Midtown South 4Q 2007

Fourth 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 fourth 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	999	8.4%	$92.03
B	25,459	1,812	7.1%	$55.85
C	45,481	3,225	7.1%	$51.81
D	77,121	2,209	2.9%	$47.03
Total	159,999	8,245	5.2%	$56.29

Total market growth masks underlying trends in pricing. The average asking rate in the Midtown South market grew 17.9% y/y to $56.29 psf. Growth in the quarter was about flat to 3Q growth of 17.8% y/y and up only slightly from 2006 full year growth of 17.0%. The growth trend in the market continues to be heavily impacted by Class A buildings. Despite these properties accounting for only 8% of inventory and only 12% of total availability, they currently trade at a 65% premium to the three other building classes, which all trade in the high $40’s to low $50’s range psf. This Class A premium is driven by several top tier properties that are attracting rates comparable to the most prestigious Plaza submarket properties, including 1095 Ave of the Americas ($135.00 psf), The New York Times Building at 629 8th Avenue ($93.51 psf) and 7 Times Square Tower ($85.00 psf). In the current quarter, the Class A average asking rate fell to $92.03 psf, representing a $5.51 psf drop from 3Q07; enough to offset rapid growth acceleration in Class C and D buildings to result in the flat growth trend witnessed for the market as a whole.

Market results by property class include: the Class A asking rate was up 13.6% y/y to $92.03 psf, representing a $5.52 psf decline from 3Q’s $97.54 psf and a deceleration from 3Q’s 20.4% y/y growth. The Class B average asking rate grew 26.3% y/y to $55.85 psf, representing a deceleration from the 30.9% y/y growth witnessed in 3Q07. Class C and D buildings, which combine to account for 77% of market inventory, both saw accelerating growth, though not enough to drive significant growth acceleration for the market as a whole. Class C rates grew 36.3% y/y to $51.81 psf, up $3.70 psf from 3Q’s $48.11 psf and representing an acceleration from last quarter’s 25.2% y/y growth. We are seeing several Class C properties with asking rates well above the market average, contributing to the rapid rate growth in this building class. These properties include 60K sq ft at 75 9th Ave at $59.85 psf, 59K sq ft at 1333 Broadway at $60.00 psf and 54K sq ft at 620 Ave of the Americas at $70.00 psf. Class D buildings saw 29.5% y/y growth to $47.03 psf, up $2.15 psf sequentially and representing an acceleration from 3Q’s 27.2% y/y growth.

Vacancy rates roughly flat over the last three quarters, but lower relative to year ago levels. Vacancy in the Midtown South submarket was 5.2% in the quarter, down 154 bps y/y and up only slightly relative to 2Q07 and 3Q07, which both witnessed 5.1% vacancy in their respective time periods. This nearly flat vacancy was the result of vacancy increases in Class B and C buildings offset by a vacancy reduction in Class A buildings. Vacancy for Class B buildings was 7.1% in the quarter, down 18 bps y/y, though up 22 bps from 3Q’s 6.9%. Class C vacancy saw a similar trend with 4Q07 vacancy of 7.1% representing a 71 bps y/y decrease and a 33 bps sequential increase from 3Q’s 6.8%.

Midtown South absorption negative in the quarter, but showing a big improvement y/y. Net absorption for 4Q07 was negative 149K sq ft as 1.83M sq ft of leased space was more than offset by 1.98M sq ft of newly available space. As a result, new supply outpaced demand in the quarter resulting in the slight increase in total market vacancy mentioned above. However, absorption in the quarter showed a dramatic improvement relative to 4Q06, when absorption was negative 722K sq ft. The improvement was the result of both an increase in leased space (to 1.83M in 4Q07, from 1.55M in 4Q06), and a reduction in newly available space (to 1.98M in 4Q07, from 2.27M in 4Q06).

The absorption improvement in 4Q07, as well as the dramatic y/y improvement witnessed in 1Q07, resulted in a dramatic improvement in full year absorption in 2007 relative to full year 2006 results. Midtown South finished 2007 with a total of 2.45M sq ft of positive absorption, up from 531K sq of negative total absorption last year. The improvement was driven by a 2.5M sq ft y/y reduction in the amount of newly available space brought to market in 2007, while leased space increased 432K sq ft. This reduction in the pace of new supply, while demand remained strong, has kept Midtown South vacancy at historically low levels, positioning the market for further asking rate growth support heading into 2008.

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	$104.99	57.49	52.78	47.29	56.94
Sublease	75.62	49.20	45.80	44.94	53.90
Wtd Avg	92.03	55.85	51.81	47.03	56.29

4Q 2007 Asking Rates vs. 3Q 2007:

Class	A	B	C	D	Wtd Avg
4Q 2007 Wtd Avg	$92.03	55.85	51.81	47.03	56.29
3Q 2007 Wtd Avg	97.54	54.00	48.11	44.88	54.77
	(5.51)	1.85	3.70	2.15	1.52

4Q 2007 Asking Rates vs. 4Q 2006:

Class	A	B	C	D	Wtd Avg
4Q 2007 Wtd Avg	$92.03	55.85	51.81	47.03	56.29
4Q 2006 Wtd Avg	81.00	44.22	38.01	36.32	47.74
	11.03	11.63	13.80	10.71	8.5

For further information contact:

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