When Hank Aaron shattered Babe Ruth’s all-time record of 714 home runs, baseball fans from around the world were shocked. In the world of real estate, few industry leaders ever expected a Manhattan office building to sell for more than $1,000 a square foot.

Nevertheless, it happened earlier this year, when Boston Properties sold the 1.2 million-square-foot, class A office complex at 280 Park Ave. to a foreign investor for about $1.2 billion, or $1,018 a square foot. Soon afterward, Sitt Asset Management and Steve Sutton sold the 15-story, 298,000-squarefoot office building at 1466 Broadway, aka Six Times Square, for about $300 million, or $1,007 a square foot. “These prices are insane,” as Crazy Eddie, the pitchman for a now-defunct electronics store, would say.

Many industry leaders expect prices to continue to rise.

“I have been on Wall Street since 1980 and have seen many markets where people have been shocked by seemingly crazy prices,” the chairman of Signature Bank, Scott Shay, said. “Seemingly crazy prices are not really crazy when underlying business activity justifies them. In this case the sustained higher levels of commercial rents and profitability has decreased cap rates and raised multiples. Based upon decreasing vacancies, increasing rents, and the fact that New York has weathered the effects of 9/11, the risk premium inherently priced into this market has dropped as well. Any time a market has moderate, or only one way, volatility for a long term, risk premiums decrease and prices thereby increase.

“Having said that, at some point every market has a correction. Just when risk premium becomes too low, real risk starts to appear,” he said.

“Scarcity of good product and a tremendous amount of capital with pent-up demand have led to generally higher prices across the board,” the chairman of the national real estate practice at Greenberg Traurig, Robert Ivanhoe, said. “The impact of several major purchases by the investment arm of the Emirate of Dubai has quickened the pace of the increases and set all kinds of price records at levels once thought to be impossible, both on a per square foot basis and going in yield basis.”

Last week, the Paramount Group and Principal Real Estate Investors sold the 44-story, 1.2 million-squarefoot mixed-use office tower at 1540 Broadway. Equity Office Properties Trust, the largest publicly traded owner of American office space, paid $525.1 million, or about $580 a square foot, for the 948,000-square-foot office component of the tower.Vornado Realty Trust purchased the 152,000-squarefoot retail space, signage, and parking garage component for about $260 million. Paramount acquired the property from Bertelsmann AG for $425 million in June 2004.

This is the second time that Equity purchased the office condominium of a Manhattan office tower. In July 2004, it purchased the office tower component of 717 Fifth Ave., comprised of 380,796-square-feet of space, for $160.5 million. The retail component was purchased by a joint venture of Lloyd Goldman, Feil Organization, and Stanley Chera.

“Investors see real estate as the best alternative when looking at the universe of investments available to them,” the president of the City Investment Fund, Thomas Lydon, said. “The top 50 public pension plans recently reported an average return of 27% on their real estate portfolios this past year. This result in turn drives higher allocations, and means more dollars are seeking high-quality assets.

“Foreign buyers view New York real estate as a safe haven and will accept very low going in returns to secure a well-located office building,” he said.

Earlier this month, private equity fund Beacon Capital signed a contract to pay about $1.55 billion, or about $800 a square foot, for the office tower at 1211 Avenue of the Americas. The seller was Jamestown, the Atlantabased German pension fund, which purchased the building in 2000 for about $600 million from the Rockefeller Group, which maintained a minor equity interest in the building.

“American investors have finally come to the realization that a 5% return on investment, in the strongest real estate market in the world, is adequate,” the president of RPW Group, Robert Weisz, said. “Every generation is overwhelmed by how high real estate values escalate, and the next generation repeats the same process. The value of real estate does not increase in a straight line.We go through periods of no appreciation, and then we face a market, as we are in now, where the appreciation becomes overwhelming.”

In June, a joint venture of Stellar Management and Rockpoint Group purchased the leasehold interest in the 231,000-square-foot office building at 1140 Avenue of the Americas, paying about $97 million.The ground lease beneath the building is leased from the estate of Sol Goldman through 2016, and there is a 70-year extension option. The seller of the property is S.L. Green Realty, which acquired it in 1997 from Murray Hill Properties for $21.3 million.

