RE:SOURCE CHARLOTTE OFFICE 2Q 2012

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1 L I N C O L N H A R R I S R E : S O U R C E C H A R L O T T E The real strength exhibited in second quarter was in the explosion of market leasing activity totaling more than 1.2 million square feet nearly twice the leases signed in the first quarter of the year. Additionally, all of the large leases over 13,000 square feet were executed by companies that had already established a presence in Charlotte. E C O N O M Y With another national slowdown taking hold for the third consecutive summer, Charlotte is not immune to overall domestic and international demand-side challenges. However, Charlotte s saving grace is the area s appeal to business decision makers and employees alike who are seeking lower cost of living locales that attract well-educated professionals. Accordingly, the Charlotte MSA had an unemployment rate of 9.5 percent in May 2012 down from 10.4 percent at the beginning of 2012 and saw employment expansion growing faster than the labor force was increasing. While 7,700 new positions were created in the metro from May 2011 to May 2012, with 5,500 of those jobs in office-using sectors, that also represents a significant deceleration from the 18,400 jobs added from May 2010 to May On the upside, within the past year, only two employment sectors in Charlotte overall have failed to bolster their ranks as government employment slipped 700 people and leisure and hospitality services shrank by 3,400 positions. Despite the uncertainty surrounding the U.S. election and the troubles in Europe, the region has continued to attract and retain an increasingly diverse repetoire of businesses and to lockdown growth plans and accompanying hiring plans from companies already in the Charlotte region. Most notable is finalization of Duke Energy s merger with Raleighbased Progress Energy to form the nation s largest utility company with both operations and leadership based out of Charlotte; the employment and real estate impact of this marriage remains to be seen over the next several years, but will result in a net positive on both fronts to Charlotte and to Uptown in particular. Several other local players are also expanding their Charlotte presences post-merger, including United Technologies Corporation selecting Charlotte for its aerospace systems headquarter after acquiring Goodrich, while PNC Bank, fresh off its union with RBC Bank, is establishing its regional headquarters in existing and expanded space at Piedmont Town Center. Organic growth is similarly underway at Time Warner Cable, Quicken Loans and Quicken Loans Mortgage Servicing, and the Lash Group, while MSC Industrial committed to opening a coheadquarters location in a new 180,000 square foot office in Davidson that will eventually house 400 employees. Overview O F F I C E M A R K E T Though Charlotte s downtrend seems to be tracking the recent pullback in national hiring and economic growth, the anemic 44,735 square feet of is more a function of slow leasing activity at the end of A fifth straight quarter of, however, is still a strong indicator of a slowly improving economy and office market as vacancy tacked downward by 10 basis points quarter-over-quarter to 18.8 percent; for contrast, the area s office vacancy rate was 21.1 and 20.4 percent in second quarter 2010 and 2011, respectively. Overall move-in activity belies this weakly positive number due mainly to the last sizeable move of Bank of America employees from leased to owned space 2,500,000 2,000,000 1,500,000 1,000, , ,000 2Q MONTH FORECAST Market Supply 43,179,767 43,179,767 Under Construction 791, ,000 Under Construct. Preleased % 30.5% 30.5% Direct Vacancy 19.8% 18.5% Total Vacancy 20.4% 18.8% Total Net Absorption 91,726 44,735 YTD Net Absorption -4, ,848 Direct Asking Rent $19.98 $20.54 Class A Direct Asking Rent $22.35 $22.55 Class B Direct Asking Rent $17.05 $18.11 STATISTICS AND TRENDS Net absorption New development Overall vacancy 24.00% 20.00% 16.00% 12.00% 8.00% 4.00% 0.00% HISTORICAL VACANCY AND NET ABSORPTION The first half of the year has seen a good bit of positive momentum as confidence in the sustainability of the overall market rises. Class B seems to be slowly catching up while the Class A flattens out at the top. - Marshall Williamson, Vice President page 1

