Downtown 4Q 2007

Fourth 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 total submarket inventory as of 4Q07. 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). The market has 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)	Availability Sq Ft (in ‘000s)	% Vacancy	Avg Asking Rate ($/psf)
A	44,976	1,819	4.0%	$60.65
B	25,815	2,492	9.7%	$47.65
C	29,365	3,898	13.3%	$44.18
D	14,239	707	5.0%	$41.85
Total	114,395	8,916	7.8%	$48.33

Asking rate growth remains strong, though pace of acceleration has slowed. The Downtown market saw significant growth in the average asking rate in the fourth quarter, though the pace of accelerations seems to have slowed. In 4Q07, the Downtown average asking rate grew 15.2% y/y to $48.33 psf, up slightly from 3Q07’s 14.6% growth representing a bit of a flattening relative to the rapid increases in asking rate growth witnessed over the last two years. Downtown rate growth has accelerated over the last six quarters from a low of just 1.0% y/y growth in 2Q06 to the high of 15.2% growth witnessed in the current quarter. Over the same time period, the average asking rate for the market has increased $8.57 psf. It is unclear at this point if the 4Q07 results represent the beginning of a longer term slowing trend for the market associated with the slowing economy and the crisis in the credit markets, or if this is a single period anomaly similar to the results witnessed in 2Q07. We would note that average asking rates are a lagging indicator of market conditions, so we would expect a lag of six months to a year before changing economic conditions became apparent in slowing rate growth or reduced asking rates. This could be particularly true in a potentially weakening market as landlords are hesitant to reduce asking rates because they do not want to signal market weakness. As a result, asking rates often change slowly and landlords attempt to attract tenants by offering more generous (and unpublished) rent concessions (i.e. longer free rent periods and/or increased work letters).

During the quarter, growth in the average asking rate was by Class A and C properties which both saw rate growth acceleration in the quarter. Several properties drove growth in these two building classes, including 32 Old Slip (Class A), which saw 59.1% y/y growth to $70.00 psf and the new 7 World Trade Center (Class A) which saw 14.2% y/y growth on over 500K sq ft of availability despite asking rates that have been consistently above market averages. The asking rate for this property as of 4Q07 was $72.50 psf. Additionally, One Hudson Square (Class C) saw 29.5% y/y growth to $63.50 psf, well above the Class C average of $44.18 psf.

Results for Class A and C properties were offset by decelerations in rate growth for both Class B and D buildings. Availability at 100 Church Street continues to have a significant impact on Class B rates. This single property had 611K sq ft of availability, representing 25% of total Class B availability as of quarter end 4Q07, at the above average asking rate of $54.75 psf.

Results by individual building class include: The Class A average asking rate grew 22.4% y/y to $60.65 psf, representing an acceleration from 16.5% y/y growth witnessed in 3Q07 and a $4.74 psf increase over 3Q’s average Class A rate of $55.91 psf. The Class B average asking rate grew 24.6% y/y to $47.65 psf, a deceleration from 31.0% growth witnessed in 3Q07 and a $0.59 psf sequential increase over 3Q’s average Class B rate of $47.09 psf. The Class C average asking rate grew 36.3% y/y to $51.81 psf, an acceleration from the 25.2% y/y growth witnessed in 3Q07 and a $3.70 psf sequential increase over 3Q’s $48.11 psf. Finally, the Class D rate grew 29.5% y/y to $47.03 psf, an acceleration from 3Q07’s 27.2% y/y growth and a $2.15 psf sequential increase over 3Q’s $44.88 psf.

Downtown vacancy flat to last quarter though still showing significant y/y declines. Downtown vacancy was essentially flat to last quarter at 7.8%. This occurred as newly available space kept pace with leased space creating a near zero impact on total market availability. While 4Q07 results still represent a 294 bps y/y decline in market vacancy, it is worth noting that this quarter represents the first quarter in over three years that did not see a sequential reduction in vacancy relative to the prior quarter. Downtown vacancy is still slightly higher than both Midtown (7.1%) and Midtown South (5.2%) vacancy levels, suggesting there is still room for further declines. However, it remains to be seen if Downtown vacancy will continue its steady decline in 2008, or if 4Q07 results represent a trough in the vacancy trendline.

Of the individual business classes, Class A and B vacancy levels were both down relative to 3Q07, while Class C vacancy increased 95 bps from 3Q and Class D vacancy was relatively flat at 5%. The increase in Class C vacancy came after a sharp reduction in vacancy in 3Q07, so 4Q07 vacancy was still below historical levels despite the sequential increase. Class C properties in the fourth quarter saw continued leasing activity at One Hudson Square (80K sq ft additional reduction in availability) in addition to significant leasing at 120 Broadway (70K sq ft leased), though these decreases were more than offset by increases in vacancy at 330 Hudson Ave (292K sq ft increase in availability) and 205 Hudson Ave (212K sq ft increase in availability). The net impact of these changes was a 279K sq ft increase in Class C availability.

The increase in Class C vacancy was offset by a 178K sq ft reduction in Class A vacancy and an 89K sq ft reduction in Class B vacancy resulting in a near zero change in overall vacancy in the quarter. However, these changes had the effect of decreasing the proportion of higher rate Class A and B space and increasing the proportion of lower rate Class C space in the calculation of weighted average asking rates. This shift in the mix of availability is at least partially responsible for the deceleration in rate growth witnessed in the quarter.

Market absorption down y/y in 4Q, but still showing strong YTD results. The Downtown market saw 41K sq ft of negative absorption in the quarter as leased space of 1.84M sq ft was outpaced by newly available space of 1.88M sq ft. Our analysis of the trendline for Downtown market absorption shows no clearly discernible seasonality, with 2006 showing strong leasing quarters in the 1st and 4th quarters while 2007 showed the strongest activity in the 1st and 3rd quarters. However, an analysis of YTD results suggests that 2007 was a much stronger year for leasing than 2006 and may have left the market in a strong position to benefit from rate growth that typically comes with periods of low vacancy.

YTD absorption for the Downtown market was a positive 3.42M sq ft in 2007 resulting from 9.4M sq ft of leased space offset by 6.0M sq ft of newly available space. These results represent a significant improvement from 2006 results, in which 7.5M sq ft of leased space was offset by 6.8M sq ft of newly available space for only 668K sq ft of positive absorption. These y/y changes amount to a 26% y/y increase in 2007 leased space and a 12% y/y decrease in newly available space. These results suggest that demand has outpaced supply for the year as a whole, however the last few quarters have been very erratic, making any conjecture about future leasing activity or the impact on rates difficult to surmise.

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	$62.27	48.08	45.48	42.53	48.78
Sublease	42.54	35.47	33.45	26.10	37.25
Wtd Avg	60.65	47.65	44.18	41.85	48.33

4Q 2007 Asking Rates vs. 3Q 2007:

Class	A	B	C	D	Wtd Avg
4Q 2007 Wtd Avg	$60.65	47.65	44.18	41.85	48.33
3Q 2007 Wtd Avg	55.91	47.09	42.41	41.81	46.77
	4.74	0.56	1.77	0.04	1.56

4Q 2007 Asking Rates vs. 4Q 2006:

Class	A	B	C	D	Wtd Avg
4Q 2007 Wtd Avg	$60.65	47.65	44.18	41.85	48.33
4Q 2006 Wtd Avg	49.56	38.25	37.26	32.30	41.97
	11.09	9.40	6.92	9.55	6.36

For further information contact:

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