metropolitan dc market overview 4q 2014market summary the washington, dc office market consists of...

Overall Market Summary

The Washington, DC Metropolitan commercial real estate market is comprised of approximately 410.9 million square feet of rent-

able office space located in the District of Columbia, Northern Virginia, and Suburban Maryland. The total vacancy rate increased

to 15.8% in the fourth quarter, up from 15.4% at the end of the previous quarter. The market recorded approximately 903,584

square feet of net absorption in the fourth quarter, a notable improvement from the -47,000 square feet absorbed in the third

quarter. Leasing activity decreased with 4.8 million square feet in transactions signed during the fourth quarter. The largest lease

executed was a renewal signed by law firm Finnegan for 252,000 square feet in Washington, DC. Three buildings completed

construction in the fourth quarter (0 DC, 1 VA, 2 MD), totaling 718,317 square feet and 47% leased. There were twenty sale

transactions in the fourth quarter, comprising of 4.9 million rentable square feet and totaling $2.2 billion. The market totaled 15

million square feet in sales transactions worth $6.2 billion in 2014. Average asking rental rates ticked down $0.14 to $35.45 per

square foot, Full Service. From November 2013 to November 2014 employment in the DC Metropolitan area had a net increase

of 18,900 jobs representing 0.6% growth, while the unemployment rate decreased to 4.5%.

Metropolitan DC Market Overview 4Q 2014

101 Constitution Avenue | Suite 325 East | Washington, DC | 20001 | 202.513.6700

1530 Wilson Boulevard | Suite 200 | Arlington, VA | 22209 | 703.522.4600

National Presence. Local Focus

Direct Vacancy Total Vacancy Total Net Absorption Leasing Activity

DC 10.0% 10.6% 343,999 SF 9.1 M SF

VA 16.2% 17.1% -164,076 SF 9.7 M SF

MD 16.2% 16.9% -199,559 SF 4.1 M SF

Metro Area 14.9% 15.8% -19,636 SF 22.9 M SF

Outlook

As slow economic and employment growth continues to impact the Washington, DC region, the commercial real estate market

is expected to remain relatively flat entering 2015. The private sector should continue to drive employment; while the federal

government continues to downsize its workforce. Early renewals are expected to dominate the larger lease transactions, as pri-

vate sector tenants leverage the current market conditions. The GSA should continue to execute renewals as well, however, their

primary focus will be on consolidating and downsizing federal office space requirements when possible. To maintain or increase

competitiveness in this “tenant’s market”, aggressive landlords will continue to renovate and upgrade amenities to their build-

ings. As the GSA and the private sector (as seen with the larger DC law firms) continue to reduce space requirements, vacancy

is expected to tick upward, while net absorption is expected to decrease. While the construction pipeline remains limited, there

will be a modest uptick in inventory with six new buildings, totaling 687,000 square feet, scheduled to deliver during the first half

of 2015. Sales velocity is expected to decline as there are approximately nine buildings currently under contract. With the recent

success of CityCenter, look for other developments including; The Wharf, Reston Town Center, and Pike & Rose attempt to capi-

talize on tenants seeking higher-end space and millennials (25% of the workforce) who desire a “Live, Work, Play” environment.

Arrows reflect differences from YTD 4Q 2013 totals Arrows reflect differences from 3Q 2014

Market Summary

The Washington, DC office market consists of 779 build-ings over 25,000 square feet, totaling approximately 142.2 million square feet of rentable space.

As of December 2014, the unemployment rate for the Washington, DC region was 4.5%, and 7.4% for the Dis-trict only. The national unemployment rate was 5.6%, with 787,000 new jobs created in the fourth quarter.

The largest private sector lease signed this quarter was a renewal executed by law firm Finnegan, Henderson, Far-abow, Garrett & Dunner, LLP for 252,000 square feet at 901 New York Avenue, NW.

The GSA signed the largest public sector transaction of the quarter with a 115,024-square-foot renewal for the U.S. Department of Education at 1990 K Street, NW.

Eight office buildings sold this quarter, totaling approxi-mately $1.2 billion. The largest sale was 800 17th Street, NW, in the CBD submarket, for approximately $392 mil-lion ($1,075 psf).

