New York's big guns take aim at the market.

Peter Riguardi, NY president of Jones Lang LaSalle, Dean Shapiro executive managing director of NYC brokerage, CBRE, Bruce Mosler, president and CEO Cushman & Wakefield, and Barry Gosin, vice chairman and CEO of Newmark, share their thoughts on the industry's performance during the third quarter ...

Q. Consolidation seems to be the watch word of the industry today. How much have the mergers and acquisitions of the past year changed the landscape and what is driving the trend. Can we expect any major M&A's in the fourth quarter?

Mosler: I have been saying for several years that consolidation was an inevitable trend in our industry and I'm sure you will see that trend continue in the near future, if not, perhaps, during the remainder of this year. We feel strongly that Cushman & Wakefield's acquisition of its 12-year partner in Canada, Royal LePage, will be the deal of the year when all is said and done. It has enormous impact in the North American market as it unites the highest per-broker producers in the United States and Canada and should dominate the industrial real estate market.

Likewise, earlier this year we were proud to acquire another long-time partner, this one in Russia, to create Cushman & Wakefield Stiles & Riabokobylko. That acquisition brought the largest and most prestigious real estate firm in that vast nation into our firm. Other recent M&A's in our industry all have in common a desire to build a truly global real estate services platform for clients, including acquiring the services required by multinationals for their multiple needs. While C&W isn't looking to acquire any company for geographic coverage reasons in the near future, we are looking at adding some service lines within the U.S.

Shapiro: The industry is adapting to the needs of clients today. And what clients need is a wide variety of services over an expansive landscape to keep track with the globalization of their own businesses. To adapt to increasing globalization, real estate companies are looking to develop a wider scope and depth of services and consistency across the spectrum. We expect that trend to continue.

Gosin: The tenants in the buildings and the owners of those building continue to become more global in their reach. To properly service the clients, our industry has to offer services that also have a global reach. This is a major force behind the M&A and partnering that is occurring in our industry. But it is not bigness for the sake of size.

Rather, an acquisition or a partnering has to further the company's ability to reach and service its client in more markets and with a more powerful understanding of the markets and products. So, there likely will be more restructuring in the industry, but it is becoming increasingly more difficult to do a merger or partnering that does enhance the capabilities of the firm to improve its service capabilities.

Riguardi: The real estate service industry continues to mature, and change and address the needs of our client base. This client base expects us to be able to serve their needs globally and, at the same time, they demand strong local market leadership. These demands by corporate users and owners force the leading real estate service firms to evaluate how to grow geographically and gain local market share. Sometimes acquisition or merger becomes the best alternative to grow a business. Whether a merger occurs between now and the end of the year, I could not say. I would be not at all surprised to see further consolidation in the commercial real estate sector in the next 12 months.

Q. What impact are hurricanes Katrina and Rita and the resultant increase in fuel prices having on the market and will it be enough to cause any regression?

Mosler: Despite the devastation Katrina and Rita wrought in the Gulf Coast region, the national economic impact in the short-term has been far less than feared. However, the disruption to oil and gas refining is likely to have a strong impact on gas and oil heating prices this winter throughout the country. It remains to be seen how those increases will affect landlords and tenants in the commercial real estate sector, but it's safe to say there will an impact on rents and how tenants assess their space needs. Overall, though, with moderate job growth, companies are seeing increasing profits and that will drive employment, which in turn will drive a healthy and gradually improving real estate industry.

Shapiro: There's no direct correlation between fuel prices and the demand for real estate. But if fuel prices create a tremor in the economy, such that we're beginning to see in the consumer confidence numbers, then it can have an effect. That said, we see continued strong demand, at least as it pertains to the markets we cover.

Gosin: Katrina and Rita are having two major impacts. First, by interrupting the supply of energy and pushing prices higher, the threat of inflation has increased. The Federal Reserve is concerned about this and will keep steady upward pressure on short-term interest rates. Also, longer term interest rates will move upward. These higher interest rates put a cap on the upward escalation in real estate property values. That is, cap rates will tend to stop declining.

The need to rebuild and improve the infrastructure along the Gulf Coast and in other parts of the U.S. will also put some upward pressure on long-term interest rates. Again, this implies that cap rates declines are likely to stop as competing uses for capital increase.

