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KKR’s Ralph Rosenberg Is Not Sitting on the Sidelines

The investment firm has $70 billion of real estate assets under management


When Ralph Rosenberg came to KKR (KKR) in 2011, the company didn’t have a real estate practice.

“Building a real estate business was a strategic priority of senior leadership,” Rosenberg recalled from a 79th-floor meeting room at the company’s 30 Hudson Yards headquarters. “And, if I was going to join a firm, I wanted to feel relevant and that I could really make an impact.”

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Yes, Rosenberg made an impact.

Starting from zero, KKR now has some $70 billion of real estate assets under management (about $37.7 billion on the credit side, $32.8 billion on the equity side). KKR’s real estate practice, which Rosenberg runs, employs approximately 150 professionals in 16 offices in 11 countries. Just last year, KKR raised $69 billion across all asset classes and purchased outright Global Atlantic, the $150 billion insurance company. (They already owned a stake in the company but purchased the 37 percent that they didn’t already possess.)

These are staggering sums and bold moves, especially given that 2023 was a year of retrenchment for many in the real estate business. But KKR has long believed something that the rest of the market hasn’t quite come to terms with — i.e., that 2024 is the year when the transactions will start again, interest rate anxiety or not.

The affable, bearded Rosenberg — who resembles Paul Rudd or perhaps Eric Bana — graduated from college never having taken a math course. He is perfectly at ease talking about his wife of 31 years or his four adult children. But the prime topic of conversation when we stopped by last week was real estate — and the Chicago native had a lot to say.

This conversation has been edited for length and clarity.

Commercial Observer: Tell me, how did you get into real estate?

Ralph Rosenberg: My entry into real estate was actually quite serendipitous. I graduated from college in 1986. I went to Brown University, and I was, quite honestly, just looking for a high-quality job and ended up getting a job offer to go to Goldman Sachs (GS). I didn’t grow up in a real estate family or have any exposure to the sector.

The real estate business was a lot of fun. I learned a lot. It was an interesting asset class in the sense that it was a very large asset class, and every deal was different. Even if there were two buildings literally next door to one another, the outcomes could be very different from the experience of the users and from a valuation perspective, and I liked the uniqueness of the individual deals within the asset class. And, as I’m sure you experienced in your travels, the personalities in the real estate business are pretty interesting.

Fast forward, I spent two years at Stanford Business School, and Goldman was starting to commit the firm’s private partnership capital to real estate deals directly and not just being an intermediary or an adviser. They asked me to come and be one of the founding members of that group, which, over the course of the 1990s, turned out to be one of the largest real estate investment platforms in the world.

If you were there in ’87, you saw Black Monday. That must have been a pretty formative experience.

You didn’t really realize it at the time, because I’d only been in the job for a year, but I remember sitting in the partner’s office who I worked for, and the market was crashing. It was pretty visible that something really transformative was happening, but I didn’t really have a full appreciation of what for a few weeks. The firm started processing what it meant to be a private investment bank at the time.

When you really felt it was in 1990, when I came back to the firm. That’s when the real recession started to sink in. The Gulf War was taking its toll on consumer confidence and business sentiment, and we laid off about a quarter of the real estate business. I remember that having a more profound, personal impact on me at the time.

The Tax Reform Act in 1986 really was the other big game-changer for the real estate industry. That took a couple of years to percolate — because a lot of the building that was done in the 1980s was speculative building, and it was tax motivated. That speculative building came online right when this recession was happening coming out of the crash.

I imagine starting a real estate fund at that time must have been an incredibly useful experience for 2024.

For sure. There were very few players in the world who could take advantage of the distress that was being created in the real estate industry broadly. Our first fund, which was formed in 1991, was $150 million, and at the time it was one of the few private, closed real estate funds that existed in the world. We spent most of our time buying nonperforming mortgages from the [Resolution Trust Corporation] and the FDIC and then subsequently from the insurance industry. We then migrated that concept from the United States to Europe and set up a platform in Europe to do the same thing, then migrated the platform to Asia in the latter part of the ’90s.

And now that thesis is what holds true as you march through time to today’s environment, where a lot of dislocation provides a lot of opportunities to take advantage of the deleveraging of the real estate cycle, lots of opportunities to buy assets at low replacement costs, and to recapitalize assets that are held by sellers who need to find liquidity, etc. It’s 35 years later, but there’s a lot of pattern recognition in my career.

Tell me how KKR is viewing the market now?

