Lehman having second thoughts?

Lehman Brothers may not be as interested in a new Manhattan office tower as recent speculation has suggested.

The firm is currently negotiating a massive 400,000 s/f lease at 1271 Avenue of the Americas, where the building's landlord, the Rockefeller Group, just tacked an additional five years onto the length of the deal's term.

If Lehman agrees to the deal, and sources say that it likely will, the extension will commit the firm to a large block it would have otherwise wanted to consolidate in a new tower. It also stretches Lehman's occupancy at 1271 Avenue of the Americas too far into the future to prompt the firm to begin negotiating now for a brand new office building in which it would be the sole or anchor tenant.

Lehman had been a prominent name among a shortlist of tenants with space requirements significant enough to necessitate new construction amid the current Manhattan office market, where available office space has steadily declined and rents have risen dramatically. Should the lease at 1271 nix Lehman's interest in a new tower however, it would deal a blow to the collection of developers around the city with plans to build. Major real estate firms like Vornado, Brookfield Properties, Boston Properties, and The Related Companies all have development parcels on Midtown's West Side, but none have yet been able to secure the prearranged leasing commitments necessary to begin construction.

Real estate experts meanwhile, paint the current real estate market as the seemingly ideal climate in which to build, where office space, after declining in the wake of the tech bust, finally is commanding rents high enough to make the costly undertaking of developing a building economically feasible. Landlords have indicated that they would need to yield rates of about $90s per s/f to justify a new construction project.

Such rents have become commonplace in Midtown, where more deals than ever before a being done at triple figure rates.

Lehman had been negotiating with Time Inc. for a 10-year sublease of 400,000 s/f at 1271 Avenue of the Americas with rents in the mid to high $70s per s/f when the Rockefeller Group--eager to tap the current record rates in Midtown--stepped in with the requirement that any deal include a five year extension arranged directly with the landlord.

Leasing space directly from a building's owner is almost always more expensive than a sublease and it is said that the Rockefeller Group is asking Lehman to pay over $100 per s/f for the space.

In recent weeks, Lehman was said to have been in talks with Vornado Realty Trust to take a portion, or all, of the office space in a tower that the real estate developer has been planning for the site of the Pennsylvania Hotel. Vornado's building would house roughly 2 million s/f of commercial space and allow the developer to greatly expand the Manhattan Mall, which now borders the site from the east. According to the developer's plans, the mall would be enlarged to stretch all the way from 6th to 7th Avenue, bringing the major retail destination formerly restricted to Herald Square just across the street from the city's busiest commuter hub, Penn Station. Developers have been eager to develop on the far West Side of Manhattan not only because the area is one of the few districts in the city with available development parcels but because its proximity to Penn Station makes it convenient for commuters.

A Studely team, led by its chairman and CEO Mitchell Steir, is representing Time Inc., in the deal. Lehman is represented by a CBRE team led by the firm's co-chairman Bob Alexander.