3Q 2011

Report Report
MARKET HIGHLIGHTS
DROP IN AVAILABILITY RATES Manhattans overall availability rate registered a 0.5 pp decline, falling to 10.8%. Midtowns Class A rate fell by 0.7 pp, closing the third quarter at 10.7%. Downtowns Class A rate posted a smaller 0.4 pp drop to 10.1%. RENTS INCREASE Overall asking rents rose for the fourth consecutive quarter, led once again by Midtowns Class A rents, which increased by 2.0% from $72.64 to $74.10. Downtowns Class A rate fell by 0.7% to $46.62 as some of the markets higherpriced space was leased up. QUARTERLY LEASING FALLS Overall deal volume decreased by 20.3% during the quarter, sliding from 8.8 msf to 7.0 msf. Quarterly leasing was 4.4% below its long-term average and Class A activity (2.8 msf) dropped below its long-term average by 10.9%.

NEW YORK

S T U D L E Y O F F I C E M A R K E T A N D S PA C E D ATA R E P O R T

Stopgap Measures
Considering the steady deterioration in the national economy this summer, it is no surprise that more companies are becoming gun-shy about moving forward with IPOs, investments, purchases and leases. Even the Federal Reserve conceded by August that the obstacles to growth run deep and are not transitory. Worse yet, acknowledging its waning ability to boost the economy, the Fed said that the pressure was on legislators to resolve many of the issues hindering the recovery. Counting on compromise and coordinated action from Congress and the Obama Administration may be betting on the wrong horse the recent stopgap measure to raise the debt ceiling resolved very little, instead setting the stage for yet another confrontation later this year. Businesses and consumers may be suffering from crisis fatigue. Over the last three years, they have been subjected to a dizzying series of near-collapses, critical votes and crucial policy decisions including TARP in October 2008, the stimulus bill in February 2009 and the healthcare act about a year later. Throughout this period, white-knuckled investors and bankers have eagerly awaited every Federal Reserve statement and decision. Unfortunately, the road does not get much smoother from here the House and Senate face several key votes in the fourth quarter. Few expect the Budget Supercommittee to craft a deal that will survive the Congressional gauntlet. A jobs act has been thrown into the mix as well, not to mention decisions by the Greek Parliament and ECB that could add to the volatility. Economists warn that legislators could exacerbate the worsening conditions. Excessive austerity or a slash-and-burn approach may snuff out what little ame is still ickering in the recovery. Goldman Sachs has estimated that a failure to extend unemployment benets and the payroll tax cut would shave approximately 1.7 pp off GDP in 2012, possibly pushing the economy back into recession. Many economists think policy makers need to pass a short-term stimulus bill to revitalize the recovery, while also outlining a credible long-term plan to deal with the decit. Such a balancing act would require a degree of compromise that is in short supply in the nations capital. At a time when the economic stakes are very high, most legislators or at least a sufcient number of them to obstruct solutions seem to be more focused on the high political stakes of the 2012 elections. What do the governments decisions have to do with the health of the New York City economy and commercial real estate? Opinions vary widely. The Dodd-Frank nancial reform bill is a prime example of why uncertainty regarding the regulatory climate is so high. Predicting the

MIDTOWN TRANSACTION BAROMETER

Under OneQtr Over One Qtr 50,000 sf Change 50,000 sf Change

DOWNTOWN TRANSACTION BAROMETER

Under OneQtr Over One Qtr 50,000 sf Change 50,000 sf Change

Average Term: Concessions: Free Rent Tenant Improvements Other Outlook

10 yrs

10-15 yrs

Average Term: Concessions:

7-10 yrs

15 yrs

8-10 months $60.00-$70.00 Various

10-12 months $60.00-$70.00 Various

Free Rent Tenant Improvements Other Outlook

8-12 months $55.00-$65.00 Various

14 months $75.00 Various

Best-in-class properties in the Plaza District continue to attract the most interest. Landlords in select properties continue to pull back on concessions and a broader set of owners raised rents during the quarter.

