German asset manager DWS Group and its U.S. real estate subsidiary Rreef are on an office selling spree, especially in South Florida.
In February, Frankfurt-based DWS sold the Las Olas Centre I & II office towers at 350 and 450 East Las Olas Boulevard in downtown Fort Lauderdale for $208 million. The next day, a Rreef Property Trust affiliate sold the Bank of America Plaza at Las Olas City Centre at 401 East Las Olas Boulevard, also in downtown Fort Lauderdale, for $221 million, according to records.
The deals mark the biggest office investment sales in South Florida so far this year. (If Spanish billionaire Amancio Ortega’s planned $275 million purchase of the Sabadell Financial Center in Miami’s Brickell closes, it will surpass DWS and Rreef’s sales.)
In Coral Gables, DWS has The Alhambra two-building office complex on the market for about $125 million, a source told The Real Deal last month.
Yet, DWS and Rreef aren’t reaping a windfall from their sales. Las Olas Center I & II traded for $4 million more than DWS’ purchase price in 2014, and Bank of America Plaza sold for $1 million than Rreef Property Trust’s purchase price in 2016, according to records. At the $125 million asking price, The Alhambra would trade for $6.4 million than DWS’ purchase price in 2015, records show.
Elsewhere in the U.S., DWS’ 24-story office building at 505 Montgomery Street in San Francisco hit the market in April with an asking price of about $95 million. DWS had paid $118.5 million for the tower in 2015.
In an interview, Todd Henderson, DWS’ head of real estate for the Americas, declined to talk about specific assets –– but shed light on Rreef’s overall strategy, including why it’s stepping back from offices and where it’s redirecting capital.
This interview has been edited and condensed for clarity.
Q. What is the relationship between Deutsche Bank, DWS Group and Rreef? There seems to be a lot of confusion out there?
A. The brand is Rreef. It was started in 1975 in San Francisco. The business was acquired in 2002 by Deutsche Bank and continued to be operated under the Rreef brand while at Deutsche Bank.” [Deutsche Bank bought Rreef in 2002 for $490 million. The Rreef name is an abbreviation for Rosenberg Real Estate Equity Funds, with Rosenberg a reference to Rreef’s founder Claude Rosenberg.]
[Rreef] extended across the global real estate business when Deutsche Bank bought it.
In 2018, Deutsche Bank spun out all of their asset management business under the brand of DWS, which included the Rreef business. We still operate under the DWS umbrella, with its largest shareholder remaining Deutsche Bank. And we still operate under that 50-year old brand of Rreef. All of our funds are named with the Rreef [brand]. Rreef Property Trust is a fund, Rreef America II is a fund. They’re all different funds and different ownership entities that have different groups of investors in them. Some are commingled, some are not. … Some focus on equity, some focus on debt, some focus on core real estate, some focus on development. So it’s a big, big business, and oftentimes people get lost when they just focus on one of the funds. I’m the chairman of the board of Rreef Property Trust, which is a fund, and it’s only a small piece of our overall AUM.
Q. So is Rreef a subsidiary of DWS Group?
A. Yes. We have offices in New York, Chicago, Dallas, San Francisco, Los Angeles, Atlanta, Boston, Orange County, Seattle. We believe capital is global and real estate is local and you need the local knowledge to execute appropriately.
Q. Speaking of local, let’s talk about Rreef’s divestment this year of South Florida offices. What is the strategy?
A. I never talk about individual assets. If I did, I’d spend all my time talking about individual assets because the firm owns here in the Americas 500 or so assets. I’ll talk about macro strategy. … In terms of office as a sector, we’ve de-weighted the office sector in our portfolios, and that has driven a number of selling decisions. Those selling decisions are the result of us thinking that we can redeploy capital for better risk adjusted returns in other sectors.
Q. So you are not just divesting from offices in South Florida but across the U.S.?
A.Yes.
Q. What are the other sectors in which Rreef is redeploying capital?
A. Residential. We’re very bullish on the residential sector. If you look at what’s occurring in terms of supply, new starts are down to 15-year lows, which is going to translate into a shortage of apartments or living units in the next, probably 12 months. Demand is unprecedented. We have never seen absorption of multifamily units like we’ve seen for the last two quarters, and last year was only beaten by 2021. You couple that with the lack of affordability for single-family homes, driven by a lack of supply, and then the cost of financing being expensive, and us not believing that there’s really any relief in sight for that cost of financing, translates into a pretty significant opportunity in rental housing. When you look further into the affordability of rental housing at the highest quality apartment levels, it’s very affordable, given the incomes and the rents. So we really like that sector. We feel there’s significant opportunities for income growth. We like Florida as a market for that. We like South Florida. … Florida has been the big beneficiary of in-migration in a number of the gateway markets, and so Florida is a target market for us.
