OUTLOOK DENVER METRO SNAPSHOT AT THIRD QUARTER 2013 OFFICE VACANCY RATES A MARKET REPORT FOR COMMERCIAL REAL ESTATE EXECUTIVES

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1 D E N V E R M E T R O OUTLOOK A MARKET REPORT FOR COMMERCIAL REAL ESTATE EXECUTIVES DENVER METRO SNAPSHOT AT THIRD QUARTER 2013 ECONOMY: EXPANSION CONTINUES 12-month payroll job growth through July 2013: 38,100. Unemployment rate: 6.6% in July 2013, down from 8.0% a year earlier. The metro unemployment rate ticked up 10 basis points from a quarter earlier as more job seekers returned to the labor force. U.S. unemployment stood at 7.4% in July Outlook: Steady growth expected through PAYROLL JOB GROWTH Large Metro Areas 12 Months Ending July 2013 Payroll Jobs in 000 s OFFICE MARKET: METHODICAL GROWTH Q net absorption: 450,000 SF. YTD: 901,000 SF. Overall vacancy rate: 12.1%, down from 12.5% a year ago. Asking rents: Up 3.1% year-to-date in 2013; increases likely to continue into Outlook: Modest expansion through end of 2013 followed by more robust absorption in OFFICE/FLEX MARKET: ABSORPTION ACCELERATES Q net absorption: Positive 229,000 SF. YTD: positive 545,000 SF. Overall vacancy rate: 10.6%, down from 11.6% at mid-year Overall vacancy has declined 190 basis points from 12.5% a year ago. Asking rents: Up 0.8% year-to-date and up 2.6% since the 3rd quarter of Outlook: Improvement likely to level off in the 4th quarter of 2013, but growth looks durable through as demand continues to outpace new supply. 0 NY DFW Hou LA Basin Atl Chi Min Bos SF Bay Phx Was Den Source: Bureau of Labor Statistics, Delta Associates; September OFFICE VACANCY RATES Large Metro Areas 3 rd Quarter % OFFICE MARKET POSITION INDEX 3 rd Quarter 2013 Expansion Phase DENVER Atlanta Chicago Los Angeles New York Orange County Phoenix South Florida Washington Correction/Contraction Phase Overall Vacancy Rate 20% 15% 10% 5% 9.9% National Vacancy Rate: 13.3% 10.3% 10.7% 10.9% 11.2% 12.1% 12.7% 13.4% 13.5% 13.7% 15.5% 15.8% 19.4% 2 Dallas/Ft. Worth San Francisco Baltimore Boston Houston 0% Bos SF Bay Hou NY OC Den LA Was S Fla Chi Atl DFW Phx Source: CoStar, Delta Associates; September Source: Delta Associates; September DENVER METRO OUTLOOK THIRD QUARTER

2 PAYROLL JOB CHANGE IN PERCENTAGE TERMS Large Metro Areas 12 Months Ending July 2013 Percent Change in Payroll Jobs 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% DFW Minn Hou Aus Phx Atl Sea Den Bos NY Was Chi Source: Bureau of Labor Statistics, Delta Associates; September JOB GROWTH Denver Boulder Metro Area 1985 July 2013 Payroll Jobs in Thousands Year Average = 17, % '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13* Note: Figures reported in this chart are annual average job growth. Source: Bureau of Labor Statistics, Delta Associates; September UNEMPLOYMENT RATE Large Metro Areas July 2012 vs. July 2013 Unemployment Rate 12% 10% 8% 6% 4% 2% 0% Basis Point Change Was Bos DFW Hou Den SF Bay Phx NY S. Fla Atl LA Basin 10 July 2012 July Source: Bureau of Labor Statistics, Delta Associates; September *12 months ending in July Chi +20 National Average 8.2% 7.4% THE DENVER METRO ECONOMY ECONOMIC GROWTH CONTINUES Economic growth continues in metro Denver, with a gain of 38,100 payroll jobs for the 12 months ending in July Metro Denver s 2.7% job growth rate continues to rapidly outpace the national expansion, which stood at 1.7% over the same period. The Mining/ Logging/Construction, Professional/Business Services, Tourism/ Hospitality, and Education/Health Care sectors led employment growth during the period. The region s unemployment rate declined 140 basis points to 6.6% in July 2013, from 8.0% one year earlier. Of note, the metro area s unemployment rate rose 10 basis points since April due to expansion of the labor force. The national unemployment rate was 7.4% at July 2013; it edged down to 7.3% in August The Goss Institute reported that the Colorado Business Conditions Index stood at 54.8 in July The index measures changes in new orders, inventories, production/sales, and employment components. The index ranges from 0 to 100; a reading greater than 50 indicates expectations of expansion. While the July figure is a modest decline from the 58.7 reported in June, the index remains well above neutral. According to the Institute, recent metro-wide economic growth was bolstered by upturns in business activity linked to construction and vehicle manufacturing. Denver (No. 6) and neighboring Boulder (No. 26) ranked within the top 50 U.S. cities for business and careers according to Forbes magazine s annual rankings. Out of 200 metro areas surveyed, the Denver metro area was commended for its natural location as a distribution hub for the American West, and for supporting growth industries such as technology, telecommunications, and energy. The Denver metro area continues to be an attractive destination for highly-skilled workers. According to a Bureau of Labor Statistics report released in July 2013, Denver County saw average weekly wages rise 4.6% from 2011 to month job growth through July 2013 in key industries: Professional/Business Services: 14,100 Tourism/Hospitality: 6,500 Education/Health: 5,100 Mining/Construction: 5,900 Trade/Transportation/Utilities: 3,600 Financial Services: 2,100 Information/Technology: 1,500 DENVER METRO OUTLOOK THIRD QUARTER

