Washington Area Commercial Real Estate Market Update

WASHINGTON AREA COMMERCIAL REAL ESTATE MARKET UPDATE

A CohnReznick LLP ReportFourth Quarter 2014

COHNREZNICK WASHINGTON AREA COMMERCIAL REAL ESTATE MARKET UPDATE JANUARY 2015

TABLE OF CONTENTSEXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

OFFICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

APARTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

CONDOMINIUMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

RETAIL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

HOUSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

FLEX/INDUSTRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

MIXED-USE LEADERS KEEP THEIR EYES ON THE BIG PICTURE . . . . . . . . . . . . . . . 28

ABOUT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

COHNREZNICK WASHINGTON AREA COMMERCIAL REAL ESTATE MARKET UPDATE JANUARY 2015

1COHNREZNICK WASHINGTON AREA COMMERCIAL REAL ESTATE MARKET UPDATE JANUARY 2015

EXECUTIVE SUMMARYThroughout 2014, the consistent (if modest) improvements in the Washington area economy influenced much of the measured performance of major real estate asset types in the region. The metro area markets should have a slightly stronger year in 2015 as the effects of Federal austerity measures continue to wane and as job growth strengthens, as in recent months. However, absolute employment growth will be modest relative to the size of the regional economy. The Washington area will increasingly depend on its private sector rather than the Federal government, and as pent-up demand for goods and services rises, the region’s highly-skilled and well-educated workforce will fuel economic activity in the intermediate term. The continued momentum of the national economy – driven by encouraging labor market conditions and rising consumer confidence nationwide – will nudge regional economic growth and will create more optimism for the local real estate markets in the year ahead.

Sluggish regional economic growth in 2014 affected the office market more acutely than other major property types in the metro area. Rents and absorption were held down in 2014 due to pressure from the “densification” of space (fewer SF leased per worker). Investor confidence in the metro area’s office assets, however, remains strong, as sales transaction volume is high. As uncertainty in the private sector tapers, and more leasing decisions are made, growth in private sector demand over the next several years will overcome some of densification’s effects.

By contrast, the Washington metro area apartment market held up better than expected in the face of increasing competition throughout 2014. The region saw back-to-back years of record-setting apartment absorption despite the onslaught of new supply. The rise in Millennial households and lower-wage workers who tend to/prefer to rent rather than own is influencing the regional multifamily market and is keeping apartment metrics from significantly weakening. A decline in rents and absorption is, however, expected in 2015 given a robust delivery schedule of new product.

The Washington condominium market continued its rebound during the 4th quarter of 2014, despite unrelenting apartment absorption and weak job growth. Prices increased metro-wide throughout 2014 as sales volume of new units remains supply-constrained, pushing prices higher. The positive regional economic outlook will help boost demand for condominiums, emphasizing the need for more product in the near-term.


EXECUTIVE SUMMARYMeanwhile, the retail real estate market’s performance remained consistent throughout 2014 . The decline in vacancy rates continued while shopping center rents rose steadily metro-wide. The local retail market will likely gather momentum in the near-term as retail spending grows thanks to declining gasoline prices, improving consumer sentiment, and strengthening national employment numbers.

Washington area for-sale housing metrics also ended 2014 on an upbeat note, with modestly accelerating price growth during the 4th quarter. However, in a broader sense, the regional housing market’s expansion continues to level off. Sales activity may rise early in the year ahead, however, as potential buyers take advantage of the slowdown in price increases during 2014 and of still-low mortgage rates .

Lastly, the flex/industrial market remains a bright spot among the Washington metro area real estate asset types. Rents and occupancy climbed in 2014. Investor sentiment increased for flex/industrial product, driving prices and transaction activity near record highs in 2014 . The near-term outlook is positive for flex/industrial properties, especially as the rise of e-commerce fuels growth in the Washington distribution market .

In summary, the Washington area’s commercial real estate markets are likely to experience a mixed 2015, with condominium, flex/industrial, and retail market activity strong, while the office and single-family housing markets remain tepid and the robust apartment market cools .

In summary, the Washington area’s commercial real estate markets are likely to experience a mixed 2015.


