accelerating success.

eFFecTIVe RenTaL RaTe QUaRTeRLy cOmPaRISOn

Lorem Lorem Lorem Lorem Lorem

ReSeaRch & FORecaST RePORTSan FRancIScO

www.colliers.com/sanfrancisco

Tech Support Tech Sector Fuels San Francisco economy and Office market

OVeRVIew

The San Francisco office market showed increasing strength of life during the third quarter. The quarter registered 191,791 square feet of positive net absorption, pushing the overall vacancy rate down to 14.9 percent.

curiously, the San Francisco tenant occupancy levels are back in the black despite minimal job growth. according to data from the employment Development Department, preliminary august labor force data for San Francisco pegs the unemployment rate at 9.7 percent, unchanged from July. counter intuitively, office occupancy surged due to employment growth. nearly 2,200 jobs were added since the beginning of 2010, largely in the technology sector.

The preferred location for technology companies has typically been South of market. This is still strongly the case, but tech demand is now lighting up the South Financial District as well as Union Square. Despite the high number of financial sector firms returning office space during the quarter, the South Financial District experienced positive net absorption from new and expanding tech tenants. Both sub markets have experienced a notable pickup in leasing activity, a leading indicator that we will continue to see rental and occupancy growth in these areas.

There has also been a recent uptick in large tenant requirements in the market, as well as in transaction volume. Four transactions over 100,000 square feet each took place over the quarter, and three out of the four were tech companies. 12 additional 100,000+ square foot tenants have active office space requirements, of which four are technology-based companies.

Influenced by the pickup in leasing activity, average rental rates are surging upward, particularly for quality space. The non-weighted average net effective rent for direct class a office space in San Francisco increased 8.7 percent over the quarter $36.22 per square foot. Unable to repeat the series of larger, high-rent renewals for premium office space from the second quarter, the weighted average for class a space dropped 11 percent over the quarter to $34.87 per square foot.

RenT IncReaSeS

non-weighted average net effective rent for class a space continued to increase over the quarter making it the third consecutive quarter with rent growth. conversely, the weighted average has seen more fluctuation over the year, as larger, high rent transactions have a greater effect on the average.

maRkeT InDIcaTORS

UPDaTeabsorption and Vacancy Rates

Q3

2010

ye

2010

Vacancy

neT aBSORPTIOn

cOnSTRUcTIOn

weIGhTeD RenTaL RaTe

nOn weIGhTeD RenTaL RaTe

SaLeS VOLUme

SaLe PRIceS

Q3 2010 | OFFIce

2Q '10 Overall

3Q '10 Direct

3Q '10 Sublease

3Q '10 Overall

% change

*Financial District: class a $39.34 $37.94 $25.05 $37.30 -5.2%

$33.43 $36.99 $24.66 $36.18 8.2%

*all markets: class a $38.70 $34.87 $20.07 $33.85 -12.5%

$33.01 $36.22 $20.80 $34.86 5.6%

*all markets: class B $25.42 $28.03 $19.58 $27.77 9.2%

$26.26 $26.14 $19.50 $25.84 -1.6%

*all markets: class c $24.16 $22.70 na $22.70 -6.0%

$21.94 $22.53 na $22.53 2.7%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

-800,000

-600,000

-400,000

-200,000

0

200,000

400,000

600,000

800,000

2Q '04

3Q '04

4Q '04

1Q '05

2Q '05

3Q '05

4Q '05

1Q '06

2Q '06

3Q '06

4Q '06

1Q '07

2Q '07

3Q '07

4Q '07

1Q '08

2Q '08

3Q '08

4Q '08

1Q '09

2Q '09

3Q '09

4Q '09

1Q '10

2Q '10

3Q '10

Net Absorption Vacancy

*weighted average rents

NORTHWESTNORTHEAST

AIR-PORT

SOUTHEAST

SOUTHWEST

south financial district

yerba buena

The price and volume of office buildings acquired over the past few months imply that investors remain bullish about the future performance of the San Francisco office market. During the past quarter, two cBD buildings sold, and this year already more than $1.14 billion of office product has traded, which is more than 6 times the transaction volume for all of 2009. The pricing for many of these assets has exceeded earlier expectations.

