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TRUST HONESTY INTEGRITY RESPECT FAMILY GENEROSITY PROFESS IONALISM

S A N J O S E / S I L I C O N VA L L E Y

COL L IER S IN T ER N AT ION A

MA R KE T R E P O RT & FO R E C A S T

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JANUARY 2010

2

January 2009

affecting 5,000 to 6,000 employees. This includes shuttingdown a wafer production facility in Santa Clara.

and closing 300 more stores. 200 of those stores will be inthe U.S. 30 acres of adjacent land from Electronics For Imaging, Inc.The office building is approximately 163,000 square feet with

the land designed to accommodate 542,000 square feet. Both

sit next to Gileads Foster City campus.

replaces co-founder Jerry Yang. announcing 1,300 job cuts two months prior. jumping to 10.1%.February 2009

its Main Street project in Cupertino. Sand Hill went into

early 2008 through a debt and equity package. facilities. This is in addition to previous 600 job cuts it hadannounced in October 2008. 2,000 jobs.

longer considering the city as a site for a new ballpark.

worldwide, after filing for bankruptcy protection last month. bill is aimed to create 3.5 million jobs and leverage economic billion in tax breaks.March 2009

Fremont-based, Solyndra to support the companys construction

of a 600,000 square foot manufacturing plant in Fremont.

billion federal spending bill. employees at its Santa Clara headquarters.April 2009

deal, becoming the nations largest home builder. to the 2,500 cuts made last year. May 2009

jobs, or 2% of the companys workforce. their first day of trading. It marks the biggest IPO gain sin June 2009

Toyota and announces that it will cease production of th

Pontiac Vibe, the only GM vehicle made at the Fremont aut

manufacturing plant.

per share. Data Domain also announces that it hterminated the previously announced merger agreement wiNetwork Appliance. Dow Jones & Company replaces Citigroup and General Motors wi

Travelers Companies and Cisco Systems on its Industrial Average.

THE YEAR 2009 IN REVIEWCOLLIERS INTERNATIONAL

2009 - 2010 SILICON VALLEY

MARKET REPORT & FORECAST

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5/44COLLIERS INTERNATIONAL 3

JANUARY 2010

July 2009

by California Bavarian Corp. the two companies take on rival Google.

court supervision

first time since January.August 2009 square feet in Palo Alto for its power train facility. The electricvehicle maker will also move its corporate headquarters toPalo Alto.

with NUMMI and shut down operations in March 2010,

affecting approximately 5,400 employees.

second term as chairman of the Federal Reserve.September 2009 significant funding. New venture capital is rumored to total

soccer team, announces the design of the new stadium, which

will be located at the intersection of Coleman and Newhall

Avenues, adjacent to the San Jose International Airport.

to strained government budgets impacted by plummetingtax revenues. Skype communications unit in a deal valuing the business at

will buy approximately 65% of Skype, with eBay continuing to

own 35%.

October 2009

its workforce, or about 3,000 jobs. The news comes as S

awaits the completion of the takeover by Oracle.

Fremont, a 506,490 square foot manufacturing building. through foreclosure, to Vallco Shopping Mall, LLC

investments in Commercial Real Estate: Pacific National Ba

California National Bank, and San Diego National Bank.

November 2009

1,500 jobs, in addition to the 1,100 job cuts announced February 2009. its workforce by 1,500 employees over the next 18 months

leading provider of networking switching, routing and secur

Andreas Apostolopoulos.December 2009 users, up from 150 million users in January 2009.

Arden Realty, Inc., the largest publicly-traded office landlord

Ardens outstanding debt. First Street project. Las Vegas CityCenter project. This is considered the larg

private development in U.S history.


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Most economists

are calling formodest job growth

in 2010 and for the

unemployment rate

to peak around 11%

in the second or third

quarter. Temporary

help is on the rise

and more employers

are reporting thatthey plan to hire

in 2010 than one

year earlier. Still,

unemployment is not

expected to return to

long-term sustainable

levels until 2014

according to many

experts.

Good Riddance 2009

For most of us, the best that can be said for 2009

is that it is finally over. A deep and widespreadrecession was going to require an extended

recovery period and getting through 2009 was

the just first step. Although few expect 2010 to

be a barnburner year, optimism is finally returning

and most are simply satisfied that it should be a

better year ahead and that the economy has taken

a much-needed step in the right direction.

This recession caused people across the nation to

re-examine everything from their spending habits

to their values. Millions of people are out of a job,

homes have been lost and investments have been

obliterated; no industry or part of the countryhas been spared. Couple this with information

overload we get in the form of RSS feeds, podcasts,

webcasts, blogs and the like, and we are all aTwitter

in more real-time information than we know what

to do with, or frankly, that we care about. As a

result, we collectively bid adieu to 2009 and look

forward to 2010 with renewed optimism.

The Economy

Last year at this time, talk was centered on the

financial crisis that started with the residential

meltdown. The byproduct of that meltdown is the

employment crisis we face today and so the focal

point of most any economic forecast is jobs, jobs, jobs. With government stimulus as the catalyst,

conditions have improved but many experts

on training wheels. A self-sustaining recoveryrequires employment and wage growth and thebig question is whether that will happen after thetraining wheels are removed.The enormity of the labor problem is daunting

and at the same time, hopeful. Economists

such as Princeton Professor Paul Krugman have

postulated that the U.S. needs to add between

250,000 and 300,000 jobs per month everymonth for the next five years just to employ new

workers added to the workforce and recover

the eight million jobs lost in the last two

years. The frightening part is that we are still

losing ground and this formula adds up to 18

million jobs. Looking at the silver lining, getting

those 18 million people in the workforce will

be a tremendous boost to the economy and

most every one of them will eventually need a

place to sit and that bodes well for commercial

real estate.

How much one believes that federal stimulus

has led the economic turnaround is the subjectof much debate but based on reports generated

as a part of the American Recovery and

Reinvestment Act, stimulus created or saved

640,000 jobs through the end of October.

Moodys Economy.com actually thinks that

reports may understate the total impact of

stimulus on jobs. They write that if 640,000

more workers had lost jobs, they would

have spent less, reducing economic activity

and leading to job losses in other industries

such as retail, transportation/distribution and

the like.

Moodys points to other evidence that stimulus

has been effective. Real GDP declined at an

2008 and the first quarter of 2009. PresidentObama signed off on the stimulus package inFebruary of 2009 and then GDP declined by 2.2% in the third quarter. Consumer spendinghas also gained ground since March. While these

improvements could be unrelated to the stimulus

package, Moodys estimates that GDP in the third

quarter was 1.5% greater than it would have been

without stimulus. All told, Moodys estimates that

between 600,000 and 1.6 million jobs were savedrelative to a no-stimulus baseline.

Californias unemployment rate is 12.4% and held

flat over the last quarter of 2009 only because

106,000 people dropped out of the labor force.

California actually lost 38,800 jobs in December,

the most of any state in the nation. According

to Challenger, Gray & Christmas, job growth in

2009 will come from health care, information

technology, government, financial services and

energy. Silicon Valley wants to be a leader in at

least two of those areas but competition from

other regions is fierce. Doug Henton, chairmanand chief executive of Collaborative Economics,

conducted a study reporting that there are

159,000 green jobs in California that are evenly

disbursed throughout the state. Approximately

in the Bay Area. If we are going to put a dent inCalifornias unemployment problem, it will takemuch more than even a thousand new green jobs.As we went to press, economists surveyed by

COLLIERS INTERNATIONA


MARKET REPORT & FOREC

JANUARY 2010

OBSERVATIONS & FORECAST

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JANUARY 2010

COLLIERS INTERNATIONAL6

COLLIERS INTERNATIONAL



GDP in the fourth quarter of 2009, fueled by a

huge swing in the inventory cycle and government

stimulus. These are non-sustainable factors and

GDP forecasts for 2010 are generally in the

over the second half of the year. The Wall Street Journals survey of experts and Bloombergssurvey both had all respondents forecastingpositive growth in 2010-2011, with the consensusat 3.2% growth in 2010 and 4.0% in 2011. Positivecontributors to growth are expected to bemodest increases in consumer spending, business

investment, housing and federal spending.

Consumer savings rates returned to their highest

levels in 15 years in 2009. After getting their

spending habits under control, consumers startedcoming out from the shadows at the end of the

year. Retail sales over the 2009 holiday period

managed to grow 1.5%, compared to the 2.3%

drop during the same period one year earlier.

