SAN FRANCISCO OFFICE REPORT

4Q09

ECONOMY
Despite a diverse mix of tenants, unemployment in the San Francisco Bay Area reached BEAT ON THE STREET
record
ECONOMY highs this year. The unemployment rate in San Francisco’s Metropolitan Statistical
"In the wake of a recession that began over
Area (MSA) increased
The Manhattan to 8.9%continued
office market at the closeto of 2009,during
tighten the highest in over
the first half 30 years. extending
of 2007, This still two years ago, some optimism has returned to
compares favorably during
strengths exhibited to California’s
the secondunemployment
half of 2006.rate of 11.7%
Steady for the growth
employment same period. The
contributed the market. There has been a recent increase
largest job losses
to positive were of
absorption concentrated in banking
available space and finance,
and rapidly escalatingretail, andrents.
asking construction industries. in activity, which is consistent with national
The technology sector, however, is contributing to new demand in the Bay Area, and will play trends, although there is a sentiment among
The New York City economy expanded at a healthy pace during the first six months of the tenants that the more aggressive deal is still
a significant role in the recovery of the local economy. While job losses are expected to
year, led by strong gains in office-using employment. Data available through the end of May out there."
continue to climb into 2010, the rate of loss has begun to decrease. Commercial real estate
show that the City has added nearly 16,800 jobs in industries that are key to the commercial - Joseph J. Cook II, Executive Vice President
fundamentals lag overall economic trends and should not be expected to maintain sustainable
office market, with financial services and professional business services adding 7,400 and
growth until employment begins its recovery.
5,500 jobs, respectively. This resulted in increased demand for office space in a market that ECONOMIC INDICATORS
was already the tightest it had been since the first quarter of 2001.
OVERVIEW National 2008 2009F 2010F
The San Francisco office market struggled in 2009, with over negative 2.3 million square feet GDP Growth 0.4% -2.5% 2.3%
The year began with 26.1 million square feet available throughout Manhattan. By the end of
(msf) of overall absorption citywide. Third and fourth quarters showed small positive
June, available space had fallen precipitously to 20.8, a decline of 20.5%. This diminishing CPI Growth 3.8% -0.4% 1.7%
absorption in the Central Business District (CBD), which indicates the worst may be behind
availability of space has been the story of the market; April 2007 was the only month in the Regional
us. First quarter 2009 marked the lowest amount of city-wide leasing activity in over ten years,
past year that did not record a month-to-month decline of at least 122,000 square feet). As Unemployment 5.0% 8.9% 9.8%
although activity increased significantly during the second half of the year, attributable to the
a result, Manhattan’s overall vacancy rate has tumbled to a six-year low, closing the mid- Employment 0.7% -4.3% -1.3%
abundance of high-quality office space that is now available at a discount of the rents offered
year at 5.3%. For the third consecutive quarter, the vacancy rate closed below equilibrium, Growth
in 2008.
defined as a vacancy rate range of 7.0% - 9.0%. Source: Moody’s | Economy.com

