FHO Partners 1 Q 2010 Market Report

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B O S T O NF I R S T Q U A R T E R 2 0 1 0MARKET

“Things will get better -- despite our efforts to improve them.”Will Rogers

M A R K E T W A T C H l F I R S T Q U A R T E R 2 0 1 0

Executive Overview

Q1 2009 Q1 2010

DJIA 7,608.92 10,856.63

US Unemployment 8.6% 9.7%

MA Unemployment 7.7% 9.3%

US Employment Payroll (Jan.-Mar.) (1,281,000) 148,000

MA Employment Payroll (Jan.-Mar.) (28,400) 11,600

The Massachusetts unemployment rate currently stands at 9.3%, one if its highest points since 1976, but down from the 9.5% posted in February 2010. However despite the persistent high level of unemployment, economists seem to agree that the recession is over and the recovery is underway. The state’s strong education and healthcare sectors, along with the recent housing rebound, have allowed it to emerge from the recession more quickly than other areas of the country. Meanwhile the commercial real estate market, always a lagging indicator, has yet to see a meaningful recovery. That said, fi rst quarter 2010 statistics in some key submarkets – notably Cambridge, 128 Central and 495 North – point to pockets of stabilization and even improvement, indicating that the worst may be over.

MASSACHUSETTS’ RELATIVE RESILIENCE Massachusetts’ relative resilience to the downturn can be attributed to some of the linchpins of its econo-my, such as its signifi cant education, healthcare, bio-technology and high technology sectors. In addition, the local housing market generally has weathered the recession better than the nation as a whole.• The education and healthcare sectors, which account for over 20% of the state’s total employment, have

added almost 24,500 jobs since the recession began in 2008.• According to Moody’s Economy.com, the Case-Schiller home price index indicates that Massachusetts

home prices are expected to see a peak-to-trough decline of 20%, signifi cantly less than the 37% decline predicted nationally. The Warren Group reports that home prices in Massachusetts for March 2010 are up 13.5% from those of a year ago, representing the third consecutive month of price increases.

IMPACT OF THE RECESSIONThe impact of the recession on the Massachusetts’s employment picture cannot be understated. While modest growth has been posted so far in 2010, a signifi cant number of jobs, many of them in high-paying sectors such as fi nancial services, business services and high technology, were lost during the recession.• The state has added 11,600 jobs so far in 2010, with gains spread across a broad array of eight industry

sectors; however 81,000 jobs have been lost in Massachusetts since January 2009.• Since the recession began here in March 2008, almost 160,000 jobs have been lost.

COMMERCIAL REAL ESTATE MARKETOverall Greater Boston’s commercial real estate market appears to have stabilized as fi rst quarter 2010 sta-tistics show modest changes. While availability rates remain elevated and asking rents are still depressed when compared to those of the last market high-point, conditions during the fi rst quarter remained largely unchanged.• Boston, due to its reliance on the hard-hit fi nance and professional services sectors, saw its availability

rate climb to 17.7%. Meanwhile, the decline of asking rental rates has slowed, as rents decreased by only 2% from the prior quarter, signifi cantly less than the 20% drop from 12 months ago.

• Cambridge has weathered the recession better than any other area due to its education, bio-pharma and high technology tenant base. Both the city’s offi ce and lab sectors saw some improvement in conditions with availability rates declining to 16.1% and 16.7% respectively. Cambridge offi ce rents appear to have stabilized, while asking rates for lab space posted a modest gain.

• Stabilization is the watchword in the suburbs, as the overall availability rate and average asking rental rates changed little from the last quarter. The combined Suburban offi ce/R&D market’s availability rate remains 25.2% and the average asking rental rate for offi ce space currently stands at $22.58 per RSF.

• According to the Federal Reserve Bank’s Beige Book, the area’s investment sales market shows grow-ing demand for commercial properties with buyers looking for fully-leased, low-risk assets. The report also states that investors are unsure as to whether prices have truly bottomed out and some remain concerned about additional commercial mortgage defaults, as many owners’ equity positions remain weak.

OUTLOOK IS CAUTIOUSLY OPTIMISTICThe outlook for the Boston area’s commercial real estate market is cautiously optimistic, based on Mas-sachusetts’s recent gains in employment, strengthening of its housing market and improved business con-fi dence. Given the recession’s substantial job losses and the state’s typically lower than average growth rates, it will take time for the recovery to produce signifi cant improvement in the commercial real estate sector. The most likely scenario is that while 2010 will see increased market activity, any real decrease in availability rates and growth in rental rates will not occur until next year.

