While they continue to target core properties, the search for yield has sent them beyond their boundaries into secondary markets, non-core assets and marginal plays with value-add opportunities. Many are also gearing up for the chance to bank on the massive wave of CMBS debt that will roll over in the next few years and they're looking out for development, portfolio and joint venture opportunities. Yet whatever the tactic these institutions take, the driver is the same: making the most of their money.

PARTICIPANTS (above photo, from left)

Joseph Milleris managing director for Northwestern Mutual Real Estate Investments, overseeing mortgage production in the Eastern US. The Milwaukee-based firm has $36 billion in real estate assets under management, approximately $7 billion invested in real estate equity and a $29-billion mortgage portfolio.

Jim Halliwell, principal, oversees the Private Real Estate Investments for Principal Real Estate Investors. The Des Moines, IA-based firm has about $60 billion in assets under management today, $27 billion of which consists of private equity.

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

Michael Desiato (moderator) is vice president of ALM's Real Estate Media Group in New York City.

John Clarkis a Bloomfield, CT-based managing director with CIGNA Realty Investors. He is the head of direct equity and debt investments on a national basis. CRI is the real estate arm of Cigna Investment Management, with $5 billion in real estate assets under management.

Gerald Casimiris a managing director and head of Global Real Estate Asset Management for TIAA-CREF. Based in New York City, the firm has about $82 billion in real estate debt and equity assets under management globally, with $32 billion in US equity holdings.

Thomas V. Berminghamis managing director of investments for San Antonio, TX-based USAA Real Estate Co., which has $12.5 billion in real estate assets under management. Operating out of New York City, he oversees the firm's Northeast region.

STEVE PUMPER: The market has become hypercompetitive. As you're looking at your investment strategy, what metrics do you utilize to determine where we are in the cycle? Are there similarities between today and 2007?

JIM HALLIWELL: There are some technical similarities between now and then. If you look at the bar chart of transaction volume, the period of 2009-2015 is eerily similar to 2001 through 2007, with 2015 shaping up to have transaction volume close to 2007. Further, there has been an acceleration of REIT de-listings and large portfolio sales, as there was in the 2005-2007 time frame. The cap rate compression and the low income returns are also very similar and private real estate has seen double-digit returns for five consecutive years, and it's the only real estate sector doing that. So these technical similarities, combined with an abundance of debt and equity capital in the system, provide some level of concern. On the positive side, the difference between the two time periods is that leverage levels are more palatable and the fundamentals are still relatively good.

Our main metric in our investment decisions is price relative to reproduction cost. When looking to buy an asset, we'd also like to be an index beater in that relative market, so if we think that the asset will generate a return equal to or greater than the NCREIF index or sub index, we may participate. If we think it will trail, then we probably won't pursue it. It's been very difficult procuring assets at levels where you feel an acceptable risk adjusted return exists. We're getting transaction volume, but it has less to do with winning core, fully marketed deals, but rather, working some form of relationship or having some story on the transaction.

JOHN CLARK: I would echo what Jim said. There are some fundamentals that feel like we're back to the previous peak. If you look at the number of conduits and first quarter transaction volume, especially the number of entity-level transactions, it does feel like we're getting back to 2007. With that said, property level fundamentals are good and continue to improve. We focus on the supply pipeline, and outside of some multifamily submarkets and a few pockets of industrial and office, supply feels in balance as compared to 2006 through 2008. Another major difference is that leverage levels are lower and the cost of debt is much cheaper. You are not seeing the negative leverage that was so prevalent in the last cycle. A final difference would be that equity investors appear a little more patient this time.

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We are focused on wealth creation, not current income returns. We like development and value-add opportunities, create core, and sell when the time is right. Like Jim, we also focus on replacement cost as well as risk premiums to not only core real estate but also to other asset classes. Real estate today does provide pretty strong relative value, whether it's compared to the 10-year Treasury, BBB bonds or the S&P 500.

