U.S. Office Market Report

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New York • Chicago • Dallas • Miami • San Diego • Washington D.C. www.falconreal.com

U.S. Office Market Report

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Current U.S. Market Overview

.... 3

Summary of Statistical Data

... 5

Primary Office Markets:

Boston ... 7

Chicago ... 8

Los Angeles ... 9

New York City ... 10

San Francisco ... 11

Washington D.C. ... 12

Secondary Office Markets:

Atlanta ... 13

Houston ... 14

Miami ... 15

Northern New Jersey ... 16

Orange County ... 17

Phoenix ... 18

San Diego ... 19

Seattle ... 20

Glossary

... 21

Key Markets

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New York • Chicago • Dallas • Miami • San Diego • Washington D. C. www.falconreal.com

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2012

The slow but steady improvement in the US commercial real estate market,

which we have noted in the last few issues of the Office Market Report, is continuing.

Where this improvement was originally concentrated on several key markets such as

New York, Boston, Washington and San Francisco, the recovery has now spread to

other markets across the country. Markets such as Seattle, Houston and Orange

County, California, are now experiencing all of those signs associated with a strong

recovery.

Office vacancy rates have been dropping in most of the major markets in the

US. New York City has led the way as the vacancy rate in Midtown Manhattan has

fallen to 8.9%, while San Francisco is not far behind with a rate of 9.7%. When the

office vacancy rate in the United States drops below the 10% to 12% range, property

owners are then usually able to initiate rental increases. And such increases have been

occurring in Manhattan where the average asking rent for Class A properties now

exceeds $70, and some prestigious buildings with views of Central Park now are

asking over $100 per square foot. San Francisco has also experienced a dramatic

recovery, with average asking rents having risen by over 25% during 2011.

The strength of the recovery in the office market is illustrated by the fact that

of the 14 markets covered by this report, 11 of them have shown a decline in vacancy

rates during the past quarter. Up to now, this strengthening has been concentrated in

Class A properties, as tenants have taken advantage of depressed rents to upgrade into

better quarters. As Class A rents continue to move up, however, we expect that rents

in Class B properties will also begin to rise, as more tenants decide to take advantage

of the most cost efficient alternative.

One of the things that many overseas investors comment on when visiting the

United States is the rarity of construction cranes in the sky. At the present time, there

is still very little office construction taking place in any of the major cities of the

country. Financing is again available for some projects, but rental rates in most cities

are still too low to provide economic justification for building a new office tower.

There is some construction taking place in suburban locations, primarily for

single-tenant build-to-suit projects, but construction of speculative office towers in major

cities is almost non-existent. Both vacancy rates and rental rates will improve as a

result of the lack of new competition.

The office market does, of course, depend heavily on the strength of the US

economy. And month after month, quarter after quarter, the statistics on US GDP

continue to surprise on the upside. Real gross domestic product -- the total output of

all goods and services produced in the United States -- increased at an annual rate of

3.0% in the fourth quarter of 2011 (that is, from the third quarter to the fourth quarter).

In the third quarter, real GDP had increased at a 1.8% rate. The all-important services

sector, which accounts for two-thirds of US economic activity,

expanded at its fastest

pace in a year in February.

And consumer confidence is clearly on the rise.

The

Bloomberg Consumer Comfort Index rose to an almost four-year high in the week

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4 FALCON REAL ESTATE INVESTMENT MANAGEMENT, LTD.

through Feb. 19, and the Thomson Reuters/University of Michigan measure of

consumer sentiment recorded its sixth straight monthly gain and its longest advance

since 1997. Many economists are predicting that the rate of growth in the US

economy will slow in 2012 due to the problems in Europe and the slowdown taking

place in China. But most are still predicting growth of between 2% and 2½%, and, in

Falcon’s view, those growth rates will continue to support an improving US office

market.

From an investor’s viewpoint, one of the main problems that has to be faced

today in approaching the US office market is the fact that so few quality properties are

being offered for sale. In the following report, Falcon’s acquisition representatives

make the same comment about virtually every market – very few properties are

available for purchase. There are probably two main reasons for the scarcity of new

offerings. On the one hand, many existing owners are seeing the improvement in the

market and in the economy and want to wait for a further increase in pricing before

putting their properties on the market. And most owners are not under any financial

pressure to sell. On the other hand, those properties that did get into trouble during

the recession have been taken over by the banks and special servicers very, very

slowly, and they are also being very slow about selling such properties. Falcon does

expect, however, that the market will continue to improve and that more quality

properties will be offered for sale during 2012.

Chairman

March 2012

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5

Boston, Massachusetts

U.S. Office Market Report

Primary Markets

4th Quarter 2011

Chicago, Illinois

Los Angeles, California

New York, New York

San Francisco, California

Washington, D.C.

Total Inventory (sq. ft.)

Vacancy Rate

Y-T-D Net Absorption

(% of inventory) Y-T-D Construction _{Completed (sq. ft.)} Avg. Asking Rent _{(per sq. ft.)}

CBD: 60,756,026 13.4% 778,011 $47.50 Non-CBD: 122,382,534 19.8% 200,000 $26.78 Total: 183,147,560 17.7% 0.4% 978,011 $33.65 Market trends: Total Inventory (sq. ft.) Vacancy

Rate Y-T-D Net Absorption(% of inventory) Y-T-D Construction _{Completed (sq. ft.)} Avg. Asking Rent _{(per sq. ft.)}

CBD: 121,081,705 14.7% $37.63 Non-CBD: 95,711,011 24.3% 0 $24.28 Total: 216,792,716 18.9% 0.3% 0 $31.74 Market trends: Total Inventory (sq. ft.) Vacancy Rate

Total: 192,063,279 18.8% 0.0% 326,988 $33.28 Market trends: Total Inventory (sq. ft.) Vacancy Rate

Midtown: 306,493,331 8.9% - $70.68 Downtown: 86,372,509 9.5% - $44.92 Total: 392,865,840 9.0% 0.5% - $65.01 Market trends: Total Inventory (sq. ft.) Vacancy

Rate Y-T-D Net Absorption(% of inventory) Y-T-D Construction Completed (sq. ft.) Avg. Asking Rent (per sq. ft.)

