Second Quarter 2016 Office Market Report. Chicago

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1 Chicago Market Facts 5.5% Chicago s unemployment rate remained relatively flat year-over-year. $361.5 M There was $361.5M venture capital invested within Chicago area 1.7% The metro Chicago area added over 61,500 jobs year-over-year. 16,200 jobs The most active industry in the Chicagoland area during the first quarter of 2016 was the leisure and hospitality sector Economic Overview Chicago s diverse economy continued to grow moderately throughout the second quarter of The metropolitan area added more than 61,000 jobs as of May 2016 up 1.3% year-over-year. The strong job market kept unemployment relatively unchanged over the same period recorded at 5.5%. The supersectors that recorded the highest year-over-year growth in employment were leisure and hospitality; professional and business services; and trade, transportation and utilities sectors witnessing increases of 250 bps, 160 bps, and 140 bps respectively. The manufacturing sector saw minimal growth. According to World Business Chicago, there were 693 corporate expansions within the Chicagoland area in 2015, up 11.1% from This compelled Site Selection Magazine to list Chicago as a Top Metro in the United States. Notable expansions within the market include Amazon, which plans to add 2,000 full-time jobs at their new I-80 East corridor warehouse. McDonalds has stated that it will move its corporate headquarters from suburban Oak Brook to the West Loop. The Chicago housing market saw moderate increases in sale prices. As of May there have been 11,600 home sales up 12% from May Median sale prices rose 7% over the same period. Rents across the city are expected to rise considerably with the proposed tax increase. Looking forward, home sales in certain suburban areas are expected to pick up throughout 2016 as home prices in the city of Chicago keep rising. Office Market Overview The downtown Chicago office market finished the second quarter of 2016 with increased demand. A shortage of highquality space across the CBD remains an issue for some tenants, stimulating increasingly competitive rental rates. This has caused slight shift in market conditions favoring landlords over users. Landlords across the market continued to pour capital into building improvements

2 Historical Vacancy Rates 12.0% 10.0% 8.0% Asking Rents $34.00 $33.00 $32.00 $31.00 $30.00 $29.00 Historical Net Absorption 1,500,000 1,000, ,000 0 (500,000) Q Q YTD 2016 such as adding tenant amenities. Demand remains strong in both the West and Central Loop submarkets. However, many tenants are no longer focused solely on preferred submarkets, and instead are looking at options in alternative areas, which are often more cost effective or provide distinctive lifestyle advantages. This trend is likely to continue for the foreseeable future. Absorption & Demand The CBD continued to record healthy leasing activity through the second quarter of Most submarkets saw a moderate increase in demand, prompting overall absorption to remain relatively unchanged when compared to the second quarter of This is partly due to a record amount of sublease space coming online up 83.6% since mid The absorption of class A product within the East Loop and River East submarkets recorded the highest in the CBD. The West Loop remains one of the most popular submarkets; demand remained much the same when compared to recent quarters. The River North submarket witnessed great momentum through the first half of The North Michigan Avenue submarket continued to trail the rest of the CBD. With four straight quarters of negative absorption. Leasing activity remained strong during the second quarter with over 2.1 msf leased, slightly below the 2.3 msf posted this time last year. Notable leases inked during the first quarter included Leo Burnett Worldwide renewing its 642,000 sf at 35 W. Wacker. Suburban based McDonald s Corporation inked a 486,000 sf lease to move its headquarters to the River West submarket. Its new facility is being developed by Sterling Bay and once completed will house the corporation s 2,000 employees. Glassdoor signed a 51,000 sf lease with the intention of hiring 250 people over the next several years. Their building is also being developed by Sterling Bay. With several large tenants actively looking in the market and a healthy deal pipeline expected to continue, activity should remain strong through the remainder of Vacancy & Availability Vacancy within the CBD witnessed a dramatic downward shift year-overyear down 90 bps to 11.3%. Class A vacancy dipped 190 bps over the same period posted at 9.5%. Class B product witnessed a minor uptick in vacancy. The West Loop submarket continued to see a surge of activity, with class A vacancy dropping 1.2% in the last 12 months. Following four quarters of tightening vacancy, the East Loop saw a 160 bps year-over-year drop in overall vacancy to 11.9%. Class A and B vacancies both recorded moderate dips during the quarter recorded at 12.5% and 11.9% respectively. The Central Loop saw little change with vacancy remaining at 8.5% throughout the first half of The popular River West submarket saw substantial activity during the second quarter. Vacancy dropped to 12.5%, with class A vacancy significantly lower down to 4.6%. The North Michigan Avenue submarket has witnessed a moderate increase in demand throughout the past several quarters. Vacancy was recorded at 11.2%. Class A vacancy recorded an 80 bps drop from the first quarter of 2015, currently posted at 13.1%. The River North and South Loop submarkets vacancy rates continued to trend downward. Looking forward, Chicago should continue to see declining vacancy rates within select submarkets.

