SAN FRANCISCO OFFICE REPORT 1Q08

ECONOMY ECONOMY
The Manhattan office market continued to tighten during the first half of 2007, extending The contraction of jobs in the Bay Area continues to weigh on the regional outlook. strengths exhibited during Francisco County’s2006. Steady employment growth grew As of February 2008, San the second half of year-over-year unemployment rate contributed to 4.4%. Technology, life availablehealthcare and energy sectorsasking rents. from 4.2% to positive absorption of science, space and rapidly escalating remain strong and are generating demand for new space. Conversely, banking and financial The New York City economy expanded at a healthy pace during the first six months of institutions are experiencing a dearth of growth while fostering little new demand. the year, led by strong gains in office-using employment. Data available through the end Current real estate decisions are driven by the unpredictability of the economy and of May show that the City has added nearly 16,800 jobs in industries that are key to the financial outlook over the next few years. Tenants are signing short-term renewals to commercial office market, with financial services and professional business services garner more time to wait out the market and plan accordingly for the future. Few long adding 7,400 and 5,500 jobs, respectively. This resulted in increased demand for office term decisions are being made as companies avoid locking into long-term real estate space in a market that was already the tightest it had been since the first quarter of 2001. obligations during this unstable and weakening market. 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 OVERVIEW diminishingand business confidence been the story of by mid-year April 2007 at the start Consumer availability of space has began to weaken the market; 2007 and, was the only month in confidence remained depressed. Office leasing and sales activity slowed as of 2008, the past year that did not record a month-to-month decline of at least 122,000 square. fundamentals weakened this quarter. Some landlords haveto a to lower low, market As a result, Manhattan’s overall vacancy rate has tumbled yet six-year asking closing the mid-year at 5.3%. stalling, third consecutive quarter, the vacancy rate closed rents while some tenants are For the opting for short-term commitments or waiting to below equilibrium, defined as aAs sublease space grows, landlords may be forced to see what the market will bear. vacancy rate range of 7.0% - 9.0%. lower direct asking rents on their competing spaces. There is also the threat of shadow OVERVIEW underutilized space not yet on the market coming online, which will sublease space or In this environment, it is no surprisethe door forrates have skyrocketed. to enter the increase vacancy and possibly open that asking price-sensitive tenants Up 36.2% from a year ago, Manhattan’s overall totalfor the short term. closed the first half of 2007 at San Francisco market or relocate average asking rent another record-high: $59.17 per square foot. Thus far this year, rents have increased by an Investment activity slowed significantly during the second half of 2007. After the average of $1.44 each month since January, breaking the old record set back during the booming office investment market in San Francisco during 2005, 2006 and early 2007, second and third quarters of 2000. The rapid pace of rental rate growth has extended the current number of class A buildings for sale remains low. Owners of premium throughout Manhattan. In every submarket but one, overall rents have registered doublebuildings began pulling their buildings off the market as sale offers did not meet digit percentage increases from a year ago. Chelsea, up 4.2%, was the only exception. expected asking prices. Investor and owner/occupier demand for new product is On a cautionary note, however, leasing activity throughout Manhattan was slower during declining due to higher financing costs, reduced capital availability and increasing the first two quarters, partially attributable to both significantly higher rents and lack of vacancy rates. With investment capital shrinking in the market, the gap between buyer available space. With 11.8 need to close to facilitate activity trailsSellers are still through and seller perception will leased year-to-date, 2007 more deals. last year’s total June by 5.4%, withrampant sale environment of the past five years while buyers have influenced by the Midtown trailing by nearly 20.0%. This suggests that tenants are possibly beginning to searchconservative. Both remain response to ends of the become more cautious and for lower-priced space in at opposite landlords hiking up rents throughout thepricing. This, coupled with the lack of available credit, is creating spectrum regarding market. the slowdown in the real estate investment market.

BEAT ON THE STREET
“With both the economy and national financial markets in flux, landlords concerned with cash flow (not face rates) are aggressively pursuing tenants in the market and renewals. Tenants are more tentative in their planning and relocations as they watch sublease opportunities increase and softening of some CBD rents. Only SOMA/creative spaces are still a hot commodity, with tech firms still fueled by venture capital funding.” –Margaret Duskin, Senior Director

ECONOMIC INDICATORS
National 2006 2007 2008F

GDP Growth CPI Growth
Regional

2.9% 3.2% 3.9% 2.0%

2.2% 2.8% 4.0% 1.9%

1.5% 3.0% 4.4% 0.2%

Unemployment Employment Growth

Source: Moody’s | Economy.com

MARKET FORECAST
LEASING ACTIVITY dipped slightly, and may ramain depressed, as tenants review real estate decisions in the near term. OVERALL ABSORPTION was positive during the quarter but the growing number of subleases will dilute this number in upcoming quarters. SUBLEASE SPACE: CBD class A sublease space grew 51.1% this quarter, a trend expected to continue as tenants review their current space usage.
ENTERENT

OUTLOOK This year’s leasing has been dominated by Manhattan’s leading industries. Financial FORECAST
services firms (36.4%) andlimited in 2008 as businessesaccounted forto expand. With Corporate growth will be legal services firms (11.7%) are reluctant nearly one of every two square feet leased from January through June. In April, Lehman Brothers Holdings, activity slowing and tour volume decreasing, the office market is caught in the middle Inc. signed Manhattan’s largest newnegative outlooks. This market couldat 1271 Avenue of minimal positive and mounting lease in 2007, a 414,575-sf sublease well be of the Americas. The asking rental rates, major adjustments rents starting at orvalues, defined by flattening frequency of transactions with taking in office building above $125.00vacancies and climb: 18 such transactions year-to-date versus 21 signed in the higher continued to tightening credit. Unemployment is growing, further emphasizing four previous years combined. and streamlining of business practices. The only corporate America’s contraction offset to this is the technology demand fueled by venture capital funding. When confidence grows, so will the push for hiring and expansion. Until then, we can expect weaker leasing and sale numbers for the better part of 2008. SAN FRANCISCO OFFICE REPORT 1Q08

