A JLL REVIEW OF 2015 COMMERCIAL REAL ESTATE IN SACRAMENTO’S URBAN CORE

VOLUME TWO WINTER 2016

T H E G R I D

Jones Lang LaSalle © 2016. Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

OFFICE SPECIALISTS

Greg Levi Managing Director

Jason Goff Managing Director

Alexis Garrett Senior Associate Agency Leasing

CAPITAL MARKETS SPECIALISTS

Rob Cole Senior Vice President

Alan Stevenson Vice President

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RESEARCH TEAM

John Sheaffer, III Senior Research Analyst

Amber Schiada Vice President, Director of Research

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MARKETING TEAM

Leo Canale Senior Marketing Associate

Kristina Sanderson Marketing Director, Northern California

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T H E G R I DA JLL SACRAMENTO PUBLICATION

About the Backcover Rendering of the Sacramento Station. Credit NC3D

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WINTER 2016

Page 4

Page 5

Interview with Greg Levi Review of 2015 and Beyond

The Arena EffectInvestor’s Perspective

Page 6

Page 8

Page 10

How’s the Downtown Market Performing? Updates from our JLL Sacramento office

Grid ProjectsA glance at the Sacramento Urban Pipeline

Downtown Area PerimetersExciting projects that add value to the core

contents

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natural brick. This has not yet been a major trend in Class A downtown Sacramento office buildings, although it has been in the Bay Area. Driving this trend is the desire by tenants to be in a more unique and edgy environment for employees. The idea is to create an environment that will attract and retain younger talent from the millennial generation.I anticipate national and professional firms located in Class A office buildings will continue to gravitate toward more traditional finished look with a bit of an edgy feel.

As competition for downtown office space escalates, how high do you expect Class A rents to rise in 2016 above their current $2.72 PSF mark?

We can expect Downtown Class A building to continue to tighten with a decrease in vacancy to under 8% and overall asking rates to reach an historical high of $3.00 on average. ■

Landlords are positioning themselves to push lease rates higher, while balancing and maintaining critical occupancy. Large tenants will need to plan well in advance of their lease expiration dates because they will have little or no choices for relocation. This means they will need to evaluate the market prior to their notification date for their renewal options.If lease rates and demand continue to increase, we will potentially start to see new construction, and this entire dynamic could change. For now, large tenants are actually at a disadvantage.

What about trends inside the buildings themselves? Is downtown Sacramento, like many other downtown markets on the West Coast — Portland, San Francisco, Seattle, L.A. — seeing greater desire for so-called ‘creative’ space?

Creative spaces are starting to creep into the Class A downtown office buildings in Sacramento. In the past, creative spaces, which consist of non traditional improvements such as exposed duct and rafter ceilings, polished concrete floors and exposed exterior walls, have been primarily developed along the R Street Corridor and in Midtown. This concept has done very well in aged buildings that have some of these older elements, like

How would you sum up the last 12 months in Sacramento’s downtown real estate sector?

The last twelve months has been a steady climb in occupancy downtown with a lot of underlying excitement. The Arena is the big story downtown. Sacramento’s downtown has always been just a place to work. Workers drive downtown at 8am and leave at 5pm. The tenancy has always been dominated by the state government on one side and law firms and advocacy related tenants on the other. In the past, it has been safe to say that no tenant would choose to locate in downtown Sacramento unless they had to. It was simply more expensive and less convenient than suburban locations. In 2015, this balance changed. Arena construction is in full swing and scheduled for completion in Fall 2016. Tenants are now choosing to relocate to downtown due to the perception that it will now be the true heart of the city.

How are downtown landlords approaching the current market? Is there a lot of competition to bring in big tenants and how are landlords differentiating their product?

GREG LEVI REVIEWS 2015 AND LOOKS BEYOND

F R O M O U R M A N A G I N G D I R E C T O R

Landlords are positioning themselves to push lease rates

higher while balancing and maintaining critical occupancy.

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The Golden 1 Center and Downtown Commons will be the new face and heart of Downtown Sacramento encompassing six blocks and up to 1.5 million square feet of new development.

