Marcus & Millichap, Inc. (MMI) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Hessam Nadji, President and CEO of Marcus & Millichap. On behalf of everybody throughout our organization, all of our investment professionals, finance professionals, support personnel management, we welcome you to the session. This was not a scheduled session as part of our information distribution and the amount of time and energy, we invest in providing you real-time research content. We felt a few weeks ago, that there is a likely need in the marketplace for an update and clarity, not just from us and our perspective on the markets. Our Head of Research, John Chang, and his team constantly put out the most recent and developing content based on the latest economic indicators, commercial real estate indicators, but we wanted to go above and beyond what we normally provide you in our usually scheduled content. And that is to bring in thought leaders from outside the industry and within the industry, to really compare notes on what we're seeing in the marketplace and try and give you as much direction as possible at a time when a lot of different variables are conflicting, and there is a fair amount of confusion in the marketplace. Before I get started, we have over 10,000 investors on this session. So traffic may become a little bit of an issue with bandwidth. If your recession freezes by chance, please hit your F5 key that will reset the entire session for you. We do have a Q&A tab on your screen. If you have a question or a topic, please go ahead and feel free to share that with us. John Chang, our Head of Research, will be monitoring those. Hopefully, we'll get time for a few of them into the session and make it as interactive as possible. And of course, we will provide you with the replay of this in a day or two. Let me welcome the -- special guests that we have for this session, to friends and associates that I work with very closely that are thought leaders in their respective areas: Mark Zandi, who is very well known to everybody who's been with us a number of times. He was with us in January in our kickoff market outlook. Mark has 20 years plus in the role that he has with Moody's as their Chief Economist, probably the most quoted economists on Wall Street. And I've always enjoyed his balanced fact-based approach to forecasting. We wanted to get him back given the search of news and headlines that have come to the marketplace since our late January session just to see if any of the developments are going to change his forecast for the economy. And our other guest is none other than Jeff DeBoer. Jeff plays a really important role for the industry. as the Head of the Real Estate Roundtable, which has 150 members, the most influential and significant real estate owners, investors, lenders that work with Jeff on behalf of the industry really to educate lawmakers. Nobody works harder than Jeff to do that and to bring practical math and knowledge and a little bit of homework to lawmakers who may not know what some of their decisions will mean to average Americans renting space, renting an apartment or buying a home or frankly, as investors and capital flows. So Jeff, 40 years of industry experience, the roundtable has really become a very effective way that our industry communicates with the White House and Congress. Having been to D.C. just a couple of weeks ago. I can tell you that the real-time dialogue that Jeff orchestrates with lawmakers is essential to logical and reasonable outcomes when it comes to industry and government and public policy. So I want to start with recapping kind of where we were from Mark's perspective. We're going to start with Mark today. You basically said, Mark, we need to watch the potential for a trade war very carefully. We also need to watch the fragile bond market. Interest rates, the 10-year treasury range bound from 4.25% to 4.5%, slowing but positive employment market. That was the kind of a recap of your message when we were together in late January. So let me just, at this point, say welcome. Thanks for rejoining us and have you take over the presentation. We're going to walk through Mark's most recent analysis. We'll have some conversation. We'll switch over to commercial real estate. I'm going to give you an update on what we're seeing in the markets, and then we'll cut over to Jeff for some commentary on tax policy and his Washington update, which will be fascinating. So Mark, let me turn it over to you. Welcome.

Thank you, Hessam. It's so good to be with you, and thank you for the opportunity. I appreciate that. So it was 3 months ago that we chatted, it was late January. It feels like 3 years ago somehow. A lot has changed. Let me begin by saying buckle up, the uncertainty around economic policy, particularly at this point in time around the global trade war is doing significant damage to -- so far mostly to sentiment, business sentiment, consumer confidence, investor sentiment. You can see in today's -- all the red that we're seeing in the equity market and bond market today. And I do think if we don't see a shift in policy here pretty quickly with regard to the trade war, the risks are very high that we're going to go into a recession. You'll see in a second that that's not my baseline view. I do think the President and the administration will take an off-ramp here one way or the other and deescalate the war and we'll be able to navigate through because fundamentally, the economy is -- came into the year in a very good place, quite strong. So I think it can weather lots of storms. But unless the storm abates here pretty quickly in the next few weeks, next month or so, I think increasingly likely, we're going to suffer an economic downturn. The reason is the trade war and the tariffs, they're big. This isn't small. This is big. And you can see that here. This shows the effective tariff rate. So this is just simply take all the tariff revenue that's being generated divide by the value of imports that are being tariffed, and you get this picture. It's back to 1,900 to give you context. That red circle represents the current effective tariff rate if all of the tariffs that have been announced are actually implemented. And that would also include the so-called reciprocal tariffs. They were put on hold here for a couple of 3 months to allow us for some discussion negotiation. But if they actually get implemented, we're at a 21%, 22% effective tariff rate. You can see before the start of all of this, we were at 2.5%. And prior to President Trump's first term, we were closer to 1%. You also noticed that this is the highest effective tariff rate since the early 1900s, even higher than in 1930 with -- you may recall from college [indiscernible] class or maybe from Ferris Bueller's Day Off. Now that's the Smoot-Hawley trade war. We got up to a 20% effective tariff rate. Just a -- I'll give you a rule of thumb here. For every percentage point increase in the effective tariff rate, that will raise inflation in the subsequent year by 10 basis points, 1 percentage point. So if we go from 2.5 to say, to make the arithmetic easier 22.5%, that's a 20 percentage point increase, that's going to add 2 percentage points to inflation. So we're going to go from a 2.5% consumer expenditure flat or inflation rate. That's the measure the Fed looks at when setting policy to 4.5%. I'm rounding, abstracting just a rule of thumb that kind of gives you a sense of the direction of travel. And of course, that inflation rate, everyone knows it, inflation expectations are up, particularly among consumers. And that combination of that means the Fed is not going to be cutting interest rates anytime soon, regardless of what's going on in the economy, whether it's good, bad or down the middle of the fairway, I wouldn't expect the Fed at this point to cut rates until they have. They feel very confident that they've got inflation expectations contained. The other rule of thumb...

