Cassidy Turley San Francisco Bay Area CRE 2013 Forecast

San Francisco Bay Area
Commercial Real Estate
2013 Forecast
Your comprehensive guide to trends impacting the commercial real estate market.

CAPITAL MARKETS
CORPORATE SERVICES
LAND ACQUISITION & DISPOSITION
PROJECT & DEVELOPMENT SERVICES
PROJECT LEASING
PROPERTY MANAGEMENT
TENANT REPRESENTATION
We are pleased to share with you our San Francisco Bay Area
Commercial Real Estate 2013 Forecast. This report is an annual
review and forecast that summarizes the trends impacting
commercial real estate in each of the major Bay Area markets
covered by Cassidy Turley’s 15 regional offices.
This guide offers forward-looking analysis in addition to summaries
of recent activity for office, R&D, industrial, retail, investment and
multi-family real estate throughout the Bay Area. We examine both
leasing and investment trends as well as the underlying economic
fundamentals that drive our marketplace. This report represents
only a fraction of our research capabilities. Working in unison with
our brokerage staff, Cassidy Turley research maintains the region’s
largest database of properties, tenants, landlords, buyers, sellers,
availabilities, and deal comparables of all types. Our research
department publishes detailed quarterly snapshots and reports
covering all of our markets and we provide custom analytics for our
clients. Contact your Cassidy Turley broker to get on our research
mailing list to regularly receive research publication notifications.
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CASSIDY TURLEY
4
Table of Contents
For a digital ebook version of this book, go to www.ctbt.com/Forecast2013
Message from our President 5
Economic Outlook 6
Ofﬁce and R&D Forecast 10
Warehouse & Manufacturing Forecast 16
Retail Forecast 20
Investment & Multi-Family Forecast 24
Market Data & Forecast 28
Company Overview 34
Credits & Terms 38

SAN FRANCISCO BAY AREA COMMERCIAL REAL ESTATE 2013 FORECAST
5
To Our Valued Clients,
Over the past year, the Bay Area’s economy
has continued to outperform both California
and the nation as a whole. During this period,
our region has grown its overall employment
base by approximately 90,000 jobs, placing
both San Jose and San Francisco among
the top employment growth markets in the
country. Meanwhile, our commercial real estate market has
generally thrived. We are now heading into our third consecu-
tive year of a recovery that, for some sectors, has put up
growth numbers in excess of what we saw during the first dot
com boom. And a boom is what it has been for the region’s
office and R&D sectors.
Through the first nine months of 2012, occupancy in the Bay
Area’s office sector had grown by over 3.7 million square feet.
Since 2010, office occupancy has expanded by nearly 14
million square feet. In San Francisco weighted average asking
rents have increased by 39% since the low-water mark of the
recession in 2009. Meanwhile, all of the trade areas along
the Highway 101 Corridor on the Peninsula have recovered
all of the occupancy lost during the recession and then some.
R&D space has also surfed this wave, posting over 5.1 million
square feet of positive net absorption since the start of 2011.
Of course, tech users are once again behind the boom, having
accounted for a whopping 69% of the deals that we have
tracked this year. The growth of Apple, Facebook, Google,
LinkedIn, Salesforce, Samsung and others has made the Bay
Area the strongest local economy within the United States
and fueled one of the strongest growth periods in the history
of our region’s commercial real estate market.
But with this recovery period driven almost exclusively by just
one sector of the economy, it certainly has not been even, nor
has it been without its challenges. Our tech-driven boom has
primarily benefited the Bay Area’s office and R&D markets.
Of course, it has spurred job growth, generated consumer
demand and fueled demand for housing thereby indirectly
helping all sectors. Yet the recovery has been uneven both in
terms of product type and geography, with the East and North
Bay seeing only peripheral gains. But those markets have been
building momentum on their own and there are a number of
reasons why we are very optimistic for their performance in
the year ahead.
The past year was one in which we saw the biggest challenge
to the economy shift from weak underlying fundamentals to
political stalemate. However, despite the discord and political
mayhem of the past few months, we’ll gladly swap gridlock
in Washington in place of weak fundamentals as the primary
evil. Even if policy concerns have emerged as the greatest
headwinds, the national economy continues to post slow but
sure growth. This certainly played out over the final half of
2012. Uncertainty over the election became uncertainty over
the fiscal cliff, and is now uncertainty over the debt ceiling
and federal spending cuts. All of this uncertainty during the
second half of the year slowed growth as many space users
put the brakes on planned moves.
Fortunately, as I sat down to write this in early January, there
was cause for optimism. Congress and the President, while
kicking the proverbial can down the road on many issues, did
reach a compromise on the most politically charged issue
and potentially damaging issue—that of the expiration of
the Bush-era tax cuts. While most of the massive automatic
federal spending cuts have been postponed and we are certain
to see more policy-inspired business uncertainty in the weeks
ahead, we can only hope that Washington is heeding the pleas
for bipartisan moderation in dealing with the fiscal challenges
that face us while at the same time recognizing the need for
real tax and spending reform.
In anticipation of increasing tax rates, the fourth quarter
saw a significant jump in activity, with December being the
strongest month in our company’s history. Brokerages, banks
and title companies were working overtime to finalize all of
the tax driven, year-end activity. That very well could mean
that the coming year will be one in which we get off to a slow
start. But the building economic momentum that we saw
building through December of last year will return quickly.
More importantly, the housing market is finally picking up
traction nationally. Although the Bay Area’s housing market
has outpaced national trends by a couple of years, the return
of housing appreciation and new home construction nationally
will have massive positive implications for both the national
and local economies. Housing, which usually accounts for
about one fifth of GDP, has been so far absent in our recovery
and that is one of the reasons why economic improvement
has been so slow and so fragile. It will take a while, but the
turnaround underway in this segment of our economy will
begin to register a profound impact on the marketplace by
2014. One that will mean that our own local and uneven tech-
driven recovery will spread to more sectors and strengthen
growth in the local markets that have, so far, experienced
only peripheral gains from Tech Boom 2.0. So, East Bay and
Central Valley, your time is nearing.
With that, we are pleased to share with you Cassidy Turley’s
San Francisco Bay Area 2013 Forecast Report. We firmly
believe that in economic environments such as this, our
commitment to in-depth, forward-looking research is what
sets us apart from our competitors. Research has been and
will continue to be a key ingredient in our value proposition
to you, our clients. We are eager to continue working with you
and to expand our relationship across our expanded business
lines and geography. Meanwhile, our commitment to market
leading research will never change because we know that
information is vital to your decision making process. I hope
you enjoy this publication and find it useful. As always, if there
is ever anything we can do for you or do better, please do not
hesitate to call me.
Best wishes for a prosperous and productive 2013.
C. Michael Kamm
President
Cassidy Turley

CASSIDY TURLEY
6
T
he economy truly is at a crossroads as we head into
2013. But unlike in recent years, when the biggest
economic threats came from weakened fundamentals of
one type or another, the greatest challenge currently facing the
U.S. economy is that of policy uncertainty. As this report went
to press, Congress and President Obama had reached a partial
compromise on the issue of the fiscal cliff. This combination
of tax increases and sharp automatic federal spending cuts
would have removed about $600
billion from the U.S. economy in
2013. Most economists agreed
that the failure to either reinstate
some of the Bush era tax cuts
or temper austerity measures
would have sunk the economy
back into recession no later
than the second quarter of the
year and likely would have sent
unemployment back upward—
likely well above the 9.0% level.
The lion’s share of the damage was likely to be caused by the
expiration of the Bush-era tax cuts, which alone would have
removed about $280 billion from the economy. The good news
is that this is where a compromise was met. The tax cuts
have been reinstated for all but those who earn more than
$400,000 annually ($450,000 for couples), or roughly 98%
of the population. The bad news is that negotiations regarding
federal spending cuts were essentially postponed.
While the issue of policy clarity has been with us for some time
now, the specific concerns regarding the fiscal cliff escalated
over the course of December as the deadline drew closer.
Business and consumer confidence fell and many of the space
users that we work with opted to postpone planned moves in
the face of this uncertainty. While this had a negative impact
on the leasing market, it had the opposite impact on commer-
cial real estate investment. Fearful of new taxes in 2013, many
sellers rushed to close deals before January, sending quarterly
deal volume up by at least 20%. As we reached the final week
of 2012, the Dow Jones began to tumble and it appeared that
we were heading towards a self-inflicted recession. Yet, like an
errant college student who waits until the night before exams
before studying, Congress came through with a last second
minute (well, actually a late) deal that averted the worst of
the damage. The Dow Jones immediately surged 300 points
and the S&P 500 closed at its highest level within the last
five years.
But the challenge of policy clarity is not completely behind
us. Within a few weeks, Debt Ceiling II begins and this debate
promises to be even more contentious than the first one. By
the time the first debt ceiling debate ended in August 2011,
the U.S. sovereign credit rating had been lowered and the
economic recovery nearly stalled. You can rest assured
that this political battle will result in more headwinds to the
economy. We believe there is a 75% chance that the ratings
agencies once again downgrade
U.S. credit. And we expect the
stock market to dip. But we also
don’t think the hit will be quite as
bad as last year’s.
We are likely looking at slow
growth over the next few months.
But we are not looking at nega-
tive growth, much less even flat
growth. Certainly, the lack of
policy clarity will remain an issue
for now and additional political
discord on top of that won’t help. But there are plenty of
economic indicators to be extremely optimistic about. Not
the least of which being a December jobs report that surprised
nearly everyone—the economy created over 150,000 new
positions even as gloom was setting in before the fiscal cliff
deal. It may have a bumpy start, but we anticipate 2013 to
be a year in which the economy gradually builds momentum.
Déjà vu or Something New?
On the surface, it appears that not much may have changed
with the economy over the course of the past twelve months.
Heading into 2012, unemployment was elevated and job
ECONOMIC OUTLOOK
While U.S. job growth has averaged 2.1%
over the past year, San Jose has seen its
employment base grow by 3.5% (31,400
jobs) while San Francisco achieved a growth
rate of 3.4% (32,600 jobs).
0
10
20
30
40
50
60
70
80
90
100
2008 2009 2010 2011 2012
United States Consumer Confidence
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
2007 2008 2009 2010 2011 2012
United States GDP Growth Rate
Annual GDP Growth Adjusted by Inflation
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Annual GDP Growth Adjusted by Inflation

