Mid-year roundtable.

Real Estate Weekly: If we could take a temperature of the real estate market right now, how is the market fairing?

Robert Selsam: Let me start by saying that I am an optimist by nature, so you must take that into consideration.

William Macklowe: I think that is an occupational hazard.

Selsam: Nonetheless, I had very little empirical evidence of a bottoming out in the market in Midtown for much of this year. Happily, there are a couple of signs of good news out there such as a job increase in April, which was substantial. There were 8,300 jobs in April following declines for all the previous months. If that number holds up and is a trend it is a very substantial monthly increase. That is sort of the baseline thing I have been waiting to see. We have had a stable month in May in terms of leasing. Volume was up by about a third over the prior month. The vacancy rate, depending on who is measuring it, or the availability rate is either stable or has declined slightly in class A Midtown space. Those are both good signs.

Macklowe: I think you have, to consider the market. I agree with what Robert is saying to a degree, but you have to accept the health of the market in pockets, not as a whole. Certainly, as we saw in the late 90s early 2000s, there was such an expansion of traditional neighborhoods. Those fringe properties, I don't want to say they are suffering more, but I think that they are turning more to the rents that they should command, not the rents that they had risen to. In the core districts - whether it is the plaza district or the grand central district - you tend to find that the right buildings, the well-located buildings, are still renting. There is just a bifurcation in the market now. Both Robert and I are sitting here with two large continuous blocks of space available for lease, Robert with Times Square and me with 340 Madison Ave. That is a different market than the people who are out there renting a 10,000-SF floor at 540 Madison Ave. or at 280 Park Ave. There is always sort of a constant volume, whethe r that velocity ebbs or flows. The larger big block tenant must plan in advance. They tend to be more of an industrial nature and are not as sensitive to economic cycles. They will accept rents by the market, but their moves are planned 18-24 months hence. I think New York, traditionally, has suffered a paucity of big block space and that positions down side to the asset think differently from what I would call the bread and butter deals of 5,000 to 20,000 SF.

Lawrence Fiedler: I'm an observer of people like those who have just spoken and what I have detected, both from my own property and from the words of others, is that we have two markets in Manhattan in the commercial office market. There is the major tenant market, the big blocks, and there is still a tremendous health in that market, a demand for space. As a result, I don't think that some of the disastrous events of the past few weeks--the Anderson situation--will eventually hurt us. Yet, on the other side in the office market, there is the 2,000 to 10,000 or 25,000-SF tenant. With small tenants I have seen a lot of softness by hearing about it from certain people and seeing it myself in a couple of buildings I had. I had a small block of 2,000 SF available in a building, I put and ad in the NY Times, just to see what would come back. In the past we used to see 10, 15, 20 responses. Now, not one. I see, in other buildings, a reduction in rent if you have a 15,000 or 20,000-SF piece of space, where it was $5 8 to $60 dollars a SF in a 10-year-old building. Today it is probably $48 to $50 dollars a SF, going down depending on how long the space is on the market. As a result, I am convinced that we are a trailing indicator. Except for the class A space, we have yet to see the worse to come. No one knows how much the vacancy factor is because inside every company there is a lot of unused space. Just like after 9/11 it just comes to the surface after a cataclysmic event and they sublease it out. Newmark reported 40 million SF of vacant space before 9/11. 9/11 came and 20 million SF came off the market, the next month they still reported K 40 million SF of vacant space. I have a suspicion that they have a lot more within the companies that they do not have on the sublet market that can be easily pushed out on the market and hurt us. I am not very optimistic except in Bob's case for the big block of space. There is a market there for the people planning two or three years out who can't look at today's circumstances, bu t have to look at a much broader picture.

Simon Ziff: I can speak to the capital side. On a historical basis, I think we are on the top. There is tremendous interest, both on the debt and equity side of major institutional and private investors in New York, particularly with the better assets. As we saw with a few recent transactions, including 450 Park, the debt markets between Wall Street, the foreign banks, insurance companies and the domestic banks are as active as they have been in the last 15 years. As far as equity, New York and Washington are still the darlings of the world. And I think particularly Washington, because of the size of the deals there, and then New York--the deals are a little bit larger in New York, so that there are not quite as many people clamoring after the deals in Washington. But those two markets are very special and remain to be markets that everyone wants to be in. So there is no shortage of any type of capital chasing deals for the better properties of Manhattan.

