Principal's Pat Halter

GlobeSt.com: So hotels are a possibility?

Halter: My sense is that if we decided to move into hotel investing it wouldn't be until the later part of 2005 or 2006. It's a small, minor piece of our strategy—and too early even for a plan.

GlobeSt.com: It's interesting because many investors have told me they're seeking alternatives because they're getting squeezed out of their core targets.

Halter: Investors are searching for more outlets but also for more yield. They're expanding their strategies into non-core and opportunistic investment strategies and that trend will continue into 2005. You'll also probably see more US domestic investors look at foreign opportunities, even as they continue to put more capital into fully occupied, high-quality core real estate.

The other trend we're seeing is more new sources of capital, particularly from small or medium-sized pension plans that either exited real estate in the late '80s or are increasing their allocation.

GlobeSt.com: How much has that trend grown?

Halter: We have an open-ended, commingled account for US private equity. Last year we generated 35 new institutional client relationships for that account, which raised about $600 million. It had $3.6 billion in assets under management at the end of 2004.

GlobeSt.com: You've said that it was a fast-and-furious 2004.

Halter: It was a fantastic 2004, a very active year, and there still seems to be fuel in the tank. Institutional and retail investors are still very interested, and there will be a continuation of the transaction levels we saw. In terms of private-equity transactions, 2004 saw more than $160 billion of buying and selling, which is a record, 60% higher than transaction activity in 2003.

GlobeSt.com: But is it too fast, too furious?

Halter: Absolutely, and you need to be very prudent. You have participants who are new to real estate or who have organizational pressures to put dollars out into the marketplace. There are properties that are mispriced, and you can debate if you should have used a cap rate of X as opposed to X plus 50 basis points. But we haven't seen a cause for major concern in terms of investor expectations being dramatically disappointing.

GlobeSt.com: Looking at the four core groups, how will multifamily shape up?

Halter: The fundamentals will improve with supply being a bit more constrained and interest rates increasing a bit. The long-term fundamentals are excellent when you consider that we're adding 25 million people into the US economy every 10 years, and they all need a place to live. We believe multifamily will continue to benefit from that alone. The issue is if it is priced for perfection.

GlobeSt.com: Which means?

Halter: Which means that everything has to go right for multifamily to deliver investors' return expectations. The concern is if those fundamentals are fully priced into the valuations.

GlobeSt.com: Will industrial vacancies peak this year?

Halter: Yes, but the pace of recovery will be moderate. There's tremendous productivity growth occurring in the economy today and that brings much more efficiency into the system, which will change user demand and temper industrial-space needs. But we do see recovery. It will just be slow.

GlobeSt.com: Investors who have been cool on office say now's the time to buy. What say you?

Halter: We buy into that strategy, although you have to be very careful. There are still markets that haven't experienced job growth, but there is a recovery underway. After all, we've seen 2.5 million new jobs since August of 2003, and we believe the economy will continue to produce new jobs. It will take time, and you should see a real impact in 2006 and 2007.

GlobeSt.com: And what of capital flows?

Halter: Foreigners are still very interested in US property investments, although there's a lot of frustration in finding properties. As a result, foreign investors have made some comments that they're looking to reduce their offshore allocations in the US. That being said, they still managed to increase their purchase activities by more than $3 billion in 2004.

Institutional investors will also continue to be active, despite that same frustration. For ourselves, we're going to be more active also. We acquired about $1.9 billion and sold about $1.1 billion, and that pace will continue in '05. The key challenge is to find the investments that will provide the best risk-adjusted returns and avoid shortsighted decisions and pressing the underwriting envelope. We're a long-term, focused money management firm and we will continue to behave in that regard.