On July 1, John J. Kerin, former senior vice president andmanaging director of Marcus & Millichap Real Estate InvestmentServices, became the firm’s president and CEO. He replaced HarveyE. Green, whose retirement was revealed a few months ago after 29years at the firm. According to chairman George M. Marcus, Kerin,who has been with the firm since 1981, has been instrumental in thedevelopment of its sales efforts and expansion of new offices. WestCoast region editor Natalie Dolce caught up with the new chief todiscuss his views on the market and where it’s headed, as well ashis ongoing strategy for Marcus & Millichap.

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NATALIE DOLCE: What is your outlook for the market inboth the short and long terms?

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JOHN J. KERIN: In the short term, the worst isover, both in terms of occupancy declines and sales-transactionvolume. Vacancies for apartments already peaked, renter demand iscoming back stronger than anticipated and property owners are juststarting to get some pricing power in a number of markets.Industrial absorption has also turned positive, which is animportant early indicator of an economic recovery because it showsthe improvement in the production and movement of goods. Industrialvacancies may not start to decline measurably until next year dueto an overhang of new supply.

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We are most concerned about the office and retail sectors. Inthe case of office, demand tends to lag economic recovery, which islosing momentum. Retail is about a year behind the recovery curvedue to the overbuilding that was going on during the boom years andstore closures. The good news is that the increase in vacancy hasslowed dramatically in both sectors. Of course, the most importantdriver of the recovery is job growth, and while we are notanticipating another technical recession, an extended period ofslow job growth is ahead. This means that occupancies should beginto recover gradually next year and pick up momentum by midyear2011.

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DOLCE: How about investment, specifically?

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KERIN: On a longer-term basis, commercial realestate will be a competitive investment vehicle as new supplybecomes harder and more expensive to add and the US economyeventually gets back on a growth track. If you look at alternativeinvestments today, commercial real estate returns are alreadycompetitive, assuming the worst of the downturn is over. REITs andprivate investors should lead the charge in the next acquisitioncycle, especially as the market becomes convinced that the economicrecovery is real. This may take another nine to 12 months, but onceit happens, momentum should pick up more quickly.

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Pension funds and insurance companies’ preference for lower-riskcore assets will be prevalent for some time, and they will continueto dispose of non-strategic assets in their portfolios. We areseeing increased interest from offshore buyers, which I expect willcontinue as the US regains favor globally. The economy and realestate industry will face some long-term issues such as highertaxes and spending cuts, but that is included in our forecast ofslower-than-usual growth.

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DOLCE: Are deals starting to shake loose?

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KERIN: Yes, we have seen a marked increase insales, dominated by larger property deals. Sales volume totaled anestimated $61.6 billion in the first half of 2010, up 50% comparedto the first half of 2009. Most sales above $20 million werevirtually impossible to execute in the first half of 2009. Startingabout a year ago, transaction velocity started to improve withlarger sales dominating the scene through the first half of thisyear. Financing is still very tight and buyer and seller pricinggaps are still relatively wide, although narrowing some. So I wouldnot call this a “normal” transaction market by any stretch; infact, sales volume is still down 77% from the peak in the firsthalf of 2007 despite its improvement over last year. There is alsoan intense preference for higher-quality, stable assets in primarymarkets and we are seeing cap rates compress with multiple buyersbecause of this flight to quality.

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DOLCE: Distressed assets have not hit the market atanywhere near the anticipated volume. Do you expect this to change,and how long it will take for these assets to work through thesystem?

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KERIN: The macro picture is still verydifferent than our last crisis in the early 1990s due to lenders’needs, not just preferences, to extend loans as much as possible.But distressed sales are occurring with many lenders and servicersopting to move product out to the market.

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The quality and level of discounting are still verydisappointing to most opportunity buyers, and sales are happeningin small, fragmented waves, but there are opportunities, includingnew equity being injected into deal-structuring situations. We willsee more distressed inventory come through the system as lendersget stronger financially and withstand the actual losses ofdisposing of some assets, but this will continue to be adecentralized, fragmented process.

