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 Under One Qtr Over One Qtr Under One Qtr Over One Q

50,000 sf Change 50,000 sf Change 50,000 sf Change 50,000 sf Chan

Average Term: 5 years 10 years Average Term: 5 years 7 years

Concessions: Concessions:

 

Free Rent 4 months 8 months Free Rent 7 months 9 months

Tenant Improvements $35.00/sf $65.00/sf Tenant Improvements $30.00/sf $45.00/sf  

Moving allowance $2.00/sf $2.00/sf Parking/Other some some

Outlook: Outlook:  Asking price momentum is likely to continue surging ahead of Tenant leverage is strong as availability rates remain high,

supply/demand fundamentals, which could slow transaction

velocity.

especially in suburban markets.

LEASE ACTIVITY

Lease activity declined slightly for a secondconsecutive quarter. Approximately 1.1 millionsquare feet were leased in the rst quarter, a40% shortfall from the 10-year historic average.

ASKING RENTS RISE

Optimistic landlords drove asking rents higher in the rst quarter. The average asking rent for Class A space rose 2.8% to $32.21, full service. Asking rents for Class B space rose 3.7% to$29.34.

AVAILABILITY DECLINES

Market availability declined in the rst quarter,from 18.4% to 18.0%. Approximately 14.5million square feet is currently available for lease. In comparison, 16.6 million square feetwas available at the market’s peak, 3Q 2009.

LARGE BLOCK INVENTORY DECLINED

SLIGHTLY

The number of available large contiguous blocksof space (50,000 square feet or more) declinedslightly in the rst quarter. 46 large blocks of space are currently available, compared to 48last quarter and 48 a year ago.

MARKET HIGHLIGHTS

SAN FRANCISCO CBD TRANSACTION BAROMETER EAST BAY TRANSACTION BAROMETER

1Q 201

S T U D L E Y O F F I C E M A R K E T A N D S P A C E D AT A R EReport 

SAN FRANC

Up Down Unchanged

A booming technology industry is leading San Francisco’s office market out of decline. A decadeafter the dot-com bubble, this sector is experiencing a second wave of transformative growth.Next-generation “web 2.0” technology firms are expanding at a rapid pace, shoring up demand fooffice space as traditional tenants in declining industries consolidate operations and increase wospace efficiency.

Global demand for social networking, online gaming, cloud-computing and app developmenthas risen to new heights. As a result, the tech-heavy NASDAQ index pushed past 2,800in the first quarter, returning to pre-recession levels. San Francisco and the Bay Area arebenefitting from being the geographic hub for much of the current technological innovation. Manycompanies leading the new wave in technology, including salesforce.com, Zynga and Twitter, ar

headquartered in San Francisco. The local office market is profiting from the rapid expansion of next-generation tech firms and rising office space demand on the part of technology tenants hasbeen welcomed by landlords. However, technology companies are peripheral in San Francisco’stenant base, the majority of which has puttered along with the economic recovery.

Market-wide availability declined from 18.4% to 18.0% in the first quarter. In aggregate,approximately 400,000 square feet of previously available space was removed from the market.While many tenants continue to downsize upon lease rollover, technology firms are expanding arobust pace. Salesforce.com leased four more floors at 123 Mission Street. Additionally, its majoland purchase in Mission Bay eliminated the possibility of constructing a multi-tenant spec officebuilding that had been proposed in the area. The future Salesforce.com move to Mission Bay wilfree up an estimated 800,000 sf to 1.0 million square feet of currently occupied office space in thNorth and South Financial Districts.

Twitter dominated news headlines throughout the quarter, finally signing a letter of intent to lease

large block of space in the historic Furniture Mart at 1355 Market Street. The deal was contingenupon the city’s recent approval of a new payroll tax exemption. The Mid-Market Street/Tenderloinarea tax exemption, aimed at Twitter, exempts tenants in the area from paying the city’s 1.5%payroll tax on new hires for up to six years. In addition to Salesforce.com and Twitter, the trend oweb-based tech tenant expansion was exemplified by online social gaming companies Big Pointand Kabam, as well as web discovery engine firm StumbleUpon. Big Point subleased an entire

