CCIM Northern California Chapter Broker Investment and Leasing Forum October 9, 2014 Wells Fargo Bank Penthouse

San Francisco Office Market Update

Market Knowledge. Insight on Trends. Expert Forecasts. Garrick Brown Vice President, Research Western United States [email protected]

Cranes, Cranes Everywhere….

Salesforce Tower 222 2nd Street 415 452K SF 1.4 Million SF 2K Available 700K Available 07/2015 01/2017

Transbay Transit Center Street 451K SF 416K SF 6K Available 416K SF Available 01/2015 06/2016 Cranes, Cranes Everywhere….

Salesforce Tower 222 2nd Street 415 Mission Street 452K SF 1.4 Million SF 2K Available 700K Available 07/2015 01/2017

Transbay Transit Center 350 Mission Street 181 Fremont Street 451K SF 416K SF 6K Available 416K SF Available 01/2015 06/2016 Cranes, Cranes Everywhere….

535 Mission Street 329 Brannan Street 307K SF 180K SF 201K Available 0K Available Pending… 08/2015

Kaiser SF Public Safety Building 1600 Owens Street 1351 3rd Street 182K SF 151K SF -K SF Available 0K Available 10/2015 12/2014 Cranes, Cranes Everywhere….

535 Mission Street 329 Brannan Street 307K SF 180K SF 201K Available 0K Available Pending… 08/2015

Kaiser SF Public Safety Building 1600 Owens Street 1351 3rd Street 182K SF 151K SF -K SF Available 0K Available 10/2015 12/2014 Cranes, Cranes Everywhere….

345 Lansing 320 Units 06/2015 1000 Channel St 273 Units 09/2015

260 5th St 325 Octavia St 176 Units 182 Units 10/2015 02/2015 701 China Basin 188 Units 04/2015 Can the Market Absorb it All?

4.8 Million SF of Office Space Now Under Construction

50% Already Pre-Leased 30% in Negotiation Still 18 Months from Peak Deliveries San Francisco Office Market

Net Absorption, New Construction (SF) & Vacancy Trend

1,500,000 17%

15% 1,000,000

13% 500,000

11%

0 9%

(500,000) 7% 7.1% (1,000,000) Vacancy now at lowest level since Q2 2000! 5%

Net Absorption New Construction Vacancy

Source: Cassidy Turley Research Is Demand Cooling?

Net Absorption Trend

1,600,000 Annual Occupancy Growth 17% 1,400,000 1,200,000 2010: 1.1 M SF 15% 1,000,000 2011: 4.2M SF 13% 800,000 2012: 2.1 M SF

600,000 2013: 566K SF 11% 400,000 2014YTD: 2.4M SF

200,000 9% 0

(200,000) 7% (400,000)

(600,000) 5%

Net Absorption New Construction

Source: Cassidy Turley Research Demand Still Hot

Demand Trends

We are tracking 17.1 million SF of Office & R&D requirements throughout Bay Area. This number is up 10% from last year. We are tracking 3.9 million SF of current space user requirements in San Francisco. San Francisco Office Market

Vacancy & Average Asking Rate (FSG) Trend

25% $80.00 $70.94 $56.89 $70.00 20% $60.00

15% $50.00 $40.00 10% $31.67 $30.00 $24.99 $20.00 5% $10.00

0% $0.00

Asking Rents up 80% from recession lows. Vacancy Avg. Asking (FSG)

Source: Cassidy Turley Research Bay Area Space User Requirements

By Industry Total Total SF Average Size Requirements Software/Internet 119 5,975,611 50,215 Professional Services 140 3,533,700 25,241 Consumer Products/Services 58 1,139,500 19,647 Hardware/Tech Tech Users Account23 1,133,500 for 49,283 Medical/Health Care 32 1,081,300 33,791 Government/EducationRoughly 70% of21 All805,000 38,333 Communications/MediaCurrent Demand21 604,000 28,762 Clean Technology 7 398,000 56,857 Life Science 16 361,500 22,594 Non Profit 16 205,000 12,813 Aerospace/Defense 2 90,000 45,000 Undisclosed 76 1,796,500 23,638 Total 532 17,128,611 32,197 San Francisco Office Market

Net Absorption, New Construction (SF) & Vacancy Trend

3,000,000 24% Dot.com Dot. Great Tech 2.0 2,000,000 Bomb Recession Boom 20%

1,000,000 16%

0 12% (1,000,000)

8% (2,000,000)

4% (3,000,000)

(4,000,000) 0%

S&L Rollercoaster Net Absorption New Construction Vacancy

Source: Cassidy Turley Research Does Tech Boom 2.0 Have Staying Power?

