D.C. Office Market Report – Second Quarter 2022

OFFICE MARKET ASSESSMENT

The District of Columbia’s office market fundamentals showed modest signs of improvement with 24k SF of direct space absorbed in Q2 – its second straight quarter of positive absorption – bringing the YTD total up to 146k SF of occupancy gains.

The District’s direct vacancy rate rose by 40 bps in Q2 and have climbed 130 bps from a year ago to an all-time high of 16.2% largely due to newly delivered space hitting the market.

The Class A sector registered positive absorption for the second straight quarter with 205k SF of direct net absorption in Q2, driven by pre-leased deliveries in the Wharf, bringing the trailing 12-months total up to 690k SF of occupancy gains.

Class B properties continued to experience softness with 192k SF of red ink in Q2 and 1.3 MSF of occupancy losses over the trailing 12 months resulting from recent business contractions and a flight to quality trend that has severely impacted this sector over the past 5 years.

Sublease availability rose by 229k SF to an all-time high of 3.4 MSF in Q2. Nearly 80% of the District’s sublease inventory is located in the East End and CBD submarket with 1.5 MSF and 1.2 MSF of space being marketed, respectively.

Leasing activity modestly slowed during the second quarter, but pent-up demand has caused leasing volume over the trailing 12-month period to improve by 17% Y-O-Y. Leasing volume totaled 1.2 MSF in Q2, up 15.6% compared to its pandemic low a year ago but remains 48% below its pre-pandemic quarterly average.

Although Class A face rates have modestly risen over the past year, the gap between asking and effective rates have widened as owners remain aggressive in pricing, concessions, and flexibility to attract and retain tenants.

The office development pipeline currently has 2.2 MSF of new product under construction currently 63% pre-leased. Developers delivered 994k SF of new product during the first half of 2022, with an additional 1 MSF of new inventory slated to deliver by year-end 2022.

Even though demand remains the strongest for new construction and renovated product, we expect fewer ground breakings over the next 12 months unless a significant pre-lease is secured. Developers have remained cautious in moving forward on any significant speculative projects due to the supply-demand imbalance and uncertainty in the market.

Although the decline in development activity could help stabilize vacancy in the long run, the second-generation spaces that will eventually be left behind as tenants relocate to newer projects will indirectly place further upward pressure on vacancy rates.

The office market will remain tenant-favorable in the near term as space availability options are plentiful, but pent-up activity should help improve leasing fundamentals as return to office momentum continues to build and more companies make long-term real estate decisions. However, we expect office space demand to remain challenged as select tenants consolidate and reduce their footprint to move up in quality and/or adopt a hybrid remote work model.

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San Diego Office Market Report – Second Quarter 2022

OFFICE MARKET ASSESSMENT

San Diego’s office market registered positive absorption for the fifth consecutive quarter with 1.1 MSF of direct net absorption in Q2, its largest quarterly gain since the pandemic’s onset, bringing the trailing 12 months total up to 1.8 MSF of occupancy gains.

This solid demand has caused the market-wide direct vacancy rate to drop 140 bps to 13.7% in Q2 and has compressed 180 bps since hitting a 9-year high at mid-year 2021.

The Class A property sector posted robust absorption gains totaling 640k SF in Q2 and 1.1 MSF over the trailing 12-month period. Class A direct vacancy dropped by 150 bps to 15.3% in Q2 after hitting an 11-year high during the prior quarter.

Class B properties posted 462k SF of direct net absorption in Q2, bringing the trailing 12-month total up to 768k SF. Class B direct vacancy dropped by 130 bps to 12.1% in Q2 and has improved 270 bps since its cyclical peak in Q3 2021

Touring and leasing activity has picked up as occupiers are re-evaluating their future space needs and more confidently executing leasing decisions. The life sciences and technology sector has been the driving force behind the upswing in leasing demand.

Leasing activity has sharply accelerated to pre-pandemic levels with 6.8 MSF leased over the trailing 12-months, up 77.5% Y-O-Y, with Class A product experiencing most of the increase due to a surge in pre-leasing activity in recent quarters within life science projects currently planned and under construction.

The largest lease transaction in Q2 involved Leidos signing a 170k SF pre-lease commitment at 4150 Campus Point Ct that will deliver by mid-year 2024. In addition, Apple continued to grow its presence with a 95k SF lease at 16765 W Bernardo Dr and a 53k SF lease at 16409 W Bernardo Dr.

