Hessam Nadji, CEO of Marcus & Millichap (MMI), joins Catalysts to share his insights on bank lending, the commercial real estate (CRE) market, and what real estate investors should take note of.
As experts worry that a crisis is looming, Nagy commented on CRE investing: “While many stayed on the sidelines, smart investors went into the market and made offers, and while they may not have executed on the deal, they were on the front lines of prices correcting to a reasonable level. If you look at multifamily, [housing]For example, in most cases, we have seen price corrections of 20-25%.”
He continues: “When you find a good asset in the market, you want to be an investor at that price, and you care very little about interest rates. You care very little about the fact that the interest rate on the loan you're taking out is going to be much higher than it was two and a half years ago, because interest rates are going to go up at some point.”
To learn more about expert insights and the latest market trends, click here to watch this full episode of Catalysts.
This post was written by Nicholas Giacobino
Video Transcript
Four years later, the commercial real estate market is still reeling from the fallout from the pandemic, the rise of hybrid work, rising interest rates and mass layoffs, creating a series of challenges for real estate executives and the bank loans they rely on.
As more landlords find themselves dealing with vacant properties, banks are starting to build up reserves for future losses, while some investors are choosing to exit or seek alternative strategies for commercial real estate funds. We'd like to invite Hassan Naji to offer his thoughts here.
He is Marcus and Mira's buddy, CEO Hasan.
It's great to be in the studio.
Thanks for coming.
Thank you for inviting me. I'm happy to be here.
So let's talk about the current state of commercial real estate.
Many investors will be looking to the next few quarters to gauge whether the worst is over, but I think this remains a difficult question.
What to expect?
Well, broadly speaking, we've had four years of ups and downs that typically occur in 10- to 12-year cycles, from the pandemic itself to a very sharp recovery after the pandemic, and then two years of the Federal Reserve tightening monetary policy in a way not seen since 1980.
For an industry that is highly sensitive to interest rates and demand, this is a big issue to understand.
So, in terms of the most important part, supply and demand, the industry as a whole is doing well.
The story continues
There is overbuilding occurring within the cycle.
Although there is some overbuilding in apartment complexes and industrial sites, overall there is no overbuilding and demolition has generally not taken place.
If you think about it.
In some sectors, such as retail, e-commerce took hold 15 to 20 years ago.
I am applying for the office department.
But even within the office sector, it's the older urban assets that are really suffering, with loans going into delinquency and distressed assets being sold onto the market at huge discounts, whereas suburban office assets across the country are doing much better and newer properties are doing much better.
When it comes to commercial real estate, generalization is all the rage.
They have 16 different branches, self-storage, senior, residential, home parks and retail.
Of course, within retail, there are single-tenant stores, multi-tenant shopping centers, self-storage, and of course apartments and hotels.
So each of these niches has its own cycle, its own supply demand and therefore investor demand.
Now we see a lot of opportunities.
After two years of depreciating interest rates, capital is returning to the market after waiting for a price correction to begin.
How will the impending rate-cutting cycle, which is a silver lining for investors, impact this?
That is very encouraging news that has yet to come to fruition.
And what I'm really interested in is what we're already seeing, where capital is coming off the sidelines to buy assets at 15 to 20 percent discounts, pretty much similar to what's happening across markets ahead of a rate cutting cycle.
That will come someday.
This will further boost activity levels, which are already showing signs of recovery.
You're right, so I'm curious what you think this recovery will look like.
A.
As you say, a lot of people tend to lump CRE together, even though there are many different disciplines within it, right?
I see. That's not something that can be uniformly called a weakness.
But when we talk about areas that are struggling, what will that recovery look like?
And you mentioned some of those opportunities.
Where is there the greatest demand today?
In each of these areas, that broad perspective creates a lot of opportunity for smart investors because while many others have stayed on the sidelines, student investors have been in the market making offers, and while they may not have been executing deals, they have been at the forefront of getting prices to a reasonable level.
For example, if you look at multifamily housing, in most cases, you're seeing an apples-to-apples comparison from the peak to now, where we've seen a 20-25% correction in prices, with prices now below replacement cost. Commercial real estate of any kind has become very expensive to build and is around 20-25% below its peak.
So, if you find a good asset in the market you want to get into as an investor, at that price range, you could care less about interest rates.
You probably don’t care much about the fact that the interest rate on the loan you take out is much higher today than it was 2.5 years ago.
Because at some point interest rates will rise.
And in the long term, we know that that asset is going to perform extremely well and that it's going to be very hard to replace in the future.
Hassan, thank you so much for joining us.
Thank you very much.
Naji, it's good to have you here.
He is the CEO of Marcus and Mi.
Thank you very much.
Thank you for inviting me.