Macklowe: It's not just 450 Park. It's 450 Park, it's 745 Fifth, it was announced today that Shorenstein is stepping into Marvin Davis's position at 450 Lex. There is still a tremendous - I don't know if I want to say disconnect - but there is a moment in the market that is not congruous between leasing and between sales and the capital activity. The capital markets are still very bullish on real estate and there is activity and desire for lenders to put out product. I have my needs, these guys are much deeper into that field.

Ziff: You ask about various markets.. .you have the capital side, you have the leasing side, you have the sales side. Clearly the sales side and the capital side are very strong.

Real Estate Weekly: Are there particular properties that are being sought after versus others? Is it trophy buildings or small buildings?

Macklowe: Is that from a lending perspective or from an investor's perspective?

Real Estate Weekly: Investor perspective.

Ralph Herzka: Trophy buildings. For any trophy building there are how many REITs and people trying to buy them?

Macklowe: I think for any building. Every building has its market. It was reported this week that RFR - which is more known today for their trophy assets -- are starting to buy more B and terciary assets. They are selling those to that market of buying.

Herzka: We are actually representing the client that bought that. Within a three-day period, we had six different clients who called and said we are going to end up with that property.

Macklowe: When a building goes on the market for sale, whether it is a 450 Park or 745 Fifth, or a building like the Sixth Avenue building, there is always going to be 10 to 15 names that will be on a short list, of people who would be interested in that building. It is no different from one of the top buildings for rent in the plaza district. A high-end financial tenant is going to say 'I want to be at 9 West 57th St. or 667 Madison Ave.' The same way a building doesn't have to market, whether it is Sixth Avenue or some other type of asset, the broker is going to know where to place that asset first. So investors in building, I think there is always interest in New York.

Selsam: There is an interesting disconnect between the view of potential investment buyers and the value of property and the view of that same market from the perspective of tenants.

Fiedler: Which came first the chicken or the egg, Bob? Do the tenants effectively end up leaving the market in terms of pessimism? And eventually the investment brokers, owners, etc. follow in the capital markets being the last to figure it out.

Selsam: You would think, but there is no evidence of that whatsoever.

Fiedler: But the tenants are the ones that call the shots. If they are not going to...if it takes six months to make a deal...

Macklowe: I respectfully disagree with that because I think a tenant is always going to want to pay the least amount to rent possible and landlords always want to collect the most amount of rent as possible. The equilibrium comes at whatever the asking rent is. I don't know if the tenant is always in the driver's seat. In a long-term lease commitment, something always happens over a 10-year period. A tenant needs a landlord, the landlord needs a tenant.

Fiedler: I agree. I think, though that when it takes a month to make a deal as opposed to four or five months, it is indicative to how the market is. If the tenant continues to shop as he is talking to the landlord, then effectively that length of period to negotiate the deal is exponentially a sign of weakness in the market. If the tenant makes the deal 30 days out, you are already at a lease signing, then it is a sign of strength because perceptively the occupier of space deems it to be a strong market. The arbitrator in all that is time and negotiation unless you collapse and drop your rent down to a very low level.

Selsam: The point I was making is just that investors have a very strong view of the future of real estate in New York City.

Fiedler: Clearly. Very optimistic.

Selsam: And tenants that are in the market have a much more opportunistic shorter-term view.

Fiedler: That is a very positive way of describing it.

Selsam: Tenants want to find the bottom. But there is a disconnect: You look at the rents in the seller's book and people are buying buildings at those numbers. Then you look at a broker and ask them what they can actually do and...

Herzka: I think we have failed to mention so far that we are in a historical low interest rate environment that is driving a lot of these sales. What made sense a year ago at a 6% LIBOR rate or 18 months ago. And now at a 2% LIBOR rate...Simon will tell you, he is the king of floating LIBOR deals. It is a different market.

