Brookfield's plight points to pent-up demand

Add Brookfield Properties Corp. to a growing list of commercial real estate players who have lots of money to spend, but little to buy.
The Globe and Mail reported Friday that Brookfield has $5 billion in cash at its disposal, but can't find Canadian properties that will provide the requisite 20 per cent return. Brookfield set up a $5-billion real estate investment fund in September with a sister company and dozens of major institutional players with the goal of acquiring several distressed office and mall properties.
"There really hasn't been that much out there," Brookfield CEO Ric Clark told the Globe. "When we first started thinking about this, we had many companies on the list as potential targets – the public markets have been so efficient that many have been able to solve their problems."
The situation points to the fact that many Canadian commercial property owners do not have the same debt problems as their U.S. counterparts, and tenants are not nearly as stressed, either. Canadian landlords are also showing more willingness to work with tenants to retain them.
As Avison Young's National Fall Newsletter pointed out, there is considerable activity in the Toronto office market, especially in the heart of Bay Street, as tenants take advantage of deals to move into new space or stay in their existing locations. Vancouver landlords are also expected to offer much more favourable lease terms as numerous agreements roll over following the 2010 Winter Olympics.
Vacancy is on the rise in major markets, but building owners are refusing to panic. Notably, in the retail asset class, several potential deals on malls ranging from Vancouver to Toronto have been scuttled because sellers did not get the prices that they were looking for, and properties have been quietly pulled off the market. Owners are banking that property values will hold relatively firm, and they can cash in on large equity gains later, even if they have to take less in rent now.
The same principle applies to both office and retail. The Calgary office market, where vacancy is expected to double in the short term, will definitely test this strategy as several speculative builds start to play out. But, generally, the builders of the Calgary properties have strong financial support.
Signs indicate that there is still considerable pent-up demand across the country.
While Brookfield built its $5 billion fund, several REITs and other investors were cleaning up their balance sheets and raising cash for an expected resurgence in acquisitions during the second half of this year. That resurgence has yet to materialize, and may be delayed slightly, because buyers and sellers are still trying to narrow their price-expectation gap.
Some have questioned whether REITs wanted the money primarily to manage their debts rather than acquire assets. But RioCan's recent $180-million foray into the U.S. market and Artis REIT's recent acquisitions of retail and industrial properties in Vancouver and Winnipeg, respectively, clearly indicate that some REITs are active buyers.
However, they are also having trouble figuring out where to spend their money. For instance,
many are anxious to invest in the downton Vancouver office market, where there is a shortage of class A properties, is a prime example.
The same goes for international investors who have a unique affection for Vancouver despite traditionally low cap rates.
What does this all mean? Brookfield is not the only investor with money to invest, and there is much more than $5 billion kicking around.