Sublease availability rose by 123k SF in Q2 but has declined by 7.0% since hitting an all-time high of 2.1 MSF early in 2021. The reduction has resulted from many sublease listings either converting to direct space or tenants taking advantage of discounted sublease spaces.

Rising construction costs and sustained demand for quality space have pushed asking rents higher. Class A asking rents have increased 2.1% while Class B rents rose 1.2% Y-O-Y. New spec construction and life sciences conversions of older buildings will likely push rents even higher in the year ahead.

New construction remains robust with 4.1 MSF underway, which is 23% pre-leased. Approximately 68% of this new product underway is concentrated in the Downtown submarket. Developers are expected to deliver 1.4 MSF of new product in 2022.

As pent-up demand from the pandemic continues to flow back into the market, office demand is poised to grow and positively impact the market in 2022. Despite the anticipated recovery, vacancy levels are expected to gradually improve at a measured pace due to a wave of new construction deliveries slated to come online.

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Orange County Office Market Report – Second Quarter 2022

OFFICE MARKET ASSESSMENT

Orange County’s office market registered its strongest quarterly gain since the pandemic’s onset with 873k SF of direct net absorption in Q2, improving the trailing 12-months total to 537k SF of occupancy gains after experiencing a temporary retraction during the prior quarter.

The countywide direct vacancy rate dropped 80 bps to 13.5% in Q2 and has managed to improve by 100 bps since hitting a 9-year high in 3Q21. Despite the improvement, the countywide vacancy rate remains 230 bps above its pre-pandemic levels.

The Class A sector accounted for the bulk of the quarterly gains with 542k SF of direct space absorbed in Q2, but has experienced 131k SF of occupancy losses over the prior 12 months. Class B properties registered its third straight quarter of leasing gains with 331k SF of direct space absorbed in Q2, bringing the trailing 12-months total to 668k SF.

The majority of the occupancy gains occurred in South County with 612k SF of direct net absorption in Q2, bringing the trailing-12 months total up to 933k SF. The Airport Area also contributed with 393k SF of absorption but has experienced 255k SF of occupancy losses over the prior 12 months.

Touring activity has picked up as occupiers are reevaluating their future space needs and more willing to execute on long-term leasing decisions. The largest deals inked in Q2 included Americor’s 31k SF new lease at 18200 Von Karman Ave, Glasir Group’s 31k SF sublease at 43 Discovery and Lugano Diamonds & Jewelry Inc’s 29k SF new lease at 620 Newport Center Dr.

Leasing activity has accelerated to 7.3 MSF over the trailing 12 months, up 24.1% year-over-year, but remains 24.8% below 2017-19 pre-pandemic levels. Leasing volume totaled nearly 1.9 MSF in Q2, up 29.1% compared to a year ago.

Sublease availability rose by 377k SF in Q2 reaching an all-time high of nearly 3.7 MSF as some occupiers downsized their footprints. Sublease inventory will likely remain high as employers adapt to new workplace strategies and continue to optimize their footprints to best fit their needs and future business plans.

Class A asking rents have trended downward since the pandemic emerged with a 4.4% reduction from its peak at mid-year 2020 but has stabilized in recent quarters and managed to increase by 1.6% in Q2. Class B rents have also risen by 0.5% Y-O-Y. However, effective rents experienced downward pressure as landlord concession packages remain aggressive to attract and retain tenants.

The construction pipeline remains active with 1.2 MSF underway currently 48% pre-leased. Three major projects are slated to deliver by year-end 2022, which include The Press (449K SF pre-leased to Anduril), the third phase of Spectrum Terrace (375k SF across 3 buildings), and the second phase of Innovation Office Park (259k SF across 7 buildings).

The OC office market is expected to remain tenant-favorable with generous concession packages for longer term deals, but pent-up activity should help improve leasing fundamentals and generate more occupancy as employees return to the office and more long-term decisions are made in the year ahead.

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Atlanta Office Market Report – Second Quarter 2022

OFFICE MARKET ASSESSMENT

After a slow start to 2022, the Atlanta office market registered its strongest quarterly gains since the pandemic’s onset with almost 1.1 MSF of direct net absorption in Q2, improving the trailing 12-months total to 2.1 MSF of occupancy gains. The strong leasing gains which outpaced supply resulted in the market-wide direct vacancy rate declining by 40 bps to 19.7% in Q2 after hitting its highest level since the late 1980s largely due to an influx of construction deliveries.

