CEO of Brookfield Remains Optimistic About The Market

Good morning. Brookfield Asset Management CEO Bruce Flatt discusses the outlook for the commercial real estate market. U.S. homeowners have lost a staggering $2.3T in market value since June as higher interest rates drive down demand. Meanwhile, Realty Income is expanding into agriculture development with a new billion-dollar partnership.

🎧 Listen to Deconstruct's episode to hear luxury developer Michael Shvo's perspective on the challenges currently confronting the office market, as well as why he remains optimistic about New York and San Francisco.

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CAUTIOUS OPTIMISM

Brookfield’s Flatt Sees Hot Commercial Real Estate Demand Despite Recession

Where many analysts see gloom and doom in the CRE market, Bruce Flatt, CEO of Brookfield Asset Management (BAM), sees a silver lining.

Where demand won’t die: According to Flatt, the fundamentals of the commercial real estate industry have never been stronger at this point of an economic slump. High demand for prime spaces and low vacancy rates have led to exorbitant rents for premium properties in major cities such as New York and London. Furthermore, Flatt anticipates steady demand for specific sectors, such as information storage, which should drive continued investment in data centers.

‘It’s different this time’: Brookfield appears relatively unconcerned with the current market downturn, as Flatt has brushed off BAM's recent loan defaults as insignificant. The present situation appears to be unique, as landlord borrowing levels and constrained demand have created a distinct scenario that differs from prior economic slumps brought about by lax credit or excessive construction. However, the oft-repeated adage "it's different this time" comes to mind.

➥ THE TAKEAWAY

Risk is less, prices declining: Despite widespread layoffs, recent defaults, and cautious funding, Brookfield remains steadfast and prepared to make strategic moves. Last year, the company successfully raised ~$100 billion, and according to Flatt, they aim to do so again this year by investing capital overseas, particularly in China. Flatt emphasized that the current market conditions provide an ideal opportunity to invest since risks are lower and prices have dropped. While it is too soon to predict the market's trajectory, it is undoubtedly refreshing to hear such confidence.

WHERE'D THE MONEY GO?

Over $2.3T in Value Wiped Out by Market Downturn

The housing market is looking a bit deflated as $2.3T in value has vanished into thin air. And experts think prices could fall another 10%.

Disappearing act: Since June 2022, high interest rates have rained on everyone’s parade, with the total value of US homes falling from $47.7T to $45.3T by the end of the year—the largest June-to-December drop since 2008. Home prices were up 1.5% over the past year, but median prices have fallen about 11.5% from their May peak. And just last week, purchase applications hit a 28-year low.

Where it hurts most: The regions most affected by the downturn include those hit hardest by tech layoffs (the same ones that saw prices explode over the pandemic). Notable examples include San Francisco, Oakland, and NYC. Fortunately, in many places values are still above pre-pandemic levels, so homeowners could still make money on a sale. The total value of US homes is still $13T higher than in February 2020. But that doesn’t mean prices will stay where they are.

➥ THE TAKEAWAY

When does the climb start? Some economists are more optimistic than others. Overall, there’s agreement that we have yet to see the bottom. Analysts at Comerica Economics think the decline will eventually slow down. As of now, they predict prices will fall modestly throughout the year, ultimately resulting in a 9% decrease. With that being said, no one can reliably predict when a recovery could begin, so even a decrease of that size would be good news.

FUTURE FARMS

Realty Income Expands Into Vertical Farming With $1B Deal

Publicly traded REIT Realty Income Corp (O) is expanding into agricultural development after forming an alliance with vertical farming company Plenty to acquire sites and lease them back to the startup.

Planting more seeds: The agreement is worth nearly $1B, with the first deal being for Plenty’s facility in Richmond. Upon completion, the building is anticipated to be the world’s largest vertical farming facility. Realty Income will be acquiring the land and funding its development. The 120-acre campus is already being used for a deal with produce giant Driscoll to grow strawberries for the Northeastern market.

