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EFFECTIVE RENTAL RATE QUARTERLY COMPARISON

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RESEARCH & FORECAST REPORTSAN FRANCISCO

www.colliers.com/sanfrancisco

Continued Recovery Significant Q1 Absorption and Stable and Increasing Rents attract Investor Interest

OVERVIEW

Supported by an improving economy and measurable job growth, the San Francisco office market is positioned for further recovery in 2011. The first quarter marked the third consecutive quarter to post positive net absorption. A healthy 487,030 square feet of positive net absorption was recorded, which lowered the vacancy rate by 0.5 percent to 14.2 percent.

Absorption was influenced more by actual job growth, rather than companies taking advantage of favorable market conditions. According to the California Employment Development Department, in February, the unemployment rate fell 0.4 percentage points to 9.1 percent. The number of unemployed in San Francisco fell by 2,000 (from 43,100 to 41,100) as the number of employed increased by 1,200 (from 410,100 to 411,300). The overall unadjusted California unemployment rate fell by 0.4 percentage points to 12.2 percent, as the ranks of the unemployed fell by 83,400.

The improvement in the city’s employment was measurable by the city’s leasing activity. More than 1.63 million square feet of office space were signed for during the first quarter, which is on par with the city’s historical average. Technology-related sectors accounted for 29 percent of the overall transaction volume. Strong absorption and decreasing vacancies are placing pressure on rental rates, although overall Class A rental rates slipped slightly during the first quarter by 0.3 percent to $34.15 per square foot, it has increased 12 percent year over the past year (the first quarter of 2010’s average of $30.50 per square foot.)

With the return of stable and improving rental rates, investors have become more confident about the recovery of the San Francisco office market, as measured by the increased volume of investor interest. During the first quarter of 2011, eight office investment transactions closed, totalling $267 million. The improving market and the increased competition among buyers has also lowered overall cap rates for the city’s core assets.

RENT INCREASES

While rental rates slipped slightly during the first quarter, we expect overall rental rates to continue their upward trend over the coming quarters.

MARKET INDICATORS

UPDATEAbsorption and Vacancy Rates

Q1 2011 2011

VACANCY

NET ABSORPTION

CONSTRUCTION WEIGHTED RENTAL RATE

NON WEIGHTED RENTAL RATE

SALES VOLUME

SALE PRICES

Q1 2011 | OFFICE

4Q '10 Overall

1Q '11 Direct

1Q '11 Sublease

1Q '11 Overall

% Change

*Financial District: Class A $38.40 $36.32 $27.79 $35.03 -8.8%

$34.69 $34.75 $27.01 $33.76 -2.7%

*All Markets: Class A $37.39 $36.34 $27.79 $35.28 -5.6%

$34.24 $35.03 $27.01 $34.15 -0.3%

*All Markets: Class B $30.88 $29.62 $24.84 $29.41 -4.8%

$29.58 $29.14 $24.84 $29.04 -1.8%

*All Markets: Class C $24.75 $29.65 $32.00 $29.88 20.7%

$24.72 $26.98 $32.00 $24.73 0.0%

-10%

-5%

0%

5%

10%

15%

20%

600 000

-400,000

-200,000

0

200,000

400,000

600,000

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-800,000

-600,000

-400,000

-200,000

0

200,000

400,000

600,000

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

4Q'09

1Q '10

2Q'10

3Q '10

4Q'10

1Q'11

Net Absorption Vacancy

*weighted average rents

ABSORPTION

The San Francisco office market experienced 487,030 square feet of positive absorption during the quarter. The majority of the growth took place in the Financial District, which alone posted 349,079 square feet of positive absorption.

Expansions from tech-related industries drove much of the growth. Although the preferred location for this sector has typically been South of Market (SOMA), tech demand is now spilling into the Financial District. The surplus of office space vacated by financial firms is an enticing option for growing tech firms looking for a large block of office space.

A few of the notable tech companies that occupied large blocks of space in the South Financial District include Salesforce.com, which expanded by 70,687 square feet at 123 Mission Street and added 50,000 square feet to its footprint at the Landmark at One Market Street, and Google, which took an additional 63,817 square-foot-floor at Hills Plaza.

