Manhattan commercial vacancy rate hits 13-year high.

While commercial leasing activity has picked up in the past few months, the city's Class A vacancy rate increased and average rents fell last month. The vacancy rate of Class A space in Manhattan reached 11.9 % in May, up from 11.3 % in April.

New York Market Overview:

Class B and Class C availability also increased last month, pushing the overall Manhattan vacancy rate to 13.1 %, its highest level since reaching the same rate in December 1996. Meanwhile, the average asking rent for Class A space fell to $65.43 per square foot in May, down 4.9 percent from $68.83 a foot a month earlier. The amount of office space leased in Midtown crept up in May, but remained less than half what it was in the same month last year. There was 620,000 square feet leased in Midtown last month, up from 490,000 square feet a month earlier, but far below the 1.16 million square feet leased in May 2008. The availability rate, measuring the amount of space that will be available for a tenant build out within 12 months, rose to 15.2 %, from 14.8 % in April. Downtown office market has held up better than the other two Manhattan markets in the current recession, but that will change as beleaguered financial firms return space to the market. Leasing volume rose in the Downtown market while falling in both Midtown and Midtown South. While all three markets showed declines in average asking rents and increases in availability rates, the Downtown results were the healthiest. In Manhattan overall, average asking rents fell to $55.95 per square foot in April, a 2.4 percent drop from the month earlier, and the availability rate, which measures space being actively marketed that will be available within 12 months for tenant build-out rose to 13.8 percent, up from 13.3 percent in March. Midtown office leasing, which has taken the brunt of the current economic downturn, will see a flurry of expiring leases in 2010, which will help reverse the dearth of activity. Midtown will see a large increase in leasing activity in 2010 when 1,380 leases totaling 20.3 million square feet expire. The Midtown office market, with 34 million square feet available for leasing, has seen an average price cut of 16 percent for 16 million square feet of that space since September 2008. The country's commercial real estate market is unlikely to recover until 2017. Until then, commercial real estate values could fall by more than 50 percent from their 2007 peak. In New York, rents are already down about 50 percent if free rent and other incentives are factored in.

Total Manhattan Class A Office vacancies increased from 7.60 % vacant to 7.80 % vacant. Total New York City Office vacancy increased from 7.10 % vacant to 7.20 % vacant. Total Available Manhattan Retail Space decreased from 1.05 million SF to 1.04 million SF.

The default rate on commercial mortgages held by U.S. banks may rise to the highest rate in 17 years in the fourth quarter as debt for refinancing remains scarce and rents fall. The rate is expected to reach 4.1 percent by the end of the year. The projection expects defaults on about $44.3 billion of commercial mortgages, based on the $1.08 trillion of loans held by U.S. banks in the first quarter. Commercial defaults are already at a 15-year high after climbing to 2.3 percent in the first quarter.

New Developments

The Federal Reserve has few deals for the start of its program to aid the commercial real estate market. Today is the first monthly deadline for investors to apply for loans to buy new commercial mortgage-backed securities through the Term Asset-Backed Securities Loan Facility. The Fed will start accepting investor requests for loans to purchase older CMBS.

James Abadie, head of New York operations for construction firm Bovis Lend Lease, has resigned amid investigations of the company for alleged overbilling and bribery. Bovis is working on the September 11th Memorial and the demolition of the Deutsche Bank building.

Global real estate transaction volume has slowed significantly, dropping 67 percent year-over-year in the second quarter of this year. But the drop between the first and second quarters was only five percent, suggesting that the decline may have hit a plateau. For the Americas, the projected quarterly sales volume is $8 billion, an 83 percent decline year-over-year and a 6 percent drop from the first quarter.

With few commercial building sales taking place, the foreclosure auction of the $130 million mezzanine note at the former Macklowe Properties office tower at 1330 Avenue of the Americas was a critical market indicator. Kevin O'Shea, who made the winning bid for the note on behalf of the victor Canadian pension fund Otera Capital, the owner of the note.

Landlords are cutting rents, offering incentives and shedding building names, hoping the property won't be pigeonholed as a single tenant-type tower. At 650 Madison Avenue, the landlord dropped the asking rent to $85 per square foot from $100, and broke floors into smaller office suites. Many companies that offer sublease space are now handing over fully furnished offices. Average Manhattan asking rents are down 11 percent from their peak last year, to $65 a square foot, but the amounts that landlords are actually accepting have plunged by between 25 percent and 30 percent.