Looking to the future: Last year, the produce startup closed $400M in funding with one of its most prolific investors being Walmart (WMT). Plenty will be providing the retail space with crops grown at another facility to be developed in Compton, California. They see the new partnership as an opportunity to pursue their goal of scaling up across the country while supporting their own technology.

➥ THE TAKEAWAY

Still one step ahead: The proliferation of vertical farming nationwide, especially in urban metro areas, has made these plays more attractive in densely populated city centers like New York. Presently, Income Realty owns over 11K properties around the globe in nearly every sector. Their tenants include Walgreens, 7-Eleven, and more. Adding Plenty’s vertical farms to the mix could allow them to have a presence in most steps of the agricultural supply chain.

• Don't let the door hit you: Mere days after Wells Fargo (WFC) rewarded its mortgage bankers with a retreat, the financial services company laid many of them off including top producers.

• Grab your popcorn: Shares of UK theater chain Cineworld fell as they reported no buyers have been found for its UK and US assets.

• Straight from the feds: The Federal Housing Agency (FHFA) announced a proposal to amend several provisions in the Enterprise Regulatory Captial Framework for GSEs.

• Pleading petitions: Amazon (AMZN) workers are not okay with returning to the office 3 days a week. Employees are petitioning the CEO to scrap the return-to-office mandate.

• Nosediving: According to the Mortgage Bankers Association, mortgage applications have plummeted since the beginning of February as interest rates have jumped.

• Almost got away with it: Eight landlords in New Jersey have been slapped by the Attorney General after allegations that some were denied housing because they were on public assistance.

• Dogged determination: The CEO of Public Storage (PSA) will continue efforts to purchase rival Life Storage (LSI) even after LSI rejected an unsolicited $11B offer this month.

• Building blues: According to AIA’s Architecture Billings Index, architectural billings have shrunk from December to February.

• Billionaires making moves: From Bezos to Musk, more UHNWIs have begun investing in the single-family market, including Musk’s “Project Awesome” with Lennar Corp (LEN).

• Hedging their bets: REITs could conceivably help investors hedge against inflation, at least until a market crisis makes that far more difficult.

• Head on a swivel: Smart-beta investing pioneer Rob Arnott believes the slumping stock market is ‘far from finished’ and advocates for Treasury Inflation-Protected Securities.

• Another one bites the dust: Columbia Property Trust is the latest casualty of a sleepy market as they have now defaulted on $1.7B of loans across seven office buildings.

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📰 Deals & Dealmakers

• Taking things East: CapitaLand Investment Limited (CLI) has raised $1.1B for a new investment strategy with a particular interest in special-situation opportunities in China.

• Snapping it up: Developer Thor Equities has entered a deal for the biggest development site remaining in Chicago’s Fulton market for over $100M.

• Given permission: The FTC will not be blocking Amazon’s (AMZN) proposed purchase of One Medical Health Clinics, although they are still investigating for the time being.

• Wide tracts of land: Georgia’s state government has begun negotiations to acquire a huge parcel of undeveloped land with the objective of stopping development in the area.

• The hits keep coming: Rental platform REZI announced a $100M deal with SR Alternative Credit for a new investment model on the heels of another $100M funding round.

• On thin ice: The owner of the Holiday Inn by DC’s Mount Vernon Triangle, Birchington LLC, has filed for bankruptcy protection.

• Pickleball-palooza: NY-based chain CityPickle has opened its first indoor pickleball court in Long Island City, Queens. The space will take up 10 KSF on the building’s first floor.

• Spreading their influence: Private brokerage KLNB is expanding its presence by purchasing Edge Commercial Real Estate in a deal whose details have not been disclosed.

• Reaching for the clouds: Innovo Property Group (IPG) has topped out its project the Borden Complex, a five-story 900 KSF Class-A mixed-use development in Queens, NY.

• Forcing the hand: Sovereign Partners is buying the Tower56 office building from Pearlmark for $110M after the latter was forced to sell after being unable to refinance.

📰 Chart of the Day

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