Lower Manhattan ...10 years later

Executive Summary

As we acknowledge the 10-year anniversary of the events of September 11, Lower Manhattan is poised for its next great transformation. After a decade of market conditions defined by erratic shifts in vacancy rates, asking rents and the global economy, a confluence of five key drivers will position the Downtown market to once again capture demand and thrive as a center of business and community.

State of the Market Compared to 2001The current dynamics of the stressed Downtown real estate market is more a byproduct of the downturn in the global economy than a long-term impact of the events of September 11, 2001. Despite the more than 10 million square feet of Class A inventory loss associated with September 11, the reported second quarter 2011 vacancy rate of 9.2 percent is significantly higher than the 3.2 percent vacancy rate in 2001. Further to this point, there are 13 million fewer square feet occupied in Downtown than in 2001 and the asking rental rate is reported to be 7.3 percent less, at $41.66 per square foot, versus $44.93 per square foot rate in 2001.

Future State of the MarketIn the near-term, new product at the World Trade Center and large blocks of space scheduled to return to the market will result in an excess of supply throughout the Downtown market. The surplus inventory of space coupled with the sluggish economy will drive an increase in the Class A vacancy rate projected to exceed 15%. While asking rents are likely to plateau in response to the growing supply, a decline is not expected due to the caliber of available product.

Despite the initial impact of an expanding inventory and moderate demand, the forecast for the Downtown market is bullish. By 2013, the vacancy rate is expected to commence a steady decline, the market will experience positive absorption and the gap between Downtown rental rates as compared to the Midtown market will close.

A decade of rising and falling indicators

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Five key market drivers

1 Abundant inventory of affordable new and modern space.

2 Migration of a highly-educated, creative workforce to urban centers.

3 Tenant base diversification in Downtown beyond financial services.

4 Improved transportation infrastructure.

5 Government incentives and quality of life improvements.

Lower Manhattan…

green technology. For the aforementioned tenant benefits, Jones Lang LaSalle’s proprietary analysis estimates that the rental rate premiums for new construction can be as high as 50.0 percent for similarly-located space in Manhattan. While the abundance of inventory and resulting high vacancy rate will keep competitive pressure on asking rents Downtown in the near-term, the change in age and quality of building stock will propel the market as a competitor to Midtown alternatives in a manner not seen in recent decades.

The addition of an extraordinary volume of new space in Lower Manhattan could deflate demand for second-and third-generation space in the short-term. In the long-term, we see this as a healthy opportunity for Downtown to diversify and to lure and grow new companies which would have otherwise been priced out of New York City.

Abundant inventory of affordable new and modern space

As compared to other national and international office markets Manhattan has a significantly older building stock with an average built date of 1950. The age of building stock was especially conspicuous Downtown in 2001. Only two buildings totaling 2.1 million square feet in the Downtown market had been constructed in the previous decade. In contrast, 16 buildings totaling 10.2 million square feet had been constructed in Midtown during the same time period. The limited inventory of new construction contributed to the divergence in pricing between Downtown and Midtown. The discounted rental rate in Downtown as compared to Midtown had more than doubled from 15.0 percent in 1990 to 32.0 percent by 2001. At the peak of the market in 2007/2008 the rental rate variance exceeded 40.0 percent. Fast forward ten years and the Downtown market is becoming the site of one of the largest expansions of office inventory in the country. Due to the combination of new construction and the demolition or hotel/residential conversion of nearly seven million square feet of older building stock since 2001, Downtown will have a far younger inventory in five years that will compete directly with product in Midtown and the New Jersey Waterfront.

• By 2016, 15.4 million square feet (17.0 percent of the Class A Downtown office stock) will have been constructed since 2001, including 7 World Trade Center, 200 West Street (Goldman Sachs), and the World Trade Center site.

• New buildings will offer large floor plates and the latest communication and green technologies and are expected to achieve Gold certification under the Leadership in Energy and Environmental Design (LEED) by the U.S. Green Building Council.

Although Hudson Yards on Midtown’s West Side and other potential Midtown sites could add additional new inventory, the Downtown market will likely have a competitive pricing advantage.

In the years that followed the events of September 11, the Downtown market has been the beneficiary of a spike in new construction that will ultimately drive strong tenant demand. Key market trends indicate that the majority of tenants prefer new construction for improved infrastructure, space efficiency, employee recruiting and, increasingly,

Manhattan has older stock than comparable markets Percent of stock older than 1960

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Downtown discount to MidtownKey Market Driver

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World Financial Center hits market

7 World Trade Center hits market

... 10 years later

Migration of a highly-educated,creative workforce to urban centers

Recent trends in workforce migration indicate that New York City is reemerging as an epicenter for educated and talented professionals. The creative atmosphere and convenience and openness of the urban environment in New York City is driving interest from a broader spectrum of professionals and the diverse industry segments that support them. Downtown, in particular, is attracting and retaining top human capital in two distinct categories: decision makers and potential workforce, both of which have expanded in Downtown over the past 20 years.