GERRY CASIMIR: We have a very full plan in terms of new acquisitions. Last year, we did about $5.5 billion, all cash. This year, we have about $6.5 billion in place. Still, it certainly feels like a competitive landscape. It's a question of whether revenue has grown to where we believe it should be relative to the price that we're paying for assets. That's where the opportunity lies. Cap rate compression is no longer going to generate appreciation; it's more about revenue growth. When you look at fundamentals with respect to companies that lease office space in particular, we believe there's some room to raise rents in many of these sectors because rents haven't peaked yet on a relative basis. I'd like to believe that the pricing that we're paying today is based on where we believe rents will go.

We comp to the NCREIF index, which is very important to us, and we look at replacement cost. At the end of the day, the price per pound must make sense for the market you're in, and revenue must ultimately be generated because it's top-line growth. I tell my team the two most important things in the future are top-line growth and minimizing CapEx outflows.

You should also look at the long-term fundamentals of all of the gateway cities on a relative basis to the amount and type of capital that's coming in. A lot of money that's coming in from China and other places is looking at the alternatives in their own markets and, on a relative basis, the gateway US cities are looking pretty good to them. Being long-term holders, they will look for the best assets in the best locations in the best markets, with the best fundamentals.

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That's what we do, and we will also place bets on the margin with respect to value and opportunistic investments. In some of these gateway cities, the bullseye is no longer the only place you should be looking. For example, Manhattan will always outperform, but it spills over. Who would have thought places like Williamsburg, Brooklyn and Long Island City in Queens would be a contributor to the market's performance? There are opportunities there.

TOM BERMINGHAM: It's important to recognize, though, that with the abundance of capital chasing deals in the market, deals that ordinarily would have produced value-add returns are now achieving what would traditionally have been core-plus type of returns. As a result, we've looked at ways to create attractive risk-adjusted returns, rather than layering on risk to chase yield. That's another important metric that's critical to keeping your discipline in these times.

JOE MILLER: It's interesting times. It feels like core assets are priced for perfection. I'm guessing we're all working to sub-6% unlevered IRRs for core assets. In '07, when things felt overheated, the yield curve was flat or maybe partially inverted. Now, we have a steep yield curve. Real estate tends to outperform when the spread between cap rates and the 10-year is high, and we're near an all-time high right now. Cap rates are probably 5.25% for all property types, the 10-year is at 2.15%, so we're almost 300 basis points north of the 10-year. That would be indicative of outsized returns.

I'm on the debt side, and I want to make sure I'm not taking equity risk because I'm certainly not getting paid for it. Pricing is extremely competitive on the debt side. Last year, we invested approximately $5.1 billion in mortgage loans, about $3 billion of which was in the eastern half of the US. We would like to do somewhere between $4.5 billion and $5 billion in mortgage origination in 2015. As of June we've had a good start, but it's tenacious and it's a great time to be a borrower. We haven't really changed a lot of things. We tend to underwrite conservatively and go after relatively low-leverage deals with great sponsorship; we take most of our risk on the equity side.

On the equity side, it's more difficult. We have a $1.1-billion allocation this year and we've had a very slow start. I think we've collected a lot of second- and third-place ribbons at the auctions. Ultimately, we'll get the money out. We're most interested in investing in core real estate, so we have our work cut out for us.

MICHAEL DESIATO: With conditions so tough in major CBD markets, are any of you looking at opportunities outside of those areas, including the suburban markets?

BERMINGHAM: Unquestionably. Many CBD opportunities are in that frothy priced area, and we're unwilling to reach to those kind of rates. We're looking further afield into secondary markets where we see job growth. You've got good, strong job growth for example in the energy sector, healthcare and technology, so markets like Boston and New York, San Francisco, Silicon Valley, San Jose are easy targets. But you also need to look in the secondary areas of Austin, Denver and other markets that offer better opportunities and are still experiencing strong job growth.

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We just closed a deal in Manhattan's Garment District. We took on 200,000 square feet in two fully stabilized, good quality B assets. What we liked about the deal is that it's a submarket where, right now, you can find the cheapest office rents in Manhattan in the $45-per-square-foot range. Office space in Midtown, depending where you are, is going for $65 to $80 a foot. And, of course, Downtown is now starting to really take off with some major deals.

