Chicago Rising CHICAGO OFFICE MARKET OVERVIEW Q DOWNTOWN OFFICE RESEARCH REPORT SECOND QUARTER 2011 DOWNTOWN CHICAGO OFFICE

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1 Q DOWNTOWN OFFICE CHICAGO OFFICE MARKET OVERVIEW Chicago Rising The Chicago CBD office market is by no means fully recovered and vacancy rates still remain elevated relative to pre-credit crisis levels. However, positive demand and a declining vacancy rate in the first half of the year indicate that the market should begin to see a steady rising from the bottom. While it is impossible to predict when a full recovery will occur nor is it expected that one will transpire with major tenacity recent statistics seem to indicate stabilization in the market and landlords and tenants alike are beginning to see a shift in market dynamics. As the third largest metropolitan area in the United States, Chicago has become one of the most influential economic regions in the country. The city s vitality and strong workforce continues to attract attention from major corporations, illustrating the ongoing trend of corporate migration from the suburbs into the CBD. As corporations use the down market to reevaluate their strategic mindset, many are discovering the advantages to being located within the heart of the city the ability to tap into a more expansive employee talent pool and access to a more centralized commuting system. MARKET INDICATORS Overall Chicago CBD: MID-YEAR COMPARISON VACANCY RATE 16.1% 15.8% ABSORPTION (SF) -417, ,205 RENTS $32.05 $31.36 INVENTORY 140,995, ,995,196 Recent announcements of major corporate expansions by existing CBD tenants have added even greater momentum to the market. These corporate relocations and expansions will eventually translate to positive absorption gains for the CBD. In 2009, United Continental Holdings made the decision to relocate its operational center to the Willis Tower from its suburban location, adding 2,500 jobs to the downtown workforce. During the second quarter of this year, the airline announced intentions to bring an additional 1,300 workers to Chicago by the end of 2012, taking its total occupancy to twelve floors at the Willis Tower. Additionally, Motorola Solutions has also committed to bringing an additional 400 jobs to Chicago by the end of GE Capital, the financial services arm of General Electric, recently decided to double its Chicago workforce to 2,000 employees. The company is currently located at 500 W. Monroe Street and is considering a potential relocation although the company may be forced to remain in place due to a lack of large available blocks of space. Lastly, Groupon, the online coupon company, has continued to expand at a rapid pace, growing to over 500,000 square feet over the last year. All of these expansions will have a significant impact on the city s economy with potential to indirectly impact fuel job growth across other industries in Chicago. Despite these large wins for the city, there still remains a general mindset of cautious optimism and a tendency towards being conservative in growth plans as many companies continue to contract or consolidate. Tenants are seeking to contract their employee per square foot ratio in an attempt to maximize space utilization and increase efficiencies in an effort to avoid leasing additional space until absolutely necessary. Many companies currently have underutilized space under lease (also known as shadow space ) that they will need to grow in to before absorbing additional space. COLLIERS INTERNATIONAL P. 1

2 VACANCY AND ABSORPTION For the third consecutive quarter, the overall Chicago CBD vacancy rate posted a modest decrease, bringing the rate to 15.8 percent at mid-year Although direct vacancy has continued to hover around the current rate of 14.2 percent, the sublease vacancy rate has steadily declined over the last several quarters. A decrease in sublease vacancy can be attributed to lease expirations coming due, space being absorbed by discount-seeking tenants that desire plug-and-play options, and space being removed from the market by companies that are reconsidering their space requirements for the coming quarters. Fueled entirely by demand for sublease space during the second quarter, the CBD witnessed positive 166,115 square feet of net absorption, bringing the year-to-date total to positive 226,205 square feet. Positive absorption was reported in three of the five submarkets during the quarter, with the Central Loop showing the strongest gain. NET ABSORPTION & VACANCY CENTRAL BUSINESS DISTRICT 4,000,000 3,695,540 3,468, % Square Footage 3,000,000 2,000,000 1,000, ,000, % 16.00% 15.80% 14.40% 11.90% 11.90% 392, , , % 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% Vacancy -2,000,000-3,000,000-2,204, YTD 2.0% 0.0% LEASE ACTIVITY The Chicago CBD experienced another strong quarter of leasing activity as several sizable transactions were consummated. In the largest lease transaction so far this year, Wells Fargo signed a 293,000- square-foot lease at 10 & 30 S. Wacker Drive, allowing the company to consolidate operations that are currently spread over five locations. The new lease represents a 43,000-square-foot expansion for the bank and subsequently removed from the market one of the few remaining 100,000+ square foot blocks of space in the West Loop. 10 & 30 SOUTH WACKER DRIVE Groupon continued its rapid pace of expansion by subleasing 220,000 square feet of space from Banker s Life & Casualty Co. at its current location at 600 W. Chicago Avenue, providing the online coupon company with a total of 340,000 square feet at the building. When combined with the 196,000 square feet of temporary space leased at 303 E. Wacker Drive, Groupon s total occupancy in Chicago is approximately 500,000 square feet. Groupon s desire to sublease space at 600 W. Chicago Avenue also spurred another large lease as Banker s Life & Casualty Co. subsequently signed a new 12-year direct lease for 135,000 square feet at 111 E. Wacker Drive. Over the past two years, renewals have dominated the leasing landscape as many tenants opted to remain at their existing locations in an effort to avoid the larger capital costs often required to reconfigure or build-out space at a new location. However, in the second quarter alone, six of the top ten leasing transactions involved relocations, a sign that some tenants may be reconsidering relocation alternatives in an effort to accommodate future expansion needs or upgrade to a more robust building infrastructure due to technology requirements. 111 EAST WACKER DRIVE COLLIERS INTERNATIONAL P. 2

