Cassidy Turley San Francisco Bay Area CRE 2013 Forecast

San Francisco Bay Area Commercial Real Estate

2013 Forecast

Your comprehensive guide to trends impacting the commercial real estate market.

Discover Market Intelligence

CAPITAL MARKETS

CORPORATE SERVICES

LAND ACQUISITION & DISPOSITION

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PROJECT LEASING

PROPERTY MANAGEMENT

TENANT REPRESENTATION

We are pleased to share with you our San Francisco Bay Area

Commercial Real Estate 2013 Forecast. This report is an annual

review and forecast that summarizes the trends impacting

commercial real estate in each of the major Bay Area markets

covered by Cassidy Turley’s 15 regional offi ces.

This guide offers forward-looking analysis in addition to summaries

of recent activity for offi ce, R&D, industrial, retail, investment and

multi-family real estate throughout the Bay Area. We examine both

leasing and investment trends as well as the underlying economic

fundamentals that drive our marketplace. This report represents

only a fraction of our research capabilities. Working in unison with

our brokerage staff, Cassidy Turley research maintains the region’s

largest database of properties, tenants, landlords, buyers, sellers,

availabilities, and deal comparables of all types. Our research

department publishes detailed quarterly snapshots and reports

covering all of our markets and we provide custom analytics for our

clients. Contact your Cassidy Turley broker to get on our research

mailing list to regularly receive research publication notifi cations.

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CASSIDY TURLEY

4

Table of Contents

For a digital ebook version of this book, go to www.ctbt.com/Forecast2013

Message from our President 5

Economic Outlook 6

Offi ce and R&D Forecast 10

Warehouse & Manufacturing Forecast 16

Retail Forecast 20

Investment & Multi-Family Forecast 24

Market Data & Forecast 28

Company Overview 34

Credits & Terms 38

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

5

To Our Valued Clients,

Over the past year, the Bay Area’s economy

has continued to outperform both California

and the nation as a whole. During this period,

our region has grown its overall employment

base by approximately 90,000 jobs, placing

both San Jose and San Francisco among

the top employment growth markets in the

country. Meanwhile, our commercial real estate market has

generally thrived. We are now heading into our third consecu-

tive year of a recovery that, for some sectors, has put up

growth numbers in excess of what we saw during the fi rst dot

com boom. And a boom is what it has been for the region’s

offi ce and R&D sectors.

Through the fi rst nine months of 2012, occupancy in the Bay

Area’s offi ce sector had grown by over 3.7 million square feet.

Since 2010, offi ce occupancy has expanded by nearly 14

million square feet. In San Francisco weighted average asking

rents have increased by 39% since the low-water mark of the

recession in 2009. Meanwhile, all of the trade areas along

the Highway 101 Corridor on the Peninsula have recovered

all of the occupancy lost during the recession and then some.

R&D space has also surfed this wave, posting over 5.1 million

square feet of positive net absorption since the start of 2011.

Of course, tech users are once again behind the boom, having

accounted for a whopping 69% of the deals that we have

tracked this year. The growth of Apple, Facebook, Google,

LinkedIn, Salesforce, Samsung and others has made the Bay

Area the strongest local economy within the United States

and fueled one of the strongest growth periods in the history

of our region’s commercial real estate market.

But with this recovery period driven almost exclusively by just

one sector of the economy, it certainly has not been even, nor

has it been without its challenges. Our tech-driven boom has

primarily benefi ted the Bay Area’s offi ce and R&D markets.

Of course, it has spurred job growth, generated consumer

demand and fueled demand for housing thereby indirectly

helping all sectors. Yet the recovery has been uneven both in

terms of product type and geography, with the East and North

Bay seeing only peripheral gains. But those markets have been

building momentum on their own and there are a number of

reasons why we are very optimistic for their performance in

the year ahead.

The past year was one in which we saw the biggest challenge

to the economy shift from weak underlying fundamentals to

political stalemate. However, despite the discord and political

mayhem of the past few months, we’ll gladly swap gridlock

in Washington in place of weak fundamentals as the primary

evil. Even if policy concerns have emerged as the greatest

headwinds, the national economy continues to post slow but

sure growth. This certainly played out over the fi nal half of

2012. Uncertainty over the election became uncertainty over

the fi scal cliff, and is now uncertainty over the debt ceiling

and federal spending cuts. All of this uncertainty during the

second half of the year slowed growth as many space users

put the brakes on planned moves.

Fortunately, as I sat down to write this in early January, there

was cause for optimism. Congress and the President, while

kicking the proverbial can down the road on many issues, did

reach a compromise on the most politically charged issue

and potentially damaging issue—that of the expiration of

the Bush-era tax cuts. While most of the massive automatic

federal spending cuts have been postponed and we are certain

to see more policy-inspired business uncertainty in the weeks

ahead, we can only hope that Washington is heeding the pleas

for bipartisan moderation in dealing w ith the fi scal challenges

that face us while at the same time recognizing the need for

real tax and spending reform.

In anticipation of increasing tax rates, the fourth quarter

saw a signifi cant jump in activity, with December being the

strongest month in our company’s history. Brokerages, banks

and title companies were working overtime to fi nalize all of

the tax driven, year-end activity. That very well could mean

that the coming year will be one in which we get off to a slow

start. But the building economic momentum that we saw

building through December of last year will return quickly.

More importantly, the housing market is fi nally picking up

traction nationally. Although the Bay Area’s housing market

has outpaced national trends by a couple of years, the return

of housing appreciation and new home construction nationally

will have massive positive implications for both the national

and local economies. Housing, which usually accounts for

about one fi fth of GDP, has been so far absent in our recovery

and that is one of the reasons why economic improvement

has been so slow and so fragile. It will take a while, but the

turnaround underway in this segment of our economy will

begin to register a profound impact on the marketplace by

2014. One that will mean that our own local and uneven tech-

driven recovery will spread to more sectors and strengthen

growth in the local markets that have, so far, experienced

only peripheral gains from Tech Boom 2.0. So, East Bay and

Central Valley, your time is nearing.

With that, we are pleased to share with you Cassidy Turley’s

San Francisco Bay Area 2013 Forecast Report. We fi rmly

believe that in economic environments such as this, our

commitment to in-depth, forward-looking research is what

sets us apart from our competitors. Research has been and

will continue to be a key ingredient in our value proposition

to you, our clients. We are eager to continue working with you

and to expand our relationship across our expanded business

lines and geography. Meanwhile, our commitment to market

leading research will never change because we know that

information is vital to your decision making process. I hope

you enjoy this publication and fi nd it useful. As always, if there

is ever anything we can do for you or do better, please do not

hesitate to call me.

Best wishes for a prosperous and productive 2013.

C. Michael Kamm President

Cassidy Turley

CASSIDY TURLEY

6

The economy truly is at a crossroads as we head into

2013. But unlike in recent years, when the biggest

economic threats came from weakened fundamentals of

one type or another, the greatest challenge currently facing the

U.S. economy is that of policy uncertainty. As this report went

to press, Congress and President Obama had reached a partial

compromise on the issue of the fi scal cliff. This combination

of tax increases and sharp automatic federal spending cuts

would have removed about $600

billion from the U.S. economy in

2013. Most economists agreed

that the failure to either reinstate

some of the Bush era tax cuts

or temper austerity measures

would have sunk the economy

back into recession no later

than the second quarter of the

year and likely would have sent

unemployment back upward—

likely well above the 9.0% level.

The lion’s share of the damage was likely to be caused by the

expiration of the Bush-era tax cuts, which alone would have

removed about $280 billion from the economy. The good news

is that this is where a compromise was met. The tax cuts

have been reinstated for all but those who earn more than

$400,000 annually ($450,000 for couples), or roughly 98%

of the population. The bad news is that negotiations regarding

federal spending cuts were essentially postponed.

While the issue of policy clarity has been with us for some time

now, the specifi c concerns regarding the fi scal cliff escalated

over the course of December as the deadline drew closer.

Business and consumer confi dence fell and many of the space

users that we work with opted to postpone planned moves in

the face of this uncertainty. While this had a negative impact

on the leasing market, it had the opposite impact on commer-

cial real estate investment. Fearful of new taxes in 2013, many

sellers rushed to close deals before January, sending quarterly

deal volume up by at least 20%. As we reached the fi nal week

of 2012, the Dow Jones began to tumble and it appeared that

we were heading towards a self-infl icted recession. Yet, like an

errant college student who waits until the night before exams

before studying, Congress came through with a last second

minute (well, actually a late) deal that averted the worst of

the damage. The Dow Jones immediately surged 300 points

and the S&P 500 closed at its highest level within the last

fi ve years.

But the challenge of policy clarity is not completely behind

us. Within a few weeks, Debt Ceiling II begins and this debate

promises to be even more contentious than the fi rst one. By

the time the fi rst debt ceiling debate ended in August 2011,

the U.S. sovereign credit rating had been lowered and the

economic recovery nearly stalled. You can rest assured

that this political battle will result in more headwinds to the

economy. We believe there is a 75% chance that the ratings

agencies once again downgrade

U.S. credit. And we expect the

stock market to dip. But we also

don’t think the hit will be quite as

bad as last year’s.

We are likely looking at slow

growth over the next few months.

But we are not looking at nega-

tive growth, much less even fl at

growth. Certainly, the lack of

policy clarity will remain an issue

for now and additional political

discord on top of that won’t help. But there are plenty of

economic indicators to be extremely optimistic about. Not

the least of which being a December jobs report that surprised

nearly everyone—the economy created over 150,000 new

positions even as gloom was setting in before the fi scal cliff

deal. It may have a bumpy start, but we anticipate 2013 to

be a year in which the economy gradually builds momentum.

Déjà vu or Something New?

On the surface, it appears that not much may have changed

with the economy over the course of the past twelve months.

Heading into 2012, unemployment was elevated and job

ECONOMIC OUTLOOK

While U.S. job growth has averaged 2.1% over the past year, San Jose has seen its employment base grow by 3.5% (31,400

jobs) while San Francisco achieved a growth rate of 3.4% (32,600 jobs).

0102030405060708090

100

2008 2009 2010 2011 2012

United States Consumer Confidence

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2007 2008 2009 2010 2011 2012

United States GDP Growth RateAnnual GDP Growth Adjusted by Inflation

-10%-8%-6%-4%-2%0%2%4%6%8%

10%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Annual GDP Growth Adjusted by Inflation

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SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

7

growth weak. The Eurozone was grappling with fl at to nega-

tive growth and Asia was in the midst of a slowdown. Policy

uncertainty ruled the roost and the looming issue of debt hung

over the U.S. economy. Fast forward through a contentious

election cycle and policy uncertainty remains, only with a new

name. Little has changed with the European or Asian econo-

mies. Meanwhile, though the unemployment rate has fallen

to 7.7% (as of November 2012), the labor force participation

rate is now at a 31-year low. The

combination of baby boomers

retiring and discouraged workers

dropping out of the labor force

has driven this metric as much

as job growth over the past few

years. But while it may seem

like little has changed with the

economy, there are a few consid-

erable differences to consider as

we head into 2013.

Though unemployment remains

problematic, job growth has

actually been picking up. Over the course of 2011, the U.S.

economy created just over 1.8 million jobs (roughly 153,000

per month). Through November 2012, the U.S. economy had

created just under 1.7 million jobs. Though this overall number

refl ects monthly gains of 152,000 per month, just below last

year’s average, this statistic includes a dismal spring in which

job gains fell below the six fi gure mark. Since July 2012,

job creation has ranged between 132,000 and 192,000 per

month and the trend throughout the fall had been heading

upward. Meanwhile these levels of employment growth are

important because the economy needs to create approximately

125,000 jobs per month simply to keep up with population

growth. Throughout most of the downturn, the economy has

struggled to reach this mark.

Meanwhile, the San Francisco and San Jose markets continue

to lead all other U.S. metropolitan areas in terms of job

growth. While U.S. job growth has averaged 2.1% over the

past year, San Jose has seen its employment base grow by

3.5% (31,400 jobs) while San Francisco achieved a growth

rate of 3.4% (32,600 jobs). Meanwhile, after years of fl at to

negative numbers, the Oakland/East Bay marketplace also

saw a return to employment growth—posting an annual rate

of 2.0% (19,400 jobs).

But while employment growth has improved over the past

year, it is still not where we would like it to be. As is the case

with a number of other indicators, it is better, but not great.

For example, the Conference Board’s Consumer Confi dence

Index (CCI) reached 73.7 in November. This is well below

the historical average of 95.0 but it is the highest level that

has been recorded since February 2008 when it measured

76.4. That reading came before the recession when the

economy was just dealing with a

declining housing market. And

the housing market is where we

have not only seen the greatest

improvement over the past year,

but it is the greatest cause for

optimism about the economy as

a whole going forward.

Housing Finally Returns

The depth of this downturn was

due to the deleveraging nature of

this recession and there was no

other sector of the economy that

had more deleveraging to do than housing. Fueled by exotic

and often toxic loans, housing values grew by 100% or more

in some markets from 2002 to 2006. When this bubble began

to burst in 2007, the resulting impact led the nation into its

worst downturn since the Great Depression with the housing

market struggling to stabilize since then.

United States Unemployment Rate

0%

2%

4%

6%

8%

10%

12%

2008 2009 2010 2011 2012

400

-200

0

200

400

600

US Employment GrowthJobs in Thousands

-1,000

-800

-600

-400

2008 2009 2010 2011 2012

Housing typically accounts for 15% to 25% (from average to boom cycles) of total GDP…

It typically leads us out of recessions, but this sector of the economy has been missing in action over the past six years.

But, this is all about to change.

Decline in SFR Available Inventory

Metropolitan Statistical Area # of Houses for Sale Yearly Change

Boston 10,788 -37.2%

Chicago 34,192 -5.1%

Inland Empire 8,559 -58.8%

Las Vegas 15,106 -25.1%

Los Angeles 12,569 -55.3%

Phoenix 16,601 -11.1%

Portland 7,854 -20.8%

Sacramento 3,660 -66.4%

San Diego 4,168 -53.5%

San Francisco 3,851 -57.6%

San Jose 1,378 -55.7%

Seattle 9,647 -38.8%

Washington DC 11,146 -28.4%

National 198,581 -29.3%

CASSIDY TURLEY

8

Housing typically accounts for 15% to 25% (from average to

boom cycles) of total GDP. Following the past three recessions

(1980, 1991 and 2001), residential investment grew more

than 30% on average during the fi rst two years of recovery.

In past cycles, this meant strong rebounds, thanks to millions

of jobs and billions of dollars

in additional economic output.

According to the National Asso-

ciation of Home Builders (NAHB),

were home construction near its

historic norm, it would create an

additional three million jobs. Past

studies from this same group have

found that each new home built in

the U.S. creates three new fulltime

jobs (from construction to fi nancial

services to retail) and generates

$90,000 in tax revenue. Even at

half those numbers, the impact of

housing is huge, especially when

considering the fact that housing

starts have set new records for

lows throughout this downturn. Housing typically leads us

out of recessions, but this sector of the economy has been

missing in action over the past six years. This is all about

to change.

Over the past 30 years, the United States has averaged

1.3 million new households per year. But throughout the

recession, this number dropped to just 600,000 per year as

fewer young people left the nest, renters took on roommates

or people otherwise doubled up on housing arrangements.

We estimate current pent-up demand for housing to stand

at approximately 3.5 million units. Most of this demand will

land in multifamily product fi rst, and this trend is already well

underway. Most national markets

are currently reporting multifamily

vacancy in the 5% and 6% range.

In the Bay Area this trend has

been particularly pronounced with

regional vacancy standing at just

2.5% as of Q3 2012. Meanwhile,

rental rate growth over the past two

years has approached 30% in both

San Jose and San Francisco, while

Oakland has seen extremely robust

growth in excess of 20%.

With apartment rents growing at

a rapid clip in most markets and

single-family residential pricing still

averaging 30% below peak pricing

nationally, it is now cheaper to buy in most U.S. markets than

it is to rent. A recent JP Morgan study found this to be the

case in nearly half of all U.S. markets, while surveys by Trulia

and others have provided even more aggressive numbers.

Meanwhile, JP Morgan analysts also estimate pent-up demand

for single-family residential (SFR) housing units to stand at

600,000 units. Against this backdrop, it would only seem

natural that home sales would start to surge. And they have…

ECONOMIC OUTLOOK

The perception that the housing market is rebounding still has not hit the

general public, though it should by late in the year. This will result in a sharper “pop” in demand heading into 2014… Housing will begin to impact GDP by

2014 with quarterly growth levels fi nally returning to the 3.0% or range or more.

-4,000 -2,000 0 2,000 4,000 6,000

Manufacturing

Information

Financial Activities

Professional & Business

Education & Health

Leisure & Hospitality

Other Services

Trade, Trans. & Utilities

Construction

Government

Change in Employment by IndustryEast Bay 2011 - Nov. '12

-2,000 0 2,000 4,000 6,000 8,000

Manufacturing

Information

Financial Activities

Professional & Business

Education & Health

Leisure & Hospitality

Other Services

Trade, Trans. & Utilities

Construction

Government

Change in Employment by IndustrySouth Bay 2011 - Nov.'12

-3,000 0 3,000 6,000 9,000 12,000

Manufacturing

Information

Financial Activities

Professional & Business

Education & Health

Leisure & Hospitality

Other Services

Trade, Trans. & Utilities

Construction

Government

Change in Employment by IndustrySan Francisco 2011 - Nov. '12

Percentage of Job Growthby Region 2011 - Nov. '12

0% 1% 2% 3% 4%

South Bay

San Francisco

Bay Area

East Bay

US

California

LA-Orange County

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SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

9

Over the course of 2012, residential home sales have posted

their strongest annual sales gains in three years (when sales

were artifi cially propped up by a fi rst-time buyer stimulus

program), with the inventory of available homes falling

sharply. Meanwhile, the inventory of homes for sale nationally

has dropped substantially. According to RedFin, the available

inventory has dropped in Boston by 37.2%, while the hard-

hit Inland Empire has seen SFR availability fall by 58.4%

and Sacramento has recorded a drop of 66.4%. In the

Bay Area, San Francisco has seen availability fall by 57.6%

while San Jose’s inventory of available

homes for sale has fallen by 55.7%.

