First quarter review.

Real Estate Weekly: We like to start our conversations off by just getting a general temperature of what has been happening in the market. Recently we had some bright spots in leasing, there was a 500,000-SF lease signed just recently, some other 100,000-SF deals. So, can you give me a general sense of what you are seeing as brokers in the field in terms of leasing?

Robert Emden: Lately, in the last month, I've seen a slight pick up of activity. And not only what was reported in the last few weeks but where there is a niche in terms of a renegotiation - people feel that, with the impending end of the war, there will be an opportunity to renegotiate a lease where palatable, depending upon lease term, ownership of building, and how the building is positioned financially. That is basically where we are. A lot of colleagues are trying to pierce that market. In terms of the overall market over the last year or two, I've never seen a worse market in comparison to the early 70's, early 80's, or early 90's markets in terms of lack of activity and people just getting off center. They're uncomfortable making a decision financially, or even from their employees safety perspective. So these transactions tend to take incredibly long amounts of time. Lease expirations tend to mean less than what they used to mean because they know that the landlord is not going to throw them out. They know that they can get extensions.

Edward LaGrassa: I agree. For the first time we are starting to see office tenant activity. You are starting to see more showings, which is really a bright spot. Corporate America is concerned for two reasons, the direction of business and the lack of confidence. So, it is beefing up its balance sheet and not expanding as it is trying to solidify a business direction. Expansions mean additional space but we are still having some contractions, although I think that that may be bottoming out. Some of the statistics seem to indicate that sublease space coming on the market nationally has flattened out, which is positive. But I still don't see the optimism in corporate America - in the tenant's world that is going to drive new leases. And, as Bob mentioned, renewals tend to get longer and have been put off. In a down market you can be criticized for snaking a deal when the rates are going to be lower tomorrow. So, I think decisions are taking much longer to be made.

Bruce Sinder: I agree with Ed on that. Every lease transaction seems to take 2-3 times longer than it had in the past mostly because new opportunities are coming on the market almost weekly. So tenants look for space and, as soon as they get close to a deal, there may be another 3 or 4 buildings or spaces that are coming available. They have more choices. The more choices they have, the more negotiating power they have. I think we have seen the worst of the market. And now I, too, have seen some activity on the office side. I think we have certainly passed the bottom and we are starting what will hopefully be a recovery, although it will be a slow one.

Richard Kielar: I am speaking from the construction interiors and technologies side of the business, so we are further down stream in the cycle. Obviously the first decision is with the company. The company makes the decision to take more space or renegotiate, then they get designers involved and the space is built. So, there is no question that the corporate market has been depressed for over a year. In our business we had an uptick after 9/11 because of repairs to space that was damaged, such as Bank of New York, 101 Barclay (externally and internally), the Verizon building and several other buildings. So, we didn't feel the negative aspects. The real economic slowdown kicked in for us about 8 months ago - the corporate sector has slowed and obviously leasing activity has decreased. It seems like some major companies are renegotiating their space. As Bob said, the landlords are not going to throw them out so they can avoid the build out expense by staying where they are until their bottom line improves and they have money to spend on new offices. There is activity - no one has mentioned this yet, but I am sure everyone is talking about it - in the legal profession. There are mergers among law firms that create need. Also, because law firms tend to want top space in their businesses, they feel they need to move or rejuvenate the whole office at least every 20 years. So, there is activity there, as we all know. It is a good time for non-profits because there are still some deals out there.

LaGrassa: About 80% of deals are being done with second-generation space where the tenants have less money to spend fitting out and they are getting the benefit of what is already invested. And that negatively impacts your business.

Kielar: Some people will buy the furniture in place, get a paint job and move in.

Emden: That is a very good point. That is really what we call the shadow market today. I have had a big history with law firm representation and if they can avoid a $150 SF vs. a $50 or $60, they are going to do it. Everybody is very bottom line conscious today. And personally I will push in that direction, whether it is a 10,000-SF tenant or a 100,000-SF tenant. A typical example is that I have a negotiation going on right now with one of the Lehman subleases where they have committed to the large block of space at 399 Park as well as some other locations after 9/11. They built the space out and, with the downturn, this is an opportunity for either a law firm or a financial services firm to reap the benefits of HVAC, wiring, furniture, and the retrofit. My firm does a lot of project and development and design as part of our business. So, I can tell you that I am incorporating as I speak a tremendous year for that for the tenant.

