bankruptcybroader economy

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According to a Jones Lang LaSalle forecast, looking at thesituation with Lehman and depending upon if all or none of thespace is added to the market, if there is 100% of disposition,roughly 2.7 million sf will be added to the market resulting in apotential Q1 '09 midtown class A vacancy rate of 12.1%. Theforecast already assumes more than 15,000 in job losses prior torecent announcements. If there is a 75% disposition, a little morethan two million sf will be added to the market resulting in apotential vacancy rate of 11.7%. If there is 50% of disposition,about 1.3 million sf will be added to the market leading to avacancy rate of 11.3%. If there is 25%, roughly 673,345 sf will beadded to the market, pushing a potential vacancy rate to 10.8%.

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Hugh Finnegan, an attorney in the real estate group at Sullivan& Worcester LLP, tells GlobeSt.com that the result of financialindustry failure in Manhattan will most definitely have an effecton the office leasing market here. "The leasing market willsoften," he says. "There will be a lot vacancies created whereverLehman has large chunks of space." Merrill Lynch reportedly hasapproximately 60,000 employees, and Lehman has more than 20,000.Finnegan says that as for the firm's 32-story Midtown officebuilding--said to be worth north of $1 billion--"is valuable, evenif vacant, so I doubt there will be a foreclosure."

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However, Finnegan says that "given how tight the debt marketsare, it will not be that easy to finance." Finnegan further notesthat "if Merrill Lynch, Bank of America, AIG, Washington Mutual andothers start to lay off, there may be a significant number ofvacancies. This will further erode the class A market in New YorkCity."

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Finnegan explains that "the assets financed by Lehman should notface any immediate effect because of the bankruptcy. In fact, aslong as the loans are performing, they will be valuable assets inthe bankruptcy." The assets mentioned include the debt of SLGreen's 1166 Sixth Ave., 1515 Broadway and Broadway Partners'acquisitions of 340 Madison Ave., 450 W. 33rd St. and 280 Park Ave."The issue will be that efforts to refinance will not be easybecause there are not many players right now and even fewer at themagnitude of loans on assets like these. Some large property ownersmay need to call upon affiliated entities to assist with theefforts to refinance."

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Robert Knakal, chairman and founding partner of Massey KnakalRealty Services, tells GlobeSt.com that Lehman's bankruptcy filingis an unfortunate--but necessary--step in the overall stabilizationof financial institutions. He explains that one of the things thatneed to happen before the markets can turn around is that financialinstitutions need to be stabilized. As for Lehman's real estateportfolio, Knakal says that "Lehman has a tremendous amount ofgreat real estate in their portfolio, which should be in highdemand from institutional buyers. There is a massive amount ofcapital which has been sitting on the sidelines waiting for such anopportunity."

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Knakal says that unemployment hit 7.8% in the early 1990s and isonly 6.1% today with many economists expecting it to rise to about7%. "These job losses have likely already been anticipated in theseextrapolations," he says. "Unemployment has the most profoundeffect on the fundamentals of commercial real estate market as itnot only affects office vacancy but also residential vacancy."Knakal further notes that Lehman's midtown building is a tremendousasset, and believes it would be in high demand from buyers in themarket.

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Whatever the final layoff number, numerous workers will beimpacted, and statistics show a dip in asking rents and a drop-offin leasingvelocity in the Manhattan market. A Studley Q2 report notedthat rental rates declined by 2.2% to $69.29--the first declinesince 2005, while availability jumped to 8.2%. "Layoffs in thefinancial sector have fueled speculation about the amount of subletspace that would come onto the market and to what extent rentswould decline," Steve Coutts, Studley's SVP of national researchservices, says in a prepared release. "But during the first half of2008, the proverbial axe fell, resulting in sublet space thatspikedto 7.8 million sf from 6.2 million sf in January, and closedat 8.3 million sf in June."

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While the numbers are clearly heading in the wrong direction,there is still hope that the damage may be contained. "If themarkets get worse and the S&P continues to drop and creditmarkets continue to deteriorate, we will certainly see morelayoffs," James Feldman, an analyst with UBS, recently toldGlobeSt.com.

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Marc Francis, president and CEO of the Delphine Real EstateAdvisory Group Ltd., tells GlobeSt.com that "leasing prices willsoften up following layoffs at Lehman, Merrill, and later possiblyMorgan Stanley." Lehman's building will attract buyersinternationally, he explains. "The proceeds can be used to pay downpart of its huge debt."

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Dan Fasulo, managing director of research at Real CapitalAnalytics, tells GlobeSt.com that as far as the real estate side ofthings, "Lehman has not been a major player since last year, so theimpact will be more indirect through further risk repricing andnegative investor sentiment," he says, noting that "a majority ofthe Lehman real estate assets are good."

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An anonymous industry source tells GlobeSt.com that as far astrading goes, "with the recent financial news, we should expectfinancials to trade down pretty significantly today [Monday],especially the broker-dealers." The source notes that "there willbe others up next, as confidence in the system—and businessmodel—is not great." The source further explains that as far as NewYork City's office leasing market goes, he agrees with others that"I think it will put downward pressure on rents in New York City,"noting that "the publicly traded office companies with exposure toNew York City may trade down today [Monday]."

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Natalie Dolce

Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.