Corporate Office Perspectives | February 1, 2003

Headlines: “S.F.’s office bust not as bad as elsewhere, but it may get worse” (SF Business Times
12/6/02), “Valley vacancy rate highest in U.S,” (San Francisco Chronicle 1/9/03), “Biotech Firms
Hand Out The Pink Slips” (SF Business Times 1/10/03), “Office Vacancies Climb to 16%:
Landlords Face A Tough 2003” (Wall Street Journal 1/13/03), “Office Properties: The Worst
Could Be Ahead” (National Real Estate Investor December 2002), “California Jobless Rate
Worsening” (Contra Costa Times 1/18/03), “Biotech firms lay off workers at increasing pace” (East
Bay Business Times 1/17/03).

Okay, where is the good news in the office sector? If you’re an office tenant with a lease coming up
within the next 18 months just about everything is good news, but for the office landlord good news
may be harder to find. Yes, interest rates are still very low and office building investor demand is
still high, and this is good if you have long-term credit tenants. In a number of sub-regions (i.e.,
downtown San Francisco, San Ramon) the bulk of the market activity is in small office leases for
less than 10,000 square feet, with prime small space exacting a premium, especially as compared
with the numerous larger blocks of space offering deep discounts. At a recent economic forecast
there was mention of the two-growth industries of 2002, residential real estate and government.
Well, with the Fed $200 billion underwater, California negative more than $30 billion, and city and
county municipalities in severe financial turmoil such as San Francisco, with a negative $300
million, Contra Costa a negative $100 million, etc. and etc., look for potential jettisoning of
thousands of jobs in 2003. K-mart just announced firing 37,000 employees, United gave layoff
notices to 22,000 workers in California alone, and the Labor Department reported 101,000 jobs were
lost in December 2002. Even when there is corporate good news, future earnings forecasts may still
bring about corporate layoffs as shown by the San Francisco Chronicle (12/6/02) headlines, “Cessna
to cut 1,500 jobs despite record year.” The San Francisco Business Times (1/10/03) “VC’s pulling
in their horns – Venture capitalists are quietly closing the doors to satellite offices and shedding
partners amid the industry’s worst downturn ever. And there’s no sign of the pullback ending
anytime soon – many expect it will accelerate … others expect more dramatic firm closures will
occur late next year and in 2005 when venture capitalists will have to raise new funds from
institutional investors.” “Law firms advise clients: Give us more business – Half of the region’s
largest firms as measured by number of attorneys – reported layoffs and drops in revenue last
year” (San Francisco Business Times 1/10/03). In the December 2002 Corporate Office
Perspectives, the Bay Area office/R&D vacancy rate was estimated at 84 million, but it may actually
be closer to 95 million as of today.

Telecommuting continues to be beneficial to corporations. In the San Francisco Chronicle
(11/29/02), “Companies find benefits from telecommuting – Employees are happier, more
productive. Heralded as the workplace of the future, telecommuting is thriving today and saving
companies millions of dollars. About 25 percent of IBM’s Corp.’s 320,000 workers worldwide
telecommute from home offices, saving $700 million in real estate costs,” said Jeanette Barlow,
marketing manager for IBM Lotus. “IBM reaps additional benefits in higher worker productivity
and a happy workforce,” Barlow said. The International Telework Association and Council
estimates 28 million people telecommute one to three days a week – up 42 percent from 19.6 million in 1999. By 2005, one-third or 50 million, of the nation’s workers will be part – or full time teleworkers, Kane said. “For
employees, the top benefit of working from home is balance”, said Jeff Zbar, the author of Teleworking & Telecommuting:
Strategies for Remote Workers and Their Managers. “Telecommuting has some real advantages for companies too,” Zbar said.
“It aids in recruiting and retaining workers. Some studies indicate that telecommuters work longer hours and more workdays
than the average employee because they spend less time commuting … many employers encourage telecommuting because they
see it as a way to get more work out of people who are already productive.”

As reported in Silicon Valley Biz Ink (11/24/02), “The United States is home to about 1,450 public and private biotech
companies, more than three times the number in Canada, the closest global competitor, according to a report by Ernst & Young.
There were 412 companies based in California in 2001, concentrated mainly in the Bay Area, with additional clusters in San
Diego, Los Angeles, and Orange Counties.”

