REAL ESTATE OUTLOOK

SAN FRANCISCO OFFICE MARKET FIRST QUARTER 2018

Strong Market Fundamentals carry over to 2018 opens for business

The office market continues to show signs of strong market TRENDLINES fundamentals as we move into the first half of 2018. There were two confirmed lease transactions over 220,000 square feet (WeWork and Twitter) in the quarter, 5-YEAR TREND CURRENT QUARTER building off leasing success seen throughout last year. The economic outlook for VACANCY the Bay Area seems to have reached the point of full employment with slowing of job growth, and minor increases in unemployment rates throughout the region. 8.2% Significant construction at Salesforce Tower came to a close in early January, Vacancy rates drop allowing several tenants to occupy during the quarter as the finishing touches are with major lease commencements being completed. Park Tower on Howard Street remains on schedule for delivery by the end of the year, but has yet to sign a tenant at the 751,000-square foot ABSORPTION South Financial District development. 1,524,353 SF ECONOMY Significant positive Bay Area employment slows absorption gains San Francisco employment growth slowed significantly in the 1st quarter adding just 7,300 jobs year over year, a 0.7% increase. The unemployment rate for San RENTAL RATE Francisco increased 20 basis points in the quarter to 2.5% as the greater Bay $73.39 PSF Area economy begins to enter a level of full employment. In the surrounding Bay Average asking rates Area counties, unemployment rates increased in every county, with San Mateo flatten County (2.4%) and Marin County (2.5%) remaining the top performing counties in California. Santa Clara County (2.9%), Alameda County (3.2%), and Contra UNDER CONSTRUCTION Costa County (3.4%) are all below the National average of 4.1%, and California’s SF average of 4.5% unemployment. 4,457,261 Salesforce Tower and SUPPLY & DEVELOPMENT 505 Brannan Deliver Salesforce Tower and Pinterest Building Deliver PRICE PER SQUARE FOOT The highly anticipated Salesforce Tower was delivered to market in the 1st quarter as its namesake tenant began to operate in the building during the first $741 PSF week of January. Additionally, Covington & Burling, LLP signed on for 78,414 Investment sale square feet capping off successful pre-leasing efforts at the development. 505 pricing rebounds Brannan Street (153,117 SF) was also delivered and occupied by Pinterest midway through the quarter. Pre-leasing at Park Tower has yet to yield a lease transaction JOB GROWTH as construction progress continues to move along at the 751,000 square-foot 7,300 jobs South Financial development and the anticipated 4th quarter delivery. 350 Bush Year-over-year growth Street (447,000 SF) and (432,000 SF) should both deliver in the 2nd slows quarter or early 3rd quarter barring any construction delays. SAN FRANCISCO OFFICE MARKET FIRST QUARTER 2018

VACANCY UNEMPLOYMENT RATE South Financial District vacancy rates improve San Francisco’s combined office vacancy rate for Class-A and Class-B space in the 8.0 1st quarter was 8.2%, dropping 40 basis points from the close of 2017. Financial 6.0 District (9.6%) and South Financial District (7.7%) both had improved vacancy 4.0 rates in the quarter, a signal that the market is tightening in downtown as space 2.0 becomes scarce and developments deliver fully leased. Notable lease transactions 0.0

14 15 16 17 18 included WeWork’s largest lease to date in San Francisco for the entirety of 430 United States San Francisco California Street (251,000 SF). StitchFix signed an expansion and extension at One Montgomery Street (133,951 SF), and Covington & Burling, LLP signed a new SOURCE: BLS lease at Salesforce Tower (78,414 SF). Expect vacancy rates to remain low as the result of healthy leasing velocity from 2017 begins to commence in the first half of the year.

CAP RATE DEMAND Major 2017 leases commence in 1st quarter 7.50% 7.00% There was 1,524,353 square feet of positive absorption in the 1st quarter, most 6.50%

6.00% significantly due to Salesforce Tower wrapping construction just as TI work was 5.50% completed for several key tenants. Two significant 2017 leases, Google (121 Spear 5.00% 4.50% Street) and Amazon (525 Market Street), also commenced during the quarter 4.00% 3.50% helping to make South Financial District the best performing submarket of the year 3.00% 14 15 16 17 18 so far (+1,385,166 SF). According to a report from VC research firm CB Insights, United States San Francisco there was $6.4B of funding (a 23% increase over Q4 2017) for San Francisco-based SOURCE: RCA companies in the 1st quarter. Expect leasing activity to remain robust throughout 2018, and positive absorption trends to continue as more large tenants (Dropbox, Facebook, Twitch, Okta, Cruise Automation, and Atlassian) open downtown locations or add to their existing footprints before the end of the year.