Macklowe: It is a different market, but jumping out of commercial for a second, since you gave us the e-mail "In your opinion, what was the biggest real estate story over the past six months?" In my humble opinion, it has to be the residential market. Not the residential rental market, but the residential sales market. It is unbelievable.

Fiedler: Still hot.

Macklowe: Still hot. And it is starting to come back. Transactions are up, they are starting to get to last year's levels. Sales prices are still somewhat down, but they are down from such a high.

Fiedler: But yet the residential rental market is down 20%.

Macklowe: Not across the board.

Fiedler: The high-end rentals are down 20%. I have a personal survey because my daughter just rented an apartment coming back from Chicago. In buildings that are junior 4, one-bedrooms with dining area, living room etc., and well located on the Upper East Side, used to rent for $3,600 to $3,700. Today they rent for $2,700 to $2,800 on a high floor, with a view. That was unheard of five to seven years ago. If you go down below 14t Street, The Archive and other buildings down there, they are making very strong deals. They never made that before.

Selsam: Are we seeing the exact same phenomenon in the residential market as we are seeing in the office market between sales and rentals?

Herzka: It is off the charts. I was in someone's office on Park Avenue in one of the buildings that just sold. He said to me, "What are you think they are getting a SF?" So, I figured I would be aggressive and said $2,000 a SF. He said, "No, some of these apartments are selling to over $3,000 a SF on Park Avenue." It is very high-end stuff, but the prices are...

Macklowe: I just stepped out of the market. I am so intimate with this market as an end user, not a speculator. I was just looking for an apartment. When you look at these things and the numbers and the quality, or lack thereof, it's incredible. There are no listing times. The apartments go right away. My broker is not one who is prone to hyperbole - the guy is very mellow, it is a wonder that he has ever sold anything, which is part of the reason why I like working with him - but, in all seriousness, he comes across with an understated sense of urgency. But you go, you look at it, and it sells.

Fiedler: But is that an indication that this market is in the bubble stage and it is ready to break?

Macklowe: I think that interest rates tick the residential sales market. I think that is what ticks it over the edge. People really are coming out of a very volatile stock market. There are historically low rates, people don't know what to do with their money. That is not a Manhattan phenomenon, this is happening nationwide.

Fiedler: I sense it, too.

Macklowe: I think once those rates start to tick up to $2,000 a SF and issues like that...

Fiedler: Yet rates are down a quarter of a point off the treasury in the last 10 days. There is a perception of lowering rates.

Macklowe: Yeah, but the 10-year has been ticking up.

Fiedler: It was, but it has been coming down. I think we are seeing the first sustained period of time where we haven't seen inflation. We see no inflation, but deflation or stagflation. That really influences the interest rates because the long-term side of the cycle is really an inflation-oriented market. When you see over a long period of time no threat of inflation - no matter what Greenspan ever says because he speaks from both sides of his mouth - when you see no inflation. you are going to see a very low interest rate based off the treasuries. We have seen that in the past two or three years. Now they have pushed it down even further and now they say that they are not going to lower it any further. They can't, it is almost at zero.

Ziff: These high prices could be because of an overall repricing of real estate in general with what is going on with global interest rates and what is going on with just the stock market.

Real Estate Weekly: Could you talk a little bit more about that? To what extent does the volatility in the stock market play into this?

Ziff: To the extent that these large sales had high net worth investors behind them. Even the World Trade Center had some very significant high net worth investors behind it and there were many bidders at 450 Park that were high net worth investors. One could argue that it is partly because of what happened with the technology stocks within the last couple of years. The stock market has shifted a significant amount of capital to real estate.