Meanwhile, the shadow inventory of REOs,

foreclosed and delinquent homes is now

back to 2008 levels.

According to the National Association of

Realtors (NAR), single-family home prices

have improved in 100 out of 134 metros

since the beginning of 2012 (Case-Shiller

data mirrors this trend). Meanwhile,

RedFin’s data indicates that pricing

per square foot metrics have improved

signifi cantly even in some of the markets

worst hit by the housing crisis. The Las

Vegas market has seen pricing jump by

10.5%, the Inland Empire booked an annual increase of 9.6%,

Sacramento pricing improved by 8.8% while RedFin reports

a whopping increase of 30.0% in the per square foot pricing

for the beleaguered Phoenix marketplace.

Lastly, and perhaps most importantly, new home starts are

now at their highest level since before the fi nancial meltdown

of 2008. Additionally, permits remain high, meaning that this

trend will continue, at least for now. The construction sector

accounted for roughly two million of the more than eight million

jobs lost during the recession. Though it will have a slow

start, 2013 will be a year in which gradually improving housing

fundamentals will accelerate. Keep in mind that many who

would have otherwise bought homes during the downturn have

held off until the market “hits bottom.” The perception that

the housing market is rebounding still has not hit the general

public, though it should by late in the year. This will result in a

sharper “pop” in SFR demand heading into 2014. Meanwhile,

new home construction will continue to

accelerate. We anticipate that housing will

clearly begin to impact GDP by 2014 with

quarterly growth levels fi nally returning to

the 3.0% or greater range. Meanwhile,

new home construction could add as many

as one million new jobs to the economy by

2015, reinforcing a further virtuous cycle

that will drive economic growth ahead.

But perhaps the most important impact

of housing’s return will be improvement in

household wealth. Historically, for every

$1 increase in home values, consumer

spending typically increases by $0.05.

Though consumer spending has largely

kept the economy afl oat over the past four

years, it has been against a backdrop of declining personal

wealth. The return of home pricing appreciation will have a

signifi cant impact on consumer spending, retail and invest-

ment in general. The “new frugality” that has signifi cantly

impacted retail trends over the past few years will certainly

be with us for a while, but the eventual return of the “wealth

effect” by 2015/2016 could mean relief for some of the

retailers hardest hit by the recession.

The lack of policy clarity will remain an issue for

now and additional political discord on top of that won’t help. But there are plenty

of economic indicators to be extremely optimistic about

CASSIDY TURLEY

10

In terms of regional performance, the Bay Area economy has

emerged as the strongest in the U.S. over the past couple

of years and technology has been at the heart of this trend.

While the San Jose and San Francisco markets have been

among the fastest growing cities in terms of job growth, the

region’s commercial real estate market has been booming as

well. That being said, the boom has been uneven, both in

terms of product type and in terms of geography.

The offi ce and R&D sectors are where we have seen the

greatest turnaround, with these properties accounting for the

most regional occupancy growth and some of the most robust

rental rate gains. After hemorrhaging over 19.5 million square

feet of offi ce and R&D occupancy in 2008 and 2009, the

market has experienced the strongest rebound in its history

(even slightly surpassing the growth rates recorded during the

fi rst couple of years of the fi rst tech explosion). Since market

conditions turned in 2010, the San Francisco Bay Area’s offi ce

and R&D markets have combined for approximately 20 million

square feet of total occupancy growth. The overwhelming

majority of this was driven by tech users, but because most

of these companies have remained heavily concentrated in

just those markets situ-

ated along the Highway

101 cor r idor (San

Francisco, San Mateo

and Santa Clara Coun-

ties), recovery has been

uneven geographically.

Offi ce and R&D proper-

ties in San Francisco,

San Mateo and Santa

Clara Counties have

accounted for over 17.3

million square feet of

the roughly 20 million

square feet of growth

recorded in the region since 2010. Overall East Bay numbers

only turned positive in 2011. In the North Bay, Marin County

barely registered positive numbers in 2010 and after a strong

2011 has struggled to remain in positive territory in 2012.

Sonoma County saw stronger gains in 2010 and also posted

robust growth in 2011 but has seen those numbers falter in

2012. In fact, Q3 2012 was the fi rst time since the current

wave of recovery began that some seemingly bulletproof

markets (like San Francisco) saw any weakness at all. San

Francisco is still on course to close the year in strongly positive

territory and Santa Clara County (home to Silicon Valley) hasn’t

faltered at all. But even San Mateo County has struggled with

negative net absorption in 2012.

The recent negative trending in San Mateo County and San

Francisco’s weak performance in Q3 have led many to question

whether the current tech boom may be going bust. But unlike

the 2001 dot.com crash, there are a few critical differences

with the current cycle. While the dot.com wave was fueled by

start-ups with heavy funding, but little in the way of proven

business plans, Tech Boom 2.0 has been driven by some of the

most proven and profi table companies in the world, including

Apple, Google, Microsoft, Salesforce and Samsung to name

just a few. Meanwhile, the San Francisco Bay area continues

to account for between 35% and 40% of all venture capital

funding nationally and that is fueling additional growth in the

region. With personal computing and smartphone use only

accelerating worldwide, the new tech boom isn’t about to go

bust any time soon. But it may be changing. After over two

years of runaway growth, it may be slowing to levels that will

be more sustainable in the long-term.

Bay Area Offi ce/R&D Review

Throughout the Bay Area as a whole, combined offi ce and R&D

vacancy stood at 13.6% as of the close of Q3 2012. This fi gure

refl ects a total inventory in excess of 454 million square feet

of product throughout the San Francisco Peninsula, Silicon

Valley and the East and North Bay markets. As stated earlier,

recovery has been uneven. This holds true both geographically

and for product types.

In terms of offi ce space alone, the Bay Area is home to more

than 253 million square feet of offi ce product. In terms of

occupancy growth, offi ce has far outpaced R&D during the

current growth cycle. Of the roughly 20 million square feet

of positive net absorption recorded since Q2 2010, offi ce

product was responsible for over 14.4 million square feet

of that total. Compared against the region’s overall offi ce

inventory, this equates to a stunning overall growth rate of

5.7% in just 27 months.

Q3 2012 offi ce vacancy stood at 12.9%, down from 14.3%

one year earlier and signifi cantly reduced from a peak reading

of 17.5% posted in Q1 2010. The current average asking rent

for offi ce space throughout the region is $2.80 per square foot

(on a monthly full service basis). This metric has increased

8.4% from the $2.58 per square foot rate that was recorded in

Q3 2011. Regional asking rents hit a low of $2.48 per square

foot in Q2 2010 but have rebounded by 12.9% since that

time but this metric masks a wide range of rental rate growth

that measures from aggressive in San Francisco to modest

in the North and East Bay. Regardless, all of this has been

fueled by strong occupancy growth. The market recorded over

one million square feet of occupancy growth in Q3 alone and

had posted 3.7 million square feet of positive net absorption

through Q3 2012. We anticipate fi nal Q4 numbers to only

build upon that total. When measured against the region’s

inventory, this number represents an extremely robust growth

rate of 1.5% over the past months.

OFFICE AND R&D FORECAST

San Francisco County Offi ce Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address Submarket Transaction TypeSalesforce.com Q1 501,786 50 Fremont St South Financial District Relocation/Expansion

Macy's.com Q1 238,000 680 Folsom St South Financial District Relocation/Expansion

Airbnb Q2 170,000 888 Brannan St Showplace Square Relocation/Expansion

Twitter Q3 164,051 1301-1355 Market St West End Relocation/Expansion

Riverbed Technology Q1 160,000 680 Folsom St South Financial District Relocation/Expansion

The largest San

Francisco offi ce deal

of 2012 (through 3Q)

was Salesforce’s lease

of nearly 502,000

square feet of space

at TIAA-CREF’s 50

Fremont Street.

Salesforce occupied

this space in the

Financial District

South submarket in

December 2012.DE

AL H

IGH

LIG

HT

OF

FIC

E A

ND

R&

D F

OR

EC

AST

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

11

Though the Marin, San Francisco and

San Mateo County markets all recorded

occupancy losses during Q3 2012, only

the Marin and San Mateo County trade

areas were in negative territory for the

year. Based upon the trending that we

saw in the marketplace and numerous

deals that had either been signed or

that were in the works when this report

went to press in December, it appears

that all three of these regions will return

to growth in Q4, though it is unclear

whether these numbers will be enough

to bring both Marin and San Mateo

Counties out of the red for the year. The

good news here is that the East Bay,

which has largely been sidestepped

by a tech-driven recovery, is finally

showing strong signs of improvement.

While total annual growth numbers for the Oakland market are

modest, both the Pleasanton and Walnut Creek trade areas

have posted solid occupancy growth in 2012. In fact, some of

the strongest gains that these markets have seen came during

Q3 2012 when the specter of political uncertainty began to

impact tenant behavior.

As we drew closer to the November 2012 elections, we began

to see many space users postpone or even cancel planned real

estate moves due to their concern over the lack of clarity on

taxation policy. Though this trend was limited in its impact,

it did generally slow growth across the board. Though the

re-election of President Obama has given the marketplace a

better sense of the general direction of policy, the issue of the

fi scal cliff only prolonged this pause in the action for many

space users.

While concerns over taxation policy were not enough to derail

the Bay Area’s offi ce market in Q3, the region’s R&D sector did

see some slowing. For the fi rst time since mid-year 2012, R&D

product posted negative growth to the tune of 444,000 square

feet. While this is a comparatively small number when taking

the region’s 192.3 million square foot inventory into account,

it does raise some concerns. As of the close of Q3, vacancy

for R&D product throughout the region stood at 14.4%, up

slightly from a midyear reading of 14.2%. This remains well

below the 15.7% rate of one year ago

and marks a major reduction from the

post-recession peak of 19.0% that was

recorded in Q1 2010. Even with Q3’s

losses, the market has seen its overall

R&D occupancy increase by over 5.7

million square feet since that time,

refl ecting a 3% overall growth rate.

But the question remains as to whether

the growth cycle is coming to an end.

The short answer is no.

Though occupancy growth turned nega-

tive in Q3, the Bay Area’s R&D sector

remained in positive territory over the

fi rst nine months of 2012—to the tune

of 832,000 square feet and, based

upon deals signed or in the works as

this report went to press in December,

we anticipate that Q4 2012 totals will be modestly positive.

And we should note that about 25% of Q3’s occupancy loss

was due to older R&D buildings being demolished to make way

for new projects (mostly multifamily) in Santa Clara County.

Still, deal activity has slowed and while some of this could be

blamed on the issue of political uncertainty, most of it refl ects

a deeper trend. Most of Q3’s R&D occupancy loss came from

space users moving to offi ce projects and the biggest chal-

lenge ahead for R&D landlords will be how to battle the fact

that tech user preferences are increasingly shifting towards

offi ce space. This has not been as much of a problem with

life science or non-tech users, but as offi ce space continues

to evolve away from the old model of commodity space to

creative space, it has emerged as a direct competitor to R&D.

The good news is that R&D remains the lower cost alterna-

tive ideal incubator option for start-ups and, as offi ce rents

continue to escalate, may be well-positioned for more frugal

tenants. The bad news is that this trend will only accelerate

as offi ce space continues to change and as the region’s R&D

inventory ages. While the current regional average asking

rent for offi ce space is $2.80 per square foot (on a monthly

full service basis), the average rate for R&D currently stands

at just $1.33 per square foot (on a monthly triple net basis).

Though R&D space is almost always leased on a triple net basis

which passes expenses on to the tenant (and these can vary

San Mateo County R&D Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City Transaction TypeDepomed, Inc. Q1 45,990 1330-1360 O'Brien Dr Menlo Park Renewal

NestGSV Q3 45,866 425 Broadway Ave Redwood City Relocation/Expansion

Global Blood Therapeutics Q3 41,387 400 E. Jamie Ct South San Francisco Relocation/Expansion

Pan Pacifi c Q1 39,150 1205 Chrysler Dr Menlo Park Relocation/Expansion

Intersect ENT Q2 23,232 1555 Adams Dr Menlo Park Relocation/Expansion

San Mateo County Offi ce Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City Transaction TypeHeartFlow Q1 102,981 1400 Seaport Blvd Redwood City Sublease

Evernote Q1 87,774 305 Walnut St Redwood City Relocation/Expansion

Success Factors Q2 87,067 Centennial Towers South San Francisco Relocation/Expansion

Wildfi re by Google Q1 58,686 1600 Seaport Blvd Redwood City Expansion

Gazillion Entertainment Q1 49,800 475 Concar Dr San Mateo Renewal

In September 2012, Lab 126 signed a

deal for 582,000 square feet of space

at Jay Paul’s Moffett Towers project in

Sunnyvale. Lab 126 is the Amazon-

subsidiary responsible for developing the

Kindle device. They will be relocating and

expanding into Building D at Moffett Park

upon its completion (currently scheduled

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widely), tenants can still fi nd top quality R&D space at rents

well below like offi ce rents.

Bay Area Offi ce/R&D Forecast

Looking ahead to 2013, we anticipate slower growth during

the fi rst quarter of 2013 for both offi ce and R&D properties.

The wheels of commercial real estate move slowly and the

political uncertainty that began with the November elections

only intensifi ed with the fi scal cliff issue. Though we expect

this to improve now that a partial deal is in place, enough real

estate decision makers put the brakes on making moves that

it will impact activity in January and February. But demand

for goods and services still trumps fear of taxes in terms of

what motivates businesses to expand their commercial real

estate usage and so the region’s tech engine has hardly slowed,

with a number of major deals inked in Q4 and many teed

up for Q1 2013. But the same may not be true for other

sectors of the economy and though we do not expect any

major space givebacks, a Q1 slowdown across the board is

almost inevitable. The good news is that the market should

be on track for more accelerated growth by Q2. User space

requirements remain strong. We are currently tracking a total

of 18.1 million square feet of space user needs that could land

in offi ce or R&D projects over the next 24 months. Some of

these are for renewals or relocations that will not result in any

occupancy growth. Likewise, some of these may never land.

But the current deal pipeline is roughly in the same place it

was six months ago and should guarantee positive growth going

forward. The real question may be how long could some of

these moves be postponed.

We anticipate moderate growth ahead in most trade areas.

We are also extremely optimistic about the resurgent housing

market and its eventual return as an economic driver. This

has the potential to bring back demand from a number of

key sectors including the fi nancial services sector, which has

largely been missing in action since 2007. This is not likely

to happen prior to 2014 at the earliest, but we do expect an

uptick of demand that will extend beyond the big fi nancial

services players in need of larger blocks of commodity space to

smaller residential real estate fi rms, title companies, mortgage

brokers and other players that had been squeezed by the

housing crash.

San Francisco Offi ce Outlook and Forecast

As stated earlier, Q3 2012 was the fi rst time in nine consecu-

tive quarters that the market recorded occupancy losses,

posting negative net absorption of 409,000 square feet of

space. However, annual numbers remained in the black

through Q3 to the tune of over 1.4 million square feet and an

annual growth rate (when measured against San Francisco’s

total offi ce inventory of 83.6 million square feet) of 1.7% in

just nine months. San Francisco does not have a signifi cant

R&D presence and so that type of space is a non-factor here.

As this report went to press, offi ce vacancy stood at 9.9%, up

from the 9.4% rate of Q2 2012, but still signifi cantly reduced

from the 12.0% rate posted in Q3 2011. Market vacancy

had peaked at 16.4% in Q1 2010 but had been on a sharp

downward trajectory until recently. The market has backfi lled

over six million square feet of space since that time, posting

an astonishing growth rate of 7.3% in just 27 months. But

after two years of nonstop aggressive growth any slowdown is

bound to raise some concerns. The good news is that Q3’s

occupancy losses are best described as a pause in the action.

Market timing was key to much of the decline both in terms

of space users postponing planned moves in light of political

uncertainty and a number of shadow spaces coming vacant

as tenants relocated within the marketplace. Likewise, the

biggest deal of Q3 was Twitter’s lease of 164,000 square feet

at Market Square North, but because they won’t be moving

in until 2015 it has yet to impact statistics. The good news

is that deal activity has picked back up and, as this report

went to press in December, the market was on track to post

occupancy growth in Q4.

As of Q3, San Francisco’s average asking rent stood at $3.62

per square foot (on a monthly full service basis), up 19.3% over

the $3.03 reading of a year ago. This metric has improved by

37.8% since the market’s low-water mark of $2.63 was posted

in Q1 2010. Based upon the tenant deals in the marketplace

that we are tracking, we anticipate that the San Francisco

offi ce market will not only return to growth in the fi nal quarter

of 2012, but that it will continue this pattern throughout 2013.

While we expect Q1 2013 numbers to be modest, look for

occupancy growth totals to escalate heading into the fi nal half

of the year. The market will likely close 2013 having posted

about 1.6 million square feet of positive net absorption and

Santa Clara County Offi ce Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City Transaction TypeLab 126 Q3 581,973 1100-1120 Enterprise Wy Sunnyvale Relocation/Expansion

LinkedIn Q3 557,143 555 Mathilda Ave Sunnyvale Relocation/Expansion

Samsung Info Systems Q3 385,000 625 Clyde Ave Mountain View Relocation/Expansion

Palo Alto Networks Q3 299,784 4301-4401 Great America Pkwy Santa Clara Relocation/Expansion

Arista Corp. Q3 149,608 5453 Great America Pkwy Santa Clara Relocation/Expansion

Santa Clara County R&D Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City Transaction TypeSynopsys, Inc. Q1 215,824 445-455 N. Mary Ave Sunnyvale Renewal

Barnes & Noble, Inc. Q1 207,857 3400 Hillview Ave Palo Alto Relocation/Expansion

Xerox Q3 202,000 3333 Coyote Hill Rd Palo Alto Renewal

JDS Uniphase Q1 162,934 400, 430, & 460 N. McCarthy Blvd Milpitas Renewal/Expansion

Stanford Hospital & Clinics Q2 155,000 1804 Embarcadero Rd Palo Alto Palo Alto

OFFICE AND R&D FORECAST

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a vacancy rate in the range of 8.7%. New construction will

eventually become more of a factor impacting trends, though

we don’t see much of an impact before 2014. The good news

is that is also when we anticipate the recovery as a whole to get

a signifi cant boost from the return of the housing market as

an economic driver. Look for rents to continue to post strong

gains, though they will likely not approach the double-digit

increases of the past year. Our assumption is that they will

likely increase at a rate of 9.0% to 10.0% in the coming year.