CBD: 104,950,191 11.9% 991,861 $59.28 Non-CBD: 185,678,715 16.7% 775,229 $32.51 Total: 290,628,906 15.0% 0.2% 1,767,090 $42.18 Market trends: Total Inventory (sq. ft.) Vacancy Rate

CBD: 49,309,738 9.7% - $46.69

Non-CBD: 167,386,161 15.0% - $33.30

Total: 216,695,899 13.8% 2.5% - $36.35

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6

Atlanta, Georgia

U.S. Office Market Report

Secondary Markets

4th Quarter 2011

Houston, Texas

Miami, Florida

Orange County, California

Seattle, Washington

Northern New Jersey

Phoenix, Arizona

San Diego, California

Vacancy

CBD: 41,813,548 19.5% 1,012,431 $32.96 Non-CBD: 39,920,396 16.0% 223,088 $27.67 Total: 81,733,944 17.8% 2.4% 1,235,519 $30.38 Market trends: Total Inventory (sq. ft.) Vacancy

Total: 72,526,533 15.2% 0.8% 83,000 $30.35

Market trends:

Vacancy

Total: 78,117,373 26.0% 1.4% 622,070 $24.56

Market trends:

Vacancy

Total: 83,325,393 17.9% 2.4% - $25.47

Market trends:

Vacancy

Total: 107,674,349 17.9% 1.0% 30,000 $28.82

Market trends:

Vacancy

Rate Y-T-D Net Absorption(% of inventory) Y-T-D Construction Completed (sq. ft.) Avg. Asking Rent(per sq. ft.)

Total: 79,070,237 18.4% 1.6% 614,908 $34.20

Market trends:

Vacancy

Total: 167,193,318 15.5% 1.8% 2,125,039 $30.14

Market trends:

Vacancy

Total: 142,615,166 21.9% 0.4% 0 $23.45

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Boston, Massachusetts

4th Quarter 2011

Falcon Contact: Kenneth Lorman Phone: (212) 271-5445 ext. 111 klorman@falconreal.com

U.S. Office Market Report

Vacancy

CBD: 60,756,026 13.4% 778,011 $47.50 Non-CBD: 122,382,534 19.8% 200,000 $26.78 Total: 183,147,560 17.7% 0.4% 978,011 $33.65 Market trends: Capitalization Rates Boston Unemployment: 5.7%

Market Relevance

Greater Boston is the tenth largest metropolitan area in the United States. Boston is one of the most desirable real estate markets in the country due to its 24-hour city environment, strong tenant base, barriers to entry, and overall high quality of life. Boston has a broad economic base with strengths in finance, technology, biology, education and healthcare. Greater Boston is consistently ranked as one of the top five U.S. cities for real estate investment by domestic and foreign investors.

Regional Economy

Boston’s economy continues to be among the leaders of the U.S. recovery. Economists expect all office-using jobs lost in the downturn to be regained by the end of 2013, which would be a positive for office vacancy rates. Key indicators including consumer and business confidence, unemployment claims, and housing prices have also begun to show continuous improvement. The unemployment rate in Boston, which was not greatly impacted during the recession, continues to be dramatically below the national average due to the area’s exposure to the growing high tech, healthcare, and education industries.

Current Market Conditions

Boston experienced a relatively strong economy during 2011 but the second half performed at a slower pace than the first. The CBD has shown improved fundamentals throughout the year while the non-CBD areas continue to weaken in terms of average rental rates. The Back Bay submarket continues to be the strongest in the greater Boston areawith a 6.6% vacancy rate and Cambridge has shown recent strength with rental rates increasing by 20% during the year compared to 2.0% for the overall market. Construction activity has picked up with approximately 5 million square feet of new projects currently underway. Most of the properties are built-to-suit single tenant projects with the largest being the 1.1 million square foot headquarters for Vertex Pharmaceuticals.

Falcon Perspective

Despite the relative strength of the Boston commercial real estate market, there continues to be a scarcity of investment quality properties on the market. We anticipate that the high demand for quality properties will eventually lead to a greater number of owners testing the sales market. In particular, the low capitalization rates being realized in New York City and Washington DC should serve as an enticement.

Investment Opportunities

Despite the strength of the CBD market, there are very few quality properties expected to come to market over near term. We are tracking a renovated Seaport property that may come to market shortly and will provide further commentary after reviewing the offering materials. Over the near term we would expect mostly smaller properties, priced below $40 million, to come to market as larger owners are waiting for market conditions to improve further. Two large office transactions occurred in the 4th quarter. The 1.1 million sq. ft. 53 State Street building sold for $600 million ($527 psf) and One Exeter Plaza in the Back Bay sold for $112 million ($530 psf). The latter was a reported 3.5% cap rate and was completed via a pre-emptive bid.

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8

Chicago, Illinois

4th

Quarter 2011

U.S. Office Market Report

Capitalization Rates

Chicago Unemployment: 9.8%

Market Relevance

The Chicago metropolitan area is the third largest in the U.S. by population and is the fourth largest office market in the U.S. Chicago is a 24-hour city and a leading destination for business and leisure travel. The city’s location in the virtual center of the U.S. makes it a key transportation and distribution hub. The city is known for its broad economic base and diversification of industries. The Chicago area is home to one of the largest concentrations of corporate headquarters in the U.S., including 28 Fortune 500 companies.

Regional Economy

The Chicago economy, which had been stabilizing as of late, added jobs during the quarter bringing unemployment down to 9.8% from 10.4% at the end of the prior quarter. Chicago’s larger tenants in the fields of advertising, accounting, architectural engineering, financial services and law have been driving the leasing markets while smaller users have had little impact. Manufacturing, construction, and professional services are leading the economy as it continues to emerge from the downturn.

Current Market Conditions

The year ended with a strong fourth quarter as leasing activity in the Chicago CBD market posted a sixth consecutive quarter of positive absorption. The activity continues to be dominated by large leases signed during the quarter while smaller to mid-sized users have delayed decisions until the economy shows sustained improvement. Available large spaces for lease are dwindling and this should put pricing pressure on rents. This tightening of supply should result in an improvement in the Class B office market as demand looks for other options. Another sign of a recovering market is the shrinking of landlord concessions to attract new tenants. This is usually the precursor of a trend of rising rental rates.

