Inland Empire Office Market Report – First Quarter 2022

OFFICE MARKET ASSESSMENT

The Inland Empire office market posted positive absorption for the fourth straight quarter with 175k SF of direct space absorbed in Q1, its largest quarterly gain since the pandemic’s onset, bringing the trailing 12 months total up to 455K SF.

The market-wide direct vacancy rate improved by 60 bps to 11.0% in Q1 and has improved 130 bps since hitting its peak early in 2021. The vacancy rate has managed to fall below its 5-year historical average of 11.4% and only remains 90 bps above its pre-pandemic level as the Inland Empire was not as severely impacted by the pandemic as other markets.

The Class A sector has also shown signs of a recovery with 14k SF of direct space absorbed in Q1, the fourth consecutive quarter of positive absorption totaling 45k SF over the 12-month period. The Class B sector accounted for 161k SF of direct space absorbed in Q1 and has led in the recovery with four consecutive quarters of positive absorption totaling 410k SF over the period.

The largest occupancy gains in Q1 involved San Bernardino County Fire District’s 71k SF lease commencing at 1111 E Mill St and City of Hope Corona moving into 32k SF at the recently delivered Corona Regional Medical Campus at 320 W 6th St.

Leasing volume has totaled 1.2 MSF over the trailing 12-months, up 10.1% compared to prior year, but remains 26.9% below the pre-pandemic quarterly average from 2017-19. Healthcare, education, engineering, and legal services tenants have contributed to the rise in leasing activity over the past year.

Office development has primarily been limited to build-to-suit and medical office projects, which remain in high demand due to robust population growth. Two projects totaling 53k SF delivered in Q1. The only significant project underway is the Canyon Springs Medical Campus in Riverside, which is a 75k SF three-story property currently available for lease and scheduled to deliver by year-end.

Sublease availability declined by 29k SF in Q1 to 310k SF after hitting an all-time high during the prior quarter. The Airport Area submarket currently accounts for 53% of the sublease inventory across the entire market.

Even though leasing activity still lags its baseline pre-pandemic pace, touring and leasing activity have picked up in recent quarters as users that had postponed leasing decisions are approaching their lease expirations and are re-evaluating their future space needs.

Overall rental rates have continued to trend upwards to reach their highest level on record, up 4.5% over the past 12 months. Class A asking rents averaged $2.57 PSF per month, up 6.2% YOY, while Class B rents averaged $2.14, up 2.0% for the same period.

While the recovery efforts show a promising outlook for the local economy, the office market is poised to make a healthy rebound in the year ahead with limited construction and growing demand pushing vacancy rates toward pre-pandemic levels.

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San Diego Office Market Report – First Quarter 2022

OFFICE MARKET ASSESSMENT

After a strong close to 2021, San Diego’s office market registered 94k SF of direct net absorption in Q1, marking the fourth consecutive quarter of positive absorption totaling 820k SF over the trailing 12-month period.

Despite the quarterly absorption gain, the market-wide direct vacancy rate slightly rose 20 bps to 15.1% in Q1 largely due to new supply additions but has managed to improve 40 bps since hitting a 9-year high at mid-year 2021.

Class B properties posted 96k SF of direct net absorption in Q1 on the heels of its strongest quarterly gain since the pandemic’s onset to close out 2021, bringing the trailing 12-month total up to 210k SF. Class B direct vacancy declined by 30 bps to 13.4% in Q1 and has improved 130 bps since its cyclical peak in Q3 2021.

The Class A property sector posted modest occupancy losses in Q1 but has experienced robust absorption gains totaling 609k SF over the trailing 12-month period. Class A direct vacancy jumped 60 bps to 16.8% in Q1, reaching an 11-year high largely due to recent construction deliveries.

Touring and leasing activity picked up as occupiers re-evaluate their future space needs and more confidently execute 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 7.0 MSF leased over the trailing 12-months, up 102% year-over-year, with most of the increase taking place in Class A product. Leasing activity totaled 2.1 MSF in Q1 with roughly 60% of this volume attributed to pre-leasing activity.