I think you have to answer that question in two ways. One is: What types of fact patterns are we gravitating toward that create really interesting risk-return opportunities for us as either an equity investor or a lender? Those fact patterns typically come from counterparties who have a fundamental need to either deleverage or to create liquidity. Those parties are open-ended funds that are facing redemption pressure; they’re private real estate investment trusts; they’re closed-end funds who are in their harvesting periods and either need to sell assets to return capital or they don’t have money to deleverage assets whose capital structures are maturing; they are major sovereign wealth funds or pension funds that were prolific direct investors in the real estate sector, but, now, with the real estate market contracting, they’re looking for liquidity.

Then, you have to marry that with the themes that we are particularly interested in investing behind. What are those themes? We basically map everything we do back to one or more of the following thematic buckets: How companies produce and or distribute goods — think onshoring supply chains to become less dependent on China.

Then there’s demographic patterns — think the movement from agrarian China or Japan into the big cities. So, while the Japanese population is shrinking, Osaka and Tokyo are growing. What does that mean for the real estate sector? Think people moving from the big cities in the North to the Sun Belt in the South.

And there’s a third bucket of themes around how people will either spend their time or their money — think everything from shopping online to work from home.

Let me give you some examples of things that we’re focused on: We are strong believers in long-term demand drivers for the industrial logistics complex in the United States. Why is that? We have yet to see the greater implications of the onshoring desires of corporations here, even though people have announced that they want to become less dependent on China. 

To go from announcement to actual enactment takes a fair amount of time.

I had actually been hearing reports that industrial and logistics had plateaued in terms of rents and availabilities.

One hundred percent. In almost every sector that I’m going to mention, rents have plateaued. A real estate golden rule is the only way you make money in this industry is when there’s supply-demand balance at the asset level. What does that mean? It means occupancy, in my opinion, above 93 or 94 percent, because that’s when a landlord has pricing power to push rents with elasticity.

When I said logistics or distribution assets is something that we like, I’m not talking about the resiliency of that supply-demand dynamic today — I’m talking about the long-term demand drivers that over a cycle will allow a landlord to increase rents and an average annual compounded growth rate that exceeds the CPI expectation. If you can do that, you can create real income at the asset level.

Logistics distribution is one product type. Multifamily apartments is another example. In many markets, the self-storage sector has been overbuilt. You’ve certainly seen that in the life science sector in many markets. Senior housing would be another area where that’s basically true. The one area where you see fundamentals stay very resilient from a supply-demand perspective is single-
family housing for rent, because there’s just not a lot of new building of new houses and the consumer is having a tough time securing financing to buy a new home, even if they’re available.

Have you guys started to actually transact on all of these asset classes?

Yes, we’ve had a very prolific first half of the year. In no particular order, we’re making a big investment in an independent-living senior housing company where a global sovereign wealth fund is selling us a minority interest that they’ve controlled for a long time [which will be announced in several weeks].

We’re buying a large portfolio of multifamily apartments from a fund manager who’s liquidating a closed-end vehicle [also to be announced in a couple of weeks]. I’m sure you read recently in the paper that we’re buying a large portfolio of student housing assets from Blackstone, as they are risk-managing their BREIT portfolio. We just bought Unizo Hotel Company out of bankruptcy in Japan. We’re under exclusivity to buy another hospitality company in Europe from a large global sovereign wealth fund.

Last year, at this time, we  had a pipeline of loans that we were quoting, that was about 10 billion in U.S. dollars in size. Fast forward to today, the same pipeline is $20 billion in size. Of the $20 billion that we see today in our opportunity set, 32 percent of that is associated with new acquisition activity and 68 percent of it is associated with people who need to refinance.

So, what is that saying to us? It’s saying two things. Number one, there’s a lot more deal flow going on, both in the refinancing space and in the acquisition space. And, secondly, the amount of the activity associated with new deal flow in terms of acquisitive activity has gone from 20 percent to 32 percent. As a percentage of the deal flow that we’re seeing, people are starting to clear the market, they’re starting to become buyers and sellers that are agreeing on terms for a two-way market to start to re-emerge again.

Talk to me a little bit about the Japanese hospitality purchase.

Unizo was in bankruptcy coming out of COVID. It had limited service hotels throughout the country. It was a complicated deal that I think KKR was uniquely qualified to execute, because we’ve got the dominant private equity franchise in Japan. And, about a year and a half ago, we purchased from Mitsubishi and UBS one of the largest private real estate asset management platforms in Japan now called KKR Japan Realty Management — that platform unto itself has about 165 professionals. We are, by definition, one of the largest direct players in commercial real estate in Japan having made that acquisition.

So the corporate expertise that we have, through the private equity franchise, coupled with our ability to take on scale with respect to acquisitive activity in the real estate space, allows us to create something like this Unizo opportunity that we’re talking about. The size of that deal was about $800 million.

You have a story on the KKR website about Japan as almost a model for recovery. Tell me a little bit about how you started to think about that concept.