We now have more than 50 commercial real estate organizational programs listed on www.officetimes.com, so if you want to
know when and where CREW, BOMA, SIOR or IFMA is meeting, how to register for CoreNet, NCCAR, NAIOP, or IMF
programs, or when the Bay Area CCIM educational courses are happening, one click and get all the details at
www.officetimes.com. Also posted is a recent speech we gave to the Northern California CCIM Chapter on where the Bay Area
office market is headed in 2003 and 2004.

In the December 2002 issue of Real Estate Forum, the top U.S. brokerage firm presidents and CEOs gave their predictions for
the future commercial real estate markets. Here are highlights from this interview: Mark Burkhart, chairman of Colliers, “We’re
just hoping for business to remain at the current pace and certainly, indicators show it could fall below that level.” Robert
Zerbst, president of CB Richard Ellis Investors, “… we are not betting on rents going up anywhere next year.” Ronald Uretta,
president, Insignia/ESG, “I don’t want to be a doomsayer, but the next 24 months are going to be quite challenging.” Julien
Studley, chairman, Julien Studley Inc. “Regardless of the economic conditions, there’s going to be a set-back in rentals and
we’re going to see more dispositions of major assets.” Earl Webb, CEO, Jones Lang LaSalle, “For 2003, you’re probably talking
about a duplication of 2002, where corporate spending is down, expansion is virtually non-existent, CBDs are at zero or at
slightly positive net absorption, and there’s downward pressure on rents in office, retail and industrial as well as oversupply in
the multifamily market.” Well, that certainly mirrors all of my cheerful market comments…

An increasing number of corporations are sending work to less-expensive locales. In previous issues I’ve mentioned call centers
going to India, engineering projects to South America, and manufacturing to China. According to the Silicon Valley Biz Ink
(1/13/03), “HP Moving More Work Abroad… Palo Alto-based Hewlett Packard Co. will move more integration and consulting
work to lower-cost countries, including China and India. HP would not say if U.S. or European jobs would be cut. In addition to
China and India, some HP work may also go to Eastern European countries.”

Deals and Rumors: In San Francisco, Dodge & Cox leased 60,000 sf at 555 California St.; Arthur J. Gallagher expanded from
16,000 sf to 28,000 sf at 580 California St.; Orrick, Herrington & Sutcliffe may be signing 150,000 sf at Foundry Square where
Gordon Chong & Partners may be taking 45,000 sf; State Compensation leased 86,000 sf at 560 Mission; RBC Dain Rauscher
Inc. leased 35,000 sf and Bingham Osborne, 11,000 sf, both leases at 345 California St.; EDAW leased 36,000 sf at 150
Chestnut; and the City and County of San Francisco is on-again, off-again for developing a 400,000 sf Class A office building in
Civic Center. Down the Peninsula, Icon Clinical Research leased 34,000 sf at 555 Twin Dolphin Drive in Redwood City. In
Palo Alto on University Circle, Law & Associates leased 53,000 sf. In Oakland, Cambridge Systematics took 11,000 sf at 555
City Center; State Compensation might be leasing 19,000 sf at 180 Grand Ave.; and Alameda County Social Services Agency
inked a 30-year 100,000 sf lease for a future office development at 20th St. and San Pablo. In Emeryville, Cambria Technologies
leased 14,000 sf on Hollis St.; Netopia is relocating to 30,000 sf at 6001 Shellmound; Electronic Arts is studying several
opportunities for a 100,000 sf expansion; and State Farm expanded by 16,000 sf at EmeryTech. Over in Alameda, EDD leased
12,000 sf at 1601 Harbor Bay; and in Novato, Hall Kinion & Assoc. leased 17,000 sf at 75 Rowland Way. In Pleasanton, TUT
Systems vacated 90,000 sf and moved into 17,000 sf at 5200 Franklin Drive and Vineyard Technologies might have sublet
10,000 sf at 4473 Willow Road. In San Ramon, Irwin Home Equity is close to subleasing 42,000 sf from Verizon at Bishop
Ranch 15 and Lanier may have leased 11,000 sf at 2000 Crow Canyon Place. In Walnut Creek, State Compensation (yes, them
again) is rumored to be subleasing 19,000 sf from Barclays Global Investors at 1277 Treat Blvd., and RMC Engineers leased
11,000 sf at Three Ygnacio. In Concord, Secure Computing is relocating to 17,000 sf at 1855 Gateway.

