CORPORATE OFFICE PERSPECTIVES | JUNE 1, 2006

I recently wrote an article titled “The East Bay office market is in balance
(temporarily)” published in the May 12, 2006 East Bay Business Times
www.officetimes.com/EBOfficeMarket.htm. In general, throughout not just
the East Bay, but much of the Bay Area, both office landlords and tenants feel the
market is in their favor. Landlords point to lowering vacancy rates, rising rents
and lack of new product in the horizon, and believe it is now a landlord’s market.
Office tenants point to the millions (or in the case of San Jose, tens of millions) of
square feet of available office space, recent downsize announcements whether it
be Sun, HP or AT&T, and still maintain it a tenant’s market. In my opinion, both
sides are correct, and we are balancing on top of the landlord/tenant negotiating
fence after spending the past four to five years solidly in a tenant’s market. Smart
landlords are still aggressively pursuing lease transactions, and if it still takes free
rent or extra TI’s to secure a tenancy, this may well be financially better for the
landlord than to sit on vacant space for another 12 to 24 months to get a higher
rental rate. For the first time since dotcom days, I find myself increasingly
competing on behalf of my clients for the same space another tenant is pursuing,
and recently I’ve run into multiple other brokers touring the same space with their
different clients. It is only a matter of time before the pendulum swings more
firmly into the landlord camp, but until then we are in a balanced office market..

How much of a factor are tax incentives in luring corporations to a particular
state? According to corporate real estate executives and their advisers, tax breaks
have a negligible impact on where a company sets up shop. A survey conducted
last year by CoreNet Global and Northwestern University with a cross sampling
from NAIOP, bears out that assertion. After polling 107 companies, the top three
factors in location decisions were rental rates, on-site employee parking and
availability of skilled or trainable workers. State and local tax incentives ranked
12th and 13th, respectively. Real Estate Forum (March 2006)

New technology innovations in video surveillance called Video Content Analysis
allows computers to interpret shapes seen in the video image and understand what
they are. They can tell when a person enters an area designated as restricted, if
people are loitering in the area, or moving in the wrong direction. Today’s
Facility Manager (March 2006) Next the cameras will be programmed to spot
brokers canvassing existing tenants …

It’s not all bad news for the U.S. … “The United States overtook Singapore as the No. 1 country for
the development of information and communications technology, according to the “Networked
Readiness Index” from the World Economic Forum. The report highlighted the technical
infrastructure and business environment in the United States, as well as its technological innovation,
higher education system and the availability of venture capital. The index of 115 economies is based
on a survey of business executives.” Expansion Management (2006)

The future of offshoring and its impact on U.S. office space: “…officials revealed that a $3 billion
semiconductor plant, known as Fab City, would be built in rival Hyderabad (India). The plant is
expected to house more than 200 companies and employ 1.5 million people, and will be the first
modern semiconductor plant in India.” San Francisco Chronicle (5/7/06) Using a rate of 200 square
feet per employee, this translates to 300 million square feet of R&D space. Impact on U.S. – if fab
jobs are offshored due to this, availability of former U.S. fab plants that are convertible to office
space – 300 million feet of new construction is a lot of concrete, so continued high prices in U.S. for
construction materials.

Deals & Rumors: Starting with Emeryville, which after the dotbomb in 2002 had a nickname of
Emptyville is now Excitementville, where Leapfrog just expanded by 35,000 sf at 6401 Hollis St.;
Electronic Arts leased 11,000 sf at Heritage Square; Pixar leased 20,000 sf at 1250 45th St. and
Backbone Entertainment took 15,000 sf at 1375 55th St. Over in Concord, I represented First
American Title Company in a 22,000 sf office lease extension at 1355 Willow Way, while another
First American division will be downsizing from 21,000 sf and relocating to 15,000 sf at
1855 Gateway Blvd. Over the hill in Pittsburg, I represented GWF in their 17,000 sf office lease
renewal at 4300 Railroad Ave. Along the I-680 corridor, T-Mobile is out looking for 75 to 90,000 sf;
North American Title is hunting on the North portion of I-680 for 20,000 sf, as are GMAC and Safeco
Insurance, each for 18,000 sf, and down in the Pleasanton/San Ramon area, Innovative Claims
Solutions is out for 13,000 sf. In Point Richmond, Transoral Pharmaceuticals leased 12,000 sf at
Point Richmond Tech Center. Over in Alameda FKI Logistex leased 21,000 sf at 1650 Harbor Bay
Parkway. Just across the Bay in San Rafael, Autodesk leased 29,000 sf at 4040 Civic Center Drive,
and in Novato, BioMarin Pharmaceuticals bought a 70,000 sf building at 46 Galli Drive. In San
Francisco, the City and County of San Francisco leased 19,000 sf at One Market St.; where
Capital Group leased 93,000 sf, Salesforce expanded by 37,000 sf and Duane Morris expanded by
31,000 sf; Method leased 23,000 sf at 637 Commercial St.; Cowen & Co. took 29,000 sf at 555 Calif.
St.; SEIU Local 790 will be moving to 25,000 sf at 350 Rhode Island; GUBA leased 12,000 sf at 1
Front St., where in the same building FTI Consulting took 37,000 sf; Davis Wright Tremaine leased
30,000 sf at 505 Montgomery St.; Autodesk signed for 46,000 sf at One Market St.; Skadden, Arps,
Slate, Meagher & Flom committed for 36,000 sf at Four Embarcadero; Baker & Mckenzie took
40,000 sf at Embarcadero Center, Morrison & Foerster leased 48,000 sf at 555 Market St.; Duff &
Phelps sublet 10,000 sf at 345 Calif. St.; MindJet took 47,000 sf at Levi’s Plaza One, 1160 Battery; at
275 Battery West O’Melveny & Myers expanded by 23,000 sf, MKThink leased 20,000 sf at 1500
Sansome St.; and Brydon Hugo Parker took 20,000 sf at 135 Main St. (Whew!) Down the Peninsula,
in Redwood City U3 Inc. leased 21,000 sf and SurgRx Inc. took 30,000 sf at 101 Saginaw Drive.
In Foster City, Honeywell International took 10,000 sf at 353 Vintage Park Drive, The O’Brien Group
leased 11,000 sf at 950 Tower Lane, and Latham & Watkins will be expanding from 58,000 sf to
80,000 sf in Menlo Park. Lots more deals in the works so stay tuned!

