Colliers International. Silicon Valley SILICON VALLEY'S SHRINKING SUPPLY

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1 olliers International Third Quarter 2006 Market Report Net gains in occupancy were realized for the seventh consecutive quarter in as another 1.59 million absorption was added in Q3. Through three quarters, 6.42 million absorption has been recorded, well ahead of our annualized forecast for 7.0 million occupancy gain. Q3 SILION VLLEY'S SHRINKING SUPPLY s commercial real estate market posted yet another solid quarter that extended what has already been an impressive year. Leasing activity took a slight hit as gross absorption for the quarter checked in at 5.67 million square feet and million square feet yeartodate. The amount of leasing activity in the Valley is slightly behind our annualized forecast of 28.0 million square feet of gross absorption, but net occupancy gains are ahead of forecast. Net gains in occupancy were realized for the seventh consecutive quarter in as another 1.59 million absorption was added in Q3. Through three quarters, 6.42 million absorption has been recorded, well ahead of our annualized forecast for 7.0 million occupancy gain. s consistency in occupancy growth has heavily contributed to the reduction of available space on the market. The overall availability rate fell to 14.97% at the end of Q3, 16.3% lower the same time last year, and below 15. for the first time since the third quarter Expectations for further net absorption in Q4 are cautiously optimistic. olliers measured a substantial amount of space made available in the third quarter that has not yet been vacated. s that space becomes vacant, any occupancy gain generated during the last three months of the year will be compromised. t the same time, Q4 is historically a strong quarter for. On the economic front, the first half of 2006 saw increased venture capital investments at levels not seen since The third quarter was no different. ccording to Dow Jones VentureOne, 8% more was invested per deal in Q3 compared to the same time last year. During the third quarter, $2.6 billion, or 41% of the nationwide total, was invested in local companies. This also marks the third consecutive quarter of more than 600 financings that have totaled more than $6.0 billion in the U.S. Economic growth for alifornia remained steady and consistent with the UL nderson Forecast for a slowdown in growth, vg. Starting Rent 1 4 Gross bsorption vailability R&D Office Industrial Warehouse vailability 21.0 Square Feet in Millions Q404 Q105 Q205 Q305 Q405 Q106 Q206 Q306 R&D Office Industrial Warehouse Q404 Q105 Q205 Q305 Q405 Q106 Q206 Q306 vailability colliersparrish.com olliers International 450 W. Santa lara Street San Jose, US Tel: (408) Fax: (408)

2 olliers International Third Quarter 2006 Market Report OVERVIEW 3 Dollars Per SF, NNN/Month $1.50 Santa lara s R&D net occupancy gain for the quarter represented more than 5 of the total net occupancy gain in, posting 419,648 square feet of net absorption. That resulted in Santa lara s R&D availability rate falling to 16.31%, which is below 2 for the first time in five years. Q404 Q105 Q205 Q305 Q405 Q106 Q206 vg. Starting Rent vg. Starting Rent Dollars Per SF, FS/Month 4 $4.00 $3.00 R&D vailability Office vailability Q404 Q105 Q205 Q305 Q405 Q106 Q206 vg. Starting Rent but no recession. With the exception of construction and real estate related jobs, overall employment continues to grow, but at a slowing pace. Focusing on, the economic outlook is slightly better. n additional 1,900 jobs drove the September unemployment rate down to 4.5%, about 1% lower from exactly a year ago. The technology sector led the growth in. However, employment growth was spread throughout other sectors as well, including government and construction. R&D Market Q3 generated mixed results