TRANSPORTATION.

San Francisco Bay Area | 2016

jll.com/transit

What you need to know.

FOR OCCUPIERSHUMAN CAPITAL

WHY DOES TRANSPORTATION MATTER?

AMENITIES

1See JLL’s 3-30-300 Calculator: Quantifying real estate’s impact on your human capital.2

Locating near transit has a significant positive impact on your company’s human capital. Removing driving out of the live-work equation more than offsets the additional real estate costs1.

The most expensive transit-oriented office locations are always complemented by a sizeable array of walkable and diverse amenities. Transit-oriented offices within “amenities deserts” are usually priced on par with “drive-to-rail” locations. Choose your location wisely.

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FOR INVESTORSMIGRATION FORESIGHT

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Tenant migration along the rail spreads outwards most notably from San Francisco and Palo Alto. Submarkets adjacent to these markets have recorded the most demand in the current cycle.

More transit is coming, plan asset acquisition and development accordingly. Current governmental efforts are focused on improving rail transit in the Bay Area. Immediate impacts on speed, frequency, and noise are expected in the near future and will present new locations for prime investment.

FOR OCCUPIERS

There are anecdotal horror stories about long commutes abound these days; however, the effects on human capital are real and have reached epidemic levels. With no sign of improvement in the foreseeable future, many commuters are ready to give up on driving altogether (if only all of us could be so lucky). As illustrated below, N. San Jose 101 corridor has become a hotspot for tenants and a “gauntlet” for commuters.

Removing driving out of the live-work equation leads to happy employees.

13.1%389,000

De La Cruz/Trimble

13.0%348,000

87 @ Guadalupe Pky10.0%286,000

N. First Street

8.9%332,000

101/880 Interchange

6.9%279,000

N. Fourth Street

% increase since 2010Average weekday traffic

(# of cars, both directions)

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HUMAN CAPITAL

Not coincidentally, Caltrain and BART ridership has steadily increased every year since 2010. The strong correlation between these two suggests both employees and employers are actively seeking alternatives to commuting by car (e.g. Google, Facebook buses).

Bay Area talent is widely regarded as some of the most productive (and expensive) human capital in the world. Keeping this in mind, the majority of Bay Area employers are inclined to protect their human capital by securing the best working conditions and locations.

Securing a location where driving is optional has struck a chord with most firms as a way to protect their human capital.

165,000,000

115,000,000

65,000,0002000 2002 2004 2006 2008 2010 2012 2014 2016

65,000,000

15,000,000

BART Ridership

Caltrain & BART Annual Ridership

Caltrain Ridership

40,000,000

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110% growth since 2000

41% growth since 2000

Not all “walk-to-rail” offices boast higher rents than “drive-to-rail” areas. “Walk-to-rail” assets near some train stations such as Daly City (BART), South San Francisco (Caltrain), College Park (Caltrain), and most VTA light-rail stations are achieving office rents on par with “drive-to-rail” locations. One common denominator for these stations: “amenities deserts.” Walkable, numerous, and diverse amenities are the complement found in every single hot transit-oriented micro-market. Downtown San Mateo and Downtown Redwood City are prime examples of hot micro-markets that possess the ideal combination of walkability and entertainment to support the vibrant environments that tenants seek along the rail. These micro-markets have experienced single-digit

Walkable locations are not created equal.

vacancy rates and strong rent growth for the past 22 quarters, insulating them from the current softening in overall Peninsula market conditions.

On the other hand, some train stations have a strong amenities base, but a non-existent office inventory. These locations could present ripe investment opportunities for new development, and tenants should certainly be interested in these locations because they offer future opportunities for growth. For instance, San Carlos boasts a wide diversity of restaurants and bars at walking distance from the San Carlos Caltrain station; however, the office inventory is virtually non-existent despite the presence of walkable industrial assets that could potentially be repurposed.

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AMENITIES

FOR OCCUPIERS

Across the San Francisco Bay Area, the average direct rent for office space within a 10-minute walk to a train station was 30 percent higher than the average direct rent for office space located beyond a 10-minute walk to a train station.

Across the San Francisco Bay Area, total vacancy was, on average, three percentage points lower for office buildings within a 10-minute walk to a train station.

