First quarter roundtable.

Real Estate Weekly: Maybe we can start off by looking back at the first quarter's activity. Can you give me a sense of what you are seeing out there in terms of leasing activity or, if you are in the ownership game, financing activity?

Jonathan Zich: I think the first quarter, for us at least, was relatively slow. We noticed a lot of tenants staying on the sidelines trying to pick the bottom of the market and unwilling or unable to make a long-term commitment thinking that the rental rates were going to continue to fall. We are located in Midtown. Midtown did have activity - it has picked up over the last month or so - as the market seemed to have stabilized. We had a relatively slow first quarter, it may be that nobody answered us, because nobody did anything the first quarter.

Real Estate Weekly: Are others finding, the same situation?

Stephen Heyman: Trinity's portfolio is in Midtown South with a modest-sized building in Downtown. With the onslaught of 9-11, it got very quiet, and then started to pick up. From our perspective what was really happening was that every broker who had worked with a tenant within the past four years who had not taken space was knocking on theft door and telling them now was the moment of opportunity. So, there started to be quite a few people kicking tires and almost no one making any commitments other than small tenants. Our activity with small tenants was fairly brisk.

Joseph Moinian: On the commercial side, after the attacks, there was the immediate frenzy of tenants that were displaced and wanted to find space immediately. It took most of the balance of 2001 to settle them into their permanent or semi-permanent space. All of that is basically done. In the first quarter we saw activity in commercial, with tenants are starting to understand what the incentives will be. The market still is 10-15% lower than last year, at least in the commercial class B buildings, mid- to high-$20s. It is taking time to realize truly what the incentives are and how they are marketed. That's the beginning of activity that was starting for us in the first quarter, especially the last two to three weeks, there has been some movement.

Real Estate Weekly: What do you think is moving tenants? Is it a sense that the economy is improving or about to improve?

David Workman: I think there is some sense that the economy could be improving, but nobody is guaranteeing that yet. Most commercial tenants are sitting on the sidelines hoping that they can capture that one gem that they think is out there, and there really aren't that many gems. I think tenants are starting to wake up and confront the fact that there are no $20 deals for class A space. No one is just slashing and burning and leaving their space, but they are stilt slow to move. The accounting situation doesn't help because it doesn't give everyone a good sense of their own financial worth. So there is uncertainty, as it plays out we will move forward.

Real Estate Weekly: That is an interesting point, are you referring to the Enron situation? Are we seeing a shakedown in terms of that?

Heyman: I am repeatedly saying to "in-house" that I thought that no large corporation is going to make a commitment that it absolutely did not have to make at this point. No one knows where the fickle finger might point next and there is no confidence in the immediate viability of firms. So, only space that is absolutely necessary to take is being taken by corporate America, at least in the New York area.

Zich: We see an awful lot of companies restating earnings, everyone is trying to clean up their act while they can hide behind Enron. Until that all plays out in the marketplace they are not going to make long-term commitments.

Moinian: Natalie, one thing that I would like to add - because we are all involved deeply in residential business Downtown - is that for 2001, after the attack, it was the moving of tenants out of Downtown. The page really turned in the middle of the first quarter when people realized the incentives to bring them back. That has been a tremendous force in moving people Downtown again. The package of about $200 million has worked very, very nicely. I would say, by this summer, that the average occupancy of downtown buildings will reach 95%. My buildings are about 95% now and we are hoping to fill them. (The incentives) came as a clear message residentially. They made it very simple and people understood. I'm hoping the day will come commercially when those incentives will be spelled out and will be given to companies that will be able to compare us to Connecticut, New Jersey, Midtown and other places. When those incentives are applied with better pricing to begin with, I think we will have a good chance of win ning the battle. If you remember the 'Plug and Go' program with the technology tenants, they moved over 300 companies Downtown in a matter of 24 months. If you remember the renovation that Giuliani planned that converted old class B and C office buildings to residential, they moved 7,000 to 9,000 people Downtown. The message was clear. The tenants knew what they were getting, the developer knew how high they had to jump and it brought everything to a nice closure. You just need one more program this time around to become more competitive with our neighboring counties and buildings.

Real Estate Weekly: But you feel confident that once it is spelled out then the tenants will come, they are just waiting to see what cards they have on the table?

Moinian: They are just waiting to see, yes. I have tenants that are asking me for 6-month extensions, several of them. They want to know what is going to happen with the incentives, they are comparing. They have the deals in Long Island, the deals in New Jersey, but they don't necessarily want to move there. They want to get the incentive package, plug it into their projection and see if it pays for them to stay. The clear message is probably the most important thing.

