The biggest question in the minds of real estate executives is what effect the Wall Street layoffs and the prospect of a recession will have on New York City’s commercial office marketplace.

“Nearly 50,000 Jobs Slashed This Year: More Lehman Pain” a headline warned in the May 10 edition of the Wall Street Journal. On Tuesday, JPMorgan Chase announced that 50% of employees at Bear Sterns would be axed, and the bank announced plans to eliminate about 1 million square feet of its office space in the city.

In addition to the layoffs, large blocks of office space in Midtown are scheduled to come on the market, with the grand opening of the 2.1 million-square-foot Bank of America tower at One Bryant Park and Equity Office’s 1.3 million-square-foot building at 1095 Sixth Ave.

“The spaces being vacated by the Bank of America are from various buildings and will offer a significant amount of sizable blocks of office space at some of the highest rents in Midtown,” the president of W&M Properties, Anthony Malkin, said.

“We are now starting to see more space come on the market due to the layoffs,” the chief operating officer of the New York metro region for Cushman & Wakefield, Joseph Harbert, said. “We are continuing to see lots of activity for office space, seeking approximately 30,000 square feet, and in the large tenant arena over 100,000 square feet, but not as much as for spaces in between. Rents continue to rise even today.”

The New York City office market ended the first quarter with a vacancy rate of 5.4%, according to the CoStar Group, and rental rates ended the first quarter at $64.36, an increase over the previous quarter.

During the first quarter, three major leases were signed: the relocation of Ogilvy to 530,130 square feet of office space at 636 Eleventh Ave.; a lease of 440,240 square feet by the State of New York Unified Court System at 60 Broad St.; and a 340,876-square-foot renewed lease by the city of New York at 100 Church St.

“Wall Street accounts for 31% of the city’s personal income and 12.5% of its jobs,” the executive vice president and principal at Newmark Knight Frank, David Falk, said. “Each Wall Street job produces two other jobs in the city. Financial sector employment in New York City is down 6,000 jobs since late 2007. This sector is considered the highest rent payer in Manhattan. Thus, with cutbacks from the large banks, there will be fewer players than normal for the large blocks coming on to the market on a direct basis. The large tenants in Midtown today are mostly led by law firms.”

“Demand for office space in Manhattan has moderated in the first few months of 2008,” Mr. Falk added. “The availability rate has climbed to 8.8% from 8.3% at the end of 2007 and 8.1% at the end of the third quarter. Given the general weakness of the financial services sector and the effects of the credit crunch, many companies are being much more cautious and either putting decisions on hold, or not committing to as much space as originally planned. This is causing concern about future demand. From 2004 to 2006 there was a net absorption of 30.3 million square feet, reducing the vacancy rate to 5% from 10.9%. However, over the last two quarters net absorption was negative, a total of 2 million square feet. This is compared to the previous 18 quarters, where there was positive absorption. With the expected blocks of space coming to the market from the cutbacks in the banking industry, we are expecting continued negative net absorption in Manhattan.”

Given the increasing availability rate, the rising rents are in contradiction of the deterioration of the macro-environment for office space and the decline in leasing volume, Mr. Falk said. By square foot, leasing was down 9.3% in the second half of 2007 versus the previous year, and he said he expects further reductions in the first half of 2008.

Industry leaders are still cautiously optimistic on the state of the office market.

“Rents will ease 10% to 15% from the highs for sure,” the chief operating officer of Stellar Management, Robert Rosania, said.

“The credit markets are giving everyone plenty of anxiety,” a co-founder and principal at Broad Street Development, Daniel Blanco, said. “Tenants whose leases are expiring are looking for value-added opportunities. In spite of it all, there’s still business to be done and landlords have to work smarter, not harder.”

“There is no doubt that some big spaces will come on the market within the next year to 18 months, and will have a temporary effect on the vacancy rate,” the chief executive of the Moinian Group, Joseph Moinian, said. “However, the Moinian Group has not felt the effects of Wall Street and financial industry cutbacks on our portfolio.”

“No one can accurately predict the future, but New York has enjoyed single-digit vacancy for several years and companies have been clamoring for large blocks of space,” Mr. Moinian said. “Now that these blocks will be hitting the market, there will be some short-term effect on vacancy rates, but we believe many of these prime locations will not be on the market very long.”

Last week, Newsweek announced plans to follow the lead of several press and broadcast companies and relocate to Hudson Square. The company has signed a lease with the landlord, the New York City District Council of Carpenters Pension Fund, for a 15-year term at 395 Hudson St., where it will occupy approximately 165,000 square feet.

Newsweek will be moving from the Moinian Group’s 1776 Broadway, which has been renamed 3 Columbus Circle. More than 500,000 square feet of office space will become available in the recently renovated property.

Mr. Moinian said, “Being in one of the city’s strongest submarkets, and one of the only large blocks of available space in the area, we are very confident in its leases up. We have already received a lot of interest in the building.”

A limited supply of large-block class-A office space is available today and will become available within the next 30 months. The majority is around Times Square and Eighth Avenue. Africa Israel Investments is completing a renovation of the former New York Times Building at 229 W. 43rd St., between Seventh and Eighth avenues. A total of 789,826 square feet of space is available, and the landlord is seeking rents ranging from $80 a square foot on the second floor to $125 a square foot on the 16th floor.

Construction is under way at SJP Properties’s 11 Times Square, ahead of schedule, with the building’s concrete core now past the 12th floor. This tower, directly across from the Port Authority Bus Terminal, will be delivered to the market before 2010. According to the trade, many prospective tenants are in serious negotiations for spaces ranging from 200,000 to 400,000 square feet in the 1.1 million-square-foot tower.

Leasing will continue in the New York region, albeit at a slower pace. I must concur with Anthony Malkin when he says, “People are not looking as far out as they were, and that may be the explanation for the slowdown in the market.”

Many industry leaders expect the economy, and New York’s leasing market, to recover in 2009.

Mr. Stoler, a contributing editor of The New York Sun, is a television and radio broadcaster, and a senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.