Spending is generally forecasted to increase by

about 5% in 2010 and double that figure in 2011.

Businesses cut back in 2009 as well, with spending

down 26% from its peak. Now, with S&P profits

up 26% in the last year, companies have enough

breathing room to begin investing again.

As spending slowly starts to increase, the economic

recovery will have a chance to gain a foothold ofits own. However, consumers and businesses will

both be cautious again in 2010. Consumer debt

is still near an all-time high and banks will be

reluctant to extend credit for business expansion

until they have their own balance sheets in order.

While interest rates for business borrowing will

remain low, a recent track record of achieving

more profit with less investment and spending

may keep companies away from the borrowing

trough a little while longer.

Anyone who decided to hop on the stock market

bandwagon after March 9th of last year did pretty

well. The Dow Average gained 61% from its March ended 2009 up by nearly 19%. It was the largestgain in the Dow in six years and welcome reliefgiven that the rally still left the market 26.4% Given the markets surprising resurgence, manybelieve that another correction is in order. Eveninvestment professionals are skittish, believing

that the 2010 stock market ride will be volatile

and not for the faint of heart.

deficit in fiscal 2010. This presents a growi

problem for the Administration, especially wi

elevated spending and diminished revenues. In t

declared a fiscal emergency in the wake of o fiscal 2011.2009 worldwide DRAM chip sales totale decline from 2008. Gartner Research expec

DRAM chip sales to increase worldwide

in three years. After two troubling years, th

increase is expected to open the doors for necapital spending from chip makers. Citigro

estimates that memory-chip capital expenditur

billion as companies look to retool and upgradmanufacturing facilities. billion invested in Silicon Valley was down 34.8

and is the least since 2003. Still, the Vall

0

12

24

36

60

72

48

SquareFeetinMillions

Year-End Availab le

14.35%13.16%

2006 2007

14.92%

17.60%

2008 2009

0

5

-5

30

40

20

10

-10

-15

-20

15

35

25

Gross Absorption


Net Absorption

2005 2007 2008 20092006

Although world

economic output was

down 1.5% in 2009,

foreign economies

are showing signs

of growing again

and will be counted

on to help lead

the recovery. In

particular, developing

countries such as

China, India andBrazil are expected

to gain momentum

and help lift GDP

growth rates across

Asia and other

parts of the world.

Moodys calls for real

GDP to grow a bit

above 2.0% in the

advanced economies

of the world after

contracting 3.0% in

2009 and for Chinas

GDP growth to once

again surpass 8.0%.

SILICON VALLEY AVAILABILITY

ALL PRODUCT TYPES

SILICON VALLEY ABSORPTION

ALL PRODUCT TYPES


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JANUARY 2010


Interest rates

were a non-factor

in 2009 as theFed maintained

short-term rates

near zero. With

employment lagging,

it is unlikely that

2010 will produce

more than a

25-basis point

hike overall and nochange before June.

Inflation fears are

not materializing yet

and most experts

believe this shoe

will not drop before

2011. With global

demand still soft,

price pressures willremain subdued.

Most economists are

calling for inflation to

be less than 2.0% in

2010.

continues to be the favored location for emerging

companies. Eight of the top ten funded companies

in 2009 are in the Bay Area, including Silicon Valley

firms Solyndra, Tesla, Silver Stream Networks

and Meru Networks.

Initial public offering have numbered less than 50

since 2008, including only three in the Bay Area,

compared to more than 400 per year in the late

1980s and 1990s. Conditions look good for a

marked improvement in 2010, although nowhere

near a return to the 160 per year average between

estimates that there will be at least 26 venture

backed IPOs in 2010.

News on the housing front has taken a decidedback seat to its commercial cousin. Low mortgage

rates and the first-time buyer tax credit boosted

residential sales but debt-ridden consumers are still

in no rush to make these sorts of major purchases.

grow in order for consumers to gain confidenceand return to spending. Most of the downslide hasabated with estimates that housing prices will beflat to negative 10% nationwide in 2010.

A bubble of pending debt maturities that is

much speculation on the commercial side.Any short-term prospect for a recovery of

fundamentals is unlikely. With the FDIC stepping

in and forming loss-sharing partnerships with

banks and failed institutions, there is less urgency

to unload underperforming assets than many

anticipated. In addition, recent changes in the

mark-to-market accounting rules are facilitating

the kicking-the-can mentality that was already

pervasive with the banks. It remains to be seen

how it will play out for those looking to profit

from this avalanche of pending loan maturities.

The Commercial Real Estate Market

Colliers forecasted that 2009 would be the worstabsorption year on record and our 16.5 million

square foot forecast was right on the money. Total

gross absorption of all product types in Silicon

Valley during 2009 was 16.1 million square feet.

Colliers began tracking comprehensive absorption

data in 1988 and since that time, total gross

absorption has dropped below 20.0 million square

feet in just one other year and that was in 2008

when total activity hit its previous low-water mark

of 18.5 million square feet. Gross absorption for

2008 and 2009 add up to a combined 35.6 million

square feet and that is nearly 10% less than the

year 2000 alone. It is also 21% less than the 45.3

million square feet of combined gross absorption

in 2002-2003, which heretofore were considered

poor absorption years.

With the economy improving and more leases

expiring in 2010, Colliers believes this dubious

record-setting trend will end and that 2010 will

be a better year for leasing and user sales activity.

the second half of 2009 was 19.3 million squarefeet and while we would like to forecast that

activity will get back to 20.0 million square feet

after its two-year hiatus, that goal is probably too

ambitious. There is still a great deal of caution in

the air and it is difficult to imagine that some of

the mammoth Q4 deals that closed are part ofa pattern that can repeat itself in each quarter

of 2010. It is more reasonable to expect that

average quarterly absorption in 2010 will increase

5-10% from the 2009 average and that points us

to a forecast figure of about 18.0 million square

feet. That is still a low gross absorption tally

historically but it would be an 11.8% improvement

over 2009.

Net absorption will be significantly limited by slow

employment growth. However, net absorption is

also impacted negatively by occupied space that

is vacated and in that regard, 2010 should bemuch improved. Most companies that needed to

done so. Not all of this excess has been wrungout of the system but we anticipate a significantlysmaller pipeline of preimproved space gettingadded to supply in 2010.Overall, the total amount of improved spaceadded to available supply was not much different

from 2008 to 2009. However, the pipeline started

wide open in the first quarter of 2009, peaking at

The pipeline then got smaller in each subsequent

quarter, culminating in Q4 when less than 5.0million square feet of improved space came on

the market, the lowest figure since the second

that small, but a figure even close to 20.0 millionsquare feet would be a huge improvement from that came available during 2009.Colliers recorded negative net absorption to the

tune of 10.9 million square feet in 2009. That figure

was in the ballpark of our forecast for a 9.5 million

square foot occupancy loss. Given recent trends

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JANUARY 2010

COLLIERS INTERNATIONAL8




The actual change in

available space over

2009 equals 10.7

million square feet.

The year began with

total availability in all

product categories at

46.54 million square

feet and by year

end there was 57.27

million square feet

of available office,

R&D, industrial and

warehouse space

throughout Santa

Clara County and

Fremont.

and our outlook for the coming year, we expect

significant improvement in 2010 but that net

absorption will still be negative over the course of

the year. It is an extremely precarious year ahead

and much like the economic outlook, commercial

real estate prospects hinge on whether or not

the economic recovery is sustainable. Assuming

the recovery continues at the tepid pace most

expect, we anticipate that total available space

will grow by another 3.0 million square feet or

so before tapering off. Each product type could

experience at least a quarter or two of positive

net absorption with the industrial and warehouse

markets having the greatest chance for positive

net absorption overall.

In the R&D sector, mediocre demand for space islikely to keep net absorption in the red. Although

occupancy losses were down significantly in Q4, this

product sector still has excess space to shed before

expanding businesses will start to generate positive

net absorption. R&D gross absorption could stretch

be enough to hold negative net absorption aroundthe 1.5 million square foot mark.

The office market should experience an increase in

demand as larger tenants come out of hibernation.

We are beginning to see some demand for space

that was built in the last two years and mostof that falls under the office category. Look for

total office space activity to approach 4.5 million

square feet in 2010 with negative net absorption

of about 1.0 million square feet.

