Private investors have come to dominate office investment sales, and for one very good reason: the added purchasing power of high leverage. Unlike public office REITs, whose shareholders have less of a stomach for debt-drenched portfolio deals, private players can pile on leverage and, in many cases, outbid their listed competitors.

During the second quarter, for example, private equity funds closed on $5.25 billion in office deals. They also had more than $20 billion in office properties under contract, reports Real Capital Analytics. By contrast, public REITs booked only $1 billion in acquisitions during that period, a slight drop from the first quarter.

As a result, public REITs are relying increasingly on development to build their portfolios. That approach is not without risk, of course, as soaring construction and land costs have made it painfully expensive to assemble sites and build on them. It's still cheaper to buy than build office in most markets, considering the high replacement cost, but that gap is narrowing.

“The only growth mode that's open to office REITs is development,” says Doug Poutasse, investment strategist at Boston-based pension fund advisor AEW Capital, citing Boston Properties (NYSE: BXP) as an example. “There's just so much leveraged private money out there that it's very hard to compete for existing buildings.”

Even on the development side, however, the public REITs may be outgunned. Nearly half of all office sites sold over the past 18 months were bought on behalf of private investors.

One of the most active developers among office REITs is Atlanta-based Cousins Properties (NYSE: CUZ). The company, which builds apartment, retail and industrial properties, built several of Atlanta's largest office towers in the 1990s, and is still active. It's now developing a 520,000 sq. ft. skyscraper in the Buckhead section of Atlanta, part of the sprawling mixed-use project known as Terminus. The 27-story Terminus 100 tower will be completed next spring. The space is already 60% pre-leased.

“Most of the office buildings that we develop are due to some special circumstance,” says Tom Bell, CEO of Cousins Properties. “If a tenant wants 300,000 sq. ft. in a market, we may build a larger building and take the risk on the remaining space.”

Even so, Bell agrees that it's challenging to buy existing properties. He describes the amount of private capital that's looking to find a home in the office market as “astounding.” While the veteran corporate executive says that he's shocked at the volume of capital that's sidelined, Bell doesn't expect this logjam to break up anytime soon. That should keep demand cooking for office properties, he says.

“I would guess that pension funds will allocate more into the real estate market,” says Bell. “And I'd also guess that other capital sources continue to press into the market, too.”