Office market woes: Older buildings are 'having some trouble,' says Marcus & Millichap CEO
A new survey from Bloomberg found that 65% respondents say the U.S. office market won't recover without a severe crash. Marcus & Millichap CEO Hessam Nadji tells Yahoo Finance Live that he is seeing "older, obsolete buildings suffer the most from the lack of demand," but "newer, higher-quality buildings are performing much better." Nadji says there are already some distressed sales in the sector. However, outside of office, it's a different story. "We're not seeing the level of distress at all in multi-family, even shopping centers, hospitality. All of those sectors have recovered very well since the pandemic," Nadji says.
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Video Transcript
JULIE HYMAN: So let's just zero in on offices then, shall we? Because according to the survey that we cited, investors are looking for another perhaps as long as nine months' slide and a bottoming out in office prices before we could see some sort of recovery within that sector. Does that timeline sort of make sense to you?
HESSAM NADJI: Yeah, great to see you again. It does in the sense that the office sector has a whole different cycle moving through than, let's say, apartments or shopping centers and other property types in that we're seeing older, obsolete buildings suffer the most from the lack of demand. Quality assets, if you look at the most recent vintage, let's say, built in the last 10 years, those vacancy rates are around 11% nationwide. And the overall office vacancy rate is pushing about 20%.
So the newer, higher quality buildings are performing much better. Even within office, the generalization is very dangerous. And as I was saying a minute ago, the exposure that banks have in the banking system breaks down as follows-- of total outstanding loans held by US banks, 24% is in all of commercial real estate-- all of commercial real estate. And of that 24%, 15% is in office buildings. As
I mentioned, within office buildings the newer ones are performing just fine. The older ones are having some trouble, for sure. We're seeing prices decline. We're seeing some distressed sales.
The interest rate shock that the fed has delivered to all of commercial real estate and banks pulling back from lending because of these sort of cautionary notes and concerns about commercial real estate is affecting the whole industry. And we're going through a pricing adjustment right now. But it's really concentrated in older office buildings.
JULIE HYMAN: So even if we're just talking about a percentage of a percentage, right-- and it's not huge. I mean, what you're looking at potentially is sort of a freeze in the industry, right? If you're looking at these higher interest rates, if you're looking at pricing that is not moving enough to get new buyers interested in some of these older properties you're talking about, you know, what are the implications for the banks that do hold the stuff that-- you know, are they going to have to write down the values of it?
Looks like they're not going to be able to refinance right now, except at much higher rates. What's sort of the outcome then for those who do hold these properties?
HESSAM NADJI: The predominant strategy that we're seeing in the marketplace as suggested by the Treasury and by the Federal Reserve is for banks to work with those owners, borrower/borrowers as much as possible to extend the current loans, modify the terms. But there are some of the stocks of office buildings that are just not going to come back. And I think that's where we're going to see some distressed sales. We're actually seeing some of them already.
In general, there is a tendency to cooperate and avoid write-downs and avoid the significant sort of, if you will, domino effect that could happen from too many distressed properties being sold at the same time. Again, I want to emphasize, we're not seeing the level of distress at all in multifamily and even shopping centers, hospitality. All of those sectors have recovered very well since the pandemic. So this is, again, concentrated predominantly in the office sector.