By Rob Cole and Alan Stevenson, Capital Markets Group

Downtown Sacramento is enjoying a surge of investment and tenant activity due in large part to the development of the new Golden 1 Center, a 17,500-seat sports and entertainment venue that will predominantly feature the Sacramento Kings professional basketball team. While the new arena is under construction and set to open in October 2016, properties that are proximate to the site and around downtown are enjoying strong interest from developers, investors and users seeking to be part of the revitalization of the area. Key recent acquisitions in and around the new arena site include

THE ARENA EFFECT DRAWS INVESTORS TO DOWNTOWN

F R O M O U R M A N A G I N G D I R E C T O R

Recent JLL Transactions

501 J Street, a 195,500 square foot office building that Kaiser Permanente is currently converting to medical office; 630 K Street, an 85,000 square foot office-retail mixed use building

located at the east entrance to the arena that San Francisco-based

Swift is repositioning; and the Capital National Bank building at 700 J Street, a 60,000 square foot historic office building recently acquired by a partnership led by

Sacramento-based CS-360 to also be repositioned.

Outside of these acquisitions, the only significant office sale

downtown in 2015 was that of The Senator at 1121 L Street; this 151,000 square foot historic office building sold in July, also to Swift who outbid a number of other well-known regional and national investment groups. The Senator is widely considered as having one of the very best locations downtown, just north of the State of California Capitol building and, with appropriate capital investment, is poised to be repositioned into one of downtown Sacramento’s premier office buildings. JLL handled three of the four key downtown transactions.

The Senator Lobby

The Senator• 151,000 SF, value-add

multi-tenant office

• Prime location in Downtown Sacramento’s Capitol District

• Closed July 2015

Capital National Bank• 60,000 SF, value-add

mixed-use office

• Located in Downtown Sacramento’s new Arena District

• Closed October 2015

501 J Street• 195,501 SF

• Just north of Arena site

• Closed December 2014

• Medical Office Conversion

INVESTOR’S PERSPECTIVE

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The downtown office landscape has become increasingly competitive due to renewed interest in Sacramento’s urban core, and expansions from the area’s major demand drivers: the State of California and regional healthcare systems. Rising demand for downtown office space is borne out by the average asking rate, which has risen for 9 consecutive quarters and increased by 4.0 percent during 2015.

The recent in-migration has left large users seeking downtown space in a lurch with a single option over 50,000 square feet of contiguous space. The urban renaissance has also attracted an influx of professional services, particularly architecture and design firms seeking closer proximity to the action.

DOWNTOWN

BY THE NUMBERS

STATE OF THE STATE

As the State of California employment continues to expand—adding over 3,300 jobs to the region over the past 12 months—State-owned buildings are reaching capacity, forcing growing agencies to look beyond their traditional downtown sphere. The revised 2015-2016 budget indicates future expansion for additional agencies and JLL is tracking 17 State agency requirements totaling over 843,000 square feet, an increase of 75 percent over State requirements 12 months ago. Of these agencies, all but four are targeting either the central business district (CBD) or Highway 50 Corridor submarkets.

The Skyline market for Sacramento is defined as the Trophy market, which is further defined as a top-tier Class A product, larger than 100,000 square feet in a centralized core Sacramento CBD location. These Trophy assets tower above Sacramento’s metropolitan market and are considered the premier business address in our region. The key indicator for inclusion or exclusion is based on product type, location and rent levels.

The State remains in expansion mode

S E C T I O N O N E // D o w n t o w n O f f i c e U p d a t e

SACRAMENTO SKYLINE

Downtown office market tightening

1325 J Street Renaissance Tower 801 K Street

12th K Tower1201 K Street

Esquire Plaza1215 K Street

770 L Street Capitol Place915 L Street

925 L Street Park Tower980 9th Street

One Capitol Mall1 Capitol Mall

The Senator 1121 L Street

Meridian Plaza1415 L Street

Emerald Tower300 Capitol Mall

Wells Fargo Center400 Capitol Mall

Bank of the West Tower 500 Capitol Mall

New Legacy 555 LLC 555 Capitol Mall

U.S. Bank Tower621 Capitol Mall

RBA 348,407 338,876 223,893 248,016 169,078 163,425 165,919 450,153 201,707 159,917 227,644 383,238 589,408 433,500 376,432 366,821

Total vacant (s.f.) 35,102 63,569 0 20,486 0 3,813 7,016 123,176 44,015 38,708 6,280 37,745 76,939 83,718 62,993 43,752

Total vacant % 9.9% 18.8% 0% 8.0% 0% 2.3% 4.2% 27.3% 21.8% 24.0% 2.7% 9.8% 13.1% 19.0% 16.7% 11.9%

