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$72.12 FSClass A

Average Asking Rate

$64.63 FSClass B

Average Asking Rate

While overall asking rents increased slightly, the first quarter of 2017 exhibited continued signs of a cooling San Francisco office market. Despite several large leases by tenants like Slack, Google, and WeWork, absorption dropped from last quarter to -390,340. In particular, the North Financial District (NFD) saw notable negative absorption (-227,571). This was largely caused by an uptick in Class A sublease availabilities this quarter and 9% decline in NFD leasing activity. However, despite negative absorption, rents remained largely flat this quarter, a mark of continued market strength.

Submarkets that showed overall rent growth from Q4 2016 were the North Financial District (2.1%), Union Square (1.4%), and Mid-Market (2.4%). Unsurprisingly, of these submarkets the North Financial District had the highest average rents at $73.56 for Class A and $63.38 for Class B. Conversely SOMA and the South Financial District saw the largest overall decreases, with their rents dropping -2.2% and -0.9% respectively.

Major leases this quarter by several high-profile tech tenants exemplified a continued demand for quality, well-located, Class A office space. This can be seen in both Slacks’ 227,000 SF lease at 500 Howard and Google’s 166,000 SF lease at 121 Spear. This activity along with continued behind-

the scenes-interest from several major tech tenants, was a reassuring sign for San Francisco developers. However even with this activity, the 6M SF of office being developed right now (with an approximate average asking rate of $98.00) will surely test overall market strength in the coming years.

This quarter had an increase in the overall vacancy rate by 50 basis points (from 6.1% to 6.6%). At the heart of this increase was the North Financial District. NFD Class A vacancy increased 60 basis points from last quarter and Class B jumped 160 basis points (now 7.4% and 9.3% respectively). As mentioned before, a slowdown in NFD leasing activity was in part responsible for this uptick in vacancy. However, an increase in the amount of vacant sublease space also contributed. In particular, the North Financial District saw a 42% increase (85,000 SF) in the amount of vacant sublease space from Q4 as tenants have looked to increase office efficiency and shed unneeded space.

Thus while absorption was negative in Q1 and vacancy has increased, slight rent growth and continued tenant demand give us reason to be confident in the San Francisco market for the coming quarters.

Market Overview

Q1 2017 / Quarterly Office Market Report

San Francisco

Market Facts

6.8%Class A Vacancy

6.6%Class B Vacancy

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San Francisco Q1 2017 / Quarterly Office Market Report

Market Snapshot

Even major leases by Slack, Google, and WeWork could not prevent an uptick in Q1 San Francisco vacancy. Nevertheless, slight rent growth from Q4 2016 and continued tenant demand give us confidence looking forward to Q2.

Historical Asking Rental Rate (FSG) Historical Vacancy

By Sector (Deals over 25K)

Market Inventory

83,412,847 SF

OverallVacancy Rate

6.6% (6.1%*)

Net Absorption

-390,340 SF

Average Asking Rate

$69.64 FS ($69.33*)

Under Construction

6,017,821 SF

WeWork’s 60,576 SF lease at 650 California, was one of only a handful of major deals in the North Financial District. Most of the Q1 2017 leasing activity was in SOMA and the South Financial District.

Technology

Financial/Banking Legal Other

Business Services

67%15%

5%2%

12%

Technology

Financial/Banking Legal Other

Business Services

67%15%

5%2%

12%

$0.00

$20.00

$40.00

$60.00

$80.00

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017

Class A Class B Class A Class B

$72.12

$56.50

$65.00

$69.88$64.63

6.8%6.6%

0.0%

2.0%

4.0%

6.0%

8.0%

$0.00

$20.00

$40.00

$60.00

$80.00

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017

Class A Class B Class A Class B

$72.12

$56.50

$65.00

$69.88$64.63

6.8%6.6%

0.0%

2.0%

4.0%

6.0%

8.0%

*Compared to previous quarter

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Market By The Numbers

Historical Net Absorption & Leasing Activity

San Francisco Q1 2017 / Quarterly Office Market Report

SUBMARKET Total RBA (SF)

Vacancy Rate A

Vacancy Rate B

Avail Rate A

Avail Rate B

Net Absorp

(SF)

Under Construction

(SF)

Avg Ask Total

Avg Ask A

Avg Ask B

Direct Avg Ask

Total

Direct Avg

Ask A

Direct Avg

Ask B

North Financial 28,139,121 7.4% 9.3% 13.1% 14.8% -227,571 447,000 $71.27 $73.56 $63.38 $73.65 $76.02 $65.03

South Financial 24,889,984 6.6% 5.5% 13.6% 8.1% -123,011 3,834,357 $72.02 $72.15 $70.74 $74.12 $74.69 $72.02

CBD Average 53,029,105 7.1% 7.7% 13.4% 11.9% -350,582 4,281,357 $71.61 $72.87 $65.04 $73.86 $75.40 $66.65

SOMA* 13,464,852 6.7% 6.2% 13.6% 12.3% 8,796 422,180 $66.99 $69.35 $66.18 $70.97 $82.43 $66.99

Union Square 4,034,489 0.0% 7.0% 4.5% 11.7% -10,437 0 $67.59 $73.00 $67.96 $67.24 $73.00 $67.52

