SAN FRANCISCO OFFICE REPORT

1Q10

ECONOMY
High unemployment numbers continue to set a negative outlook for the possibility of BEAT ON THE STREET
ECONOMY
growth, tenant stability
The Manhattan or expansion.
office market continuedMarch unemployment
to tighten during thefor Sanhalf
first Francisco
of 2007,stands
extending “The general sentiment within the brokerage
at 10.0% but is expected to trend downward as the year progresses. Business
strengths exhibited during the second half of 2006. Steady employment growth contributed community is that the market seems to have
confidence is beginningoftoavailable
positively influence decision makingasking
but it remains found a bottom and is beginning to show
to positive absorption space and rapidly escalating rents. to be signs of stabilization. The recent expansion by
seen if sustained confidence can translate into hiring and larger space requirements. As
Thesettle
Newalong
Yorkthe Citybottom
economy expanded Salesforce.com, narrowing of the “ask-take”
we of the currentatmarket
a healthy pace
cycle, 2009during the first asixlow
represented months
point of the gap between landlords and tenants, and
year,occupancy,
for led by strong
rentsgains
and in office-using
absorption. employment.
Shadow space isData
still aavailable
concern through
for thosethe end to
trying of May multiple proposal submittals on quality space,
show that the
determine the City
healthhasofadded nearly Large
the market. 16,800blocks
jobs inofindustries that are
shadow space keycome
have to the orcommercial
will are all indicators that the market is heading
officecome
soon market, withSan
to the financial services
Francisco andcreating
market, professional
morebusiness
challenges services adding 7,400 and
for landlords down the road to recovery. ”
5,500 jobs, for
competing respectively. This term
tenants. Short resulted in increased
renewal are still demand
commonplacefor office space optimism
as tenant in a marketis that –Zach Siegel, Senior Director
restricted by economic uncertainty.
was already the tightest it had been since the first quarter of 2001.
ECONOMIC INDICATORS
OVERVIEW
The year began with 26.1 million square feet) available throughout Manhattan. By the end National 2009 2010F 2011F
The shrinking
of June, delta
available between
space landlords
had fallen and tenants
precipitously in terms
to 20.8 of market
a decline and economic
of 20.5%. This GDP Growth -2.4% 2.8% 3.7%
perception has created a more open and even playing field. The growth
diminishing availability of space has been the story of the market; April 2007 in space
was the only CPI Growth -0.3% 1.9% 2.1%
availability
month in the during
past 2010 could
year that didbenot
tempered
record abymonth-to-month
improved deal activity,
decline both
of at in number
least 122,000
and
square. As a result, Manhattan’s overall vacancy rate has tumbled to a six-year taking
size, more extensions and some expansions. Deal flow is up but leases are low, closing
Regional