Workman: The Giuliani plan was extremely successful - even too successful. What happened was that a lot of people bought residential buildings and, rather than converting them, commercial building prices went up so high that they would get these buildings that were really technologically obsolete as commercial buildings. That is not a good part of it. But I do agree that you need a convergence of certain factors, one of them being certain economic programs that are going to bring people Downtown. The other is obviously cheaper rents, and tenants will catch on. And the third one is simply transportation.

Zich: Unless the infrastructure is fixed up they are not going to commit. It is one thing to commit between Jersey City and Downtown., The difference between Downtown and Midtown is still a big spread and people know what is going on in Midtown, it is relatively stable. Now you want to move to Downtown - I saw that they were doing away with the commercial rent tax for Downtown - it is going to make a big difference once people understand that.

Workman: I think smart players are going to move Downtown, without a doubt. And the people who move Downtown before the transportation is completely in place and before the programs are completely in place are going to have the best deals.

Zich: But they are going to have very unhappy employees.

Workman: For a short period of time, but it all depends on how the employees react to the whole feeling of being there.

Real Estate Weekly: Jonathan, you brought up the issue of commercial rent tax and the city possibly reducing it for Downtown tenants. What kind of impact would that have for Downtown?

Brian Schwagerl: Pure economics. It makes the space cheaper. Anything that is going to support and retain businesses Downtown will go a long way. I think the Bloomberg administration has done a fabulous job in transitioning from the Giuliani administration and giving business leaders a sense that things are under control. They are organized in a very business fashion. The communication is the key and they are doing a fabulous job of communicating. Dan Doctoroff has been a wonderful spokesperson and leader in trying to administer the message in how they are going to come up with the master plan to build Downtown, which gives people and business leaders a sense of confidence. And - as the people around this table suggest - once the money is there, the brightest ones are the ones that are going to take advantage of it before the flood begins because the real opportunities are going to be Downtown. The difference between the rent that is going to be charged uptown compared to Downtown will make people look Downt own. It will come back in a big way and make it very attractive. So it is only a matter of time. I think the best thing that the administration has done is create a sense of confidence and cooperalion with other state and federal organizations and the various administrative bodies, such as The MTA, the Port Authority, the TA. They are working together cooperatively to put a plan in place and to achieve the greatest good for the people of New York in the long run.

Heyman: Though it should be added that there was a significant delay in getting a package on the table because the city and state were waiting for the federal government to commit to funds. It hesitated for a considerable amount of time. The benefits package has now been put on the table. The benefits package is confusing and is going to take a fair amount of digging and research and explanation. There is a discretionary element to it that is significant, which works well, but it is going to lead to confusion early on, until there is some examples of set deals made.

Schwagerl: But I think that they are trying very aggressively to get the message out there, to streamline the message. There are things, that are user friendly for corporations and for small companies, not just big businesses. There is a huge gap. Most people envision NYC as all big business, but there is a huge amount of small businesses that need to be attended to and which make up a great part of our city. And I think they are doing a great job of trying to reach out and make that message known, whether it is at various events like we sponsor at CoreNet Global or the Real Estate Board or even public community hearings. It is a huge effort and you need to try all avenues whether it is the Internet, or public relations forums, etc., to try and get that message out.

Workman: There are a lot more small markets, but it is the larger tenants who get the PR, by far.

Zich: I think the commercial broker community needs to be brought into this loop and educated so that they can actually give the right advice to their clients. It is very hard to compare Midtown to Downtown if you don't know what Downtown has to offer as far as these incentives. The best anyone can tell from the outside is that it is very complicated.

Workman: I find that most incentives are semi-negotiable. I think the city just wants a shot at getting a big fish to say 'lets sit down and talk about how you can keep us Downtown.' The city, once they get a shot, will keep somebody Downtown. It may be a one off type of deal, because certain incentives are abatements, but they want that feather in their cap in keeping a major name every couple of months.

Heyman: The incentives are two tiered. Two hundred employees you get into a much more discretionary realm than below two.

Schwagerl: I would just like to say while we are on the subject, as much as short-term incentives to, the tenants are very exciting for landlords and necessary to draw people Downtown, I think anyone who owns property Downtown and plans to be there for awhile would really like to see money put into transportation infrastructure. To put a fantasy on the table, if there were extensions of train service from Grand Central and Penn Station that ended up Downtown with the ferry service that also is available, you would see Downtown flourish in a way that you couldn't imagine for many decades. The likelihood of that happening is probably very small because it is enormously expensive.