Developer Larry Silverstein and the Port Authority of New York and New Jersey are to come to an agreement on the World Trade Center redevelopment. The two parties are not close to a deal, and are continuing negotiations. Shopping mall developer Westfield, which operated almost 500,000 square feet of retail in the World Trade Center before Sept. 11, 2001, offered to put up $1.3 billion to build the two retail pedestal buildings that the Port Authority wants to build in place of two office towers. The office towers could be built on top of the retail pedestals when the economy recovers, but Silverstein has previously resisted building the retail spaces.

Silverstein asked the Port Authority to guarantee as much as $3.2 billion in financing for the construction of two towers, but the authority, which is already spending billions of dollars on its own tower at the site, is reluctant to spend more money on speculative office buildings, especially now that revenues are declining. City officials hope for a breakthrough in the hours leading up to Thursday's deadline.

Mayor Michael Bloomberg and Assembly Speaker Sheldon Silver singled out the Port Authority for dragging out the World Trade Center redevelopment talks with developer Larry Silverstein. Bloomberg and Silver are pushing the Port Authority to guarantee more financing for Silverstein. The developer wants financing for two skyscrapers, but the Port Authority only wants to back one tower. Without an agreement, officials on both sides fear that Silverstein could delay integral components of the site, including the main access roadway and transportation hub.

Goldman Sachs Group could get up to $321 million if the state and city fail to meet construction and security deadlines at the World Trade Center site. Goldman Sachs is entitled to as much as $160 million if the state doesn't fulfill obligations on eight projects, including a transit hub and the memorial, by the end of the year according to their lease. The firm also can recover an additional $161 million in rent from the city on the headquarters it is building on West Street downtown. Almost none of the projects named in the ground lease will be finished by the end of the year, and the lease allows an extension to March 2010. The city is confident it will meet the lease's security provisions by the end of the year and avoid the loss of $161 million.

Parks Commissioner Adrian Benepe oversees nearly 30,000 acres of prime real estate in the city and is getting ready to announce who his agency has picked as the new operator of Central Park's Tavern on the Green. They also talked about which developers are contributing money to parks and why, even with the recent budget cuts, the city's green spaces won't look like they did in the 1970s.

Manhattan Borough President and Comptroller are asking for a meeting with the mayor's office to express concerns about the Bellevue development, and to address the shortage of nursing home and assisted-living housing in the area, rather than turn it into a hotel. Redevelopment of the former Psychiatric Building is necessary to generate revenue for Bellevue Hospital.

U.S. hotel industry will hit the bottom of its current cycle soon. Revenue per available hotel room, or revpar, will hit the low point of the cycle. The industry's declines will likely total 17.5 percent in 2009, making it the weakest year on record, with a subsequent 3.5 percent decline in 2010.

The Empire State Development Corp. voted to amend the Atlantic Yards project's plan so that the site can be acquired and paid for in stages. Although the entire modified plan hasn't been publicly disclosed, the ESDC said it allows developer Forest City Ratner to acquire the 22-acre site in stages instead of all at once, and that Ratner would first take possession of the parcel that will hold the arena, parking and four towers. The vote kicks off a 30-day public comment period on the changes to the $5 billion project. The MTA said it would allow Ratner to stretch out the payment of $100 million over two decades instead of paying it in one lump sum.

Bruce Ratner, who said he would build a scaled-back, cheaper arena without architect Frank Gehry, is still having trouble financing the project amid the real estate crisis. Ratner recently announced that Gehry will not be designing the project, though his master plan will remain in place. Critics of Ratner say the MTA should not do him any favors by accepting an altered version of his development plans.

Fordham University received approval from City Council to embark on a 25-year-long expansion project at the school’s Lincoln Center campus. The expansion includes a new law school, dorms, parking garages and residential towers, will extend between 60th and 62nd streets and Amsterdam and Columbus avenues. The school first proposed the 2.3 million-square-foot expansion in 2005, but the local community board opposed the plans. The measure is also expected to be approved next Wednesday by two City Council committees and then by the full council June 30.

Bankrupt retailer Hartmarx was paid $11.8 million by its landlord, a partnership of Crown Acquisitions, the Carlyle Group and Kushner Companies, to terminate a below-market lease at 666 Fifth Avenue. The partnership bought the leasehold June 4, months after Hartmarx filed for bankruptcy protection in Illinois in January. The lease was signed in 2000, expired in 2016 and had an option to extend another five years.

Downtown retailers are interested in the former Brooks Brothers site at 666 Fifth Avenue, at 53rd Street. The two front-runners to take the 30,000-square-foot, two-level space are Uniqlo and Topshop, which both have locations on Broadway in Soho. The partners bought Brooks Brothers out of its below-market lease last year for $47 million. The asking rent for the space is reportedly $30 million a year.