Overall Market Statistics YTD 2010 Summary

The state of the economy by the numbers

Unemployment Rate

Greater Boston Market Snapshot

Asking Rent Vacancy Absorption

Boston

Cambridge

Suburbs

Sources: Dow Jones, Bureau of Labor & Statistics

6

8

10

12

March 2010

Feb. 2010

Jan. 2010

Dec. 2009

Nov. 2009

Oct. 2009

Sept. 2009

Aug. 2009

July 2009

June 2009

May 2009

April 2009

March 2009

United StatesMassachusetts

Q1 2009 Q1 2010

Overall Availability 20.4% 22.3%

Average Rent (Offi ce) $35.81 $29.95

Net Absorption YTD 2010 (3,378,197) (204,955)

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Boston Market OverviewThe Boston market continued to struggle during the fi rst quarter 2010 and given the city’s reliance on the fi nancial and business services sectors, some of the hardest-hit areas of the economy, the further weakening of conditions is not unexpected. How-ever, the pace of decline has slowed considerably from last year, perhaps indicating that the market has begun to bottom out. While the dramatic improvement in the stock market over the past year has provided a much-needed boost to business con-fi dence, it has yet to produce meaningful job growth in Boston. As a result, the lion’s share of Boston’s market activity was generated by tenants with upcoming lease expiration dates, including those working with their landlords to “blend and extend” well in advance of those expiration dates. Large creditworthy tenants continue to be the benefi ciaries of generous landlord concession packages, including free rent and signifi cant tenant improvement allowances.

• Boston’s availability rate again moved upward increasing from 16.7% at year-end 2009 to 17.7% currently, resulting in 328,136 RSF of negative absorption.

• Asking rents continued to fall during the quarter, albeit modestly, as the average asking rent for the overall Boston market declined from $40.83 PSF at year-end 2009 to its current $39.73 PSF. Concurrently, the average rate for Class A space declined by a $0.96 (2.1%) to its current $44.90 PSF. Asking rates are down sig-nifi cantly - approximately 20% - over the past 12 months, as average rents for the fi rst quarter of 2009 for the overall and Class A markets stood at $44.92 PSF and $55.98 PSF respectively.

• Most of Boston’s negative absorption was concentrated in the Class B and C sec-tors, which can be attributed to tenant “fl ight to quality” as users previously priced out of the Class A sector move to higher quality space at the current market’s lower rental rates. This trend is likely to continue until the market and Class A rents rebound signifi cantly.

Market MakersIn the South Boston Waterfront, Foley Hoag LLP renewed its lease for 197,000 RSF at 155 Seaport Boulevard.

AECOM has signed a renewal and expansion at 66 Long Wharf for 47,000 RSF.

Audax Group renewed its lease for 45,000 RSF at 101 Huntington Avenue in the Back Bay.

Morgan Stanley Smith Barney has renewed its 40,000 RSF lease for the top two fl oors at 53 State Street in the Financial District.

Historical Perspective

At 17.7%, the current availability rate has surpassed the 17.3% rate posted at year-end 2007 and is at its highest point since 1991 when it peaked at 19.5%. The 10.5 MSF of currently available space represents a new high-point for the Boston market exceeding the almost 10.0 MSF available as of year-end 2004.

Absorption / Vacancy 2001 - YTD 2010

Inventory 59,209,735 SF

Availability Rate 17.7%

Net Absorption YTD 2010 (328,136) SF

Average Asking Rent $39.73/SF

200920082007200620052004200320022001

Square Feet % Vacancy

Net AbsorptionVacancy Rate

YTD2010

-2,500,000

-2,000,000

-1,500,000

-1,000,000

-500,000

0

500,000

1,000,000

1,500,000

2,000,000

0%

5%

10%

15%

20%

Market Highlights

$0

$20

$40

$60

$80

YTD 201020092008200720062005

Class AOverall

Average Asking Rental Rates - Overall & Class A

M A R K E T W A T C H l F I R S T Q U A R T E R 2 0 1 0

Cambridge Market OverviewThe Cambridge lab market, which has weathered the recession better than any other submarket, carried that momentum into 2010 as confi dence among its ten-ant base rose. Lab and offi ce space demand resulted in 208,219 square feet of positive absorption, driven by growth among its technology, biopharmaceutical and entrepreneurial community. With no new construction delivered during the quarter, large lease transactions by Google, Ironwood Pharmaceuticals and the Cambridge Innovation Center helped strengthen fundamentals and suggest growth for this mar-ket in the near future.