Decision makersAs an example, Downtown Manhattan and the adjacent Midtown South neighborhoods of TriBeCa, SoHo, Hudson Square and Greenwich Village have become preferred locations for industry leaders and decision makers to both live and work. The percentage of college educated adults in the above neighborhoods rose from 43.6 percent in 1990 to 53.5 percent in 2010 as compared to 24.8 percent nationally. An astonishing 20.0 percent of the population has advanced degrees compared to 9.0 percent nationally. As industry leaders from both the creative industries and finance sector relocate to the Downtown area, wealth has increased at rates well above the national average. Since 2000, per capita income has increased 42.0 percent compared with 28.0 percent nationally. From 1990 to 2010 per capita income rose from $29,000 to $70,000 (a 140.0 percent increase). Household income rose to $129,000 in 2010 compared to $73,000 nationally.

Percentage of increase in per capita income 2000-2010

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Key Market Driver

Number 2

Lower Manhattan…

Tenant base diversification in Downtown beyond financial services

The diversification of the Downtown market away from financial services dominance is often exaggerated. In 2001, six out of the top 10 leases were for financial services requirements. Thus far in 2011, six out of the top 10 leases are still within the financial services segment. The reality is that the Downtown market will remain a financial capital, which is an important distinction for Lower Manhattan.

Despite this fact, recent transaction activity and increasing interest in the Downtown market among the creative and professional services sectors indicate that while financial services continue to dominate, tenant base diversification is also a reality in Lower Manhattan. For example, publishing giant Conde Nast recently preleased 1.1 million square feet (largest deal year-to-date in 2011) at One World Trade Center. Other recent media relocations to the Downtown area include American Media, American Lawyer, Newsweek, The Deal, Vibe Media, Spin Magazine, Mansueto Ventures (Fast Company & Inc.), WNYC, the Knot and Omnicom.

Additionally in 2011, the law firm Wilmer Hale signed a lease for 210,000 square feet at 7 World Trade Center, relocating from 399 Park Avenue in Midtown. In 2010, the Daily News signed one of the top 10 deals of the year at 4 New York Plaza, also relocating from Midtown. In 2009, The Gap signed the largest new lease Downtown at 40 Worth Street, relocating from Chelsea.

The scarcity of Class A space in Midtown South is contributing to diverse tenant demand Downtown. While still the preferred location

Access to educated workforcenumber of college graduates within seven-miles of Downtown market

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Potential workforceNew York City has the largest potential workforce in the country. Since 1990 the population within a seven-mile radius of Downtown has grown by 12.0 percent, far out-pacing New York State which rose by just 7.6 percent over the same period.

• The population of New York County (Manhattan) and Kings Coun-ty (Brooklyn) increased 11.7 percent and 8.4 percent, respectively.

• In nearby Northern New Jersey, Hoboken‘s population surged by 30.0 percent over the past ten years, according to 2010 Census data.

The large potential workforce is an educated workforce including approximately 800,000 college graduates—250,000 of which have master’s degrees and 40,000 of which have doctorates.

The population of the potential workforce continues to grow as a younger, educated labor pool migrates to Brooklyn, Queens and parts of New Jersey. As a result of this migration, demand for housing remains strong compared to the rest of the country. As an example, the median price of all Brooklyn condos, co-ops and one- to three-family houses increased 3.7 percent to $480,000 in the second quarter of 2011 while the national average decreased by approximately the same amount. Specifically in Manhattan, Douglass Elliman’s loft index—heavily weighted to Downtown—increased by 6.7 percent to $1.7 million over last year.

Key Market Driver

Number 3

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photo credit: Joe Woolhead | courtesy of Silverstein Properties http://www.wtc.com

... 10 years later

neighborhoods that have a growing office-using workforce, including the New Jersey Waterfront (Jersey City, Hoboken), Queens (Long Island City) and Brooklyn (DUMBO, Williamsburg, and what is commonly referred to “Brownstone” Brooklyn.)

Existing infrastructure• 12 subway lines• 30 bus routes• Six (6) ferry terminals and 12 routes• PATH Train to New Jersey

Planned infrastructure• World Trade Center (WTC) Port Authority Trans-Hudson (PATH)

Transportation Hub (situated at Church and Fulton Streets, between Towers 2 and 3) will accommodate more than 250,000 pedestrians per day.

