MESSAGE FROM BAY AREA MANAGEMENT

Michael F. Smith, Executive Managing Director
Anita Ghai, Bay Area Research Manager

CB Richard Ellis' Bay Area offices are pleased to present you with the Market Outlook for 2011. This annual report provides a market-specific analysis of trends for all major commercial property types and services, as well as insight into forecasts for the year.

Although 2010 was not without its challenges, it was a year that was characterized by an economy attempting stabilization. Concurrently, businesses began the slow process of rebuilding and reassessing their future profitability. In the Bay Area, CBRE took the opportunity to expand, and further develop, our already extensive platform of commercial real estate services.

A major focus for 2010 was the enhancement of our healthcare services platform with the addition of Scott Sypult and Geoff Pierce of Sypult Construction to CBRE's Global Corporate Services team. Mr. Sypult and Mr. Pierce were the principals of Sypult Construction, a leading general contractor and construction management firm. CBRE's dedicated focus on enhancing its healthcare real estate services has resulted in best in class services for our clients. Based in San Francisco, Mr. Sypult and Mr. Pierce will have significant responsibilities within CBRE's healthcare services group, including project and construction management services, site utility and infrastructure upgrades, building additions and new ground-up facilities. They will also enhance CBRE's support for healthcare systems throughout California in managing the challenges associated with new seismic standards (SB 1953) and review by the state Office of Statewide Health Planning and Development (OSHPD).

CBRE manages in excess of 50 MSF of managed inpatient, outpatient, medical office, and support space facilities within prominent U.S. health systems. In addition, CBRE has managed over $3 billion in healthcare construction project management since 2001. In 2011, we will continue to focus on healthcare opportunities with an even greater focus.

One of the other major accomplishments for the year was the strategic expansion of our Retail Services Group throughout the Bay Area, including the hire of Brian Mirkovich to serve the East Bay. Based in the Walnut Creek office, Mr. Mirkovich is focused on landlord and tenant representation, as well as ground-up development throughout the East Bay. In Contra Costa County, Mr. Mirkovich has been responsible for leasing over a dozen properties from neighborhood centers to power centers. His most prominent assignments have included leasing Century Plaza in Pittsburg, Slatten Ranch (East) in Antioch, and Clayton Valley Shopping Center in Concord. Mr. Mirkovich brings his talent to a rapidly growing regional CBRE Retail Services practice that includes other recent recruits across our Bay Area offices.

The Occupier Advisory Practice group, which was formally assembled in 2009, made great strides in the last year, focusing on proactively addressing our clients' financial and operational objectives through the use of scenario-planning financial analysis tools and methodologies to drive disposition strategies. Under the leadership of Raul Campos, some of the major wins for the Bay Area included a headquarters relocation for Metropolitan Transportation Commission (approx 200 KSF), and a contract for global transaction management with Hewlett-Packard, among others.

Our Global Corporate Services outsourcing business continues to deliver strong results. In 2010, the outsourcing business continued its upward trend, exceeding performance expectations despite challenging market conditions as corporate occupiers continued to seek innovative cost-saving methods and strategically manage their real estate portfolios. During the year, CBRE secured 62 new contracts with clients, including AIG, NYSE, City of Sacramento, Deere and Company, and Northwestern Memorial. We expanded 25 existing accounts, including Boeing and Chevron, and renewed 34 contracts with existing clients, including Allianz Fireman's Fund, HSBC Canada, McGraw Hill, Regus, and Ricoh, among others.

Our Asset Services group had a record-setting year as they continued to focus on identifying cost-saving opportunities for our clients. CBRE currently manages 51 MSF of R&D, industrial and life science, office, and retail space in more than 280 properties in the Bay Area, not including the Corporate Services facilities under CBRE management.

In 2007, CBRE became the first company in our sector to adopt a company-wide Environmental Stewardship policy that included the goal of becoming carbon neutral. We were successful in fulfilling that pledge for 2010. We are currently in negotiations for several carbon offset projects around the globe that are both socially responsible and in line with internationally accepted standards in the carbon market. These projects include conservation-based forest initiatives, landfill methane emissions mitigation, and developing world sustainable economy investments. Since 2007, CB Richard Ellis has been recognized as the industry leader in sustainability, as evidenced by our strong performance in the Newsweek greenest company rankings as well as the numerous awards and accolades we have achieved globally.

With the economy beginning the slow process towards recovery during the latter half of 2010, the commercial real estate market in the Bay Area kept pace as well as could be expected, given the glut of vacant space added to the market in 2009. The year ended with some positive signs, including occupancy gains across the Silicon Valley and San Francisco Peninsula office markets. Lease rates began to stabilize across the board by year-end with high-end space even showing some upward movement. The region also benefitted from a lack of new construction. After two years of significantly negative fundamentals, the Bay Area office market witnessed approximately 600,000 SF of positive absorption for 2010. The industrial market continued its negative trend, realizing nearly 1.2 MSF of negative net absorption, which does compare favorably, however, to the 15 MSF of occupancy losses for 2009. The majority of the growth was driven by social networking, gaming, cloud computing, life science and clean tech companies, while the residential real estate sector and governmental contractions continue to impact and forestall growth in certain markets. Market-wide and Class A office rents held relatively steady compared to a year ago, each falling by less than 1%, clearly demonstrating that asking rents have reached bottom for most markets. Although the majority of 2010 leasing activity was dominated by renewal and short-term extensions, a shift towards longer leases may begin to take place in the near future.

As the economy slowly begins to show improvement, we expect job growth to follow, which will ultimately impact the commercial real estate market. Given the major losses in occupancy, we are banking on growth in the technology sector to help pave the way to a brighter tomorrow. Fortunately, the Bay Area continues to be the leader in innovation and new technology. These attributes, along with a highly-skilled labor force, will help the region to capitalize on positive changes in the economy.

At CBRE, our values are focused around respect, integrity, service, and excellence, and our aim is to incorporate these values into everything we do, especially where our clients are concerned. No other firm in the Bay Area is better equipped to deliver a full scope of integrated services, locally, regionally, or globally, than CBRE. We look forward to helping you achieve your goals in 2011! We hope you find this publication to be an interesting and informative read.