Marcus & Millichap, Inc. Stock

Thank you. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Jacques Cornet. Thank you.

Thank you, Operator. Good morning, and welcome to Marcus and Milachap's second quarter 2026 earnings conference call. With us today are President and Chief Executive Officer, Hassam Najee, and Chief Financial Officer, Steve DiGennaro. Before I turn the call over to management, please remember that our prepared remarks and the responses to questions may contain forward-looking statements. words such as may, will, expect, believe, estimate, anticipate, goal, variations of these words and similar expressions are intended to identify forward-looking statements. Actual results can differ materially from those implied by such forward-looking statements due to a variety of factors, including but not limited to general economic conditions and commercial real estate conditions, the company's ability to retain and attract transactional professionals, the the company's ability to retain its business philosophy and partnership culture amid competitive pressures, the company's ability to integrate new agents and sustain its growth. factors discussed in the company's public filings including its annual report on form 10 K filed with the Securities and Exchange Commission on February 26 2026 Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can make no assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events, or future events. or otherwise. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release, which was issued this morning and is available on the company's website, includes a reconciliation to the appropriate gap measures and explains why the company believes such non-gap measures are useful to investors.

This conference call is being webcast. The webcast link is available on the investor relations section of the company's website at www.marcusmillichap.com along with the slide presentation you may reference during the prepared remarks. With that, it's my pleasure to turn the call over to CEO, Hossam Najee.

Thank you, Jacques. On behalf of the entire Marcus and Millichap team, good morning and welcome to our second quarter 2026 earnings call. I'm pleased to report that MMI had a strong second quarter, continuing the momentum from the first quarter and delivering the company's best first half since 2022. Total revenue increased 18% in the second quarter, with all business segments registering growth. Brokerage revenue for the quarter grew 18% year-over-year, and our financing business was up 15% as the company's recovery broadened. Private client and middle market brokerage segments posted more than 13% revenue growth, while larger transaction revenue jumped 43%. Over the last two years, private, client, and larger transactions moved at different trajectories due to a variety of factors. In the first half of 2026, however, the company achieved solid growth across the board for the first time since the market disruption began.

This is driven by our team's persistent client outreach finally resulting in more transactions as values adjust and healthier lender balance sheets foster more financing options across the full price spectrum. I'm also pleased to report significant progress in MMI's profitability in the quarter. During the market disruption, we remained committed to strengthening the company's leading brand, attracting and retaining top talent, and enhancing the infrastructure that supports growth. This strategy pressured our near-term earnings largely due to the expensing of these investments, but it allowed us to keep strategic initiatives on track and maintain a high level of producer support when it mattered the most. Maximizing revenue growth per producer, positioning the company for market share gains, and gaining operating leverage in the recovery continue to guide our strategy. With this backdrop, net income for the quarter came in at $4 million, while adjusted EBITDA improved to $12 million. will elaborate on more details. We view this as a critical stepping stone toward more ambitious margin improvements as a a better functioning market environment enables revenue growth.

Looking at various revenue drivers, their largest contribution to the top-line results came from our private client brokerage business. Microcap multifamily and single-tenant retail deals continue to show improvement in trading volumes as significant price adjustments recalibrate to higher interest rates and as more banks and credit unions re-engage in the marketplace. In the last 12 months, revenue from private client multifamily and single-tenant retail grew 19% and 16% respectively. On the larger deal segment, major investors and institutions became highly selective last year after the initial wave of institutional capital returned to the market in 2024. Institutional investors are opting to pay a premium for top-tier assets in top-tier markets, widening the gap with older and lower-quality assets. Further price adjustments and the rising tide of loan maturities have driven increased activity in larger asset sales this year. Operating challenges in many markets and among many property types have also been the catalyst for inventory coming to market at more realistic prices.

Our financing business delivered another strong quarter with revenue up 15% on top of the 43.5% growth registered in the second quarter of 2025. Our expansion strategy into IPA capital markets, progress on expanding agency financing, investments in technology, and lender relationships continue to drive growth. MMI has become Freddie Mac and Fannie Mae's largest non-direct multifamily debt originator through our partnership with M&T Bank. expect further expansion in our financing business as we emphasize collaboration between our sales and financing teams, evaluate strategic acquisitions, and add to the roster of experienced originators. IPA Capital Markets in particular continues its expansion with highly experienced originators added this year. Refinancing has picked up meaningfully during the quarter, accounting for 47% of revenue compared to 39% a year ago, as more owners were able to secure new loans in an improving environment. Lastly, on our financing, the team closed with 207 separate lenders during the quarter and 304 lenders for the first half of the year, illustrating our market-leading reach into a vast network of capital sources for MMI's clients as a key part of the team's success. strategic advantage. Turning to our sales force, we ended the quarter with 1,575 investment sales professionals, up modestly on a year-over-year basis.

As a As we've discussed previously, the first quarter is typically our highest attrition period In addition, quarter-to-quarter variability is primarily due to our tightened performance standards, leading to faster separation from underperforming agents and trainees. Our headcount composition and quarterly numbers also reflect an intentional shift toward heavier reliance on our expanded internship and fellowship programs as primary sources of the company's organic growth strategy. These channels are a slower path to nominal headcount growth. However, recent enhancements are starting to show higher productivity and higher retention rates among this cadre. At the same time, our focus on recruiting experienced professionals and teams remains on track with meaningful gains so far this year. Looking ahead at the broader market, we continue to see a balancing act between lingering uncertainty and higher interest rates on one hand, and more motivation among sellers to move forward the transactions on the other. Enter 2026, expecting rate reductions by the Fed.

But the debate has since shifted to the degree and timing of potential rate hikes due to the Middle East war, its impact on energy prices, and resurging inflation. The 10-year Treasury yield is 50 basis points higher than the start of the year and 70 basis points higher than the low point prior to the start of the military conflict in February. As I've shared on previous calls, interest rate volatility challenges deal underwriting, marketing, making it more difficult to keep buyers, sellers, and lenders aligned, and and getting deals across the finish line. As a result, we continue to experience extended transaction timelines. Our team is leveraging ample liquidity in the market with investors eager to act on realistically priced assets, particularly when there is a discount to replacement cost for buyers. Many transactions that could not be brought together previously are now starting to work as bid-ask spreads narrow and net proceeds for borrowers improve thanks to more accommodating lenders. We believe this dynamic, combined with improving property fundamentals across most property types, supports the market's positive long-term trajectory, even as the recovery in the transaction cycle remains somewhat choppy.

We're encouraged by early stage dialogue with some acquisition targets, particularly on the financing side, which have emerged as the market improves. MMI is ideally positioned to sustain our strong balance sheet, as well as our strategy to return capital to shareholders, while maintaining a high level of liquidity for strategic acquisition. With that, I will turn the call over to Steve for more details on our financial results. Steve?.

Thank you, Assam. Total revenue for the second quarter was $203 million, an increase of 18% compared to $172 million in the second quarter of last year. For the six-month period, total revenue was $374 million, also an increase of 18% compared to $317 million a year ago. Breaking down revenue by segment, real estate brokerage commissions were $167 million for the quarter, an increase of 18% year-over-year, and accounted for 82% of total revenue. We completed 1,530 brokerage transactions for total volume of $10 billion, representing increases of 11% and 18%, respectively, compared to the second quarter of 2025. the six-month period, brokerage commissions were $305 million, an increase of 15% compared to the prior year. Within brokerage, our core private client market business grew 14% year-over-year to $106 million. Our middle market business grew 13% to $22 million, and our larger transaction segment, covering deals above $20 million, grew 43% to $33. This is the strongest growth we've seen in this segment since the fourth quarter of 2024, following an extended period of institutional softness.

Revenue from our financing business was $30 million in the second quarter, an increase of 15% compared to $26 million in the prior year quarter, driven by a 17% increase in transaction count to 480 loans and a 5% increase in dollar volume to $4 billion. For the six-month period, financing revenue was $57 million, an increase of 29 percent compared to the prior year. Other revenue was $6 million in the quarter compared to $5 million in the second quarter of last year. For the six-month period, other revenue totaled $12 million compared to $8 million a year ago. Turning to expenses, total operating expense for the quarter was $201 million compared to $181 million a year ago. Cost of services was $127 million, or 62.4% of revenue, an increase of 50 basis points compared to the same period last year, reflecting higher commissions earned by our more senior investment sales and financing professionals. For the six-month period, cost of services was 61.5% of revenue, up 10 basis points year over year.

Selling general and administrative expense was $72 million for the quarter, virtually flat on a dollar basis with a second quarter of 2025. As a percentage of revenue, SG&A for the quarter was 35% compared to 42% in the prior year, reflecting positive operating leverage. the six-month period, SG&A totaled $143 million, slightly below the prior year. Net income for the quarter was $4 million or 10 cents per share compared to a net loss of $11 million or 28 cents per share in the prior year. Adjusted EBITDA was $12 million compared to $1.5 million a year ago. For the six-month period, earnings were $0.02 per share compared to a net loss of $0.40 per share in the prior year, and adjusted EBITDA was $15 million year-to-date compared to a loss of $7 million in the same period last year. Together, these results reflect a notable improvement in the business year-over-year. Our effective tax rate for the quarter was approximately 38% compared to negative 195% in the second quarter of last year.

As a reminder, our tax rate may fluctuate from quarter to quarter as we continue our recovery towards higher profitability. Moving to the balance sheet, we ended the quarter with $345 million in cash, cash equivalents, and marketable securities, up from $335 million at the end of Q1 and up from $333 million at the end of Q2 last year. The increase reflects continued operating cash generation and is inclusive of the semiannual dividend paid in April, as well as share repurchases. As part of our ongoing efforts to create value and return capital to shareholders, in the quarter, we repurchased approximately 913,000 shares of common stock for a total of $24 million at an average price of $26.22 per share. Since the program's inception in 2022, we have repurchased approximately 4 million shares for a total of $120 million. During the quarter, our Board of Directors approved an additional share repurchase authorization, bringing our remaining program authorization to approximately $90 million. Last week, the Board also declared a semiannual dividend of 25 cents per share payable on October 6, 2026 to shareholders of record as of September 15, 2026.

Between dividends and share repurchases over the last four years, we have returned more than $251 million. million of capital to shareholders. Looking ahead, we entered the third quarter with modest year-over-year growth in our pipeline due to the latest period of interest rate volatility. That said, we are encouraged by increased motivation to sell, improved liquidity in the market, and more realistic price expectations. Cost of services as a percentage of revenue in the third quarter is expected to follow the usual pattern as revenue builds through the year and be sequentially higher than the second quarter. On a dollar basis, SG&A is expected to increase modestly over the second quarter. Income tax expense should be in the range of $1.5 million to $2 million. In summary, the second quarter reflected broad-based improvement across our platform, balanced growth between brokerage and financing, a return to growth in our larger transaction business, and continued discipline on cost.

We remain confident in the long-term recovery of the commercial real estate transaction market and in our ability to capture a growing share of that opportunity.

With that, Operator, we can now open the call for Q&A. if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. moment please while we poll for questions. Thank you. Our first question is from Mitch Germain with Citizens Bank.

Great, thanks Hassan, your secret sauce has been the ability to tap into that private client network, you know, sourcing deals out of state and using your desk platform to be able to connect your clients to deals. Are you seeing any competition? or competitive pressures when it comes to your ability to tap into those customers?.

Good morning, Mitch. Great to connect with you. Nothing unusual. We have the usual competitive forces, predominantly local, small firms, and maybe some regional boutiques. Some of our larger competitors do a modest amount of private client transactions, predominantly in the industrial sector. And we're not seeing anything unusual. The retention and recruiting competitiveness has always been there and it remains. What's interesting is that we are able to attract more semi-experienced professionals from a lot of the boutiques and regional firms in the past several quarters because they're starting to see the benefits of being with a larger platform as the market improves. And we've had some successes there.

Therefore, there's a little bit more focus on that between our recruiting department and our local market leaders. And one of the, interesting trends that I can share is that even semi experienced brokers that come into the Marcus and Milchap network, uh, really give us the feedback that going through our training program and being put through what our inexperienced hires go through really makes a visible difference in their performance and the way they go about the business. So the training systems and support systems that we've had for years and we continue to refine every single day seem to be getting recognized as one of the key advantages, even from semi-experienced brokers from these local firms and boutiques.

That's super helpful. It seems like number of professionals, I think it's about a 50-person increase. year over year. I'm curious to some, you know, what is the breakdown? You talked about the semi-annual professionals that have some kind of seasoning already. But if I think about that increase in the number of professionals from kind of year over year, kind of how much of that is new and how much of that are individuals coming in with the program?.

with some knowledge and capabilities? Generally, Mitch, somewhere around 25% of our hires are coming in with some experience. That number is increasing because of the fact that we're actually slowing down our top of the funnel, traditional inexperienced individual recruiting as I mentioned in my comments, we're shifting a lot more aggressively toward our internship program, which we've expanded over the last couple of years. and have also added some new generation candidate testing and screening systems that are slowing down the nominal number of people coming in through the top of the funnel, but improving the quality. We're also relying more heavily on our fellowship program, Both the fellowship program and the internship program that have been enhanced over the last, let's say three years, are starting to show meaningful advantages as they graduate individuals and those individuals come back and join us. as it is reflected in their productivity and their speed to becoming productive agents. So we're really encouraged by all that. And again, this arena of being able to attract semi-experienced brokers, is also gaining traction. I wouldn't put too much on the percent of the net increase being experienced or not, only because there is going to be some noise in our net hiring sort of reported data because of all these changes that we're implementing to improve our organic growth part of the strategy. Let me also reiterate, Mitch, that the efforts to bring in very experienced individuals and teams has not slowed down at all. a parallel track of our recruiting strategy, which has worked incredibly well over the last five years, especially when it comes to our finance division.

We started an IPA Capital Markets pretty much from scratch about five years ago. that has become one of the largest contributors to our financing business growth and highly successful in that arena those those experienced loan originators that are coming into the system, whether they had their own boutique firms in a couple of instances that we acquired or were at other brands or independent originators, are really finding the ability to collaborate with our sales force and kind of be a member of the broader markets and no-chat network. and the benefits of getting referrals and leads and being able to do joint pitches has also been identified as a major advantage.

Yes, Mitch, to add to that, I'm sorry, Mitch, to add to that, directionally, you'll start seeing the the benefits of these various programs in our number of transactions per agent, which during at least year to date were up 9-10% on that metric. So we'll start slowly seeing an increase as a result of these three tracks.

Great. Last one, Steve, while I have you, just a clarification. It's not in 13,000 shares acquired or bought back year to date, not in the quarter, correct? That is correct. That is correct. Okay.

Great. Thanks, guys. Thanks, Mitch. Our next question is from Blaine Heck with Wells Fargo.

Great, thanks. Good morning, guys. Can you guys talk a little bit about any other potential business lines that you might be interested in exploring at this point, whether that be maybe on the leasing side or property management or anything else that might have given some of your peers a bit more of diversification or stabilization of revenue during times of volatility?.

in the transaction market is that something you guys are looking into at all good morning Blaine the answer is yes and also let me elaborate that the diversification and having more stable revenue streams of course is very important but we view the synergies of various other businesses with our core business as importantly and to some extent maybe more importantly in that we believe for example the expansion of our current leasing capabilities and footprint can be one of the most effective and largest needle-moving ways that the can leverage his existing brand infrastructure and essentially boots on the ground to ramp up additional revenue from a new business line in markets where we don't have leasing, But as importantly, for whatever additional leasing professionals we would bring in to collaborate with our investment sales brokers and essentially deliver a more well-rounded overall service to the same client. as one of the most exciting expansion opportunities, particularly for multi-tenant retail and industrial, where we have a great market share, especially on the retail side, we're leading brokerage firm by a number of deals and by volume. but there is so much more potential growth within multi-tenant retail and and within industrial where we have a much smaller presence currently. So those have really been a priority in terms of ways that we can enhance the current value proposition, build up the current market share gains in our private client business, in our investment brokerage core business, but at the same time, add a, a very logical additional revenue contributor and being able to leverage expenses of having the footprint and management capacity, offices and so on and so forth. The other really important arena for us is to keep expanding our finance division. And if you look at our success with M&T Bank and the way that we've been able to achieve much more stable financing in the institutional arena, especially in our IPA multifamily division, Having built up the finance and debt placement capacity in that niche has really felt served the company well particularly in the capture rate of being able to finance our own brokerage transactions. That's probably the most important bright spot. Therefore, we now have even more confidence and conviction that scaling that capability can be a significant contributor to revenue and profits, but also, to your point, diversification. Other business lines we've been interested in for quite a while. are appraisal and consultation.

That industry is going through lots of change, of course, with AI and technology. Nonetheless, we really believe that the core need for an MAI endorsed appraisal, both for internal purposes and as related to transaction related appraisal, is here to stay the process of getting to those appraisals is dramatically changing so we have an eye out for tech enabled appraisal and consultation groups that we might be able to acquire and then scale around we've had a few conversations around that particular in a particular space in an M&A realm. And investment management has been another an arena where we believe there are significant synergies within our existing brokerage and financing business and All of this, by the way, wrapped around the private client market and especially the middle quasi-institutional market, where a lot of our larger competitors are, for the most part, predominantly focused on uber institutional and very large transactions. where IPA competes very effectively, but essentially one or two levels below that by price point is a greatly underserved and very fragmented market. And that comment relates to leasing, it relates to appraisals, it relates to investment management. And because of that, we believe we've got a lot of run-overs for creating external growth revenue and profit contribution channels.

if you kind of look at all of those things that I just summarized. Great. Thanks, Sam. That's really great to hear, and I look forward to updates on those initiatives. I guess just to follow up, what percentage of NOI revenue do you think those business lines, leasing and financing in particular, but appraisal, investment management as well, what do you think those could potentially end up contributing to overall operations?.

You know, I'm not really trying to back into a predetermined percent of revenue in the way that we're exploring and actively talking to folks about revenue. bringing them on board or initiating an entry or expansion into some of these concepts. But it's fair to say that over the next five to seven years, a significant amount of our nominal growth and of course, degree of diversification is going to come from these channels that I just summarized. But that also, Blaine, gives me an opportunity to reiterate that Marcus and Millichap is essentially committed to being the premier brokerage and finance intermediary for the commercial real estate industry. Many of our competitors have stated that they view the transaction market because of its volatility and understandably so as an arena where they don't want to invest. And therefore, they're really focusing on other activities and other businesses. And we wish them well and hope that works for them. We are not abandoning. the core reason the company exists, which is to create value for buyers and sellers and to have long-term relationships with hopefully someday 100% of every owner of commercial assets in the United States and Canada.

