Research & Forecast Report | OFFICE MARKET Q1 | 2018

2018 Kicks Off with Strong > VACANCY The overall vacancy rate shrunk 40 basis points to 6.5 percent Net Absorption during the first quarter of the year. San Francisco continues to have historically low vacancy with the vacancy rate resting below seven percent for the past two years. Watch for the vacancy to decline further next quarter as the City is expecting to have some additional large occupancies, however with nearly 4.4 million square WeWork secures its 13th San Francisco location at feet of new office supply being added to the market in 2018 the vacancy rate is DivcoWest acquired 180 400-430 Street expected to increase to 9.1 percent by year end. Vacant sublease space inched Townsend Street for $28 million ($681 psf) downward by 10 basis points to 0.8 percent. San Francisco experienced a flight to quality as the Class A vacancy rate fell from 6.8 percent to 6.4 percent.

> LEASING VOLUME San Francisco experienced an historic high year of gross Google expands its leasing activity in 2017 and while leasing activity has slightly slowed during the footprint in the City first three months of the year it remains quite healthy posting 2.1 million square leasing over feet of transactions. This leasing volume is 18 percent higher than the 17-year 57,000 square feet historical quarterly average of 1.8 million square feet. During the first quarter at 2 Harrison Street several deals over 50,000 square feet were completed as well as two leases over C O LU M B U S 100,000 square feet. WeWork leased 251,000 square feet of the entire building at 400-430 California Street, Stitch Fix renewed and expanded at One for 134,000 square feet, Covington & Burling took nearly 78,000 square feet at 415 and New Relic renewed and expanded at 188 Spear

E M BA RC AD ERO Street.

> ABSORPTION As anticipated, San Francisco posted significant positive net GREEN absorption, nearly 1.6 million square feet, during the first quarter of 2018. This has BROADWAY translated into one of the strongest quarters of net absorption since the second quarter of 2014, which posted over 1.4 million square feet. The driving force

T N A R G

R O L Y A T WASHINGTON behind this record occupancy growth was the delivery of at 415

H T R O W N E V A E L

E D Y H

S S E N N A V Mission Street and tenants such as Salesforce, Accenture and WeWork moving

CALIFORNIA into the newest trophy building in San Francisco. Watch for additional positive

S P E A R 80 net absorption in the second quarter as two new projects are scheduled to be

BUSH delivered and are completely preleased. The San Francisco market currently has F R E M O N T 5.3 million square feet of office requirements involving 148 tenants and 14 of

MARKET S1 T those requirements are over 100,000 square feet. This well above the 7-year quarterly average of 4.9 million square feet. Technology tenants’ insatiable

GEARY POWELL appetite for space in San Francisco is not waning as these tenants account for 55 3 R D percent of the demand in the market.

MISSION

5 T H > RENTS Citywide overall weighted rents softened during the first quarter by FOLSOM 2.8 percent to $79.17 per square foot. Non-weighted rents remained relatively BRYANT steady at $70.99 per square foot. Meanwhile, overall weighted Class A rents 7 T H BRANNAN in the Financial District grew 8.2 percent to $81.50 per square foot. Year over

4 T H TOWNSEND year weighted and non-weighted rents have grown, with overall Citywide rents HAYES

80 KING increasing 10.1 percent and 7.4 percent respectively. Rents are expected to grow

01 T H throughout the year, but at a slower pace than the past couple of years.

D R 3

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

H T 4 Market Indicators Relative to prior period Q1 2018 2018 Forecast 101 O W E N S VACANCY  

280 NET ABSORPTION   1 6 T H 80 CONSTRUCTION  

WEIGHTED RENTAL RATE  

1 9 T H NON-WEIGHTED RENTAL RATE   SALES VOLUME   SALES PRICES   Rental Rates San Francisco – Office Rents - Q1 2018 % OVERALL While the overall weighted and non-weighted 1Q '18 1Q '18 1Q '18 4Q '17 MARKET QUARTERLY rents soften slightly, Class A rents for both the OVERALL DIRECT SUBLEASE OVERALL CHANGE North and South Financial Districts grew this All Markets $79.17 $80.19 $80.19 $81.42 -2.8% quarter. The overall weighted Class A rent in All Markets: Class A $82.19 $84.04 $66.92 $84.51 -2.7% the South Financial District increased by 7.9 All Markets: Class B $75.39 $74.29 $82.55 $74.89 0.7% percent to $86.67 per square foot. This can be attributed to leases signed by Covington Financial District: Class A $81.50 $83.83 $66.55 $75.34 8.2% & Burling, LLP at 415 Mission Street and Financial District: Class B $83.86 $85.82 $72.48 $79.03 6.1% Autodesk at 1 Market Street. Additionally, SOMA Overall $71.57 $71.57 - $79.23 -9.7% the overall weighted Class A rent in the Source: Colliers International Note: Weighted Average Rents North Financial District grew 8.1 percent to $74.21 per square foot. Deals such as Hellman & Friedman, LLC and Daiwa Capital Markets America both at contributed to this quarterly rent growth. Significant Net 1,700,000 20.0% Absorption Posted Absorption & Vacancy