Falcon Perspective

As the Chicago CBD market continues to show improvement, it offers opportunities for investors that may not be available in the pricier and more competitive Washington D.C. and New York City markets. Five large office buildings traded during the quarter ranging in price from $91 million to $610 million while four others in excess of 933,000 square feet each are under contract. Foreign buyers included UBS, Credit Suisse, and Korean Teachers Credit Union/Korean Community Co-op among others. Cap rate compression continued as cap rates ranged from 5.1% to 6.5% for core deals.

Investment Opportunities

Over the second half of 2011, several core office building sales were completed and we expect this level of activity to continue through 2012. We expect to see similar high quality properties come to market in the upcoming months and a continuation of international buyers investing in Chicago. Falcon will continue to evaluate every property that comes to market and recommend the most suitable investment opportunities, primarily focusing on core stabilized office and high-end retail properties.

Vacancy

CBD: 121,081,705 14.7% $37.63

Non-CBD: 95,711,011 24.3% 0 $24.28

Total: 216,792,716 18.9% 0.3% 0 $31.74

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9

Los Angeles, California

4th Quarter 2011

Falcon Contact:

Adam Doud

Phone: (858) 451-8131 adoud@falconreal.com

U.S. Office Market Report

Los Angeles Unemployment: 12.0%

Market Relevance

The greater Los Angeles Metropolitan Statistical Area “MSA” is the second largest MSA in the United States with a population in excess of 12.8 million people. Los Angeles County residents alone account for over 9.8 million of this total. Over the past decade the county of Los Angeles’s population has grown 11.5% and it is projected that by the year 2025 the county’s population will increase by an additional 30%. Los Angeles County’s office market totals over 192 million square feet in seven distinct office submarkets and is one of the largest office markets in the country.

Regional Economy

Employment gains in the technology, entertainment, media and retail sectors helped drop unemployment in Los Angeles from 12.3% at the end of the 3rd quarter 2011 to 12% at year’s end. This positive news is tempered by the fact that unemployment in Los Angeles remains well above the national average of 8.6% and the Los Angeles economy continues to struggle. Government and manufacturing are the most depressed sectors of the local economy. Over 5,000 government jobs alone were eliminated during the 4th quarter. Despite growing demand for their products and services, small businesses that are considered a vital part of the Los Angeles economy continue to have difficulty obtaining financing for expansion. Notwithstanding the current problems of the local economy, job growth and improved economic conditions are predicted for 2012.

Current Market Conditions

Increased tenant activity in several premier Los Angeles office submarkets led a strong year-over-year turnaround for office market fundamentals. Although overall absorption remained negative by 64,972 square feet, the amount of space returned to the market in 2011 was far less than the 2.5 million square feet of negative absorption recorded in 2010. Sublease space is no longer coming to market and that which was already placed on the market is either being leased, being reoccupied by tenants that had vacated or is being converted to direct vacancy as leases expire. Regardless, the elimination of sublease space and increased tenant activity suggest that the Los Angele office market is in the early stages of recovery. After increasing during the 2nd and 3rd quarters of 2011, the office vacancy rate in Los Angeles declined back to 18.8%, the rate recorded at the start of the year. Average asking rents increased for the third consecutive quarter but remain depressed relative to their 2007 peak. Stable market conditions are expected to prevail during 2012 with more measurable improvement coming in 2013.

Falcon Perspective

Many market observers expected Los Angeles to be among the first regions to show signs of economic and office market recovery. In fact, Los Angeles has struggled to regain its economic footing that has delayed fundamental improvement of the office market. The delayed recovery of this important international business center could offer an excellent opportunity for investors to make strategic Los Angeles real estate acquisitions. As has been shown in other major markets of the western U.S., once investors perceive that a market is strengthening, the investment environment will become extremely competitive.

Investment Opportunities

Investment activity was somewhat limited in Los Angeles during the 4th quarter. The transaction highlights include LBA Realty’s $157.5 million purchase of 550 South Hope in the Downtown submarket. The price equates to a price per square foot of $260 and a low 6% cap rate for the 80% occupied building. It is anticipated that the number of buildings brought to market in Los Angeles will increase in 2012 as the economy stabilizes and office market fundamentals improve.

Vacancy

Total: 192,063,279 18.8% 0.0% 326,988 $33.28

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New York, New York

4th Quarter 2011

Falcon Contact:

Kenneth Lorman

Phone: (212) 271-5445 ext. 111 klorman@falconreal.com

U.S. Office Market Report

New York City Unemployment: 8.9%

Market Relevance

New York City is a part of the nation’s largest Metropolitan Statistical Area “MSA”, and is home to the largest office market, and most expensive market in terms of rental rates and sales prices in the United States. NYC is a leading global city exerting a powerful influence over worldwide commerce, finance, culture, and entertainment. It is home to 45 Fortune 500 firms, major financial institutions including the New York Stock Exchange and NASDAQ, and an array of important international firms as well as the United Nations headquarters. As Manhattan is an island, unimproved land is almost non-existent and new construction is both costly and complex.

Regional Economy

New York City’s economy continues to recover, but stalled somewhat during the quarter. The Manhattan office market slowed noticeably from the first half as Wall Street had mixed results and for a time there was a risk of a double-dip recession. Despite the worldwide turmoil, Manhattan’s leasing activity continued to improve and vacancy continued to decline, albeit at a slower pace than was experienced earlier in 2011.

Current Market Conditions

Improvement continued throughout the year for Manhattan office market whereby vacancy rates fell to 9.0%, the lowest level since early 2009 and sublet availability dropping to its lowest figure since September 2008. Rental rates increased for the fourth consecutive quarter and reached its highest level in three years. Although the market showed improvement, the growth rate slowed during the latest quarter due to a lack of commitment in the financial services industry due to the economy and regulatory issues. The trophy properties continue to outpace lesser quality properties or those in less desirable locations. Class A Midtown office rents increased by 7.6% over the year while other classes increased by only 1.8%.

Falcon Perspective

Falcon expects quality opportunities to continue to be relatively scarce. While cap rates for these best in class properties have fallen to 5% or lower we may see pricing stagnate for a while until rental rates demonstrate better growth across the market. Bidding processes are very competitive, requiring advanced due diligence and sizable non-refundable deposits. Falcon expects that joint venture opportunities with experienced operators will continue to be a strategic way to enter the Manhattan office market.

