by Jack Sidders and Patrick Clark
After three-years of anemic transaction volumes, large real estate deals are making a comeback, according to Lowell Baron, the new chief executive officer of Brookfield Asset Management’s real estate business.
The alternative asset manager has sold $13 billion of property already this year, including major deals in the US, Spain and Australia, in a sign that liquidity is returning even for larger portfolios. That’s up from $3 billion in the first half of last year and just $2 billion in the first six months of 2023.
The sales are crucial for private equity firms investing in real estate, which have struggled to dispose of assets and return capital to investors, meaning fundraising has fallen sharply as cash remains locked in older funds.
“We’re edging back to a more normalized rate of transactions,” Baron said, in his first interview since assuming the role last month. “Over the last couple of years, there has been a severe lack of liquidity in the market and there haven’t been larger transactions trading.”
The end of the low interest-rate era prompted buyers to seek higher returns from real estate while sellers clung to backward looking valuations. That created a stalemate in which deal volumes plumbed historic lows and made it hard for valuers to appraise prices, further delaying a recovery.
The lack of sales has been a particular headache for private equity real estate fund managers, whose ability to raise capital has been hampered by investors’ funds tied up in older vehicles that have yet to make disposals. Private real estate fundraising declined for its third straight year in 2024, with managers hauling in $131.1 billion, less than half the 2021 peak, data compiled by PERE show.
But there are signs the protracted period of inertia is coming to an end. US commercial real estate investment jumped 14% in the first quarter compared to a year earlier when dealmaking was at its lowest in a decade with the exception of the lockdowns of 2020, data compiled by CBRE Group Inc. show.
Brookfield, which manages about $272 billion of real estate globally, has agreed to several sales this year, including an Australian retirement housing business, a Spanish student dorm owner and most recently Phoenix, Arizona-based Fundamental Income Properties, which is being acquired by Starwood Property Trust for $2.2 billion.
Fundraising is also accelerating, with the firm mopping up $5.9 billion for the fifth vintage of its flagship real estate fund in the first quarter, bringing the total to $16 billion.
“When we were out talking to our partners, one of the reasons people were holding back is because they weren’t getting capital back,” said Baron, a 20-year Brookfield veteran who replaced Brian Kingston atop the real estate business last month. With these disposals, “we are returning a material amount of capital to our investors and I think it is going to grease the wheels and allow them to allocate to new funds,” he added.
Still, the recovery remains uneven, with demand focused on sectors like data centers, rental housing and some logistics properties where there are shortages of supply and robust demand. But traditional mainstays of commercial real estate portfolios like office buildings face a more uncertain landscape, with demand concentrated on the limited amount of high quality new supply while vacancy rates remain elevated for older space.
In London, Brookfield has restructured a loan secured against the CityPoint skyscraper to buy time to upgrade the building and fill empty space after failing to sell it for more than the outstanding value of debt secured against it. In Los Angeles, the firm has defaulted on loans secured against office towers and ceded control of the properties to its lenders.
“Capital isn’t coming back across the board, which is creating a really interesting investing environment,” Baron said. “For assets that aren’t yet performing that well, that have more stories to them, we’re not seeing capital come back. But for companies that are best in class, there’s significant capital coming back.”
Brookfield made a series of contrarian bets in the aftermath of the pandemic — when questions about the work-from-home legacy were most prominent — acquiring a trio of European office landlords. That was a marked contrast from rival real estate giant Blackstone Inc., which has talked up its minimal exposure to office properties in recent years.
Uncertainty about future demand has limited new development, while major corporations led by Wall Street banks and tech giant Amazon.com Inc. have pushed hard to get workers back to the office. That’s now setting up supply shortages in the best districts, forcing rents higher and prompting even previously bearish investors to weigh getting back in.
“For us right now, we will focus on the highest quality assets and over time it will widen out,” Baron said. “We still see that bifurcation of the office market. There will be more stress to run through the system because there are large debt maturities that haven’t come due and large leases that haven’t rolled yet.”
The slow feed-through of distress has compounded the lack of transactional activity, extending the longest period of dislocation in real estate markets since the aftermath of the global financial crisis. But for managers that have been able to raise capital, that extension has also created opportunity, Baron said.
“This moment in time continues to be elongated,” he said. “The buying window is continuing because it takes time for capital to come back and get redeployed and in the meantime we are seeing investment opportunities with limited competition.”
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