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NEW YORK CITY-Sublease space has come onto the Manhattan office market in quantities that haven’t been seen for years and is putting downward pressure on asking rents, according to several quarterly reports. However, forecasts call for less cloudy conditions as the economy begins to stabilize late this year and into 2010.

“The spread between asking rents and taking rents will start to narrow in the next few months,” said John Powers, chairman of the New York tri-state region for CB Richard Ellis, at the company’s quarterly media briefing on Wednesday. In the meantime, though, the availability rate will continue to increase, although Powers predicted it won’t hit the 1992 nationwide peak of 18.7%.

Currently, the overall vacancy rate for Manhattan is 8.5% as measured by CBRE, and reaching 9.6% if the space that will become available in the next months is taken into account, as Cushman & Wakefield does in its first-quarter report. Class A vacancy has reached 10.8% from 10.2% in February, according to the monthly snapshot released Tuesday by Colliers ABR. Midtown’s vacancy rate at 10.5% is noticeably higher than the 8.1% rates seen in both Midtown South and Downtown, according to C&W. “You could almost say this is a Midtown recession,” said C&W COO Joseph Harbert during the company’s media briefing on Tuesday.

Some of that increasing availability will result from what Powers called “a lot of shoes dropping” Downtown in the coming months, including the space that Goldman Sachs will give up when it moves into its new headquarters at year’s end and the fallout from AIG’s travails. And some will come from blocks of sublease space as major employers continue to downsize.

Already, the amount of sublet space in Manhattan has more than doubled year over year, reaching 10.3 million square feet at the end of 2009′s first quarter of 2009, up from 4.4 million square feet a year earlier, according to C&W’s Q1 report. That’s the highest amount of available sublease space seen here since the second quarter of 2004, when it reached 10.9 million square feet.

In Midtown, one-third of the 30 million square feet of available space is sublease, Powers said. However, he observed that seven million of the 10 million square feet of sublease space in Midtown is probably unleaseable at present, due to issues with the term structure of the space.

For example, a potential tenant offered a large block of “poorly built-out” space for a two-year sublease would probably pass it up because the expense of build-out for a relatively short stay would not be justified. Conversely, a landlord may be reluctant to make a deal now for a sublease tenant to take over the space in a long-term deal after the existing lease runs out, because it’s difficult to predict what the space will be worth a few years from now.

A lot of that uncertainty about the future stems from what CBRE calls a re-pricing of office space, particularly in Midtown. Overall asking rents for Manhattan fell to $65.01 per square foot in Q1, down 6% or $4.43 decline from $69.44 per square foot at the end of 2008. C&W calls this the largest quarter-over-quarter decline since the company began keeping records in 1984. In Midtown, 11.5 million square feet of office space has seen asking price declines since the Lehman Brothers collapse last September, including 8.2 million square feet in Q1 ’09, according to CBRE. Midtown rents declined 17% in January and in February, and 11% in March. About 30 million square feet has been re-priced downward across Manhattan, CBRE says.

Leasing velocity has slowed considerably from a year ago, with C&W calling Q1 ’09 the slowest first quarter on record, down 39% to three million square feet from five million square feet in Q1 ’08. However, Powers pointed out, “The bad news is we’re running at half speed. The good news is that there is a speed and deals are getting done”–except in the sphere of 250,000 square feet and above, where no new leases have occurred over the past six months. Deals of 25,000 square feet or less have dominated the picture lately, especially those of less than 10,000 square feet. In Midtown alone, there have been 321 such deals in the past six months, CBRE says.

Investment sales activity has slowed as well, with Q1 totals on transactions $10 million and higher reaching $1.1 billion, according to C&W. While $1.6 billion in sales were closed in Q1 ’08, at the time there was $3.5 billion in sales under contract, compared to current estimates of less than $100 million in properties currently under contract.

Fifteen deals were closed in the first quarter of 2009, compared to 25 in the first quarter of 2008, C&W says. They included the sale of the office condominium at 1540 Broadway for a reported $355 million and the $225-million sale-leaseback of the New York Times Co. headquarters at 620 Eighth Ave.

Reflecting this lack of velocity as well as continued deterioration in local and national economies, the average price per square foot for class A properties fell almost 50%, from $842 per square foot in ’08 to $442 per square foot in Q1, according to a FirstService Williams report. That brings pricing back to 2004 levels, and if only class A transactions are counted, the dropoff in velocity is even steeper: off 76% to $950 million from the Q1 ’08 tally of $4 billion. On the other hand, that’s nearly double the $500 million in class A sales seen during Q4 ’08. “With rents in a freefall, no well capitalized owner with a seasoned property will be compelled to sell in this market,” says Williams CEO Mark Jaccom in a release.

However, both C&W and CBRE see conditions improving within the next six months to a year. “The worst is behind us,” said Ken McCarthy, managing director of the New York region, at C&W’s Tuesday briefing. At the CBRE event, James Costello, principal of CBRE Econometric Advisors, noted that consumer spending is “ever so slightly less negative” as the pace of decline starts to level off. An increase in consumer spending is the first of five signals of a recovery, Costello says, followed by increased corporate profits and production, growing demand for new hiring, increased pace of personal savings and investment and positive trends in financial services hiring.

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