However, office investment in 2005 is not expected to reach 2004 levels. This year, volume is expected to top $1.8 billion in comparison to $2.7 billion in 2004, according to Delta Associates, the Washington, DC-headquartered research arm for Houston-based Transwestern Commercial Services. Nonetheless, office investment in 2005 will still be stronger than activity in 2002 and 2003. Cap rates also are expected to rise over the next couple years.

Significant transactions during the first quarter include Unilev Capital's acquisition of One Riverway for $66.4 million or $138 per sf and TA Associates Realty's purchase of the Frost Bank Building for $23.8 million or $109 per sf. According to Delta Associates, sale prices averaged $111 per sf in the first quarter, a decrease of $17 per sf from last year. In particular, class A sale prices dipped to $129 per sf from $149 per sf in 2004. However, current pricing remains above average since office assets were selling for $87 per sf, on average, in 2003.

Much of the interest is driven by the market's improving office fundamentals. The market absorbed 1.3 million sf of office space during the first quarter, according to Delta Associates. The marketwide vacancy rate dropped to 15.1% from 16.7%. The strong absorption and declining vacancy are expected to create a slight escalation in rental rates this year.