One building broke ground this quarter, 800 Maine Ave-nue, SW, part of The Wharf development in the Southwest submarket. No buildings delivered, however.

Total vacancy decreased to 10.6% at the end of the quar-ter, totaling approximately 15.0 million square feet.

Until the fourth quarter 2014, the total vacancy rate had been on a steady rise since the end third quarter 2013 when the rate was 9.9%.

Sublet vacancy remained flat at 0.6% at the end of the fourth quarter, totaling approximately 872,000 square feet.

Washington, DC 4Q 2014

101 Constitution Avenue | Suite 325 East | Washington, DC | 20001 | 202.513.6700

1530 Wilson Boulevard | Suite 200 | Arlington, VA | 22209 | 703.522.4600


4Q ‘14 3Q ‘14 4Q ‘13

Direct

Vacancy10.0% 10.4% 9.5%

Total

Vacancy10.6% 11.0% 10.1%

Net

Absorption 410,564 sf 18,784 sf 291,829 sf

Leasing

Activity2.6 m sf 2.4 m sf 1.6 m sf

Under

Construction1.9 m sf 1.7 m sf 1.0 m sf

Under

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Percent

Pre-Leased

42% 42% 63%

Asking Rental

Rates

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$50.07 $50.01 $49.38

Deliveries (SF)

0 169,150

1.3 M

Vacancy Rate

www.lpcwashingtondc.com

Absorption and Gross Leasing

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The Washington, DC market recorded 410,564 square feet of net absorption in the fourth quarter.

The total net absorption of DC in 2014 is 343,999 square feet; the 10-year average for net absorption in the District is 1.5 mil-lion square feet absorbed per year.

Contributing to the positive absorption this quarter was Coving-ton & Burling’s move into 420,000 square feet at 800 & 850 10th Street, NW - CityCenter.

The Central Business District (CBD) submarket posted 237,930 square feet of net absorption in the fourth quarter, for a total of 473,322 square feet absorbed in 2014.

The East End submarket posted 127,061 square feet of net ab-sorption in the fourth quarter, for a total of 400,861 square feet absorbed in 2014.

Leasing activity in DC increased with approximately 2.6 mil-lion square feet signed in the fourth quarter, totaling 9.1 million square feet leased in 2014; which matches the 10-year aver-age of 9.1 million square feet leased annually in the District.

The largest of the Top Ten Leases signed this quarter was for 252,000 square feet in the East End submarket; all other leases in the Top Ten ranged between 238,000 to 56,000 square feet. Nine out of the ten largest leases were renewals.

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A total of seven buildings were under construction in the DC market at the end of the fourth quarter, totaling approximately 1.9 million square feet and 42% pre-leased.

One building broke ground in the fourth quarter, 800 Maine Av-enue, SW (210,000 sf, 0% pre-leased). 800 Maine is part of the The Wharf, a mixed-use development, under construction in the Southwest submarket. The building is scheduled to deliver in the fourth quater 2017.

Washington, DC Quarterly Overview

4Q 2014

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Construction (cont.)

Washington, DC Quarterly Overview

4Q 2014

Buildings scheduled to deliver in 2015 include; 900 G Street, NW (111,446 sf, 72% pre-leased), 400 6th Street, SW (342,000 sf, 0% pre-leased), 601 Massachusetts Avenue, NW (478,882 sf, 78% pre-leased to Arnold & Porter), and 900 16th Street, NW (127,000 sf, 66% pre-leased to Miller & Chevalier).

660 N. Capitol Street, NW (200,000 sf, 0% pre-leased) is scheduled to deliver in 2016; while 600 Massachusetts Avenue (401,172 sf, 61% pre-leased to Venable) is scheduled to deliver in 2017.

Expected to break ground in the first quarter 2015 is 1000 F Street, NW, located in the East End submarket. This new, 94,655-square-foot office building is being built on a speculative basis, tentatively scheduled to deliver third quarter 2016. 2001 M Street, NW is currently under a full building renovation. The renovations, scheduled for completion in first quarter 2016, include adding one new floor and an additional 55,000 square feet of space; increasing the total rentable area of the building to 284,000 square feet.

