As we move into the fourth quarter, industry leaders are operating in a very different environment than they were 12 months ago. Rising interest rates, inflation and a likely recession have created choppy markets that are not for the faint of heart. But it wasn’t the pandemic period either, as some companies showed they could continue to seamlessly transact whatever the market threw at them.
Hessam Nadji has been President and CEO of Marcus & Millichap for six years and his tenure with the company spans almost 27 years, during which time he has experienced a number of market cycles. As a Power LA honoree, Nadji spoke to Commercial Observer earlier this month to share with us what he’s prioritizing today and how Marcus & Millichap are positioned to weather any storms that may come their way.
When you look back over the last 12 months, what has been on your mind the most?
Hessam Naji: Marcus & Millichap have done very well during the pandemic. Two key factors contributed to this, including our ongoing investments in technology that prevented downtime and our unique ability to match buyers and sellers when the transactional market was severely hampered. In 2021 and the first half of 2022, we set records for sales and earnings as the backlog has dissolved and our investments in our sales force and their productivity have paid off. In 2021, we closed over 13,000 transactions valued at $84 billion, which equates to more than 50 deals per business day. While we’re very proud of these numbers, we’re even more excited about the growing client relationships that form the backbone of these financial results. I spend most of my time ensuring that the management team supports our existing sales force and customers, providing direction on how we can continually improve the business, and focusing on strategic growth opportunities that expand our capabilities. Our clients benefit greatly from the longevity of countless experienced brokers and finance professionals who have grown up with us, as well as a record number of experienced teams and firms who have joined us in recent years.
We are witnessing increased market volatility today. As a leader, how are you navigating this time, and is there a chance to find yourself amidst the turmoil?
The cycle we are facing is really unusual. Economically, we have two consecutive quarters of GDP contraction, which is a definition of a technical recession, while adding over 800,000 jobs in the last two months alone and over 6 million last year. The labor market is hardly in a recession, although there are signs of falling employment and possible layoffs. We all know that the Federal Reserve has no choice but to act aggressively on interest rates and quantitative tightening to fight inflation. Record liquidity injected during the pandemic has created a major challenge from rising prices, compounded by global supply chain issues and unusually tight labor markets. This has led to the fastest rise in interest rates in a short period of time in decades, creating volatility in capital markets and prompting a repricing of risks and assets.
As a company with over 50 years of cycling experience, we guide our team and clients on the long-term benefits of commercial real estate as an investment vehicle. We assure the investor community that this period of uncertainty will pass by presenting historical data and focusing on what matters most – understanding investors’ needs and goals and helping them implement them. We are the industry’s most effective problem solvers, solution finders and opportunity creators, combining the art, skill and knowledge of our 2,000 sales and financing professionals with cutting-edge market research. Higher interest rates and expectations of an economic slowdown will certainly result in a wider bid-ask spread and there will be price adjustments when the math has changed.
The lack of overbuild and excessive leverage in this cycle and the exceptional strength of the labor market, even if job growth slows to zero or turns negative when the Fed hikes rates, bode well for the mid- to long-term outlook for commercial real estate. Our strategy is based on market share gains and supports our existing sales force in expanding their customer reach and continued talent acquisition. We are fortunate to have a leading market position in a very large and fragmented industry, particularly in the retail segment.
Over the past year you have been busy expanding Marcus & Millichap’s Institutional Property Advisors (IPA) business, including through the acquisition of the Eisendrath Finance Group. What is the most common need of IPA customers today?
The addition of Brian [Eisendrath] and his team of financing professionals at IPA Capital Markets was a critical step in expanding our services to institutional clients in the multi-family housing space. Brian and his team have led multi-family origination volume across the industry for several years, while our IPA multi-family consulting business has become a leading force on the sales side. The integration of capital markets with distribution, together with the recent addition of Greg Willett, the industry’s best known housing research expert, aims to provide multiple levels of service to our key clients. IPA closed a record $22.2 billion in 2021 with an average transaction size of $53.9 million and $17.9 billion in H1 2022 with an average price of $58 million. We are also pleased with the success of our IPA retail team, as well as the IPA office and industry. This is a key strategy to diversify the firm’s traditional retail investor dominance, already known to Marcus & Millichap as a category killer. We can connect private and institutional capital and offer financing, refinancing and recapitalization of assets and portfolios better than ever.
What do you think of whether we will see a recession next year? How are Marcus & Millichap positioned to weather the storm?
Several variables remain at play that could significantly influence the recession risk for next year. Whether the Federal Reserve maintains its aggressive anti-inflationary stance and how much it changes interest rates, whether imbalances in the supply chain improve and what happens to food and energy prices over the winter months will all have a major impact. Most economists see a relatively high probability of a recession within the next 12 months, but a soft landing is possible.
If a recession threatens, the commercial real estate sector is fundamentally well positioned. Vacancy rates for most property types are very low, rental growth has been strong and the risk of over-development is muted. Apart from the global financial crisis, past recessions have not resulted in a significant drop in commercial real estate transaction activity. Marcus & Millichap has a strong balance sheet and has a history of outperforming in recessions. Whether the next recession lasts nine months like the 1990 recession or 17 months like the 1981 recession, investors can turn to Marcus & Millichap for the best research and transaction guidance available.
Have you noticed any interesting investment or financing trends recently, specifically in the LA market? What are your customers focusing on as we wrap up the year?
Demand for industrial assets remains particularly strong, particularly for newer Class A properties. Truck storage is also attracting a great deal of interest. Rising interest rates and a challenging regulatory environment have started to weigh on multifamily housing investment activity. As investors continue to target these assets, an extended bid-ask spread has emerged, slowing selling from last year’s record pace. However, housing demand is still driving development investment, but risk-taking by investors and lenders has become more conservative. With rising interest rates, there has been a surge in refinancing bridging loans into permanent debt as borrowers look to lock in today’s rates and LTVs before expected higher rates tomorrow make it more difficult.
Are there any personal goals that you would like to achieve by the end of the year?
The most urgent focus is to help our salespeople drive business, expand their customer reach in the face of the rapidly changing market, and execute to the best of their ability despite the previously mentioned market challenges. This is where we differentiate ourselves with experienced brokerage managers who run each of our offices, combined with the latest technology. We must also strategically move the company forward over the long term and ensure that we maximize revenue and earnings in the short term. We have transformed the company’s leadership team and management lineup over the past five years. This has resulted in the promotion of our best managers to divisional level leadership.
The C-Suite benefits from two experienced Chief Operating Officers, Richard Matricaria and JD Parker; a very experienced Chief Administrative Officer, Greg LaBerge; a new CFO, Steve DeGennaro, with a technology background; Chief Legal Officer, Mark Cortell, with extensive M&A experience; a new head of capital markets, Evan Denner; and a new Chief Marketing Officer, Andrew Strockis, who recently joined from Charles Schwab with extensive digital marketing experience. This team has been tested during the pandemic and has performed incredibly well and kept moving forward. We’re already working on our plan and priorities for 2023, including redesigning and enhancing several key initiatives, the next round of technology upgrades, expanding our acquisition targets, further modernizing our training programs, and making significant advances in diversity and inclusion. As the market becomes more demanding, we will uphold the tradition of always being there for our customers. Our financing division, Marcus & Millichap Capital Corporation, is now an important part of our value creation. With nearly 100 capital markets professionals, the team has closed deals with over 400 lenders over the past year, providing our clients with the widest choice of capital sources and the best terms. We are confident that the integration of financing and investment brokerage, together with our research and advisory capabilities, will help us continue to outperform the market.
Cathy Cunningham can be reached at [email protected]rver.com.