GREATER BOSTON MARKET VIEWPOINT

3RD QUARTER 2014

Accelerating success. MARKET VIEWPOINT | Q3 2014 Boston Overview The vacancy rate in the 62.8-million-square-foot Boston office The largest third quarter leases represented Financial District market dropped to 11.1% during the third quarter, and nearly Class A buildings, with select transactions including: 800,000 square feet of positive absorption was recorded. The core Financial District and Back Bay submarkets were largely Tenant Address SF Submarket Financial responsible for the increased occupancy, with 522,000 and Sonos (n) Lafayette City Center 170,000 District 248,000 square feet of absorption, respectively. Financial CDM Smith (n) 75 State Street 170,000 While most of the smaller peripheral submarkets report single- District Financial State Street Bank (r) 100 Summer Street 167,000 digit vacancies, the vacancy rate in the Financial District is 13.1%, District a marked improvement from early 2011 when it topped 20%. Financial Choate Hall & Stewart (c) Two International Place 135,000 District Statistics in the core submarkets are as follows: Financial Jewish Vocational Service 101 Federal Street 42,200 District Supply Market Segment SF Available Vacancy Rate Financial Atlantic Trust 100 Federal Street 40,000 (SF) District Financial District – Class A 27,544,321 3,847,840 14.0% (n) = relocation from Cambridge (c) = contraction (r) = renewal Financial District – Class B 6,054,905 542,551 9.0% Back Bay – Class A 10,863,855 1,131,593 10.4% • The Financial District accounts for a slightly disproportionate Back Bay – Class B 2,030,085 311,428 15.3% share of the leasing activity thus far in 2014, with roughly 60 Seaport – Class A 3,067,295 209,696 6.8% percent of transaction velocity, compared to the Back Bay and Seaport – Class B 4,545,896 343,677 7.6% Seaport at 23 percent and 11 percent, respectively.

SUPPLY AND DEMAND • While generally considered to be static or even in contraction mode, the FIRE (Finance, Insurance, Real Estate) and Legal • Supply totals 62.8 million square feet of which 29.2 million sectors accounted for nearly half the leases executed through square feet represents Class A tower space in the Financial the first three quarters of the year, including some expansion District (32 buildings, 22.1 million SF) and the Back Bay (9 requirements. While dominated by the FIRE and Legal sectors, buildings, 7.1 million SF). Technology, Architectural and Engineering, and Business Services firms are increasingly making their mark in the • At the end of the third quarter there were approximately 200 downtown markets. A depiction of the lease velocity by tenants in the market seeking an aggregate of close to 4 industry is provided below: million square feet of space. Although the median requirement is 10,000 square feet, some of the larger requirements include: Transaction Velocity by Industry (SF Thousands)

Tenant SF Industry FIRE Legal BNY Mellon 350,000 Financial Services Technology Putnam Investments 275,000 Financial Services Architectural/Engineering Business Services Wells Fargo 250,000 Financial Services Health/Life Sciences Government/Non-prot The Boston Globe 150,000 Media Electronics Houghton Mifflin 150,000 Publishing Media & Publishing Advertising/Marketing Education VELOCITY Telecommunications Hospitality/Retail • Velocity (signed lease activity) totaled over 1.2 million square 0 200 400600 8001,000 1,200 feet during the third quarter, representing over 40 transactions. An additional 25 tenants representing close to ABSORPTION AND VACANCY 700,000 square feet of leases had commitments pending at quarter-end. Year-to-date transaction velocity is 3.7 million • The quarter-end vacancy rate of 11.1% compares favorably to square feet, which is on pace to exceed 2013 totals. the 12.3% vacancy rate reported at the end of the third quarter 2013. p. 2 | Colliers International MARKET VIEWPOINT | Q3 2014

• Absorption was positive in both the Back Bay and Financial • The trend of East Cambridge rents surpassing those of the District submarkets, due to a number of mid-sized leases at Financial District has been the case since late 2011 and is 501 Boylston Street and 200 Clarendon Street in the Back likely to remain the case for the foreseeable future. Bay, as well as the CDM Smith and Sonos leases in the Financial District. Average Class A Asking Rents

$80 • Continued positive absorption is anticipated over the 2014 to 2018 forecast period and the market is expected to reach the $70

“equilibrium” rate, generally believed to be 10%, by 2017. $60

$50 Projected Vacancy & Absorption $40 2,000 20% Forecast $30 1,500 15% 8.9% 1,000 10% $20 Q3 05 Q3 06 Q3 07 Q3 08 Q3 09 Q3 10 Q3 11 Q3 12 Q3 13 Q3 14

