As of May 2014, all 8.7 million jobs lost during the recession were regained. However, according to the Bureau of Labor Statistics, as of June the unemployment rate had only decreased to 6.1%. Due to population growth, job growth will have to increase beyond pre-recession levels in order for unemployment rates to meet pre-recession levels. Fortunately, unemployment is expected to continue decreasing. Figure 1 shows U.S. unemployment rates over the last ten years, from July 2005 to June 2014. Figure 1 U.S. Unemployment Rate

Source: Bureau of Labor Statistics

Furthermore, office-using jobs are increasing, and expected to continue increasing, at a higher rate than overall job growth in the United States. Office employment has expanded 9.0% since December 2009 versus overall employment, which has expanded 5.8%. Thus far, office vacancy rates, like unemployment rates, have not yet decreased to pre-recession levels. Office vacancy rates in 2005–2008 hovered between 12% and 14%. During the recession, the overall office vacancy rate reached peaks of approximately 17%. As of Q1 2014, the overall U.S. office vacancy rate had decreased to 14.8% and was expected to continue decreasing over the next couple of years to between 12% and 13%.1

1 CBRE Econometric Advisors, U.S. Office MarketView: Q1 2014

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As depicted in Figures 2 and 3, office vacancy rates are currently much higher in some markets than others: Figure 2 Lowest Office Vacancy Rates Downtown Suburban Metropolitan Manhattan, Midtown South 6.0% Cambridge 7.1% Manhattan 8.2% San Francisco 7.2% Nashville 8.2% San Francisco 8.4% Manhattan, Midtown 8.0% Pittsburgh 10.1% Pittsburgh 9.9% Boston 8.6% San Jose 10.5% Nashville 10.7% Houston 9.3% San Francisco 10.6% Austin & San Jose 11.7% Source: CBRE Econometric Advisors, U.S. Office MarketView: Q1 2014

Figure 3 Highest Office Vacancy Rates Downtown Suburban Metropolitan Tucson 30.7% Wilmington 23.8% Palm Beach County 23.6% Albuquerque 29.7% Palm Beach County 23.6% Wilmington 23.5% St. Louis 26.1% Las Vegas 22.9% Las Vegas 22.5% Dallas/Ft. Worth 25.5% Detroit 22.8% Detroit 22.2% San Antonio 23.6% Cincinnati 22.5% Phoenix 22.1% Source: CBRE Econometric Advisors, U.S. Office MarketView: Q1 2014

As shown in Figure 4, year-to-date completions and total net absorptions, as of Q2 2014, also vary significantly between MSAs. In most MSAs, absorption outpaces completions, showing that users are leasing office space that was previously oversupplied during the recession. In total, the U.S. office sector experienced 13.9 million square feet of positive net absorption in the second quarter of 2014 and 46.0 million square feet of positive net absorption over the last four quarters.2 If that trend continues, there should be demand for new development. However, in a few select markets, like Washington, D.C. and Dallas, completions far outpace absorption. Some MSAs have even experienced negative completions, likely due to oversupply of outdated office space.

2 JLL, Office Outlook: United States, Q2 2014

Figure 4 YTD Completions and Absorptions in Square Feet

Source: JLL, Office Outlook: United States, Q2 2014

[Redacted] has put together a list of target MSAs, in which office demand is forecasted to outpace supply over the next five years. These markets include Austin, TX; Raleigh, NC; Phoenix, AZ; Orlando, FL; Charlotte, NC; Nashville, TN; Houston, TX; Dallas/Fort Worth, TX; Ft. Lauderdale, FL; Washington, D.C.; Miami, FL; Tampa, FL; Atlanta, GA; and Denver, CO, in no particular order. [Redacted] has selected its target markets and submarkets based on a number of factors, including above average population and office-using employment growth, high forecasted office demand growth, expected outperformance of historical average occupancy, high forecast rent growth, and/or a low number of offices currently under construction compared to average annual office supply growth between 1996 and 2012.3 Clarion Partners agrees that not all office markets are created equal. Whereas earlier in the recovery period, office demand growth was largely seen in the primary gateway cities and cities with a large tech/energy presence (Austin, Boston, Denver, Houston, NYC Midtown South, San Diego, San Francisco, San Jose, and Seattle), now office demand growth is spreading to secondary markets. In 2013, proportional share of net absorption in tech/energy markets decreased from 223% in 2010-2012 to 110%. Also in 2013, net absorption in secondary markets increased to 1.44% of stock, while net absorption in the top 15 markets stayed flat at 0.73%. Furthermore, net absorption in suburban markets (markets in which high-rise office buildings do not represent a

3 CoStar Portfolio Strategy and Parmenter Realty Group, The Office Opportunity in High Growth Markets, Spring 2014

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majority of the total square footage) increased to 1.31% of stock in 2013, up from 0.98% in 2012, while Central Business District (CBD) absorption stayed flat at 0.49%.4 Figure 5 below depicts the proportional share of office absorption by Tech/Energy Sectors in comparison to All Other sectors from 2010 through 2013. Figure 5 Proportional Share of Office Absorption in Tech/Energy Sectors vs. All Others

Clarion Partners, U.S. Office Sector Outlook: The Transformation of Office Demand, February 2014 Figure 6 depicts the proportional share of office absorption by CBD in comparison to suburban markets.

4 Clarion Partners, U.S. Office Sector Outlook: The Transformation of Office Demand, February 2014

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Figure 6 Proportional Share of Office Absorption in CBD markets vs. Suburban markets

Clarion Partners, U.S. Office Sector Outlook: The Transformation of Office Demand, February 2014 Another important factor that office investors should consider today is a shift in requirements for office space. Many companies today are looking for less traditional office spaces with more flexible and unique office space and greater access to amenities like public transportation, bike paths, parks, restaurants and bars, grocery stores, etc. According to Cushman and Wakefield, this shift could spell trouble for the recovery of the office market. Companies have begun exhibiting a preference for more efficient use of office space (i.e. open office spaces and collaborative work areas rather than separate offices for each employee; more portable, compact technology that takes up less space). This is reflected in the amount of square footage required for each employee. In 2010, the average amount of space per office worker globally was 225 square feet. In 2013, 64% of corporations had decreased office space to 150 square feet per worker. Cushman and Wakefield predicts that in 2018, 52.3% of corporations will average 100 square feet or less per worker. This reduction of office space per worker could ultimately lead to a decrease in absorption, slowing the recovery of the office market. As companies trend toward workplace strategy, working with their employees to discover what type of office space will increase employee satisfaction and production, more flexible, customized office spaces become desirable. A study conducted by CBRE of more than 20,000 workers around the world found that people spend less than 50% of their work time at their desk.5 In general, the rest of their time is spent meeting with others virtually or in more collaborative workspaces. Furthermore, as mobility increases 5 CBRE, The Evolving Workplace: How U.S. Office Space is Changing, July 2014

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and it becomes more plausible for employees to work from home, companies must do more to attract employees to the office. This translates to health and wellness provisions in the office, premier in-office technology, community spaces, etc. Traditional offices do not meet these space needs. This increases demand for refurbishment of old offices to meet new needs, as well as new development of flexible, customizable office space in desirable locations, creating an opportunity for office developers like [Redacted].