OFFICE MARKET The Cambridge offi ce market posted 153,970 square feet of positive absorption

during the fi rst quarter of 2010, reversing the negative performance of 2009 and bringing the availability rate down to 16.1% from 17.7%. The majority of leasing activity took place in East Cambridge.

Offi ce rents declined marginally during the fi rst quarter to $36.10 PSF, down from year-end 2009’s $36.58 PSF, signaling that rents have begun to stabilize. Average rates have decreased almost 12% from year-end 2008’s $40.99 PSF.

LAB MARKET Biopharmaceutical and technology tenants, who have weathered the economic

storm better than the general economy, continue to demand space as shown by the 54,249 square feet of positive absorption.

Lab rents increased slightly from $47.39 NNN PSF at year-end 2009 to their cur-rent $48.88 NNN PSF. Current average rents are down approximately 14% from the last peak of $56.97 NNN PSF reached at year-end 2007.

Despite the boost in activity, leverage remains in the hands of the tenants.

Market MakersIn order to serve more entrepreneurs, the Cambridge Innovation Center leased 99,000 SF at One Broadway of which 61,000 SF was expan-sion.

Google renewed and expanded into 81,000 SF at Five Cambridge Center. Ironwood Pharmaceuticals expanded and leased an additional 60,000 SF at 301 Binney Street, a state-of-the-art laboratory research facility in the heart of Kendall Square.

Hubspot relocated and expanded to 38,000 SF at 25 First Street.

Constellation Pharmaceuticals leased 34,000 SF at 148 Sidney Street.

Historical PerspectiveThe impact of the current recession has been much less severe in Cambridge than that of the last decade’s dot-com downturn. At year-end 2003, 3.6 MSF of offi ce and lab space was available for lease in Cambridge resulting in an avail-ability rate of 27.2%. In comparison, the current market includes 2.8 MSF of available offi ce and lab inventory with a 16.4% availability rate.

Offi ce Absorption / Vacancy 2001 - YTD 2010

Offi ceInventory 10,046,144 SF

Availability Rate 16.1%

Net Absorption YTD 2010 153,970 SF

Average Asking Rent $36.10/SF

LabInventory 7,762,685 SF

Availability Rate 16.7%

Net Absorption YTD 2010 54,249 SF

Average Asking Rent $48.88/SF NNN

Market Highlights

Average Asking Rental Rates - Offi ce & Lab

200920082007200620052004200320022001

Square Feet % Vacancy

Net AbsorptionVacancy Rate

YTD2010

-1,200,000

-1,000,000

-800,000

-600,000

-400,000

-200,000

0

200,000

400,000

600,000

800,000

0%

5%

10%

15%

20%

25%

30%

$0

$15

$30

$45

$60

YTD 201020092008200720062005

Office (Gross)Lab (NNN)

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Suburban Market OverviewOverall, the suburbs experienced little change over the fi rst quarter of 2010. Com-pared to the 1.5 million square feet of offi ce and R&D space that tenants shed one year ago, the 85,038 square feet of negative absorption endured since the beginning of 2010 indicates that the worst may be over. Deal volume remained relatively fl at, but tenant activity has picked up steam as companies begin to regain confi dence as the country emerges from the recession. Among the core markets, the 495 North submarket experienced the most activity but still suff ers from a 30.9% availability rate. While a few notable transactions took place, such as BJ’s relocation to Westborough from Natick, demand is still being driven by lease expirations. Until signifi cant job growth is realized, market conditions in the suburbs will most likely remain stagnant.

128 Central, the largest submarket covering over 41 million square feet, mirrored the performance of the overall market with little change in both offi ce and R&D availability rates. Both rates increased 0.1 percentage points to 24.7% and 18.7% respectively as of fi rst quarter 2010.

In the 495 North submarket, the offi ce availability rate increased 2.3 percentage points to 22.6% with 225,677 RSF of negative absorption, while the R&D rate dropped from 35.9% to 34.6% with 306,462 RSF of positive absorption.

Average asking rental rates declined marginally for both offi ce and R&D since last quarter by $0.04 and $0.02 respectively.

