Minneapolis-St. Paul Office Market Stalls During the Fourth Quarter

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1 Q OFFICE MINNEAPOLIS-ST. PAUL OFFICE MARKET REPORT Minneapolis-St. Paul Office Market Stalls During the Fourth Quarter VACANCY AND ABSORPTION TRENDS MARKET INDICATORS Q After absorbing almost one million square feet in 2012, and 604,467 square feet through the third quarter of 2013, there was negative absorption of 100,711 square feet in the fourth quarter. This brings 2013 s absorption total to just over 500,000 square feet. After absorbing 221,108 square feet and 263,792 square feet during the first and second quarters, respectively, absorption slowed to 119,567 in the third quarter before turning negative for Quarter Four. Vacancy inched upward to 15.6 percent from 15.4 percent. VACANCY NET ABSORPTION RENTAL RATE Landlords at Class A properties along the 394 corridor and along Nicollet Mall in the Minneapolis CBD are pushing their quoted rental rates upward, and holding to these rates in negotiations. At the other end of the spectrum, there is still strong competition among landlords for any tenants looking at Class B and C buildings, in particularly those with inferior locations, dated common areas, and limited amenities. SF Absorbed Percent Vacant VACANCY 25% 20% 17.4% 16.3% 16.8% 17.2% 16.7% 16.1% 15.6% 15.2% 14.9% 15% 10% 5% NET ABSORPTION 2,000,000 1,453,291 1,500, , ,1691 1,000, , ,779 0 (500,000) (1,000,000) (1,500,000) (2,000,000) (1,661,963) (312,099) 981, , , In addition to stalling absorption, the number of users in the market has tapered considerably since the beginning of the year, and companies continue to decrease their overall footprints. This reduction is not always reflective of decreasing employee counts, but rather it involves the effort to reduce their real estate occupancy levels and costs, create more collaborative spaces, and respond to changing work styles. While there are select examples of companies that are expanding, the majority are reducing occupancy levels as they renew or relocate. An example of expanding companies are businesses that provide flexible, lower-cost shared office space for workers. Often called co-working space, it includes necessary business accessories and services such as printing, scanning, and wi-fi, and offers both individual workstations and shared gathering spaces. Café, Inc. opened its first such alternative workspace at the Edina Gateway building. Other companies in this market include Regus, Workspring, and LiquidSpace, the company behind CoCo. Users of these services range from individual entrepreneurs to large corporate consulting companies that send staff into the field and away from home offices. As we look into 2014, we expect a continued stark contrast in demand and rental rates between premier, well-located properties and struggling Class B and C properties. Development has been limited to build-to-suit activity for large users and redevelopment of existing properties. The lack of speculative development combined with tenant demand for custom spaces could spur additional build-to-suit development, most likely along the 394 Corridor in the West submarket.

