That surge has left many industry insiders warning investors not to expect prices to go higher; and they say it's not necessarily good news if they do. “Interest rates can't go lower so there won't be rate compression. As a result, there have to be real supply/demand generators to increase pricing,” says Eric Anton, senior managing director at HFF.

Avison Young principal Greg Kraut is seeing worrisome signs that the party is just about over. “We've had a few years of very good pricing but we don't have much juice left. Investors have lowered the bar on risk-adjusted returns because they have to place the money. It's a great strategy if you don't have a gun to your head to do something within the next three to 10 years. If you're a long-term holder, you don't need debt or it's a short-term value-add play, it's a great approach. But you don't want to get caught after the cycle, in years three through seven. I wouldn't want to be left holding the bag.”

Discussing short-term players who are willing to buy property with little cash flow in return for a big pay out when the rent roll comes due, David Schechtman, principal and executive managing director of Eastern Consolidated, says, “That's fine as long as they are capitalized well enough to survive a correction. But if they borrowed the equity, took a big mortgage and are just relying on appreciation to break even, that's scary.”

He continues, “I'm always wary of the in-and-out investor because real estate, historically, has been an area that requires longer-term holds. The concept of being in and out in one-to-three years is a boom market concept. If you're relying on appreciation, you should think twice. If you're banking on immediate appreciation and can't survive without it, you're a big gambler.”

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After all, he notes, “You hear about great market timers but you don't hear about the tons of people who don't succeed that way.”

Adds Kraut, “Several investors not from New York—like AvalonBay Communities, Toll Brothers, Anbang Insurance Co. and Norges Bank Investment Management—came into the market last month, and that's always a sign that the city is being perceived as a safe haven, leading to inflated values because there's a rush of money and a lack of supply.”

Last month, AVB purchased the American Bible Society's headquarters at 1865 Broadway for $300 million, GlobeSt.com reported. Known for multifamily projects, the developer plans to turn the Midtown office building—located near Lincoln Center—into a 300,000-square-foot residential tower with “significant retail” at the base.

Meanwhile, Toll Brothers bought two Tribeca parcels for $12.9 million while signing a 99-year ground lease in the West Village at 100 Barrow St. On the former site, at 351-355 Broadway, the developer plans to construct a 98-unit condominium tower while at the latter site, the firm intends to build a 35-unit rental.

Also in February, Anbang followed up its epic purchase of New York City's Waldorf-Astoria hotel for almost $2 billion in 2014 by picking up a trophy office condominium in the upscale Plaza district for an undisclosed price. The seller, the Blackstone Group, had bought the property back in 2007 for approximately $450 million—or $1,182 per square foot, according to industry data.

Additionally, Norges swooped into Midtown last month when it bought a 45% stake in 11 Times Square. Valued at $1.4 billion—putting Norges' investment at $630 million—the 1.1 million-square-foot building's minority stake was sold by a JV of SJP Properties and Prudential Real Estate Investors.

Notes Jonathan Yormack, founder and managing principal, East End Capital, “There's been a strong run up in office property values ahead of fundamentals and now they are catching up, as is demand, so we're going to see rental growth and asset valuation growth slow down.”

Cautions Anton, “There could be continued capital flight from other parts of the world and that'll increase pricing, even if fundamentals don't support it.”

Skyrocketing prices raise additional concerns, notes Michael Slattery, SVP of research at the Real Estate Board of New York. When recently surveyed on their level of confidence in the market, some members of New York's largest industry group raised questions. “When you see prices rising faster than anticipated, it's natural to ask if those levels are sustainable. If interest rates begin to rise next year, value increases will slow down and borrowing costs will be higher. These two factors will correct for the quickly rising prices we are seeing today. It's always a concern when prices get too high, because it's good for sellers but could be an issue for buyers and they create demand.”

The possibly overstimulated market is raising some concerns on the leasing front too; particularly in Midtown.

“Availability has the potential to increase in Midtown right now because Hudson Yards and One World Trade Center are targeting Midtown tenants,” notes Michael Cohen, president of the tri-state region at Colliers International. “The area availability rate went up one-tenth of a percent in the first quarter from Q4 of last year; keep your eye on that number.”

