Belltown/ Denny Regrade Market Analysis

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BELLTOWN DENNY REGRADE MARKET ANALYSIS

PREPARED BY: DAVID KNIGHT, JAMES MAYTON, MARY FIALKO & JEFF BERNARD

MARCH 9TH, 2012PREPARED FOR: KBFM

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PrePared By: david Knight, James mayton, mary FialKo & JeFF Bernard

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Purpose of Market Analysis Study

We are pleased to present our market analysis for the Belltown/Denny Regrade submarket area. Our team was asked to research and analyze future rent growth for any potential new Class A office space in the area. The goal of the study is to provide rent rates to be used by KBFM to determine the viability of developing office properties on land holdings in the Belltown/Denny Regrade area.

There is strong support for future rents growing above the cost of construction for KBFM. We recommend pursuing class A office space development while cautioning KBFM to carefully consider and monitor risks to this unique submarket. While strong rent growth provides motivation for starting development soon, the success of new development in this submarket may be influenced by a few key market participants as well as other macro and micro economic factors.

The following report starts with an executive overview, explains some key methodology assumptions and breaks out our findings in detail. Please feel free to contact our team with any questions or additional analysis requests as specific development plans are put in place.

BELLTOWN/DENNY REGRADE MARKET STUDY

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ANALYSIS OVERVIEW & DESIGN1. Executive Summary2. Study Design Key Definitions 3. Study Design Methodology4. Study Design Flow Chart

MARKET OVERVIEW5. Market Context & Productivity6. Market Productivity Strengths & Weaknesses7. Productivity Attributes8. Key Market Attributes

MARKET DELINEATION9. Market Delineation Overview10. Competitive Markets11. Market Characteristics12. MSA Economic Profile13. Market Snapshot

DEMAND14. Competitive Market Employment15. Class A Competitive Market Subset16. Full Service Asking Rent History17. Vacancy History18. Employment Growth Forecast19. MSA Projected New Office Space

ORGANIZATION STRUCTURE

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Belltown/ Denny Regrade Location Within Seattle MSA

20. Competitive Base Industries21. Establishing Capture Rates22. Net Absorption Capture Rates23. Denny Triangle Capture Rates24. Denny Triangle Net Absorption Forecast25. Demand Risk Analysis

SUPPLY26. Supply Overview27. Land Availability28. Key Competitive Projects29. Amazon’s Place and Influence30. Construction Activity31. Historic Trends Comparison32. Completions Forecast33. Supply Risk Analysis

RENT FORECAST34. Equilibrium Rate35. Short Term Rent Forecast - 2 Tier Model36. Long Term Qualitative Forecast37. Rent Forecast Risk Analysis

CONCLUSIONS38. Recommendations and Next Steps


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EXECUTIVE SUMMARY

Increasing Rents: Rents are predicted to increase at a much higher rate in Belltown/Denny Regrade than in the other down-town submarkets, potentially making the area an ideal place for development in the very near future. Submarket rents are expected to increase to the point of po-tentially creating a bubble. The forecast predicts rent leveling off in the long term as Amazon vacates its old properties and developers slow their delivery of a large new building inventory.

Higher Status Hub Location for Class A Office Properties: The Denny Triangle Area is expected to serve as a continuation of the South Lake Union premium office space district and an expansion of the Downtown CBD. The bullish forecast assumes premium office space with key attributes

required to attract creative employees will be concentrated in this area. Geographic constraints, development uncertainties along the central waterfront, Pioneer Square and the SODO neighborhoods, and development trends in the Seattle market all support the continued evolution of this new business district marketed by distinct premium attributes.

Competition Between High Level Build-ing Attributes: The market analysis is based on South Lake Union’s recent net absorption history as well as buildings that have attributes that match those of the most recent new development in the Den-ny Triangle area. Rent growth prospects hinge on the ability to match building attributes to the tenant-specific demand in this area.

RENT GROWTH - MAIN POINTS

Watch Market Movers: Recommend careful monitoring of key single tenants like Amazon and developers with large holdings. A few key market participants may have great impact on future development prospects.

Risks: Analysis findings hinge on development market movers and the growth of key Seattle employers. Market analysis should be revisited periodically over new development planning phases.

FORECAST RISKS

Competitive Market Rent Forecast 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021Rent Growth % 0 0.4% -15.5% -0.1% -3.1% 5.0% 7.0% 8.0% 8.0% 8.0% 0.5% -3.0% -3.0% 1.0% -2.0%Rents (Asking) 36.31$ 36.46$ 30.81$ 30.78$ 29.82$ 31.31$ 33.50$ 36.18$ 39.08$ 42.20$ 42.41$ 41.14$ 39.91$ 40.31$ 39.50$ Concessions Multiplier 95% 95% 85% 85% 85% 90% 90% 95% 95% 90% 85% 85% 85% 85% 85%Full-Service Effective Rents 34.49$ 34.64$ 26.19$ 26.16$ 25.35$ 28.18$ 30.15$ 34.37$ 37.12$ 37.98$ 36.05$ 34.97$ 33.92$ 34.26$ 33.58$

Belltown/ Denny Regrade Rent Forecast 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021Rent Growth % (from CoStar Class A) 0 9.5% -19.4% 12.0% 2.5% 5.0% 7.0% 8.0% 8.0% 8.0% 0.5% -3.0% -3.0% 1.0% -2.0%Rents (Asking) 37.37$ 40.93$ 32.99$ 36.95$ 37.89$ 39.78$ 42.57$ 45.97$ 49.65$ 53.63$ 53.89$ 52.28$ 50.71$ 51.22$ 50.19$ Concessions Multiplier 95% 95% 90% 90% 90% 90% 95% 95% 95% 95% 90% 90% 85% 85% 85%Full-Service Effective Rents 35.50$ 38.88$ 29.69$ 33.26$ 34.10$ 35.81$ 40.44$ 43.68$ 47.17$ 50.94$ 48.50$ 47.05$ 43.10$ 43.53$ 42.66$


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STUDY DESIGN

Competitive Market: This area consisted of the South Lake Union, Downtown CBD, Belltown/Denny Regrade, and Pioneer Square submarkets as they are geographically defined by CoStar; data collected for the Competitive Market includes all Class A office properties as defined by CoStar.

Belltown-Denny Regrade (Submarket): We used CoStar’s geographic definition of the Belltown/Denny Regrade submarket as our subject area and forecasted for that entire area, although we feel most growth will occur in the Denny Regrade component and that the submarket itself is bifurcated in terms of character and product types offered. Further, we see the Denny Regrade area becoming more and more like South Lake Union and the CBD, perhaps being absorbed into one of those or a new, unique submarket as the area evolves and CoStar’s submarket definitions are updated.

Class A+ Properties: Class A+ office properties are those that are most productive and are driving demand in the Competitive Market going forward. Class A+ properties include the property subsets

as well as other towers in the CBD that are differentiated by their character and the type of primary tenants they attract.

Class A (and below) Properties: Class A office properties as defined by CoStar, of any age and size, appealing to any tenant. Many of these are commodity-type office properties that are not as competitive in the market based on their ability to attract the most desirable tenants and yield high rents. While such properties are influential in the supply and demand forecasts, they are not considered directly competitive with the identified subset that only includes Class A+ properties.

Demand Subset: 20 properties that appeal to creative class tenants, located throughout the Market Area but primarily in South Lake Union. In addition to suggestions from our broker, the criteria used to identify the Demand Subset include:

• Located within competitive market

• Existing Office

• Class “A”

• 12,000 minimum floor plate

• Built after 1990

• Multi- and Single-tenant

• Creative class tenants including medical research and other related industries

Supply Subset: 7 Class A+ properties located in or very near to Belltown/Denny Regrade, analyzed to determine an effective base/present rent for the area going forward

Rents: Forecasts were made based on full-service, gross asking rents, since that is the form that all of CoStar’s historical data exprorts take. A “concessions multiplier” was then applied to identify full-service, gross effective rents (see below).

Concessions Multiplier: The multiplier applied to asking rents to produce an effective rent achieved by a landlord after accounting for concessions given in the least agreement. The multiplier changes over time based on whether it is a landlord or tenant market. See the Current Rents and Lease Terms section for more information.

CLARIFICATION OF TERMS


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STUDY DESIGN: KEY METHODOLOGY ASSUMPTIONS

Rent Required to Justify Cost of Construction: $40/sf break even cost of construction rent is based on full service, gross effective rents(defined earlier). Tenant allowances are not included in this target break even rent and need to be considered part of the capital budget.