ECONOMICOUTLOOK
7
growth weak. The Eurozone was grappling with flat to nega-
tive growth and Asia was in the midst of a slowdown. Policy
uncertainty ruled the roost and the looming issue of debt hung
over the U.S. economy. Fast forward through a contentious
election cycle and policy uncertainty remains, only with a new
name. Little has changed with the European or Asian econo-
mies. Meanwhile, though the unemployment rate has fallen
to 7.7% (as of November 2012), the labor force participation
rate is now at a 31-year low. The
combination of baby boomers
retiring and discouraged workers
dropping out of the labor force
has driven this metric as much
as job growth over the past few
years. But while it may seem
like little has changed with the
economy, there are a few consid-
erable differences to consider as
we head into 2013.
Though unemployment remains
problematic, job growth has
actually been picking up. Over the course of 2011, the U.S.
economy created just over 1.8 million jobs (roughly 153,000
per month). Through November 2012, the U.S. economy had
created just under 1.7 million jobs. Though this overall number
reflects monthly gains of 152,000 per month, just below last
year’s average, this statistic includes a dismal spring in which
job gains fell below the six figure mark. Since July 2012,
job creation has ranged between 132,000 and 192,000 per
month and the trend throughout the fall had been heading
upward. Meanwhile these levels of employment growth are
important because the economy needs to create approximately
125,000 jobs per month simply to keep up with population
growth. Throughout most of the downturn, the economy has
struggled to reach this mark.
Meanwhile, the San Francisco and San Jose markets continue
to lead all other U.S. metropolitan areas in terms of job
growth. While U.S. job growth has averaged 2.1% over the
past year, San Jose has seen its employment base grow by
3.5% (31,400 jobs) while San Francisco achieved a growth
rate of 3.4% (32,600 jobs). Meanwhile, after years of flat to
negative numbers, the Oakland/East Bay marketplace also
saw a return to employment growth—posting an annual rate
of 2.0% (19,400 jobs).
But while employment growth has improved over the past
year, it is still not where we would like it to be. As is the case
with a number of other indicators, it is better, but not great.
For example, the Conference Board’s Consumer Confidence
Index (CCI) reached 73.7 in November. This is well below
the historical average of 95.0 but it is the highest level that
has been recorded since February 2008 when it measured
76.4. That reading came before the recession when the
economy was just dealing with a
declining housing market. And
the housing market is where we
have not only seen the greatest
improvement over the past year,
but it is the greatest cause for
optimism about the economy as
a whole going forward.
Housing Finally Returns
The depth of this downturn was
due to the deleveraging nature of
this recession and there was no
other sector of the economy that
had more deleveraging to do than housing. Fueled by exotic
and often toxic loans, housing values grew by 100% or more
in some markets from 2002 to 2006. When this bubble began
to burst in 2007, the resulting impact led the nation into its
worst downturn since the Great Depression with the housing
market struggling to stabilize since then.
United States Unemployment Rate
0%
2%
4%
6%
8%
10%
12%
2008 2009 2010 2011 2012
400
-200
0
200
400
600
US Employment Growth
Jobs in Thousands
-1,000
-800
-600
-400
2008 2009 2010 2011 2012
Housing typically accounts for 15% to 25%
(from average to boom cycles) of total GDP…
It typically leads us out of recessions,
but this sector of the economy has been
missing in action over the past six years.
But, this is all about to change.
Decline in SFR Available Inventory
Metropolitan Statistical Area # of Houses for Sale Yearly Change
Boston 10,788 -37.2%
Chicago 34,192 -5.1%
Inland Empire 8,559 -58.8%
Las Vegas 15,106 -25.1%
Los Angeles 12,569 -55.3%
Phoenix 16,601 -11.1%
Portland 7,854 -20.8%
Sacramento 3,660 -66.4%
San Diego 4,168 -53.5%
San Francisco 3,851 -57.6%
San Jose 1,378 -55.7%
Seattle 9,647 -38.8%
Washington DC 11,146 -28.4%
National 198,581 -29.3%

CASSIDY TURLEY
8
Housing typically accounts for 15% to 25% (from average to
boom cycles) of total GDP. Following the past three recessions
(1980, 1991 and 2001), residential investment grew more
than 30% on average during the first two years of recovery.
In past cycles, this meant strong rebounds, thanks to millions
of jobs and billions of dollars
in additional economic output.
According to the National Asso-
ciation of Home Builders (NAHB),
were home construction near its
historic norm, it would create an
additional three million jobs. Past
studies from this same group have
found that each new home built in
the U.S. creates three new fulltime
jobs (from construction to financial
services to retail) and generates
$90,000 in tax revenue. Even at
half those numbers, the impact of
housing is huge, especially when
considering the fact that housing
starts have set new records for
lows throughout this downturn. Housing typically leads us
out of recessions, but this sector of the economy has been
missing in action over the past six years. This is all about
to change.
Over the past 30 years, the United States has averaged
1.3 million new households per year. But throughout the
recession, this number dropped to just 600,000 per year as
fewer young people left the nest, renters took on roommates
or people otherwise doubled up on housing arrangements.
We estimate current pent-up demand for housing to stand
at approximately 3.5 million units. Most of this demand will
land in multifamily product first, and this trend is already well
underway. Most national markets
are currently reporting multifamily
vacancy in the 5% and 6% range.
In the Bay Area this trend has
been particularly pronounced with
regional vacancy standing at just
2.5% as of Q3 2012. Meanwhile,
rental rate growth over the past two
years has approached 30% in both
San Jose and San Francisco, while
Oakland has seen extremely robust
growth in excess of 20%.
With apartment rents growing at
a rapid clip in most markets and
single-family residential pricing still
averaging 30% below peak pricing
nationally, it is now cheaper to buy in most U.S. markets than
it is to rent. A recent JP Morgan study found this to be the
case in nearly half of all U.S. markets, while surveys by Trulia
and others have provided even more aggressive numbers.
Meanwhile, JP Morgan analysts also estimate pent-up demand
for single-family residential (SFR) housing units to stand at
600,000 units. Against this backdrop, it would only seem
natural that home sales would start to surge. And they have…
ECONOMIC OUTLOOK
The perception that the housing market
is rebounding still has not hit the
general public, though it should by late
in the year. This will result in a sharper
“pop” in demand heading into 2014…
Housing will begin to impact GDP by
2014 with quarterly growth levels finally
returning to the 3.0% or range or more.
-4,000 -2,000 0 2,000 4,000 6,000
Manufacturing
Information
Financial Activities
Professional & Business
Education & Health
Leisure & Hospitality
Other Services
Trade, Trans. & Utilities
Construction
Government
Change in Employment by Industry
East Bay 2011 - Nov. '12
-2,000 0 2,000 4,000 6,000 8,000
Manufacturing
Information
Education & Health
Other Services
Construction
Government
South Bay 2011 - Nov.'12
-3,000 0 3,000 6,000 9,000 12,000
Manufacturing
Information
Education & Health
Other Services
Construction
Government
San Francisco 2011 - Nov. '12
Percentage of Job Growth
by Region 2011 - Nov. '12
0% 1% 2% 3% 4%
South Bay
San Francisco
Bay Area
East Bay
US
California
LA-Orange County

ECONOMICOUTLOOK
9
Over the course of 2012, residential home sales have posted
their strongest annual sales gains in three years (when sales
were artificially propped up by a first-time buyer stimulus
program), with the inventory of available homes falling
sharply. Meanwhile, the inventory of homes for sale nationally
has dropped substantially. According to RedFin, the available
inventory has dropped in Boston by 37.2%, while the hard-
hit Inland Empire has seen SFR availability fall by 58.4%
and Sacramento has recorded a drop of 66.4%. In the
Bay Area, San Francisco has seen availability fall by 57.6%
while San Jose’s inventory of available
homes for sale has fallen by 55.7%.
Meanwhile, the shadow inventory of REOs,
foreclosed and delinquent homes is now
back to 2008 levels.
According to the National Association of
Realtors (NAR), single-family home prices
have improved in 100 out of 134 metros
since the beginning of 2012 (Case-Shiller
data mirrors this trend). Meanwhile,
RedFin’s data indicates that pricing
per square foot metrics have improved
significantly even in some of the markets
worst hit by the housing crisis. The Las
Vegas market has seen pricing jump by
10.5%, the Inland Empire booked an annual increase of 9.6%,
Sacramento pricing improved by 8.8% while RedFin reports
a whopping increase of 30.0% in the per square foot pricing
for the beleaguered Phoenix marketplace.
Lastly, and perhaps most importantly, new home starts are
now at their highest level since before the financial meltdown
of 2008. Additionally, permits remain high, meaning that this
trend will continue, at least for now. The construction sector
accounted for roughly two million of the more than eight million
jobs lost during the recession. Though it will have a slow
start, 2013 will be a year in which gradually improving housing
fundamentals will accelerate. Keep in mind that many who
would have otherwise bought homes during the downturn have
held off until the market “hits bottom.” The perception that
the housing market is rebounding still has not hit the general
public, though it should by late in the year. This will result in a
sharper “pop” in SFR demand heading into 2014. Meanwhile,
new home construction will continue to
accelerate. We anticipate that housing will
clearly begin to impact GDP by 2014 with
quarterly growth levels finally returning to
the 3.0% or greater range. Meanwhile,
new home construction could add as many
as one million new jobs to the economy by
2015, reinforcing a further virtuous cycle
that will drive economic growth ahead.
But perhaps the most important impact
of housing’s return will be improvement in
household wealth. Historically, for every
$1 increase in home values, consumer
spending typically increases by $0.05.
Though consumer spending has largely
kept the economy afloat over the past four
years, it has been against a backdrop of declining personal
wealth. The return of home pricing appreciation will have a
significant impact on consumer spending, retail and invest-
ment in general. The “new frugality” that has significantly
impacted retail trends over the past few years will certainly
be with us for a while, but the eventual return of the “wealth
effect” by 2015/2016 could mean relief for some of the
retailers hardest hit by the recession.
The lack of policy clarity
will remain an issue for
now and additional political
discord on top of that won’t
help. But there are plenty
of economic indicators to be
extremely optimistic about

