Research & Forecast Report SAN FRANCISCO | OFFICE MARKET Q4 | 2020 Sublease Space In San > VACANCY The office market in San Francisco continues to be affected by the pandemic and shelter-in-place (SIP) mandate, which has translated into Francisco Continues To continued uncertainty in the market. The vacancy rate rose 110 basis points to 11.2 percent at year-end, translating into nearly 867,000 square feet of negative net absorption. The direct vacancy rate increased 80 basis points to 7.1 percent Grow while vacant sublease space also increased 30 basis points to 4.1 percent. The North Financial District accounted for nearly 48 percent of the negative net absorption during the last quarter of 2020. Additionally, the SOMA East A joint venture purchased submarket posted nearly 154,000 square feet of negative net absorption. the Transamerica Pyramid Center for $650 million or > LEASING VOLUME Leasing volume remained low during the fourth quarter $854 per blended square with most of the lease activity being driven by lease expirations. There were foot approximately 295,000 square feet of transactions that closed during this timeframe. Year-to-date San Francisco has only seen three transactions over 100,000 square feet. Vir Biotechnology signed the largest sublease this quarter Vir Biotechnology for nearly 134,000 square feet at 1800 Owens Street. Additionally, Clark Hill COLUMBUS subleased nearly 134,000 square feet at leased over 15,000 square feet at 505 Montgomery Street. Sublease availability 1800 Owens Street continued to grow in the market hitting a little over 8 million square feet at the close of the year. EMBARCADERO > ABSORPTION San Francisco’s year-to-date absorption hit nearly 5.5 million Kenson Ventures square feet of negative net absorption. While many tenants continue to put their market requirements on hold, there are currently 110 tenant requirements GREEN acquired 634 2nd Street for $55 million for nearly 2.9 million square feet, with six requirements over 100,000 square BROADWAY or $1,176 per square feet. Currently there are nearly 6.2 million square feet of lease expirations in foot 2021; however, we expect tenant activity will likely remain quiet during the first GRANT TAYLOR WASHINGTON quarter of 2021. LEAVENWORTH HYDE V A N N E S S Due to the ongoing pandemic, San Francisco’s overall weighted CALIFORNIA > RENTS effective rents continued to drop across the board during the final quarter of SPEAR 80 BUSH 2020. These rents fell by 8.6 percent to $74.63 per square foot as annual FREMONT overall weighted rents dropped 25.4 percent from last year’s peak of $100.02 MARKET 1 S T per square foot. Overall non-weighted effective rents declined 5.8 percent to $75.91 per square foot this quarter. Overall weighted Financial District rents also GEARY dropped 20.8 percent to $62.00 per square foot this quarter.. POWELL 3 R D MISSION 5 T H FOLSOM BRYANT 7 T H BRANNAN 4 T H TOWNSEND HAYES Market Indicators Relative to prior period Q4 2020 Q1 2021 Forcast 80 KING 1 0 T H VACANCY NET ABSORPTION 3 R D 7 T H TERRY A FRANCOIS CONSTRUCTION 4 T H WEIGHTED RENTAL RATE 101 OWENS NON-WEIGHTED RENTAL RATE 1 6 T H 280 SALES VOLUME 80 SALES PRICES 1 9 T H Rental Rates San Francisco – Office Rents - Q4 2020 Year-over-year overall weighted effective rents % OVERALL 4Q '20 4Q '20 3Q '20 MARKET 4Q '20 DIRECT QUARTERLY have declined 25.4 percent to $74.63 per square OVERALL SUBLEASE OVERALL CHANGE foot. Year-over-year overall non-weighted rents All Markets $74.63 $77.07 $69.50 $81.63 -8.6% in San Francisco fell 10.5 percent to $75.91 per All Markets: Class A $76.69 $80.86 $69.50 $85.04 -9.8% square foot. Overall, sublease space continues to weigh down the weighted effective rents, falling All Markets: Class B $59.93 $59.93 NA $80.29 -25.4% from $76.04 per square foot in the third quarter Financial District: Class A $76.08 $80.56 $69.50 $85.74 -11.3% to $69.50 per quarter foot in the fourth quarter. Financial District: Class B $62.00 $62.00 NA $78.28 -20.8% With motivated sublessors, sublease effective rents could continue to push down effective rents during SOMA Overall NA NA NA $81.51 NA the first half of 2021. Source: Colliers International Note: Weighted Average Effective Rents Absorption & Vacancy The City posted approximately 867,000 square feet of negative net absorption which translated to the vacancy rate rising to 11.2 percent at the close of 2020. The Financial District and the SOMA East submarkets accounted for most of this shift with a negative net absorption of 630,000 square feet and nearly 154,000 square feet, respectively. A key contributor for the SOMA East submarket was PayPal which vacated nearly 71,000 square feet at 123 