Recovery process to proceed in Big Apple.

Recovery has been a slow process for the New York City office market. But the past 18 months have provided mounting evidence of renewed market strength, a trend that we expect to continue in 1994.

In order to comprehend the magnitude of the recovery, it is helpful to understand the depths to which the market had fallen by the early 1990s. The residue of the 1980s construction boom and a feeble economy - New York City shed jobs at an average rate of more than 7,700 a month for four years - had created, in a relatively short period of time, a surfeit of commercial space unprecedented since the Great Depression.

In Midtown Manhattan, the amount of available office space doubled between 1988 and 1991. In the Downtown market, available space burgeoned by more than 60 percent in the same timeframe. Between the two business districts, some 52 million square feet was available - far exceeding the total inventory in most major U.S. cities.

In 1992, a rebound began to germinate in the Midtown market. Total leasing in this market rose by 37 percent, strong positive absorption was recorded and the availability rate eased, ending a five-year pattern of higher rates. Meanwhile, the Downtown market continued to be penalized by downsizing in the securities and financial services industry. Annual leasing activity shriveled to 3.4 million square feet in 1992 and newly available space continued to proliferate, pushing the Downtown availability rate above 22 percent for the first time.

Over the past year, we have seen the Midtown market build on the improvement that was started in 1992, and the Downtown market, characterized by significantly higher activity levels, show signs of bottoming out, although this market continued to be plagued by a prodigious over-supply of space.

Midtown Upswing Broadens

The Midtown recovery began first in prime locations, such as the Sixth/Rock Center corridor and Park Avenue, which led all other market segments in leasing activity during 1992. In 1993, demand in prime locations remained strong, but accelerated activity spread to other market segments. For example, total leasing climbed sharply in Penn/Garment (up 31 percent), Grand Central (up 29 percent) and the West Side (up 14 percent).

Overall, leasing in Midtown was up 4 percent to 12.9 million square feet (through November) in 1993. The two industries, which led the rise in leasing were financial services and law. The advertising industry also showed a notable increase over its activity in 1992.

The accelerated leasing activity produced a second consecutive year of positive absorption for the Midtown market. Indeed, since the market hit bottom in April 1992, a total of 4.2 million square feet of office space has been removed from the market due to growth in the tenant base.

The availability rate in Midtown is now at a three-year low (15.5 percent). We expect this rate to decline further in 1994, primarily because no new construction is planned and there are fewer existing units being offered for sublease.

While the Midtown market remains far from equilibrium, the declining availability rate has already emboldened property owners to firm up base rents and tighten concessions. This is most clearly evident in Class A buildings in prime locations, but is beginning to manifest with greater frequency in secondary market segments as well.

Demand Revives Downtown

Recovery has proven more elusive for the Downtown market. Prior to 1993, overall leasing activity has been depressed for two years. That trend was reversed in 1993, when leasing velocity surged by 43 percent over the year earlier.

Indeed, the 4.6 million square feet leased (through November) was the highest Downtown in three years. Particularly encouraging, major tenants, which had been largely absent from the Downtown market, returned in force during 1993. In the largest transaction in Downtown Manhattan in several years, Prudential Securities committed to lease more than one million square feet at One New York Plaza.

Three vital industries for Downtown - financial services, banks and insurance -all experienced significant increases in activity from 1992. Among the major companies that made commitments to Downtown were Prudential Securities, Bank of America and Rollins Hudig Hall.

Despite the surge in activity, the pace of leasing continued to be outstripped by the amount of space being put on the market - indicating that true recovery has yet to take hold Downtown. However, the market did make significant strides last year, and we believe the bottom may have been reached.

Negative absorption was cut from two million square feet in 1992 to 500,000 square feet last year (through November). Moreover, the two principal submarkets, Financial and World Trade/World Financial, showed slightly positive net absorption. (Together, these submarkets account for 70 percent of the total space Downtown.)

Indeed, the World Trade/World Financial Center segment has shrugged off the negative publicity stemming from last year's terrorist incident to become the firmest submarket in all of Manhattan, with an availability rate of 12.3 percent and rents that rival those in

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