Nadji: Economic Cycle Has 'Room to Run'

CALABASAS, CA—The conflicts and undercurrents of risk that have marked global politics in recent months have underscored the continuing safety of US assets for investors, both domestic and foreign. “Given increased geopolitical issues and risks around the world, US Treasuries have attracted increased international investment, pushing yields a full 50 basis points lower,” according to Hessam Nadji, SVP and chief strategy officer at Marcus & Millichap. “The resulting low interest rates remain a major advantage for both the US economy and real estate markets.”

Simultaneously, commercial lenders have become increasingly active. Nadji notes that this has created competition among financial institutions and banks as they allocate capital toward commercial real estate transactions. “Despite this rising tide of capital, underwriting standards remain sufficiently tight to maintain market balance,” Nadji observes.

Furthermore, Nadji sees an unexpected silver lining in the cloud of slow-paced job growth: “it has been sufficient to spur demand for commercial real estate, but slow enough to avoid an economic overheat that could induce inflationary pressure and other excesses.” With cap rates producing returns well above those of 10-year Treasuries and corporate bonds, “The attractiveness of investing in an asset class with built-in spreads to interest rates, improving fundamentals and limited new supply has resulted in a 17% percent rise in commercial property sales so far this year.”

The current economic cycle has “room to run,” Nadji says. Corporate profits now stand 26% above their 2006 peak; conversely, corporate investment has advanced just 9% beyond its prior peak.

“Companies have remained cautious and limited their expansion so far in this cycle. Improving corporate confidence, aided by the low cost of capital, should drive additional expansion and hiring over the next two to three years,” predicts Nadji. “Therefore, interest rates should rise in tandem with improving job growth, which in turn will generate more demand for various types of commercial real estate. Barring any unanticipated shocks, this relative balance should provide a favorable environment for increasing commercial real estate sales and values in the foreseeable future.