So just where is New York's office market these days - peak or pop? In this surprising discussion, held over a recent breakfast at the Plaza Hotel in Manhattan, some of New York's top experts differed greatly on whether the office market is at its peak and overexposed to economic distress, or still has blue skies ahead.

NREI: Last year, our discussion on the state of the New York office market was decidedly upbeat. What is your overview of this market today?

Woody Heller: One is from the leasing fundamentals and the second is from the investment marketplace. Historically from a leasing perspective, the fundamentals of the market are as strong as I think they've ever been. Why? Because of the healthy economy. Last year, Manhattan gained 101,000 jobs, which exceeds the state of New Jersey, which gained 78,000. So that's sort of remarkable. But at the end of last year, Manhattan was still 10% below the level of private employment at the end of 1987, when we had the last stock market adjustment. Nevertheless, we've had tremendous private employment growth in recent years and that's been increasing exponentially.

As a result, net absorption has hit record levels in 1997 and 1998. In 1997 [absorption was at] roughly 6 million sq. ft. in both Midtown and Downtown, and in 1998 just slightly below those levels, but still, the highest two years that both Midtown and Downtown have ever seen. So there is tremendous new absorption and with the virtual absence of any new construction with the exception of the four buildings in Midtown which are basically fully pre-leased, obviously vacancy levels have fallen to among their lowest levels ever and rental rates have risen exponentially. Midtown's levels are higher than we saw in the 1980s, and Downtown is basically getting back to those levels on average. So from the leasing perspective the market is incredibly strong.

With respect to the investment marketplace, it had a rude awakening about a year ago when the financing markets dried up and asset values fell into a tailspin and we saw a withdrawal of several different types of buyers. Values have rebounded to roughly almost the levels we saw at the end of last year or the middle of last year, so that market is healthy and active. The volume levels are at the highest levels that I've ever seen. That's a function of two things. One, prices are at levels where owners of high-quality properties are comfortable exiting and two, when you saw what happened in August of last year, they can get out cleanly at the top.

Tony Malkin: The pricing is as high or higher than in the late-1980s on a dollar-adjusted basis. In real dollar terms we're probably still 30% below the late-1980s. The only softness is in absorption and that is because there is very little space to absorb. We're at a pretty healthy point in the marketplace. Clearly you're seeing some inelastic supply and some radical growth in rents. It is an interesting time in terms of where does one go from here.

David Levinson: Everyone wants to say in the broadest sense that the marketplace is healthy, but if you look at the segments of the market it's a different story. In Midtown, where the prices are the highest, it's my opinion that the pricing has gotten a little ahead of the market. There are several large blocks of space in Midtown that, when they came on the market as early as a year ago, everyone said was going to get absorbed quickly. Sixth Avenue rents were in the $60 range and Broadway rents in the $50 range. There are several blocks of space that have been on the market of at least 100,000 sq. ft. for a year because their pricing is ahead.

We've seen the biggest leasing activity in the alternative markets. You go down to 17th and 23rd streets, those deals that were bought or owned for the third time when you had a $25 to $28 proforma are getting $35 to $37 per sq. ft. A huge amount of money is being made in those markets.

Malkin: Following up on 'where does it go from here,' the interesting thing is (the market) isn't projecting up, it's projecting down. It's a very healthy thing from that perspective because the economics motivate people to re-invest in what 10 years ago would have been viewed as obsolete stock and that stock is a better investment than people either building new or paying $350 to $400 per sq. ft. for a Class-A.

1251 Sixth Avenue, let's not forget what that building went for in 1986, $600 a foot. That today would be $850 a foot, on a dollar-adjusted basis? You aren't seeing anything like that, but you will see 500-512 Seventh Avenue being sold for a very large number, and that's driven by the fact that, when Ian Schrager looks for the new headquarters for his office space for his hotel company, he's not going to Midtown, he went over to 10th Avenue and paid what, a mid-$20s rent? That's where the market is going.