190 SF Per Employee: This study deviates from the normal assumed 200 sf required per employee based on knowledge of layouts in Amazon, Path, Gates Foundation and other employers who have a more dense interior office dense. We compromised by not lowering this number to reflect Amazon’s reported 150 sf per employee ratio, internal employee vacancies, common work areas and hoteling stations for visitors makes us believe the 190 sf number is a more realistic number in the short term. Our short term forecast begins with an estimate of 200 sf/employee and works down to the 190 sf number by the end of five years, accounting for current shadow space in the market.

Competitive Market: For clarity’s sake, the competitive market shown on the map to the right includes Belltown/ Denny Regrade (yellow), South Lake Union (blue), Central Business District (Red), Pioneer Square (green). These submarket areas are geographically defined by CoStar.

METHODOLOGY ASSUMPTIONS

Market Tour: The team visited the market area numerous times and benefited from members who have experience living in the area.

Broker Visits: The team met with commercial real estate broker Dane Murphy for over an over at the Ballard Windermere office. Dane pulled information from other brokers including the following market reports:

Seattle Office Market Quarterly Update, 4th Q 2011, Office Space.com

Real Estate Market Review, Seattle Office, 4th Q 2011, Kidder Mathews

Current News: The team researched local news for the area.

Planning Review: Reviewed current planning regulations and relevant white papers on the BDR submarket’s planning vision.

MARKET RESEARCH METHODOLOGY

Custom Map

February 24, 2012

Made with Esri Business Analyst©2012 Esri www.esri.com/ba 800-447-9778 Try it Now! Page 1 of 1

Relevant Submarkets: Pioneer Square, Belltown/Denny, CBD, South Lake Union.Map Courtesy of ESRI (Custom Polygons).

PrePared By: david Knight, James mayton, mary FialKo & JeFF BernardPage 4

METHO

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MSA Employment Forecast (Puget Sound Forecasters)

Office Employment Sectors (Non Goods-Producing)

Office SF/Employee Forecast MSA

NEW CLASS A+ EFFECTIVE

RENTS FORECAST FOR

BELLTOWN/DRG

KEY

MEMO - FORECAST METHODOLOGY FLOWCHART

Building Permits/Under Construction Data from City/

CoStar

MSA Net Absorption Forecast

Competitive Market Office Employment

Sectors

Capture Rate

Market Area Completions Forecast

Belltown Denny Regrade Completions

Forecast

Supply Forecast

C. Market Net Absorption Forecast

Belltown/DRG Net Absorption Forecast

SLU Recent Share of Market Area Net

Absorption

Givens/ Costar

Demand Forecast

Local Knowledge

Consultation with Market Participants

Class A+ Concessions Multiplier Base

Class A+ Concessions Forecast (Short Term)

Class A+ Concessions Multiplier Forecast

Class A+ (Belltown/DRG) Subset History

and Base from CoStar

12.5% Equilibrium Vacancy, $40SF/Effective Rent to

Justify New

Iterative Process

Belltown/DRG Class A+ Asking Rent

Growth Forecast

Class A+ (Belltown/DRG) Subset Rent History and

Base from CoStar

Market Area Class A Asking Rent Growth

Forecast

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MARKET CONTEXT AND PRODUCTIVITY

Few Class A Office Growth Opportunities in Belltown: While there are some infill opportunities in the lower Belltown area that will influence the Denny Triangle, this study focused on a specific class of buildings expected to be built in the Denny Triangle area. While this class of buildings have the highest rent potential and line up with future demand, these types of buildings have more capital cost risk. Careful consideration of construction costs must be balanced out when determining future profitability.

Higher Status Office Location: The Denny Triangle Area is expected to be a continuation of the South Lake Union premium office space that also serves directly as a transition to the CBD. The bullish forecast assumes premium office space, with key attributes required to attract creative or highly productive employees, will be concentrated in this area. Geographic constraints in Seattle and development trends support the continued evolution of the Denny Triangle.

Importance of Developing Competitive Subset Building Criteria: While this report does take into consideration less productive Class A office space, Class B-C office space, and the impacts of the residential/retail focus of areas outside of the Denny Triangle, most market participants seem to feel that the real growth potential for the Denny Triangle is premium class A office space. Further, these buildings are assumed to have retail, dining and services on the bottom floors to continue creating an attractive urban environment for employees.

This study builds on the current market direction by focusing on existing or planned buildings that fit into the future urban landscape. This provides a more true forecast, but also assumes development is focused on buildings with similar attributes to the competitive subset.

Synergy of Area: The building attributes and urban environment stretching from South Lake Union into the Denny Triangle area has a similar feel to a well designed lifestyle center. Assuming development continues to improve and expand in the area, the Denny Triangle will be incorporated into a desirable place for employers to place their business offices.

Linkages: While the Mercer tunnel work is causing traffic issues, the eventual transportation linkages to the area will be excellent. Nearby residential development will provide opportunities for urban living and a short walk to work.

MARKET PRODUCTIVITY STRENGTHS

Traffic: Current congestion is challenging and large influx of employees may further compound traffic issues.

Competing Areas: Bellevue, Pioneer Square, Everett and other areas may not have the “cache” that South Lake Union has, but these others do offer similar services and office space opportunities. Employees who live outside of metro Seattle may influence office location decisions along with lower rent costs.

Control of Available Land: Few owners controlling availabile land may not plan their developments to match rising rents growth or have the ability to overdevelop at lower costs compared to other developers without land assets.

POTENTIAL WEAKNESS

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ᐅTech firms driving economic development in Seattle

ᐅForbes rated Seattle #1in tech growth potential

ᐅSupply of educated workforce. Tech industry supported by UW and other university research and education

ᐅA growing demand for urban living, especially within the “creative class”

ᐅTech industries moving to urban areas to compete for employees

ᐅTech investment “cluster” in Seattle

TECH INDUSTRY GROWTH & EMPLOYER FOCUS

KEY MSA INDUSTRIES - BLS DATA

Industry Primary Businesses MSA Emps. LQAll Total 1,363,645

Misc. Stores Amazon 9,199 1.2 Information: Data Processing/ Computers Microsoft/ ADP 57,104 4.5

Grantmaking, Biotech, Research & Dev. PATH, ISB 125,805 1.1 Financial Institutions KPMG/Parametric 57,041 0.8

Ambulatory Health Care Services Group Health 69,968 0.9

COMPETITIVE MARKET AREA’S ROLE WITHIN MSA

ᐅRanked 6th/7th Highest MSA for investment/development prospects, respectively, by ULI’s Emerging Trends 2012 forecast

ᐅHigh investment appetite may lead to bubbles

ᐅComparatively good unemployment rate and job growth

ᐅModerately Diversified Economy (Hachman Index of .84)

INDUSTRY MAKEUP

INVESTOR’S OUTLOOK

ᐅDominated by FIRE, Professional Services, Tech (Medicine, Software, Internet, etc.)

ᐅHighest Land Prices, Productivity, Density

6thHIGHEST MSA FOR INVESTMENT

BROADER SEATTLE MSA MARKET PROFILE

Source: BLS

MSA COMPETITION FOR BELLTOWN/DENNY REGRADE

ᐅBellevue and the larger Eastside remain attractive locations for tech firms, particularly for office campuses

ᐅPioneer Square and SoDo in general have more historic properties but development potential nonetheless, as well as comparable livability features and proximity to the CBD

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“Belltown Denny Regrade is a bifurcated market. Everything East of 5th is assumed to be prime for Class-A Office Space.”

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PHOTO COURTESY OF COSTAR ᐅPlanning Vision for Neighborhood

ᐅAvailable land in geographically constrained city

ᐅCBD to Southlake: “Lifestyle Center” attracts office tenants seeking the creative class

ᐅUrban Lifestyle = live in Belltown and walk to work in Denny Triangle

ᐅMore predictable near-term development environment when compared to SODO, Central Waterfront, and Pioneer Square

REASONS TO BE BULLISH

“South Lake Union is the hottest neighborhood for retail in Seattle,” said Jeremy Moller, a broker at JSH Properties Inc. ... no neighborhood has more buzz or interest from retailers at this time.”--Bloomberg Business Week, “Paul Allen’s Vulcan Urges Seattle to Raise Building Heights” February 21, 2012

ᐅMajority of existing office buildings are older buildings with lower rents. Few class A office buildings with attributes that compete with Demand Subset’s quality buildings.

