2012 Forecast Edition

Office Trends Report Fourth Quarter 2011

Boston, MA

rts& 2 2 1 1&

Vacancy Rate
24% 24% 20% 20% 16% 16% 12% 12% 8% 8% '02 '02 '04 '04
CBD

Volatility Looms Heading Into 2012

Insulated by an abundance of growing technology companies, health care firms and educational institutions, Greater Boston posted a solid year of economic expansion in 2011 after reaching a cyclical low in 2009. Of the nations 80 metropolitan areas with a
'08 '08 '10 '10 '12-F '12-F

'06 '06

population of more than 1 million residents, the Boston Metropolitan Statistical Area (MSA) has recovered 76 percent of jobs lost during the recession the seventh highest percentage and a stark contrast to the United States recovery rate of 28 percent. While the data confirms the local economy is resilient in outperforming most other parts of the United States, the region still has significant ground to make up to reach pre-recession conditions. A nagging national high unemployment rate remains in acute awareness to local employers clouding projections for momentous growth. The forecast for 2012 shows signs of potential as businesses and investors hunt for opportunistic ventures in the comparatively strong Boston economy, while at the same time remaining risk averse. Over the longer term, economists predict employment will grow an average of one percent a year in Massachusetts through 2017. In summary, Bostons formidable economic and demographic fundamentals bode well for the area with the commercial real estate market experiencing its positive effects.

Suburban

Combined

(in Thousands of SF) 6,000 6,000 3,000 3,000 0 0 -3,000 -3,000 -6,000 '02 '04 '06 -6,000

Completions vs. Absorption

'08

'10

'12-F

'02

'04

'06

'08

'10

'12-F

2011 REviEw
It is conventional understanding that commercial real estate activity is a lagging economic indicator by approximately six months, and the same held true for Greater Bostons office market in 2011. While not a great year by any stretch of the imagination, record occupancy levels driven by improved local economic indicators enabled Greater Bostons office market to modestly strengthen during the year.

- Chart 3

Absorbed

Completed

Asking Rental Rates

($/SF/Yr. Full Service)

(COnTinuEd On PagE 2) KEy TRansaCTiOns FOR 2011

$40

$35
$30 $25

*Acme Packet Company

leased 262,000 SF at 100 Crosby Drive, Bedford, MA from Divco West Real Estate Services

*Daymark Realty Advisors

sold 15 Kneeland Street & 260 Tremont Street Boston, MA to ProMed Acquisition, Inc. for $112 Million

*A.P. Levin Real Estate

sold 99 Chauncy Street Boston, MA to Synergy Investment & Development for $12.8 Million

$20
$15 '02 '04
Class A

'06
Class B

'08

'10

'12-F

* Transaction Represented by Grubb & Ellis Grubb & Ellis Boston 470 Atlantic Avenue, 11th Floor, Boston, MA 02210 www.grubb-ellis.com Prepared by: Tim Van Noord Senior Research Analyst 617.772.7275 tim.vannoord@grubb-ellis.com Matt Keys Database Coordinator 617.772.7276 matt.keys@grubb-ellis.com

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2012 Forecast Edition

Office Trends ReportFourth Quarter 2011

Boston, MA

OFFiCE MaRKET REviEw and FORECasT 2010 Vacancy Rate Class A Rental Rate Class B Rental Rate Net Absorption Space Completed 14.9% $36.33 $24.37 -293,000 105,000 2011 14.6% $34.22 $23.64 885,000 901,000 2012 Forecast 14.2% $35.15 $23.70 950,000 383,000

(COnTinuEd FROM PagE 1)