3 CORE INDUSTRIES Denver-Boulder CSA 2012 CORE INDUSTRIES $ (BIL) % GRP Financial, Prof., & Business Services State & Federal Government Construction Educational & Health Services Tech/Telecom Services Manufacturing Hospitality/Tourism Transportation & Warehousing Total Core Industries Other Total GRP $34 $20 $15 $12 $9 $9 $7 $5 $112 $73 $185 18% 11% 8% 7% 5% 5% 4% 3% 61% 39% 100% Note: Subcomponents of core industries were redefined in June Source: BEA, BLS, GMU Center for Regional Analysis, Delta Associates; September GRP = Gross Regional Product The Manufacturing sector remains on a path of slow and steady improvement. The sector lost 200 jobs, or 0.2%, during the 12 months ending in July 2013, but it has added 900 jobs since January Manufacturing job growth will get a boost from Cool Planet Energy Systems, a biofuel start-up currently based in California, when it relocates its headquarters to Greenwood Village and opens a manufacturing plant. The move could create as many as 393 new jobs over a three-year period. Additionally, Ardent Mills, a proposed joint venture led by ConAgra Foods, Cargill, and CHS that would create the largest flour-milling company in the nation, has picked Denver for its headquarters. The move could bring up to 250 high-paying jobs to the area. VENTURE CAPITAL INVESTED IN COLORADO FIRMS nd Quarter 2013 Venture Capital Invested in Millions $900 $800 $700 $600 $500 $400 $300 $200 $100 $ * *Through 3 rd quarter 2013, annualized. Source: PricewaterhouseCoopers, Delta Associates; September The Denver Purchasing Managers Index (PMI), a measure of metro Denver s manufacturing economy, stood at 54.5 in June 2013, a slight increase from 54.2 in April There was no overall PMI number in July due to insufficient responses. Increasing new orders, lead times, prices, and employment contributed to the rise in June. A reading of 50 is neutral; readings above or below 50 indicate expanding or contracting manufacturing activity, respectively. In contrast, the Institute for Supply Management s national PMI index stood at 55.4 in July, up 4.5 percentage points over the June 2013 reading of July s ISM number was the highest of any month this year. According to the Institute for Supply Management, a national PMI in excess of 42.2 over a significant period of time generally indicates an expansion of the overall economy. DENVER METRO OUTLOOK THIRD QUARTER

4 Financial Services sector employment in metro Denver increased by 2,100 jobs 2.1% growth while the Professional and Business Services sector gained 14,100 jobs (a 5.5% increase) during the 12 months ending in July Through the end of July 2013, the Bloomberg Colorado Index (BCOX) rose 14.7%, which only slightly lagged the S&P 500. The BCOX is a price-weighted index designed to measure the performance of the Colorado economy. According to the latest PricewaterhouseCoopers MoneyTree report, Colorado firms raised $379 million annualized through the balance of 2013, compared to $561 million in all of IT services, biotechnology, and software were the largest investment categories. Broomfield-based Accera, a biotech firm developing central-nervous-system treatments, received $35 million in funding. Datalogix, a software firm that uses consumer data to boost advertising effectiveness, received the second largest award at $25 million. The Mining/Construction sector gained 5,900 jobs, or 7.4%, in the 12 months ending in July 2013, which is the largest percentage increase among Denver s employment sectors. The health of the sector has been bolstered by renewed energy interests and expansion in Colorado. University of Colorado Boulder researchers found that the oil and gas energy industry added $29.6 billion to the Colorado economy in 2012 and supported more than 110,000 jobs. Colorado s 2013 oil production figures are already 18% higher through the first five months of 2013 than through the first five months of 2012, a year in which oil production broke 50-year records. PDC Energy of Denver expects to raise $243 million in an IPO of 4.5 million shares later this year, up from initial estimates of 3.75 million shares. DENVER METRO OUTLOOK THIRD QUARTER

5 MEDIAN SINGLE FAMILY HOME PRICE Denver/Boulder Metro Areas nd Quarter 2013 Median Single Family Home Price $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Denver Boulder Note: Denver and Boulder are considered separate metro areas by NAR. Source: National Association of Realtors, Delta Associates; September In the Information sector, a report by Built in Denver found that 122 Colorado startups were launched in 2012, or one roughly every three days. Employment in the industry grew at a 2.9% clip yearover-year ending July Rally Software of Boulder announced plans to add 89,000 SF to its facility and as many as 375 new staff members. We expect growth and investment in the tech industry to remain healthy in metro Denver for the foreseeable future. The Hospitality and Tourism sector added 6,500 jobs a 4.0% increase in the Denver metro area in the 12 months ending in July According to Smith Travel Research, hotels in Denver experienced an 11.4% increase in RevPAR (revenue per available room) in the 12 months ending in July Over the same period, occupancy was up 6.8% and average daily rates increased 4.2%. Meanwhile, in downtown Denver, plans for a 346-room hotel are underway. The hotel will operate under two brands as a Hyatt Place and Hyatt House. The sponsor, White Lodging Services Corporation, anticipates construction will begin in the fall of 2013, with completion likely by the 2nd quarter of Alliance Construction Solutions completed renovating the former Xcel Energy office building at 14th and Welton Street into Denver s first dual-brand hotel. Hampton Inn will occupy floors two through five, and Homewood Suites will operate floors six through twelve. JOB FORECAST Denver Boulder CSA , average annual job growth = 27, average annual job growth = 37,300 In Housing, the National Association of Realtors reports that the median sales price of an existing single-family home in the Denver metro area was up 9.9%, to $286,500, in the 2nd quarter of 2013 compared to the 2nd quarter of 2012, and up 12.4% compared to year-end The median sales price in the Boulder metro area was up 11.1%, to $431,200, in the 2nd quarter of 2013 compared to the 2nd quarter of 2012, and up 12.2% compared to year-end According to the Colorado Division of Housing, foreclosure sales and foreclosure filings are currently at historic lows. Foreclosure sales decreased 25.4% from 965 to 720 over the 12 months ending in May 2013, while foreclosure filings decreased 50.5% from 2,249 to 1,113 over the same period. Annual Payroll Job Growth 20, ,000 40,000 60,000 80, Source: Bureau of Labor Statistics, Delta Associates; September THE DENVER METRO ECONOMIC OUTLOOK The Denver metro area economy will likely experience solid growth over the next several years. Thus far in 2013, the Denver metro economy has been resilient compared with the national economy, and we expect that the strength of the Professional/ Business Services and Energy industries will be the main driver of growth in the region. However, we expect the rate of employment growth to decelerate modestly in 2014, as the effects of spending DENVER METRO OUTLOOK THIRD QUARTER

