San francisco bay area commercial real estate 2013 by Cassidy Turley

San Francisco Bay Area Commercial Real Estate

2013 Forecast

Your comprehensive guide to trends impacting the commercial real estate market.

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We are pleased to share with you our San Francisco Bay Area Commercial Real Estate 2013 Forecast. This report is an annual review and forecast that summarizes the trends impacting commercial real estate in each of the major Bay Area markets covered by Cassidy Turleyâ&#x20AC;&#x2122;s 15 regional offices.

This guide offers forward-looking analysis in addition to summaries of recent activity for office, R&D, industrial, retail, investment and multi-family real estate throughout the Bay Area. We examine both leasing and investment trends as well as the underlying economic fundamentals that drive our marketplace. This report represents only a fraction of our research capabilities. Working in unison with our brokerage staff, Cassidy Turley research maintains the regionâ&#x20AC;&#x2122;s largest database of properties, tenants, landlords, buyers, sellers, availabilities, and deal comparables of all types. Our research department publishes detailed quarterly snapshots and reports covering all of our markets and we provide custom analytics for our clients. Contact your Cassidy Turley broker to get on our research mailing list to regularly receive research publication notifications.

CAPITAL MARKETS CORPORATE SERVICES LAND ACQUISITION & DISPOSITION PROJECT & DEVELOPMENT SERVICES PROJECT LEASING

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PROPERTY MANAGEMENT TENANT REPRESENTATION

Table of Contents Message from our President

Economic Outlook

Office and R&D Forecast

Warehouse & Manufacturing Forecast

Retail Forecast

Investment & Multi-Family Forecast

Market Data & Forecast

Company Overview

Credits & Terms

For a digital ebook version of this book, go to www.ctbt.com/Forecast2013 4

CASSIDY TURLEY

To Our Valued Clients, Over the past year, the Bay Area’s economy has continued to outperform both California and the nation as a whole. During this period, our region has grown its overall employment base by approximately 90,000 jobs, placing both San Jose and San Francisco among the top employment growth markets in the country. Meanwhile, our commercial real estate market has generally thrived. We are now heading into our third consecutive year of a recovery that, for some sectors, has put up growth numbers in excess of what we saw during the first dot com boom. And a boom is what it has been for the region’s office and R&D sectors. Through the first nine months of 2012, occupancy in the Bay Area’s office sector had grown by over 3.7 million square feet. Since 2010, office occupancy has expanded by nearly 14 million square feet. In San Francisco weighted average asking rents have increased by 39% since the low-water mark of the recession in 2009. Meanwhile, all of the trade areas along the Highway 101 Corridor on the Peninsula have recovered all of the occupancy lost during the recession and then some. R&D space has also surfed this wave, posting over 5.1 million square feet of positive net absorption since the start of 2011. Of course, tech users are once again behind the boom, having accounted for a whopping 69% of the deals that we have tracked this year. The growth of Apple, Facebook, Google, LinkedIn, Salesforce, Samsung and others has made the Bay Area the strongest local economy within the United States and fueled one of the strongest growth periods in the history of our region’s commercial real estate market. But with this recovery period driven almost exclusively by just one sector of the economy, it certainly has not been even, nor has it been without its challenges. Our tech-driven boom has primarily benefited the Bay Area’s office and R&D markets. Of course, it has spurred job growth, generated consumer demand and fueled demand for housing thereby indirectly helping all sectors. Yet the recovery has been uneven both in terms of product type and geography, with the East and North Bay seeing only peripheral gains. But those markets have been building momentum on their own and there are a number of reasons why we are very optimistic for their performance in the year ahead. The past year was one in which we saw the biggest challenge to the economy shift from weak underlying fundamentals to political stalemate. However, despite the discord and political mayhem of the past few months, we’ll gladly swap gridlock in Washington in place of weak fundamentals as the primary evil. Even if policy concerns have emerged as the greatest headwinds, the national economy continues to post slow but sure growth. This certainly played out over the final half of 2012. Uncertainty over the election became uncertainty over the fiscal cliff, and is now uncertainty over the debt ceiling and federal spending cuts. All of this uncertainty during the second half of the year slowed growth as many space users put the brakes on planned moves.

Fortunately, as I sat down to write this in early January, there was cause for optimism. Congress and the President, while kicking the proverbial can down the road on many issues, did reach a compromise on the most politically charged issue and potentially damaging issue—that of the expiration of the Bush-era tax cuts. While most of the massive automatic federal spending cuts have been postponed and we are certain to see more policy-inspired business uncertainty in the weeks ahead, we can only hope that Washington is heeding the pleas for bipartisan moderation in dealing with the fiscal challenges that face us while at the same time recognizing the need for real tax and spending reform. In anticipation of increasing tax rates, the fourth quarter saw a significant jump in activity, with December being the strongest month in our company’s history. Brokerages, banks and title companies were working overtime to finalize all of the tax driven, year-end activity. That very well could mean that the coming year will be one in which we get off to a slow start. But the building economic momentum that we saw building through December of last year will return quickly. More importantly, the housing market is finally picking up traction nationally. Although the Bay Area’s housing market has outpaced national trends by a couple of years, the return of housing appreciation and new home construction nationally will have massive positive implications for both the national and local economies. Housing, which usually accounts for about one fifth of GDP, has been so far absent in our recovery and that is one of the reasons why economic improvement has been so slow and so fragile. It will take a while, but the turnaround underway in this segment of our economy will begin to register a profound impact on the marketplace by 2014. One that will mean that our own local and uneven techdriven recovery will spread to more sectors and strengthen growth in the local markets that have, so far, experienced only peripheral gains from Tech Boom 2.0. So, East Bay and Central Valley, your time is nearing. With that, we are pleased to share with you Cassidy Turley’s San Francisco Bay Area 2013 Forecast Report. We firmly believe that in economic environments such as this, our commitment to in-depth, forward-looking research is what sets us apart from our competitors. Research has been and will continue to be a key ingredient in our value proposition to you, our clients. We are eager to continue working with you and to expand our relationship across our expanded business lines and geography. Meanwhile, our commitment to market leading research will never change because we know that information is vital to your decision making process. I hope you enjoy this publication and find it useful. As always, if there is ever anything we can do for you or do better, please do not hesitate to call me. Best wishes for a prosperous and productive 2013. C. Michael Kamm President Cassidy Turley

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

ECONOMIC OUTLOOK But the challenge of policy clarity is not completely behind he economy truly is at a crossroads as we head into us. Within a few weeks, Debt Ceiling II begins and this debate 2013. But unlike in recent years, when the biggest promises to be even more contentious than the first one. By economic threats came from weakened fundamentals of the time the first debt ceiling debate ended in August 2011, one type or another, the greatest challenge currently facing the the U.S. sovereign credit rating had been lowered and the U.S. economy is that of policy uncertainty. As this report went economic recovery nearly stalled. You can rest assured to press, Congress and President Obama had reached a partial that this political battle will result in more headwinds to the compromise on the issue of the fiscal cliff. This combination economy. We believe there is a 75% chance that the ratings of tax increases and sharp automatic federal spending cuts agencies once again downgrade would have removed about $600 U.S. credit. And we expect the billion from the U.S. economy in stock market to dip. But we also 2013. Most economists agreed While U.S. job growth has averaged 2.1% don’t think the hit will be quite as that the failure to either reinstate bad as last year’s. some of the Bush era tax cuts over the past year, San Jose has seen its or temper austerity measures employment base grow by 3.5% (31,400 We are likely looking at slow would have sunk the economy growth over the next few months. back into recession no later jobs) while San Francisco achieved a growth But we are not looking at negathan the second quarter of the rate of 3.4% (32,600 jobs). tive growth, much less even flat year and likely would have sent growth. Certainly, the lack of unemployment back upward— policy clarity will remain an issue likely well above the 9.0% level. for now and additional political The lion’s share of the damage was likely to be caused by the discord on top of that won’t help. But there are plenty of expiration of the Bush-era tax cuts, which alone would have economic indicators to be extremely optimistic about. Not removed about $280 billion from the economy. The good news the least of which being a December jobs report that surprised is that this is where a compromise was met. The tax cuts nearly everyone—the economy created over 150,000 new have been reinstated for all but those who earn more than positions even as gloom was setting in before the fiscal cliff $400,000 annually ($450,000 for couples), or roughly 98% deal. It may have a bumpy start, but we anticipate 2013 to of the population. The bad news is that negotiations regarding be a year in which the economy gradually builds momentum. federal spending cuts were essentially postponed.

While the issue of policy clarity has been with us for some time now, the specific concerns regarding the fiscal cliff escalated over the course of December as the deadline drew closer. Business and consumer confidence fell and many of the space users that we work with opted to postpone planned moves in the face of this uncertainty. While this had a negative impact on the leasing market, it had the opposite impact on commercial real estate investment. Fearful of new taxes in 2013, many sellers rushed to close deals before January, sending quarterly deal volume up by at least 20%. As we reached the final week of 2012, the Dow Jones began to tumble and it appeared that we were heading towards a self-inflicted recession. Yet, like an errant college student who waits until the night before exams before studying, Congress came through with a last second minute (well, actually a late) deal that averted the worst of the damage. The Dow Jones immediately surged 300 points and the S&P 500 closed at its highest level within the last five years.

Déjà vu or Something New? On the surface, it appears that not much may have changed with the economy over the course of the past twelve months. Heading into 2012, unemployment was elevated and job

United States Consumer Confidence 100 90 80 70 60 50 40 30 20 10 0 2008

2009

2010

2011

2012

United States GDP Growth Rate Annual GDP Growth Adjusted by Inflation

Annual GDP Growth Adjusted by Inflation

10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10%

4% 2% 0% -2% -4% -6% -8% -10% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

CASSIDY TURLEY

2007

2008

2009

2010

2011

2012

ECONOMIC OUTLOOK

United States Unemployment Rate

US Employment Growth Jobs in Thousands

12%

600 400

10%

200

-200 400 -400

-600

-800

-1,000

2008

2009

2010

2011

2012

2008

2009

2010

2011

2012

growth weak. The Eurozone was grappling with flat to negaBut while employment growth has improved over the past tive growth and Asia was in the midst of a slowdown. Policy year, it is still not where we would like it to be. As is the case uncertainty ruled the roost and the looming issue of debt hung with a number of other indicators, it is better, but not great. over the U.S. economy. Fast forward through a contentious For example, the Conference Board’s Consumer Confidence election cycle and policy uncertainty remains, only with a new Index (CCI) reached 73.7 in November. This is well below name. Little has changed with the European or Asian econothe historical average of 95.0 but it is the highest level that mies. Meanwhile, though the unemployment rate has fallen has been recorded since February 2008 when it measured to 7.7% (as of November 2012), the labor force participation 76.4. That reading came before the recession when the rate is now at a 31-year low. The economy was just dealing with a combination of baby boomers declining housing market. And retiring and discouraged workers the housing market is where we dropping out of the labor force have not only seen the greatest Housing typically accounts for 15% to 25% has driven this metric as much improvement over the past year, (from average to boom cycles) of total GDP… as job growth over the past few but it is the greatest cause for It typically leads us out of recessions, years. But while it may seem optimism about the economy as like little has changed with the a whole going forward. but this sector of the economy has been economy, there are a few considmissing in action over the past six years. Housing Finally Returns erable differences to consider as But, this is all about to change. we head into 2013. The depth of this downturn was Though unemployment remains problematic, job growth has actually been picking up. Over the course of 2011, the U.S. economy created just over 1.8 million jobs (roughly 153,000 per month). Through November 2012, the U.S. economy had created just under 1.7 million jobs. Though this overall number reflects monthly gains of 152,000 per month, just below last year’s average, this statistic includes a dismal spring in which job gains fell below the six figure mark. Since July 2012, job creation has ranged between 132,000 and 192,000 per month and the trend throughout the fall had been heading upward. Meanwhile these levels of employment growth are important because the economy needs to create approximately 125,000 jobs per month simply to keep up with population growth. Throughout most of the downturn, the economy has struggled to reach this mark. Meanwhile, the San Francisco and San Jose markets continue to lead all other U.S. metropolitan areas in terms of job growth. While U.S. job growth has averaged 2.1% over the past year, San Jose has seen its employment base grow by 3.5% (31,400 jobs) while San Francisco achieved a growth rate of 3.4% (32,600 jobs). Meanwhile, after years of flat to negative numbers, the Oakland/East Bay marketplace also saw a return to employment growth—posting an annual rate of 2.0% (19,400 jobs).

due to the deleveraging nature of this recession and there was no other sector of the economy that had more deleveraging to do than housing. Fueled by exotic and often toxic loans, housing values grew by 100% or more in some markets from 2002 to 2006. When this bubble began to burst in 2007, the resulting impact led the nation into its worst downturn since the Great Depression with the housing market struggling to stabilize since then. Decline in SFR Available Inventory Metropolitan Statistical Area

# of Houses for Sale Yearly Change

Boston

10,788

Chicago

34,192

-5.1%

8,559

-58.8%

Inland Empire

-37.2%

Las Vegas

15,106

-25.1%

Los Angeles

12,569

-55.3%

Phoenix

16,601

-11.1%

Portland

7,854

-20.8%

Sacramento

3,660

-66.4%

San Diego

4,168

-53.5%

San Francisco

3,851

-57.6%

San Jose

1,378

-55.7%

9,647

-38.8%

Seattle Washington DC National

11,146

-28.4%

198,581

-29.3%

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

ECONOMIC OUTLOOK fewer young people left the nest, renters took on roommates Housing typically accounts for 15% to 25% (from average to or people otherwise doubled up on housing arrangements. boom cycles) of total GDP. Following the past three recessions We estimate current pent-up demand for housing to stand (1980, 1991 and 2001), residential investment grew more at approximately 3.5 million units. Most of this demand will than 30% on average during the first two years of recovery. land in multifamily product first, and this trend is already well In past cycles, this meant strong rebounds, thanks to millions underway. Most national markets of jobs and billions of dollars are currently reporting multifamily in additional economic output. vacancy in the 5% and 6% range. According to the National AssoIn the Bay Area this trend has ciation of Home Builders (NAHB), The perception that the housing market been particularly pronounced with were home construction near its is rebounding still has not hit the regional vacancy standing at just historic norm, it would create an 2.5% as of Q3 2012. Meanwhile, additional three million jobs. Past general public, though it should by late rental rate growth over the past two studies from this same group have in the year. This will result in a sharper years has approached 30% in both found that each new home built in “pop” in demand heading into 2014… San Jose and San Francisco, while the U.S. creates three new fulltime Oakland has seen extremely robust jobs (from construction to financial Housing will begin to impact GDP by growth in excess of 20%. services to retail) and generates 2014 with quarterly growth levels finally $90,000 in tax revenue. Even at With apartment rents growing at returning to the 3.0% or range or more. half those numbers, the impact of a rapid clip in most markets and housing is huge, especially when single-family residential pricing still considering the fact that housing averaging 30% below peak pricing starts have set new records for nationally, it is now cheaper to buy in most U.S. markets than lows throughout this downturn. Housing typically leads us it is to rent. A recent JP Morgan study found this to be the out of recessions, but this sector of the economy has been case in nearly half of all U.S. markets, while surveys by Trulia missing in action over the past six years. This is all about and others have provided even more aggressive numbers. to change. Meanwhile, JP Morgan analysts also estimate pent-up demand for single-family residential (SFR) housing units to stand at Over the past 30 years, the United States has averaged 600,000 units. Against this backdrop, it would only seem 1.3 million new households per year. But throughout the natural that home sales would start to surge. And they have… recession, this number dropped to just 600,000 per year as 8

Percentage of Job Growth

Change in Employment by Industry

by Region 2011 - Nov. '12

San Francisco 2011 - Nov. '12 Government

LA-Orange County

Construction

California

Trade, Trans. & Utilities Other Services

Leisure & Hospitality

East Bay

Education & Health

Bay Area

Professional & Business Financial Activities

San Francisco

Information

South Bay

Manufacturing

-3,000

3,000

6,000

9,000

Change in Employment by Industry

South Bay 2011 - Nov.'12

East Bay 2011 - Nov. '12

Government

Construction

Trade, Trans. & Utilities

Other Services

Leisure & Hospitality

Education & Health

Professional & Business

Financial Activities

Information

Manufacturing

-2,000

CASSIDY TURLEY

2,000

4,000

6,000

8,000

-4,000

-2,000

2,000

4,000

12,000

6,000

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

ECONOMIC OUTLOOK

trend will continue, at least for now. The construction sector Over the course of 2012, residential home sales have posted accounted for roughly two million of the more than eight million their strongest annual sales gains in three years (when sales jobs lost during the recession. Though it will have a slow were artificially propped up by a first-time buyer stimulus start, 2013 will be a year in which gradually improving housing program), with the inventory of available homes falling fundamentals will accelerate. Keep in mind that many who sharply. Meanwhile, the inventory of homes for sale nationally would have otherwise bought homes during the downturn have has dropped substantially. According to RedFin, the available held off until the market “hits bottom.” The perception that inventory has dropped in Boston by 37.2%, while the hardthe housing market is rebounding still has not hit the general hit Inland Empire has seen SFR availability fall by 58.4% public, though it should by late in the year. This will result in a and Sacramento has recorded a drop of 66.4%. In the sharper “pop” in SFR demand heading into 2014. Meanwhile, Bay Area, San Francisco has seen availability fall by 57.6% new home construction will continue to while San Jose’s inventory of available accelerate. We anticipate that housing will homes for sale has fallen by 55.7%. clearly begin to impact GDP by 2014 with Meanwhile, the shadow inventory of REOs, quarterly growth levels finally returning to foreclosed and delinquent homes is now The lack of policy clarity the 3.0% or greater range. Meanwhile, back to 2008 levels. will remain an issue for new home construction could add as many According to the National Association of as one million new jobs to the economy by now and additional political Realtors (NAR), single-family home prices 2015, reinforcing a further virtuous cycle discord on top of that won’t have improved in 100 out of 134 metros that will drive economic growth ahead. since the beginning of 2012 (Case-Shiller help. But there are plenty But perhaps the most important impact data mirrors this trend). Meanwhile, of housing’s return will be improvement in of economic indicators to be RedFin’s data indicates that pricing household wealth. Historically, for every extremely optimistic about per square foot metrics have improved $1 increase in home values, consumer significantly even in some of the markets spending typically increases by $0.05. worst hit by the housing crisis. The Las Though consumer spending has largely Vegas market has seen pricing jump by kept the economy afloat over the past four 10.5%, the Inland Empire booked an annual increase of 9.6%, years, it has been against a backdrop of declining personal Sacramento pricing improved by 8.8% while RedFin reports wealth. The return of home pricing appreciation will have a a whopping increase of 30.0% in the per square foot pricing significant impact on consumer spending, retail and investfor the beleaguered Phoenix marketplace. ment in general. The “new frugality” that has significantly impacted retail trends over the past few years will certainly Lastly, and perhaps most importantly, new home starts are be with us for a while, but the eventual return of the “wealth now at their highest level since before the financial meltdown effect” by 2015/2016 could mean relief for some of the of 2008. Additionally, permits remain high, meaning that this retailers hardest hit by the recession.

