The Downtown Crossing project in Boston is about to get a new start with Millennium Partners taking over development reigns from Vornado Realty Trust.

On Feb. 3, Boston Mayor’s Thomas A. Menino’s office revealed New York-based Millennium would be stepping in as the lead partner on the development at One Franklin Street, with plans to build retail, office and residential space on the site.

Vornado, which has retained a 50 percent stake in Downtown Crossing, will become a passive partner. Vornado declined to comment on the transaction.

Though Millennium has yet to submit a new development plan to the Boston Redevelopment Authority (BRA), the firm has an excellent track record in the city, according to Bill Motley, managing director in the Boston office of real estate services firm Jones Lang LaSalle. It built the Ritz-Carlton hotel in Boston Commons, and recently started construction on Hayward Place, a $220 million, 15-story residential tower.

The firm’s website also lists the Boston Music Building and 179 Lincoln Street as future development sites in the city.

“We have long dreamed of what Downtown Crossing could become, and we will soon realize that potential with Millennium stepping up to the plate and making this deal happen,” said Mayor Menino in a statement. “This took a lot of hard work and difficult negotiations, but we are very proud to be moving forward with a company like Millennium, which has a history of good work in our city.”

New plans

Officials with Millennium declined to comment on their plans for Downtown Crossing, citing the fact that they have yet to go through the design and permitting process with the BRA. But people familiar with the site say they expect the firm to slightly alter Vornado’s project.

When Downtown Crossing was first conceived, Vornado planned to include 297,000 sq. ft. of retail, 500,000 sq. ft. of office space, 136 residential condos and a 225,000-sq.-ft. hotel in the approximately 1.2-million-sq.-ft. development.

According to the BRA, that plan will be used as a starting point by Millennium. But given current market dynamics, the new developer might put in more residential space and cut down on office space, according to Mark Weld, managing director and head of the New England headquarters with Clarion Partners, a real estate investment management firm. Clarion owns 101 Arch Street, a building adjacent to One Franklin Street.

By the fourth quarter of 2011, the vacancy rate for office properties in Boston stood at 13.5 percent, according to Marcus & Millichap Real Estate Investment Services. Effective office rents averaged approximately $30.12 per sq. ft.

On the other hand, Marcus & Millichap expects that the average vacancy rate for Boston apartments will reach a 10-year low of 3.5 percent in 2012. Effective rents will likely go up 5.8 percent, to $1,802 per sq. ft.

As a result, the new tower will likely be devoted primarily to rental units, with the option to convert to condominiums, according to Motley. “To a lot of renters that would be a very appealing element of the project,” he says.

Last year, Boston also saw a record low level of new retail construction, at 500,000 sq. ft. That helped bring retail vacancy down to about 6.1 percent and rents up to approximately $19.26 per sq. ft. In recent months, Target has considered opening a small format store at the Downtown Crossing site.

“It’s a potentially fabulous site for retail, [though] the retail gets compromised to some degree by the mixed-use nature of the site,” says William J. Beckeman, president and CEO of Burlington, Mass.-based Linear Retail, which owns some properties near One Franklin Street. “But the site offers some of the largest floor plates in the city of Boston, and that should be very attractive to a number of retailers who haven’t been able to penetrate the Boston marketplace.”

Now, Beckeman adds, “having some clarity on what’s going to happen is just huge” in terms of being able to attract new retail tenants to the site.

The most problematic component of Downtown Crossing is likely to be the Burnham Building, according to Weld. Vornado planned to use the upper floors of the historic building for office space and “that is a very soft part of the market in Boston,” Weld says.

Given that office rents in Downtown Boston tend to be on the low end of the spectrum, in Millennium’s new plan office space might be limited to about 150,000 sq. ft., according to Motley.

The money issue

Millennium Partners has already secured Handel Architects to redesign the project and hopes to start construction by February of 2013. Whether the firm will be able to make that date will depend on how fast it can get financing for the various components of the new Downtown Crossing, according to Weld.

Vornado has claimed that the challenge of securing financing was the reason it had to postpone construction on the site for several years, angering Mayor Menino. Menino, as well as some real estate industry insiders, suspected the firm was stalling to sell the project to another party at a premium. But the truth, according to Weld, is that Vornado did try numerous strategies to recapitalize Downtown Crossing and couldn’t make the numbers work until now.

“As far as the people from Vornado trying to seek pretty much every avenue they could to recapitalize and re-energize the project, I could tell you first-hand that we had been involved in trying to find solutions for this site,” Weld says. “I think they are trying to make the best financial deal they can, but I don’t think it’s a situation where ‘premium’ would be an appropriate descriptor” for the money they are getting.