After years in the overbuilt doldrums, New York City's commercial real estate has bounded back, thanks to an entertainment and retailing-led resurgence.

It wasn't so long ago that New York was in the tank, real estate-speaking anyway. The office market was over-built and office and retail tenants were fleeing the city in droves (sound familiar, America?). But the city has bounded back in a big way, led by growing, smaller service companies and a retailing boom in the Midtown and Times Square areas.

Two new announcements of major office starts, one by the Durst Organization to build a new 48-story office tower in the heart of Times Square and the other a new 23-story headquarters for the owners of Louis Vuitton just off Fifth Avenue, have dramatically jump-started renewed interest in the city's office market (for more details on these two projects, see page 8 in this issue).

Recently we gathered representatives from four of New York's leading brokerage firms to discuss the relevant real estate issues of the day at the Rihga Royal Hotel in Midtown Manhattan. Not surprising, they provide an interesting dialog on the state of the market.

Q: Is New York a tenant's market, and when will that change?

Howard Grufferman: In Midtown, the market has changed rather significantly. What was a tenant's market is now becoming an even game. The pendulum is going to shift, if it hasn't already, to the landlords. Downtown, where I am based, is certainly a tenant's market. Midtown South is a jump ball.

Within Downtown Manhattan a tenant is still king, regardless of size. One of the true trends is this whole notion of brain ware, technology-based firms. These are small companies but they have some leverage. That was not the case five or six years ago.

Jerry Cohen: The Downtown market has such a tremendous growth potential. I think with the focus our industry has had on tenant rep work there has not been enough focus on agency rep. Brokers today unwisely have gotten themselves in a straight jacket doing either tenant work or agency work. A balance is what makes for a better understanding of the marketplace. When you're a tenant rep broker exclusively and you're getting information on what deals are being made, it isn't quite the same as when you're also on the other side.

Midtown has become a much more stabilized market because supply and demand seem to be in much better equilibrium. I'm fascinated by Downtown because we're starting to see as agency representation a greater variety of tenants who are looking at this market. It's always been my feeling that Downtown will succeed if it gets new categories of tenants.

So how do we take this critical mass and appeal to other types of tenants? The brain ware, smaller high-tech firms and other industries are a great help. The problem is we don't have the development of the other things Downtown that make the market that appealing. You hear about it and we talk about it, the shopping, the 24-hour lifestyle. I think we're almost there.

David Maurer-Hollaender: The city has done a lot to enable Downtown, to tee up Downtown, to accommodate tenants that have shied away from taking space down there. Turning it into a more 24-hour environment makes it more inviting and more exciting to be there, and the natural swings in the cycles in terms of available space and pricing now will make Downtown even more attractive.

When you had a high availability rate in Midtown, Midtown South and Downtown, and overall pricing was being depressed, the larger tenants migrated toward Midtown. A lot of those opportunities are now gone. There are fewer choices in Midtown, prices have been rising, competition is fierce, and a lot of the space that is left is not as competitive in terms of facilities. Downtown is certainly more of a tenant's marketplace. If you can't write your own ticket you can certainly structure whatever kind of transaction that you need in just about any building.

We've seen that shift in Midtown where we've reached that equilibrium point and we think we're going to push way past it very quickly and we're going to have a very strong landlord's market.

Bruce Mosler: Economics override location in Midtown versus Downtown, maybe not enough to give Downtown the first crack at the bat, but the field is level and economics become the overriding factor. But I agree with the concept that Midtown is tightening and either rents are going to strengthen or workletters or free-rent periods are going to come down. The net effect is the same. So Downtown may well pick off a major tenant.

Maurer-Hollaender: You're starting to see some significant pricing differences between Midtown and Downtown. Not only as opportunities dry up in Midtown, but it's more difficult for large-space users because they're forced to look elsewhere, and the pricing differential will tend to drive people to consider Downtown.

We're starting to create some interesting blocks of space south of 42nd Street. There's an interesting market developing there. Jerry's company is handling an agency at 11 Madison which is a former venture of MetLife and is enjoying unprecedented activity, because it's been retrofitted to accommodate tenants' technological needs and it's priced attractive as a Midtown alternative, yet it's successful.

Cohen: That area has become so much more acceptable because of the housing now available, the restaurants, the quality of life. There was a period when that had a secondary rating.

The other thing we haven't mentioned is the realization of the dream that we started 10 years ago on the west side. The geography has changed in many different directions now. It's not so simple to draw the preferred area now. Geography is important to certain people, but I find it's more important to international or foreign headquarters than it is to a lot of the major companies today. They want to be in a building that has the essentials that they need. We haven't had a new building to sell for a long time. Look at the excitement of the Durst building. We've been selling used cars for the last 10 years. We haven't gone into the showroom. The supply of new buildings generated our market. It created demand. It's what made our business.