3 TOP LEASING TRANSACTIONS OF SECOND QUARTER 2011 Tenant Address Class Submarket Size (SF) Deal Type Wells Fargo 10 & 30 S. Wacker Drive A West Loop 293,000 New Lease Groupon 600 W. Chicago Avenue B River North 220,000 Sublease Accenture 161 N. Clark Street A Central Loop 160,000 Renewal/Contraction Bankers Life & Casualty Co. 111 E. Wacker Drive B East Loop 135,000 New Lease Interpublic Group 875 N. Michigan Avenue A North Michigan Ave 127,000 New Lease Marsh 540 W. Madison Street A West Loop 121,000 New Lease McKinsey & Co. 300 E. Randolph Street A East Loop 100,000 New Lease/Contraction GE Railcar 161 N. Clark Street A Central Loop 64,000 New Lease Bryan Cave 161 N. Clark Street A Central Loop 62,000 Renewal/Contraction The PrivateBank 120 S. LaSalle Street B Central Loop 57,200 Expansion Legal Assistance Foundation 120 S. LaSalle Street B Central Loop 56,000 New Lease Hostway Corp. 100 N. Riverside Plaza A West Loop 53,000 Renewal United Continental Holdings 233 S. Wacker Drive A West Loop 52,000 Expansion Obama for America 130 E. Randolph Street A East Loop 50,000 New Lease Strata Marketing 30 W. Monroe Street B Central Loop 25,000 Renewal/Expansion Sanchez, Daniels & Hoffman 333 W. Wacker Drive A West Loop 25,000 Renewal Stout Risius Ross 1 S. Wacker Drive B West Loop 25,000 Renewal Chicago Community Trust 225 N. Michigan Avenue B East Loop 24,000 New Lease Chicago Board of Options Exchange 111 W. Jackson Boulevard B Central Loop 24,000 Renewal Guerrero Howe 205 N. Michigan Avenue B East Loop 22,000 Sublease National Able Network 567 W. Lake Street A West Loop 22,000 Sublease Ifbyphone 300 W. Adams Street C West Loop 21,000 New Lease HDI-Gerling 161 N. Clark Street A Central Loop 18,000 New Lease CONSTRUCTION Discussions surrounding the potential for new office tower developments picked up steam during the quarter. Several developers have begun actively marketing proposed office towers in hopes of finding anchor tenants to resurrect projects that were tabled two years ago when lending froze. The majority of discussions surrounding new development opportunities tend to be focused on the West Loop due to its popularity with tenants, ease of access to public transportation, and historical success rate with being a springboard for new office towers. If a new development were to be launched in 2011 or 2012, it would likely reach completion between 2015 and Although it would be some time before the market would feel the impact of a new development, the ability for a developer to commence construction would likely serve as a positive sign for the market as a whole. With several development opportunities floating around the market, large tenants may begin considering the possibility of being an anchor tenant if developers can instill confidence that pre-leasing and financing requirements can be met. COLLIERS INTERNATIONAL P. 3

4 CONSTRUCTION (continued) The River Point project at 444 W. Lake Street has been resurrected by Hines, albeit on a smaller scale, after plans for the development were scrapped in 2009 when Hines was unable to obtain financing despite significant pre-leasing. The new tower would be planned in the one-million-squarefoot range. Additionally, InSite Real Estate is marketing a potential 1.0-million-square-foot development at 301 S. Wacker Drive. LAKE STREET RANDOLPH STREET WASHINGTON STREET 444 WEST LAKE SITE While properties such as 444 W. Lake Street or 301 S. Wacker Drive would require lease commitments from several anchor tenants in order to launch, smaller projects that would only need one large tenant to obtain financing have also surfaced in the market. The Alter Group and White Oak Realty Partners are marketing a 435,000-square-foot building at 625 W. Adams Street and Fifield is proposing a 460,000-square-foot office tower at 601 W. Monroe Street. NEW CONSTRUCTION DELIVERIES ,000,000 3,652,913 3,500,000 Square Footage 3,000,000 2,500,000 2,000,000 1,500,000 1,000, , ,745,968 1,892,460 1,897,981 1,504,364 1,331, , , , , COLLIERS INTERNATIONAL P. 4

5 9 blocks of CBD Class A space consisting of 2,048,510 square feet 4 blocks of West Loop Class A space consisting of 921,099 square feet 2 blocks of West Loop High Rise Class A space consisting of 668,721 square feet LARGE BLOCKS OF AVAILABILITY AND TENANT DEMAND Large block availability in the Chicago CBD became further constrained during the second quarter, leaving very few quality options for large tenants in the market. Availability currently consists of 19 blocks of Class A and B direct space, totaling 3.4 million square feet. During the quarter, five large blocks of space were removed from the market due to several large lease signings. Wells Fargo s lease at 10 & 30 S. Wacker Drive removed two large blocks of availability. Additionally, Marsh s lease at 540 W. Madison Street, Banker s Life & Casualty s lease at 111 E. Wacker Drive, and McKinsey s future relocation to 300 E. Randolph Street each removed a block of space during the quarter. While small- to mid-sized tenants have an abundance of space options in the market, large tenants are finding that the number of large blocks available for their requirements are quickly shrinking. Numerous companies are active in the market and are vying for these spaces. Included in these are Aon with a 350,000-square-foot requirement, GE Capital estimated at 400,000 to 500,000 square feet and Citadel seeking around 400,000 square feet. LARGE BLOCK DIRECT AVAILABILITIES (100,000+ SQUARE FEET) Building Class Size (SF) Floor Submarket 330 N. Wabash Avenue A 371, River North 500 W. Monroe Street A 369, West Loop 200 E. Randolph Street A 311, East Loop 233 S. Wacker Drive A 299, West Loop 130 E. Randolph Street A 185, East Loop 227 W. Monroe Street A 145, West Loop 111 W. Illinois Street A 141, River North 161 N. Clark Street A 116, Central Loop 500 W. Monroe Street A 106, West Loop 303 E. Wacker Drive B 271, East Loop 55 E. Monroe Street B 175, East Loop 333 S. Wabash Avenue B 136, East Loop 350 W. Mart Center B 126, River North 225 N. Michigan Avenue B 120, East Loop 33 S. State Street B 117, East Loop 200 S. Wacker Drive B 112, West Loop 101 N. Wacker Drive B 106, West Loop 300 S. Riverside Plaza B 105, West Loop 111 W. Jackson Boulevard B 102, Central Loop 11 S. LaSalle Street C 155, Central Loop 401 S. State Street C 110, East Loop When dissected further, the lack of high-view, well-located, quality space becomes even more evident. Only nine of the available spaces reside in Class A assets and of those spaces only four are in the highly desired West Loop submarket. Of those West Loop Class A spaces, only two are within the building high-rise. Large tenants seeking the best space in the market are presented with a very limited set of options compared to those that are willing to consider low rise space or Class B and C assets. COLLIERS INTERNATIONAL P. 5

