City enjoys strong growth in exciting neighborhoods.

The pace of the 2004 real estate market was extraordinary. While the rate of increase in prices slowed during the second half of the year, inventory remained low.

Trading in all markets maintained a brisk pace with prices reaching record levels from brownstones in Fort Greene and Boerum Hill in Brooklyn to condominiums in Harlem and lofts in TriBeCa.

Throughout the City, mint condition properties were still strong sellers, as busy professionals and families shied away from construction projects, unless strongly motivated by price differentials. Tight pricing remains the best approach to foster competitive bidding, while overpriced units continue to languish on the market for months. Some of the biggest news has been the record sale numbers achieved in areas strongly impacted by the expanding housing boom moving deeper into Harlem, Brooklyn, Long Island City, Washington Heights and Inwood.

Small apartments continued to be a driving force behind the strength of the sales market. In spite of apprehensions to the contrary, the cost of borrowing remains at record lows. Buying thus remains a more attractive option than renting for people entering the marketplace at all price points.

Of course, with alcove studios costing over $300,000 in many parts of the vity, buying is not an option for everyone. Consequently, the rental market has picked up a bit, although it remains weaker than in past years. For those able to put together a down payment, mortgage payments and common or maintenance charges are still a better after tax deal than rentals.

New Yorkers are more enthusiastic than ever about owning their homes. Each blip in the stock market, which has been circling just above 10,000 for months now, makes real estate seem a more stable and attractive investment.

Even the many reports and news about a "real estate bubble" have not deterred most buyers. After all, Fortune Magazine listed New York as 22nd on its list of America's most inflated cities, and many economists argue with money so cheap, housing is actually at its most inexpensive level relative to income in a quarter century.

Another interesting phenomenon for families seeking two- or three-bedrooms is the resurgence of the Upper East Side as a viable option. Increasingly, postwar apartments east of Third Avenue offer better value than their counterparts on the Upper West Side or Downtown.

Warburg recently sold an apartment in the East 60s to a family who realized they were getting a better value there than in Washington Heights, where they had been looking for months without finding a suitable property in their price range.

Brownstones, large apartments, large lofts: all have been highly saleable provided the pricing and condition were right.

In this market we see another interesting phenomenon: as awareness of the actual impact of the 1996 change in the capital gains tax laws has grown, more and more expanding families are considering combining their current unit with an adjacent one. Although this generally requires that the family move to a hotel for six months, the potential savings are enormous when compared to the cost of selling an enormously appreciated six or seven room unit, paying 27% in Federal, state, and city capital gains taxes to the government, and then starting over to locate a larger space. Increasingly, one of the most likely buyers for any apartment is the neighbor.

Everywhere you look, New York is on the move.

Bruce Ratner's proposed revitalization of Downtown Brooklyn will make the borough even more of a destination for upscale New Yorkers seeking a more intimate neighborhood experience. Similarly, the boom on 125th Street and throughout Harlem, with luxury rental and condominium units appearing from Broadway as far east as First and Second Avenues, has made that neighborhood a beautiful residential area with a family feel, more and more sought after by Manhattanites of every type.

Now the election is behind us, job creation nationwide is on the rise and the economy is stable and growing moderately.

While demand continues to outstrip supply we expect a strong 2005, with modest price growth in an unhurried selling atmosphere.

FREDERICK W. PETERS

PRESIDENT

WARBURG REALTY PARTNERSHIP