OFFICE AND R&D FORECAST n terms of regional performance, the Bay Area economy has emerged as the strongest in the U.S. over the past couple of years and technology has been at the heart of this trend. While the San Jose and San Francisco markets have been among the fastest growing cities in terms of job growth, the region’s commercial real estate market has been booming as well. That being said, the boom has been uneven, both in terms of product type and in terms of geography.

DEAL HIGHLIGHT

The offi ce and R&D sectors are where we have seen the greatest turnaround, with these properties accounting for the most regional occupancy growth and some of the most robust rental rate gains. After hemorrhaging over 19.5 million square feet of office and R&D occupancy in 2008 and 2009, the market has experienced the strongest rebound in its history (even slightly surpassing the growth rates recorded during the first couple of years of the first tech explosion). Since market conditions turned in 2010, the San Francisco Bay Area’s office and R&D markets have combined for approximately 20 million square feet of total occupancy growth. The overwhelming majority of this was driven by tech users, but because most of these companies have remained heavily concentrated in just those markets situated along the Highway The largest San 101 c o r r id o r (S a n Francisco office deal Francisco, San Mateo of 2012 (through 3Q) and Santa Clara Counwas Salesforce’s lease ties), recovery has been of nearly 502,000 uneven geographically. square feet of space 10

at TIAA-CREF’s 50 Fremont Street. Salesforce occupied this space in the Financial District South submarket in December 2012.

Office and R&D properties in San Francisco, San Mateo and Santa Clara Counties have accounted for over 17.3 million square feet of the roughly 20 million square feet of growth recorded in the region since 2010. Overall East Bay numbers only turned positive in 2011. In the North Bay, Marin County barely registered positive numbers in 2010 and after a strong 2011 has struggled to remain in positive territory in 2012. Sonoma County saw stronger gains in 2010 and also posted robust growth in 2011 but has seen those numbers falter in 2012. In fact, Q3 2012 was the first time since the current wave of recovery began that some seemingly bulletproof markets (like San Francisco) saw any weakness at all. San Francisco is still on course to close the year in strongly positive territory and Santa Clara County (home to Silicon Valley) hasn’t faltered at all. But even San Mateo County has struggled with negative net absorption in 2012. The recent negative trending in San Mateo County and San Francisco’s weak performance in Q3 have led many to question

whether the current tech boom may be going bust. But unlike the 2001 dot.com crash, there are a few critical differences with the current cycle. While the dot.com wave was fueled by start-ups with heavy funding, but little in the way of proven business plans, Tech Boom 2.0 has been driven by some of the most proven and profitable companies in the world, including Apple, Google, Microsoft, Salesforce and Samsung to name just a few. Meanwhile, the San Francisco Bay area continues to account for between 35% and 40% of all venture capital funding nationally and that is fueling additional growth in the region. With personal computing and smartphone use only accelerating worldwide, the new tech boom isn’t about to go bust any time soon. But it may be changing. After over two years of runaway growth, it may be slowing to levels that will be more sustainable in the long-term.

Bay Area Office/R&D Review Throughout the Bay Area as a whole, combined office and R&D vacancy stood at 13.6% as of the close of Q3 2012. This figure reflects a total inventory in excess of 454 million square feet of product throughout the San Francisco Peninsula, Silicon Valley and the East and North Bay markets. As stated earlier, recovery has been uneven. This holds true both geographically and for product types. In terms of office space alone, the Bay Area is home to more than 253 million square feet of office product. In terms of occupancy growth, office has far outpaced R&D during the current growth cycle. Of the roughly 20 million square feet of positive net absorption recorded since Q2 2010, office product was responsible for over 14.4 million square feet of that total. Compared against the region’s overall office inventory, this equates to a stunning overall growth rate of 5.7% in just 27 months. Q3 2012 office vacancy stood at 12.9%, down from 14.3% one year earlier and significantly reduced from a peak reading of 17.5% posted in Q1 2010. The current average asking rent for office space throughout the region is $2.80 per square foot (on a monthly full service basis). This metric has increased 8.4% from the $2.58 per square foot rate that was recorded in Q3 2011. Regional asking rents hit a low of $2.48 per square foot in Q2 2010 but have rebounded by 12.9% since that time but this metric masks a wide range of rental rate growth that measures from aggressive in San Francisco to modest in the North and East Bay. Regardless, all of this has been fueled by strong occupancy growth. The market recorded over one million square feet of occupancy growth in Q3 alone and had posted 3.7 million square feet of positive net absorption through Q3 2012. We anticipate final Q4 numbers to only build upon that total. When measured against the region’s inventory, this number represents an extremely robust growth rate of 1.5% over the past months.

San Francisco County Office Market 2012 Notable Leases (Through Q3 2012) Quarter

Total SF

Address

Submarket

Transaction Type

Salesforce.com

Tenant

501,786

50 Fremont St

South Financial District

Relocation/Expansion

Macy's.com

238,000

680 Folsom St

South Financial District

Relocation/Expansion

Airbnb

170,000

888 Brannan St

Showplace Square

Relocation/Expansion

Twitter

164,051

1301-1355 Market St

West End

Relocation/Expansion

Riverbed Technology

160,000

680 Folsom St

South Financial District

Relocation/Expansion

CASSIDY TURLEY

DEAL HIGHLIGHT

OFFICE AND R&D FORECAST

below the 15.7% rate of one year ago Though the Marin, San Francisco and and marks a major reduction from the San Mateo County markets all recorded post-recession peak of 19.0% that was occupancy losses during Q3 2012, only recorded in Q1 2010. Even with Q3’s the Marin and San Mateo County trade losses, the market has seen its overall areas were in negative territory for the R&D occupancy increase by over 5.7 year. Based upon the trending that we million square feet since that time, saw in the marketplace and numerous reflecting a 3% overall growth rate. deals that had either been signed or But the question remains as to whether that were in the works when this report In September 2012, Lab 126 signed a the growth cycle is coming to an end. went to press in December, it appears deal for 582,000 square feet of space The short answer is no. that all three of these regions will return at Jay Paul’s Moffett Towers project in to growth in Q4, though it is unclear Sunnyvale. Lab 126 is the AmazonThough occupancy growth turned negawhether these numbers will be enough subsidiary responsible for developing the tive in Q3, the Bay Area’s R&D sector to bring both Marin and San Mateo Kindle device. They will be relocating and remained in positive territory over the Counties out of the red for the year. The expanding into Building D at Moffett Park first nine months of 2012—to the tune good news here is that the East Bay, upon its completion (currently scheduled of 832,000 square feet and, based which has largely been sidestepped for February 2013). upon deals signed or in the works as by a tech-driven recovery, is finally this report went to press in December, showing strong signs of improvement. we anticipate that Q4 2012 totals will be modestly positive. While total annual growth numbers for the Oakland market are And we should note that about 25% of Q3’s occupancy loss modest, both the Pleasanton and Walnut Creek trade areas was due to older R&D buildings being demolished to make way have posted solid occupancy growth in 2012. In fact, some of for new projects (mostly multifamily) in Santa Clara County. the strongest gains that these markets have seen came during Still, deal activity has slowed and while some of this could be Q3 2012 when the specter of political uncertainty began to blamed on the issue of political uncertainty, most of it reflects impact tenant behavior. a deeper trend. Most of Q3’s R&D occupancy loss came from space users moving to office projects and the biggest chalAs we drew closer to the November 2012 elections, we began lenge ahead for R&D landlords will be how to battle the fact to see many space users postpone or even cancel planned real that tech user preferences are increasingly shifting towards estate moves due to their concern over the lack of clarity on office space. This has not been as much of a problem with taxation policy. Though this trend was limited in its impact, life science or non-tech users, but as office space continues it did generally slow growth across the board. Though the to evolve away from the old model of commodity space to re-election of President Obama has given the marketplace a creative space, it has emerged as a direct competitor to R&D. better sense of the general direction of policy, the issue of the fiscal cliff only prolonged this pause in the action for many The good news is that R&D remains the lower cost alternaspace users. tive ideal incubator option for start-ups and, as office rents continue to escalate, may be well-positioned for more frugal While concerns over taxation policy were not enough to derail tenants. The bad news is that this trend will only accelerate the Bay Area’s office market in Q3, the region’s R&D sector did as office space continues to change and as the region’s R&D see some slowing. For the first time since mid-year 2012, R&D inventory ages. While the current regional average asking product posted negative growth to the tune of 444,000 square rent for office space is $2.80 per square foot (on a monthly feet. While this is a comparatively small number when taking full service basis), the average rate for R&D currently stands the region’s 192.3 million square foot inventory into account, at just $1.33 per square foot (on a monthly triple net basis). it does raise some concerns. As of the close of Q3, vacancy Though R&D space is almost always leased on a triple net basis for R&D product throughout the region stood at 14.4%, up which passes expenses on to the tenant (and these can vary slightly from a midyear reading of 14.2%. This remains well San Mateo County Office Market 2012 Notable Leases (Through Q3 2012) Tenant

Quarter

Total SF

Address

City

Transaction Type

HeartFlow

102,981

1400 Seaport Blvd

Redwood City

Sublease

Evernote

87,774

305 Walnut St

Redwood City

Relocation/Expansion

Success Factors

87,067

Centennial Towers

South San Francisco

Relocation/Expansion

Wildfire by Google

58,686

1600 Seaport Blvd

Redwood City

Expansion

Gazillion Entertainment

49,800

475 Concar Dr

San Mateo

Renewal

San Mateo County R&D Market 2012 Notable Leases (Through Q3 2012) Tenant Depomed, Inc.

Quarter

Total SF

45,990

Address

City

Transaction Type

1330-1360 O'Brien Dr

Menlo Park

Renewal

NestGSV

45,866

425 Broadway Ave

Redwood City

Relocation/Expansion

Global Blood Therapeutics

41,387

400 E. Jamie Ct

South San Francisco

Relocation/Expansion

Pan Pacific

39,150

1205 Chrysler Dr

Menlo Park

Relocation/Expansion

Intersect ENT

23,232

1555 Adams Dr

Menlo Park

Relocation/Expansion

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

OFFICE AND R&D FORECAST widely), tenants can still find top quality R&D space at rents well below like office rents.

Bay Area Office/R&D Forecast

Looking ahead to 2013, we anticipate slower growth during the first quarter of 2013 for both office and R&D properties. The wheels of commercial real estate move slowly and the political uncertainty that began with the November elections only intensified with the fiscal cliff issue. Though we expect this to improve now that a partial deal is in place, enough real estate decision makers put the brakes on making moves that it will impact activity in January and February. But demand for goods and services still trumps fear of taxes in terms of what motivates businesses to expand their commercial real estate usage and so the region’s tech engine has hardly slowed, with a number of major deals inked in Q4 and many teed up for Q1 2013. But the same may not be true for other sectors of the economy and though we do not expect any major space givebacks, a Q1 slowdown across the board is almost inevitable. The good news is that the market should be on track for more accelerated growth by Q2. User space requirements remain strong. We are currently tracking a total of 18.1 million square feet of space user needs that could land in office or R&D projects over the next 24 months. Some of these are for renewals or relocations that will not result in any occupancy growth. Likewise, some of these may never land. But the current deal pipeline is roughly in the same place it was six months ago and should guarantee positive growth going forward. The real question may be how long could some of these moves be postponed. We anticipate moderate growth ahead in most trade areas. We are also extremely optimistic about the resurgent housing market and its eventual return as an economic driver. This has the potential to bring back demand from a number of key sectors including the financial services sector, which has largely been missing in action since 2007. This is not likely to happen prior to 2014 at the earliest, but we do expect an uptick of demand that will extend beyond the big financial services players in need of larger blocks of commodity space to smaller residential real estate firms, title companies, mortgage brokers and other players that had been squeezed by the housing crash.

San Francisco Office Outlook and Forecast As stated earlier, Q3 2012 was the first time in nine consecutive quarters that the market recorded occupancy losses, posting negative net absorption of 409,000 square feet of space. However, annual numbers remained in the black through Q3 to the tune of over 1.4 million square feet and an annual growth rate (when measured against San Francisco’s total office inventory of 83.6 million square feet) of 1.7% in just nine months. San Francisco does not have a significant R&D presence and so that type of space is a non-factor here. As this report went to press, office vacancy stood at 9.9%, up from the 9.4% rate of Q2 2012, but still significantly reduced from the 12.0% rate posted in Q3 2011. Market vacancy had peaked at 16.4% in Q1 2010 but had been on a sharp downward trajectory until recently. The market has backfilled over six million square feet of space since that time, posting an astonishing growth rate of 7.3% in just 27 months. But after two years of nonstop aggressive growth any slowdown is bound to raise some concerns. The good news is that Q3’s occupancy losses are best described as a pause in the action. Market timing was key to much of the decline both in terms of space users postponing planned moves in light of political uncertainty and a number of shadow spaces coming vacant as tenants relocated within the marketplace. Likewise, the biggest deal of Q3 was Twitter’s lease of 164,000 square feet at Market Square North, but because they won’t be moving in until 2015 it has yet to impact statistics. The good news is that deal activity has picked back up and, as this report went to press in December, the market was on track to post occupancy growth in Q4. As of Q3, San Francisco’s average asking rent stood at $3.62 per square foot (on a monthly full service basis), up 19.3% over the $3.03 reading of a year ago. This metric has improved by 37.8% since the market’s low-water mark of $2.63 was posted in Q1 2010. Based upon the tenant deals in the marketplace that we are tracking, we anticipate that the San Francisco office market will not only return to growth in the final quarter of 2012, but that it will continue this pattern throughout 2013. While we expect Q1 2013 numbers to be modest, look for occupancy growth totals to escalate heading into the final half of the year. The market will likely close 2013 having posted about 1.6 million square feet of positive net absorption and

Santa Clara County Office Market 2012 Notable Leases (Through Q3 2012) Quarter

Total SF

Address

City

Transaction Type

Lab 126

Tenant

581,973

1100-1120 Enterprise Wy

Sunnyvale

Relocation/Expansion

557,143

555 Mathilda Ave

Sunnyvale

Relocation/Expansion

Samsung Info Systems

385,000

625 Clyde Ave

Mountain View

Relocation/Expansion

Palo Alto Networks

299,784

4301-4401 Great America Pkwy

Santa Clara

Relocation/Expansion

Arista Corp.

149,608

5453 Great America Pkwy

Santa Clara

Relocation/Expansion

Santa Clara County R&D Market 2012 Notable Leases (Through Q3 2012) Quarter

Total SF

Address

City

Transaction Type

Synopsys, Inc.

Tenant

215,824

445-455 N. Mary Ave

Sunnyvale

Renewal

Barnes & Noble, Inc.

