Northern California Industrial Report Q4 2009

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1 Americas Research Northern California Industrial Report Q Market conditions have started to stabilize and occupiers have emerged to capitalize on both lease and purchase opportunities. While a moderate rise in vacancies and a moderate fall in rents are expected in 2010, the return of economic growth should drive new demand late in the year. However, aggressive competition for tenants will keep rental rates and concession packages attractive. One sector seeing some promise is modern, large-user space near major ports and distribution centers. Sales transaction volumes remain at low levels, but the East Bay managed to show some signs of life during Owner-users dominate current sales activity, but as leasing velocity picks up and cap rates remain elevated, investors will begin to return.

2 2 On Point Northern California Industrial Report Q Northern California s overall industrial market Overview While the recession may have come to a technical end and economic growth has resumed, industrial real estate markets in Northern California are unlikely to see positive benefits until later in The lingering effects of the current consumer-led recession, which hit the East Bay and Central Valley industrial markets harder compared to the business-led 2001 dot-com induced recession, will take time to get meaningful recovery in motion. While the timing of renewed consumer demand and job growth to drive industrial real estate remains uncertain, a recovery scenario is taking shape and will likely start in the coastal areas of the East Bay and work its way inland. This scenario means the current flight to quality for future positioning and operating efficiency will continue to drive opportunistic activity in the East Bay markets that will eventually tighten conditions for modern warehouse and distribution facilities and be a leading indicator of recovery. The Central Valley will continue to struggle in 2010 with high rates and a lack of demand. Stockton, in particular, will remain the weakest submarket as its economy has been battered by the bursting of the housing bubble and a decline in associated consumer demand. The markets on the west side of the Bay are primarily technology driven and are likely to experience recovery in tandem with the R&D market. Prospects for new development remain distant, and the best case scenario is that construction costs and rents come into better alignment by At that time, speculative new construction may resume, but in the interim only special case build-to-suit or owner-user development may take place. Capital Markets Sales volumes remain at depressed levels with commercial real estate credit being extremely tight. Northern California sales volume for 2009 came in at a meager $644 million, which was 86 percent below the 2007 peak and the lowest total since No submarket escaped the sales freeze overall, but the East Bay managed to show the some signs of life in 2009 as owner-users emerged to capitalize on well below replacement cost acquisitions. As a result of the decreased volume and deteriorated leasing market fundamentals, cap rates required to entice investors rose steadily over the course of During the 2007 to 2008 time period cap rates were in the 6 to 7 percent range. By the second half of 2009, they were in the 7 to 9 percent range. It appears that cap rates have peaked and will remain stable until market conditions warrant their decline. Moving toward the stability of interest rates will weigh heavily on future cap rate movements. Trends spotlight NUMMI Plant Closure Fremont s New United Motor Manufacturing, Inc. (NUMMI) plant will close on April 1, The 5.3 million-square-foot auto plant situated on 380 acres of land is a joint venture between General Motors and Toyota formed in Approximately 4,700 NUMMI workers will lose their jobs upon closure and the impact on its over 3,600 North American suppliers, 1,000 of which are in California, and the suppliers estimated 20,000 workers remains unknown. The impact on the industrial market will certainly be felt, but will likely come from suppliers and other nearby businesses dependent on NUMMI workers rather than the massive industrial complex. Every challenge brings opportunity and finding a replacement industrial use will certainly be difficult. Long-term redevelopment is clearly the opportunity for the complex, which has on-site rail service and is well served by transportation networks. In addition, the future Warm Springs BART station being built adjacent to the site bodes well for potential mixed use development.

