SAN FRANCISCO OFFICE REPORT

2Q10

ECONOMY BEAT ON THE STREET

Confidence remains positive as many business leaders see growth and hiring in their future.
ECONOMY
Until hiring happens, the San Francisco office market will see minimal growth. The “Tenant activity is up, with noticeably less
The Manhattan rate
unemployment office
formarket continued
June was 9.7% and to is
tighten during
projected the first
to stay halfthe
flat for of 2007, extending
remainder of 2010.
caution than we’ve seen over the last 18
strengths exhibited during the second half of 2006. Steady employment growth contributed months. Tech companies are increasingly
This is positive news as the number of job losses may remain in check causing stability to looking for short term space, while tenants
to positive
return to theabsorption of available
market. Although space and
occupancy rapidly escalating
continues asking
to fall in San rents. there has been a
Francisco, with longer term visibility see it as a great time
recent
The New uptick
York in City
tenant demand.expanded
economy The technology and pace
at a healthy creative-use tenant
during the firstsectors looking
six months for
of the to lock in favorable rates. With ample
commodity space propping up the vacancy
office space in the market continue to grow.
year, led by strong gains in office-using employment. Data available through the end of May rate, landlords are keeping pricing stable in
show that the City has added nearly 16,800 jobs in industries that are key to the commercial order to attract this demand.”
office market, with financial services and professional business services adding 7,400 and
OVERVIEW –Bob Kraynak, Senior Director
The
5,500technology sector continues
jobs, respectively. to improve
This resulted as technology-based
in increased demand for office tenants
spacerepresent a growing
in a market that
portion of active tenants. New deal activity is driven
was already the tightest it had been since the first quarter of 2001.by new tech requirements and many see ECONOMIC INDICATORS
technology as the leading force behind San Francisco recovery. Landlords are starting to push
The year began with 26.1 million square feet) available throughout Manhattan. By the end National 2009 2010F 2011F
rents up in top-tier properties but recent signed leases fail to support such movement. The
of June, available space had fallen precipitously to 20.8 a decline of 20.5%. This GDP Growth -2.4% 3.1% 3.9%
drive to push rents comes from limited view space availability, the perception of improvement
diminishing availability of space has been the story of the market; April 2007 was the only CPI Growth -0.3% 1.8% 2.1%
taking place in the market and that tenants perceive these spaces as being undervalued.
month in the past year that did not record a month-to-month decline of at least 122,000
Conversely, the majority of space in the Central Business District (CBD) is low-rise, limited Regional
square. As a result, Manhattan’s overall vacancy rate has tumbled to a six-year low, closing Unemployment 8.7% 9.7% 8.7%
view, commodity space where asking rents remain flat as demand has yet to force rent growth.
the mid-year at 5.3%. For the third consecutive quarter, the vacancy rate closed below Employment -5.4% -2.2% 1.3%
Sale activity, defined
equilibrium, led by foreign investment,
as a vacancy sprang
rate range of to life -during
7.0% 9.0%. second quarter. Kilroy Realty Growth
Corporation purchased 303 Second Street. This acquisition represents Kilroy’s new growth Source: Moody’s | Economy.com
into Northern California. 351 California Street sold at auction during the quarter. As the lone
OVERVIEW
bidder, Polidev International
In this environment, purchased
it is no surprise thatthe building
asking ratesandhaveis also looking to
skyrocketed. Upacquire
36.2%other
from Bay
a MARKET FORECAST
Area properties.
year ago, 333 Market
Manhattan’s overallStreet, with Wells
total average askingFargo
rentasclosed
its largest tenant,
the first halfalso sold at
of 2007 during the LEASING ACTIVITY: New deal activity
quarter
anotherto a Korean investment
record-high: $59.17 per group
squarethatfoot.includes
Thus far thethis
Korean Teachers'
year, rents haveCredit Union.
increased 255
by an will grow in the 3,000 to 10,000-sf range
California
average ofStreet
$1.44 is currently
each monthunder
since contract
January, to Highridge
breaking Partners
the old recordandsettwo
backofduring
the three
the while larger tenants look to renew to take
advantage of low rental rates.
buildings
second and of third
the former
quarters California
of 2000.State Automobile
The rapid pace ofAssociation campus,has
rental rate growth 150 Van Ness and
extended
150 Hayes, are
throughout on the block
Manhattan. for sale.
In every submarket but one, overall rents have registered double- TENANTS IN THE MARKET: Zynga and
digit percentage
Deal activity grewincreases
as Blue from
Shielda renewed
year ago.three
Chelsea, upat4.2%,
floors was the
225 Bush onlytotaling
Street exception.
75,432
Dolby are in the market with large
requirements that, together, could lease
square feet (sf) and
On a cautionary lawhowever,
note, firm Morrison
leasing&activity
Foerster signed a 220,000-sf
throughout Manhattanrenewal for 17
was slower years at
during up to 480,000 sf in the South of Market
425 Market Street. Morrison, like many large tenants opting to renew early, took
the first two quarters, partially attributable to both significantly higher rents and lack ofadvantage of and Mission Bay submarkets.
favorable market conditions and locked them in long-term. This renewal is also the
available space. With 11.8 leased year-to-date, 2007 activity trails last year’s total through largest ASKING RENTAL RATES in the CBD
deal
Junethis year based
by 5.4%, on total value.
with Midtown The
trailing byIRS leased
nearly 72,738
20.0%. Thissfsuggests
at 100 First
thatStreet and
tenants areSalesforce will stay competitive due to current and
continues to grow making it one of the fastest growing companies in San Francisco.
possibly beginning to search for lower-priced space in response to landlords hiking up Deloitte
rents upcoming big-block direct and sublease
& Touche is closing in on a deal for 180,000 sf at Tishman Speyer’s 555 Mission Street, a availabilities.
downsize
throughout from
the the 285,000 sf they have at 50 Fremont Street. This deal, though positive for
market. ENTERENT
Deloitte and Tishman, will negatively impact the market as it represents a drop in occupancy. OVERALL RENT VS. VACANCY
CBD-R ent Non- CBD-Rent

