Midtown South 3Q 2007

Third Quarter, 2007 Analysis

The Midtown South market is composed of the following submarkets: Port Authority/Penn Station/Garment, Murray Hill, Chelsea, Flatiron/Gramercy Park, Greenwich Village/SoHo, East Village, and Union Square.

The inventory of the Midtown South market is primarily comprised of Class D buildings. At the end of the second quarter the market consisted of 11.9M sq ft of Class A space (8% of inventory), 25.5M sq ft of Class B space (16% of inventory), 45.5M sq ft of Class C space (28% of inventory) and 77.1M sq ft of Class D space (48% of inventory).

Building Class	Inventory Sq Ft (in ‘000s)	Availability Sq Ft (in ‘000s)	% Vacancy	Avg Asking Rate ($/psf)
A	11,938	1,028	8.6%	$97.54
B	25,459	1,755	6.9%	$54.00
C	45,481	3,076	6.8%	$48.11
D	77,121	2,237	2.9%	$44.88
Total	159,999	8,096	5.1%	$54.77

Total market growth masks underlying trends in pricing. The average asking rate in the Midtown South submarket grew 17.8% y/y to $54.77 psf, a sharp acceleration from the 10.9% y/y growth witnessed in the weak 2Q07 quarter, but about flat to growth levels seen in 1Q07 and 4Q06. However, a review of the asking rate growth of individual building classes shows rate growth for all classes in excess of this level; the Class A rate grew 20.4% y/y to $97.54 psf; the Class B rate grew 30.9% y/y to $54.00 psf; the Class C rate grew 25.2% y/y to $48.11 psf; and the Class D rate grew 27.2% y/y to $44.88 psf. The explanation for total market growth below each of the property class growth levels is that total submarket growth is being held back by a reduction in the percentage of available space attributable to higher rate Class A space. Class A accounted for 12.7% of total availability in 3Q07, down from 15.9% in 3Q06. Since Class A space trades at an 81% premium to Class B space, a reduction in the weighting given to Class A space in the calculation of the average asking rate represents a significant drag on growth. Rates for each of the property classes as of the end of 3Q07 were; $97.54 psf for Class A, $54.00 psf for Class B, $48.11 psf for Class C and $44.88 psf for Class D.

Vacancy rates flat sequentially, but down y/y. Vacancy in the Midtown South submarket was 5.1% in the quarter, down 118 bps y/y and flat to 2Q vacancy. The flat sequential performance was driven by sequential decreases in vacancy for Class A and D buildings, offset by sequential increases in B and C buildings. It is worth noting that the sequential increase in Class C buildings still represented a y/y decline of 116 bps, so Class B was the only building class that saw a y/y increase in vacancy. Results for each of the Classes include: Class A vacancy of 8.6% (down 471 bps y/y and down 139 bps sequentially); Class B vacancy of 6.9% (up 112 bps y/y and up 107 bps sequentially); Class C vacancy of 6.8% (down 116 bps y/y, but up 68 bps sequentially); and Class D vacancy of 2.9% (down 140 bps y/y and down 64 bps sequentially).

Midtown South absorption is just barely positive, but still strong on a YTD basis. Net absorption for the period was just barely positive in the quarter, with 2.6M sq ft of leased space offset by 2.6M sq ft of newly available space, for positive net absorption of just 82K sq ft. Quarterly absorption results for the first three quarters of 2007 appear to be following a similar trend as 2006, with strong positive absorption in 1Q, negative absorption in 2Q and near zero absorption in 3Q.

In our view, YTD absorption results offer a clearer indication of persistent market demand, since it eliminates the impact of seasonality on absorption numbers. YTD results for the individual components of absorption in Midtown South suggest favorable supply and demand dynamics which should drive continued rate growth. YTD 2007 results show an improvement in net absorption of 2.4M sq ft due primarily to a reduction in the amount of newly available space brought to market in 2007. Total leased space in 2007 increased slightly to 7.7M sq ft from 2006’s 7.5M, but newly available space dropped significantly to 5.1M sq ft from 2006’s 7.4M. This suggests a continued pace of demand in the submarket with a tightening supply driving positive net absorption on a YTD basis.

Total Inventory	160.0 MM sq ft	1510 buildings
Class A (1969-current)	11.9 MM sq ft	34 buildings
Class B (1931-1969)	25.5 MM sq ft	102 buildings
Class C (before 1931>250,000 sq ft)	45.5 MM sq ft	109 buildings
Class D (before 1931<250,000 sq ft)	77.1 MM sq ft	1265 buildings

Class	A	B	C	D	Wtd Avg
Direct	$108.47	56.37	48.41	45.09	55.48
Sublease	75.37	47.08	44.70	43.20	51.46
Wtd Avg	97.54	54.00	48.11	44.88	54.77

3Q 2007 Asking Rates vs. 2Q 2007:

Class	A	B	C	D	Wtd Avg
3Q 2007 Wtd Avg	$97.54	54.00	48.11	44.88	54.77
2Q 2007 Wtd Avg	94.69	49.76	42.49	41.35	51.05
	2.85	4.24	5.62	3.53	3.72

3Q 2007 Asking Rates vs. 3Q 2006:

Class	A	B	C	D	Wtd Avg
3Q 2007 Wtd Avg	$97.54	54.00	48.11	44.88	54.77
3Q 2006 Wtd Avg	81.01	41.24	38.44	35.29	46.50
	16.53	12.76	9.67	9.59	8.27

For further information contact:

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