You have to start with the fact that the Japanese economy is the third-biggest economy in the world. It’s developed — it’s got a banking system, it’s got a legal system, it’s got a currency that’s hedgeable, it’s got a deep financing market, it’s got a capital market system that’s resilient. Those are the macro attributes if you’re a real estate investor that are seductive.

Secondly, you have to point to the fact that we’ve had a private equity franchise in Japan for 20 years, and we have established ourselves as the dominant private equity player in that market. When you have the dominant private equity platform in the market, you start to focus on how to be a relevant real estate participant. 

That led us to the acquisition of this Mitsubishi UBS platform, which is perceived as one of the best-in-class real estate investment and asset management platforms in the market. When you combine that asset with our private equity franchise, we think we’ve created something in Japan that is irrevocable from a real estate perspective.

You have to also appreciate that, in Japan, a lot of the real estate is held on the balance sheet of corporates, that the corporates really over time have not felt the urgency to monetize. As the markets have progressed in Japan, just in the last couple of years, there has been more pressure from the Japanese monetary authority on corporates to optimize the return on equity for their shareholders.

A lot of our activity is the partnership between our real estate team and our private equity team to try to unlock the real estate value that’s in these corporates. An example of that was in early March when we announced a deal where we purchased 32 logistics assets out of a company that KKR had bought from Hitachi and we effectively did a sale-leaseback on behalf of one of the two publicly traded REITs that our Japanese asset manager runs capital for.

Do you think the distress shakeout is gonna get worse?

I think that the market has sort of found a floor in terms of values. I think that there is a reasonably deep bid for properties that are long-term, demand-driven resilient, like the property sectors we mentioned earlier, in the 5 to 6-plus percent unlevered yield on value. And that is 25-plus percent cheaper than those assets would have traded for in 2022 and ’23.

I think that the credit markets are showing signs of thawing. I think that we’re seeing optimism that while we might not get a rate cut here that rates have sort of plateaued.

And, as long as people are able to underwrite cash flows, without much of an expectation of any real rental growth over the next couple of years, I think you’ll continue to see sort of a functioning market. I’m not a believer that you’re going to see some type of a big systemic problem or like a crash in the real estate market with respect to all these healthy sectors that I rattled through.

The commercial office sector is a different animal. And I do think that the value destruction in that sector of the market will ultimately continue to suppress average capital flows into the rest of the market. Historically, 70 percent of the real estate market by value was in the office sector. And the office sector is facing this fundamental resetting of values, based on the massive disruption of this supply-demand equilibrium.

Manhattan’s got plus or minus 500 million square feet of commercial office space. Either actually vacant or shadow space, meaning people with leased space but they’re not using it — that’s about 100 million square feet. That’s 20 percent of this market. I like to say, you only need to be like a 12-year-old kid to understand that it probably takes a lot of economic growth in business formation to absorb that kind of square footage.

Where’d you grow up?

Grew up in Chicago. Even though I’ve been in New York since college, I am a diehard Chicago sports fan. [White Sox.]

I went to Brown not having any preconceived notion as to what I was going to study or what I was going to do.

Senior year I had offers to work at Drexel Burnham, Kidder Peabody, Salomon Brothers, and Goldman Sachs. Because I came from a family of lawyers, I didn’t really have any preconceived notion as to what job to accept. I really wanted to go to Drexel, because back then that was the hot firm. And, just by the luck of the draw, a very close friend of our family in Chicago was a financial adviser who ran his own boutique firm. My parents said, “Why don’t you ask this guy David Heller for some advice?”

When I sat down with this guy he said to me, “All these firms, other than Goldman, are the top players in one dominant sector.” Drexel Burnham owns the junk bond market. Kidder Peabody at the time owned the mortgage market. Salomon Brothers is the biggest fixed-income player and really was the biggest trader of Treasurys. 

He said, “Goldman might not be the biggest in any of these things. But they’ve got the most diversity across all their products, including traditional investment banking. And, by the way, they’ve got the best culture.”

And for somebody who was a history major — never took a math class in college — he said, “I believe you’ll be better off in a culture that’s more nurturing, more collaborative, more team-oriented.”

Last question. What are your thoughts on the actor Paul Rudd?

I’ll tell you a funny story. I said to my wife, “You know I get stopped a fair amount and asked if I’m Paul Rudd,” and my wife said, “That is complete bullshit. Not possible.”

And, literally two days later, my wife and I are checking into a restaurant in Midtown for a reservation. And the hostess said, “Are you Paul Rudd?” Right in front of my wife. So, I said to her, “Can you please stop calling bullshit on me?”

Max Gross can be reached at mgross@commercialobserver.com