According to Hugh Kelly in a recent article titled “Defying the Speculation Bubble Theorists” in the
Society of Industrial & Office Realtors (Spring 2006), the United States has a Gross Domestic
Product of more than $12 trillion, a workforce of 150 million, more than 4 billion square feet of Class
A and B office space and more than 12 billion square feet of industrial space. Now you are ready for
playing the next game of Trivial Pursuit, commercial real estate edition …

Contradicting reports on offshoring abound: In the same newspaper, East Bay Business Times
(4/7/06), one headline reads “Higher costs, old woes erode offshoring savings … Higher wages and
staffing competition has hit India’s outsourcing centers. These problems, added to the difficulties of
moving vital business functions halfway around the globe, are making other locations around the
world increasingly attractive.” Then on the very next page, different story, “Apple Computer Inc.
is setting up a technical support center in Bangalore, India … Apple will hire 1,500 people to staff
the technical center by the end of the year, and have 3,000 staff at the end of next year.” And the
next article: “U.S. security software maker McAfee Inc. has announced plans to invest $80 million in
India and hire 400 people by 2008 in a bid to expand operation in the world’s outsourcing hub.”
What, don’t they read the papers?

Interesting San Francisco Bay Area office market, with large blocks of space coming onto the
marketplace like Oracle’s rumored 800,000 sf of prime office space in San Mateo or Sun’s 1.2 million
square foot Newark office campus coming available, and yet when large office opportunities like
these have hit the market, more often than not we have had multiple users vying for the same space. I
remember a few months ago as I was driving to tour a client through a 75,000 sf sublease that had just
hit the market, the listing agent paged me and told me that even though the space had only been on the
market for a few days, they had a subtenant prospect far enough along to cancel my tour. The 370,000
sf PeopleSoft Pleasanton office campus was rumored to have more than 25 bidders competing, so
many of us in the business aren’t too worried about these upcoming large office availabilities.

Mobile office redefined (for the executive on the road with an unlimited budget) – Becker Automotive
Design provides a customized private office with a 32 inch PC screen, soundproofing, window
curtains, wireless internet, and lots of other bells and whistles in this $250,000 Ford Excursion
conversion … and if you have to ask what the gas mileage is, this office is not for you …

“Job Market ‘best in years’ … the Bay Area job market is strong enough that employers are poised to
hire more people than at any time in the past five years, and some companies have begun to wrestle
with shortages of qualified workers. Of the roughly 500 chief executives and top executives surveyed,
43 percent said they plan to increase their Bay Area work force in the next six months. Just 8 percent
plan job cuts, and 48 percent intend to maintain current staffing levels.” Contra Costa Times
(5/18/06) And of course, this will translate into increased demand for additional office space …

Offshoring update: “For many years, the outsourcing favorites were in Asia. India, China, the
Philippines, Singapore and Malaysia still top the list. But Eastern European countries such as
Bulgaria, Romania, Slovakia and the Czech Republic are quickly gaining steam by playing up a newer
twist – “nearshoring,” which essentially shifts work from the United States and Western Europe to
countries with less expensive labor that are closer than Asia.” San Francisco Chronicle (5/16/06)

“After three straight years of dropping vacancy rates and rising rents, developers are quietly lining up
to join San Francisco’s next wave of office construction … Charles Malet, director of leasing for
Shorenstein said the office market “is getting pretty close” to justifying new spec construction. He
said the company has not made a decision yet on whether to proceed without an anchor tenant.” San
Francisco Business Times (4/7/06) There are also several East Bay office developers blowing dust off
development plans that were shelved after the 2001 dotcom crash. New construction costs have
escalated dramatically during the past 18 months, both for the building shell as well as tenant
improvement costs in general. Price escalations of 20 to 30 percent in just the past year are blamed on
demand in China, India, the Katrina rebuilding, the spiraling cost of gas and even the industry-specific
frenzy currently going on with the health care new construction and hospital earthquake retrofit.
Timing is everything … the developer who picks the prefect starting date to be completed when rents
have escalated into profit stratosphere looks like the genius, while the ones who build too early or too
late get caught in the wrong part of the curve …

According to Expansion Management (January/February 2006), the top “Knowledge Competitive”
economies in the world are as follows: #1 San Jose, Calif.; #2 Boston; #3 San Francisco; #4 Hartford,
Conn.; #5 Seattle; #6 Grand Rapids, Mich.; #7 San Diego; #8 Stockholm, Sweden; #9 Rochester,
Minn.; #10 Los Angeles. The World Knowledge Competitiveness Index (WKCI) is a benchmark of
the knowledge capacity, capability and sustainability of 125 regions around the world, and the extent
to which the knowledge is translated into economic value and transferred into the wealth of the
citizens of these regions. It utilizes 19 knowledge economy benchmarks, including employment
levels in the knowledge economy, patent registrations, research and development investment by the
private and public sectors, education expenditures, information and communication technology
infrastructure, and access to private equity.”