Investment Opportunities

For the few properties that come to market, the bidding will continue to be highly competitive. In order to compete, a buyer usually needs to conduct some of the due diligence before the bidding process is completed. Falcon tracked a desirable multi-tenant office building at 148 Lafayette Street in the Soho submarket. This is not a typical office location and as such was priced at more attractive cap rate of approximately 5.75%. Investors desiring a better yield may wish to consider other quality properties in secondary locations.

Vacancy

Midtown: 306,493,331 8.9% - $70.68

Downtown: 86,372,509 9.5% - $44.92

Total: 392,865,840 9.0% 0.5% - $65.01

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11 Falcon Contact: Adam Doud Phone: (858) 451-8131 adoud@falconreal.com

Market Relevance

The San Francisco region is the fifth largest metropolitan area in the U.S. and is the business hub of California’s Bay Area office market. The city is widely recognized as among the preeminent financial and commercial centers in the world. Many prominent companies have corporate headquarters that are located in San Francisco including Wells Fargo, Gap, Charles Schwab, and McKesson. Companies with headquarters in suburban markets include Chevron, Hewlett-Packard, Apple, Oracle, and Google. The city also serves as the regional headquarters for many other companies.

Regional Economy

San Francisco’s economy is among the healthiest in the United States. Employment growth in the technology and professional and business services sectors of the local economy has pushed unemployment down from 9.6% in the 4th quarter of 2010 to 7.8% as of the 4th quarter of 2011. Continued improvement is forecast for the San Francisco economy as employment is expected to expand by 2% during the coming year.

Current Market Conditions

Employment growth in San Francisco has fueled renewed tenant demand for office space and has elevated San Francisco’s office market to the top performing market in the United States. Gross leasing activity in 2011 totaled 6.8 million square feet and generated 2.3 million square feet of positive absorption. Prior to 2011 it had been three years since the San Francisco office market posted positive absorption for the year. Average asking rents were substantially higher at the end of 2011 than they were at the end of 2010. Overall, rents increased by 25.5% during 2011. The positive trend for the San Francisco office market’s fundamentals is expected to continue given the predicted employment growth.

Falcon Perspective

The historical performance of the San Francisco office market and its status as one of the world’s most important business centers makes it a prominent target of real estate investors. The strengthened economic conditions in the city are now fully apparent to real estate investors. While San Francisco investment activity is strong, it is not nearly strong enough to satisfy the huge appetite of those wanting to purchase assets in the city. Therefore, competition for buildings that do come to market is fierce. Falcon’s opinion is that the reality of the economic recovery is not yet fully priced intothe real estate market and, as such, there is still opportunity for investors to achieve strong returns through San Francisco real estate acquisitions.

Investment Opportunities

The San Francisco real estate investment market was not as active during the 4th quarter as it had been during previous quarters. However, there were several transactions that closed at the end of the year. Specifically, Kilroy Realty Corporation, among the more active investors in San Francisco, purchased the 93% vacant building at 370 Third Street for $91.5 million or $228 per square foot. The appeal of vacant San Francisco CBD office properties such as 370 Third Street illustrates the desirability of the San Francisco investment market and the optimism for the market’s future. Investment activity is expected to remain healthy with buyers aggressively competing for properties and pushing cap rates lower.

San Francisco, California

4th Quarter 2011

San Francisco Unemployment: 7.8%

U.S. Office Market Report

Vacancy

CBD: 49,309,738 9.7% - $46.69

Non-CBD: 167,386,161 15.0% - $33.30

Total: 216,695,899 13.8% 2.5% - $36.35

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12 Falcon Contact: Laurence Welsh Phone: (703) 740-2201 lwelsh@falconreal.com

Market Relevance

Home to the United States Federal Government, the Washington, DC Metropolitan Region is the nation’s 4th largest regional economy and is the nations 7th largest MSA by population. The Washington, DC metro area leads the nation in median household income, as its highly skilled population possesses one of the highest concentrations of graduate degrees in the country. The Washington, DC economy boasts a diverse range of industries including government, defense, and education. Major employers include the Federal Government, Lockheed Martin, General Dynamics, Northrop Grumman, Capital One, and Marriott International.

Regional Economy

The DC Metro area has been one of the top performers in terms of job creation in recent years and employment growth has continued but on a somewhat more limited basis. While the Federal budgetdeficit kept government hiring to a minimum, private sector hiring picked up as recovery expectations remain optimistic. Even with minimal overall growth, Washington DC’s regional unemployment rate dropped to 5.4%, which continues to be the lowest in the country among major metropolitan areas.

Current Market Conditions

The slowdown in government leasing activity continued into the fourth quarter. In 2010 nearly 80% of the leasing activity was driven by government requirements. Government leasing accounted for only 52% of total activity in 2011. However, vacancy rates were kept in check by the relatively limited additional supply that was added to the market during the period. Metro-wide vacancy ended up exactly where it began at the start of the year, a sign of the continued stability of the region. Consolidating moves and renewal activity dominated the bulk of leasing activity. In general, landlord concessions remained fairly constant during the quarter reflecting the overall market stabilization.

Falcon Perspective

Compared to prior years, job growth has been slow which has translated into modest leasing activity. Employment figures are expected to improve into 2012, which should increase the overall demand for office space. Moderate demand in the near term combined with a limited new construction pipeline will continue to keep a positive balance in the market.

Investment Opportunities

Washington, DC continues to be one of the favorite markets for buyers seeking security and stability and well leased assets continue to receive strong interest from domestic and international investors. Many of the expected fourth quarter trades have rolled over into the first quarter 2012. The US Mint building has reportedly found a buyer in the sub-six percent cap rate range and 733 10th Street, developed by Skanska, also experienced competitive pricing levels and is expected to trade for nearly $850 per square foot. 1776 Eye Street, which had some current vacancy and near term rollover, is said to be trading for $550 per square foot.

Washington, D.C.

4th Quarter 2011

DC Metro Unemployment: 5.4%

U.S. Office Market Report

Vacancy

CBD: 104,950,191 11.9% 991,861 $59.28

Non-CBD: 185,678,715 16.7% 775,229 $32.51

Total: 290,628,906 15.0% 0.2% 1,767,090 $42.18

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13

Market Relevance

Atlanta is the largest office market in the southeast area of the U.S. It is one of the nation's leading tourist destinations, both for Americans and those visiting the U.S. from abroad. With a population of over 5.2 million, the city is the 9th largest metropolitan area in the country. Employment growth, a reasonable cost of living, a high quality of life and a business-friendly environment fueled a population growth of approximately 25% during the past decade. Atlanta also ranks in the top ten U.S. cities in number of Fortune 500 headquarters that call it home. Top companies located in the Atlanta metropolitan area include Coca-Cola, Home Depot, UPS, and Delta Airlines.