Ironically, SOMA East, the submarket where technology-related companies tend to cluster, was one of only two submarkets that experienced occupancy loss during the quarter. The submarket experienced 46,710 square feet of

negative absorption. The losses were mainly due to United Business Media returning 30,000 square feet in its relocation from 600 Harrison Street to 303 Second Street and Fox Interactive vacating 33,000 square feet of its office space at 625 Second Street.

VACANCYThe overall growth in the market during the first quarter shed the city’s vacancy rate by 0.5 percent from to 14.2 percent.

Sublease space, in particular, is diminishing due to the high demand from startups and tech firms for its flexible terms and reasonable price. Unoccupied sublease vacancy dropped by .3 percent to 0.7 percent. The tight market has made reasonable sublease options a rarity. As a result, average sublease rents have increased across the board.

Leasing activity remained strong during the first quarter. More than 1.63 million square feet of office lease transactions took place. The two largest leases were completed by law firms taking advantage of still favorable fundamentals. Keker Van Nest committed to 90,264 square feet at 633 Battery Street where it plans to consolidate all of its employees. Sedgwick

The payroll tax break that recently passed with 8-3 votes will benefit companies located in the Civic Center / Mid-Market area.

UPDATE Lease and Investment Transactions

SIGNIFICANT LEASES Q1 2011

PROPERTY ADDRESS TENANT SIZE TYPE DATE SIGNED CLASS

One Jackson Place Keker Van Nest 90,264 Renewal Mar-11 A

333 Bush Street Sedgewick 89,076 New Mar-11 A

720 California Street Goodby Silverstein 81,065 Renewal Mar-11 A

100 North Point William Sonoma 58,500 New Mar-11 B

123 Mission Street Salesforce.com 55,977 Expansion Jan-11 A

185 Berry Street Catholic Healthcare West 55,000 Renewal Feb-11 A

199 Fremont Street Aptimus 51,429 Sublease Feb-11 A

SIGNIFICANT SALES Q1 2011

PROPERTY ADDRESS SELLER BUYER SQ. FT. SALE DATE CLASS SALE PRICE PRICE PER SF

1355 Market Street / 875 Stevenson Street ADCO Group Shorenstein 1,105,000 Mar -11 B $110,000,000 $99.55

1700 - 1800 Montgomery Street1Lincoln Property Co OBO State of IL Teachers Retirement

LaSalle Investment Management 297,260 Feb -11 B $44,000,000 $148.20

250 Brannan Street2 BROE Cos. Kilroy Realty Corporation 92,948 Jan-11 B $33,000,000 $355.04

530 Bush Street STG Group HVC Partners 103,968 Feb-11 A $23,000,000 $221.22

200 California Street Trophy Properties, LLC Manchester Capital Management 21,531 Jan-11 B $8,650,000 $366.711 Property is on a ground lease with 29 years remaining 2 Sale Price includes parking component valued at $3,000,000

NORTHWESTNORTHEAST

AIR-PORT

SOUTHEAST

SOUTHWEST

Yerba Buena

Civic Center/Midmarket

Soma West

Union Square

P. 2 | COLLIERS INTERNATIONAL

RESEARCH & FORECAST REPORT | Q1 2011 | OFFICE | SAN FRANCISCO

TAX CREDIT

The central component of the tax credit will provide payroll tax exemptions for new employees hired by companies that move to the Mid-Market Street area roughly between Fifth and 11th Street. Any company that pays 1.5% payroll taxes (those with payrolls above $250,000) would be eligible for the exemption. The pay roll exemption is proposed to last up to six years.

Existing Properties Absorption New Supply

U/C & Proposed

Class Bldgs Total Inventory

SF

Direct

Vacant SF

Direct Vacancy

Rate

Sublease

Vacant

SF

Sublease

Vacancy

Rate

Total

Vacant

SF

Occupied

Space SF

Vacancy

Rate

Current

Period

Vacancy

Rate

Prior

Period

Net

Absorption

Current SF

YTD Net

Absorption

Net

New

Supply

Current

SF

Net New

Supply YTDSF

Under

Construction

SF

ProposedSF

Colliers International

Office Market Report -

Q1 2011

Class Bldgs

Total

Inventory

Sq. Ft.

Direct

Vacant

Sq. Ft.

Direct

Vacanc

y

Sublease

Vacant

Sq. Ft.

Suble

ase

Vaca

Total

Vacant

Sq. Ft.

