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

Good morning. I'm Susan Weber, and joining Walker & Dunlop's CEO, Willy Walker, today is Dr. Peter Linneman. They will discuss the state of the market and Dr. Linneman's economic predictions. Thank you for joining us today. And now over to Willy.

Thank you, Susan, and welcome, everyone, to what has now become a pretty regular quarterly update for Peter and I to touch base and see where things are in the world around us. Peter, always great to see you, and thanks for joining me yet again. Let me do a quick kind of intra on a couple of things before we dive into our discussion, Peter. I've had a pretty busy week with the Walker & Dunlop Summer Conference here in Sun Valley, Idaho where I interviewed Gonzaga Head Basketball Coach, Mark Few, who you just told me is a former student of yours, legendary actress Jamie Lee Curtis. And then I interviewed four-star Admiral James Stavridis at the Sun Valley Writers Conference on his leadership career and his new book. And now I have you today, Peter. And I will tell you, you are right there with a legendary coach, a legendary actress and a legendary Admiral with regard to insights and lessons to the world that we live in You and I missed one and other in Chicago a couple of weeks ago at the Annual Marshall Bennett Classic. Those discussions are confidential and yet -- so I want to attribute any of my comments to specific individuals. Yet just talking thematically, the conference was kicked off by a couple of billionaires being extremely pessimistic about the world we live in today and saying if things are bad today, they're only going to get worse tomorrow. I did remind myself that the group of billionaires who stood up and made those comments have rarely given me anything of optimism to think about whether assets are doing well or doing bad. So I do put a little bit of a caveat on that. But we went into office where there's clearly a dichotomy between Class A office and everything else. We went to retail. We're one of the large retail REIT CEO stood up and said, we survived COVID, we're trading at a 7.5% cap. You can still put positive leverage on retail. Let's go, which I thought was pretty great. The next day, we turn to multi and industrial. And as you highlight in the Linneman Letter, Peter, multi and industrial as far as performance characteristics today are about as good as we've ever seen them. And both are very much sort of the most favored asset classes and both from a performance standpoint are doing exceptionally well. There were a couple of concerns about last mile industrial where Amazon and some others are pulling back from last mile in distribution at the local level. And then there were some also comments about concerns about tenant risk on life sciences. Life sciences has been an asset class, Peter, as you've written about, that's been incredibly strong. And there was just some questions as it relates to whether venture dollars will continue to flood that space and that really in investing in life sciences and medical office, you got to, for the first time in a while, be really careful about the tenant base. So let me -- and so after a pretty pessimistic first day, I would say that most people left thinking that the sun would actually come up the following day. And I very much look forward to seeing you back and hosting that meeting a year from now. That's a pretty good segue into the Linneman Letter this quarter. You begin by listing a litanies of problems confronting the U.S. like polarized, politics, COVID, war in Ukraine, deficits, global warming, et cetera. But as you typically say, Peter, don't bet against the U.S. economy. This morning, I got my New York Stock Exchange daily update and it said markets are a little lower after yesterday's 2.4% gain on the Dow, 50 S&P 500 companies have reported earnings so far and 70% have beat expectations. The MBA reported mortgage applications fell 7% this week and were 19% below a year ago, which actually surprises me given the flurry of mortgage activity a year ago. But the mortgage demand is now at a 22-year low for the Mortgage Bankers Association. WTI crude back below $100 a barrel and the 10 years down 6 basis points to 2.96. So my question to you, Peter, is what could go wrong. I'm not hearing you, Peter. You're on mute. I got you muted. Did you mute it?

There we go, sorry. As always, I say my best things when I'm muted, right? So I chose my background today as a photo I took at Niagara Falls from the American side a few years ago. That's the most powerful waterfall in the world, and it's a good analogy to the U.S. economy. It's powerful. It keeps going. There may be times when it's a little slower, but it keeps going. And what the U.S. economy achieves is pretty stunning. And the wonderful thing about real estate is we're in the long-term business. We're not in the business of the next 6 minutes or the next 6 days. You mentioned the litanies and one of the things I pointed out is there's always been a litany. I'm 71, you're younger. But every day of your life, you can make a litany of things wrong with the U.S. economy. And they really were things -- they really are things that are wrong. It's not like [Technical Difficulty] the waterfall. The economy is 3%, 3.5% bigger than it was before COVID, before the social unrest, before the contentious elections, before all of this, what a remarkable achievement. Now yes, it could have been larger still. What could go wrong? Interestingly, I don't think it's politics could go wrong because pretty much the entirety of my 71 years, the politics have been miserable. That's just what they are, right? And yes, we go forward. What could go wrong that is really severe is if we got wage and price controls. Nixon imposed them in the 70s. They didn't do anything to inflation. They did distort resources enormously and dragged the economy down. Second, we have a nuclear power at war in a real shooting war. And if that somehow went nuclear, that would be in all bets, I mean that's not occurred. And I don't know how the world would react to it. And the third is if that war spilled over into Poland, shooting part spilled over into Poland or into the NATO countries, that would be very [Technical Difficulty] to be a consensus that we're going to talk ourselves into a recession. And it seems to be coming from the Republicans want to use their media to point out how badly the Democrats are going. They don't need help. And the Democrats have apparently decided to kind of blame everything on Biden. He doesn't need help. And so the entire media is trying to talk us into a recession. And they are creating nervousness. But I think right now, where we're at is another moment of [Technical Difficulty] fear conquering greed, right? And that happens from what's the lesson we've learned from history about when fear conquers greed, not for long, not for long. And I just remind if we go back to March 2020, that was fear. You would agree. I mean real fear. And you came back a year later and greed was back. And I don't mean greed in a negative -- a nasty sense. I just mean you see all the good things that can happen rather than all the bad things. So when you think of fear, you think of all the bad things that happen and greed as you think of all the good things. And there's a balance out there and more good than bad. So there is a slight chance we're going to talk ourselves into...

