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National Studley Effect Rent Index

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National Studley Effect Rent Index

National Studley Effect Rent Index
2010

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    National Studley Effect Rent Index National Studley Effect Rent Index Presentation Transcript

    • 10
    • Methodology Since 1995, the Studley Effective Rent Index (SERI) has been providing the real estate industry’s only comprehensive, in-depth study of effective rental rate trends and the real cost of occupancy for tenants in the nation’s major Central Business Districts (CBDs) and selected suburban markets. The SERI report provides “real world” numbers that reflect lease terms, including negotiated rents and concessions, as well as operating expenses, real estate taxes and electricity costs. Each year, Studley analysts examine larger long-term direct deals signed in the highest-quality Class A properties. Total (gross) rent is separated into its key components: net (or base) rent, operating expenses, real estate taxes and electricity costs. The Tenant Effective Rent Index (the cost of occupancy to the tenant) is derived from total rent less the value of concessions provided by the landlord. Finally, the Landlord Effective Rent Index (the landlord’s bottom line) is calculated from total rent less costs incurred by the landlord, which include expenses, concessions and commissions. All statistics in this year’s SERI report are based on larger long-term leases completed during 2009 in existing or newly constructed Class A buildings.
    • SERI2010 TABLE OF CONTENTS Summary of Key Findings 1 National Benchmarks 2 Landlord Concessions 4 Tenant Effective Rent 6 Landlord Effective Rent 10 Total Rent Components 14 CBD Rent Trends 24 Suburban Rent Trends 32 Statistical Summary 36 Glossary 37 Supplementary Information 38
    • Summary of Key Findings Plunge in Net Rents Resets Market Floor Effective rents registered their largest single-year correction since the SERI index began, as demand for office space in most markets plummeted to its lowest level in more than a decade. The value of concessions spiked by more than 25% and the decline in net (base) rents reset the starting point for rents in nearly every market. Net rents plunged by more than 30% in the markets that had the most room for adjustment, such as Manhattan and West Los Angeles. Atlanta, Chicago, and Tampa Bay posted more moderate declines of less than 10%, but the operating margins were already razor-thin in these markets. Only a few markets – Denver, Houston, Philadelphia, and Washington, DC – can be accurately described as holding their ground on rents due to less severe conditions. Although the effective rents of 2009 represent just one year’s worth of transactions, the decline was so extensive that the new starting point for net rents – the floor for prime Class A space – has fallen to its levels of 2003 or in some cases of the mid-1990s. The upside was a much lower cost to lease space – businesses that were able to sign new leases or restructure their current leases were able to lock in generational savings on real estate. KEY CBD FINDINGS  2009  2008  Markets  Markets  2009 2008 Change Change Decreasing Increasing COMMENTS TOTAL RENT COMPONENTS The net rent index fell for the second straight year,   Net (Base) Rent Index  ‐ (Page 17) $29.51 $40.34 ‐26.9% ‐6.4% 15 1 posting its steepest annual decrease on record. Operating expenses registered a very moderate increase       (Operating Expenses) ‐ (Page 18) $9.86 $9.72 1.5% 3.2% 2 14 compared to prior years. Real estate taxes rose at a faster pace than operating       (Real Estate Taxes) ‐ (Page 19) $9.67 $9.32 3.8% 3.4% 2 14 expenses and tenant electric. The increase in tenant electric was about half that       (Electricity ) ‐ (Page 20) $2.69 $2.63 2.4% 4.3% 2 14 recorded in 2008. Total rent posted a record decline, exceeding the 11.1%  Total Rent Index ‐ (Page 21) $51.73 $62.24 ‐16.7% ‐2.9% 14 2 drop in 2002. Concession packages spiked by more than 25.0%,       (Concessions) ‐ (Page 4) $91.10 $71.94 26.6% 19.4% 0 16 exceeding last year's jump of nearly 20.0%. BENCHMARK EFFECTIVE RENT INDEXES A record jump in concessions combined with  Tenant Effective Rent Index ‐ (Page 6) $38.98 $51.14 ‐23.8% ‐7.0% 0 16 plummeting net rents spurred a decline of nearly 25.0%. Landlords' bottom line plunged by more than 40.0% in  Landlord Effective Rent Index ‐ (Page 10) $17.11 $29.21 ‐41.4% ‐13.1% 0 16 2009 as they extended generous packages and lowered  net rents. STUDLEY EFFECTIVE RENT INDEX 2010 1
    • National Benchmarks Pivotal Fall in Effective Rents Tenant Landlord National Benchmarks Comparison Effective Effective Tenant occupancy costs (the National Tenant Effective Rent Index) registered the largest year-on-year decline since the SERI $60 index started in 1995. Tenant effective rent decreased by 23.8% during 2009, falling from $50 $51.14 to $38.98. Tenant effective rent was about 2.5% below its mark in 2005 ($40.00). $40 The National Landlord Effective Rent Index dropped by a record 41.4%, plummeting from $30 $29.21 in 2008 to $17.11 in 2009. A sharp drop in net rent, combined with $20 generous concession packages, caused the decline. $10 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Tenant Effective Rent $37.63 $45.44 $43.68 $36.73 $35.15 $36.35 $40.00 $46.14 $55.02 $51.14 $38.98 Landlord Effective Rent $21.61 $28.74 $27.33 $19.65 $17.64 $18.06 $20.79 $26.39 $33.63 $29.21 $17.11 2 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Total Rent Dives Operating Real Estate Total Rent Components Net Rent Expenses Taxes Electricity Total (or gross) rent fell by 16.7% in 2009, declining from $62.24 to $51.73. Total rent consists of four components: net (or base) rent, operating expenses, real estate taxes $70 and electricity. $60 The sharp drop in net rent was the critical factor in 2009. Net rent declined for the $50 second straight year, falling by 26.9% to $29.51. By comparison, net rent decreased $40 by 6.4% in 2008 to $40.34. $30 Expenses associated with building operations $20 continued to increase. Real estate taxes rose by 3.8% to $9.67, slightly more than last $10 year’s growth of 3.3%. Electricity posted a more moderate gain than in recent years, $0 inching up by 2.4% to $2.69. Operating 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Net Rent $29.54 $36.66 $33.18 $26.94 $25.58 $26.01 $28.43 $33.97 $43.11 $40.34 $29.51 expenses recorded the most modest rise, of Operating Expenses $6.78 $7.01 $7.26 $7.54 $7.84 $8.13 $8.22 $8.59 $9.42 $9.72 $9.86 1.5% from $9.72 to $9.86. Real Estate Taxes $5.62 $5.71 $5.82 $6.42 $6.74 $7.23 $7.84 $8.09 $9.02 $9.32 $9.67 Electricity $1.73 $1.84 $1.87 $1.91 $1.94 $2.00 $2.20 $2.33 $2.52 $2.63 $2.69 Total Rent $43.67 $51.22 $48.14 $42.81 $42.09 $43.37 $46.68 $53.01 $64.07 $62.24 $51.73 STUDLEY EFFECTIVE RENT INDEX 2010 3
    • Landlord Concessions Fire Sale Concessions Tenant Concessions: Market Comparison 2008 2009 The value of concession packages has increased in every year since 2006, with double-digit spikes in each of the last two years. In prior years, the increase was caused in part by the growth in $140 rental rates that in turn inflated the value of the packages. In 2009, the value of concession packages spiked by a record $120 26.6% from $71.94 to $91.10, in spite of steep declines in net rent. Landlords went to great lengths in most markets to $100 get leases completed. In some markets, though, the depletion of reserves and the inability to secure funding kept tenant $80 improvement dollars in check, forcing many landlords to offer expanded free rent periods instead. $60 The value of concession packages reached record levels in 2009 in all but $40 four markets as landlords scrambled to jumpstart waning demand. Every market except Philadelphia (up by only 7.1%) $20 posted a double-digit increase in the value of concession packages. Values pushed above $100 in four markets: Chicago $0 SAN (+16.7% to $105.00); Atlanta (+18.2% to WDC MTNY ATL CHI DTNY MIA TAM DEN HOU NJ FRAN DT LA DAL WLA SDO PHI $105.00); Midtown Manhattan (+22.3% to 2008 $70.00 $94.00 $88.86 $90.00 $78.00 $42.50 $55.88 $53.75 $37.50 $50.00 $45.00 $50.00 $44.00 $45.00 $29.00 $42.00 $115.00) and Washington, DC (+87.1% 2009 $131.00 $115.00 $105.00 $105.00 $92.84 $65.85 $64.12 $62.04 $58.56 $57.50 $57.04 $55.00 $51.34 $50.00 $47.00 $45.00 to $131.00). The increase in concession packages in Washington, in contrast to that in the other markets, was not 4 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 accompanied by a significant decrease in Lowest net rents. Landlords in the nation’s capital National Highest Value of Amortized Concessions Average (Chicago) (San chose to lure tenants with record-setting Francisco) concessions including generous build- outs, but held their ground on base rents. Amortized concessions as a percentage of gross rent provide a more precise gauge of the dramatic spike in the true value of packages. The 16.7% decline in gross rents combined with the 26.6% increase 40% in concessions pushed the ratio of concession packages to initial year’s rent 35% from 17.1% in 2008 to 24.3% in 2009, well above the peak ratio of 20.1% in 2003. 