Life science projects currently planned and under construction experienced a surge in pre-leasing activity in Q1. Neurocrine Biosciences signed a 637k SF pre-lease commitment at the Aperture Del Mar project currently under construction which will encompass 5 buildings upon completion. In addition, Bristol Myers Squibb secured a 427k sf pre-lease at Campus Pointe 4, while Singular Genomics inked a 209k sf prelease at One Alexandria Square.

Sublease availability rose by 285k SF in Q1 but has fallen by 12.3% since hitting an all-time high of 2.2 MSF one year ago. The reduction has been attributed to 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 to an all-time high. Class A asking rents moved up 4.9% while Class B rents rose 2.6% Y-O-Y. New spec construction and life sciences conversions of older buildings are expected to push rents even higher in the year ahead.

New construction remains robust with 4.1 MSF underway, which is 30% pre-leased; approximately 61% of which is concentrated in the Downtown submarket. Developers are expected to deliver 1.5 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 – First Quarter 2022

OFFICE MARKET ASSESSMENT

Orange County’s office market retracted with 293k SF of direct space turning vacant in Q1 after showing initial signs of recovery late in 2021 with its strongest quarterly absorption gain since the pandemic’s onset and leasing activity reaching pre-pandemic levels.

The countywide direct vacancy rate has risen 80bps from a year ago to 14.2% but has exhibited signs of stabilization in recent quarters. Even though direct vacancy rose by 30bps to 14.2% in Q1, the vacancy rate has managed to improve by 30bps since hitting a 9-year high in 3Q 2021.

The Class A sector accounted for the bulk of the occupancy losses with 371k SF of direct space becoming vacant in Q1, pushing the trailing 12-months total to 891k SF of occupancy losses. On a positive note, Class B properties registered its second straight quarter of leasing gains with 77k SF of direct space absorbed in Q1, bringing the trailing 12-months total to 253k SF.

The bulk of the negative absorption occurred in the Airport Area, which resulted from several large move-outs involving Happy Money (72k SF at 1700 Flight Way), Alliant Insurance Services (53k SF at 1301 Dove St), and HireRight LLC (40k SF at 3349 Michelson Dr).

Sublease availability rose 538k SF to 3.3M SF in Q1, reversing a trend of two consecutive quarterly declines, but inventory remains below its all-time high of 3.4M SF at mid-year 2021. Sublease availability 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.

Leasing activity has accelerated to 6.8 MSF over the trailing 12 months, up 12.9% year-over-year, but remains 28.3% below 2017-19 pre-pandemic levels. Leasing volume totaled 1.8 MSF in Q1, up 9.3% compared to a year ago.

Touring activity picked up as occupiers are re-evaluating their future space needs and more willing to execute on long-term leasing decisions. The largest deals inked in Q1 include Carrington Mortgage Services’ 128k SF renewal at 1600 S Douglass Rd, Cap Diagnostics’ 54k SF new lease at 15545 San Canyon Rd and Wells Fargo’s 46k SF lease renewal at 2030 Main St.

Class A asking rents have trended downward since the pandemic emerged with a 5.9% reduction from its peak at mid-year 2020 but has exhibited signs of stabilization over the past 6 months. Class B rents have risen over the past 3 quarters to return to their prior peak. 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).

Orange County’s office market is expected to remain tenant-favorable, but pent-up activity should help improve leasing fundamentals and generate more occupancy as employees return to the office and more long-term real estate decisions are made in the year ahead.

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Los Angeles Office Market Report – First Quarter 2022

OFFICE MARKET ASSESSMENT

The Los Angeles office market experienced 396k SF of occupancy losses in Q1 after showing initial signs of a recovery late in 2021 with positive absorption recorded for the first time since the pandemic emerged two years ago. Despite the negative absorption, the rate of occupancy losses has dramatically decelerated to 1.9M SF of red ink over the trailing 12-months. As a result, the market-wide direct vacancy rate has risen 190 bps from a year ago to 18.3%, reaching its highest level on record.

