SAN FRANCISCO OFFICE REPORT 4Q09

ECONOMY
Despite a diverse mix of tenants, unemployment in the San Francisco Bay Area reached record highs this year. The unemployment rate in San Francisco’s Metropolitan Statistical ECONOMY AreaManhattan office market continued to of 2009,during the firstover 30 2007, extending The (MSA) increased to 8.9% at the close tighten the highest in half of years. This still compares exhibited during the second half of 2006.rate of 11.7% for the growth contributed strengths favorably to California’s unemployment Steady employment same period. The largest job losses were of available space and rapidlyfinance, retail, andrents. to positive absorption concentrated in banking and escalating asking construction industries. The technology sector, however, is contributing to new demand in the Bay Area, and will play The New York City economy expanded at a healthy pace during the first six months of the 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 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 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 was already the tightest it had been since the first quarter of 2001. OVERVIEW The San Francisco office market struggled in 2009, with over negative 2.3 million square feet 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 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 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 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 midabundance 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, in 2008. defined as a vacancy rate range of 7.0% - 9.0%. Increasing vacancy, competition from subleases and renewals with minimal tenant improvements drove down rental rates. The direct class A asking rent in the CBD was $38.33 OVERVIEW perthis environment, it is(psf/yr) at the close of fourthhave skyrocketed. Up 36.2% from a In square foot per year no surprise that asking rates quarter, down 24.5% from $50.75 psf/yr one year ago. overall total average asking rent closed the first half of 2007 at year ago, Manhattan’s another record-high: $59.17 per square foot Thus far this year, rents have increased by an Most of the major lease transactions signed in fourth quarter occurred in class A CBD 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 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 doubletechnology 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. SalesForce.com’s requirement for 200,000 sf and and Zynga, Inc.’s for 130,000 sf. Leases signed by technology companiesleasing activity throughoutTwitter, ZoomSystems and Nektar. On a cautionary note, however, in fourth quarter include Manhattan was slower during Energy efficient design is also growing in demand in San Francisco. Class Aand lack of the first two quarters, partially attributable to both significantly higher rents CBD buildings that achieved LEED certificationyear-to-date, include 425 California with LEEDthrough available space. With 11.8 leased this quarter 2007 activity trails last year’s total Silver certification and theMidtown trailing by nearly 20.0%.505 Sansome Street, One Montgomery June by 5.4%, with Transamerica Pyramid Building, This suggests that tenants are and 525 Market Streetsearch for lower-priced space in response to landlords hiking up rents possibly beginning to with LEED Gold. Sales activity, while still anemic, surged in fourth quarter, particularly in the CBD, as sellers throughout the market. became more motivated while buyers were attracted to historically low pricing. Transactions in fourth quarter of approximately $160.5 million composed 90.8% of total office sales OUTLOOK volume for leasing Sales transactions included 550 Terryleading industries. Financial and 188 This year’s 2009. has been dominated by Manhattan’s Francois for $135.5 million Spear Street for $25 million, a 20.9% andfirms (11.7%) accounted for nearly one of every services firms (36.4%) and legal services 42.0% reduction, respectively, from the value of theirsquaretrades. two prior 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 FORECAST the Americas. The frequency of transactions with taking rents starting at or above $125.00 With over 2.5 msf full-floor availabilities coming vacant in 2010 and negative employment continued to climb: 18 such transactions year-to-date versus 21 signed in the four previous growth until 2011, the office market will not likely begin a sustainable recovery until 2011. years combined. Tenants in the market will continue to benefit from landlords’ competitive lease rates and increased concessions. A flight to quality class A and “creative” class B space is expected to continue. SAN FRANCISCO OFFICE REPORT 4Q09 BEAT ON THE STREET
"In the wake of a recession that began over two years ago, some optimism has returned to the market. There has been a recent increase in activity, which is consistent with national trends, although there is a sentiment among tenants that the more aggressive deal is still out there." - Joseph J. Cook II, Executive Vice President

ECONOMIC INDICATORS
National 2008 2009F 2010F

GDP Growth CPI Growth
Regional

0.4% 3.8% 5.0% 0.7%

-2.5% -0.4% 8.9% -4.3%

2.3% 1.7% 9.8% -1.3%

Unemployment Employment Growth

Source: Moody’s | Economy.com

MARKET FORECAST
RENTAL RATES are expected to decline, although at a slower pace than in 2009, due to competition from aggressive renewals and a decrease in basis as a result of recent sales. OVERALL VACANCY is leveling out citywide and activity steadily increased throughout 2009. There are potentially 2.5 msf of vacant space hitting the market in 2010. OVERALL ABSORPTION will likely stabilize, but remain depressed in near term due to right-sizing.

