As layoffs begin on Wall Street as well in the professional service industries, the real estate industry is bracing for a wave of office space to hit the market, followed by a precipitous fall in rental rates and a surge in vacancy. Even the most optimistic real estate executives are finally beginning to worry, with many dubbing this month “Black September.”

“Due to the recent events, rents are down by at least 10% to 15% and trending downward,” the president of Newmark Knight Frank, James Kuhn, said. “If a building in the Plaza District expected to rent for $150 per square foot, the price is down to perhaps $110. Certain markets are even worse, especially downtown.”

According to the chief economist at REIS, Sam Chandan, Governor Paterson’s recent estimate of potential job losses on the order of 40,000 is equivalent to the addition of just more than 9.6 million square feet of office space. “An increase in availability of approximately 10 million square feet would imply an increase in the New York office vacancy rate to 8.5%,” he said.

The national head of the real estate practice at Greenberg Traurig, Robert Ivanhoe, said that while “it is premature to calculate the effect of the consolidation and closing of the financial institutions in New York, some have estimated that as much as 20 million square feet of surplus space could become available within the next few months as the financial institutions make their staff reductions. A figure anywhere near this amount would have an immediate adverse effect on the office market and, undoubtedly, lower rents would likely follow in short order.”

Mr. Ivanhoe added, “September has, thus far, been the most tumultuous month in my 30-year career. It was unimaginable just a few months ago that the Treasury would have to take over Fannie and Freddie, that Lehman would go the way of Bear Stearns, that AIG would require a federal bailout, that Merrill would be acquired by BofA, and that Morgan Stanley and Goldman Sachs would be hammered to the point of first jeopardizing their very existence, and then into becoming depository institutions regulated as bank holding companies.”

Still, Mr. Ivanhoe noted, it will “take a while for the dust to settle on the breaking up of Lehman and other acquisitions to determine the ultimate scale of the staff reductions, and one should keep in mind that staff reductions do not directly correlate with space available for sublet. Each newly vacant office will not necessarily be available for sublease, as vacancies need to be aggregated logically into larger spaces for sublet, and future growth needs also need to be considered. It will take quite a while until there is a good handle on the amount of space being vacated and available for lease, and the amount ultimately marketed will be important to determine the direction of the leasing market.”

He added that, “as head of real estate for a law firm occupying in excess of 1 million square feet of space in about 30 locations around the U.S., I would try to hold off on leasing new space, if at all possible, until the economy and market conditions have had an impact on the market, as I would expect that the direction will be falling, taking rents in most markets, particularly in New York, over the coming months.” Mr. Chandan added that, “absent payroll growth at the leading financial service firms, and with smaller firms hesitating to make long-term commitments in the face of overwhelming economic uncertainty, we can expect to see shorter average lease terms and a modest widening of concessions in the third quarter’s results.

“Current and anticipated increases in sublet availabilities are fomenting greater competition for the smaller pool of prospective tenants. The full measure of sublet availabilities will depend, in large part, on the job losses that ultimately follow from the current wave of consolidations in the banking sector. The risks are to the downside that a near term spikes in layoffs and a resulting rise in sublet availabilities will coincide with anemic demand for space, undercutting occupancy. Even a modest slowdown, as we have already observed in the New York market, confutes the underwriting assumptions that prevailed in the period leading up to the last year’s investment peak.”

The chief operating officer for the New York metro region of Cushman & Wakefield, Joseph Harbert, said: “During these days of historic events for the country, it will take some time to sort out the state of the commercial office marketplace. I suspect it will make corporate decision to lease space more cautious and deliberative.”

He added: “Today the real question is what is the effect of the recent events on the growth of New York City and the nation. American consumers are two thirds of the GDP. As they slow down due to concern over employment, it has the potential to make the downturn longer. In New York, where one out of every three square feet are occupied by a financial services companies, the impact could be more immediate. Unfortunately, we don’t have the answer today, and it will take us at least another three months to figure out the true effect on the market.”

