dtz dc survey 2q15

Market Report Washington, DC | 2nd Quarter 2015

DTZ | 2

Contents

DC Metropolitan Area Overview.....................................................................................................3

Washington, DC & Map...............................................................................................................4-6

East End .............................................................. ..................................................................................7

CBD ........................................................................................................................................................8

West End/Georgetown.....................................................................................................................9

Capitol Hill/NoMa...........................................................................................................................10

Southwest/Capitol Riverfront/Southeast.................................................................................11

Uptown......................................................................................................................................................12

Appendix...................................................................................................................................................13

Tables..................................................................................................................................................13-22

Methodology & Definitions..................................................................................................................23

About DTZ...............................................................................................................................................24

www.dtz.com | 3

Washington, DC Metropolitan Area

WASHINGTON, DC METRO

Economic IndicatorsQ2 14 Q2 15 12-Month Forecast

DC Metro Employment 3.11M 3.18M

DC Metro Unemployment 5.0% 4.6%

U.S. Unemployment 6.1% 5.3%

Market IndicatorsQ2 14 Q2 15 12-Month Forecast

Overall Vacancy 15.6% 16.1%

Net Absorption 154K 666K

Under Construction 3.9M 5.8M

Deliveries 2.1K 567K

Average Asking Rent (FS) $35.91 $35.29

DC Metro Region Rises off the Bottom

After a lackluster performance in 2014, by midyear 2015 it was clear that the DC Metro economy is back on track. Job growth in 2014 was below average with just over 19,000 new nonfarm payroll jobs for the year; in fact the DC Metro Region was last among major metropolitan regions in job growth in 2014. Compare that to June 2015: over-the-year employment in the region was 64,000 net new jobs well above the historical average of 35,000 jobs per year. Adding to the good news is the return of office-using job growth to the region. Overall office-using employment (including federal government employment) in the DC Region shrank by 12,000 jobs in 2014. At midyear 2015, office-using employment had turned positive, driven by a surge of over 20,000 jobs in the high- paying Professional and Business Services sector since June of 2014. A closer examination of that very important sector shows that consulting has been leading the way in employment growth, adding 9,500 jobs from since June 2014, administrative jobs adding 8,100 positions and an even a modest growth in executive level management and legal services in the region.

Major regional demand drivers are at an inflection point. After being a drag on the local economy for the last four years, the Federal Government has reached stabilization both in terms of spending and employment. The federal contracting community that is an integral part of the suburban office landscape is estimated to be about 65% of the way through its round of downsizing. Finally, about 80% of law firms that account for a third of the District of Columbias downtown core market footprint have transacted deals. While these law firms as a whole have reduced size requirements and returned 1.2 million square feet to the market from 2011-2014, the impact of any future downsizing will be far less dramatic.

In retrospect, it appears that the DC Metro regions office market hit bottom in 2014 and is now poised for positive, if modest, conditions moving forward in the near term. The vacancy rate for the region stands at 16.1%, a 0.1% decrease from its level in the first quarter of 2015. More importantly, the decrease in regional vacancy signals a reversal from 15 straight quarters of flat or rising vacancy. The downtick in vacancy coincides with overall positive absorption of 670,000 sf for the second quarter, bringing the midyear absorption total to 390,000 sf. With this as a backdrop, investment in the region continues unabated. As of midyear 2015, $4 billion in transaction volume had occurred in the office sector signaling another robust year for investors bullish on prospects for the future of the DC Region.

Net Absorption/Asking Rent 4Q TRAILING AVERAGE

Washington, DC Metropolitan Area NET ABSORPTION - DELIVERIES - VACANCY

0%

4%

8%

12%

16%

-4

-2

0

2

4

6

8

10

12

05 06 07 08 09 10 11 12 13 14 YTD15

Vac

ancy

Rat

e

MS

F

Net Absorption Deliveries Vacancy Rate

$33.50

$34.00

$34.50

$35.00

$35.50

$36.00

$36.50

-1.0

0.0

1.0

2.0

2010 2011 2012 2013 2014 2015

Net Absorption, MSF Asking Rent, $ PSF

DTZ | 4

Washington, DCEconomyIt is clear that after a lackluster year in 2014, the Washington, DC Metropolitan Regions economy has returned to above average conditions. The DC Metro continues to register one of the lowest unemployment rates among major metros in the United States4.6%. Since May of 2014, the region has added 59,000 non-farm payroll jobs, 15,400 of them in the office-using sectors of Professional and Business Services, Information, Financial Activities, and Federal Government. This is quite impressive considering about 35,000 net new jobs are added in a typical year and in 2014, the region lost approximately 12,000 office-using jobs. In the District of Columbia (DC), the unemployment rate dropped 40 basis points from 7.7% in January 2015 to 7.3% in May of this year while nonfarm job growth is up over 13,000 jobs compared to a year ago. The Federal Government, which accounts for over 25% of nonfarm payrolls in DC, has continued to stabilize after four years of contraction, adding 1,400 jobs from May 2014 to May 2015 while Professional and Business Services employment is up nearly 5,000 jobs.