However, we see lots of opportunities to do a better job in our core business and gain more share while adding these synergistic services. It's not a one or the other kind of a choice. It is an integrated choice reinforcing who we know we are and we want to be even bigger.

Great. That's really helpful. Maybe switching over to the cost side, you guys have talked about a focus on increasing profitability through cost controls, and you've discussed the investment that you made in technology and recruiting over the past few years. I Is that the main area of savings you see as you look forward? When should we expect to see that incremental margin improvement fully online? just any guidelines for trends and margins you guys can provide, especially related to the cost side, would be really helpful.

Yes, Blaine, this is Steve. all themes getting to increased profitability. And that comes from two aspects. One, is certain level investment that we're making in infrastructure and cost of running the business. And as we look at last year's revenue, $755 million got us to essentially break even. So revenue growth above that level certainly creates operating leverage. We're seeing that here as we, you know, particularly here in Q2. So you've got top line growth, obviously, that will create efficiency and leverage.

And then on the cost side, investments in our infrastructure that includes increase and improve workflows, processes, create efficiency, whether that's with AI or just applications and and tools but we're doing a a lot more in the area of data capture to improve productivity, whether it's in underwriting, whether it's in, you know, how we, you know, down to how we close the books. how proposals get done, how BORs get done, get done as well. So there's two aspects. There's the cost containment, making smart investments, but then there's the leverage generated by improved revenue at these levels and above.

Glenn, the only thing I'll add is that one of our focuses is to redeploy current costs to new areas, where as we evaluate the firm, all the time, but formally twice a year at midpoint, mid-year and year-end for our budgeting purposes. And really you have a zero base budgeting process and re-examine everything every year, we're looking at ways to take the current cost structure and focus more of the capital on client-facing, lead generating, and innovations around marketing that enables the individual to producer to do what they do quicker and better and for the company to contribute more attribution to revenue growth. And that's another important aspect of our cost-related strategy. And as we've looked at the company every time, there's always room for tightening, there's always room for making sure there's no waste or duplication of effort. But in general, we've been pretty disciplined in making sure the costs don't basically get a life of their own or become, you know, runaway on a year-over-year basis because it's easy to react to a recovering market as transaction velocity is picking up and the average agent feels like they need another analyst, an office feels like they need one or two more graphic production folks, it's very important to use this period of a market recovery to also be rethinking about the model in which we provide the support at a lower cost. at the same time. So you're not just essentially throwing more bodies and dollars at a recovering market.

Okay, great. That's all really helpful. Maybe just putting it all together, and I'm sure this is an impossible question to answer, but you guys have shown solid improvement in revenue, NOI, and EBITDA this year. But EBITDA levels are still materially off the peak levels of $150 to $200 million. We saw them in 2021 and 2022. understanding that those were uniquely positive environments, do you feel like those levels are even achievable or repeatable or stabilized or kind of optimal, even somewhere lower than that? And do you have any sense of kind of how long it might take to get back to, whatever that stabilized level is, excluding any major kind of needle moving transactions.

We absolutely have conviction that we will return to very exciting profitability levels and much better operating margins. The composition of how we get there from an expense allocation perspective is changing rapidly. If you look at the industry, Blaine, and look at Marcus Milchak. cost structure, a very large portion of our expenses that show up on EPS every quarter are non-cash expenses related to the expensing of investments we've made predominantly on talent acquisition and retention. That is by far the largest cost increase if you look at MMI in 2025 versus say 2018 or 2019 pre-pandemic. That's a reflection of how the industry has become much more competitive. And we've been right there to compete. The timing of that investment, of course, coincided with an incredibly high level of volatility in the market from the pandemic on, in that the last three years, the talent retained and acquired has not been in a normal operating environment where they can essentially produce what they're capable of producing. 100% based on a mechanical market breakdown because of the interest rate shock and everything else that we've talked about.

Therefore, as the market improves and becomes more functional, the leveraging of expenses on the revenue growth side of it will really start to make a material difference as Steve just mentioned. So, it's really important for us to take a look at where the expense increases and are occurring and is there an ROI for every line item that increases the company's cost structure? So that's one element that will be different because the composition of our P&L has changed in the last five to seven years. Therefore, the focus on revenue per agent, the focus on ROI per expense category becomes really important on how fast we can get to that $150 million pre-tax level that you're reaching. calling, and whether it takes the same amount of revenue to generate that pre-tax income, or we have to think about different ways to get to that profitability by adding other revenue streams because it is costing more to be competitive in the investment brokerage arena, which is absolutely the case.

as you well know. Thanks, Hassan. Appreciate the thoughtful answers.

Thank you, Blaine. Thank you. There are no further questions at this time. I would like to hand the floor back over to Hesam Najee for any closing remarks.

Thank you, Operator, and thank you for joining our second quarter earnings call. We look forward to seeing a lot of you on the road.

have you back on our next call. The session is adjourned. This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Greetings, and welcome to the Marcus & Millichap First Quarter 2026 Financial Results Conference Call. [Operator Instructions] And as a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Jacques Cornet. Thank you. You may begin.

Thank you, operator. Good morning, and welcome to Marcus & Millichap's First Quarter 2026 Earnings Conference Call. With us today are President and Chief Executive Officer, Hessam Nadji; and Chief Financial Officer, Steve DeGennaro. Before I turn the call over to management, please remember that our prepared remarks and the responses to questions may contain forward-looking statements. Words such as may, will, expect, believe, estimate, anticipate, goal and variations of these words and similar expressions are intended to identify forward-looking statements.

Actual results can differ materially from those implied by such forward-looking statements due to a variety of factors, including, but not limited to, general economic conditions and commercial real estate market conditions, the company's ability to retain and attract transactional professionals, the company's ability to retain its business philosophy and partnership culture amid competitive pressures, company's ability to integrate new agents and sustain its growth and other factors discussed in the company's filings, including its Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2026.

Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can make no assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, certain financial information presented on this call represents non-GAAP financial measures.

The company's earnings release, which was issued this morning and is available on the company's website, represents a reconciliation to the appropriate GAAP measures and explains why the company believes such non-GAAP measures are useful to investors. This conference call is being webcast. The webcast link is available on the Investor Relations section of the company's website at www.marcusmillichap.com, along with the slide presentation you may reference during the prepared remarks.

With that, it's my pleasure to turn the call over to CEO, Hessam Nadji.

Thank you, Jacques. On behalf of the entire Marcus & Millichap team, good morning, everybody, and welcome to our first quarter 2026 earnings call. We're pleased to report a strong start to the year with revenue growth of 18% over the first quarter of 2025. This reflects improving market conditions, a more robust recovery in our private client business and further momentum in our financing division.

Building on last year's fourth quarter, our strong start is also driven by 2-plus years of persistent client outreach, frequent valuation updates and seller consultations that are now translating into transactions. Brokerage revenue grew nearly 12% year-over-year, while our financing business delivered a stellar 48% increase, demonstrating both the scaling of our capital markets platform and an improving lending environment.

Adjusted EBITDA improved to nearly $3 million from a loss of nearly $9 million a year ago as we start to benefit from expense leveraging with revenue recovery from the prolonged market disruption. MMI completed nearly 1,400 brokerage transactions in the first quarter, a 15% increase. Transactions per agent increased 11%, which we see as a key measure of productivity gains, particularly given the growth in our headcount over the past year.

Improvements were broad with 7 of the 11 property types we service posting brokerage revenue growth for the quarter. Office transactions delivered the largest gains in several years, thanks to significant price resets and an improving space demand driven by a growing return to office mandates. Activity was also strong in multifamily, manufactured housing and single-tenant retail.

Our private client brokerage revenue improved 13% year-over-year and contributed the largest share of incremental brokerage revenue gains in the quarter. The strength was driven by a narrowing bid-ask spread, thanks to more realistic price expectations by sellers and more banks and credit unions returning to the market.

We're seeing broader acceptance by sellers that current interest rate levels represent the new normal, which is forcing more realism on valuations. Small and mid-cap multifamily and single-tenant properties, which were most affected by the interest rate shock and lender constraints are now seeing more transactions following the unusually sharp and prolonged correction we experienced since 2023.

Our larger transaction segment delivered a 25% revenue increase in the quarter, reversing last year's decline. As I shared on our last quarter's call, revenue from our $20 million-plus sales increased by 28% in 2024, clearly leading the recovery. In 2025, this segment faced a very tough comp, while institutions also became more selective and focused primarily on top-tier assets.

During the first quarter, our IPA division, which drives the majority of our larger deals, leveraged a widening buyer pool and increasing appetite across the asset quality spectrum. As a general observation, price adjustments over the last 2 years point to a compelling entry point for investors, especially relative to replacement cost. MMI's financing revenue reached $27 million in the quarter, a 48% increase, while total financing volume grew 60% across nearly 400 finance transactions.

Average deal size increased 36% as we executed larger and more complex transactions. This is a direct result of our successful recruiting and acquisition strategy over the past few years to attract highly experienced originators and finance boutique firms. Given the success in this strategy, we continue to focus on adding origination teams in key regions around the country.

It is also critical to note that MMCC benefits from a deep bench of veteran originators who've been with the firm for many years and continue to thrive as we expand technology, lender relationships and collaboration with our sales brokers. A notable shift this quarter was toward acquisition financing, which accounted for 61% of originations, up from 50% a year ago. This trend is consistent with the rising transaction market, which enables more trades than refinancings and recapitalization.

As lenders feel the pressure to become more competitive, we're seeing various metrics improve, particularly in higher loan-to-value ratios. At the same time, underwriting and sponsor qualification remained tight, still requiring more time and diligence from our originators and investment brokers to execute transactions. Lastly, our finance team used 188 unique lenders in the first quarter to provide our clients with a competitive advantage by leveraging our vast and growing network of qualified capital sources.

Our auction services and loan sales business continue to gain traction and cross-generate referrals with our brokerage and financing teams. Auction revenue nearly doubled year-over-year in the first quarter, while revenue from loan sales and IPA Capital Markets increased 39%. These value-added services are effectively providing alternative marketing and sales channels to investors and lenders with ample growth opportunity ahead.

On headcount, we ended the quarter with 1,621 investment brokers, up 87 from the first quarter of 2025. This includes a larger-than-usual seasonal reduction in sales force during the first quarter due to the proactive termination of 2- to 3-year agents in development who are falling short of key metrics.

We are being more selective in recruiting and exercising tighter monitoring of sales performance for newer agents in their first 18 to 24 months with us. Going forward, more of the company's organic growth strategy will shift towards reliance on our expanded internship program and our fellowship channel, both of which are generating higher-performing agents with more reliable production.

This shift would likely cause some noise in the net hiring data from quarter-to-quarter, but should be a better approach in the long term. Results from the recent expansion of our corporate recruiting team working hand-in-hand with our local market leaders have been encouraging as measured by the screening improvement and improved placements we've seen so far.

We're scaling this further with the recent hiring of an industry veteran recruiter focused entirely on adding experienced talent. The company's technology investments continue to advance across multiple areas of the business, including our Central Support Services. This critical group is referred to as Brokerage Transaction Services or BTS, and provides financial analysis, document generation and marketing tools to support our sales force.

The central theme in our technology strategy is the scalable application of AI to drive efficiency gains throughout all aspects of the brokerage service continuum and various internal functions. While the power of AI applied to a particular brokerage team, a particular geographic market or property type is clearly measurable, our focus is on building scalable AI agents and tools that markedly improve sales force productivity across the firm.

This is a bigger challenge than simply applying AI to a particular practice. Looking forward, we expect commercial real estate fundamentals to remain healthy with more catalysts emerging to drive the rising tide of transactions. Pricing has generally adjusted and continues to recalibrate by asset quality, while new construction is slowing dramatically.

This is especially critical for industrial and multifamily assets, which have seen record new inventory in the last few years. These factors are making the commercial real estate investment case increasingly compelling on a replacement cost basis. More of our clients are accepting that the pricing paradigm has shifted and lenders are facilitating the transition to a new cycle with more competitive terms.

Notwithstanding some cooling of activity around the time of the conflict in the Middle East, our focused sales force, granular client-centric business model and local market expertise should drive growth amid ongoing macro political and economic developments. Our balance sheet remains a competitive advantage with approximately $335 million in cash and no debt.

MMI has achieved the flexibility to invest in our platform, continue to pursue its strategic acquisitions and return capital to shareholders all at the same time. The ability to maintain a strong balance sheet clearly stands out as a catalyst to accelerate growth as the next real estate cycle takes shape.

We see substantial growth opportunity ahead with operating leverage from recent investments and the addition of talented individuals we brought on board over the past several years.

With that, I will turn the call over to Steve for more details on our financial results. Steve?

Thank you, Hassan. Total revenue for the first quarter was $171.5 million, an increase of 18% compared to $145 million in the prior year quarter. This represents the strongest first quarter revenue growth in 4 years. Breaking down revenue by segment, real estate brokerage commissions for the first quarter were $138 million, an increase of 12% year-over-year and accounted for 81% of total revenue.

We completed 1,348 brokerage transactions for total volume of $7.9 billion, representing increases of 15% and 19%, respectively, compared to the first quarter of 2025. Average transaction size was $5.9 million, up 3% from a year ago. Average commission rate was 1.75%, a slight decrease of 11 basis points year-over-year, resulting from a modest mix shift towards larger transactions that carry lower commission rates.

Within brokerage, our core private client market accounted for 64% of brokerage revenue or $88 million in the quarter, an increase of 13% year-over-year. Private client transaction count was up 19% and dollar volume grew 22%, reflecting the broad-based improvement in this core segment and more realistic price expectations by sellers. This compares to $78 million or 63% of brokerage revenue in the first quarter of 2025.

Revenue from middle market transactions was $20 million, 6% lower than prior year, while the larger transaction segment covering deals above $20 million accounted for 18% of brokerage revenue and $25 million, representing a 25% increase year-over-year. Revenue from our financing business was $27 million in the first quarter, an increase of 48% compared to $18 million in the prior year quarter.

This was driven by 60% growth in dollar volume to $3.1 billion across 398 financing transactions, representing an 18% improvement in transaction count. Average transaction size grew 36% to $7.8 million, reflecting our expanding footprint in larger institutional and agency loan originations. The average origination fee rate was modestly lower, consistent with the larger deal mix.

Other revenue, which includes leasing, consulting, advisory and ancillary fees, was $6.5 million in the first quarter compared to $3.3 million in the prior year, an increase of 98%. This change primarily reflects growth in our loan sales and advisory services, consistent with the trend of rising distressed and transitional loan sales. Turning to expense.

Total operating expense for the first quarter was approximately $177 million, an increase of just 9% on 18% revenue growth, reflecting improved operating expense leverage. Cost of services was $104 million or 60.4% of revenue, a favorable improvement of 50 basis points compared to prior year. Selling, general and administrative expense was $71 million, essentially flat compared to the prior year.

In addition to ongoing cost containment, the first quarter's typical expenses were somewhat lower due to the last-minute cancellation of the company's annual sales award trip due to security concerns. As a percentage of revenue, SG&A improved substantially to 42% compared to 49% in the first quarter of 2025, reflecting the operating leverage in our model as revenue scales.

For the first quarter, net loss was $3 million or $0.08 loss per share compared to a net loss of $4 million or $0.11 loss per share in the prior year, an improvement of 30%. On a pretax basis, the loss of $2 million this quarter represents a notable operating improvement from the prior year loss of $14 million. Tax expense for the quarter was $900,000.

As Hessam mentioned, we are pleased to see adjusted EBITDA for the first quarter improving significantly to $3 million compared to negative $9 million in the prior year quarter. This represents more than $11 million of year-over-year improvement and reflects the combination of strong revenue growth, a controlled cost structure and the operating leverage I mentioned.

Moving to the balance sheet. We remain in an exceptionally strong financial position with no debt and $335 million in cash, cash equivalents and marketable securities as of the end of the first quarter. The sequential reduction of approximately $64 million from year-end is typical for a first quarter and primarily reflects current and deferred agent commission payouts, performance-based management compensation and investments in production talent.

A key distinction in the first quarter of 2026, however, is our share repurchase activity, where we repurchased approximately $23 million of our common stock in the quarter at a weighted average price of $26.22 per share. This compares to less than $1 million in share repurchases in the first quarter of last year. Excluding the impact of repurchases, the underlying business consumed significantly less cash this quarter than in either of the prior 2 first quarters, reflecting improved operating cash generation as revenue recovers.

Since inception of our dividend and share repurchase programs, we have returned approximately $251 million in capital to shareholders. As a continuation of our commitment to the return of capital to shareholders, our Board recently approved an additional authorization of $70 million for the share repurchase program, bringing our total available authorization to $90 million.

No time limit has been established for the completion of the program and repurchases will continue to be executed opportunistically through open market purchases and Rule 10b5-1 plans, subject to market conditions and other capital priorities. During the quarter, we declared a semiannual dividend of $0.25 per share or approximately $10 million, which was paid in the first week of April.

Looking ahead, we see several constructive catalysts for continued growth balanced against the near-term macro uncertainty that Hessam described. Second quarter revenue is expected to reflect continued year-over-year improvement, building on Q1 momentum. As always, the sequential increase from Q1 to Q2 reflects normal seasonality with transaction volume typically building as the year progresses.

While we are encouraged by April results, we remain mindful of the geopolitical and macroeconomic variables, which could moderate the pace of activity. Cost of services in the second quarter is expected to remain in the range of 62% to 63.5% of revenue, consistent with revenue building throughout the year.

SG&A in the second quarter should reflect modest year-over-year growth in absolute dollars, driven by continued investment in agent support programs and technology infrastructure, partially offset by our ongoing efficiency initiatives. As for taxes, the effective tax rate remains difficult to predict given the proximity to breakeven profitability.

The rate is driven primarily by the mix of deductible and nondeductible expenses relative to projected annual pretax income and to a certain extent, by the distribution of income between our U.S. and Canadian operations. In the near-term, pretax income and adjusted EBITDA are more meaningful measures of operating performance.