ECONOMYNATIONAL ECONOMY

In 2014, the national economy continued to expand at a moderate pace, with strength building toward the end of the year. Job growth is strong and the unemployment rate continues to decline, signaling labor market conditions are improving. The Federal Open Market Committee, however, wants to see more progress before increasing the Federal Funds Rate, especially as employment for middle-skill occupations remain a concern. We project that the national economy is likely to continue experiencing moderate growth over the next few years. It will be spurred by supportive monetary policy, increasing home prices and equity values (despite some volatility), and a decreasing drag from fiscal policy. The recovery likely will proceed as it has for more than five years now: on a bumpy – but upward – trajectory.

The national economy added 3.0 million new payroll jobs (not seasonally adjusted) during the 12 months ending December 2014, with the private sector accounting for the majority of net additions (the public sector added 97,000 positions). Recent month-to-month gains (seasonally adjusted) have been robust:

• August 2014: 203,000 • September 2014: 271,000 • October 2014: 261,000 • November 2014: 353,000 (Preliminary) • December 2014: 252,000 (Preliminary)

As of the 12 months ending December 2014, the top four sectors in job gains were Professional/Business Services, Education/Health Services, Leisure/Hospitality, and Construction/Mining – adding a total of 2.0 million new jobs and accounting for 66% of net new employment. Some sectors have experienced weaker recoveries than others. Specifically, the financial services and information industries have lagged, though manufacturing activity is now picking up. Job losses were confined to the Federal Government sector over the past year, with a total net loss of 10,000. Of note, while the Federal Government sector is shedding jobs, the rate of loss is slowing.


The unemployment rate (seasonally adjusted) declined to 5.6% as of December 2014 from 6.7% one year earlier. 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 edge down 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.

After real GDP contracted by a 2.1% annualized rate during the 1st quarter of 2014, it bounced back strongly in the two succeeding quarters. Real GDP increased by a revised annualized rate of 4 .6% during the 2nd quarter of 2014 and an annualized rate of 5.0% (the government’s third and final estimate) during the 3rd quarter of 2014. Looking ahead, real GDP growth is predicted to average 3.1% in 2015, 2.9% in 2016, and 2.8% in 2017.

The housing market is slowing nationally on a year-over-year basis as inventory, which had been very low in some metro areas, is gradually normalizing and easing pricing pressure. In the 20 major metro areas home prices increased 4.5% during the 12 months ending October 2014, the most recent data available from S&P/Case-Shiller .

Through most of 2014, the national economy expanded. We expect to see ongoing improvement in 2015. Encouragingly, job growth levels were consistently strong throughout 2014, GDP growth has been above expectations, the S&P 500 reached a record high, and the unemployment rate continues to decline .

ECONOMY

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.


Looking forward, we expect most if not all of these trends to continue. In 2015 we expect to see more growth in the Professional/Businesses Services sector, which should help increase wages. The national economic expansion likely will move forward through approximately 2018, barring a damaging geopolitical event.

Specifically, we believe the economic outlook is as follows:

• Real GDP growth: 2.5% in 2014 when data is finalized; 3.1% in 2015. • Payroll jobs: 2.8 million added in 2014 when data is finalized; modestly stronger growth in 2015. • Housing: Price appreciation around 3% to 5% in 2015. • Unemployment rate: Hovering around 5.6% in 2015.

REGIONAL ECONOMY

After a slow start in 2014, the Washington metro area economy improved slightly. Albeit below historical averages, job growth has been stronger on an annual basis in recent months and we expect it to continue gaining strength in 2015 . Growth in the private sector combined with pent-up demand for goods and services will help to spur job growth for the balance of this cycle, likely through 2018.

The metro area economy added 18,900 new payroll positions during the 12 months ending November 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 a result, this expansion, while strengthening, feels weak by comparison. See Figure 1 .

The top four sectors for job growth in the Washington metro area are State/Local Government, Professional/Business Services, Construction/Mining, and Financial Services as of the 12 months ending November 2014. In these four sectors alone, a total of 21,100 new jobs were added to the regional economy.

ECONOMY

18.9

0

70

140

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DFW NY SF Bay SouthFl

Atl Phx Bos Den Chi Was

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PAYROLL JOB GROWTH Select Metro Areas | 12 Months Ending November 2014 Figure 1

Source: Bureau of Labor Statistics, Delta Associates; January 2015.


