wls report (1).pdf

8/20/2019 WLS Report (1).pdf

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TENANT LANDSCAPE | YEAR-END 2015 1

TENANT OUTLOOK

Tenants still have the upper hand, but the market has begun to tighten.

After years of soft market metrics, the Washington area office market began

to show signs of stabilization in 2015, foreshadowing an impending shift away

from tenant-favorable conditions. Job growth was strong and Congress agreed

on a two-year federal budget, lending a limited degree of certainty to the Federal

sector. As a result, regional economic uncertainty eased somewhat, supporting

moderate growth in the office market. Investment sales activity was the

highlight of the Washington region’s office market during 2015, with trading

volume for the year at the highest level in nearly a decade. Leasing activityremained relatively constrained and was dominated by smaller leases involving

net reductions in space. However, tenants are beginning to sign large leases in

higher-end buildings, particularly in more desirable submarkets.

In general, Class A space in the region has outperformed the market as a whole,

as tenants have been taking advantage of attractive leasing terms in quality

space. We expect this trend to continue for a short while, but opportunities for

tenants to secure new, high-quality space in the most attractive submarkets will

become increasingly scarce as the market tightens. The region’s vacancy rate is

expected to begin to fall over the next two years. Declining vacancy is typically

a lagging indicator of a strengthening market.

Regional employment growth was strong in 2015, especially in Professional/

Business Services — a sector that generates office demand. There was also

considerable positive activity in the public sector. After years of losses, Federal

employment growth turned positive. GSA has also resumed significant leasing

activity and was behind some of the largest deals of 2015 in the metro area.

The agency will be a major competitor for tenants, especially for those seeking

large blocks of space. Still, the private sector will generate the vast majority of

leasing activity over the next few years. As more tenants seek office space due to

improving macro-economic conditions, rents will rise. For now, though, tenants

still have the upper hand.

LANDSCAPE T E N A N T

YEAR-END 2015

A Washington office market summary from the tenant’s perspective prepared exclusively for West, Lane & Schlager’s clients

EXECUTIVE SUMMARY

Net Absorption in 2015

• The District – positive 25,000 SF

• Northern Virginia – positive 482,000 SF

• Suburban Maryland – positive 346,000 SF

Overall Vacancy Rate at Year-End 2015

• The District – increased to 12.2%, from 12.0% ayear-end 2014

• Northern Virginia – decreased to 19.7%, from20.1% at year-end 2014

• Suburban Maryland – 19.4%, unchanged fromyear-end 2014

Face Rent Averages at Year-End 2015

• The District Class A – $56.17/SF Class B –$42.96/SF

• Northern Virginia – $32.09/SF

• Suburban Maryland – $26.18/SF

Gross Leasing Activity in 2015

• The District – 7.2 million SF

• Northern Virginia – 9.9 million SF

• Suburban Maryland – 3.8 million SF

Investment Sales in 2015

• The District – $3.4 billion, 36 transactions

• Northern Virginia – $2.1 billion, 69 transactions

• Suburban Maryland – $741 million, 32 transactions

Market conditions are still favorablefor tenants, but tenant leverage haspeaked in core submarkets

Apart from a few select submarkets,rent growth remains modest

Regional economic growth expected togain strength as job growth ramps up

LAY OF THE LAND


2/21


TENANT OUTLOOK

A handful of submarkets may be particularly appealing to tenants at this time:

• In the District, the NoMa and Capitol Riverfront districts offer an

abundant selection of newly-built , high-quality buildings, with another

half million SF of additional space currently under construction. Withrelatively high vacancy and low rental rates in both submarkets as of

year-end 2015, tenants have significant negotiation leverage, making it

an opportune time to sign for new space.

• In Rosslyn, rental rates are higher than the Northern Virginia average, but

competition from the Silver Line corridor, the Distr ict, and Alexandria is

forcing building owners to offer higher tenant improvement allowances

and more free rent. Tenants looking to upgrade to higher-quality

accommodations may want to take advantage of these incentives while

they last. We expect the office market to become more competitive in

Northern Virginia in late 2016 or early 2017, leading to a reduction in the

value of incentives landlords will offer.

• Downtown Bethesda is appealing for tenants who want a Metrorail-

accessible and amenity-rich submarket, but who don’t need a lot of

space. We expect strong incentives from landlords to last until roughly

late 2016. North Bethesda is an attractive option for tenants looking to

maximize value as recent Federal relocations have left the submarket

with a large amount of vacant Class A space (the most in Suburban MD)

and declining rents.

We expect the Washington metro area office market to remain favorable

for tenants in the near term, while landlords are still dealing with a large

inventory of vacant space. As the economy continues to improve, owner-

favorable conditions are expected to return in 2017 in most submarkets.

In this slow-growth environment, here are some action steps for tenants to consider:

Lock-in lowrents for

as long aspossible

Upgrade spacebefore demand

— and rents— rise in 2016and 2017 due toaccelerating job

growth

Renegotiate and extendcurrent leases in advance

of the expiration date toreduce rents and obtainconcessions while market

conditions still favortenants

Relocate closer torail transit stations

in high-demandurban areas whileowners are still

offering substantialincentives

Consider relocation tohigher-quality space in

emerging office centers —NoMa, Capitol Riverfront— or existing, but strugglingtransit-accessible hubs suchas Rosslyn and Crystal City


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WLS LEVERAGE LOOKUP

Vacancy low and nearing bottom, rentsat highest, available space at minimum;tenant’s leverage at nadir

Vacancy stable or rising, rents up onlyslightly if not f lat, available space increasing

Vacancy rising, rents flat to declining,concessions accelerating

Vacancy rising, rents declining, availablespace at or near maximum

Vacancy and rents stabilizing, concessionsplateauing; tenant’s leverage at apex

Vacancy beginning to decrease, rentsrelatively stable

Vacancy declining, rents edging up, tenant’sleverage decreasing

Vacancy declining, rents rising, concessionofferings low

Note: Tenant leverage descriptions are a guide; not alllisted conditions will be present even when market is atthe corresponding place on the diagram.

Source: Delta Associates; January 2016.

WLS LEVERAGE LOOKUP

The West, Lane & Schlager Leverage Lookup curves ref lect how much leverage the typical office tenant currently has in each jurisdiction. As the leverage

position moves down the curve, demand for space is increasing and tenant leverage is diminishing. As the leverage position moves up the curve, demand

for space is declining and tenant leverage is increasing.

District of Columbia: Overall vacancy is likely to hold steady, but should begin declining in the near future. Vigorous absorption of

Class A space will continue to be offset by speculative construction. In some submarkets — CBD, East End, Georgetown — the office

market has shown substantial growth and the window for tenants to secure quality space with generous rents and concessions

is quickly narrowing. Tenants should look for deals in high-quality space in emerging submarkets such as NoMa and Capitol Hill

Improved regional job growth will only accelerate the market recovery and reduce tenant leverage in the coming years.

Northern Virginia: Vacancy has begun to stabilize, and compress in certain submarkets inside and near the Beltway. Overall, rents

will increase moderately in 2016. Conditions do not currently favor building owners, so they are more likely to offer favorable terms

in order to secure leases for their available space, especially for larger tenants. Submarkets along the Metro Silver Line — Tysons

Corner, Reston — should see substantial growth over the coming years, with leverage tilting toward building owners. Historically

robust submarkets, such as Rosslyn, have been str uggling recently (largely due to Federal relocations) and provide tenants negotiating

leverage for high-quality, transit-accessible space.

