Manhattan's primary commercial property sectors - office, residential, retail and hotels - are obviously not as robust as they were a year ago. Less obvious is what that circumstance means. Are the markets normalizing after two or so years of spectacular numbers?

Or are they doing a full gainer into the tank?

Most observers agree that a severe downturn is probably not in the cards for the office market. More probable is a slow, steady decline in rents and a rise in vacancies that won't turn around until 2004. But few doubt that this is an ordinary slowdown with an ordinary resurgence to follow.

Residential is on stable ground. People still want to live in the Big Apple, and they'll find a way to pay the high rents and condo prices. Retail's a little less certain, what with recent pullbacks by several national chains. However, most observers agree that the market is merely cooling down to a comfortable temperature.

Hotels, on the other hand, appear to be in trouble. The demise of the dot-com industry has hurt occupancy rates Downtown, while high room rates have scared off Midtown customers. Still, some contend that every city should have such a bad hotel market.

When it comes to the office market, the main topics of discussion here are the same as most other top-tier cities today - negative absorption and a surfeit of sublease space. Class A space in prime locations continues to do well, while lesser-grade assets are hardest hit. How hard that hit will be over the next 12 months or so is anyone's guess and opinions vary widely.

"I'm not optimistic about a short-term recovery," says Michael Dow, national president and CEO of Cresa Partners. "Sublease space will be difficult to move unless it's attractive and well priced."

According to Cresa, each of Manhattan's submarkets showed negative net absorption in first half '01: 3.2 million sf for Midtown, 1.7 million sf for Midtown South and 1.1 million sf for Downtown.

"In a 400-million-sf market that's not the end of the world," Dow allows, "but it's worse than people were expecting. It puts Midtown's vacancy at about 7% for class A and 12.5% for class B. Downtown, it's 7% for A, 15.25% for B. Eight percent is considered equilibrium. Right now, it looks like an owner's market, but when you do the deals you know it's not."

Franklin Speyer, executive vice president of Cushman & Wakefield Inc., agrees that the market will be slow for a while. His firm projects slight annual vacancy increases through 2003, but with modest rent escalations 2002 and '03.

"Enough leases are n place for owners to withstand the cold wind that sub-landlords are facing," he says. "Owners' needs are less immediate: they're dealing with lease expirations, not balance sheet issues. Things aren't going anywhere fast.

Nevertheless, there is no discounting that sublease availability has grown fivefold in the past year and that portends considerable pain yet to come - particularly for Midtown South, asserts James S. Meiskin, president of Plymouth Partners. "Midtown South benefited most from the high-tech explosion," he explains. "Internet and telecom companies accounted for 39% of the space leased in the submarket in 2000. The collapse of these companies has caused a 145% rise in availability there. Average asking rents, when the increased negotiating differential and concessions are taken in to account, are down almost 50%. The few tenants who've been able to sublease have realized that $20 per sf net of downtime and brokerage cost.

Average asking rents for city office space declined slightly during the second quarter to $51.08 per foot from $52.94 in March, reports CB Richard Ellis. The greatest decrease was posted in Midtown South, where the cost of space dropped $2.80 to $41.61.

Midtown came in at $64.87 and Downtown at 41.18.

For owners leasing space on a direct basis, a major headache in this uncertain market is pricing, says Paul Revson, executive managing director of Julien J. Studley's Midtown branch. "Any tenant who reads the papers is sure the bottom has fallen out and all space is a steal," the executive explains. "That makes deals harder to close, further contributing to the slowdown."

Revson cautions that tenants looking for sweet deals had better think again. "The fact that overall inventories are up doesn't mean there are more options," he warns. "Imagine your building was mostly leased in the past two years for top dollar. Now you have two stories out of 50 available, but the market has softened considerably. Will you drop the prices to meet the market? No. You have only a 4% vacancy rate, so you'll wait for someone to pay your price."

Even with the influx of sublease spaces, conditions are somewhat tight, attests Joseph R. Harbert, COO, metro region for Insignia/ESG. "Large blocks of space don't exist," he maintains. "Brown Brothers took 425,000 sf at 140 Broadway recently and there was only one alternative. Downtown, the World Trade Center and World Financial Center are only 2% or 3% available. The high end is holding fast."

