Downtown 1Q 2008

First Quarter, 2008 Analysis

Lower Manhattan consists of the following submarkets: Hudson Square, City Hall, World Trade/Battery Park, Financial District, and Insurance District. Prior to 9/11/01, the inventory of Lower Manhattan was predominately Class B and Class C space. However, Class A inventory has grown since then, reaching 39% (45.0M sq ft) of total submarket inventory as of 1Q08. The market as a whole totals 114.4M sq ft of office space. Residential conversion, as well as demolition and development of new buildings in and around Ground Zero, are all starting to change the mix of inventory in the market.

Building Class	Inventory Sq Ft (in ‘000s)	% of Total Vacancy	Availability Sq Ft (in ‘000s)	% Vacancy	Avg Asking Rate ($/psf)
A	44,976	39%	1,611	3.6%	$62.88
B	25,815	23%	1,665	6.4%	$48.78
C	29,365	26%	3,841	13.1%	$48.17
D	14,239	12%	750	5.3%	$42.16
Total	114,395	100%	7,866	6.9%	$50.74

Quarter over quarter asking rate growth continued. The Downtown market saw continued and accelerating asking rate growth in 1Q08 with a $2.40 psf increase over 4Q07’s result. The average asking rate in 1Q08 was $50.74 psf, up 16.2% y/y for a new record high in the market. Additionally, Downtown rate growth has accelerated over the last eight quarters from a low of just 1.0% y/y growth in 2Q06 to the high of 16.2% y/y growth witnessed in the current quarter. Over the same time period, the average asking rate for the market has increased $10.98 psf. We see primarily two drivers of the current asking rate growth in the face of slowing economic conditions. The first is that cost conscious tenants continue to be drawn to Downtown as a lower priced alternative to Midtown lease rates. Evidence of this can be seen by the fact that 33% of all leased space in 1Q08 was leased in the Downtown market, up from 28% in 1Q07, while 32% of leased space was leased in Midtown in 1Q08, down from 36% in 1Q07. Over the same time period, the discount available to tenants willing to consider Downtown as an alternative to Midtown grew from 56% in 1Q07 to 65% in 1Q08.

The second, though likely less prevalent, driver of demand is support from foreign firms who are leasing space in currencies that are strong against the dollar. This is certainly having an impact on lease rates for retail space in key shopping districts, but it is having an impact on the office market as well. As a final point, we would note that landlords are maintaining high published asking rates, but lowering the net effective lease rates by offering greater rent concessions like free rent and work letters. This trend is lending further support to the current record lease rate levels we are witnessing across the island.

From a submarket perspective, all five submarkets saw an increase in the 1Q08 average asking rate relative to last quarter. However, the most significant drivers were the Insurance District and World Trade Center submarkets, which saw $2.90 psf and $2.02 psf increases over last quarter respectively. The Insurance District finished the quarter with an average asking rate of $48.48 psf (up 30.2% y/y) while the World Trade Center submarket finished with an average asking rate of $53.82 psf (up 15.0% y/y). The Financial District also saw a meaningful asking rate increase of $1.80 psf to $48.40 psf (up 17.2% y/y), though a 960K sq ft reduction in availability in the submarket reduced its weighting in the calculation of the Downtown average asking rate, resulting in a reduced net impact on the total market rate.

From a building class perspective, the most meaningful driver of average asking rate growth was Class C buildings. While these properties account for only 26% of total market inventory, they account for 49% of availability, which is used to calculate the weightings in the calculation of weighted average asking rate. Also worth noting, Class C properties are the only properties that saw growth rate acceleration in the quarter, with growth of 22.2% y/y in 1Q08 representing an acceleration from 18.6% y/y in 4Q07. Simultaneous to the movement of tenants from Midtown to Downtown, these results may also indicate a willingness by tenants to consider Class C space as a lower cost alternative to Class A or B space. Class C space in the Downtown market has historically traded at a 23-28% discount to Class A space and a 5-10% discount to Class B space. Results for the Downtown market by building class include:

Vacancy declines likely excluded shadow space. Downtown vacancy fell to a new low in 1Q08 of just 6.9%. This result was down 92 bps from 4Q07’s 7.8%, down 233 bps y/y and represents the first quarter in which Downtown vacancy was not the highest of the three major markets. 1Q08’s vacancy was less than Midtown’s 7.4%, but still greater than Midtown South’s 5.2%. Downtown’s 1Q08 vacancy also represents a return to a trend of declining vacancy after 4Q07’s results suggested vacancy may have hit a structural low point. However, we would note that Downtown’s 1Q08 results likely exclude shadow space from financial services firms with unused space in the wake of recent sizeable layoffs during the quarter. Firms that own their office properties are often reluctant to market available space as FASB 13 and related technical rulings requires a write-off of the value of these spaces at the time the companies “cease to use” the space. However, as a practical matter, the market is generally unaware of these vacancies until the space is publicly marketed.