500 5% Financial District East Cambridge

0 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -500

SF (Thousands) SF Space Type Rental Range/SF -1,000 Class A – High Rise $55 - $80 -1,500 Class A – Mid Rise $50 - $60 -2,000 Total Boston Absorption Total Boston Vacancy Rate Class A – Low Rise $42 - $50 Class B $30 - $47 RENTAL RATES DEVELOPMENT • Rental rates are firming across the market, with the most notable increases in Class B buildings in the Seaport and for • In the Back Bay, Boston Properties had an October ground- Class A space in the Back Bay. breaking at 888 Boylston Street, a 17-story building in the Prudential Center complex anchored by Natixis Global Asset • It is significant that two of the larger leases executed in the Management’s 128,000-square-foot lease and scheduled to Financial District during the quarter were Sonos and CDM open in late 2017. Smith, both relocating from East Cambridge in order to achieve more favorable rental rates. Given the scarcity of • Other office development activity across the city includes two space in East Cambridge, and the 14% Class A vacancy rate in build-to-suit office buildings for PwC and Goodwin Procter in the downtown market, the Financial District is an attractive the Seaport (420,000 SF and 360,000 SF, respectively); a option for tenants seeking value as well as excellent access to build-to-suit headquarter building for Converse near North public transportation. Station (187,000 SF); and speculative construction at 1325 Boylston Street, Samuels & Associates mixed-use project in • Class A rents in the Financial District historically tended to the Fenway submarket (230,000 SF). lead the market, but given rising rents in Cambridge and the Seaport that trend has reversed over the past two years. TRENDS Tenants seeking value options are finding suitable options in • Gradual rent growth is anticipated over the next 24 months. the Financial District’s low-rise office space. • City-wide, landlords will look to both traditional and non- traditional tenants including start-ups and technology firms and out-of-market migration in order to absorb the available space.

CONTACT: Mary Sullivan Kelly | [email protected] Colliers International | p. 3 MARKET VIEWPOINT | Q3 2014 Cambridge Overview Conditions in the 20.8-million-square-foot Cambridge office and BioMed Realty Trust’s 50 Hampshire Street. CDM Smith, an lab market are heated. The overall vacancy rate of 10.7% is engineering and construction services firm, will vacate 180,000 hardly indicative of market reality as lab and office tenants of all square feet and relocate to less expensive low-rise space at 75 sizes are finding options scarce, particularly in the ever- State Street, Boston. This reflects an opportunistic move by tightening Kendall Square market. Net absorption registered BioMed, as CDM’s lease was not scheduled to expire until 2018. nearly 250,000 square feet during the third quarter, bringing the BioMed was able to create a large block of vacancy in the year-to-date total to over 700,000 square feet. Although incredibly tight core Kendall Square market and will likely quarterly absorption in the office market was negative for the achieve current market rents in the mid- to high-$60s, first time in two years primarily due to a new large block of compared to the mid-$40s per square foot rent they were availability at 50 Hampshire Street, demand is strong and rental collecting from CDM Smith. Absent the 50 Hampshire block, the rates continue to rise. The lab market fundamentals are office vacancy rate in the core Kendall submarket market is incredibly strong with Big Pharma/Big Bio companies continuing 3.5%, with the next largest block of space 23,350 square feet at to pile into Kendall Square as well as the continued expansion of 101 Main Street. both existing and homegrown early to mid-stage biotech companies. Another example of a large Cambridge tenant migrating to Boston was Sonos, a California-based wireless speaker Key statistics at the end of the third quarter include: company that currently occupies 56,750 square feet at 25 First Street. Sonos is experiencing explosive growth and when faced Supply SF Vacancy Absorption (000s) Market/Submarkets with both rising asking rents and the limited number of large- (000s) Rate Q3 2014 YTD block options in East Cambridge, opted to sign a Total Cambridge* 20,831 10.7% 247 722 169,600-square-foot lease at Lafayette City Center in Downtown Office 11,012 9.5% (154) (5) Crossing. Ultimately Lafayette City Center will allow Sonos a Lab 8,947 13.1% 397 703 phased occupancy and flexible expansion rights at rents *Includes R&D space significantly below those of East Cambridge.