San Mateo County Offi ce/R&D Outlook and Forecast

2012 has been a challenging year

for the San Mateo County offi ce and

R&D market. The combined inven-

tory of 50.5 million square feet of

product here includes 31.1 million

square feet of offi ce space and 19.4

million square feet of R&D space.

Total vacancy as of the close of Q3

stood at 13.4%, up a full percentage

point from the 12.4% rate booked

at the close of 2011. Through the

fi rst nine months of 2012, just under

357,000 square feet of space had

been returned to the marketplace

with both offi ce and R&D properties

reporting losses.

The offi ce market has been harder hit,

accounting for 240,000 square feet

of negative net absorption through

Q3 2012. Offi ce vacancy stands at

13.9%, up from the 13.6% rate that

was posted exactly a year ago (Q3

2011). But even with offi ce vacancy

creeping upward, the real problem

facing San Mateo County is the lack

of available space. Obviously, on

the surface, that statement sounds

counter-intuitive to the extreme.

But the problem is that while San

Mateo County may still have plenty

of offi ce space available, it is not the

right kind of space. Currently tenant

offi ce demand on the Peninsula is

dominated by tech companies looking for larger blocks of

space of 10,000 square feet or more. Yet, offi ce suites of

10,000 square feet or more account for only about 18% of

the more than 4.2 million square feet of space currently avail-

able. Likewise, tech companies are also looking for downtown

creative space ideally situated near public transportation and

urban amenities. This type of space is also in short supply.

This has resulted in some companies relocating elsewhere

in the Bay Area as they look (primarily to San Francisco) to

markets that can accommodate their growth needs.

Despite a year in which growth has been negative, offi ce rents

have grown. The current average asking rate for offi ce space

of $3.33 per square foot (on a monthly full service basis) is

up 5.1% over the $3.16 reading of a year ago. This metric is

up 31.9% from the $2.52 low-water rate posted in Q1 2010.

R&D space has also struggled to gain traction in 2012. As

of Q3 2012, vacancy stood at 12.7% compared to 11.9%

twelve months prior. Through the fi rst nine months of 2012,

the market had posted 117,000 square feet of negative net

absorption. This year’s lackluster performance comes in stark

contrast to the previous three years when R&D space in San

Mateo County had accounted for nearly 2.5 million square feet

of growth (2009 – 2011). The challenge here has not only

been the increasing preference of offi ce space for many tech

companies, but stiff competition from cheaper R&D space in

the neighboring Silicon Valley market.

So, it should come as no surprise that

rents have been flat here over the

past year. The current average asking

rate of $2.17 per square foot (on a

monthly triple net basis) compares to

Q3 2011’s reading of $2.14. Activity

in Q4 has picked up but we anticipate

minimal growth at best to close out

the year and not enough to boost this

segment of the market into positive

territory for the year.

We anticipate growth to return to posi-

tive territory in 2012, though the fi rst

half of the year will likely be sluggish

with some quarters possibly continuing

the trend of negative net absorption.

Still, we anticipate that combined

occupancy growth for offi ce and R&D

properties will reach the 200,000

square foot mark by the close of 2013

and that the current overall vacancy

rate of 13.0% will fall to about 12.8%.

The few rare large blocks of available

space on the market will drive overall

metrics for asking rates up by about

5.0%, though the market will be very

competitive for small spaces. Offi ce

growth numbers will be much more

robust by 2014 thanks to a number

of projects expected to deliver to the

marketplace by then which will offer the

large blocks of space that tech users

are currently going elsewhere to fi nd.

Santa Clara County Offi ce/R&D Outlook and Forecast

While San Mateo County faced challenges throughout 2012

and San Francisco’s offi ce market took a break in Q3, the

Santa Clara offi ce and R&D markets has continued to produce

impressive numbers, albeit unevenly. The combined inventory

here includes over 201.4 million square feet of space and had

posted just over three million square feet of occupancy growth

through the fi rst nine months of 2012. As of the close of Q3

2012, this equated to a combined vacancy rate of 13.0%, a

substantial drop from the 14.2% rate posted at the close of

2011. That being said, Silicon Valley’s offi ce sector has simply

been on fi re, having recorded over 1.8 million square feet of

occupancy growth through September and with enough Q4

deals having been inked as this report went to press to easily

guarantee it will close out 2012 well above the two million

square foot mark.

San Mateo County’s largest offi ce

lease through the fi rst nine months of

2012 occurred in February. Heartfl ow

took 103,000 square feet of space at

Shorenstein’s Pacifi c Shores Center

Building 9 in Redwood City. DE

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In April 2012, the University of

California at Berkeley inked a deal for

93,000 square feet of Class B offi ce

space at the Strada Investment Group’s

Berkeley Crossing project. They will be

occupying the Class B space in

January 2013.DE

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Silicon Valley office vacancy stood at 13.0% as of Q3,

refl ecting a signifi cant drop from the 14.3% rate of a year ago

and a massive improvement from the 18.9% high-water mark

posted in Q1 2010. Silicon Valley has posted growth nine out

of the ten past quarters, racking up an impressive 5.8 million

square feet of positive net absorption for an overall growth rate

of 8.8%. Meanwhile, offi ce rents continue to climb, though

the rate of increase appears to be slowing. The current average

asking rate of $2.89 per square foot (on a monthly full service

basis) is 6.8% above last year’s reading, but the current actual

effective rate of $3.87 per square foot reflects a 19.1%

gain from where it stood a year ago. This number was bolstered

by a number of transactions completed at new developments

throughout the region. Major corporate

campus moves from tech companies

continue to fuel this marketplace

and has spurred a new wave of

development that will increasingly

impact vacancy and rental rate trends

from late 2013 onward.

Silicon Valley’s R&D sector has also

outperformed. Through Q3 2012 it

has posted just over one million square

feet of occupancy growth and this is

despite the fact that nearly one million

square feet of old R&D space had been

converted (demolished, mostly to make

way for new residential projects) over the

fi rst nine months of the year. This factor

helped to drive negative numbers in Q3,

however, our tracking of Q4 deal activity

indicates that quarterly net absorption

numbers will turn positive again to close

out 2012. The current R&D vacancy rate of 14.5% compares

to a reading of 16.2% posted a year ago and a peak vacancy

reading of 19.6% in Q1 2010. The R&D market has backfi lled

over 5.7 million square feet of previously vacant space in the

intervening 27 months, refl ecting a robust overall growth rate

of 3.4%.

While we expect slower activity during in Q1 2013 for all Bay

Area markets, Silicon Valley will still lead the way in terms of

growth. Offi ce will remain the hotter of the two property types,

but R&D will also continue to post positive numbers with both

seeing greater growth towards year-end. We anticipate that

today’s combined vacancy rate of 13.0% will drop to about

12.5% by the end of 2013 thanks to about three million square

feet of total occupancy growth, with roughly two thirds of that

occurring in the region’s offi ce properties. Look for rents to

continue aggressive growth in the 10% to 15% range. It will

be 2014 before new speculative construction makes much of

an impact on either vacancy or rental rate growth.

East Bay Offi ce/R&D Outlook and Forecast

The combined East Bay inventory of offi ce and R&D properties

is 98.7 million square feet and recorded a vacancy rate of

17.3% as of the close of Q3 2012. This refl ects some improve-

ment over the 18.0% rate posted as of

the close of 2011 thanks to the 734,000

square feet of occupancy growth that

the region’s markets have experienced

throughout 2012, much of which has

come later in the year.

In terms of offi ce space, there are three

major trade areas within the East Bay;

Oakland, Walnut Creek and Pleasanton.

None of these markets have a huge

tech presence, though the Oakland

marketplace does have a couple of tech

clusters within the Berkeley, Emeryville

and Alameda submarkets. As a result,

recovery has come here much later

than elsewhere in the Bay Area. Offi ce

tenancy in these trade areas has typically

come from the government, healthcare,

education, personal and business

services sectors and these have only

recently begun to spring back into expansion mode. Modest

improvement in the overall economy and regional improvement

as a whole (many East Bay workers commute to tech jobs in

the Highway 101 Corridor markets but spend their paychecks

back home in Alameda or Contra Costa County) has helped to

fi nally turn things around in these trade areas. The Oakland

offi ce market currently has a vacancy rate of 17.2%, up from

a Q3 2011 reading of 16.4%, but still below its 17.5% peak

in Q2 2011. Through the fi rst nine months of 2012, it had

posted just 37,000 square feet of occupancy growth, but this

refl ects an improvement over a lackluster 2011 in which it

East Bay Offi ce Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City/Submarket Transaction TypeUC Berkeley Q2 93,000 1608 4th St West Berkeley Expansion

PG&E Q3 80,000 Bishop Ranch 1 San Ramon Relocation/Expansion

Singulex Q3 52,000 1701 Harbor Bay Pkwy S. Alameda Relocation/Expansion

Wendel Rosen Black & Denn Q1 52,000 1111 Broadway City Center - Oakland Renewal

Assoc. Third Party Admin. Q2 49,067 1640 Loop Rd, S. S. Alameda Renewal

East Bay R&D Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City Transaction TypeWarm Springs Constructors, Inc. Q2 107,000 45401 Research Ave Fremont Relocation/Expansion

Volterra Semiconductor Corp. Q3 73,111 47451-47475 Fremont Blvd Fremont Renewal

Depomed, Inc. Q2 60,416 7999 Gateway Blvd Newark Relocation/Expansion

Solta Medical Q3 51,449 25881 Industrial Blvd (Bldg F) Hayward Renewal

LAM Research Q3 50,900 45757 W. Northport Loop Fremont Relocation/Expansion

OFFICE AND R&D FORECAST

While there have been plenty of large

new R&D leases in Silicon Valley this

year, the biggest deal through Q3

was actually a renewal. Synopsys

re-upped on the 216,000 square feet

of space that it has occupied at Jay

Paul’s Crossroads Technology Center

in Sunnyvale since 2000.DE

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lost nearly 150,000 square feet of occupancy. The current

average asking rent here of $2.16 per square foot is slightly

above the $2.10 rate of a year ago, but we have yet to see

substantial growth returning since the downturn. Rents had

peaked at $2.39 per square foot in Q4 2008 as the impact

of the recession was just being felt. While conditions have

been choppy in Oakland, the Pleasanton offi ce market has

demonstrated a much clearer trend line. Vacancy here now

stands at 13.9%, down considerably from its Q3 2011 peak

of 18.4%. Recovery here has only just begun to pick up

steam. As of Q3, Pleasanton had recorded four consecutive

quarters of strong growth and had posted 716,000 square feet

of positive net absorption over the fi rst nine months of 2012.

The Walnut Creek offi ce market has followed a similar growth

trend with vacancy falling fi ve of the last six quarters and total

occupancy growth of 195,000 square feet through Q3. Like

all East Bay offi ce markets, Walnut Creek’s current vacancy

rate of 14.8% remains elevated, but this is a considerable

improvement over the 17.7% peak posted in Q1 2011.

The East Bay’s R&D marketplace is mostly centered in

Alameda County, where roughly 31.9 million square feet of

product is situated. The Oakland R&D marketplace currently

has a vacancy rate of 21.7% and has actually regressed over

the past year. As of Q3 2011 vacancy stood at 20.0%. This

hasn’t impacted rents signifi cantly, with asking rates currently

averaging $0.88 per square foot (on a monthly triple net basis),

compared to $0.82 a year ago. The Pleasanton market is

home to approximately 7.1 million square feet of R&D space

and the trend here has been more positive. The current

vacancy rate here is 10.8%, down from a Q3 2011 reading of

13.5%. This trade area had posted R&D occupancy growth of

129,000 square feet through the fi rst nine months of 2012,

compared to Oakland’s loss of 342,000 square feet. The big

challenge here is that R&D space in the East Bay has seen

little benefi t from the region’s tech sector and has traditionally

been more about quasi-industrial or back-end offi ce usage

than anything else. The current average asking rent for R&D

space in Pleasanton is $0.91 per square foot, up from $0.85

a year ago.

Going forward, we anticipate that the East Bay marketplace will

see continued slow growth for offi ce product and fl at growth

for R&D in the Oakland trade area. Both the Walnut Creek

and Pleasanton offi ce markets will continue to post moderate

growth while we also anticipate activity to tick up for R&D

space in Pleasanton. All told, we expect today’s combined

offi ce and R&D vacancy rate of 17.3% to fall over the course of

2013 to about 16.0% by year-end. We expect total occupancy

growth to come in at about 1.2 million square feet, with totals

ramping up later in the year.

North Bay Offi ce Outlook and Forecast

The North Bay is the San Francisco Bay Area’s smallest trade

region in terms of offi ce product (there are no major R&D

projects in this marketplace to speak of) and accounts for

a total inventory of just over 20 million square feet between

Marin and Sonoma Counties. In Marin County, we track 9.8

million square feet of space, which had a vacancy rate of

15.5% as of Q3 2012. Performance has been weak in 2012,

with the market in the red in terms of occupancy growth to

the tune of 181,000 square feet. Vacancy had reached as

low as 13.6% in Q4 2011. Despite this setback, the average

asking rent for offi ce space in Marin County currently stands

at $2.52 per square foot (on a monthly full service basis)

refl ecting an increase of 3.3% over where it stood a year ago.

Sonoma County has also struggled with occupancy issues this

year, having posted negative net absorption of 215,000 square

feet over the course of 2012. But this all came from one

user, State Farm, who has pulled out of their existing North

Bay campus and because the project is slated for demolition

it has had no impact on vacancy at all. The current vacancy

rate for offi ce space in Sonoma County of 20.4% is actually

down from the 20.9% rate that had been posted a year ago.

Before State Farm’s departure, Sonoma County had been on

a course for modest growth throughout the year, though our

tracking of Q4 activity indicates that both markets will return

to modest growth over the fi nal months of 2012. The current

average asking rent for offi ce space in Sonoma County is $1.66

per square foot, roughly the same place it was one year ago.

We anticipate a return to very slow growth in Marin County

for 2013. Our current forecast calls for this market to close

2013 with approximately 60,000 to 90,000 square feet of

total occupancy growth and a fi nal vacancy rate of roughly

14.3%. We expect rents to post a growth rate of roughly 3.0%.

Sonoma County should end 2013 with a vacancy rate at, or

near, 17.9%. We expect total occupancy growth in the range

of 160,000 to 190,000 square feet and for rents to increase

at a pace of about 4.0%.

Marin County Offi ce Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City Transaction TypeHealth Net Q3 52,454 2350 Kerner Blvd San Rafael Renewal

Autodesk Q2 46,766 3950 Civic Center San Rafael Renewal

Redwood Trust, Inc Q1 27,292 1 Belvedere Pl Mill Valley Renewal

Meritage Medical Network Q2 22,266 500 Hangar Ave Novato Relocation/Expansion

Willis Lease Finance Corporation Q1 20,534 773 San Marin Dr Novato Renewal/Expansion

Sonoma County Offi ce Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City Transaction TypeMarmot Mountain, LLC Q2 43,000 5789 State Farm Dr Rohnert Park Relocation/Expansion

Raydiance Q2 41,638 1450 Mcdowell Blvd Petaluma Relocation/Expansion

Sonoma Marin Area Rail Transit Q3 28,000 5401 Old Redwood Hwy Petaluma Relocation/Expansion

Adventist Health Q3 26,200 463 Aviation Blvd Santa Rosa Relocation/Expansion

Clover Stornetta Farms Q1 17,846 1650 Corporate Cir Petaluma Relocation/Expansion

CASSIDY TURLEY

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The San Francisco Bay Area’s 366 million square foot

industrial market posted total vacancy 8.6% as of the

close of Q3 2012, refl ecting just under 452,000 square

feet of total occupancy growth through the fi rst nine months

of the year. The region’s industrial marketplace is on track

for its second consecutive year of growth. Industrial space

accounted for 362,000 square feet of positive net absorption

in 2011, but the region had hemorrhaged over 12.9 million

square feet of occupancy between 2008 and 2010. While

offi ce and R&D occupancy levels are back to pre-recession

levels, the same cannot be said of the region’s industrial base.

However, the good news for local landlords is that at least

the industrial sector did not enter into

the recession with already inflated

vacancy levels, as was the case for

offi ce and R&D properties in many

Bay Area markets. But as has been

the case with those property types,

recovery for industrial properties has

also been uneven both in terms of

product type and geography.

Bay Area Manufacturing Outlook

Manufacturing space accounts for

147.2 million square feet of the

region’s industrial inventory. The

region’s manufacturing sector

performed well in Q3 2012, posting

932,000 square feet of occupancy

growth and closing the quarter with a

vacancy rate of 6.9%. Unfortunately,

this comes after three consecutive

quarters of substantial occupancy

losses, including those related to the high profi le collapse of

Fremont-based solar panel manufacturer Solyndra. Through

the fi rst nine months of the year, manufacturing occupancy

in the Bay Area has actually fallen by 37,000 square feet.

The good news is that Q4 activity should boost this segment

of the marketplace back into the black for the year, but gains

are likely to be modest at best. Still, despite these lackluster

numbers, the trend has been one of general improvement for

the market as a whole. If you take Solyndra out of the mix,

the region’s manufacturing base would have posted almost

800,000 square feet of growth through the fi rst nine months

of 2012. This would have far surpassed the 343,000 square

feet of occupancy growth that the market experienced in 2011.

The good news is that while many feared that the Solyndra

facility would remain vacant for years, it actually sold very

quickly. Seagate Technology will close on the property in

February 2013, at which point the region’s manufacturing

occupancy will tick up by about 800,000 square feet.

