/pulse/

San Francisco / Office Insight / Q2 2010

Key market indicators
12-month forecast
Supply

Tech expansion draws attention, but commodity space drags recovery

Economy Improvements in employment have signaled a turn for San Francisco. Consistently declining since the start of the year, unemployment stood at 9.2 percent at the end of May as job losses in core industries have waned. Positive response from the housing market in the form of increased sales and average prices further validate that residents feel confident in a recovery. Market conditions Strong demand from tenants thats now reached 2.5 million square feet of leasing activity year-to-date has raised hopes of rapid recovery, but overcoming large blocks of space additions has caused consternation. During the second quarter, over half a million square feet of absorption was generated by new and expanding tenants, but with approximately 620,000 square feet of space newly returned to the market by five large users, net absorption stayed in negative territory. Yet market optimism and elevated demand levels provided for higher asking rents. Technology firms are leading the charge with venture capital and financial partners willing to fund growth plans and new business ventures. Key submarkets south of Market Street dominated by technology firms are tightening significantly and leading recovery efforts with an injection of new demand thats rebalancing negotiating power and allowing landlords to nudge rents upward. Segmenting the market into two categories, tenants and spaces above and below 30,000 square feet, yields divergent results. The four submarkets south of Market Street have a combined vacancy of 27.0 percent. However, when segmented as described above, vacancy was 17.0 percent for spaces over and 10.0 percent for spaces under 30,000 square feet. When matched with tenants, there were eight seeking over, and 75 seeking under 30,000 square feet at the end of the quarter. Smaller technology tenants are starting to face conditions that feel oddly like 1999. Likewise, tenants in the Central Business District have also recognized that nows the time to take advantage of low rates and top tier space. As a result, competition has emerged and given landlords new leverage and a healthier marketplace. Both of these positive developments have given new life to the capital markets by bringing buyers and sellers into better alignment, thereby boosting transaction volume. Outlook The stage is now set for performance metrics to catch up with growth expectations being driven by the innovation engine thats gearing up and being led by social media, life sciences, and software firms. Leases signed and pending occupancies provide confidence that all market fundamentals will turn positive in the second half of the year, but heavy drag from commodity space will likely weigh down performance in 2010.

Supply Direct vacancy rate Total vacancy rate Under construction (% preleased)
Demand

73,147,683 sf 15.9% 17.8% 205,500 (75.7%) 52.7% -581,025 sf 0.06% $37.08 psf $27.30 psf

Leasing activity 12 mo. % change YTD net absorption 12-month overall rent % change

Pricing

Class A overall asking rent Class B overall asking rent

*Jones Lang LaSalle performed an audit of total building supply, vacancies and rent levels. Material changes to current quarter statistics resulted, which may not be comparable to previously reported figures.

Net new supply, net absorption and total vacancy

Net new supply
sf 3,000,000 18% 2,000,000 15% 1,000,000 12% 0 -1,000,000 -2,000,000 -3,000,000 2005 2006 2007 2008 2009 Q2 2010 9% 6% 3% 0%

Net absorption

total vacancy

Leasing activity vs. sublease vacant rents Historical asking vs. effective space
Leasing activity sf 8,000,000 Sublease space

6,000,000

4,000,000

2,000,000

0 2005 2006 2007 2008 2009 Q2 2010

Sublease space only includes vacant space

Jones Lang LaSalle Americas Research Pulse San Francisco Office Insight Q2 2010 2

Tenant perspective A dichotomy of sorts has emerged in the San Francisco office market as demand for high-tech and high-end space has grown substantially since the start of the year. Tenants that are leading a market recovery have created a market within a market, driving rents higher and supply lower in these small segments. Among the buildings most coveted by these tenants, vacancy in premier office space is declining and less than 20 large blocks can be found south of Market Street. For the lions share of the office market, however, high vacancy continues to offer great options at great prices. With 73 blocks of space over 30,000 square feet and more than 100 subleases of all sizes on the market, variety of supply will continue to give tenants the negotiating leverage they are looking for in this economy.

Landlord perspective The close of the quarter produced more negative results for landlords as vacancy inched upwards, reinforcing that two quarters of healthy leasing activity is not enough to offset tenants returning space to the market. Though the rush of large vacancies appears to have wound down, the rate of dispositions has largely outweighed tenant demand since the start of the recession. And while some segments are reporting healthy activity, the large majority of buildings are waiting for significant job growth to boost leasing and occupancy levels. Commodity space remains abundant and will be a drag of the market, so it will be important to remain competitive.

Class A overall asking rents

CBD $ psf $60 $50 $40 $30 Non-CBD

Class A tenant improvement allowance

$ psf $50 CBD Non-CBD

$40

$30

$20

$20 $10 $0 2005 2006 2007 2008 2009 Q2 2010

$10

$0 2006 2007 2008 2009 Q2 2010

Class A free rent

months 6 CBD Non-CBD

Class A blocks of contiguous space

CBD # of blocks 25 20 15 10 Non-CBD

5 1 11 11 4 5 50,000 100,000 sf 100,000 200,000 sf 30,00050,000 sf 3 5 > 200,000 sf

5 0

0 2005 2006 2007 2008 2009 Q2 2010

Includes vacant existing blocks and available UC/UR blocks

Jones Lang LaSalle Americas Research Pulse San Francisco Office Insight Q2 2010 3

Property clock current market conditions

Submarket leverage market history and forecast

Submarket
2008 2009 2010 2011 2012

CBD

Landlord leverage

Non-CBD

Tenant leverage

Peaking market

Falling market

Rising market

Bottoming market

Landlord-favorable conditions

Balanced conditions

Tenant-favorable conditions

CBD Non-CBD

Completed lease transactions Tenant Salesforce.com Latham & Watkins Securities and Exchange Commission Conifer Securities Woodruff Sawyer Regus Ubisoft Schiff Hardin Trust for Public Land Trulia Address Submarket sf 225,000 122,000 60,000 51,424 43,194 43,094 42,429 37,737 33,119 32,000 Type / Occupancy footprint Renewal / Expansion Renewal / No change Renewal / No change Renewal / No change New / Downsize Renewal / No change Renewal / No change Renewal / No change New / Downsize New / Expansion

The Landmark at One Market South Financial District 505 Montgomery Street 44 Montgomery Street 1 Ferry Building 50 California Street 1 Market Plaza, Spear Tower 625 Third Street 1 Market Plaza, Spear Tower 101 Montgomery Street 116 New Montgomery Street North Financial District North Financial District North Financial District North Financial District South Financial District South of Market South Financial District North Financial District South Financial District

Completed sale transactions Address 303 Second Street 333 Market Street 351 California Street Submarket South Financial District South Financial District North Financial District Buyer / Seller Kilroy Realty / Kennedy Associates Korean syndicate of investors / Principal Real Estate Investors Polidev International / S.E.C. sf 731,972 657,114 136,791 $ psf $324 $507 $256

San Francisco methodology: Inventory includes all Class A, B, & C office properties > 40,000 square feet, and non-owner occupied buildings

About Jones Lang LaSalle Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2008 global revenue of $2.7 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.4 billion square feet worldwide. LaSalle Investment Management, the companys investment management business, is one of the worlds largest and most diverse in real estate with more than $37 billion of assets under management. For further information, please visit our Web site, www.joneslanglasalle.com. About Jones Lang LaSalle Research Jones Lang LaSalles research team delivers intelligence, analysis, and insight through market-leading reports and services that illuminate todays commercial real estate dynamics and identify tomorrows challenges and opportunities. Our 300 professional researchers track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions.

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