Suburban Maryland: Vacancy leveled off in 2015, and is positioned to shrink slightly in the year ahead, as the pipeline for new

construction remains relatively empty. Rents will continue to see modest increases, except for close-in submarkets and the biotech

corridor which will likely see more material gains in the year ahead. Considerable job growth will drive increased absorption, and

lower vacancy in 2016 and beyond. Transit-accessible Montgomery County submarkets inside the Beltway — Bethesda/Chevy Chase

Silver Spring — as well as those in the county’s Life Sciences corridor — Rockville, Gaithersburg — will continue to outperform the

Suburban MD market as a whole, providing landlords with greater leverage.

TENANT LEVERAGE DESCRIPTIONS


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REGIONAL ECONOMY

REGIONAL ECONOMY

Resurgent Washington area economy produces strongest job growth

in a decade.

Following two years of limited job growth, 2015 brought a major rebound in

the Washington metro area economy, mirror ing national trends. During the

12 months ending November 2015, the metro area economy added 61,900

new payroll positions, well above the 20-year annual average of 41,800.

Looking ahead to 2016, we expect job growth in the Washington metro area

to continue at a pace similar to 2015’s. With 3.2 million payroll jobs, the

Washington metro area ranks as the fifth largest job market, behind only

New York, the LA Basin, Chicago, and Dallas/Ft. Worth.

The top four sectors for job growth in the Washington metro area in the

12 months ending November 2015 were Professional/Business Services,

Education/Health, State/Local Government, and Construction. These

sectors alone accounted for a net gain of 50,900 jobs, more than 80% of

the total employment increase. The most substantial progress in 2015 was

in the Professional/Business Services sector, which rebounded from a net

job loss in 2014 to once again become the primary dr iver of job growth in

the metro area. This is significant for the regional economy because jobs

in the Professional/Business Services sector tend to pay well and generate

demand for office space. Another notable trend in 2015 was the modest

gain in Federal employment sector, which had shed jobs each year from

2011 and 2014. Only two sectors – Information and Manufacturing – had net

job losses over the year, but neither represents a major component of the

metro area’s employment base.

As the Washington region begins to depend more on the private sector

than on the Federal government, its growth potential stems from the

region’s native assets — a highly skilled workforce, access to international

markets, and high-quality educational systems. The passage of a Federal

budget and related appropriation bills at the end of 2015 was still critical

to the metro area’s economy. Moving forward into 2016, there will be

considerably less uncertainty surrounding the Washington region’s

economy. Increased Federal government and contractor hiring should

provide an added economic boost in the near future, while private sector

firms continue to be the cornerstone of employment growth in the period

ahead. We expect 66,400 new jobs wi ll be added in 2016 and 57,800 in 2017.

Although employment growth is expected to slow somewhat in 2018 and

beyond, the five-year forecast of 54,500 net new jobs per year represents a

higher level of growth than the region has experienced since the middle

of the last decade. The acceleration of hiring in the Professional/Business

Services sector suggests that the office market will tighten over the next

several years, leading to declining vacancy, rising rents, and more limited

tenant leverage.

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62,100

-200


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VACANCY AND ABSORPTION


Office absorption in the region seems to be rebounding from a period of weak demand. In the past, this change has been a bellwether for a

shift from a tenant-favorable environment to landlord-favorable, as office vacancy diminishes and building owners tighten up on rent and

other concessions.

Office space absorption was positive in all three of the Washington region’s substate areas during 2015. In general, Class A space has

consistently outperformed the market as a whole as tenants continue to seek high-quality space at relatively reasonable rental rates.

Overall office vacancy across the metropolitan area at the end of 2015 remained mostly unchanged compared to the same point in time in

2014. The end of rising vacancy rates is strong evidence of a stabilizing market. Look for continued stability in the market in 2016, but then

possible vacancy rate declines coming in later years as job growth continues. Vacancy rates for Class A space in core submarkets have already

started to shrink, and tenant-leverage has already slowly begun to erode.

The DistrictThe District of Columbia’s office market improved significantly in 2015, particularly for Class A office space, as demand grew due to the

steadily improving economy. As a result, tenant leverage is weaker in the District — especially in the traditional core submarkets — than inthe suburbs. To compete for the best employees, many private sector tenants are seeking room to expand and are moving to higher-quality

space in more desirable submarkets. The General Services Administration is slowly re-engaging with the market, which will also increase

demand. However, with nearly 4 million square feet of new space under construction, there are still plenty of options for tenants looking to

upgrade to newer space over the next couple of years, especially in emerging submarkets such as the Capitol Riverfront and NoMa.

Net absorption for all classes of space in the District of Columbia was barely positive in 2015, totaling 25,000 SF, a considerable

improvement over the negative 777,000 in net absorption recorded during 2014. Net absorption of Class A space was positive at 425,000

SF during all of 2015, compared to positive 360,914 SF during 2014. Class A space will continue to be in demand in the year ahead as the

economy improves, which will likely drive rents up even higher. Looking ahead, District absorption will likely be strongest for trophy

class buildings in the core submarkets of the CBD, East End, and West End, as demand for top-quality buildings remains high.

SUMMARY OF OFFICE MARKET INDICATORS - ALL SPACEDistrict of Columbia | Year-End 2015

SUBMARKETYEAR-END 2015 NET ABSORPTION (SF)

TOTAL RENTABLESF1

DIRECT VACANCYRATE

VACANCY RATE WITHSUBLET SPACE

SF UNDERCONSTRUCTION 2015 2014

CBD 36,190,527 10.5% 11.2% 662,916 163,793 55,501

East End 42,674,776 13.1% 13.6% 1,105,207 (367,302) (116,287)

Capitol Hill 4,519,334 12.6% 12.9% 966,917 103,228 (312,109)

Capitol Riverfront 4,902,956 13.0% 13.2% 0 189,580 86,971

NoMa 9,604,036 14.4% 14.9% 444,000 (40,333) 257,478

Southwest 11,833,306 9.1% 9.2% 585,904 (87,097) 74,644

Georgetown 3,077,621 5.8% 6.4% 0 58,709 22,205

West End 3,583,061 13.5% 13.9% 0 36,622 (412,666)

Uptown 8,171,703 14.0% 14.5% 99,404 (32,415) (488,542)

Total - District of Columbia 124,557,320 11.7% 12.2% 3,864,348 24,785 (832,805)

1/Includes buildings 15,000 SF RBA and greater. Does not include buildings under construction or buildings owned by the government. 2/Does not include sublet space.Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by West, Lane, & Schlager; January 2016.*Includes major renovation projects which are defined as “slab” renovations.


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The District’s overall vacancy rate for all types of space was 12.2% at year-end 2015, up from 12.0% at the end of 2014. The direct

vacancy rate for all t ypes of space in the Distr ict is 11.7%, up from 11.4% at year-end 2014. The District’s overall Class A vacancy rate

was 12.6% at the end of 2015, unchanged from year-end 2014. The direct vacancy rate for Class A space increased slightly to 12.0%, up

from 11.9% at year-end 2014. The District ’s vacancy rate is likely to remain steady in the near-term, despite increased leasing act ivity

as new product delivers.

