Bullish on market for first time in years.

For the first time in years, we at Robert P. Corso & Co. See some smiling faces which support evidence that real estate market conditions are definitely improving for many property owners. Savvy investors and institutions, realizing that prices appear to have bottomed out and are increasing, are betting -- as we are -- that yields in 1994 on real estate will outperform stocks and bond returns. Also the enthusiasm among pension funds to invest is beginning to return and we feel certain they will slowly move back into the market to purchase institutional grade property. Opportunities are now better than any tine in recent history.

Fresh evidence of a rejuvenated economy appeared as all signs pointed to a pick-up throughout 1993. Factories posted their longest streak of gains in big ticket orders since 1987, housing starts were up dramatically, personal income increased, and spending grew at healthy rates in November and December of this past year. Consumer confidence is at its highest level since 1991. The numbers we've seen for projected economic growth -- 3-4 percent -- are still of moderate levels, but suggest the economy has the where-withal to grow at a reasonably robust pace. If low interest rates prevail, they will continue to have a positive impact.

Brighter New York 

New York, which was hit harder and longer by the recession than other parts of the country, finally appears to be emerging from its economic doldrums with a slight rise in employment over the last few months, although we are still lagging behind the national turnabout. Unemployment averaged 10.8 percent last year but is expected to fall into single digits in 1994. This is a reflection of the recovery that began more than two years ago. Many industries the city depends on such as publishing, accounting, advertising, and business services have still not fully recovered but all signs point to a positive upside trend. The real estate picture firmed up in the Manhattan office market. Vacancy rates in the real estate sector for prime mid-town property are down from 16.3 percent to 15.6 percent in the 3rd quarter of this year and down from 18.3 percent to 16.9 percent in Manhattan as a whole. Rental prices are still below par and shall remain there until vacancy rates drop further, but at least we are moving in the right direction. According to Crain's, even leasing was up 39 percent for the year. Real estate assessments have stopped rising in the city. Suburban vacancy rates continue to climb and remain generally above the Manhattan rate. I think we're going to start to see real growth in New York in 1994, and well into the end of the decade.

The major risk to this forecast could be higher interest rates. In our opinion, rates will probably increase slightly in 1994. In the past few weeks, we have begun to see some rate pressures. This is normal in a positive economic cycle. If the demand for funds grows too rapidly, Federal Reserve Chairman Alan Greenspan, who has already indicated he believes short term rates are too low, may feel the need to restrain inflation. Given any signs of inflation, the Fed is likely to tighten the money supply.

Looking to build on recent strengths, the economy is heading into 1994 with the hope that continued growth will not spark inflation and lead to another bumpy ride.

Desperate Hunt For Yields

Investors fleeing low interest rates on bank deposits, CD's and other short term instruments have shifted billions of dollars into stock mutual funds in search of better yields. Fund managers are hunting for high-yielding investments. this has created a virtual explosion of interest by both real estate companies and investors in real estate investment trust (REITS) and the public has responded. Reits offer a new source of capital to companies that have been hungry for fresh money since the credit crunch, and their dividend yields have historically been higher than the S&P 500 yields. They also offer fund managers a liquid way of meeting their investment requirements without, having to buy illiquid real properties directly.

Investment trusts are not new. They were created by Congress when Dwight Eisenhower was president. Many did not survive, so caution should be the watchword applied. Managers swamped with money must invest quickly, which could make them prone to huge errors in judgment. That is exactly what happened to lending officers in the 1980s, causing them to finance massive overbuilding that generated the property value collapse.

Securitization 

The hot topic of the year in finance is securitization of commercial mortgages. With approximately $300 billion in mortgages coming due in the next few years, the market needs liquidity. One vehicle of choice to liquidate these assets will most certainly be mortgage-backed securities. Under this scenario, lenders with large pools of mortgages sell them to investment bankers who structure REMIC (Real Estate Mortgage Investment Conduits) securities with investments grade ratings. An investment rating of AA or better makes it acceptable for large institutional investors, pension funds, l insurance companies and banks to invest at a lower risk or with less regulatory burden. Insurance companies are significant players both on the buy and sell side of securitization transactions in domestic and foreign markets.

Financing Pendulum Is Swinging

For the past couple of years real estate financing has been a lender's market with money hard to come by for borrowers. Now the pendulum has begun to swing back as business clearly heats up and competition for loans increase. The market is changing in a positive way. Lenders that were absent from the market -- small and medium size insurance companies, banks and pension funds -- are aggressively starting to provide money for real estate deals. In the past two months our firm has had requests for loan applications from half a dozen lenders who had been on the sidelines in recent years. As lenders put their problems behind them real estate has reached the end of the credit crisis.

