Midtown 4Q 2007

Fourth 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	7,373	6.1%	$89.44
B	35,353	3,100	8.8%	$72.20
C	14,845	1,507	10.2%	$60.28
D	21,892	1,708	7.8%	$61.48
Total	193,199	13,688	7.1%	$78.84

Asking rate growth continues despite economic concerns. The average asking rate in the Midtown market grew 20.5% y/y in 4Q07 to $78.84 psf, representing a $13.40 psf y/y increase over 4Q06 and a $1.25 psf sequential increase over 3Q07. While 4Q’s growth was a slight deceleration from 3Q’s 21.9%, we would note that Class A, B and D buildings all saw significant rate growth acceleration while only Class C growth remained flat relative to last quarter. This implies that the slowing rate growth of the overall market is more related to a shift in availability between building classes and less related to slowing in the underlying rate growth for the individual classes. A significant reduction in Class A availability and a simultaneous increase in Class B vacancy served to shift the calculation of the weighted average asking rate to lower rate Class B properties, causing the majority of the drag on total market rate growth. It is our belief that the apparent slowing of growth in the current quarter is related to this shift in availability and we would caution against using it as evidence of a longer term trend of slowing growth. However, it is also important to note that in a slowing market, 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 As a result, asking rates often change slowly and landlords attempt to attract tenants by offering more generous (and unpublished) rent concessions (i.e. longer free rent periods and/or increased work letters).

4Q07 average asking rate results by building class include: Class A buildings saw 26.2% y/y asking rate growth to $89.44 psf, an acceleration from 3Q’s 25.2% growth and up $2.48 psf from 3Q’s average asking rate. Class B buildings saw 32.2% y/y growth to $72.20 psf, an acceleration from 24.5% y/y growth last quarter and up $0.68 psf sequentially. Class C buildings saw strong growth at 19.2% y/y to $60.28 psf, though this was flat to 3Q’s 19.3% growth. Class C asking rate was up $1.73 psf sequentially. Class D buildings saw 12.1% y/y growth to $61.48 psf, also representing an acceleration from 3Q’s 9.9% y/y growth.

Vacancy rebounds slightly but remains low relative to historical averages. Midtown saw vacancy tick up slightly in 4Q07 after strong leasing activity in 3Q drove the lowest vacancy level seen in this market in over three years. Vacancy in 4Q was 7.1%, up from 3Q’s 6.9% but still down from historical levels in the high 7% range. It is worth noting that the vacancy increase in 4Q was the result of vacancy increases in Class B and C buildings, which were partially offset by a decrease in Class A availability. Class A vacancy fell to just 6.1% in the quarter, representing a 160 bps y/y decline and the lowest vacancy level witnessed in this building class in over three years. We expect this low vacancy level will continue to drive rate growth for Class A properties, potentially increasing the rate premium over Class B space, which currently stands at 24%.

Class B and C building both saw vacancy increases over 3Q levels. Class B vacancy reached 8.8%, up 119 bps over 3Q though still down 142 bps y/y. This vacancy increase represents a 422K sq ft increase in Class B available inventory (15.8% increase), which could result in a slowing in the pace of rate growth from 4Q’s record 32.2% y/y pace for this building class. Class C vacancy increased to 10.2% representing both a sequential and y/y increase. Class C vacancy was up 166 bps from 3Q and up 332 bps y/y. This dramatic increase in availability likely contributed to the slowing rate growth witnessed in the quarter for Class C properties.

Absorption was negative in 4Q but strong YTD. Net absorption was negative in 4Q for the Midtown market with 2.1M sq ft of leased space being more than offset by 2.5M sq ft of newly available space, for negative net absorption of 369K sq ft. These results suggest that supply outpaced demand in the quarter, but it remains to be seen if this will drive a longer term trend of slower asking rate growth in the future. One of the factors making this determination difficult is strong leasing activity in the first and third quarters of the year, which have kept market vacancy at low levels relative to historical averages. Full year 2007 absorption was a 2.1M sq ft, a dramatic improvement from 710K sq ft of negative absorption in 2006.

In our view, recent vacancy results and already slowing growth provide support for the notion that rates growth could continue to slow for Class B and C properties. However, Class A saw a further reduction in vacancy to record lows, which could drive further rate growth in this property class, which represents over 60% of the market. It remains to be seen if rate growth in Class A properties is enough to more than offset the likely slowdown in rate growth for the other property classes.

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	$96.17	73.88	61.96	62.79	81.63
Sublease	65.32	56.96	38.00	45.32	61.91
Wtd Avg	89.44	72.20	60.28	61.48	78.84

4Q 2007 Asking Rates vs. 3Q 2007:

Class	A	B	C	D	Wtd Avg
4Q 2007 Wtd Avg	$89.44	72.20	60.28	61.48	78.84
3Q 2007 Wtd Avg	86.96	71.52	58.54	59.34	77.59
	2.48	0.68	1.74	2.14	1.25

4Q 2007 Asking Rates vs. 4Q 2006:

Class	A	B	C	D	Wtd Avg
4Q 2007 Wtd Avg	$89.44	72.20	60.28	61.48	78.84
4Q 2006 Wtd Avg	70.89	54.60	50.57	54.87	65.44
	18.55	17.60	9.71	6.61	13.40

For further information contact:

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