While 2004 may be remembered as the year for residential real estate, the coming year may emerge as a period of strong commercial sales, real estate professionals say.

Industry experts say they expect the economy to continue to improve, and that increased hiring could bolster demand for office space. A senior research analyst at Grubb & Ellis, Richard Persichetti, released a report that said, “Economists predict that by the end of 2005, New York City should reach employment levels last seen in 2000.” Midtown and the area south are two areas expected to attract greater demand for office space this year, while the downtown area may begin to prosper in 2006.

Midtown has seen strong growth in the last three years with the trend likely to continue, some say. As prime office space becomes sparser in Midtown, vacancies in subprime space will decrease, and creative tenants looking for less expensive alternatives will increasingly migrate to Midtown South.

As for downtown, the general consensus is that the market’s revival will not occur this year, with the Fulton Street Transit Hub and other projects not scheduled for completion for another one to three years.

“I consider the downtown market a secondary market until demand gets stronger sometime in 2006 as vacancy in Midtown starts to evaporate, and transportation and other things are improved downtown,” Mr. Persichetti said. “In Midtown, I predict rents will go up $5 in 2005 to about $45 to $105, and in Midtown South by about $2.50 to $32.50 to $42.50.” Mr. Persichetti forecasts that the short-term interest rate will reach as high as 3% to 3.5% in 2005.

Not everyone is as pessimistic about downtown. “Perception hasn’t caught up to reality, which makes downtown a great buying opportunity,” said Kent Swig, a landlord who owns a number of buildings in the financial district. “They city is opening 17 new parks down here this year, the financial district has received an entirely new underground infrastructure system, and it is getting a brand new transportation hub. Overlay this with the World Trade Center, and in three to seven years, you’ll have one of the best investments in the entire U.S.,” the head of Swig Burris Equities said.

Drivers of the commercial market in 2005 include the conversion of commercial buildings into residential.

The 500,000-square-foot Giftware Building at 225 Fifth Ave., for example, was recently converted into a residential condominium, with tenants signing new leases at an office building at 7 W. 34th St. “This created positive absorption because all the tenants were moved to the building on West 34th Street, while the Giftware Building was converted into residential use,” a principal at the commercial brokerage firm Newmark, David Falk, said. “This will be the hottest part of the market in 2005.”

As for commercial retail space, 2004 was the most successful year in five years, breaking the previous record set in 1999,according to Faith Hope Consolo of Garrick Aug.

“I think this momentum will continue into 2005,” she said. “If the stock market cooperates – which I think it should – the first quarter of 2005 will bring another department store, the expansion of Bank of America, Wachovia, and some new retail branches from Citibank, which hasn’t opened a new location in a number of years.” Ms. Consolo also predicts another big-box store, possibly a Trader Joe’s supermarket, could open this quarter in Manhattan.

Other factors boosting the market for office space include demand from hedge funds and private equity firms, which have had record-breaking profits and seek space in the most exclusive buildings. “Executives of hedge funds and private equity firms who want to be in prestigious buildings are willing to pay top dollar,” he said. Mr. Falk said the desirable addresses include the General Motors building at 767 Fifth Ave., 450 Park Ave., 667 Madison Ave., and other buildings where rents are between $65 a foot and $125 a foot, he said.

Brokers of commercial properties hope in 2005 their sector can be as successful as residential has been. Meanwhile, some residential brokers cite rising interest rates as a factor that could affect prospects for continued growth.

“Interest rates is the question mark hanging over the residential real estate market,” the chief economist for Terra Holdings, Gregory Heym, said. “Values increased by 20% in 2004, and it will not repeat that in 2005. Instead, we are looking for sustained growth.”

“Economists are saying that longterm interest rates will go up to 6% or 7% as a worst-case scenario. As long as interest rates stay below the double digits, it won’t have too great an impact, “the president of residential brokerage firm Halstead, Diane Ramirez, said. “I believe this is going to be another banner year, with low inventory, strong demand, and nothing to take away from the desire of owning a piece of New York City.”

“Interest rates are more psychological than anything realistic, at least for my clients,” said Kirk Henckels, who runs Stribling’s private brokerage group, which covers deals greater than $4 million. High-end deals often limit the amount of financing that is allowed, protecting buyers from interest rate swings. While this time of year is traditionally quiet, Mr. Henckels said he knows of three deals that have closed for more than $20 million in the last 30 days.

“The big boys are shopping,” he said. “The market is now more balanced, with less frenzy, and I expect this calm to continue through 2005.”