The Big Apple is experiencing an exciting real estate market with investors once again. Except perhaps for the tenant who cannot find the right space, who in New York can complain? The city is witnessing the most dynamic commercial real estate market in years.

Real estate investment trusts (REITs) and other institutional investors have brought the investment market back to life and posted record prices in some of their property purchases. Major office space tenants, who have not yet signed deals with landlords, in what New York-based real estate brokerage firm Julien J. Studley Inc. calls the race for quality space, are finding that large prime blocks are not so easy to find. Manhattan hotels are reporting record occupancies and average daily rates, prompting a rash of new development plans, and apartments are trading for top dollar.

A vigorous office leasing market has led to speculation as to when new construction will be on the horizon again. One new build-to-suit development was announced in August, Bear, Stearns & Co. will move its headquarters to a new office tower to be constructed at 383 Madison Avenue, near Grand Central Station. The financial services firm has agreed to a 50-year lease for 850,000 sq. ft. of space in the new development, which could contain as much as 1 million sq. ft. Construction could start as early as next year, with occupancy beginning in 2000 or 2001, according to Dow Jones. The project is only the second major new office building to be constructed in New York in the 1990s.

As for other development, Colliers ABR's The Barometer, a quarterly Manhattan office space market report, notes that development is certainly not out of the picture as overall office space vacancies are at their lowest level in five years and rents increased in the second quarter of 1997 by 6% and Class-A absorption by more than 21%. Studley reports the Dursts' Times Square project has been heralded as the bellwether of the next construction cycle, it remains to be seen if the market can support new development. Lenders remain for the most part cautious and, in the meantime, retrofitting older buildings will serve as a viable substitute.

The rehabilitation of some key Manhattan neighborhoods continues at a brisk pace. Times Square seems to have already started the count down to the new millennium, as developers announce plans or break ground for new mixed-use projects that will come on line before the turn of the century.

Times Square's reformation is beginning to have a spill-over effect, leading to increased interest in surrounding neighborhoods on Manhattan's West Side that have historically been considered less than ideal areas for prime retail or office locations. For example, Eighth Avenue may be the next target of retail gentrification and, a bit to the south, the Garment District or Fashion Center (35th Street to 41st Street from Avenue of the Americas to Eighth Avenue), is witnessing some attention from investors and tenants alike, especially the area around Madison Square Garden and Pennsylvania Station around West 34th Street. Downtown in the financial district, the first of the converted old Class-B buildings, considered dinosaurs less than a decade ago, are on the market as new residences with plenty more in the pipeline.

New Times Square takes shape While construction is under way on the Durst Organization's 4 Times Square, the 48-story, 1.6 million sq. ft. office tower which will be known as the Conde Nast Building. Durst and other developers are moving forward in negotiations with office and retail tenants for this and other mixed-use projects that will further transform the area in the next few years. Durst announced in the summer that Rainforest Cafe is planning to open a two-story restaurant with more than 20,000 sq. ft. in 4 times Square. The developer also has reported negotiating with the National Basketball Association and Viacom to open themed merchandise stores in the building's ground-floor retail space.

In August, Forest City Ratner started construction on its $160 million retail and entertainment complex on West 42nd Street, which is to be home to a five-floor Madame Tussaud's Wax Museum, a 25-screen AMC Entertainment complex, HMV Records and Just For Feet stores. Tishman's E Walk on Eighth Avenue between 42nd and 43rd streets is lining up tenants, which are expected to include Sony Theatres and a hotel.

It is widely expected that Reuters, the massive British media and information company, will establish a North American headquarters in a new 800,000 sq. ft. office tower at the northwest corner of Seventh Avenue and 42nd Street, where Prudential Insurance controls the site and Marriott International has also discussed plans with Prudential to build a hotel on the site.

Even a vacant building makes the news in Times Square. In June it was announced that One Times Square, the thin tower best known for the New Year's Eve ball drop, was being sold by the Lehman Brothers investment brokerage firm to the Jamestown Group, a German investment firm, for approximately $110 million. The building is vacant and serves as a giant billboard in Times Square. The building was recently leased to Warner Brothers Studios for a large store and possibly a themed restaurant in its base. Lehman Brothers purchased the 22-story landmark structure just over two years ago for $27.5 million.

"All of the activity has helped to drive retail rental rates up by about 15% in the entire area," says Faith Hope Consolo, senior managing director with Garrick-Aug Worldwide. "It's not just Times Square, but a six-to-eight-block radius around it that is doing incredibly well. Eighth Avenue seems to be getting a lot of interest from better service retailers, and side streets are filling up with good restaurants. We knew in 1993 that Times Square had great potential but never thought it would be so explosive and help so much to improve the surrounding neighborhoods."

