The inaugural version of this paper,

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1 FALL 2013 RESEARCH PUBLICATION Major NYC Activity & Holdings A 2013 Analysis of the Notable -owned Manhattan Office Properties & Portfolios A research report prepared for The Steven L. Newman Real Estate Institute, Baruch College, CUNY by Benjamin Polen, MBA. Introduction The inaugural version of this paper, published one year ago, observed a shift in ownership of New York office buildings from families to public real estate investment trusts (s). Market observers now see this trend accelerated by the possible initial public offering (IPO) of Empire State Realty Trust (ESB), a new controlled by the Malkin and Wien families along with the Helmsley estate. This shift is driven by several factors which include estate taxes, division of assets among multiple heirs, and rules limiting the duration of estates. In support of this last point, one of the primary reasons given by ESB management for the IPO is the necessity of the Helmsley estate to divest itself of assets and dissolve the estate. Unavoidable, material change is coming, driven by the requirement for the executors under Leona Helmsley s will to sell her estate s ownership interests in properties supervised by Malkin Holdings, ESB said in a SEC filing. The ESB IPO exemplifies, on a very large scale, many of the issues that other long-time family owners confront when dealing with generational transition of real estate: estate planning reality; partnership negotiations and buy-outs; realized capital gains; and the emotions that accompany selling inherited assets that have held an esteemed place in family lore. While these s also control significant Manhattan retail and suburban New York properties, and non-new York properties, the focus of this paper is on the Manhattan commercial office holdings of these s. As this paper goes to press, the ESB IPO 1290 Avenues of the Americas is moving forward and expected to clear various legal and investor hurdles but has not yet launched. Assuming a successful completion of the IPO, it would increase the amount of Manhattan office space controlled by major s to million sq. ft. up from million sq. ft. However, comparing only the same four S the previous version reviewed - SL Green Realty Corporation (SLG), Boston Properties, Inc. (BXP), Brookfield Office Properties (BPO) and Vornado Realty Trust (VNO) that figure would be down slightly to million sq. ft. While the amount of Manhattan office space dropped slightly on a same- basis, the amount of mortgage debt collateralized by the four major S increased to $19.77 billion from $18 billion a year previous, and that figure is $20.29 billion if ESB s debt is included. This increased use of debt is representative of favorable capital market conditions, and the high quality of the properties owned by s in desirable Manhattan locations, according to statements made by the s. Capital markets continued to provide low interest rate-fueled liquidity in 2012, and corporate access to capital was largely immune from European bond market turmoil. With this availability of capital, S continued to access low-cost funding as they had the year previous. The same trend identified in the previous version of this paper continues to hold, as favorable capital market conditions provide s with corporate-level debt and equity (in addition to mortgages). As a result, s have a measurable cost of capital advantage compared to all but the largest private owners and operators when it comes to competing for deals and providing incentives to tenants. This capital is structured in several ways, including unsecured corporate debt, preferred stock, and common equity which can be increased via secondary equity offerings. Proceeds from capital events can then be used to pay for property capital expenditures, tenant improvements (T&I), leasing commissions, capital expenditures, and competitive property maintenance, all creating an advantage over less well-capitalized owners.

