This discussion with Dr. Peter Linneman looks past headline job growth numbers to reveal what sophisticated real estate investors actually need to know: it's not whether markets are adding jobs, but how they're adding them. Applying stock market concepts of alpha and beta to metropolitan employment, Linneman distinguishes between markets that only grow when the national economy expands (beta) versus those with inherent momentum regardless of broader conditions (alpha). Silicon Valley is high beta, for example, riding venture capital waves. Meanwhile, education, healthcare, and government—the only sectors genuinely outpacing historical job creation—offer steady, low-volatility growth that translates directly into defensible real estate fundamentals.

The conversation expands into how capital markets behavior, especially the flow of funds, influences cap rates far more directly than interest rates. It also covers multifamily dynamics, specifically the tension between development opportunities and investor risk tolerance. Broader reflections include the AIMCO liquidation, public-private valuation gaps, and the long-term benefits available to investors whose scorecards differ from shorter-horizon capital sources.

Adam:

Hi, Peter, welcome. You recently wrote a piece where you dig into employment, specifically sector specific employment risk. What's behind that?

Peter:

Just for those that are not familiar, alpha and beta get talked about in a stock market context or an investment context. Beta is essentially how does something perform relative to how everything else performs. If everything is up, does this go up more or less than everything else? That's the beta. And the alpha is, how does it do just in and of itself beyond reacting to everything else?

So several years ago, we applied that concept to the growth of employment in different metropolitan areas. And we did that in the context of what areas basically only grow if the country grows its employment - that’s beta - and what areas grow even if the economy is not adding jobs in general - that would be alpha.

And it's not an either or, it's “to what extent.” Most people talk about job growth in an area, but is that because everything's growing in the country or because even if everything isn't growing, this does.

What insights do we get? Vegas and Silicon Valley both have high growth, okay, over history. However, the growth that comes out of Vegas is really high beta. When the economy is doing well, it does really, really well because people have discretionary money. Orlando is the same way. People have discretionary money. In addition to that, Vegas and Orlando are warm climates that attract people, so they also have some alpha. They have growth even if the economy is not growing.

Silicon is a bit different. Silicon does really well when the economy is doing well because there's a lot of money to fund venture. But when the economy is not doing well and there's not a lot of money to fund venture, Silicon doesn't do well at all in terms of job growth. So you could see Vegas, Silicon and Orlando might all have 2 % growth, but coming from very different phenomena. Think about that from a risk perspective.

The other insight was state capitals and the national capital have relatively low responsiveness to the economy growing. They just grow. They don't have nearly the volatility of the private sector. And that's an insight as well.

And then recently we looked at industries. What industries are big responders to the economy? Construction, highly responsive to the economy. Healthcare and government employment on the other hand, they do kind of well whether the economy is growing or not. Yes, they also get a boost from the economy growing. So what we were looking at is the overlay between what industries are happening in an economy and what's actually driving the economy.

It's these kinds of overlays that allow more subtlety than just saying “job growth.” It's what kind of job growth, where's it coming from, how does that overlay with the economy… all that sharpens your thinking about risk.

Daniel:

Our friend Moses Sternstein has been saying for a while that actually very few industries in the US are creating net new jobs at a pace that's faster than what they've been doing historically. Only three industries really are and you already mentioned them: education, healthcare, and government. And everything else is either below the historical pace or shrinking. How do you think real estate investors should be internalizing that in their decision making?

Peter:

Well, you've seen that some multifamily companies, Eds and Meds are what they look for, right? If you want kind of steady growth, Eds and Meds, right? If you want big upside, you're going to go tech much more so than Eds and Meds, right? And so I think it is about thinking of risk profiles you want to take on in markets.

But this does imply you need to understand the risk that you're taking: Are you getting into an economy that's being driven by fundamental growth, cyclical growth or growth dependent on lots of capital or lots of discretionary income? So, let's go back to what we were talking about before. The gaming industry has lots of growth, but it's quite volatile cyclically. And you ought to know that going in as it makes development riskier in that type of market than going into a market which is largely Ed's and Meds.

