COMMERCIAL PROPERTY: A Year After the Crash, Climbing Back; Office Leasing Picking Up Pace in Manhattan

IN the last year, downtown Manhattan has been a lonely place for landlords burdened by vacant office space.

As the urban equivalent of a company town, downtown Manhattan has felt the full force of the layoffs, mergers, consolidations and fears that have occurred in the financial-services industry since Black Monday a year ago.

Elsewhere in the New York metropolitan region, the crash has prodded landlords into accepting lower rents. But law firms, foreign banks and other expansion-minded tenants have helped fill the void created by a shrinking financial-services sector.

Some analysts believe the rough stretch is now over; others fear that rosy portrayals of post-crash demand for office space are premature. ''It's well and good to point out the strengths of the market, but I think we're fooling ourselves if we think that other office users can replace a vibrant financial-services economy,'' said Lloyd Lynford, president of the Reis Reports, a Manhattan research company that studies real estate trends.

After the crash, investment banks and other companies in financial services virtually stopped leasing office space. Their volume of major lease transactions in Manhattan plunged by 84 percent in the first half of 1988, compared with the same period one year earlier, according to Cushman & Wakefield, a realty company.

The decline hit downtown hardest because of its dependency on stocks and bonds. It suffered an overall drop of nearly 75 percent in major leases, while midtown continued to prosper, with other office users signing major leases that totaled more than 4 million square feet during the first half of 1988.

''Surprisingly, it looks like the total leasing volume for 1988 will be down only 10 percent from last year, and that's not bad when you consider that the leasing pace in 1987 was torrid,'' said Raymond T. O'Keefe, New York regional director of Cushman & Wakefield. ''Midtown has been keeping pace. Downtown was way off during the first half of the year, but it showed some signs of coming back in the third quarter.''

Nevertheless, downtown still has a surfeit of office space. At the end of September, the vacancy rate in first-class buildings stood at 13.3 percent, up two percentage points from a year earlier. Vacancies in older second-class space, which cannot handle the high-technology needs of brokerages, pushed up to almost 19 percent, six percentage points higher than a year earlier. Collectively, that means downtown has more empty office space - 15 million square feet - than the total inventory in Stamford, Conn.

''The crash changed people's attitudes about lower Manhattan,'' Mr. O'Keefe said. ''Developers and investors are giving downtown a bit of a jaundiced look. But when you take a close look at downtown, it still shows a lot of strength.''

Leasing brokers and developers like to point out that because downtown Manhattan has very little office space under construction today, demand should catch up with supply over the next few years. Only one speculative office building - a small one with 220,000 square feet of space - is opening downtown this year.

That is a dramatic decline from 1987, when developers completed more than five million square feet of speculative office space south of Chambers Street, the demarcation line for downtown Manhattan.

But in midtown Manhattan, construction crews are continuing at a dizzying pace, especially west of Avenue of the Americas, where nearly a dozen office projects are under way. Many of the developers had hoped to lure investment banks from downtown, but after the crash last Oct. 19 they had to revise their strategies.

They trimmed profit projections and then began pursuing law firms, advertising agencies and other service companies that were looking to expand into buildings that could accommodate their technological requirements into the 1990's.

''Developers all were nervous,'' said Herbert Weinstein, a partner at Proskauer Rose Goetz & Mendelsohn, a law firm that began shopping for new office space six months before the crash. ''In our cost analysis of competing lease packages, we found that offers weren't just minimally better after the crash - they were significantly better.''

During their search for about 350,000 square feet of space, partners at Proskauer reviewed more than 20 proposals that owners and developers submitted after the crash. The firm ended up signing a lease at 1585 Broadway, a 1.3-million-square-foot tower set to open in 1990.

''Fairly universally, with the notable exception of Larry Silverstein, who seemed to be very intransigent,'' Mr. Weinstein said, ''every developer offered a much better deal after the crash.''

Mr. Silverstein is the developer of Seven World Trade Center, a two-million-square-foot tower that has been sitting virtually empty in downtown Manhattan since its completion two years ago.

He is now in negotiations to rent about half the building to Salomon Brothers, the investment bank that after the crash canceled its plans to erect a headquarters tower at 59th Street and Columbus Circle.

''Without question,'' Mr. Silverstein acknowledged, Seven World Trade Center has been a symbol of malaise in the downtown office market. But with ''major lease-up activity in the very near future,'' he said, the building will shed that image.

''There's renewed confidence today,'' Mr. Silverstein said. ''Immediately after the crash, we were all in a daze, wondering what was going to happen in the world. But the enormous number of anticipated layoffs did not affect us to the degree we expected because, by and large, people who were laid off ended up being re-employed elsewhere.''

At latest count, there were 149,000 people working for New York City securities and commodities companies, the primary Wall Street category tracked by the Federal Bureau of Labor Statistics. That reflects a loss of about 11,000 jobs from a precrash peak.