2 Table 1: Manhattan Office s ownership, debt & occupancy (2012) 2 Manhattan Office Market - Overview Brookfield Properties specifically highlighted favorable capital market conditions in its annual report when it note that the cost of borrowing is currently less than [Brookfield s] projection for future inflation due to macro-economic policies designed to stimulate growth, which BPO said provides a tremendous opportunity to finance our assets at attractive rates on a long-term basis. The firm described itself as very active in the debt and equity markets in 2012, completing nearly $2.5 billion of financings and reducing its total cost of capital by issuing new equity in the form of perpetual preferred shares at lower interest rates than existing securities which [Brookfield] bought back during Specifically, in April 2012 Brookfield issued C$150 million of senior unsecured notes at 4.00% due in 2018, and in September 2012 issued $250 million of preferred shares at a yield of 4.60% due in Occupancy Owned & Managed (sq. ft.) At the end of 2012, Brookfield said that its weighted average cost of capital, assuming a target long-term 12% return on common equity, was 7.13% compared to 7.23% a year earlier. BPO argued that its business strategy of Class A properties in Class A locations with institutional tenants helps support its low cost of capital, specifically stated that its cost of capital is lower than many of [Brookfield s ] peers because of the amount of investmentgrade financing that can be placed on [Brookfield s] assets, which is a function of the highquality nature of both the assets and the tenant base that compose [Brookfield s] portfolio. Supporting this idea, SL Green s annual report makes a statement that connects its ability to offer quality property with its balance sheet and access to capital: The leasing of real estate is highly competitive, especially in the Manhattan office market. We compete for tenants with landlords and developers of similar properties located in our markets primarily on the basis of location, rent charged, services provided, balance sheet strength and liquidity and the design and condition of our properties. 1 Proportional Ownership (sq. ft.) Property Debt Total Debt / sq.ft. Brookfield Office (BPO) 93.8% 18,345,000 15,768,000 $ 4,258,000,000 $ 232 Boston Properties (BXP) 92.8% 7,415,580 6,349,915 3,849,182, Empire State Realty Trust (ESB) 77.0% 5,907,042 5,907, ,816, S.L. Green (SLG) 94.1% 24,372,379 22,765,706 6,874,670, Vornado (VNO) 95.9% 20,209,000 17,503,071 4,792,877, Total Debt/sq.ft. 92.9% 76,941,001 68,293,734 $20,359,545,000 $265 SL Green took advantage of capital markets when, in November 2012, it entered into a $1.6 billion credit facility which refinanced, extended and upsized an existing credit facility. The 2012 credit facility consists of a $1.2 billion revolving credit facility, which matures in March 2017 and a $400 million term loan facility, which matures in March The revolving credit facility and term loan facility currently bear interest at 145 basis points and 165 basis 1 Emphasis was added by an author of this white paper. 2 BXP s total debt includes partner loans of $450 million made to GM Building, not counted in proportional debt. The office space totals only include Manhattan office space. Vornado s office space total does not include a 132,000 sq. ft. building in Paramus, NJ that is 100% owned. SL Green s sq. ft. totals include 280 Park Avenue and 3 Columbus Circle but do not include its Downtown Brooklyn properties. ESB data as of September 30, points over LIBOR. Boston Properties took advantage of the capital market conditions in 2012 to complete a $1 billion offering of 3.85% senior unsecured notes due in 2023 and used cash to redeem notes carrying a 6.25% coupon. BXP utilized equity markets during 2012 to issue $249.8 million in at the market (ATM) secondary stock offerings. It has structured the ATM so that an additional $305.3 million remains available for issuance. Vornado redeemed $510.2 million in senior unsecured debt during VNO issued $290.9 million of preferred equity shares carrying a 5.7% coupon during 2012, while it redeemed $250 million of two separate preferred issuances that carried a 7.0% coupon. At the property level, Vornado refinanced its 70% owned 1290 Avenue of the Americas for $950 million in a 