What’s next for the Bay Area office market?Economic and real estate outlook for 2017

February 2017

1.

3.

U.S. economy will record another strong year, perhaps outpace 2016

• Full employment will drive wage growth

• Fed will temper inflation with interest rate increases

Bay Area growth cooling to more sustainable levels

• Housing market flattening, providing some relief, but still unaffordable for most

• Fundamentals on solid footing in each major market, but tempered growth ahead

U.S. economy expected to outpace 2016 growth; Bay Area

poised for another solid year

San Francisco Office 44

2.New administration’s impact will be a mixed bag

• Infrastructure spending and deregulation will boost economic growth

• Immigration and trade reform are top concerns for Bay Area economy

Macroeconomic trends

and the impact of the

new administration

For the second consecutive month, unemployment rose on the

back of increasing participation; now stands at 4.8 percent

0%

2%

4%

6%

8%

10%

12%

-1,000

-800

-600

-400

-200

0

200

400

600

Unemployment rate (%)

1-month net change (thousands)

Monthly employment change Unemployment rate

Source: JLL Research, Bureau of Labor Statistics

0%

1%

2%

3%

4%

5%

6%

Unemployment rate for bachelor’s degree holders (%)

Unemployment for bachelor’s degree holders remains at a

cyclical low of 2.5 percent

Source: JLL Research, Bureau of Labor Statistics

Wage growth dipped to 2.5 percent from a cycle high of 2.8

percent in December, but continues to outpace rising inflation

Source: JLL Research, Bureau of Labor Statistics

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

2008 2009 2010 2011 2012 2013 2014 2015 2016

12-month % change

Hourly wage growth CPI growth

The “Trump Bump”* - what should you know?

*coined by Ken Rosen, Chairman of the Fisher Center for Real Estate and Urban Economics

Good• Infrastructure spending• Business tax cuts• Pullback on regulations

• Infrastructure spending• Business tax cuts• Pullback on regulations

Not so good

• Trade proposals• Immigration reform• Trade proposals• Immigration reform

Bay Area economic,

demographic and

housing trends

2.6%

2.7%

2.7%

2.8%

3.2%

3.2%

3.5%

3.5%

3.9%

4.2%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0%

Oakland

Orange County

Las Vegas

Atlanta

San Fran/San Mateo

Denver

Seattle

Austin

Fort Lauderdale

Dallas

12-month % change

Bay Area slips from top 10 employment growth markets, 2016

Bay Area’s robust employment gains will taper through 2021

-250

-200

-150

-100

-50

0

50

100

150

200

Thousands

Bay Area expected to add 65,000 jobs annually through 2019, slowing to 11,000

annually in 2020-21

Source: JLL Research, Bureau of Labor Statistics, Moody’s

Source: JLL Research, CA Department of Finance, Census

Bay Area net migration boosted by immigration patterns

An average of 86 people moved into the Bay Area

each day in 2016

This is down from 121 per

day in 2015 and a high of

143 per day in 2012

Immigration reform would have a substantial impact on the Bay Area economy and slow demand for

housing

Rapid population growth and net migration were driven by booming tech economy; slowing tech expansion and low affordability will curb trend but Bay Area will continue to lead

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

60,000

2011 2012 2013 2014 2015 2016

Population growth is fueled by immigration; domestic migration contracting in response to high cost of living

Domestic migration Immigration

Least-affordable housing markets in 2016

Source: JLL Research, BLS QCEW survey, Rosen Consulting Group

Average wages include all benefits, stock options, and meals provided; inflation adjusted using annual change in CPIAffordability is the share of households able to afford a median-priced single family home assuming 20% down, current mortgage rates, and allocating no more than 35% of total income to housing costs.

Advanced employment industries driving wealth creation, yet

single family homes prices are well beyond reach for most

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

San Francisco East Bay Peninsula Silicon Valley United States

Inflation-adjusted average annual wages are up significantly in the Bay Area, outpacing U.S. in all markets