Penn Station sees development Vornado Realty Trust, a Saddle Brook, N.J.-based REIT, earlier this year purchased several buildings around Madison Square Garden and Pennsylvania Station, between 34th and 31st streets on Seventh Avenue, and announced plans to revitalize the area with new restaurants, stores and a revamped Hotel Pennsylvania, all with a sports and entertainment theme to the project. The city also continues to await Vornado's announcement as to plans for the high-profile block on East 57th Street that it controls. The site of the defunct Alexander's department store that has been vacant for five years.

"This area has been a long time coming," says Consolo. "It is now being controlled by a super developer with a vision and the capital to develop it." With lots of big open spaces, it is a perfect place to draw traffic from tourists, office tenants, commuters and Macy's shoppers alike, she says. Space in the area has been underutilized in terms of places to eat and shop but, in 18 to 24 months, we will start seeing it take shape. Tenants are out there, just waiting for the development plan to take shape.

In the Garment District, Marriott International Inc. and Interstate Hotel Co. broke ground in late July for a new Courtyard by Marriott hotel on West 40th Street, just west of Avenue of the Americas in the Garment District, the first new construction in that area since 1970. The developer is Granite Park LLC, an affiliate of G. Holdings, a New York development company. The 244-room, 32-story hotel is expected to open in December 1998 and offer accommodations at less than luxury rates.

Studley reports there is speculation that the Fashion Center area may benefit from the flurry of blue-chip tenants moving to Times Square and reports that a number of office properties have changed hands and primed for building upgrades. While it remains to be seen whether tenants will start swarming around this submarket, rental rates there have nonetheless started to edge upwards, according to Studley.

Helmsley portfolio on market Investors seeking to buy New York commercial property will not be confined to Garment District possibilities. Leona Helmsley recently put the vast Helmsley portfolio on the market, an assemblage of buildings that is valued at close to $5 billion, with much of it concentrated in New York. The portfolio includes the Graybar Building, 10 other Manhattan office towers and hotels, apartment houses, and other secondary buildings in the Garment District and outer boroughs. Considered to be one of the largest privately held real estate empires in the nation, the portfolio is not expected to be an easy sale due to the complex ownership structures of most of the properties. Eastdil Realty is coordinating the disposition.

Two major Manhattan sales transactions of note are the purchase by Boston Properties Inc. of 280 Park Avenue, two large office towers between 48th and 49th streets, for $321 million from Bankers Trust Co. Also, SBC Warburg, a division of Swiss Bank Corp., sold 222 Broadway, a 703,702 sq. ft. office building, for more than $100 per sq. ft., which marks the highest price paid for a Downtown office building this year, according to Insignia/ESG and Insignia Capital Advisors. Merrill Lynch is planning to occupy more than 400,00 sq. ft. in the building next year.

Downtown conversions move The Alliance for Downtown Manhattan Inc. forecasts that 7,000 units of converted residential housing are projected for Downtown by the year 2002. Six buildings have already come on the market, including 345 units at 25 Broad Street and 441 units at 45 Wall Street. Three more properties, representing nearly 600 units, are under construction; four more buildings have received permits, which will add approximately 400 more apartments to the inventory; and the Alliance lists 110 Church Street, 120 Church Street, 53 Park Place, 90 John Street and 21 West Street as likely candidates for residential conversion in the near future.

"One of the first major conversions, 45 Wall Street, is fully rented at an average of $34 per sq. ft., which is higher than the $27 per sq. ft. generally expected. The early conversion jobs seem to be very successful," says Eric J. Kaufman, president of Mercury Capital Corp. "Whether the market can sustain so many new units seems as if New York City has a bottomless pit of people who want expensive apartments. The price of convertible buildings is on the rise and financing is generally available, although the investment market Downtown is not as broad as in Midtown."

Downtown leasing at high level The Downtown office market continues to benefit from the removal of inventory that is being converted to apartments and from some major leases that have put available space at its lowest point since 1991, according to Insignia/ESG, which reports that in the first seven months of 1997, more space has been leased downtown -- 4.46 million sq. ft. -- than in any year since 1993.

