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Market recovery a fact, not cry of wolf.

Real estate brokers have long been considered New York's eternal optimists. We seem to predict imminent turnarounds when the market is in decline and endlessly spiraling rents during a boom.

That said, 1 recognize that I'm going to have to rely on cold, hard numbers (and three decades of experience) to prove this fact: The real estate market in midtown Manhattan is already on the rebound.

The easiest way to prove this is by examining the net effective rents tenants pay. This rate -- rather than the nebulous "asking rents most people track-is harder to factor, but provides a much more accurate view of the market. More than just the monthly rent payment, net effective rental includes all of the quasi-business points that are a material part of a lease, from rent concessions to landlord's work contribution, to escalation clauses, electric formulas and the rest.

Taking a look at these numbers, I can safely say that when people predict a bottom of the market for midtown Manhattan in the near future they'll have missed it; it is here right now.

This becomes clear when you examine the situation in Midtown's Class A properties. These buildings, featuring ideal locations such as the Sixth Avenue corridor and Rockefeller Center complex of properties, also boast Class A reputations, style, service and prestige. They will soon be privileged to print "No Vacancy" signs on the facades of the buildings. These top of the line properties, along with Second-Tier Class A buildings such as 1114 Avenue of the Americas, 51 West 52nd Street and 666 Fifth Avenue, will be fully leased by the end of the year.

Rockefeller Center itself, indeed a most prestigious, world renowned location, has also experienced an abundant amount of activity as of late. With the consummation of a number of deals by the end of the year and with many more on the table, availabilities and opportunities in this location will taper off.

This recent drop in vacancy rates has caused an increase in the net effective rental numbers Class A properties achieve.

I'm not saying that opportunities for tenants in the market today have disappeared completely or even diminished dramatically. Clearly, there are many options for tenants of just about every size who want to make a deal in Midtown today. But, the reality of the market is that those tenants will not be able to achieve the same net -- bottom line-effective numbers he or she heard about from their friends on the train each morning.

Let's talk numbers. To set the scenario, let's examine a "rational" deal for space in a Class A building. The tenant is a credit-worthy corporate user with a requirement for 30,000 square feet. In a deal of this size, rents should average from a low of $33 per square foot to a high of $39 per square foot over a 15-year lease term.

As you can see, the simple rent numbers have not yet felt the turnaround. The difference is in the net effective rent number.

The net effective rental, which is significantly lower than the simple rent number, is achieved by adding in the value of the landlord's contributions to the deal (free rent, work letter package, etc.). This is where the tenant will feel the change in the market.

When vacancy rates spiralled and corporations downsized, landlords struggled to give their space away-even Class A space. The lenders, aware of this new reality, either helped the landlord to retinanee the property and read just the "bottom line" rent or became the landlord itself.

Now that vacancies are waning and a great number of businesses are once again considering expansion or upgrading (to use the now infamous Flight to Quality phrase), landlords find they can make deals at the attractive low market rates -- but dramatically reduce the magnitude of the concession packages they offer. This subtle shift in the market, difficult to detect based on rent payments, will definitely have an impact on every new Midtown deal.

The start of a turnaround in the market does not signal immediate bad news for Midtown tenants. Even though the market is tightening, market rents remain at their lowest point since the boom years of the mid-to-late 1980's and opportunities at some of Manhattan's finest business addresses are still available. The one change is that net effective rental rates are definitely on the rise as years of free rent and huge landlord work letters become relics of the early 1990's.

In other words, tenants with leasing requirements over the next three years should really act now to take advantage of today's market before this opportunity surely dwindles slowly away.

They haven't missed the boat altogether -- but if they don't act quickly they will not occupy the penthouse suite on the QE2 at the rate one could pay for a junior suite without a window.
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Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Mid-Year Review & Forecast, Section III; New York, New York real estate market evaluation
Author:Lerner, Arthur H.
Publication:Real Estate Weekly
Article Type:Column
Date:Jun 23, 1993
Previous Article:Income property assessments may still be too high.
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