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WASHINGTON/

BALTIMORE OFFICE

MARKET REPORT

THIRD QUARTER 2014

DELTA ASSOCIATES

THIRD QUARTER 2014

DELTA ASSOCIATES

WASHINGTON/

BALTIMORE OFFICE

MARKET REPORT

By Subscription Only

Prepared For Exclusive Use of Subscribers

On September 30, 2014

© Delta Associates, 2014. All rights reserved.You may neither copy nor disseminate this report. If quoted, proper attribution is required.

Please see www.DeltaAssociates.com for more information on our reports.

www.DeltaAssociates.com

DELTA ASSOCIATES | WASHINGTON/BALTIMORE OFFICE MARKET REPORT | THIRD QUARTER 2014 | NOT FOR REDISTRIBUTION

TABLE OF CONTENTS

1. STATE OF THE ECONOMY The National Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

The Washington Area Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

The Baltimore Area Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

2. STATE OF THE WASHINGTON AREA OFFICE MARKET The Washington Metro Area Office Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

The Northern Virginia Office Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

The Suburban Maryland Office Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

The District of Columbia Office Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

3. STATE OF THE BALTIMORE AREA OFFICE MARKET The Baltimore Area Office Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

4. EXPLANATION OF GEOGRAPHIC COVERAGE AND METHODOLOGY Methodology and Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

Office Submarket Definitions - Washington/Baltimore Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Submarket Maps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117


OFFICE PRACTICE TEAM

GREGORY H. LEISCH, CRE 703-836-5700Editor and Chief Executive

ALEXANDER (SANDY) PAUL, CRE 703-299-6373Executive Vice President

JOSHUA COHEN 703-299-6374Associate

LUKE GELBER 703-299-6372Associate

PHILIP TILLY 703-299-6365Associate

MICHELE FRAZZETTA 703-299-6361Graphic Designer

DR. STEPHEN S. FULLER 703-993-3186Of Counsel on the Economy

Although the information contained herein is based on sources which Delta Associates (DA) believes to be reliable, DA makes no representation or warranty that such information is accurate or complete. All prices, yields, analyses, computations, and opinions expressed are subject to change without notice. Under no circumstances should any such information be considered representations or warranties of DA of any kind. Any such information may be based on assumptions which may or may not be accurate, and any such assumption may differ from actual results. This report should not be considered investment advice.

TEAM


AVAILABLE REPORTS FROM DELTA ASSOCIATES

• Market-maker survey on capitalization rates, investment posture, thoughts on the economy, and more

COMMERCIAL MARKET

WASHINGTON/BALTIMORE OFFICE MARKET REPORTMarket Coverage: Washington Metro and Baltimore Metro

A comprehensive quarterly report on office market conditions, focusing on the following indicators:

• Analysis of the national and regional economies

• Metro-level and substate area (Northern Virginia, Suburban

Maryland, District of Columbia) office market summaries

• Key market statistics (All Space and Class A Space) for all

major submarkets and regional totals for:

• Net absorption

• Vacancy

• Construction

• Additional data include:

• Supply/demand analysis

• Rental rate and tenant improvement data

• Average lease terms and operating expenses

• Delivered, proposed, and planned SF

• Building and land sales

• Investment returns

• Cap rate trends

Additional indicators analyzed in the Year-End report:

• Market-maker survey on capitalization rates, hard & soft development costs, investment posture, thoughts on the economy,

and more

• Development economics

Special supplements to the report have included:

• Analysis of Federal bailout/stimulus spending

• Impact of stimulus spending on office leasing

• Office rent equilibrium zone study

WASHINGTON/BALTIMORE FLEX/INDUSTRIAL REPORTMarket Coverage: Washington Metro and Baltimore Metro; data is separated into flex/R&D and warehouse/distribution product types.

A comprehensive semi-annual report on flex/industrial market conditions, focusing on the following indicators:


• Regional, metro-level and substate area (Northern Virginia,

Suburban Maryland, and Suburban Baltimore) flex/

industrial market summaries

• Key market statistics for all major submarkets and

regional totals for:

• Inventory

• Net absorption

• Vacancy

• Construction


• Supply/demand analysis

• Rental rate and tenant improvement data

• Average lease terms and operating expenses

• Delivered, proposed, and planned SF

• Building sales

• Investment returns

• Cap rate trends

Additional indicators analyzed in the Year-End reports:


MID-ATLANTIC CLASS A APARTMENT MARKET REPORT Market Coverage: Washington Metro, Baltimore Metro, Philadelphia Metro

A comprehensive report on apartment market conditions, focusing on the following indicators:


• Regional condo market summary

• Key market statistics for 47 submarkets and regional totals for:

• Current rents and rent change

• Vacancy

• Concessions

• Class A apartment building sales

Additional indicators analyzed in the Third Quarter and Mid-Year reports:

• Third Quarter Report: Comparison of median revenue,

expense, and net operating income data for the USA

and Washington MSA .

• Year-End Report: Market-maker survey on capitalization

rates, hard and soft development costs, investment posture,

thoughts on the economy, and more

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT

A comprehensive report on apartment market conditions, focusing on the following indicators:




• Vacancy

• Concessions

• Renovation information including budget and timetable

• Class B apartment building sales

Additional indicators analyzed in the Year-End report:

• Year-End Report: Market-maker survey on capitalization rates, investment posture, thoughts on the economy, and more .

WASHINGTON/BALTIMORE CONDOMINIUM MARKET REPORTMarket Coverage: Washington Metro and Baltimore Metro

A comprehensive report on condominium market conditions, focusing on the following indicators:


• Regional apartment market summary


• Sales trends for new and resale condos

• Historic condominium price changes

• Pipeline trends


• Absorption pace

• Multifamily building and land sales

Additional indicators analyzed in the Third Quarter and Year-End reports:

• Third Quarter Report: Comparison of median condo

expenses in the Washington MSA and Mid-Atlantic region

• Year-End Report: Market-maker survey on

capitalization rates, investment posture, thoughts

on the economy, and more .

MULTIFAMILY MARKET




• Analysis of the regional economy

• Regional apartment market summary

• Key market statistics for all major submarkets and regional totals for:


• Vacancy

• Concessions

• Regional apartment building sales

FREE REPORTS

Delta Associates publishes free reports on the economy and real estate market, including:

• Washington, DC Metro Retail Outlook (quarterly)

• Washington Metro Area Housing Outlook (quarterly)

• Understanding the Economy (periodic)

• Washington TrendLines (annual)

• Houston TrendLines (annual)

Delta Associates also publishes occasional white papers on areas of interest . To view sample reports or to subscribe,

please visit www .DeltaAssociates .com .

PHILADELPHIA APARTMENT MARKET REPORT

An executive summary-style report on apartment market conditions, focusing on the following indicators:

www.DeltaAssociates.com

DELTA A SSOCIATESLeading advisor and information provider

to the commercial real estate industry

Market Studies | Repositioning Analyses | Asset Valuations | Feasibility Studies Litigation Support | Market Data and Publications | Boardroom Presentations

500 MONTGOMERY STREET, SUITE 600 | ALEXANDRIA, VA 22314P: 703.836.5700 | WWW.DELTAASSOCIATES.COM |

DELTA A SSOCIATES

Is a firm of experienced professionals offering

consulting, valuation, and data services to the

commercial real estate industry for over 30 years. The

firm’s practice is organized in four related areas:

CONSULTING, RESE ARCH AND ADVISORY SERVICES

For commercial real estate projects, including

market studies (FHA/HUD compliant), market entry

strategies, asset performance enhancement studies,

pre-acquisition due diligence, and financial and fiscal

impact analyses.

LITIGATION SUPPORT

That includes dispute resolution, from forensic fact

finding to mediation and expert witness services.

Damages, material adverse change, and contract

disputes are specialties.

VALUATION

Of partial interests in commercial real estate assets.

SUBSCRIPTION DATA

For select metro regions for office, industrial, retail,

condominium, and apartment markets.