CASSIDY TURLEY
10
I
n terms of regional performance, the Bay Area economy has
emerged as the strongest in the U.S. over the past couple
of years and technology has been at the heart of this trend.
While the San Jose and San Francisco markets have been
among the fastest growing cities in terms of job growth, the
region’s commercial real estate market has been booming as
well. That being said, the boom has been uneven, both in
terms of product type and in terms of geography.
The office and R&D sectors are where we have seen the
greatest turnaround, with these properties accounting for the
most regional occupancy growth and some of the most robust
rental rate gains. After hemorrhaging over 19.5 million square
feet of office and R&D occupancy in 2008 and 2009, the
market has experienced the strongest rebound in its history
(even slightly surpassing the growth rates recorded during the
first couple of years of the first tech explosion). Since market
conditions turned in 2010, the San Francisco Bay Area’s office
and R&D markets have combined for approximately 20 million
square feet of total occupancy growth. The overwhelming
majority of this was driven by tech users, but because most
of these companies have remained heavily concentrated in
just those markets situ-
ated along the Highway
101 corridor (San
Francisco, San Mateo
and Santa Clara Coun-
ties), recovery has been
uneven geographically.
Office and R&D proper-
ties in San Francisco,
San Mateo and Santa
Clara Counties have
accounted for over 17.3
million square feet of
the roughly 20 million
square feet of growth
recorded in the region since 2010. Overall East Bay numbers
only turned positive in 2011. In the North Bay, Marin County
barely registered positive numbers in 2010 and after a strong
2011 has struggled to remain in positive territory in 2012.
Sonoma County saw stronger gains in 2010 and also posted
robust growth in 2011 but has seen those numbers falter in
2012. In fact, Q3 2012 was the first time since the current
wave of recovery began that some seemingly bulletproof
markets (like San Francisco) saw any weakness at all. San
Francisco is still on course to close the year in strongly positive
territory and Santa Clara County (home to Silicon Valley) hasn’t
faltered at all. But even San Mateo County has struggled with
negative net absorption in 2012.
The recent negative trending in San Mateo County and San
Francisco’s weak performance in Q3 have led many to question
whether the current tech boom may be going bust. But unlike
the 2001 dot.com crash, there are a few critical differences
with the current cycle. While the dot.com wave was fueled by
start-ups with heavy funding, but little in the way of proven
business plans, Tech Boom 2.0 has been driven by some of the
most proven and profitable companies in the world, including
Apple, Google, Microsoft, Salesforce and Samsung to name
just a few. Meanwhile, the San Francisco Bay area continues
to account for between 35% and 40% of all venture capital
funding nationally and that is fueling additional growth in the
region. With personal computing and smartphone use only
accelerating worldwide, the new tech boom isn’t about to go
bust any time soon. But it may be changing. After over two
years of runaway growth, it may be slowing to levels that will
be more sustainable in the long-term.
Bay Area Office/R&D Review
Throughout the Bay Area as a whole, combined office and R&D
vacancy stood at 13.6% as of the close of Q3 2012. This figure
reflects a total inventory in excess of 454 million square feet
of product throughout the San Francisco Peninsula, Silicon
Valley and the East and North Bay markets. As stated earlier,
recovery has been uneven. This holds true both geographically
and for product types.
In terms of office space alone, the Bay Area is home to more
than 253 million square feet of office product. In terms of
occupancy growth, office has far outpaced R&D during the
current growth cycle. Of the roughly 20 million square feet
of positive net absorption recorded since Q2 2010, office
product was responsible for over 14.4 million square feet
of that total. Compared against the region’s overall office
inventory, this equates to a stunning overall growth rate of
5.7% in just 27 months.
Q3 2012 office vacancy stood at 12.9%, down from 14.3%
one year earlier and significantly reduced from a peak reading
of 17.5% posted in Q1 2010. The current average asking rent
for office space throughout the region is $2.80 per square foot
(on a monthly full service basis). This metric has increased
8.4% from the $2.58 per square foot rate that was recorded in
Q3 2011. Regional asking rents hit a low of $2.48 per square
foot in Q2 2010 but have rebounded by 12.9% since that
time but this metric masks a wide range of rental rate growth
that measures from aggressive in San Francisco to modest
in the North and East Bay. Regardless, all of this has been
fueled by strong occupancy growth. The market recorded over
one million square feet of occupancy growth in Q3 alone and
had posted 3.7 million square feet of positive net absorption
through Q3 2012. We anticipate final Q4 numbers to only
build upon that total. When measured against the region’s
inventory, this number represents an extremely robust growth
rate of 1.5% over the past months.
OFFICE AND R&D FORECAST
San Francisco County Office Market 2012 Notable Leases (Through Q3 2012)
Tenant Quarter Total SF Address Submarket Transaction Type
Salesforce.com Q1 501,786 50 Fremont St South Financial District Relocation/Expansion
Macy's.com Q1 238,000 680 Folsom St South Financial District Relocation/Expansion
Airbnb Q2 170,000 888 Brannan St Showplace Square Relocation/Expansion
Twitter Q3 164,051 1301-1355 Market St West End Relocation/Expansion
Riverbed Technology Q1 160,000 680 Folsom St South Financial District Relocation/Expansion
The largest San
Francisco office deal
of 2012 (through 3Q)
was Salesforce’s lease
of nearly 502,000
square feet of space
at TIAA-CREF’s 50
Fremont Street.
Salesforce occupied
this space in the
Financial District
South submarket in
December 2012.
DEALHIGHLIGHT

OFFICEANDR&DFORECAST
11
Though the Marin, San Francisco and
San Mateo County markets all recorded
occupancy losses during Q3 2012, only
the Marin and San Mateo County trade
areas were in negative territory for the
year. Based upon the trending that we
saw in the marketplace and numerous
deals that had either been signed or
that were in the works when this report
went to press in December, it appears
that all three of these regions will return
to growth in Q4, though it is unclear
whether these numbers will be enough
to bring both Marin and San Mateo
Counties out of the red for the year. The
good news here is that the East Bay,
which has largely been sidestepped
by a tech-driven recovery, is finally
showing strong signs of improvement.
While total annual growth numbers for the Oakland market are
modest, both the Pleasanton and Walnut Creek trade areas
have posted solid occupancy growth in 2012. In fact, some of
the strongest gains that these markets have seen came during
Q3 2012 when the specter of political uncertainty began to
impact tenant behavior.
As we drew closer to the November 2012 elections, we began
to see many space users postpone or even cancel planned real
estate moves due to their concern over the lack of clarity on
taxation policy. Though this trend was limited in its impact,
it did generally slow growth across the board. Though the
re-election of President Obama has given the marketplace a
better sense of the general direction of policy, the issue of the
fiscal cliff only prolonged this pause in the action for many
space users.
While concerns over taxation policy were not enough to derail
the Bay Area’s office market in Q3, the region’s R&D sector did
see some slowing. For the first time since mid-year 2012, R&D
product posted negative growth to the tune of 444,000 square
feet. While this is a comparatively small number when taking
the region’s 192.3 million square foot inventory into account,
it does raise some concerns. As of the close of Q3, vacancy
for R&D product throughout the region stood at 14.4%, up
slightly from a midyear reading of 14.2%. This remains well
below the 15.7% rate of one year ago
and marks a major reduction from the
post-recession peak of 19.0% that was
recorded in Q1 2010. Even with Q3’s
losses, the market has seen its overall
R&D occupancy increase by over 5.7
million square feet since that time,
reflecting a 3% overall growth rate.
But the question remains as to whether
the growth cycle is coming to an end.
The short answer is no.
Though occupancy growth turned nega-
tive in Q3, the Bay Area’s R&D sector
remained in positive territory over the
first nine months of 2012—to the tune
of 832,000 square feet and, based
upon deals signed or in the works as
this report went to press in December,
we anticipate that Q4 2012 totals will be modestly positive.
And we should note that about 25% of Q3’s occupancy loss
was due to older R&D buildings being demolished to make way
for new projects (mostly multifamily) in Santa Clara County.
Still, deal activity has slowed and while some of this could be
blamed on the issue of political uncertainty, most of it reflects
a deeper trend. Most of Q3’s R&D occupancy loss came from
space users moving to office projects and the biggest chal-
lenge ahead for R&D landlords will be how to battle the fact
that tech user preferences are increasingly shifting towards
office space. This has not been as much of a problem with
life science or non-tech users, but as office space continues
to evolve away from the old model of commodity space to
creative space, it has emerged as a direct competitor to R&D.
The good news is that R&D remains the lower cost alterna-
tive ideal incubator option for start-ups and, as office rents
continue to escalate, may be well-positioned for more frugal
tenants. The bad news is that this trend will only accelerate
as office space continues to change and as the region’s R&D
inventory ages. While the current regional average asking
rent for office space is $2.80 per square foot (on a monthly
full service basis), the average rate for R&D currently stands
at just $1.33 per square foot (on a monthly triple net basis).
Though R&D space is almost always leased on a triple net basis
which passes expenses on to the tenant (and these can vary
San Mateo County R&D Market 2012 Notable Leases (Through Q3 2012)
Tenant Quarter Total SF Address City Transaction Type
Depomed, Inc. Q1 45,990 1330-1360 O'Brien Dr Menlo Park Renewal
NestGSV Q3 45,866 425 Broadway Ave Redwood City Relocation/Expansion
Global Blood Therapeutics Q3 41,387 400 E. Jamie Ct South San Francisco Relocation/Expansion
Pan Pacific Q1 39,150 1205 Chrysler Dr Menlo Park Relocation/Expansion
Intersect ENT Q2 23,232 1555 Adams Dr Menlo Park Relocation/Expansion
San Mateo County Office Market 2012 Notable Leases (Through Q3 2012)
HeartFlow Q1 102,981 1400 Seaport Blvd Redwood City Sublease
Evernote Q1 87,774 305 Walnut St Redwood City Relocation/Expansion
Success Factors Q2 87,067 Centennial Towers South San Francisco Relocation/Expansion
Wildfire by Google Q1 58,686 1600 Seaport Blvd Redwood City Expansion
Gazillion Entertainment Q1 49,800 475 Concar Dr San Mateo Renewal
In September 2012, Lab 126 signed a
deal for 582,000 square feet of space
at Jay Paul’s Moffett Towers project in
Sunnyvale. Lab 126 is the Amazon-
subsidiary responsible for developing the
Kindle device. They will be relocating and
expanding into Building D at Moffett Park
upon its completion (currently scheduled
for February 2013).
DEALHIGHLIGHT

