San Francisco Office Market

MarketView

San Francisco Office S E C O N D Q UA R T E R 2 0 0 8

QUICK STATS Change from last

Current

Vacancy

9.1%

Lease Rates

$42.85

Yr. Qtr.

Net Absorption* 303.5K Construction Completions

783.3

* The Quick Stat arrows are trend indicators over the specified time period and do not represent a positive or negative value. i.e. Absorption could be negative, but still represent a positive trend over a specific period.

San Francisco’s downtown office market continued to nearly 100,000 square feet in the quarter. In the see a subdued level of leasing activity in the second six months so far in 2008, sublease space available quarter of 2008. Overall vacancy rates maintained has increased by nearly 30% and now stands at their slow rise, seeing a small increase for the more than 1.6 million square feet. third consecutive quarter. Mission Bay construction While the market continues to be steady, it has completions added nearly 450,000 square feet of become obvious that tenants are hesitant to commit vacant space to the market in early June with the to high-priced real estate in hopes of a decline new campus at 500 Terry Francois and the vertical in pricing. With uncertainty over the direction of expansion at 185 Berry St receiving occupancy consumer spending, inflation and GDP growth permits. Helping to mitigate the effects of those businesses are inclined to shelf speculative expansion deliveries on vacancy rates was the completion of plans and avoid cost increases when possible. As Barclay’s build-to-suit project in Foundry Square. a result, market activity has in large Barclay’s occupation of the entire "Tenants focused on part been focused on cost effective 335,000 square feet at 400 Howard created positive absorption for the value and short-term alternatives. overall market. Without the Barclay’s deals are creating a As the year progresses, it seems less expansion San Francisco would have likely that the economic turmoil will posted a second consecutive quarter strong level of activity in sublease space." end in 2008, which may portend a of negative absorption. As it stands, continuation of the lack of activity seen the market experienced 320,000 in the first half of the year. Adding to the supply, square feet of positive absorption for the quarter, two speculative construction projects are expected with negative numbers for both class B and C to complete in the fourth quarter. 370 Third Street, market-wide. a 390,000 rehab project in the Yerba Buena submarket and 555 Mission, a new 555,000 square As was the case in the first three months of the year, foot tower in the South Financial District may add tenants focused on value and short-term deals are more than three quarters of a million square feet of creating a strong level of activity in sublease space. vacant space to the market upon completion. Despite the increased number of signings, the total amount of sublease space available increased by

HOT TOPICS • Overall vacancy rises for the third consecutive quarter

VACANCY VS. ABSORPTION

• Asking rates decrease for the first time in nearly five years

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1.2M 1.0M 0.8M 0.6M 0.4M 0.2M 0 -0.2M -0.4M -0.6M

9.1% 303,542

20% 18% 16% 14% 12% 10% 8% 03’Q2 03’Q4 04’Q2 04’Q4 05’Q2 05’Q4 06’Q2 06’Q4 07’Q2 07’Q4 08’Q2

© 2008 CB Richard Ellis, Inc.

6%

% Vacancy

• Mission Bay/China Basin vacancy over 30%

Net Absorption

• Class B & C both post negative absorption

Vacancy Rate Net Absorption

CB Richard Ellis | San Francisco Office MarketView | 2Q 2008 NET RENTABLE AREA

TOTAL VACANCY RATE

TOTAL AVAILABILITY RATE

Financial District

27,160,376

9.0%

13.0%

$50.50

$39.00

South Financial District

20,520,328

7.2%

10.9%

$47.50

North Waterfront & Jackson Square

4,793,666

9.0%

11.4%

Rincon / South Beach

2,690,902

10.7%

Yerba Buena

3,260,036

South of Market

AVG. ASKING RATE

Q2 NET ABSORPTION

YTD NET ABSORPTION

$27.00

(45,882)

(318,570)

$36.00

$27.00

384,359

287,991

$45.50

$32.50

$32.00

(51,271)

(96,688)

17.5%

$45.00

$39.00

$28.25

(63,207)

7,164

4.9%

17.2%

$46.00

$35.00

$25.00

43,938

(40,127)

2,613,337

4.8%

31.5%

$35.00

$32.00

$24.00

(11,405)

8,798

Multimedia Gulch

3,529,583

14.0%

24.7%

$40.00

$38.25

$33.25

27,513

33,473

Mission Bay/China Basin

1,654,272

30.3%

31.8%

$58.00

N/A

N/A

-

(10,672)

Potrero Hill

2,052,242

14.2%

15.2%

$37.50

$35.25

$32.75

24,544

35,657

Civic Center & Van Ness Corridor

3,132,137

8.3%

29.4%

$35.00

$30.00

$28.00

(33,008)

