Absorption hasn't followed usual patterns.

Historically, the formula has been that as office worker employment increases, so does office leasing velocity. One of the major forces behind positive absorption of office space has been the hiring of new employees. However, over the past three years, absorption has not conformed to the usual patterns.

Net absorption was whipsawed at a time when there was nominal change in employment figures. Office space procurement experts more closely tracked firms' decisions on projections and technology investments, than investments in additional personnel. During the dotcom era, leasing velocity outpaced employment growth exponentially. Companies ended up leasing more space than needed for fear of losing out on good opportunities.

As the economy began to cool in mid- to late-2000, excess space was soon put on the market for sublease. Consequently, for the first time in market history, the percentage of sublease to direct space increased by a ratio of almost 2-1.

Today, the percentage of sublease space in Manhattan accounts for 41% of all available space. Net absorption seems to have fallen faster than warranted, and based on the limited velocity that we are seeing, there now appears to be a number of years of supply in the pipeline. Could this be the beginning of yet a different new economy? If decision makers revert and react to recent layoffs, the negative net absorption trend line may have only just begun.

So, what does a landlord do with respect to a lease maturity that is 36 to 48 months away? The disconnect between market opinion and market approach perhaps lies in the questions themselves: from the landlord's perspective--whether in fact the real estate downturn is over, and from the tenant's perspective whether to gamble on eventual business growth and retain space, or whether to consolidate and sublease excess space.

Let's face it, even at an overall availability rate in Manhattan of 11.75%. despite this being almost 250% higher than the most recent low availability rate of 3.38% in September 2000; the actual number of spaces matching all of a tenant's criteria vis-a-vis location, infrastructure, costs, image, etc, still remain limited by comparison to the opportunities which prevailed in the early 1990's.

The experts all agree that a slowdown is underway and depending on which camp you're in, it's either going to be a "soft" or "hard" landing. A soft landing occurs when the economy slows, but a recession is avoided; a hard landing results when the slow down leads to a recession.

Some of the recent events, such as the uncertainty in the Middle East, continued increases in oil prices, corporate scandals, and schizophrenic stock market behavior, have some observers suggesting that a hard landing is imminent. If this happens, the list of criteria meeting alternatives will grow for those tenants in the market.

We believe that now is the time to focus on the early renewal perspective. Our approach to the early lease renewal process has helped us maintain strong occupancy rates and develop laddered lease maturaties with reduced lease rollover risks for our clients. For our conservative landlord clients who believe it will be a hard landing, the choice is simpler, i.e. early renewal. But for the soft landing believers, who are more risk tolerant, the decision to negotiate an early renewal is fraught with strife and concern about lost future opportunity. These clients typically prefer to opportunistically hedge their bets and wait to see if the economy improves. Based on overall market performance, two things are certain: rental rates will continue to decline as the availability rate increases, and the trend line for the up-tick in rents is anything but linear. Historically, pricing variations are relatively flat over longer periods of time, then spike at specific demand inflection points which are relatively static in occurrence.

From a real estate fundamentals perspective, the analysis is simply the calculation of the recovery rent necessary for the landlord to achieve should the tenant choose to leave. We have witnessed that sometimes the "momentum phenomena" takes over. Under this set of circumstances, a tenant is ready to make a long-term commitment to renew with their landlord only to find the landlord not responsive. This leads to the tenant making a commitment to another landlord, which the incumbent landlord can't undo without significant cost consequences, or, at minimum, the creation of ill-will between both parties.

With real estate price variations tending to be small over longer stretches of time, and, given today's economic environment, it's difficult to predict sudden major upward pricing pressure. Our objective is to align both parties' interests and to effect a win-win scenario.

From the landlord perspective, we focus on numerous issues ranging from financing and credit risk, tenant mix, lease rollover exposure, holding period and yield objectives, cost of capital, overall rent roll market value delta, and partnership/ownership structure considerations.