With a gap of more than $20.00 between asking rents in Midtown and Downtown, smaller and mid-sized tenants can still find strong values. Larger tenants have a limited number of quality options currently, but this may change in a few quarters.

Up

Down

Unchanged

($/sf)

Class A Rental Rate Trends

$100 $80 $60 $40 $20

Midtown Downtown

impact of the 2,300-page bill is a bit of a crapshoot. Many of the details of the reform still have to be ironed out by future committees.
$74.10

$64.70

$48.08

$46.62

As a kneejerk reaction to the deteriorating economy and regulatory uncertainty, some businesses may avoid risk and lie low. Some may second-guess their leasing decisions due to concerns about their bottom line, others may wait to see whether rents decline. Demand may be faltering quarterly leasing declined by 20.3% to 7.0 msf, the rst time since midyear 2009 that it has fallen short of its long-term average of 7.1 msf. It is too soon to say, though, that the deterioration in the economy is causing the reduced activity. Companies with ample time remaining on their leases could wait a bit longer to see whether conditions change. However, tenants with an upcoming lease expiration should be careful about opting for stopgap leases. Unless a rms bottom line is at risk, signing a short-term lease at this point in the cycle makes sense only if the sky is in fact falling. A tenant signing a two- or three-year lease could get clobbered by a tighter market and higher rents in 2013 or 2014. Similarly, companies that back away from a rare block of space in a prime location with very favorable lease terms run the risk of nding that quality spaces are no longer available and that lower-quality spaces are higher-priced. This is most applicable to Class A space. Smaller and mid-sized rms with geographical exibility are likely to enjoy an extended period of tenant-favorable conditions that should carry into 2012. Availability in Manhattan is at a pivotal point. The overall availability rate fell to 10.8% in the third quarter, the rst time it has been below 11.0% since year-end 2008. Barring a double-dip recession, Class A rents are likely to follow their pattern of prior cycles and increase by 50% to 100% over the course of the next expansion. This process can be slow to start and may take two to three years to gather momentum, but at some point it accelerates at a breathtaking pace. In the last three quarters, rents in the Plaza District have been increasing at a pace that exceeds the rate of growth in the prior two recoveries. A problem with trying to time the market is that the gain from waiting may be not all that much. There is only one scenario in which rents are likely to fall sharply a severe doubledip recession that paralyzes demand and unleashes another wave of sublet space. Besides the worst-case double-dip scenario, there are two more probable tracks one bullish the other bearish that New York Citys economy and ofce market could take. Both tracks would lead to lower availability and higher rents. The bullish outlook calls for stronger growth once the economy pushes through temporary problems and a more diverse set of businesses start hiring again. This hiring would jump start leasing pushing it from its current limited nature to a more pervasive form that spills over into the entire market. As recently as August, this outlook was the consensus short-term forecast. Now it seems overly optimistic. New York City has lost 14,589 ofce-using jobs since April, nearly offsetting the 15,899 gained in the rst four months of the year. The second scenario, now the consensus forecast, predicts very sluggish and staccato growth interrupted by intermittent crises and continued volatility and uncertainty. Even in this scenario, though, the availability of quality space will slowly decline due to the limited amount of new development. In such a climate, tenants might revert to more cautious renewals and short-term leases, which would force landlords trying to lease less

$0 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

(%)

Class A Availability Rate Trends

20% 14.5% 10.7% 10% 7.6% 10.1%

15%

5%

Midtown

Downtown

0% 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

(msf)