CASSIDY TURLEY
12
widely), tenants can still find top quality R&D space at rents
well below like office rents.
Bay Area Office/R&D Forecast
Looking ahead to 2013, we anticipate slower growth during
the first quarter of 2013 for both office and R&D properties.
The wheels of commercial real estate move slowly and the
political uncertainty that began with the November elections
only intensified with the fiscal cliff issue. Though we expect
this to improve now that a partial deal is in place, enough real
estate decision makers put the brakes on making moves that
it will impact activity in January and February. But demand
for goods and services still trumps fear of taxes in terms of
what motivates businesses to expand their commercial real
estate usage and so the region’s tech engine has hardly slowed,
with a number of major deals inked in Q4 and many teed
up for Q1 2013. But the same may not be true for other
sectors of the economy and though we do not expect any
major space givebacks, a Q1 slowdown across the board is
almost inevitable. The good news is that the market should
be on track for more accelerated growth by Q2. User space
requirements remain strong. We are currently tracking a total
of 18.1 million square feet of space user needs that could land
in office or R&D projects over the next 24 months. Some of
these are for renewals or relocations that will not result in any
occupancy growth. Likewise, some of these may never land.
But the current deal pipeline is roughly in the same place it
was six months ago and should guarantee positive growth going
forward. The real question may be how long could some of
these moves be postponed.
We anticipate moderate growth ahead in most trade areas.
We are also extremely optimistic about the resurgent housing
market and its eventual return as an economic driver. This
has the potential to bring back demand from a number of
key sectors including the financial services sector, which has
largely been missing in action since 2007. This is not likely
to happen prior to 2014 at the earliest, but we do expect an
uptick of demand that will extend beyond the big financial
services players in need of larger blocks of commodity space to
smaller residential real estate firms, title companies, mortgage
brokers and other players that had been squeezed by the
housing crash.
San Francisco Office Outlook and Forecast
As stated earlier, Q3 2012 was the first time in nine consecu-
tive quarters that the market recorded occupancy losses,
posting negative net absorption of 409,000 square feet of
space. However, annual numbers remained in the black
through Q3 to the tune of over 1.4 million square feet and an
annual growth rate (when measured against San Francisco’s
total office inventory of 83.6 million square feet) of 1.7% in
just nine months. San Francisco does not have a significant
R&D presence and so that type of space is a non-factor here.
As this report went to press, office vacancy stood at 9.9%, up
from the 9.4% rate of Q2 2012, but still significantly reduced
from the 12.0% rate posted in Q3 2011. Market vacancy
had peaked at 16.4% in Q1 2010 but had been on a sharp
downward trajectory until recently. The market has backfilled
over six million square feet of space since that time, posting
an astonishing growth rate of 7.3% in just 27 months. But
after two years of nonstop aggressive growth any slowdown is
bound to raise some concerns. The good news is that Q3’s
occupancy losses are best described as a pause in the action.
Market timing was key to much of the decline both in terms
of space users postponing planned moves in light of political
uncertainty and a number of shadow spaces coming vacant
as tenants relocated within the marketplace. Likewise, the
biggest deal of Q3 was Twitter’s lease of 164,000 square feet
at Market Square North, but because they won’t be moving
in until 2015 it has yet to impact statistics. The good news
is that deal activity has picked back up and, as this report
went to press in December, the market was on track to post
occupancy growth in Q4.
As of Q3, San Francisco’s average asking rent stood at $3.62
per square foot (on a monthly full service basis), up 19.3% over
the $3.03 reading of a year ago. This metric has improved by
37.8% since the market’s low-water mark of $2.63 was posted
in Q1 2010. Based upon the tenant deals in the marketplace
that we are tracking, we anticipate that the San Francisco
office market will not only return to growth in the final quarter
of 2012, but that it will continue this pattern throughout 2013.
While we expect Q1 2013 numbers to be modest, look for
occupancy growth totals to escalate heading into the final half
of the year. The market will likely close 2013 having posted
about 1.6 million square feet of positive net absorption and
Santa Clara County Office Market 2012 Notable Leases (Through Q3 2012)
Lab 126 Q3 581,973 1100-1120 Enterprise Wy Sunnyvale Relocation/Expansion
LinkedIn Q3 557,143 555 Mathilda Ave Sunnyvale Relocation/Expansion
Samsung Info Systems Q3 385,000 625 Clyde Ave Mountain View Relocation/Expansion
Palo Alto Networks Q3 299,784 4301-4401 Great America Pkwy Santa Clara Relocation/Expansion
Arista Corp. Q3 149,608 5453 Great America Pkwy Santa Clara Relocation/Expansion
Santa Clara County R&D Market 2012 Notable Leases (Through Q3 2012)
Synopsys, Inc. Q1 215,824 445-455 N. Mary Ave Sunnyvale Renewal
Barnes & Noble, Inc. Q1 207,857 3400 Hillview Ave Palo Alto Relocation/Expansion
Xerox Q3 202,000 3333 Coyote Hill Rd Palo Alto Renewal
JDS Uniphase Q1 162,934 400, 430, & 460 N. McCarthy Blvd Milpitas Renewal/Expansion
Stanford Hospital & Clinics Q2 155,000 1804 Embarcadero Rd Palo Alto Palo Alto

13
a vacancy rate in the range of 8.7%. New construction will
eventually become more of a factor impacting trends, though
we don’t see much of an impact before 2014. The good news
is that is also when we anticipate the recovery as a whole to get
a significant boost from the return of the housing market as
an economic driver. Look for rents to continue to post strong
gains, though they will likely not approach the double-digit
increases of the past year. Our assumption is that they will
likely increase at a rate of 9.0% to 10.0% in the coming year.
San Mateo County Office/R&D
Outlook and Forecast
2012 has been a challenging year
for the San Mateo County office and
R&D market. The combined inven-
tory of 50.5 million square feet of
product here includes 31.1 million
square feet of office space and 19.4
million square feet of R&D space.
Total vacancy as of the close of Q3
stood at 13.4%, up a full percentage
point from the 12.4% rate booked
at the close of 2011. Through the
first nine months of 2012, just under
357,000 square feet of space had
been returned to the marketplace
with both office and R&D properties
reporting losses.
The office market has been harder hit,
accounting for 240,000 square feet
of negative net absorption through
Q3 2012. Office vacancy stands at
13.9%, up from the 13.6% rate that
was posted exactly a year ago (Q3
2011). But even with office vacancy
creeping upward, the real problem
facing San Mateo County is the lack
of available space. Obviously, on
the surface, that statement sounds
counter-intuitive to the extreme.
But the problem is that while San
Mateo County may still have plenty
of office space available, it is not the
right kind of space. Currently tenant
office demand on the Peninsula is
dominated by tech companies looking for larger blocks of
space of 10,000 square feet or more. Yet, office suites of
10,000 square feet or more account for only about 18% of
the more than 4.2 million square feet of space currently avail-
able. Likewise, tech companies are also looking for downtown
creative space ideally situated near public transportation and
urban amenities. This type of space is also in short supply.
This has resulted in some companies relocating elsewhere
in the Bay Area as they look (primarily to San Francisco) to
markets that can accommodate their growth needs.
Despite a year in which growth has been negative, office rents
have grown. The current average asking rate for office space
of $3.33 per square foot (on a monthly full service basis) is
up 5.1% over the $3.16 reading of a year ago. This metric is
up 31.9% from the $2.52 low-water rate posted in Q1 2010.
R&D space has also struggled to gain traction in 2012. As
of Q3 2012, vacancy stood at 12.7% compared to 11.9%
twelve months prior. Through the first nine months of 2012,
the market had posted 117,000 square feet of negative net
absorption. This year’s lackluster performance comes in stark
contrast to the previous three years when R&D space in San
Mateo County had accounted for nearly 2.5 million square feet
of growth (2009 – 2011). The challenge here has not only
been the increasing preference of office space for many tech
companies, but stiff competition from cheaper R&D space in
the neighboring Silicon Valley market.
So, it should come as no surprise that
rents have been flat here over the
past year. The current average asking
rate of $2.17 per square foot (on a
monthly triple net basis) compares to
Q3 2011’s reading of $2.14. Activity
in Q4 has picked up but we anticipate
minimal growth at best to close out
the year and not enough to boost this
segment of the market into positive
territory for the year.
We anticipate growth to return to posi-
tive territory in 2012, though the first
half of the year will likely be sluggish
with some quarters possibly continuing
the trend of negative net absorption.
Still, we anticipate that combined
occupancy growth for office and R&D
properties will reach the 200,000
square foot mark by the close of 2013
and that the current overall vacancy
rate of 13.0% will fall to about 12.8%.
The few rare large blocks of available
space on the market will drive overall
metrics for asking rates up by about
5.0%, though the market will be very
competitive for small spaces. Office
growth numbers will be much more
robust by 2014 thanks to a number
of projects expected to deliver to the
marketplace by then which will offer the
large blocks of space that tech users
are currently going elsewhere to find.
Santa Clara County Office/R&D Outlook and Forecast
While San Mateo County faced challenges throughout 2012
and San Francisco’s office market took a break in Q3, the
Santa Clara office and R&D markets has continued to produce
impressive numbers, albeit unevenly. The combined inventory
here includes over 201.4 million square feet of space and had
posted just over three million square feet of occupancy growth
through the first nine months of 2012. As of the close of Q3
2012, this equated to a combined vacancy rate of 13.0%, a
substantial drop from the 14.2% rate posted at the close of
2011. That being said, Silicon Valley’s office sector has simply
been on fire, having recorded over 1.8 million square feet of
occupancy growth through September and with enough Q4
deals having been inked as this report went to press to easily
guarantee it will close out 2012 well above the two million
square foot mark.
San Mateo County’s largest office
lease through the first nine months of
2012 occurred in February. Heartflow
took 103,000 square feet of space at
Shorenstein’s Pacific Shores Center
Building 9 in Redwood City.
DEALHIGHLIGHT
In April 2012, the University of
California at Berkeley inked a deal for
93,000 square feet of Class B office
space at the Strada Investment Group’s
Berkeley Crossing project. They will be
occupying the Class B space in
January 2013.
DEALHIGHLIGHT

