Research & Forecast Report | OFFICE MARKET Q3 | 2020

San Francisco Office > VACANCY The continued uncertainty in the market has translated into companies vacating additional space which increased vacancy in the San Rents Soften In The Francisco office market to 10.1 percent, or more than 1.5 million square feet of negative net absorption this quarter. San Francisco’s direct vacancy rate increased by 140 basis points to 6.3 percent and vacant sublease rate space Third Quarter grew 100 basis points to 3.8 percent. The Financial District accounted for over 79 percent of the negative net absorption over this quarter. Another key contributor to the negative net absorption was the Jackson Square submarket Open AI leased nearly posting nearly 220,000 square feet of negative net absorption. 97,000 square feet at 575 Florida Street > LEASING VOLUME Leasing volume continued to remain slow during the third quarter, with approximately 575,000 square feet of closed transactions. Year-to-date the market has only experienced two transactions over 100,000 square feet and both were renewals. Despite a decline in leasing volume, some IBM renewed for 53,323 square feet at 425 Market large transactions closed this quarter, such as OpenAI leasing nearly 97,000 Street square feet at 575 Florida Street, IBM renewing for over 53,000 square feet at C O LU M B U S , San Francisco Aids Foundation renewing 45,000 square feet at 1045 Market Street and the City and Council of San Francisco securing over 44,000 square feet at 333 Valencia Street. San Francisco’s overall availability has grown 62 percent to nearly 15.6 million square feet since the beginning of

E M BA RC AD ERO 2020. Additionally, sublease availability has grown 136.9 percent since the start of the year to over 7.4 million square feet.

GREEN CBRE Global Investors > ABSORPTION Year-to-date absorption for San Francisco reached nearly bought 123 Townsend BROADWAY 4.6 million square feet of negative net absorption. Despite many tenants putting Street for $140M or their requirements on hold, there are 111 tenant requirements for a combined

T N A R G $1,017 psf

R O L Y A T WASHINGTON total of over 3.6 million square feet and nine of those tenants have requirements

H T R O W N E V A E L

E D Y H

S S E N N A V for over 100,000 square feet. While tenant requirements year-over-year are

CALIFORNIA down 54.5 percent, watch for tenant activity to pick up with over 6.3 million

S P E A R 80 square feet of leases rolling in 2021. Tenant activity will likely be stagnant during

BUSH the last quarter of 2020. F R E M O N T

MARKET S1 T > RENTS The San Francisco office market’s weighted effective rents softened across the board during the third quarter of 2020. Overall weighted effective

GEARY rents fell 9.1 percent, lowering the overall effective rents in the City from $89.80 POWELL 3 R D to $81.63 per square foot. Annually overall non-weighted effective rents declined

MISSION 10.2 percent to $81.63 percent per square foot. Non-weighted effective rents

5 T H also experienced declines except for Class B rents in the Financial District, rising

FOLSOM 8.3 percent since last quarter to $78.28 per square foot. The City is likely to BRYANT experience continued softening in overall effective rents over the last quarter of 7 T H BRANNAN the year.

4 T H TOWNSEND HAYES

80 KING

01 T H Market Indicators Relative to prior period Q3 2020 Q4 2020 Forcast

D R 3 VACANCY  

7 T H S I O C N A R F A Y R R E T

H T 4 NET ABSORPTION   101 CONSTRUCTION   O W E N S WEIGHTED RENTAL RATE   1 6 T H 280 80 NON-WEIGHTED RENTAL RATE   SALES VOLUME  

1 9 T H SALES PRICES   Rental Rates San Francisco – Office Rents - Q3 2020 The largest rent declines experienced this quarter % OVERALL 3Q '20 3Q '20 3Q '20 2Q '20 MARKET QUARTERLY were among Class A weighted effective rents OVERALL DIRECT SUBLEASE OVERALL CHANGE in the Financial District. Those effective rents All Markets $81.63 $82.60 $76.06 $89.80 -9.1% ended the quarter at $85.74 per square foot, All Markets: Class A $85.04 $86.73 $78.19 $94.95 -10.4% a drop of 12.6 percent since last quarter and 10.8 percent from a year ago. Overall sublease All Markets: Class B $80.29 $80.29 NA $88.68 -9.5% weighted effective rents softened this quarter Financial District: Class A $85.74 $87.65 $78.19 $98.09 -12.6% experiencing a 19.3 percent decline since the first Financial District: Class B $78.28 $78.28 NA $72.29 8.3% quarter to $76.06 per square foot. Additionally, overall weighted effective sublease rates are 7.9 SOMA Overall $81.51 $81.51 NA $86.35 -5.6% percent lower than overall direct rates at $82.60 Source: Colliers International Note: Weighted Average Effective Rents per square foot. Motivated sublessors will continue to drive down overall effective rents during the remainder of 2020. 2,600,000 20.0%