OUTLOOK CBD-Vacancy Non- CBD-Vacancy

FORECAST
This year’s leasing has been dominated by Manhattan’s leading industries. Financial $50 22%

Office
servicesspace
firmsvacancy
(36.4%)inand
Sanlegal
Francisco
serviceswill remain
firms high accounted
(11.7%) as long as the
for labor
nearlymarket
one of stays
everyflat. $45
20%

Despite
two squareweakened job growth,
feet leased tenantthrough
from January activity June.
is improving.
In April,Significant lease rollovers
Lehman Brothers Holdings, $40
18%
16%
scheduled
Inc. signedfor this year and
Manhattan’s 2011new
largest havelease
beeninthe driving
2007, force behind
a 414,575-sf a large
sublease portion
at 1271 of overall
Avenue of
psf/ yr

$35 14%
activity in the market.
the Americas. Renewalofactivity
The frequency continues
transactions withto growrents
taking but some tenants
starting at or relocate to take
above $125.00 12%
$30
advantage
continued of to more
climb:suitable
18 suchspace, depressed
transactions asking rents
year-to-date and21
versus concessions.
signed in the Lease
fourconcessions,
previous 10%

in the combined.
years form of free rent, beneficial occupancy and tenant improvement allowances, continue $25
8%

to play a significant role in the transactions taking place. Tenants still have the upper hand as $20 6%
2Q06 2Q07 2Q08 2Q09 2Q10
landlords look to maintain occupancy, maintain balance sheets and make loan payments.
SAN FRANCISCO OFFICE REPORT 2Q10 1
 SAN FRANCISCO OFFICE REPORT 2Q10

MARKET/SUBMARKET STATISTICS
OVERALL DIRECT YTD YT D YTD YTD DIRECT WTD . AVG.
N O. OF VACANCY VACANCY LEASING UNDER CONSTRUCTION DIRECT OVERALL CLASS A GROSS
MARKET/ SUBMARKET INVENTORY BLDGS. RAT E RATE AC TIVITY CONSTRU CTION C OMPLETION S ABSORPT ION ABSORPTION RENTAL RATE*