After posting over one million square feet of positive net absorption through the third quarter, U.S. fiscal budget concerns and uncertainty in Europe over the summer translated into sluggish local office demand in the fourth quarter as tenants gave back 146,000 net square feet. Nevertheless, aggregate vacancy recovered by 30 basis points during the year ending at 14.6 percent. The markets 885,000 square feet of positive net absorption was the first year of net occupancy gain since 2008. The growth was primarily driven by tenants absorbing one million square feet of Class A space in a flight to quality trend most evident in spot recovery areas such as the Back Bay, Cambridge and the Longwood Medical Area. Despite demand metrics strengthening during 2011, landlords were reticent to increase asking rental rates across any asset class in ongoing tenant attraction efforts. While Back Bay Class A average asking rents increased 7.4 percent to $55.30 per square foot during the year, overall Class A rents were flat, ending the fourth quarter at $34.22 per square foot as certain struggling submarkets, such as West 495, saw Class A rents fall. Class B rates experienced a modest decline, falling 1.8 percent in 2011 to $23.64 per square foot. With rents too low and replacement costs too high for landlords to justify speculative construction, certain tenants such as Biogen Idec, Vertex Pharmaceuticals and MathWorks elected to begin construction on build-to-suit projects in 2011. The 1.7 million square feet under construction is all build-to-suit and marks the most square feet under construction since 2009. Strong performances were felt in both the CBD and certain suburban markets. The CBD welcomed the 700,000-square-foot Atlantic Wharf tower and absorbed just over 208,000 Department of Social Services vacating a combined 185,000 square feet during the fourth quarter. The suburbs also saw positive absorption in 2011 as numerous large fourth quarter tenant move-ins contributed to the 678,000 square feet of new occupancy.
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net square feet in 2011, despite Fidelity Real Estate Services and the Massachusetts

(COnTinuEd On PagE 3)
2

2012 Forecast Edition

Office Trends ReportFourth Quarter 2011

Boston, MA

(COnTinuEd FROM PagE 2)

Dassault Systemes and EDC are two firms that occupied a significant amount of suburban space in the fourth quarter; each of them accounted for over 100,000 square feet of net absorption.

Optional - Investment

The stronger leasing market fundamentals helped the local investment sales market achieve tangible signs of improvement. According to Real Capital Analytics, Greater Boston was the sixth most active office investment sales market in the United States in 2011.

