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Market Analysis

World Trade Center Tenants Disperse.
55% of the affected square footage returns to or relocates Downtown;
44% relocates outside of Lower Manhattan; 1% remains undecided.

New York, New York. March 21, 2002. TenantWise.com continues to provide comprehensive information regarding the effects of the September 11th attack upon Manhattan’s real estate markets and economy. TenantWise.com is an online real estate market research and leasing firm offering complete listings of all office availabilities in Manhattan, tenant representation services with a discounted fee schedule, and extensive information on the market and the lease transaction process. This report is fifth in the series of reports about the impact of the September 11th attack on the affected tenants in the WTC buildings and surrounding damaged properties as well as the overall Downtown office market. All reports are available at www.tenantwise.com.

Situation Overview:

The destroyed properties of the World Trade Center (“WTC”) and the damaged surrounding properties represent a total of 34.5 MM sq. ft. of office space. Six buildings were destroyed, accounting for 13.4 MM sq. ft., and 23 surrounding properties were damaged, accounting for another 21.1 MM sq. ft. of office space. Overall, the destroyed and damaged property was a loss affecting 60% of Downtown Manhattan’s Class A office space. (Downtown is defined as the area south of Chambers Street.) Eleven of the 23 damaged buildings, or 11.5 MM sq. ft., have now been restored to service. Two and Three World Financial Center (“WFC”), totaling 5.0 MM sq. ft., are expected to open in April, and the remaining 10 damaged buildings, or 4.6 MM sq. ft., have not announced projected opening dates. (For further details, see Special Report: Damaged Areas at www.tenantwise.com/reports/wtc_damage.asp.)

TenantWise.com research indicates that there were 186 non-governmental tenants over 10,000 sq. ft. in size (“larger tenants”) in the WTC buildings (“destroyed properties”) and the 23 damaged buildings surrounding the WTC (“damaged properties.”) Out of a total 34.5 MM sq. ft. in destroyed and damaged properties, the larger tenants occupied approximately 24.3 MM sq. ft. TenantWise.com estimates that governmental tenants accounted for an additional 1.8 MM sq. ft., and the remainder of 8.4 MM sq. ft. was occupied by smaller tenants.

TenantWise.com has maintained contact with each of the larger tenants and tracked these companies’ transition since 9/11. The survey results of their relocation plans form the basis for the research included in this continuing series of reports. TenantWise.com assumed that 100% of the governmental tenants will remain in the City, and predicted the destination relocations of the smaller tenants by applying the same percentage trends as exhibited by the larger tenants. The results, from a geographical viewpoint, are as follows:

Remaining Downtown: A total of 19.1 MM sq. ft., or 55% of the total affected 34.5 MM sq. ft., will remain Downtown.
  • 16.7 MM sq. ft. will be reoccupied Downtown
• 1.3 MM sq. ft. was backfilled Downtown
• 1.1 MM sq. ft. was leased Downtown
 
Leaving Downtown: A total of 15 MM sq. ft., or 44% of the total affected 34.5 MM sq. ft., will leave Downtown.
  • 9.7 MM sq. ft. was leased outside of Downtown
• 5.3 MM sq. ft. was backfilled outside of Downtown
 
Undecided: A total of 0.4 MM sq. ft., or 1% of the total affected 34.5 MM sq. ft., is undecided.

In terms of job distribution, TenantWise estimates that relocation decisions noted above will result in the following broad categories of job dispersion:

Jobs leaving Downtown: 59,830   Jobs leaving to Midtown: 37,035
Jobs returning Downtown: 76,294   Jobs leaving to New Jersey: 15,778
Undecided: 1,795   Jobs leaving to Elsewhere* 7,017
Total: 137,919     59,830
*Elsewhere is defined as non-NJ and outside of Manhattan

Relocation decisions follow three possible outcomes: reoccupy; lease new space; or backfill existing space. From a transactional viewpoint, the results are as follows:

Reoccupy:
 
49%, or 16.7 MM sq. ft. of space, will be reoccupied as tenants return to damaged properties
 
New Leases: 28%, or 9.7 MM sq. ft. of new space, was leased on a long-term basis
  • 6.6 MM sq. ft. was leased in Midtown
• 1.3 MM sq. ft. was leased in New Jersey
• 1.8 MM sq. ft. was leased Elsewhere  
 
Backfill:
 
19%, or 6.5 MM sq. ft., has been backfilled into other unaffected space that was unoccupied or made available within a tenant's existing real estate portfolio.
  • 2.7 MM sq. ft. backfilled in Midtown
• 2.6 MM sq. ft. backfilled in New Jersey
• 1.3 MM sq. ft. backfilled Downtown.
 
