Small tenants more active in NY office market

By Ilaina Jonas

NEW YORK (Reuters) - Laid-off investment bankers reinventing themselves as hedge fund managers are helping to mitigate the pain the Manhattan office market is suffering, as demand for smaller office space offsets the pullback by large investment houses, the chief executive of SL Green Realty Corpsaid on Tuesday.

During the past boom, the large financial institutions, needing big blocks of space for trading floors and expanding work forces, drove demand and rents for Manhattan office space. But many of these tenants, such as Merrill Lynch & Co Inc, Bank of America Corp, Lehman Brothers Holdings Inc and Citigroup Inc are slashing staff, reducing their office space needs.

"As you get to 100,000 square feet and over, that used to be the primary space in demand when the market was very tight, and financial service users were driving a lot of the tenant decisions," Marc Holliday, SL Green CEO, said at the Reuters Real Estate Summit in New York.

"Now that a lot of the financial service users have moved to the sidelines, the larger blocks are going to move slower. The good news is the under 50,000-foot spaces are still moving briskly."

Holliday said law firms and entertainment, public relations and media companies have been looking for space. SL Green also signed two smaller spaces for new hedge funds at 461 Fifth Ave.

"As people exit their investment banking jobs, they tend to start new businesses," he said.

Holliday said that he expects effective rents -- rents paid after factoring in free months of rent and other incentives -- to fall between 10 and 15 percent from their highs reached last year, as sublease space from financial firms hits the market.

But the sublease space and the lower rents probably won't appear for another 12 to 18 months as financial firms figure out what they want to do and put plans in place to do it.

"There's a real lag time between companies saying I'm going to do it and having that space actually available for rent," he said.

Still, Holliday is optimistic about the future of Manhattan's office market.

"Like any cycle, demand will eventually come back from the financial service companies as they start to add resources to their businesses and business lines where they're making money where they had shed in the past," he said.

(For summit blog: summitnotebook.reuters.com/)

(Reporting by Ilaina Jonas, editing by Gerald E. McCormick)