Downtown 3Q 2007

Third Quarter, 2007 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 the submarket as of 3Q07. Currently, Class B space accounts for 23% (25.8M sq ft) of total inventory; Class C space accounts for 26% (29.4M sq ft); and Class D space accounts for the remaining 12% (14.2M sq ft). These submarkets total to 114.4M sq ft of office space in the Downtown market. 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)	Availability Sq Ft (in ‘000s)	% Vacancy	Avg Asking Rate ($/psf)
A	44,976	1,998	4.4%	$55.91
B	25,815	2,581	10.0%	$47.09
C	29,365	3,619	12.3%	$42.41
D	14,239	678	4.8%	$41.81
Total	114,395	8,875	7.8%	$46.77

Rate growth accelerated, though still below Midtown and Midtown South levels. The Downtown market saw significant growth in the average asking rate with 14.6% y/y growth to $46.77 psf. This represents a meaningful acceleration from mid-9% growth in each of the first two quarters of the year and 5.9% growth in 2006. Growth in the submarket is driven by Class C and B buildings. Class C buildings, which make up 41% of total availability, showed 15.4% y/y growth to $42.41 psf, while Class B buildings, which make up slightly less at 29% of availability, showed 31.0% y/y growth to $47.09 psf. However, we would note that availability at 100 Church Street is having a significant upward impact on Class B rates. This single property has 698K sq ft of availability, representing 27% of total Class B availability, at the above average asking rate of $55.33 psf. However, this space has been available for over a year, suggesting the asking rate is above what the market will bare. If this is the case, than this rate may be skewing our Class B average asking rates upwards, resulting in rate growth measurements in excess of broader market trends. For this reason, we consider Class A and C rate growth a better indicator of the strength of the overall market.

Class A properties also showed strong growth at 16.5% y/y to $55.91 psf, though this was virtually flat to 2Q growth of 16.3% y/y suggesting Class A properties were not a key contributor to the acceleration of rate growth in the market. Our calculations of Class A rates and availability currently include space at 7 World Trade Center, which was completed in May, 2006. However, it does not include planned space in World Trade Center Towers 1 through 4, or space in the expected JP Morgan building at World Trade Center site 5.
Additionally, Class D properties showed 34.7% y/y growth to $41.81 psf, though at only 8% of total availability, this building class is not big enough to drive rate growth to the same degree as the other building classes. However, it is worth noting that this is the fourth straight quarter that Class D growth has outpaced Class C growth, which has the effect of closing the gap in pricing between the two building classes. As of 3Q07, the Class D rate of $41.81 psf was only down $0.60 from the Class C rate of $42.41 psf.

Despite the acceleration in rate growth in the Downtown market, growth is still outpaced by both the Midtown and Midtown South markets. As a result, the discount available to tenants seeking alternatives to higher priced Midtown rents continues to grow. The average asking rate in the Downtown market in 3Q07 represents a 15% discount to Midtown South and a 40% discount to Midtown. These discounts are up from 12% and 36% respectively at the end of 2006. This suggests that despite 14.6% y/y rate growth in 3Q07, the Downtown submarket actually continues to get less expensive on a relative basis.

Significant vacancy reduction more than offsets 2Q07 increase. Leasing was strong in the quarter contributing to a significant vacancy reduction, consistent with performance in both the Midtown and Midtown South markets in the quarter. Downtown vacancy was reduced to 7.8%, representing a 163 bps sequential reduction and a 330 bps y/y reduction. This decline in vacancy was the result of a 1.9M sq ft reduction in availability, of which, 1.3M sq ft was accounted for by a reduction in Class C availability. This represents the largest single period change in availability we have witnessed in any of the Downtown building classes over the last two years. Several large properties contributed to this reduction, including 32 Ave of the Americas (286K sq ft reduction in availability) and One Hudson Square (252K sq ft reduction in availability). As a result of this leasing activity, Class C properties saw a 434 bps sequential decrease in vacancy to 12.3%, more than offsetting the 123 bps sequential increase witnessed in 2Q07. Class A and B buildings also contributed to the vacancy reduction, with Class A vacancy falling 104 bps sequentially to 4.4%, and Class B vacancy falling 82 bps sequentially to 10.0%. Class D vacancy was actually up 60 bps to 4.8%, though this still represents a 20 bps y/y decline.

Market absorption far surpassed year ago results. The Downtown market saw significant positive absorption in the quarter, with 3.0M sq ft of leased space offset by 1.1M sq ft of newly available space driving positive absorption of 1.9M sq ft. These 3Q results suggest a meaningful divergence from 2006 seasonal patterns. While both 2006 and 2007 saw strong positive absorption in the first quarter, followed by weaker performance in the second quarter, 2006 saw third quarter results even weaker than those in the second quarter, vs. 3Q07, which showed positive absorption in excess of 1Q07 results. As a result of this strong 3Q07 performance, YTD 2007 absorption numbers in Downtown showed a marked improvement y/y. YTD 2007 leasing activity totaled 7.6M sq ft, up from 5.5M in 2006. At the same time, YTD 2007 newly available space totaled 4.1M sq ft, down from 5.2M in 2006. As a result, total positive absorption for YTD 2007 increased to 3.5M sq ft, up from just 302K sq ft in the year ago period. These results suggest that demand is outpacing supply for office space in the Downtown market. This data, coupled with the increasing discount offered by the Downtown markets relative to Midtown and Midtown South, suggests significant support for future rate growth in the Downtown market.

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	$56.93	47.48	43.49	41.90	47.28
Sublease	35.03	36.44	31.76	40.48	34.02
Wtd Avg	55.91	47.09	42.41	41.81	46.77

3Q 2007 Asking Rates vs. 2Q 2007:

Class	A	B	C	D	Wtd Avg
3Q 2007 Wtd Avg	$55.91	47.09	42.41	41.81	46.77
2Q 2007 Wtd Avg	55.00	40.82	39.82	38.69	43.50
	0.91	6.27	2.59	3.12	3.27

3Q 2007 Asking Rates vs. 3Q 2006:

Class	A	B	C	D	Wtd Avg
3Q 2007 Wtd Avg	$55.91	47.09	42.42	41.81	46.77
3Q 2006 Wtd Avg	48.01	35.96	36.76	31.04	40.79
	7.90	11.13	5.66	10.77	5.98

For further information contact:

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