GREGORY H. LEISCH, CRE Chief Executive703.836.5700

[email protected]

DAVID WEISEL, CRE President

[email protected]

ALEXANDER (SANDY) PAUL, CRE Executive Vice President

[email protected]

CONTACT US

www.DeltaAssociates.comwww.deltaassociates.commailto:greg.leisch%40deltaassociates.com?subject=mailto:david.weisel%40deltaassociates.com?subject=mailto:alexander.paul%40deltaassociates.com?subject=

DC | MD | VA202-457-7800

www.wilkesartis.com

CharteredAttorneys at Law

The Washington Area’s Oldest Premier Real Estate Firm Specializing in Tax Assessment

and Condemnation Law

www.wilkesartis.com

3050 K Street, NW • Suite 125 • Washington,DC 20007 • main 202.719.9000 • MRPRealty.com

Acquisitions | Development & Construction Management | Asset Management | Property Management

DEVELOPING GREAT PLACES, PARTNERSHIPS & IDEAS

www.MRPRealty.com

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DELTA NEWS

MEDIA

DELTA INSIGHTS: EACH WEEK IN THE WASHINGTON BUSINESS JOURNAL

See Delta Associates’ weekly feature in the Washington Business Journal . In each release of Delta Insights, the WBJ highlights key

statistics and analysis from Delta that bring the local commercial real estate market into perspective .

PRESENTATIONS

HOUSTON TRENDLINES

The 14th annual Houston TrendLines® event will be held on November 13, 2014 at the River Oaks Country Club in Houston, TX .

TrendLines® is an invitation-only, annual presentation of market conditions with an outlook for investment and development

opportunities in the period ahead . Delta’s Executive Vice President, Sandy Paul, will present his assessment of the regional

economy and commercial real estate market conditions . To reserve an invitation to the 2014 event, hosted by Transwestern,

please contact Jennifer Glaser at 703-299-6363 .

The Houston TrendLines® report and presentation will be available at Transwestern .com . The report will include data and analysis

on the office, industrial, multifamily, and retail markets as well as a detailed forecast on the national and regional economies .

PHILADELPHIA APARTMENT MARKET PRESENTATION AND AWARDS

Delta’s annual Philadelphia Apartment Market event was held on April 22, 2014 at the Four Seasons Hotel in Philadelphia,

PA . Delta’s CEO, Gregory Leisch, presented his Real Estate Market and Economic Overview . This event is co-sponsored by the

Bozzuto Group . To download the market presentation from our 2014 event, please visit our website . To register for the 2015 event,

to be held April 21, 2015, please contact Jennifer Glaser at 703-299-6363 .

WASHINGTON TRENDLINES

The 17th annual Washington TrendLines® event was held on February 6, 2014 at the Ronald Reagan Building and International

Trade Center in Washington, DC . TrendLines® is an invitation-only, annual presentation of market conditions with an outlook

for investment and development opportunities in the period ahead . Delta’s CEO, Gregory Leisch, presented his assessment of

the market prior to the presentation of the annual TrendSetter awards . The event was co-sponsored by PNC Bank, Baker Tilly,

and Transwestern . For an invitation to the February 5, 2015 event, or to learn more about our TrendLines presentation and

report, please contact Jennifer Glaser or visit TrendLinesDC .com .

NEW YORK TRENDLINES

The inaugural New York TrendLines® event was held on December 10, 2013 at the Roosevelt Hotel in New York, NY . Delta’s

Executive Vice President, Sandy Paul, presented commercial real estate market conditions with an outlook for investment

and development opportunities in the period ahead . The New York TrendLines® event was co-sponsored by Transwestern . A

recording of the market presentation may be viewed at www .TrendLinesNYC .com .

WASHINGTON/BALTIMORE MULTIFAMILY PRESENTATION AND AWARDS

The 18th annual Washington/Baltimore Multifamily Presentation and Awards will be held on October 3, 2014 at the Mayflower

Renaissance Hotel in Washington, DC . Delta’s CEO, Gregory Leisch, will present his Real Estate Market and Economic Overview

prior to the awards ceremony . The Multifamily Awards event is co-sponsored each year with Transwestern and Greystar . To

see the list of award winners, or to download the market overview presentation, please visit the Multifamily Awards page on

our website following the event .

http://www.bizjournals.com/washington/https://www.deltaassociates.com/event/37/houston-trendlines-2014mailto:Jennifer.Glaser%40DeltaAssociates.com?subject=www.Transwestern.comhttps://www.deltaassociates.com/event/7/philadelphia-apartment-market-overviewhttps://www.deltaassociates.com/mailto:Jennifer.Glaser%40DeltaAssociates.com?subject=https://www.deltaassociates.com/event/5/washington-trendlines-2014mailto:Jennifer.Glaser%40DeltaAssociates.com?subject=www.TrendLinesDC.comhttps://www.deltaassociates.com/event/9/new-york-trendlinesregwww.TrendLinesNYC.comhttp://multifamilydc.com/http://www.transwestern.net/http://www.greystar.com/https://www.deltaassociates.com/event/12/17th-annual-mid-atlantic-multifamily-awards


DELTA NEWS

WASHINGTON AREA APARTMENT WEBINARS

On July 15, 2014, Delta Associates hosted its eighth webinar covering the Washington apartment market, with information

from Delta Associates’ Mid-Year 2014 Class A Apartment Report . These webinars are co-sponsored by the ROSS Companies

and the Washington Business Journal . At each webinar, Delta Associates’ CEO, Gregory Leisch, provides a short regional economic

overview followed by a comprehensive review of the Washington apartment market . A brief question and answer period with

Greg Leisch and Scott Ross rounds out each webinar . The slide show from each webinar is available to attendees and to Delta’s

clients . For more information, please contact Rachelle Sarmiento at 703-299-6360 .

RECENT SPEECHES AND PRESENTATIONS GIVEN BY DELTA EXECUTIVES

• 18th Annual Washington/Baltimore Multifamily Market Presentation: 10 .3 .14

• Maryland Housing Outlook: 9 .10 .14

• Mid-Year 2014 Washington Area Apartment Market Webinar: 7 .15 .14

• Bisnow’s Baltimore Multifamily Conference: 6 .25 .14

• Bisnow’s 2nd Annual Future of Alexandria: 6 .6 .14

• Bisnow’s National Multifamily West Conference: 5 .22 .14

• Trends in Apartment Design: 5 .20 .14

• 2014 NMHC Research Forum: 4 .29 .14

• Philadelphia Apartment Market Overview: 4 .22 .14

UPCOMING SPEECHES AND PRESENTATIONS BY DELTA EXECUTIVES

• AIDC Real Estate Update: 11 .6 .14

• Bisnow’s National Multifamily East Conference: 11 .24 .14

• 18th Annual Washington TrendLines Event: 2 .5 .15

• 3rd Annual Philadelphia Apartment Market Overview & Awards of Excellence 4 .21 .15

PUBLICATIONS

PHILADELPHIA CLASS A APARTMENT MARKET REPORT

The 2nd issue of Delta’s newest publication, Philadelphia Class A Apartment Market Report, was released in July 2014 . The next issue

will be released in October 2014 . To subscribe to this executive summary-style report, please contact Jennifer Glaser at 703-299-6363 .

UNDERSTANDING THE ECONOMY

Delta publishes an electronic newsletter called Understanding the Economy on changes in the national economy and their

relevance to commercial real estate . This newsletter is available free of charge via e-mail, and the latest issue is released every

few months . Please subscribe to the report via our website .

WASHINGTON AREA RETAIL OUTLOOK

The Washington Area Retail Outlook is a quarterly report in which Delta provides a quantitative and qualitative assessment of the

Washington area retail market, with a focus on grocery-anchored shopping centers . Information is included on vacancy rates,

rents, investment sales, projects of interest, and key trends in the retail market . The report is co-sponsored by The Rappaport

Companies,and is available free of charge via e-mail . The latest issue of this report was released in July 2014 . The next issue of

the report will be released in October 2014 . Please subscribe to the report via our website .

