Sept. 16 (Bloomberg) -- Manhattan office vacancies may rise above 10 percent for the first time since 2003 as the bankruptcy of Lehman Brothers Holdings Inc. and sale of Merrill Lynch & Co. Inc. cut demand and add to supply, the world's two biggest publicly traded commercial real estate brokers said.

Office vacancy rates in Midtown could go as high as 11 percent by early next year as a result of the Lehman bankruptcy, according to Jones Lang LaSalle, the world's second-biggest publicly traded commercial real estate broker. Lehman occupies 2.7 million square feet of space in New York, including its 1.1 million square-foot headquarters on 7th Avenue at 47th Street.

Vacancies could top 10 percent next year, Raymond Torto, chief economist at CB Richard Ellis Group Inc., the largest commercial broker, said in an interview. ``In our forecast, we had vacancy rates rising to the high single digits. This is just going to add a little bit more to that softening.''

Merrill landlord Brookfield Properties lost 18 percent yesterday in New York trading, its biggest drop in eight years. SL Green, New York's biggest office landlord, fell 20 percent, the most ever. Lehman and Merrill own or occupy 8.3 million square feet in New York, according to CoStar Group Inc. A return of some of that space to the market, Torto said, may accelerate a fall in rents and sale prices, which were at record highs last year, and in occupancy rates.

``The Manhattan office market is now in uncharted territory, with events continuing to unfold,'' CB Richard Ellis said in a statement.

Vacancy Rates

Manhattan, the U.S.'s largest and most expensive office market, had the lowest vacancy rate at the end of the second quarter, 5.3 percent.

Offices available for sublease rose to 8.3 million square feet as of mid-June, a 33 percent jump from mid-January, according to a report by New York based broker Studley Inc.

After the Sept. 11, 2001 attacks, vacancies rose as financial firms gave back or subleased hundreds of thousands of square feet of offices they had held to accommodate expansion.

Lehman owns its 1.1 million square-foot headquarters building near Times Square, 745 Seventh Ave. It also rents nearly a half- million square feet in both the Time & Life Building at 1271 Avenue of the Americas, owned by Rockefeller Group Inc., and at Citigroup Inc.'s headquarters building at 399 Park Ave, which is owned by Boston Properties Inc., according to CoStar, a real estate data service.

Merrill's Space

Merrill owns or rents 5.8 million square feet in Manhattan, including 4.2 million square feet at its headquarters at the World Financial Center in lower Manhattan, where its lease runs out in 2013. It had been in talks with Vornado Realty Trust to build a new headquarters across from Pennsylvania Station in Midtown, and with Silverstein Properties Inc. at the World Trade Center site.

Bank of America earlier this year moved into a new 54-story Midtown tower, One Bryant Park, where it has six trading floors totaling about 450,000 square feet. The bank leases its space from the Durst Organization, which built the tower.

Douglas Durst, Durst Organization president, declined comment.

To contact the reporter on this story: David M. Levitt in New York at dlevitt@bloomberg.net.

Last Updated: September 16, 2008 00:00 EDT