Market downturns keep tenant reps in business.

New York City's office leasing market has slowed significantly, but from a tenant broker's perspective that's just as well. In 1999 and 2000, leasing activity was frenzied, and with so little new space coming onto the market, a tenant representative couldn't do much more than prepare his clients for a choice of unattractive terms or an unfavorable location--and sometimes both. Bidding wars would sometimes push the eventual rent on a block of space to several dollars psf over the landlord's original asking price.

"New economy" firms -- dot-corns and their supporting industries - were largely responsible for this situation. These young, sometimes well-capitalized companies would promise landlords the world in exchange for a quick deal, and outbid more established, dependable companies. Also, they often paid for very expensive new tenant installations, despite intentionally signing short leases -- often of only two or three years.

At the height of this activity, I predicted that this unhealthy situation would correct itself. A shakeout of the dot-coms was inevitable, and now it has happened.

Manhattan's vacancy rates have risen for three consecutive quarters, and took a 26% jump in the first quarter of 2000: from 5.0% to 6.3%. 'We've also seen negative net absorption for three straight quarters, but the square footage returned to the market in the first quarter of 2001 -- 5.2 million SF -- was almost four times the negative absorption of the previous quarter.

Many of us in the industry are glad to see this, because it brings balance to the supply/demand relationship. If, like me, you represent a few tenants whose pockets aren't very deep (I specialize in representing not-for-profit organizations) you might find that properties in some of the more desirable neighborhoods are open to you once again.

It is true that the drop in rents hasn't been dramatic, nor is it likely to be. In fact, asking rents haven't moved much. But here's the difference: A year ago, a landlord might ask $40 PSF "as-is," but he'd finally close at $42, or even $45, because several prospective tenants were bidding on the space. Today, a landlord asking $40 might take $36 or $37 from a tenant whose credit he knows is solid. A year ago, work concessions and free rent were mighty hard to come by; today, the landlord will usually give a little.

The market is considerably more credit-driven to-day than it was last year. Now that-the technology bubble has burst, nobody wants to do business with some flaky dot-com with a poor balance sheet, trying to raise its next round of capital. Landlords will take a little less money from someone they know will still be around to pay the rent in a couple of years.

(The reduction of the dot-coms may even be a little worse than it looks at first glance. Many of these firms are still in business, and have not declared bankruptcy -- but they've drastically cut their employment rolls.)

The ripple effect hasn't been huge, but it's been evident enough. Several financial companies have canceled expansion plans and announced layoffs; in the residential market, some people are putting off the purchase of an apartment or townhouse. We're all taking a deep breath and pausing until we figure out where the market's going, to land.

As a result, I believe we'll see continuing modest decline in rents and transaction volume over the next six to 12 months, but it will just be a little cold, not a serious illness. Unlike' other cyclical downturns, we've been blessed this time in that we didn't overbuild during the up-cycle, especially not on the commercial side.

This slight downturn isn't going to hurt Midtown too badly. Midtown's current tenant base is as solid as you'll find anywhere and space is always going to rent pretty briskly in the area, with its convenient location. On the other hand, the downturn may hurt-fringe areas like Chelsea and West Chelsea, which attracted tenants when Midtown got too expensive. Now that the market's softening, and people can find good deals in Midtown, they are going to be less interested in properties like the Starrett Lehigh Building on 27th Street and 12th Avenue, with no public transportation and not much in the way of retail amenities.

We have a few concerns about Downtown. If the financial services industry takes a big hit in the current economic slowdown, we might continue to see negative absorption. The first quarter of 2001 was particularly ugly for Downtown, with 2.6 million SF of space becoming vacant. But development has been constrained, and the telecommunications industry continues to like Downtown for its "telco hotels." Moreover, lower Manhattan continues to be more favorably priced than Midtown. The situation there isn't great, but fundamentals remain strong.

Midtown South got clobbered by the dot-com shakeout, with more than a million sf of sub-lease space getting dumped onto the market in the first three months of this year. However, this is the kind of market that's likely to come back stronger than ever once we've hit the bottom of the cycle. In the past 10 years, the Garment District, the Flatiron District and Union Square have turned from down-and-dreary to hip, vibrant neighborhoods with retail and entertainment galore, and plenty of attractive office buildings -- especially older buildings that have been repositioned for modern needs.

In a softening market, an owner's best course is simple: maintain the properties you have; keep them occupied; give good deals to your best tenants to avoid large vacancies. Time Equities remains strong both nationally and in New York City. We recently acquired 125 Maiden Lane, a 330,000 SF Class A building in the Insurance District: it's virtually full now, and we are keeping it that way. 55 Fifth Avenue, our headquarters building, is also full.

Time Equities is looking for other buying opportunities. We think the next frontier in office leasing will be the nearby, very accessible neighborhoods in Harlem and along the waterfront in Brooklyn and Queens. Neighborhoods like Long Island City, Green Point and Williamsburg will become strong mixed-use communities, and we're exploring the commercial, residential, retail and mixed-use opportunities in these markets.

On the whole, New York City's office leasing market is healthy and will remain so. Law firms, not-for-profit groups, computer consulting and telecom companies are expanding, and the publishing business looks strong. Dot-coms and some financial firms are the only weak links.

For a tenant, at this point, the smart play might be to buy space, rather than rent it, or nail down a long-term lease while the market's fairly tenant-friendly. Of course, that will work only if you can accurately predict your company's growth and expansion, and ensure that more space will open up nearby if you need it.