NEW YORK - After Sept. 11, Manhattan commercial realty businesses seemed poised for a windfall. About 13 million square feet of office space was lost in the Twin Towers, and another 18 million square feet was lost or damaged in the surrounding properties, representing about 60% of the downtown office space, according to TenantWise, a real estate market research and leasing firm.

When supply drops that dramatically and demand holds steady, chances are good that prices will rise. In fact, in the first day of trading after the market opened Sept. 17, New York commercial realty firms, including SL Green Realty (nyse: SLG - news - people), Mack-Cali Realty (nyse: CLI - news - people) and Vornado Realty (nyse: VNO - news - people), all saw shares spike.

But it's clear now--six months later--that a price rise hasn't happened. In fact, it's been quite the opposite. Manhattan's commercial real estate vacancy rate spiked from 7.4% (calculated immediately before Sept. 11) to 9.5% as of the end of February, according to CoStar Group (nasdaq: CSGP - news - people), a commercial real estate research firm in Bethesda, Md. Office rental prices dropped from $48.75 a square foot at the end of 2001's second quarter to $46.67 at the end of the fourth quarter, according to Cushman & Wakefield, a real estate services firm.

What exactly went wrong?

Excess capacity exists in any real estate market--whether it's in Manhattan or Boise, Idaho. Companies sit on space they're not using, when they could put it up for lease. The problem in Manhattan was that excess capacity was rolled out to market all at once to meet a demand for office space that never really materialized.

An estimated 57,000 Manhattan jobs will be lost by 2003, according to the New York City Partnership and Chamber of Commerce. And many jobs were taken out of Manhattan. Of the displaced World Trade Center tenants, an estimated 13% relocated to New Jersey, and another 6% relocated to upstate New York or left the state entirely. Most notably, longtime downtown resident Morgan Stanley (nyse: MWD - news - people) said it will move 2,000 jobs to Westchester County. Goldman Sachs (nyse: GS - news - people) is moving its equity trading division to Hudson County. American Express (nyse: AXP - news - people) will keep 25% of its former lower-Manhattan workers in New Jersey.

Certainly, a psychological barrier must be overcome before lower Manhattan real estate returns to its glory days. But it's unfair (and blatantly false) to blame the market's decline on Sept. 11. In point of fact, some believe the terrorist attacks effectively provided a little housecleaning.

"The market can't deal with uncertainty. I almost think that if Sept. 11 had never happened, a lot of businesses would have just sat on excess capacity, and it would have created lingering doubt and unease throughout the year," says Kenneth Krasnow, senior managing director of the New York metro region for Cushman & Wakefield. "Now that everything's out in the open, the bad news has been absorbed in the market, and we're ready to move on."

Of course the market will move on--the question is how fast. During the 1991 recession, it took several years for the market to return, largely because as demand dropped, supply increased due to the construction boom. This time around, demand may have dropped, but supply is pretty much the same.

"In 1990, the mantra was 'Just let me survive until 1995,' " Krasnow says. "People were looking at five years of serious pain. This time, supply is in check, and the drop in demand hasn't been as significant. This time around, the fundamentals are solid. My guess is that we'll see the whole downtown area fully turn around by the end of 2003."