Uh Yeah…

Tech: San Francisco Clustering The Bigger Picture

The “Flat World” View

“Thanks to technology and competition in telecoms, distance will soon be no object...” – The Economist Magazine, 1995

“The wireless revolution is ending the dictatorship of place in a more profound way…” –The Economist Magazine, 1999

Technology is making place irrelevant… isn’t it? Place Still Matters… Immensely

“There are many advantages that children can enter this world with—including intelligence, physical power and agility, good looks and caring parents. It also matters where you live.” – Edward Leamer, Economist, UCLA Anderson School of Management

Globalization/Tech Revolution is not Either/Or

We Are Seeing Both Simultaneously… • Globalization/Flat World • Geographic spread of routine economic functions – Manufacturing – Service work – Support work (call centers, etc.) • Concentration

• Concentration of higher-level economic activities – Innovation/tech – Design – Finance – Media

Economic Output is Concentrating…

Not Spreading…

Concentrated Populations = Economic Output

Economic Output is Concentrating…

Not Spreading…

These Areas Account for 80% of USA Output

Mega-Region Population (Millions) Economic Output (Billions) # of Metros Bos-Wash 56.5 $3,751 41

Chi-Pitts 41.8 $2,314 60

Char-lanta 22.0 $1,149 45

So-Cal 21.8 $1,204 5

So-Flo 16.9 $765 15

Tor-Buff-Chester 16.4 $593 22

Nor-Cal 14.5 $909 17

Dal-Aus 11.9 $723 8

Hou-Orleans 10.8 $755 12

Cascadia 9.7 $593 11

Phoenix-Tucson 5.3 $256 2

Denver-Boulder 4.2 $256 5 Concentration: Pre-Requisite to Innovation

Young workforces need to be corralled

Clustering brings Productivity advantages Economies of scale Knowledge spillover

Innovation, economic growth and prosperity continue to occur in places that attract a critical mass of top creative talent

Globalization increases the returns on innovation… Fast rollouts of innovative products and services Increases lure of innovation centers for planet’s best and brightest Why Place Matters

• Despite all the hype over globalization, place is actually more important in the global economy than ever before. • Places are growing more diverse and specialized— from their economic makeup and job market to the quality of life they provide and the kinds of people who live in them. • We live in a highly mobile society, giving most of us more say over where we live. Global IPO Trends 2013

$137 Billion Globally in 2013

Europe: $26.9 Billion

Asia Pacific: $44.9 Billion North America: $54.9 Billion

Middle East & Africa: $1.4 Billion

Latin America: $12.1 Billion

Global Total: $140.2 Billion North America Accounted for 39% of all Activity

Source: Renaissance Capital/ Cassidy Turley Research IPOs Driving Growth

Significant Bay Area IPOs (Public) US IPO Trends 2013

US IPO Historical Trends

In 2013, the US IPO market posted its strongest showing in over a decade.

Proceeds by Sector in 2013 US Total Bay Area Total As of midyear 2014, Sector # $(B) % of $ # $(B) % of $ Energy 22 $10.7 19% 2 $0.43 8% the US IPO market Financial 45 $10.2 19% 1 $0.23 4% Health Care 54 $8.6 16% 8 $0.79 15% was on pace to Consumer 19 $8.3 15% 3 $0.4 8% Technology 45 $7.9 14% 15 $3.45 65% surpass 2013 totals Capital Goods 14 $3.7 7% 0 $0.0 0% Transportation 7 $1.8 3% 0 $0.0 0% by at least 15%. Materials 9 $1.5 3% 0 $0.0 0% Business Services 3 $1.4 3% 0 $0.0 0% Communications 4 $0.8 1% 0 $0.0 0% Utilities 0 $0.0 0% 0 $0.0 0% Source: Renaissance Capital/ Cassidy Turley Research Total 222 $54.9 29 $5.31

Source: Renaissance Capital, SalesGenie, Cassidy Turley Research © Cassidy Turley 2014 Bay Area IPO Trends 2013

Proceeds by Sector (% of $) in 2013

The San Francisco Bay Area has emerged as the clear leader, nationally and globally, in terms of technology-related IPOs, accounting for 65% of all US activity last year. Source: Renaissance Capital/ Cassidy Turley Research