As one, two or three new buildings come through, we'll see another excitement that will build up, because the needs of today's tenants are far different than they were 20 years ago.

Q: What are some of the changing tenant needs?

Grufferman: The most significant thing is no one has confidence in longterm planning. That has created an interesting effect on us as professionals and on the market in general. Without any confidence in growth projections, or nogrowth projections, what you're finding is tenants requiring flexibility. Flexibility in design. Flexibility in the financial structure of the lease. Because of that, the pressure on us and the pressure on space planners is to listen to what they need and to appeal to their creative senses. Large space is a hard sell these days.

Mosler: The average business plan for any corporation today is two to three years. Fundamentally you can't do a 10-year deal or a 15-year deal unless you have out-clauses with flexibility. The days of must-takes and taking space and warehousing space are over. They've been over for some time, but now the flag has been run up and it's very clear.

Maurer-Hollaender: Some tenants need the flexibility to expand and contract.

Q: How do you do deals that way?

Maurer-Hollaender: You build it into the lease. A buy-out clause at the end of the lease. You have to do them in an environment where there is a willing participant to the negotiation.

Grufferman: The operative word is does the deal make sense. I recently negotiated a lease with the ability to take advantage of technology on a priority basis. We were so pleased that we got it but no one understands what it is that we got. No one knows where tomorrow is going. It's very difficult to describe it, but everyone knows that they need it.

Mosler: Technology is rapidly becoming one of the more important costs of the lease today. It is rapidly becoming the third most expensive item in negotiating the lease. A fundamental change is going to happen in the marketplace and it will occur with ownership. They're going to have to change the way they do business if they want to accommodate the future in terms of what tenants demand. It's going to be interesting to see which owners have the ability to finance their properties so that they have the ability to provide some of the essentials for the tenants.

That's going to be the single most significant change in the way business is done. It will come on the ownership side as a result of the shift in the user base.

Tenants are unable to build a longterm lease into their business today, because their business is changing every couple of years and they're not sure where their growth will be. Their core business may not be their core business six years down the road.

Q: How is that changing the way owners finance their deals?

Cohen: The historic 20-year lease which enabled the long-term mortgages will have to change. Certainly high loan-to-values are going to be in place if they're not already. You might have to see more equity participation in deals.

Also, the type of technology that has to go into some of the older buildings to bring them into the 21st Century. Some of that is not financible.

Mosler: That's exactly what's going to change over the long haul, the ability to respond. Those that can't will suffer the consequences. It's happening and it will continue to happen very rapidly over the next 24 months. One of the unspoken words that people try to avoid but I think is a fact is that you're going to see obsolescence of Midtown properties for the first time. You've always associated that with Downtown, but I think you're going to see that in Midtown. You can't provide a user today with 6 watts per sq. ft. Today it's closer to double that almost. If you can't provide that you can't play in the game.

Cohen: And it's not just high-tech companies. Everybody needs it.

Maurer-Hollaender: And it's not just providing the power, but also the hidden cost of providing the cooling, which is really substantial and represents some very real practical problems.

Cohen: Also what we're starting to see again is the type of space, the column spacing, we're seeing much more of a return to some combination of the old office landscape, and we're starting to see more concern in the buildings that are 20-25 years old where they were modern post-War but the column spacing is wrong. We see a lot of tenants that need flexibility of open space. I see a reduction in the amount of private offices for everyone. We're seeing that Downtown where a lot of the investment banking firms had their back office space, the column spacing is pretty good and they do have some of the better floor plates for today's market.

Maurer-Hollaender: That's been borne out. The post-banking buildings Downtown is basically a market that's in equilibrium and very stable. Certainly it doesn't carry the specter of 25% vacancy. Downtown is a collection of markets and property types, not just locationally but based on age. The buildings that were built from 1980 forward is a very healthy marketplace and they're scattered throughout the Financial District.

Grufferman: The fundamental way the businesses operate has changed. At law firms, it used to be a secretary and an attorney and that was kind of the cookie-cutter. Now it's more of a triangle, where there's a paralegal somehow involved. Some of the buildings are going to incredibly inhibit the ability for someone to stay put, renew and still accommodate its expansion. That may create a nice little market of activity.

