INSIGHTSTRENDS OPPORTUNITIES

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1Q 2014

IN THIS ISSUE...ECONOMIC OPTIMISMIncreasing Certainty, Economic Growth and Rising Interest Rates

EXIT STRATEGYNegotiate an Exit When Entering a Lease Agreement

HEALTHY ASSETSAffordable Care Act’s Impact on Medical Office Buildings

SPOTLIGHT ON DEVELOPMENTBHP Billiton Tower – Houston, Texas

ECONOMIC OPTIMISMIncreasing Certainty, Economic Growth and Rising Interest Rates

transwestern.com | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

Uncertainty was a theme for 2013, but signs are looking up as Congress was finally able to reach a budget agreement at the end of the year

Recent polling data reflects the optimism that began to bubble in 2H13

Since March 2012, there has been an upward trend of those who believe the economy has begun to recover versus those who believe it has not begun to recover

Optimistic responses reached its peak in mid-December 2013, around the time that Congress passed the two-year budget deal, at 59% believing the economy had begun to recover

Many indicators point to stronger conditions for both consumers and businesses in 2014:

Record corporate profits, soaring stock prices, sturdy job gains, robust housing market growth, rising consumer confidence and spending

transwestern.com | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

NATIONAL ECONOMIC RECOVERY POLLHAS THE ECONOMY BEGUN TO RECOVER?

30%

35%

40%

45%

50%

55%

60%

65%

70%No

v ‘09

Dec ‘

09

Feb

‘10

Oct ‘

10

Dec ‘

10

Jun

‘11

Jan

‘12

Mar

‘11

Nov ‘

11

Mar

‘12

Dec ‘

12

Mar

‘13

May

‘13

Dec ‘

13

Note: Totals may not equal 100% due to ‘No opinion’ responses.

Source: ABC News/Washington Post Polls, Delta Associates; February 2014.

Shar

e of

Res

pond

ents

HasHas Not

59%

39%

transwestern.com | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

October2010

October2011

October2012

October2013

Shar

e of

Res

pond

ents

Note: Totals may not add to 100% due to rounding.Source: PNC, Delta Associates; February 2014.

Optimistic

Moderately Optimistic

Pessimistic

4%

37%

58%

2%

29%

68%

4%

38%

57%

7%

53%

39%

BUSINESS OWNERS’ OUTLOOK ON THE NATIONAL ECONOMY

transwestern.com | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

RATE OF INCREASE HOW ARE INCREASING INTEREST RATES EXPECTED TO IMPACT THE REAL ESTATE MARKET?

Increase in long-term interest rates will gradually – but meaningfully – affect investors’ decision-making in 2014

With the national economy showing signs of more significant traction during 2H13 and the Fed making it clear that tapering will continue in 2014, long-term interest rates are likely to continue their ascent

J.P. Morgan forecasts 10-year Treasury yields stabilizing at 4.5 to 5.0% in 2018, with a 200 to 300 bps spread for core real estate

Commercial mortgage rates of perhaps 7.25% in 2018

It is likely that cap rates will edge up in 2014, with investors demanding higher initial returns on investment

While fundamentals generally improved in 2013, there are still significant factors working against the real estate market, most notably office tenants’ reduction in square feet leased per worker

The key question is when will rate increases accelerate to the point that access to financing becomes materially more expensive and changes the decision calculus for investors?

transwestern.com | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

1.00%1.25%1.50%1.75%2.00%2.25%2.50%2.75%3.00%3.25%3.50%

Feb

‘13

Mar

‘13

Apr ‘

13

May

‘13

Jun

‘13

Jul ‘1

3

Aug

‘13

Sep

‘13

Oct ‘

13

Nov ‘

13

Dec ‘

13

Jan

‘14

Jan

‘13

Perc

enta

ge Yi

eld

on 1

0-Ye

ar N

ote

Note: As of each month’s end.Source: U.S. Department of the Treasury, Delta Associates; February 2014.