Market MakersBJ’s Wholesale Club will consolidate roughly 1,000 employees currently located in 5 Natick offi ces to the 282,000 SF former National Grid campus at 25 Research Drive in Westborough.

Executive Offi ce of Health and Human Services leased 114,000 square feet at 100 Hancock Street in Quincy relocating four Boston operations.

ABSCIEX, formerly Applied Biosystems, renewed 90,000 square feet at 500 Old Connecticut Path in Framingham

Hittite Microwave purchased the 105,934 square foot Two Elizabeth Drive in Chelmsford for $3.3 million ($32.04 per RSF).

Decision Resources will relocate from Waltham to 8 New England Executive Park in Burlington taking 53,000 square feet.

Historical Perspective

Since 2008, the overall suburban offi ce/R&D market has produced a signifi cant give-back of space – 5.2 MSF of negative net absorption – resulting in a current availability rate of 25.2%. This amount pales, however, in comparison to the last downturn which lasted from 2001 to 2003 when the market posted 21.0 MSF of negative absorption and reached a 29.6% availability rate.

Offi ce/R&D Absorption / Vacancy 2001 - YTD 2010

200920082007200620052004200320022001

Square Feet % Vacancy

Net AbsorptionVacancy Rate

YTD2010

-10,000,000

-8,000,000

-6,000,000

-4,000,000

-2,000,000

0

2,000,000

4,000,000

0%

5%

10%

15%

20%

25%

30%

Market Highlights

$0

$5

$10

$15

$20

$25

$30

YTD 201020092008200720062005

Office (Gross)R&D (NNN)

Average Asking Rental Rates - Offi ce/R&D

Offi ceInventory 74,161,696 SF

Availability Rate 23.1%

Net Absorption YTD 2010 (244,788) SF

Average Asking Rent $22.58/SF

R&DInventory 53,552,167 SF

Availability Rate 28.2%

Net Absorption YTD 2010 159,750 SF

Average Asking Rent $10.67/SF NNN

M A R K E T W A T C H l F I R S T Q U A R T E R 2 0 1 0

Market Total Total Availability Total Vacancy YTD 2010 Direct Weighted Inventory Available Rate Vacant Rate Net Absorption Average Rent

