REAL ESTATE OUTLOOK

SAN FRANCISCO OFFICE MARKET FOURTH QUARTER 2017

Turning the Page on 2017, the office market continues to thrive Dropbox, Inc. signs record lease

San Francisco had an historic year with strong leasing activity, robust development TRENDLINES and an encouraging economic outlook as 2017 came to a close. Dropbox, Inc. signed the largest lease transaction in the City’s history, and large development 5-YEAR TREND CURRENT QUARTER projects inched ever closer to completion with pre-leasing activity supporting VACANCY speculative developers. The Bay Area is well below the national unemployment average, and San Francisco in particular reached one of the lowest unemployment 8.6% rates for the City in recent decades. As the page is turned to 2018, the outlook for Vacancy remains flat in the San Francisco office market remains positive as market fundamentals suggest 4th quarter continued growth. ABSORPTION ECONOMY 330,373 SF Bay Area economy at near full employment Absorption continues San Francisco had its best three month stretch for job growth of 2017 with 11,500 positive gains jobs added year over year, a 2.11% increase. The unemployment rate for San Francisco dropped to 2.3% at the end of the quarter, 80 basis points lower than RENTAL RATE the same period a year ago, and the lowest unemployment figure since December $73.57 PSF 1999 (2.4%). In the surrounding Bay Area, unemployment rates in San Mateo Rental rates have County (2.1%) and Marin County (2.2%) remain the top performing counties in steady upward trend California again in the 4th quarter. Santa Clara County (2.6%), Alameda County

(2.9%), and Contra Costa County (3.1%) are all well below the National average UNDER CONSTRUCTION of 4.1%, and California’s average of 4.0% unemployment. 6,030,459 SF SUPPLY & DEVELOPMENT Major downtown Significant pre-leasing continued in 4th quarter development projects near delivery Dropbox Inc. signed the single largest lease transaction in San Francisco history (736,000 SF) when it pre-leased the Exchange at 1800 Owens Street in early PRICE PER SQUARE FOOT October. The transaction has left Park Tower on Howard Street, scheduled for a 4th quarter 2018 delivery, as the largest block of available office space left in San $694 PSF Francisco. This further impacted an already tight life sciences market with the San Francisco sales removal of a large block of lab capable space, impacting major life sciences firms activity strong in 2017 looking to take advantage of downtown amenities and talent. Delivery of 350 Bush Street was pushed back to early 2018, with the building signing Atlassian JOB GROWTH (145,000 SF) and Publicis (52,000 SF) in the 4th quarter, bringing pre-leasing to 11,500 jobs 100% prior to completion. and are also nearing Strong year-over year their anticipated delivery in the first half of 2018. job gains and near full employment SAN FRANCISCO OFFICE MARKET FOURTH QUARTER 2017

VACANCY UNEMPLOYMENT RATE Vacancy is flat in 4th quarter

UNTED STATES SAN FRANCSCO San Francisco’s combined office vacancy rate for Class-A and Class-B space in the 4th quarter was 8.6%, essentially flat to the previous quarter. Notable lease transactions included the previously mentioned Dropbox, Inc. (736,000 SF) and

Atlassian (145,215 SF) deals, as well as Okta (207,066 SF) at 100 First Street, Airbnb (82,852 SF) sublease at 650 7th Street, and WeWork (76,401 SF) at 415 Mission Street which will become the firm’s West Coast headquarters. Expect

vacancy rates to remain low as major construction projects have all but completed pre-leasing, settling concerns that large vacancies would be delivered to market SOURCE: BLS in early 2018.

DEMAND Positive net absorption in 4th quarter CAP RATE There was 330,000 square feet of positive absorption in the 4th quarter, bringing

UNITED STATES SAN FRANCISCO the year-to-date absorption closer to net zero. Glu Mobil took occupancy at 875 7.5% 7.0% Howard Street in early November, and WeWork began operating new locations 6.5% at Street and 655 during the quarter. In 6.0% 5.5% addition, LendingHome relocated from to their new space at 315 5.0% Montgomery Street over the Thanksgiving holiday. Strong leasing in the quarter, 4.5% 4.0% and several large leases set to commence in early 2018, are an indication that 3.5% positive market fundamentals will carry over well into 2018. 3.0% 13 14 15 16 17

SOURCE: RCA

San Francisco Office Fourth Quarter Largest Lease Transactions

TENANT PROPERTY SF TYPE SUBMARKET

DropBox 1800 Owens Street 736,550 Class A Direct Mission Bay/China Basin Okta 100 First Street 207,066 Class A Direct South Financial District Atlassian 350 Bush Street 145,215 Class A Direct Financial District Airbnb 650 7th Street 82,852 Class B Sublease Showplace Square WeWork 415 Mission Street 76,401 Class A Direct South Financial District Postmates 201 Third Street 57,530 Class B Direct South Financial District Lyft 185 Berry Street 57,000 Class A Direct Mission Bay/China Basin Publicis 350 Bush Street 52,879 Class A Direct Financial District

San Francisco Office Fourth Quarter Largest Sale Transactions

PROPERTY BUYER SF PRICE PSF SUBMARKET 201 California Street Beacon Capital Partners 243,000 $737.00 Financial District 22 4th Street Ponte Gadea 231,000 $1,038.00 Yerba Buena 555 De Haro Street Bridgeton Holdings 50,021 $540.00 Potrero East of 101 Fwy 945 Bryant Street Bridgeton Holdings 37,848 $713.00 Showplace Square 401 Washington Street Century Urban 15,923 $942.00 Financial District