One other thing however. How many square feet are being rented, particularly in these alternative spaces, to companies which can only afford to pay that rent by accessing public or private equity markets for fresh capital, who have no bottom line? You see an awful lot of people talking about their company's credit based upon their stock price or their recent private-placement valuation, and not based upon retained earnings or the ability to generate earnings.

John Bader: It's a wonderful market for us because in bringing a new amenity to the building - the Internet - we see that tenants can't get enough of it and not only tenants that you might expect who have a heavy need for it which are the larger companies and the richer companies in the Class-A buildings, but really it's in the alternative areas where we're seeing the heaviest use because a lot of the 100,000 new jobs are in high-tech and new media which aren't interested in Midtown. They're interested in the alternative areas and we're seeing ferocious demand for our services on the 17th Street and 21st Street. The strong market is making the owners of those buildings comfortable in renovating to the extent that you need to bring in a service like ours.

Conversely, we're also seeing owners telling us they want this new amenity in place to help give them a cushion during the next adjustment.

Robert Freedman: There's no question there is a lot of pent-up demand for these edgier alternative markets and the pricing structure reflects it, but let's remember one thing, the landlords haven't priced the risk and a lot of these rentals, while they may appear to be over stated on its face are repricing the risk.

We're marketing space in the Flatiron district and I received five proposals from Internet companies without any operating history of profitability. They have massive capital infusions, but how can I make an enlightened judgment? So, although the face rate on a lot of these transactions may appear to be very high, it's a function of pricing the risk and there is going to be a lot of fallout in that market segment.

Thomas Kaufman: One thing that counter-balances that risk is the telecommunications companies are expanding rapidly and what it's causing is certain areas that were definitely tertiary are coming back, for instance 67 Broad and 75 Broad Street. The idea that you can get $40 a sq. ft. or $35 a sq. ft. in buildings like that... These are strongly capitalized companies which is very different from the Internet companies.

Patrick Robinson: For the alternative uses by Internet companies, I see landlords looking at security more so than pricing risk in their rental rates. In other markets like California and even here in New York, some landlords are taking stock options in some of these companies as part of the security deposit, so they're looking for heavy upside too. Is the market a little over heated? Only time will tell.

I would say in general the market overall is very healthy but there is more downside going forward than upside. I think we're at the precipice of a strong market. It could stay here for a while, it just depends on the general economy.

Josh Kuriloff: The market is going to be very resilient going forward. Despite asking rental rates increasing and vacancy rates stabilizing, absorption is off more than 20% to 25% from mid-year last year in Midtown. We have had employment growth which has fueled the market for the past few years, but the word 'resiliency' comes to mind because I think job growth is going to slow down. New York has outpaced the nation in employment growth in the past two years, which is unprecedented.

I do see diversification of the end user, which is important. But when you look at that diversification, we're still driven by financial services in this economy. If Goldman Sachs sneezes, they'll be out a half million to a million sq. ft. and that's what drives this economy. But, we don't have any of the speculative construction that we saw years ago. That clearly is positive news.

Steven Swerdlow: Why do you think activity is down so significantly?

Heller: People are out of breath.

Kuriloff: Yes, you do talk about the $70 and $80 rents in the General Motors building, maybe it's a hedge fund leasing 15,000 sq. ft. and it doesn't mean anything to the bottom line. But for a major corporation with a major infrastructure, I see those corporations keying in on looking outside of Manhattan from a strategic planning point of view. I believe every major institution sooner or later starts to focus on real estate and occupancy costs.

Heller: When you look back to the last cycle 10 years ago at the same stage, there were so many more companies that had already moved out of New York and heavily into the secondary and tertiary markets to save costs. Why haven't we seen more of that given the fact that we're at the same or higher levels today?

Larry Ackman: A lot of these companies took advantage of these markets over the last five years and locked themselves into long-term leases at very favorable rents.