OVERALL RENTAL VS. VACANCY RATES
CBD-Rent CBD-Vacancy $50.00 $45.00 $40.00 Non-CBD-Rent Non-CBD-Vacancy 22.0% 20.0% 18.0% 16.0%

psf/yr

$35.00 14.0% $30.00 12.0% $25.00 $20.00 $15.00 1Q05 1Q06 1Q07 1Q08 10.0% 8.0% 6.0%

1

SAN FRANCISCO OFFICE REPORT 1Q08
MARKET/SUBMARKET STATISTICS
MARKET/ SUBMARKET INVENTORY NO. OF BLDGS. OVERALL VACANCY RATE DIRECT VACANCY RATE YTD LEASING ACTIVITY UNDER CONSTRUCTION YTD CONSTRUCTION COMPLETIONS YTD OVERALL ABSORPTION DIRECT WTD. AVG. CLASS A GROSS RENTAL RATE*

NOMA Financial District SOMA Financial District CBD Total Jackson Square North Waterfront South Beach/Rincon Hill San Francisco S. of Market West of Kearny The Presidio Union Square Van Ness Corridor Potrero Hill/Inner Mission Mission Bay Non-CBD Total San Francisco Total
* Rental rates reflect $psf/year

26,051,324 21,470,542 47,521,866 1,369,168 2,394,975 2,387,582 4,855,126 703,735 995,955 4,035,868 4,379,522 1,766,140 283,000 23,171,071 70,692,937

113 97 210 24 31 29 43 9 7 58 34 21 1 257 467

8.6% 7.4% 8.0% 4.2% 5.6% 12.5% 15.0% 0.5% 4.5% 9.3% 9.6% 19.1% 0.0% 10.4% 8.8%

7.4% 6.3%

353,444 756,662

0 547,000 547,000 0 0 0 0 0 0 0 0 0 718,000 718,000 1,265,000

0 321,545 321,545 0 0 0 0 0 0 0 0 0 0 0 321,545

(135,573) 417,234 281,661 (7,105) 65,417 (34,563) (172,492) 4,669 0 23,833 33,238 3,419 0 (83,584) 198,077

$51.66 $48.90 $50.34 $37.63 $40.00 $38.49 $39.79 $38.00 N/A $41.39 $34.99 $30.66 N/A $38.33 $47.31

6.9% 1,110,106 3.7% 5.2% 8.1% 13.6% 0.5% 4.5% 9.0% 8.9% 15.5% 0.0% 9.1% 11,584 63,331 54,980 71,854 7,655 0 88,957 41,274 42,456 0 382,091

7.6% 1,492,197

MARKET HIGHLIGHTS
SIGNIFICANT 1Q08 NEW LEASE TRANSACTIONS
BUILDING SUBMARKET TENANT SQUARE FEET BLDG CLASS

633 Folsom Street 555 Mission Street 303 Second Street 100 First Street 250 Brannan Street 799 Market Street 50 Francisco Street 135 Main Street

SOMA Financial District SOMA Financial District SOMA Financial District SOMA Financial District South Beach/Rincon Hill Union Square North Waterfront SOMA Financial District

California Pacific Medical Center Gibson Dunn Avenue A/Razorfish WTAS Omniture Monster.com Comcast Sedgwick, Detert, Moran & Arnold

175,000 60,400 42,659 38,866 35,419 34,232 33,310 26,410

A A B A B B A A

SIGNIFICANT 1Q08 SALE TRANSACTIONS
BUILDING SUBMARKET Buyer SQUARE FEET PURCHASE PRICE

CSAA Headquarters 199 Fremont Street

Van Ness Corridor SOMA Financial District

Vornado & Patson Van Ness Holdings PNC Realty Investors

549,392 397,300

$120,000,000 $260,000,000

SIGNIFICANT 1Q08 CONSTRUCTION COMPLETIONS
BUILDING SUBMARKET MAJOR TENANT SQUARE FEET COMPLETION DATE

400 Howard Street 185 Berry Street (two-floor addition)

SOMA Financial District San Francisco South of Market

Barclays Global Investors N/A

321,545 175,000

1/08 1/08

SIGNIFICANT PROJECTS UNDER CONSTRUCTION/RENOVATION
BUILDING SUBMARKET MAJOR TENANT SQUARE FEET COMPLETION DATE

555 Mission Street 500 Terry Francois Boulevard

SOMA Financial District Mission Bay

Gibson Dunn N/A

547,000 268,000

10/08 4/08

For further information, please contact our Research Department: Cushman & Wakefield, Inc. One Maritime Plaza, Suite 900 San Francisco, CA 94111 (415) 397-1700 www.cushmanwakefield.com

*Market terms & definitions based on BOMA and NAIOP standards. This report contains information available to the public and has been relied upon by Cushman & Wakefield on the basis that it is accurate and complete. Cushman & Wakefield accepts no responsibility if this should prove not to be the case. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by our principals. ©2008 Cushman & Wakefield, Inc. All rights reserved.