Source: Renaissance Capital, SalesGenie, Cassidy Turley Research © Cassidy Turley 2014 Bay Area IPO Trends 2014

Bay Area IPOs in 2014 (Midyear 2014) Bay Area IPO Locations YTD 2014

Company Industry IPO Status Target ($M) GoPro Technology Jun 2014 $427.0M Business TriNet Mar 2014 $240.0M Svcs Arista Networks Technology Jun 2014 $226.0M A-10 Networks Technology Mar 2014 $188.0M Castlight Health Health Care Mar 2014 $178.0M Coupons.Com Technology Mar 2014 $168.0M Versartis Health Care Mar 2014 $126.0M Ultragenyx Health Care Jan 2014 $121.0M Pharmaceuticals MobileIron Technology Jun 2014 $100.0M ZenDesk Technology Jun 2014 $100.0M Revance Health Care Jan 2014 $86.3M Therapeutics Aerohive Networks Technology Mar 2014 $75.0M Achaeogen Health Care Mar 2014 $72.0M Five9 Technology Apr 2014 $70.0M Ardelyx Health Care Jun 2014 $60.0M Corium International Health Care Apr 2014 $52.0M Adamas Health Care Apr 2014 $48.0M Pharmaceuticals Energous Technology Mar 2014 $24.0M Sysorex Global Technology Apr 2014 $20.0M Enterprises YTD 2014 IPOs: 20 | $2,469M

Source: Renaissance Capital, SalesGenie, Cassidy Turley Research © Cassidy Turley 2014 Bay Area IPOs Still Strong in 2014

Proceeds by Sector through YTD 2014 (Midyear 2014) US Total Bay Area Total Sector # $(B) % of $ # $(B) % of $ Energy 17 $7.5 24% 0 $0.0 0% Financial 16 $6.9 22% 0 $0.0 0% Technology 37 $6.6 21% 10 $1.4 66% Health Care 52 $3.6 12% 9 $0.8 34% Business Services 5 $2.5 8% 1 $0.2 0% Consumer 9 $2.2 7% 0 $0.0 0% Capital Goods 7 $1.1 3% 0 $0.0 0% Transportation 3 $0.6 2% 0 $0.0 0% Materials 1 $0.2 1% 0 $0.0 0% Communications 0 $0.0 0% 0 $0.0 0% Utilities 0 $0.0 0% 0 $0.0 0% Total 147 $31.4 20 $2.5 Proceeds by Sector (% of $) YTD 2014 (Midyear 2014) Proceeds by Sector (% of $) YTD 2014 (Midyear 2014)

65% Bay Area IPO Trends 2014 Bay Area Pending IPOs (Filings) in 2014 (Midyear 2014) Bay Area IPO Watch List Company Industry IPO Status Target ($M) Box Technology Filed – Jan 2014 $250.0M Zoosk Technology Filed – Apr 2014 $100.0M Good Technology Technology Filed – May 2014 $100.0M CardioDX Healthcare Filed – Nov 2013 $92.0M Protein Simple (being acquired) Healthcare Filed – May 2014 $86.0M Avalanche Biotech Healthcare Filed – Jun 2014 $86.0M Intersect, ENT Healthcare Filed – Jun 2014 $80.0M TubeMogul Technology Filed – Mar 2014 $75.0M Yodlee Technology Filed – Jun 2014 $75.0M Tobira Therapeutics Healthcare Filed – Jun 2014 $69.0M Zosano Pharma Healthcare Filed – Jun 2014 $65.0M Ariosa Diagnostics Healthcare Filed – Mar 2014 $61.0M CareDx (xDX) Healthcare Filed – Jun 2014 $50.0M Atara Biotherapeutics Healthcare Filed – Jun 2014 $50.0M KineMed Healthcare Filed – Jan 2014 $41.0M CymbaBay Therapeutics Healthcare Filed – Apr 2014 $30.0M YTD 2014 Pending IPOs: 16 | $1,310M

The San Francisco Bay Area has accounted for $31.4 billion in IPO activity so far this year…

Bay Area IPO Trend Tracker

Example Footprint Trends for Notable Companies Debuting IPO since 2011 (Bay Area only) *Footprint consists of all real estate under contract (signed lease or own) or under construction in the Bay Area