15.0% 1,200,000 The largest occupancy gains were experienced in the South Financial District and SOMA East, 10.0% posting over 1.5 million square feet and over 700,000 56,000 square feet respectively. The key 5.0% contributors for the occupancy growth in the 200,000 South Financial District was the delivery of 0.0% Salesforce Tower with Salesforce expanding -300,000 and occupying 714,000 square feet and -5.0% Accenture moving into over 101,000 square feet at 415 Mission Street. Additionally, -800,000 -10.0% 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q Amazon occupied nearly 176,000 square feet '07 '07 '08 '08 '08 '08 '09 '09 '09 '09 '10 '10 '10 '10 '11 '11 '11 '11 '12 '12 '12 '12 '13 '13 '13 '13 '14 '14 '14 '14 '15 '15 '15 '15 '16 '16 '16 '16 '17 '17 '17 '17 '18 at 525 Market Street and Google moved into

Vacancy Net Absorption Source: Colliers International over 166,000 square feet at 121 Spear Street. The SOMA East submarket had Ancestry occupying nearly 32,000 square feet at 153 Townsend Street and DemandForce moving into over 31,000 square feet at 600 Harrison $0.3B in office Street. This positive net absorption for SOMA San Francisco Sales Activity (Billions) # Transactions investments YTD East help shrink the vacancy rate 250 basis $10.0 2018 80 points to 5.8 percent.

$9.0 68 70 68 $8.0 Investment Volume 57 60 60 The first quarter of 2018 saw far fewer $7.0 53 investment sales transactions when compared to the same quarter last year with just 50 $6.0 over $282 million in volume. The largest 45 transactions closed during the quarter were $5.0 38 38 40 the recapitalization of for 36 33 $761 per square foot and the sale of the Lion 32 $4.0 Building at 2525 16th Street $452 per square 30 foot. There remains an abundance of capital 25 in the market chasing very few available $3.0 investment opportunities with several very 18 [VALUE] 17 20 14 high profile buildings expected to trade this $2.0 10 year. At the start of the second quarter 2018, 8 10 there were 20 buildings on the market or under $1.0 5 contract with an aggregate value of more than $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 $0.3 $1.7 billion. The strength of the office leasing $0.0 0 market and continued pace of large-block pre- 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD leasing activity is forecasted to drive strong 2018 investment sales activity through 2018. Source: Colliers International

2 San Francisco Research & Forecast Report | Q1-2018 | San Francisco / Office Market | Colliers International Major Office Lease Transactions - Q1 2018

ADDRESS TENANT SIZE TYPE SIGNED DATE CLASS 400-430 California Street WeWork 251,000 New Mar-18 B One Montgomery Street Stitch Fix 134,000 Renewal/Expansion Feb-18 A 415 Mission Street Covington & Burling, LLP 77,667 New Jan-18 A 188 Spear Street New Relic 73,631 Renewal/Expansion Jan-18 A 350 Rhode Island Street - South Samsara 71,482 New Feb-18 B 1088-1090 Sansome Street Pattern Energy Group 62,500 New Feb-18 B 2 Harrison Street Google 57,259 New Feb-18 A 155 5th Street Lever 48,818 Sublease Jan-18 B 1 Ferry Building Meltwater 44,805 New Jan-18 B 1 Maritime Plaza Hall Capital Partners, LLC 43,692 New Jan-18 A 208 Utah Street Strava 33,375 New Mar-18 B 160 Spear Street Databricks 31,718 Renewal Jan-18 A

