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Surplus space must be absorbed.

There was a noticeable change for the better in the New York office market during the last two months of 1992, although I doubt a "real pick-up" is likely to be very imminent and believe it may be as much as two years away.

After the election, some of the uncertainty that had been in everyone's mind prior to November 3rd seemed to disappear. News about the economy brightened and activity in the market, which had been fairly strong all year, seemed to increase. During the two-month period new leases helped our overall vacancy rate decrease somewhat faster than the three-steps forward, two-steps backward mode of preceding months.

Among the new leases was one for a 11,300-square-foot tower unit comprising the entire 36th floor, which was rented by the accounting firm of Murphy, O'Connor & Company. By the end of the year, The Lincoln Building's occupancy rate was 88.6 percent in a market where the average vacancy was 20 percent.

Nonetheless, I consider the recent improvement a tentative one, not the long upturn everyone would like to see. I agree with the growing consensus that the office market has finally bottomed out, and that it is probably only a matter of time before there is a reasonably strong recovery. How much time is, of course, the question.

Timing the Recovery

Many people who have been holding back, waiting for signs that the market has bottomed out, are now looking around to see what kind of deals are out there, in

an effort to time the market's upturn. I believe we have to remember the huge amount of surplus space still overhanging the market and consider how long it will take to absorb enough of it for the market to make a sustained climb.

My estimate is that it could take two years, on the assumptions that the economy gradually improves and that within the period, a material reduction of the overhanging space available will begin to take place A faster rebound of the economy could certainty shorten the time. For the immediate future, I think the market will follow current patterns.

Deals will still be long in closing, long in negotiation. Companies will continue to take full advantage of the strong tenants market,, with its huge space excess, with which we'll still be dealing. The year-end improvement in the 1992 market, like the others that have occurred intermittently since the slump began, did not have much effect on the overall surplus. In fact, statistically we have been in a long period of "negative" space absorption, with square feet vacated consistently exceeding those leased.

One of the reasons the market improvement we've been experiencing can be considered tentative is that a key ingredient is lacking in current business conditions. Without it, a strong-limb in leasing can not be sustained. People's confidence in the security of their jobs and in their prospects for future employment was badly damaged in the recession and has not been restored.

Consequently, consumer confidence, a vital force for economic recovery for all sectors, including real estate, has been shaken. Positive signs that companies are hiring, not cutting back, are needed. Actual evidence, though, continues to be mixed. As two Long Island companies announce expansions, a corporate giant like IBM reveals plans for a 25,000-job reduction. Clear signals will be necessary before consumer confidence will be fully restored.

Moving Toward Recovery

When the market does move strongly toward recovery, demand will obviously accelerate the more as the surplus available space shrinks. Another factor influencing future demand will be the absence of new office construction in the 90's. Buildings which have opened in the last few years have been end products of the 80's, and no new office construction has been started in this decade, although many projects have been canceled, others postponed, and some developments for the future are being discussed.

Under the fastest scenario, therefore, we will be in the second half of the 90's before new office space comes on the market.

Consequently, owners and managers of existing office buildings now have an opportunity to prepare their buildings to take advantage of a unique market situation later in the decade, even as they struggle with the competitive complexities of the current market.

At The Lincoln Building, with eyes toward both present and future markets, we are continuing improvement programs. An extensive lobby renovation was recently completed. Now we are about to embark on a $500,000 renovation of Our main entrance on 42nd Street to strengthen our building's identity.

We are also preparing vacancies as they occur for immediate occupancy. We immediately paint, carpet and make any other cosmetic adjustments we deem necessary to make the space a very attractive place to work. All the prospective tenant has to do is rent the space and move in.
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Title Annotation:Review & Forecast, Section IV; office space available for lease
Author:Spielman, Charles H.
Publication:Real Estate Weekly
Date:Jan 27, 1993
Previous Article:Zund Realty reports leases.
Next Article:Office shift to suburbs continues.

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