Manhattan's health is slow and unsteady.

In reviewing the first half of 1996, it is evident that national and international trends are causing changes, both positive and negative, on a industry-by-industry basis throughout the region. In this global hub of communications, finance and services, tri-state area companies are leading players in changing the way companies deliver services to clients and consumers. Business organizations are also facing external pressures from the aging demographics profile in the United States and from growth in free market economies globally. The impact of these changes is tracking through the tri-state market in a variety of ways.

From a commercial real estate perspective, the overall health of the Manhattan office market can be characterized by slow and unsteady gains in market conditions mixed with cautious optimism for renewed growth in rent and absorption.

The signs of stagnant market conditions are occurring due to the continued trend of corporate downsizing and restructuring. The quest for increased corporate profits has focused attention on achieving savings though a reduction in real estate costs. The impact of rising productivity through application of technology, a rationalization of space standards and efficiencies gained from consolidating operations are factors that have enabled companies to reduce their real estate requirements.

Overall, the Manhattan market contains 310.6 million square feet with a 14.9 percent vacancy at year end 1995 and 14.3 percent in the first quarter 1996. This compares with a vacancy rate of 16.2 percent at year end 1994 and a high of 16.0 percent in 1991. Vacant space including immediately available sublet space currently totals 46.5 million square feet while available space including occupied sublet space totals 54.8 million square feet.

Average asking rents in the midtown market made steady gains over the past two years while downtown continued to float with no evidence of steady trends in either direction. Midtown Manhattan, which has shown signs of increasing strength over the past two years, seemed to have stalled at year end as evidenced by an increase in overall available space and a slight decrease in asking rents in the first quarter of 1996.

Despite the recent problems, there is a great deal of optimism in the market due to the enactment of the Downtown Commercial Revitalization Program (DCRP). The DCRP provides commercial rent tax, real estate tax, real estate tax and energy expense relief to tenants who sign new or renewal leases in properties built before 1975. Tax incentives are being offered for the conversion of older office buildings to residential use which will give downtown a more 24-hour character.

Given the intensity of activity over the past few months from both tenants and developers, it is believed that these incentives will have a immediate impact on tenant leasing and produce a longer term gain from the development of more residential units.

CBC/Torto Wheaton Research unit, CB Commercial's econometric forecasting group, projects that the overall market vacancy rate will continue to fall over the next two years. Rent inflation is expected to average 2.7 percent per annum over the same period. TWR projects that outlying submarkets including Columbus Circle, West Midtown South and the Times Square area will sow the greatest improvement in occupancy. While there is strong demand for higher and well-located space, many companies that are under pressure to cut costs will be forced to locate in these outlying areas as the vacancy rate in the core of midtown drops further.

STEVEN A. SWERDLOW Executive Vice President, Managing Officer New York Region/CB Commercial Real Estate Group, Inc.