OVERALL RENT VS. VACANCY
CBD-Rent CBD-Vacancy $49 $42 $35 $28 $21 $14 $7 $0 4Q05 4Q06 4Q07 4Q08 4Q09 Non-CBD-Rent Non-CBD-Vacancy 23.0% 21.0% 19.0% 17.0% 15.0% 13.0% 11.0% 9.0% 7.0%

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SAN FRANCISCO OFFICE REPORT 4Q09

CITYWIDE
OVERALL RENTAL vs. VACANCY RATES
Rent al Rate $45 Vacancy Rate 17% 15% 13% psf/yr $35 11% $30 9% 7% 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 12.0 11.0 10.0 $40 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 $25 0.0 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 m sf

DIRECT vs. SUBLEASE SPACE
D irect Sublease

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

• After increasing for six consecutive quarters, sublease availabilities trended down in third and fourth quarters of 2009 due to the volume of sublease transactions. • Future city-wide big block anticipated vacancies in 2010 include: 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 Center submarket by AAA. In the Presidio, Babcock & Brown’s early termination resulted in 159,176 sf of direct vacancy. OVERALL VACANCY RATES CLASS A vs. CLASS B

LEASING ACTIVITY vs. OVERALL ABSORPTION
Leasing Activi ty 2.00 1.75 1.50 1.25 1.00 msf 0.75 0.50 0.25 0.00 (0.25) (0.50) (0.75) 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 17% 16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 Overall Absorption Class A Class B

• 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.

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SAN FRANCISCO OFFICE REPORT 4Q09

CBD
OVERALL RENTAL vs. VACANCY RATES
Rental Rate $50 $45 $40 psf/yr Vacanc y Rate 16% 14% 12% 7. 0 6. 0 5. 0 m sf 4. 0 3. 0 2. 0 $30 $25 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q9 8% 1. 0 6% 0. 0 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09

DIRECT vs. SUBLEASE SPACE
Direct Sublease

$35

10%

• 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
Leasing Ac tivity 1.50 1.00 $50 0.50 psf /yr msf 0.00 (0.50) $40 (1.00) (1.50) 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q9 $35 $45 Ov erall Absorption $55

CLASS A DIRECT ASKING RATES
NOMA SOMA Combined

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.

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SAN FRANCISCO OFFICE REPORT 4Q09 MARKET/SUBMARKET STATISTICS
MARKET/ SUBMARKET INVENTORY NO . OF BLDGS. OVERALL VACANCY RATE DIRE CT VACA NCY RATE YTD LEAS ING A CTIVITY UNDER CONSTRUCTION YTD CONSTRUCTIO N COMP LETIONS YTD OVERALL ABSORPTION DIRECT WTD. AVG. CLASS A G ROSS 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

26,006,324 22,032,963 48,039,287 1,369,168 2,411,354 2,387,582 5,366,228 703,735 995,955 4,126,582 4,384,883 1,831,996 1,006,272 24,583,755 72,623,042

112 98 210 24 32 29 45 9 7 59 34 22 4 265 475

15.2% 10.2% 12.9% 18.2% 17.0% 16.5% 28.9% 13.0% 23.5% 11.6% 8.5% 17.8% 48.1% 18.7% 14.8%

12.0% 8.7% 10.5% 18.2% 15.4% 11.3% 26.0% 7.9% 4.5% 10.4% 7.9% 17.4% 48.1% 16.1% 12.4%

1,483,424 1,194,010 2,677,434 74,227 85,918 46,674 236,344 7,599 40,192 115,520 47,901 47,877 0 702,252 3,379,686

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

(977,198) (123,041) (1,100,239) (71,857) (193,905) (162,263) (424,467) (79,716) (77,714) (179,784) (43,810) (10,955) 0 (1,244,471) (2,344,710)

$38.31 $38.36 $38.33 $29.64 $31.05 $31.88 $34.35 $26.32 N/A $27.21 $26.50 $25.92 N/A $31.49 $37.08

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

One Maritime Plaza 101 Second Street 345 Spear Street Three Embarcadero Center 555 Mission Street 555 Mission Street 555 Mission Street 875 Howard Street 795 Folsom Street 555 California Street
BUILDING

NOMA Financial District SOMA Financial District SOMA Financial District NOMA Financial District SOMA Financial District SOMA Financial District SOMA Financial District SF South of Market SF South of Market NOMA Financial District
SUBMARKET

Del Monte Foods Reed Smith Medivation, Inc. Ropes & Gray CNA Insurance Silicon Valley Bank RCM Carat Advertising Twitter Foley & Lardner, LLP
Buyer

152,887 109,994 63,817 50,403 37,438 35,274 35,154 33,000 31,611 30,462
SQ UARE FEET

A A A A A A A C A A
PURCHASE PRICE

SIGNIFICANT 2009 SALE TRANSACTIONS
550 Terry Francois Blvd 120 Howard Street/188 Spear Street 562-566 Market Street 731 Sansome Street
BUILDING

Mission Bay SOMA Financial District NOMA Financial District Jackson Square
SUBMARKET

GLL Real Estate Partners Shorenstein Properties Chelsea Pacific Holdings, LLC Polatnick Properties
MAJ OR TEN ANT

283,000 147,556 64,955 37,800
SQ UARE FEET

$135,500,000 $25,000,000 $9,200,000 $7,000,000
COMPLETION DATE

SIGNIFICANT 2009 CONSTRUCTION COMPLETIONS
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

For industry-leading intelligence to support your real estate and business decisions, go to Cushman & Wakefield’s Knowledge Center at www.cushmanwakefield.com/knowledge Cushman & Wakefield, Inc. – Lic. #616335 One Maritime Plaza, Suite 900 San Francisco, CA 94111 (415) 397-1700

*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. ©2010 Cushman & Wakefield, Inc. All rights reserved.

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