Chart 1 Office Property Sales Volume (in millions) Aided by a bullish first eight months and strong December, sales volume was $2.9 billion; Investment Optional Office Property Sales Volume Sales Volume 144 percent of 2010 volume. Cap rates fell to an average of 6.1 percent 90 basis points (in Millions) '02 1,640 lower than the 2010 average. Furthermore, office sales accounted for 70 percent of all $12,000 1,735 Chart 1 product that exchanged hands. '04 3,758(in millions) Office Property Sales Volume $8,000 4,493 2012 FORECasT'06 10,664 Sales Volume 11,418 '02 1,640 $4,000 Looking to 2012, although Boston weathered the storm better than most markets during $12,000 '08 1,458 1,735 the recent downturn, a softer dip may translate into a less vigorous recovery. The technol847 '04 3,758 $0 ogy, medical and education sectors4,493 will '10 1,981 continue to spur positive net absorption in 2012. $8,000 '02 '04 '06 '08 '10 '12-F 2,856 This heightened demand will push Back Bay, Cambridge and Waltham/128 to the forefront '06 10,664 Sales Real '12-F 4,100 Source:Volume Capital Analytics, Grubb & 11,418 of the current expansion cycle. Premium properties in these areas will experience rent $4,000 '08 1,458 increases and an ongoing decline in vacancy, tightening supply and forcing tenants to seek Source: Real Capital Analytics, Grubb & Ellis Chart 2 847 $0 alternative locations in the Seaport District, Inner-Suburban, Central 128 and Northwest Average Office Capitalization Rates '10 1,981 '02 '04 '06 '08 '10 '12-F 128 areas. However, older properties on the periphery of the market, specifically on Route 2,856 Your Market 495 and Route 3, are'12-F another 4,100 year due to location, flight to quality and funcin for difficult U.S. Source: Real Capital Analytics, Grub '02 landlords less willing to increase concessions as in 2011, rents 9.2% 9.2% tional obsolescence. With 11% 8.5% 8.6% willChart 2 and vacancy rates will remain well above 20 percent in these submarkets. stay flat '04 8.0% 7.9% Average Office Capitalization Rates 9% 7.4% 7.3% While Boston is home to many world class multi-national companies, the majority of '06 6.4% 6.9% Your Market U.S. Average Office Capitalization Rates growth in 2012 will be spurred on by start-ups and smaller users looking for 5,000 to 5.8% 6.4% '02 9.2% 9.2% 7% 20,000 square feet due to price considerations and7.1% class talent pool. Modern techa world 11% '08 6.7% 8.5% 8.6% 8.6% 8.3% nological advancements will make office space more efficient, further diminishing average '04 8.0% 7.9% 5% '10 and average lease size. While the expected increase in demand 7.0% 7.6% 9% 7.4% 7.3% '02 '04 '06 '08 '10 '12-F square foot per employee 6.1% 7.4% '06 to 20,000-square-foot range is not substantial enough to spur 6.4% 6.9% amongst users in the 5,000 '12-F 6.0% 7.2% Source: Real Capital Analytics, Grubb & 5.8% 6.4% 7% new speculative construction, it is the market demographic which will continue to fill in '08 6.7% 7.1% the gaps. This too should spur upward rent pressure and foster a more expeditious turn 8.6% 8.3% 5% around. '10 7.0% 7.6% '02 '04 '06 '08 '10 '12-F 6.1% 7.4% Boston U.S. As the gap between buyers capacity and sellers expectations narrows, and given the areas '12-F 6.0% 7.2% Source: Real Capital Analytics, Grub strengths and the increased prospects for growth, 2012 office investment sales volume will Source: Real Capital Analytics, Grubb & Ellis
investors look to diversify portfolios with stable core plays along with high yielding value moves. Class A and B properties with strong cash flows in the CBD, Cambridge and Page 1 West 128 will generate significant interest as the pool of investors expands. Local CMBS and distressed asset default rates will tick up as pretend and extend era deals run out. 3
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exceed 2011. The trophies and trash mantra will dominate the investment landscape as

