SAN FRANCISCO OFFICE REPORT

4Q09

ECONOMY

The Manhattan office market continued to tighten during the first half of 2007, extending strengths exhibited during the second half of 2006. Steady employment growth contributedto positive absorption of available space and rapidly escalating asking rents. The New York City economy expanded at a healthy pace during the first six months of theyear, led by strong gains in office-using employment. Data available through the end of May show that the City has added nearly 16,800 jobs in industries that are key to the commercialoffice market, with financial services and professional business services adding 7,400 and5,500 jobs, respectively. This resulted in increased demand for office space in a market that was already the tightest it had been since the first quarter of 2001. The year began with 26.1 million square feet available throughout Manhattan. By the end of June, available space had fallen precipitously to 20.8, a decline of 20.5%. This diminishing availability of space has been the story of the market; April 2007 was the only month in thepast year that did not record a month-to-month decline of at least 122,000 square feet). Asa result, Manhattan’s overall vacancy rate has tumbled to a six-year low, closing the mid-year at 5.3%. For the third consecutive quarter, the vacancy rate closed below equilibrium,defined as a vacancy rate range of 7.0% - 9.0%.

OVERVIEW

In this environment, it is no surprise that asking rates have skyrocketed. Up 36.2% from ayear ago, Manhattan’s overall total average asking rent closed the first half of 2007 atanother record-high: $59.17 per square foot Thus far this year, rents have increased by anaverage of $1.44 each month since January, breaking the old record set back during thesecond and third quarters of 2000. The rapid pace of rental rate growth has extendedthroughout Manhattan. In every submarket but one, overall rents have registered double-digit percentage increases from a year ago. Chelsea, up 4.2%, was the only exception.On a cautionary note, however, leasing activity throughout Manhattan was slower during the first two quarters, partially attributable to both significantly higher rents and lack of available space. With 11.8 leased year-to-date, 2007 activity trails last year’s total through June by 5.4%, with Midtown trailing by nearly 20.0%. This suggests that tenants arepossibly beginning to search for lower-priced space in response to landlords hiking up rentsthroughout the market.

OUTLOOK

This year’s leasing has been dominated by Manhattan’s leading industries. Financialservices firms (36.4%) and legal services firms (11.7%) accounted for nearly one of every two square feet leased from January through June. In April, Lehman Brothers Holdings,Inc. signed Manhattan’s largest new lease in 2007, a 414,575-sf sublease at 1271 Avenue of the Americas. The frequency of transactions with taking rents starting at or above $125.00continued to climb: 18 such transactions year-to-date versus 21 signed in the four previousyears combined.

SAN FRANCISCO OFFICE REPORT4Q09

BEAT ON THE STREET

"In the wake of a recession that began overtwo years ago, some optimism has returned tothe market. There has been a recent increasein activity, which is consistent with nationaltrends, although there is a sentiment amongtenants that the more aggressive deal is stillout there."- Joseph J. Cook II, Executive Vice President

ECONOMIC INDICATORS

National 2008 2009F 2010F

GDP Growth 0.4% -2.5% 2.3%CPI Growth 3.8% -0.4% 1.7%

Regional

Unemployment 5.0% 8.9% 9.8%EmploymentGrowth0.7% -4.3% -1.3%

Source: Moody’s | Economy.com

MARKET FORECAST

RENTAL RATES

are expected todecline, although at a slower pace than in2009, due to competition from aggressiverenewals and a decrease in basis as aresult of recent sales.

OVERALL VACANCY

is leveling outcitywide and activity steadily increasedthroughout 2009. There are potentially2.5 msf of vacant space hitting themarket in 2010.

OVERALL ABSORPTION

will likelystabilize, but remain depressed in nearterm due to right-sizing.

