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We're seeing urban market vacancies rise in big cities across the U.S.: Marcus & Millichap CEO

Marcus & Millichap CEO Hessam Nadji, joined Yahoo Finance Live to discuss how the COVID-19 pandemic continues to impact the commercial real estate and retail sectors

Video Transcript

ADAM SHAPIRO: Let's bring in Hessam Nadji. He is the CEO from Marcus & Millichap. He wants to talk with us about commercial real estate and the retail outlook. It's good to have you here and good to see you. Happy New Year, by the way.

When we talk about real estate--

HESSAM NADJI: Thanks for having me on.

ADAM SHAPIRO: --local, local, local. I would imagine that in a place like New York City the recovery, especially in commercial real estate, will come later than perhaps a place like, you know, a suburb in Texas. What say you?

HESSAM NADJI: You're exactly right. We're seeing a very strange phenomenon where some of the markets that are usually leaders like San Francisco, Los Angeles, New York, Chicago, Seattle, see their urban-market vacancies rise in pretty much every property type, whether it's residential apartments or office buildings, of course. And then the secondary and tertiary markets like a Boise, Idaho, for example or Reno, Nevada, and Sacramento, seeing people move there because of the pandemic and the shift in working remotely. So it's a very interesting time for commercial real estate.

At the moment, I will say we are feeling on the operations side of commercial real estate the collateral damage of the delayed stimulus package. A lot of small businesses were put under extra pressure. A lot of small- to mid-sized tenants are now struggling even more than they were before. Now thankfully the stimulus now is on its way, but that delay really did exacerbate the problem.

Beyond the short term, meaning the next six months or so, we expect a significant release of pent-up demand, whether it's the consumer who's been saving somewhere around $2 and 1/2 trillion that would have normally been spent without a pandemic that is now pent up and ready to be released when things move back toward normal, whether it's businesses that have deferred leasing decisions, expansion decisions, and so on. But the back half of the year should see a lot of that pent-up release.

SIBILE MARCELLUS: And what about the phenomenon of buying online, picking up at the store? Do you think that's going to be enough to sustain commercial real estate, brick and mortar, at least until the vaccines are distributed and we reach some level of immunity in America?

HESSAM NADJI: A lot of brick-and-mortar retail-- older shopping centers, shopping centers that have not really retenanted-- are struggling and are going to continue to struggle. This was already happening way before COVID became an accelerator of the changes in consumer habits and, of course, online shopping.

Those properties are going to be reused. They're going to be completely retenanted, maybe even redesigned for alternative uses. We're already seeing a lot of those examples play out.

On the other side of retail, you have fast-food drive-throughs where 50% to 70% of the revenue in normal times comes from a drive-through-- or necessity retail, grocery stores, and drugstores that are doing very well. And that's actually a very attractive investment for a lot of baby boomer, high-net-worth individuals because they have long-term leases with credit tenants, and they don't require a whole lot of hands-on management.

So there's a-- you know, a tale of two cities when it comes to retail, and it's [AUDIO OUT] that's really throwing us for a loop in that, like I said earlier, normally you don't see apartment vacancies rise to the degree that they've risen in urban markets. Of course, people are leaving downtown areas right now because of the pandemic, and that'll take time to recover.

ADAM SHAPIRO: And when you talk about the tale of two cities, one person's misery is another's opportunity. For instance, empty storefronts throughout New York City, see them every day when you walk around here. But then I think of a place like Broad Ripple, a suburb of Indianapolis. Where are you going to see the recovery faster, the empty storefronts, say, in Broad Ripple or in a place like New York City? What do you think?

HESSAM NADJI: From an economic perspective, I think it'll take the urban markets longer to recover because people will be reluctant to take public transportation, even after the vaccine is widely distributed for a while. Companies will be reluctant to open fully until people really get confidence that the pandemic is behind us. That's going to take time.

In the meantime, though, and from an investment opportunity, there are now assets available for sale that normally never come to market. There are now individuals and institutions that need to create liquidity by selling some assets because of overall financial distress or, you know, situations that wouldn't have happened without COVID.

So it's, like you said, a tale of two cities from the standpoint of opportunity. We're seeing a lot of our clients move capital from market to market or even property type to property type. A lot of apartment owners, for example, are selling their apartment assets and rolling their equity into these long-term leases with fast-food restaurants because they're stable and they don't have to do much to manage them. That trend is actually increasing.

We're seeing a lot of our clients come into hospitality. They want to buy distressed, nonperforming hotels because they can get attractive pricing. Financing is available. I will say this is a liquid crisis compared to '08 and '09 because the Fed has been aggressive. The government has been aggressive, you know, notwithstanding the delay in the last round of stimulus. It is a liquid market environment. Just the same as you're seeing in the stock market, you are seeing that liquidity coming to commercial real estate.

SIBILE MARCELLUS: And as you mentioned, it's going to take time for commercial real estate to come back. But I know that in urban areas, a lot of people are actually hoping that those empty storefronts, that commercial real estate will be turned into residential places, homes, apartments because before the virus in many of these urban areas, there was a crisis where you couldn't find enough apartments that were necessarily at the price point that you wanted. So do you see that possibly changing amid the pandemic?

HESSAM NADJI: To a very small extent, I do believe it will happen, but converting urban real-estate product from one use to another is very expensive. I mean, we're talking about reconstruction. We're talking about significant renovations to convert, let's say, a hotel to apartments or even more so an office building to apartments.

And so it's a good theory, but I don't think it's going to become a widely used application because of the cost and the permitting and the time it takes. I think by the time you work through all that, let's hope, anyway, that the world economy is in a significant recovery. This release of pent-up demand, I think it's-- as we sit here with cases surging and hospitals being beyond capacity and the human toll just being so God awful, it's hard to imagine the other end of this when that pent-up demand is being released into the economy.

I think we're going to have a pretty big surge in the back half of this year, early 2022 in job creation and consumption in a way that's going to include the urban markets. It just won't be overnight.

ADAM SHAPIRO: And those investors who are looking for the outcome in a year or two would be wise to listen to you.

Hessam Nadji is the CEO of Marcus & Millichap. We appreciate your being here.