Vacancies in the most expensive U.S. office market rose to 7.1 percent from 5.3 percent a year earlier, the highest since the third quarter of 2006, New York-based Cushman, the largest closely held commercial real estate brokerage, said today. Sales of Manhattan commercial property declined 59 percent in the first half of 2008 compared with the same period last year. Rents rose to $71.59 a square foot, up 21 percent from a year earlier and 6.6 percent from the previous three months.

``Space coming on the market is more high-priced than the space coming off the market,'' Joseph Harbert, chief operating officer of the New York metropolitan region for Cushman, said today. ``We live in a space-starved city. Despite the state of the economy and despite the problems in the financial services industry, you're still seeing space leased in Manhattan at very high prices.''

Financial companies took about 14 percent of space that was leased in the second quarter, down from more than a third a year earlier, Cushman said. New York City's Independent Budget Office said in a May report that it expects 33,300 finance jobs in the city, or 7.1 percent of the total, to be cut from the peak in 2007. More than 9,000 jobs are being eliminated at New York-based Bear Stearns Cos., acquired last month by JPMorgan Chase & Co.

Higher Rate

Ken McCarthy, Cushman's managing director for New York research, said he expects 40,000 people who work in offices to lose their jobs in the next year, pushing the vacancy rate to about 9.5 percent.

``Because financial services jobs tend to be high-paying, they have a multiplying effect on the economy, so you also get losses in service jobs like retail and restaurants,'' McCarthy said. ``Total job losses could be double the number of office- using job losses, though there may be some offset due to the strength of tourism in the city.''

Vacancies also increased in San Francisco, where occupancy of the city's best office space fell the most in five years during the second quarter, Cushman said.

San Francisco

The vacancy rate for Class A space, the highest quality in the most sought-after locations, increased 1 percentage point from the first quarter to 9.1 percent, the biggest jump since 2003 when San Francisco was reeling from the collapse of the technology bubble, Cushman said. Average Class A rents rose 4 percent to $48.77 a square foot.

Manhattan's three submarkets -- Midtown, Midtown South, and Downtown -- all had increases in their vacancy rates from the second quarter. Midtown's vacancy rate in the third quarter was 7.1 percent, Midtown South's was 5.9 percent, and Downtown's was 7.7 percent, Cushman said.

Asking rents for Class A office space in Midtown, home to Manhattan's most expensive office buildings, rose to a record $92.30 a square foot.

Manhattan's largest leases in the second quarter included American International Group Inc.'s 800,000-square-foot lease at 180 Maiden Lane downtown, and Newsweek's 163,000-square-foot lease at 395 Hudson Street in Midtown South, the area between Canal and 34th streets.

Sales of commercial property in Manhattan fell to $13.8 billion of real estate closed or under contract for the first half of 2008, from $34 billion a year earlier. Last year's first-half total included $10 billion in real estate investment trust privatizations, Cushman said.

International buyers, especially from the Middle East, China, Russia, Ireland, England, Sweden and Germany, accounted for 40 percent of total sales, an increase from about 12 percent last year, Harbert said.

To contact the reporter on this story: Daniel Taub in Los Angeles at dtaub@bloomberg.net; Bob Ivry in New York at bivry@bloomberg.net.

Last Updated: July 1, 2008 17:44 EDT

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