207,857

3400 Hillview Ave

Palo Alto

Relocation/Expansion

Xerox

202,000

3333 Coyote Hill Rd

Palo Alto

Renewal

JDS Uniphase

162,934

400, 430, & 460 N. McCarthy Blvd

Milpitas

Renewal/Expansion

Stanford Hospital & Clinics

155,000

1804 Embarcadero Rd

Palo Alto

CASSIDY TURLEY

2012 has been a challenging year for the San Mateo County office and R&D market. The combined inventory of 50.5 million square feet of product here includes 31.1 million square feet of office space and 19.4 million square feet of R&D space. Total vacancy as of the close of Q3 stood at 13.4%, up a full percentage point from the 12.4% rate booked at the close of 2011. Through the first nine months of 2012, just under 357,000 square feet of space had been returned to the marketplace with both office and R&D properties reporting losses.

DEAL HIGHLIGHT

San Mateo County Office/R&D Outlook and Forecast

2012 occurred in February. Heartflow took 103,000 square feet of space at Shorenstein’s Pacific Shores Center Building 9 in Redwood City.

We anticipate growth to return to positive territory in 2012, though the first half of the year will likely be sluggish with some quarters possibly continuing the trend of negative net absorption. Still, we anticipate that combined occupancy growth for office and R&D properties will reach the 200,000 square foot mark by the close of 2013 and that the current overall vacancy rate of 13.0% will fall to about 12.8%. The few rare large blocks of available space on the market will drive overall metrics for asking rates up by about 5.0%, though the market will be very competitive for small spaces. Office growth numbers will be much more robust by 2014 thanks to a number of projects expected to deliver to the marketplace by then which will offer the large blocks of space that tech users are currently going elsewhere to find.

DEAL HIGHLIGHT

The office market has been harder hit, accounting for 240,000 square feet of negative net absorption through Q3 2012. Office vacancy stands at 13.9%, up from the 13.6% rate that was posted exactly a year ago (Q3 2011). But even with office vacancy creeping upward, the real problem In April 2012, the University of facing San Mateo County is the lack California at Berkeley inked a deal for of available space. Obviously, on 93,000 square feet of Class B office the surface, that statement sounds space at the Strada Investment Group’s counter-intuitive to the extreme. Berkeley Crossing project. They will be But the problem is that while San occupying the Class B space in Mateo County may still have plenty January 2013. of office space available, it is not the right kind of space. Currently tenant office demand on the Peninsula is Santa Clara County Office/R&D Outlook and Forecast dominated by tech companies looking for larger blocks of While San Mateo County faced challenges throughout 2012 space of 10,000 square feet or more. Yet, office suites of and San Francisco’s office market took a break in Q3, the 10,000 square feet or more account for only about 18% of Santa Clara office and R&D markets has continued to produce the more than 4.2 million square feet of space currently availimpressive numbers, albeit unevenly. The combined inventory able. Likewise, tech companies are also looking for downtown here includes over 201.4 million square feet of space and had creative space ideally situated near public transportation and posted just over three million square feet of occupancy growth urban amenities. This type of space is also in short supply. through the first nine months of 2012. As of the close of Q3 This has resulted in some companies relocating elsewhere 2012, this equated to a combined vacancy rate of 13.0%, a in the Bay Area as they look (primarily to San Francisco) to substantial drop from the 14.2% rate posted at the close of markets that can accommodate their growth needs. 2011. That being said, Silicon Valley’s office sector has simply Despite a year in which growth has been negative, office rents been on fire, having recorded over 1.8 million square feet of have grown. The current average asking rate for office space occupancy growth through September and with enough Q4 of $3.33 per square foot (on a monthly full service basis) is deals having been inked as this report went to press to easily up 5.1% over the $3.16 reading of a year ago. This metric is guarantee it will close out 2012 well above the two million up 31.9% from the $2.52 low-water rate posted in Q1 2010. square foot mark. SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

OFFICE AND R&D FORECAST

R&D space has also struggled to gain traction in 2012. As of Q3 2012, vacancy stood at 12.7% compared to 11.9% twelve months prior. Through the first nine months of 2012, the market had posted 117,000 square feet of negative net absorption. This year’s lackluster performance comes in stark contrast to the previous three years when R&D space in San Mateo County had accounted for nearly 2.5 million square feet of growth (2009 – 2011). The challenge here has not only been the increasing preference of office space for many tech companies, but stiff competition from cheaper R&D space in the neighboring Silicon Valley market. So, it should come as no surprise that rents have been flat here over the past year. The current average asking rate of $2.17 per square foot (on a monthly triple net basis) compares to Q3 2011’s reading of $2.14. Activity in Q4 has picked up but we anticipate minimal growth at best to close out the year and not enough to boost this segment of the market into positive San Mateo County’s largest office territory for the year. lease through the first nine months of

a vacancy rate in the range of 8.7%. New construction will eventually become more of a factor impacting trends, though we don’t see much of an impact before 2014. The good news is that is also when we anticipate the recovery as a whole to get a significant boost from the return of the housing market as an economic driver. Look for rents to continue to post strong gains, though they will likely not approach the double-digit increases of the past year. Our assumption is that they will likely increase at a rate of 9.0% to 10.0% in the coming year.

OFFICE AND R&D FORECAST Silicon Valley office vacancy stood at 13.0% as of Q3, reflecting a significant drop from the 14.3% rate of a year ago and a massive improvement from the 18.9% high-water mark posted in Q1 2010. Silicon Valley has posted growth nine out of the ten past quarters, racking up an impressive 5.8 million square feet of positive net absorption for an overall growth rate of 8.8%. Meanwhile, office rents continue to climb, though the rate of increase appears to be slowing. The current average asking rate of $2.89 per square foot (on a monthly full service basis) is 6.8% above last year’s reading, but the current actual effective rate of $3.87 per square foot reflects a 19.1% gain from where it stood a year ago. This number was bolstered by a number of transactions completed at new developments throughout the region. Major corporate campus moves from tech companies continue to fuel this marketplace and has spurred a new wave of development that will increasingly impact vacancy and rental rate trends from late 2013 onward.

East Bay Office/R&D Outlook and Forecast The combined East Bay inventory of office and R&D properties is 98.7 million square feet and recorded a vacancy rate of 17.3% as of the close of Q3 2012. This reflects some improvement over the 18.0% rate posted as of the close of 2011 thanks to the 734,000 square feet of occupancy growth that the region’s markets have experienced throughout 2012, much of which has come later in the year.

In terms of office space, there are three Silicon Valley’s R&D sector has also major trade areas within the East Bay; outperformed. Through Q3 2012 it Oakland, Walnut Creek and Pleasanton. has posted just over one million square None of these markets have a huge feet of occupancy growth and this is tech presence, though the Oakland While there have been plenty of large despite the fact that nearly one million marketplace does have a couple of tech new R&D leases in Silicon Valley this square feet of old R&D space had been clusters within the Berkeley, Emeryville year, the biggest deal through Q3 converted (demolished, mostly to make and Alameda submarkets. As a result, was actually a renewal. Synopsys way for new residential projects) over the re-upped on the 216,000 square feet recovery has come here much later first nine months of the year. This factor of space that it has occupied at Jay than elsewhere in the Bay Area. Office helped to drive negative numbers in Q3, Paul’s Crossroads Technology Center tenancy in these trade areas has typically however, our tracking of Q4 deal activity in Sunnyvale since 2000. come from the government, healthcare, indicates that quarterly net absorption education, personal and business numbers will turn positive again to close services sectors and these have only out 2012. The current R&D vacancy rate of 14.5% compares recently begun to spring back into expansion mode. Modest to a reading of 16.2% posted a year ago and a peak vacancy improvement in the overall economy and regional improvement reading of 19.6% in Q1 2010. The R&D market has backfilled as a whole (many East Bay workers commute to tech jobs in over 5.7 million square feet of previously vacant space in the the Highway 101 Corridor markets but spend their paychecks intervening 27 months, reflecting a robust overall growth rate back home in Alameda or Contra Costa County) has helped to of 3.4%. finally turn things around in these trade areas. The Oakland

DEAL HIGHLIGHT

seeing greater growth towards year-end. We anticipate that today’s combined vacancy rate of 13.0% will drop to about 12.5% by the end of 2013 thanks to about three million square feet of total occupancy growth, with roughly two thirds of that occurring in the region’s office properties. Look for rents to continue aggressive growth in the 10% to 15% range. It will be 2014 before new speculative construction makes much of an impact on either vacancy or rental rate growth.

While we expect slower activity during in Q1 2013 for all Bay Area markets, Silicon Valley will still lead the way in terms of growth. Office will remain the hotter of the two property types, but R&D will also continue to post positive numbers with both

office market currently has a vacancy rate of 17.2%, up from a Q3 2011 reading of 16.4%, but still below its 17.5% peak in Q2 2011. Through the first nine months of 2012, it had posted just 37,000 square feet of occupancy growth, but this reflects an improvement over a lackluster 2011 in which it

East Bay Office Market 2012 Notable Leases (Through Q3 2012) Quarter

Total SF

Address

City/Submarket

Transaction Type

UC Berkeley

Tenant

93,000

1608 4th St

West Berkeley

Expansion

PG&E

80,000

Bishop Ranch 1

San Ramon

Relocation/Expansion

Singulex

52,000

1701 Harbor Bay Pkwy

S. Alameda

Relocation/Expansion

Wendel Rosen Black & Denn

52,000

1111 Broadway

City Center - Oakland Renewal

Assoc. Third Party Admin.

49,067

1640 Loop Rd, S.

S. Alameda

Renewal

East Bay R&D Market 2012 Notable Leases (Through Q3 2012) Tenant

Quarter

Total SF

Address

City

Warm Springs Constructors, Inc.

107,000

45401 Research Ave

Fremont

Relocation/Expansion

Volterra Semiconductor Corp.

73,111

47451-47475 Fremont Blvd

Fremont

Renewal

Depomed, Inc.

60,416

7999 Gateway Blvd

Newark

Relocation/Expansion

Solta Medical

51,449

25881 Industrial Blvd (Bldg F)

Hayward

Renewal

LAM Research

50,900

45757 W. Northport Loop

Fremont

Relocation/Expansion

CASSIDY TURLEY

Transaction Type

The East Bay’s R&D marketplace is mostly centered in Alameda County, where roughly 31.9 million square feet of product is situated. The Oakland R&D marketplace currently has a vacancy rate of 21.7% and has actually regressed over the past year. As of Q3 2011 vacancy stood at 20.0%. This hasn’t impacted rents significantly, with asking rates currently averaging $0.88 per square foot (on a monthly triple net basis), compared to $0.82 a year ago. The Pleasanton market is home to approximately 7.1 million square feet of R&D space and the trend here has been more positive. The current vacancy rate here is 10.8%, down from a Q3 2011 reading of 13.5%. This trade area had posted R&D occupancy growth of 129,000 square feet through the first nine months of 2012, compared to Oakland’s loss of 342,000 square feet. The big challenge here is that R&D space in the East Bay has seen little benefit from the region’s tech sector and has traditionally been more about quasi-industrial or back-end office usage than anything else. The current average asking rent for R&D space in Pleasanton is $0.91 per square foot, up from $0.85 a year ago. Going forward, we anticipate that the East Bay marketplace will see continued slow growth for office product and flat growth for R&D in the Oakland trade area. Both the Walnut Creek and Pleasanton office markets will continue to post moderate

growth while we also anticipate activity to tick up for R&D space in Pleasanton. All told, we expect today’s combined office and R&D vacancy rate of 17.3% to fall over the course of 2013 to about 16.0% by year-end. We expect total occupancy growth to come in at about 1.2 million square feet, with totals ramping up later in the year.

North Bay Office Outlook and Forecast The North Bay is the San Francisco Bay Area’s smallest trade region in terms of office product (there are no major R&D projects in this marketplace to speak of) and accounts for a total inventory of just over 20 million square feet between Marin and Sonoma Counties. In Marin County, we track 9.8 million square feet of space, which had a vacancy rate of 15.5% as of Q3 2012. Performance has been weak in 2012, with the market in the red in terms of occupancy growth to the tune of 181,000 square feet. Vacancy had reached as low as 13.6% in Q4 2011. Despite this setback, the average asking rent for office space in Marin County currently stands at $2.52 per square foot (on a monthly full service basis) reflecting an increase of 3.3% over where it stood a year ago. Sonoma County has also struggled with occupancy issues this year, having posted negative net absorption of 215,000 square feet over the course of 2012. But this all came from one user, State Farm, who has pulled out of their existing North Bay campus and because the project is slated for demolition it has had no impact on vacancy at all. The current vacancy rate for office space in Sonoma County of 20.4% is actually down from the 20.9% rate that had been posted a year ago. Before State Farm’s departure, Sonoma County had been on a course for modest growth throughout the year, though our tracking of Q4 activity indicates that both markets will return to modest growth over the final months of 2012. The current average asking rent for office space in Sonoma County is $1.66 per square foot, roughly the same place it was one year ago. We anticipate a return to very slow growth in Marin County for 2013. Our current forecast calls for this market to close 2013 with approximately 60,000 to 90,000 square feet of total occupancy growth and a final vacancy rate of roughly 14.3%. We expect rents to post a growth rate of roughly 3.0%. Sonoma County should end 2013 with a vacancy rate at, or near, 17.9%. We expect total occupancy growth in the range of 160,000 to 190,000 square feet and for rents to increase at a pace of about 4.0%.

Marin County Office Market 2012 Notable Leases (Through Q3 2012) Quarter

Total SF

Address

City

Transaction Type

Health Net

Tenant

52,454

2350 Kerner Blvd

San Rafael

Renewal

Autodesk

46,766

3950 Civic Center

San Rafael

Renewal

Redwood Trust, Inc

27,292

1 Belvedere Pl

Mill Valley

Renewal

Meritage Medical Network

22,266

500 Hangar Ave

Novato

Relocation/Expansion

Willis Lease Finance Corporation

20,534

773 San Marin Dr

Novato

Renewal/Expansion

Sonoma County Office Market 2012 Notable Leases (Through Q3 2012) Tenant

Quarter

Total SF

Address

City

Transaction Type

Marmot Mountain, LLC

43,000

5789 State Farm Dr

Rohnert Park

Relocation/Expansion

Raydiance

41,638

1450 Mcdowell Blvd

Petaluma

Relocation/Expansion

Sonoma Marin Area Rail Transit

28,000

5401 Old Redwood Hwy

Petaluma

Relocation/Expansion

Adventist Health

26,200

463 Aviation Blvd

Santa Rosa

Relocation/Expansion

Clover Stornetta Farms

17,846

1650 Corporate Cir

Petaluma

Relocation/Expansion

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

OFFICE AND R&D FORECAST

lost nearly 150,000 square feet of occupancy. The current average asking rent here of $2.16 per square foot is slightly above the $2.10 rate of a year ago, but we have yet to see substantial growth returning since the downturn. Rents had peaked at $2.39 per square foot in Q4 2008 as the impact of the recession was just being felt. While conditions have been choppy in Oakland, the Pleasanton office market has demonstrated a much clearer trend line. Vacancy here now stands at 13.9%, down considerably from its Q3 2011 peak of 18.4%. Recovery here has only just begun to pick up steam. As of Q3, Pleasanton had recorded four consecutive quarters of strong growth and had posted 716,000 square feet of positive net absorption over the first nine months of 2012. The Walnut Creek office market has followed a similar growth trend with vacancy falling five of the last six quarters and total occupancy growth of 195,000 square feet through Q3. Like all East Bay office markets, Walnut Creek’s current vacancy rate of 14.8% remains elevated, but this is a considerable improvement over the 17.7% peak posted in Q1 2011.

INDUSTRIAL FORECAST he San Francisco Bay Area’s 366 million square foot industrial market posted total vacancy 8.6% as of the close of Q3 2012, reflecting just under 452,000 square feet of total occupancy growth through the first nine months of the year. The region’s industrial marketplace is on track for its second consecutive year of growth. Industrial space accounted for 362,000 square feet of positive net absorption in 2011, but the region had hemorrhaged over 12.9 million square feet of occupancy between 2008 and 2010. While office and R&D occupancy levels are back to pre-recession levels, the same cannot be said of the region’s industrial base. However, the good news for local landlords is that at least the industrial sector did not enter into the recession with already inflated vacancy levels, as was the case for office and R&D properties in many Bay Area markets. But as has been the case with those property types, recovery for industrial properties has also been uneven both in terms of product type and geography.

of 2012. This would have far surpassed the 343,000 square feet of occupancy growth that the market experienced in 2011. The good news is that while many feared that the Solyndra facility would remain vacant for years, it actually sold very quickly. Seagate Technology will close on the property in February 2013, at which point the region’s manufacturing occupancy will tick up by about 800,000 square feet. The East Bay is home to 87.6 million square feet of manufacturing inventory. Vacancy here stood at 7.9% as of the close of Q3, up from a 6.7% reading a year ago. It tends to be the most active marketplace and usually drives growth in the region, though this trade area had posted negative net absorption to the tune of 485,000 square feet of space through the first nine months of 2012. This was, of course, due to the impact of Solyndra. The average asking rent has increased 19% over the past year from $0.42 to $0.51 per square foot (on a monthly triple net basis).