Only two buildings have completed construction in 2014, for a total of 456,950 square feet. Compared to the 10-year average of 2.2 million square feet delivered to the DC market annually, this represents a 79% reduction in new inventory for 2014.

The private sector should continue to drive job growth and the de-mand for the office market through 2015.

Expect the GSA to execute short term lease renewals and continue to “rightsize” federal agencies through space consolidations.

Vacancy is expected to tick upward as approximately 1 million square feet is scheduled to deliver in 2015 (only 42% was pre-leased at the end of 2014).

The market should remain a “tenant’s market” as landlords continue to offer generous concessions (TI Allowance and rent abatement).

Sales volume is expected to increase as there are potentially six or seven buildings rumored to be coming to the market in early 2015.

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Fourth Quarter Vacant Space Available &

Vacancy Rate By Building Class

For More Information, Please Contact:

John Marvin Jones | [email protected]

Ed Gilpin | [email protected]

Adam Biberaj | [email protected]

Elaine Clancy | [email protected]

John Olson | [email protected]

Terry Amling | [email protected]

Joe Mehok | [email protected]

202.513.6700


Washington, DC Top Sales 4Q 2014


1055 Thomas Jefferson St, NW - Foundry BuildingSubmarket: GeorgetownDate Sold: December 2014Price: $79,500,000 PPSF: $342Buyer: The JBG Companies & CBRE Global InvestorsSeller: Cornerstone Real Estate Advisers, Inc.Class: ALeased: 70.0%

555 11th St, NW - Lincoln SquareSubmarket: East EndDate Sold: October 2014Price: $300,000,000 PPSF: $724Cap Rate: 5.20%Buyer: Rockrose DevelopmentSeller: Dweck Properties & Ruben CompaniesClass: ALeased: 84.8%

810 7th St, NWSubmarket: East EndDate Sold: October 2014Price: $215,000,000 PPSF: $791Buyer: IGIS Asset ManagementSeller: KanAm Group LLCClass: ALeased: 100%

800 17th St, NW Submarket: CBDDate Sold: October 2014Price: $392,000,000 PPSF: $1,075Cap Rate: 4.25%Buyer: TIAA-CREF & Norges BankSeller: The PNC Financial Services Group, Inc.Class: ALeased: 84.2%


Washington, DC Top Sales 4Q 2014

2401 Pennsylvania Ave, NWSubmarket: West EndDate Sold: December 2014Price: $75,375,000 PPSF: $525Cap Rate: 4.69%Buyer: Principal Real Estate Investors LLCSeller: Brookfield Office Properties, Inc.Class: ALeased: 90.4%


100 M St, SESubmarket: Capitol RiverfrontDate Sold: November 2014Price: $78,875,000 PPSF: $324Cap Rate: 4.47%Buyer: Lionstone Investments & Hermes Real Estate Investment Mgmt.Seller: Northwood Investors, LLCClass: ALeased: 80.0%

2501 M St, NWSubmarket: West EndDate Sold: December 2014Price: $31,623,705 PPSF: $322Buyer: PRP, LLCSeller: Association of American Medical CollegesClass: BLeased: 0%Note: Residential condo conversion

4201 Connecticut Ave, NWSubmarket: UptownDate Sold: October 2014Price: $23,100,000 PPSF: $325Cap Rate: 6.35%Buyer: Brickman Pacific LLCSeller: JOSS Realty Partners, LLCClass: BLeased: 79.0%


In the fourth quarter 2014, nine of the Top Ten Leases were renewals. Five of the top leases signed this quarter exceeded 100,000 square feet.

The largest private sector lease signed this quarter was by Finnegan, Henderson, Farabow, Garrett & Dunner, LLP renewing for 252,000 square feet (a 10% space reduction) at 901 New York Avenue, NW. The largest public sector transaction was a renewal by the GSA for the U.S. Department of Education for 115,024 square feet at 1990 K Street, NW.