CASSIDY TURLEY
14
Silicon Valley office vacancy stood at 13.0% as of Q3,
reflecting a significant drop from the 14.3% rate of a year ago
and a massive improvement from the 18.9% high-water mark
posted in Q1 2010. Silicon Valley has posted growth nine out
of the ten past quarters, racking up an impressive 5.8 million
square feet of positive net absorption for an overall growth rate
of 8.8%. Meanwhile, office rents continue to climb, though
the rate of increase appears to be slowing. The current average
asking rate of $2.89 per square foot (on a monthly full service
basis) is 6.8% above last year’s reading, but the current actual
effective rate of $3.87 per square foot reflects a 19.1%
gain from where it stood a year ago. This number was bolstered
by a number of transactions completed at new developments
throughout the region. Major corporate
campus moves from tech companies
continue to fuel this marketplace
and has spurred a new wave of
development that will increasingly
impact vacancy and rental rate trends
from late 2013 onward.
Silicon Valley’s R&D sector has also
outperformed. Through Q3 2012 it
has posted just over one million square
feet of occupancy growth and this is
despite the fact that nearly one million
square feet of old R&D space had been
converted (demolished, mostly to make
way for new residential projects) over the
first nine months of the year. This factor
helped to drive negative numbers in Q3,
however, our tracking of Q4 deal activity
indicates that quarterly net absorption
numbers will turn positive again to close
out 2012. The current R&D vacancy rate of 14.5% compares
to a reading of 16.2% posted a year ago and a peak vacancy
reading of 19.6% in Q1 2010. The R&D market has backfilled
over 5.7 million square feet of previously vacant space in the
intervening 27 months, reflecting a robust overall growth rate
of 3.4%.
While we expect slower activity during in Q1 2013 for all Bay
Area markets, Silicon Valley will still lead the way in terms of
growth. Office will remain the hotter of the two property types,
but R&D will also continue to post positive numbers with both
seeing greater growth towards year-end. We anticipate that
today’s combined vacancy rate of 13.0% will drop to about
12.5% by the end of 2013 thanks to about three million square
feet of total occupancy growth, with roughly two thirds of that
occurring in the region’s office properties. Look for rents to
continue aggressive growth in the 10% to 15% range. It will
be 2014 before new speculative construction makes much of
an impact on either vacancy or rental rate growth.
East Bay Office/R&D Outlook and Forecast
The combined East Bay inventory of office and R&D properties
is 98.7 million square feet and recorded a vacancy rate of
17.3% as of the close of Q3 2012. This reflects some improve-
ment over the 18.0% rate posted as of
the close of 2011 thanks to the 734,000
square feet of occupancy growth that
the region’s markets have experienced
throughout 2012, much of which has
come later in the year.
In terms of office space, there are three
major trade areas within the East Bay;
Oakland, Walnut Creek and Pleasanton.
None of these markets have a huge
tech presence, though the Oakland
marketplace does have a couple of tech
clusters within the Berkeley, Emeryville
and Alameda submarkets. As a result,
recovery has come here much later
than elsewhere in the Bay Area. Office
tenancy in these trade areas has typically
come from the government, healthcare,
education, personal and business
services sectors and these have only
recently begun to spring back into expansion mode. Modest
improvement in the overall economy and regional improvement
as a whole (many East Bay workers commute to tech jobs in
the Highway 101 Corridor markets but spend their paychecks
back home in Alameda or Contra Costa County) has helped to
finally turn things around in these trade areas. The Oakland
office market currently has a vacancy rate of 17.2%, up from
a Q3 2011 reading of 16.4%, but still below its 17.5% peak
in Q2 2011. Through the first nine months of 2012, it had
posted just 37,000 square feet of occupancy growth, but this
reflects an improvement over a lackluster 2011 in which it
East Bay Office Market 2012 Notable Leases (Through Q3 2012)
Tenant Quarter Total SF Address City/Submarket Transaction Type
UC Berkeley Q2 93,000 1608 4th St West Berkeley Expansion
PG&E Q3 80,000 Bishop Ranch 1 San Ramon Relocation/Expansion
Singulex Q3 52,000 1701 Harbor Bay Pkwy S. Alameda Relocation/Expansion
Wendel Rosen Black & Denn Q1 52,000 1111 Broadway City Center - Oakland Renewal
Assoc. Third Party Admin. Q2 49,067 1640 Loop Rd, S. S. Alameda Renewal
East Bay R&D Market 2012 Notable Leases (Through Q3 2012)
Warm Springs Constructors, Inc. Q2 107,000 45401 Research Ave Fremont Relocation/Expansion
Volterra Semiconductor Corp. Q3 73,111 47451-47475 Fremont Blvd Fremont Renewal
Depomed, Inc. Q2 60,416 7999 Gateway Blvd Newark Relocation/Expansion
Solta Medical Q3 51,449 25881 Industrial Blvd (Bldg F) Hayward Renewal
LAM Research Q3 50,900 45757 W. Northport Loop Fremont Relocation/Expansion
While there have been plenty of large
new R&D leases in Silicon Valley this
year, the biggest deal through Q3
was actually a renewal. Synopsys
re-upped on the 216,000 square feet
of space that it has occupied at Jay
Paul’s Crossroads Technology Center
in Sunnyvale since 2000.
DEALHIGHLIGHT

15
lost nearly 150,000 square feet of occupancy. The current
average asking rent here of $2.16 per square foot is slightly
above the $2.10 rate of a year ago, but we have yet to see
substantial growth returning since the downturn. Rents had
peaked at $2.39 per square foot in Q4 2008 as the impact
of the recession was just being felt. While conditions have
been choppy in Oakland, the Pleasanton office market has
demonstrated a much clearer trend line. Vacancy here now
stands at 13.9%, down considerably from its Q3 2011 peak
of 18.4%. Recovery here has only just begun to pick up
steam. As of Q3, Pleasanton had recorded four consecutive
quarters of strong growth and had posted 716,000 square feet
of positive net absorption over the first nine months of 2012.
The Walnut Creek office market has followed a similar growth
trend with vacancy falling five of the last six quarters and total
occupancy growth of 195,000 square feet through Q3. Like
all East Bay office markets, Walnut Creek’s current vacancy
rate of 14.8% remains elevated, but this is a considerable
improvement over the 17.7% peak posted in Q1 2011.
The East Bay’s R&D marketplace is mostly centered in
Alameda County, where roughly 31.9 million square feet of
product is situated. The Oakland R&D marketplace currently
has a vacancy rate of 21.7% and has actually regressed over
the past year. As of Q3 2011 vacancy stood at 20.0%. This
hasn’t impacted rents significantly, with asking rates currently
averaging $0.88 per square foot (on a monthly triple net basis),
compared to $0.82 a year ago. The Pleasanton market is
home to approximately 7.1 million square feet of R&D space
and the trend here has been more positive. The current
vacancy rate here is 10.8%, down from a Q3 2011 reading of
13.5%. This trade area had posted R&D occupancy growth of
129,000 square feet through the first nine months of 2012,
compared to Oakland’s loss of 342,000 square feet. The big
challenge here is that R&D space in the East Bay has seen
little benefit from the region’s tech sector and has traditionally
been more about quasi-industrial or back-end office usage
than anything else. The current average asking rent for R&D
space in Pleasanton is $0.91 per square foot, up from $0.85
a year ago.
Going forward, we anticipate that the East Bay marketplace will
see continued slow growth for office product and flat growth
for R&D in the Oakland trade area. Both the Walnut Creek
and Pleasanton office markets will continue to post moderate
growth while we also anticipate activity to tick up for R&D
space in Pleasanton. All told, we expect today’s combined
office and R&D vacancy rate of 17.3% to fall over the course of
2013 to about 16.0% by year-end. We expect total occupancy
growth to come in at about 1.2 million square feet, with totals
ramping up later in the year.
North Bay Office Outlook and Forecast
The North Bay is the San Francisco Bay Area’s smallest trade
region in terms of office product (there are no major R&D
projects in this marketplace to speak of) and accounts for
a total inventory of just over 20 million square feet between
Marin and Sonoma Counties. In Marin County, we track 9.8
million square feet of space, which had a vacancy rate of
15.5% as of Q3 2012. Performance has been weak in 2012,
with the market in the red in terms of occupancy growth to
the tune of 181,000 square feet. Vacancy had reached as
low as 13.6% in Q4 2011. Despite this setback, the average
asking rent for office space in Marin County currently stands
at $2.52 per square foot (on a monthly full service basis)
reflecting an increase of 3.3% over where it stood a year ago.
Sonoma County has also struggled with occupancy issues this
year, having posted negative net absorption of 215,000 square
feet over the course of 2012. But this all came from one
user, State Farm, who has pulled out of their existing North
Bay campus and because the project is slated for demolition
it has had no impact on vacancy at all. The current vacancy
rate for office space in Sonoma County of 20.4% is actually
down from the 20.9% rate that had been posted a year ago.
Before State Farm’s departure, Sonoma County had been on
a course for modest growth throughout the year, though our
tracking of Q4 activity indicates that both markets will return
to modest growth over the final months of 2012. The current
average asking rent for office space in Sonoma County is $1.66
per square foot, roughly the same place it was one year ago.
We anticipate a return to very slow growth in Marin County
for 2013. Our current forecast calls for this market to close
2013 with approximately 60,000 to 90,000 square feet of
total occupancy growth and a final vacancy rate of roughly
14.3%. We expect rents to post a growth rate of roughly 3.0%.
Sonoma County should end 2013 with a vacancy rate at, or
near, 17.9%. We expect total occupancy growth in the range
of 160,000 to 190,000 square feet and for rents to increase
at a pace of about 4.0%.
Marin County Office Market 2012 Notable Leases (Through Q3 2012)
Health Net Q3 52,454 2350 Kerner Blvd San Rafael Renewal
Autodesk Q2 46,766 3950 Civic Center San Rafael Renewal
Redwood Trust, Inc Q1 27,292 1 Belvedere Pl Mill Valley Renewal
Meritage Medical Network Q2 22,266 500 Hangar Ave Novato Relocation/Expansion
Willis Lease Finance Corporation Q1 20,534 773 San Marin Dr Novato Renewal/Expansion
Sonoma County Office Market 2012 Notable Leases (Through Q3 2012)
Marmot Mountain, LLC Q2 43,000 5789 State Farm Dr Rohnert Park Relocation/Expansion
Raydiance Q2 41,638 1450 Mcdowell Blvd Petaluma Relocation/Expansion
Sonoma Marin Area Rail Transit Q3 28,000 5401 Old Redwood Hwy Petaluma Relocation/Expansion
Adventist Health Q3 26,200 463 Aviation Blvd Santa Rosa Relocation/Expansion
Clover Stornetta Farms Q1 17,846 1650 Corporate Cir Petaluma Relocation/Expansion