Santa Clara County closed Q3 with a vacancy rate of 5.2%, down Manufacturing space accounts for The largest industrial deal to be inked significantly from the 6.5% rate of a 147.2 million square feet of the throughout the first nine months of year ago. This trade area had posted region’s industrial inventory. The 2012 on the San Francisco Peninsula 471,000 square feet of occupancy region’s manufacturing sector growth through the first nine months was Williams-Sonoma’s renewal on performed well in Q3 2012, posting of 2012. This is despite the fact that 194,000 square feet of warehouse space 932,000 square feet of occupancy nearly 240,000 square feet of previat CalSTRS’ Crocker Industrial Park growth and closing the quarter with a ously occupied manufacturing space in Brisbane. vacancy rate of 6.9%. Unfortunately, was vacated and demolished to make this comes after three consecutive way for new residential projects in quarters of substantial occupancy San Jose. The trend of conversions losses, including those related to the high profile collapse of for older industrial properties in San Jose is only expected Fremont-based solar panel manufacturer Solyndra. Through to intensify going forward as city planners and developers the first nine months of the year, manufacturing occupancy contend with a housing shortage, skyrocketing rents and home in the Bay Area has actually fallen by 37,000 square feet. prices and little land left to build. More owners will find that, The good news is that Q4 activity should boost this segment assuming they can rezone and get through the environmental of the marketplace back into the black for the year, but gains hurdles, that redevelopment plays into residential housing may are likely to be modest at best. Still, despite these lackluster be the best use for older industrial properties bordering on numbers, the trend has been one of general improvement for obsolescence. This trend will help to tighten market vacancy the market as a whole. If you take Solyndra out of the mix, further. Though tenant activity levels for manufacturing space the region’s manufacturing base would have posted almost are minimal compared to the warehouse sector, there are not a 800,000 square feet of growth through the first nine months lot of quality options to choose from in the marketplace. This is

DEAL HIGHLIGHT

Bay Area Manufacturing Outlook

San Francisco County Industrial Market 2012 Notable Leases (Through Q3 2012) Tenant KWW Kitchen Cabinets & Bath

Quarter

Total SF

Address

Submarket

Transaction Type

32,500

211 Industrial St

Bayshore Corridor

Relocation/Expansion Relocation/Expansion

Young's Market Company

26,000

3000 3rd St

Mission Bay/Dog Patch

SRG Designs, Inc.

25,000

695 Minnesota St

Mission Bay/Dog Patch

Relocation/Expansion

Thatcher's Gourmet Popcorn

20,000

1225 Minnesota St

Mission Bay/Dog Patch

Renewal

Roar Wines

20,000

1225 Minnesota St

Mission Bay/Dog Patch

Relocation/Expansion

San Mateo County Industrial Market 2012 Notable Leases (Through Q3 2012) Tenant

Quarter

Total SF

Address

City

Transaction Type

Williams Sonoma

194,112

435-440 Valley Dr

Brisbane

Renewal

SF Chronicle

79,300

240 Valley Dr

Brisbane

Expansion

Pacific Gourmet

70,335

380 Valley Dr

Brisbane

Relocation/Expansion

NNR Global Logistics

45,362

550 Eccles Ave

South San Francisco

Expansion

Metro Air Service

43,500

425 Valley Dr

Brisbane

Expansion

CASSIDY TURLEY

of Q3 2012, compared to a 9.0% as of the close of 2011. In the intervening nine months, the marketplace had absorbed 511,000 square feet of previously vacant space. As this report went to press in December there were a number of deals that had closed or that were in the works that should further boost With just 6.6 million square feet of product, San Mateo this total in Q4 2012. All told, we anticipate that the Bay County is the smallest manufacturing market that we break Area’s warehouse sector will close 2012 with total annual out statistically. Through the first nine months of 2012 it occupancy growth in the range of 800,000 square feet. This had posted 23,000 square feet of negative net absorption. will make it the third year in a row that warehouse properties Ongoing deal activity in Q4 will likely bring it back into have posted positive annual totals. The market had lost over modestly positive territory, but just barely. If so, it will be ten million square feet of occupancy between 2007 and 2009. the first time since 2008 that manufacturing space closes the The good news is that 2012 will likely end as being the region’s year in the black. Despite this negative strongest growth year since 2006. The trending, current vacancy of 7.6% is bad news is that the combined positive still relatively low. The problem is that net absorption of the past three years demand has been equally low. The still equates to just 10% of all the We are optimistic that the current average asking rent of $0.79 occupancy lost during the downturn. ongoing trend of gradual per square feet has actually dropped 5% over the past year. The East Bay is home to the region’s improvement will escalate largest concentration of warehouse heading deeper into 2013. At the peak of the last cycle in 2007 space. The East Bay/Oakland market The trend of on-shoring is real manufacturing vacancy fell as low as has a total inventory base of 74.1 4.7%. The market still has a long million square feet. It closed Q3 2012 and has been fueled by a mix of way to go before it even comes close with a 9.3% vacancy rate, reflecting factors including rapidly rising to those numbers, however, we are a slight decline from the 9.6% rate optimistic that the ongoing trend of costs in Asia and stagnant of one year prior. This trade area has gradual improvement will escalate accounted for 227,000 square feet of wages here at home. heading deeper into 2013. The trend of occupancy growth through the fi rst on-shoring is real and has been fueled nine months of 2012 and continues by a mix of factors including rapidly to be one of the most sought after rising costs in Asia and stagnant wages locations from tenants who wish to be here at home. The tech boom has had little impact on local close to the Port of Oakland and major transportation hubs. manufacturing demand so far, but even this may change soon. At the peak of the last cycle, vacancy here had fallen as Apple has announced that they will begin assembling at least low as 4.4% (Q3 2006). Though vacancy remains elevated one model of their iPad product line in California. Though this from pre-downturn levels, one of the challenges facing will probably land in the Sacramento area, this will be part of this trade area is a lack of available modern space. The a greater marketing campaign to see if they can successfully average age of warehouse buildings in Alameda County is charge more for product clearly branded as made in America. 42 years. Industrial demand is currently being driven by Should it succeed, this could have immense implications for distribution and logistics users who need warehousing space manufacturing jobs and space demand in the future. that can handle heavy floor loads and that offer cross-docking capabilities, high ceilings for stacking and numerous other Bay Area Warehouse Outlook modern amenities. These facilities are in high demand and fetch top rents. Much of what remains vacant in the East Warehouse space accounts for almost 219 million square feet Bay/Oakland marketplace is older product. This past year is of the Bay Area’s 366 million square foot industrial base. the first since the downturn where this market has started Vacancy for this product type stood at 8.7% as of the close Santa Clara County Warehouse Market 2012 Notable Leases (Through Q3 2012) Tenant

Quarter

Total SF

Address

City/Submarket

Transaction Type

DGA Services

149,010

999 Montague Expwy

Milpitas

Relocation/Expansion

Apple, Inc.

134,160

2940 Mead Ave

Santa Clara

Expansion

Golden State T's Wholesale

90,000

2070 S. Seventh St

South San Jose

Renewal

Cepheid

70,627

914 Caribbean Dr

Sunnyvale

Expansion

Apple, Inc.

54,934

590 Macara Ave

Sunnyvale

Expansion

Santa Clara County Manufacturing Market 2012 Notable Leases (Through Q3 2012) Tenant

Quarter

Total SF

Address

City/Submarket

Transaction Type

Legacy Transportation Services

107,116

2011 Senter Rd

South San Jose

Expansion

Riverview Systems Group

70,042

1101 Cadillac Ct

Milpitas

Relocation/Expansion

SMTC

64,800

2302 Trade Zone Blvd

North San Jose

Renewal

Versgrove Moving Systems

51,600

665 Lenfest Rd

North San Jose

Relocation

ACTA Health Products

34,040

41320 Boyce Rd

Sunnyvale

Renewal

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

INDUSTRIAL FORECAST

one of the reasons why the ultra-modern Solyndra facility sold so quickly as well as what is driving strong rental rate growth in Santa Clara County. The current average asking rent of $0.68 per square foot is up 18% from last year’s rate.

INDUSTRIAL FORECAST Clara County warehouse market includes 31.2 million square feet of inventory and closed Q3 2012 with an overall vacancy rate of 8.8%. While this marks an improvement over the 9.8% While the East Bay/Oakland marketplace typically sees the rate that was posted a year ago, Santa Clara County lost over most tenant activity in the region, it was the East Bay’s inland 454,000 square feet of warehouse occupancy through the Contra Costa County markets that have posted the most growth first nine months of 2012. There is some good news here in in 2012. The East Bay/Pleasanton that building conversions have been market is home to 17.8 million the real culprit. Since the beginsquare feet of warehouse space. It ning of the year, we have removed closed Q3 2012 with a vacancy rate 653,000 square feet of space from of 15.0%, down from a reading of our statistical tracking. In virtually 16.3% one year ago. It has posted every case these were buildings 211,000 square feet of occupancy slated to be demolished to make growth through the first nine months way for new projects, usually new of 2012. The current average asking multifamily developments though the rent here of $0.57 per square foot extension of BART has also played has only just begun to stabilize over a role. Though this trend results in the past six months. It is down lower overall occupancy numbers, it The East Bay’s (and the region’s) 17% from where it stood a year actually has helped to drive vacancy ago. While we do not expect it to largest industrial deal of the year was rates down because some of this fall any further, the region’s still-high inventory was already empty. The a relocation/expansion lease. Ceva vacancy rate will continue to weigh current vacancy rate for warehouse Logistics inked a deal for 323,000 on rental rate growth. product in Santa Clara County is square feet of space at Hayward’s 8.8%, down from 9.8%. Without Huntwood Logistics Center in February. The East Bay/Walnut Creek trade these conversions, the market would area led all other Bay Area wareThe third-party logistics provider took actually be on page for modest house markets in terms of occupancy growth in the 200,000 square foot occupancy of the space in November. growth through the first nine months range. This helps to explain why of 2012 with 479,000 square feet rents here are growing. The current of positive net absorption. Vacancy average asking rate of $0.49 per here has fallen from 17.0% to 13.8% over the past twelve square foot is up 10% over last year’s reading. With leasing months. But like its neighbor to the south, rents are only now fundamentals continuing to gradually improve and more older stabilizing and significant rental rate growth is unlikely until or obsolete industrial properties likely to face the wrecking ball vacancy falls further. The current average asking rent of $0.53 in 2013 and beyond, we see vacancy continuing to tighten and per square foot has not budged in the past six months, but a rents continuing to grow. year ago it stood at $0.58 per square foot. Looking ahead to 2013, we anticipate that Santa Clara In 2013, we expect the combined industrial markets of the County’s combined industrial marketplace (warehouse and East Bay (warehouse and manufacturing in all trade areas) manufacturing) will account for at least 250,000 square feet to account for at least 860,000 square feet of positive net of occupancy growth in 2013 and that it will close the year absorption, if not more. We expect the current overall vacancy with an overall vacancy rate of 6.2% rate of 9.6% to fall to 9.1% over the course of 2013. San Francisco’s 20.3 million square foot industrial market But while the East Bay as a whole grew in 2012, the same was closed Q3 2012 with a vacancy rate of 4.8%, down from 5.5% not true of the region’s second largest marketplace. The Santa over the past twelve months. Through the first nine months of

DEAL HIGHLIGHT

to see rents recovering. The current average asking rate of $0.40 per square foot is up almost 11% over one year ago.

East Bay Warehouse Market 2012 Notable Leases (Through Q3 2012) Tenant

Quarter

Total SF

Address

City

Ceva Logistics

323,254

31353 Huntwood Ave

Hayward

Transaction Type Relocation/Expansion

RK Logistics

191,483

41707 Christy St

Fremont

Relocation/Expansion

Architectural Glass & Aluminum

175,000

6400 Brisa St

Livermore

Relocation/Expansion

Owens Corning

174,278

201 C St

Hayward

Renewal

Primary Steel

173,600

1699 W. Grand Ave

Oakland

Renewal

East Bay Manufacturing Market 2012 Notable Leases (Through Q3 2012) Quarter

Total SF

Address

City

Transaction Type

Theranos

Tenant

219,255

7333 Gateway Blvd

Newark

Relocation/Expansion

Gary Steel

173,600

1699 Grand Ave, W.

Oakland

Renewal

Dean Refrigeration

130,000

860 81st Ave

Oakland

Relocation/Expansion

Whole Foods Market

117,008

2000 Atlas Rd.

Richmond

Relocation/Expansion

Specialized Packaging Solutions

107,199

38505 Cherry St

Newark

Renewal/Expansion

CASSIDY TURLEY

DEAL HIGHLIGHT

INDUSTRIAL FORECAST

on smaller industrial users in need of service-related, light 2012 it has posted 82,000 square feet of occupancy growth manufacturing or basic warehousing (not distribution) space. but some Q4 move-outs will likely put this market into negative The current average asking rate for industrial space in Marin territory on the year. We also anticipate vacancy as of Q4 County is $1.10 per square foot, up 13% over the $0.98 per 2012 to climb as high as 5.8%. Rents here have remained square foot reading of one year ago. Rental rate growth has unchanged over the past year at $$0.74 per square foot. The continued to take place simply because there are not a lot of San Francisco market is dominated by long-term owner/users quality options for space users. While with little in the way of available we expect growth levels to pick up space for lease. As a result, this is a here heading into 2013, we still do low demand/low activity marketplace not think that absorption levels for that also has low vacancy and higher next year will grow much above the pricing. Tenancy here is driven by 50,000 square foot mark. Still, we service providers who need to be anticipate that Marin County’s induslocated here. Looking forward, we trial market will close 2013 with a anticipate that likely conversions vacancy rate of about 6.2% and that of existing space to other property rents will also continue to grow at a types and continued modest levels moderate clip. of demand should combine to bring vacancy levels back downward. We Unlike Marin County where industrial also expect rental rate growth in The South Bay’s largest industrial deal service users rule the roost, Sonoma 2013 to ramp up, likely above the of the year so far (through Q3) was a County’s industrial marketplace 5% level. warehouse lease. In the first quarter, is much more about warehousing, particularly in support of the region’s San Mateo County’s industrial DGA Services inked a deal for 149,000 strong wine industry. As of Q3 2012, market closed Q3 2012 with a square feet of space at 999 Montague vacancy stood at 10.1%, down from vacancy rate of 9.6%. One year ago Expressway in San Leandro. a 10.6% reading a year ago. The it stood at 9.0%. The market has lost market has recorded nine consecu71,000 square feet of occupancy tive quarters in which occupancy had through the first nine months of either grown slightly or remained flat. Demand remains tepid 2012, but we know of a few Q4 deals in the works that should and with vacancy still slightly above the 10% mark, rents have bring those numbers back into positive territory. The current also remained flat. The current average asking rate of $0.64 average asking rent here of $0.69 per square foot is down 8% per square foot has budged little since Q1 2010. As this report over the past year. While final 2012 growth numbers should be went to press we were aware of a couple of planned tenant modestly positive, we anticipate that growth should ratchet up move-outs that could send vacancy as high as 11.2% and in 2013. We expect the San Mateo marketplace to close 2013 bring annual occupancy growth totals into the red by as much with about 160,000 square feet of positive net absorption and as 220,000 square feet. However, we do expect a return to a vacancy rate at, or near, 8.6%. modest growth in 2013. We anticipate that Sonoma County Marin County closed Q3 2012 with an industrial vacancy rate will close out next year with vacancy at, or near, 10.5%. of 7.1%, compared to a reading of 7.3% twelve months ago. This trade area has experienced extremely modest growth of just 14,000 square feet through the first nine months of 2012. Deals in the works for Q4 will boost this total slightly, but it will still likely fall beneath the 50,000 square foot mark. Though vacancy levels are relatively low, deal activity and demand has also been low. Most local deal activity remains focused Sonoma Industrial Market 2012 Notable Leases (Through Q3 2012) Tenant

Quarter

Total SF

Address

City

Kala Brand Music Company

24,006

1105 Industrial Ave

Petaluma

Transaction Type Relocation/Expansion

Office Playground

17,456

715 Southpoint Blvd

Petaluma

Relocation/Expansion

Enphase Energy

15,580

1380 Redwood Wa

Petaluma

Relocation/Expansion

Moresco Distributing Company

14,550

1460 Cader Ln

Petaluma

Relocation/Expansion

Three Twins Organic Inc.

7,989

2190 S. Mcdowell Blvd

Petaluma

Relocation/Expansion

Marin Industrial Market 2012 Notable Leases (Through Q3 2012) Tenant

Quarter

Total SF

Address

City

Transaction Type

38,000

90 Windward Wy

San Rafael

Relocation/Expansion

32Ten Studios

29,982

3210 Kerner Blvd

San Rafael

Relocation/Expansion

Marin Senior Coordinating Council

9,070

15 Jordan St

San Rafael

Relocation/Expansion

Tesla Motors

8,000

595 Redwood Hwy

Mill Valley

Relocation/Expansion

San Francisco Exotic Cars

8,000

15 Jordan St

San Rafael

Relocation/Expansion

EO Products

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

RETAIL FORECAST he 2012 holiday shopping season was well under way as this report went to press and initial indicators are that final sales will be up at least 3.0% over 2011 totals, but the final tally could exceed the 4.0% mark. Analyst forecasts were more robust this year than they were in 2010 and 2011 but that is due to a number of reasons. This year’s holiday sales season includes an extra weekend of selling time while retailers continued to push the envelope with further early openings during the Black Friday weekend. Meanwhile, the number of major malls that opened on Friday at midnight increased from roughly 35% to about 50%. But while these factors were bound to have an incremental impact on retailer sales figures, the primary reason for optimism was consumer confidence.