According to Insignia/ESG statistics, the pace of leasing activity rose from June to July in all three submarkets. Midtown was up by 29%, Downtown by 15% and Midtown South by 46%. "Although some companies held off on making decisions in recent months, tenants are now returning to the market," Harbert says. "Those companies with active requirements are finding more space options and better concession packages."

Frances D'Loren, managing director and Eastern regional manager for Heller Financial's real estate finance unit, stakes the middle-ground between pessimism and optimism. Further moderation in the US and global economies could have an adverse effect on the city's economic growth, she says. However, Manhattan's poised to handle a downturn.

"We're better positioned for a recession than we were in the early 1990s," she insists. "The economy's more diverse, less dependent on financial services."

D'Loren says that Heller has been actively involved in the purchase of solid class B Locations. "We like those plays where there's a spread between current rents in a building and market rents."

Several industry professionals categorize the investment sales market for office product as quite active. Reasonably priced capital is plentiful and interest rates are low.

"Growth is slower but ongoing," says Woody Heller, managing director of Jones Lang LaSalle. "Lower interest rates, ample debt financing and the re-emergence of REITs have helped facilitate several trophy transactions."

The most notable transaction during the first half, hands down, was Silverstein Properties/Westfield America's $3-billion deal for the lease on the World Trade Center.

Real Capital Analytics' August Capital Trend Report states that some $5.4 billion of office assets located above 23rd Street changed hand over the past 12 months. The majority of buyers were private national investors (39%). Below 23rd Street, some $1.6 billion of assets were sold, mostly to institutional/foreign buyers (31%).

But as with many US markets today, there seems to be a stalemate between buyers and sellers. Buyers are shopping for bargains while sellers are hanging tough until conditions improve. Norman Sturner, general partner of Murray Hill Properties, says he knows of at least two instances where sellers rejected offers lower than their asking bid. "Sellers are not caving in and taking a lesser price," he says.

Buyers are having problems as well. "We're still looking at deals, but we're more flush with capital than opportunities," says Pal Pariser, co-founder and principal of Taconic Investment Partners.

Development, too, is moving slowly. Bruce S. Fowle, co-founder and senior principal of Fox & Fowle Architects, reports that he's working on two prospective projects on 42nd Street - the Milstein site at Eighth Avenue and the Durst site at Sixth - but that both are still seeking tenants.

"That may be an indicator of a slowdown," he admits. "But compared to the late 1980s, there's no overbuilding. Demands will continue, but at a slower rate."

Construction activity will pick up this year, and through 2004 Manhattan will grown by 3.9 million sf annually, relates Frances D'Loren. This is the highest level since the 1980s. "But that's almost all built-to-suit," she adds. That includes 1.1 million sf at Seventh Avenue and 42^nd Street for Reuters; and 1.3 million at 383 Madison Ave. for Bear Stearns.

There are several office towers on the rise with users in place. Boston Properties is constructing two buildings: one for Ernst & Young and another for Arthur Andersen, notes Steven A. Swerdlow, executive managing director of CB Richard Ellis. "Related is building the AOL Time Warner project, Brookfield is building for CIBC and 42nd and Madison, and the New York Times has announced construction of its new space."

"There was no construction during the boom," he continues. "This is concentrated delivery for 2002 and '03 and then there'll be a drop-off. The question is, will the market have recovered by the time the space is delivered? I think it will."

Even if the office market is taking a hit, residential looks pretty strong going forward. A little leveling off in prices and availability is to be expected - but not much.

"Residential is a mixed bag," reports Paul Purcell, managing director and COO of Douglas Elliman. "We've seen continued rising prices despite the gloom-and-doom predictions. Prices rose 5% in the second quarter of 2001 over the same period a year ago. We saw the number of unit sales decrease, though, in a rather pronounced manner: 19% fewer than second quarter 2000." One revealing indicator of the market's climate has been the increase in the "negotiability factor," says Purcell. "The percentage difference from last asked price to sale price doubled to 4.1 %. Last year, some properties were going into overbid. Four percent is still huge, but it will expand a little further."

According to Real Capital Analytics, private local investors picked up $72 million of garden apartments located north of 23rd Street over the last 12 months and $28.5 million of mid-rise and high-rise buildings.