Fiedler: There are two types of equity investments that are most popular. It is the stock market and the real estate market. As the stock market has leveled out and perhaps gone down, the confidence in it has waned. That is why people are looking for real estate investments. Last night I hosted a roundtable at New York University and a former investment banker - now a CFO of one of the major real estate companies - all his friends who are managing directors who are making millions of dollars a year are asking where they can put their money in real estate. Real estate is the magic word today. There is plenty of money available from the lower end investor - not just the institutional investor, but the guy who is willing to put up $100,000 to $200,000 to invest in a particular deal. I think we are being flooded with equity. The cost of equity is down the cost of debt is down. And I often wonder what came first, the chicken or the egg? Is it that you get the money to build that makes you build? Or is it that you are going to build into a good investment? In the 90s we used to be driven by the fact that the money forced the investment to occur and we, of course, overbuilt like hell. Today there is a lot more discipline in the development market. You wouldn't build because you couldn't get the money unless you had substantial pre-leasing.

Macklowe: I think the discipline comes from the capital markets.

Fiedler: Right, I agree with you.

Macklowe: If you give us money, boy we will build. We love building. I want to touch on something you said and direct a question to Robert. You said that there is money out there, whether it is the individual investor who wants to put $100,000 or $200,000 or $50,000 in real estate. What is the disconnect now between the equity markets and the flood of capital into real estate? How are you positioning the market to do secondaries in our equity market today? How is the market receptive? Because there is two ways to own real estate. There is the way that we all own real estate and then there is the whole REIT trend, and REITs have kind of come back into fashion as the tech stocks waned. What is the appetite that you guys see out there?

Selsam: I'm not sure I am in a good position to answer that because we are very well capitalized right now. Our development pipeline is fully funded and we have a completely dry line of credit, so we aren't even thinking about getting back into the equity markets right now.

Ziff: But a REIT is a hybrid, so for those people where the stock market is moving one way, but the world is moving towards harder assets and people are investing in harder assets. The REIT market could move 1 to 1 or maybe .8 to 1 with the money flowing towards private real estate investments. If people are putting money to you, me, our friends who say 'do you have a deal, can I put money in a real estate deal? I hear that all the time. That trend has got to be going throughout the country. People who owned tech stocks, who had other investments in the stock market. Probably some of that money is moving to REITs, because REITs are real estate. It is another way of investing in hard assets.

Fiedler: I think the bloom is off. The REIT is a growth stock. Therefore, people who are turning away from other parts of the stock market are now moving towards the REIT market. That is why you see the REIT stock doing rather well. You still can get a 6% return. Who else would pay you a 6% today? 6% is a hell of a return when you can get 1% out of treasuries.

Herzka: We actually just did a transaction where we saw a hedge fund put the equity into a real estate deal. She said, 'all my friends that are doing real estate funds are making money, I just keep going down so $20 million of my hedge fund equity will go into this transaction.' She has seen a lot of money come out of the market. I think that is what is really driving the individual sales: The average person who doesn't have the opportunity to invest in real estate, but at least feels that he should buy an apartment. He is paying rent, even though rent has come down, but looks at an apartment for $4 million or $2 million or $1 million. He can borrow the money really cheap; get the incentive of the tax right off...

Fiedler: Isn't that the same circumstances that occurred with the Japanese in 1985. They could borrow money at 2% and put it into a 5% investment and lost it all. The people today are buying condos and coops substantially above replacement costs.

Macklowe: But they are living in them, they are using them. The Japanese were buying apartments with television and print advertising in Japan. Zeckendorf would go with his marketing materials to Japan, we did it with Metropolitan tower. It is a different market. This is an end-user driven market.

Fiedler: That really slows down the disposition. It doesn't really slow down the fact that there is going to be pressure going out the door, especially when the rest of the market falls away.

Herzka: Larry you asked if this is the peak or the bubble? I have heard over my career that, when dentists are investing in real estate, it is time to get out. I got a call from a guy that said he represented a group of 10 dentists.

Fiedler: I got a call that we have a consortium of 100 Pakistani physicians. So I said, my God--Pakistani? Doctors? My God.

Ziff: I got a guy that needs to get money out of some country. He has $75 million and he needs help getting it out.

Herzka: I think Bob joked around before, but if you were to ask me what is the biggest story in real estate. I think interest rates. Besides Meridian, the second biggest story in the real estate business is interest rates. It is really unbelievable how low they have gone.

