Transcript

Aaron: Welcome everyone to The Dealmaker’s Edge. Today we’re very excited to be joined by the great Dr. Peter Linneman. He’s an American academic, the Principal of Linneman Associates, CEO, and founder of American Land Fund and KL Realty, and an individual really recognized as one of the most influential people in the U.S. real estate sector. He was the Founding Chairman of Wharton’s Real Estate Department, Director of Wharton’s Zelle-Lurie Real Estate Center for 13 years where he won the lifetime achievement award and his quarterly publication, Linneman Letter, is consistently relied upon by market-makers and industry leaders as the one-stop-shop for commercial real estate investing. His life’s work has been centered on helping people and organizations reach higher levels of performance and his latest book, which we’ll definitely touch on, is continuing that commitment. It’s called The Great Age Reboot: Cracking the Longevity Code for Younger Tomorrow, [and is] co-written with Dr. Michael Rosen and Albert Ratner. And for more than 40 years, Peter, you’ve seen everything, you’ve led corporations, served on over 20 public and private boards, including serving as chairman of Rockefeller Center Properties where you led the successful restructuring in the sale of Rockefeller Center in the mid-1990s.

It’s really hard to have a bio more sophisticated than that. We’ll just let people absorb that. But anyway, Peter you’re here now. We’re very excited to have you. And maybe you could just kick us off with a couple minutes of just background. I mean, obviously you’ve had academia as your DNA, but sort of how you got to where you are today with this sort of macro vision of the real estate world.

Peter Linneman: Well, I’m sort of…look, I’m a blue-collar kid, blue-collar family. First in [my] family to go to university, to graduate from university; three out of four siblings. [I] didn’t go to university. I had great mentors in university: a woman—Dr. Luci Ford—who’s now 100 ½ years old. And I talk to her every day. [She] was my professor then, and the rest of my life in a way. And then she suggested I go to University of Chicago, where I studied with Milton Friedman and Gary Becker and George Stigler, and a raft of amazing Nobel Prize winners. And I absorbed everything I could. I then began my academic career and my consulting career pretty close to simultaneously.

I had taken a position. I had been in University of Chicago on the faculty for two years, and I just had taken a position at the Wharton School of Business at the University of Pennsylvania in 1979. And almost at the same time, I said yes, which would’ve been around March of [19]79. I got a call one day from Michelin Tire. And then two days later from Scott Paper, which was a very large paper manufacturer saying “we would like to hire you to do some consulting.” And I had no idea what that meant and they asked how much I charge and I said “$50 an hour”. I don’t know why I chose that number. But they said “great!” And that started my consulting career, not in real estate, but another kind of [avenue]. I was doing a lot of corporate finance, corporate restructuring, general economics teaching, all sorts of applied microeconomics and statistical kind of stuff. And then in 1985, an amazing man, Russ Palmer, who was in his second year as Dean at the Wharton School, said what Wharton had in real estate—as far as he could figure out—was a disgrace. And I said, “you’re right”. I had nothing to do with it at that time.

Nobody who had any judgment had anything to do with it at that time. And he said, “would you take a look at it as a consulting effort, not pay me, but should I grow it or kill it?” I looked at it and it was a very under-professionalized industry. It was a huge industry with lots of interesting problems and questions and Wharton was in the business of professionalizing and answering interesting problems and questions. So I said, “of course”, after studying it a bit and he said, “well, why don’t you do it?” And I said, “well, I don’t know anything about it other than what I’ve just researched.” And he said, “you’ll figure it out.” And I was still young enough and stupid enough to say “fine.” And out of that came an overnight success that took sort of 13 years to create the Wharton Real Estate Center, which continues today as the Zelle-Lurie Real Estate Center at Wharton. We created the program. A lot of other universities have modeled to that over the years and proved upon it. And my advisory career, my consulting career—whatever you [want to] call it—evolved as you might imagine, more and more into real estate as I got more and more fascinated. And that’s how, as I said, one time, it was a quick trip from young Turk to deadwood, you know, and as I sit here at 71, I suspect that most people think I’m deadwood, right? But there was a time when I was a young Turk, but that’s…

AY Strauss: I would challenge that assumption. I would. That’s the first assumption I would challenge you. Definitely not, definitely not.