Technology Boom 2.0

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Tenant Sq Feet Address Market Area

Williams-Sonoma 60,000 100 North Point St Waterfront North Beach

Wiley Publishing 57,190 One Montgomery St Financial District North

Wells Fargo Insurance Services 57,081 45 Fremont St Financial District South

Salesforce.com 55,977 123 Mission St Financial District South

 

Catholic Healthcare West 54,000 185 Berry St Mission Bay/China Basin

California Dept of Health Care Services 36,324 575 Market St Financial District South

ABM Industries Incorporated 31,179 600 Harrison St Rincon/South Beach

Recurrent Energy 30,610 300 California St Financial District North

Big Point 29,000 500 Howard St Financial District South

Kabam 25,897 405 Howard St Financial District South

BTIG 22,372 600 Montgomery St Financial District North

Bank of New York Mellon 22,073 100 Pine St Financial District North

Fortress Investment 21,547 1 Market St - Spear Financial District South

A2Z Development 21,419 475 Sansome St Financial District North

Yammer 19,301 410 Townsend St Lower South of Market

Sum of Top 15 Leases 543,970

MAJOR TRANSACTIONS

$32.21

$28.72

$29.34$27.72$25

$30

$35

$40

Rental Rate Trends($/sf)

$0

$5

$10

$15

$20

2011 1Q2010 4Q2010 3Q2010 2Q2010 1Q

Class A Class B

46

40

50

60

Overall Large Block Trends*

34

0

10

20

30

2008 3Q 2009 1Q 2009 3Q 2010 1Q 2010 3Q 2011 1Q

Contiguous Spaces Over 50,000 sf 

16.8%17.9%

19.7%22.3%

15%

20%

25%

(%) Availability Rate Trends

0%

5%

10%

2011 1Q2010 4Q2010 3Q2010 2Q2010 1Q

Class A Class B

3.53.43.0

3.5

4.0

4.5(msf)

Four-Quarter Trailing Leasing Activity*

2.01.8

0.0

0.5

1.0

1.5

2.0

.

2011 1Q2010 4Q2010 3Q2010 2Q2010 1Q

Class A Class B*Sum of leasing activity in prior four 

quarters

floor in the Orrick Building at 500 Howard Street from Sun Microsystems, while Kabamsubleased a floor at 405 Howard Street from Stantec. StumbleUpon subleased Slide’sold space at 301 Brannan Street, Slide having been previously acquired by Google.As evidenced by these recent transactions, tech tenant demand is heavily focused onbuildings located south of Market Street and has yet to cross Market Street in a materiaway.

Sublease space has steadily declined since peaking in 2009. Now totaling less than1.5 million square feet, available sublease space has retreated to pre-recession levelsas active tenants take advantage of discounted rental rates. Conversely, the amount ofavailable direct space on the market is still 40% greater than it was in 2007, prior to therecession. In addition to the 1.5 million square feet of available sublease space, 13.0million square feet is available directly. Combined, total market availability is thereforecurrently 14.5 million square feet, or 18% of inventory. When landlords were last pushinrental rates aggressively in 2007, market fundamentals were in much better shape.At that time availability totaled just 10 to 11 million square feet, in the range of 13% of inventory.

The San Francisco office market faces a long road to recovery. Despite this fact, positmomentum is prevailing. Availability has retreated from historic highs. Inventory is staband demand for space is slowly increasing. In turn, landlords have increased asking reover four consecutive quarters. Aggressive hikes in pricing may be a bit premature andremains to be seen whether landlords will be able to make their asking rents stick.

Market-wide average asking rents increased by 3.4% in the first quarter to $31.07. Interms of space quality, Class A rents rose by 2.8% to $32.21 and asking rents in Class

B properties jumped by 4.1% to $29.43. In total, asking rents have increased by nearly10% in the recovery and landlords are jumping to capitalize on any positive movementin the market. Owners of Financial District buildings are hoping to experience theforward momentum tech tenants are creating South of Market. It remains to be seen,though, whether tech tenants will cross the Market Street boundary to lease traditional“corporate” office spaces.

