Goldman Sachs paid $40 million to end its lease early at 10 Hanover Sq. in Lower Manhattan. Goldman, the third-largest securities firm, will leave behind more than half-a-million square feet as it struggles to downsize its operation and cut costs.

Goldman will vacate the 21-story tower where it has about 522,000 square feet by September 2004. The company, headquartered at 85 Broad St. in the financial district, still occupies six other office buildings in the area, with about 3.3 million square feet.

Goldman’s move to unload an overabundance of office space serves as a sign that the company does not expect to grow back to the size it was before the economic downturn.

“In the past couple of years given the downturn of the economy, we’ve lost people, and within the median term, we don’t think that we’ll be occupying some of that space,” said a spokesman for the company, Peter Rose. “We have a natural tendency to try and look ahead and anticipate our space needs.”

Real-state analysts say Goldman has about 100,000 feet of unused office space at 77 Water St. that it is expected to unload.

The Hanover Square office space was used for a variety of operations, from accounting to investor relations. Employees will be moved to other Goldman offices throughout Lower Manhattan.

The Witkoff Group, which owns the Hanover Square building, plans to convert the building, five blocks away from the New York Stock Exchange, into rental apartments.

Goldman’s decision to unload its excess space comes at a time when Manhattan’s commercial real-estate market struggles against decreased leasing activity and an increase in available office space.

Job cuts in the financial sector have left many firms with a glut of empty space. Goldman has cut its workforce by 15% since 2001, Bloomberg News reported.

“We expect negative job growth for the remainder of the year, certainly in the sector affecting the office market,” said an analyst at Colliers ABR, Robert Sammons. Earlier this month, the state department of Labor reported that the city's jobless rate reached 8.6% in January, led by layoffs in the financial sector. January's jobless rate was the highest level in nearly five years.
Even though a handful of firms like Merrill Lynch and American Express have re-anchored in Lower Manhattan, the rate of available space is still climbing.

The availability rate reached 23.9% last month, according to M. Myers Mermel, CEO of TenantWise Inc., a real-estate leasing and market research firm. Compare that to the 4% availability rate in the quarter before the September 11 attacks. "It's exceptionally high," Mr. Mermel said.

With that in mind a handful of real-estate executives are opting to convert their building into residential spaces instead. The Witkoff Group has said the building at 10 Hanover Square was originally built as a residence, and they intend to follow through with that intention.

It is unclear if the conversion to a rental building will be profitable. The city's rental market has softened the last year as more New Yorkers opt to buy instead.

"Residential rents don't justify conversion of office rents at this time," Mr. Myers said. "The market isn't demanding it."

The $40 million payment was included in $97 million in exit costs that Goldman, said last week were associated with reduction in the firm's global office space, in the firm's first quarter report. The company decided to leave a third of the interior space at its 1.6 million-square-foot tower it is building in Jersey City, unfinished to save costs, Bloomberg News said.

Meanwhile, the company will remain in six buildings in Lower Manhattan, including 1 New York Plaza, 180 Maiden Lane, 125 Broad St., 32 Old Slip, 77 Water St., and its headquarters on Broad Street.