Executive Spotlight: Hessam Nadji, Marcus & Millichap

The president & CEO of one of the industry’s largest investment brokerage companies says a conservative upcycle and new sources of demand mean multifamily will continue to be undersupplied overall.
Hessam Nadji, president & CEO of Marcus & Millichap

Hessam Nadji is now approaching his third year as president & CEO of Marcus & Millichap, one of the most powerful brokerage houses in the industry. Following a unique path, Nadji joined the company in 1996 as head of research and advisory services and quickly established the firm among the top experts in research and investment trend forecasting. This led to overseeing the company’s specialty brokerage divisions, which grew significantly under his supervision. Then in 2013, he played a leading role in the preparation and execution of the firm’s IPO (NYSE: MMI). Commercial Property Executive will be honoring Nadji with the Service Executive of the Year award as part of our annual Executives of the Year awards in December. In advance of this honor, we took the opportunity to get his take on the economy and other potential disruptors to commercial real estate.

Where are we in the current economic cycle and how does it differ from the last upcycle?

Nadji: Here we are in late 2018 and the recovery began in 2010. If you look at the history, this far into any expansion, you typically see a lot of overbuilding and overleveraging. Historically, overbuilding or overleveraging are the most common reasons commercial real estate cycles have come to end.

In this cycle, we neither overbuilt nor over-leveraged. At the same time, we have an economy that did not overheat because the severity of the financial crisis in ‘08 and ‘09 was so profound that both companies and consumers stayed conservative. And because of some regulatory pressures, banks did not over-lend. And the combination of all these factors created this rather slow and muted expansion that has not led to overheating. 

With the mid-terms behind us, we face the high probability of a good balance between rising interest rates, a moderate slowing of the economy and managing of inflation by the Fed that does not have to kill the economy.

A global trade war could be a very large-scale issue but, given that everyone is very interconnected around the globe and everyone knows there are no winners in a trade war, I do not anticipate the worst-case scenario will happen. Short of a macro issue like that, I believe in the high probability of a soft landing where the expansion can endure for the foreseeable future.

What are the stories surrounding multifamily that you’re paying attention to at the moment and what should investors be thinking about that asset class?

Nadji: That is a really interesting topic right now. Because obviously apartments led the recovery and because they are one of the safer and most reliable sectors within commercial real estate, the prices go up and yields come down the fastest in an expansion.

Here we sit, again, far into the expansion and apartments have appreciated a lot and cap rates have compressed significantly. What do you do as an investor? What I find interesting is that, just in the last two quarters, we have seen a definite pickup in renter demand and absorption. This is what happens when interest rates go up, home prices go up and fewer people are able to afford homes. And, demographically, there are now so many more people that prefer to rent —including lifestyle renters and empty-nesters—that really were not a big factor 20 years ago. So, all of a sudden, apartments have multiple sources of demand.

Rent growth is holding together very nicely. Thus, prices are well supported by strong occupancies and rents, and the only concern is the overbuilding and oversupply. Apartment developers have built more units at a record pace in the last few years, and about a dozen markets have captured more than 50 percent of this new inventory. I don’t want to discount the fact that some local markets are going to experience or have already experienced softness due to overbuilding, but it’s not a broad-based systemic issue. The overall industry and the country as a whole are undersupplied for multifamily, not oversupplied.

Technology is often flagged as the biggest “disruptor” to real estate, particularly retail. How will the disruption continue to play out?

Nadji: The statement I like to share with our clients is that technology is not disrupting anything because disruption hints of an end to something. Disruption to me translates to the death of one thing and the birth of another. And that’s not how I view what is happening in commercial real estate. Morphing, evolving and changing are much better descriptions.

For example, in retail, when you think of entertainment, you think of movie theaters. But in the next five to 10 years, I believe there will be an explosion of all kinds of different forms of entertainment that will morph into retail—like Top Golf as an example. We spend more money eating out now as a country than we do buying groceries. Consumer habits have changed along with technological forces that are creating havoc. This has short-term pain but long-term gains. New space demand is also shifting into health care and exercise facilities. This is why the fastest growing segments of retail include fitness centers and health and beauty-related retailers. Space utilization and configuration is changing rapidly, and real estate structures have to evolve. We are seeing this play out.

How will technology and AI ultimately impact the need for brokerage firms?

Nadji: I think to a large extent technology has already changed the continuum of how a broker interacts with a client and what a client expects from a broker. Because the client now has access to the same information regarding the economy or vacancies, the broker is not just the carrier of information the way the broker was in the ‘70s, ‘80s and ‘90s. The broker must be something more.

(However), I do not think technology or AI will ever replace the personal relationship, trust and ability to open the hood and get dirty with the client to analyze each asset and alternative investment choice. I do not see technology getting to the point where it supersedes the connection and the trust, but it is forcing all of us to become that trusted expert advisor instead of a delivery service of information.

How does a research and tech guy become the head of a major commercial real estate brokerage firm?

Nadji: I got into this business with the hopes of being a systems analyst. My major in college was technology and systems operations in the mid-1980s in Seattle, when Microsoft was all the rage. At the time, I happened to do that for a real estate company, Grubb & Ellis, but I did not know anything about real estate. Very quickly, I was able to put two and two together and see that the analysis of the data going into these computers helps owners make decisions and enables the broker to present that information to an owner in a way that is a lot more decision-oriented.

I had been with Grubb & Ellis for six or seven months entering a lot of tenant information into a database and I said: “Hmm, these expiring leases. I wonder when they expire how much vacant space there will be for them.” I did an analysis of the contiguous space in downtown Seattle and I contrasted it with major tenants and expiring leases. Even though the vacancy rate was relatively high, the amount of contiguous space from our tenants was very limited and dwindling.

I put a couple of graphs together and presented it to our tenant rep group, and you would have thought someone had parted the oceans because nobody had done the analysis of the supply side versus the upcoming demand side on expiring leases. They told me we were going on a roadshow that afternoon. I said what the heck is a ‘roadshow?’ They just lined up these meetings with major tenants and, over the following couple of months, we signed up some pretty large tenant rep agreements using that one study. That basically launched my entire career and led to analyzing markets in a way that helped the broker help the client. Essentially, this became a consultative selling career path.

From there, my career morphed into managing sales people—given the amount of time I spent in client presentations—and direct client interactions, growing revenues and, eventually, being accountable for the business side.

George Marcus and Bill Millichap had the vision for transforming investment brokerage into more of an advisory service for the client based on long-term relationships. I was fortunate to be recruited into the firm to grow an advisory-based brand, well beyond just producing research. That was 1996 and a match made in heaven as far as I’m concerned.