$0$7$14$21$28$35$42$494Q054Q064Q074Q084Q097.0%9.0%11.0%13.0%15.0%17.0%19.0%21.0%23.0%CBD-RentNon-CBD-RentCBD-VacancyNon-CBD-Vacancy

ECONOMY

Despite a diverse mix of tenants, unemployment in the San Francisco Bay Area reachedrecord highs this year. The unemployment rate in San Francisco’s Metropolitan Statistical Area (MSA) increased to 8.9% at the close of 2009, the highest in over 30 years. This stillcompares favorably to California’s unemployment rate of 11.7% for the same period. Thelargest job losses were concentrated in banking and finance, retail, and construction industries. The technology sector, however, is contributing to new demand in the Bay Area, and will play a significant role in the recovery of the local economy. While job losses are expected tocontinue to climb into 2010, the rate of loss has begun to decrease. Commercial real estatefundamentals lag overall economic trends and should not be expected to maintain sustainablegrowth until employment begins its recovery.

OVERVIEW

The San Francisco office market struggled in 2009, with over negative 2.3 million square feet(msf) of overall absorption citywide. Third and fourth quarters showed small positiveabsorption in the Central Business District (CBD), which indicates the worst may be behindus. First quarter 2009 marked the lowest amount of city-wide leasing activity in over ten years,although activity increased significantly during the second half of the year, attributable to theabundance of high-quality office space that is now available at a discount of the rents offeredin 2008.Increasing vacancy, competition from subleases and renewals with minimal tenantimprovements drove down rental rates. The direct class A asking rent in the CBD was $38.33per square foot per year (psf/yr) at the close of fourth quarter, down 24.5% from $50.75psf/yr one year ago.Most of the major lease transactions signed in fourth quarter occurred in class A CBDbuildings, including Del Monte Foods’ relocation and expansion of its headquarters into152,887 sf at One Maritime Plaza and Medivation’s 63,817-sf lease at 345 Spear Street. Thetechnology industry represents approximately 27.1% of current market demand, including SalesForce.com’s requirement for 200,000 sf and and Zynga, Inc.’s for 130,000 sf. Leasessigned by technology companies in fourth quarter include Twitter, ZoomSystems and Nektar.Energy efficient design is also growing in demand in San Francisco. Class A CBD buildingsthat achieved LEED certification this quarter include 425 California with LEED Silvercertification and the Transamerica Pyramid Building, 505 Sansome Street, One Montgomery and 525 Market Street with LEED Gold.Sales activity, while still anemic, surged in fourth quarter, particularly in the CBD, as sellersbecame more motivated while buyers were attracted to historically low pricing. Transactionsin fourth quarter of approximately $160.5 million composed 90.8% of total office sales volume for 2009. Sales transactions included 550 Terry Francois for $135.5 million and 188Spear Street for $25 million, a 20.9% and 42.0% reduction, respectively, from the value of their prior trades.

FORECAST

With over 2.5 msf full-floor availabilities coming vacant in 2010 and negative employmentgrowth until 2011, the office market will not likely begin a sustainable recovery until 2011. Tenants in the market will continue to benefit from landlords’ competitive lease rates andincreased concessions. A flight to quality class A and “creative” class B space is expected tocontinue.

OVERALL RENT VS. VACANCY

CITYWIDE

OVERALL RENTAL vs. VACANCY RATES

$25$30$35$40$454Q071Q082Q083Q084Q081Q092Q093Q094Q09

p s f / y r

7%9%11%13%15%17%Rental RateVacancy Rate

• Vacancy leveled out throughout 2009. Year-over-year overall vacancy, however, increased to 14.8% at the close of 2009, upfrom 12.4% one year ago, and 8.8% two years ago.• City-wide overall asking rental rates came down 41.3% year-over-year, and direct asking rental rates came down 25.5% forthe same period.