10 year, 3.34% interest-only deal. This deal not only provided very low and attractive terms, it also allowed VNO to retain $522 million in proceeds after repaying the existing loan and closing costs. VNO also refinanced 350 Park Avenue in a $132 million five year term loan with a 3.75% interest rate and two years of interest-only payments. Real Estate Market Performance By analyzing the s office property data, it is possible to bring together real estate and capital markets, with the access to public data shedding light on the mostly private world of real estate holdings. This analysis incorporates the view of U.S. Securities & Exchange Commission (SEC) filings, public website information, and industry press reports. The vast holdings and associated debt of New York City s largest owners of office space is quantified in Table 1. The s control and manage nearly 80 million sq. ft. of Manhattan office space. Even when joint venture (JV) partnerships are subtracted, the proportional ownership to shareholders 2

3 Table 2: Manhattan Office Market Market Occupancy Asking Rent Inventory (sq. ft.) Midtown 89.9% $ ,464,881 Midtown South 93.1% ,941,188 Downtown 92.0% ,856,334 Total 90.9% $ ,262,403 Source: Cushman & Wakefield, Q is nearly 70 million sq. ft. The mortgage debt used to support this ownership is significant and grew more than $2 billion in 2012 to $20.28 billion. The use of mortgage debt per sq. ft. grew from $249 per sq. ft. in 2011 to $264 per sq. ft. in Applying a required loanto-value ratio of 65%, this mortgage debt would require an average appraised value of $406 per sq. ft., a more than reasonable assumption given both in-place income and comparable recent transaction prices. Occupancy & Rents The five s analyzed all have average occupancy levels of 92.9% as of December 31, 2012, that outperform the overall Manhattan office market of 90.9% (see Tables 1 & 2). However, an apples-to-apples analysis of the S ex-esb shows an average occupancy level of 94.4% for 2012 compared to 94.1% in Empire State Realty Trust s Manhattan office portfolio occupancy of 76.9% certainly stands out and brings down the average of the group. As reported previously by the Newman Real Estate Institute and throughout the press, the Empire State Building has undergone a thorough building systems upgrade over the past several years, and the low occupancy levels are a result of management s strategic decision to largely empty the building of smaller tenants and re-tenant the retrofitted building with larger, corporate tenants. Even within the ESB portfolio, the Empire State Building has the lowest occupancy level of 67.3% while its other buildings average 85.0% occupancy. The differential between occupancy levels and market occupancy is measureable, with average occupancy levels 325 basis points higher than the market. Vornado s occupancy levels are 500 basis points greater than the overall Manhattan market and represent the best occupancy performance of the group. According to Cushman & Wakefield, Manhattan average asking rents rose to $59.60 per sq. ft. in March 2013, representing an increase of 1.2% from March Cushman and Wakefield also noted that at $51.97 per sq. ft., Midtown South asking rents rose the most substantially, mainly due to higher priced blocks of space placed on the market. The portfolio rents of the s average $53.28/sq. ft. across their Manhattan office holdings. This is 11% less than average market asking rents of $59.60/sq. ft., because the portfolio rents reflect older, below market leases. The under market rents represent potential upside to release space at greater rents upon lease expiration. The differentials among the portfolio rents reflect the nature of their holdings. Brookfield s lower rents reflect its older, below-market leases and its large Downtown holdings, a submarket with lower rents than the overall Manhattan office market. Boston Properties higher rents show the horsepower of the General Motors Building, which obtains some of the highest rents in Manhattan. Vornado and SL Green s rents hover around the current average asking rents. Though these two s are below the average Class A rents, this provides the opportunity to obtain higher rents upon issuing new leases. Indeed, the s are capitalizing on the improved leasing market and capturing higher rents. A comparison of