Cautious optimism dominates Manhattan market.

New York City's commercial real estate market has proven to be quite resilient even in the face of war, vast fluctuations in the national economy and stagnant national job growth.

After going through a lackluster three-year period, New York City leasing is finally experiencing positive signs of a recovery as unemployment decreases, Real GCP increases and companies start to be proactive again and enter the real estate market.

As an indication of this recovery, the Midtown Manhattan office market has experienced tremendous leasing activity for the first few months of 2004 aided by mega-deals such as Bank of America's 1.1 million square foot lease at the Durst Organization's new construction at One Bryant Park; Pricewaterhouse Coopers' 800,000 square foot sublease from CIBC at 300 Madison Avenue; and Fairchild Publications' relocation to 234,000 square feet at 750 Third Avenue.

In fact, the almost four million square feet in total leasing over the first two months of the year, represents a 140% (or 2.3 million s/f) increase over the amount leased during the same period in 2003.

This reversal in fortune for Midtown, which began last September, shows few signs of abating. In fact, the "hot-streak" is expected to continue as companies start to realize that the Midtown office market may be fast approaching the inflection point and that the opportunity is dwindling to either lock-in at the low rents [that are leveling off or even rising in most segments of the submarket] or restructure existing leases that may expire one to two years in the future.

The latter is and will become increasingly more difficult to implement as landlords become more bullish about the future of the real estate market.

Midtown South and Downtown's short term future is a little more difficult to predict. Midtown South, which came to prominence during the boom in the technology sector three years ago when the average asking rent for the submarket approached $50 per square foot, has, over the last couple of years, experienced a slight migration from companies that looked to take advantage of low priced and/or built out opportunities in Midtown.

However, over the last couple of months, Midtown South's availability rate has started to decline and average asking rents have started to increase.

As rents continue to creep up in Midtown, Midtown South will be a good compromise for companies looking to reduce occupancy costs, but are hesitant to move Downtown to do it. There are a wide variety of available alternatives in Midtown South that could result in a 25%-30% decrease in cost as compared to Midtown, albeit with a negligible increase in commute time.

In my opinion, Downtown Manhattan is the land of opportunity, although the submarket certainly has its share of issues such as transportation, need for a 24/7 environment, need for capital infusion into the older building stock and stiff competition from other submarkets in the area and across the river.

Also, federal funding for Downtown municipal incentives is expiring at the end of the year at an inopportune time as more shadow space is expected to be added to the inventory of available space and developers continue with their plans to build new office buildings Downtown while demand for new space continues to be soft. However, decisions are being made and a timeline is set for the reconstruction of the World Trade Center site which will include a tremendous retail component.

In addition, there seems to be consensus with the proposed planning of the World Trade Center memorial and Larry Silverstein has commenced construction of 7 World Trade Center which will help improve the look of the area around the Trade Center site:

It is evident from the deals that are being completed Downtown that opportunistic companies such as Cadwalader, Wickersham & Taft, State Street Bank, Merrill Lynch, American Express, HIP and others are committed to Downtown and envision a 24/7 work environment.

To that end, currently, there are nearly 9,000 residential conversion units planned for construction which will effectively remove 31 Downtown office buildings (or almost 10 million square feet) from the overall inventory. This will not only help create a true live/work/play community, but will also help boost the area's economy.

In fact, 100 Maiden Lane, Cadwalader's former headquarters will be one of these buildings that will be converted into residential units which, in turn, will result in approximately 250,000 square feet of much needed positive absorption for the submarket.

Despite all of New York City's recent challenges, overall optimism dominates industry predictions regarding the health of New York City's commercial real estate market as a whole for the coming years, which is more than I can say for my stock portfolio.