2 REAL ESTATE OUTLOOK SAN FRANCISCO OFFICE MARKET Q4 2017 RENTS DOWNTOWN SAN FRANCISCO NET ABSORPTION AND VACANCY THOUSAND SF Average asking rates continue to rise in San Francisco NET ABSORTON ACANC Average asking rates continue their upward climb, increasing again in the 4th quarter to $73.57 per square foot (up 8.35% year-over-year). For Class-A office space in the CBD, expect an average of $77.84 per square foot in the Financial District, and $75.94 per square foot in the South Financial District, both increasing more than 2% over the previous quarter. Class-B office rates declined on average $0.41 in the quarter to $67.05 per square foot, relatively the same level asking rates were reported at the end of the first half of the year. SOURCE: Transwestern

INVESTMENT SALES 2017 a strong year for Investment in San DOWNTOWN SAN FRANCISCO ANNUAL ASKING RENTS Francisco real estate

The 4th quarter saw a decrease in sales activity OERALL CLASS A CLASS B ($267.8 million), but closed out a strong 2017 that had nearly $3.75 billion in total sales, an average of $692 per square foot. The most notable transactions of the quarter included 22 4th Street ($1,038 per SF) purchased by Ponte Gadea, and 0 201 California Street ($739 per SF) purchased by Beacon Capital Partners with both buildings close to, or at full occupancy at the time of sale.

SOURCE: Transwestern

DOWNTOWN SAN FRANCISCO DEVELOPMENT PIPELINE THOUSAND SF

COLETONS UNDER CONSTRUCTON

SOURCE: Transwestern

REAL ESTATE OUTLOOK SAN FRANCISCO OFFICE MARKET Q4 2017 3 SAN FRANCISCO OFFICE MARKET FOURTH QUARTER 2017

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 -5,291 -26,444 35,313 5,291 40,604 N/A Class B 2,429,833 0 29,003 174 118,326 33,156 151,482 $64.83 North Waterfront Subtotal 3,145,568 0 23,712 -26,270 153,639 38,447 192,086 Class A 120,000 0 -1,936 -5,479 5,784 2,121 7,905 $48.50 Class B 1,020,133 0 8,197 7,208 165,315 0 165,315 $56.37 Van Ness Subtotal 1,140,133 0 6,261 1,729 171,099 2,121 173,220 Class A 444,347 0 2,440 6,146 20,560 612 21,172 $72.64 Class B 1,587,113 0 -38,911 -20,127 95,804 8,050 103,854 $63.03 Jackson Square Subtotal 2,031,460 0 -36,471 -13,981 116,364 8,662 125,026 Class A 21,242,378 447,000 37,771 -103,682 1,890,203 255,189 2,145,392 $77.84 Class B 6,866,835 0 -7,950 -115,492 713,298 127,469 840,767 $70.17 North Financial District Subtotal 28,109,213 447,000 29,821 -219,174 2,603,501 382,658 2,986,159 Class A 19,246,376 3,834,357 7,895 -257,672 1,430,721 74,589 1,505,310 $75.94 Class B 4,037,910 0 54,053 5,551 317,284 75,973 393,257 $68.24 South Financial District Subtotal 23,284,286 3,834,357 61,948 -252,121 1,748,005 150,562 1,898,567 Class A 213,125 0 3,326 3,326 0 6,207 6,207 N/A Class B 3,244,005 0 -46,641 -72,521 318,156 24,636 342,792 $62.88 Union Square Subtotal 3,457,130 0 -43,315 -69,195 318,156 30,843 348,999 Class A 553,562 0 0 -9,862 6,238 14,822 21,060 $62.00 Class B 2,386,158 0 203,999 137,637 15,039 43,915 58,954 $76.06 Yerba Buena Subtotal 2,939,720 0 203,999 127,775 21,277 58,737 80,014 Class A 2,330,503 0 -25,475 146,061 52,752 0 52,752 $70.41 Class B 1,487,085 0 8,976 112,966 20,515 50,578 71,093 $59.40 Mid Market Subtotal 3,817,588 0 -16,499 259,027 73,267 50,578 123,845 Class A 1,860,581 0 -48,838 -519 163,024 61,905 224,929 $86.49 Class B 7,236,568 422,180 132,543 40,825 291,890 115,057 406,947 $67.85 SOMA Subtotal 9,097,149 422,180 83,705 40,306 454,914 176,962 631,876 Class A 2,508,788 1,326,922 17,830 33,882 78,496 0 78,496 $88.00 Class B 249,594 0 -618 -11,018 213,712 0 213,712 $65.00 Mission Bay Subtotal 2,758,382 1,326,922 17,212 22,864 292,208 0 292,208 Class A 49,235,395 5,608,279 -12,278 -214,243 3,683,091 420,736 4,103,827 $77.19 Class B 30,545,234 422,180 342,651 85,203 2,269,339 478,834 2,748,173 $67.05 San Francisco Market Total 79,780,629 6,030,459 330,373 -129,040 5,952,430 899,570 6,852,000 $73.57

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.