So first of all, I'm getting a bunch of latency off of, I think, your end of it. So it's anyone listening in who is hearing the delay on Peter's side, I'll -- hopefully, that will get better as we go along and his connection speeds up a little bit.

Let me just change the Wi-Fi here while we're doing that. Go ahead.

Yes, that's great. So Peter, I want to talk about rates to start with because, on our last call, I talked about the increasing rates, and you essentially said to me, "Hey, Willy, we'll adjust." And I remind people that on our call a year ago right now, the 10-year was at 1.31, and it's at 3% today. I want to also -- and this is one of the problems, Peter, of having such a long history with me as I take notes on everything, and then I can go back and look at my notes. So let me go back to where you were a year ago as it relates to rates. And you said for 2 things on rates and inflation. First thing, I asked you was it sounds like you agree with that while certain inflationary pressures are impacting industries like homebuilding, what you see today doesn't concern you and is transitory. So a year ago, you were on that this is transitory inflation, not 8% inflation. On rates, you had a very bullish outlook on rates, and you said we expect short-term interest rates to remain near 0 for at least the next 5 years as the Fed replaced its post-GFC playbook. And I asked you 5 years, and here we are a year from now, and we're well off of that 0 Fed funds rate. So in this quarter's Linneman Letter, your projection is including what you are assuming is a 75 basis point increase next week that we will have between 150 and 175 basis points added in 2022 to get us to a short-term normalized rate of 2.50 and a long-term normalized rate of 3.50. Give us a little bit of your thinking on how you're getting to a short-term rate of 2.50 and a long-term rate of 3.50?

Okay. So I think the transitoriness of inflation fits in is important to this. I still believe inflation is transitory. It's higher than I thought it would get, and it's higher than the Fed thought it would get. It's very interesting when we shut down the economy, not just us, the world, right, shut down the economy. Demand and supply both plummeted. When that happened, there were only 2 possibilities. Supply would come back faster than demand or demand would come back faster than supply. Has supply come back faster than demand, we would have massive deflation. We would have prices falling, wages falling, debt being defaulted on, not a pretty story, and that would have been a mess to be dealing with. That was always unlikely because supply usually lags demand coming out of the bottom. And when you had 23% of the labor force collecting unemployment insurance, not surprising that supply lags demand, okay? So demand grew, I guess you may use GDP. So demand grew 3% over pre-pandemic and supply lagged. What did you have happened across the economy? Prices went up. This is real simple. Now did they go up in some sectors more than I thought, and it's been added to by the Ukrainian situation, which nobody really foresaw or these no economists. There may have been military types who foresaw.

So [ Reid ] has actually said when I interviewed him on Saturday, that the Defense Intelligence Agency was well ahead of the curve as it relates to what Putin was going to do, which was an interesting insight from the defense systems.

Right. And good for them. And while -- you can look at the inflation indexes that leave out energy. They don't really leave out energy because energy inputs and everything, right, through electricity and fuels and so forth. So you can leave out oil, but you don't leave out energy, if you will. And so it's there. So it's higher. What happens -- well, I'll give you 1 example. Why do I still take this transitory? I think it's transitory because industrial output grew 3%, not 3% annualized, 3% in the first quarter. What's that doing? Manufacturers are saying it's highly profitable at these prices to expand out, but they're doing it. Is it happening as fast as we'd like? No. China is still shut down in major places, right? So it's still a problem. Chip prices. Chip prices have fallen. The Wall Street Journal finally figured that out yesterday. Auto sales are picking up. Why are auto sales picking up? The demand has been there. But without chips, we didn't have cars. Now they're getting chips, so they're able to sell cars. Shipping rates and truck rates have fallen 15% to 20% over the last, whatever, 1.5 quarters. Oil prices are down. They're still very high, but they're down. Let's remind ourselves about the reality of oil prices. 2 years ago, oil prices were basically $20. Is it a surprise that there was a big drop in output? Huge. Do you start it up overnight? No. So I think my memory is Permian rigs went from about 480 active down to about 100 active in a matter of months. It's backed up to some number like 360. Does it have a ways to go yet? Yes. When will oil prices really normalize? You want to figure that one out when production picks up.

But on that, I got a question for you on that because there was a Truist analyst who was on CNBC on Monday. And he said in like the most matter of fact way, I can see oil going to $130 a barrel and it wouldn't surprise me if it gets to $160 million. He says that, and nobody reacts to it. And I'm sitting here listening to him say, I wouldn't be surprised if it goes to $160. And I'm saying to myself, the Dow is at 25,000 at $160 a barrel. I mean in other words, like it's Armageddon if we get to $160 a barrel. Am I correct in thinking that?