in the R&D sector as leasing activity slowed. Gross absorption dropped to 2.49 million square feet, the lowest threemonth total since the second quarter of This marks two consecutive quarters of R&D gross absorption below 3.0 million square feet, and a sign that momentum in the R&D sector has slightly tapered off. Net absorption in the R&D market was a different story as net occupancy rose to a solid 828,133 square feet. olliers continues to track a significant amount of available R&D space which has yet to be vacated. This could potentially translate to a shortterm R&D occupancy loss in the upcoming months. Q % 2 1 5% vailability vailability Q306 25% 2 1 5% vailability Two of the five major R&D submarkets posted gains in activity levels from the previous quarter. Fremont experienced a modest gain (405,324 square feet to 439,050 square feet) and Santa lara s gross absorption increased by 57.3% (324,980 square feet to 511,287 square feet). Sunnyvale s activity fell from 452,309 square feet to 386,141 square feet. Mountain View dipped slightly to 287,107 square feet. fter rebounding in Q2, San Jose generated 504,545 square feet of R&D gross absorption, the lowest level of activity since the second quarter of Every city experienced R&D net occupancy gains except for San Jose. The R&D sector in San Jose generated a net occupancy loss of 304,265 square feet, the second straight quarter in which R&D net absorption has been negative in San Jose. Santa lara s net occupancy gain for the quarter represented more than 5 of the total net occupancy gain in, posting 419,648 absorption. This resulted in Santa lara s R&D availability rate falling to 16.31%, which is below 2 for the first time in five years. Some of the quarter s largest R&D transactions were 70,000 square feet leased to Lumenis in Santa lara, 117,504 square feet leased to Rackable Systems in Fremont, 85,585 square feet leased to Polycom in San Jose, and a 87,146 square foot user sale in Milpitas to Skymore Venture, LL. The average start rate for R&D users spiked up to.98 per square foot (NNN), up.11 per square foot from the prior quarter. The increase was not caused by results in any one submarket, as average starting rents increased in every city except for Fremont, which remained flat. Office Market s office market continued its hot streak with third quarter results similar to Q2. Gross absorption increased to 1.91 million square feet and was the most activity the Valley has seen in the past year. The office market recorded its sixth straight quarter of positive net absorption with a solid 746,150 square feet of net occupancy gain. Net absorption now totals 2,404,582 square feet for the year, and by yearend we expect the most office net absorption the has seen since The trend of solid activity and net occupancy gains resulted in the office availability rate dropping below 15. to 14.82%, a 17.1% decline from a year ago, and a 28.1% decline from two years ago. Leasing activity stayed strong amongst the office submarkets. San Jose remained consistent with 443,700 square feet of gross absorption and 192,365 absorption. Santa lara and Palo lto posted impressive occupancy gains of 264,876 square feet and 256,820 square feet respectively. Santa lara

3 olliers International Third Quarter 2006 Market Report continues to draw more than its share of office users, and its availability rate has declined by 45.6% from one year ago. Some of the quarter s largest office transactions were a 140,935 square foot sublease by itrix Systems in Santa lara and a 77,050 square foot lease by Seagate Technologies in Sunnyvale. The average starting rent for office leases dropped to $2.08 per square foot (full service), correcting a Q2 spike that was exacerbated by the larger number of high rental rate deals in Palo lto in Q2. Industrial Market The s industrial market had a