3 On Point Northern California Industrial Report Q Northern California industrial market: East Bay Economy Unemployment in the East Bay rose to its highest point in 2009 at 11.5 percent, with the cumulative total of industrial sector job losses reaching 14,600. However, stimulus funding for the Port of Oakland has offered promise to help position future growth in the industrial sector. Trade volumes through the Port appear to have stabilized with near term export growth expected due to foreign businesses replenishing their inventories. Additionally, the hard hit housing market has started to see increased sale velocity in recent months. Market conditions The East Bay began to feel a semblance of stabilization during the fourth quarter as a result of strengthening market fundamentals and economic conditions. Although landlords remained aggressive, rental rates were believed to be near bottom and are expected to remain stable moving into Recording no change since the end of the third quarter, average rental rates for industrial space were $0.47 NNN at the end of the fourth quarter. However, a steady decline in rental rates throughout the year, while challenging for landlords, has created a favorable market for manufacturers and distributors. With limited options over 100,000 square feet, the East Bay market experienced positive absorption as industrial users look to take advantage of low rates. Likewise, owner-users have also been able to capitalize on the down market by purchasing discounted or distressed assets, as evidenced by Agilent Technologies purchasing a 101,050 square foot building in Newark from Old Republic Title for $45.00 per square foot. Something to watch Demand for available space in areas surrounding the Port of Oakland will increase further in the next 6-12 months as tenants realign internal and external business strategies. As a result, we can expect to see a decline in rates throughout the Oakland/East Bay I-880 Corridor. 101 San Francisco 101 Property clock - current market conditions 80 Richmond/ San Pablo Oakland San Leandro Key market indicators (leased industrial) Supply ,517,355 s.f. 9.9% availability 15.9% YTD net absorption -2,278,394 s.f. Asking rents $ Hayward Union City Fremont/ Newark month forecast Outlook The next 6-12 months will bring an increase in tenant demand and leasing activity as tenants take advantage of favorable market conditions. To maintain occupancy levels landlords must remain competitive until rates begin to fall. Landlord leverage Rent growth slowing rising falling stagnant Union City Oakland Tenant leverage Hayward San Leandro Fremont/Newark Richmond/San Pablo

4 4 On Point Northern California Industrial Report Q Northern California industrial market: East Bay Market snapshot All classes, 30,000 s.f. and higher industrial market including owner occupied space Under construction Overall Leased industrial market availability YTD net absorption Average Prior qtr avg Richmond/San Pablo 9,369, % 7,062,054 16% 22% -19,087 $0.34 $0.34 Oakland 31,098, % 24,071,348 8% 13% -311,145 $0.47 $0.48 San Leandro 19,890, % 14,188,384 12% 19% -3,376 $0.47 $0.46 Hayward 33,703, % 28,726,505 8% 17% -1,216,695 $0.45 $0.44 Union City 7,797, % 5,739,749 2% 13% -64,540 $0.40 $0.46 Fremont/Newark 28,658, , % 21,124,041 13% 15% -663,551 $0.57 $0.56 Market - 130,517, , % 100,912,081 10% 16% -2,278,394 $0.47 $0.47 East Bay - sales highlights Location Market Buyer Seller Price Size (s.f.) Price (p.s.f) 1980 North Loop Road Oakland 1980 North Loop Road, LLC Waterfront BTS-NL Phase II, LLC $6,800, ,091 $ Barrington Business Park (3 property portfolio) Hayward Jaeger McHugh, LLC Prologis $13,250, ,515 $ Mack Street Hayward Huron Investments, LLC BayStone Group, Inc. $3,850, ,784 $ Sabre Street Hayward Betty P H Lim Azuma Foods International, Inc. $3,100, ,880 $ Fremont Boulevard Fremont/Newark Global Team Investors, LLC MDS Realty II, Inc. $16,500, ,842 $ Cherry Street Fremont/Newark Agilent Technologies Old Republic Title Company $5,700, ,050 $ Grimmer Boulevard Fremont/Newark Svotek, Inc. Balch Enterprises, Inc. $1,968, ,582 $45.16 East Bay - lease highlights Location Market Tenant Size (s.f.) Type th Avenue Oakland Agusna Logistics 41,535 Sublease Fairway Drive San Leandro Simmons Bedding Company 236,500 Renewal 1950 Marina Boulevard San Leandro International Paper Company 106,000 Renewal 1501 Doolittle Drive San Leandro New Haven Moving Equipment 61,827 Renewal 1937 Davis Street San Leandro Copier Network 48,391 New Lease 1588 Doolittle Drive San Leandro RSC Roofing Supply 40,051 New Lease 3004 Alvarado Street San Leandro UPS 34,945 New Lease Catalina Street San Leandro Lartom Inc - City Auto Parts 30,720 New Lease Atlantic Court Union City Young's Market 52,151 New Lease 901 Page Avenue Fremont/Newark Solyndra, Inc. 506,490 New Lease Fremont Boulevard Fremont/Newark Economic Packaging Cleanroom Supplies 50,000 New Lease Fremont Boulevard Fremont/Newark Owens Trust 30,400 Renewal Milmont Drive Fremont/Newark Hantle USA 30,028 New Lease