Of the three GSA transactions, the Civilian Board of Contract Appeals (CBCA) & Medicaid and CHIP Payment and Access Com-mission (MACPAC) was a long-term, 10-year renewal; while the Corporation for National and Community Service (CNCS) and the U.S. Department of Education were short-term renewals of 2 and 3 years respectively.

Along with Finnegan, two additional law firms renewed leases; Latham & Watkins signed for 238,000 square feet at 555 11th Street, NW and Zuckerman Spaeder signed for 65,533 square feet at 1800 M Street, NW.

Leasing activity increased with approximately 2.6 million square feet signed in the fourth quarter, for a total of 9.1 million square feet leased in 2014. This represents a 6% reduction in leasing activity compared to 2013.

Washington, DC Top Ten Leases 4Q 2014

1133 21ST ST, NW

Tenant: MedStar Size: 112,363 sf New

1201 NEW YORK AVE, NW

Tenant: GSA - Corporation for National and Commu- nity Service (CNCS)Size: 111,159 sf Renewal

1990 K ST, NW

Tenant: GSA - U.S. Department of EducationSize: 115,024 sf Renewal

555 11TH ST, NW

Tenant: Latham & Watkins Size: 238,000 sf Renewal

400-444 N. CAPITOL ST, NW

Tenant: C-SPANSize: 74,590 sf Renewal

1625 EYE ST, NW

Tenant: Federal Housing Finance AgencySize: 94,064 sf Renewal

701 PENNSYLVANIA AVE, NW

Tenant: Edison Electiric In- stitueSize: 79,211 sf Renewal


901 NEW YORK AVE, NW

Tenant: Finnegan, Henderson, Farabow, Garrett & Dunner, LLPSize: 252,000 sf Renewal / Contraction

1800 M ST, NW

Tenant: Zuckerman Spaeder Size: 65,533 sf Renewal

1800 M ST, NW

Tenant: GSA - CBCA & MACPAC Size: 56,000 sf Renewal


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The total vacancy rate decreased to 9.7% at the end of the fourth quarter, down from 10.0% at the end of the third quarter.

The CBD market recorded 237,930 square feet of net absorption in the fourth quarter, a decrease from the 324,762 square feet absorbed in the third quarter. Contributing to the positive absorption includes Pillsbury moving into 105,565 square feet at 1200 17th Street, NW.

Leasing activity increased to 929,151 square feet in the fourth quarter, up from the 776,797 square feet leased in the previous quarter. Tenants executing leases this quarter include the GSA - U.S. Department of Education renewing 115,024 square feet at 1990 K Street, NW, the Federal Housing Finance Agency renewing 94,064 square feet at 1625 Eye Street, NW, and Zuckerman Spaeder renewing 65,533 square feet at 1800 M Street, NW.

Only one building sold in the CBD; 800 17th Street, NW - PNC Place, traded to TIAA-CREF and Norges Bank for $392 million, or $1,075 psf. This is the first time that a building has sold for over $1,000 psf in Washington, DC.

Highlights

Market Stats

TERRY AMLING ADAM BIBERAJ ELAINE CLANCY ED GILPIN JOHN MARVIN JONES JOE MEHOK JOHN OLSON

CBD Market Spotlight 4Q 2014

ASKING RENTAL RATES (FULL SERVICE)

2005: $39.27 PSF2014: $51.00 PSF

INVENTORY: 44.0 MILLION SFDIRECT VACANCY: 9.0%TOTAL VACANCY: 9.7%

YTD 2014 ABSORPTION: 473,322 SFUNDER CONSTRUCTION: 127,000 SF

% PRE-LEASED: 66%YTD DELIVERIES: 169,150 SF

10 YEAR AVERAGES (2005-2014)

TOTAL ABSORPTION: 167,972 SF/YRDELIVERIES: 342,129 SF/YR


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The East End market recorded 127,061 square feet of net absorption in the fourth quarter, a substantial increase from the -202,444 square feet absorbed in the third quarter. Contributing to the positive absorption includes Covington & Burling moving into 420,000 square feet at 800 & 850 10th Street, NW - CityCenter (relocating from 1201 & 1275 Pennsylvania Avenue, NW).