solid, but not spectacular, quarter. fter posting 1.15 million square feet of gross absorption in Q2, leasing activity slowed down to 776,477 square feet, the lowest amount since the first quarter of With that said, the industrial availability rate dropped below 8. for the first time since the second quarter of 2001, and the industrial market recorded its seventh consecutive quarter of net occupancy gain. Industrial net absorption measured to 186,878 square feet and the availability rate dropped to 7.55%. San Jose, Fremont, and Santa lara all posted respectable industrial gross figures. San Jose generated the bulk of the quarter s leasing activity, as it typically does among industrial submarkets, with 326,265 square feet of gross absorption. Fremont and Santa lara followed with 146,306 square feet and 141,037 square feet of gross absorption respectively. San Jose witnessed a slight loss in occupancy, but also generated the largest industrial lease of the quarter, a 97,059 square foot lease by xial Industries on Senter Road. Johns Family Trust acquired an 88,351 square foot industrial building in a user sale in Morgan Hill, and Fremont lowered its availability rate to 8.54% with the help of eycle and Global Industries leasing 52,500 square feet and 36,431 square feet. The average starting rental rate for industrial leases in the third quarter.64 per square foot triple net (NNN). With the exception of several lowrate industrial leases in Santa lara, starting rents held steady in the Valley and the average starting rental rates should bounce back next quarter. Warehouse Market Results in the warehouse sector in were less than stellar, but somewhat anticipated. Gross absorption registered 494,044 square feet with a net occupancy loss of 175,176 square feet. s reported earlier in the year, large amounts of occupied warehouse space came onto the market and their vacancies caught up in Q3, affecting net absorption. Even with the mediocre results, the warehouse availability rate dropped from 10.1 the previous quarter, to vailable warehouse sublease $.30 space has decreased $.20 tremendously during the year, $.10 from over one million square feet of available sublease space recorded at the end of Q1, to 170,706 square feet posted at the end of Q3. Not since the first quarter of 2001 has available sublease space been less than 200,000 square feet. San Jose led in warehouse leasing activity with 265,587 square feet of gross absorption in Q3. Milpitas improved with 88,708 square feet of gross absorption and 72,384 absorption in Q3. The largest warehouse lease of the quarter, Lockheed Martin orporation s 100,170 square foot lease on Martin venue in Santa lara, cut Santa lara s warehouse availability rate to 3.39%. Other significant warehouse transactions were 60,400 square feet leased to Lord & Son s in San Jose, and 49,728 square feet leased to reative Plan Design, also in San Jose. Warehouse rents remained steady at.39 per square foot, (NNN) for the second consecutive quarter. With the large amount of available sublease space off the market, we can expect rents to remain flat, if not rise towards yearend. Dollars Per SF, Gross/Month $ Dollars Per SF, NNN/Month $.70 $.60 $.40 Industrial vailability Q404 Q105 Q205 Q305 Q405 Q106 Q206 vg. Starting Rent Warehouse vailability Q404 Q105 Q205 Q305 Q405 Q106 Q206 vg. Starting Rent Q306 vailable warehouse sublease space has decreased tremendously during the year. From over one million square feet of available sublease space recorded at the end of Q1, to 170,706 square feet posted at the end of Q3. 14% 12% 1 8% 6% 4% 2% vailability Q306 24% 21% 18% 12% 9% 6% 3% vailability