Most tech tenants in the market have limited their office searches to buildings withcreative space in the technology hotbed south of Market Street. The critical issueskeeping tech tenants from expanding into submarkets north of Market Street are ashortage of such creative space and lack of transportation. Caltrans, which is critical foconnecting young workers and engineering talent from the South Bay to offices in SanFrancisco, does not extend north of Market Street.

Limited transportation, rising office space costs and, perhaps most critically, high taxes

are beginning to weigh on business leaders attracted to San Francisco’s amenities andhighly skilled work force. San Francisco is the only city in California with legislation inplace to tax employee stock options. High-valued, pre-IPO companies would potentiallyface huge tax burdens under current legislation if they were to go public and hademployees exercise such options. Twitter, it appears, will score the first major victoryin the battle to remain in San Francisco. Its threat to potentially move to Brisbane wasthe impetus for the city’s creation of the new Mid-Market Street payroll tax break, and

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STUDLEY OFFICE MARKET AND SPACEDATA REP

ABOUT OUR FIRM

  is the only global tenant advisory firm with a pure tenant representative delivery platform.Founded in 1954, Studley pioneered this conflict- free business model. Today, with 19 offices nationwideand an international presence through its London office and AOS Studley throughout Europe, Studley pro-vides strategic real estate consulting services to top-tier corporations, law firms, nonprofits, governmentagencies and institutions of higher education. Information about Studley is available at www.studley.com.

EMPLOYMENT TRENDS

        2

0.0%

2.0%

4.0%

0.92

0.94

0.96

0.98

1.00

Millions San Francisco*

Total Empl. % Ann. Change

        2        0        0        1

        2        0        0

        2        0        0        3

        2        0        0        4

        2        0        0       5

        2        0        0        6

        2        0        0       7

        2        0        0        8

        2        0        0        9

        2        0        1        0

        2        0        1        1

-8.0%

-6.0%

-4.0%

-2.0%

0.78

0.80

0.82

0.84

0.86

0.88

0.90

Source: Bureau of Labor Statistics *San Francisco-San Mateo-Redwood City 

        2        0        0        9

1.0%

2.0%

3.0%

134

136

138

140

Millions National

Total Empl. % Ann. Change

        2        0        0        1

        2        0        0        2

        2        0        0        3

        2        0        0        4

        2        0        0       5

        2        0        0        6

        2        0        0       7

        2        0        0        8

        2        0        1        0

        2        0        1        1

-4.0%

-3.0%

-2.0%

-1.0%

.

124

126

128

130

132

$32.73

$32.39

SOMA

Financial District North

$32.10

$31.07

Union Square/Civic Center 

San Francisco

.

$30.05

$29.08

Rincon/South Beach

 Yerba Buena

$28.53

$28.27

US Index

Jackson Square

$27.73

$25.01

Mission Bay/Showplace Square

Waterfront/North Beach

$31.76

$25.63

Direct

Sublet

Type

$0 $20($/sf)

10.4%

13.5%

Rincon/South Beach

Jackson Square

13.8%Waterfront/North Beach

.

17.6%Financial District North

18.0%

18.3%

San Francisco

US Index

23.6%

25.4%

Mission Bay/Showplace Square

Union Square/Civic Center 

25.7%

32.9%

SOMA

 Yerba Buena

0% 10% 20% 30%(%)

it appears that Twitter will be able to remain in the city and operate under an easedtax structure. San Francisco supervisors are scrambling to modify the payroll tax inadditional ways in order to keep other profitable and expanding tenants in town.

Forecast The U.S. economy is slowly climbing out of recession. However, employment growth hastrailed behind corporate profits, hindering a stronger recovery in commercial real estatemarkets. Up to this point in the recovery, business leaders have chosen to improvebalance sheets and boost productivity rather than add workers. Nevertheless, with

steadily growing demand from tenants and limited additions to inventory, tenant leverageis expected to diminish slowly in the years ahead. Tenants with near-term space needswould be wise to lock into low rental rates in 2011 as the market begins to rise.