First of all, I read those kind of reports, and they get a lot of headline, but I don't get it. If fracking is profitable at around $40, $35 a barrel, you explain to me how it can be at $160 for very long. That's -- I mean, it's just that simple. And yes, maybe the Biden administration is not as welcoming of it, but you can overcome a lot of unwelcomeness at that kind of margin, right? I mean, it just is. And not to mention Saudi and others be there. The other thing you're not quite right on, Willy, is people think back to past when high oil prices were a big tax on the U.S. economy. We're the largest producer of oil in the world. So if I said to you, Saudi Arabia, do they win or lose from higher oil prices? You'd say they win. If I said the Emirates. You say they win. If I said Russia, you'd say they win. Venezuela, they win. The U.S. wins, very different than prior to when we started fracking oil, which was only about 2012 that we began fracking oil. So that changed everything in that we actually benefit. Now not every citizen, but Houston, Dallas, Denver, even Pittsburgh with natural gas. So I don't think it goes that high. I would be surprised if it's about -- here's when you can write down and we can revisit a year from now. I think oil will come down below $80 within a year. And it's not because demand falls apart, it's that supply adjusts. I think people lose sight of how much supply adjusts.

And so Peter, in this quarterly Linneman Letter, you sort of take Europe to town on having outsourced all of their energy supply and a bunch of other things to try and look like they were the great leaders on the new green economy. And as you accurately say, they just outsource it to somebody else and continue to use it. They just weren't manufacturing it. And then taking them to task on that, you make I think, very interesting point, which is that as the world and Europe look to the United States for goods and services as Europe falls away, that could add 40 to 80 basis points of GDP growth to the United States economy.

Yes. I mean, it's pretty straightforward. We didn't do a lot of direct trade with Russia or the Ukraine. We are really good at weapons and weapon systems. You don't think Taiwan. Even Germany is eventually going to buy more. Even France is going to buy more. Even Poland's going to buy more. And we aren't going to get all those sales, but we're going to get some of those sales. And by the way, I think Indonesia and Philippines and Vietnam are going to buy more, given what's concerns about China. So there's the boot. Second, I just said we're the largest producer of oil in the world where a net exporter will become an even bigger net exporter and we'll gain from that. And the third is people forget that Ukraine and Russia were essentially the largest exporter of calories in the world, exporter, not necessarily creator, but exporter. And it's crushed Northern Africa, especially and into Central Asia from the food stuff. Well, come on if you're a farmer in Nebraska, you're happy right now because food prices are up, you're going to plant more of whatever the highest price stuff is. And yes, you haven't benefited so much yet because of the rotation. But moving forward, you're going to benefit going forward. And so when you add all that up, remember, the war is what, 5 months old at this point, 4 months old at this point. And so it's easy for Germany to say they're going to increase defense spending. They haven't done it yet, right? It's easy to say that Egypt is going to import more grain from us, but it hasn't so much happened yet. And it's easy to say we're going to frac more and produce more, but we haven't done it much yet. Now give it 2, 3, 4 years of runway. And so I feel good about the areas that are defense related in the U.S. I feel good about areas that are agriculture related, I feel good about areas that are energy related as a result of what's happening in Europe.

So just one quick point on the geopolitics because you mentioned Taiwan. And when I was talking to Stavridis, he wrote a book a number of years ago, Peter, that you may have read called 2034, which was a novel about the U.S. and China getting into war over Taiwan. And I asked him does he think that the reality of 2034 is closer to happening now, given everything in Ukraine and what China has been thinking about or further away? And surprisingly, he said further away. That everything that's happened in Ukraine makes it in his mind that China doing something on Taiwan right now actually has less of a likelihood today than it did when he wrote that book a couple of years ago. But I just want to stay on fiscal stimulus and the monetary supply, which is one of the things that I think is really interesting that you point out is you talk about the Fed shrinking its balance sheet. You talk about the amount of not only treasuries but also GSE debt that the Fed has. And you basically say, even if they get rid of $5 trillion on their balance sheet over the next 5 years, there is plenty of liquidity in the market to absorb that and that, that will not be a shock. Given that on the fiscal side, Peter, what about on the monetary side? There's been so much capital pumped into the system that sits on not only the consumers' balance sheet but on state balance sheets, on stimulus payments. Can the Fed control that to get to where they want to get to as it relates to long-term real interest rates?

