The head of one of the leading firms in commercial real estate investment sales thinks we’ll be seeing distressed buying, but not at the volume that would shape the market as it did in the early 1990s or following the Global Financial Crisis.
“Is that going to be the catalyst to move the market? I don’t think so,” Marcus & Millichap president and CEO Hessam Nadji said earlier this month in a conversation with Connect Media CEO Daniel Ceniceros. “We’ve now gone through a couple of cycles where the expectation of the fire-sale, bargain pricing hasn’t come to fruition. And if you look at the financial system, the messaging from the Fed and the Treasury, it wouldn’t support a fire sale in commercial real estate.”
He acknowledged a bifurcation in the office market compared to all other asset classes “in terms of loan performance and actual fundamentals, where you have more performance issues with older or obsolete office space than anything else.”
Yet Nadji added, “A lot of the Class A office spaces that are attracting whatever tenant demand there is in the market are doing fine. It’s not that all office is non-performing. Certain metros are hit a lot harder than others.”
Marcus & Millichap is gearing up to handle distressed transactions. For example, Nadji said, the company’s acquisition of Mission Capital Advisors positions it to be in the forefront of note sales. There will also be auctions, and some of the company’s agent listings are now being handled through its auction division, which it established in the spring of 2022.
“So there are alternate channels for marketing real estate or loan portfolios, but is that going to redefine the entire marketplace?” Nadji asked. “I don’t think so. I think what redefines the marketplace is a realignment of price expectations, is a continuation of a decent economy—where you either have flat growth or maybe a mild recession somewhere along the way, but not a huge recession—that supports the occupancies and rents. and you have an entire reset in the marketplace.”
The pricing reset will take time, said Nadji. “Everyone who’s been through cycles knows that it’s not a quick fix when there’s a profound change in the marketplace. What we just experienced was profound because of the curve of interest rate shock, really taking the industry by surprise.
“Going back to normal interest rates should not be this disruptive. But if you’re going to five and a quarter on the federal funds rate from zero in 15 months or so, that is, of course, going to be disruptive to valuation. Everyone is still trying to figure it out. And the right price depends on the right asset and the right motivations of the seller.”
The impact of the Federal Reserve’s rate hikes hasn’t been felt as deeply as expected just yet. “Give it another 12 months; we’re going to see more of the effects of high interest rates really ripple through the economy,” Nadji said. “We would have expected to see more of it by now. But the economy has proven to be very resilient.”