Developers begin to see the light.

Two of the city's most active developers have emerged from their hibernations and are talking about the market being ripe for new buildings.

Using similar words, they described their efforts to "stay alive until '95," and their individual determinations that the market is just about ready for new product.

Nothing has been constructed in the last five to seven years, they observed, and the positive absorption has finally created a demand for both technologically advanced commercial space and high-end residential units.

Developer Harry Macklowe provided an upbeat but cautious look at both the residential and commercial sectors to the National Realty Club luncheon held last week at the 60 East Club, while revealing a bewilderment at the changing retail profile on the city's most elegant streets.

Developer Howard Ronson's commercial tower being planned for the heart of Midtown is well into the development stages. He unveiled the newest limestone and glass model, designed by Skidmore Ownings Merrill, for Larry Silverstein's New York University Real Estate Institute workshop.

The developers' delight in a new phase of the marketplace was tempered by both men's recollections of the last seven years.

Macklowe recalled that the first casualty of the marketplace was Donald J. Trump, who had the greatest visibility and owed millions to many lenders.

"The restructuring of his portfolio... was a major and severe shock to the entire industry," Macklowe said. "The capital market structure disappeared. The only thing we were able to do was to restructure loans."

The real estate community also stood by and watched almost all of the major companies restructure themselves, he said, and make painful choices that affected the real estate community.

Rents of $40 and $50 a foot with escalations became a great uncertainty to mortgagees. They wanted to stabilize rents and restructure within the new realities, he said.

Macklowe remembers a heated discussion with a banker in 1990 who wanted a loan paid off on a nearly fully-rented property. The banker said "It's over. The halcyon days are over, and we want out and we want out of real estate."

"That was typical of those days," added Macklowe.

The developer has been tracking the residential marketplace and figures showed an uptick of 6 percent in 1993 and an 8 percent increase in the first half of 1994.

There is a healthy and positive absorption in the rental market, and in the co-op and condo market above three units, where prices have risen quite a bit. "There is still a considerable supply in the one and two bedroom area," he said. "We are starting to feel there is a healthy climate here and there is a pent-up demand."

But he worried, any new rentals will have to come in at high numbers or go 80/20, as will any new condominiums, because of rising costs.

At this point, declared Macklowe, he is studying the feasibility of a new residential construction product. "We are evaluating that information but starting to feel there is a healthy climate here and there is a pent-up demand."

Macklowe complained about the new residential zoning passed when the industry was "defenseless and numb" that requires a bulky and expensive "wedding cake" design and eliminates the desirable views.

He has also seen streets such as 57th Street change in retailing character, while Madison Avenue appears headed that way as well. "I thought it would continue to sustain its value at $200 to $350 a rental foot based more on Armani than on Crate & Barrel," he said.

Along with the residential market, Macklowe said they have tracked absorption in the commercial marketplace over the last 18 months.

"That is healthy, it's exciting, and beneficial to all of us," he said. There are only seven blocks of office space in excess of 250,000 square feet in Midtown, he discovered. "That is a very small supply and many tenants are in the marketplace."

Over the past eight months, he has also watched tenant amenities and attitudes change. "Tenants say they will settle for less and the negotiations are considerably easier than they were 18 months ago," Macklowe noted. "It's not totally a seller's market, but there is give and take."

He used as a benchmark the sale of the IBM Building at 590 Madison Avenue to Odyssey and the Minskoff partnership, and the fact that Ohio State Pension Fund took 8 percent of the loan to the partnership that acquired the property.

"There are some convertible features there but it's very healthy," said Macklowe. "It's wonderful to see a responsible financial institution come in and make a bulk cash commitment."

The IBM building will rent in the $50 to $60 a square-foot neighborhood; the tenant installation will be less than in the past; "and the deal will pencil out," believes Macklowe. "I am suggesting, that there will be a rent roll of nominally $55 a foot. Of itself, that is very, very encouraging."

A German bank, currently housed in Delmonico Plaza, is about to sign an expansion lease for 100,000 square feet, while another institution will take 200,000 square feet.

[REW has learned the bank is Berliner Handels Frankfuter Bank and it has three floors of the Delmonico Plaza on the market.!

"When they achieve $55 a square foot going in, that means that a financial institution will say to a Howard Ronson, who has a contract on 383-385 Madison Avenue, 'I believe you.'" predicted Macklowe. "'And if you can get a pre-leasing commitment of 50 or 60 percent, we will fund.'"

The marketplace will be convinced that what happened on 57th Street will happen for Mr. Ronson, said Macklowe, because he will have a tenant in hand and the tenant will be convinced he is getting a terrific deal at $55 or $60 a foot.

Macklowe said the development community needs that $60 to not only make a profit but to have a comfort level for the lenders when project costs are running $300 a foot.

Macklowe said they are looking forward to next year and fulfilling 'staying alive to '95.' "We are in a community that has licked its wounds. We have survived and we will be very deliberate in all the investments that we make. We think the business will grow, we think we will be very conservative, and we think that all of us will be players that will make a meaningful contribution," he said.

"But it isn't, certainly as we all know, the halcyon days of the 1980s. There are lots of challenges, It's simply not enough to make a good investment. You have to have the challenges and understanding of where you are going to be going, and even though you can't really peer into the future, you can make some reasoned and valid judgements."

Ronson, international chairman of HRO International, called he and Larry Silverstein survivors. "We're all coming back to the development business," he noted. "The magnitude of the change over the last 18 months surprised everyone."