BOSTON OFFICE 59,209,735 10,494,400 17.7% 6,110,419 10.3% (328,136) $39.73

Back Bay 12,182,324 1,653,021 13.6% 1,190,070 9.8% 47,671 $42.55

Charlestown 1,748,336 240,461 13.8% 153,467 8.8% (7,795) $25.15

Fenway 1,911,890 38,200 2.0% 38,200 2.0% (600) $31.25

Financial District 28,202,230 5,644,156 20.0% 2,903,494 10.3% (178,097) $42.85

Government Center 1,878,278 455,059 24.2% 360,913 19.2% (47,287) $34.62

Midtown 1,863,609 348,390 18.7% 164,930 8.9% (13,272) $29.42

North Station 1,638,642 196,002 12.0% 121,965 7.4% 60,051 $28.72

South Boston Waterfront 5,646,511 1,432,317 25.4% 880,388 15.6% (129,048) $29.39

South Station 4,137,105 486,794 11.8% 296,992 7.2% (59,759) $35.40

CAMBRIDGE OFFICE 10,046,144 1,620,033 16.1% 1,013,810 10.1% 153,970 $36.10

Alewife/West Cambridge 1,714,404 353,650 20.6% 286,014 16.7% (29,008) $26.11

East Cambridge 6,160,198 1,060,088 17.2% 651,803 10.6% 157,026 $40.68

Mass Avenue Corridor 2,171,542 206,295 9.5% 75,993 3.5% 25,952 $32.02

CAMBRIDGE LAB 7,762,685 1,300,222 16.7% 1,036,040 13.3% 54,249 $48.88

Alewife/West Cambridge 533,311 60,712 11.4% 60,712 11.4% 10,582 $34.07

East Cambridge 4,872,719 933,718 19.2% 732,694 15.0% 20,862 $48.16

Mass Avenue Corridor 2,356,655 305,792 13.0% 242,634 10.3% 22,805 $54.13

SUBURBS OFFICE/R&D 127,713,863 32,225,843 25.2% 22,342,801 17.5% (85,038) $22.58

128 Central 41,334,274 9,554,050 23.1% 6,517,326 15.8% (43,305) $25.68

128 North 9,628,176 2,820,444 29.3% 1,965,591 20.4% 38,646 $19.60

128 South 14,490,507 3,482,632 24.0% 2,497,334 17.2% (67,399) $19.16

3/24 South 1,982,663 515,756 26.0% 449,035 22.6% (1,511) $21.33

495 Central 17,701,364 4,351,880 24.6% 3,192,202 18.0% (65,878) $20.23

495 North 31,817,702 9,845,558 30.9% 6,559,986 20.6% 80,785 $18.41

495 South 4,285,045 888,816 20.7% 673,041 15.7%3 39,454 $19.91

Inner Suburbs 6,474,132 766,707 11.8% 488,286 7.5% (65,830) $24.77

TOTAL 204,732,427 45,640,498 22.3% 30,503,070 14.9% (204,955) $29.95**Average of offi ce rents only

Market Summary

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Glossary of TermsMETHODOLOGYThe information included in this report is the result of a compilation of informa-tion on Class A, B and C offi ce, R&D and investment properties located in the Boston area. The information was obtained by FHO Partners from representa-tives of each property.

All of the information gathered is stored in a FHO Partners database which is updated quarterly. From this database, total inventory, vacancy rate, rental rate and absorption fi gures may be calculated and presented.

Total inventory may change from year to year as a result of newly constructed or newly renovated buildings, recently remeasured properties, or signifi cant change or deletion of a particular building status. The database is thoroughly checked and balanced from year to year. The appropriate adjustments are made in order to balance the fi gures and calculate the most accurate vacancy and absorption fi gures.

DEFINITIONSInventory:Includes all existing competitive offi ce and R&D buildings over 20,000 sq. ft. as well as signifi cant buildings less than that size. Under construction, government, medical, educational and 100% owner-occupied buildings are not included.

Direct Space:Space available directly from the building owner. Includes space available for occupancy within the next 24 months. Does not include space in under construction buildings.

Sublease Space:Space available through a lessee to a third party for the remainder of the origi-nal lease term and/or beyond. Includes space being actively marketed.

Vacancy Rate:Space, available both directly and by sublease, that is currently vacant and being marketed for immediate occupancy. Does not include space under construction.

Availability Rate:Available space is generally defi ned as space that is being actively marketed and/or available for occupancy within the next 24 months.

Construction Completions:Buildings which have received their certifi cate of occupancy in the stated time period.

Under Constructio n:Buildings which have had excavation work commence, but have not yet received their certifi cate of occupancy.

Offi ce:Space designed for general offi ce use. Buildings are generally two or more stories and off er tenants a higher-level of fi nish than R&D space.

R&D:Space designed for high technology, offi ce or light industrial use. Buildings are generally one or two stories. Net Absorption:The net change in occupied space over a given period of time. Calculations are based on available space.

Rental Rates:Gross: Rents which include tax and operating expenses, but generally not electricity.

Triple Net: Rents where the tenant is directly responsible for all tax, operating and utility expenses.

Weighted Average Rent:An average rental rate that is weighted by the amount of square footage avail-able at each respective rental rate.

495

495

90

95

93

95

24

3

2

128

128

3

Chelmsford

Lowell

Westford

Acton

Littleton

WilmingtonBillerica

Andover

Tewksbury

Boxborough

MaynardHudson

Marlborough

Woburn

SouthboroughWestborough

Hopkinton

Concord

Framingham

Milford

Franklin

Wellesley

Lynnfield

Peabody

Stoneham

Lexington

Bedford

Burlington

Lincoln

Newton

Waltham Medford

Somerville

AllstonBrookline

Needham

Natick

Wakefield

Saugus

N. Andover

Methuen

Lawrence

DanversBeverly

Malden

Revere

Foxborough

Mansfield

Taunton

Brockton

Pembroke

Rockland

Dedham

Norwood

Westwood

Braintree

Weymouth

Hingham

NorwellRandolph

Canton

Quincy

495 South

128 South

495 Central

3/24 South

Boston

128 North

128 Central

495 North

Inner Suburbs

Submarket Map

©2010 FHO Partners. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to FHO Partners.

For more information contact:

Ashley E. LaneDirector of ResearchFHO PartnersOne International PlaceBoston, Massachusetts 02110

Direct Tel: +1 (617) 279 4570Email: [email protected]

www.FHOpartners.com

Commercial Real Estate Value-Addvisors