New York City is home to a number of major hospitals and healthcare systems, serving the city’s 8.5 million people. New York City’s medical real estate is unique, in that medical office building inventory is limited in Manhattan, with a majority of locations in Queens and Brooklyn. In Manhattan, significant activity occurs in traditional office buildings, where healthcare tenants can repurpose buildings and create a “building within a building” to suit their needs.

Traditional Office Building ActivityAmong major office-using industry sectors, healthcare has the highest employment in the city. The sector accounts for more than 700,000 jobs, and has grown 21.9% since the third quarter of 2010. Healthcare has added the most jobs over the past decade, driven primarily by a steep rise in the ambulatory services subsector. This growing trend is resulting in large, off-campus activity from major healthcare providers, as patients are demanding more accessibility. Many of these new leases are separate from their main New York City headquarters and occurring in traditional office submarkets, as New York Presbyterian recently took 480,000 square feet along Park Avenue and Columbia Doctors took 118,000 square feet on the Avenue of the Americas.

The building at 222 East 41st Street was previously home to law firm Jones Day, but is

now fully occupied by NYU Langone. This is an example of a healthcare tenant repurposing a building, which in this case, previously catered to legal tenants. Another unique example is Mount Sinai’s lease at 55 Hudson Yards. The Hudson Yards development is known for state-of-the-art office, residential, and retail buildings. Mount Sinai’s lease in a Class A, new construction office building, providing a healthcare center that caters exclusively to Hudson Yards residents, is a situation that is unique to Manhattan.

Healthcare tenants in Manhattan average the longest term of all major office-using sectors. With high overhead and operating costs,

healthcare tenants have a need to be at the same location for a long period. However, recent deals with healthcare tenants have had the lowest level of concessions among the major sectors, averaging more than $15.00/SF less than FIRE (finance, insurance, and real estate) tenants have.

Financial InstabilityNew York City hospitals have been hit particularly hard by the broader sector’s struggles. Since 2000, 19 hospitals in the city have either closed or overhauled how they operate. Closures have hit Downtown the hardest, and the market was already the least accessible for healthcare patients.

Mergers & Acquisitions

Summary

Overall M&A 2017 deals for the tri-state area is projected slightly less than 2016 M&A deals for Hospitals and Medical Physician Groups. One major hospital merger was announced in 2017, JFK Health merged with Hackensack Meridian Health. After the merger, Hackensack Meridian Health will have a network of 15 hospitals and increase its already large ambulatory network. For medical physician groups, the majority of M&A deals were acquired by other Physician Medical Groups. Northwell Health acquired 2 physician practices in 2017.

2017 MERGERS & ACQUISITIONS

Hospitals Medical Physician Groups

0 0 0 0

1

0 0 0 0 0

3

2

1

0

1 1

0

1 1

2

0

0.5

1

1.5

2

2.5

3

3.5

DEAL

S

2016 2017

1

0

2

3

2 2

0

2

3

2

0

33

2

1

0

2

1

0

1 1

2

0 00

0.5

1

1.5

2

2.5

3

3.5

DEAL

S

2016 VS 2017 MERGERS & ACQUSITIONS

Source – Irving Levin Associates, Newmark Knight FrankData represents mergers and acquisitions deals for the Tri-State area (New York, New Jersey and Connecticut). Data for 2017 is up to October 31st 2017

DEAL ANALYSISLEASES SIGNED GREATER THAN 5K SF AND 5 YEARS

11.0

10.6

9.9

9.2

8

9

10

11

12

Healthcare Legal FIRE TAMI

YEAR

S

WOR

K AM

OUNT

($/S

F)

$70.51$61.71 $59.45

$54.30

6.0

6.2

6.4

6.6

6.8

7.0

7.2

7.4

7.6

7.8

$0

$10

$20

$30

$40

$50

$60

$70

$80

FIRE TAMI Legal Healthcare

FREE

REN

T (M

ONTH

S)

Average Free Rent2015-20172015-2017

Mount Sinai Beth Israel is closing and a much smaller facility is opening, which will further reduce the number of healthcare options available to Downtown residents. This type of consolidation has become common as some hospitals downsize their footprint, close certain locations, and open smaller off-campus locations.

