Brookfield wants US$15 billion for real estate bet after stumbles

As downtown skyscrapers sat empty in the aftermath of the pandemic and central bankers were about to embark on the fastest pace of interest-rate hikes in a generation، the Canadian asset-management giant Brookfield doubled down on one of the bets that made its name: buying office buildings.

The firm’s property funds spent US$7.2 billion on office real estate investment trusts in Germany، Belgium and Ireland in late 2021 and early 2022، decisions that sparked debate both internally and from some of its major investors، according to people with knowledge of the discussions. Yet the deals went through، in accord with Chief Executive Officer Bruce Flatt’s longtime playbook of buying seemingly undervalued assets and wagering they’d appreciate over time.

Biggest owner of commercial property

It’s a strategy that helped build Brookfield Corp. into one of the world’s biggest owners of commercial property. Now، as office values languish and higher rates persist، the investment firm is at the center of a global real estate shakeout.

Prices for most European and U.S. offices have tumbled in the past two years. And the effects are rippling out، pummeling banks from New York to Japan that have bet big on the space.

Brookfield has defaulted on more than $3 billion of U.S. commercial mortgages، walking away from properties including two Los Angeles office towers and Manhattan’s famed Brill Building. In December، S&P Global Ratings cut its credit rating on subsidiary Brookfield Property Partners to junk status، warning weak office demand could hurt prospects for $2.7 billion of loans maturing through 2025. 

Brookfield، set to report earnings this week، is now trying to raise $15 billion for a new real estate fund to capitalize on an expected wave of value deals. One year in، it’s almost halfway there; in the sunnier days of 2021، its previous property flagship took just a few months to attract $9 billion. The European acquisitions and investors still waiting on more capital to be repaid from previous funds are causing some to rethink committing money to the latest vehicle، according to interviews with more than two dozen fund managers، advisers، analysts and corporate executives.

Investing USD8bn in property funds

Real estate is in Brookfield’s blood. Property bets helped build a firm that now runs $865 billion، second only to Blackstone Inc. among alternative-asset managers. The parent، Brookfield Corp.، has invested about $8 billion of capital in the asset manager’s property funds، as well as a separate portfolio of trophy real estate from London’s Canary Wharf to New York’s Manhattan West. While the company has the financial means to easily weather the turmoil، it has signaled to investors that it plans to sell properties to cut its real estate holdings from roughly $24 billion to $15 billion by 2028.

Few investment firms better exemplify the rapid shift happening in a property industry that’s been upended by the twin shocks of higher interest rates and a pandemic that fundamentally altered how buildings are used and priced. Flatt views this downturn as another opportunity to strike; others see a more permanent change. For many investors، deals that once looked like good values now look like value traps.

“This is a time in the market where defaults are happening، particularly on office،” said Margaret McKnight، head of real estate portfolio solutions for Stepstone، which advises institutional investors. “Whether that affects your fundraising is a function of the bigger manager، and it has to do with their overall track record and whether you can get confidence in their ability to make money in the future.”

Strengthening renewables business

The doubts driven by the current environment aren’t just seen in the slower fundraising. While Brookfield Asset Management’s stock has climbed 24 per cent since its spinoff in late 2022 due in part to strength at its renewables، infrastructure and credit businesses، the shares in New York have lagged Blackstone and Apollo Global Management Inc. And shares of Brookfield Corp. have stubbornly hung around half what the company says are their intrinsic value.

Brookfield executives argue they own mostly high-quality real estate that will prove its value beyond the current down cycle. The company successfully refinanced more than 160 loans last year. 

“We have always considered ourselves to be value investors and that often involves taking a contrarian view that is different from the rest of the market for a period of time،” Brian Kingston، CEO of Brookfield’s real estate business، said in an interview. “I think we are in one of those periods now، and we will ultimately be proven right.”