Office market 'coming down to earth' since Sept. 11. (Insiders Outlook).

Despite the horrific loss of some 14 million SF of office space destroyed in the Sept. 11 attacks, the real estate market in New York City continues to soften and is finally coming down to earth. Tenants seeking space have started to take advantage of new opportunities that did not exist 12 months ago. In today's lease negotiations, tenants should be able to capitalize on these opportunities. As the economy retrenches, tenants may gain significant cost savings if they conclude transactions during the next six to 12 months.

Although large users needing 60,000-plus SF still prefer to wait on the sidelines for rents to drop lower before negotiating for space, tenants particularly those looking for space less than 60,000 SF - have a real chance to capitalize on these new opportunities.

One of the new options being capitalized on is the growing number of companies putting space on the market for sublease. Space available for sublease is now flooding the New York market. This space is primarily coming from faltering new economy businesses as well as telecommunications firms and financial institutions that have undergone corporate restructuring. Between Sept. 11 and Dec. 31, 2001, 6.6 million SF of new sublet space, plus 8 million SF of direct space came on the market - that's 14.6 million SF in just under four months.

Plymouth Partners research indicates that as the economy continues to bottom, the amount of sublease space coming on the market will continue to grow, with approximately 3.2 million SF of sublets coming back on the market each month. That said, we anticipate the amount of space being returned to the marketplace to slow down.

The subleased space exists across the board in all three of New York's submarkets and the rents are generally 10 to 20% lower than competitive "direct" space in the same buildings. Tenants did not have this opportunity 18 months ago. For example, the Hudson Square submarket is very attractive to large businesses seeking big chunks of Class A space. This was an area that was mostly occupied by printers up to two years ago. Dot-commers displaced the printers, who were in turn displaced by the economy, leaving a large amount of prime space vacant.

In one of the largest transactions of 2000, our firm represented Getty Images in its lease of 266,000 SF at One Hudson Square. Just a year later, we represented Getty in subletting 150,000 SF of that space to Morgan Stanley with an aggregate rental of $50 million.

Tenants unable to find suitable sublease space that meets their needs at below market rents can look to other bargaining options that have started to surface. One other option is free rent, which is providing more leverage during negotiations. While free rent generally is being offered in both Class A and Class B buildings located downtown, midtown and in the midtown south district, it's the fringe area building landlords who are more flexible in offering free rent. That, of course, is because Manhattan's fringe areas got hit the hardest when the economy took its downturn.

The Starrett Lehigh building, which was hot when the market was tight and tenants were limited with spaces to choose from, is a good example of a fringe area building where free rent is being negotiated. A typical free rent arrangement across the board is six months free rent on a 10-year lease. I believe that free rent concessions will continue to grow as more space is expected to come on the market.

In addition, landlord work concessions are starting to creep back in all three submarkets in both Class A and Class B buildings. Landlords, in fact, are now giving $20-$30 per SF towards work allowances.