30% Washington, DC (+11.5 pp) and Miami 25% (+13.0 pp) registered the largest year- on-year increases in concessions as a 20% percentage of initial year rent. In contrast, this percentage rose more moderately in 15% Downtown Los Angeles (+1.3 pp) and San 10% Francisco (+2.2 pp). 5% Tenants were also able to negotiate other substantial incentives not quantified in the 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 value of concession packages. These National 13.8% 11.3% 14.2% 18.7% 20.1% 19.5% 17.9% 15.7% 13.9% 17.1% 24.3% ranged from cancellation options and San Francisco (Low) 6.2% 3.4% 8.0% 21.0% 21.0% 20.4% 18.2% 16.8% 11.2% 13.9% 16.0% offset rights to flexibility on moving and Chicago (High) 15.7% 20.0% 26.1% 31.1% 31.6% 33.5% 36.9% 34.5% 28.1% 34.1% 38.0% cabling allowance. Other companies gained building signage. The most notable Amortized value of concession package/initial year's gross rent instance was Willis Group’s lease that resulted in the renaming of Chicago’s iconic Sears Tower. STUDLEY EFFECTIVE RENT INDEX 2010 5
    • Tenant Effective Rent Occupancy Costs Dive National Tenant Effective Rent Market Comparison Median 2008 2009 Tenant effective rent, the cost of occupancy for firms, declined by 23.8% in 2009, falling to $38.98. $90 $85 $80 In markets such as Manhattan, $75 the steep drop was due to $70 generous concession packages $65 and a record cut in net rents. In $60 $55 2008, the $100 mark was the $50 starting point for negotiations $45 in Midtown Manhattan, but this $40 $35 dropped to the $60.00-$70.00 $30 range by midyear 2009. Even $25 with these fluctuations, few $20 $15 markets changed positions from $10 a year ago – Midtown Manhattan $5 remained the most costly for $0 SAN MTNY WDC WLA DTNY HOU DTLA MIA SDO NJ CHI PHI DAL DEN TAM ATL FRAN tenants, and Atlanta was once 2008 $82.95 $54.64 $49.79 $45.21 $45.77 $34.93 $29.33 $37.71 $37.71 $25.60 $25.68 $23.12 $28.59 $19.74 $18.73 $17.94 again the least expensive. 2009 $49.62 $47.92 $46.06 $33.46 $32.00 $29.04 $27.85 $26.01 $24.54 $23.95 $23.66 $22.69 $22.30 $19.50 $17.65 $16.04 6 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Index Falls By Nearly 25% Tenant Effective Rent Trends: Year-on-Year Change The 23.8% decline in tenant effective rent during 2009 exceeded the 15.9% drop in 2002, which had been the largest year-on-year decrease. Tenant 10-Year Average: +0.4% effective rent has now fallen by 25% 29.2% from its peak of $55.02 in 20% 2007. During the last recession, 15% tenant effective rent fell by a total Cumulative decline: of 22.7%, from $45.44 in 2000 to 10% -22.7% $35.15 in 2003. 5% 0% Tenant occupancy costs will decline further in 2010, but the -5% decreases will probably be in the -10% 5% to 10% range rather than the -15% Cumulative extreme drops seen during 2009. decline: -29.2% An additional 10.0% decrease -20% would push tenant occupancy -25% costs just below their mark in -30% 2003. 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Annual Change 5.8% 20.8% -3.9% -15.9% -4.3% 3.4% 10.0% 15.3% 19.2% -7.0% -23.8% STUDLEY EFFECTIVE RENT INDEX 2010 7
    • Tenant Effective Rent by Market Tenant Occupancy Costs Decline Across the Board Tenant occupancy costs declined in every market, with decreases of at least 10% in nine of the 16 markets. Tenant effective rent fell by more than 25% in five markets, with the steepest drops occurring in Miami (-31.0%), San Diego (-34.9%) and both Manhattan submarkets (-40.2% in Midtown and -30.1% Downtown). In ten of the markets, tenant effective rents fell at a much more moderate rate of less than 20.0%. In four of these markets – Denver (-1.2%), Philadelphia (-1.8%), Washington, DC (-12.3%) and Houston (-16.9%) – the relative stability can be attributed to healthier demand or more limited supply of quality product. Denver’s and Philadelphia’s CBDs, for example, both have a smaller supply of premiere product, and compared to other markets, the recession did not hit either of these markets as hard in terms of layoffs. Sublet supply consequently increased but not to the extent seen in Los Angeles, Chicago or Manhattan. On the other hand, in markets such as Tampa Bay (-5.8%), New Jersey (-6.5%), Chicago (-7.9%) and Atlanta (-10.9%), tenant effective rent was already well below the national average headed into 2009. These markets had already experienced rent deflation during 2007 and 2008, and landlords had little margin left to squeeze out lower net rents or increase concessions. In Atlanta, for example, tenant effective rent was just below $18.00 in 2008 – the lowest it had been on a non-inflation adjusted basis since the mid-1990s. This rate fell to $16.04 in 2009. 8 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Tenant Effective Rent: Year-on-Year Change by Market Denver -1.2% Philadelphia -1.8% Downtown LA -5.1% Tampa Bay -5.8% New Jersey -6.5% San Francisco -7.5% Chicago -7.9% Atlanta -10.6% Washington, DC -12.3% Houston -16.9% Dallas -22.0% West LA -26.0% Manhattan (DT) -30.1% Miami -31.0% San Diego -34.9% Manhattan (MT) -40.2% -45% -40% -35% -30% -25% -20% -15% -10% -5% 0% STUDLEY EFFECTIVE RENT INDEX 2010 9
    • Landlord Effective Rent Decline Exceeds 40% National Landlord Effective Rent Market Comparison Median 2008 2009 Landlord effective rents fell by 13.1% in 2008. This was just the cusp of the collapse; the landlord $60 effective rent index dove by 41.4% to $17.11 in 2009. $50 For the first time since 2003, Midtown Manhattan was $40 pushed off the top of the scale, supplanted by San Francisco and Washington, DC. The median $30 landlord effective rent (San Diego) fell from $23.88 to $11.76 $20 in 2009, and the highest landlord effective rent (San Francisco, $28.60) fell below $30.00 for the $10 first time since 2004. Chicago and Atlanta were in the bottom $0 SAN two positions for the second FRAN WDC MTNY HOU WLA DTLA MIA SDO NJ DAL DTNY DEN PHI TAM CHI ATL 2008 $32.12 $27.85 $52.44 $23.19 $29.12 $15.03 $22.72 $23.88 $11.68 $16.30 $23.83 $9.73 $8.28 $7.39 $6.31 $5.62 straight year. 2009 $28.60 $21.09 $19.57 $17.70 $17.49 $13.40 $12.25 $11.76 $10.16 $10.10 $9.99 $9.15 $7.68 $6.61 $4.09 $3.65 10 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Concentrated Collapse Landlord Effective Rent Trends: Year-on-Year Change It took three years in the last downturn for landlord effective rents to fall by 38.6% from peak to trough. Landlord effective 10-Year Average: -2.3% 40% rents have fallen by nearly 50.0% from their peak rate of $33.63 in 30% 2007. The bulk of this correction Cumulative decline: -38.6% 20% occurred over four quarters from late 2008 to midyear 2009. The 10% nosedive of nearly 42.0% in 0% landlord effective rents during -10% 2009 pushed the index down to just above the $16.06 rate -20% Cumulative recorded in 1997. Difficulty in -30% decline: -49.1% securing capital and the number -40% of properties with approaching financial commitments make the -50% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 contraction in cash flow much Annual Change 10.6% 33.0% -4.9% -28.1% -10.2% 2.3% 15.1% 26.9% 27.4% -13.1% -41.5% more problematic in this cycle. STUDLEY EFFECTIVE RENT INDEX 2010 11
    • Landlord Effective Rent by Market Pervasive Cut in Landlord Effective Rent As the recession first emerged in 2008, landlords held their ground on rents, initially increasing concession packages instead. By early 2009, though, with demand at record lows and sublet supply flooding the market (particularly in the top-tier Class A properties that had pushed rents to record highs in 2007), landlords had to make sharp adjustments to net rents as well. During 2009, landlord effective rent fell by double digits in every market except Denver (-6.0%) and Philadelphia (-7.2%). Tenants willing to sign deals in 2009 came to the table anticipating substantial discounts in rents as well as generous incentives. Landlord effective rent fell by more than 40% in four markets including Miami (-46.1%), San Diego (-50.8%), and both Manhattan markets (-58.1% in Downtown and -62.7% in Midtown) Even markets that had headed into 2009 with scant landlord effective rents of less than $10.00 suffered additional haircuts to margins. Atlanta’s landlord effective rent dropped by 35.1% to $3.65 and Chicago’s landlord effective rent fell by 35.2% to $4.09. Some landlords agreed to lease terms that worked out to negative cash flow in initial years.The SERI index only tracks direct transactions, but the flood of sublet space and the highly favorable terms granted by many sub- lessors set a new standard for how low rents could go, putting significant pressure on all property owners to follow suit. Many leases signed for quality sublet space included high-end installations and a lengthy remaining term. Some sub-lessors, many in the financial sector, adopted a lease-at-all-costs approach to unloading space. Landlords with the capacity to take a cut in their bottom line made aggressive moves, while others were handcuffed by financial obligations, pro forma rent goals or depleted reserves that prevented them from lowering rents or extending competitive concession packages. Other property owners signed shorter-term leases, hoping to fill the space for a while and then sign for more profitable terms once the market recovers in two to three years. 12 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Landlord Effective Rent: Year-on-Year Change by Market Denver -6.0% Philadelphia -7.2% Tampa Bay -10.5% Downtown LA -10.9% San Francisco -11.0% New Jersey -13.0% Houston -23.7% Washington, DC -24.3% Atlanta -35.1% Chicago -35.2% Dallas -38.0% West LA -39.9% Miami -46.1% San Diego -50.8% Manhattan (DT) -58.1% Manhattan (MT) -62.7% -70% -60% -50% -40% -30% -20% -10% 0% STUDLEY EFFECTIVE RENT INDEX 2010 13