Increasing vacancy, competition from subleases and renewals with minimal tenant
improvements
OVERVIEW drove down rental rates. The direct class A asking rent in the CBD was $38.33 MARKET FORECAST
per square
In this foot per year
environment, it is(psf/yr) at thethat
no surprise close of fourth
asking quarter,
rates have down 24.5%
skyrocketed. from $50.75
Up 36.2% from a RENTAL RATES are expected to
psf/yr oneManhattan’s
year ago, year ago. overall total average asking rent closed the first half of 2007 at decline, although at a slower pace than in
another record-high: $59.17 per square foot Thus far this year, rents have increased by an 2009, due to competition from aggressive
Most of the major lease transactions signed in fourth quarter occurred in class A CBD renewals and a decrease in basis as a
average of $1.44 each month since January, breaking the old record set back during the
buildings, including Del Monte Foods’ relocation and expansion of its headquarters into result of recent sales.
second and third quarters of 2000. The rapid pace of rental rate growth has extended
152,887 sf at One Maritime Plaza and Medivation’s 63,817-sf lease at 345 Spear Street. The
throughout Manhattan. In every submarket but one, overall rents have registered double- OVERALL VACANCY is leveling out
technology industry represents approximately 27.1% of current market demand, including
digit percentage increases from a year ago. Chelsea, up 4.2%, was the only exception. citywide and activity steadily increased
SalesForce.com’s requirement for 200,000 sf and and Zynga, Inc.’s for 130,000 sf. Leases throughout 2009. There are potentially
signed by technology
On a cautionary note,companies in fourth
however, leasing quarter
activity include Twitter,
throughout ManhattanZoomSystems
was slower and Nektar.
during 2.5 msf of vacant space hitting the
Energy
the firstefficient designpartially
two quarters, is also growing in demand
attributable to both in San Francisco.
significantly higherClass
rentsAand
CBD buildings
lack of market in 2010.
that achieved
available LEED
space. With certification this quarter include
11.8 leased year-to-date, 425 California
2007 activity trails last with
year’sLEED Silver
total through
OVERALL ABSORPTION will likely
certification
June by 5.4%, and theMidtown
with Transamerica Pyramid
trailing Building,
by nearly 20.0%.505ThisSansome
suggestsStreet, One Montgomery
that tenants are stabilize, but remain depressed in near
and 525 Market
possibly beginningStreet with LEED
to search Gold.
for lower-priced space in response to landlords hiking up rents term due to right-sizing.

Sales activity,the
throughout while still anemic, surged in fourth quarter, particularly in the CBD, as sellers
market.
became more motivated while buyers were attracted to historically low pricing. Transactions OVERALL RENT VS. VACANCY
in fourth quarter of approximately $160.5 million composed 90.8% of total office sales
OUTLOOK
volume for leasing
This year’s 2009. Sales transactions
has been dominatedincluded 550 Terryleading
by Manhattan’s Francois for $135.5
industries. million and 188
Financial CBD-Rent Non-CBD-Rent

Spear Street
services firmsfor(36.4%)
$25 million, a 20.9%
and legal andfirms
services 42.0% reduction,
(11.7%) respectively,
accounted fromone
for nearly theofvalue
everyof $49
CBD-Vacancy Non-CBD-Vacancy
23.0%
their prior trades.
two square feet leased from January through June. In April, Lehman Brothers Holdings, $42 21.0%
Inc. signed Manhattan’s largest new lease in 2007, a 414,575-sf sublease at 1271 Avenue of 19.0%
FORECAST $35
the Americas. The frequency of transactions with taking rents starting at or above $125.00 17.0%
With over 2.5 msf full-floor availabilities coming vacant in 2010 and negative employment $28
continued to climb: 18 such transactions year-to-date versus 21 signed in the four previous 15.0%
growth until 2011, the office market will not likely begin a sustainable recovery until 2011. $21
years combined. 13.0%
Tenants in the market will continue to benefit from landlords’ competitive lease rates and $14
11.0%
increased concessions. A flight to quality class A and “creative” class B space is expected to $7 9.0%

continue. $0 7.0%
4Q05 4Q06 4Q07 4Q08 4Q09

SAN FRANCISCO OFFICE REPORT 4Q09 1

 SAN FRANCISCO OFFICE REPORT 4Q09

CITYWIDE
OVERALL RENTAL vs. VACANCY RATES DIRECT vs. SUBLEASE SPACE
Rent al Rate Vacancy Rate D irect Sublease
12.0
$45 17%
11.0
10.0
15% 9.0
$40
8.0
13% 7.0

m sf
psf/yr

$35 6.0
5.0
11%
4.0
$30 3.0
9% 2.0
1.0
$25 7% 0.0
4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

