STREET SMARTS

MHPNYC.COM

Q4 2016

WINTER IN MANHATTAN

Forecasters of all stripes should have learned a lesson in humility from 2016, a year where there were electoral upsets in the U.S. presidential election, the Brexit vote as well as championships for perennial underdogs the MLB Chicago Cubs and the NBA Cleveland Cavaliers.

2017 begins propelled by a strong economic tailwind. Final economic data for 2016 shows consumer confidence, with expectations for the economy hitting a 13-year high, and the Conference Board’s index hitting 113.7, up 19.6% from a year ago. The BEA’s final revision for Third Quarter 2016 GDP showed the national economy growing at 3.5%, and real gross domestic income gaining 4.8%. Corporate profits were up 2.1% for the year, to $2.1 trillion.

The stock market has surged since Election Day on the premise that tax cuts, deregulation, expanded defense spending, and greater infrastructure investment will spur economic growth in the year ahead. Such fiscal

stimulus will likely push GDP up, temporarily, within the constraints of a tight labor market. However, the bond market is already warning of a heightened risk of inflation. The Fed nudged interest rates up in December, and is widely expected to continue tightening monetary policy in the year ahead.

As has been the case since 2010, New York’s economy has been performing even better than the nation’s, whether measured by gross product, employment gains, or inflation. City private sector employment grew by 1.9% through October (the latest available data), smartly above the 1.6% for the U.S. The city’s job growth was broad, with only financial services slipping (by 2,200 jobs) during the year, though the securities sector posted a modest gain of 400 jobs. Professional and business services jobs were up by 11,400; the information sector rose by 2,700. Even manufacturing eked out a gain of 200 jobs. The citywide unemployment rate dropped to 5.4%, down from 5.9% a year ago.

US ECONOMY IN ZONE OF MODERATE GROWTHWITH SOME FISCAL STIMULUS IN SHORT RUN

8%

6%

4%

2%

0%

-2%

-4%

-6%

PERCENT CHANGE FROM PREVIOUS YEAR

GDP NON-FARM EMPLOYMENT

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

FORECAST GDP FORECASTJOBS

NEW YORK CITY OUTPACING U.S.ON MOST ECONOMIC MEASURES

Data as of December 2016; Source: NYC Comptroller’s Office

0 1 2 3 4 5 6

GCP/GDP Growth

Jobs Growth

Inflation Rate

Unemployment Rate

ANNUAL PERCENTAGE CHANGE

■ U.S.

■ NEW YORK CITY

YIELD CURVE SHOULD TREND UPWARD IN 2017WITH GREATEST MOVE IN INTERMEDIATE MATURITIES

Sources: 12/8/16 rates from Federal Reserve H.15 Report;Forecast by Hugh Kelly Real Estate Economics

TREASURY YIELD TO MATURITY, IN PERCENT DEC. 8, 2016 DEC. 2017 (FORECAST)

0.0

0.5 1.0 1.5 2.0 2.5

3.0

3.5 4.0 4.5

1 Month 3 Month 6 Month One Year Two Year Three Year

Five Year Seven Year

Ten Year 20 Year 30 Year

CUMULATIVE TOTAL RETURNS FOR NEW YORK OFFICES50 PERCENT HIGHER THAN US NORM SINCE 2000

Index based on NCREIF annual total returns, as of 3Q 2016

600

500

400

300

200

100

02000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

INDEX: 2000 VALUE = 100 NEW YORK U.S.

Changes in Federal policy under the new Trump administration are expected to alter the outlook only slightly in 2017. Tax cuts and deregulation are generally viewed as favoring New York, with its large number of high-income households and as a center of corporate finance. Trade restrictions, however, are detrimental to a city like New York which thrives on the flow of goods and capital. Demographically, immigration has been the main driver of New York’s population growth and the New York City Comptroller’s office has stated that “without immigrants, the NYC economy will face stagnation and decline.”

Office building transaction volume in Manhattan slowed during 2016, reflecting an overall trend in the U.S. This is not necessarily bad news, since it is reflecting a discipline in the marketplace that was sadly lacking a decade ago. Prices per square foot actually rose by 9% year-over-year in Manhattan by the end of 2016, a steeper gain than the U.S. as a whole, which posted a six percent increase in office

pricing. The average cap rate in Manhattan dropped to 3.9%, which seems irreducibly low and reflects the high quality of the assets traded. For the nation, the mean cap rate in the Fourth Quarter of 2016 was 250 basis points higher, at 6.4%. Institutional investors, cross-border investors, and private equity alike see Manhattan as a magnet for capital as well as for talent, and the cumulative total return for office

