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Barbara Nelson is editor of Real Estate New York .

(To read more on the debt and equity markets, click here.)

NEW YORK CITY-Panelists at the third annual Transwestern Real Estate Pension Fund Advisory Panel noted that their domestic funds realized 30% to 50% more volume than last year. The majority also said 2006 will see a continuation of this trend, but they expect lower volume. The group met this year at the Waldorf Astoria with experts Dave Hardman of Morgan Stanley, Todd Henderson of Rreef, Tom Garbutt of TIAA-CREF, Eric Johnson of JP Morgan and Victoria Kahn of ING Clarion, with moderators Steve Pumper of Transwestern Commercial Services and Michael Desiato, editor in chief of Real Estate Media. Additional information on this panel will be featured in the February issue of Real Estate Forum.

“There weren’t really too many surprises in 2005, because 2004 was such a shock for us,” said Kahn, senior portfolio manager for ING Clarion. “If you look back at 2004 all the panels predicted that by the end of 2004 there would be a sharp spike in rates. That didn’t happen, so we got over the sticker shock.” He added that they are being a bit more conservative in terms of looking at next year assuming that things will slow down a little bit.

To expand investment opportunities the alternative markets of senior housing, student housing, medical-office buildings, storage-unit complexes are also winning favor among some investors, said the panelists. “We are seeing an awful lot of demand now for alternative strategies, as well as, the value added and the opportunistic investments,” said Kahn. “We will reach out and try to achieve alternative strategies in 2006.”

However, core and core plus investors are still seeking less return with a safer more traditional investment such as office and industrial space. Garbuut, who oversees the equity division for TIAA-CREF says, “Our return expectations have come down quite a bit, but at the time the risk profile is different. So across the board return expectations are down.”

Although, some panelists were hard pressed to define a higher risk, value added investment. “We’ve seen it manifesting by alternatives to get a better a return to invest in medical office buildings, student housing, but I think the line between what’s value added and opportunistic can be blurred,” said Hardman.

And even though prices have continued their creep upward, most panelists say they were still investing in the primary markets of the Northeast and the East, with some investment being made in California where real estate investment can be cost prohibitive. “I think a lot of people have been priced out of the West Coast for the last year, but that doesn’t mean that your not seeing a lot of capital pursuing that, but the chances to be successful on the coast over the last year or two is diminishing,” said Pumper, executive managing director of Transwestern.

Alternative investments have also spread to the middle of the country, taking with it cap-rate compression, Pumper noted. “We’ve seen capital flowing to what I call the Sunbelt in the central part of the country, as a result over the last few months or so compression in cap rates have occurred in those markets that previously occurred on the coast.”

With the economy in good standing and the expectation of continued job growth, the panelists say 2006, barring any sudden or dramatic increase in interest rates or a geopolitical event, will see pricing and cap rates remaining stable. They also agreed that the market is attracting savvy buyers. “There will be a consistency of buyers to keep cap rates and yields fairly consistent,” said Johnson, who heads the West Coast acquisitions for JP Morgan. “If you look at the type of capital that’s in our market today I don’t think it’s ever been broader. It’s been this deep, but it’s never been broader. It’s a different capital investment decision that’s being made today than has been made in the past.”

Beyond cap rates, investment indicators include return results, notes Henderson, who runs the Northeast for Rreef. “We absolutely look at total return, equity multiples, real returns, over our projected hold period, he says. “I think it’s much more important in a transaction where you are creating value than in a transaction where you buying a more bondable yield.”

With 2005 being a record year for pension fund volume, the future seems relatively stable with little or no surprise. “The tolerance for volatility will be greater,” Johnson explained. “In addition, the market cycles in terms of fundamentals in our industry will be tolerated more and capital will be more consistent. It won’t fly away. It will be at the margin for alternative investments and yield for other asset classes, but in general I think it will stay fairly loyal.”

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