While today’s commercial real estate markets often defy easy descriptions, one that might stick is the Dickens-esque, “It is the best of times, and the worst of times.”

“There are mixed signals in the market and good arguments that conditions could continue to deteriorate or alternatively improve by the end of the year,” says Robert White, president of New York-based research firm Real Capital Analytics. “Ultimately, one’s viewpoint depends largely on their outlook for a recession.”

One outlook is crystal clear – 2008 will see an end to the recent record levels of investment in commercial real estate.

As usual, office was the favored sector by investors in 2007, with both downtown and suburban properties capturing the greatest share of investment dollars. It was a record year for office transactions, with $211 billion in office properties changing hands, a 55% increase over 2006 volume, according to Real Capital Analytics. While 4,300 individual office properties changed hands last year, the total number of transactions dropped to 2,800, as portfolio players like The Blackstone Group were the most active buyers.

But chinks are evident in the office armor. Sales fell by 42% in the fourth quarter of 2007, to $26.5 billion. Heading into 2008, portfolio sales are on the wane, racking up just $5 billion in the fourth quarter versus $105 billion in the first three quarters of 2007.

Prices have tumbled as well. While downtown buildings appreciated 9% in the first half of 2007, their prices dropped 10% by the fourth quarter, while suburban prices dropped 11%. Also tellingly, after five years of steady declines, cap rates on both downtown and suburban properties were on the rise again in the fourth quarter, by 25 basis points and 50 basis points, respectively.

Buyers and sellers are retesting the bid/ask dynamic, according to White. “Fortunately sellers are generally not under pressure to sell quickly or accept too steep a discount and this has kept prices from falling further,” says White.

Foreign investment opportunities are also on the rise. According to White, 11 of the 20 top investment markets in 2007 were in the United States. Cross-border investments are rising, with U.S. investors leading the way overseas, and more international investors are taking advantage of the weak dollar to snap up U.S. deals. “Compared to prices in other global cities, even Manhattan prices look reasonable,” says White.

In 2007, Manhattan maintained its status as the top market for office deals, with $40 billion in transactions, nearly four times the volume for the second-ranked market, San Francisco.