Mark, your sound is going in and out a little bit. If you can speak a little closer to the mic and a little bit louder, that would be great.

Okay. Sure. I've got a heavy-duty mic here, too. This is my like sure microphone. I'm a little surprised.

You're hitting in your basement doing a broadcast with us. That's great.

One other rule of thumb, every percentage point increase in the effective tariff rate raises -- or excuse me, reduces GDP growth as of course, the value of all the things we produced by 6, 7 basis points. So you do the arithmetic there, 20 percentage point increase, that will push down GDP in the coming year by almost 1.5 points. So we're getting very, very close if this is the end of the story, very, very close to an economic downturn or recession. This does not account for potential retaliation by other countries, and that's something to consider. The Chinese obviously are retaliating so-called tit for tat, and that makes these numbers even a bit darker. So the trade war is in full swing. If it sticks to this script and who knows, given how things are jumping around all over the place. But if it does, then we've got a much darker economic outlook dead ahead as a result of all of this. The channels through which the trade war affect the economy, I'm not going to go through all of these. They're just here for your edification. These are the ways in which the trade war will negatively impact the economy, rank ordered roughly based on chronology. So we're already feeling the effects of the heightened uncertainty and weaker confidence. Financial conditions are tightening. That goes to the decline in equity prices. The stock market now given today's action, I think the S&P is probably down about 18% from the peaks of bearing down on bear market territory. And of course, the thing that's most worrisome in the context of a risk-off environment is that treasury yields are going up. Interest rates are rising. They're not falling. The 10-year yield today is at -- excuse me, 4.4%, still manageable, but the thing that's worrisome is, they're not -- they're rising, not falling, and they should be falling in a risk-off environment. Historically, we're the save heaven on the planet, AAA, money good, and that's being questioned here. You can also see that in the context of the decline in the value of the dollar against major currencies. So global investors are turning much more cautious in circumspect. I mentioned retaliation. A key to how this all plays out, the Chinese are dug in. They're not going anywhere, and this is going to take a while to resolve. And this is a big deal because that's the largest bilateral trade relationship in the world. And that's now effectively shutting down because of our tariffs on China and China's tariffs on us and all the other export restrictions that are going in place. But the real key, I think, is going to be how the European Union and Japanese decide to play this to a lesser degree, the Canadians and Mexicans. And that's going to be very important to how much damage this does and what kind of impacts it has globally. I'll mention one other thing on the list, just to highlight the negative wealth effects. This goes to the fact that the U.S. economy has become quite dependent on high income, high net worth households, the well to do, probably everyone on this call to drive consumer spending and growth. In this group, the well to do are very closely monitoring their stock portfolios. That's really critical to their wealth. With that being down as much as it is, if it stays down for any length of time, that's going to cause this group to become much more cautious. Not that they won't continue to spend. They have tremendous resource to do that, financial resource, but if they become more cautious, save a bit more, spend a bit less, that will have a big impact on the broader economy, much more so than in times past. So there are -- I can't think of a single positive from the trade war. I really can't. I mean there's arguments, but they don't hold water in my mind. And we can talk about them if you'd like, Hessam. But I think this is universally broad-based tariffs, aggressive tariff hikes to the degree that we're experiencing is a problem. Now getting to the outlook and my baseline, which, as I said earlier, does not include a recession, I say that with no confidence. And increasingly, it's clear that the risks are to the downside. And the reason we get no recession is, I am assuming that the administration will find an off-ramp here quickly that in this 90-day period of discussing the retaliatory tariffs, that we were able to strike a few deals with some countries that cools things off, allows the administration to effectively back away from the tariffs and normalize them over the coming 12 to 18 months. And if that's the case, I think we're -- we'll be able to navigate through. But this has happened very quickly. This gives you my forecast for the effective tariff rate. The solid line represents the history, the dotted line, the forecast. I've broken it down into the tariffs on China. You can see I do expect them to come in a bit, but they're not going back to where they were. We're on a whole different plane here with regard to tariffs and our decoupling with that country is going to accelerate here in a very significant way. But with the rest of the world, that's the black line -- black dotted line, I expect them to kind of normalize after we get another refresh of the USMCA deal, the U.S., Mexico, Canada free trade deal. But this is just an assumption, a very tenuous one. If we don't get this, if the tariffs remain higher for longer than for -- even a little bit compared to what I've got here, I think a recession is more likely than not. Here's the baseline forecast, again, assuming that we're able to take off-ramp. This is GDP growth, a percent change a year ago. This is quarterly data. You can see where history ends and forecast begins. The light gray line represents the forecast as of November of 2024, so right when the election occurred. The orange line represents the forecast going back to December of 2024 once it became clear who was going to win the election and the policy shift. And the black line represents the current baseline forecast. And you can see by the end of this year, we're down to very little growth, about 0.5 point. Employment growth is going to slow. We're -- just to give you a number, we're at $150,000 per month on average at the current point in time, abstracting from the variability of the monthly data. We're going to be down close to 0 even in this forecast by early 2026. And the unemployment rate is going to go from around 4%, we're at 4.2%, to be precise, to closer to 5% by the summer or fall of 2026. So this is the baseline, most likely scenario, but obviously, again, the risks are to the downside. And I do want to highlight, this is a global problem. The tariff war is -- the trade war is a global trade war. And you can see here, recession risks are high everywhere. Those countries that have -- that are now in yellow have a probability of going into recession in the coming year of over 50%, and I would include the U.S. in that. I've not changed the baseline yet because I'm not confident enough to do it. The probabilities aren't quite high enough, but we're obviously very close. But most of Europe, China, many other parts of the world. Some parts of South Latin America, Southeast Asia kind of hang in. They benefit from trade diversion and are less likely to be impacted by the U.S. tariffs. But broadly speaking, our recession risks are high. The final thing I want to say, Hessam, is on a cautionary note. And that is when the economy is under pressure for any significant length of time, and now it's under pressure, and it feels like it's going to be under pressure for quite some time, things start to break. And I do want to call out that we are starting to see even before all of the fallout from the trade war becoming evident, stresses in different parts of the economy. And I'm calling out the nonfinancial corporate debt. This is a so-called the number of percent of defaults that are so-called distressed exchanges. These are defaults that are just essentially workouts where generally a private equity firm will work through the problems with the troubled business, roll in the interest into the principal and move on without forcing a broader restructuring or big pullback in hiring or investment. But that's at this point in time, without any of the stresses from the trade war, with the stresses in the trade war, I do expect we could see a significant pickup in corporate defaults, and that obviously would be the fodder for problems throughout the broader financial system in the economy. So just another thing to worry about in the context of an economy that's being stressed, if it -- again, if the President can figure out a way to get off this trajectory here pretty quickly, the economy can find its footing, we'll be okay, but that has to happen quickly. With that, I'll stop, Hessam and turn it back to you.