    • Total Rent Components Base Rents Plummet Total (or gross) rent consists of four components: net (or base) rent, operating expenses, real estate taxes and electricity. Of these four components, net rent as a percentage of total rent plummeted from 64.8% in 2008 to 57.0% in 2009. This was the first time since the SERI index started in 1995 that net rent’s share fell below 60.0%. With the steep decline in net rent, the proportionate share of other components of total rent increased. Operating expenses rose from a 15.6% share in 2008 to 19.1% in 2009. Real estate taxes surged to a new peak, increasing to 18.7%. Electricity as a percentage of total rent hit its highest mark as well, rising to 5.2% and surpassing the prior peak of 4.9% in 1996. Net Operating Real Estate National Rent Components Rent Expenses Taxes Electricity Rent Components - 2008 Rent Components - 2009 Elec. Elec. 4.3% 5.2% Taxes 15.3% Taxes 18.7% Net (Base) Rent Op. Ex 57.0% Net (Base) Rent 15.6% 64.8% Op. Ex 19.1% 14 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Net Rent as a Percentage Net Rent as a Percentage of Total Rent of Total Rent Net (or base) rent is the largest and most critical component of total rent. 80.0% At its peak in 2000 just before the dotcom bust, net rent represented nearly 72.0% of total (gross) rent. This 70.0% level decreased to 57.0% in 2009. 60.0% The cost of operating a property accounted for more than 40% of the 50.0% initial year’s gross rent. In short, even before concessions are factored 40.0% in, operating margins for properties contracted sharply during 2009. 30.0% 20.0% 10.0% 0.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Net Rent 67.7% 71.6% 68.9% 62.9% 60.8% 60.0% 60.9% 64.1% 67.3% 64.8% 57.0% STUDLEY EFFECTIVE RENT INDEX 2010 15
    • Total Rent Components Net Rent Trimmed Net Rent as Percentage of Total Rent 2008 2009 The nation’s most expensive markets posted the sharpest declines in net rent’s share of total rent. Net rent’s 80% share in Downtown Manhattan was the lowest in the nation, plummeting from 60.3% a year ago to 47.4% in 2009. Other markets with net rent shares well 70% below the national average included Chicago (49.5%, down from 51.3%) and Midtown Manhattan (51.8%, down 60% from 68.6% a year ago). Tampa Bay and Washington, DC were the exceptions to the rule posting meager increases of 0.2 pp (to 58.5%) and 0.6 pp (to 59.1%), 50% respectively. 40% SAN HOU ATL DEN WLA WDC NJ TAMP DTLA SDO PHI DAL MIA MTNY CHI DTNY FRAN 2008 70.8% 68.1% 64.1% 63.0% 69.2% 58.5% 60.0% 58.3% 59.9% 66.2% 55.0% 63.6% 61.4% 68.6% 51.3% 60.3% 2009 69.1% 66.0% 63.1% 62.7% 59.3% 59.1% 58.5% 58.5% 57.8% 56.7% 53.6% 53.0% 52.0% 51.8% 49.5% 47.4% 16 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Net Rent Dives to 2005 National Levels Net Rent Comparison Median 2008 2009 The National Net Rent index declined by 26.9%, falling from $40.34 in 2008 to $80 $29.51. Net rent ended 2009 just above $75 its 2005 level ($28.43). Net rent fell in $70 all markets except Washington, DC and $65 Denver. The sharpest declines occurred $60 in markets that attained record rents in $55 2007. Net rent in Midtown Manhattan $50 plummeted by 48.9% from $66.47 to $45 $33.95, followed closely by Downtown $40 Manhattan (-38.5% to $21.26), San $35 Diego (-33.1% to $19.23) and Dallas (- $30 26.1% to $16.50). In both Washington, $25 DC and Denver, several new properties, $20 plus the effort by landlords to extend $15 generous concessions rather than $10 lowering rents, contributed to modest $5 increases in net rent of 2.6% and 2.8%, $0 SAN respectively. WDC FRAN MTNY HOU WLA DTNY DTLA ATL SDO CHI NJ MIA DEN DAL PHI TAM 2008 $38.00 $39.34 $66.47 $28.65 $35.89 $34.55 $22.00 $19.93 $28.75 $20.00 $19.80 $27.00 $17.99 $22.33 $16.13 $15.75 2009 $39.00 $36.20 $33.95 $25.82 $23.92 $21.26 $20.50 $19.25 $19.23 $18.90 $18.65 $18.60 $18.50 $16.50 $15.50 $15.50 STUDLEY EFFECTIVE RENT INDEX 2010 17
    • Total Rent Components Moderate Up-tick in National Operating Expenses Operating Expense Comparison Median 2008 2009 Of the three expense indexes, the National Operating Expense Index $14 registered the smallest annual increase in 2009, posting a modest 1.5% rise from $9.72 to $9.86. $12 Most markets recorded minor up-ticks $10 in operating expenses. Chicago and Philadelphia both registered increases of 1.2%, for example, and Downtown Los $8 Angeles’ operating expenses rose by 1.6%. $6 Miami (down by 11.6%) was the only market to register a large decline. In $4 contrast, operating expenses rose significantly in Houston (+6.6%). $2 Operating expenses should moderate further in 2010. $0 SAN MTNY DTNY DTLA WLA WDC MIA NJ CHI PHI DAL SDO DEN ATL HOU TAM FRAN 2008 $11.76 $10.85 $9.44 $9.15 $8.90 $9.00 $10.00 $8.32 $8.25 $8.10 $7.55 $8.10 $6.57 $6.07 $5.43 $5.50 2009 $11.95 $11.10 $9.42 $9.30 $9.16 $9.00 $8.84 $8.38 $8.35 $8.20 $7.75 $7.00 $6.75 $6.30 $5.79 $5.50 18 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Real Estate Taxes Continue National Ascent Real Estate Tax Comparison Median 2008 2009 Real estate taxes once again posted the largest annual jump among the expense $18 indexes, rising by 3.8% to $9.67. The year-on-year increase was slightly higher $16 than in 2008, when taxes jumped by 3.4%. $14 Real estate taxes increased by 3.1% in $12 Dallas and spiked by 19.1% in Miami. Tampa Bay (-7.7%) and Houston $10 (-14.4%) posted the only notable declines. $8 Taxes should start to lose some $6 momentum, and in fact decline, in many markets during 2010 as they are finally $4 impacted by reduced property values. This period of declining assessments $2 could be brief, though – commercial property will be a tempting target as $0 SAN many municipalities deal with revenue MTNY WDC CHI DTNY FRAN MIA WLA SDO DTLA ATL HOU NJ PHI TAM DAL DEN shortfalls in the coming years. 2008 $15.23 $15.00 $9.25 $8.66 $6.23 $4.50 $4.95 $3.90 $3.59 $3.59 $4.03 $3.25 $3.10 $3.25 $2.55 $2.38 2009 $16.04 $15.00 $9.35 $9.05 $6.28 $5.36 $5.09 $4.40 $3.65 $3.48 $3.45 $3.14 $3.10 $3.00 $2.63 $2.55 STUDLEY EFFECTIVE RENT INDEX 2010 19
    • Total Rent Components Electricity Costs Inch Up National Electricity Cost Comparison Median 2008 2009 Tenant electricity registered a smaller increase than in prior years, growing by 2.4% from $2.63 to $2.69. Tenant $3.50 electricity was flat or rose minimally in most markets, inching up by 3.3% in Chicago and 4.4% in Midtown $3.00 Manhattan. Miami, where the rate jumped by 18.0%, registered the $2.50 largest increase. Dallas and Houston posted the largest declines (-6.4% $2.00 and -13.1%, respectively). $1.50 Reduced demand and relatively stable fuel costs prevailed in 2009 $1.00 and should continue in 2010. $0.50 $0.00 SAN MTNY DTNY WDC MIA SDO DAL TAM WLA PHI HOU DTLA NJ DEN CHI ATL FRAN 2008 $3.40 $3.25 $3.00 $2.79 $2.50 $2.67 $2.67 $2.50 $2.13 $2.00 $2.37 $1.99 $1.63 $1.60 $1.50 $1.50 2009 $3.55 $3.40 $3.00 $2.96 $2.95 $2.75 $2.50 $2.50 $2.19 $2.10 $2.06 $1.99 $1.71 $1.70 $1.55 $1.50 20 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Record Decline in Total Rent National Total Rent Market Comparison Median 2008 2009 Total (gross) rent dropped by 16.7% in 2009, decreasing from $62.24 during the prior year to $51.73. $110 $105 $100 It fell in every market with the $95 exception of Washington, DC $90 (+1.5%) and Denver (+3.4%). New $85 $80 construction and stronger demand $75 in both of these markets were key $70 factors in the small increase in total $65 rents. $60 $55 $50 Of note, gross rent in Washington, $45 DC ($66.00) nudged just past the $40 rate of $65.49 in Midtown Manhattan $35 $30 as the $30 gap between Midtown $25 Manhattan and Washington, DC $20 that had prevailed in 2007 and 2008 $15 $10 evaporated in 2009. $5 $0 SAN WDC MTNY DTNY WLA CHI HOU MIA DTLA SDO NJ ATL DEN DAL PHI TAM FRAN 2008 $65.00 $96.86 $57.80 $57.31 $51.87 $39.00 $40.48 $44.00 $36.73 $43.42 $33.00 $31.09 $28.54 $35.10 $29.33 $27.00 2009 $66.00 $65.49 $54.86 $44.81 $40.36 $38.15 $37.12 $35.75 $35.44 $33.38 $31.88 $30.53 $29.50 $29.38 $28.90 $26.50 STUDLEY EFFECTIVE RENT INDEX 2010 21