We see an opportunity in under-rented properties that have low rents but a chance of good tenant rollover in the next three to four years to increase the NOI. It's a very basic, fundamental play. It doesn't have a great deal of pizzazz to it but it's a very solid investment. The best opportunities are still in core markets. Looking at non-core markets is a bit more challenging, particularly in the Northeast.

CASIMIR: We're not suburban buyers right now, but we do look at what I would describe as the next ring outside of the core markets. We are long-term investors, and we believe that if you have proper diversification and concentration within these target markets, these major MSAs, you will avail yourself of what should be outperformance in these markets. So while the bullseye of those target markets is extremely pricey, Tom's deal in the Garment Center is one of the places you can go to get some outperformance because it's not traditionally a market where institutions go.

CLARK: Our strategy still focuses on infill locations in the major gateway markets. Due to competition, we are looking outside the Urban Core in what we call premier suburban locations such as Burlington, MA and Irvine, CA. These areas are attractive due to numerous demand drivers, high quality work force, quality of life, and are heavily amenitized and accessible. We've built around 5,000 units since 2011 and we've had some great results. Two of our better performing investments have been premier suburban deals where we have been able to take advantage of a first mover advantage and a good basis.

HALLIWELL: Many high-growth cities—Raleigh, Austin, Houston, Boston and Charlotte—are seeing job growth in the suburbs that's similar to the Downtowns. For the right markets, where the suburban areas are still a very active part of the employment base and you can recruit workers to go into those locations, you can make some money by pursuing the correct assets in the best locations. The thing we like about it is that they're very manageable bets. You're not making a $300-million suburban bet; you're making a $50-million suburban bet.

PUMPER: One of the key stories this year has been the surge in portfolio and entity-level deals, which were up 37% in the first quarter over last year. Have any of you gone that route?

BERMINGHAM: Yes, but it was a struggle and there was a great deal more scrutiny involved. Entity-level transactions are far more difficult than pure asset transactions.

CASIMIR: Earlier this year we bought the remaining 40% stake in TIAA Henderson Real Estate that we did not own. We were looking to increase our global footprint, creating more of an international presence. We thought that an inorganic approach to that would be better than trying to pick off properties one at a time. It's worked out well for us; we were able to get a firm that is very like-minded in terms of their strategy and their philosophy, and understood our core values. It's allowed us to gain a significant foothold in the European markets and actually have a company domiciled in London. We're now working on a very large deal of well over $1 billion. In terms of just entity buys, though, they tend to be extremely difficult to get done.

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MILLER: On the lending side, we've seen a lot of large opportunities in both single-asset and portfolio deals. What's been interesting this year is there have been several large, core deals that I thought would end up being financed by a life company club but ultimately financed through single-asset CMBS deals. In the short run I believe many large trophy deals will go CMBS.

CASIMIR: Joe, I've seen the same trend with the large, single-asset deals. Is that because of execution and pricing?

MILLER: The feedback that we're getting is it's a combination of leverage and an interest-only period. The street seems to be a little more comfortable topping off the capital stack and offering more interest-only than we might.

DESIATO: If you look at the 2006-2007-era CMBS loans, billions are coming due soon. Are any of you looking to play in that arena?

BERMINGHAM: Definitely. There's $1.4 trillion of commercial real estate debt that's going to mature by 2018 and available sources of conventional debt are not going to support that large an amount. So there's an opportunity, whether it's through whole loans or recaps or stretch first mortgages and mezzanines. Of course, many of those opportunities would be in secondary and tertiary markets and non-core assets. I think the market values of core assets have superseded their relative prior peaks in pricing.

We're looking at all those opportunities, mainly through our affiliate, Square Mile Capital, and they're very active purchasers of debt, focusing on originating and creating high-quality loans and B notes. That's part of the plan going forward for our team, to hopefully provide equity-like returns with lower risk. We are also starting a program with our life company to start providing whole loans in which, heretofore, they've taken small participations.

