NORTH PENINSULAOFFICE MARKET

RESEARCH 2Q 2020

RESEARCH | 1

VACANCY AND RENTAL RATES UP WITH ABSORPTION TRENDING DOWNThe second quarter of 2020 for the North Peninsula office market showed signs of vacancy and rental rates trending up, construction and deliveries staying neutral and absorption trending down. Despite softening tenant demand and rising vacancy in the North Peninsula, average asking rates were recorded at $5.61/SF full service, up from $5.53/SF in the prior quarter. The average Class A rate was recorded at $5.96/SF, up from $5.90/SF in the previous quarter but down from $6.00/SF one year ago. Overall vacancy was recorded at 11.9% this quarter, up from 10.2% in the previous quarter. On the sublease front, vacancy counted for 3.1% of the total inventory and 24.9% of the total vacancy. The construction pipeline currently holds approximately 4.0 million square feet awaiting completion, with 1.1 million square feet expected to deliver next quarter; however, no new deliveries were reported this quarter. At the end of the last quarter, the San Francisco Bay Area was in the initial stages of Governor Gavin Newsom’s stay-at-home mandate as a result of the COVID-19 pandemic. Now at the end of the second quarter, signs of the economic shutdowns throughout the region as a result of the pandemic can be seen.

The COVID-19 Perspective on Market Deal Activity The North Peninsula leasing market waned this quarter, recording 477,068 square feet of gross absorption, its lowest mark in 20 years. Deal velocity was so sluggish in the second quarter that space became vacant at a much faster pace than it was leased, resulting in negative 896,553 square feet of net absorption, which was predicted. There were six completed lease transactions greater than 20,000 square feet, compared with seven executed in the previous quarter. Of those top six transactions, four of them were lease renewals. Equinix signed the largest deal of the quarter, renewing its 123,384-square-foot lease at 1 Lagoon Drive in Redwood City through March 2031. In the second-largest transaction of the quarter, Kaiser Permanente renewed its 39,553-square-foot lease on the second and third floor at 801 TraegerAvenue in San Bruno through October 2027. The largest sale of the quarter was GI Partners’s purchase of the Shoreline Center located at 130-150 Shoreline Drive in Redwood Shores. The 81,569-square-foot Class A office property was sold by Thor Equities for $81.0 million, or $993/SF, and was 100% occupied at the time of acquisition by AurisHealth.

Nonessential business shutdowns and job losses linked to the pandemic have caused business leaders to remain hesitant to commit to expansion exhibited by the low leasing velocity this quarter. Moving

MARKET SUMMARYCurrent Quarter

PriorQuarter

Year AgoPeriod

12 MonthForecast

Total Inventory 39.9M SF 39.8M SF 39.0M SF

Total Vacancy Rate 11.9% 10.2% 9.7%

Quarterly Net Absorption -896K SF -436K SF 68K SF

Total FS Asking Rent $5.61/SF $5.53/SF $5.35/SF

Under Construction 4.0M SF 3.5M SF 3.1M SF

Deliveries 0 SF 637K SF 321K SF

-900,000

-600,000

-300,000

0

300,000

600,000

2Q15 2Q16 2Q17 2Q18 2Q19 2Q20

CURRENT CONDITIONS

North Peninsula tenants leased 477,068 square feet of space this quarter, a decrease of 40.2% from 798,030 square feet in the previous quarter.

The quarter’s average Class B and Class C asking rents were recorded at $4.81/SF and $3.81/SF full service, respectively.

Tenant demand decreased 5.5% this quarter to 2.22 million square feet.

Sublease vacancy was recorded at 3.1%, up from 2.6% in the prior quarter.

MARKET ANALYSIS

Asking Rent (Full Service) and Vacancy

Net Absorption (SF)

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

$3.00

$3.60

$4.20

$4.80

$5.40

$6.00

2Q15 2Q16 2Q17 2Q18 2Q19 2Q20

Avg. Asking Rent ($/SF) (Full Service) Vacancy %

© NEWMARK KNIGHT FRANK | 2020

RESEARCH | 2

2Q 2020 NORTH PENINSULA OFFICE MARKET

into the second half of 2020, the region’s market fundamentals will largely depend on how quickly job losses in the first two quarters can turn around. Pent-up tenant demand for office space that was being

