ICSC: Nadji Sees Two Rate Hikes Coming, Then a Pause

In September, Marcus & Millichap CEO Hessam Nadji hosted Larry Summers for an online chat in which the former US Treasury Secretary predicted that the Fed’s campaign of rate increases—now 275 bps and counting—would produce a “recession of choice” in 2023.

More recently, Summers has suggested that the Fed may need to exceed its own target and set the federal funds rate ceiling as high as 7%, warning everyone to buckle up for a hard landing.

In his booth at ICSC 2022 in New York on Wednesday, Nadji flashed a caution sign and said “7% would be overdoing it in a big way.”

“I’m optimistic the Fed won’t have to go to extreme measures like 7%,” Nadji told GlobeSt. “I do think there will be more increases. There will be one more increase in 2022 and another early next year, but at that point, everything warrants pausing.”

“I believe inflation most likely has peaked,” he added. “That doesn’t mean it’s going to come down to the 2% range the Fed wants, but I think the direction will be encouraging. Once we have time to see the lag effect of the previous rate hikes, we’ll get more encouragement that inflation is heading in the right direction.”

Regarding the Fed’s stated goal of bringing inflation down to 2%, the brokerage chief said he’s not sure “if that’s a realistic target anymore.”

“The new normal may be three to four percent,” he said.

Nadji said he expects each of the next two rate hikes to be 50 bps rather than the 75 bps wallops that the Marcus & Millichap chief called “sledgehammers.” He urged everyone to remember that the full impact of the Fed’s four rate hikes this year will not be measured for several months.

“Every interest rate movement takes nine to 12 months to show up in the economy. The jobs numbers are trailing indicators: they look backwards. What we don’t know yet is how much of a slowdown we will have from the actions the Fed has already taken,” Nadji said, adding that the full picture won’t become clear until March or April.

By the middle of next year, Nadji projected that three developments in H1 2023 would spur CRE transaction volumes in H2 2023:

“Once we see that the Fed is done, not just reducing interest rate hikes, but is done raising rates for a while, and we see that inflation is heading in the right direction and we see that job losses in fact are moderate—those three elements by the middle of next year should give the market a lot more conviction and a lot more confidence to transact again,” Nadji told GlobeSt.

According to Nadji, asset classes like retail that struggled during the pandemic have had to make less of an adjustment in recalibrating prices to reflect Fed rate hikes, because the sectors that had the highest demand—industrial and multifamily—had the lowest yields and therefore much wider spreads between their yields and the increasing cost of borrowing when rates increased.

Several top CRE execs we spoke to at ICSC this week said they were concerned that the Fed may be putting too much emphasis on the wrong metric—employment—to guide its rate adjustments, because certain sectors of the economy now are hiring to make up for unprecedented labor shortages that developed during the pandemic, including hotels and restaurants.

“The biggest challenge [for the Fed] is to take the country from adding 250,000 jobs a month to losing 250,000 jobs a month. That’s an important part of what the Fed is watching,” Nadji told us.

Nadji said that the tremendous amount of stimulus that was pumped into the US economy during the pandemic “in hindsight, was overdone,” suggesting that the Fed may have contributed to the inflationary spiral by failing to raise rates when the economy showed remarkable resilience last year.

“To me, the biggest mistake was not being able to normalize [rates] in 2021, when we had plenty of evidence that the country was on a sustainable recovery path,” he said.