INSTABILITY IN THE FINANCIAL SECTOR...

One of the biggest jolts to hit New York City in quite some time occurred earlier this month as three major financial services firms in rapid succession—Lehman Brothers, Merrill Lynch and AIG—went through radical changes. In the case of Lehman, it was a bankruptcy declaration followed by a distressed sale of much of its assets to Barclays PLC. Merrill was sold to Bank of America to avoid a similar fate, while AIG's rescue took the form of a bailout by the federal government. Considerably less of a jolt was the results of a GlobeSt.com poll asking readers to gauge the effects all of this will have on commercial real estate. Seventy-eight percent of you think the Wall Street upheaval will "decimate" the office market. A local expert who also thinks along these lines is Richard Persichetti, research manager for the New York region of Grubb & Ellis. He produced a special report last week predicting that the fallout will be a sizeable increase in sublease space. Persichetti commented further on this issue in conjunction with last week's poll.

"Obviously, it will have an impact on the New York market, since financial service firms are the biggest occupiers of space in Manhattan. There's no way around that. In the past few days, it's almost like the world has changed. You wake up every morning and find more global financial services firms restructuring. There's a new piece to the puzzle every minute, and it's look everything is quickly changing. On the positive side, New York will retain its position as the anchor for the world financial structure. It's just that the whole global service industry is going to shift a little.

"You're going to see more space come onto the market, a lot of it in the form of sublease space. That's going to start to shift the power from the landlords, who have basically held the reins for the New York commercial real estate market over the past several years, and little more in favor of the tenants. Instead of tenants competing for space, you're going to have landlords competing for tenants as demand slows down. From the beginning of this year, you started to see little facets of this market start to change. This will just propel it a little quicker over the next 12 months. Barclays hopefully will acquire a piece of Lehman and keep their Midtown tower. Once they get in there, who knows how they'll restructure it; who knows how much space comes on the market? And even with the federal government stepping up for AIG, they've already said they're going to make changes to the leadership at AIG. And with the changes will come restructuring, which could involve looking directly at the real estate. Maybe they'll sell off a building or two that they own, or lease some of their space.