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NEW YORK (AP) ― The fate of one of the strongest property markets in the world hangs in the balance as Wall Street stalwarts crumble and job losses loom over the Big Apple.

The days of skyrocketing rents and out-of-sight sales prices on everything real estate from office buildings to condos are over in New York as the credit crisis chills the lifeblood of the city: the financial services industry.

"It doesn't look pretty," said Barry Gosin, chief executive of commercial real estate services firm Newmark Knight Frank. "There's a downturn on Wall Street and jobs will be lost. The question is, how many jobs?"

The financial services industry makes up nearly a third of all income in the city and 12 percent of its employment. Through August, the sector shed almost 103,000 workers worldwide, according to Challenger, Gray & Christmas. That total doesn't include the likely rounds of layoffs coming from investment banks Merrill Lynch and Lehman Brothers.

Bear Stearns and Merrill Lynch have been taken over, while Lehman Bros. is in bankruptcy. The world's largest insurer AIG survived only after the government offered two loans totaling $122.8 billion. The four companies occupied a total of 12 million square feet of Manhattan office space.

It could take another year at least for the market to feel the full impact -- no industry expert expects all of it to come back online -- but already leasing activity has "ground to a halt," said Ken McCarthy, managing director of research at Cushman & Wakefield, as tenants wait on the sidelines and hope rents will drop.

"If you don't have to do a deal today, you're not doing a deal today," McCarthy said.

The vacancy rate for Manhattan commercial real estate hit a two-year high of 7.4 percent in the third quarter, up 30 percent from the year-ago period, according to a report last week by Cushman & Wakefield. The firm predicted the vacancy rate could rise as high as 9 percent to 10 percent by the first quarter of next year.

August leasing activity in the Midtown area trailed the five-year monthly average by 41 percent, and the Downtown area, by 71 percent, according to CB Richard Ellis. Average asking rents are starting to fall in both areas, and vacancy rates are inching higher. Landlords are offering more concessions to appease tenants.

"I did hear of a transaction pending where the landlord dropped the rent by $10 per square foot on a $100-plus per-square-foot rent to entice the tenant to stay," said Steve Siegel, chairman of global brokerage for CB Richard Ellis.

Rents, which have doubled since 2003, could lose as much as 23 percent, Gosin predicts, but believes the city's market is resilient and will bounce back better than expected.

Investment sales are at a near standstill too as the squeeze on credit markets have stopped many investors from getting financing. Sales so far this year are off by as much as 70 percent, while office prices have dropped between 15 percent and 20 percent, though it's hard to determine pricing when no deals are being struck.

New development, once ever-present on the streets, has been scaled back because no lender is willing to finance even the most sure-thing projects.

"Drive around the city now. All the cranes are in Dubai," Siegel said.

The financial fallout could ensnare the city's other property markets -- apartment, hotel and retail -- if the turmoil isn't contained.

Apartment rents already are softening as more renters choose to double up instead of living alone. Landlords are offering more incentives, like one month of free rent, to lure potential tenants.

Preliminary numbers from brokerage house Prudential Douglas Elliman show rent increases slowing in the first half of the year, growing about 2 percent overall. That compares with between 7 percent and 8 percent in the first six months of 2007.

And those numbers occurred before last month's unraveling of the financial industry. If renters start losing their jobs, apartment owners will feel it, said Yuval Greenblatt, an executive vice president at Prudential Douglas Elliman.

"It's too soon to tell now," he said. "But this is not a market that will establish new highs."

The financial services industry is a big user of city hotels, especially the higher priced ones, said Warren Marr, director of PricewaterhouseCoopers' hospitality and leisure research. That demand has waned this year, he said, but has been partly offset by the influx of foreign tourists taking advantage of a weak dollar.

However, he said that benefit will erode later this year if the global economy continues to weaken and the severity of the financial crisis deepens.

Likewise, European visitors have helped to buoy the Big Apple's shopping hot spots like 5th Avenue and SoHo even as American consumers cut back on spending. But the widening credit crisis has spread overseas and will likely hamper foreign tourism.

More job losses here will also hurt retail activity. While Cushman & Wakefield's McCarthy expects the retail market to weather the Wall Street downturn better than the office market, it won't escape unscathed.

"All you have to do is walk down the streets," McCarthy said. "There are clearly more empty stores than a year ago."

(© 2009 The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.)

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