2 SF Absorbed 200, ,000 Q4 ABSORPTION 0 (906) (37,101) (100,000) (200,000) Airport/South of the River Minneapolis CBD (30,929) Southwest 65,011 28,826 St. Paul CBD St. Paul Suburban (124,112) West (1,500) Northwest VACANCY AND ABSORPTION TRENDS (CON T) Longer term, we see significant vacancies looming as a handful of large companies in the Minneapolis and St. Paul CBDs recently completed lease negotiations to renew for less space at their existing location, or relocate out of multi-tenant space into their own new facilities. In the Minneapolis CBD alone, Dorsey & Whitney, Campbell Mithun, Xcel Energy, CenterPoint Energy and Wells Fargo combined will be decreasing their multi-tenant space occupancy by over 1.4 million square feet. These moves will not be taking place until 2015 and 2016 and represent 5.1 percent of the total amount of space in the Minneapolis CBD and 1.7 percent of the space in the total market. In St. Paul, Lawson Software, Comcast, and US Bank will contract their space use by over 200,000 combined square feet. SOUTHWEST The vacancy in the Southwest submarket is 16.4 percent. Class A properties have the lowest vacancy at 15.1 percent and Class B properties have the highest at 18.4 percent. Class C properties are 16.0 percent vacancy. Absorption was negative overall at 30,929 square feet. There are not a large number of users. There are still numerous options for tenants in blocks of 50,000 square feet or more, in buildings such as International Plaza, Minnesota Center, 8300 Normandale and Northland Plaza. SIGNIFICANT SOUTHWEST ACTIVITY LEASES TENANT BUILDING ADDRESS CITY SIZE (SF) Prime Therapeutics (sublease from Regis Corp) Centennial Crossings th St Edina 66,000 The Cradle Club, Inc. Pentagon Park 4815 West 77th St Edina 15,015 Insight USA Southdale Office Center S France Ave Edina 8,067 Marcus & Millichap MoZaic 1340 Lagoon Ave Minneapolis 7,310 SALES BUILDING ADDRESS CITY BUYER SELLER PRICE PRICE PSF. SIZE (SF) Minnesota Center 7760 France Ave Bloomington Transwestern LNR Partners $31,000,000 $ ,425 Riverview Office Tower th Ave S Bloomington PWA Real Estate Intercontinental Real Estate JV Golb & Co. $29,000,000 $ ,271

3 WEST/NORTHWEST West The vacancy rate in the West submarket is 13.8 percent. Class A properties are 12.7 percent vacant, but there are few available options for Class A properties along 394. Rental rates for some landlords at premiere properties have gone up as much as 25 percent in three years. Class B and C properties are 14.8 percent and 11.4 percent, respectively. Activity was slow, and absorption was negative at 124,112 square feet overall. Buildings posting negative absorption numbers included the 1550 Tower and 605 Waterford Park. In terms of building sales, 505 Waterford Park sold for $33 million. Campus Acquisitions acquired the 252,000 square foot property from Franklin Street Properties. Excelsior Crossings, two office buildings in Hopkins that are 100 percent occupied by Cargill, sold for $123 million, and were purchased from Real Estate Capital Partners by Colony Financial. Northwest The vacancy rate in the Northwest submarket is 24.4 percent, the highest of any submarket in our report. Class A properties are almost 30 percent vacant. Activity was slow, and absorption was negligible at negative 1,500 square feet. Users in this submarket are mainly smaller companies, and there isn t a significant concentration of large corporate users driving demand. SIGNIFICANT WEST/NORTHWEST ACTIVITY LEASES TENANT BUILDING ADDRESS CITY SIZE (SF) US Bank National Association 55 West Financial Center th Avenue Plymouth 20,752 Bell State Bank & Trust Golden Hills Office Center 701 Xenia Ave S Golden Valley 8,003 SALES BUILDING ADDRESS CITY BUYER SELLER PRICE PRICE PSF SIZE (SF) Excelsior Crossings Building A & B (Cargill Buildings) 9350 & 9380 Excelsior Blvd Hopkins Colony Financial Inc. 505 Waterford 505 Waterford Park Plymouth Campus Acquisitions 7077 Northland Circle 7077 Northland Circle Quadrant Building 7100 Northland Circle N Brooklyn Park Brooklyn Park Providence Minneapolis LLC JV Garrison Investment & Gramercy Property Trust Real Estate Capital Partners Franklin Street Properties Corp. $123,000,000 $ ,600 $33,000,000 $ ,165 Eagle Valley Bank $2,300,000 $103 22,245 KBS REIT $1,320,000 $24 55,000

