GlobeSt Kicks off Multifamily Conference Talking About the Elephant in the Room

LOS ANGELES—“I am optimistic about multifamily’s future, but inflation is the big elephant in the room.” So said Marcus & Millichap’s CEO Hessam Nadji during a special presentation on Tuesday afternoon at the GlobeSt. Multifamily national conference here in Los Angeles.

Nadji reviewed the strengthening U.S. and California growth outlook, what it means for housing demand, rising development costs and how demographics will shape the multifamily outlook during his presentation. He also built a case for a stronger California multifamily market than the headlines would suggest.

According to Nadji, the good news is that multifamily—or any other property type for that matter—doesn’t have to worry about being overbuilt at the moment. “The foundation of the multifamily industry is sound.” 

LABOR MARKET SHORTAGE PERSISTS

He also noted that hiring has recovered more than three-fourths of losses, but labor shortage persists.  “The way the labor market is coming back is very different than what it was prior to Covid,” he said. “We have a lot of service workers who haven’t been back in the labor force, and that has created havoc.”

In working through the reopening of the economy, we will continue to face challenges in the way that we can create growth because of labor shortages, he explained. What has helped the economic recovery is the pent-up consumer demand that is gradually releasing.  “The strength of the economy is unquestionable.”  

RESCUE PACKAGE FAST TRACK

From a financial front, Nadji said it took 13 months from the first signs of the 2007, 2008, 2009 issues to have rescue packages come out. Fast forward to this crisis, and he said “we pumped trillions of stimulus into the economy and that started showing up in seven weeks. If you are wondering why you are competing against so many buyers, the entrepreneurism wins because of their ability to be agile.” He added that “At some point, it has to get mopped up. This economy of the US has been compared to a lot of different countries. We don’t get stale. We don’t sit still. Our country is all about reinvention and creativity.”

When he discussed the housing economy, he said not only is there pent up demand, but the liquidity and low interest rates are there along with the fact that the pandemic makes you focus more on the home space.

THE MONSTER IN THE CLOSET

“The monster in the closet or bad news is inflation,” said Nadji. “Inflation will create a disruption, but it will be temporary.” He also pointed out that if you look at materials and construction costs, they are off the charts. There are supply chain issues and disruption. “Interest rates are exceptionally low but inflationary pressure could force the Fed’s hand.” 

He also said that “This notion of ‘transitory’ inflation going to go away is a little bit of an unrealistic expectation.” Many people, he said, aren’t willing to go back to the job they had pre-pandemic. “We need to be more on guard with inflation and what the Fed might have to do sooner or later.”

INVESTOR APPETITE? 

Today, as we sit here right now, interest rates are still below pre-covid levels and now is the best time to look at commercial real estate, Nadji told the more than 600 attendees. “There is no longer a question of ‘if’ but the question is ‘when’ the hospitality will come back,” he said as an example, noting that he has investors lined up to still buy hotel properties.

A Recent survey done by Marcus & Millichap backs those claims, indicating that investor appetite is there and that investors are expected to remain active in 2022. 

According to the survey, 55% of respondents said they plan a net increase in CRE holdings of at least one property in 2022. The survey also said that 62% are planning on buying more assets in the next six to nine months. 

SUBURB SHIFT …ON STEROIDS?

Class A apartments faced the biggest impact, he said. “Suburbs are outperforming across all market types and the population growth has shifted to areas outside of the city,” Nadji said. But demographics are what is driving suburban revival as millennial generation enters the typical age of family formation. This shift, Nadji said, was already happening and the pandemic put it on steroids. “Urban markets will recover too but not at the cost of the urban markets.”

Nadji also talked about apartment cap rate spreads and said that “pricing is getting rich.” Are we headed for a price correction in multifamily? “The spread is as good as it has been since the 1990s,” said Nadji. “When you look at where we are and where we are headed, apartments are a compelling investment alternative due to competitive yields.” 

Keep checking back with GlobeSt.com for more from the two-day national multifamily event.