Direct asking rate ($FS) $2.65 $2.65 N/A $2.95 N/A $2.85 $2.95 - $3.15 $2.95 $2.25 $2.75 - $3.25 $3.00 - $3.30 $2.85 $3.00 $2.85 - $3.10 $2.50 $3.00

Year built/renovated 1989 1989 1989 1999 1984 1988 1973 1991 1992 1924/1982 2003 1984/1996 1992 2009 1970 2008

Visit www.jll.com/skyline

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Occupied floor Direct vacant floor

Similarly, market conditions among the premier Skyline micro-market considerably tightened in 2015, with over 112,000 square feet of positive net absorption— the largest yearly figure since 2009. Rental rates responded, shooting up by 8.4 percent over the past 12 months— more than doubling the CBD’s average annual growth rate. With no deliveries on the immediate horizon, rental rates will continue along their upward trajectory in 2016.

$2.84

$2.57

$2.30

$2.55

$2.80

Q3 2010 Q2 2011 Q1 2012 Q4 2012 Q3 2013 Q2 2014 Q1 2015 Q4 2015

Skyline CBD CBD (10-year average)

$ p.s.f. FSG

Skyline vs. CBD Average Asking Rent Skyline rents surge

1325 J Street Renaissance Tower 801 K Street

12th K Tower1201 K Street

Esquire Plaza1215 K Street

770 L Street Capitol Place915 L Street

925 L Street Park Tower980 9th Street

One Capitol Mall1 Capitol Mall

The Senator 1121 L Street

Meridian Plaza1415 L Street

Emerald Tower300 Capitol Mall

Wells Fargo Center400 Capitol Mall

Bank of the West Tower 500 Capitol Mall

New Legacy 555 LLC 555 Capitol Mall

U.S. Bank Tower621 Capitol Mall

RBA 348,407 338,876 223,893 248,016 169,078 163,425 165,919 450,153 201,707 159,917 227,644 383,238 589,408 433,500 376,432 366,821

Total vacant (s.f.) 35,102 63,569 0 20,486 0 3,813 7,016 123,176 44,015 38,708 6,280 37,745 76,939 83,718 62,993 43,752

Total vacant % 9.9% 18.8% 0% 8.0% 0% 2.3% 4.2% 27.3% 21.8% 24.0% 2.7% 9.8% 13.1% 19.0% 16.7% 11.9%

Direct asking rate ($FS) $2.65 $2.65 N/A $2.95 N/A $2.85 $2.95 - $3.15 $2.95 $2.25 $2.75 - $3.25 $3.00 - $3.30 $2.85 $3.00 $2.85 - $3.10 $2.50 $3.00

Year built/renovated 1989 1989 1989 1999 1984 1988 1973 1991 1992 1924/1982 2003 1984/1996 1992 2009 1970 2008

DOWNTOWN SACRAMENTO OFFICE UPDATE / Q4

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JASON GOFF | GREG LEVI

±372,000 SF

916.447.6300

NOW PRE-LEASING

STORY HIGH RISEOFFICE BUILDING26

GOLDEN 1 CENTER

WHOLE FOODS

VANIR TOWER

EVIVA MIDTOWN SACRAMENTO COMMONSICE BLOCKS

700K BLOCK

2015 2020

SACRAMENTO KEY URBAN PROJECT PIPELINE

GOLDEN 1 CENTERSTATE OF THE ART ENTERTAINMENT AND SPORTS COMPLEX

A TIMELINE OF ESTABLISHED AND ANTICIPATED CONSTRUCTION START DATES

700 K ST. BLOCK 137 RESIDENTIAL UNITS, 15 RETAIL SPACES

630 K ST. GROUND FLOOR RETAIL CONVERSION AT GATEWAY OF GOLDEN 1 CENTER

VANIR TOWER 26 STORY OFFICE TOWER

WHOLE FOODS 141 RESIDENTIAL UNITS AND 41,000 S.F. COMMERCIAL

RAILYARDS1.0 M S.F. RETAIL, 2.3 M S.F. OFFICEVARIOUS RESIDENTIAL TYPES AND MEDICAL CAMPUS

EVIVA MIDTOWN118 RESIDENTIAL UNITS, 5,000 S.F. OF RETAIL

SUPERIOR COURTS 6 STORY COURT TOWER IN RAILYARDS

DOWNTOWN COMMONS250 ROOM KIMPTON HOTEL, 50 CONDOS, 630,000 S.F. RETAIL AND 250,000 S.F. OFFICE

ICE BLOCKS* 145 RESIDENTIAL UNITS, 55,000 S.F. RETAIL AND 46,000 S.F. OFFICE

2016

ProposedPermittedUnder ConstructionEst. Start Date* Currently being re-evaluated due to fire