SUMMARY OF OFFICE MARKET INDICATORS - CLASS A1

District of Columbia | Year-End 2015

1/Defined as buildings deemed Class A by CoStar and those greater than 50,000 SF. 2/Does not include buildings under construction or buildings owned by the government. 3/Does not include subletspace. Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by West, Lane, & Schlager; January 2016.*Includes major renovation projects which are defined as “slab” renovations.

SUBMARKETYEAR-END 2015 NET ABSORPTION (SF)

TOTAL RENTABLESF1

DIRECT VACANCYRATE

VACANCY RATE WITHSUBLET SPACE

SF UNDERCONSTRUCTION

2015 2014

CBD 21,837,119 11.9% 12.7% 662,916 155,896 249,506

East End 32,589,405 12.8% 13.5% 1,105,207 20,175 188,481

Capitol Hill 3,284,479 11.2% 11.3% 966,917 79,241 (175,131)

Capitol Riverfront 3,775,032 11.0% 11.3% 0 189,580 80,462

NoMa 8,705,586 13.7% 14.2% 444,000 (39,818) 259,056

Southwest 8,798,165 10.1% 10.2% 585,904 (31,677) 83,162

Georgetown 1,797,166 5.8% 6.8% 0 57,581 (293)West End 2,509,190 16.8% 16.8% 0 10,345 (400,999)

Uptown 2,220,767 3.7% 4.9% 99,404 (16,326) 76,670

Total - District of Columbia 85,516,909 12.0% 12.6% 3,864,348 424,997 360,914


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VACANCY AND ABSORPTIONVACANCY AND ABSORPTION

SUMMARY OF OFFICE MARKET INDICATORS - ALL SPACENorthern Virginia | Year-End 2015


SUBMARKET

YEAR-END 2015 NET ABSORPTION (SF)

TOTAL RENTABLESF1

DIRECT VACANCYRATE

VACANCY RATEWITH SUBLET

SPACE


2015 2014

Ballston 7,759,281 17.7% 18.8% 0 89,065 (412,549)

Clarendon/Courthouse 5,073,874 18.3% 19.4% 243,734 (355,293) 173,774

Rosslyn 9,525,081 28.4% 28.9% 552,781 131,933 (604,958)

Virginia Square 993,904 15.6% 15.6% 0 168,843 (15,991)

Crystal City 11,013,269 20.2% 20.7% 25,000 656,463 (314,754)

Pentagon City 1,499,844 16.0% 16.0% 0 0 0

Falls Church 1,780,750 13.6% 15.3% 0 30,698 3,225

Herndon 11,102,486 14.5% 16.2% 0 (208,464) (198,879)

Reston 16,338,574 15.2% 16.2% 390,000 334,070 77,209

McLean 1,214,549 9.6% 9.6% 0 11,314 (40,449)

Merrifield 7,379,040 17.4% 18.7% 0 (73,748) 12,556

Old Town Alexandria 7,320,207 11.9% 13.0% 0 (36,582) 193,364

Eisenhower Avenue Corridor 4,920,413 10.5% 10.9% 700,000 (4,024) 83,137

Tysons Corner 24,008,353 19.2% 20.4% 816,913 (245,863) 209,680

Fairfax Center 6,971,109 16.1% 16.7% 0 (93,352) 66,530

Fairfax City 4,100,979 14.5% 14.8% 0 43,878 (68,787)Vienna 1,393,301 16.8% 16.9% 0 22,583 (254)

Huntington/Mt. Vernon 805,040 18.8% 19.3% 0 (44,192) (10,813)

I-395 Corridor 8,729,156 36.8% 38.8% 0 (224,233) 133,038

Rt 28 Corridor South (Chantilly) 12,129,860 20.7% 21.4% 160,000 126,360 (229,105)

Rt 29/I-66 Corridor 2,286,267 12.3% 12.4% 0 94,221 27,401

Springfield/Burke 5,982,117 19.2% 21.2% 0 56,848 (8,765)

Woodbridge-I-95 Corridor 1,971,965 12.3% 12.9% 0 1,474 (185)

Total - Northern Virginia 154,299,419 18.7% 19.7% 2,888,428 481,999 (925,575)

Northern VirginiaNorthern Virg inia’s office market was disproportionately affected by the economic downturn and recent Federal tenant consolidations

and will take longer to recover than the region’s other office markets, giving tenants significant leverage in negotiating leases.

2016 likely will bring improvements to the office market as the economy recovers, but substantial absorption growth and vacancy

stabilization is not expected soon. High-quality, Class A space in desirable submarkets, particularly along Metro’s new Silver Line—specifically Reston and Tysons Corner—will drive g rowth of the area’s office market in the near future.

After plunging to close to negative 1 million SF in 2014, total net absorption in Northern Virginia climbed back and ended 2015 with

a total 482,000 SF of positive net absorpt ion. Net absorption of Class A space was flat at zero SF, but that was better than the negative

326,000 SF recorded in 2014. Crystal City, which has been experiencing very high vacancy due to Federal defense Base Closure and

Realignment Commission (BRAC)-related move-outs over the decade, saw the greatest amount of overall and Class A office space

absorption of any submarket in Northern Virginia. The Reston submarket, buoyed by the new Silver Line, also experienced strong

positive absorption in 2015.

The overall office vacancy rate for all types of space in Northern Virginia as of December 2015 is 19.7%, down from 20.1% at year-end

2014. The direct vacancy rate for all types of space is 18 .7% as of the end of 2015, down from 19.1% at year-end 2014. Overall Class A

vacancy in Northern Virginia at the end of 2015 remained unchanged from the end of 2014. The direct vacancy rate for Class A spaceat year-end 2015 is 19.7%, also unchanged from year-end 2014.


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Northern Virginia | Year-End 2015


SUBMARKET


TOTAL RENTABLESF1

DIRECT VACANCYRATE


SPACE


2015 2014

Ballston 6,843,689 15.9% 16.8% 0 49,217 (510,003)

Clarendon/Courthouse 3,775,336 19.5% 20.9% 243,734 (355,721) 114,535

Rosslyn 5,541,783 29.3% 29.7% 552,781 55,528 (375,192)

Virginia Square 469,372 18.1% 18.1% 0 (3,708) (11,248)

Crystal City 5,016,371 22.4% 22.8% 25,000 500,651 34,811

Pentagon City 698,150 0.0% 0.0% 0 0 0

Falls Church 141,903 18.6% 18.6% 0 40,461 8,897

Herndon 8,679,166 12.4% 14.3% 0 (170,485) (76,703)

Reston 12,542,130 14.3% 15.6% 390,000 343,345 50,688

McLean 0 0.0% 0.0% 0 0 0

Merrifield 4,934,320 22.0% 23.6% 0 (94,284) (38,530)

Old Town Alexandria 4,354,833 13.6% 15.2% 0 14,772 93,388

Eisenhower Avenue Corridor 3,786,778 12.5% 12.6% 700,000 (12,971) (14,983)

Tysons Corner 16,132,428 20.0% 21.2% 816,913 (289,328) 319,449

Fairfax Center 5,089,474 16.9% 17.5% 0 (27,321) 76,336

Fairfax City 834,143 21.7% 21.7% 0 (4,929) (29,216)

Vienna 416,324 3.2% 3.2% 0 32,450 8,725

Huntington/Mt. Vernon 191,718 43.2% 43.2% 0 (30,944) (18,269)

