As values slide, Brookfield Asset Management plans to boost commercial real estate investment

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Pedestrians and office workers walk past the Bay St. entrance to Brookfield Place in Toronto’s Financial District, on July 12, 2022.Fred Lum/the Globe and Mail

Not since the Great Recession, Brookfield Asset Management Ltd. BAM-T says, have there been such attractive real estate investment opportunities.

Persistently high interest rates coupled with the rise of remote working means “the best real estate opportunities since 2009 are coming,” the Toronto-based investment company said Wednesday in a letter to shareholders published alongside its second-quarter results.

The company, which owns a one-quarter stake in the asset-management business that is 75 per cent owned by Brookfield Corp., is hoping to capitalize on plunging commercial real estate valuations. Other institutional investors are remaining on the sidelines and Wall Street banks are writing down billions of dollars in commercial real estate assets.

“Given the increase in interest rates, people were ill-prepared or unlucky with financing structures and that is where the opportunity is going to come,” Brookfield Asset Management CEO Bruce Flatt said on a Wednesday morning conference call with analysts. “Over the next two or three years, people won’t be able to pay their interest. Therefore, their capital structures will need to get fixed.”

“It is hard work buying tough assets and reworking them,” he said. “What is really lucrative is when you can buy great assets at discount prices just because they have bad capital structures.”

Lenders to U.S. industrial and office real estate investment trusts (REITs) that supplied credit-risk assessments to data provider Credit Benchmark in July said companies in the sector were now 18 per cent more likely to default on their debt than they were six months ago.

Pressure from short-sellers, meanwhile, is increasing as a July report from data provider Hazeltree found the volume of real estate stocks lent by institutional investors to support shorting activity has grown by 93 per cent in North America over the previous 15 months.

Major banks such as Goldman Sachs GS-N and Wells Fargo WFC-N have revealed spiralling losses stemming from their commercial property holdings during the first half of 2023. They have warned of further writedowns in the months ahead.

Much of the negative outlook stems from historically high office-vacancy rates as many employers, particularly in Canada and the U.S., struggle to persuade their workers to give up the benefits of working remotely. In downtown Toronto, for example, landlords have been forced to offer discounted rents to retain their tenants.

The uncertain environment has led some major institutional investors to avoid real estate. AustralianSuper, a pension fund with A$300-billion in assets under management, said in May it would suspend new investment in unlisted office space and retail assets because of poor returns.

Mr. Flatt said roughly 20 per cent of real estate assets, such as “traditional, non-premium office or offices in some cities” are “not so good” and he acknowledged “there is real estate that does not have good fundamentals.”

But 80 per cent of real estate properties “have fundamentals that are really good,” he said.

The company’s South Korean, Dubai and São Paulo office portfolios are 99 per cent full with record high rents, Mr. Flatt said, while rents for logistics properties grew 11 per cent in 2022 and “hotel rooms are full almost everywhere.”

“Over the next 12 to 18 months, you are going to see some very significant transactions by us or others, hopefully us,” Mr. Flatt said. “Then people will say, ‘Ah, we’ve hit the bottom of the market and the opportunity is now.’ ”

In 2009, the company launched the US$5.6-billion Brookfield Real Estate Turnaround Fund, which delivered a 35-per-cent net rate of return. Four iterations of the Brookfield Strategic Real Estate Partners fund have been launched since then – each producing double-digit rates of return though none approaching the level achieved by the 2009 fund – and the company is currently raising funds for a fifth.

The company is also raising money to invest in funds related to infrastructure, renewable power and private credit. In total, Brookfield Asset Management said Wednesday it is on track to raise a record US$150-billion of capital in 2023.

Company president Connor Teskey said on Wednesday’s call that the latest real estate fund has the potential to be one of the company’s best. Asked by Scotiabank analyst Mario Saric whether he was referring to the size of the fund itself or its potential returns, Mr. Teskey replied “let’s hope it is both.”

With files from Reuters

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