Sustained economic improvement driving occupancy and rent growth

Sustained economic improvement driving occupancy and rent growth United States Office Review Q2 2015

After a markedly slow first quarter, office market fundamentals made a significant rebound at the close of the second quarter, undermining suggestions that both economic and office-market growth were slowing. As activity returns and, in many markets, intensifies, much needed supply will offer new growth opportunities to help carry the cycle into the latter half of the decade.

Organic growth due to stronger macroeconomic fundamentals is chipping away at vacancy and boosting landlord confidence Leasing activity Absorption Vacancy Rents Construction Leasing activity jumped in Q2 2015 to 64.2 million square feet, up 16.9 percent compared to Q1. In line with uptick in total transactional activity, six markets saw more than 3.0 million square feet of leasing in Q2. After a slower Q1, Q2 posted a return to 0.4-percent levels of occupancy growth, or 14.4 million square feet, while YTD absorption currently rests at 0.5 percent (20.6 million square feet) and is on track to exceed the historic average for the sixth consecutive year. Industry hubs (Raleigh-Durham, Austin, Denver) joined primary markets as leads in YTD net absorption, although sharp decreases in Houston s growth push energy markets contribution down to just 5.9 percent. Strong quarterly absorption, even with an increase in completions, pushed total vacancy down 30 basis points to 15.3 percent. CBD vacancy just 40 basis points from historic low, while suburban vacancy is 200 basis points away. Markets continue to move along the property clock as rents rise on aggregate, although Houston is now in falling phase. While not as fast as in Q1, Q2 2015 rental growth was among the highest quarterly figures this cycle at 1.1 percent. CBD and suburban rents both rose in Q2 2015, but the gap widened even more to $16.43 per square foot. Similarly, the premium for Class A space held steady at $5.12 per square foot. Construction volumes have risen by 9.3 percent since year-end 2014 to 86.2 m.s.f. in Q2 2015. Year-to-date, completions already total 62.1 percent of YTD 2014, but this is still well below historical norms. Slightly under half of all U/C space is preleased, but this figure falls sharply looking only at speculative development 2

Leasing activity

Leasing activity jumped in Q2 2015 to 64.2 million square feet, up 16.9 percent compared to Q1 90,000,000 80,000,000 70,000,000 60,000,000 Leasing activity (s.f.) 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 4

Year-to-date, leasing activity is on track to meet 2014 levels; currently 50.4 percent of 2014 total YTD 2015 119,130,711 2014 2013 2012 236,140,690 234,094,033 249,187,644 2011 2010 282,356,988 275,274,581 2009 2008 2007 228,764,145 246,521,385 258,547,529 0 50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000 Leasing activity (s.f.) 5

In line with uptick in total transactional activity, six markets saw more than 3.0 million square feet of leasing in Q2 2015 8,000,000 7,000,000 11.9 MSF Leasing activity (s.f.) 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 6

Only one-tenth of leasing activity was contractionary, while transaction volumes continued to increase in Q2 31.5 m.s.f. total square feet leased in Q2 in transactions 20,000 s.f. or larger 49.1% / 50.9% urban 2 suburban breakdown of Q1 volume 96 average term in months 43.7% / 46.3% / 10.0% of tenants are growing / shrinking / stable 7

Coastal markets dominated leasing activity in Q2 2015, led by New York and DC Urban Suburban Total metro New York 7,105,496 Los Angeles 2,757,812 New York 7,105,496 Washington, DC 3,000,000 Dallas 2,703,254 Washington, DC 5,250,000 Chicago 2,204,269 New Jersey 2,443,873 Chicago 3,626,133 San Francisco 1,451,987 Boston 2,325,645 Boston 3,444,800 Boston Denver Minneapolis 1,119,155 616,412 609,746 Washington, DC Denver Orange County 2,250,000 2,154,403 1,770,000 Los Angeles Dallas 3,333,813 3,032,955 Los Angeles 576,001 Chicago 1,421,864 Denver 2,770,815 Portland 472,275 Phoenix 1,304,748 New Jersey 2,443,873 Phoenix 423,950 Houston 1,246,936 Orange County 1,770,000 0 5,000,000 10,000,000 0 2,000,000 4,000,000 0 5,000,000 10,000,000 8

