“Flight to quality. Downtown, the Jersey

Waterfront and Long Island City are no longer

stalking horses. Tenants are taking advantage

of the lower rents and strong incentives in

these locations." Jeffrey Peck, Executive

Managing Director

“This has been a year of amazing change.

The flow of firms to Hudson Yards

accelerated, intensifying the hollowing

out of office buildings in Midtown's core."

Bill Montana, Senior Managing Director

Savills Studley Report New York City office sector Q4 2015

Savills Studley Research New York City

SUMMARYMarket Highlights

CLASS A AVAILABILITY RATE RISES IN MIDTOWN

As expected, Manhattan's Class A availability rate reversed directions, rising by 0.6 pp to 12.3%. Midtown’s Class A rate rose by 1.2 pp to 11.8%, offsetting decreases of 0.7 pp to 15.9% Downtown and 2.4 pp to 1.8% in Midtown South. Manhattan's Class A rate is likely to register additional increases in 2016 as more big blocks with 2017 occupancy impact availability.

CLASS A RENTS FALL

Class A asking rent in Midtown fell by 3.5% to $87.44. Downtown's Class A sector

posted a similar 2.1% quarter-on-quarter decrease, with the rate falling to $64.33 to end 2015.

LEASING ACTIVITY GROWS

Fourth quarter leasing totaled 7.1 msf, jumping from the third-quarter total of 6.6 msf and just below the market’s long-term annual average. Even as more tenants are priced out of Midtown South, deal volume was sustained during the quarter. Activity Downtown declined during the quarter, falling by 12.7%, but leasing in Midtown jumped to 4.5 msf as Hudson Yards completed another round of transactions.

02

Savills Studley Report | New York City

The Westside and WeWork A Disruptive Year in Manhattan’s Office MarketFor quite some time now, there has been no higher standard for office space in Manhattan than buildings in Midtown’s core – from Broadway to Lexington Avenue. These buildings, within walking distance of Penn Station and Grand Central, command by far the highest rents and loftiest sales prices in the city. Retail, hospitality and residential properties in the heart of Midtown also sell for top dollar. As 2015 began, a 10,923-sf penthouse at One-57 was purchased for $100 million. In February, Chinese insurance agency Anbang paid $1.95 billion ($1.38 million/unit) for the Waldorf Astoria. Finally in May, Jeff Sutton and General Growth Properties added to their Fifth Avenue portfolio, acquiring the Crown Building for $1.78 billion ( $4,551/sf).

Midtown real estate remains one of the most prized assets in the world, but 2015 could be seen as a tipping point for Midtown’s office leasing market. Midtown is at risk of being knocked off its pedestal as a “must-have” location for office tenants. The rapid pre-leasing of space in Hudson Yards in 2015 was truly remarkable; some have characterized KKR’s purchase of the top 10 floors at 30 Hudson Yards and abandonment of the top floors at 9 W. 57th Steet as a “culture change.” At the very least, KKR’s move is further proof that the Plaza District is losing some of its aura as the exclusive choice for private equity firms.

Such changes have been years in the making. Hudson Yards’ recent success is the culmination of several years of extensive relocation activity among tenants. Demand is dispersing across Manhattan and the metro region as tenants tap into options all over the island, and a few move to Northern New Jersey or the Outer Boroughs. As the center of gravity in the office sector is pulled in multiple directions, a long list of buildings in Midtown’s core must rethink their leasing strategy and reposition accordingly.

New Industry Concentrations, New CitiesChanging industry preferences and needs have fueled much of the movement. Midtown South and Lower Manhattan each witnessed pivotal early sales and leases that set the stage for the more extensive industry relocation activity that followed. Google’s purchase of 111 Eighth Avenue in 2010 and its prolific expansion since then provided much of the impetus for Midtown South’s emergence as the nucleus of Manhattan’s tech and creative sector. Tenants unable

Source: Bureau of Labor Statistics

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40Millions

NYC Off. Emp. NYC (% Annual Change) U.S.(% Annual Change)

Office-Using Employment Trends

$78.22$70.12

$70.31$65.72 $60.64$52.27

$0

$20

$40

$60

$80

4Q153Q152Q151Q154Q143Q142Q141Q144Q13

Overall Rental Rate Trends

Midtown Midtown South Downtown

($/sf)

Asking Rent Trends (All Classes)

