Private investors have come to dominate office investment sales. And for one very good reason: The added buying power of heavy 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 look like pikers, booking 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. This tack 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 if you consider replacement costs, but that gap is narrowing.

“The only growth mode that’s open to office REITs is development,” says Doug Poutasse, chief investment strategist at Boston-based pension fund advisor AEW Capital, citing Boston Properties (NYSE: BXP) as a prime 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 (see below).

One of the most active developers among office REIT s is Atlanta-based Cousins Properties (NYSE: CUZ). Cousins, which is also active in apartment, retail and industrial development, built several of Atlanta’s largest office towers in the 1990s, and its development pipeline remains 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.

Office development site: Buyer
Private/In state: 42%
Private/Out of state: 12%
REIT/public: 12%
Other: 44%
Source: Real Capital Analytics

“Most of the office buildings that we develop are due to some special circumstance,” says Tom Bell, CEO, 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 also describes the amount of private capital that’s looking to find a home in the office market as “astounding.” While he says he’s shocked at the volume of capital that’s sidelined, Bell doesn’t expect this logjam to break up anytime soon. And that, he believes, should keep demand cooking for office properties.

“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.”