W. Todd Henderson is the CEO for the Americas' real estate business of Deutsche Asset and Wealth Management. Formerly known as RREEF, the New York City-based firm has $85 billion of assets under management globally.

Craig Tagen is managing director and head of asset management for Clarion Partners, headquartered in New York City. The firm has $32 billion in assets under management in the US, Mexico and Brazil.

Steve Pumper (moderator) is an executive managing director with Transwestern in Houston.

Stephen Kingsley, an AEW Capital Management LP senior office asset manager, is based in Boston. The firm has about $50 billion in global assets under management, about half of which is in the US.

Paul Boneham, executive VP, runs the asset management group of Bentall Kennedy in the US. The firm has $30 billion in real estate assets under management in the US and Canada.

After several years of uncertainty, the economic recovery seems to have hit a steady pace. Business fundamentals and, subsequently, commercial real estate conditions, are improving not only in top-tier markets, but in the surrounding environs as well. Leasing activity and rent growth has extended beyond just a select few asset types, interest rates remain low and there's plenty of capital in the market in search of investment opportunities.

It was in this environment that senior-level executives from six of the nation's largest institutions-—accounting for a collective $340 billion-plus in assets under management—gathered last month at the New York Palace Hotel as part of the 10th annual Capital Markets Symposium. The session, hosted by Transwestern and Real Estate Forum, covered a variety of topics ranging from conditions in sectors and markets across the US to strategic planning for the coming year.

In sharing their insights, one major theme became clear. Despite their firms' size, experience and resources, these heavyweights are all facing the same challenge: dealing with the immense pressure from their investors to put capital to work in the most effective way possible—and, of course, achieve high returns on that endeavor. Read on for more. —Sule Aygoren

FOLLOWING UP A BANNER YEAR

MICHAEL DESIATO: 2014 has supposedly been a banner year for capital raising, transactions and recovery of the most markets. Where do you see current market dynamics, and how's that affecting your business? Are you doing more volume in deals now versus last year?

RICHARD COPPOLA: Absolutely. We're up in both dollar volume and deal count for the year. Our strategy is similar to the prior year's—we're still very core—but in terms of overall acquisitions, it's absolutely up, as are our dispositions.

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PAUL BONEHAM: 2014 is very comparable to 2013 in terms of total dollars acquired and disposed, selling about $1.2 billion and acquiring a comparable amount each year. We invest in core and value-add, and we're also fairly heavily positioned in build-to-core. That's part of our strategy for the past 30-plus years. Whenever possible, we like to get in on the ground floor and take the leasing, construction and some entitlement risk in exchange for the upside of being up there on the development front. That typically accounts for a third to 40% of the volume we do in a year.

We have 10 separate accounts and an ODCE open-end commingled fund. The fund typically amounts to about 70% of our assets under management, with separate accounts being 30%, but a disproportionate amount of development activity happens in the fund.

W. TODD HENDERSON: Globally, we raised over $20 billion in 2014. On the transactions side of our business, volume this year was significantly larger than 2013, both in acquisitions and dispositions. We probably tripled acquisitions over 2013, and doubled dispositions, so we were a larger net acquirer in 2014 than the prior year. We're a core/non-core investor, and core represented 80% to 85% of our investments. Our non-core investments were predominantly development transactions in the apartment sector, driven primarily because we didn't like the dynamics or the pricing of core apartments. If you can get expanded yields on stabilized apartments through rent increases, and push the development risk onto the developer, it's a better value proposition for the type of apartments that we want to own long term.

CRAIG TAGEN: It's been our busiest year since the Great Recession by far; compared to last year we've doubled our transaction volume during 2014, most of it attributed to large asset sales or large acquisitions. For example, we purchased a portfolio of industrial assets, and sold two large portfolios of hotels. We were very busy across all five property types, and expect the same to continue in 2015.

We would like to continue to invest across the risk/return spectrum—continuing to be a big buyer of core, but specifically on the office side, doing a lot more value-add. We're continuing to build our multifamily portfolio in the markets where we can achieve an attractive return on cost.

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ANDREA PIERCE: We invested more than $12 billion of equity from first quarter 2013 through third quarter 2014, which were record volume levels for us. However, the market became increasingly competitive in late '14, causing our investment pace to slow considerably. Unless market conditions change, I would expect deal volumes to be somewhat lower in 2015.

STEPHEN KINGSLEY: We also had a more active year in 2014. In our Direct Investment Group, which houses our core fund, value-added funds and all of our separate accounts—we're on track to close in the neighborhood of $3.5 billion gross value, and sell about $2 billion this year. We have remained fairly disciplined in our approach to finding strong investment opportunities, but with recovering property markets around the country we've also seen an opportunity to move into some secondary markets with very strong near term fundamentals.

DESIATO: What about the market surprised you this year, in terms of having to adjust your strategies? And what drove your strategy in terms of acquiring in a given product type?