the same four s (excluding ESB) from the previous version of this paper shows average rents of $54.38 in 2012, up slightly from $54.16 in Including ESB, the average rents drop to $53.17 (see Table 5). Leasing Activity When leasing or renewing leases, s have an advantage in offering tenant improvements (T&I) and other concessions. This is due to their lower cost of capital, as discussed above. Especially over the past two years, the four s analyzed have all successfully raised capital through equity and corporate debt sources. These capital sources are generally unavailable to most private family owners, and private equity real estate demands a greater return than what is offered by s to their public investors. Given the rent and occupancy performance of the four s, near-term lease expirations and the ability to compete on T&I offer an opportunity to capture higher rents. The s are succeeding on this frontier. In 2012, Brookfield faced a significant amount of vacant space in its Lower Manhattan portfolio, as described in the [2012 publication of the look at Manhattan s]. BPO said the s highlight of 2012 was the 17-year lease with Morgan Stanley for 1.2 million sq. ft. at One New York Plaza. Table 3: Performance compared to Market vs Market Performance Occupancy vs Market (basis points) BPO 290 BXP 190 ESB SLG 320 VNO 500 Average -018 Average ex-esb

4 MAJOR NYC ACTIVITY & HOLDINGS FALL 2013 Table 5: Portfolio Rents as of December 31, 2012 (ESB as of September 30, 2011) Portfolio Rent Performance Average Rents / sq. ft. BPO BXP ESB SLG VNO Average $ Average ex-esb $ Table 6: Leasing Activity (BXP estimated from company filings) Table 4: Manhattan Office Market Share Owned & Managed (sq. ft.) Manhattan Office Market 2012 Leasing Activity Market Share (% sq. ft.) Brookfield Office (BPO) 18,345, % Boston Properties (BXP) 7,415, % Empire State Realty (ESB) 5,907, % S.L. Green (SLG) 24,372, % Vornado (VNO) 20,901, % 76,941, % Total However, Brookfield has still to find a new tenant for Nomura Holding s 800,000 sq. ft. space at Brookfield Place (as it renamed the World Financial Center). Leased (sq. ft.) BPO 2,116,000 BXP 304,105 ESB na SLG 911,651 VNO 1,950,000 Total 5,281,756 lease, the development property is now 46% pre-leased. BXP said it expects the In 2013, Brookfield will have 398,000 sq. ft. of space expiring in Midtown, and 3,442,000 building to open in late 2013, and Kaye sq. ft. in Lower Manhattan, at average rents of $34.00 and $35.00 per sq. ft., respectively. Scholer said it expects to move into the These below market, relatively small spaces should be easy for the company to re-lease. office sometime in mid BXP does not However, Brookfield will lose a large tenant in 2013, since Nomura Holdings indicated it will provide annual leasing figures for its existing be vacating its 800,000 sq. ft. space at the World Financial Center when its lease expires. portfolio. However, BXP appears to have Nomura signed a 900,000 sq. ft. lease in Midtown at Worldwide Plaza (privately owned by incurred leasing vacancies of 13,227 sq. ft. George Comfort & Sons). Re-tenanting that space is already a major priority for Brookfield. of its Manhattan office space in Since SL Green increased the occupancy levels in its Manhattan same-store operating properties BXP does not provide this figure directly, to 93.8% in 2012 from 93.0% in During 2012, SLG leased 3.7 million sq. ft. in Manhattan, of which 3.0 million sq. ft. represented office leases that replaced previously occupied space. SLG s mark-to-market rents on these 3.0 million sq. ft. of signed Manhattan office leases that replaced previously occupied space was 7.5% for The highlight of SLG s leasing activity during 2012 was the signing of Manhattan s largest non-sale leaseback office lease, a 1.6 million sq. ft. lease with Viacom for all of the of the office space at 1515 Broadway. In addition, SLG fully leased up 100 Church Street with the 485,000 sq. ft. renewal and expansion of New York City. provided by the company. Street in December 2012 to law firm Kaye Scholer. The building s floorplates and layouts are designed to meet the needs of law firms, BXP has stated publicly. Including this new 4 BXP began 2012 with 332,757 sq. ft. of scheduled lease expirations in Manhattan, and 184,820 sq. ft. of vacant space. It ended 2012 with 530,803 sq. ft. of vacant space.4 By subtracting that change in vacant space from 2012 scheduled lease expirations, the 13,277 loss leased BXP annual report; Kaye Scholer press release Not including Two Grand Central Tower, which was sold in Boston Properties leased 246,000 of its 989,000 sq. ft. development at 250 West 55th it can be derived through other figures