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Indeed, he continues, “We're looking at all of 4 Times Square potentially being empty,” with its anchor tenant, Conde Nast, headed for One World Trade Center and Skadden Arps considering Brookfield Office Properties' Manhattan West. Time Inc. is exiting 1271 Ave. of the Americas for Two Brookfield Place, while law firm Jones Day is moving out of 222 E. 41st St. to move to Three Brookfield Place and GroupM is leaving several Midtown locations to come to 3 World Trade Center.

On the plus side, Cohen adds, “Midtown's going to offer tenants some of the best bargains out of the three submarkets.”

Besides, notes Schechtman, “If you're looking at real estate in one to three years, everything is skewed but if you look at it in more pragmatic five-to-10-year trends, a 12-month vacancy followed by 20 years of tenancy,”—assuming such a lease is signed for these vacant Midtown spots—“is not a bad thing.”

Midtown buildings on Third and Lexington avenues, adds Yormack, “are probably the most challenged because they have the most cookie-cutter spaces, whereas demand is for creative space; people want buildings with character and amenities that older class A buildings don't provide. One we're working on, at 285 Madison Ave., is an example of converting a traditional building into one with character and amenities. We're putting in a communal roof deck, a tenant amenity area, a gym and more.”

Moving Beyond Manhattan

In the investment sales market, these trends are prompting buyers to look to secondary markets. “We certainly are looking at neighborhoods that are off the beaten path, from the standpoint of institutional real estate investors,” says Seth Pinsky, EVP, fund manager and metro emerging markets director at RXR Realty.

“Some businesses and residents who have been in Manhattan are being priced out of the Central Business District,” he notes, “and at the same time there's this push out of Manhattan, you have a pull into what had previously been peripheral areas.

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“The fundamentals for the boroughs are very strong; demand is high and is likely to remain so,” Pinsky adds. “There's still significant price discount that residents and businesses can find in the outer boroughs and supply hasn't kept pace with demand.”

He continues, “We've looked at a wide variety of neighborhoods, including places in the South Bronx, the North shore of Staten Island and Jamaica, Queens. We like places that are transit accessible, have good retail, are diverse and have the kind of character that residents and businesses seek.”

RXR is known for having property in Long Island City too. “We bought almost a million square feet of office space last year in LIC and in Fort Greene, Brooklyn. We didn't own any office space outside of Manhattan in New York City previously but we're bullish on the outer boroughs. We invested in these areas because we saw tenants going there.”

In Long Island City, RXR owns the Standard Motor Products building, a 330,000-square-foot property on which it has done a $14-million renovation. In Fort Greene, RXR purchased 470 Vanderbilt Ave. Spanning a full city block, the 650,000-square-foot class A office asset is bounded by Atlantic Avenue and Fulton Street. The property, which has undergone a $74 million restoration, is minutes away from Barclays Center and the Pacific Park (formerly Atlantic Yards) complex.

“We spend a lot of time as a city trying to figure how to accommodate people in a fixed geography,” Pinsky notes, “and we lose sight of the fact that just outside the city are communities with great infrastructure, walkable diverse downtown areas—where we can create workforce cities—at a fraction of the cost of development in the city.”

Other industry professionals also are seeing a shift outside of Manhattan in the multifamily sector, and a change in how owners are generating returns. “We're seeing the continued strength of the boroughs,” says HFF's Anton. “Rents have continued to rise and I think they'll continue to do so, but gently, not dramatically.”

Even modest increases though, in the wake of sharp ones in recent years, may prompt some tenant flight, notes Yormack. “Tribeca, Chelsea, the East Village, Brooklyn Heights, Park Slope, the West Village and Williamsburg are seeing rents consistently over $70 per square foot, with many of the units already being share units and quite small for the individual tenants.”

He explains, “As rents go higher in the 'main and main' areas, users will go to places like Harlem in Manhattan and Bushwick in Brooklyn or Astoria in Queens, for example, as a means of getting more bang for their buck. Alternate locations will see more demand, and at some point, that does decrease demand in the prime locations.”

Things certainly aren't all bad, Schechtman quips, but investors need to be vigilant when it comes to watching market conditions. “I have 13 contracts being signed, including multifamily and retail deals, so there's a diversity,” he says. “I've had seven signed contracts since January, three closings; in total, I've done 23 deals since January 1. Even if volume drops, for this broker, that's a fevered pitch.”

However, he warns, “Things can change on a dime—be prepared.”