Market OverviewAfter a modest start to the year, the District of Columbia experienced strong positive demand in the second quarter of 2015, driven by the two core downtown submarkets: the Central Business District (CBD) and East End. In fact, these two submarkets captured 69% of the demand across Washington DC during the quarter. The CBD boasted the strongest demand with 125,400 sf of positive absorption, while the East End registered 64,300 sf. The divergence of the East End and CBD that began in the first quarter of the year seemed to take a halt during the second quarter. The majority of deals signedboth new deals and relocationswere for space in the same submarkets where tenants leases were previously.

After three straight quarters of rising vacancy, the District of Columbias vacancy rate ticked downward 30 basis points to 11.0%. Vacancy in the CBD dropped below 10% for the first time since the end of 2008. Leasing activity in the second quarter was dominated by larger deals in new construction or renovated buildings. Kirkland & Ellis signed a prelease for 186,000 sf at 1301 Pennsylvania Avenue, NW in the East End. As is the case with several other large law firms, Kirkland & Ellis will downsize by more than 60,000 sf upon delivery of the Pennsylvania Avenue building in 2018. Another large lease in new construction was that signed by Bracewell Giuliani at 2001 M Street, NW currently undergoing a complete renovation. Following on the heels of its successful renovation of 799 9th Street which delivered in 2014 leased to two major law firms, Brookfields 2001 M Street, NW, has seen the most interest among all other major renovations throughout the District of Columbia. It is expected to deliver in 2016. Office buildings that are currently under construction are over 60% leased in the District of Columbia.

GSA activity was relatively light throughout the first half of the year, but is expected to pick up in the near future. A staggering 13 million square feet of federal leases are set to expire through 2019 in the District of Columbia and owners that can deliver large blocks of space that fit federal lease requirements are set to benefit. This activity could only have modest impacts on the overall vacancy rate in the District as most large prospectus level leases in the queue at this time are targeting space efficiencies in the 10 20% range with one for the Department of Education targeting a 42% space reduction.

Overall Vacancy Rate

Large Blocks of Contiguous Space

Gross Leasing Activity District of Columbia, Square Feet per Year

Market IndicatorsQ2 14 Q2 15 12-Month Forecast

Overall Vacancy 11.2% 11.0%

Net Absorption (321K) 275K

Under Construction 1.5M 3.1M

Deliveries 274K 0

Average Asking Rent $50.35 $50.12

0 10 20 30 40 50 60 70 80

CBD

East End

West End/Georgetown

Capitol Hill/NoMa

Southwest/Southeast

Uptown

# of Blocks

25k to 50k50k to 100k100k to 150k150k to 200k200k +

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

2010 2011 2012 2013 2014 2015

Historical Average = 10.7%

9.6

7.6

10.5

8.710.1

8.59.6

8.4 7.86.6

8.4

11.710.1

7.7

10.7

4.5

0

2

4

6

8

10

12

14

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Q215

Mill

ions

CBD East EndWest End/Georgetown Capitol Hill/NoMaSouthwest/Southeast Uptown

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Washington, DC SubmarketsWashington, DC Submarkets

50

1

1

29

395

295

395

395

395

1

5066

DISTRICT OF COLUMBIA

VIRGINIA

WEST END/GEORGETOWN CBD

EAST ENDNOMA

CAPITOL HILL

SOUTHWEST

CAPITOL RIVERFRONT/SOUTHWEST

UPTOWN

DTZ | 6

Washington, DC Office MarketInventory by Class, Second Quarter 2015

Top Transactions

Washington, DC Office MarketNet Absorption - Deliveries - Vacancy, Second Quarter 2015

Key Sales Transactions 2Q 15

PROPERTY SF SELLER/BUYER PRICE SUBMARKET

1101 K Street, NW 291,500 Rockefeller JV Mitsubishi / UBS Realty $260,000,000 East End

1325 and 1341 G Street, NW 431,600 TIER REIT / Westbrook Partners $200,000,000 East End

