Charles County Government

November 18, 2014

Indian Head Science and Technology Park Market Study

Agenda

I. About JLL

II. IHSTP Market Study Overview

III. Local and Regional Economic Trends

IV. Real Estate Market Dynamics

V. NSF IH Related Demand

VI. Conclusions: Market Demand

VII. Property Value and Disposition Strategy

VIII. Next Steps

2

About JLL

3

Corporate Facts, Qualifications and Achievements

Employees (United States)

15,000+ Corporate Offices (United States)

69 Public Institutions Employees / Clients

110 / 225+ Landlord/Tenant Rep Transactions (s.f.)

618M SF LEED ® Professionals

1,250+ Square Feet under Management

2.6B SF Clients Served in the United States

5,000+ Capital Markets Transactions ($)

$63 billion

• World’s leading financial and professional services provider specializing in real estate

• Industry-leading Public Institutions team brings private sector expertise to the public sector

• Tenant Representation leader, providing services on a global, national, state and local level

• Leading Energy and Sustainability Services team addresses environmental challenges

• IT systems and solutions compatible with client systems that drive efficiency

• The only firm among our principal competitors with an investment-grade rating from Moody’s and S&P

• #1 Corporate Real Estate Services Provider (2005, 2007, 2009, 2011, 2013) – Watkins Research Group, Inc.

• 100 Best Corporate Citizens (2007, 2009, 2013) – CR Magazine (Corporate Responsibility)

• America’s 100 Most Trustworthy Companies (2013) – Forbes Magazine

• ENERGY STAR Sustained Excellence (2012, 2013) & Partner of the Year (2007, 2010, 2011) – Environmental Protection Agency

• National Top Workplaces, Top 150 , U.S. Companies (2013) – Workplace Dynamics

• World’s Most Ethical Companies (2008, 2009, 2010, 2011, 2012, 2013, 2014) – The Ethisphere Institute

• World’s Most Admired Companies (2008, 2009, 2011, 2012) – FORTUNE Magazine

• Global Outsourcing 100 (2009, 2010, 2011, 2012, 2013) – International Association of Outsourcing Professionals

Fast Facts Key Qualifications

Track Record of Achievement

IHSTP Market Study Overview

• In May 2014, JLL was engaged by the Department of Economic Development to provide an analysis for IHSTP

• The purpose of the study was to:

• Inventory local and regional demographics

• Assess real estate and economic dynamics that impact IHSTP

• Determine demand for office, commercial, industrial and residential uses at IHSTP

• Study only considers this specific project, not the overall economic condition of Charles County

• Conduct pro forma analyses to project the value of the IHSTP Site under various land uses

• Investment approach and concept of risk

4

Background

IHSTP Market Study Overview

• 260 acre Site in Charles County

• Bounded by Indian Head Highway, Livingston Road, Bumpy Oak Road and adjacent to Maryland Airport

• February 2006: County received 50 acres from State

• October 2008: County entered in to an agreement with JV to develop the Site

• Site was approved to provide office and flex space:

- 1.1 million SF office

- 380,000 SF industrial

- 21,000 SF retail

• August 2014: Per initial JV agreement, County purchased private portion of the Site

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Current Status of the Park

IHSTP Market Study Overview

• In order to conduct an exhaustive market study of IHSTP, JLL:

• Gathered existing demographic and real estate market data using industry databases

• Reviewed existing planning efforts and the 2008 IHSTP public-private economic development agreement

• Sought input from County staff

• Toured the Site, NSF IH and larger Market Area

• Collected primary data using our dedicated research professionals

• Contacted local real estate brokers and other real estate professionals to assess on-the-ground deal

momentum and trends

• Projected real estate trends using historical data

6

Market Study Methodology

Local and Regional Economic Trends

• Our analysis focused on the perspective of a firm looking to make a location decision

• The immediate Market Area is comprised of a set of communities located within a 15-mile driving distance from the Site

- Population: 176,000

- Area: 350 square miles

• The Market Area has an educated workforce, low unemployment and a low cost of living relative to the larger Washington, DC MSA

- The tight job market, high purchasing power and ease of access to employment nodes has created a boom in single family residential development

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Market Area

Local and Regional Economic Trends

• Commercial activity is heavily clustered along US-301, in and around Waldorf, St. Charles and La Plata

- The Waldorf-St. Charles corridor is the largest cluster and is home to 50% of Market Area population and 11 million SF of space

- Charles County, and specifically US-301 is home to healthy, well-performing mixed-use product, book-ended by St. Charles Towne Center and central Waldorf

• There is only limited retail development near the Site and no office, industrial or hospitality projects nearby, indicating that local demand is satisfied by supply elsewhere

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Commercial Clusters

Properties 30,000+ square feet by product type

Month 00, 2014 9

Product Type Office Industrial /

Flex Commercial

Number of Assets 282 193 736

Inventory (SF) 3,147,000 4,267,000 10,376,000

Vacancy (Q1 2014) 12.2% 4.0% 5.0%

5-yr trailing avg annual absorption (SF) 18,400 30,000 50,000

Demand for new product at IHSTP Low Low Low

Real Estate Market Dynamics Office, Industrial and Commercial Market Conditions

• Office: Class A & B properties are exclusively concentrated in the LaPlata and Waldorf-St. Charles corridors

