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RE market readjustment to begin in '93.

After a three-year downward adjustment, the New York City real estate market has bottomed out.

But, the move back up will be uneven. For example, we could begin to see new office construction in two to three years in the best mid-town locations -- the Plaza District, Rockefeller Center, Madison Avenue.

In contrast, a far different situation exists downtown. The probability is that we will not see any new office construction in lower Manhattan for a number of years.

Sales of downtown office buildings that took place in the past year or two reflect the current softness in the market. Several pre-war downtown office buildings, that had sold for $100 a square foot in the mid-80s, sold for less than $50 a square foot in 1992.

Office buildings in Midtown-South and office loft buildings in the garment district also were selling for well below the prices of the '80s. Buildings in these areas were being sold at levels that ranged from $60 to $80 a square foot last year.

But, as always, location played a major role in determining the market price. Well-located, premier buildings that are well managed, fully occupied or with few vacancies -- and a good tenant mix have generally retained their value. Here, again, we are referring to prime buildings in the Plaza District and Rockefeller Center.

The lower building prices we have seen in the past 12 to 18 months may not be with us for long. As the office market strengthens in mid-town, and occupancy rates improve, it is expected that prices will begin to climb.

The Midtown market could be further strengthened by the activity of users seeking a presence in the area and willing to pay higher prices for outstanding locations. Takashimia, for example, purchased a choice property on Fifth Avenue. We can expect to see other users purchasing and recycling' older buildings in prime locations.

For investors, however, there may well be a continued emphasis on real estate investments that generate immediate returns equal to any other investment.

In the past year we found investors focusing on the first year rate of return. They were no longer influenced by estimates of what income the building would generate in five six or seven years based on a certain set of assumptions.

Instead, during 1992, we witnessed sales of smaller apartment buildings where the true rate of return approached 10 percent in the first year. Large apartment buildings were selling at prices that realized an initial return of seven to nine percent.

The outcome of this investment policy has been a drop in building values over the past four or five years. Building prices in certain categories have dropped 20 to 40 percent.
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Title Annotation:Review & Forecast, Section II; real estate market expected to improve in 1990s
Author:Von Ancken, Robert
Publication:Real Estate Weekly
Date:Jan 27, 1993
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