Retail Traffic: What effects do you think the Lehman Brothers bankruptcy, the sale of Merrill Lynch and the nationalization of AIG will have on commercial real estate?

Hessam Nadji: The direct impact is a bit of an unknown right now, because it really has to do with how the commercial real estate part of those portfolios is treated. If there is a rush to liquidation in the current environment, where a lot of buyers are sitting on the sidelines and requiring deep discounts, there will be more of a price adjustment. But we have to really distinguish between distressed paper and distressed properties. Commercial property fundamentals have weakened in the past few months, but they are still generally healthy…retail is among the property types we are most concerned with because it experienced more construction in the past three years than other property types.

RT: We heard from some investors that Lehman's retail loans are too risky. Would you agree with that assessment?

Nadji: I did not study their retail portfolio specifically, but I will say that because a substantial portion of their portfolio was transactions closed after 2005, those assets have a higher probability of correction. Properties invested in 2005 and 2006 probably featured expectations for higher tenancies than what has materialized.

RT: If Lehman is forced into a fire sale right now, how much of a discount do you think they will have to accept?

Nadji: I think it's a mistake to make a general estimate. It depends on the asset. For example, there should be less of a price correction for apartment assets in the primary markets and more of a correction for retail properties in secondary and tertiary markets. Office and retail would require the biggest discounts.

RT: Do you think we will see investment sales volumes increase next year?

Nadji: I think there will be more sales next year, for one of two reasons. We'll either see confirmation that the economy, while weak, is not going to have a severe recession and, at the same time, the capital markets situation will hopefully improve. That's going to increase transactions without a substantial price correction. In the worst-case scenario, the economy gets a lot worse or the credit situation stays as it is right now for a prolonged period of time and the credit crunch is going to create much more pressure on pricing. The sales will increase then too, but because of discounting rather than increased buyer confidence.

RT: When do you think we will see financial markets recover?

Nadji: I think we are near bottom in the capital markets, but I don't see how this can resolve quickly. I think it will take at least 9 to 12 months before capital markets are anywhere near normal.

RT: In the past, you've said that REIT stock prices are a good proxy for real estate valuations. Do you think the correlation still holds true?

Nadji: I don't think the next 30 days are a reliable time period to look for any trend because of the magnitude of the news that has occurred globally. I would not look at fund flows in and out of REITs just yet. When we saw REIT valuation corrections of more than 35 percent in 2007, I believe that was overdone. The property fundamentals did not support that kind of discounting. It will be interesting to see where it ends up by the end of this quarter, but I would not rely heavily on what you see in the next 30 days.

HESSAM NADJI
Economist and managing director of research services

Marcus & Millichap Real Estate Investment Services