Bruce Sinder: The sublease market has been the story, as I think everyone agrees, over the last few years. One interesting aspect can be found in my market, which is mostly downtown to 25th Street and Tribeca, where a lot of dotcoms took space and are now gone. In many cases there were substantial security deposits from the tenants. So the landlords - even though the market has been hurt badly and is soft haven't really been feeling it as much as they might.

LaGrassa: But those are maybe 18-month to 24-month guarantees.

Sinder: Yes, but the point I am trying to make is that they are starting to feel it now and they see the end in sight. So they are being a little more negotiable in terms of bringing new tenants in and letting their tenants off the hook, depending on their credit or renegotiating getting back space and trying to commit to some longer term deals.

LaGrassa: Bruce, are you seeing that the better space in the dotcom is going first?

Sinder: Absolutely. In my market I am finding that the best space, and not the least expensive spaces, are the spaces that are renting first. Best meaning with good mechanicals, HVAC, windows, improved lobbies. Even though a good part of our tenants are in the creative fields and may want to redesign the space, they don't want to reinvent it.

Real Estate Weekly: Bruce, can you talk a little bit about what is happening in the retail sector? 2002, from what I understand, was a pretty strong year. I am wondering if that has been carrying in to this year or if there has been a drop off?

Sinder: I think there has been a significant drop off in retail. There is still activity and there are still tenants out looking for good locations, but the rent has to be at the right price. Retail rents, in my market, have gotten way ahead of themselves. As you can see in SoHo there are many vacancies now and more that are about to come on the market in the next year or so. That is not to say there is no market. We have signed 3 deals in SoHo, despite the soft market. But those deals were done at a lower rent than in the past.

Emden: Are you at liberty to say whom you signed?

Sinder: Yes, we signed a deal with a furniture company from San Francisco that is a manufacturer and retailer, which is part of a trend that you will see in SoHo often. Even though a retail business may not be so strong, you have a secondary function, either a showroom or a manufacturing base. You can take advantage of the large spaces and have the ability to show a bigger line than you might ordinarily in another smaller, more retail type location. We also signed a men's clothing company f r o m France that is going to be op e n in g on West Broadway. That is an example of a much smaller store where we have gotten a very high per SF price, about $170 per SF, but the store is about 800 SF. And the third lease that we signed on the outskirts of SoHo was with a European cosmetics company. So, there is still a lot of interest from fashion and from furniture in the Downtown market, but the price has to be right.

LaGrassa: In 2002 retail activity, for the most part, was not apparel driven. It was bank expansion with Washington Mutual and Northfork Bank, the drug chains and home furnishings. There was a big drive in 2002 with people spending more time on construction and furnishings. We manage about 120 stores in the metro area, and we have seen the level of activity decrease. The stores are quieter as far as volume. When I walk along Fifth Avenue in some of the major shopping districts I see many more vacant stores. So, I think some of the retail leasing activity is softening with the economy. I remember walking two years ago on Fifth Avenue and there wasn't an empty space, now you are seeing much more of that.

Emden: Or I think it is becoming more opportunistic. I haven't had a great deal of experience in retail, but I have done a few deals in my career. Actually, I just did one about three years ago at 55"' Street. I represented Starwood at the St. Regis Hotel on 55th Street and Fifth Aveneu. We put in Club Monaco. The market was just beginning to rebound and we got a high rental. But you saw what happened there, they didn't last long, they got bought out, they went off on 57th Street and sold those properties between Fifth Avenue and Sixth Avenue and reaped the benefits of a 17year lease remaining. So, that got under our radar.

LaGrassa: I also think that the banks are catching their breath a little after a tremendous expansion in 2002. They still have expansion plans, but they have digestion problems. So they have got to open and operate and begin to make money before they work on the next phase.

Sinder: I think the one bright spot in the retail market has been the develop m e n t of the meat-packing district, which is an alternative location, but many high fashion tenants have located there recently. There are several deals, both retail and showroom. We recently did a deal with a hotel called SoHo house to take over about 50, 000 SF of a building on Ninth Avenue and 13th Street. They are in construction and are about to open in a month. It has become a hot area because it is chic and it is cutting edge. But you have to remember that the rents relative to SoHo and Madison Avenue are significantly lower. You can rent a store on a prime street in the meatpacking district for $60 or $70 dollars a SF. It creates a lot of opportunities for fashion forward companies to take space and be part of a new up and coming trendy area.

Real Estate Weekly: Are there any other areas that are experiencing similar types of activity?

Sinder: From my view that is the one bright spot in the retail market. I think most other markets in retail are soft right now.