Probably not. They can pretend they can. They've been pretending for a long time they can. Obviously, the globalization of money, the near monies that have come out versus when I was a grad student has made that much more difficult and was always difficult. On the monetary side, if we use M2 as the measure of what the Fed did, and I -- you can use the monetary base or M1 or M2 or M3 or whatever you want. Let's just take M2 because you got to pick something. The M2 since the beginning of the pandemic is basically $6 trillion higher that went from -- remember $17 trillion to $23 trillion. The economy is about $22 trillion GDP, just for a benchmark, okay? So $6 trillion is a lot that they added to the economy. Of that $5 trillion sits on cash just sits in cash. $1 trillion of cash above normal cash, right, that is if you kind of try to track what happened to the $6 trillion, you'd have found that $1 trillion was spent and $1 trillion was held by corporations as cash and $4 trillion is held by household beyond normal in cash, $4 trillion held by households in cash. That's because -- and it passes a smell test. We spent $1 trillion on a $20 trillion economy. So we spent about 5% of what we got, right -- 5% of GDP, excuse me. We spent 5% of GDP tiding us through a really hard year, right? And you -- well that kind of makes sense. And the rest we said is wealth, is wealth. We added it to our wealth. And it's not circulating. It's sitting in cash. It all happened so fast. It happened in a period of enormous uncertainty with COVID and otherwise. People were worried about, will I have enough cash? And they sat on it. Now here's the question. If let's just take the household side because I think it's the most transparent. If households are given $4 trillion, I can understand that they hold it for a while in cash. Do you think they hold that for perpetuity in cash? I don't think so. They will allocate it more or less like they allocate all their other investments in terms of real estate and stocks and bonds, et cetera, right, including government bonds. So with that $4 trillion, I would expect to see it become not a permanent extra amount of cash, but as a proportion of wealth cash goes back to normal and all the money flows to other things, that's propping up a lot of asset prices as it moves that way. And it's actually -- there's a theoretical foundation as to why they would -- households have reacted this way. I mean if you win a $1 trillion lottery, you're going to go out and buy ice cream cones. I mean you can't buy $1 trillion worth of ice cream cones. So you save most of it. You have a little fun, you go buy some Sundaes. And then you put the rest into savings and it grows and you allocate it. So there's a lot of money out there. And that's why I took a Linneman Letter, the $5 trillion if the Fed ran off. This $5 trillion sitting there that will be able to move out of cash and into bonds, GSEs, real estate stocks, you name us and offset. Now it may not be neutral because you can imagine the Fed said we are only buying certain types of assets, right? They only bought vanilla, right? They really only bought vanilla. You can imagine that not all of the $4 trillion is going to 1 vanilla such as the Fed sells their vanilla or doesn't replace their vanilla, some of it's going to get replaced out of the $4 trillion, but some of it's going to go into pistachios like life science, right? Some of it's going to go into private equity, some of it. So it's not going to be mechanically one-to-one because the Fed bought vanilla.

So on that, and I want to go through this real quick on national debt because you focus on it for a moment, and it's very much germane to this issue. So you point out in Linneman Letter that the real U.S. net wealth per capita has gone up to $452,000, $1.2 million per household, which is 15.5% above the 2019 peak. You then go on to talk about, as you just outlined, the debt burden in America, given the amount of money that we printed and that we're now up to $232,000 per household, which is up $120,000 since 2008 on a per household basis. So on the household net worth of $1.2 million and $232,000 per household of national debt, it's a 20% debt-to-equity ratio. Does that concern you right now?

It doesn't, no. But it is never concerned me what the federal debt is. It is always concerned did we get our monies worth for what the debt funded. If we got our monies, by the way, just think of your customers, your clients, the question isn't debt, it's are they getting their monies worth? Are they getting the good property that covers and so forth, right? And if they've got a bad property, I don't care if they got low debt, it's still a bad property. And if they've got a good property with high debt, it's still a good property, right? So the fundamental thing is, did we get our monies worth? And lots of time, we don't get our monies worth from the federal debt. By the way, a lot of times, we don't get our monies worth from private debt, too, right? I mean it's not unique to the federal government. The second thing about the federal debt is, is largely misunderstood. And I have a chart in Linneman Letter that I think -- again, I'm going to do this from memory. We have about $29 trillion of federal debt. Now remember, by the way, $22 trillion GDP just as a benchmark. However, 6 of that is 1 branch of the federal government owes it to another branch of the federal government. So you can imagine the exercise, the left pocket of the federal government owes the right pocket of the federal government $6 trillion. How much on net does that represent? The answer is 0, right? That's intercompany debt that's book keeping. There's no real net liability there. Second is then you go with the Federal Reserve. And the Federal Reserve holds -- and again, I'm doing from memory, Willy, about $6 trillion of Federal debt. Now technically, the Federal Reserve is an independent agency. Come on, is it a part of the U.S. government? The answer is, of course, right? Of course, with some technicalities. So again, that's the money that the Federal government owes to another entity of the Federal government. So that nets out. Then you're left with about $16 trillion to $17 trillion owed not to the government, okay? And of that, about $7 trillion is owned for ode to foreigners, that's real debt. That's real, real debt, okay?

Not if you're Argentina, but that's okay.

And -- yes, well, and that's to the point. It's real, real debt until we decide to sit people. We've never done but -- and then the rest of it is owed by U.S. citizens to U.S. citizens, including somewhat I owe it partly to myself, right, literally. My money market funds have government notes in it. I'm servicing the debt on my money market fund, if you think about it, right? Or another way to think about it, suppose your wife owes all the debt and you have to pay the tax to service it, your household's net neutral, right? I mean -- so when you think about it, the debt that U.S. citizens owe to themselves is neutral at a national level. It is not neutral at an individual level. The fact that it's not neutral at an individual level makes it an enormous political problem. Even though per se, it's not economic. Why? Because I want you to pay it and you want me to pay. So it's an enormous, enormous political problem. And the higher the debt is the bigger that political problem gets. So am I worried about the debt? Let's just take the $7 trillion owned by foreigners. GDP is $22 trillion, come on. That's not so bad, right?