WASHINGTON AREA HOUSING OUTLOOK

The Washington Area Housing Outlook is a quarterly report in which Delta provides an assessment of the region’s single-family

housing market, including data on pricing, sales volume, and days on market . The report is co-sponsored by George Mason

University’s Center for Real Estate Entrepreneurship, and is available free of charge via e-mail . The latest issue of this report was

released in July 2014 . The next issue of the report will be released in October 2014 . Please subscribe to the report via our website .

http://ross-companies.com/http://www.bizjournals.com/washington/mailto:Rachelle.Sarmiento%40DeltaAssociates.com?subject=https://www.deltaassociates.com/event/29/18th-annual-washingtonbaltimore-multifamily-market-overview--awards-for-excellencehttps://www.deltaassociates.com/event/35/the-maryland-housing-outlookhttps://www.deltaassociates.com/event/25/delta-associates-washington-area-apartment-market-webinar---julyhttps://www.deltaassociates.com/event/33/bisnows-4th-annual-baltimore-multifamily-summithttps://www.deltaassociates.com/event/32/bisnows-2nd-annual-future-of-alexandriahttps://www.deltaassociates.com/event/23/bisnows-multifamily-westhttps://www.deltaassociates.com/event/28/apartment-design-trends-conference--washington-dchttps://www.deltaassociates.com/event/31/2014-nmhc-research-forum-https://www.deltaassociates.com/event/7/philadelphia-apartment-market-overviewhttp://www.deltaassociates.com/delta/event_detail.php?event_id=55https://www.deltaassociates.com/event/36/aidc-real-estate-updatehttps://www.deltaassociates.com/event/24/bisnows-multifamily-easthttps://www.deltaassociates.com/event/38/washington-trendlines-2015https://www.deltaassociates.com/event/34/3rd-annual-philadelphia-apartment-market-overview--awards-for-excellencemailto:Jennifer.Glaser%40DeltaAssociates.com?subject=https://www.deltaassociates.com/reports-and-publicationshttps://www.deltaassociates.com/subscriptionshttp://www.rappaportco.com/http://www.rappaportco.com/https://www.deltaassociates.com/subscriptionshttp://som.gmu.edu/realestate/http://som.gmu.edu/realestate/https://www.deltaassociates.com/subscriptions

1STATE OF

THE ECONOMY

DELTA ASSOCIATES | WASHINGTON/BALTIMORE OFFICE MARKET REPORT | THIRD QUARTER 2014 | NOT FOR REDISTRIBUTION 3

According to Federal Reserve Chair Janet Yellen’s semiannual

Monetary Policy Report, the economy continues to see

improvement, but the recovery from the Great Recession is

still in progress . This is partially based on the unemployment

rate being above the Federal Open Market Committee’s

(FOMC) longer-run normal level estimate and the labor force

participation rate appearing weaker than expected .

Despite these current shortcomings, the national economy

is expected to continue experiencing moderate growth over

the next few years . It will be spurred by supportive monetary

policy, increased home prices and equity values, stronger

foreign growth, and a decreased drag from fiscal policy .

Until the FOMC sees a significant increase in stability in the

labor market, we can expect it to continue utilizing monetary

policies to support economic growth . For example, the FOMC

has continuously reaffirmed its stance on maintaining the

Federal Funds Rate at 0% to 0 .25% . The road to a complete

recovery has been slow, but there has been continued

progress despite bumps along the way .

Now, for a look at major U.S. economic indicators:

PAYROLL JOBS

The national economy added 2 .6 million new payroll jobs

(not seasonally adjusted) during the 12 months ending July

2014, with the private sector accounting for the majority

of net additions (the public sector added 98,000 positions) .

Recent month-to-month gains (seasonally adjusted) have

been fairly strong and have shown improved consistency:

• April 2014: 304,000 (revised from 282,000)

• May 2014: 229,000 (revised from 217,000)

• June 2014: 298,000 (preliminary)

• July 2014: 209,000 (preliminary)

After the Bureau of Labor Statistics (BLS) releases job growth

data it revises its records a number of times as more data

becomes available . These revisions tend to be pro-cyclical,

meaning that revisions tend to show stronger growth during

an expansion and less growth during recessions . Recently,

since we are in an expansion period, BLS has typically been

revising job growth upwards . Revisions to April and May of 2014

showed an additional 34,000 jobs compared to preliminary

data . It is also noteworthy that for the 12 months ending in

July 2014, the public sector added the most jobs since the 12

months ending June 2010, more than four years ago .

ECONOMY GAINING TRACTION; UNEMPLOYMENT RATE CONTINUES TO DECLINE;HIRES RATE INCREASING, SUGGESTING RENEWED STRENGTH IN LABOR MARKET

PAYROLL JOB GROWTH United States | Year-Over-Year

Source: Bureau of Labor Statistics, Delta Associates; September 2014.

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

Mar.10

May10

Jul.10

Sep.10

Nov.10

Jan.11

Mar.11

May11

Jul.11

Sep.11

Nov.11

Jan.12

Mar.12

May12

Jul.12

Sep.12

Nov.12

Jan.13

Mar.13

May.13

Jul.13

Sep.13

Nov.13

Jan.14

Mar.14

May.14

Jul.14

Private Sector

Public Sector

TH

OU

SAN

DS

OF

NE

W P

AY

RO

LL J

OB

S

Note: Data are not seasonally adjusted.

THE NATIONAL

ECONOMYTHIRD QUARTE

R 2014

DELTA ASSOCIATES

DELTA ASSOCIATES | WASHINGTON/BALTIMORE OFFICE MARKET REPORT | THIRD QUARTER 2014 | NOT FOR REDISTRIBUTION4

The public sector has now added jobs for four consecutive

months after shedding jobs for the previous 44, and all of

this growth stems from state and local governments . The

Federal government continues to cut its workforce as it faces

budget shortfalls and rising liabilities . Of note, these cuts

are being achieved primarily through attrition rather than

layoffs . One benefit of Federal austerity and an enduring

economy is deficit reduction . The Congressional Budget

Office (CBO) projects that in 2015, the Federal budget deficit

will be 31% smaller than it was in 2013 . Of note, the U .S . will

still be running a deficit – we are not paying down debt, just

increasing it at a slower rate – but that is still substantial

progress in two years . In its April 2014 update, the CBO

reported that 2014 will be the fifth consecutive year that the

deficit’s share of the GDP has decreased . The CBO projects

the budget deficit in 2014 will be $492 billion, which is 2 .8%

of GDP and is nearly a third less than the $680 billion deficit

in 2013 . However, after 2015, the deficit will stop shrinking

and will reach approximately $1 trillion from 2022 through

2024 . This will be caused by our aging population, rising

health care costs, an expansion of Federal subsidies for

health insurance, and growing interest payments on the

Federal debt .

As was the case in our mid-year report, the top four sectors

in job gains were Professional/Business Services, Leisure/

Hospitality, Education/Health Services, and Retail Trade –

adding a total of 1 .7 million new jobs and accounting for over

64% of net new employment . Retail employment continues

to grow at a healthy rate, though retail jobs have less of a

multiplier effect than many others due to their low wages .

Some sectors have experienced weaker recoveries than

others . Specifically, the manufacturing, financial services,

and information industries have lagged behind while some

other sectors have either matched their pre-recession

levels or surpassed them . Job losses were confined to the

Federal Government and Information sectors over the past

year, with a total net loss of 43,000 and 28,000, respectively .

Of note, while those two sectors are still shedding jobs, the

rate of loss is slowing .

The Bureau of Labor Statistics projects that the economy

will add approximately 15 .3 million nonfarm payroll jobs

from 2012 through 2022, for an average annual growth rate

of 1 .1% . This compares to an average annual growth rate

of 0 .3% from 2002-2012, albeit that decade was marred by

the Great Recession . Education/Health Services is projected

to be the leader in job growth through 2022, adding 5 .7

PAYROLL JOB GROWTH United States | 12 Months Ending July 2014

-100,000 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000

Federal Government

Information

Other Services

Financial Activities

Wholesale Trade

State and Local Government

Transportation/Utilities

Manufacturing

Construction/Mining

Retail Trade

Education/Health

Leisure/Hospitality

Professional/Business Services

J O B C H A N G E

Source: Bureau of Labor Statistics, Delta Associates; September 2014. Note: Data are not seasonally adjusted.

PROJECTED PAYROLL JOB GROWTH United States | December 2012 – December 2022

-1,000 0 1,000 2,000 3,000 4,000 5,000 6,000

Manufacturing

Federal Govt

Information


Wholesale Trade

Other Services

Financial Activities

State/Local Govt

Retail Trade

Leisure/Hospitality

Construction/Mining

Professional/Business

Education/Health

J O B C H A N G E ( T H O U S A N D S )


BASELINE BUDGET PROJECTIONS United States

Baseline budget projections as of April 2014. Source: Congressional Budget Office, Delta Associates; September 2014.

FED

ER

AL

DE

FIC

IT (

$ B

ILLI

ON

S)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

-1,200

-1,000

-800

-600

-400

-200

0

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Deficit % of GDP

DE

FIC

IT A

S A

% O

F R

EA

L G

DP

THE NATIONAL ECONOMY

DELTA ASSOCIATES

5DELTA ASSOCIATES | WASHINGTON/BALTIMORE OFFICE MARKET REPORT | THIRD QUARTER 2014 | NOT FOR REDISTRIBUTION

million jobs . Professional/Business Services follows, adding

3 .5 million positions . Manufacturing, Federal Government

and the Information sectors are expected to shed positions

over the 2012-2022 period . Of note, the Bureau of Labor

Statistics expects the disparity between goods-producing

jobs and service jobs as a percentage of total employment

to widen . Goods-producing jobs (Mining, Construction and

Manufacturing) will comprise 12 .1% of all jobs in 2022,

compared to 12 .6% in 2012 . Service jobs as a percentage of

all employment is forecasted to rise to 80 .9% in 2022, from

79 .9% in 2012 .