Investor sentiment is that the recovery of the San Francisco office market will be slow in the short term, weighted down by weak national economic growth, and downsizing in its financial services industry. In the medium term the success of the tech industry will fuel growth, help push unemployment down, and create a solid, strong platform for investment returns.

aBSORPTIOn

The San Francisco office market experienced a total of 191,791 square feet of occupancy gains over the quarter, making it the second quarter this year with positive net absorption. The gains occurring over the quarter helped balance out some of the occupancy losses from the previous quarter. net absorption year-to-date currently stands at negative 34,035 square feet, and is expected to turn positive by year end.

The growth came organically, from companies taking on incremental mid-sized space. Some of the more considerable contributions to the net absorption came from: cisco expanding by 32,000 square feet at 185 Berry Street, SOma central’s 28,000 square foot expansion at 153 Townsend Street, and Trulia taking on an additional 20,000 square feet in its relocation from 208 Utah to 116 new montgomery Street.

SOma east, the South Financial District, and Union Square were three sub markets that benefitted from the soaring tech industry, as they posted positive net absorption of 65,349 square feet, 77,376 square feet, and 46,795 square feet respectively. as the Tech industry soars, it provides relief to the office market and helps to absorb space from financial service firms that continue to vacate space in the north Financial District. The north Financial district posted 51,489 square feet of negative absorption, as many financial firms are still downsizing. Bankrupt United commercial Bank’s 60,000 square foot space at 555 montgomery returned to the market, Goldman Sachs only renewed 71,000 square feet of its 90,500 square foot space at 555 california Street, and Ge capital gave back 20,173 square feet on the 10th floor at 100 california Street.

The South of market area is experiencing a spike in activity as a result of the strong demand for office space from the tech industry. a total of 31 transactions took place in the greater South of market area, representing over 601,000 square feet.

UPDaTe Lease and Investment Transactions

SIGnIFIcanT LeaSeS Q3 2010

PROPeRTy aDDReSS TenanT SIze TyPe DaTe SIGneD cLaSS

699 eighth St zynga 270,000 new Sep-10 a

555 mission St Deloitte 166,000 new Sep-10 a

111 Pine St First Republic Bank 115,000 Renewal aug-10 a

One market St - Landmark autodesk 114,664 Renewal aug-10 a

123 mission St Salesforce.com 71,000 new aug-10 a

475 Sansome St yahoo corporation 63,886 Renewal Sep-10 a

50 Beale St UcSF 50,000 Renewal Sep-10 a

333 Bush St national Parks Service 50,000 new Jul-10 a

SIGnIFIcanT SaLeS Q3 2010

PROPeRTy aDDReSS SeLLeR BUyeR SQ. FT. SaLe DaTe cLaSS SaLe PRIce PRIce PeR SF

One market - Landmark(75% interest - Partner buyout) Ge asset management american assets 437,228 July 2010 a $173,500,000 $529.00

575 market St. market center RReeF Funds manulife Financial 770,000 Sept. 2010 a $265,000,000 $344.00

170 columbus ave Savoy corporation Rona Real estate LLc management, LLc 62,265 July 2010 B $13,000,000 $209.00

165-167 O’Farrell St. east west Bank Pacific View ReO 23,925 Sept. 2010 B $6,000,000 $251.00

soma west

OVeRVIew cOnTInUeD

P. 2 | cOLLIeRS InTeRnaTIOnaL

ReSeaRch & FORecaST RePORT | Q3 2010 | OFFIce | San FRancIScO

LeaSInG acTIVITy

Third Quarter leasing activity, fueled by tech sector demand, reached levels not seen since Q1 2005. a total of 2,187,358 square feet of office lease transactions were completed during the quarter. That takes the year to date total leasing activity to over 5.4 million square feet, which has already surpassed the leasing volume for all of 2009, which was close to 5.3 million square feet.