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DOLCE: With the announcement of your appointment, GeorgeMarcus said that the firm “is entering a new and exciting phase ofgrowth.” Can you elaborate?

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KERIN: We are the dominant broker of investmentproperty in the US by a large margin. Our core market coverage,which is the $1-million to $20-million price level, makes up 85% to90% of sales transactions in any given year, so it is by far thelargest market segment, even though it is 10% of market share bynumber of sales. We have a tremendous opportunity to grow in amarket and a business we already dominate. This includes furthergeographic coverage, including international expansion but, quitehonestly, it will be driven mostly by growing in major marketswhere we already operate.

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We have also had solid growth in our mid-market program withover 100 agents located in secondary and tertiary locations, and weeffectively move capital in and out of these markets. There is justso much room for bringing on more professionals, training ourexisting professionals better and building on our value-addedservices. From a client point of view, our research and mortgagebrokerage divisions have been very well received as value-addservices, and we will continue to build more client loyalty throughour various offerings from both groups. Another area of expansionfor us is within our mortgage brokerage and financial servicesdivision, which is funding nearly $1 billion a year and growing ata healthy rate through our relationships with still-activecommercial banks, insurance companies and agency lenders.

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In the past five to seven years, we have also grown our share ofthe $20-million-plus category, particularly in apartments. We areintroducing a customized platform, referred to as InstitutionalProperty Advisors, to offer major private and institutionalinvestors a more coordinated and streamlined service delivery witha select and specialized team of agents. This should help us expandour institutional and major investor business across all propertytypes. These are just a few examples of our strategic growthinitiatives.

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DOLCE: How does managing a firm like Marcus &Millichap differ during difficult times like these in comparison towhen the market is hot?

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KERIN: The back-to-basics approach, the levelof expertise, hands-on client care and proactive marketing requiredto sell real estate are very good for us and for the industry.Fundamentals matter again, and I no longer have to convince anyoneof that because, as you can imagine, when the market was frothy andowners’ profit-taking drove sales, it was very hard to keep agentsfocused on the fundamentals that we have taught for nearly 40years. Then came 2008 and 2009, which were very difficult years forreal estate sales—perhaps the most difficult. And that’s whenexperience, skill and fundamentals became a necessityovernight.

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As an example, a lot of our agents successfully sold assets forclients in the past two years that had previously been listed byother brokerage firms that simply could not find a buyer or executea sale in a very difficult market. In just about every case, therewere either experienced agents who have been through past cycles orindividuals that stayed focused on the fundamentals. For everyasset, there is an ideal buyer and our job is to find that idealbuyer, and not just hope that the asset or the market will sellitself at fair value. I refer to these situations to instill pridein our people as I travel around the country because we are solvingproblems others could not. Also in a difficult market, it isnecessary to maintain morale, and I have found that sharing my ownpersonal experiences, having persevered through difficult times, tobe the only way to keep morale up. This cycle has been a shock tothe system for commercial real estate brokers, at any firm, andbelieving in the market and having people who can help you getthrough it are very important.

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DOLCE: Does the platform make the broker, or does thebroker make the platform?

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KERIN: An independent broker with experience,expertise and market knowledge can do a good job for a givenclient. But, without the right platform behind that broker, theclient will be under-served whether the client knows it or not. Wehave honed our platform to do one thing and do it incredibly well,and that is to find not only the likely, known buyers for aparticular property, but also the many unknown buyers.

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This kind of broader buyer access can be produced only throughyears of relationship building with investors, years of trainingand developing professional brokers, a culture that encouragesinformation sharing and very customized communication technologythat makes it all happen in real-life situations. Once connectionsbetween potential buyers and the asset are made, you have toprovide incredibly strong research and market information tofacilitate the process, not just showing backward-lookingindicators, but quantifying the future and the asset’s potential.It takes a specialized platform brought forth by a verywell-trained professional to make this happen correctly. Having areal platform behind you gives you access to a wider range ofbuyers than those you can produce on your own, which in turn givesyou more confidence as a broker. I know this from my own experiencebefore joining Marcus & Millichap. I was with a firm thatdidn’t have much of a platform, so it was up to me to produce myown results.

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Natalie Dolce

Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.