ᐅLarge tracks of underdeveloped land in Denny Triangle

ᐅFew infill development opportunities exist West of 5th--these lots are limited by lower height restrictions and residential zoning

--Dane Murphy from Windermere

BUILT ENVIRONMENT ATTRIBUTES

The Denny Triangle Area is expected to be a continuation of the South Lake Union premium office space in addition to providing a transitional zone between the CBD. The bullish forecast assumes premium office space, with key attributes required to attract creative employees, will be concentrated in this area. Geographic constraints in Seattle and development trends support the continued evolution of the Denny Triangle.

HIGH DEMAND / HIGH STATUS AREA

BELLTOWN/DENNY REGRADE OVERVIEW - PRODUCTIVITY ATTRIBUTES

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ᐅDepending on FAR and height restrictions, Denny Regrade area may support ~24M SF in new office space with Retail on ground floor

ᐅAmazon only plans to develop 3M of the 24M, leaving large tracks of potential development. (See more analysis regarding Amazon’s impacts to the market in in Supply Section).

GROWTH POTENTIAL ᐅCompetitive Cluster: Amazon, Microsoft, Path and other similar industries

ᐅProximity to Amenities: Density, lifestyle center, proximity to condos

ᐅSLU Sense of Place similar to an immature SOMA, Pearl District and Yale Street

KEY ATTRIBUTES

BELLTOWN/ DENNY REGRADE ZONING MAP

WHAT’S AVAILABLE ᐅSpaces available from 600sf to 40,000sf

ᐅFloor plates from 20k to 40k

ᐅFlexible spaces with many allowing tenants as small as 100sf

ᐅRents are $25/sf to $44/sf

MARKET OVERVIEW - KEY MARKET ATTRIBUTES

Waterfront Areas open to mixed use, but each project reviewed by city and subject to shoreline plans

Pikes Place Market Zoning

Downtown Mixed Commercial: 240’-340’

Downtown office core “transition” zone 600’ Height Potential

West of 5th = Medium Rise Residential Zoning Focus

ᐅ“Flexible” planning Vision for Denny Triangle bridges the gap between South Lake Union and the CBD.

“Being designated as a planned-community development would give the online retailer greater flexibility in how it obtains permission to build that much office space on those properties, located between downtown and South Lake Union.”

SUPP LY


Page 9PrePared By: david Knight, James mayton, mary FialKo & JeFF Bernard

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DELINEATION

MARKET DELINEATION METHODOLOGY

DEMAND ANALYSIS

Competitive Market and Subset: Through our market analysis and conversations with market participants, it was determined that future high-rise development in the Belltown/Denny Regrade (submarket/ BDR) will be driven by newly developed high-end class “A+” buildings. Most significantly, this assumption comes from the continued development and expansion of South Lake Union and the success of tenants located there. Therefore, the competitive market area that was identified consisted of the core downtown Seattle neighborhoods that have similar high-rise zoning and/or productivity characteristics (as described in the previous sections) with the ability to attract similar tenants as seen in SLU. In addition to Belltown/ Denny Regrade, the neighborhoods identified include Pioneer Square, the Central Business District, and of course South Lake Union.

Key Subset Criteria: Within the competitive market area, the demand subset was identified by searching Class “A” building with specific criteria. Based on discussions with a broker and market research, the key criteria we used included:

• Located within competitive market

• Existing Office

• Class “A” +

• 12,000 minimum floor plate

• Built after 1990

• Multi- and Single-tenant

• Creative class tenants including medical research and other related industries

The demand subset identified includes 19 highly productive properties that we believe will compete with future development in the submarket. By analyzing the historic rents and vacancy rates along with developing an understanding of the tenants in those buildings, conclusions were drawn on the demand for competitive class A+ in the subject area. Those conclusions are discussed further in the next section.

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DELINEATION

MARKET DELINEATION METHODOLOGY CONTINUED

DEMAND ANALYSIS

Steps and Assumptions in Identifying the Competitive Market and Demand Subset:

1. Identified Class “A” stock in BDR area using general CoStar search (These were considered as relevant, but not competitive for our study after our broker feedback disqualified many of those properties)

2. Eliminated properties that were determined not comparable to majority of others

3. Used building characteristics to define broader Demand Subset search criteria in the Competitive Market

4. Identified additional competitive submarkets for the Competitive Market based on similarities identified in productivity analysis, zoning and inventory of comparable uses within adjacent submarkets

a. Belltown/Denny Regrade (BDR)

b. Pioneer Square

c. CBD

d. Lake Union

e. Key competitive market attributes

. Proximity to BDR and CBD

. Mid to high rise zoning

. Ability to attract creative class tenants

. Access to cultural resources (parks, art, food, drinks, music, recreation, etc.)

. (CoStar includes all of Lake Union, which was used for historic rents, vacancy, and absorption. However, the focus of our study and numbers used with ESRI is shown to include South Lake Union only based on focus of market activity and character.)

5. Searched for additional competitive buildings based on characteristics of BDR subset

6. Spoke with broker to determine opinion of which buildings are “True Class A” and will be most relevant for future development in the area

7. Determined competitive subset to consist of “True Class A” that attract primarily creative class (Amazon) and other professional industries including medical research (Path)

8. Applied refined criteria (described above) to CoStar search

9. Further refined subset by removing buildings not considered “True Class A” or did not have the attributes required to attract creative class tenants

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DELINEATION

LAKE UNIONBELLTOWN/ DENNY REGRADECBDPIONEER SQUARE STADIUM DISTRICT

MARKET DELINEATION

ComPetitive marKet CharaCteristiCs

Belltown-denny regrade suBmarKet

ᐅProximity to Subject Area

ᐅCurrent Mid to High Rise Zoning

ᐅAbility to Attract Creative Class Tenants

» Urban character

» Similar adjacent office tenants

» Proximity to cultural resources (parks, art, food, drinks, music, recreation)

ᐅArea Near Denny Triangle Beginning to Feed off of SLU/ Driving Market

ᐅHigh Tech, Biotech, Medical, Creative Class

ᐅOlder, Second Tier Class ‘A’ Removed

ᐅCurrent Competitive “True Class ‘A’ Limited

ᐅWithin Competitive Market

ᐅClass ‘A+’ Office

ᐅBuilt Between 1990-2012

ᐅ12,000 - 50,000 sf Typical Floor Size

demand suBset Criteria

ᐅ6-60 Stories (+ a Few 4 Story Buildings in SLU)

ᐅCurrent Tenant Characteristics

ᐅSingle- and Multi-tenant

20PROPERTIES

4NEIGHBORHOODS


DELINEATION

2301 5TH AVENUE:RBA: 197,136 SFTotal Available: 122,704 SFTypical Floor: 32,328 SFStories: 6Year Built: 2002% Leased: 98.6%Rent: Withheld Parking: 1.10 Ratio

1918 8TH AVENUE:RBA: 668,333 SFTotal Available: 11,326 SFTypical Floor: 20,000 SFStories: 36Year Built: 2009% Leased: 98.3%Rent: Withheld Parking: 1.20 Ratio

2001 6TH AVENUE: RBA: 400,369 SFTotal Available: 38,899 SFTypical Floor: 11,763 SFStories: 34Year [renovated]: 2007% Leased: 92%Rent: $24.94 Parking: 4.0 Ratio

DEMAND SUBSET

The properties shown here are the class A+ properties included in our demand subset. Some of these properties have been broken out for inclusion into a separate “Supply Subset,” as indicated next to each property. The main criterion for inclusion in the Supply Subset is proximity to the Denny Regrade area that is the subject of our market analysis, allowign a more realistic picture of what types of rents are being achieved by Class “A+” properties in that specific area (this second Supply Subset allows us to exclude rent data on competitive buildings in further away submarkets such as Pioneer Square that would otherwise be present in the Demand Subset).

In this section, rents are shown as listed individually by CoStar. Rents were later converted through CoStar property analytics and adjusted per the concessions multiplier to define full service, gross effective rents.