2001 2008 Today

+17.9% since 2001

+8.9% since 2001

+22.5% since 2001

+17.9% since 2001

+7.9% since 2001

San Francisco, CA 19.3%

Honolulu, HI 19.5%

Salinas, CA 19.6%

San Jose, CA 22.3%

Santa Barbara, CA 22.4%

Orange County, CA 23.5%

Santa Rosa, CA 26.4%

San Diego, CA 27.1%

Los Angeles, CA 27.8%

Ventura, CA 29.7%

Oakland, CA 30.3%

New York, NY 32.1%

Seattle, WA 40.5%

Miami, FL 42.7%

Fort Lauderdale, FL 44.4%

Vallejo, CA 45.2%

Denver, CO 46.5%

West Palm Beach, FL 46.6%

Inland Empire, CA 46.6%

Portland, OR 47.3%

12

194,040New Bay Area HHs 2010-15

133,068New residential permits 2010-15

Source: JLL Research, Census, Moody’s

Bay Area household formation levelling off, permits pick up

0

5,000

10,000

15,000

20,000

25,000

2,350,000

2,400,000

2,450,000

2,500,000

2,550,000

2,600,000

2,650,000

2,700,000

2,750,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Permitting activity is struggling to keep pace with new household formation

Households (left axis)

Total units permitted (right axis)

3:5Only three residential permits have been pulled for every 5 households

formed in the last five years

13Source: JLL Research, Yardi Matrix

New supply concentrated near transit and urban centers36,054 units are either planned or under construction throughout the Bay Area

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018f

Multifamily completions peak in 2017

Historical average: 4,718 units annually

U.S. office market

trends

U.S. leasing activity dips, but still healthy

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

55,000,000

60,000,000

65,000,000

70,000,000

2008 2009 2010 2011 2012 2013 2014 2015 2016

Leasing activity (s.f.)

Total leasing activity (s.f.) 4-quarter moving average (s.f.)

Although slightly slower than Q2 and Q3, Q4 saw a healthy 56.1 m.s.f. of leasing activity

Source: JLL Research

Tech remains the leader in total U.S. leasing activity in Q4,

even as the industry faces a talent shortage

1,060,760

1,091,269

1,185,646

1,228,820

1,493,676

1,504,276

2,162,539

2,464,638

3,026,617

8,050,896

0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 9,000,000

Other professional services

Accounting and consulting

Health

Life sciences

Coworking/real estate

Media and entertainment

Law firm

Government

Finance

Tech

Leasing activity (s.f.)

Source: JLL Research – leasing activity > 20,000 s.f.

Slower leasing and give-backs as a result of relocations to

new supply pushed down U.S. net absorption in Q4

-5,000,000

0

5,000,000

10,000,000

15,000,000

20,000,000

2010 2011 2012 2013 2014 2015 2016

Quarterly net absorption (s.f.)

Source: JLL Research

Net absorption by market over time: Sun Belt markets taking

absorption share from tech markets

Source: JLL Research – light grey represents remaining markets

9,142,438

4,611,340

12,369,604

279,789

15,420,058

21.9%Tech

0.7%NYC/ DC

11.0%Sun Belt

0.0%Energy

2016

29.6%Diverse

20142012

12,753,090

3,170,589

5,875,838

16,315,899

8,366,896

8,609,523

23.1%Tech

15.2%NYC/ DC

5.8%Sun Belt

10.7%Energy

29.6%Diverse

10,565,544

2,439,7984,413,42

1

11,523,886

36.5%Tech

0.0%NYC/ DC

8.4%Sun Belt

15.2%Energy

39.8%Diverse

Despite slowing, U.S. overall rent growth will remain

positive as high-priced blocks come to the market this year

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016

Quarterly rent growth (%)

Source: JLL Research

Industry hubs continue to surpass the U.S. market as a

whole in terms of rent growth

7.2%

7.4%

7.5%

7.6%

7.8%

9.3%

10.3%

13.1%

14.7%

17.0%

17.9%

6% 8% 10% 12% 14% 16% 18% 20%

San Mateo (SF Peninsula)

Hollywood (Los Angeles)

Austin CBD

East Cambridge (Boston)

Uptown (Dallas)

Central Perimeter (Atlanta)

South Financial District (SF)

Playa Vista (Los Angeles)

Close-In Eastside (Portland)

Greenwich Village (New York)

Oakland CBD

Year-over-year rent growth (%)

Source: JLL Research

TECH

TECH

TECH

TECH

TECH

PROF. SERVICES

FINANCE/LAW

LIFE SCIENCES

TECH

MEDIA

TECH

Consistent rental growth and increasing volumes of new

supply are moving markets along the cycle

Source: JLL Research

Peakingphase

Fallingphase

Risingphase

Bottomingphase

Houston

Columbus, Fort Lauderdale, Indianapolis,Orlando, Pittsburgh, Sacramento, St. Louis