New Leases Downtown:

 
3%, or 1.1 MM sq. ft. of new space, was leased on a long-term basis Downtown
 
Undecided: 1%, or 0.4 MM sq. ft. of space is represented by tenants that have not yet made their relocation plans known.
 

A representation of all tenant relocations from both destroyed and damaged properties is as follows:

Destroyed Property Overview

TenantWise.com has determined that on September 11, 2001, the World Trade Center had 450 tenants in 13.4 MM sq. ft. Of the total 450 tenants, 77 were non-governmental, over 10,000sq. ft. in size, and represented 9.0 MM sq. ft. TenantWise surveyed each tenant and found the following:

  • 76 of 77 larger tenants from destroyed properties have made relocation decisions.
  • Of the 76 tenants that have made relocation decisions, 57% of the represented square footage will be relocated to Midtown, 32% will move to New Jersey or elsewhere, and only 8% will relocate to a new location Downtown. 3% remain undecided. The employee populations will be disbursed as some companies have decentralized operations and have secured space in several locations.
  • Tenants moving to Midtown from destroyed properties represent 5.1 MM sq. ft., or approximately 20,564 jobs.
  • Tenants moving to New Jersey or Elsewhere from destroyed properties represent 2.9 MM sq. ft., or approximately 11,464 jobs.
  • Tenants moving to a new location Downtown represent .75 MM sq. ft., or approximately 3,093 jobs.
  • 1 tenants remains undecided; a total of 0.25 MM sq. ft., or approximately 1,061 jobs.

89% of the square footage represented by larger tenants from the destroyed properties is moving out of Lower Manhattan. Only 8% will relocate Downtown.

Damaged Property Overview

TenantWise.com has determined that on September 11, 2001, the damaged properties had 158 tenants in 18.5 MM sq. ft. 109 of these tenants were non-governmental, over 10,000 sq. ft. in size, and represented 15.3 MM sq. ft. TenantWise surveyed each tenant and found the following:

  • 105 of 109 larger tenants have made relocation decisions.
  • Of the 105 tenants that have made relocation decisions, 70% of the represented square footage will be reoccupied when it is repaired, 13% will relocate to Midtown, 11.5% will relocate out-of-state, and 5% will relocate to a new location Downtown. 0.5% remains undecided. The employee populations will be disbursed as some companies have decentralized operations and have secured space in several locations.
  • Tenants from damaged properties that are reoccupying space Downtown represent 10.8 MM sq. ft., or approximately 43,019 jobs.
  • Tenants moving to Midtown from damaged properties represent 2.0 MM sq. ft., or approximately 7,895 jobs.
  • Tenants moving to New Jersey or Elsewhere from damaged properties represent 1.7 MM sq. ft., or approximately 6,962 jobs.
  • Tenants moving to a new location Downtown represent 0.7 MM sq. ft., or approximately 2,946 jobs.
  • 4 tenants remain undecided; a total of 86,416 sq. ft., or approximately 346 jobs.

70% of the square footage represented by larger tenants from damaged properties will be reoccupied; 25% has committed long-term to leave Downtown.

Conclusions

At the sixth-month anniversary of 9/11, companies are moving forward with the enactment of newly developed strategic plans. The initial four reports in the TenantWise.com series reflected a changing picture as corporations began to make long-term commitments. Now, some are reversing earlier supposed long-term moves. Recent announcements by Merrill Lynch and American Express to move portions of their operations back to the World Financial Center were the largest of such move backs. Otherwise, strategic occupancy changes are decreasing as companies continue to execute announced resettlement plans.

Major trends noted in occupancy decisions:

More companies decentralize and/or bifurcate operations and concentrate on improving contingency plans and business continuity.
From TenantWise.com’s analysis of the largest tenants, 29 tenants representing a total of 16.4 MM sq. ft. from the affected properties have strategically planned to decentralize operations. Many have secured space both in Manhattan and outside of the city. Among the larger of these tenants are Morgan Stanley, Lehman Brothers, Cantor Fitzgerald Securities, Dow Jones & Co., Empire Blue Cross, Royal Bank of Canada and Salomon Smith Barney.

Qualitative concerns held greater weight in decision making than cost.

In the post 9/11 real estate markets, pricing for relocation alternatives varied widely due to location and asset quality. For assets of similar quality, prices were dramatically higher in Midtown and New Jersey than in Downtown. Despite the price difference, many companies chose to pay more and relocate facilities away from Downtown despite the availability of comparable lower-priced alternatives. Some companies received municipal and State incentives to move but most companies made decisions without engaging in the lengthy incentive negotiations necessary to obtain discretionary benefits. The increase in property cost, though partially covered by insurance, was significant. Based on TenantWise.com’s discussions with the larger tenants, decisions were heavily based on concerns regarding security, transportation, environmental safety, redundancy of operations, and contingency planning. Concerns about employee comfort and productivity levels were the overriding reasons for these companies, despite the cost increase. On the other hand, some of the larger financial firms that were faced with falling share prices and a weak economy were forced into the least expensive alternatives. Some of the move backs to Downtown reflect this pressure as some companies found that moving back was the least costly alternative.

