In the REIT's recent earnings call, SL Green's CEO Marc Holliday outlined what he called a "strong quarter," remarking that the New York City office market "held up surprisingly well." The REIT's performance "was very good in the first quarter, especially when viewed against the backdrop of the challenging economic environment and the continuing illiquidity in the credit markets," Holliday said.

Despite the strong quarterly leasing performance, Holliday said, "We do, however, stand by our previous statement that we believe the leasing market will soften as a result of the lack of financial services firms' participation." He estimated that net effective rents could drop by 10% to 15% from their peak levels. In addition, he says "there could be some widening of free rent to give some tenants relief from the sticker shock that they might feel when they roll over from the old rents to today's market rents."

Holliday lists a number of major leases that were signed in the city in the first quarter. "Not one of the companies I just listed is a financial services firm, showing that the diversity of the Manhattan economy can mitigate volatility in the financial services market," he says. "When a third of your user base has basically pulled back from the market, the other major New York firms can only do so much to occupy the space."

SL Green expects the financial services firms will require a year or two to "regain their footing, get past the write-offs and enjoy the benefits of low interest rates to replenish their coffers and then get back into a growth mode," the REIT's chairman says. "Our focus continues to be on the leasing market and the NYC economy, in general, where we are tracking current demand and sublet availability."

Holliday says in the face of mounting layoffs at the financial services firms that leasing activity is slowing. But, he points out it is continuing at levels that are better than those of the previous downturn in 2001, 2002 and 2003 when technology firms led the slump.

Holliday explains demand has been able to keep better pace with direct and rising sublease availabilities today than it did in the previous downturn. "We entered this downturn with a very strong starting position of 5% vacancy at the peak and it now stands at around 6%," he says. Competitive sublease space is still relatively scarce, measuring about 2.5 million sf from the financial services firms, but that represents less than half a percentage point of the total inventory for Midtown and Downtown, according to Holiday.

Other differences between now and the 2001 downturn is that financial services companies are more efficiently staffed than they were going into the 2001 downturn. Holliday says "there was lots of excess capacity and availability to begin with" seven years ago.

In addition, Holliday adds bankruptcies are not as prevalent now as they were then and new construction projects have largely been deferred. He estimates about six million sf that was slated to be built between 2008 and 2010 has now been put on the shelf except for a few projects that were too far along to stop.

Holliday notes SL Green expected going into this year that it "was going to be largely an internal growth story," as the REIT noted in its December 2007 conference call. That, he says, is proving to be the case. The SL Green CEO says that with more than 500,000 sf of leasing completed in the first quarter alone, the company achieved a 44% mark-to-market while concessions on those leases held relatively steady.

During the call, SL Green's president and CEO Andrew Mathias says office building sales in Manhattan "slowed significantly in the quarter as a standoff developed between buyers and sellers and a lack of financing continued to make it difficult to get deals done." He adds there were some notable exceptions during the quarter, with several properties selling at prices that "demonstrated the continued willingness of buyers to still pay sub-5% going-in cap rates for quality assets that have a strong mark-to-market story."