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Marcus & Millichap: Weakening Headwinds Present An Attractive Growth Opportunity

April 11, 2023


  • Aggressive federal tightening has significantly disrupted the commercial real estate market and created a dislocation between valuation and price, reducing sales volumes.
  • Despite this, Marcus & Millichap has posted record revenues; indicating that as rate hikes begin to slow, they can further capitalise on their private client market for sustainable growth.
  • Strength in financial position and health reflects high efficiency at utilising its other business arms to responsibly finance initiatives, unlocking greater cashflow and investment potential.
  • Several operational efficiency ratios highlight Marcus & Millichap to be one of the most competitive firms in the sector, allowing for capitalization on market share upon cycle reversal.
  • An independent DCF analysis reveals a potential margin of safety of around 14% from current levels, demonstrating a reasonable level of value at current prices.

Investment Thesis

Marcus & Millichap (NYSE:MMI) may currently present an attractive value buy, as we believe it is poised to capture a greater market share on the brink of a cycle turnaround. Continued strength in fundamentals despite recent economic volatility indicates that weakening headwinds may release MMI towards a new all-time high within the next 3 years.

FED Induced Dislocation

MMI are a brokerage firm operating throughout the United States and Canada, with specific business areas focused on commercial real estate (CRE) investment, financing, research and advisory services. The share price of MMI is down 43% over the last 12 months at the time of writing, as a result of declining commercial property sales volume in the face of interest rate volatility.

Aggressive financial tightening from the federal reserve has been a constant throughout recent memory, in an attempt to wrestle with inflation. The pace at which interest rate hikes have occurred has shocked several markets, particularly disrupting those revolving around finance. This is a theme further evident in the recent banking system crisis.

One variable which requires particular thought when considering the CRE sector is mortgage performance, many banks possess CRE on their balance sheets, which poses a threat amidst recent disruption. Short term lease renewals and refinancing on maturing loans are very real concerns.

Weakening Headwinds

Moving forwards, it seems increasingly likely that financial sectors will remain directionless and reactive for the remaining half of the year as markets absorb the dislocation experienced and lenders remain cautious. MMI will likely remain crab like in this period as price discovery is unlikely.

Ultimately, recessionary fears will dominate investor sentiment in the short term; however, many have suggested an economic slowdown is more likely, including MMI CEO Hessam Nadji in a recent interview with Yahoo Finance Live. Hessam argues that employment and consumer markets appear strong, which should generate further clarity on the likelihood of recession in the months to come.

In light of this, the most recent interest rate rise of 0.25% can be seen as the beginning of the end of the fed's tightening, as the rise was expected to be consistent with others at 0.5%. This is a clear indication that macroeconomic headwinds are weakening, which will allow investors to turn their attention to finely recalibrating their commercial investment valuations.

MMI will look towards its unique private client market, highly fragmented in its nature, to offer a swift recovery through the heightened transaction volumes and greater commissions on offer. 


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