TAGEN: We thought we would continue to have to search outside of the major core markets to find yield. We were investing in Houston early, then we found ourselves investing in Austin, and recently closed on our first deal in San Antonio. We're investing in premier submarkets outside of the CBD as well as top secondary markets and the surprise is that we find they have similar attributes. For instance, Cambridge, MA, Playa Vista, CA and Portland we found to be markets that had many of the same fundamentals as core locations, but weren't as competitively priced. At the same time, it was compelling for us because some of the other driving factors we look for when we invest, such as job growth, were present in those markets.

Part of what drove our strategy to increase our investment on the office side is knowledge we gained from our existing portfolio. Clarion currently owns approximately 30 million square feet of office space. We spent a lot of time talking to our tenants and asking, where are you growing? Where do you want to be? That's been a big part of what shapes our current office acquisition strategy.

INVESTING FOR THE PROCYCLICAL

HENDERSON: We spend an awful lot of time planning at the beginning of the year by looking at the economic backdrop and then choosing the sectors and geographies we believe will outperform. Because we don't invest in hotels, we exclude that sector from our planning. In a procyclical environment, which we are currently experiencing, we want to start overweighting our portfolios to those asset types—office and industrial—which benefit from a procyclical climate. Our portfolio is already overweighted toward industrial, but we'd positioned it to be fairly underweight to the office sector. We felt like it was the time to start making a more aggressive move in certain areas of the office sector. We set out to increase our office exposure, which we did. In addition, we set out to increase our retail exposure in a couple of areas, super-regional mall and high-street retail for the most part, and we did.

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We have also increased our exposure to subordinated debt, which is done on the principal side of the business, whereas our investment bank does senior lending. They've been active, predominantly with CMBS. We have been active in the subordinate lending space over the past couple of years, be it recapitalizing certain projects or just taking advantage of the fact that senior lenders were not aggressively lending beyond 55% to 60% loan to value. We felt like we could get good risk-adjusted returns on lending between 60% and 80% LTV on new origination. We continue to do that business, though it's more competitive today versus 24 to 36 months ago.

BONEHAM: We're feeling particularly comfortable taking leasing risk in office right now. You pick your battles, right? What gets you excited? Frankly, leasing risk gets us excited right now. It might not 12 months from now or it might not have two years ago. At this moment, it looks like the economy is on track to deliver some pretty strong continued job creation, which translates to office space absorption, and we want to get in front of that. We think there will be outsized appreciation in office rents in good quality assets in primary markets.

We are recovering suburban office investors. Now we're looking for tech orientation, medical commitment, institutions of higher learning, energy. What are the primary drivers of economic activity in that community? That really helps steer us. For the most part, we focus on the gateway cities, but there are a few exceptions that appeal to us like Denver and Austin.

COPPOLA: We're still very core, but we're also in markets like Austin and Cambridge. We're going deeper into the target markets because we think those will continue to outperform over the long term. I feel bullish about where we're going for the next few quarters, but given where we are in the cycle, we're making some long-term bets, particularly in areas active in technology, media and creative office space. We're looking at submarkets within New York we think will benefit from the recovery, lower quality office buildings we wouldn't normally buy, but it's sitting in our $19-billion separate account portfolio, so we can take that kind of a risk. We will be more active in creative space on a go-forward basis because that's where the jobs are.

We aren't doing much value-add because it doesn't fit what we need to deliver for the organization or for our clients. That being said, we're doing pre-sales on industrial because we're not overweight. We're quite the opposite. We're doing pre-sales on multifamily in Washington, DC. It's the only way to get in the markets that we want to be in. Looking at where we are in the cycle, we feel bullish, but not that bullish. That capital needed for value-add can really hit your returns in your early years.

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On the debt side, we raised capital to go into subordinate debt. We did about half a billion dollars this year, up from a fraction of that the year before. We're doing large, 50% to 60% LTV transactions. They tend to be either large trophy office buildings or portfolios of assets where the total financing stack is in the $500-million to $600-million range. We're doing the $100-million slice of the capital. Debt produces a pretty good equity-like return, frankly, for a different risk profile than what I'm doing in my day job.

PIERCE: We completed a big office acquisition in Boston, where we added to our holdings in Cambridge and the Financial District. We like that market for its great economic fundamentals and focus on innovation—tech, biotech, health and sciences. Boston is also a gateway market, where top-quality assets still sell at a discount to replacement cost, which is not necessarily the case in San Francisco, Washington, DC or New York.

On the retail side, regional mall acquisitions are tough because they don't trade that often. Where we've had success is putting capital back into our mall portfolio either through expansions, creating mixed-use environments or upgrading them. To increase exposure to neighborhood and community centers, we invested in a couple of retail operating companies and had success in developing and acquiring community and neighborhood centers. However, it's tough to acquire these types of properties since a lot of investors are also out looking for retail right now.

We'd certainly like more exposure in industrial and are buying industrial assets one at a time in good, solid markets. We're definitely underweight for industrial on the East Coast, though we have a sizable portfolio on the West Coast. We build and we buy existing assets. For example, we bought a class B industrial park in the Meadowlands area of NJ, which is a prime warehouse market. This property is steady and stays full--we haven't had a hard time finding tenants.