existing Properties absorption new

SupplyU/c

& Proposed

class Bldgs Total Inventory

SF

Direct

Vacant SF

Direct Vacancy

Rate

Sublease

Vacant

SF

Sublease

Vacancy

Rate

Total

Vacant

SF

Occupied

Space SF

Vacancy

Rate

current

Period

Vacancy

Rate

Prior

Period

net

absorption

current SF

yTD net

absorption

net

new

Supply

current

SF

net

new

Supply

yTD

SF

Under

construction

SF

Proposed

SF

Colliers International

Office Market Report -

Q3 2010

Class Bldgs

Total

Inventory

Sq. Ft.

Direct

Vacant

Sq. Ft.

Direct

Vacancy

Rate

Sublease

Vacant

Sq. Ft.

Sublease

Vacancy

Rate

Total

Vacant

Sq. Ft.

Occupied

Space

Sq. Ft.

Vacancy

Rate

Current

Vacancy

Rate

Prior

Net

Absorption

Current-

S

Net

Absorption

YTD-Sq. Ft.

Net

New

Supply

C

Net New

Supply

YTD

S

Under

Constructio

n

S

Proposed

Sq. Ft.

DOWNTOWN MARKET:

A 172 52,123,101 6,984,200 13.4% 865,936 1.7% 7,850,136 44,272,965 15.1% 14.5% 78,017 (161,241) - - 277,000 6,383,520

B 239 23,882,495 3,893,728 16.3% 184,371 0.8% 4,078,099 19,804,396 17.1% 17.5% 84,950 58,019 - 110,000 - -

C 120 7,218,574 506,406 7.0% 4,002 0.1% 510,408 6,708,166 7.1% 8.0% 28,824 69,187 - - - -

Total 531 83,224,170 11,384,334 13.7% 1,054,309 1.3% 12,438,643 70,785,527 14.9% 14.8% 191,791 (34,035) - 110,000 277,000 6,383,520

FINANCIAL DISTRICT:

A 106 40,236,611 4,530,304 11.3% 736,237 1.8% 5,266,541 34,970,070 13.1% 12.9% 4,516 (35,583) - - - 4,710,000

B 66 7,730,141 1,085,889 14.0% 7,255 0.1% 1,093,144 6,636,997 14.1% 14.1% 20,577 (66,324) - - - -

C 34 1,659,983 140,651 8.5% 2,000 0.1% 142,651 1,517,332 8.6% 8.8% 794 (14,730) - - - -

Total 206 49,626,735 5,756,844 11.6% 745,492 1.5% 6,502,336 43,124,399 13.1% 13.0% 25,887 (116,637) - - - 4,710,000

- - -

SUBMARKETS:

North Financial 109 26,573,274 3,516,207 13.2% 483,158 1.8% 3,999,365 22,573,909 15.1% 15.0% (51,489) 31,955 - - - 469,000

South Financial 97 23,053,461 2,240,637 9.7% 262,334 1.1% 2,502,971 20,550,490 10.9% 10.6% 77,376 (148,592) - - - 4,241,000

Total 206 49,626,735 5,756,844 11.6% 745,492 1.5% 6,502,336 43,124,399 13.1% 13.0% 25,887 (116,637) - - - 4,710,000

Union Square 50 3,692,571 409,674 11.1% 4,719 0.1% 414,393 3,278,178 11.2% 13.6% 46,795 118,880 - 110,000 -

Yerba Buena 31 4,044,270 943,510 23.3% 126,521 3.1% 1,070,031 2,974,239 26.5% 18.3% 6,710 (273,230) - - - 140,000

SOMA West 23 2,338,507 562,363 24.0% - 0.0% 562,363 1,776,144 24.0% 25.1% (1,149) 9,136 - - - -

SOMA East 40 4,803,937 613,908 12.8% 46,895 1.0% 660,803 4,143,134 13.8% 14.0% 65,349 27,652 - - - 212,000

Civic Center/Mid-Market 46 6,347,635 1,622,154 25.6% - 0.0% 1,622,154 4,725,481 25.6% 25.9% 21,539 (660) - - 221,000