I-395 Corridor 5,340,583 45.5% 48.8% 0 (223,033) 115,993

Rt. 28 Corridor South (Chantilly) 8,914,820 20.8% 21.4% 160,000 171,785 (147,955)

Rt. 29/I-66 Corridor 619,819 5.8% 5.8% 0 20,534 (2,233)

Springfield/Burke 2,518,021 30.3% 34.7% 0 (667) 59,758

Woodbridge-I-95 Corridor 409,424 7.4% 10.3% 0 (15,359) 16,090

Total - Northern Virginia 97,250,585 19.7% 21.1% 2,888,428 (7) (325,662)


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Suburban MarylandTotal net absorption of office space swung back to positive in Suburban Maryland in 2015, after about half a mill ion SF of negative ne

absorption in each of the prior two years. As in the District and Northern Virginia, the market for Class A office space in Suburban

Maryland has outperformed the market as a whole, as tenants increasingly seek higher quality space. Construction of speculative

space in Suburban Maryland remains very limited, and will likely remain that way in the near term. Looming consolidations ofFederal tenants into government owned space will create additional vacancy. For the next year or two, tenants will continue to have

significant negotiating leverage in most Suburban Maryland submarkets, particularly for product in traditional suburban office parks

Look for the office market to tighten soon in premium, transit-served submarkets such as Silver Spring and Bethesda/Chevy Chase

which have limited construction/renovation activity, benefitting landowners at the negotiating table.

Net absorption for all types of space totaled positive 346,000 SF in Suburban Maryland during all of 2015, up sharply from negative

406,000 SF of net absorption recorded in all of 2014. Net absorption of Class A space totaled positive 239,000 SF dur ing 2015, significantly

higher than the negative 292,000 SF in absorption recorded in 2014. The Rockville submarket led Suburban MD in positive absorption

of Class A space in 2015, with 108,000 SF absorbed during the year.

The Suburban Maryland overall off ice vacancy rate for all types of space is 19.4% at year-end 2015, unchanged from year-end 2014. The

Suburban Maryland direct vacancy rate for all types of space is 18.4% at year-end 2015, down from 18.6% at year-end 2014. The overalClass A vacancy rate is 21.4% as of the December 2015, down 30 basis points from 21.7% at year-end 2014. Suburban Maryland’s direct

Class A vacancy rate is 20.4% at year-end 2015, down slightly from 10.5% at year-end 2014.

SUMMARY OF OFFICE MARKET INDICATORS - ALL SPACESuburban Maryland | Year-End 2015


SUBMARKET


TOTAL RENTABLESF1

DIRECT VACANCYRATE


SPACE


2015 2014

Bethesda/Chevy Chase 9,952,742 11.0% 11.9% 0 11,321 54,556

North Bethesda/Potomac 9,687,877 24.5% 24.8% 0 76,445 (521,521)

Rockville 9,564,129 12.6% 12.8% 238,550 69,242 530,019

North Rockville 12,002,080 17.4% 20.7% 0 21,145 (131,578)

Gaithersburg 4,573,176 14.4% 15.2% 0 28,959 90,033

Kensington/Wheaton 1,437,087 29.8% 29.8% 53,432 (30,787) (25,003)

Silver Spring 5,962,179 12.1% 12.5% 71,644 (104,273) 77,054

North Silver Spring Rt. 29 2,192,308 18.6% 19.5% 0 8,332 15,795

Germantown 2,545,065 20.4% 21.4% 80,000 40,149 19,921

Beltsville/Calverton 1,740,427 31.2% 32.0% 0 5,795 (190,898)

College Park 3,728,909 18.8% 18.8% 0 58,712 35,935

Greenbelt 3,355,614 32.4% 33.0% 0 (110,573) (23,732)

Landover/Largo/Capitol Heights 2,928,779 23.4% 23.4% 34,089 96,940 (48,106)

Lanham 1,812,168 42.2% 42.2% 0 57,387 (320,571)

Laurel 1,954,641 12.8% 13.4% 35,000 116,929 32,443

Total - Suburban Maryland 73,437,181 18.4% 19.4% 512,715 345,723 (405,653)


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Suburban Maryland | Year-End 2015


SUBMARKET


TOTAL RENTABLESF1

DIRECT VACANCYRATE


SPACE

SF UNDERCONSTRUCTION 2015 2014

Bethesda/Chevy Chase 6,226,851 10.5% 11.7% 0 35,566 140,866

North Bethesda/Potomac 6,068,262 30.2% 30.6% 0 4,116 (363,713)

Rockville 4,279,874 16.5% 16.8% 238,550 107,729 438,830

North Rockville 7,253,949 15.9% 18.2% 0 56,664 (85,561)

Gaithersburg 803,496 38.4% 42.7% 0 (12,762) 6,028

Kensington/Wheaton 165,000 17.6% 17.6% 53,432 (11,294) (5,045)

Silver Spring 3,659,816 12.6% 13.1% 71,644 (86,010) 55,676

North Silver Spring Rt. 29 340,167 12.2% 12.6% 0 (1,041) 850

Germantown 1,395,968 23.1% 23.9% 80,000 15,050 40,395

Beltsville/Calverton 897,523 46.1% 47.8% 0 (6,400) (198,077)

College Park 1,286,014 0.0% 0.0% 0 71,600 0

Greenbelt 2,157,323 34.2% 34.8% 0 (63,400) (9,393)

Landover/Largo/Capitol Heights 777,158 29.4% 29.4% 34,089 48,264 (7,640)

Lanham 631,673 71.2% 71.1% 0 29,968 (311,968)

Laurel 506,541 18.3% 18.3% 35,000 38,625 6,634

Total - Suburban Maryland 36,449,615 20.4% 21.4% 512,715 226,675 (292,118)


11/21


UNDER CONSTRUCTION/RENOVATION

OFFICE SPACE UNDER CONSTRUCTION OR RENOVATIONDistrict of Columbia | Year-End 2015

Source: CoStar; January 2016.

SUBMARKET SF % PRE-LEASED

CBD 662,916 33.2%

East End 1,105,207 60.8%Capitol Hill 966,917 0.0%

NoMa 444,000 10.7%

Southwest 585,904 0.0%

Uptown 99,404 0.0%

Total 3,864,348 24.3%

OFFICE SPACE UNDER CONSTRUCTION OR RENOVATIONNorthern Virginia | Year-End 2015


SUBMARKET SF % PRE-LEASED

Clarendon/Courthouse 243,734 27.9%

Rosslyn 552,781 64.6%

Crystal City 25,000 100.0%

Reston 390,000 15.7%

Eisenhower Ave. Corridor 700,000 97.4%

Tysons Corner 816,913 41.8%

Rt 28 Corridor S. (Chantilly) 160,000 0.0%

Total 2,888,428 53.1%

OFFICE SPACE UNDER CONSTRUCTION OR RENOVATIONSuburban Maryland | Year-End 2015


SUBMARKET SF % PRE-LEASEDRockville 238,550 20.1%

Kensington/Wheaton 53,432 100.0%

Silver Spring 71,644 100.0%

Germantown 80,000 12.7%

Landover/Largo/Cap Hts 34,089 100.0%

Laurel 35,000 100.0%

Total 512,715 49.2%

UNDER CONSTRUCTION/RENOVATION

The District Office building developers have been very active in the District recently

and construction has rebounded considerably since the recent recession.The low percentages of pre-leased space indicate that developers are

more confident in the market and are will ing to build speculatively on the

expectation of secur ing tenants by the time construct ion is complete. Banks

have also been more willing to provide capital for speculative projects in

certain premium submarkets.

