INSTABILITY IN THE FINANCIAL SECTOR...

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One of the biggest jolts to hit New York City in quitesome time occurred earlier this month as three major financialservices firms in rapid succession—Lehman Brothers, Merrill Lynchand AIG—went through radical changes. In the case of Lehman, it wasa bankruptcy declaration followed by a distressed sale of much ofits assets to Barclays PLC. Merrill was sold to Bank of America toavoid a similar fate, while AIG's rescue took the form of a bailoutby the federal government. Considerably less of a jolt was theresults of a GlobeSt.com poll asking readers to gauge the effectsall of this will have on commercial real estate. Seventy-eightpercent of you think the Wall Street upheaval will "decimate" theoffice market. A local expert who also thinks along these lines isRichard Persichetti, research manager for the New York region ofGrubb & Ellis. He produced a special report last weekpredicting that the fallout will be a sizeable increase in subleasespace. Persichetti commented further on this issue in conjunctionwith last week's poll.

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"Obviously, it will have an impact on the New York market, sincefinancial service firms are the biggest occupiers of space inManhattan. There's no way around that. In the past few days, it'salmost like the world has changed. You wake up every morning andfind more global financial services firms restructuring. There's anew piece to the puzzle every minute, and it's look everything isquickly changing. On the positive side, New York will retain itsposition as the anchor for the world financial structure. It's justthat the whole global service industry is going to shift alittle.

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"You're going to see more space come onto the market, a lot ofit in the form of sublease space. That's going to start to shiftthe power from the landlords, who have basically held the reins forthe New York commercial real estate market over the past severalyears, and little more in favor of the tenants. Instead of tenantscompeting for space, you're going to have landlords competing fortenants as demand slows down. From the beginning of this year, youstarted to see little facets of this market start to change. Thiswill just propel it a little quicker over the next 12 months.Barclays hopefully will acquire a piece of Lehman and keep theirMidtown tower. Once they get in there, who knows how they'llrestructure it; who knows how much space comes on the market? Andeven with the federal government stepping up for AIG, they'vealready said they're going to make changes to the leadership atAIG. And with the changes will come restructuring, which couldinvolve looking directly at the real estate. Maybe they'll sell offa building or two that they own, or lease some of their space.

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"There's always a possibility that other firms will downsizeeven if they're not facing the same kind of restructuring. A lot ofthese firms have scaled back in recent years and become a littlesmarter about hiring and staffing, especially since 2001. Butwhether the individual firm is successful or faltering is reallywhat will determine whether they scale back on employees.Generally, they're not going to be in space acquisition mode. Theymay dispose of some, but they're not going to be out there activelyacquiring space, especially if they're not hiring.

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"Over the next three to six months, you're going to start to seeparts of the real estate puzzle fall into place. The firms thathave taken over ownership, like Barclays with Lehman, will start todo due diligence on what they've acquired. Once they figure outwhat they need and don't need, you'll start to see the effects interms of space hitting the market. Long term, forecasting where thedemand will come from is not easy because we don't know how muchfallout there will be from the financial services sector. It'salways reported that for every job lost on Wall Street, two orth

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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.