Fiedler: Do you think this is a permanent adjustment? Where 6% used to be the norm, now...

Herzka: JP Morgan was once asked is the stock market going to go up or down and he answered 'yes.' That's the reality if you look at the economy and the stock market, especially with retail. Landlords are telling me about the rent, not the trophy buildings that Boston Properties has, but the jewelry buildings, the buildings here on Tenth Avenue. They are seeing tenants having a hard time paying rents. In the sportswear industry, I have heard this. The economy is not as strong as people think it is and I don't think that we are in such a great recovery yet. Real estate is keeping it as strong as it is, along with low interest rates and a failed stock market. Everyday I get calls from friends that they have some money and want to be in the market. I go to the banks, they want a half a point and I put in a real estate deal. That is what we are seeing and that is why...

Fiedler: That is why the popularity of the REIT market, in terms of holding up its equity value is because it is a 6% dividend. A 6% dividend is enormous.

Herzka: With real assets behind it.

Fiedler: I don't know how real some of the assets are, but certainly the asset is only as good as its earning power.

Herzka: The other thing that is really interesting about New York real estate is the mezzanine debt that is out there. It is fascinating that there is not a day that goes by that another fund is established to offer equity in mezzanine debt at interest rates that used to look like real first mortgages. So, that is what also driving this market. You could borrow 95% and still have a return on your 5% equity.

Audience: What is the pricing that you suggest on that mezzanine traunch?

Herzka: It all depends on what you consider mezzanine. A lot of mezzanine debt today you are talking about 12% money. But if you are borrowing the first 75% at 250 over LIBOR, which is 4 1/2% if you average your costs you are talking about a 6 1/2 % all in rate. Am I correct Simon?

Ziff: One thing that is being left out of the equation of interest rates are the uncertainty of rates going up or down for lenders today much more so are requiring floors on floating loans. Caps are a great thing. It is an easy sensitivity analysis to see what happens to the rates for someone whose caps kicked. I'm very much an advocate of caps.

Fiedler: But caps are very good for a short hold where you have a change in development or position ... 3 years, that is it. When you start to go out on 4, 5, 6, 7 years on a long term basis the cost is prohibitive. You create value because you are a developer, but if you are an investor who holds and who maybe has a window going out 7 or 10 years to do a cap is suicide because it is expensive. You have to go for the fixed rate.

Ziff: But at a 480 treasury with 200 over, you still are...

Fiedler: You are at 687 at 7.

Macklowe: You're at 7+ with the constant.

Fiedler: Well, that's cheap. I don't know 1 why we don't think it is cheap.

Macklowe: It's cheap, but when you can go back to what Ralph was saying before, to a 440 or 480 LIBOR with 200 basis points on that...so roll the dice for 3 years. Roll the dice for 3 years, take the excess cash flow and roll it into a segregated account.

Ziff: I think if you already own an asset that kind of bet is one level of bet. But we have prospective owners, developers, buyers who come to us and show us why they are going to buy it. They partially base their purchase or development on where interest rates are today. I think it is one thing to gamble as a portfolio decision to do some as floaters, some fixed, take the risks on some floaters, do a hedge. But what I find to be the case is that there are many developers or just people who are seduced with today's interest rates where they come in with their business plan. Their business plan is to borrow at 4%, and cash on cash return to my equity investors and that is a great return.

Macklowe: That is the neophyte investor.

Ziff: Generally, you are right. For the neophyte investor. It is just a lot of people falling into the trap. Not always the neophyte, but mostly the neophyte. There are actually owners that come around and say that they are going to go buy today. Maybe they are great operators, but they have been great financiers and they propose that they go buy property with this low financing. They show the mezz, they show the debt, they show the returns and we have to explain to them that if you have equity invested and want to take that kind of risk that is one thing. But to go to the world and convince them that 12% or 14% cash on cash return because you are borrowing at 4%.

Fiedler: You are making money on the debt. The idea is that, are you really making money on the real estate itself separating the real estate from the financing of that real estate? If you bifurcate it you should be making money on the real estate. Then, if you want to employ the debt market and make money on the debt that is a whole different investment.

