"We have a client who has been interested in building a large, diversified portfolio of net-leased properties, under the belief that the idiosyncratic risk of such assets allows them to be purchased at slightly better pricing than traditional multi-tenant properties or high-credit, net-lease deals," Poutasse explains. "When you put together a large portfolio, you end up with a lot of credit-risk diversification. Net Lease Capital Partners is one of the more well-established firms in that business, and it sees transactions that wouldn't ever come to us."

Likewise, ING Clarion has redoubled its joint-venture initiatives. However, it has done so "reluctantly," concedes managing director and head of acquisitions Jeffrey A. Barclay, since it would prefer to have full control of its holdings. "We've shifted a good bit of our investment activity away from outright purchases of assets to joint ventures," he details. "So far we've been extremely fortunate in our choice of partners."

Yet such structures do have their disadvantages, the New York City-based executive points out. "The pros are that you get an operating partner who is very skilled," he says. "If you structure the venture right, you can align your interests with those of your operating partner, and you'd probably have access to a pipeline of transactions you wouldn't otherwise have. But it is complicated to have a joint venture that owns something 100%. When you structure it, you need to have agreements on how to operate it and more importantly, how to finance it and how to get out of it."

Even long-time, traditional real estate investors are pushing beyond their historic comfort zone to make deals nowadays. Investments that were once considered opportunistic are becoming more mainstream. "We are looking at things outside the four major food groups," says E. Davisson Hardman, New York City-based managing director and head of US real estate investment at Morgan Stanley Real Estate.

Yet perhaps the most non-traditional of plays is infrastructure. Rreef, for one, invests in transport-related facilities such as ports, airports and toll roads, and utility networks as well as healthcare and educational properties and broadcast towers.Poutasse says investing in infrastructure has "tremendous potential. It's a different definition of real estate but the government-owned infrastructure sector is enormous."

"Everything is incredibly competitive," Poutasse states. "In the hotel area, there is somewhat more competition at the portfolio level, but any leased office, retail or industrial building that is listed by a competent broker gets extraordinary interest right now." Even so, "there is enough capital out there that it's extremely competitive for well marketed and decent real estate, regardless of whether it's a single property or a large portfolio," he says.

Dan Fasulo agrees. "In the past there would have been only a few major firms that could take down a billion-dollar portfolio. Now there are so many different players and buyer groups that can do it," he finds. "Then there is the added value of getting all the investment capital out at once."

Jeff Barclay of ING Clarion, however, contends that buyers may pay a bit more for bundled assets in today's market. "There are probably more portfolio premiums than discounts because the opportunity for large investors to get their hands on large groupings of properties is very desirable," he says.

ING has made a few sizeable purchases in recent months. In January it paid $66 million for five industrial warehouse buildings in Southern California. The seller was an institutional fund managed by Rreef. The package included the 319,000-sf Anaheim Miraloma Distribution Center and the three-building, 325,000-sf Valencia Commerceplex.

Yet, as the portfolios get larger and more expensive, the pool of buyers gets smaller, counters Hardman. Therefore, an investor may get a break on the cost. "You do get some pricing advantages with these larger acquisitions," he says. "It may not be enormous, but it's better than making a series of one-off acquisitions, depending on the property type. For instance, it can be very competitive to make a $25-million multifamily acquisition. With 80% financing often available, purchasers can buy with $5 million of equity. Lots of people either have that capital or have access to it, but as you get farther up the scale size-wise, that's not the case."

One way to grab a substantial cluster of properties is to buy a company. And in recent months, seemingly not a week has gone by without an announcement of another public firm being taken private. According to RCA, of the $260.5 billion of core properties that traded last year, $130.8 billion went to private buyers.

Last year, ING Clarion bought Gables Residential Trust and its 162 properties for $2.8 billion. Earlier this year, Morgan Stanley's Prime Property Fund completed its $2.1-billion purchase of Amli Residential Properties Trust, and a joint venture that includes Morgan Stanley recently won a bidding war for Town & Country Trust. Magazine Acquisition LP has agreed to pay $1.3 billion for Town & Country's 38 multifamily communities.