LEASING ACTIVITY vs. OVERALL ABSORPTION

(0.75)(0.50)(0.25)0.000.250.500.751.001.251.501.752.004Q071Q082Q083Q084Q081Q092Q093Q094Q09

m s f

Leasing ActivityOverall Absorption

• Following six consecutive quarters of negative absorption,San Francisco’ small amount of positive absorption in fourthquarter mostly came from class A CBD properties.• The large pipeline of future vacancies expected to hit themarket in 2010, coupled with a steady uptick in leasing activity, indicates that overall vacancy will likely level out overthe next few quarters.

DIRECT vs. SUBLEASE SPACE

0.01.02.03.04.05.06.07.08.09.010.011.012.04Q071Q082Q083Q084Q081Q092Q093Q094Q09

m s f

DirectSublease

• After increasing for six consecutive quarters, subleaseavailabilities trended down in third and fourth quarters of 2009 due to the volume of sublease transactions.• Future city-wide big block anticipated vacancies in 2010include: 74,935 sf at 575 Florida by Williams Sonoma;153,000 sf at 101 Montgomery by Charles Schwab; 597,000 sf in three buildings in the Van Ness Corridor/Civic Centersubmarket by AAA. In the Presidio, Babcock & Brown’searly termination resulted in 159,176 sf of direct vacancy.

OVERALL VACANCY RATES CLASS A vs. CLASS B

6%7%8%9%10%11%12%13%14%15%16%17%4Q071Q082Q083Q084Q081Q092Q093Q094Q09Class AClass B

• Class A vacancy rates briefly rose above class B as largeblocks of space were given back in 2008 and the first half or2009. Landlords responded quickly with competitive rentalrates and additional concessions on leases, which arebeginning to attract new tenants to those properties.• Notable class A and B buildings with big blocks of vacantspace include One Montgomery (Charles Schwab sublease),333 Bush Street, 555 Mission, One Montgomery, 101Montgomery (still under lease), and 500 Terry Francois.

SAN FRANCISCO OFFICE REPORT 4Q09

CBD

OVERALL RENTAL vs. VACANCY RATES

$25$30$35$40$45$504Q071Q082Q083Q084Q081Q092Q093Q094Q9

p s f / y r

6%8%10%12%14%16%Rental RateVacancy Rate

• 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 includeDel Monte Foods at One Maritime Plaza, Reed Smith at 101Second Street, Medivation at 345 Spear Street, and Ropes &Gray at Three Embarcadero Center.

LEASING ACTIVITY vs. OVERALL ABSORPTION

(1.50)(1.00)(0.50)0.000.501.001.504Q071Q082Q083Q084Q081Q092Q093Q094Q9

m s f

Leasing ActivityOverall Absorption

• The majority of leasing activity in the second half of 2009occurred in class A CBD properties, although demand forSouth of Market “creative” space also increased during thisperiod.• Many of the future full-floor availabilities are not expected togo vacant until 2010, which will impact absorption. Itremains to be seen if leasing activity will keep up with future vacancies, although it seems likely that absorption will benegative or level out for the next few quarters.

DIRECT vs. SUBLEASE SPACE

0.01.02.03.04.05.06.07.04Q071Q082Q083Q084Q081Q092Q093Q094Q09

m s f

DirectSublease

• Large sublease vacancies in the CBD include DresdnerRCM’s space at Four Embarcadero, Charles Schwab’s spaceat One Montgomery Street, and Symantec’s space at 475Sansome Street.• Sublease CBD absorption in the first half of 2009 wasnegative 682,485 sf, and in the second half of 2009 waspositive 242,599 sf.

CLASS A DIRECT ASKING RATES

$35$40$45$50$554Q071Q082Q083Q084Q081Q092Q093Q094Q09

p s f / y r

NOMASOMACombined

• Class A CBD buildings were hit hard by financial and legalfirms giving back large blocks of space. Rental rates camedown significantly as landlords of these properties becamemore aggressive in filling vacancies.• Many of the large vacancies to hit the market came fromfinancial and legal firms occupying class A space in theNOMA submarket decreasing the spread between NOMAand SOMA Financial District rents during the 2007recession.