Mid-Market 3,947,367 5.4% 2.0% 9.2% 8.0% 2,176 0 $69.45 $69.21 $65.83 $68.17 $74.17 $64.37

Jackson Square/North Waterfront

5,159,870 9.7% 5.3% 19.8% 8.2% 6,872 0 $60.08 $66.63 $56.50 $60.65 $65.07 $58.81

Civic Center/Van Ness Corridor

2,001,481 5.9% 7.2% 11.1% 8.1% -3,540 0 $49.55 $54.26 $51.75 $49.58 $57.90 $51.98

Mission Bay 1,775,683 2.5% - 3.6% - -43,625 1,185,000 $74.00 $74.00 N/A - - N/A

San Francisco Total 83,412,847 6.8% 6.6% 12.9% 11.5% -390,340 5,888,537 $69.64 $72.12 $64.63 $71.99 $79.41 $65.99

*Includes China Basin, South of Market, Rincon/South Beach, Yerba Buena, Showplace Square, and Potrero Neighborhoods

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

-500,000

-250,000

0

250,000

500,000

750,000

1,000,000

1,250,000

1,500,000

Q2-2012 Q4-2012 Q2-2013 Q4-2013 Q2-2014 Q4-2014 Q2 2015 Q4 2015 Q2 2016 Q4 2016

Net

Abs

orpt

ion

Squa

re F

eet L

ease

d

Net Absorption Leasing Activity

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© 2017 Avison Young [Avison Young - Northern California, Ltd.]. All rights reserved. E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young.

AY San Francisco Team

Tenant Building Submarket Square Feet Type

Slack 500 Howard Street South Financial District 227,632 Direct

Google 121 Spear Street South Financial District 166,460 Direct

Otto Pier 70 Mission Bay 160,000 Direct

Cruise Automation 1201 Bryant Street SOMA 139,102 Direct

Accenture 415 Mission Street South Financial District 100,616 Direct

Top Leases

Building Buyer Submarket Square Feet Sale Price PSF

211 Main Street Blackstone Group South Financial District 417,266 ±$292,882,000 ±$702

100 Pine Street Rockpoint Group North Financial District 402,534 ±$287,500,000 ±$714

150 Spear Street Walnut Hill Capital South Financial District 264,492 ±$185,000,000 ±$699

114 Sansome Street Deka Immobilien North Financial District 191,055 ±$145,000,000 ±$759

555 Montgomery Street GAW Capital Advisors North Financial District 228,573 ±$120,600,000 ±$528

Top Sales

Building Developer Submarket Square Feet % Leased Delivery

Salesforce Tower Boston Properties South Financial District 1,420,081 68% Q3 2017

Oceanwide Center Oceanwide Holdings South Financial District 1,250,000 0% Q4 2021

Park Tower John Buck / Golub & Co. / Metlife South Financial District 751,500 0% Q4 2018

The Exchange Kilroy Realty Mission Bay 740,000 0% Q3 2017

350 Bush Lincoln Property / Gemdale USA North Financial District 447,000 56% Q2 2017

Under Construction

Office Group

Nick Slonek, Managing Director / Principal 415.322.5051

John Cashin, Principal 415.322.5052

Riccardo Gale, Vice President 415.322.5063

Raquel Ledesma, Graphic Designer 415.322.5057

David Linsmayer, Principal 415.322.5061

Jim Lucas, Vice President 415.322.5051

Stephanie McNeill, Vice President 415.322.5062

Melinda Miyagishima, Operations Manager 415.322.5058

Peter Setzer, Senior Vice President 415.349.3402

Ryan Smith, Marketing Coordinator 415.349.3400

Robert Yeagle, Market Analyst 415.322.5056

Hospitality Group

Chris Stark, Principal 503.621.8530

Chelsea Wang, Senior Hospitality Broker 415.322.5067

Capital Markets Group

Chris Abbott, Senior Vice President 415.322.5050

Laef Barnes, Vice President 415.349.3391

Nadav Kariv, Senior Associate 415.349.3392

Kevin Klink, Vice President 415.349.3393

Grant Sedgwick, Senior Vice President 415.322.5053

Mac Carlsen, Financial Analyst 415.349.3390

Property Management / Lease Administration

Tom Greenfield, CPM® LEED®, Property Manager 510.534.4700

Bryce McEfee, LEED® AP, Property Manager 916.426.3584

Tom McEfee, CPM®, SVP, Management Services 916.426.3570

Project / Construction Management

David Gonzales, Managing Director / Principal 415.322.5065

Shannon Dupler, Manager, Financial Reporting 415.349.3399

Clare Friel, Project Manager 415.349.3406

Phoebe Ng, Administrative Coordinator 415.349.3403

Nicole de la Rosa, Assistant Project Manager 510.254.4268

San Francisco Q1 2017 / Quarterly Office Market Report

Avison Young - Northern California, Ltd.601 California Street, 5th FloorSan Francisco, CA 94108T 415.322.5050 F 415.322.5055