NOMA Financial District 25,995,252 112 15.3% 12.9% 929,075 0 0 (386,178) (121,877) $37.33
SOMA Financial District 23,162,801 100 10.7% 9.4% 555,750 0 0 (320,579) (321,277) $38.78
CBD Total 49,158,053 212 13.1% 11.3% 1,484,825 0 0 (706,757) (443,154) $37.94
Jackson Square 1,369,168 24 17.6% 17.6% 57,826 0 0 2,486 2,486 $31.61
North Waterfront 2,411,354 32 15.9% 14.0% 138,254 0 0 41,490 20,668 $29.92
South Beach/Rincon Hill 2,412,962 29 17.3% 13.1% 137,026 0 0 (48,926) (45,706) $31.52
San Francisco S. of Market 5,715,514 46 26.2% 23.5% 174,261 0 0 1,953 4,028 $35.73
West of Kearny 703,735 9 8.3% 7.4% 3,287 0 0 2,725 2,725 $26.14
The Presidio 995,955 7 22.8% 20.0% 14,117 0 0 (154,377) 6,420 N/A
Union Square 4,217,942 60 11.4% 10.5% 156,331 0 0 67,989 76,113 N/A
Van Ness Corridor 4,486,156 35 21.1% 21.1% 22,493 0 0 (617,332) (617,332) $26.02
Potrero Hill/Inner Mission 1,893,398 23 21.8% 21.0% 101,855 0 0 (52,246) (47,393) $24.03
Mission Bay 1,006,272 4 48.1% 48.1% 0 0 0 0 0 N/A
Non-CBD Total 25,212,456 269 20.4% 18.9% 805,450 0 0 (756,238) (597,991) $28.59

SAN FRANCISCO TOTAL 74,370,509 481 15.6% 13.9% 2,290,275 0 0 (1,462,995) (1,041,145) $36.85
* Rental rates reflect $psf/year

MARKET HIGHLIGHTS
SIGNIFICANT 2Q10 NEW LEASE TRANSACTIONS
BUILDING SUBM ARKET TENANT SQUARE F EET BLDG C LASS

100 First Street SOMA Financial District IRS 72,738 A

600 Harrison Street South Beach/Rincon Hill Premier Retail Networks, Inc. 45,982 A
101 Montgomery Street N OMA Financial District The Trust for Public Land 33,119 A
116 New Montgomery Street SOMA Financial District Trulia 31,748 B
One Montgomery Tower N OMA Financial District R obbins Geller Rudman & Dowd 18,953 A
71 Stevenson Street SOMA Financial District Teachscape 18,248 A
One Market, Steuart Tower SOMA Financial District C AI International 17,598 A
345 California Street N OMA Financial District Joyent 17,387 A
1355 Sansome Street N orth Waterfront Euro RSCG Worldwide 16,540 A
660 Alabama Street Potrero Hill/Inner Mission Meraki 15,000 B
22 Fourth Street San Francisco S. of Market Men's Warehouse 14,673 A
800 Market Street U nion Square C enter for English Studies 12,969 B
135 Main Street SOMA Financial District Black Letter Discovery 12,949 A

SIGNIFICANT 2Q10 SALE TRANSACTIONS

BUILDING SUBM ARKET Buy er SQUARE F EET PURCHASE PRICE
333 Market Street SOMA Financial District Korean Teachers' Credit Union 632,952 $333,000,000
303 Second Street SOMA Financial District Kilroy Realty Corporation 680,151 $237,000,000
351 California Street N OMA Financial District Polidev International 129,533 $35,000,000

SIGNIFICANT 2Q10 CONSTRUCTION COMPLETIONS

BUILDING SUBM ARKET MAJOR TENANT SQUARE F EET COMPLETION DAT E
N/A

SIGNIFICANT PROJECTS UNDER CONSTRUCTION/RENOVATION

BUILDING SUBM ARKET MAJOR TENANT SQUARE F EET COMPLETION DAT E
N/A
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