Industrial gross absorption blew through the

roof in Q4 and net absorption was positive for

While certainly encouraging, the overall results

were skewed by one transaction. Still, Q4 n

absorption would have been slightly positive ev

without that 506,490 square foot gain. In additio

there has always been an uptick in demand in th

product category when there is more space

choose from. We expect 2010 industrial gro

absorption to be in the 3.5 million-square-fo

range and possibly lift higher if owner-user sal

rebound. Look for a modest occupancy loss

this product category, probably not exceedi

500,000 square feet for the year.

Likewise, the warehouse market is coming off

strong Q4 in which one very large transactio

paved the way for the best gross absorptio

quarter of the year and the only quarter

positive net absorption. This sector improvesignificantly over the second half of 2009 a

could be one where net absorption might swi

to the black. Our projections anticipate gro

absorption approaching 2.5 million square feet f

the year with no overall change in net occupan

by year-end.

Unfortunately for landlords, we see mo

downside ahead for rents in 2010. Tenants shou

not get too excited however. Rents will probab

not fall as much in 2010 as they did in 2009 an

many owners are not in a position to move ren

much further without reaching a point whetheir rents barely cover operating expenses, l

alone debt service. We expect effective rents

slip another 10% or so for R&D, industrial an

warehouse deals and closer to 15% in the offi

market. Some of this additional rent slippage

already priced into proposals on the street; it ju

need to play out in the deals that get closed.

-12

-10

-8

-6

-4

-2

0

2

4

6

8

4Q09

2Q09

4Q08

2Q08

4Q07

2Q07

4Q06

2Q06

4Q05

2Q05

4Q04

2Q04

4Q03

2Q03

4Q02

2Q02

4Q01

2Q01

4Q00

2Q00

4Q99

2Q99

4Q98

2Q98

Change in Total Jobs (200 SF/Job)

San Jose, Sunnyvale, Santa Clara MSA

Net Absorption

MillionsofSquareFeet

Net Absorption vs. Change in Total Jobs as measured by 200 SF/Job


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JANUARY 2010

COLLIERS INTERNATIONAL 9

SILICON VALLEY - ALL PRODUCTSCOLLIERS INTERNATIONA



Building Inventory:

Availability:

Absorption:GrossNetEffective Net

CompletedConstruction:

# of Avails. by Size< 10K SF10K to 29K SF30K to 59 K SF60K to 99K SF100K SF +

Available Available Total Available Current and

Vacant Occupied Available Current Vacancy Availability Under Pending

Date Direct Direct Sublease Available Rate Rate Construction Availability

Available

Sublease Occupied

4.04%

Available

Sublease Vacant

8.68%

Available

Occupied Direct

12.49%

Available

Vacant Direct

72.62%

Available

Under Construction

2.18%

Availability Rate BreakdownSilicon Valley - All Products

0.0%

5.0%

10.0%

15.0%

20.0%

Breakdown ofAvailable Space

Silicon Valley

All Products

1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1,990,530

59 68 63 62 68 63 68 63

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JANUARY 2010

COLLIERS INTERNATIONAL 1

R&D net absorption

was negative in

every quarter of

2009 and occupancy

losses have now

accumulated in this

market sector in

eight out of the last

nine quarters. For

the year, Colliers

recorded 5.94

million square feet

of R&D negative net

absorption, the most

in a single year since

2003.

The R&D market took it on the chin in 2009,

contributing well over one-half of Silicon Valleystotal occupancy loss for the year. Colliers

anticipated that the R&D market was in the

crosshairs for a tough year and that forecast

held to form in a year where no single quarter

was able to muster enough R&D demand to hit

the two million square foot mark. R&D gross

absorption has now been less than 2.0 million

square feet in six consecutive quarters. Prior to

the current streak, the last quarter with less than

2.0 million square feet of R&D gross absorption

was the first quarter of 2003; no previous year

on record had more than two quarters of gross

absorption below 2.0 million square feet.

This streak of paltry absorption results naturally

led to the lowest total R&D gross absorption that

Colliers has ever recorded and it happened for

the second year in a row. The 6.51 million square

feet of new activity in 2009 is 22.2% less than the

in 2008.One supposed advantage the R&D sector held

in 2009 was that companies were not pursuing

Class-A office space in light of economic conditions.

But this flight to R&D affordabilitynever really left

the gate. With all the headcount reductions inthe Valley, companies were not moving around

and when they did, their space needs were not

significant. Similarly, not as many new companies

were launched and growing start-ups were few

and far between. By year-end, the R&D availability

rate reached 19.2%, down from 19.5% the quarter

before but otherwise the highest availability rate

since the second quarter of 2006.

R&D net absorption was negative in every

quarter of 2009 and occupancy losses havenow accumulated in this market sector in eight

out of the last nine quarters. For the year,

Colliers recorded 5.94 million square feet of

R&D negative net absorption, the most in a single

year since 2003. The 30.4 million square feet of

available R&D space was the most to close a year

since 2005.

While the demand side of the equation was most

problematic in the R&D sector, the pipeline of

preimproved space added to available supply

also contributed to the sectors considerable

occupancy loss. During the course of the year,

12.4 million square feet of preimproved R&D

from the 10.8 million square feet added in 2008and the most added since 2004. Still, this pipelineremains well below the figures recorded in thefour-year period between 2001 and 2004.With growing inventories and lackluster demand,rents are falling as we anticipated in last years

forecast. Average starting rents for R&D leases

foot average in the final quarter of 2008. Average

starting rents in the R&D sector are now below third quarter of 2006.R&D Hot SpotsIn most of the major Silicon Valley R&Dsubmarkets, activity slowed in 2009, followingan already slow 2008. Of the Valleys 6.51 millionsquare feet of R&D gross absorption generated in

0%

3.5%

7.0%

10.5%

14.0%

17.5%

21.0%

24.5%

28.0%

$0.60

$0.80

$1.00

$1.20

$1.40

Quarter-End Availability Rate Average Starting NNN Rental Rates

4Q-06 1Q-07 2Q-07 3Q-07 4Q-07 1Q-08 2Q-08 3Q-08 4Q-08 1Q-09 2Q-09 3Q-09 4Q-09

Silicon Valley R&D Rent vs. Availability Rate Trends

R&D Off its Back

SILICON VALLEY R&D MARKETCOLLIERS INTERNATIONA



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14/44COLLIERS INTERNATIONAL12

2009, Fremont and San Jose accounted for nearly

50% of the total.

R&D activity in Fremont actually gained ground in2009, growing to 1.58 million square feet, a 10.8%

increase from 2008. Still, that figure fell short of

million square feet. Notable deals contributing toFremonts activity include Flash Electronics leaseof 129,808 square feet on Starboard Drive andWestern Digitals sublease of 101,882 square feeton Reliance Way. The uptick in R&D activity wasnot enough to generate positive net absorption

San Joses R&D sector generated 1.60 millionsquare feet of gross absorption for the year, falling

short of the two million square foot mark for the

first time since 2002. The lack of deal flow and

the nearly 4.0 million square feet of preimproved

R&D space that came on the market during the

year, combined to produce a 2.34 million square

foot occupancy loss, the most R&D negative net

absorption in San Jose since 2003. Although San

Joses R&D activity decreased considerably from

2008 to 2009, there was a strong push towards

the end of the year that bodes well for 2010.

Fourth quarter R&D gross absorption was the

highest since Q2 2008. It was also more than San

Jose generated in all of Q2 and Q3 combined. San Joses most significant R&D transaction for the

year was the Carlyle Groups 188,332 square foot

lease to Harmonic, Inc. on North 1st Street.

After averaging 1.44 million square feet of R&D

gross absorption per year for the past five years,

Santa Claras R&D activity dialed back to 819,926

square feet in 2009, which was below 1.0 million

square feet for the first time since 2004. A net

the largest annual loss in R&D occupancy for that

city since 2004. From an 8-year low of 12.3%

available in 2008, the R&D availability rate

Santa Clara grew to 15.0% by the end of 200

Similar to San Jose, Santa Clara ended the ye

with a bang as gross absorption in Q4 accounte

for 49% of the years total. Santa Claras Q

home run was Harris Stratex Networks lease

128,541 square feet on Great America Parkw

from DJM Capital Partners. Spectra-Physic

square feet on Peterson Way was another maj

R&D transaction for Santa Clara in 2009.

