Midtown 3Q 2007

Third Quarter, 2007 Analysis

The Midtown market is composed of the following submarkets: Columbus Circle, Plaza District, Times Square, Midtown Eastside, Sixth Avenue, Rockefeller Plaza, Park Avenue, and Grand Central.

The inventory of the Midtown market is primarily comprised of Class A properties. At the end of the first quarter, the market consisted of 121.1M sq ft of Class A space (63% of the market); 35.4M sq ft of Class B space (18%); 14.8M sq ft of Class C space (8%); and 21.9M sq ft of Class D space (11%).

Building Class	Inventory Sq Ft (in ‘000s)	Availability Sq Ft (in ‘000s)	% Vacancy	Avg Asking Rate ($/psf)
A	121,110	7,657	6.3%	$86.96
B	35,353	2,678	7.6%	$71.52
C	14,845	1,260	8.5%	$58.54
D	21,892	1,724	7.9%	$59.34
Total	193,199	13,318	6.9%	$77.59

Asking rate growth accelerates. The Midtown average asking rate grew 21.9% y/y to $77.59 psf, an acceleration from 2Q’s 14.4% y/y growth for the strongest growth in any quarter for over two years. Growth accelerated across all property classes, but the most notable growth occurred in Class A and B properties, which combine to account for 81% of total inventory and 78% of total availability as of September. The Class A average asking rate grew 25.2% y/y to $86.96 psf, representing a $5.89 increase over 2Q, while the Class B average asking rate grew 24.5% y/y to $71.52 psf, representing a $7.11 increase over 2Q’s level. Rate growth in Class C and D buildings was also strong, though these classes account for only 19% of total market inventory and 22% of availability. Class C rate growth accelerated to 19.3% y/y from 2Q’s 10.2%, resulting in an asking rate of $58.54 psf, up $4.32 sequentially. Class D rate growth accelerated to 9.9% y/y from 2Q’s 6.3%, resulting in an asking rate of $59.34 psf, up $2.20 sequentially. Also of note, most of the rate growth in 3Q was driven by direct lease space, which saw rate growth of 21.7% y/y to $80.19 psf vs. sublease space, which saw rate growth of 11.7% y/y to $64.65 psf. 3Q marks the first quarter since 2Q06 that saw direct lease rate growth in excess of sublease rate growth. Additionally, the percentage of availability accounted for by direct space has increased steadily over the last three quarters, reaching 78% of total market availability in 3Q, up from 69% at year end 2006. This increase represents a further driver of total average asking rate growth as direct space currently trades at a 24% premium to sublease space in the market.

Low vacancy falls still further driving rate growth. Midtown vacancy fell significantly to 6.9% at quarter end, representing a 169 bps y/y decline and a 101 bps sequential decline from 2Q’s 7.9%. This vacancy reduction suggests the limited supply of space that has driven Midtown rate growth has grown even tighter despite less expensive alternatives in Midtown South and Downtown markets. Midtown continues to outpace both Midtown South and Downtown in rate growth with 21.9% y/y growth in 3Q07, vs. Midtown South at 14.4% y/y growth and Downtown at 14.6% y/y growth.

Sequential vacancy decreases in Midtown were seen across all but Class D buildings, with the most meaningful decreases in Class B and C properties. Class B vacancy dropped 310 bps sequentially to 7.6% in 3Q, while Class C vacancy fell 175 bps sequentially to 8.5%. Class A vacancy was also down 100 bps y/y to 6.3%, though this represented only a 54 bps sequential reduction simply due to the fact that Class A vacancy has little room left for further reductions. 3Q07 represents the eighth straight quarter of Class A direct vacancy below 5%. During that time the Class A direct lease asking rate has increased $26.21 psf, driving the increase in total market asking rates of $19.62 over the same period. Class D was the only property class that did not see a sequential vacancy decline, with 3Q vacancy of 7.9% representing a 26 bps sequential increase from 2Q’s 7.6%. However, this still represented a 51 bps y/y decline.

Absorption swings positive. Total available space in the Midtown market decreased by 2.0M sq ft in 3Q07 as 4.2M sq ft of space was leased up, offset by 2.2M sq ft of newly available space. 3Q absorption represents a return to the improvement in absorption that started back in 4Q06, but was interrupted in 2Q07 when an increase in available space of 2.7M sq ft drove negative absorption of 478K sq ft. Of the 2.0M sq ft of space that came off the market in 3Q, 56% was attributable to Class B space, while 33% was attributable to Class A space. As a result, the percentage of availability attributable to higher rate Class A space increased slightly to 57% in 3Q from 54% in 2Q, contributing another driver to rate growth in the quarter.

Total Inventory	193.2M sq ft	781 buildings
Class A (1969-current)	121.1M sq ft	194 buildings
Class B (1931-1969)	35.4M sq ft	154 buildings
Class C (before 1931>250,000 sq ft)	14.8M sq ft	33 buildings
Class D (before 1931<250,000 sq ft)	21.9M sq ft	400 buildings

Class	A	B	C	D	Wtd Avg
Direct	$92.89	73.40	60.84	60.82	80.19
Sublease	68.70	57.98	36.24	38.39	65.65
Wtd Avg	86.96	71.52	58.54	59.34	77.59

3Q 2007 Asking Rates vs. 2Q 2007:

Class	A	B	C	D	Wtd Avg
3Q 2007 Wtd Avg	$86.96	71.52	58.54	59.34	77.59
2Q 2007 Wtd Avg	81.07	64.41	54.23	57.14	71.67
	5.89	7.11	4.31	2.20	5.92

3Q 2007 Asking Rates vs. 3Q 2006:

Class	A	B	C	D	Wtd Avg
3Q 2007 Wtd Avg	$86.96	71.52	58.54	59.34	77.59
3Q 2006 Wtd Avg	69.47	57.46	49.06	54.00	63.64
	17.49	14.06	9.48	5.34	13.95

For further information contact:

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