Brookfield Seeks $150B Raise Despite Woes

Brookfield Asset Management sees now as the best opportunity to buy commercial properties in over a decade. The opportunistic tone comes on the heels of increased second-quarter earnings and strong real estate fundraising.

Brookfield Seeks $150B Raise Despite Woes

Brookfield Asset Management sees now as the best opportunity to buy commercial properties in over a decade. The opportunistic tone comes on the heels of increased second-quarter earnings and strong real estate fundraising.

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Good morning. Brookfield aims to raise $150B in 2023, spotting prime real estate opportunities unseen since '09. Single-family rentals remain resilient, with millennials fueling the demand. Meanwhile, SF property owners, hit by dropping real estate values, escalate appeals for tax cuts.

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DRY POWDER

Brookfield Sees the Best Opportunities in Commercial Real Estate Since 2009

Brookfield Asset Management sees now as the best opportunity to buy commercial properties in over a decade. The opportunistic tone comes on the heels of increased second-quarter earnings and strong real estate fundraising.

Golden era: BAM's Chief Executive, Bruce Flatt, is riding the bullish wave. In the company’s latest earnings call, he emphasized the current market situation characterized by increasing interest rates, inflation, and stricter lending criteria, which has led to volatility in the real estate sector. Yet, he perceives this as the most favorable condition for his firm’s strategy since 2009.

Opportunities ahead: “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. And he is not wrong. The rise in interest rates has pushed certain desirable properties into distress, creating a wealth of opportunities for mega managers like Brookfield to pursue. Yet, they haven't been entirely immune. Their venture in LA, the Brookfield DTLA Fund Office Trust, faced potential foreclosure risks this year.

Between the lines: Flatt noted 80% of real estate properties maintain strong fundamentals. In 2022, retail centers set sales records, logistics property rents increased by 11%, and US multifamily rents grew by 15%. Premier office rents hit all-time highs in many cities, and hotel room rates surpassed pre-pandemic levels. Supply constraints, material costs, and limited financing will keep supply low, enabling sustained rent growth outpacing inflation.

Business is booming: Brookfield finished Q2 with $850B in assets, a 13% increase from the previous year. Their focus spans infrastructure, real estate, and renewables, with significant stakes in private equity and credit. Despite fundraising challenges, they aim to gather a record $150B this year, buoyed by a $50B insurance acquisition. Recently, they secured $17B, with $3.4B dedicated to their largest-ever infrastructure fund, totaling $27B by June's end.

➥ THE TAKEAWAY

Looking around the corner: Brookfield Asset Management's trajectory provides an intriguing perspective for investors. As challenges emerge in the real estate landscape, firms that adapt, strategize, and seize timely opportunities can not only survive but thrive. Investing isn't just about predicting trends; it's about adapting to ever-changing market conditions with agility and foresight.

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INVESTMENT STRATEGY

Yardi Report: Single-Family Rental Sector Demonstrates Solid Growth Prospects

The national single-family rental (SFR) space continues to show promise in 2023, with significant drivers like millennial renters and post-pandemic adjustments contributing to the growth.

Growth factors: Yardi Matrix's August 2023 report on the national single-family rental (SFR) space highlights the resilience of SFRs in the commercial real estate arena. Millennials are seen as the primary force behind this resilience. As they age and search for cost-effective alternatives to homeownership and traditional apartment rentals, SFRs become more appealing.

Between the lines: “We see a looming millennial maturation—starting families, things like that— and I think they no longer want to rent the mid-sized, garden tower apartment, they want something that looks and feels like a home,” explained Doug Ressler, manager of business intelligence at Yardi Matrix, and author of the report. “As millennials mature, they will spark the demand for single-family rentals, and you’ll see a strong tide of that going forward in the next three-to-four years.”

Pandemic fueled growth: COVID-19 significantly boosted the SFR sector due to increased remote work and the demand for spacious homes at prices akin to regular apartments. Alongside rising mortgage rates, this spurred greater investment in SFRs. Since 2019, the national SFR stock grew by 40%, doubling from 2014 levels. In 2023, predominant growth areas include the Southwest, Southeast, and Western U.S., with cities like Orlando, Atlanta, and Jacksonville anticipating over a 200% increase in their SFR stocks.

Market dynamics: Despite the growth, the SFR space is not without challenges. Rent prices, after witnessing a 20.2% spike in 2021 and 2022, grew by just 1.3% in the first half of 2023. Furthermore, the volume of transactions involving institutional investors has decreased significantly due to factors like higher interest rates. Nonetheless, prices in the SFR sector have remained elevated, with an 8% rise in average sales prices for 2023.