Peter Linneman: Well, and I’ll say one other thing; not to be too philosophical. If I learned anything over my career, it was [that] if you get around good people and smart people and you do good work, somebody notices. They may not notice in a day or a week or a year even, but they’ll notice. So somebody had noticed I had done good work and suggested me to be a consultant, you know, and because they weren’t available, Russ Palmer had noticed I did good work on anything he asked me to do. And out of that group, I did good work. And I got asked to be on corporate boards. And you mentioned the Rockefeller Center. I thought I did pretty good work there. And I was asked to chair it and you know—and yet Pete Peterson was on the board for God’s sake; [he was] the co-founder of Blackstone.

And it was real honor to be asked. And so over and over my career, I’m not saying I’ve always done perfectly, but I work hard and try to do good work. And I think I’m living proof that people notice and give you an opportunity to make a mistake or to recover from a mistake.

AY Strauss: A hundred percent and notice they surely do. If you ask anybody who’s done anything significant in commercial real estate, your name is certainly synonymous with the deepest level of understanding you could at a macro-micro basis. Well, as long as we have you, I know our listeners are very hungry for sort of what I call the standard fair. You know, you get somebody on like yourself, they want to know about cycles. They want to know about macro. They want to know what’s up or down and different asset classes. Maybe we can get to some of that meat. I’m sure every day somebody is sort of pushing you for great detail. And it’s all a bit of alchemy at the end of the day, but you’re the…

Peter Linneman: Well, it’s funny. The first time, like many things in life…a company like your first podcast. You almost kind of feel like a faker at the first time, like, “why are you asking me?” You know, like, “there’s, there’s 7 billion people. Why are you asking me?” And then of course you absorb a lot of information, you know, you’re not always right. Even Babe Ruth struck out with men on base. Even Tom Brady overthrew an open receiver at a key moment in the game. Right? And I’m not claiming to be at their level. So of course, I’m wrong. Sometimes everybody who listens to me knows I’m wrong sometimes. Right? So, if you then say, “where are we at?” Under those standard fair. Right? “We” being the United States, [the] United States real estate industry. I have two things I would remind people of: real estate’s a long-term business. It’s not a trading business. You don’t get in it at two o’clock today and get out of it at four o’clock today. It’s just not that type of business. It’s a long-term business. It’s about having [a] decent location, trying to make it a better location, a better design, a better property, better tenants improved amenities, et cetera. Well, that’s a long-term exercise and one of the mistakes people make, all of us make, is we get distracted by the shiny objects, you know, in life. And right now, there’s a lot of shiny objects out there. Interest rates and will we have a recession, and will, you know, the dollar strengthen or weaken? There’s a lot of shiny objects, and the election, and there’s a normally high level of shiny objects right now. I mean, we always have all these shiny objects, but there’s an abnormally high [amount]. And I sometimes say to people, “based on my research, your investment is certainly going to be affected by those shiny objects. You don’t have any control over them, and more to the point, if you invest and hold for 10 years let’s say, none of the success or failure of your property depends on any of those shiny objects. None. If you do badly over the next 10 years, it’s because you picked a bad location or you picked a bad design for your property.” And this is consistent with my research, which says if it’s a decent property in a decent location, you’re going to do well with like a 10-year hold. You’ll probably not lose money on income-producing properties. [On] land, you can lose; it’s very volatile, but on income-producing properties, you’re going to make money. And by the way, you get in at the peak, you’re still going to make money. And [if] you get in at the bottom, you’re still going to make money. And it just works out that way because markets work. So, I said to somebody the other day, “so what if interest rates rise 50 basis points?” If you’ve got a business depending on whether interest rates rise 50 basis points or not, you are not in the right business if you’re in the real estate business. Now, by the way, would you like your money 50 basis points cheaper? Of course! That’s a different question. But if your business depends on it, you shouldn’t be in the real estate business. It’s not that sensitive. There are so many things that are going to happen over a 10-year period. So, think of the last 10 years we’re sitting here summer of 2022, let’s go back and we’re having this conversation summer 2012. Think of everything that happened over those 10 years. And then go, “well, what if interest rates had risen 50 basis points back in 2012?” It would’ve been swamped, like all these other things in between.