Thanks, Mark. Let me just zero in on a couple of things. While it's clear that the uncertainty that the trade wars and all the headlines over the last 3 or 4 weeks are creating may ripple into inaction, meaning postponing decisions on expansions, hiring, maybe even exhilarating some layoffs and so on, just out of reaction to this degree of heightened uncertainty is a real thing. And when that happens, and it's happening as we speak, it's a moving train. So it takes a while to accelerate and it takes a while to also decelerate. So some economic slowing per your forecast is already baked in, even in the best case scenario of an off-ramp you were talking about. But -- and I think that's what supports your baseline case for not a recession because of that off-ramp. But I wanted to go back and point something out to all the investors and clients of ours that are on this session. Should this come together the way that Mark framed it, look at the blue line also exhilarating on the other end of this from what the original forecast for the latter part of '25, '26 and then catching up on '27 was coming into the year with the enthusiasm related to the election outcome. So that enthusiasm, we saw it late in 2024. That's the orange line. We are now forecasting growth well below that orange line at the time because of the scope and scale of the tariffs. But assuming there is this off-ramp, and I can't wait to hear what Jeff has to say, I think everybody knows nobody really wins a trade war. It's fairly easy to do the math. Nobody really wins if it's a global all-out trade war. So I would give the probability of the off-ramp a very, very high chance. And then in that regard, now you're looking at growth that would be above what the original forecast was. Am I reading this right? Am I interpreting that right, Mark?

Yes. Yes, that's right. I mean the off-ramp means that the war deescalates, the tariffs come down, not on China, that's a whole -- a whole different dynamic there, but for the rest of the world and our trading partners and the economy quickly finds its footing. I mean in this scenario, we don't actually get to a place where we see mass layoff and surging unemployment. Employment slows, it goes -- comes to a standstill, unemployment kind of mean it's higher, but we don't get into this kind of self-reinforcing negative vicious cycle. So you get this bounce back because now you have -- confidence is restored and people get back to business. There's a pent-up demand that gets -- that needs to be satiated. Businesses have put off things that they want to do and they get going again. So you get that ramp-up in growth that happens. So yes, that's what I'm hoping for. I still expect that to happen. That's what happened in -- effectively in President Trump's first term. He kind of took the off-ramp before we went into the -- off the rails. But it has to happen soon. It has to happen here pretty quickly.