4 olliers International Third Quarter 2006 Market Report Regional Offices Q SILION VLLEY/SN JOSE 450 West Santa lara Street San Jose, (408) Main (408) Fax PENINSUL/PLO LTO Two Palo lto Square, Suite El amino Real Palo lto, (650) Main (650) Fax SN FRNISO PENINSUL Metro enter Tower 950 Tower Lane, Suite 1725 Foster ity, (650) main (650) fax SOUTH VLLEY/GILROY 8070 Santa Teresa lvd., Suite 220 Gilroy, 9502 (408) Main (408) Fax EST Y/PLESNTON 5050 Hopyard Road, Suite 180 Pleasanton, (925) Main (925) Fax EST Y/OKLND 1999 Harrison Street, Suite 1750 Oakland, (510) Main (510) Fax EST Y/WLNUT REEK 1850 Mt. Diablo oulevard, Suite 200 Walnut reek, (925) Main (925) Fax NORTH Y/FIRFIELD 360 ampus Lane, Suite 101 Fairfield, (707) Main (707) Fax ENTRL VLLEY/STOKTON 3414 rookside Road, Suite 300 Stockton, (209) Main (209) Fax dditional offices located in Reno and Las Vegas, NV. olliers International member firms located throughout the U.S. and abroad. SELETED OLLIERS INTERNTIONL TRNSTIONS, Q bbott Laboratories leased 218,366 square feet of R&D/office space at 3625 Peterson Way in Santa lara. DivcoWest Properties is the landlord. Synopsys, Inc. renewed their 207,000 square foot office lease at 445 & 555 Mary venue in Sunnyvale. Jay Paul ompany is the landlord. Excel Logistics, Inc. signed a 190,808 square foot warehouse lease at hristy Street in Fremont. Mercantile ank & Trust is the landlord. Nearon Enterprises, purchased a 127,180 square foot warehouse at Madrone Parkway in Morgan Hill from Mission West Properties. Lockheed Martin orporation sold 23.1 acres of land at 11th Street in Sunnyvale to Paul Holdings, Inc. xial Industries signed a longterm, 97,059 square foot industrial lease at 1991 Senter Road in San Jose with JP DiNapoli ompanies, Inc. Savi Networks completed a 91,056 square foot R&D lease at 351 & 381 East Evelyn venue in Mountain View. RREEF is the landlord. Landlord arrmerica Realty orporation completed a longterm, 85,585 square foot R&D/ office lease at 3553 North 1st Street in San Jose with Polycom, Inc. SP Green Milpitas, LL, sold an 85,040 square foot R&D/Office building at 1545 arber Lane in Milpitas to arber Lane Investors, LL. Mass Precision Sheetmetal, Inc. leased 80,000 square feet of industrial space at 2960 opper Road in Santa lara. opper Industrials is the landlord. Seagate Technologies, LL inked a 77,050 square foot office lease at 100 Mathilda Place in Sunnyvale. Mozart Development is the landlord. VM Services expanded into 75,997 square feet of R&D space at 6701, 6723 & 6737 Mowry venue in Newark. ProLogis is the landlord. dvanced Micro Devices signed a longterm, 71,912 square foot R&D/office lease at 1050 East rques venue in Sunnyvale with landlord istar Financial. Lumenis completed a 70,000 square foot R&D/ office lease at 5302 etsy Ross Drive in Santa lara. HDP ssociates, LL is the landlord. UNDERSTNDING SORPTION olliers uses several measurements to track market conditions and deal flow. While related, the formulas to arrive at these measurements differ. Using the results of the most recent quarter, here is how olliers measures change in availability, net absorption and effective net absorption. hange in vailability: This measurement is simply the difference between the amounts of space available at the end of one period to the next. The table below shows that total available space decreased by 2,277,562 square feet in the year s Third quarter. Note that change in availability includes adjustments for space that is taken off the market. Space taken off the market is not a factor in net absorption measurements. vailable end of 2Q06 48,779,181 Plus: & occupied space that came available 3Q06 5,905,956 Q2 vailable + Newly vailable in Q3 = 54,685,137 Less: 3Q06 Gross bsorption 5,671,291 Less: 3Q06 Taken off the Market 2,512,227 vailable end of 3Q06 46,501,619 Net bsorption: Net absorption measures the change in occupied space from one period to the next. In this measurement, it is important to distinguish that a building may be available, but not vacant (often the case in a