(25,363)

Union Square

3,776,028

10.0%

11.2%

$42.50

$37.50

$30.75

55,474

7,747

75,182,907

9.1%

14.9%

$48.41

$36.15

$28.87

303,542

(133,391)

SUBMARKET

SAN FRANCISCO OFFICE MARKET

7% 6% 5% 4% 3% 2% 1% 06’Q4

Source: EDD

07’Q1

07’Q2

CLASS B

CLASS C

U.S. California San Francisco

UNEMPLOYMENT RATES

0%

CLASS A

07’Q3

07’Q4

08’Q1

08’Q2

5.2% 6.5% 4.9%

Employment rates across the nation continue to rise. The national rate increased 40 basis points during the quarter to 5.2% while California stayed static at 6.5%. In San Francisco, the unemployment rate has begun to rise again after a steady 2007. The rate has risen 50 basis points during the year and now stands at a still-healthy 4.9%. The largest job losses came from a normal seasonal loss of accounting and tax preparation positions. Despite rising unemployment rates, the number of employed persons in the city actually rose during the quarter, perhaps reflecting an increase in those seeking work as opposed to a shedding of jobs. Leisure and hospitality added the greatest number of employees during the quarter.

© 2008 CB Richard Ellis, Inc.

CB Richard Ellis | San Francisco Office MarketView | 2Q 2008 Vacancy Availability

VACANCY/AVAILABILITY

9.1% 14.9%

16% 14% 12% 10% 8% 6% 4% 2% 0%

06’Q4

07’Q1

07’Q2

07’Q3

07’Q4 08’Q1

08’Q2

Vacancy increased in the San Francisco Downtown market by 40 basis points to 9.1%. The market added more than 1.1 million square feet of total availability and the rate increased 140 basis points to 14.9%. More than 600,000 square feet of that availability is attributable to several rehabilitation projects in the Civic Center submarket, including the three-building AAA headquarters that traded hands during the first quarter of the year. Other increases in availability came from 650 Townsend where more than 200,000 square feet hit the market in May, 69,000 square feet on three floors of 225 Bush St and 60,000 square feet on four floors of 650 California St. 225 Bush and 650 California comprised a significant portion of the nearly 250,000 square feet of new space advertised in the Financial District that helped push that submarket’s availability rate up 90 basis points to 10.3%.

NET ABSORPTION

Net Absorption

303,542

800K 600K 400K 200K 0 -200K -400K -600K

06’Q4

07’Q1

07’Q2

07’Q3

07’Q4

08’Q1

08’Q2

After experiencing nearly 500,000 square feet of negative absorption in the first three months of the year, the San Francisco Downtown market saw a slight rebound in the second quarter posting 303,542 square feet of positive absorption. However, 335,000 square feet of positive absorption was created by Barclay’s expansion into buildto-suit space at 400 Howard St in June. Without the absorption created by that single deal, the market would have experienced negative absorption for a second consecutive quarter. Class B saw 61,616 square feet of negative absorption market-wide while class C saw 10,601 square feet of lost occupancy. Class A space, buoyed by the Barclay’s expansion, was the only class to see positive gains, posting 375,759 square feet. Looking forward, it is expected that more shadow space will continue to hit the market as sublease space, creating the likelihood of more negative absorption in 2008. © 2008 CB Richard Ellis, Inc.

Class A Class B

LEASE RATES $50.00 $45.00 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00

06’Q4

07’Q1

07’Q2

07’Q3

07’Q4

08’Q1

$48.41 $36.15

08’Q2

After 16 consecutive quarters of rising asking rates, the San Francisco market experienced its first rate decline since the third quarter of 2003, falling 0.6% to $42.85 market-wide. The greatest decreases were in the North Waterfront/Jackson Square submarket, which shed nearly a dollar and now stands at $36.21 and South of Market, which saw a 5.5% decrease to $30.60. This quarter saw several properties, which were attempting to achieve greater rental growth in recent months, return to asking rates more in line with those seen in 2007. While published asking rates show small declines, completed deals are getting done at lower rates in recent months. Trophy buildings aside, many landlords seem willing to offer more concessions and are showing greater flexibility in their rate requirements.

CONSTRUCTION ACTIVITY The completions of 400 Howard, 500 Terry Francois and expansion space at 185 Berry’s Berry Street building added 783,272 square feet to the market in the last three months. There are still nine properties and a total of 3.2 million square feet under construction in the city with only 449,000 square feet pre-committed. Later this year 370 Third, 555 Mission and 409 Illinois St are all expected to complete, adding 1,184,000 square feet of office space to the market. 409 Illinois is fully leased to Fibrogen, while 555 Mission has leased 144,000 square feet and is negotiations on several additional floors. Also, Beacon and Swinerton pulled a street space permit on June 20 and fenced off the existing surface lot at 535 Mission Street where they have approval for a 294,000 square-foot speculative tower.

