The vacancy rate dropped 20 basis points to 4.9%--its lowestlevel in more than 25 years--and average asking rent on all classesof space increased $2.15 per sf from the second quarter to $69.55per sf. Investors, however, were not as bullish on the real estatemarket as landlords were, as the blistering pace of investment ofthe first half of the year showed evidence of slowing, the reportnoted. In Q3, $5 billion in transactions were completed, which is asharp decline from the $13.1 billion average in each of the twoprevious quarters. Still, with more than $31 billion in totalinvestment transactions so far this year, the market is on track todouble 2006's total of $17 billion.

"Changes in the cost of debt and equity are having an impact onthe commercial real estate investment market," explains DavidArena, president of Grubb & Ellis New York. "Assets are being're-priced' accordingly, driving cap rates up." Arena went on tonote that rental rates, however, should remain steady over the next12 to 18 months due primarily to the low vacancy, lack of newsupply in the marketplace and the cost of bringing new developmentsto market. "If employment growth slows for a sustained period, wemay see some softness around the edges--and demand for 'growth'space will diminish while tenants who occupy large blocks mayconsider partial sublets," he explains. "But New York is a terrificmarket with access to the best educated, most productive work forceon the planet…I am bullish on its long-term health andvitality."

Arena says that for now, Grubb & Ellis is counseling clientsto act with caution, but to be prepared to move quickly whenopportunities arise. The report notes that tenants seemed to focustheir activity in the third quarter on Midtown, despite the factthat asking rents have reached an all-time high. Most must decidebetween remaining in Midtown and absorbing a steep increase in realestate expenses or moving their operations to another part of thecity. And for some--the rents are truly astounding--severaltransactions closed in the third quarter at rents starting as highas $180 per sf, the report explained.