Corporate Office Perspectives | August 1, 2002

Okay, where the heck is the good news in today’s office market…the few silver linings are
ample building parking (usually), less commute traffic, some of the lowest prices on office
space in the past 15 years (in many areas), and it’s a lot easier to get a table at your local
restaurants for business lunches. Overall, the San Francisco Bay Area currently has an
estimated 65 million square feet of available office and R&D space. Silicon Valley leads the
pack with more than 40 million feet of this, followed by San Francisco with 14 million feet.
San Mateo, Alameda and Contra Costa make up the balance. Submarket vacancies range from
10 percent for Class A Walnut Creek office space to 30 to 40 percent for Class A space in
Emeryville. Landlord agents can put a positive spin on market definitions, and varying vacancy
rates for the same market can be attributed to how “vacancy” is defined. As an example, Cisco
has millions of feet of “vacant” office space, i.e. non-occupied, yet at the present time not all of
this space is on the market. Other firms may be occupying hundreds of thousands of feet of
office space but with a skeleton crew on site, which to some brokerage houses defines the space
as “occupied” and not vacant. However, any way you slice it, 65 million square feet of office
space with prospective tenants far and few between is not a healthy market by anyone’s
definition…

In my June 2002 OfficeTimes newsletter I stuck my neck out in predicting 30 to 60,000 telecom
jobs might be cut during 2002. This was before WorldCom, and boy, was I conservative… The
San Francisco Chronicle July 9, 2002 stated “WorldCom, SBC Communications and other
communications firms announced plans to shed nearly 166,000 jobs through the first half of the
year – putting the battered sector on pace to surpass last year’s bloodletting. Overall, telecom
firms have eliminated close to half a million jobs since January 2001, accounting for a fifth of
all layoff announcements.”

Bay Area corporations doing 20-year projections on where future workforce might be coming
from should take note that out in San Joaquin Valley, the city of Lathrop (near Tracy) is
planning a 25 to 30,000 resident community on 4,800 acres with house prices starting at
$150,000. Included in the development plans is a business park envisioned for 15,000 jobs and
executive housing with backyard boat docks accessible to the 1,000 miles of Delta waterways.
Add this to Mountain House, also near Tracy, which will be home to 44,000 residents, and you
can envision the next Contra Costa I-680 Corridor…

In the San Ramon Valley Herald 6/26/02, mention was made of a number of California cities
that now do not allow compact parking spaces, recognizing that when the compact stall trend
first began in the 1970s, we were all supposed to be driving little compacts with great gas
mileage, but in reality, the SUV and minivan craze has created a parking nightmare for many.
“In 2001, small cars represented just 41.2 percent of automobile sales nationally, down from 23
percent a decade earlier. Over the same period, sales of SUVs, vans and light trucks increased
to 44.9 percent of motor vehicles sold in 2001, up from 33.3 percent in 1991.” How many times have you found a compact car in a full-size stall, thus forcing larger cars into compact spaces? Older buildings do not have
the luxury of making all stalls full-size or they would lose 20 percent of their parking. Many office building leases have a
clause allowing the landlord to make changes in parking configuration and charges. What about sending a notice to the
tenants informing them that there will be a $20/month additional charge for compact cars tagged parking in a full-size stall?
Give the $20/month collected to the property manager in charge of enforcement, or use the money to give ice cream or
BBQ parties for all the tenants who comply with these new regulations.

Another element also emerged during this Realcomm conference…the click-to-brick concept of just a few years whereby
an office tenant would use the Internet to search for space, do market comparables, take a virtual tour of the space,
negotiate on-line, hammer out the lease terms and language on-line, and then sign digitally, thus going from A to Z using
the power of the Internet. Many industry professionals now view this to be an unrealistic objective. Instead, portions of the
transaction will be expedited and enhanced through the Internet. Property management, tenant interaction and hundreds of
other aspects of leasing, managing and owning commercial real estate will be vastly improved through harnessing the
increasingly powerful and user-friendly Internet, but this does not mean everything has to go on-line. Just as few folks
would buy a home, site unseen, without at least a personal inspection of the neighborhood, views, layout, etc., so too will
human interaction still be a required element in the leasing and purchasing of commercial real estate. (Whew, I almost
thought I was out of a job!)