Financing is now a reality. Although there are a lot of reasons the lending environment has improved, the extensive writedowns taken by institutions is the single most important, since it freed up institutional capital. Properties that were writedowns could be sold to equity investors closer to market expectations and financed once again based on cash flow. Institutions willing to bite the bullet also satisfied rating agencies and government regulators who were in our opinion unduly tough on real estate. Spreads are under pressure and better than they have been in 20 years. They had been as high as 250 basis points over the curve for the benchmark 10-year Treasuries. Now they can be down to 150 basis points for the right deals. Corporate bond yields are only 100 basis points over Treasuries, and any product with a higher yield looks good. With conservative underwriting, high yields and creative financing techniques, real estate financing is once again picking up steam.

There appears to be a seemingly endless number of small-to moderate-sized insurers who are now active in the market. Most of their activity remains concentrated in loans from $1 to $20 million. Although none are a large force in and of themselves, it is our opinion that they will band together in syndicates to do some larger transactions.

Large loans are often picked up by Wall Street especially if they have corporate credit aspects or lend themselves to the growing commercial securitization market.

Lenders are not focusing as much on upside price potential when they make loans as they are on income prospects and the financial strength of tenants and borrowers.

New Legislation Favors Real Estate

A bitter and costly lesson of how dependent real estate is on a thriving national economy has been learned over the past several years. Business growth, jobs and a conductive financial environment are necessary to improve all real estate markets. There is hope that the present administration in Washington is on the way to solving some of the persistent economic problems that have plagued the nation and more capital will flow this year to support the growth.

At long last we're beginning to see legislation that holds promise for the real estate industry. Two recent changes in the law -- the Federal Reconciliation Act of 13 and New York's amended J-51 -- signal a kinder, more equitable approach to the needs of real estate professionals. The Reconciliation Act, signed into law in August, corrects tax inequities contained in the Tax Reform Act of 1986, particularly the Passive Loss Tax Reform, which under specific requirements allows owners to deduct rental real estate losses against their regular income. While we are seeing increases in taxes on personal and corporate income, the capital gains taxes on real estate will remain fixed at 28 percent. That is good news to the industry and should make investing more attractive.

The liberalization of the eligibility provisions under Local Law 49 which expands and extends the J-51 real estate tax and improvements completed by December 31, 1999, will provide needed capital for major capital improvements, generate jobs and benefit co-ops, condominiums and the multifamily housing industry.

Multifamily Top Choice Of Investors

With very little multifamily development having taken place over the past few years and vacancy rates low, the multifamily housing market is strong and by far and away the healthiest of all property markets across the country. Supply and demand are in balance and value declines are a thing of the past.

We are doing a lot of business, rates are down and the apartment market has become very attractive to investors both big and small. Opportunities for financing multifamily and underlying co-op loans are available, as many lenders return to the apartment financing market.

Also the administration in Washington is bent on providing more housing to low and middle income families in 1994. Fueling some of this activity are guasi-government agencies such as the Federal National Mortgage Association (Fannie Mae) and the recently revitalized Federal Home Loan Mortgage Corporation (Freddie Mac). As of October 1993 Fannie Mae has agreed to fund $500 million for both underlying and individual co-op loans but most important, they have agreed to purchase loans with pre-sales as low as 51 percent. If any co-op board member is interested in receiving a copy of the important features of the share loan program, call or write our firm and we shall be pleased to forward a copy.

It's an excellent time to buy property on a selective basis. Many can be acquired well below the replacement cost of the asset. With good mortgage underwriting and a strong understanding of your market, there are many very attractive investment opportunities.

Private Sector Following Government's Ways

The Resolution Trust Corp. (R.T.C.) has sold large portfolios of properties. Now the private sector is following the Government's lead. Approximately $10 billion in private institutional sales have been completed which almost matches the $12 billion sold by the R.T.C. since 1991. In the coming year we should see $15 billion to $20 billion In private sector sales.

As more lender and investor interest picks up for all types of real estate, individual buying and selling is expected to continue at a feverish pace.

The 1994 long term outlook for economic recovery still hinges on many issues. Job creation, business growth, inflation levels, a conducive financial environment and the performance of European and Asian market as well. If our prediction of moderate growth and inflation prove correct, long-term interest rates will bounce in a narrow range between 6-7 percent. The yield on the 30 year bond finished 1993 at 6.34 percent. The short-term interest rate has been at 3 percent for over a year and the six-month Treasury Bill finished 193 with a discount rate of 3.19 percent. A jump of a quarter to half a percentage point is expected. In any case, rates are likely to remain low and 1994 should prove to be a better year for the real estate industry throughout.

The rules of the game have changed and we at Robert P. Corso & Co. have evolved and adapted to these new and exciting times. If anything we feel the present holds enormous opportunity for the brokers in our organization to get transactions completed.