6 RENTS The average direct gross asking rate for the CBD increased very modestly during the quarter to $31.36 per square foot, up from $31.15 per square foot in the prior quarter. All three buildings classes saw minor increases in rates during the second quarter. The current Class A asking rental rate resides at $37.62 per square foot while Class B asking rate is $29.38 per square foot. During the economic downturn, the spread between Class A and B rents has narrowed substantially. In pre-recession quarters, Class A and B rates were an average of $11.00 per square foot apart whereas the spread has now narrowed into the $8.00 per square foot range. Since the second quarter of 2008, when CBD vacancy was at its lowest point, Class A rental rates have fallen 8.9 percent and Class B rates have posted a 5.9 percent decline, an indication that landlords of both building classes have felt pressure to reduce rates in response to decreased demand. A lack of new building deliveries, the limited number of large existing blocks of space available for lease, and bolstering confidence in the economy will likely translate to some landlords placing upward pressure on rental rates in coming quarters. It is also expected that as vacancy begins to tighten on a more consistent basis, there will be a departure from the generous concessions previously offered to tenants. ASKING GROSS FACE RATE CENTRAL BUSINESS DISTRICT $45.00 $40.00 $35.00 $30.00 $25.00 $20.00 Average Class A Class B Class C $15.00 $10.00 $5.00 $ NORTH MICHIGAN CAPITAL MARKETS The investment sales market continued its return to more normalized levels with increased activity during the second quarter of the year. Seven new properties were listed on the market during the quarter with one of those properties under contract before the quarter s end. 22 W. Washington Street, located in the Central Loop and currently owned by Golub & Company, is under contract for $187 million ($425 per square foot) to Israel-based Property & Building Corp. The largest sale of the quarter was Parkway Properties disposition of 233 N. Michigan Avenue in the East Loop, to CommonWealth REIT for $162.2 million ($165 per square foot). Cleansing of distressed assets continued during the quarter, as Behringer Harvard REIT was able to secure Sam Zell and another equity partner to help recapitalize the $95.5 million CMBS loan on the once troubled property at 200 S. Wacker Drive. Although lending volume is still well below pre-credit crisis levels, the successful recapitalization efforts of properties once considered unmarketable to tenants helps reinstate confidence that capital markets are trending in a positive direction. High-profile sales of Class A trophy towers have dominated sales activity during the past 12 months with investors focusing on core assets that are well-located and considered stable with long-term tenancy already in place. The high-priced disposition of these core properties has caused a reactionary response by owners of value-add properties to test the market by placing non-core buildings up for sale. As fewer trophy assets are available for purchase, investors are developing a renewed appetite for non-core but quality properties that may have some vacancy. COLLIERS INTERNATIONAL P. 6

7 Recognizing a surge in investor demand for quality Class A properties, owners of two iconic Wacker Drive properties decided to test the market during the second quarter. Fremont Group, Shorenstein, and Mark Karasick, the owners of 311 S. Wacker Drive, and American Landmark Properties, owner of the Willis Tower at 233 S. Wacker Drive, have placed their properties up for sale. American Landmark Properties is also considering a recapitalization effort for the Willis Tower. INVESTMENT SALES ACTIVITY Number of Sales YTD Class A Class B Class C COMPLETED SALES TRANSACTIONS IN SECOND QUARTER 2011 Address Class Sale Price Size (SF) Price/SF Seller Buyer 233 N. Michigan Avenue B $162,202, ,362 $ Parkway Properties CommonWealth REIT 200 S. Wacker Drive B $95,500, ,751 $ Behringer Harvard Equity Group Investments & Transwestern 11 E. Adams Street, 8 S. Michigan Avenue & 29 E. Madison Street (Portfolio Sale) C $18,500, ,862 $32.00 Winthrop Realty Trust Marc Realty SALES UNDER CONTRACT IN SECOND QUARTER 2011 Address Class Sale Price Size (SF) Price/SF Seller Buyer 22 W. Washington Street A $187,000, ,434 $ BlackRock/Golub & Co. Property & Building Corp 70 W. Madison Street A $369,000,000 1,439,369 $ Hines Korean Teacher's Credit Union 35 W. Wacker Drive A $400,000,000 1,118,042 $ Piedmont UBS Realty 600 W. Chicago Avenue B $390,000,000 1,571,386 $ W. Chicago Associates (David Werner, Jacob & Victor Gerstein) CommonWealth REIT MARKETED FOR SALE Address Class Size (SF) Asking Price Price/SF Seller 444 N. Michigan Avenue B 503,224 TBD TBD GLL Properties 200 W. Jackson Boulevard B 476,711 TBD TBD Apollo Investment 32 W. Randolph Street C 226,666 TBD TBD David & Barbara Kalish NEW TO THE MARKET IN SECOND QUARTER 2011 Address Class Size (SF) Asking Price Price/SF Seller 1 N. Wacker Drive A+ 1,340,000 TBD TBD Hines (Selling 50% Stake) 233 S. Wacker Drive A 3,781,045 TBD TBD American Landmark Properties; The Chetrit Group, LLC; The Moinian Group 311 S. Wacker Drive A 1,281,000 TBD TBD Shorenstein/Fremont Group 141 W. Jackson Boulevard B 1,400,000 TBD TBD CME Group 55 W. Monroe Street B 807,822 TBD TBD LaSalle Investment Management 541 N. Fairbanks Court B 541,637 TBD TBD Golub & Co. COLLIERS INTERNATIONAL P. 7