4 MINNEAPOLIS CBD VACANCY BY CLASS Class C Class B 16.3% 16.4% Class A 11.1% 0 5% 10% 15% 20% Percent Vacant MINNEAPOLIS CBD The vacancy in the Minneapolis CBD is 13.9 percent, with Class A properties posting the lowest vacancy at 11.1 percent, Class B at 16.4 percent and Class C at 16.3 percent. Absorption totaled negative 906 square feet during quarter four, with absorption for the year totaling 95,331. The city recently approved demolition of The Star Tribune s Minneapolis headquarters near the site of the new Viking Stadium, clearing the way for Ryan Cos. US Inc. s Downtown East project. Wells Fargo has officially signed on as the major office anchor tenant. The company will own and occupy 1.1 million square feet in two buildings. Ryan plans on breaking ground on the project this spring. It was also confirmed that the Minnesota Timberwolves and the Lynx have signed on to put a practice facility at Block E. The practice facility will occupy the third and fourth floors and there are plans for additional office and retail space on the lower levels. There is also significant development occurring North on Nicollet Mall as a 212,000-square-foot office building is under construction for Xcel Energy, and will be completed in In addition, the former Neiman Marcus building is being converted to office space. Adding to the activity is continued multi-family development, as several apartment buildings are under construction or planned for the area. Going forward, there are challenges to weather for the CBD. As Wells Fargo moves into its new space it will need to vacate a significant number of workers from space in other buildings in the CBD including the Baker Building and Northstar Center. Also vacating multi-tenant space in 2015 and 2016 are Dorsey & Whitney, Xcel Energy, and CenterPoint Energy, with the total square feet returning to the multi-tenant market reaching over 1.4 million square feet. This represents 5.1 percent of the space in the total Minneapolis CBD, so a spike in vacancy can be expected. Among in-demand space along Nicollet Mall and particularly in the upper floors, we expect vacancy to remain low. But landlords at Class B and C buildings will find tenants have numerous options and will face strong competition for any tenants in the market. SIGNIFICANT MINNEAPOLIS CBD ACTIVITY LEASE TENANT BUILDING ADDRESS CITY SIZE (SF) Dorsey & Whitney (renewal) Fifty South Sixth 50 6th St S Minneapolis 243,554 Campbell Mithun 510 Marquette 510 Marquette Ave Minneapolis 62,870 Board of Pensions Evangelical Lutheran Church in America McGladrey Plaza 801 Nicollet Mall Minneapolis 52,825 Augsburg Fortress 510 Marquette 510 Marquette Ave Minneapolis 26,141 Associated Bank Plaza Seven 45 7th St S Minneapolis 12,000 SALES BUILDING ADDRESS CITY BUYER SELLER PRICE PRICE PSF... SIZE (SF) Canadian Pacific Plaza 120 S. 6th St. Minneapolis Ladder Capital Finance Hempel Properties $51,500,000 $ ,000

5 ST. PAUL CBD The vacancy rate in the St. Paul CBD is 18.9 percent. Class A properties have a relatively low vacancy rate of 11.2 percent, while Class B properties hold significant vacancies and are 23.8 percent vacant. The small amount of Class C space in the market is 8.6 percent vacant. Absorption was positive at over 65,000 square feet. The former Ramsey County Government Center offices and former Adult Detention Center property along the Mississippi River are being analyzed to determine costs to tear down the properties. The buildings sit empty,and offer intriguing redevelopment potential with their locations near downtown and views of the Mississippi River. U.S. Bank Center, a 361,000-square-foot office tower, sold for $21.5 million. Madison Equities Inc. purchased the property from C-III Asset Management. The Bush Foundation and The St. Paul Foundation moved into 36,000 square feet at the property during the third quarter, and U.S. Bancorp recently renewed its lease