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Marcus & Millichap CEO on ‘excitement’ around commercial real estate as an alternative investment

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Marcus & Millichap CEO Hessam Nadji, joins Yahoo Finance to discuss the company’s third-quarter earnings and outlook on commercial real estate.

Video transcript

SEANA SMITH: Marcus & Millichap, the company posting its second straight quarter of record profits. Now the commercial brokerage firm posting a jump in earnings and revenue as the industry recovers from the pandemic. So here to talk a little bit more about the numbers we're seeing, what we could expect going forward, we want to bring in Hessam Nadji. He's the CEO of Marcus & Millichap.

And Hessam, it's great to see you again. Second quarter in a row of record numbers. A couple of these stats stuck out to me, but one the brokerage commissions more than doubling from a year ago, bringing in almost $300 million. What's the biggest driver of the jump that you're seeing in your business?

HESSAM NADJI: Good afternoon. Thanks for having me on the program. There is a combination of the market recovery, as you mentioned. Of course, we're positioned very well to leverage that market recovery on behalf of our clients. There's a lot of appetite for commercial real estate, given where interest rates are, where the economy is. We're recovering the jobs that were lost very rapidly now. And there is a lot of excitement around commercial real estate as an alternative investment, which is helping the market come back and helping us.

But at the same time, our internal strategies have really paid off. We've acquired a number of firms that have added a lot of value to our company. We have long-term tenured specialists on the financing side and on the investment brokerage side, who, of course, have long-term relationships. And when the market comes back like it is this year, those relationships really pay off and increase the productivity of our salesforce and massive investments in technology.

We've upgraded a lot of our internal workflow systems that helped us really get through the pandemic very quickly and very effectively with virtual operations almost overnight and external technology that is helping clients find inventory and connect the marketplace with our investment sales professionals and financing professionals. All of it has come together, just about converging at the right time at the right place for us to be putting up these numbers, which we're very pleased with and proud of.

ADAM SHAPIRO: It's good to see you again. It's Adam here. And something that jumped out to me was that you've said that retail recovery in full swing, that the total occupied retail space is now above pre-COVID levels and the vacancy rates are beginning to tighten. Help those of us who love big cities understand what's about to happen, though, for instance, Chicago. And I'm thinking of Water Tower Place. It used to have Marshall Field and Macy's. And that huge space is now empty. What's the future hold for that of retail?

HESSAM NADJI: Great to see you again. Retail is such a mixed bag and misjudged by the marketplace in that you can't judge a book by its cover. Not all of retail is the same. There are segments within retail that are hit very hard, older shopping centers that have lost tenants. They're very hard to position to attract new tenants. Therefore, many of them are going through a reuse, renovation, and complete repositioning.

But that's offering a lot of our clients. Frankly, retail is one of the strongest components of our business we were talking about a little bit earlier, because investors are coming in to take advantage of a higher risk, higher return kind of an investment within some of those older shopping centers.

On the other side of the equation, you have fast food restaurants, drugstores, and necessity retail that's performed incredibly well throughout the pandemic and now into the recovery. And because they have drive-thru as a 50% to 70% component of their revenue, which was essential during the pandemic, and because they have predictable returns, given the long-term leases. There is a lot of retiring baby boomers, aging baby boomers that want that kind of a cash flow return that are very attracted to that part of retail.

And then there's everything in between. Urban retail has been hit very hard. It's going to take longer to recover. Suburban retail, on the other hand, is benefiting from the migration to the suburbs. Secondary and tertiary metros, where people are migrating now that they can work more virtually, are also benefiting from new demand. All in all, retail is truly an opportunity play. There is virtually no overbuilding of it going on anywhere because retail was overbuilt for a long time. And the market is adjusting to this world of e-commerce very rapidly.

SEANA SMITH: Hessam, retail across no matter where you are, you're facing the supply chain issue, right, and I know something that you've been talking to some of your clients about. What are you hearing from them just in terms of how difficult they expect it to be or currently is to keep inventory in stock heading into the holiday season?

HESSAM NADJI: That's a major concern. And no real break in that concern on the horizon because of the fact that, you know, every part of the supply chain is challenged right now. And it is going to hamper, to some extent, retail sales. A lot of our retail clients are reporting that the tenants are acting quickly and much more swiftly to secure as much inventory as they can.

I wouldn't be surprised if a lot of the retail sales gains that we expect this holiday season, somewhere around 8% to 10%, which should be very achievable, tilt more toward gift cards and experiential gifts than actual items that people can find. I think it's going to be a challenge for some time. And our clients are concurring with that.

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