“Sooner or later the market turns. The shift

to tenant’s favor is becoming more apparent

heading into 2017."

Joe Genovesi, Executive Managing Director

"Some market observers are hoping that the

new Administration’s “pro-growth” agenda will

jumpstart activity. Any reforms that see the

light of day will not change the supply-demand

equation in Manhattan overnight."

Erik Schmall, Executive Managing Director

Savills Studley Report New York City office sector Q4 2016

Savills Studley Research New York City

SUMMARYMarket Highlights

AVAILABILITY RATES RISE

Manhattan’s overall availability rate jumped by 50 basis points from 10.6% to 11.1% as rates rose in all areas. Midtown’s Class A availability rate increased by 20 basis points to 12.5%. Downtown's Class A rate rose by 80 basis points to 15.2%. Finally, Midtown South’s overall availability rate spiked by 90 basis points to 9.6%.

RENTS DECLINE

Overall asking rent fell by 2.6% to $72.96 spurred largely by a 4.4% decline in Midtown's Class A sector to $84.92 - its lowest mark since early 2015

LEASING ACTIVITY ENDS ON A SLOW NOTE

Leasing activity dropped from 7.6 msf in the third quarter to 6.8 msf. Midtown once again captured most of the larger transactions. Deal volume in Midtown South was steady, exceeding 1.0 msf for the seventh quarter in a row. SALES DOWN SHARPLY FROM A YEAR AGOSales this year have struggled to keep pace with the 2015 tally — as of November year-to-date office sales totaled $20.4 billion, a 19.7% decrease from the $24.5 billion in the first 11 months of 2015.

02

Savills Studley Report | New York City

Turn to Tenants' Favor Becoming More Apparent

Good News

Tenants can take heart from some good news heading into 2017. Manhattan’s office market is expected to continue its gradual tilt to tenant’s favor next year. This shift was tough to discern in 2015, but became more apparent in 2016, and will be crystal clear in 2017. Demand has been contracting for years, but it has been more of a slow leak than the rapid deflation that occurred in 2008 and 2009. The core of the market - 20,000 and 30,000-sf users - has been shedding space in bits and pieces. Most tenants will continue to take a deliberate approach to space-use decisions next year, curbing leasing volume and velocity.

Fake News

Companies need to drown out the noise and ignore real estate’s own version of fake news – the threat that demand is as strong as ever and rent will always rise. Success stories, such as Hudson Yards and WeWork, overshadow the very anemic level of activity since year-end 2014. Despite some accounts, leasing is down on multiple counts. During 2016, tenants leased 29.5 msf, up from 28.4 msf in 2015 but well below the 35.0 msf in 2014. The number of leases signed has also fallen from an average of just over 400 per month (since 2000) to less than 300 per month in the last 12 months. Investment sales have also declined in 2016. There seems to be some convergence between the office, retail and residential markets, all are reporting decelerating leasing and sales velocity. Time on market for Class A direct office space in Midtown is approaching an average of 11 months.

Leasing activity has not fallen off a cliff, but it could benefit from a stimulus. Some market observers are hoping that the new Administration’s “pro-growth” agenda will spark activity. The broader U.S. economy could in fact expand at a pace that surprises to the upside in 2017 and 2018, but this is contingent on a flotilla of “ifs” – if a major infrastructure bill is passed, if corporate tax reform can be agreed upon and if banking regulations are clawed back. Even if all of these measures are enacted, it will take several quarters for their full impact to materialize.

Any reforms that come to fruition will not fundamentally change the supply-demand equation in Manhattan. The fourth quarter brought a preview of the sharper jump in availability that is in store for 2017 and

Source: Bureau of Labor Statistics

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

1.00

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

$77.82$77.09

$72.93$72.01

$60.72$60.22

$0

$20

$40

$60

$80

4Q163Q162Q161Q164Q15

Overall Rental Rate Trends

Midtown Midtown South Downtown

($/sf)

Asking Rent Trends (All Classes)