3 Rental Rates Asking rental rates have continued to trend upward, rising consistently over the past several quarters averaging $33.06 psf during the second quarter of Class A rents shifted upward for the fourth straight quarter up 2.5% year-overyear to $34.79 psf. Class B rental rates remained relatively unchanged during the past several quarters. The West Loop, Central Loop, and River North submarkets continued to have the highest asking rents within the market, especially for class A product which saw an uptick over last quarter. The River West submarket saw rental rates spike 14% year-overyear up to $30.29 psf. Class A rates within the market are as high as $40.00 psf. Rental rates have become more competitive, especially in submarkets where demand is high. This has caused a shift in market conditions favoring landlords over users. Construction With no new product added since 2009, the Chicago CBD has seen an influx of projects currently under construction. The five projects, which total 3.8 msf, are located within the West Loop and River West submarkets. The first of two projects to have recently broken ground is a 432,000-sf speculative project located at 625 West Adams. As a rare occurrence of speculative development, 625 West Adams verifies developer/ investor commitment to the market. The second, 1330 W Fulton St, is a 287,000 sf development within the River West submarket. The property is being developed by Sterling Bay and is 47% preleased to Glassdoor and Skender Construction Company. Construction continued on the three remaining trophy office towers. 150 N. Riverside will add 1,229,064 sf and is now 79.9% preleased. River Point will add 1,073,100 sf and is 72.9% preleased. CAN Center will add 807,130 and is 46.7% preleased. Investment Investment in CBD office product remained relatively unchanged throughout the second quarter of Cap rates have remained relatively consistent, averaging 7.1%. Overall, sale prices are on the rise. On a per-square-foot basis, pricing saw a moderate decrease when compared to previous quarters currently averaging at $222 psf. The most notable second quarter investment sales transaction was the sale of The Sullivan Center. The 942,000-sf class A building, traded for $267 million, or $283 psf when Madison Capital purchased the property from Elad Canada Operations. 440 S LaSalle traded for $191 million, or $186 psf when the CIM Group purchased the property from TIER REIT. Investor demand for office product shows no signs of losing steam, and prices should increase through the remainder of 2016.

4 Office Market Snapshot Chicago s CBD continued to tighten throughout the second quarter of Demand across the Chicago office market remains high sending absorption up and vacancy down. Market Inventory Vacancy Rate Net Absorption Construction Pipeline Average Asking Rate 163,572,010 SF 11.3% -441,412 SF 7,540,712 SF $33.06 SF 1,000, , , , ,000 0 CBD Office Vacancy and Direct Net Absorption 12.0% 11.5% 11.0% 10.5% 10.0% 9.5% -200,000 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 9.0% Net Absorption Vacancy Submarket Total RBA (SF) Direct Available Space (SF) Sublet Available Space (SF) Vacancy Rate Total Class A Class B Leasing Activity (SF) Net Absorption (SF) Average Asking Rent CBD 163,572,010 14,545,687 1,422, % 9.5% 11.9% 2,186, ,412 $33.06 $34.79 $30.20 West Loop 50,311,108 4,264, , % 9.3% 11.6% 493, ,429 $38.09 $39.74 $27.10 East Loop 26,798,081 3,113, , % 12.5% 11.9% 263,646-4,859 $30.07 $30.94 $29.42 Central Loop 46,766,306 3,562, , % 7.8% 9.4% 885, ,564 $31.33 $31.27 $31.56 North Michigan Ave 16,264,696 1,651, , % 13.1% 9.6% 232,904 47,440 $ $26.92 $27.17 River North 14,443, ,488 82, % 3.9% 5.5% 227, ,486 $33.61 $38.99 $36.01 South Loop 3,638, , % N/A 10.7% 0 0 $23.54 N/A $22.00 River West 5,349, ,573 30, % 4.6% 15.8% 83,526 30,704 $30.29 $42.00 $30.25 Overall Avg Class A Class B

5 Top Lease Tenant Address/Name Submarket Size (SF) Type Leo Burnett Worldwide, Inc. 35 W Wacker Dr Central Loop 642,545 Renewal McDonalds Corporation 1045 W Randolph St River West 486,400 New Beam, Inc The Mart River North 112,803 Renewal/Expansion Ann & Robert H. Lurie Children s Hospital American Dental Association Bldg North Michigan Ave 68,082 New Glassdoor 1330 W Fulton St River West 51,500 New Regional Transportation Authority 175 W Jackson Blvd Central Loop 41,370 Renewal Top Investment Sales Address/Name Size (SF) Buyer Seller Sales Price The Sullivan Center 942,330 Madison Capital Elad Canada Operations Inc. $267,000, S. LaSalle St 1,041,150 CIM Group LP TIER REIT, Inc. $191,000, S State St 487,590 Rampante Realty Partners, LLC Anvan Realty & Management Company $68,100,000 Under Construction Address Developer Submarket RBA (SF) Preleased (%) 150 N Riverside Dr Riverside Investment & Development West Loop 1,229, % 444 W Lake St - River Point Hines West Loop 1,073, % 151 N Franklin St-CAN Center John Buck Company West Loop 807, % 625 W Adams St White Oak Realty Partners, LLC West Loop 443, % 1330 W Fulton St - Fulton West Sterling Bay River West 287, % Trends to Watch Population Growth: Census data shows that the Chicago area population remained relatively flat over the past several years. Employment: Moderate second quarter growth prompted employment to see a slight uptick year-over-year. Active Markets: West Loop, River West, and Central Loop Market Drivers: Professional and Business Services, Technology, and Education and For more information, please contact: Greg Rogalla Research Analyst gregory.rogalla@ 2016 Avison Young Chicago. All rights reserved. E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young. Michelle Chen Research Analyst michelle.chen@

6 2016 Avison Young Chicago. All rights reserved. E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young.