There is 3.9 million SF of office space under construction or undergoing

substantial renovation in the District at year-end 2015, sharply up from

2.5 million SF at year-end 2014. At year-end 2015, 24% of space under

construction or undergoing renovation is pre-leased, compared to 46% one

year ago — an indication of developers’ and lenders’ growing confidence in

the office market.

The East End submarket is the leader in pipeline projects as of mid-year 2015,

followed closely by Capitol Hill; together, these submarkets account for over

half of the space under construction in the District. Notably, 61% of the East

End’s under-construction space is pre-leased, while none of Capitol Hill’s

space is leased yet.

Northern VirginiaThere is 2.9 million SF of office space under construction or undergoing

renovation in Northern Virginia at year-end 2015, up from 2.6 million at

year-end 2014. Just over half of the space under construction is pre-leased,

and nearly all of the space is along the Orange/Silver Line Metro corridor in

Arlington and Fairfax counties.

Suburban MarylandIn Suburban Maryland there is 512,500 SF of office space under construct ion

or undergoing renovation as of the end of 2015, compared to 751,000 SF

at year-end 2014. 49% of space currently under construction is pre-leased.

Two buildings in Rockville account for nearly half of all current office

construction in Suburban MD.


12/21


BLOCKS OF SPACE

N U M B E R O F O F F I C E

B U I L D I N G S

OFFICE BUILDINGS WITH CONTIGUOUS BLOCKS OFAVAILABLE SPACE

0

200

400

600

800

1000

1200

10,000 - 19,999 SF 20,000 - 49,999 SF 50,000 - 99,999 SF 100,000+ SF

DC Sub MD NoVa

844

612

270

133

N U M B

E R O F O F F I C E B U I L D I N G S

0

50

100

150

200

250

10,000 - 19,999 SF 20,000 - 49,999 SF 50,000 - 99,999 SF 100,000+ SF

Prince George's County

Montgomery County227

160

5423


N U M B E R O F O F F I C E B U I L D I N G S

205

134

3628

0

50

100

150

200

250

10,000 - 19,999 SF 20,000 - 49,999 SF 50,000 - 99,999 SF 100,000+ SF


N U M B E R O F O F F I C E B U I L D I N G S

0

100

200

300

400

500

600

10,000 - 19,999 SF 20,000 - 49,999 SF 50,000 - 99,999 SF 100,000+ SF

Alexandria/Arlington County

Fairfax County423

308

14371

OFFICE BUILDINGS WITH CONTIGUOUS BLOCKS OF

AVAILABLE SPACE

BUILDINGS WITH CONTIGUOUS BLOCKS OF AVAILABLE SPACEDistrict of Columbia | Year-End 2015


SUBMARKET 10,000 -19,999 SF20,000 -

49,999 SF50,000 -

99,999 SF100,000+ SF

CBD 65 36 6 3Capitol Hill 5 4 3 3

East End 80 56 16 13

Georgetown 9 0 0 0

Uptown 17 7 5 1

West End 5 4 0 1

Capitol Riverfront 7 7 1 2

Southwest 11 7 3 3

NoMa 6 13 2 2

Total 205 134 36 28

BLOCKS OF SPACE

The number of available blocks of office space across the Washington metro

area declined during 2015. New construction will bring more blocks of space

to the market in both the District and Northern Virginia in the near future,while the lack of significant construction activity in Maryland should cause a

gradual reduction in available blocks of space, especially large Class A blocks.

There are 403 buildings with blocks of available contiguous space 10,000

SF or greater in the District of Columbia at year-end 2015, compared to 464

buildings at year-end 2014. There are 205 buildings with blocks of available

space between 10,000 and 20,000 SF, with the vast majority located in the East

End and CBD submarkets.

Northern Virginia has the largest supply of contiguous space with 868 blocks

of space 10,000 SF or greater as of year-end 2015. This is a moderate decline

from 938 blocks available at year-end 2014. Notably over the half of the region’stotal blocks of available space larger than 100,000 SF are located in Northern

Virginia, providing a variety of opportunities for tenants looking to expand to

larger space at bargain rates. In addition, Northern Virginia has 430 buildings

with blocks of space available between 10,000 and 20,000 SF.


13/21


RENTS

RENT RATE OVERVIEW, DISTRICT OF COLUMBIAClass A and B Office Buildings | Year-End 2015


YEAR-END 2015 AVERAGE DIRECT FACE RENT

SUBMARKET CLASS A$/SF PER ANNUMCLASS B

$/SF PER ANNUM

CBD $57.26 $44.65

East End $59.85 $45.38

Capitol Hill $57.31 $47.70Capitol Riverfront $46.87 $39.00

NoMa $52.32 $29.46

Southwest $47.83 $44.20

Georgetown $50.47 $37.26

West End $53.93 $44.37

Uptown $45.22 $41.25

Total - District of Columbia $56.17 $42.96

RENT RATE OVERVIEW, NORTHERN VIRGINIAAll Classes of Office Buildings | Year-End 2015



SUBMARKET $/SF PER ANNUM

Ballston $42.73

Clarendon/Courthouse $42.49

Rosslyn $38.74

Virginia Square $40.04

Crystal City $38.19

Pentagon City N/A

Falls Church $23.23

Herndon $27.91

Reston $28.22

McLean $31.90

Merrifield $32.76

Old Town Alexandria $33.46

Eisenhower Avenue Corridor $39.33

Tysons Corner $31.88

Fairfax Center $28.37

Fairfax City $23.47

Vienna $24.05

Huntington/Mt. Vernon $21.71

I-395 Corridor $30.07

Rt. 28 Corridor South (Chantilly) $25.03

Rt. 29/I-66 Corridor $21.09

Springfield/Burke $31.31

Woodbridge-I-95 Corridor $23.39

Total - Northern Virginia $32.09


RENT RATE OVERVIEW, SUBURBAN MARYLANDAll Classes of Office Buildings | Year-End 2015


SUBMARKET $/SF PER ANNUM

Bethesda/Chevy Chase $38.24

North Bethesda/Potomac $30.00

Rockville $30.97

North Rockville $26.01

Gaithersburg $22.71

Kensington/Wheaton $23.83Silver Spring $27.94

North Silver Spring Rt 29 $24.00

Germantown $24.40

Beltsville/Calverton $21.61

College Park $21.00

Greenbelt $21.60

Landover/Largo/Captl Hts $19.27

Lanham $20.62

Laurel $19.04

Total - Maryland $26.18

Suburban MD saw the largest drop in available blocks of space with 364 blocks

of space available over 10,000 SF at the end of 2015, compared to 424 blocks

at year-end 2014. High tenant demand and a near absence of speculative

construction over the past decade, has resulted in a shortage of space in

Montgomery County’s premium submarket, Bethesda/Chevy Chase. Thereare only two blocks of contiguous space in the entire submarket with more

than 50,000 SF. In Prince George’s County, there are just a handful of large

blocks of Class A space. The two largest blocks are 325,000 SF in Lanham and

74,450 SF in Hyattsvil le—both in buildings purchased at auction in 2015.

