Brokers look longingly in rearview mirror.

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Though the reaction was delayed, market statistics for the Manhattan commercial real estate market finally began to reflect reality in the second quarter: rental rates fell for the first time since 2005, dropping by 2.2% percent to $69.29 and availability jumped to 8.2 percent.

"Manhattan's office market is not impervious to Wall Street's malaise," said Steve Coutts, Studley's senior vice president of National Research Services. "Layoffs in the financial sector have fueled speculation about the amount of sublet space that would come onto the market and to what extent rents would decline. But during the first half of 2008, the proverbial axe fell, resulting in sublet space that spiked to 7.8 million square feet from 6.2 million square feet in January, and closed at 8.3 million square feet in June."

While the level of available sublet space (8.3 msf) is just a little more than what tenants typically lease each quarter, Studley's second quarter New York City market report illustrates that in many Manhattan submarkets, sublet space now comprises more than 25% of all available space. Most of the sublet space are big blocks, of 100,000 s/f or larger and has nearly doubled in quantity over the last two quarters. Additionally, these totals don't include another 4.0 million square feet of space that is rumored to be in play. In fact, the largest lease of the quarter, AIG's 800,000 s/f lease at 180 Maiden Lane, represented a pre-emptive strike on one such space that was not being actively marketed.

According to Coutts, the AIG lease is a good example of firms looking beyond the downturn to the future, hoping to seize an opportunity to consolidate a location and lock in a rental rate.

The report also speculates that professional and service firms, which have been insulated from job cuts thus far, will soon feel the repercussions from the large number of layoffs in the financial sector.

Many companies got a jump-start at putting sublet space on the market at a discounted rate, giving themselves a competitive edge against firms still sitting on excess space.

Companies offering quality space are sparking the most interest, especially among tenants with leases coming up for renewal in the priciest Manhattan properties.

Generous concession packages are still a factor in retaining tenants and attracting new ones. The gap between asking rents and taking rents, which was widening in the first quarter, became even wider in the second.

Rental rates have peaked, but they still have not fallen significantly, given current economic turbulence and uncertainty. Asking rents fell by only 2.2 percent in the quarter, but the decline was steepest in high-priced submarkets such as the Plaza District, where Class A rent showed a 5.5 percent decline to $122.22 per square foot.

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Leasing velocity totaled 6.5 million square feet, down by 15.5 percent from last quarter and 12.7 percent below the historical average of 7.8 million square feet leased each quarter. Leasing Downtown dropped by 36.6 percent to 1.4 million square feet--had AIG's 800,000-square-foot lease not materialized, this would have been one of the slowest quarters on record for Downtown.

What does all this mean? It means that while tenants still face record rent levels and spiking expenses, the exponential rental rate growth that occurred in 2006 and 2007 is now in the rearview mirror. Those tenants considering opportunities for expansion can pick from a wider spectrum of space options, and with fewer firms in the market, landlords will continue to expand concession packages.