➥ THE TAKEAWAY

Resilient sector: The evolution in the SFR space is cyclical, not linear. Despite market challenges, it remains a pivotal sector for major Real Estate Investment Trusts (REITs) who view this once overlooked space as an essential part of their future strategy. Prices, even with reduced sales, have retained their upward trajectory, reflecting the SFR market's fundamental strength. As millennials mature and continue to shape market demand, the future of the SFR space looks promising.

PANDEMIC RECOVERY

Property Values in San Francisco Tumble as Owners Demand Tax Relief

San Francisco property owners, ranging from office tower landlords to homeowners, are increasingly appealing for reductions in their property assessments and associated taxes, driven by the falling real estate prices in the city following the pandemic's impact.

Scale and impact of appeals: The number of assessment reduction appeals has doubled over the past three years. Major real estate corporations, including Brookfield Corp. and Blackstone Inc., are among those seeking cuts. The repercussions of the real estate downturn in San Francisco and other cities include lower tax revenue for city services, from policing to aiding the homeless. These declining revenues compound challenges for cities already facing budgetary constraints.

The financial strain on SF: For the fiscal year ending June 30, San Francisco saw requests for a staggering average reduction of 48% on property valued at over $60B. With about 55% of the 2,420 appeals heard getting a reduction, the city's finances are under pressure, pushing Mayor London Breed to implement austerity measures. Predictions indicate office tower prices might plummet up to 60% from pre-pandemic values.

Comparative landscape: However, San Francisco is not isolated in this trend. Other U.S. cities, like Los Angeles, Chicago, and New York, have also witnessed a surge in assessment appeals. The shift towards remote work has notably influenced property values, with a joint study suggesting that New York office spaces might lose around 44% of their pre-pandemic value by 2029.

More cuts, please: San Francisco's property-tax rolls increased by 4.6% to $340 billion this fiscal year, largely due to older real estate assessment hikes. Despite this, landlords like Brookfield and Columbia Property Trust are actively seeking significant assessment reductions for their properties. Others, such as Blackstone and Equity Residential, have requested more modest cuts.

➥ THE TAKEAWAY

Zoom out: San Francisco's real estate downturn serves as a case study in how global events can shift urban landscapes. While property-tax rolls have increased in the recent fiscal year, the appeal data suggests a pending adjustment period. Both large and smaller property owners are strategizing to mitigate financial losses, revealing an industry grappling with change and uncertainty. The city's resilience and adaptability will be tested in the coming years, setting a precedent for urban centers worldwide.

🌐 AROUND THE WEB

📖 Read: The Federal Reserve aims to shrink its balance sheet by $1tn this month, a pivotal step in reversing pandemic-era monetary policies.

🎧 Listen: On this episode of GreyCast by Greysteel, CEO Daryl Carter of Avanath Capital Management delves into his experience in the debt and equity worlds and the challenges of starting a business in 1991 and 2008.

✍️ DAILY PICKS

  • Bridge Investment Group, led by Jonathan Slager, has acquired six workforce and affordable housing properties in Greater Boston, totaling 1,722 units.

  • Nightingale Properties is under federal investigation for allegedly diverting tens of millions intended for building acquisitions to its CEO's accounts.

  • UC Santa Barbara halted its $1.5B windowless dorm project, criticized for resembling a jail, and is now seeking new design proposals.

  • Barry Sternlicht, CEO of Starwood Capital Group, says the company is in the early stages of launching a distressed real estate fund to capitalize on falling property values.

  • The Bronx is unveiling a 530,000-square-foot museum, the largest ever, celebrating Hip Hop's history and legacy.

  • A $550M hotel project with 888 rooms in Arlington has attracted thousands of bookings seven months before its February debut.

  • Jeff Bezos, Amazon's founder, is acquiring a $68M waterfront mansion in Indian Creek, a man-made barrier island in Miami.

  • Disney recently unveiled "Storyliving by Disney," a new real estate venture aiming to extend the company's magic into planned communities across the U.S.

📈 CHART OF THE DAY

New Report Shows San Francisco Has Worst Recovery of Any City From the Pandemic

ranking of cities

San Francisco's ongoing decline was highlighted by the University of Toronto School of Cities Downtown Recovery Rankings report, indicating the city's weakest pandemic recovery among all cities. The report analyzed mobile phone data from 52 U.S. and Canadian cities, revealing that San Francisco experienced only 32% of the foot traffic it had during Spring 2019. This 32% figure persisted during Winter 2022-2023 as well, signifying no improvement despite city efforts.

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