Street Smarts Q3 2016

STREET SMARTS Q3 2016

MHPNYC.COM THE NATIONAL ECONOMIC expansion which began in the prior three quarters, growing at 3.2% and when the Global Financial Crisis hit bottom in the U.S. 3.1% in the third and fourth quarters of 2015, and at is now one of the longest-running upcycles in American 4% in the first three months of 2016. Meanwhile, local history. September 2016 marked the 87th consecutive inflation was a mere 0.9% at mid-2016, lower even month of employment gains – with almost 15 million than the 1.1% for the U.S. as a whole. jobs added since the end of 2009. Low interest rates have helped spur the recovery, and rates will likely MANHATTAN OFFICE PRICING TRENDS remain low through the end of 2017, even with the Fed CONTINUE TO OUTPERFORM OTHER CITIES now signaling a mild inclination to tighten monetary AVE CAP RATE (YIELD) AVE CAP RATE (YIELD)

MANHATTAN MANHATTAN policy. The U.S. economy remains a safe haven for UNITED STATES UNITED STATES the world’s capital, the primary reason why long-term 1,000 7.5% 900 7.0% rates are still below two percent. The Brexit vote in 800 6.5% 700 6.0% the United Kingdom only reinforces the advantage of 600 5.5% U.S. financial markets and U.S. real estate investment. 500 5.0% 400 4.5% 300 4.0% 200 US ECONOMY FLUCTUATING Q1 ‘13 Q1 ‘14 Q1 ‘15 Q1 ‘16 Q1 ‘13 Q1 ‘14 Q1 ‘15 Q1 ‘16 IN ZONE OF MODERATE GROWTH Source: Real Capital Analytics, as of Third Quarter 2016

PERCENT CHANGE FROM PREVIOUS YEAR 8% 6% As a result, Manhattan office building pricing has 4% been soaring above the commercial property markets 2% in other large U.S. cities. Since early 2013, the price 0% 2011 1990 1993 1996 1999 2002 2005 2008 2014 2017 -2% per square foot for Manhattan office buildings is -4% up approximately 50 percent, and cap rates have -6% descended more than 100 basis points as investors GDP NON-FARM EMPLOYMENT FORECAST GDP FORECASTJOBS aggressively seek to own New York assets. This is not a short-run phenomenon. Cumulative total returns THE NEW YORK CITY ECONOMY has not only kept (a measure of income plus appreciation) stood at a pace with the national rebound; it has exceeded the national index value of 318.8 over the fifteen years U.S. measures throughout this decade. The most recent 2000 – 2015, according to data from the National data, through the 2nd Quarter of 2016, shows New Council of Real Estate Investment Fiduciaries (NCREIF). York outpacing the U.S. Gross City Product growth For New York, the index has risen to 484.7 for the this year 1.7%, versus the national 1.2% rate in the same period, a 52 percent return premium for local second quarter. The City however, had stunning results office assets.

CUMULATIVE TOTAL RETURNS FOR NEW YORK OFFICES NEW YORK CITY OUTPACING U.S. 52 PERCENT HIGHER THAN US NORM SINCE 2000 ON MOST ECONOMIC MEASURES

INDEX: 2000 VALUE = 100 NEW YORK U.S. ANNUAL PERCENTAGE CHANGE 600

GCP/GDP Growth 500

Jobs Growth 400 ■ U.S. ■ NEW YORK CITY 300 Inflation Rate 200 Unemployment Rate 100

0 1 2 3 4 5 6 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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

Index based on NCREIF annual total returns, as of 2Q 2016 Manhattan is not only the nation’s (and the world’s) MANHATTAN OFFICE VACANCY AT 8.2% AT CENTER largest office market. It is also the most complex. OF 2013 – 2016 RANGE AS MARKET ACCOMMODATES Cross-currents of supply and demand, international NEW CONSTRUCTION SMOOTHLY and domestic capital flows, and developments in

OVERALL MARKET VACANCY, IN PERCENT REFLECTS MOST RECENT REVISIONS TO THE DATA SERIES fields as diverse as energy, technology, trade, and 12 AS OF 9/30/16 immigration impact New York’s relative desirability 10 8 as a business locale, and as forces affecting real 6 4 estate performance. Most of these are long-game ANNUAL DATA QUARTERLY DATA 2 factors, and yet there can be short-run shifts worth 0

1997 2001 paying attention to. 2003 q3 2004 q3 2006 q3 2007 q3 2008 q3 2009 q3 2010 q3 2011 q3 2014 q3 2015 q3 2005 q3 2012 q3 2013 q3 2016 q3