Occupied

Space

Sq. Ft.

Vacan

cy

Rate

C

Vacan

cy

Rate

i

Net

Absorption

Current-

S

Net

Absorption

YTD-Sq. Ft.

Net

New

Supply

C

Net New

Supply YTD

Sq. Ft.

Under

Constructio

n

S

Proposed

Sq. Ft.

DOWNTOWN MARKET:

A 171 52,333,099 7,183,260 13.7% 394,812 0.8% 7,578,072 44,755,027 14.5% 15.1% 363,181 363,181 - - 288,000 5,938,520

B 291 25,523,686 3,739,161 14.6% 204,100 0.8% 3,943,261 21,580,425 15.4% 17.1% 214,516 214,516 - - - -

C 143 7,778,573 654,803 8.4% - 0.0% 654,803 7,123,770 8.4% 7.1% (90,667) (90,667) - - - -

Total 605 85,635,358 11,577,224 13.5% 598,912 0.7% 12,176,136 73,459,222 14.2% 14.9% 487,030 487,030 - - 288,000 5,938,520

FINANCIAL DISTRICT:

A 105 40,236,611 4,506,769 11.2% 373,899 0.9% 4,880,668 35,355,943 12.1% 13.1% 402,178 402,178 - - 67,000 4,198,000

B 79 8,060,719 1,102,714 13.7% 18,558 0.2% 1,121,272 6,939,447 13.9% 14.1% (39,134) (39,134) - - - -

C 43 1,896,298 162,214 8.6% - 0.0% 162,214 1,734,084 8.6% 8.6% (13,965) (13,965) - - - -

Total 227 50,193,628 5,771,697 11.5% 392,457 0.8% 6,164,154 44,029,474 12.3% 13.1% 349,079 349,079 - - 67,000 4,198,000

- - -

SUBMARKETS:

North Financial 118 26,783,376 3,634,287 13.6% 220,649 0.8% 3,854,936 22,928,440 14.4% 15.1% 153,644 153,644 - - - 469,000

South Financial 109 23,410,252 2,137,410 9.1% 171,808 0.7% 2,309,218 21,101,034 9.9% 10.9% 195,435 195,435 - - 67,000 3,729,000

Total 227 50,193,628 5,771,697 11.5% 392,457 0.8% 6,164,154 44,029,474 12.3% 13.1% 349,079 349,079 - - 67,000 4,198,000

Union Square 57 3,839,477 314,938 8.2% 7,218 0.2% 322,156 3,517,321 8.4% 11.2% 29,934 29,934 - - -

Yerba Buena 32 4,072,149 953,452 23.4% - 0.0% 953,452 3,118,697 23.4% 26.5% 23,094 23,094 - - - 140,000

Existing Properties U/C & ProposedAbsorption New Supply

SOMA West 30 2,748,771 798,452 29.0% - 0.0% 798,452 1,950,319 29.0% 24.0% 39,530 39,530 - - - -

SOMA East 53 5,125,653 592,389 11.6% 57,024 1.1% 649,413 4,476,240 12.7% 13.8% (46,710) (46,710) - - - 870,000

Civic Center/Mid-Market 49 6,433,923 1,610,862 25.0% - 0.0% 1,610,862 4,823,061 25.0% 25.6% 11,948 11,948 - - 221,000

Jackson Square 41 2,334,712 204,575 8.8% 7,734 0.3% 212,309 2,122,403 9.1% 10.4% 33,593 33,593 - - - -

North Waterfront 51 3,957,245 399,763 10.1% 36,363 0.9% 436,126 3,521,119 11.0% 8.1% 7,931 7,931 - - - -

Van Ness Corridor 26 1,608,591 209,414 13.0% 78,116 4.9% 287,530 1,321,061 17.9% 18.6% (1,332) (1,332) - - - -

Potrero West 14 1,410,391 101,570 7.2% - 0.0% 101,570 1,308,821 7.2% 10.9% 24,116 24,116 - - - -

Potrero East 11 1,040,544 70,625 6.8% 20,000 1.9% 90,625 949,919 8.7% 10.9% 12,359 12,359 - - - -

Mission Bay 14 2,775,091 549,487 19.8% - 0.0% 549,487 2,225,604 19.8% 20.9% 3,488 3,488 - - - 730,520