Kielar: Times Square and 42nd Street have gone through changes since the initial renaissance. Then, the traffic patterns dictated what the tenants would be. We are getting ready to announce three leases, they are not huge, but there is interest. I think that there is always interest because of the traffic and the reputation of Times Square. People want to have something to eat, people want to buy something. Sketchers opened in our building a little further east, not too long ago, in the corner of the Rudin Building. So, that corner has now taken shape. There are some spaces, but nothing significant. They are holding their own.

LaGrassa: How is the tourism?

Kielar: In general, international tourism in NYC has been down. I think that the latest studies have shown that domestically people are not traveling beyond our boundaries, but they are coming to NYC. We had a bad winter and that impacted a lot, but we will see what happens with spring and with the situation in Iraq hopefully under control. That could bring back the traffic. The traffic was tremendous. It met all the expectations every one had even before these new buildings were built in the area. We are happy when there is interest and, of course, the tenants are looking for the most competitive rates that they can get.

Real Estate Weekly: Speaking of the situation in Iraq, it seems now that at least the heavy fighting is ending. What type of impact did the war have on activity?

Emden: I could tell you that the first few days I saw, including myself, a major diminished interest in doing anything except for looking at CNN. Last week, when people saw the toppling of the statue as. we were eating away at the Iraqis, we started to feel better, the phones were ringing a bit more from the business side, whether it was retail, office or whatever. I think we have been so beat up since 9/11. Looking in back of us, in front of us and on the side of us,' people were just not comfortable and felt unsettled. As I said earlier, I have seen a big change here going on in the past few weeks in terms of interest level because they think, with the war behind us, that they may focus on where we are economically.

LaGrassa: I think the security measures in place were heightened. Most buildings really tightened security levels right before the war. Also as Bob said, we saw very little activity, but in the last few weeks-- two weeks or so--we are leasing a building on Sixth Avenue and 27th Street called the capital. We are seeing so many showings. For about a month it was very slow and now we are seeing activity.

Emden: I think a lot of it is historic where people feel that whatever this bottom is, be it a year-a year and a half, they want to try and hit bottom. It is like buying that stock at a low, you never inherently pick the low, but you feel that when it is possible and you feel comfortable with going forward and you can extend. I must have a half a dozen companies out there right now looking to identify this corridor. It will probably take 3-5 months, which historically would have taken 3-4 weeks, but from the interest level it is--find out about that option, or find out about that tenant and what they are going to do and landlords will cooperate with you. It will take more time, but the interest level is there. And I have spoken to a lot of my colleagues in the industry and I can tell' you that there is consensus.

Sinder: I think that is right. I think we were just starting to recover a little bit from 9/11, when the market became stifled, and with the anticipation of the war with Iraq. So, it had an effect not just once the war started but two months prior. And I do also agree that we are starting to see some more interest now. Some of it has been pent-up demand because there were many tenants out there that have been literally frozen for the past year. I think that is starting, to change now and it will accelerate because there has been so little activity in the past year to 18 months.

Kielar: We experienced the "wait and see" attitude starting last summer. With the anticipation of the 9/11 anniversary and the, talk of war, most businesses needed to. see what happened before they moved ahead. In the last few weeks, with the statues toppling, 1 think people felt more comfortable that it wasn't going to be a huge nuclear or biochemical War. We are getting calls that are along the lines of "what if," like what if we want to move along on these projects in six months. Let's start doing the budgeting, let's start getting the contractors to talk about this. So, there is pent-up demand. It's a positive sign when people start saying "what if" because then you know that they have been thinking about it and they are bringing it up to the forefront. We have seen a major uptick in data center requirements. The FCC isn't requiring a 300-mile minimum for a data center; they seemed to have moved ahead. We just got a contract to build data centers for BankOne in two locations within the past month. So, tho se calls are coming in.

Emden: I have seen that in the past 2 years. Why go off and build from scratch? In the 80's, with all that new construction, that was accepted behavior. You would start from scratch, it would take 6-9 months, and you'd go through the headaches.

LaGrassa: Some of the major retrofits are so difficult for law firms that it is easier to have it all done and move in with everything. From a logistical standpoint, it is much' easier to take new space than to constantly phase in. Also the mergers and acquisitions of law firms is necessitating larger blocks of space and forcing some of the big decisions that are happening.

Kielar: Our real estate people handled 2 World Financial Center after the offices were destroyed. They were in the south tower they moved to a location on West 42nd Street which was a nice building, but nowhere near as modem. Of course we looked at both Midtown and Downtown, but World Financial Center is one of the classiest buildings and one of the most technologically advanced buildings in NYC. So, that was one of the factors. And they wanted to go back to the area where they were from 50 years ago.