0

9

18

36

27

45


Year-End Availability

18.48%

16.29%16.99%

19.20%

2006 2007 2008 2009

-12

12

18

0

-6

6

24

Gross Absorption


Net Absorption

2006 2007 2008 20092005


R&D PRODUCT

SILICON VALLEY ABSORPTIONR&D PRODUCT

San Jose Santa ClaraSunnyvale Mountain ViewFremont

14.16%

11.99%

13.26%

14.49%

15.70%

14.26%

12.28%

15.03%

0% 4% 8% 12% 16% 20%24% 28% 32% 0% 4% 8% 12% 16% 20% 240% 4% 8% 12% 16% 20% 24% 30%0% 4% 8% 12% 16% 20% 24% 28%0% 4% 8% 12% 16% 20% 24% 28%

26.38%

22.37%

23.96%

26.59%

10.94%

10.96%

13.62%

14.19%

21.67%

20.40%

19.72%

23.31%

2006

2007

2008

2009

2006

2007

2008

2009

2006

2007

2008

2009

2006

2007

2008

2009

2006

2007

2008

2009

Selected Cities Historical Availability Rate Trends - R&D

Although

San Joses R&D

activity decreased

considerably from

2008 to 2009, there

was a strong push

towards the end of

the year that bodes

well for 2010. Fourth

quarter R&D gross

absorption was the

highest since Q2

2008. It was also

more than San Jose

generated in all

of Q2 and

Q3 combined.

SILICON VALLEY R&D MARKETCOLLIERS INTERNATIONAL



JANUARY 2010

8/14/2019 c o l l i e r


After seven straight

quarters of declining

gross absorption

in the R&D sector,

demand increased

in the third quarter

of 2009 and then

again in the fourth

quarter. Second half

gross absorption

totaled 3.82 million

square feet, a 42.6%

improvement from t

2.68 million square

feet of leasing and

user sales in the firs

half of the year.

Sunnyvale and Mountain View both recorded

sub-par gross absorption totals for the year.

Sunnyvale R&D activity measured 981,602 square

feet, down 33% from the previous year and wellbelow the 10-year annual average of 1.93 million

square feet. Net absorption in Sunnyvale was

negative for the second consecutive year with an

Mountain View R&D activity has been fallingeach year since 2005 and that number totaledjust 430,829 square feet in 2009. While Mountain slightly less than the previous year, total available

since 2005.

Looking ForwardConsistently across all four product types that

Colliers tracks, the slide started in the fourth

quarter of 2008. In the first half of 2009, it got

even worse. Then, over the second half of 2009,

improvement was clearly evident in the statistics.

This improvement is now clear enough to show

a definite trend but the numbers are still very

low by historical standards. After seven straight

quarters of declining gross absorption in the R&D

sector, demand increased in the third quarter of

2009 and then again in the fourth quarter. Second

half gross absorption totaled 3.82 million square

feet, a 42.6% improvement from the 2.68 million

square feet of leasing and user sales in the firsthalf of the year.

Colliers expects that R&D demand will be greater

in 2010 as companies look beyond 2009 and

forward to a cautious, post-recession recovery.

The increase is not expected to be significant

until employment growth starts in earnest and

most experts are not expecting much change on

that front until later in the year at the earliest.

So, demand will grow but not significantly. We

do expect to see an end to the current streak of

six consecutive quarters of sub-2.0 million square

feet of gross absorption. Not all four quarters will

feet of R&D gross absorption will be a reach, but

an achievable reach, as tenants begin to movearound more and more in search of good deals

and space that better fits their current needs.

Colliers believes that the current cycle of

negative net absorption peaked in 2009. However,

improvement in 2010 will be as much a result of

less space coming back on the market than it will

be growing net demand. The pipeline of improved

R&D space coming on the market grew by nearly

15% in 2009 but with labor and other expense

cuts mostly out of the way, there will be fewer

companies retrenching in 2010. This trend may

have begun to shift in the fourth quarter of 2009when 2.6 million square feet of preimproved R&D

space was added to available supply, 35.3% less

than the 4.0 million square feet added in Q3.

Although we may experience a quarter of positive

R&D net absorption in 2010, anticipating an

occupancy gain overall is probably a stretch. The

preimproved supply channel has eased but it

remains fragile as many smaller companies continue

to weather the storm. New demand is still a ways

off with flat employment growth and nominal VC

spending to launch new companies. Overall, we

anticipate a net occupancy loss approximating 1.5

million square feet in 2010, which would increasethe R&D availability rate to about 20%. While

troubling, it is a far cry from the 5.94 million-

square-foot occupancy loss of 2009.

R&D rents have dropped as anticipated and

are likely to drop further before flattening out

later in 2010. However, the drop will not be as

precipitous as it was in 2009. Look for R&D rents

to fall by another 10% by mid-year to an average

to remain in that vicinity through the balance of

the year.

Selected Colliers R&D Transactions

completed a long term, 188,332 square foot R&D/Office lease at 4300 North 1st Street in San Jose.Harmonic, Inc. is the tenant. Applied Materials/AKT America RREEF isthe landlord. signed a long term, 128,540 square foot R&D lease at 5200 Great America Parkway in Santa Clara .Great America Office Investors TIC 1, LLC is the landlord.

WCV Commercial Properties, at

Fremont. WCV Commercial Properties is the landlord.

JANUARY 2010

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Prior to the first

three quarters of

2009, the last earlie

quarter with less

than 1.0 million

square feet of off ice

gross absorption was

the first quarter of

2001. All told, 2009

produced the lowest

gross absorption

total in the office

sector dating all the

way back to 1992.

The office market took a big hit in 2008 and

our 2009 forecast anticipated that this sectorsavailability rate would increase from 19.8% to a

level greater than the dot-com bust high of 24.4%.

Our forecast was based upon demand levels

that were at an eleven-year low, as well as large

pipelines of both new and preimproved space that

were being added to available supply. Our fears

this sector soared to 24.6% by year-end.On the demand side, we anticipated that the

worst had passed and that office gross absorption

would increase from that eleven-year low figure

feet or more. In spite of second-half surge, we

missed the mark on that count, as office activity

finished the year at 3.96 million square feet.

Office gross absorption was less than 1.0 million

square feet in each of the first three quarters

of 2009 and reached a low-water mark of

An improved second half boosted office gross

absorption back near seven-digit territory in Q3

million square feet in the fourth quarter. Prior to

the first three quarters of 2009, the last earlier

quarter with less than 1.0 million square feet ofoffice gross absorption was the first quarter of

2001. All told, 2009 produced the lowest gross

absorption total in the office sector dating all the

way back to 1992.

The most noteworthy occurrence in this sector

speaks well for the future. Not only was demand

greatest in the second half of the year, but the

fourth quarter also produced the first deal

at Sunnyvales Moffett Towers. Rambus leased125,210 square feet in this 1.6 million-square-

foot campus and not only was it the first deal at

Moffett Towers but it was the first lease at any

new office development completed in the last two

years. Other new shell activity is ongoing in both

the office and R&D sectors and while this activity is

certainly meaningful in its own right, the underlying

significance is that companies are starting to move

beyond the internal optics issues that made such

a bold move bad for business in 2008 and 2009

and it also demonstrates that rents in these new

developments are now at a level where at least

some companies are prepared to take a look at the

space, if not in fact pull the trigger.

The Rambus deal in Q4 tipped the scales enough

to help produce the first occupancy gain for office

it was not enough to make much of a dent inthe office sectors overall net occupancy loss of2.52 million square feet, slightly less than 2008soccupancy loss of 2.59 million square feet. At

year-end, total available office space measured

14.94 million square feet, not far removed from

Colliers 16.0 million-square-foot prediction.

Office rents finally tumbled in 2009 after remainingstubbornly resistant through most of 2008. The

average starting rent for fourth quarter office

10.3% drop from average starting rents recordedone year earlier. The second half uptick in rentwas due to increased activity in high-rent marketsand is not sustainable.0%

5%

10%

15%

20%

25%

$1.50

$1.75

$2.00

$2.25

$2.50

$2.75

Quarter-End Availability Rate Average Starting Full Service Rental Rates

4Q-06 1Q-07 2Q-07 3Q-07 4Q-07 1Q-08 2Q-08 3Q-08 4Q-08 1Q-09 2Q-09 3Q-09 4Q-09

Silicon Valley Office Rent vs. Availability Rate Trends

SILICON VALLEY OFFICE MARKETCOLLIERS INTERNATIONA



JANUARY 2010

Office Shell On the Shelf

8/14/2019 c o l l i e r


Office Hot Spots

The Valleys largest office market, San Jose,

produced a statistical repeat of its 2008

performance in 2009. After generating 1.32

million square feet of office gross absorption

and a 1.08 million-square-foot occupancy loss in

2008, the Valleys largest city contributed 1.25

million square feet of office gross absorption and

a 932,412 square foot occupancy loss in 2009.

