New York City's economy is firing on all cylinders. Wall Street is the most important, though not the sole, driver of an expansion in which nearly all sectors of the economy are participating.

While the number of jobs in financial services is still down significantly from the pre-recession peak, total wages earned in financial services not only have recovered, they have soared to an historic high.

Wall Street bounty is driving demand for retail goods, real estate and a wide range of business and personal services. Condominium prices have soared past $1,000 per square foot; hotel room rates are up more than 10% from a year ago; office rents are rising sharply and a few buildings in Midtown Manhattan's Plaza District are asking, and reportedly achieving, rents above $100 per square foot.

Thanks to tax revenues generated by spiraling corporate profits and record-high bonuses, commercial and residential real estate transactions, and retail and hotel room sales, the city enjoyed a substantial budget surplus in 2005 and should do so again in 2006. Overflowing coffers not only enable the city to maintain services affecting quality of life, they also provide the wherewithal to attract and keep important employers like Goldman Sachs, which is building a new headquarters in downtown Manhattan with help from tax incentives.

In the past 15 years corporate migration patterns have taken an interesting turn: in contrast to the 1970s and 1980s, when numerous firms left for more cost effective locations, frequently in the Sunbelt states, the number of corporate headquarters in Manhattan has actually doubled since 1990. Many of these companies have arrived without fanfare, not asking for or receiving tax breaks, motivated by the visibility and networking opportunities the city affords.

However, these new corporate citizens have not tended to bring large staffs with them. In many cases, only the highest paid workers have accompanied the CEOs to Manhattan, while non-essential personnel have been relegated to lower cost locations. Overhead reduction strategies such as offshoring will continue among the large corporations that remain.

Accordingly, New York City's future economic well-being will depend on its continued success at attracting and retaining the highest-compensated workers.

New York City's growth spurt is likely to subside by the end of this year. The city's Office of Management and Budget forecasts a downshifting of employment growth from 1.3% in 2006 to 0.6% in 2007. Higher interest rates are already taking a toll on the local housing market, which is losing steam as opposed to collapsing. Fortunately for the city's economic health, housing has not been as critical a driver as it has been for many other US markets. The corporate sector continues to enjoy a favorable profits picture, and hiring is strong. The brisk pace of M&A and IPO activity in the year to date augurs another year of generous bonuses at investment banks, though the record-breaking payout of early 2006 may not be repeated.

From an owner's perspective, Manhattan office market conditions have rarely been better than they are right now. For some time law firms were the top drivers of demand, but now financial firms are stepping up and leasing more aggressively. They are, however, taking space rationally: the speculative leasing that pumped up the market in the days preceding the NASDAQ downturn has not returned. With this activity, the midtown Manhattan market is bursting at the seams: the occupancy level is above 95% and rents have been rising robustly since 2003. Midtown is the bastion of high-end users such as hedge funds and real estate investment companies and others willing to pay upwards of US$70 (€54) per square foot for office space.

In the Downtown market, where occupancy is closer to 90%, rents have only just begun to rebound from the post-9/11 plunge. Consequently the Downtown rent discount to Midtown is larger than at any time in history. The wide rent delta and scarcity of space in Midtown greatly enhance the Downtown market's near-term prospects for improvement. Although Midtown has an unassailable advantage over Downtown in terms of its transportation connections, the Downtown amenity base has improved dramatically in recent years with scores of new shops and thousands of new residential units, many of them carved out of former office buildings. Lower Manhattan has become a more attractive place to live and work in the post-9/11 era, and its future as an office market is looking considerably brighter notwithstanding the uncertainty still surrounding the rebuilding at Ground Zero.

Goldman Sachs' commitment to a new headquarters is another positive development for the Downtown market.

Conversion of numerous office properties in both Midtown and Downtown Manhattan to residential use has removed a considerable amount of lower-quality inventory from the market and has helped drive down vacancy rates.

In Midtown alone, some 5m square feet of obsolete office space has been demolished or converted to apartments in the past ten years. With demand for condominiums leveling off, conversions also are on the decline and so are unlikely to play a role going forward in keeping market conditions taut. However, the office market should remain relatively tight even in a more moderate employment climate because very little new supply is under construction.

Because office development in New York City is such a lengthy process from approvals to completion, deliveries are predictable several years in advance.

Based on the current pipeline, it is safe to assume that total office inventory will not return to the pre-9/11 level until 2010 at the earliest. The amount of new office space that will be completed by the end of 2008 amounts to a mere 1% addition to inventory, and more than half of that space is already spoken for by tenants. Farther out on the timeline, more new office buildings inevitably will rise in Lower Manhattan and on the Far West Side, where massive mixed use developments have been proposed for the Hudson Yards and the High Line.

For the next few years, however, Manhattan landlords should continue to have the upper hand with tenants even if the local economy loses some momentum.

Anne Hoagland is vice president and senior research analyst at the Real Estate Investment Group of JP Morgan Asset Management in New York City.