Before the 2010 Christmas season, retailer growth was dominated by discounters (ranging from off-price apparel to warehouse stores and discount Remember that both the 2010 and 2011 grocers) and low ticket restaurants (fast holiday sales seasons turned out to be food and fast casual). The surprisingly pleasant surprises for U.S. retailers. In strong holiday sales season marked the 2010, the economy was still emerging from official end of the recession for many the depths of the recession. Luxury and retailers. Many chains that had put upscale retailers had seen their same store Walmart leased 41,000 square feet of space at San Jose’s expansion on hold now moved to cautious comparables hammered, with some chains Evergreen Village Center and growth mode and with rents off in some having posted 18 consecutive months of opened one of its new smaller markets by 40% to 50% from peak declines in the double-digits. Sales for this format Walmart neighborhood pricing, it led to a wave of opportunistic segment of the market had only begun to stores. The world’s largest deals. We track retailer growth plans turn positive in September 2010. Most retailer is actively looking for sites nationally and saw a 30% surge in new importantly, consumer confidence had throughout the Bay Area and we store plans between September 2010 been on a lengthy run of declines, reaching anticipate a number of openings and March 2011. The 2011 holiday a low of 48.6 in that same month. Analysts in 2013. With speculation rife shopping season played out in a nearly predicted a weak sales season only to that Walmart could potentially buy identical manner as surprisingly strong be shocked when consumer confidence Fresh & Easy as they exit the U.S. sales figures resulted in another uptick suddenly began to trend upward and market, what could be a handful in retailer demand. But this time the shoppers turned out in force. While most of openings next year could surge accounted to an increase of about forecasters predicted annual sales gains potentially turn into an overnight footprint of more than 20 stores. 15%. The market was already moving of 2% or less, American consumers drove back to more normalized trends, meanannual sales growth by over 4%. while, as the marketplace had improved A similar phenomenon took place in 2011, though by then considerably over the previous year opportunistic plays for top upscale retailers were doing markedly better. But confidence properties were becoming harder to engineer. slumped following an early year run-up in gas prices and the With final 2012 holiday sales figures expected to show strong summertime discord surrounding the debt ceiling debate and growth the question is whether this will translate into a similar subsequent downgrade of U.S. credit. By October 2011, surge in retailer growth plans. Unfortunately, the answer for consumer confidence had fallen to a low of 40.9 as economists 2013 is likely not. The rapid acceleration of retailer growth debated the possibility of a double-dip recession. Analysts plans in 2010 and 2011 were anomalous. While it is not predicted sales increases in the 2.5% to 3.0% range. Yet, uncommon for demand to increase following a strong holiday once again shoppers came through, fueling an annual increase showing, historically this surge has usually been in the 5% to in holiday sales of just over 4.0%. 10% range. Additionally, though the retail market has not fully recovered from the impact of the downturn, there are fewer opportunistic plays available for retailers seeking premium Retail E-Commerce Sales Billions of Dollars space. While the Class C marketplace still offers plenty of 200 opportunities for chains looking for deals, rents for Class A A Seven-Fold Increase Since 2000 Gaining roughly 10% annually 160 space in nearly every major U.S. market (including those still posting the weakest overall performance) have been on the 120 rise as vacancies have fallen. Meanwhile, Class B product in all but the weakest of U.S. marketplaces has also seen 80 considerable improvement over the past 30 months. As 2012 40 drew to a close, Class B properties were rebounding in general as vacancies tightened for Class A space. This was not the 0 case a year ago. The last reason why we do not expect a repeat 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 of the last two years is indicative of a longer term trend; the increasing encroachment of e-commerce.

DEAL HIGHLIGHT

But unlike in those past years, consumer confidence was not weak heading into the Holiday season. In fact, it is currently on its strongest uptrend in over four years. After hitting a low of 61.3 in August, it jumped to 68.4 in September and has only been climbing since. By November it had reached a peak of 73.7—it’s highest rate since February 2008. Against this backdrop, it only makes sense that projections for 2012’s holiday sales would be more robust. This is important because a strong holiday sales season can directly impact retailer expansion. Following both the 2010 and 2011 holiday sales seasons, retailers boosted their growth plans considerably.

CASSIDY TURLEY

DEAL HIGHLIGHT

Luxury and upscale retail is back while concepts offering low price points (from restaurants to hard goods) have mostly

In terms of shopping center vacancy, the current rate of 4.0% reflects a significant decline from the 6.9% rate of a year

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

RETAIL FORECAST

thrived throughout the downturn. But the middle class consumer remains in frugal mode and, having downsized, We are currently aware of plans from retailers to open as many this is taking its toll on mid-price point retailers of all stripes. as 41,000 new retail storefronts in the U.S. over the next twelve Those very same hard goods concepts have been doubly months. This compares to a reading of just under 40,000 pinched thanks to e-commerce, though many casual dining potential storefronts one year ago. Growth remains slow and chains (with a few exceptions mostly limited to new concepts) cautious and has shifted increasingly to retail concepts that also continue to face challenges. Meanwhile, site selection are considered bulletproof when it comes to e-commerce. remains about “the sure thing.” Higher income demographics Hard goods retailers, with the exception of dollar stores and greater population densities are what most chains are and discounters, remain in conservative chasing. Likewise, the market remains growth mode at best. Meanwhile, food bifurcated in terms of class with Class related or service oriented retail remains A and B properties remaining in most in aggressive growth mode. Restaurant Though top Union Square demand. Meanwhile, all of these trends concepts alone account for 42% of all have served the Bay Area remarkably well rents have occasionally the planned growth that we are tracking. over the past couple of years. Meanwhile, smaller format grocery surpassed the $500 per remains hot—driven by strong demand square foot mark, this remains San Francisco Peninsula Outlook from niche players ranging from discount well below top rents for Our retail division, Terranomics, tracks to upscale and ethnic to organic. This retail trends across nearly 60 major U.S. holds true nationally as well as regionMidtown Manhattan which marketplaces. As of the close of Q3 ally—of the top 25 retail leases inked have surpassed the $2,700 2012, shopping center vacancy within throughout the Bay Area this year, smaller per square foot mark. Many the San Francisco market stood at just format grocery accounted for five of them. 4.0%, placing it second in the nation in Walmart, Grocery Outlet, Fresh Market retailers who typically look terms of boasting the tightest vacancy. and other players remain extremely active to New York for flagship We should note that these numbers don’t in the marketplace. Though Fresh & Easy include freestanding retail or ground floor locations are heading to the has announced that it will be withdrawing retail spaces within mixed-use buildings. from the U.S. market in 2013, demand for West Coast instead. That would include much of the inventory its existing Bay Area sites is expected to of the city’s high-end shopping district, be high. Though speculation is rife that Union Square, where we estimate current the chain could sell to either Walmart or vacancy to be below the 4% mark. Union ALDI, a sale to one of the numerous dollar Square has continued to see intense store chains in growth mode could be just activity over the past year with pricing as likely. accelerating at a rapid clip. Though top Dollar stores are entering their third rents here have occasionally surpassed consecutive year of explosive growth and the $500 per square foot mark for we are tracking a potential of over 2,000 premium space, this remains well below new dollar stores throughout the U.S. similar high street rents in New York over the next year. Dollar General alone City where recent top rents for Midtown is planning on as many as 625 openings Manhattan (according to the Real Estate nationally over the course of 2013. MeanBoard of New York) have surpassed the while, Family Dollar is expected to open at After years in the works, Neiman $2,700 per square foot mark. Because least 500 new stores while Dollar Tree has Marcus opened a new 86,000 of this, many retailers who typically look plans for at least 300 new units in 2013. square foot store in Downtown first to Manhattan for flagship locations All of these chains are expected to be Walnut Creek earlier this are increasingly skipping the Big Apple active in California this year. We anticipate year. There they will be going and looking to the West Coast instead. that dollar stores alone will account for head-to-head against chief Office leasing activity has been brisk in a minimum of 15 million square feet of competitor Nordstrom, which the city’s SoMa district and has continued occupancy growth across all retail building recently remodeled its full service to move westward. Meanwhile, a large types in the coming year. department store next door. number of multifamily are units planned Besides these categories, we continue to or already under construction both in the see expansion from fitness/health/spa concepts, drug stores, SoMa and mid-Market region. Both of these factors are laying thrift stores, automotive service, discounters, off-price apparel, the groundwork for the retail trend that will take centerstage in pet supplies, sporting goods, hobby stores/arts & crafts, San Francisco over the next couple of years—the revitalization wireless stores (limited growth driven mostly by a few new of the long-blighted area of Market Street between 6th and 9th concepts) and some banking/check cashing/financial services Streets. There is already heavy touring and deal activity in providers. Ultimately, however, if you want to understand who this area and we anticipate that this will only escalate over the is growing and why, it all comes down to a few basic trends. course of the year.

Who is Growing and Why?

RETAIL FORECAST due to a shortage of available land and—most importantly— ago. This vacancy rate is likely to fall further in 2013, but the the difficult development environment here. Vacancy, in the rate of occupancy growth will slow. This is simply because meantime, will remain tight at, or close to, current levels. Look quality product is in short supply. The good news for retailers for average asking rents to increase is that the ongoing boom in multifamily between 5% and 10% for most quality development will be providing plentiful space in the coming year. ground floor options for expansion over Class A space is at a premium, the next 24 months. But shopping center South Bay Outlook space is tight and much of what is left is with little in the way of current challenged. Thanks to the fact that San Jose’s

availability and extremely quick turnaround times for spaces that do go dark. Rental rate growth for many of these centers has exceeded 10.0% over the past year and we anticipate similar gains in 2013.

We anticipate strong rental rate growth for all retail in San Francisco in the coming year. Depending upon the product type, increases should range from 5% to as high as 15%. Look for key big box activity in 2013 with a new CityTarget opening in Japantown as well as major leasing activity from a mix of apparel retailers (some off-price and some not) in the emerging mid-Market corridor.

As this report went to press, shopping center vacancy in San Mateo County stood at 3.6%. This is actually an increase over the 3.2% rate of a year ago, but it’s not because demand has diminished. The problem for retail site selection specialists in this marketplace is the lack of available quality space. With few quality spots available, leasing activity has slowed. Most of the deals getting done are for freestanding retail space, which also is dwindling in its supply. There are a few smaller proposed shopping centers on the books, but nothing currently under construction. This is not likely to change anytime soon

tech-driven economy continues to boom and that this market leads the nation both in terms of annual job growth and income demographics, this marketplace remains one of the strongest in the country. Vacancy currently stands at 6.0%, down from a reading of 6.2% posted a year ago, ranking it as the 7th best performing U.S. marketplace in terms of vacancy.

Class A space is at a premium, with little in the way of current availability and extremely quick turnaround times for spaces that do go dark. Rental rate growth for many of these centers has exceeded 10% over the past year and we anticipate similar gains in 2013. Class B space is also performing strongly, though there are certainly more space options available to expanding tenants. Still, the pendulum for these properties has swung firmly to the favor of landlords over the past 24 months. Vacancy for this sector of the market is also below the market average, though opportunities still exist for space users. Rental rate growth has typically averaged about 5%

2012 Northern California Major Retail Leases Tenant

Total SF

Shopping Center/Address

City

Neiman Marcus

86,000

1140 S. Main St

Walnut Creek

Hobby Lobby

77,185

990 Cochrane Rd

Morgan Hill

Fallas Paredes Discount

71,040

Capitol Square

San Jose

Dick's Sporting Goods

55,000

Fallon Gateway Shopping Center

Dublin

Hammer Auto, Inc.

53,000

2121 Diamond Blvd

Concord

Dick's Sporting Goods

50,000

East Washington Place

Petaluma

Nordstrom Rack

47,000

703-707 Contra Costa Blvd

Pleasant Hill

The TJX Companies

46,000

East Washington Place

Petaluma

24 Hour Fitness

42,540

North Bay Centre

Rohnert Park

Walmart

41,000

Evergreen Village Center

San Jose

Payless Furniture

26,277

40460 Albrae St

Fremont

Sprouts Farmers Market

25,409

1510 Geary Rd

Walnut Creek

Sprouts Farmers Market

25,000

East Washington Place

Petaluma

Staples

24,120

55 Rowland Wy

Novato

Paradise Palace

23,189

Peralta Plaza

Fremont

Susan Sachs, et al.

23,134

4100-4120 Peralta Blvd

Fremont

Grocery Outlet

21,446

Lawrence Station

Santa Clara

Grocery Outlet

21,000

Livermore Valley Square

Livermore

Meyer Appliance

18,826

861 E. El Camino Real

Mountain View

Linen Warehouse

18,600

2720 Santa Rosa Ave

Santa Rosa

Harbor Freight Tools

17,500

863 E. Francisco Blvd

San Rafael

My Hot Cars

17,019

Kitty Hawk Plaza

Livermore

Total Renal Care, Inc.

15,874

Lowe's Center

San Jose

Joann Fabrics

15,000

75 Colma Blvd

Daly City

Grocery Outlet

14,568

311 N. Capitol Ave

San Jose

CASSIDY TURLEY

DEAL HIGHLIGHT

approximately 43,000 square rate of a year ago. Although the market Though there are a slew of entitled feet of space at Rohnert Park’s has recorded over 260,000 square feet multifamily projects that will add a North Bay Centre. Health club of occupancy growth over the past twelve significant amount of new ground floor and fitness concepts are rapidly months, the overwhelming majority of retail space over the next two years, expanding throughout the Bay this (all but about 40,000 square feet) we are tracking only a few projects Area with 24 Hour Fitness one of was absorbed in either Q4 2011 or Q1 currently under construction. Still, the most active players. Expect 2012. The fact is that vacancy here there are a number of proposed shopmore local growth from this chain remains extremely tight and that most of ping centers that will start construction in 2013. the roughly 858,000 square feet of space in 2013. Though most won’t deliver that is currently available is located within until 2014, absorption should remain the region’s weaker Class B and C centers. positive in the coming year. With major players like Target, Napa County shopping center vacancy currently stands at an Walmart, Safeway and others active and the market for inline extremely low rate of 2.4%. The current average asking rent leasing remaining strong, rents should continue to post solid here of $28.99 per square foot is up 27% from the $22.92 growth in the coming year even as the challenge of finding rate of a year ago. This average masks asking rates from quality space will become more of a challenge. Deliveries in $16.00 to $60.00 per square foot. Meanwhile Marin County 2014 will help to alleviate this issue, but the current developvacancy is at a low 3.9%. The current average asking rent of ment pipeline may still not be adequate enough. $22.03 per square foot covers a range of $13.00 to $36.00 per square foot. Lastly, Sonoma County vacancy stands at East Bay Outlook 5.6%. The current range of asking rates here goes as low as Overall East Bay shopping center vacancy stood at 6.3% as $9.00 and as high as $42.00 per square foot, with an average this report went to press, placing the East Bay marketplace as of about $19.00 per square foot. 11th in the nation in terms of overall vacancy. This reflects a Like elsewhere in the Bay area, retailer demand is high but reduction from the 6.9% rate posted one year ago and reflects a lack of quality available space is impeding growth. The over 350,000 square feet of occupancy growth through average age of the shopping center inventory in the North Bay Q3 2012. The delivery of Paragon Outlet’s new center in is 32.8 years and only 10% of the region’s 18.7 million square Livermore in Q4 will only further boost 2012’s annual totals, foot base has been built in the last ten years. The good news which have overwhelmingly been driven by new construction. is that new construction is ramping up, despite the fact that The East Bay is one of the few places in the Bay Area where many North Bay communities are known for being difficult for development has been robust. We are tracking over 580,000 development. We are currently tracking 230,000 square feet square feet of new projects in the pipeline, placing the East of new shopping center space under construction which will be Bay within the top ten U.S. markets for retail development in coming online in the months ahead. These heavily pre-leased general. There are multiple factors behind this ranging from projects will have an immediate positive impact on absorption an easier development environment (generally) to cheaper land totals and no negative impact on rents. We anticipate that costs and pent-up demand. The region’s excellent public rental rate growth will continue to be aggressive; in the low transit system, coupled with a shortage of available housing double digits for Marin and Napa Counties, while above the in the neighboring San Francisco and Silicon Valley markets, 5% range in Sonoma. Look for vacancy levels to remain near is already translating into increased cross-Bay migration. where they are now due to the addition of new product. Anticipate this trend to only accelerate in 2013 and for both multifamily and retail development to continue ahead at a fast clip. Among the larger projects that will be delivered next year will be Catellus’ Target-anchored 450,000 square foot Alameda Landing project, though we expect a number of other projects to move forward in the months ahead.