Last summer, a joint venture of Stellar Management and the Rockpoint Group purchased the ground lease under the 23-story, 545,000-square-foot office building at 522 Fifth Ave. for about $53 million. A few months later, the joint venture purchased the building from JPMorgan Chase for $164 million, resulting in a total purchase price of $217 million. In April, Doug Harmon represented the joint venture in the sale of the building for $420 million, about $800 a square foot, to Broadway Real Estate Partners. Last month, Morgan Stanley signed a long-term lease for the entire building.

“At this point in time, large blocks of available class A office space are very scarce, so buyers are willing to take near-term lease-up risk even at very high prices for the buildings, as there is a lot of pricing power favoring landlords,” the managing director of RBS Greenwich Capital, Chuck Rosenzweig, said.

A joint venture led by Broadway Real Estate Partners is in contract to sell to Kensico Properties the 238,000-square-foot Pickwick Plaza office complex in Greenwich, Conn., for a recordbreaking price of $238 million, or $1,000 a square foot. “To justify these prices, people will need rental rate growth in order to get reasonable returns on equity,” Mr. Rosenzweig said. “Owners with deeper pockets and longterm staying power will be fine, and others may not.”

“The two biggest variables in the valuation of a property are, A: the cost of capital, and B: the net market rents which are achievable,” a principal at Stellar Management, Robert Rosania, said. “The stability (or lack thereof) of both also acts a primary driver in the valuation. Interest rates are dramatically higher today than when Harry Macklowe purchased the General Motors building, therefore ownership costs are higher. When he purchased the building, the argument was, ‘I’m only getting 1% in the bank, so I’m certainly going to get paid more investing in the building.'” Now that rates and alternative risk-free returns are higher, clearly that will be mitigated immensely.

“On the second subject of net market rents: Today rents are much higher than two years ago, and are more levered to inflation than we may ordinarily think (for example, if rents increase from $60 to $80, it represents a 25% increase, then the net income increases from $40 to $60, an increase of 33 %).

“Basically, in its simplest form if you believe that net market rents are going to increase at a greater percentage than the underlying cost of capital, and you are purchasing a building which can take advantage of the dramatically increasing rents, then your investment should be fine,” he said.

“I think the answer lies in the notion of replacement rents, the rents required to make a new building viable,” a co-chairman of Cohen & Steers, Martin Cohen, said. “Market rents are not quite there yet, but as leases turn over, just getting to market will mean gigantic profits for current owners.

“Take a typical Park Avenue building. At $45 per square foot, and a cost of $30, the landlords make $15. On a new lease at $75 a foot, the building makes $45, or three times as much. Rents will get there, barring some kind of bust, and that’s what buyers and bankers are banking on,” he said.

One man who has the pulse of the office marketplace is Douglas Harmon, of Eastdil Secured. This year, he and his company have been responsible for the sale of many of the trophy properties. “People’s view on investment horizons have changed,” Mr. Harmon said. “Today, people are willing to suffer through short-term thin yields for the upside, the common theme that all of these properties are being purchased for long-term holding periods.

“In Manhattan, for quality locations, price per square foot is secondary to yield and the potential net operating income growth. Replacement cost matters less, because in Manhattan the sites can’t be duplicated and there is no room to build a competitive site.Therefore, the replacement cost analysis is less important,” he said.

“There is very little inventory of buildings for sale,” the executive director at Cushman & Wakefield, Scott Latham, said.

Properties that are on the market include Murray Hill Properties’s 135 W. 50th St., Sitt Asset Mangement’s New York Gallery Building at 24 W. 57th St., Thor Equities’s mixed-use office building whose ground floor is leased to Birdland jazz club at 321 W. 44th St., and the government of Kuwait office building at 350 Park Ave.

One has to concur with Robert Ivanhoe when he says a strong leasing market “has permitted some of these record purchases to achieve the kind of returns that now make sense, even though such returns were not predictable when the buildings were purchased. It will be interesting to see how long this trend will continue.”

Mr. Stoler is a television broadcasters and a senior vice president at a title insurance company. He can be reached at mstoler@newyorkrealestatetv.com.