Notes from the underground: There is palpable evidence of promise in the New York City economy

This summer, I have witnessed more activity than in most of 2009. Buyers and sellers are re-emerging, both more realistic as the bid-ask spread narrows and a valuation consensus emerges. Clients are surprised to hear of any pricing and valuation strength in the face of a summer market lacking any catalysts. Buyers in vain protest with price talk for distressed comps, impending note sales, and vacancies' disproportionate impact on valuations. But I am forced to respond with boots on the ground feedback that multiple offers occur more frequently, with terms alone separating the field. Routinely I try and explain the dichotomy to buyers that there is essentially a parallel market, far smaller than the "real market." It is for now a collection of disparate, unique, and largely unrepeatable deals that does not represent the aggregate of buyer-seller interaction. And of course, buyers are calling me because not surprisingly they can't avail themselves of those largely unavailable opportunities. Nonetheless, if only for negotiating advantage, buyers generally feel this parallel market has bearing on the "mainstream" market. Thus far, the two are entirely separate, a trend I feel may persist for years. There is palpable evidence of promise in the New York City economy. Closely watched statistics such as defaults, bankruptcies and unemployment appear to be stabilizing around a "moving median," which while all negative, are starting to reveal a central tendency. An abundance of anecdotal evidence in office sales and leasing activity and corporate hiring surveys point to early signs of 'base-building.' Although at reduced levels, that kind of semi-certainty often signals the re-establishment of true market activity. Markets hate nothing more than uncertainty. I had five distressed deals 15 months ago. While people had underbid them dramatically at the time, four have now successfully been worked out at very healthy valuations. It's no surprise the market prices uncertainty asymmetrically. There's an undeniable human element embedded in our psyche today that we would rather overpay for security than underpay for opportunity. Would you rather take $1,000 now or take a 50% chance at $4,000? Mathematically, you should be a risk taker, but our perception and tolerance of risk has changed dramatically. You wouldn't even trust the 50% odds in the above example and I can't blame you. When enough people believe that, that becomes the market. But I will let you off the hook. When was the last time you read about something other than what a disaster the economy is, the deficits of incomprehensible proportions, BP's oil spill, the war on terror, a succession of corporate scandals, and the looming commercial real estate defaults? Did you miss the $550 million fine imposed on Goldman Sachs by the S.E.C.? Even that got lost in apparently more negative news. But quietly, away from all this, U.S. companies have over $2 trillion in cash on their balance sheets, one of the highest levels in history. While companies must put that money to work, so far the only noticeable impact has been an increase in M&A activity and dividending. For now, Wall St. analysts write up earnings estimates while simultaneously writing down price targets. This is unsustainable. To clear balance sheets and earn acceptable returns, significant capital must be deployed in the form of investment and hiring. This overhang parallels the mountain of real estate capital which now increasingly pursues "market" vs. "distressed" deals. If the economy double-dips back into recession, some may recast this period as a short term bubble. However, I think vague generalities hide this new normal, where multiple parallel property markets can emerge and co-exist simultaneously. Markets climb on a wall of worry, and we may yet see that, but it's difficult when reality is so surrounded by the din of despair, the politics of divisiveness, and the confusion of uncertainty. I think for the foreseeable future, good deals will go to those who can play the flipside of uncertainty, those who (to paraphrase Kipling) "can keep your head while all about you are losing theirs...can trust yourself when all men doubt you..." In the meantime, the market lurches forward in fits and starts in a dangerous game of musical chairs. But when will the music stop? Andrew Lester is the managing director of investment sales, CPEX Real Estate, Brooklyn, N.Y.