Current market status:

Availability has risen even though market size has been reduced.
As of 9/10, the total size of the Downtown market was 97 MM sq. ft. and had an availability rate of approximately 8.7%. The attack of September 11th reduced the size of the Downtown market by 13.4MM sq. ft. to 84 MM sq. ft., yet the availability rate increased to 15.3% as of February 2002. Several factors have led to this condition and continue to weaken the market:

Overall economic downturn. The overall economic downturn due to the dot.com crash in 2000 resulted in layoffs and reduced office occupancy requirements in New York City’s critical financial services sector, technology industry and all of the companies that support these industries.

Many 9/11 tenants moved out of Downtown. Tenants affected by the WTC tragedy were expected to create demand that would decrease the availability rate in Downtown and throughout Manhattan. The opposite occurred. The tenants from destroyed properties did not relocate Downtown and many from the damaged buildings vacated their space Downtown. In total, of the 34 MM sq. ft. of tenants that occupied damaged or destroyed building, 15MM sq. ft. of these tenants relocated outside of Lower Manhattan. Clearly, tenants from destroyed properties cannot return to their space. However, many tenants from damaged buildings that could return are not. Tenants representing 25% of the square footage in the damaged buildings, or 5.0 MM sq. ft., backfilled elsewhere or relocated outside of Downtown. This has added more available space to the Downtown market.

More space continues to be added to the market. In the near term, more space is likely to be added to the Downtown market. Space in the damaged buildings that is in the process of being put on the market is 1.5 MM sq. ft. This additional sublease space increases the current availability rate from 15% to 18%. Furthermore, tenants that are scheduled to return, such as Deutsche Bank, American Express, Gruntal and Dow Jones, may not return or may take less space than announced. We estimate that if only 10% of the 16.7MM sq. ft. from damaged properties that have committed to return to their Downtown space do not, then an approximate 1.7 MM sq. ft. of space will be added to the market. If this occurs, the availability rate will be pushed up by 2% Downtown. TenantWise believes that existing leasing levels will continue in the Lower Manhattan market and will not offset the large amounts of space expected to be added. Given the pace of leasing and continued withdrawal from Downtown by tenants not directly affected by the attacks, TenantWise predicts that availability rates will break the 20% mark by summer 2002.

Downtown historically weak. Despite understandable concern that the availability rate might exceed 20%, the fact remains that Downtown has historically been a weak office market since at least 1985. Over the last 16 years, the average availability rate was 16.2%. The average asking rate over the same period was $30.81 per square foot. Further, the Downtown market has experienced availability rates of 15% or higher in eight of the last 16 years and over 20% in six of the last 16 years. Therefore, today’s 15% availability rate is not atypical of Downtown’s historical performance.

Future concerns:

Leases expiring in properties not directly affected by 9/11.
The total employee population below Chambers Street as of 9/10 was 388,000. Assuming that 59,000 jobs were moved out of Lower Manhattan from the destroyed and damaged properties alone, there remains considerable incentive to revitalize Lower Manhattan not only for the affected tenants, but also for those Downtown tenants not directly affected by 9/11. Deducting 59,000 jobs from the September 10 total of 388,000 leaves 329,000 jobs. Assuming, on a ten-year lease horizon, half of those leases expire during the next five-year period, 164,500 jobs could be at risk of leaving the Downtown area in the near term. Companies that have a large employee population from the Upper West Side and New Jersey may constitute a large part of those which decide to leave Downtown if PATH and subway transportation issues are not addressed.

Impact of Terrorism Insurance.
The impact of 9/11 on insurance providers and purchasers is significant and far-reaching. Insurance policies that are being renewed reflect minimum 20-50% increases, if the policies are renewed at all. Many major insurance companies have either terminated offering insurance coverage in Lower Manhattan or have become highly selective in renewing or issuing new policies in the area. Some have chosen to leave Manhattan entirely. As a direct result of 9/11, insurance companies are raising concerns about insuring companies with populations of over 1,000 employees in one location. For large building policies, some owners are resorting to two or three levels of mezzanine insurance to reach only to 50% coverage of replacement value. The full effect of the change in insurance is now being felt throughout the real estate industry and is likely to further reduce net operating income of commercial buildings.

For further information contact:
M. Myers Mermel
Chief Executive Officer
(212) 943-7777
Caroline McLain
Chief Financial Officer
(212) 943-1902

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