Blueprint: Brookfield’s second office default, Goldman Sachs’ affordable housing venture, Ascent’s family office partnership

Brookfield defaults on 12-property office portfolio in Washington DC and other locations after extending debt three times; Goldman Sachs forms a $1.15bn affordable housing venture at a time when the sector has 'never been more important'; Ascent Real Estate, formerly of Carlyle China, partners with a family office to expand its specialty real estate investment strategy; and more in today's briefing, exclusively for our valued subscribers.

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They said it

“People keep saying, ‘in six months’ time it’ll be better,’ but they’ve been saying that for 12 months now”

Gianluca Romano, head of capital raising at Catella, tells PERE how it has been a tough capital raising environment for a while as he embarks on expanding the firm’s global relationships. Read the full story here.

What’s new?

Bruce Flatt, Brookfield Asset Management

Bad debt
Two months after defaulting on $784 million of loans on Los Angeles offices, Brookfield Properties once again finds itself out of options to extend office financing. The real estate arm of Toronto-based manager Brookfield Asset Management last week defaulted on a $161.4 million commercial mortgage-backed securities loan backing a portfolio of Class B office properties, as reported by affiliate title Real Estate Capital USA (registration required). The 2018 financing was extended three times already, each for one year, prior to being transferred to special servicing. It was due to mature in August. The 12 properties backed by the loan are all offices, spanning Washington DC, Maryland, Virginia, Florida and Georgia.

The loan joins a growing roster in special servicing. According to data firm Trepp, nine loans with a balance of at least $100 million were transferred in March. Trepp’s CMBS Special Servicing Rate rose 37 basis points in the month to 5.55 percent, its largest monthly increase since August 2020. For office specifically, which was responsible for around 35 percent of new transfers in the month, the rise was 34bps.

Marks on mortgage defaults
Some of private real estate’s heavyweights, including Blackstone and Brookfield, have made headlines recently for defaulting on their real estate loans. In his latest memo published last week, Howard Marks, co-chairman of Brookfield-owned Oaktree Capital Management  gave his views on the topic.

On the one hand, he said, mortgage defaults do not necessarily mean losses for the banks involved. “If loans were made at reasonable LTV ratios, there could be enough owners’ equity beneath each mortgage to absorb losses before the banks’ loans are jeopardized. Further, mortgage defaults generally don’t signal the end of the story, but rather the beginning of negotiations between lenders and landlords.”

On the other hand, while the magnitude of bank losses from their commercial real estate loans is still unknown, it is clear mortgage defaults in the headlines will create further disruption for lenders and borrowers, he said: “At a minimum, this may spook lenders, throw sand into the gears of the financing and refinancing processes, and further contribute to a sense of heightened risk.”

Goldman forms affordable crew 
Goldman Sachs and its partners has purchased a $1.15 billion affordable housing portfolio in the US. The New York-based investment bank partnered with private REIT The Community Development Trust and The Michaels Organization – a developer based in Camden, New Jersey – to launch the Essential Housing Impact Partnership to acquire 90 properties located across eight states.

The portfolio is expected to benefit from initial capital improvements, environmental upgrades, and a long-term capital repair program, according to an announcement. Dan Alger, managing director and co-head of the Urban Investment Group at Goldman Sachs, said the preservation of affordable housing “has never been more important than it is today” and the acquisition allows the firm to “do it at scale, with a real focus on promoting positive outcomes for the residents”.

Ascent finds local friends 
Ascent Real Estate Investors, a manager that was spun out by executives from Carlyle Group‘s China business, has teamed up with Hong Kong-based family office Chow Tai Fook Enterprises to invest in the growth of real estate platforms in the country. The joint venture, called WS Ascent, is to be 75 percent owned by the family office, which will also provide seed capital.

WS Ascent is expected to invest in so-called ‘new economy’ real estate asset classes, such as the living and industrial sectors. Investments are expected to be exited through C-REIT public offerings. The venture is part of Ascent’s broader push to establish specialized real estate platforms in the country. Since 2018, the firm has launched logistics business Brilliant China and life science platform Concora. Read our full story here.

Trending topics

The heat is (back) on
Buyers surveying European real estate opportunities are tightening their focus on the UK market. After eight consecutive declines, MSCI’s UK Monthly Property Index turned positive in March, generating a return of 0.67 percent, of which the capital return component was 0.21 percent. This may indicate that values have reached a floor in Europe’s hardest-hit market, with the UK expected to lead the global recovery in deal activity.