11.4%

10.5%9.6%

8.6%

11.3%

11.5%

0%

5%

10%

15%

4Q163Q162Q161Q164Q15

(%) Overall Availability Rate Trends

Midtown Midtown South Downtown

Availability Rate Trends (All Classes)

savills-studley.com/research 03

Q4 2016

Tenant Sq Feet Address Market AreaBlackRock 850,000 50 Hudson Yards Hudson YardsMajor League Baseball Prprts 380,983 1271 Avenue of the Americas Columbus CircleHogan Lovells US LLP 206,720 390 Madison Ave Grand CentralNational Basketball Association* 195,563 645 Fifth Ave Plaza IIPoint72 Asset Management 175,000 55 Hudson Yards Hudson YardsNational Hockey League 160,000 One Manhattan West Hudson YardsWeWork 122,057 2 Herald Sq Penn Plaza/Times Square SouthRSM 95,000 4 Times Sq Times SquareZocDoc* 85,000 568 Broadway SohoIntercept Pharmaceuticals, Inc. 84,888 55 Hudson Yards Hudson YardsSum of Top Leases 2,355,211 Sum of 4th Quarter Leasing Activity 6.8 MSF

2018. Availability jumped by 90 basis points in Midtown South and by 80 basis points Downtown. Manhattan's Class B and C availability rate increased by 60 basis points to 9.5%, its highest point in more than two years. This availability does not yet include 4.8 msf of known future moveouts, and 6.4 msf of unleased space in buildings underway. Finally, sublet supply has been rising in recent months. Total available sublet space increased from 8.4 msf as of July to 10.4 msf in December.

Ugly News

Class A effective rent is likely to decline again in 2017 as landlords push concessions even higher into record territory. However, next year’s rental rate decreases will not be sharp enough to provide relief to tenants who negotiated their lease in the last two cycles. Many tenants who signed leases between 2001 and 2003 secured quality space for less than $60.00/sf in Midtown and $40.00/sf Downtown. During the last cycle they had an extended window of opportunity (2008 to 2010) to find space in the mid-$60.00/sf range in Midtown and sub-$50.00/sf range Downtown. The current supply of Class A space with a rent of $50.00/sf or lower is negligible. Midtown’s Class A sector has a few quality space options priced in the $70.00/sf range, but the average is in the mid $80.00/sf range.

Construction Costs in Record Territory

Relocating tenants face an added drag on their bottom line – soaring construction costs. The average cost for the buildout of a standard installation has spiked from under $100 five years ago, to more than $130/sf currently. High-end installations are sometimes running above $200/sf. Landlords are pushing improvement allowances higher. Triple-digit tenant improvement allowances or new building installations are becoming more prevalent. Owners can avoid nearly all of these costs, as well as the lost income associated with a lengthy lease-up period, by signing renewals with their existing tenants. We anticipate landlords will become far more aggressive in engaging existing tenants in early renewal conversations. It is also worth noting that if inflation does start to escalate, escalations tied to arcane indexes such as porters’ wages will become relevant again.

Tenant Base Continues to Shrink

Manhattan’s landlords are competing with one another for a shrinking tenant base. An office location in the city is still the dominant choice of most companies.

Tenants could find quality space with rent well below $30.00/sf in Northern New Jersey, but most prefer to remain in Manhattan. While they have retained their taste for New York City, most firms are reducing the size of their lease obligations. Office employment has increased by over 150,000 in New York City since 2009, but the amount of space occupied in the same period has actually decreased by approximately 10.0 msf.

Companies will not abandon this adherence to space efficiency. Manhattan’s vibrant tech and creative sector provided a counterbalance to some of the contraction among banks and law firms, but tech companies have been tightening their belts in 2016 as well. Hospitals, schools and coworking facilities filled some of the gap in demand among traditional space occupiers. Some of the space was repurposed as retail but there is a limit to how many curated food courts the market can digest.

Looking Forward

Availability is rising even in a market with positive job growth. While is there is no expectation of a recession in the next several quarters, uncertainty is running at very high levels. Barring a negative shock to the economy we can be certain about a couple of things – effective rent for Class A space in Midtown and Lower Manhattan peaked in 2016. Next year is likely to bring a slight moderation in rent, as landlords stretch to get tenants to commit in a market with a diminished sense of urgency. In the short term, the best opportunities will continue to be at opposite ends of the extreme. Tenants who are among the first to commit to new trophy buildings in Hudson Yards, Midtown East or Downtown stand to gain record concessions. Conversely, commodity space along Sixth Avenue and Third Avenue will have to offer the sharpest discounts in rent. Landlords without the capital to reposition their assets in these buildings will be among the first to make a big adjustment to their rent expectations.

