HinkinsREA analyzes market data obtained from third party sources and the accuracy thereof has not been independently verified. References and quotes are taken from online sources, Business Times, CoStar, LoopNet, Company websites & Press Releases, and other third party sources. Reproduction of this report prohibited. Copyright HinkinsREA. September 2013. 2012, A year which exceeded expectations. Leasing Market Recap 50% of the 61 largest blocks of space where Historic Sales Volume absorbed towards the end of 2012 including 2007 - $8.5 billion traded hands making it the 305,000 square foot at 500 Terry Street Francois highest sales volume year in the history of San Blvd where Maraki leased 110,000 SF; 264,000 SF Francisco. at 360 Third Street where Square Trade took 55,000 SF and two other tenants took 125,000 2012 – Sale Volume & Investor Demand SF; 1155 Market Street where the City of San Building sales blasted towards $6.1 billion due to Francisco took 110,000 SF; 760 Market Street foreign investors and pension funds activity where Obvious took 75,000 SF and 101 Spear marking the second time in history that the sales Street where Salesforce took 100,000 SF. volume topped $6.0 billion. The opportunistic The year-end decision by Salesforce to prelease buyers of 2010 and 2011 were replaced by the entire 444,000 square foot tower planned for institutional investors looking for stable, income 350 (developer, Kilroy Realty Corp) producing properties, seeking well-leased core spurred the stage for fast-growing tenants to assets. The real estate cycle moved from buying begin grabbing space early in other large leased buildings to rehabs to ground up downtown buildings coming out of the ground in development. 2013. The rent was agreed at $65 per square foot Stabilized core office buildings sold for an average fully-serviced for the entire $275 million tower of $640 per square foot with cap rates around 4%. making it the largest lease in 2012 and set the In 2009, in the wake of the economic downturn, stage for the City’s first new office high-rise in the average price was below $400 per square foot five years. Salesforce was set to become the and cap rates had spiked to over 8%. City’s second largest tenant after Wells Fargo. A Low interest rates, strong rent growth and tenant chart of average class A office rents is included on demand fueled the market in 2012. Investors page 4 of this report. seeking safe locations for their money gravitated to core gateway markets like San Francisco.

Sale Facts Recap Active Investors & Developers 2013 The largest sale transaction of 2012 was the Acron 92.5% interest sale of 101 California St by Nippon Beacon Capital Life Insurance to an Asian partnership led by Boston Properties Singapore’s sovereign wealth fund for $910 Broadway Partners million. The highest price paid was $802 per square foot Cornerstone Real Estate Advisers ($445 million) for . At prices Cannae Partners north of $800 per square foot, approximately Group 1 $150 per square foot more than its costs to Hudson Pacific construct a new tower, the market would turn in Jay Paul Corp 2013 to ground-up new high-rise development. Kilroy Realty Corp (Future fact - In 2013 the ‘median sales price’ Lincoln Property Company settled around $500 per square foot by 3Q13 with MacFarlane Partners cap rates sub 6%). Principal Real Estate Investors The traditional north financial market displayed Prudential Real Estate Company of America higher vacancies and lower rents than SoMa Sansome Street Advisors (Future fact - 2013 would see the start of non- SKS Partners/Vantage Property Investors profits being pushed out of SoMa and Up-Market and heading across the bay to Oakland due to Shorenstein their inability to pay the higher San Francisco Tishman Speyer rents). TMG Partners Westport Capital Partners LLC 2013, Mid-Market Sizzles, Downtown Spec the current buildings and will deliver the City’s Office Developments begin to rise. second tallest office and residential tower in 4Q15 topping out at 54-stories and 684,000 About 3 million square feet of new or fully square feet. renovated office space enters the development Kilroy Development Corp with its 4.7 million pipeline. While downtown witnesses ground-up square foot northern California portfolio shifts development, Mid-Market sees investors from value-add properties to ground-up office snapping up buildings as technology giants lease building developer, cementing the shift to new large blocks of space. development in San Francisco’s downtown office market. Sale Volume Starting the year with expectations built on a Mid-Market Sizzles successful prior year, investors continue their While downtown witnesses ground-up commitment to San Francisco; but indications are development, Mid-Market sees investors 2013 will see year end sales total around half of snapping up buildings in the wake of technology that done in 2012, i.e. approx. $3.0 billion in 2013 giants leasing large blocks of space between Fifth versus $6 billion in 2012. In 2013 the spotlight will Street and Van Ness. go to developers who began adding more ground- up office development to the pipeline than Leasing Market anytime since the 1980’s. Sales rebound in the Rents increase, climbing 60% since 2010 and now fall as half-a-dozen buildings hit the market in average $52 per square foot, fully serviced, are time for a projected year end close. The list the primary driver behind the turn towards new includes 114 Sansome Street, 201 Spear Street, ground-up development. Rents for premium 703 Market Street, 888 Brannan Street, 655 space reached $55 and $60 per square foot, only Montgomery Street, 350 Rhode Island Street, 795 10% to 15% less than the $65 per square foot Folsom Street, 685 Market Street, and 10 Union developers need to make new construction Nations Plaza. viable. Technology giants, Twitter, Square, Yammer, and The ‘median sales price’ settled out around $500 Dolby, lease large blocks of space on Market per square foot by 3Q13 with cap rates sub 6%. Street in the Mid-Market submarket. Other tenant’s attracted to the burgeoning mid-market Sale Activity included Benchmark Capital, Zendesk, and Zoosk. Boston Properties emerges as a key downtown developer lining up $1.4 billion in new projects Notable Office Sales 2012/2013 which will add more than 2 million square feet of Property Size (SF) office space to the city. Ground-up development 101 California 1,251,454 takes over the downtown area with Tishman 662,060 Speyer and JP Morgan Chase Asset Management’s 657,114 spec 300,000 square foot office building at 505 555 Mission Street 557,000 Howard St under construction and expectations 680 Folsom Street 521,598 that they will break ground at 489,373 with a new 450,000 square foot tower. Boston 600 California Street 358,590 Properties take on for a new 475 Sansome Street 353,269 27-story office building and Kilroy Realty Corp gets 343 Sansome Street 256,985 ready to begin development of , a new 30-story tower which is 100 percent 901 Market Street 210,976 preleased to Salesforce. 100 Spear Street 203,071 Jay Paul Co puts Street into the new 255 California Street development pipeline commencing demolition on 1000 Van Ness