CASSIDY TURLEY
16
T
he San Francisco Bay Area’s 366 million square foot
industrial market posted total vacancy 8.6% as of the
close of Q3 2012, reflecting just under 452,000 square
feet of total occupancy growth through the first nine months
of the year. The region’s industrial marketplace is on track
for its second consecutive year of growth. Industrial space
accounted for 362,000 square feet of positive net absorption
in 2011, but the region had hemorrhaged over 12.9 million
square feet of occupancy between 2008 and 2010. While
office and R&D occupancy levels are back to pre-recession
levels, the same cannot be said of the region’s industrial base.
However, the good news for local landlords is that at least
the industrial sector did not enter into
the recession with already inflated
vacancy levels, as was the case for
office and R&D properties in many
Bay Area markets. But as has been
the case with those property types,
recovery for industrial properties has
also been uneven both in terms of
product type and geography.
Bay Area Manufacturing Outlook
Manufacturing space accounts for
147.2 million square feet of the
region’s industrial inventory. The
region’s manufacturing sector
performed well in Q3 2012, posting
932,000 square feet of occupancy
growth and closing the quarter with a
vacancy rate of 6.9%. Unfortunately,
this comes after three consecutive
quarters of substantial occupancy
losses, including those related to the high profile collapse of
Fremont-based solar panel manufacturer Solyndra. Through
the first nine months of the year, manufacturing occupancy
in the Bay Area has actually fallen by 37,000 square feet.
The good news is that Q4 activity should boost this segment
of the marketplace back into the black for the year, but gains
are likely to be modest at best. Still, despite these lackluster
numbers, the trend has been one of general improvement for
the market as a whole. If you take Solyndra out of the mix,
the region’s manufacturing base would have posted almost
800,000 square feet of growth through the first nine months
of 2012. This would have far surpassed the 343,000 square
feet of occupancy growth that the market experienced in 2011.
The good news is that while many feared that the Solyndra
facility would remain vacant for years, it actually sold very
quickly. Seagate Technology will close on the property in
February 2013, at which point the region’s manufacturing
occupancy will tick up by about 800,000 square feet.
The East Bay is home to 87.6 million square feet of manu-
facturing inventory. Vacancy here stood at 7.9% as of the
close of Q3, up from a 6.7% reading a year ago. It tends to
be the most active marketplace and usually drives growth in
the region, though this trade area had
posted negative net absorption to the
tune of 485,000 square feet of space
through the first nine months of 2012.
This was, of course, due to the impact
of Solyndra. The average asking rent
has increased 19% over the past year
from $0.42 to $0.51 per square foot
(on a monthly triple net basis).
Santa Clara County closed Q3
with a vacancy rate of 5.2%, down
significantly from the 6.5% rate of a
year ago. This trade area had posted
growth through the first nine months
of 2012. This is despite the fact that
nearly 240,000 square feet of previ-
ously occupied manufacturing space
was vacated and demolished to make
way for new residential projects in
San Jose. The trend of conversions
for older industrial properties in San Jose is only expected
to intensify going forward as city planners and developers
contend with a housing shortage, skyrocketing rents and home
prices and little land left to build. More owners will find that,
assuming they can rezone and get through the environmental
hurdles, that redevelopment plays into residential housing may
be the best use for older industrial properties bordering on
obsolescence. This trend will help to tighten market vacancy
further. Though tenant activity levels for manufacturing space
are minimal compared to the warehouse sector, there are not a
lot of quality options to choose from in the marketplace. This is
INDUSTRIAL FORECAST
San Mateo County Industrial Market 2012 Notable Leases (Through Q3 2012)
Williams Sonoma Q2 194,112 435-440 Valley Dr Brisbane Renewal
SF Chronicle Q1 79,300 240 Valley Dr Brisbane Expansion
Pacific Gourmet Q3 70,335 380 Valley Dr Brisbane Relocation/Expansion
NNR Global Logistics Q2 45,362 550 Eccles Ave South San Francisco Expansion
Metro Air Service Q3 43,500 425 Valley Dr Brisbane Expansion
San Francisco County Industrial Market 2012 Notable Leases (Through Q3 2012)
Tenant Quarter Total SF Address Submarket Transaction Type
KWW Kitchen Cabinets & Bath Q2 32,500 211 Industrial St Bayshore Corridor Relocation/Expansion
Young's Market Company Q2 26,000 3000 3rd St Mission Bay/Dog Patch Relocation/Expansion
SRG Designs, Inc. Q2 25,000 695 Minnesota St Mission Bay/Dog Patch Relocation/Expansion
Thatcher's Gourmet Popcorn Q2 20,000 1225 Minnesota St Mission Bay/Dog Patch Renewal
Roar Wines Q2 20,000 1225 Minnesota St Mission Bay/Dog Patch Relocation/Expansion
The largest industrial deal to be inked
throughout the first nine months of
2012 on the San Francisco Peninsula
was Williams-Sonoma’s renewal on
194,000 square feet of warehouse space
at CalSTRS’ Crocker Industrial Park
in Brisbane.
DEALHIGHLIGHT

INDUSTRIALFORECAST
17
one of the reasons why the ultra-modern Solyndra facility sold
so quickly as well as what is driving strong rental rate growth in
Santa Clara County. The current average asking rent of $0.68
per square foot is up 18% from last year’s rate.
With just 6.6 million square feet of product, San Mateo
County is the smallest manufacturing market that we break
out statistically. Through the first nine months of 2012 it
had posted 23,000 square feet of negative net absorption.
Ongoing deal activity in Q4 will likely bring it back into
modestly positive territory, but just barely. If so, it will be
the first time since 2008 that manufacturing space closes the
year in the black. Despite this negative
trending, current vacancy of 7.6% is
still relatively low. The problem is that
demand has been equally low. The
current average asking rent of $0.79
per square feet has actually dropped
5% over the past year.
At the peak of the last cycle in 2007
manufacturing vacancy fell as low as
4.7%. The market still has a long
way to go before it even comes close
to those numbers, however, we are
optimistic that the ongoing trend of
gradual improvement will escalate
heading deeper into 2013. The trend of
on-shoring is real and has been fueled
by a mix of factors including rapidly
rising costs in Asia and stagnant wages
here at home. The tech boom has had little impact on local
manufacturing demand so far, but even this may change soon.
Apple has announced that they will begin assembling at least
one model of their iPad product line in California. Though this
will probably land in the Sacramento area, this will be part of
a greater marketing campaign to see if they can successfully
charge more for product clearly branded as made in America.
Should it succeed, this could have immense implications for
manufacturing jobs and space demand in the future.
Bay Area Warehouse Outlook
Warehouse space accounts for almost 219 million square feet
of the Bay Area’s 366 million square foot industrial base.
Vacancy for this product type stood at 8.7% as of the close
of Q3 2012, compared to a 9.0% as of the close of 2011. In
the intervening nine months, the marketplace had absorbed
511,000 square feet of previously vacant space. As this report
went to press in December there were a number of deals that
had closed or that were in the works that should further boost
this total in Q4 2012. All told, we anticipate that the Bay
Area’s warehouse sector will close 2012 with total annual
occupancy growth in the range of 800,000 square feet. This
will make it the third year in a row that warehouse properties
have posted positive annual totals. The market had lost over
ten million square feet of occupancy between 2007 and 2009.
The good news is that 2012 will likely end as being the region’s
strongest growth year since 2006. The
bad news is that the combined positive
net absorption of the past three years
still equates to just 10% of all the
occupancy lost during the downturn.
The East Bay is home to the region’s
largest concentration of warehouse
space. The East Bay/Oakland market
has a total inventory base of 74.1
million square feet. It closed Q3 2012
with a 9.3% vacancy rate, reflecting
a slight decline from the 9.6% rate
of one year prior. This trade area has
accounted for 227,000 square feet of
occupancy growth through the first
nine months of 2012 and continues
to be one of the most sought after
locations from tenants who wish to be
close to the Port of Oakland and major transportation hubs.
At the peak of the last cycle, vacancy here had fallen as
low as 4.4% (Q3 2006). Though vacancy remains elevated
from pre-downturn levels, one of the challenges facing
this trade area is a lack of available modern space. The
average age of warehouse buildings in Alameda County is
42 years. Industrial demand is currently being driven by
distribution and logistics users who need warehousing space
that can handle heavy floor loads and that offer cross-docking
capabilities, high ceilings for stacking and numerous other
modern amenities. These facilities are in high demand and
fetch top rents. Much of what remains vacant in the East
Bay/Oakland marketplace is older product. This past year is
the first since the downturn where this market has started
Santa Clara County Warehouse Market 2012 Notable Leases (Through Q3 2012)
DGA Services Q1 149,010 999 Montague Expwy Milpitas Relocation/Expansion
Apple, Inc. Q3 134,160 2940 Mead Ave Santa Clara Expansion
Golden State T's Wholesale Q1 90,000 2070 S. Seventh St South San Jose Renewal
Cepheid Q1 70,627 914 Caribbean Dr Sunnyvale Expansion
Apple, Inc. Q1 54,934 590 Macara Ave Sunnyvale Expansion
Santa Clara County Manufacturing Market 2012 Notable Leases (Through Q3 2012)
Legacy Transportation Services Q1 107,116 2011 Senter Rd South San Jose Expansion
Riverview Systems Group Q1 70,042 1101 Cadillac Ct Milpitas Relocation/Expansion
SMTC Q1 64,800 2302 Trade Zone Blvd North San Jose Renewal
Versgrove Moving Systems Q3 51,600 665 Lenfest Rd North San Jose Relocation
ACTA Health Products Q1 34,040 41320 Boyce Rd Sunnyvale Renewal
We are optimistic that the
ongoing trend of gradual
improvement will escalate
heading deeper into 2013.
The trend of on-shoring is real
and has been fueled by a mix of
factors including rapidly rising
costs in Asia and stagnant
wages here at home.

CASSIDY TURLEY
18
to see rents recovering. The current average asking rate of
$0.40 per square foot is up almost 11% over one year ago.
While the East Bay/Oakland marketplace typically sees the
most tenant activity in the region, it was the East Bay’s inland
Contra Costa County markets that have posted the most growth
in 2012. The East Bay/Pleasanton
market is home to 17.8 million
square feet of warehouse space. It
closed Q3 2012 with a vacancy rate
of 15.0%, down from a reading of
16.3% one year ago. It has posted
of 2012. The current average asking
rent here of $0.57 per square foot
has only just begun to stabilize over
the past six months. It is down
17% from where it stood a year
ago. While we do not expect it to
fall any further, the region’s still-high
vacancy rate will continue to weigh
on rental rate growth.
The East Bay/Walnut Creek trade
area led all other Bay Area ware-
house markets in terms of occupancy
of 2012 with 479,000 square feet
of positive net absorption. Vacancy
here has fallen from 17.0% to 13.8% over the past twelve
months. But like its neighbor to the south, rents are only now
stabilizing and significant rental rate growth is unlikely until
vacancy falls further. The current average asking rent of $0.53
per square foot has not budged in the past six months, but a
year ago it stood at $0.58 per square foot.
In 2013, we expect the combined industrial markets of the
East Bay (warehouse and manufacturing in all trade areas)
to account for at least 860,000 square feet of positive net
absorption, if not more. We expect the current overall vacancy
rate of 9.6% to fall to 9.1% over the course of 2013.
But while the East Bay as a whole grew in 2012, the same was
not true of the region’s second largest marketplace. The Santa
Clara County warehouse market includes 31.2 million square
feet of inventory and closed Q3 2012 with an overall vacancy
rate of 8.8%. While this marks an improvement over the 9.8%
rate that was posted a year ago, Santa Clara County lost over
454,000 square feet of warehouse occupancy through the
first nine months of 2012. There is some good news here in
that building conversions have been
the real culprit. Since the begin-
ning of the year, we have removed
653,000 square feet of space from
our statistical tracking. In virtually
every case these were buildings
slated to be demolished to make
way for new projects, usually new
multifamily developments though the
extension of BART has also played
a role. Though this trend results in
lower overall occupancy numbers, it
actually has helped to drive vacancy
rates down because some of this
inventory was already empty. The
current vacancy rate for warehouse
product in Santa Clara County is
8.8%, down from 9.8%. Without
these conversions, the market would
actually be on page for modest
growth in the 200,000 square foot
range. This helps to explain why
rents here are growing. The current
average asking rate of $0.49 per
square foot is up 10% over last year’s reading. With leasing
fundamentals continuing to gradually improve and more older
or obsolete industrial properties likely to face the wrecking ball
in 2013 and beyond, we see vacancy continuing to tighten and
rents continuing to grow.
Looking ahead to 2013, we anticipate that Santa Clara
County’s combined industrial marketplace (warehouse and
manufacturing) will account for at least 250,000 square feet
of occupancy growth in 2013 and that it will close the year
with an overall vacancy rate of 6.2%
San Francisco’s 20.3 million square foot industrial market
closed Q3 2012 with a vacancy rate of 4.8%, down from 5.5%
over the past twelve months. Through the first nine months of
East Bay Manufacturing Market 2012 Notable Leases (Through Q3 2012)
Theranos Q1 219,255 7333 Gateway Blvd Newark Relocation/Expansion
Gary Steel Q2 173,600 1699 Grand Ave, W. Oakland Renewal
Dean Refrigeration Q1 130,000 860 81st Ave Oakland Relocation/Expansion
Whole Foods Market Q2 117,008 2000 Atlas Rd. Richmond Relocation/Expansion
Specialized Packaging Solutions Q1 107,199 38505 Cherry St Newark Renewal/Expansion
East Bay Warehouse Market 2012 Notable Leases (Through Q3 2012)
Ceva Logistics Q3 323,254 31353 Huntwood Ave Hayward Relocation/Expansion
RK Logistics Q2 191,483 41707 Christy St Fremont Relocation/Expansion
Architectural Glass & Aluminum Q3 175,000 6400 Brisa St Livermore Relocation/Expansion
Owens Corning Q3 174,278 201 C St Hayward Renewal
Primary Steel Q2 173,600 1699 W. Grand Ave Oakland Renewal
INDUSTRIAL FORECAST
The East Bay’s (and the region’s)
largest industrial deal of the year was
a relocation/expansion lease. Ceva
Logistics inked a deal for 323,000
square feet of space at Hayward’s
Huntwood Logistics Center in February.
The third-party logistics provider took
occupancy of the space in November.
DEALHIGHLIGHT