• Vacancy leveled out throughout 2009. Year-over-year overall • After increasing for six consecutive quarters, sublease
vacancy, however, increased to 14.8% at the close of 2009, up availabilities trended down in third and fourth quarters of
from 12.4% one year ago, and 8.8% two years ago. 2009 due to the volume of sublease transactions.
• City-wide overall asking rental rates came down 41.3% year- • Future city-wide big block anticipated vacancies in 2010
over-year, and direct asking rental rates came down 25.5% for include: 74,935 sf at 575 Florida by Williams Sonoma;
the same period. 153,000 sf at 101 Montgomery by Charles Schwab; 597,000 sf
in three buildings in the Van Ness Corridor/Civic Center
submarket by AAA. In the Presidio, Babcock & Brown’s
early termination resulted in 159,176 sf of direct vacancy.
LEASING ACTIVITY vs. OVERALL ABSORPTION
OVERALL VACANCY RATES CLASS A vs. CLASS B
Leasing Activi ty Overall Absorption
Class A Class B
2.00
1.75 17%
1.50 16%
1.25 15%
1.00 14%
0.75 13%
msf

0.50 12%
0.25 11%
0.00 10%
(0.25) 9%
(0.50) 8%
(0.75) 7%
4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 6%
4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

• Following six consecutive quarters of negative absorption,

San Francisco’ small amount of positive absorption in fourth
quarter mostly came from class A CBD properties.
• The large pipeline of future vacancies expected to hit the
market in 2010, coupled with a steady uptick in leasing
activity, indicates that overall vacancy will likely level out over
the next few quarters.
• Class A vacancy rates briefly rose above class B as large
blocks of space were given back in 2008 and the first half or
2009. Landlords responded quickly with competitive rental
rates and additional concessions on leases, which are
beginning to attract new tenants to those properties.
• Notable class A and B buildings with big blocks of vacant
space include One Montgomery (Charles Schwab sublease),
333 Bush Street, 555 Mission, One Montgomery, 101
Montgomery (still under lease), and 500 Terry Francois.

2
 SAN FRANCISCO OFFICE REPORT 4Q09

CBD
OVERALL RENTAL vs. VACANCY RATES DIRECT vs. SUBLEASE SPACE
Rental Rate Vacanc y Rate Direct Sublease
7. 0
$50 16%
6. 0
$45 14%
5. 0

$40 12% 4. 0

m sf
psf/yr

3. 0
$35 10%
2. 0
$30 8%
1. 0

$25 6% 0. 0
4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q9 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

• Vacancy in the CBD trended down during 2009 as a result of
drastically reduced rental rates, and tenants’ flight to quality
space, on a sublease or direct basis.
• Some notable 2009 new lease transaction in the CBD include
Del Monte Foods at One Maritime Plaza, Reed Smith at 101
Second Street, Medivation at 345 Spear Street, and Ropes &
Gray at Three Embarcadero Center.
• Large sublease vacancies in the CBD include Dresdner
RCM’s space at Four Embarcadero, Charles Schwab’s space
at One Montgomery Street, and Symantec’s space at 475
Sansome Street.
• Sublease CBD absorption in the first half of 2009 was
negative 682,485 sf, and in the second half of 2009 was
positive 242,599 sf.

LEASING ACTIVITY vs. OVERALL ABSORPTION CLASS A DIRECT ASKING RATES

Leasing Ac tivity Ov erall Absorption NOMA SOMA Combined

1.50 $55

1.00
$50
0.50
psf /yr
msf

0.00 $45

(0.50)
$40
(1.00)

(1.50) $35
4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q9 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

• The majority of leasing activity in the second half of 2009
occurred in class A CBD properties, although demand for
South of Market “creative” space also increased during this
period.
• Many of the future full-floor availabilities are not expected to
go vacant until 2010, which will impact absorption. It
remains to be seen if leasing activity will keep up with future
vacancies, although it seems likely that absorption will be
negative or level out for the next few quarters.
• Class A CBD buildings were hit hard by financial and legal
firms giving back large blocks of space. Rental rates came
down significantly as landlords of these properties became
more aggressive in filling vacancies.
• Many of the large vacancies to hit the market came from
financial and legal firms occupying class A space in the
NOMA submarket decreasing the spread between NOMA
and SOMA Financial District rents during the 2007
recession.