Thanks, Mark. Before I switch over to Jeff, I can tell you that having been in Washington a couple of weeks ago at the roundtable, half day meetings, dinner and then pretty much a full day of additional meetings with probably the highest engagement of the member base that I've seen in a long, long time, given all the news and Jeff ushered in a series of lawmakers and the Secretary of Commerce that joined us to give us some insights. In my own informal survey of the couple of hundred people that were part of this event, I would say about half said that they're hesitating and going back to the sideline to some degree, having come off the sidelines in the last 18 months, 12 months. And the other half basically said they're taking advantage of those that are hesitating in order to acquire the right assets and pursue business plans that make sense because pricing has adjusted, because fundamentals across pretty much all property types and can put office space in its own little category because even there, it's a tale of 2 cities, have improved. And this appears to be an opportunity window if you believe in the off-ramp scenario. So Jeff, let me bring it to you. What is your general response to Mark's forecast and your representation of the pulse in Washington, D.C?

Well, thank you, Hessam. It's great to be with you, and it's great to hear Mark, and I'm honored to be here with you again. I guess I'd start by saying, in Washington, if you get a call in the morning on any day, any time that I've worked here for 40 years, if I got a call in the morning and someone said, how are you today? I would say, I'm okay. Is there something I don't know because there's information going on all the time. But now in the current environment, it's even more acute. I mean, things are changing so rapidly and some of the things that were said to us at that meeting that you referenced changed almost within 24, 48 hours. So things do change quickly, which kind of brings me to my -- a general point just about this recession and predictions and so forth. This is so different, in my opinion, from past recessions, whether it was in the early '90s or Y2K around the turn of the century or the great financial crisis or the pandemic, those were issues that related to problems within markets and problems within the financing system or things like this. These are -- this is a policy-induced issue that has been brought upon people, meaning that it could change overnight. And so I am optimistic on an off-ramp scenario. I think that -- and it could be corrected quickly. Having said that, I mean, for real estate specifically, I mean, in times of uncertainty, hard assets to me is where you want to go. And obviously we've had values fall in many real estate asset prices, and we've had vacancy rates now falling in almost all asset classes. And we've had basically a cessation of construction in almost all asset classes. All of those lead me to believe that once this policy-induced problem in markets is overcome that these other real estate products and markets are going to be very, very good. But I'm not an economist. I know enough about the economy to be -- I mean, in that way. So I would follow Mark. But that does sort of stick in my mind. I guess when you layer on top of that, what's happening in Washington, look, we've got a debt ceiling coming up that needs to be addressed. We have the overall budget situation that needs to be addressed here. We have the 2017 tax reductions, which arguably need to be extended or by the end of this year, beginning next year, there will be large tax increases on virtually all Americans. We've got a desire to expand energy security and so forth in the country. We've got immigration problems. So there's a lot of things out there that Washington is kind of juggling with. And how that all comes together, I think, Hessam will be critical to how the economy moves forward and how Mark's forecasts come out and so forth. But a lot going on and a lot of it dramatically affecting -- could dramatically affect real estate investment.

Thanks for that overview, Jeff. Very helpful. Let me walk everybody through the latest readings that we have on the macro environment for commercial real estate. To your point, Jeff, the fundamentals look excellent. Even in office space, we're starting to see people come back into the workplace. More and more companies are insisting on that. Absorption of office space was the strongest it's been since the pandemic. Multifamily is doing well. I'll highlight a couple of things. Retail is the new darling of the industry because the consumer has been so strong and remains strong. Some hesitation recently because of consumer sentiment coming down very sharply in the last 30 days. A little bit of overbuilding in both multifamily and industrial, which has been corrected by the pullback in new construction. You can see pretty much even hospitality and self-storage showing very steady fundamentals. This is probably the most important point to remember in this window of extreme volatility and the dark clouds of uncertainty really are offset by a strong foundation for our industry across all product types pretty much. From a housing perspective, when you look at the multifamily market, and I know a lot of multifamily owners and investors are on the session, that's a significant part of our service base, of course, is apartment brokerage and financing. And the demand side of the equation is boosted by record home prices, high interest rates and therefore, the largest affordability gap. The renewal rates for apartments, the renewal rental growth for apartments is a very strong part of the fundamentals picture that I mentioned on the multifamily side. Both Jeff and I have referenced this pullback in new construction. In no other product that is it more evident than multifamily because we've had a lot of construction, record production of new units in the last few years, concentrated in about 10 metros, which account for about 42%, 43% of all total new units in the U.S. But nonetheless, look at the pullback in starts and expectations going forward. The combination of that and the strong renter demand is something we cannot overlook. Investors are actually not overlooking. Fundamentals with industrial, you see vacancies rising. Construction has been high for multiple years, again, pulling back. And there, too, the balance of supply and demand looks very healthy. With the office market, I think it's really interesting to take a note on how the differences are really showing within the office market, whether it's newer product having much lower vacancies, whether it's suburban product versus downtown having much lower vacancies. And everything that's discussed in the media in terms of this wave of distress, which technically on paper is quite concerning, is really masked by the fact that lenders have been very accommodative with owners. It's not in their best interest to mark assets to market and do a wholesale sort of a fire sale on any of the assets. With the exception of older obsolete office product that is truly devastated by what's happened post pandemic, we see a very, very low appetite for huge discounts across the board among lenders. There is plenty of situational distress. Our team is working with clients in pretty much all property types and markets around situational distress, short-term debt that is terming out, some aggressive underwriting in '21 and '22 vintage assets. And the biggest question that I get anywhere and everywhere that I go overall is what's going to basically capitulate, interest rates coming down when it comes to the relationship between interest rates and cap rates or cap rates continuing to go up. The chart that I'm showing is the ever popular analysis that I always share in pretty much every presentation that shows the gap between the 10-year treasury and cap rates. And the question, just this morning, I was on the phone with a client wondering if they should be aggressive on a transaction that they want to act on, but there are other bidders that are essentially pushing up the value, wanting my opinion on it. And the point being that negative leverage is no longer the primary thought process for most astute buyers. It's taken advantage of this time window. And frankly, having to pay up more than just 3, 4, 5 months ago because there's multiple buyers at the table for the appropriately priced asset. Now in this particular case, that asset is selling at a significant discount even with the higher price that this seller was contemplating because others are stepping up versus peak and versus where the asset was actually transacted at last time around. So some equity has been lost. And that's the reality of the marketplace. That's what I mean by situational distress or situational reality where the current underwriting really reflects much more realism than it did even a year ago. We are seeing that in the marketplace. We are seeing record capital wanting to take advantage of where we are in the market. And those are some of the themes that I wanted to share on this call. We have a lot more detail, of course, through our research content that can be made available to all of you. Before I switch gears now and go back to Jeff on the outlook on the tax front, which is a positive and deregulation, which is another positive. We're not hearing a whole lot about those right now because of all the uncertainty. Let me stop right here and see if John Chang has a question or 2 from the audience. John, anything?

