Downtown market remains healthy despite stock market concerns.

Recent fluctuations in the stock market have caused building owners and tenants alike to reassess the near- and long-term future of the real estate market. With lenders pulling back, REIT valuations down and financial firms slowing their growth, many are speculating that the end of real estate's bull market might be approaching. Accordingly, there is greater evidence of cooperation between owners and tenants than there was earlier in the year, when owners were placing extensive demands on tenants.

Fundamental economic indicators - including unemployment and inflation - remain strong, and a look at third quarter numbers show similar strength in New York City's Downtown real estate market. The Downtown market continued its healthy pace in the third quarter, as 5.6 million square feet of space was leased. This represents a 40 percent increase over the same period one year ago. More than 11 million square feet have been leased year to date, putting us well ahead of 1997's total of 12.1 million square feet leased.

Vacancy rates continue to decline, with the overall vacancy rate dropping from 8.9 percent in the second quarter to 7.4 percent in this third quarter 1998, a figure which is a 42 percent decline from one year ago. The scarcity of Class A space remains even more dramatic. The vacancy in Downtown's better buildings dipped to 3.9 percent, a 48 percent drop from third quarter 1997 and a 25 percent decrease from the second quarter of 1998.

Following Guardian Life Insurance's move Downtown, the Metropolitan Transit Authority signed a 49-year net lease for 1.5 million square feet at 2 Broadway. While a boost for the Downtown market, the leasing of the entire building at 2 Broadway has simultaneously displaced other tenants who were in competition for the space.

Other commitments in the Downtown market inc??? Goldman Sachs, once rumored to be targeting 2 Broadway, leasing more than 665,000 square feet at 180 Maiden Lane, with an option to purchase the building. The scarcity of space throughout the market has forced many large tenants to stay and expand at their current locations when possible. Three prominent law firms: Milbank Tweed at 1 Chase Manhattan Plaza; Brown & Wood at 1 World Trade Center; and Hughes Hubbard & Reed at 1 Battery Park Place - all chose this course of action. Similarly in the financial services sector, Keefe, Bruyette & Woods, and Weiss Peck & Greer repositioned themselves at 2 World Trade Center and One New York Plaza respectively.

So far, the strength of the real estate market has countered the economic crises overseas, political turmoil in the United States and the nervous stock market. While all eyes remain focused on the financial markets, lack of existing product and limited new construction should bring steady leasing activity at current rates in the fourth quarter.