Nadji: Notion That Widespread Distress Will Lead to Fire Sales 'Is Overblown'

The notion of widespread distress among commercial real estate assets leading to fire sales is overblown, according to comments that Hessam Nadji, President and CEO of Marcus & Millichap, made to CNBC this week.

Nadji said nearly every asset class, except for office, has strong fundamentals regarding occupancy and rent, because “they are a reflection of a strong economy. They’re as healthy as they’ve ever been,” he said.

He said self storage, industrial warehouses (even with overbuilding), apartments, and hotels are in a good position, adding that even retail has forged a big comeback).

“Banks are so much better capitalized than they were in 2008-09,” Nadji said, addressing previous tough economic times of the past 25 years. “There’s a significant improvement. Funds, in some cases, are stepping in to fill the lending void that banks have left.”

Nadji said asset prices are adjusting within a higher interest rate environment because the Fed said that “interest rates aren’t coming down any time soon.”

He pointed out that by looking at things on a long-term basis, “these interest rates are ‘normal’ but are adjusting.”

Nonetheless, Nadji said CRE discounts near-term would be in the 15% to 20% range compared to March 2020 – the last time properties were getting multiple offers. He suggested that office properties will see more significant discounts of 40% to 60%.

He said that transaction velocity is down by 50% to 60% across the industry.

Interest rates and valuations are what’s “broken,” Nadji said, pointing to the 525 bps interest rate hike “at such a rapid pace” by the Federal Reserve that “is causing trepidation.”

Nadji said roughly 24% of bank loans are overdue in commercial real estate and 15% of those are office buildings.

“Office will experience more pain in the next two to four years than others,” he added.