The worst is over, but it's a long road back.

The good news is that the worst is over. The bad news is that it will be a long, slow climb back up from the bottom of this real estate cycle.

With regard to new development, it is our opinion that there will be little or no construction of projects that are not significantly pre-leased or of a build-to-suit nature. Until supply and demand reach equilibrium, there is no chance of real rents rising to a level which will justify the cost of new construction. This lack of new construction will result in the eventual correction of current supply conditions.

This fact pattern presents a significant opportunity. As real rents rise over the next three to five years, there will be significant price appreciation of income-producing real estate assets.

1993 saw a tremendous increase in sales activity as the yields available on real estate investments have begun to attract entrepreneurial capital from around the world. This trend was aided by the rapid recovery of bank earnings, which has enabled many lending institutions to better absorb the write-offs necessary to be able to sell property at current market prices.

1994 will see a continued acceleration of institutions selling foreclosed real estate. Therefore, we believe that there will be significant acquisition opportunities for those buyers who have the skills to turn around distressed real estate. As a result, National Realty & Development Corp. will be an active buyer of strip shopping centers, retail land and non-performing retail loans during 1994.

One of the major changes which became evident during 1993 was the return to the lending market of many regional banks and life insurance companies attracted by record spreads on real loans. The liquidity crisis appears to be over, and we believe that during 1994 lenders will be forced by competition to reduce spreads and relax conservative underwriting criteria. However, non-recourse loans will never be the same. "Carve-outs" from non-recourse have expanded dramatically, and all borrowers need to be aware of their increased personal liabilities.

In addition to acquiring retail properties, we will continue to develop sites and build new strip shopping centers for clients such as Wal-Mart, KMart and Caldor, as these retailers battle for the northeast market.

Our other development activity is the construction of single family houses in a development known as Orchard Crest in Wall Township, New Jersey. This is an award winning 206 unit sub-division where we built and sold 50 houses in 1993 and we expect to double our activity during 1994. The demand for detached single family homes is being driven by many factors, including the lowest mortgage rates in approximately 30 years. However, we expect profit margins to narrow as suppliers of commodities to the home building industry have begun to raise prices due to increasing demand.

The major unknown variable affecting our industry remains job creation. The anemic recovery to date, along with technological changes in the workplace, resulted in little or no job creation in many markets. Without an improvement in the national economy resulting in an expansion of the job base, there will be little improvement in demand for most types of real estate. Nevertheless, we are encouraged by the fact that the industry is entering 1994 in much better shape than it was in a year ago.

Jeffrey B. Mendell President National Realty Development Corp.