National Press Club: DCBIA DC Office Leasing Outlook

© Copyright 2012 Cassidy Turley. All rights reserved.

DCBIA Commercial Real Estate Update

October 11, 2012

© Copyright 2012 Cassidy Turley. All rights reserved. 2

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DC Metro Employment, 000's

Big Pause in the Economy

DC Metro: Total Nonfarm Employment, 000’s

Minimal job growth since February

Sources: BLS

• No new demand for space

• Vacancy inching up

• Rents are flat to falling

• Shift to short-term renewals

• Confidence is at a low

• BRAC headwind is here

Office Trends:


Employment Growth/Decline by IndustryDC Metro, Aug 12 vs. Aug 11, Rolling 3 Month Av.

(Industry Total Employment Level)

Source: Bureau of Labor Statistics


Source: Cassidy Turley Research

Fiscal Cliff Scenario

Real GDP, Annualized %Under current law, the fiscal drag from

spending cuts & tax increases will sink the US into recession in 2013


-6%

-4%

-2%

0%

2%

4%

6%

20

10

Q1

20

10

Q2

20

10

Q3

20

10

Q4

20

11

Q1

20

11

Q2

20

11

Q3

20

11

Q4

20

12

Q1

20

12

Q2

20

12

Q3

20

12

Q4

20

13

Q1

20

13

Q2

20

13

Q3

20

13

Q4

20

14

Q1

20

14

Q2

20

14

Q3

20

14

Q4

Fiscal Cliff Fed Baseline

Fed Expects NO Cliff


Under current law, the fiscal drag from spending cuts & tax increases will sink the

US into recession in 2013

Real GDP, Annualized %


Consensus Expects NO Cliff

Source: U.S. Bureau of Economic Analysis (BEA); National Association of Business Economics (NABE)

GDP, Annualized %


$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

Reagan Bush I Bush IIClinton Obama

Republican Controlled House Democrat Controlled House Light Colored Bar = Opposite Party President

Sources: Consolidated Federal Funds Report; GMU Center for Regional Analysis, Cassidy Turley

Federal Spending Slows, but NO Cliff

DC Metro: Federal Outlays, billions $

Obama/Romney


Despite all of this…

DC Metro share of US GDP


DC Metro Rankings:

#1 Lowest Unemployment

#1 Educated Workforce

#1 Real Estate Market by ULI

#2 Job Growth Since 2000

#3 Population/Net Migration


There is Strength

Household balance sheets looking much better

Source: U.S. Board of Governors of the Federal Reserve System, U.S. Bureau of Economic Analysis


There is Strength

Median Existing Home Prices: % Year-over-Year Change

Source: National Association of Realtors®, Moody’s

USGrowth

DCGrowth

2.5 yrs


There is Strength

Job Growth: % Chg. August 2012 over August 2011

StrongGrowth

ModerateGrowth

Below U.S.Growth


Source: Bureau of Labor Statistics, George Mason University, Moody’s, Cassidy Turley

DC Metro Job Growth Forecast

20 Year Historical Average


DC Metro Office Leasing


10 Yr Avg. Net Abs 3.4m sq ftf= forecast


-4

-2

0

2

4

6

8

10

12

14

16

181999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012f

2013f

2014f

Sq

uare

Feet

(mil

lio

ns)

0%

2%

4%

6%

8%

10%

12%

14%

16%

Vacan

cy R

ate

New Deliveries Net Absorption Vacancy Rate

Washington MetroDeliveries – Net Absorption – Vacancy

10 Yr Avg. Deliveries 7.9m sq ft


Source: CoStar, Cassidy Turley Research

0

5

10

15

20

25

30

35

40

45

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD

2011

YTD

2012

Sq

ua

re F

ee

t (m

ill.)

Annual Avg. Gross Absorption: 25.9 MSF

Leasing Activity Slows

DC Metro Gross Leasing Activity, millions sq. ft.


2007 – Q3 2012, millions sq. ft.

-15

-10

-5

0

5

10

15

20

District Northern VA Suburban MDSq

ua

re F

ee

t (m

ill.)

Total New Delivered New Space Absorption Relet Space Absorption

New Space Dominates


Office Vacancy: Winners/Losers

Percentage point change, 3Q 12 vs 3Q 11

13.5

9.9

5.5

3.5

3.2

-1.2

-1.3

-1.9

-2.2

-4.1

-5 0 5 10 15

Crystal City

I-395

Route 7

Ballston

Herndon

Route 28 South

50/66

North Rockville

Fairfax Center

Clarendon/Courthouse

*submarkets >1.5m sq ft

Improved

Deteriorated


$42.46

$26.36

$21.55

$20

$25

$30

$35

$40

$45

20

00

1Q

20

01

1Q

20

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1Q

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1Q

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1Q

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09

1Q

20

10

1Q

20

11

1Q

20

12

1Q

DC VA MD

Effective Office Rents

Per Square Foot, Full Service

Source: REIS, Cassidy Turley Research


f= forecast


0

1

2

3

4

5

6

7

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

f20

13f

2014

f

Sq

ua

re F

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t (m

illio

n)

0%

2%

4%

6%

8%

10%

12%

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Va

ca

nc

y R

ate

New Deliveries Net Absorption Vacancy Rate

Annual 10 Yr Avg. Delivered: 2.5 MSF

Annual 10 Yr Avg. Net Absorption: 1.5 MSF

Washington, DCDeliveries – Net Absorption – Vacancy


Transaction Distribution

District of Columbia: # of Transactions


-300,000

-200,000

-100,000

0

100,000

200,000

300,000

400,000

500,000

CBD East End West End/

Georgetown

Capitol Hill NoMA SW Capitol

Riverfront/

SE

Uptown

2011 YTD 2012

Demand shifts back to the “Core”

Net Absorption (sq. ft.) & Vacancy Rates

12.5% 9.8% 10.1% 4.1% 10.8% 6.9% 17.3% 7.4%


Next 18 Months

• Weak job growth overall, though growth in

– Lobbying, Corporate government relations

– Healthcare

– IT & Finance (suburbs)

• Federal government & contractor reductions

• Flat to falling effective rents

• Strong demand/pricing for trophy properties

2014 & Beyond• Return to normalcy:

– 30-40k annual job growth

– 4-5m sq ft annual office demand

– Eroding vacancy

– 3%+ rent growth

DC Metro Outlook

© Copyright 2012 Cassidy Turley. All rights reserved.

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National Press Club: DCBIA DC Office Leasing Outlook