1750 K Street, NW 165,800 Sumitomo Corporation / Mirae Asset Global Management $115,000,000 CBD

645 H Street, NE 84,700 Jair Lynch / Intercontinental Real Estate $51,400,000 Capitol Hill

1140 19th Street, NW 71,100 AREP / Rockrose $40,500,000 CBD

Key Lease Transactions 2Q 15

PROPERTY SF TENANT TRANSACTION TYPE SUBMARKET

1301 Pennsylvania Avenue, NW 186,000 Kirkland & Ellis Prelease East End

1111 19th Street, NW 70,482 Undisclosed Tenant New CBD

1299 Pennsylvania Avenue, NW 56,500 APCO New East End

2001 M Street, NW 55,000 Bracewell Giuliani New CBD

2450 N Street, NW 43,100 Cogent Communications New West End

1001 G Street, NW 42,844 Quadrangle Development Corp. Renewal East End

955 L'Enfant Plaza, SW 34,000 Veracity Engineering New Southwest

900 G Street, NW 33,216 American Legacy Foundation New East End

0%

4%

8%

12%

16%

-1

1

3

5

7

05 06 07 08 09 10 11 12 13 14 YTD15

Vaca

ncy

Rat

e

MS

F


5%6%7%8%9%10%11%12%13%14%15%

0

5

10

15

20

25

30

35

40

45

CBD East End West End/Georgetown

Capitol Hill/NoMa

Southwest/Southeast

Uptown

Vaca

ncy

Rat

e

MS

F

Class A Class B Class C Vacancy % DC Overall Vacancy

www.dtz.com | 7

East End

After a dismal first quarter of 2015, the East End experienced positive demand and stronger leasing conditions throughout the second quarter. The submarket registered nearly 65,000 sf of net absorption and its vacancy rate declined slightly to 11.5%. The most demand was for Class B product with 120,000 sf of positive absorption, while Class A space actually posted negative absorption of 56,200 sf. Asking rents continued to diverge between Class A and B product and may now be affecting tenant preferences. The East End has traditionally been the main focus for DCs most credit worthy tenants as it was developed later; offering generally newer product than the Central Business District (CBD) and its proximity to both the Capitol and the White House is unparalleled throughout the District of Columbia. But over the past year or so the consistent trend has been tenants moving towards the CBD and into new or renovated product.

Although the submarket saw improvement during the second quarter, a further spike in vacancy may be in the cards as the availability rate is currently hovering at 21%. The spread is the widest among all submarkets in the District of Columbia and, with an inventory of nearly 40 million square feet, has led to a city-wide vacancy rate that is well above the historical average of 9%.

As has been the case over the last two years, new construction outperformed the rest of the market, registering 35,500 sf of absorption in the second quarter and accounted for over 50% of demand. The only delivery in the District through the first half of 2015, 900 G Street, NW, continued to see increased activity with the American Legacy Foundation signing for nearly 33,200 sf. Other large deals across the submarket were Kirkland & Ellis signing a 130,000 sf prelease at 1301 Pennsylvania Avenue, NW, and APCO signing for 56,500 sf at 1299 Pennsylvania Avenue, NW.

Outlook Many large blocks of space came back to market in the

East End in 2014, primarily the result of the GSA and major law firms increasing space efficiency. While this trend is not completely over, it appears the majority of planned consolidations have already taken place. As the East End has historically accounted for much of the District of Columbias leasing activity, look for conditions to level out in 2015 as expansion returns to the submarket.

Looking ahead, the East End will rely increasingly on private sector growth to fuel demand as the submarket is becoming too pricey for federal tenants.

While asking rents increased year-over-year in the East End, much of the increase can be attributed to new trophy product delivering to the market. With market conditions still leaning toward tenants favor, effective rents will likely remain flat into 2016.

Market Indicators*Arrows = Current Qtr Trend

Asking Rent

Net Absorption Deliveries Vacancy

Vacant and Available Space

Net Absorption64,365 SF

Vacancy11.5%

Deliveries0 SF

Under Construction932,300 SF

0%

4%

8%

12%

16%

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

05 06 07 08 09 10 11 12 13 14 YTD2015

Va

can

cy R

ate

MS

F


3.6 3.7 4.1 3.5 4.24.6

1.9 1.5 1.5 2.6

4.3 3.8

0123456789

Q4 10 Q4 11 Q4 12 Q4 13 Q4 14 Q2 15

MS

F

Vacant Marketed Available (not yet vacant)

$35

$40

$45

$50

$55

$60

$65

2009 2010 2011 2012 2013 2014 2015

Ful

l Ser

vice

PS

F

Class A Class B, $ PSF

Asking Rent$54.51 FS

DTZ | 8

Central Business District

The Central Business District (CBD) registered another very strong quarter in 2015. Net absorption for the second quarter was 125,400 sf, bringing the midyear total to 345,000 sf. Vacancy continued to decline, from 10.2% at the end of the first quarter to 9.9% to close out the secondthe first time vacancy has been below 10% since 2008. The CBDs availability rate and its spread from the vacancy rate are not nearly as pronounced as it is in the East End. Currently the availability rate is 14.2%; only a 4.3% spread which is among the smaller spreads across the entire District of Columbia market. Analyzing the two rates further, the CBD should continue to become more competitive as only five blocks of space are available over 100,000 sf.

The future continues to look very bright for the submarket with the existing development pipeline exceptionally well pre-leased. 900 16th Street, NW and 905 16th Street, NW are both more than 70% preleased and are expected to deliver at the beginning of 2016. Kicking off the leasing at Brookfields project, 2001 M Street, NW, Bracewell Giuliani signed for nearly 50,000 sf in the second quarter of the year. Although the building is currently only 19% leased with nearly 8 months until delivery, activity in the CBD has proven that newly renovated buildings outperform the rest of the market. For instance, Clarion Partners building at 1111 19th Street, NW has continued on its path towards a full lease-up with a new lease signed for 70,500 sf in the second quarter by an undisclosed tenant. After some major renovations to its lobby and faade, the building has gone from 55% leased to nearly 90% leased within one year.

The top-quality properties in the CBD have outperformed other properties in the submarket during the second quarter 2015, accounting for 136,999 sf of quarterly absorption. The Class B division of the CBD has been more competitive and boasts only 9.4% vacancy and 13.1% availability while Class A properties have a 10.4% vacancy and 15.1% availability. Considering the submarkets current momentum, combined with a scarcity of large blocks of space on the horizon, expect concessions to stabilize and dial back, leading to modest asking rent growth and a market that leans in the landlords favor.