Regional Economy

The unemployment rate declined to 9.2% at year-end compared to 9.9% at the end of the 3rd quarter. The Atlanta economy is still weak, and commercial vacancies remain high, but the office market appears to be at the bottom of the cycle with flattened rents and stabilizing occupancy. Improving employment prospects will help alleviate the ongoing apprehension in the business sector and the commercial real estate recovery will begin slowly and improve slightly as we move through 2012.

Current Market Conditions

The Atlanta office market vacancy rate was just under 22% at the end of 2011, while rental rates have remained flat. Demand for Class A Atlanta office space was positive in 2011 with absorption of 1,216,000 square feet, while Class B space had negative absorption of almost 900,000 square feet. The absorption was centered in the Buckhead submarket. Tenants, when able, are trading up from Class B & C space into Class A product. 2011 saw no new construction delivered and only small inventory increases are expected in 2012. The market can expect to see rental rates and overall vacancy improve slowly in the coming year. Significant property sales during the year included the 502,000 square foot Riverwood Tower property in Vinings, GA, which sold for $86.3 million, or $172 per sf, 3344 Peachtree in Buckhead, a 484,000 square foot mixed-use tower project that sold for $167.3 million ($346 per sf), and Promenade II, a 774,000 square foot 40-story office building in Midtown that traded for $134.7 million ($174 per sf).

Falcon Perspective

The positive Class A office space absorption during 2011 is a good indicator for continued Atlanta office demand in the coming year. Although rental rates remain flat, we can expect improvement during the current year as the local, regional and national economies continue their slow recovery. The relatively higher capitalization rates for Atlanta, especially when compared to the compressed rates of primary markets like New York and Washington, may present an opportunity for investors to earn higher yields.

Investment Opportunities

Falcon believes that this is an opportune time in the cycle topurchase select assets in top locations, primarily the Midtown and Buckhead submarkets. These two markets tend to offer newer and higher quality properties with better credit tenancy. Deal flow continues to be limited, mainly because current owners wish to avoid selling quality properties at the bottom of the cycle, or there are lender constraints in allowing certain properties to come to market. Falcon will present Atlanta opportunities to our clientele that seek quality investments that also offer a higher yield profile.

Atlanta, Georgia

4th Quarter 2011

Capitalization Rates Atlanta Unemployment: 9.2%

U.S. Office Market Report

Vacancy

Total: 142,615,166 21.9% 0.4% 0 $23.45

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Market Relevance

Known as the Energy Capital of the world, Houston is the sixth largest MSA in the country and serves as the headquarters location for 11 of the 25 largest public oil and gas corporations. Supplementing the strong energy sector, Houston is also home to the world’s largest medical center and a rapidly growing port. Over three times as large as the second largest medical center, the Texas Medical Center employs over 93,500 people and has over 71,500 students enrolled. The Port of Houston is one of the top 5 largest U.S. ports by volume and the largest petroleum port in the world. Houston is home to 26 Fortune 500 corporations, including Conoco Phillips, Marathon Oil, Sysco and Shell Oil.

Regional Economy

Houston, like other metropolitan areas, is a collection of distinct individual sub-markets. Houston’s submarkets are defined by the strong industry presences comprising each; Medical Center (health care), Westchase (engineering), Energy Corridor (oil and gas extraction). Houston also benefits from a few diversified submarkets including the CBD, Galleria, Greenway Plaza and Woodlands submarkets. Due to Houston’s diversified industry sectors, the local economy has fared quite well relative to the rest of the nation over the past two years. The MSA’s unemployment rate ending December 2011 came in at 7.6%.

Current Market Conditions

The Houston market continues to see robust economic activity and not surprisingly the greatest activity in the leasing market came from the oil and gas sector. With solid expansion in the energy sector and a strong housing market, Houston’s economy is expected to continue outperforming the national economy over the next twelve to eighteen months. Overall vacancy has tightened and improving market conditions have spurred some limited and targeted development projects.

Falcon Perspective

Houston’s office market has undergone significant changes in the past twelve months benefiting from positive absorption, falling vacancy, and rising rental rates. Increased leasing activity in the energy sector has been a significant factor in the year-end positive net absorption. As one of the strongest office markets in the country with continual new employment growth and a relatively low cost of living Houston remains a key investment location.

Investment Opportunities

While fourth quarter activity slowed compared to the fast pace experienced in previous quarters, 2011 closed with two monumental transactions, the sales of Hess Tower and 1000 Main achieved record setting per square foot pricing of $525 and $425 respectively. Both sales reflected cap rate pricing of around 6.5% making the return on investment more attractive than many markets in the country. These successful sales should lead to additional activity in 2012 as existing owners of other well leased and well located office towers consider their options and other sellers hope to take advantage of the positive market conditions and recent sales successes.

Falcon Contact: Laurence Welsh Phone: (703) 740-2201 lwelsh@falconreal.com

Houston, Texas

4th Quarter 2011

Capitalization Rates Houston Unemployment: 7.6%

U.S. Office Market Report

Vacancy

Total: 167,193,318 15.5% 1.8% 2,125,039 $30.14

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Falcon Contact:

Kenneth Lorman Carl Omark

Phone: (212) 571-5445 ext. 111 Phone: (732) 671-0916 klorman@falconreal.com comark@falconreal.com

Miami, Florida

4th Quarter 2011

Miami Unemployment: 10.3%

U.S. Office Market Report

Market Relevance

Miami is the 8th largest metropolitan area in the United States, an international gateway city that attracts visitors and investors from around the world, especially from Brazil, Venezuela, Argentina, and other countries of Latin America. The Port of Miami is the area’s 2nd most powerful economic engine after Miami International Airport. It generates over $17 billion in revenue and is responsible for over 150,000 jobs. The Port of Miami Tunnel is a $900 million dollar project that will enable the Port of Miami to grow by providing direct access to the port from Highways I-95 and I-395. This project will not only allow the Port to remain competitive with other Florida ports but will significantly reduce congestion on downtown streets. The project is slated for completion in May 2014.