Jackson Square 34 2,265,711 228,438 10.1% 7,734 0.3% 236,172 2,029,539 10.4% 11.5% 27,613 35,864 - - - -

North Waterfront 44 3,790,147 263,525 7.0% 44,832 1.2% 308,357 3,481,790 8.1% 10.8% 22,169 94,691 - - - -

Van Ness Corridor 22 1,508,380 203,049 13.5% 78,116 5.2% 281,165 1,227,215 18.6% 18.2% (12,421) (5,328) - - - -

Potrero West 11 1,232,809 134,837 10.9% - 0.0% 134,837 1,097,972 10.9% 7.9% (29,987) (20,795) - - - -

Potrero East 10 1,008,376 110,057 10.9% - 0.0% 110,057 898,319 10.9% 9.9% 12,786 (10,037) - - - -

Mission Bay 14 2,565,092 535,975 20.9% - 0.0% 535,975 2,029,117 20.9% 22.7% 6,500 106,429 - - 277,000 1,100,520

Total 531 83,224,170 11,384,334 13.7% 1,054,309 1.3% 12,438,643 70,785,527 14.9% 14.8% 191,791 (34,035) - 110,000 277,000 6,383,520

-

QUARTERLY COMPARISON AND TOTALSQ2 -10 531 83,149,235 11,503,832 13.8% 1,126,602 1.4% 12,630,434 70,518,801 15.2% 14.8% (317,655) (222,400) - 182,073 320,000 6,383,520

Q1 - 10 531 83,149,235 11,202,883 13.5% 1,087,871 1.3% 12,290,754 70,858,481 14.8% 14.7% 95,255 95,255 - 182,073 320,000 6,383,520

Q4 - 09 529 82,991,151 10,946,694 13.2% 1,267,118 1.5% 12,213,812 70,777,339 14.7% 14.4% (270,140) (1,649,181) - 157,929 320,000 6,383,520

Q3 - 09 529 82,894,721 10,498,280 12.7% 1,445,392 1.7% 11,943,672 70,951,049 14.4% 14.1% (136,702) (1,379,041) 157,929 157,929 260,000 6,383,520

Q2 - 09 528 82,894,721 10,298,220 12.4% 1,350,821 1.6% 11,649,041 71,245,680 14.1% 13.2% (688,514) (1,242,339) - - 417,929 6,383,520

Q1 - 09 528 82,894,721 9,992,192 12.1% 968,335 1.2% 10,960,527 71,934,194 13.2% 12.6% (553,825) (553,825) - - 417,929 6,383,520

Q4 - 08 529 82,894,722 9,286,968 11.2% 1,119,734 1.4% 10,406,702 72,488,020 12.6% 10.5% (766,464) (589,805) 1,818,000 417,929 6,383,520

Q3 - 08 529 81,873,424 7,832,836 9.6% 786,102 1.0% 8,618,938 73,254,486 10.5% 10.4% (110,282) 176,713 - 801,000 2,340,000 4,773,000

Q2 - 08 529 81,873,424 7,980,832 9.7% 527,824 0.6% 8,508,656 73,364,768 10.4% 9.9% 100,528 285,795 335,000 801,000 2,340,000 6,324,000

Q1 - 08 529 81,562,425 7,832,769 9.6% 465,415 0.6% 8,298,184 73,264,241 10.2% 9.9% 185,268 185,268 475,000 475,000 2,052,000 5,553,000

Existing Properties U/C & ProposedAbsorption New Supply

ReSeaRch & FORecaST RePORT | Q3 2010 | OFFIce | San FRancIScO

cOLLIeRS InTeRnaTIOnaL | P. 3

Vacancy

The San Francisco office market is continuing to strengthen. The vacancy rate fell to 14.9 percent during the quarter from 15.2 percent the previous quarter. currently, 11.4 million square feet of product stands vacant in all of San Francisco, down from the peak in Q4 2009.