The first section of the High Line opened and advocates for the project are hoping that a section of the old rail yards can be turned into park space. Friends of the High Line is calling for about a half-mile -- 30th Street, between 10th and 12th avenues, and 12th Avenue between 30th and 33rd streets -- to be set aside for park space. The Related Companies was chosen by the Metropolitan Transportation Authority to develop a combination of commercial and residential buildings, along with parks, a school and cultural facility on the 26-acre West Side rail yards. Related officials said they would include the High Line in their development plan.

Manhattan Borough President wants to require developers to address the availability of food markets in a neighborhood before beginning projects there. Under the proposal, food infrastructure would become a required component of the environmental impact statements. Developers whose projects would increase the population by 1 percent in a quarter-mile radius would have to do detailed studies of the number of food markets in the area. The requirement would apply to neighborhoods particularly lacking in food infrastructure, including Harlem, Washington Heights, the South Bronx and Bushwick.

General Motors' bankruptcy could have repercussions for Mort Zuckerman's Boston Properties, which owns the GM Building. General Motors' lease for 101,000 square feet at the GM Building expires in March 2010, and the company's 120,000-square-foot lease at another Boston Properties building, 601 Lexington Avenue -- the former Citigroup Center -- began on Monday, and expires in May 2019. GM hasn't begun construction on the new space. GM's bankruptcy gives it the right to reject the leases at any time, but Boston could, in turn, file a claim for damages, which would be subject to the limitations under the bankruptcy laws and availability of funds to pay creditors.

The Hudson River Park Trust voted to begin talks with legislators about extending the 30-year lease agreement for the 14-acre Pier 40 dock space at the end of West Houston Street to 49 years. Extending the lease is necessary because the 30-year lease is not long enough for developers to recoup their investments. Many community advocates, however, fear a longer lease would lead to large developments, like the Related Companies' old plan for Pier 40, which included a home for Cirque du Soleil and the Tribeca Film Festival. Related opted not to pursue the site when they did not receive their desired 49-year lease.

Shaub a retailer says she has never seen business conditions as rough or vacancy rates as high in Nolita as they are now. Three storefronts just south of her shop at 232 Mulberry Street are available. In all, this stretch of Mulberry between Prince and Spring streets has five stores that are closed or on the market. A similar pattern is unfolding throughout this nine-block district, which lies south of East Houston Street and north of Broome Street, between the Bowery and Lafayette Street.

Real estate investment trusts are becoming more popular among investors as a market rebound nears. REITs were particularly popular in the first half of the decade as the real estate market boomed, but many REITs crashed in 2006 and 2007, following the market. Now, as investors wait expectantly for the market to trend upward again, many are putting their money back into REITs, which they expect will hold up long-term.

The Mandell School on the Upper West Side will expand into 795 Columbus Avenue. The school, which already has three locations on West 94th, 95th and 96th streets, will occupy 60,000 square feet at the building.

H. Dale Hemmerdinger, chairman of the M.T.A. and owner of Atco Properties & Management, is being sued by partners in one of his buildings for allegedly illegally draining $2.2 million from funds set aside to run the property. The lawsuit claims that Hemmerdinger put unqualified general partners on the board at 555 Fifth Avenue, creating an artificial majority.

The Federal Reserve's purchase of securities and Treasury bonds in an effort to keep mortgage rates down has been expensive and has not had much of an impact. The Federal Reserve purchased more than $480 billion in mortgage-backed securities and more than $130 billion in Treasury bonds. However, the Federal Reserve is underwater on its portfolio and would lose about $5 billion if it revalued its portfolio to match the market. The Fed's purchases amount to about $2,500 per borrower, which is more than it costs most mortgage borrowers to refinance their debt.

Despite the slowdown in the commercial market, many small and mid-sized firms are hiring more brokers and expanding, intending to challenge the industry's leaders when the market turns up. The smaller firms are taking advantage of the situation faced by large companies, which lost money in the first quarter, by pointing out to prospective clients that they can offer more personalized services.

R&B Development Group's 22-story boutique hotel at 16 East 46th Street, between Madison and Fifth avenues, just topped off. The 66-room hotel will have a 70-seat restaurant, balconies in every hotel room and a yoga room. The hotel was designed by C3D Architecture and is scheduled to be completed in early 2010.

