The results are in: The Dow Jones industrial average returned a mere 3.15% increase for last year. The S&P 500 index rose 10.88% compared to 28.69% in 2003. Investors seeking ownership and profit-participation in real estate were able to gain access by investment in real estate investment trusts. The S&P REIT index rose 15.29% in the fourth quarter, ending the year up 32.06%. According to Jeffrey Wiesenfeld, principal at Bernstein Investment Management, the Bernstein Institutional REIT Fund gained 35.6% after all costs for the year. “We recommend that an investor maintain approximately 10% of their domestic equity allocation in any REIT investment, but should only be housed in a non-taxed account, since REITs are required by law to disburse 95% of their income to shareholders which would be taxed as ordinary income in a taxable account,” he said.

As reported in my December 30 column, according to the Cushman & Wakefield New York Capital Markets Group, total real estate investment sales for New York City rose last year to $14.3 billion, as compared to $9.97 billion in 2003, an increase of 43.4%. More than $11.2 billion of investment sales were recorded in Midtown as compared to $9.3 billion in 2003. Sales in downtown Manhattan increased to $3.1 billion last year from $600 million in 2003, a 517% rise. “Demand for real estate was evident for all profiles of investors, everyone is chasing the product, especially private investors,” said the executive managing director of the New York Metro region for Cushman & Wakefield, Ken Krasnow. “Investors for the first time in years are seeking to purchase buildings with high vacancy, and taking advantage of leasing opportunities for upside potential,” he added. Evidence of this came in 2004 with S &L Green Realty Corp.’s partnership with The City Investment Fund, for the purchase of two office buildings, comprising 1.7 million square feet at 750 Third Ave. and 485 Lexington Ave. for $480 million, or $282 a square foot. The properties were acquired from TIAA-CREF. According to the president of The City Investment Fund, Thomas Lydon, since the acquisition, the value of the properties has increased substantially by at least $10 a square foot.

Earlier this week, Cushman & Wakefield released year-end statistics for the Manhattan commercial real estate market that show 29 million square feet of office space was leased in 2004, roughly 9 million more than was leased in 2003. Mr. Krasnow said the “financial services sector represented close to 51% of the office leasing, followed by the professional sector, in particular legal firms, representing 17%.”

The 10-year Treasury note ended the year at a rate of 4.22%, a few basis points lower at the end of 2003. The rate fell in 2004 from a peak of 4.87% in June, with a low of 3.97% in October. The combination of low rates and availability of funds continued to fuel interest and activity in owning commercial real estate. According to the president of Ackman-Ziff Real Estate Group, Simon Ziff, “Why should this year be different than all other years, or at least why should it be different than 2004?” He continued, “It shouldn’t be, we should have more of the same. There is still a tremendous supply of debt mezzanine and equity capital seeking a home in real estate.”

A number of leading economists feel that the 10-year Treasury rate will remain at year-end levels. The general consensus from real estate capital market executives is that short-term interest rates will climb about 75 to 100 basis points this year. Many concur that the 10-year Treasury note will range between 4% and 4.75%.

***

December sales continued their record pace throughout the metropolitan area. Last week, DiamondRock Hospitality Company paid $75 million, or $244,300 a room, for the 307-room Marriott Courtyard New York hotel, located on the top 19 floors of 866 Third Ave. Two weeks ago, it purchased the 189-room Hotel 5A at 3 East 40th St. and Fifth Avenue for $34.4 million, or $182,010 a room. According to the trade, the property will undergo a $4 million renovation and be renamed Courtyard by Marriot in January. DiamondRock is a lodging REIT that was formed last July, and has a strategic relationship with Marriott International.

It is expected that within the next 60 days, Olympus Real Estate Partners and its partner Murray Hill Properties will once again put on the market the 11-story, 387,000-square-foot office building at 417 Fifth Ave. A few blocks from this building is the 42-story, 1.23 million-square-foot headquarters of Verizon at 1095 Avenue of the Americas. The building, directly across from Bryant Park and the new headquarters for Bank of America at One Bryant Park, is expected to fetch close to $400 a square foot. The building requires extensive interior renovations, and Verizon is expected to stay in the building and own a condominium interest in a portion of its space.

Last month, Verizon announced plans to sell three sites on the West Side: buildings at 604 W.43rd St.,605 W. 42nd St., and 563 11th Ave. According to industry insiders, a residential developer could build a 720,000-square-foot tower on the site. Verizon may be able to sell the buildings for more than $140 million, or $200 a developable foot. Developable land all over the city is selling at record prices.

According to reports, a land marked Fifth Avenue building near 42nd Street was acquired in 2002 by a group of prominent New York investors and is close to being sold. The property is expected to be purchased by a group of German investors and investment funds. The property is expected to fetch close to $275 million.

The New York Sun has learned that the first bids have been received by W &H Properties, owner of the 670,592-square-foot, 15-story International Toy Center at 200 Fifth Ave. and its companion site, the 16-story 337,000-square-foot building at 1107 Broadway. According to industry insiders, this excellent location might fetch a price in the range of $450 a square foot. Most of the prospective buyers are interested in converting the buildings into residential condominiums. Last year, the Gift Building at 225 Fifth Ave. was purchased by Elad Properties, which is in the process of converting the building into residential condominiums.

A number of new residential condominiums and very few market-rate rental buildings are scheduled to open in 2005. Due to the high cost of land, developers are unable to build rental buildings. The president of Citi Habitats, Andrew Heiberger, feels that “rental prices for residential units are poised to rise rapidly with the next wave of hiring.” He adds, “Vacancy rates are at a three-year low, and fewer landlords are offering incentives such as one to two months free rent.”

***

The founder and president of The Praedium Group LLC, Russell Appell, said “New York City will see a further improvement in rental rates as the economic expansion of the financial services sector increases demand for office space and residential units. This will push gentrification of neighborhoods in the boroughs and upper Manhattan. We will see continued redevelopment and expansion in upper Manhattan and the outer boroughs as these areas will become the hot spots to work, live, and shop.”

In October, the president and chief executive officer of Tishman Speyer Properties, Jerry Speyer, told a group of real estate executives that “happy days are here again.” Based on the record investment sales of commercial properties, the increased leasing of office properties all over Manhattan, and the economy, things are looking much brighter for the New York City real estate marketplace. All indications are positive for a record 2005 for commercial and residential projects in the metropolitan New York region.

Mr. Stoler is a television broadcaster and vice president of the First American Title Insurance Company of New York.He can be reached at mstoler@nysun.com.