*Included in Supply Subset




551 BOREN AVE N: RBA: 150,039 SFTotal Available: 25,828 SFTypical Floor: 34,713SFStories: 5Year Built: 2011% Leased: 82%Rent: WitheldParking: -

818 STEWART:RBA: 668,333 SFTotal Available: 11,326 SFTypical Floor: 20,000 SFStories: 36Year Built: 2009% Leased: 98.3%Rent: Withheld Parking: 1.20 Ratio

209 YALE AVENUE:RBA: 668,333 SFTotal Available: 11,326 SFTypical Floor: 20,000 SFStories: 36Year Built: 2009% Leased: 98.3%Rent: Withheld Parking: 1.20 Ratio




DELINEATION

SUBSET

501-505 1ST AVENUERBA: 287,851 SFTotal Available: 103,215SFTypical Floor:45,455 SFStories: 7Year Built: 2010% Leased: 64.1%Rent: $20.00-$22.0(nnn)Parking: 1.40 Ratio

605 5TH AVENUERBA: 254,995 SFTotal Available: 72,292 SFTypical Floor: 28,333 SFStories: 9Year Built: 2000% Leased: 71.7%Rent:$18-$22.00 (nnn)Parking: 2.0 Ratio

705 UNION STATIONRBA: 253, 769 SFTotal Available: 249,555 SFTypical Floor: 23,070 SFStories: 11Year Built: 2001% Leased: 1.7%Rent: $23.08 (nnn)Parking: 1.0 Ratio

2001 8TH AVENUE:RBA: 497,798 SFTotal Available: 22,560 SFTypical Floor: 20,000 SFStories: 28Year Built: 2009% Leased: 95.5%Rent: $38.85Parking: 1.0 Ratio

320 WESTLAKE AVE N:RBA: 169,065 SFTotal Available: 3,391 SFTypical Floor: 34,555 SFStories: 6Year Built: 2007% Leased: 98%Rent: Withheld Parking: 180 covered spcs.

2201 WESTLAKE AVE RBA: 318,880 SFTotal Available: 5,209 SFTypical Floor 22,072SFStories: 12Year Built: 2009% Leased: 98.4%Rent: Withheld Parking: 1.0 Ratio

1220 HOWEL ST:RBA: 185,939 SFTotal Available: 51,776 SFTypical Floor: 226,563 SFStories: 11Year Built: 2000% Leased: 72.2%Rent: Withheld Parking: 1.20 Ratio

500 BOREN AVE N:RBA: 172,245 SFTotal Available: 0 SFTypical Floor: 37,047 SFStories: 4Year Built: 2010% Leased: 100%Rent: Withheld Parking: 258 covered spcs.

333-345 BOREN AVE NRBA: 569,726 SFTotal Available: 0 SFTypical Floor: 43,688 SFStories: 12Year Built: 2011% Leased: 100%Rent: Withheld Parking: 784 covered spcs.



DELINEATION

SUBSET

410 TERRY AVE N:RBA: 325,762 SFTotal Available: 103,215SFTypical Floor: 81,440 SFStories: 4Year Built: 2010% Leased: 100%Rent: WithheldParking: 415 covered spcs.

321 TERRY AVE N:RBA: 148,300 SFTotal Available: 0 SFTypical Floor: 237,084 SFStories: 4Year Built: 2007% Leased: 100%Rent: Withheld Parking: 120 covered spc.

535 TERRY AVE N:RBA: 115,484 SFTotal Available: 0 SFTypical Floor: 25,400 SFStories: 4Year Built: 2010% Leased: 100%Rent:WItheldParking: 1.5 Ratio

401-425 TERRY AVE N:RBA: 140,605 SFTotal Available: 0 SFTypical Floor: 35,151 SFStories: 4Year Built: 2004% Leased: 100%Rent: WitheldParking: -

500-550 TERRY AVE NRBA: 126,443 SFTotal Available: 13,657 SFTypical Floor: 21,235 SFStories: 5Year Built: 2011% Leased: 89.2%Rent: WitheldParking: 363 covered spcs.

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SNAPSHOT

CURRENT SNAPSHOT: CLASS ‘A+’ SUPPLY SUBSET

ᐅAVERAGE ASKING RENT IN BELLTOWN/DRG:

» Asking $33.05 / SF, Full-Service

» Based on today’s average full-service asking rent for 7 true Class A properties selected for the “Supply Subset.”

ᐅCONCESSIONS MULTIPLIER:

» Market participants have informed us that Class A- and Class B buildings need to give concessions worth approximately 10-15% of their lease value (including TIs and free rent). True Class “A+” buildings give substantially less free rent and, if they are new, moderately more in TIs.

» We assume that a “Concessions Multiplier” of .9 is fair for new true Class A properties in today’s market, and that this multiplier will increase along with rent rates, thereby decreasing the value of concessions given.

» In contrast, we believe Class A- and lower buildings deserve a “Concessions Multiplier” of .85 in today’s market.

$29.75

$25.35

ᐅEFFECTIVE RENTS IN BELLTOWN/DRG:

» $29.75/SF, Full-Service

» This effective rent rate for the Belltown/Denny Regrade submarket is based on the Average Asking Rent multiplied by the 90% Concessions Multiplier appropriate for

ᐅCOMPETITIVE MARKET EFFECTIVE RENTS:

» Similarly, effective rents in the competitive market have been established by applying a 85% Concessions Multiplier to the average asking rents for that group of Class A properties as defined by CoStar (many of which we feel do not deserve the high status).

eFFeCtive rents COMPARISON

MARKET CO

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Belltown Pioneer Square C. Market Demand SubsetLake Union Seattle CBD Seattle MSA

FULL-SERVICE ASKING RENT HISTORY

Historical data from CoStar was collected and charted to give us insight into the individual asking rent performance of the four submarkets that make up our competitive market (BDR, Lake Union, Pioneer Square, and the Seattle CBD), the competitive market as a whole, the entire Seattle MSA, and the specific properties selected for our demand subset.

Key observations include:

1. Trends from 2001 to 2008 show Lake Union and competitive subset properties headed into the mid $40/sf range. (Class A+ properties, mostly)2. Belltown proper performs significantly worse than nearly all other competitive area submarkets. We attribute

this to the large number of subpar commodity-type spaces that CoStar categorizes as Class A.3. Lake Union properties proved immune to the tech bubble recession of 2002-2005. A key factor here appears to be the building anticipation for redevelopment and investment plans by major stakeholders.

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TOTAL VACANT AVAILABLE PERCENTAGE HISTORY

Similarly, historical data from CoStar was collected and charted to give us insight into the total available vacant space performance of the four submarkets that make up our competitive market (BDR, Lake Union, Pioneer Square, and the Seattle CBD), the competitive market as a whole, the entire Seattle MSA, and the specific properties selected for our demand subset.

Key observations include:

1. Both Lake Union and our Demand Subset properties were able to demand higher rents (as shown on the previous page) than other data groups from 2009-2011, despite a spike in vacancies caused by the Great Recession and large numbers of completions.

2. Belltown experienced very low vacancy rates from 2009-2011. Digging through the CoStar historical data leads us to conclude that this is because of few new completions and “Legacy Tenants” who re-fuse to move out of the cheap commodity-type space abundant in the neighborhood that CoStar classfied as Class-A (we disagree with this classification).

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Belltown Pioneer Square C. Market Demand SubsetLake Union Seattle CBD Seattle MSA

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DEMAND


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DEMAND FORECAST, STEP 1 - MSA OFFICE EMPLOYMENT GROWTH FORECAST

*Based on PSREF Forecast Data, some sectors hidden

MSA Employment (Thousands.)* 1,777.07 1,805.04 1,843.27 1,886.09 1,915.79 *Wholesale and retail trade 267.1 270.2 275.7 281.2 282.3*Information 93.1 94.5 96.0 97.6 99.1*Financial activities 90.8 90.7 90.7 91.3 91.2*Professional and business services 250.7 262.7 275.2 288.8 301.1*Other services 460.1 469.2 480.1 491.7 502.3Government 286.0 287.0 290.1 293.7 297.6

% of Office Workers Per Industry*Wholesale and retail trade 40% 40% 40% 40% 40%Information 69% 69% 69% 69% 69%Financial activities 82% 82% 82% 82% 82%Professional and business services 61% 61% 61% 61% 61%Other services 40% 40% 40% 40% 40%Government 44% 44% 44% 44% 44%

Total MSA Office Employees* 772.3 785.7 802.6 821.7 836.5Wholesale and retail trade 82.8 83.8 85.5 87.2 87.5Information 64.3 65.2 66.2 67.3 68.4Financial activities 74.5 74.4 74.4 74.9 74.8Professional and business services 152.9 160.2 167.8 176.2 183.7Other services 184.1 187.7 192.0 196.7 200.9Government 125.8 126.3 127.7 129.2 130.9

MSA Office Employment Growth Forecast. MSA employment forecast information was gathered from the PSREF forecaset for the next five years to indicate the expected growth in office employment for each of the industries.

