Sudden removal of space to have major impact on New York Metro Area office tenants and building owners. They're leasing space in Jersey City. And in Stamford, and Westchester. In Midtown and on Long Island.

Across the New York metro area a wave of office leasing transactions are being negotiated in a headlong rush to secure available space for companies displaced by last Tuesday's devastating attack.

The scramble for replacement space in a market that already had one of the lowest vacancy rates in the country reminds some brokers of the frenzy that gripped the market when tech and telecom firms would mushroom overnight and landlords would lease space to the highest bidder. But after the investment bubble burst, demand for office space hit a brick wall.

Now, once again, brokers are combing every office enclave in search of suitable space for the 650 office tenants displaced from New York's Financial District by the cowardly attack that destroyed or damaged 3.6% of New York City's 476 million square-foot office inventory.

Looking for a Silver Lining

Yesterday, when the Dow Jones Industrial Average plummeted 7.1% in its biggest ever point loss, most of the public companies that own real estate in the New York region registered gains.

Investors quickly bid-up share prices of publicly traded owners of Manhattan office space on expectations that strong demand for space from displaced tenants will quickly fill the little available space remaining and likely lead to increased rental rates. Mack-Cali Realty Corp. (NYSE: CLI) surged 6.63% and S.L. Green Realty Corp. (NYSE: SLG) was up 5.4% to lead real estate gainers.

"Clearly the implications for the NYC office market in the near term are quite positive in the aftermath of the attack," wrote Salomon Smith Barney in a research note.

Laws of Supply and Demand Still Apply

Meanwhile, for all the chaos and devastation from last week's attack, the laws of supply and demand have remained in effect. The immediate loss of more than 11 million square feet of prime office space is making it increasingly difficult, and likely more expensive, for companies and businesses seeking to lease alternative office space in Manhattan.

The current unavailability of large blocks of available office space in New York is forcing the displaced tenants to pursue two different strategies depending on the size of their office requirements.

Should they choose to stay in the city, small to mid-size businesses (those with 125 employees or less occupying 25,000 square feet or less) should find plenty of options. According to a recent market study by CoStar Group (Nasdaq: CSGP), just under 500 of the approximately 650 tenants displaced by the attack fall into this category. As of last Friday, there were 3,549 available space options that could accommodate these tenants in Manhattan, or about seven options per tenant, according to CoStar.

The larger firms (those that require 25,000 square feet or more) will find it difficult to remain in the city, especially if they want to remain in a single location. These firms will likely have to consolidate into their existing New York locations, disperse employees among multiple new locations or move to outer market areas.

James Meiskin, president of Plymouth Partners, said he expects to see a "mass exodus" of office tenants from Lower Manhattan to Midtown South and other markets such as Long Island City, Brooklyn, and Jersey City. "More than 10 million square feet have evaporated from the Manhattan market, but I only expect about 5 million to come back because some businesses will never be able to function again and still others will uproot and move elsewhere," Meiskin said.

Some of the biggest names of Wall Street are being forced to shift more of their operations outside the city. On Friday, American Express said it signed an agreement with The Landis Group to lease approximately 175,000 square feet of office space at 400 Atlantic St. in Stamford, CT, where it plans to relocate its New York headquarters staff. The financial service giant said Stamford will be just one of several locations in the metropolitan New York area where it plans to lease facilities.

The major beneficiary of this exodus appears to be New Jersey, where many of the financial services firms had set-up telecommunications and technology centers.

American Express is reportedly close to leasing another 500,000 square feet at multiple locations in northern New Jersey, and Lehman Brothers, another displaced World Trade Center tenant, is also close to signing a lease for 300,000 square feet in Jersey City, close to where it already leases space. Hanover Capital, Fiduciary Trust Co., and others have also taken space across the Hudson River in New Jersey.

Other firms are spreading their operations among their other local office locations. Oppenheimer Funds, for example, set up temporary operations in the Rye, NY, office of Tremont Advisers, a company it is in the process of acquiring, while it continues searching for replacement space.