The East Bay is home to 87.6 million square feet of manu-

facturing inventory. Vacancy here stood at 7.9% as of the

close of Q3, up from a 6.7% reading a year ago. It tends to

be the most active marketplace and usually drives growth in

the region, though this trade area had

posted negative net absorption to the

tune of 485,000 square feet of space

through the fi rst nine months of 2012.

This was, of course, due to the impact

of Solyndra. The average asking rent

has increased 19% over the past year

from $0.42 to $0.51 per square foot

(on a monthly triple net basis).

Santa Clara County closed Q3

with a vacancy rate of 5.2%, down

signifi cantly from the 6.5% rate of a

year ago. This trade area had posted

471,000 square feet of occupancy

growth through the fi rst nine months

of 2012. This is despite the fact that

nearly 240,000 square feet of previ-

ously occupied manufacturing space

was vacated and demolished to make

way for new residential projects in

San Jose. The trend of conversions

for older industrial properties in San Jose is only expected

to intensify going forward as city planners and developers

contend with a housing shortage, skyrocketing rents and home

prices and little land left to build. More owners will fi nd that,

assuming they can rezone and get through the environmental

hurdles, that redevelopment plays into residential housing may

be the best use for older industrial properties bordering on

obsolescence. This trend will help to tighten market vacancy

further. Though tenant activity levels for manufacturing space

are minimal compared to the warehouse sector, there are not a

lot of quality options to choose from in the marketplace. This is

INDUSTRIAL FORECAST

San Mateo County Industrial Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City Transaction TypeWilliams Sonoma Q2 194,112 435-440 Valley Dr Brisbane Renewal

SF Chronicle Q1 79,300 240 Valley Dr Brisbane Expansion

Pacifi c Gourmet Q3 70,335 380 Valley Dr Brisbane Relocation/Expansion

NNR Global Logistics Q2 45,362 550 Eccles Ave South San Francisco Expansion

Metro Air Service Q3 43,500 425 Valley Dr Brisbane Expansion

San Francisco County Industrial Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address Submarket Transaction TypeKWW Kitchen Cabinets & Bath Q2 32,500 211 Industrial St Bayshore Corridor Relocation/Expansion

Young's Market Company Q2 26,000 3000 3rd St Mission Bay/Dog Patch Relocation/Expansion

SRG Designs, Inc. Q2 25,000 695 Minnesota St Mission Bay/Dog Patch Relocation/Expansion

Thatcher's Gourmet Popcorn Q2 20,000 1225 Minnesota St Mission Bay/Dog Patch Renewal

Roar Wines Q2 20,000 1225 Minnesota St Mission Bay/Dog Patch Relocation/Expansion

The largest industrial deal to be inked

throughout the fi rst nine months of

2012 on the San Francisco Peninsula

was Williams-Sonoma’s renewal on

194,000 square feet of warehouse space

at CalSTRS’ Crocker Industrial Park

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one of the reasons why the ultra-modern Solyndra facility sold

so quickly as well as what is driving strong rental rate growth in

Santa Clara County. The current average asking rent of $0.68

per square foot is up 18% from last year’s rate.

With just 6.6 million square feet of product, San Mateo

County is the smallest manufacturing market that we break

out statistically. Through the fi rst nine months of 2012 it

had posted 23,000 square feet of negative net absorption.

Ongoing deal activity in Q4 will likely bring it back into

modestly positive territory, but just barely. If so, it will be

the fi rst time since 2008 that manufacturing space closes the

year in the black. Despite this negative

trending, current vacancy of 7.6% is

still relatively low. The problem is that

demand has been equally low. The

current average asking rent of $0.79

per square feet has actually dropped

5% over the past year.

At the peak of the last cycle in 2007

manufacturing vacancy fell as low as

4.7%. The market still has a long

way to go before it even comes close

to those numbers, however, we are

optimistic that the ongoing trend of

gradual improvement will escalate

heading deeper into 2013. The trend of

on-shoring is real and has been fueled

by a mix of factors including rapidly

rising costs in Asia and stagnant wages

here at home. The tech boom has had little impact on local

manufacturing demand so far, but even this may change soon.

Apple has announced that they will begin assembling at least

one model of their iPad product line in California. Though this

will probably land in the Sacramento area, this will be part of

a greater marketing campaign to see if they can successfully

charge more for product clearly branded as made in America.

Should it succeed, this could have immense implications for

manufacturing jobs and space demand in the future.

Bay Area Warehouse Outlook

Warehouse space accounts for almost 219 million square feet

of the Bay Area’s 366 million square foot industrial base.

Vacancy for this product type stood at 8.7% as of the close

of Q3 2012, compared to a 9.0% as of the close of 2011. In

the intervening nine months, the marketplace had absorbed

511,000 square feet of previously vacant space. As this report

went to press in December there were a number of deals that

had closed or that were in the works that should further boost

this total in Q4 2012. All told, we anticipate that the Bay

Area’s warehouse sector will close 2012 with total annual

occupancy growth in the range of 800,000 square feet. This

will make it the third year in a row that warehouse properties

have posted positive annual totals. The market had lost over

ten million square feet of occupancy between 2007 and 2009.

The good news is that 2012 will likely end as being the region’s

strongest growth year since 2006. The

bad news is that the combined positive

net absorption of the past three years

still equates to just 10% of all the

occupancy lost during the downturn.

The East Bay is home to the region’s

largest concentration of warehouse

space. The East Bay/Oakland market

has a total inventory base of 74.1

million square feet. It closed Q3 2012

with a 9.3% vacancy rate, refl ecting

a slight decline from the 9.6% rate

of one year prior. This trade area has

accounted for 227,000 square feet of

occupancy growth through the fi rst

nine months of 2012 and continues

to be one of the most sought after

locations from tenants who wish to be

close to the Port of Oakland and major transportation hubs.

At the peak of the last cycle, vacancy here had fallen as

low as 4.4% (Q3 2006). Though vacancy remains elevated

from pre-downturn levels, one of the challenges facing

this trade area is a lack of available modern space. The

average age of warehouse buildings in Alameda County is

42 years. Industrial demand is currently being driven by

distribution and logistics users who need warehousing space

that can handle heavy fl oor loads and that offer cross-docking

capabilities, high ceilings for stacking and numerous other

modern amenities. These facilities are in high demand and

fetch top rents. Much of what remains vacant in the East

Bay/Oakland marketplace is older product. This past year is

the fi rst since the downturn where this market has started

Santa Clara County Warehouse Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City/Submarket Transaction TypeDGA Services Q1 149,010 999 Montague Expwy Milpitas Relocation/Expansion

Apple, Inc. Q3 134,160 2940 Mead Ave Santa Clara Expansion

Golden State T's Wholesale Q1 90,000 2070 S. Seventh St South San Jose Renewal

Cepheid Q1 70,627 914 Caribbean Dr Sunnyvale Expansion

Apple, Inc. Q1 54,934 590 Macara Ave Sunnyvale Expansion

Santa Clara County Manufacturing Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City/Submarket Transaction TypeLegacy Transportation Services Q1 107,116 2011 Senter Rd South San Jose Expansion

Riverview Systems Group Q1 70,042 1101 Cadillac Ct Milpitas Relocation/Expansion

SMTC Q1 64,800 2302 Trade Zone Blvd North San Jose Renewal

Versgrove Moving Systems Q3 51,600 665 Lenfest Rd North San Jose Relocation

ACTA Health Products Q1 34,040 41320 Boyce Rd Sunnyvale Renewal

We are optimistic that the ongoing trend of gradual

improvement will escalate heading deeper into 2013.

The trend of on-shoring is real and has been fueled by a mix of factors including rapidly rising

costs in Asia and stagnant wages here at home.

CASSIDY TURLEY

18

to see rents recovering. The current average asking rate of

$0.40 per square foot is up almost 11% over one year ago.

While the East Bay/Oakland marketplace typically sees the

most tenant activity in the region, it was the East Bay’s inland

Contra Costa County markets that have posted the most growth

in 2012. The East Bay/Pleasanton

market is home to 17.8 million

square feet of warehouse space. It

closed Q3 2012 with a vacancy rate

of 15.0%, down from a reading of

16.3% one year ago. It has posted

211,000 square feet of occupancy

growth through the fi rst nine months

of 2012. The current average asking

rent here of $0.57 per square foot

has only just begun to stabilize over

the past six months. It is down

17% from where it stood a year

ago. While we do not expect it to

fall any further, the region’s still-high

vacancy rate will continue to weigh

on rental rate growth.

The East Bay/Walnut Creek trade

area led all other Bay Area ware-

house markets in terms of occupancy

growth through the fi rst nine months

of 2012 with 479,000 square feet

of positive net absorption. Vacancy

here has fallen from 17.0% to 13.8% over the past twelve

months. But like its neighbor to the south, rents are only now

stabilizing and signifi cant rental rate growth is unlikely until

vacancy falls further. The current average asking rent of $0.53

per square foot has not budged in the past six months, but a

year ago it stood at $0.58 per square foot.

In 2013, we expect the combined industrial markets of the

East Bay (warehouse and manufacturing in all trade areas)

to account for at least 860,000 square feet of positive net

absorption, if not more. We expect the current overall vacancy

rate of 9.6% to fall to 9.1% over the course of 2013.

But while the East Bay as a whole grew in 2012, the same was

not true of the region’s second largest marketplace. The Santa

Clara County warehouse market includes 31.2 million square

feet of inventory and closed Q3 2012 with an overall vacancy

rate of 8.8%. While this marks an improvement over the 9.8%

rate that was posted a year ago, Santa Clara County lost over

454,000 square feet of warehouse occupancy through the

fi rst nine months of 2012. There is some good news here in

that building conversions have been

the real culprit. Since the begin-

ning of the year, we have removed

653,000 square feet of space from

our statistical tracking. In virtually

every case these were buildings

slated to be demolished to make

way for new projects, usually new

multifamily developments though the

extension of BART has also played

a role. Though this trend results in

lower overall occupancy numbers, it

actually has helped to drive vacancy

rates down because some of this

inventory was already empty. The

current vacancy rate for warehouse

product in Santa Clara County is

8.8%, down from 9.8%. Without

these conversions, the market would

actually be on page for modest

growth in the 200,000 square foot

range. This helps to explain why

rents here are growing. The current

average asking rate of $0.49 per

square foot is up 10% over last year’s reading. With leasing

fundamentals continuing to gradually improve and more older

or obsolete industrial properties likely to face the wrecking ball

in 2013 and beyond, we see vacancy continuing to tighten and

rents continuing to grow.

Looking ahead to 2013, we anticipate that Santa Clara

County’s combined industrial marketplace (warehouse and

manufacturing) will account for at least 250,000 square feet

of occupancy growth in 2013 and that it will close the year

with an overall vacancy rate of 6.2%

San Francisco’s 20.3 million square foot industrial market

closed Q3 2012 with a vacancy rate of 4.8%, down from 5.5%

over the past twelve months. Through the fi rst nine months of

East Bay Manufacturing Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City Transaction Type

Theranos Q1 219,255 7333 Gateway Blvd Newark Relocation/Expansion

Gary Steel Q2 173,600 1699 Grand Ave, W. Oakland Renewal

Dean Refrigeration Q1 130,000 860 81st Ave Oakland Relocation/Expansion

Whole Foods Market Q2 117,008 2000 Atlas Rd. Richmond Relocation/Expansion

Specialized Packaging Solutions Q1 107,199 38505 Cherry St Newark Renewal/Expansion

East Bay Warehouse Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City Transaction TypeCeva Logistics Q3 323,254 31353 Huntwood Ave Hayward Relocation/Expansion

RK Logistics Q2 191,483 41707 Christy St Fremont Relocation/Expansion

Architectural Glass & Aluminum Q3 175,000 6400 Brisa St Livermore Relocation/Expansion

Owens Corning Q3 174,278 201 C St Hayward Renewal

Primary Steel Q2 173,600 1699 W. Grand Ave Oakland Renewal

INDUSTRIAL FORECAST

The East Bay’s (and the region’s)

largest industrial deal of the year was

a relocation/expansion lease. Ceva

Logistics inked a deal for 323,000

square feet of space at Hayward’s

Huntwood Logistics Center in February.

The third-party logistics provider took

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2012 it has posted 82,000 square feet of occupancy growth

but some Q4 move-outs will likely put this market into negative

territory on the year. We also anticipate vacancy as of Q4

2012 to climb as high as 5.8%. Rents here have remained

unchanged over the past year at $$0.74 per square foot. The

San Francisco market is dominated by long-term owner/users

with little in the way of available

space for lease. As a result, this is a

low demand/low activity marketplace

that also has low vacancy and higher

pricing. Tenancy here is driven by

service providers who need to be

located here. Looking forward, we

anticipate that likely conversions

of existing space to other property

types and continued modest levels

of demand should combine to bring

vacancy levels back downward. We

also expect rental rate growth in

2013 to ramp up, likely above the

5% level.

San Mateo County’s industrial

market closed Q3 2012 with a

vacancy rate of 9.6%. One year ago

it stood at 9.0%. The market has lost

71,000 square feet of occupancy

through the first nine months of

2012, but we know of a few Q4 deals in the works that should

bring those numbers back into positive territory. The current

average asking rent here of $0.69 per square foot is down 8%

over the past year. While fi nal 2012 growth numbers should be

modestly positive, we anticipate that growth should ratchet up

in 2013. We expect the San Mateo marketplace to close 2013

with about 160,000 square feet of positive net absorption and

a vacancy rate at, or near, 8.6%.

Marin County closed Q3 2012 with an industrial vacancy rate

of 7.1%, compared to a reading of 7.3% twelve months ago.

This trade area has experienced extremely modest growth of

just 14,000 square feet through the fi rst nine months of 2012.

Deals in the works for Q4 will boost this total slightly, but it will

still likely fall beneath the 50,000 square foot mark. Though

vacancy levels are relatively low, deal activity and demand

has also been low. Most local deal activity remains focused

on smaller industrial users in need of service-related, light

manufacturing or basic warehousing (not distribution) space.

The current average asking rate for industrial space in Marin

County is $1.10 per square foot, up 13% over the $0.98 per

square foot reading of one year ago. Rental rate growth has

continued to take place simply because there are not a lot of

quality options for space users. While

we expect growth levels to pick up

here heading into 2013, we still do

not think that absorption levels for

next year will grow much above the

50,000 square foot mark. Still, we

anticipate that Marin County’s indus-

trial market will close 2013 with a

vacancy rate of about 6.2% and that

rents will also continue to grow at a

moderate clip.

Unlike Marin County where industrial

service users rule the roost, Sonoma

County’s industrial marketplace

is much more about warehousing,

particularly in support of the region’s

strong wine industry. As of Q3 2012,

vacancy stood at 10.1%, down from

a 10.6% reading a year ago. The

market has recorded nine consecu-

tive quarters in which occupancy had

either grown slightly or remained fl at. Demand remains tepid

and with vacancy still slightly above the 10% mark, rents have

also remained fl at. The current average asking rate of $0.64

per square foot has budged little since Q1 2010. As this report

went to press we were aware of a couple of planned tenant

move-outs that could send vacancy as high as 11.2% and

bring annual occupancy growth totals into the red by as much

as 220,000 square feet. However, we do expect a return to

modest growth in 2013. We anticipate that Sonoma County

will close out next year with vacancy at, or near, 10.5%.

Marin Industrial Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City Transaction Type

EO Products Q2 38,000 90 Windward Wy San Rafael Relocation/Expansion

32Ten Studios Q1 29,982 3210 Kerner Blvd San Rafael Relocation/Expansion

Marin Senior Coordinating Council Q3 9,070 15 Jordan St San Rafael Relocation/Expansion

Tesla Motors Q2 8,000 595 Redwood Hwy Mill Valley Relocation/Expansion

San Francisco Exotic Cars Q2 8,000 15 Jordan St San Rafael Relocation/Expansion

Sonoma Industrial Market 2012 Notable Leases (Through Q3 2012)

Tenant Quarter Total SF Address City Transaction TypeKala Brand Music Company Q1 24,006 1105 Industrial Ave Petaluma Relocation/Expansion

Offi ce Playground Q2 17,456 715 Southpoint Blvd Petaluma Relocation/Expansion

Enphase Energy Q1 15,580 1380 Redwood Wa Petaluma Relocation/Expansion

Moresco Distributing Company Q3 14,550 1460 Cader Ln Petaluma Relocation/Expansion

Three Twins Organic Inc. Q1 7,989 2190 S. Mcdowell Blvd Petaluma Relocation/Expansion

The South Bay’s largest industrial deal

of the year so far (through Q3) was a

warehouse lease. In the fi rst quarter,

DGA Services inked a deal for 149,000

square feet of space at 999 Montague

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The 2012 holiday shopping season was well under way as

this report went to press and initial indicators are that

fi nal sales will be up at least 3.0% over 2011 totals, but

the fi nal tally could exceed the 4.0% mark. Analyst forecasts

were more robust this year than they were in 2010 and 2011

but that is due to a number of reasons. This year’s holiday sales

season includes an extra weekend of selling time while retailers

continued to push the envelope with further early openings

during the Black Friday weekend. Meanwhile, the number

of major malls that opened on Friday at

midnight increased from roughly 35% to

about 50%. But while these factors were

bound to have an incremental impact on

retailer sales fi gures, the primary reason for

optimism was consumer confi dence.

Remember that both the 2010 and 2011

holiday sales seasons turned out to be

pleasant surprises for U.S. retailers. In

2010, the economy was still emerging from

the depths of the recession. Luxury and

upscale retailers had seen their same store

comparables hammered, with some chains

having posted 18 consecutive months of

declines in the double-digits. Sales for this

segment of the market had only begun to

turn positive in September 2010. Most

importantly, consumer confidence had

been on a lengthy run of declines, reaching

a low of 48.6 in that same month. Analysts

predicted a weak sales season only to

be shocked when consumer confi dence

suddenly began to trend upward and

shoppers turned out in force. While most

forecasters predicted annual sales gains

of 2% or less, American consumers drove

annual sales growth by over 4%.

