San Francisco

Commercial Real Estate Market Conversation

Presented By JD Lumpkin, Senior Director

Cushman & Wakefield
 San Francisco Commercial Real Estate Market

Surgeon

Surgery Patient

Broker / Attorney

Owner / Investor
Surgery

…the bleeding has STOPPED!

San Francisco Commercial Real Estate Market
Bay Area Traditional Tenant Base
Bay Area Technology Tenant Base
 Bay Area Technology Tenant Base

Education Real Estate Retail

Technology

Litigation / Law Finance /

Banking

Media Advertising
Intellectual Capital and Innovation
The Collapse…
Bay Area Technology Tenant Base
Bay Area Technology Tenant Base
Bay Area Technology Tenant Base
 The Great Recession – October 2007 to March 2009

S&P 500 Down 45%

Real Estate values have fallen

40%+ nationwide

Consumer Confidence hit lowest levels since 1967

$11.2 Trillion lost in the Stock Market

Unemployment from 4.4% to 10.1% Nationally (through today)

Venture Capital down 55% in 2009 alone, the least since 2003

Only 6 VC Backed IPO’s in 2008 and 13 in 2009.

7.2 million jobs shed

The Great Recession – October 2007 to March 2009
Rising Maturity Levels - Nationally

Source: ACLI, Federal Reserve Board of Governors, Wachovia Capital Markets 2009
 San Francisco Tenant Demand, Supply and Pricing

18,500,000 $70

16,500,000
$60

14,500,000
$50
12,500,000

10,500,000 $40

8,500,000 $30

6,500,000
$20
4,500,000

$10
2,500,000

500,000 $0
1Q 01
2Q 01
3Q 01
4Q 01
1Q 97
2Q 97
3Q 97
4Q 97
1Q 98
2Q 98
3Q 98
4Q 98
1Q 99
2Q 99
3Q 99
4Q 99
1Q 00
2Q 00
3Q 00
4Q 00

1Q 02
2Q 02
3Q 02
4Q 02
1Q 03
2Q 03
3Q 03
4Q 03
1Q 04
2Q 04
3Q 04
4Q 04
1Q 05
2Q 05
3Q 05
4Q 05
1Q 06
2Q 06
3Q 06
4Q 06
1Q 07
2Q 07
3Q 07
4Q 07
1Q 08
2Q 08
3Q 08
4Q 08
1Q 09
2Q 09
3Q 09
Sq. Ft. of Tenants in the Market Overall Avail. Space Overall Rental Rate

Source: Cushman & Wakefield Research

*Overall = Direct and Sublease
San Francisco Demand Profile - By Business Type
 Lease “Roll” in coming Years

2010 14.6%

2009 8.2%

2008 8.5%

Source: Costar
 Lease Renewals and Passive Demand

growing share
# of deals

2009
213 2008 New
Transactions
824 2008
Renewals

666 2009 New

Transactions
2009
Renewals
155
2008

Source: Cushman & Wakefield Research

 San Francisco Office Rates vs. NASDAQ

5,000 $80
4,566 Rents peaked
2 quarters
4,500 $69.84 after NASDAQ
peaked $70
4,000
spike? $60
3,500

3,000
$50
2,500 2,282
$40
2,000
$31.50
1,500 $30
1,000 1,172 $25.68
Rents bottomed
7 quarters $20
500 after NASDAQ
bottomed
0 $10
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
1Q09
1Q10
1Q11
1Q12
1Q13
1Q14
1Q15
Nasdaq Citywide Overall Rental Rate

Source: Cushman & Wakefield Research

*Overall = Direct and Sublease
The New Capital Stack

*This assumes that NOI

THEN 2008 - 2009 doesn’t change which is highly
possible in today’s
Value - $10 Million 30% decrease environment
Equity
96 – 100%
Now - Refinance
$500,000
“Under Water”
Mezzanine 2 Value - $7 Million
91 – 95% Value - $7 Million
Wiped out Equity
$500,000
71 – 100%
$2,100,000
Mezzanine 1
81 – 90%
$1,000,000

First Trust
First Trust
38.75% 0 – 70%
0 – 70%
decrease in
$4,900,000
First Trust $8,000,000 note value
0 – 80%
$8,000,000

NOI of $650,000 NOI of $650,000

Cap Rate 6.5% Cap Rate 9.3%
Leveraged ROE 19% Leveraged ROE 12.2%
The “Clearing” of the Market
 Central Business District (CBD)
Vacancy & Unemployment vs Rental Rates

25% $80
$69.48
$70
20%
$60

$48.00
$45.33 $46.31 $50
15% $42.12

$35.40 $36.72 $40

$32.76 $33.36 $33.31
$29.28
10% $26.67 $27.36 $27.96
$30
$21.61

$20
5%
$10
10.6%

15.9%

19.7%

20.1%

17.4%

14.8%

10.3%
12.9%
11.2%

11.6%
4.7%

3.7%

3.3%
3.3%

2.7%
5.8%

2.5%
2.7%

3.5%
2.9%

6.5%

5.8%

5.0%

4.3%

3.9%

4.0%
8.0%

6.2%
7.1%

5.1%

0% $0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

San Francisco Unemployment Rate CBD All Classes Overall Vacancy Rate
CBD All Classes Overall Rental Rate
Source: Cushman & Wakefield Research
*Overall = Direct and Sublease
 Changes in Worker Productivity

Spike in productivity

Output per hour

Source: Bureau of Labor Statistics, USA

New Drivers in The Market
New Drivers in The Market
New Drivers in The Market
 Forecast - We’re going down before up…

Central Business District Overall Net Absorption vs. Overall Vacancy

Today

Forecast
Source: Cushman & Wakefield Research
*Overall = Direct and Sublease
Forecast We’re going down before up…

Central Business District Overall Rental Rates vs. Overall Vacancy

*Overall = Direct and Sublease

 “Stay lean ‘til ’13!”

Thank You
Questions…?

Presented By JD Lumpkin, Senior Director

Cushman & Wakefield
JD.Lumpkin@Cushwake.com