Availability Rate Comparison Rental Rate Comparison

Major Transactions

*Renewal

$93.47$89.51

$86.77$82.56$81.73$80.55$80.43

$77.82$77.74$77.08

$74.83$73.76$72.96$72.93

$69.47$66.70

$63.49$63.44$62.85

$60.72$58.45$57.52$56.99

$32.78

$0 $15 $30 $45 $60 $75 $90

Plaza IHudson Yards

Plaza IISoho

Hudson SquareGreenwich Village

Times SquareMidtown

Columbus CircleTribeca

Union SquareGrand Central

ManhattanMidtown South

Park Ave S./Madison SquareChelsea

Penn Plaza/TSQ SouthFlatiron

WTC/Brookfield PlaceDowntown

East Side/UNFinancial District

City HallU.S. Index

($/sf)

1.4%5.0%

6.9%7.0%7.1%

9.0%9.3%9.3%9.4%9.6%9.6%10.1%10.6%10.9%11.1%11.3%11.3%11.4%

13.0%14.1%14.1%

17.1%18.4%18.5%

0% 5% 10% 15% 20%

East Side/UNCity Hall

Greenwich VillagePark Ave S./Madison Square

TibecaFlatiron

Columbus CircleUnion Square

ChelseaMidtown SouthTimes Square

Penn Plaza/TSQ SouthFinancial District

SohoManhattanDowntown

Plaza IIMidtown

Grand CentralPlaza I

WTC/Brookfield PlaceU.S. Index

Hudson SquareHudson Yards

(%)

Savills Studley Report | New York City

04

Map Submarket Total

SF(1000's)

ThisQuarter

ThisQuarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

YearAgo

ThisQuarter

%Change

fromLast Qtr.

YearAgo

Columbus Circle 28,877 639 2,677 -2.1% 2,926 9.3% -0.2% 10.2% $77.74 5.6% $81.20Columbus Circle - Class A 19,972 567 2,060 -2.4% 2,125 10.3% -0.3% 10.6% $80.68 6.0% $87.24Times Square 35,647 320 3,439 5.0% 3,207 9.6% 0.5% 9.0% $80.43 -0.3% $73.79Times Square - Class A 30,932 211 2,745 6.9% 2,367 8.9% 0.6% 7.7% $86.41 0.8% $79.93Hudson Yards 5,297 1,370 981 4.3% 634 18.5% 0.8% 12.3% $89.51 -2.5% $82.59Hudson Yards - Class A 3,875 1,370 732 -6.9% 542 18.9% -1.4% 14.0% $97.45 0.7% $85.00Penn Plaza/Times Square South 55,205 740 5,563 5.6% 5,237 10.1% 0.5% 9.5% $63.49 -4.7% $60.46Penn Plaza/Times Square South - Class A 8,401 91 802 12.4% 744 9.5% 1.1% 8.9% $79.75 -15.1% $67.95Plaza I 29,819 322 4,200 0.0% 2,749 14.1% 0.0% 9.3% $93.47 -14.2% $131.38Plaza I - Class A 22,960 249 3,716 3.9% 2,411 16.2% 0.6% 10.5% $96.42 -15.1% $139.02Plaza II 43,995 640 4,992 0.0% 4,387 11.3% 0.0% 10.0% $86.77 -3.9% $89.71Plaza II - Class A 38,909 613 4,472 1.1% 3,846 11.5% 0.1% 9.9% $89.24 -3.4% $93.45Grand Central 72,399 1,168 9,398 2.1% 9,424 13.0% 0.3% 13.0% $73.76 -2.4% $71.11Grand Central - Class A 40,461 707 6,273 0.2% 6,313 15.5% 0.0% 15.6% $79.66 -2.8% $75.10East Side/UN 3,266 0 45 -36.7% 121 1.4% -0.8% 3.7% $58.45 -7.5% $55.39East Side/UN - Class A 783 0 1 0.0% 74 0.2% 0.2% 9.4% $53.00 N/A N/A