Footprint (Sq. Ft.) Footprint (Sq. Ft.) 6 Mos Footprint (Sq. Ft.) IPO Current Company 12 Mos Prior to IPO Prior to IPO at IPO Date Footprint Facebook 1M 1M 1M May-12 1.4M Twitter 371K 379K 466K Nov-13 779K Zynga 270K 331K 457K Dec-11 391K Groupon 12K 40K 40K Nov-11 45K Workday 112K 112K 112K Oct-12 163K GoPro 200K 200K 200K Jun-14 200K LinkedIn 146K 146K 146K May-11 2M FireEye 88K 140K 140K Sep-13 193K Veeva Systems 40K 40K 40K Oct-13 40K Arista Networks 66K 66K 127K Jun-14 127K Palo Alto Networks 106K 106K 106K Jul-12 300K A10 Networks 80K 80K 80K Mar-14 80K Chegg 45K 45K 45K Nov-13 45K Nimble Storage 165K 165K 165K Dec-13 165K Coupons.com 40K 40K 40K Mar-14 40K Violin Memory 29K 29K 92K Dec-13 92K

Through our own analyses, Cassidy Turley has discovered a growing phenomenon involving companies either still in planning or filing stages of an IPO that is leading to significant leasing activity as decision makers look to lock up space to accommodate continued and anticipated expansion. Although real estate decisions have historically followed the influx of IPO capital, numerous modern-era companies are able to generate strong funding during the pre-IPO stages—especially in the tech sector—allowing them to greatly expand their local footprints while still amidst such stages.

Contributing Sources: Renaissance Capital, IPO Monitor Silicon Valley Business Journal, Google Finance, Cassidy Turley Research © Cassidy Turley 2014 Bay Area Venture Capital Eclipses All

US Regional Snapshot (Midyear 2014) Total Total Average Region Deals Funding Deal Size Silicon Valley 365 $7,094M $19.44M NY Metro 122 $1,203M $9.86M New England 128 $1,251M $9.78M LA/Orange County 68 $539M $7.92M Midwest 82 $496M $6.05M Northwest 48 $423M $8.82M Southeast 61 $364M $5.96M Texas 47 $354M $7,54M DC/Metroplex 58 $247M $4.26M San Diego 26 $222M $8.56M SouthWest 20 $219M $10.96M Colorado 20 $151M $7.54M Philadelphia Metro 28 $141M $5.03M North Central 21 $135M $6.42M Sacramento/N.Cal 5 $98M $19.71M Upstate NY 14 $29M $2.07M South Central 8 $13M $1.61M AK/HI/PR 1 $0M $0.35M Total 1,114 $12,969M $11.64M The San Francisco Bay Area has emerged as the clear leader in terms of venture capital activity. Through midyear 2014, it has accounted for 55% of all venture capital funding in the U.S.

Source: Cassidy Turley Research PriceWaterhouseCoopersMoneyTree Bay Area Venture Capital Q2 2014

Bay Area Snapshot (Q2 2014) Total Total Average North Bay By Geography Deals Funding Deal Size North Bay 6 $52.5M $8.76M $52M East Bay 22 $412.5M $18.75M San Francisco Co. 138 $3,794.1M $58.37M San Mateo Co. 65 $955.7M $6.93M San Francisco Santa Clara Co. 112 $1,878.6M $16.77M East Bay Total Bay Area 365 $7,094M $19.44M $3,794M $412M Bay Area Historical Trend

San Mateo $956M Santa Clara $1,879M

Bay Area V.C. Activity Q1 2014: $4.098 Billion Q2 2014: $7.094 Billion

Source: Cassidy Turley Research PriceWaterhouseCoopersMoneyTree The “20 Minute Rule”

Only companies within a 20- minute commute of the venture capital firm’s office are considered worthy of a high-risk investment.

Firms do make exceptions, but given the hands-on demands of venture capitalism, proximity to clients, investors and colleagues is highly prioritized.” --Dr. Richard Florida

Other Reasons for Optimism… Strong Population Growth Bay Area 2010 2011 2012 2013 Growth % Counties 2010 – Growth 2013 San Francisco 805,704 815,016 827,420 837,442 31,738 3.9%

Santa Clara 1,786,539 1,811,297 1,836,025 1,862,041 75,502 4.2% San Mateo 719,756 728,288 738,681 747,373 27,617 3.8% Alameda 1,513,527 1,531,324 1,553,960 1,578,891 65,364 4.3% Contra Costa 1,052,700 1,065,917 1,078,257 1,094,205 41,505 3.9% Marin 252,897 255,252 255,841 258,365 5,468 2.1% Sonoma 484,698 487,549 490,596 495,025 10,327 2.6% Napa 136,780 137,883 138,916 140,326 3,546 2.5% California 2.6% Threats…

What About Shrinking Space Usage?