That said, for the second quarter, tax expense is anticipated to be in the range of $500,000 to $1.5 million. In summary, the first quarter demonstrated that the investments we have made over the past several years in talent, technology and the breadth of our platform are translating into measurable financial results.

Strong revenue growth, meaningful improvement in adjusted EBITDA and favorable operating leverage all point to a business model that is scaling effectively as the transaction environment recovers.

Our balance sheet provides us the flexibility to simultaneously invest in growth, return capital to shareholders and pursue strategic opportunities. The combination of financial strength and operational momentum is a defining characteristic of this company.

With that, operator, we can now open the call for questions and answers.

[Operator Instructions] And the first question comes from the line of Mitch Germain with Citizens Bank.

So Hessam, are your customers more immune to rate movements given that it seems to be kind of part of everyday life at this point?

Mitch, no, they're not immune and they're actually very sensitive to it. They have become used to the volatility that you just spoke of over the past 3 years. And the pent-up demand for transactions that have been delayed for the last couple of years is trumping the interest rate volatility effect in my opinion and observations as I travel around the country in that many of them are now convinced that their hopes for a Fed miracle or interest rates drop, at least somewhat close to where we were is not in the making.

And therefore, you can't really count on that to return valuations anywhere close to where we were at peak. Plus there are some operational challenges in some of the markets and product types around the country. There's maturing loans that are still having a hard time being refinanced. And all of that is causing more demand to bring product to market despite the interest rate volatility that we've seen in the last 90 days.

Got you. That's helpful. I think you mentioned 188 unique lenders, if I'm not mistaken, this quarter. I know you probably don't have the number in front of you, but I'm just curious kind of where did that stand, I don't know, maybe 2, 3 years ago? I mean, how has that environment changed?

It certainly has been one of our advantages throughout the cycle and even prior to the Fed rate shock, we were one of the largest providers of access to multiple types of lenders. It did tighten down quite a bit, especially in 2023 and 2024, particularly on the bank and credit union side of the equation, which, of course, is the primary source of private capital financing.

If you remember in 2023, regional banks, in particular, were hit very hard. So options were fewer. But once again, that created an opportunity for us to illustrate our advantage to our clients because we would shop for them so aggressively and enabled that process through a lot of new technology that actually interconnects our 100-plus originators so that within the team, the knowledge of which lender is in the market for type of -- what type of deal and what price point was being shared real-time, and that helped us become a lot more efficient.

I would say that in the last 2 quarters, we've seen a significant improvement in the return of banks and credit unions back into this, if you will, active network of lenders. And there's no question that in '23 and 2024, that number would have been measurably less.

And last one for me. Larger transaction activity, clearly, pretty decent amount of growth this quarter. Was that a function of your hiring or do you think that just the price expectations amongst the sellers have become a bit more reasonable or did both basically contribute to that?

It was contributions from both factors. Predominantly, though, it was transactions that didn't consummate last year because of a pricing gap that finally cleared the market in Q1 and a number of our clients that had been hesitant to bring product to market because the pricing expectation just wasn't going to be met, capitulating to more realistic price expectations.

I would say that the vast majority of what we closed had been in some form of discussion, analysis, valuation between the seller and our IPA teams and the veteran Marcus & Millichap agents who do larger transactions for probably a better part of a year. So that's an indication of the fact that the overall business execution is still taking extra time and our ability to help clients just requires a lot more handholding and nurturing of their internal process for coming up with their strategy and then execution.

That does conclude the question-and-answer session. I would like to turn the floor back over to Hessam Nadji for any closing comments.

Thank you, operator, and our thanks to everyone who attended this call. We look forward to seeing some of you on the road and to having you back for our Q2 earnings call. The session is adjourned.

Thank you, ladies and gentlemen. That does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

Welcome to the Annual Stockholders' Meeting of Marcus & Millichap, which will now come to order. I am George Marcus, Chairman of the Board of Directors. As you know, we are holding a virtual meeting again this year. At this time, please allow me to introduce Hessam Nadji, our CEO and a member of the Board of Directors, who will be presiding over the meeting. Hessam has been CEO since 2016 and a key member of senior management since 1996.

Thank you, George, and good afternoon, everyone. Let me begin by introducing our directors who are all in attendance today, starting with our founder and chairman, George Marcus, of course, Collete English Dixon, Norma Lawrence, Nick McClanahan, Lauralee Martin, George Shaheen and Don Watters. Also present on this call are a number of our company officers and representatives from Ernst & Young, the company's independent accountant.

This afternoon, I will conduct the official business of the 2026 Annual Meeting, including certain formalities that we need to fulfill. I ask that you bear with us as we go through. I will then conclude with a short review of our business. The first order of business is an affidavit from Equiniti, the company's transfer agent, certifying that each stockholder of record as of March 13, 2026, was mailed an official notice of this meeting, together with the proxy statement, proxy card, annual report and other materials necessary to vote. Steve Hoffman has been appointed to serve as Inspector of Elections, responsible for tabulating the results of the voting. Let me now call on Steve.

Thank you, Mr. Nadji. We have examined the proxies received as of this morning and over 91.7% of the shares of common stock entitled to vote at this meeting are represented by proxies.

We have a quorum, and this meeting may now proceed. We will address the matters on the agenda shown on your screen.

The first matter to be voted upon is the election of the Class I members of the Board of Directors. Norma Lawrence and myself have been nominated to serve for a 3-year term expiring at the 2029 Annual Meeting of the Stockholders or until any successors are duly elected and qualified.

The second matter to be voted on concerns the appointment of the company's independent auditors. The Board of Directors has appointed Ernst & Young as the company's independent public accounting firm for the year ending December 31, 2026. Ernst & Young has served as our auditors for many years.

Thirdly, we ask our shareholders, on an advisory basis, to approve the compensation of the company's named executive officers as discussed in the proxy statement. We will now open the meeting to any questions about the 3 matters placed to vote before the shareholders. If you registered with your 11-digit voting control number previously provided and wish to ask questions, you may do so by clicking the Questions box located at the right of your screen. Please type and submit your questions, and we will return in just a few moments.

There are no questions, and we will now proceed to vote on each of these matters. We will be open for further online voting for the next few moments. It is not necessary for stockholders to vote today if they have already sent in their proxy cards, voted electronically or by telephone unless they wish to change their vote. Those stockholders who wish to vote today should have received the required 11-digit control number. If you would like to vote today, please click on the Vote My Shares button located on the right side of the screen and follow the instructions. We will provide additional time for voting and return shortly.

[Voting]

I declare the polls closed. I ask the Inspector of Elections, Steve Hoffman, to present the preliminary results of the voting. Steve?

Upon tabulation of the preliminary votes, Norma Lawrence and Hessam Nadji have been elected as directors until the 2029 Annual Meeting.

Additionally, the appointment of Ernst & Young as the company's independent auditor has also been ratified.

Finally, the stockholders approved, on an advisory basis, the compensation of the company's named executive officers.

Thank you. And congratulations to Norma, and her election -- re-election, I should say, and I am honored to have also been approved as the Director of the Board. I will ask that the report of the Inspector of Election be filed with the secretary. The final results will also be reported in a Form 8-K to be filed with the SEC following this meeting.

I will now provide a brief update on our business. 2025 marked gradual recovery following the severe and prolonged market disruption over the past 3 years. Despite ongoing market headwinds, we achieved revenue growth of 8.5% in 2025 while adjusted EBITDA improved to $25 million, up from $9 million in 2024. For the entire management team, this is a step in the right direction towards our potential and much higher aspirations. The company executed nearly 9,000 transactions totaling more than $50 billion in sales and financing volume, enabling MMI to maintain its #1 investment brokerage ranking by transaction count. Marcus & Millichap's long-standing market leadership reflects the strength of our specialized sales force and long-term client relationships across North America and every property type.

Results improved in the company's private client business, which is incredibly important, which faced an unusual set of pressures from the severe pricing gap and constrained lending since 2023. Prices have finally adjusted to levels that support more transactions, while regional banks and credit unions essential to smaller, lower-priced assets have gradually returned to the market. The decline in larger transactions reflected a difficult comparison to 2024 when our institutional division, IPA, led the initial stages of recovery. Our institutional platform remains well positioned for continued expansion and leveraging our synergies with a unique position that the company has had in accessing private investments.

Revenue from financing grew 23%, driven by the addition of experienced originators over the past few years and our vast network of capital sources. We secured loans from 420 separate lenders on behalf of our clients last year, which enables stronger collaboration between our brokerage and financing teams. 2025 also marked a strong year for growing our sales force, the strongest in 7 years, in fact, which included adding nearly 100 professionals, including experienced teams and individuals with a healthy pipeline of business and additional candidates waiting to be added to our sales force. Our exceptionally strong balance sheet enables ongoing investments in talent, infrastructure expansion, strategic acquisitions and continuation of our capital allocation plan.

The company has returned $217 million to shareholders in the form of dividends and share repurchases since the expansion of our capital allocation plan in 2022, while maintaining a strong cash position and investment to support long-term value creation.

Looking ahead, we remain disciplined in investments in cost management while continuing to focus on productivity across the organization. Our investments in technology, centralized services and data-driven tools, including early applications of AI are beginning to show leverage as the market begins to improve.

In closing, I should note that this marks our 55th anniversary. And the principles that have guided Marcus & Millichap from the very start continue to drive the firm along with our focus on innovation, diversification and excellence in client service. It is now my pleasure to turn the call back over to our founder, George Marcus.

Thank you, Hessam. As always, your presentation was informative, and of your fine leadership is much appreciated by everyone. And now there will be no further business to come before the meeting, and the 2026 Annual Meeting of Stockholders of Marcus & Millichap is now adjourned. That concludes our meeting today. Thank you for your attention and for the shareholders' meeting.

Thank you for joining the meeting today. You may now disconnect.

Greetings, and welcome to Marcus & Millichap's Fourth Quarter and Year-end 2025 Earnings Conference Call. As a reminder, this call is being recorded.

I will now turn the conference over to your host, Jacques Cornet. Thank you. You may begin.

Thank you, operator. Good morning, and welcome to Marcus & Millichap's Fourth Quarter and Year-end 2025 Earnings Conference Call. With us today are President and Chief Executive Officer, Hessam Nadji; and Chief Financial Officer, Steven DeGennaro.

Before I turn the call over to management, please remember that our prepared remarks and the responses to questions may contain forward-looking statements. Words such as may, will, expect, believe, estimate, anticipate, goal and variations of these words and similar expressions are intended to identify forward-looking statements. Actual results can differ materially from those implied by such forward-looking statements due to a variety of factors, including, but not limited to, general economic conditions and commercial real estate market conditions, the company's ability to retain and attract transactional professionals, company's ability to retain its business philosophy and partnership culture amid competitive pressures, the company's ability to integrate new agents and sustain its growth and other factors discussed in the company's public filings, including its annual report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2025.

Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can make no assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release, which was issued this morning and is available on the company's website represents a reconciliation to the appropriate GAAP measures and explains why the company believes such non-GAAP measures are useful to investors. This conference call is being webcast. The webcast link is available on the Investor Relations section of the company's website at www.marcusmillichap.com along with the slide presentation you may reference during the prepared remarks.

With that, it's my pleasure to turn the call over to CEO, Hessam Nadji.

Thank you, Jacques. Good morning, and welcome to our Fourth Quarter and Year-End 2025 Earnings Call. I'm pleased to report MMI's continued recovery from one of the most complex and prolonged market disruptions on record with 2025 revenue growth of 8.5% and adjusted EBITDA improving to $25 million compared to $9 million in 2024. The fourth quarter particularly showed the strength of our resolve and execution as we set out to beat the exceptional 2024 fourth quarter, which had been propelled by a significant drop in interest rates.

Despite entering the fourth quarter of 2025, without the benefit of lower interest rates, I'm proud to report that we beat a tough comp by 2% on the top line and significantly improved profitability. We drove these results through elevated client outreach, tapping our extended lender network, and taking advantage of key market improvements despite the absence of lower interest rates. A larger-than-expected resurrection and closing of deals that had been delayed or canceled early in the quarter, and a lift in urgency among our private clients deciding to take advantage of bonus depreciation by year-end were key factors in the late-stage rally. Although the bonus depreciation provision of the new tax law does not phase out, its advantage became a stronger motivating factor in getting deals closed in the final period of the year.

I'm also pleased to report that 2025 marked the strongest growth in our sales force in 7 years with nearly 100 net additions of brokerage and financing professionals. Various initiatives to combat the unusual pandemic and post pandemic forces that have elevated our new agent dropout rate culminated in this critical return to growth. The additions include a steady cadre of experienced individuals and teams that continue to choose MMI as the ideal platform for taking their career to the next level. We are very encouraged by last year's hiring results and a strong candidate pipeline going into 2026.

Throughout 2025, we maintained our market leadership position by transaction count completing nearly 9,000 transactions totaling over $50 billion in volume. This translates to more than 35 transactions per business day, reinforcing a consistent expansion of client relationships and enabling our team to move capital across markets and property types.

Looking back, 3 key factors impacted our performance in 2025, all of which also bode well for the outlook in 2026. The first, capital markets and investor sentiment improved, particularly in the second half of the year after recovering from the initial shock of Liberation Day. Despite a cautious federal reserve that lowered rates at a much slower pace than anticipated, lender spreads compressed by 75 to 100 basis points and loan-to-value ratios expanded. Many lenders have repaired balance sheets, restructured and are resolved a large portion of maturities and have more capacity as transaction volume has picked up.

Second, momentum in our private client and middle market segments picked up last year as prices finally began to adjust and regional banks and credit unions became more active. MMI's $1 to $20 million transaction count and revenue each grew 12% as we started to reestablish our traditional advantage in these segments. This part of the market not only comprises the vast majority of commercial property stock and transactions, but it is also poised for more activity as a narrowing bid-ask spread releases pent-up supply from sellers who previously were hanging on to assets.

Third, our financing business continues a strong trajectory with revenue up 23% in 2025 after growing 26% in 2024. This solid pace is the result of our expanded cadre of experienced financing professionals and the team's ability to access over 420 separate lenders last year. Our team of nearly 100 finance professionals is interconnected through our proprietary technology, which is integrated with our expansive lender relationships. This tech-enabled combination secures the most optimal financing options available in the marketplace. MMCC and IPA Capital Markets closed over 1,600 transactions for a volume of nearly $12 billion, which includes a $2.3 billion portion placed with Fannie Mae and Freddie Mac primarily through our strategic alliance with [ M&] T Bank.

Agency financing has been one of the fastest-growing segments of our business. Thanks to the talent acquisition and rapidly growing collaboration we have managed to pull off between our finance professionals and our sales teams. The only segment that was off last year was our larger transactions valued at $20 million or more, which declined by 13%. This is primarily driven by a tough comparison to 2024 when our institutional segment led the recovery with a 28% revenue increase, including an 88% surge in the fourth quarter of 2024. Institutional apartment sales, which showed exceptional strength in 2024, eased as the acute flight to safety limited the buyer pool for lower-tier assets and secondary markets.

While our IPA division is well positioned to continue expanding in the institutional arena, some volatility is to be expected as a number of metros grappled with oversupply. The ripple effect of high vacancies, particularly for multifamily in these metros is leading to a rise in underperforming assets that are not yet priced to clear the market.

In summary, we're pleased with the significant improvement in the company's key metrics. However, we are laser-focused on driving further momentum in the pace of recovery and capturing the substantial growth runway ahead of us. We entered 2026 with greater clarity on the path to achieving this, thanks to a largely recalibrated marketplace and our unwavering conviction in our client value proposition.

Building on that strengthening position, we remain disciplined in our approach to strategic investments while maintaining prudent cost controls. The investments we have made over the past several years in talent retention and acquisition, technology infrastructure and branding are beginning to show leverage as the revenue tide turns.

As I've mentioned on previous calls, the expensing of capital investments has been an outsized drag on earnings since the start of the market disruption in 2023, given the hampered revenue production of the past few years. As market conditions and broker productivity improve, so will the production level of the talent pool we have retained and added to over the past several years. As a critical part of our technology strategy to leverage AI and drive efficiency, the company's centralized back office and marketing center called Brokerage Transaction Services or BTS is intensifying its reliance on third-party services at a lower cost, while we also begin to leverage various AI applications to our benefit. These efforts are concentrated in financial analysis, document generation, underwriting and lead scoring.

All of these efforts are showing promising results, but need significant advancements in the AI capacity and the use of historical data mining for accuracy and scalability. We expect and fully embrace the opportunity that AI has opened for massive efficiency in virtually all aspects of property analysis, underwriting client targeting and outreach, an era of higher throughput at a much lower cost is emerging, and our goal is to lead this tremendous productivity gain over time.

However, we do not expect AI to dis-intermediate the function of a value-added broker, given the expertise, building by building nuances and buyer seller relationships that ultimately drive the commercial real estate industry. In our view, the broker of the future will be armed with an array of additional analytics with more efficiency in a way that will help clients create value. At the same time, value-added offerings such as our auction services and loan sales division continued to gain traction, generating direct incremental revenue and increasing sales and financing opportunities through collaboration with our sales force.

Looking ahead, we entered 2026 with greater optimism driven by several positive market fundamentals. Interest rates, while still elevated, have stabilized, which provides a more predictable valuation benchmark. Simply stated, values have to adjust to the new normal in the cost of debt, and they're doing so. The price corrections over the past 3 years, combined with a major pullback in new construction are creating compelling investment opportunities, especially on a replacement cost basis.

Cap rates are up 85 to 110 basis points on average since 2022, and prices are down roughly 20% on average. This, combined with lower all-in interest rates driven largely by lower lender spreads should further bolster investor demand and capital flows in 2026. Despite expectations of a more accommodative federal reserve, inflation pressures and trade-related variables will likely limit the feds ability to significantly lower rates. While the labor market is slowing faster than expected, the incoming Fed Chair will most likely face the same obstacles to lowering rates. Nevertheless, we expect last year's transaction market improvements to continue as time narrows the bid-ask spread and facilitates the sale of many delayed trades.

2026 is a milestone year for all of us at MMI as we celebrate the company's 55-year anniversary. Many aspects of the company's culture that retain and attract the best of the best in brokerage, financing, management and support functions, find their cornerstones in the company's founding principles that still drive us today. These include bringing efficiency and value, liquidity and certainty to an otherwise fragmented market, measuring our success by our clients' results, and creating long-term and rewarding careers for all team members at Marcus & Millichap.