A. % Office Workers Per Industry. The employment growth forecast for each industry was kept separate to determine the per-centage of office employees each industry supports. Using Burns and MacDonald office worker ratios, a more accurate number of forecasted office employees were determined for each industry for the coming years.B. Projected MSA Office Employment Growth. For each year, the total forecasted employment from the previous year was subtracted to provide the projected total MSA Office Employment Growth.

2012 2013 2014 2015 2016

Projected MSA Office Employment Growth

12,877 13,329 16,946 19,127 14,740

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DEMAND


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DEMAND FORECAST, STEP 2 - MSA PROJECTED NEW OFFICE SPACE

1. Projected MSA New Office Space. The quantity of new office space was determined by multiplying the employment growth by a square foot factor per new employee in the MSA. We began with an assumption of the “industry standard” of 200 sf/employee; however, we have adjusted this number down slowly over the duration of the five year forecast to 190 SF based on the follow-ing assumptions:

Competitive Market Net Absorption 2012 2013 2014 2015 2016Projected MSA Office Employment Growth 12,877 13,329 16,946 19,127 14,740 Office Space/ Employee 200 195 195 190 190 MSA Projected New Office Space 2,575,406 2,599,096 3,304,434 3,634,192 2,800,618

A. Market participants have stated numbers as low as 150 sf/ Amazon em-ployee, and while we feel this may be an exaggeration, we feel that many tenants (and particularly tech tenants that are driving new office space demand) are slowly reducing their office space usage per employee (“Office Space Per Worker Shrinks to 151 SF By 2017”: http://news-manager.commpartners.com/naiops/issues/2012-03-06/10.html).

B. In our opinion the office space mar-ket currently has some “shadow space” which is inflating today’s sf/employee figures. Since our forecast assumes an improving economy and declining va-cancy rates, we expect that number will deflate as tenants move towards a “space banking” mode.

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DEMAND


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*Numbers Derived From ESRI BAO

tenants are maJor eConomiC ForCes

Industries by NAICS Codes (Source: ESRI BAO) Competitive Market Employees

MSA Employees

Current Employment Ratio

Finance & Insurance 18,628 67,305 28%Professional, Scientific & Tech Services 31,805 115,181 28%Public Administration 16,554 95,218 17%Information 10,080 75,836 13%Real Estate, Rental & Leasing 5,851 50,656 12%Retail Trade (Amazon) 11,858 207,674 6%Health Care & Social Assistance 9,183 194,494 5%Base Employment Capture Rate 97,121 1,538,491 6%

DEMAND FORECAST, STEP 3 - ESTABLISHMENT OF “COMPETITIVE MARKET BASE INDUSTRIES.”

Establishment of “Competitive Market Base Industries.” ESRI’s BAO platform was used to collect employment data for both the competitive market and the entire Seattle MSA. After analyzing the data, we established that the Competitive Market’s overall share of the MSA’s employment was 6%. That number was compared to other industry sectors employment shares, with larger office-space using industries highlighted, and certain industry sectors combined with others as deemed relevant

(Amazon’s retail sector was combined with the information sector). Those industries with disproportionately high office employment capture rates were identified and qualitatively translated to match the industry labeling of the Puget Sound Regional Economic Forecaster (PSREF )forecast we received. The highlighted industries include: Retail Trade (Amazon), Information, Real Estate Rental & Leasing, Finance and Insurance, and Professional, Scientific and Tech

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DEMAND


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DEMAND FORECAST, STEP 4 - FORECASTING COMPETITIVE MARKET NET ABSORPTION WITH CAPTURE RATES

4A - Establishing Competitive Market/MSA Net Absorption Capture Rates. Historic CoStar data was used to establish an average “Recent Share Capture Rate” base of 48% for the Competitive Market/MSA total net absorption figures based on quarterly numbers from 1Q2002 through 4Q2011. This NA capture rate base was a starting point for projecting forward and was later adjusted based on the performance of the “Competitive Market Base Industries” established in the previous step. The adjustments can be seen in the table below, and are directly linked to the comparative performance of each “Competitive Market Base Industry” in that specific year.

Competitive Market Net Absorption

2012 2013 2014 2015 2016 Average:

Competitive Market/MSA Projected Capture Rate

44.00% 44.00% 50.00% 56.00% 44.00% 48%

MSA Employment Growth Percentage *Wholesale and retail trade 1.5447% 1.1468% 2.0575% 1.9955% 0.3602%*Information 2.5063% 1.4772% 1.5567% 1.6659% 1.5870%*Financial activities 0.5293% -0.1633% 0.0004% 0.7042% -0.1618%*Professional and business services 4.6687% 4.7620% 4.7607% 4.9608% 4.2538%*Other services 1.2369% 1.9733% 2.3110% 2.4331% 2.1547%Government -1.0275% 0.3685% 1.0812% 1.2177% 1.3329%

Average Rate of Base Employment Change:

1.5764% 1.5941% 1.9612% 2.1629% 1.5878%

4B - Calculate Competitive Market Net Absorption. The Competitive Market/MSA NA Capture Rate Projections are applied to the Projected New MSA Office Space projections to provide forecasted competitive market net absorption figures.

Competitive Market Net Absorption 2012 2013 2014 2015 2016Projected MSA Office Employment Growth 12,877 13,329 16,946 19,127 14,740 Office Space/ Employee 200 195 195 190 190 MSA Projected New Office Space 2,575,406 2,599,096 3,304,434 3,634,192 2,800,618 Competitive Market/MSA Projected Capture Rate 44.00% 44.00% 50.00% 56.00% 44.00%Competitive Market Net Absorption 1,133,179 1,143,602 1,652,217 2,035,147 1,232,272

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DEMAND FORECAST, STEP 5 - CALCULATE BDR/COMPETITIVE MARKET NA CAPTURE RATES

Year SLU Annual NA

Submarket Annual N.A.

CR Modified CR

Historical Notes

2011 1,170,775 1,087,931 108% 108% *22 Class A Office Buildings Present in SLU2010 940,321 1,250,641 75% 75% *Amazon begins SLU Occupancy2009 23,335 (813,181) -3% 103%2008 271,817 (34,112) -797% 897%2007 229,768 630,456 36% 36% *Amazon Announces Move to SLU, SLUT Begins Service2006 338,269 1,669,314 20% 20%2005 (8,436) 176,578 -5% -5% *SLUT Project Approved2004 309,546 277,656 111% 111% *500,000 SF of RBA Delivered, High Capture Rate2003 12,192 592,993 2% 2%2002 36,278 76,368 48% 48% *Paul Allen and Vulcan Propose SLUT Project2001 3,752 (247,176) -2% 102%2000 77,382 641,585 12% 12% *Only 3 Class A Office Buildings Exist in SLU2002-2011 SLU Capture Rate of Competitive Market NA: 68%

A Submarket/Competitive Market “capture rate” should be applied to BDR based on the historical performance of SLU

SLU History

BDR Forecast

Extreme Numbers

Recession Adjustments for BDR Capture Rate

2008 2016 897% 80%2007 2015 36% 40%2006 2014 20% 20%2005 2013 -5% 10%2004 2012 111% 5%

Calculate BDR/Competitive Market NA Capture Rates. To arrive at net absorption forecasts for the Belltown/Denny Regrade area, historic CoStar data on South Lake Union was gathered and analyzed in comparison to CoStar data for the Competitive Market. This allowed us to determine a historic SLU/Competitive Market Net Absorption capture rate. Importantly, the two recessions present in the historical data produced extreme capture rate numbers (including false negatives) that needed to be adjusted. Once adjusted, these numbers represent a reasonable BDR/Competitive Market Forecast for reasons described on the following page.

