A Studley Q2 report notes that rental rates inched downward by 2.2% to $69.29, marking the first decline since 2005, while availability jumped to 8.2%. "Manhattan's office market is not impervious to Wall Street's malaise," says Steve Coutts, Studley's SVP of national research services, in a prepared release. "Layoffs in the financial sector have fueled speculation about the amount of sublet space that would come onto the market and to what extent rents would decline. But during the first half of 2008, the proverbial axe fell, resulting in sublet space that spiked to 7.8 million sf from 6.2 million sf in January, and closed at 8.3 million sf in June."

According to a report from Banc of America Securities, which hosted a conference call in July with Scott Latham, EVP with Cushman & Wakefield Capital Markets, "Manhattan fundamentals appear to be losing their momentum as vacancies approached frictional levels (7% to 9%), rising 100 basis points quarter over quarter to 7.1%." Although asking rents increased 6.6% from Q1 '08 to $71.59, Latham said in the July 18 conference call that he expects rental rates will stabilize or possibly decline over the course of the year. "Net effective rents are declining as free rent (up by one to two months) and tenant improvements (up $5 to $10 per sf) have risen." Studley's reports notes that in many Manhattan submarkets, sublet space now comprises more than 25% of what's available.

The upshot, according to both Studley and CresaPartners, both of which represent tenants, is that increasingly it's a tenant's market. "The worm has turned, and it turned quickly," Marcus Rayner, principal of CresaParnters, tells Real Estate New York. "What we've found in talking to landlords is from remaining really bullish three or four months ago, which was unwise, they suddenly were all getting a tiny bit scared. They began to see that the credit markets were drying up and demand was falling off much faster than they thought."