Overall Quarterly Leasing Activity

12.0 10.0 8.0 6.0 4.0 2.0

Quarterly Leasing Historical Average

7.0 msf

0.0 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11

Overall Large Block Trends*

40 35 30 25 20 15 10 5 0 3Q06 3Q07 3Q08 3Q09 3Q10 3Q11
Midtown Downtown

24 18 17 23

*Downtown Contiguous Space >= 100,000 sf Midtown Contiguous Space >= 150,000 sf

MAJOR TRANSACTIONS Major Transactions

Tenant
Oppenheimer & Co., Inc. A&E Open Society Foundations MSCI, Inc. B&H Photo* Alvarez & Marsal ASME International Gilt Groupe^^ ARUP Polo Ralph Lauren^^ Rothstein Kass & Co., P.C.** Getty Images, Inc.* TransPerfect International** ITOCHU International** Jones New York*

Sq Feet
269,105 167,629 159,800 125,811 121,475 102,917 99,262 98,646 97,412 91,417 88,049 77,834 75,000 69,134 65,133

Address
85 Broad St 685 Third Ave 224 W 57th St 7 World Trade Center 440 Ninth Ave 600 Madison Ave 2 Park Ave 2 Park Ave 77 Water St 625 Madison Ave 1350 Ave of the Americas 75 Varick St 3 Park Ave 1411 Broadway 1441 Broadway

Market Area
Downtown I Grand Central I Westside II Downtown II Westside II Plaza I Grand Central II Grand Central II Downtown I Plaza I Westside I Midtown South II Grand Central II Westside II Westside II

Sum of Top Leases 1,708,624 * Renewals **Renewal & Expansion ^ Sale-Leaseback ^^Expansion

Sum of 3rd Quarter Leasing Activity

7.0 MSF

competitive space to increase concession packages. Developers trying to get the ball rolling at new properties might also dramatically extend tenant improvement dollars and other terms to lure the rst wave of tenants. A relapse into more cautious leasing activity would represent a discouraging retreat from the recent increase in more forward-looking space-use decisions by some New York City rms. Leases signed by companies such as Nomura, Cond Nast and Tiffany & Co. were motivated in part by the sense that the window of opportunity for bigger blocks of quality space was closing. Businesses that have had to battle for space in prior expansions, and paid the premiums that come with these bidding wars, are pre-emptively trying to avoid reliving this situation. Additionally, the immediate need for newer space was strong enough to override shaky market fundamentals. In the prior two cycles, many rms employed band-aid approaches to solving their space needs leasing oors in separate buildings or spreading across disconnected oors, dealing with tired and outdated space. These rms are overdue for intensive capital investment in their space not only in terms of technology, but also in terms of a fresh approach to the layout and functionality of space. Businesses are embracing space efciency and higher density, and not for cost reasons alone. Companies are also accepting that collaborative and creative space fosters innovation and teamwork. A relapse into recession would not only stem this more forward-looking type of leasing it would also hold back the next wave of ofce space, which could add as much as 25.0 msf of much-needed product by 2020. Many of these developments are on the cusp of capturing critical anchor tenants. Coach, for example, is reportedly nearing agreement on a 600,000-sf block in Related Companies Westside project.

Overall Rental Rate Comparison

Westside I Plaza II Plaza I Grand Central I Midtown Westside II New York City Midtown South I Downtown II Grand Central II Midtown South II Downtown Downtown I US Index ($/sf) $0 $28.63 $ $20 $40 $60 $80 $79.58 $77.10 $67.38 $58.98 $58.79 $54.89 $51.94 $45.42 $42.39 $42.17 $41.16 $40.14 $39.60

Availability Rate Comparison

Looking Forward
This economy and even lawmakers in Washington have shown the ability to exceed expectations in the past. A year ago, the situation was similar to todays. The economy appeared precariously close to falling back into recession and business and household condence was faltering. A battle over the budget loomed. By December, though, the economy started to pick up steam and the agreement reached in Washington was actually a boost to sentiment and spending power. This next quarter will be critical to determining whether the economy and Washington can rise to the occasion and pull off a repeat performance. The longer the economy remains stalled and legislators adopt feckless measures, the more condence will wane, making it more likely that companies and lenders will start to pull back from investments and loans that are key to the recovery.

