Commercial real estate isn't a 'distressed asset': Marcus & Millichap CEO

Marcus & Millichap CEO Hessam Nadji joins Yahoo Finance’s On The Move to assess how the coronavirus crisis is impacting commercial real estate.

Video Transcript

ADAM SHAPIRO: We want to address an issue that a lot of people are wondering about as the economy emerges from the lockdown, and what is the impact COVID-19 will have on commercial real estate? Who better to help us answer that question than the CEO from Marcus & Millichap, Hessam Nadji, who's joining us now from California. Thank you for being here.

HASSAM NADJI: Good morning. It's my pleasure. Thanks for having me on.

ADAM SHAPIRO: I just want to get to the headline from this morning because, long term, you've said that structural demand drivers for many asset classes remain in place. But I got to ask you, how does that, you know, jive with the fact that you did have to-- and this is always a terrible decision for a CEO-- lay off some of your salaried employees-- not the sales brokers but salaried employees?

HASSAM NADJI: Well, as a healthy company with a very strong balance sheet, you have to do whatever it takes to stay that way. And, of course, the health crisis has created a temporary disruption in real-estate trading volumes, both financing and transactional, and we have to do the right thing in terms of scaling our expenses according to the short term and current reality on the ground.

But we've done it in a way that's very flexible. We are already concentrating on the initiatives that will basically help us lead the recovery. There is so much capital on the sideline-- you've covered it in your previous segments-- for other investment vehicles. But in commercial real estate in particular, there is a record amount of sideline capital. There are now more owners than previously that are going to need to sell assets to create liquidity. Interest rates are at record lows.

The market is currently disrupted, but once we begin to move toward normalization, we're anticipating a pretty robust recovery in transactional activity. It will take some time for occupancies and rents and, of course, the broader economy to recover, but trading will-- should lead that, I should say.

JULIE HYMAN: Hassam, it's Julie here. I want to focus in on that sort of temporary view that you're outlining, that we will see a return, because we've certainly heard a lot of anecdotal reports about people who say, well, I'm just going to give up the office entirely, particularly for smaller business. You have companies, particularly in the tech sector, that are saying we're not coming back before the end of the year. Some companies are saying you can work from home indefinitely. So what gives you confidence that it is indeed temporary and not more of a structural change in how people work?

HASSAM NADJI: Sure. I think there are structural elements to it. Certainly every company in America that has been successful in the last 90 days-- including ourselves-- to go almost entirely remote on their operations has learned a lot from that, and I think that will have a residual effect.

But at the same time, when you look beyond the current, if you will, disruption in the economy and commercial real estate and resume an economic expansion somewhere down the road, we're going to see new formation of jobs. We're going to see new formation of companies and therefore demand for office space.

Prior to a health solution, a vaccine or a broad health solution, we're going to have a lot of issues with companies over-reacting in some ways, delaying leasing decisions. That's the reality on the ground. We're seeing movement toward the suburbs. We're seeing companies create suburban satellite offices so where people wouldn't have to commute all the way to central downtown locations.

So all those kinds of things I think will last and will have a residual effect. But the demise of office space used as a kind of a broad statement I think is overexaggerated.

ADAM SHAPIRO: But what's going to happen to cities like New York, Chicago, San Francisco, Dallas as there is this push to go, perhaps, to the suburbs? What does commercial real estate look like in those metropolitan areas?

HASSAM NADJI: You know, the most recent lesson we have is the 9/11 tragedies and the residual resistance by a lot of companies to want to locate in central business locations, which lasted a while and lasted 18, 24 months as we saw very weak leasing activity in some of those comparable markets. And I think that will be the experience this time around.

But again, it all depends on the degree of economic growth. Two, three years from now if the economy is growing again and there has been a health solution at a large scale, people tend to come back to the long-term patterns of behavior. We've seen from many companies, including IBM, that experimented heavily with telecommuting that they eventually want to bring people back at least a few times a week to work in groups and be in person and have collaborative, you know, functions that bring people together in office locations.

BRIAN CHEUNG: Hey, it's Brian here. So based on that point, if you do, indeed, maybe see if even a temporary shift out of the cities that in those actual large populated cities like San Francisco, like New York City that there is maybe an investment opportunity for companies like yourself to kind of maybe snatch up some property, especially if there's even some foreclosures with people not paying rent to those commercial real estate, I guess, landlords for right now? Is that something that maybe you're seeing as a trend in at least the near term?

HASSAM NADJI: Well, you bring up a great point, and that is the kind of assumption that tenants will get a bit of a break on not paying rent for a while and that landlords should just, you know, be flexible and work with tenants on abating or postponing rent payment. But at the same time, we have to remember there's $3.8 trillion of real-estate debt outstanding that are held by banks and other types of lenders. If the property owners aren't able to make their debt payment on a monthly basis because the tenants aren't paying their rent, that's going to create more of a systemic problem in this recovery.

So it's really a domino effect, and it doesn't stop with the property owner. It really stops with the lender and what the Fed is doing to shore up, not just on the tenant side with the stimulus but also on the property-owner side.

To your point, we believe there will be a lot of opportunistic invest situations that will come up. But again, there's a broad-brush sentiment that commercial real estate is going to get distressed pricing across the board, and that is just not the case. Apartments, warehouses, fast-food restaurants that have had drive-throughs are trading very well, and their values are unlikely to get into a distressed kind of a category with 20%, 30%, 40% discounts.

Hospitality, older shopping centers that have a lot of local tenants and small restaurants and service providers that are really distressed are going to be a whole different story, and those values have to adjust in order to clear the market as the-- you know, as we move back toward a more of a normal market environment.

So it's very difficult to just kind of generally expect commercial real estate to become a distressed asset class. We don't believe it will. But there's definitely opportunity out there that many of our clients are pursuing as we speak.

ADAM SHAPIRO: And you're not only the CEO at Marcus Millichap but you have been there almost 25 years, so a lot of people need to pay attention when you speak about these issues. Thank you for being with us.

HASSAM NADJI: Thanks for having me on.