After the Sept. 11 terrorist attacks, most analysts and real estate industry players predicted that the New York real estate market would end up even tighter than before. But according to a Merrill Lynch report by Steve Sakwa, the opposite has happened. The overall vacancy rate for Manhattan has climbed to 9.1% at the end of November, from 8% on Sept. 11.

And in downtown the situation is much worse. The downtown market’s overall vacancy is 10.7% today, up from 7.5% at midyear, the report said. In midtown, the vacancy rate has held steady at about 7%.

"We’re looking for New York City’s office market to weaken further," Sakwa wrote. "Considering the substantial run-up in available (but not necessary vacant) space in lower Manhattan during the past two months, it’s likely that the vacancy rate in the downtown market will climb sharply in coming months and peak in the vicinity of 17% to 18% late next year."

Most of the weakness in vacancy is in lower Manhattan. And the report contends that three unforeseen events have contributed to the up tick in vacancy:

1. Tenants who were displaced by the terrorist attack have leased much less space in their new locations than they had formerly occupied.

2. Tenants whose New York City leases have expired during the past two months have been signing new leases for much less space in the city than they had formerly occupied.

3. NYC’s office markets have been inundated with large additions to the supplies of directly available space or of space available for sublet.

The New York office market was expected to tighten because displaced tenants would have to lease space elsewhere in the region. The report said that the expectation was for the vacancy rate to decline to 5% or less, depending on how many displaced tenants chose to remain in the city as opposed to moving to outlying areas.