But rather than causing the market to tighten, as might have been expected when 25 percent of the downtown submarket suddenly vanished, the attack released a flood of sublet space, as if by magic. According to a report by Grubb & Ellis, the brokerage and services company, 10.1 million square feet was offered for sublet in the three months after the attack, as companies that had been holding excess space put it on the market in hopes of attracting tenants who had been displaced from downtown buildings.

"After Sept. 11, there was an overnight land rush to anything that was built and operable next day," said Mitchell Steir, vice chairman of Julien J. Studley, a brokerage that specializes in representing tenants. "It lasted 7 to 10 days."

But once the rush to relocate had passed, the market slowed, with tenants who did not have to make decisions deferring them until market conditions become clearer. As the year ended, a high degree of confusion seemed to grip the market, with both buyers and sellers unsure about pricing.

"There is a disconnect between bid and asked in both sales and leasing," said Mary Ann Tighe, vice chairman of Insignia/ESG, the brokerage and services company. "Twenty-nine percent of the direct space was on the market with no asking rent as of the end of the year," she said. "Forty-two percent of the sublease space had no asking rent."

And the lack of transactions is only adding to the uncertainty, Ms. Tighe added. "Landlords are saying, `Make a bid.' Tenants say, `What are the comparables?' And there are not enough comparables to tell them much."

Others in the industry agree. "The degree of uncertainty is the greatest in my entire career," said Michael T. Cohen, the president of Williams Real Estate, a brokerage and services company. "People are glum, and in real estate that is a self-fulfilling prophesy."

Most real estate executives say they expect the pricing issue to work itself out in the form of lower rents this year as the amount of available space increases as a result of a continuing softening of the economy. Midtown should suffer the least, they say, because much of the available space has been taken by tenants from downtown.

Some of the space that was placed on the market after Sept. 11 was driven more by a desire to clean up financial statements than to satisfy the needs of displaced tenants, according to Anthony E. Malkin, president of W&M Properties, an investment and management company.

"A lot of people dumped space so that they could take the financial hit in 2001," he said. "It was going to be a terrible year anyway, so why not get it all done at once?" By packing a lot of losses in one year, publicly held companies can lay the groundwork for rosier financial statements in the future.

Mr. Malkin said 1999 and 2000 were such good years for the real estate business that even if a recovery begins later this year it may seem unsatisfying. "People have got to get used to the idea that things will be more normal before they become incredible again," he said.

With the investment sales market having slowed sharply because building owners think their properties are still worth what they were before Sept. 11, while buyers are expecting discounts, real estate executives say owners may turn to refinancing as a way of turning part of a building's value into cash. With interest rates at unusually low levels, this appears to be an attractive alternative.

The Starrett-Lehigh Building at 601 West 26th Street did a $230 million refinancing late in the year, said Howard L. Michaels, chairman of the Carlton Group, which helped arrange the financing. He said the West Side structure, large parts of which have been converted from industrial to office use, gained additional tenants after Sept. 11 from government agencies displaced from downtown.

He said the events of Sept. 11 had made it harder to develop financing packages for properties downtown and hotels anywhere in the city. "Before Sept. 11, you could refinance a property with one lender," he said. "Afterward, you might need as many as three lenders to get a deal done downtown."

The capital markets had already noticed the deteriorating fundamentals of the real estate market earlier in the year and had begun tightening underwriting standards, according to John Lyons, chairman of Granite Partners, a real estate investment-banking company. "As the economy softened in the spring and summer, lenders began to modify such things as projected rental growth and occupancy levels in a way that lowered the value of properties," he said.

Although a gap remains between the bid and asked prices for properties, there are forces at work that will increase pressure to complete transactions this year, Mr. Lyons said. "There are opportunity funds who have a certain stated rate of return and the longer they hold property, the lower the returns typically become," he said. "They are not in a position where they have to sell immediately, but the limited life of these funds will begin to force their hands to sell in 2002."

Douglas Durst, president of the Durst Organization, a family company that owns 10 major office buildings in Manhattan, said Sept. 11 had posed some questions to which the answers are unclear. "Normally, recessions creep up on you as the space gradually is added to the market," he said. "After Sept. 11, everybody dumped space on the market and created a situation different than anything I have ever seen."

He said tenants housed in temporary quarters may wait until the middle of this year before deciding whether they want to remain in Manhattan or increase security by spreading out to several locations.

Typical of the short-term alternatives that companies have sought is the 146,000 square feet that Morgan Stanley, an investment banking company that had 840,000 square feet in Tower Two of the World Trade Center, sublet in the One Hudson Square building at Canal and Varick Streets, said James Meiskin, the president of Plymouth Partners, a tenant's broker. Morgan Stanley relocated other operations to 825 Third Avenue and 1633 Broadway.

"A lot of companies are doing short-term renewals and sublets," he said. "Rents are headed down, and the longer a tenant can wait to make a decision the better they will do."

Although this year may not be a big one for new development because of the soft office market, Mr. Durst said he might go ahead with a 2 million square foot building on the eastern end of the block bounded by 42nd and 43rd Streets and the Avenue of the Americas and Broadway. Late last year he was able to buy a key parcel of land in the middle of the block to largely complete the assemblage of the site.

