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NEW YORK CITY-The fall-out from the credit crisis bullied its way into the Manhattan office leasing market during the first quarter of 2008, causing the vacancy rate to jump 40 basis points to 4.9%. So says Grubb & Ellis’ Manhattan office market trends report.

With JP Morgan Chase’s acquisition of Bear Stearns and the continuation of financial firms posting billions of dollars in write downs—including recent announcements by UBS and Deutsche Bank—the financial services industry as a whole began to dispose of space throughout Manhattan, according to the G&E report. Available space for sublease jumped to seven million sf, with the addition of one million sf in the first quarter. The sharp increase was precipitated by the 599,000-sf block of space placed on the market by Goldman Sachs at 77 Water St., the 140,000 sf marketed by the Royal Bank of Scotland at 7 World Trade Center, the 110,000-sf sublease put on the market at 2 World Financial Center by Nomura Holdings and iStar Financial’s return of 107,000 sf at 1095 Ave. of the Americas.

Regarding the addition of one million sf of sublease space from financial firms, Richard Persichetti, client services manager for Grubb & Ellis, tells GlobeSt.com that “this is only the beginning of a trend as more financial firms likely will place additional sublease space on the market over the next three to six months.” Over the past four years, the financial services industry accounted for more than 40% of the leasing activity in Manhattan, but with the financial markets in turmoil, Grubb & Ellis expects overall demand to remain flat throughout the year. A slowdown in leasing velocity has already been witnessed in the first quarter as only 7.6 million sf in lease transactions occurred. A drop in demand by 15% compared to one year ago insinuates a weakening market. A more telling indicator, the report says, is that 48% of the sf leased this year were renewals, a significant increase compared to last year when renewals only accounted for 19% of the first quarter’s activity. The lack of new transactions in the market suggests that tenants are in standby mode as the status of the economy unfolds.

The report says that one year ago, tenants with large space requirements had limited options in Manhattan, with only 26 available blocks of space greater than 100,000 sf. By the end of the first quarter, 14 new large-block availabilities hit the market, as the year-over-year total more than doubled with 53 such blocks of space in the available supply. Still, landlords kept pricing in Manhattan stable, as direct class A asking rents edged up $1.14 to $90.20 per sf. However, the increase is a noticeable decline from the $4.35 per sf quarterly average rise recorded over the past 18 months. Persichetti tells GlobeSt.com that “aside from the 53 blocks of space that are actively being marketed, there are, at a minimum, an additional 20 large blocks of space that could be made available over the next 18 months.”

Asking rents likely will flatten over the next six months, and begin to gradually decline as 2009 approaches. “The trend should begin to give tenants more negotiating influence to achieve more generous concession packages in the form of free rent and tenant improvement allowances,” the report says.

A recent GlobeSt.com article, which focused on Wall Street woes weighing in on the office market, also noted that JPMorgan Chase’s acquisition of Bear Stearns could put hundreds of thousands of sf on the market. The article mentioned that news followed just a few days after Marcus & Millichap Real Estate Investment Services forecasted a growth of 16,000 jobs citywide in 2008. “In normal circumstances, we’d be talking about net gain in job growth,” said Edward Jordan, regional manager of Marcus & Millichap’s Manhattan office in the previous article. “On the other hand, if you look at some of the layoffs and consolidations that have been planned, there could very likely be another 2.5 million to three million sf of space available for sublet this year that had not been anticipated.”

A recent market snapshot from Newmark Knight Frank also noted that the availability rate in the Manhattan office market had risen slightly from 8.2% in January to 8.4% in February, with nearly one million sf added. Neil Goldmacher, EVP and principal at Newmark Knight Frank also recently told GlobeSt.com that he predicts asking rent increases will level off. “You’ll see pricing come down, because the sublet space that comes to market will be at lower numbers,” he said. “That will put downward pressure on pricing.”

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