So let me jump in here because I want to get down to specifics on the markets that I want to dive into for a moment and also asset classes. But the final thing on the general macro outlook, your team tracks 20 economic indicators, real GDP growth, capacity utilization, medium home prices, et cetera. And of those 20, 15 of 20 are beating trend, only 5 are behind trends. So on that outlook, it's exceedingly strong. But on your canaries in the coal mine, a year ago, you only had 1 canary. And anyone who doesn't read the Linneman Letter, I would say, strongly recommend you get it; and b, one of my favorite things to look at is the canaries in the coal mine where Peter and his team look to try and see where are we seeing anything to be concerned about like a canary going into a coal mine. And so last year, you had one. This year, you have 6 okay? So we've got 2 dead birds on speculative real estate development. You've got 1 dead bird on narrowing spreads and rising loan to values. You've got 1 dead bird on record buyout deals. You've got 1 dead bird on empty space being worth more than full space. And then only one, which I'm interested in because when you went to the risk to growth, you named COVID. But on the COVID fear strangles the economy, you've still only got 1 bird. So as you sit there and think about from 1 bird to 6 dead birds on your outlook, yet 15 of 20 major economic indicators you track all being above trend is the canary situation, something we ought to be paying more attention to?

Early on, we're early on is how I view it. When you really get in trouble is when everybody believes trees grow to the sky, and when there's more money than brains. That doesn't mean that people are stupid. You can take the most brilliant investor in the world and give them 10x as much money, and they'll have more money than brains, right? So I truly mean it, more money than brains and trees grow to the sky. Do you think we're in a belief period where people believe trees grow to the sky right now? No, no way. People are worried that they're going to burn to the ground, not grow to the sky. So in that sense, I feel good. More money than brains, there's a lot of money out there, and that part is the risk. And you're starting to see it. You were mentioning life science. I believe in life science long term. I don't know how. As you know, I've written this book with Al Ratner and Mike Roizen, you can't believe what we say in that book and not be bullish about life science long term because of what it can do to medical and life and so forth. We can talk about that at a different time, I know. So -- but it is speculative by its very nature. Industrial, you're seeing more and more speculative. Now it's being absorbed. There's no doubt, it's being absorbed. You're not really seeing much in office. You are starting to see hotels again creeping back. They should creep back because we probably lost 10% of the hotel stock during the pandemic. So it should creep back, but it's coming. But we are not in a period where -- we just have a belief trees are growing to the sky. I just don't see it, especially given the amount of -- if we had cash balances below normal, right, I'd say, people have chased everything. They believe trees grow to the sky. We just talked about it. Corporations have $1 trillion more than normal in cash and households have $4 trillion more than normal in cash. That's not what you do when you believe trees are growing to the sky, right? So they're still being relatively restrained. So I just feel pretty good about the economy. The two things -- and you see it in Linneman Letter, I just find it humorous that people keep saying, workers aren't returning to work. And you go -- well, excuse me, we've added 2.7 million jobs in the last 6 months. I consider that workers returning to work. Now you may say, "Gee, I wish they return faster." And that's an interesting argument, but you can't sit there saying, we're doing 400,000 jobs a month or 450,000 jobs a month, and nobody is coming to work. That's absurd. That's one of the funny things. I mean you just don't have recession. The first quarter GDP was negative. We didn't shrink. We did not shrink. How do I know that, right? You don't add over 1 million jobs in a quarter while you're shrinking. You don't have record retail sales while you're shrinking. You don't have industrial output grow 3% while you're shrinking, just doesn't happen. So I feel good still about the economy. We have a shortfall versus what we would have normally grown to versus the pandemic. We do have interest rate shocks occurring because inflation has occurred. And inflation has occurred largely because of the supply lagging demand, not so much the money because the money largely stayed in. I think the Fed got bullied into raising rates. You asked earlier, how was I that wrong? They got bullied into raising rates. They really didn't want to raise rates. You saw [ Powell ] saying, "I don't want to do it." But they felt one of the horrible things you know it as an executive, and you could only imagine what it must be like if you're under the political limelight. When things are happening, there's a tremendous pressure to do something. Even if not doing much is the right thing. And we all live with that. And then imagine you're under that political spot limelight, unbearable, I'm sure.

So Peter, you talk about capital flows. And one of the things you point out in this Linneman Letter is the fact that the disciplined lending that took place in 2016, '17 and '18 when all things were looking good, and you typically would have had lenders flooding the system with capital and underwriting standards would have gone out the window. And fortunately, lenders stayed disciplined. And as a result of that and that flow of capital, as you have always said, cap rates don't adjust based off of interest rates, cap rates adjust based off of capital flows. So if I had to kind of synthesize what I've heard from our clients over the last 2 to 3 months, it has been when are cap rates going to move because I can't afford to put negative leverage by a multifamily asset of a 3.75 cap rate and put 5% debt on it, buy an industrial asset at a 3.75 cap rate and put 5% debt on it, that doesn't work. And so there seems to be right now in the market, everyone is saying cap rates must adjust. And yet you say in the Linneman Letter, it's not hard to see today's 4 cap declining by 10% to 3.6% by 2026.

Lots of money follow the money. The $4 trillion, the $5 trillion we talked about. If banks start lending their excess reserves.

If, and we're not seeing banks do that right now. So that's -- help me understand why banks aren't lending right now because you go through in the letter and you talk extensively about how overcapitalized the banks are. How on any ratio you could possibly look at where banks have massive amounts of liquidity. Yet just this past week, we've heard that BofA and Wells Fargo have basically said, "I'm not putting capital to CRE right now."