longer to complete. There are third

also more LOI's and RFP'sthedue to growing business and Unemployment 9.8% 8.7% 6.9%
the mid-year at 5.3%. For the consecutive quarter, vacancy rate closed below
economic confidence. Many believe that asking rents
equilibrium, defined as a vacancy rate range of 7.0% - 9.0%. have or will bottom out soon but Employment -2.1% 1.2% 3.3%
owners with a low basis can take lower rents. Free rent and early occupancy have Growth
Source: Moody’s | Economy.com
helped
OVERVIEWto attract or keep tenants as they keep effective rents lower
In this
First environment,
quarter it is no
CBD overall surprise that
absorption asking
for San rates have
Francisco wasskyrocketed. Up 36.2%
negative 107,523 squarefrom a
year ago, Manhattan’s overall total average asking rent closed the first half of
feet (sf) while citywide registered negative 130,772 sf. There will be little relief on the2007 at MARKET FORECAST
horizon as the market can expect significant big-block availabilities coming in the by an
another record-high: $59.17 per square foot. Thus far this year, rents have increased SUBLEASE SPACE currently makes up
averageand
second of $1.44
third each month
quarters since
of this January,
year. breaking
Citywide the product
sublease old recordonset
theback
marketduring
is the almost 14% of CBD availability. This will
second and third quarters of 2000. The rapid pace of rental rate growth has
nearly 500,000 sf less than the 1.7 million square feet (msf) at the end of 2009. This extended grow when Blackrock puts nearly
120,000 sf on the market later this year.
throughout
can Manhattan.
be attributed In every
to subleases submarket
turning direct but one, overall
or taken back byrents have registered
landlords, and leasingdouble-
digit percentage increases from a year
activity that was focused on sublease space. ago. Chelsea, up 4.2%, was the only exception. CONSTRUCTION: The Environmental
Protection Agency (EPA) could drive
On a cautionary
Investment note,
activity hashowever,
nowhereleasing activity
to go but up inthroughout Manhattan
2010 and the recent saleswasofslower during
211 Main construction activity up if they decide to
the first
Street two
and 49quarters,
Stevenson partially
Street attributable
indicate thattosale
both significantly
volumes shouldhigher
easily rents and2009
surpass lack of build new headquarters.
available
totals. space. bids
Multiple Withfor11.8 leased year-to-date,
properties 2007 activity
reflect the number trailsinlast
investors theyear’s total
market butthrough
the OVERALL ABSORPTION should remain
June by 5.4%,
number with Midtown
of buildings trailing by
for sale remains nearly
low, 20.0%.
helping Thisprices
to push suggests that Broadway
higher. tenants are negative in 2010 as new space additions
possibly beginning
Partners, the ownerstoofsearch for lower-priced
One Sansome, gave thespace in response
property back totoPrudential
landlords Real
hiking up rents outweigh leasing activity.
throughout
Estate the market.
Investors in March. This, along with 333 Bush Street, represents the latest give-
back of highly leveraged properties to lenders in San Francisco. OVERALL RENT VS. VACANCY
ENTERENT

OUTLOOK CBD-Rent Non-C BD- Rent

This year’s leasing has been dominated by Manhattan’s leading industries. Financial
FORECAST CBD-Vacancy Non-C BD- Vacancy

services firms
Caution (36.4%)
has been and legal
the force services
behind firms
decision (11.7%)
making accounted
so far in 2010.for nearly
Lease one of every
negotiations $50 22%

two square feet leased from January through June. In April, Lehman Brothers
are more involved and time consuming as landlord and tenants work to find agreeable Holdings, $45
20%

18%
terms. Larger tenants continue to cut costs and downsize rather than grow at thisAvenue
Inc. signed Manhattan’s largest new lease in 2007, a 414,575-sf sublease at 1271 time. of $40
16%
the Americas. The frequency of transactions with taking rents starting at or
Smaller tenants, particularly technology-based and under 10,000 sf, make up the bulk above $125.00
psf/yr

$35 14%
continued to climb: 18 such transactions year-to-date versus 21 signed in the four
of new leasing activity. Growth in the real estate market will ultimately depend on jobs. previous $30
12%

years combined.
When recovery news starts coming from businesses, rather that the media, we can 10%
$25
then begin to expect business growth and stronger real estate market fundamentals. 8%

$20 6%
1Q06 1Q07 1Q08 1Q09 1Q10

SAN FRANCISCO OFFICE REPORT 1Q10 1

 SAN FRANCISCO OFFICE REPORT 1Q10

MARKET/SUBMARKET STATISTICS
OVERALL DIRECT YTD YT D YTD YTD DIRECT W TD. AVG.
N O. OF VACANCY VACANCY LEASING UNDER CONSTRUCTION D IRECT OVERALL CLASS A GROSS
MARKET/ SUBMARKET INVENTORY BLDGS. RAT E RATE ACTIVITY CONST RUCTION C OMPLET ION S ABSORPTION ABSORPTION REN TAL RAT E*

