MID-ATLANTIC MEDICAL OFFICE BUILDING REPORT MID-YEAR 2014

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MID-ATLANTIC MEDICAL OFFICE MARKET MARKET OVERVIEW

ECONOMIC OVERVIEW

The passage of the Affordable Healthcare Act in 2010 coupled with an aging baby-boomer population has brought healthcare into the national conversation. Per the Centers for Medicare & Medicaid Services, personal health care expenditures in 2012 were almost $2.4 trillion with physician and clinical services accounting for $565 billion.

Per the U.S. Bureau of Labor Statistics, overall U.S. healthcare employment for June 2014 increased by 21,000 jobs with employment upticks in ambulatory healthcare services and nursing and residential facilities. Preliminary June numbers point to an increase of 6,000 jobs each in the Education & Health Services sectors for the Washington-Arlington-Alexandria and the Baltimore-Towson metropolitan statistical areas. This was welcome news after it was reported in Q4 2013 that for the first time in years, healthcare employment declined. While healthcare employment remains robust, for 2013 employment gains were less than the prior year averaging 17,000 per month rather than 27,000 per month.

INVESTMENT ACTIVITY

The first half of 2014 experienced some significant investment sales activity. In the DC metro area, Harrison Street Real Estate Capital LLC closed on a 22-property medical office portfolio, worth $500 million, from Washington Real Estate Investment Trust. The 1.5-million square foot (msf) portfolio included the three-property Prosperity Medical Center, located in Merrifield, VA, with a combined rentable base area (rba) of 253,293 sf, and Woodburn Medical, located in

Annandale, VA, with a combined rba of 173,718 sf. Additionally, American Realty Capital Healthcare Trust, Inc. purchased 4175 N Hanson Court (Bowie, MD) from LaSalle Investment Management in May. The 36,260-square feet (sf) building traded for $12.4 million or $343 psf.

In Baltimore, the 79,360-sf Johnston Professional Building traded for $24 million or $302 psf to Healthcare Trust of America, Inc. Number 9 LLC purchased the 32,583-sf 9 Park Center Court in Owings Mills for $8.25 million.

CONSTRUCTION PIPELINE

Inova Medical Office IV (112,507 sf) located at 3580 Joseph Siewick Drive in Fairfax, VA delivered in March and is currently only 52.8% leased. Inova is in the midst of an $850 million hospital expansion of its Fairfax Medical Campus. The entire project is expected to deliver in 2016. In 2013, the hospital opened a new medical/surgical tower in addition to renovating its old tower. Also included in the expansion is a new tower to house its Women and Children’s Hospitals and a parking garage.

Fallsgrove Plaza (110,000 sf) located at 14995 Shady Grove Road in Rockville, MD delivered in April almost fully available. Balfour Concord is developing 1850 Town Center Parkway in Reston, VA. The 175,000-sf condominium property is set to deliver in Q3 2014. Also, due to deliver in Q3 2014 is the 15,000-sf Gatehouse Medical Center located at 8120 Gatehouse Road in Fairfax, VA.

Montgomery County will have its first new hospital in 35 years when the 237,000-sf Holy Cross Germantown Hospital opens in October. The hospital will be LEED Gold certified and will also have a four-story medical office building on its campus.

The Maryland Proton Treatment Center is under construction at the University of Maryland BioPark in Baltimore and expected to open in 2015. It is estimated that the center will be able to treat 1,900 patients annually and will be the only facility in Maryland to have five treatment rooms.

Location Active Physicians (2012)

Total Hospitals (2011)

United States 834,769 4,973

Washington, DC 6,238 11

Virginia 20,060 89

Maryland 20,688 48

*Source: The Henry J. Kaiser Family Foundation

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MID-ATLANTIC MEDICAL OFFICE MARKET SNAPSHOT

MARKET OVERVIEW

The overall vacancy for all four markets finished Q2 2014 at 9.9%. DC metro markets averaged an overall vacancy rate of 10.5%. Both the Suburban Maryland and Baltimore Metro markets had overall vacancy rates in the single digits. Additionally, both Suburban Maryland and Baltimore Metro maintained positive overall net absorption for the last four years. Year-to-date absorption for all four markets finished at 68,868 sf.

An uptick in vacancy put downward pressure on direct asking rents. The average direct asking rental rate for all four markets declined 5.7% from Q1 2014 to end Q2 at $28.04 psf. Washington, DC has the highest direct average at $31.81 psf.

Year-to-date leasing activity ended the first half of the year at 292,607 sf, a 2.1% increase from this time last year. The first quarter was responsible for the majority of new activity with 220,703 sf in transactions.

Not surprisingly, Northern Virginia leads the other four markets in activity. The redevelopment of Tysons Corner and the (now active) Silver Line rail route are expected to significantly increase the local Tysons population from 17,000 residents to over 100,000 residents by 2050.

-300

-200

-100

0

100

200

300

2010 2011 2012 2013 2014 YTD

Thou

sand

s

Washington, DC Suburban Maryland Northern Virginia Baltimore Metro

OVERALL NET ABSORPTION

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

psf

DIRECT GROSS RENTAL RATE DIRECT VACANCY RATE

DIRECT RENTAL RATE VS VACANCY

OUTLOOK

Both the DC and Baltimore metro regions are projected to grow in population. Ten years from now, the DC metro region will have increased by an expected 8.2% while the Baltimore metro population should increase 11.0%.* Washington, DC experienced a considerable growth in its “millennial” population. Per a January 2014 report by the DC government, an analysis of 2012 data showed that “Of the 53,830 who moved to DC from other states, the majority were 20-24 years old (23.8%) and 30-34 years old (18.4%).”