10.9%

11.8%

8.4%

11.2%

11.1%

14.9%

0%

5%

10%

15%

20%

4Q153Q152Q151Q154Q143Q142Q141Q144Q13

(%) Overall Availability Rate Trends

Midtown Midtown South Downtown

Availability Rate Trends (All Classes)

savills-studley.com/research 03

Q4 2015

Tenant Sq Feet Address Market AreaWells Fargo+ 500,000 30 Hudson Yards Westside IIKKR+ 343,000 30 Hudson Yards Westside IIMorgan Stanley** 260,829 1633 Broadway Westside IIGoogle 250,000 Pier 57 Midtown South IBoston Consulting Group 193,295 10 Hudson Yards Westside IITeachers' Retirement System** 191,138 55 Water St Downtown IThe Associated Press 172,352 200 Liberty St Downtown IIndeed, Inc. 125,000 1120 Ave of the Americas Westside IGensler 119,414 1700 Broadway Westside IIWeWork 109,631 300 Park Ave Grand Central ISum of Top Leases 2,264,659 Sum of 4th Quarter Leasing Activity 7.1 MSF

to find or afford space in Silicon Alley have looked to Penn Plaza, Lower Manhattan, Brooklyn and Queens. Few have moved to Midtown. A resurgent Lower Manhattan has become the new heart of the publishing and advertising sector. Condé Nast’s 1.0-msf lease at One World Trade Center in 2011 was well out in front of an influx of media, publishing and advertising firms. The hollowing-out of Midtown buildings intensified in 2013 and 2014 as law firms and retailers flocked to Brookfield Place, and has continued with deals by The Associated Press and SNY.

Hudson Yards’ success has been less industry-specific. Although the development was once considered too far afield, a broad cross-section of Midtown’s traditional tenants – law firms, consultants, retailers and private equity companies – have flocked to Hudson Yards. Amazing amenities and architecture, access to the High Line, new retail and residential product, fantastic views and the extension of the 7 subway line – in short, the emergence of a new city – have helped businesses overcome hesitancy about the Far Westside. The first three buildings underway at Hudson Yards are nearly 75.0% pre-leased.

WeWork on Every CornerThe geographical diffusion of mega-tenants across Manhattan has been matched by a fragmentation in its tenant base – much of the growth across the market has come from start-ups and small firms. WeWork has emerged as the front runner in the crowded shared workspace arena. It leased almost 700,000 sf in 2015 and now has nearly 25 outposts spread across New York City. In addition to filling a lot of space, WeWork saves some landlords from the headache of chopping up space into small units, marketing it to micro-tenants and managing their needs. Other landlords are leasing lower floors to retail tenants, schools and medical users. In a different market (San Francisco) or a different time (2007) landlords would have recaptured some of this space. Today, more realize that diversification of their tenant base will help them hedge against contracting demand for office space. The shrinking demand for office space was particularly apparent in 2015. Tenants leased 28.2 msf in 2015, well below the 36.0 msf leased in 2014. Manhattan’s Class A sector probably peaked a quarter ago. The Class A availability rate in Midtown rose by 1.2 pp to 11.8% in the fourth quarter.

A Street Too FarClass A tenants can be selective. They have

clearly preferred to be in the heart of Hudson Yards or Brookfield Place. Some see the other side of the street or avenue as being a bit too remote. Landlords leasing space in the developments clustered around Hudson Yards and in Lower Manhattan (Manhattan West, Two World Trade Center and 28 Liberty Street) are banking on another wave of leasing. So far, however, pre-leasing in these “edge properties” has been tentative and the pool of 250,000-sf-plus tenants seeking space is quite shallow.

While Class A tenants are moving by choice, Class B and C tenants are being displaced. Tenants who signed their last lease 10 years ago or more, in Class A-/B buildings with rents of $40.00/sf or less, have very few options. Asking rents in Penn Plaza/Garment District have pushed well above $50.00/sf, and properties on William Street and Water Street have rents approaching $50.00/sf. Smaller tenants may be able to find some sublet spaces for less than $40.00/sf but

they will have to compromise on quality. Crossing the Rivers

In addition to the movement within Manhattan, more tenants are joining the flow of companies to Brooklyn, Queens and Northern New Jersey that began a couple of years ago. Generous landlord incentives coupled with extensive tax credits can push effective rents below $20.00/sf for Class A space in Jersey City and Hoboken. While Northern New Jersey has ample existing buildings that can accommodate corporate tenants, the number of such properties in the Outer Boroughs is limited largely to Downtown Brooklyn. On the other hand, Brooklyn and Long Island City have some of the largest and most innovative adaptive reuse projects on the East Coast such as the former Jehovah’s Witness Center, Navy Yards and Industry City. These buildings suit the needs of its burgeoning industries ranging from maker/3-D printing to video production and social media.

Availability Rate Comparison Rental Rate Comparison

Major Transactions

+ Sale *Renewal ** Renewal&Expansion

$96.11

$92.75

$85.46

$78.22

$74.18

$72.91

$72.34

$70.66

$70.31

$69.00

$67.74

$60.64

$59.89

$56.57

$32.40

$0 $20 $40 $60 $80 $100

Plaza I

Westside I

Plaza II

Midtown

Midtown South II

New York City

Grand Central I

Downtown II

Midtown South

Midtown South I

Westside II

Downtown

Downtown I

Grand Central II

US Index

($/sf)

2.6%

7.3%

7.6%

8.2%

8.4%

9.0%

9.1%

10.6%

10.9%

11.1%

11.3%

11.8%

13.1%

15.0%

17.0%

0% 5% 10% 15% 20%

Downtown II

Midtown South I

Plaza II

Grand Central II

Midtown South

Plaza I

Westside II

New York City

Midtown

Downtown

Midtown South II

Westside I

Downtown I

Grand Central I

US Index

(%)

Availability Rate Comparison

Savills Studley Report | New York City

04

Map Submarket Total

SF(1000's)

Last12 Months

ThisQuarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

YearAgo

ThisQuarter

%Change

fromLast Qtr.