RETAIL FORECAST

As is the case with Santa Clara County, bifurcation based upon or slightly more over the past year and should also continue Class remains a reality here. Class A product in Emeryville or at a similar pace in the coming year. Though Class C centers Walnut Creek is facing an entirely different set of circumstances are posting vacancy above the local average of 6%, most of than Class C centers in Hayward. However, with the exception these older projects are still below the 10% mark and would of the weakest centers, the trend ahead be considered to be in a relatively will be for rental rate growth—ranging healthy state in most other U.S. trade anywhere from 5% to 12% depending areas. Still, rents for this space remain upon the location and type. Alameda competitive and here is where we see County properties continue to outperform the most opportunistic plays at work. Contra Costa County projects in general, Mom-and-pops are slowly returning to with the exception of prime retail corridors the marketplace—a development that like downtown Walnut Creek. will help further lower Class C vacancy levels in the year ahead—even as we North Bay Outlook continue to see strong demand from grocers, restaurant users, discounters Shopping center vacancy throughout the and a mix of other tenant types elseNorth Bay marketplace now stands at where. 24 Hour Fitness leased 4.6%, down considerably over the 5.9%

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

INVESTMENT FORECAST hrough the first nine months of 2012, over $11.2 billion in commercial real estate trades had taken place in the San Francisco Bay Area. This figure already surpasses the $11.1 billion in deals transacted in 2011, making 2012 the strongest year for investment activity that the market has recorded since 2007 when total sale volume approached a whopping $35 billion. Office properties have dominated trading, accounting for nearly $6 billion of total deal activity compared to $4.3 billion in total volume last year. Multifamily ranks second—with $2.1 billion in total transactions booked through Q3. This is down significantly from the more than $3.1 billion in deals that closed in 2011 but this is less a reflection of diminishing demand than it is of reduced availability. Retail properties have accounted for over $1.8 billion in total sales (up from $1.4 billion last year) and just under $1.3 billion in industrial properties (down from $2.2 billion in 2011) had traded as of the end of Q3.

In terms of who is driving the activity, the short answer is every investor type. Private investors still account for the lion’s share of regional activity having purchased over $4.4 billion in local commercial real estate through the end of September. This is roughly the same level of deal activity that they accounted for in 2011. Equity funds have bought over $1.7 billion in properties, marking a slight decline from the $1.9 billion in deals they inked last year—but, remember, the 2012 statistics listed here do not include Q4 totals yet so this number will increase. Users have acquired over $1.5 billion, while institutional investors have purchased just below that mark. Meanwhile, REITs have bought over $1.4 billion in local projects while foreign investors have accounted for about $377 million in total deal activity.

This report went to press in December before final tallies for Q4 2012 could be made. That being said, even though the $11.2 billion in sales posted through Q3 already surpassed last year’s totals. While this is already the Bay Area’s strongest performance in five years, we anticipate that final numbers for 2012 will likely surge. Deal activity has exploded in the final months of 2012 with our brokers reporting extremely brisk activity. Mild end-ofyear surges are normal. Sellers want to get properties off their books for tax purposes. But this year, concern over tax increases both known and unknown are fueling fears of what some investors are calling “taxmaggedon.” As a result, many are looking to close deals before the New Year—enough so that we know The 360 Residences in of a few private investors who have even downtown San Jose sold in April been willing to budge on pricing that for $118,000,000. This 213 had previously been set in stone in unit project traded at the price order to process a transaction before of $554,000 per unit, making it 2013. We don’t anticipate this current one of the year’s biggest ticket wave to impact overall pricing trends multifamily sales in the U.S. (in much, but we do anticipate that it will terms of per unit cost). Capri seriously boost total deal volume for Capital Partners bought this four the year. We would not be surprised if year old project from Kennedy total investment sales in the Bay Area Wilson Properties at a reported for 2012 exceeded $17 billion before cap rate of 4.0%. it is all over.

The 1,751 unit Crescent Village, in San Jose’s Oak Creek submarket, is the largest new multifamily project to be delivered regionally in 2012. So far new construction has not significantly impacted the region’s extremely low vacancy rates or aggressive rental rate growth. But with 15,000 units currently under construction throughout the Bay Area it is only a matter of time before it begins to make a mark.

Only REIT and equity fund activity levels have declined since last year, but those numbers could turn positive by the time final tallies are in after the close of 2012. Meanwhile, with three months still left on the clock, user sales had jumped by 46.0%, foreign investment activity had picked up by 24.7%, and both institutional and private investor moves had increased incrementally. All of these numbers will increase CASSIDY TURLEY

Fear of “Taxmageddon” Fueling Late Year Surge

Multifamily To Near Peak Conditions Ahead

DEAL HIGHLIGHT

In terms of geographic activity, it should come as little surprise that San Francisco is leading all other Bay Area markets with more than $4.7 billion in closed deals through Q3. San Francisco has led all other local trade areas in terms of total dollar volume over the past few years. Just over $3.2 billion in investment sales have closed in the Silicon Valley marketplace, while the East Bay has seen roughly $1.6 billion in total activity. Meanwhile, both the North Bay and Peninsula (San Mateo County) markets have seen deal activity in the $850 to $860 million range.

DEAL HIGHLIGHT

substantially once Q4 data is available, particularly private investors who are largely fueling a late-year surge in activity.

While investment activity has been up in general, multifamily sales volume was actually down by 33% through the first three quarters of 2012. Yet, this remains the product type where we see the most general demand. The problem is that there simply is not a lot of product to sell. It’s no secret that the Bay Area’s multifamily market has seen booming rental demand over the past three years, with vacancy levels falling and rents skyrocketing.

The Bay Area’s average rent has climbed from $1,583 in 2009 to today’s average of $1,969—an increase of 24%. In San Francisco, rents have climbed 30% over the past three years. San Mateo County has seen rents climb 50% while Santa Clara County saw rents climb by 41%. Clearly this level of rental rate growth isn’t sustainable forever and we are starting to see it slow. Our data indicates that annual growth throughout the region has slowed to a still robust rate approaching 10%. But as affordability has become more of an issue in the Highway 101 Corridor markets, it has created a ripple effect throughout the region. We are beginning to see

All of these metrics have only helped to fuel intense investor demand for multifamily product in the Bay Area. But with rents rising so rapidly, it has also made existing landlords much less willing to part with their properties. Adding to this challenge is the fact that sellers have little to trade into if they wish to keep with multifamily product. This may be changing soon.

Silicon Valley led the way with $634 million in closed transactions, while the San Francisco market posted $497 million in deals. The East Bay booked $445 million of that total, while the North Bay accounted for $364 million. Deal volume in the Peninsula/San Mateo trade area fell to about half of last year’s levels at $167 million—this decline was due to the minimal availability of product. The average price per unit of multifamily properties that have traded throughout the Bay Area in 2012 was $223,000 per unit, down slightly from $225,000. The average cap rate on properties that traded was 5.5%, reflecting no movement since 2011.

With 15,000 multifamily units currently under development, the days of 10%+ annual rental rate growth in some markets will be coming to an end soon. Many will want to explore selling their properties in 2013 when conditions area at their peak.

We are now tracking more than 15,000 multifamily units under construction throughout the Bay Area. Santa Clara County leads all other regions in terms of development, with 30 projects under construction that will add over 7,700 new apartment units through 2014. San Francisco has 33 projects underway with just under 5,400 units slated for delivery over the next 27 months. The East Bay follows with 13 developments that will add just over 1,700 new apartment units to that area’s inventory over the next couple of years. We expect all of these markets to see additional projects entering the development pipeline throughout 2013, though we anticipate that the biggest surge will be in the East Bay.

Aggressive levels of new development will begin to impact vacancy levels and rents in Santa Clara County by next year. We anticipate the same within San Francisco by early 2014, though we don’t anticipate this to occur in the remaining Bay Area markets anytime soon. Prohibitive land costs and difficult development hurdles in some communities remain an issue in San Mateo County. Meanwhile, high pricing along the 101 Corridor markets (Santa Clara, San Mateo and San Francisco Counties) is already pricing many renters out of those markets. Most are landing in the East Bay. Despite strong development levels there, in-migration will mean that most of the new projects in the pipeline will be easily absorbed as they come to market. In short, pricing is rapidly approaching peak levels for the San Jose, San Mateo and San Francisco markets. Landlords who understand that the days of 10%+ annual rental rate growth in those markets will be coming to an end soon may want to explore selling their properties in 2013 when conditions are at their peak. We expect to see the availability of product improving considerably over the next year.

Multifamily Investment Review Multifamily trades had accounted for just over $2.1 billion in total deal volume throughout the Bay Area through Q3 2012.

INVESTMENT FORECAST

a trend of in-migration from renters who have been priced out of other Bay Area markets. So far, this trend is mostly about San Francisco losing tenants to Alameda County, but with rents still going up we anticipate that this trend will only accelerate over the next 12 to 18 months. Likewise, we anticipate that increasing rents in Alameda County will also spur a lesser movement of renters inland to Contra Costa County. This trend has had little impact on the North Bay’s apartment market, which tends to be insular and local in its trending due to its weaker public transit connections to the region, though the smaller size and higher rents of those markets also play a role.

The average price per unit in San Francisco was $244,000, up from a reading of $239,000 per unit in 2011. The average cap rate of properties that sold was 5.3%, down from 5.9%.

San Mateo County pricing increased from $297,000 from $288,000 per unit while cap rates fell from 6.0% to 5.2%. The average price per unit in Silicon Valley was $265,000, up substantially from the previous year’s reading of $220,000. East Bay multifamily pricing fell from $237,000 to $156,000 per unit, but this was due to so few quality projects moving in 2012. The actual trending is for sharp price increases here. The average cap rate in the East Bay of 5.9% is up slightly from 2011’s 5.7% rate. Lastly, the average price per unit for apartments in the North Bay increased from $145,000 to $226,000 thanks to an increase of Class A complexes moving here over the past year. The average cap rate fell in the North Bay from 6.1% to 6.0% over the course of 2012.

Office Investment Review While total office deal volume for the Bay Area stood just below the $6 billion mark as of Q3 2012, over half of this activity took place in San Francisco. Nearly $3.6 billion of office properties had changed hands as this report went to press and we anticipate that final numbers for the year will easily top $4.2 billion. Silicon Valley follows with about $1.3 billion in total office activity. Just over $518 million in deals closed in the East Bay while the Peninsula/San Mateo marketplace closed $517 million. The North Bay has seen just $25 million in deals this year. The average price per square foot of office properties that have traded throughout the Bay Area in 2012 was $318 per square foot, up significantly from 2011’s average of $225. The average cap rate on properties that traded was 5.8%. This is the same level recorded in 2011. However, trends within the Bay Area’s five basic trade areas have been quite divergent. The average price per square foot of properties sold in San Francisco in 2012 was $464 per square foot, reflecting a whopping 76% increase over the $263 rate posted the prior year. Meanwhile, the current average cap rate of 5.0% is down from 2011’s reading of 5.7%. Pricing skyrocketed even further in San Mateo County where the average price SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

INVESTMENT FORECAST

Retail Investment Review

Tishman Speyer’s sale of their 557,000 square foot building at 555 Mission Street in San Francisco was one of the region’s (and nation’s) largest office sales in 2012. The Union Investment Group bought this Class A project for $446,500,000 ($802 per square foot) in June. The deal reportedly had a cap rate of just 4.3%.

Industrial Investment Review Through the first nine months of 2012, total deal volume for industrial properties stood at just below $1.3 billion. Roughly $819 million of this total traded in Silicon Valley. The East Bay accounted for an additional $210 million in sales while none of the Bay Area’s other trade areas posted more than $60 million in total transactions. The average price per square foot of industrial properties that have traded throughout the Bay Area in 2012 was $119 per square foot, up from 2011’s average of $108. The average cap rate on properties that traded was 6.9%. This is the same level recorded in 2011. The average price per square foot of properties sold in San Francisco in 2012 was $116 per square foot. In San Mateo County, pricing increased from $113 to $153 per square foot between 2011 and 2012 while the average cap rate in this trade area fell from 6.7% to 6.4%. The average pricing for industrial deals that closed in Silicon Valley was $127 per square foot, up from $124 a year ago while the average cap rate here increased from 7.0% to 6.4%. The average price for East Bay deals was $103 per square foot,

CASSIDY TURLEY

Office pricing has accelerated rapidly with cap rates falling to 5% or less for Class A office properties in the Highway 101 corridor markets, while gains have been moderate in the East Bay and for premier North Bay properties.

DEAL HIGHLIGHT

up from $80 while cap rates here also increased from 6.8% to 7.6% between 2011 and 2012. In the North Bay pricing has increased from $75 to $78 per square foot with cap rates increasing from 7.0% to 8.1%.

DEAL HIGHLIGHT

on deals that closed in 2012 was $406 per square foot, up from a low of $119. The average pricing for office deals that closed in Silicon Valley was $204 per square foot, down from $227 a year ago while the average cap rate here increased from 6% to 7%. The average price for East Bay office deals was $176 per square foot, down from $202 while cap rates here fell from 8.3% to 6.0% between 2011 and 2012. North Bay, home to the fewest deals, also posted the most stable metrics; the average price per square foot of deals transacted here in 2012 was $83, down from $86 per square foot in 2011. While all of these trends may seem highly divergent, the differences have come primarily from what types of properties traded. In general, pricing has accelerated rapidly with cap rates falling to 5% or less for Class A office properties in San Francisco, San Jose and San Mateo County. Pricing is posting moderate gains in the East Bay with typical cap rates in the 6% range. Pricing in the North Bay has generally remained flat, though premier properties are seeing increases. Cap rates here typically range from the 6% to 7% range.

The 108,000 square foot Safeway-anchored Rossmoor Shopping Center in Walnut Creek sold in July for $35,000,000. In one of the region’s larger shopping center sales of the year, Citivest Commercial purchased it from Washington Capital Management with a reported cap rate of 5.3%.

Retail building and shopping center sales had accounted for just over $1.8 billion in total deal volume throughout the Bay Area through Q3 2012. San Francisco led the way with $602 million in closed transactions. The East Bay and Silicon Valley followed with respective trades to the tune of $449 million and $405 million. North Bay deals accounted for $327 million while the Peninsula/San Mateo marketplace recorded just $54 million in total activity. The average price per square foot of retail properties that have traded throughout the Bay Area in 2012 was $236 per square foot, up sharply from 2011’s average of $169. The average cap rate on properties that traded was 6.6%, down from 7.0%. The average price per square foot of properties sold in San Francisco in 2011 was $632 per square foot, reflecting a whopping jump over the $191 rate of a year ago. But while overall pricing has increased, this jump was mostly due to a few key Union Square transactions that have skewed overall averages. The current average cap rate of 5.1% is down from 2011’s reading of 8.5% when a number of distress sales helped to tweak those numbers downward. San Mateo County pricing increased from $162 to $186 per square foot while cap rates fell from 7.6% to 6.4%. The average pricing for deals that closed in Silicon Valley was $148 per square foot, up from $132 a year ago while the average cap rate here increased from 6% to 7%. The average price for East Bay office deals was $176 per square foot, down from $202 while cap rates here fell from 7.3% to 6.3% between 2011 and 2012. The average price per square foot of deals transacted in the North Bay in 2012 was $199, up from $149 per square foot in 2011. The average cap rate here increased slightly from 6.6% to 6.8%.

Office Investment Market

$200,000

$400

$300

$200

$100

10% 8% 6%

$150,000

$100,000 $50,000 $0 2007

2008

2009

2010

$Price/Unit

2011

2% 0% 2007

2012*

INVESTMENT FORECAST

Multifamily Investment Market $250,000

2008

2009

2010

$Price/SF

Cap Rate

Industrial Investment Market

2011

2012*

Cap Rate

Retail Investment Market

$150

10%

$120

$90

10%

$400

$300

6% $200

$60

4% $100

$30

$0 2007

2008

2009

2010

$Price/SF

2011

2% 0%

2012*

2007

2008

Cap Rate

2009

2010

$Price/SF

2011

2012*

Cap Rate *Through Q3 2012

Investment Market Select Major Sale Transactions 2012 (through Q3 2012) Seller Buyer

Sale Price Cap Rate

Price PSF Price Per Unit

06/2012

Tishman Speyer The Union Investment Group

$446,500,000 4.3%

$802 N/A

662,060 N/A

09/2012

FIG, LLC Mitsubishi Estate N.Y., Inc.

$305,000,000 4.5%

$461 N/A

Office San Francisco

334,230 N/A

04/2012

AREA Property Partners State Teachers Retirement, Ohio

$238,000,000 5.8%

$712 N/A

Townsend Center 650 Townsend St

Office San Francisco

670,000 N/A

04/2012

Farallon Capital Management, LLC Zynga

$228,000,000 Owner/User

$340 N/A

The Hartford Building 650 California St

Office San Francisco

489,373 N/A

06/2012

AEW Capital Management, L.P. Tishman Speyer

$218,639,000 4.5%

$447 N/A

225 Bush St

Office San Francisco

593,000 N/A

09/2012

SEB Immobilien-Investment Flynn Holdings

$212,000,000 5.1%

$358 N/A

Foundry Square IV 500 Howard St

Office San Francisco

233,290 N/A

06/2012

Utah State Retirement Fund Heitman LLC

$184,500,000 7.1%

$791 N/A

Federal Home Loan Bank 600 California St

Office San Francisco

358,590 N/A

06/2012

Beacon Capital Partners Clarion Partners

$180,000,000 5.0%

$502 N/A

Mission Bay Office Campus 550 Terry Francois Blvd

Office San Francisco

282,773 N/A

08/2012

GLL Real Estate Partners, Inc. Hines REIT, Inc.

