Half-year figures say all that glitters isn't gold.

Despite a strong first quarter, second quarter market figures suggest that 2005 won't be as big a year for Manhattan commercial leasing as 2004.

According to Cushman & Wakefield market data, there was roughly 11 million square feet of leasing in the first two quarters of 2005, down about one million s/f from the same period a year ago. That number includes leasing activity only through May, but June figures are not expected to offset the total by much.

While C&W director of research, Jim Delmonte, called the one million s/f disparity between 2004's and 2005's first halves "significant," it could have been an even bigger gap had the opening quarter of 2005 not been so strong.

During that period there were a number of big deals, of which many were carryovers from the fourth quarter of last year. The first quarter of 2005 posted 6.6 million s/f of leasing, less than the 7.7 million s/f done in the same period the year before, but far better than the 4.4 million s/f of leasing accomplished in the second quarter, withholding June's as yet unknown figures.

The second quarter slowdown--endemic, especially in the taking of big block space--underscores financial and law firms' hesitancy or inability to commit to expand amid a host of ambiguous economic indicators.

While interest rates have remained low, many are uncertain when and by how much Treasurys will rise in the face of rising inflation and Fed rates. And though some job reports are offering encouraging forecasts for hiring in the third quarter of 2005, there has been concern regarding how well the economy will continue to fair.

"The feeling in the market is that we're at a crossroads," said Kenneth M. Krasnow, executive managing director of C&W. "In the spring, we saw a pause, a lot of people are catching their breath after 18 months of strong activity, they're looking to see how the economy is doing and how the world is doing. There is a sense that they are being careful now about their decisions. This is still a healthy pace, though, historically speaking.

"We did come back to reality a little quicker than expected."

Although the first quarter of 2005 did post strong performance, the size of its big deals could not compare with what was accomplished during the same period in 2004.

In 2004, the year began with the pacesetting 789K-s/f lease by PWC at 300 Madison, the 458K s/f lease by law firm, Cadwalader, at One World Financial Center, the 352K s/f lease by Fairchild at 730 Third Avenue, and a 254K s/f lease by law firm, Kramer Levin, at 1177 Avenue of the Americas.

In comparison, among the biggest leases in the first quarter this year were the 450K-s/f of space taken by Morgan Stanley at One New York Plaza, the 235K s/f lease taken by the US Securities and Exchange Commission in 3 World Financial Plaza, the 195K s/f of space taken by Ralph Lauren Polo at 625 Madison Avenue, and the 192K s/f lease signed by Baum & Co. at 55 Water Street.

Not only do 2005's opening quarter big deals amount to less square footage, they also show a trend that more big space users were eager to go downtown where they could capitalize on cheaper rents and snatch up sublease space.

Among the only notable big deals in the second quarter, and one of the few big leases done in Midtown this year, was the 271K s/f of space taken by Viacom at 1540 Broadway in May. Morgan Stanley also expanded by 200K s/f in One New York Plaza at the beginning of June.

Big deals may have tapered off for the time being, but activity has been supported by an increased frequency of smaller deals.

Though not as eye-catching as 100K+ s/f deals, smaller deals can provide landlords of high-end space with optimal rents. The proliferation of hedge funds, private equity funds and private client groups--firms that often have small staffing requirements but yet can manage billions of dollars--have done a lot to feed this area of the leasing market and have helped push rents for trophy space to unprecedented heights.

Those firms can and often do pay into the six digits per s/f for space, a rental rate that few big users would be able to match.

"The ratio of income to occupancy is very pronounced with these types of tenants," said Dean Shapiro, CB Richard Ellis's executive managing director, who just closed two hedge fund deals, one for 20K s/f at $100 psf and another for 11K at $80 psf.

"Here are these small firms with great wealth, and rent, even very high rent, is a small expense to them. If you look back, I remember for quite some time that $65 psf in Midtown was the highest landlords could go. That has changed completely."

To accommodate the growing market for these types of rich yet small tenants, some owners of class A Midtown space have repositioned their buildings to appeal to the hedge fund industry.

"Macklowe did a great job of changing 400 Madison from a dental building to a hedge fund building," said Michael Liss, a broker at Trammel Crow who has worked on a number of hedge fund deals this year. "There are 9800 hedge funds listed right now, and they have helped spur a lot of growth in the Plaza District."

Smaller users have been so active, some big blocks of space may even get carved up by landlords tired of holding out for large institutional tenants.

Although big block space had been heralded as a shrinking commodity in Midtown, Robert Tunis, senior executive managing director at GVA Williams, said that there are 31 200K+ s/f spaces on the market in Midtown right now. Their prevalence is considered relative to how well the market does in the coming months. If firms start taking big blocks, then 31 may seem like a small number, but if there is little activity, it may hasten their dismantlement into smaller pieces.

"It will be interesting to see what happens in the third quarter," Tunis said.

According to Tunis, rents in Midtown remain virtually unchanged from the start of the year. Midtown vacancy has also hit a plateau it seems, hovering at about 10%, or just above equilibrium. Even without June data, Tunis said that downtown rents, however, have slid slightly since the start of 2005; a phenomenon that many landlords hope will be arrested by the uptake of sublease space.

"Government incentives need to be brought back into the picture," Tunis said. "In December of 2004, a lot of those incentives disappeared, now they only exist for buildings that were built before 1972. I think we need them back, whether it's federal, state, or city."

Where downtown is supposed to provide a cheaper alternative to Midtown, Midtown South has been posting stronger performance so far by luring many tenants away from Midtown class B space with more economical space of equal quality.

"Midtown South has been the darling of the recovery," Tunis said. "It has the highest rents for what it is and is one of the most rented areas. It has broad appeal and just about zero new construction, so the market won't get watered down by new properties."