The 92 bps vacancy decline in the quarter represents a 1M sq ft decrease in availability driven primarily by an 828K sq ft decrease in Class B availability. Class B vacancy fell to 6.4% in 1Q08, down 320 bps from last quarter and down 481 bps y/y, driven by 500K sq ft that was leased at 60 Broad Street in February to New York State Office of General Services. This property is located in the Financial District, so this lease also resulted in a reduction in vacancy in this submarket to 4.8% from 7.4% in 4Q07. Vacancy results by building class were:

The Downtown market saw a reduction in absorption y/y in 1Q08, but was still the only major market with positive absorption in the period. We analyze net absorption (leased space less newly available space) in the submarket as a measure of the relative strength of demand relative to new supply. Net absorption for the Downtown market was positive in the first quarter, resulting in the reduction in market vacancy mentioned above. However, the level of absorption was down significantly from absorption results in the first quarter of last year. Net absorption in 1Q08 was positive 1.05M sq ft, consisting of 2.1M sq ft of leased space offset by 1.05M sq ft of newly available space. This compares to 1Q07 results when net absorption of 1.8M sq ft was driven by leased space of 3.1M sq ft offset by newly available space of 1.3M. While the pace of absorption appears to be slowing with reduced leasing activity, it is worth noting that the y/y reduction in leasing in the Downtown market (32%) was less than that of both the Midtown South (42%) and Midtown (49%) markets. Additionally, the Downtown market was the only one of the three markets to experience positive absorption in 1Q08. Some of the major contributors to the 2.1M sq of leased space in the quarter were the 500K sq ft leased to the New York State Office of General Services at 60 Broad Street mentioned above, 184K sq ft leased to Omnicom at 195 Broadway and 75K sq ft leased to Sedgwick Detert Moran & Arnold at 125 Broad Street. Additionally, Goldman Sachs signed for a 517K sq ft lease renewal at One New York Plaza, though the landlord of the building never put this space on the market, so the lease does not represent a reduction relative to prior periods.

In our view, the significant slowdown in leasing activity, on both the supply and demand sides, in 1Q08 suggests the market was in a holding pattern for much of January and February as market participants waited for some clarity on the direction of the market. By March, activity began to increase once again. 69% of all space leased in the quarter was leased in the month of March, and 78% of all newly available space brought to market in the quarter was introduced in March. This indicates to us that landlords and prospective tenants have delayed as long as possible, and now transactions are occurring at an increased velocity. This should provide more data and greater insight into the state of the commercial leasing market.

The Financial District contributed the most to the leased space total for the quarter, with 1.2M sq ft leased in this submarket alone. Newly available space in the quarter was spread more evenly across the submarkets, with 227K sq ft of new space in the Financial District, 301K sq ft of new space in the Insurance District and 267K sq ft of new space in the World Trade Center submarket contributing the most to the increase.

Total Inventory	114.4 M sq ft	431 buildings
Class A (1969-current)	45.0 M sq ft	55 buildings
Class B (1931-1969)	25.8 M sq ft	68 buildings
Class C (before 1931>250,000 sq ft)	29.4 M sq ft	61 buildings
Class D (before 1931<250,000 sq ft)	14.2 M sq ft	247 buildings

Class	A	B	C	D	Wtd Avg
Direct	$64.62	49.56	49.53	42.64	51.46
Sublease	41.77	35.47	33.71	24.72	36.56
Wtd Avg	62.88	48.78	48.17	42.16	50.74

1Q 2008 Asking Rates vs. 4Q 2007:

Class	A	B	C	D	Wtd Avg
1Q 2008 Wtd Avg	$62.88	48.78	48.17	42.16	50.74
4Q 2007 Wtd Avg	60.65	47.65	44.18	41.85	48.33
	2.23	1.13	3.99	0.31	2.41

1Q 2008 Asking Rates vs. 1Q 2007:

Class	A	B	C	D	Wtd Avg
4Q 2007 Wtd Avg	$62.88	48.78	48.17	42.16	50.74
4Q 2006 Wtd Avg	53.36	43.00	39.42	36.81	43.65
	9.52	5.78	8.75	5.35	7.09

For further information contact:

M. Myers Mermel Chief Executive Officer (212) 943-7777	Caroline McLain Chief Financial Officer (212) 943-1902