YearAgo

Westside I 59,468 2,806 7,036 0.4% 6,953 11.8% 0.0% 11.6% $92.75 -4.6% $88.12Westside I - Class A 50,158 2,179 6,211 0.4% 6,199 12.4% 0.0% 12.4% $97.22 -4.5% $90.62Westside II 92,483 7,988 8,454 -4.1% 8,549 9.1% -0.4% 9.3% $67.74 1.1% $67.60Westside II - Class A 30,105 2,677 2,057 -12.2% 2,399 6.8% -0.9% 8.1% $87.86 4.0% $92.22Plaza I 23,080 1,476 2,074 19.6% 2,230 9.0% 1.5% 9.5% $96.11 0.5% $95.49Plaza I - Class A 17,057 1,186 1,782 26.7% 1,828 10.4% 2.2% 10.7% $98.96 -1.3% $98.17Plaza II 19,184 1,372 1,462 3.8% 1,577 7.6% 0.3% 8.2% $85.46 8.7% $84.77Plaza II - Class A 15,542 1,121 1,069 4.5% 1,171 6.9% 0.3% 7.5% $94.64 9.7% $91.62Grand Central I 62,100 4,853 9,330 27.1% 9,372 15.0% 3.2% 14.9% $72.34 -3.8% $72.70Grand Central I - Class A 40,773 3,224 7,046 30.0% 7,211 17.3% 4.0% 17.5% $74.69 -5.3% $76.37Grand Central II 14,218 724 1,170 14.6% 824 8.2% 1.0% 5.7% $56.57 0.0% $44.78Grand Central II - Class A N/A N/A N/A N/A N/A NA N/A N/A N/A N/A N/AMidtown South I 48,470 2,762 3,518 -4.3% 4,546 7.3% -0.3% 9.2% $69.00 -5.5% $69.11Midtown South I - Class A 5,626 437 144 -54.7% 324 2.6% -3.1% 5.8% $140.56 19.8% $92.00Midtown South II 18,439 1,525 2,080 -11.9% 2,224 11.3% -1.5% 12.1% $74.18 0.1% $72.62Midtown South II - Class A 2,164 46 0 -100.0% 100 0.0% -0.6% 4.6% N/A N/A $102.43Downtown I 76,477 4,076 9,999 -7.1% 10,120 13.1% -1.0% 13.1% $59.89 1.3% $56.03Downtown I - Class A 37,969 2,346 6,684 -4.7% 6,339 17.6% -0.9% 16.9% $64.33 -2.2% $62.63Downtown II 18,164 577 477 -15.5% 767 2.6% -0.5% 4.5% $70.66 -2.2% $55.52Downtown II - Class A 4,335 18 49 58.5% 41 1.1% 0.4% 1.6% N/A N/A N/AMidtown Total 270,533 19,220 29,526 8.1% 29,506 10.9% 0.8% 10.9% $78.22 -0.8% $74.84Midtown Total - Class A 153,634 10,387 18,166 10.9% 18,809 11.8% 1.2% 12.3% $87.44 -3.5% $86.16Midtown South Total 66,909 4,286 5,598 -7.3% 6,769 8.4% -0.7% 10.0% $70.31 -3.7% $70.65Midtown South Total - Class A 7,790 484 144 -56.5% 424 1.8% -2.4% 5.4% $91.00 0.0% $94.47Downtown Total 94,641 4,653 10,476 -7.5% 10,886 11.1% -0.9% 11.5% $60.64 1.7% $55.67Downtown Total - Class A 42,304 2,364 6,733 -4.4% 6,379 15.9% -0.7% 16.0% $64.33 -2.1% $62.68Manhattan Total 432,083 28,159 45,601 2.0% 47,161 10.6% 0.2% 10.9% $72.91 -0.9% $68.25Manhattan Total - Class A 203,729 13,234 25,042 5.4% 25,612 12.3% 0.6% 12.7% $82.01 -1.6% $76.72

LeasingActivity

AvailableSF

AvailabilityRate

Asking RentsPer SF

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2

3

4

5

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9-10

1-10

6

7

8

9

10

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@SavillsStudleywww.savills-studley.com

Please contact us for further information

(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded.

The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2016 Savills Studley

Savills Studley399 Park Avenue11th FloorNew York, NY 10022(212) 326-1000

Chairman & CEOMitchell S. Steir msteir@savills-studley.com(212) 326-1000

Corporate Research ContactsSteve Coutts - SVP, National Researchscoutts@savills-studley.com

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Vesey / Fulton St.

Canal St.

12 St.

30th

5th A

ve.

39th

50th

54th

2nd A

ve.

7th A

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42nd

Keith DeCoster - Director, U.S. Real Estate Analyticskdecoster@savills-studley.com