8 Central Loop Over the past two years, the Central Loop s health has varied widely by asset class, creating a disparity in pricing and vacancy levels for Class A and B properties. MARKET INDICATORS Central Loop: MID-YEAR COMPARISON LARGE BLOCKS AVAILABLE TOP 10 BY SQUARE FOOTAGE VACANCY RATE 14.5% 15.1% ABSORPTION (SF) -63, ,485 RENTS $30.51 $29.97 INVENTORY 37,927,663 37,927, S. LASALLE ST. 231 S. LASALLE ST. 161 N. CLARK ST. 111 W. JACKSON BLVD. 1 N. DEARBORN ST. 231 S. LASALLE ST. 111 W. JACKSON BLVD. 79 W. MONROE ST. 222 N. LASALLE ST. 200 N. LASALLE ST. CLASS A CLASS B CLASS C 155,822 SF 126,439 SF 116,964 SF 102,943 SF 97,261 SF 91,962 SF 83,612 SF 82,921 SF 78,974 SF 71,728 SF Central Loop boasts the healthiest Class A sector of any other submarket with a vacancy rate consistently trending around 10.0 percent. On the contrary, it possesses the unhealthiest Class B sector in the CBD, with a vacancy rate of 19.0 percent. A number of reasons exist for the large variance between occupancy levels in Class A and B assets in the Central Loop. Among them are differences in floor plates, space efficiencies, building vintage and the types of amenities offered in each asset class. Market characteristics in the Central Loop seem to indicate a potentially jagged road to recovery for the submarket. As many tenants in the market are seeking quality Class A space, the Central Loop s predominantly Class B and C building makeup may hinder its pace of recovery, especially relative to its direct competitor, the West Loop, which has nearly double the amount of Class A properties. Another factor slowing the pace of recovery in the Central Loop is a lack of large, Class A space offerings on a direct and contiguous basis. While large blocks of availability in buildings present a challenge to landlords, they also can present an advantage, allowing for the recruitment of large tenants and the ability to quickly backfill space. In the Central Loop, only one Class A space greater than 100,000 square feet exists on a direct basis. Additionally, many of the Central Loop s assets are of an older vintage with smaller and less efficient floor plates, making it more difficult to attract the larger tenants needed to see quick gains in absorption and further impeding the recovery process. On a direct basis, absorption in the Central Loop remains a challenge. Most of the net gains in absorption achieved over the last several quarters were driven by the leasing of sublease space. In fact, since the fourth quarter of 2008, total net absorption on a direct basis has approached an astounding negative 1.2 million square feet, while total net absorption on a sublease basis during that same time period approximates only negative 200,000 square feet. The Central Loop, known as Chicago s core financial district, witnessed a large amount of sublease space placed on the market during the financial crisis as tenants sought ways to dispose of excess space. Other tenants in the market were able to take advantage of discounted pricing on this excess space, translating to gains in sublease absorption as that space has become occupied. VACANCY The overall vacancy rate in the Central Loop fell 40 basis points over the last quarter. The current rate of 15.1 percent resides one percentage point above the Central Loop s ten-year average. Square Footage NET ABSORPTION & VACANCY CENTRAL LOOP SUBMARKET 1,500,000 1,187, % 14.80% 15.10% 14.30% 1,000, % 497, % 500, , , , , ,939-1,000, YTD 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Vacancy ABSORPTION Net absorption ended the quarter at positive 129,433 square feet, driven entirely by positive sublease absorption. During the quarter, Northern Trust took occupancy of over 200,000 square feet of space at 231 S. LaSalle Street under a sublease from Bank of America. Despite a positive quarter, the submarket s year-to-date net absorption totals negative 129,485 square feet. COLLIERS INTERNATIONAL P. 8

9 CONSTRUCTION No new construction was delivered to the Central Loop during the second quarter. There are currently no office developments planned in the submarket. RENTS The average direct gross asking rate increased to $29.97 per square foot from $29.55 per square foot in the prior quarter. The average asking Class A rate currently resides at $37.01 per square foot. For the first time in five quarters, Class B asking rates saw a slight increase, ending the quarter at $28.41 per square foot. ASKING Central Loop GROSS -Asking FACE Gross Face RATES Rates CENTRAL LOOP SUBMARKET $45.00 $40.00 Class A 161 N. CLARK $35.00 $30.00 Average Class B $25.00 Class C $20.00 $15.00 $10.00 $5.00 $ S. LASALLE LEASE & SALES ACTIVITY LEASE TRANSACTIONS - SECOND QUARTER 2011 Tenant Address Class Deal Type Size (SF) Accenture 161 N. Clark Street A Renewal/Contraction 160,000 GE Railcar 161 N. Clark Street A New Lease 64,000 Bryan Cave 161 N. Clark Street A Renewal/Contraction 62,000 The PrivateBank 120 S. LaSalle Street B Expansion 57,200 Legal Assistance Foundation 120 S. LaSalle Street B New Lease 56, W. JACKSON BOARD OF TRADE SALES ACTIVITY - SECOND QUARTER 2011 Status Address Class Size (SF) Sale Price Price/SF Seller Buyer FS 70 W. Madison Avenue A 1,439,369 TBD TBD Hines TBD UC 35 W. Wacker Drive A 1,118,042 $400,000,000 $ Piedmont UBS Realty UC 22 W. Washington Street A 439,434 $187,000,000 $ BlackRock/Golub & Co. Property & Building Corp NM 141 W. Jackson Boulevard B 1,400,000 TBD TBD CME Group TBD NM 55 W. Monroe Street B 807,822 TBD TBD LaSalle Investment Management TBD FS 32 W. Randolph Street C 226,666 TBD TBD David & Barbara Kalish TBD FS = For sale NM = New to Market UC = Under Contract COLLIERS INTERNATIONAL P. 9