Investor interest in the robust Cambridge market has been Rents Cambridge-wide are influenced by the strength of the East intense over the past year, and the third quarter was no Cambridge submarket, which have risen steadily over the past exception. As discussed in the Capital Markets section of this five years. Despite a vacancy rate which has ticked up from report, Oxford Properties and JP Morgan Investment 9.6% to 11.0% over the past four quarters due primarily to large Management acquired One Memorial Drive from The Blackstone blocks of space at 50 Hampshire Street and 25 First Street, Group as part of a $1.6 billion portfolio purchase including two weighted average asking rents reached $62.30 during the third Boston office buildings, and CBRE Global Investors purchased quarter, an increase of 15% over the third quarter last year and Building 200/300 in Cambridge Discovery Park from the are in line with the all-time high-mark. Bullfinch Companies. The Cambridge Discovery Park transaction Class A Office - East Cambridge consisted of the 200,000-square-foot Forrester Research global headquarter building and the adjacent 6-story parking garage $70 25% and traded for $123.4 million with a reported cap rate of 5.7%. $60 20% Bullfinch will retain ownership of Building 100 (leased to The $50

Smithsonian Institution, Genocea Biosciences and Nuclea $40 15% Biotechnologies) and development rights for an additional $30 10% 450,000 square feet. $20 5% OFFICE MARKET $10

$0 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 0% While an uptick in the vacancy rate and net negative absorption 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13 13 13 14 14 14 Weighted Rent Total Vacancy might seem to signal deterioration in market conditions, this is not the case in the Cambridge office market. The largest contributor to negative absorption during the third quarter was

p. 4 | Colliers International MARKET VIEWPOINT | Q3 2014

Biogen Idec signed a sublease with Ironwood Pharmaceuticals absorption of 703,000 square feet. Lease velocity was led by for 93,000 square feet at 301 Binney Street, representing the Baxalta’s (a spinoff of Baxter International) lease at 650 East largest office lease signed during the quarter. Biogen has had a Kendall, Pfizer’s second build-to-suit lease with MIT for half of seemingly insatiable appetite for space in Kendall Square 610 Main Street North, and Agios Pharmaceuticals’ relocation recently and is also actively searching the market for a large and expansion from 38 Sidney Street to 88 Sidney Street, within block of space to accommodate future growth. Forest City’s University Park @ MIT.

Infinity Pharmaceuticals signed a 61,000-square-foot lease at The biggest story of the quarter is the torrent of activity that has 784 Memorial Drive. The company recently signed a license blown through the Cambridge lab market and is showing no agreement with AbbVie that includes a $275 million upfront signs of dissipating. This is being fueled by Big Pharma/Big Bio, payment, and the lease at 784 Memorial Drive will allow Infinity such as Baxalta and Pfizer establishing research and to grow adjacent to their existing laboratory building at 780 development centers as well as growing early to mid-stage drug Memorial Drive and bring their total East Cambridge footprint to discovery companies such as Agios. Partnerships and license approximately 120,000 square feet. agreement between these two types of companies have played an increased role in the importance of the Kendall Square super The largest office leases executed during the third quarter are cluster. listed below: The largest lab leases executed during the third quarter are Tenant Address SF listed below: Biogen (s) 301 Binney Street 93,000 Infinity Pharmaceuticals 784 Memorial Drive 61,000 Tenant Address SF

Cambridge Seven Associates (r) 1050 Massachusetts Avenue 16,000 Baxalta 650 East Kendall Street 200,000

Retrophin (s) 301 Binney Street 14,000 Pfizer 610 Main Street (North) 138,326

Cisco Systems (e) 55 Cambridge Parkway 12,300 Agios Pharmaceuticals 88 Sidney Street 74,500

(s) = sublease (r) = relocation (e) = expansion Dicerna Pharmaceuticals 87 Cambridge Park 36,833 Shell Techworks 281 Albany Street 24,333 Headed into the fourth quarter, tenant demand is healthy with Manus Biosythesis 1030 Massachusetts Avenue 12,000 several large requirements weighing various urban alternatives LiquiGlide 75 Sidney Street 11,800 including Boston, Cambridge and the Inner Suburbs. At quarter- end there were approximately 30 tenants eyeing the Cambridge Historical Vacancy & Absorption market, seeking in excess of 750,000 square feet of office Cambridge Lab space. These range in size from 4,000 to 300,000 square feet, with life science companies representing nearly half of these 700 25% 18.9% 16.5% 20% requirements, and technology companies also well represented. 500 14.8% 14.3% 13.9% 13.1% 15% 10.3% 300 10% A comparison of current asking rents compared to 12 and 24 100 5% months ago follows: 0% 2008 2009 2010 2011 2012 2013 Q3 2014 -100

