Brookfield’s Bruce Flatt says commercial real estate market is at a turning point

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Brookfield Corp. BN-T chief executive officer Bruce Flatt is predicting “a much different story” for the beleaguered commercial real estate sector over the next two years, suggesting falling interest rates and an uptick in transactions should create “major tailwinds” for property owners.

Mr. Flatt signalled what he sees as a turning point for gloomy real estate trends, particularly in the United States. He acknowledged the stress that has weighed on commercial real estate owners as a rapid rise in interest rates drove up the cost of borrowing, pushed down building values and slowed the volume of property deals to a trickle.

But that was last year’s story, Mr. Flatt told analysts on a Thursday conference call as the parent company for Brookfield’s varied asset management business reported fourth-quarter earnings.

“The new story will become soon that there are major tailwinds behind real estate, fundamentals are good and interest rates are coming down by 200 basis points,” Mr. Flatt said. (100 basis points equal one percentage point.)

Assuming that prediction for rates is correct, he expects that real assets such as infrastructure and “real estate in particular” are going to see cash flows and profits improve significantly “because the fundamental revenues are flat to going up, and interest costs are coming down dramatically,” he said.

In turn, cap rates – a measure of the yield from owning a property, based on its operating income relative to its value – should settle at more “realistic” levels, “and therefore transaction activity will come back,” Mr. Flatt said.

“I think the next 24 months in real estate, you’re going to see a much different story play out than what you imagined. And those stories that people are still talking about are stories from 24 months ago, not the next 24 months,” Mr. Flatt said.

Brookfield built its vast scale – it manages US$916-billion of assets, including infrastructure, private equity, renewable power and credit – with real estate as its cornerstone. It is still the company’s largest business, managing a US$276-billion portfolio.

In a difficult, expensive market for real estate owners in recent years, as many industry observers predicted widespread pain from high interest rates, Mr. Flatt has consistently said that the best quality real estate assets would continue to perform well, even in hard hit sectors such as office towers. It was the owners of second-class buildings that were at risk, he said.

Brookfield has not been immune to the market’s woes, and has defaulted on some commercial mortgages in the U.S. That included buildings in Los Angeles, Washington and New York, where Brookfield chose to walk away from properties that weren’t performing well if it couldn’t renegotiate better terms with lenders.

The asset manager is also planning to cut the amount of capital it has invested in real estate from US$24-billion to US$15-billion by 2028. It will keep most of what it calls its core real estate portfolio, which holds its trophy assets in major world cities, and sell transitional and development assets that have had a harder time, as well as residential holdings.

Last year, Brookfield raised US$8-billion for the latest vintage of its main real estate fund, which aims to bring in US$15-billion before the end of this year. But it has taken longer to secure that money from investors than it did the last time Brookfield raised a flagship real estate fund.

Even when refinancing real estate was at its most challenging last year, Brookfield said it completed US$30-billion of real estate financings on more than 150 different investments. Now, financing markets for properties are getting more liquid so far in 2024, “and that should be very supportive of transaction activity as well,” said chief financial officer Nick Goodman.

Brookfield Corp. reported a US$5.1-billion profit in 2023. The parent company of Brookfield Asset Management BAM-T, with a 75-per-cent stake in the asset manager, had distributable earnings of US$4.8-billion – a proxy for cash that could be paid out to shareholders – which was down from US$5.2-billion in 2022.