10 East Loop During the economic downturn, the East Loop has proven to be an attractive alternative for tenants seeking quality space at a discounted price relative to the West and Central Loop. MARKET INDICATORS East Loop: MID-YEAR COMPARISON VACANCY RATE 18.0% 17.9% ABSORPTION (SF) -150, ,107 RENTS $30.86 $29.64 INVENTORY 25,998,001 25,998,001 LARGE BLOCKS AVAILABLE TOP 10 BY SQUARE FOOTAGE 200 E. RANDOLPH ST. 303 E. WACKER DR. 130 E. RANDOLPH ST. 55 E. MONROE ST. 333 S. WABASH AVE. 225 N. MICHIGAN AVE. 33 S. STATE ST. 401 S. STATE ST. 200 E. RANDOLPH ST. 303 E. WACKER DR. CLASS A CLASS B CLASS C 311,957 SF 271,382 SF 185,042 SF 175,263 SF 136,500 SF 120,446 SF 117,207 SF 110,898 SF 95,103 SF 82,865 SF The East Loop successfully balances a more diverse tenant composition while still maintaining appeal to corporate users that are content with a location not immediately proximate to suburban commuter train lines. Many universities, media and advertising firms, and not-for-profits call the East Loop home. Additionally, it is appealing to younger employees that desire the work-life balance offered by the East Loop due to a growing retail and entertainment presence. The submarket experienced a flurry of leasing activity during the quarter as several sizeable tenants secured leases. Bankers Life & Casualty Co. signed a long-term lease at 111 E. Wacker Drive to relocate from the River North submarket. The company will be occupying 135,000 square feet, backfilling space that Blue Cross Blue Shield of Illinois vacated after executing an early termination right at the building. Additionally, McKinsey & Company decided to relocate from 21 S. Clark Street in the Central Loop to occupy 100,000 square feet at 300 E. Randolph Street. Both of these transactions will result in positive absorption for the East Loop in future quarters when the tenants relocate. The East Loop currently possesses the greatest number of large, contiguous blocks of space available for lease in the CBD, resulting in the highest vacancy rate of all submarkets. With eight blocks of space consisting of 100,000 square feet or greater, the East Loop could face challenges in coming quarters. Only two of these large blocks reside in Class A properties, with the balance in B or C assets that may not attract tenants as quickly. The number of large vacancies existing in the submarket will likely mean a lengthier recovery time relative to competing submarkets. Historically, organic growth in the East Loop has proven to be difficult and transactions such as Groupon s recent expansion into the submarket are rare. East Loop landlords are likely to focus efforts on attracting tenants from the neighboring North Michigan Avenue and River North submarkets in addition to attempting to recruit tenants from the suburbs. VACANCY The overall vacancy rate in the East Loop increased further to 17.9 percent from 17.6 percent in the prior quarter. Largely contributing to an elevated vacancy rate in the East Loop is a large amount of sublease availability. The submarket s sublease vacancy rate of 2.7 percent remains the highest in the CBD. Square Footage NET ABSORPTION & VACANCY EAST LOOP SUBMARKET 800, , , , , % 17.90% 17.40% 256, , % 14.60% 0-200, % -12, , , , ,000-1,000,000-1,200,000-1,209,284-1,400, YTD 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Vacancy ABSORPTION Net absorption ended the quarter at negative 67,194 square feet, bringing the year-to-date total to negative 121,107 square feet. Class B space saw positive gains during the quarter as Groupon took occupancy of its 150,000-square-foot expansion space at 303 E. Wacker Drive. However, this space was taken on a temporary basis and expires in early COLLIERS INTERNATIONAL P. 10

11 CONSTRUCTION No new construction was delivered to the East Loop during the second quarter. There are currently no office developments slated in the submarket. RENTS The average direct gross asking rate decreased to $29.64 per square foot from $30.10 per square foot in the prior quarter. Class A rental rates posted the largest decline, falling $1.53 per square foot during the quarter. With few Class A properties, the East Loop s average Class A rental rate was significantly impacted upon McKinsey & Company signing a lease at 300 E. Randolph Street, thereby removing one of the higher-priced Class A spaces from the market. ASKING GROSS FACE RATES EAST LOOP SUBMARKET $45.00 $40.00 Class A $35.00 $30.00 Average Class B $25.00 ClassC $20.00 $15.00 $10.00 $5.00 $ E RANDOLPH STREET LEASE & SALES ACTIVITY LEASE TRANSACTIONS - SECOND QUARTER 2011 Tenant Address Class Deal Type Size (SF) Banker's Life & Casualty Co. 111 E. Wacker Drive B New Lease 135,000 McKinsey & Co. 300 E. Randolph Street A New Lease/Contraction 100,000 Obama for America 130 E. Randolph Street A New Lease 50, N MICHIGAN AVENUE SALES ACTIVITY - SECOND QUARTER 2011 Status Address Class Size (SF) Sale Price Price/SF Seller Buyer SOLD 233 N. Michigan Avenue B 980,362 $162,202,355 $ Parkway Properties CommonWealth REIT SOLD 11 E. Adams Street, 8 S. Michigan Avenue & 29 E. MadisonStreet (Portfolio Sale) C 571,862 $18,500,000 $65.00 Winthrop Realty Trust Marc Realty COLLIERS INTERNATIONAL P. 11