Direct Asking Rents PSF (Thousands) SF -300 Space Type - Location Q3 2012 Q3 2013 Q3 2014 -500 Class A – East Cambridge $45- $65 $48 - $70 $55 - $75 -700 Class B – East Cambridge $38 - $47 $42 - $50 $42 - $55 Absorption Total Vacancy Class A – Alewife $28 - $35 $33 - $40 $35- $42 As availability in East Cambridge has dwindled and asking rents LAB MARKET have increased, the Alewife market has been a major benefactor of companies looking to find cost effective lab space and a The 8.9-million-square-foot lab market closed the third quarter Cambridge address. King Street Properties showed great with a vacancy rate of 13.1% and positive year-to-date foresight by purchasing two former Pfizer buildings, 87 and 200

CONTACT: Mary Sullivan Kelly | [email protected] Colliers International | p. 5 MARKET VIEWPOINT | Q3 2014 Cambridge Overview Cambridge Park Drive and is in the process of retrofitting them Therapeutics (SAGE $90 million) and Tokai Pharmaceuticals into multitenant laboratory buildings. King Street signed a (TKAI $97 million). Overall, biotech stocks have outperformed 36,833-square-foot lease with Dicerna Pharmaceuticals at 87 the broader markets over the course of the past year, and while Cambridge Park Drive and has a pending commitment for some of these companies are still in their early stages the sector 60,000 square feet at 200 Cambridge Park Drive. remains one of the region’s most powerful economic engines.

Cranes continue to fill the Cambridge skyline as build-to-suit lab TRENDS buildings under construction include: • Office landlords will continue to push rents as demand will • Two research buildings for Novartis totaling 550,000 square outpace supply in the core Kendall Square office market. feet at 181 Massachusetts Avenue and 22 Windsor Street • Lab landlords will continue to push rents as well-located • Millennium: The Takeda Oncology Company’s 244,000-square- quality lab space options will remain limited. foot laboratory building at 300 Massachusetts Avenue, and • At least one build-to-suit lease will be signed during the fourth • ARIAD Pharmaceuticals 386,000 square feet at 75 & 125 quarter as several large pharmaceutical companies are circling Binney Street. The company was plagued by product set backs the remaining sites in Kendall Square. late last year and while the building has not yet delivered, the company has put 175,000 square feet on the market for sublease, a number that is not reflected in the third quarter statistics.

Demand is robust and headed into the fourth quarter there were over 30 tenants in the market seeking over 2 million square feet of lab space. Of this, eight companies have requirements of at least 100,000 square feet in size and account for 1.3 million square feet of the total demand. With a limited number of build- to-suit sites and virtually no large blocks of quality existing lab space many of these companies are entering the market well in advance of their actual needs in order to secure growth space for the future. Biotech companies facing the most difficult leasing challenge tend to be those in the 25,000 to 50,000-square-foot range, as they are too small for a build-to- suit and there are extremely limited options in that size range.

Rental rates vary by class and location and are depicted below:

Space Type - Location Asking Rents, PSF, NNN Build-to-Suit – East Cambridge $69, with $150/SF TI Class A Existing – East Cambridge $59 - $65 Class B – East Cambridge $48 - $55 Class A Existing - Alewife $42 - $45 Class B - Alewife $38

The US stock markets are pushing new records and this is helping fuel expansion in the local biotech sector. Fourteen Massachusetts-based life science companies have gone public in 2014 including eight Cambridge companies. Two Cambridge firms went public during the third quarter including Sage