The Rise of Creative Office Space

From corner offices… to cubicles… to communal space…

Getting More Space Efficient

U.S. Office space per worker, average square feet

230 225

220 Office space per worker, sf

210

200 The 2,500 SF tenant has

190 become the 2,000 SF tenant and will become 180 176 the 1,500 SF tenant… 170

160 151

150 2010 2011 2012 2013 2014 2015 2016 2017

Some of the forecasts have been aggressive… But is it Overblown?

Market Current Current Est. Office Space Est. Office Space Vacancy Average Per User Ratio Per User Ratio Asking Rent 2000 2014 San Francisco 8.4% $50.30 4.0 5.25 Boston 12.2% $29.57 4.0 5.25 Dallas 20.0% $21.02 4.0 4.75 Houston 13.7% $25.98 4.0 4.5 Los Angeles 17.9% $31.48 4.0 4.5 New York 11.2% $63.55 4.0 5.25 Phoenix 22.2% $20.59 4.0 4.25 Sacramento 15.3% $20.04 4.0 4.25 San Diego 17.7% $29.64 4.0 5.0 St. Louis 15.5% $18.64 4.0 4.0 Washington DC 10.2% $49.48 4.0 4.5 San Francisco Multifamily Market

Vacancy & Average Asking Rent Trend 7% $3,400 $3,229.00 6% $3,200

5% 4.60% $3,000

4% $2,800

3% $2,600

2% $2,422.00 $2,400

1% $2,200

0% $2,000

Q1 2014 Q1 Q4 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q2

Vacancy Avg. Asking Rent

Does not include projects impacted by rent control Source: Cassidy Turley Research RealFacts Bay Area Apartment Market

How Far Can Rents be Pushed?

7% 45.8% Rent Growth Since Q2 2010! 6%

5%

4%

3%

2%

1%

0%

-1%

-2%

-3%

4Q 4Q 2011 4Q 4Q 2006 4Q 2007 4Q 2008 4Q 2009 4Q 2010 4Q 2012 4Q 2013

Source: Cassidy Turley Research RealFacts Bay Area Apartment Market

% Change in Per Capita Income Growth

10%

8% 14% Per Capita Income Growth Since 2010! 6%

4%

2%

0%

-2%

-4%

-6%

-8% Bay Area Per Capita Personal Income Growth US Per Capita Personal Income Growth -10% 2006 2007 2008 2009 2010 2011 2012 2013

Source: Cassidy Turley Research BEA Housing Affordability Index

Home Ownership Unattainable for Most Bay Area Residents

Q2 2013 Q1 2014 Q2 2014 Alameda 25 22 18 Contra Costa 23 24 19 Marin 20 15 14 Napa 34 28 25 San Francisco 17 15 14 San Mateo 17 13 14 Santa Clara 24 22 19 Solano 63 53 51 Sonoma 29 29 29

Source: Cassidy Turley Research National Association of Realtors Brooklynification of Oakland Manhattan Multifamily Market

Vacancy & Average Asking Rent Trend 5% $2,600 10% Annual $2,400 4% Rental Rate $2,200 3% Growth = Rise $2,000 $1,800

2% of Brooklyn $1,600

$1,400 1% $1,200

0% $1,000

2003 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2004

Vacancy Avg. Asking Rent

Does not include projects impacted by rent control Source: Cassidy Turley Research RealFacts Expect Change from Aging Millennials!

Millennials DON’T PREFER Smaller Spaces Millennials DON’T PREFER Renting Over Owning (at least not as they age)

Don’t Confuse Millennial Patterns of Necessity for Preferences!

Biggest Long-Term Threat?

The current average age of employee at…

Google 28 Facebook 29 Twitter 27 Apple 30

Will these same employees want to live in the City once they start marrying up and having kids?

Source: Cassidy Turley Research 2015 Office Market Predictions

• Office vacancy Hits 6% • Rental rate growth accelerates • Average asking rate hits $65 PSF TOP SPACES COMMAND $85 PSF+ • Interest rates increase May 2015… • But insatiable investor appetite for core urban office = continued cap rates of 5% or less… little or no impact on pricing • 2016: vacancy levels in 6% range as more new projects are delivered Get On My Mailing List! Thank You!

Garrick Brown Vice President, Research Western United States Cassidy Turley [email protected]