Mr. Durst said he hoped to start demolishing the buildings on the site in the summer to make way for the structure he plans to call One Bryant Park. The new building would share the block with the CondŽ Nast building at 4 Times Square, which Mr. Durst completed in 1998.

The downtown area continues to suffer a variety of problems, including excavation operations near ground zero, transportation snarls caused by the closing of several subway stations and the PATH line to New Jersey and blocked-off streets. As a result, while asking rental rates for Class A space in Midtown have fallen about 10 percent since Sept. 11, rates downtown are off 20 percent, according to Bruce Mosler, president of United States operations for Cushman & Wakefield, the brokerage and services company.

Like many other real estate executives, Mr. Mosler was critical of the city and state for what they characterized as having been too slow to develop a package of incentives to give companies a financial reason to return to downtown or to stay there. "The city and state have failed to communicate to companies what the plan will be," he said.

In addition to financial incentives, public officials have to lay out a timetable for getting the transportation system fixed and possibly improved by bringing rail lines that now terminate in Midtown closer to the southern tip of Manhattan. "The transportation issue has got to be addressed," Mr. Mosler said. "New York businesses will withstand hardship as long as they know when it is going to be fixed."

According to Mitchell Moss, director of the Urban Research Center at New York University, rather then focus on the complex and difficult job of deciding what will happen at the 16-acre Trade Center site, city officials should move swiftly to make life in lower Manhattan more normal.

"They need to improve the entire circulation system in downtown," Professor Moss said. "The frozen zone is too large. There are too many streets closed off. There has been excessive delay in building a bridge across West Street. We have to address the ecology of lower Manhattan."

The Port Authority of New York and New Jersey, which owns the land under the Trade Center and operates the PATH trains, has declared that it will build a temporary PATH station in Lower Manhattan. This would re-establish a direct link to Jersey City and relieve pressure on the line that runs from Hoboken to 33rd Street. Officials of the agency said the new station could be in operation in about two years.

One downtown deal that was apparently killed by the events of Sept. 11 was a plan to build a new home for the New York Stock Exchange. Under a city-sponsored plan, the exchange was to have its trading floor in the first 10 stories of a 50-story tower on the block bounded by Wall, Broad and William Streets and Exchange Place.

With the exchange one of the most prominent symbols of American capitalism, its officials worried that a tall building housing the trading floors would be a target for terror. "A 900-foot tower post-Sept. 11 is not a salable transaction," Richard A. Grasso, the chairman of the exchange, said at a securities industry meeting in November.

At a subsequent news conference, Mr. Grasso said the exchange still wanted to move its trading to the site at 23 Wall Street, but with far less office space above it. Referring to the trading operation as a box, he said the new location "could be a box, or a box with space above it, but not a box with 1.5 million square feet of space above it."

The exchange said it had also developed and tested an alternate trading floor at an undisclosed site in the city that could be used if another incident interrupted its telephones, power and other utilities at its primary location.

As the year ended, the exchange and the city still could not agree on the scope of the project. Instead, both parties signed a general agreement to build a 10-story trading complex with the remaining details to be worked out with the new Bloomberg administration.

One institution that was not deterred by the problems facing downtown was Deutsche Bank, which closed its $610 million purchase of the 47-story building at 60 Wall Street, the former headquarters of the J. P. Morgan banking company, as scheduled on Nov. 1. "The transaction relocated Deutsche Bank to downtown at a time when it would have been easy not to close and rationalize the decision," said Robert Alexander, a vice chairman of Insignia/ESG, who helped broker the deal. And it was done without extracting an incentive package from the city, noted David Maurer-Hollaender, an executive managing director of Insignia/ESG.

Despite what is expected to be a lackluster year in 2002, real estate executives say the office market could recover quickly if the national recession ends, as expected, in the third quarter and businesses start hiring people instead of laying them off.

"It is clear to me that most of the major corporations in Manhattan have slimmed down to the least amount of real estate they can have and still function," Ms. Tighe said. "If business were to improve, they would have to add real estate. This means there will be a very direct connection between the economy and demand for real estate."

In the past, she said, there has typically been an 18-month lag between an economic upturn and a recovery of the office market.

Following are accounts of how some specialized market sectors performed and their prospects.

Retail Space
Many Rents Drop, By Varying Degrees

Like other businesses at least partially dependent on tourists and business travelers, retailers, including restaurants, were hurt by the reluctance of many people to visit the city after Sept. 11. Some were hurt worse than others. The shopping mall under the trade center, which sold to both visitors and the tens of thousands of people working in the buildings above, was wiped out.

Other retail stores that were physically little disturbed by the disaster found that a large part of their customer base had been forced to relocate to other parts of Manhattan or the suburbs.

But stores operating in prime retail locations on Madison and Fifth Avenues and on 57th Street still had sizable foot traffic and few sites were vacant, brokers specializing in retail real estate reported.

