Domestic and foreign investors alike have been in love with the U.S. commercial real estate market for quite a while, but Randy Mundt suspects that their eyes might soon start to wander.

Mundt, the president and chief investment officer of Principal Real Estate Investors, spoke at the annual Commercial Real Estate Trends & Issues Forum April 4. Though he was optimistic about the U.S. economy for the rest of 2006, he discussed several factors that could cool the real estate market.

* Money poured into the market during 2005, with transactions, foreign investor activity and the issuance of commercial mortgage-backed securities all at record levels. However, that has created a situation in which large investors sometimes have to wait for two years to get into a mutual fund that specializes in real estate.

Making the problem more severe, 11 publicly traded real estate investment trusts have been taken private in the past 15 months, Mundt said, accounting for 9 percent of the publicly traded universe, and new initial public offerings have not come close to making up the difference.

Being told to wait in line makes institutional investors more likely to look elsewhere for investment opportunities.

* REITs have reached all-time highs in price-to-earnings ratios, Mundt said. However, he added, “the public is still willing to pay more.”

* In the first quarter of 2006, with the final statistics still being assembled, real estate sales activity appears to have slowed from a year ago. “That may be partly due to ‘transaction fatigue,’ but it may also be that people think prices are too high,” Mundt said. “A lot of the cooling is due to a slowdown in the sale of apartment buildings for conversion into condominium units. That activity is softening quite a bit.”

* Although the current inventory of available space is reasonable, Mundt said the amount of new space in the planning stage has increased significantly. That makes the potential total “a little disturbing,” in his opinion.

Looking at the landscape from the real estate broker’s point of view, Mundt classified the increasing cost of construction as good news. “Reproduction costs are rising faster than rents,” he said. “Every component is rising: interest rates, land prices, construction labor costs and commodities. That should help reduce the amount of actual new construction.”

On the negative side, Mundt said real estate is still “priced for perfection,” with no allowance made for market corrections. “Investors aren’t getting much of a premium for being in the asset class,” he said. “The spectacular returns with very little downside risk are in the past, but people have moved up the risk spectrum in search of higher returns.

“The U.S. has $2.7 trillion in commercial mortgage debt outstanding, which means the industry has really leveraged up,” he said. “Is that cause for alarm? Maybe, maybe not.”

Mundt said real estate offers good value compared to other investment categories, but also said, “I think way too much capital is chasing real estate.”

Following his presentation, Mundt took part in a panel discussion along with Darin Ferguson, president of Ferguson Commercial Real Estate Services, Chris Pose, an attorney with Connolly, O’Malley, Lillis, Hansen & Olson L.L.P., and Eric Busch, a senior loan officer at Sands Mortgage Co.

Here are some of their comments.

* On local economic prospects: “Iowa’s economy is going to slow at a slower rate than the national economy,” said Pose, pointing to a high level of investment here from other parts of the country.

* On Central Iowa’s reliance on insurance and finance: “Insurance companies are relatively recession-proof, and I think we should go after more of them,” said Busch. “I see a recession coming.”

* On efforts to attract new businesses to the area: “You need to get people to come here” so they have an accurate image of Greater Des Moines, Ferguson said. “Some people think of Des Moines as gravel roads and tractors driving on them.” Mundt agreed, saying, “if you can get someone to come to Des Moines, the market sells itself.”

* On the lending climate: “For a four-plex, a lot of lenders will let you buy for no money down,” Busch said. “I see more and more finance options going that route.”

The Commercial Real Estate Trends & Issues Forum was held in Johnston at Foxboro – The Center for Business. The event was presented by Business Publications Corp., the publisher of the Des Moines Business Record, and sponsored by Russell Construction Co., Des Moines Area Community College, Metro Waste Authority and American Trust & Savings Bank.