Heyman: I would hope that is not the case. It is a missed opportunity if that is not the case. And I think it goes back to communicating to the public. I hope that it is not the case that we miss that opportunity. I think that political leaders understand that they must attack the infrastructure, the transportation needs. The reason why people will go Downtown is because it is an easy commute. And it is not right now. They have a golden opportunity to design it in a way, in partnership with the federal government, which a lot of those funds will come from. That type of rebuilding doesn't happen overnight, it takes years to do. But the rewards, the fruits of that labor, are plentiful.

Heyman: For example, the transportation infrastructure of the city was crumbling at the end of the 1970s. With Dick Ravage coming up with money, billions were put into the subway system and railroads and that really was the, financial rebirth of the city. We want to keep it alive.

Real Estate Weekly: What do you see as the most important first step the city could do to enhance those goals?

Schwagerl: I think it is important that they speak in one voice, that they are not fighting amongst each other for any sort of superior leadership position. The motive should be to see the general rebirth of the Downtown area. And as that part of the city goes, so will go the state, so will go the Northeast region. I think it would have a definite domino effect. I think that they have been able to put a lot of pettiness aside and to attack those issues head on. There are a lot of constituencies that have different needs. Whether they are landlords, tenants, residents, cultural institutions, etc., they have a vested interest in what they would like to see happen. It is not easy to get a consensus, but I think they are trying to reach that. At least the appearance is that they are moving in that direction. If they don't, it is a terrible loss.

Heyman: But wouldn't a crucial element really be to decide upon a plan for transportation infrastructure before you commit to new buildings? Some of those buildings could be built blocking opportunities that could exist.

Workman: I think what everyone is getting at here is just an overall plan which is very simple so everyone can understand it. But it takes into account taxes, incentives, and transportation. You have to convey it so that the tenants understand a year from now, or two years from now, that there is going to be a subway entrance in front of this building. That is also going to change their mind in puffing up with what is going to be an unpleasant year of commuting for their employees for a very simple 14 years after that. You just have to convey the information.

Real Estate Weekly: How important is the World Trade Center site to that overall transportation problem?

Schwagerl: How important is the infrastructure plan? I think it is critical, everyone around the table agrees that that is the key to rebuilding Downtown if you want to see a rebirth in a significant way. if you want something good to happen out of this terrible incident. That is how we go about the process of rebuilding and starting anew, to start fresh, to think out of the box. And I think everything I have heard out of Doctoroff and Bloomberg and other administrative sources indicates they are thinking in that direction. They are building a consensus and they are communicating to the community.

Zich: We also need to remember that it is going to be a different world. Most major corporations now, as their standard for their risk management, are not going to put 2,500 employees in the same location again. I don't know if we are going to see the huge amount that we saw at the WTC.

Real Estate Weekly: You mentioned the Bloomberg administration. Any other thoughts about his first three months in office?

Workman: Without having anyone to compare him against in the same period, he has done a good job. Giuliani rallied and did a very good, hands on job of just being there. Communication is key. But, Bloomberg brings a real sense of understanding business, from the transportation aspect to just being in business.

Zich: You do get a sense of stability. It's comforting.

Heyman: You have a question coming up about what the news of the first quarter was and it-parallels this. I think it is a question of life getting back to normal, Bloomsberg represents that. One of my associates looked up from the subway two mornings ago coming in and there is Bloomberg standing there, riding to work. He takes off for Bermuda for the weekend. There is not this sense that the world is crumbling but, rather, that we will persist. Life will go on, life will return to normal, and the best way to do it is to get on with business. And he seems to be receptive to all colors and a less exclusionary administration than the one proceeding it.

Schwagerl: That is basically how the market will turn around. When the consumers get confidence through their business or political leaders. As people open up their pocketbooks and start buying more, then businesses turn around and hire more people and fill up more offices. So, I think we will see tremendous deals in the sublease market that will undercut a lot of landlords in deals and space. Good corporations are going to take a little bit longer to take those opportunities, but then opportunities will be had by creditworthy tenants that can drive the deals down. Good landlords will understand when to make a deal and when to wait for every last penny on the table. It really goes down to how you represent yourself not only as a corporation, but as a landlord - and how you make decisions. The best people out on the market will always do well.

Real Estate Weekly: What do you see as the biggest real estate story of the past three months? There have been quite a few major events.

