SUMMER 2012 | OFFICE | TENANT ADVISORY SERVICES

Class A rental rates increasing despite Slower Q2 absorption MARKET OVERVIEW Demand in the San Diego County office market remained slightly positive with net absorption reaching nearly 81,000 SF in Q2 2012 bringing the total YTD to 383,000 SF. The drop in net absorption can be attributed to the lower leasing volume that occurred the prior quarter (Q1). A large portion of tenants continue to occupy their former space one or more quarters after signing leases, translating to lower level of positive net absorption (net move-ins) in Q2. Leasing activity – measured in square footage – increased by nearly 25% in Q2 which will bode well for increased absorption in the latter half of the year. Countywide Class A space continued its trend as the most preferred office class with 114,000 SF of positive net absorption. Class B and C space each recorded negative net absorption of 23,000 SF and 10,000 SF, respectively. The increase in absorption by smaller tenants will likely continue throughout the rest of 2012. This is evident in part by a 15% increase in the number of leases by tenants under 10,000 SF during the quarter. Downtown San Diego (CBD) posted negative net absorption of 42,000 SF in Q2. Overall demand in the CBD continues to be weak as some tenants have relocated, and will continue to relocate to the suburban submarkets. This trend will most likely equate to continued vacancies throughout the last half of the year. Overall net absorption for Class A space in the suburban office submarkets totaled 126,000 SF. Increased activity with small and mid-sized tenants continued in Q2 and will likely accelerate in the last half of the year. This will likely translate into improved Class B and C demand over the next six to twelve months. Rental rates are on the rise in the San Diego County Class A office market. Over the last 12-18 months, and particularly the last 90 days, there has been a steady increase in rates; and this despite views that rates are spotty” in certain areas of the market. The “Flight to Quality” moniker has become passé as rising rental rates approach historical highs, leaving only a few discerning companies willing to justify paying for the higher rates. The trend could instead be called “Flight to Value,” as Class B offices offer a much lower rental rate, with many landlords improving amenities in their buildings to attract those tenants that may be on the fence when considering paying a 30-40% premium to be in Class A. On average in the North City Office market (defined as Carmel Valley, Sorrento Mesa, and UTC), Class A asking rents are approximately 33% higher than Class B asking rents. The highest priced markets above $3.00 PSF are primarily North Coastal markets such as UTC, Carmel Valley, pockets of Del Mar, Solana Beach, and Encinitas. VACANCY | OBSERVATIONS Ten consecutive quarters of positive net absorption have culminated in a countywide total vacancy rate that has dropped to 14.9% in Q2 2012. The countywide total vacancy comprises 14.2% direct vacancy and 0.7% sublease vacancy. The overall suburban office market and CBD market vacancy rates were 14.1% and 20.5%, respectively. The suburban submarkets of Scripps Ranch (35.7%) and Carlsbad (23.4%) continue to maintain the highest vacancy rates in the county. Countywide Class A vacancy in Q2 decreased to 13.2%. The Class B rate increased to 18.1% and the Class C rate remained flat at 12.1%. Very few large blocks of quality space remain, which are driving rents to new highs. Even smaller spaces under 5,000 SF are commanding high rents in the Class A buildings in UTC, Sorrento Mesa and Carmel Valley. The best values can be found in the Class B buildings where rents are close to or under $2.00/SF with similar amenities as Class A buildings. Opportunistic tenants should seek out space in Downtown, Mission Valley and Carlsbad to achieve affordable rental rates.

VACANCY BY CLASS Q2 2012 Q1 2012 CHANGE

CLASS A 13.18% 13.64%

CLASS B 18.05% 17.95%

CLASS C 12.12% 12.09%

OFFICE VACANCY RATESQ2 2012

17.9%

11.8%

13.2%

20.5%

14.1%

14.9%

0% 5% 10% 15% 20% 25%

Downtown

Suburban

S.D. County

All Classes Class A

OFFICE VACANCY RATES Q2 2012

62.2%

24.8% 8.0%

3.3%

1.7% <= 2,000 SF [374]

2,001 - 5,000 SF [149]

5,001 - 10,000 SF [48]

10,001 - 20,000 SF [20]

>= 20,001 SF [10]

OFFICE LEASING ACTIVITY BY TENANT SIZE Percentage of Total Leases Completed in Q2 2012

$2.00$2.10$2.20$2.30$2.40$2.50$2.60$2.70$2.80$2.90$3.00$3.10$3.20$3.30

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Q411

Q112

Q212

$ /

SF /

Mon

th (F

S)

Class A All Classes

HISTORICAL RENTAL RATE TRENDS Class A & Overall Office Rates Quarterly Average Asking Rate Per SF Per Month (Full Service)

Colliers International | Accelerating success. | www.colliersTAS.com

VACANCY BY SPACE TYPE Q2 2012 Q1 2012 CHANGE

DIRECT 14.24% 14.18%

SUBLEASE 0.68% 0.86%

TOTAL 14.92% 15.04%

TENANT OUTLOOK REPORTSAN DIEGO COUNTY

COLLIERS INTERNATIONAL | P. 2

TENANT OUTLOOK REPORT | SUMMER 2012 | OFFICE | SAN DIEGO COUNTY

Average rental rates are defined as the average asking monthly rate per square foot normalized to a “full service gross” basis.