And that’s an important thing I think for people to remind themselves at times like this. Don’t get distracted by the shiny objects. You’re in the long-term business. Yes, your model might look a little better or a little worse. Your model’s never right. Nobody has ever come back 10 years later—maybe if you did a net lease to a AAA company or the U.S. government, I don’t know—but nobody comes back 10 years later and says, “oh boy, I got every row and column number right!” So it’s an important time to remember that because there are so many shiny objects. I think the economy’s in good shape. I’m not a believer that we’re in a recession or that we’re on the brink of a recession. I think there’s a lot of runway for the economy. We are still underemployed. We are still undergrowth. We have still not gotten back to where we would’ve been. Had we not had COVID. Yes, we have inflation. We have inflation because if you shut the world’s economy down and demand comes thankfully back, right? Thank G*d demand came back for all sorts of products, but it came back more slowly than supply. And that created a lot of inflation and it created a lot of supply chain stuff. And it’s just another cost of COVID, right? It’s not as painful as if you happen to have a mother or a father or a grandparent die of COVID, but it’s a pain. It’s all part of the cost of COVID and the policies of it, and inflation will moderate as supply catches up to demand. It’s not that demand has grown too much. It’s that supply has grown too little. That’s what people get wrong. And that of almost everything, of almost everything in the economy people forget that in April and May of 2020, not that long ago, 23% of the economy was collecting unemployment insurance. 23% of the labor force was collecting unemployment. How quickly we forget. Right? And oil prices in April 2020 were negative. How quickly we forget. You know? And people were saying, “oil will never go above $20 and people will never leave their homes again. And no one will shop again…oh, come on. That’s all nonsense. We’re humans. We don’t change that fast evolutionary. And so, I feel pretty good about where the economy’s at. It’s made up. Don’t bet against the U.S. economy in the long term. And we’re in the long-term business.

AY Strauss: Well said. You, you probably run into more dealmakers than anybody I would ever meet. And you’ve seen the greatest ones perform. You’ve consulted for them. You’ve been on the business-side yourself—given what you just said—which is essentially buy value, hold long term, sort of like the core principle of real estate in a nutshell. And everybody is, you know, underwriting and proformas are sort of garbage effectively after a few years anyway, [because] given the macro trends you’re suggesting, what type of edge would you suggest? I mean, this podcast is called The Dealmaker’s Edge. We try to get star performers on, right? People leverage technology, they get lucky, they’re smart, they’re hardworking. In your experience [with] some of the best dealmakers you’ve seen, what are some of those principles they’ve applied to get an edge beyond just being in the business a long term?

Peter Linneman: Three things. Discipline. They do approach things in a disciplined way. It’s not willy nilly. By the way, when I started back in ‘85, there was a lot of willy nilly… but a disciplined approach, a professional approach. The industry has gotten professional. If you want to compete, you have to be professional. And so, I would say they’re quite professional in how they approach it in a place like Blackstone or Simon Properties or whoever. You know? They’re quite disciplined in their approach.

They’re thinking what they’re doing.

Second is that they…focus more on the downside, then the upside. And Sam Zelle—who is as great as any investor I’ve known, dealmaker I’ve known—Sam has this phrase, “the upside will take care of itself. Don’t worry about it. It’s the downside you gotta figure out.” And most of us do not analyze the downside closely enough. We’ll say, “well, what if rents were 10% lower.” Right? “Well that’s great, but why are rents 10% lower? And if rents are 10% lower, what are your marketing costs? How do they get changed?” Or are your answer leave revenue from parking? How do get, I mean, really try to understand what it is that creates downside. Not just mechanically tweaking a model. And when you do it, actually think through “what should I do if…?”

Now that leads to the third thing, which is I liken in some ways investing, dealmaking to professional or football at any reasonable. I didn’t play professional. I played a little college badly, but you have this elaborate game plan. You go over all the films, you study the films, you study the tendencies, you know your strengths, you know who’s injured on your team. You think you know who’s injured on them. You come up with a game plan and et cetera. And then, you try to implement that game plan, but it starts to rain. And how do you adjust? And by the way, on the third play, your left guard is injured. Well, now you’ve got to adjust. So yes, you had a plan. Yes, you understood their personnel, their strengths and weaknesses, but you gotta adjust. And I think what the great dealmakers do is adjust, constantly. They do not view it as a single decision. They view it as the beginning of many decisions they’re going to make. And again, by the way, if you’re a football coach—the season starts what next Saturday or next Sunday, whenever—I mean, you’re not going to run every play based on what’s in your head at the beginning of the game, right? You’re gonna situationally evolve. And yet, your plan figures into it because you have studied their strengths and their weaknesses and their tendencies. And you are trying to adjust that their safety went out.