The Class A sector accounted for the bulk of the occupancy losses with 477k SF of direct space becoming vacant in Q1, pushing the trailing 12-months total to nearly 1.7 MSF of red ink. However, Class B properties registered its second straight quarter of leasing gains with 81k SF of direct space absorbed in Q1, bringing the 12-month total to 229k SF of occupancy losses.

Sublease availability increased by 717k SF to reach an all-time high of 9.3 MSF in Q1, reversing a trend of three consecutive quarterly declines. The quarterly hike was largely attributed to space additions by Farmers Insurance (580k) and Yahoo! (132k).

Leasing activity has accelerated to 14.0 MSF over the trailing 12 months, up 58.5% since hitting its pandemic low a year ago but remains 27.8% below 2017-19 pre-pandemic levels. Leasing volume totaled 3.4 MSF in Q1, up 38.0% compared to a year ago.

The largest lease signed in Q1 involved Creative Artist Agency’s 400k SF deal following its landmark merger with ICM. The other top leases inked included Lionsgate Entertainment’s extension on its 193k SF headquarters, Nike’s 93k SF expansion in Playa Vista, and law firm Buchalter’s 87k SF renewal in Downtown L.A.

Touring activity has noticeably picked up as occupiers continue to re-evaluate their future space needs and are more willing to execute on long-term leasing decisions. Technology and entertainment/media companies are expected to continue to lead in the market’s recovery, while studio leasing and development show no signs of slowing down.

Demand for newer creative projects built in recent years has been particularly strong and will likely continue to draw attention of leading creative users seeking to attract top talent and provide ample indoor and outdoor collaborative space.

Asking rents have risen over the past 3 quarters to surpass their prior peak. However, concessions such as rental abatement and tenant improvement allowances have increased as landlords have chosen to remain aggressive in chasing occupancy while keeping the face rates high.

The construction pipeline contains 3.7 MSF underway currently 44.6% pre-leased, which has fallen by 44% since its peak in Q3 2020. Developers delivered approximately 849k SF in Q1, with an additional 2.5 MSF of new product scheduled to deliver by year-end 2022.

Los Angeles’ office market is expected to remain tenant-favorable for 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 long-term real estate decisions are made in the year ahead.

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D.C. Office Market Report – First Quarter 2022

OFFICE MARKET ASSESSMENT

The District of Columbia’s office market continues to emerge from the pandemic’s worst effects and has entered the early stages of a recovery with 117k SF of direct net absorption recorded in Q1, marking the first quarter of occupancy gains since the second quarter of 2020.

The District’s direct vacancy rate has risen 140 bps from a year ago to an all-time high of 15.8% largely due tenant downsizings combined with new supply additions but there are signs of stabilization taking place as vacancy only rose 10 bps during the first quarter of 2022.

Driven by the flight to quality, the Class A sector demonstrated signs of turning the corner with 559k SF of direct net absorption in Q1, breaking a streak of six consecutive quarters of occupancy losses and improving the trailing 12-months total to 217k SF of red ink.

Class B properties continued to experience softness with 444k SF of red ink in Q1 and 881k SF 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.

Leasing activity modestly slowed during the first quarter of 2022, but pent-up demand has caused leasing volume over the trailing 12-month period to improve by 22.2% Y-O-Y. Leasing volume totaled 1.8 MSF in Q1, up 71.7% compared to its pandemic low a year ago but remains 22% below its 2017-19 pre-pandemic quarterly average.

Sublease availability slightly declined by 36k SF in Q1 and has only contracted by 4.5% since hitting an all-time high of 3.4 MSF at year-end 2020.

Asking rents have slightly contracted by 1.0% over the past year. Although Class A face rates have remained relatively steady, 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 2.6 MSF of new product under construction (73% pre-leased), with most of the construction activity taking place in the CBD and Southwest. The District is slated to deliver nearly 2.0 MSF of new product by year-end 2022.

Even though new construction and renovated product continues to outperform lower quality buildings, we expect fewer ground breakings over the next 12 months unless a significant pre-lease is in place. Developers have remained cautious in moving forward on any significant speculative projects largely due to the supply-demand imbalance. Although the decline in development activity could help stabilize vacancy in the long run, the second-generation spaces that will eventually be left behind by those tenants with pre-lease commitments in new projects will place further upward pressure on vacancy rates.

