Marcus & Millichap’s Post

Transcript

Four years later, the commercial real estate market is still reeling with the aftermath of the pandemic, the rise of hybrid work, higher interest rates and also mass layoffs, posing a series of challenges for real estate executives, but also for the bank loans tied to them. With more landlords dealing with vacant properties, banks are starting to increase reserves for future losses, while some investors choose to pull out or seek alternative strategies of commercial real estate funds. Here to weigh in, we want to bring in Hasam Naji. He's Marcus and Millichap's CEO. Hassam, it's great to have you in studio. Thanks for coming in for having me on. Great to be here. So let's talk about where things are, where things stand today within commercial real estate. I think a lot of investors are trying to figure out whether or not the worst is over at the next couple of quarters is going to remain challenging. What do you expect? Well, broadly speaking, we've had four years of ups and downs that equate to what would normally occur in a 10 to 12 year cycle from the pandemic itself to the very, very sharp recovery post pandemic and then two years of Fed tightening in ways we haven't. Seen since 1980, that's a lot to digest for an industry that is very interest rate sensitive and very supply demand sensitive. O on the supply demand side of the equation, which is the most important part, the industry as a whole is doing great. We have an overbuilt in the cycle. There are pockets of overbuilding in multifamily and industrial, but broadly we are not overbuilt and we are basically under demolished if you think about it in some sectors like retail was 1520 years ago when ecommerce. Took over now applying to the office sector. But even within the office sector, it's the older urban assets that are really suffering, showing loan delinquencies, saying significant discounts of distressed assets being sold into the marketplace. And then the suburban assets, office assets across the country are doing much, much better or newer properties are doing much, much better. So there's a lot of generalization that goes on about commercial real estate. It has 16 different branches self. Storage, seniors housing, mobile home parks, retail, of course even within retail there are single tenant and at least there is multi tenant shopping centers, self storage and of course apartments and hotels. So each one of these niches has its own cycle, has its own supply demand and therefore investor demand. Right now we're seeing a lot of opportunistic capital that's been waiting for the price corrections to start to come back into the market because we've had two years of pressure from interest rates. Lowering values? How does the hopefully for investors in pending rate cut cycle play into this? It's a very encouraging piece of news that hasn't materialized just yet. Yeah. And what I'm really interested in seeing is the encouragement that we're seeing already with capital coming off the sideline, buying assets at 15 to 20% discounts, which is pretty much what's occurred in the marketplace in general. Ahead of the interest rate reduction cycle, it will come at some point that's only gonna boost the activity level that we're already seeing the beginning of the pickup for. I'm curious what you think this recovery is going to look like, because you're right, as we say, I think a lot of people lump CR read together when there are a number of different verticals within it, right? So it's not a blanket weakness that you can call it across the board. But when we talk about the the areas of it that have struggled, what does that recovery look like? And you mentioned some of those opportunities. Where are you seeing the most demand today? Great question in that within each of the sectors. That broad brush is creating a lot of opportunity for smart investors because as a lot of people went on the sideline, the student investor was in the market making offers, maybe not executing transactions, but being in the front end of where the prices would adjust to the point where they make sense. If you look at multifamily, for example, we've seen a 2025% price correction in most cases if you just look at on an apples to apples basis from peak to today and those prices are below. Replacement cost is getting so expensive to build commercial real estate of any kind and they're below peak by about 2025%. So when you see a good asset in a market you wanna be in, as an investor at those price points, you almost don't care about the interest rate. You almost don't care about the fact that the loan that you would take on it would be at a much higher interest rate today than 2 1/2 years ago. Because interest rates will come in at some point. And over the long term, you know that asset is going to do very, very well and it'll be very much harder to replace. Down the road, Umm Hassan, thank you so much for joining us. We really appreciate it. That was great to be here. Naji, he is the CEO of Marcus and Millichap, thank you so much for having.