San Francisco Peninsula Office Market

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

The ongoing credit crunch, housing slump, and unstable stock market continued to limit activity in the San Francisco Peninsula office market during the second quarter of 2008. While the fourth quarter of 2007 and the first quarter of 2008 were slow but stable, this quarter showed signs of some pullback.

QUICK STATS Change from last

Current

Vacancy

10.1%

Lease Rates

$4.21

Yr. Qtr.

Net Absorption* -499.4K Construction Completions

36.9K

* The Quick Stats arrows are trend indicators over the specified time period and do not represent a positive or negative value. E.g. absorption could be negative, but still represent a positive trend over a specific period.

HOT TOPICS

Businesses remain cautious, but not all signs are pessimistic. While sales activity in the office market is much slower, many investors view the current market conditions as a good time for value buys. Projects under construction are also seeing significant interest and pre-leasing. Venture capital continues to invest heavily in Peninsula based innovative industries, most notably the rapidly growing clean tech industry.

For the first time in eight quarters, net absorption is negative. The last time this happened was the first quarter of 2006 when Oracle acquired Siebel and With increased sublease supply and lower asking rates, the market may respond dumped nearly 800,000 square feet of space onto the sublease "Businesses remain cautious, with renewed demand and market activity in the coming market. Similarly, this quarter but not all signs are quarters. Ropes & Gray and PDL Biopharma in Redwood City pessimistic." OnLive have already taken placed over 447,000 square feet advantage of the current market of office space on the market trends and signed significant sublease spaces this for sublease. Hewlett Packard, headquartered in quarter in Palo Alto. Gunderson Dettmer has also Palo Alto, also announced plans to shed space in committed to an entire building in Redwood City, coming quarters. and Akamai signed a major lease in San Mateo. These moves by prominent users have helped to Because the current market downturn has thus cool the office market. The increased amount far been relatively shallow in comparison to prior of sublease space is putting downward pressure cycles, should more users follow suit in capitalizing on average asking rates. For the first time since on lower rental rates and increased negotiating 2003, average asking rates dropped, though only power, business confidence and market momentum by $0.03 per square foot down to $4.21. The may rebound quickly. overall vacancy and availability rates also shot up by a full percentage point each, to 10.1% and 12.4%, respectively.

• First instance of negative net absorption since 2006

VACANCY VS. ABSORPTION

• First instance of asking rate decreases since 2003

Vacancy Rate Net Absorption

10.1% -499,449

• Under construction space is being preleased

1.0M

25%

• Midsize investment sales continue

0.5M

20%

0

15%

-0.5M

10%

Net Absorption

30%

-1.0M

www.cbre.com

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.

5%

% Vacancy

1.5M

CB Richard Ellis | San Francisco Peninsula Office MarketView | 2Q 2008

SUBMARKET

NET TOTAL TOTAL AVG. ASKING RATE RENTABLE VACANCY AVAILABILITY Q2 NET YTD NET AREA RATE RATE CLASS A CLASS B CLASS C ABSORPTION ABSORPTION

Daly City

1,030,086

4.4%

4.4%

$3.40

$2.75

$2.15

(5,940)

12,052

-

South San Francisco

2,524,453

7.2%

9.6%

$3.60

$2.90

$2.40

10,912

(29,732)

303,612

Brisbane

1,322,558

17.6%

20.5%

$3.40

$2.75

$2.15

32,019

25,178

-

San Bruno

1,361,908

13.9%

14.2%

$3.55

$2.90

$2.10

(37,649)

(77,875)

-

161,395

0.0%

0.0%

$3.55

$2.90

$2.10

-

-

-

Burlingame

2,563,650

10.7%

15.5%

$3.50

$2.70

$2.35

(938)

33,760

-

North County

8,964,050

10.3%

12.8%

$3.52

$2.79

$2.28

(1,596)

(36,617)

303,612

San Mateo

6,974,099

10.8%

14.4%

$4.10

$3.60

$2.70

(207,071)

(183,047)

270,000

Foster City

3,496,850

2.4%

3.6%

$4.40

$3.40

$2.70

(34,191)

69,376

-

Belmont

810,494

32.6%

32.6%

$3.50

$3.10

$2.70

12,168

8,470

-

San Carlos

617,278

36.1%

36.1%

$3.50

$3.10

$2.70

(55,746)

(93,985)

-

Redwood City

10,136,570

14.6%

17.1%

$4.10

$3.55

$2.60

(247,718)

(338,951)

-

Central County

22,035,291

12.7%

15.2%

$4.12

$3.49

$2.67

(532,558)

(538,137)

270,000

Menlo Park

3,682,902

7.3%

9.1%

$8.05

$4.37

$4.33

(17,114)

16,128

172,295

Palo Alto

8,460,862

4.1%

5.8%

$6.50

$5.16

$4.57

51,819

79,517

226,069

South County

12,143,764

5.1%

6.8%

$6.96

$4.94

$4.46

34,705

95,645

398,364

SAN FRANCISCO PENINSULA OFFICE MARKET

43,143,105

10.1%

12.4%

$4.61

$4.10

$2.82

(499,449)

(479,109)

971,976

Millbrae

U.S. California San Mateo County

UNEMPLOYMENT RATES

5.2% 6.5% 4.3%

The total number of jobs in the San Francisco/San Mateo Metropolitan Area has increased by 3,200 jobs to reach one million jobs. Leisure and hospitality employment increased by 1,900 jobs. Construction and Trade, transportation and utilities both posted an average seasonal gain of 300 jobs. Meanwhile, Professional business services lost 100 jobs. While the total number of jobs has increased, it has not caught up with the increase in the labor force, thereby yielding an increase in the unemployment rate to 4.3% for San Mateo County. However, unemployment in the county remains well below the National and California averages of 5.2% and 6.8%, respectively.