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Financial District North 29,195 2,206 5,151 -0.4% 5,148 17.6% -0.1% 17.7% $32.39 3.3% $28.82

Financial District North - Class A 20,447 1,694 3,773 -0.8% 3,805 18.5% -0.1% 18.7% $33.39 1.6% $29.45

Financial District South 23,658 1,459 3,381 -4.6% 3,713 14.3% -0.6% 15.6% $30.12 4.9% $26.83

Financial District South - Class A 19,247 1,202 2,412 -6.4% 2,738 12.5% -0.9% 14.4% $30.46 3.8% $27.46

Rincon/South Beach 4,154 578 434 -12.1% 683 10.4% -1.4% 16.2% $30.05 0.1% $27.08

Rincon/South Beach - Class A 1,544 298 160 -23.8% 200 10.4% -3.2% 13.0% $35.00 1.5% $30.70

 Yerba Buena 3,343 190 1,099 1.4% 1,274 32.9% 0.5% 38.2% $29.08 0.3% $26.35

Yerba Buena - Class A 690 70 433 0.0% 497 62.8% 0.0% 72.0% $29.93 0.0% $28.91

SOMA 4,659 236 1,199 10.8% 1,206 25.7% 2.8% 25.4% $32.73 1.0% $31.48

SOMA - Class A 1,848 N/A 176 657.9% 23 9.5% 8.3% 1.3% $33.90 0.3% $31.87

Union Square/Civic Center  4,925 169 1,251 -1.8% 1,365 25.4% -0.5% 27.3% $32.10 2.9% $27.33

Union Square/Civic Center - Class A 502 6 134 -0.2% 143 26.7% -0.1% 28.6% $36.77 N/A N/A

Jackson Square 1,956 212 264 -1.3% 326 13.5% -0.2% 15.8% $28.27 2.4% $24.43

Jackson Square - Class A 326 77 N/A N/A N/A N/A N/A N/A N/A N/A N/A

Waterfront/North Beach 3,687 278 508 -7.2% 561 13.8% -1.1% 15.4% $25.01 0.1% $23.06

Waterfront/North Beach - Class A 912 71 208 -9.3% 131 22.8% -2.3% 14.4% N/A N/A $26.31

Mission Bay/Showplace Square 5,251 165 1,238 -16.2% 1,746 23.6% -3.8% 32.5% $27.73 1.0% $23.87

Mission Bay/Showplace Square - Class A 2,643 46 794 -21.9% 1,085 30.1% -5.5% 38.0% $39.32 5.5% $35.00

SAN FRANCISCO TOTAL 80,830 5,494 14,524 -2.8% 16,022 18.0% -0.4% 19.7% $31.07 3.4% $28.35

SAN FRANCISCO TOTAL - Class A 48,159 3,463 8,090 -4.0% 8,623 16.8% -0.6% 17.9% $32.21 2.8% $28.72

9

1-9

3

4

5

6

7

8

2

1

MARKET SNAPSHOT: 1Q 2011

SAN FRANCISCO CONTACTS

 

The information in this report is obtained from sources deemed reliable, but no representation

is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group.Copyright © 2011 Studley

STUDLEY OFFICE MARK ET AND SPACEDATA REP

  M a  r  k e  t   S  t

 Bu s h  S t

C  o l  u  m b u  s  A v  e 

  T o  w  n

  s e  n d

   S  t

4  t  h  S  t  

7  t  h  S  t  

3                                             r                                   d                                                S                                             t                                               

16 th S t

Ca l i forn ia  S t

Ba y S t

12

34

5

6

7

8

9

(1) Percentage point change for availability rates.

Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf.

Statistics are calculated using both direct and sublease information. Recent Inventory adjustments may havecontributed to statistical fluctuations in some submarkets.

SUBMARKETMAP TOTAL LEASING AVAILABLE SF ASKING RENTS PER SFAVAILABILITY RATE

Inventory

SF

(1,000’s)

Last

12

MosThis

Qtr

%

Change

from

Last Qtr

Yr

Ago

This

QtrYr

AgoThis

Qtr

%

Change

from

Last Qtr

Yr

Ago

pp

Changefrom Last

Qtr(1)

150 California Street,14th Floor 

San Francisco, CA 94111(415) 421-5900

Branch Manager 

Steve Barker - Executive Vice Presidentsbarker@studley.comLicense 01165044

California Corporate License 00388260