So I’d say discipline, I’d say concentration more on downside than upside and why downsides happen, and then a commitment to adjusting. None of that’s shocking when you hear it. But if you think about it, it’s what these great coaches do in football, right? It is exactly what they do.

AY Strauss: Well said. Having the discipline, understanding [and] protecting that downside and being nimble to adjust in real time. Those are the key elements of greatness on dealmaking. And coming from you with that authoritative perspective, having seen the greats in action, having done what you’ve done, it’s very meaningful for people to hear. You’ve written a lot. You’ve published a lot of courses. I know a lot of people have listened to your online courses, which have been amazing. And your latest book it’s not out yet. So I don’t know the full detail, but maybe you could talk about The Great Age Reboot: Cracking the Longevity Code for Younger Tomorrow. By the time this podcast is released, it will be out early September. People are living longer from an economic perspective, they want to tap economic theory. And what will that mean? Maybe you could talk about the themes of the book, why it’s prevalent. Why would somebody want to understand. This new era we’re about to go into from longevity perspective?

Peter Linneman: So the great American reboot, Great Age Reboot lead author is Dr. Michael Rosen of Cleveland Clinic, head of their wellness, brilliant longevity physician. Albert Ratner and I assisted. Albert’s a very dear friend of mine for 33 years or something and called me and said, you know, “I’m on the board of Cleveland Clinic and Dr. Roy understands all the medicine of longevity and he is got amazing things happening in DNA and so forth. And as soon as we come to the conclusion that people are gonna live a lot longer, everybody says ‘we can’t afford it. Can’t afford it.’ That’s the knee-jerk reaction.” Says “you can hear their knee, hit the table almost right. The knee-jerk reaction, and we need your help.” So I came in as an economist with a focus on real estate, but you know, an economist with a broad background. And I was knocked out by the science. The book comes out next month. National Geographic is the publisher. And it comes out in September and the science is…it’s fantasy, but we’ve seen fantasy come true. I mentioned, I went to graduate school at the University of Chicago and in 1976 and 1977, I’m using a 370 IBM computer, which was the state of the art and took like six rooms of a building. Right. And by 1981, I had a PC on my desk that was more powerful than that. And you go, well, how is that possible? And you go well, and we’ve been living longer. First, we got rid of waterborne pathogens and we got antibiotics and we got better medicine. But about 20 years ago, we came to understand the genome. We came to understand the source and organization of life. And when we did that, remember it’s only like 20 years ago. And when originally it was very expensive to deal with the genome. They didn’t quite know how to do it. Well now it’s gotten very cheap. Getting cheaper. And we’ve learned a lot in those 20 years. So gee, one of the big problems are diabetes and high blood pressure and heart disease that comes from excessive fat. Well, what if genetically you can change and get rid of that fat? Well, they’ve done it. They’ve done it. And several major institutions with several species. Now, it’s not quite ready for humans yet, but gee, can you imagine how that changes life? Not just, we would feel healthier. We would cut medical expenditures staggeringly. We would show up for work more often and we would be better workers because of being healthier. And that’s just one.

Another: imagine you could take somebody who’s 71 years old—me—and do a genetic modification and they have the muscle vigor and the recovery time, et cetera, of a 30 year old, but they retain all their memories. Wow. And by the way, they’re gonna live 30 to 40 more years, but it’s like going from 30 forward, right. It’s not like living the last day of your life. It’s not a Groundhog Day. 20 or 30 more years living the last day of your life. It’s Groundhog days, living your twenties and thirties and forties and fifties. And so you, my God, well, if you’re gonna live 30 years longer, 20 years longer, you’re gonna work at least five years more, 10 years more. Well, think of the productivity of that, the typical person works 40 to 45 years currently. If you work five years longer, that’s a 12% increase in your lifetime output. And if you’re gonna live 20 or 30 years longer, it’s not hard to imagine you’re gonna work five years more and you’re gonna be healthier. And so when people say you can’t afford it, you say “you don’t get it. Human capital that’s all there is. I want as much of it as possible. I want it as productive and as vibrant and as sharp. And as long as I can get it, because that’s how we get solutions to the challenges. That’s how we get breakthroughs.” And people say, “yeah, but we can’t afford it.” We can’t afford not to get, it. We need those. And you say, well, “what kind of implications?” I’ll give you a couple. Well, we estimate that the population is going to grow well over a hundred million people in the next 30 years, gonna grow about 1% a year. Not because of more births, but fewer deaths. And the people who are alive are really healthy, and you go, “wow, that means more housing, doesn’t it?” That means more boxes being consumed longer. That’s more warehouses. That means, “oh, if I’m healthy longer, senior housing is not gonna be needed as much and assume as it is today.” And so you start marching this through, if I can get rid of excess fat, Weight Watchers out of business, Haagen-Dazs through the roof! Right? So, you can start thinking of all these kinds of very real possibilities. So the thing is one, these scientific things are going to happen. They’re gonna be mind-boggling in the way that all science is by the way. [In the] same way it was mind boggling, I went from a 370 to a more powerful computer on my desktop in four years. Right? That was mind boggling and science is always mind boggling and there’s brilliant people working on it. And the more brilliant people work, the better chance that we get these breakthroughs over the next 10, 20, 30 years.

