1994 to be a period of sustained growth.

The New York City commercial real estate market has witnessed a renewed sense of vitality during the first six months of 1994. Overall, market and economic indicators are positive, as leasing activity is up in both the Midtown and Downtown submarkets, while the regional economy continues to gain strength, mirroring the national recovery. Already, emerging signs of the ]market's return to balance have influenced leasing activity, particularly among large space users.

The wild card currently surfacing in the marketplace is the possibility of a number of major corporations quietly considering to relocate out of the city, which would free-up millions of square feet of prime space, particularly within the Midtown submarket. The recent announcement of MasterCard's possible retrenchment from its proposed relocation to 350,000 square feet of space at 1345 Avenue of the America's exemplifies how this trend could dramatically influence the market's future activity. Additionally, as Midtown continues to tighten, pressuring rental values to climb, many large space users will begin to focus on opportunities in Midtown South, Lower Manhattan or new construction alternatives.

To this end, the clank of construction is anticipated to echo the city streets in the near future; however, many industry players are taking cautious steps, and evaluating all of the market's existing opportunities before breaking ground. While numerous sites are available, developers are motivated and there is the perception that the market is ready for new construction, it is unlikely that any plans will materialize without a financially strong tenant, which would enable the financing to be placed.

To date, an estimated 14 million square feet of space was leased in all New York City buildings, representing a significant increase over the 11.3 million square feet leased during the first half of 1993; while year-to-date leasing activity in Manhattan's Class A space totals nearly 5 million square feet. Overall, this lively pace of activity has led to steady absorption of the market's Class A product.

Midtown Focus: The Midtown marketplace has enjoyed a brisk pace of leasing activity, with approximately 11 million square feet of office space leased to date, representing an estimated 11% increase over 1993's performance during the same time period. This healthy surge in activity has served to lower the Midtown vacancy rate, which is currently hovering around 14 percent, down from 16.5 percent reported midyear 1993.

Year-to-date leasing activity in Midtown Class A space totals an estimated 3.5 million square feet, of which, nearly 2 million square feet occurred along the West Side I submarket (encompassing 42nd to 59th Streets from Fifth to Seventh avenues), outpacing activity in all other Midtown submarkets as well as activity in Class B space. As a result of this intensified level of activity, the West Side I submarket represents the lowest vacancy rate in Midtown, resting at approximately 11.4 percent. Tenants who have recently consummated transactions in this desirable submarket include, Viacom International, Liberty Mutual Insurance Company, among others. By year-end 1994, there will be fewer opportunities for tenants requiring 50,000 square feet or more of quality space in this submarket, as evidenced by the handful of options remaining along the Avenue of the Americas.

Already, asking rental rates for quality space in Midtown are starting to show signs of the market's tightening conditions. For instance, the average asking rental rate for Class A product in Midtown increased slightly over the past six months from $39.87 per square foot reported in January/February, to a current rate of approximately $42 per square foot.

Downtown Focus: Lower Manhattan also has witnessed an increase in leasing activity during 1994. To date, approximately 2.4 million square feet were leased in the downtown submarket, representing a significant increase over the 1.4 million square feet leased during the first half of 1993. Of this total, approximately 1.3 million square feet of space was leased in Class A product, while only 600,000 square feet was leased in Class B space, evidencing the rapid evaporation of Downtown's quality blocks of space. As a result, there is a tremendous overhang of Class B product and a significant amount of sublease space, which will overall, preclude Lower Manhattan's resurgence for some time.

Meanwhile, tenants will continue to benefit from the favorable lease economics in the form of upgrades and renewals, as owners compete to retain as well as attract tenants. Additionally, there are numerous opportunities for large credit-worthy tenants to negotiate advantageous terms, such as equity stakes in owners' properties. In contrast to Midtown's increasing values, Lower Manhattan's average asking rental rates currently are being offered at approximately $34.92 per square foot for Class A space, and $26.87 per square foot for Class B space.

Outlook: Looking ahead to year-end 1994, leasing activity is expected to persist at a steady pace in both the Midtown and Downtown markets. It is likely that a number of tenants with large space requirements will begin to turn to Lower Manhattan for more economical lease terms or split operations in order to be strategically-positioned in the marketplace. Furthermore, Manhattan's traditional service tenant-base, which recently has enjoyed a "flight to quality," will begin to shift its focus to office space requirements which reflect a globally-competitive business environment. These strategically-motivated moves will include access to technologically-advanced operating and HVAC systems. Additionally, the quest by many corporations to right-size operations, combined with the latest wave of 90s-style mergers and acquisitions, which has affected the telecommunications, media, financial and most recently, the insurance industry, will continue to alter many tenants' office space requirements.