Riguardi: The horrific events of Hurricanes Katrina and Rita have again stimulated corporate America's view on business continuity planning and making sure their facilities are prepared for short- and long-term closures.

The increase in the cost of fuel obviously has a direct relationship to the operating expense of office buildings, and needs to be managed correctly and be properly budgeted for by office owners and users of space. Additionally, we have seen an urbanization movement and growth of cities in the United States during the past few years. We have seen tremendous regentrification and growth in major cities. It will be interesting to see if a continuation of an increase in the price and fuel would lead to companies selecting real estate solutions in inner cities, where they can take advantage of public transportation, as opposed to suburban markets which often require people driving to work.

Q: Some CEOs are said to be hesitant to commit to long-term leases yet there have been reports that demand for huge chunks of space, particularly in midtown, is on the rise. What do you see occurring?

Mosler: We see Midtown virtually at equilibrium with demand still solid for the few large blocks of space still available. In general, both nationally and in Manhattan, positive absorption is occurring. In part, this is because most major CBDs are close to equilibrium, and also, despite what can only be described as slow to modest job growth.

Last year, we had 30 million square feet leased in Manhattan, which far exceeded some of the truly great years. Year-to-date leasing in New York, through August, measured 17.1 square feet, off from 18.7 million square feet for the same period last year. We seem to be more in line to have a year closer to 22-24 million square feet of leased, which put us close to historically some of the best years, but not quite as good as 2004. Overall average asking rents have escalated up to $42.50 per square foot, up from $40.66 at the end of August 2004. Again, this is in spite of modest job growth.

We believe that the outlook for asking rents, as well as net effective rents, is that they should continue to rise for the remainder of the year. The other great indicator of our real estate economy looks promising as the financial services sector is poised to sign some very significant leases around the city, and it appears also as though there may be significant new hires made in this arena as well. Once again, financial services will lead the way, and this is good news. Financial services typically accounts for 40% of all leasing activity in the city. Bottom line, New York again leads the way for the nation in absorption.

Shapiro: Everybody sees the economy differently, and all CEOs are different, both in terms of their outlook on the economy and their business. So we don't see a broad trend one way or another. Generally, as it pertains to large chunks of space where there are significant capital costs that have to be amortized over longer periods of time, people have no choice but to go in for the long haul. Nobody's taking 200,000 sq. ft. on a five-year basis. It's just not the nature of things. As it pertains to large deals, regardless of concerns about the economy, people are still committing long term.

Gosin: In the Mid-town market we still have close to 20 million sf of available space. There are currently 25 blocks of space with 100,000 sf being marketed. In addition, over the next two years almost 10% of the leases in Class A building will come up for renewal. About 4 million sf of space will be added to the Mid-town market over the next two years. So while we are constructive on the Mid-town economy and the demand for space, it is also the case that there is enough space available in the market to make it a very competitive leasing environment.

Riguardi: Most CEOs, COOs and CREs would prefer having the most flexibility they could within their office lease portfolio. In most instances, a shorter lease term affords a corporation more flexibility than a long-term lease. But, supply and demand is the ultimate decision maker on whether a company can get a short- or long-term lease. For example, the Midtown Manhattan Class A office market is landlord oriented at this time. Landlords prefer locking in a tenant with good credit on a long-term basis. With an ample supply of tenants in the market, landlords will get their way and push for the long-term lease.

In Lower Manhattan, the market is tenant oriented. To generate velocity, and with the hope that the market would be better in the future, landlords will accept shorter-term lease and hope the market will have improved when these leases expire.

Q. Is the leasing of 7 WTC a barometer for downtown's fortunes and would a major lease signing there be a cure to the current slow pace? Does midtown have to overflow before 7 WTC will see any significant activity?

Mosler: There is no doubt that 7 WTC is a major barometer for the downtown office market and we are beginning to see leases signed there, with larger deals expected by early next year, when the building actually opens. However, it is only one indicator of the growing strength of downtown, which will also be given a boost by the announced improvements to mass transit and a east-west Fulton Street retail corridor that is beginning to pick up steam and will go a long way to creating the 24/7 community needed in the area. Midtown doesn't have to overflow for more business to move downtown, as the $17 per square foot price disparity is already making companies sit up and take notice of the economic opportunities involved in making a move downtown.