Large leasing continues to take place throughout the United States and by companies of varying industry clusters Seattle-Bellevue HBO: 112,222 s.f. Denver Comcast: 288,000 s.f. Detroit Ally: 321,027 s.f. San Francisco Stripe: 300,000 s.f. Silicon Valley Palo Alto Networks: 721,953 s.f. Phoenix Infusionsoft: 100,622 s.f. New York Bloomberg: 254,556 s.f. Philadelphia ABB: 115,000 s.f. Charlotte Walmart: 107,609 s.f. Austin Apple: 217,490 s.f. Dallas RealPage: 399,788 s.f. 9

Tech, finance, telecom and other professional services dominated leasing activity during Q2 2015 Leasing activity within the scientific and technical industry cluster Scientific and technical Professional services Finance Consumer-oriented Nonprofit Creative Other 0 5,000,000 10,000,000 15,000,000 20,000,000 dominated by technology companies, led activity in the fourth quarter Technology Banking and finance Telecom Other PBS Healthcare Law firm Architecture and engineering Retail and hospitality Government Manufacturing and distribution Energy and utilities Life sciences Media and entertainment Real estate Advertising and marketing All other industries Accounting and consulting Education Association nonprofit union Aerospace and defense 0 2,000,000 4,000,000 6,000,000 10

Small and mid-sized leases dominated number of transactions, although large leases represented 49.8 percent of volume s.f. leased number of transactions 10,000,000 9,000,000 214 250 8,000,000 200 Leasing activity (s.f.) 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 88 49 58 24 52 24 150 100 50 Number of transactions (s.f.) 0 0 11

Leasing continues to be robust in Class A space, although expansions are occurring across property classes Total leasing activity >20,000 s.f. by building class % of tenants expanding in each building class A 21,596,213 C 67.0% B 7,350,039 B 53.8% Trophy 2,110,618 A 41.4% C 450,929 Trophy 25.7% 0 10,000,000 20,000,000 30,000,000 0.0% 20.0% 40.0% 60.0% 80.0% 12

Expansionary leases account for more than half of all large-block activity, dominated by tech and finance 43.7% of companies grew in Q2 46.3% of companies were stable in Q2 10.0% of companies shrunk in Q2 Technology 32.0% of companies Banking, finance, insurance 12.6% of companies Other professional services 10.9% of companies Telecom 15.6% of companies Banking, finance, insurance 15.0% of companies Technology 10.4% of companies Law firm 35.1% of companies Healthcare 14.7% of companies Architecture, engineering 12.3% of companies 13

On average, slightly under half of quarterly leasing activity is now expansionary; only one-tenth represents contraction 100% 90% Growing Stable Shrinking 8.1% 11.0% 10.0% 10.0% 4-quarter average share 9.8% Shrinking 80% 70% 60% 48.7% 41.0% 34.0% 46.3% 42.5% Stable 50% 40% 30% 20% 43.2% 48.0% 56.0% 43.7% 47.7% Growing 10% 0% Q3 2014 Q4 2014 Q1 2015 Q2 2015 14

Skilled sectors such as real estate, advertising, tech and other PBS posted the highest shares of expansionary leasing activity Real estate Advertising and marketing Technology Other professional services Retail and hospitality Education Media and entertainment Finance and banking Health care Architecture and engineering Associations Energy and utilities Life sciences Government Accounting and consulting Telecom Manufacturing Transportation and aerospace Law 43.2% 41.8% 40.1% 36.0% 33.7% 33.1% 30.8% 27.1% 24.4% 22.4% 19.8% 19.5% 12.4% 77.5% 75.2% 69.8% 62.3% 58.1% 55.0% 40.6% 40.5% 37.8% 58.8% 67.8% 75.3% 74.3% 80.5% 26.6% 48.4% 52.2% 66.3% 66.9% 69.2% 22.5% 0.0% 18.9% 5.9% 25.8% 4.4% 36.7% 0.0% 15.3% 45.0% 0.0% 8.4% 6.0% 19.4% 26.2% 0.0% 0.0% 0.0% 14.1% 7.8% 2.3% 5.9% 0.0% 47.0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Share of leasing activity (%) 15

Absorption

After a slower Q1, Q2 posted a return to 0.4-percent levels of occupancy growth 1.5% Quarterly net absorption (as % of inventory) 1.0% 0.5% 0.0% -0.5% 15-year trailing annual average -1.0% 2008 2009 2010 2011 2012 2013 2014 2015 17

