City's commercial leasing boom is just beginning.

So much emphasis has been put on the imminent burst of the residential "real estate bubble" that many people haven't paid a lot of attention to the commercial leasing boom.

Even as the air is coming out of the residential market, however, the commercial market is tightening up, especially in the Midtown South and Flatiron districts.

The first and most obvious sign of a tightening real estate market is soaring rents; Manhattan's commercial space has been growing more and more expensive for the past 12 months.

The first three months of 2006 have seen the greatest increase, as rents in Midtown South and the Flatiron District have already grown an astounding 7.5 percent on average.

Another phenomenon is the disappearance of landlord concessions. A year ago, landlords were willing to offer new tenants three or four months of free rent; now, tenants are accepting just one or two months rent-free.

Similarly, tenants who were able to demand built-out space in early 2005 are now often happy to find quality unbuilt space and choose to build out and finish the space with money from their own pockets.

Lease contracts used to stipulate a scheduled, flat increase in rent, usually around 3 percent, that would cover all the landlord's increasing costs from year-to-year.

However, the recent mushrooming of oil prices and increasing inflation rates have caused many landlords to request a rent increase based upon the Consumer Price Index. In this system, if the Consumer Price Index escalates 5 percent, a tenant's rent would increase by 5 percent as well.

A landlord's market like this makes the broker's job of finding a tenant goodspace that fits their budget far more difficult, It may now take several months to discover the perfect space in which a client feels at home.

We really have to fight for our clients to win every concession and every amenity. Comprehensive knowledge of the market, as well as familiarity with specific neighborhoods, becomes invaluable when searching for that "perfect fit."

While this type of global market trend can never be explained by a sole cause, one of the factors driving the commercial market is the residential conversion of so much space in these neighborhoods.

Less commercial space pushes rents higher, and smaller tenants are now willing to accept fewer amenities and concessions as well as smaller spaces.

We believe that we are just seeing the beginning of a tightening market and we expect these trends to continue through the rest of 2006.

Rents in Midtown South and the Flatiron District still have room to grow, and we expect smaller firms and not-for-profit companies to start looking for space in other parts of the city, especially in the growing downtown commercial and retail neighborhoods.

The face of Manhattan's commercial market will continue to evolve as these traditionally less expensive neighborhoods absorb the overflow of commercial tenants from Midtown South and the Flatiron District.

BY JAMES BUSLIK

PARTNER, ADAMS & Co. REAL ESTATE