San Francisco Office First Quarter Largest Lease Transactions

TENANT PROPERTY SF TYPE SUBMARKET

WeWork 430 California Street 251,000 New Lease Financial District Twitter 1355 Market Street 221,417 Renewal/Contraction Mid-Market StitchFix 1 Montgomery Street 133,951 Expansion/Extension Financial District

Covington and Burling, LLP 415 78,414 New Lease South Financial District

New Relic 188 Spear Street 73,631 Renewal South Financial District Pattern Energy Group 1088 Sansome Street 62,500 New Lease Waterfront/North Beach

San Francisco Office First Quarter Largest Sale Transactions

PROPERTY BUYER SF PRICE PSF SUBMARKET

333 Market Street* Allianz Real Estate 657,115 $765.13 South Financial District

1800 Mission Street AJ Capital Partners 250,000 $325.00 Mission District

180 Townsend Street Divco 37,647 $750.00 Rincon/South Beach

2115 Van Ness Ave Jin Y Zhao 27,257 $917.00 Van Ness Corridor

353 Kearny Street Pine Kearny 9,729 $699.00 Financial District

* Transfer of 22.5% partial interest

2 REAL ESTATE OUTLOOK SAN FRANCISCO OFFICE MARKET Q1 2018 RENTS DOWNTOWN SAN FRANCISCO NET ABSORPTION AND VACANCY THOUSAND SF Average asking rates continue to rise in San Francisco 12.0% 2,000,000 Asking rates flattened in the 1st quarter averaging 1,500,000 $73.39 per square foot, a decrease of $0.18 over 10.0% 1,000,000 the previous quarter (+6.97% year-over-year). For 8.0% Class-A office space, Mid-Market ($76.28 per square 500,00 foot) increased 8.34% from the end of 2017 mainly 6.0% 0 due to Shorenstein listing 78,792 SF at 1355 Market 4.0% Street, which will not be part of Twitter’s 221,417 2.0% (500,000) square foot renewal. Financial District ($77.86) and South Financial District ($77.29) are still where the 0.0% (1,000,000) 14 15 16 17 18 highest rental rates will be found in the city. Class-B Net Absorption Vacany office rates declined for the second quarter in a row SOURCE: Transwestern to $66.68 per square foot, but remain 5.86% higher year-over-year. DOWNTOWN SAN FRANCISCO ANNUAL ASKING RENTS INVESTMENT SALES 2018 Investment sales activity has a slow Overall Class A Class B $90.00 start $80.00

Sales activity was off to a slow start in the 1st quarter, $70.00 which likely is a result of a lack of product available $60.00 on the market. The Armory at 1800 Mission Street $50.00 traded for $65M ($325 per square foot) in January, $40.00 and is being marketed for Office and PDR users $30.00 with a 1st quarter 2020 target commencement. In $20.00 South Financial District, a 22.5% partial interest at $10.00 was transferred to Allianz Real $- Estate as part of a 4-property portfolio sale from 14 15 16 17 18

Columbia Property Trust. Properties rumored to be SOURCE: Transwestern on the market include the Center (45% interest), 600 California Street (49% interest), 475 Sansome Street (49% interest) and DOWNTOWN SAN FRANCISCO DEVELOPMENT PIPELINE THOUSAND SF 101 Mission Street. Under Construction Completions