Midtown South I Plaza II Midtown South II Plaza I Downtown II Grand Central II Midtown New York City Westside I Downtown Westside II

6.2% 8.3% 9.5% 9.6% 9.9% 10.3% 10.6% 10.8% 11.0% 11.4% 11.4% 11.7% 13.8% 17.9% % 5% 10% 15% 20%

ABOUT OUR FIRM

is the only global tenant advisory rm with a pure tenant representative delivery platform. Founded in 1954, Studley pioneered this conict-free business model. Today, with 19 ofces nationwide and an international presence through its London ofce and AOS Studley throughout Europe, Studley provides strategic real estate consulting services to top-tier corporations, law rms, nonprots, government agencies and institutions of higher education. Information about Studley is available at www.studley.com.

Downtown I Grand Central I US Index (%) 0%

OFFICE-USING EMPLOYMENT TRENDS

Millions

New York City

Total Empl. % Ann. Change

Millions

National
Total Empl. % Ann. Change

1.30 1.20

4.2% 2.2% 0.2%

30 29 28 27

4.0% 2.0% 0.0%

1.10 1.00 0.90

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-1 8% -1.8% -3.8% -5.8%

2011

2009

-2.0% -4.0% -6.0% -8.0%

26 25
2001 2002 2003 2004 2005 2006 2007 2008

2010

0.80

-9.8%

23

Source: Bureau of Labor Statistics

STUDLEY OFFICE MARKET AND SPACEDATA REPORT

2011

-7.8%

24

MARKET SNAPSHOT: 3Q 2011

MAP SUBMARKET TOTAL
Inventory SF (1,000s)

LEASING ACTIVITY
Last 12 Mos 5 Yr Average

AVAILABLE SF
% Change from Last Qtr
-8.2% -8.6% -1.1% -18.1% -16.4% -18.4% -2.0% -2.9% 2.6% 6.7% -7.9% N/A -3.4% -11.6% -9.4% N/A -7.6% -0.8% -8.7% -68.9% -3.7% -6.2% -7.8% -3.7% -4.7% -5.7%

AVAILABILITY RATE
5 Yrs Ago pp Change from Last Qtr (1)
-1.0% -1.0% -0.1% -2.1% -1.9% -2.1% -0.2% -0.2% 0.4% 0.9% -0.9% N/A -0.2% -0.6% -1.0% N/A -1.0% -0.1% -0.9% -5.1% -0.4% -0.7% -1.0% -0.4% -0.5% -0.6%

ASKING RENTS PER SF

5 Yrs Ago % Change from Last Qtr
3.0% 3.7% 4.6% -0.1% -3.7% -3.0% -5.7% -9.9% 2.5% 3.9% 0.2% N/A 4.9% N/A 1.0% N/A 2.4% 1.6% -5.3% 1.3% 2.0% 2.0% 0.8% -0.7% 2.5% 1.9%

This Qtr

Yr Ago

This Qtr

Yr Ago

This Qtr

Yr Ago

5 Yrs Ago

Westside I 1 Westside I - Class A Westside II 2 Westside II - Class A Plaza I 3 Plaza I - Class A Plaza II 4 Plaza II - Class A Grand Central I 5 Grand Central I - Class A Grand Central II 6 Grand Central II - Class A Midtown South I 7 Midtown South I - Class A Midtown South II 8 Midtown South II - Class A Downtown I 9 Downtown I - Class A Downtown II 10 Downtown II - Class A MIDTOWN TOTAL 1-8 MIDTOWN TOTAL - Class A DOWNTOWN TOTAL 9-10 DOWNTOWN TOTAL - Class A MANHATTAN TOTAL 1-10 MANHATTAN TOTAL - Class A