Page 1

2012 Forecast Edition

Office Trends ReportFourth Quarter 2011

Boston, MA
By submarket Total sF CBD - Back Bay - Low Rise 6,452,914 CBD - Back Bay - Tower 6,875,872 CBD - Financial District - Low Rise 9,409,126 CBD - Financial District - Tower 22,777,563 CBD - Government Center 1,796,457 CBD - Midtown 3,026,809 CBD - North Station 3,052,881 CBD - Seaport District 7,790,798 CBD - South Station 3,110,076 CBD Total 64,292,496 Cambridge Cambridge - BioScience Total Cambridge Inner - North Inner - South Inner Suburbs MassPike - Route 128 North - Route 128 Northwest - Route 128 South - Route 128 Route 128 North - Route 495 South - Route 495 West - Route 495 Route 495 13,043,294 7,693,906 20,737,200 9,178,131 11,821,563 20,999,694 25,123,395 6,643,658 15,812,294 10,809,113 58,388,460 12,675,339 3,907,445 12,205,609 28,788,393 Vacant sF 458,762 401,464 1,183,859 3,521,739 263,847 452,870 239,379 1,154,017 343,411 8,019,348 1,099,294 1,091,367 2,190,951 1,042,891 1,419,530 2,462,421 4,105,112 1,003,974 2,952,483 1,256,112 9,317,681 2,618,364 904,155 2,703,068 6,225,587 18,005,689 20,196,640 28,215,988 Vacant % 7.1% 5.8% 12.6% 15.5% 14.7% 15.0% 7.8% 14.8% 11.0% 12.5% 8.4% 14.2% 10.6% 11.4% 12.0% 11.7% 16.3% 15.1% 18.7% 11.6% 16.0% 20.7% 23.1% 22.1% 21.6% 16.6% 15.7% 14.6% Available % 10.6% 5.3% 19.7% 19.5% 13.9% 17.8% 10.5% 18.3% 12.7% 16.0% 10.9% 20.9% 14.6% 15.3% 13.7% 14.4% 21.7% 19.8% 21.2% 19.8% 21.0% 32.0% 25.8% 35.5% 32.7% 22.8% 21.5% 19.7% NET ABsoRPTIoN Current Year To Date (24,423) (35,353) 22,228 223,876 (42,113) 157,509 73,069 179,056 (16,502) 7,939 (20,952) (210,521) 7,368 (42,950) (179,903) (110,819) 2,427 39,573 (178,801) 208,310 64,663 (16,071) 48,592 (71,545) (19,353) (90,898) 276,220 54,012 (190,020) (12,079) 128,133 (9,626) (56,113) 12,341 (53,398) (16,163) 32,429 (146,372) 176,965 20,456 197,421 (236,128) (95,133) (331,261) 284,016 286,024 (123,636) 290,750 737,154 167,692 (64,570) (28,910) 74,212 480,105 677,526 885,836 Under Construction sF 1,000,000 1,000,000 305,000 305,000 210,860 171,716 382,576 382,576 687,576 1,687,576 AsKING RENT Class A Class B $37.76 $36.72 $59.30 $45.41 $31.96 $47.13 $33.00 $40.00 $30.53 $35.00 $26.82 $35.00 $27.40 $50.17 $27.31 $32.50 $31.08 $46.89 $30.38 $42.44 $61.79 $50.02 $24.33 $27.28 $26.05 $29.81 $21.38 $26.87 $23.17 $27.24 $21.94 $21.85 $20.24 $21.14 $25.04 $28.57 $34.22 $37.98 $42.17 $40.46 $26.52 $20.93 $24.58 $22.72 $17.92 $18.99 $18.95 $20.05 $18.51 $18.29 $18.11 $18.32 $19.68 $20.96 $23.64

All Suburbs (excl. Cambridge) 108,176,547 Suburban Total 128,913,474 Totals 193,206,243

By Class Class A Class B Class C Totals

123,708,762 58,173,226 11,324,255 193,206,243

18,019,136 8,657,001 1,539,851 28,215,988

14.6% 14.9% 13.6% 14.6%

19.4% 20.8% 16.5% 19.7%

278,722 (132,953) (292,141) (146,372)

1,036,041 157,293 (307,498) 885,836

1,687,576 1,687,576

AVAILABLE FoR sUBLEAsE CBD suburban 636,086 2,770,477 290,796 597,605 23,522 118,000 950,404 3,486,082

OFFiCE TERMs and dEFiniTiOns

2012 Grubb & Ellis Company

Total SF: Office inventory includes all multi-tenant and single tenant buildings at least 20,000 square feet. Owner-occupied, government and medical buildings are not included. Office Building Classifications: Grubb & Ellis adheres to the BOMA guidelines. Class A properties are the most prestigious buildings competing for premier office users with rents above average for the area. Class B properties compete for a wide range of users with rents in the average range for the area. Class C buildings compete for tenants requiring functional space at rents below the area average.

Vacancy and Availability: The vacancy rate is the amount of physically vacant space divided by the inventory and includes direct and sublease vacant. The availability rate is the amount of space available for lease divided by the inventory. Net Absorption: The net change in physically occupied space over a period of time. Asking Rent: The dollar amount asked by landlords for available space expressed in dollars per square foot per year in most parts of the country and dollars per square foot per month in areas of California and selected other markets. Office rents are reported full service where

all costs of operation are paid for by the landlord up to a base year or expense stop. The asking rent for each building in the market is weighted by the amount of available space in the building. * Grubb & Ellis statistics are audited annually and may result in revisions to previously reported quarterly and final year-end figures. Reproduction in whole or part is permitted only with the written consent of Grubb & Ellis Company. Some of the data in this report has been gathered from third party sources and has not been independently verified by Grubb & Ellis. Grubb & Ellis makes no warranties or representations as to the completeness or accuracy thereof.