As pent-up demand from the pandemic continues to flow back into the market, office demand is poised to grow in the coming quarters and positively impact the market since those users that postponed decisions are evaluating their future space needs with upcoming expirations.

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Atlanta Office Market Report – First Quarter 2022

OFFICE MARKET ASSESSMENT

The Atlanta office market contracted with negative 450k SF of direct net absorption during the first quarter of 2022, after showing signs of a recovery over the prior two quarters with solid absorption gains totaling 1.2M SF during the second half of 2021. Even though the trailing 12-months absorption total has turned positive, the market-wide direct vacancy rate has climbed 90 bps to 20.3% over the past year reaching its highest level since the late 1980s largely due to an influx of construction deliveries totaling 3.2 MSF over the past year.

The Class A sector registered 235k SF of occupancy losses in Q1 — breaking a streak of three straight quarters of absorption gains totaling 915k SF over the span — but the trailing 12-months total managed to turn positive for the first time in over a year due to an upswing in leasing activity. Class B properties also posted 200k SF of red ink in Q1 but has shown signs of improvement with only 96k SF of occupancy losses over the prior 12 months.

Sublease availability jumped by 822k SF to an all-time high of 6.1M SF in Q1, reversing a trend of two consecutive quarterly declines. Suburban submarkets currently account for 70% of the sublease inventory with most of the space located in North Fulton, Central Perimeter and Northwest Atlanta.

Leasing activity accelerated to 9.4M SF over the trailing 12 months, up 29.5% since hitting its pandemic low nearly a year ago. Leasing volume totaled 2.4M SF in Q1, up 24.2% compared to a year ago, but remains 29.9% below the 2017-19 pre-pandemic quarterly average. Tour activity picked up as occupiers re-evaluate their future space needs and more willing to execute on long-term leasing decisions previously placed on hold due to the pandemic.

New construction remains robust with 4.5M SF underway, which is currently 31% pre-leased. Approximately 3.6M SF of new product is scheduled to deliver by year-end, which will likely push vacancy levels higher until demand begins to outpace supply during the latter part of 2022.

Developers delivered two projects totaling 590k SF during the first quarter of 2022, with the largest completion involving the redevelopment of the Northlake Mall into offices partially occupied by Emory Healthcare.

Rent growth has significantly slowed since the pandemic emerged two years ago but rental rates have begun to trend upwards by 3.6% year-over-year, largely 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.

Despite the slow start to 2022, 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 Atlanta’s economic recovery.

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 2022.

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Dallas Office Market Report – First Quarter 2022

OFFICE MARKET ASSESSMENT

The DFW office market recovery is well underway as return-to-office momentum builds, now with a third consecutive quarter of positive absorption largely driven by leasing activity accelerating in recent quarters due to expanding and relocating businesses.

The DFW office market kicked off the year with 495k SF of direct net absorption in Q1, after recording its strongest quarterly gain since the pandemic’s onset to close out 2021. The trailing 12-months absorption total improved to nearly 1.5 MSF, which has helped reduce the direct vacancy rate by 30 bps to 22.1% since hitting its peak in Q3 2021.

The Class A sector registered 616k SF of direct net absorption in Q1, improving the trailing 12-months total to nearly 1.7 MSF of occupancy gains. The flight to quality trend remains prevalent as new buildings have captured a large share of the leasing demand. Class B properties witnessed 78k SF of occupancy losses in Q1 but has exhibited signs of stabilization with only 14k SF of red ink over the prior 12 months.

Leasing activity has rebounded to 15.2 MSF over the trailing 12 months, up 27.8% year-over-year. Leasing volume totaled 3.9 MSF in Q1, up 66.9% compared to a year ago, but remains 25.5% below 2017-19 pre-pandemic levels. Tour activity has picked up as occupiers are re-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 declined by 252k SF in Q1 after hitting an all-time high of 10.2 MSF in 4Q21. Sublet space additions have considerably decelerated in recent quarters but have increased by 1.2 MSF over the prior 12 months as companies rightsized their footprints to meet the challenges of the pandemic.