5 MAJOR NYC ACTIVITY & HOLDINGS FALL 2013 sq. ft. figure is derived. However, BXP did not report the new rents it received for the space, or what T&I it paid. In 2013, Boston Properties has Manhattan scheduled leases expirations of 61,886 sq. ft. at average rent of $86.20 per sq. ft. Through mid-2013, BXP has signed several leasing deals above $100 per sq. ft. in 510 Madison Avenue, to hedge fund tenants who require less floor space than traditional law firms and financial services tenants. The high end office building features a private spa and swimming pool for executives. Sustainability and Climate Change The awareness of corporate responsibility to environmentally sustainable practices is shared by the four major S. Case in point, as one of the largest owners and developers of office properties in the United States, BXP said it actively works properties in Lower Manhattan were fully operational by November 17. However, Sandy left a wake of destruction, leaving hundreds of thousands without homes and displacing businesses throughout the Tri-State area. Brookfield aided the Sandy Relief efforts by: displaced by Sandy to promote our growth and operations in a sustainable and responsible manner across Providing free office space in 250 Vesey Street to small businesses and nonprofits Coordinating two volunteer days through the Stephen Siller Tunnel to Towers its five regions. BXP said that its focus is Foundation to facilitate the relief efforts on Staten Island, attended by over 75 on sustainability initiatives for the design and Brookfield employees. construction of new developments, while also working to improve the operation of existing buildings and internal corporate practices. Sustainability initiatives are centered on energy efficiency, waste reduction and water preservation, as well as making a positive A $100,000 donation to the Mayor s Fund to Advance New York City s dedicated Sandy relief fund. Likewise, SLG faces possible risks associated with the physical effects of climate change. While the acknowledges that it cannot predict with certainty whether climate change is occurring and, if so, at what rate it recognizes that the physical effects of climate change impact on the communities in which the could have a material adverse effect on its properties, operations and business. conducts business. Manhattan Office Transactions Brookfield also has a rigorous sustainability Overall, s were net sellers of property during 2012, as measured by size. The total program. In 2012, Brookfield secured 16 new Manhattan office space controlled by S decreased to 71,033,959 sq. ft. at the end of LEED certifications. Among the properties 2012 from 72,366,683 sq. ft. in certified is the Grace Building on Bryant Park. The also has a successful and expanding electric vehicle charging station program. In 2012, 18 charging stations were installed throughout North America to reach 35 in total. Another 10 stations will be installed in Following Hurricane Sandy, Brookfield reported minimal collateral damage to its Lower Manhattan office portfolio and all Just outside of Manhattan, SL Green sold its 1.5 million sq. ft. One Court Square tower in Long Island City, Queens for $481.1 million to Waterbridge Capital. Within Manhattan, SL Green sold its fee interest at 292 Madison Avenue for $85.0 million. SLG also sold a 49.5% partnership interest in 521 Fifth Avenue at what the company stated was an implied gross valuation of $315.0 million, or $685 per sq. ft. on the 460,000 sq. ft. building. The transaction at 521 Fifth Avenue allowed SLG to realize a relatively quick gain of $19.4 million, as in January 2011 SLG had bought out a JV partner in the building in a transaction that valued the building at $492 million, or $502 per sq. ft. In December 2012, SLG acquired a 35.5% interest in 315 West 36th Street, a 147,619 sq. ft. office building at a gross purchase price of $45.0 million. Also in December 2012, SLG 5