    • Total Rent Components Declines in Nearly Total Rent: Year-on-Year Change by Market Every Market In 2008, total rents fell in about half of the major CBDs and rose Denver 3.4% slightly in the other half. Total rents Washington, DC 1.5% posted minor increases in two Philadelphia -1.5% -1.8% markets during 2009 and fell in all Atlanta -1.9% others. Tampa Bay Chicago -2.2% Total rent dropped by more than New Jersey -3.4% 20% in four markets as landords Downtown LA -3.5% were forced to extend more San Francisco -5.1% Houston -8.3% generous concessions while Dallas -16.3% lowering net rents. A decline of Miami -18.8% nearly 30% in net rent offset minor Manhattan (DT) -21.8% increases in operating expenses West LA -22.2% and tenant electric as well as San Diego -23.1% continued growth in real estate Manhattan (MT) -32.4% taxes. -35% -30% -25% -20% -15% -10% -5% 0% 5% 22 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Growth In Taxes Outpaces Operating Real Estate Expense and Occupancy Cost Trends Electricity Other Expenses Expenses Taxes With the exception of real estate taxes, all expenses registered more moderate 14.0 Taxes 10-Year Average: +5.6% increases than in the prior year. The 12.0 Elec 10-Year Average: +4.5% order of annual increase among the 10.0 expense indexes followed the pattern established in 2008; real estate taxes 8.0 recorded the steepest rise (up by 3.8% 6.0 in 2009, compared to 3.4% in 2008), 4.0 followed by tenant electricity (up by 2.4% in 2009, compared to 4.3% in 2008), and 2.0 operating expenses (up by only 1.5% Op. Ex 10-Year Average: 0.0 in 2009, compared to 3.2% in 2008). +3.8% Over the last ten years, real estate taxes ‐2.0 have increased at a faster rate (5.6%) ‐4.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 than electricity (4.5%) and operating Operating Expenses (3.8%) 1.0 3.4 3.7 3.8 3.9 3.8 1.1 4.6 9.6 3.2 1.4 Real Estate Taxes (5.6%) ‐2.2 1.7 2.0 10.2 5.0 7.3 8.5 3.2 11.4 3.4 3.8 expenses (3.8%). Electricity (4.5%) ‐0.8 6.7 1.5 2.3 1.4 3.2 9.7 6.0 8.1 4.3 2.4 STUDLEY EFFECTIVE RENT INDEX 2010 23
    • CBD Rent Trends Atlanta Total Tenant Landlord Atlanta Rent Trends Rent Effective Effective For the first time in five years, total rent fell.The 1.8% decline to $30.53 $35 can be attributed to decreases in both 31.09 30.53 $30 29.35 29.90 real estate taxes (-3.1%) and net rent 27.74 26.79 26.05 (-3.4%). On a yearly comparison, $25 24.01 25.58 24.94 24.04 22.69 concession package values soared 22.35 22.35 21.88 20.79 21.08 $20 20.31 20.28 19.60 by 18.2% to $105.00. Tenant effective 17.94 rent continued to drop, falling by 10.6% $15 16.04 to $16.04. Landlord effective rent 12.01 11.95 11.57 10.81 11.25 10.29 10.48 plummeted by a staggering 35.1% from $10 9.91 8.23 2009 to $3.65. $5 5.62 3.65 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Chicago Total Tenant Landlord Chicago Rent Trends Rent Effective Effective Total rent slipped for the second consecutive year, falling by 2.2% to $45 $45 $38.15. Net rent dropped by 5.5%. In $40 42.11 $40 38.25 37.73 39.00 contrast, real estate taxes (+1.1%), $35 37.50 37.73 37.05 37.38 37.39 38.59 37.05 37.38 35.63 35.15 38.15 35.35 35.63 35.35 36.10 $35 35.15 operating expenses (+1.2%) and $30 32.00 31.47 31.81 29.65 31.81 28.66 27.61 electricity (+3.3%) all recorded gains. $30 $25 29.65 26.50 24.92 30.27 24.53 27.61 23.50 24.05 23.52 The value of concession packages rose $25 $20 22.70 21.38 24.53 22.47 24.05 22.00 25.27 25.68 23.52 23.66 22.78 by 16.7% to $105.00. Tenant effective $15 $20 17.20 16.10 15.07 17.52 14.21 14.21 13.18 rent decreased by 7.9% to $23.66. $10 15.71 11.73 9.36 $15 8.33 Landlord effective rent posted a dramatic $5 6.26 13.26 4.97 6.03 5.28 10.89 10.86 4.29 decline of 35.2% to $4.09. $10 $0 1.33 7.56 (0.27) 0.73 (1.47) 6.84 6.22 6.31 (3.19) 5.85 $5 4.22 4.09 ($5) $0 ($10) 1999 1990 2000 1991 1992 2001 1993 2002 1995 2003 1994 1996 2004 1997 2005 1998 1999 2006 2000 20072002 2008 2001 2003 2009 2004 24 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Dallas Total Tenant Landlord Dallas Rent Trends Rent Effective Effective Total rent plummeted during 2009, falling by 16.3% to $29.38. Electricity $40 decreased by 6.4% for the year, while $35 35.10 net rent plunged by 26.1%. On the other 31.69 hand, operating expenses increased $30 29.38 28.59 27.00 27.52 26.25 26.50 by 2.6% and real estate taxes rose by $25 24.03 24.78 26.10 23.88 25.67 24.75 26.00 24.19 25.77 22.80 3.1%. The value of concession packages 21.97 20.61 22.30 22.30 $20 continued trending up, rising by 16.7% 16.30 to $51.34. Tenant effective rent recorded $15 14.26 14.81 13.48 14.39 a significant drop of 22.0% to $22.30. $10 11.28 10.11 10.92 11.16 11.21 10.10 Landlord effective rent declined even $5 more substantially, by 38.0% to $10.10. $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Denver Total Tenant Landlord Denver Rent Trends Rent Effective Effective Total rent grew from $28.54 to $29.50, an increase of 3.4%. All components of $40 total rent rose for the year – operating $35 expenses by 2.7%, net rent by 2.8%, 31.75 electricity by 6.2% and real estate taxes $30 29.35 28.54 28.54 29.50 27.58 27.56 by 7.1%. The value of concession 25.00 $25 23.95 24.08 24.55 packages soared by 15.4% to $62.04. 22.19 22.97 23.16 23.12 21.35 Tenant effective rent fell for the second $20 19.74 19.50 18.25 16.71 straight year, decreasing by 1.2% to $15 14.63 15.89 14.44 14.40 14.69 14.54 $19.50. Landlord effective rent also 11.54 $10 9.73 9.15 declined, by 6.0% to $9.15. 6.51 7.78 8.69 5.87 $5 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 STUDLEY EFFECTIVE RENT INDEX 2010 25
    • CBD Rent Trends Houston Total Tenant Landlord Houston Rent Trends Rent Effective Effective Total rent recorded a decline for the first time since 2005, falling by 8.3% to $45 $37.12. Net rent, real estate taxes and 40.48 $40 39.75 electricity decreased by 9.9%, 14.4% 37.12 $35 35.43 34.93 and 13.1%, respectively. In contrast, operating expenses increased for the $30 29.04 27.27 third straight year (+6.6%). The value of $25 25.53 23.31 25.42 25.65 25.62 23.72 22.69 23.10 23.19 concession packages, $58.56, surged $20 19.40 20.75 21.00 20.37 20.68 by 56.2%. Tenant effective rent dropped 15.21 16.80 16.31 15.82 15.19 17.70 $15 by 16.9% to $29.04. Landlord effective 13.24 11.67 $10 9.95 rent fell even more markedly, by 23.7% 6.91 6.15 5.52 to $17.70. $5 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Downtown Los Angeles Total Tenant Landlord Downtown Los Angeles Rent Trends Rent Effective Effective Total rent fell for the first time in more than a decade, slipping by 3.5% to $45 $35.44. Net rent declined by 6.8%. $40 Operating expenses increased by 1.6% 36.73 $35 35.47 35.44 and real estate taxes grew by 1.7%. 32.25 34.18 31.15 31.76 Tenant electric was unchanged. The $30 28.41 29.65 28.52 29.33 27.56 27.23 27.85 26.83 value of concession packages continued $25 24.49 24.95 25.30 22.99 to rise, by 10.0% to $55.00. Reversing 20.90 21.75 $20 19.88 an upward trend, tenant effective rent $15 14.54 14.99 15.03 decreased by 5.1% to $27.85. Landlord 11.79 11.89 13.12 13.45 13.53 13.40 11.33 10.51 effective rent plunged by 10.9% to $10 $13.40, likewise reversing its trend. $5 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 26 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 West Los Angeles Total Tenant Landlord West Los Angeles Rent Trends Rent Effective Effective Following five consecutive years of increase, total rent dropped by 22.2% $60 to $40.36. Net rent registered a sharp 51.87 decline of 33.4%. Real estate taxes $50 48.12 grew by 2.8%, electricity by 2.8% and 42.43 42.20 45.21 $40 40.36 operating expenses by 2.9%. The value 37.78 37.13 36.81 36.00 of concession packages continued to 31.86 31.21 34.20 32.40 31.20 32.17 33.46 $30 30.38 29.12 rise, by 11.1% to $50.00. Reversing 27.99 26.55 25.00 25.07 23.80 an upward trend, tenant effective rent 21.28 20.59 23.09 $20 18.67 decreased by 26.0% to $33.46. Landlord 17.42 14.50 17.49 12.98 13.87 effective rent plunged by 39.9% to $10 $17.49, likewise reversing its trend. $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Miami Total Tenant Landlord Miami Rent Trends Rent Effective Effective Total rent fell for the second straight year, dropping to $35.75. The 18.8% $60 decline can be attributed to decreases in operating expenses (-11.6%) and $50 particularly net rent (-31.1%). On a yearly 45.00 44.00 $40 40.50 comparison, concession package values 39.45 37.71 34.75 35.50 35.32 35.75 soared by 54.9% to $65.85. Tenant 31.25 34.00 31.04 30.76 32.50 33.00 34.00 $30 30.32 effective rent continued to drop, falling by 28.44 26.58 25.60 28.82 25.36 26.01 31.0% to $26.01. Landlord effective rent 22.00 22.72 $20 19.59 19.01 18.78 plummeted by a staggering 46.1% to 17.89 14.72 17.37 14.21 $12.25. $10 12.25 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 STUDLEY EFFECTIVE RENT INDEX 2010 27