2 for awhile as the bank vacated 103,122 square feet at 525 North Tryon. Accordingly, the only segment of the market to experience a rise in vacancy during second quarter was urban Class A buildings, which saw vacancy perk up half a percentage point to 15.0 percent. All of the other large market segments, including Class B product overall and in both urban and suburban environments, saw positive occupancy cause vacancy rates to decline modestly. In fact, the impact of Bank of America leaving a large piece of Class A space, the Class B market had of 26,749 square feet during the quarter higher than the 17,986 square feet absorbed by Class A buildings overall. There were only a handful of substantial occupancy moves, though they were relatively well spread out amongst submarkets, with Time Warner Cable expanding into a 25,863 square foot floor at Ballantyne s Hixon Building, McGuireWoods moving into an additional 23,342 square foot floor at Fifth Third Center, Quicken Loans Mortgage Servicing taking 19,511 square feet at Two SouthPark Center, and Infinisource occupying 13,156 square feet in the Harris Building. Additionally, a couple of sublease spaces were filled this quarter, as RoundPoint Mortgage moved into 23,011 square feet of short-term space at Twelve Parkway Plaza and Empowered Benefits relocated from untracked Class C space in Uptown to 12,892 square feet at 525 North Tryon. The real strength exhibited in second quarter was in the explosion of market leasing activity totaling more than 1.2 million square feet nearly twice the leases signed in the first quarter of the year as Bank of America signed substantial leases at previously-owned Hearst Tower and Fifth Third Center of 322,311 and 297,372 square feet, respectively, on the days those building sales closed. Of the remaining large leases over 13,000 square feet, all were executed by companies that had already established a presence in Charlotte; this surge in organic growth speaks well for the success that companies achieve in Charlotte and bodes well for the area s $26.00 $24.00 $22.00 $20.00 $18.00 $16.00 $14.00 $12.00 $ Class A Class B Overall market HISTORICAL DIRECT RENTAL RATES in the second half of Even more encouragingly, nine of the top 15 largest leases signed in second quarter were expansionary in nature some pure expansions such as Lash Group, Time Warner Cable, Dixon Hughes Goodman, and RoundPoint Mortgage while others were renewals that also picked up increased space such as PNC Bank at One Piedmont Town Center and McKesson at Four Resource Square. As Charlotte s office market has worked to return to health over the past 18 months, typical deal terms have begun to shift as well as some landlords increase occupancy and are beginning to see more cash flow. Accordingly, the average amount of tenant improvement (TI) dollars per square foot factoring in those leases that do not offer TI allowances has jumped from $18.29 in 2011 leases to $31.05 in leases signed during the first half of While suburban landlords are now offering less than in 2011, from $18.55 to $12.49 per square foot, urban landlords in Uptown and Midtown have dramatically upped their TI offerings from $17.75 last year to $35.98 per square foot in C O M P L E T E D L E A S E T R A N S A C T I O N S TENANT BUILDING/ADDRESS SUBMARKET SF MARKET EFFECT Bank of America Hearst Tower Uptown 322,311 Leased back space at building close Bank of America Fifth Third Center Uptown 297,372 Leased back space at building close Wells Fargo Innovation Park University 117,026 Relocation, contraction Lash Group Corporate Center I Airport 93,741 Expansion McKesson Four Resource Square University 75,057 Renewal, expansion GMAC Colonial Plaza SouthPark 43,061 Renewal, same PNC One Piedmont Town Centre SouthPark 30,983 Renewal, expansion Time Warner Cable Hixon Building Highway 51/Ballantyne 25,863 Expansion Roundpoint Mortgage Twelve Parkway Plaza Airport 23,011 Sublease: expansion NASCAR NASCAR Plaza Uptown 22,571 Relocation, expansion Quicken Loans Mortgage Servicing Two SouthPark Center SouthPark 19,511 New office in Charlotte UBS Southpark Towers I SouthPark 18,932 Relocation, expansion Addison Whitney Everett Building Highway 51/Ballantyne 16,600 Relocation, expansion Accenture Charlotte Plaza Uptown 13,953 Relocation, contraction Dixon Hughes Goodman Hearst Tower Uptown 13,000 New office in Charlotte page 2

3 Supply There were no new competitively owned office buildings that broke ground during the second quarter, leaving the three office buildings already underway in Ballantyne as the area s only under construction product. The Gragg and Woodward buildings, totaling 275,000 square feet each, are still on track for completion in late 2012, while SPX s 241,000 square foot headquarter building is slated to be finished by spring Rumblings abound on some potential build-to-suit users needing large blocks of office space constructed, with Shaw Group foremost among them, but nothing has been set into motion yet. One project coming online at some future point is MSC Industrial s 180,000 square foot office in Davidson s Harbour Place to accommodate its co-headquarters location. Rental rates Direct asking rental rates fell modestly