Leasing activity decreased to approximately 1.4 million square feet in the fourth quarter, down from 1.5 million square feet leased in the previous quarter. Tenants executing leases this quarter include Finnegan, Henderson, Garrett & Dunner, LLP renewing 252,000 square feet at 901 New York Avenue, NW, Latham & Watkins renewing 238,000 square feet at 555 11th Street, NW, and the GSA - Corporation for National and Community Service (CNCS) renewing 111,159 square feet at 1201 New York Avenue, NW.

Two buildings sold in the East End; 810 7th Street, NW traded to IGIS Asset Management for $215 million ($791 psf) and 555 11th Street, NW traded to Rockrose Development for $300 million ($724 psf).

Highlights

Market Stats


East End Market Spotlight 4Q 2014


2005: $43.21 PSF2014: $53.11 PSF



% PRE-LEASED: 71% YTD DELIVERIES: 287,800 SF




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The total vacancy rate in the CBD/East End Class A market decreased to 11.0% in the fourth quarter, down from 11.5% at the end of the third quarter.

The Class A market recorded 346,453 square feet of net absorption in the fourth quarter, an increase from the 178,555 square feet absorbed in the third quarter. Tenants contributing to the positive absorption include Freedom House mov-ing into 20,696 square feet at 1850 M Street, NW and the Pew Research Center expanding into approximately 29,000 square feet at 1615 L Street, NW.

Leasing activity increased in the fourth quarter to approximately 2.1 million square feet, up from 1.5 million square feet leased in the previous quarter. Tenants executing leases this quarter include MedStar signing for 112,363 square feet at 1133 21st Street, NW, and Edison Electric Institute renewing 79,211 square feet at 701 Pennsylvania Avenue, NW.

There are four, Class A buildings currently under construction (1 CBD, 3 East End), no additional buildings broke ground in the CBD or East End in the fourth quarter.

Highlights

Market Stats


CBD/East End Class A Market Spotlight 4Q 2014


2005: $44.48 PSF2014: $56.29 PSF


YTD 2014 ABSORPTION: 1.2 MILLION SFUNDER CONSTRUCTION: 1.1 MILLION SF

% PRE-LEASED: 70% YTD DELIVERIES: 456,950 SF




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The total vacancy rate in the CBD/East End Class B market remained flat at 9.1% at the end of the fourth quarter.

The Class B market recorded 13,901 square feet of net absorption in the fourth quarter, a notable improvement from the -30,277 square feet absorbed in the third quarter. Contributing to the positive absorption was the Department of the Treasury moving into approximately 55,000 square feet at 1722 Eye Street, NW.

Leasing activity decreased to 380,540 square feet in the fourth quarter, down from the 692,390 square feet leased in the previous quarter. Contributing tenants include the Special Olympics renewing for 33,884 square feet at 1133 19th Street, NW, Hamilton Place Strategies renewing 18,423 square feet at 805 15th Street, NW, and Centurion Center sign-ing for 17,023 square feet at 2001 L Street, NW.

Highlights

Market Stats


CBD/East End Class B Market Spotlight 4Q 2014


2005: $35.45 PSF2014: $43.20 PSF


YTD 2014 ABSORPTION: -260,556 SFUNDER CONSTRUCTION: 0 SF

% PRE-LEASED: 0% YTD DELIVERIES: 0 SF


TOTAL ABSORPTION: -68,041 SF/YRDELIVERIES: 0 SF/YR


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The Southwest market recorded 34,010 square feet of net absorption in the fourth quarter, a decrease from the 63,826 square feet absorbed in the third quarter.

Leasing activity decreased in the fourth quarter to 42,538 square feet, down from 108,242 square feet leased in the previous quarter. Leases executed this quarter include CareFirst BlueCross BlueShield signing for 30,000 square feet at 1250 Maryland Avenue, SW - The Portals I. The Southwest market has recorded a total of 324,032 square feet of lease transactions in 2014.

800 Maine Street, SW (210,000 sf, 0% pre-leased) broke ground in the fourth quarter and is scheduled to deliver in the third quarter 2017. This office building is part of Phase I of The Wharf, a mixed-use development, being constructed along Washington Channel in Southwest, DC.