RENTAL RATES

The District The average overall rent for office space in the District of Columbia is $51.58/

SF as of the end of 2015, up slightly from $50.95/SF at year-end 2014. Rent

for Class A space in the District at year-end 2015 is $56.17/SF. The East End

submarket has the highest overall rents in the District at $55.92—a 3.1%increase from a year ago. Class A rents were also highest in the East End at

$59.85. In Georgetown, rental rates for Class A space increased markedly in

2015 (by 14.4% over the year-ago average) as high-quality supply becomes

constrained. For tenants seeking to optimize value, the burgeoning Capitol

Riverfront submarket offers a wide variety of quality options with the second

lowest Class A rents in the District, averaging $46.87/SF.

After negligible rent gains in 2015, rent growth likely will accelerate modestly

in 2016, but we do not expect material increases until 2017. Better buildings in

more desirable submarkets will outperform the market as a whole. Tenants

looking for bargains on newer space in the Distr ict may want to upgrade now

as the high end of the market continues to tighten. With the return of federal

budget stability and a massive backlog of expiring federal leases, GSA will

be a major source of competition for office space over the next few years.


14/21


RENTS

Notably, GSA signed the largest lease deal of the year with StonebridgeCarras

for 839,000 SF of new Class A space for the Department of Justice directly

adjacent to the NoMa/Gallaudet U. Metro station. Consequently, tenant-

favored conditions are not likely to last for more than another year or so in the

District of Columbia.

Northern VirginiaNorthern Virginia’s face rents average $32.09/SF at year-end 2015, slightly

down from $32.57/SF at year-end 2014. The Clarendon/Courthouse submarket

commands the highest average rent at $43.51/SF. Submarkets in the Rosslyn-

Ballston Corridor—Ballston, Clarendon/Courthouse, Rosslyn, and Virginia

Square—command the highest rents in Northern Virginia, with rental rates

in all four submarkets averaging about 20% higher than the Northern Virginia

average. That said, deals are still available in the Corridor as it continues

to experience historically high vacancy rates. For instance, the 4.4 average

months of free rent being offered in the R-B Corridor is tied for the highest of

any submarket inside the Beltway. We anticipate rents will rise gradually inTysons Corner and Reston over the next several years as Metro’s new Silver

Line generates renewed tenant interest in these submarkets, especially at

properties within easy walking distance of Metro stations.

Suburban MarylandFace rents in Suburban Maryland average $26.18/SF at mid-year 2015,

an increase of 1.5% over the average rental rate at year-end 2014. The

Bethesda/Chevy Chase submarket commands the most expensive rents by

a wide margin at $38.24/SF, which is an increase of 3.1% over the submarket

average a year ago. Rents were most affordable in Laurel at $19.04/SF. The

current expansion cycle has taken a while to unfold in Suburban Maryland

due to factors such as densification (the reduction of SF leased per worker)and Federal austerity, which have dampened demand and kept rents from

rising significantly. However, the office market is poised to experience

long-term growth due to the area’s underlying economic strength and

strong tenant composition, particularly in the burgeoning biotech industry

and with a sizable number of government agencies. In time, these factors

will slowly drive rents upward. Newer office buildings in close proximity

to transit stations likely will see substantial rent growth sooner, especially

as availability becomes increasingly limited.

After years of stagnant rent growth we expect to see rents increase more

substantially as strong regional job growth will promote tenant demand.

The trend of tenant densification is plateauing as workplace efficiency gains

become maximized; this should also contribute to rental rate increases. Rents

in better buildings in stronger submarkets will continue to be significantly

higher than the metro-wide average. We expect newly-constructed and well-

renovated office buildings to continue experiencing rent increases in the near-

We expect newly-constructed and

well-renovated office buildings to

continue experiencing rent increase

in the near-term as the availability

of such space dwindles.


15/21


LEASING ACTIVITY

NOTABLE LEASE TRANSACTIONS IN THE DISTRICT OF COLUMBIASecond Half 2015

Note: List is intended to be illustrative of market activity, not comprehensive.Note: Highlighted transactions reflect deals brokered by West, Lane & Schlager.Source: CoStar, West, Lane & Schlager; January 2016.

TENANT ADDRESS SUBMARKET SF

Fannie Mae 1150 15th Street, NW East End 685,000 SF

District of Columbia Bar Mount Vernon Place East End 70,000 SF

The National Press Club 529 14th Street, NW East End 11,608 SF

Witt O’Brien’s, LLC 1201 15th Street, NW East End 13,000 SF

Friends of the Earth 1101 15th Street, NW East End 14,846 SF

The Association for Psychological Science 1800 Massachusetts Avenue, NW CBD 12,217 SF

Save The Children USA 899 North Capitol Street, NE NoMa 58,768 SF

OTJ Architects 555 11th Street, NW East End 14,234 SF

Lermen Senter 2101 L Street, NW CBD 13,892 SF

Democracy Fund 1200 17th Street, NW CBD 10,087 SF

Project Concern International 1140 Connecticut Avenue, NW CBD 8,396 SF

National Minority AIDS Council 1000 Vermont Avenue, NW East End 5,507 SF

Issue One 1401 K Street, NW East End 4,168 SF

term as the availability of such space dwindles.

LEASING ACTIVITY

Leasing activity increased moderately in the Distr ict of Columbia and Northern Virginia in 2015, but declined in Suburban MarylandAll three substate areas were well below their histor ical half-year averages. Densification continued to give tenants leverage, as they

demanded significant concessions even while taking less space than previously required. As tenants have downsized they have

also taken advantage of the depressed office market by seeking out higher-quality space in desirable, transit-accessible submarkets

at attractive rents. However, the densification trend likely has peaked (at least in the private sector) as tenants begin to experience

diminishing eff iciency benefits. Actually, a few recent large leases have exhibited net increases in the amount of space leased.

The District Gross leasing activity (including renewals) in the Distr ict of Columbia was an estimated 7.2 million SF in 2015, roughly three quarters

of the 15-year average 10.2 million SF annually, but nearly 1 million SF higher than in 2014. Tenants continue to take advantage of

cyclically low rents and cyclically high negotiation leverage to secure strong concession packages and to lock in the longest lease

terms possible. A tenant that is able to sign now for a significant block of space stands out in this market and wields considerable

leverage. However, demand for office space, driven by job growth and a resumption of GSA leasing activity, has been gradually r ising

Regarding rents, possible ac tion steps for tenants include:

Renewing a long-term lease in orderto secure currently

depressed rates

Renegotiating leases with landlords tosecure significant decreases in rentalrates, free rent and other concessionsup to five years in advance of existing

lease expiration dates

Relocating and locking in a substantialtenant improvement budget to customizespace for a changing work environment(e.g., open floor plans, hoteling, shared

workspace) or to improve accommodationsin an effort to attract and retain top talent

= Deal brokered by WLS

KEY


16/21


LEASING ACTIVITY


NOTABLE LEASE TRANSACTIONS IN SUBURBAN MARYLANDSecond Half 2015

NOTABLE LEASE TRANSACTIONS IN NORTHERN VIRGINIASecond Half 2015



Capital One 7900 Westpark DRive Tysons Corner 136,571 SF

Ryan, LLC 1000 Wilson Boulevard Rosslyn 14,700 SF

QuadraMed Corporation 2300 Corporate Park Drive Herndon 12,974 SF

Protorae Law 1921 Gallows Road Tysons Corner 9,049 SF

Keller Williams Capital Properties 4031 University Drive Fairfax City 8,561 SF

Infina, Ltd. 8180 Greensboro Drive Tysons Corner 14,112 SF

Govini 1735 N Lynn Street Rosslyn 11,687 SF

Bancroft, McGavin, Horvath & Judkins, PC 9990 Fairfax Boulevard Fairfax City 11,455 SF

