A Conversation With...Marcus & Millichap's John Kerin

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

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

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

We are most concerned about the office and retail sectors. In the case of office, demand tends to lag economic recovery, which is losing momentum. Retail is about a year behind the recovery curve due to the overbuilding that was going on during the boom years and store closures. The good news is that the increase in vacancy has slowed dramatically in both sectors. Of course, the most important driver of the recovery is job growth, and while we are not anticipating another technical recession, an extended period of slow job growth is ahead. This means that occupancies should begin to recover gradually next year and pick up momentum by midyear 2011.

DOLCE: How about investment, specifically?

KERIN: On a longer-term basis, commercial real estate will be a competitive investment vehicle as new supply becomes harder and more expensive to add and the US economy eventually gets back on a growth track. If you look at alternative investments today, commercial real estate returns are already competitive, assuming the worst of the downturn is over. REITs and private investors should lead the charge in the next acquisition cycle, especially as the market becomes convinced that the economic recovery is real. This may take another nine to 12 months, but once it happens, momentum should pick up more quickly.

Pension funds and insurance companies’ preference for lower-risk core assets will be prevalent for some time, and they will continue to dispose of non-strategic assets in their portfolios. We are seeing increased interest from offshore buyers, which I expect will continue as the US regains favor globally. The economy and real estate industry will face some long-term issues such as higher taxes and spending cuts, but that is included in our forecast of slower-than-usual growth.

DOLCE: Are deals starting to shake loose?

KERIN: Yes, we have seen a marked increase in sales, dominated by larger property deals. Sales volume totaled an estimated $61.6 billion in the first half of 2010, up 50% compared to the first half of 2009. Most sales above $20 million were virtually impossible to execute in the first half of 2009. Starting about a year ago, transaction velocity started to improve with larger sales dominating the scene through the first half of this year. Financing is still very tight and buyer and seller pricing gaps are still relatively wide, although narrowing some. So I would not call this a “normal” transaction market by any stretch; in fact, sales volume is still down 77% from the peak in the first half of 2007 despite its improvement over last year. There is also an intense preference for higher-quality, stable assets in primary markets and we are seeing cap rates compress with multiple buyers because of this flight to quality.

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

KERIN: The macro picture is still very different 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 servicers opting to move product out to the market.

The quality and level of discounting are still very disappointing to most opportunity buyers, and sales are happening in small, fragmented waves, but there are opportunities, including new equity being injected into deal-structuring situations. We will see more distressed inventory come through the system as lenders get stronger financially and withstand the actual losses of disposing of some assets, but this will continue to be a decentralized, fragmented process.

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

KERIN: We are the dominant broker of investment property in the US by a large margin. Our core market coverage, which is the $1-million to $20-million price level, makes up 85% to 90% of sales transactions in any given year, so it is by far the largest market segment, even though it is 10% of market share by number of sales. We have a tremendous opportunity to grow in a market and a business we already dominate. This includes further geographic coverage, including international expansion but, quite honestly, it will be driven mostly by growing in major markets where we already operate.

We have also had solid growth in our mid-market program with over 100 agents located in secondary and tertiary locations, and we effectively move capital in and out of these markets. There is just so much room for bringing on more professionals, training our existing professionals better and building on our value-added services. From a client point of view, our research and mortgage brokerage divisions have been very well received as value-add services, and we will continue to build more client loyalty through our various offerings from both groups. Another area of expansion for us is within our mortgage brokerage and financial services division, which is funding nearly $1 billion a year and growing at a healthy rate through our relationships with still-active commercial banks, insurance companies and agency lenders.

In the past five to seven years, we have also grown our share of the $20-million-plus category, particularly in apartments. We are introducing a customized platform, referred to as Institutional Property Advisors, to offer major private and institutional investors a more coordinated and streamlined service delivery with a select and specialized team of agents. This should help us expand our institutional and major investor business across all property types. These are just a few examples of our strategic growth initiatives.

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

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

As an example, a lot of our agents successfully sold assets for clients in the past two years that had previously been listed by other brokerage firms that simply could not find a buyer or execute a sale in a very difficult market. In just about every case, there were either experienced agents who have been through past cycles or individuals that stayed focused on the fundamentals. For every asset, there is an ideal buyer and our job is to find that ideal buyer, and not just hope that the asset or the market will sell itself at fair value. I refer to these situations to instill pride in our people as I travel around the country because we are solving problems others could not. Also in a difficult market, it is necessary to maintain morale, and I have found that sharing my own personal experiences, having persevered through difficult times, to be the only way to keep morale up. This cycle has been a shock to the system for commercial real estate brokers, at any firm, and believing in the market and having people who can help you get through it are very important.

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

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

This kind of broader buyer access can be produced only through years of relationship building with investors, years of training and developing professional brokers, a culture that encourages information sharing and very customized communication technology that makes it all happen in real-life situations. Once connections between potential buyers and the asset are made, you have to provide incredibly strong research and market information to facilitate the process, not just showing backward-looking indicators, but quantifying the future and the asset’s potential. It takes a specialized platform brought forth by a very well-trained professional to make this happen correctly. Having a real platform behind you gives you access to a wider range of buyers than those you can produce on your own, which in turn gives you more confidence as a broker. I know this from my own experience before joining Marcus & Millichap. I was with a firm that didn’t have much of a platform, so it was up to me to produce my own results.