Downtown business stepping up a gear.

The verdict is in. Downtown is switching gears from recovery mode to a period of stabilization; a phase that brokers feel is a harbinger for increasing rents.

Despite recent reports that the gap between average Midtown and Downtown rents is at or near a record high, market experts feel that Downtown office rents are poised for turnaround. Citing that the average difference, which is currently in the high $14 range, is actually much higher when comparing the rents of Downtown and Midtown class A and trophy space, brokers feel the Downtown market--especially the high end office market--is starting to garner more attention based simply on its value.

"I am bullish on downtown," Cushman & Wakefield broker Andy Peretz said. "We are not out of the woods yet but we're showing real positive signs. The fact that this huge rent discrepancy exists is a good thing because there's got to be somebody who says 'let's move our big organization downtown and save some money.' You could have a gorgeous piece of space downtown at $35 a foot compared with being in a $70 building in Midtown. You multiply that by 100,000 feet for a 10-year lease and the money starts to really add up."

The completion of 7 World Trade is expected to command rates in the $50s, unheard of for an area that has trouble cracking $40 a s/f. But it isn't just new office development that is helping raise the bar Downtown. According to C&W investment sales broker Scott Latham, the recent flurry of office to residential conversion spurred by post 9/11 Liberty Bond financing, is removing obsolete office buildings, thereby tightening the market. It is also crafting the kind of bustling, 2A/7 neighborhood that lures companies eager to offer their employees a place where they can both live and work.

"We're now seeing a comeback in urban areas as places people want to live," Latham said. "The more appealing the downtown it is to residential tenants the more appealing it will be for office tenants." Downtown's only bane is the unexpected nature of the sublease market.

Peretz speculated that if a financial institution decides to dump a large chunk of sublease space, it could put a dent in office rents. But sublease space has shrunk overall in the past year and pending big deals at World Financial Center for about 700,000 s/f and 32 Old Sip for 200,000 s/f could set the tone for an expected buoying rent market.

While cap rates remain steady in Midtown, Downtown's higher rates of return have slid slightly, not because of decreasing rents but increasing building values.

Investors who pounced on 8 caps a few months ago are starting to look like geniuses as increased demand for product has driven Downtown building values. "The rental rates could go up very quickly," Latham said. "All in all things are very good out there. Those who are saying that there's a bubble I believe are reacting to the inability to buy deals. They have loads of money to buy and they get outbid on every deal because there is so much demand."