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Larry Antonatos, managing director and portfolio manager for Brookfield Asset Management.

The spring 2020 lockdowns designed to slow the spread of COVID-19 dramatically impacted real estate, as nonessential brick and mortar stores closed and consumers shifted to online shopping. In addition, theatres and restaurants, which are important minority occupants of retail real estate, were forced to adapt. Theatres closed, restaurants either closed or shifted to takeout, and consumers shifted to in-home entertainment and dining.

In fall 2020 as lockdowns ease, these short-term impacts are reversing. However, we should look more closely at the retail sector to understand the potential impacts of long-term behavioural changes resulting from the COVID-19 lockdowns. We believe the recent lockdowns have accelerated a longer-term shift from brick-and-mortar retail to online retail and omni-channel retail, which integrates brick-and-mortar presence with online presence. This shift has been happening for decades, but the lockdowns forced late adopters to adopt or suffer. Consumers went online to shop or they did without. Retailers with online presence scrambled to accommodate increased online activity, including buy online and pickup in store or curbside, while retailers with no online presence had no revenues.

Considering theatres and restaurants, we believe traffic will recover to pre-lockdown levels due to the enduring appeal of out-of-home entertainment and out-of-home dining. The net effect across retail, restaurant, and entertainment will be a long-term net reduction in demand for retail real estate. However, not all retail real estate will suffer. We think the results will be bifurcated. Brookfield believes strong retail real estate will become stronger as retailers concentrate their physical presence in the retail real estate with high-sale, high-traffic, and strong population and income demographics. Brick-and-mortar stores will remain an important means for retailers to manage relationships with customers and to manage their images. Conversely, we believe weaker retail real estate will continue to get weaker. Over time, retailers will choose to let leases expire rather than renew, and eventually, the retail real estate will be repurposed to other uses, such as industrial, office, or multi-family.

Keep in mind all will not be lost, because large parcels of vacant land in attractive locations are hard to come by. The land value can be high, even if old buildings must be removed and new buildings constructed. In fall 2020, our optimistic long-term view on high-quality retail real estate is contrarian. Public real estate companies with outstanding retail portfolios in markets with strong demographics are trading at significant discounts to real estate asset value. This is a compelling investment opportunity but is not without risk. In the short run, we could have increases in COVID-19 infections and renewed lockdowns. In the medium run, the return to out-of-home shopping, entertainment, and dining may be slow. But in the long run, we believe strong retail will become stronger and stronger over time.

The information in this podcast is not, and is not intended, as investment advice, an indication of trading intent or holdings, or the prediction of investment performance. Views and information expressed herein are subject to change at any time. Brookfield Public Securities Group LLC disclaims any responsibility to update such views and/or information. Any outlooks or forecasts presented herein are as of the date appearing on this material only and are also subject to change without notice.

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