Continued growth in these industries is being partially offset by other industries that are experiencing losses. Notably, the Federal Government sector lost 3,600 jobs while the Information and Manufacturing sectors lost 2,800 and 2,500 jobs respectively. Of note, Education and Health Services has also experienced a loss of 1,800 jobs during the past 12 months . See Figure 2 .

Despite weak job growth in 2014, the Washington area unemployment rate consistently performed better than the national rate. The unemployment rate in Washington in November 2014 was at 4.5%, compared to the seasonally adjusted national rate of 5.8% during the same time period. The metro area’s unemployment rate is expected to stabilize in the 5% range during 2015, as new jobs are created while the labor force also continues to grow .

The Gross Regional Product (GRP) for Washington was expected to grow to $475.5 billion in 2014 – a 3.8% increase from $458.1 billion in 2013 – once the data is finalized. 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 Washington metro area should have a slightly stronger year in 2015 compared to 2014 and an even stronger year in 2016. However, absolute employment growth will be modest relative to the size of the regional economy. The Federal government will continue to face austerity measures during this period – albeit reduced from 2013 levels – and we expect growth to be concentrated in the private sector . As economic growth in Washington depends more on its private sector than the Federal government, upside resides in the highly-skilled and well-educated labor force. Creating a supportive environment for new companies, especially tech firms, will be critical in order to spur future growth. With data for 2014 not yet finalized, we estimate that an annual average of 40,700 payroll jobs will be added to the Washington metro area economy during the five-year period from 2014 to 2018. This is sufficient to support a healthy commercial real estate industry, but below the levels experienced in most recent expansion cycles.

ECONOMY

Despite weak job growth in 2014, the Washington area unemployment rate consistently performed better than the national rate.

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

Federal GovernmentInformation

ManufacturingEducation/Health

Transportation/UtilitiesOther Services

Wholesale TradeRetail Trade

Leisure/HospitalityFinancial Services

Construction/MiningProfessional/Business ServicesState and Local Government

J O B C H A N G E

+29,800

-10,900

PAYROLL JOB GROWTH Washington Metro Area | 12 Months Ending November 2014 Figure 2

Source: Bureau of Labor Statistics, Delta Associates; January 2015.


ECONOMY

Source: Dr. Stephen Fuller, Delta Associates; January 2015.

FEDERAL CONTRIBUTION TO GRP Washington Metro Area


$0

$250

$500

2000 2010 2014*Federal Procurement Balance of Federal Balance of GRP

30.5%

39.8% 33.1%

2017 Projection for Federal =

28.8%

*Estimated. Note: % = Total Federal share of GRP. G

RP

IN

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FEDERAL CONTRIBUTION TO GRPWashington Metro Area

THO

USA

ND

S O

F N

EW

PA

YR

OLL

JO

BS

-50

0

50

100

150

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

5-Year Projected Average = 40,700/Year

PAYROLL JOB GROWTH Washington Metro Area

Source: Bureau of Labor Statistics, Delta Associates; January 2015. *Note: Annual average.

PAYROLL JOB GROWTHWashington Metro Area

5.0%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Q107

Q307

Q108

Q308

Q109

Q309

Q110

Q310

Q111

Q311

Q112

Q312

Q113

Q313

Q114

Q314A

NN

UA

L G

DP

CH

AN

GE

IN

2009

CO

NST

AN

T D

OLL

AR

S

GDP PERCENT CHANGE United States

Source: Bureau of Economic Analysis, Delta Associates; January 2015. Note: Annualized.

GDP PERCENT CHANGEUnited States

STRUCTURE OF TOTAL EMPLOYMENT Washington Metro Area


0%

20%

40%

60%

80%

100%

Other

Retail Trade

Services

State and Local

Federal

1970 2013

% O

F TO

TAL

Note: 1970 figures use SIC codes; 2013 figures use NAICS codes.