Second, we are therefore gonna live longer and healthier and our medical outlays are gonna go down. Not up. Not they may go up the next year or two, but eventually if we can get rid of excess fat, if we can reboot people back—and there’s many others, [such as] if we can regenerate cartilage, we wipe out hip replacements and knee replacements. And so some of those clinics I don’t wanna own suddenly, I wanna own the clinics that are doing the genetic infusions. Right? And so dramatic implications. And it is probably the greatest disruptor in the history of mankind. You say, “what about transistors? What about electricity?” Those were created by humans. If I can create more humans and more productive humans and longer productive humans, that’s a greater disruptor in a good sense, right? Then any disruptor heretofore. So it will be exciting. So one, these things are gonna happen, not all of them. Two, of course we can afford it. What if Warren Buffet had died at 65, what, you know, just kind of goes through, of course. So when anybody tells me that “we can’t afford it”, I say, well, “why don’t we start with you?” Right? “We’ll start with you or your beloved grandfather, you know? They hit 62 [and] they’re outta here.” Of course nobody wants that either economically or socially. They know it’s stupid, but they say it. And then the third thing is you don’t know when these things are gonna happen. They may happen, like the computer example, some of ’em are gonna happen in four years. But going from the first time I saw a truly mobile phone—not the Batphone, you know, but a really mobile phone—was in 1985 with Alfred Tout, a real billionaire, multi-billionaire. And my G*d, he had a mobile phone and it was the size of a small suitcase. And, but it was a real mobile phone. Well, to get it where all of us had mobile phones—including people in the Maasai, Mara and the Serengeti, and Kenya—that took from 1985 to about 2005 to get everybody there. So that took 20 years. Now, some got it sooner.

Therefore, you’ve got to self-engineer yourself. You’ve got to engineer your own DNA so that you’re around to take advantage of the breakthroughs. You don’t wanna die before they get there, right? And of course, if a bus hits you, you’re gonna die before you get, but you wanna take care of yourself and people say, “oh, but it’s my genes.” About 80% of the activity of your genes you control. Your parents gave them to you at birth and about 80%, 8-0%. You change. You change by whether you smoke or not, whether you exercise or not, whether you eat Haagan-Dazs or not, and you just go through whether you have a lot of stress or you know, how to handle stress, these are well known. And so you have to self-engineer to kind of give yourself a chance to be there when it happens. And I’ll give you an example. I’m here. I’m pretty healthy.

Unfortunately, I have two metal hips. Damn. I didn’t hang on to my hips long enough to get the cartilage regeneration. Right? But I’m working like hell to stick around for other things to get regenerated. Right? So that’s the book. Life is gonna get longer and better and healthier and younger if you will. Two, we can afford it. And three, you gotta take care of yourself by engineering your own DNA, literally engineering your own DNA until those breakthroughs get here.

AY Strauss: Amazing, great synopsis. Can’t wait to read it. By the time this episode airs, it will be out there in the public. And I believe your team may share a code with our listeners to get a potential discount who knows, but it’s gonna be exciting to read with a lot of ramifications.

Peter, I wanna thank you for being on today. It was amazing. I learned a ton. I’m sure our listeners will learn a ton and can’t wait to have you back on again soon. Thank you again for being on today. It’s been wonderful.

Peter Linneman: My great pleasure. Thank you for having me.

AY Strauss: Perfect.