Can anything go wrong?

As we enter the new century, office space markets across the country are exhibiting unprecedented strength. With vacancy rates continuing to plummet and rentals reaching levels never seen before, it appears to be a "no brainer" to look into the future and see continued strength in the commercial real estate market.

In Manhattan, in particular, the current vacancy factor, in comparison to previous periods, is even lower than the published surveys indicate. This is because numerous buildings that were not formerly classified as office buildings are now included in these surveys.

What could go wrong? I am certain that the Federal Reserve will, in multiple moves, increase interest rates as they look to both prevent an inflationary surge and attempt to moderate the public's exuberance with the stock market. If the Federal Reserve increases rates by one percent or more it will dampen corporate profitability and halt numerous expansion plans.

What will be of even greater concern to the office market is the effect an increase in rates would have on the stock market and the ability of Internet firms to go on raising money. The dot.com companies have leased an enormous amount of space over the past few years in markets all across the United States. Because of the substantial losses most of these companies incur every year, each company's existence depends on their ability to continuously raise additional funds.

The continued financing of these Internet businesses is dependent on the on-going health of the stock market in general, and the IPO market in particular. Venture capitalists are flush with money from recent initial public offerings and secondary issues of previous companies they financed. If the IPO market collapses, the private Internet companies have only one way to survive, and that is to raise additional venture capital funds, which will be both difficult and expensive.

Those companies that are already public have come to rely on secondary issuance of additional stock to raise the supplementary financing needed to counteract their continued losses. If the public market dries up for these companies, we cannot ignore the probability of their demise.

This has the potential to lead to another problem. The strength, and therefore the certainty, of the rental income of many buildings has never been weaker because several Internet-related companies that occupy large amounts of space have not only never made a profit, but have little or no chance to make money in the foreseeable future.

This is a truly disturbing sign, given that never before has the Manhattan office market been dependent on businesses that not only lack profits, but incur substantial losses. It raises troubling questions. No matter how well Wall Street analysts dance around the facts with clever words, ultimately corporations must make real cash profits to survive and pay their rent. Apparently, many people incorrectly believe if it sounds lofty and poetic - who cares if it makes sense? How long will these companies be able to walk the tight-rope of maintaining investors' confidence while continuing to lose increasing sums of money?

The picture that emerges may not be pretty, and the consequences to the real estate market are being vastly underestimated. The office space market may very well get through this year in good shape, but the old axiom has never been more true - "The only certainty is uncertainty itself."