• Local brokers confirmed that there is limited demand for speculative product around IHSTP Site

• Industrial / Flex: All large properties are in St. Charles, White Plains and Waldorf; no Class A assets in Market Area; 25% Class B and 75% Class C

• 135,000 SF of flex space in Market Area; potential for limited additional incubation / R&D space

• Retail: Except for Bryans Road, all development is north and east of IHSTP; the Site’s limited visibility diminishes it attractiveness although there is the potential for small retail uses

• Conclusion: Other, existing assets in the Market Area will absorb before demand materializes at IHSTP Site

Real Estate Market Dynamics

• Charles County is home to some of the fastest growing residential communities in the State

• There are 20+ recently completed or under development single family residential projects in Charles County, predominately focused in Waldorf

- Between 2,000 and 2,500 homes will be delivered in the next 3 years

- The projects are on average 150 acres and have approximately 1 home per acre

- Average new home price is $140 per SF; compared with $372 per SF in the MSA

- This tremendous value further drives the recent residential community development

• Residential development is expected to continue as private developers purchase large parcels of land for less than in more highly built-out sections of the MSA

Land Comparables

• 13 comparable land sales over the past four years

- Average transaction size: 163 acres

- Average purchase price per acre: $68,200

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Residential Market Conditions

NSF IH Related Demand

• Federal Contractors in the MSA: Sequestration and government uncertainty impacts the contractor market

- The five largest lease transactions in Q2 2014 by government contractors occurred in Northern Virginia

• Active Contractors at NSF IH: 37 firms hold professional services contracts with NSF IH; the nearest corporate office is 35 miles away (30 – 45 minute driving distance)

• Base Leadership and Site Tour: Relocating energetics functions off-base is not feasible; there is a dearth of quality retail options adjacent to NSF IH; there is demand for housing not currently met in the market

• OMA: NSF IH does not have enough of a presence to spur additional off-base demand for space

• Other Stakeholders: Energetics Technology Center: There is a low likelihood of attracting a government contractor to the Site, but an institutional anchor could establish a small tech-base incubation space

• Conclusion: There is a low likelihood that a large user would occupy significant space at the Site

- The contactor presence on-base is low and there is no history of firms locating “beyond the wall”

- Uncertain future of NSF IH; contractors can easily access the base from DC and Northern Virginia

- Firms choose location in part based on preferences of their employees (walkable, transit accessible, etc.)

- These firms locate “where the money is” in nodes closer to the seat of the federal government

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Overview and Findings

Conclusions: Market Demand

Office Demand

• JLL does not see enough demand in the Market Area to justify speculative construction of new office buildings on the Site at this time

Industrial Demand

• The Market Area, and Bryans Road specifically, does not support large-scale speculative industrial development

- The Site may offer a potential location for smaller-scale flex development if users can be found

Retail Demand

• The Site’s retail potential is limited to local retailing that could service the surrounding residential communities

- Could find synergies with future office uses on the Site, should they materialize

Residential Demand

• The Market Area’s strong residential development market is expected to continue

- Although it does not explicitly meet the County’s economic development goals, new housing can also spur additional development of supporting uses such as local retail and local professional services

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By Product Type

Conclusions: Market Demand

• Due to the Site’s topography it is possible to accommodate multiple uses on-site

- Development could be phased to allow for flexibility that responds to market demand

- Ex: residential developed on a portion of the Site; County retains the remainder until conditions improve

• Our projections considered the current demand for real estate of various product types in the Market Area, but they do not account for one-off large commercial users who cannot be predicted

- These users make decisions based on Site attributes, local human capital, proximity to major transportation infrastructure and business attraction and incentives offered by State and local governments

• There is a spectrum between satisfying a need for near-term fiscal returns and sustained economic development objectives, such as job creation

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Development Program Implications

Commercial Office Industrial / Flex Retail Residential

Strength of Market Low Low Medium High

Potential Absorption

Timeframe Long Medium Medium Short

Near-term

Monetization

Economic

Development

Property Value and Disposition Strategy

• Original Project Vision Timeframe: Based on current absorption trends, it would take approximately 60 years assuming no change in the real estate market

• Scenario 1 Timeframe: 30 years to fully build-out the Site from project commencement; would require a targeted marketing strategy to identify larger office and industrial users

• Scenario 2 Timeframe: 18 years to fully develop the Site from project commencement; balanced near-term monetization with economic development goals; would also require a targeted marketing campaign

• Scenario 3 Timeframe: 5 years after project commencement; allows the County to monetize the Site in the shortest amount of time