6 Boston Properties did not purchase or sell any New York office properties during However, it did add a building from its development pipeline into service. On April 30, 2012, BXP completed and fully placed 510 Madison Avenue into service. The building, on the corner of East 53rd Street, has approximately 356,000 net rentable sq. ft. In the start of 2013, Boston Properties has shifted to selling assets. We are in the market selling assets right now, and in 2013 we could sell a billion dollars or more, Boston Properties president Douglas Linde said on a conference call to analysts in the call, noting that the firm sold 125 West 55th Street in Manhattan. In June 2013, BXP put its 1.2 million sq. ft. Times Square Tower on the market for a reported $1.2 billion asking price. In May 2013, Boston Properties sold a 40% interest in the GM Building for a reported $1.4 billion to the Zhang and Safra families in a transaction valuing the building at $3.4 billion, about $1,880 per sq. ft. 399 Park Avenue & Citigroup Center acquired a 68,000 sq. ft. mixed use retail, office and residential building at Spring Street in SoHo for $122.3 million, or about $1,799 per sq. ft. (the high price per sq. ft. represents the premium for retail space in SoHo). Vornado has aggressively increased its focus on retail property in Manhattan, while remaining a major owner of office space. Vornado s acquisition of the retail portion of 666 Fifth Avenue was arguably one of New York s deals of the year in In December 2012 Vornado acquired a retail condominium in the building (at the corner of 53rd Street) for $707,000,000 in cash. The property has 126 feet of frontage on Fifth Avenue and contains 114,000 sq. ft., 39,000 sq. ft. in fee and 75,000 sq. ft. by long-term lease from the an office condominium, which is 49.5% owned by Vornado. VNO increased its investment in a massive residential project, Independence Plaza, located in Manhattan s Tribeca neighborhood. On December 21, 2012, VNO acquired a 58.75% interest in the property by buying one of the equity partners 33.75% interest for $160,000,000, exercising a warrant for 25% of the equity and contributing the appreciated value of its interest in the subordinated debt as preferred equity. This transaction values the property $844,800,000. These recent transactions can be used as benchmarks to analyze portfolios by providing a guide of values per sq. ft. While individual property values will vary, this per sq. ft. metric can be applied across an entire portfolio to provide a bird s eye view of value. Value of Manhattan Office Holdings Applying market information from comparative sales to an income capitalization analysis is a powerful way to estimate the value of the s Manhattan office holdings. Comparative sales report information about recent market transactions can be used to determine the value of other properties. Typically private information, such as a capitalization rate (cap rate) or the current yield on a property, is occasionally divulged in market sales. Since property sales are often reported (or easy to compute) on a per sq. ft. basis, that price mark represents a property condition, location, income, risk, and upside. The comparative sales approach, when combined with income capitalization can provide an accurate depiction of property and portfolio value. Cap rates are the current yield on a property, determined by dividing net operating income (NOI) by the market price or value. Backing into a market value, the income capitalization method divides NOI by an appropriate cap rate to determine a property price. Cap rates differ among property types and markets, but as of mid-year 2013, cap rates for Class A Manhattan office space were in the 4.0% to 5.0% range, while Class B space was in the 5.0% to 7.0% range. Just as a junk bond carries a high yield, higher cap rates can signify higher risk, while lower cap rates are typically associated with core, stabilized properties. 