by Beth Mattson-Teig

Office sales are expected to gain momentum in the coming year as investors move further afield to acquire quality properties in an increasingly competitive arena.

Investors made one point crystal clear in 2010. They have a voracious appetite for low-risk office properties in top markets, and they’re willing to pay a premium to get them. “I think we have all been surprised at how strong the demand has been for fully leased buildings,” says Charles Baughn, an Executive Vice President at Houston-based Hines.

That demand is evident in a sharp compression in cap rates. Cap rates for central business district office properties dropped about 100 basis points over the past six months to average 6.5% at the close of the third quarter. At the same time, cap rates for Class-A properties in “super core” markets of Washington, D.C. and New York have plunged below 4% in some cases, according to New York-based Real Capital Analytics.

“At this point in time, it is a tale of two different markets – the quality institutional assets located in New York and Washington, D.C., and then the rest of the country. But that is a trend that is going to change as we move into 2011,” says Dennis Friedrich, President and CEO of U.S. commercial operations for New York-based Brookfield Office Properties. Intense competition coupled with stabilizing market fundamentals is expected to give investors more confidence to expand their geographic scope.