Emden: Look at Rogers and Wells. They have just committed to about 300,000 or 400,000 SF at the Douche Bank building on 31 West 52nd St. There will be major work there but the floor layouts, which I am familiar with, inherently were law firm layouts. So, even if you were going to do a 50% modification.

Real Estate Weekly: In the past few weeks you've said there has been interest on the tenant side. Can you characterize what type of tenants they are? Are they the big corporations, the smaller companies, or a mix?

LaGrassa: I'm seeing a lot much more non-profit activity. I think corporations are staffing to think about it. I haven't seen as many in the market place, but I am seeing less traditional kinds of tenants that are much more visible. I also see landlords much more willing to do transactions with non-profits. I think, traditionally, they were looking more for a different type of credit tenant. There is now a renewed interest with these organizations.

Sinder: I agree. I am seeing some of that as well. Landlords are looking at non-profits with a different eye these days, more credit worthy in many senses. Another interesting aspect of the non-profit world is an increase demand for commercial condominium space. This might seem like an anomaly in such a soft market where rents are very low. But there is demand partly because of low interest rates and an interest to secure space for long term, especially for non-profits because they get certain tax advantages. We are seeing an increase in that market at good prices per SF.

Emden: You mean Downtown?

Sinder: Downtown, yes. TriBeCa, SoHo, and Chelsea.

Emden: You would think it would probably be more active down' there because of the professional design and the lack of available office space in that area. I don't know of any condominiums in Midtown.

Sinder: You're right. The whole commercial condominium market is a fairly thin market, but there is much more of it centered Downtown, anywhere from 1,500 SF up to the 10,000-SF level. That is the range that we are seeing.

Real Estate Weekly: I would like to switch to a different topic. Recently the merger between Insignia and CB Richard Ellis was Announced--that is supposed to close in June. That is obviously going to create a major player in NYC and I am wondering what type of impact you see for your firm or just for the market itself.

LaGrassa: CB did not have the presence in NYC that it had in other parts of the country. I think that was the initial effort in bringing Mary Ann Tighe aboard, but I think that was going to take a fair amount of time. To get the impact that they were ultimately looking for, the acquisition made sense for CB. CB is a much larger player in the rest of the country and there will be some overlap in the larger markets where Insignia did expand recently within the, past five years, such as Atlanta, Chicago and Los Angeles. There it will be much more of an impact than it will be in NYC.

Emden: I agree with that. I think from the emotional standpoint we work in NYC and live in NYC and we understand Insignia. I was the first member of with their board in 72. I was part of the culture of that firm for many years until 1996. I have had numerous calls from junior, midlevel and senior level personnel, one of which just joined us - my twin brother Jimmy. I had brought him into (Insignia) two years after they had started with Edward S. Gordon. He is now officially on board and I think there are a few more to follow. But I think for every firm that is probably the case because I am sure there are a lot of discussions going on. How do I see it as a merger? I think that west of the Hudson, where CB traditionally has been very strong, the company will get stronger. I am happy for this merger and happy for all the players and I think it is opportunistic. I think it is opportunistic for us at USI and all of us at this table.

Sinder: I agree with Bob. I think it is certainly opportunistic for the smaller firms like mine. We are talking to a couple of guys who are in the midst of making decisions shifting from one side of the table to the other. A third choice is to come down to our end of the table, which is more of a niche market, a Downtown focus. And we would like to get some corporate expertise infused with local knowledge base of our areas.

LaGrassa: I think one of the big concerns is the integration and acquisition activities. In order to merge two large firms management can get distracted. When LaSalle purchased Jones Lang there were about 18 months when they really took their eye off the ball and their business suffered. I think that is always a concern when you have those kinds of digestion problems like you do with an acquisition. These things happen so infrequently; I don't know what the experience level is for the management team. That is one and the other is that it is just very difficult. There are a lot of big egos involved that have to be dealt with as part of the proposed structure. But that is the planning. The integration process is much more difficult to achieve.

Sinder: I think all the shifting, merging and acquisition tends to happen in a soft, slow market. When people are not so busy doing their deals they are trying to find other ways to create business.

Real Estate Weekly: There does seem to be an awful lot of people looking to make there next career move.

Emden: But that is healthy. To stay stagnant in any relationship tends to work against you because the world is changing and, if you don't change with it, you are left behind. So, competition is good. I can tell you that I am very proud to have my brother on board. We were competitors and are still competitors--not in the true sense of the word, but as team players at USI, we are very aggressively going to build this. It is a different world than what it was in the 70's and 80's. I think for all of us, there is tremendous opportunity to twist and turn, and incorporate and digest, and bring it to the next level. I am a very positive thinking person, but I know what we went through with (the Gordon acquisition) years ago.