The Class A sector rebounded with 817k SF of direct net absorption in Q2 after suffering a temporary retraction early in 2022, bringing the trailing 12-months total up to 1.5 MSF. Class B properties also posted 296k SF of occupancy gains in Q2, pushing the trailing 12 months total up to 560k SF.

Noteworthy move-ins contributing to the absorption gains included Google occupying 397k SF at 1105 WP in Midtown, Emory Healthcare moving into 182k SF within the recently redeveloped Northlake Mall, and Insight Global occupying 84k SF at Twelve24.

Sublease availability jumped by 422k SF to an all-time high of 6.5 MSF in Q2. Suburban submarkets currently account for 69% of the sublease inventory with most of the space located in Central Perimeter, North Fulton, and Northwest Atlanta.

Leasing activity has accelerated to 10.6 MSF over the trailing 12 months, up 45.7% since hitting its pandemic low a year ago. Leasing volume totaled 2.7 MSF in Q2, up 49.2% compared to a year ago, but remains 20.9% below the pre-pandemic quarterly average. Tour activity has picked up as occupiers have regained confidence and are more willing to execute on longer-term leasing decisions previously placed on hold due to the pandemic.

The largest lease transactions inked in Q2 included Truist Financial securing a 250k SF pre-lease commitment at 900 SE Battery Avenue, while Transportation Insight signed a 174k SF deal and Insight Global signed a 134k SF deal at Dunwoody’s new Campus 244 project.

New construction remains robust with 4.8 MSF underway, which is currently 33% pre-leased. Approximately 3.7 MSF of new product is scheduled to deliver by year-end, which is expected to push vacancy levels higher until demand begins to consistently outpace supply in 2023.

Rent growth has significantly slowed since the pandemic emerged two years ago but rental rates have trended upwards by 2.2% year-over-year, due to the influx of high-quality new construction delivering to the market on a speculative basis. Rising construction costs and sustained demand for quality space are expected to push rents even higher in the year ahead.

Even though uncertainty has increased, Atlanta’s office market finds itself in an improved position as many companies are returning to the office and several large upcoming corporate expansions and relocations recently announced should continue to bolster the local economic recovery in the year ahead.

The long-term outlook remains positive as metro Atlanta is expected to outperform and recover faster than other major markets as pent-up activity and inbound corporate relocations should translate to stronger leasing momentum and help generate more occupancy in the year ahead.

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Inland Empire Office Market Report – Second Quarter 2022

OFFICE MARKET ASSESSMENT

The Inland Empire office market registered positive absorption for the fifth straight quarter with 227k SF of direct space absorbed in Q2, its largest quarterly gain since the pandemic’s onset, bringing the trailing 12 months total up to 614K SF.

The market-wide direct vacancy rate improved by 90bps to 9.9% in Q2 and has fallen 190bps since hitting its pandemic peak early in 2021. The vacancy rate has already managed to reach its pre-pandemic level as the Inland Empire was not as severely impacted by the pandemic as other markets.

The Class B sector accounted for most of the leasing gains with 214K SF of direct space absorbed in Q2 and has led in the recovery with five straight quarters of positive absorption totaling 624K SF over the period.

The Class A sector has also shown signs of recovery with 13K SF of direct space absorbed in Q2, which was its fifth consecutive quarter of positive absorption totaling 83K SF over the period.

Leasing volume has totaled 1.2 MSF over the trailing 12-months, up 4.8% compared to prior year, but remains 27.5% below the pre-pandemic quarterly average. The majority of the leasing activity has been driven by healthcare, education, and service-related companies.

Even though leasing activity still lags its normal pre-pandemic pace, touring and leasing activity has picked up as occupiers that had postponed leasing decisions are approaching their lease expirations and are re-evaluating their future space needs.

The largest lease transactions inked in Q2 included Apostle Promise Adeyemi securing a 12k SF lease at 8678 Archibald Ave, Planned Parenthood signing an 11k sf deal at 9699 Sierra Ave, and Southwest Christian Church signing a 10k SF renewal at 28030 Del Rio Rd.

Sublease availability declined for the second consecutive quarter by 21K SF to 290K SF after hitting an all-time high in 4Q 2021. The Airport Area currently accounts for 55% of the sublease inventory across the entire market.

Construction activity remains modest with only two projects totaling 105k SF underway. Office development has primarily been limited to build-to-suit and medical office projects, which remain in high demand due to the region’s population growth.

The largest development project underway is the Canyon Springs Medical Campus in Riverside, which is a three-story property totaling 75k SF currently available for lease and scheduled to deliver by year-end.