The operative word is flexibility. That's going to be one of the dynamics both in Midtown and in Downtown. With regard to rental rates, I think that corporations are prepared to pay a higher rental to be efficient. I'm not so certain that in the long term as the rental rates rise that will hold true.

Q: Is there a lot of buy/sell activity and who are the players?

Mosler: Again, the landscape's changed. It used to be the players were some of the wealthier families in New York that wanted to grow their portfolio through opportunistic acquisitions, but today it's clear that there's so much capital in the market, the pension funds, the Zell/Merrill Lynch capital funds that are out there. I think they're the new players. Along with international acquisitions, because this will always be a city for international activity and that won't go away. I think they're finding it harder to compete in the last couple of years against some of the more active domestic funds that have come in.

The rise over the last three years has gone from $80 a sq. ft. to $100 to $150 to wherever the projections are today. History repeats itself, and soon we'll see people paying prices that we can't fathom for properties, and the simple reason is that capital has to be put out.

Cohen: I think we're already seeing some of the prices that were paid for some of the properties that underestimated the total cost of rent-up and renovations and when they finished the product the rental that they had to obtain is above perhaps the market.

Is there greater demand for purchase of office space? I would say yes. Everybody had hoped to get the bargains. That stage has passed. Now the question is what is the value.

Mosler: We just sold a property in Midtown South a month ago, a nice Midtown South property, for over $100 a square foot. That to me says there is a rise in net numbers in the city. When it comes on the market, it doesn't stay on the market very long.

Cohen: We're also not seeing the moves take place. Historically people move to new office space. We're seeing really an economy of scale to be as efficient as we can for the next generation of operating the business. Our problem is we're not getting that huge net absorption that creates a healthy market. A lot of firms are cautious about their growth needs.

Mosler: If you look at the Manhattan marketplace, growth in the last two to three years has really come internationally, not domestically. Domestic growth has been through consolidation and merger. That's really been the way you grow the top line and bottom line. Without the international growth, this marketplace would be looked at completely differently than it is today.

The net result from that is you're going to see some significant sublets that will compete on a direct basis. And if another two or three buildings go up, you may well see some significant impact as a result of that. We could have a real positive year in terms of net absorption, but it will hinge on exactly what transpires in the next 12-18 months.

Cohen: There's a market for the eight-year lease term, and that competes against some of the other space. The sublet space has a value that wasn't there three or four years ago.

Q: The Port Authority is shopping the sale of the World Trade Center Downtown. What if any impact will that have on the marketplace?

Grufferman: I don't know if it's so much of a change in the economic efficiency, but more of a change in the transactional efficiency. It's very difficult to deal with a quasi-governmental authority. Not the people, just the structure you have to work with. Some capitalists in there with a real license to make deals will make deals. The building has certain problems, but they are not insurmountable problems. This could be a very good thing for Downtown.

Mosler: A new owner is going to have to invest a tremendous amount of capital to get that ball rolling and I guess you could make the argument that there may be no owner out there with the where-withal to do what is necessary for those properties. The flip side is if a new owner gets in there and gets aggressive, retrofits it in many different ways, and realizes a net increase in the rents. I don't think it impacts the marketplace significantly in any way, shape or form.

Maurer-Hollaender: I believe that the Trade Center is priced aggressively. I think that project is priced competitively, given what you're getting. It's Downtown, it's suffering from the general overhang of space Downtown. I think it's still suffering some of the remnants of the bombing incident that still keep people away from the property. So I think a lot of things have gone the wrong way for the Trade Center, but it's a great product, it's priced aggressively, it does have significant vacancy and a marketing program could improve that from an operational standpoint. The Port Authority does a very good job of running the property.

Q: A lot of attention is being focused on the Times Square redevelopment. How is that impacting the marketplace?

Cohen: It's taken down the old DMZ line that existed there. You can just walk down that street now and see the difference in the last year. It's a portent of what that street will look like, and it's going to be by next year, not five years from now. Durst is active on one side. I think we will have created something so exciting. Tourism in the Times Square area is the greatest in history.

Mosler: The city has done a complete turnaround. This is 180 degrees. Now that DMZ line is all the way over to 10th Avenue and beyond. And retail is significant. It is a significant problem for Downtown, in that lack of retail is what will fundamentally kill it or make it down the road. Until that comes back, Downtown's just going to be a 12-hour place to be. Times Square I think has been the single shining example of what you can do in turning things around. We need that in this city.

Grufferman: We're not even coming close to verbalizing what in a few years will be an extraordinary accomplishment.

Maurer-Hollaender: The Conde Nast commitment to move there (into the Durst building) is just the first of many steps that are going to be necessary to finish that project and see it through.