As we mark this important milestone, all eyes are on the future and our quest to lead in an ever-changing industry. Our multi-pronged growth strategy includes expanding our leadership in the private client market, further penetrating the institutional segment through IPA, and accelerating the scaling of our financing, auction, loan sales and client advisory services. Given our disciplined approach to acquisitions, recent attempts to acquire additional financing boutiques, appraisal and valuation firms and complementary adjunct businesses such as investment management and cost aggregation have not yet come to fruition. However, they will in time, as the company is committed to providing an array of additional services that align with our dominance in investment brokerage and financing.

Our ultimate goal is to enhance our offerings to a client base we have come to know extremely well throughout the years. Powering this vision is MMI's still our balance sheet with nearly $400 million in cash reinforcing our ample purchasing power for strategic acquisitions, which we continue to pursue. Most recently, we have engaged in multiple large-scale explorations that would enable us to expand our financing business more rapidly. We're proud to have balanced strong liquidity and purchasing power with a consistent return of capital to shareholders with $47 million provided in dividends and share repurchases executed in 2025. As we look to the future, we are excited about a new real estate cycle and the vast opportunities ahead for expanding our market presence and revenue diversification to enhance long-term value.

And with that, I will turn the call over to Steve for more details on our results. Steve?

Thank you, Hessam. Total revenue for the fourth quarter was $244 million, an increase of 2% compared to $240 million for the same period in the prior year. As Hessam mentioned, year-over-year comparisons in Q4 are against an exceptionally strong fourth quarter last year.

For the full year, total revenue was $755 million, up 8.5% compared to $696 million last year. Breaking down revenue by segment, real estate brokerage commissions for the fourth quarter were $205 million, moderately exceeding last year's tough comp and accounting for 84% of quarterly revenue. We completed 1,902 brokerage transactions with a total volume of $11.8 billion for the quarter. While transaction dollar volume was lower by 4%, transaction deal count was up by more than 9% over last year, and the average commission rate was 1.7%. The relative increase in private client transactions contributed to a 7% decrease in the average fee per transaction given the higher mix of smaller deals.

For the full year 2025, revenue from real estate brokerage commissions was $633 million compared to $590 million last year, an increase of 7%. We completed a total of 6,038 brokerage transactions, up 11%, with total volume of $35 billion, up 3.5% compared to prior year. For the year, average transaction size was $5.8 million compared to $6.2 million in the prior year, reflecting the pickup in private client activity.

Within brokerage for the quarter, our core private client business accounted for 65% of brokerage revenue or $133 million up from 59% and $120 million in the same period last year. Private Client transactions grew 13% in volume and 10% in transaction count. For the full year, Private Client contributed 64% of brokerage revenue or $406 million versus 62% and $366 million, an 11% increase in revenue year-over-year.

For the fourth quarter, middle market and larger transaction segments together accounted for 31% of brokerage revenue at $65 million compared to 38% and $77 million last year. The year-over-year change in revenue is attributed to a decline in transactions and dollar volume in these segments of 8% and 14%, respectively, and is largely a result of fewer large transactions. Large transactions significantly outpaced the market last year, creating a very tough year-on-year comp.

For the full year, Middle Market and Larger Transaction segments combined represented 32% of brokerage revenue or $200 million compared to 34% and $203 million last year. Revenue from our financing business was $33 million during the fourth quarter up 6% year-over-year from $31 million last year. The growth reflects an 8% increase in transaction volume totaling $3.7 billion across 507 financing transactions, which was a [ 19% ] increase year-over-year. The average origination fee was down nominally due to an increase in larger deals closed in the quarter.

For the full year, financing revenue was $104 million, a 23% increase compared to last year. This growth was driven by a 33% rise in transaction count totaling $11.9 billion in volume, a notable increase of 31% year-over-year. Our overall performance reflects the continued momentum and progress and scaling of our finance platform and success in recruiting amended producers over the past several years.

Other revenue, primarily from leasing, consulting and advisory fees was $5 million in the fourth quarter compared to $6 million in the same period last year. For the full year, other revenue totaled $19 million compared to $22 million in the prior year.

Turning now to expenses. Total operating expenses for the fourth quarter were $229 million, a 2% decrease from last year on higher revenue, demonstrating our continued focus on operational efficiency. For the full year, operating expenses were $769 million, up 5.5% over 2024 though lower than our revenue growth rate of 8.5%. Cost of services for the quarter was $155 million or 63.3% of revenue compared to 63.2% last year. For the full year, cost of services totaled $470 million or 62.3% of revenue, up slightly from 62% last year.

SG&A expense for the quarter was $71 million or 29% of revenue compared to $76 million in the same period last year, a decline of 7%. For the full year, SG&A totaled $286 million or 38% of revenue, an improvement compared to 40% of revenue in the prior year. Our ongoing expense discipline is aimed at enhancing operating efficiency and leverage and improving profitability.

For the fourth quarter, net income was $13 million or $0.34 earnings per share. This compares to net income of $8.5 million or $0.22 per share in the prior year, a significant EPS improvement of 55% year-over-year. For the full year, net loss was $1.9 million or $0.05 per share, which, as a reminder, includes an $0.08 per share charge for a legal reserve we took in the third quarter. This compares to a net loss of $12.4 million or $0.32 per share in the prior year. The improvement in operating results in the year marks a meaningful inflection point, signaling renewed momentum across the business.

Regarding the legal matter, we disclosed with Q3 earnings, there is no material update to report, and we remain fully committed to pursuing relief through the appeal process.

Adjusted EBITDA for the fourth quarter was $25 million, up 39% compared to $18 million in the same period last year. Full year adjusted EBITDA was $25 million compared to $9 million in the prior year. Adjusted EBITDA for the full year would have been $4 million higher, if not for the legal reserve recorded in the third quarter which highlights the substantial progress in operating performance over the prior year.

Moving to the balance sheet. We continue to be well capitalized with no debt and $398 million in cash, cash equivalents and marketable securities, a $17 million increase over last quarter. The growth in cash was achieved while also returning $29 million to shareholders during the quarter through a $10 million dividend paid in October and $19 million of share repurchases, underscoring the strength of our cash generation as well as our disciplined capital allocation approach.

Earlier this week, we announced that our Board declared a semiannual dividend of $0.25 per share or approximately $10 million payable on April 3, 2026, to shareholders of record on March 13, 2026. During the year, we repurchased shares totaling $27 million at a weighted average price of $28.77 per share. Since inception of our dividend and share repurchase programs, nearly 4 years ago, we have returned approximately $217 million in capital to shareholders.

Looking ahead to 2026, we see several positive catalysts for our business, which Hessam summarized. First quarter revenue is expected to follow the usual seasonality trend and be sequentially lower than Q4. While we are encouraged by the prospect of continued momentum in the New Year, our cautiously optimistic outlook is tempered by ongoing macroeconomic and geopolitical uncertainties that could moderate the pace of transaction activity. Cost of services for the first quarter should follow the annual reset and be in the range of 60% to 61% of revenue. SG&A for the first quarter should reflect an increase year-over-year in absolute dollars consistent with higher agent support tied to improved revenue performance in 2025 and continued investments in technology and central services to support our sales producers.

As for taxes, the effective tax rate for the quarter and the year is expected to be in the range of 50% to 60%. We remain committed to our balanced capital allocation strategy, which includes investing in technology and talent, pursuing strategic acquisitions and returning capital to shareholders. Our strong balance sheet provides us with significant flexibility to pursue these objectives while maintaining our competitive position.

With that, operator, we can now open the call for Q&A.

[Operator Instructions] Our first question comes from the line of Blaine Heck with Wells Fargo.

Hessam, as you alluded to, the broker group has been under a lot of pressure this week, driven by concerns about AI displacement within the business and impacting the CRE sector more broadly. You talked about some of the changes that you guys have already made, but looking forward, I guess, which segments of your business could be impacted, whether that's certain deal sizes or business units. And do you think your focus on the Private Client Group gives you guys more or less protection from AI disruption?

Blaine, good to have you on the call. I was happy to be just on CNBC a few hours ago on this very topic because it's getting a lot of media attention, especially as it has impacted the Commercial Real Estate Services segment in the last 48 hours or so.

And my view and I think that of many in the industry is that AI is here to stay. And there's almost countless ways that AI is going to improve the manual processes that are so labor intensive in our business, whether it's underwriting, data gathering, data parsing, document generation and really all the production-related components of our business, which is significant. If you think about the number of times a broker needs an asset analysis, a submarket analysis, a metro analysis even before a first meeting with a client, even before they've really gotten to know the client, the need to be educated in that first interaction itself creates a tremendous amount of labor. And we're excited about finding scalable ways for AI to make that process a lot more efficient and a lot less costly, frankly, so that we can reallocate capital to other ways that the company can advance forward and more R&D as well as improving our margins. That's a given.

The big question mark is what happens in the second wave of AI? I believe right now, we're in the first wave of really this initial level of replacing a lot of manual tasks and labor-intensive tasks. The second wave is more interpretive in my view. And that's where the intelligence that would be expected from AI would start to have a gray area with the expertise and the personal experience and interpretation skill set of a good broker.

In commercial real estate, trying to scale that interpretive capability of AI becomes a lot more challenging because the data is disorganized, you have to have micro historical data to feed to the AI, that is not a cookie-cutter across various markets, not a cookie cutter across various asset types. And therefore, the notion that even in ways that they -- for sale housing market, the residential housing market, is far easier to commoditize in terms of analyzing or digitizing the valuation models or the buyer selling matches that you can do for the for-sale housing market are very hard to transfer over, I think, in a cookie-cutter fashion to commercial real estate.

And one commentary I made on CNBC when I was on a few hours ago is that you can build the exact same asset, exact same size, features and characteristics and open for business on the exact same day across the street from each other. And 10 years later, from an investment perspective, those could be entirely different cap rates, entirely different NOI based on the way that they're managed, the capital improvements and so on. So that's where the complexity of just how much interpretive power can be extracted from AI given its reliance on accurate historical data and the learning that the algorithms would have to do.

To answer your question, I do believe that the notion of fee pressure because of the commoditization of the data is going to be out there for a while. I think every disruption that we can think of in the last 20 years which initially was perceived to threat intermediary value-add work and brokerage value-add work has actually helped the brokerage business. Think about it, this is dejavu for me, being in the thick of the inception of the Internet and Marcus & Millichap really being on the forefront of embracing the Internet and embracing electronic portals because we thought it would actually enhance our value proposition and not destroy it. We were one of the founding investors in [ LoopNet ] in the late '90s, for example. So this goes back a while for us.

And we take it very seriously from the standpoint of evaluating the threat to our value proposition and at the same time, really focusing on the ways we can take advantage of it. You could argue, Blaine, that a single tenant net lease that is far easier to underwrite, I mean people say that, but even a single tenant at least requires really good underwriting. By the way, you got -- you got to go look at the real estate. It's not really a bond but closer to a bond than, let's say, a shopping center or an office building or even a multifamily rental building. And those easier to underwrite and more homogenous assets could get further down the road of being impacted by AI and requiring less of the broker touch.

However, I go back to -- and this is another thing we discussed on air a few hours ago. I go back to the relationship component the due diligence component and the art of keeping the buyer, the seller and the lender into a deal from a technological perspective, the art of managing the vendors that are on the critical path of removing contingencies or the due diligence, I don't think robots are going to go around and do that anytime soon. So I really believe that we're headed for the next generation of reinventing the broker as we went through in the early 2000s because of the Internet and because of digitization of information availability, but I think it's going to make us better. And it's going to make the industry more selective and focus on the talent of the individual in their interpretive and people skills rather than commodity data gathering.

Sorry for the long-winded answer, but I'm very passionate about this one.

No, that's very helpful perspective and well said. Shifting gears, you guys had very strong growth in broker count this quarter. I guess a few questions around that. First, was this something that you had visibility into given your recruitment efforts? Were you expecting that level of growth this quarter? Or was there something that drove kind of a surprise to the upside?

Second, are there any specific specialties you targeted in that growth? You've been kind of hiring more experienced brokers that can handle larger transactions, but I kind of would have expected a larger average deal size this quarter if that was the case.

And then just third, how should we think about your plans to grow headcount as we look forward into 2026?

Very important topic. As you know, and we have messaged multiple times. We've been under so much pressure because of the disruption created by the pandemic into our multi-decade tested system and really almost a unique feature of the company in the way that we have been successful in attracting new talent with no experience, training them, supporting them into becoming market leaders. That has driven the company for so long up until 2020. And that whole component of our system was badly disrupted because of the pandemic and then the market volatility that ensued just elevating the dropout rate of the individuals that we hired really from 2020 on.

First on -- because the market was shut down and in-person training was not possible. And then because the market had such a huge run and then a big crash. So that volatility makes it very hard to train new people into the business. And we made a concerted effort over the last 3 years to increase the channels of bringing in talent, qualifying the talent. Not only have we increased the inflow of candidates. We've really upgraded the filtering of those candidates, whether it's campus recruiting, whether it's our internship program that we have more than doubled in size and organized with a very specific curriculum across the country.

The expansion of the [ William & Millichap ] fellowship program, all of which have been very successful. We started those 3 years ago. So it takes time for all these kinds of initiatives to produce tangible results. Everything in the business has a bit of a lag time which is frustrating, but a reality. And we did have visibility to it, going into 2025 senior management felt very strongly that -- the underpinnings had time to get late and work, and it was time for us to expect better actual tangible results in 2025. It became a major focus for our local market leaders that run our offices and our division leaders, our Chief Revenue Officers and all the way to myself.

So we began to build a stronger candidate pool and again, with tougher standards of bringing in talent. The experienced talent that joined in 2025 usually would face a bit of a transition from whatever brand they came from. We don't expect them to repeat their 3- or 4-year, 5-year average immediately when they get here. There's normally a 6- to 9-month transition time before they rebuild the pipeline with us. So that's probably why you were questioning whether that cadre of the new sales force additions would have already brought some business with them. I believe that we're going to see some of that in 2026 as a benefit of the experienced folks we hired in 2025.

Going into the New Year, we are not letting up on any of the initiatives we put into place in order to produce the results we produced in 2025. Our expectations are very high going into the year just as they were in 2025. And if anything, our systems, the expansion of our recruiting team, which is under new leadership, are all going to help maintain the momentum.

Okay, great. Very comprehensive. Last question, you also mentioned continuing to explore strategic transactions. I wanted to see whether you think this latest market disruption and fear over AI displacement might bring about some opportunities for kind of lower cost acquisitions and how you're thinking about the risk reward of external growth given the current kind of concerns over dis-intermediation from AI. I guess, has anything changed with respect to your appetite for add-ons or maybe the profile of those potential expansion opportunities?

Nothing has deterred our strategy for attracting new talent, attracting boutiques and regional firms that I believe would thrive within the MMI platform. The introduction of AI as more of a business factor enhances that. It doesn't, in my mind, or as part of our strategy, diminish it at all.

And I did want to really summarize for all of our shareholders and our analysts the attempts that we've made to diversify the platform going into 2022, 2023. And those include companies that we looked at in the appraisal valuation business, the cost aggregation business, even investment management was explored with a couple of opportunities that had come up. And the common theme that I've shared before was that going into '23, '24, there was so much near-term uncertainty. And there was some -- on our part in being able to forecast the first 2, 3 years of performance of an acquired target. And there was so much reliance in both the valuation and the terms of the target companies on guaranteed value upfront, that became the biggest obstacle that we felt very uncomfortable with and some of the deals that we looked at, given the near-term market uncertainty.

As that fades and we really believe it has faded. And as I mentioned and Steve mentioned in his commentary, we're more optimistic about 2026 as the market gets closer and closer to an operating environment that we would consider fairly normal. Our confidence would be higher in that the first few years of an acquisition become somewhat more predictable than '23, '24 and '25 certainly were.

And in retrospect, Blaine, I'll have to say that the decision to pass on the vast majority of those deals was the right thing to do. Knowing what has transpired and frankly tracking them and still being in touch and knowing how they fare. So I think we did our job in terms of being diligent with our shareholders' capital. But the desire to diversify this platform in a way that's value add to our existing sales force and the core customer base we've already gotten so close to is very much there, if anything, is more energized as the market certainty and clarity returns.

Our next question comes from the line of Mitch Germain with Citizens.

Just a follow-up, following up on the M&A question. Is it -- is it just market uncertainty? Or has it also been a function of either price or a cultural fit that has prevented some of these transactions from getting over the finish line?

Mitch, I'll take that one, and Steve could add some comments as well. Really, all 3. Culture has been the least problematic because we already do a lot of due diligence upfront as to who we want to approach that we feel is like-minded and would have compatible cultures. We really haven't gotten too far down the road with a lot of targets that didn't have a good culture. There is only one I can think of a meaningful size where we had to get to know them and get to know their culture, and that became in and of itself as well as a major gap in valuation expectations and then terms a big hurdle, we just couldn't get our heads around, even if you can get the numbers resulted.

But the bid-ask spread has been wide from our standpoint. There are others who are more aggressive and maybe more willing to take risk back in '23, '24 and we weren't on a case-by-case basis. And then as I mentioned, the gap in terms of guaranteed value versus earn-out. We are very focused on bringing on talent that wants to be a part of MMI for at least 7 to 10 years or longer. And we're not really looking to become somebody's retirement plan. And what we face is a big challenge, Mitch. I think you're very familiar with this based on our previous conversations is that the vast majority of our targets are boutiques and regional firms that have 1 or 2 founders, that started a brokerage group or a team that became somewhat of a company. And those founders just having had some decades behind them are not really the revenue producers in most of the cases. And their current revenue producers would not participate in an acquisition from a capital event perspective.

So it's like, what are you really paying for? And in our fragmented core business, the pool of targets of any size, that have a diverse revenue kind of stream sources of revenue stream are fairly rare defined. That's why our experienced producer recruiting has been much more successful and -- but again, we have organized ourselves in a way where we're targeting specific spaces, specific companies and specific groups, whether it falls under experienced professional recruiting or a quasi acquisition.

Steve, anything to add?

Mitch, that's exactly where I was going to go the guarantee and not wanting to be founder's retirement plan. That is certainly a very real factor in the brokerage business, perhaps a little bit less so in some of these adjacent spaces, but still it's a strong, strong consideration that has kept us from consuming a handful of these deals.