STRUCTURE OF TOTAL EMPLOYMENTWashington Metro Area

HIGHLIGHTS


SUMMARY AND FORECAST

The Washington metro area office market experienced sluggish growth as the effects of Federal austerity continued to hamper the market throughout 2014. Pressure from shorter lease terms, densification of space, and shadow space is keeping effective rents from rising more emphatically. Despite all of these challenges, net absorption finished 2014 in positive territory – though only marginally – and other office market indicators such as sales transaction volume show investors remain confident in the metro area’s future. We also expect to see leasing activity increase in 2015. In the intermediate and long run, the Washington metro area office market is projected to remain one of the top performing markets in the nation due to its strong tenant composition. As uncertainty in the private sector tapers, and more leasing decisions are made, growth in private sector demand over the next several years will overcome some of densification’s effects. We look for meaningful market momentum by 2016, with greater traction in 2017.

NET ABSORPTION

On the year, absorption was positive at 357,000 SF but below the positive 1 .8 million SF of absorption experienced in the Washington metro area in 2013 . Net absorption in the region totaled negative 292,000 SF in the 4th quarter of 2014 compared to positive 506,000 SF in the 3rd quarter of 2014. Negative absorption in the 4th quarter was mostly driven by vacated space in the Washington suburbs. Sluggish job growth, densification, and continued effects of Federal austerity made for a challenging year for local commercial space. However, it is important to note that despite all of these challenges, absorption for the year in the Washington metro area remained positive, though pre-leased deliveries helped. We expect to see stronger office market performance in 2015 and especially in 2016 as economic conditions improve . See Figure 1 .

OFFICE

NET

AB

SOR

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ON

(T

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USA

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F SF

)

OFFICE NET ABSORPTION Washington Metro Area | 2011 – 2014 Figure 1

Source: Delta Associates; January 2015.

-1,000

-500

0

500

1,000

1,500

2,000

2011 2012 2013 2014


VACANCY

The Washington area’s direct vacancy rate is 11.1% at year-end 2014, up slightly from 11.0% at 3rd quarter and from 10.8% at year-end 2013. The metro area’s direct Class A vacancy rate at year-end 2014 was 13.2%. Lackluster demand has the region’s direct vacancy rate edging slightly upward. The recorded metro-wide direct vacancy rate for all classes of multi-tenant office space was 14.6% at year-end 2014. The multi-tenant vacancy rate is higher than our reported rate because the single-tenant market – included in our inventory – tends to be more stable and includes many fully occupied properties. Still, the Washington metro has one of the lowest vacancy rates among large markets in the United States. New York City has the lowest vacancy rate at 6.5% (exclusive of Northern New Jersey and Long Island). See Figure 2 .

PIPELINE

There was 4.1 million SF of office space under construction in the Washington metro area at year-end 2014. A significant portion of office space under construction is the result of Metrorail’s Silver Line. 2.3 million SF of space is currently under construction in Northern Virginia, which accounts for 56% of total construction (on a SF basis) throughout the metro area. Although the lending environment remains tight for speculative projects, we believe the risk is tolerable for well-capitalized developers in select submarkets, particularly at sites adjacent to rail service. Overall, we believe there will be few groundbreakings during most of 2015 that have little or no pre-leasing in place – unless the developer starts the work using internal resources. Tenants in the market continue to seek “green” and more modern office space, so we expect renovations of vacated Class B/C buildings to become more common .

There was 32.3 million SF of office space planned in the Washington metro area and 66.3 million SF proposed as of December 2014. Given current market conditions, we do not expect many, if any, of the planned projects to deliver within the next two years.

EFFECTIVE RENTS

The average effective office rent increased to $29.11 at year-end 2014, up 1.3% from year-end 2013. We expect concession packages to remain elevated in 2015, as many tenants remain hesitant to lease additional space, and the battle to secure large tenants is likely to be very competitive. With little organic growth likely in 2015, owners will need to poach tenants from other buildings as their leases expire, and concessions are a way to do that while keeping face rents intact . We expect it will not be until 2016 when the Washington metro area experiences material gains in rent . However, we expect newly-constructed office buildings to continue experiencing rent gains in the near-term as the availability of such space dwindles. Well-renovated space also may support rent increases.

OFFICE

11.1%

0%

5%

10%

15%

20%

25%

NYC SF Bos Hou Was LA Mia OC Den Chi Atl Dal Phx

DIR

ECT

VA

CA

NC

Y R

ATE

OFFICE VACANCY RATES Select Markets | Year-End 2014 Figure 2

Source: Delta Associates; January 2015. Note: Includes owner-occupied and single-tenant space.


