Quarterly Report 4Q 2005

The rent of positive absorption continued over the past three months of 2005. This, as well as sales of many significant office buildings within the 880 Corridor, has caused office rents to increase steadily.

The Bay Area has witnessed extremely strong demand for investments in Class A office buildings. This demand is due to historically low interest rates, an increased amount of foreign investment dollars, continued flow of money from the capital markets and optimism that office rents will continue to rise.

Several significant Class A office buildings in the Oakland CBD traded in 2005. Two recent and notable sales include the purchase of 1333 Broadway and 2101 Webster Street by Brandywine Realty Trust (formerly Prentiss Properties). With these two transactions and the pending construction of 2100 Franklin, Brandywine is now the largest Class A office landlord in Oakland controlling 1.7 million square feet (Shorenstein is second with 1.6 million square feet). Brandywine and Shorenstein were also among the finalists for the purchase of 1999 Harrison Street in the Lake Merritt office submarket. The competition drove the sales price north of $300 per square foot and ultimately Beacon Capital Partners of Boston was chosen as the best buyer. Beacon’s 2005 buying spree in the Bay Area also included 50 Beale Street, 100 California Street and 1 Sansome Street in San Francisco.

The Emeryville and Alameda office submarkets were hardly overlooked. Wareham Development introduced plans for EmeryStation East, a lab and office building consisting of 250,000 square feet, after they acquired 100,000 square feet of land at the intersection of Hollis and Powell Streets. Wareham’s appetite for Emeryville office and lab space was, in part, fueled by its leasing success at EmeryStation and Heritage Square. The two largest office/ R&D projects in Alameda, Marina Village and The Waterfront, are on the market and rumored to be changing hands in early 2006.

As investors continue to push sales prices higher, tenants will continue to see a rise in asking rents and expense pass-throughs as well as decreased allowances for space improvements. As a result, many tenants who signed leases and subleases following the dot-com collapse will begin to shift toward cheaper alternative markets.