CBRE sees signs of stabilization.

Although the first quarter of leasing activity in Manhattan was among the slowest on record and vacancy has steadily risen amid economic turmoil, executives at the real estate services firm CB Richard Ellis see signs that the city's office market is beginning to stabilize after months of decline.

Asking rents in Manhattan have fallen from $70.72 psf on average a year ago to $57.35 psf now with even starker declines in midtown, whose asking rates careened from $85.61 psf at the end of the first quarter in 2008 to $65.59 psf.

The availability rate, which measures the amount of space presently vacant combined with what is projected to be empty within the next year, has risen from 8.7% at this time last year to 13.3% for all of Manhattan.

Again, things were worse in midtown, a district that had seen the greatest rental increases during the boom years but now has been hard hit by problems in the financial sector in part because of its concentration of major investment and banking firms. Availability grew from 8.2% to 14.2%.

The declines represent a near historic unraveling in such a short span of time but have not yet been enough to erase all of the gains made during the last up cycle, a period spanning from the market's recovery from a previous recession in 2001 to last year when the current economic problems began to set in.

That's perhaps because rental rates and occupancy levels during the boom times were so dramatic and the downturn hasn't yet buffeted the Manhattan market long enough to erode them to levels seen in past cyclic downturns.

The recession seemed to hit Manhattan's real estate market full force beginning sometime in late September or October, just after Lehman Brothers collapsed and the financial sector, which is the city's biggest space using industry in the city, plunged into chaos and began to shed office space.

Real estate experts cite that period as an inflection point for the market, when rents began to quickly recede from record highs and tenants across Manhattan started to put leasing on hold. Economic experts say that national economic downturns typically set in later, hit harder and last longer in Manhattan because it is a provider to the rest of the country of advertising, media, legal and financial services.

A question for months has been just how far the market will fall. With vast amounts of space available but few deals to establish pricing benchmarks, brokers in recent months have had trouble valuing space. The uncertainty has made tenants hesitant to grab even at what are perceived as inexpensive deals not only because many are unsure of the health of their business and therefore how much space they will need in the future but also due to the perception that rents may continue to fall.

In recent months Powers said that he had put together a group of brokers to price spaces in the market and found that the individual valuations differed by 20% or more and that each broker could provide a rationale for their opinion.

Powers said that landlords had begun slashing rental rates to try to spark deals. The most desperate cuts began in December when in midtown, rents for 1.7 million square feet of space were lowered by 19%. In January, 3 million square feet was lowered by 17% and then in February, 3.6 million square feet was lowered by 17%.

But in a presentation in front of reporters this morning at CBRE's New York headquarters at 200 Park Avenue, John Powers, chairman of the company's tri-state operations, said that landlords have begun to decelerate their lowering of rates and that brokers now had a clearer picture of what space is worth.

In March the price for 1.6 million square feet was dropped by 11%. Powers said that the falloff in repricing was a sign that landlords had reached rents that were starting to find takers and he predicted that the rate of decline would continue foot block to slow.

One reason for the id the apparent shift towards stability is that sublease space hasn't been as deleterious to the market as some have thought. The general perception of such space is that, in quantity, it puts a severe damper on the market because sublessors are generally willing to undercut rents offered directly by landlords.

In midtown, Powers said, there is roughly 30 million square feet of vacancy, about a third of which is being offered as sublease space. But about 7 million square feet of that sublease space comes with unattractive terms.

"If there is a 400,000-square-foot block of space with a one-year term and the sub-landlord is even willing to offer it for free, would there be any takers? No," Powers said, explaining that all but the smallest tenants typically want new offices that extend for longer periods of time because of the capital they typically have to expend preparing the space for their occupancy.

Powers suggested that leasing the space would therefore hinge on whether landlords are willing to link the subleases into an attractively priced direct deal so that the lease could extend to a more reasonable length.

Powers also said that he felt that the amount of sublease space in the market has been overstated due to the fact that a number of large companies have been advertising more offices than they plan to actually get rid of in an effort to provide potential subtenants with a better selection of space to choose from in the hope that something will catch their eye.

Powers' forecast for the market predicts that the downturn in the real estate sector will be milder than previous recessions despite the fact that the current one appears to be the deepest since the great depression. Vacancy for instance, would not reach the 18 percent level seen during the recession of the early 1990s, in part because there hadn't been as much addition to the city's supply of space during the up cycle.