When they first decided to purchase 383 Madison in 1987, an offer of $200 million was rejected. This time around, the sales price was closer to a third of that figure. The original intent was to close in the first quarter of 1995 and hold it for two years. "Most of my friends had thought I'd gone stark raving bonkers," recalled the English developer, who has been in this country for 15 years.

But a number of factors have accelerated the marketplace. Prospective tenants are already paying more than the mid-$50s rent they are hoping to achieve. There has been no new construction for the last seven years. And companies that became "leaner and meaner" through downsizing have held off and are now ready to expand.

"We are seeing expansion from our tenants of all sizes for the first time," he said.

Foreigners are also seeing New York's pricing as low compared to other world class cities and consider it a bright spot in the marketplace.

Additionally, today's modern tenants can't function in obsolete older buildings. "For older buildings I'm afraid there is no hope," said Ronson. "The type of tenant for whom they were built do not exist any more."

Until the city agrees to allow large old buildings to be replaced with buildings of the same floor area ratio and incentives given across the board, Ronson does not believe new construction will take place Downtown.

But he says since he has begun the planning process he remembers why he got into this "crazy" business. "We are having a tremendous amount of fun planning and building this for the first time in five years," he said.

A design competition among seven top architects was won by David Childs and Roger Duffy of Skidmore Ownings Merrill, and Ronson revealed the newest model to Silverstein's workshop attendees.

The limestone and glass building has an institutional and Art Deco look, with four-foot limestone ribbons alternating with the five-foot windows. This design will afford a mix of interior offices that can range in size from 9 feet to 10 feet to 14 feet, depending on the number of windows and columns per office. While the windows were colored green for the model, the final color has not been determined.

The top of the building is also finished off nicely with the same theme. Ronson felt the scheme should be followed through since it will be seen by neighboring towers.

But the design of the actual building really came at the end of the process. First they tried to determine what a tenant was missing in Midtown in a prime location. They also recalled the mistakes that had been made in the past that could now be corrected.

Ronson and Larry J. Wyman, executive vice president of HRO International, also found a "dazzling" array of systems and prices that were not available in 1986, primarily because building technologies have improved so much.

Looking at most other American cities they discovered that 50 percent of the office market was constructed after 1980, while in New York, that figure is closer to 15 percent. That statistic further convinced them of the need for new product.

They picked the brains of the top city brokers to identify potential users who would want that location and be willing to pay the rents. Eventually, they developed a "hit list" of 40 firms whose leases will expire in the 1997 to 1998 time period when the new building will come on line.

Ronson did not want law or accounting firms because these were disappearing over night. "It had to be the major institutions," he explained. "Because many were already paying escalated rents into the $60s and $70s. For some the squarefoot price would actually go down by 25 percent."

The current vacant grey building is a former warehouse that comprises the full block between 46th and 47th Streets, Vanderbilt and Madison Avenue. Because it lies over the tracks of Grand Central Terminal, a basement is unnecessary and will lower the cost of construction.

The lot size permits base floors of 48,000 square feet. Above the 120-foot street wall, the setbacks will create floors of 32,500 feet and then 26,000 square feet. Ceiling heights will vary and can be as high as 12 feet, with 16 feet available from slab to slab. This will be ideal for the trading floors that are needed by their target tenants.

The building will top off at 24-stories, but will be equivalent to the height of a 33-story building due to the higher ceiling mix.

They also decided to go with an as-of--right building and avoid the harrowing and grey hair producing special permit process.

Wyman explained the butterfly core with a central corridor will house mechanicals, elevators, bathrooms, and oversized electrical closets. This will permit wide open spaces for the trading areas that are nearly column-free. Nine columns are being used for the large floors, whereas a regular building might have as many as 50 to such a floor.

Power is being supplied at 11 watts a foot and an enormous emergency backup system is being designed. Stung by the ten-day South Station power outage a few years ago, Wyman said they realized having backup power is not enough if it can't run certain systems, such as the water pumps.

This time around, there will be enough power to run air conditioning, computers, lights, bathrooms, water pumps, elevators and telephones. Additionally, after being reminded by a tenant that city water mains tend to break each Spring, they have decided to install a 50,000 gallon "pool" to serve as a reservoir for the hungry closed-loop cooling towers.

These will also be set up in series and will condense 24-hours a day, enabling tenants to have their overtime AC included in their base rent. Wyman said it will cost them perhaps a quarter a night to run the system.

"The net effective rent will compare favorably with a low $40s deal in another building and yet this is light years ahead," he said.

Additionally, the air systems will run constantly, use a greater quantity of outside air, and are designed to exceed the new ASRAE standards by 25 percent.

After much thought and walks around the area, Ronson and Wyman decided to situate the building with its main entry lobby facing Vanderbilt Avenue and Park Avenue, hoping to capitalize on the corporate avenue's cache. The project is known as Park Avenue Court.

"This is a more accessible and appealing access," explained Ronson. The new Grand Central Terminal's north exits will be constructed across 47th Street, Wyman noted.

Because the project's all-in costs will run between $370 and $380 dollars, Ronson said he will not consider even asking a lender for money until he is 50 percent leased. They have had, however, a great deal of interest in the property so far from tenants as well as from lenders, and expect they will not have to wait for two years before building. In fact, current plans call for demolition to take place beginning in May of 1995, with construction beginning in December.

"I will not build it on spec," insisted Ronson, stung by past events. "We want to have a little sleep at night."

He also advised those other developers in the class not to hold their projects long term if they build them. "Create and sell," he insisted.