5 On Point Northern California Industrial Report Q Northern California industrial market: Central Valley Economy Economic conditions may have finally reached bottom, but the trough is deep and backfilling remains a challenge. The Central Valley is still losing jobs, albeit at a minimal rate, and unemployment unexpectedly rose to 16.9 percent at year-end even though the labor force shrank. The widened U-shaped recession characterized by stagnation and a slow bounce back is still the most likely future economic scenario. The housing market may have stabilized and sales increased, but that will not add much economic activity or boost construction activity. State and local government budget cutbacks continue to be a big challenge and obstacle for recovery Stockton Lodi Tracy/Manteca Turlock/SW Stanislaus Modesto Market conditions Approximately 675,000 square feet of warehouse/distribution space was added to the market, pushing the rate to roughly 24.1 percent. Despite this rise, it was the slowest rate of increase since the start of the recession, suggesting that the market is showing signs of stabilization. As a result, confidence among tenants strengthened leading to increased leasing activity and completed deals. Weber Distribution signed a new lease for 53,000 square foot warehouse in Stockton, and Polycom, Inc. renewed its 55,200 square foot lease in Tracy. Overall however, competition remains high to attract and retain tenants given levels and the willingness of landlords to offer attractive deals. Additionally, regional investors such as the Lowenberg Corporation continue to take advantage of the attractive pricing for large industrial properties. Lowenberg purchased a 262,400 square foot multi tenant industrial property from Panattoni Development Co. in Lathrop for $12,300,000 or $46.88 p.s.f. Key market indicators (leased industrial) Supply 69,052,648 s.f. 24.1% availability 26.0% YTD net absorption -3,499,595 s.f. Asking rents $ month forecast Something to watch Facilities located near the Central Valley s major ports and distribution networks will remain the preferred locations of tenants. Capitalizing on the market downturn to reposition themselves for increased operating efficiency and future growth will ultimately benefit high-cube buildings with ample truck courts and trailer drop areas. Outlook The Central Valley will continue to struggle with high rates in Stockton, in particular, will remain the weakest submarket as its economy has been battered by the bursting of the housing bubble. As the market recovers and demand increases over the next 12 to 24 months, vacant new development product will be the first to be absorbed. Property clock - current market conditions Landlord leverage Rent growth slowing rising Turlock/SW Stanislaus falling stagnant Lodi Modesto Tracy/Manteca Stockton Tenant leverage

6 6 On Point Northern California Industrial Report Q Northern California industrial market: Central Valley Market snapshot All classes, 30,000 s.f. and higher industrial market including owner occupied space Under construction Overall Leased industrial market availability YTD net absorption Average Prior qtr avg Lodi 2,632, % 2,520, % 19.5% -159,207 $0.26 $0.26 Stockton 29,280, % 23,931, % 31.1% -1,626,133 $0.30 $0.31 Tracy/Manteca 20,559, % 18,337, % 21.8% -981,420 $0.33 $0.34 Modesto 12,981, % 8,730, % 20.9% -732,835 $0.29 $0.46 Turlock/SW Stanislaus 3,598, % 1,826, % 35.9% 0 $0.34 $0.33 Market - 66,419, % 52,825, % 26.0% -3,340,388 $0.31 $0.34 Central Valley - sales highlights Location Market Buyer Seller Price Size (s.f.) Price (p.s.f.) 4025 East Arch Road Stockton GPS International Investments, Inc. US Small Business Administration $650, ,000 $ South Harlan Road Tracy/Manteca Lowenberg Corporation Panattoni Development Co. $12,300, ,400 $ East 4th Street Tracy/Manteca Burkett 2002 Trust Townsend Family Trust $1,700, ,836 $ East Larch Road Tracy/Manteca Alerica Corp. Targeted Development, Inc. $2,500, ,800 $ Glass Lane Modesto Standiford Partners, LLC Andrade Junior 2007 Trust $958, ,050 $ Tully Road Modesto Randall & Susan Steele Dustin & Andrea Kate Saso $475, ,840 $60.59 Central Valley - lease highlights Location Market Tenant Size (s.f.) Type 7199 Longe Street Stockton Weber Distribution 51,300 New Lease South Schulte Road Tracy/Manteca Polycom, Inc. 55,200 Renewal

7 On Point Northern California Industrial Report Q Northern California contacts Jason Ovadia Senior Vice President License #: jason.ovadia@am.jll.com Kevin Ahaesy Senior Vice President License #: kevin.ahaesy@am.jll.com Heidi Ocampo Client Coordinator License # heidi.ocampo@am.jll.com About Jones Lang LaSalle Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2008 global revenue of $2.7 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.4 billion square feet worldwide. LaSalle Investment Management, the company s investment management business, is one of the world s largest and most diverse in real estate with more than $46 billion of assets under management. For further information, please visit our Web site, Jones Lang LaSalle Brokerage, Inc. License #: Jones Lang LaSalle Americas, Inc. License #: Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.