Townsend Street. Some key contributors to the Net Absorption Rate Vacancy negative net absorption for the Financial District were: WeWork vacating nearly 25,000 square feet at 180 Sansome Street, Gladly moving out of over 19,000 square feet at 1 Montgomery Tower and Clearway vacating over 20,000 square feet at 100 California Street. Investment Volume Source: Colliers International The pandemic continued translating to general uncertainty in San Francisco investment market, which was reflected in the slowdown of investment sale volume during the fourth quarter 2020. $2.6 billion investment Several large and notable transactions closed sales in 2020 during the fourth quarter including the sale of the Transamerica Pyramid Center purchased by a joint venture between SHVO, Deutsche Finance International (DFI) and Bayerische Versorgungskammer (BVK) for $650 million or $852 per blended square foot. Other notable transactions include the sale of 505 Brannan and 510 Townsend that sold as a portfolio to Ascendas REIT for nearly $197 million and $364 million respectively or $1,326 and $1,231 per square foot. The lack of current leasing velocity in the market continues to create a challenging environment for investors as office vacancies grow and rents decline. Looking forward, the forecast for 2021 remains cautiously optimistic with the distribution of the COVID-19 vaccine beginning to occur which investors hope will help positively influence office users’ decisions about leasing space for their workforce by the second or third quarter of 2021. We anticipate the activity during the first two quarters of 2021 to be mostly like the fourth San Francisco Sales Activity (Billions) Transactions quarter of 2020 with investors searching for opportunities with credit tenancy and long-term Source: Colliers International leases. 2 San Francisco Research & Forecast Report | Q4-2020 | San Francisco / Office Market | Colliers International Major Office Lease Transactions - Q4 2020 ADDRESS TENANT SIZE TYPE SIGNED DATE CLASS 1800 Owens Street Vir Biotechnology 133,896 Sublease Oct-20 A 505 Montgomery Street Clark Hill 15,104 Lease Oct-20 A 575 Market Street Clearview Healthcare Partners 12,109 Sublease Oct-20 A Major Office Sale Transactions - Q4 2020 ADDRESS SELLER BUYER SQ. FT. SALES DATE CLASS SALES PRICE PRICE.SF SUBMARET Transamerica Portfolio AEGON SHVO 763,206 Oct-20 A $650,000,000 $852 NFD 221 Main Street Columbia Allianz 387,943 Oct-20 A $180,000,000 $1,031 SFD (45% interest sale) 510 Townsend Street Alexandria Real Estate Equities Ascendas REIT 295,333 Nov-20 A $363,700,000 $1,231 SOMA West 505 Brannan Street Alexandria Real Estate Equities Ascendas REIT 148,146 Nov-20 A $196,500,000 $1,326 SOMA West 634 2nd Street Thor Equities Kenson Ventures 46,752 Dec-20 B $55,000,000 $1,176 SOMA East Year-over-year, over 5.5 million square feet have hit the San Francisco market YOY Quarterly Comparisons 18.0% 18 16.0% 11.20% 16 Millions 14.0% 10.10% 14 12.0% 12 7.70% 10.0% 10 8.0% 8 5.30% 6.0% 4.50% 6 3.90% 4.10% 4.0% 2.80% 4 2.0% 1.10% 1.30% 2 2.6M 7.4M 3.1M 9.6M 5M 12M 7.4M 15.6M 8.1M 17.1M 0.0% 0 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Available Sublease Space Total Available Space Sublease Vacancy Total Vacancy Development Pipeline The COVID-19 pandemic has also contributed to delays in the delivery of office Currently, there is over 1.4 million square feet scheduled to be delivered in 2021 construction projects throughout the City. These projects have faced multiple and 100 percent of that product has been completely preleased. Additionally, San challenges such as shortages of supplies, labor, and rising costs. During the last Francisco has nearly 8.6 million square feet of development in either proposed quarter of 2020 only one project, the Armory at 1800 Mission Street for over and pending status and currently over 5.9 million square feet have approved 244,000 square feet was delivered to the market. There was slightly over 1.1 Prop M allocations. In San Francisco Prop M restricts the amount of office space million square feet added to the San Francisco market during the past year and 78 authorized for development in the City for projects over 50,000 square feet to percent of that product was preleased. 875,00 square feet annually. 3 San Francisco Research & Forecast Report | Q4-2020 | San Francisco / Office Market | Colliers International Market Comparisons - San Francisco OFFICE MARKET VACANCY NET TOTAL DIRECT DIRECT SUBLEASE SUBLEASE TOTAL OCCUPIED VACANCY NET NET NET NEW UNDER RATE NEW SUPPLY PROPOSED CLASS BLDGS INVENTORY VACANT VACANCY VACANT VACANCY VACANT SPACE RATE ABSORPTION ABSORPTION SUPPLY YTD CONSTRUCTION CURRENT CURRENT-SQ.