So greed turned to fear, right? That's consistent with that. And the reason banks -- we saw a lot of money go in the banks in QE1, QE2, QE3 after the financial crisis. It took like 4 years for that money to really start coming out of the banks, to really start coming out of the banks. And stress tests are what kept it in. The black box, the stress test, and banks don't want to fail them. Well, we just saw all the major banks pass them recently. Now over time, if they keep passing stress tests and they have the choice of getting 25 or 50 basis points from the Fed for leaving it unused versus getting a 150 basis point spread from using it, they'll use some of it. it's that's simple, will they use it all? No. They have so much they can't use at all. How long has it taken? That's why I say it takes time. It just takes time. There's a lot of money and even more capacity to create money out there, but stress test and fear at the particular moment are keeping it in.

You're talking -- in fact they've got $5 billion sitting at the Fed, which would give you a theoretical lending capacity of $22 trillion. $5 trillion sitting at the Fed, and they could lend odd $22 trillion off of that. Yet we're not seeing even $1 trillion of it.

You can generally think of a 6 to 7 multiple versus their reserves. And I think the reserves are $4.2 trillion or some number.

But do you think there's something going on here where the Fed is talking to the OCC and other regulators and saying, look, we're trying to raise rates to slow this economy down -- into those banks and tell them stop your lending activity because we need you to partner with us on slowing this thing down?

Correct. And by the way, you may think your regulators are stupid, but you made the deal and you're going to more or less kind of take their moral suasion. I'm not saying all of that money comes out because I think the forces you're describing, but you don't need it all to come out. What if only, I don't know, of the $4.2 trillion excess reserves, I don't know, half a trillion of it got used at a 6 multiple that's $3 trillion chasing assets. That's -- now back to your customers, I've had interesting comments -- conversations with people. And they say, "You know, I can't cover at the higher interest rate and the cap rate." You know what my response tends to be, you also could lower the amount of debt.

Which we're seeing -- which we're clearly seeing. I mean we're doing a lot of 55% LTV deals.

Of course, or you can get outbid by somebody who normally use this 30% or 40% debt when you use 60 or 70, that's another possibility. You will see lower ROE investors do better at higher interest rates. And you'll see the high ROE investors will do a little less well for the reason you're saying. I can't borrow as much so I can't juice that ROE. So you'll see a lot of those factors occur. But it is -- yes. You -- there was a friend of mine who was on -- much, much older. And he was on Yale's faculty back in the day, like in the 50s when you were paid a pittance to be a faculty member. And he went to his Department Chairman, so he says, and the Yale Department Chairman says, well, I can't raise your salary son, but occasionally, you have to use your trust fund, right? Well, and he said but I don't have a trust fund, okay? But the equivalent for the borrowers is you might have to use a little less debt. And in fact, if we really got sustained high inflation. Think about this. I suppose we got sustained inflation of 8% for years. Let's suppose we go several years of 8% inflation. What does that mean? That means we're going to get negative spreads. We're going to get some very negative spreads. Why? Because the dollars that are being put into real estate, my worst day is the first day. And I have to pay to get those greater days where the income is growing 10 years from now. So I have to bid really high relative to today's income because tomorrow's inflated income is really going to make that up. So you -- negative spreads, and we had negative spreads in the 70s because with high inflation, you will get negative spreads. So of course, that makes the debt structure very difficult. You have to reconsider that debt structure.

So you mentioned that domestic holders of commercial real estate over the last year have been net sellers by a very small amount, but net sellers whereas foreign investors have been net buyers. Does the strength of the dollar right now make that an increasingly difficult play for foreign capital we get into the states?

I think it's actually slightly different, Willy. I think what the strength of the dollar is showing is how much people want to do it. It's the result.

They'll hold their nose, if you will, to get into the game, now pay that premium...

That's the way to view it. I mean I think it's like Bruce Springsteen I saw is touring again, and I just Google to see what ticket prices were that they're listing. That's like $2,000. Well, I don't want to pay $2,000. But if you want to see, you're going to have to hold your nose to get it, right? That's what's going on right now in the -- with the dollar is that however weak you think the U.S. economy is, do you want to be in Saudi Arabia, would you rather be in Russia, would you rather be in Germany, no, right? Just no is the answer. And so we're at a -- by the way, would you rather be in Colombia given what's going on there or Chile, what's going on there? So would you rather have your money in Chile or Mexico or Venezuela or Colombia, given what's going on or Miami, right? It's not hard. So those factors independent of us are making us more attractive. Try as we might to make ourselves unattractive.

Yes. No, we're not going to spend a lot of time on that today. So let me run through, Peter, just quickly. I want to run through some of the construction data you have and then get into your outlook on a sector basis. But I thought the construction data was very interesting and somewhat telling about what we've seen as it relates to construction capital flows over the last 12 months. And then that kind of leads into what you're seeing on outlook by various asset classes. So office construction down 2.6% year-on-year, but still 22% above historic average. I find that to be very surprising. Industrial up 21% year-on-year and 75% above average, that makes perfect sense. Retail up 5.5% over the last year, but down 40% over trend. I want to get you -- lodging down 26% year-on-year and down 27% over trend. And then finally, multi down 4.7% year-on-year, yet up 77% over trend. So let's start on office for a moment. You have a great line in this Linneman letter, Peter, which just says it's hard to get growth and creativity in a remote business model, which I 100% concur with. But you also -- last time we talked, said, once you get to 60% occupancy in office, it's going to snap back. And I heard you say that and I said, Peter spot on it. But I will tell you as someone who has been pushing hard to get our employees back in and talking to lots of other CEOs about how do you get people back into the office, we nor anyone else from the numbers you publish is even close to that 60% tipping point. And so why are you still bullish on office given the future of office is still very much a question mark in many people's minds?