Are you able to -- have you been able to increase your cross-sell from your financing division to your brokerage. Where does that [indiscernible] today?

Yes. That's a definite yes. As the best example, is in our IPA Capital Markets segment where we brought in a very experienced finance professional, teamed them up with some of our [ Momo's ] experienced sales teams. The one case that I can think of right away is our IPA Capital Markets for Multifamily where we brought in the [indiscernible] [ Draft Financial Group ] in 2022 and paired them up with our top 5 or 7 IPA sales teams across the country and their collaboration and joint efforts in winning business and serving the clients for both the investment sales component and financing and then in some cases, refinancing of other properties has been very successful in a short amount of time.

Other examples include another IPA Capital Markets team that we brought on board in New York that has collaborated with a number of our investment sales teams. Our loan sales division, Mission Capital is actively either responding to leads that our sales force uncovers by talking to lenders or the other way around. And I'm also happy to say that within our auction business, the channel that auction has opened, both for aging inventory that is not effectively selling through conventional marketing and now can be put on an auction platform. And frankly, our Head of auction would say that's too limiting of how the auction channel can be helpful to a seller even in the front end of deciding to market an asset, the right asset that is.

So both of those types of scenarios are now creating cross-selling between auction, loan sales and our conventional finance division and our sales force.

Got you. How do you envision 2026 performance with regards to, obviously, the market's been fairly unstable and it appears that outside of this whole AI noise that's been impacting the share price, the market itself, going into 2026, things like it appears as if allocations are increasing, people have accepted the new pricing paradigm definitely things like -- it seems like there's a little bit less volatility.

So do you think that, that will begin to resonate in the financial performance of MMI, particularly in the early part of the year. It's been a little bit of a kind of unstable start where you're -- time starting out a deficit in earnings and then kind of in the fourth quarter, working your way back up. Do you think that you -- that some of those losses are going to begin to narrow now that the environment stabilized a bit?

[indiscernible] I'll respond to the question, Mitch. I'll say that going into the early stages of 2026 is the best start of a calendar year since 2022. I will definitely say that because the factors that you mentioned have all occurred in the resetting of the prices, the acceptance that a Fed miracle is not around the corner, to bring interest rates way back down and basically be the Hail Mary for the pressure on values, reversing after the Fed to increase rates by 500 basis points.

All those kind of processes that take the market a couple of years to process and recalibrate or for the most part, behind us. That is not to say that 2026 or the current environment is a normal operating environment. We still have a bit-ask spread. We still have very fickle investor sentiment where the cautiousness because of the unexpected events of 2025, i.e., Liberation Day and the tariff effect, the 6-week shock to the capital markets that we absorbed last week, has a lot of our clients asking ourselves, what's around the corner? What else could happen? And the fact that the interest rates have been sticky around the 4% yield on the 10-year treasury hasn't been all that constructive. We really don't see a surge in activity and a big boost in investor sentiment unless the 10-year gets closer to [ 3.5 ]. And so expecting it to be range bound around that 4% and expecting this sort of measured incremental improvement in market sentiment and therefore, activity is, I think, is reasonable for 2026.

Certainly, not a hockey stick where we can declare the end of uncertainty and announce the beginning of certainty because they're still just these lingering tentacles of what's happened because of the Fed action because of the inflation pressure and still price discovery, Mitch, there are multiple markets where we're just beginning to see the level of distress, what I'll call situational distress, not systemic big portfolios being sold off by lenders at big discounts, but actual individual assets, small portfolios with situational distress where the property was purchased with very aggressive financing, very aggressive underwriting, and that didn't materialize in the near term and the loan is terming out or a longer-term loan is maturing.

Those assets all need [ rescue ] capital or they have to be sold at a significantly lower price than they traded last night. And our team is actively working with countless owners on working out those situations that aren't yet translating into immediate transactions but will in the next 12 months -- 12 to 18 months. So it's not a smooth normalized environment, it's still a lot of troubleshooting, deals are taking longer. Our marketing time lines have not come in that much. And what we benefited from was just increasing our exclusive inventory through a lot more focus on being out talking to clients and really trying to make a market.

So a lot of the incremental improvement, which we're frustrated with because it should be even better is coming from the fact that most of it was created by sweat and blood, not so much a hockey stick relief type of a trend in the marketplace.

Yes. And I'll just add, Mitch, that as we've talked about, there's a certain amount of fixed costs that are sort of embedded into our business model. Loan amortization on capital to attract and retain producers. But as the revenue growth, it only really takes even modest revenue growth before you start seeing operating leverage in the -- slowdown through our financials. That's not a forecast of any sort, but just a reminder that as revenue starts to recover as the market starts to recover, revenue follows the impact on our operating income has a pretty solid flow-through.

We have no further questions at this time. Mr. Nadji, I'd like to turn the floor back over to you for closing comments.

Thank you, operator, and thank you, everybody, for participating on our call. Thank you for the questions, Blaine and Mitch. We look forward to seeing a lot of you on the road.

This concludes our fourth quarter call, and we look forward to having you on the next earnings call. The call is adjourned.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Good afternoon, everybody. I'm Hessam Nadji, President and CEO of Marcus & Millichap. Thank you for joining us for today's 2026 outlook and market discussion. We're very proud to be hosting this. This is an annual event for us. On behalf of all of Marcus & Millichap, broker advisers, Marcus & Millichap Capital Corporation, our financing experts, our institutional division, IPA and IPA Capital Markets. I speak for all of them when I say we take great pride in bringing the latest market information and thought leadership to all of you as our clients and fellow investor community members and everyone interested in all aspects of real estate.

We have a broad audience with us today. We're very proud of the reach that this session has established over the last few years. And that's -- thanks to our wonderful guests and industry experts that are sharing their time and thoughts with us today.

A couple of housekeeping notes. We do have several thousand investors on the call and you may get a delay. If that happens, use your F5 key to refresh the session. There is a Q&A tab on the bottom of your screen. You're welcome to use that if you submit a few things. We'll try and read a couple of them into the call. This will be mostly a very lively discussion with the panel members as I'm very eager to hear what they have to say, and we'll get started.

2026 is an interesting time to be considering real estate investments and real estate returns and the things that it will take to maximize those returns and making decisions on capital deployment. To help you, as we've done for 55 years, which is an important milestone for Marcus & Millichap to celebrate this year. The company was started in 1971 by George Marcus and shortly after, joined by Bill Millichap and our founding principles of value-added brokerage and value-added information delivery to the investment community has never changed. It still really drives the company today.

And the quality of the guests that we have is a reflection of that commitment, not just bringing you our perspective and data but that of many other experts outside of our company that we can all benefit from. Mark Zandi is no stranger to this session. Sharon Géno has been with us, representing the housing market, multifamily, in particular, many other times; as has Marc Selvitelli, representing NAIOP, the office industrial component of our business, organizations that we have great partnerships with. And just to hone in on Mark's background, 20-plus years as Chief Economist at Moody's, probably one of the most quoted economists on Wall Street and throughout the media. And what I've always enjoyed about working with Mark is the objectivity, the lack of emotion and really sticking with the hard facts. And so one of the things that we do each time we have Mark, we've now had him here on the kickoff session for the year several times is to look back at the previous forecast and what we thought was going to happen last year.

So today's session, we'll start with an overview from Mark. I'll then orchestrate economic-related Q&A with him, and then we'll get into housing and the different product types within commercial real estate. So with that, let me get started and turn the session over to Mark Zandi. Mark?

Thank you, Hessam. So Hessam, have I aged relative to that picture a year ago? Do I look a little more ragged given what's I think I do. I think I do.

Mark, I think the cosmetic surgery is working very well. And I think that was a good decision.

Yes. Thank you so much. And congratulations on 30 years at Marcus & Millichap, that's pretty cool. Yes.

Well, that's an honor for me to be celebrating 30 years and being with all of you and thousands of our clients on my anniversary. Thank you, Mark.

Well, thank you, and thanks for the opportunity. And my task is to give you a sense of the outlook for the economy -- the U.S. economy in 2026. And just bottom line, it should be a reasonably good year, particularly in terms of GDP, the valuable things that we produce. I would expect -- and obviously, there's a wide distribution of possible outcomes here, but I think in the middle of the distribution, the most likely scenario of the baseline scenario, we'll get growth of somewhere around 2.5% to 3%. And just for context, in 2025, growth will come in somewhere between 2% and 2.5%. So in terms of GDP, it should be somewhat better year.

Jobs are also very important. And here, more caution. Obviously, 2025 was a pretty tough year for the job market, talk a little bit more about that in a minute. And I think we'll see a bit of an improvement in 2026, but not a whole lot. So I wouldn't expect a whole lot of jobs in 2026. But just enough to keep unemployment close to where it is. The unemployment rate nationwide today is 4.4%. That's up about 0.5 point from where it was a year ago. And if you told me if we reconvene a year from now, the unemployment rates between 4.5% and 5%, I'd say that sounds about right.

Still low in the grand historical scheme of things, but that's the soft part of the economy. So what I'm going to do here is give you some sense of why I think the economy is going to perform this way. We'll talk about the tailwinds to growth. And there's two key ones. One is artificial intelligence AI that came on strongly in 2025, and that should provide a lot of growth in '26. And also a lot of fiscal stimulus in train, that's really key to the growth picture. That's deficit finance, tax cuts and spending increases, that's going to juice up growth, particularly in the first half of 2026.

And then we'll talk about the headwinds. And the headwinds are very similar to last year, it goes to deglobalization, broadly. More specifically, it goes to the tariffs and to immigration policy, that will continue to be a way out growth. And then we'll talk about the risks. There are upside risks here, but I'm going to -- because I think it is prudent, we'll focus mostly on the downside risk and then we'll call a presentation.

So turning to the tailwinds, artificial intelligence, you can see that in the slide that you should see before you. There's really two key channels through which AI has boosted growth. One is what you're seeing here, that's investment data centers being -- data center investment being the kind of the poster child for that surge in investment, and that will continue. There's -- that's a train that's left the station. Nothing is going to stop that, certainly not in 2026. You can see in the chart, the U.S. is kind of leading the way here or certainly is leading the way here globally. The blue bar represents the number of data centers, we're somewhere around 5,000 to 6,000 data centers that are in operation or under construction. The other bar to the right represents data centers in the rest of the world, including China, and you can see it's closer to 3,000. So we're leading the way here, and that will continue to be the case. Obviously, the investment goes well beyond data centers, it goes to chips, it goes to servers, it goes to the power that's needed to drive these data centers and other activity. So there's a lot going on, and that will continue.

The second channel through which AI has boosted the economy is through the surge in AI stock pricing. And this is -- it was a surprise to me in 2025. I thought it would be a good year for AI and AI stocks. I didn't expect what we got. And we saw a surge in stock prices and valuation, generated a lot of wealth, just to give you a number, total shareholder wealth in the U.S. today is about $10 trillion greater than it was a year ago. And if you -- if there's even a little bit of what economists call a wealth effect that is when people are wealthier they're able and willing to spend more and they do, particularly the folks that own the stocks. That drives a lot of spending, consumer spending, and you can see that in the consumer spending numbers, that's where a lot of the growth has been. So AI to continue to power growth going forward, that is a key part of the optimism for 2026.

The other part of the growth story though is, as I mentioned, fiscal stimulus, deficit financed tax cuts and spending increases on that. And you get a sense of that here, this shows the contribution to GDP from the different forms of stimulus that were being provided. There are tax cuts that are going to businesses in the form of full expensing of investment spending. That will help support the AI infrastructure build-out, but other forms of investment as well. There's also tax cuts to individuals that will show up here pretty soon in the form of much larger refund checks. It looks like refunds -- tax refunds this year are going to be about $100 billion more than they were last year. That's 2%, 3% of GDP, so that's pretty consequential.

On the spending side, there's -- we're going to get a lot of spending with regard to defense and homeland security. That will be offset by some cuts to Medicaid, ACA, Affordable Care Act, health care subsidies and the SNAP program, which is food assistance. But the net of all that, as you can see, is a pretty significant boost to GDP, particularly early in the year, first quarter, second quarter. And obviously, that's by design in an effort to help support the economy in the lead up to the midterm elections. But these are really important sources of growth.

But there are headwinds. I mentioned deglobalization. And that's really -- that headwind is still going really very hard and it's most obvious in the labor market, the job market. You can see that here. This shows average monthly job growth over the past 6 months, 6 months moving average going back to the start of 2025, January 2025. So that shows you that, for example, in January '25, average monthly job growth in the second half of '24 was about 175,000. That growth remains strong right up until the Liberation Day. You may recall, that's when the President announced a very large so-called reciprocal tariffs that was early April. And since then, the job market has really taken it on the chin.

As of December, you could see job growth has come virtually to a standstill. This is before all the revisions are in and that we're going to get some revisions here and they're going to be in all likelihood downward. And it's very possible that we'll see that the economy is actually losing jobs. In fact, the only industry that's adding meaningfully to jobs right now is the health care sector. And by the way, just as a interesting factor, at least to me, I'm going to Philadelphia native, I'm from Philadelphia. Philadelphia is a health care center. And the job growth over the past year in absolute terms in Philadelphia, there's only 2 other areas -- metro areas in the country that have experienced faster job -- or stronger job growth. Number one is New York, number two is Charlotte; and number three is Philadelphia. And my entire lifetime is an economist that's we've never come close to that, but that goes to the health care employment growth that we're experiencing.

Obviously, this also goes to immigration policy. The highly restrictive immigration policy is really weighing on labor force growth, which has really slowed quite dramatically. So it's impossible for job growth to really pick up to any significant degree because of the restrictions on the labor force. But both demand and supply here are pretty weak. And this is the key vulnerability to the economy going forward. But at the end of the day, these tailwinds, these headwinds should net out to growth, and we should get some growth, I guess, I said earlier, in terms of GDP in 2026. There are risks. As I said, there are upside and downside risks. I do want to focus on the downside risks, and you can get a sense of that here in this risk matrix, I'm pretty sure I've showed this matrix to the group before. It's -- there's a lot to get your mind around, but this is, I think, a useful way of trying to get a sense of the downside risk. The X-axis, the horizontal axis is the severity of the risk. I kind of think of it like the present value of economic loss if the risk were to occur. So it accounts for the loss at the time of the risk and also the timing of the risk. And the y-axis, the vertical axis is the probability or likelihood.

Obviously, this is very subjective. We use this at Moody's to help determine the narratives that drive our scenarios that we provide to clients globally. And we do this is for the U.S., but we do it for every country around the world, do it every month. If the risk is in green, it's moving in the right direction, meaning less risk, less severity, lower probability. You can see oil prices seem to be moving -- potential for an oil price spike seems to be moving in the right direction. If it's in red, it's moving in the wrong direction, more risk and higher probability. And I do want to call out a few of these risks in more detail, beginning with the K-shaped economy. I do think this is something to consider.

We are seeing an increasing skewing of the income, wealth and spending distribution, and you get a really clear sense of that here in the data -- some data that we construct at Moody's. This shows the share of spending that's done by the top 20 -- folks in the top 20% of the income distribution. That's the orange line and those in the bottom, 80% of the distribution. This is data all the way back to 1990. You can see if you go back into the 19 -- early 1990s, it's about an equal share, but that has dramatically changed over the past 30, 35 years and continues to -- the skewing of spending continues on. Just for context, the folks in the top 20% of the distribution account, they have income of over $175,000 a year. I know that doesn't sound like a whole lot if you're sitting in New York or San Francisco, but if you're sitting in Des Moines or Oklahoma City, that's a lot of money. But the reason I bring this up is because the economy -- and this goes to the risk, the economy is very dependent on the spending done by that top 20%. And that top 20% is very dependent on their stock portfolios and their stock portfolios are very dependent on the valuation of those AI stocks. So as long as all those things kind of hang together, and that's the baseline, most likely scenario, we're fine, but that's clearly something to consider. That's clearly a risk. And that gets to the second risk, and that goes to valuations in the equity market. They are high, maybe justifiably, but by historical standards, they're noteworthy. My favorite measure of valuation is shown here this is what I call the economy-wide price earnings multiple. The numerator is the ratio of the Wilshire 5000 -- excuse me, the numerator is the Wilshire 5000. That's the value of all publicly traded stocks. The denominator is economy-wide after-tax corporate earnings, national income product account, after-tax corporate earnings.

The typical multiple on average over the period shown back to 1960 is 12, but you can see we're more than 2 standard deviations away from that average multiple. And the only other time it's been higher was briefly during the Y2K period that was clearly a bubble. Not that this is necessarily a bubble, but obviously, expectations are very high. AI adoption rates and implementation rates have to be strong, and it has to show up in the form of stronger productivity gains and corporate earnings growth. Otherwise, investors will be disappointed, and that's a risk. So the baseline is the stock market, AI stocks continue to do reasonably well. I can't imagine we'll have another year like '25 reasonably well. But the risk is that we will see a sell-off in the equity market.

Finally, I do want to call out -- put a stake in the ground. The bond market broadly feels very fragile to me. I'm not the only one saying this, but I think we're hearing an increasing course of concerns about the bond market. In my baseline outlook, I'm assuming the 10-year treasury yield, which is kind of the benchmark for the bond market will stay roughly where it is today. Last I saw it was trading at 4.25%. So if you told me, Hessam, that a year from now it's between 4% and 4.5%, I say that sounds about right to me. That does -- I do anticipate several more rate cuts by the Fed. I'm more concerned about the labor market than the consensus.

So I have 3.25 point rate cuts in the federal funds rate target, bringing the funds rate target down to just below 3%, which is kind of the equilibrium value. But the risk here is that we are going to see a dislocation in the bond market, which obviously will have knock-on effects through financial markets and real estate markets more broadly. I won't go through these reasons in detail. I'm running out of time. They're pretty obvious. I will say, though, one thing to note is that the ownership of treasury bonds has shifted away from price insensitive investors like the Federal Reserve, like global institutional investors and even the bank -- U.S. banks to very price-sensitive hedge funds that are there playing the basis trade. And of course, the hedge funds are there when times are good and -- but they leave when times are bad on mass and thus the potential for significant dislocation I see euphemism for a sell-off in the bond market. So that's something we need to consider a real possibility, not my baseline, but certainly a downside risk.

So bottom line, it should be a good year. I think everything is lining up for the tailwinds to outweigh the headwinds, but there's still plenty of things to be nervous about. And at this point, the risks are still more to the downside than to the upside. So with that, Hessam, I'll turn the conversation back to you.