Robert Billingsley: I think the model of the tenant has changed because if you were a large international company that made steel you could move out of New York. If you're a law firm that provides services here, can you move out of New York? If you're the graphics department at McCann-Erickson, are you going to recruit the same kind of people you need in the suburbs? Also, we live in a time when cities are hot.

The market in a way is a metaphor with baseball. Last year the leasing deals we saw were home runs. This year the leasing deals are smaller in a high average. Also, if you take 1998 and use that as a baseline, a lot of us who were in the business in the early-90s are seeing a year like this year we think we've died and gone to heaven.

Arlene Isaacs-Lowe: In Class-A certainly the market has slowed from last year. It's a reflection of the market's peak and where do we go from here. It's almost unreasonable to think that we could continue to see the kinds of growth and absorption and rental rate increases as we did in 1998. So does it stabilize or start trending down?

Secondly, you talk about sellers who are now prepared to put their assets on the market, and we have to think about who are the potential buyers given where rents are today and where vacancies are. We have to look at the upside on Class-A space. It's really in the Class-B markets where there are repositioning opportunities and a sort of trickle-downeffect from Class-A.

John Lyons: On the sales program it's really one of equilibrium. On a national basis, the price per square foot has really balanced out to something very close to replacement cost. I agree that upside potential is very heavily sought after. As you start to look into the C and B properties, the most aggressive purchasers today are really not for the trophy assets, it's really the opportunity in the hedge fund that is looking to buy value-added situations.

Daren Horning: The value-added situations reside in the secondary and tertiary markets. We just moved our company to Times Square South. Before we moved there it was the Garment District, but now it's Times Square South to me. Companies have taken these old bulk manufacturing buildings and put investment value into them to raise rates. There is also a lot of value outside New York City. These markets are looking up.

I really believe the technology of the world is changing. You hear the metaphor you can be anywhere and do work today in cyberspace. That is happening, and for the real estate community not to be aware of how that is going to effect them long term and not put those assets in the buildings is going to give them a lot of exposure.

Kaufman: It's not an either or scenario. The movement out to Jersey City is the manifestation of a very healthy market. You have different uses and certain departments shouldn't be in Manhattan. To me it's all good news, you have tremendous growth in other areas. I see nothing but bright skies.

Stephen Schofel: The key is the diversity of the economy. It's not just financial services, though that's obviously been a big engine. It's the telecommunications, the dot-coms, but it's also media and entertainment and if you look at certain submarkets like the West Side west of Sixth Avenue and Times Square, you have an availability which has hovered around 1.3% for a year or so and anything being built is being taken by users. And let's face it, people want to be in New York City. People want to be here, to come and they want to party here.

Greg Spevok: You mentioned resiliency and that's an excellent word for what's going on in the market. The job growth here has not been in the traditional industries. It's been in entertainment, in media, it's Internet.

These growth industries are dominated by young, creative entrepreneurs who want to be in Manhattan and they need to incubate here and have that culture for their people. They don't need to be in Class-A Midtown and the Garment District...

Horning: Times Square South...

Spevok: That's just appropriate for them. That trend will continue. Also a lot of these long-term tenants you mentioned adds more resiliency and more stability to the market. In addition, a lot of these major corporate users who had the opportunity to move in the late-80s at the peak of the last cycle, they tend to move as a group. That was appropriate for that time.

Lyon: There are two other factors. Part of the reasons cities are doing so well and the growth has occurred is that cities are in better financial shape now than they were in the '70s and '80s. The amount of public services and the quality of life are attractive, and it's a circle, and that's keeping rents high and occupancies high and people aren't moving out.

One of the important areas is the financing. There is a lot of capital available today to transact sales. Capital is a bit more cautious after what occurred in the third and fourth quarters of 1998. I'd be interested to hear what people think will happen from the last quarter of this year to the first quarter of 2000. What we're seeing is an abundance of capital, there is pressure to put the capital out, however, CMBS is in a state of flux. We're optimistic that it will find its plain and move forward with some stability.