Outlook With vacancy continuing to decline in the CBD, the

submarket may be one of the first in the District of Columbia to begin to see a shift from a tenants market to a landlords market.

The pipeline of properties under construction or renovation in the CBD is only 34% preleased. However, it includes Brookfield Office Properties speculative project at 2001 M Street, NW. The property recently signed its first core tenant and will likely gain momentum moving forward.


Asking Rent





Vacancy9.9%

Deliveries0 SF

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

05 06 07 08 09 10 11 12 13 14 YTD2015

MS

F


4.8 4.8 4.8 4.6 4.2 3.8

1.9 1.9 1.6 1.7 2.01.7

0

1

2

3

4

5

6

7

8

Q4 10 Q4 11 Q4 12 Q4 13 Q4 14 Q2 15

MS

F


$35

$40

$45

$50

$55

$60

$65

2009 2010 2011 2012 2013 2014 2015

Full

Serv

ice P

SF



0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

05 06 07 08 09 10 11 12 13 14 YTD2015

MS

F


www.dtz.com | 9

West End/Georgetown

West End/Georgetown saw a strong start to the year in the first quarter of 2015one of the few positive quarters of demand in the submarket over the last ten years. But demand remained flat throughout the second quarter of 2015, registering only 3,200 sf of absorption. The West End, largely composed of smaller office product, is vulnerable to large-scale move-outs driving vacancy rates upward. After a spike in vacancy in 2014, from 5.7% to 12.4%, the rate ticked back down by 0.5 percentage points down to 11.9% year-to date. Fortunately, the availability rate has declined consistently over the last three quarters, a solid sign that the submarket may have already endured the worst.

Typically the West End is dominated by smaller sized leases with fewer large blocks being marketed as available. Surprisingly, the fifth largest lease transaction in the second quarter for the entire District of Columbia was that of Cogent Communications which signed a new deal at 2450 N Street, NW. Previously owner-occupied by the Association of American Medical Colleges, Cogent was the first private-sector lease to be signed as it took nearly half of the 88,000 sf building.

The development pipeline continues to be bleak for the near future with no projects currently under construction and very little proposed looking out to 2018. Any development in the near term will likely be redevelopment of existing assets, possibly to other uses as will likely be the case with The Salvation Army Capitol Region headquarters at 2626 Pennsylvania Avenue, NW. This will continue to drive the demand in the land constrained submarket, likely resulting in a drop in the vacancy rate over the near term.

Outlook With the huge uptick in vacancy over the past year, expect

fierce competition for a limited number of tenants in 2015 as concession packages continue to reach record levels.

It remains to be seen whether some of the large blocks of available space in West End/Georgetown will ever be re-leased. One solution to the vacancy issue will likely be the conversion of some older office buildings to residential or other uses. 2501 M Street, NW may have started the trend and others, such as a rumored sale and redevelopment of the Salvation Army headquarters building at 2626 Pennsylvania Avenue, are likely to follow.


Asking Rent





Vacancy11.9%

Deliveries0 SF

Under Construction0 SF

0%

4%

8%

12%

16%

-600-500-400-300-200-100

0100200300

05 06 07 08 09 10 11 12 13 14 YTD2015

Vac

ancy

Rat

e

Squ

are

Fee

t, 00

0s


0.6 0.7 0.6

0.3

0.7 0.7

0.4 0.1 0.4

0.6

0.20.1

0

0.2

0.4

0.6

0.8

1

1.2

Q4 10 Q4 11 Q4 12 Q4 13 Q4 14 Q2 15

MS

F


$38

$40

$42

$44

$46

$48

$50

$52

2009 2010 2011 2012 2013 2014 2015

Fu

ll S

erv

ice

PS

F


DTZ | 10

Capitol Hill/NoMa

The Capitol Hill/NoMa submarket has continued to be one of the most active submarkets in the District of Columbia. Widely considered one of the up and coming areas of DC with increased development activity among all product types, the NoMa office submarket experienced strong demand with net absorption of 42,000 sf during the second quarter of 2015. As a result, NoMas vacancy rate declined 0.4 percentage points to 13.9%. Capitol Hill accounted for 68,000 sf of absorption from January through June, and boasted the lowest vacancy rate among all submarkets at 9.4%. Due to its prime location with proximity to the Capitol, Capitol Hill has maintained its place as the most competitive submarket that demands the highest asking rents of $56.88 psf, well above the $54.38 psf asking rents in the East End. The combined submarkets strong leasing demand has driven the vacancy rate down 0.5 percentage points to 12.5% at the half year mark.

On its own, NoMa has experienced high vacancy rates recently due to a number of large speculative projects that have been developed in the submarket. Over the last three years, both Sentinel Square and Three Constitution Square have delivered fully vacant on a speculative basis, and that has caused vacancy to spike. But as the market continues to experience government agency right-sizing, these buildings may become less expensive alternatives for the GSA than space in the CBD and East End. Another speculative building currently under construction is 660 North Capitol Street, also known as Republic Square II. The property signed its first two tenants, the National League of Cities and the National Association of Counties, which together will be taking roughly 81,000 sfnearly half the building. Another positive development: the availability rate in NoMa is currently 15.6%, a solid sign for the submarket as the spread between availability and vacancy is the smallest among major submarkets in the District of Columbia. There is little room for the vacancy rate to increase and so the worst may be over. Expect the spec properties to garner more attention from government tenants and NoMa to see a drop in vacancy in the near future.

