The first quarter of 2023 was not kind to Brookfield Asset Management's real estate holdings. With $103 billion of fee-bearing capital at the opening, the last day of March closed at $98.1 billion. Of the roughly $4.9 billion drop was $1.8 billion loss through market valuation.
You can never be too big to be hurt, and Brookfield is one of the largest real estate owners. But no company is bigger than the overall market. Company president Connor Teskey said in an earnings call on May 5 that "one thing that we are seeing across almost every region in every asset class is an absolute bifurcation of the real estate market." Class A and high-quality properties "are performing fundamentally better than they ever have been before." But legacy properties without new amenities or ways of addressing ESG "are really struggling."
"Unfortunately, the negative sentiment is dragging down the real estate sector more broadly," Teskey said. Unfair, he called it, but it is a fact.
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"[We've had] no major issues with valuations from a fundamental level, but there have been short term adjustments as the market has ebbed and flowed over the past 6 months," Kurt Westfield, managing director of WC Equity Group, tells GlobeSt.com.
But there are areas where the pressure is heavier and CRE loan distress is high. Out of the top 50 MSAs, which represent almost 57% of the nation's population, 42 saw an average increase in distress of 80 basis points, according to CRED iQ. Minneapolis has a level of 25.2%, followed by Chicago at 10.8%; Birmingham, Alabama with 10.7%; Milwaukee's 10.5%; and Cleveland at 9.4%.
"The market ultimately dictates the value of a property," says Tomas Sulichin, president of Miami real estate brokerage RelatedISG Realty's Commercial Division. "A property owner had an expectation of $20 million for an industrial park, but after showcasing the property and its potential to a group of buyers, the value decreased to $16.5 million based on their willingness to pay."
"Clearly, inflation and increased interest rates have created issues for all real estate,"
Avison Young Principal and Managing Director Michael Fay, tells GlobeSt.com. "Office buildings are not an anomaly but are getting hit harder due to the aforementioned factors as well as spotty return to office metrics in different markets. Commercial real estate in many states still continues to do well, but there is downward pressure from mortgage maturities which are coming up for refinance. It really depends on the product type as well as the market when navigating such issues."
Many property owners with maturing debt are faced with limited options: contribute more equity to pay down the debt, sell the property, or consent to foreclosure/deed in lieu of foreclosure," says Harold Bordwin, principal and co-president of Keen-Summit Capital. All have implications, including consenting to foreclosure or deed in lieu of foreclosure because "of the tax consequences of forgiveness of indebtedness as it counts as income."
And yet, a bit of good news: there's a good chance things won't come close to how badly CRE markets were battered in 2008 to 2010.
Westfield points out that "market collapse was unprecedented, and no one knew what/where the bottom was," and so there were few to no buyers. "There is still a plethora of liquidity in the market, cash on the sidelines, and buyers on the phone looking for opportunities."
That introduces a potentially less painful dynamic. Prices can fall only so far before investors pick up properties as a relative bargain rather than needing a fire sale. Think of it as a game theory problem in which players have to decide how long they can wait before someone else grabs the prize.