,000. And they're all voters. And I don't know if I want to go there. So yes, I think it definitely is something. And the pendulum has swung what a decade ago, the notion was, by God, you're going to pay them. And the pendulum is swung to, well, don't worry about it. Maybe you don't have to pay it. So yes, it's something -- that's why I put it in. Multifamily should definitely worry about it -- watch it.

So you correctly predicted that office and multi cap rates would compress in 2021. Your multi call, there were other people who made it. I think your office call may have been the lone voice in the market saying that office cap rates are going to compress in 2021 when most buildings are 15% occupied. You're maintaining a bullish outlook on office, even though I think the stat you put in the letter is that Kastle Systems, in February, on 10 major metros had 36% occupancy in office. How are you still optimistic on office?

Okay. Two phenomena. One is, I was just talking to a good friend in Tel Aviv, 2 days ago. And they're back to some -- they're back to like 5% of normal. Now remember, normal wasn't everybody was always there, right? You were on the road some days, right? They are back to something like 5% of normal. Why should Tel Aviv be different? I talked to people in London. They're back to within 20%, 25% of normal. Why should we be different? Now you can make an argument. Tokyo, I understand, is back to that same kind of mark. So one is kind of quasi empirical. I understand that's not perfect empiricism, quasi empirical. And the other is sociological. When nobody is in the office, why the hell would I go? What, just to say I went? When a few were in the office. And we've all talked to people like this, right? When a few were in the office. They're not the few I necessarily have to deal with, okay, we have a sandwich. Now the psychology changes dramatically. There's a -- I think there's a social flipping point. And the flipping point is probably around 60%, 55%, 60%. And because once 55% or 60% of them are there, I need to be there to find out what they're saying about me. I need to be there to protect my turf. I need to be there to make sure I get the plum assignments. And but when 5% are there, what's the benefit of being in that 5%? Not much. So I think what you're going to see is as the Kastle data gets to around 60%, it's going to speed up a lot. We'll see. But that's what I believe. And then you add to that -- I think the Ukrainian situation is a net positive for the U.S. economy, sadly, but net positive. I just think you get a lot of economic activity in all these sectors, but that's going to drive people back.

So I had in my notes at the beginning, you still -- you actually like retail. And you -- I want to be specific here. My comment was you like retail, not you like malls. But the news this morning of Unibail-Rodamco-Westfield getting out of their entire U.S. mall footprint is obviously big news, one of the largest mall operators in the country. I remember actually, Peter, back to -- it was probably 4 years ago, and you were talking in our Chicago event about the fact that malls were under pressure and Bobby Taubman stood up and talked about his malls. And you said, well, all you have to [ do is be ] the best mall, Bobby, and you're all good. But if you've got second-class malls, you're in trouble. But they're pulling out. You still like retail given where things are moving, if someone like Westfield putting -- they bought Westfield for $14 billion. I don't think they're going to sell the whole portfolio for that much.

So let's be honest, they overpaid. It was just reviewed they overpaid at the time. If you had gone to Bobby -- they outbid David Simon. That says a lot. They outbid David Simon in David Simon's backyard, and it's not exactly at that time, David was starved for money, and David isn't an aggressive bidder who knows how to do deals. And the general view at the time is they overpaid. And now what we're finding out is, you know what, they overpaid. And so Léon Bressler will sort it through. He's a clever guy and doesn't want to spend his time battling there. Would rather spend this capital in Europe. You mentioned Bobby Taubman, who I'm very fond of, but -- and I loved his spot, and I learned a lot of real estate from his father. And I'm paraphrasing, I say this a lot. One of the first lessons I learned from Alfred Taubman who was a legend, as you know, was that you cannot buy bad retail cheaply enough to make it work. And I said, why, Al? You can buy an apartment complex cheaply enough to make it work because I can lower the rents and I'll attract tenants and I can lower et cetera, right? And Al said, you cannot cut your rents low enough to affect the price of [ Cheerios ]. And if you can't affect the price of [ Cheerios ], you cannot change spending patterns, shopping patterns. And therefore, even though you've got it cheap, you cannot affect spending patterns. You can affect spending patterns on buying an apartment cheap, cutting your rents, you will attract people, you'll have an influence -- unless it's in a horrible locations. And the point is, I've never liked -- since that day, that was probably like 1985 or '86, I got it. I've never liked bad retail. And good retail, I want. I want good assets. It will be a constant battle, as Bobby would tell you, as David we would tell you, as Lisa Palmer would tell you at Regency, constant battle. But if you got good retail, you'll win the battle. But if you got bad retail, [ Haym Katzman ] and I once said that -- I'm very fond of [ Haym ] as well. And we got one got talking, and I said, the problem with getting old, it's like owning a C shopping center which is, you can exercise more and more and harder and harder, and you still get worse and worse, right? That's the problem. So that's the problem. So don't own a shopping center that no matter how hard I work, I do worse.