Q. Are you referring to for-sale residential or rentals?
A. Multifamily rental housing, single-family rentals. We build single-family projects. … We have an inhouse development team. As a general rule, we take on development partners for development activities, but that’s the only area that we typically take on partners.
Q. You brought up affordability earlier. In South Florida, and generally the rest of the state, homebuying remains out of reach. Is that why you are focusing on apartments?
A. Homebuying is not affordable. There are certain parts of home renting that are not terribly affordable.
Q. So are you also developing or investing in affordable or workforce rents, including through Florida’s Live Local Act?
A. We are buying and creating homes that are market-rate rental homes. … We like owning newer properties with lower CapEx, and we like targeting a renter pool that can afford what we’re buying or building. That’s why we’re in the segment of the market we’re in.
Q. When did Rreef start divesting offices and redeploying into rentals?
A. In 2018 or so. We were redeploying into industrial significantly, and as we came through the pandemic, we were redeploying into industrial and residential, and we continue to be active buyers of [both]. But given that our portfolios are well allocated to industrial, we have been more aggressively deploying into residential over the last 18 or so months.
Q. Most institutional investors started stepping back from U.S. offices once Covid started in 2020 due to remote work and higher vacancies. Why did you start stepping back from the asset class two years before Covid’s onset?
A. Office was becoming increasingly expensive from a capital commitment perspective. The amount of capital per unit of NOI is significantly higher than all the other sectors. And what we were seeing was that that was increasing both through inflation and leasing concessions. We felt like what we wanted to own in office was new product that had the lowest amount of capital commitment, in the highest job and population growth markets. So we began repositioning our portfolio in that regard. The pandemic was the great accelerator. We were seeing real shifts in population growth, changes in the supply chain and the transformation of retail all before the pandemic happened. The pandemic really accelerated all of these trends.
Q. What makes office capital intensive? Tenant improvements? Concessions?
A. A lot of office is leased on a gross basis instead of a net basis. So increasing taxes becomes a landlord’s cost, and that’s disruptive to income growth. There are a lot of reasons to de-weight office.
Q. Aside from multifamily, you also started redeploying capital to industrial. Why, how is that market doing now and how focused are you on it now?
A. We began investing in industrial long before the pandemic hit, primarily because [of e-commerce growth] and consumers’ expectation to have their online purchases delivered in a very short timeframe. It caused a need for change in the supply chain, [which] was built for three-day delivery. Everybody expects one-day delivery and even same day delivery today. You have to get goods closer to the consumer. We recognized that very early on and started shifting our capital deployment to industrial, both buying it and building it in locations that were proximate to large population bases. That accelerated during Covid. … What have we seen in the industrial sector more recently? A normalization of demand, and in some markets, we’ve even seen rather tepid demand. But new [industrial construction] starts are down. We do expect demand will bounce back over the next couple of quarters, and given the … lack of new supply, that bodes well for the industrial sector through this next cycle.
Q. Why did industrial leasing demand temper more recently?
A. There was a lot of demand that was brought forward during Covid. There was a fair amount of leasing that occurred ahead of the demand, so the utilization rate of space is catching up. We just had to work through that as demand normalizes.
Q. What about industrial demand and supply in South Florida?
A. Given the land constraints in South Florida, there’s a large population base that generates a lot of demand. There is import demand as well. The flower industry in South Florida continues to be a big driver.
Q. Are the Trump administration’s tariffs, especially on steel, aluminum and lumber, affecting development costs for Rreef’s rentals?
A. Costs are increasing. … That is further thwarting new starts, which is only going to exacerbate … the dearth of supply that we expect in ‘26, ‘27, ‘28. The combination of tariffs on materials [and] the immigration policies have an impact on overall costs. Labor can be up to 50 percent of [costs for] any construction project. It’s going to ultimately translate into higher development costs than what we experienced prior to the tariffs and prior to the immigration policies of this current administration. A lot of developers are in a bit of a wait-and-see mode as to how costs are going to shake out.
Q. How is Rreef dealing with the higher costs of building apartments and single-family home rentals?
A. We’re doing our best to lock in costs before development. At the moment, there are opportunities to buy real estate below replacement costs, and if you can buy high-quality, newer, well-designed real estate and at below replacement costs, it doesn’t make a lot of sense to be building. This is why you’ve seen such a drop off in overall new starts frankly across the real estate space, but [especially] in the two favored sectors of residential and industrial.
Q. Can you quantify Rreef’s U.S. real estate portfolio?
A. The portfolio in the U.S. is over $35 billion. That’s the amount of real estate we own currently. We developed somewhere in the order of roughly a little over $2 billion through the last cycle of residential and industrial.
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