3
 SAN FRANCISCO OFFICE REPORT 4Q09

MARKET/SUBMARKET STATISTICS
OVERALL DIRE CT YTD YTD YTD DIRECT WTD. AVG.
NO . OF VACANCY VACA NCY LEAS ING UNDER CONSTRUCTIO N OVERALL CLASS A G ROSS
MARKET/ SUBMARKET INVENTORY BLDGS. RATE RATE A CTIVITY CONSTRUCTION COMP LETIONS ABSORPTION RENTAL RATE*
NOMA Financial District 26,006,324 112 15.2% 12.0% 1,483,424 0 0 (977,198) $38.31
SOMA Financial District 22,032,963 98 10.2% 8.7% 1,194,010 0 0 (123,041) $38.36
CBD Total 48,039,287 210 12.9% 10.5% 2,677,434 0 0 (1,100,239) $38.33
Jackson Square 1,369,168 24 18.2% 18.2% 74,227 0 0 (71,857) $29.64
North Waterfront 2,411,354 32 17.0% 15.4% 85,918 0 0 (193,905) $31.05
South Beach/Rincon Hill 2,387,582 29 16.5% 11.3% 46,674 0 0 (162,263) $31.88
San Francisco S. of Market 5,366,228 45 28.9% 26.0% 236,344 0 0 (424,467) $34.35
West of Kearny 703,735 9 13.0% 7.9% 7,599 0 0 (79,716) $26.32
The Presidio 995,955 7 23.5% 4.5% 40,192 0 0 (77,714) N/A
Union Square 4,126,582 59 11.6% 10.4% 115,520 0 0 (179,784) $27.21
Van Ness Corridor 4,384,883 34 8.5% 7.9% 47,901 0 0 (43,810) $26.50
Potrero Hill/Inner Mission 1,831,996 22 17.8% 17.4% 47,877 0 0 (10,955) $25.92
Mission Bay 1,006,272 4 48.1% 48.1% 0 0 0 0 N/A
Non-CBD Total 24,583,755 265 18.7% 16.1% 702,252 0 0 (1,244,471) $31.49

SAN FRANCISCO TOTAL 72,623,042 475 14.8% 12.4% 3,379,686 0 0 (2,344,710) $37.08

* Rental rates reflect $psf/year

MARKET HIGHLIGHTS
SIGNIFICANT 2009 NEW LEASE TRANSACTIONS
BUILDING SUBMARKET TEN ANT SQ UARE FEET BLDG CLASS

One Maritime Plaza NOMA Financial District Del Monte Foods 152,887 A
101 Second Street SOMA Financial District Reed Smith 109,994 A
345 Spear Street SOMA Financial District Medivation, Inc. 63,817 A
Three Embarcadero Center NOMA Financial District Ropes & Gray 50,403 A
555 Mission Street SOMA Financial District CNA Insurance 37,438 A
555 Mission Street SOMA Financial District Silicon Valley Bank 35,274 A
555 Mission Street SOMA Financial District RCM 35,154 A
875 Howard Street SF South of Market Carat Advertising 33,000 C
795 Folsom Street SF South of Market Twitter 31,611 A
555 California Street NOMA Financial District Foley & Lardner, LLP 30,462 A
SIGNIFICANT 2009 SALE TRANSACTIONS
BUILDING SUBMARKET Buyer SQ UARE FEET PURCHASE PRICE

550 Terry Francois Blvd Mission Bay GLL Real Estate Partners 283,000 $135,500,000
120 Howard Street/188 Spear Street SOMA Financial District Shorenstein Properties 147,556 $25,000,000
562-566 Market Street NOMA Financial District Chelsea Pacific Holdings, LLC 64,955 $9,200,000
731 Sansome Street Jackson Square Polatnick Properties 37,800 $7,000,000
SIGNIFICANT 2009 CONSTRUCTION COMPLETIONS
BUILDING SUBMARKET MAJ OR TEN ANT SQ UARE FEET COMPLETION DATE

N/A
SIGNIFICANT PROJECTS UNDER CONSTRUCTION/RENOVATION
BUILDING SUBMARKET MAJ OR TEN ANT SQ UARE FEET COMPLETION DATE

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

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*Market terms & definitions based on BOMA and NAIOP standards.
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