Can you hear me?

Yes, you're on.

Okay. There were a lot of questions for Mark Zandi about the forecast for GDP slide and whether tariffs would boost reshoring of manufacturing and why there's an economic recovery forecast for 2027 and beyond following a period of pain. So referencing back to an earlier slide. Yes, that one. So you have a bounce back there, Mark?

Yes. So there were 2 questions there, I guess, John. One was on reshoring of manufacturing activity, and then I'll get to the forecast. On the reshoring, I don't see it. I don't know why a global manufacturer would expand and locate here given the uncertainty around the tariffs. They don't know what the tariffs are going to be next week, let alone 3 years from now or 10 years from now, which matters for these very long-lived investments. And these tariffs can be changed with the stroke of a pen. They're being done by executive order, and they have been changed by the stroke of a pen. They're not in law. They're not in legislation. So I don't think any major manufacturer is going to look at this and see an opportunity to expand here and locate here. And that's even before they start thinking about all the other issues that are involved in locating manufacturing here. And the other thing I'd say is even if you got manufacturers, global manufacturers to expand and operate and reshore here, it has nothing to do with jobs. These -- we're talking about highly mechanized robotic factories and facilities, the job creation is in the thousands, maybe tens of thousands if we're lucky, certainly not in the hundreds of thousands or millions. So I don't see the reshoring. And even if you got the reshoring, I just literally don't see the job. So I don't get it. Now with regard to the bounce back, this bounce back is entirely predicated on the underlying assumption that the President decides to take the off-ramp here and deescalate this war that's -- they're having discussions with different parties, different countries around the reciprocal tariffs that they cut a few deals, whether they're real or performative. It doesn't really matter. But that, that is sufficient to bring the war to an end or at least to de-escalate the war in a significant way. And that's what's behind the bounce back in the forecast in late '26 going into 2027. And you get more growth out in that period only because you have now higher unemployment, the economy is operating below capacity. The Fed has eased interest rates because it's now focused on growth and not inflation because the tariffs have gone away. And you get the bounce back and you get unemployment back into around 4% by the end of 2028. So this is entirely, entirely based on that assumption. So take it for what it's worth. It's hard to put a lot of weight on a forecast like this. And that's why it's really very important to consider alternative scenarios and why I began my presentation with the 3 words or maybe it's 2 words, buckle up because this could be much more difficult than this picture would represent. Now I think this is the most likely scenario. I'm sticking to it. But I don't -- yes, you can tell, I don't say it with a whole lot of confidence.

Mark, let me jump in as a follow-up to that. It was a good question, John. I'm pushing the slide out on inflation. Let's set aside the news of the last 30 days for a moment. Would you agree that the Fed had won the war against inflation and the problem are originating from the pandemic supply chain disruption and then the surge in demand from the stimulus that required the sledgehammer, where the Fed disrupted our business so violently had been dealt with and it was the thing in the past. Would you agree with that?

Absolutely. Fed nailed it. I mean as of March of 2025, when we go back and look at the historical record, it's going to show an unemployment rate of 4.2%, an economy that had been growing in a very strong, consistent way for the last several years. And that inflation was almost back to the Fed's target, if not already there. Soft landing, we did it. We did it, and that's why this is so frustrating to watch us go in a completely another direction, and take these kinds of risks when we had nailed it. We had literally nailed it.