In each case, those involved in the aforementioned transactions cited the public market's low valuation of the REITs and the ability to assume ownership of a large clutch of properties.

In addition, the fundamentals in the multifamily sector are seen as strong going forward in light of job growth, the Echo Boomers moving into the renter cohort and the rising cost of single-family homeownership. "That combination of factors has made us feel that multifamily will be a good place to invest," Hardman explains. "It's very difficult to get substantial scale in multifamily, because individual properties tend to be smaller. It's competitive to bid on a $25-million to$40-million multifamily property. So we looked at these public-to-private opportunities as a means of getting scale and at a return and cost basis that we felt was more in line with our investment objectives."

AEW, too, likes multifamily. "We've been very aggressive in the apartment sector, particularly class B complexes with renters by necessity, not by choice," Poutasse says. "We believe there is potential for very strong income growth in those properties over the next two to three years, with the decrease in housing affordability and solid job growth.

"We've also been quite aggressive in the full-service hotel sector, but not the luxury end," he continues. "The hotel business has had a tremendous run-up and we believe there is still two to three, maybe four years left in that."

And after shunning office properties for several years, AEW is dipping its toe into the sector. "We're focusing primarily on markets where office is no longer the highest and best use of land, places where it's being crowded out by residential. And we continue to look for opportunities in retail and industrial core properties, but so does the rest of the world," Poutasse says.

For its part, Morgan Stanley targets those sectors where it sees the most potential for income growth. "Multifamily is clearly an area where we see good income growth," Hardman remarks. "We think the office sector beginning in 2008 will also have solid net operating income growth. And hotels in many parts of the country remain attractive."

As for the cap rate/interest rate interplay, most investors contend that cap rates cannot sink any lower, while interest rates will probably increase. "Short-term interest rates are going up. It's now obvious to everyone that the federal funds rate will reach 5% and maybe higher. That means the long rates will likely move up," Poutasse says. "Over the next six to 12 months, interest rates will increase, and that puts an awful lot of pressure on cap rates.

"But the good news is, we can have a small rise in cap rates and not have falling property prices because operating income is growing for most properties," he continues. "So I do believe cap rates, which have continued to come down, are probably at the turning point."

Barclay predicts that interest rates will stay in the 5.5%-to-6% range, and "cap rates for most asset types have reached their natural bottom. Prime properties in certain product types are selling for stabilized 5% yields, and in some cases, you are getting just north of 6%. But for the top assets in each category, a 5% to 6.5% cap rate range is what we can expect for the next year or two."

Dan Fasulo says that property fundamentals, not inexpensive capital, will be the benchmark on which a transaction's cap rate is formulated. "The only thing that could drive cap rates lower in 2006 and beyond would be much higher expectations of rental growth. We are already starting to see increases in rents in several markets, such as Washington, DC and Midtown Manhattan. Many investors are willing to accept a lower going-in cap rate if they expect rents to be much higher. It's going to be more of a market-by-market situation for cap rates in 2006, and it will be directly linked to fundamentals."

Indeed, Fasulo foresees a scenario where yields may decrease in major metros such as New York City; Washington, DC; San Francisco; and Los Angeles. At the same time, he sees large investors shifting their capital between cities. "A lot of owners are taking advantage of the liquidity in secondary and tertiary markets to recalibrate their portfolios into the cities they think are going to see the most dynamic growth or the markets that some view as the global cities," he says. "It's a great strategy now because investors that keep getting outbid for properties in the primary markets" are now looking at locations they once passed over.

And if that is the case, investors can expect an acquisition frenzy for the rest of 2006. "For this year, there is enough momentum and capital in the market that it will remain extremely competitive," Poutasse says. "In '07, it's a lot harder to predict because the economy could go in either direction. But for the rest of this year, I believe it's a pretty safe bet that it's going to remain extremely competitive."