Detroit, Hartford, West Palm Beach

San Francisco Peninsula, Silicon Valley

Charlotte, Jacksonville, Oakland-East Bay, Richmond

Oakland, Fort Worth, Nashville

Dallas, San Francisco

Denver

Baltimore, Long Island

Orange County

Miami, New York, Portland, Raleigh-Durham

Atlanta, Austin, Los Angeles, Seattle-Bellevue, Tampa

Boston, Cleveland

Milwaukee, Phoenix

Hampton Roads, Philadelphia, Westchester County

Chicago, Minneapolis, Salt Lake City, United States

North Bay

Cincinnati, Fairfield County, Louisville, San Antonio

Washington, DC

New Jersey

Bay Area office market

trends

1,370,828

-89,711

-2,274,049

98,983

1,844,888 1,589,817 1,399,651 1,906,734 2,149,790

864,099

$42.12 $39.45 $31.37 $35.99

$43.39 $51.58

$56.88$62.93

$68.74 $73.65

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

9.5%12.5%

15.3%17.1%

14.6%11.8% 11.1% 9.8%

8.2% 8.2%

Total net absorption

Total vacancy rate

Direct average asking rent ($ p.s.f.)

76.3 million s.f.Inventory

5,879,830 s.f.Under construction

$75.69Class A average direct asking rate

$68.97Class B average direct asking rate

16Buildings with vacant blocks

greater than 50,000 s.f.

31Active tenant requirements greater than 50,000 s.f.

San Francisco – Q4 2016 market profile

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

$- $1 $2 $3 $4 $5 $6 $7 $8 $9 $10

Q195

Q296

Q397

Q498

Q100

Q201

Q302

Q403

Q105

Q206

Q307

Q408

Q110

Q211

Q312

Q413

Q115

Q216

($ Billions) Investment Volume

Percentage of U.S. Investment Volume

0

50

100

150

200

250

300

350

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

1995 1999 2003 2007 2011 2015

IPOsVC, millions

High-Tech Venture CapitalFunding

Technology IPOs

Controlled VC investment continues, totals $1.73B in Q3 2016

Bay Area captures 38 percent of US investment but activity slows US Tech VC funding and IPOs

Local impact:Venture capital funding

creates new jobs, which

creates new demand for

office space

Recent Bay Area IPOs:Recently funded San Francisco companies

$555.5M

$65.0M

$181.0M

$60.0M

$153.1M

25

Source: JLL Research

Sublease availabilities decline amidst targeted leasing activity

throughout 2016

San Francisco Office

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000s.f. Sublease Space s.f.

26

Source: JLL Research

Future development pipeline mitigates current risk of significant

over supply

San Francisco Office

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

2016 2017 2018 2021

86%of 100,000 square feet

availabilities are on

new construction

1

45

2

3

1

4

5

2

3

The zoning and land use changes will increase the amount of potential development for residential, commercial and office development. The existing growth versus estimated potential growth is outlined below:

5M633,000 s.f.Forest CityEntitled

Flower Mart2,020,777 s.f.Kilroy RealtyPre-Application

598 Brannan700,456 s.f.

Tishman SpeyerPending Allocation

88 Bluxome368,550 s.f.

Alexandria/TMGPre-Application

725 Harrison730,940 s.f.

Boston PropertiesPre-Application

Central

Subway

Harrison

Folsom St

Howard St

Mission St

Townsend St

Brannan St

Bryant St4

thS

t

Residential (s.f.) Jobs

Existing 2,500 10,000

Potential under Plan 5,000 35,000

Total Growth potential 2,500 25,000

Central SOMA

Boundary

Central SOMA redevelopment zone will usher in the next wave

28

Source: JLL Research

Sales volumes surpass 2015, totaling almost $5 billion

San Francisco Office

Foundry IIIBuyer: ARASeller:Tishman

Price p.s.f.: $1,202Price: $350,000,000

High Watermark 2016 Sales

$0

$1

$2

$3

$4

$5

$6

$7

2010 2011 2012 2013 2014 2015 2016

Sales volume ($ billions)

The PiersBuyer: Invesco

Seller: Waterfront PartnersPrice p.s.f.: $1,100Price:$90,800,000

760 MarketBuyer: Patrick HotungSeller: Thor EquitiesPrice p.s.f.: $1,255Price: $374,000,000

503,468 232,487

-1,629,017 -1,876,923

1,748,107

3,706,404

1,867,931 2,311,989 2,891,738

1,524,963

$25.32$31.44 $30.84 $30.96 $31.80 $32.64

$38.88 $41.28 $42.39$47.84

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

17.1%21.9%

26.4% 23.7%21.3%

17.1% 15.4% 13.8% 12.2% 12.4%

Total net absorption

Total vacancy rate

Direct average asking rent ($ p.s.f.)