Insignia/ESG speculates that Downtown may see its first 7 million sq. ft. leasing year since 1988. Activity at 55 Water Street, which is undergoing a $150 million renovation, has created a ripple effect throughout the market on the part of tenants seeking quality space. As of August, Downtown office space availability stood at 20.1%, thanks to the 486,000- sq. ft. lease by the City of New York Human Resources Administration at 130 John Street and, due to the residential conversion of 21 West Street, a 286,000 sq. ft. vacant office building near Battery Park. Chubb Insurance has signed for more than 150,000 sq. ft. and Standard & Poors Corp. is expected to close before the end of the year on a 930,000 sq. ft. lease. These two deals have sent other tenants scrambling to find space in surrounding properties Downtown, according to Studleys. The desire for quality well-located buildings with large technologically advanced floorplates is driving the market.

This is the third property in the last two months to be removed from the Downtown office inventory, Insignia/ESG reports. And 80 John Street and 71 Broadway, both pre-war secondary office buildings, lightened the office space load by more than 417,000 sq. ft. Asking rents downtown have begun to show modest gains, averaging just shy of $26 per sq. ft., according to Insignia/ESG.

Midtown office market active Commercial real estate in Midtown is witnessing a long-awaited upswing, conditions have not shifted to where landlords are getting better deal terms in most cases. The market has tightened, but the usual rise in rents and drop in concessions that typically accompanies an increase in demand has not been so widespread this year. However, market conditions are such that tenants, mainly those needing Class-A space, have less leverage than a few years ago.

Overall Midtown office space vacancies stand at 9.1%, a marked improvement from last year's 10.8% rate, according to Studley. At the end of the second quarter, Midtown's Class-A vacancy rate stood at 5.8%, with rates as low as 3.3% in some submarkets. In response, landlords have edged overall Class-A asking rental rates up to $41.49 per sq. ft., compared to $40.56 per sq. ft. last year.

Studley reports more than 12 million sq. ft. was leased in the first half of 1997, compared to less than 10 million sq. ft. leased at the same time last year. Approximately 2.7 million sq. ft. of commercial space leased is Class-A.

Park Avenue provided the foundation for Midtown's exceptional performance, according to Insignia/ESG. Three large financial services firms signed leases for 100,000 sq. ft. or more there, which puts the Park Avenue submarket in the single-digit vacancy range (9.5%), along with Sixth Avenue/Rockefeller Center at 6.2% and the West Side at 9.2%.

Retail scene strong all over Manhattan's retail space market is explosive, showing strength in practically all Manhattan neighborhoods, from upper Madison Avenue to West 34th Street to Soho, and the Financial District, according to Garrick-Aug's Consolo. The bull market, a city government that many perceive as business-friendly and a bevy of tourists, both domestic and foreign, are all reasons for the healthy state of affairs.

"Madison Avenue is now the premier shopping street in America and is rivaled worldwide by only London's Bond Street in terms of the panache it carries with designers. The dearth of available retail space on Madison Avenue from 57th Street up to 80th Street has forced lease buyouts. When 18 months ago, you could have given it away," says Consolo.

"Retail rental rates have gone back up to 1980s' levels, increasing by 8% to 10% this year, following a rise of approximately 20% in 1996. Retail vacancy rates range from 2% to 5% throughout the city. Less space than expected came on the market from recent bank mergers and bankruptcies," says Consolo. "Everybody is trying to jump in the water from Target to EllenTracy. Everybody wants their own store or showroom to showcase their products, from Kodak to Home Depot, and IKEA to communications giant Sony. The market keeps getting bigger."

Hotel rates on the rise Manhattan hotels have posted major gains in 1997 in both occupancy and average daily room rates. Occupancy rates reached 81.5% for the first six months of 1997, according to the Lodging Research Network, an internet-based lodging industry data service from Coopers & Lybrand LLP, New York. This represents a 4.7% increase over the same period last year, when occupancy was at 77.9%.

"The strong performance of Manhattan hotels in the first half of 1997 is sparking considerable interest in hotel development and investment in the borough," says Arthur Adler, lead partner at New York-based Coopers & Lybrand's lodging and gaming group.

Apartment sales at record pace Average sale prices for residential property in Manhattan has risen for five straight quarters and surpassed all previous records, according to Halstead's New York, a quarterly statistical report on the Manhattan residential market below 96th Street, produced by the Halstead Property Co. Compared to the second quarter of 1996, average sales price per room below 96th Street were up 19.6%, with an average sale price of $126,917.

Apartments are also on the market for significantly less time, on average approximately 145 days, and selling price continues to get closer to asking price in most transactions, Halstead reports.

James B. Frantz is a New York-based business writer specializing in commercial real estate.