9 Chelsea 16,116 146 1,508 37.3% 902 9.4% 2.5% 5.6% $66.70 2.8% $52.52Chelsea - Class A 330 0 155 68.4% 0 46.9% 19.1% 0.0% $108.81 11.3% N/A

10 Flatiron 13,063 337 1,176 15.2% 1,035 9.0% 1.2% 8.0% $63.44 -2.1% $64.77Flatiron - Class A 858 0 0 0.0% 0 0.0% 0.0% 0.0% N/A N/A N/A

11 Park Ave South/Madison Square 23,641 346 1,658 -10.4% 1,820 7.0% -0.8% 7.7% $69.47 2.4% $65.98Park Ave South/Madison Sq. - Class A 3,462 0 40 0.0% 46 1.1% 0.0% 1.3% N/A N/A $105.00Union Square 7,419 56 691 0.8% 930 9.3% 0.1% 12.7% $74.83 0.0% $72.92Union Square - Class A N/A 0 N/A N/A N/A N/A N/A N/A N/A N/A N/AGreenwich Village 6,931 35 480 5.4% 360 6.9% 0.4% 5.4% $80.55 -12.9% $85.66Greenwich Village - Class A 835 15 78 -16.4% 66 9.4% -1.8% 8.0% N/A N/A $165.86

14 Hudson Square 10,134 134 1,860 13.9% 1,539 18.4% 2.2% 15.3% $81.73 8.0% $72.87Hudson Square - Class A 1,439 34 0 0.0% 0 0.0% 0.0% 0.0% N/A N/A N/A

15 Soho 3,972 119 432 36.9% 360 10.9% 2.9% 9.4% $82.56 6.3% $82.40Soho - Class A 154 0 0 0.0% 0 47.9% 47.9% 47.9% $78.00 N/A N/A

16 Tribeca 5,966 0 423 9.2% 370 7.1% 0.6% 6.5% $77.08 2.0% $73.90Tribeca - Class A 765 0 0 0.0% 0 0.0% 0.0% 0.0% N/A N/A N/A

17 City Hall 4,061 21 205 21.0% 75 5.0% 0.9% 1.8% $56.99 -0.7% $45.83City Hall - Class A N/A 0 NA NA N/A N/A N/A N/A N/A N/A N/A

18 WTC/Brookfield Place 31,523 85 4,448 7.4% 4,902 14.1% 1.0% 15.5% $62.85 -0.9% $65.96WTC/Brookfield Place - Class A 18,911 11 2,958 6.3% 3,477 15.6% 0.9% 18.4% $67.68 -1.6% $71.56

19 Financial District 50,381 311 5,351 7.2% 5,177 10.6% 0.7% 10.4% $57.52 2.0% $55.89Financial District- Class A 22,285 129 3,404 5.3% 3,256 0.0% 0.8% 0.0% $61.54 1.0% $59.52

1-8 Midtown 274,505 5,199 31,294 2.0% 28,685 11.4% 0.2% 10.5% $77.82 -4.4% $77.09Midtown - Class A 166,294 3,808 20,802 1.8% 18,422 12.5% 0.2% 11.1% $84.92 -4.4% $87.22Midtown South Total 81,276 1,173 7,804 10.6% 6,946 9.6% 0.9% 8.6% $72.93 3.2% $69.87Midtown South - Class A 7,078 49 346 54.0% 179 4.9% 1.7% 2.5% $98.45 -13.5% $140.56Downtown Total 91,931 417 10,426 7.6% 10,523 11.3% 0.8% 11.5% $60.72 -0.5% $60.22Downtown Total - Class A 41,960 140 6,362 5.8% 6,733 15.2% 0.8% 16.2% $64.12 -0.8% $64.49Manhattan Total 447,712 6,789 49,524 4.4% 46,154 11.1% 0.5% 10.4% $72.96 -2.6% $71.71Manhattan Total - Class A 215,332 3,997 27,510 3.1% 25,334 12.8% 0.4% 11.8% $79.50 -3.5% $80.97

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@SavillsStudleywww.savills-studley.com

Please contact us for further information

*Rent and availability rates in submarkets with a limited amount of inventory are sometimes subject to large fluctuations.(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.

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

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

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Corporate Research ContactKeith DeCoster - Director, U.S. Real Estate Analytics