Well, Jeff's term is the policy induced uncertainty we're dealing with versus structural. It's not -- there's no problem with credit markets. The economy was always coming back. But now let's take it a step further and talk about the Fed. If that's the case, then playing out the tariff scenario and the off-ramp, we go somewhere from the 2.5% global tariff rate pre the current wave of negotiations and probably end up somewhere higher than where we were, but not nearly as high as the red dot that so that is the current proposal. So that elevation from 2.5% to wherever we end up, which I suspect would be a hell a lot lower than the proposals at this stage. Hence, the definition of an off-ramp, right?

Yes.

It will be higher than the 2.5%, so it's inflationary. But isn't that a onetime hit on the inflation reading and then it levels off. Therefore, the baseline of where the inflation measurement should be probably gets raised from 2% to 3% or 3.5%, that becomes the new norm, but it's not an ongoing increase or reversal of inflation. Am I right?

Maybe what worries the Fed and what Jay Powell said in his speech last week at the Economic Club of Chicago is, yes, that's what you would think, unless inflation expectations are also untethered high. Because what happens is you get the tariff increase effects on inflation, people expect those -- the inflation to remain high. They demand higher wages from their employers to compensate for that employers are willing to do it because they think they can pass that along in the form of higher prices and you get into this kind of self-reinforcing inflationary environment, wage-price spiral. I don't that -- I don't think the Fed thinks that's the most likely scenario, but only because the Fed is going to remain vigilant, keep interest rates high until they're absolutely sure that, that's not happening. They're going to short circuit that before it actually develops. And I'd go forward as to say, if it looks like that's starting to happen, they will kill that baby in the crib. They will push the economy in the recession because the last thing they want is inflation to become self-sustaining and persistent. So I think you're right, Hessam, but I think you're right because the Fed is going to make sure that, that does not happen. That's in their DNA. They're just not going to let it happen, which is why we're seeing all the tension now between branches of government because the Fed has said we're not moving on interest rates. They're going to remain where they are until we're absolutely sure no matter what's happening with the economy, we're going to keep rates up until inflation is contained.

Do you believe there will be any liquidity issues in the interim? I mean we're not seeing in our business any liquidity shortage lenders are actually a little bit more aggressive than they were? We're not seeing any of the noise disrupt the availability of financing? Let me start with you, Mark. Do you anticipate any liquidity issues in the near term?

The longer this goes on, the longer the stresses on the economy prevail, the more likely we will. Something is going to break. There's been a lot of efforts in the corporate debt markets, private equity, private credit. Even in the commercial real estate market, banks have shown forbearance, thinking, oh, rates will come in. The economy is great. We're creating lots of jobs, retail sales are strong. Therefore, we're going to make this, we're not going to push anyone under. We're going to do distressed exchanges. We're going to figure this out. We're going to manage through it. But at some point, these stresses, if they continue to accumulate and we actually start to see job growth slow and decline and consumers start to pull back and you're still left with high interest rates, that's when you see defaults occurring. You can no longer do that, you can no longer manage it, you get the defaults, and that's when you get the liquidity issue. So that should not happen. That would be entirely self-induced, but the longer this goes on, the more likely that will occur.

Thanks, Mark. So Jeff, how do we make sure -- you mentioned, I think, on the outset of this call that the President was meeting with a retail contingent today of CEOs of major retailers. Various industry leaders have taken steps to communicate with the administration as to how they're being impacted by the current uncertainty and to get on that off-ramp as soon as possible. I know you are doing that on our behalf. So is NMHC. Sharon is incredibly involved, as you well know. So is ICSC, so is NAIOP. You're all working together to represent us. It's just the same way as some of these other groups. What can we do? What can the industry do? What can our clients that are on this call do to get the message to the White House as to the urgency of finding that offering.

