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Some warning signs on road ahead.

If 2000 is anything like 1999, the New York real estate market is in great shape. 81,000 jobs were created this past year. The growth in the job market gave rise to an overall decade low commercial vacancy rate of 8.2 percent and a historically strong residential market in Manhattan. New York City gained a total of 335,000 positions since 1993, and its robust economy now accounts for employment of some 3.6 million people, more than any other time in the past three decades. The city grew economically an unprecedented 5.9 percent, the best annual rate of growth in a decade.

On a macro level, according to the Bureau of Labor Statistics, in the next decade the economy will add 20.3 million jobs, with most gains in the employment being felt in the service sector and more specifically with technology companies. Conjecture is that the manufacturing sector will become increasingly less significant in the overall economy, as market forces create production overseas. Statistics indicate that construction jobs will offset manufacturing. These changes are already visible in the local New York economy and are expected to be witnessed further in the coming decade.

In 1999, both the demand and supply curve were increasingly distorted, "with demand for large office space and parcels of property for residential and commercial development becoming increasingly scarce. As one example, according to the Real Estate Board of New York, the residential market pricing for Manhattan condos reached $424 per square foot in the pre-war building market, up nearly 30 percent from last year (quarter ending July 1999 to the previous year). The post-war market saw an increase of 17 percent, creating a median number of $407 per square foot during the same time period. The market numbers are not yet tabulated for the last two quarters, but real estate professionals believe the market, despite the potential Federal Reserve Board increase in the federal funds rate in the coming months, will see no change in the euphoria and pricing of residential sales and rentals.

Commercial real estate tells a similar story. According to Colliers ABR, Internet and computer companies signed 52 leases in Manhattan totaling 1.3 million square feet from January through the end of July 1999. It is these companies that seem to have more and more equity available for both residential and commercial real estate, and are becoming consumers and a catalyst in the historical low vacancy factor being felt by both sectors.

Real estate professionals should be cautious not to overreact too much to what may be temporary events. Now is not the time to throw out the fundamentals when we analyze real estate deals, either for acquisition or for lending. In fact, some sobering statistics about the new age we live in as it relates to the equity market should be considered. Two noted authors, Michael and Anthony Perkins, created a market basket of Internet stocks, as of June 11, 1999, based upon 13 publicly traded Internet companies with equity caps of $100 million or greater. Without going through the entire arithmetic models, the relevance of the data is an awareness of the growth the companies will need to generate for the next five years in order to validate the current stock valuation in today's real dollars. The aforementioned "market basket" companies will need to grow by 80 percent for the next five years. To put this into perspective, for the first 5 years after their IPOs, Microsoft achieved 53 percent revenue growth per year and Dell Computers 66 percent. The model easily illustrates why it's more logical to assume a 50 to 60 percent growth rate.

In the new millennium, I think that real estate professionals have to be careful in understanding this potential overheated economy we are now in. The above model points to significant growth that is expected for Internet companies, however that growth is 25 to 30 percent lower than what companies are trading for in today's equity market.

There is no question that the changing "idea and service economy" will continue to have a significant impact on residential and commercial space users, however, perspective and understanding is key. Let's all not get too overwhelmed by the strength of the economy and real estate, and realize that analysis is important to ascertain just decision-making processes.

NY Senator Chuck Schumer and former Secretary of Treasury Robert Rubin have set up a Blue Ribbon Committee to begin assessing the needs of this new economy and its increasing appetite for commercial space in New York. It will be interesting to see the results that are expected to be published in the second quarter of this year. An obvious conclusion is that the Manhattan real estate market is incredibly strong.

RAK Group, as owners of 3.2 million square feet and as a full service real estate company specializing in investment sales, leasing, asset and project management, looks optimistically to the next year in real estate in creating an exciting new Millennium.
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Author:Freud, Marc J.
Publication:Real Estate Weekly
Geographic Code:1U2NY
Date:Jan 26, 2000
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