Daniel:

Hey, can we go high level for a second to clarify something? When we're talking about employment, we're talking about jobs, the number of jobs specifically. And it's not a function of wage growth if I'm hearing you right.

Peter:

Yes, we're talking about jobs and that job is a job, whether it's a $12 an hour job or $12 million an hour. Now, obviously, we’d like to put a little more subtlety in it. I'd like to do what I think you're inferring, which is I would love to be able to put jobs into wage categories. The data is just not that robust. And you start asking more of the data than is really there, which leads you to the risk you'll conclude stuff that just can't be really supported. You know, it's like a house of cards.

The more localized you make the data, the less robust the data. And there's just not very good data on income by geography, except for decennial every 10 years. We want granularity, but sometimes we fool ourselves that we have granularity when we don't really have it.

Daniel:

This is a “Dan's just curious” question, but the employment growth that we're talking about drives demand for commercial real estate. It drives rent growth, which drives NOI, which drives distributions and also drives the fundamental value of that asset. I get that. Is there a separate relationship between the macro employment environment and the real estate capital markets? In other words does employment have any relationship to cap rates independent of the fundamental impact on a given asset?

Peter:

We're oversimplifying, but if you look the movement in the value of the property, it comes from two places. First of all, rent and occupancy combine to generate income. And then there's a second phenomenon which is how does the capital market value that income stream? And they both change, right?

The income that can be generated changes as supply and demand change, jobs being a big driver of demand, and then there's supply being driven by a number of factors.

But beyond that, there's variability in capital markets. And there are times when the capital markets love the income stream and give it a huge multiple or a low cap rate. And there are other times they look at it and throw up and give it a low multiple and a high cap rate.

Look at good retail properties, consider one with a Publix and good retailers around them. In 1998, the capital markets looked at that income stream and threw up because they thought that all physical retail was gonna get eliminated by online, okay? Come back post-COVID, what the capital markets came to realize was it's not all going to get eliminated. There are some things online can do quite well, and there are some things it can't do. And suddenly you saw the valuation multiple change, right?

I think one of the most important pieces of research I've done in my career found that cap rate has basically nothing to do with interest rates. It has everything to do with the flow of money. It doesn't matter what the reason. You can go back to 1973 and the oil embargo. Money didn't flow. You can go back to 1980, 1982. It didn't flow because of a general economic downturn and high short-term interest rates. After 9/11 capital didn't flow for about six months. That wasn't about interest rates, right? You can also go to the times where money really flows and cap rates come down.

The intellectual exercise is real simple. If I told you $7 billion of additional money has to be invested in Philadelphia apartments by the end of business Friday, or the head of every bank, the head of every insurance company, the head of every private equity firm and the head of every REIT will be executed at 6 p.m., we know the money will flow, right? What do you think will happen to cap rates in Philadelphia apartments between now and Friday? They'll go down, the multiple will go up. I don't care what happens to the interest rate between now and the close of business.

The flip of that is suppose I told you half of the money currently in Philadelphia apartments has to be out by the close of business Friday. What do you think is going to happen to cap rates?

You can say well that's an extreme example but think back to your high school or college physics courses when you would really up the pressure on something so you could see the response more dramatically and more easily. That's all that intellectual experiment is doing.

Daniel:

And when you say flow of funds, that idea is reducible to simply the amount of debt there is on real estate in this country overall. Imagine all of the loans on all of the assets, both residential and commercial, and if that total amount of debt is growing faster than GDP is growing, then cap rates are likely to come down and vice versa.

Peter:

You got it. By the way, it's not a perfect relationship. I'm not trying to suggest that. It's the most powerful relationship. By the way, we did a version that was debt and equity and it found the same thing. The difficulty is that debt data happens to be available both easier and cleaner than equity data.

And I can give you another even simpler metric. Transaction volumes. Just look at transaction volumes for apartments, let's say. If transaction volumes that are occurring are below normal, you know capital availability is below normal. You don't know it to a mathematical certitude, you just know it to a business certitude. And if I told you transaction volumes are double normal, you know, there's a lot of capital out there accommodating those transactions.