Total 605 85,540,175 11,577,224 13.5% 598,912 0.7% 12,176,136 73,364,039 14.2% 14.7% 487,030 487,030 - - 288,000 5,938,520

-

QUARTERLY COMPARISON AND TOTALS

Q4 -10 605 85,442,720 11,702,139 13.7% 877,621 1.0% 12,579,760 72,862,960 14.7% 14.8% 245,229 240,287 210,000 320,000 288,000 5,938,520

Q3 -10 605 85,442,720 11,540,647 13.5% 1,074,342 1.3% 12,614,989 72,827,731 14.8% 15.0% 200,072 (4,942) - 182,073 277,000 6,383,520

Q2 -10 605 85,442,720 11,668,426 13.7% 1,146,635 1.3% 12,815,061 72,627,659 15.0% 14.6% (292,962) (205,014) - 182,073 320,000 6,383,520

Q1 - 10 605 85,442,720 11,389,438 13.3% 1,110,636 1.3% 12,500,074 72,942,646 14.6% 14.6% 87,948 87,948 - 182,073 320,000 6,383,520

RESEARCH & FORECAST REPORT | Q1 2011 | OFFICE | SAN FRANCISCO

COLLIERS INTERNATIONAL | P. 3

SAN FRANCISCO:

Alan D. CollenetteManaging Director 50 California Street 19th Floor San Francisco, CA 94111TEL +1 415 788 3100FAX +1 415 433 7844

RESEARCHER:

Tove NilsenResearch Director tove.nilsen@colliers.comTEL +1 415 288 7827

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VACANCY CONTINUED

signed a 10-year 90,000 square-foot-lease at 333 Bush Street. The company will relocate from One Market Plaza, to move into the space previously occupied by the defunct law firm Heller Ehrman.

Twitter is close to signing a deal at 1355 Market Street, the former Furniture Mart. The transaction hinged on the city’s approval of the Mid-Market area pay roll tax break. Twitter will occupy 200,000 square feet of the 1.1 million-square-foot property.

RENTS

Rental rates for direct Class A and B assets decreased slightly during the quarter, but they are up over the last 12 months by 12 percent and 17.2 percent, respectively. As the overall vacancy rate continues to fall, rents are expected to continue their upward trend the duration of the year.

Average rental rates for Class A space fell 2.6 percent to $35.03 per square foot during the quarter. The average rental rate for Class A assets in the Financial District experienced similar trend as it slipped 3.2 percent during the quarter to $35.75 per square foot.

The dip in rental rates during the quarter was due to the number of “bargain” lease transactions by technology firms in commodity (non view, “vanilla” build out) Class A office space during the quarter.

While once abundant, the number of reasonable sublease offerings in premium assets are becoming scarce, and as a result, rental rates are increasing. The average effective rental rate for Class A sublease transactions increased 16.2 percent during the quarter to $27.01 per square foot. We expect this trend to continue in the coming quarters, as sublease offerings continue

to diminish, and some of the pressure is taken off office space offered directly.

INVESTMENTS

The improving market fundamentals in the San Francisco office market coupled with the pool of investors looking to acquire properties has created a highly competitive sale market for core assets. The investment transaction volume in San Francisco during the first quarter was approximately $267 million.

Several significant investment transactions took place during the quarter, topped by Shorenstein Properties’ $110 million acquisition of Market Square, a two-building complex that includes 1355 Market Street and 875 Stevenson Street. Shorenstein acquired the portfolio in January from ADCO Group.

Other notable transactions include the four-property complex located at 1700 Montgomery Street was acquired by LaSalle Investment Management, who paid about $44 million or $148 per square foot for the complex. The buildings were nearly 70 percent occupied at the time of the transaction.

Also, BROE sold 250 Brannan Street, a classic South of Market (SOMA) gem. The building once served as a salami factory, but it was renovated into a 92,948-square-foot, brick and timber creative office space. Kilroy acquired the asset for $33 million.

Looking ahead, three significant transactions: 500 Terry Francois Boulevard, 350 Rhode Island, and 250 Montgomery Street, valued at approximately $175 million are expected to close during the second quarter. As owners seek to capitalize on improving market fundamentals, we anticipate an active and competitive investment environment this year.

RESEARCH & FORECAST REPORT | Q1 2011 | OFFICE | SAN FRANCISCO