69.8 million s.f.Inventory

7,972,955 s.f.Under construction

$51.04Class A average direct asking rate

$42.71Class B average direct asking rate

39Buildings with vacant blocks

greater than 50,000 s.f.

29Active tenant requirements greater than 50,000 s.f.

Silicon Valley – Q4 2016 market profile

30

Source: JLL Research

Quarterly absorption negative for first time in 23 quarters, but

future move-ins will boost trend in 2017

San Francisco Office

-500,000

0

500,000

1,000,000

1,500,000

2,000,000

Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 Q4 14 Q2 15 Q4 15 Q2 16 Q4 16

31

Source: JLL Research

Sublease starting to creep up in Silicon Valley, driven by M&A

and movement into new construction

San Francisco Office

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

2011 2012 2013 2014 2015 2016

32

Source: JLL Research

Office investment cooled but increase expected in 2017

San Francisco Office

$.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16

Rolling 12 mo. sales volume ($B)

22.8%

17.9%

23.2%

15.9% 15.1% 16.1%18.8% 17.7%

15.2%11.2%

15.7% 14.2% 14.4%12.3% 11.9%

13.7% 12.4%10.3%

7.5%3.2%

Total net absorption

Total vacancy rate

Direct average asking rent ($ p.s.f.)

24,496,701 s.f.Inventory

260,000 s.f.Under construction

$55.04CBD Class A direct asking rate

$49.67CBD Class B direct asking rate

8Buildings with vacant blocks

greater than 50,000 s.f.

4Active tenant requirements greater than 50,000 s.f.

Oakland Metro– Q4 2016 market profile

$24.08 $26.76 $26.00 $26.41 $26.00 $27.37 $26.91 $29.87

$36.16 $39.22 $25.08 $27.24 $28.34 $26.81 $27.12 $28.56 $29.88 $33.84

$45.05 $53.12

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Total Oakland Metro CBD Only

2,010

-27,404 -105,822 -133,226

248,319

-251,392

20,051

521,999

1,146,139

459,138

Tenant relocations or expansions into Oakland

Tenant Size (SF) Former market New Address

Uber Technologies

330,000 San Francisco 1955 Broadway

The Gap 180,000 San Francisco RosewoodCommons

Brown & Toland 60,000 San Francisco 1221 Broadway

TchoChocolates

50,000 San Francisco 3100 San Pablo Ave

WCIRB 41,000 San Francisco 1221 Broadway

Sierra Club 38,776 San Francisco 2101 Webster

Del Monte Foods

27,000 San Francisco 3003 Oak Rd

Gensler 24,500 San Francisco 2101 Webster

Gordon & Rees 24,200 San Francisco 1111 Broadway

State of CA 24,000 San Francisco 1111 Broadway

Tenants look to the sunny side of the bay for rent relief

Architecture/Engineering5%

Consumer Products20%

Financial Services6%

Healthcare15%Legal

7%

Non-Profit10%

Professional Services6%

Technology27%

Architecture/Engineering Consumer Products Education

Financial Services Healthcare Legal

Manufacturing/Construction Non-Profit Other

Professional Services Technology

35

Source: JLL Research

Spillover demand driving rent growth in CBD-adjacent markets

San Francisco Office

11.0%

15.1%

17.9%

18.8%

25.1%

0% 5% 10% 15% 20% 25% 30%

Berkeley

Alameda-South

Oakland-CBD

Emeryville

Alameda-North

36

Source: JLL Research

Robust investment activity drove new high watermark in 2016

San Francisco Office

$418

$315

$243

$345

$193

$425

$160

$440$408

$376

$288

$324

$0

$150

$300

$450

$600

COPYRIGHT © JONES LANG LASALLE IP, INC. 2015

Thank you!

37