"We appear to have passed an inflection point, as the leasing market weakens, albeit at a gradual pace, due to the slowing U.S. economy and turmoil in the financial markets," says John Powers, CBRE's New York tri-state region chairman, in a release. "Manhattan should see rents begin to dip, but we do not expect a flood of sublease space to come on the market, as New York seems less affected by the recent job eliminations in the mortgage sector in southern California and the southwest. At the same time, most of Manhattan's landlords, especially REITs, appear to be well-positioned with low vacancy and strong balance sheets."

Appearing at CBRE's First Quarter 2008 Manhattan Market Research Media Luncheon earlier this month, Powers discussed the capital markets, noting that the credit crisis has made it much harder to obtain debt financing, especially on larger transactions where a consortium of lenders is required rather than the once robust CMBS market. He noted that volume is down "tremendously" from last year's record high of $12.8 billion in Q1 '07 to $1.5 billion in Q1 '08, but compares favorably with the $1.1 billion of Manhattan office sales in the same period of 2005 and the $2.0 billion in sales in 2006.

"Job growth is the best measure of commercial real estate's economic health, and right now employment is contracting," says Raymond Torto, CBRE's global chief economist at CB Richard Ellis, in a news release. "The effects are being felt especially in housing-dependent economies in the southwest and Florida. However, all markets enter this phase of the cycle in healthy condition. The sharp rise in office rents over the last few years has provided a cash flow cushion to existing owners even if market rents turn down."

Asked whether office tenants will be looking to cut costs in the face of a softening economy, Stella says, "It really depends on the business. Our company, for instance, moved from the Chrysler Building to 100 Park Ave. about four-and-a-half years ago and took a short-term sublease. Anybody that signed a lease four-and-a-half years ago got a great deal, particularly on a sublease. So if there are people on a below-market transaction and they're in a better building and they got in there because it was a sweetheart deal, the chances are they're probably not going want to stay when that lease comes up for renewal."

As reported last week on GlobeSt.com, landlords increasingly are offering incentives to persuade tenants to stay on. "They're doing early lease renewals and offering concessions for construction," says Stella. "That's happening a lot, and also it's cheaper for the tenant not to move if the building works. Construction costs today are so high that to replicate the interior construction is very expensive. With firms expecting to have a tough couple of years ahead and credit being tighter, that's even going to be more of an option."