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DEMAND


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DEMAND FORECAST, STEP 7 - APPLY ALL INPUTS AND DERIVE BELLTOWN/DENNY REGRADE NET ABSORPTION FORECAST

Bringing It All Together - A Rationale for the Use of SLU as an Analog. Once all inputs from the previous steps are inserted into the model here, an optimistic net absorption forecast for the Belltown/Denny Regrade area is produced, as represented by the table below. We feel that basing our BDR net absorption figures on SLU’s historical NA figures produces a more accurate forecast than simply looking at historical data for BDR. Our rationale is provided:

1. This study argues that Belltown/Denny Regrade is on the cusp of achiev-ing a higher status as a target for new

high-quality office development projects. Therefore, a backward-looking analysis of the submarket’s historical performance is not a good indicator of its expected future performance2. Although we do not project the exact same trends or capture rates to oc-cur, with the announcement of Amazon’s planned development in the Denny Re-grade and the conclusion that it represents the most ideal expansion zone for CBD type high-rise office space, it is projected that the area will experience absorption rates more similar to those seen in SLU starting in 2004. Using SLU’s capture rates from that period and an understanding of Amazon’s

new development plans as a point of refer-ence, we applied adjusted capture rates to the Competitive Market Net Absorption forecast shown below. A key assumption in the numbers shown is that we project most all of the office development that will occur in the submarket area will be in the Denny Triangle Area.3. This was done because of the strong relationship of the type of tenants (includ-ing Amazon and Path) that are already influencing the Denny triangle area and the similarities current market activities show with the recent redevelopment of the SLU neighborhood.

Competitive Market Net Absorption 2012 2013 2014 2015 2016Projected MSA Office Employment Growth 12,877 13,329 16,946 19,127 14,740 Office Space/ Employee 200 195 195 190 190 MSA Projected New Office Space 2,575,406 2,599,096 3,304,434 3,634,192 2,800,618 Competitive Market/MSA Projected Capture Rate 44.00% 44.00% 50.00% 56.00% 44.00%Competitive Market Net Absorption Forecast 1,133,179 1,143,602 1,652,217 2,035,147 1,232,272 BDR/Competitive Market Projected NA Capture Rate 5% 10% 20% 40% 80%BDR Net Absorption Forecast 56,658.93 114,360.24 330,443.37 814,058.96 985,817.50

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DEMAND


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DEMAND FORECAST RISK - AMAZON’S PLANS

Amazon Stock (Source: Google Finance)

?Our demand forecast is influenced in many ways by Amazon’s recent acquisition of property in the Denny Regrade area and their expressed intent to build 3 million SF in office towers there. The following assumptions based on that activity have substantial impacts on our demand forecast: 1. Amazon will complete 2 million square feet of office space in the BDR area in 2016, based on their aggressive pursuit of permits, rapidly increasing employment, and their desire to avoid renewing leases of other office space.2. Companies eager to lock in today’s relatively cheap office rent rates will seek to

sign long-term leases of vacant office space in the BDR area, knowing that it is up-and-com-ing and that rents will rise. This phenomenon shoudl result in enhanced levels of net ab-sorption in advance of new speculative office completions forecasted for later years.3. Last, Amazon’s ability to develop and other tenants’ desire to follow them hinges on the company’s future economic performance. Continued macroeconomic recovery and strong revenue growth for Amazon are critical to our forecast.

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Page 2 of 2Print - Maps

2/12/2012http://www.bing.com/maps/print.aspx?mkt=en-us&z=14&s=r&cp=47.608645,-122.336922&pt=pb

BDR Current State: Demand is for Class A+ office properties is high and the city, devel-opers , and investors are paying close atten-tion to this area. Thousands of new employ-ees are expected in the area in the coming years, capture rates are skyrocketing, and net absorption is projected to increase for the next 4 years.

Competition: From the wider Class A office space supply, buildings that are felt to be driving demand in the area were separated. These are the multi-tenant highrise Class ‘A+’ structures that will directly compete with new deliveries in the neighborhood. 7 build-ings in the direct area comprise the highest-level competition and make up this study’s “Supply Subset”.

Importance of Competitive Subset Build-ing Types: The market analysis is based on South Lake Union recent rent growth and buildings that have attributes that match with the direction of the land holdings in the overlap between the Denny Regrade & Denny Triangle areas. Rent growth prospects hinge on the ability to match building attri-butes with specific demand in this area.

Key Supply Attributes: Seven ‘Class A’ office space buildings in the Belltown/ Denny Regrade and South Lake Union Neighborhoods All have been built since 2000High-end rentsGood managementHigh-end tenantsHigh occupancy rates

Building Name Year Built RBA NA 2011 Direct Vacant SF

Direct Vacant %

Direct Available

Rents

5th & Bell Bldg 2002 197,136 -2703 2,703 1% 122,704 WithheldWestin Bldg 2007 400,369 -23340 32,249 8% 33,048 24.941918 8th Bldg 2009 668,333 240148 31,854 5% 11,326 WithheldWest 8th 2009 497,798 73049 343,264 69% 22,560 38.852201 Westlake Ave 2009 318,880 -7438 7,438 1.6% 5,209 Withheld818 Stewart Street Office Tower 2008 238,200 5,534 15,457 6% 15,457 WithheldAlley 24 - East Block 2006 198,000 0 2,929 1% 2,929 29.17TOTAL 2,333,613 285,250 435,894 18.68% 224,095 $ 30.99

SUBJECT AREA SUPPLY

OVERVIEW

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SUBJECT AREA SUPPLY

OVERVIEW

Land:

This land will soon be in high demand as the CBD has less and less develop-able land available. Pioneer Square to the south has a preservation ordinance that makes development more dif-ficult and sometimes more expensive. The Denny Triangle is in a key location of connecting the Central Business District with South Lake Union, a prime neighborhood in current downtown development.

The Denny Triangle has an abundance of large undeveloped lots as seen at right; many of them are surface park-ing. These are desirable for Class ‘A’ of-fice buildings, as they are large enough to handle high-rise structures with large and flexible floorplates. Density is clearly low in the neighborhood with many opportunities after seeing a clear high demand.

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SUBJECT AREA SUPPLY

1918 8TH AVE PROFILE

Two buildings have recently been completed in the neighborhood, 1918 8th Avenue, and West 8th, that are driving the market for supple in the area. Both are high rises with large flexible floorplates and high quality finishes. The buildings are meant to be prestigious, with the motto of the 36-floor 1918 8th as ‘Elevate your Status’.

Existing Tenant Existing Tenant

Available

1918 8th Avenue - 32nd Floor

WEST 8TH PROFILE

Due to increased zoning heights in the Denny Tri-angle, the development of more of these Class ‘A’ Sky-scrapers are possible. The rapid occupancy of these buildings, even in a poor eco-nomic climate, is a sign that the neighborhood is highly desired and demand should be driving development.

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SUBJECT AREA SUPPLY

AMAZON

Influence:

Amazon has 1.8M SF of office space rented out of 11 buildings owned by Paul Allen’s Vulcan Development and located within South Lake Union. These high-end, recently completed buildings are a sign that the area is changing rapidly. While this magnet company is a huge factor in driving demand, it might negatively impact supply if it makes sudden moves.

It owns three blocks in the Denny Triangle, and is pressuring the city to streamline the design review, which would put construction on the fast track. If Amazon moves to its self-developed buildings in the Denny Triangle, an influx of open real estate would flood the market just blocks away in South Lake Union, negatively affecting any new development that could go live around the same time.

This forces potential developments to be constructed more quickly than the Amazon developments, and/or tie into specific locational assets in the Denny Triangle.

From South Lake Union.... ...to the Denny Triangle

A rendering of the zoning envelope afforded by

the Clise purchase in the Denny Triangle.

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CLASS A CONSTRUCTION ACTIVITY

PERMIT APPLICATION:

New Construction Application

Permits Issued

PERMITS ISSUED:

Permit #: 6308627 1201 MERCER ST Commercial/Mixed/Other Open: Application Accepted Applied for Wed Jan 25, 2012

Permit #: 6308594 120 6TH AVE N Commercial/Mixed/Other Open: Application Accepted Applied for Tue Jan 24, 2012

Permit #: 6309483 1519 MINOR AVE Commercial/Mixed/Other Open: Application Accepted Applied for Wed Feb 01, 2012

Permit #: 6217572 207 BOREN AVE N New Commercial/Mixed/Other Open: Permit Issued Issued on Thu Jan 06, 2011

Permit #: 6265061 1620 MELROSE AVE New Commercial/Mixed/Other Open: Permit Issued Issued on Tue Apr 05, 2011

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SUPPLY HISTORY

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2,333,613 sfCLASS A OFFICE SPACE

18.68% CURRENTLY VACANT

Here you see the Supply Subset compared to the Competitive Market general Class A spaces in terms of histories of net absorption, rent, and vacancy. This is done to understand any trend variances in the two data groups. The Supply Subset has been separated from the wider Competitive Market to understand the differences between the four neighborhoods in the competitive market, and the specific supply parameters of the Denny Triangle. Forecasts will be done to compare and contrast both the Competitive Market Class A inventory and the smaller Supply Subset in the Denny Triangle.