SELECT LEASE TRANSACTIONS

Tenant Building(s) Submarket Type Square Feet

Equinix, LLC. 1 Lagoon Dr Redwood City Renewal 123,384

Kaiser Permanente 801 Traeger Ave San Bruno Renewal 39,553

Model N 777 Mariners Island Blvd San Mateo Renewal 35,600

Amobee 100 Redwood Shores Parkway Redwood Shores Sublease 30,250

Robinhood Markets, Inc. 68 Willow Place Menlo Park Direct Lease 27,500

SELECT SALE TRANSACTIONSBuilding(s) Submarket Sale Price $/RSF Square Feet

130-150 Shoreline Dr Redwood Shores $81,000,000 $993 81,569

1820 Ogden Dr Burlingame $6,000,000 $434 13,824

25 San Fernando Way Daly City $2,280,000 $278 8,200

100 Arroyo Dr South San Francisco $1,020,000 $216 4,720

150 San Mateo Dr (N) San Mateo $3,000,000 $1,017 2,950

VACANCY BREAKDOWN

Square Feet, Millions

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2Q15 2Q16 2Q17 2Q18 2Q19 2Q20

Sublease Vacancy Direct Vacancy

AVERAGE ASKING RENTS

Weighted, Full Service, Monthly

$3.00

$3.70

$4.40

$5.10

$5.80

$6.50

2Q15 2Q16 2Q17 2Q18 2Q19 2Q20

Overall Ask Rent Class A Ask Rent

built up during the COVID-19 stay-at-home orders likely kept asking prices stable this quarter; however, once office comps are traded at lower rates moving forward, market reductions are imminent.

© NEWMARK KNIGHT FRANK | 2020

RESEARCH | 3

OVERALL SUBMARKET STATISTICSTotal

Inventory (SF)

Under Construction

(SF)

TotalVacancy

(SF)

Total Vacancy

Rate

Qtr Gross Absorption

(SF)

Qtr Net Absorption

(SF)

Total FSAsking Rent(Price/SF)

Class A FSAsking Rent(Price/SF)

Belmont 976,830 0 131,545 13.47% 0 -37,410 $4.14 $4.16

Brisbane 568,265 0 110,348 19.42% 0 26,506 $4.16 $4.16

Burlingame 3,729,731 847,442 516,036 13.84% 15,162 -103,817 $4.88 $5.34

Downtown Burlingame 549,320 44,605 144,749 26.35% 12,311 -10,922 $8.00 $8.15

Daly City 1,281,262 0 75,145 5.86% 1,745 -11,255 $3.84 $4.50

Foster City 3,519,740 0 347,454 9.87% 0 -38,236 $5.63 $5.68

Menlo Park 5,673,663 935,924 578,048 10.19% 54,399 -115,325 $9.48 $9.93

Redwood City 5,384,937 1,588,817 310,884 5.65% 37,028 -94,998 $6.60 $9.02

Redwood Shores 4,699,134 0 567,551 12.08% 172,822 -13,696 $5.11 $5.18

San Bruno 1,713,151 0 29,339 1.71% 39,553 -2,021 $3.78 $3.87

San Carlos 1,004,442 0 135,729 13.51% 9,160 -31,429 $4.82 $5.02

San Mateo 8,962,655 652,700 1,557,023 17.37% 140,180 -356,221 $5.19 $5.09

Downtown San Mateo 1,448,966 180,353 298,694 20.61% 20,184 -70,516 $5.77 $7.77

South San Francisco 2,261,740 0 401,333 17.74% 7,019 -118,651 $3.84 $4.00

NORTH PENINSULA 39,897,601 4,024,883 4,760,435 11.93% 477,068 -896,553 $5.61 $5.96

2Q 2020 NORTH PENINSULA OFFICE MARKET

© NEWMARK KNIGHT FRANK | 2020

NEWMARK KNIGHT FRANK2950 South Delaware Street, Suite 125San Mateo, CA 94403650.341.5800Corporate CA RE #: 00832933

CHRIS TERANISHIMarket Research Coordinator650.358.5248cteranishi@ngkf.com

© NEWMARK KNIGHT FRANK | 2020 RESEARCH | 4

Newmark Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents. Newmark Knight Frank Research Reports are available at www.ngkf.com/research

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2Q 2020 NORTH PENINSULA OFFICE MARKET