Snap up the last few deals or head for New Jersey.

Lord Abbott's recent decision to risk losing 8 percent of its employees by consummating a move into 150,000 square feet at 90 Hudson Street at Colgate Corporate Center in Jersey City, NJ speaks volumes about the current state of the Downtown rental market.

Faced with the choice of premium space at big bucks or staff attrition, Lord Abbott passed on the few remaining Downtown opportunities and skipped over to New Jersey. Downtown is getting tight as a drum, and those who don't snap up the few final prized parcels of large-scale Class A space may very well find themselves following in Lord Abbot's footsteps to New Jersey or commuting to Long Island.

How tight is tight? We started 1997 with a 19 percent vacancy rate. By the beginning of June this year, vacancy fell by over 10 percent. That's an 8.5 percent drop in vacancy in only 18 months.

In just the last few weeks alone, American Express and CNA each took 200,000 square feet in 40 Wall Street, and Goldman Sachs back-filled the space CNA left at 180 Maiden Lane. The other sizeable deals responsible for the market's performance include: The Bank of New York, totaling 290,000 square feet at 100 Church Street; Countrywide Insurance, 80,000 square feet at 40 Wall Street; Marsh & McClennan, 361,000 square feet at I World Trade Center; IBJ Schroeder, 236,000 square feet at One State Street; and Empire Blue Cross and Blue Shield, taking 360,000 square feet, also at 1 World Trade Center.

At this writing, only a handful of prized, large-scale, Class A opportunities are to be found Downtown. These include opportunities at 140 Broadway, 1 Liberty Plaza and the World Trade Center. Although there are also some large-block alternates at 100 Broadway, 25 Broadway, 2 Broadway and 40 Wall Street, these are simply not the same caliber of space.

According to our market research, average asking rental rates have increased by nearly 10 percent in the last 18 months. In some buildings, they are up over 30 percent, and, by 1999 we expect to see $50 per square foot (PSF) rents as part of 10-year transactions. 140 Broadway, recently purchased by Silverstein Properties, is already asking over $40 PSF in this steel and glass tower, with $5 PSF increases after five-year periods on 10- and 15-year transactions. It's not a really big jump to $50. Other notable buildings with similar asking rents include, 180 Maiden Lane, and 1 Liberty Plaza.

Fueling the future of the market are "Downtown" requirements for nearly 3.5 million square feet. These include the MTA looking for 500,000 square feet; CIBC Oppenheimer seeking 1 million square feet; and both Reliance Insurance and Barclay's Bank, each requiting 400,000 square feet. Also in the market are NatWest Capital, needing 300,000 square feet; Milbank Tweed, needing 250,000 square feet; and FDIC requiring 100,000 square feet.

Although the numbers may not be as dramatic in less recognized properties Downtown, the rental pressure is definitely on an upward trend. Rents at 50 Broadway have increased by $7 PSF over the last 12 months. Occupancy is currently 80 percent. At 2 Rector Street, the story is similar. Occupancy is now 90 percent, and rents have increased by 35 percent. CB Richard Ellis is exclusive leasing agent for both properties.

Tenant work-letters and concessions are also going, going, gone. Today, a typical work letter on a 10-year lease might be valued at $35 PSF, as opposed to as high as $55 PSF 18 months ago. Similarly, a 10-year lease might include 4 to 6 months free rent, as opposed to 12 to 18 months a year ago.

Another indication of the market's strength is both the pace at which buildings are changing ownership and the negotiations surrounding the deals. An increasing number of Downtown owners who purchased properties within the last 12 to 18 months are beginning to cash out. For example, Taconic Investors hired CB Richard Ellis to re-sell 30 Wall Street after owning it for less than two years. Another example is Greystone Properties, which flipped 67 Broad, 39 Broadway and 19 Rector Street within several months of purchase for a significant profit. There's a similar success story behind Witkoff's sale of 100 Wall Street to Tower Realty. The deals are also getting tighter. There's a lot less maneuvering room for buyers to come in and re-trade a deal. It's becoming an "as is, take it or leave it" condition of sale.

In New York City, REITs are replacing families as the new New York City real estate dynasties. Over the next five years, I wouldn't be surprised if nearly half of all New York City Class A and B office product is owned by REITs. At the same time, this trend will also have a self-limiting effect on the number of REITs which will be formed. Before the end of the year, we're going to see that a number of the proposed New York City REITs currently preparing to go public will not make it to the market. The capital markets raise the bar on financial performance, and if a REIT can't perform to that standard, the financial community will not support it. Rather than creating a new REIT, investors - realizing the benefits inherent in merging management teams will instead end up selling the portfolio in whole or in parts to a stronger and better-positioned candidate.