Gannet Company, Inc. 7950 Jones Branch Drive Tysons Corner 188,446 SF

Distil Networks, Inc. 4501 North Fairfax Drive Arlington 15,314 SF


General Services Administration 7501 Wisconsin Avenue Bethesda/Chevy Chase 70,500 SF

Toole Design 8484 Georgia Avenue Silver Spring 12,586 SF

Resource Connections 10001 Derekwood Lane Lanham 12,000 SF

The EMMES Corporation 401 N Washington Street Rockville 11,426 SF

Stop Aging Now 7250 Woodmont Avenue Bethesda/Chevy Chase 7,025 SF

Northrop Grumman 2101 Gaither Road North Rockville 12,518 SF

Certify Global 1201 Seven Locks Road Rockville 13,730 SF

Children’s Hospital 13900-13928 Baltimore Avenue Lanham 9,514 SF

Confluytics 8757 Georgia Avenue Silver Spring 22,255 SF

especially for Class A and trophy accommodations.

Northern VirginiaNorthern Virginia: Vacancy has begun to stabilize, and compress in certain submarkets inside and near the Beltway. Overall, rents

will increase moderately in 2016. Conditions do not currently favor building owners, so they are more likely to offer favorable termsin order to secure leases for their available space, especially for larger tenants. Submarkets along the Metro Silver Line — Tysons

Corner, Reston — should see substantial growth over the coming years, with leverage tilting toward building owners. Historically

robust submarkets, such as Rosslyn, have been str uggling recently (largely due to Federal relocations) and provide tenants negotiating

leverage for high-quality, transit-accessible space.

Suburban Maryland

Estimated gross leasing activity in Suburban Maryland totaled 3.8 million SF during 2015, about 1.5 million SF shy of the 15-yearaverage. New leases and renewals for Class A office space accounted for just over half of all transactions. The North Rockville

submarket, located at the heart of Montgomery County’s booming biotech industry, saw the greatest amount of leasing activity


17/21


PLANNED / PROPOSED PROJECTS

I N T H O U S A N D S O F S F

PROPOSED OFFICE PROJECTS

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

No rt he rn V ir gi ni a S ubu rb an M ar yl an d D is tri ct o f Co lum bi a

I N T H O U S A N D S O F S F

PLANNED OFFICE PROJECTS

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

N or ther n V ir gi ni a S ubu rba n Ma ryl and D is tr ic t of C ol umbi a

with nearly 1 million SF leased or renewed in 2015. Suburban Maryland’s

primary central business district, Bethesda/Chevy Chase, saw the second

highest level of activity.

PLANNED PROJECTS

There is 27.5 million SF of office space planned in the Washington metro

area as of December 2015. To qualify as planned, size and location are

determined, and the project is in one of many phases of the planning

process: site plan review, design review, environmental compliance rev iew,

zoning, etc.

Half of this planned space is in Northern Virg inia, primarily in the Loudoun

County and Reston/Herndon submarkets. These two submarkets are set to

be the primary beneficiaries of the completion of Phase II of the Metrorail

Silver Line, which is expected to open within the next four years. The

District of Columbia also has a significant number of projects planned,

with most targeted for the Capitol Hill/NoMa/Capitol Riverfront submarket.In Suburban Maryland, the Gaithersburg/Germantown submarket has the

greatest amount of planned space, although several planned projects have

been reprogrammed for residential uses.

This 27.5 million SF of planned office space represents a pool of projects

to be drawn upon as office market conditions improve and development

is warranted. Given current market conditions, we do not expect many of

these planned projects to be constructed speculat ively within the next two

years outside of core submarkets in the District.

PROPOSED PROJECTS

As of December 2015, proposed office developments in the Washington

metro area total 70.2 million SF of space. Development projects classified as

proposed have been conceptually planned but have not yet been formally

submitted for review. The location of proposed space can hint at which

parts of the region are likely to see the greatest activity during the next

round of development. However, a large share of the proposed office space

likely will not be constructed any time soon.

About 41.6 million SF, representing more than half of all proposed space,

is targeted for Northern Virginia—more than 25 million SF of this space issituated along the Silver Line, in the Tysons Corner, Reston/Herndon, and

Loudoun County submarkets. Proposed developments in Suburban Maryland

total 17.7 million SF, with the majority of projects located along the I-270

corridor between Bethesda and Frederick. In the Distr ict, there are proposals

for 10.9 million SF of new office development, the vast majority of which is


18/21


LEASING METRICS

LEASING TERMS & CONCESSIONS

5.165.5

7.77

3.993.73 3.69

0

1

2

3

4

5

6

7

8

9

Northern Virginia Suburban Maryl and Distri ct of Columbia

Lease Term (Years) Free Rent (Months)

$ / S F

AVERAGE TENANT IMPROVEMENT PACKAGE

$22.91 $22.22

$35.12

$26.16$24.78

$40.52

$15

$20

$25

$30

$35

$40

$45

No rt he rn V ir gi ni a S ubur ba n M ary la nd D is tri ct o f Co lum bi a

Q4 2014Q4 2015

36% 72%

$ / S F / Y E A R

COMMERCIAL EXPENSES

$9.97$10.83

$19.18

$9.91$10.68

$19.03

$6

$8

$10

$12

$14

$16

$18

$20

N ort her n V irg ini a S ubu rba n Ma ryl and D is tr ict of C ol umbi a

Q4 2014

Q4 2015

36% 72%

either in the Capitol Hill/NoMa/Capitol Riverfront or Southwest submarkets.

LEASING METRICS

As of December 2015, the average length of free rent is relatively similar

across the Washington metro area, though Northern Virginia had the

highest average at 3.99 months and the District of Columbia had the

lowest average at 3.69 months. The average length of free rent in Suburban

Maryland was 3.73 months. The amount of free rent varied by individual

submarket from as low as 1.40 months in the Kensington/Wheaton

submarket to as high as 5.90 months in the Oakton/Fairfax City submarket .

On a five-year lease, these concessions equate to about 6% of the rent over

the lease term.

The average tenant improvement (TI) package in the District of Columbia

remains significantly higher than in the metro area’s suburban markets.

The average tenant improvement package increased by $3.25/SF in Northern

Virginia in 2015 to $26.16/SF, and increased by $2.55/SF to $24.78/SF in Suburban

Maryland. In the District of Columbia, the average tenant improvement

package increased $5.40/SF compared to one year prior, to $40.52/SF.

The average TI in the District has been boosted by the extremely high

value of packages for new Class A and trophy properties, which can be as

high as $100/SF. The highly competitive market in the District of Columbia

requires landlords to be accommodating, giving tenants the leverage to

win concessions.

The average new lease term as of end of 2015 is similar in Northern Virginia

and Suburban Maryland, at 5.16 years and 5.50 years respectively, but more

than two years longer in the District of Columbia at 7.88 years. Tenants that

want to be located downtown have been will ing to lock in relatively modest

rents for longer terms. As rental rates increase, lease terms are likely to

become somewhat shorter.