Macklowe: Simon is talldng about the equity component of it and how people are putting money behind a pro format and a projection.

Ziff: What we tell people is that we have to use a normalized fixed rate of something like 7%. When we have a client buying a property we don't even let them use the spot market because it can change in 30 days. We tell people to use the 7% interest rate 7.25% because in 60 days rates could go up and they don't want to through the whole equity deal out of whack.

Herzka: What I meant to say was that the lenders are not ever underwriting at the 4 1/2% rate, so they are not going to give you money on the 4 1/2%, it is really the equity.

Fiedler: That is being suckered.

Herzka: One person said to me the other day, "Ralph, was there ever a performer that didn't look good?"

Fiedler: Well, did you ever see a building that wasn't 95% occupied? Same thing.

Macklowe: I think it is dangerous to say that someone is being suckered when there are two tape recorders and a room full of notepads. The danger of the misconstruence is always worse than the actual quote. I think that you can't look at it that way. Financing today is not so difficult; let me explain that without derogating what you guys do. It is a very standardized product. The majority of real estate today, outside of the live companies and the pension funds is a securitized mortgage backed securities product. They sell banks traunch them, tear them, that is why there are a lot of people out there making money by C pieces. It is very easy. As a developer, as somebody who builds income producing properties, I know how to model my properties for all the underwriting. It is not rocket science. We don't cut our deals differently; we work out of our own equity. We don't play games with other people; we are like you but private. It is very different; we know what the numbers are. I can't go out there and say th at my project works because I am going to go out 200 over LIBOR. It would be grand if life was always that easy, but it's not. I think Simon is saying that he advises his clients that you have to look at the 7% constant; it has to work before you consider financing. That is how real estate needs to be analyzed.

Fiedler: Anytime there is a new group of investors in an asset class you will eventually have a flush out because they have made mistakes. The dentists, the Pakistani doctors, these people are not traditional investors.

Macklowe: United States citizens in the equity markets, it's no different, it's across the board. Investing always has with it an implicit risk of total loss. Plain and simple. Whether it is an asset like a building or whether it is a stock that could be delisted the next day. Whatever it is, that is your risk. We are tempered in real estate because we are beholded to a certain extent to the financial institutions that support our endeavors. Nobody plays with cash in real estate.

Fiedler: I still think that if you bifurcate the investment in real estate between an investment and debt and the investment and the hard asset itself you start to see more clearly where the risks are. Most of your risks have always been involved in the financial side of the transaction. If your rents dropped 15-20% you would still have a positive cash flow without taking into account debt. It is when you start to take into account that debt is when you get into trouble. The basic risk is when you lever up a transaction and you go up to 75% or 80% leverage means that you have very little to spare if the market turns around.

Macklowe: That is why the same token, 70% is the standard and conventional home mortgage.

Fiedler: Home mortgages are based on the income power of the person who lives there.

Macklowe: And jobs aren't permanent.

Fiedler: Well, there still is a tendency to have near that earnings power. When you start to deal with commercial property you are dealing with the ability of someone to pay rent from their business. That is quite a different set of circumstances.

Selsam: I agree that when you look at major Commercial property you could fool yourself by looking at the equity and the debt separately so we start out by looking at the total project on an unleveredged basis. I think that most sophisticated commercial investors do that too as distinct from the pure investor vs. the real estate investor/developer. We always start with pure unleveged return.

Ziff: What makes the market fun is that there are people in every market, particularly in real estate, that have different risk profiles. They will go in and say 'I will go hard on this acquisition without a loan'. And you have the same thing with how they underwrite their financing. It makes it fun. You talk to owners who have a different approach and you try and bring him into the range of where most people do things. But, he might not ultimately want to be in that range and take a risk and may be a big winner. And some of the biggest winners in real estate have taken unusually high risks. I'm just pointing out that this trap of low interest rates is one that we are seeing today. Other risks may have been recourse. Taking recourse when other people wouldn't have taken recourse.