6 OFFICE ABSORPTION AND EMPLOYMENT Denver Metro Area rd Quarter 2013 Net Absorption in Millions of SF Job Growth Net Absorption '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12'13* 80,000 60,000 40,000 20, ,000 40,000 60,000 80,000 *Employment growth for 12 months ending July 2013; Source: Bureau of Labor Statistics, Delta Associates; September net absorption annualized through 3 rd quarter Annual Job Growth reductions by the Federal government start to filter through the private sector and state government operations. In addition, financial markets could face some headwinds in the upcoming months, as the Federal Reserve is expected to taper its assetbuying programs. Volatility in the bond market may derail some of the momentum in the national economy if credit becomes more difficult to obtain, but the Denver metro economy is well positioned to outperform the national economy due to its strong mix of core industries. For the period, we project average annual employment growth in the Denver metro area of approximately 2.6%, or 37,300 new payroll jobs per year. This would exceed the peak performance of the last cycle, when employment growth averaged 27,400 jobs during the period. THE DENVER METRO OFFICE MARKET OFFICE NET ABSORPTION AND DIRECT VACANCY RATE TRENDS Denver Metro Area rd Quarter 2013 STEADY GROWTH IN Q3 Net Absorption in 000s of SF 7,000 6,000 5,000 4,000 3,000 2,000 1, ,000 2,000 3,000 16% 14% 12% 10% 8% 6% 4% 2% 0% YTD '13 Direct Vacancy Rate The metro Denver office market experienced growth in the 3rd quarter of 2013, as improvement in the local economy translated to stronger office market fundamentals. Growth in the Professional/ Business Services, Financial Services, and Energy sectors has resulted in increased demand for office space and a gradual decline in vacancy over the past year. With demand increasing, the window of greatest opportunity for tenants to strike the best long-term deals is closing. Net Absorption Vacancy Rate Sources: Vacancy Delta Associates analysis of CoStar data; Net Absorption Delta Associates; September NET ABSORPTION: ACCELERATING Net absorption for all classes of office space totaled 450,000 SF in metro Denver in the 3rd quarter of This compares to 273,000 SF in the 2nd quarter of 2013 and 68,000 SF for the same period a year ago. Year-to-date net absorption totals 901,000 SF. The delivery of the fully-leased 125,000 SF Trimble headquarters building in the Northwest submarket boosted net absorption during the 3rd quarter of Notable leases in the 3rd quarter include Rally Software renewing 65,500 SF at 3333 Walnut Street in the Boulder submarket and Gallagher Bassett Services 33,700 SF renewal at Fiddler s Green Center I in Greenwood Village. Charter Communications Operating, LLC also leased 35,700 SF of space at Fiddler s Green Center I in Greenwood Village. Hall & Evans relocated to th Street in the CBD, leasing 50,900 SF. Lately, the CBD submarket has seen negative net absorption, losing its edge to LoDo as tenants have opted for Class A space in proximity to the Union Station redevelopment. DENVER METRO OUTLOOK THIRD QUARTER

7 OFFICE VACANCY RATE Denver Metro Area rd Quarter % 16% 12% 8% 4% 0% Vacancy rates '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Q3 '13 Source: Delta Associates analysis of CoStar data; September Net absorption of Class A office space totaled 159,000 SF in the 3rd quarter of % of the metro total. The LoDo, Cherry Creek and Greenwood Village submarkets have seen the majority of the positive net absorption of Class A office space this year. Class B net absorption totaled 238,000 SF in the 3rd quarter of 2013, or 53% of the metro total. This included the 100% preleased Trimble headquarters building at Westmoor Drive, which delivered in August. NET ABSORPTION IN SELECTED SUBMARKETS (IN SF): Q YTD 2013 Cherry Creek/Glendale 115, ,000 LoDo 33, ,000 West 111,000 (41,000) CBD (74,000) (124,000) Sublease space in metro Denver increased by 113,000 SF in the 3rd quarter of There is 765,000 SF of sublease space on the market, representing only 0.5% of the standing inventory. VACANCY: EDGING DOWN Metro Denver s overall office vacancy rate (including sublet space) is 12.1% at 3rd quarter of 2013, down slightly from 12.2% at midyear 2013, and down from 12.5% one year ago. Metro Denver s direct office vacancy rate declined to 11.6% at 3rd quarter 2013, from 11.8% at mid-year 2013, and from 12.2% a year ago. Overall Vacancy Rates in Selected Submarkets: LoDo 5.3% Boulder 6.6% Cherry Creek/Glendale 11.4% CBD 13.4% West 14.2% DENVER METRO OUTLOOK THIRD QUARTER

