Area's diverse tenant mix will keep office market stable.

The Tri-State office market rushed out of the gates in 2000, yet the pace of leasing activity slowed in the second half of the year. In New York City, the market drivers came from the high-tech/new media and finance industries. The financial services' market share of square footage leased rose slightly to 15 percent, while the high/tech media cohort doubled its share to roughly 22 percent.

In New Jersey, pharmaceutical, financial and high-tech/new media firms made the strongest impact. New Jersey's Hudson Waterfront market particularly benefited from expanding and relocating firms. Merrill Lynch, Chase Manhattan Bank, Goldman Sachs and John Wiley & Sons were some of the notable tenants that New York City lost to this booming market due to restrictive Manhattan conditions: surging rents and a lack of large blocks of space. The telecom industry made a lot of noise at the start of year, leading to a growth of "telco hotels" throughout the region, yet disappointing stock performances have been reflected in reduced activity at the end of the year.

In the latter half of 2000, the major stock market indices had been unable to maintain the same levels of rapid growth that started off the year. The direction the stock market will take may be uncertain at this point, yet job growth has maintained its measured pace. These conflicting scenarios create uncertain expectations for the regions' future leasing activity.

The office market's performance hinges to a large degree on the fate of its current, main leasing demand driver: the high-tech/new media tenants are a relatively new driver, any shake-up will not return space in vast amounts nor seriously affect market fundamentals. In fact, the AOL/Time Warner merger foretells the direction that major surviving high-tech/new media companies will take; as new economy forms alliances with old economy, demand will benefit.

A recent Standard and Poors' report credits the securities industry as responsible for half of New York City's job and income growth since 1992. Job growth has created pent-up demand from traditional tenants, which will buttress the market in the event of diminished leasing activity. To be sure, the strength of the Tri-State market is its diversity of tenants. For example, consolidations in the pharmaceutical and financial industries are expected to create new opportunities in New Jersey. Still, newly active firms remain dependent on the wills of Wall Street. Further leasing by telecom firms, for instance, will depend in large part on whether the industry can recover from its current unfavorable stock market conditions.

As we enter 2001, the Tri-State office market is exhibiting healthy supply and demand fundamentals, protecting it to some degree from a possible slowing of economic conditions or a dramatic shakeout in the dot-coin/new media sector. Rent increases are expected to continue, but at a slower and more sustainable rate.

Demand levels are the key element to the future health of the Tri-State office market. New supply will be relatively restrained with long construction lead times and obstinate construction capital lenders. Hints of a cooling economy portend slowing employment growth and office demand levels below what have been seen in recent years. Growth, however, at a slower rate, remains positive and will provide opportunities as the market shifts to equilibrium.