Source: CoStar

AFTER A YEAR OF ROUGH RENTAL PARITY, CLASS A AND B OFFICE RENTS DIVERGED IN THIRD QUARTER in the World Trade Center market and at Hudson Yards, have provided over 11 million square feet of RENT PER SQUARE FOOT CLASS A CLASS B $75.00 space to the market, at construction costs that require $70.00 rents well above those of older properties in order $65.00 to recoup developers’ investments. Submarkets with $60.00 older inventory are well-leased, with the downtown $55.00 Insurance District and City Hall area at 95 percent $50.00

$45.00 Continued on back 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3

Source: CoStar

EVEN WITH TWO MEGA-PROJECTS UNDERWAY, We have been pointing out, for instance, the unusual DEVELOPMENT IS MODEST BY compression of rents that led to virtual pricing parity HISTORICAL STANDARDS for tenants over the past few quarters. That was hardly MILLIONS OF SQUARE FEET (COMPLETIONS) 20 a sustainable situation, and in the Third Quarter we 18 16 found the logjam breaking. Quoted rents for Class 14 12 A offices leapt an extraordinary 14.5 percent from 10 8 their Second Quarter average, to $71.23. Class B 6 4 2 rents merely edged upward by 0.1 percent, restoring 0 a more normal gap between these market segments. 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: CoStar Recent deliveries of new Class A buildings, mostly

NEW DELIVERIES ELEVATE CLASS A VACANCY SUMMARY MARKET STATISTICS DURING LEASE-UP PHASE; OLDER SPACE PROVIDES by Office Building Class OPTIONALITY FOR TENANTS

PERCENT VACANCY 12 CLASS A: 466 buildings 328 million sq. ft. total 10 Vacancy 9.3% Average Rent $71.23 psf 8 6 CLASS B: 1,379 buildings 159 million sq. ft. total Vacancy 7.3% Average Rent $61.85 psf 4 2 CLASS C: 1,923 buildings 71 million sq. ft. total 0 Vacancy 5.3% Average Rent $55.12 psf CLASS A CLASS B CLASS C TOTAL MARKET

■ CLASS A ■ CLASS B ■ CLASS C DOWNTOWN MIDTOWN MIDTOWN SOUTH

Source: CoStar Source: CoStar Third Quarter 2016 Manhattan Office Report Continued from page 3 occupancy or better, as are the Tribeca and for the Third Quarter was about 600,000 MHP has bought Gramercy Park neighborhoods. Top rents, square feet in the red as a result. But, and sold over $12 however, are in areas such as Penn Plaza/ compared with the same quarter last year, billion worth of commercial Garment District, the Plaza District, and the total volume of office space for rent real estate. Times Square, which have a mix of older was virtually unchanged. The rise in rents, MHP currently owns, leases and properties and new construction. therefore, continued in response to New manages over 5 York’s sustained growth in employment. million square feet As new office towers open for occupancy, of first-class office space, and features there has been a significant amount of Both new and renewed leases spanned a a 50 person strong lateral movement of tenancy. That prompts range of key industries and submarkets tenant rep practice specializing in some statistical volatility within market in the Third Quarter, illustrating both the office, retail measures. For instance, year-to-date positive breadth and depth of Manhattan’s business and sales. As a full service firm, absorption was registered in the higher-end base. That diversity is a major source of with in-house Class A category while Class B had negative New York’s strength, a factor that cuts across leasing, sales, management, and absorption. The overall absorption figure short-term movements in market statistics. project/buildout capabilities, MHP has garnered a reputation in New York for quickly transforming properties TOP LEASES OF THIRD QUARTER 2016 into profitable investments. This 44 year Tenant Submarket Building Sq. Ft. track record has enabled MHP to Coach* Penn Plaza/Garment 10 Hudson Yards 694,000 establish long term partnerships with Random House* Columbus Circle Random House Tower 631,025 leading financial institutions, pension Dentons* Times Square 1221 Avenue of 190,576 funds, and other the Americas commercial lenders. On a global scale, Omnicom Group* Grand Central The News Building 179,303 MHP provides its clients with access WeWork Plaza District Tower 49 159,306 to opportunities in over 200 major Zurich American Insurance World Trade 4 World Trade Center 131,856 markets as the New W.W. Norton & Co.* Times Square 500 Fifth Avenue 109,735 York affiliate of TCN Worldwide. 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.

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