8 AVERAGE CLASS A OFFICE RENTS Denver Metro Area rd Quarter 2013 OFFICE SPACE U/C AND RENOVATION Denver Metro Area 3rd Quarter 2013 $28 $25.57 $26.59 SUBMARKET SF % PRE-LEASED Asking Rent ($/SF, GFS) $24 $20 $16 $12 $16.33 $11.40 $24.22 $18.97 CBD LoDo Cherry Creek/Col. Blvd. North West 103, , , ,172 43, % 35% 10% 0% 100% $ Q3 '13 Balance of Southeast 742, % Source: Delta Associates analysis of CoStar data; September Total 2,057,406 56% Source: Delta Associates analysis of CoStar data; September 2013 COMPARATIVE OFFICE INVESTMENT SALES VOLUME Select Metro Areas rd Quarter 2013 Billions of Dollars $5.0 $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 Den Phx Hou DFW * *Sales volume annualized through 3 rd quarter Source: Real Capital Analytics, graphic by Delta Associates; September Delta Associates forecasts that the metro Denver overall office vacancy rate will likely decline steadily over the next two years, falling to approximately 11% as of the 3rd quarter of 2015, as demand for space outpaces the pipeline of new supply. CONSTRUCTION PIPELINE RISING There is 2.1 million SF of office space under construction or renovation at 3rd quarter 2013, compared to 1.1 million SF at midyear 2013 and 1.5 million SF a year ago. Space under construction in the 3rd quarter is only 56% pre-leased, compared to 83% at midyear 2013 and 61% a year ago. Space under construction equates to 1.4% of metro Denver s standing inventory. Speculative development in desirable areas, such as the CBD, remains minimal but is likely to increase in In the meantime, large development projects have been largely build-to-suit. Some notable projects broke ground during the 3rd quarter. These include Charles Schwab s 467,000 SF campus in Lone Tree and the new 299,900 SF Class A office property at 1601 Wewatta Street in the LoDo submarket, which is slated to deliver in May Metro Denver office deliveries in the 3rd quarter of 2013 totaled 207,000 SF, compared to 452,000 SF of new space that delivered in the 3rd quarter of last year. Three buildings were completed, including the 125,000 SF Trimble headquarters at Westmoor Drive in the Northwest submarket. This building was 100% leased upon delivery. The buildings at 7495 W. 29th Avenue in the West submarket and 1001 W. Mineral Avenue in the Southwest submarket also delivered 100% leased. DENVER METRO OUTLOOK THIRD QUARTER

9 AVERAGE OFFICE SALE PRICE Denver Metro Area rd Quarter 2013 Average Sale Price Per SF $250 $200 $150 $100 $50 $0 $109 $113 $115 $149 $148 $215 $165 $177 $164 $147 $188 $ YTD 2013 Source: Real Capital Analytics, graphic by Delta Associates; September OFFICE ASKING RENTS: RISING Asking rents rose 3.1% for all classes of office space in metro Denver through the 3rd quarter of Class A asking rents increased 3.1% through the 3rd quarter of 2013 to $26.59/SF; Class B asking rents were up 3.0% to $19.34/SF. As vacancy rates declined in recent years, space in high quality buildings dwindled, and landlords have been able to raise rents. Rent spreads between Class A and Class B properties have widened considerably. Renting Class A office property still remains an optimal tenant strategy in many submarkets, but with increasing demand and a limited spec pipeline, landlords are gaining the leverage needed to raise rents across most submarkets and property classes. CAP RATES FOR CORE OFFICE ASSETS Denver Metro Area nd Quarter % 10% 9% 8% 7% 6% Denver National 5% *Note: Methodology changed to quarterly average as of September Source: Real Capital Analytics, graphic by Delta Associates; September Rents will likely continue to rise during the remainder of Demand for Class B properties in suburban submarkets should expand in the near-term, as rents remain relatively inexpensive compared to Class A space. Stronger rent growth can be expected in as market conditions move further in favor of owners. INVESTMENT SALES: AHEAD OF LAST YEAR S PACE We recorded $518 million of investment sales (for which pricing data are available) in the 3rd quarter of Through the 3rd quarter, $1.5 billion of office properties were traded in metro Denver, compared to $1.4 billion through the same period in These totals include only closed deals. The average investment sale price in metro Denver was $196/SF in the 3rd quarter of 2013 and $184/SF year to date. This compares to $209/SF in the 2nd quarter of 2013 and $196/SF through the first three quarters of Overall, pricing has been fairly consistent year-over-year, but from a historical perspective, sales prices look particularly strong in recent years. Look for investors to support metro Denver s office market in the near term by spending capital on a mix of classes, with an emphasis on higher-quality and higheryielding assets. NOTABLE RECENT OFFICE TRANSACTIONS: Building/Submarket Westmoor Center Building 3 Northwest Sale Price/Buyer $86.0 million ($140/SF) KBS Strategic Opportunity REIT Lincoln Street $38.0 million ($138/SF) CBD Unico Properties LLC 161 W. Inverness Drive $71.0 million ($277/SF) Inverness Artis REIT Denver Service Center CBD Source: Real Capital Analytics; September $217.0 million ($331/SF) Franklin Street Properties DENVER METRO OUTLOOK THIRD QUARTER

10 Cap rates for core office assets in metro Denver averaged 6.3% during the 2nd quarter of 2013, declining from 6.8% one year earlier. Nationally, cap rates averaged 7.0% during the 2nd quarter of 2013, declining from 7.3% in the same period a year earlier. Cap rates have stayed in the 6.3% to 8.0% range in metro Denver for the past two years, as returns demanded by investors on core assets have fallen significantly since their high of 9.8% in the 2nd quarter of In August, the Denver Service Center at th Street in the CBD submarket was purchased at a 6.0% cap. In June, Westmoor Center Building 3 at the Westmoor Tech Park was bought at an estimated 7.0% cap. We expect cap rates to remain steady in the period ahead, buoying between 6.0% and 7.0% on average, as market conditions improve but long-term interest rates edge higher. THE DENVER METRO OFFICE MARKET OUTLOOK The Denver metro office market should experience moderate growth through the end of the year and into 2014, as the local economy continues to expand. The region s well-educated labor force and quality of life will continue to attract employers, generating demand for office space. For example, according to NPR, energy companies have closed deals on more than 850,000 SF of space in Denver in the past three years alone. The overall vacancy rate will likely decline gradually, dropping into the 11.0% range over the next two years. Of note, some new hires could be placed into tenants shadow space (unused space that is already under lease). Rents will likely rise during the balance of 2013 before gaining further traction in , as landlords continue to gain leverage. Thus, we expect concessions to decline over the period accordingly. With space under construction equal to just 1.4% of metro Denver s standing office inventory, we expect the number of construction starts to increase in the near term and for pre-leasing to continue. Local lending likely will loosen in response to improving office market conditions. Look for greater competition for the best investment deals as market fundamentals strengthen further. DENVER METRO OUTLOOK THIRD QUARTER