S E C T I O N T W O // G r i d P r o j e c t s

630 K ST

KIMPTON HOTEL

RAILYARDS

SUPERIOR COURT

SACRAMENTO COMMONS TWO TOWERS ENTITLED FOR 1,400 RESIDENTIAL UNITS AND 74,000 S.F. OF COMMERCIAL

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VANIR TOWER 26 STORY OFFICE TOWER

KEY PROJECTSDOWNTOWN COMMONS Downtown Commons (DOCO), the Kings’ and JMA Ventures’ development adjacent to the Golden 1 Center, is slated for completion in 2017. The 16-story mixed-use tower will house a Kimpton Hotel in addition to 50 residential units, 630,000 square feet of retail space and 250,000 square feet of office space. The project will further advance downtown Sacramento’s emergence as an “18-hour” urban core.

Pappas Investments received unanimous approval from the Sacramento City Council to develop a Whole Foods anchored, mixed-use project. Construction is expected to begin in early 2016, in the heart of midtown at 21st and L Streets. The project is entitled for approximately 41,000 square feet of retail space, 141 residential units and three levels of parking, which will both contribute to and support the urban core’s growing residential base.

Two high-rise residential buildings, two mid-rise residential buildings and a mixed-use building will constitute the Sacramento Commons redevelopment project, located between N and P Streets, and 5th and 7th Streets. The development also received approval for up to 50,000 square feet of retail and a hotel, which would include up to 300 rooms. Sacramento Commons will become an integral piece in the City’s housing initiative, by adding up to 1,400 new residential units to the urban core.

Whole Foods

UPCOMING MIXED-USE DEVELOPMENTS

THE GRID

Sacramento Commons

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ID S E C T I O N T H R E E // D o w n t o w n P e r i m e t e r s

Over the past 30 years we have generally defined the downtown area as the CBD bound by the Sacramento River to the west, 16th street to the East, the Railyard to the North and W/X Freeway to the south. This changed as the Zigaurat Building and the CalSTRS building were constructed in West Sacramento and further evolved as the Bridge District has emerged into an exciting and popular project.

Sacramento’s urban core, as traditionally conceived, continues to expand as major infill projects on the periphery, such as The Mill on Broadway, take shape. Across the river, The Bridge District is on track to bring 9,700 residents, 16,000 jobs and 5 million square feet of commercial space to West Sacramento’s riverfront. The Railyards, a 240 acre infill site just north of the CBD, will consist of a major mixed-use hub for transportation, entertainment, retail, housing, office, parks and museums. At the confluence of the American and Sacramento Rivers, the River District is undergoing a transformation from a distribution and wholesale hub into an eclectic residential and entertainment district.

These perimeter area projects will expand the geography of downtown’s office market boundaries and will also include extensive housing and retail components, playing key roles in downtown’s continued revitalization.

BRIDGE DISTRICT

RIVER DISTRICT

RAILYARDS

PUSHING THE BOUNDARIES OF DOWNTOWN

S E C T I O N T H R E E // D o w n t o w n P e r i m e t e r s

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DOWNTOWN AREA PERIMETERS

THE MILL

RIVER DISTRICT

EMERGING 18-HOUR URBAN CORESacramento is in the midst of a transitional period, evolving from a Monday to Friday government town into an “18-hour city”. Sacramentans have increasingly shown a preference for urban living and the development community is responding. When Mayor Kevin Johnson launched a “Think Downtown” marketing campaign, calling for 10,000 new housing units to be developed over the next decade, many downtown stakeholders were skeptical. That initiative is now becoming a reality. Expect and look forward to the announcement of more diverse housing developments in 2016.

400 Capitol Mall, Suite 1560 Sacramento, California +1 916 447 6300

T H E G R I DA JLL SACRAMENTO PUBLICATION

Greg LeviManaging Director+1 916 491 4310greg.levi@am.jll.com CA LIC # 00973235

Rob ColeSenior Vice President+1 916 491 4314rob.cole@am.jll.com CA LIC # 01323882

Jason GoffManaging Director+1 916 447 6092jason.goff@am.jll.comCA LIC # 01205230

Alan StevensonVice President+1 916 491 4339alan.stevenson@am.jll.comCA LIC # 01890995