$180,000,000 8.2%

$637 N/A

Menlo Corporate Center 4100-4700 Bohannon Dr

Office Menlo Park

370,619 N/A

02/2012

Walton Street Capital, LLC Kilroy Realty Corporation

$162,200,000 N/A

$438 N/A

Pacific Shores Center 2000 & 2100 Seaport Blvd

Office Redwood City

290,305 N/A

02/2012

Starwood Capital Group Informatica Corporation

$153,200,000 Owner/User

$528 N/A

SF Multimedia Center 475 Brannan St

Office San Francisco

243,233 N/A

06/2012

Prudential Real Estate Investors Clarion Partners

$148,000,000 4.8%

$608 N/A

Pacific Bell Building

Office San Francisco

556,976 N/A

08/2012

Boston Properties, Inc. Rockwood Capital, LLC

$141,605,010 N/A

$254 N/A

Apartment Portfolio (3 Properties)

Multi-Family 405,584 Cupertino/Sunny484 vale/San Jose

02/2012

Ivanhoe Cambridge RREEF America, LLC

$127,725,000 4.8%

$315 $263,895

Silicon Valley Center 2540-2590 N. 1st St

Office San Jose

06/2012

LBA Realty The Irvine Company

$120,000,000 6.1%

$273 N/A

Property

Product Type City/Market

Total SF Total Units

555 Mission St

Office San Francisco

557,015 N/A

Blue Shield of CA Building 50 Beale St

Office San Francisco

Foundry Square I 400 Howard St

438,998 N/A

Sale Date

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

MARKET DATA & FORECAST

Professional Services/ General Business

Who was

LEASING

13.1%

Technology

SPACE

69.1%

in the

13.0%

Bay Area in

Life Science/ Medical

2012?

Government/ Non Profit

4.8%

* Through Nov. 2012

AT&T PARK

In 2012, the

Bay Area created enough

AMOUNT OF OFFICE SPACE

ABSORBED in Bay Area Since 2010 (through Q3 2012) 28

jobs

to ďŹ ll just over

2AT&T Parks

equivalent of

29 Transamerica Towers

13,995,296 SF

3,723,299

Bay Area

OCCUPANCY

California Investment Deal Volume 2012

Growth 2012

(through Q3)

(through December 2012)

$20B

$19.7B

$15B

$10B

$6.5B

$5.7B

$5B

$5.4B $3.9B

831,917

$2.7B

Ce n Va tra lle l y

I Emnlan pi d re Sa cr am en to

O Co rang un e ty

Di San eg o

ge Los le s Ba M yA ar re ke a ts

402,362

+ + + + WHSE

-179,596 CASSIDY TURLEY

349,331

SHOPPING

R&D

MFG

-36,786

OFFICE

LIFE SCIENCE

San Francisco County

Total Availabilities Direct Sublease Vacancy

Vacancy & Average Asking Rate Trend | Forecast

83,588,988

25%

8,196,936 6,996,333 1,200,603

20%

15%

10%

9.8%

Average Asking (FS-M)

$3.62

Net Absorption YTD Q3

1,437,154

Square Feet in Millions

Building Base

02 03 04 05 06 07 08 09 10 11 12 13 14

02 03 04 05 06 07 08 09 10 11 12 13 14 Vacancy

Net Absorption Trend | Forecast

4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0

Avg Ask Rent FS

San Mateo County

Total Availabilities Direct Sublease Vacancy Average Asking (FS-M)

50,541,128 6,778,120 5,360,844 1,427,276 13.4%

25%

Vacancy & Average Asking Rate Trend | Forecast

20%

15%

10%

$3.33 $0

Net Absorption YTD Q3

Square Feet in Millions

Building Base

02 03 04 05 06 07 08 09 10 11 12 13 14

-356,823

Vacancy

Net Absorption Trend | Forecast

4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0

02 03 04 05 06 07 08 09 10 11 12 13 14

Avg Ask Rent FS

OFFICE AND R&D | MARKET DATA & FORECAST

Santa Clara County

Total Availabilities Direct Sublease Vacancy

201,453,094 26,234,991 23,688,456 2,546,535 13.0%

Average Asking (FS-M)

$2.74

Net Absorption YTD Q3

3,049,905

25%

Net Absorption Trend | Forecast

Vacancy & Average Asking Rate Trend | Forecast

20%

15%

10%

Square Feet in Millions

Building Base

6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 02 03 04 05 06 07 08 09 10 11 12 13 14

02 03 04 05 06 07 08 09 10 11 12 13 14 Vacancy

Avg Ask Rent FS

East Bay 98,718,076

Total Availabilities Direct Sublease

17,092,719 15,876,572 1,216,147

Vacancy Average Asking (FS-M) Net Absorption YTD Q3

17.3%

25%

Vacancy & Average Asking Rate Trend | Forecast

20%

15%

10%

$2.09

1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0

02 03 04 05 06 07 08 09 10 11 12 13 14

734,505

Vacancy

Net Absorption Trend | Forecast

2.0 Square Feet in Millions

Building Base

02 03 04 05 06 07 08 09 10 11 12 13 14

Avg Ask Rent FS

Marin County 9,841,338

Total Availabilities Direct Sublease

1,522,113 1,109,571 412,542

Vacancy

15.5%

Average Asking (FS-M)

$2.52

Net Absorption YTD Q3

-180,610

Vacancy & Average Asking Rate Trend | Forecast

0.5

20%

0.3

15%

10%

25%

Square Feet in Millions

Building Base

0.1 -0.1 -0.3 -0.5

02 03 04 05 06 07 08 09 10 11 12 13 14

02 03 04 05 06 07 08 09 10 11 12 13 14 Vacancy

Net Absorption Trend | Forecast

Avg Ask Rent FS

Sonoma County

Total Availabilities Direct Sublease Vacancy

10,279,012

30%

Vacancy & Average Asking Rate Trend | Forecast

2,099,859 1,890,263 209,596

20%

20.4%

10%

Average Asking (FS-M)

$1.66

Net Absorption YTD Q3

68,711

0% 04

06 07

Vacancy

09 10

11 12

Square Feet in Millions

Building Base

Net Absorption Trend | Forecast

0.6 0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 04

Avg Ask Rent FS

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

INDUSTRIAL | MARKET DATA & FORECAST San Francisco County

Total Availabilities Direct Sublease

20,320,172 973,968 890,896 83,072

Vacancy

4.8%

Average Asking (NNN-M)

$0.74

Net Absorption YTD Q3

Vacancy & Average Asking Rate Trend

Net Absorption Trend

$1.00

$0.75

$0.50

$0.25

$0.00

0.6 Square Feet in Millions

Building Base

0.4 0.2 0.0 -0.2 -0.4 -0.6 -0.8

02 03 04 05 06 07 08 09 10 11 12 13

81,955

Vacancy

02 03 04 05 06 07 08 09 10 11 12 13

Avg Ask Rent NNN

San Mateo County

Total Availabilities Direct Sublease Vacancy Average Asking (NNN-M) Net Absorption YTD Q3

40,746,899 3,894,736 3,505,159 389,577 9.6% $0.69

Net Absorption Trend

Vacancy & Average Asking Rate Trend

12%

$0.90

1.5

10%

$0.75

1.0

$0.60

$0.45

$0.30

$0.15

$0.00

Square Feet in Millions

Building Base

0.5 0.0 -0.5 -1.0 -1.5 -2.0

02 03 04 05 06 07 08 09 10 11 12 13

-70,918

Vacancy

02 03 04 05 06 07 08 09 10 11 12 13

Avg Ask Rent NNN

Santa Clara County

Total Availabilities Direct Sublease

5,524,444 5,031,069 493,375

Vacancy

6.6%

Average Asking (NNN-M)

$0.58

Net Absorption YTD Q3

Vacancy & Average Asking Rate Trend

10%

Net Absorption Trend

$1.00

1.0

$0.80

0.5

$0.60

$0.40

$0.20

$0.00

0.0 -0.5 -1.0 -1.5 -2.0

02 03 04 05 06 07 08 09 10 11 12 13

16,473

Vacancy

02 03 04 05 06 07 08 09 10 11 12 13

Avg Ask Rent NNN

East Bay 196,220,293

Vacancy & Average Asking Rate Trend

12%

6.0 4.0

18,781,531 17,326,781 1,454,750

10%

$0.50

$0.40

$0.30

Vacancy

9.6%

$0.20

Average Asking (NNN-M)

$0.48

$0.10

$0.00

Total Availabilities Direct Sublease

Net Absorption YTD Q3

Net Absorption Trend

$0.60 Square Feet in Millions

Building Base

2.0 0.0 -2.0 -4.0 -6.0

02 03 04 05 06 07 08 09 10 11 12 13

432,424

Vacancy

02 03 04 05 06 07 08 09 10 11 12 13

Avg Ask Rent NNN

Marin County

Total Availabilities Direct Sublease

6,346,657 448,561 396,945 51,616

Vacancy

7.1%

Average Asking (NNN-M)

$1.10

Vacancy & Average Asking Rate Trend

10%

$1.50

$1.20

$0.90

$0.60

$0.30

Net Absorption YTD Q3

Net Absorption Trend

0.2 Square Feet in Millions

Building Base

$0.00 07

13,522

Vacancy

0.1 0.0 -0.1 -0.2

Avg Ask Rent NNN

Sonoma County Building Base Total Availabilities Direct Sublease Vacancy Average Asking (NNN-M)

18,229,814 1,836,838 1,617,848 218,990 10.1% $0.64

Vacancy & Average Asking Rate Trend

15%

$1.00

12%

$0.80

$0.60

$0.40

$0.20

Net Absorption YTD Q3

-21,761

$0.00 04

Vacancy

CASSIDY TURLEY

Avg Ask Rent NNN

Net Absorption Trend

0.6 Square Feet in Millions

84,190,426

Square Feet in Millions

Building Base

0.4 0.2 0.0 -0.2 -0.4 04

San Francisco County

Total Availabilities Direct Sublease Vacancy

4,101,482 152,782 138,382 14,400 3.7%

Average Asking (NNN-A)

$33.45

Net Absorption YTD Q3

52,520

Vacancy & Average Asking Rate Trend

Net Absorption Trend

$80

$60

$40

$20

0.3 Square Feet in Millions

Total GLA

Vacancy

0.1 0.0 -0.1 -0.2

0.2

Average Asking Rent NNN

San Mateo County

Total Availabilities Direct Sublease Vacancy Average Asking (NNN-A)

10,611,033 379,806 328,806 51,000 3.6% $26.53

Net Absorption Trend

Vacancy & Average Asking Rate Trend

$36

$30

$24

$18

$12 $6

-70,586

Vacancy

0.2 0.1 0.0 -0.1 -0.2

Net Absorption YTD Q3

0.3 Square Feet in Millions

Total GLA

RETAIL | MARKET DATA & FORECAST

Average Asking Rent NNN

Santa Clara County

Total Availabilities Direct Sublease Vacancy Average Asking (NNN-A)

37,499,681 2,589,707 2,400,886 188,821 6.9% $27.50

Net Absorption Trend

Vacancy & Average Asking Rate Trend

10%

$35

$28

$21

$14

-70,289

Vacancy

0.5 0.0 -0.5 -1.0

Net Absorption YTD Q3

1.0 Square Feet in Millions

Total GLA

Average Asking Rent NNN

East Bay

Total Availabilities Direct Sublease Vacancy Average Asking (NNN-A)

49,242,291 3,096,763 2,856,101 240,662 6.3% $21.40

Net Absorption Trend

Vacancy & Average Asking Rate Trend

10%

$35

$28

$21

$14

343,464

Vacancy

0.5 0.0 -0.5 -1.0

Net Absorption YTD Q3

1.0 Square Feet in Millions

Total GLA

Average Asking Rent NNN

Marin County

Total Availabilities Direct Sublease Vacancy Average Asking (NNN-A)

5,789,233 225,313 225,313 0 3.9% $22.03

Net Absorption Trend

Vacancy & Average Asking Rate Trend

$35

$30

$25

$20

$15

$10 $5

1% 07

-24,745

Vacancy

0.2 0.1 0.0 -0.1 -0.2

Net Absorption YTD Q3

0.3 Square Feet in Millions

Total GLA

Average Asking Rent NNN

Sonoma County

Total Availabilities Direct Sublease Vacancy Average Asking (NNN-A)

10,263,889 570,069 568,769 1,300 5.6% $18.97

Vacancy & Average Asking Rate Trend

Net Absorption Trend

10%

$25

$20

$15

$10

$5 $0

Net Absorption YTD Q3

122,832

09 Vacancy

Square Feet in Millions

Total GLA

0.4 0.3 0.2 0.1 0.0 -0.1 -0.2 -0.3 -0.4 07

Average Asking Rent NNN

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

MULTIFAMILY | MARKET DATA & FORECAST San Francisco/Peninsula Leasing Statistics Vacancy Average Rent Investment Statistics Dollar Volume Price/Unit Price/SF Cap Rate

ч 99 Units 3.0% $1,744

ш 100 Units 3.2% $2,262

$229,960,528 $155,849 $227.19 5.1%

Vacancy & Average Rental Rate Trend

Total Dollar Volume (Millions.) vs. Avg. Cap Rate

$3,000

$2,500

$2,000

$1,500

$1,000

$500

$0 04

Vacancy

$2,400

$1,800

$1,200

$600

0% 04

12*

Total Dolar Volume

Avg Ask Rent NNN

12*

Average Cap Rate

North Bay Leasing Statistics Vacancy Average Rent Investment Statistics Dollar Volume Price/Unit Price/SF Cap Rate

ч 99 Units 5.2% $1,341

ш 100 Units 3.9% $1,378

$56,005,839 $179,419 $165.78 7.1%

Total Dollar Volume (Millions) vs. Avg. Cap Rate

Vacancy & Average Rental Rate Trend

$1,600

$600

$1,200

$450

$800

$300

$400

$150

$0 04

Vacancy

0% 04

12*

Total Dolar Volume

Avg Ask Rent NNN

12*

Average Cap Rate

East Bay Leasing Statistics Vacancy Average Rent Investment Statistics Dollar Volume Price/Unit Price/SF Cap Rate

ч 99 Units 2.6% $1,300

ш 100 Units 3.8% $1,604

$226,012,912 $162,541 $171.03 6.4%

Vacancy & Average Rental Rate Trend

Total Dollar Volume (Millions) vs. Avg. Cap Rate

$1,600

$2,000

$1,200

$1,500

$800

$1,000

$400

$500

$0 04

Vacancy

12*

0% 04

Avg Ask Rent NNN

Total Dolar Volume

12*

Average Cap Rate

South Bay Leasing Statistics Vacancy Average Rent

ч 99 Units 2.6% $1,645

ш 100 Units 5.0% $2,031

Total Dollar Volume (Millions) vs. Avg. Cap Rate

Vacancy & Average Rental Rate Trend

$2,400 $2,000

Investment Statistics Dollar Volume Price/Unit Price/SF Cap Rate

$800

CASSIDY TURLEY

$1,200

$800

$400

$400 0%

$0 04

Vacancy

*Through 3rd Quarter 2012

$1,600 $1,200

$238,154,476 $147,814 $185.38 6.3%

$1,600

Avg Ask Rent NNN

12*

0% 04

Total Dolar Volume

12*

Average Cap Rate

San Francisco Total Dollar Volume (Billions) vs. Avg. Cap Rate

Cap Rate Trend

Investment Statistics Office Industrial Retail Apartment Total

Dollar Volume Cap Rate $3,586,140,262 5.0% $61,127,689 5.9% $602,313,336 5.1% $496,809,301 5.3% $4,746,390,587 5.1%

10%

$15.0

10%

$12.0

$9.0

$6.0

$3.0

$0.0

Office

Industrial

Retail

0% 04

12* Apartment

Total Dolar Volume

12*

Average Cap Rate

Peninsula Cap Rate Trend

Investment Statistics Office Industrial Retail Apartment Total

Dollar Volume Cap Rate $516,915,000 6.5% $121,500,000 6.4% $54,260,000 6.4% $166,986,347 5.2% $859,661,347 6.0%

Total Dollar Volume (Billions) vs. Avg. Cap Rate

12%

$5.0

10%

$4.0

$3.0

$2.0

$1.0

8% 6% 4% 2% 0%

$0.0

Office

Industrial

Retail

12*

0% 04

Apartment

Total Dolar Volume

12*

INVESTMENT | MARKET DATA & FORECAST

Average Cap Rate

Silicon Valley Total Dollar Volume (Billions) vs. Avg. Cap Rate

Cap Rate Trend

Investment Statistics Office Industrial Retail Apartment Total

Dollar Volume Cap Rate $1,346,590,563 7.0% $818,929,557 6.4% $404,921,867 6.3% $633,970,000 5.0% $3,204,411,987 6.6%

12%

$12.0

12%

10%

$10.0

10%

$8.0

$6.0

$4.0

$2.0

$0.0

Office

Industrial

Retail

12*

0% 04

Apartment

Total Dolar Volume

12*

Average Cap Rate

East Bay

33 Total Dollar Volume (Billions) vs. Avg. Cap Rate

Cap Rate Trend

Investment Statistics Office Industrial Retail Apartment Total

Dollar Volume Cap Rate $518,168,259 6.0% $210,006,157 7.6% $449,337,888 7.3% $445,406,598 5.9% $1,622,918,902 6.6%

12%

$6.0

12%

10%

$5.0

10%

$4.0

$3.0

$2.0

$1.0

$0.0 04

Office

Industrial

Retail

0% 04

12* Apartment

Total Dolar Volume

12*

Average Cap Rate

North Bay Total Dollar Volume (Billions) vs. Avg. Cap Rate

Cap Rate Trend

Investment Statistics Office Industrial Retail Apartment Total

Dollar Volume Cap Rate $25,040,523 8.0% $87,295,513 8.1% $327,183,969 6.8% $364,076,932 6.0% $803,596,937

6.8%

12%

$2.5

15%

10%

$2.0

12%

$1.5

$1.0

$0.5

$0.0

8% 6% 4%

05 Office

07 Industrial

Retail

12* Apartment

0% 04

Total Dolar Volume

12*

Average Cap Rate

*Through 3rd Quarter 2012

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

COMPANY OVERVIEW About Cassidy Turley At Cassidy Turley, we are market leaders, industry leaders and community leaders. Nationwide, clients recognize us for the creative sophistication of our real estate advice as well as for the discipline and accuracy of our service delivery. We are a trusted partner and advocate, supporting our clients’ overall business performance. In markets across the country, we are respected as a leading provider of commercial real estate services as well as for our community engagement. Our thorough understanding of local business practices and market dynamics, combined with our customer focus and service commitment, give our clients a distinct edge in commercial real estate across the globe.