YTD absorption currently rests at 0.5 percent; on track to exceed the historic average for the sixth consecutive year 5.0% 4.0% YTD net absorption (as % of inventory) 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% 15-year trailing annual average -3.0% -4.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 18

Nearly 69.6 percent of occupancy growth in Q2 2015 took place in Class A properties 20,000,000 15,000,000 Class A (CBD) Class B (CBD) Class C (CBD) Class A (suburban) Class B (suburban) Class C (suburban) Quarterly net absorption (s.f.) 10,000,000 5,000,000 0-5,000,000-10,000,000 2010 2011 2012 2013 2014 2015 19

Quarterly absorption in Class B space is now occurring 2.7x faster than during earlier in the recovery 25,000,000 1,198,852 s.f. per quarter 3,211,318 s.f. per quarter 21,579,344 Class B net absorption (s.f.) 20,000,000 15,000,000 10,000,000 12,845,274 5,000,000 0 2010-Q2 2014 Past four quarters 20

Industry hubs (Raleigh-Durham, Austin, Denver) join primary markets as leads in YTD net absorption Dallas Silicon Valley Atlanta Boston Raleigh-Durham Chicago Los Angeles Austin Denver Philadelphia Detroit Tampa Bay San Francisco Seattle-Bellevue All other markets Market YTD net absorption (s.f.) Share Dallas 2,880,550 14.0% Silicon Valley 1,420,029 6.9% Atlanta 1,260,109 6.1% Boston 1,205,200 5.8% Raleigh-Durham 1,182,448 5.7% Chicago 1,085,046 5.3% Los Angeles 887,879 4.3% Austin 885,221 4.3% Denver 829,801 4.0% Philadelphia 815,226 4.0% Detroit 795,213 3.9% Tampa 728,710 3.5% San Francisco 704,926 3.4% Seattle-Bellevue 611,990 3.0% All other markets 5,320,899 25.8% United States 20,613,247 100.0% 21

Growth in Atlanta, Boston, DC and New York, among other markets, pushes East Coast into leading position 100% East Coast Central West Coast 80% Share of quarterly net absorption 60% 40% 20% 0% -20% -40% -60% -80% -100% 2010 2011 2012 2013 2014 2015 22

Sharp decreases in Houston occupancy growth push energy markets contribution down to just 5.9 percent YTD in 2015 6.4% 23.9% 5.1% 7.4% 0.0% 26.4% 11.1% 29.7% 2010 2011 33.5% 29.1% 2012 37.5% 2013 21.6% 70.0% 18.4% 18.6% 19.0% 26.0% 22.3% NYC and DC (*excludes Midtown South) Tech markets (*includes Midtown South) Energy markets Sun belt All other markets 27.8% 20.1% 2014 13.7% 15.3% 23.1% 40.5% 0.0% 28.5% YTD 2015 5.9% 25.1% 23

Energy losses severe, but not yet negative; tech at or surpassing national average, although supply constraints intensifying 3.0% Energy Tech Sun belt 2.7% YTD net absorption (s.f.) 2.5% 2.0% 1.5% 1.0% 0.5% 0.8% 0.4% 0.7% 0.9% 0.7% 0.8% 2.1% 0.9% 0.6% 0.6% U.S. average 0.1% 0.0% 24

Occupancy growth on the East Coast coming back, but must make up for Q1 losses in New York and DC 25,000,000 Atlanta South Florida Rest of the East Coast 20,000,000 Net absorption (s.f.) 15,000,000 10,000,000 5,000,000 0-5,000,000-10,000,000 2010 2011 2012 2013 2014 YTD 2015 25

Quality space continues to lead, having contributed to 82.3 percent of net absorption since Q1 2010 Trophy and Class A net absorption 157.6 m.s.f. 2010-YTD 2015 Class B and C net absorption 33.9 m.s.f. 2010-YTD 2015 26

Diversified markets have posted 5.1 million square feet of occupancy growth in 2015 so far and poised for continued gains 15,000,000 Atlanta Chicago Los Angeles Miami Philadelphia Phoenix 10,000,000 Net absorption (s.f.) 5,000,000 0-5,000,000-10,000,000 2010 2011 2012 2013 2014 YTD 2015 27

Class A s share of annual occupancy growth has steadily declined, but up slightly in 2015 year-to-date 160.0% 140.0% 133.4% Class A share of annual absorption 120.0% 100.0% 80.0% 60.0% 90.5% 85.3% 71.1% 70.5% 82.3% 40.0% 20.0% 0.0% 2010 2011 2012 2013 2014 2015 28