58,491 49,102 84,286 24,840 23,128 17,057 18,974 15,467 62,554 40,773 13,961 N/A 44,131 4,887 17,480 1,609 74,185 37,124 16,900 2,430 323,005 153,735 91,085 39,554 414,091 193,289 /

5,347 4,774 7,198 1,990 1,508 1,051 1,031 724 5,694 4,105 1,568 N/A 3,015 151 1,278 N/A 5,002 3,113 1,652 871 26,640 12,795 6,654 3,983 33,293 16,779

4,460 3,714 6,065 1,829 1,248 951 1,527 1,261 4,673 2,957 853 N/A 2,408 232 1,107 35 4,596 2,230 1,092 361 22,339 11,007 5,688 2,591 28,027 13,599

6,414 5,393 9,635 2,314 2,218 1,595 1,582 1,159 8,617 5,723 1,436 N/A 2,718 231 1,653 N/A 8,679 3,924 1,670 56 34,274 16,415 10,349 3,979 44,623 21,635

7,337 6,232 9,783 2,831 2,773 2,050 2,283 1,814 8,888 5,832 1,412 N/A 3,884 395 2,087 14 9,482 4,345 2,203 420 38,447 19,169 11,685 4,765 50,132 23,934

4,644 4,004 6,006 1,201 1,436 1,121 1,069 838 5,039 2,915 1,098 N/A 1,944 100 2,505 50 7,050 2,001 2,511 N/A 23,740 10,244 9,561 2,792 33,301 13,035

11.0% 11.0% 11.4% 9.3% 9.6% 9.4% 8.3% 7.5% 13.8% 14.0% 10.3% N/A 6.2% 4.7% 9.5% N/A 11.7% 10.6% 9.9% 2.3% 10.6% 10.7% 11.4% 10.1% 10.8% 10.6%

12.5% 12.7% 11.6% 11.4% 12.0% 12.0% 12.0% 11.7% 14.2% 14.3% 10.1% N/A 8.8% 8.1% 11.9% 0.9% 12.8% 11.7% 13.0% 17.3% 11.9% 12.5% 12.8% 12.0% 12.1% 12.4%

7.9% 8.2% 7.5% 6.0% 6.2% 6.6% 5.7% 5.5% 8.1% 7.2% 7.6% N/A 4.5% 2.8% 14.3% 3.1% 9.6% 5.6% 14.9% N/A 7.5% 7.0% 10.6% 7.3% 8.2% 7.0%

$79.58 $88.42 $54.89 $72.85 $67.38 $76.28 $77.10 $83.22 $58.98 $63.23 $42.17 N/A $45.42 N/A $41.16 N/A $39.60 $46.19 $42.39 $70.46 $58.79 $74.10 $40.14 $46.62 $51.94 $65.62

$60.31 $64.46 $49.12 $64.26 $62.30 $61.17 $53.84 $55.48 $54.44 $60.11 $39.85 N/A $38.91 N/A $37.01 N/A $38.76 $43.75 $44.30 $61.00 $50.61 $62.09 $39.88 $45.66 $46.61 $56.19

$72.57 $75.36 $44.12 $84.19 $80.53 $83.02 $58.34 $60.65 $59.20 $67.25 $41.08 N/A $35.09 N/A $39.15 N/A $34.43 $38.98 $46.34 N/A $54.37 $73.17 $38.21 $47.69 $49.57 $67.71

(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded.

The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright 2011 Studley

Av e.

Chairman & CEO Mitchell S. Steir msteir@studley.com (212) 326-1000 Corporate Research Contact Steve Coutts - SVP, National Research scoutts@studley.com (212) 326-8610
Ca na lS t.

7
12 St.

Ves ey /

10

Fu lto nS t.

STUDLEY OFFICE MARKET AND SPACEDATA REPORT

2n d

30t h

5th Av e.

399 Park Avenue New York, NY 10022 (212) 326-1000

5
39t h

Av e.

7t h

NEW YORK CONTACTS

42n d

54t h 50t h