1Q 2008 Market Update - Uncertainty Persists

First Quarter 2008 Market Update

Tenant’s Viewpoint

Asking rents are expected to remain flat over the next few quarters. More sublease space will come on the market and landlords will be more reluctant to exercise their recapture rights. Recent economic events have produced sufficient uncertainty to change landlords’ attitudes towards deal making. Incentives to tenants are on the rise and landlords will increasingly be motivated to get a transaction done. This is welcome news for tenants with requirements over the next 2-3 years. There is a window of opportunity that tenants should be looking to take advantage of.

Market Overview

The level of unease in the New York City office market is increasing in light of the layoffs on Wall Street and the recent collapse of Bear Stearns. Further job losses are expected and this will check the demand for space and put more sublease space on the market. Tenants are rethinking their plans and, in some cases, are withdrawing from transactions or major commitments. However, the statistics are slow to react: Class A space vacancy in Midtown increased only slightly whereas Class A space vacancies in Midtown South and Downtown actually decreased in Q1. There were negative absorptions in all submarkets except Midtown South and Downtown.

Trends & Statistics

Midtown
Midtown Class A vacancy rates increased from 4.5% to 4.7% in the last quarter. Asking rents for Class A space continued to increase to $84.46 per rentable square feet (rsf). Vacancy in Class B midtown space increased from 3.9% to 4.3%, with asking rents barely increasing from $53.81/rsf to $53.97/rsf. Q1 2008 net absorption was -355,632 rsf for Class A space, the first negative absorption in quite some time. Class B absorption was -258,529 rsf.

Midtown South (Class A & B)
Q1 vacancy decreased nominally from 4.0 to 3.6% from Q4, with asking rents increasing $0.41/rsf (0.8%) to $54.26/rsf. Net absorption in Midtown South was still low at 9,822 rsf, a reflection on extremely limited availability in the submarket and lower activity in light of current economic conditions.

Downtown
Class A vacancy dropped by 11.3% from 5.3% in Q4 to 4.7% in Q1, with asking rents increasing slightly ($0.48/rsf) to $52.94/rsf. Class B vacancy increased marginally in Q1 2008 to 10.1% from 9.0% in Q4, but asking rents climbed at a slower pace than the prior quarter — only 1.5% to reach $47.41/rsf.

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