    • CBD Rent Trends Manhattan (Downtown) Manhattan (Downtown) Rent Trends Total Tenant Landlord Rent Effective Effective Total rent recorded a second year of decline (-21.8% to 44.81), primarily due $70 to a 38.5% drop in net rent. Operating 61.55 expenses (+2.3%), real estate taxes $60 57.31 (+4.5%) and electricity (+4.6%) all rose $50 50.04 51.95 50.31 during 2009. The value of concession 43.76 45.77 44.81 42.65 42.50 41.34 40.95 40.85 packages rose for the fourth consecutive $40 39.17 40.60 35.77 year, increasing by 19.0% to $92.84. 32.76 32.37 32.00 $30 29.78 28.95 29.85 28.93 Tenant effective rent, $32.00, fell by 25.96 23.83 30.1% year-on-year. Landlord effective $20 18.90 20.70 16.88 rent plummeted, by 58.1% to $9.99. 14.35 11.58 10.59 10.99 $10 9.99 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Manhattan (Midtown) Total Tenant Landlord Manhattan (Midtown) Rent Trends Rent Effective Effective Total rent recorded a second year of decline (-32.4% to 65.49). This decrease $120 is attributable to a 48.9% drop in net 104.55 rent. Operating expenses (+1.6%), $100 96.86 94.34 electricity (+4.4%) and real estate taxes 90.05 82.95 (+5.3%) all rose for the year. The value $80 74.00 74.54 75.42 80.06 of concession packages posted a fourth 66.61 65.66 64.00 63.10 66.27 65.06 64.06 65.49 $60 60.26 year of growth, increasing by 22.3% to 51.38 53.72 55.17 52.44 51.26 51.26 49.62 $115.00. Tenant effective rent, $49.62, 45.88 44.38 $40 37.33 fell by 40.2% year-on-year. Landlord 31.76 30.86 28.78 26.44 effective rent decreased even more $20 19.57 dramatically, by 62.7% to $19.57. $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 28 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 New Jersey Total Tenant Landlord New Jersey Rent Effective Effective Total rent fell by 3.4% to $31.88. This decrease is attributable to a 3.4% decline $45 in real estate taxes and a 5.8% drop in $40 net rent. Operating expenses (+0.7%) 35.94 and electricity (+4.9%) increased for the $35 34.50 33.60 33.50 32.98 33.00 32.49 32.66 31.88 31.54 31.60 31.78 year. The value of concession packages $30 30.54 30.64 30.50 28.05 27.90 27.34 27.48 26.80 posted a third year of growth, increasing $25 25.60 23.95 by 15.0% to $57.50. Tenant effective 21.40 20.07 $20 19.23 19.13 rent, $23.95, fell by 6.5% year-on-year. 15.54 Landlord effective rent decreased even $15 14.63 14.88 14.90 14.19 11.68 more dramatically, by 13.0% to $10.16. $10 10.16 $5 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Philadelphia Total Tenant Landlord Philadelphia Rent Trends Rent Effective Effective Total rent declined by 1.5% to $28.90. Operating expenses increased by $35 1.2% and tenant electric rose by 5.0%. 31.05 31.11 30.95 30.50 $30 In contrast, real estate taxes were 28.15 29.10 27.35 28.92 29.33 28.90 26.50 unchanged and net rent dropped by $25 24.28 24.66 26.24 25.93 24.74 23.10 23.12 3.9%. The value of concession packages 21.14 21.52 22.69 increased by 7.1% to $45.00. Tenant $20 19.84 effective rent dipped by 1.8% to $22.69. $15 Landlord effective rent registered an 11.42 11.81 12.67 12.05 10.52 even more substantial decline of 7.2% to $10 8.53 8.28 7.24 7.60 7.68 $7.68. 6.29 $5 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 STUDLEY EFFECTIVE RENT INDEX 2010 29
    • CBD Rent Trends San Diego Total Tenant Landlord San Diego Rent Trends Rent Effective Effective Total rent registered a decrease of 21.9% to $33.38. Operating expenses $50 declined by 13.6%, but real estate taxes $45 43.89 43.42 and electricity increased, rising by 3.0% $40 39.63 and 12.8%, respectively. The value of 36.76 35.06 37.13 35.09 37.71 $35 concession packages surged by 62.1% 30.86 32.95 31.24 33.38 $30 29.16 to $47.00. Tenant effective rent continued 26.13 $25 24.54 to drop, by 34.9% to $24.54. Landlord 22.79 22.27 23.88 effective rent plunged by 50.8% to $20 19.61 19.77 $11.76. $15 11.76 $10 $5 $0 2003 2004 2005 2006 2007 2008 2009 San Francisco Total Tenant Landlord San Francisco Rent Trends Rent Effective Effective Total rent fell by 5.1%, dropping to $54.86 in response to rising space $80 availability. Net rent decreased by 77.60 74.93 8.0%. Operating expenses declined by $70 0.2%. In contrast, real estate taxes and $60 61.83 59.72 57.80 57.15 55.45 tenant electric rose by 0.8% and 6.1%, 53.59 51.00 53.06 54.86 $50 49.79 respectively. The value of concession 42.38 46.06 $40 40.85 packages, $57.04, surged by 26.8%. 37.35 34.95 36.21 35.26 35.48 33.95 33.95 32.12 Tenant effective rent declined by 7.5% $30 26.83 26.83 27.83 29.62 28.60 to $46.06. Landlord effective rent $20 20.06 decreased even more markedly, by 12.68 12.68 13.18 14.95 $10 11.0% to $28.60. $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 30 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Tampa Bay Total Tenant Landlord Tampa Bay Rent Trends Rent Effective Effective Total rent fell for the first time in several years, declining by 1.9% to $26.50. Real $30 estate taxes also decreased, falling by 26.75 27.00 26.50 7.7%. Operating expenses and electricity $25 25.00 23.00 remained unchanged year-on-year, 21.25 22.00 21.57 20.56 while net rent fell by 1.6%. The value of $20 18.73 17.65 concession packages, $64.12, surged 16.00 16.67 16.93 $15 by 14.7%. Tenant effective rent declined by 5.8% to $17.65. Landlord effective 11.18 10.75 $10 rent decreased even more markedly, by 7.39 6.40 6.61 10.5% to $6.61. $5 6.05 5.81 $0 2003 2004 2005 2006 2007 2008 2009 Washington, DC Total Tenant Landlord Washington, DC Rent Trends Rent Effective Effective Contrary to the national trend, total rent has been increasing for more than a $70 decade. In 2009, it rose by 1.5% to 65.00 66.00 64.00 $66.00, a new high. Real estate taxes, $60 58.50 55.50 which had jumped substantially during 51.25 53.00 55.12 54.64 $50 49.35 49.99 2008, remained unchanged in 2009. 46.00 46.40 44.86 48.10 47.92 42.60 43.11 Similarly, tenant electric and operating $40 38.60 38.56 41.21 35.20 expenses were stable. The value of 31.38 $30 28.22 29.00 27.85 concession packages climbed for the 24.62 24.56 25.84 27.41 27.33 21.88 21.09 fourth straight year, soaring by 87.1% to $20 $131.00. Tenant effective rent dropped $10 by 12.3% to $47.92. Landlord effective rent registered a sharp decline, falling by $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 24.3% to $21.09. STUDLEY EFFECTIVE RENT INDEX 2010 31
    • Suburban Rent Trends Fort Lauderdale Total Tenant Landlord Fort Lauderdale Rent Trends Rent Effective Effective Total rent fell year-on-year by 3.5% to $33.50. Net rent dropped by 5.0%, and $45 operating expenses decreased by 6.1%, $40 but tenant electric spiked by 10.8%. The 36.50 38.25 $35 34.70 value of concession packages grew by 33.00 32.33 33.50 31.50 30.58 35.1% to $56.75, well above historic $30 28.23 28.08 28.49 27.42 27.08 norms. Tenant effective rent declined $25 25.27 23.72 25.58 25.67 (-9.9% to $25.67). Landlord effective $20 22.16 rent registered a drop of 15.7% to 15.69 16.48 16.64 $15 14.19 14.35 $12.10. 12.25 12.10 10.78 $10 9.99 $5 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Orange County Total Tenant Landlord Orange County Rent Trends Rent Effective Effective Continuing its downward trend, total rent declined by 14.3% to $28.80. Operating $45 expenses fell by 5.6% and net rent $40 39.00 plummeted by 21.5%. In contrast, real 36.91 $35 34.86 estate taxes and electricity rose by 1.3% 31.80 32.47 33.60 31.20 and 6.6%, respectively. The value of $30 29.40 28.80 27.52 28.20 27.68 26.76 27.36 concession packages, $55.00, surged by $25 23.02 24.52 24.51 22.63 21.82 37.5%. Tenant effective rent decreased $20 21.21 17.73 17.88 for the third straight year, sliding by 15.46 17.15 $15 14.10 23.4% to $21.21. Landlord effective rent 13.56 11.26 $10 posted an even steeper drop (-34.3% to $11.26). $5 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 32 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Silicon Valley Total Tenant Landlord Silicon Valley Rent Trends Rent Effective Effective All components of total rent remained stable year-on-year. In consequence, $70 total rent was unchanged at $34.25. 64.10 $60 59.19 The value of concession packages rose by 2.4% to $42.00. Tenant effective rent $50 50.21 posted a minimal decrease of 0.6% to $40 $27.37. Landlord effective rent also 34.80 34.25 34.25 34.25 recorded a modest decline (-1.1% to $30 29.07 33.00 29.50 31.75 27.27 27.50 27.70 27.54 27.37 $15.18). 25.20 21.31 20.95 $20 19.60 17.83 15.51 15.35 15.18 14.04 11.82 11.15 $10 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Northern Virginia Total Tenant Landlord Northern Virginia Rent Trends Rent Effective Effective Reversing its upward trend, total rent dropped by 2.0% to $35.68. Operating $40 expenses were unchanged for the 36.25 36.40 35.68 $35 year, but all other components of total 33.50 rent declined – real estate taxes by $30 29.50 28.75 29.50 0.6%, electricity by 0.7% and net rent $25 25.06 25.00 24.50 26.10 25.89 24.56 23.58 23.86 by 2.7%. The value of concession 21.30 22.83 20.43 $20 packages posted a fourth consecutive 16.91 16.64 year of growth, jumping by 7.1% to $15 13.67 13.99 14.45 15.72 13.95 13.30 12.58 $85.67. Tenant effective rent continued $10 to decrease (-2.9% to $23.86). Landlord effective rent dropped even more notably, $5 by 4.6% to $13.30. $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 STUDLEY EFFECTIVE RENT INDEX 2010 33