there for 127,000 square feet. The high vacancy and numerous options for space will keep effective rates low and concessions significant. SIGNIFICANT ST. PAUL CBD ACTIVITY SALES BUILDING ADDRESS CITY BUYER SELLER PRICE PRICE PSF... SIZE (SF) U.S. Bank Center 101 5th St. St. Paul Madison Equities C-III Asset Management $21,500,000 $58 370,187 AIRPORT/SOUTH OF THE RIVER The vacancy rate in the Airport/South of the River submarket is 19.1 percent. Class A properties are 20.6 percent vacant, and B and C properties are 19.0 percent and 17.4 percent vacant, respectively. For the year, the submarket had the only negative overall absorption of all of the submarkets at negative 100,563 square feet. The Airport/South of the River submarket is the smallest of the submarkets we track, and includes just 6.7 million square feet of space. Similar to the Northwest submarket, there is not a significant amount of large tenants seeking multi-tenant space. Marketing has begun on a 10-story planned office tower at the Mall of America in Bloomington. Mall of America owner Triple Five Group plans to leverage the unique setting that includes strong visibility, retail amenities, mass transit options, and hotels in appealing to a future office tenant. ST. PAUL SUBURBAN The vacancy rate in the St. Paul Suburban submarket is 14.5 percent, and there is little difference in vacancy between the classes with Class A, B, and C properties posting vacancy rates of 14.6, 14.4, and 14.6 percent. Activity was minimal, and absorption totaled 28,826 square feet in quarter four and 49,000 square feet for the year. The Hartford Life & Annuity Insurance Co. is selling its 346,000-square-foot building in Woodbury. The building is fully leased and boasts a strong, visible location along 494. SIGNIFICANT EAST METRO ACTIVITY LEASES TENANT BUILDING ADDRESS CITY SIZE (SF) Westside Summit St. Matthews Catholic Church 497 Humboldt Avenue St. Paul 42,334 BMO Harris Bank Woodlake Centre Lyndale Ave Richfield 17,584

6 Market Statistics SUBMARKET TOTAL SF DIRECT VACANT SF % VACANT DIRECT SUBLEASE VACANT SF % VACANT W/SUBLEASE 4TH QUARTER ABSORPTION 2013 ABSORPTION QUOTED NET RENTAL RATES AIRPORT/SOUTH OF THE RIVER A 1,787, , % 3, % (35,091) (86,255) $12.51 B 3,517, , % 6, % (2,620) (20,868) $11.56 C 1,363, , % 3, % 610 6,560 $10.35 Totals: 6,669,074 1,272, % 13, % (37,101) (100,563) $11.52 MINNEAPOLIS CBD A 12,854,246 1,421, % 212, % (30,378) (21,794) $16.61 B 10,903,696 1,790, % 153, % (2,709) 52,783 $11.53 C 4,281, , % 31, % 32,181 64,342 $10.45 Totals: 28,039,287 3,908, % 397, % (906) 95,331 $12.23 SOUTHWEST A 9,473,521 1,336, % 94, % (43,514) 59,948 $14.47 B 5,751, , % 116, % (51,172) (123,173) $11.61 C 926, , % % 63, ,793 $10.30 Totals: 16,152,115 2,431, % 210, % (30,929) 50,568 $13.01 ST PAUL CBD A 2,128, , % 20, % 26,394 36,161 $12.53 B 5,016,179 1,194, % 9, % 13,617 92,954 $11.38 C 831,936 71, % 4, % 25,000 52,109 $8.00 Totals: 7,976,782 1,504, % 33, % 65, ,224 $11.70 ST. PAUL SUBURBAN A 2,517, , % 20, % (23,433) (7,781) $14.09 B 6,519, , % % 26,339 24,675 $10.68 C 2,165, , % % 25,920 32,106 $9.74 Totals: 11,202,215 1,621, % 20, % 28,826 49,000 $11.63 WEST/NORTHWEST A 5,402, , % 72, % (106,635) (36,921) $14.97 B 5,752,829 1,118, % 27, % (49,014) 203,732 $11.83 C 2,119, , % 3, % 30,037 61,385 $7.89 Totals: 13,274,828 2,225, % 103, % (125,612) 228,196 $12.29 WEST A 4,038, , % 54, % (106,043) NA $16.60 B 4,013, , % 20, % (43,594) NA $12.27 C 803,893 91, % 3, % 25,525 NA $8.75 Totals: 8,855,981 1,146, % 77, % (124,112) NA $12.96 NORTHWEST A 1,364, , % 18, % (592) NA $13.44 B 1,738, , % 7, % (5,420) NA $10.79 C 1,315, , % % 4,512 NA $6.88 Totals: 4,418,847 1,078, % 25, % (1,500) NA $11.27 TOTAL ALL MARKETS A 34,164,405 4,599, % 424, % (212,657) (56,642) $14.41 B 37,461,586 6,653, % 312, % (65,559) 230,103 $11.45 C 11,688,310 1,709, % 42, % 177, ,295 $9.67 Totals: 83,314,301 12,963, % 780, % (100,711) 503,756 $12.18 The above table is summarized data on multi-tenant office buildings greater than 20,000 square feet. Not included are single-tenant, owner-occupied, medical or government buildings.