Highlights

Market Stats


Southwest Market Spotlight 4Q 2014


2005: $48.17 PSF2014: $48.56 PSF



% PRE-LEASED: 0%YTD DELIVERIES: 0 SF




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The total vacancy rate increased to 8.0% at the end of the fourth quarter, up from 7.8% at the end of the third quarter.

The West End/Georgetown market recorded -258,043 square feet of net absorption in the fourth quarter, a substantial drop from the 17,582 square feet recorded in the third quarter. Contributing to the negative absorption was Pillsbury vacating 240,199 square feet at 2300 N Street, NW (relocating to 1200 17th Street, NW) and Marsh Mercer vacating ap-proximately 82,000 square feet at 1255 23rd Street, NW (relocating to 1050 Connecticut Avenue, NW).

Leasing activity decreased in the fourth quarter to 33,801 square feet, down from the 106,817 square feet leased in the previous quarter. The West End/Georgetown market has recorded 248,895 square feet of lease transactions YE 2014.

Three buildings sold this quarter including; 1055 Thomas Jefferson Street, NW - Foundry Building selling to JBG and CBRE for $79,500,000 ($356 psf), 2401 Pennsylvania Avenue, NW selling to Principal Real Estate Investors for $75,375,000 ($525 psf), and 2501 M Street, NW sold to PRP for $31,623,705 ($322 psf).

Highlights

Market Stats


West End / Georgetown Market Spotlight 4Q 2014


2005: $40.68 PSF2014: $48.99 PSF


YTD 2014 ABSORPTION: -357,088 SFUNDER CONSTRUCTION: 0 SF





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The total vacancy rate decreased to 13.3% at the end of the fourth quarter, down from 14.4% at the end of the third quar-ter.

The Capitol Hill/NoMa market recorded 166,690 square feet of net absorption in the fourth quarter, a substantial increase from the -151,678 square feet absorbed in the third quarter. Contributing tenants include the DC Department of Human Services & Mental Health moving into 120,255 square feet at 64 New York Avenue, NE.

Leasing activity decreased to 150,757 square feet in the fourth quarter, down significantly from the 788,183 square feet leased in the previous quarter. Contributing tenants include C-SPAN renewing 74,590 square feet at 400-444 N. Capitol Street, NW and the GSA - U.S. Department of Education renewing 25,774 square feet at 555 New Jersey Avenue, NW.

The 2.21 acre ground lease at 400-444 N. Capitol Street sold to TIAA-CREF and Norges Bank for $165,000,000.

Highlights

Market Stats


Capitol Hill / NoMa Market Spotlight 4Q 2014


2005: $37.53 PSF2014: $50.80 PSF



% PRE-LEASED: 0% YTD DELIVERIES: 0 SF


TOTAL ABSORPTION: 450,976SF/YRDELIVERIES: 591,373 SF/YR


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The total vacancy rate decreased to 17.5% at end of the fourth quarter, down from 18.8% at the end third quarter.

The Capitol Riverfront market recorded 65,433 square feet of net absorption in the fourth quarter, a substantial in-crease from the -8,670 square feet absorbed in the third quarter. Contributing tenants include CBS moving into 33,042 square feet at 1015 Half Street, NW. The market has totaled 75,838 square feet of net absorption in 2014.

Leasing activity increased to 18,119 square feet in the fourth quarter, up from the 10,555 square feet leased in the previous quarter. Tenants executing leases this quarter include ICI Services Corporation signing for 11,679 square feet of expansion space at 300 M Street, SE. The Capitol Riverfront has recorded a total of 234,372 square feet of leasing activity in 2014.

100 M Street, SE sold this quarter to Lionshare Investments and Hermes Real Estate Investment Management from Northwood Investors for $78,875,000 ($324 psf).

Highlights

Market Stats


Capitol Riverfront Market Spotlight 4Q 2014


2005: $41.62 PSF2014: $40.72 PSF


YTD 2014 ABSORPTION: 75,838 SFUNDER CONSTRUCTION: 0 SF




metropolitan dc market overview 4q 2014market summary the washington, dc office market consists of...

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