Don’t Try to Time the Recession

“Where are we in the cycle,” has become the staple question at every real estate conference, and as we move later in this cycle, the question has only become more prevalent. Hessam Nadji’s advice at RealShare Apartments this week: Don’t try to time the cycle. Instead, focus on buying the right asset and implementing quality underwriting standards. Nadji, president and CEO of Marcus & Millichap, spoke as the keynote speaker on the second day of the conference in Los Angeles.

“The picture doesn’t look all that bad,” said Nadji in the opening of his speech, as he gave a snapshot of the current market. In the last decade, there has been population growth, the formation of new households and the lowest unemployment in 50 years. While GDP growth has been slow and steady this cycle, since 2007, it has equaled the size of Japan’s entire economy. Overall, we are in a high growth low inflation economy. The future prospects are also positive, namely the demographic trends. While we have an aging population—like much of the world—with 10,000 people every day turning 65, we also have 12,000 people a day turning 21. This dual demographic wave, Nadji said, is a huge opportunity, especially in the multifamily market.

Specifically, these changes in demographics might be a reason to look at suburban opportunities or opportunities outside of the urban core. There is a lot of focus on the millennial demographic and the move to urban cores, but Nadji said that a lot of that change has already happened. As millennials move into the next phase of their lives—Nadji pointed out that they will soon move into the 35 to 55 demographic—they are returning to suburban or urban-adjacent markets, and investors should follow.

Despite the strong fundamentals and positive demographic shifts, Nadji said that many capital sources are either waiting on the sidelines—anticipating the next recession—or shifting investment strategies to whether the next correction. While it is difficult to say what will trigger the next recession, Nadji anticipates that when it does come, it will be mild. “We have so much capital on the sideline waiting for the next big recession, and I just don’t expect it to be a repeat of 2008 and 2009,” he said. “It will be a normal recession, where we go down for 6 to 12 months. That is not a reason to stay on the sidelines.”

Affordability problems are the biggest challenges facing the multifamily market, and in California, that issue is manifesting as Prop 10. Nadji was opposed to the idea of rent control, saying that it isn’t the answer, and it will reduce the incentive to invest in the market. Instead, he said that affordability is a supply problem, and that it needs to be addressed as the solution to affordability problems.