Moinian: I would have to say the residential rebate program, the $200 billion program had to be the biggest news for Downtown. For all of us that are there before 1995 or 1994 in Downtown, we remember some cloudy days. It is not as bad as it was at that time. Downtown is clean, it is beautiful. For one thing, we're taking advantage of our waterfronts in a very slow and nice speed. The incentive that was brought to the table for the residential brought a huge amount of attention to the Northeast saying that Downtown is not a forbidden area. If you come and see for yourself, you see that it is a very nice, livable community. Additionally, you have the incentive of the rebates from the federal, state and city governments. To rent 1,000 apartments you have to bring at least 5,000 to 10,000 people Downtown to look at them. That happened in the last few weeks. When they come, they back the retailers, they back the restaurants, they back all the other infrastructure that has stay put since 9-11. Our stores are begin ning to open on Saturdays, some on Sunday...and hospitality, tourism and retail are great sectors that are doing better than offices Downtown. People come to visit the site. The hotels are practically full, I don't know if they get the rates, but they are full. The food and beverage outlets are busy. I have had, in the last few months, more retail leases than in the past couple of years. There is a new generation coming into the retail of Downtown because they found it a great opportunity. We are beginning to see with Battery Park - which is the second biggest piece of greenery on the island - people are using the benches, watching the birds. They take the boats to the site seeing islands, they take a tour of Manhattan. To bring those companies and give them incentives to come Downtown, that is the gate. The first quarter was well done, the biggest news was the residential, I think.

Workman: I think you are off by a number of days, you are leaning a little more than three months ago. I think in addition to all these programs was the UFT commitment to move Downtown. It is a real vote of confidence and a smart move all across the board.

Zich: For me, there were two things that stood out. One was the continuing growth of the residential sales market throughout the city. People have committed to live here. We were surprised to see that the prices of condos continued to rise. Whether people are taking money from the stock market and moving it to real estate, they are making a commitment to the city. You also saw that people were chasing trophy properties in Midtown. People were willing to commit big money. New York - notwithstanding the pain that we all had to go through - is still where people want to be.

Real Estate Weekly: Any other thoughts. Nobody mentioned the dreaded tax assessor scandal. I did want to touch on that.

Moinian: I personally know some of the owners or landlords that use, what they called at that time consultants, to reduce or keep their taxes down. I really don't know if - those few that I knew were involved - knew that this is going to be called a scandal years down the line because they hired people with the best of intentions, thinking that they are doing the right thing. Had they known somebody was passing money for favors I'm sure the people I know would not be participating. So, it was kept as two separate operations. One was the consultants getting their assignment and, two, the consultants making their own deal with the assessor. But I think that it was kept very, very separate. I don't know where the problem is. The owners, per se, are not in violation of anything, because I don't think they knew about what was going to happen, or what was happening behind closed doors.

Zich: One of the things that concerns me, when we are talking about the incentive programs Downtown, is that they are discretionary. These kind of discretionary decisions made by any civil servant seems to open the door to undue influence. With the city tax assessor's office, suspicions have been raised before that the system wasn't fair - whether it was done by former employees or whether it was done by consultants. You have a huge economic decision made by a single individual. That poses a problem. Whether the city properly policed their employees, whether there was some way to understand why one assessment was different from another...I don't know if it was just the consultants. It is very hard, from the newspapers, to figure out exactly what was going on. But a system that allows an individual to wield that much power is prone to corruption. We have seen it in the building departments in some of the outer boroughs.

Real Estate Weekly: What does the industry need to do, if anything, to try and repair its image? Should an owner say proactively 'we are not involved in this'?

Workman: I can't speak for all the brokerage community, but it seems to have faded as quickly as it came out. I think that most tenants probably shook their heads. Brokers always assumed, like Mr. Moinian said, you had hired somebody, they had access, you didn't think that they had illegal access, just experience with their job. You hired them because they were considered the best. You didn't know they were the best because their access was paid for. So, I don't know if they plan some sort of statement. I think they will have assessors that are compensated fairly so they don't feel the need to get other monies outside. I don't think it is a hot topic.

Zich: I think outside the real estate industry, the general population doesn't care anymore. There is another scandal somewhere.

Heyman: Just briefly, the system. One, most large tenants insist that landlords go through a certain proceedings and request that it be put specifically in the lease to challenge whatever the original assessment is or the tenant assessment that is put on a building. The whole process is confusing, there are alternative ways to approaching the problem. For the most part, most landlords are not terribly well educated about how to go. Simply hire an attorney or a specialist in the area that seems to have a reputation for doing well. Liability is as important to tenants, who pay increases in real estate taxes under their leases, as it is to the owner, who want to make an effort to keep it as low as possible. Most of us have no real idea what the process is, just as most of us have no real idea what the process is in the building department when we submit plans for construction. The city, over the years, has tended to keep things rather convoluted and confused and that is another area that has been hit by scandal in recent years. I don't think there is a landlord who wouldn't be in favor of more oversight, with less confusion. There is no investment in keeping the system some obscure mystery. We would really like to keep it as above board as possible. The reality is those of us who didn't happen to think people were cheating have been cheated by the system and our taxes were very high to make up for it.