A similar phenomenon took place in 2011, though by then

upscale retailers were doing markedly better. But confi dence

slumped following an early year run-up in gas prices and the

summertime discord surrounding the debt ceiling debate and

subsequent downgrade of U.S. credit. By October 2011,

consumer confi dence had fallen to a low of 40.9 as economists

debated the possibility of a double-dip recession. Analysts

predicted sales increases in the 2.5% to 3.0% range. Yet,

once again shoppers came through, fueling an annual increase

in holiday sales of just over 4.0%.

But unlike in those past years, consumer confi dence was not

weak heading into the Holiday season. In fact, it is currently

on its strongest uptrend in over four years. After hitting a

low of 61.3 in August, it jumped to 68.4 in September and

has only been climbing since. By November it had reached a

peak of 73.7—it’s highest rate since February 2008. Against

this backdrop, it only makes sense that projections for 2012’s

holiday sales would be more robust. This is important because

a strong holiday sales season can directly impact retailer

expansion. Following both the 2010 and

2011 holiday sales seasons, retailers

boosted their growth plans considerably.

Before the 2010 Christmas season,

retailer growth was dominated by

discounters (ranging from off-price

apparel to warehouse stores and discount

grocers) and low ticket restaurants (fast

food and fast casual). The surprisingly

strong holiday sales season marked the

offi cial end of the recession for many

retailers. Many chains that had put

expansion on hold now moved to cautious

growth mode and with rents off in some

markets by 40% to 50% from peak

pricing, it led to a wave of opportunistic

deals. We track retailer growth plans

nationally and saw a 30% surge in new

store plans between September 2010

and March 2011. The 2011 holiday

shopping season played out in a nearly

identical manner as surprisingly strong

sales fi gures resulted in another uptick

in retailer demand. But this time the

surge accounted to an increase of about

15%. The market was already moving

back to more normalized trends, mean-

while, as the marketplace had improved

considerably over the previous year opportunistic plays for top

properties were becoming harder to engineer.

With fi nal 2012 holiday sales fi gures expected to show strong

growth the question is whether this will translate into a similar

surge in retailer growth plans. Unfortunately, the answer for

2013 is likely not. The rapid acceleration of retailer growth

plans in 2010 and 2011 were anomalous. While it is not

uncommon for demand to increase following a strong holiday

showing, historically this surge has usually been in the 5% to

10% range. Additionally, though the retail market has not fully

recovered from the impact of the downturn, there are fewer

opportunistic plays available for retailers seeking premium

space. While the Class C marketplace still offers plenty of

opportunities for chains looking for deals, rents for Class A

space in nearly every major U.S. market (including those still

posting the weakest overall performance) have been on the

rise as vacancies have fallen. Meanwhile, Class B product

in all but the weakest of U.S. marketplaces has also seen

considerable improvement over the past 30 months. As 2012

drew to a close, Class B properties were rebounding in general

as vacancies tightened for Class A space. This was not the

case a year ago. The last reason why we do not expect a repeat

of the last two years is indicative of a longer term trend; the

increasing encroachment of e-commerce.

RETAIL FORECAST

Walmart leased 41,000 square

feet of space at San Jose’s

Evergreen Village Center and

opened one of its new smaller

format Walmart neighborhood

stores. The world’s largest

retailer is actively looking for sites

throughout the Bay Area and we

anticipate a number of openings

in 2013. With speculation rife

that Walmart could potentially buy

Fresh & Easy as they exit the U.S.

market, what could be a handful

of openings next year could

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120

160

200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Retail E-Commerce Sales

A Seven-Fold Increase Since 2000Gaining roughly 10% annually

Billions of Dollars

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Who is Growing and Why?

We are currently aware of plans from retailers to open as many

as 41,000 new retail storefronts in the U.S. over the next twelve

months. This compares to a reading of just under 40,000

potential storefronts one year ago. Growth remains slow and

cautious and has shifted increasingly to retail concepts that

are considered bulletproof when it comes to e-commerce.

Hard goods retailers, with the exception of dollar stores

and discounters, remain in conservative

growth mode at best. Meanwhile, food

related or service oriented retail remains

in aggressive growth mode. Restaurant

concepts alone account for 42% of all

the planned growth that we are tracking.

Meanwhile, smaller format grocery

remains hot—driven by strong demand

from niche players ranging from discount

to upscale and ethnic to organic. This

holds true nationally as well as region-

ally—of the top 25 retail leases inked

throughout the Bay Area this year, smaller

format grocery accounted for fi ve of them.

Walmart, Grocery Outlet, Fresh Market

and other players remain extremely active

in the marketplace. Though Fresh & Easy

has announced that it will be withdrawing

from the U.S. market in 2013, demand for

its existing Bay Area sites is expected to

be high. Though speculation is rife that

the chain could sell to either Walmart or

ALDI, a sale to one of the numerous dollar

store chains in growth mode could be just

as likely.

Dollar stores are entering their third

consecutive year of explosive growth and

we are tracking a potential of over 2,000

new dollar stores throughout the U.S.

over the next year. Dollar General alone

is planning on as many as 625 openings

nationally over the course of 2013. Mean-

while, Family Dollar is expected to open at

least 500 new stores while Dollar Tree has

plans for at least 300 new units in 2013.

All of these chains are expected to be

active in California this year. We anticipate

that dollar stores alone will account for

a minimum of 15 million square feet of

occupancy growth across all retail building

types in the coming year.

Besides these categories, we continue to

see expansion from fi tness/health/spa concepts, drug stores,

thrift stores, automotive service, discounters, off-price apparel,

pet supplies, sporting goods, hobby stores/arts & crafts,

wireless stores (limited growth driven mostly by a few new

concepts) and some banking/check cashing/fi nancial services

providers. Ultimately, however, if you want to understand who

is growing and why, it all comes down to a few basic trends.

Luxury and upscale retail is back while concepts offering low

price points (from restaurants to hard goods) have mostly

thrived throughout the downturn. But the middle class

consumer remains in frugal mode and, having downsized,

this is taking its toll on mid-price point retailers of all stripes.

Those very same hard goods concepts have been doubly

pinched thanks to e-commerce, though many casual dining

chains (with a few exceptions mostly limited to new concepts)

also continue to face challenges. Meanwhile, site selection

remains about “the sure thing.” Higher income demographics

and greater population densities are what most chains are

chasing. Likewise, the market remains

bifurcated in terms of class with Class

A and B properties remaining in most

demand. Meanwhile, all of these trends

have served the Bay Area remarkably well

over the past couple of years.

San Francisco Peninsula Outlook

Our retail division, Terranomics, tracks

retail trends across nearly 60 major U.S.

marketplaces. As of the close of Q3

2012, shopping center vacancy within

the San Francisco market stood at just

4.0%, placing it second in the nation in

terms of boasting the tightest vacancy.

We should note that these numbers don’t

include freestanding retail or ground fl oor

retail spaces within mixed-use buildings.

That would include much of the inventory

of the city’s high-end shopping district,

Union Square, where we estimate current

vacancy to be below the 4% mark. Union

Square has continued to see intense

activity over the past year with pricing

accelerating at a rapid clip. Though top

rents here have occasionally surpassed

the $500 per square foot mark for

premium space, this remains well below

similar high street rents in New York

City where recent top rents for Midtown

Manhattan (according to the Real Estate

Board of New York) have surpassed the

$2,700 per square foot mark. Because

of this, many retailers who typically look

fi rst to Manhattan for fl agship locations

are increasingly skipping the Big Apple

and looking to the West Coast instead.

Offi ce leasing activity has been brisk in

the city’s SoMa district and has continued

to move westward. Meanwhile, a large

number of multifamily are units planned

or already under construction both in the

SoMa and mid-Market region. Both of these factors are laying

the groundwork for the retail trend that will take centerstage in

San Francisco over the next couple of years—the revitalization

of the long-blighted area of Market Street between 6th and 9th

Streets. There is already heavy touring and deal activity in

this area and we anticipate that this will only escalate over the

course of the year.

In terms of shopping center vacancy, the current rate of 4.0%

refl ects a signifi cant decline from the 6.9% rate of a year

After years in the works, Neiman

Marcus opened a new 86,000

square foot store in Downtown

Walnut Creek earlier this

year. There they will be going

head-to-head against chief

competitor Nordstrom, which

recently remodeled its full service

department store next door.DE

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Though top Union Square rents have occasionally surpassed the $500 per

square foot mark, this remains well below top rents for

Midtown Manhattan which have surpassed the $2,700 per square foot mark. Many retailers who typically look

to New York for fl agship locations are heading to the

West Coast instead.

CASSIDY TURLEY

22

ago. This vacancy rate is likely to fall further in 2013, but the

rate of occupancy growth will slow. This is simply because

quality product is in short supply. The good news for retailers

is that the ongoing boom in multifamily

development will be providing plentiful

ground fl oor options for expansion over

the next 24 months. But shopping center

space is tight and much of what is left is

challenged.

We anticipate strong rental rate growth for

all retail in San Francisco in the coming

year. Depending upon the product type,

increases should range from 5% to as

high as 15%. Look for key big box activity

in 2013 with a new CityTarget opening

in Japantown as well as major leasing

activity from a mix of apparel retailers

(some off-price and some not) in the

emerging mid-Market corridor.

As this report went to press, shopping center vacancy in San

Mateo County stood at 3.6%. This is actually an increase over

the 3.2% rate of a year ago, but it’s not because demand has

diminished. The problem for retail site selection specialists in

this marketplace is the lack of available quality space. With

few quality spots available, leasing activity has slowed. Most

of the deals getting done are for freestanding retail space,

which also is dwindling in its supply. There are a few smaller

proposed shopping centers on the books, but nothing currently

under construction. This is not likely to change anytime soon

due to a shortage of available land and—most importantly—

the diffi cult development environment here. Vacancy, in the

meantime, will remain tight at, or close to, current levels. Look

for average asking rents to increase

between 5% and 10% for most quality

space in the coming year.

South Bay Outlook

Thanks to the fact that San Jose’s

tech-driven economy continues to

boom and that this market leads the

nation both in terms of annual job

growth and income demographics,

this marketplace remains one of the

strongest in the country. Vacancy

currently stands at 6.0%, down from

a reading of 6.2% posted a year ago,

ranking it as the 7th best performing

U.S. marketplace in terms of vacancy.

Class A space is at a premium, with little in the way of current

availability and extremely quick turnaround times for spaces

that do go dark. Rental rate growth for many of these centers

has exceeded 10% over the past year and we anticipate similar

gains in 2013. Class B space is also performing strongly,

though there are certainly more space options available to

expanding tenants. Still, the pendulum for these properties

has swung fi rmly to the favor of landlords over the past 24

months. Vacancy for this sector of the market is also below

the market average, though opportunities still exist for space

users. Rental rate growth has typically averaged about 5%

2012 Northern California Major Retail Leases

Tenant Total SF Shopping Center/Address CityNeiman Marcus 86,000 1140 S. Main St Walnut Creek

Hobby Lobby 77,185 990 Cochrane Rd Morgan Hill

Fallas Paredes Discount 71,040 Capitol Square San Jose

Dick's Sporting Goods 55,000 Fallon Gateway Shopping Center Dublin

Hammer Auto, Inc. 53,000 2121 Diamond Blvd Concord

Dick's Sporting Goods 50,000 East Washington Place Petaluma

Nordstrom Rack 47,000 703-707 Contra Costa Blvd Pleasant Hill

The TJX Companies 46,000 East Washington Place Petaluma

24 Hour Fitness 42,540 North Bay Centre Rohnert Park

Walmart 41,000 Evergreen Village Center San Jose

Payless Furniture 26,277 40460 Albrae St Fremont

Sprouts Farmers Market 25,409 1510 Geary Rd Walnut Creek

Sprouts Farmers Market 25,000 East Washington Place Petaluma

Staples 24,120 55 Rowland Wy Novato

Paradise Palace 23,189 Peralta Plaza Fremont

Susan Sachs, et al. 23,134 4100-4120 Peralta Blvd Fremont

Grocery Outlet 21,446 Lawrence Station Santa Clara

Grocery Outlet 21,000 Livermore Valley Square Livermore

Meyer Appliance 18,826 861 E. El Camino Real Mountain View

Linen Warehouse 18,600 2720 Santa Rosa Ave Santa Rosa

Harbor Freight Tools 17,500 863 E. Francisco Blvd San Rafael

My Hot Cars 17,019 Kitty Hawk Plaza Livermore

Total Renal Care, Inc. 15,874 Lowe's Center San Jose

Joann Fabrics 15,000 75 Colma Blvd Daly City

Grocery Outlet 14,568 311 N. Capitol Ave San Jose

RETAIL FORECAST

Class A space is at a premium, with little in the way of current availability and extremely quick turnaround times for spaces that do go dark. Rental rate growth for many of these centers has exceeded 10.0% over the past year and we anticipate similar

gains in 2013.

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SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

23

or slightly more over the past year and should also continue

at a similar pace in the coming year. Though Class C centers

are posting vacancy above the local average of 6%, most of

these older projects are still below the 10% mark and would

be considered to be in a relatively

healthy state in most other U.S. trade

areas. Still, rents for this space remain

competitive and here is where we see

the most opportunistic plays at work.

Mom-and-pops are slowly returning to

the marketplace—a development that

will help further lower Class C vacancy

levels in the year ahead—even as we

continue to see strong demand from

grocers, restaurant users, discounters

and a mix of other tenant types else-

where.

Though there are a slew of entitled

multifamily projects that will add a

signifi cant amount of new ground fl oor

retail space over the next two years,

we are tracking only a few projects

currently under construction. Still,

there are a number of proposed shop-

ping centers that will start construction

in 2013. Though most won’t deliver

until 2014, absorption should remain

positive in the coming year. With major players like Target,

Walmart, Safeway and others active and the market for inline

leasing remaining strong, rents should continue to post solid

growth in the coming year even as the challenge of fi nding

quality space will become more of a challenge. Deliveries in

2014 will help to alleviate this issue, but the current develop-

ment pipeline may still not be adequate enough.

East Bay Outlook

Overall East Bay shopping center vacancy stood at 6.3% as

this report went to press, placing the East Bay marketplace as

11th in the nation in terms of overall vacancy. This refl ects a

reduction from the 6.9% rate posted one year ago and refl ects

over 350,000 square feet of occupancy growth through

Q3 2012. The delivery of Paragon Outlet’s new center in

Livermore in Q4 will only further boost 2012’s annual totals,

which have overwhelmingly been driven by new construction.

The East Bay is one of the few places in the Bay Area where

development has been robust. We are tracking over 580,000

square feet of new projects in the pipeline, placing the East

Bay within the top ten U.S. markets for retail development in

general. There are multiple factors behind this ranging from

an easier development environment (generally) to cheaper land

costs and pent-up demand. The region’s excellent public

transit system, coupled with a shortage of available housing

in the neighboring San Francisco and Silicon Valley markets,

is already translating into increased cross-Bay migration.

Anticipate this trend to only accelerate in 2013 and for both

multifamily and retail development to continue ahead at a fast

clip. Among the larger projects that will be delivered next

year will be Catellus’ Target-anchored 450,000 square foot

Alameda Landing project, though we expect a number of other

projects to move forward in the months ahead.

As is the case with Santa Clara County, bifurcation based upon

Class remains a reality here. Class A product in Emeryville or

Walnut Creek is facing an entirely different set of circumstances

than Class C centers in Hayward. However, with the exception

of the weakest centers, the trend ahead

will be for rental rate growth—ranging

anywhere from 5% to 12% depending

upon the location and type. Alameda

County properties continue to outperform

Contra Costa County projects in general,

with the exception of prime retail corridors

like downtown Walnut Creek.

North Bay Outlook

Shopping center vacancy throughout the

North Bay marketplace now stands at

4.6%, down considerably over the 5.9%

rate of a year ago. Although the market

has recorded over 260,000 square feet

of occupancy growth over the past twelve

months, the overwhelming majority of

this (all but about 40,000 square feet)

was absorbed in either Q4 2011 or Q1

2012. The fact is that vacancy here

remains extremely tight and that most of

the roughly 858,000 square feet of space

that is currently available is located within

the region’s weaker Class B and C centers.

Napa County shopping center vacancy currently stands at an

extremely low rate of 2.4%. The current average asking rent

here of $28.99 per square foot is up 27% from the $22.92

rate of a year ago. This average masks asking rates from

$16.00 to $60.00 per square foot. Meanwhile Marin County

vacancy is at a low 3.9%. The current average asking rent of

$22.03 per square foot covers a range of $13.00 to $36.00

per square foot. Lastly, Sonoma County vacancy stands at

5.6%. The current range of asking rates here goes as low as

$9.00 and as high as $42.00 per square foot, with an average

of about $19.00 per square foot.

Like elsewhere in the Bay area, retailer demand is high but

a lack of quality available space is impeding growth. The

average age of the shopping center inventory in the North Bay

is 32.8 years and only 10% of the region’s 18.7 million square

foot base has been built in the last ten years. The good news

is that new construction is ramping up, despite the fact that

many North Bay communities are known for being diffi cult for

development. We are currently tracking 230,000 square feet

of new shopping center space under construction which will be

coming online in the months ahead. These heavily pre-leased

projects will have an immediate positive impact on absorption

totals and no negative impact on rents. We anticipate that

rental rate growth will continue to be aggressive; in the low

double digits for Marin and Napa Counties, while above the

5% range in Sonoma. Look for vacancy levels to remain near

where they are now due to the addition of new product.

