Must it be seven years of feast and seven of famine?

In the euphoria of the ever-rising real estate market, many people are beginning to lose sight of the fact that it is now time to be careful. Like all cyclical businesses, there are times of great opportunities and periods of even greater risks.

Over the last 40 years, the New York real estate market has behaved somewhat like the old Biblical quotation in that it has many factors similar to the annual harvest of the crops.

Office and retail space is a relatively inflexible commodity, which constantly has to exist in a supply and demand equation. Over time, demand has proven to be a far more flexible item than the supply of bricks and mortar.

New York has experienced a boom in demand from all sectors in the great economic expansion of the past decade. All existing industries have prospered and added to this is the unparalleled introduction of new media and Internet businesses. The real estate industry has worked inventively to create new space in areas never before considered for modem office facilities, as well as new retail developments in areas heretofore considered marginal.

Having been a part of the New York real estate scene during all this time, I believe that there has been a fundamental growth in [the, size of the city's economy that will not be relinquished. However, the demand side of the business is cyclical, and at some point there will be a need for business cutbacks and the disposal of space by firms that can no longer afford the large amount of office space that they have under lease. This sudden supply of sublease space has always been the force that starts a downturn in our real estate market.

Leone J. Peters of Cushman & Wakefield decades ago gave basic training to all his young brokers and salespeople: "A hot market is two spaces and three tenants and a cold market is just the opposite."

In the early 1960's, a pending change in the zoning law caused a rush to bring new supply to the market that a soft business environment could not absorb. In the mid 1970's likewise, a glut of new buildings hit the market as business demand weakened, causing difficulty for many builders and foreclosure for a few. During the early 1980's, a booming real estate market was caused largely by the failure to add any new class "A" supply for many years. Then the sudden production of a large new office space supply and a new federal tax code led to the worst debacle in real estate in New York that most of us can remember, causing a massive collapse of the stability of the industry through the early 1990's.

While it now appears to be the seventh year since the nadir of commercial market rates and leasing conditions, there appears to be nothing on the horizon to indicate an imminent collapse. Business is still strong in New York and the addition of new inventory is difficult, thus still trailing demand. In 1993, there was a 17% vacancy rate in the nation's largest office space market. Today, there is an immediate unfilled demand for several million sf with rates over $50 per sf.

Nonetheless, it is a commodity business where value is affected by only three factors: supply, demand, and the cost of funds to investors. There are strategies to lessen the effect of the commodity cycle and these should be employed now, at the top of a boom cycle -- not after things start to turn down. Whether this cycle is longer, the next let-down less severe, or the following recovery takes us still higher, no one can avoid the swings inherent in investing or renting in this most valuable real estate market of the world.

I believe we have come to the latter stages of a cycle where everyone must now be extraordinarily careful with new investments or lease commitments. The opportunities where you can do no wrong in an investment or lease commitment come early in each cyclical recovery, now several years past.

The possibility of mistakes can be mitigated, if not entirely avoided, in this market by hedging and. strategic planning -- similar to what suppliers and users employ in any commodity market. Developing a strategic plan and having an outside expert provide his alternative advice to the sales pressures of the market is a must, allowing for critical protection at this time.