5 New York, as usual, offers an exception, as office investors may be willing to accept a lower cap rate due to high vacancy or other factors in the short term if they think they can quickly lease the property or increase rents on near-term lease expirations. A valuation based on a 5.0% cap rate would value the GM Building at $5.171 billion, compared to when BXP acquired the property in a $3.95 billion transaction in But this cap rate analysis does not always compare to the market. As noted above, BXP sold a 40% stake in the GM Building for a reported $1.4 billion, valuing the building at $3.4 billion, which is a value of approximately $1,880 per sq. ft. 6 When used together, such as in the Vornado and BXP examples below, it is possible to see how different cap rates, when applied to NOI, result in different values per sq. ft., providing a basis for reviewing comparable sales. 5 Of course, as an asset class, real estate differs from bonds significantly, since real estate can provide long-term capital appreciation, as opposed to a return of par value. 6 FFO = Net Income + Amortization & Depreciation Gains from Sale of Real Estate. 6

7 Applied to financials Vornado provides for its New York office holdings, 7 a 5.0% cap rate results in a valuation of $15.4 billion or $882/ sq. ft. A more aggressive 4.0% cap rate results in a portfolio value of $19.3 billion, or $1,103/sq. ft. 8 With recent investment sales in the $700+ per sq. ft. range, this may be a fair assessment, even with the low cap rate. While Boston Properties does not provide the same level of detailed information as Vornado, BXP does breakout NOI for its Manhattan office portfolio. An applied cap rate derives a portfolio valuation. The same 5.0% cap rate applied to BXP generates a value of $6.4 billion or $1,012/sq. ft. Taking the portfolio values from Table 12 and subtracting mortgage debt (Table 1) provides a net asset value (NAV) for the Manhattan office holdings of the s. This net asset value is the equity that a portfolio level investor would have in the aggregated properties. 13 Table 7: Vornado s New York Office 2012 NOI 9 New York Office 2012 Revenue $ 1,374,984,000 Operating Expenses 602,833,000 NOI $ 772,151,000 The values in Table 13 show the implied leverage of the s Manhattan portfolios, based on an estimated value per sq. ft. Using the valuation in the top left cell as an example, if BPO s Manhattan office portfolio is valued at $400 per sq. ft., it would have a total value of $6.3 billion (Table 12), a loanto-value (leverage) of 55% (Table 13). As observed previously, the West Side, Park Avenue, and Penn Station are all favored development areas, as indicated by investment activity by the four s. Vornado has publicly argued for the upzoning of Park Avenue to allow for bigger buildings. Additionally, both Vornado and Brookfield have substantial development 10, 11 Table 8: Vornado s New York Office 2012 financial performance Description Vornado s New York Office reported financials 2012 Annual Net Income $ 573,996,000 + Depreciation & Amortization 252,257,000 - Gain from sale - Funds From Operations (FFO $ 826,253,000 Table 9: Vornado s New York Valuation per sq. ft. (2012) 12 Cap Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% Value ($B) $ 25.7 $ 22.1 $ 19.3 $ 17.2 $ 15.4 $ 14.0 $ 12.9 NOI Multiple FFO Multiple NOI $ 1,471 $ 1,260 $ 1,103 $ 908 $ 882 $ 802 $ 735 Table 10: BXP s Manhattan Office Net Operating Income (2012) 2012 Manhattan Office Portfolio Manhattan Office 2012 Revenue $ 481,844,000 Expenses 160,386,000 NOI $ 321,458,000 Table 11: BXP s Manhattan Office Valuation (2012) Cap Rate 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% Value ($B) $ 25.7 $ 22.1 $ 19.3 $ 17.2 $ 15.4 $ 14.0 $ 12.9 NOI Multiple Value/sq. ft. $ 1,687 $ 1,446 $ 1,266 $ 1,125 $ 1,012 $ 920 $ 844 Table 12: NYC portfolio value using per sq. ft. comparable $ 400 $ 500 $ 600 $ 700 $ 800 $ 900 $ 1,000 BPO BXP ESB SLG VNO Total $ 34.1 $ 41.0 $ 47.8 $ 54.6 $ 61.5 $ 68.3 $ VNO s NYC income data includes a 132,000 sq. ft. Paramus, NJ office building with gross rents of $2.3 million (based on annualized rents of 87.1% occupancy) in its calculations, amounting to approximately 0.25% of NYC office income. 8 Based on proportionate owned sq. ft., as Vornado s 10-K, Note 2, p 173: Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation of net income to EBITDA includes our share of these items from partially owned entities. 9 NOI based on reported New York Office Revenues minus New York Office Operating Expenses minus General and Administrative expenses. Does not include depreciation and amortization or interest and debt expense. 10 Net Income = NOI (Depreciation & Amortization) (Interest and Debt Expense). 11 In this analysis, Vornado s income from owned office space in New Jersey is included in their New York office financial reporting, since information to separate this out is not available. 12 Based on proportionate owned sq. ft., as Vornado s Note 2, p 173: Interest and debt expense, depreciation and amortization and income tax expense in the reconciliation of net income to EBITDA includes our share of these items from partially owned entities. 13 Excluding any unsecured, corporate level debt. 7