CBD Class A s share of absorption has fallen even more, but largely due to growth in suburbs and commodity space 80.0% 70.0% 70.1% Class A share of annual absorption 60.0% 50.0% 40.0% 30.0% 39.9% 23.7% 30.8% 30.9% 20.0% 10.0% 0.0% 4.5% 2010 2011 2012 2013 2014 2015 29

Demand for creative space pushing occupancy gains above national average % of inventory 10.0% 9.0% 8.6% YTD Class B net absorption (% of inventory) 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 4.9% 3.1% 3.1% 2.4% 1.0% 0.0% Mid-Market (San Francisco) Mid-Cambridge (Boston) Austin CBD Pioneer Square (Seattle) Santa Monica (Los Angeles) U.S. average 30

Still, Class A continues to outperform Class B according to most indicators 82.3% of absorbed space in 2015 has been Class A 45.8% premium charged for Class A space versus Class B $11.43 per square foot difference between Class A and B space -270bp difference between Class A and Class B total vacancy 31

Vacancy

Strong quarterly absorption, even with an increase in completions, pushed total vacancy down 30bp to 15.3 percent 20.0% 19.0% 18.0% Total vacancy (%) 17.0% 16.0% 15.0% 14.0% 13.0% 12.0% 2009 2010 2011 2012 2013 2014 2015 33

Total vacancy is now roughly halfway to its pre-recession low; high preleasing levels should help keep vacancy down 20.0% 18.0% 16.0% Total vacancy (%) 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2015 34

Vacancy is falling fastest in quality space, then core locations; uneven in Class C and suburban B properties 22.0% 20.0% Class A (CBD) Class B (CBD) Class C (CBD) Class A (suburban) Class B (suburban) Class C (suburban) Total vacancy (%) 18.0% 16.0% 14.0% 12.0% 10.0% 2010 2011 2012 2013 2014 2015 35

After a pause in Q1, increasing office-sector hiring once again coincided with falling vacancy 31,000 Office-using employment (thousands) Total vacancy (%) 19.0% Office-using employment (thousands) 30,500 30,000 29,500 29,000 28,500 28,000 27,500 27,000 18.0% 17.0% 16.0% 15.0% 14.0% Total vacancy (%) 26,500 26,000 13.0% 25,500 2011 2012 2013 2014 2015 12.0% 36

CBD vacancy just 40 basis points from historic low, while suburban vacancy is 200 basis points away 23.0% 21.0% 19.0% 17.0% Total vacancy (%) 15.0% 13.0% 11.0% 9.0% 7.0% 5.0% 37

Despite an increase in sublease space in peaking markets such as Houston, total sublease space is falling sharply across the U.S. 100,000,000 90,000,000 80,000,000 Sublease space (s.f.) 70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 2009 2010 2011 2012 2013 2014 2015 38

Rents

Markets continue to move along the property clock as rents rise on aggregate; Houston now in falling phase Houston San Francisco Peninsula, Silicon Valley Austin, Dallas, San Francisco Peaking phase Falling phase Minneapolis Seattle-Bellevue Los Angeles, Pittsburgh, Portland Boston, Tampa New York Atlanta, Denver, Jacksonville, Miami, Orange County, Phoenix, United States Fort Lauderdale, Orlando, Kansas City, Richmond, Salt Lake City Chicago, Indianapolis, Raleigh-Durham Charlotte, Cincinnati, Fairfield County, San Diego Hampton Roads, St. Louis Cleveland, Detroit, Long Island, Milwaukee, Philadelphia Baltimore, San Antonio West Palm Beach, Westchester County Columbus, Sacramento Rising phase Bottoming phase New Jersey, Washington, DC

CBDs display slightly less variance, continue to be ahead of suburbs as supply constraints are evident Houston Austin, Midtown South (New York), San Francisco Minneapolis, San Jose, Tampa Portland Boston, Dallas, Los Angeles, Pittsburgh, Seattle Fort Lauderdale, Miami Atlanta, Denver Orlando, United States Midtown (New York), Raleigh-Durham Chicago, Downtown (New York), Philadelphia, Jacksonville, Salt Lake City Charlotte, Greenwich, Indianapolis Cincinnati, Cleveland, Stamford Milwaukee, Phoenix, West Palm Beach Detroit; Sacramento; San Diego; Washington, DC; White Plains Columbus, San Antonio Peaking phase Rising phase Falling phase Bottoming phase Kansas City Baltimore, Richmond, St. Louis