THE BARBELL STRATEGY

TAGEN: We currently own approximately $5 billion in industrial investments, about 15% of which is value-add and development. In our search for yield in this sector, we've concentrated for the most part on the gateway industrial markets. We're building in Southern California, Dallas, Seattle, Indianapolis and Phoenix. Our strategy is similar to the office sector, where we speak with our tenants and continue to develop those relationships; we've now done five large transactions with Amazon.

We continue to work with our established partners on new developments, with Trammell Crow and Panattoni. It continues to be a challenge to buy industrial.

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KINGSLEY: Additionally, we've been taking a bit of an alternative approach to industrial, looking at some infill, smaller assets of 100,000 to 250,000 square feet. We're also developing a “build-to-core” strategy, targeting development yields of 150 basis points over stabilized yields, in markets like Houston, Dallas and Baltimore with some big national partners.

HENDERSON: We have focused our multifamily strategy almost exclusively in live-work-play environments. We made a very conscious decision in our portfolio pre-crisis to get out of a lot of suburban, non-live-work-play markets, and that's turned out to be a very good decision. While we've been underweight in the apartment sector, our multifamily portfolio has outperformed. We'll continue to be underweight in multifamily through 2015. Multifamily was the highest-performing sector, from a total-return perspective, in the ODCE index in 2010-11. It was the second highest-performing sector in 2012, and third in 2013. In 2014, it was the last of the four major food groups, and I think that trend will continue. Renter demand is still high but the supply picture is concerning. That being said, multifamily produced a 7.3% return through the 3Q of 2014—not bad, but not good relative to what the other sectors produced.

So if you're a relative investor or you're trying to beat the benchmark, if you're not underweighting multifamily for the next couple of years, you'd better have some great market selection and asset selection to make up for what I expect to be poor performance relative to the other three major food groups in which we invest.

Our retail strategy is a barbell strategy, with super-regional malls and high-end retail on one end and necessity shopping centers at the other. We have to be very careful as e-grocers are rising in popularity. We used to go into markets and buy the top two or three grocers; now we only buy the top grocer in the market today.

BONEHAM: In 2014, we did not commit one new deal in multifamily, due to higher land prices and construction costs, and rental growth is really starting to hit a clear affordability ceiling. The echo boomers absolutely want the urban live/work/play environment, but they're figuring out that maybe they can't really afford to live there. There's a little bit of harsh reality that's setting in. I think there's some reassessment taking place. At the same time, we don't believe we're overbuilt. Demand in general is keeping pace with the supply additions, but there were a lot of years of under-delivery compared to the growth in demand at that point in time.

On the retail front, we've been avoiding power centers for a long time. We have focused our retail investment activity solely on grocery-anchored neighborhood and community centers.

STEVE PUMPER: Where do you think we are in terms of pricing, and how is that impacting your strategy?

COPPOLA: I'm one that says everything seems to be priced to perfection, and there's not a lot of room for a slowdown in rental growth or meaningful increases in interest rates. Frankly, I don't really see any real threat of meaningful increases in interest rates. That's not going to be overcome by a little cap rate or spread compression relative to the 10-year treasury. There's probably still a 50-basis-point spread between the historical average and returns.

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In the near term, if I look at the liquidity and the capital that's in our space, both debt and equity, there's a lot of capital that's coming to this country. We try to get our fair share of that capital that's coming in, and you have to look at the alternatives. The rest of the world is kind of messed up, and the US looks pretty good.

When you look at the sovereign debt, a lot of that money wants to go to markets in which most of us are investing, and they need a 51% partner. We'd like to be that capital. As long as that continues, that flow of capital is going to trump the slowdown in the rental rates certainly. Even if you look at the domestic players, a lot of large sources of capital are under-allocated or under-invested in commercial real estate.

PIERCE: There is a wall of capital and pricing is very competitive. And while cap rates are very low, and the 10-year unleveraged IRR is hitting 6%, the way you win is by pinpointing certain segments, certain office and industrial markets where you have a high degree of conviction that rent growth is there. Of course, the challenge is predicting how much growth and when it will happen.

BONEHAM: We've been squeezed for the past 18 months. The benchmark that I try to measure everything else off of would be core quality assets in primary markets. What's the 10-year unleveraged IRR for that asset class? We watched it go from 7% to 6.5% to 6% in the past 12 to 18 months. The real question in my mind is whether we're going to go to 5.5%, or reach a point where you just can't justify the risk/reward dynamic. In the past three to four months, my perspective is that people hit a natural floor at 6%, and they have a hard time going lower than that with the exception of maybe New York, where you'll go a little lower.

TAGEN: There's a wall of capital out there and while this year was a great year to invest, we're going to be under the same pressures in 2015 as we're continuing to raise new capital. Contributing to this is that we expect to continue to see a lot more foreign capital coming to the US in 2015. In a market where deals are priced to perfection, we're going to be forced to underwrite imperfect deals. You need to have a high degree of conviction because we're now five years into the cycle. The easy deals are done.