A recession could lead to large increases in office vacancy rates, Cushman & Wakefield executives said at a breakfast press conference today.

The firm’s chief economist, Kenneth McCarthy, said Manhattan’s market is in an “uncertain place,” but he predicted a recovery as long as there are not significant job cuts in the financial industry.

“So far we’ve seen the write-downs, but not the lay offs,” he said. “It could be that we get through this without a major problem.”

If there is a recession—and economists put the chances at 50%–the vacancy rate could rise to 10% from last year’s average of 4.8%, Mr. McCarthy said.

While leasing activity dropped by nearly 13% in Manhattan to 23.5 million square feet, the average rental rate increased by 28.7% to $65 a square foot, according to Cushman & Wakefield’s fourth quarter report.

The strong increases in 2007 rental rates are attributed to reductions in supply, the chief operating officer of Cushman & Wakefield, Joseph Harbert, said.

“Though many projects have been announced, and are either in the beginning stages or under construction, relatively little has been added to the market in the past 10 years,” Mr. Harbert said.

Still, deals are more difficult to get completed and landlords are increasingly offering incentives — including extra square feet at no cost and free re-construction of the space — to make their space more attractive, a vice chairman of Cushman & Wakefield, Mitchell Konsker, said.

The firm also reported that investment sales rose to $47.8 billion in 2007, a 40% increase from 2006. Most of the deals were from the first six months of the year, before the credit crunch began roiling the markets.

And because of constrained supply and strong consumer spending, retail spaces saw record-breaking rent increases in 2007. Rents on Madison Ave., for example, rose to $1,091 a square foot, a 14% increase from 2006.