12 North Michigan Avenue The North Michigan Avenue submarket has a unique composition of building product type consisting of retail, hotels, office, medical, residential and entertainment venues. MARKET INDICATORS North Michigan Avenue: MID-YEAR COMPARISON LARGE BLOCKS AVAILABLE TOP 10 BY SQUARE FOOTAGE 680 N. LAKE SHORE DR. 455 N. CITYFRONT PLAZA DR. 740 N. RUSH ST. 875 N. MICHIGAN AVE. 980 N. MICHIGAN AVE. 401 N. MICHIGAN AVE VACANCY RATE 11.4% 13.5% ABSORPTION (SF) -153,527-45,153 RENTS $35.50 $31.25 INVENTORY 13,241,350 13,241,350 CLASS A CLASS B CLASS C 73,294 SF 68,372 SF 62,384 SF 51,870 SF 95,523 SF 90,207 SF During the second quarter, North Michigan Avenue s iconic Hancock Center at 875 N. Michigan Avenue made headlines as it attracted two business units of Interpublic Group, which signed a 127,000-square-foot lease at the building. Public relations firms GolinHarris and Weber Shandwick, both owned by parent company Interpublic Group, will be relocating from 111 E. Wacker Drive in the East Loop and 676 N. St. Clair Street in North Michigan Avenue, respectively. Because of its diversity, the submarket is attractive to a smaller office tenant base, typically appealing to advertising and media agencies as well as medical office users that desire close proximity to Northwestern Memorial Hospital, which resides within the submarket. The North Michigan Avenue corridor is known for relatively stable vacancies due to tenant loyalty and does not often post major shifts in occupancy levels. As a result, it boasts the lowest vacancy rate in the CBD. Despite its position as the least vacant submarket in the CBD, North Michigan Avenue s current vacancy rate of 13.5 percent is its 10-year historical high point. Because it is insulated by a more diverse tenant composition, vacancy rates in North Michigan Avenue responded very minimally in the early part of the economic downturn, while other submarkets saw more dramatic initial increases. However, the submarket s rate began to surge higher in the second half of 2010, bringing vacancy to its current peak. Vacancy rates are expected to remain elevated in the submarket until a more definitive market recovery is recognized across the CBD. The submarket s typical low transaction velocity, smaller user base, and few large space availabilities are likely to translate into a more sluggish recovery relative to its submarket counterparts that possess more modern buildings with consistently stronger tenant demand. Nonetheless, with the presence of Northwestern Memorial Hospital and the opening of Children s Memorial Hospital in 2012, the submarket is still likely to benefit from future positive absorption, eventually bringing vacancy rates to more normal levels. VACANCY Vacancy in North Michigan Avenue increased slightly during the second quarter to 13.5 percent, up from 13.3 percent in the prior quarter. The submarket has posted six consecutive quarters of rate increases. Vacancy is expected to hover around the current peak rate for several quarters before reaching stabilization. NET ABSORPTION & VACANCY NORTH MICHIGAN AVENUE SUBMARKET Square Footage 400, , , , , , % 274, % 11.70% 13.50% 13.10% 12.0% 117, % 10.0% 10.20% 9.60% -21, % -61,793-45, % Vacancy ABSORPTION Net absorption totaled negative 25,047 square feet for the second quarter, bringing the yearto-date total to negative 45,153 square feet. Although absorption has been negative over the past six quarters, the degree of negative absorption has dissipated over last the two quarters, suggesting that the submarket could be reaching a more balanced state. -300, % -400, , , YTD 2.0% 0.0% COLLIERS INTERNATIONAL P. 12

13 CONSTRUCTION No new construction was delivered to North Michigan Avenue during the second quarter. There are currently no office developments planned in the submarket. RENTS The average direct gross asking rate increased slightly to $31.25 per square foot from $31.18 per square foot in the prior quarter. The average asking Class A rate currently resides at $35.92 per square foot while Class B rates ended the quarter at $30.51 per square foot, both posting only minor increases over the prior quarter. ASKING GROSS FACE RATES NORTH MICHIGAN AVENUE SUBMARKET $50.00 $45.00 $40.00 $35.00 $30.00 Class A Class B Average 875 N MICHIGAN AVENUE JOHN HANCOCK CENTER $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 Class C LEASE & SALES ACTIVITY LEASE TRANSACTIONS - SECOND QUARTER N FAIRBANKS COURT Tenant Address Class Deal Type Size (SF) Interpublic Group 875 N. Michigan Avenue A New Lease 127,000 SALES ACTIVITY - SECOND QUARTER 2011 Status Address Class Size (SF) Sale Price Price/SF Seller Buyer FS 444 N. Michigan Avenue B 503,224 TBD TBD GLL Properties TBD NM 541 N. Fairbanks Court B 541,637 TBD TBD Golub & Co. TBD FS = For sale NM = New to Market COLLIERS INTERNATIONAL P. 13

14 River North Similar to North Michigan Avenue, the River North submarket is considered to be one of the more peripheral submarkets in the CBD. The large majority of properties in River North are brick and timber loft-style properties, attracting a different tenant base than the more traditional Loop submarkets. MARKET INDICATORS River North: MID-YEAR COMPARISON VACANCY RATE 16.1% 14.3% ABSORPTION (SF) 229, ,667 RENTS $33.04 $33.67 INVENTORY 16,525,340 16,525,340 LARGE BLOCKS AVAILABLE TOP 10 BY SQUARE FOOTAGE 330 N. WABASH AVE. 350 W. MART CENTER 111 W. ILLINOIS ST. 350 W. MART CENTER 600 W. CHICAGO AVE. 330 N. WABASH AVE. 353 N. CLARK ST. 321 N. CLARK ST. 353 N. CLARK ST. 222 MERCHANDISE MART CLASS A CLASS B CLASS C 160,568 SF 141,503 SF 126,535 SF 117,101 SF 97,932 SF 62,390 SF 61,431 SF 55,370 SF 50,000 SF 371,945 SF The addition of two new Class A trophy towers at 300 N. LaSalle Street and 353 N. Clark Street in 2009 brought new life to the submarket as more traditional office users began to take occupancy. Additionally, Groupon more than doubled its headquarters space at 600 W. Chicago Avenue, bringing the property to 97 percent leased. The ever-expanding company negotiated a deal to sublease 220,000 square feet of space from Bankers Life & Casualty Co. which is backfilling part of the space originally occupied by Blue Cross Blue Shield of Illinois at 111 E. Wacker Drive in the East Loop. Although this transaction will not result in any absorption gains for River North, Groupon s growing presence has contributed to increased vitality in the submarket as much of the workforce consists of young, urban professionals. River North currently possesses the CBD s largest contiguous block of space with 371,945 square feet of space available for lease at 330 N. Wabash Avenue This space was vacated in 2009 by law firm Jenner & Block upon the firm s relocation to the new office tower at 353 N. Clark Street. Despite this large availability, River North has the second lowest vacancy rate in the CBD. Landlords are likely to benefit from continued expansions in the growing technology and social media industry. VACANCY The overall vacancy rate in River North fell slightly during the second quarter from 14.4 percent to 14.3 percent. Due to large vacancies at IBM Plaza and the lack of Class A properties within the submarket,the Class A vacancy rate is the highest in the CBD at 25.2 percent. Meanwhile, River North has the strongest Class B sector of any submarket, posting 5.4 percent vacancy during the second quarter. ABSORPTION Net absorption ended the quarter at positive 13,840 square feet, bringing the year-to-date total to positive 142,667 square feet. The largest occupancy during the quarter was Whole Foods Market Inc. s relocation of its Midwest headquarters from the north side of the city to 640 N. LaSalle Street in River North. The company now occupies approximately 36,000 square feet. NET ABSORPTION & VACANCY RIVER NORTH SUBMARKET Square Footage 900, , , , , , , , % 265, % 338, % 177, , % 15.20% 376, % 142, Vacancy (%) 100, YTD 0.0 COLLIERS INTERNATIONAL P. 14