p. 6 | Colliers International MARKET VIEWPOINT | Q3 2014 Suburban Overview The suburban Boston office and R&D markets are having a • Greater Boston’s most recent recovery is largely attributed to banner year. With another 668,000 square feet of positive growth in the tech and biotech industries. Several medical, absorption on the books, year-to-date net absorption surpassed computer software, and telecom companies are actively 1.9 million square feet. This is almost three times higher than looking for space in the suburban markets. Firms with larger last year’s total of just 650,000 square feet. Vacancies fell by requirements are scouting along the 495 belt, while smaller 130 basis points over the past year, to end the third quarter at tech firms continue to focus on Newton, Waltham, and all of 18.3%. Rates in the suburbs haven’t been this low since 2008. the Route 128 office markets 10 miles north and south of the While the core Route 128 area is still garnering a significant Mass Pike. share of tenant activity, landlords throughout the broader market are seeing positive momentum. Accordingly, lease rates have Some of the more sizeable tenants in the market with potential been ticking up — increasing by 5% since bottoming in early requirements over the next 12 to 24 months include: 2013. Tenant SF Industry Target Market Aggregate statistics for the office and R&D market are provided Fresenius Medical 500,000 Health Care/Medical Route 128 Mass Pike below: Hologic Corporate 400,000 Medical Devices Route 495 West MKS Instruments 300,000 Medical Devices Route 495 North Supply Absorption SF (000s) Vacancy Route 495 North/ Market / Submarkets SF Comcast 200,000 Telecommunications Rate Route 128 Northwest (000s) Q3 2014 YTD Route 128 Mass Pike/ Clark Shoes 160,000 Retail – Apparel Suburban Boston 133,878 18.3% 668 1,875 Route 128 South Inner Suburbs 5,816 10.0% 37 18 Route 128 76,758 16.3% 174 702 VELOCITY Route 495 49,287 22.3% 473 1,154 • Businesses are banking on the positive economic climate (i.e., Worcester 2,017 19.3% (16) 1 low unemployment rate, increasing corporate profits, etc.) greater Boston is currently experiencing. Velocity, or signed SUPPLY AND DEMAND lease activity, is on the rise in the suburbs with the Route 128 • The suburban office and R&D market totals more than 133 Mass Pike and Route 495 West submarkets accounting for a million square feet, with performance and product varying large share of leases signed this year. from one submarket to the next. Class A properties comprise • The Inner Suburbs boasts proximity to downtown Boston, 31% of the market, with a majority (close to 70%) of this access to a variety of public transit options (including a new high-end office space located along Route 128. Orange Line MBTA station in Somerville), and numerous • Declining vacancies and rapidly rising rents have incited more amenities. These characteristics have led to an increase tenant projects to get off the ground in the suburbs. In Burlington, the demand in recent years. Most recently, Partners Healthcare 100,000-square-foot 4 Burlington Woods recently broke leased 800,000 square feet at Assembly Row in Somerville. ground on a speculative basis and is slated to complete in the This represents the largest transaction for the third quarter second quarter of 2015. The developer, Gutierrez Co., is also and for the year in the suburbs. The health care giant is slated looking to build a 350,000-square-foot office at 400-600 to anchor the office portion of the massive mixed-use Wheeler Drive. Cresset recently began redeveloping the former development, which will result in a consolidation of GE Iconics building at 65 Grove Street, Watertown into an administrative personnel from more than a dozen sites 117,000-square-foot office, also on a speculative basis. In throughout the metro. More than 4,000 employees are Waltham, construction on Boston Properties’ 230,000-square- expected to move to their new office in late 2016. Other foot 10 CityPoint, anchored by Wolverine Worldwide, kicked off third-quarter transactions in the Inner Suburbs include BR+A’s in August. The project is expected to deliver in mid-2016. 47,000-square-foot lease at 10 Guest Street, Brighton and Hobbs Brook Management is also redeveloping 275 Wyman Candlewick Press’ 30,000-square-foot lease at 99 Dover Street in Waltham into 300,000 square feet of office space for Street, Somerville. Vistaprint.

CONTACT: Mary Sullivan Kelly | [email protected] Colliers International | p. 7 MARKET VIEWPOINT | Q3 2014

• Tenants have been particularly active in the Route 495 West tenant absorption took place in the Class B market. This has submarket this quarter as well, with several large, multi- allowed the delta between Class A vacancies to narrow national healthcare and tech firms executing leases here. EMC significantly — reaching just 0.9 percentage points at the end renewed its 192,000-square-foot lease at 109 Constitution of the third quarter. Boulevard in Franklin. Harvard Bioscience also renewed and expanded its footprint at 84 October Hill Road in Holliston, and • Build-to-suit construction continues to prop up net absorption now occupies 83,100 square feet at the building. GE in the suburban office market. Boston Scientific recently added Healthcare’s life science division plans to occupy 160,000 another 110,000-square-foot building at its campus in square feet at the new Marlborough Hills development on Marlborough, and several other corporate expansions are Forest Street. This move will consolidate the company’s East currently underway. TripAdvisor (Needham), Keurig Coast operations, and represents a 60,000-square-foot (Burlington), New Balance (at New Boston Landing in increase from its current space needs. Genzyme Corporation Brighton), and Vistaprint (Waltham) will all be increasing their also leased 114,000 square feet at One Research Drive, suburban office footprint within the next 18 months. Westborough, with plans to move 500 employees from • Vacancies in the Route 128 markets are among the lowest in Framingham later this year. the suburbs. Despite some lingering weakness in the north Some of the larger transactions executed during the quarter submarkets, net absorption reached 174,000 square feet in the included: third quarter. This represents the third consecutive quarter of positive absorption, totaling 700,000 square feet for the year. Tenant Address SF Vacancies edged toward 16% and ended September 100 basis