Thank you, Mark. Very insightful as always. Let me just zoom in on a few things and ask a couple of questions about it.

Starting with the fact that a year ago, coming into 2025, your forecast was essentially accurate, both in terms of GDP, interest rates and job growth. Those 3 most important aspects of the economy or economic metrics, I should say that affect commercial real estate. So looking back, any reflections on how 2025 turned out? And if anything, was there anything that you missed or anything that's looking back at it from a year ago, is worth noting going into 2026.

Well, I alluded to the fact that I was surprised by the contribution to economic growth coming from AI, that surprised me. It was clear that it was going to be a driver of growth, but not to the degree that it has been, particularly around AI stock prices and the wealth effects that that's generated. So that was an upside surprise to me. And we got a bit more GDP growth than I anticipated. On the downside, I was -- I am a bit surprised at how aggressive the administration has been with regard to immigration policy. It was very clear that that's the direction of travel. The President said that in the campaign, it was very obvious.

But the crack down on immigration has been very significant, and it's really hit the labor market hard. So the job growth at the end of the year is 0 at best. We may be even losing jobs. That's more negative than I would have expected. And a lot of that goes to the immigration policy was just more significant. As an economist, sometimes you get a little lucky kind of you miss on one side, but on the other side, you also missed and they kind of net out. To some degree, that's what happened in 2025. But those are the two things that stand out for me, Hessam.

Great. Focusing on a couple of things that I frequently get asked by our clients to address. One is inflation. Take a look at the inflation trend, it looks like a battle that has been won by the Fed. And the wildcard that really erupted last year between the early year forecast and where we ended up for the year, of course, was Liberation Day and the tariff factor. Nonetheless, if you look at just pure statistical view on core CPI and PCE, those look like they've moved in the right direction, not quite at the target level of 2% that the Fed likes to see, especially on the PCE. And that's 1 component. I get asked a lot about inflation. And then on the tariff side of the equation, your phrase last year was, gee, a initially proposed rate of 27%, which is where we started, weighted average would require an off-ramp.

The off-ramp is something that we've talked a lot about in a similar session last year ahead of having had enough time to see what the tariff and the trade wars were going to actually look like. And it looks like we did experienced the off-ramp to a large extent because we went from 27% weighted average proposed tariff rates currently at about 17%. However, that 17% is still the highest since the depression era tariffs. And to some extent, this still hasn't played out yet. Are you worried at all about a resurgence of inflation once companies who've so far absorbed most of the hit from tariffs, start to pass that on to the consumers or is the tariff factor any kind of a big wild card in 2026.

Well, if tariffs remain roughly where they are on net. And I think that's the most likely scenario that they stay roughly where they are. Then the inflationary effects of the tariffs will start to fade by the second half of 2021. So inflation will be persistently above the Fed's target through most of 2026, and it won't be until 2027 until we're really back to something that most Americans feel comfortable about.

And one just tangential point about the inflation. Inflation for staples is actually high and much higher. And that's why Americans -- many Americans go back. Feel very uncomfortable with their financial situation. They're paying more for groceries and for clothing and for electricity and that kind of thing, and that's really bothering and reasonably. So if -- but if the tariffs stay where they are, inflation will become less initio, this is one of the reason why -- in addition to my worries about the labor market, why I expect the Fed to cut a few more times in 2026. There's also the question of Fed independence, and that might place on role in the second half of the year, but even abstracting from that. I think that in case -- there is an upside risk here, though, and that is the Supreme Court is going to rule on the reciprocal the constitutionality of the reciprocal tariffs. And is a reasonable probability, not inconsequential that they strike down the tariffs. And if that's the case, it will cut the effective tariff rate in half, and that would be quite positive for inflation for the economy.

Now the President could respond by trying to impose other tariffs. But my guess is you likely won't do that, you'll probably use it as an opportunity to get inflation back in. Again, everything is focused on the election. And of course, affordability is a big part of the conversation around the election. And I think we'll use that as well, say, "Hey, look, the Supreme Court ruled. We'll come back and visit this at some point in time. But right now, we're going to let them stand and use that as a way to get inflation back in." That's an upside risk.

The downside risk was highlighted by the recent events over Greenland. The President still is willing to use, at least rhetorically, at least in a preformative way, tariffs is a [indiscernible] and some -- that's a possibility that he actually goes through -- follows through at some point in 2026 on higher terms. And that would be a problem on lots of different levels. So I think the most likely scenario is the tariffs to remain where they are, and that the inflationary effects begin to fade, particularly in the second half of the year.

And then one other -- thank you, Mark. And one other factor here to talk about is the disconnect between the federal funds rate and the 10-year treasury, you're expecting the 10-year treasury to be range bound between 4% and 4.5%. We're sitting at 4.3%. The reductions by the Fed have done nothing, literally nothing to move the 10-year treasury yield because the market forces are driving that. And the one that you mentioned, the profile of who's buying treasuries has changed a lot, much less long-term, less price-sensitive investors have been replaced by more speculative and shorter-term investors. But this disconnect is interesting for us to see -- for commercial real estate in that it's really the long-term rates that drive the cost of financing for our industry. But on top of the disconnect here, the change in the Fed -- the head of the Federal Reserve with Powell's term ending in May. Between that and the Supreme Court potential ruling on tariffs. Is that going to be a lot of chaos? Is there going to be a lot of volatility and noise in the market? Should we be expecting some turbulence around both of those?

Well, I think turbulence is definitely in our future, I mean there's a lot of drama, right? I mean, we can see that almost every day. And the market, the bond market, in particular, just much more volatile because of some of the shifts you talked about in terms of ownership, but for a lot of other reasons. And valuations are high in the equity market. In the corporate bond market, take a look at corporate bond spreads, they are paper thin, you rarely see them as narrow as they are. So I think we are going to see a lot of volatility in rates. And as I said in my remarks, I do think there is a reasonable threat. I use the word dislocation. It's a euphemism for a sell-off, a spike in long-term interest rates. So you can't -- I can't forecast that in the baseline, but I think the risks of that are not inconsequential.

I would say that, Hessam, I wouldn't view this as a disconnect. I would view this as a normalization. I mean, it's just -- the yield curve is just normalizing. So if the 10-year yield stays roughly where it is and the federal funds rate goes to 3%, that spread, 125, 150 basis points is kind of an average typical spread. So it's -- I view it more as a normalization than a disconnect -- is something unusual.

Great point. Thank you, Mark. Let me shift the discussion over to commercial real estate by first giving the audience a big picture graphic on what's happening with the major property types with apartments essentially posting fairly stable vacancy rates below 5%. Same thing with retail. The office market, everyone knows has been through a lot of volatility really because of a demand shock and that is beginning to recover gradually.

And the industrial market is reeling from a surge in construction which we'll talk about in a moment. But at a big picture level, it seems like the fundamentals, except for industrial, which we'll address here in a moment, are moving in the right direction, focusing more on the supply side of what is happening. It's pretty amazing to see that the forward-looking trend on increasing stock for the major property types is starting to reflect a major pullback in new starts. That, of course, is most profound in the most active product types, apartments. We see a lot of construction in the last few years and industrial with literally a surge that we saw post pandemic. Retail not so much. We've seen a very, very limited amount of new product for all the obvious reasons and the same thing with the office market.

But the supply side is painting a very positive picture, which is just in time if the job market is going to slow to the degree that it has or potentially even as Mark said, with some revisions point to some net employment losses.

Zooming in on the housing part of the equation, what's quite remarkable about the apartment market is the 72% drop from peak in multifamily starts and over 50% drop in units under construction. That is a profound shift. And it will affect the most active markets, of course, because there's only about or so metros that have significant construction as a percent of their multifamily housing base. And those 10 markets usually account for 40%, 45% of the total inventory of new product nationwide. So it will have a big effect on Dallas, Houston, Atlanta, Phoenix, Austin, many of the markets that have seen on our construction.

From a demand perspective, it's remarkable to see the affordability gap hit levels that we have never seen before. only 28% of Americans can qualify for a typical first home purchase. And the gap between the average rents versus the median-priced home mortgage payment, is as wide as it's ever been. With that, we see, obviously, a major underpinning for demand. Renters are staying renters longer. Renewal rates are showing the effect of this trend. Yet there are concerns about operations, insurance, labor costs and most of our apartment clients, owners across the country, private and institutional are not really all that excited at reporting fantastic operational results or rent growth. It's in the pipeline, given the pullback in construction and this strong indication of demand, but it's not quite there yet.

So let me welcome Sharon Wilson Géno to the session. Sharon has more than 30 years of experience in the housing industry. She's done a fantastic job in taking over to the leadership of National Multifamily Housing Council, NMHC. NMHC is the most effective organization and educating lawmakers and advocating for the apartment industry, including and most importantly, starting with the renter because it is the U.S. consumer and the renter that we all serve. And their interests are really the focal point of everything from the affordability issue to adding new supply and many other regulatory components of the industry that NMHC advocates for and educates.

Sharon, welcome to the session. I thought I would start with just asking you for some general observations about some of the trends that I showed some of Mark's comments about the economy. And I did put this slide together to hear your thoughts about the federal policy proposal that had come out recently to improve the housing market dynamics, which I think would be interesting for our audience to hear about.

Sharon, welcome to the session.

All right. Thank you, Hessam, and I appreciate the opportunity to be here and appreciate our long-term partnership with Marcus & Millichap IPA. You guys are incredible partners for advocacy work and our thought leadership and other things. So I really appreciate that, not just today, but every day.

Lots of interesting things, obviously, going on in the federal policy level. We're coming into an election year, which changes the dynamic a little bit. There's always tension in every administration between the policy people that are driving the policy to come out from an administration from an economic side and the political people, particularly in election year. You're seeing a lot of that happening right now. And most recently and specifically, the President's announcement yesterday around the limitation -- the proposed limitation on the acquisition of single-family homes.

Honestly, that's one of those situations where you can see the politics that are increasingly rising to the surface and pulling data around affordability, around -- it's pulling well for voters to perceive that corporations and private equity are hurting them. And also more acute concern around housing affordability. But a lot of that is driven to your earlier point around the single-family side. You saw that gap between single-family and rental. And while rents increases have ameliorated as you pointed out, over the last year or so, largely due to an influx of new supply, we are keeping our eye on exactly what you said. There's really tremendous reductions in starts, starting around 2022, 2023, given increased interest rates and other things.

So you've got this proposal out there that, again, we've had really good relationships with this administration around housing. They want to be the housing administration. They really get it. But you saw that proposal really being one that I think is much more politically driven than not. But even in that proposal, you see opportunity for creating definitions, working with the treasury on how that actually plays out. We are we put out positions that we are very supply focused, and we will work with this administration on defining things in a way that will help us continue to increase supply because we know ultimately that is the answer to affordability.

In terms of access to 401(k)s and the possibility of the GSEs is doing large MBS purchases. Again, those are opportunities -- in theory, opportunities to put more people in a position for homeownership.

But again, all demand-side solutions and these effectively are depend on supply. If you don't have single-family homes available for first-time purchasers, which is what these are largely targeted at, and we don't have that right now for a variety of demographic and other reasons, people will continue to be in rental housing. And rental housing is an important part of that continuum of people that make a choice to purchase at some point in their life or maybe don't and decide that it's better for their lifestyle to be a lifelong renter. Nothing wrong with any of those choices. So while these particular proposals focus on bringing people into that homeownership component, none of that happens overnight. And rental housing will still be an important place for people to live even if they are taking advantage of some of these proposals, which may, in fact, not happen overnight and be around the edges and not be a fundamental shift.

Thank you, Sharon. Overall, do you expect 2026 to be a better year for operations and rent growth because of the supply pull back and the underpinning of a very strong demand picture? Or the same as last year or better or worse. I should give you a multiple choice question. The same as last year, better or worse?

It's a little bit of a mixed bag, and I'm not just hedging on it. If I had to pick one KPI that I watch very carefully, it's absorption rates. And absorption rates tell you a lot of things. They tell you about demand. They also tell you about supply, and they tell you about how fast the market is correcting for different supply and demand dynamics in various markets because people are obviously -- if the absorption is still happening, particularly in markets that have additional supply like the Austin, the Phoenixes, the Nashvilles and others, it's because the market is adjusting and doing concessions and other things to make the absorption rates work. We're still seeing that. The absorption rates remain pretty much at historic norms.

So there remains demand, and we see that going into '26. I think the big factor is highlighted in Mark's presentation is what happens with job growth. Homes are where jobs go to sleep at night. And the demand continues that curve be as strong as job growth remains at least at some level where that demand curve can continue. So -- and then, of course, to your other point, so we're seeing this curve of the absorption moving into '26, particularly on that historic delivery over last year and maybe even through '26 into '27. But undeniably, you cannot deny that significant drop-off in starts beginning in 2022, 2023, that will come to roost here, we think, last quarter of '26, first quarter of '27. And even if demand and job growth goes down, you could still see demand for housing go up because you've got -- you're going to have such a shortage again.

Great commentary. Thank you. Let me switch over to the office and industrial market real quick. Amazing to see some office market recovery in vacancies. It's the first time we've seen that in a number of years, of course, since the pandemic when there was the ultimate demand shock of working virtually and not seeing people come in the office. The office market has not had an overbuilding problem for a long, long time, and it's been a demand problem. The good news is that the daily attendance with companies insisting that workers come back into the office has improved the picture significantly, and it continues to improve.

I mean, look at where on the left side of the equation, look at where the year-over-year increase in daily office visits are coming in about a 10% increase. So market is way ahead of that. And on the right, you see where we are relative to a pre-pandemic level with a significant amount of improvement. Not sure that we'll ever get back to pre-pandemic daily attendance, but the trend is definitely moving in the right direction. And what I've always said in pretty much every media appearance, every opportunity that I get is to never judge the book by its cover. The office sector is not just one thing. There is so much variety of product and market trends. And this graph was put together just to illustrate the vast difference in vacancies of older urban product around 27% versus smaller, newer product in the suburban markets at about a 10.5% vacancy rate. So in so many ways, the office market, I view as the diamond in the rough. We kind of said that over a year ago. And you're seeing the significant discounts on distressed office becoming a catalyst for lots of distressed transactions. But again, healthy performing office buildings are not trading for major discounts and nor should they.

On the industrial side, what has been quite remarkable to see is the post-pandemic surge in construction, as I mentioned before, really driving vacancies to the highest level we've seen in a long time. That's not been a shortage of demand, and there's a lot of transition happening in the industrial real estate market because of the need for modern facilities on the warehouse distribution front. It's a constant pressure to modernize the properties, their locations relative to the ever-evolving consumer trends on e-commerce and proximity to consumers with delivery efficiency. That change itself is basically rendering a lot of product obsolete. That is happening at a record speed within the industrial market. And there's also a big bifurcation toward where the vacancy pain is really concentrated. It's really the larger assets, which is where the concentration of new product is.

The more private investor-owned smaller to midsized warehouse facilities or even light manufacturing incubator space has not seen in any way, shape or form, an overbuilding problem with vacancies at a very low level. And you see the sort of the range of what we're seeing in the marketplace. And of course, energy is a huge topic related to data centers. Data centers have become a whole subset of the commercial real estate industry in the last 5 years or so. And what is happening on the demand side of the equation and utility rates and consumption in general and what's happening with the niche that has emerged within commercial real estate is quite remarkable to see.

So that is a component of what we consider the industrial market that really has its own momentum and its own dynamics. So at this point, let me just stop and bring Marc into the discussion. Marc represents NAIOP, which is an organization with over 20,000 members within the office and industrial marketplace. He has over 30 years of experience as well, and we're very proud of our partnership with NAIOP. So Marc, let me just turn it over to you with some general observations about the office and industrial market. And if anything, you can add to the data center discussion and add to Marc's perspective.

Yes, happy to do that. And by the way, it seems 30 is the magic number. It's your 30th year. Obviously, today, here, Sharon and I both have 30 years' experience. Perhaps we don't want to go back to the Sesame Street counting up that high. But other than that, your slides paint an interesting picture. And let's start with office first because I think that, that's -- when we look at a lot of commercial real estate, it's the asset class that's probably had the most attention drawn to it. Certainly when you look at the press, the sky was falling, the sky was falling.

Well, I think Chicken Little is done running around saying the sky is falling. Now that doesn't mean we're looking at market improvement yet. But a couple of things that we're seeing here in NAIOP. First, we do twice a year in office demand forecast. And we just released our most recent one in Q4 of 2025. What we saw in that looking forward is positive net absorption for the first time in a couple of years since we've been doing this. Now part of that is actually looking at what happened most recently towards the tail end of 2025 when again, for the first time in a while, we saw positive net absorption for the first time in a couple of years since we've been doing this. Now part of that is actually looking at what happened most recently towards the tail end of 2025 when, again, for the first time in a while, we saw positive net absorption in all 4 of the major census areas, whether that's the Northeast, the South, the west, the Midwest, we finally saw some improvement there. A graphic Hassan that showed the industrial -- excuse me, the suburban versus the inner office.

I think one Chart to that would illustrate an interesting point is what's happening between the classes in that, you look at Class A, you look at trophy and office they're performing exceptionally well. And it doesn't really get all the press on that. Undoubtedly, B&C class building share. They're older, they don't quite have the amenities because it's amenities that are really helping change the narrative on that. It is that the companies are using less space per se. They're just using the space differently. And I think that's part of the office narrative as we continue to go forward.

I'll just add one more thing quickly on buses you did show the slide about where we're seeing better return office, better usage of office. I believe we saw Chicago in there, certainly San Francisco, I think San Francisco was probably the 1 city immediately post pandemic -- did we heard everybody talking about it, "Oh, my god, look at all the vacancy rates," particularly in the San Francisco CBD, but that's changing. And AI companies are undoubtedly helping to fuel that but there are other cities, and you can see them right here on the chart, Chicago, Austin, continuing to do better than they had seen the noticeable improvement. And I think we're going to see that eventually in other markets as well, too.

But let's talk about industrial. One of the other areas you talked about, which is a little bit of the opposite of office. We saw this incredible boom in construction. I mean just unheard of numbers of new industrial properties coming to market, but I don't think it takes Mark Zandi here, type of economist to tell you, supply and demand. We had a lot of supply come online there. Well, the demand couldn't quite keep up. And we saw that, and we're still seeing that with the vacancy rates, we saw negative net absorption in the industrial market in -- I believe it was Q3 last year. It was the first time in a long time. But again, the laws of supply and demand tend to work well. We have not had nearly as much product in the pipeline. What I'm seeing now in terms of product that's under construction. We're looking more at levels that -- where we were pre e-commerce boom.