7,000,000

6,000,000

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

0 14 15 16 17 18

SOURCE: Transwestern

REAL ESTATE OUTLOOK SAN FRANCISCO OFFICE MARKET Q1 2018 3 SAN FRANCISCO OFFICE MARKET FIRST QUARTER 2018

Metro San Francisco Office Market Indicators

UNDER QTR NET YTD NET DIRECT SUBLEASE TOTAL AVERAGE SUBMARKET INVENTORY CONSTRUCTION ABSORPTION ABSORPTION VACANCY SPACE VACANCY RATE PSF Class A 715,735 0 0 0 0 5,291 5,291 N/A Class B 2,457,765 0 (23,953) (23,953) 140,204 14,253 154,457 $68.79 North Waterfront Subtotal 3,173,500 0 (23,953) (23,953) 140,204 19,544 159,748 Class A 120,000 0 2,121 2,121 5,784 0 5,784 $48.50 Class B 1,020,133 0 (72,718) (72,718) 241,033 0 241,033 $50.44 Van Ness Subtotal 1,140,133 0 (70,597) (70,597) 246,817 0 246,817 Class A 444,347 0 (23,473) (23,473) 25,960 18,685 44,645 $77.69 Class B 1,589,080 0 (3,315) (3,315) 97,619 1,500 99,119 $58.18 Jackson Square Subtotal 2,033,427 0 (26,788) (26,788) 123,579 20,185 143,764 Class A 21,034,209 447,000 43,052 43,052 1,679,517 211,018 1,890,535 $77.86 Class B 7,218,719 0 (4,373) (4,373) 736,866 98,014 834,880 $67.97 North Financial District Subtotal 28,252,928 447,000 38,679 38,679 2,416,383 309,032 2,725,415 Class A 20,646,362 2,414,276 1,294,469 1,294,469 1,557,627 72,460 1,630,087 $77.29 Class B 4,046,164 0 90,697 90,697 205,754 77,468 283,222 $72.07 South Financial District Subtotal 24,692,526 2,414,276 1,385,166 1,385,166 1,763,381 149,928 1,913,309 Class A 213,125 0 6,207 6,207 0 0 0 N/A Class B 3,244,480 0 24,726 24,726 287,123 34,075 321,198 $62.29 Union Square Subtotal 3,457,605 0 30,933 30,933 287,123 34,075 321,198 Class A 553,562 0 4,775 4,775 0 16,285 16,285 $40.00 Class B 2,386,158 0 17,352 17,352 18,010 20,992 39,002 $78.21 Yerba Buena Subtotal 2,939,720 0 22,127 22,127 18,010 37,277 55,287 Class A 2,330,503 0 11,392 11,392 15,885 0 15,885 $76.28 Class B 1,479,654 0 (1,137) (1,137) 21,652 50,578 72,230 $62.85 Mid Market Subtotal 3,810,157 0 10,255 10,255 37,537 50,578 88,115 Class A 1,860,581 0 74,628 74,628 120,181 66,582 186,763 $77.79 Class B 7,538,262 269,063 (37,288) (37,288) 589,743 82,299 672,042 $69.92 SOMA Subtotal 9,398,843 269,063 37,340 37,340 709,924 148,881 858,805 Class A 2,508,788 1,326,922 (5,403) (5,403) 83,899 0 83,899 $88.00 Class B 259,094 0 126,594 126,594 87,118 0 87,118 N/A Mission Bay Subtotal 2,767,882 1,326,922 121,191 121,191 171,017 0 171,017 $- Class A 50,427,212 4,188,198 1,407,768 1,407,768 3,488,853 390,321 3,879,174 $77.52 Class B 31,239,509 269,063 116,585 116,585 2,425,122 379,179 2,804,301 $66.68 San Francisco Market Total 81,666,721 4,457,261 1,524,353 1,524,353 5,913,975 769,500 6,683,475 $73.39

CONTACT METHODOLOGY Jamie Mahoney The information in this report is the result of a compilation of information on office Research Analyst properties located in the Bay Area. Transwestern obtained the information from a variety 415.489.1826 of primary and secondary sources including Costar. This report includes single-tenant [email protected] and multi-tenant office properties 10,000 sq. ft. or larger, excluding office condominiums, medical office facilities, flex and owner-occupied properties.

101 Second Street, Suite 300 CA BROKERAGE LIC 01263636 San Francisco, CA 94105 T 415.489.1820 www.transwestern.com/sanfrancisco

Copyright © 2018 Transwestern. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. The information contained in this report was gathered by Transwestern from CoStar and other primary and secondary sources believed to be reliable. Transwestern, however, makes no representation concerning the accuracy or completeness of such information and expressly disclaims any responsibility for any inaccuracy contained herein.