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Average FSG Rent per month per square foot

Less than 10 minutes

More than 10 minutes

Average Direct Rent across Bay Area San Francisco, Peninsula, Silicon Valley, East Bay

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Average FSG Rent per month per square foot

Less than 10 minutes

More than 10 minutes

Total vacancy rate across Bay Area San Francisco, Peninsula, Silicon Valley, East Bay

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Total vacancy rate

more than 10 minute walk

less than 10 minute walk

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Total vacancy rate

more than 10 minute walk

less than 10 minute walk

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Tenants migrate away from hot walk-to-rail micro-markets for many reasons (e.g. expensive renewals, stiff competition for the best space); however, they usually do so along the rail.

San Francisco and Palo Alto have been the primary sources of migrating tenants in the Bay Area in the current cycle. A noted tendency among migrating tenants has been to stay at a short train-ride distance from where they originated. Demographics seem to be the clue as to why this is happening. The most highly coveted human capital is concentrated in and around San Francisco and Palo Alto, as indicated by educational attainment levels and millennial concentration. The fierce competition for human capital between quick-growth rival companies resonates loudly at the time of securing the next location.

Overflowing hot markets such as San Francisco and downtown Palo Alto have benefited adjacent, lower-profile submarkets over the past six years and the trickle down seems to finally be reaching Oakland and Downtown San Jose.

Follow the rails from San Francisco & Palo Alto. # Station

Count of establish-

ments

Average Monthly

Direct Rent PSF (FSG)2

Total Vacant SF (%)

1 Downtown Berkeley 18 $2.96 4.4%2 Lake Merritt 6 $3.83 1.9%3 19th Street/Oakland 88 $4.08 3.7%4 12th St/Oakland City 86 $3.91 3.3%5 Embarcadero 87 $6.17 8.6%6 Montgomery Street 152 $6.15 8.6%7 Powell Street 141 $5.84 8.9%8 Civic Center/UN Plaza 75 $4.50 4.4%9 Daly City 5 $4.00 29.2%10 Millbrae 9 $3.95 17.8%11 Fourth & King Street 29 $6.47 15.5%12 South San Francisco 11 $3.50 5.2%13 Burlingame 16 $4.46 1.6%14 San Mateo 32 $5.52 3.8%15 Hayward Park 6 $3.68 20.1%16 Redwood City 22 $6.78 3.0%17 Menlo Park 9 $5.26 2.9%18 Palo Alto 46 $9.80 0.9%19 California Avenue 9 $8.51 5.9%20 San Antonio Road 3 $5.28 22.3%21 Dwtn Mountain View 21 $9.31 8.9%22 Sunnyvale 17 $6.98 7.0%23 Santa Clara 2 $3.40 10.6%24 College Park 7 $2.15 8.9%25 Tasman Drive 2 $3.37 20.4%26 Old Ironsides Drive 4 $4.07 19.4%27 Metro/San Jose Int'l 8 $3.30 9.4%28 Santa Clara 106 $3.09 15.4%29 Convention Center 80 $3.46 14.2%30 Bascom Avenue 2 $2.35 2.6%31 Downtown Campbell 12 $3.93 6.0%32 Concord 5 $2.79 26.9%33 Walnut Creek 10 $3.54 10.6%34 San Leandro 5 $3.00 0.0%35 West Dublin/Pleasanton 2 $2.56 7.6%36 Fremont 2 $2.35 5.6%

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MIGRATION

FOR INVESTORS

2 Rents are as of Q2 2016

1

23 45

67

8

9

10

12

11

1314

15

16

1718

19

2021

22

2324

2526

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2829

3031

9

3435

36

33

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2 Rents are as of Q2 2016

Six years into of the greatest economic growth cycles in the Bay Area’s history, authorities appear to have started reacting with much-needed infrastructure improvements.

A recent announcement on the successful procurement of funds for the electrification of Caltrain, the ongoing construction of new BART stations, and the vision to connect San Francisco and Los Angeles with a high-speed rail system within the next decade are strong signs of governmental efforts to improve rail transit. These projects seek to increase speed, frequency, and reduce environmental impacts (e.g. noise, traffic, GHGs) which will definitely shape current and future real estate decisions.

We expect tenants’ preference for rail-transit-oriented office buildings to grow as existing rail systems are improved. Moreover, we expect unused rail systems to be reactivated and re-purposed for commuting as a result of private-public joined efforts.

The best is yet to come, in the form of a better rail system in the near future.

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# Station Status1 Santa Clara Future2 Downtown San Jose Future3 San Jose Diridon Future4 Alum Rock Future5 Berryessa Future6 Montague Future7 Calaveras Under Construction8 Warm Springs / South Fremont Under Construction

FORESIGHT

FOR INVESTORS

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EXISTING STATIONS

FUTURE STATIONS

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6

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