11 SUMMARY OF OFFICE MARKET INDICATORS ALL SPACE Denver Metro Area 2010 Through 3rd Quarter 2013 September 2013 September 2013 # Total SF Avail. Vacancy SF Under of Rentable SF Immediately Direct Vacancy Rate at End of: Rate Constr. or Net Absorption (SF) Submarket Bldgs. All Bldgs. 1/ All Bldgs. 2/ Q w/ Sublet Renovation Q YTD 2013 CBD ,666,222 3,083, % 10.9% 12.6% 12.5% 13.4% 103, , ,000 (410,000) (74,000) (124,000) LoDo 112 8,297, , % 10.2% 6.8% 5.2% 5.3% 663, , , ,000 33, ,000 Midtown 100 5,265, , % 7.5% 6.5% 6.6% 6.8% 0 (80,000) (2,000) 106,000 47,000 (3,000) Cherry Creek/Glendale 97 6,757, , % 15.2% 14.7% 11.3% 11.4% 208,272 54,000 (142,000) 34, , ,000 Colorado Blvd./I ,323, , % 16.8% 17.3% 17.5% 17.6% 0 (26,000) 57,000 (22,000) 22,000 (8,000) Cherry Crk/Col. Blvd. Total ,080,680 1,520, % 15.8% 15.7% 13.7% 13.8% 208,272 28,000 (85,000) 12, , ,000 Northwest ,159,384 1,763, % 11.0% 12.3% 13.4% 13.8% 0 239,000 74,000 (2,000) 43,000 (113,000) North 3/ 65 2,905, , % 16.9% 15.4% 13.8% 14.3% 297,172 (60,000) (48,000) 85,000 26,000 48,000 Aurora/Northeast ,822,232 1,461, % 13.3% 11.8% 13.5% 13.6% 0 506, , ,000 (11,000) (109,000) Southwest 157 7,526,462 1,174, % 12.8% 18.1% 15.6% 15.8% 0 47,000 0 (385,000) 49, ,000 West ,323,609 1,404, % 12.1% 12.7% 13.6% 14.2% 43,000 (148,000) 141, , ,000 (41,000) Denver Tech Center 89 11,070,467 1,173, % 13.2% 11.5% 10.6% 12.3% 0 331,000 67, ,000 33, ,000 Greenwood Village 4/ 87 8,468,852 1,117, % 17.4% 14.1% 13.2% 13.2% 0 (309,000) 73, ,000 17,000 77,000 Inverness 68 4,998, , % 9.1% 8.9% 7.0% 7.2% 0 200, ,000 22,000 5,000 95,000 Balance of Southeast ,211,915 2,039, % 14.5% 12.2% 11.2% 11.9% 742,000 52, ,000 18, ,000 Southeast Total ,749,432 4,680, % 12.0% 12.1% 10.9% 11.7% 742, , ,000 1,040,000 73, ,000 Boulder 208 8,080, , % 8.2% 6.7% 6.2% 6.6% 0 41,000 25, ,000 16,000 40,000 TOTAL Denver Metro 2, ,877,115 16,767, % 12.7% 12.0% 11.6% 12.1% 2,057,406 1,783,000 1,089,000 1,470, , ,000 Vacancy Rate With Sublet Space 13.8% 13.2% 12.3% 12.1% 1/ Includes buildings 15,000 SF RBA and greater; includes multi and single tenant buildings. Includes Class A, B, and C space. Does not include buildings under construction or buildings owned by the government. 2/ Does not include sublet space. 3/ Inventory and number of buildings amended per CoStar. 4/ 6020 Greenwood Plaza Boulevard was added to the inventory, as it was reclassified from flex to Class B office by CoStar. Note: Net absorption occurs when a lease is signed, not when space is physically occupied; pre leased space counts as net absorption when a building delivers. Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; September Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA Phone: DeltaAssociates.com DENVER METRO OUTLOOK THIRD QUARTER