Tech and energy suburbs are at peak, while remainder are catching up to urban cores Silicon Valley Dallas San Francisco Peninsula Houston Cambridge, San Francisco (non-cbd) Austin Richmond Peaking phase Falling phase Bellevue CBD Southern New Jersey Kansas City, Los Angeles Pittsburgh Nassau County, Portland Boston, Jacksonville, Minneapolis, Orange County, Phoenix, Salt Lake City, Tampa Rising phase Bottoming phase Suffolk County Seattle-Bellevue (non-cbd), St. Louis Atlanta, Denver, Indianapolis, San Diego, Westchester County, United States Baltimore, Chicago, Cincinnati Charlotte, Detroit, Fairfield County, Fort Lauderdale, Hampton Roads, Miami, Milwaukee, Orlando, Philadelphia, Raleigh-Durham Cleveland, Columbus, San Antonio West Palm Beach Washington, DC Northern New Jersey Central New Jersey, Lehigh Valley, Northern Delaware, Sacramento

Although not as fast as in Q1, Q2 2015 rental growth was among the highest quarterly figures this cycle at 1.1 percent 6.0% 4.0% Quarterly rent growth (%) 2.0% 0.0% -2.0% -4.0% -6.0% 2008 2009 2010 2011 2012 2013 2014 2015 43

Up 5.3 percent year-on-year CBD Class A rents continue to grow the fastest; flat for Class B $50.00 $45.00 Class A (CBD) Class B (CBD) Class C (CBD) Class A (suburban) Class B (suburban) Class C (suburban) Average asking rents ($ p.s.f.) $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 2010 2011 2012 2013 2014 2015 44

Since Q1 2010, CBD Class A rents have grown by more than one-fifth; Suburban Class B barely increased in nominal terms Growth in asking rents since Q1 2010 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Class A (CBD) Class B (CBD) Class C (CBD) Class A (suburban) Class B (suburban) Class C (suburban) +22.7% CBD Class A +14.5% CBD Class C +12.8% Suburban Class C +8.1% Suburban Class A +7.7% CBD Class B +1.7% Suburban Class B -5.0% -10.0% 2010 2011 2012 2013 2014 2015 45

CBD and suburban rents both rose in Q2 2015, but the gap widened even more to $16.43 p.s.f. (+66.3 percent) $45.00 CBD Suburbs $40.00 Average asking rent ($ p.s.f) $35.00 $30.00 $11.36 $16.43 $25.00 $20.00 2010 2011 2012 2013 2014 2015 46

The Class A premium held firm in Q2 due to limited supply and higher-priced new construction pushing up rents $5.50 $5.13 $5.12 $5.00 $4.86 $4.71 $4.82 $4.76 $4.97 $4.92 $4.90 $4.81 Class A premium ($ p.s.f.) $4.50 $4.00 $3.68 $3.81 $3.97 $3.99 $4.21 $4.26 $4.37 $4.38 $3.50 $3.40 $3.49 $3.49 $3.53 $3.00 2010 2011 2012 2013 2014 2015 47

TI allowances are beginning to elevate due to new construction providing higher concessions, but free months are declining Free months of rent 7.0 6.0 5.0 4.0 3.0 3.5 4.1 5.1 Free months of rent 6.1 6.2 5.7 TI allowance ($ p.s.f.) 5.1 5.3 5.8 5.4 $32.00 $31.00 $30.00 $29.00 $28.00 $27.00 TI allowance ($ p.s.f.) 2.0 $26.00 $25.00 1.0 $24.00 0.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 $23.00 48

Construction

Construction volumes up 8.4 percent since year-end 2014 to 86.2 m.s.f. in Q2 2015 160,000,000 140,000,000 120,000,000 Under construction (s.f.) 100,000,000 80,000,000 60,000,000 40,000,000 20,000,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 50

