The notion of widespread distress among commercial real estate assets leading to fire sales is overblown, according to comments that Hessam Nadji, President and CEO of Marcus & Millichap, made to CNBC this week.
Nadji said nearly every asset class, except for office, has strong fundamentals regarding occupancy and rent, because "they are a reflection of a strong economy. They're as healthy as they've ever been," he said.
He said self storage, industrial warehouses (even with overbuilding), apartments, and hotels are in a good position, adding that even retail has forged a big comeback).
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"Banks are so much better capitalized than they were in 2008-09," Nadji said, addressing previous tough economic times of the past 25 years. "There's a significant improvement. Funds, in some cases, are stepping in to fill the lending void that banks have left."
Nadji said asset prices are adjusting within a higher interest rate environment because the Fed said that "interest rates aren't coming down any time soon."
He pointed out that by looking at things on a long-term basis, "these interest rates are 'normal' but are adjusting."
Nonetheless, Nadji said CRE discounts near-term would be in the 15% to 20% range compared to March 2020 – the last time properties were getting multiple offers. He suggested that office properties will see more significant discounts of 40% to 60%.
He said that transaction velocity is down by 50% to 60% across the industry.
Interest rates and valuations are what's "broken," Nadji said, pointing to the 525 bps interest rate hike "at such a rapid pace" by the Federal Reserve that "is causing trepidation."
Nadji said roughly 24% of bank loans are overdue in commercial real estate and 15% of those are office buildings.
"Office will experience more pain in the next two to four years than others," he added.
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