8 Table 13: Implied 2012 portfolio leverage (loan to value) $ 400 $ 500 $ 600 $ 700 $ 800 $ 900 $ 1,000 BPO 52% 42% 35% 30% 26% 23% 21% BXP 104% 83% 69% 59% 52% 46% 41% ESB 25% 20% 17% 14% 12% 11% 10% SLG 56% 45% 38% 32% 28% 25% 23% VNO 39% 31% 26% 22% 19% 17% 15% Average 55% 44% 37% 31% 28% 24% 22% plans for the Penn Station area. In January 2013, Brookfield commenced development on its 5.4 million sq. ft. Manhattan West project, located between 31st and 33rd Streets and Eighth and Ninth Avenues by 2013 by launching a platform over the railroad tracks on top of which this mixed-use project will be built. BPO obtained $340 million of construction financing for the development project. Vornado began the process of re-tenanting and redeveloping 280 Park Avenue, of which 50% is co-owned with SL Green. Vornado shelved its plans to redevelop the site of the Hotel Pennsylvania into a 2.8 million sq. ft. office tower. In its annual report VNO said it is evaluating other development and redevelopment opportunities at the Hotel Pennsylvania, but press and other reports cite a hold on the project. Conclusion Even in the face of economic uncertainty, the demand for New York office property by major s and other real estate investors remains strong. s are aggressively acquiring prime Manhattan office space through both outright purchases and by taking advantage of creative capital uses, as shown by Vornado s use of mezzanine debt to partner with SL Bibliography Boston Properties, Form 10-K for the Period Ending 12/31/12. Boston Properties, Supplemental Operating and Financial Data for the Quarter Ended December 31, Brookfield Office Properties, Annual Report for the Period Ending 12/31/12. Brookfield Office Properties, Supplemental Information for the quarter ended December 31, Green at 280 Park Avenue. Existing space is being released at higher rates, and tenants are signing leases on development projects, an economic vote of confidence. More than 11 million sq. ft. of office space is under development or redevelopment by the s, demonstrating their confidence in the long term strength of New York s office market. End Notes Some numbers may differ slightly from company figures due to rounding. Net ownership is proportionate to total shareholder ownership through JV partnerships or subsidiary holdings, as reported in securities filings. The method of identifying holdings by net ownership percentage is also utilized by Brookfield in its annual report. Most notably, as commercial property values increased in 2012, Manhattan office s shifted into selling gear. Both property and capital were sold The Steven L. Newman Real Estate Institute, Baruch College, CUNY. Do not copy or distribute without written permission. The Newman Real Estate Institute gratefully acknowledges the support of the sponsors who make possible our efforts to promote critical thinking on topical issues for the real estate industry. The views expressed in the research report are those of the author and not necessarily those of Baruch College, City University of New York, or any of its affiliated organizations, foundations, and sponsors. Please address inquiries to Jack S. Nyman, Executive Director, at: Cushman & Wakefield, Marketbeat Office Snapshot Manhattan Q GlobeSt.com, Investment Sales Dominate at Boston Properties, May 1, The Real Deal, GM Building stake sells for $1.4B, June 3, SL Green Realty Corp, Form 10-K, for the Period Ending December 31, SL Green Realty Corp, Fourth Quarter Supplemental Data, December 31, Vornado Realty Trust, Form 10-K, for the period ending December 31, Vornado Realty Trust, Supplemental Operating and Financial Data for the Quarter and Year Ended December 31, Baruch College, CUNY 137 East 22nd Street Box C-0120 New York, NY Tel: Fax: William Newman, Founding Chair Richard Pergolis, Co-Chair Jack S. Nyman, Executive Director Emily Grace, Associate Director of Research 8