Deals and Rumors: I helped UFCW sell its 55,000 sf two-building office complex at 150-190 N.Wiget Lane, Walnut
Creek, and assisted IBEW in its office site purchase in Vacaville for a 20,000 sf build-to-suit. In Pleasanton, KB
Homes sublet 20,000 sf at 6700 Koll Center Parkway, Team Health sublet 12,000 sf at 5000 Hopyard Rd., Trapeze
Networks leased 38,000 sf at 5753 W. Las Positas Blvd. and Litrex leased 15,000 sf at 6670 Owens Drive. In Livermore,
Allstate Insurance leased 28,000 sf at 2600 Gateway, and the University of Phoenix just leased 27,000 sf at the Tri-Valley
Business Center. Over the hill in Emeryville, Avalon Publishing leased 14,000 sf at EmeryTech; Thios Pharmaceuticals is
taking 18,000 sf of lab space at EmeryStation, where Kaiser is rumored to be looking at a 60,000 sf lab location and Pixar
is planning a 200,000 sf expansion of its Emeryville campus. In Berkeley, Bayer Pharmaceutical will be expanding by
80,000 sf. In Oakland, the big rumor is Kaiser’s contemplation of 200,000 sf at 555 12th St., which another rumor has as
now on hold; also where Meyers, Nave, Riback, Silver & Wilson leased 29,000 sf. In Hercules, Shields Nursing is
rumored to be leasing 19,000 sf of office space. Up in Novato, SpatiaLight took 14,000 sf at Hamilton Landing. In San
Rafael, GSA Federal leased 10,000 sf at 100 Smith Ranch Rd. In San Francisco, Offit Hall Capital Partners sublet
21,000 sf at One Maritime; Zelle Hofman, Voelbel, Mason & Gette took 14,000 sf at 44 Montgomery; Shea Labagh
Dobberstein leased 15,000 sf at 505 Montgomery; AKQA sublet 13,000 sf at 1035 Battery St.; UBS Warburg took 14,000
sf at 101 California St.; Actify, Inc. sublet 13,000 sf at 60 Spear St.; and ATEL Capital Group leased 20,000 sf at 600
California St. In South San Francisco, Genentech has a 125,000 sf expansion in planning and just leased 30,000 sf at 801
Gateway. In San Mateo, TeraRecon sublet 23,000 sf at 2955 Campus Dr., and down in Redwood City’s Pacific Shores
Dreamworks signed for 120,000 sf (earlier reported at 100,000 sf), while ArQuel leased 35,000 sf, and Recourse and
Nextance combined sublet 60,000 sf from Broadvision, all at Redwood Shores. Also in Redwood City, E2open signed a
37,000 sf lease at 1600 Seaport Blvd.

Our building management systems are becoming more computerized and Internet-driven, with hand-held PDA interface
and Bluetooth wireless connectivity to the central systems. Computerized sensors on the HVAC components can now
signal when a system is acting even slightly erratic or is potentially about to experience mechanical failure. Security
systems can be integrated in doors and hallways, and monitoring systems are available at relatively inexpensive costs for
every exterior and interior building point imaginable. However, with recent suspected terrorist hackers trying to access
government systems, how susceptible are these new office building systems to outside intruders? According to the San
Ramon Valley Herald 8/27/02, “Suspected al-Qaida cyber terrorists have been quietly casing the computers that govern the
Bay Area’s powerplants, water systems and emerging response capabilities, prompting a high-priority security push by the
FBI and experts at Lawrence Livermore Labs…U.S. investigators have found evidence that al-Qaida operators spent time
on Internet sites that offer software and programming instructions for the digital switches that run power, water, transport
and communication grids.” If a coordinated cyber-attack on trophy properties were part of a larger scheme, will our
building systems function to protect us or can they be turned against us? If a ventilation system control was turned the
wrong direction during a chemical attack, or the wrong doors were locked or unlocked, what might the result be?

At the recent Realcomm Commercial Real Estate Tech Conference in Las Vegas, I moderated a panel comprised of leading REIT and institutional owners titled “Who’s Pushing the Envelope?”. One of the many interesting concepts discussed was
the impact of the global economy on the way we think about our business. A long time ago (i.e. 1960s and before),
American factories produced a great amount of our goods. In the 1980s and 1990s, our factory production shifted to
Mexico and other less expensive nations. In the San Francisco Chronicle 6/21/02, “Since the end of 2000, about 250,000
factory workers in Mexico have lost their jobs. Some of the same work that left North Carolina textile plants and Chicago
auto parts assembly lines for Mexico in the 1980’s is now moving to Asia. The reason is the same : cheap labor.” In the
CC Times 6/14/02, “About 100 credit card call-center employees at ChevronTexaco Corps’ Concord office will lose their
jobs in November or December as part of a move of some call-center operations to a new office in the Philippines.” So
what does this have to do with REITS and institutional investors? An increasing number of commercial property
ownership and management functions do not have to be done on site, in the same region or even in the same country.
Property analysis prior to acquisition can, in part, be done in India the same as many highly technical engineering and
programming assignments are currently done digitally. With many surveillance camera systems now capable of being done
off-site through secured Internet sites, does the monitoring have to be done in the U.S. Pinkerton office or can it be done in
the Pinkerton office in Brazil? (assuming they have one there…) Local security can be notified should a physical
investigation be required. What other functions can be done elsewhere by highly trained professionals at a fraction of the
current cost?