12 SUMMARY OF OFFICE MARKET INDICATORS CLASS A SPACE Denver Metro Area 2010 Through 3rd Quarter 2013 September 2013 # Total SF Avail. Direct Vacancy SF Under of Rentable SF Immediately Vac. Rate Constr. or Net Absorption (SF) Submarket Bldgs. All Bldgs. 1/ All Bldgs. 2/ Rate w/ Sublet Renovation Q YTD 2013 CBD 30 16,813,868 2,084, % 13.7% 0 370,000 (50,000) (387,000) 0 (84,000) LoDo 14 3,681, , % 4.0% 663, , , ,000 37,000 91,000 Midtown 3 834,496 69, % 8.3% 0 12,000 (4,000) (17,000) 56,000 17,000 Cherry Creek/Glendale 14 2,294, , % 15.2% 89,000 (39,000) (102,000) (12,000) 39,000 98,000 Colorado Blvd./I ,541 94, % 10.5% 0 (30,000) 37,000 15,000 (9,000) (47,000) Cherry Crk/Co. Blvd Total 20 3,199, , % 13.9% 89,000 (69,000) (65,000) 3,000 30,000 51,000 Northwest 37 5,024, , % 16.2% 0 419,000 (174,000) 189,000 10,000 (80,000) North 2 146,626 16, % 18.7% 297,172 (15,000) 12,000 9, ,000 Aurora/Northeast 18 2,381, , % 10.6% 0 434, ,000 (131,000) 5,000 22,000 Southwest 5 1,245,624 67, % 6.7% 0 0 (5,000) (1,000) (27,000) (26,000) West 16 1,868, , % 8.2% 43,000 29, , ,000 (2,000) (36,000) Denver Tech Center 37 7,211, , % 8.5% 0 180,000 72, ,000 (7,000) (7,000) Greenwood Village 15 3,231, , % 8.9% 0 (136,000) 113,000 (30,000) 55, ,000 Inverness 16 2,016,693 96, % 4.9% 0 105,000 26,000 8,000 (6,000) 61,000 Balance of Southeast 62 7,991, , % 9.9% 275,000 8, ,000 8,000 40,000 Southeast Total ,450,633 1,634, % 8.8% 275, , , ,000 50, ,000 Boulder 9 980,881 19, % 2.0% 0 (67,000) 48,000 29, ,000 TOTAL Denver Metro ,628,447 5,641, % 10.8% 1,367,294 1,871, , , , ,000 1/ Class A buildings per CoStar that are greater than 50,000 SF. Does not include buildings under construction or owned by the government. 2/ Does not include sublet space. Note: Net absorption occurs when a lease is signed, not when space is physically occupied; pre leased space counts as net absorption when a building delivers. Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; September Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA Phone: DeltaAssociates.com DENVER METRO OUTLOOK THIRD QUARTER

13 SUMMARY OF OFFICE MARKET INDICATORS CLASS B SPACE Denver Metro Area 2010 Through 3rd Quarter 2013 September 2013 # Total SF Avail. Direct Vacancy SF Under of Rentable SF Immediately Vac. Rate Constr. or Net Absorption (SF) Submarket Bldgs. All Bldgs. 1/ All Bldgs. 2/ Rate w/ Sublet Renovation Q YTD 2013 CBD 63 6,853, , % 14.4% 103,840 13,000 (6,000) 7,000 (96,000) (48,000) LoDo 78 3,848, , % 7.1% 0 (64,000) 175,000 51,000 4,000 65,000 Midtown 53 2,993, , % 5.6% 0 40,000 3,000 98,000 9,000 12,000 Cherry Creek/Glendale 66 3,896, , % 9.8% 119, ,000 35,000 12,000 51, ,000 Colorado Blvd./I ,125, , % 20.9% 0 50,000 (42,000) (16,000) 28,000 22,000 Cherry Crk/Co. Blvd Total 111 7,022,454 1,028, % 14.7% 119, ,000 (7,000) (4,000) 79, ,000 Northwest 157 7,326, , % 12.5% 0 (151,000) 90,000 (65,000) 37,000 23,000 North 58 2,664, , % 13.5% 0 (31,000) (50,000) 113,000 27,000 59,000 Aurora/Northeast 117 7,068,548 1,067, % 15.3% 0 90,000 14, ,000 (7,000) (40,000) Southwest 122 5,395,392 1,008, % 18.7% 0 42,000 (70,000) (256,000) 67, ,000 West 140 7,438,400 1,190, % 16.6% 0 (151,000) 11,000 (131,000) 102,000 35,000 Denver Tech Center 45 3,487, , % 20.5% 0 80,000 (4,000) (34,000) 42,000 90,000 Greenwood Village 3/ 66 5,106, , % 16.3% 0 (158,000) (71,000) 265,000 (41,000) (117,000) Inverness 50 2,936, , % 8.9% 0 82,000 26,000 18,000 (26,000) 59,000 Balance of Southeast 184 8,996,275 1,259, % 14.4% 467,000 54, , ,000 27, ,000 Southeast Total ,526,735 2,920, % 15.1% 467,000 58, , ,000 2, ,000 Boulder 182 6,942, , % 7.3% 0 49,000 68,000 20,000 14,000 (14,000) TOTAL Denver Metro 1,426 78,082,117 10,363, % 13.7% 690,112 89, , , , ,000 1/ Class B per CoStar, and buildings under 50,000 SF even if CoStar classifies them as Class A. Does not include buildings under construction or owned by the government. 2/ Does not include sublet space. 3/ 6020 Greenwood Plaza Boulevard was added to the inventory, as it was reclassified from flex to Class B office by CoStar. Note: Net absorption occurs when a lease is signed, not when space is physically occupied; pre leased space counts as net absorption when a building delivers. Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; September Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA Phone: DeltaAssociates.com DENVER METRO OUTLOOK THIRD QUARTER

14 ASKING RENTAL RATE ANALYSIS OF CLASS A & B OFFICE BUILDINGS Denver Metro Area 2010 Through 3rd Quarter 2013 % Change rd Quarter /12 9/13 Submarket Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B CBD $ $ $ $ $ $ $ $ % 10.5% LoDo $ $ $ $ $ $ $ $ % 3.5% Midtown $ $ $ $ $ $ $ $ % 8.4% Cherry Creek/Glendale $ $ $ $ $ $ $ $ % 4.1% Colorado Blvd./I 25 $ $ $ $ $ $ $ $ % 4.8% Cherry Crk/Col. Blvd. Total $ $ $ $ $ $ $ $ % 4.3% Northwest $ $ $ $ $ $ $ $ % 0.6% North $ $ $ $ $ $ $ $ % 1.1% Aurora/Northeast $ $ $ $ $ $ $ $ % 4.3% Southwest $ $ $ $ $ $ $ $ % 0.1% West $ $ $ $ $ $ $ $ % 3.1% Denver Tech Center $ $ $ $ $ $ $ $ % 1.0% Greenwood Village $ $ $ $ $ $ $ $ % 0.7% Inverness $ $ $ $ $ $ $ $ % 3.0% Balance of Southeast $ $ $ $ $ $ $ $ % 1.9% Southeast Total $ $ $ $ $ $ $ $ % 1.6% Boulder $ $ $ $ $ $ $ $ % 0.1% Denver Metro Total: $ $ $ $ $ $ $ $ % 3.0% Note: Rents for properties using triple net terms have been grossed up to full service by applying operating expense data. Rents reflect full service equivalent. Note: Due to small submarket sample sizes in some cases, particularly in Class A, rent increases and decreases may be magnified relative to other submarkets. Source: Delta Associates' analysis of CoStar data; September Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: ; DeltaAssociates.com DENVER METRO OUTLOOK THIRD QUARTER

