The Sears Tower in Chicago. The Chrysler Building in New York. The Embarcadero Center in San Francisco. Name virtually any landmark US office building and there is a good chance that it recently changed hands - or is just about to.

The return of capital to some of the biggest US central business districts marks a profound change of mood. After the bust of the early 1990s, the investment enthusiasm that remained for office buildings tended to spin out to the suburbs. The downtown office markets were declared dead, killed by excessive costs, antiquated buildings and the shift away from the old cities of the north east and mid-west to the sprawling ex-urbias of the south and west.

The pendulum has swung back with a vengeance - and the prices being paid for top-class buildings have surged. Prime space in Manhattan's midtown district, an area that comprises the world's largest commercial real estate market, now commands as much as $500 a sq ft, while the Embarcadero Center in San Francisco looks likely to top $300 a sq ft when a long-running auction of the development finally comes to an end.

Behind this rebound are two powerful forces: a firming of many downtown rental markets, and the wave of cash that has flowed into real estate investment trusts (Reits). The former has had an unambiguously positive impact for investors, while the latter may already have driven prices to excessive levels.

The long US economic expansion and the dearth of new construction have combined to push vacancy rates down - and rents up - across the country. It was not long ago that pessimists were predicting a steady exodus of big corporations from New York.

Now rents in midtown Manhattan "are at levels last hit in the mid-1980s, and the market is very strong," says Bruce Mosler, a director of Cushman & Wakefield.

The headline rates do not even tell the whole story: there are fewer concessions available, raising the all-in cost for new tenants, he adds.

New office construction has certainly picked up - but, compared with the 1980s, remains negligible. According to LaSalle partners, a Chicago-based real estate company, the construction of new office space during the peak years of the last decade reached 7 per cent of total outstanding supply: the recent increase in construction took the level to only around 1 per cent last year, rising to an expected 2 per cent in 1999.

At the same time, most purchasers still claim that a comfortable gap remains between the prices they are paying and the replacement cost of a new building. Even deals like that involving the Embarcadero, which is in the final stages of being auctioned, should be completed at less than replacement cost, says John Moody, chairman of Cornerstone Properties, one of the bidders.

It is no surprise that San Francisco - with Boston - tops most investors' list of the hottest downtown real estate markets. New development land is scarce and a regional economic boom has driven rents higher. Similar factors have fuelled the enthusiasm for New York and, to a lesser degree, Chicago.

Despite the generally low levels of new development, though, some cities may already be in the first stages of a new cycle of over-construction. Dallas, fresh from a severe downturn in the late 1980s, is in the grip of a new wave of building, even though its downtown vacancy rate is the highest of any leading city. The demand for space from tenants is rising sharply, but may not be enough.

These cities' problems are not yet severe enough, though, to disturb the general picture. Among 32 central business districts monitored by Cushman & Wakefield, only five suffered an increase in vacancy rates between the first quarter of 1997 and the same period this year. Just two - Atlanta and New Haven - saw rent levels decline.

Whether the prices now being paid for office buildings have got to an unrealistic level is another matter. Not so long ago, seemingly invincible Japanese financial institutions fought for control of prime US real estate: now domestic investment trusts have taken up the running, fuelled by the wave of equity that has flowed into the sector over the past three years. That competition has already driven prices to heady levels.

Take the Embarcadero Center. According to Mr Moody, a price of $300 a sq ft would equate to a capitalisation rate for the buyer of around 6.5 per cent. That is well below the "cap" rate of around 9 per cent that, according to Paine Webber, is typical in the office sector.

How could any company justify an investment that would yield less than its cost of funds? According to Mr Moody, though, that 6.5 per cent does not tell the full story. By renegotiating rents that fall due in the short term and bringing forward other rent reviews, it might be possible to lift the yield fairly quickly to 9 per cent or more, he says.

That may be so. However, the fact that real estate companies are now having to work harder to squeeze an acceptable yield from their purchases suggests that the level of risk is going up.

At the same time, the supply of prime office buildings in central business districts may start to shrink. For the most acquisitive Reits, that could spell a tougher period ahead.