STREET SMARTS

MHPNYC.COM

Q3 2016

AUTUMN IN NEW YORK

THE NATIONAL ECONOMIC expansion which began when the Global Financial Crisis hit bottom in the U.S. is now one of the longest-running upcycles in American history. September 2016 marked the 87th consecutive month of employment gains – with almost 15 million jobs added since the end of 2009. Low interest rates have helped spur the recovery, and rates will likely remain low through the end of 2017, even with the Fed now signaling a mild inclination to tighten monetary policy. The U.S. economy remains a safe haven for the world’s capital, the primary reason why long-term rates are still below two percent. The Brexit vote in the United Kingdom only reinforces the advantage of U.S. financial markets and U.S. real estate investment.

THE NEW YORK CITY ECONOMY has not only kept pace with the national rebound; it has exceeded the U.S. measures throughout this decade. The most recent data, through the 2nd Quarter of 2016, shows New York outpacing the U.S. Gross City Product growth this year 1.7%, versus the national 1.2% rate in the second quarter. The City however, had stunning results

in the prior three quarters, growing at 3.2% and 3.1% in the third and fourth quarters of 2015, and at 4% in the first three months of 2016. Meanwhile, local inflation was a mere 0.9% at mid-2016, lower even than the 1.1% for the U.S. as a whole.

As a result, Manhattan office building pricing has been soaring above the commercial property markets in other large U.S. cities. Since early 2013, the price per square foot for Manhattan office buildings is up approximately 50 percent, and cap rates have descended more than 100 basis points as investors aggressively seek to own New York assets. This is not a short-run phenomenon. Cumulative total returns (a measure of income plus appreciation) stood at a national index value of 318.8 over the fifteen years 2000 – 2015, according to data from the National Council of Real Estate Investment Fiduciaries (NCREIF). For New York, the index has risen to 484.7 for the same period, a 52 percent return premium for local office assets.

US ECONOMY FLUCTUATINGIN ZONE OF MODERATE GROWTH

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 Second Quarter 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

MANHATTAN OFFICE PRICING TRENDSCONTINUE TO OUTPERFORM OTHER CITIES

Source: Real Capital Analytics, as of Third Quarter 2016

1,000

900

800

700

600

500

400

300

200Q1 ‘13 Q1 ‘14 Q1 ‘15 Q1 ‘16

MANHATTANUNITED STATES

MANHATTANUNITED STATES

AVE CAP RATE (YIELD)

7.5%

7.0%

6.5%

6.0%

5.5%

5.0%

4.5%

4.0%

Q1 ‘13 Q1 ‘14 Q1 ‘15 Q1 ‘16

AVE CAP RATE (YIELD)

CUMULATIVE TOTAL RETURNS FOR NEW YORK OFFICES52 PERCENT HIGHER THAN US NORM SINCE 2000

Index based on NCREIF annual total returns, as of 2Q 2016

600

500

400

300

200

100

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

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

Manhattan is not only the nation’s (and the world’s) largest office market. It is also the most complex. Cross-currents of supply and demand, international and domestic capital flows, and developments in fields as diverse as energy, technology, trade, and immigration impact New York’s relative desirability as a business locale, and as forces affecting real estate performance. Most of these are long-game factors, and yet there can be short-run shifts worth paying attention to.

We have been pointing out, for instance, the unusual compression of rents that led to virtual pricing parity for tenants over the past few quarters. That was hardly a sustainable situation, and in the Third Quarter we found the logjam breaking. Quoted rents for Class A offices leapt an extraordinary 14.5 percent from their Second Quarter average, to $71.23. Class B rents merely edged upward by 0.1 percent, restoring a more normal gap between these market segments.

Recent deliveries of new Class A buildings, mostly

in the World Trade Center market and at Hudson Yards, have provided over 11 million square feet of space to the market, at construction costs that require rents well above those of older properties in order to recoup developers’ investments. Submarkets with older inventory are well-leased, with the downtown Insurance District and City Hall area at 95 percent

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 THIRD QUARTER

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

RENT PER SQUARE FOOT CLASS A CLASS B

MANHATTAN OFFICE VACANCY AT 8.2% AT CENTEROF 2013 – 2016 RANGE AS MARKET ACCOMMODATES

NEW CONSTRUCTION SMOOTHLY

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 9/30/16

2016

q3

EVEN WITH TWO MEGA-PROJECTS UNDERWAY,DEVELOPMENT IS MODEST BY

HISTORICAL STANDARDS

20181614121086420

MILLIONS OF SQUARE FEET (COMPLETIONS)

19821984

19861988

19901992

19941996

19982000

20022004

20062008

20102012

20142016

Source: CoStar

SUMMARY MARKET STATISTICSby Office Building Class

Source: CoStar Third Quarter 2016 Manhattan Office Report

■ CLASS A ■ CLASS B ■ CLASS C

CLASS A: 466 buildings 328 million sq. ft. total Vacancy 9.3% Average Rent $71.23 psf

CLASS B: 1,379 buildings 159 million sq. ft. total Vacancy 7.3% Average Rent $61.85 psf

CLASS C: 1,923 buildings 71 million sq. ft. total Vacancy 5.3% Average Rent $55.12 psf

Continued on back

MHP has bought and sold over $12

billion worth of commercialreal 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 44 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.

TOP LEASES OF THIRD QUARTER 2016

Tenant Submarket Building Sq. Ft.

Coach* Penn Plaza/Garment 10 Hudson Yards 694,000

Random House* Columbus Circle Random House Tower 631,025

Dentons* Times Square 1221 Avenue of 190,576 the Americas

Omnicom Group* Grand Central The News Building 179,303

WeWork Plaza District Tower 49 159,306

Zurich American Insurance World Trade 4 World Trade Center 131,856

W.W. Norton & Co.* Times Square 500 Fifth Avenue 109,735

The Michael J. Fox Penn Plaza/Garment 111 West 33rd St 86,492 Foundation

Market Axxess Holdings, Inc. Penn Plaza/Garment 55 Hudson Yards 83,000

ICAP Times Square 4 Times Square 82,442

TOTAL FOR TOP LEASES 2,347,735

*Lease renewal Source: CoStar, Inc.

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 © 2016 MHP Real Estate Services LLC. All rights reserved.

Continued from page 3

occupancy or better, as are the Tribeca and Gramercy Park neighborhoods. Top rents, however, are in areas such as Penn Plaza/Garment District, the Plaza District, and Times Square, which have a mix of older properties and new construction.

As new office towers open for occupancy, there has been a significant amount of lateral movement of tenancy. That prompts some statistical volatility within market measures. For instance, year-to-date positive absorption was registered in the higher-end Class A category while Class B had negative absorption. The overall absorption figure

for the Third Quarter was about 600,000 square feet in the red as a result. But, compared with the same quarter last year, the total volume of office space for rent was virtually unchanged. The rise in rents, therefore, continued in response to New York’s sustained growth in employment.

Both new and renewed leases spanned a range of key industries and submarkets in the Third Quarter, illustrating both the breadth and depth of Manhattan’s business base. That diversity is a major source of New York’s strength, a factor that cuts across short-term movements in market statistics.