Hessam Nadji: How We Got to Where We Are and What’s Next

LOS ANGELES—“Our markets are so dynamic, it is hard to pinpoint what to do at any particular time given all the options commercial real estate offers.” That is according to Hessam Nadji, president and CEO of Marcus & Millichap, who led an economic overview at Monday’s GlobeSt. Multifamily conference here at the JW Marriott LA LIVE.

Nadji began his macro and micro trend overview forecast by “getting the good news out of the way” because “we are going to hit some challenges ahead.”

THE POSITIVES FROM 2012 to NOW

From 2012 to today, there are 18.5 million more people in terms of population. There is a 2.6 million increase in young adult population and roughly 9.8 million more households, Nadji said. In addition, there are 18.5 million more jobs, and 6.2 million more job openings than in 2012. “Our GDP as a country has grown by $8.6 trillion. That is the same as the combined output of Japan and Great Britain.  The resilience of the U.S. should never be underestimated. There are 10,000 people per day who are turning 65 in the US and unlike any other developed economy on the planet, we also have 12,000 people turning 21 today every single day,” he said. 

“That dichotomy gives us an underlying strength that no other country can point to,” Nadji said. And with all of those factors in mind, 10 years from now, he said, “Whether it is me or someone else on the stage, they will be telling you something similar to this because the next 10 years are going to be great… The next 10 months, not so much.”

PUMPED LIQUIDITY, CONSUMPTION

Interest rates have been increasing and the problem is due to the global pandemic, he explained. “During that time, the central banks around the world pumped more liquidity into the global economy than it has ever experienced… It was unprecedented to have $5 trillion plus pumped into the economy.”

Not only was it unprecedented, but injecting that much into the system will have a ripple effect, he explained. “We will never look at toilet paper and hand sanitizer the same… Things did change and there were ramifications. Look at what it did to the economy.”

He continued that we lost 20 million plus jobs in two months at the outset of the pandemic and then “had a rapid and full recovery from that within about 24. This recovery pace could only have happened because of the stimulus that was pumped into the system.” 

Switching gears, Nadji talked a bit about retail sales growing and consumption still on the rise. “Consumption also has changed dramatically,” he said. “We are over-consuming because it is so easy to consume thanks to e-commerce.”

All of these factors, he explained, compounded by the war in Europe and supply-chain breakdown drove an inflation rate near a 40-year high and it is a major challenge, but it is better than the alternative. “Had the government not acted the way they did, it would have been worse in the form of a much deeper and longer recession.”

Asset prices also soared. Median home prices increased nationally (up 37.3% over the past two years). “Is that going to come back down to Earth/? Absolutely… Prices will adjust. We are living through a dramatic wave of inflation and deflation.” 

WHO IS TO BLAME?

Many economists knew that the Fed wasn’t acting as it should have, Nadji explained. Rates stayed way too low for too long, he said, and that delay contributed to the inflation pressure that shocked the system. “It was a missed opportunity by about a year and here we are having to deal with dramatic rate increases and liquidity tightening that is also shocking the system. ”

The Fed is having to declare war on the economy, he said. “They are walking a tightrope.”

He continued that commercial real estate was in a good spot. “it wasn’t being overbuilt or overleveraged and presented all sorts of opportunities… The beauty of our business is that we have risk reward opportunities that match pretty much every investment appetite. The speed and degree of interest rates increases since March is challenging real estate valuations, compounded by recession fears. The market is going through a pricing recalibration and many investors with maturing loans will need solutions to bridge the next several quarters.

BEHAVIOR TRANSFORMATION, LENDER COMPOSITION

Behavior transformation has also invigorated space demand, he explained. Look at the metros that benefited from the natural migration out of urban areas. “The pandemic also drove young adults back to their parents and pent-up households will be a positive force for future demand,” Nadji said. “These are future renters and demand creators… Yes, it hurts in the short turn, but we are building demand.” 

As for US apartment rent, there is still strong momentum in many metros but growth rates are slowing. Class A apartments faced the biggest initial impact and are experiencing rising vacancy rates and Nadji expects that pricing power there will be taken back. The dynamic between urban and suburban markets also changed dramatically with suburbs outperforming across all market types, he explained.

In terms of lender composition, agencies are no longer priced out of the market, Nadji said. “They become the solution in a market like we experienced in 2020 but lost share to banks and debt funds in 2021 and are coming back again as a solution with the challenges we are facing now.” Short term debt solutions in this market are also a key tool. He added that “creativity is critical in solving whatever it is that you are facing or wanting to execute on a property that is available that wasn’t available before. For everything that needs to get done, there is a solution. I would not exit this market and miss out on opportunities.”

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