Insignia/ESG broker bullish on Midtown South neighborhood.

First, let me start with a disclaimer: I am an unabashed booster of the Midtown South market. As a broker specializing in commercial office space in this vibrant market since 1981, I have witnessed firsthand the dramatic growth and revitalization the area has undergone in the last 20 years. I believe that the reasons for this dramatic change in fortunes is based on fundamental strengths and attributes that transcend recent market conditions.

The causes for the downturn in the market are well documented and, in reality, began long before the tragedy of Sept. 11. The dot-com meltdown and the troubled stock market were the biggest contributing factors. Outside forces beyond the borders of Midtown South, such as the concerns over homeland security and the uncertain national economy, are continuing to create downward pressure on rental rates and are significantly increasing vacancy rates. Year-to-date statistics reveal this unfortunate trend. Negative net absorption--the net change in occupied space--totaled 263,000 SF for the month of April. Average asking rents have dropped almost $10 per SF and the availability rate rose from 7.8% to 12% as compared to a year ago. But there are some bright spots.

Bifurcation of the market was evident with a relatively active marketplace for smaller spaces and some very large bellweather deals that have recently been inked with major corporate entities. Conversely, mid-size deals in the 15,000- to 25,000-SF range were few and far between. In March, 82% of the leases signed were for under 10,000 SF, which represented one-third of the total square footage leased. In particular, major avenue buildings were the biggest beneficiaries of this trend.

Another positive sign for the long term is the commitment made by major corporations in the creative community to Midtown South. The Interpublic Group of Companies signed a long-term lease for 285,000 SF at 100 West 33rd St., which was formally known as the Manhattan Mall. EMI Records relocated their U.S. headquarters from Midtown, leasing all the commercial office space, approximately 170,000 SF, at 150 Fifth Ave. at 20tg Street. While the bounce experienced from relocations resulting from the Trade Center disaster was short-lived, a subsidiary of Marsh & McLennan, Guy Carpenter & Co. which was displaced from Two World Trade Center, subleased a significant block of space consisting of 105,000 SF at 1 and 11 Madison Ave. from Credit Suisse First Boston. Initially a significant amount of available sublease space was leased in the period just following Sept. 11, but the Bank of New York is returning 591,000 SF of this space back to the market, which will now have to be reabsorbed.

There are many hurdles to clear before the Midtown South market begins to rebound. First and foremost is the huge amount of sublease space overhanging the market; our statistics show that 46% of all the space available is being offered on a sublease basis. It is crucial that this "excess inventory" is fully absorbed--either by disposition through subleasing or, as economic conditions improve, tenants finding a need for the space within their own organizations.

Secondly, with the heavily promoted municipal incentive programs and the availability of numerous secondary office buildings, competition with Downtown for the economically-driven tenant is likely to become more pronounced in the near term. Finally, the struggling economy must improve if there is to be real sustainable growth that will spark new demand for office space in the city as a whole and Midtown South in particular.

Given these challenges, why am I so bullish on the future prospects of Midtown South? During the boom years when the area began to attract the new media and technology based businesses whose corporate culture demanded the prewar architecturally distinctive buildings that are so prevalent in Midtown South, owners began substantial upgrades to their buildings removing the stigma of functional obsolescence. Today this stock of older buildings has been fully converted for modern office uses with new mechanical systems, elevators, windows, restored facades and lobbies, and wiring for high-speed data transmission.

What's equally important, the area's attractions to businesses seeking an unparalleled quality of life are many: excellent access to all forms of public transportation; beautifully restored parks (just look at the vibrant Union Square Park on a sunny spring day); enhanced public amenities; and fantastic dining and shopping venues. Its emergence as a full-time community along with a distinct cultural dynamism, make Midtown South the location of choice for businesses in and serving the artistic/creative community. Despite recent trends, the city will remain the media capital of the country and Midtown South will remain its creative heart. These days the viability of commercial real estate in the city, not just Midtown South, must be viewed through the post 9/11 lens.

The catastrophic events downtown, just four miles from the Flatiron building and one-half of a mile from the center of Tribeca have, of course, had a major impact. As always the area's prospects will rise and fall with the economy. But, I am very confident that its inherent qualities and vastly improved infrastructure will assure the future viability and long term health of Midtown South.