Houston s share of development activity has fallen due to completions and slowing demand; rising elsewhere Houston New York Dallas Seattle-Bellevue Washington, DC Silicon Valley Boston Phoenix San Francisco Denver Chicago Philadelphia Austin Los Angeles All other markets Market Under construction (s.f.) Share Houston 11,114,260 12.9% New York 9,487,363 11.0% Dallas 8,508,652 9.9% Seattle-Bellevue 7,030,599 8.1% Washington, DC 5,227,655 6.1% Silicon Valley 5,043,620 5.8% Boston 4,522,701 5.2% Phoenix 3,411,901 4.0% San Francisco 3,134,205 3.6% Denver 3,120,372 3.6% Chicago 3,055,164 3.5% Philadelphia 2,967,329 3.4% Austin 2,913,140 3.4% Los Angeles 1,951,171 2.3% All other markets 14,779,400 17.1% United States 86,267,532 100.0% 51

YTD 2015 completions already total 62.1 percent of YTD 2014; still well below historical norms 140,000,000 120,000,000 100,000,000 Completions (s.f.) 80,000,000 60,000,000 40,000,000 20,000,000 Average completions: 46.0 m.s.f. 15.6 m.s.f. 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 52

Roughly half of all development will deliver in 2016; remainder will mostly deliver throughout the rest of 2015 and 2017 40,000,000 Speculative BTS 35,000,000 30,000,000 Completions (s.f.) 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 2015 2016 2017 2018 2019 53

Due to high levels of preleasing, only 43.4 m.s.f. of construction will be available upon delivery in 2015 and 2016 50,000,000 45,000,000 40,000,000 35,000,000 Available Preleased Completions (s.f.) 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 2015 2016 2017 2018 2019 54

Construction starts slowed somewhat in Q2, but are 6.3 percent higher than this time last year 14,000,000 13,060,032 12,720,560 12,810,553 12,000,000 11,407,786 11,818,372 10,000,000 9,168,187 9,855,374 9,748,464 Starts (s.f.) 8,000,000 6,000,000 7,322,061 4,781,395 4,000,000 2,000,000 0 2013 2014 2015 55

The office component of Brookfield s Manhattan West project made New York the leader in starts in Q2 New York Dallas Charlotte Denver San Francisco Peninsula Chicago Cincinnati Seattle Washington, DC Miami San Diego Portland New Jersey Fort Lauderdale Phoenix Silicon Valley Market Starts (s.f.) Share New York 2,300,000 23.6% Dallas 1,240,824 12.7% Charlotte 978,309 10.0% Denver 904,767 9.3% San Francisco Peninsula 775,614 8.0% Chicago 763,000 7.8% Cincinnati 485,000 5.0% Seattle 473,937 4.9% Washington, DC 439,394 4.5% Miami 315,000 3.2% San Diego 297,441 3.1% Portland 244,444 2.5% New Jersey 185,000 1.9% Fort Lauderdale 143,535 1.5% Phoenix 125,000 1.3% Silicon Valley 77,199 0.8% United States 9,748,464 100.0% 56

Trammell Crow, Hines, KDC and Silverstein are building 15.1 percent of development underway Trammell Crow Hines KDC Silverstein Brookfield Boston Properties Related Liberty Schnitzer West Lincoln O'Donnell Crescent Touchstone Tishman Speyer All other markets Market Starts (s.f.) Share Trammell Crow 3,631,840 4.2% Hines 3,539,334 4.1% KDC 3,015,000 3.5% Silverstein 2,861,402 3.3% Brookfield 2,554,500 3.0% Boston Properties 2,220,081 2.6% Related 1,700,000 2.0% Liberty 1,462,000 1.7% Schnitzer West 1,391,000 1.6% Lincoln 1,334,115 1.5% O'Donnell 1,229,064 1.4% Crescent 1,130,000 1.3% Touchstone 1,098,044 1.3% Tishman Speyer 1,025,248 1.2% All other markets 58,828,904 67.3% United States 86,267,532 100.0% 57

Although slightly under half of all U/C space is preleased, this figure falls sharply looking only at speculative development 47.8% All properties 29.8% Spec only 58

BTS-heavy markets such as Phoenix, Philadelphia and Dallas are posting the highest preleasing rates nationally Phoenix 74.5% Philadelphia Chicago Dallas 66.6% 65.4% 69.3% San Francisco 55.6% Washington, DC Boston Houston Silicon Valley 52.5% 50.6% 48.1% 46.6% Seattle-Bellevue 39.6% Austin 35.2% New York 27.5% Denver Los Angeles 19.6% 22.9% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% Preleasing rate (%) 59