Look, I think there needs to be a basic recognition that it's not just about tariffs and that there are -- and then the question is what are tariffs about? Are tariffs about negotiating with countries? Or are -- is this a long-term thing? And are they about trying to bring down other barriers for the United States manufacturing or business opportunities in other nations, which would be a positive thing. And so that's going on, and we don't really know [indiscernible] one day say it's negotiation and so forth. And if that's true, then this will self-off-ramp, if you will. Meanwhile, there's a lot of policy, very pro-growth policies that are going on in Washington. The tax bill is only one. There are some very important business provisions in the bill that the business community wants that they believe will stimulate activity there. The deregulatory environment, the administration wants to ease up on a lot of regulatory pressures that have added cost to investment and business decision-making and mergers and new IPOs and so forth. So we'll see how all of that balances out over the coming months. And I don't think that it's fair necessarily to just look in isolation at tariffs. And the whole portrait has to be painted, and that includes these other colors that come from deregulatory, maybe foreign markets open up, maybe they're right on this stuff. The tax bill will stimulate some activities and so forth. So we'll see about all of this. Yes, we're -- the industry is working together. All of us representing various aspects of the real estate community try to educate up there on one of our big items. There was a discussion about state and local tax deductions for businesses. And we've all banded together in a very, I think, persuasive way to point out that businesses need to be -- particularly real estate businesses need to be able to fully deduct their property tax payments. It's a cost of doing business, and we're optimistic about that. We think that the capital gain rate should stay where it is. We think carried interest is basically an appropriate policy, particularly for real estate when you talk about sweat equity and things like that. You mentioned obsolete buildings. A lot of states, cities have enacted incentives to convert those obsolete buildings into housing. And we'd like to see some of that at the federal level as well to kind of give that last bump to those assets that are even more difficult to convert. The opportunity zone area, that arguably ends at the end of 2026. And I think there's a very strong likelihood that opportunity zones will be extended. I think it's possible that they could be made more attractive, particularly for housing and maybe in the conversion area. So we'll see that. I think the low-income housing tax credit area is probably going to see a slight increase, made a little more robust in terms of volume for particular states and so forth. So I'm totally negative on this. Again, I do think this is a policy-induced issue. I'm not sure what the policy is that they're trying to drive here, whether it's to bring manufacturing back. I don't know. Is it for national security? Maybe is it for other issues like these non-tariff trade barriers that they keep talking about. But that will pass. And when it does pass, then we'll be back into the normal, I think, opportunities for investors, and that's kind of where we want to go. So we're optimistic about this. I think the energy area is one thing that the real estate industry and where electricity is going to come to power all of this, whether it's AI or other things is a big ongoing issue. And then finally, and then maybe you want to throw a few rifle shots at me, maybe that's a bad term, but [indiscernible] something here. But on the Fed, I really -- I think it's -- to me, I think it's unlikely that he would try to fire Jay Powell. I think it's more likely that he will continue to serve his term out, which goes to the end of March 26, I believe, is when he expires. And I think he will stay there. And I think that will be a steady hand to continue to get us through even though we can all criticize whether it was too late or too early here and there on things. But -- so that's where I am. What people can do, I think you mentioned that to me. I think that now is the time more so than almost any other times when a dialogue has to be undertaken between business people, with investors and business people and so forth and their elected representatives to make sure that they understand what are the real problems and challenges to future economic growth and job creation. And we talk about maybe we're going to -- the administration wants to reduce funding for certain universities and certain activities there. How does that play out into the economy? And how do returns on real estate impact pensioners in 401(k)s. I mean America is now invested in the stock market. This is not just necessarily a wealthy investor play. People are investing in it through their IRAs, their 401(k)s, what have you, and their pension plan people are. So we saw a reversal a few weeks ago or a pause caused by activities in the bond market. And so they are listening to markets. And so I don't necessarily say this is a course that just continues on in its current direction. I think it's a course that can be modified and impacted. And I would urge everybody to pay attention to this.

Jeff, I'm showing on the screen the various components of the 2017 Tax Reduction and Jobs Act. Capital gains is not mentioned here, but like you said, the prevailing expectation is for there to be no change in the capital gains tax rate in the renewal of the package. And just about every provision here is a positive for commercial real estate. And it kind of...

I see -- only negatives I really see are on this property tax issue, the deductibility for businesses, which would be catastrophic for people. And we have to keep our eye on that and do a good job. The rest of this on the tax front is largely positive, I think. And so we'll continue to make that case, and there's a lot of regulatory actions that we're taking that we think will help continue to allow capital to flow. I would say one real damage that Mark didn't talk about necessarily, I don't think from these tariffs and this stuff, is just a branding problem for the United States and within -- with foreign investors and foreign travelers and how the United States is viewed around the world as a friend and so forth. And is this a lasting damage or a short-term damage. And I guess, again, we shall see. But it's a very important aspect of this, I think.

Thank you, Jeff. John Chang, let's do another audience question.

Yes. I guess this is the dark question. Again, to Mark Zandi, what if the off-ramp isn't taken? How does that affect the outlook?

It's darker. Recession, very likely, just how severe it depends on really 3 things: one, how high are the tariffs and for how long? Will we be at 20 -- will we get actually to 21%? And will it stay there or not. So that's one key assumption. Second is the retaliation, what do other parts -- what are trading partners do in response? How dug-in are the Chinese and will the EU respond with their own tariffs and other non-tariff trade barriers if they feel like it's not going well. And three, it goes to the conversation we were just having with regard to kind of the nonlinearities that are -- what economists called nonlinearities that are created by all the stresses. What else is going to break that we're not even anticipating now because it's been put under pressure for an extended period of time. So those 3 key assumptions will determine how dark the scenario is. And obviously, the darker, the near-term scenario, the bigger the problem in the long run, because it will undermine the safe haven status of the United States of America, which I already think given what we're observing in financial markets, the run-up in treasury yields and the decline in the value of the dollar is already being questioned. And I do think the longer this goes on, the more that the global investors are going to ask that question and the higher the interest rate we are ultimately going to pay, which will do significant long-term economic damage. So you can construct some very dark scenarios, but it really does depend on what the administration decides to do or not do here in a relatively short order of time, which is obviously a very, very uncomfortable place to be. We're relying on the decisioning of the administration and determining how dark the outlook is going to be at this point.

Mark, let me jump in with a follow-up question on that. Thanks, John. That was another good one. The impact of the dark scenario, lack of an off-ramp scenario for a moment. On the other countries would also suggest that they are highly incentivized to help us with an off-ramp, right? I mean from a negotiating perspective, the U.S. has something like 11% of our GDP tied to exports, which most people don't realize. We export a lot in -- especially in services, we're definitely an exporter of services, but even in goods, 11% of our GDP is tied to exports, which means this is really, really important. But for many of our trading partners, the scale and the impact of the worst-case scenario would be as big, if not bigger. Therefore, it would suggest that they would definitely come to the table in an off-ramp scenario. Would you agree with that? Am I thinking about the right way?