INVESTMENT SALES VOLUME

Despite its short-term hurdles, investment sales totaled $7.5 billion in the Washington metro area during 2014, compared to $5 .1 billion in the Washington metro area during 2013 . Sales prices averaged $369/SF in the Washington metro area during the past 12 months . This compares to $352/SF during 2013 .

CAP RATES

The average cap rate for core office assets in the Washington metro area, on a 12-month trailing basis, was 6.5% at the end of the 3rd quarter of 2014, according to Real Capital Analytics. The average cap rate is up 10 basis points from one year earlier. We believe the 12-month trailing average cap rate will remain in the mid-6% range in early 2015. However, trophy assets will likely continue to trade at lower cap rates. Cap rates for recent Class A/Trophy trades have been in the high-4% to mid-5% range .

We believe the 12-month trailing average cap rate will remain in the mid-6% range in early 2015.

OFFICE


OFFICE

SUMMARY OF OFFICE MARKET INDICATORSWashington Metro Area | Year-End 2014

Rentable Building Area (SF)2

Vacant Available (SF)

Direct Vacancy Rate

Net Absorption (SF) - Q4 2014

2014

2013

% Rent Change 2013 - 2014

405,744,526

45,238,202

11 .1%

292,000

357,000

1,831,000

1 .3%

1Class A is defined as properties that tend to be the best in the market, have above-average design, construction and finish, minimal or no deferred maintenance, superior locations, achieve the highest rents, and have tenants of strong credit quality. Class A RBA per REIS. 2Does not include buildings under construction or buildings owned by the government. 3Source: REIS. Source: Delta Associates; January 2015.

CURRENT INDICATORS ALL CLASSES

174,481,187

23,083,850

13 .2%

397,000

3,204,000

822,000

--

CLASS A1

INVESTMENT SALES YTD ALL CLASSES

158

$7,467,000,000

$369

0

30,000

60,000

90,000

No VA Sub MD The District

Under Construction Planned Proposed

IN T

HO

USA

ND

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F SF

OFFICE PROJECTS IN THE PIPELINE Washington Metro Area | Year-End 2014

Source: REIS, Delta Associates; January 2015.

OFFICE PROJECTS IN THE PIPELINEWashington Metro Area | Year-End 2014

IN M

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F SF

OFFICE DEMAND AND DELIVERIES IN NEXT TWO YEARS Washington Metro Area | Year-End 2014


0.0

2.0

4.0

6.0

8.0

7.1

0.7 4.1

Demand Under Construction Planned

OFFICE DEMAND AND DELIVERIES IN NEXT TWO YEARSWashington Metro Area | Year-End 2014

Number of Transactions

Total Sales

Average Price per SF

Under Construction (SF)3 4,123,200

DEVELOPMENT PIPELINE ALL CLASSES

4,073,440

CLASS A1

PROJECTIONS FOR DEC 2016 ALL CLASSES

43,051,222

10 .5%

Direct Available Space (SF) After Proj. Demand

Direct Vacancy Rate

HIGHLIGHTS



Washington metro area apartment market metrics held up better in 2014 than expected. There is a flight to both quality (high-end Class A units) and value (Class B product or shared Class A units) as the region broke another annual absorption record in 2014 despite increasing competition. The stabilized vacancy rate for all classes of apartments declined over the past year; however, Class A vacancy increased due to so many deliveries competing for market share. Metro area rents rose in 2014, but we project a decline in rents given a robust delivery schedule of new product and projected absorption below the recent record-setting pace (but still elevated). This decline in rents will be short-lived, as we expect rents to rebound in 2016 and rent growth to recover to the 3.0% range by 2017, with stronger growth in 2018.

ABSORPTION

The Washington area annual net absorption of Class A apartments was 11,237 units in 2014 — an 83% increase over the 10-year average. This record-setting absorption was not at the expense of the Class B market, which also experienced positive absorption of 4,888 units. An increase in Millennial households and lower-wage job occupiers that tend to/prefer to rent rather than own has influenced the multifamily markets in the region and explains the record level of apartment absorption in recent quarters . See Figure 1 .