Office activity remained at historically low levels

less than 20,000 square feet made up 92% of SanJoses gross absorption in 2008 and 2009, versus

Sunnyvale was the only major office market to

post increased gross absorption totals in 2009.

Office activity in 2009 measured 342,392 squarefeet in that city, 15% greater than the prior

year. With that said, Sunnyvale experienced a

greater occupancy loss compared to 2008 as

well. Negative net absorption totaled 189,958

square feet, the largest loss in office occupancy

for Sunnyvale since 1993. Office supply in

Sunnyvale has skyrocketed with the injection of

new construction to the tune of over 1.6 million

square feet in the past two years. As a result,

the office availability rate in Sunnyvale rose to

42.1% at year-end. Of the newly constructed

space added to Sunnyvales office supply, only one

deal has been completed and that was Rambus125,210 square foot lease at Moffett Towers.

Palo Altos office sector has experienced a

three-year trend of increasing amounts of

preimproved office space coming on the market

frame, negative net absorption has grown in eachsuccessive year. In 2009, negative net absorption largest annual loss in office occupancy since

2003. As a result, the total supply of available

office space surpassed 1.0 million square feet

in for the first time since 2005. The increase

available supply presents an opportunity for Pa

Alto users who are accustomed to low vacan

rates and sky-high rents. Gross absorption

office space in Palo Alto has been consistent

feet per year, with 695,843 square feet measurin 2009. A late-inning rally towards the end 2009 pushed Palo Altos office activity up, than

to Facebooks 265,000 square foot sublease an

Page Mill Road.

0

3

6

9

12

15

2006 2007 2008 2009


Year-End Availabil ity

14.71%14.51%

19.80%

24.60%

0

-1

-3

6

2

8

4

10

Gross Absorption


Net Absorption

2006 2007 2008 20092005


OFFICE PRODUCT


OFFICE PRODUCT

San Jose Palo AltoSanta Clara SunnyvaleCupertino

0% 4% 8% 12% 16% 20% 24% 28% 0% 4% 8% 12% 16% 20% 240% 4% 8% 12% 16% 20% 24% 28%0% 4% 8% 12% 16% 20% 24% 28%0% 4% 8% 12% 16% 20% 24% 28%

12.49%

14.05%

14.84%

16.74%

15.61%

14.70%

19.12%

24.21%

2006

2007

2008

2009

2006

2007

2008

2009

2006

2007

2008

2009

2006

2007

2008

2009

2006

2007

2008

2009

14.20%

17.23%

18.17%

18.17%

9.93%

7.45%

13.21%

16.21%

15.69%

15.41%

34.

42.

Selected Cities Historical Availability Rate Trends - Office

Office supply in

Sunnyvale hasskyrocketed with

the injection of

new construction

to the tune of over

1.6 million square

feet in the past two

years. As a result,

the office availability

rate in Sunnyvale

rose to 42.1% at

year-end.

SILICON VALLEY OFFICE MARKET JANUARY 2010




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19/44

JANUARY 2010


SonicWALL, Inc. at 2001 Logic Drive in San Jose. Prudential Realtythe landlord. McAfee, Inc. is the Sublessor. Christensen Holdinis the landlord.

Equity Office Properties is the landlord.

Law Foundation of Silicon Valley is the tenant.

A year after experiencing increased gross

absorption, both Cupertino and Santa Claras

office activity dropped off in 2009. Cupertinos

office gross absorption totaled 246,438 square

feet for the year, 65% lower than in 2008. The

net result was an office occupancy loss measuring

94,248 square feet, the third straight year of

negative net absorption for that city. Apple

was again the major player for office space in

Cupertino, led by its 104,990 square foot lease on

Santa Clara generated 584,683 square feet of

office activity in 2009, 38% less than the previous

year. Net absorption was negative once again,

with the occupancy loss totaling 443,313 square

feet. This was Santa Claras largest annual loss

in office occupancy since 2003. Despite themediocre results there was activity, the largest of

which was Huaweis 108,860 square foot lease on

Central Expressway.

Looking Forward

A number of factors suggest that the office market

will improve in 2010. However, positive net

absorption is not a part of that conclusion. Without

employment growth, office demand will primarily be

in the form of gross absorption as companies shift

from one building or location to another. Lower

rents and improved business outlook will help spur

activity but it will not do much for net absorption.In many cases, companies may still have excess space

and even with modest employment growth, net

occupancy gains may have to wait until 2011.

While it is difficult to put too much stock in a few

year-end deals, it does appear that activity in the

office sector is on the upswing and should improve

in 2010. Gross absorption over the last half of 2009

first half of the year. If the Valley can come close

to sustaining that second-half trend, office gross

absorption should grow to 4.5 million square feet

in 2010.

recorded in the fourth quarter of 2009 is probably

not sustainable through 2010. To that point, not too

much should be made of Rambus 125,210 square

feet of positive net absorption that was recorded

when they signed their lease in Q4. There is an

offsetting 100,000 square feet occupancy loss to

follow in 2010 when they vacate their current

offices in Los Altos. This sort of dynamic is at work

in all sectors but it tends to play more havoc in the

office sector where users can absorb large blocks

of new space but then not move out of existing

facilities for several months.

The preimproved pipeline of office space comingto market slowed over the second half of 2009

and this suggests most of the employee shake-out

has neared its end and that there will be fewer

space consolidations in 2010. With the supply

much improved but still negative net absorptionyear for the office sector. Our forecast calls for 1.0million square feet of negative net absorption of

office space, with most of that coming in the first

half of the year.

Office rents may not fall to their post dot-com

levels simply because of the competition thatexisted back then as a result of the enormous

glut of new, Class-A buildings that were available.

Also, expenses are included in full service rents and

those costs are higher today and largely fixed. Still,

office rents remain historically high when compared

to other product types and to other periods

of supply/demand imbalance and Colliers expects

that another 15% drop is likely before office rents

average starting rents for office space to below

first quarter of 2006.

Selected Colliers Office Transactions

While it is difficult

to put too much

stock in a few

year-end deals, it

does appear that

activity in the office

sector is on the

upswing and should

improve in 2010.

Gross absorption

over the last half

of 2009 measured

2.29 million square

feet, 37.1% greater

than the 1.67 million

square feet recorded

in the first half of

the year.

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20/44

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0%

6%

10%

2%

4%

8%

14%

12%

$0.40

$0.50

$0.70

$0.90

$0.60

$0.80

$1.00

Quarter-End Availability Rate Average Starting NNN Rental Rates

4Q-06 1Q-07 2Q-07 3Q-07 4Q-07 1Q-08 2Q-08 3Q-08 4Q-08 1Q-09 2Q-09 3Q-09 4Q-09

After becoming

the beneficiaryof a $535 million

government loan

guaranty and closing

escrow on a 30-acre

site on Kato Road in

Fremont, Solyndra,

Inc. broke ground on

a state-of-the-art,

600,000 square foo

solar manufacturing

facility with rumored

project costs totaling

$750M - $1B that

will create upwards

of 2,000 new

permanent jobs.

This deal will beadded to Fremonts

absorption data

when construction

is completed in late

2010 or early 2011.

By most accounts, Silicon Valleys industrial sector

performed a little better than expected in 2009.

Colliers forecast anticipated a second half surge

in demand with 3.0 million square feet of gross

absorption for the year. Industrial activity did pick

up during the second half of 2009 as 1.98 million

square feet of the years 3.32 million square feet

of activity took place in Q3 and Q4.

At the end of 2009, total available industrial

supply measured 6.41 million square feet, with

an availability rate of 11.4%. Available industrial

mid-year but the second half surge reduced that second half results look good for 2010, industrialsupply remains at its highest figure since 2003.In addition, Silicon Valleys industrial statisticsare somewhat skewed by Solyndras 506,490square foot lease in Q4, which single-handedlyaccounted for over 15.3% of the total industrialgross absorption for the year. The impact was

even greater on the net absorption side since the

Solyndra deal was pure net absorption and did

not leave any other space vacant in its wake.