The construction pipeline remains robust with 5.7 MSF underway currently 29% pre-leased. There were no construction deliveries in Q1 due to several projects being delayed but developers broke ground on numerous spec projects totaling 1.3 MSF. Looking ahead, approximately 2.7 MSF of new product is scheduled to deliver by year-end 2022.

Higher construction costs and a tight supply of new office buildings in some high-demand areas are pushing rents higher. Rising operating expenses and inflation also continue to exert 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, newer and amenity-rich Class A buildings in prime locations are expected to capture a large share of the demand activity and experience a faster recovery at the expense of lower quality assets.

Dallas remains one of the top U.S. markets leading in the share of employees who are back to their workplaces. The impact of hybrid and remote work strategies is still unclear as many occupiers are still exploring ways to optimize and reconfigure their workspace to meet new challenges and work patterns.

The long-term outlook for Dallas-Fort Worth remains positive as the region is expected to outperform and recover faster than other major markets as pent-up activity and inbound corporate relocations positively impact the market in 2022.

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Houston Office Market Report – First Quarter 2022

OFFICE MARKET ASSESSMENT

Houston’s office market fundamentals show continued signs of improvement as key drivers of the economy strengthen. The office sector registered positive absorption for the second straight quarter with 1.2 MSF of direct space absorbed in Q1. The strong quarterly gain, the largest since the pandemic’s onset, helped reduce the direct vacancy rate by 60 bps to 23.3% in Q1 after hitting a new high in 4Q21.

The Class A sector accounted for the bulk of the gains with nearly 1.1 MSF of direct net absorption in Q1, marking the second consecutive quarter of absorption growth – which helped push direct vacancy levels down by 70 bps to 24.9%.

Newly completed construction projects captured three-fourths of the quarterly absorption gains with the largest move-in involving Hewlett Packard Enterprise occupying 440k SF in CityPlace in a relocation from their corporate-owned 2 MSF campus which just sold to an affiliate of Mexcor International. The new owners will immediately occupy a portion of the space, but a fraction of the campus is expected to become part of the competitive inventory after redevelopment.

Other noteworthy move-ins contributing to the absorption gains included Vinson & Elkins (215k SF at Texas Tower), Healthstore Holdings (126k SF at Millennium Tower), Cadence Bank (82k SF at Park Towers South), and Buckeye Partners (73k SF at 200 Park Place).

Sublease availability remains elevated at 7.7M SF but has managed to modestly decline since hitting its peak at mid-year 2021. Many companies have already rightsized their footprint to meet the challenges of the pandemic so limited shadow-space remains on the sidelines as potential sublease space.

Leasing volume totaled 2.3 MSF in Q1 but remains 49.6% below the pre-pandemic quarterly average from 2017-2019 largely due to the lack of large new deals in the market. The largest deal inked in Q1 involved Enbridge’s 293k SF sublease at Energy Center Five, which will relocate from the Galleria and downsize their footprint by almost half.

The impact of hybrid and remote work strategies is still unclear, but many occupiers are still exploring ways to optimize and reconfigure their workspace to meet new challenges and work patterns.

Landlords continue to hold face rates relatively steady but the gap between asking and effective rates remains wide as landlords are offering aggressive concession packages, such as rental abatement and tenant improvement allowances, aimed at attracting and retaining tenancy.

Developers delivered 738k SF of new product in Q1, with the largest completion involving HPE’s build-to-suit comprised of two buildings totaling 440k SF in CityPlace. New construction remains active with 2.0 MSF underway currently 19% pre-leased with 528k SF of this new product slated to deliver by year-end 2022.

Touring activity has risen due to increased business confidence though it has yet to translate to notable deal volume. But, as the office market recovery gathers steam in 2022, newer and amenity-rich Class A office product in prime locations are expected to capture the recovery in demand, occupancy, and rents at the expense of older buildings. Pent-up activity should help improve leasing fundamentals and generate more occupancy as companies execute on previously delayed long-term space decisions.

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