Moving t the rental segment, Robert Von Ancken, executive managing director of Landauer Realty Group, says there is plenty of upside. Nevertheless, "prospective tenants used to have to pay one month's rent, one month's security and 15% to the broker. Instead, owners are paying brokers to find tenants. That's a big change."

Michael A. Maidman, CEO of Townhouse Management Co., says his firm has four buildings under development, two of which are being built as corporate apartments on behalf of ExecuStay, a Marriott International division.

"Everyone who's building residential in Midtown is building only super-deluxe product because of a lack of land and the presence of rent-stabilized units," says Maidman. "We recently bought two rent-stabilized buildings on 63^rd Street. These are attractive opportunities, to either change the scope of the property or to renovate as you get the apartments back and get your market rents."

In retail, as in office, a flight to quality is apparent although retail is not hurting - yet. Faith Hope Consolo, vice chairman of Garrick-Aug Worldwide, admits that the market's softer than it was, but insists the downturn is merely an adjustment.

"Rent levels are still strong," she notes. "But tenants are getting more concessions and longer leases. A couple of years ago, deals were done at 15% to 20% above asking rent."

Consolo predicts that conditions will improve in the fourth quarter and retailers will experience a good, but not great, holiday shopping season. "You'll see more expansions from Cosmetics Plus, Innovation Luggage, Zara, a couple of European accessories retailers and more home furnishings," she adds.

"Retail has not eased up at all in terms of availability in the primary sectors," agrees Alan Victor, executive vice president of the Lansco Corp. "The prime locations - such as 57^th Street, Fifth Avenue - have almost no vacancy. Deals often get made before the space hits the market."

A few of the bigger Midtown retailers are feeling some pain, particularly entertainment-based operations, admits Victor. "There's been an excess of movie screens on 42^nd Street and as theaters close, developers who depend on movie traffic might get hurt."

Ben Ashkenazy, president of Ashenazy Acquisitions Corp., is also bullish on retail. He recently bought the Barney's building in New York City, as well as in Chicago and Los Angeles, for $180million and is acquiring other retail properties in the Tri-State area. "There's no question that there's less growth today and fewer grand openings in Manhattan," he admits, "but quality retail will always be leased. Prime locations will always do well."

One such area is SoHo, especially the luxury segment, contends Susan Penzer, president of Susan Penzner Real Estate. She predicts that the market is likely to stay strong because it doesn't always depend on strong numbers. "Most of the luxury retailers are there for branding," she asserts. "Volume is less important."

SoHo is holding its own, agrees Bruce Sinder, president of Sinvin Realty Corp. "European fashion houses are coming in and pushing rents up as high as $300 per sf for prime space."

Conversely, Downtown hotels are not faring as well, reports real estate attorney Georgia Malone. "When Hartz built those boutique hotels in SoHo and Tribeca, they were fueled by the dot-coms and European businesses," she explains. "Now, dot-com business doesn't exist anymore, and the Europeans are more wary of travel.

"Another problem for the hotel market citywide is that we had no big events this summer," she continues. "The speed at which tourism has dropped has been a real eye-opener. RevPAR has dropped significantly across the board, and occupancy has dropped. Several hotels have changed hands recently, and raised their prices to cover the purchase, and this turned off their existing clientele."

PKF Consulting reports that hotel occupancy reached 76.1% in the first six months of this year, compared to 84% a year earlier. ADR fell 2.2% year over year. Average room rates stood at $216.69 in June.

RevPar has dropped, but not dramatically, claims Paul Stern, director of the hotel and leisure advisory group for CB Richard Ellis. "Most markets would like to have our mid-70% occupancy. The trouble with hotels in New York City is that they track the economy. GDP movement and hotel revenue have an almost scary correlation."

Stern says he's bullish on hotels, medium-term, despite the likelihood of more near-term decline. "True, a few thousand hotel rooms have been added in the past couple of years, but we were under hoteled," he asserts. "There'll be some pain, but we're not oversupplied and there's no prospect of adding many more rooms."

Still, Robert Von Ancken reports that he's looking for two hotel sites for prospective developers: one for a 125-room boutique in Greenwich Village, the other a 500-roomer in Midtown. "This is surprising," he admits.