24 Hour Fitness leased

approximately 43,000 square

feet of space at Rohnert Park’s

North Bay Centre. Health club

and fi tness concepts are rapidly

expanding throughout the Bay

Area with 24 Hour Fitness one of

the most active players. Expect

more local growth from this chain

in 2013.DE

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CASSIDY TURLEY

24

Through the fi rst nine months of 2012, over $11.2 billion

in commercial real estate trades had taken place in the

San Francisco Bay Area. This fi gure already surpasses

the $11.1 billion in deals transacted in 2011, making 2012

the strongest year for investment activity that the market has

recorded since 2007 when total sale volume approached

a whopping $35 billion. Offi ce properties have dominated

trading, accounting for nearly $6 billion of total deal activity

compared to $4.3 billion in total volume last year. Multifamily

ranks second—with $2.1 billion in total

transactions booked through Q3. This is

down signifi cantly from the more than $3.1

billion in deals that closed in 2011 but this is

less a refl ection of diminishing demand than

it is of reduced availability. Retail properties

have accounted for over $1.8 billion in total

sales (up from $1.4 billion last year) and just

under $1.3 billion in industrial properties

(down from $2.2 billion in 2011) had traded

as of the end of Q3.

In terms of geographic activity, it should

come as little surprise that San Francisco is

leading all other Bay Area markets with more

than $4.7 billion in closed deals through Q3.

San Francisco has led all other local trade

areas in terms of total dollar volume over

the past few years. Just over $3.2 billion

in investment sales have closed in the

Silicon Valley marketplace, while the East

Bay has seen roughly $1.6 billion in total

activity. Meanwhile, both the North Bay

and Peninsula (San Mateo County) markets

have seen deal activity in the $850 to $860

million range.

In terms of who is driving the activity, the

short answer is every investor type. Private

investors still account for the lion’s share

of regional activity having purchased over

$4.4 billion in local commercial real estate

through the end of September. This is

roughly the same level of deal activity that

they accounted for in 2011. Equity funds

have bought over $1.7 billion in properties,

marking a slight decline from the $1.9 billion

in deals they inked last year—but, remember,

the 2012 statistics listed here do not include

Q4 totals yet so this number will increase.

Users have acquired over $1.5 billion, while

institutional investors have purchased just

below that mark. Meanwhile, REITs have

bought over $1.4 billion in local projects

while foreign investors have accounted for

about $377 million in total deal activity.

Only REIT and equity fund activity levels have declined since

last year, but those numbers could turn positive by the time

fi nal tallies are in after the close of 2012. Meanwhile, with

three months still left on the clock, user sales had jumped

by 46.0%, foreign investment activity had picked up by

24.7%, and both institutional and private investor moves had

increased incrementally. All of these numbers will increase

substantially once Q4 data is available, particularly private

investors who are largely fueling a late-year surge in activity.

Fear of “Taxmageddon” Fueling Late Year Surge

This report went to press in December before fi nal tallies for

Q4 2012 could be made. That being said, even though the

$11.2 billion in sales posted through Q3 already surpassed

last year’s totals. While this is already the Bay Area’s strongest

performance in fi ve years, we anticipate that fi nal numbers

for 2012 will likely surge. Deal activity

has exploded in the final months

of 2012 with our brokers reporting

extremely brisk activity. Mild end-of-

year surges are normal. Sellers want

to get properties off their books for tax

purposes. But this year, concern over

tax increases both known and unknown

are fueling fears of what some investors

are calling “taxmaggedon.” As a result,

many are looking to close deals before

the New Year—enough so that we know

of a few private investors who have even

been willing to budge on pricing that

had previously been set in stone in

order to process a transaction before

2013. We don’t anticipate this current

wave to impact overall pricing trends

much, but we do anticipate that it will

seriously boost total deal volume for

the year. We would not be surprised if

total investment sales in the Bay Area

for 2012 exceeded $17 billion before

it is all over.

Multifamily To Near Peak Conditions Ahead

While investment activity has been up

in general, multifamily sales volume

was actually down by 33% through

the fi rst three quarters of 2012. Yet,

this remains the product type where

we see the most general demand. The

problem is that there simply is not a lot

of product to sell. It’s no secret that the

Bay Area’s multifamily market has seen

booming rental demand over the past

three years, with vacancy levels falling

and rents skyrocketing.

The Bay Area’s average rent has

climbed from $1,583 in 2009 to

today’s average of $1,969—an increase

of 24%. In San Francisco, rents have

climbed 30% over the past three years.

San Mateo County has seen rents climb

50% while Santa Clara County saw rents climb by 41%. Clearly

this level of rental rate growth isn’t sustainable forever and

we are starting to see it slow. Our data indicates that annual

growth throughout the region has slowed to a still robust rate

approaching 10%. But as affordability has become more of

an issue in the Highway 101 Corridor markets, it has created

a ripple effect throughout the region. We are beginning to see

INVESTMENT FORECAST

The 1,751 unit Crescent

Village, in San Jose’s Oak

Creek submarket, is the largest

new multifamily project to be

delivered regionally in 2012.

So far new construction has

not signifi cantly impacted the

region’s extremely low vacancy

rates or aggressive rental rate

growth. But with 15,000 units

currently under construction

throughout the Bay Area it is only

a matter of time before it begins

to make a mark.DE

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The 360 Residences in

downtown San Jose sold in April

for $118,000,000. This 213

unit project traded at the price

of $554,000 per unit, making it

one of the year’s biggest ticket

multifamily sales in the U.S. (in

terms of per unit cost). Capri

Capital Partners bought this four

year old project from Kennedy

Wilson Properties at a reported

cap rate of 4.0%.DE

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INV

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SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

25

a trend of in-migration from renters who have been priced out

of other Bay Area markets. So far, this trend is mostly about

San Francisco losing tenants to Alameda County, but with rents

still going up we anticipate that this trend will only accelerate

over the next 12 to 18 months. Likewise, we anticipate that

increasing rents in Alameda County will also spur a lesser

movement of renters inland to Contra Costa County. This trend

has had little impact on the North Bay’s apartment market,

which tends to be insular and local in its trending due to its

weaker public transit connections to the region, though the

smaller size and higher rents of those markets also play a role.

All of these metrics have only helped

to fuel intense investor demand for

multifamily product in the Bay Area.

But with rents rising so rapidly, it has

also made existing landlords much

less willing to part with their proper-

ties. Adding to this challenge is the

fact that sellers have little to trade into

if they wish to keep with multifamily

product. This may be changing soon.

We are now tracking more than 15,000

multifamily units under construction

throughout the Bay Area. Santa Clara

County leads all other regions in terms

of development, with 30 projects

under construction that will add over 7,700 new apartment

units through 2014. San Francisco has 33 projects underway

with just under 5,400 units slated for delivery over the next

27 months. The East Bay follows with 13 developments that

will add just over 1,700 new apartment units to that area’s

inventory over the next couple of years. We expect all of these

markets to see additional projects entering the development

pipeline throughout 2013, though we anticipate that the

biggest surge will be in the East Bay.

Aggressive levels of new development will begin to impact

vacancy levels and rents in Santa Clara County by next year.

We anticipate the same within San Francisco by early 2014,

though we don’t anticipate this to occur in the remaining

Bay Area markets anytime soon. Prohibitive land costs and

diffi cult development hurdles in some communities remain

an issue in San Mateo County. Meanwhile, high pricing along

the 101 Corridor markets (Santa Clara, San Mateo and San

Francisco Counties) is already pricing many renters out of

those markets. Most are landing in the East Bay. Despite

strong development levels there, in-migration will mean that

most of the new projects in the pipeline will be easily absorbed

as they come to market.

In short, pricing is rapidly approaching peak levels for the San

Jose, San Mateo and San Francisco markets. Landlords who

understand that the days of 10%+ annual rental rate growth

in those markets will be coming to an end soon may want to

explore selling their properties in 2013 when conditions are

at their peak. We expect to see the availability of product

improving considerably over the next year.

Multifamily Investment Review

Multifamily trades had accounted for just over $2.1 billion in

total deal volume throughout the Bay Area through Q3 2012.

Silicon Valley led the way with $634 million in closed transac-

tions, while the San Francisco market posted $497 million in

deals. The East Bay booked $445 million of that total, while

the North Bay accounted for $364 million. Deal volume in the

Peninsula/San Mateo trade area fell to about half of last year’s

levels at $167 million—this decline was due to the minimal

availability of product.

The average price per unit of multifamily properties that have

traded throughout the Bay Area in 2012 was $223,000 per

unit, down slightly from $225,000. The average cap rate on

properties that traded was 5.5%,

refl ecting no movement since 2011.

The average price per unit in San

Francisco was $244,000, up from a

reading of $239,000 per unit in 2011.

The average cap rate of properties

that sold was 5.3%, down from 5.9%.

San Mateo County pricing increased

from $297,000 from $288,000 per

unit while cap rates fell from 6.0%

to 5.2%. The average price per unit

in Silicon Valley was $265,000, up

substantially from the previous year’s

reading of $220,000. East Bay multi-

family pricing fell from $237,000

to $156,000 per unit, but this was due to so few quality

projects moving in 2012. The actual trending is for sharp

price increases here. The average cap rate in the East Bay of

5.9% is up slightly from 2011’s 5.7% rate. Lastly, the average

price per unit for apartments in the North Bay increased from

$145,000 to $226,000 thanks to an increase of Class A

complexes moving here over the past year. The average cap

rate fell in the North Bay from 6.1% to 6.0% over the course

of 2012.

Offi ce Investment Review

While total offi ce deal volume for the Bay Area stood just below

the $6 billion mark as of Q3 2012, over half of this activity

took place in San Francisco. Nearly $3.6 billion of offi ce

properties had changed hands as this report went to press

and we anticipate that fi nal numbers for the year will easily

top $4.2 billion. Silicon Valley follows with about $1.3 billion

in total offi ce activity. Just over $518 million in deals closed

in the East Bay while the Peninsula/San Mateo marketplace

closed $517 million. The North Bay has seen just $25 million

in deals this year.

The average price per square foot of offi ce properties that

have traded throughout the Bay Area in 2012 was $318 per

square foot, up signifi cantly from 2011’s average of $225. The

average cap rate on properties that traded was 5.8%. This is

the same level recorded in 2011. However, trends within the

Bay Area’s fi ve basic trade areas have been quite divergent.

The average price per square foot of properties sold in San

Francisco in 2012 was $464 per square foot, refl ecting a

whopping 76% increase over the $263 rate posted the prior

year. Meanwhile, the current average cap rate of 5.0% is

down from 2011’s reading of 5.7%. Pricing skyrocketed

even further in San Mateo County where the average price

With 15,000 multifamily units currently under development, the days of 10%+ annual rental rate growth in some markets will be coming to an end soon. Many

will want to explore selling their properties in 2013 when conditions

area at their peak.

CASSIDY TURLEY

26

on deals that closed in 2012 was $406

per square foot, up from a low of $119.

The average pricing for offi ce deals that

closed in Silicon Valley was $204 per

square foot, down from $227 a year ago

while the average cap rate here increased

from 6% to 7%. The average price for

East Bay offi ce deals was $176 per square

foot, down from $202 while cap rates

here fell from 8.3% to 6.0% between

2011 and 2012. North Bay, home to the

fewest deals, also posted the most stable

metrics; the average price per square foot

of deals transacted here in 2012 was

$83, down from $86 per square foot

in 2011. While all of these trends may

seem highly divergent, the differences

have come primarily from what types of

properties traded. In general, pricing has

accelerated rapidly with cap rates falling

to 5% or less for Class A offi ce properties

in San Francisco, San Jose and San Mateo

County. Pricing is posting moderate gains

in the East Bay with typical cap rates

in the 6% range. Pricing in the North

Bay has generally remained fl at, though

premier properties are seeing increases.

Cap rates here typically range from the

6% to 7% range.

Industrial Investment Review

Through the fi rst nine months of 2012,

total deal volume for industrial properties

stood at just below $1.3 billion. Roughly

$819 million of this total traded in Silicon

Valley. The East Bay accounted for an

additional $210 million in sales while

none of the Bay Area’s other trade areas

posted more than $60 million in total

transactions.

The average price per square foot of

industrial properties that have traded

throughout the Bay Area in 2012 was

$119 per square foot, up from 2011’s

average of $108. The average cap rate

on properties that traded was 6.9%. This

is the same level recorded in 2011.

The average price per square foot of

properties sold in San Francisco in 2012

was $116 per square foot. In San Mateo

County, pricing increased from $113 to

$153 per square foot between 2011 and

2012 while the average cap rate in this

trade area fell from 6.7% to 6.4%. The

average pricing for industrial deals that

closed in Silicon Valley was $127 per

square foot, up from $124 a year ago

while the average cap rate here increased

from 7.0% to 6.4%. The average price for

East Bay deals was $103 per square foot,

up from $80 while cap rates here also

increased from 6.8% to 7.6% between

2011 and 2012. In the North Bay

pricing has increased from $75 to $78

per square foot with cap rates increasing

from 7.0% to 8.1%.

Retail Investment Review

Retail building and shopping center sales

had accounted for just over $1.8 billion

in total deal volume throughout the Bay

Area through Q3 2012. San Francisco

led the way with $602 million in closed

transactions. The East Bay and Silicon

Valley followed with respective trades

to the tune of $449 million and $405

million. North Bay deals accounted for

$327 million while the Peninsula/San

Mateo marketplace recorded just $54

million in total activity.

The average price per square foot of retail

properties that have traded throughout

the Bay Area in 2012 was $236 per

square foot, up sharply from 2011’s

average of $169. The average cap rate on

properties that traded was 6.6%, down

from 7.0%.

The average price per square foot of

properties sold in San Francisco in 2011

was $632 per square foot, refl ecting a

whopping jump over the $191 rate of a

year ago. But while overall pricing has

increased, this jump was mostly due

to a few key Union Square transactions

that have skewed overall averages. The

current average cap rate of 5.1% is down

from 2011’s reading of 8.5% when a

number of distress sales helped to tweak

those numbers downward. San Mateo

County pricing increased from $162 to

$186 per square foot while cap rates fell

from 7.6% to 6.4%. The average pricing

for deals that closed in Silicon Valley was

$148 per square foot, up from $132 a

year ago while the average cap rate here

increased from 6% to 7 %. The average

price for East Bay offi ce deals was $176

per square foot, down from $202 while

cap rates here fell from 7.3% to 6.3%

between 2011 and 2012. The average

price per square foot of deals transacted

in the North Bay in 2012 was $199, up

from $149 per square foot in 2011. The

average cap rate here increased slightly

from 6.6% to 6.8%.

The 108,000 square foot

Safeway-anchored Rossmoor

Shopping Center in Walnut

Creek sold in July for

$35,000,000. In one of

the region’s larger shopping

center sales of the year,

Citivest Commercial purchased

it from Washington Capital

Management with a reported

cap rate of 5.3%.DE

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Tishman Speyer’s sale of

their 557,000 square foot

building at 555 Mission Street

in San Francisco was one of

the region’s (and nation’s)

largest offi ce sales in 2012.

The Union Investment Group

bought this Class A project

for $446,500,000 ($802 per

square foot) in June. The deal

reportedly had a cap rate of

just 4.3%.DE

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HT

INVESTMENT FORECAST

Offi ce pricing has accelerated rapidly with cap rates falling

to 5% or less for Class A offi ce properties in the Highway

101 corridor markets, while gains have been moderate in the East Bay and for premier

North Bay properties.

INV

EST

ME

NT

FO

RE

CA

ST

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

27

Investment Market Select Major Sale Transactions 2012 (through Q3 2012)

Property Product TypeCity/Market

Total SFTotal Units

Sale Date

SellerBuyer

Sale PriceCap Rate

Price PSFPrice Per Unit

555 Mission StOffi ce

San Francisco

557,015

N/A06/2012

Tishman Speyer

The Union Investment Group

$446,500,000

4.3%

$802

N/A

Blue Shield of CA Building

50 Beale St

Offi ce

San Francisco

662,060

N/A09/2012

FIG, LLC

Mitsubishi Estate N.Y., Inc.

$305,000,000

4.5%

$461

N/A

Foundry Square I

400 Howard St

Offi ce

San Francisco

334,230

N/A04/2012

AREA Property Partners

State Teachers Retirement, Ohio

$238,000,000

5.8%

$712

N/A

Townsend Center

650 Townsend St

Offi ce

San Francisco

670,000

N/A04/2012

Farallon Capital Management, LLC

Zynga

$228,000,000

Owner/User

$340

N/A

The Hartford Building

650 California St

Offi ce

San Francisco

489,373

N/A06/2012

AEW Capital Management, L.P.

Tishman Speyer

$218,639,000

4.5%

$447

N/A

225 Bush StOffi ce

San Francisco

593,000

N/A09/2012

SEB Immobilien-Investment

Flynn Holdings

$212,000,000

5.1%

$358

N/A

Foundry Square IV

500 Howard St

Offi ce

San Francisco

233,290

N/A06/2012

Utah State Retirement Fund

Heitman LLC

$184,500,000

7.1%

$791

N/A

Federal Home Loan Bank

600 California St

Offi ce

San Francisco

358,590

N/A06/2012

Beacon Capital Partners

Clarion Partners

$180,000,000

5.0%

$502

N/A

Mission Bay Offi ce Campus

550 Terry Francois Blvd

Offi ce

San Francisco

282,773

N/A08/2012

GLL Real Estate Partners, Inc.

Hines REIT, Inc.

$180,000,000

8.2%

$637

N/A

Menlo Corporate Center

4100-4700 Bohannon Dr

Offi ce

Menlo Park

370,619

N/A02/2012

Walton Street Capital, LLC

Kilroy Realty Corporation

$162,200,000

N/A

$438

N/A

Pacifi c Shores Center

2000 & 2100 Seaport Blvd

Offi ce

Redwood City

290,305

N/A02/2012

Starwood Capital Group

Informatica Corporation

$153,200,000

Owner/User

$528

N/A

SF Multimedia Center

475 Brannan St

Offi ce

San Francisco

243,233

N/A06/2012

Prudential Real Estate Investors

Clarion Partners

$148,000,000

4.8%

$608

N/A

Pacifi c Bell BuildingOffi ce

San Francisco

556,976

N/A08/2012

Boston Properties, Inc.