A notable project that broke ground in the second quarter was Capital Crossing, backed by Property Group Partners. The project aims to connect the East End with Capitol Hill/NoMa while building a platform over I-395. There will be nearly one million sf developed over the course of the landmark project, adding a new aspect to the District of Columbia market. Property Group Partners goal is to create a new vibrant neighborhood with 63,000 sf of retail, restaurants and amenities to complement the office and residential portions of the project. A truly groundbreaking project, Capitol Crossing will bring a new excitement to Capitol Hill/NoMa when the project is completed in 2018.

Outlook Although Capitol Hill/NoMa has several large blocks of

space available, including two fully vacant buildings that delivered at the end of 2013, most of the available blocks are already vacant, so vacancy is expected to remain flat to declining into 2015.

While a play for GSA seems to be a no brainer for a NoMA submarket that can offer a new, highly efficient floorplate under the $50 prospectus rent cap in the District, there has also been rumored to be large private sector technology firms in play.


Asking Rent





Vacancy12.5%

Deliveries0 SF

Under Construction1,166,900 SF

0%

4%

8%

12%

16%

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

05 06 07 08 09 10 11 12 13 14 YTD2015

Vac

ancy

Rat

e

MS

F


1.71.2 1.2

2.0 1.9 1.9

0.6

0.6 0.9

0.6 0.4 0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Q4 10 Q4 11 Q4 12 Q4 13 Q4 14 Q2 15

MS

F


$25

$30

$35

$40

$45

$50

$55

2009 2010 2011 2012 2013 2014 2015

Ful

l Ser

vice

PS

F


www.dtz.com | 11

Southwest/Capitol Riverfront/Southeast

The Southwest/Capitol Riverfront/Southeast submarkets have consistently performed exceptionally well over the last two years. It is often viewed as one of the major submarkets gaining the most momentum in the District of Columbia. After a spectacular 2014, both Southwest and the Capitol Riverfront have proved worthy of the momentum, bringing in positive midyear absorption of 45,000 sf and 57,400 sf, respectively. The entire submarkets vacancy rate declined 0.2 percentage points to 10% with rates that hover around $43.00 psf.

With average asking rates well below $50.00 psf, it is federal government tenants driving the market activity by Nationals Stadium. The first quarter of 2015 was particularly active for GSA throughout the submarket. There were deals signed at 250 E Street, SW, 425 3rd Street, SW and 375 E Street, SW, all for over 50,000 sf. GSA activity in the second quarter slowed, not only in SW/Capitol Riverfront/SE but across the District of Columbia as a whole. Bucking the trend of GSA efficiency, the National Labor Relations Board actually expanded its footprint by nearly 10,000 sf at 1015 Half Street, SE during the second quarter, an indication that perhaps it may have been too aggressive in the attempt to maximize space efficiency.

Among private sector tenants, the American Psychiatric Association (APA) signed the first lease at 800 Maine Avenue, SW. The project, known as the first phase of the mixed-use Wharf development, has brought added excitement to the Southwest submarket. APA will take nearly 70,000 sf, or a third of the building, upon delivery in 2017. After another major lease transacts at the Wharf, expect 1000 Maine Avenue, SW to break ground shortly thereafter. The only other project under construction in the submarket is 400 6th Street, SW (also known as 500 D Street, SW). The property, developed by Trammell Crow, is expected to be finished by the end of the third quarter of this year and will supply 341,300 sf to the submarket. Currently the project is unleased but is expected to be very competitive for an unprecedented amount of government deals hitting the market in the near future.

Outlook With 70,000 sf preleased out of 550,000 sf under

construction in Southwest, rising vacancy is a definite possibility.

The National Association of Broadcasters will be moving to a build to suit office building at 1 M Street, SE in the Capitol Riverfront neighborhood. The building will break ground in spring of 2016 and bring 130,000 sf of office space to the submarket by 2018. With its ever-expanding amenity base, the Capitol Riverfront is rapidly becoming the citys full-service entertainment district.


Asking Rent





Vacancy10.0%

Deliveries0 SF


0%

4%

8%

12%

16%

20%

24%

-1

0

1

2

3

05 06 07 08 09 10 11 12 13 14 YTD2015

Vac

ancy

Rat

e

MS

F


1.31.6 1.8

2.0 1.8 1.7

0.5

0.70.6 0.1 0.6 0.9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Q4 10 Q4 11 Q4 12 Q4 13 Q4 14 Q2 15

MS

F


$35

$40

$45

$50

$55

2009 2010 2011 2012 2013 2014 2015

Ful

l Ser

vice

PS

F


DTZ | 12

Uptown

Uptown has experienced a sustained lack of demand since the beginning of the last recession and so has suffered from a severe spike in vacancy. In 2007, the vacancy rate hovered around 5%; vacancy is currently at 14.1%. Uptown also has the second highest availability rate among major Washington, DC submarkets: 19.0%. Net demand over the last 8 years has averaged nearly -75,000 sf per year and has totaled -655,000 sf. While this may not tell the greatest story, a few large-scale move-outs have significantly impacted the area given its relatively small inventory. With only 6.6 million square feet in the submarket, Intelsats move from 4000 Connecticut Avenue, NW to the suburbs played a large role in the vacancy spike as it gave back nearly 355,000 sf.