Real Estate Weekly: Time is running short and we do want to get to the last question, which is predictions in the second quarter and through the rest of the year. What do you foresee in the market within the next few months?

Moinian: On the commercial side I am hoping to do a lot of leasing, maybe not so much on the bigger companies that need a lot of space. But maybe we will get contracted with some of our smaller and more clever tenants that see something down the line that they can take space anywhere from 10,000 to 5,000 SF or less. It is called the prebuilt market. I see activity coming. I hope it comes. On the residential side, I think we will be okay. We are okay now, but it could be tighter, nicer. On the retail side, I don't think there is much left of the marketplace. I checked Downtown, we don't have the malls that we had with the WTC, we don't have that kind of retail anymore. But the streets are basically tight. We don't have that much more to rent. On the parking side, I hope we lift the ban of cars for the single occupancy coming into the city because that has hurt us, not only in Downtown tremendously, but all over. And on the buy and sell side, I hope that some buildings become available for sale downtown because we are looking and looking and we can't find them. We are very eager to do more development, to invest more Downtown, to buy more Downtown because we know Downtown will be good. But right now there is not much to speak of. We are hoping to be busy for the rest of the year in our Downtown part of the business.

Schwagerl: I think if you tenant you are going to be looking very diligently at a lot more space. You will be looking at the sub-tenancy market more aggressively. As the space sits out there people are going to be making deals more quickly. I don't think the deals will be made over the next three months. I think that people are going to be lining up deals judging how the economy improves going into the new year and, in effect, have their own master plan in place based on the amount of space that is out there. They will try to be ahead of the curve and make certain key decisions and then the curve being switched. Not so quickly, but what you will see is the sublease market tighten and that will provide some opportunities for the landlords to cut deals with credit worthy tenants that will thrive. It is all going to be on the confidence of your business plans, the confidence in the future of the city and the confidence of the economy. None of us have a crystal ball, but we are hoping that it improves. I don't t hink anything is going to happen immediately.

Zich: I would probably agree with that. We've had seven quarters of declining rents, if we could see some improvement on the employment side it Would drive the need for space. I think that it is possible that small space, medium space market will plateau sometime by this summer. I think that the tenants that are watching on the sidelines are ultimately going to be convinced that they can see the bottom and I would expect the activity to pick up by the summer.

Workman: I think there was a tremendous amount of people on the sidelines getting ready to jump in. For the most part, what is really important to see is a $50 work letter, $60 work letter. Two or three years ago you were preparing one month free, now you are getting six months on a 10-year. You are being offered real deals on the leasing side. Residentially, properties in the $750,000 to $2.5 million range are a very active market. But, once you get higher than that, people get a perception that if you save 10% it is such a large amount of money that you may as well try for it. That is the level that I heard. As far as investments, I have done a couple of sales for both markets. I am very active because, with a lot of the properties that I am looking at right now, the landlords will quietly sell their properties. They don't want to have a big building pony show. People want to buy who have a tremendous amount of real, cash, not like the old buyers. Today you need a whole different set of finances for a bank, but if you meet the criteria there is money available and there are sellers. There are not a lot of buyers who can withstand bank examinations.

Heyman: The issue still goes to the national economy, which is still very much teetering. I think at best you may see a pick up, not in the summer, but starting to happen in the fall and really getting a little momentum in the beginning of the year. I think there is one interesting dynamic in place, which is that there is so much sublease space on the market. This is typical of what happens in the down cycle and this is a down cycle that followed such a long period of a strong economy. An inordinate amount of people were fired. These companies are likely to add people again early, quickly. There tended to be inordinate amounts of sublease space throughout our market by companies who are very likely to come back to settle in their same roots. We really didn't need to give up that much, pull space back off the market.

RELATED ARTICLE: The Players

Stephen Heyman, dir. of commercial RE leasing, Trinity Real Estate

Joseph Moinian, chief executive officer, The Moinian Group

Brian Schwagerl, advisory board member, CoreNet Global

David Workman, executive director, Brown Harris Stevens Commercial Services

Jonathan Zich, principal, The Burak Organization