According to a recent article in the San Francisco Chronicle 6/02/02, “California’s bioscience industry is expected to add
nearly 40,000 jobs by 2005…The more than 800 bioscience companies in Northern California employ in excess of 85,000
people, including about 52,000 in the Bay Area…” At first glance this looks like a partial cure for the Bay Area’s severe
office/R&D space “hangover.” Many lab users have a much lower space utilization density than traditional office users,
i.e. a normal office density of 200 sf per person means this job influx might represent 8 million square feet of space. For
lab usage, it might represent as much as 20 to 30 million square feet of lab space. However, the bioscience industry likes
unique, specialized labs with lots of fume hoods, special gas piping, very specialized heating, cooling, air filtering,
mechanical systems, etc., which is why, in spite of today’s huge excess space inventory, Genentech is building its own
expansion facility, as are Bayer and numerous other lab users…

Did you know that new personal computers might be emitting enough pollutants to impair typing skills? According to a
recent article in Tri-Valley Herald 7/3/02, a study done in Denmark found that “Most pollutants come from the monitor,
where the hot cathode ray tube in a running computer causes more volatile chemicals to escape into the air. The flame
retardant used in computers is also a source of the chemicals.” Errors jumped an average of 22 percent when workers used
the new PCs versus three-month-old models (and I thought I was being nice letting my staff get the newest equipment…).

Buildings (June 2002), in an article titled “The Next Evolution of Data Center Design,” stated that data center design has
not changed for more than 30 years, but computer equipment has changed drastically. “The existing method cannot
effectively cool the heat dissipation generated by today’s computers…Today’s computers dissipate heat at up to 10 times
faster than what was produced just three years ago.” One solution – cool the cabinet, not the room, taking the conditioned
supply air and pushing it through the electronic equipment … for more information, contact the author R. Stephen
Spinazzola at website www.RTKL.com.

In the July 1, 2002 California Real Estate Journal, “According to a 1999 nationwide study by Knoll Inc., a global office
furniture manufacturer, the cubicle size for midlevel professionals has shrunk in the past decade from an average of 10 feet
by 8 or 10 feet, to 8 feet by 6 or 8 feet. This space reduction has affected not just those relegated to cubicles. During the
same time, the density of employees in offices has nearly doubled…The 360 full-time office workers who responded to the
Knoll Study said the number one impact of increased office density is a lack of adequate storage, followed by problems
with HVAC control, followed by acoustics, all of which can be detrimental to worker productivity and satisfaction.” I try
to remind my clients that the cost of real estate is far surpassed by the cost of employees, and at some point diminishing
returns means lowered productivity, a dissatisfied workforce and higher turnover. In other words, be careful how far you
take your employee density…

I recently took a 1,000 mile road trip with the family through Northern California and even though I am a native
Californian, driving along Highway 1 with the beautiful coastline, quaint towns like Mendocino and Ferndale, and then
going through the huge redwood forests up near Humboldt – this is one incredibly beautiful state! When you are in Los Angeles or the Bay Area everything seems so hectic and populated. But get out of the metropolitan regions and I’d venture
to guess 80 percent or more of California is undeveloped, and much of this is in state and national parks to ensure the
beauty will remain for future generations. We took our five-year-old son, Jordan, and two of his cousins up to Southern
Oregon to stay in Treehouses, where the “hotel” rooms are complete with bathtubs and all the amenities built high atop
trees connected by swinging bridges. Jordan learned to rope climb and rapel down trees, horseback ride, and basically be
in boy-paradise with a mountain spring-fed pool, rope swings, and lots of places to jump and climb. If you’d like more
information on this wonderful place, please check out www.treehouses.com. Back at home we are working on his batting
and catching skills. It’s amazing at this age, how quickly their physical coordination changes – what was impossible just
six months ago is so doable today… Jordan’s recent photos can be viewed at http://www.officetimes.com/jordanaug02.htm.

As always, don’t hesitate to e-mail or call me if we can be of assistance in your corporate expansion, consolidation, renewal
or overall strategic planning. Have a great, safe rest of your summer

Sincerely,
Jeffrey S. Weil, MCR.h, CCIM, SIOR
Senior Vice President