Overall rental rates have continued to trend upwards to reach their highest level on record, up 4.3% over the past 12 months. Class A asking rents averaged $2.55 PSF per month, up 5.6% YOY, while Class B rents averaged $2.16, up 1.7% for the same period.

The office market is expected to continue to experience moderate demand and rent growth in the year ahead with limited construction and steady demand keeping vacancy rates in check.

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Los Angeles Office Market Report – Second Quarter 2022

OFFICE MARKET ASSESSMENT

The Los Angeles office market is experiencing a slow recovery with 429k SF of direct net absorption in Q2, offsetting the losses incurred early in 2022. The quarterly gain comes after showing early signs of a recovery late in 2021 with positive absorption recorded for the first time since the pandemic emerged two years ago.

The office market has shown signs of stabilization as the rate of occupancy losses has significantly decelerated to only 109k SF of red ink over the prior 12-months. As a result of the quarterly leasing gains, the market-wide direct vacancy level remained unchanged in Q2 but has risen 70 bps Y-O-Y to a record high of 18.2%.

The Class A sector recorded 219k SF of direct net absorption in Q2, improving the trailing 12-months total to 486k SF of red ink. Class B properties registered its third straight quarter of leasing gains with 210k SF of direct space absorbed in Q2, bringing the 12-month total to 377k SF of occupancy gains.

Sublease availability rose by 91k SF to reach an all-time high of 9.4 MSF in Q2. The sublease space additions during the quarter included DirectTV (101k SF), Optum (81k SF) and Edgecast (79k SF).

Leasing activity has accelerated to 13.7 MSF over the trailing 12 months, up 54.8% since hitting its pandemic low early in 2021 but remains 27.9% below the pre-pandemic average. Leasing volume totaled 3.2 MSF in Q2, which is only 14.9% below its five-year quarterly average.

The largest lease signed in Q2 involved Amazon’s 208k SF deal at the Water Garden in Santa Monica. The other top leases inked included Forever 21 taking 162k SF in Downtown, First Republic Bank’s 156k SF renewal and expansion in Century City, and law firm Quinn Emanuel’s 139k SF renewal in Downtown.

Touring activity has picked up at a slow but steady pace as occupiers evaluate their future space needs and are more willing to execute on long-term leasing decisions. Technology and entertainment/media companies will continue to lead in the market’s recovery, but economic headwinds have prompted some tech companies to place a temporary hold on expansion plans as they assess market conditions.

Asking rents have risen by 1.4% year-over-year to surpass their prior peak. However, concessions such as rental abatement and tenant improvement allowances remain high as landlords have chosen to remain aggressive in chasing occupancy while keeping the face rates high.

The construction pipeline contains 3.4 MSF underway currently 47.3% pre-leased, which has fallen from its 6.6 MSF peak in Q3 2020. Developers delivered approximately 366k SF in Q2, with an additional 2.3 MSF of new product scheduled to deliver by year-end 2022.

The office market is expected to remain tenant-favorable in the near term as space availability options are plentiful, but pent-up activity should help improve leasing fundamentals and generate more occupancy as employees return to the office and more companies make long-term real estate decisions.

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Dallas Office Market Report – Second Quarter 2022

OFFICE MARKET ASSESSMENT

The DFW office market recovery is well underway as return-to-office momentum continues to build, now with its fourth straight quarter of positive absorption largely driven by leasing activity accelerating over the past year as the region continues to be the epicenter of corporate expansions and relocations.

The DFW office sector registered 433k SF of direct net absorption in Q2, marking the fourth consecutive quarter of absorption growth totaling 2.3 MSF, which has caused the direct vacancy rate to subside by 20 bps to 22.2% since hitting its peak in Q3 2021.

The Class A sector registered 309k SF of direct net absorption in Q2, improving the YTD total to 926k SF of occupancy gains. The flight to quality trend remains prevalent as newer buildings have captured a large share of the leasing demand. Class B properties have also exhibited signs of stabilization with 185k SF of absorption gains in Q2, bringing the YTD total to 107k SF.

Leasing activity has rebounded to 16.2 MSF over the trailing 12 months, up 34.4% Y-O-Y. Leasing volume totaled 4.2 MSF in Q2, up 26.1% compared to a year ago, but remains 18.6% below the pre-pandemic quarterly average. Tour activity has picked up as occupiers are evaluating their future space needs and more willing to execute on long-term leasing decisions previously placed on hold due to the pandemic.