Colliers International | Accelerating success. | www.colliersTAS.com

TENANT ADVISORY SERVICESOFFICE OVERVIEWSan Diego County Office Market | SUMMER 2012

Submarket / Class Bldgs

Total

Inventory

SF

Direct

Vacancy

Rate

Sublease

Vacancy

Rate

Total

Vacancy

Rate

Prior Qtr

Vacancy

Rate

Net Abs

Current Qtr

SF

Net Abs

YTD

SF

DOWNTOWNA 20 7,254,266 16.3% 1.6% 17.9% 17.7% (11,541) (53,149)B 25 2,232,115 24.1% 0.6% 24.6% 23.6% (9,496) 21,019C 13 663,591 35.4% 0.1% 35.5% 32.4% (20,811) 10,383TOTAL 58 10,149,972 19.2% 1.3% 20.5% 20.0% (41,848) (21,747)MISSION VALLEYA 13 2,008,118 13.1% 0.7% 13.8% 14.3% 3,954 60,367B 61 3,360,970 11.6% 0.9% 12.4% 12.2% (8,593) (13,748)C 66 1,596,960 10.8% 0.4% 11.2% 11.6% 5,352 (26,480)TOTAL 140 6,966,048 11.8% 0.7% 12.6% 12.7% 713 20,139KEARNY MESAA 24 2,436,160 6.3% 0.8% 7.0% 6.4% (15,333) (2,269)B 73 3,272,367 12.3% 0.0% 12.3% 12.9% 19,515 47,519C 89 2,017,130 16.1% 0.0% 16.1% 16.3% 3,003 58,017TOTAL 186 7,725,657 11.4% 0.2% 11.6% 11.7% 7,185 103,267UTCA 20 3,088,798 12.3% 0.5% 12.8% 17.1% 99,215 186,932B 12 930,435 20.9% 0.0% 20.9% 24.7% 24,907 75,707C 6 320,381 4.8% 0.0% 4.8% 7.1% 7,380 11,205TOTAL 38 4,339,614 13.6% 0.4% 13.9% 18.0% 131,502 273,844SORRENTO MESAA 23 3,456,338 3.0% 1.1% 4.1% 3.4% (7,070) (10,640)B 41 3,081,949 8.5% 0.8% 9.4% 9.8% 11,918 32,558C 44 920,986 11.7% 0.0% 11.7% 12.0% 2,844 20,144TOTAL 108 7,459,273 6.4% 0.8% 7.2% 6.9% 7,692 42,062CARMEL VALLEYA 41 3,582,193 12.6% 1.5% 14.1% 14.6% 19,870 948B 26 1,299,977 18.9% 1.6% 20.4% 20.5% 807 10,284C 1 13,914 0.0% 0.0% 0.0% 0.0% 0 0TOTAL 68 4,896,084 14.2% 1.5% 15.7% 16.2% 20,677 11,232RANCHO BERNARDOA 19 2,232,431 6.9% 0.2% 7.1% 8.0% 21,750 26,977B 45 1,833,832 12.9% 0.0% 13.0% 13.3% 19,369 1,067C 25 490,093 8.1% 0.0% 8.1% 11.9% 18,619 27,364TOTAL 89 4,556,356 9.4% 0.1% 9.6% 10.6% 59,738 55,408CARLSBADA 44 2,000,467 22.4% 2.1% 24.5% 23.3% (7,760) 15,421B 109 2,988,291 24.0% 0.6% 24.5% 24.5% (12,523) (66,260)C 38 567,571 13.9% 0.0% 13.9% 12.0% (10,980) (1,199)TOTAL 191 5,556,329 22.4% 1.1% 23.4% 22.8% (31,263) (52,038)SAN DIEGO COUNTY OFFICEA 284 30,979,559 12.1% 1.1% 13.2% 13.6% 114,410 286,200B 911 31,382,678 17.5% 0.6% 18.1% 17.9% (23,089) 5,773C 1,151 15,895,860 12.0% 0.1% 12.1% 12.1% (10,327) 91,268TOTAL 2,346 78,258,097 14.2% 0.7% 14.9% 15.0% 80,994 383,241

San Diego County Office Market�

VACANCY NET ABSORPTIONEXISTING PROPERTIES

OFFICE OVERVIEW

Q2 2012 EXISTING PROPERTIES VACANCY NET ABSORPTION

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• $1.9 billion in annual revenue

• 2.4 billion square feet under management

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This report has been prepared by Colliers International for general information only. Information contained herein has been obtained from sources deemed reliable and no representation is made as to the accuracy thereof. Colliers International does not guarantee, warrant or represent that the information contained in this document is correct. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from.