Rockwood Capital, LLC

$141,605,010

N/A

$254

N/A

Apartment Portfolio

(3 Properties)

Multi-Family

Cupertino/Sunny-

vale/San Jose

405,584

48402/2012

Ivanhoe Cambridge

RREEF America, LLC

$127,725,000

4.8%

$315

$263,895

Silicon Valley Center

2540-2590 N. 1st St

Offi ce

San Jose

438,998

N/A06/2012

LBA Realty

The Irvine Company

$120,000,000

6.1%

$273

N/A

0%

2%

4%

6%

8%

10%

$0

$100

$200

$300

$400

2007 2008 2009 2010 2011 2012*

Retail Investment Market

$Price/SF Cap Rate

0%

2%

4%

6%

8%

10%

$0

$100

$200

$300

$400

2007 2008 2009 2010 2011 2012*

Office Investment Market

$Price/SF Cap Rate

0%

2%

4%

6%

8%

10%

$0

$30

$60

$90

$120

$150

2007 2008 2009 2010 2011 2012*

Industrial Investment Market

$Price/SF Cap Rate

0%

2%

4%

6%

8%

$0

$50,000

$100,000

$150,000

$200,000

$250,000

2007 2008 2009 2010 2011 2012*

Multifamily Investment Market

$Price/Unit Cap Rate

*Through Q3 2012

CASSIDY TURLEY

28

69.1%13.0%

13.1%

4.8%

Technology

Government/Non Profit

Life Science/Medical

Professional Services/General Business

?

Who was

in the

in2012

LEASING

Bay AreaSPACE +

* Through Nov. 2012

*

AMOUNT OF OFFICE SPACE

ABSORBEDin Bay Area Since 2010 (through Q3 2012)

13,995,296 SF

29equivalent of

Transamerica Towers

AT&T PARK AT&T PARK

Bay Area created

In 2012, the

enough jobs to filljust over 2AT&T

Parks

+ ++ +

LIFE SCIENCEOFFICEMFGWHSE SHOPPING R&D

349,331

3,723,299

-36,786

831,917

402,362

-179,596

Growth 2012 (through Q3)

OCCUPANCYBay Area

MARKET DATA & FORECAST

Los

Ange

les San

Diego

Orange

Coun

tyIn

land

Empir

e

Sacra

mento

Cent

ral

Valle

y

$0

$5B

$10B

$15B

$20B

Bay A

rea

Markets

$19.7B$20B

$6.5B $5.7B $5.4B$3.9B

$2.7B

California Investment Deal Volume 2012 (through December 2012)

OF

FIC

E A

ND

R&

D |

MA

RK

ET

DA

TA

& F

OR

EC

AST

29

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

OFFICE AND R&D | MARKET DATA & FORECAST

San Francisco County

Building Base 83,588,988

Total Availabilities 8,196,936333,699,6tceriD

Sublease 1,200,603

Vacancy 9.8%

Average Asking (FS-M) $3.62

Net Absorption YTD Q3 1,437,154

San Mateo County

Building Base 50,541,128

Total Availabilities 6,778,120448,063,5tceriD

Sublease 1,427,276

Vacancy 13.4%

Average Asking (FS-M) $3.33

Net Absorption YTD Q3 -356,823

Santa Clara County

Building Base 201,453,094

Total Availabilities 26,234,991654,886,32tceriD

Sublease 2,546,535

Vacancy 13.0%

Average Asking (FS-M) $2.74

Net Absorption YTD Q3 3,049,905

East Bay

Building Base 98,718,076

Total Availabilities 17,092,719275,678,51tceriD

Sublease 1,216,147

Vacancy 17.3%

Average Asking (FS-M) $2.09

Net Absorption YTD Q3 734,505

Marin County

Building Base 9,841,338

Total Availabilities 1,522,113175,901,1tceriD245,214esaelbuS

Vacancy 15.5%

Average Asking (FS-M) $2.52

Net Absorption YTD Q3 -180,610

Sonoma County

Building Base 10,279,012

Total Availabilities 2,099,859362,098,1tceriD695,902esaelbuS

Vacancy 20.4%

Average Asking (FS-M) $1.66

Net Absorption YTD Q3 68,711

$0

$1

$2

$3

$4

$5

0%

5%

10%

15%

20%

25%

02 03 04 05 06 07 08 09 10 11 12 13 14

Vacancy & Average Asking Rate Trend | Forecast

Vacancy Avg Ask Rent FS

-4.0-3.0-2.0-1.00.01.02.03.04.0

02 03 04 05 06 07 08 09 10 11 12 13 14

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend | Forecast

$0

$1

$2

$3

$4

$5

0%

5%

10%

15%

20%

25%

02 03 04 05 06 07 08 09 10 11 12 13 14

Vacancy & Average Asking Rate Trend | Forecast

Vacancy Avg Ask Rent FS

-4.0-3.0-2.0-1.00.01.02.03.04.0

02 03 04 05 06 07 08 09 10 11 12 13 14

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend | Forecast

$0

$1

$2

$3

$4

$5

0%

5%

10%

15%

20%

25%

02 03 04 05 06 07 08 09 10 11 12 13 14

Vacancy & Average Asking Rate Trend | Forecast

Vacancy Avg Ask Rent FS

-10.0-8.0-6.0-4.0-2.00.02.04.06.0

02 03 04 05 06 07 08 09 10 11 12 13 14Sq

uare

Fee

t in

Mill

ions

Net Absorption Trend | Forecast

$0

$1

$2

$3

$4

$5

0%

5%

10%

15%

20%

25%

02 03 04 05 06 07 08 09 10 11 12 13 14

Vacancy & Average Asking Rate Trend | Forecast

Vacancy Avg Ask Rent FS

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

02 03 04 05 06 07 08 09 10 11 12 13 14

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend | Forecast

$0

$1

$2

$3

$4

$5

0%

5%

10%

15%

20%

25%

02 03 04 05 06 07 08 09 10 11 12 13 14

Vacancy & Average Asking Rate Trend | Forecast

Vacancy Avg Ask Rent FS

-0.5

-0.3

-0.1

0.1

0.3

0.5

02 03 04 05 06 07 08 09 10 11 12 13 14

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend | Forecast

$0

$1

$2

$3

0%

10%

20%

30%

04 05 06 07 08 09 10 11 12 13 14

Vacancy & Average Asking Rate Trend | Forecast

Vacancy Avg Ask Rent FS

-1.0-0.8-0.6-0.4-0.20.00.20.40.6

04 05 06 07 08 09 10 11 12 13 14

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend | Forecast

CASSIDY TURLEY

30

INDUSTRIAL | MARKET DATA & FORECAST

San Francisco County

Building Base 20,320,172

Total Availabilities 973,968698,098tceriD270,38esaelbuS

Vacancy 4.8%

Average Asking (NNN-M) $0.74

Net Absorption YTD Q3 81,955

San Mateo County

Building Base 40,746,899

Total Availabilities 3,894,736951,505,3tceriD775,983esaelbuS

Vacancy 9.6%

Average Asking (NNN-M) $0.69

Net Absorption YTD Q3 -70,918

Santa Clara County

Building Base 84,190,426

Total Availabilities 5,524,444960,130,5tceriD573,394esaelbuS

Vacancy 6.6%

Average Asking (NNN-M) $0.58

Net Absorption YTD Q3 16,473

East Bay

Building Base 196,220,293

Total Availabilities 18,781,531187,623,71tceriD

Sublease 1,454,750

Vacancy 9.6%

Average Asking (NNN-M) $0.48

Net Absorption YTD Q3 432,424

Marin County

Building Base 6,346,657

Total Availabilities 448,561549,693tceriD616,15esaelbuS

Vacancy 7.1%

Average Asking (NNN-M) $1.10

Net Absorption YTD Q3 13,522

Sonoma County

Building Base 18,229,814

Total Availabilities 1,836,838848,716,1tceriD099,812esaelbuS

Vacancy 10.1%

Average Asking (NNN-M) $0.64

Net Absorption YTD Q3 -21,761

$0.00

$0.25

$0.50

$0.75

$1.00

0%

2%

4%

6%

8%

02 03 04 05 06 07 08 09 10 11 12 13

Vacancy & Average Asking Rate Trend

Vacancy Avg Ask Rent NNN

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

02 03 04 05 06 07 08 09 10 11 12 13

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend

$0.00

$0.15

$0.30

$0.45

$0.60

$0.75

$0.90

0%

2%

4%

6%

8%

10%

12%

02 03 04 05 06 07 08 09 10 11 12 13

Vacancy & Average Asking Rate Trend

Vacancy Avg Ask Rent NNN

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

02 03 04 05 06 07 08 09 10 11 12 13

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

0%

2%

4%

6%

8%

10%

02 03 04 05 06 07 08 09 10 11 12 13

Vacancy & Average Asking Rate Trend

Vacancy Avg Ask Rent NNN

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

02 03 04 05 06 07 08 09 10 11 12 13

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend

$0.00

$0.30

$0.60

$0.90

$1.20

$1.50

0%

2%

4%

6%

8%

10%

07 08 09 10 11 12 13

Vacancy & Average Asking Rate Trend

Vacancy Avg Ask Rent NNN

-0.2

-0.1

0.0

0.1

0.2

07 08 09 10 11 12 13

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

0%

3%

6%

9%

12%

15%

04 05 06 07 08 09 10 11 12 13

Vacancy & Average Asking Rate Trend

Vacancy Avg Ask Rent NNN

-0.4

-0.2

0.0

0.2

0.4

0.6

04 05 06 07 08 09 10 11 12 13

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

0%

2%

4%

6%

8%

10%

12%

02 03 04 05 06 07 08 09 10 11 12 13

Vacancy & Average Asking Rate Trend

Vacancy Avg Ask Rent NNN

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

02 03 04 05 06 07 08 09 10 11 12 13

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend

RE

TA

IL |

MA

RK

ET

DA

TA

& F

OR

EC

AST

31

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

RETAIL | MARKET DATA & FORECAST

San Francisco County

Total GLA 4,101,482

Total Availabilities 152,782283,831tceriD004,41esaelbuS

Vacancy 3.7%

Average Asking (NNN-A) $33.45

Net Absorption YTD Q3 52,520

San Mateo County

Total GLA 10,611,033

Total Availabilities 379,806608,823tceriD000,15esaelbuS

Vacancy 3.6%

Average Asking (NNN-A) $26.53

Net Absorption YTD Q3 -70,586

Santa Clara County

Total GLA 37,499,681

Total Availabilities 2,589,707688,004,2tceriD128,881esaelbuS

Vacancy 6.9%

Average Asking (NNN-A) $27.50

Net Absorption YTD Q3 -70,289

East Bay

Total GLA 49,242,291

Total Availabilities 3,096,763101,658,2tceriD266,042esaelbuS

Vacancy 6.3%

Average Asking (NNN-A) $21.40

Net Absorption YTD Q3 343,464

Marin County

Total GLA 5,789,233

Total Availabilities 225,313313,522tceriD0esaelbuS

Vacancy 3.9%

Average Asking (NNN-A) $22.03

Net Absorption YTD Q3 -24,745

Sonoma County

Total GLA 10,263,889

Total Availabilities 570,069967,865tceriD003,1esaelbuS

Vacancy 5.6%

Average Asking (NNN-A) $18.97

Net Absorption YTD Q3 122,832

$0

$20

$40

$60

$80

0%

2%

4%

6%

8%

07 08 09 10 11 12 13 14

Vacancy & Average Asking Rate Trend

Vacancy Average Asking Rent NNN

-0.2

-0.1

0.0

0.1

0.2

0.3

07 08 09 10 11 12 13 14

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend

$0

$6

$12

$18

$24

$30

$36

0%

1%

2%

3%

4%

5%

6%

07 08 09 10 11 12 13 14

Vacancy & Average Asking Rate Trend

Vacancy Average Asking Rent NNN

-0.2

-0.1

0.0

0.1

0.2

0.3

07 08 09 10 11 12 13 14

Squa

re F

eet

in M

illio

ns

Net Absorption Trend

$0

$7

$14

$21

$28

$35

0%

2%

4%

6%

8%

10%

07 08 09 10 11 12 13 14

Vacancy & Average Asking Rate Trend

Vacancy Average Asking Rent NNN

-1.0

-0.5

0.0

0.5

1.0

07 08 09 10 11 12 13 14Sq

uare

Fee

t in

Mill

ions

Net Absorption Trend

$0

$7

$14

$21

$28

$35

0%

2%

4%

6%

8%

10%

07 08 09 10 11 12 13 14

Vacancy & Average Asking Rate Trend

Vacancy Average Asking Rent NNN

-1.0

-0.5

0.0

0.5

1.0

07 08 09 10 11 12 13 14

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend

$0

$5

$10

$15

$20

$25

$30

$35

0%

1%

2%

3%

4%

5%

6%

7%

07 08 09 10 11 12 13 14

Vacancy & Average Asking Rate Trend

Vacancy Average Asking Rent NNN

-0.2

-0.1

0.0

0.1

0.2

0.3

07 08 09 10 11 12 13 14

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend

$0

$5

$10

$15

$20

$25

0%

2%

4%

6%

8%

10%

07 08 09 10 11 12 13 14

Vacancy & Average Asking Rate Trend

Vacancy Average Asking Rent NNN

-0.4-0.3-0.2-0.10.00.10.20.30.4

07 08 09 10 11 12 13 14

Squa

re F

eet i

n M

illio

ns

Net Absorption Trend

CASSIDY TURLEY

32

MULTIFAMILY | MARKET DATA & FORECAST

San Francisco/Peninsula

Leasing Statistics 99 Units 100 Units

%2.3%0.3ycnacaVAverage Rent $1,744 $2,262

Investment StatisticsDollar Volume $229,960,528Price/Unit $155,849Price/SF $227.19

%1.5etaR paC

North Bay

Leasing Statistics 99 Units 100 Units

%9.3%2.5ycnacaVAverage Rent $1,341 $1,378

Investment StatisticsDollar Volume $56,005,839Price/Unit $179,419Price/SF $165.78

%1.7etaR paC

East Bay

Leasing Statistics 99 Units 100 Units

%8.3%6.2ycnacaVAverage Rent $1,300 $1,604

Investment StatisticsDollar Volume $226,012,912Price/Unit $162,541Price/SF $171.03

%4.6etaR paC

South Bay

Leasing Statistics 99 Units 100 Units

%0.5%6.2ycnacaVAverage Rent $1,645 $2,031

Investment StatisticsDollar Volume $238,154,476Price/Unit $147,814Price/SF $185.38

%3.6etaR paC

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

0%

1%

2%

3%

4%

5%

6%

04 05 06 07 08 09 10 11 12*

Vacancy & Average Rental Rate Trend

Vacancy Avg Ask Rent NNN

0%

2%

4%

6%

8%

$0

$600

$1,200

$1,800

$2,400

04 05 06 07 08 09 10 11 12*

Total Dollar Volume (Millions.) vs. Avg. Cap Rate

Total Dolar Volume Average Cap Rate

$0

$400

$800

$1,200

$1,600

0%

2%

4%

6%

8%

04 05 06 07 08 09 10 11 12*

Vacancy & Average Rental Rate Trend

Vacancy Avg Ask Rent NNN

0%

2%

4%

6%

8%

$0

$150

$300

$450

$600

04 05 06 07 08 09 10 11 12*

Total Dollar Volume (Millions) vs. Avg. Cap Rate

Total Dolar Volume Average Cap Rate

$0

$400

$800

$1,200

$1,600

0%

2%

4%

6%

8%

04 05 06 07 08 09 10 11 12*

Vacancy & Average Rental Rate Trend

Vacancy Avg Ask Rent NNN

0%

2%

4%

6%

8%

$0

$500

$1,000

$1,500

$2,000

04 05 06 07 08 09 10 11 12*

Total Dollar Volume (Millions) vs. Avg. Cap Rate

Total Dolar Volume Average Cap Rate

$0

$400

$800

$1,200

$1,600

$2,000

$2,400

0%

2%

4%

6%

04 05 06 07 08 09 10 11 12*

Vacancy & Average Rental Rate Trend

Vacancy Avg Ask Rent NNN

0%

2%

4%

6%

8%

$0

$400

$800

$1,200

$1,600

04 05 06 07 08 09 10 11 12*

Total Dollar Volume (Millions) vs. Avg. Cap Rate

Total Dolar Volume Average Cap Rate

*Through 3rd Quarter 2012

INV

EST

ME

NT

| M

AR

KE

T D

AT

A &

FO

RE

CA

ST

33

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST

INVESTMENT | MARKET DATA & FORECAST

$0.0

$3.0

$6.0

$9.0

$12.0

$15.0

San Francisco

Investment Statistics Dollar Volume Cap RateOffice $3,586,140,262 5.0%Industrial $61,127,689 5.9%Retail $602,313,336 5.1%Apartment $496,809,301 5.3%

Total $4,746,390,587 5.1%

Peninsula

Investment Statistics Dollar Volume Cap RateOffice $516,915,000Industrial $121,500,000 6.4%

6.5%

Retail $54,260,000 6.4%Apartment $166,986,347 5.2%

Total $859,661,347 6.0%

Silicon Valley

Investment Statistics Dollar Volume Cap RateOffice $1,346,590,563 7.0%Industrial $818,929,557 6.4%Retail $404,921,867 6.3%Apartment $633,970,000 5.0%

Total $3,204,411,987 6.6%

East Bay

Investment Statistics Dollar Volume Cap RateOffice $518,168,259 6.0%Industrial $210,006,157 7.6%Retail $449,337,888 7.3%Apartment $445,406,598 5.9%

Total $1,622,918,902 6.6%

0%

2%

4%

6%

8%

10%

04 05 06 07 08 09 10 11 12*

Cap Rate Trend

Office Industrial Retail Apartment

0%

2%

4%

6%

8%

10%

04 05 06 07 08 09 10 11 12*

Total Dollar Volume (Billions) vs. Avg. Cap Rate

Total Dolar Volume Average Cap Rate

0%

2%

4%

6%

8%

10%

12%

04 05 06 07 08 09 10 11 12*

Cap Rate Trend

Office Industrial Retail Apartment

0%

2%

4%

6%

8%

10%

12%

04 05 06 07 08 09 10 11 12*

Cap Rate Trend

Office Industrial Retail Apartment

0%

2%

4%

6%

8%

10%

12%

04 05 06 07 08 09 10 11 12*

Cap Rate Trend

Office Industrial Retail Apartment

0%

2%

4%

6%

8%

10%

12%

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

04 05 06 07 08 09 10 11 12*

Total Dollar Volume (Billions) vs. Avg. Cap Rate

Total Dolar Volume Average Cap Rate

North Bay

Investment Statistics Dollar Volume Cap RateOffice $25,040,523 8.0%Industrial $87,295,513 8.1%Retail $327,183,969 6.8%Apartment $364,076,932 6.0%

Total $803,596,937 6.8%0%

2%

4%

6%

8%

10%

12%

04 05 06 07 08 09 10 11 12*

Cap Rate Trend

Office Industrial Retail Apartment

0%

3%

6%

9%

12%

15%

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

04 05 06 07 08 09 10 11 12*

Total Dollar Volume (Billions) vs. Avg. Cap Rate

Total Dolar Volume Average Cap Rate

0%

2%

4%

6%

8%

10%

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

04 05 06 07 08 09 10 11 12*

Total Dollar Volume (Billions) vs. Avg. Cap Rate

Total Dolar Volume Average Cap Rate

0%

2%

4%

6%

8%

10%

12%

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

04 05 06 07 08 09 10 11 12*

Total Dollar Volume (Billions) vs. Avg. Cap Rate

Total Dolar Volume Average Cap Rate

*Through 3rd Quarter 2012

CASSIDY TURLEY

34

About Cassidy Turley

COMPANY OVERVIEW

Key Statistics

• More than 60 U.S. offi ces

• 65 international offi ces*

• More than 3,700 professionals

• More than 900 brokers

• 2011 transactions

- Gross transaction volume

$22 billion

- Gross capital markets volume

$10.3 billion

• 455 million sf management

portfolio on behalf of institutional,

corporate and private clients

• More than 28,000 Corporate Services

locations served

*Through GVA partnership

At Cassidy Turley, we are market leaders, industry leaders and community leaders. Nationwide, clients recognize us for the

creative sophistication of our real estate advice as well as for the discipline and accuracy of our service delivery. We are a trusted

partner and advocate, supporting our clients’ overall business performance. In markets across the country, we are respected as

a leading provider of commercial real estate services as well as for our community engagement. Our thorough understanding of

local business practices and market dynamics, combined with our customer focus and service commitment, give our clients a

distinct edge in commercial real estate across the globe.