Spevok: At Bear Stearns, we've been lending on office and multifamily mainly in New York for several years now. The debacle of last year was actually very healthy and adds to the stability and resiliency. The quotes we are continuing to get are reasonable.

Horning: How quickly will that change if there is a correction in the market? This market is really floating on the Dow. It gives firms with a bottom line of zero and a balance sheet of $60 million to $100 million the ability to take 50,000 feet. It really is a little frightening that a lot of peoples' futures and the economy floats on the Dow day to day, tick by tick.

Ackman: I'd like to remind people that, in 1983, we leased space in 110 E. 42nd Street for $33 a square foot In 1993, we leased space there for $22 a square foot. We just took additional space across the hall from our offices and we paid $30 a foot for five years and $32 a foot for another five years. We're not even back to where we were in 1983. It's taken 16 years to get back, and in the meantime operating taxes and real estate taxes have gone way up. I think this is a pretty unique opportunity to sell major real estate in Manhattan because the market is not made either by $70 a square foot nor is it made by leasing space in 111 Eighth Avenue at $35 a square foot. That is not the market.

Malkin: By the end of this week we will have over the last two years unloaded our interests in 4.5 million sq. ft. of Class-A real estate in New York. We'll have none left. And there is a very simple reason for that. The economics allow it and the performance is not what we think of as real estate which is secure consistent returns. Class-A real estate in New York performs like an electrocardiogram.

Where are we going from here? Look at our economy. The natural people who could move out have moved - JCPenney, Mobil. The traditional users, investment banks, they were the low-credit users of 1985. Now they're the credit businesses. We have a service economy which rises and falls directly with GDP. The bottom line is that New York is remarkably exposed. If the nation gets a sniffle and decides to start watching TV, we're going to catch a serious cold here.

Where we will see space coming back on the market is in Class-A and then on the Class-B space it will be interesting to see if these Internet businesses remain businesses or if four years from now there will be no more Internet businesses. There will be businesses with Internet strategies and there will be Internet businesses which couldn't get incorporated into somebody else's business strategy and failed.

Bader: It's frightening to me because a lot of attention is being paid to dot-com companies that don't have a bottom line and, in a normal business condition, wouldn't have the right to exist. Yet there is a lot of money looking for a home and it's not only looking at real estate assets, it's looking for investment in Internet companies that can provide a return. But the narrow band of companies that are carrying the [stock] market have no resiliency whatsoever if the psychology changes because they don't have any fundamental strength.

Samuel Gus: A lot of this conversation has pointed out the strength of New York, and Tony's comment about the upside of Class-A buildings not withstanding, you may look and say rents are up and there's really not a lot of upside in rental increases on Class-A space. But the fact that you can talk about redoing almost any building in Manhattan for some other use points to its strength versus the rest of the country. When the economy of most other cities went down, there was very little you could do with the larger Class-B product. There is always something to do in New York.

The fact that there is still plenty of money that wants to be deployed in the market on the debt side will be priced according to the risk that you're undertaking with the property. That leads to the ability to provide space for the people who want to be here. And people do want to be here.

Larry Ackman Ackman-Ziff RE Group

John Bader Intellispace

Robert Billingsley Colliers ABR

Samuel Guss Sonnenblisck-Goldman

Woody Heller Jones Lang LaSalle

Daren Horning OnSIte Access

Arlene Isaacs-Lowe Moody's Investors Service

Thomas Kaufman Tishman Real Estate Services

Josh Kuriloff Cushman & Wakefield

David Levinson Insignia/ESG

John Lyons Granite Partners

Tony Malkin W&M Properties

Patrick Robinson The Staubach Co.

Stephen Schofel Williams Property Advisors

Greg Spevok Bear, Sterns

Steven Swerdlow CB Richard Ellis

Ben Johnson NREI/Moderator