Manhattan Off ce Market 3 RD QUARTER 2016 REPORT A NEWS RECAP AND MARKET SNAPSHOT Pictured: 200 Park Avenue South Looking Ahead Tax Plan Proposal Could Potentially Help Leveraged RE Firms An emerging tax plan proposed by Republican candidate Donald Trump could reportedly benef t debt-laden real estate companies by coupling 2-policies — letting businesses deduct interest and allowing expensing, or immediate write-offs, for investments in equipment and buildings. The proposal would “provide negative tax rates for investments f nanced with debt, creating incentives for companies to pursue projects that wouldn’t make sense economically without the tax benef ts.” Currently tax law requires businesses to spread the deductions over multiple years, but under Trump’s proposed plan “a business would be able to generate signif cant losses in the f rst year of an investment and then generate ongoing interest deductions. Those losses could be carried forward and used to offset future income.” It is reportedly the intended goal of the tax plan, which is still a work-in-progress, to “tie expensing to job creation and new investment and not, for example, purchases of existing leveraged real estate portfolios,” according to reported comments by a Trump advisor. Interest Deductions: The pairing of an end to interest deductions and expensing is typically done to prevent giving an extra subsidy according to some sources, however it is anticipated that the taking away of interest deductibility would make it hard for businesses to capitalize; and with that in mind Trump had proposed an unspecif ed “reasonable cap” in an earlier proposed tax plan. Expensing: The policy has reportedly grown in popularity with Republicans over the past few years as a way to stimulate business spending and spur economic growth. Some sources further point out that expensing would “increase long-run gross domestic product by more than 5% and is eff cient because it only rewards new capital and reduces the marginal effective tax rate on new investment to zero.” The yet to be off cially announced proposed tax plan has sparked mixed response, critics anticipating that the proposal would basically convert the tax code into a direct spending program for anything declared as a debt-f nanced business investment unless sharp limits are established on interest deductions. In addition, it has been cautioned that expensing could result in potential revenue loss, while projecting that the “speeding up of deductions for capital investment would not have much benef t in an era when low interest rates mean deductions today and deductions in the future have similar value.” Concerns have also arisen that the plan to allow immediate write-offs and interest deductions would give large corporations generating high prof ts an advantage over start-up companies whose prof ts are signif cantly lower. In contrast, proponents of the proposal say that interest deductions can be appropriately combined with expensing, pointing out that “many recipients of interest, such as banks, would pay taxes on the interest income they receive from the businesses taking deductions.” It is also anticipated that the plan would encourage investment in plants and equipment. Sources: http://www.wsj.com/articles/donald-trumps-tax-ideas-could-boost-debt-laden-real-estate-f rms-1471542621 P.PP2.2 2 Looking Ahead (cont’d) NYC Comptroller’s Off ce: NYC Quarterly Economic Update 2Q16 The report released in August revealed a continued positive growth of the city’s economy during the 2nd quarter, but the pace of growth represented the slowest rate since the 4th quarter of 2013 despite continuing to outpace the nation’s economic growth. The 1.7% estimated annual rate of the city’s real gross city product (GCP) for the 2nd quarter, exceeded the nation’s 1.2% rate by nearly 40% as private domestic investment fell to its lowest level in 7-years amidst uncertainty over the Federal Reserve’s interest rate hikes and low energy prices. Signs continue to surface of a weakening of the city’s economy as commercial leasing activity slows and venture capital investment remains on a downward trend. 