Partners Healthcare (e) 450 Artisan Way, Somerville 800,000 points below year-ago levels. Demand has been robust in Waltham, Needham, and Burlington, and tenants have been EMC (r) 109 Constitution Boulevard, Franklin 192,000 branching out beyond these major office nodes. Building GE Healthcare (e) 200 Forest Street, Marlborough 160,000 owners that are providing modernized properties with Wolverine Worldwide (e) 500 Totten Pond Road, Waltham 155,000 improved amenities, lobbies and/or facades have remained Osram Sylvania Inc. (c) 200 Ballardvale Street, Wilmington 125,000 extremely competitive this cycle. Look for continued Genzyme Corporation (e) One Research Drive, Westborough 114,000 improvements in the near term, as large contiguous blocks of (r) = renewal (e) = expansion (c) = contraction available space are harder to come by and construction is subdued. ABSORPTION AND VACANCY • The Route 495 markets are on a roll, accounting for close to Historical Vacancy & Absorption Office and R&D three quarters of the suburban market’s third quarter net absorption, at 473,000 square feet. Vacancies are approaching 4,000 25% 22% here, which represents a 140-basis-point decline since 3,000 20% the beginning of this year and a 190-basis-point drop from 15% 2,000 year-ago levels. The Route 495 North and West submarkets 10% 1,000 5% were evenly matched in the third quarter, with tenants like 0 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD Boston Scientific, GE Healthcare, Genzyme, and Polycom -1,000 taking down space. The overall outlook for the Route 495 belt

SF (Thousands) SF -2,000 is decidedly positive, as the area remains attractive to price- -3,000 sensitive firms, back-office companies and larger/expanding

-4,000 tenants that are unable to find space in the core Route 128 belt Class A Class B Class A Vacancy Class B Vacancy and Inner Suburbs. Landlords with updated, modern, amenity- • The suburban office and R&D markets recorded 668,000 rich assets will be in high demand among potential tenants. square feet of absorption in the third quarter, pushing vacancies down to 18.3%. The Class B market was a little late to the recovery, but conditions are more favorable now than a few years ago. So far this year, the majority (roughly 81%) of p. 8 | Colliers International MARKET VIEWPOINT | Q3 2014

OFFICE RENTAL RATES

Suburban Office Asking Rents TRENDS

$25 • The greater Boston real estate market will benefit from solid

$20 regional growth, a below-average unemployment rate, and growing optimism among businesses. $15 • Improving fundamentals and increasing rents will only $10 continue to drive both speculative and build-to-suit

$5 construction in the coming quarters.

$0 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 • With limited space and further rent increases on the horizon

Class A Class B along Route 128, more tenants may consider moving to the Route 495 markets. • On a year-over-year basis, overall asking rents — including • Landlords can expect even more rent growth in the coming Class A and B space — in the suburban markets have quarters. Although outsized gains will be focused in premier increased by close to 4 percent. Per square foot, lease rates Class A buildings, lease rates in the Class B market will rise as range from the low-mid teens to the high $20s-low $30s in well. the Class B market. Landlords with Class A assets have seen outsized gains in the past year, and rents are ranging from the • In addition to the economics of rent per square foot, tenants high teens to low-mid $40s. All signs point to continued seek value through efficiency, amenities and sustainability. tightening in the market in the near future, which bodes well for forecast gains. With higher-end properties continuing to fill up, rents in the Class B market will see even more upward pressure.

• Rapidly declining vacancies in core Route 128 have rents surging in the Route 128 Mass Pike and Northwest submarkets. Much of this growth has taken place in the Class A buildings, with asking lease rates having surpassed $30 per square foot in Route 128 Northwest (20% higher than year- ago levels), and are hovering near $32 per square foot in Route 128 Mass Pike. Pricing has been especially frothy in Lexington, Burlington, Waltham, Newton, and Wellesley, as leasing proposals on top-quality properties are being aggressively quoted. For reference, certain segments of the Burlington market are seeing lease rates in the low-to-mid $30s per square foot (i.e., Mall Road and Burlington Woods). Rents in Waltham and Wellesley are among the highest in the suburban markets with a few select properties (i.e., Wellesley Office Park and Reservoir Woods) in these towns quoting rates in the mid-$40s per square foot.

