MARKET HIGHLIGHT, JULY 2006

NEW YORK CITY MARKET HIGHLIGHT

New York City Investment Market

Today’s market is as diverse as the city’s product categories. In the last 3 years, the luxury housing market has created 60,000 new units, adding to a previous total of 360,000 units — an 18 percent increase. We anticipated and are now experiencing a 5 percent to 10 percent drop-off in land values in the luxury condominium and conversion market. Accordingly, sales volume had declined in this market segment by approximately 5 percent to 15 percent, depending on exact location.

Saturation point will be reached and we anticipate aggressive and creative developers to turn to the affordable housing market. A recent New York Times article announced that New York City will experience an increase in total population from 7 million to 8 million people over the next 7 to 10 years. We expect new immigrants to continue to populate markets, especially in the boroughs of Queens, Brooklyn and the Bronx. This trend is sensible from the standpoint that transportation, infrastructure, communities and schools all exist to support that population growth.

It is assumed that if we do experience this increase, approximately 2.3 people will inhabit each individual housing unit, equating to a housing need of 430,000 units. It is sensible that the Mayor and HPD are calling for the creation of 160,000 affordable housing units. We expect that they would even want to create more affordable housing, but budget constraints may limit their ability to do so.

A major opportunity exists for affordable housing creation in some sections of Brooklyn, specifically Crown Heights, where there have been recent major sales in the $40 per square foot buildable category. We applaud Atlantic Yards Development, where a portion of that project will be dedicated to middle and affordable income housing. The Bronx also has pockets of land available in the $30 per square foot to $50 per square foot buildable price bracket.

The office building market, especially Midtown Manhattan, has seen prices stabilize at $40 per square foot to $50 per square foot and is now rising. We are currently experiencing a lack of inventory for purchase and expect that scarcity to continue. The retail market is healthy. Prices are nearing $1,000 per square foot on Madison Avenue and $400 per square foot to $600 per square foot in hot pockets all over New York City, especially downtown. Moving forward, we expect the multifamily market to remain stable, with cap rates for quality elevatored buildings still trading at 3 percent to 5 percent. Capital remains available for that type of investment. As residential rents continue their first increase in 6 years, we expect stability in the multifamily housing market to continue.

— Paul Massey, founding partner, Massey Knakal Realty Services

New York City Office Market

Tenant demand continues to be fueled by the belief among businesses across a variety of industries and sizes that there is a rapidly decreasing landscape of premier office space. In May, the overall vacancy rate in Manhattan dropped to 7.4 percent and is expected to continue to descend, reaching 7 percent by the close of the second quarter. As the flight-to-quality continues, Class A direct vacancies are expected to fall even further to 5.5 percent.

A lack of new construction throughout the city, coupled with tenants’ unwillingness to venture into alternative neighborhoods, continues to constrain Manhattan’s primary Midtown market. As a result, vacancies in this market will reach a low of 6 percent by the end of June while average asking rents will reach a high of $57 per square foot. Demand for Midtown’s Class A space has risen more than 15 percent over the past 6 months, causing rents to exceed $100 per square foot regularly in trophy buildings such as 660 Madison Avenue and the Seagram Building. Financial services firms were particularly interested in leasing Class A space. Hedge fund Temblant Capital signed a 22,000-square-foot lease at the General Motors Building, which has asking rents that are approximately $120 per square foot, while Broadband Capital Management recently signed a 10-year lease for 7,000 square feet at 712 Fifth Avenue where asking rents are approximately $135 per square foot.

This increase in demand has ultimately affected concession packages. Landlords have sharply reduced work allowances set aside for tenant improvements to approximately $30 per square foot to $40 per square foot on a 10-year lease commitment, which is down from $40 per square foot to $50 per square foot in 2005.

As the maturation of Midtown continues, the Downtown market is picking up velocity as tenants with upcoming requirements — especially those involving large blocks of contiguous space — look to Downtown as a viable alternative due to the lack of relocation options elsewhere. Vacancy is expected to reach equilibrium by the close of the second quarter with average asking rents reaching $35 per square foot. However, Class A space Downtown should exceed $40 per square foot by the end of the year. Moreover, the more significant concession packages currently being offered by Downtown landlords are expected to decrease over the next 6 months.

Several tenants have already found Downtown to be a great value. Aon Corp., which relocated to Midtown after 9/11, is moving its entire New York City workforce back downtown to 199 Water Street where it will consolidate its offices into 400,000 square feet. In addition, there are several large transactions pending at the World Financial Center which may further lessen the availability of large, Class A blocks of space in the downtown market.

— Ken Krasnow, executive vice president, director of Tri-State Brokerage, Trammell Crow Company

New York City Multifamily Market

Solid job growth throughout the New York metropolitan area will support improvement in New York City’s apartment rental market this year. In the investment sales market, pricing has reached record-high levels, but inventory is rising, a trend that should bring a degree of moderation to the heated multifamily sales market.

Vacancy is expected to decline in New York City, while asking rents are set to rise by the greatest rate in 5 years. Despite an uptick in completions, tenant demand for apartments remains robust. As a result, the vacancy is forecast to fall 10 basis points to 3.6 percent by the end of 2006. Apartment builders are expected to complete 3,500 units by year’s end, up from 3,300 units last year. In addition, approximately 2,400 units are underway and scheduled for delivery in 2007 and 2008.

