Executive Summary

Absorption was positive 164,273 SF in Q3 bringing the total to

negative 149,610 SF on the year. The bulk of the positive absorption

(720K SF) gained from the completion of the National Science

Foundation’s new HQ facility in Alexandria was muted by the space

they left behind in Ballston (620K SF). As a result of the move, as well

as nearly 400K SF of vacancy delivered in new construction, Northern

Virginia’s vacancy rate increased 40 basis points from year ago levels

to 20.1%.

In what is the largest new lease of 2017, the GSA awarded Boston

Properties the contract to build the TSA a new 625K SF HQ that will

relocate the agency from its current HQ in Pentagon City in 2020. The

TSA finalized the new 15 year lease valued at $316M nearly two years

after a federal judge blocked their initial plans to move to Alexandria.

In the private sector, General Dynamics leased 216K SF formerly

occupied by Noblis at 3150 Fairview Park in Falls Church. The lease

is a major win for the Merrifield submarket that has lost 266K SF of

1 | Northern Virginia | Offiice Market | Q3 2017

Office Market NORTHERN VIRGINIAQ3 2017

Build-to-Suit Federal Agency Projects Leave Behind Large Blocks of Vacancy

Net Absorption

Average Vacancy Rate

Average Asking Rent

Class A

Class A

Class B

Class B

Overall

Overall

Q3

Overall

Q3 Key Market Indicators

Total Vacancy

Net Absorption

Rental Rate

New Deliveries (YTD)

20.3%

(61,947) SF

$32.00/SF

0 SF

2008 2009 2010 2011 2012 2013 2014 2015 2016 20178%

10%

12%

14%

16%

18%

20%

22%

-2.5 M

-2.0 M

-1.5 M

-1.0 M

-0.5 M

0.0 M

0.5 M

1.0 M

1.5 M

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

$20.00

$22.00

$24.00

$26.00

$28.00

$30.00

$32.00

$34.00

$36.00

$38.00

$40.00

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

2 | Northern Virginia | Offiice Market | Q3 2017

Corridor commands the highest rents in the market averaging $41.99/

SF, followed by Eisenhower Avenue and Crystal City at $39.77/SF

and $36.78/SF, respectively. Concession packages remain generous,

averaging between $80.00-$100.00/SF in TI and one month of free rent

per year of term.

Supply and Demand

There are 40.4M SF of space available for lease (down 457K SF YoY)

across Northern Virginia with 28.5M SF of Class A space available

(down 336K SF YoY) and 11.9M SF located in Class B product (down

120K SF YoY). Although available space for lease has decreased, the

vacancy rate has increased due to the amount if new construction

in the pipeline. As new owner occupied and build-to-suit projects

deliver, tenants will relocate from existing buildings, increasing the

amount of vacancy in the market.

Three new office buildings totaling 1.25M SF delivered in Q3 that

are 67% preleased. The largest building is the National Science

Foundation’s 720K Sf headquarters at 2415 Eisenhower Avenue in

Alexandria. The agency vacated their longtime home in Ballston and

expanded their footprint by roughly 100K SF. In Reston, Comstock

Partners completed the first office building in their Reston Station

mixed use development. The 366K SF spec building delivered 100%

vacant which caused the vacancy rate in Reston to jump 160 bps

from the previous quarter to 13.8%. The third project to deliver is

Marymount University’s 167K SF office building at 1000 N Glebe St

in Ballston. The school will occupy the first six floors and is currently

seeking a tenant for the top three.

Employment Growth by Month

Net Absorption by County

occupancy so far in 2017.

Vacancy and Rental Rates

The vacancy rate in Northern Virginia increased by 40 basis points

(bps) in Q3 2017, coming in at 20.1%. Overall vacancy should remain

elevated as tenants vacate existing space in favor of new deliveries.

Class A vacancy increased 40 bps year-over-year to 21.4%, while Class

B vacancy fell 20 bps to17.5%. Among the major office submarkets

with the lowest vacancy are Old Town Alexandria at 13.7%, Reston at

13.8%, and Fairfax City at 14.0%. Outside of these markets however,

high levels of vacancy persist as nine of the fourteen office submarkets

with inventory greater than 5 million square feet have vacancy rates

above 20%.

Asking rental rates accelerated in Q3 2017, increasing $0.55/SF

year-over-year to $32.25/SF largely due to rent appreciation in Class

A product. Class A asking rents increased $0.65/SF to $34.54/SF

while Class B rents rose $0.41/SF to $28.52/SF. The Rosslyn-Ballston

Total Job Growth

Q3 2017

Office-Using Job Growth

YTD

Building Submarket Size Sale Price Price (PSF) Buyer

1919 Gallows Road Tysons Corner 454,000 $136,000,000 $299.56 Rockpoint

Group

Worldgate Metro Plaza Herndon 325,072 $53,500,000 $164.58 Harbert

Management

12930 Worldgate Dr Herndon 195,193 $40,000,000 $204.93 The Pinkard

Group

13900 Lincoln Park Dr Herndon 201,376 $29,750,000 $147.73 Goldman Sachs

22970 Indian Creek Dr Route 28 North 128,477 $29,375,000 $228.64 EPIC, LLC

Tenant Address Submarket Size Type

TSA6595 Springfield

Center DriveSpringfield/Newington

622,812 Prelease

Department of State

1701 Fort Meyer Drive

Rosslyn 280,259 Renewal

General Dynamics 3150 Fairview Park Merrifield 215,500 New Lease

Department of State

1200 Wilson Boulevard

Rosslyn 55,793 New Lease

Hogan Lovells LLP8350 Broad

StreetTysons Corner 44,500 New Lease

Q3 Top Signed Leases Q3 Top Sales

Market Outlook

The GSA has signed several large leases, both new and renewals, in 2017 and appears to be actively working through its sizable backlog. Although the leasing activity looks good on paper, many of the deals are for build-to-suit developments in tertiary submarkets, leaving large blocks of vacancy in core submarkets such as Ballston, Pentagon City, and Crystal City. Furthermore, large firms such as Capital One and MITRE are choosing to purchase and build new HQs rather than lease space. With record vacancy across much of Northern Virginia, large block relocations and consolidations into new construction will continue to weaken long term fundamentals.