As confidence builds, speculative developments without any preleasing are rising 609 Main at Texas (Hines) Houston 1,057,668 s.f. 390 Madison Avenue (L&L) New York 858,710 s.f. One SoHo Square (Rockpoint) New York 768,000 s.f. 6 Houston Center (Crescent) Houston 600,000 s.f. Energy Center V (Trammell Crow) Houston 505,000 s.f. Three Alliance (Tishman Speyer) Atlanta 500,000 s.f. 1775 Tysons Boulevard (Lerner) Northern Virginia 476,913 s.f. 929 Office Tower (Trammell Crow) Bellevue 462,000 s.f. 60

With rents approaching $52 per square foot for Trophy space, new construction commands a very large premium $60.00 $50.00 $51.66 $45.15 Direct average asking rent ($ p.s.f.) $40.00 $30.00 $20.00 $36.38 $24.95 $23.52 $10.00 $0.00 Trophy U/C Class A U/C Class A Class B Class C 61

Speaking to demand and the need for new, quality space, multiple buildings in the Bay Area and DC are asking more than $80 p.s.f. 135 Hamilton Avenue (Silicon Valley) $159.00 Salesforce Tower (San Francisco) $110.00 181 Fremont Street (San Francisco) 1450 Page Mill Road (Silicon Valley) 1000 F Street NW (Washington, DC) Pickwick Plaza (Fairfield County) 350 Bush Street (San Francisco) 345 Brannan Street (San Francisco) 333 Brannan Street (San Francisco) 600 Massachusetts Avenue NW (Washington, DC) 2001 M Street NW (Washington, DC) 222 2nd Street (San Francisco) 100 Northern Avenue (Boston) $95.00 $90.00 $85.00 $85.00 $85.00 $80.00 $80.00 $80.00 $76.00 $75.50 $75.00 $60 $80 $100 $120 $140 $160 $180 data for many high-profile properties, such as 3 World Trade Center and 10 Hudson Yards in New York, is not available 62

Sales

With $39.2 billion of office transactions in second quarter, nearly 60 percent of full-year 2014 deal flow closed in first half 2015 $250.00 Q1 Q2 Q3 Q4 Office investment sale volumes ($ billions) $200.00 $150.00 $100.00 $50.00 $0.00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 64

Strong deals in Boston, NY and growing pipeline in others driving primary market growth of 55.3 percent first half 2015 Y-o-Y 30 25 26 Number of office investment sales 20 15 10 5 0 19 19 18 17 17 12 11 9 8 8 8 7 7 6 6 6 5 5 5 4 4 2 1 Boston New York San Francisco Seattle-Bellevue Chicago Los Angeles Washington, DC Houston 65

..with four of eight primary markets exceeded $1.0 billion Atlanta second quarter deal flow more than doubled over first quarter $7,000 Top ten market volumes ($ millions) $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $6,137 $2,284 $1,942 $1,388 $1,179 Primary markets Secondary markets $841 $676 $667 $656 $568 $0 66

From broader perspective, primary markets are up 55.3 percent YTD compared to 2014 San Francisco and LA are currently behind first half of 2014 14,000 First Half 2014 First Half 2015 Primary market investment volumes ($ millions) 12,000 10,000 8,000 6,000 4,000 2,000 0 67

As East Coast CBD investment increases, Boston and West Coast investment strategies diversifying further into the Suburbs CBD investment sales (as a % of total volumes) 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 100% 100% 99% 81% 60% 69% 90% 66% 65% Cambridge / 495 Mass Pike New York Chicago Houston Washington, DC Boston Seattle-Bellevue San Francisco Los Angeles 47% 50% 2014 First Half 2015 Lake Union / Belltown 66% Palo Alto / Santa Clara 55% 55% Westside 25% 13% 68

Resurgence in Trophy activity with one-third of comparable fullyear 2014 sales in second quarter Trophy Class A Class B Trophy Class A Class B 23.7% 14.1% 24.9% 19.3% YTD 2014 2015 62.2% 55.8% 69

Primary markets dominating CBD investment activity; non-cbd volumes led by secondary markets Most active CBD markets Most active Non-CBD markets $7,000 Q1 office investment sale volume (millions of $US) $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $6,137 Of CBD volumes in Primary markets $1,926 $1,049 $1,031 $667 $1,054 Of Non-CBD volumes in Secondary markets $841 $417 $331 $253 $0 Atlanta Northern and Central NJ San Diego Phoenix Northern Virginia 70

