Brookfield Corp. undertook a major restructuring last year to try to get a better valuation. Concerns about office real estate are getting in the way.

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Shares of the Canadian firm have dropped about seven per cent since spinning off a 25-per-cent stake in Brookfield Asset Management Ltd. in December. The stock has underperformed the parent’s largest publicly traded affiliates, as well as the S&P 500 and competitors including KKR & Co. and Blackstone Inc.

Brookfield Corp.’s major real estate holdings are no longer publicly traded since it took Brookfield Property Partners private in 2021 at a valuation of about US$17 billion, after the pandemic weakened demand for offices and shopping centres.

“They obviously have a lot of footprint in office — and it’s better kind of office — but it’s still office,” Goldman Sachs Group Inc. analyst Alex Blostein said in a phone interview. “The market is penalizing them for it.”

The implied value of the real estate group is now “close to nothing” per Brookfield share, Blostein said. Brookfield also owns other closely held businesses, including Oaktree Capital Group.

A spokesperson for Toronto-based Brookfield declined to comment.

The idea behind the last year’s asset-management spinoff was to extract value from the firm’s large and growing business of managing money for sovereign-wealth funds, pensions and other institutional clients.

Investors who want to own only that business can now buy Brookfield Asset. Those seeking exposure to an array of infrastructure, property and other hard assets can choose to invest in the parent company.

Brookfield Corp. owns, operates and develops one of the world’s largest real estate portfolios, and has more than US$30 billion of its own capital invested in property. About US$15 billion is invested in roughly three dozen trophy office and retail properties that are among “the best in the world,” chief executive Bruce Flatt said in a letter to shareholders this year.

While Brookfield owns luxurious office buildings — such as One Manhattan West, Canary Wharf and Dubai’s gleaming new ICD Brookfield Place — it also holds less-glamorous assets in cities struggling with anemic demand as people continue to work remotely.

In the past three months, Brookfield funds have defaulted on mortgages covering more than a dozen office buildings, mostly in Los Angeles and around Washington. In the latter case, the portfolio of buildings had an average occupancy rate of 52 per cent. With interest rates surging over the past year, office landlords sometimes use defaults as a strategy to renegotiate commercial mortgages.

Closely held Brookfield Real Estate Income Trust offers another glimpse of the upheaval. The US$2.4-billion entity owns apartments, office space and industrial properties — plus the DreamWorks Animation campus in Glendale, Calif. Its net asset value has declined in four of the past five months, according to disclosures to investors.

Even so, Brookfield Asset continues to raise money for property investments. It started fundraising for its fifth real estate flagship fund in February and said it expects to have a first close in coming months. In 2022, the firm completed fundraising for the fund’s fourth vintage, with about US$17 billion of commitments.

“All of the things that have happened in the past few years have exacerbated one simple thing that’s always been in real estate,” Flatt said at an investor conference last month. “Quality wins.”

Bloomberg.com