It's steady. It's not an insignificant amount. It's just not the salad days we saw in the post pandemic time. But I do think we're getting back towards that equilibrium. I wouldn't say that this is the asset class quite yet where I think we're going to see the returns we saw a few years ago. But I do believe we're still looking at something that's pretty steady.

And then there are data centers, a topic that everybody wants to talk about, you don't have to. I don't care what new site you choose, data centers is always going to be top of mind. And here, we have an interesting thing. When I look at our sentiment survey. We ask people in the development community, what property type are you going to be working in the next 12 months. And we really expand this to include data centers beginning in the fall of 2023. When we did that follow in 2023, only 1.8% of our respondents said in the next 12 months, they'd be involved in data centers. Just 2 years later, it's up to 12%. I expect that to continue to grow. It's still a strong performing asset class. There's a lot of demand for it. But -- there are headwinds out there. Energy, affordability, those issues, you have a public perception that it is the data centers that are driving up electrical costs.

You mentioned it. Mark mentioned it, Sharon mentioned it, affordability. Affordability is going to come down partly to utility bills as well, too. And this is where data centers are really catching an awful lot of fire right now is because there is a perception out there that it is driving up the utility cost for homeowners, renters. And it's a tough day. It's an easy target to play. And I also think there's a little bit of resistance nowadays on data centers. And I'd be curious, if Mark has seen some research on this, but I believe there's a little bit of a perception when it comes to AI, that it is data centers and AI's responsibility for taking away jobs, that gives a little bit more of a negative perception to the data center as well, too. They're not adding, let's say, the number of jobs to normal distribution warehouse would, but also that AI kind of fuels at least a perception out there, I'm taking away jobs. So I know that's a lot in a short amount of time, but...

Well, you covered a lot of the critical points, which we really appreciate. Marc, any comments about whether we're really seeing job displacement because of AI? It seems like AIs at this stage anyway, boosting productivity, which is a good thing for the economy. But you could have a situation where you're getting a lot of output profit growth, but not necessarily as many jobs, which is what drives demand for various kinds of structures in commercial real estate. Any quick thoughts on that, just very quickly.

Yes. I mean, I think to date, the impact on productivity from AI has been modest. There's some evidence that's affected hiring rates. One reason the job market is as weak as it is, is hiring rates are very low. And particularly among the larger companies where adoption rates of AI are higher. They're, I think, waiting to see how this plays out and what kind of impact that will have on their job labor market needs. You can also see it among young people and in the tech sector.

So there is some small -- there's some evidence that there's been some small impact on productivity growth. But I would anticipate some significant increase here. I mean certainly, investors are expecting a significant increase. I mean, they're not going to get the earnings that they anticipate unless we get these big productivity gains. And so that's another risk the job market and to the outlook, right? Because if we're not creating any jobs now and the AI effects have been small, what happens when the FX starts to mount. So that's something we need to watch in 2026, another potential risk.

Thank you, Marc. Let me just make sure we cover a couple of the aspects of the retail fundamentals. We have a lot of retail investors on the call. We're incredibly proud of our market leadership in both shopping centers and single-tenant net lease retail. And I will say that when I was putting this slide together, I was happy to be able to reflect what I'm hearing from all my travels and including yesterday here in Washington, D.C. at the real estate roundtable of various product type rankings among investors, private and institutional with retail still coming in as the top choice.

Retail has had 15-plus years to reinvent itself. The notion that retail was not really overbuilt, it was under demolished was accurate and that demolishing of obsolete space and repositioning and reimagining of obsolete shopping centers and retail structures has occurred to a large extent. And now we have a consumer base that's not just driven by the higher-end consumer with luxury goods. Certainly, that's an important segment. But because retail has become so much more experiential, and really the 3 Fs, food, fitness and fun driving foot traffic and if you look at restaurants and bars, for example, huge trends on the positive direction, way outpacing quarter sales. And the consumer in all categories is seeking the fund business and food component of retail shopping center visits and so on. So the trends in retail have been very positive.

Shifting gears toward pricing and investment trends and so on. I wanted to show the very important point of price adjustments and cap rate adjustments. And the fact that we've seen a significant amount of movement in the cap rates, somewhere around 100 basis points to 150 basis points. Apartments, for example, showing cap rates moving up about 100 basis points and office, 150 basis points and other product types, somewhere in between. The price adjustments that are driving these cap rate movement, you take a look at the spread between interest rates and cap rates, when they narrowed as much as they did versus the 10-year treasury yield, we saw the market basically comfortable hole.

As interest rates were going up and cap rates have come down so much prior to the Fed thickens led hammer and increasing rates by 500 basis points, that narrowing of the spread was a shock to the marketplace and needed 18, 24 months of price recalibration and price resetting. That resetting has occurred to a large extent, and we're seeing a huge amount of interest by new buyers, experienced buyers, capital coming back into the market because we're now seeing the opposite of that narrowing with the trend showing a widening gap as cap rates have gone up and interest rates have come down. This is the most important indication of where trading volumes are headed, which I was interested to say how it would compare to the Mortgage Bankers Association and the [indiscernible] forecast of loan volume and financing activity for refis and transaction-related financing, which is pointing to a 24% increase in their forecast for 2026.

So with that, let me just do a quick reality check starting with Sharon. What are you hearing from your member base in MHC is represented by private and institutional apartment owners? Are you seeing a return of capital and '26 being a net buying period? Or are you seeing more of a neutral stance or maybe even net selling? What are your observations about capital flows this year?

Yes. I think it's -- we'd all hope this would happen sooner. But I think you're increasingly seeing people -- the deals that have been on the shelves or deals that were coming up on maturities that there was a little bit of extend and pretend. People like, okay, the coast is clear. We're seeing a lot more activity now. People feeling like the capital markets have settled sufficiently for them to step back in. And plus, a lot of them are looking at exactly what you highlighted earlier, that incredible drop in new construction that's been happening over the last 11 or 12 quarters that we've been tracking it. So you've got opportunity for getting a return on your investment much sooner. If you hit -- you hit it right and your new acquisition or your new development hits during that time when we're going to see that shortage really come back to hit us -- and I think it has the potential, if demand remains strong and job growth, it picks back up, that it tends to be even worse than it was coming out of COVID.

Interesting. It's also interesting to see how higher quality Class A newer assets are getting multiple offers and actually seeing cap rate compression while the older Class B, B- assets have a very shallow buying pool, which means there's more price adjustments to come in the lower end of the market. Marc, let me shift gears to you on capital flows and investment trends, expectations for office and industrial.

Yes. Overall, our membership is a lot more positive and optimistic about the direction of cap rates than they've been in about a decade. Our latest sentiment index showed a real improvement with this. And there's a real expectation over the next 12 months for an increase in deal volume as well, too. So I think we're at a much more favorable point now than we were when we met a year ago in regard to this. It's certainly reflected in where our members are seeing it going. And if you take a look at a lot of the other kind of sentiment forecast within the industry is very much in line with where NAIOP is at right now. And I think there's a lot of good reason for that optimism as well, too.

Well, that's great to hear. I do think that the market is sort of passed the worst of what we've seen related to tariffs, related to interest rates, related to all the volatility around what the Fed may do and then message all the confusion around lowering of rates and the messaging that, that might be it for a while yet following up with another reduction and the rents and repeat, which caused a lot of confusion in the marketplace. Given the slowing job market, given the inflation having come in quite a bit, I agree with Mark's viewpoint that at least 2, maybe 3 rate reductions are to be expected this year. And more importantly, though, for so many real estate investors that have been waiting for the 10-year treasury to come in significantly, which really drives more of our cost of debt for the industry.

A miracle -- interest rate miracle on that is highly unlikely, which means that each asset should be evaluated on its own merit and really the portfolio position of each asset and the long-term strategy with each asset. And with that, those investors that moved into the market first have already benefited from that decisiveness. And our job is to really try and decipher each individual transaction and each individual capital deployment strategy. which we're very proud to be a part of with all of you. I want to take a minute to thank this amazing panel. Mark, Sharon, Marc, thank you very much for the time and the wisdom and the information that you shared. Please never hesitate to let us know how we can improve these sessions, how all of our professionals across North America can be a further help and how our research content can be a part of your decision-making.

With that, let me adjourn the session, and thank you again for your time.

Thank you.

Thank you.

Greetings, and welcome to Marcus & Millichap's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Jacques Cornet. Thank you. You may begin. Thank you, operator.

Good morning, and welcome to Marcus & Millichap's Third Quarter 2025 Earnings Conference Call. With us today are President and Chief Executive Officer, Hessam Nadji; and Chief Financial Officer, Steven DeGennaro.

Before I turn the call over to management, please remember that our prepared remarks and the responses to questions may contain forward-looking statements. Words such as may, will, expect, believe, estimate, anticipate, goal and variations of these words and similar expressions are intended to identify forward-looking statements.

Actual results can differ materially from those implied by such forward-looking statements due to a variety of factors, including, but not limited to, general economic conditions and commercial real estate market conditions, the company's ability to retain and attract transaction professionals; company's ability to retain its business philosophy and partnership culture amid competitive pressures, company's ability to integrate new agents and sustain its growth and other factors discussed in the company's public filings, including its annual report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2025. Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can make no assurance that its expectations will be attained.

The company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release, which was issued this morning and is available on the company's website, represents a reconciliation to the appropriate GAAP measures and explains why the company believes such non-GAAP measures are useful to investors.

The conference call is being webcast. The webcast link is available on the Investor Relations section of the company's website at www.marcusmillichap.com, along with the slide presentation you may reference during the prepared remarks.

With that, it's my pleasure to turn the call over to CEO, Hessam Nadji.

Thank you, Jacques. Good morning, and welcome to our third quarter 2025 earnings call. I'm pleased to report that we delivered a strong quarter with total revenue increasing 15% over Q3 2024. This marks the fifth consecutive quarter of year-over-year revenue growth as we continue to navigate the severe and complex market disruption of the past 3 years.

Adjusted EBITDA for the quarter was $7 million compared to approximately breakeven in the prior year period. This year's third quarter results included a $4 million legal reserve that Steve will address in his remarks.

Excluding this reserve, the company's SG&A was modestly lower than the prior year, reflecting our ongoing focus on cost management while still making strategic investments in technology, talent and branding. As noted on prior calls, the expensing of investments made over the past several years in talent retention and acquisition during a period of hampered revenue production has been a significant drag on our earnings.

We expect this dynamic to shift into operating leverage as the market improves. During the quarter, our results outpaced the market based on transaction growth of 25% for MMI versus an estimated market growth of 12% in transactions based on RCA data for sales of $2.5 million plus assets. This was driven by momentum in our private client brokerage business, which was up 17% in revenue and 22% in the number of transactions. This critical segment, defined as transactions in the $1 million to $10 million price range is improving, thanks to more banks and credit unions returning to the market, gradual price discovery and more investors finally coming off the sidelines.

Private client apartments and single-tenant retail posted strong revenue gains of 35% and 16%, respectively. The company's mid-market segment also contributed to the quarter's results with a revenue increase of 35% from deals in the $10 million to $20 million price range, mostly dominated by larger private and quasi-institutional investors and developers.

Our team's elevated client outreach campaigns and countless opinions of value that did not culminate in transactions over the past 2 years were instrumental in staying close to our clients during a time of uncertainty and providing guidance when they became ready to execute. This is the essence of Marcus & Millichap's client-centric and relationship-driven culture and business model that continue to differentiate us.

Our larger deals valued at $20 million or more declined 12% in revenue and 13% in transaction count for the quarter, similar to what we have reported last quarter. Once again, this is a result of outsized growth in larger deals last year, which led the recovery from the 2023 market shock.

Our $20 million and above transactions grew by 19% in calendar year 2024, 30% in the third quarter of 2024 and 59% in last year's final quarter. As a result, we faced a very difficult comparison this year. Given this dynamic, our overall brokerage volume in the third quarter posted a 2% gain compared to a 17% increase in market volume as reported by RCA, again for the $2.5 million plus asset sales.

Our IPA division continues to deepen its institutional client base, which we're taking to the next level by the recent addition of 2 new executives, Andrew Laehy, who heads our IPA Multifamily division; and Dags Chen, our new Head of IPA Research.

Each of these is a seasoned institutional executive with more than 20 years of experience with some of the most renowned institutional investors in the industry. The added leadership, which we're very excited about, combined with our healthy pipeline and robust exclusive inventory position us well to continue the expansion of our institutional platform as a supplement to our private client market dominance.

Financing revenue once again exhibited strong growth, up 28%, reflecting improved lending conditions and our team's ability to leverage our extensive network of active lenders. So far this year, we've closed over 1,100 financing transactions with nearly 350 separate lenders, enabling our team to pivot when lenders move in and out of the market. Revenue growth has been widespread with contributions from our veteran originators, IPA Capital Markets as well as recent additions of experienced originators.

We're also seeing steady progress in integrating our sales and financing teams, offering combined services to our private and institutional clients.

Our loan sales and advisory division, Mission Capital, is also seeing a significant uptick in activity and has posted solid revenue growth this year as more lenders are finally moving both performing and nonperforming loans to the marketplace.

Other developments of note include the net addition of 29 investment brokers in the quarter. As I've shared on previous calls, restoring and improving the company's organic talent development after a post-pandemic disruption has remained a priority, and our actions are starting to produce results, although the turnover rate of newer professionals is still elevated due to a difficult market environment.

The quarter's improvement is encouraging as is our continued success in attracting and integrating experienced professionals.

Our team also made progress in expanding MMI's brokerage transaction services, which is designed as a centralized resource for analytics and production support to our sales force. We see this as an area that can directly benefit from AI, technology and bringing more efficiency and expanded output to our team and to our clients.

Lastly, I'm pleased to report that our auction division, which started in 2022, continues to gain traction, particularly in its collaboration with our investment brokers who are bringing this added marketing channel to many of our clients.

So far this year, we've closed 191 sales through our auction platform, accounting for an estimated 25% share of total commercial property auctions in the U.S.

Looking forward, we're encouraged by the ongoing improvement in our key operating metrics, including shorter marketing timelines, fewer significant price reductions and near-record exclusive listing inventory.

Marketing and closing timelines still remain longer than usual and continue to weigh on productivity, largely due to persistently tight underwriting by lenders and a narrow margin of error on valuations among buyers and sellers.

However, the trend is improving, which allows us to allocate more bandwidth to new business development as the market regains alignment.

From a market perspective, this year's rate reduction failed to bring down long-term yields and did not spark a significant boost in the transaction pipeline as it did going into the fourth quarter of last year.

Nonetheless, we remain cautiously optimistic about the start of a new sales and financing cycle as the market resets with measured improvement in the trading environment for 3 key reasons.

First, we believe the Fed will continue to reduce interest rates over the next year, notwithstanding what may or may not happen in December to shore up the labor market. Although long-term rates are likely range bound, the more accommodative Fed and the end of quantitative tightening will be constructive for real estate transactions.

Second, the price adjustments that have occurred over the last 2 years are making many assets compelling on a replacement cost basis. Although there is clearly a flight to safety with capital preferring high-quality assets in strong locations, investor confidence and fear of missing out are becoming more evident in the marketplace. This is most pronounced in apartments, industrial and retail in the majority of the metros we serve. The recovery in the office sector is clearly broadening with the growing return to office mandates and average daily attendance at 80% of pre-pandemic levels. This measure was at 50% just 2 years ago and 57% just last year.

Last but not least, the pullback in new construction driven by limited risk appetite by equity capital and high construction costs will set the stage for stronger occupancies and rent growth across most property types in 2026 and 2027. Again, this is most pronounced for apartments and industrial, which were the most active in new deliveries over the past 5 years.

Self-storage was also affected by this, and we'll see improvements in the coming years.

For MMI, our vision of expanding market coverage through improved organic hiring and scaling our experienced professional recruiting as well as synergistic acquisitions remains our primary growth path. These are the parallel paths we have set to expand our private client market share and continue building on IPS success.

Going into 2026, we're expanding our growth strategy in retail and industrial in particular, both of which offer significant growth or opportunity in the majority of the markets we serve.

We also believe that further scaling of our financing capabilities has much room to run as we're proving through the success of many senior level originators who have joined MMI in the last several years.

On the acquisition front, we continue to see a wide bid-ask spread and misaligned expectations on the guaranteed portion of valuations and therefore, capitalizing on more accretive opportunities to recruit experienced individuals and teams.

Given the fragmented nature of our core business and the limited number of large viable M&A targets, most of our efforts focus on boutique firms with highly concentrated ownership, which presents its own challenges.

We're expanding our recruiting team and resources to increase capacity for additional experienced talent acquisition, while we continue to explore complementary business expansions.

From a capital allocation standpoint, our dividend and share repurchase program over the past 3.5 years has enabled us to maximize shareholder value while maintaining an exceptionally strong balance sheet.

In the near term, we face a particularly challenging comparison to last year's exceptional fourth quarter, which benefited from the significant reduction in interest rates. That said, we expect to see continued sequential improvement in our business as the drivers of transaction activity continue to improve.

Our strategy remains focused on leveraging our unique platform, expanding our market reach and investing in the tools and talent that will drive long-term growth.

With that, I will turn the call over to Steve for more details on the quarter. Steve?

Thank you, Hessam. As mentioned, total revenue for the third quarter was $194 million, an increase of 15% compared to $169 million for the same period in the prior year.

Year-to-date, total revenue was $511 million, up 12% compared to $456 million last year. Breaking down revenue by segment, real estate brokerage commissions for the third quarter accounted for 84% of total revenue or $162 million, an increase of 14% year-over-year. While transaction volume declined 2% to $8.4 billion, the company closed nearly 1,600 transactions at an average commission rate of 1.9%, which was nearly 30 bps higher than last year.

The increase in private client volume drove a 4% decrease in average fee per transaction due to the higher mix of smaller deals. We are not experiencing any notable fee erosion in the marketplace in any of our price tranches.

For the 9 months year-to-date, real estate brokerage commission accounted for 84% of total revenue or $427 million, an increase of 10% year-over-year. The year-to-date improvement included 8% growth in transaction volume to $23 billion across 4,136 transactions and a 2% increase in the average commission rate.