660 Third Street Eero 30,253 New Feb-18 B

Major Office Sale Transactions - Q1 2018 PRICE/ ADDRESS SELLER BUYER SQ.FT. SALES DATE CLASS SALE PRICE SQ.FT. 333 Market Street (22.5% Partial Allianz Real Estate of Columbia Property Trust 657,115 Feb-18 A $112,500,000 $761(1) Interest Transfer) America 2525 16th Street - Lion Building(2) CAN DO LP Angus McCarthy 148,680 Mar-18 B $67,250,000 $452 1800 Mission Street - The Armory(3) Armory Studios, LLC AJ Capital Partners 244,101 Jan-18 C $65,000,000 $266 180 Townsend Street Petrucela Family Trust DivcoWest 41,125 Jan-18 B $28,000,000 $681 1155 Mission Street Market Street Capital Investors LLC A Star Holdings LLC 15,678 Jan-18 B $9,500,000 $606

(1) $/SF reflects full building value at $500,000,000. (2) PDR Industrial building with 29% permitted Office use. (3) PDR Industrial building seeking 48% Office use. Currently in the Prop M Large Cap Office pipeline.

Development Activity

TOTAL TO BE DELIVERED: 2018...... 4,376,371 SF 2019...... 1,002,582 SF 2020+.... 1,057,549 SF

181 Fremont Street 100 Hooper Street Oceanwide Center ETA Q1 2018 ETA Q3 2018 ETA 2022 412,234 SF 314,447 SF 1,057,549 SF Jay Paul Company Kilroy Realty Corporation Oceanwide J J J FMAMJJASOND FMAMJJASOND 2018 2019 2020

The Exchange Park Tower ETA May 2018 ETA Oct 2018 736,550 SF 751,500 SF 1455-1515 3rd Street Kilroy Realty Golub/John Buck ETA Jan 2019 422,980 SF Alexandria/Uber 350 Bush Street ETA Q1 2018 185,000 SF Lincoln/Gemdale

3 San Francisco Research & Forecast Report | Q1-2018 | San Francisco / Office Market | Colliers International Development Pipeline Leasing Activity San Francisco’s tallest building, Salesforce Tower at nearly 1.4 million Historically leasing activity can be a bit slower during the first quarter square feet, was delivered this quarter. There’s nearly 5.1 million square of the year and the City was not exempt from that trend. While the feet under construction throughout the City and over 4.3 million square gross leasing volume cooled slightly this quarter to 2.1 million square feet is scheduled to be delivered by year end. Currently all this new feet, leasing activity remained very healthy and well above the historical construction has been preleased except for Park Tower at 250 Howard 17-year quarterly average of 1.8 million square feet. Tenant demand Street, but with limited large blocks of available space in the market this for space in the City has grown by 16 percent to 5.3 million square feet status is likely to swiftly change and follow the trend of being completely since the end of 2017. The San Francisco market has 14 tenants with preleased. Currently San Francisco has 15.5 million square feet of office requirements over 100,000 square feet and while all the demand isn’t development that is either proposed or in various stages of planning with likely to be fulfilled, it might translate into over 3.1 million square feet of over 7 million still competing for Prop M allocations. positive net absorption.

Existing Properties Absorption New Supply U/C & Proposed Class # of Buildings Inventory Total feet) (square Vacant Direct feet) (square Direct Rate Vacancy Sublease Vacant feet) (square Sublease Rate Vacancy Vacant Total feet) (square Space Occupied feet) (square Rate Vacancy Period Current Rate Vacancy Period Prior Net Current Absorption YTD Net Absorption Net New Supply Current Feet) (Square Net New Supply YTD Under Construction Feet) (Square Proposed Feet) (Square

DOWNTOWN MARKET:

A 184 60,567,578 3,434,319 5.7% 419,341 0.7% 3,853,660 56,713,918 6.4% 6.9% 1,601,486 1,601,486 1,370,577 1,370,577 4,646,862 9,604,959

B 290 25,024,324 1,474,485 5.9% 291,189 1.2% 1,765,674 23,258,650 7.1% 7.0% (63,665) (63,665) - - 419,063 858,592

C 124 6,396,485 304,060 4.8% 20,426 0.3% 324,486 6,071,999 5.1% 7.0% 15,288 15,288 - - - -

Total 598 91,988,387 5,212,864 5.7% 730,956 0.8% 5,943,820 8 6,044,567 6.5% 6.9% 1,553,109 1,553,109 - - 5,065,925 10,463,551

FINANCIAL DISTRICT:

A 109 45,722,284 2,995,358 6.6% 269,519 0.6% 3,264,877 42,457,407 7.1% 7.8% 1,565,790 1,565,790 1,370,577 1,370,577 2,593,283 -