    • Suburban Rent Trends Suburban Tenant and Suburban Tenant Effective Rent Comparison: Percentage Change 2008 - 2009 Landlord Effective Rent Tenant effective rent rose year-on-year Westchester, NY 6.9% Silicon Valley, CA -0.6% only in Westchester, New York (+6.9%). Fairfield County, CT -0.8% The rate fell in all other markets, with Main Line/Conshohocken, PA -1.0% the most significant decreases occurring Northern Virginia -2.9% in Orange County, California (-23.4%), West Palm Beach, FL -4.4% North Dallas Corridor -7.8% DuPage County, Illinois (-24.1%) and Long Island, NY -7.8% Lake County, Illinois (-31.4%). The Fort Lauderdale, FL -9.9% highest tenant effective rents were Cook County, IL -12.7% recorded in West Loop/Galleria, Texas Central Perimeter, GA -16.4% West Loop/Galleria, TX -21.7% ($31.68), Fairfield County, Connecticut Southeast, CO -23.2% ($35.30) and West Palm Beach ($38.00). Orange County, CA -23.4% Lake County ($11.87), DuPage County DuPage County, IL -24.1% ($12.40) and Central Perimeter, Georgia Lake County, IL -31.4% ($13.49) posted the lowest rates. -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% Suburban Landlord Effective Rent Comparison: Percentage Change 2008 - 2009 All suburban markets registered declines Silicon Valley, CA -1.1% in landlord effective rents, the greatest of Northern Virginia -4.6% which took place in Westchester (-55.1%), Main Line/Conshohocken, PA -6.8% DuPage County (-75.6%) and Lake West Palm Beach, FL -8.0% Long Island, NY -9.3% County (-81.6%). Landlord effective rents Fort Lauderdale, FL -15.7% were highest in Silicon Valley, California North Dallas Corridor -18.9% ($15.18), Main Line/Conshohocken, Orange County, CA -34.3% Pennsylvania ($15.45) and West Palm Southeast, CO -38.4% West Loop/Galleria, TX -38.5% Beach ($19.66). In contrast, the rates Central Perimeter, GA -42.8% were lowest in Lake County ($1.24), Fairfield County, CT -51.9% DuPage County ($1.29) and Cook Cook County, IL -53.0% Westchester, NY -55.1% County, Illinois ($2.03). DuPage County, IL -75.6% Lake County, IL -81.6% -90% -80% -70% -60% -50% -40% -30% -20% -10% 0% 34 STUDLEY EFFECTIVE RENT INDEX 2010
    • $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 West Pal B m each, FL $38.00 Fairfield County, CT $35.30 West Loop/Galleria, TX $31.68 Westchester, NY $31.04 Long sland, NY I $29.08 Silicon Valley, CA $27.37 Main Li e/Conshohocken, PA n $26.85 Fort Lauderdale, FL $25.67 Northern Virginia Suburban Tenant Effective Rent $23.86 North Dallas Corridor $21.53 Orange County, CA $21.21 Cook Count , IL y 2008 $15.44 Southeast, CO $14.50 Central Perimeter, GA $13.49 DuPage Count , IL y $12.40 2009 Lake County, IL $11.87 $0 $4 $8 $12 $16 $20 $24 West Pal B m each, FL $19.66 Main Li e/Conshohocken, PA n $15.45 Silicon Valley, CA $15.18 West Loop/Galleria, TX $13.40 Northern Virginia $13.30 Long sland, NY I $12.28 Fort Lauderdale, FL $12.10 Orange County, CA $11.26 North Dallas Cor ridor $7.84 Suburban Landlord Effective Rent Fairfield County, CT $6.99 Southeast, CO $6.07 Central Perimeter, GA 2008 2008 $4.02 Westchester, NY $3.93 Cook Count , IL y $2.03 DuPage Count , IL y $1.29 2009 2009 STUDLEY EFFECTIVE RENT INDEX 2010 Lake County, IL $1.24 35 SERI2010
    • Statistical Summary Operating Real Estate Total (Gross) Tenant Landlord Net (Base) Rent Expenses Taxes Tenant Electric Rent Concessions Effective Rent Effective Rent CBD Markets 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 Atlanta (ATL) 19.93 19.25 6.07 6.30 3.59 3.48 1.50 1.50 31.09 30.53 88.86 105.00 17.94 16.04 5.62 3.65 Chicago (CHI) 20.00 18.90 8.25 8.35 9.25 9.35 1.50 1.55 39.00 38.15 90.00 105.00 25.68 23.66 6.31 4.09 Dallas (DAL) 22.33 16.50 7.55 7.75 2.55 2.63 2.67 2.50 35.10 29.38 44.00 51.34 28.59 22.30 16.30 10.10 Denver (DEN) 17.99 18.50 6.57 6.75 2.38 2.55 1.60 1.70 28.54 29.50 53.75 62.04 19.74 19.50 9.73 9.15 Manhattan- Downtown (DTNY) 34.55 21.26 10.85 11.10 8.66 9.05 3.25 3.40 57.31 44.81 78.00 92.84 45.77 32.00 23.83 9.99 Houston (HOU) 28.65 25.82 5.43 5.79 4.03 3.45 2.37 2.06 40.48 37.12 37.50 58.56 34.93 29.04 23.19 17.70 Downtown Los Angeles (DTLA) 22.00 20.50 9.15 9.30 3.59 3.65 1.99 1.99 36.73 35.44 50.00 55.00 29.33 27.85 15.03 13.40 West Los Angeles (WLA) 35.89 23.92 8.90 9.16 4.95 5.09 2.13 2.19 51.87 40.36 45.00 50.00 45.21 33.46 29.12 17.49 Miami (MIA) 27.00 18.60 10.00 8.84 4.50 5.36 2.50 2.95 44.00 35.75 42.50 65.85 37.71 26.01 22.72 12.25 Manhattan - Midtown (MTNY) 66.47 33.95 11.76 11.95 15.23 16.04 3.40 3.55 96.86 65.49 94.00 115.00 82.95 49.62 52.44 19.57 New Jersey (NJ) 19.80 18.65 8.32 8.38 3.25 3.14 1.63 1.71 33.00 31.88 50.00 57.50 25.60 23.95 11.68 10.16 Philadelphia (PHI) 16.13 15.50 8.10 8.20 3.10 3.10 2.00 2.10 29.33 28.90 42.00 45.00 23.12 22.69 8.28 7.68 San Diego (SDO) 28.75 19.23 8.10 7.00 3.90 4.40 2.67 2.75 43.42 33.38 29.00 47.00 37.71 24.54 23.88 11.76 San Francisco (SAN FRAN) 39.34 36.20 9.44 9.42 6.23 6.28 2.79 2.96 57.80 54.86 45.00 57.04 49.79 46.06 32.12 28.60 Tampa Bay (TAM) 15.75 15.50 5.50 5.50 3.25 3.00 2.50 2.50 27.00 26.50 55.88 64.12 18.73 17.65 7.39 6.61 Washington, DC (WDC) 38.00 39.00 9.00 9.00 15.00 15.00 3.00 3.00 65.00 66.00 70.00 131.00 54.64 47.92 27.85 21.09 Suburban Markets Central Perimeter, GA 16.33 13.65 4.70 5.11 2.72 2.81 1.50 1.50 25.25 23.07 61.56 64.73 16.14 13.49 7.02 4.02 Cook County, IL 14.39 11.50 6.43 6.46 5.43 5.45 1.65 1.69 27.90 25.10 69.05 70.00 17.68 15.44 4.32 2.03 DuPage County, IL 13.63 10.00 7.11 7.15 2.43 2.46 1.25 1.28 24.42 20.89 54.54 61.50 16.35 12.40 5.31 1.29 Fairfield County, CT 22.65 20.85 9.70 11.00 3.90 4.40 2.75 2.75 39.00 39.00 23.00 25.00 35.60 35.30 14.52 6.99 Fort Lauderdale, FL 20.00 19.00 7.70 7.23 4.50 4.50 2.50 2.77 34.70 33.50 42.00 56.75 28.49 25.67 14.35 12.10 Lake County, IL 15.84 11.00 6.18 6.22 2.87 2.91 1.65 1.68 26.54 21.81 62.38 72.00 17.31 11.87 6.76 1.24 Long Island, NY 17.50 17.50 7.95 7.95 6.75 6.75 3.25 3.25 35.45 35.45 35.00 35.00 30.27 30.27 10.29 10.29 Main Line/Conshohocken, PA 19.31 19.01 6.58 7.00 2.29 2.68 2.65 2.60 30.83 31.29 25.00 30.00 27.13 26.85 16.57 15.45 North Dallas Corridor, TX 13.44 11.50 7.95 8.05 4.01 4.04 3.12 3.18 28.52 26.77 38.00 35.00 23.34 21.53 9.67 7.84 Northern Virginia 25.00 24.32 5.50 5.50 3.10 3.08 2.80 2.78 36.40 35.68 80.00 85.67 24.56 23.86 13.95 13.30 Orange County, CA 21.55 16.92 6.92 6.53 2.23 2.26 2.90 3.09 33.60 28.80 40.00 55.00 27.68 21.21 17.15 11.26 Silicon Valley, CA 19.50 19.50 8.25 8.25 3.50 3.50 3.00 3.00 34.25 34.25 41.00 42.00 27.54 27.37 15.35 15.18 Southeast, CO 13.20 12.75 4.89 3.70 3.78 3.78 1.65 1.65 23.52 21.88 31.00 49.87 18.88 14.50 9.86 6.07 West Loop/Galleria, TX 24.46 21.38 12.52 12.68 4.55 4.16 3.05 1.98 44.58 40.20 28.00 28.00 40.44 31.68 21.81 13.40 West Palm Beach, FL 30.00 33.00 10.00 9.93 5.00 7.43 2.50 2.90 47.50 53.26 52.50 58.33 39.73 44.63 21.36 23.49 Westchester, NY 14.75 15.00 8.25 9.70 6.00 6.30 3.00 3.00 32.00 34.00 20.00 20.00 29.04 31.04 8.74 3.93 36 STUDLEY EFFECTIVE RENT INDEX 2010
    • Glossary SERI2010 Net Rent (Base Rent) The gross rental rate exclusive of the tenant’s proportionate share of real estate taxes, operating expenses and tenant electricity. Operating Expenses Includes (1) heating, ventilation and air conditioning (HVAC); (2) maintenance; (3) common area utilities and electricity; (4) cleaning; and (5) all other non-capital costs associated with the operation of a building. Real Estate Taxes Local real estate taxes exclusive of special assessments and other one-time charges. Tenant Electricity Payments made by the tenant, whether to the landlord or public utility, or by the landlord, as a general building expense, for the electrical power utilized within a tenant’s premises, exclusive of building HVAC. Total Rent (Gross Rent) The sum of the four rental rate components: net rent, operating expenses, real estate taxes and electricity. Concessions Includes tenant improvements, free rent and other non-rent incentives that a tenant may receive as part of the lease terms. The dollar value of the concession package is calculated as the total value of free rent and tenant improvements. Tenant Effective Rent An estimate of the actual cost of occupancy for the tenant. The calculation is the total rent minus lease concessions, which are amortized over the average lease term in the market, using an 8.0% interest rate and beginning-of-period payments. Landlord Effective Rent An estimate of rent received from a tenant less related expenses. The calculation is the total rent less operating expenses, real estate taxes, concessions and commissions. [This estimated rent is determined without consideration of a landlord’s debt service obligation, if any, since financing structures are complex and involve far too many variables to be factorable.] STUDLEY EFFECTIVE RENT INDEX 2010 37