The amount of preimproved industrial space that

came on the market during the year measured

anticipated. The pipeline narrowed considerably inthe years fourth quarter when, for the first time

preimproved industrial space was vacated. Our

2009 forecast projected roughly the same amount

of rollover space coming back onto the market

and a slightly lower gross absorption figure than

2008. However, with industrial gross absorption

exceeding expectations and rollover space slightly

lower than anticipated, the industrial sectors

occupancy loss was less than forecasted.

Industrial net absorption was negative for the

third consecutive year, to the tune of 1.42 million

square feet. As noted above however, the industrial

occupancy loss was lower than our 2009 negative

net absorption forecast of 2.0 million square feet.Industrial net absorption was positive in the years

fourth quarter, measuring 522,865 square feet.

Prior to that quarter, industrial net absorption

had been negative in ten consecutive quarters,

Industrial rents had climbed for five straight yearsbefore softening in 2009. The average starting

rent for industrial deals done in the final quarter

lower than one year earlier.

Industrial Hot Spots

Silicon Valleys largest industrial market, San Jose,

generated 1.06 million square feet of industrial

gross absorption in 2009, a near repeat of the

was negative for the second straight year in SanSilicon Valley Industrial Rent vs. Availability Rate Trends

SILICON VALLEY INDUSTRIAL MARKETCOLLIERS INTERNATIONA



JANUARY 2010

Not a Bad Industrial Finish

8/14/2019 c o l l i e r


Jose, with the occupancy loss measuring 534,145

square feet. Though significant, this was 34% less

negative net absorption than in 2008. San Joses

industrial availability rate grew to 10.6%, with the

total square footage available equaling 2.40 million

square feet. This is the most available industrial

inventory for San Jose since 2003. Notable deals

include 4 Wholesale Onlines lease of 25,000

square feet on South 10th Street and ProBuilds

24,040 square foot lease on Mabury Road.

Fremont was the only major city in the Valley

to record more industrial activity in 2009 than

the year before and that was the direct result

of a behemoth deal with Solyndra, which leased506,490 square feet on Page Avenue. As a result,

industrial gross absorption increased by 60% from

2008 to 893,621 square feet, the largest annual

total since 2003. Despite the spike in activity,

Fremonts industrial net absorption was negative

for the third consecutive year, totaling 88,904

square feet. Behind the numbers, it is noteworthy

that Solyndra leased in Q4 had been vacated

earlier in the year and therefore resulted in a net

absorption wash overall in 2009.

Available industrial supply in Fremont remains

historically low and measured 558,464 square feet

at year-end, representing a 6.4% availability rate.

Of major significance during the year, New United

closure of its Fremont plant in 2010. While theplant does not factor into our industrial inventory,the closure will surely impact suppliers associated

with the plant and may cause Fremonts availability

rates to increase in the coming year.

Santa Clara and Sunnyvales industrial marke

experienced similar levels of industrial gro

absorption in 2009 from 2008. In Santa Clar

down just 8.0% from the year before but thlowest since 2001. Santa Clara had an industr

was 31% less than the year before. Sunnyvale

FremontSanta ClaraSan Jose Mountain ViewSunnyvale

2006

2007

2008

2009

2006

2007

2008

2009

2006

2007

2008

2009

2006

2007

2008

2009

2006

2007

2008

2009

0% 2% 4% 6% 8% 10% 12% 14%

6.84%

6.13%

8.62%

10.59%

0% 2% 4% 6% 8% 10% 12% 14%

4.81%

7.07%

8.23%

10.51%

0% 2% 4% 6% 8% 10% 12% 14%

8.00%

6.62%

6.42%

6.43%

0% 2% 4% 6% 8% 10% 12% 14%

9.01%

12.24%

11.56%

0% 2% 4% 6% 8% 10%

3.30%

9.18%

7.52%

8.87%16.73%

0

2

4

6

8

2006 2007 2008 2009


Year-End Availability

6.76%

7.65%

9.18%

11.37%

0

5

3

2

1

-1

-2

4

6

2005 2006 2007 2008 2009

Gross Absorption

Sq

uareFeetinMillions

Net Absorption


INDUSTRIAL PRODUCT

Selected Cities Historical Availability Rate Trends - Industrial


INDUSTRIAL PRODUCT

Of major significance

during the year,

New United Motors

Manufacturing

(NUMMI) announced

the closure of its

Fremont plant in 2010.

While the plant does

not factor into our

industrial inventory,

the closure will surely

impact suppliers

associated with the

plant and may cause

Fremonts availability

rates to increase in the

coming year.

SILICON VALLEY INDUSTRIAL MARKETCOLLIERS INTERNATIONAL



JANUARY 2010

8/14/2019 c o l l i e r


square feet in 2009, down just 0.4% from 2008;

net absorption was in the red with an occupancy

loss of 182,581 square feet, 4% more than 2008.

Looking Forward

After a year that pretty much mirrored our

expectations in 2009, where does the industrial

market go from here? Demand is clearly on the

upswing, the supply pipeline has f lattened out and

there is more space for users to choose from

than at any time dating back to late 2003. All

things considered, 2010 could be a pretty good

year for the industrial market.

A robust Q4 broke three notable streaks in the

industrial sector and each of these plays into

our forecast for 2010. It was the first quarter of

positive net absorption after 10 straight quarters

of negative net absorption. Q4 was also the first

quarter of gross absorption above 1.0 million

square feet since the third quarter of 2008 and only

the second quarter north of 1.0 million square feet

since the second quarter of 2006. These results

were owing in large part to Solyndras 506,490

square foot lease in Fremont. On the supply side,

after adding more than 1.0 million square feet ofimproved industrial space to available supply in

feet was added in Q4.These improved results must be tempered withcautious expansion plans that prevail across allsectors. While industrial users will be lookingto take advantage of better deals and more

selection, they will not be undertaking significant

growth plans. We do anticipate that the flow of

improved space added to available supply should

remain around 1.0 million square feet per quarter

but at the same time it will be a stretch for gross

absorption to top 1.0 million square feet in anyquarter without another major takedown on the

order of the Solyndra deal.

All told, we anticipate that industrial gross

absorption will approach 3.5 million square feet in

2010. Activity levels could lift closer to 4.0 million

square feet for the first time since 2005 if the

Solydra facility is completed and occupied in 2010

or if more distressed property comes to market

suitable for owner-users.

After two years of negative net absorption in

the industrial sector, we anticipate flat to slightly

negative net absorption results in 2010, with a

total occupancy loss of 500,000 square feet or less.

Should that occur, the industrial availability rate

would nudge above 12.0%. Positive net absorption

in this sector is not out of the question but it would

feet of occupancy growth, to drive the industrial

availability rate back into single-digit territory,

something we see as more likely in 2011.

More selection has resulted in more competition

from landlords for deals than at any time since

mid-2003 but that could be a short-lived blip.

Our expectation is that industrial rents will drop

another 10% or so in the first half of 2010 but

as occurred in 2003, when demand picks up the

industrial sector will be early to rebound. Quite

simply, there is not as much excess inventory to

burn off before tight market conditions return to

the industrial sector.

Industrial users like

own real estate and

2010 could present

them with the first

good buyers market

in many years. The

questions will be

whether financing is

available and whethe

buyers have the

necessary cash at

a time when many

are still struggling to

keep their businesse

afloat.

Selected Colliers Industrial Transactions purchased a 30-acre site on Kato Road in Fremont to build a 600,000 square foot solar manufacturing facility.The Laborers Pension Trust is the seller. Conti Warehouse of California is the landlord.

American Medical Response West is the tenant.

Pinnacle Manufacturing Corporation is the buyer.

OMP Page, LLC completed a long term, 506,490 square foot industrial lease at 901 Page Avenue in Fremont. Solyndra Fab 2 is the tenant.

JANUARY 2010

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As 2010 kicks off,

available warehouse

supply measures

3.53 million square

feet, 24.5% more

than one year earlie

and 45.5% more

than two years ago.

At one point during

the first half of2009, warehouse

supply had grown

to more than 4.0

million square feet,

so the improvement

since then is not to

be discounted. Still,

we are hesitant

to call this a

sustainable trend,

particularly when

one deal contributed

so much to the

overall results...

While we anticipated a rough start for the

warehouse sector in 2009, after the first half of

the year, rough start might have been too generous

of a description. Colliers anticipated 2.0 million

square feet of warehouse gross absorption and

1.0 million square feet of negative net absorption

for the year. By the end of the second quarter,

and a net occupancy loss of 1.56 million square period, over 2.0 million square feet of preimproved

warehouse space was added back to the market.