I want to jump to the [ LREI ] and talk about just the general cap rate outlook that you have because it's incredibly insightful and it's where I want to end. But one thing on that, Peter, that I think is so important for us all to keep in mind when Blackstone threw the keys back to the CMBS investors on 1720 or 1740 Broadway in New York, week before last, a lot of people said, oh, office is dead. And I think exactly to your comment about the Westfield portfolio. They just paid too much for that office building, and it needs to just have a basis reset rather than the fact that office is dead. And I think a lot of people see the headline of Blackstone walking on a big office building 3 blocks off of Central Park South, and they say, oh, man, we've got real issues coming up. And it's really more of a basis play. They just paid too much for it. They're kicking the keys because their numbers could never work. Someone else can go buy that office building and make it work. Let me jump before you comment on that because I'm sure you have a lot of commentary on that. Let me jump to the [ LERI ] and end on this, which is that you expect it to rise 200 to 300 basis points over the next 5 to 7 years. And therefore, you predict cap rate reductions of 45 to 65 basis points for multi, 130 to 195 basis points for office, and 90 to 140 basis points for industrial.

Yes. And that's because if you put unprecedented amounts of money in the system, which is what I'm predicting because the Fed is pumped so much -- not just the Fed, all the central banks, have pumped so much money in the system and it will start coming out again over the next few years. If you put unprecedented amounts of money in the system, it will push up prices, that is to say, push down cap rates. And you say, even if interest rates are higher? Yes, even if interest rates are higher. The interest rates are about a balance sheet. They're not about value. They're about balance sheet. How much of the balance sheet is made up of debt and equity. By the way, for a tech firm, they have no debt, right? Some of these tech firms, the value is very high. It's not about debt. It's about value. The balance sheet is a separate discussion. And yes, if interest rates go up and cap rates come down, oh my god, you can't borrow quite as much and have the same coverage. But I was in Egypt recently looking at the back. There's nothing on all those walls that I could find in hieroglyphics that says real estate guys have a right to borrow 70% and have 1.5% interest coverage. It wasn't there on any of these temples, right? You may have to go down to 1.62%, right? And you may have to have reduced LTV, and that's how markets work. So I just think that cap rates -- I'll end by -- I know we're on time. But if I told you $2 trillion additional want to be in multifamily within the next 3 years, what do you think is going to happen to the price of multifamily? You don't need to know anything else, right? The weight of $2 trillion trying to find it. Now it's not going to be that much. But it's going to drive cap rates down. And if I told you $1 trillion is going to try to get out of multifamily over the next couple of years. What would happen to cap rates? It'll skyrocket because there's no money. It's primarily about money. And we covered this with a lot of care, or at least as much care as I can muster in the last several issues, of Linneman Letter and some serious research but also some anecdotes the way I was just doing. Anyway, I believe we're on time.

On time, insightful, amazing data in the letter. Anybody who hasn't read it ought to get it. We'll do this again next quarter, Peter. Thank you. I look forward to seeing you soon. Everybody, have a wonderful, peaceful day. And let's hope for peace in Europe and in Ukraine. Our thoughts and prayers are out to those people. And again, Peter, deeply thankful for the friendship and for doing this on a quarterly basis.

Thank you.

Take care.