    • Supplementary Info 2009 – From a Free Fall to a Collapse in Values Across Multiple Asset Classes Slow Crawl One of the most disconcerting 150.0% features of this recession has been the lack of a safe haven for investors West Texas Oil Case-Shiller Home Prices – lenders, companies and consumers 120.0% Dow Jones REIT Index SERI Tenant Effective all retreated in late 2008 and early 2009, spurring a sharp drop in demand 90.0% for goods and services as well as a dramatic decline in values across 60.0% multiple asset classes. Commercial real estate was no exception, as demand for office space collapsed 30.0% and markets were flooded with sublet space. More fluid commodities 0.0% and assets such as oil and REIT 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 stocks have rebounded of late, but commercial real estate has a much -30.0% longer road to recovery. -60.0% A self-sustaining expansion is not anticipated until late 2010 or early 2011 38 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 in most markets. Consequently, rents are not likely to gain Measuring Trough to Recovery - Last Recession momentum until 2011. In the last recession, tenant effective rents started their ascent nearly at the Trough Trough (Tenant Return to Peak same time as employment began (Employment) - Effective) - Last (Tenant Effective) - Availability (At Availability Last Recession Recession Last Recession Trough) (4Q09)^^ increasing. Even so, in most ATL 1Q04 2004 2006 21.9% 31.4% markets it took two to three years CHI 2Q03 2005 95% in 2007^ 18.5% 19.3% for effective rents to fully regain DFW 3Q03 2003 2007 20.3% 29.4% their prior peak. Rents in Chicago, DEN 3Q03 2003 2007 19.8% 21.1% New Jersey, Philadelphia and San HOU 1Q04 2005 2007 23.4% 12.2% Francisco never fully recovered. DTLA 4Q03 N/AP* N/AP* 19.2% 17.2% WLA 4Q03 2003 2006 19.4% 21.6% Rents will likely take longer to MIA 3Q03 2003 2006 13.0% 26.8% rebound in this cycle; availability NJ 2Q03 2003 85% in 2006^ 15.9% 17.8% DTNY 1Q04 2004 2007 16.7% 7.6% in this recession is significantly MTNY 1Q04 2003 2006 10.6% 14.7% higher in five of the markets, and PHI 1Q04 2005 88% in 2008^ 13.7% 14.4% slightly higher in another five. Only SAN FRAN 1Q04 2002 71% in 2007^ 17.8% 17.6% Houston, Downtown Los Angeles WDC 1Q03 N/AP* N/AP* 7.0% 18.5% and Downtown Manhattan thus far ^^Much higher availability rate ^^Moderately higher availability rate Recovery time for tenant effective rents from trough to prior peak ranged from two to three years. have lower availability rates in this ^Effective rents in Chicago, New Jersey, Philadelphia and San Francisco never returned to their prior peak levels. downturn. *Effective rents in Downtown LA and Washington, DC continued to increase during the last recession. * STUDLEY EFFECTIVE RENT INDEX 2010 39
    • Supplementary Info Downturn Losing Leasing Activity as a Percentage of Historical Average (1st & 2nd Half 2009) Momentum Three real estate indicators suggest that the downturn is moderating, with some 160% markets already showing signs of recovery: 1st Half 2009 2nd Half 2009 a) leasing activity is showing tentative signs NJ (2nd Half),  of returning to full strength; b) the flow of 140% 136.1% sublet space is ebbing; and c) the decline in asking rents is leveling off. 120% During the first six months of 2009, leasing Above Historical Average activity in nearly every market fell at least 20% below its historical average. New 100% Jersey’s transaction volume, for example, reached only 57.1% of its long-term average. South Florida was the sole market 80% to reach its historical average in the first half of 2009. 60% Most markets still fell short of their historical averages in the second half of 2009, NJ (1st Half),  40% but more than half registered a slight improvement. Four markets – Manhattan 57.1% (106.4%), Northern Virginia (124.5%), 20% Dallas/Fort Worth (131.7%) and New Jersey (136.1%) – pushed above their average I ( C OC SO C U (S ) NJ FR I L PH DNV O W ) VA A S. . M AN AL B) SA CH L.A M CBD UB AT D PH NY FL HO SD U. SU TA DF pace. Even in these markets, though, SV W NO I ( N  D  leasing activity, particularly larger leases, was dominated by renewals, some involving significant downsizing. 40 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Supply of Sublet Space Change in Sublet Supply (1st & 2nd Half of 2009) Falling The dramatic slowdown in the flow of 60% sublet space in late 2009 signaled that the correction was entering its final HOU, +51.0% Change 1st Half 2009 Change 2nd Half 2009 stages in most markets. 50% NYC During the first half of 2009, sublet 40% supply increased in every market except San Diego and Orange County, including spikes of more than 50% in 30% Houston and nearly 40% in Manhattan. DFW LAX WAS PHI 20% CHI DEN In contrast, during the second half NNJ SFL of the year, only five markets added sublet space, with smaller increases 10% ranging from 1.5% in Denver to 13.2% in Houston. All other markets posted 0% HOU NYC DFW LAX WAS PHI CHI DEN NNJ SFL TAM SDO SDO OC small reductions in sublet supply ranging TAM from 1.1% in Washington, DC to 5.8% in San Diego. It is likely that these ‐10% numbers understate the total increase OC due to shadow space not being actively ‐20% marketed. STUDLEY EFFECTIVE RENT INDEX 2010 41
    • Supplementary Info Pace of Decline in Rents Decline in Face Rents (1st & 2nd Half of 2009) Slowing Effective rents, which typically lag asking SAN SO SUB PHI PHI MTNY SVAL FRAN US OC FLA LA SDO NOVA MD HOU DEN WDC NJ TAM (SUB) DAL (CBD) rents, were still falling at year’s end, but 0.0% asking rents were starting to stabilize. In most markets, the speed and scale of the decline in rents during the first half of -5.0% 2009 were the most severe in decades. Corrections of this magnitude occurred in several markets during the early -10.0% 1990s, but in the last recession were limited to a handful of markets such as San Francisco and Silicon Valley. -15.0% Rents are generally quite sticky, but the deluge of sublet supply, combined with -20.0% the evaporation in demand, forced a Decline 2nd Half 2009 rapid adjustment. Rents fell further in the Decline 1st Half 2009 second half of 2009, but the decline lost -25.0% some of its momentum as some tenants finally gained enough confidence to move forward with leases. -30.0% 42 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Availability Exceeds 20% in National Availability Comparison 2008 2009 Many Markets Average Although the downturn appears to be Manhattan (Downtown) 7.0% 7.6% 8.5% losing momentum, most markets have Houston 12.2% 11.5% several years of available space to work Philadelphia 14.4% 12.1% through. Class A availability rates in Manhattan (Midtown) 14.7% 15.6% Atlanta, Dallas and Orange County ended Downtown LA 17.2% 15.2% 2009 in the 30% range. Two markets San Francisco 17.6% 19.2% – Northern New Jersey and San Diego Northern New Jersey 17.8% 17.8% – posted slight declines in availability, but Northern Virginia 18.2% 14.5% supply remains elevated in both markets. Washington, DC 18.5% 17.4% National Average 18.8% 19.3% Tenants in nearly every market can select San Diego 18.9% 15.8% from a wide range of options. In a handful Chicago 19.3% 16.4% of CBDs (Downtown Manhattan, Houston Denver 21.1% 16.3% and Philadelphia), though, while smaller West LA 21.6% 20.5% and mid-sized firms still have plenty of Tampa Bay 24.9% 21.1% options, the supply of quality big blocks Miami 26.8% 21.3% of space is more limited. In general, Silicon Valley 27.5% 26.0% however, availability is not likely to change Orange County 28.5% 28.3% much until a majority of firms shift from Dallas 29.4% 28.3% Atlanta renewals to more opportunistic leases 31.4% involving expansions. (%) 0% 5% 10% 15% 20% 25% 30% 35% CBD Availability shown in all markets except: New Jersey, Orange County, San Diego, Silicon Valley and Tampa Bay STUDLEY EFFECTIVE RENT INDEX 2010 43