METHODOLOGY:

HISTORIC TRENDS:The historic net absorption for both data groups follow the general economy and the greater MSA. Both show rising net absorption, but more drastically in the Denny Regrade area in the most recent quarter. Rents are mostly parallel between the two groups, rising and falling at similar rates. The new buildings in the Denny Regrade area have higher rents overall. Vacancy rates is where the Denny Regrade area differs significantly from the Competitive Market. Vacancies rose drastically in the last part of the last decade as deliveries came to market, but have fallen rapidly as the new buildings have quickly been leased up--an indicator of high demand, especially given macroeconomic contexts.

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SUPPLY FORECAST - COMPLETIONS

8xNET ABSORPTION RATE OF COMPETITIVE MARKET

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Inventory 929282 1167482 2333613 2333613 2,333,613 2,333,613 2,333,613 2,333,613 3,233,613 6,233,613 Completions 0.00 238200 1,166,131 0.00 70,000 - 500,000 900,000 3,000,000 Vacancy 34048 124950 1208408 949501 435,894 261,031 154,530 92,718 55,631 33,379 Vacancy Rate 8% 11% 53% 44% 0 0 0 0 0 0 Net Absorption 13820 129114 19716 85182 13,349 174,863 106,501 61,812 37,087 22,252 NA Rates 0.135 -0.081 0.045 0.481 0.401 0.408 0.400 0.400 0.400 0.400

Forecast of Completions: Denny Regrade

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Inventory 25,504,276 25,919,476 27,684,851 28,701,277 29,547,485 30,393,693 30,769,775 31,119,775 32,219,775 34,219,775Completions 613,365 415,200 1,765,375 1,016,426 846,208 376,082 350,000 1,100,000 2,000,000 3,500,000Vacancy 1,884,709 2,616,491 5,038,179 4,567,850 3,769,812 3,197,287 2,860,946 2,594,938 2,378,558 5,702,966Vacancy Rate 9% 11% 19% 18% 16% 10.5% 9.3% 8.3% 7.4% 16.7%Net Absorption -35,565 -62,778 25,450 368,722 80,448 572,525 336,341 266,008 216,380 175,592NA Rates 0.075 0.075 0.094 0.163 0.152 0.105 0.093 0.083 0.074 0.064

Forecast of Completions: Competitive Market

FORECASTING THROUGH NET ABSORPTION AND VACANCY:

The two completed forecasts are for the Competitive Market and an outtake completions expected only in the Belltown/Denny Regrade area. No new Class ‘A’ multi-tenant office buildings are currently under construction in the Denny Regrade Area (only a single-tenant data center project slated for 2012), althought the area is prime for absorbing leakage from the CBD. Projected Amazon completions are potentially skewing the Competitive Market. Importantly, there are relatively few projects in today’s pipeline, meaning that demand could build up through 2014.

As projected Amazon completions are delivered, vacancy rates drop quickly although the buildings aren’t affecting demand or supply. Amazon is currently projected to complete 2M square feet in 2016, and an additional 1M in 2017. However, the presence of a company like Amazon will likely drive up demand in the market, requiring a steep increase of supply. This completions forecast will be used to inform the iterative rent forecasting process.

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SUPPLY FORECAST RISK

• Poor Quality Existing Supply• How Quickly Developers Deliver to Market• The potential for construction delays• Amazon leaving leased space sooner than expected• Limited supply of land controlled by few major

participants• Next economic downturn sooner than forecasted• Financing may be hard to obtain because the neighbor-

hood is an unknown• Competitition from Class B (and Class A-) space

* with high ProJeCted demand in the area, suPPly will have to BalanCe Between meeting demand and going overBoard.

Supply risk is driven by the multiple and deep unknowns of the neighborhood. Underdeveloped, neglected, and untried, the neighborhood has many positive attributes yet no existing proof that it can live up to its potential. Major market movers like Amazon and PATH could release an over abundance of supply on the nearby area if they initiate built-to-suit projects that they later decide to vacate and sublet. Finally, existing supply of Class B buildings will exurt downward rent pressures on any new office construction, so Class B office rents and vacancies within the Competitive Market should be monitored and considered (see CoStar historical data to the right.) 0.0%

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Class A vs. B Vacancy Comparison, Competitive Market

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SUPPLY & DEM

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20004Q

20002Q

C. MarketRent

C. MarketVacancy

ᐅFirst we plotted asking rents and vacancy rates for the Competitive Market

ᐅAfter drawing an Equilibrium Rate Trend Line, it appears to end at about 12.5%

Prior to forecasting rents, an equilibrium rate was identified. By plotting both the asking rents and vacancy rates for all Class A (as defined by Costar) in the Competitive Market, a 12.5% vacancy was identified as the point where supply and demand meet. When vacancies rise above 12.5%, rents tend to fall.

When vacancies fall below 12.5%, rents tend to rise. This, along with the $40/ sf that was provided as the price that justifies construction, heavily influences the rent forecasts shown in the next section.

FORECAST


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5 YEAR RENT FORECAST: TWO TIER MODEL

COMPETITIVE MARKET

DENNY REGRADE (SUBJECT AREA)

*Here we reach cost to justify new construction (this only needs to occur in one area of the competitive market), driving most of the completions coming on line in

2015 and beyond

Rent forecasts were made through a fundamental analysis of the historic trends and relationships of vacancy rates and asking rents. As discussed in previous sections, the equilibrium rate of 12.5% vacancy along with the rent rate of $40/ sf (full service, effective rents), known completions, and the absorption forecasts are the primary factors that influence the rent forecast. Most significantly, as the vacancy drops,

rents are projected to rise. As inventory increases, vacancies rise to adjust rents back down. The concessions multiplier (which adjusts over time as well, generally increasing with rent rates) is then applied to the asking rents to identify the full-service effective rent.

To account for our prediction of a fundamental shift in the level of desirability in the Denny Regrade submarket, a two tier model was used. This process began with forecasts for the Competitive Market. To better reflect current and future supply and demand factors, the net absorption numbers that were generated from the economic forecast were adjusted based on market knowledge. Much of the absorption projected in the more recent years was transferred towards 2016 when Amazon and other projects are expected to be brought to market. It should be noted too, that because rents for class A in the competitive market are typically around 85% less than the supply subset for Denny Regrade (on account of CoStar including some low quality buildings in their Class A definition), completions of lesser class A buildings are

expected to still occur below the $40/ sf rent mark. Those completions will have a secondary influence on the supply and demand for our submarket and are therefore included in the forecasts. With those considerations, the forecast for the Competitive Market shows rents steadily increasing over the next 5 years to reach full-service, effective rent of $37.98 in 2016.

The second tier of our forecast projects rents for the Denny Regrade submarket through much the same process as done for the Competitive Market. The Denny Regrade net absorption capture rate of the Competitive Market (as generated from the economic forecast) is adjusted to better reflect current market conditions and considers the historic performance of South Lake Union as discussed in the demand section of this document. Again, Amazon’s recently announced plans are a significant driver in this forecast, as their first two million square feet will be delivered in 2016. In addition to demand projected by economic forecasts, it is expected that market participants will begin stockpiling shadow space in the submarket now in anticipation of future productivity expected in the area. For this

reason, vacancies will start falling immediately in the area and begin driving up rents. Moreover, it is expected that a number of smaller projects will be brought into the pipeline sooner than later to capitalize on Amazon’s recent news. That news, along with uncertainties surrounding the tunnel project, central waterfront, and stadium district will keep interest in Denny Regrade strong. As a result, this bullish forecast shows rents reaching $50.94 full-service effective rents in 2016 when Amazon begins delivering approximately two million square feet of office space.

