Hessam Nadji is one of the commercial real estate industry’s foremost experts on the economy. The managing director of Marcus & Millichap’s Research and Advisory Services Group, he is a frequent guest on CNBC, Fox Business News, Bloomberg News and National Public Radio. He also is regularly quoted in such publications as The Wall Street Journal, Financial Times, The Economist and Bloomberg Businessweek.
We recently got a chance to chat with him about the performance of the economy as well as the showing of the various property sectors. Nadji also discussed the impact of the upcoming presidential election on commercial real estate and confessed to a strong enthusiasm for a certain quartet from Liverpool.
HS: What do the recent job statistics say about the health of the economy and, by extension, the health of the commercial real estate markets?
Nadji: The pace of job creation in the United States has slowed measurably, stirring fears of another disappointing chapter in the struggle to stage a durable economic recovery. This disappointment in the domestic economy happens at a transitional time in Europe, as reflected in the election results from France and Greece, all of which add to volatility and renewed concerns. In other words, below-trend growth persevering through macro headwinds remains intact as the theme of this recovery.
The commercial real estate market, aside from apartments, which have already advanced into an expansionary cycle, will continue to face challenges in achieving substantive growth. Retail, office and industrial properties all made gains last year, and assuming we do not hit a worst-case scenario in Europe or encounter some other severe setback, they should continue to advance. The very limited construction environment will ensure that supply-side pressures do not inhibit the recovery, and baseline demand, though not robust, remains positive.
HS: Which commercial real estate sectors have shown the most improvement since the start of 2012 and which ones are stuck in the mud?
Nadji: Apartments continue to lead the commercial real estate recovery in 2012 with momentum only slightly below trend from last year. Vacancies have fallen to the lowest level in 10 years, generating upward pressure on rents.
Retail, office and industrial properties all maintained positive absorption in the first quarter, and although the improvements have yet to achieve a breakout performance, each of these property types has seen vacancies retreat from the cyclical highs of the recession.
Industrial properties have improved steadily, with vacancies down 70 basis points in the last year, and based on the positive momentum in both manufacturing and international trade, this sector should continue to make headway.
Office, though improving slowly, has yet to see a breakthrough quarter as companies continue to backfill existing space. Positive trends in corporate earnings and hiring in the professional and business services sector, however, indicate that office property performance will continue to improve.
Retail demonstrated the weakest first-quarter performance of the major property types. Though consumption well exceeds pre-recession levels, consumer behavior shifted dramatically during the recession. As a result, some retailers continue to face significant challenges while others have already begun a new expansionary cycle. This has created a somewhat uneven recovery in retail properties with some locations generating strong performance and others still facing numerous hurdles.
HS: To what extent, if any, will the upcoming 2012 presidential election affect the performance of the commercial real estate markets between now and November?
Nadji: The biggest challenge created by the election year will be uncertainty. Businesses and consumers alike continue to await clear direction on many important issues ranging from tax policy to healthcare to financial reform. With so many issues having been kicked down the road to the months following the election, it is quite difficult for people to make definitive decisions.
Nonetheless, the economy continues to make steady, though unremarkable, headway. This economic momentum will be sufficient to power continued improvement in commercial real estate performance, but it’s unlikely 2012 will be a breakthrough year.
HS: A non-commercial real estate question for you: when you're not advising clients or studying economic numbers, how do you like to relax?
Nadji: I’m a big Beatles fan and an avid reader.