We anticipated significant rollover in Q1 but the

pipeline was even greater than expected.

Then, Silicon Valleys warehouse sector picked up

and the results were decidedly different over the

second half of 2009. Warehouse activity surged to

1.54 million square feet in the final two quarters

of 2009, with 1.05 million square feet recorded

in the fourth quarter alone. There had not been

a quarter of warehouse gross absorption greater

than 1.0 million square feet prior to that since the

second quarter of 2005.

The amount of preimproved warehouse space

re-entering the market also slowed in the secondhalf of 2009, totaling 1.89 million square feet,

about two-thirds of what rolled over in the

first two quarters. Greater activity and a much

smaller pipeline of rollover space combined to

result in positive warehouse net absorption over

the second half of the year totaling 450,220

square feet. All told, Colliers 2009 forecast

proved to be accurate as the occupancy loss

for the year measured 991,093 square feet and

gross absorption totaled 2.32 million square

feet. Although the second-half improvement was

considerable, warehouse availability nevertheless

increased for the second consecutive year leaving

the warehouse availability rate at 9.12%.

As 2010 kicks off, available warehouse supply

measures 3.53 million square feet, 24.5% more

than one year earlier and 45.5% more than two

years ago. At one point during the first half of

2009, warehouse supply had grown to more than

4.0 million square feet, so the improvement since

then is not to be discounted. Still, we are hesitant

to call this a sustainable trend, particularly whenone deal contributed so much to the overall results

and that was the case in the warehouse sector

to an even larger degree than Solyndras deal

impacted the industrial results. Homelegances

365,842 square foot absorption of the former

the total warehouse activity for the year and likeSolyndras deal, it was all positive net absorption

for Silicon Valley.

Warehouse rents held up through the first half

of 2009 and then dropped off precipitously in thesecond half. Starting rents for warehouse deals

per square foot, NNN. One year later, average square foot, reaching their lowest level since the Silicon Valley Warehouse Rent vs. Availability Rate Trends

Warehouse Back to Black?

0%

4%

8%

2%

6%

12%

10%

$0

$.30

$.15

$.45

$.60

$.75

$.90

4Q-06 1Q-07 2Q-07 3Q-07 4Q-07 1Q-08 2Q-08 3Q-08 4Q-08 1Q-09 2Q-09 3Q-09 4Q-09

Quarter-End Availabil ity Rate Average Starting NNN Rental Rates

SILICON VALLEY WAREHOUSE MARKETCOLLIERS INTERNATIONA



JANUARY 2010

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Warehouse Hot Spots

activity took place in San Jose and Fremont.

the Valleys warehouse gross absorption wasgenerated in these two cities. While San Joseproduced the lions share in 2008 , Fremont took Fremonts warehouse activity more than doubled

warehouse activity in Fremont since 1998. In

addition to Global Investors Teams purchase

of the 365,842 square foot former Mervyns

Distribution Center for use by Homelegance,

square foot warehouse on Auto Mall Parkway,Economic Packaging leased 50,000 square feet onFremont Boulevard and Rose Lei leased 35,105square feet on Warm Spring Boulevard. Fremontsported a double-digit warehouse availabilityrate for most of the year until the fourth quarter

availability rate.

San Joses warehouse activity decreased from

square feet in 2009. It was the least amount ofwarehouse activity in San Jose since 2002. Whilegross absorption slowed, there were notablewarehouse deals, such as Graebel Moving andStorages sublease of 138,240 square feet on10th Street and the 113,952 square foot lease

on Brennan Street by Mannington Mills, Inc.

for the second year in a row with negativnet absorption measuring 340,581 square feeAvailable warehouse supply grew in San Jose 14% to 1.46 million square feet, representing9.0% availability rate.

0

2

4

6

8

2006 2007 2008 2009


Year-End Availabili ty

7.90%7.32%

9.12%

6.29%

5

3

2

1

0

-1

-2

-3

4

6

Gross Absorption

Square

FeetinMillions

Net Absorption

2005 2006 2007 2008 2009


WAREHOUSE PRODUCT


WAREHOUSE PRODUCT

San Jose MilpitasFremont Santa Clara Gilroy

2006

2007

2008

2009

2006

2007

2008

2009

2006

2007

2008

2009

2006

2007

2008

2009

2006

2007

2008

2009

0% 4% 8% 12% 16% 20% 24%

7.84%

5.29%

7.83%

8.95%

0% 4% 8% 12% 16% 20% 24%

9.73%

7.70%

5.49%

7.03%

0% 4% 8% 12% 16% 20% 22% 0% 2% 4% 6% 8% 10% 1

10.45%

8.78%

6.90%

5.25%

2% 4% 6% 8% 10% 12% 14%

3.08%

2.89%

8.17%

11.04%

9.33%

6.59%

10.18%

15.89%

Selected Cities Historical Availability Rate Trends - Warehouse

In spite of the

surge of new deals,

Fremont finishedthe year with a

warehouse net

absorption loss of

96,762 square feet.

This is owing to the

fact that most of

the late-year positive

net absorption was

in space recordedas negative net

absorption earlier in

the year.

SILICON VALLEY WAREHOUSE MARKETCOLLIERS INTERNATIONAL



JANUARY 2010

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Sunnyvales warehouse activity has been almost

nonexistent in recent years largely due to

little-to-no supply of available space. In 2009,space freed up and then was taken in short order.

Warehouse gross absorption totaled 232,358

square feet, the most activity in Sunnyvale since

1999. Overall, Sunnyvale finished with a warehouse

occupancy loss of 115,550 square feet for the

year. The warehouse availability rate in Sunnyvale

was 2.1% to start the year and it finished at 4.3% .

Notable deals include Actiontecs 54,934 square

foot lease on Macara Avenue and Lockheed

Martins 50,880 square feet on Borregas Avenue.

Milpitas warehouse sector generated more gross

absorption than the year before but also a greater

warehouse gross absorption represented a 23%increase for Milpitas but it was still a historicallylow level of activity. Milpitas warehouse the citys second straight year of negative net

feet of available warehouse supply in Milpitas, the

most since 2004.

Looking Forward

Dynamics in the warehouse sector changed

considerably in the second half of 2009, reversing

what had been a rough start to the year for

this product type. Should this improving trend

continue in 2010, we could see a small amount

of positive net absorption for the year after two

straight years of negative net absorption.

While demand improved over the second half

of the year, so did the pipeline of improved

warehouse space that was coming on the market

for lease. The first half of 2009 generated a

2.23 million-square-foot tsunami of improvedwarehouse space that was added to available

supply. In the second half of the year, just over

1.0 million square feet came on the market. As

a result, there was a 1.44 million-square-foot

occupancy loss in the warehouse sector over the

first half of the year and a 450,000 square foot

gain since the first of July.

With the bloodletting and the shakeout largely

complete, there is now an opportunity for

positive net absorption in the warehouse

sector. We are not quite ready to go that far

however. Although unanticipated, the overall

weak economy could result in more big blocks

of warehouse space coming available that are

not on our radar now. So, we are calling for a

flat net absorption year overall and a year-end

availability rate very close to todays rate of

9.1%. Colliers expects gross absorption of

warehouse space will improve but will still most

likely fall shy of 2.5 million square feet.

square foot NNN. Our brokers are seeing muchmore competitiveness from warehouse ownersthan at any time in recent memory. The prospectof long-term vacancies on large blocks of space isdriving these landlords to the bargaining table. Asa result, we anticipate that warehouse rents will the year.

Selected Colliers Warehouse Transactions purchased a 365,842 square foot warehouse facility from MDS Realty II LLC at 48200 Fremont Boulevard Fremont. leased a 105,200 square foot warehouse building at 1523 Gladding Court, Milpitas. Herzstein FamilyTrust is the landlord. completed a long term, 113,952 square foot warehouse lease at 524 Brennan Street in San Jose with landlord ,AMB Property Corporation. completed a 150,408 square foot warehouse renewal at 1285 Walsh Avenue in Santa Clara. RREEF is the landlor San Jose V Investors is the

landlord.

Harvest Properties, Inc. is the landlord.

The first half of 2009

generated a 2.23

million-square-foot

tsunami of improved

warehouse space tha

was added to availab

supply. In the second

half of the year, just o

1.0 million square fee

came on the market.