INDUSTRIALFORECAST
19
2012 it has posted 82,000 square feet of occupancy growth
but some Q4 move-outs will likely put this market into negative
territory on the year. We also anticipate vacancy as of Q4
2012 to climb as high as 5.8%. Rents here have remained
unchanged over the past year at $$0.74 per square foot. The
San Francisco market is dominated by long-term owner/users
with little in the way of available
space for lease. As a result, this is a
low demand/low activity marketplace
that also has low vacancy and higher
pricing. Tenancy here is driven by
service providers who need to be
located here. Looking forward, we
anticipate that likely conversions
of existing space to other property
types and continued modest levels
of demand should combine to bring
vacancy levels back downward. We
also expect rental rate growth in
2013 to ramp up, likely above the
5% level.
San Mateo County’s industrial
market closed Q3 2012 with a
vacancy rate of 9.6%. One year ago
it stood at 9.0%. The market has lost
through the first nine months of
2012, but we know of a few Q4 deals in the works that should
bring those numbers back into positive territory. The current
average asking rent here of $0.69 per square foot is down 8%
over the past year. While final 2012 growth numbers should be
modestly positive, we anticipate that growth should ratchet up
in 2013. We expect the San Mateo marketplace to close 2013
with about 160,000 square feet of positive net absorption and
a vacancy rate at, or near, 8.6%.
Marin County closed Q3 2012 with an industrial vacancy rate
of 7.1%, compared to a reading of 7.3% twelve months ago.
This trade area has experienced extremely modest growth of
just 14,000 square feet through the first nine months of 2012.
Deals in the works for Q4 will boost this total slightly, but it will
still likely fall beneath the 50,000 square foot mark. Though
vacancy levels are relatively low, deal activity and demand
has also been low. Most local deal activity remains focused
on smaller industrial users in need of service-related, light
manufacturing or basic warehousing (not distribution) space.
The current average asking rate for industrial space in Marin
County is $1.10 per square foot, up 13% over the $0.98 per
square foot reading of one year ago. Rental rate growth has
continued to take place simply because there are not a lot of
quality options for space users. While
we expect growth levels to pick up
here heading into 2013, we still do
not think that absorption levels for
next year will grow much above the
50,000 square foot mark. Still, we
anticipate that Marin County’s indus-
trial market will close 2013 with a
vacancy rate of about 6.2% and that
rents will also continue to grow at a
moderate clip.
Unlike Marin County where industrial
service users rule the roost, Sonoma
County’s industrial marketplace
is much more about warehousing,
particularly in support of the region’s
strong wine industry. As of Q3 2012,
vacancy stood at 10.1%, down from
a 10.6% reading a year ago. The
market has recorded nine consecu-
tive quarters in which occupancy had
either grown slightly or remained flat. Demand remains tepid
and with vacancy still slightly above the 10% mark, rents have
also remained flat. The current average asking rate of $0.64
per square foot has budged little since Q1 2010. As this report
went to press we were aware of a couple of planned tenant
move-outs that could send vacancy as high as 11.2% and
bring annual occupancy growth totals into the red by as much
as 220,000 square feet. However, we do expect a return to
modest growth in 2013. We anticipate that Sonoma County
will close out next year with vacancy at, or near, 10.5%.
Marin Industrial Market 2012 Notable Leases (Through Q3 2012)
EO Products Q2 38,000 90 Windward Wy San Rafael Relocation/Expansion
32Ten Studios Q1 29,982 3210 Kerner Blvd San Rafael Relocation/Expansion
Marin Senior Coordinating Council Q3 9,070 15 Jordan St San Rafael Relocation/Expansion
Tesla Motors Q2 8,000 595 Redwood Hwy Mill Valley Relocation/Expansion
San Francisco Exotic Cars Q2 8,000 15 Jordan St San Rafael Relocation/Expansion
Sonoma Industrial Market 2012 Notable Leases (Through Q3 2012)
Kala Brand Music Company Q1 24,006 1105 Industrial Ave Petaluma Relocation/Expansion
Office Playground Q2 17,456 715 Southpoint Blvd Petaluma Relocation/Expansion
Enphase Energy Q1 15,580 1380 Redwood Wa Petaluma Relocation/Expansion
Moresco Distributing Company Q3 14,550 1460 Cader Ln Petaluma Relocation/Expansion
Three Twins Organic Inc. Q1 7,989 2190 S. Mcdowell Blvd Petaluma Relocation/Expansion
The South Bay’s largest industrial deal
of the year so far (through Q3) was a
warehouse lease. In the first quarter,
DGA Services inked a deal for 149,000
square feet of space at 999 Montague
Expressway in San Leandro.
DEALHIGHLIGHT

CASSIDY TURLEY
20
T
he 2012 holiday shopping season was well under way as
this report went to press and initial indicators are that
final sales will be up at least 3.0% over 2011 totals, but
the final tally could exceed the 4.0% mark. Analyst forecasts
were more robust this year than they were in 2010 and 2011
but that is due to a number of reasons. This year’s holiday sales
season includes an extra weekend of selling time while retailers
continued to push the envelope with further early openings
during the Black Friday weekend. Meanwhile, the number
of major malls that opened on Friday at
midnight increased from roughly 35% to
about 50%. But while these factors were
bound to have an incremental impact on
retailer sales figures, the primary reason for
optimism was consumer confidence.
Remember that both the 2010 and 2011
holiday sales seasons turned out to be
pleasant surprises for U.S. retailers. In
2010, the economy was still emerging from
the depths of the recession. Luxury and
upscale retailers had seen their same store
comparables hammered, with some chains
having posted 18 consecutive months of
declines in the double-digits. Sales for this
segment of the market had only begun to
turn positive in September 2010. Most
importantly, consumer confidence had
been on a lengthy run of declines, reaching
a low of 48.6 in that same month. Analysts
predicted a weak sales season only to
be shocked when consumer confidence
suddenly began to trend upward and
shoppers turned out in force. While most
forecasters predicted annual sales gains
of 2% or less, American consumers drove
annual sales growth by over 4%.
A similar phenomenon took place in 2011, though by then
upscale retailers were doing markedly better. But confidence
slumped following an early year run-up in gas prices and the
summertime discord surrounding the debt ceiling debate and
subsequent downgrade of U.S. credit. By October 2011,
consumer confidence had fallen to a low of 40.9 as economists
debated the possibility of a double-dip recession. Analysts
predicted sales increases in the 2.5% to 3.0% range. Yet,
once again shoppers came through, fueling an annual increase
in holiday sales of just over 4.0%.
But unlike in those past years, consumer confidence was not
weak heading into the Holiday season. In fact, it is currently
on its strongest uptrend in over four years. After hitting a
low of 61.3 in August, it jumped to 68.4 in September and
has only been climbing since. By November it had reached a
peak of 73.7—it’s highest rate since February 2008. Against
this backdrop, it only makes sense that projections for 2012’s
holiday sales would be more robust. This is important because
a strong holiday sales season can directly impact retailer
expansion. Following both the 2010 and
2011 holiday sales seasons, retailers
boosted their growth plans considerably.
Before the 2010 Christmas season,
retailer growth was dominated by
discounters (ranging from off-price
apparel to warehouse stores and discount
grocers) and low ticket restaurants (fast
food and fast casual). The surprisingly
strong holiday sales season marked the
official end of the recession for many
retailers. Many chains that had put
expansion on hold now moved to cautious
growth mode and with rents off in some
markets by 40% to 50% from peak
pricing, it led to a wave of opportunistic
deals. We track retailer growth plans
nationally and saw a 30% surge in new
store plans between September 2010
and March 2011. The 2011 holiday
shopping season played out in a nearly
identical manner as surprisingly strong
sales figures resulted in another uptick
in retailer demand. But this time the
surge accounted to an increase of about
15%. The market was already moving
back to more normalized trends, mean-
while, as the marketplace had improved
considerably over the previous year opportunistic plays for top
properties were becoming harder to engineer.
With final 2012 holiday sales figures expected to show strong
growth the question is whether this will translate into a similar
surge in retailer growth plans. Unfortunately, the answer for
2013 is likely not. The rapid acceleration of retailer growth
plans in 2010 and 2011 were anomalous. While it is not
uncommon for demand to increase following a strong holiday
showing, historically this surge has usually been in the 5% to
10% range. Additionally, though the retail market has not fully
recovered from the impact of the downturn, there are fewer
opportunistic plays available for retailers seeking premium
space. While the Class C marketplace still offers plenty of
opportunities for chains looking for deals, rents for Class A
space in nearly every major U.S. market (including those still
posting the weakest overall performance) have been on the
rise as vacancies have fallen. Meanwhile, Class B product
in all but the weakest of U.S. marketplaces has also seen
considerable improvement over the past 30 months. As 2012
drew to a close, Class B properties were rebounding in general
as vacancies tightened for Class A space. This was not the
case a year ago. The last reason why we do not expect a repeat
of the last two years is indicative of a longer term trend; the
increasing encroachment of e-commerce.
RETAIL FORECAST
Walmart leased 41,000 square
feet of space at San Jose’s
Evergreen Village Center and
opened one of its new smaller
format Walmart neighborhood
stores. The world’s largest
retailer is actively looking for sites
throughout the Bay Area and we
anticipate a number of openings
in 2013. With speculation rife
that Walmart could potentially buy
Fresh & Easy as they exit the U.S.
market, what could be a handful
of openings next year could
potentially turn into an overnight
footprint of more than 20 stores.
DEALHIGHLIGHT
0
40
80
120
160
200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Retail E-Commerce Sales
A Seven-Fold Increase Since 2000
Gaining roughly 10% annually
Billions of Dollars