NOMA Financial District 25,995,252 112 14.1% 11.7% 513,056 0 0 (60,856) 194,386 $38.26
SOMA Financial District 22,532,963 99 11.0% 9.9% 210,999 0 0 (351,170) (301,909) $37.77
CBD Total 48,528,215 211 12.6% 10.9% 724,055 0 0 (412,026) (107,523) $38.04
Jackson Square 1,369,168 24 20.5% 20.5% 11,229 0 0 (36,959) (36,959) $28.95
North Waterfront 2,411,354 32 16.9% 15.0% 97,968 0 0 15,438 (5,384) $29.81
South Beach/Rincon Hill 2,412,962 29 14.7% 11.7% 66,427 0 0 (12,205) 21,743 $31.51
San Francisco S. of Mark 5,715,514 46 26.4% 23.7% 96,667 0 0 (9,796) (7,721) $34.33
West of Kearny 703,735 9 8.8% 7.9% 0 0 0 (562) (562) $26.12
The Presidio 995,955 7 22.8% 20.0% 6,420 0 0 (154,377) 6,420 N/A
Union Square 4,217,942 60 13.0% 12.2% 76,460 0 0 3,191 14,244 $27.29
Van Ness Corridor 4,267,878 33 8.2% 8.2% 10,074 0 0 (19,568) (19,568) $26.43
Potrero Hill/Inner Mission 1,893,398 23 17.4% 16.8% 82,168 0 0 (2,815) 4,538 $26.06
Mission Bay 1,006,272 4 48.1% 48.1% 0 0 0 0 0 N/A
Non-CBD Total 24,994,178 267 18.2% 16.8% 447,413 0 0 (217,653) (23,249) $31.23

SAN FRANCISCO TOTA 73,522,393 478 14.5% 12.9% 1,171,468 0 0 (629,679) (130,772) $36.84
* Rental rates reflect $psf/year

MARKET HIGHLIGHTS
SIGNIFICANT 1Q10 NEW LEASE TRANSACTIONS
BUILDING SUBMARKET TENAN T SQUARE F EET BLDG CLASS

575 Florida Street Potrero Hill/Inner Mission Charlotte Russe Clothier 52,910 C
225 Bush Street NOMA Financial District BeneFit Cosmetics 52,580 B
One Montgomery Street NOMA Financial District URS Corporation 38,128 A
795 Folsom Street San Francisco South of Market Twitter 31,611 A
1355 Sansome Street North Waterfront Hult International Business School 28,590 A
760 Market Street Union Square Sears.com 24,569 C
651 Brannan Street San Francisco South of Market SFMTA - Central Subway Design Division 25,245 B
One Montgomery Street NOMA Financial District Posit Science 18,590 A
One Montgomery Street NOMA Financial District Medicines360 18,590 A
One Front Street NOMA Financial District McMorgan & Company 16,796 A
One Montgomery Street NOMA Financial District Design Within Reach 16,105 A
One California Street NOMA Financial District Salesforce 15,956 A
SIGNIFICANT 1Q10 SALE TRANSACTIONS
BUILDING SUBMARKET Buyer SQUARE F EET PURCHASE PRICE
211 Main Street SOMA Financial Market CIM Group 359,000 $112,000,000
49 Stevenson Street SOMA Financial Market Steven Pan 126,359 $24,200,000
550 Montgomery Street NOMA Financial Market Downtown Properties 94,488 $12,650,000
SIGNIFICANT 1Q10 CONSTRUCTION COMPLETIONS
BUILDING SUBMARKET MAJ OR TENANT SQUARE F EET C OMPLETION DAT E

One Kearny Street (renovation) Union Square N/A 91,360 1/10

SIGNIFICANT PROJECTS UNDER CONSTRUCTION/RENOVATION
BUILDING SUBMARKET MAJ OR TENANT SQUARE F EET C OMPLETION DAT E

N/A

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