Office Portfolio Concerns Weigh on Brookfield

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Good morning. Brookfield Corp. has been hit hard by recent defaults and concerns over its office portfolio, with shares falling 7% since spinning off a 25% stake in Brookfield Asset Management last December.

Meanwhile, Alexandria Real Estate is also facing challenges, announcing plans to reduce construction spending by $250M due to global supply chain and labor shortages affecting biotech lab projects.

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Brookfield Valuation Hit by Concerns Over Office Real Estate

Brookfield Corp. (BN) shook things up last year with a major restructuring, all in the hopes of getting a better valuation. But concerns over office real estate are causing some serious jams.

Trophy offices: Brookfield Corp owns a massive $15B real estate portfolio, mainly consisting of high-end offices and retail spaces. Unfortunately, the market is currently unimpressed, with analysts claiming the portfolio is worth next to nothing. To make matters worse, Brookfield defaulted on mortgages for over a dozen office buildings, mostly in LA and DC, as remote work persists.

Dwindling NAVs: Investor disclosures show that the net asset value of Brookfield Real Estate Income Trust (BREIT) has dropped in four of the past five months. This $2.4B entity owns various properties, from apartments and offices to the DreamWorks Animation campus in sunny Glendale, CA.

Daunting defaults: Just when it seemed like things couldn't get worse, Brookfield defaulted on two senior loans totaling $350M. The first default was due to the company's inability to pay off the loan in full by February, and the second was a failure to pay a property tax advance of $3.6M by April 10th.

Adding to their troubles: Citi Real Estate Funding and Morgan Stanley - both CMBS lenders for $350M debt on the 54-story Gas Company Tower in LA - are now requesting a court-appointed receiver for the property, as an alternative to bankruptcy. And even with the tower's monthly rent of $2.3M, it's still not enough to cover Brookfield's new debt service payments.

➥ THE TAKEAWAY

Quality over quantity: Brookfield Asset Management has successfully raised $17B for its fourth vintage fund, even amid Brookfield Corp.'s valuation struggles. Currently fundraising for its fifth fund, the company remains focused on quality over quantity to drive success, as CEO Bruce Flatt has emphasized. While their efforts are commendable, only time will tell if Brookfield can truly turn things around and overcome the current challenges they face.

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Alexandria Halts Biotech Projects Amid Supply Shortages and High Costs

Alexandria Real Estate Equities (ARE), one of the nation’s largest biotech owners, is reducing planned construction spending by $250M in 2023 due to supply shortages and high material and labor costs.

Lingering inefficiencies: The shift in spending comes as global chip shortages and rising worldwide demand for electrification is causing significant delays in acquiring specialized construction materials and equipment for biotech labs. Global chip shortages and difficulty locating qualified workers have compounded these problems. Alexandria still is focused on completing several large national projects already underway, totaling around 7.6MSF.

Rents on the rise: Despite challenges, Alexandria executives reported more than 48% rent growth in Q1 2023 compared to the prior year, representing the highest growth rate in its nearly 30-year history. Q1 2023 leasing of 1.2MSF also exceeded its quarterly average for the five years preceding 2021. Roughly 85% of the new leases in Q1 came from Alexandria's existing tenant base, many of which are global pharmaceutical firms.

Minimal fallout: Overall, demand for life science space has remained strong among large tenants, with funding adding up to $30B in 2022, compared to nearly $39B in 2021. While Alexandria and its tenants have generally seen little fallout from the collapse of Silicon Valley Bank, a transition to new lease security has been necessary. As of April 24th, Alexandria reported tenants had moved $26M in deposits to new banks, while $64.7M in deposits are in transition, with an additional $17.6M awaiting movement.

➥ THE TAKEAWAY

Building in a difficult market: The biotech construction market faces significant challenges that will likely persist, hitting all developers of speculative biotech projects. Alexandria has maintained growth and demand, with nearly half its acres pre-leased for completion. However, the current cost surge may make lab office projects more expensive to build, necessitating further supply chain innovation to keep pace with rising demand.

📖 Read about the importance of looking beyond the numbers in data to uncover the underlying story and meaning behind the metrics.

🖥️ Watch Nitin Chexal, CEO of Palladius Capital Management, explains why the US CRE market remains a viable option for investors despite short-term challenges.

🎧 Listen to Bisnow Reports as they head over to the 127th REBNY Gala and converse with attendees about political uncertainty and the complexities of the market.

• Crushing the coast: Proposed legislation in FL may allow developers to demolish structures that do not meet National Flood Insurance Program requirements, potentially destroying historic coastal properties.

• Sales slipping: In this high inflation and high interest rate environment, US retail sales and foot traffic fell 5% nationally in March 2023, according to a report by Placer.ai.

• Florida-based Avanti Way: Avanti Way Group’s Enrique Teran and Andres Korda team up with Jennifer Wollmann and Fernando Arencibia Jr. to launch a CRE brokerage in FL called Avanti Way Commercial.

• Javice's banking debacle: Frank founder Charlie Javice, whose college finance site was acquired by JPMorgan (JPM) for $175M in 2021, transferred millions from her JPMorgan accounts to Signature Bank shortly before SB’s collapse.

• Concessions are king: Despite concessions falling from 2020 peaks, Manhattan landlords continue offering tenants an average of 16 months free rent on leases, up from 13 pre-pandemic, as well as high tenant improvement allowances.

• NYC's largest landlord: Columbia University, NYC’s largest landlord, owns almost twice as many properties as previously thought at 383 buildings, outpacing other NYC universities by a landslide.

• Development of the day: Miami-Dade County could get a 630-unit multifamily complex built outside its Urban Development Boundary as developers propose 14 three- and four-story buildings on 20 acres in the south of the county's Princeton neighborhood.

• Revolutionizing cost management: With roughly 75% of CRE projects over budget right now, developers are embracing AI tools to uncover efficiencies and curb cost increases.

• Hawaii state of mind: Silverstein Capital Partners provided a $528M construction loan for a 972-unit mixed-use development, The Park on Keeaumoku, HI, featuring a food court, fitness center, theater, and infinity pool.

• Office apocalypse: Investment in US office properties took a dive in Q1 2023, with sales down 68%, at their lowest level since 2010, amid economic uncertainty and a disconnect between buyer and seller expectations.

• Offloading assets: First Republic Bank is looking to offload up to $100B worth of assets to avoid being seized by the FDIC and clear the way for a possible capital raise to stabilize itself.

Office subletting availability varies across Texas, with cities like Austin boasting sublet availability rates of more than 4.0%, while San Antonio only has 1.0% availability.

Brookfield Shares Are Slipping Amid Office Concerns