UNEMPLOYMENT

Overall, Initial unemployment claims have steadily

fallen since their peak in March of 2009 . As of mid-August

2014, initial claims stood at 295,750 based on a four-week

seasonally-adjusted moving average, falling 11 .7% from the

same period one year ago . This compares to the 15-year

average of 379,800 . We expect unemployment claims to

continue decline gradually through the year in concert with

improving labor market conditions .

The unemployment rate (seasonally adjusted) declined to

6 .2% as of July 2014 from 7 .3% one year earlier . (The rate

declined to 6 .1% as of August in data released shortly before

this writing .) Earlier in the year, the unemployment rate

was declining in part because of workers dropping out of

the labor force, but more recently the rate has been driven

more by new jobs being created . In general, we anticipate

that the unemployment rate will gradually decline over

the next year as the economic expansion continues, hiring

accelerates, and uncertainty dissipates . In the short term

unemployment may tick up slightly as the current increase

in hiring might encourage even more people to rejoin the

labor force .

One indicator of the economy that has not seen significant

growth as of late is the national average hourly wage . In

July 2014 the hourly wage only increased slightly to $24 .45,

a 2 .0% increase since one year prior . By comparison, in 2007

the national hourly wage increased by at least 3 .0% during

each month compared with the same month one year prior .

The slow growth in wages is an indicator that the jobs being

created are in lower-paying industries . Even if people are

finding jobs, they are likely to be underemployed, meaning

job seekers are taking jobs that are below the education

levels they have earned .


INITIAL UNEMPLOYMENT CLAIMS United States | Four-Week Moving Average

250,000

300,000

350,000

400,000

450,000

500,000

550,000

600,000

650,000

700,000

Peak in Initial Unemployment Claims (Week of 3/28/09) = 659,250

15-Year Average = 379,800

INIT

IAL

UN

EM

PLO

YM

EN

T C

LAIM

S

Source: Bureau of Labor Statistics, Delta Associates; September 2014. Note: Data are seasonally adjusted.

(Week of 9/6/14) = 304,000

UNEMPLOYMENT RATE United States

0%

2%

4%

6%

8%

10%

12%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14*

Note: Through August 2014; seasonally adjusted; shaded bars represent recessions. Source: Bureau of Labor Statistics, Delta Associates; September 2014.

U.S

. U

NE

MP

LOY

ME

NT

RA

TE

0%

1%

2%

3%

4%

5%

2007* 2008 2009 2010 2011 2012 2013 2014

AVERAGE HOURLY EARNINGS 12-Month Percentage Growth | 2007- July 2014

* Data available starting March 2007 Source: Bureau of Labor Statistics, Delta Associates; September 2014.

Average 2007-2008 = 3.3%

Average 2009-2014 = 2.1%

12

-MO

NT

H P

ER

CE

NTA

GE

GR

OW

TH

DELTA ASSOCIATES


Hires Rate: According to the Economic Policy Institute, a

method to gauge the relative strength of the current labor

market is through the hires rate, or the share of total

employment accounted for by new hires . In effect, the hires

rate captures (1) Net new hires, and (2) New hires that are

due to “churn .” The indicator is useful because top-end

payroll job growth hides a lot of shuffling in the economy,

or the natural “churn” in the job market as hires fill vacated

or lost positions . One feature of the current expansion

has been the reluctance of workers to separate from their

current job, which is usually an important way for many

workers to advance their careers and take advantage of

better and bolder opportunities . As shown below, the hires

rate fell dramatically during the Great Recession and has

shown only modest improvement thereafter . From 2009

to year-end 2013, net new hires accounted for only about

3 .15% of payroll job growth on average . The adjacent graph

illustrates the fragility of the labor market, as employees

are clinging to less desirable positions and may be missing

opportunities for future career growth . The recent trend

has been positive, however, with the June 2014 rate (the

most recent data available) at 3 .5% .

Job applicants: As of June 2014, there were 2 .0 potential

applicants for every job opening . This is well below the July

2009 peak of 6 .7 applicants for every job and also less than

the 10-year average of 3 .2 . Also, this is the lowest ratio since

March 2008 and the 11th consecutive month the ratio has

been below 3 .0 . At the peak of the previous expansion cycle,

in March 2007, the ratio was 1 .4 potential applicants for

every job opening .

However, there are still many sectors that have significantly

more potential applicants than jobs available . This gap is

most apparent in the construction sector, where for every

job opening, there are 7 .0 potential applicants as of June

2014 . This gap is forcing many unemployed construction

workers to revamp their skill sets in order to be hirable

in other sectors . This need to learn new skills applies to

workers in all industries, which might help explain why so

many people have dropped out of the labor force since the

Great Recession . While the construction industry has the

highest unemployed workers to job openings ratio, other

industries also have a significant oversupply of candidates .

Importantly, the oversupply in construction is declining, with

the ratio down from 7 .5 just three months earlier and 10 .4 a

year earlier . In comparison, the Professional and Business

Services sector has just 1 .6 applicants per job opening .

HIRES RATE United States

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

SH

AR

E O

F TO

TAL

EM

PLO

YM

EN

T T

HA

T I

S N

EW

H

IRE

S

Note: Shaded bar represents most recent recession. Source: Bureau of Labor Statistics, Delta Associates; September 2014.

Average 2009-2013 = 3.15%

Average 2003-2008 = 3.75%

JOB-SEEKERS RATIO United States

0

1

2

3

4

5

6

7

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

RA

TIO

OF

JOB

-SE

EK

ER

S T

O

JOB

OP

EN

ING

S

Note: Through June 2014. Source: Bureau of Labor Statistics, Economic Policy Institute, Delta Associates; September 2014.

10-Year Average = 3.1

NUMBER OF UNEMPLOYED VS. JOB OPENINGS 12-Month Average Ending June 2014

0 200 400 600 800 1,000 1,200 1,400 1,600

Wholesale and retail trade

Leisure and hospitality

Professional and business services

Education and health services

Manufacturing

Construction

Government

Financial activities

Other services

Transportation and utilities

Information

Mining

Number of Job Openings

Number of Unemployed

T H O U S A N D S O F J O B S

Note: Based on 12-month trailing average. Data are not seasonally adjusted. Source: Bureau of Labor Statistics, Delta Associates; September 2014.


DELTA ASSOCIATES


GROSS DOMESTIC PRODUCT (GDP)

Real GDP contracted for the first time in three years by

a revised 2 .1% annualized rate during the 1st quarter of

2014, but bounced back and increased by an annualized

rate of 4 .2% (the government’s second estimate) during

the 2nd quarter of 2014 . The increase in real GDP growth

during the 2nd quarter stemmed from a rise in personal

consumption expenditures, private inventory investment,

exports, nonresidential fixed investment, state and local

government spending, and residential fixed investment .

According to the most recent report from Federal Reserve

Bank of Philadelphia, economists predict that the real GDP

growth will be 3 .0% in the 3rd quarter of 2014, 3 .1% in the

4th quarter, and 2 .1% in 2014 overall . Looking further ahead,

real GDP is predicted to average 3 .1% in 2015, 2 .9% in 2016,

and 2 .8% in 2017 .

Nevertheless, global economic growth could face near-term

constraints from a combination of current account deficits/

weak currencies in emerging economies and questions

about the rate of future growth in China . And, of course,

there are always worries about geo-political events .

The national economic expansion remains on track, even if

its performance is slow and uneven from month to month .

This is due in part to consumer’s improved outlook due to:

• Higher-income Americans feeling wealthier due to a

17 .7% gain in the S&P 500 in the past year;

• Middle-income Americans feeling better due to a 6 .2%

gain in housing prices over the past 12 months (per the

S&P/Case-Shiller national index), though the rate of

increase is decelerating; and

• Lower- and middle-income earners benefiting from low

inflation .

In addition, as households continue to fuel growth in the

economy through consumption expenditures, household

wealth accumulation (e .g ., residential investment)

continues to be on the mend . Non-residential investment

as a percentage of GDP is returning to pre-recession levels,

as inventory stock has been building up and commercial

construction is ramping up . Residential investment, which

includes new housing starts and upgrades to existing

residential buildings, has historically been a significant

contributor to GDP growth following the last four

recessions, but growth in residential investment following


FIXED INVESTMENT CONTRIBUTIONS TO GROSS DOMESTIC PRODUCT (GDP)

Source: Federal Reserve Economic Database (FRED), Delta Associates; September 2014.