Local Market Leaders, Nationwide • Our professionals have deep ties to our communities and our industry, and a thorough understanding of local business leaders and practices, giving Cassidy Turley and our clients an edge. • Our in-depth, local market knowledge provides a comprehensive understanding of market dynamics and enables us to effectively forecast market trends – providing insight to clients and helping them make informed real estate decisions. • Our leadership position is recognized in the communities we serve. We are often rated in local business journals as a “Best Place to Work,” and are honored for our many local philanthropic efforts.

Industry Leadership and Recognition • Named to Leaders List of 2012 Global Outsourcing 100 • Over 80% of real estate executives familiar with our brand ranked it “Very Good or Excellent” – Wall Street Journal survey 34

• Ranked in the Top Five in Best Practices Index – Commercial Property Executive • 2012 Greenest Companies Index – Commercial Property Executive • Top 5 in Office Sales over $25 Million Nationwide – Real Estate Alert

Key Statistics • More than 60 U.S. offices • 65 international offices* • More than 3,700 professionals • More than 900 brokers

World-Class Expertise • Many of our associates have honed their skills in their respective markets for years – even decades – gaining an understanding of industry best practices and serving as thought leaders. • Cassidy Turley has served clients’ needs outside of the United States since 1985. In order to better serve our clients in Europe and Asia-Pacific, the firm is proud to partner with GVA, giving clients access to commercial real estate professionals in 65 international offices in over 20 countries.

Integrated, Tailored Solutions • Cassidy Turley provides clients with a full suite of comprehensive real estate solutions, including investor services, occupier services, specialty services and industry-specific services.

• 2011 transactions - Gross transaction volume $22 billion - Gross capital markets volume $10.3 billion • 455 million sf management portfolio on behalf of institutional, corporate and private clients • More than 28,000 Corporate Services locations served

• By partnering with Cassidy Turley, clients gain a true business advocate. • Our nimble approach and service delivery model allow our professionals to devise the most appropriate, comprehensive response to each client’s needs.

*Through GVA partnership

CASSIDY TURLEY

Cassidy Turley provides regional real estate services in Northern California. With 15 Northern California offices and a 400-member team, our Northern California market leadership is demonstrated by completion of over 3,300 transactions, totaling over $4.3 billion in 2011. •

Ranked in the Top 3 Commercial Real Estate Brokerage Firms in San Francisco , Silicon Valley, Peninsula, East Bay, and North Bay as ranked by the San Francisco Business Times

•

Top Regional Firm in Northern California, with 15 offices covering every market in the Bay Area

•

Cassidy Turley’s industry-leading market research publishes the most research reports of any brokerage firm in Northern California

COMPANY OVERVIEW

About Cassidy Turley Northern California

SACRAMENTO

SANTA ROSA

Offering Comprehensive Services Cassidy Turley provides clients with a full suite of comprehensive real estate solutions, including investor services, occupier services, specialty services and industry-specific services.

SAN RAFAEL

WALNUT CREEK OAKLAND

SAN FRANCISCO PLEASANTON

Core Services

Real Estate

• Tenant Representation

• Office

• Project Leasing

• Industrial

• Property Management

• Retail

• Project & Development Services

• Multi-family

• Capital Markets - Debt Placement - Investment Sales - Note Sales - Structured Finance

• Land

BURLINGAME / TERRANOMICS PALO ALTO LOS ALTOS SAN JOSE

CAPITOLA

SALINAS

MONTEREY

Northern California Key Statistics

• Corporate Services - Facilities Management - Portfolio Administration - Project Management - Strategic Consulting - Transaction Management

• 400 Professionals: 275 agents, 125 staff • 15 offices in Northern California • 3,300 Transactions in 2011

Practices and Specialties Our practice groups include professionals with considerable expertise unique to particular property types and within specific industries. • Auction Services

• Law Firm

• Distressed Assets

• Life Sciences

• Financial Advisory

• Location Advisory and Incentives

• Food and Beverage

• Mission Critical

• Golf and Resort Properties

• Net Lease

• Government Contracting

• Not-for-profit

• Government Services

• Private Client

• Healthcare

• Supply Chain

• Higher Education

• Sustainability Services

• $4.3 billion in transaction volume in 2011

• Hospitality

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

COMPANY OVERVIEW Cassidy Turley Offices Northern California Burlingame 1350 Bayshore Highway Suite 900 Burlingame, CA 94010 Tel 650-347-3700 Fax 650-347-4307

Oakland 555 12th Street Suite 1400 Oakland, CA 94607 Tel 510-465-8000 Fax 510-465-1350

Sacramento 520 Capitol Mall 5th Floor Sacramento, CA 95814 Tel 916-375-1500 Fax 916-376-8840

San Rafael 781 Lincoln Avenue Suite 100 San Rafael, CA 94901 Tel 415-485-0500 Fax 415-485-1341

Capitola 2121 41st Avenue Suite 204 Capitola, CA 95010 Tel 831-476-8000 Fax 831-479-4387

Palo Alto 1950 University Avenue Suite 220 East Palo Alto, CA 94303 Tel 650-852-1200 Fax 650-856-1098

Salinas 328-B Main Street Salinas, CA 93901 Tel 831-449-8000 Fax 831-769-0314

Santa Rosa 200 Fourth Street Suite 200 Santa Rosa, CA 95401 Tel 707-360-1300 Fax 707-360-1350

Los Altos 2339 S. San Antonio Road Suite 1D Los Altos, CA 94022 Tel 650-941-5221 Fax 650-941-2071

Palo Alto (Satellite) 3239 El Camino Real Suite 210 Palo Alto, CA 94306 Tel 650-852-1200 Fax 650-780-9137

San Francisco 201 California Street Suite 800 San Francisco, CA 94111 Tel 415-781-8100 Fax 415-956-3381

Terranomics 1350 Bayshore Highway Suite 900 Burlingame, CA 94010 Tel 650-348-2400 Fax 650-347-4307

Monterey 1 Lower Ragsdale Drive Bldg 1, Suite 100 Monterey, CA 93940 Tel 831-375-8000 Fax 831-647-2116

Pleasanton 5000 Hopyard Road Suite 205 Pleasanton, CA 94588 Tel 925-621-3840 Fax 925-621-3841

San Jose 300 Santana Row Fifth Floor San Jose, CA 95128 Tel 408-615-3400 Fax 408-615-3444

Walnut Creek 1850 Mt. Diablo Boulevard Suite 540 Walnut Creek, CA 94596 Tel 925-627-2880 Fax 925-627-2899

Nationwide 36

Cassidy Turley currently has more than 60 U.S. office locations. Atlanta, GA Austin, TX a Baltimore, MD Baton Rouge, LA a Bethesda, MD Boston, MA Burlingame, CA Capitola, CA Carlsbad, CA Charlotte, NC Chicago, IL (2) b Cincinnati, OH Columbia, MD Columbus, OH Dallas, TX (2) b

Dayton, OH Denver, CO Denver Tech, CO Detroit, MI a Fort Collins, CO Fort Worth, TX a Houston, TX (2) b Indianapolis, IN Kansas City, MO Los Angeles, CA Louisville, KY Milwaukee, WI (2) Minneapolis, MN Monterey, CA Nashville, TN

New York, NY Oakland, CA Oklahoma City, OK Orange County, CA Otay Mesa, CA Palo Alto, CA Parsippany, NJ Phoenix, AZ Pleasanton, CA Raleigh, NC Rochelle Park, NJ Sacramento, CA Salinas, CA San Antonio, TX a San Diego, CA (2)

San Francisco, CA San Jose, CA San Rafael, CA Santa Rosa, CA Somerset, NJ Springfield, IL a St. Louis, MO (3) Tampa, FL Tysons Corner, VA Walnut Creek, CA Washington, DC a b

Limited service at 1 of 2 locations Limited service locations

Global Cassidy Turleyâ&#x20AC;&#x2122;s global reach beyond North America extends to more than 65 offices in over 20 countries across Europe and Asia-Pacific, through its partnership with GVA, the founder and majority shareholder of GVA Worldwide. GVA Worldwide is a leading global services company with over 2,000 real estate professionals, including many focused on institutional real estate sales and investment throughout the world. Australia Austria China Cyprus Denmark

CASSIDY TURLEY

Estonia Finland Germany Greece Hong Kong

Hungary Ireland Italy Lithuania Netherlands

New Zealand Poland Romania Russia Sweden

Switzerland United Kingdom

Cassidy Turley utilizes state-of-the-art information systems to monitor over 1 billion square feet of commercial real estate in Northern California. This information is gathered by 14 dedicated research staff, not 3rd party data services. We constantly update our databases, all of which are scrubbed and verified by in-market brokers from among our 400 professionals in 15 offices throughout the region.

COMPANY OVERVIEW

Northern California Research

Northern California Research Reports BAY AREA SNAPSHOTS

APARTMENT REPORTS

SHOPPING CENTER SUMMARIES

NATIONAL REPORTS

Bay Bay Bay Bay Bay Bay

Bay Area East Bay North Bay San Francisco County San Mateo County Santa Clara County Sacramento Valley

Bay Area Central Valley Sacramento Valley East Bay Monterey County North Bay Santa Clara County San Francisco County San Mateo County Santa Cruz County Solano County

U.S. Industrial Trends Report U.S. Office Trends Report U.S. Single Tenant Net Lease Investment Report U.S. Retail Report US Retail Investment Report California Investment Report

Area Area Area Area Area Area

Investment Life Science Manufacturing Office R&D Warehouse

MARKET SNAPSHOTS East East East East East East

Bay/Oakland Office Bay/Oakland R&D Bay/Oakland Warehouse Bay/Oakland Manufacturing Bay/Walnut Creek Office Bay/Walnut Creek Industrial

East Bay/Pleasanton Office East Bay/Pleasanton R&D East Bay/Pleasanton Industrial Marin County Office Marin County Industrial Monterey County Office Monterey County Industrial

Sacramento Valley Office Sacramento Valley Industrial San Francisco Office San Francisco Industrial Silicon Valley Office Silicon Valley R&D Silicon Valley Manufacturing Silicon Valley Warehouse

Santa Cruz County Office Santa Cruz County Industrial San Mateo County Office San Mateo County R&D San Mateo County Ind & Whse Solano County Industrial Sonoma County Office Sonoma County Industrial

INTERACTIVE BAY AREA RESEARCH MAP An interactive way to research commercial real estate market data for all of Northern California across all product types.

Research Publications RESEARCH WHITE PAPERS Cassidy Turley provides valuable perspectives and insights on numerous issues and topics. Our White Papers arm you with knowledge to better understand the dynamics of trends that shape the commercial real estate landscape. NATIONAL RETAILER & RESTAURANT EXPANSION GUIDE This guide details the current expansion plans for hundreds of the largest U.S. retail and restaurant chains, and is unlike any other in the commercial real estate industry in terms of the depth and the scope of the data it includes.

U.S. NATIONAL RETAIL REPORT & U.S. RETAIL INVESTMENT REPORT These comprehensive reports detail shopping center market & investment trends, retailer demand and the big picture trends that impact the retail industry nationwide. We strive to give you the most in-depth level of analysis and forecasting available in the marketplace.

Weekly Newsletters RESEARCH RANT

RETAIL NEWSLINE

This weekly email provides our clients with a streamlined summary of news impacting Bay Area real estate; covering Deals, Development, Financing, Real Estate News, and the Bay Area and National Economy. It gives our clients quick and easy access to the news they need to make informed decisions.

We track retail commercial real estate trends at the local, regional, national and global levels. Our goal is to keep our clients up to speed with what is happening in the retail world with this weekly publication.

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

CREDITS && TERMS CREDITS TERMS Credits Author Garrick Brown Director of Research

Design & Production Krissy Daily Creative Director

Market Research Staff Todd Campbell, Julie Leiker, Joshua Deale, Laef Barnes, James Masuda, Tricia Kirsch, Abigail Friedman, Erica Ryan, Kyle Hertel, Patrick Wong, Zachary Anderson, Sam Pickus

Managing Editor Mark Bollozos VP Research & Marketing

Terms Commercial Real Estate (CRE) Commercial property includes office buildings, industrial property, medical centers, hotels, malls, retail stores, shopping centers, farm land, multi-family housing buildings, warehouses, and garages. Office Includes Class A, Class B, Class C, and suburban garden office buildings over 10,000 square feet. Class A product is steel and concrete construction, built after 1980, quality tenants, excellent amenities, and premium rents. Class B product is built after 1960, fair to good finishes, and wide range of tenants.

R&D Modern flex buildings with some space dedicated to research and/ or product development. Buildings usually have parking greater than 3.5/1000, clear height less than 18’, 1-2 stories, and three sides of glass. Industrial (IND) Buildings used for warehouse, light manufacturing and R&D purposes that meet those building’s specifications. Manufacturing (MFG) Manufacturing buildings generally have a parking ratio less than 3/1000, clear height less than 18’, dock or grade-level doors, 6-15% office buildout, and one side of glass. Warehouse (WHSE) Warehouse buildings generally have a parking ratio less than 2/1000, clear height greater than 18’, multiple dock and/or grade-level doors, limited office buildout, and a limited amount of glass. Retail Shopping Center A planned group of connected retail stores, usually with an attached parking area, specially developed on a parcel of private property and managed by a single organization. Building Base Total market inventory of buildings generally over 10,000 square feet. Gross Leaseable Area (GLA) Total market inventory of retail shopping centers generally over 50,000 square feet. Total Availables All space being marketed for lease, direct or sublease, available within 90 days. This may include availabilities with pending leases.

CASSIDY TURLEY

Vacancy Available square footage divided by total square footage of inventory. Net Absorption Change in occupied square footage from period to period. Avg. Rent Rate The weighted average (per square footage) of quoted rents at the end of 2011. Rates are quoted full service for office, NNN for all other property types. Rates are monthly for all properties with the exception of retail shopping centers, quoted per annum. Apartment rental rates are quoted monthly per unit. N/A Indicates information was not applicable or not available at press time. Total Dollar Volume Dollar amount of total transactions in a given period. Total Properties Traded Total number of properties sold in a given period. Total Volume SF Square footage amount of total transactions in a given period Average Price per Square Foot Average sale price per square foot, excluding apartments, in a given period. Average Price per Unit Average sale price per unit (apartment) in a given period. Market Capitalization (Cap) Rate The estimated return on a property based on the total net income divided by the purchase price. Forecast Methodology Forecast analytics calculated by Cassidy Turley Research. The basis of the model applies growth projections of various indices with a strong correlation to CRE, regression analysis of past market activity and projections from reliable sources within Cassidy Turley. Data Sources Cassidy Turley Research, Terranomics Research, Costar Analytics, Real Capital Analytics, Bureau of Labor Statistics, The Conference Board, and Bureau of Economic Analysis.

Environmental Benefits Statement In our ongoing effort to be more “green”, this book was printed on FSC Certified Mixed Source paper. By doing so, we saved: 2.446 Trees 1.712 Million BTU’s of Energy 878.114 Gallons of Water 145.29 lbs. Solid Waste 915.53 lbs. Green House Gases Environment impact calculation estimates were made using the Environmental Defense paper calculator (US EPA’s Power Profiler)