It's no secret that New York City is one of the best office markets in the country. Shares of real estate investment trusts, or REITs, focused on the prime market have shot up as of late. But given the strong rental growth in the city and the lofty prices at which property deals are trading, the group might actually be undervalued. Last year, rents rose 5% in Manhattan, with office vacancy dropping 80 basis points, to 9.4%, according to a recent Deutsche Bank report. Vacancy in Midtown -- the most attractive market because of its lack of new supply -- is even lower at 7.8%. A recent report from CB Richard Ellis says that if office employment growth and new inventory remain steady, vacancy rates in Manhattan will decline below 5% in 2008. By 2009, vacancy could fall below 3%, and asking rents could be up 49% from 2006, CBRE says. "New York City is among the best markets where REITs can increase their operating margins the greatest because occupancy levels have rebounded to the point where companies can really push their top line," says Robert Promisel, a principal with Adelante Capital Management, which owns several companies with heavy exposure in the city, including SL Green ( SLG), Vornado ( VNO), Boston Properties ( BXP) and Brookfield Properties ( BPO) (which isn't a REIT). Strong capacity for rent growth and recent pricey office-building sales are two main reasons why Banc of America Securities analysts John Kim and Ross Nussbaum recently upped their price targets on SL Green (to $100) and Boston Properties (to $88). Banc of America provides investment banking services to both companies. SL Green now trades around $93 and Boston Properties around $89. Both shot up in price after the upgrade and now trade at over 20 times their 2006 estimated funds from operations (a proxy for REIT earnings), higher than historic valuations.