Shapiro: So far this fall, we're certainly seeing strong interest in 7 WTC but also in Downtown in general. A major lease signing in a market like Downtown, has the potential of building momentum. Goldman's announcement of its Downtown headquarters plans was an important endorsement and created momentum as did the new incentives for 7 WTC put in place by the state. Any further endorsements by a major tenant, especially coupled with a dramatic run-up in the Midtown market, would further hasten the inevitable improvement of the Downtown market.

Midtown doesn't have to overflow before 7 WTC will see significant activity. There's still an economic incentive to go Downtown to a world-class building with strategic value.

Gosin: First of all, the Downtown market is doing better. The availability rate is down to 14.8%. Some major institutions have taken space off the sublet markets and some direct leasing has developed. Second, while there is some commonality in the types of tenants in the two markets, there are also some differences. More bond issuance, for example, will increase the demand from the rating agencies for space. This will help the Downtown market.

7 WTC will be something of a signature building; both in terms of what it means for the recovery of the City but also in terms of the quality of the building. Leasing space in that property will signify a major commitment by the tenant to New York City and the Downtown market. Clearly, the tenants in that building will have a high profile and as a result will have to have decided that they are committed to this market for a long time. To that extent, there is a lot of symbolism associated with 7 WTC and the tenants that take space in it.

7 WTC will be an indicator, if, in fact, coupled with its renting, we see overall Manhattan job growth in financial and professional and business services sectors.

Riguardi: Yes and no. While, 7 World Trade Center is certainly a barometer of the Downtown market, the success and/or failure of any endeavor is often determined by psychological factors. The business community is certainly looking for a leader to make a commitment to Lower Manhattan. And, a major tenant commitment at 7 WTC would make an impact on the Lower Manhattan market. This would attract positive media attention and would create energy in the Downtown market.

That being said, there are still other challenges for the real estate market Downtown that one major lease by itself would not solve. With the rental gap between Midtown and Downtown at the highest level in my 22 years in the industry, I do believe this does make it more likely that a Midtown tenant will make a commitment Downtown.

But, the real flow of Midtown tenants to Downtown will occur not because of a pricing advantage in Downtown alone, but when the infrastructure, amenities and lifestyle of Lower Manhattan undergo the paradigm change that is expected. Then, Lower Manhattan will truly be an alternative of choice, and the Downtown real estate market will boom.

Q. With investment sales at an all-time high and rents improving across the board, when will cap rates start to climb and what will be the primary factor behind it? What can we expect the next quarter to bring?

Mosler: Even with cap rates coming down and interest rates going up, we see a strong continued flow of capital into the New York investment sales market. Manhattan, which is the top CBD market for investment sales, has already surpassed last year's total number of dollars invested, standing at $19 billion year-to-date in sales or under contract versus $15.1 billion for all of last year, which was, of course, a record year. The previous high was 2001 when $12 billion sold (primarily due to two significant sales--The World Trade Center and Rockefeller Center--$5 billion combined). It should be noted, that the sale of 200 Park Avenue, the Metropolitan Life building, accounts for $1.72 billion of the $19 billion sold so far this year. This is also the largest ever single asset sale in US history and fortunately C&W sold this asset on behalf of Met Life.

Shapiro: We don't expect any changes in cap rates in the near term. The pipeline of quality commercial investment product is light while investor demand remains strong. I think that will continue.

Gosin: Given the flow of capital into the real estate investment market, cap rates are likely to remain at current levels over the next few quarters. However, because of the forces outlined above, some modest increase in cap rates will begin in 2006, likely in the latter half of the year.

Riguardi: Great question. If I had the answer for this, I would probably be working in the White House right now. There is a high probability we will get into an inflationary period over the next couple of years. This will lead to an increase in interest rates. Investors are becoming concerned about inflation and higher interest rates. I believe we are starting to see this already in the residential market.

It appears that next quarter will not be much different than the current quarter. But, as inflation sets in and interest rates go higher, this could have a negative impact on the commercial real estate investment market in the third and fourth quarters of 2006.

BRUCE MOSLER,

president & CEO,

Cushman & Wakefield

BARRY GOSIN,

vice chairman & CEO,

Newmark

DEAN SHAPIRO,

executive managing director,

CBRE-NY

PETER RIGUARDI,

NY president,

Jones Lang LaSalle