For Lower Manhattan, industry leaders are even more wary. An owner of downtown office buildings, who prefers not to be identified, said, “Leasing had dried up over the past four months. Today, the market is dead with little or no activity.” If AIG consolidates its offices in Lower Manhattan, a vast amount of space will join the inventory of available space. Without the financial incentives of 421a and 421g tax abatements which are no longer available, there is no way that a developer will pursue the conversion of these towers for residential use. The lack of tax abatements coupled with the inability for financing will make it impossible for conversion to residential.

The president of W Financial, Gregg Winter, said corporations, “like individuals, like to feel the earth isn’t moving beneath their feet, but lately we all feel like we’ve riding on the Coney Island Parachute Drop, which has fallen and momentarily stopped. The trouble is that it’s hard to know how much farther there is to go before you smash into the pavement below. Once on the ground, operating within the new paradigm is like navigating a path through a minefield.”

A partner of mine at Apollo Real Estate Advisors, William McCahill, said, “Just like the Capital Markets, the New York City office market will probably go through a period of lack of confidence. Bankruptcies and forced mergers of some of the household names in the financial market will not only cause significant available space; but, the thought of expansion will simply not exist. Ken Lewis of Bank of America announced that the Merrill merger would produce significant cost savings for the combined company, which will definitely be a result of lower occupancy costs. Unfortunately for the office market, all major financial companies will be looking to cut costs. This ripples through the system in less revenue for lawyers, accountants and consultants. “Belt tighting” will be a way of life.

The executive vice president at Capital One Bank, Michael Slocum, said: “We expect vacancies to rise from current lows and we are already seeing available office space, which includes subleased space. Rents have certainly backed off, and we expect further erosion there.”

With the financial markets in turmoil, investors and lenders are staying on the sidelines. “The reports I read recently show investment sales activity down by as little at 59%, according to Cushman & Wakefield, and by as much as 85%, according to Jones Lang LaSalle,” the chairman of Massey Knakal Realty Services, Robert Knakal, said.

This past Monday, at The Money Summit event I coordinated and moderated, a group of 10 prominent commercial banks and insurance company senior lenders concurred that financing, if available, has returned to its basic of low leverage, higher loan-to-value of 50% to 60%. Few lenders or investors have any desire to provide financing for commercial office building in New York City.

Mr. Slocum of Capital One said: “The key issue is what happens to the overleveraged properties purchased and financed in the past three years. In many cases, the financial projects were based on rising rents and debt markets remaining stable. Many of the loans required the borrowers to provide interest reserves, but they will likely exhaust over the 2009-2010 time frame.” He added: “It always comes back to cash flow on commercial real estate. Properties financed on true cash flow should be fine. Those financed with rents rolls significantly below the market in 2007 should be okay. If rents roll back to the 2004-2005 levels, upside is lost, but downside is protected if the increases were not backed into the financing.”

Mr. Ivanhoe said: “The investment sales market has slowed to a snail’s pace, and most of what has traded are deals with assumable long-term debt (for example, the Macklowe office building assets). The lack of availability of financing has brought the investment sales market to a halt (except for distress sales), and with the latest from Wall Street and the Treasury, it is unlikely that liquidity will return to the capital markets anytime soon.”

He added: “The erosion of the balance sheets of our major financial institutions will require an incredible rebuilding of capital at a time when capital formation in the real estate finance and financial services sector will be extremely challenging. Consequently, I think that financing will remain difficult to obtain and terms will continue to reflect lower leverage and higher pricing for the foreseeable future. It is hard to imagine how the finance market will not have a significant impact on the investment sales market and the values of the properties.”

It is way too hard to predict the future, but one thing is certain: We are in the first or second inning of the baseball game. Our team has a number of players who are on the disabled list and our pitching is quite weak. Hopefully, the economy will improve slightly and our team will win the game. We need a lot of superstars, rookies, and relievers to help us get out of this predicament. History repeats itself and hopefully it won’t take so long.

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.