Challenging year ahead for investors and developers.

Cautious optimism will continue to dominate most investment forecasts in 1996. Confidence is slowly being restored in the market, capital sources are coming back and opportunities are abundant for the most savvy of investors.

The retail market, which suffered through tough times in '95, is full of potential for the perceptive buyer. Although the slowdown in retail sales and widespread bankruptcy filings put a scare into many potential investors, opportunities are abundant and rewards plentiful for investors not afraid of risk and willing to brave much of the untamed frontier.

Ground-up development will continue to be the best bet in '96. Land can still be purchased at a fair price throughout suburban markets and the demand for space by retail tenants remains high. Stable mid-teen returns have enticed many developers/investors to add retail properties to their portfolios.

Further contributing to the attractiveness of retail centers is the added insurance that credit supermarkets, like Waldbaums and Pathmark, bring to the profitability of the property. Immune to the volatility of the soft goods market, supermarkets are a guaranteed profit center for shopping centers.

The investment market for residential properties remains strong, with the majority of activity in New York centered around Downtown Manhattan. The prohibitive cost of purchasing multi-tenanted apartment buildings in the City's prime residential neighborhoods has encouraged many investors to turn their sights to alternative locations. The conversion of Downtown's Class B office buildings to residential use will provide the best opportunity for investors interested in the residential market. These tertiary office buildings, which lack the amenities to accommodate the needs of modern tenants, are priced to acquire and can be converted at minimal cost and rented at levels that yield substantial returns.

New development will also make a comeback in '96, with incentives like the 80/20 program and other affordable housing programs encouraging residential development throughout the Country's largest cities. A strong housing demand in Los Angeles, New York and Washington, D.C. has already justified new construction. According to the Daily News, New York developers are set to break ground on more major projects in 1996 than in any year since the real estate industry collapsed in the late 80's - with the bulk of the planned developments in rental apartments.

Still, with limited financing options and lending criteria on the conservative side, developers who are moving forward with residential projects in '96 are those who have figured out uncommon ways to borrow capital or who specialize in atypical projects.

Opportunity in the office market still exists, but market rents still need to rise to justify a sound return before we see mass office construction grace the Manhattan skyline. With speculative building still too risky, developers have turned their energies to facelifts for tired buildings in an attempt to bolster the rent roll.

The dramatic revitalization of many of the City's niche markets is a direct result of this trend of renovation before new construction. The Times Square area, for instance, has recently witnessed a number of notable office property acquisitions and has seen its new product availability rate drop from 40 percent to 10 percent over the past three years. The rejuvenation of Manhattan's niche markets will continue to be a key focus for investors in '96.

New development, although slow coming in New York, has been prodded by necessity in other states. In Rockville, Maryland, a Washington submarket, a need for office space by Federal Agencies that is convenient to Metro stops and in compliance with the Americans with Disabilities Act, prompted the development of a $300 million "town center" with 1.5 million square feet of office space. Essex Capital Partners will redevelop the 7.7 acre site where the Rockville Mall, a failed urban development project, once stood. Other Projects will follow.

Real estate investment conditions will gradually improve for all property types - some rebounding quicker than others. In the meantime, it will be the insightful, savvy, and patient investor that profits from today's real estate market.