sublease situation, for example). Therefore, occupancy is not reduced (negative net absorption) until the space is vacated, and sometimes that does not happen until the space is leased, creating a net absorption wash for the deal and for that particular period. space that came available 3Q06 2,401,085 Previously available space that was vacated in 3Q06 1,684,221 3Q06 dded (occupancy loss) 4,085,306 3Q06 Gross bsorption (occupancy gain) 5,671,291 3Q06 Net bsorption (change in occupancy) 1,585,985 Effective Net bsorption: In 2003, olliers created a measurement of effective net absorption. Effective net absorption uses the same formula as the net absorption formula, except that it treats any space that comes available as if it is vacant, whether it is or it isn t. The purpose of the measurement is to get a better real time gauge of occupancy flow in and out of the market, acknowledging that space that is available for lease is likely to be vacated shortly and underutilized presently. space that came available 2Q06 2,401,085 Occupied space that came available 2Q06 3,504,871 2Q06 vailable dded 5,905,956 2Q06 Gross bsorption 5,671,291 2Q06 Effective Net bsorption 234,665

5 OFFIE olliers International Third Quarter 2006 Office Market Statistics Existing Properties bsorption onstruction Rents lass ldgs Inventory Direct Direct Sublease Sublease DOWNTOWN SETION Downtown San Jose ,046,777 1,897,617 2,330,179 7,274, , , ,651 1,461, % 13.1% 19.9% 20.1% , , ,651 1,461, % 13.1% 19.9% 20.1% % % 2,296,283 1,649,458 1,867,528 5,813,269 74,979 21,249 29, , ,818 71,074 49, ,694 $31.44 $24.84 $20.28 $26.14 Prior Qtr urrent Occupied Space Net bsorption urrent Net bsorption YTD ompletions urrent Qtr. Sq.Ft. Under onstruction SUURN SETION San Jose 131 9,909,250 1,342, % 60, % 1,403, % 16.6% 8,505, , ,530 $ ,576, , % 4, % 684, % 7,891,708 27, ,508 $ ,193, , % , % 15.2% 3,586,847 3,147 44,611 $ ,678,955 2,629, % 65, % 2,695, % 14.5% 19,983, , ,649 $25.38 SUURN SETION Santa lara 38 4,431, , % 206, % 351, % 12.5% 4,079, , ,041 $ ,050, , % 13, % 616, % 17. 3,433,447 52, ,169 $ ,949 82, % 0. 82, % 13.4% 578,141 5,056 19,364 $ ,142, , % 220, % 1,050, % 20.9% 8,091, , ,574 $23.73 Palo lto 34 2,701, , % , % 6.9% 2,551, , ,253 $ ,400,415 94, % 0. 94, % 6.5% 2,305,855 62, ,675 $ ,756 53, % 0. 53, % 5.1% 875,854 7,664 (28,571) $ ,032, , , % 5,733, , ,357 $38.53 verage sking upertino Sunnyvale SUURN TOTL MRKET TOTL 7 632,165 39, % 0. 39, % 17.1% 592,488 80, ,301 $ ,362,555 31, % 0. 31, % 1.6% 2,330,869 8,475 12,420 $ ,495 5, % 0. 5, % 2.3% 200,418 (5,361) $ ,200,215 76, % 0. 76, % 8.8% 3,123,775 89, ,360 $ ,599, , % 87, % 505, % 9.2% 3,093,426 (175,487) (11,217) $ ,372, , % , % 10.2% 1,254,675 (10,100) 158 $ ,440 79, % 0. 79, % 23.6% 392,204 30,410 33,203 $ ,443, , % 87, % 702, % 13.7% 4,740,305 (155,177) 22,144 $ ,273,920 2,096, % 354, % 2,451, % 17.5% 18,822, ,859 1,349,908 $ ,761,819 1,526, % 18, % 1,545, % 11.1% 17,216, , ,930 $ ,460, , % , % 15.1% 5,633,464 46,277 63,246 $ ,496,716 4,450, % 373, % 4,823, % 14.6% 41,672, ,959 1,986,084 $ ,320,697 2,846, % 354, % 3,201, % ,119, ,838 1,508,726 $ ,659,436 1,774, % 18, % 1,793, % 11.8% 18,866, , ,004 $ ,791,156 1,290, % 0. 1,290, % 16.8% 7,500,992 75, ,048 $ ,014 53,771,289 5,911, , % 6,285, % 15.9% 47,486, ,877 2,265,778 $31.50 QURTERLY OMPRISON ND TOTLS Q306 1,014 53,771,289 5,911, , % 6,285, % 15.9% 47,486, ,877 2,265,778 $31.50 Q206 1,014 53,744,876 6,379, % 659, % 7,039, % 14.1% 46,731, ,594 1,491,901 2,580 $ W. Santa lara Street, San Jose, fax The information furnished has been obtained from sources we deem reliable and is submitted subject to errors, omissions and changes. lthough olliers International has no reason to doubt its accuracy, we do not guarantee it. ll information should be verified by the recipient prior to lease, purchase, exchange, or execution of legal documents.