Silicon Valley Biz Ink (11/22/02) had an interesting interview with Paul Wiefels, co-founder and managing director of the Chasm
Group, a San Mateo based strategy-consulting firm serving technology companies. In one form or another technology has been
the reason for the office sector rise and fall during the past 10 years, and thus in this context I found Mr. Weifels’ comments insightful. “From about 1993 until 2000, we had the characteristic high-tech binge cycle in the Valley (Silicon Valley). A
number of tornados (A tornado is a phase in market development where infrastructures get completely swapped out. The
question is not “if” you’re going to buy something, but “from whom.”) took place and we binged on different technologies. Now
there aren’t any tornados. We’ve gone from the binge cycle to the purge cycle. Customers are full and they need to start making
sense out of all the things they bought.” Biz Ink question: Is the doom-and-gloom attitude that’s so prevalent in Silicon Valley
warranted? “Yes, to a certain extent. How can you be chipper and energetic when your market capitalization has been chopped
by 90 percent and your stock options are so far underwater that you’re living in a submarine? Biz Ink: What opportunities can be
found the rubble of the dot-com collapse? “I don’t see any great opportunities in the short term. It’s not because there are not
great technologies there, it’s because customers just don’t want to buy anything right now. There are certainly some promising
things – including wireless, next-generation PDA’s, business analytics software, biotechnology – but in traditional information
technology, nothing is really exciting.”

What a difference just two years make… It was only 2001 when top San Francisco office rents were going for $90 to $110/sf
per annum, and now most of the best space is at $30 to $35/sf with generous tenant improvement allowances. However, there
have been several “premium” leases recently at $50/sf for the top floors of trophy buildings. Top rents in Walnut Creek in
December 2000 topped out at $4.66/sf a month, “as-is” and now Class A Downtown space is going for $2.60 to $3.15/sf with
great TI packages. Pleasanton Class A office space is down from $4.25/sf to $2.10/sf; Peninsula rents down from $5/sf to $2.25/
sf (or less); Santa Clara rates down from $5-6/sf to $2/sf or “just make me an offer”…Check out http://www.officetimes.com/
BayAreaOfficeRates for a one-page overview of the office rents.

In Today’s Facility Manager (October 2002), the concept of value-add to facilities by developing strategies directly aligned to
business goals brought up a number of interesting points. “Cost per square foot or cost per employee are commonly used
expressions. If the only available measures are cost based, it is no surprise that organizations continue to exert pressure to slash
facility costs. Yet these measures have little relevance to organizational goals of innovation, improved performance, service
quality, shareholder value, or customer loyalty. An expanded approach to measurement is necessary to demonstrate the value,
impact, and benefit of facilities. Most organizations spend between $10 and $15 on human resources for every $1 they spend on
facilities, real estate, and workplaces. Consequently, facilities have significant leverage, especially in light of the impact of the
physical environment on employee performance and the consequent contribution to organizational effectiveness and profits.”

According to an article in Red Herring (December 2002), “The Bankrupt Go Bankrupt,” “The worst is yet to come in the telecom
sector. Companies that have spent the past 12 months clawing their way out of bankruptcy will only go bankrupt again, killed by
the continued decline in bandwidth prices. Bandwidth prices have fallen to such a low level that it’s hard for companies to cover
expenses… Expect a cycle of bankruptcies, much like those the airline industry suffered in the late ‘60s and early ‘70s.”

Business Facilities (September 2002), cited a May 27, 2002 Forbes magazine survey that has California cities holding 10 of the
top 25 spots on the list, with San Diego at number one, Santa Rosa number two, and Ventura number four. “Nearly 300 U.S.
Metro areas were ranked according to a wage and salary growth, job growth and high-tech output growth, among other criteria.
This year, the study included a ‘job momentum’ category that tracks employment during the first quarter of 2002 to gauge how
metro areas were dealing with the effects of the slowing economy.” Details of this survey can be viewed at www.forbes.com/
bestplaces.