• Fulton Street Transit Center will link 12 subway lines with the PATH and accommodate more than 300,000 riders daily.

for technology and new media companies such as Google, AOL, and Yelp, Midtown South has nearly reached full occupancy. The Class A vacancy rate of 6.5 percent indicates that the Midtown South market is one of the tightest markets in the country with limited options for large development. There are currently only three options within the existing Midtown South market for a tenant requirement of 100,000 square feet or larger.

The technology sector has been a key driver behind new tenant requirements, which has helped position Manhattan for recovery. After a significant decrease in 2009, high-tech employment has experienced steady quarter-to-quarter growth. By 2013, Manhattan is expected to report technology employment levels equal to the 2001 peak. Technology firms currently account for an aggregate three million square feet of demand throughout Manhattan. The rebound in technology has fueled much of the absorption in recent quarters, specifically in Midtown South. Tenant demand will surpass the inventory in Midtown South if high-tech employment continues to grow in New York City at its projected rate. The demographics of the workforce, the price advantage and the increased mixed-use, transit-oriented environment of Lower Manhattan will drive tenants to favor the Downtown market over Midtown as a viable alternative.

Improved transportation infrastructure

With nearly 50.0 percent of commuters using public transportation daily, New York City has the highest percentage of transit users in the nation and Downtown offers the highest level of connectivity. In the face of rising fuel costs, congestion—and perhaps one day congestion pricing—transportation centers, like Lower Manhattan, will fare better than competing markets. The percentage of New Yorkers commuting via transit went up by 4.0 percent between 2000 and 2009.

Interestingly, when Conde Nast announced its move to One World Trade Center, the company’s thousands of employees who travel more commonly by subway from Brooklyn or the PATH train from New Jersey expressed that the Downtown location was more advantageous than the current Times Square office location.

Considering that New York City’s subway system was originally planned around Downtown, the system has unparalleled access to adjacent

Key Market Driver

Number 4photo credit: dbox | courtesy of Silverstein Properties http://www.wtc.com

Lower Manhattan…

The City and State of New York also created an aggressive offering of tenant incentive programs to generate demand for office space at the World Trade Center site—versions of which remain in place today including:

• Lower Manhattan Commercial Rent Tax (CRT) Reduction• Lower Manhattan Commercial Revitalization Program (CRP)• Lower Manhattan Energy Program (LMEP)• Lower Manhattan Relocation Employment Assistance Program

(LMREAP)• Lower Manhattan Sales and Use Tax Exemption

As an example, Conde Nast, the single largest tenant moving back to the Downtown market, is reported to have received a cash subsidy of $5.00 per square foot for its recent lease at One World Trade Center.

An additional element in the rebirth of Lower Manhattan, beyond government funding to attract office tenants, has been strategic investments designed to increase the quality of life for residents, workers and tourists. To date, municipal support has resulted in:

• More than $100 million allocated toward projects at more than 20 park sites throughout the Downtown area since 2002.

• $27.4 million in grants given to 64 Lower Manhattan art organiza-tions and projects.

• $37 million in community enhancement fund grants to support a variety of community improvements.

• National September 11 Memorial & Museum expected to draw an estimated five million tourists a year.

Government incentives and quality of life improvements

The events of September 11 had such an enormous impact on Lower Manhattan that a decade later the City, State and Federal governments continue to demonstrate a stalwart commitment to the resurgence of the Downtown market.

After September 11, special legislation and incentive programs were instated to spur the redevelopment of the World Trade Center site and to reinvigorate the business community in Lower Manhattan. The Federal government provided approximately $20 billion dollars in assistance to New York through FEMA, HUD, DOT and other tax benefits. The single largest tool created was the Liberty Bond program authorizing the sale of $8.0 billion in tax-free debt to help rebuild the World Trade Center site. Due to the lower cost of funds through the tax-advantaged status the cost to finance each of the buildings was reduced by 30 to 35 percent.

In an effort to secure financing for the World Trade Center project the City of New York, the State of New York, the Federal General Services Agency and the Port Authority of New York and New Jersey committed to leasing significant blocks of space. The Federal Government and the State of New York expressed interest in approximately one million square feet of space at One World Trade Center. The Port Authority and the City of New York signed leases for an estimated 1.2 million square feet of space at Four World Trade Center.

Key Market Driver

Number 5

... 10 years later

Conclusions

As the nation, the international business community and the residents of New York City take stock in a decade that began with an unthinkable series of acts, Lower Manhattan is poised for its next great transformation. The visual of new construction, the draw of the urban environment, the diverse industry segmentation, the unparalleled transportation and the unwavering support of the City, State and Federal governments all support the resurgence of Downtown—10 years after the events of September 11 and well into the future.

photo credit: dbox | courtesy of Silverstein Properties http://www.wtc.com photo credit: dbox | courtesy of Silverstein Properties http://www.wtc.com

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