0%

2%

4%

6%

8%

10%

12%

14%

16%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

PE

RC

EN

TAG

E O

F R

EA

L G

DP

RI %GDPNRI % GDP

Residential Private Investment Nonresidential Private Investment

*Through Q2 2014. Note: data are seasonally adjusted at annual rates.

GDP PERCENT CHANGE United States

Source: Bureau of Economic Analysis, Delta Associates; September 2014. Note: Annualized.

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Q411

Q112

Q212

Q312

Q412

Q113

Q213

Q313

Q413

Q114

Q214

AN

NU

AL

GD

P C

HA

NG

E I

N 2

00

9

CO

NST

AN

T D

OLL

AR

S

20-Year Average = 2.5%

DELTA ASSOCIATES


the latest recession has been sub-par . We expect residential

fixed investment as a percentage of GDP will increase

during the coming year, as home values continue to rise

(though perhaps more slowly) and home construction picks

up . Much like our expectation that personal consumption

expenditures are poised to expand as household equity

continues to mend, a rise in residential fixed investment

should translate into accelerating GDP growth in the

coming year or two .

CORPORATE PROFITS

U .S . corporate profits totaled $1 .94 trillion during the 1st

quarter of 2014 on an annualized basis, a 4 .8% decrease

over the 1st quarter of 2013 . Despite this decline, overall

corporate profits have been trending upwards since 2008 .

Companies have the resources to hire but remain wary

about future demand for products and services . We expect

that record corporate profits will gradually decline over the

next few years as uncertainty fades, businesses expand

their capital expenditures and M&A activity ramps up . We

have already seen a number of large acquisitions in 2014

including Facebook’s $19 billion purchase of WhatsApp,

Google’s $3 .2 billion deal for Nest Labs, and Apple’s $3

billion acquisition of Beats Electronics .

HOUSING MARKET

Home prices in the 20 major metro areas increased 8 .1%

during the 12 months ending June 2014, the most recent

data available, according to S&P/Case-Shiller . The housing

market is slowing nationally on a year-over-year basis,

and is now more in line with the pace of overall economic

growth . Inventory, which had been very low in some metro

areas, is gradually normalizing, easing pricing pressure .

The number of U .S . home sales rose to 5 .15 million (on an

annualized basis) in July 2014 from 5 .03 million one month

earlier . The 5 .15 million-unit pace is 4 .3% below the 5 .38

million-unit pace from the same period a year ago . The

average existing home sales price was $268,700 in July

2014 according to the National Association of Realtors,

surpassing the pre-recession average .

FEDERAL INTERVENTION AND INFLATION

Janet Yellen, the Federal Reserve’s new Chair, stated in

her semiannual Monetary Policy Report to Congress that

ANNUAL CHANGE IN EXISTING HOME SALE PRICES United States

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

PE

RC

EN

T C

HA

NG

E F

OR

ME

DIA

N P

RIC

E

OF

SIN

GLE

-FA

MIL

Y H

OM

ES

Source: S&P/Case-Shiller, Delta Associates; September 2014.

2008 2009 2010 2011 2012

Note: Data reflect 20-city composite index.

2013 2014

Source: National Association of Realtors, Delta Associates; September 2014.

$200,000

$210,000

$220,000

$230,000

$240,000

$250,000

$260,000

$270,000

$280,000

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

2006 2007 2008 2009 2010 2011 2012 2013 2014*

Number of Existing Home Sales**

Average Existing Home Sales Price

NU

MB

ER

OF

SALE

S –

T

HO

USA

ND

S O

F U

NIT

S

U .S . EXISTING HOME SALES VS. SALES PRICE

AV

ER

AG

E S

ALE

S P

RIC

E

*Data as of July 2014. ** Seasonally adjusted annual sales rate.


$0

$20

$40

$60

$80

$100

$120

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

Corporate Profits

S&P 500 12-Month EPS

Note: Seasonally adjusted at annual rates. *EPS through March 2014.

U.S. CORPORATE PRE -TAX PROFITS

Source: Bureau of Economic Analysis, Multpl.com, Delta Associates; September 2014.

CO

RP

OR

AT

E P

RO

FIT

S I

N T

RIL

LIO

NS

S&

P 5

00

12

-MO

NT

H E

PS

DELTA ASSOCIATES



the economy continues to improve, but has still not

completely recovered . Accordingly, the Fed plans to keep

short-term rates at their current range of 0% to 0 .25% until

labor market conditions, indicators of inflation pressures

and inflation expectations, and readings on financial

developments improve .

In late July the Fed cut its bond-buying activities (QE3) by

another $10 billion, bringing down total long-term bond

purchases to $25 billion per month . Also, minutes from the

Federal Open Market Committee’s June meeting reveal the

tapering process will end in October .

For commercial real estate investors, we perceive the

tapering decision as a net positive . The Fed’s announcement

should provide more clarity as to the central bank’s

monetary guidance going forward . The move also sheds

light on the improving prospects of the U .S . economy, and it

should remove a portion of the all-too-familiar uncertainty

that has plagued business decision-making and capital

investment for some time .

How will markets react going forward? Time will tell, but we

expect some short-term volatility, especially in emerging

economies that benefited from record-low borrowing

rates . The stock market has seen its upward momentum

continue through the summer as the Fed has tapered its

bond purchases .

Regarding inflation, prices increased 2 .0% during the

12 months ending July 2014 . The personal consumption

expenditure price index (PCEPI), which takes into account

changes in consumption habits as people substitute away

from some goods and services towards others, rose 1 .6%

during the 12 months ending July 2014 . The slight increase

in prices stems partially from the rise in costs for food,

especially meats, poultry, fish, and eggs, and the rise in

energy costs . Meat prices are rising due to droughts in the

central United States, which has significantly cut down hay

production, leaving ranchers with less food for cattle . As

a result ranchers are reducing cattle production, cutting

supply during barbeque season, which is when demand for

meat is at its highest . We expect inflation to be contained

in the near-term due to modest wage growth, coupled with

the fact that price pressure tends to lag economic growth

by a year or more . Given this, coupled with appropriate

monetary measures, inflation looks soft and should hover

near 2 .0% during the balance of 2014 .

SELECTED U.S. GOVERNMENT INTEREST RATES

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

INT

ER

EST

RA

TE

S (

%)

Federal Funds Rate

10-Year Treasury

30-Year Treasury

Source: Federal Reserve Economic Data (FRED), Delta Associates; September 2014. Note: Federal Funds Rate unchanged since December 16, 2008. 30-Year Treasury not issued between Q2 2002-2005.

U.S. INFLATION AND PERSONAL CONSUMPTION EXPENDITURE INDEX

Source: Federal Reserve Economic Database (FRED), Delta Associates; September 2014.

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14*

PE

RC

EN

TAG

E C

HA

NG

E

Series1

Series2

CPI-U PCEPI

Note: *CPI-U through July 2014 and PCEPI through July 2014. 12-month seasonally-adjusted percentage change.

DELTA ASSOCIATES


ECONOMIC OUTLOOK

During the 3rd quarter of 2014, the economy experienced

growth at the slow and steady pace we have become

accustomed to during the recovery from the Great

Recession . The most recent GDP readings, from the 2nd

quarter of the year, were strong, but most economists

believe the overall set of current and leading indicators

suggests that growth will settle in at a slower rate for the

balance of 2014 . Looking forward, we expect to see payroll

employment growth continue, the unemployment rate to

decline further, and household net worth to increase from

the rise in home and stock market values . The economy

successfully bounced back from a slow 1st quarter and we

expect it do so again if faced with similar challenges in

the near future . On balance, we look for this recovery to

continue on its slow but steady course through 2018 or so,

barring a catastrophic event .

Specifically, we believe the economic outlook is as follows:

• Real GDP growth: 2 .5% in 2014 .

• Payroll jobs: 2 .6 million added in 2014, slightly outpacing

the 2013 total .

• Housing: Price appreciation around 6% to 8% in 2014, off

last year’s performance .

• Unemployment rate: Hovering around 6 .0% to 6 .2% for

the balance of 2014 .

• Federal Funds Rate: 0% to 0 .25% through year-end 2015 .

• Long-term interest rates: Edging higher during the rest

of 2014 .