NEW DELIVERIES ELEVATE CLASS A VACANCYDURING LEASE-UP PHASE; OLDER SPACE PROVIDESOPTIONALITY FOR TENANTS

Source: CoStar

PERCENT VACANCY 12

10

8

6

4

2

0

DOWNTOWN MIDTOWN MIDTOWN SOUTH

CLASS A CLASS B CLASS C TOTAL MARKET

AFTER A YEAR OF ROUGH RENTAL PARITY, CLASS AAND B OFFICE RENTS DIVERGED IN SECOND HALF OF 2016

Source: CoStar

$75.00

$70.00

$65.00

$60.00

$55.00

$50.00

$45.002014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4

RENT PER SQUARE FOOT CLASS A CLASS B

MANHATTAN OFFICE VACANCY AT 8.1%REFLECTING 1.2 MILLION SF OF NET ABSORPTION

IN 4TH QUARTER

OVERALL MARKET VACANCY, IN PERCENT

ANNUAL DATA QUARTERLY DATA

1997

2001

2012

q3

2003

q3

2006

q3

2007

q3

2004

q3

2005

q3

12

10

8

6

4

2

0

2008

q3

2010

q3

2009

q3

2011

q3

2013

q3

2014

q3

2015

q3

Source: CoStar

REFLECTS MOST RECENT REVISIONS TO THE DATA SERIES AS OF 12/31/16

2016

q3

HUDSON YARDS DEVELOPMENT PROMISESGREATEST INVENTORY EXPANSION SINCE MID-80S

20181614121086420

MILLIONS OF SQUARE FEET (COMPLETIONS)

19821984

19861988

19901992

19941996

19982000

20022004

20062008

20102012

20142016

2018

Source: CoStar

SUMMARY MARKET STATISTICSby Office Building Class

Source: CoStar Year-end 2016 Manhattan Office Report

■ CLASS A ■ CLASS B ■ CLASS C

CLASS A: 466 buildings 328 million sq. ft. total Vacancy 9.0% Average Rent $72.34 psf

CLASS B: 1,374 buildings 160 million sq. ft. total Vacancy 7.4% Average Rent $61.81 psf

CLASS C: 1,926 buildings 71 million sq. ft. total Vacancy 5.6% Average Rent $54.73 psf

Continued on back

MHP has bought and

sold over $12 billion

worth of commercial

real estate. MHP

currently owns, leases

and manages over

5 million square feet

of first-class office

space, and features

a 50 person strong

tenant rep practice

specializing in office,

retail and sales. As

a full service firm,

with in-house leasing,

sales, management,

and project/buildout

capabilities, MHP has

garnered a reputation

in New York for

quickly transforming

properties into

profitable investments.

This 45 year track

record has enabled

MHP to establish long

term partnerships

with leading financial

institutions, pension

funds, and other

commercial lenders.

On a global scale,

MHP provides its

clients with access to

opportunities in over

200 major markets as

the New York affiliate

of TCN Worldwide.

To subscribe to our quarterly STREET SMARTS newsletter, contact: Edna Lassiter, elassiter@mhpnyc.com / 212.944.4747 or your exclusive MHP broker

Editorial Development: Hugh F. Kelly. Production: Alexander Scott Graphics Copyright © 2017 MHP Real Estate Services LLC. All rights reserved.

Continued from page 3

buildings here has been 150 percent of the national average yield since 2000.

Even with the new generation of office properties coming to market, Manhattan vacancy remained strong at 8.1%, thanks to net absorption of 1,213,780 square feet in the Fourth Quarter. Major sports leagues, including Major League Baseball and the National Hockey League were among the top tenants signing leases during the final three months of 2016. This is a great reminder that sports and entertainment are a major export industry for New York City, bringing substantial income into the city and having a significant multiplier effect across other sectors. Law firms such as Milbank Tweed are inking deals in Hudson Yards, and WeWork continues to contract for space which it then rents out to the ‘gig economy.’

One change on the horizon worth noting is the volume of completions now scheduled for 2018 and 2019. Manhattan has not seen two consecutive years of deliveries in excess of four million square feet since the mid-1980s. Tenants took advantage of the very narrow spread in Class A and Class B rents from early 2015 to mid-2016. But now the market is seeing the historical premium for Class A offices reassert itself. When roughly ten million square feet of new space comes to market in 2018-2019, though, we may see that rent gap narrow once again.

MANHATTAN OFFICE PRICING TRENDSCONTINUE TO OUTPERFORM OTHER CITIES

Source: Real Capital Analytics, as of Fourth Quarter 2016

1,000

900

800

700

600

500

400

300

200Q1 ‘13 Q1 ‘14 Q1 ‘15 Q1 ‘16

MANHATTANUNITED STATES

MANHATTANUNITED STATES

AVE PRICE $ PER SF

7.5%

7.0%

6.5%

6.0%

5.5%

5.0%

4.5%

4.0%

Q1 ‘13 Q1 ‘14 Q1 ‘15 Q1 ‘16

AVG CAP RATE (YIELD)