CONTACT: Mary Sullivan Kelly | [email protected] Colliers International | p. 9 MARKET VIEWPOINT | Q3 2014 Capital Markets INVESTMENT BOSTON OFFICE

If 2013 was the year of core suburban Class A asset sales, 2014 As of the end of the third quarter 2014, foreign capital accounted is the year of the trophy asset sales. Between the disposition of for over 40% of all closed and pending transactions, the largest Blackstone/EOP’s remaining Boston assets and a number of of any investor class. Oxford Properties (the real estate arm of other prominent sales including the Vertex/Fan Pier buildings Ontario Municipal Employees Retirement System), Norges Bank and One Beacon Street, approximately $5 billion in Class A (the central bank of Norway), and Zurich Alternative Asset properties in the Financial District, Seaport and Cambridge alone Management (a wholly-owned subsidiary of Zurich Insurance have traded hands in 2014. Group) all made big splashes in the Boston office market in the third quarter. At the same time, over the past two years, there has been a noticeable shift in investor sentiment toward non-core assets Blackstone/EOP’s divestiture of its Boston assets continued in and investment strategies. The reason value-add and full force during the quarter. In a joint venture, Oxford opportunistic transactions have been more commonplace Properties and JP Morgan Chase & Co. purchased 60 State include: Street and 225 Franklin Street, Boston and One Memorial Drive, Cambridge for $1.575 billion or $743.41 per square foot. • Supply vs. Demand: There are just not enough core assets available for sale. Separately, JP Morgan also bought Rowes Wharf and Oxford Properties bought 100 High Street and 125 Summer Street, the • Buyers chasing yield need to purchase properties with some former of which was contemporaneously resold to CBRE Global vacancy. Investors. • Investors are anticipating future rent growth or near-term rent roll. Following a successful close at One Financial Center late last year, a joint venture of Norges Bank and MetLife acquired One The chart below compares buildings that changed hands in the Beacon Street from Beacon Capital Partners and Allianz third quarter 2014 to properties that traded a year ago. The Insurance Company for $561.5 million and a reported cap rate of average vacancy for greater Boston office buildings acquired in 3.9%. Q3 2014 registered just over 30%. In contrast, the average vacancy for office buildings acquired in Q3 2013 was closer to Joint ventures are becoming more commonplace in these larger 20%. MetLife Real Estate and Norges Bank’s recent purchase of transactions as foreign capital sees Boston as a market where One Beacon Street (more than 20% vacant) and CBRE Global they can place money and recognize appreciation with limited Investors’ acquisition of 100 High Street (more than 30% hands-on activity. Also pending at quarter-end was Norges vacant) are examples of these types of transactions. Bank’s announcement of a 45% joint venture interest in Boston Properties’ Atlantic Wharf and 100 Federal Street. The Norges- Office Vacancies: Sold Buildings Boston Properties entity will also acquire an interest in 601 35% Lexington Avenue, New York in the transaction for a gross 30% purchase price of $1.5 billion.

25% Price $/ Address Buyer Seller 20% ($ Mil) SF 15% Beacon Capital 1 Beacon MetLife RE Investors JV Partners JV Allianz $561.5 $552 10% Street Norges Bank Invt Mgmt RE of America 5% 100 High Oxford Properties CBRE Global Investors $282.5 $517 Street Group 0% Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 399 Boylston Shorenstein Buildings sold in Q3 2014 Buildings sold in Q3 2013 Blackstone/EOP $117.0 $512 Street Properties Synergy RE Q3 14 sample set includes 45 properties (9 CBD and 36 suburban). 51 Melcher Zurich Alternative Services JV $ 52.8 $560 Q3 13 includes 30 properties (6 CBD and 24 suburban). Street Asset Management LLC Independencia SA 38 Chauncy Brickman DivcoWest Properties $ 39.5 $297 Street Associates

p. 10 | Colliers International MARKET VIEWPOINT | Q3 2014

CAMBRIDGE/SUBURBAN OFFICE Closed transactions during the quarter include:

As referenced previously, the uptick in leasing momentum has Price Address Buyer Seller Units $/Unit boosted demand for assets with upside and vacancy. Canal Park ($ Mil) National in Cambridge was 34% occupied at the time of sale and had Green District, Mount Vernon Development $150.0 283 530,035 Boston Company negative cash flow, yet still reaped $370/SF. Bear Hill Business JV ASB Park, a seven-building office and lab portfolio in Waltham was Residences at JRK Asset Invesco Real Stevens Pond, $94.0 326 288,344 71% occupied at the time of sale and sold for $160/SF and a Management Estate Saugus 4.4% cap rate. Unicorn Park in Woburn was 81% occupied at Criterion the time of sale and sold for $192/SF and a 5.4% cap rate. It Riverbend on Berkshire Development will be significant to see how these new owners lease up the the Charles, Property Partners JV $66.0 170 388,235 Watertown Advisors Gables assets compared to their pro-forma rents and whether they Residential exceed or fall short of their desired returns. Bell Bell The Hanover Stoughton, $54.1 240 225,521 Partners Company Stoughton Price Address Buyer Seller $/SF ($ Mil) DEBT 5 Wall Street, Piedmont REIT Gutierrez Co $62.5 344 Burlington Local and regional banks are some of the more aggressive 800 South Street, Intercontinental New $55.0 267 lenders in the greater Boston area, and relatively more active in Waltham Real Estate Boston Fund this market compared to other U.S. markets. Longer interest- Jumbo 100 Crosby Drive, DivcoWest Capital $50.0 197 only terms are becoming a way for lenders to differentiate Bedford Properties Management themselves to win deals, ranging from one year to full term, Columbia 9 Technology Drive, depending on the leverage. On the other side, borrowers are WP Carey (REIT) Property $47.0 187 Westborough Trust looking into prepaying their loans early, wrapping the penalties 35 Cambridge Park into new loans due to the favorable rates and more generous Vecna Schochet Drive, $43.0 350 Technologies Associates credit standards. Additionally, CMBS have been crucial to the Cambridge recovery, lending in markets where other lenders are not as Cornerstone One Van de Graaff TA Realty Real Estate $38.5 250 active, helping to narrow the pricing gap between primary and Drive, Burlington Advisers secondary markets and assets.

