First Quarter Tri-Cities Office

Leasing Activity Increases Over Last Quarters Vacancy Spike; Net Absorption Begins To Stabilize

MARKET OVERVIEW

Last quarters spike in negative net absorption presented firms who have been trying to expand their operations in the Tri-Cities office market an opportunity to do so. Kaiser Permanente, ATI Systems International and other firms are expanding their opertations and leasing activity increased to 585,600 SF for the quarter, more than double the level of leasing activity that occurred in the previous quarter.

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First Quarter 2008 Inland Empire Office

Vacancy Rate Increases, Asking Lease Rate Declines

MARKET OVERVIEW

Currently, the Inland Empire office market is an attractive market for tenants. Rising vacancy rates coupled with decreasing asking rental rates are a natural consequence of the massive building boom that has finally reached its height. This slow and predictable increase in the office supply has been met with a rapid and drastic drop off in demand as mortgage and real estate companies begin to come to terms with the bursting housing bubble.

Developers are responding to the changing market conditions. Projects that were “under-construction” last quarter – land grading started but concrete slabs not poured yet - have been downgraded to proposed and larger projects that have been started are being phased in their development to prevent a glut of new space hitting the market.

Average asking lease rates for Class A space, the newly developed office space, has decreased $0.05 over the previous quarter whereas asking lease rates for older Class B space has remained unchanged.

The spread between Class A and Class B space is narrowing, indicating that landlords in newly developed properties are getting aggressive and are eager to place tenants in their properties. Landlords in older Class B and obsolete Class C space are losing tenants to these newer properties. Tenants in these older buildings are starting to realize that they can afford to move into newer and more functional space, especially given the amount of concessions landlords are willing to negotiate with strong credit tenants.

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First Quarter 2008 San Gabriel Valley Office

Asking Lease Rates Increase Despite A Rise In The Vacancy Rate

MARKET OVERVIEW

Weighted average asking lease rates for the entire San Gabriel Valley office market increased by three percentage points over the previous quarter to end at $2.43 PSF per month, Full Service Gross (FSG). Last quarter asking lease rates actually declined; spurred on by rising vacancy rates in Class B space as landlords cut their rates to lease up this space.

This quarter, Class A vacancy rates are beginning to rise but landlords are viewing this as an opportunity to lease their prestigious space at higher rates. These landlords have remained firm on their high asking lease rates and are unlikely to drop them, preferring instead to offer generous tenant improvements and beneficial occupancy packages. As such, we can expect the average asking rental rate to increase into the next quarter as more Class A space becomes available, raising the average asking rate for the region.

The total vacancy rate for the San Gabriel Valley office market rose to 8.1% this quarter, up a full percentage point from a record low 7.1% the previous quarter. A higher portion of this vacant space is sublet space, which on average is 40 cents cheaper than direct vacant space. If sublet vacant space increases at a faster rate than the direct vacant space, this will put a significant damper on the asking lease rates for the region.

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