Regional Economy

The Miami-Dade county unemployment rate decreased from the Q3 rate of 11.5% to 10.3% at the end of the year. The unemployment rate for South Florida decreased from 11.9% to 9.4% over the same period. There are however two reasons for caution when viewing these positive employment figures for the recent quarter. One is that a declining labor force was a factor in the reduced unemployment rates, primarily the result of discouraged job seekers who have stopped looking for work. The second factor is that the American Airlines bankruptcy, which will result in 15% of its workforce being eliminated, is just starting to show up in employment figures. American, Miami’s dominant airline, employs about 9,000 people in South Florida. Business and employment growth is expected to continue throughout 2012 based on increases in the retail, hospitality, and healthcare sectors.

Current Market Conditions

Class A buildings were responsible for almost all the positive absorption during 2011 as many tenants moved to newer buildings with better locations at the end of their lease terms. Significant sale transactions during the year include the 420,000 square foot SunTrust International Tower, an 82% leased Class B office building that sold for $82.5 million, or $196 per square foot, and One Herald Square, a 758,000 square foot building housing The Miami Herald, sold for $236 million, or $311 per square foot. The latter was bought by the Genting Group, and will be part of a proposed massive development project, the timing and scope of which will be determined based on whether resort casino gambling is approved. Voting on resort casino gambling faces some stiff obstacles and will probably not see passage in 2012. The Miami market is stabilizing, evidenced by lower vacancies and increasing rents, and buoyed by better employment prospects. The vacancy rate, although showing improvement, is still high, and there are millions of square feet available to new and expanding office users.

Falcon Perspective

The Miami-Dade office market’s recovery has been slow but steady since early 2010. As job creation picks up the demand for office space and rental rates will increase correspondingly. As values increase more owners (or their lenders) will be in a position to market their properties.

Investment Opportunities

Few quality properties are currently for sale in the State as owners either wait for improved market conditions before selling or work with lenders to refinance or extend loan maturities. Falcon will continue to seek out quality marketed and off-market investments in the greater Miami area that present opportunities to take advantage of this area’s potential for future returns and asset value appreciation.

Vacancy

Rate Y-T-D Net Absorption(% of inventory) Y-T-D Construction _{Completed (sq. ft.)} Avg. Asking Rent_{(per sq. ft.)}

Total: 79,070,237 18.4% 1.6% 614,908 $34.20

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Market Relevance

Northern New Jersey (NNJ) ranks as the 9th largest office market in the U.S. and the 18th largest economy in the world. New Jersey is a leading state in terms of total population, population density and average household income. NNJ offers a diversified tenant base and is home to a significant number of corporate headquarters. Leading industries include pharmaceuticals, telecommunications, insurance and finance. Fifty-four Fortune 500 companies have either a corporate headquarters or a major facility in New Jersey.

Regional Economy

NNJ’s economy continues to stabilize with signs of slight improvement. The unemployment rate fell again during the quarter from 9.4% to 9.0%. The state continues to add private sector jobs as corporate confidence improves. Growth has continued to be dominated by the professional and business services sectors while State government has been shrinking its payrolls.

Current Market Conditions

NNJ’s overall rents may have bottomed out and the State has witnessed four consecutive quarters of positive space absorption. The most positive gains have been concentrated inhigher quality Class A buildings within a few select quality markets. Pharmaceutical and life science firms were responsible for a majority of the leasing transactions in the quarter. About half of the markets have shown signs of improvement while others remain sluggish. Better Class A office properties continue to significantly outperform the greater market and as a result remain most desirable for buyers. There is a degree of optimism going into 2012 as incremental improvement has been sustained throughout 2011.

Falcon Perspective

We expect gradual recovery over the next few years that should result in only marginal improvement over the near term. Opportunities should arise in top properties located in stronger submarkets including the Hudson Waterfront, Interstate-78 and Princeton, which generally outperform the greater market. We recommend targeting long-term leased corporate headquarters and Class A office properties with quality tenants. Otherwise, it is still early in the recovery cycle to consider lesser quality properties, secondary locations or near term leasing risk.

Investment Opportunities

Only a handful of large core properties have traded in the market during the year and we expect this trend to continue. Falcon had recommended for purchase a trophy quality single-tenant deal under a non-cancellable 15-year term with larger than usual rental rate increases. We had mentioned this project in our previous quarterly market report indicating that the newly constructed 325,000 square foot BASF North American headquarters building would be an excellent opportunity to earn attractive returns, especially when compared to office properties located in New York City, Washington DC and Boston. Other opportunities are expected to come to market in the form of value-add multi-tenant office and on the other end of the investment spectrum, Class A multi-tenant office buildings. Top locations that allow quick access to better residential communities and New York City will remain a priority.

Falcon Contact:

Kenneth Lorman

Phone: (212) 271-5445 ext.111 klorman@falconreal.com

Northern New Jersey

4th Quarter 2011

New Jersey Unemployment: 9.0%

U.S. Office Market Report

Vacancy

Total: 107,674,349 17.9% 1.0% 30,000 $28.82

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Market Relevance

Orange County is the sixth most populous county in the U.S. It benefits from an extremely diverse economy led by major employers such as Walt Disney Company, University of California, St. Joseph Health System and Boeing. Orange County’s status as one of the most desirable places to live in the nation has attracted a population of just less than 3.1 million that is projected to exceed 3.25 million by 2013. The area has historically ranked among the stronger regions of the U.S. in terms of job growth.

Regional Economy

Orange County’s economy added 24,600 jobs during 2011 dropping the unemployment rate in the region to 7.8% at the end of the 4th quarter. This is much improved from the 8.9% unemployment rate reported at the end of the 1st quarter 2011. Job gains were recorded in nearly every sector of the diverse Orange County economy. Government, professional and business services and education/health services have contributed over half of the jobs added in Orange County during the past year. Continued improvement is forecast for 2012 with the region expected to add another 21,000 jobs during the upcoming year.