MARKET OUTLOOK The San Francisco Downtown office market has experienced a lowered level of activity in the first half of 2008 as tenants and landlords attempt to assess where the market is heading. While a steep decline in asking rates and large amounts of negative absorption is unlikely, it is probable that vacancy rates will continue to rise through the rest of 2008. With a large amount of speculative space set to hit the market, it would take an unexpected expansion or large in-migration for San Francisco to avoid vacancy rates returning to levels above 10%. This likely will lead to continued decreases in rental rates as tenants begin to regain some negotiating leverage.

MarketView | San Francisco Office SAN FRANCISCO SUBMARKET MAP

AVAILABLE SQUARE FEET

Vacant Square Feet plus space that is marketed as available but not currently vacant, includes sublease space. AVAILABILITY RATE

Available Square Feet divided by the NRA. AVERAGE ASKING DIRECT LEASE RATE

The rate determined by multiplying the asking full service lease rate for each building in the summary by its associated NRA, summing the products, then dividing by the sum of the NRA. Rates are reported on a yearly basis. FULL SERVICE LEASES

Includes all types whereby the Landlord assumes responsibility for most or all of the operating expenses and taxes for the property, including utilities, insurance and/or maintenance expenses. MARKET COVERAGE

Includes office buildings 20,000 square feet and larger located within defined submarkets. It excludes medical office buildings and government owned office buildings.

MARKET AREA DESCRIPTIONS

NET ABSORPTION

•

Financial District consists of 27.2 million square feet (36.1%) of the office market NRA.

•

South Financial District consists of 20.5 million square feet (27.3%) of the office market NRA.

The change in Occupied Square Feet from one period to the next.

•

Jackson Square consists of 2.0 million square feet (2.6%) of the office market NRA.

NET RENTABLE AREA

•

Waterfront/North Beach consists of 2.8 million square feet (3.8%) of the office market NRA.

•

Van Ness Corridor consists of 1.2 million square feet (1.5%) of the office market NRA.

•

Civic Center consists of 2.0 million square feet (2.6%) of the office market NRA.

•

Union Square consists of 3.8 million square feet (5.0%) of the office market NRA.

•

Rincon/South Beach consists of 2.7 million square feet (3.6%) of the office market NRA.

•

Yerba Buena consists of 3.3 million square feet (4.3%) of the office market NRA.

•

South of Market consists of 2.6 million square feet (3.5%) of the office market NRA.

•

Multimedia Gulch consists of 3.5 million square feet (4.7%) of the office market NRA.

•

Mission Bay/China Basin consists of 1.7 million square feet (2.2%) of the office market NRA.

•

Potrero Hill consists of 2.1 million square feet (2.7%) of the office market NRA. LOCAL OFFICES

SAN FRANCISCO PENINSULA 950 Tower Lane Suite 870 Foster City, CA 94404 1.650.577.2900

OAKLAND 555 12th Street Suite 900 Oakland, CA 94610 1.510.874.1900

PLEASANTON 5000 Hopyard Road Suite 180 Pleasanton, CA 94588 1.925.251.4600

SILICON VALLEY 225 W. Santa Clara Street 10th Floor San Jose, CA 95113 1.408.453.7400

PALO ALTO Two Palo Alto Square 3000 El Camino Real Suite 100 Palo Alto, CA 94306 1.650.494.5100

WALNUT CREEK 2175 N. California Blvd. Suite 300 Walnut Creek,CA 94596 1.925.296.7700

SAN FRANCISCO DOWNTOWN 101 California Street 44th Floor San Francisco, CA 94111 1.415.772.0123

© Copyright 2008 CB Richard Ellis (CBRE) Statistics contained herein may represent a different data set than that used to generate National Vacancy and Availability Index statistics published by CB Richard Ellis’ Corporate Communications Department or CB Richard Ellis’ research and Econometric Forecasting unit, Torto Wheaton Research. Information herein has been obtained from sources believed reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of the market. This information is designed exclusively for use by CB Richard Ellis clients, and cannot be reproduced without prior written permission of CB Richard Ellis.

The gross building square footage minus the elevator core, flues, pipe shafts, vertical ducts, balconies and stairwell areas. OCCUPIED SQUARE FEET

Building Area not considered vacant. UNDER CONSTRUCTION

Buildings which have begun construction as evidenced by foundation work. VACANCY RATE

Vacant Square Feet divided by the NRA. VACANT SQUARE FEET

Available square feet which is either physically vacant or immediately available, includes sublease space.