APARTMENTS

11,237

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12,000

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ANNUAL CLASS A APARTMENT NET ABSORPTION Washington Metro Area | Year-End 2014 Figure 1



VACANCY

The region placed fourth in lowest stabilized vacancy rate for all classes of apartments in the U.S at year-end 2014. The robust pipeline, however, continues to affect the vacancy rate for Washington area Class A apartments, which increased to 5.6% at December 2014 from 4.7% a year earlier. Low-rise vacancy increased at a lesser pace than mid-rise and high-rise product, reflecting the region’s flight to value since low-rise product is not as expensive . Given the projected delivery schedule of projects currently under construction, we expect the region-wide vacancy rate for stabilized Class A apartment properties to edge upward from 5.6% today to near 6.0% before declining to approximately 4.6% by 2017. See Figure 2 .

RENTS

Metro area effective rents for all classes of investment grade apartments rose by 1.2% in 2014. Class A rents increased by 1.0% while Class B rents rose by 1.6%. Low-rise Class A rents increased by 2.2% while mid-rise and high-rise rents decreased by 0.6%, suggesting an affordability issue is beginning to affect this market segment. At the regional level, Class A rents will likely decline over the next 12 months due to the large slate of scheduled deliveries compared to projected demand levels.

PIPELINE

The pipeline of likely deliveries over the next 36 months remained relatively unchanged during the fourth quarter of 2014, at 39,254 units. As pro formas become more difficult to pencil in light of rising construction costs and relatively flat rents, we expect the pipeline to shrink to a more healthy level over the next 12 to 24 months . Most of the decline will come from projects that delay starting construction, since there are currently 22,925 units under construction metro-wide that have not yet begun leasing and only 8% of these units are suitably sized to switch to a condominium regime before delivery. Notably, construction starts in 2014 decreased 11% from 2013 to 10,605 units. Approximately 2,370 units at 12 projects started construction in the fourth quarter of 2014. This slowdown in starts could cue the end of the supply problem. However, deliveries in 2015 are projected to outpace the 2014 total . See Figure 3 .

APARTMENTS


4.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

NY LA Chi Wash* DFW Phx Phi Atl Balt Hou

VA

CA

NC

Y R

ATE

* 3rd quarter 2014 data except for Washington, which is as of Year-End 2014.

APARTMENT VACANCY RATES Major Apartment Markets | All Classes of Apartments Figure 2


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39,254

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15,000

30,000

45,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

APARTMENT DEVELOPMENT PIPELINE Washington Metro Area | Year-End 2014 Figure 3


INVESTMENT SALES

Through November 2014, annualized Class A multifamily building transaction volume stood at $1 .81 billion in 16 trades – compared to $1.7 billion in all of 2013. Class B apartment property sales also remain strong, with 39 transactions and an annualized transaction volume of $2.08 billion. Meanwhile, a total of 14 multifamily land sales closed through November 2014, annualized at $257 million, with the capacity for more than 3,600 multifamily units. More than $282 million in multifamily land sales was completed in 2013, with the capacity for more than 4,200 units. The metro area has been able to maintain a similar level of investment activity despite an oversized pipeline and sluggish job growth as the Federal government continues to act as a stabilizing force for the regional economy even though it has not grown in recent years. See Figure 4 .

CAP RATES

Apartment cap rates held steady at cyclical lows in 2014 due to record absorption counterbalancing a near-record level of pipeline. The annual year-end Market Maker Survey from Delta Associates indicated that apartments have been and will remain in favor as an asset class, but Delta expects that cap rates may edge up in the future due to macro-economic conditions and a crowded pipeline set to deliver in early 2015, increasing competition among property owners.

Given the projected delivery schedule of projects currently under construction, we expect the region-wide vacancy rate for stabilized Class A apartment properties to edge upward from 5.6% today to near 6.0% before declining to approximately 4.6% by 2017.

APARTMENTS

TOTAL SALES VOLUME Washington Metro Area | Year-End 2014 Figure 4


IN B

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*Sales through November, annualized.