• Inflation: Around 2 .0% to 2 .5% for 2014 as consumer

demand strengthens .

The outlook for the intermediate-term is bright as well .

According to the Bureau of Labor statistics, the prime

working age population has been growing since 2012, and will

continue to do so until 2020 . The rise in the prime working

age population is an important shift in demographics that

should help boost economic activity in the coming years .

This data also suggests that we would have likely faced

slower economic activity, to some degree, during the past

decade no matter what – the financial crisis compounded



40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

130,000

1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008 2014*

PO

PU

LAT

ION

(0

00

S)

population

*As of July 2014.

PRIME AGE POPULATION, 25 TO 54 YEARS OLD United States

Looking forward, we expect to see payroll employment growth continue, the unemployment rate to decline further, and household net worth to increase.

DELTA ASSOCIATES



*Seasonally-adjusted change for 12 months ending in July 2014; others are comparisons of annual averages. Note that BLS has rebenchmarked figures since their initial publication; the figures presented above are the most recent estimates.

U.S. PAYROLL JOB GROWTH

YEAR JOB CHANGE % CHANGE

1 .9%

1 .7%

1 .7%

1 .2%

-0 .7%

-4 .3%

-0 .6%

1 .1%

1 .8%

1 .7%

1 .1%

-0 .2%

-1 .1%

2,542,000

2,264,000

2,250,000

1,576,000

-948,000

-5,949,000

-765,000

1,532,000

2,407,000

2,265,000

1,417,000

-313,000

-1,451,000

2014*

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

METRO AREA # % METRO AREA # %New York 155,400 1.8% Baltimore 34,600 2.6%LA Basin Philadelphia 33,900 1.2% Los Angeles/Long Beach/Glendale 69,200 1.7% Orlando 33,200 3.2% Orange County (Santa Ana/Anaheim/Irvine) 22,500 1.6% Austin 32,600 3.8% Riverside/San Bernardino/Ontario 36,200 3.0% Portland (OR) 31,700 3.1% Subtotal LA Basin 127,900 1.9% Raleigh-Durham 31,000 3.8%Dallas/Ft. Worth 120,800 3.9% St. Louis 27,100 2.1%Houston 112,200 4.0% Charlotte 25,800 3.0%San Francisco Bay Area Las Vegas 25,700 3.0% San Jose/Sunnyvale/Santa Clara 27,100 2.8% Indianapolis 22,600 2.4% San Francisco/San Mateo/Redwood City 35,400 3.3% Nashville 21,400 2.7% Oakland/Fremont/Hayward 23,700 2.3% Tampa-St. Pete 21,000 1.8% Subtotal Bay Area 86,200 2.8% San Antonio 20,800 2.3%South Florida Sacramento 20,800 2.4% West Palm Beach/Boca Raton 17,700 3.3% Cincinnati 19,900 1.9% Fort Lauderdale 22,800 3.1% Washington, DC 19,800 0.6% Miami/Miami Beach/Kendall 36,400 3.5% Oklahoma City 19,000 3.2% Subtotal South Florida 76,900 3.3% Salt Lake City 19,000 2.9%Atlanta 63,900 2.7% Jacksonville 17,100 2.8%Boston (Metropolitan NECTA) 57,200 2.2% Detroit (Detroit/Warren/Livonia) 16,800 0.9%Seattle 49,700 2.8% Cleveland 16,000 1.6%Denver-Boulder 48,100 3.3% New Orleans 15,100 2.8%Phoenix 47,400 2.7% Kansas City 13,700 1.4%Chicago 47,200 1.1% Pittsburgh 12,400 1.1%Minneapolis-St. Paul 46,300 2.6% Memphis 8,900 1.5%San Diego 37,200 2.8% Columbus (OH) 6,600 0.7%

Note: Data are not seasonally adjusted.Source: Bureau of Labor Statistics, Delta Associates; September 2014.

12-MONTH PAYROLL EMPLOYMENT CHANGE THROUGH JULY 2014

JOB CHANGE JOB CHANGE

the problem of weaker workforce demographics, but some

economic retrenchment was likely in any case .

Additionally, the largest five-year age cohort is now the 20

to 24-year-old age group based on data from the Census

Bureau . As workers within this cohort grow older over the

next few years, their wages will rise and the amount they

spend will increase as result, further boosting the economy .

Also, as this age cohort shifts to the 25 to 29-year-old

group, they will be more likely to start buying their own

homes as opposed to renting . Based on the aforementioned

conditions, we expect the national economy to see

continued growth in both the near and intermediate terms .

NATIONAL PAYROLL JOB GROWTH SUMMARY

The U .S . economy gained 2 .5 million payroll jobs over the 12

months ending July 2014 (seasonally adjusted), representing

an increase of 1 .9% . This compares to the 25-year annual

average of 1 .2 million jobs at a 1 .1% average growth rate .


The Washington metro area faced a number of challenges in

early 2014, including Federal budget cuts and harsh winter

weather that hindered businesses throughout the region .

Despite these challenges, payroll job change still remained

positive, albeit below historical averages . In more recent

months, job growth has been stronger on an annual basis

and we expect it to continue gaining strength throughout

the balance of 2014 . During the 12 months ending July 2014,

payroll employment increased by 19,800, or 0 .6% . However, the

12-month employment gain is below the metro area’s 20-year

annual average of 42,600 and compares to prior expansion

cycles of 60,000 to 100,000 in job gains . As a result, this

expansion, while strengthening, feels anemic by comparison .

As the Washington metro area adjusts to these conditions,

we expect the private sector to increasingly pick up the

slack . Growth in the private sector combined with pent-up

demand for goods and services will help to spur job growth

for the balance of 2014 and will likely continue through

2018 . Job growth will keep the region’s unemployment rate

low; as of July 2014 the unemployment rate was at 5 .4%, one

of the lowest rates among major metro areas .

Specifically, more job growth will be needed from the

Professional/Business Services sector, as it produces higher

paying jobs . Currently, the job growth is highest in the Retail

Trade sector, which produces lower-wage jobs . Plans in Virginia,

such as Governor McAuliffe’s recently announced “New Virginia

Economy Workforce Initiative,” are a step in the right direction .

The initiative will focus on training people for middle-skill jobs

that require some training past high school, but do not need a

four-year degree . Governor McAuliffe has set a goal for 50,000

Virginians to graduate the program by the end of 2017 .

P A Y R O L L E M P L O Y M E N T

ECONOMIC HIGHLIGHTSW A S H I N G T O N M E T R O A R E A

3.1m i l l i o n

at July

2014

J O B C H A N G E

19.8thousand

12 months ending July

2014

U N E M P L O Y M E N T R AT E

5.4%I N F L AT I O N

1.7%12 months ending July

2014

H O U S I N G P R I C E S

5.3%12 months

ending June

2014Source: Bureau of Labor Statistics, S&P/Case-Shiller; September 2014.

at July 2014

down from

5.7% one year ago

THE WASHINGTON

AREA ECONOMY

THIRD QUARTER 2014

JOB GROWTH IMPROVING; CONTRACTORS SLOWLY GAINING MORE CONFIDENCE; UNEMPLOYMENT RATE REMAINS LOW

DELTA ASSOCIATES


PAYROLL JOBS

The Washington metro ranks seventh in population among

the nation’s metro areas, with 5 .9 million residents . With

3 .1 million payroll jobs, the Washington metro area ranks

as the fifth-largest job market, behind New York, LA Basin,

Chicago, and Dallas/Ft . Worth . The Washington metro area

economy added 19,800 new payroll positions during the

12 months ending July 2014 . Growth is below the 20-year

annual average of 42,600 and less than in past recovery

cycles, which averaged 60,000 to 100,000 .

As noted previously, a majority of job growth since the

end of the recession has come from lower-wage jobs . Jobs

filled that were mid-wage and higher-wage were outpaced

by lower-wage jobs by about 40,000 and 20,000 jobs,

respectively . As jobs in the Manufacturing, Information, and

Federal Government sectors continue to be shed, creating

higher-wage jobs becomes an ever-increasing priority .

The Washington metro area added 19,800 new jobs during

the past 12 months . Other metro areas with larger private

sectors continue to outpace it in job gains . New York, the

LA Basin, DFW, Houston, and SF Bay are the leaders in

job growth, spurred by growth in Professional/Business

Services, Trade/Transportation/Utilities, and Energy .