Macklowe: Or holding into a high interest environment. Go back to 1980 when you were confronted with 17, 18, 19% interest. The people who were able to secure and successfully build and lease a building, they were the risk takers because they were the ones three years later that did the first interest rate swaps. They pulled a lot of money out of the building for doing nothing pure financial engineering.

Fiedler: There is a difference between financial engineering and understanding real estate and real estate values. It is a very basic phenomenon.

Real Estate Weekly: We are running short on time. We would like you to go around the table and give your thoughts and predictions for the remainder of 2002.

Selsam: I'm very loath to predict anything, but if we see continued strength in job creation. I don't necessarily mean six gangbuster months in a row, but positive trend in job growth, we will see stabilization in NYC and an upturn in commercial real estate in Manhattan.

Macklowe: I am going to almost parrot what Robert said. I think it is all about a consumer-driven economy when you look at retail sales and how it improves the economy as a whole. We have to have sustained job growth, because it is only that sustained job growth that starts to back fill the sublease sector and take that kind of negative pricing pressure off direct space. Other than that, no predictions for me.

Ziff: Back to the capital markets, that is all I really know. As long as the commercial mortgage backed securities markets hold up I think we will continue to have a strong market for buying and selling real estate with prices holding. That is the armor that is important that we have today that we didn't have in the early 90s when we had liquidity problems. So, my view is as long as the CMBS market holds where it is most people in real estate should be okay. And I think that that will be true for the foreseeable future.

Herzka: I'm from Brooklyn and we have palm readers and fortunetellers on every block. I'm not going to predict. I think that there are so many things that can happen on the positive side and so many on the negative side. Last year if we sat around this table who would of thought of Sept. 11? God forbid there is another terrorist attack on New York, New York would be in trouble. If we find Osama tomorrow everything would be great. So there are a lot of things happening in that world. Simon is right. If the stock market keeps on getting hurt and then the capital markets for trading CMBS's starts struggling that becomes an issue. All in all if everything just stays status quo and if rents stay low I'm amazed at how the mood changes everyday. If the market is up 100 points, everyone is in a great mood; if the market is down for three days everyone is down. It is the same thing in real estate. If you have two major Enron stories come out and you have some vacant blocks, everyone is down and it affects interest rat es and spreads and all the other things. As long as everything stays status quo I think we will have a decent six months.

Fiedler: The capital markets are driven by the source of capital, which are basically the pension funds. Even the CMBS market has most of its capital being derived from pension funds or insurance companies. Now these are just people who are running this money. If they feel negative with respect to real estate, those portions of the capital market will become a lot more conservative. So, I don't think that we can rely upon the fact that if the capital market holds up, then real estate will hold up. I do have this nagging feeling that we are in a market that suffers after the fact, after the recession is finished, after the people are back at work. Then I think the companies look back and say 'I really lost a ton of money last year' and I can't do this or I can't do that. Traditionally real estate has been a trailing indicator. After the recession it starts to get hurt. Before the recession, somehow it is bullet proof. It is my opinion that we probably haven't seen the worst of it yet. We may see a reduction in demand going forward, both in the office building market, definitively in the apartment rental market. Certainly the bubble will have to burst eventually in the Condominium and for sale market. Why pay more than replacement costs? Someone is going to build a brand new building next door and offer it to you for a lot less money than you paid for yours.

Macklowe: We are going to get you a wreath of garlic.

Fiedler: Well, that is the role of the developer, he has got to be an optimistic or he wouldn't be sitting at the table. I fortunately stopped developing a long time ago because I was getting ulcers.

Macklowe: When I started the year I was actually three inches taller.

Fiedler: Thank you very much for having us all here.

Real Estate Weekly: Thank you for coming.

RELATED ARTICLE: The Players

Lawrence Fiedler, adjunct professor, New York University

Ralph Herzka, president, Meridian Capital Group LLC 

William Macklowe, president, Macklowe Properties

Robert Selsam, senior vice president Boston Properties

Simon Ziff, president, The Ackman-Ziff Real Estate Group LLC