By 
By Helen Chernikoff
The bankruptcies and buyouts of Wall Street giants Bear Stearns, Lehman Brothers and Merrill Lynch, and the massive layoffs implemented by survivors such as American International Group Inc
"The pendulum has swung completely the other way from being a landlord's market to being a tenant's market," said Steve Chasanoff, a director at FirstService Williams, a real estate services firm.
Financial firms typically occupy a third of the office space in New York City's commercial and cultural center of Manhattan, according to real estate services firm Colliers International.
Because the city's Independent Budget Office says such firms might lose 82,300 jobs between 2008 and 2011, office landlords must work hard to keep the tenants they have by offering inducements like reduced rents and renovated spaces, Chasanoff said.
Rents have already fallen by 21 percent, said Barry Gosin, chief executive of real estate services company Newmark Knight Frank.
He sees them falling between 30 percent and 35 percent from their recent peak of $64.13 per square foot in the second quarter of 2008 and said the percentage of space available for rent could rise to 13 percent from its most recent low of 8.1 percent in the third quarter of 2007.
The turmoil at banks is bad news for real estate investment trusts (REITs) too.
Citigroup is by far the biggest tenant of office REIT SL Green Realty Corp
SL Green has the most exposure, but other REITs have big Manhattan holdings: about 38 percent at Brookfield Properties Corp
Brookfield might also be vulnerable to upheaval among the banks. Merrill generated 7.4 percent of its annual revenue, and Bank of America
Bank of America has said that consolidation of its office space would generate some of the acquisition's cost savings, according to UBS.
But Brookfield can maintain its performance through the downturn, given that 42 percent of its income comes from Manhattan, where 98.5 percent of its properties are already leased, spokeswoman Melissa Coley said.
SL Green could not be reached for comment.
NO DUMPING!
The tendency of banks and other businesses to dump space as needs diminish, also pushes prices down by adding supply, Chasanoff said. The percentage of sub-leased space on the Manhattan office market was under 20 percent but could go as high as 35 percent, he said.
Bankrupt investment bank Lehman alone occupied 2.3 million square feet in Manhattan's midtown business district, with only 274,000 already up for sub-lease, UBS said.
The "dark space" left when a tenant pulls out stays on a lease is another looming danger to landlords.
"When the owner of that property goes to refinance or sell, they're going to suffer. Nobody is going to give them credit for that income because they don't really have that tenant in the long term," said Jay Rollins, president of Denver-based JCR Capital, a boutique commercial real estate capital provider.
But office market experts agree that the current downturn -- while it will match that of the dot.com bust in 2001 -- will not equal the havoc wreaked in the late 1980s and early 1990s by the savings-and-loan crisis.
That is because the 1980s saw a buildup of office construction that chastened the entire industry, said Jeffrey Baker, a director of Savills LLC, a global real estate services provider.
"We do not have the overhang of the new supply that was the problem in the late 1980s and there will be a faster recovery as a result," Baker said. "The construction lenders never forgot that experience."
Also, both Baker and Chasanoff are starting to perceive interest in cheaper Manhattan property on behalf of international investors.
Foreign lenders expect to boost U.S. investment by 58 percent in 2009 versus 2008, while equity investors see increases of 73 percent, according to an annual report published by the Association of Foreign Investors in Real Estate (AFIRE).
(Reporting by Helen Chernikoff and Joan Gralla; editing by Patrick Fitzgibbons and Bernard Orr)