As reported in the California Real Estate Journal (11/11/2002), “The office market bust could turn into a boom for multifamily
housing projects in the San Francisco Bay Area if an emerging trend to convert offices to apartments and condominiums takes
off. Developers, large and small, are working on plans to convert high-vacancy office space to high-density housing.
Converting office buildings to housing makes economic sense for several reasons in the Bay Area. Despite the recession,
California has a greater demand than supply for all kinds of housing, with an annual undersupply of 90,000 units. “In addition to
conversion projects, vacant business park land is being rezoned for both multi-family and single-family throughout Santa Clara,
in San Francisco, Pleasanton, Emeryville, Oakland, and elsewhere.” Paul Menzies, president of Levin Menzies will be building
53 condos instead of 50,000 sf of office space, and said, “I doubt anyone will build spec office space in the Bay Area for at lease
five years, but there is still an unmitigated demand for housing here.”

According to the U.S. Patent and Trademark Office (2000), out of the top 10 R&D Universities by Utility Patents, University of
California ranked number one, Stanford was number four, and California Institute of Technology was number 5. In terms of patents issued, California was number one in 2001 with 20,863 patents, followed by New York with 7,181, Texas with 6,764 and
New Jersey with 4,286. California is the fifth largest economy in the world and the nation’s number one exporting state
accounting for 15 percent of all U.S. exports.

Real Estate Forum (November 2002), “The lack of sufficient technology platform is among the greatest obstacles facing
corporate executives when it comes to managing their real estate portfolios.” So said a panel of top corporate professionals at the
recent National Association of Industrial and Office Properties annual conference held at the Opryland Hotel here. When it
comes to technology, “our industry is struggling to make it into the next century – the 20th century,” remarked Robert Patterson,
senior vice president of Corporate Real Estate for Bank of America in Charlotte. “The problem,” observed Peter Kane, VP of
Global Real Estate for American Express, “is that there is not an existing software solution on the market today that ties together
finance, project development, management, and lease administration functions. A solution might have two of the functions, but
not all.” However, the PikeNet Dispatch (1/15/2003) calls the Oracle E-Business Suite for Real Estate the “Swiss Army Knife
for the Enterprise,” offering fully integrated Construction Management, Lease Administration, Space Management, and Facilities
Management, linking the entire real estate life cycle to the corporate financials.

Real Estate Forum (December 2002), interviewed Peggy Binzel, CEO of CoreNet Global. “In an independent survey conducted
in April 2002, it was reported that 48 percent of corporate executives were planning a net decrease in the amount of office space
they occupied. Furthermore, just 13 percent indicated that they were planning an increase and 38 percent said they had no
changes planned.” In the November 2002 survey, a new question was posed. What percentage of your company’s current
portfolio is shadow space – excess space that is held for future use or vacant space no longer needed? The answers showed that
29 percent of corporate respondents held between 10 percent and 30 percent of their portfolios as so-called shadow space.
Additionally, for 68 percent of the corporations, up to 9 percent of their portfolios were designated as shadow space.

I’m occasionally reminded by clients and friends that you can buy a great, large house on several acres in Iowa or Ohio, at a
fraction of the price of a California home, and you even get a full basement and an attic, which is usually unheard of with our
houses built during the past 30 years. However, two weekends ago, I drove three hours door-to-door to ski at Lake Tahoe, one of
the prettiest spots on the entire planet, and it was blue sky, incredible snow, and a choice of more than 20 ski resorts. One guy on
my chairlift told me he had skied five days straight and he was headed back to the Bay Area to go water-skiing the next day.
Much of January was sun block weather back at home, and the weekend after the ski trip I went to the annual ZAP festival in San
Francisco, at Fort Mason overlooking the San Francisco Bay where more than 300 wineries were pouring new releases with
more than 600 different wines available for sampling. If we wanted, a 90-minute drive takes you to the heart of Napa/Sonoma
with more than 400 wineries to visit (definitely designated driver territory). We have the Raiders, the 49’ers, the A’s the Giants,
the Warriors, the Sharks, and on any given night a choice, literally, of more than 500 different symphony, opera, jazz, musical,
and other live performances, all within a one-hour or less drive. Do we Californians pay the price? You bet … Is it worth it?
To some, nope, and back to Alabama or Minnesota they go, but to most, absolutely …

