NYSE Features Marcus & Millichap CEO Hessam Nadji

Good morning. Great to be with you.

Marcus Millichap is the largest firm in North America specializing in investment real estate brokerage, financing, research, and advisory services. We've specialized for 55 years in making a market for commercial real estate assets for private investors, institutions, lenders, and foreign investors. And we provide the largest sales force of investment specialists in the industry of around 1,700 professionals that specialize in the space covering every property type from multifamily apartment investments, offices, shopping centers to self-storage, medical office, seniors housing, mobile home parks. And it's been a wonderful sort of a 50-year plus cycle of seeing commercial real estate become a mainstay not just among private investors who dominate this industry but institutional capital coming into the space as well.

Well, the industry is very cyclical and interest rate dependent, especially for private investors who rely on leverage and the financing component of the business to execute their transactions. On average, 60 to 70% of the value of each transaction is financed by banks, insurance companies, pension fund advisors, and other forms of either equity investors or lenders. And therefore the liquidity in the marketplace is highly dependent on interest rates and loan to value ratios. In other words, what percent of the value lenders are willing to finance. When the risk tolerance is at a low point during recessions and other shocks to the economy, the loan to value ratios drop and it's harder to get financing. Therefore, the transaction market slows way down. We saw that in 2023 after the Fed basically took a sledgehammer to interest rates to battle inflation and the market had to recalibrate. It's taken almost two years now, over two years for the prices to adjust and valuations to have to readjust to the higher interest rates and the uncertainty that's been in the marketplace. We are coming out of that fog and that's why 2026 is a turning point given interest rates are coming in, values have adjusted by somewhere around 20% on average. Office buildings have seen a much bigger value hit than let's say multifamily assets or single tenant net lease assets such as your fast food restaurants, auto parts, real estate investments that are there for a long-term lease. So, it's a very wide variation of yields and pricing, but overall the industry is well positioned to go into 2026 with a fresh start.

Well, we saw a demand shock unlike anything we've ever seen. Office buildings had not been overbuilt. They were performing just fine prior to the pandemic. And then of course there was a once in a century life type of event that shocked demand in a way that nobody had predicted. And the exodus out of urban markets in particular really hurt those types of markets especially New York, San Francisco, Chicago, Seattle pretty much across the country. And very very gradually we've seen that demand come back especially in the last 12 months or so with the mandate to return to office now bringing daily traffic up to about 80-85% of where it was pre-pandemic and just as a point of comparison a year ago it was around 60%. Two years ago it was below 50%. So we're seeing a big resurgence of daily traffic into office space. Nonetheless, the pandemic has caused a permanent shift in the way that we all work. So the hybrid formula, even if it's four days in the office, one day virtual or 3-2 or whatever it is, will reduce office space demand. The good news is that the supply side, new construction has been very limited and the market is adjusting. So the office investment prospect is the diamond in the rough. We actually declared that over a year ago and there's some great valuations to take advantage of.

Thanks for having me.