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Will 1993 finally bring recovery.

For 1993 we are predicting a slow but methodical uptick in activity, particularly in Midtown, as the local office market recovers, aided by a better economy, While we expect little positive absorption, we do expect to see an acceleration of "trading up" -- tenants formerly in Class B and C buildings signing leases in Class A buildings. It will be Class A buildings in Midtown with stable ownership, the best locations, attractive architecture and superior services and amenities what we call "premier" buildings -- where the recovery will first be manifested.

Lagging behind will be Class A buildings with various deficiencies in ownership or physical plant, while Class B and C buildings will take the longest to recover. Some of these buildings, particularly Downtown, are technologically obsolete and will never recover without extraordinary renovation or conversion to another use.

Here are indicators to watch in 1993 to gauge the recovery:

* Net Effective Rents. Net effective rents -- rental income to the owner after deducting real estate taxes, operating expenses, commissions, amortization of free rent and workletters -- have deteriorated to nearly zero in some Midtown, and many Downtown, lease transactions

Following the pattern in cities like Dallas, Denver and Houston, which entered the down cycle earlier than New York, we will first see a change in the mis of elements in the net effective rent equation. With an increase in instituional ownership (i.e., banks, insurance companies, pension funds), upfront concessions -- free rent and workletters

-- will begin to tighten. On the flip side, we will see stable or even lower rents. Net effective rents will then begin to improve slowly with premier buildings achieving higher contract rents. *Absorption. We expect it will be 1994 before we see significant positive absorption for the New York City market -- but watch specific submarkets and specific buildings lead the recovery

* Watershed Events. Watch for big leases, firms moving in or out of the City, bankruptcies. While the substantive impact of these events may be small, they often create a significant psychological impact. Certainly, the well-publicized financial distress of Olympia & York in 1992 had an impact which extended beyond its effect on the local market.

Remember, too, that positive "surprises' can have an equally amplified impact, but they are rarely publicized.
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Title Annotation:Review & Forecast, Section III; prediction for New York, New York real estate market
Author:Swerdlow, Steven A.
Publication:Real Estate Weekly
Date:Jan 27, 1993
Previous Article:Residential roundup and predictions for '93.
Next Article:1993 to be a turning point for real estate.

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