HALLIWELL: We'd love to take part in that as well, though we're not particularly optimistic. If you look at the recession from 2008 to 2010, everybody thought there'd be the abundance of opportunities given heavy maturities or defaults. However, these items didn't really result in tremendous buying opportunities that opportunistic capital pools were formed to pursue. Most believed there would be a repeat of the early 1990s, where you'd find low-hanging fruit and you make 20% IRR doing nothing. Like everyone else, we have vehicles to take advantage of those opportunities, if they exist. However, we're not particularly optimistic as the predominance of the opportunities may not be the quality or in markets in which we generally like to participate.

CLARK: On the debt side, we target deal sizes in the $20-million to $60-million range, so the larger CMBS deals are too big for us. Our focus is always on asset quality, borrower and location, so a lot of CMBS loans won't satisfy our underwriting standards. We've broadened our search in terms of markets and locations, but we are still very conservative about lending on commodity suburban real estate.

PUMPER: What are your thoughts on development?

MILLER: We have a construction to permanent product, we provide construction financing for all property types, but are active in the multifamily sector. We have seen some large office deals that seem to make sense. Office and industrial are probably the two property types that are likely to outperform in the next two to four years as the economic cycle continues to recover.

BERMINGHAM: We're very active. We've been a leader in that segment over the past two to three years, though we're more cautious today due to the prospect of overdeveloping. In certain multifamily markets, we're tracking supply and demand fundamentals very carefully, so maybe there's a reduced emphasis now on tactical developments and greater emphasis on build-to-core strategy, with the focus on a smaller number of submarkets that we believe will outperform over the next 10 years.

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Our build-to-suit business has been a real strong performer; we've probably been one of the most active capital sources in this area. We'll continue to be so this year, mainly with an emphasis on opportunities that capitalize on e-commerce growth in the industrial sector. Shrinking inventories and rising rents will feed into investor demand for industrial, and there's a significant level of liquidity for these completed assets. We've built eight projects, all north of 750,000 feet, over the past two-and-a-half years and sold six of them prior to completion.

Speculatively speaking, there are some office markets that present opportunities due to obsolescent product and growing demand. We committed a tremendous amount of capital to developing a program through 2018 to try and find opportunities for speculative office product in select markets.

CASIMIR: TIAA has played a big role in financing as well as developing throughout its history. We have weaned our development pipeline considerably. We have been taking advantage of select opportunities such as the Five Oaks in Houston, where we have preleased the entire building to a highly credit-worthy tenant, BHP Billiton Petroleum. It's a home run. We also have excess land at Port Northwest in Houston, and we can develop buildings and have them leased before they're finished. Those are the sort of deals we've been focusing on—basically taking our existing portfolio and creating opportunities through development and then, on occasion, we will do some ground-up with the partner.

Finding opportunities and not having to pay through the nose for the land is becoming extremely difficult, so we are trying to figure out ways to generate some alpha through our existing portfolio. Beyond that, we're doing repositioning for 75 Fifth Ave. in Manhattan, where we bought a building owned by the Moinian Group through Barclays. It was basically empty. We finished the gut renovation, got some really good names in there and it looks like we're on our way to a mid-teens return on that.

DESIATO: How are you positioning your business for the next cycle, whenever that may come?

MILLER: We have a separate investment strategy group at Northwestern, populated by professionals out of all three investment disciplines. Our strategy group establishes asset allocation and provides benchmarks we maintain. However, we want to make sure we have dry powder because, at some point in time the economy is going to roll over. You can only take advantage of that volatility if you're well capitalized.

Economic cycles don't die of old age. Something pushes them off the cliff. We're six years into this cycle and it's not clear to me what that event is going to be. A rapid increase in interest rates would stress the economy. However, I'm not terribly concerned about the seven-to-10-year portion of the yield curve, which reflects the market's inflation expectations. Inflation does not concern me a whole lot; there is still slack in the economy, and little growth in real incomes. It's hard to have sustainable inflation without real income growth and, frankly, inflation should be easy to control by the Fed by inverting the yield curve.

That said, I think the Fed is likely going to slowly start raising the short end of the curve.

CASIMIR: I think you're right, Joe. Wage inflation really has to be the precursor. If you've got kids in their mid-20s and they have jobs, talk to them about what they can afford. There's a stat that says that generation will be the first generation that makes less money than their parents. Think about that for a minute. People talk about employment growth but, if you don't have wage inflation, what does it matter?