That's why I'm bullish. I believe they come back. And by the way, if I'm wrong, it's not a good bet. I believe -- I mean, it's that simple. I believe they come back. By the way, I was talking to somebody from Guatemala City, nothing special about Guatemala City. They're back up to 94%. Talking to somebody from Israel, Tel Aviv, the other day, they're back up to 98%. Talking to somebody from Tokyo the other day, they're up to something like 92%. Germany, Germany is basically back up to 75% major cities.

So on that, though, you go back to your old model and you say you're projecting 11.2 million new jobs over the next 5 years. And because of the math, what that does, it says that your occupancy -- your vacancy rates are going to drop by 330 basis points. And CoStar's last quarterly was at 12.2% vacancy in the U.S. office. Okay? Don't you change the model given the impact the pandemic has had on office usage?

In the short term, yes. In the long term, I don't think so. I just don't think so. Here's why, Willy. We're just the species, we're just the species. We've evolved over millions of years. I don't think a year or 2 changes the species that much. Now I could be wrong.

I hope you're right. I hope you're right. I really do. I really do.

I come to believe about the office sector because you and I have spoken to analysts, number of CEOs who basically say in private, I need my people back. I have no idea of what a lot of them are doing. Yes, we've stumbled by. But to really drive growth, we got to have them back, right? I'm paraphrasing. And I say, you're being paid $22 million earn it and get them back. And by the way, if you look at the real estate firms like, Owen Thomas brought his people back. He didn't have a mass exodus. He had the same kind of exodus everybody else did. I'm not picking on Owen specifically. And it reminds me, I said this to a group of CEOs, so you can imagine how popular I was. I said it was right after the NBA championships and I said Seth Curry is paid $32 million to make a shot under tremendous pressure, both from defense and the games on the line. And he steps up and earns his $32 million. You guys aren't earning your salary. Shareholders are paying.

I would hope that there's more to determining whether someone is successful as the CEO beyond the office occupancy rate that one has...

But if they really believe their people are 10% and 15% more productive, do that as -- do the math. If you really believe they're 10% more productive in the office than not, what's that mean to profitability.

Yes. And I don't hear many people talking about productivity, Peter. I hear a lot of people talking about learning and future value and culture. It's not a productivity issue right now. I think most people are focused on learning and lifelong value, if you will, and culture. And those are going to be a lot of you. The one other thing that I would say on this, and then I want to move from this to multi and industrial, is just that just because we learned a certain way does not mean that the next generation has to learn the same way. So I have -- when I was at Morgan Stanley, I learned a lot by looking over someone's shoulder at a computer screen showing me how to do a model. But we also didn't have zoom for me to learn that remotely. And so I do think there is somewhat of a trap for people of my generation and older that says, well, we learned that way, so everyone else has to learn that way. And so I just -- I'm a big proponent of culture and productivity and everything that comes from the office. And at the same time, I think there is a little bit of it. It doesn't have to be exactly as we had it.

So I'm going to give you one quick rejoinder that boomers can identify with. We were going to sing songs and the world would never have war again, right? That was our view. We -- in the sense that we were different. Our generation was different. We were going to sing songs and the world would ever have piece. It's not getting so peaceful over that time period. You don't change fundamentals is you change window dressing, but you don't change fundamentals. That's -- you may change how the desks are laid out, but you don't change the fundamentals. So -- but other segments...

You still like industrial because of the transformation on the retail side of -- and we -- you and I talked about this a lot as it relates to online sales only being a small percentage of brick-and-mortar and brick-and-mortar doing surprisingly well. Record sales volume in the first quarter on brick-and-mortar retail.

I wasn't surprised. I was the only person in America not surprised.

Exactly. You weren't surprised by that, and you've said it, and you've been on it for a long period of time. You like industrial, though, because of the multiplier effect as you get growth in online sales, you have to have a huge amount of industrial infrastructure and you see that as a trend that continues to go. On the multi side, Peter, you talked through right now in April, May and June, more development on the multi side than we have seen well above trend. Trend being at 365,000 units a year. And on an annualized basis, we've been at sort of 450,000 to 550,000 over that 3-month period. But even with that amount of supply coming on, you're still bullish on multi.

Yes. Let's just real quick. My numbers, and I don't think they're very different than what somebody else would like Ken Rose and the quality analysts would have. My numbers are we have a national shortfall around 600,000 units. Let's take your numbers and say normally would be 350,000 and we do 500,000. We do that for 4 years, and we've just caught up at a national level. Now you would then say, well, every submarket, well, of course, some submarkets going to overshoot and some are going to undershoot, but we have a shortfall such that it supports it. And then when you add that on the single-family side, we have about a 3.6% shortfall in the supply of single-family homes. I mean, that's huge. And you say, well, how is that relevant for multi? That shortfall has meant that since 2011, home prices will outrun inflation just on supply/demand, just on supply/demand, shortage. And that 3.6% is not going to disappear in the single-family side quickly. It's going to take at least a decade, at least a decade. Now again, different submarkets. That's important because it means if prices are rising faster than inflation, home prices, they're probably a little outrunning income growth. And that means people have to save longer to get a down payment. And that means they have to live somewhere else, either with their parents or in an apartment longer, and that boost the demand for multi.

