Those who may be waiting for the other shoe to drop in the New York office market are still waiting — and have been for the last nine months. While there is now more of a market equilibrium between tenants and landlords, it is still a supply-constrained market, Cushman & Wakefield executives noted at a midyear New York market briefing in Manhattan.

Ken McCarthy, Cushman & Wakefield’s managing director for New York area research, said that even taking into account the loss of 16,000 jobs in the financial services sector, there has been no major impact. McCarthy expects more job losses in the financial services sector in the second half of the year with total losses as high as 34,000.

As a rule of thumb, every job lost in the financial services sector results in the loss of two to three more jobs in other sectors of the economy.

Office vacancy rates in New York could rise to 9.5%, up from the current rate of 7.1 %, if this worst-case scenario for job losses materializes. At midyear 2007, the New York office vacancy rate stood at 5.3%. Sublease space was up 50%, rising to 1.5% from 1% a year ago over the same period. Furthermore, the major Manhattan markets are all seeing negative space absorption.

“We have started to see some more substantial sublet space come to the market, but so far less than anticipated,” said Joseph Harbert, Cushman & Wakefield’s COO for the New York metro region. “It’s a healthy sign for tenants who have been starved for space alternatives, and therefore a more favorable time for tenants to be in the market.”

Even though asking rents continued to climb, rising nearly 7% from the first quarter of 2008 to touch $71.59 per sq. ft on average at midyear, landlords are also parting with more concessions. At midyear 2007, average asking rents were more than $59 per sq. ft.

The financial services sector accounted for only 14% of the space leased in the city as of midyear, Harbert noted. One year ago, the sector accounted for more than one-third of the leasing activity in the city.

Even then, the market is very active, with large leasing deals continuing to be done, an important indicator. As of midyear, leasing activity totaled 11.5 million sq. ft., down 2% from the activity level at midyear 2007.

Investment activity for New York property market also picked up in the second quarter. Taking into account transactions closed and under contract as of midyear, sales volume was at $13.8 billion. As of June 2007, investment sales activity stood at $34 billion, including $10 billion related to two real estate investment trust privatizations.

Harbert cited certain prominent second quarter transactions that augur well for the market, such as sales of the General Motors Building, Park Avenue Tower and 830 Third Avenue.

While recent sales prices are 15% below last year’s peaks, they still represent significant appreciation over the last few years, Harbert pointed out. Cushman & Wakefield expects the market to pick up as securitized lenders get back into business closer to the end of the year.

Because it is supply constrained, the New York commercial real estate market has always attracted foreign interest and the weak dollar is now making it even more attractive to these investors. As of midyear, foreign buyers accounted for 48% of the investment by dollar volume, up from 12% to 15% in recent years.