Largest Ground-Up Office High Rise Development Projects 2013 -2016 Property Developer Type Size (SF) Delivery Year Transbay Tower Boston Properties Spec 1,600,000 2016 101 Mission Street (50% stake with Hines)

181 Fremont Street Jay Paul Corp Spec 54 story 684,000 4Q, 2015 office and residential tower 222 Second Street Tishman Speyer Spec 450,000 2015

350 Bush Street Lincoln Properties Spec 435,000 2015

350 Mission St Kilroy Realty Corp Preleased to 400,000 2015 (LEED Platinum (Paid $52m for the ) entitled site)

Foundry Square III Tishman Speyer Spec 355,000 2013/14 (505 Howard Street)

535 Mission Street Boston Properties Spec 354,000 2014

Notable Rehabilitation Projects

Property Developer Size (SF) Year Started Anchor

50 United Nations GSA 350,000 2012 GSA Plaza 1019 Market Street Cannae Partners/ 75,000 2013 Leasing Westport Capital Partners LLC

Warfield Office Group 1 42,000 2012 Benchmark Capital, Building Spotify, Google Bay Area Average Fully Serviced Class A Annual Office Asking Rents, 2Q2013

Concord Oakland CBD Palo Alto

Pleasanton Redwood City San Francisco CBD North

San Francisco CBD South San Francisco SOMA Santa Clara

San Mateo San Jose Walnut Creek CBD

Hinkins Real Estate Analytics is a contemporary real estate analytics and real estate brokerage firm specializing in commercial property investment in the San Francisco Bay area.

We assist investors and the users of commercial real estate with the evaluation of their investment objectives and investment performance, and provide full service acquisition and disposition services for NNN, office, retail, industrial and medical office buildings.

HinkinsREA engages the latest research capabilities and investment analysis technology. With our best of class analysis and brokerage services we provide an unparalleled insight into commercial real estate decisions.

1966 Tice Valley Blvd; #187 Mark D. Hinkins, CCIM, FRICS Walnut Creek, CA 94595 President NCal CCIM, 2014 Tel: (925) 627-6027 www.hinkinsREA.com

Licensed Real Estate Broker CA #0132084

HinkinsREA analyzes market data obtained from third party sources and the accuracy thereof has not been independently verified. References and quotes are taken from online sources, San Francisco Business Times, CoStar, LoopNet, Company websites & Press Releases, and other third party sources. Reproduction of this report prohibited. Copyright HinkinsREA. September 2013.