2.67%

10-YEAR TREASURY YIELDJANUARY 2013 THROUGH JANUARY 2014

EXIT STRATEGYNegotiate an Exit When Entering a Lease Agreement

transwestern.com | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

Many companies fail to plan for possible shifts in their real estate requirements

Negotiating an exit strategy is insurance against an unforeseeable future

Tenants need lease protection in case changes occur in the economy, their company or the industry in which they operate

For example, a client occupied 17,000 square feet in Dallas and needed another 5,500 square feet. The company next door was marketing 9,000 square feet for sublease, but the client could not take any of it because the sublease contract prevented leasing to an existing tenant in the building

Specifically, the language concerning “use,” “parking” and “assignment and subletting” is extremely important to keep as many options as possible open

transwestern.com | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

The most likely sublease candidate is the tenant next door or one that’s nearby in the building

A good sublease candidate might have toured the building recently but did not find the space it needed

Secure as many rights as possible to pass along on the sublease, such as those connected to building signage and advertising sublease space

Strive for a landlord consent time of seven to 10 days

Subleases historically bring in lower than current market rates, but companies cannot charge less than market rent without specifying that in the original lease

In the rare case that a company can secure above-market rent, it’s advisable for the firm to request expenses, commissions and tenant improvements be covered first as part of a profit-sharing agreement with the building owner

SUBLEASE-RELATED TIPSMAY SEEM LIKE REAL ESTATE 101, BUT NEGLECTING THESE COULD BE COSTLY Business shifts are

often unimaginable to the tenant at the beginning of a lease term, but planning for them is as important as negotiating any other element in the agreement.

HEALTHY ASSETSAffordable Care Act’s (ACA) Impact on Medical Office Buildings

transwestern.com | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

More physicians are relying on hospital systems for financial stability in today’s changing healthcare sector

Hospitals are preserving their admission revenue by acquiring physician practice groups

Physicians are able to spend more time practicing medicine by joining hospital systems, which are better suited financially to spend capital on new medical equipment and electronic records required by the ACA

Hospitals can create efficiencies and lower real esate costs by consolidating physicians into larger multi-specialty groups

Contrary to public perception, this paradigm shift evoked by the ACA will have an overall positive effect on medical office buildings and healthcare facilities over time

transwestern.com | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

Owners of medical office buildings (MOBs) are benefitting from this integration by executing larger leases as hospitals combine multiple doctor practices

Average tenant increasing in size from 2,500 to 7,500 square feet

Grouping physicians has also fostered an environment for cross-patient referrals and synergies, promoting tenant retention and mitigating risk

This is also generating leasing velocity from prospects beyond the MOBs traditional sphere of influence

Historically, the lack of credit behind medical leases was a major obstacle in attracting institutional investment in the healthcare sector, but this shift has improved the credit profile of many MOBs

Sales volume as increased and cap rates have lowered in the healthcare sector, and institutional investment in the healthcare sector has increased 12% since the ACA

IMPACT ON OWNERS OF MEDICAL OFFICE BUILDINGS All types of investors

that previously may not have considered medical real estate as a stable asset class are responding to [the sector’s] improved credit

SPOTLIGHT ON DEVELOPMENTBHP Billiton Tower – Houston, Texas

transwestern.com | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

Owners and developers are raising the bar for the latest generation of premier office space

BHP Billiton Tower, a Class AA project under development, showcases the higher standard of workplaces of the future

The project will total 600,000 square feet and is situated within Four Oaks Place, a four-building, 1.7 million-square-foot complex owned by TIAA-CREF, a New York-based financial services firm

BHP Billiton, a global natural resources company, has leased the entire project under construction

The 30-story structure is designed to meet LEED® Gold certification

Pickard Chilton Associates designed the project to both complement the existing campus as well as stand out from the remaining inventory in Houston’s Galleria/Uptown submarket

transwestern.com | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

A glass skybridge will connect BHP Billiton Tower with one of the existing Four Oaks Place buildings in which BHP Billiton currently leases space

The bridge was widened to accommodate tables and chairs where employees can eat and congregate

Design modifications were made to support the weight and mitigate heat loads

Includes a dedicated dining area that can be used for more formal occasions

Floor-to-ceiling glass curtain wall system

Expansive 30-foot lobby

Stand-alone conference center

State-of-the-art fitness facility

Functional green roof

DISTINGUISHING FEATURESBHP BILLITON WAS ABLE TO TAKE PART IN THE DESIGN PROCESS Even before its

completion, this landmark represents the future development direction for top-quality office space in the United States.

Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, research and sustainability. The fully integrated global enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. As a member of the Transwestern family of companies, the firm capitalizes on market insights and operational expertise of independent affiliates specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 181 offices in 40 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate. For more information, please visit transwestern.com and follow us on Twitter: @Transwestern.

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