Owners will continue to trim concessions across the city, which are projected to drop to their lowest level since 2001. By year-end 2006, asking rents are forecast to climb 3.7 percent to $3,148 per month, while effective rents are expected to advance 5 percent to $3,075 per month.

Some of the hottest rental submarkets to monitor are Midtown West, the West Village and Lower Manhattan. In the Midtown West submarket, for example, vacancy is forecast to remain in the upper-3 percent range this year as prime locations near major office buildings and transit hubs remain in high demand. Incentives in this submarket are anticipated to ease to 3.1 percent of asking rents, which will support a 4 percent rise in effective rents this year.

Fueled by respectable job growth and hefty (year-end 2005) Wall Street bonuses, demand for apartments in the West Village/Downtown submarket was strong in the first quarter of 2006. Vacancy is expected to drop 50 basis points to 6.5 percent by the end of 2006. New supply, however, may present a challenge going forward, as 670 units are under construction and another 4,000 units are planned in this area.

Strong operating fundamentals and irreplaceable locations will bolster investor interest in Manhattan properties. The average sales price for all residential housing reached $1.3 million, the second highest average sales price recorded since 1999. During the second quarter of 2005, the average sales price reached an all-time high of $1.32 million. The median price of New York City multifamily properties rose 26 percent last year to $189,000 per unit.

While sales prices are expected to climb for the remainder of the year, it is important to note the recent rise in inventory, particularly in the condominium market. Condominium inventory rose to its highest level in 7 years. At the end of 2005, there were 2,933 condominiums for sale, compared to 1,707 at the end of 2004, a 71.8 percent increase. On average, it took both new condos and re-sale units 144 days to sell in the first quarter of 2006, compared to only 99 days during the first quarter of 2005.

Meanwhile, cap rates continued to drop, falling from a range of approximately 5 percent to 6 percent by the end of 2005. Sales to condo converters contributed to the rapid price appreciation, as conversion deals claimed more than 5,300 units at a median price of nearly $500,000 per unit.

As prices continue to climb and more investors are priced out of Manhattan high-rise and even low-rise multifamily buildings, small investors will turn increasingly to less costly assets in the outer boroughs. Properties in Brooklyn, for example, were selling at a median price of $139,000 per unit last year. Cap rates for outer-borough properties run 150 basis points to 200 basis points more than Manhattan.

As mid-year 2006 approaches, demand for apartment rentals will be strong, especially as the Fed continues to raise interest rates. Furthermore, New York City is considered the second-most expensive homeownership market in the country, which should bode well for the rental apartment market. In the meantime, watch for even greater price appreciation in a number of Brooklyn submarkets, including Williamsburg, Brooklyn Heights and Cobble Hill.

— Mitchell R. LaBar, senior vice president and managing director in the Manhattan office of Marcus & Millichap.

New York City Retail Market

New York City is one of the great shopping destinations of the world. As rents in the core retail districts — Madison Avenue and Fifth Avenue — continue to see rates nearing $1,000 per square foot, retailers are looking to Brooklyn, New York’s burgeoning area where upwardly mobile, young people are moving to escape Manhattan’s high residential prices. Sections of Brooklyn such as Williamsburg, DUMBO, Park Slope, Boerum Hill and Cobble Hill feature pedestrian-friendly streets where trendy retailers are setting up shop. While some chains like Whole Foods, which is scheduled to open in 2008, are looking at Brooklyn to expand, many newcomers such as small boutiques Noisette and Nom de Gueere recently opened in Williamsburg where rents are currently between $60 per square foot to $100 per square foot depending on space size.

Side streets in Manhattan have also become a lower cost alternative to the primary retail corridors. Fifty-Seventh Street between Park and Madison avenues is exploding with the opening and/or renovation of flagship locations for retailers Coach, Bvlgari, Jacob the Jeweler, Frank Muller, Niketown, Tourneau and Mont Blanc.

Apple is also opening up a 10,000-square-foot flagship store on Fifth Avenue between 58th and 59th streets in the GM office building. The store will reflect New York City’s culture by remaining open 24/7.

There have been several other significant developments that have created a buzz. As reported in several publications, Nordstrom is in the market looking for space; Trader Joe’s recently opened in Union Square; and UNIQLO, Japan’s leading retailer of casual clothing, has signed a 51,000-square-foot lease at 546 Broadway in SoHo. This is largest store to open in the area since Bloomingdale’s opened 2 years ago.

According the REBNY’s spring 2006 Retail Report, the New York City marketplace continues to flourish with average asking rental rates climbing 4.9 percent to $108 per square foot since spring 2005, and average asking rents for ground-floor space in major retail corridors rising 18.8 percent to $329 per square foot. Average asking rents in Midtown South posted a 16.4 percent increase — the largest percentage increase — followed by the East Side at 11.3 percent and Downtown at 9.7 percent with average asking rents in these areas at $178 per square foot, $138 per square foot and $90 per square foot, respectively. Madison Avenue from 57th to 72nd streets recorded the highest average rent for ground-floor space at $902 per square foot followed by Fifth Avenue from 49th to 59th streets at $844 per square foot. Forty-Second Street between Sixth and Eighth avenues had the highest percentage increase for ground-floor asking rents per square foot at 85.9 percent.

As always in retail, it’s location, location, location. Finding one that’s affordable, as well as one that will sustain the test of time, is the remainder of the mantra for New York’s retailers.

— Elizabeth Obloy managing director, Studley

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