MULTIFAMILY TRENDS

Greater Boston is one of the more sought after markets for • Solid market fundamentals coupled with political and economic multifamily investment in the country. Properties on the market uncertainty abroad will keep Boston a target for foreign capital. include Gatehouse 75 in Charlestown asking approximately • Potential rate increases are a concern, but should not hinder $580,000 per unit; 315 on A Street – Gerdling Edlen’s new activity and pricing over the next 18 months. Seaport building – being offered in a portfolio for approximately $700,000 per unit; and the Arlington – luxury apartments in the • As many Class A properties have traded hands in the past Back Bay – looking for roughly $1,000,000 per unit. The latter, 12-18 months, expect rents to rise and the delta between Class a renovated charter school repurposed by Congress Group and A and Class B rents to grow. Related Beal, is currently achieving rents of approximately $5.50-$6.00 per square foot, and at one million dollars per unit, the sale would roughly equate to a 4.0% cap rate.

CONTACT: Mary Sullivan Kelly | [email protected] Colliers International | p. 11 Market Snapshot

Q3 2014 STATISTICS | OFFICE/R&D

YTD MARKET SQUARE FEET DIRECT SF SUBLEASE SF VACANCY* Q3 2014 (SF) SUPPLY AVAILABLE AVAILABLE ABSORPTION ABSORPTION BOSTON 62,848,701 6,415,011 573,593 11.1% 787,562 1,462,013 Back Bay 12,893,940 1,339,355 103,666 11.2% 247,679 (321,979) Financial District 33,599,226 4,072,448 317,943 13.1% 522,029 538,346 Charlestown 2,843,898 359,775 0 12.7% (17,607) (58,025) Crosstown 1,025,000 150 0 0.0% 3,000 14,110 Fenway/Kenmore 1,826,057 95,962 0 5.3% 0 15,703 North Station 1,863,372 62,847 12,442 4.0% (20,200) (4,041) Seaport 7,613,191 418,487 134,886 7.3% 35,646 1,098,192 South Station 1,184,017 65,987 4,656 6.0% 17,015 179,707 CAMBRIDGE 20,831,466 1,461,417 763,801 10.7% 246,723 721,517 Alewife Station/Route 2 2,732,093 385,786 166,249 20.2% 17,218 113,180 East Cambridge 16,130,982 1,029,090 597,552 10.1% 203,736 593,481 Harvard Square/Mass Ave 1,968,391 46,541 0 2.4% 25,769 14,856 SUBURBS 133,878,153 21,598,202 2,870,625 18.3% 667,898 1,874,885 Inner Suburbs 5,816,062 428,232 151,642 10.0% 37,085 18,123 Route 128 North 8,605,886 1,382,631 208,323 18.5% 9,582 (115,091) Route 128 Northwest 22,898,571 3,488,663 490,977 17.4% (199,936) (74,171) Route 128 Mass Pike 29,942,165 3,537,796 839,692 14.6% 287,199 554,549 Route 128 South 15,310,937 2,533,334 7,618 16.6% 77,589 336,630 Route 495 North 26,178,324 5,032,781 419,409 20.8% 296,670 710,030 Route 495 West 18,509,421 3,920,307 699,360 25.0% 373,746 570,741 Route 495 South 4,599,604 914,695 25,000 20.4% (197,373) (126,500) Worcester 2,017,183 359,763 28,604 19.3% (16,664) 574 TOTAL 217,558,320 29,474,630 4,208,019 15.5% 1,702,183 4,058,415

*Including sublease space

CONTACT: Mary Sullivan Kelly Senior Vice President & Chief Research Officer DIR +1 617 330 8059 FAX +1 617 330 8127 [email protected]

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