It Looks Like Brookfield Has an LA Problem


Brookfield Asset Management’s (US:BAM) real estate subsidiary, Brookfield Property Partners (CA:BPYP-A), recently defaulted on $275 million of CMBS (commercial mortgage-backed securities) underpinning the financing on its 41-story office tower at 725 South Figueroa St. in downtown Los Angeles.

It is the second office tower in Los Angeles that Brookfield has defaulted on. So how worried should Brookfield Asset Management shareholders be about the latest development?

BAM stock is down almost 31% in the last six months, while the Toronto-traded real estate unit’s preferred shares are down by 6.5%. By comparison, the Vanguard Real Estate ETF (US:VNQ) is down about 8% in the same time.

According to CBRE, annual investment volume in commercial real estate fell by 57% to $78 billion in the first quarter. Green Street’s Commercial Property Price Index showed that prices dropped by 15% over the past year as of May, following a peak in Q1 of 2022.

Trouble in LA

The actual owner of the 920,300 square foot property known as EY Plaza is Brookfield DTLA Fund Office Trust Investor Inc., which is 100% owned by Brookfield DTLA Holdings LLC. It, in turn, is an indirect, partially owned subsidiary of BPY.

Brookfield paid $150 million for the 38-year-old office building in 2002. In 2020, it took out a $275 million loan on the property with an October 2022 maturity. The company stopped paying its $305 million in debt on the property in April.

Trident Pacific Real Estate was appointed receiver. Colliers was awarded the assignment to lease and manage the building while in receivership.

Brookfield sent its 52-story Gas Company Tower into receivership in April after defaulting on $350 million in CMBS loans. The company’s said to have defaulted on $1.1 billion in loans on its LA portfolio.

The Los Angeles office market has weakened considerably in the past year. According to Bloomberg, downtown LA office vacancies were 30% at the end of March. Office rents are projected to fall by 55% by 2030.

Brookfield has said that most of its properties in Los Angeles and elsewhere are generally Class A buildings with high demand. However, these developments in 2023, with interest rates much higher, suggests that it’s better for Brookfield to walk away from underperforming buildings than find more expensive refinancing.

CEO Says ‘All Is Well’

The $20 trillion commercial real estate market is showing cracks in some pockets, Rich Hill, head of real estate strategy and research at Cohen & Steers, said on the Odd Lots podcast on March 17. Higher interest rates are one contributor, but also a lot of commercial office space is still not at pre-Covid capacity levels, putting pressure on income, he said.

In Brookfield’s first-quarter 2023 letter to shareholders, CEO Bruce Flatt told shareholders that it wasn’t concerned about the recent problems in LA and Washington, D.C. because those were market-specific issues rather than a prognosis for commercial real estate overall.

“When you own 7,000 properties, it is impossible not to make a few mistakes,” Flatt said in a May 11 letter to investors that accompanied first-quarter results. “But we have always prided ourselves on being an extremely responsible borrower, and our reputation in the capital markets sets us apart.”

Flatt highlighted that it’d done more than $12 billion in office financings since 2020 with few signs its overall portfolio is in trouble.

NY Success Story

The New York Fed last month said that ongoing stress in the local commercial real estate sector is still creating economic headwinds for the region as it seems to be making an otherwise-complete recovery from the pandemic, and it’s unclear when or if the sector will return to its prior strength.

One of the success stories in the office market is New York City’s Two Manhattan West. Brookfield’s Q1 2023 reported that it had signed more than one million square feet of leases in the soon-to-be-completed office tower at rents 35% higher than One Manhattan West, which was leased up before the pandemic.

While it does have an LA problem, until defaults spread to generally considered healthy markets, it doesn’t appear BAM shareholders need to worry about the situation.

However, it wouldn’t hurt to pay closer attention to Brookfield’s real estate investments over the next few quarters. Better safe than sorry.

This article originally appeared on Fintel

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