How long can this economic buoyancy last?

I have just returned from my 20th reunion at Harvard Business School, where I had the opportunity to see over 250 classmates and listen to their economic views of the world (alumnae flew in from as far as China, Japan and Australia). My classmates - aging but still wise - helped give me some business perspective on the real estate industry, including the following:

* We are in the midst of the greatest economic resurgence in the last 50 years.

* P/E ratios in the stock market (some averaging well over 25 to 1) are, and have remained, at historical highs for a long time.

* Basic high mathematical formulas for stock prices are being dramatically aided by low inflation, low interest rates, and high levels of optimism similar to the late 1920's.

* Wealth via the American Dream is being created in many industries, i.e., Wall Street ($5 million bonuses); software and technology-related companies (the Bill Gates Billionaire Story); entertainment and sports heroes and heroines earning record high salaries; and real estate capital markets (especially REITs) giving huge sums of cash to many owners and operators.

* The real estate office market is the beneficiary of the increased tenant demand from expanding businesses (entertainment, software, international, etc.).

Yet in the face of all these positive economic signs, there are the same underlying negative trends for the real estate industry, including:

* As computers change the way we transact our daily life, i.e., working from our laptops and electronic data being stored, the amount of space needed to conduct our lives is greatly diminished. Hence, the "macro" view of these computer trends should lead to a contraction of retail stores, as well as reduced office space. How many people do you know who work from their laptops at home or while travelling on the road?

* The Millennium Problem, whereby computers have not been programmed to change from December 31, 1999 to January 1, 2000, is expected to cost the United States Government and businesses over $500 billion. Could this be the catalyst for a world-wide severe recession?

* REITs are becoming a monolithic capital structure, and although these have provided great liquidity for the industry, the pressure to increase FFO (Funds From Operations) via acquisitions is increasing the purchase price of transactions.

The real estate and industry boom is reflected in the activity of Himmel + Meringoff's ownership, which includes over two million square feet of primarily Class B office buildings in New York City. Our properties are 99.2 percent occupied, with only one retail space available at 462 Broadway, and one office space available at 729 Seventh Avenue. Rental rates are at least 20 percent higher than one year ago, and activity during the past year in renewals and new leases has been substantial. Some examples of market recovery include:

* At 6 East 32nd Street, a 160,000 square-foot building located off Fifth Avenue, one block away from the Empire State Building, where we are in the midst of completely renovating the lobby and elevators, two new leases were signed. One lease for 20,500 square feet was signed at $20 per square foot to a publishing company, with a renewal option after five years at $23 per square foot.

* At 729 Seventh Avenue, where we are beginning the construction of a 60 [feet] x 60 [feet] sign on the roof which is being marketed by Van Wagner to prospective companies who are vying for signage in Times square, five tenants renewed (one of those tenants adding an additional floor of 10,800 square feet), and two new leases were signed at $24 per square foot - 8,500 square feet being leased to a popular video retailer/rental chain and 21,600 square feet to a well-known not-for-profit agency, rendering this 185,000 square-foot location fully occupied.

* 411 Lafayette Street in the dynamic Astor Place district has two renewed leases at $25 and $22 per square foot, marking how rents are increasing as this area continues to be a hot spot for companies searching for prime office space.

* We have decided to sell our property at 5-15 West 125th Street, as this vital shopping corridor in Harlem becomes known as North Times square, with such giants as Disney, Loews Theaters, Price/Costco and HMV Records moving into a neighborhood already occupied by The Body Shop, Fairway Market, Blockbuster Video and Mart 125. We are sure this is a lucrative decision for our company, as this space is ideal for one of the developers clamoring to purchase property in this area.

On the acquisition front, we continue to be extremely aggressive in purchasing properties. We recently signed a contract for a portfolio of strategically located real estate neighboring some of our existing properties. We continue to look for opportunistic purchases, whereby creative financing or structuring is required.

In conclusion, we remain cautiously optimistic for the next 18 months. We are fully aware of the underlying current which pulls a reality that this upward trend won't last forever. While this economic boom is here, it is a lot of fun to continue to expand our business, which was originally begun in 1979. Let's hope that the good dines continue!