The city Economic Development Corp. has issued a request for proposals for the development of a 100,000-square-foot site in the Castle Hill section of the Bronx. The industrial site is comprised of two lots and currently there is a community garden on the site which will be relocated. Bidders for the development project have to submit a green building plan identifying the project's sustainable design goals, address how it will include minority and women-owned enterprises and participate in the targeted hiring and workforce development program.

The Related Companies will be appearing before Bronx Community Board 7 to discuss the development of Kingsbridge Armory. Related is planning to convert the 588,000-square-foot building into a $323 million shopping center. Community groups and unions are in favor of the project, which will include a cinema, fitness center and retail space. But the groups and unions are asking the developers to bring in retailers that pay a livable wage to employees, which Related said would force it to abandon the project.

Sources say a deal to sell Worldwide Plaza -- one of the seven office towers Harry Macklowe was forced to return to his lenders -- has fallen apart. This is the second time a deal to sell the building has fallen through, and both instances involved George Comfort & Sons as the buyer. In the latest transaction to break down, George Comfort and real estate investment firm RCG Longview struck a deal to purchase the 47-story tower for an undisclosed sum. Deutsche Bank, which controls the building, would have retained a stake and provided financing for the deal. The building is on the market again.

City Council speaker told contractors and builders that the Moynihan Station planners need to consider smaller or staggered plans, despite the fact that Pennsylvania Station is an eyesore. The Moynihan Station plan envisions converting the James A. Farley Post Office on Eighth Avenue and 33rd Street to a rail transit hub, part of a wider vision to transform the Penn Station area, with a new Madison Square Garden structure and office towers.

Lower Manhattan and Midtown West are each expected to gain at least 20 hotels over the next two years. Citywide, a total of 10,298 new hotel rooms could flood Manhattan through 2011, including the Mark and the Double Tree Chelsea, which are expected to open in the middle of this year; the Nolitan, which is scheduled to open in 2010; and Trump Soho, expected to open this September. Of the proposed 50 new hotels citywide, 18 are mid-scale, 22 are boutiques and just three are pitched as luxury hotels.

The lenders for the Midtown development where Aby Rosen's RFR Holding was slated to build Shangri-La Hotel, New York, have filed to foreclose on $144.2 million in loans and fees used to buy, plan and develop the site, court records say. ING Real Estate Finance and Swedbank sued to foreclose on the loan to Park Avenue Hotel Acquisition, a company registered at the address of developer Aby Rosen's RFR Holding, which was slated to develop the Shangri-La Hotels and Resorts' tower at 610 Lexington Avenue, at 53rd Street. The borrower was unable to refinance its loan by an April 8 deadline, and so ING determined the loan was in default on June 15, the filing says.

The Department of Education plans to convert the former Sports Museum of America space in 26 Broadway into a school. The museum went bankrupt and closed earlier this year. The city has not signed a lease yet for the 45,000-square-foot space, but is very close to an agreement. The space could become a home for the Greenwich Village Middle School, which needs to move out of its current building in fall 2010 due to overcrowding. The new space would provide seats for 1,000 students, but it is unclear when it would be ready.

Manhattan Buildings sold

The AIG buildings -- 70 Pine Street, which might become a landmark, and 72 Wall Street -- sold for less than $140 million, under $100 a foot. Youngwoo & Associates and Kumho Investment Bank agreed to buy the buildings, AIG's former headquarters, which total 1.4 million square feet. The buyers are expected to create a mixed-use development that could include residential and retail space, and will have to put down at least a $10 million deposit at the contract signing. Because of anti-terror legislation, the Department of State will have to approve the overseas buyer.

The president of the Landmarks Conservancy wrote to the city's Landmarks Preservation Commission asking to consider 70 Pine -- an Art Deco building designed by architectural firms Clinton & Russel and Holton & George in 1932 -- for landmark designation. De Bourbon said the commission has "authority to designate a building without an owner's consent.

Extell Development sold a 10-story building at 30 West 47th Street for nearly $8 million less than the company paid for it last year after stripping it of air rights needed for its nearby Gem Tower. Extell sold the property at 30 West 47th Street to Jemsa Realty for $42.5 million. The developer bought the property for $50.1 million in 2008, and then transferred air rights from the building to its under-construction, 32-story tower at 50 West 47th Street.

A Jewish mental health and social service agency based in Midtown bought a parking garage at 210 West 77th Street between Amsterdam Avenue and Broadway for $45 million, or about $588 per developable foot. The Jewish Board of Family and Children's Services, based in its own building at 120 West 57th Street, went into contract in December 2007 and closed on the purchase.