Hessam Nadji: RTO Mandates Won’t Fix Office Sector Damage

What damage the office market was likely to sustain following the pandemic has already been done, with a full return to office five days a week unlikely, Marcus & Millichap CEO Hessam Nadji said during an interview on CNBC.

“We’re seeing more and more companies mandate return to office … but the obsolescence of office buildings was already a problem pre-pandemic, and the pandemic just accelerated it,” Nadji said.

Retail has undergone a similar shift, but it was much easier to reimagine shopping centers that were old and obsolete for other uses. It is much more expensive to re-use and re-format office buildings, he said.

More broadly, investors are coming back to the US commercial real estate market, including both European and domestic investors, Nadji said. Several factors are attracting investors, including positive employment trends, consumer strength and household formation, all of which are the underpinnings of demand for various types of commercial real estate, including office space. The Fed’s shift toward an easing cycle, better inflation figures and a lack of overbuilding in most property types, except office, are all appealing to investors as well, he said.

However, the CRE market does face a near-term challenge with a significant amount of loans maturing over the next couple of years. “There’s no question that maturing loans are at a record level in 2024 and 2025,” said Nadji. However, the Treasury and the Fed have encouraged lenders to work with borrowers, extend loans and avoid fire sales.

Asked whether that activity is “Extend and Pretend,” Nadji said the latter part has actually been bailed out by good economic recovery cycles, preventing fire sales except for older, obsolete office buildings in urban markets that face obsolescence on par with what the retail sector experienced in the United States 15-20 years ago.