7% 6% 5% 4% 3% 2% 1% 0%

UNDER CONSTRUCTION

06’Q4

Source: EDD

07’Q1

07’Q2

07’Q3

07’Q4

08’Q1

08’Q2

© 2008 CB Richard Ellis, Inc.

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

VACANCY/AVAILABILITY

10.1% 12.4%

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

06’Q4

07’Q1

07’Q2

07’Q3

07’Q4

08’Q1

08’Q2

Class A Class B

LEASE RATES $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00

06’Q4

07’Q1

07’Q2

07’Q3

07’Q4

08’Q1

$4.61 $4.10

08’Q2

The San Francisco Peninsula office market vacancy rate increased 110 basis points to 10.1% this quarter, but has decreased 140 basis points from last year. Overall market availability also increased, ending the quarter up 120 basis points at 12.4%, but is also down by 3 basis points compared to last year. Most cities on the Peninsula experienced vacancy and availability increases with the exception of Brisbane, South San Francisco, and Palo Alto. For the second quarter in a row, Class A and C experienced vacancy and availability increases while Class B space experienced a decrease as a result of tenants compromising image for value. Sublease space as a percentage of total availability increased significantly to 26% from 18% last quarter, much of which is a result of the PDL Biopharma sublease in Redwood City.

For the first time since 2003, the overall asking rate for the San Francisco Peninsula office market decreased 0.7% from $4.24 to $4.21. However, the current asking rates are still 17% higher than the same time last year. The North and Central Counties saw slight decreases, down by $0.06 to $3.06 and $0.08 to $3.80, respectively. The South County, however, was flat. Continuing on last quarter’s trend, Class A rents dropped $0.04, ending at $4.65. Class C asking rents followed suit, dropping $$0.09 to $2.82. However, Class B asking rents remained flat.

NET ABSORPTION

CONSTRUCTION ACTIVITY

1.4M 1.2M 1.0M 0.8M 0.6M 0.4M 0.2M 0 -0.2M -0.4M -0.6M

Net Absorption

-499,449

The 36,858 square feet project at 250-260 Homer Ave in Palo Alto came to market 33% pre-leased this quarter. 2825 El Camino is anticipated to be delivered in the third quarter with 10,000 square feet available for lease. 64 Willow Pl and 2825 Sand Hill Rd in Menlo Park have shown significant tenant interest and will be delivered with at least 50%-75% pre-leased in the coming quarters. Construction is on schedule at the Centennial Towers in South San Francisco and existing buildings are beginning to be demolished at the University Plaza site in East Palo Alto.

06’Q4

07’Q1

07’Q2

07’Q3

07’Q4

08’Q1

08’Q2

The decreased activity that started last quarter continued into the current quarter with almost half a million square feet of negative net absorption. This quarter, the Peninsula saw its first quarter of negative net absorption since the first quarter of 2006 when Oracle acquired Siebel. The space returns mainly came from the Central Peninsula. The largest was PDL Biopharma’s sublease offering of two Class A buildings. For the second consecutive quarter, Class B space outperformed Class A, indicative that macroeconomic worries are indeed forcing businesses to be more cash conservative.

© 2008 CB Richard Ellis, Inc.

MARKET OUTLOOK After experiencing four solid years of growth on the Peninsula, recent macroeconomic uncertainty has trickled into the local market, with negative numbers almost across the board. There has been a recent increase in sublease space, and a slight decrease in asking rates. Should users capitalize on this trend, they will pick up more reasonably priced space and help the market recover. However, if business optimism continues to lag and users contract and further defer their real estate decisions, the market may face further rate declines in order to boost activity.

MarketView | San Francisco Peninsula Office SAN FRANCISCO PENINSULA SUBMARKET MAP

AVAILABILITY RATE Available Square Feet divided by the NRA. AVAILABLE SQUARE FEET Vacant Square Feet plus space that is marketed as available but not currently vacant, includes sublease space. 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 AREA DESCRIPTIONS

1. Daly City consists of 1.0 million square feet (2.4%) of the office market NRA. 2. Brisbane consists of 1.3 million square feet (3.1%) of the office market NRA. 3. South San Francisco consists of 2.5 million square feet (5.9%) of the office market NRA. 4. San Bruno consists of 1.4 million square feet (3.2%) of the office market NRA. 5. Millbrae consists of 0.2 million square feet (0.4%) of the office market NRA. 6. Burlingame consists of 2.6 million square feet (5.9%) of the office market NRA. 7. San Mateo consists of 7.0 million square feet (16.2%) of the office market NRA. 8. Foster City consists of 3.5 million square feet (8.1%) of the office market NRA. 9. Belmont consists of 0.8 million square feet (1.9%) of the office market NRA. 10. San Carlos consists of 0.6 million square feet (1.4%) of the office market NRA. 11. Redwood City consists of 10.1 million square feet (23.5%) of the office market NRA. 12. Menlo Park consists of 3.7 million square feet (8.5%) of the office market NRA. 13. Palo Alto consists of 8.5 million square feet (19.6%) 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.

MARKET COVERAGE Includes office buildings 10,000 square feet and larger located within defined submarkets. It excludes medical office buildings and government owned office buildings. NET ABSORPTION The change in Occupied Square Feet from one period to the next. NET RENTABLE AREA 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.