Manhattan space availability has changed since Sept. 11. (Insiders Outlook).

Since Sept. 11, the composition of available space in all three Manhattan submarkets has significantly changed. The most noteworthy change in composition is the ratio of available sublet space to direct space. From January 2001 through December 2001, vacancy rates in Midtown rose 100%, from 3.9 to 8.7%, and rose 250%, from 4.4 to 11.9% Downtown. The availability of sublease space is the largest contributor to this increase in vacancy rates. In fact, New York City has not seen such a large quantity of sublease space in the market in decades.

Historically, sublease space accounts for approximately 10-20% of the total supply of available space. Today, however, of Midtown's total available space, almost 45% (of the 8.7%), consists of sublease space. Downtown, the scenario is similar but, understandably, the rates have risen even higher post Sept. 11. Of Downtown's total available space, more than 50% (of the 11.9%), consists of sublease space.

What is contributing to the rise in sublease and vacancy rates? Pre-leasing, corporate downsizing and the trend away from the campus size concept, are some of the more significant factors which have affected the recent rise in rates.

In Midtown, the extent of pre-leasing, which is still "de rigueur" for new developments, is clearly not helping. Boston Properties' Times Square Tower, although over 50% pre-leased to anchor tenant Arthur Anderson, still offers 550,000 SF of vacant space. Further, given Anderson's alleged role in the demise of Enron, there's speculation in the market that Anderson might have to alter its space needs considerably, possibly adding additional square footage to ever increasing market supply. Similarly, Forest City Ratner's 1.6 million-SF new development at 42nd Street and Eighth Avenue, though over 50% pre-leased to anchor tenant The New York Times Company, is still seeking tenants for the remaining 775,000 SF.

Downtown, one can look to Solomon Smith Barney, Goldman Sachs, Merrill Lynch and Lehman Brothers, as just a few of the financial service magnates with Downtown offices who have announced significant downsizing. Post Sept. 11, each of these companies has added sublet blocks of space exceeding 250,000 SF, further contributing to the oversupply of such space Downtown.

Following Sept. 11, the corporate campus concept of clustering employees all in one space is no longer in fashion and is perceived as too risky in large, urban cities such as New York. The trend against clustering in campus size space has contributed to the availability of large blocks of space which, in the past, were quickly absorbed by tenants. For example, JP Morgan Chase at 277 Park Ave. and CS First Boston at One and Eleven Madison. One can look to Morgan Stanley, who recently sold its new headquarters building at 747 Seventh Ave. to Lehman Brothers, effectively dissolving its urban corporate campus in one fell swoop. The reticence of companies to cluster in a marketplace like New York City reinforces the uncertainty of how the needs of major space users can best be addressed in order to keep them in the city.

It is not all bad news, however. One factor helping to stem the rise in vacancy rates is the lack of speculative new construction currently on the market. If such construction were prevalent, the vacancy rates would be even higher - as we saw in the 1980s when the large amount of speculative new construction drove vacancy rates in Midtown North of 18% and north of 25% Downtown.

Even New York City and State are doing their part to help stem the rise in rates. Although they have announced a much-publicized incentive program, they have yet to provide the details of the program, such as when it will be implemented, who will be eligible, and what it will mean in terms of savings for potential takers. Once the particulars of the incentive program are provided, there is no. doubt that it will jump-start a return to downtown, both from tenants who resided there pre-Sept. 11 and new ones seeking to benefit from reduced rents.

Even without the incentive program, the pluses of having an office in New York City far outweigh the minuses. The city offers an unparalleled transportation system, easy access to all three of the metropolitan airports, a plethora of Class A buildings, and world-class amenities such as restaurants, theatres and hotels, all of which continue to attract companies to locate their offices here.

The real estate industry is and always has been inextricably linked to the health of the financial markets. According to the formula, forevery' 5,000 lost jobs, one million SF becomes available the market. In 2001, particularly post Sept. 11, New York City experienced more than 20,000 layoffs. Under the formula, this. would result in an availability rate of some four million SF in Manhattan, the large majority of which would be sublet space. The formula is not far off since there is presently a total of approximately 33.2 million available SF, including 14.7 million SF of sublet space, in Manhattan today.

The road to lower vacancy and sublease rates is contingent upon the stabilization of the economy and the ability of financial service firms, which on average occupy between 20% and 25% of space in New York City, to once again increase hiring and begin to absorb additional space.

Ultimately, when the economic indicators show, that a recovery is imminent, companies which previously announced layoffs will begin hiring again arid within six months to a year they will be back in the market seeking to occupy the same amount of space they had been subletting. The pendulum will swing and demand for space will begin to exceed supply