during second quarter not only as high-priced properties near the top of the market were leased and removed from available supply, but also as the uneven geography of recovery has forced some landlords with less desirable properties to cut rates. This slight dip in asking rates has permeated nearly every submarket this quarter, with the exception of the University area that saw the average rate jump 13.4 percent quarter-over-quarter as BECO South repriced Innovation Park space up from $17.00 to $21.50 per square foot after landing several large tenants. Signed rental rates in the strongest submarkets Uptown (except for Super-A buildings, SouthPark (except for top-tier product), Highway 51/Ballantyne, and Midtown have begun to converge in the $21.00 to $23.00 per square foot range, highlighting the similarities in building quality and demand amongst these prime locales. Also interesting to note is the increased flexibility that landlords are granting to achieve target net effective rates, including no free rent but much lower agreed upon rental rates. S U B M A R K E T A N A LY S I S With five of the nine submarkets experiencing of less than 20,000 square feet in either direction during second quarter, there were only a few segments with salient changes. SouthPark and Midtown continue to trade the designation as the submarket with the lowest vacancy rate back and forth; this quarter, SouthPark claims the title as the biggest Hwy 51/Ballantyne Uptown Southpark Midtown University North Airport Park Road East & Southeast $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 Direct asking rent Sublease asking rent SUBMARKET-BY-SUBMARKET ASKING RENTAL RATES winner in terms of vacancy now down 1.2 percentage points to 11.7 percent and of, with companies filling any additional 54,549 square feet. As SouthPark s Class A space has leased up quickly in the past year, all of the submarket s gains in second quarter came from moves and expansions into Class B space, especially Quicken Loans Mortgage Servicing s commitment to 19,511 square feet at Two SouthPark Center and Turner Construction opening in 20,022 square feet at the Roxborough Building from Class A Carnegie VII; those tenants sought out the largest blocks of available space in the area, which also happened to be some of the least expensive, leading the submarket s Class B vacancy down by an astonishing 350 basis points in one quarter to 15.5 percent. Highway 51/Ballantyne, the other suburban hotspot, enjoyed the opposite trend from SouthPark, with all positive activity occurring in Class A buildings. The submarket had 43,400 square feet of, which forced vacancy down by 90 basis points to 17.9 percent, as Time Warner Cable signed and occupied a full floor at the Hixon Building and market newcomer Infinsource occupied 13,156 square feet in the Harris Building. Leasing activity was surprisingly well-distributed in second quarter as sluggish areas such as the University submarket snagged the renewal and expansion of pharmaceutical wholesaler McKesson in Four Resource Square, where the Southpark Hwy 51/Ballantyne 35.0% 30.0% North 25.0% Airport 20.0% 0% University 15.0% Midtown Park Road East & Southeast 10.0% 5.0% 0.0% Uptown -80,000-60,000-40,000-20, ,000 40,000 60,000 Net absorption SUBMARKET-BY-SUBMARKET NET ABSORPTION 2Q 2011 SUBMARKET-BY-SUBMARKET VACANCY TRENDS page 3

4 firm expanded by 27.9 percent to a total office size of 75,057 square feet. Wells Fargo, which maintains a substantial presence in the University area, also announced its 117,026 square foot lease in the 8505 building at Innovation Park; though they will be moving from the 148,169 square foot building at 8740 Research Drive in mid-2013, it is anticipated that space optimization in the new building will enable the bank to locate more employees at the location than before. With many of Innovation Park s deals slated for movein during the next year, the area s vacancy rate has remained unmoved for the past 4 quarters at an unhealthy 32.9 percent; by the summer of 2013, just accounting for already signed leases, University s vacancy rate should settle around 27.0 percent. Additionally, even the Park Road area had a sizeable lease transaction, retaining one of its largest occupiers as Child Care Resources moved from 4601 Park Road to the Park Abbey building across the street and expanded by 23.0 percent to 17,126 square feet. O F F I C E M A R K E T S T A T I S T I C S URBAN inventory overall vacant SF overall vacancy % total net absorption (% of inventory) Completions Under construction 2Q12 overall direct asking rent (PSF) UPTOWN 17,434,154 2,587, % -72,982 88, % 0 0 $23.85 MIDTOWN 1,333, , % , % 0 0 $20.65 URBAN TOTALS 18,767,402 2,754, % -73, , % 0 0 $23.62 SUBURBAN inventory overall vacant SF overall