PAYROLL JOBS BY SECTOR

The top four sectors for job growth in the Washington

metro area are Retail Trade, Leisure/Hospitality, Education/

Health Services, and State/Local Government – with a total

of 24,300 new jobs added to the economy in these four

sectors alone . These industries are still seeing job growth,

but they are being partially offset by other industries that

are experiencing losses . Notably, the Federal Government

sector lost 8,100 jobs while the Manufacturing and

Information sectors lost 2,600 and 2,500 jobs, respectively,

during the 12 months ending July 2014 . Federal agencies

continue to tighten spending due to Federal austerity

measures, notwithstanding the partial rollback of

sequestration . The majority of the region’s Federal job

cuts occurred in the District of Columbia . The Federal

government is not laying off workers; rather, a hiring

freeze has prevented hiring for many positions vacated

due to retirement or workers leaving for other positions

outside the Federal government .

(60) (40) (20) 0 20 40 60 80

Lower Wage

Mid-Wage

Higher-Wage

Thousands

2008-2009

2010-2013 H I G H E R - W A G E

M I D - W A G E

L O W E R - W A G E

JOB CHANGE IN THOUSANDS

PAYROLL JOB CHANGE BY WAGE Washington Metro Area

Source: Dr. Stephen Fuller, Delta Associates; September 2014.

19.8

0

20

40

60

80

100

120

140

160

180

NY LABasin

DFW Hou SF Bay SouthFL

Atl Bos Denver Phx Chi Was

PAYROLL JOB GROWTH Selected Large Metro Areas | 12 Months Ending July 2014

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-60

-40

-20

0

20

40

60

80

100

120

140

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

20-Year Annual Average = 42,600/Year

*12 months ending in July 2014.

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PAYROLL JOB GROWTH Washington Metro Area

THE WASHINGTON AREA ECONOMY

DELTA ASSOCIATES


UNEMPLOYMENT RATE

The Washington area unemployment rate was 5 .4% at July

2014, down 30 basis points from 5 .7% one year ago . This

compares to the national (seasonally adjusted) rate of

6 .2% in July 2014, which is down 110 basis points from one

year earlier . The Washington metro area has the second-

lowest unemployment rate among the nation’s largest

metro areas, behind Denver . The Washington metro area’s

unemployment rate peaked in January 2010, at 7 .1%,

and has since declined, albeit unevenly . We expect the

Washington metro area’s unemployment rate to hold in the

low-5% range during the balance of 2014 .

REGIONAL CONSUMER PRICE INDEX

Overall inflation in the Washington/Baltimore region was

1 .7% during the 12 months ending July 2014, compared to

the national inflation rate of 2 .0% . Inflation for all types

of items remained relatively in check with the regional

inflation rate . Medical expenses only rose 2 .3% in the

Washington/Baltimore region during the past 12 months,

the lowest rise in a 12 month period since November 2009 .

Also, housing fuel and utilities have decreased 1 .4% during

the same period after rising 7 .2% during the 12 months

ending March 2014 and 4 .0% during the 12 months ending

PAYROLL JOB GROWTH Washington Metro Area | 12 Months Ending July 2014

-12,000 -8,000 -4,000 0 4,000 8,000 12,000 16,000

Federal Government

Manufacturing

Information

Wholesale Trade

Professional/Business Services

Construction/Mining


Other Services

Financial Services

State and Local Government

Education/Health

Leisure/Hospitality

Retail Trade

J O B C H A N G E

+33,000

-13,200


0%

2%

4%

6%

8%

10%

12%

Den Was Bos DFW Hou SF Bay Phx S Fla Chi NY Atl LABasin

July 2013 July 2014

UN

EM

PLO

YM

EN

T R

AT

E

National Rate*

7.3% 6.2%

-170 -30 -120 -260 -130 -90 -130 -100 -100 -120 -30 -140 Basis Point Change

UNEMPLOYMENT RATE Large Metro Areas | July 2013 vs. July 2014

Source: Bureau of Labor Statistics, Delta Associates; September 2014. *Seasonally adjusted.


Note: In thousands of payroll jobs. Data are not seasonally adjusted.Source: BLS, Delta Associates; September 2014.

TRENDS IN EMPLOYMENT BY MAJOR SECTORWashington Metro Area

JULY 2014

Retail Trade

Leisure/Hospitality

Education/Health

State and Local Govt .

Financial Services

Other Services


Construction/Mining

Professional/Bus . Svs .

Wholesale Trade

Information

Manufacturing

Federal Government

Total

273 .3

311 .7

391 .8

306 .5

156 .1

193 .5

61 .5

150 .7

712 .6

63 .2

74 .2

46 .0

366 .7

3,107.8

12-MONTHCHANGE

7 .7

7 .2

5 .4

4 .0

3 .8

2 .5

1 .0

0 .7

0 .5

0 .2

-2 .5

-2 .6

-8 .1

19.8

20-YEAR ANNUAL AVERAGE

1 .9

5 .1

8 .6

3 .8

0 .0

3 .7

0 .1

1 .0

16 .8

2 .0

-0 .2

-0 .9

0 .7

42.6


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IN

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CONSUMER PRICE INDEX (CPI ) Washington/Baltimore Region

-2%

-1%

0%

1%

2%

3%

4%

5%

10-Year Annual Average = 2.7%

Note: Data is 12 months ending in each period, through July 2014.

DELTA ASSOCIATES


May 2014 . For the balance of 2014, we expect inflation

to be contained locally, as slowly progressing economic

conditions keep prices in check, with growth of 1 .5% to 2 .5% .

As long as appropriate monetary measures are in place at

the Federal level, inflation should remain controlled .

HOUSING PRICES

House prices increased 5 .3% in the Washington metro area

during the 12 months ending June 2014, according to the

S&P/Case-Shiller Home Price Index . This compares to a rise

of 8 .1% in the 20 MSA Composite Index .

Using a different methodology, the Federal Housing

Finance Administration (FHFA) measured price growth in

the Washington region at 5 .2% for the 12 months ending

in June 2014 . Both measures reflect decent year-over-year

gains thanks to a resilient private sector, though price

increases have been slower in recent months across the

nation . As demand continues to grow we expect prices to

continue rising . However, housing has become increasingly

unaffordable due to the slower acceleration of wage growth .

REGION’S CORE INDUSTRIES

The Gross Regional Product (GRP) for Washington is expected

to grow to $475 .5 billion in 2014 – a 3 .8% increase from

$458 .1 billion in 2013 . The Federal government is the largest

component of the Washington area economy, as its spending

touches every job sector . However, this share of spending

is shrinking . During 2013, Federal government spending

accounted for 35% of GRP . By 2018, we expect this share

to shrink to 29%, as the Federal government continues to

control spending and the private sector picks up the slack .

The most important element of Federal spending in the

metro area economy is procurement – the government’s

purchase of goods and services from the private sector .

Procurement spending declined 5 .9% during 2013 compared

to a decline of 5 .0% in 2012 . While government contractors

have right-sized over the past three years and found ways

to increase their business with private sector clients,

Federal procurement spending is continuing to decline,

which has a negative impact on this region’s overall

economic performance . In consultation with Dr . Stephen

Fuller of the Center for Regional Analysis, we expect Federal

procurement spending in the Washington metro area to

decline at least 3 .0% in 2014 on a current-dollar basis .

Source: S&P/Case-Shiller, Delta Associates; September 2014.

PE

RC

EN

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HA

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PERCENT CHANGE IN HOUSE PRICES Washington MSA vs. U.S. 20 MSA Composite

Note: Seasonally adjusted.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

Washington MSA

U.S. 20 MSA Composite

*12 months ending June 2014.


35%

15%

5% 5% 5%

3%

34% Federal SpendingTechnologyBuilding IndustryInt'l BusinessHealth/EducationHospitalityOther


SHARE OF GRP Washington Metro Area | 2013

$458 Billion

Percentages may not add to 100% due to rounding.

DELTA ASSOCIATES


The Washington region has experienced slow-growth in the

first half of 2014, as expected, due to the lingering effects of

mandatory Federal budget cuts, but harsh winter weather

further stymied the economy earlier this year . We expect

to see stronger economic growth in the Washington metro

area during the balance of 2014 and into 2015 .

Contractors are continuing to adjust to the new economic

environment . With the budget deal and debt limit suspension

in place, contractors have more confidence to commit

towards larger future projects instead of being limited

to smaller short-term deals . This increased certainty has

allowed contractors to adjust their personnel accordingly

and we should see fewer job cuts moving forward . For

example, 500 jobs were added in the Professional/Business

Services sector over the past 12 months, which is not a

significant gain, but is a positive sign compared to the net

loss of jobs in the sector earlier in the year .