-800 K

-600 K

-400 K

-200 K

0 K

200 K

400 K

600 K

800 K

Alexandria County Arlington County Fairfax County Loudoun County

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

3 | Northern Virginia | Offiice Market | Q3 2017

Submarket Statistics

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McLean, VA 22102

703.972.5799

Submarket Total Bldgs InventorySublet

AvailableTotal Available Total Vacant

Vacancy Rate

Net Absorption (Q3 2017)

Net Absorption (YTD)

Class A Rent Class B RentTotal

Direct Rent Under Constr.

SF Delivered YTD

Tysons Corner 151 23,747,379 595,403 6,962,296 5,305,485 22.3% 24,845 27,984 $36.75 $27.60 $33.09 800,419 -

Merrifield 82 7,570,230 94,499 1,936,978 1,535,379 20.3% (69,490) (266,755) $32.81 $27.57 $31.81 - -

Vienna 25 1,188,243 33,012 184,916 77,671 6.5% (88,522) (112,016) n/a $31.86 $31.86 - -

Oakton 16 1,447,595 3,082 259,949 234,248 16.2% 11,266 51,743 $30.77 $26.95 $29.68 - -

Fairfax Center 61 6,896,689 179,722 2,024,035 1,870,053 27.1% (18,189) (45,831) $28.93 $24.28 $27.00 150,000 -

Fairfax City 103 3,751,213 4,200 588,567 526,155 14.0% 8,863 83,658 $26.36 $22.27 $23.60 - -

Reston 146 16,262,032 382,668 3,350,375 2,237,562 13.8% 67,484 249,238 $32.34 $27.88 $30.47 - 368,413

Herndon 127 11,734,864 350,106 2,970,837 2,733,662 23.3% 12,485 (142,475) $30.84 $21.80 $29.13 - -

Route 28 S 139 11,686,697 311,720 2,601,214 1,892,190 16.2% 30,625 2,396 $27.01 $22.41 $25.43 680,000 -

Springfield 117 5,707,363 116,529 1,516,195 1,231,294 21.6% (31,018) (74,093) $36.84 $24.44 $30.80 - -

Fairfax County 967 89,992,305 2,070,941 22,395,362 17,643,699 19.6% (51,651) (226,151) $32.81 $25.62 $30.00 1,630,419 368,413

Route 28 N 121 8,550,454 200,482 2,095,726 1,612,290 18.9% 35,294 1,205 $24.99 $21.20 $23.74 - -

Route 7 48 2,366,941 18,803 377,741 293,553 12.4% 106,299 137,093 $26.69 $20.35 $25.42 - -

Leesburg 60 2,092,066 12,331 166,630 141,613 6.8% 2,100 26,532 $29.09 $23.27 $25.50 - -

Loudoun County 229 13,009,461 231,616 2,640,097 2,047,456 15.7% 143,693 164,830 $25.50 $21.53 $24.13 - -

Rosslyn 37 9,032,190 664,609 3,219,554 2,486,630 27.5% (6,178) 843 $46.94 $39.33 $41.36 552,781 -

Clarendon/Courthouse

30 4,948,608 75,527 1,126,239 848,501 17.1% 34,666 156,998 $44.07 $39.97 $42.80 175,000 -

Virginia Square 10 883,943 19,282 222,083 59,923 6.8% (4,006) 12,605 $41.89 $36.54 $40.93 - -

Ballston 34 7,792,641 164,211 2,452,614 2,015,375 25.9% (642,453) (459,976) $42.93 $38.19 $41.58 - 166,756

RB Corridor 111 22,657,382 923,629 7,020,490 5,410,429 23.9% (617,971) (289,530) $43.63 $39.11 $41.99 727,781 166,756

Crystal City 35 10,318,192 106,210 2,338,474 2,240,685 21.7% 14,591 97,011 $38.42 $35.39 $36.78 - -

Arlington County 146 33,143,996 1,102,326 9,423,344 6,968,756 21.0% (603,380) (192,519) $41.94 $37.59 $40.22 727,781 166,756

Old Town 126 7,237,646 367,205 1,761,780 993,024 13.7% (27,258) (16,766) $35.98 $31.45 $34.57 - -

Eisenhower Ave. 24 5,036,413 8,945 485,865 497,508 9.9% 689,824 64,092 $42.08 $24.13 $39.77 - 720,000

I-395 69 7,915,434 19,476 3,444,588 3,208,490 40.5% 13,045 (43,096) $31.19 $28.59 $30.56 - -

Alexandria County

219 20,189,493 395,626 5,692,233 4,699,022 23.3% 675,611 4,230 $33.66 $29.06 $32.46 - 720,000

Northern Virginia Totals

1,672 178,992,637 4,724,138 47,171,526 36,769,362 20.1% 164,273 (249,610) $34.62 $28.87 $32.50 2,358,200 1,255,169