2,100,000

15 . 0 % 1,600,000 Absorption & Vacancy 1,100,000 10.0% San Francisco posted approximately 1.5 million 600,000 square feet of negative net absorption which translated to the vacancy rate increasing from 100,000 5.0% 7.7 percent to 10.1 percent. The Financial District

-400,000 accounted for approximately 79 percent of the

Net Absorption Rate Vacancy negative net absorption this quarter, posting over 0.0% -900,000 1.2 million square feet. Some key contributors were vacating over 91,000 square -1,400,000 -5.0% feet at 101 Street while consolidating to the 22nd and 23rd floors, and Benefit Cosmetics -1,900,000 vacating nearly 62,000 square feet at 225 -2,400,000 -10.0% Bush Street. The Jackson Square submarket 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q experienced nearly 220,000 square feet of ' 10 ' 11 ' 11 ' 12 ' 12 ' 13 ' 13 ' 14 ' 14 ' 15 ' 15 ' 16 ' 16 ' 17 ' 17 ' 18 ' 18 ' 19 ' 19 '20 '20 negative net absorption. The biggest contributors for this submarket were WPP vacating over Source: Colliers International 112,000 square feet at 600 Battery Street and MGM moving out of 27,502 square feet at Pier One.

$ 10 . 0 YTD investment sales 80 hit $1.3 billion with 11 $9.0 68 closed investment sales 70 68 $8.0 Investment Volume 57 60 60 $7.0 53 The continued uncertainty in the market has translated into a slowdown of investment activity 50 $6.0 during the third quarter of 2020. Two significant 45 42 40 transactions closed in the third quarter with CBRE $5.0 38 38 40 36 Global Investors’ purchase of 123 Townsend Street 33 32 for $140 million or $1,017 per square foot and $4.0 Hearst’s acquisition of 1098 Harrison Street for 30 25 $52 million or $1,161 per square foot. $3.0 18 COVID-19 has created a challenging environment 17 17 20 14 $2.0 for investors to evaluate San Francisco investment 10 properties as vacancies continue to rise combined 8 11 10 $ 1. 0 with falling rents. Additionally, due to the low leasing volume in the market, investors have not $ 1. 9 $0.4 $ 0 .1 $0.5 $ 1. 8 $3.5 $3.2 $9.8 $0.7 $0.3 $ 1. 5 $2.8 $6.0 $2.4 $6.3 $3.7 $4.6 $3.6 $3.7 $6.8 $1.3 $0.0 0 been able to gain clarity on pricing as there are 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2 0 10 2 0 11 2 0 12 2 0 13 2 0 14 2 0 15 2 0 16 2 0 17 2 0 18 2 0 19 YTD very few datapoints to leverage to understand 2020 value. Case in point, the purchase of Oceanwide Center San Francisco Sales Activity (Billions) Transactions has been delayed due to the pandemic to the end of December 2020. Source: Colliers International

2 San Francisco Research & Forecast Report | Q3-2020 | San Francisco / Office Market | Colliers International Major Office Lease Transactions - Q3 2020

ADDRESS TENANT SIZE TYPE SIGNED DATE CLASS 575 Florida Street OpenAI 96,960 Lease Jul-20 B