Indeed, PERE’s latest analysis finds competition is already heating up. “It doesn’t feel like bargain pricing, and we’re having to compete against some of our peers and get somewhat aggressive to win these processes,” said Dan Valenzano, managing director of pan-European transactions at Patrizia. Despite the scale of the opportunity, there are nonetheless obstacles preventing a wave of new transactions. Access to financing, however, is not even the biggest problem buyers face. Read our analysis to see what is.

Pensions planning for a warmer tomorrow
Steadier times in the US are incoming, if a study assessing public sector pension plans’ predictions about inflation is anything to go by. According to the study by financial adviser Ortec Finance, 90 percent of a cohort of US pensions, responsible for more than $1.3 trillion of assets, have said they are confident inflation is on the decline.

“There is genuine optimism that lower inflation will become well-established with very few managers expecting it to be as high as it currently is within a year or two,” said Marnix Engels, managing director, pension strategy at Ortec.

Such favorable sentiment will be welcomed by the private real estate sector, which saw fundraising suffer in 2022. According to PERE data, $168.7 billion was raised in the year for closed-end funds, down 24 percent on 2021. Notably, within that activity, pensions were most prolific, accounting for 32 percent of the money raised for private property strategies as per associations INREV, ANREV and NCREIF’s annual capital raising survey published last week. That was the highest percentage for any single investor group, the associations said.

Fiera shows its competitive streak
The real estate debt fund universe has become a crowded playing field, with 244 closed-end and 61 open-end vehicles in market, according to PERE data. In launching its debut European real estate debt fund, Fiera Real Estate, the real estate arm of Canadian investment manager Fiera Capital, is seeking to stand out from the competition with the fund’s structure. While most real estate debt funds in Europe are closed-end, Fiera’s vehicle will have a semi-open-end strategy.

Managing director David Renshaw, who co-runs Fiera’s pan-European real estate debt platform, explains that the idea for the open-end structure came partly from Fiera Capital’s North American business, which already has multiple open-end funds. Such vehicles “have been very, very successful at attracting not just institutional capital, but also high-net-worth individuals as well,” he notes. For more on the fund, check out our coverage here.

Data snapshot

Sinking fastest
Apartments are seeing the fastest decline in pricing among property sectors. According to a white paper from MSCI Real Assets, apartment pricing is down by more than 10 percent from Q1 2022. By comparison, no other asset class was down by more than 6 percent in the period.

People

Young Buck(ingham)
Benjamin Young, one of three BlackRock senior executives to leave the world’s largest asset manager last year, has picked his next stomping ground. He has joined Indianapolis-headquartered developer Buckingham Companies as chief investment officer, a newly created position for the firm. “One of his principal goals as CIO will be to expand the company’s fund model and its relationships with new and existing institutional investors,” a source with knowledge of the hire told PERE.

Young is the second of his peers to find work elsewhere, following former head of US real estate investment management John Lamb joining Berkshire Residential Investments last year. The other leaver, Justin Brown, BlackRock’s former head of European portfolio management, is still on a career break, according to his LinkedIn.

Oxford’s debt hire
Toronto-based Oxford Properties Group has hired a former director in US lender Bank of America’s real estate structured debt team to manage its €3 billion of debt related to its European business. The real estate investment arm of the Ontario Municipal Employees Retirement System has appointed Tina Pristovsek [her LinkedIn here] as vice-president for real estate finance and capital markets of Europe, where she will monitor and manage Oxford’s relationships with lenders in the region.

Among Pristovsek’s portfolio of high-profile financing transactions during her career as a lender was the £1.25 billion ($1.56 billion; €1.4 billion) sustainability-linked financing of the 22 Bishopsgate London office tower in September 2022.

Investor watch

Teachable moment

Less than a year after Sacramento-based California State Teachers’ Retirement System’s best performing asset class was real estate, posting 26.2 percent net returns, its chief investment officer is bracing for writedowns. “Our real estate consultants spoke to the board last month and said they felt that real estate was going to have a negative year or two,” Christopher Ailman told the Financial Times last week. The investor’s real estate portfolio is 17 percent of its portfolio and worth roughly $52 billion. Office holdings are expected to be the biggest contributor to the negative returns, with Ailman predicting values have already deteriorated around 20 percent in that asset class.

The projection comes at a time when the pension has no direct steward of the real estate portfolio, after former director Mike DiRe was promoted to senior investment director of private markets at the start of this year. A replacement is yet to be announced.

This week’s investor meetings

Tuesday, April 25

Wednesday, April 26

Thursday, April 27

Friday, April 28

Today’s letter was prepared by Peter Benson with Jonathan Brasse, Evelyn Lee, Charlotte D’Souza and Christie Ou contributing