RETAILFORECAST
21
Who is Growing and Why?
We are currently aware of plans from retailers to open as many
as 41,000 new retail storefronts in the U.S. over the next twelve
months. This compares to a reading of just under 40,000
potential storefronts one year ago. Growth remains slow and
cautious and has shifted increasingly to retail concepts that
are considered bulletproof when it comes to e-commerce.
Hard goods retailers, with the exception of dollar stores
and discounters, remain in conservative
growth mode at best. Meanwhile, food
related or service oriented retail remains
in aggressive growth mode. Restaurant
concepts alone account for 42% of all
the planned growth that we are tracking.
Meanwhile, smaller format grocery
remains hot—driven by strong demand
from niche players ranging from discount
to upscale and ethnic to organic. This
holds true nationally as well as region-
ally—of the top 25 retail leases inked
throughout the Bay Area this year, smaller
format grocery accounted for five of them.
Walmart, Grocery Outlet, Fresh Market
and other players remain extremely active
in the marketplace. Though Fresh & Easy
has announced that it will be withdrawing
from the U.S. market in 2013, demand for
its existing Bay Area sites is expected to
be high. Though speculation is rife that
the chain could sell to either Walmart or
ALDI, a sale to one of the numerous dollar
store chains in growth mode could be just
as likely.
Dollar stores are entering their third
consecutive year of explosive growth and
we are tracking a potential of over 2,000
new dollar stores throughout the U.S.
over the next year. Dollar General alone
is planning on as many as 625 openings
nationally over the course of 2013. Mean-
while, Family Dollar is expected to open at
least 500 new stores while Dollar Tree has
plans for at least 300 new units in 2013.
All of these chains are expected to be
active in California this year. We anticipate
that dollar stores alone will account for
a minimum of 15 million square feet of
occupancy growth across all retail building
types in the coming year.
Besides these categories, we continue to
see expansion from fitness/health/spa concepts, drug stores,
thrift stores, automotive service, discounters, off-price apparel,
pet supplies, sporting goods, hobby stores/arts & crafts,
wireless stores (limited growth driven mostly by a few new
concepts) and some banking/check cashing/financial services
providers. Ultimately, however, if you want to understand who
is growing and why, it all comes down to a few basic trends.
Luxury and upscale retail is back while concepts offering low
price points (from restaurants to hard goods) have mostly
thrived throughout the downturn. But the middle class
consumer remains in frugal mode and, having downsized,
this is taking its toll on mid-price point retailers of all stripes.
Those very same hard goods concepts have been doubly
pinched thanks to e-commerce, though many casual dining
chains (with a few exceptions mostly limited to new concepts)
also continue to face challenges. Meanwhile, site selection
remains about “the sure thing.” Higher income demographics
and greater population densities are what most chains are
chasing. Likewise, the market remains
bifurcated in terms of class with Class
A and B properties remaining in most
demand. Meanwhile, all of these trends
have served the Bay Area remarkably well
over the past couple of years.
San Francisco Peninsula Outlook
Our retail division, Terranomics, tracks
retail trends across nearly 60 major U.S.
marketplaces. As of the close of Q3
2012, shopping center vacancy within
the San Francisco market stood at just
4.0%, placing it second in the nation in
terms of boasting the tightest vacancy.
We should note that these numbers don’t
include freestanding retail or ground floor
retail spaces within mixed-use buildings.
That would include much of the inventory
of the city’s high-end shopping district,
Union Square, where we estimate current
vacancy to be below the 4% mark. Union
Square has continued to see intense
activity over the past year with pricing
accelerating at a rapid clip. Though top
rents here have occasionally surpassed
the $500 per square foot mark for
premium space, this remains well below
similar high street rents in New York
City where recent top rents for Midtown
Manhattan (according to the Real Estate
Board of New York) have surpassed the
$2,700 per square foot mark. Because
of this, many retailers who typically look
first to Manhattan for flagship locations
are increasingly skipping the Big Apple
and looking to the West Coast instead.
Office leasing activity has been brisk in
the city’s SoMa district and has continued
to move westward. Meanwhile, a large
number of multifamily are units planned
or already under construction both in the
SoMa and mid-Market region. Both of these factors are laying
the groundwork for the retail trend that will take centerstage in
San Francisco over the next couple of years—the revitalization
of the long-blighted area of Market Street between 6th
and 9th
Streets. There is already heavy touring and deal activity in
this area and we anticipate that this will only escalate over the
course of the year.
In terms of shopping center vacancy, the current rate of 4.0%
reflects a significant decline from the 6.9% rate of a year
After years in the works, Neiman
Marcus opened a new 86,000
square foot store in Downtown
Walnut Creek earlier this
year. There they will be going
head-to-head against chief
competitor Nordstrom, which
recently remodeled its full service
department store next door.
DEALHIGHLIGHT
Though top Union Square
rents have occasionally
surpassed the $500 per
square foot mark, this remains
well below top rents for
Midtown Manhattan which
have surpassed the $2,700
per square foot mark. Many
retailers who typically look
to New York for flagship
locations are heading to the
West Coast instead.

CASSIDY TURLEY
22
ago. This vacancy rate is likely to fall further in 2013, but the
rate of occupancy growth will slow. This is simply because
quality product is in short supply. The good news for retailers
is that the ongoing boom in multifamily
development will be providing plentiful
ground floor options for expansion over
the next 24 months. But shopping center
space is tight and much of what is left is
challenged.
We anticipate strong rental rate growth for
all retail in San Francisco in the coming
year. Depending upon the product type,
increases should range from 5% to as
high as 15%. Look for key big box activity
in 2013 with a new CityTarget opening
in Japantown as well as major leasing
activity from a mix of apparel retailers
(some off-price and some not) in the
emerging mid-Market corridor.
As this report went to press, shopping center vacancy in San
Mateo County stood at 3.6%. This is actually an increase over
the 3.2% rate of a year ago, but it’s not because demand has
diminished. The problem for retail site selection specialists in
this marketplace is the lack of available quality space. With
few quality spots available, leasing activity has slowed. Most
of the deals getting done are for freestanding retail space,
which also is dwindling in its supply. There are a few smaller
proposed shopping centers on the books, but nothing currently
under construction. This is not likely to change anytime soon
due to a shortage of available land and—most importantly—
the difficult development environment here. Vacancy, in the
meantime, will remain tight at, or close to, current levels. Look
for average asking rents to increase
between 5% and 10% for most quality
space in the coming year.
South Bay Outlook
Thanks to the fact that San Jose’s
tech-driven economy continues to
boom and that this market leads the
nation both in terms of annual job
growth and income demographics,
this marketplace remains one of the
strongest in the country. Vacancy
currently stands at 6.0%, down from
a reading of 6.2% posted a year ago,
ranking it as the 7th best performing
U.S. marketplace in terms of vacancy.
Class A space is at a premium, with little in the way of current
availability and extremely quick turnaround times for spaces
that do go dark. Rental rate growth for many of these centers
has exceeded 10% over the past year and we anticipate similar
gains in 2013. Class B space is also performing strongly,
though there are certainly more space options available to
expanding tenants. Still, the pendulum for these properties
has swung firmly to the favor of landlords over the past 24
months. Vacancy for this sector of the market is also below
the market average, though opportunities still exist for space
users. Rental rate growth has typically averaged about 5%
2012 Northern California Major Retail Leases
Tenant Total SF Shopping Center/Address City
Neiman Marcus 86,000 1140 S. Main St Walnut Creek
Hobby Lobby 77,185 990 Cochrane Rd Morgan Hill
Fallas Paredes Discount 71,040 Capitol Square San Jose
Dick's Sporting Goods 55,000 Fallon Gateway Shopping Center Dublin
Hammer Auto, Inc. 53,000 2121 Diamond Blvd Concord
Dick's Sporting Goods 50,000 East Washington Place Petaluma
Nordstrom Rack 47,000 703-707 Contra Costa Blvd Pleasant Hill
The TJX Companies 46,000 East Washington Place Petaluma
24 Hour Fitness 42,540 North Bay Centre Rohnert Park
Walmart 41,000 Evergreen Village Center San Jose
Payless Furniture 26,277 40460 Albrae St Fremont
Sprouts Farmers Market 25,409 1510 Geary Rd Walnut Creek
Sprouts Farmers Market 25,000 East Washington Place Petaluma
Staples 24,120 55 Rowland Wy Novato
Paradise Palace 23,189 Peralta Plaza Fremont
Susan Sachs, et al. 23,134 4100-4120 Peralta Blvd Fremont
Grocery Outlet 21,446 Lawrence Station Santa Clara
Grocery Outlet 21,000 Livermore Valley Square Livermore
Meyer Appliance 18,826 861 E. El Camino Real Mountain View
Linen Warehouse 18,600 2720 Santa Rosa Ave Santa Rosa
Harbor Freight Tools 17,500 863 E. Francisco Blvd San Rafael
My Hot Cars 17,019 Kitty Hawk Plaza Livermore
Total Renal Care, Inc. 15,874 Lowe's Center San Jose
Joann Fabrics 15,000 75 Colma Blvd Daly City
Grocery Outlet 14,568 311 N. Capitol Ave San Jose
RETAIL FORECAST
Class A space is at a premium,
with little in the way of current
availability and extremely quick
turnaround times for spaces that
do go dark. Rental rate growth
for many of these centers has
exceeded 10.0% over the past
year and we anticipate similar
gains in 2013.

Cassidy Turley San Francisco Bay Area CRE 2013 Forecast

Cassidy Turley San Francisco Bay Area CRE 2013 Forecast

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