C&W's Kinum: current market conditions pose some challenges.

In any market, opportunity exists. This has remained true during a variety of economic times in our industry's past. And while unprecedented worldwide issues have compounded the downward trends of the past year, seasoned real estate veterans recognize that the cyclical nature of our industry will ultimately bring balance to today's volatile markets.

Still, the current environment presents some extraordinary conditions, including historically high sublet availabilities and historically low interest rates against a backdrop of world instability. One of the most glaring differences between today's cycle and those in past decades is that all economic indicators at mid-year 2001 showed that we had reached bottom, and a recovery was expected. However, with Sept. 11, and more recently, the loss of corporate confidence spurred by Enron, WorldCom and other corporate scandals, that upswing has not been realized.

Today it appears, once again, that the indicators have stopped moving down and have flattened. As a result, we in the real estate industry remain poised for economists to tell us that the recession is over. Most of us are trying to remain patient, to be strategic, and to position ourselves for an upturn, armed with the historic knowledge that our business will start to pick up three to six months after the recovery begins.

At the same time, not everyone is waiting. Some active users are finding attractive leasing opportunities. A number of pharmaceutical firms, insurance companies and financial service providers remain dynamic in the market In fact, third quarter activity produced a number of large leases, including three of more than 100,000 SF. Among them, AIG leased 171,624 SF at 121 River St. in Jersey City; Cendant leased 145,983 SF at 7 Sylvan Way in Parsippany; and ABN Amro leased 127,000 SF at 499 Washington Ave. in Jersey City.

In addition, the strong investment sales component of our business -- in New Jersey and nationwide -- has continued to show significant and steady activity as investors seek a safe haven to shelter their assets from the uncertain economy. Investors are taking advantage of available capital and low interest rates to maximize new acquisitions. At the same time, well-tenanted, Class A buildings continue to attract strong interest, and many owners recognize that the finance market is at its peak. As a result, they are considering disposal of their stabilized assets.

In total, 13 sales involving properties greater than 100,000 SF closed during the first nine months of 2002. Among the most significant transactions, Pharmacia agreed to purchase AT&T's 1.3 million-SF, 10-building, 140-acre corporate headquarters campus in Basking Ridge for $200 million in early July. Also in July, a German investor purchased the 696,876-SF 10 Exchange Place in Jersey City for an undisclosed price.

According to a report issued by the Commerce Department on Sept. 30, the economy during the third quarter was supported by consumer spending and income growth, yet the manufacturing sector continued to struggle. Despite the positive glimmers provided by the market's active tenant sectors and investors, these uncertain times continue to keep overall demand down while driving vacancies up.

In Northern New Jersey, year-to-date leasing activity registered 4.6 million SF, compared to 7.9 million SF in the same period last year. The vacancy rate jumped nearly four percent, from 12% at third quarter 2001 to 15.8% today.

In Central New Jersey, leasing activity totaled 3.2 million SF from January through September, nearly 35% off levels posted during the same time frame last year. Vacancy rates in Central New Jersey have reached the 20% threshold for the first time since 1995.

The state's historically active submarkets, for the most part, reflect the downward trend. In the Parsippany market, for example, 1.17 million SF of sublet space accounts for 45% of the total available space -- the most in any market. The Somerset/Upper 287 submarket has the state's highest vacancy rate -- at 42.4% -- impacted largely by AT&T and Merrill Lynch placing large blocks online.

Even the Hudson Waterfront, New Jersey's real estate darling for the past several years, has a vacancy rate that has tripled in 12 months. Still at a respectable 10.9%, vacancy on the Hudson Waterfront has increased as a result of sublease availabilities as well as new product coming online, such as 650,000 SF at the now completed Harborside X and V. The Newark submarket, with a vacancy rate of 11.2%, is one of the few places showing rate stability. This can be attributed, in part, to the city's limited office inventory, a lack of new construction and continued strong demand among law-related organizations -- a core of the city's tenant base.

Monmouth County has also bucked the trend, with leasing activity that has nearly tripled from this time last year. The Monmouth-Ocean Labor Area is the fastest growing residential market in the state, and it continues to create jobs at a faster-than-statewide rate as well. It is one of the few submarkets still experiencing office buildind construction starts.

Many argue that the current recession, which economists predicted to end a year ago, is still with us. And the state of the real estte industry in New Jersey supports this. Yet the cyclical nature of our business dictates that a recovery will come. And, as always, the strong market fundamentals in New Jersey position us to bounce back with vigor.