Also, the retail and hospitality sectors still have room for

growth . Although these sectors consist of lower-wage jobs,

we expect that they will continue to add workers, which

benefits the overall regional economy .

Even with the headwinds generated by job losses in the

Federal government and contracting sectors, the region’s

overall job growth has been fairly healthy due to the

outperformance of other sectors . These other sectors

generated 62,900 new payroll jobs during the 12 months

ending in July 2014, which is more on par with the historical

average of the Washington metro area .

WASHINGTON AREA ECONOMIC OUTLOOK

We expect job growth in the metro area to remain tempered

for an expansion cycle – in the range of 25,000 to 60,000

jobs per annum . This is sufficient to support a healthy

commercial real estate industry, but below the levels

experienced in most recent expansion cycles .


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Source: Bureau of Labor Statistics, Dr. Stephen Fuller, Delta Associates; September 2014.

PAYROLL JOB GROWTH Washington Metro Area

-60

-40

-20

0

20

40

60

80

100

120

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

District Sub. MD No. Virginia

20-Year Annual Average = 42,600/Year 5-Year Projected Average = 43,800/Year

*Preliminary

A N N UA L C H A N G E I N F E D E R A L P R O C U R E M E N T S P E N D I N G Washington Metro Area (Current Dollars)


-10%

-5%

0%

5%

10%

15%

20%

25%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 2014**

**Projected

14-Year Annual Average = 4.2%

% C

HA

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E I

N S

PE

ND

ING

(8,100)

(35,000)

62,900

-40,000

-20,000

0

20,000

40,000

60,000

80,000

Federal Government Procurement/ Contractors* All Other

Source: BLS, Delta Associates, September 2014.

JOB GROWTH Washington Metro Area | 12 Months Ending July 2014

*Estimate.

JO

B G

RO

WT

H

Even with the headwinds generated by job losses in the Federal government and contracting sectors, the region’s overall job growth has been fairly healthy due to the outperformance of other sectors.

DELTA ASSOCIATES


We expect the Washington metro area economy to build on

some of the momentum started during the 3rd quarter of the

year . Consumer confidence is at its highest level in nearly

seven years according to The Conference Board’s Consumer

Confidence Index and 60% of CEOs are optimistic about the

national economy’s outlook over the next year according

to PwC’s most recent Trendsetter Barometer report . Also,

52% of companies have expansion initiatives planned over

the next year and 63% plan on hiring more workers during

the period of time . We expect these national trends to have

a local impact and boost the regional economy during the

balance of 2014 and into 2015 .

During 2015 and 2016 we expect healthy growth, though at

a slower rate than seen in recent expansion cycles . As the

Federal government will continue to face austerity measures

during this period – albeit reduced from 2013 levels – we

expect the source of growth to continue its shift to the

private sector . Overall, employment growth will be healthy

but average wages lower on an inflation-adjusted basis than

what this region has experienced in the past . International

business activities will benefit Washington and support

payroll job growth in the National Capital Region .

We estimate that an annual average of 43,800 payroll jobs will

be added to the Washington metro area economy during the

five-year period from 2014 to 2018 . Private sector firms will be

the cornerstone of employment growth in the period ahead .


We expect job growth in the metro area to remain tempered for an expansion cycle – in the range of 25,000 to 60,000 jobs per annum. This is sufficient to support a healthy commercial real estate industry, but below the levels experienced in most recent expansion cycles.


The Baltimore metro area’s economy experienced

continued economic growth during the 3rd quarter of

2014 and remains a leader among comparably-sized metro

areas . Overall, we expect conditions to continue to improve

for the remainder of 2014 and into 2015 .

The Baltimore metro area economy has continued to record

strong job growth . Payroll employment increased 34,600

(a 2 .6% increase) during the 12 months ending July 2014,

which is above the long-term annual average of 11,800 .

The Professional/Business Services sector continued to

power the local economy during the past 12 months,

however, the Leisure/Hospitality, Construction, and State/

Local Government sectors all played important roles as

well . Compared to past recovery cycles, all four sectors

have achieved healthy gains in jobs since the trough of the

most recent recession . Hindering more robust job growth

is the 1,600 payroll positions lost in the Manufacturing

sector and the 1,100 payroll positions lost in the Federal

Government sector during the 12 months ending July 2014 .

The unemployment rate is at 6 .9% as of July 2014, down

from 7 .2% one year earlier .

The Baltimore economy should continue to outperform other

comparably-sized metro areas . With a solid core economic

base, boosted by a growing cyber-security industry, the

Baltimore economy is poised for long-term growth .

PAYROLL JOBS

With 1 .4 million payroll jobs, the Baltimore area ranks

as the largest job base among comparable metro areas,

slightly larger than St . Louis . The Baltimore metro area

BALTIMORE METRO ECONOMY GROWING AS HIRING ACCELERATES

P A Y R O L L E M P L O Y M E N T

ECONOMIC HIGHLIGHTSB A L T I M O R E M E T R O A R E A

1.4m i l l i o n

at July

2014

J O B C H A N G E

34.6t h o u s a n d

12 months ending July

2014

U N E M P L O Y M E N T R AT E

6.9% down from 7.2% one year ago

I N F L AT I O N

1.7%12 months ending July

2014

H O U S I N G P R I C E S

3.7%12 months

ending June

2014Source: Bureau of Labor Statistics, FHFA; September 2014.

at July 2014

THE BALTIMORE

AREA ECONOMY

THIRD QUARTER 2014

DELTA ASSOCIATES


gained 34,600 new payroll positions during the 12 months

ending July 2014, first in its peer group . This compares to

the 20-year annual average of 11,800 new payroll jobs .

JOB GROWTH BY SECTOR

Over the past 12 months, nine sectors added jobs in the

Baltimore metro area, up from only six in the 12 months

ending April 2014 . The top three sectors are Professional/

Business Services, Leisure/Hospitality, and Construction/

Mining – with a total of 23,600 new jobs added to the

economy in these three sectors alone . The Professional/

Business Services and Leisure/Hospitality sectors shared

the lead for the amount of payroll jobs added in the past

12 months, each adding 8,800 payroll jobs . These totals

exceeded the Professional/Businesses Services sector’s

20-year annual average of 4,800 jobs and the Leisure/

Hospitality sector’s 20-year annual average of 1,700 jobs .

UNEMPLOYMENT RATE

The Baltimore area unemployment rate was 6 .9% (not

seasonally adjusted) at July 2014, down from 7 .2% one

year earlier . This compares to the seasonally-adjusted

national rate of 6 .2% in July 2014 . Among comparable metro

PAYROLL JOB GROWTH Baltimore Metro Area | 12 Months Ending July 2014

-6,000 -4,000 -2,000 0 2,000 4,000 6,000 8,000 10,000

Manufacturing

Federal Government

Information

Other Services

Wholesale Trade

Financial Services

Retail Trade


Education/Health

State/Local Gov

Construction/Mining

Leisure/Hospitality

Prof/Business Services

J O B C H A N G E

+38,700

-4,100


34.6

0

5

10

15

20

25

30

35

40

Baltimore St. Louis Milwaukee Detroit Cleveland Pittsburgh

PAYROLL JOB GROWTH Comparable Metro Areas | 12 Months Ending July 2014

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THE BALTIMORE AREA ECONOMY

Note: In thousands of payroll jobs. Data are not seasonally adjusted.Source: BLS, Delta Associates; September 2014.

Prof/Business Services

Leisure/Hospitality

Construction/Mining

State/Local Govt

Education/Health


Retail Trade

Financial Services

Wholesale Trade

Other Services

Information

Federal Government

Manufacturing

Total

225 .0

142 .3

78 .5

169 .0

251 .3

46 .4

139 .1

77 .8

53 .4

54 .4

15 .9

50 .5

56 .5

1,360.1

8 .8

8 .8

6 .0

5 .2

4 .5

2 .3

1 .6

0 .9

0 .6

(0 .5)

(0 .9)

(1 .1)

(1 .6)

34.6

4 .8

1 .7

0 .7

1 .0

4 .5

0 .5

0 .3

0 .1

0 .2

0 .5

-0 .1

0 .1

-2 .5

11.8

TRENDS IN EMPLOYMENT BY MAJOR SECTORBaltimore Metro Area | In Thousands

JULY 2014

12-MONTHCHANGE

20-YEAR ANNUAL AVERAGE

-50

-40

-30

-20

-10

0

10

20

30

40

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

20-Year Annual Average = 11,800/Year

*12 months ending in July 2014.

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PAYROLL JOB GROWTH Baltimore Metro Area

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