Real Estate Weekly: I think I am going to wrap things up. What we like to do is go around the table and everyone looks in their crystal ball and gives us their thoughts or predictions for the rest of the year or 2004, or anything you would like.

LaGrassa: The investment sales market, with the exception of trophy properties, in the last year has been quite slow. There has been tremendous disconnect between buyers and sellers. Buyers want to pay for in place cash flow and sellers have not recognized that fact. And what has kept the sellers going is low interest rates, but that will be changing as the current landlords are going to have to eat the cost for vacant space. So, I think that will start to change. When the investment sales market starts to become more active, the architects, the attorneys the construction folks, the mortgage brokers, all will be involved in much of these transactions and that will engage much more of the real estate community as the investment sales market goes. So, I think that will be a higher spot in 2003. I still have concern that the office leasing market will remain tepid with the exception of - I think Bruce had a good point the deals reflecting pent-up demand with law firms and non-profits. But general corporate expansion is going to be slow well into 2004 when the administration starts to prime the pump for the election.

Sinder: I agree with Ed. Part of what we are seeing in our market as a result of the weakness in Wall Street and the financial markets are several investment bankers and small investment type companies that are coming to SoHo. For a long time Chelsea, SoHo were the markets of choice for Midtown companies who wanted a bargain. Then as rents got ahead of themselves, the rents in SoHo at some point for a while were higher than they were on Wall Street. Now it is starting to turn around again, so that there is still value in the Downtown markets. And also a particular lifestyle that some smaller corporate tenants and some larger corporate tenants, mostly in the creative, but also now in financial, are starting to enjoy.

Kielar: The great thing about our collective businesses is that leases expire and spaces need to be upgraded. These days it is mostly technologically. So, tenants like Associated Press - their lease is expiring are in the market close to a decision. Estee Lauder has been looking; I think their lease expires in 2005. So does Dow Jones, it seems like 2005 is a year of a lot of leases, they seem to come in waves. But that automatically kicks in activity by all of us at the table. I think, in general, people like to start in a new place, reorganizing things in the office. So, that automatically pushes things forward. That and HIP going Downtown are tremendous shots in the arm for Downtown. Merrill Lynch is there, AMEX is there, AIG is there, Bank of New York is there and it looks for the most part that they are staying put. We are all waiting for the first tenant to be signed at 7 World Trade Center because at that point Downtown will have really turned the corner and NYC will continue to be the financial capital of the world. We all know the financial engines are the big companies. And hopefully some of them pent-up demand that we have talked about. Once the war gets under control and the economy moves ahead things will pick up, as they have in the past.

Sinder: It is interesting that you mention Estee Lauder, we recently did a deal with a subsidiary of Estee Lauder, Bumble and Bumble to take a large chunk of space in the meat packing district--about 55,000 SF in a newly constructed building. That is a perfect example of a large corporation taking space in a very edgy area. Plus, we have the credit of Estee Lauder, so it is a great deal all around.

Kielar: One thing that I forgot to throw in was the pitch. It is a good time to build. Some contractors are guaranteeing prices for 9 months and of course after that they are saying they are not sure what will happen. But, if a company has the wherewithal to move and they feel their space is not what it should be, it would be a good time to do that.

Real Estate Weekly: Bob gets the last word.

Emden: Well I never want to get the last word but...I concur with everybody's feelings here that the Downtown has always been the opportunity where big money has been made. It is called leveraging yourself in many different regards and having the staying power. I think that if you are consulting, and all of us are in that role - be it owner, agent, broker, what have you. If you are going to very carefully coexist and advise your customer client that you have to be very careful to do it, given a longstanding relationship. But, I think the plus out ways the minus in being cautiously bullish on where this market is heading and on where the exposure to the individual firms should be. For example, a lease renewal for 2-5 to 10-15 years depending upon or being to option with the first right of refusal on the building or a piece of space. And I will tell you that the USI model, which is a very different model than a one off brokerage, although we do a one off brokerage with existing relationships that we have as wel l as new relationships is really building that strategy and alliance ourselves as if we were partnering with that company. And we are partnering with that company. If you think that way versus a salesman mentality, you are going to personally benefit by it. I think that if there were more people around that looked in that direction to build a city, a healthier city and a healthier foundation we are going to be a lot better off. And I see, to answer your question, very slow steady growth into '04-'05, and probably not repeating the market that we came with for many years in my career anyway, but stronger more solid ground.