In the next 12-18 months, it’s clear a variety of suburban types of real estate will benefit: Marcus & Millichap CEO

Hessam Nadji, Marcus & Millichap CEO joins the On the Move panel to discuss the impact of COVID-19 on the real estate industry.

Video Transcript

ADAM SHAPIRO: Some of us have joked a little bit that the death of the soul begins in suburban office parks. Quite seriously, there is a migration to suburbs, and office parks are some of the gainers because of that, as people leave cities. But to help us understand what is truly happening, we invite into the stream Hessam Nadji. He is the CEO of Marcus & Millichap.

And I wanted to ask you, is there going to be a balance? Because as people flock to suburbs and to office parks and to all kinds of commercial real estate outside of big cities, prices here in the big cities will fall. Won't that make them more attractive to come back?

HESSAM NADJI: Good morning. Thanks for having me on the program. We're seeing exactly what you just described on a short-term basis. Right now, the world is reacting, of course, to the pandemic, and the migration is a reflection of that. There's a lot of concern about what happens to downtown office space, downtown residential units that have been built in large numbers over the past four or five years because the urban lifestyle-- the 24-hour city, if you will-- has been the hottest segment of both the housing market and, of course, uses of commercial real estate.

So in the foreseeable future, the next 12 to 18 months, it's clear that a variety of suburban types of real estate will benefit from this, which to your point, will create some buying opportunities in urban areas. And we really believe, on a long-term basis, way beyond the current state of the pandemic and so on, there will be renewed demand for central business districts. And that will come from new business formation-- of course, the economic recovery. But also remember, the fact is that commercial real estate has not been overbuilt in this last 10-year expansion cycle. So we have the benefit of a pretty good balance between supply and demand prior to COVID, preventing a worst-case scenario.

JULIE HYMAN: How long do these cycles last that you're talking about? I mean, you mentioned that it's well beyond the sort of end of COVID that we could see this current real estate cycle play out. How long, and what does that cycle look like as it as it kind of gets there?

HESSAM NADJI: I think if we look back to the post-9/11 tragedies, where people were very reluctant to lease office space in high-visibility, high-rise downtown space. That phenomenon took about 18, 24 months to really pass and for people to get more comfortable returning to those types of office facilities. In this case, because of the more broad nature of the health crisis, it might take a little bit longer. But one of the things that we have to keep in mind is that as rents adjust to the reality of the market, that, in and of itself, is going to attract companies to want to come back into central business district.

And the other point about this is that the existing leases throughout the whole office sector, on average, have another four and a half years left on them. So it's not like you can just turn a switch in and turn that off. There is a lease obligation and a commitment. And I know firsthand from many of our clients across the country, property owners are working very closely with their tenants in a partnership manner to prevent the worst-case scenario and to really work with them on some rent abatement and being flexible to make sure that the worst-case scenario doesn't play out.

JULIA LA ROCHE: Hessam, it's Julia La Roche. I was hoping we can talk a bit about multifamily housing apartment units in, I guess, bigger cities, for example. And I'm looking at-- I was seeing headlines in New York just about the vacancies and the available units now. And it does feel like-- I'm a-- I guess I'm an older millennial now. There's kind of-- I'm seeing more of my friends start to shift to the more suburban areas.

What are some of the issues that will come up in cities? Do we need more stimulus to help, you know, pay some of the rents? How do you think of the wage pressure on some of the folks who might be in these higher-end units, those sorts of things coming down the pike? How do you start to assess that, and what is kind of needed, I guess, on the stimulus side of things to help those in the real estate business?

HESSAM NADJI: Sure. I think your assessment of the current state of the residential rental market in central business district is very accurate and that it is the most vulnerable segment in the immediate term because there has been a lot of construction of new units, conversion of older units to upgraded units over the past four or five years in downtown areas. Now you do have a very large exodus and reluctance by younger people, professional service job-seekers in renting downtown. That is going to hurt that segment of the market, and we're already seeing it.

I think it will take some time for that to recover because of the fact that we've also proven that we can work very effectively virtually. You know, on the office part of that phenomenon, eventually there will be the need for bringing people back in teams and have meetings in person and so on. We believe that will happen post-COVID with a vaccine or a solution to the health component of this.

On the residential side for downtowns, it will take longer for people to feel comfortable wanting to be in that higher density housing environment. Prices will adjust. They're adjusting as we speak, and it's a matter of time.

Five years from now, I think we'll look back at this particular window of time is a great opportunity to invest in some of those assets. We have a lot of clients that have opportunistic funds looking to invest, both on the-- some of the portions of the residential housing component as well as shopping centers. They're seeing that as a contrarian play because of the shift and the changes that are inevitable coming into the retail segment of commercial real estate.