15 CONSTRUCTION No new construction was delivered to River North during the second quarter. There are currently no office developments planned in the submarket. RENTS The average direct gross asking rate increased to $33.67 per square foot from $33.40 per square foot in the prior quarter. The average asking Class A rate currently resides at $38.81 per square foot while Class B rate averaged $27.75 per square foot gross at the end of the second quarter. ASKING GROSS FACE RATES RIVER NORTH SUBMARKET $45.00 $40.00 Class A $35.00 Average $30.00 $25.00 $20.00 Class B Class C $15.00 $10.00 $5.00 $ LEASE & SALES ACTIVITY LEASE TRANSACTIONS - FIRST QUARTER 2011 Tenant Address Class Deal Type Size (SF) Groupon 600 W. Chicago Avenue B Sublease 220, W CHICAGO AVENUE SALES ACTIVITY - SECOND QUARTER 2011 Status Address Class Size (SF) Sale Price Price/SF Seller Buyer UC 600 W. Chicago Avenue B 1,571,386 $390,000,000 $ UC = Under Contract 600 W. Chicago Associates (David Werner, Jacob & Victor Gerstein) Commonwealth REIT COLLIERS INTERNATIONAL P. 15

16 West Loop The CBD s most active and highly desired submarket continued its path to recovery during the second quarter. The West Loop vacancy rate declined for the fifth consecutive quarter, down 2.0 percent from its peak of 18.3 percent nearly two years ago. As the CBD s largest submarket, trends in the West Loop often serve as a barometer for landlords and tenants trying to determine the direction the market is heading as a whole. While other submarkets have been unable to sustain consistent positive absorption on a quarter-by-quarter basis, the West Loop s recent steady vacancy rate descent may be an indication that other submarkets could follow suit as the economy continues to improve. While the submarket still has quite a bit to go before reaching the vacancy rates witnessed during pre-recession quarters, it appears to be stabilized and trending towards recovery. MARKET INDICATORS West Loop: MID-YEAR COMPARISON VACANCY RATE 17.7% 16.3% ABSORPTION (SF) -279, ,283 RENTS $32.70 $32.85 INVENTORY 47,302,842 47,302,842 LARGE BLOCKS AVAILABLE TOP 10 BY SQUARE FOOTAGE Activity in the West Loop has been relatively elevated in recent quarters as several large tenants recently signed leases or continue to evaluate their space options. During the second quarter, Wells Fargo signed the largest lease of the year to date, consolidating five offices into 293,000 square feet at 10 & 30 S. Wacker Drive. Additionally, Marsh signed a lease for 120,000 square feet in a relocation from 500 W. Monroe Street to 540 W. Madison Street. Several other large tenants in the West Loop with impending lease expirations are actively evaluating their space options. Due to increased confidence in economic conditions, GE Capital announced intentions to double its workforce in Chicago, making the company one of the more closely watched tenants in the market. With a late-2012 lease expiration at 500 W. Monroe Street and relatively few large contiguous space options to consider, landlords and other large tenants are awaiting the company s decision to either remain entirely at 500 W. Monroe Street or potentially relocate part of its operations to an alternate location, thereby removing another large block of space availability from the market. Originally anticipated to contract from 308,000 square feet down to approximately 130,000 square feet, the decision to expand its presence in Chicago is likely to boost the company s requirement to anywhere from 400,000 to 500,000 square feet. 500 W. MONROE ST. 233 S. WACKER DR. 225 W. RANDOLPH ST. 227 W. MONROE ST. 200 S. WACKER DR. 101 N. WACKER DR. 500 W. MONROE ST. 300 S. RIVERSIDE PLZ. 71 S. WACKER DR. 500 W. MADISON ST. CLASS A CLASS B CLASS C 369,207 SF 299,514 SF 238,778 SF 145,903 SF 112,959 SF 106,732 SF 106,475 SF 105,183 SF 99,378 SF 92,924 SF GE Capital s growth plans have spawned discussions in the market about the potential impact on not only existing space options, but also the potential for new development. As the high-view, quality space sector of the West Loop market becomes more constrained and large tenants begin to possess fewer options for relocation or expansion, pent up demand is likely to spur the development of one or more new office towers, likely in the 2015 to 2017 timeframe. Although hesitation exists by tenants about developers ability to meet the financing and preleasing requirements to launch a new development, market characteristics seem to indicate a future need for large space options with modern amenities, high-tech finishes and enhanced infrastructure. Several developers have begun courting large tenants with leases expiring in the next couple of years in an attempt to potentially reinstate plans for new West Loop developments that were tabled over two years prior as the credit crisis unfurled. 500 WEST MONROE STREET COLLIERS INTERNATIONAL P. 16

17 VACANCY During the second quarter, the overall vacancy rate in the West Loop declined further to 16.3 percent from 16.6 percent in the prior quarter. All three building classes posted decreases in vacancy during the quarter, another sign of relative health in the submarket. ABSORPTION Demand remained positive during the quarter as positive 157,995 square feet of net absorption was reported. The year-to-date total for the submarket is positive 379,283 square feet, making the West Loop the strongest submarket in the CBD. The most notable occupancy during the quarter was University Healthcare Consortium s lease of 77,000 square feet at 155 N. Wacker Drive. The requirement represents entirely organic growth for the CBD as the company relocated from the suburbs. NET ABSORPTION & VACANCY WEST LOOP SUBMARKET Square Footage 2,500,000 2,000,000 1,500,000 1,000, , ,000 2,029, % 1,639, % 12.90% -481, % 17.10% -21, % 379, % 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% Vacancy -1,000, , % -1,500, YTD 0.0% CONSTRUCTION No new construction was delivered to the West Loop during the second quarter. There are currently no office developments slated in the submarket, but discussions have ensued about the potential for future developments in the 2015 to 2017 timeframe. COLLIERS INTERNATIONAL P. 17