As a result, there wa

1.44 million-square-fo

occupancy loss in the

warehouse sector ove

the first half of the y

and a 450,000 squar

foot gain since the fir

of July.

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JANUARY 2010

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

19981997 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Silicon Valley Capital Investment Trends

Of the approximate

$250 billion of loans

coming due in 2010

across the United Sta

(up from approximate

$200 billion in 2009)

roughly 65% of the

loans, by definition, a

not re-f inanceable. A

host of factors contrib

to this phenomenon

including inflatingcapitalization rates,

much tighter lending

standards, loan-to-val

ratios in the 50% ran

deteriorated leasing

fundamentals, increas

vacancies and failing

businesses.

Opportunistic investors are expecting the very

to lead to a high volume of distressed sales.

The Ioans associated with these sales may be

below the current values of those assets. With

declining rental rates and increased vacancies,

covering the debt service will be a challenge for

many of these owners. The next two years will

be a major test.

What will 2010 Look Like?

Moving forward we see a slight-to-moderate

uptick in conventional sales in tandem with

the availability of credit. However, we do not

expect many sales of class-A trophy assets as

the bid and ask prices will remain too far apart.We expect more sales of typical Silicon

Valley product with 100,000 square feet or

less. Again, we correlate this directly with the

availability of credit, which as of late has been

improving especially amongst the life insurance

company sector.

We also expect more owner-user sales as such

transactions provide the best prices for sellers

and they represent very good values at this

point in the market cycle for buyers.

We feel lenders spent 2009 understanding what

they really had on their books, and may start

divesting of select assets. Of the approximate

definition, are not re-financeable. A host offactors contribute to this phenomenon including lending standards, loan-to-value ratios in the

50% range, deteriorated leasing fundamentals,

increasing vacancies and failing businesses.

Hence, we forecast an acceleration of loansdefaulting and foreclosures locally. The product

type will continue be of lesser quality in inferior

locations, mostly in the sub-50,000 square

foot sector. Further complicating matters is

which would adjust LIBOR-based floating ratesupward, negatively affecting cash flow and debtservice for existing loans.Selected Colliers Investment Transactions

sold 1661 Page Mill Road in Palo Alto, a 61,205 square foot office building, to the Gordon & Betty Moore Foundat Dick Wah Lo & Jill Khien Lo are the buyers. Avanti Group LLCis the buyer. A large industrial REIT sold, as part of a 9.6 million-square-foot multi-building portfolio sale, 1,346,009 square feet of industrial/wareho

space located in the Bay Area. Stockbridge Real Estate Funds is the buyer.

The third largest Yum! Brands throughout the Southeast United States and sold to individual private capital investors.

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SILICON VALLEY RETAIL MARKETCOLLIERS INTERNATIONA



The periphery market

of southern Santa Cla

County (Morgan Hill

and Gilroy) continued

to maintain high

double-digit vacancy,

with negative net

absorption, as more

stores closed than

opened. It may be

some time before the

housing and job mark

recover enough for th

submarkets to improv

substantially.

For retailers, the best part of 2009 was that it was

not a repeat of 2008, when sales often decreased

10-30% and major chains such as Circuit City,

Linens N Things, and Mervyns became extinct.Retailers adjusted to the fact that a nation of

compulsive consumers became a nation of

savers. They focused on lower inventories and

product lines that appealed to a more discerning

shopper who tended to shop for needs versus

wants. Even for those with the ability to spend,

it became vogue to shop for value. Discounters

such as Walmart, Ross Stores, and Dollar Tree

enjoyed record profits. Other stores, such as

expand their footprints and increase store counts.

Also, some market segments such as the gourmet

burger started to step out of the shadow of theirmore generic brethren. Notably, the east coasts

version of In-N-Out Burger, Five Guys Burger and

Fries, began a process to penetrate the Bay Area

market with 50+ stores planned within the next

three to five years.

The retail investment sales market was all but dead

for much of 2009, even as cap rates increased to

part of the last decade. A large disconnect on

value remained between buyers and sellers,

as sellers were reluctant to acknowledge that

their properties had decreased in value andopportunistic buyers were looking for more

distress. The bigger problem was the underwriting

of loans by lenders, who assumed tenants would

not renew leases at their contracted option rates

and that vacant space would lease at rates much

lower than had been originally anticipated.

In the last quarter of 2009, small investors

with pent-up demand began to re-enter the

market. There was upward movement in

sales of creditworthy, single-tenant net leased

dollar range, these transactions represented

cash-ready buyers seeking higher yields than

other investment alternatives. Additionally, large

institutional buyers were also in the market,but for credit-grade, multi-tenant properties. A

notable transaction of interest was AEW Capital

Managements acquisition of the 196,000 square

foot Stevens Creek Central Shopping Center for

is speculated that this equated to about a 8.25%cap rate.What does 2010 hold for the world of retail

real estate? Well, it will not be 2006, but with

some carryover momentum, the year will show

a moderate increase in leasing activity as tenants

and landlords continue to reach middle groundon lease rates. Increased consumer activity may

embolden some retailers to get back in the game.

At the same time, other retailers may continue

to modify their square footage requirements

and store counts, learning to make do with less.

continue to thaw as well, as lenders who are ableto underwrite begin to do so and others clear thebooks and unload distressed properties.

Selected Colliers Retail Transactions Simeon Commercial Properties is the landlord. Kentwood Development is the buyer.

Restoration Hardware is the tenant.

completed a 25,000 square foot retail lease renewal at 1845 Aborn Road in San Jose to tenantOffice Depot.

sold their 14,250 square foot retail building at 12230 Saratoga Sunnyvale Road in Saratoga. Time SpaceDevelopment, LLC is the buyer.

JANUARY 2010

SILICON VALLEYAVERAGE RETAIL CAP RATE

$257.12$276.54

$298.64

$349.80$365.61

$390.29

$442.01$430.34

$452.35

$0.00

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

$450.00

$500.00

2001 2002 2003 2004 2005 2006 2007 2008 2009

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

Average PSF Average Cap Rates

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SILICON VALLEY OFC % Avail. R&D % Avail. IND % Avail. WHSE % Avail. Total % Avail.

4Q09 New Construction 0 0 0 0 0 3Q09 New Construction 485,094 0 335,000 0 820,094 Gross Absorption 922,288 1,834,513 586,926 481,841 3,825,568

2Q09

1Q09 TOTALS

Net Absorption -2,518,890 -5,935,658 -1,420,502 -991,093 -10,866,143

DISCLAIMER: Colliers International is pleased to be able to provide the market information contained herein, and in so doing believes its validity. However, we cannot guarantee its accuracy or take responsibi lity for its use.

CAMPBELL OFC % Avail. R&D % Avail. IND % Avail. WHSE % Avail. Total % Avail.

4Q09 New Construction 0 0 0 0 0 3Q09

New Construction 0 0 0 0 0 Gross Absorption 53,609 48,611 8,904 0 111,124

2Q09 New Construction 0 0 0 0 0Net Absorption -64,125 3,888 28,656 0 -31,581 1Q09 New Construction 0 0 0 0 0

JANUARY 2010



MARKET REPORT & FORECAST SILICON VALLEY MARKET STATISTICS

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CUPERTINO OFC % Avail. R&D % Avail. IND % Avail. WHSE % Avail. Total % Avail.

4Q09 New Construction 0 0 0 0 0 3Q09 New Construction 0 0 0 0 0Net Absorption -26,058 30,106 0 0 4,048

2Q09 New Construction 0 0 0 0 0 1Q09 New Construction 0 0 0 0 0Net Absorption -12,349 6,426 0 0 -5,923

FREMONT OFC % Avail. R&D % Avail. IND % Avail. WHSE % Avail. Total % Avail.

4Q09 New Construction 0 0 0 0 0 Gross Absorption 24,832 428,481 565,332 662,488 1,681,1333Q09

New Construction 0 0 335,000 0 335,000 2Q09 New Construction 0 0 0 0 0 Gross Absorption 39,601 296,036 93,135 13,350 442,1221Q09

New Construction 0 0 0 0 0 DISCLAIMER: Colliers International is pleased to be able to provide the market information contained herein, and in so doing believes its validity. However, we cannot guarantee its accuracy or take responsibil ity for its use.

JANUARY 2010

COLLIERS INTERNATIONA


MARKET REPORT & FORECSILICON VALLEY MARKET STATISTICS

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