1. Cassidy Turley Northern California. www.ctbt.com Observations about the Sacramento Region’s Office Market Jim Gray, CCIM jgray@ctbt.com (916) 617-4255

2. WWW.CTBT.COM/Research Garrick Brown heads up our research  14 staff and 400 brokers  43 northern California regional reports  Office and Industrial  8 reports –from our retail division Terranomics  Abby Friedman maintains the Comp Exchange Network (916) 617-4266 Go check them out!

3. The Numbers Positive 2012 closed with the best showing in 7 years! Occupancy has increased by almost 1.5 million square feet Vacancy has declined from 17.6% to 16.2% A number of large deals Modest employment growth Q4 2011= 920,500 Q4 2012 = 931,200 10.9% 9.8%

4. The Numbers Negative Average asking rents lower $1.63 full service 2012 vs. $1.67 2011 2% lower than last year 18% lower than 2008

5. Employment Growth

6. 11 Largest Leases in 2012 11 Leases 20K to 295K Average rent of $1.53 PSF, FSG

7. 10 Largest Sales Top four were portfolios Healthnet - 9% cap rate, institutional buyer, long term, strong quality tenant Distress and REO a big part of market dynamics ($38 to $90 per square foot) Value add with hopes for a quick flip or mid-term cash flow

8. It’s More than “Just the Numbers” 1.Government 2.Complexity 3.Zombies 4.New Money 5.“Med-Ed” 6.Challenge of Creativity

9. Government Employment Sacramento 232,100 in Jan 2007 and 223,000 December 2012. Off nearly 4%.

10. Government Insights Sacramento region identified as second most at risk market in the event of the Fiscal Cliff State leases termination clause GSA seeking shorter terms Passage of Proposition 30 brings relief and a bottom

11. Complexity Dramatic increase Huge societal and market changes Examples Patience, perseverance and expertise

12. Zombies Office buildings 50% vacant or more for longer than 1,000 Days Nearly 250 buildings Nearly 6 million square feet

13. New Money Acquire a building at market in 2007 Paid $200/sf, 7.5% cap rate 65% LTV, 6.25% rate, 25 years Lose tenant in half the building Purchase Price $ 10,000,000 Down Payment35% $ 3,500,000 Balance65% $ 6,500,000 Rate6.25% Amortization300 Payment $ (42,879) Occupied 25,000 Average Rent $ 1.85 $ 46,250 Operating Expenses$0.60 $ (15,000) Net Income1.25 $ 31,250 Vacant25,000$ - Operating Expenses0.45 $ (11,250) Monthly Cash Flow 50% Vacant $ (22,879) Annual Loss $ (274,542)

14. What Do I Do? Broker brings a tenant 5 year lease at $1.50 NO TI’s AS-IS 6% commission for 5 years = $135,000 Net operating income = $645,000 Building loses $2 million in “value” ROE 3.73%, ROA 1.3% Loan comes due in 3 years Kick down the road? Monthly Cash Flow 50% Vacant $ (22,879) Rent 50% @ $ 1.50 $ 37,500 Additional Operating Expense $ 0.15 $ (3,750) Gross Rents $ 83,750 Operating Expenses $ 0.60 $ (30,000) Debt Service/Amort $ (42,879) Cash Flow $ 10,871 ROA 1.30% ROE 3.73% Net Operating Income $ 645,000Value Cap Rate7% $ 9,214,286 8% $ 8,062,500 9% $ 7,166,667

15. $30 in additional TI’s = $750,000 5 months of free rent $1.40 FSG Rent Rent reduction for current tenant to $1.50/sf and a $6/sf refurbishment allowance. =$150,000 Renewal commission at 5% = $105,000 New Money = $1,140,000 NOI = $510,000 @ 8% Cap Rate = $6,375,000 Adj. NOI with 15% Vacancy @ 8% Cap Rate = $5,418,750 Loan balance $6 to $6.5 Million More Zombies? But It Can Get Worse!

16. “ED-MED” Healthcare and educational real estate have been a huge part of the market Region blessed with large systems. –Sutter, Dignity, UCDMC, Kaiser, Adventist –Smaller: Marshall, Ride-out, North-Bay –Hill Physicians, Radiological Associates, etc. Real estate influence and trends Strong demand on campus of hospitals Big systems competition for capital –Pension liabilities, electronic health records, physician alignment

17. Obamacare/Medicare Greater coverage More access Increased reliance on public funding According to Congressional Budget Office, Medicare will cost a trillion dollars by 2020 Average wage earner pays in $109,000 but will receive $343,000 Healthcare delivery system will get bigger and bigger, more concentrated, complicated, and regulated!

18. Education and Health Care Employment

19. For Profit Colleges Losing Their Luster! California lawmakers this summer decreed that students at 154 schools—nearly all of them for-profit colleges—will no longer be eligible for the state's need-based Cal Grants, citing the schools' low graduation rates and students' heavy debt burdens.

20. Student Loan Debt Unsustainable!

21. Creative Space Not thisBut this Sample Sacramento OfficeGoogle’s Office Menlo Park

22. More Than Design Sense of place Mixed use Ubiquitous connectivity – (Bring Your Own Device) Dynamic and collaborative workplace Our industry and landlords need to compete for a changing workforce and changing space needs