Local Market Leaders, Nationwide

• Our professionals have deep ties to our communities and our industry, and

a thorough understanding of local business leaders and practices, giving

Cassidy Turley and our clients an edge.

• Our in-depth, local market knowledge provides a comprehensive

understanding of market dynamics and enables us to effectively forecast

market trends – providing insight to clients and helping them make informed

real estate decisions.

• Our leadership position is recognized in the communities we serve. We are

often rated in local business journals as a “Best Place to Work,” and are

honored for our many local philanthropic efforts.

Industry Leadership and Recognition

• Named to Leaders List of 2012 Global Outsourcing 100

• Over 80% of real estate executives familiar with our brand ranked it “Very

Good or Excellent” – Wall Street Journal survey

• Ranked in the Top Five in Best Practices Index – Commercial Property

Executive

• 2012 Greenest Companies Index – Commercial Property Executive

• Top 5 in Offi ce Sales over $25 Million Nationwide – Real Estate Alert

World-Class Expertise

• Many of our associates have honed their skills in their respective markets for

years – even decades – gaining an understanding of industry best practices

and serving as thought leaders.

• Cassidy Turley has served clients’ needs outside of the United States since

1985. In order to better serve our clients in Europe and Asia-Pacifi c, the fi rm

is proud to partner with GVA, giving clients access to commercial real estate

professionals in 65 international offi ces in over 20 countries.

Integrated, Tailored Solutions

• Cassidy Turley provides clients with a full suite of comprehensive real estate

solutions, including investor services, occupier services, specialty services

and industry-specifi c services.

• By partnering with Cassidy Turley, clients gain a true business advocate.

• Our nimble approach and service delivery model allow our professionals to

devise the most appropriate, comprehensive response to each client’s needs.

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35

Offering Comprehensive Services

Cassidy Turley provides clients with a full suite of comprehensive real estate

solutions, including investor services, occupier services, specialty services and

industry-specifi c services.

About Cassidy Turley Northern California

• Ranked in the Top 3 Commercial Real Estate Brokerage Firms in San Francisco , Silicon Valley,

Peninsula, East Bay, and North Bay as ranked by the San Francisco Business Times

• Top Regional Firm in Northern California, with 15 offi ces covering

every market in the Bay Area

• Cassidy Turley’s industry-leading market research publishes the most

research reports of any brokerage fi rm in Northern California

Northern California

Key Statistics

• 400 Professionals:

275 agents, 125 staff

• 15 offi ces in Northern California

• 3,300 Transactions in 2011

• $4.3 billion in transaction

volume in 2011

SACRAMENTO

WALNUT CREEK

SANTA ROSA

SAN RAFAEL

SAN FRANCISCO

BURLINGAME / TERRANOMICS

PALO ALTOLOS ALTOS

SAN JOSE

CAPITOLA

SALINAS

MONTEREY

OAKLAND

PLEASANTON

Cassidy Turley provides regional real estate services in Northern California. With 15 Northern California offi ces and a

400-member team, our Northern California market leadership is demonstrated by completion of over 3,300 transactions,

totaling over $4.3 billion in 2011.

Core Services• Tenant Representation

• Project Leasing

• Property Management

• Project & Development Services

• Capital Markets

- Debt Placement

- Investment Sales

- Note Sales

- Structured Finance

• Corporate Services

- Facilities Management

- Portfolio Administration

- Project Management

- Strategic Consulting

- Transaction Management

Practices and SpecialtiesOur practice groups include professionals with considerable expertise unique

to particular property types and within specifi c industries.

• Auction Services

• Distressed Assets

• Financial Advisory

• Food and Beverage

• Golf and Resort Properties

• Government Contracting

• Government Services

• Healthcare

• Higher Education

• Hospitality

• Law Firm

• Life Sciences

• Location Advisory and Incentives

• Mission Critical

• Net Lease

• Not-for-profi t

• Private Client

• Supply Chain

• Sustainability Services

Real Estate• Offi ce

• Industrial

• Retail

• Multi-family

• Land

CASSIDY TURLEY

36

Cassidy Turley Offi ces

COMPANY OVERVIEW

Atlanta, GA

Austin, TX a

Baltimore, MD

Baton Rouge, LA a

Bethesda, MD

Boston, MA

Burlingame, CA

Capitola, CA

Carlsbad, CA

Charlotte, NC

Chicago, IL (2) b

Cincinnati, OH

Columbia, MD

Columbus, OH

Dallas, TX (2) b

Dayton, OH

Denver, CO

Denver Tech, CO

Detroit, MI a

Fort Collins, CO

Fort Worth, TX a

Houston, TX (2) b

Indianapolis, IN

Kansas City, MO

Los Angeles, CA

Louisville, KY

Milwaukee, WI (2) b

Minneapolis, MN

Monterey, CA

Nashville, TN

New York, NY

Oakland, CA

Oklahoma City, OK a

Orange County, CA

Otay Mesa, CA

Palo Alto, CA

Parsippany, NJ

Phoenix, AZ

Pleasanton, CA

Raleigh, NC

Rochelle Park, NJ

Sacramento, CA

Salinas, CA

San Antonio, TX a

San Diego, CA (2)

San Francisco, CA

San Jose, CA

San Rafael, CA

Santa Rosa, CA

Somerset, NJ

Springfi eld, IL a

St. Louis, MO (3)

Tampa, FL

Tysons Corner, VA

Walnut Creek, CA

Washington, DC

a Limited service at 1 of 2 locationsb Limited service locations

Cassidy Turley’s global reach beyond North America extends to more than 65 offi ces in over 20 countries across Europe and

Asia-Pacifi c, through its partnership with GVA, the founder and majority shareholder of GVA Worldwide. GVA Worldwide is

a leading global services company with over 2,000 real estate professionals, including many focused on institutional real

estate sales and investment throughout the world.

Cassidy Turley currently has more than 60 U.S. offi ce locations.

Nationwide

Northern California

Global

Australia

Austria

China

Cyprus

Denmark

Estonia

Finland

Germany

Greece

Hong Kong

Hungary

Ireland

Italy

Lithuania

Netherlands

New Zealand

Poland

Romania

Russia

Sweden

Switzerland

United Kingdom

Burlingame1350 Bayshore Highway

Suite 900

Burlingame, CA 94010

Tel 650-347-3700

Fax 650-347-4307

Capitola2121 41st Avenue

Suite 204

Capitola, CA 95010

Tel 831-476-8000

Fax 831-479-4387

Los Altos2339 S. San Antonio Road

Suite 1D

Los Altos, CA 94022

Tel 650-941-5221

Fax 650-941-2071

Monterey1 Lower Ragsdale Drive

Bldg 1, Suite 100

Monterey, CA 93940

Tel 831-375-8000

Fax 831-647-2116

Oakland555 12th Street

Suite 1400

Oakland, CA 94607

Tel 510-465-8000

Fax 510-465-1350

Palo Alto1950 University Avenue

Suite 220

East Palo Alto, CA 94303

Tel 650-852-1200

Fax 650-856-1098

Palo Alto (Satellite)3239 El Camino Real

Suite 210

Palo Alto, CA 94306

Tel 650-852-1200

Fax 650-780-9137

Pleasanton5000 Hopyard Road

Suite 205

Pleasanton, CA 94588

Tel 925-621-3840

Fax 925-621-3841

Sacramento520 Capitol Mall

5th Floor

Sacramento, CA 95814

Tel 916-375-1500

Fax 916-376-8840

Salinas328-B Main Street

Salinas, CA 93901

Tel 831-449-8000

Fax 831-769-0314

San Francisco201 California Street

Suite 800

San Francisco, CA 94111

Tel 415-781-8100

Fax 415-956-3381

San Jose300 Santana Row

Fifth Floor

San Jose, CA 95128

Tel 408-615-3400

Fax 408-615-3444

San Rafael781 Lincoln Avenue

Suite 100

San Rafael, CA 94901

Tel 415-485-0500

Fax 415-485-1341

Santa Rosa200 Fourth Street

Suite 200

Santa Rosa, CA 95401

Tel 707-360-1300

Fax 707-360-1350

Terranomics1350 Bayshore Highway

Suite 900

Burlingame, CA 94010

Tel 650-348-2400

Fax 650-347-4307

Walnut Creek1850 Mt. Diablo Boulevard

Suite 540

Walnut Creek, CA 94596

Tel 925-627-2880

Fax 925-627-2899

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Northern California Research

This guide details the current expansion plans for hundreds of the

largest U.S. retail and restaurant chains, and is unlike any other

in the commercial real estate industry in terms of the depth and

the scope of the data it includes.

These comprehensive reports detail shopping center market &

investment trends, retailer demand and the big picture trends that

impact the retail industry nationwide. We strive to give you the most

in-depth level of analysis and forecasting available in the marketplace.

Cassidy Turley provides valuable perspectives and insights on numerous issues and topics. Our White Papers arm you with knowledge to

better understand the dynamics of trends that shape the commercial real estate landscape.

NATIONAL RETAILER & RESTAURANT EXPANSION GUIDE U.S. NATIONAL RETAIL REPORT & U.S. RETAIL INVESTMENT REPORT

RESEARCH WHITE PAPERS

We track retail commercial real estate trends at the local, regional,

national and global levels. Our goal is to keep our clients up to

speed with what is happening in the retail world with this weekly

publication.

SIGN UP TODAY! E-mail Garrick Brown at [email protected]

This weekly email provides our clients with a streamlined summary of

news impacting Bay Area real estate; covering Deals, Development,

Financing, Real Estate News, and the Bay Area and National

Economy. It gives our clients quick and easy access to the news they

need to make informed decisions.

SIGN UP TODAY! E-mail Jim Scotland at [email protected]

RESEARCH RANT RETAIL NEWSLINE

Northern California Research Reports

Research Publications

Weekly Newsletters

BAY AREA SNAPSHOTS

Bay Area Investment

Bay Area Life Science

Bay Area Manufacturing

Bay Area Offi ce

Bay Area R&D

Bay Area Warehouse

APARTMENT REPORTS

Bay Area

East Bay

North Bay

San Francisco County

San Mateo County

Santa Clara County

Sacramento Valley

NATIONAL REPORTS

U.S. Industrial Trends Report

U.S. Offi ce Trends Report

U.S. Single Tenant Net Lease

Investment Report

U.S. Retail Report

US Retail Investment Report

California Investment Report

Cassidy Turley utilizes state-of-the-art information systems to monitor over 1 billion square feet of commercial real estate in Northern

California. This information is gathered by 14 dedicated research staff, not 3rd party data services. We constantly update our databases,

all of which are scrubbed and verifi ed by in-market brokers from among our 400 professionals in 15 offi ces throughout the region.

SHOPPING CENTER SUMMARIES

Bay Area

Central Valley

Sacramento Valley

East Bay

Monterey County

North Bay

Santa Clara County

San Francisco County

San Mateo County

Santa Cruz County

Solano County

An interactive way to research commercial real estate market data for all of Northern California across all product types.

INTERACTIVE BAY AREA RESEARCH MAP

MARKET SNAPSHOTS

East Bay/Oakland Offi ce

East Bay/Oakland R&D

East Bay/Oakland Warehouse

East Bay/Oakland Manufacturing

East Bay/Walnut Creek Offi ce

East Bay/Walnut Creek Industrial

East Bay/Pleasanton Offi ce

East Bay/Pleasanton R&D

East Bay/Pleasanton Industrial

Marin County Offi ce

Marin County Industrial

Monterey County Offi ce

Monterey County Industrial

Sacramento Valley Offi ce

Sacramento Valley Industrial

San Francisco Offi ce

San Francisco Industrial

Silicon Valley Offi ce

Silicon Valley R&D

Silicon Valley Manufacturing

Silicon Valley Warehouse

Santa Cruz County Offi ce

Santa Cruz County Industrial

San Mateo County Offi ce

San Mateo County R&D

San Mateo County Ind & Whse

Solano County Industrial

Sonoma County Offi ce

Sonoma County Industrial

CASSIDY TURLEY

CREDITS & TERMS

38

Commercial Real Estate (CRE)Commercial property includes offi ce buildings, industrial property,

medical centers, hotels, malls, retail stores, shopping centers, farm

land, multi-family housing buildings, warehouses, and garages.

Offi ceIncludes Class A, Class B, Class C, and suburban garden offi ce build-

ings over 10,000 square feet. Class A product is steel and concrete

construction, built after 1980, quality tenants, excellent amenities,

and premium rents. Class B product is built after 1960, fair to good

fi nishes, and wide range of tenants.

R&DModern fl ex buildings with some space dedicated to research and/

or product development. Buildings usually have parking greater than

3.5/1000, clear height less than 18’, 1-2 stories, and three sides

of glass.

Industrial (IND)Buildings used for warehouse, light manufacturing and R&D purposes

that meet those building’s specifi cations.

Manufacturing (MFG)Manufacturing buildings generally have a parking ratio less than

3/1000, clear height less than 18’, dock or grade-level doors, 6-15%

offi ce buildout, and one side of glass.

Warehouse (WHSE)Warehouse buildings generally have a parking ratio less than 2/1000,

clear height greater than 18’, multiple dock and/or grade-level doors,

limited offi ce buildout, and a limited amount of glass.

Retail Shopping CenterA planned group of connected retail stores, usually with an attached

parking area, specially developed on a parcel of private property and

managed by a single organization.

Building Base Total market inventory of buildings generally over 10,000 square feet.

Gross Leaseable Area (GLA)Total market inventory of retail shopping centers generally over

50,000 square feet.

Total Availables All space being marketed for lease, direct or sublease, available within

90 days. This may include availabilities with pending leases.

Vacancy Available square footage divided by total square footage of inventory.

Net Absorption Change in occupied square footage from period to period.

Avg. Rent RateThe weighted average (per square footage) of quoted rents at the end

of 2011. Rates are quoted full service for offi ce, NNN for all other

property types. Rates are monthly for all properties with the exception

of retail shopping centers, quoted per annum. Apartment rental rates

are quoted monthly per unit.

N/A Indicates information was not applicable or not available at press time.

Total Dollar Volume Dollar amount of total transactions in a given period.

Total Properties TradedTotal number of properties sold in a given period.

Total Volume SFSquare footage amount of total transactions in a given period

Average Price per Square Foot Average sale price per square foot, excluding apartments, in a given

period.

Average Price per UnitAverage sale price per unit (apartment) in a given period.

Market Capitalization (Cap) RateThe estimated return on a property based on the total net income

divided by the purchase price.

Forecast MethodologyForecast analytics calculated by Cassidy Turley Research. The basis of

the model applies growth projections of various indices with a strong

correlation to CRE, regression analysis of past market activity and

projections from reliable sources within Cassidy Turley.

Data SourcesCassidy Turley Research, Terranomics Research, Costar Analytics,

Real Capital Analytics, Bureau of Labor Statistics, The Conference

Board, and Bureau of Economic Analysis.

Market Research Staff Todd Campbell, Julie Leiker, Joshua Deale,

Laef Barnes, James Masuda, Tricia Kirsch,

Abigail Friedman, Erica Ryan, Kyle Hertel,

Patrick Wong, Zachary Anderson, Sam

Pickus

AuthorGarrick BrownDirector of Research

Design & ProductionKrissy DailyCreative Director

Managing EditorMark BollozosVP Research & Marketing

CREDITS & TERMS

Terms

Credits

2.446 Trees

1.712 Million BTU’s of Energy

878.114 Gallons of Water

145.29 lbs. Solid Waste

915.53 lbs. Green House Gases

Environmental Benefi ts Statement In our ongoing effort to be more “green”,

this book was printed on FSC Certifi ed

Mixed Source paper. By doing so, we saved:

Environment impact calculation estimates were made using the

Environmental Defense paper calculator (US EPA’s Power Profi ler)

www.cassidyturley.com