While Manhattan's vacancy rate of 4.9% was well below thequarterly national average of 13.6%, the island's available spacefor sublease jumped to over seven million sf, which an increase ofabout one million sf from the end of 2007. The increase ofapproximately 16% compared to the 12% national average. "Most ofthis was from Downtown," although iStar Financial put 107,000 sf at1095 Ave. of the Americas back "after leasing it less than a yearago," Richard Persichetti, client services manager with Grubb &Ellis' New York office, tells Real Estate New York.

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He adds, "There was more than just an addition of availablesublease space in the first quarter. We also saw a drop-off inleasing activity," a 15% decline compared to Q1 '07. In addition,Persichetti says, 48% of the square footage leased in Q1 '08 was inlease renewals.

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"So most of the demand is not coming from new requirements; it'scoming from tenants renewing in place because they don't want toface moving costs or disruption in business," Persichetti says."For the most part, they're not early renewals, but renewals out ofnecessity. It's good that these firms aren't leaving the city, butat the same time, almost half the demand in the first quarter wasbecause firms had to renew, not because they were looking for newspace." By comparison, 19% of the square footage leased in thefirst quarter of '07 stemmed from renewals, Persichetti says.

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The investment market "completely stalled" for the most part inQ1 '08, says Persichetti, at least when it came to officeproperties of 100,000 sf or greater. Grubb & Ellis recorded$1.7 billion traded during the quarter, compared to more than $13billion in Q1 '07—a quarter that saw Macklowe Properties'$7-billion purchase of an eight-building Equity Office Propertiesportfolio. "That's a direct result of banks pulling back on loans,"he adds.

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Although Persichetti acknowledges that "one quarter doesn't makea trend," Q1 results suggest that "the market appears to beturning. That isn't a bad thing, if you think about it, becausewe're at 25-year vacancy lows and all-time highs in asking rents.However, vacancies are starting to tick up as well, and as thathappens, tenants will have more options."

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As reported on GlobeSt.com, SL Green CEO Marc Holliday in arecent earnings call said the REIT's performance "was very good inthe first quarter, especially when viewed against the backdrop ofthe challenging economic environment and the continuing illiquidityin the credit markets." Despite the strong quarterly leasingperformance, Holliday added, "We do, however, stand by our previousstatement that we believe the leasing market will soften as aresult of the lack of financial services firms' participation." Heestimated that net effective rents could drop by 10% to 15% fromtheir peak levels. In addition, he said, "there could be somewidening of free rent to give some tenants relief from the stickershock that they might feel when they roll over from the old rentsto today's market rents."

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During the call, SL Green's president and CIO, Andrew Mathias,said that office building sales in Manhattan "slowed significantlyin the quarter as a standoff developed between buyers and sellersand a lack of financing continued to make it difficult to get dealsdone." He added that there were some notable exceptions during thequarter, with several properties selling at prices that"demonstrated the continued willingness of buyers to still paysub-5% going-in cap rates for quality assets that have a strongmark-to-market story."

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.