Unlike in many of the past quarters, the Uptown submarket experienced one of its first lease transactions over 10,000 sf during the second quarter of 2015. Metalogix, a software provider focused on Microsoft products such as Office 365, Exchange and Sharepoint, signed for 17,000 sf in the Chevy Chase Pavilion at 5335 Wisconsin Avenue, NW. The rest of the submarkets leasing activity was predominately deals for less than 5,000 sf. 2001 S Street, NW and 4315 50th Street, NW both saw a flurry of deals signed, all of which were under 5,000 sf. Those buildings alone accounted for nearly 20,000 sf of positive absorption. There were no notable large-scale move-outs during the quarter but expect some in the near future. After Fannie Mae signed for 700,000 sf in the East End last quarter, the GSEs existing buildings on Wisconsin Avenue NW will likely go to market for a redevelopment play. Given the slow leasing market in Uptown, expect the property to undergo a repurpose play and potentially change its use to residential.

Outlook Uptowns year-end 2014 vacancy rate of 13.0% is

significantly elevated from the submarkets ten-year average vacancy of 7.5%. With vacancy up across all of the District of Columbia submarkets, its likely this will be the new normal for Uptown. However, most of the large blocks of available space in Uptown are already vacant, the submarket inventory is only 6.6 msf and there are no buildings under construction. Because of these conditions, even a few moderate-sized leases over the next year will allow vacancy to trend back downward toward its long term average.

4000 Connecticut Avenue, NW, the 630,000-sf building that was left almost fully vacant with Intelsats departure, is undergoing extensive renovations in an effort to attract Washington, DCs growing base of technology and creative tenants. While it will likely take some time, a successful lease-up of this building could help turn things around in Uptown.


Asking Rent




Net Absorption(38,400) SF

Vacancy14.1%

Deliveries0 SF

Under Construction0 SF

0%

4%

8%

12%

16%

-400

-300

-200

-100

0

100

200

05 06 07 08 09 10 11 12 13 14 YTD 2015

Vac

ancy

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e

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are

Fee

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Q4 10 Q4 11 Q4 12 Q4 13 Q4 14 Q2 15

MS

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$25

$30

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2009 2010 2011 2012 2013 2014 2015

Ful

l Ser

vice

PS

F


www.dtz.com | 13

Appendix

Table Summaries

Metro Washington Office Market Summary13

Employment Data13

Office Availability, Vacancy, and Net Absorption14

Trailing 12-Month Data15

Historical Year-End Data16

Market Statistics by Class17-18

Survey of New Office Space by Submarket19-22

Methodology & Definitions23

Metro Washington Current Employment Data

Metro Washington Office Market Summary: Second Quarter 2015p

SOURCE: U.S. Bureau of Labor Statistics (Not seasonally adjusted)* Average per year to datep - preliminary

TotalInventory

Total SpaceVacant

VacancyRate

Q2 2015Absorption

YTDAbsorption

Washington, DC 122,850,343 13,562,737 11.0% 275,133 250,129

Northern Virginia 162,377,414 30,463,789 18.8% 370,078 172,605

Suburban Maryland 72,887,967 13,466,110 18.5% (79,631) 36,624

Regional Totals 358,115,724 57,492,636 16.1% 665,580 459,358

Non Farm Employment

(Jan-June 2014)

Non FarmEmployment

(Jan-June 2015p)

Jobs Added/ Lost* Percent Change

Washington, DC 751,100 761,950 10,850 1.4%

Northern Virginia 1,376,800 1,397,000 20,200 1.5%

Suburban Maryland 956,550 974,250 17,700 1.9%

Regional Totals 3,101,550 3,155,450 53,900 1.7%

DTZ | 14

AppendixO

ffice

Ava

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lity,

Vac

ancy

, and

Net

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orpt

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Sec

ond

Qua

rter

201

5p

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y R

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p - p

relim

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y

www.dtz.com | 15

AppendixTr

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g 12

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th D

ata

Tota

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canc

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p - p

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DTZ | 16

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250,

129

p - p

relim

inar

y

www.dtz.com | 17

Washington, DC 2nd Quarter 2015 Market Statistics

BuildingsTotal

Inventory(SF)

New Vacancy

(%)

Relet Vacancy

(%)

Sublet Vacancy

(%)

Total Vacancy*

(%)

Total Availability

(%)

Net Absorption Current QTR

(SF)

Under Construction

(SF)

Average Asking Rent(FS)