    • Supplementary Info Office-Using Employment Average Annual Growth Rate in Office-Using Employment – A Jobless Recovery? The trajectory of job growth in 2010 and 2011 will determine whether it 7.0% takes a couple of years or five years for S. Valley ‐ 1990s,  rents to rebound. Will the approaching +6.1% 1990s 2003-2008 expansion parallel the decade-long 6.0% ATL TAM boom of the 1990s or the shorter and shallow upturn that followed the dotcom SAN FRAN bust – or is a double-dip recession 5.0% DC MIA around the corner? DFW FTLAUD OC DEN US 4.0% SEA The consensus view for most HOU SDO NJ economists is that employment growth CHI NYC will be subpar in 2010 and 2011. 3.0% PHI Markets such as Miami and Fort LA Lauderdale, as well as several Southern California markets, face severe 2.0% challenges in key sectors such as real estate that will inhibit employment growth. Other markets including 1.0% Chicago and New Jersey face long-term obstacles such as the cost of doing 0.0% SVAL ATL TAM DFW SAN FRAN DEN DC MIA SEA FTLAUD HOU OC US SDO NJ CHI NYC PHI LA business and population loss. 44 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Most Severe Decline in Cumulative Decline in Office-Using Employment Decades Office-using employment (which includes the information, professional/business services 0.0% New York City (July 2008) Denver (Feb. 2008) Philadelphia (Dec. 2007) San Francisco (Oct. 2007) San Diego (July 2007) Silicon Valley (April 2008) Atlanta (Sept 2007)  Fort Lauderdale (Jan. 2007) Orange County (Oct. 2006) Tampa Bay (Aug. 2006) Los Angeles (Mar 2007) Miami (Aug. 2006) Chicago (Aug. 2007) United States (Dec. 2007) West Palm Beach(January 2007) New Jersey (Aug 2007) Seattle (May 2008) Dallas‐Fort Worth (May 2008) Houston (Feb. 2008) and financial services sectors) is the critical catalyst for office space demand. From peak -2.0% Washington, DC Metro (Dec. 2007) to trough, U.S. office-using employment has fallen by 8.3%. Four markets were hit with layoffs in office-using sectors that were well -4.0% above the national average. These were Atlanta (-12.1%); Fort Lauderdale (-11.9%); Orange County (11.6%) and Tampa Bay -6.0% (11.4%). At the other end of the spectrum, the two -8.0% Texas markets, Dallas/Fort Worth (-4.3%) and Houston (-4.1%), as well as Washington, DC -10.0% (-1.2%), have held up much better than most markets during this downturn. -12.0% These percentages will likely increase in all markets once the Bureau of Labor Statistics posts benchmark revisions for metropolitan -14.0% areas. STUDLEY EFFECTIVE RENT INDEX 2010 45
    • Supplementary Info Layoffs Slowing Change in Office-Using Employment (Last Three Months) Office-using layoffs abated in most markets by summer, and eight of the 18 markets posted net job growth in the last 1.5% three months. Of note, though, the three largest markets – Chicago (-0.5%), Los WPB: +1.0% Angeles (-0.8%) and Manhattan (-0.9%) 1.0% seem to be stuck in reverse. Many of the most severely impacted markets such as Orange County 0.5% US +0.3% (+0.8%) and West Palm Beach (+1.0%) have registered job growth in the last three months that was well above the 0.0% national average. -0.5% NYC: -0.9% -1.0% L LA UD I NJ AL N U C OC O M W I US C N MIA B CH PH AT RA HO WD NY DE WP SD TA DF SV LA NF FT. SA 46 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Some Recovery Underway Office-Using Job Losses - Jobs Recovered & Total Gap from Prior Peak On a positive note, more than half of the markets appear to have pushed past their trough in terms of office-using WDC employment. This is reflected in markets SVAL that have actually recovered a small WPB portion of their job losses. SDO SAN FRAN Jobs Recovered Office-using employment in Washington, DEN Gap From Last Peak DC, for example, has increased HOU by approximately 3,500 jobs since MIA hitting its trough several months ago FT LAUD - representing a recovery rate of nearly SEA DFW 35.0%. Office-using employment in Los TAM Angeles has increased by nearly 7,800 PHI jobs, but this is just a sliver (about 8.0%) OC of the total layoffs. NJ ATL Atlanta, Manhattan and Chicago, in NYC contrast, still may have not hit bottom. CHI LA 0 20,000 40,000 60,000 80,000 100,000 120,000 STUDLEY EFFECTIVE RENT INDEX 2010 47
    • Supplementary Info Concessions Value of Concessions as a Percentage of Initial Gross Rent The value of concession packages varied widely from market to market and, to an increasing extent, from landlord to landlord during 2009. In 40% spite of sharp corrections in Midtown Manhattan and West Los Angeles, the 35.0% 35% value of concession packages (as a percentage of initial year’s gross rent) was about half that in the Chicago 30% 29.1% suburbs, and well below Suburban 28.2% 27.5% 26.9% Denver and Atlanta’s CBD. 25.4% 25.1% 25% 23.3% Particular landlords who were 22.6% 21.8% constrained by depleted capital reserves 21.3% 19.8% or upcoming debt obligations were 20% 18.1% unable to offer substantial tenant improvement allowances. Some offered longer free rent periods instead. 15% 13.9% These numbers likely understate the value of concession packages since 10% they do not include a wide range of unquantifiable incentives tenants were able to negotiate during 2009, such as 5% termination options, lease buyouts and signage. Additionally, the index does not include the value of high-quality 0% CHI- DNV-SE ATL- CHI- ATL-CP NOVA FAR N. DAL SAN DT LA DEN- WDC NYC WEST installations in subleases. SUB CBD CBD DAL FRAN CBD (MTNY) LA 48 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Comparing Free Rent Periods Months Free Rent/Lease Term One common component in concession packages is free rent. Once differences 0 0.2 0.4 0.6 0.8 1 1.2 1.4 in lease term are accounted for, the softer markets such as Chicago and DNV‐SE, 1.2 Atlanta are clearly offering more CHI‐SUB, 1.1 generous terms. ATL‐CP, 1.1 Tenants who delayed space-use decisions during 2008 and then signed SAN FRAN, 1.0 in 2009 capitalized on significant CHI‐CBD, 1.0 savings. The advantages of delaying such decisions throughout 2010 may not DAL, 1.0 be as substantial. FAR N. DAL, 0.9 That said, concessions should remain favorable to most tenants during 2010. NYC (MTNY), 0.8 Concessions could be quite fluid in markets such as Miami that still have not DEN‐CBD, 0.8 felt the full impact of new construction. As more companies gain confidence ATL ‐CBD, 0.8 that their business will improve, the WDC, 0.7 trend toward renewals that prevailed in 2009 should subside. Companies WEST LA, 0.7 will remain averse to extensive out-of- pocket expenses, so landlords will need NOVA, 0.7 to compete with the renewal option by offering generous build-out allowances DT LA, 0.7 and turnkey packages. STUDLEY EFFECTIVE RENT INDEX 2010 49
    • Supplementary Info Inflation-Adjusted Rents Tenant Landlord Amortized Inflation-Adjusted Rents and Concessions Effective Effective Concessions Rent Rent Those tenants able to commit to long- term leases during 2009 capitalized on significant savings to occupancy costs as rents declined and the value of concession packages spiked to $40.00 unprecedented levels. $35.00 Inflation-adjusted rents provide a more $30.00 accurate measure of real costs as opposed to nominal costs. All totals $25.00 in the chart to the right are based on $20.00 unweighted average effective rents and amortized concessions. Adjusted $15.00 for inflation, tenant effective rents $10.00 have fallen to $29.30, just above 2001 and 2005 levels. Landlord effective $5.00 rents have plummeted even more $0.00 dramatically, diving to $12.35 – the 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 lowest level yet registered since the TER $26.95  $31.02  $28.62  $24.57  $26.35  $26.71  $28.24  $32.51  $37.12  $36.84  $29.30  LER $18.19  $21.79  $18.99  $14.10  $12.88  $12.94  $14.05  $17.58  $21.46  $19.70  $12.35  SERI index began. This decline is due CONC $4.28  $4.20  $5.03  $5.94  $6.70  $6.53  $6.57  $6.59  $6.98  $8.52  $9.95  in part to the cut in net rents, but also to the doubling of amortized concessions since 1999. 50 STUDLEY EFFECTIVE RENT INDEX 2010
    • SERI2010 Using an index with a base year of Tenant Landlord Amortized 1999, concession packages have more Effective Rent Indexes (Base Year 1999) Effective Effective Concessions Rent Rent than doubled. Concessions have spiked much more quickly and sharply in this downturn, reflecting landlords’ response to the collapse in demand during late 2008 and early 2009. In the last 260 recession, after three years of declines, landlord effective rents bottomed out 240 233 in 2004, falling by 29% compared to its 220 base year level in 1999. Tenant effective rents also hit their low point in 2004 but 200 were essentially even with their 1999 180 levels in spite of a 53% increase in 153 160 concessions. 140 120 In 2009, landlord effective rents were 120 down by 32% compared to the 1999 99 base year amount. Tenants were paying 100 94 98 about 6% less in inflation-adjusted terms 80 relative to 1999 totals. Finally, the value 68 60 71 of amortized concession packages 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 skyrocketed, increasing by 133.0%. STUDLEY EFFECTIVE RENT INDEX 2010 51
    • 399 Park Avenue Steve Coutts - SVP, National Research (212) 326-8610 scoutts@studley.com San Diego 15303 Dallas Parkway 12531 High Blu ff Drive, Suite 140 Suite 1200 San Diego, CA 92130 Addison, TX 75001 (858)793-8600 (972) 739-2200 1250 99 Wood Avenue 150 California Street, 14th Floor Suite 305 San Francisco, CA 94111 Iselin, NJ 08830 (415) 421-5900 (732) 906-1001 200 S. Biscayne Boulevard, Suite 1830 Continental Plaza III 577 College Avenue, Suite C Miami, F L 33131 433 Hackensack Avenue,12th floor Palo Alto, CA 94306 (305) 423-1919 Hackensack, NJ 07601 (201) 556-9700 399 Park Avenue 675-7070 2010