But the business-service sector - which includes advertising, consulting and health services - has more than counteracted that loss. That sector accounted for nearly three-quarters of the 45,000 new jobs created in New York City during the first seven months of 1988, according to a recent report of the Port Authority of New York and New Jersey.

The shrinkage of the financial-services industry has prompted major companies like Dean Witter Reynolds to postpone or cancel plans for moving computer and back-office operations outside of Manhattan.

As a result, suburban office centers are feeling a ripple effect of the stock market crash. But vacancy rates are largely holding steady or declining. That's because suburban developers, after a long building spree, were already cutting back sharply on construction before the crash.

''LEASING activity in northern New Jersey slowed by about 35 percent during the first half of this year,'' said Mr. Lynford of the Reis Reports. ''That's clearly a discernible impact of the crash.'' But the vacancy rate in northern New Jersey edged up only one percentage point, to 25 percent, in the first half of 1988.

Construction has virtually halted in Westchester County, with only 280,000 square feet of office space now under construction. And the countywide vacancy rate showed considerable improvement in the first half of 1988, falling to 19.7 percent from 25 percent last December, according to Rostenberg-Doern Company, a realty company in White Plains.

Directly east, the Connecticut county of Fairfield is chock full of empty office space. Its vacancy rate has held steady around 27 percent in the last year and shows little promise of improving much before 1990.

The market forces of Westchester and Fairfield are only tangentially tied to Wall Street because high housing costs make both counties unlikely prospects for computer and back-office facilities being shifted out of Manhattan. The usual destination is northern New Jersey or, occasionally, another borough of New York City.

But for the time being, most companies in financial services are sitting tight rather than leasing new space or putting surplus space up for rent.

Indeed, layoffs on Wall Street have not prompted companies to put the expected corresponding volume of surplus office space back on the market. ''It's very different from the early 70s,'' said Mr. O'Keefe of Cushman & Wakefield, ''when firms literally were going out of business and putting huge blocks of space back on market.''

''We've seen some space come back on sublease market,'' he said, ''but most of it is from relocations out of New York - by companies like J.C. Penney and International Paper - that have nothing to do with the events of last October.''

The merger of E.F. Hutton & Company into Shearson Lehman Brothers was the big exception; that deal resulted in the Hutton Building on West 53d Street and 500,000 square feet of space at One Battery Park Plaza being put up for grabs.

''But generally speaking, firms that contracted haven't been able to turn around and put their surplus space on the market,'' said William Hedman, director of the downtown office of Edward S. Gordon Company, a realty company. ''Even if a firm renting 500,000 square feet of space laid off 20 percent of its work force, those people are scattered all over the building. So to sublease some of its space, the firm would have to rearrange its offices - and that costs money. Then it would have to start marketing the space - and that costs money.''

Shrunken investment banks and brokerages, locked into oversized offices, are unlikely prospects for renting additional space in the near future. This sudden reversal of fortunes in the financial-services industry has left Manhattan landlords feeling poorer, too.

''The expansion of international firms has helped to fill the void created by the consolidation of the financial-services industry,'' Cushman & Wakefield noted in a recent report. ''Within the banking industry alone, almost 90 percent of the total space leased was signed by off-shore institutions. . . . However, not even the growth of foreign firms in Manhattan could compensate for the significant decline in leasing activity by the financial-services industry.''

OUTSIDE New York City, the crash shook up other office markets, but did not leave many enduring bruises. In Los Angeles, banks and brokerages have continued to be major space takers because the city is a young financial center - still in an early growth stage, as it moves into the ranks of such giants as Tokyo and Manhattan.

''Los Angeles is absolutely and clearly the West Coast financial center,'' said Robert Baggott, an investment specialist in Los Angeles for Grubb & Ellis, a national realty company. ''Every bank that wants to be a player in the international market is either here or planning to be here.''

Since 1983, the inventory of first-class office space in downtown Los Angeles has doubled, to about 25 million square feet, and developers are adding a million square feet of space this year.

''Here in Los Angeles, I suppose we're as boastful as Texas was seven or eight years ago because we've been absorbing huge amounts of office space - and that hasn't changed since the crash,'' Mr. Baggott said. ''Two weeks after October 19th, everyone was back signing deals again.''

In Chicago, the crash spurred First Boston Corporation, the investment bank, to trim by a third the 100,000 square feet of space it was negotiating to lease. ''And some other investment banks that were looking seriously at major leasing deals and consolidations put a halt to their plans after October 19th,'' said John Goodman of the Chicago office of Julien J. Studley Inc., a realty company.

That backtracking, however, has been more than offset by the activity of other space users. Downtown Chicago showed a modest increase in leasing activity in the first three-quarters of this year, compared with the same period of 1987.

''The crash had a chilling effect on leasing decisions, but as time went on, most everyone who needed space prior to the crash realized they needed space after the crash,'' said John A. Buck, a developer who recently completed a 42-story office tower at 190 LaSalle Street, in the center of Chicago's financial district. ''For certain, however, investment banking houses are much more deliberate in their leasing decision today and careful about their assessment of requirements.''