NEW YORK CITY-With uncertainties surrounding the financial services industry caused by the credit crisis of 2007, expect to see a flattening office market in 2008 as a slowdown in demand occurs. So says Grubb & Ellis’ Northeast real estate forecast for 2008.

The Manhattan office market is expected to remain stable according to David Arena, president, Grubb & Ellis New York, as rental rates should remain steady over the next 12 to 18 months with class A vacancies remaining historically low, lack of new supply over the next two years and the cost of bringing new developments to market. Average asking rates for CBD class A office space in Manhattan are projected to be $90.25 per sf in the fourth quarter of 2008, slightly up from $89.06 per sf in the fourth quarter of 2007, he adds.

The Downtown office market fully recovered in 2007, as vacancy dropped below 6.5%, a level not witnessed since late 2000. Landlords rode the increase in tenant demand by raising asking rental rates for both class A and B space to all-time highs, as class A space averaged over $60 per sf and class B space surpassed $40 per sf. Despite the strong market fundamentals experienced throughout the year, Downtown class A asking rents remained at a 35% discount when compared to Midtown, which, according to the report, will keep Lower Manhattan a viable option for tenants looking to save on their real estate expenses.

The report noted that the Downtown market should feel the influence of the credit crisis by mid-2008 due to the multiple large financial companies that reported significant losses during the last quarter of 2007 and announced layoffs. Since financial services firms occupy 46% of the space in Lower Manhattan, demand could slow in 2008 as major financial firms likely will put office space acquisitions on hold.

In addition, the announcements of a hiring freeze by the mayor’s office in late 2007 does not bode well for Downtown, as the City of New York is the largest single-occupier of space in Lower Manhattan. The report says that in 2008, different industries will occupy space, as more legal services firms, health and educational companies look to take advantage of the less expensive sublease space which is likely to be placed on the market by the stagnant financial services industry.

Despite the flat market that is projected for 2008, the redevelopment over the next seven years in Lower Manhattan will make this market an area of destination, according to the report. With modern infrastructure and a transportation hub set to be completed by 2009, as well as booming retail and residential markets, Downtown could finally rival Midtown as a primary office market. From 2010 through 2014, six new buildings (two owner-occupied) will add more than 12 million sf of new office product to the inventory. The release said that with two of the world’s largest financial firms investing in Downtown’s future–Goldman Sachs at Site 26 and JP Morgan Chase at Tower 5–expect to see more firms begin to commit to the World Trade Center development site in a flight to quality scenario.

“Despite the credit market turmoil experienced in 2007, market rents continued to rise, but the rate of increase should begin to taper off in 2008,” explains Richard Persichetti, client services manager of the New York Metro Region. In 2007, the Midtown office market witnessed leasing transactions signed in excess of $180 per sf. Fueled by high demand and a vacancy rate that remained below 5% for the entire year, landlords raised average asking rents to historical highs. Class A asking rents surpassed $90 per sf, while class B asking rents topped the $60 per sf plateau. The first substantial office construction in three years was completed during the third quarter of 2007, as the New York Times’ 1.6-million-sf building was fit for occupancy at 620 Eighth Ave.

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