FORECAST


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BDR New True Class A+ Properties 2011 2012 2013 2014 2015 2016Inventory 2,333,613 2,403,613 2,403,613 2,903,613 3,803,613 6,403,613Completions* 0 70,000 0 500,000 900,000 2,600,000Vacancy Rate 19% 18% 10% 9% 9% 5%Net Absorption Capture Rate 100% 5% 10% 20% 40% 80%Net Absorption (Economic Forecast) 13,349 56,659 114,360 330,443 814,059 985,817 Net Absorption (Adjusted) 13,349 84,988 171,540 495,665 820,000 2,600,000Rent Growth % 2.5% 5.0% 7.0% 8.0% 8.0% 8.0%Rents (Asking) $ 37.89 $ 39.78 $ 42.57 $ 45.97 $ 49.65 $ 53.63 Concession Multiplier 90% 90% 95% 95% 95% 95%Full-Service Effective Rents $ 34.10 $ 35.81 $ 40.44 $ 43.68 $ 47.17 $ 50.94

CoStar Class A Properties 2011 2012 2013 2014 2015 2016Inventory 29,547,485 29,923,567 30,273,567 31,373,567 33,373,567 36,373,567Completions* 846,208 376,082 350,000 1,100,000 2,000,000 3,000,000Vacancy Rate 16% 11% 8.9% 7.6% 7.5% 6.2%Net Absorption (Economic Forecast) 1,087,931 1,133,179 1,143,602 1,652,217 2,035,147 1,232,272 Net Absorption (Adjusted) 800,000 1,000,000 1,400,000 1,900,000 3,232,272Rent Growth % -3.1% 5.0% 7.0% 8.0% 8.0% 8.0%Rents (Asking) $ 29.82 $ 31.31 $ 33.50 $ 36.18 $ 39.08 $ 42.20 Concessions Multiplier 85% 90% 90% 95% 95% 90%Full-Service Effective Rents $ 25.35 $ 28.18 $ 30.15 $ 34.37 $ 37.12 $ 37.98

5 YEAR RENT FORECAST: TWO TIER MODEL

COMPETITIVE MARKET


12.5% EQUILIBRIUM VACANCY RATE

$40/sfJUSTIFIES CONSTRUCTION

amazon deliveries

*Completions in 2012 and 2013 are based on projects in the pipeline (under construction, permitted), while further years are projected based on market knowledge

*Here we reach cost to justify new construction (this only needs to occur in one area of the competitive market), driving most of the completions coming on line in

2015 and beyond

FORECAST


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LONG TERM RENT FORECAST: QUALITATIVE


2017 2018 2019 2020 2021Inventory 39,605,839 41,605,839 43,105,839 43,855,839 44,605,839Completions* 2,600,000 2,000,000 1,500,000 750,000 750,000Vacancy Rate 6.0% 5.2% 6.2% 6.0% 5.9%Net Absorption (Adjusted) 2,500,000 2,200,000 1,000,000 800,000 750,000Rent Growth % 0.5% -3.0% -3.0% 1.0% -2.0%Rents (Asking) $ 42.41 $ 41.14 $ 39.91 $ 40.31 $ 39.50 Concessions Multiplier 85% 85% 85% 85% 85%Full-Service Effective Rents $ 36.05 $ 34.97 $ 33.92 $ 34.26 $ 33.58

COMPETITIVE MARKET

2017 2018 2019 2020 2021Inventory 8,203,613 9,403,613 10,403,613 10,903,613 11,403,613Completions* 1,800,000 1,200,000 1,000,000 500,000 500,000Vacancy Rate 7% 11% 14% 12% 13%Net Absorption (Adjusted) 1,600,000 700,000 600,000 600,000 300,000Rent Growth % 0.5% -3.0% -3.0% 1.0% -2.0%Rents (Asking) $ 53.89 $ 52.28 $ 50.71 $ 51.22 $ 50.19 Concession Multiplier 90% 90% 85% 85% 85%Full-Service Effective Rents $ 48.50 $ 47.05 $ 43.10 $ 43.53 $ 42.66

In the long-term, rents are expected to fall off from the peak rents of 2016-2017 when Amazon’s new inventory (and others) enter the market. Vacancies and rents will continue to fluctuate slightly in a downward trend as vacancy increases due to other speculative completions that will follow Amazon in the neighborhood as well as the increased draw of Pioneer Square, Stadium District and the central waterfront. Even as rents adjust downward, Denny Regrade will remain above the competitive market class A average for the foreseeable future with effective rents leveling off in the lower to mid- $40/ sf mark.

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FORECAST

DENNY REGRADE (SUBJECT AREA) RENT FORECAST SENSITIVITY

ASSESSMENT OF KEY RISKS TO FORECAST

Throughout this document we have attempted to identify various risks to the validity of our supply and demand forecasts, and as you’d expect those same risks apply to our overall rent forecast. The following key sources of rent forecast risk are summarized here, followed by a sensitivity analysis chart that considers theses risks.

Amazon’s Performance - Amazon’s ability to develop and occupy the space that we are forecasting is contingent on the company’s performance, as well as our assumption of the company as a catalyst for additional development by other actors.

SLU Data from Downturn - The period that we used SLU’s data as an analog comparison featured two recessions and our compensation technique was based on market knowledge rather than hard numbers.

Big Dig West - Infrastructure mega-projects are infamous for delays and our forecast

projects a scheduled completion for the viaduct replacement tunnel. Furthermore, while we forecast a positive impact on the BDR area’s desirability, it’s possible that the project will have unintended negative consequences.

Few Historical Data Points - While using CoStar’s historical data for analysis allowed more customization of our competitive market area and subject submarket, the data range was quite limited, preventing us from applying rigorous statistical measures for our forecast.

Few Key Market Participants - Our forecast assumes that the Clise family’s decision to sell off portions of its Denny Regrade assemblage is an indication that it will sell off the remaining portions to other developers. However, if Clise holds on to its remaining assemblage property, perhaps as a speculation move with the intent to benefit from increased land values due to Amazon’s improvement of its newly acquired land, then our completions

forecast will become seriously off-base. Competition from SLU - Now that Amazon has begun to shift its considerable weight away from SLU and into the Denny Regrade area, it will theoretically vacate space in SLU as its leases expire, creating downward rent unless other substitute tenants are quickly found. In either case, the new vacancies and/or net absorption in SLU caused by Amazon’s void will serve as a strong competitive element for the neighboring Belltown/Denny Regrade area. Moreover, there is talk of a potential upzone in SLU which would further increase competition wiht BDR.

Class B Office Space - New Class A office properties will continue to face competition from older, lower-quality properties. If rents for those lesser properties do not rise commensurately with Class A+ properties, it will be difficult to convince tenants of higher-quality buildings’ comparative value.

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021Low $34.73 $39.03 $41.93 $44.58 $47.38 $44.38 $42.11 $37.71 $37.00 $35.20 Forecast $35.81 $40.44 $43.68 $47.17 $50.94 $48.50 $47.05 $43.10 $43.53 $42.66 High $36.88 $41.86 $45.42 $49.76 $54.51 $52.63 $51.99 $48.49 $50.06 $50.13 Window 6% 7% 8% 11% 14% 17% 21% 25% 30% 35%

CONCLU

SIONS


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CONCLUSIONS AND NEXT STEPS

Rent Growth Forecast Supports Development: There is strong support for future rents growing above the cost of construction for KBFM.

Carefully Monitor Market: We recommend pursuing class A office space development while cautioning KBFM to carefully consider and monitor risks to this unique submarket. While strong rent growth provides motivation to fast track development plans, future development may be influenced by a few key market participants as well as other macro and micro economic factors.

Collaborate With Market Participants: Coordinating development of the Denny Regrade area will help create an extension of the South Lake Union submarket. Rent growth is based on the creation of a high end office core that will attract tenants in the competitive submarket. Capturing premium rents assumes a synergy in the development to create an area that will attract future tenants.

Consider Single Tenant Partners: Finding a single tenant willing to sing a long term lease and collaborate in the development process may be possible, or at least not be overlooked as a strategy considering the potential for other large companies to want their headquarters to be located in the Denny Regrade Area.

Watch Market Movers: Recommend careful monitoring of key single tenants like Amazon and developers with large holdings. A few key market participants may have great impact on future development prospects.

KEY RECOMMENDATIONS

Establish Market Analysis Update Milestones: Due to the influence of a few key developers and employers, we recommend KBFM commission a second phase of the marketing analysis before final go, no-go decision are made.

Develop Conceptual Design and Budget: In order to evaluate the viability of providing premium class A office space in the Denny Triangle, careful study of construction costs should be developed to further confirm $40/sf is the break even rent.

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Belltown/ Denny Regrade Market Analysis

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