CBD

Class

A 102 22,620,478 0.6% 9.1% 0.7% 10.4% 15.1% 136,999 405,225 $55.10

B 128 15,002,584 0.0% 8.7% 0.7% 9.4% 13.1% 3,081 135,798 $42.96

C 20 877,698 0.0% 5.1% 0.0% 5.1% 3.7% -14,635 - $37.43

TOTAL 250 38,500,760 0.4% 8.9% 0.7% 9.9% 14.3% 125,445 541,023 $50.25

East End

Class

A 116 30,908,031 0.2% 10.8% 0.9% 11.9% 21.3% (56,189) 932,371 $57.43

B 65 7,921,789 0.0% 9.9% 0.7% 10.6% 18.1% 120,066 - $43.76

C 22 983,077 0.0% 3.4% 1.0% 4.4% 8.1% 488 - $48.96

TOTAL 203 39,812,897 0.2% 10.4% 0.8% 11.5% 21.0% 64,365 932,371 $54.51

West End/Georgetown

Class

A 23 3,886,159 0.0% 13.8% 0.7% 14.5% 17.9% 1,244 - $50.00

B 29 1,942,755 0.0% 7.4% 0.0% 7.4% 11.4% (5,086) - $41.01

C 6 92,213 0.0% 0.0% 0.0% 0.0% n/a 7,056 - n/a

TOTAL 58 5,921,127 0.0% 11.5% 0.4% 11.9% 15.7% 3,214 - $47.76

Capitol Hill

Class

A 13 2,865,971 2.5% 8.1% 0.3% 10.9% 16.9% 54,049 966,917 $58.29

B 17 1,364,132 0.0% 6.2% 0.2% 6.4% 17.6% (8,772) - $42.15

C 14 412,476 0.0% 8.3% 0.0% 8.3% 8.0% -1,750 - $44.90

TOTAL 44 4,642,579 1.6% 7.6% 0.2% 9.4% 14.9% 43,527 966,917 $53.72

NoMa

Class

A 32 9,497,067 7.6% 4.5% 0.2% 12.3% 15.1% 54,319 200,000 $52.04

B 5 730,545 0.0% 26.7% 1.0% 27.7% 19.6% 2,275 - $29.25

C 2 61,762 0.0% 88.1% 0.0% 88.1% 23.4% -14,630 - $24.01

TOTAL 39 10,289,374 7.0% 6.5% 0.3% 13.9% 15.8% 41,964 200,000 $47.60

* Total Vacancy - the vacancy rate is calculated using the combined total of relet, sublet and new vacant space.

Market Statistics

DTZ | 18

Washington, DC 2nd Quarter 2015 Market Statistics

Market Statistics

BuildingsTotal

Inventory(SF)

New Vacancy

(%)

Relet Vacancy

(%)

Sublet Vacancy

(%)

Total Vacancy*

(%)

Total Availability

(%)

Net Absorption Current QTR

(SF)

Under Construction

(SF)

Average Asking Rent(FS)

Southwest

Class

A 23 10,099,177 1.2% 7.1% 0.4% 8.6% 13.1% (35,449) 553,879 $47.72

B 11 3,283,382 0.0% 13.4% 0.0% 13.4% 23.9% 25,950 - $40.43

C - - - - - - - - - -

TOTAL 34 13,382,559 0.9% 8.6% 0.3% 9.8% 14.9% (9,499) 553,879 $45.75

Capitol Riverfront/Southeast

Class

A 11 3,736,758 5.9% 4.7% 0.3% 10.8% 16.2% 44,514 - $41.94

B - - - - - - - - - -

C - - - - - - - - - -

TOTAL 11 3,736,758 5.9% 4.7% 0.3% 10.8% 16.7% 44,514 - $42.32

Uptown

Class

A 12 2,126,653 0.0% 2.9% 2.1% 4.9% 8.2% (26,393) - $40.90

B 55 3,603,081 0.0% 21.7% 0.2% 22.0% 26.6% (23,692) - $40.95

C 31 834,555 0.0% 2.0% 1.2% 3.2% 3.2% 11,688 - $37.25

TOTAL 98 6,564,289 0.0% 13.1% 1.0% 14.1% 18.6% (38,397) - $40.82

Washington, DC

Class

A 332 85,740,294 1.6% 8.8% 0.7% 11.0% 17.2% 173,094 3,058,392 $54.33

B 310 33,848,268 0.0% 11.0% 0.5% 11.6% 17.1% 113,822 135,798 $41.82

C 95 3,261,781 0.0% 5.6% 0.6% 6.2% 6.3% (11,783) - $40.42

TOTAL 737 122,850,343 1.1% 9.3% 0.6% 11.0% 17.0% 275,133 3,194,190 $50.35

* Total Vacancy - the vacancy rate is calculated using the combined total of relet, sublet and new vacant space.

www.dtz.com | 19

Was

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DTZ | 20

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819

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2016

DEL

IVER

IES

1,20

2,14

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4,22

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2017

DEL

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212,

596

212,

596

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2018

DEL

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966,

917

966,

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TOTA

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www.dtz.com | 21

Was

hing

ton,

DC

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DTZ | 22

Was

hing

ton,

DC

Sur

vey

of N

ew O

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stat

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ase

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rate

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s

www.dtz.com | 23

MethodologyMarket statistics are calculated from a base building inventory made up of office properties deemed to be competitive in the typical Washington, DC office market. Single-tenant buildings and privately-owned buildings in which the federal government leases space are included. Generally, owner-occupied and federally-owned buildings are not included. Older buildings unfit for occupancy or ones that require substantial renovation before tenancy are generally not included in the competitive inventory. Vacant space is defined as space that is physically vacant and available immediately. Sublet space still occupied by the tenant is not counted as vacant space.