18 RENTS The average direct gross asking rate increased to $32.85 per square foot from $32.43 per square foot in the prior quarter. Rental rate increases were posted in all three building classes in the West Loop. Class A rates saw the largest increase, ending the second quarter at $38.39 per square foot, up from $37.74 per square foot in the first quarter. ASKING GROSS FACE RATES WEST LOOP SUBMARKET $45.00 $40.00 $35.00 Average Class A 10 & SOUTH WACKER DRIVE $30.00 $25.00 $20.00 $15.00 $10.00 Class B Class C $5.00 $ LEASE & SALES ACTIVITY LEASE TRANSACTIONS - FIRST QUARTER S WACKER DRIVE WILLIS TOWER Tenant Address Class Deal Type Size (SF) Wells Fargo 10 & 30 S. Wacker Drive A New Lease 293,000 Marsh 540 W. Madison Street A New Lease 121,000 Hostway Corporation 100 N. Riverside Plaza A Renewal 53,000 United Continental Holdings 233 S. Wacker Drive A Expansion 52, S WACKER DRIVE SALES ACTIVITY - SECOND QUARTER 2011 Status Address Class Size (SF) Sale Price Price/SF Seller Buyer NM 1 N. Wacker Drive A+ 1,340,000 TBD TBD Hines (Selling 50% Stake) TBD NM 233 S. Wacker Drive A 3,781,045 TBD TBD American Landmark Properties; The Chetrit Group, LLC; The Moinian Group TBD NM 311 S. Wacker Drive A 1,281,000 TBD TBD Shorenstein/Fremont Group TBD SOLD 200 S. Wacker Drive B 754,751 $117,800,000 $ Behringer Harvard Equity Group Investments & Transwestern FS 200 W. Jackson Boulevard B 476,711 TBD TBD Apollo Investment TBD FS = For sale NM = New to Market COLLIERS INTERNATIONAL P. 18

19 SECOND QUARTER 2011 OFFICE MARKET STATISTICS COLLIERS INTERNATIONAL STANDARDS (Includes all owner-occupied properties) VACANCY ABSORPTION RENTS Direct Sublease Total Net Asking Full Service Class Total Inventory SF Direct SF Vacant Sublease SF Vacant Total Vacant SF Vacancy Rate Vacancy Rate Total Vacancy Rate 2Q 2011 Total Direct Net Absorption Total Sublease Net Absorption Absorption 2Q 2011 Net Absorption YTD SF Average Direct Rent Per SF Central Loop Class A: 16,001,354 1,474, ,188 1,577, % 0.6% 9.9% (79,172) 66,478-12,694 (100,499) $37.01 Class B: 22,023,919 2,981, ,271 3,396, % 1.9% 15.4% (114,714) 278, ,039 95,027 $28.41 Class C: 6,311, ,367 62, , % 1.0% 14.4% (12,543) (20,297) (32,840) (124,561) $20.67 Subtotal: 44,337,241 5,302, ,390 5,884, % 1.3% 13.3% (206,429) 324, ,505 (130,033) $29.97 East Loop Class A: 6,663,954 1,242, ,496 1,453, % 3.2% 21.8% (196,945) 252,785 55,840 47,215 $35.87 Class B: 12,784,283 1,992, ,533 2,155, % 1.3% 16.9% 94,266 34, ,008 74,184 $29.51 Class C: 8,899, ,136 22, , % 0.3% 10.2% 84,965 (13,155) 71,810 81,566 $22.09 Subtotal: 28,347,647 4,122, ,582 4,518, % 1.4% 15.9% (17,714) 274, , ,965 $29.64 North Michigan Avenue Class A: 4,928, ,030 76, , % 1.5% 16.1% (19,689) 0-19,689 (16,726) $35.92 Class B: 7,591, ,246 45, , % 0.6% 10.1% (22,538) (10,080) (32,618) (39,620) $30.51 Class C: 3,516, ,677 2, , % 0.1% 8.5% 18, ,883 18,606 $22.80 Subtotal: 16,037,498 1,735, ,864 1,859, % 0.8% 11.6% (23,344) (10,080) (33,424) (37,740) $31.25 River North Class A: 5,228,329 1,238,845 78,087 1,316, % 1.5% 25.2% 3,610 33,744 37,354 24,155 $38.81 Class B: 9,837, , , , % 3.3% 8.8% 114,169 (101,638) 12, ,866 $27.75 Class C: 4,033, ,468 48, , % 1.2% 14.2% 40,415 15,634 56,049 76,334 $20.75 Subtotal: 19,099,156 2,304, ,895 2,756, % 2.4% 14.4% 158,194 (52,260) 105, ,355 $33.67 West Loop Class A: 27,664,130 3,979, ,413 4,356, % 1.4% 15.7% 74,833 (51,697) 23, ,740 $38.39 Class B: 17,596,523 2,343, ,927 2,482, % 0.8% 14.1% 38,637 1,870 40,507 68,563 $30.27 Class C: 5,382,152 1,163,322 9,699 1,173, % 0.2% 21.8% (46,723) 7,915 (38,808) 58,886 $20.60 Subtotal: 50,642,805 7,485, ,039 8,012, % 1.0% 15.8% 66,747 (41,912) 24, ,189 $32.85 CBD Total Class A: 60,486,765 8,650, ,409 9,496, % 1.4% 15.7% (217,363) 301,310 83, ,885 $37.62 Class B: 69,834,094 8,579,290 1,089,466 9,668, % 1.6% 13.8% 109, , , ,020 $29.38 Class C: 28,143,488 3,720, ,895 3,866, % 0.5% 13.7% 84,997 (9,903) 75, ,831 $21.29 Subtotal: 158,464,347 20,950,565 2,081,770 23,032, % 1.3% 14.5% (22,546) 495, , ,736 $31.36 The information contained in this report was provided by sources deemed to be reliable, however, no guarantee is made as to the accuracy or reliability. As new, corrected or updated information is obtained, it is incorporated into both current and historical data, which may invalidate comparison to previously issued reports. COLLIERS INTERNATIONAL P. 19