I don't know, Hessam. I mean I've had -- if I had conversations with the Canadian, EU and Japanese officials and the debate they are having is a reasonable one. They're saying, look, if we give in now, what's going to stop the administration from coming back later and asking for something else. It is a classic kind of position that they're taking. Now you've got people, strong voices saying, look, we just need to cut a deal going to your point, this is going to be tremendous [indiscernible], let's just get this behind us and move forward. But you've got other voices saying, look, this isn't a one-and-done thing. This could be many, many things, given the way the administration is operating here. So we've got to stand up, and that's the decision, that's the way the Chinese have gone. So I don't know whether that's the case or not. And that's why I would carefully consider the downside scenarios here because those are probabilities that are less than the baseline, the off-ramp scenario, but not inconsequential probabilities.

Jeff, let's assume for a moment, let's go back to the off-ramp, which I personally believe is the most likely outcome. Given the posturing that's already happened and the adjustments and the backing off that's already happened and the 90-day reprieve that's already happened. And the exemptions even with China that have already happened. Those all point to an off-rent to me. Let's assume the off-ramp scenario takes hold, how do you envision being so plugged into Washington that we can also message a level of finality. So Mark's point about, gee, is the U.S. going to change its mind and come back for another round of tariff discussions a year from now, 2 years from now. How do you see that playing out in terms of -- once this is all done, the off-ramp has been created. How do we give that message of certainty to our trading partners? Yes.

Look, people have been complaining about the federal deficit for years and done nothing really. And now it's a greater problem. And people say, oh, we really have to do something about it. On the trade imbalances and trade problems, it's kind of the same situation. This problem is out there. And at some point, I think there are a lot of people believe that these imbalances need to be addressed and that the pain will be quite acute for a relatively short period of time, whatever that means. So I just wonder, again, people have been talking about the deficits and not done anything, and now it's reaching -- starting to reach a crisis. The trade imbalance has been out there and it's starting to reach a crisis. And so I don't know that if there is an off-ramp, whether the basic problem will go away long term. And I think that it needs to be addressed. Same on the deficit. And some people would say on this deficit question, well, Jeff, you're talking about the 2017 tax bill being extended, doesn't that cost revenue and won't that increase the deficit. And in some ways, I suppose it will, but that's politics and so forth, and a lot of people will probably be mad at the result because it will increase the deficit but that's politics here. I guess, the one happy note, if there is a happy note on all of this is, it seems like the House and the Senate have agreed on a budget resolution and a path forward to deal with these expiring tax provision and also a path forward on dealing with the debt ceiling which is historically a difficult thing to increase. But in the current environment would be very, very difficult to increase on a one-off basis. And so this budget resolution and the cloak of budget reconciliation gives protection to the debt ceiling vote and allows people to vote for something that they might otherwise not vote for, and we can't have the cataclysmic event of defaulting on our national debt. So that I'm hopeful will get done. And the tax bill, I think, will get done, and I think it will get done probably later than the administration says, which they think will be done late this spring or early summer, I think it will be late summer, early fall, certainly before the end of our nation's fiscal year, which is September 30. So we've got a short period of time to see a lot of action and a lot of action that will impact our economy and maybe it will be short-term impact would be longer term. But I'm optimistic long term that we can get over all of these problems move forward.

Thanks, Jeff. In closing, let me first thank both yourself and Mark for joining us, but I want to close on going back to our business, the foundation of commercial real estate, the fundamentals of every product type, looking as healthy as they are and the fact that the likely scenario of an off-ramp should result in a pullback in the near term but not a major recession and then outsized growth on the other end of it, coupled with the tax package and coupled with deregulation, should those come together, which appears to be the highest probability outcome even in the darkest day. I mean the market is definitely reacting to whatever breaking news spooked to everybody today, really fosters that attitude of entrepreneurism that I picked up at your meeting, Jeff, with half the room saying, we're not hesitating at all, we're not pausing at all. If we're getting a reasonable price on an asset that we're pursuing, we're moving forward. And the scarcity premium of inventory on the market is another very important factor in the way that we're advising our clients in terms of the timing of bringing inventory to market because of the record capital that is now looking to get back into the marketplace. And so it is, of course, market by market, asset by asset, but I want to thank everyone for joining the session with us today. Mark and Jeff, as always, you bring real-time wisdom to our clients. We take a lot of pride throughout our Marcus & Millichap team, our institutional property advisers team, especially set up to help institutions with their decision-making, our MMCC Finance, professionals across the North America markets. And of course, our support personnel management, myself included, we're all here to help you navigate what is right for you. That is an almost 55-year tradition at Marcus & Millichap. We're very proud of it. And we look forward to future sessions. And please never hesitate to let us know how we can be of help.

Hessam, if I could just add. These are very valuable, and your slides and presentation and the discussion is incredible, and it's very hard to read ahead when we're dealing in such an uncertain and different players doing different things. But it's very important to have these dialogues. Thank you for including me in this. And Mark was fantastic. Thank you so much.

Thank you, Jeff. Most kind. Thanks, everyone, and the session is adjourned.