Toronto-based mega manager Brookfield Asset Management’s chief executive remains bullish on opportunistic real estate investing, given the shortage of capital and strong real estate fundamentals against a volatile capital markets backdrop.
“In the decades that we have invested in real estate, we have found that volatile markets often present the best opportunities to acquire high quality real estate at exceptional values,” said Bruce Flatt, speaking during the firm’s second-quarter earnings call.
Such a volatile market exists today, with higher interest rates, higher inflation and tightening lender requirements creating uncertainty and pockets of stress in real estate markets globally, particularly in the US, he noted. “As the current cycle is evolving, this story has become one of stress in the capital markets versus the fundamentals of most asset classes.”
According to Flatt, 80 percent of the properties in real estate continue to have good fundamentals. He added that in 2022, retail centers hit record sales, rents for logistics properties grew 11 percent, and US multifamily rents grew 15 percent. He also added that premier office rents are at all-time highs in most cities, while hotel rooms have average daily rates above pre-pandemic levels. Meanwhile, land constraints, high material costs and limited financing will keep supply low, allowing for continued rent growth that should outpace inflation, he said.
Rather, distressed investment opportunities will come from borrowers that “were ill prepared or unlucky” with the financing structures of their properties. “I would say that over the next 12 to 18 months, you’re going to see some very significant or very interesting transactions happen by us or others,” Flatt predicted.
“The combination of the pockets of stress in capital markets and strong underlying fundamentals with constrained supply will lead to the best environment we have seen since 2009 to execute on our longstanding investment strategy for real estate, which is to buy high quality assets for value and drive upside through active asset management,” he added. “Buying great assets with compromised capital structures is always the easiest way to strong returns.”
Brookfield is currently in the market with its fifth opportunistic real estate fund. The firm launched Brookfield Strategic Real Estate Partners V this January with what is believed to be a $15 billion fundraising target. In his Q2 2023 letter to shareholders, Flatt said the firm is expecting a first close for the fund this year. Brookfield closed the predecessor vehicle, BSREP IV, on $17 billion in November 2022.
“It is during periods of time like now where our opportunistic real estate flagship fund series is designed to take advantage of market turbulence, and we have seen the success of our strategy through multiple cycles,” he said during the call. “We think the latest vintage, which is our fifth fund, will be an excellent vintage, maybe one of our best.”
Brookfield Asset Management had an aggregate $272 billion in real estate assets under management as of the end of the second quarter. Real estate is the largest asset class for the $850 billion AUM firm, followed by credit at $197 billion.
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