According to Commercial Investment Real Estate (January/February 2003), “Terrorism insurance was not available at any cost
for 27 percent of building owners who responded to the BOMA survey (National Survey of Security Concerns Within The Real
Estate Industry, BOMA/ULI, March 2002). Of the 73 that obtained coverage, 80 percent had higher premiums and deductibles,
coverage caps, shorter cancellations, and exclusions for chemical, biological, or radiological acts.”

Many major Bay Area office-building owners are appealing their property tax assessments, hoping for 40 to 65 percent tax cuts
based upon the current office economy (that will make government budgeting even more fun with further decreased revenue…).

The CoStar Advisor (Fall 2002), summarized the professional designations available to the commercial real estate practitioner.
“The National Association (NAR) recognizes more than 15 such professional designations, including the two most widely
recognized ones among commercial real estate professionals: the SIOR designation from the Society of Industrial and Office
Realtors and the CCIM (Certified Commercial Investment Member) from the CCIM Institute. Behind both designations are
hours of difficult educational courses concerning real world real estate issues and taught by experienced professionals. The
Society of Industrial and Office Realtors is a professional commercial and industrial real estate association with more than 2,200
members in 450 cities in 20 countries. The CCIM (Certified Commercial Investment Member) designation, “the Ph.D of
Commercial Real Estate,” covers a wider assortment of commercial real estate professionals. Brokers of land, retail space, hotels
and self-storage properties can earn a CCIM as can corporate real estate officials, appraisers and lenders. Of approximately
125,000 commercial real estate practitioners nationwide, about 7,000 currently hold the CCIM designation. For additional
information please go to www.sior.com or www.ccim.com.

During the past two years I have occasionally been accused by office landlords and their broker representatives of being too
“gloom and doom” in my market assessments and predictions. However, looking back over the during 23 years and 136 issues
of this newsletter, in almost every case, the predictions held true. When the office market was hot these same folks didn’t seem
to mind my comments about skyrocketing office rents…

In Buildings (November 2002), the concept of Workplace Resource Management is discussed as a much more efficient method
of calculating workplace costs. Data is pulled from each of the “silos” (multiple departments with inter-relationships) and consolidated
into a central, Web-based repository for immediate access and decision-making. Within the company, complete workplace
data is shared – when an employee is hired, fired, moves to a new location, is assigned new office resources, when a new
lease is signed and more. “With the click of a mouse, companies can find out: From Facilities Management – what space, assets
and inventory are newly available and where they are located … From Real Estate – which spaces can be consolidated and which
leases eliminated … From Information Technology – which resources can be eliminated, including cell phone contracts … From
Security – how changing space requirements impact security needs and costs … From Human Resources – the impact on payroll,
benefits and space requirements … From Finance – the overall cost benefit to the organization. By analyzing data from each of
these silos, organizations can easily construct what-if scenarios …”

I’m writing this February 2003 Newsletter after just returning from a wonderful three-day weekend skiing up in Lake Tahoe.
Our son, Jordan, is 5-1/2 and just graduated to level 5 in ski school. My wife and I sometimes spy on his ski school class coming
down the mountain, and little kids skiing are one of the cutest sights imaginable, especially when they don’t know you’re watching.
Jordan started when he was two, and we make sure he progresses at his own comfort level so he doesn’t rebel in being
forced to do something against his will. Jordan is in kindergarten, and it’s amazing that they actually get homework at that early
age. We are also teaching him to read and it is so neat to watch things “click” in a young child’s mind when concepts begin to
come together. Jordan’s past two months adventures can be seen at http://www.officetimes.com/JordanWinter03. We hope this
winter has been kind to you and your family, and as the daylight hours slowly get longer and the last neighbor has finally taken
down the holiday decorations, we know spring is just around the corner …

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