15 OFFICE/FLEX NET ABSORPTION AND DIRECT VACANCY RATE TRENDS Denver Metro Area rd Quarter 2013 THE DENVER METRO OFFICE/FLEX MARKET 1,000 20% ABSORPTION ACCELERATES IN Q Net Absorption in 000s of SF YTD '13 Net Absorption Vacancy Rate Sources: Vacancy Delta Associates analysis of CoStar data; Net Absorption Delta Associates; September NET ABSORPTION IN SELECTED SUBMARKETS (IN SF): 18% 16% 14% 12% 10% Q YTD 2013 Southeast 113, ,000 North 78,000 90,000 Aurora/NE 19,000 76,000 Southwest 14,000 71,000 Boulder 31,000 (24,000) OVERALL OFFICE/FLEX VACANCY RATES IN SELECTED SUBMARKETS: North 0.9% CBD 5.7% Boulder 7.7% Southeast 14.7% Aurora/Northeast 15.3% 8% 6% 4% 2% 0% Direct Vacancy Rate The metro Denver office/flex market experienced positive 229,000 SF of net absorption in the 3rd quarter of 2013, compared to negative 42,000 SF in the 2nd quarter of the year. Year-to-date net absorption totals 545,000 SF. In addition to two pre-leased deliveries, several leases of more than 15,000 SF in the Southeast submarket contributed to the positive absorption in the 3rd quarter. Available sublet space rose by 9,000 SF during the 3rd quarter, but it did not increase enough to change the overall sublease rate of 0.2%. OFFICE/FLEX VACANCY RATE: SHARP DECLINE IN Q3 Metro Denver s overall office/flex vacancy rate declined one percentage point to 10.6% in the 3rd quarter of 2013, from 11.6% at mid-year Overall vacancy in the office/flex market is down 190 basis points from 12.5% a year ago. The direct vacancy rate also fell sharply to 10.4% in the 3rd quarter of 2013, from 11.4% at mid-year Direct vacancy is also down 190 basis points from a year ago, when it was 12.3%. We expect the overall office/flex vacancy rate in metro Denver to decline to the low-10% range over the next 12 months, as economic growth improves and rising demand outpaces the limited pipeline of new supply. OFFICE/FLEX CONSTRUCTION: LIMITED There are no office/flex buildings under construction in the Denver metro area as of 3rd quarter We expect the office/flex pipeline to be more active during 2014, as market fundamentals strengthen, and developers seek to bring new supply to the market. There were two office/flex deliveries in metro Denver during the 3rd quarter of The properties delivered 86% pre-leased and totaled 54,000 SF. The 19,500 SF Cigarette Store Corporation headquarters delivered in the Boulder submarket fully leased Gilpin Way delivered in the North submarket. The 34,200 SF property delivered 78% pre-leased. Year-to-date, there have been four deliveries in the office/flex market in metro Denver, totaling 160,000 SF. DENVER METRO OUTLOOK THIRD QUARTER

