Brookfield Asset Management (NYSE: BAM) has a long history of making contrarian real estate investments. For example, the leading global alternative asset manager helped buy former mall REIT GGP out of bankruptcy following the financial crisis. It has since purchased complete control despite the impact the retail apocalypse is having on mall tenants.
Brookfield has continued making contrarian bets this year. It's working to purchase its office- and mall-owning real estate affiliate Brookfield Property (NASDAQ: BPY)(NASDAQ: BPYU) for $6.5 billion despite the impact the pandemic has had on those property types. Now, it's further increasing its wager on the future of the office by agreeing to buy most of WashREIT's (NYSE: WRE) office portfolio in Washington, D.C.
Details on the deal
WashREIT has agreed to sell nearly all its office portfolio to a private real estate fund managed by Brookfield for $766 million. Overall, Brookfield will purchase 12 office assets located in the Washington, D.C., metro area with nearly 2.4 million square feet of space. The properties are 83% leased.
WashREIT's office portfolio performed fairly well during the pandemic. It collected 99% of the office rent due during the fourth quarter of 2020. While net operating income (NOI) declined, that was partly due to lower physical occupancy, which impacted parking income. Meanwhile, market conditions have improved in 2021. WashREIT noted that office touring and proposal activity increased in March to the highest level since the pandemic started. On top of that, many more tenants are back in the office, with more than 60% currently utilizing their space.
Why Brookfield is betting big on the D.C. office market
There's still a lot of uncertainty about the future of offices because of the pandemic. However, that's less of a headwind in Washington, D.C., than in other major office markets. For starters, the U.S. government and government-related contractors -- major regional office tenants -- are less likely to utilize remote work and hybrid office solutions in the future given their need for proximity to the capital and the sensitivity of their work.
Meanwhile, two notable catalysts on the horizon should bolster the Washington, D.C., office market. Amazon (NASDAQ: AMZN) is building its HQ2 in the region, and Virginia Tech is investing $1 billion into its Innovation Campus. Those catalysts should drive more companies to open offices in the region to support Amazon's efforts and benefit from hiring Virginia Tech's knowledge workers. As that happens, it could provide a lift to the occupancy and rental rates of the office portfolio Brookfield is acquiring.
Why WashREIT is selling its D.C. office portfolio
On the other side of the transaction, WashREIT is selling all but one of its office properties to Brookfield. It's retaining the iconic Watergate 600 building, for now. The diversified REIT is taking this step to accelerate its strategic transformation into a multifamily-focused residential REIT. WashREIT has also agreed to sell its retail portfolio and will eventually divest the Watergate building, hoping that a separate sale in the future will yield a higher value.
The company plans to use the cash from those asset sales to repay debt and fund the expansion of its multifamily portfolio by making acquisitions in select Southeastern markets. In addition to growing its current multifamily portfolio in the Washington, D.C., metro area, WashREIT wants to expand into fast-growing Sun Belt markets like Atlanta, Charlotte, and Raleigh-Durham. It believes this strategy will create greater value for its investors than if it remained a diversified REIT focused on Washington, D.C.
Pouncing on a unique opportunity
Brookfield has a long history of buying during periods of uncertainty. That certainly describes the current office market, given the unknowns of how remote work and hybrid situations will affect demand and rental rates in the coming years.
However, it's buying in a market that shouldn't experience as much disruption as others. Meanwhile, it's purchasing from a seller in WashREIT that prefers the ease of selling most of its portfolio in one transaction rather than trying to maximize value by selling each separately. That suggests Brookfield is getting a good deal. Because of that, this wager could pay big dividends for Brookfield investors in the future as the office market recovers.