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TENANT OUTLOOK REPORT | SUMMER 2012 | OFFICE | SAN DIEGO COUNTY

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29.8

24.8

25.1

26.4

12.6

25.4

18.5

29.1

26.5

23.8

18.7

20.7

15.5

28.4

21.6

29.8

26.9

25.3

28.0

20.4

21.5

19.1

23.7

23.8

27.0

27.3

25.1

0

6

12

18

24

30

36

Downtown MissionValley

KearnyMesa

UTC SorrentoMesa

CarmelValley

RanchoBernardo

Carlsbad San DiegoCounty

Mon

ths

Class A Class B All Classes

OFFICE SPACE TIME-ON-THE-MARKET Average Months by Submarket and Class

Tenant Advisory Services

www.ColliersTAS.com

> Only represent tenants in their office lease and purchase negotiations

> Provide objective conflict-free advice with full service resources

> Increase profitability & mitigate risk

RON MILLER Senior Director Tenant Advisory Services 858.677.5363 LIC # 00874868

Ron Miller is a tenant advisory specialist. His expertise encompasses relocation / expansion / contraction strategies, lease renewal and restructuring, market analysis, and user purchase opportunities. With his extensive career experience in representing both tenants and landlords, Ron offers a unique perspective and valuable insight to his tenant clients.

TIME ON MARKET

Time-on-the-market for Class A office space is averaging 26.5 months countywide.

17.9%

11.8%

13.2%

20.5%

14.1%

14.9%

0% 5% 10% 15% 20% 25%

Downtown

Suburban

S.D. County

All Classes Class A

OFFICE VACANCY RATES Q2 2012

62.2%

24.8% 8.0%

3.3%

1.7% <= 2,000 SF [374]

2,001 - 5,000 SF [149]

5,001 - 10,000 SF [48]

10,001 - 20,000 SF [20]

>= 20,001 SF [10]

OFFICE LEASING ACTIVITY BY TENANT SIZE Percentage of Total Leases Completed in Q2 2012

$2.00$2.10$2.20$2.30$2.40$2.50$2.60$2.70$2.80$2.90$3.00$3.10$3.20$3.30

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Q411

Q112

Q212

$ /

SF /

Mon

th (F

S)

Class A All Classes

HISTORICAL RENTAL RATE TRENDS Class A & Overall Office Rates Quarterly Average Asking Rate Per SF Per Month (Full Service)

17.9%

11.8%

13.2%

20.5%

14.1%

14.9%

0% 5% 10% 15% 20% 25%

Downtown

Suburban

S.D. County

All Classes Class A

OFFICE VACANCY RATES Q2 2012

62.2%

24.8% 8.0%

3.3%

1.7% <= 2,000 SF [374]

2,001 - 5,000 SF [149]

5,001 - 10,000 SF [48]

10,001 - 20,000 SF [20]

>= 20,001 SF [10]

OFFICE LEASING ACTIVITY BY TENANT SIZE Percentage of Total Leases Completed in Q2 2012

$2.00$2.10$2.20$2.30$2.40$2.50$2.60$2.70$2.80$2.90$3.00$3.10$3.20$3.30

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Q411

Q112

Q212

$ /

SF /

Mon

th (F

S)

Class A All Classes

HISTORICAL RENTAL RATE TRENDS Class A & Overall Office Rates Quarterly Average Asking Rate Per SF Per Month (Full Service)

RENTAL RATES

For over 3 ½ years, the average asking rental rate in all office classes had been steadily decreasing and bottomed out at $2.10/SF/month “full service gross” at the end of 2011. However, for the last two quarters, the average rate for all classes increased slightly (+$0.01 to $2.11/SF). The Class A rate of $2.58/SF had remained flat for the previous three quarters, but made a notable increase (+$0.05 to $2.63/SF) in Q2.

LEASING ACTIVITY

A total of 601 leases were completed in Q2 totaling 1.9 million square feet. This equated to a 17% increase in lease transactions compared to the previous quarter and 15% increase in activity for transactions of 10,000 square feet or less. There was a 58% increase in leasing of spaces over 10,000 SF which will likely translate into increased absorption in the second half of 2012.

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