Commercial operating expenses in Northern Virginia and Suburban

Maryland are also similar, at $9.91/SF and $10.83/SF respectively, but

the District of Columbia’s average is far higher at $19.03/SF. The much

lower operating expenses for suburban office properties give those

areas an advantage when attracting office users, particularly corporateheadquarters, from other regions of the country.


19/21


INVESTMENT SALES

INVESTMENT SALES OF OFFICE PROPERTIESWashington Metro Area | 2014 and 2015

Source: Real Capital Analytics, table by Delta Associates; January 2016.Note: Class B data may include some Class C sales.

2014 2015

TOTAL CLASS A CLASS B / C % OF REGION TOTAL CLASS A CLASS B / C % OF REGION

Distrit of Columbia

# of Transactions 46 4 42 36 16 20

Total Sales (in millions) $3,715 $850 $2,865 64% $3,355 $2,766 $589 54%

Average Price/SF $548 $799 $501 $638 $712 $432

Northern Virginia


Total Sales (in millions) $1,620 $1,192 $428 28% $2,119 $1,364 $755 34%

Average Price/SF $277 $325 $196 $264 $299 $218

Suburban Maryland


Total Sales (in millions) $446 $236 $211 8% $741 $437 $305 12%

Average Price/SF $129 $213 $90 $215 $233 $194

Washington Metro Total

# of Transactions 143 62 81 137 59 78

Total Sales (in millions) $5,782 $3,759 $2,023 100% $6,216 $4,657 $1,649 100%

Average Price/SF $359 $444 $266 $372 $442 $258

INVESTMENT SALES

2015 was a strong year for the investment sales market in the Washington metro area. In addition to surging trading volume, prices

for office properties also rose considerably, with multiple sales in central Washington breaking the $1,000/SF barrier. Institutional

investors accounted for a large share of transactions, attracted by the region’s strong economic fundamentals and demographicsForeign investors also stepped up investment sharply, as uncertainty in overseas f inancial markets and geopolitical instabil ity have

driven them to the “safe haven” of the Washington commercial real estate market.

Trading volume for office buildings was at its highest post-recession level in 2015 with a total of $6.2 billion in total sales of recorded in

the Washington area during the year, an increase of 7.5% over the 2014 level. The average price per square foot for office sales in 2015 was

$372 — the highest average per-SF price since the recession. Despite the ongoing struggle to fill vacant space, investors recognize the value

of the region’s relatively stable economy and strong demographics regarding the upside of off ice space investments over the long-term.

Investment sales volume in the District totaled $3.4 billion ($638/SF) during 2015, compared to $3.7 billion ($548/SF) during 2014.

Investment sales volume in Northern Virg inia totaled $2.1 billion ($264/SF) dur ing 2015, compared to $1.6 billion ($277/SF) during 2014

Investment sales volume in Suburban Maryland totaled $741 million ($215/SF) during 2015, compared to $446 million ($129/SF) during 2014


20/21


METHODOLOGY AND GLOSSARY

METHODOLOGY AND GLOSSARY

Vacancy Only space immediately available is used and not space becoming avai lable. Sublet space availability is reported separately from direct vacancy.

Net AbsorptionNet absorption is defined as the change in leased, standing inventory from one period to the next . If a building is under construction, and a large lease

is signed for future occupancy, this transact ion is counted as net absorption only when the building is delivered. Net absorption reflects di rectly-leased

space; it excludes absorption of sublet space. Net absorption reflects the change from year-end 2014 through mid-year 2015.

Class ADefined as buildings deemed Class A by CoStar and those greater than 50,000 SF.

RentsRent rates are full service face rents (or full service equivalent) as surveyed in CoStar’s database. Surveys include properties that are 15,000 square fee

or greater and specif ically exclude sublease and lower level space. Classifications of A and B propert ies are based on CoStar’s definitions.

Owner Occupied BuildingsTo qualify, the building’s owner must occupy at least 75% of the rentable space in the building.

Planned ProjectsTo qualify, permits are filed, a g round-break date is established, size and location is determined and the project is in one of many phases of the planning

process: site plan review, design review, environmental compliance review, zoning, etc.

Proposed ProjectsTo qualify, the developer has proposed to build a project (either formally or informally) but has not submitted any plans for review. Permits have not

yet been filed.

Free Rent The average number of months of free rent granted by the owner per lease term.

Lease TermThe average term currently being quoted for new leases (in years).

Operating ExpensesThe average annual cost per square foot of operating buildings, including property taxes, energy, janitorial service, insurance, general building

maintenance, management and leasing fees, and other expenses.

Tenant ImprovementsThe average value granted to a new tenant by an owner for work done on previously occupied space (expressed as dollars per square foot per lease term)

Investment SalesSales exclude user purchases and reflect closed transactions.

Twelve-Month Over-the-Year Job GrowthThe same-month change over a year; e.g., the difference from May 2013 to May 2014. It is the change for a one-year period for a given month. This

measure does not require any adjustment for seasonality, since May of one year has similar seasonal behavior to May of the next year.

Geographic CoverageThe Washington metro area office market is defined for purposes of this report as:

• Distric t of Columbia (all)

• Northern Virginia: Arlington County, Alexandria City, Fairfax County, City of Falls Church, City of Fairfax

• Suburban Maryland: Montgomery County and Prince George’s County

Tenant Landscape is prepared by West, Lane & Schlager (WLS) using data from CoStar and other sources, with additional research and analysis by Delta Associates. Delta Associates’ research is limited to the non-CoStar portions of this publication. Although the information contained herein is based on sources which WLS believes to be reliable, WLS makes no representation or warranty thatsuch 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 informationbe considered representations or warranties of WLS of any kind. Any such information may be based on assumptions which may or may not be accurate, and any such assumption may differ fromactual results. This report should not be considered investment advice.


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ABOUT WEST, LANE & SCHLAGER

ABOUT WEST, LANE & SCHLAGER

Founded in 1996, West, Lane & Schlager Realty Advisors, LLC adopted the mission of exclusively representing tenants in the leasing

and purchasing of commercial real estate in the Washington, DC metropolitan area. We recognized the need for tenants to have

strong, creative advocates to represent them in the complex process of securing and negotiating real estate transactions in a markedominated by international real estate companies conflicted in their representation of both owners and tenants.

We do not simply take on the task of representing tenants, but commit all of our resources and focus to creating a system that

accomplishes that mission. As a result, WLS has developed a sophisticated strategic planning process that provides our clients a

guide from the day-one determination of project goals through delivery of a complete analysis of all viable options. Our strategic

plan provides for the benchmarking of various metrics against those of our clients’ peers and competitors, and ultimately yields a

document that provides our clients the necessary support and data required for their board of directors, executive committee, C-leve

decision makers or whoever is ultimately going to determine that the transact ion is not only sound in its results, but in its process.

For nearly 20 years, West, Lane & Schlager has strived to provide our diverse and prestig ious clients exceptional service and results

and has risen to become one of the most prominent tenant representation firms in one of the largest and most competitive commercia

real estate markets in the world.

Please contact us at:

1155 Connecticut Avenue, NW

Suite 700

Washington, DC 20036

P: 202.835.3388 | F: 202.835.3654

www.wlsrealty.com
http://www.wlsrealty.com/http://www.wlsrealty.com/

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