In 2010, St. Vincent’s Hospital in Greenwich Village, the last Roman Catholic general hospital in the city, closed for good. Rudin Management purchased the building and demolished it, giving way to luxury apartment buildings.

NYC Medical Office Building ActivityWhile Manhattan’s healthcare tenants are increasingly finding space in traditional office buildings, there are still a number of specific medical office buildings across the city, including the outer boroughs. Asking rents in these buildings have been steadily increasing since the trough, trending in line with the rest of the country. Vacancy has seen an uptick in recent years, due to several factors. As healthcare tenants lease space in traditional office buildings, space in medical office buildings continues to sit vacant. Additionally, with the wave of mergers and acquisitions

occurring in the industry, smaller offices are rightsizing their footprints and joining with larger healthcare systems that have established locations. Gross activity in MOBs

was 44.7% lower last year than in its previous peak in 2008, while vacancy has increased 2.5% since 2014.

National Capital Markets ActivityCapital markets activity for MOBs has increased steadily since 2010, far outpacing the peak from the previous cycle. Cap rate compression is occurring, but cap rates remain favorable for investors compared to other asset classes. In conjunction, pricing continues to increase.

Private investors have been the most active in the MOB market over the past two years, and have been net sellers in both 2016 and 2017 year-to-date. REITs and cross-border investors have been net buyers in both years. Healthcare Trust of America (HTA), a public REIT, has been the most active buyer this year, with $2.4 billion in volume over 81 properties. They are followed by Physicians Realty Trust with $1.1 billion of volume, and CBRE Global Investors with $572 million. Duke Realty, a public REIT, has been the largest seller this year, with $2.5 billion in dispositions over 63 properties.

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

2006Q3

2007Q3

2008Q3

2009Q3

2010Q3

2011Q3

2012Q3

2013Q3

2014Q3

2015Q3

2016Q3

2017Q3

MEDICAL OFFICE BUILDING ASKING RENTAL RATEQUARTERLY, 2006 Q3 TO 2017 Q3; ALL NYC

Gross Rent

MEDICAL OFFICE MARKET KEY STATISTICSANNUAL PERFORMANCE; ALL NYC

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017YTD

Gross Absorption Q3 Vacancy

MEDICAL OFFICE BUILDING INVESTMENT BY QUARTERTRAILING FOUR QUARTER TOTALS; NATIONAL

$-

$2

$4

$6

$8

$10

$12

$14

$16

2006Q3

2007Q3

2008Q3

2009Q3

2010Q3

2011Q3

2012Q3

2013Q3

2014Q3

2015Q3

2016Q3

2017Q3

BILL

ION

S

Tenant Address SF

New York Presbyterian 237 Park Avenue 479,016

Mount Sinai 150 East 42nd Street 448,819

NYU Langone 222 East 41st Street 389,522

Columbia Doctors Hospital 1290 Avenue of the Americas 118,000

Memorial Sloan Kettering 650 Madison Avenue 100,788

Beth Israel Comprehensive Cancer Center 111 Eighth Avenue 98,825

Hospital for Special Surgery 777 Third Avenue 98,600

NYU Langone 360 Park Avenue South 67,500

Mount Sinai 55 Hudson Yards 25,000

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Todd Perman, CCIMExecutive Managing Director Global Healthcare Services404.806.2510 tperman@ngkf.com

Garth Hogan Executive Managing Director Global Healthcare Services949.608.2115 ghogan@ngkf.com

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Josh GosinDirector212.372.2076 jgosin@ngkf.com

Jordan GosinAssociate Director212.372.2289 jordan.gosin@ngkf.com

Ira RovitzSenior Managing Director 212.372.2469 irovitz@ngkf.com