Insignia executive director: 2002 one of Manhattan's best years for retail.

At the beginning of 2002, the consensus outlook for Manhattan retail leasing was cautiously optimistic. With a reasonable range of retailers moving carefully back into the market in the lingering aftermath of 9/11, a solid but in no way spectacular year was anticipated.

Contrary to this relatively conservative viewpoint, 2002 is now on record as one of the strongest years in the history of New York City retail real estate. In addition, a reasonable degree of momentum remains into the first quarter of 2003. All of this is surprising given that Consumer Confidence, which ended 2001 at a respectable 93.7, trended downward to 83.8 as of the end of 2002, and stands, as of the end of February, at 64-a 32% decline in just 14 months. This is the lowest the index has been since October of 1993, when it fell to 60.5.

Further, the regional. and national economic slowdown has manifested itself most clearly in New York City by the dramatic contractions across all industry segments, including those upon which the city most heavily depends, such as technology, health care, telecommunications and financial services. This is effectively illustrated by the fact that from September 2001 to December 2002, the city has lost a stunning 154,500 jobs.

Despite this, Manhattan's prime shopping areas, most notably upper Madison Avenue, Fifth Avenue, 57th Street and Times Square, saw strong leasing activity, tightening supply and generally unwavering asking rents.

On Madison Avenue, for example, Mallet of London leased the entire 8,000-SF building at 929 Madison. And Exhale, one of the many spa operators grabbing turf in Manhattan, leased more than 10,600 SF at 980 Madison.

Fifth Avenue also saw its share of large transactions. At 630 Fifth, Faconnable leased 21,000 SF, and American Girl signed a lease for a very substantial 40,000 SF at 609 Fifth.

Times Square, despite the uncertainty plaguing office leasing in this market segment, continued its evolution as the City's most dynamic retail environment, and saw deals completed by Swatch, Quicksilver, Champs, Foot Locker, Red Lobster and Sketchers, among others.

In Midtown South, the on-again, off-again Bloomingdale's transaction at 504 Broadway in the former Canal Jeans space was finally completed. At an impressive 124,000 SF, this transaction is expected to have a significant impact on the surrounding area in terms of visibility and foot traffic.

Downtown benefited from the 16,500-SF Janovic/Plaza deal at 136 Church St. just months after 9/11, and more recently from the 32,000-SF Borders Books transaction at the long-vacant retail space at 100 Broadway. Both of these deals occurred just blocks from the World Trade Center site.

Several factors in our region coalesced to support this level of activity, and provide an offset to our area's weakening economic environment For example:

* Aggressive Federal Reserve policies created the most favorable interest rates m a generation, resulting in, among other things, an unprecedented national wave of home refinancing that put significantly more money in the pockets of New York-area consumers--money which they were willing to spend.

* New York remains the first choice for international retailers seeking to come to the United States and for those domestic retailers looking to expand on the East Coast. The leases with DeBeer's at the St. Regis and Best Buy at 86th and Lexington Avenue (in the former HMV space) are prime examples.

* Perhaps most significantly, several categories of tenants have, and continue to, maintain their strategies of increased market share in Manhattan, prompting fierce competition for well-located retail space. In particular, banks (Washington Mutual, Commerce, Fleet, North Fork, etc.), drug stores (CVS, Duane Reade, etc.), food tenants (Allied Domecq, Subway, Quizno's, Chipotle, etc.), spas and select apparel retailers were all extremely active in the region. This has led to a chronic shortage of quality space in the City's prime markets, a sense of competition for quality spaces when they become available, and a predictable steadiness in rents.

Taking all of this information into account it is interesting to examine where the most leasing activity has actually been generated over the previous six months, and what this might indicate for the balance of this year. As previously mentioned, banks, food tenants and drug stores have been extremely active, but digging deeper into levels of activity by industry segment reveals the following:

In line with expectations, banks and food tenants have indeed been active, accounting for 37% of the transactions and nearly one-third of leased space. On the other hand, it appears drug store leasing may have run its course for now. More interestingly, other industry segments, particularly apparel and miscellaneous conventional retail, are showing quite good levels of activity, with 43% of the transactions and 52% of space leased.

While these recent results are by no means a predictor of future activity, we can-for now-be encouraged by the fact that there is velocity in the market, and tenant activity is apparent in a number of industry verticals. While today's market has momentum and an adequate supply of active tenants, fears of further layoffs, terrorism on our shores and a possible war with Iraq are clearly weighing heavily on the minds of consumers and testing their continued willingness to spend. This is well-illustrated by February's drop in retail sales, which was about three times the size expected by Wall Street. Weakness was distributed across all industry segments, with declines reported for automobile dealers, electronics and appliance stores, apparel shops and other merchants, while harsh weather across much of the nation caused building and garden supply stores to post a record drop in sales.

In summary, we can reasonably expect retailers to respond to any sustained slowdown in consumer spending by continuing their aggressive cost cutting, quickly eliminating marginal or unprofitable operations, and reducing their leasing activity until the future becomes more clear. While both national brands and strung local players are expected to continue to capitalize on real estate opportunities in quality locations, retail leasing will level off as the market seeks to determine the direction of the economy, as well as the impact world events will have on employment, consumer confidence and spending, and the host of other factors that directly impact Manhattan retail leasing activity.