B 73 8,126,568 751,805 9.3% 80,128 1.0% 831,933 7,294,635 10.2% 9.4% (43,016) (43,016) - - - -

C 34 1,476,936 123,215 8.3% 7,201 0.5% 130,416 1,346,520 8.8% 15.9% 6,766 6,766 - - - -

Total 216 55,325,788 3,870,378 7.0% 356,848 0.6% 4,227,226 51,098,562 7.6% 8.3% 1,529,540 1,529,540 - - 2 ,593,283 -

SUBMARKETS:

North Financial 116 28,405,524 2,355,025 8.3% 278,643 1.0% 2,633,668 25,771,856 9.3% 9.2% (12,873) (12,873) - - 372,000 -

South Financial 100 26,920,264 1,515,353 5.6% 78,205 0.3% 1,593,558 25,326,706 5.9% 7.3% 1,542,413 1,542,413 1,370,577 1,370,577 2,221,283 -

Total 216 55,325,788 3,870,378 7.0% 356,848 0.6% 4,227,226 51,098,562 7.6% 8.3% 1,529,540 1,529,540 - - 2 ,593,283 -

Union Square 58 4,063,190 202,113 5.0% 13,259 0.3% 215,372 3,847,818 5.3% 6.4% 44,784 44,784 - - - -

Yerba Buena 31 4,663,528 94,924 2.0% 122,712 2.6% 217,636 4,445,892 4.7% 3.8% (57,297) (57,297) - - - 1,886,868

SOMA West 38 3,355,267 72,686 2.2% 9,938 0.3% 82,624 3,272,643 2.5% 3.0% 17,731 17,731 - - 419,063 3,796,728

SOMA East 61 6,337,586 315,280 5.0% 50,252 0.8% 365,532 5,972,054 5.8% 6.7% 56,075 56,075 - - - 468,275

Civic Center/Mid-Market 45 6,385,741 124,559 2.0% 52,006 0.8% 176,565 6,209,176 2.8% 2.8% 15,052 15,052 - - - 463,000

Jackson Square 40 2,330,330 105,987 4.5% 20,185 0.9% 126,172 2,204,158 5.4% 5.4% (811) (811) - - - -

North Waterfront 48 3,633,826 128,877 3.5% 32,609 0.9% 161,486 3,472,340 4.4% 4.6% 4,942 4,942 - - - -

Van Ness Corridor 18 1,063,442 187,831 17.7% - 0.0% 187,831 875,611 17.7% 18.9% (51,398) (51,398) - - - -

Potrero West 17 1,258,348 65,746 5.2% 25,767 2.0% 91,513 1,166,835 7.3% 9.6% 28,975 28,975 - - - 119,599

Potrero East 10 773,606 6,983 0.9% 40,280 5.2% 47,263 726,343 6.1% 2.2% (30,374) (30,374) - - 314,447 -

Mission Bay 16 2,797,735 37,500 1.3% 7,100 0.3% 44,600 2,753,135 1.6% 1.1% (4,110) (4,110) - - 1,739,132 3,729,081

Total 598 91,988,387 5,212,864 5.7% 730,956 0.8% 5,943,820 8 6,044,567 6.5% 6.9% 1,553,109 1,553,109 - - 2,472,642 10,463,551

QUARTERLY COMPARISON/TOTALS

Q4-17 599 90,727,315 5,480,724 6.0% 823,116 0.9% 6,303,840 84,423,475 6.9% 6.9% 1,504 (333,149) - - 2,472,642 10,544,444

Q3-17 599 90,727,315 5,487,833 6.0% 817,511 0.9% 6,305,344 84,421,971 6.9% 7.1% 168,981 (334,653) - - 6,446,900 10,501,944

Q2-17 599 90,727,315 5,778,994 6.4% 695,331 0.8% 6,474,325 84,252,990 7.1% 6.9% (226,774) (503,634) - - 6,462,104 10,023,944

Q1-17 599 90,727,315 5,374,857 5.9% 883,194 1.0% 6,258,051 84,469,264 6.9% 6.6% (287,360) (287,360) - - 6,392,162 10,023,944

FOR MORE INFORMATION Alan D. Collenette, MRICS Erin Proto Executive Regional Managing Director Senior Research Manager San Francisco San Francisco +1 415 288 7850 +1 415 288 7827 [email protected] [email protected]

Colliers International | San Francisco , 11th Floor San Francisco, CA 94105 +1 415 788 3100 Copyright © 2018 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