Sublease availability rose by 493k SF to reach an all-time high of 10.4 MSF in Q2. Sublet space additions have risen by 1.6 MSF over the prior 12 months as many companies have rightsized their footprints to adjust to a post-pandemic environment.

The construction pipeline remains robust with 5.2 MSF underway (23% pre-leased) as numerous spec projects totaling 3.5 MSF have broken ground over the prior 12 months. Developers delivered 936k SF in Q2, with an additional 1.8 MSF of new product scheduled to deliver by year-end 2022.

Higher construction costs and a tight supply of new office buildings in some high-demand areas have pushed rents higher. Rising operating expenses and inflation have also exerted upward pressure on rental rates, while many landlords are offering competitive concession packages which include tenant improvement allowances and free rent in order to preserve face rates.

As the office market recovery accelerates in the year ahead, the flight to quality trend should continue as newer, highly amenitized Class A buildings in prime locations are expected to capture a larger share of the demand activity and lead to a faster recovery at the expense of lower quality assets.

The DFW employment recovery has been especially robust when compared to other markets across the US. While just over half of major metros that employ at least 1 million people have reached pre-pandemic levels of employment, the Metroplex now boasts 259K more jobs than prior to the pandemic onset. However, higher inflation expectations continue to undermine consumer confidence. The Federal Reserve has begun a sharp tightening of monetary policy. Higher interest rates will cool private investment and reduce consumer purchasing power. Even still, the long-term outlook for DFW remains positive as the region is expected to outperform other major markets as pent-up activity and inbound corporate relocations positively impact the market.

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Houston Office Market Report – Second Quarter 2022

OFFICE MARKET ASSESSMENT

Houston’s office market fundamentals continue to show modest signs of improvement. The office sector registered positive absorption for the third straight quarter with 159k SF of direct space absorbed in Q2, improving the trailing 12-months total to 948k SF of occupancy gains.

The Class A sector accounted for the bulk of the gains with 156k SF of direct space absorbed in Q2, marking the third consecutive quarter of absorption growth totaling 1.4M SF, which has helped reduce the direct vacancy rate by 70 bps to 24.9% since hitting its cyclical peak in 4Q 2021. Noteworthy move-ins contributing to the absorption gains included UT Physicians (139k SF at Bellaire Station), Weaver Tidwell (61k SF at Five Post Oak Park), Entergy (54k SF at Lake Front North), Linde PLC (41k SF at Sierra Pines I), and DLA Piper LLP (32k SF at Texas Tower).

Leasing volume totaled 2.6M SF in Q2 but remains 41.1% below the pre-pandemic quarterly average from 2017-2019 due to the combination of many firms trending towards smaller footprints and the lack of large new deal and expansion activity.

The flight-to-quality trend remains prevalent as tenants continue to prioritize highly amenitized buildings containing fitness complexes, dining options serving up chef-inspired food, rooftop gardens, and finishes in interior and exterior commons areas that are noticeably distinguishable from lower-end or older Class A buildings.

Landlords continue to hold firm on face rates but the gap between asking and effective rates remains significant as highly competitive concession packages with rental abatement and tenant improvement allowances, aimed at attracting and retaining tenancy.

New supply continues to capture a large share of the demand, as 25.7% of the YTD leasing activity has occurred in buildings delivered since 2015 and contributed to all the absorption gains. The largest deal inked in Q2 involved Cheniere Energy’s 151k SF new lease at Texas Tower, which brings the newly built trophy tower up to 62.4% leased.

Sublease availability remains elevated at 7.9M SF but has slightly declined since hitting its peak at mid-year 2021. Even though many companies have already rightsized their footprint to adjust to a post-pandemic environment, some occupiers are still exploring ways to optimize and reconfigure their workspace to meet new challenges and work patterns.

Developers delivered 122k SF of new product in Q2, bringing the YTD total to 802k SF. New construction remains active with 2.0M SF underway currently 20% pre-leased with 567k SF of this new product slated to deliver by year-end 2022. As the office market recovery gathers steam in the coming quarters, newer and amenity-rich Class A office product in prime locations will continue to outperform the broader market in demand, occupancy, and rents at the expense of older buildings.

Employment indicators and consumer spending have remained strong through the first half of 2022 however, higher inflation expectations continue to undermine consumer confidence. The Federal Reserve is now engaging in a sharp tightening of monetary policy. Higher interest rates will cool private investment and reduce consumer purchasing power. Even still, there remains pent up demand which should help improve leasing fundamentals and generate more occupancy as occupiers get more certainty on their longer-term space needs.

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