Current Market Conditions

The 4th quarter of 2011 marked the fifth consecutive quarter of positive absorption in the Orange County office market. Positive absorption for the year totaled 2.4 million square feet with demand driven by tenants taking advantage of low rents and increased landlord concessions. Vacancy fell 90 basis points during the quarter to 17.9% and is substantially reduced from the recessionary peak of 21.8%. However, the vacancy rate is still too high for overall rent growth to occur. The average asking rental rate in the Orange County office market continued its 2-year decline and ended the year down 3%. The 2012 outlook calls for steadily increasing tenant demand and continued erosion of the overall vacancy rate. The market wide average rental rate should stabilize later in the year with moderate rent growth recorded by the higher quality buildings in the premier locations.

Falcon Perspective

Orange County boasts a diversified economy that includes almost every economic sector. Historically, Orange County has outperformed the economies and office markets of most major metropolitan areas of the U.S. As such, the region has emerged as a premier target for institutional real estate investment. Decreased vacancy in the Orange County office market and positive net absorption suggest that the region is in the early stages of economic recovery. Investors have returned to the market as evidenced by the increased competition for the few properties that have been presented for sale. Because the region’s economy and the office market are still in the early stages of recovery, there is still time for investors with a long-term horizon to find good value in Orange County real estate.

Investment Opportunities

AEW Capital Management’s purchase of 2050 Main Street in the Airport Area submarket of Orange County was the 4th quarter’s premier transaction. The purchase price was $108.5 million or $345 per square foot and equated to a low 6% cap rate. The seller, a partnership of Westbrook, Walton Street and Greenlaw, purchased the asset for $56 million in 2009 and increased occupancy from 20% to over 80% prior to marketing the property. This transaction illustrates the institutional appeal of Orange County’s real estate investment market and the optimism regarding the market’s recovery.

Falcon Contact:

Adam Doud

Orange County, California

4th Quarter 2011

Orange County Unemployment: 7.8%

U.S. Office Market Report

Vacancy

Total: 83,325,393 17.9% 2.4% - $25.47

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Falcon Contact: Adam Doud Phone: (858) 451-8131 adoud@falconreal.com

Market Relevance

The City of Phoenix is notable for the high quality of life and relatively low cost of living that has attracted a young, well-educated population to the region. Phoenix has been known as a leader in population and job growth among large cities in the United States. Since 1968, Phoenix has added, on average, 68,000 residents annually. In the years immediately prior to the recession, the region’s population increased dramatically and job growth was among the best, if not the best, in the U.S.

Regional Economy

The Phoenix economy rebounded strongly during 2011. The region’s unemployment rate ended the year 110 basis points lower than it began the year and now stands at 7.7% which now bests the national average rate of 8.6%. In sharp contrast to the nearly 230,000 jobs lost to the recession between 2008 and 2010, the Phoenix economy added approximately 33,400 jobs during 2011. Although seasonal retail employment bolstered the job growth figures, retail was not the only sector of the economy to post gains during the 4th quarter. Six of the 11 major sectors added jobs during the quarter. Jobs were lost in three sectors while the remaining two sectors remained flat. It is projected that another 40,000 jobs will be added in Phoenix during 2012.

Current Market Conditions

During 2011, leasing activity, a primary indicator of market strength, improved 31.1% over 2010 levels. An estimated 4.7 million square feet of gross activity was recorded during the year, which translated to 1.1 million square feet of positive absorption. Direct vacancy dropped to 24.4%, a 60 basis point improvement over year-end 2010. However, sublease space added to the market by one of the region’s largest office users, University of Phoenix, resulted in a 30 basis point increase of the overall vacancy rate that now stands at 26%. This large amount of vacancy compels property owners to drop rental rates in order to maintain occupancy in their buildings. This trend will continue until vacancy reaches 15% - 17%. The most optimistic projections suggest that asking rents could stabilize during 2012. No rent growth is expected for some time.

Falcon Perspective

Phoenix is a timing market that exhibits significant fundamental swings during economic cycles. Market fundamentals and property values are significantly reduced from their 2007 peaks. The stabilization of the local economy has caught the attention of opportunistic investors who have once again focused on the region in hopes of positioning themselves to benefit from the pending market recovery. This is evidenced by increased investment activity in Phoenix. This market is a good target for investors who may accept its cyclical instability for the chance to achieve strong overall investment returns.

Investment Opportunities

Following a 3rd quarter during which several notable investment sales were completed, transactions during the 4th quarter were limited to a few medical office and class B properties. There are no quality offerings in the market currently. The lull in activity could be attributable to the improving economic conditions in the region. Owners who have weathered the worst of the recession are likely holding on to properties to see what effect the improved market conditions will have on property values. As it has in past recoveries, housing affordability, population growth and employment growth may translate to business expansion in, and relocation to, the Phoenix metropolitan area. If this happens then many more investment opportunities should be brought to market in Phoenix by owners who hope to achieve better value for their assets.

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Phoenix, Arizona

4th Quarter 2011

Phoenix Unemployment: 7.7%

U.S. Office Market Report

Vacancy

Total: 78,117,373 26.0% 1.4% 622,070 $24.56

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Market Relevance

With more than three million residents, San Diego is one of California’s most densely populated regions and is the 17th largest MSA in the United States. San Diego is a popular tourist destination, is home to three significant military installations and benefits from a port that is, among other things, home to the largest naval fleet in the world. San Diego also boasts a remarkable concentration of world-renowned research institutions that make the region an important hub of bio and high technology.

Regional Economy

The addition of 26,600 jobs during 2011 dropped the unemployment rate to 9.2%. This past year was the first year since 2008 that San Diego recorded positive job growth. Professional/business and financial services added 8,000 jobs, the largest amount of any sector. More robust job growth is predicted for 2012 during which time the office using employment base is expected to expand by as much as 3.7%. The industries that are expected to contribute most to that expansion are technology, biotech and professional/business and financial services.

Current Market Conditions

Leasing activity in San Diego increased by 16.3% year-over-year with gross activity during 2011 totaling 7.2 million square feet. 2011’s leasing activity was 60% higher than what was recorded in 2009, when the market was hardest hit by the recession. The 349,396 square feet of positive absorption posted during the 4th quarter increased annual positive absorption to approximately 1.1 million square feet, which dropped direct vacancy to 14.2%. Overall vacancy, including sublease space, dropped from 15.5% at the end of the 3rd quarter to 15.2% at the end of the 4th. If the market is able to demonstrate that it is able to maintain the positive momentum and hold on to the gains that have been achieved, then vacancy has reached a level where rent growth should occur; especially within the top tier subset of properties and in the premier submarkets.