7 Market Statistics (EXPANDED MARKET) SUBMARKET TOTAL SF DIRECT VACANT SF % VACANT DIRECT SUBLEASE VACANT SF % VACANT W/SUBLEASE 4TH QUARTER ABSORPTION 2013 ABSORPTION QUOTED NET RENTAL RATES AIRPORT/SOUTH OF THE RIVER A 3,996, , % 4, % 23,424 23,735 $12.75 B 6,449,075 1,064, % 6, % 16,044 (21,699) $11.53 C 3,080, , % 7, % (39) 6,205 $10.35 Totals: 13,525,536 2,290, % 18, % 39,429 8,241 $11.67 MINNEAPOLIS CBD A 13,618,828 1,422, % 212, % (30,708) (22,124) $16.61 B 12,254,255 1,824, % 153, % (719) 47,383 $11.44 C 6,218, , % 31, % 32,181 64,342 $10.45 Totals: 32,091,768 3,943, % 397, % ,601 $12.16 SOUTHWEST A 10,745,741 1,381, % 201, % (38,163) 58,198 $14.40 B 7,636,921 1,040, % 129, % (8,690) (87,827) $11.45 C 3,232, , % % 51, ,133 $10.82 Totals: 21,615,236 2,919, % 330, % 4,936 90,504 $12.84 ST PAUL CBD A 2,773, , % 20, % 25,938 32,312 $14.35 B 5,953,723 1,194, % 9, % 13,617 92,954 $11.28 C 3,002,535 99, % 6, % 25,000 52,109 $8.00 Totals: 11,730,218 1,538, % 36, % 64, ,375 $12.20 ST. PAUL SUBURBAN A 4,332,783 1,115, % 20, % (29,383) 3,733 $14.02 B 10,720,098 1,147, % 16, % 19,771 (32,442) $10.73 C 7,635, , % 0 6.6% 25,920 32,427 $9.71 Totals: 22,688,531 2,768, % 37, % 16,308 3,718 $11.62 WEST/NORTHWEST A 7,074, , % 72, % (101,035) (6,471) $14.56 B 9,180,819 1,236, % 124, % (45,824) 277,844 $11.46 C 5,226, , % 3, % 3, ,120 $8.67 Totals: 21,482,127 2,480, % 200, % (143,298) 443,493 $12.06 TOTAL ALL MARKETS A 42,542,479 5,747, % 531, % (149,927) 89,383 $14.29 B 52,194,891 7,508, % 440, % (5,801) 276,213 $11.30 C 28,396,046 2,686, % 49, % 138, ,336 $9.82 Totals: 123,133,416 15,942, % 1,021, % (17,316) 812,932 $12.10 The above table is summarized data on multi- and single-tenant office buildings greater than 10,000 square feet. Owner-occupied properties are also included. Not included are government or medical buildings.

8 MARKET REPORT Q OFFICE MINNEAPOLIS-ST. PAUL 482 offices in 62 countries $2 billion USD in annual revenue 13,500 professionals and staff 1.2 billion* square feet under management $71 billion USD in total transaction value * Together, Colliers International and FirstService manage 2.51 billion square feet of property - second largest in the world. Minneapolis-St. Paul 4350 Baker Road, Suite 400 Minnetonka, MN DIRECT Accelerating success.