Marcus & Millichap CEO: Amid the Challenges There are Also Opportunities

In a recent interview on CNBC, Hessam Nadji, President and CEO of Marcus & Millichap, the commercial real estate investment firm, talked about vacancies in commercial real estate, concerns about older property loans maturing and individual banks taking a hit. 

Despite these multiple challenges of which the industry is well aware, multiple silver linings are emerging throughout the industry. Nadji clarified and put into context much of what’s happening in both scenarios.

For example, the looming vacancy rate issue is not happening only in Seattle or San Francisco, he said. Pressure on office space is occurring across the industry and particularly in urban areas, which were affected so much by the pandemic and post-pandemic work environment. In addition, he said, it’s important not to judge commercial real estate only by what’s taking place in the office market but to look at its other sectors. Retail has recovered, he said. Apartment rentals are doing very well, and so are self-storage properties, hospitality and warehouses.

Within the office segment, some properties fare better or worse than others. Older properties are hurting the most, he said, and as their loans mature, they’ll suffer because of competition from higher quality properties that attract tenant demand. Delinquencies for office will rise and be especially acute in some select urban areas because of the divide that’s arisen between urban and suburban markets.

But the good news, he said, is that there is less concern about how the banking system will fare. Banks that are exposed are better capitalized to cope than during the 2008-2009 Great Recession when there was higher stress on the country’s credit system. To make this point, he said, back in 2007, banks had $100 billion of cash on hand. That rose to $1.7 trillion in cash in February 2020 before the lockdown and has now gone far higher to more than $3 trillion. There may be individual bank issues and individual property issues.

Nadji also said that a lot of his firm’s clients are making a big bet on office spaces–and maybe some quasi-distress hospitality space–because they believe in the next two to four years that more will return to offices. Already, there are signs that more are getting away from their home offices with business travel recovering more that it has, consumer travel is recovering well and the overall hospitality sector doing well.

There are also opportunities to convert offices to other uses and in some cases replace older, obsolete office space because the land on which they sit has value. A great example to recognize, he said, is what’s happened with retail and shopping centers. Over the last 10 years, shopping centers have changed due to the massive e-commerce phenomenon, and they have come out of that “incredibly well in this cycle,” he said, and without overbuilding new products. In fact, “retail is the darling of the commercial real estate industry while office has become the new retail in some ways,” he said.