Falcon Perspective

The outlook for San Diego’s economy continues to improve and this is reflected in fundamental gains for the region’s office market. Absorption of office space in San Diego remains positive and is driven by tenants that are drawn to high quality buildings at relatively low cost. This trend should quickly generate fundamental improvements market-wide and when this occurs San Diego office investments will again be targeted by core buyers. Investors who want to be ahead of the curve should focus on San Diego now as capital is once again targeting San Diego office buildings.

Investment Opportunities

There were several notable investment sales that closed in San Diego during the 4th quarter. Pacific Center 1 & 2 was purchased by Commonwealth for $116 million or $265 per square foot. The seller was the special servicer, LNR. The property was 70% leased at the time of sale and the property was sold well below the $121 million mortgage balance. Seaview Corporate Center was purchased by Manulife from Pacific Office Properties for $109 million. The purchase price equated to a price per square foot of $306 and a cap rate of 7.4% on proforma year one income. Seaview was 95% leased at the time of sale. Mission Valley Crossroads was sold by Behringer Harvard to Brookwood for $27.9 million or $200 per square foot. The class B+ asset was 80% leased at the time of sale. The cap rate was 7.0% on in-place income. Although no quality projects are on the market currently, it is expected that many opportunities will be presented during 2012.

Falcon Contact:

Adam Doud

San Diego, California

4th Quarter 2011

San Diego Unemployment: 9.2%

U.S. Office Market Report

Vacancy

Total: 72,526,533 15.2% 0.8% 83,000 $30.35

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Seattle, Washington

4th Quarter 2011

Capitalization Rates Seattle Unemployment: 8.2%

U.S. Office Market Report

Market Relevance

Due in part to its status as a major port city of the western United States and because of its relative proximity to Japan and China, Seattle is a preferred market for real estate investment. The city’s attributes have attracted many well-known Fortune 500 companies including Microsoft, Costco, Starbucks, Amazon, T-Mobile, Nordstrom and Weyerhaeuser that locate their headquarters in Seattle.

Regional Economy

During 2011 there were 44,600 jobs added in the Seattle Metropolitan Area. Job growth reduced the region’s unemployment rate to 8.2%; down approximately 60 basis points from where it started the year. Manufacturing, leisure and hospitality, education, health services and professional and business services were the sectors of the economy that contributed to the strengthening employment figures. Government job losses offset some of the employment gains but were not substantial enough to derail the local economy’s improvement. Over the next 12 months, Seattle job growth is expected to expand by an additional 1.8%, which puts the region near the top of the list of the best performing regional economies in the western U.S.

Current Market Conditions

Moderate but steady fundamental improvement in the Seattle office market persisted through 2011. Positive absorption of 1.1 million square feet in the Seattle CBD contributed to a reduction of the region’s overall vacancy rate that now stands at 17.8%. The year-end vacancy rate represents a 70 basis point improvement from the beginning of the year. The increased leasing activity has prompted landlords to reduce or eliminate leasing concessions and to begin to increase rents, especially within the competitive set of top tier office properties. The outlook for 2012 indicates that market fundamentals will continue their steady improvement.

Falcon Perspective

Seattle was among the cities in the western U.S. that benefitted most from the burgeoning economy and real estate market of several years ago. The market was characterized by rapidly increasing rental rates, low office vacancy and tremendous tenant demand. As one of the markets to thrive during the strong economy, Seattle was also among the markets hardest hit by the recession. Now the region seems to have weathered the economic storm and conditions in the office market are improving. Falcon considers this an excellent time for investors to focus on this gateway city.

Investment Opportunities

In an offering that is reported to have generated over 80 bids, JP Morgan Chase purchased two Seattle office properties from Schnitzer West for a combined $479.4 million. 1918 Eighth Avenue was purchased for $350.1 million, which equated to a 5.2% cap rate on year two stabilized income. The second building purchased by JP Morgan Chase was 818 Stewart. The purchase price for this building was $129.3 million, which also equated to a low 5% cap rate. At well over $500 per square foot, the sale of these assets illustrates the demand for quality office properties in Seattle. Another prominent office tower, the 870,000 square foot Russell Investments Center, is on the market and should command similar pricing.

Vacancy

CBD: 41,813,548 19.5% 1,012,431 $32.96

Non-CBD: 39,920,396 16.0% 223,088 $27.67

Total: 81,733,944 17.8% 2.4% 1,235,519 $30.38

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U.S. Office Market Report

Absorption

Net absorption represents the net change in physically occupied space within a given time period for a particular market. This number is calculated by adding all the positive changes in occupancy; for example, new leases, and subtracting all the negative changes in occupancy, such as tenants expiring or otherwise leaving previously occupied spaces.

Average Asking Rental Rates

The annual price per square foot sought by Landlord’s in a particular market for a full-service lease. This means the Landlord pays the first year amount of certain expenses like maintenance, real estate taxes, office cleaning, insurance and other items as part of the asking rent. Most often tenants pay for any future increases in these expenses as additional rent. Utilities vary by location but are commonly paid directly by the tenant.

Capitalization Rate (Cap Rate)

Equal to a property’s Net Operating Income (net income) divided by the Purchase Price. Sometimes referred to as “gross initial yield”.

CBD

Central Business District

New Construction

This number represents the amount of square footage under construction in a particular market that will subsequently be added to inventory and available for lease. Upon completion, new construction becomes part of inventory and, if vacant, will add to the reported Vacancy Rate.

Unemployment

For an individual, unemployment is the state of looking for a paying job, but not having one. The unemployment rate, therefore, is the total of those individuals divided by the total workforce, the sum of all those employed as well as those currently unemployed. Neither the unemployment rate nor those unemployed includes full-time students, the retired, children, or those not actively seeking a paying job.

Vacancy Rate

The percentage amount of the physically vacant space divided by the total amount of existing inventory.

Glossary:

All of the statistical information has been taken from Cushman &Wakefield, Jones Lang LaSalle, Colliers International, CB Richard Ellis, the Bureau of Labor Statistics, and the Federal Reserve Board.

The text of the city reports with a statistical breakdown between CBD and non-CBD covers only CBD, unless otherwise noted. The text of the city reports without that statistical breakdown covers the total market.

Inventory, vacancy rate, net absorption, and YTD Construction Completions are for all classes of property. Rental rate is for Class A only.