Adam:

Switching gears, I want to talk about AIMCO announcing an orderly liquidation. That’s a pretty rare headline in our world. We've got some backstory into AIMCO, but would love your thoughts.

Peter:

I think very highly of Terry Considine. I haven't spoken to them about this. As you know, they had been trying to figure out strategically how to increase value as a development company because they didn't think development was being valued by the public market adequately.

At the end of the day, for almost every public apartment company, there is a big gap between the valuation being assigned by the public market and the valuation being assigned by the private market. At what point do you say that gap is so big that in the interest of shareholders, we have to act?

And there's a lot of considerations in that, taxes and strategy and timing. But there is an arbitrage and it's an interesting situation. It's not just a theoretical arbitrage because we see in apartments a lot of transactions, right? And so there is some real meaning to NAV. It's not like the NAV of a data center where you really don't see many transactions. Or what's the NAV of 10,000 acres of undeveloped land? I mean, it has a value, but it's not transparent.

For apartments there is, I would guess, as much as 100 basis points difference between the cap rate on Wall Street and the cap rate on Main Street. And at some point do you need to arbitrage that? I would guess that that was a large part of their consideration, since you're constantly trying to drive value for shareholders. And as a fiduciary, that's what you have to do.

Daniel:

There's an interesting related backstory too, because AIMCO prior to 2020 had 125 assets and was a big multifamily REIT. And then they spun out most of those into a new company that most people refer to as AIR. And AIR had about 100 properties in it and they didn't do development, AIR was a pure play multifamily owner.

And then the same forces you’re talking about applied because AIR was bought just last year by Blackstone for $10 billion. And now AIM is selling off its more complicated set of assets, development sites and assets under development.

Peter:

Same exercise happened there, exactly.

Daniel:

I'm reminded about the cyclicality of all this. Obviously there's been a huge overhang of multifamily supply through most of 2025, and that's slowly been absorbed and largely been responsible for flat rent growth. But demand has not really changed. Demand has been very strong every quarter of this year and it supports the thought that a development strategy would be lucrative, that you'd be first out of the ground in a new supply-scarce environment in the foreseeable future.

But that clearly was not the conclusion that AIMCO came to when they decided that these things should be owned by other people and they should take the cash and distribute it.

Peter:

What most people fail to appreciate is the demand for apartment units has stayed quite strong. All of the softness in the apartment market has come from the spurt of supply. In some cases, that spurt was really big, and in some cases, it was not as big.

And in fact, I have an apartment complex in a small city in Ohio, a very small city in Ohio. There was no supply spurt. And it's a kind of a nice little experiment. Demand grew at about the rate the economy grew. And it does just fine.

When it's most attractive to develop is when nobody else is developing as long as you believe in growth. Sam Zell and I used to talk about this a lot. You need courage and capital at the same time. And it's one thing to say I have courage. I believe that the capital market is going to improve because historically they go through cycles. I believe the rent and occupancy are going to improve not linearly, but in a kind of cyclical way. And I think it's a great time to develop. It's easy to say that.

The problem is you've got to convince the capital markets of that. I was just at a program that I and David Helfand host once a year. And we got talking about apartment development and office development with a pretty select group of people. The entrepreneurial guys, if you will, and the public company guys, and the private equity guys all said exactly what you did, Daniel.

It's time, I'd like to come online, but capital doesn't really want to do it and I can't force capital to do what they don't want to do.

But there were five extraordinarily high wealth families there, each of them was involved in developments of either office projects or apartments. Why? They know that over the 10 to 15 years they're going to hold it, it's going to do well. And I don't think they're any smarter than anybody else. It's just their scorecard is a different scorecard.

Adam:

There's no IRR treadmill.

Peter:

And I think it’s not a disconnect because everybody knows what they're doing, but the disconnect of why you're not seeing more development is because their capital has a different scorecard from most of the capital market.

Sam Zell used to say, “Everybody thinks they want to be contrarian right until they have the opportunity to be contrarian.”

Adam:

Yeah, that's a good line to wrap on. We look forward to the next Stacked!

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