These days, speculation about the economic impact and fallout of the COVID-19 pandemic tends to have a whiff of doom. But according to Bruce Flatt, CEO of Brookfield Asset Management, opportunities abound even in the midst of this crisis — corporate office buildings will not be empty for long, he says, and in some ways the coronavirus epidemic may leave the world better prepared for future disruptions.
“This too shall pass,” Flatt insisted in a wide-ranging Reuters Newsmaker interview with Rob Cox, editor of Reuters Breakingnews. “When you’re in the middle of these things, they always seem bad in the moment,” he said, citing the 9/11 terrorist attacks and the Great Recession of 2008 as calamities whose moment of dread has largely passed. As bad as COVID-19 has been, there are plenty of reasons to be bullish about the recovery to come, he added. “We see green shoots around the world and things opening up everywhere — and that needs to continue.”
Growth out of the ashes
Brookfield Asset Management itself is in an interesting position vis-à-vis the world economy, managing more than $500 billion in assets that include businesses in infrastructure, real estate, renewable energy, and private equity that are integral to society in general. Last year, Brookfield also acquired a majority stake in Oaktree Capital Management, another “alternative” investment firm that specializes in distressed securities — a move that looks more prescient every day. (Brookfield has offices in the U.S., but is headquartered in Toronto.)
You can watch the full video of the Reuters Newsmaker interview with Bruce Flatt here.
With assets invested in so many crucial sectors of society, Flatt sees reasons for optimism almost everywhere. “In the real economy, things are still tough,” Flatt admitted, but the stock market has rebounded because investors are looking toward 2021, and most expect the Fed to keep pumping liquidity into the market. The Fed “did the right thing” to avoid an economic depression, he said. “With interest rates at zero, what that means for asset valuations and business valuations is unclear,” he said. “What it probably means is that valuation multiples — P/E multiples, and valuations for real assets and real estate — are going to be higher in the future once you normalize the environment.”
That normalization process will include numerous bankruptcies and a significant amount of re-financing and debt-restructuring, Flatt conceded, but also said that “significant opportunities” could arise from the ashes of all that re-financing activity in the coming year. “Possibly, we’re going to get the best thing for everybody, because we avoided the true economic collapse, and you’ll have a slow equitization of all of these businesses over the next year and a half.”
Why businesses need offices
Flatt is also optimistic that office life will soon return to some semblance of normal, and that predictions of a permanent shift toward working at home and conducting business online are misguided. “The culture of a company is about its people,” Flatt explained. “The spontaneity and creativity that comes out when groups of people are working together, the interjection of ideas — you need a physical space to do that,” he added. “Our view is that it is ludicrous to think that companies will not return to offices, and that anyone who thinks otherwise is naïve about how a culture is built in a company.”
Brookfield has billions invested in commercial real estate and, according to Flatt, far from abandoning their buildings, many of the firm’s clients are asking for more office space in order to provide adequate social distancing for their employees. Indeed, to meet the COVID-19 crisis head on, Brookfield-managed properties are adapting, Flatt said. Offices are being outfitted with glass panels between desks, for instance, and other measures — such as one-way traffic patterns, regular disinfecting, and temperature-checks stations — are also being implemented. Some people may still elect to work at home if they can, he said, “but the spontaneity and culture of a business needs an office.”
Malls, retail & renewable energy
Flatt is equally sanguine about another sector that has been hammered by the COVID-19 crisis: retail. And that includes malls, which Flatt believes will eventually emerge with a viable hybrid business model in which physical stores serve as “showrooms,” and merchandise can be purchased on-site, picked up at the curb, or ordered online.
“Increasingly, online-plus-store retail is inter-mixing,” Flatt explained. “Our view has been that we are in the middle of that, in a value play to integrate those together.” Brookfield has more than $75 billion invested in retail and, according to Flatt, 60% of the U.S. population is within a one-hour drive of one of its malls. Some malls will undoubtedly fail, Flatt admitted, but he also said that Brookfield’s “big play” over the next 25 years is to re-develop failing malls into “office buildings, hotels, residential apartment, and condominiums,” a process that COVID-19 is already accelerating.
Renewable energy is another area where Brookfield is well-positioned to capitalize on current trends. The firm has more than $48 billion invested in wind, hydro, solar, and other renewable technologies, and Flatt said he expects the renewable-energy market to continue on its current growth path and possibly accelerate coming out of the pandemic.
“We think a big acceleration is going to happen with renewables, because the cost curves have been coming down with both technology and, more importantly, manufacturing capacity,” Flatt said. “That’s allowed solar in particular to set the price of energy in some markets.”
Flatt’s optimism also extends to the future of business in the United States, despite the ravages of COVID-19 and the civil unrest currently spilling out onto America’s streets. “Our view hasn’t changed,” Flatt said. “The U.S. is still a great country, and it will come back.”