*Source: Cushman & Wakefield; CoStar Group

*Source: CoStar Group

Since 2012, 1,058 residential units have delivered in Tysons. Half of the square footage currently under construction is residential or 1,275 units. An additional 3,000 residential units could be added to the pipeline based on approved plans.

*Source: Moody’s Economy.com

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MID-ATLANTIC MEDICAL OFFICE MARKET SNAPSHOT

An important consumer in healthcare, the 65 and older segment, is estimated to climb in the DC metro and Baltimore metro regions by 37.2% and 32.6%, respectively. This trend coincides with the U.S. government’s estimates regarding the country’s aging population. Those 65 years and older are expected to make up 20% of the U.S.’s population by 2030. By 2050, 19 million residents will be over 85 years of age.*

*Source: Federal Interagency Forum on Aging Related Statistics

The affects on access to healthcare via The Affordable Healthcare Act have yet to be fully felt. Health reform, in whatever form it takes, is expected to create a greater dependency on ambulatory care and prevention services. Experts advocate that health delivery in medical office facilities needs to represent more of a retail experience. This should propel developers to increase investment to expand ambulatory capacity in the future.

MID-ATLANTIC MARKET

SUBMARKET INVENTORY OVERALL VACANCY RATE

DIRECT VACANCY RATE

YTD LEASING ACTIVITY

YTD DIRECT NET ABSORPTION

YTD OVERALL NET ABSORPTION

DIRECT WTD. AVG ALL CLASSES GROSS RENTAL RATE*

DIRECT WTD. AVG. CLASS A GROSS RENTAL RATE*

Washington, DC 1,540,851 16.9% 16.6% 9,504 570 (2,688) $31.81 $43.00

Suburban Maryland 5,380,449 7.3% 6.9% 46,183 2,718 5,718 $30.09 $31.50

Northern Virginia 4,525,466 12.1% 11.7% 168,223 (37,842) (40,607) $28.51 $29.04

Baltimore Metro 5,233,997 8.5% 8.4% 68,697 103,422 106,259 $24.41 $24.43

TOTALS 16,680,763 9.9% 9.6% 292,607 68,868 68,682 $28.04 $27.82

* Source: Cushman & Wakefield; CoStar Group. Rental Rates Reflect Asking $psf/year

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MID-ATLANTIC MEDICAL OFFICE MARKET

MID-ATLANTIC MARKET SIGNIFICANT YTD 2014 LEASE TRANSACTIONS MARKET TENANT BUILDING CLASS SQUARE FEET

Fallsgrove Plaza, Rockville Suburban Maryland Arthritis & Rheumatism Associates A 12,419

224 Cornwall Street, Leesburg Northern Virginia Inova Health A 9,452

200 Hospital Drive, Glen Burnie Baltimore Metro Chesapeake Orthopaedic & Sports Medicine Center B 5,357

650 Pennsylvania Avenue, Washington, DC Washington, DC Children’s Hospital B 4,300

2440 M Street NW, Washington, DC Washington, DC Sibley Physicians Group B 1,537

SIGNIFICANT YTD 2014 SALE TRANSACTIONS MARKET BUYER PURCHASE

PRICE/$PSF SQUARE FEET

WRIT Medical Office Portfolio DC Metro Region Harris Street Real Estate Capital LLC $500,000,000/$333 1,500,000

Johnston Professional Building, Baltimore Baltimore Metro Healthcare Trust of

America, Inc. $24,000,000/$302 79,360

4175 N Hanson Court, Bowie Suburban Maryland American Realty Capital Healthcare Trust, Inc. $12,450,000/$343 36,260

SIGNIFICANT YTD 2014 CONSTRUCTION COMPLETIONS

MARKET MAJOR TENANT COMPLETION DATE

BUILDING SF/ (% LEASED)

Inova Medical Office Building IV, Fairfax Northern Virginia N/A Q1 2014 112,507 (52.8%)

Fallsgrove Plaza, Rockville Suburban Maryland Arthritis & Rheumatism Associates Q2 2014 110,000 (11.0%)

SIGNIFICANT PROJECTS UNDER CONSTRUCTION MARKET MAJOR TENANT

COMPLETION DATE

BUILDING SF/ (% LEASED)

24430 Gum Springs Road, Aldie Northern Virginia N/A Q3 2015 57,000 (0%)

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CONTRIBUTORS

Cushman & Wakefield is the world’s largest privately held commercial real estate services firm. The company advises and represents clients on all aspects of property occupancy and investment, and has established a preeminent position in the world’s major markets, as evidenced by its frequent involvement in many of the most significant property leases, sales and management assignments. Founded in 1917, it has approximately 250 offices in 60 countries, employing more than 16,000 employees. It offers a complete range of services for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, corporate services, property management, facilities management, project management, consulting and appraisal. The firm has more than $3.7 billion in assets under management globally. A recognized leader in local and global real estate research, the firm publishes its market information and studies online at www.cushmanwakefield.com/knowledge.

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A Cushman & Wakefield Research Publication

Scott A. Mason, D.P.A.,FACHE Executive Managing Director Healthcare Practice Group, the Americas Cushman & Wakefield 1800 Tysons Boulevard, Suite 200 Tysons Corner, VA 22102 T +1 (703) 286 3008 E scott.mason@cushwake.com Paula F. Munger Managing Director, Research Mid-Atlantic | Southeast 1800 Tysons Boulevard, Suite 200 Tysons Corner, VA 22102 T +1 (703) 847 2785 E paula.munger@cushwake.com Daniela R. Stundel Senior Research Analyst – Americas Research One Liberty Place 1650 Market Street, 33rd Floor Philadelphia, PA 19103 T +1 (215) 963 4046 E daniela.stundel@cushwake.com