The scorching market for Class-A Manhattan office buildings just keeps getting hotter. Not only did the dollar volume of deals through midyear exceed those closed in the first half of 2005 ($8.4 billion versus just $6.9 billion), but Cushman & Wakefield brokers told attendees at their quarterly market breakfast this morning that they expect full-year sales to eclipse last year’s record of $16.8 billion.

The reason for the surge includes strong fundamentals (rising rents an evaporating vacancies) as well as an unexpected surge in foreign investment —money that seems undaunted by plunging cap rates. Foreigners — including beneficiaries of the spike in oil prices — accounted for more than 23% of all Manhattan office acquisitions during the first half, up from just 6% during the same stretch last year. Some notable deals on behalf of this investor bloc include the May sale of Six Times Square for $300 million to Dubai-based Istithmar [Arabic for “investment”] Holdings. The investment firm also spent $1.2 billion to buy 280 Park Avenue last month.

Soaring demand from foreign buyers is a bit of a surprise. Some legendary buyers such as German syndicators have clearly pulled back from buying Manhattan office properties, opting to sell them instead. But the world is full of deep-pocketed foreign investors who see tiny yields as the cost of doing business in a world-class city like Manhattan.

Cushman & Wakefield reports that momentum is already building for a second-half record — more than $10 billion in investment sales deals are now under contract, it estimates, which would push that midyear tally up to $18.4 billion (and that’s well above full-year 2005 volume).

“There really is far more capital than product available in Manhattan,” says Joseph Harbert, chief operating officer for Cushman & Wakefield’s New York metro region. “When you combine that with strong leasing fundamentals, a tightening market and a lack of speculative development, the investment market will maintain its strength through year-end.”

Broker Richard Kennedy, senior director at Cushman & Wakefield’s Manhattan office, says that incredibly low yields aren’t deterring many offshore investors from buying Manhattan office towers. Case in point: When 280 Park Avenue was sold last month, brokers estimated that Istithmar accepted a puny 3.75% yield [capitalization rate] on the property.

How low is that? Most of the trophy office sales that have closed within the past 18 months generated average going-in yields of 5.25%, according to Cushman & Wakefield. Even so, it’s becoming far more common for investors to accept sub-5% yields given the intense demand for properties. Brokers attribute this offshore demand to two factors: Many foreign investors value the resilient Manhattan office market, which has tightened significantly since the 9-11 attacks and recession.

Office vacancy dropped from roughly 10% to 6.9% between midyear 2005 and 2006, plus asking rents have increased by roughly 10% during each of the past two quarters. They also appreciate the limited amount of new supply slated to hit the market in coming years. Just 6.45 million sq. ft. of new office space is under construction in the massive 389.13 million sq. ft. Manhattan market.

Adds Kennedy: “There are many foreign-led deals under contract right now, and we expect the second half of the year to be as active or more active than the first half.”