Cautious optimism to guide us in 1999.

During the past several months, the real estate markets have rebounded from this Fall's exceptional volatility caused by both economic and political forces. The coming year bodes to be a macro economic environment of slower growth, moderate inflation and stable declining interest rates, with perhaps one or two downward adjustments in short-term interest rates to offset the negative global economic environment.

The state of our local economy reflects the changes experienced by our nation. Perhaps of great interest last year was not what did happen, but what didn't happen to the real estate markets. Yes, pricing for New York real estate has been adjusted downward by perhaps 10 to 15 percent for greater than $10 million transactions for large office buildings and other real property transactions of this size. Yes, REIT valuations, according to the National Association of Real Estate Investment Trusts (NAREIT), have declined by more than 17 percent for calendar year 1998, resulting in some withdrawals of this buyer from the local marketplace. However, as we begin 1999, optimism prevails in the local marketplace. The market downturn due to the debt compression of CMBS market had a halting effect on the real estate markets, but not to the extent some prognosticators had earlier forecast.

Economically, New York City and the U.S. are perhaps beginning to witness a new model of an economic landscape created for a less "bumpy ride." One example of this new paradigm may be reflected in the statistics supplied by the official arbiter of the dates of economic turning points, the National Bureau of Economic Research, an Econometric Forecasting Agency. It is their "guestimation" that contractions and economic changes in the future will begin to shorten to around 11 months, as compared historically to contractions that extended in the past to 16 to 18 months. The probabilities for the shortening of the down troughs can be pointed to several denominators.

The service sector has increasingly become a bigger part of the economy, in comparison to the manufacturing sector. Locally, the long exodus of manufacturing companies from Manhattan has afforded for a mature and fertile economic environment where loft space has been converted to loft residential and commercial properties.

The Citizen Budget Committee, a research group based in NYC, states explicitly that jobs in the manufacturing sector are declining. Wall Street and financial services are stagnant, but media related NYC jobs are growing by 30,000 jobs per anum. Though private jobs at media related agencies only account for 9 percent of NYC private employment, it is a growing sector. It is this sector of employment and the "new media" companies that are beginning to replace the more mature employment section of the past. This growing segment of office user, among others, has afforded commercial property rents to achieve a 28 percent growth rate in the past two years. It is the service sector of employment that tends to not be as cyclical as the manufacturing sector, helping to foster a more stable real estate and economic environment.

What parallels the optimism in the marketplace is a recent conversation I had with a major local NYC-based REIT executive. In discussing the overall REIT environment, he stated he believes the New Year will see the emergence of share repurchase programs as a way for real estate investment trusts to gain back investor confidence. He already alluded to REITs dividend investor coverage ratios beginning to steadily increase, with this factor perhaps one of several that will add to the buoyancy of the market in 1999.

We are RAK Group share the confidence of many of our colleagues and are bullish about the economic and real estate markets for 1999. To that end, in December of 1998, we purchased a 200,000 square-foot Beaux Arts style building in the Boston Financial District. This office building is the longest continually owned fee in the country, owned by Old South Church since 1669. We have already begun a classic turnaround of this office property, signing leases at double digit increases that reflect the lack of available space in the market and our commitment to creating a more superior work environment.

With almost 80 percent of the building's office leases on average 50 percent below projected market rates, this acquisition will prove an ideal asset for the RAK team of professionals to use their leasing and asset management skills to improve the intrinsic value of the property.

We expect 1999 to be an exciting time for the RAK Group. As a full service real estate company and owner of 2.4 million square feet of property nationwide, we approach the New Year with cautious optimism, but with great hope for the new millennium.