Tenants hunker down

The caution buyers showed in shying away from mega deals was also evident in the leasing market. As Manhattan's Class-A office vacancy rate climbed to 8.7%, its highest level since September 2005, tenants hesitated to make big changes, according to brokerage Colliers. “There certainly have been major transactions. The first one that jumps out is Viacom,” says Robert Sammons, director of research for Colliers.

Global entertainment company Viacom renewed its lease for 1.3 million sq. ft. at 1515 Broadway. In December Viacom announced it was laying off 7% of its workforce, or 850 people, and taking other cost-saving measures.

With tenants worried about the economy, the Manhattan office market didn't experience positive absorption in 2008, Sammons says. “I think people are feeling a little burned because they've heard that we've reached bottom. A month later something else happens and we fall back into that malaise.”

In response, tenants are asking landlords to negotiate lower rates or shorter terms. And landlords are willing to appease them to hold on to the tenants.

Bracing for the first quarter

There are encouraging signs. For December alone, Luskin's firm closed $1 billion in sales, although the law firm does not hold ownership in the properties and only represents the clients. But investors are on alert. Fresh retail bankruptcies could lower property prices, and the coming months could bring more forced sales.

Lenders are approaching troubled property owners sensibly, says Real Capital Analytics' Fasulo. “No lender wants these buildings back.” Deutsche Bank worked with Macklowe after he defaulted on the former Equity Office properties. “Deutsche Bank was very tough, but they were also very pragmatic in working out a plan,” he says.

Sammons of Colliers has kept statistics since the early 1990s, but this recession has him stymied. “It's the most difficult I've seen in terms of having to predict the next year or so. You feel like you may have a handle on it one day, and the next day another shoe drops.”

Meanwhile, credit problems are evident around the globe. In July, Spanish developer Martinsa-Fadesa, which invested in resorts, golf courses, malls and houses, filed for bankruptcy after failing to get a loan of €150 million.

The prevailing wisdom is that the U.S. may emerge from recession ahead of other nations, explains Fasulo of Real Capital Analytics. “I'm not sure I buy into that. We all need to come out of this mess together.”

Denise Kalette is senior associate editor.

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