The balance of the year will be full of opportunity for those who understand the market

The economy remains very sluggish and most economic indicators lead to the conclusion that we are in a recession. Additionally, the financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to burden economic growth over the next few quarters. Actions the Fed has taken, including measures to foster market liquidity, should help to promote moderate growth over time and mitigate risks to economic activity. The Fed has no choice but to keep interest rates low, which does provide a benefit to our real estate market, provided of course that financing is available. It is important, however, to differentiate between market segments. I would say that the availability of financing for income-producing properties with values under $50 million is very strong. Portfolio lenders, Freddie Mac and Fannie Mae have been extremely active in this segment as well as life insurance companies. Small portfolio lenders are coming in from all over the region to make loans on New York City buildings. We must keep in mind that banks are in business to lend money and the minute they stop lending money, they are out of business. Subprime related losses have yet to be quantified but some estimates are as high as a trillion dollars in what is now a $14 trillion dollar economy. Comparisons have been made of our current market to that of the early '90s. I believe the markets are very different mainly because of underlying fundamentals. In the early '90s, the S&L crisis was a $250 billion dollar hit to a $6 trillion dollar economy. Another point of interest is that in the early '90s, the volume of sales was running at only 1.4% to 1.6% of the total stock of buildings in the Manhattan market. During the first quarter of 2008, turnover was running at about 2%. Based on where the economy is and where most people think it is heading, it's a good bet that rates will not go up substantially in the short term. Even with spreads as high as they are, our borrowing rates are still relatively low on a historic basis, fluctuating between 5.5% and 6% today for 5-year fixed rate money, depending upon product type. The multifamily market is still the most resilient and the stable based upon rent regulation, which keeps apartments at artificially low rent levels despite market conditions. In the coming November elections there appears to be six competitive senate seats out of 52 in New York State. If the Democrats take the Senate in November, the Urstadt law could evaporate (which will lead to the city taking control of regulation and will likely lead to the disbanding of the rent guidelines board) and the $2,000 threshold for luxury decontrol will be elevated. To this point, we have seen land values hold, but only in the most prime of locations. In secondary and tertiary locations, land values are experiencing significant downward pressure. Novice developers are certainly on the sidelines and if they are midstream with a project, lenders are encouraging them to bring in more substantial partners to complete developments. There are some projects that may be delayed or put on hold temporarily. This is actually a positive thing for the market place as this reduction in production will keep the existing supply tight. Lowering of production will also exert downward pressure on construction costs which have gone up significantly over the past few years. Presently, the volume of sales is running at about 2% of the total stock in the city, which is lower than the 3% average experienced in 2007 but significantly higher than the 1.4% to 1.6% volume experienced during the recessionary years in the early '90s. Prices per s/f (on a year over year basis) are continuing to escalate based upon the significant increases in rental prices for both commercial and residential space over the last few years. It is important to differentiate between market segments as we believe the market for properties under $50 million is dramatically different from that for larger valued properties. The near term impact of the sell off is difficult to extrapolate, largely because CDO collateral offerings usually take weeks or even months to play out. It won't be until the market has fully come to grips with the depth of these write downs that we will able to start the recovery. The issue of the current mortgage mess is unlikely to get resolved without further intervention. We believe the balance of the year will be full of opportunity for those who really understand the market. We are encouraged by the present level of activity in the market and have actually seen an upswing in activity in February and March. There is no doubt that we live in interesting times. Robert Knakal is the chairman and founding partner of Massey Knakal, New York, N.Y.