In fresh evidence that New York’s office market is being buffeted by the widening credit crisis and recession, sublease space has flooded the Manhattan market, driving the vacancy rate up sharply in the fourth quarter, according to New York-based FirstService Williams. 

The office vacancy rate reached 8.1% for the quarter, with sublease space registering 2.8%, the highest rate in more than three years, according to FirstService Williams, a real estate services firm that is a subsidiary of Toronto-based FirstService Corp.

Citigroup, Credit Suisse First Boston, Credit Lyonnais, Alliance Bernstein, UBS, MetLife, Bear Stearns, and National Financial Partners, placed nearly 1.2 million sq. ft. of sublease space on the market in the fourth quarter.  

For the year, Manhattan’s overall vacancy rate is 10.9%, the highest level in two years and more than three percentage points higher than a year ago, the company reports. “With leasing activity languishing and tenant space choices growing exponentially, it is not surprising that the overall asking rent for Manhattan dropped by 4% from the previous quarter,” Mark Jaccom, CEO of FirstService Williams said in a statement.

Over the past three months, nearly 2.4 million sq. ft. of sublease space entered the market, outpacing the quarterly increase of 1.8 million sq. ft. in directly available space, FirstService Williams reports. The majority of the space was added in Midtown North, accounting for 83% of the increase in sublease space. Meanwhile, Midtown North delivered 57% of the directly available space for the quarter.

The 24.7 million sq. ft. of space leased during 2008 is 18.4% below the pace of a year ago, FirstService Williams notes. A significant reason for the change is the reversal of fortune in the financial services and legal services industries in Manhattan, in view of recent turmoil on Wall Street and the collapse of certain major investment banks. 

The financial services and legal firms, which had driven a great deal of leasing activity during much of the past decade, were among the main companies vacating space, downsizing and contributing to the availability of sublease space.