Secondary market activity continues to rise on a square footage basis, accounting for 56.0 percent of 2015 activity year-to-date Primary markets Secondary markets Primary markets Secondary markets Primary markets Secondary markets 43.3% 43.9% 56.7% 56.0% 52.9% 47.1% 71

And more than 45.0 million square feet of non-cbd deal flow drove secondary market volumes in the second quarter 100% 90% 80% 70% 60% 50% Primary CBD Primary Non-CBD Secondary CBD Secondary Non-CBD 16% 15% 13% 13% 17% 7% 9% 21% 17% 21% 10% 7% 13% 17% 14% 15% 10% 14% 8% 24% 27% 27% 16% 17% 27% 24% 28% 2% 11% 15% 40% 30% 20% 44% 40% 50% 57% 43% 69% 52% 45% 56% 51% 10% 0% 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 72

Moreover, secondary markets grew 19.6 percent in Q2 outpacing Primary market growth $8 $7.4 $7.4 Secondary market volume ($ billions) $7 $6 $5 $4 $3 $4.6 $5.6 $6.3 $5.8 $3.7 $5.8 $6.6 $6.2 $2 $1 $0 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 73

Only Phoenix was top five secondary market to fall short of first quarter volume $1,400 Top 5 secondary market ($ millions) $1,200 $1,000 $800 $600 $1,179 $841 Mesirow Realty purchase of Verizon Center $676 $639 $451 $461 $435 $400 $200 $133 $227 $0 $28 Atlanta Northern and Central NJ Philadelphia San Diego Phoenix 74

Secondary market class A, B and Trophy volumes are at 62 percent of 2014 volumes year-to-date Secondary market building class volumes ($ millions) $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 Class A office $150 M from peak levels $0 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q1 2015 Q2 75

Foreign investment up 57.1 percent year-to-date, China has surpassed high water mark in 2007 Percentage of foreign investment by country Canada 21% United Kingdom 5% South Korea 14% All else 5% Norway 33% South Korea, 5% Norway, 6% Germany, 10% All else, 15% China, 35% Germany 22% Canada, 27% 2014 2015 YTD 76

Foreign appetite for quality assets in New York remains high and growing San Francisco, 3% Percentage of investment into markets by foreign countries Houston, 5% Seattle- Bellevue, 5% Northern Virginia, 6% All else, 16% Washington, DC, 21% New York, 47% Washington, DC, 14% Seattle- Bellevue, 8% All else, 5% New York, 70% 2014 2015 YTD 77

Outlook

2015 outlook strongest in nearly a decade 1. 2. 3. 4. Nearly half of all tenants leasing space over the past four quarters are growing, dominated by scientific and technical industries (most predominantly tech and telecom). This should accelerate over the next 12-18 months as economic stability encourages business growth. Occupancy gains were more diversely spread across markets with DC and New York making significant comebacks from the first quarter while Los Angeles, Atlanta and Dallas continued to heat up. This geographic and industry diversity will continue to boost absorption in coming quarters with the notable exception of Houston, where fallout from the oil and energy will further slow growth and potentially lead to occupancy losses later in the year. As expansionary leases begin to commence ahead of new supply, we expect to see vacancy fall below 15 percent by year-end. Over the next two years, however, that rate will creep back upward as markets steady themselves for the largest pipeline of new supply in nearly a decade currently at 86 million square feet. If market momentum continues, as we expect it will, rents could see additional increases that reach a cumulative 5-7 percent annual growth rate by year-end. 79

By all accounts, economic and corporate confidence are stable and growing. This will only further translate into office market expansion and value appreciation as supply and demand become unbalanced in landlords favor over the next two to four quarters. Occupiers will be hard-pressed in negotiations in the near-term, but rent growth and leverage should begin to decelerate toward the end of 2016 as the majority of the development pipeline will be complete.

Julia Georgules Director Office Research +1 415 354 6908 Julia.Georgules@am.jll.com Sean Coghlan Director Capital Markets Research +1 215 988 5556 Sean.Coghlan@am.jll.com Phil Ryan Research Analyst Office and Economy Research +1 202 719 6295 Phil.Ryan@am.jll.com Seth Kazarian Research Analyst Capital Markets +1 312 228 3478 Seth.Kazarian@am.jll.com COPYRIGHT JONES LANG LASALLE IP, INC. 2015