2nd Quarter 2016 - Key Economic Indicators NYC Compared with U.S. for 1Q16 and 2Q15 2Q16 1Q16 2Q15 Gross City Product (GCP)* NYC 1.7% 4.0% 2.2% Gross Domestic Product (GDP)* U.S. 1.2% 0.8% 2.6% NYC 1.4% 4.1% 2.5% Payroll-Jobs Growth* U.S. 1.3% 1.9% 1.9% NYC 0.5% 3.1% 9.1% Personal Income Taxes (PIT) Withheld, Growth** U.S. -2.0% 6.0% 5.2% NYC 0.9% 0.7% 0.0% Inf ation Rate* U.S. 1.1% 1.1% 0.0% NYC 5.2% 5.4% 5.7% Unemployment Rate*** U.S. 4.9% 4.9% 5.4% *Seasonally adjusted annual rate **Not seasonally adjusted *** Seasonally adjusted • Venture Capital Investment (VC) – Totaled about $1.4 billion in the 2nd quarter in the New York metro area, representing a 40.3% decrease year-over-year from the nearly $2.4 billion total last year. On the national level, VC investment fell at a more moderate rate of 12.2% to $15.3 billion in the 2nd quarter, while Silicon Valley incurred a 9.6% decrease to $8.2 billion. VC investment in the New York metro area was spread across 124 deals, a nearly 16% decline of the total 147 deals year-over-over. Deal volume on the national level and in Silicon Valley slid more sharply by 22% and 20% respectively as the total number of deals fell to 961 and 311 in the 2nd quarter. • Hospitality Market – The city’s hospitality market fell in April 2016, hotel occupancy in Manhattan averaged 89%, a 2.5% decline over the year-over-year rate of 91.3%. Average daily room rates lowered at a comparatively faster pace, declining 5.2% to $271 versus last April’s average rate of $286. Sources: http://comptroller.nyc.gov/wp-content/uploads/documents/QEU_2Q16_8_10_16.pdf P.PP3.3 3 In the News: Fast-Growing WeWork Facing Financial Setbacks The co-working space provider that was founded in 2010 and has become a prominent player in New York City’s real estate market and reportedly boasts a roster of 64,000 users in 83 buildings throughout 22 cities across 7-countries appears to be experiencing some growing pains. Estimated to be worth $16 billion, WeWork’s revenue projections of $2.9 billion for 2018 reported last year were signif cantly higher than the $75 million expected in 2014. However, this year projections were more conservative as the 6-year startup slashed its prof t forecast for 2016 by 78%, cut revenue estimates by 14%, and disclosed a 63% surge in projected negative cash f ow according to some mid-July reports. Delayed building openings, “higher spending on construction and lower-than-expected remodeling subsidies from landlords, particularly outside the U.S.” attributed to the lower projections. WeWork has reportedly relied on a good percentage of space build-out costs being shouldered by the landlord, and has had to adapt in some markets where the concept of tenant improvements (TI) and rent concession doesn’t exist. Estimates of capital expenditure by landlords were reportedly reduced by 21% for 2016, from the company’s original expectation of 75%. Typical spending for build-outs ranges $200-$250 a foot on usable square feet depending on the market according to reported information from a company spokesperson earlier this year — a f gure that is about triple the roughly $70 per square foot TI allowance a landlord provides in Manhattan. Some of the co-working space operator’s Lower Manhattan facilities reportedly have a higher level of vacancy than is typical at other WeWork facilities. According to reported comments by a company in May, locations open at least 6-months generally have a 98% occupancy. Tenant incentives for new members at 4-Lower Manhattan locations — 25 Broadway, an 86,000-square-foot facility leased in 2013, 85 Broad Street, a 240,000-square-foot facility leased In 2015, as well as 200 Broadway and 110 Wall Street were being offering for a period of time such as a 50% discount for the f rst 3-months and free upgrades to larger spaces plus a 25% discount for the f rst 6-months. Although average occupancy and revenues per member of 99% and $630 per month were projected, dropping to 85% and $599 per month in an economic downturn, some industry sources point out that the company’s balance sheet may be “vulnerable to f uctuations in the venture capital markets to tech,” as the start-ups become unable to afford the more expensive off ce space at WeWork’s facilities if the f ow of venture capital cash disappears. We Work hopes its move to further diversify by leasing space to professionals outside the technology sector and the taking on of larger tenants will help diminish risk. Sources: http://www.bloomberg.com/news/articles/2016-07-15/wework-cut-forecasts-as-staff-told-to-change-spending-culture P.PP4.4 4 WeWork (cont’d) Other recent bumps in the road have surfaced with the company’s WeLive co-living platform. Build-out costs have reportedly been higher than expected, prompting the 6-year-old startup to put on hold projected plans for the opening of 14 WeLive locations by the end of 2016. Currently there are (2) co-living locations in operation — Crystal City in Washington, D.C. owned by Vornado Realty Trust, and Rudin Management’s 110 Wall Street in Manhattan’s Financial District. While a 3rd WeLive location is reportedly planned, moving forward the concept will primarily be put into new developments.