So interestingly, when you talk about various submarkets, I found this to be very interesting. You like Louisville, New York City, L.A., Boston and Orange County. You don't like Jacksonville, Raleigh-Durham, Salt Lake, Austin and Nashville. All right. So pause for a second because Raleigh-Durham, Salt Lake, Austin and Nashville have been the white hottest markets in the United States over the last 2 to 3 years period end of statement. So you now have them out of favor and you have some of the coastal gateway cities back in favor. And just as a point on hospitality, you also put D.C., Boston and San Francisco as hospitality markets you like. Are we seeing a big shift here from the smile states of the high-growth Sunbelt back to opportunities in the coastal gateway cities?

I think we overreacted in the mid- to late 2000 teens, thinking Gateway was the answer to everything, and I said at the time, suburbs in the middle of the country are real. Then we had the reaction of nobody wanted to be in the cities, nobody wanted to be in the big cities and you have that reaction. And that was an overreaction as well. And you had to be in the Raleighs and Nashville. Do I think Raleigh and Nashville grow? Of course, they grow. It supply relative to demand. And in the near term, there is a lot of supply in those markets coming not in every submarket in those places but in those markets relative to the demand over the next few years. It's -- it reminds me, Willy, when I entered the real estate business, I remember ULI had a survey about is such and such market good. And I thought, well, that's crazy because it depends, are you a developer or an owner. If it's a great market for developer, it's a terrible market for the owner. If it's a great market for the owner, it's probably a terrible market for the developer, right, because nobody is building. And so I think we're in a period where, yes, will Nashville be a long-term good place with a lot of growth? Yes, it's gotten a little -- it's getting a little ahead of itself short term, markets adjust. And when it adjusts, it will get more back in balance. Raleigh-Durham, it will grow. No doubt it will grow. It will grow faster than Louisville. It will absolutely grow faster than Louisville. But there can be a time where Louisville may not grow very fast, but it's supply is growing even slower, you can have a good time to be there.

So final thing. Next time you and I get together will be in October, we'll be right before the midterm elections. You look at your number for 2022 GDP growth of 3.5%. You look at the number of jobs that you just put forth -- I'm going out of focus. You look at the job growth that you just put in, in the 2.6 million or 2.8 million jobs over the last 6 months. You look at relative piece. In this call 2 years ago, we were already previewing what if Joe Biden got elected and what would happen with tax policy. And you were already ahead of that issue saying, "Oh, if Biden gets elected, we've got taxes going up, going to be big." A year ago, it was almost all anyone want to talk about. And we had a lot of people who sold not only assets but sold companies due to what they thought was bankable tax rates are going to go up. And here, we come into the midterms, we've had. We pretty much are assured there will be no change in tax policy given Mansion coming out last week and saying I ain't voting for anything and anything on the tax side or anything on the environmental side. So you're basically waiting to the midterms and the expectation is at least the House and potentially the House and the Senate flip. Why doesn't all that play into Joe Biden being a popular President today -- everything else that we've talked about?

Yes, I'm not a political pandit. I think people kind of figured out, they didn't elect Joe Biden to be president, they elected him not to be Donald Trump. And he succeeded in not being Donald Trump. And I'm not a big political type. But as I said, Joe Biden had been rejected by his party probably quite rightly several times before, and he wasn't getting better with age. And so it's not a surprise that as the reality replaced the fantasy.

My only point is I'm not trying to make a political comment about Joe Biden, and I hope everyone listening to this doesn't assume that. I'm saying if you look at the data, what about the person, forget about the war, forget about Afghanistan. If you look at it from an economic standpoint and people say, people vote with their back pocket all the things that people expected to come from a Biden administration, quite honestly, haven't come. You haven't had a decelerating economy. You haven't had no job gains. You haven't had all the things that everyone was fearful of. And yet, he's wildly unpopular. I'm not trying to -- just really saying look at the data.

Trump lost with the same information if you think about it, right? The economy was growing, economy was recovering very well. COVID was -- vaccines had come, et cetera, right? -- coming, and he lost in the same way. And I can't quite explain it other than it seems to not have to do with the economy in either case because I think you're dead on. I think you're dead on that if all you did was look at the economy Trump would have won, right? And if all you did was look at the economy, I think Biden would win. And what people are saying is at least with these 2 candidates, there's a lot -- these 2 presidents, there's a lot more than the economy to look at. Seems to be the case.

Yes. I got 1,000 more notes to go over. I had to do -- I ought to do an off-line conversation with you so that 3,500 people who are still on the line can come across with us. Peter, as always, fantastic to both see you and talk about all your great insight. Thank you very much for spending the hour. I look forward, we're going to do the Mike Roizen book and your book in September, and then we're going to be back with our quarterly in October. And between now and then, we will see whether banks actually decide they're going to get back into this market or not. And to everyone who listened today, thank you for your time. I believe that we're going to replay my interview with Jamie Lee Curtis from last week, next week. And if you have any interest in listening to really an incredible discussion with one of Hollywood luminaries of Jamie Lee Curtis, tune in next for you to hear that. Very different from what we've discussed today, Peter. Thanks so much for your time and take care of yourself.

Thank you.

Great to see you.

Goodbye.