Sublease vacancy quietly continues to diminish and currently stands at 1.3 percent down from 1.4 percent the previous quarter. a significant number of sublease options quietly evaporated as growing companies lease or take back once-vacant space. a total of 1.05 million square feet of sublease space is vacant in downtown San Francisco, which seems paltry in comparison to the nearly 4.1 million square feet available at the end of 2002.

Leasing activity for the 3rd quarter came in at approximately 2.2 million square feet. This is considerably more than the historical quarterly average of 1.7 million square feet, indicating that the office market fundamentals are starting to gain momentum. Leasing activity is fueled by the flood of demand from tech companies, as this group accounts for 30 percent of overall activity. The average space leased was 13,519 square feet, which is an increase from 10,545 square feet last quarter.

RenTS

Influenced by the pickup in leasing activity, average rental rates are surging, particularly for quality space. The average net effective rent for direct class a office space in San Francisco increased 8.7 percent to $36.22 per square foot. The weighted average rent is reflecting the average square foot of all leases. The discrepancy in the change between the non-weighted average and the weighted average is due to the pressure larger transactions have on the weighted average. The third quarter was unable to repeat the series of larger high rental rate renewals that took place during the second quarter. as a result, the weighted average rent dropped 11 percent during the quarter to $34.87.

average rental rates for class a space in the Financial District experienced ever greater growth, as the average net effective rent for direct class a office space increased 9.4 percent over the quarter to $36.99. a total of 61 percent of leasing transactions took place in class a buildings in the Financial District.

Overall rental rates in certain submarkets are also starting to feel the effects of the buzzing tech activity. creative space (i.e. exposed ceilings, brick and timber build out) is in demand and a recent study by colliers shows that asking rates for creative space increased 6.3 percent during the quarter to $30.03 (creative space is typically found in class B buildings).

The average net effective rent for class B office space dropped by one percent to $26.14 per square foot during the quarter, while the weighted average rent for B space increased 10 percent to $28.03. This can be explained by the amount of larger transactions taking place in class B buildings paying premium rent. Out of the five top rent transactions, three were greater than 20,000 square feet.

InVeSTmenT

The recent investment transaction activity in the San Francisco office market suggests that investors are bullish on the market’s ability to rebound from the downturn.

There is a lot of competition for well leased assets, since there is an abundance of capital chasing few deals. Debt has clearly returned for investment transactions of core buildings. cash-strapped underwater owners are being replaced by well-capitalized investors, who are picking up properties at prices up to 40 percent of what they would have sold for at the height of the market three years ago.

manulife Financial purchased market center at 555-575 market Street, a 770,000 square foot, class-a office complex. manulife paid about $350 per square foot, or a total of $265 million. This new addition to manulife’s global real estate portfolio marks the company’s first property investment in the Bay area.

In another transaction that confirms the demand for core assets, american assets paid $173.5 million to Ge Pension Fund for its 75 percent interest in the 437,000 square foot building at One market – The Landmark. The transaction makes american assets sole proprietor of the class a office building located in the South Financial District. The price equals to about $529 per square foot, reflecting the fact that the building is 100 percent occupied.

San FRancIScO:

alan D. collenettemanaging Director 50 california Street 19th Floor San Francisco, ca 94111TeL +1 415 788 3100FaX +1 415 433 7844

ReSeaRcheR:

Tove nilsenResearch Director tove.nilsen@colliers.comTeL +1 415 288 7827

480 offices in 61 countries on 6 continentsUnited States: 135canada: 39Latin america: 17asia Pacific: 194emea: 95

• $1.6 billion in annual revenue

• 672.9 million square feet under management

• Over 10,000 professionals

This document/email has been prepared by colliers International for advertising and general information only. colliers International makes no guarantees, representations or warranties of any kind, expressed or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. any interested party should undertake their own inquiries as to the accuracy of the information. colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. colliers International is a worldwide affiliation of independently owned and operated companies.

www.colliers.com/marketname

accelerating success.

ReSeaRch & FORecaST RePORT | Q3 2010 | OFFIce | San FRancIScO