Average transaction size year-to-date was $5.6 million compared to $5.8 million a year ago, reflecting a higher proportion of private client revenue for the 9-month period.

Within brokerage for the quarter, our core private client business accounted for 63% of brokerage revenue or $102 million, up from 62% and $87.5 million in the same period last year.

Private Client transactions grew 24% in volume and 22% in transaction count. Year-to-date, private client contributed 64% of brokerage revenue or $274 million versus 63% and $245 million last year.

Middle market and larger transaction segments together accounted for 32% of brokerage revenue, generating $52 million in revenue compared to 35% and $49 million last year. While we achieved a 4% increase in the number of transactions within these segments, the overall dollar volume decreased 17%, reflecting a change in mix to more middle market activity and fewer transactions in the larger transaction space.

Large transactions significantly outgrew the market last year, creating a tough year-on-year comparison. Year-to-date, middle market and larger transaction segments combined represented 32% of brokerage revenue or $136 million compared to 33% and $126 million last year.

Revenue from our financing business, which includes MMCC, grew 28% year-over-year to $26 million in the third quarter. The strong growth was driven primarily by a 34% increase in transaction volume totaling $2.9 billion across 406 financing transactions, which was a 28% increase year-over-year.

The average financing commission rate was nominally down 4 bps as expected due to an increase in larger deals closed in the quarter. The overall performance reflects the continued momentum and progress in scaling our financing platform.

For the 9-month period, financing revenue was $71 million, a 33% increase compared to last year. This growth was driven by a 40% rise in transaction count and $8.2 billion in volume, up 46% year-over-year.

Other revenue, primarily from leasing, consulting and advisory fees was $5 million in the third quarter compared with $6 million in the same period last year.

For the 9-month period, other revenue totaled $13 million compared to $16 million in the prior year.

Turning to expenses. Total operating expense for the quarter was $196 million compared to $180 million a year ago. For the 9-month period, total operating expense was $540 million compared to $496 million last year. Year-over-year increases in absolute dollars for both the quarter and year-to-date period are largely attributable to the increase in cost of services resulting from higher revenue.

Cost of services for the quarter was $121 million or 62.4% of revenue compared to 62.2% last year.

For the 9-month period, cost of services totaled $316 million or 61.8% of revenue, up 50 basis points year-over-year. The increase in cost of services as a percentage of revenue was primarily driven by year-over-year revenue growth resulting in producers achieving higher commission thresholds.

SG&A expense for the quarter was $73 million or 37.4% of revenue compared to $71 million or 41.9% of revenue in the same period last year.

The current quarter results include a $4 million reserve for a litigation matter that we believe has a number of legal rulings we intend to aggressively appeal. Also, as Hessam pointed out, our SG&A expense would have decreased by $2 million year-over-year, excluding the legal reserve as a result of tight cost controls.

I'd also like to reiterate that we have continued to make investments in key strategic areas throughout the market disruption with an eye towards long-term competitiveness.

For the 9-month period, SG&A totaled $216 million or 42.2% of revenue, down from 44.9% in the prior year. For the third quarter, we reported net income of $240,000 or $0.01 per share, which includes an $0.08 per share charge for the legal reserve that we took in the quarter.

This compares to a net loss of $5.4 million or $0.14 loss per share in the prior year. In spite of the $4 million legal reserve, the year-over-year earnings per share improvement of $0.15 marks a notable return to profitability. During the third quarter, we maintained the same tax methodology we adopted in the second quarter and recorded a provision for income taxes of $1.2 million. For the 9-month period, the net loss was $20.9 million or $0.54 per share compared to a net loss of $23.8 million or $0.61 per share in the same period of the prior year. Adjusted EBITDA for the third quarter was $6.9 million compared to breakeven adjusted EBITDA in the same period last year.

Year-to-date, adjusted EBITDA was nearly breakeven compared to a loss of $8.7 million in the prior year. Adjusted EBITDA for both the quarter and year-to-date would have been $4 million higher if not for the legal reserve, underscoring the substantial progress in operating performance over the prior year.

Moving to the balance sheet. We continue to be well capitalized with no debt and $382 million in cash, cash equivalents and marketable securities, a $49 million increase over last quarter. Subsequent to quarter end, we returned $10 million in capital to shareholders through a dividend paid in early October. During the 9 months ended September 30, the company repurchased nearly 265,000 shares of common stock at an average price of $30.33 per share for a total of $8 million. Since August of 2022, the company has repurchased more than 2.4 million shares of common stock at an average price of $32.03 per share for a total price of $77 million. From the inception of our dividend and share repurchase programs over 3 years ago, we have returned a combined $200 million in capital to shareholders. We remain committed to a balanced long-term capital allocation strategy, which includes investing in technology, recruiting and retaining the best-in-class producers, strategic acquisitions and returning capital to shareholders.

We are encouraged to see signs of market stabilization evidenced by improved listing activity, a stronger pipeline, a better lending environment and renewed investor engagement. Ongoing uncertainty around global macro conditions, inflation, tariff policy and the labor market still exist, but the Fed has signaled a more accommodative environment, which should drive more transactional activity.

For the fourth quarter, we anticipate quarter-over-quarter sequential revenue growth consistent with normal year-end seasonality. However, being mindful that our prior year results benefited from an exceptional surge in activity as investors capitalized on rate declines. Cost of services as a percentage of revenue should follow the usual pattern as revenue builds through the year and be sequentially higher than the third quarter.

As for SG&A, after normalizing for the legal reserve in the third quarter, SG&A for the fourth quarter should increase modestly on a dollar basis. With the current tax methodology, tax expense is expected to be in the range of $4 million to $6 million for the fourth quarter.

With that, operator, we can now open the call for Q&A.

[Operator Instructions] Our first question is from Mitch Germain with Citizens.

I appreciate the chance to ask a question. And I know you talked about some of the tougher comps in the larger transaction segment of your business, but your hiring efforts have been on more experienced producers.

So maybe just talk about that dynamic in terms of the ability to get some of that larger deal activity accelerating again.

Sure, Mitch. The look sort of beyond the headline numbers in that category for us shows that in the usual price ranges where our IPA division and more senior Marcus & Millichap professionals execute transactions in the $20 million to $50 million price range.

Our business has been fairly steady. There was pretty much a same amount of deals done this year in the third quarter than last year. What happened last year is that we had an outsized number of very large deals, $70 million plus that we executed, which is predominantly why the comparison has become tough.

Last year, we executed 21 deals priced above $71 million and this year, there was $7. And there is no particular pattern to that or reflection of any change in strategy. It's just a matter of the size deals that many, many of our institutional clients and large private clients happen to execute at a given time.

So the strategy, both on the support levels of our existing IPA and senior Marcus & Millichap teams that are doing larger deals is unwavering, is on track. No changes at all have been executed there other than adding more leadership, adding a new Head of Research and investing more in expanding the IPA platform and capturing more share of the larger market transaction because we really believe it integrates well with our private client business, particularly as we see more and more of our private clients move equity from smaller assets and multi-decade held portfolios into larger institutional quality assets as they get closer and closer to retirement and estate planning. That bridging of the capital migration from private owners to the institutional market is a huge value proposition of IPA and Marcus & Millichap. And we're just really at the beginning stages of building that out, especially as the demographics continue to move in that direction.

On the hiring front, the experienced brokers that we target for acquisition or recruiting are very select in terms of which markets we have what need and what product type we have what need. And it's those needs and avoiding overlap with our existing capacity in a market that drives the recruiting strategy. So it's a very market-by-market, property type-by-property type effort, and it takes a long time because you have to develop relationships with those individuals. They have to get to know the platform over time. And many of them are with other brands where they may not be maximizing their potential. And frankly, that's the reason that a number of them have joined IPA Marcus & Millichap over the last 5 years.

Got you. That's super helpful. Curious about the conversations you're having with some of your customers. I know that many of them have really been on the sidelines last several years. And it does seem like some of them are now returning to the markets.

Are you getting a sense that they've either, A) Just accepted the new pricing dynamic that's in the market? And B) Are you seeing them begin to feel a little bit more constructive about transacting in this backdrop?

Yes and yes. We're seeing more motivation to put property on the market because of the reality that there is no Fed miracle. Many of our private clients over the last 1.5 years were expecting a much more dramatic drop in interest rates, the evidence for which wasn't there. And we've been very consistent in our analysis of the market where we did not believe interest rates would go back down significantly, and they haven't. That realization is now creating more motivation is the first thing.

The second is more and more of our private clients that didn't have a reason to sell are now facing reasons to sell because of loan maturities, maybe some operational issues and death, divorce, partnership breakups and all the other private client motivation. So we are seeing motivation also pick up due to that reason.

Most importantly, though, Mitch, is a combination of moderately better interest rates. We have seen lender spreads come in, which is favorable. But the price adjustments is the primary reason there is now more alignment in the market where we had a lot of unsuccessful listings on the market over the last 18 months due to unrealistic pricing.

And frankly, for us, there was a process of price discovery because there was so much moving around in the marketplace. It was hard to tell where the market really was. You had to put product out to market the best you could with great underwriting and see what the market response was going to be.

The number of listings that are now basically aging or becoming unsellable at the expected price of the seller is dropping, which is telling us that the market is finding that realignment. And then more and more of our deals are having less significant price adjustments and fewer are falling out of contract, all of which tells us that this alignment in price expectation is starting to happen. Is it there all the way? Absolutely not. We still have a ways to go. There's still plenty of owners that believe their assets are worth more than they actually are based on real numbers and especially year 1 and year 2 operations, which is where we're finding the most friction between buyers and sellers.

Great. Last one for me is I checked your financials to see when was the last time you had a similar level of revenues and you're extremely more profitable back then. And so I'm curious, and I really appreciate Steve's discussion around some of the legal reserve and some of the platform scale. But what's the new magic number to get back to producing the type of profitability that you did before?

Obviously, you've had cost of living adjustments and numerous issues that may have changed in your business from 4 years or 5 years ago. I'm just curious, how do you become a bit more scalable and start to see a little bit greater improvement in bottom line when you start producing, I don't know, 200 plus in terms of revenues per quarter?

Mitch, this is Hessam. Let me share some comments on that one, and then I'll turn it over to Steve. The most important difference over the last, let's say, 6 years, 7 years of our operating structure is the fact that we have invested capital in talent acquisition, talent retention and essentially talent development at levels that the company hadn't engaged in prior to this period.

And as a result of that, we have more experienced market leaders that have joined the company from the outside. Our retention of our top-level producers has been stellar, and we have invested in their careers by bringing them on or keeping them at Marcus & Millichap over the long term.

As you know, all of those kinds of long-term agreements have performance thresholds, have stickiness for the company's ultimate margin protection over the term of an agreement. But that capital that's been invested is actually being amortized on an ongoing straight-line basis at a time when all of that talent is facing a disruptive marketplace that has not been functioning.

Therefore, their normal just long-term average revenue production capability has been significantly hampered. So you have an additional expense line of a noncash item in the amortization of the capital that has been put out in getting this amazing talent pool retained and added to our company, yet the revenue component from all that talent has been significantly held back.

As that starts to change, what has been a drag should become an operating leverage for us. In terms of the comparison of cost structure, that's probably the largest item, and it's a noncash item, as you know.

Other investments in the platform do include a much bigger commitment to technology that we have implemented over the last 5 years than previously to when I became CEO. because, frankly, the company needed to move a lot faster and be a lot more nimble on things like a CRM system on things like automated matching of buyers and sellers to our website. And a lot of it was really sprung out of the pandemic because we pivoted and took major leaps forward in internal automation and a lot of automation we now offer to our clients through MyMMI, which is a major investment in a platform where clients, buyers, in particular, can tell us what they're looking for and the matching of their investment parameters to our fresh inventory is an amazing sort of mechanism for bringing efficiency to both our clients and to our sales force. So those are some key elements of why the expense structure has changed.

We're building the firm for a much larger revenue base than where we are today. And because of the talent that's been brought on board and retained and these investments, we really believe in a normal market operating environment, we'll be able to achieve that leverage.

So I just want to give that context, but let me turn it over to Steve.

That's pretty broad context. I guess a couple of additional points I would make and specific to your question, Mitch, that significant leverage, you're starting to see it happen at this revenue level. We're just shy of $200 million in this quarter. you can kind of do the math that sands the legal reserve, what results would have been. So we're kind of at that inflection point where you really see an acceleration of profitability, perhaps not all the way back to where we were at comparable revenue levels 6 years, 7 years, 8 years ago for reasons Hessam mentioned. But this is the inflection point.

One additional point, the investments in not only retention and recruiting of those senior agents, the technology as well that Hessam mentioned, but central services where we will also gain additional leverage by adding more value and therefore, connectivity to the firm with our producers. So just a couple of additional points to tack on there.

Our next question is from Blaine Heck with Wells Fargo.

Hessam, you mentioned the banks and credit unions expanding lending, which is clearly a positive for the transaction market. But I'm wondering if you can give some context around the scale of that expansion and how you feel about their willingness to lend today, especially on smaller transactions just relative to their activity maybe last year and relative to a more normalized level of activity in a functional transaction market.

Happy to, Blaine. There is a marked difference from even a year ago in just the number of lenders at any given time willing to give us quotes on certain assets, number one. Number two, with quotes coming back so out of market about a year ago, a good number of lender quotes were just not usable. And if you contrast that to where we are today, we have more lenders signaling to us that they're back in the market and the quotes that are coming back are a lot closer to consummating a transaction than they were even a year ago. The loan to values are improving. And the -- part of that is lender spreads having come in.

And probably the most important change is that it seems like what was clogging up the banking system in terms of loans that had to be extended, loans that needed workouts and so on has largely been addressed or there are plans to address them and fewer lenders appear to be clogged up versus a year ago. So it's taken our team of 100 or so originators across the country that are technologically connected to our -- to each other on a collaborative basis where we have real-time information sharing on what lenders are quoting at what levels based on specific loans that are being requested or mandates that we have. And that information sharing is another reason we're able to move faster in securing the right financing for each of our clients.

In terms of the composition of where the capital is coming from for our financing, something close to 50% is now being funded by banks and credit unions. That percentage hasn't changed a whole lot from a year ago, but the time that it's taking and the number of lenders you have to knock on doors with a year ago is where the improvement has been. So it's taking less time to secure loans from banks and credit unions.

We're seeing that also predominantly from the regional banks, a lot of regional banks were out of the market a year ago that are back in the market, which is for us as a local private client provider that regional bank connectivity has been significantly important over the history of the firm, and it's improving.

Great. That's great color and seems like a marked improvement over the last year. I guess to the second part of the question, when you compare the activity today to maybe what you saw in pre-pandemic periods, are we all the way back? Are we halfway back? How would you compare the activity versus kind of optimal capital efficiency?

On an overall basis, we believe the market is still somewhere around 15% to 20% below normal as a whole. But if you look at various price points and property types, the real answer is in that level of detail. So for example, if you look at Southern California, for example, or if you look at other regions like Texas, some markets are a lot closer to the velocity in what we consider a normal period, and we used 2014 to 2019 as the last sort of 5-year period of a normal, less choppy environment.

The Texas markets are a lot closer to that normal than, let's say, the California markets are. Large apartments are still well below their normalized 5-year average pre-pandemic as are small apartments and single-tenant net lease. I would say that small apartments and single-tenant net lease are about 20% to 25% below where that average trading in a normal environment should fall.

Got it. Very helpful. Switching gears, can you talk a little bit more about the auction business? I don't think we've discussed that in very good detail in past quarters. Just how large you see that segment growing in the next few years? And maybe touch on any differences in the fees you generate from that business versus your more typical brokerage business? .

Absolutely. Well, first of all, it goes back to specialization and expertise. We built the capabilities that are now in place organically by bringing on auction specialists that had significant experience -- and then shortly after we knew that there was a real market for it, both internally in terms of the collaboration and externally, we brought on Jim Palmer as the executive in charge. That goes back to our philosophy that you have to have management that has had practical experience in the niche. And Jim certainly brings that with his years and years of involvement in the auction business.

So the combination of auction specialist producers that are dedicated to the auction business that's all they do, strategically located in various regions under the direction of a dedicated executive with experience, Jim Palmer, is the combination that has made this very successful for us.

And one of the benefits is that for our investment sales force that is out there, especially in a disruptive market with conventional marketing -- and as we've discussed and I've made comments on just earlier on this call, the response to listings, aging listings and listings that weren't movable in a conventional way over the past, let's say, 24 months, we've found that more and more of them are good candidates for marketing through an auction platform.

And the auction platform obviously has the benefit of having prequalified bidders where we know that they're financially capable and committed to executing transactions. And as we've not only been able to find the right niche in executing the auction model, the benefit of the internal collaboration is that we collect the brokerage service fee for the seller and then there is the auction-related fees on top of that and a buyer premium that is added. So it's a win-win for the client. and it's multiple fee generation opportunities for the firm.

Got it. That's very helpful. Last one for me. With respect to the litigation, was this a onetime event? Or do you expect some ongoing headwinds? And maybe you can just give some color on the nature of the litigation. Is this related to ongoing segments of your business such that there could be more coming or just a more nuanced situation?

Yes. Blaine, I'll take that. First of all, I'll refer you and everyone to the 10-Q that will be on file with the SEC later today for some additional context. In addition to that, I'll say that we do anywhere from 8,000 to 10,000 transactions a year. So inevitably, from time to time, disputes of varying nature will -- are going to arise, most of which go away in the normal course of business. A very small number of those actually go to trial. And this matter, unfortunately, which involves a disputed disclosure-related claim actually did go to trial. It certainly is an outlier.

We believe that the verdict, which went against us was rendered in error. And therefore, we have very strong grounds for appeal. We intend to exhaust all our legal avenues to have the award reduced or reversed entirely. The -- so no, it's not an indication of any greater pattern or a specific segment of the business. It's an extreme outlier. No -- not an indication of any greater issue.

With respect to the amount, just based on the information that we've got available and our assessment at this time, we felt that was the appropriate amount to reserve.

There are no further questions at this time. I'd like to hand the floor back over to Hessam Nadji for any closing comments.

Thank you, operator, and thank you, everyone, for joining the call. We look forward to seeing a lot of you on the road and having you back on our next earnings call. This call is adjourned.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.