Explanation of TermsTotal Inventory: The total amount of office space (in buildings greater than 10,000 square feet) that can be rented by a Fourth party.

New Space Vacant: First generation, never-occupied office space in newly constructed or substantially renovated buildings, being actively marketed by a landlord.

Relet Space Vacant: Second-generation, unoccupied office space being actively marketed by a landlord. (Space that is marketed but largely occupied is not counted as vacant space.)

Sublet Space Vacant: Second-generation, unoccupied space being actively marketed by a tenant. (Sublet space that is marketed but still occupied is not counted as vacant space.)

Total Space Vacant: The sum of new, relet, and sublet space that is unoccupied and being actively marketed.

Vacancy Rate: The amount of unoccupied space (new, relet, and sublet) expressed as a percentage of total inventory. (Total Space Vacant divided by Total Inventory.)

Total Space Available: The total amount of space, both vacant and occupied, being actively marketed for lease by a tenant or landlord. (This includes space that is currently occupied but marketed for future availability.)

Availability Rate: The total amount of space being actively marketed for lease (both vacant and occupied) expressed as a percentage of total inventory. (Total Space Available divided by Total Inventory.)

Absorption: The net change in occupied space between two points in time. (Total occupied space in the previous quarter minus total occupied space in the current quarter, quoted on a net, not gross, basis.)

New Space Absorption: The net change in occupied new space between two quarters.

Relet/Sublet Absorption: The net change in occupied relet and sublet space between two quarters.

Total Absorption: The The net change in total occupied (new, relet, and sublet) space between two quarters.

Methodology & Definitions

DisclaimerThis report and other research materials may be found on our website at www.dtz.com. This is a research document of DTZ in Washington, DC. Questions related to information herein should be directed to the Research Department at 202-463-2100. Information contained herein has been obtained from sources deemed reliable and no representation is made as to the accuracy thereof.

About DTZDTZ is a global leader in commercial real estate services providing occupiers, tenants and investors around the world with a full spectrum of property solutions. The companys core capabilities include agency leasing, tenant representation, corporate and global occupier services, property management, facilities management, facility services, capital markets, investment and asset management, valuation, research, consulting, and project and development management. DTZ provides property management for 1.9 billion square feet, or 171 million square meters, and facilities management for 1.3 billion square feet, or 124 million square meters. The company completed $63 billion in transaction volume globally in 2014 on behalf of institutional, corporate, government and private clients. Headquartered in Chicago, DTZ has more than 28,000 employees who operate across more than 260 offices in 50 countries and represent the companys culture of excellence, client advocacy, integrity and collaboration.

DTZ announced an agreement to merge with Cushman & Wakefield in a May 11 press release. The new company, which will operate under the Cushman & Wakefield brand, will have revenues over $5.5 billion, over 43,000 employees and will manage more than 4 billion square feet globally on behalf of institutional, corporate and private clients. The agreement is subject to customary closing conditions and is expected to close before the end of 2015. For further information, visit: www.dtz.com or follow us on Twitter @DTZ.

Publication date: 7.30.15

Copyright 2015 DTZ. All rights reserved.

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Real Estate Types Industrial Land Multi-family Office Retail

About DTZDTZ is a global leader in commercial real estate services providing occupiers, tenants and investors around the world with a full spectrum of property solutions. The companys core capabilities include agency leasing, tenant representation, corporate and global occupier services, property management, facilities management, facility services, capital markets, investment and asset management, valuation, research, consulting, and project and development management. DTZ provides property management for 1.9 billion square feet, or 171 million square meters, and facilities management for 1.3 billion square feet, or 124 million square meters. The company completed $63 billion in transaction volume globally in 2014 on behalf of institutional, corporate, government and private clients. Headquartered in Chicago, DTZ has more than 28,000 employees who operate across more than 260 offices in 50 countries and represent the companys culture of excellence, client advocacy, integrity and collaboration.

DTZ announced an agreement to merge with Cushman & Wakefield in a May 11 press release. The new company, which will operate under the Cushman & Wakefield brand, will have revenues over $5.5 billion, over 43,000 employees and will manage more than 4 billion square feet globally on behalf of institutional, corporate and private clients. The agreement is subject to customary closing conditions and is expected to close before the end of 2015. For further information, visit: www.dtz.com or follow us on Twitter @DTZ.

Visit www.dtz.com for more information on the full range of DTZ

commercial real estate services or contact:

Nathan EdwardsVice President2101 L Street, NW, Suite 700Washington, DC 20037+1 202 463 2100

Northern VirginiaCJ HardyResearch Analyst 2101 L Street, NW, Suite 700Washington, DC 20037+1 202 463 2100

Washington, DC & Suburban Maryland Joseph WoodResearch Analyst 2101 L Street, NW, Suite 700Washington, DC 20037+1 202 463 2100

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