425 Market Street IBM 53,323 Renewal Aug-20 A

1045 Market Street SF Aids Foundation 45,000 Renewal Jul-20 C

333 Valencia Street City and Council of San Francisco 44,229 Lease Aug-20 B

360 Spear Street Vitalent 33,317 Lease Sep-20 B

20 California Street Etsy 15,870 Renewal Jul-20 B

1725 Montgomery Street Brightmark 15,000 Lease Jul-20 B

Major Office Sale Transactions - Q3 2020

ADDRESS SELLER BUYER SQ. FT. SALES DATE CLASS SALES PRICE PRICE.SF SUBMARET

123 Townsend Street Manchester Capital Management CBRE Global Investors 137,625 Jul-20 B $140,000,000 $1,017 SOMA East

1098 Harrison Street Embarcadero Capital Partners Hearst 44,794 Sep-20 B $52,000,000 $1,161 SOMA

10 Since the beginning of the 9 year, tenant demand has decreased by 8 54% 7

6

5

4 SquareFeet in Millions

3

2

1

0 ct 18 t- Oc 18 Nov- 18 - c De 19 n- a J 19 b- e F 19 - Mar 19 - pr A 19 - y Ma 19 un- J 19 - ul J 19 ug- A 19 ep- S 19 t- Oc 19 Nov- 19 - c De 20 an- J 20 eb- F 20 - Mar 20 Apr- 20 May- un-20 J ul-20 J 20 Aug- 20 ep- S

Development Pipeline While the pandemic has caused considerable delays on office construction As noted earlier, the pandemic has caused delays on construction projects, as projects in San Francisco, two major office projects were delivered this quarter: a shortage of supplies and steel coupled with rising costs have caused several 1500 and Block 33, or 480 16th Street. The City of San Francisco projects to be pushed back. As a result, some developers have paused pending preleased the former, while UCSF preleased the latter. There is tentatively 1.6 construction projects until they have a tenant in tow. million square feet of office space scheduled to be delivered next quarter, 84 percent of which is preleased, and nearly 930,000 square feet to be Uber’s new Mission HQ.

3 San Francisco Research & Forecast Report | Q3-2020 | San Francisco / Office Market | Colliers International Market Comparisons - San Francisco OFFICE MARKET

VACANCY NET TOTAL DIRECT DIRECT SUBLEASE SUBLEASE TOTAL OCCUPIED VACANCY NET NET NET NEW UNDER RATE NEW SUPPLY PROPOSED CLASS BLDGS INVENTORY VACANT VACANCY VACANT VACANCY VACANT SPACE RATE ABSORPTION ABSORPTION SUPPLY YTD CONSTRUCTION CURRENT CURRENT-SQ. SQ. FT. SQ. FT. SQ. FT. RATE SQ. FT. RATE SQ. FT. SQ. FT. PRIOR PERIOD CURRENT-SQ. FT. YTD-SQ. FT. SQ. FT. SQ. FT. PERIOD FT.

DOWNTOWN MARKET

A 190 63,542,717 3,497,260 5.5% 2,306,013 3.6% 5,803,273 57,739,444 9.1% 7.1% (932,948) (2,945,857) 340,000 417,999 4,969,715 8,134,417

B 291 25,704,821 2,080,895 8.1% 1,133,585 4.4% 3,214,480 22,490,341 12.5% 9.2% (424,666) (1,262,843) 460,000 460,000 624,920 439,622

C 123 6,355,485 442,674 7.0% 167,261 2.6% 609,935 5,745,550 9.6% 6.7% (182,443) (366,772) - - - -

Total 604 95,603,023 6,020,829 6.3% 3,606,859 3.8% 9,627,688 85,975,335 10.1% 7.7% (1,540,057) (4,575,472) 800,000 877,999 5,594,635 8,574,039

FINANCIAL DISTRICT:

A 112 47,279,479 2,614,336 5.5% 1,429,473 3.0% 4,043,809 43,235,670 8.6% 6.7% (857,127) (2,048,163) - 77,999 956,968 288,677

B 73 8,140,598 791,217 9.7% 271,158 3.3% 1,062,375 7,078,223 13.1% 9.4% (294,963) (511,983) - - - -

C 34 1,476,936 169,487 11.5% 44,737 3.0% 214,224 1,262,712 14.5% 9.8% (69,294) (100,946) - - - -

Total 219 56,897,013 3,575,040 6.3% 1,745,368 3.1% 5,320,408 51,576,605 9.4% 7.1% (1,221,384) (2,661,092) - 77,999 956,968 288,677

SUBMARKETS:

North 117 28,791,554 2,212,462 7.7% 873,394 3.0% 3,085,856 25,705,698 10.7% 7.7% (826,284) (1,541,624) - 77,999 - - Financial South 102 28,105,459 1,362,578 4.8% 871,974 3.1% 2,234,552 25,870,907 8.0% 6.5% (395,100) (1,119,468) - - 956,968 288,677 Financial

Total 219 56,897,013 3,575,040 6.3% 1,745,368 3.1% 5,320,408 51,576,605 9.4% 7.1% (1,221,384) (2,661,092) - 77,999 956,968 288,677

Union 58 4,063,190 335,689 8.3% 204,712 5.0% 540,401 3,522,789 13.3% 9.3% (164,520) (276,370) - - 114,766 90,900 Square

Yerba Buena 31 4,663,528 250,891 5.4% 599,325 12.9% 850,216 3,813,312 18.2% 16.4% (85,496) (749,146) - - 640,000 804,000

SOMA West 40 3,774,330 202,597 5.4% 67,453 1.8% 270,050 3,504,280 7.2% 5.3% (68,610) (185,979) - - 710,399 2,411,385

SOMA East 60 6,160,990 206,997 3.4% 414,948 6.7% 621,945 5,539,045 10.1% 8.9% (76,691) (340,483) - - 266,053 1,214,725

Civic Center/ Mid-Market 46 6,845,741 312,222 4.6% 176,334 2.6% 488,556 6,357,185 7.1% 6.1% 359,913 210,201 460,000 460,000 - - Jackson 40 2,330,330 268,655 11.5% 109,564 4.7% 378,219 1,952,111 16.2% 6.8% (219,827) (329,165) - - - - Square North 48 3,646,953 283,425 7.8% 124,106 3.4% 407,531 3,239,422 11.2% 6.9% (154,993) (201,494) - - - - Waterfront Van Ness Corridor 18 1,063,442 138,250 13.0% 5,286 0.5% 143,536 919,906 13.5% 12.7% (8,435) (37,490) - - - -

Potrero West 17 1,258,348 97,236 7.7% 71,091 5.6% 168,327 1,090,021 13.4% 12.6% (9,839) (78,867) - - 244,101 362,416

Potrero East 11 1,088,053 123,160 11.3% 4,604 0.4% 127,764 960,289 11.7% 11.0% (7,811) (34,920) - - 126,537 -

Mission Bay 16 3,811,105 226,667 5.9% 84,068 2.2% 310,735 3,500,370 8.2% 2.5% 117,636 109,333 340,000 340,000 2,535,811 3,401,936

Total 604 95,603,023 6,020,829 6.3% 3,606,859 3.8% 9,627,688 85,975,335 10.1% 7.7% (1,540,057) (4,575,472) 800,000 877,999 5,594,635 8,574,039

QUARTERLY COMPARISON/TOTALS

Q2-20 602 94,803,023 4,605,022 4.9% 2,651,604 2.8% 7,256,626 87,546,397 7.7% 5.3% (2,264,285) (3,004,410) - 77,999 3,552,736 10,961,039

Q1-20 602 94,803,023 3,755,615 4.0% 1,261,883 1.3% 5,017,498 89,785,525 5.3% 4.5% (748,839) (748,839) 77,999 77,999 3,552,736 10,961,039

Q4-19 602 94,788,993 3,236,008 3.4% 1,018,605 1.1% 4,254,613 90,534,380 4.5% 4.9% (130,053) 763,919 - 750,370 2,481,002 10,459,655

Q3-19 602 94,788,993 3,812,762 4.0% 877,324 0.9% 4,690,086 90,098,907 4.9% 7.0% 1,985,808 1,635,587 100,800 1,614,131 3,515,969 10,887,044

FOR MORE INFORMATION Erin Proto Senior Research Manager San Francisco +1 415 288 7827 [email protected]

Colliers International | San Francisco , 11th Floor San Francisco, CA 94105 +1 415 788 3100 Copyright © 2020 Colliers International. The information contained herein has been obtained from sources deemed reliable. While colliers.com every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional4 Northadvisors Americanprior to acting Researchon any of the material& Forecast contained Report in this report. | Q4 2014 | Office Market Outlook | Colliers International