16 NOTE ON DATA CONTAINED HEREIN Our inventory, vacancy and absorption figures include owner-occupied and single-tenant buildings. We include these buildings to capture the entire market so that we may derive correlations between job growth and occupancy of inventory. Our reported vacancy rate is based on immediate availability All rights reserved. You may neither copy nor disseminate this report. If quoted, proper attribution is required. NATIONAL ECONOMY AND METHODOLOGY Please visit Transwestern.net for: Our National Economic Outlook Explanation of our methodology OFFICE/FLEX RENTS: EDGING UP Office/flex asking rents have ticked upward by 0.8% since yearend Additionally, office/flex rents have risen 2.6% year over year. As the amount of available space declines, landlords are eager to increase rents. Office/flex rents will likely increase modestly during the balance of 2013 and into Sustainable rent traction will likely follow in the upcoming years, as office/ flex market conditions gradually tighten. INVESTMENT SALES: MORE DEALS IN Q3 There were two notable investment sales in the 3rd quarter of 2013, compared to none in the 2nd quarter. A total of 163,000 SF was purchased for $7.8 million ($48/SF). The 144,000 SF property at 8000 Southpark Way in the Southpark Business Center was the largest deal of the quarter, selling for $4.6 million ($32/SF) to the Etkin Johnson Group. This property is in the Southwest submarket. We expect greater investor interest in Denver s office/ flex assets once demand gains traction. September 2013 September 2013 # Total SF Avail. Vacancy SF Under of Rentable SF Immediately Direct Vacancy Rate at End of: Rate Constr. or Net Absorption (SF) Submarket Bldgs. All Bldgs. 1/ All Bldgs. 2/ Q w/ Sublet Renovation Q YTD 2013 CBD 6 187,159 7, % 4.6% 3.8% 5.7% 5.7% 1,000 9,000 1,000 (7,000) (4,000) Midtown 3 77, % 0.3% 0.3% 0.0% 0.0% Cherry Creek/Glendale % 0.0% 0.0% 0.0% 0.0% Colorado Blvd./I , % 0.0% 0.0% 0.0% 0.0% (2,000) Cherry Crk/Co. Blvd Total 1 39, % 0.0% 0.0% 0.0% 0.0% (2,000) Northwest 3/ 79 2,352, , % 12.8% 14.7% 11.2% 11.3% (8,000) 89,000 (51,000) 2, ,000 North 15 1,028,887 66, % 3.4% 6.5% 0.9% 0.9% 38,000 (6,000) (27,000) 78,000 90,000 Aurora/Northeast 90 2,769, , % 17.3% 16.5% 15.3% 15.3% 101,000 (53,000) 23,000 19,000 76,000 Southwest 70 2,705, , % 11.6% 12.1% 9.5% 9.5% 109,000 (65,000) (13,000) 14,000 71,000 West 48 1,886, , % 14.6% 9.6% 6.2% 6.2% 7,000 (9,000) 85,000 (21,000) 64,000 Denver Tech Center 5 172,316 60, % 42.0% 35.1% 34.7% 34.7% 3,000 (26,000) 12,000 7,000 Greenwood Village 3/ % 0.0% 0.0% 0.0% 0.0% Inverness 41 1,623, , % 17.4% 15.8% 13.6% 15.6% 79,000 (30,000) 52,000 16,000 35,000 Balance of Southeast 67 2,717, , % 17.0% 16.3% 12.8% 12.9% 16,000 7, ,000 90,000 95,000 Southeast Total 113 4,513, , % 18.1% 16.8% 13.9% 14.7% 98,000 (49,000) 178, , ,000 Boulder 3/ 74 3,240, , % 7.7% 5.9% 7.5% 7.7% (16,000) 55,000 31,000 (24,000) TOTAL Denver Metro ,802,238 2,333, % 13.4% 12.6% 10.4% 10.6% 346,000 (100,000) 249, , , % 13.7% 12.8% 10.6% 1/ Includes buildings 15,000 SF RBA and greater; includes multi and single tenant buildings. Does not include buildings under construction or buildings owned by the government. 2/ Does not include sublet space. 3/ Inventory amended per CoStar. Vacancy Rate With Sublet Space 3/ 6020 Greenwood Plaza Boulevard was removed from the inventory, as it was reclassified as Class B office by CoStar. SUMMARY OF OFFICE/FLEX MARKET INDICATORS ALL SPACE Denver Metro Area 2010 Through 3rd Quarter 2013 Note: Net absorption occurs when a lease is signed, not when space is physically occupied; pre leased space counts as net absorption when a building delivers. Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; September Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA Phone: DeltaAssociates.com DENVER METRO OUTLOOK THIRD QUARTER

17 DELTA ASSOCIATES Delta Associates, the research affiliate of Transwestern, is a firm of experienced professionals offering valuation, consulting and data services to the commercial real estate industry for over 30 years. The firm s practice is organized in four related areas: 1. Valuation of partial interests in commercial real estate assets. 2. Consulting, research and advisory services for commercial real estate projects, including market studies, market entry strategies, asset performance enhancement studies, pre-acquisition due diligence, and financial and fiscal impact analyses. 3. Litigation support, including dispute resolution, from forensic fact-finding to mediation and expert witness services. Damages, material adverse change, and contract disputes are specialties. 4. Subscription data for selected metro regions for office, industrial, retail, condominium, and apartment markets. Headquarters Gregory H. Leisch, CRE Chief Executive 500 Montgomery Street, Suite 600 Alexandria, VA / ; Fax: 703/ Greg.Leisch@DeltaAssociates.com Transwestern Support Group Elizabeth Norton National Research Director 500 Montgomery Street, Suite 600 Alexandria, VA / ; Fax 703/ Elizabeth.Norton@DeltaAssociates.com Consulting and Advisory Services David Weisel President, Consulting Division 500 Montgomery Street, Suite 600 Alexandria, VA / ; Fax: 703/ David.Weisel@DeltaAssociates.com Online Contacts Website: DeltaAssociates.com General box: info@deltaassociates.com Report Author: Philip Tilly Report Editor: David Parham For further information about Delta Associates and to see all of our publications, please browse our web site at: DeltaAssociates.com. TRANSWESTERN Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, development, research and sustainability. The fully integrated enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. Transwestern facilitates better decision-making for clients by combining penetrating local market intelligence and macro-market research through its affiliate, Delta Associates. Transwestern has 34 U.S. offices and assists clients through more than 180 offices in 36 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate. For more information, please visit and follow us on Denver, Colorado 4643 S. Ulster Street Suite 300 Denver, CO Bill Lawrence bill.lawrence@transwestern.net Bill Lawrence Kevin McKinnon David Shapiro Peter Thomas Andrew Piepgras Lyla Gambow Brad Cohen Larry Thiel Atlanta Austin Baltimore Bethesda Boston Chicago Dallas Denver Detroit Fort Lauderdale Fort Worth Greenwich Houston Los Angeles Miami Milwaukee Minneapolis New Jersey New Orleans New York Northern VA Oklahoma City Orange County Orlando Phoenix Saint Louis Salt Lake City San Antonio San Diego San Francisco Seattle Silcon Valley Walnut Creek Washington, DC Transwestern Outlook is published quarterly by Transwestern and its research affiliate, Delta Associates. All information is from sources deemed reliable; however, no representation is made as to the accuracy thereof. Sources: U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, Colorado Division of Housing, Colorado NPR, Coldwell Banker, Colorado Real Estate Journal, Metrodenver.org, CoStar, Denver Business Journal, Denver Post, GMU Center for Regional Analysis, The Goss Institute, Bloomberg.com, Forbes Magazine, National Association of Purchasing Management - Denver, National Association of Realtors, PricewaterhouseCoopers, Real Capital Analytics, Smith Travel Research. DENVER METRO OUTLOOK THIRD QUARTER