Activity to continue at faster pace in 1994.

Looking back, 1993 was a year of improvement in the New York City real estate marketplace - with accelerated activity in the late months of the year.

By late 1993 we were seeing increased leasing and sales activity and a firming of the market - definite signs of increased confidence in the regional and national economy. In New York, tenants finally had some competition for the space they wanted to lease such as what occurred at 10 Union Square and 1114 Avenue of the Americans.

The real estate market, responding to the improvement in the economy was rebounding from its long downward slide. As the economy continues to strengthen in the New Year we expect leasing activity to continue at a somewhat faster pace in 1994.

In large part, what we were seeing late in 1993, were firms, sensing an improvement in the market, jumping off the fence and seeking to lock up their space while the market was still in their favor. We expect tenants will continue that trend in order not to miss that window of opportunity that, we believe, will continue to narrow in 1994.

By and large 1993 was still a tenants' market, although more limited that in the past. In fact, it had become increasingly popular for firms with two of three years remaining, to offer to extend their lease out for at least seven years, in exchange for an immediate reduction in rent and other benefits.

We are already beginning to see landlords being a little less generous in dealing with tenants seeking to renegotiate and extend their existing leases in primary buildings. The opportunity for tenants to renegotiate is in fact starting to depend on how well leased a building actually is. Tenants in well leased buildings are having a more difficult time renegotiating while those in high vacancy properties are finding the opportunity to renegotiate to be easier.

With the recent increase in leasing activity, landlords are sensing that the market is improving and are less anxious than they were three or six months ago. This, in turn, probably means that the window of opportunity for tenants to secure very favorable lease terms, may be closing, especially in Class A buildings. While we have not yet seen landlords attempt to raise the rents, the concession package has begun to shrink.

Growing Strength in Financial Community

The growing strength in the financial community has had a strong and positive impact on New York real particularly within the last six months. Led by the significant upward movement in the stock markets and substantial activity in other areas, firms in the financial sector are again expanding. This growth had visible impact n the real estate market in the last half of 1993. For example, a number of smaller companies who had been operating in 10,000 square feet of space needed additional space to accommodate their expanded staffs.

The expansion in these firms is largely in front office type positions. They have come back into the market to find and lease prime space in the 15,000 to 25,000 square feet range in Class A buildings.

A second sector that has had positive impact on the real estate market is health care. There has been a significant increase in space recently by hospitals and health care organizations outside of the traditional institutional buildings. For example, Beth Israel Hospital purchased the available space at 10 Union Square; Columbia Presbyterian Hospital leased space at 650 Madison Avenue; St. Luke's-Roosevelt Hospital took space at 555 57th Street and HIP is expanding and taking major space in buildings in throughout the City.

This activity together with significant lease signing by law firms and financial institutions in particular has tightened the midtown market from where it stood at the beginning of 1993.

Two Markets Downtown

A markedly different situation exists Downtown. In reality we are seeing two distinctly different markets, a fairly strong and improving market for Class A space and a weak market continuing for Class B, C and D buildings.

The Class A market downtown will continue to firm up as the financial sector grows, dramatized by the rapid leasing of the Merrill Lynch sublease space at the World Financial Center and One New York Plaza.

But, the need for high tech installations together with the continued pressure to lower costs for back office operations is hurting the rest of the market which had traditionally housed such facilities.

There is a drift away from Downtown for back office operations, as newer facilities with better technology have become available in Brooklyn, Jersey City and other areas. This is leaving the typical downtown back office building that has low window to floor area ratio and a wide core to window depth at a disadvantage. There are fewer users for this kind of space today outside of municipal and government agencies.

One hundred Gold Street is a case in point. When Prudential Securities relocated out of that space to One New York Plaza, the City of New York purchased the space to expand its operations. If the City had not done this, the building owner would have been hard pressed to find a user.

There are many secondary buildings downtown with greater than 50 percent vacancies. Would these buildings lease with further cuts in rent? Probably not. Rents have been substantially reduced already to the point where many of them are throwing off negative returns. Many building owners need their lenders' approval before they can sign leases.

Some of the secondary buildings with irregular floor plates and high vacancies should look for alternate uses, i.e. hotels and residential buildings. The best recipe to improve the Downtown market will be to attract other industries and to improve transportation downtown.

The dual market conditions seen downtown will continue through the year. The Class A market will continue to pick up while the rest of the market will continue to struggle.

Overall, we have been witness to a flight to quality in 1993, a trend that will continue through the current year. Further improvement in the economy, specifically a strengthening of the City's economy, will provide further impetus to the strengthening of the real estate