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Scenario Analysis

Original Project

Vision

Scenario 1

Economic Development

Scenario 2

Balance

Scenario 3

Near-term Monetization

Office (SF) 1,100,000 SF 250,000 SF /

27 years to full absorption

150,000 SF /

16 years to full absorption 0 SF

Industrial / Flex (SF) 379,000 SF 100,000 SF /

10 years to full absorption

50,000 SF /

5 years to full absorption 0 SF

Retail (SF) 21,000 SF 20,000 SF /

6 years to full absorption

20,000 SF/

6 years to full absorption 0 SF

Residential (units) 0 units 0 units 200 units /

3 years to full absorption

400 units /

5 years to full absorption

Total Land Value

(NPV at 6.0%) - $4,007,628 $8,767,100 $11,108,142

There have been multiple informal discussions to attract an innovative or unique user to the Site:

• Conclusion: Demand for any one of these users is difficult to predict and is not the highest and best use for the Site on a financial basis.

- The County will have to be willing to discount the land below market value to attract these users

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Property Value and Disposition Strategy Innovative Users

Innovative User Potential

National Harbor The Site would not be competitive, however it could position itself to meet new residential demand

as there will be an increased demand for housing options along the MD-210 corridor.

Eco-Tourism The Site could be developed into an eco-tourism destination; the County would need to: (1) refine its

eco-tourism vision; (2) procure an eco-tourist developer; and (3) increase marketing efforts

Maryland Airport

User

While the first airport-related development will occur on the airport property, the Site could capture

spillover. However, it would be limited as the Site is across a roadway, lessening its attractiveness to

users who need to be “on-airport.” We do not believe it is a de facto attractor to the Site.

Universities and

Hospitals

JLL does not know of any institutions looking to locate at the Site, however the County can engage

in discussions with these users to determine the probability of brining a user to the Site.

Green Residential

Development

The product is possible, however demand is tentative due to the Site’s relative inaccessibility to high-

speed public transit, which is a near requirement for a project of this scope.

Property Value and Disposition Strategy

• If the County decides to sell all or a portion of the Site, the time it will take to dispose of the asset will depend on multiple factors, including asking price, acreage of land offered, marketing and intended land use, etc.

• Our estimates below are for the amount of time to list, market, tour/show and close on the property

• Ultimately the goal is to assist the County in making an informed decision on the strategy for the project moving forward; important considerations for the County include:

- Near-term asset monetization and long-term economic development goals

- Desired land uses and product types at the Site

- Business recruitment efforts and allocation of funds to attract a large tenant to the Site

- The future of NSF IH and how it impacts Site marketing

- Available business incentives and the ability to subsidize the project and financial returns

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Disposition Timeframes and Conclusion

Land Use Estimated Time to Transaction Close

Residential 6 – 9 months

Office Unknown; County will carry until a user is found

Industrial / Flex Unknown; County will carry until a user is found

Retail 2 – 2.5 years

Innovative Users Unknown; County will carry until a user is found

Next Steps

• IHSTP is one of only 13 sites in the State larger than 200 acres, and is the closest to DC of the top 10 sites

• There are several unique marketing features that can be incorporated into the project's marketing strategy:

- The strong population demographics of the County

- The Site’s proximity to Washington, DC and points in Northern Virginia

- Proximity to Maryland Airport

• The County can engage a professional real estate marketing firm, private brokers and advertise the opportunity in industry forums that are followed by developers and potential users.

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Marketing Strategy

Project Location Size (ac)

Sparrows Point International Trade Center Sparrows Point, MD 3,100

Principio Business Park North East, MD 800

Hunter Hagerstown, MD 524

Greensboro Farm Industrial Site Greensboro, MD 440

Bainbridge Site Port Deposit, MD 350

Friendship Business Park Hagerstown, MD 300

Indian Head Science and Technology Park Indian Head, MD 268

Keysers Ridge Business Park Grantsville, MD 225

Harrison Property Hagerstown, MD 210

Greensboro Lot - 313 N. Greensboro, MD 207

Presidential Corporate Center Upper Marlboro, MD 200

The GATE Office & Technology Park Aberdeen Proving Ground, MD 200

Watkins Mill Town Center Gaithersburg, MD 200

Next Steps

• Although there is a low possibility of a large user choosing to locate at the site, the County can:

- Develop an attractive toolkit of State and local business incentives

- Ensure that the Site is “shovel ready” to reduce the time to development

- Pursue tenant leads that arise through business connections, including ETC, NSF IH, Maryland DBED, etc.

• County should develop a strategic plan for the Site that incorporates qualitative and quantitative considerations

- What does the County want it to be?

- What are the County’s fiscal drivers?

- What can the market support?

• County decision makers can use this information to inform their next steps, including articulating:

- Goals for the Site: economic development vis-à-vis near-term monetization goals

- Available County resources: Site marketing, willingness to hold the Site, etc.

- Desired land uses: office, industrial, retail, residential or some mixture thereof

- Disposition strategy: Phased disposition by projected use vs. sale of entire Site, broker(s) engagement, etc.

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Tenant Attraction and Conclusion

COPYRIGHT © JONES LANG LASALLE IP, INC. 2014

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