In yet another sign that America’s largest office market is a world unto itself, the amount of office space available for lease in Manhattan’s mammoth 390.6 million sq. ft. market has hit a seven-year low, while office rents have peaked to record highs.

According to Cushman & Wakefield’s new year-end report on Manhattan commercial real estate, 22.2 million sq. ft. of office space was available at year-end 2007. That is down from 26 million sq. ft. on the market at the end of 2006 and the lowest level of available space since the beginning of 2001.

This cheery news comes on the heels of more sobering data for the year. Leasing for all of 2007 was down 12.8% from 2006, totaling 23.6 million sq. ft. And in the last three months of 2007, slightly more than 5 million sq. ft. of office space was leased in Manhattan, less than in each of the previous three quarters.

Major financial services firms, many of which make Manhattan their corporate home, are under significant pressure to retrench following the subprime mortgage debacle, but Joseph R. Harbert, chief operating officer of the New York metro region for Cushman & Wakefield, says other factors explain the recent slowdown. “Record asking rents and decreasing available space have given prospective tenants fewer options from which to choose,” he says.

It is also fair to note that despite the slow fourth quarter, Manhattan’s overall vacancy rate improved for the year, finishing at 5.7%, down from 6.7% registered at the end of 2006.

Developers have restrained their construction cranes in the current cycle, as well. “Though many projects have been announced, and are either in the beginning stages or under construction, relatively little has been added to the market in the past 10 years,” says Harbert. Indeed, less new construction will be delivered during the combined decades of the 1990s and 2000s than in any decade since the 1950s.

“Considering that more than 15 million sq. ft. was leased in Midtown Manhattan alone last year, the seven million square feet being added to the market in the next three years will do little to ease Manhattan’s space shortage,” says Harbert.

Less supply usually means higher rents, and such is the case, with overall asking rents for Manhattan office space reaching new highs in 2007. By year’s end, average asking rents had jumped 28.7% from the end of 2006, reaching $65.08 per sq. ft.

The key to long-term stability in Manhattan, as it has for many years, is the potential fallout in the financial services industry on which the city so depends. So far, firms are holding off dumping large amounts of sublease space on the market. The overall sublease vacancy rate fell below 1% for the first time in seven years, reaching 0.9% at the end of 2007.

Given the appealing fundamentals, investors continue to favor ownership of New York office properties, with more than $47.8 billion in Manhattan commercial real estate sales closed during 2007, up nearly 40% from the $34.7 billion closed in 2006.

“There was a record level of activity in the first six months of the year,” says Harbert. “But even after the summer's credit crisis and the following financial uncertainty, transactions continue to close. The difference is that we're seeing a shift in the players winning deals as tightening lending standards have required more equity.”

Of the more than $2.6 billion in sales currently under contract, foreign buyers account for 33% and institutional investors and pension funds tally 24%. Private equity players, which had garnered 65% of the sales closed in 2007, accounted for only 23% of sales under contract at the close of 2007.