Still, the lack of visitors, particularly the free-spending international travelers, hurt overall sales. The city's convention and visitors bureau estimated that visitors spent $2.1 billion less in 2001 than they did a year earlier, a decline of 12 percent.

The outlook for this year is not particularly encouraging, with the bureau estimating that the number of visits will increase about 1 percent but that visitor spending will decline about 1 percent because most of the additional visitors will be lower-spending Americans.

The downtown retail market has been changed by the destruction of the buildings and the interruption of subway and PATH links, said C. Bradley Mendelson, who manages retail operations of Insignia/ESG. One reason, he said, is that corporations will be careful not to put all their operations in one large building like the towers at the Trade Center.

"We put Borders Books into the Trade Center," he said, but without the traffic supplied both by the workers in the Trade Center and the tourists that were drawn to the area, "I doubt Borders will take another store downtown now." And without the tourist traffic the Trade Center drew, he said, the downtown market is a five-day-a-week office market.

Elsewhere in the city, he said, sales in restaurants have been off about 15 percent from 2000, a good year, and sales at other stores have been about flat. A key indicator, he said, is that receipts at parking garages are off 40 to 50 percent since Sept. 15, indicating that nearby residents, the most likely to drive, are avoiding coming into the city.

Although overall asking rental rates for retail space is down 25 to 30 percent compared with last year, actual rentals vary widely with location, cautioned Benjamin Fox, an executive vice president of Newmark New Spectrum Retail, a brokerage specializing in retail space.

"If you are talking about a 700-square-foot store in the prime areas of Madison and Fifth Avenues, there is very little available and the prices remain high," he said. "But if you are talking 4,000 square feet to 8,000 square feet in lesser areas, there has clearly been an adjustment."

Mr. Fox said lower rental rates for stores can be good for consumers because the lower rents reduce the cost of opening a new type of store in the city. "If you look back to the mid-1970's and the '89-'91 period," he said, "that's when new retail concepts came into the city Ü retailers take advantage of lower rents to come into Manhattan."

Hotels
An Abrupt Change

In Tourism Industry The terrorists who attacked the World Trade Center probably did not have the city's hotels in mind, but their timing could not have been worse, according to Thomas McConnell, director of the hotel practice at Insignia/ESG. "Retailers make their money near Christmas," he said. "For hotels, the time between Labor Day and Thanksgiving is Christmas."

Both tourist and business visits dropped abruptly after the attack, particularly from international travelers suddenly wary of coming to the city. According to the Convention and Visitors Bureau, 5.4 million fewer people came to New York in 2001 than in the previous year, a decline of 14 percent.

The decline hurt all segments of the lodging industry, including companies that rent apartments for relatively short periods as an alternative to hotels. "Our business is about 50 percent domestic and about 50 percent overseas," said Howard Pitter, general manager of AHS, which has about 300 apartments in various parts of Manhattan. After the attack, he said, "we had hundreds of cancellations." He added, "Our European business went away, both business and tourist."

Since then, he said, the domestic business has improved somewhat, partially because residents driven out of buildings in Battery Park City have sought other locations in Manhattan. But the international business remains all but dead, he said.

Many luxury hotels in the city reacted to the falloff in traffic by sharply cutting their rates. This helped fill up rooms during the Christmas season, but many in the industry expect vacancies to soar in the early months of the year, traditionally a slow time in the hotel business.

According to Mr. McConnell, the average daily rate in September last year was $179 a night, compared with an average rate of $226 for September 2000. Since the overall economy was weakening, he said, 2001 would have finished with a 76 percent occupancy rate and a $200 a night average room charge. Because of the attack, the occupancy rate fell to 72 percent, with an average nightly charge of $177.

Suburban Space
A Surge of Interest

In New Jersey Space New Jersey was the principal beneficiary among the suburban markets of the dislocation in lower Manhattan. According to a report by CB Richard Ellis, nearly 2 million square feet of space was signed for by financial services companies like Lehman Brothers and Goldman Sachs. Much of the space taken was along the Hudson River waterfront, but interior parts of the state benefited as well.

Most of the attention has focused on Jersey City, but activity is spreading north to Hoboken and Weehawken. SJP Properties is building a 550,000-square-foot office building at Waterfront Corporate Park in Hoboken on speculation, having filled the first phase of the project with tenants largely lured from Manhattan before Sept. 11, including the venerable publisher John Wiley & Sons.

Farther north, in Weehawken, Hartz Mountain Industries is prepared to move ahead with the final phase of the Lincoln Harbor project, which first began in 1982. But Emanuel Stern, Hartz's president, said work would not commence until tenants are signed.

Stamford, in Fairfield County, Conn., lured two major tenants displaced from lower Manhattan. Citigroup agreed to lease 235,000 square feet at 100-300 Stamford Place, while American Express (which announced plans last month to reoccupy its headquarters in downtown Manhattan in the spring) took 175,000 square feet at 400 Atlantic Avenue, according to a report by Colliers ABR, the real estate services company. Both leases were for 10-year terms.

In Westchester County, the vacancy rate remained stubbornly high as few tenants appeared to be attracted to the former corporate headquarters buildings that dominate the office-building landscape immediately north of the city.ÊÊ