vacancy % total net absorption (% of inventory) Completions Under construction 2Q12 overall direct asking rent (PSF) AIRPORT 8,188,775 2,087, % 7, , % 0 0 $16.70 EAST & SOUTHEAST 1,640, , % -12,383-21, % 0 0 $15.13 HWY 51/BALLANTYNE 4,785, , % 43, , % 0 791,000 $24.02 NORTH 1,566, , % 21,681 58, % 0 0 $18.89 PARK ROAD 542, , % -1,735 25, % 0 0 $15.90 SOUTHPARK 4,034, , % 54, , % 0 0 $22.03 UNIVERSITY 3,654,595 1,200, % 5,657 5, % 0 0 $19.36 SUBURBAN TOTALS 24,412,365 5,391, % 118, , % 0 791,000 $19.55 CHARLOTTE TOTALS 43,179,767 8,145, % 44, , % 0 791,000 $20.54 R E C E N T I N V E S T M E N T S A L E S BUILDING ADDRESS RBA SALE PRICE PRICE PSF BUYER SALE DATE Fifth Third Center 201 N Tryon Street 666,114 $163,000,000 $245 Parmenter Realty Partners June 2012 Hearst Tower 214 N Tryon Street 970,002 $250,000,000 $257 Parkway Properties June 2012 Morehead Place 521 E Morehead Street 107,824 $17,400,000 $161 Sun Life Financial June 2012 Morehead Square 1001 Morehead Square Dr. 130,000 $24,000,000 $185 Ferncroft JV Springland Assoc. May 2012 Coliseum Centre I-VI Yorkmont Rd & W Tyvola Rd 974,329 $103,300,000 $106 CarVal Investors JV Vision Equities April 2012 After almost five years of near silence on non-distressed investment sales, the market for Charlotte office product roared back to life during second quarter. Institutional investors, facing an increasingly crowded field of competitors for top-tier gateway market product that has pushed down cap rates and ramped up valuations, have begun to shift focus to slightly more risky second-tier markets to accelerate yields; for welllocated urban product in Charlotte, cap rates were in the mid-to-low 7.0 percent range, while suburban product with higher vacancy rates attracted a buyer at about an eight cap. Top-of-market properties in Uptown traded during second quarter as Bank of America divested itself of some of its headquarters real estate holdings, with Hearst Tower and Fifth Third Center selling for roughly $250 per square foot; for perspective, in mid- 2007, Charlotte Plaza and Carillon sold for $278 and $297 per square foot, respectively. In Midtown, Morehead Place and Morehead Square also traded this spring for $161 and $185 per square foot, respectively, with the difference in valuation due mostly to the adjacent pad site that Morehead Square offered. Lastly, a joint venture between CarVal Investors and Vision Equities made its first foray in the Charlotte office market, purchasing the six Coliseum Centre buildings, which had approximately 20.0% at time of sale, in a value-add play for just over $106 per square foot. page 4

5 F O R E C A S T During the last six months of 2012, the office space demand momentum that has been building since late 2011 is expected to skyrocket, with the known pipeline for third quarter 2012 alone anticipated to easily sum to 400,000 square feet. Move-ins by Chiquita, Charlotte School of Law, Peak10, Lash Group, and McKesson s expansion piece are all accounted for in this prediction. That growth, coupled with any short-term effects from DNCrelated occupancy, should bring down the overall market s office vacancy rate by 25 basis points and Uptown vacancy by a full percentage point. Lincoln Harris remains firmly committed to the viability of its prediction of 750,000 square feet of metro-wide during S U B M A R K E T M A P ABOUT LINCOLN HARRIS Lincoln Harris, an affiliate of Lincoln Property Company, is a full-service corporate real estate company focused on development, commercial brokerage, corporate real estate services, retail services, land services, project services, property management and asset management. Based in Charlotte, NC, Lincoln Harris has twenty-three service offices across the country. More information about Lincoln Harris can be found at. CONTACT INFORMATION Sarah Godwin Research Manager sgodwin@lincolnharris.com Trey Dempsey Executive Vice President tdempsey@lincolnharris.com Jubal Early Senior Vice President jearly@lincolnharris.com Chris Wasko Senior Vice President cwasko@lincolnharris.com Adam Colvin Senior Vice President acolvin@lincolnharris.com Marshall Williamson Vice President marshall.williamson@lincolnharris.com Campbell Walker Vice President cwalker@lincolnharris.com Ted Haley Vice President thaley@lincolnharris.com Chris Swart Vice President cswart@lincolnharris.com Faith Lampkins Assistant Vice President flampkins@lincolnharris.com Lincoln Harris. All rights reserved. Trevor Bona Leasing Associate trevor.bona@lincolnharris.com All information provided in Lincoln Harris research reports are from sources deemed reliable, but no warranty or representation is made as to its accuracy thereof and same is submitted subject to errors, omissions, or other conditions Piedmont Row Drive, Suite 800 Charlotte NC office