4Q 2007 Market Update - Is a Landlord’s Market Softening?

Fourth Quarter 2007 Market Overview

Tenant’s Viewpoint

Continuing uncertainty in the financial markets coupled with announcements of job cutbacks have quelled the surge that commercial real estate experienced over the last year. We expect this pause to continue through 2008 as the financial services industry continues to write down losses from the credit crisis. Tenants contemplating renewal or relocation should consider taking advantage of this window of opportunity before the uncertainty stabilizes and landlords and sublandlords regain their market bullishness.

Market Overview

The tide of sentiment about the strength of the New York City Office Market has ebbed even though the statistics remain strong. As more reports of job losses are published, we would expect to see this trend in confidence continue. Class A space in Midtown remains strong with a vacancy rate of 4.5%. Class A space in Midtown South and Downtown are also showing no signs of weakening, due to limited supply. The big winner in 2007 on absorption was Downtown Class A space which reduced its vacancy by almost half, absorbing 3.2 million rentable square feet (”rsf”) in comparison to 2.7 million rsf in midtown Class A space. Overall, there now appears to be less competition for space, and we see the first signs of landlords being more negotiable.

Trends & Statistics

Midtown
Midtown Class A vacancy rates decreased from 5% to 4.5% in the last quarter. Asking rents for Class A space continue to increase, now $83.32 per rsf. Vacancy in Class B midtown space improved to a new low of 3.9% from 4%, with asking rents decreasing slightly from $54.95 to $53.81 per rsf. Since Q4 2006, Class A vacancy rates have decreased 13.46% (from 5.2% to 4.5%) and the average asking rent has increased by $15.87 per rsf or 23.53%. Class B vacancy decreased nominally from 4% in Q4 2006 to 3.9% and asking rents increased $11.04 per rsf (or 25.81%). Q4 2007 Net absorption was 927,873 rsf for Class A space, almost 70% higher than Q3 2007. Class B absorption did an “about face” with positive absorption of 282,572 rsf (compared to the previous quarter which had negative absorption of 211,951 rsf).

Midtown South (Class A & B)
Q4 vacancy increased once again nominally from 3.8 to 4% from Q3, with asking rents increasing by another $4.99 per rsf (or 10.21%) to $53.85 per rsf. A year ago (Q4 2006), vacancy was 20% higher at 5%. Asking rents in the same period increased $13.80 per rsf or by 34.46%. Midtown South has continued to remain tight in light of the premium cost of space in Midtown. Net absorption in Midtown South in Q4 was quite low at 29,585 rsf, a reflection on the very limited availability in the submarket.

Downtown
Class A vacancy reduced by 10.17% from 5.9% in Q3 to 5.3% in Q4, with asking rents increasing only slightly ($o.98 per rsf) to $52.46 per rsf. Class B vacancy increased marginally in Q4 2007 to 9% from 8.3% in Q3, but asking rents continued to climb by 6.45% to $46.71 per rsf. A year ago, Class A Vacancy was 10.3%, and class B was 10%. Asking rents were $45.27 per rsf and $36.38 per rsf, respectively. This shows a massive 48.54% reduction in vacancy for class A (10% for class B) and an increase of 15.88% (Class A) and 28.39% (Class B) in asking rents.

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