$1.8 $2.1

$0.0

$1.0

$2.0

$3.0

2010 2011 2012 2013 2014*

Class A Class B


SUMMARY OF APARTMENT MARKET INDICATORSWashington Metro Area | Year-End 2014

APARTMENTS

Effective Rents

Comparison at 12/13

Rent Increase/Annum Since Sept 2013¹

Vacancy Rate

Comparison at 12/13

Net Absorption

2014

2013

$1,894

$1,834

1 .0%

5 .6%

4.7%

1“Same-store” (comparable unit) rent comparison.


CURRENT INDICATORS CLASS A

$1,565

$1,543

1 .6%

3 .1%

5 .3%

CLASS B

Deliveries

2014

Projected Deliveries

2015

2016

2017

Starts

Q4 2014

2014

36-Month Pipeline

At 12/2014

At 12/2013

DEVELOPMENT PIPELINE CLASS A

14,286

16,416

11,434

3,610

2,370

10,605

39,254

39,122

16,125

6,185

Available Units

Stabilized Vacancy


45,338

4 .6%

MA

RK

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UN

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IN

TH

OU

SAN

DS

CLASS A APARTMENT DEMAND AND DELIVERIES IN NEXT THREE YEARS Washington Metro Area | Year-End 2014


0

15

30

45

9,167 / year

7,123

32,131

Demand Under Construction Planned

CLASS A APARTMENT DEMAND AND DELIVERIES IN NEXT 3 YEARSWashington Metro Area | Year-End 2014

ANNUAL CLASS A APARTMENT RENT CHANGE Washington Metro Area


PER

CEN

T EF

FEC

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E

REN

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HA

NG

E

-4%

-2%

0%

2%

4%

6%

8%

10%

ANNUAL CLASS A APARTMENT RENT GROWTHWashington Metro Area

HIGHLIGHTS



The Washington metro area is into its third year of price appreciation and it appears that market conditions will continue to improve into 2015. Sales volume of new units remains supply constrained, helping push prices higher. Prices in the metro area rose by 8.8% metro-wide in 2014. Current micro- and macro-economic factors – such as a projected improvement in regional job growth and an easing of lending standards by Fannie/Freddie – will bring more buyers into the market, further underscoring the need for more product. But despite this recent activity, conversions are not likely to play a significant role in this cycle as they did in the last, especially in suburban jurisdictions. The eventual ramp-up of new condo supply will be largely built from scratch, taking a longer period of time, supplemented with smaller conversions of older apartment buildings, mostly inside the Beltway.

SALES VOLUME

New condominium sales activity during the fourth quarter of 2014 dropped back below 400 sales after a relatively strong third quarter. Metro-wide, there were 312 net sales in the fourth quarter, down 30% from the same period in 2013 . Over the past 12 months sales are down 23% from 2013. It should be noted, however, that some of the declines are a result of product shortage and not demand trends . We estimate new unit sales for 2015 to be in the 1,600 to 2,000-unit range and higher in 2016 as more product is brought to market . See Figure 1 .

CONDOMINIUMS

312

0

200

400

600

800

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2012 2011 2010 2013 2014

NET

SA

LES


NEW CONDOMINIUM SALES ACTIVITY Washington Metro Area | Year-End 2014 Figure 1


PRICES

The average effective price per square foot for “same-store” new condominium sales in the metro area rose by 8.8% in 2014. The fraction of available inventory that is “fresh” (built within the past two years) has stabilized. Over three-fourths of all units currently selling have been on the market for two years or less. Since 2012, as fresh product made up more than 60% of the selling inventory, we have seen new condominium prices rise after more than half a decade of decline when markets were in turmoil or a high fraction of stale product was on the market . We anticipate percentage price increases to be in the mid-single digits over the next 24 to 36 months . See Figure 2 .

CONCESSIONS

Concession rates have decreased by 80 basis points metro-wide since the fourth quarter of 2013 with declines in all three substate areas in the Washington region. Concessions now average approximately 1.6% of asking price.

PIPELINE

The actively marketing condominium pipeline has steadily increased over the past three quarters after eight years of decline, with some help from condominium switches. In addition, more than 2,000 condominium units may start construction next year – the highest total in a decade – but a shortage will still exist in the market . The number of unsold units in projects currently marketing or under construction (and not yet marketing) was 3,281 units as of year-end, up 5% since the third quarter of 2014 . We expect this number to rise further over the next six months, as switches and conversions reappear in the market . See Figure 3 .

The supply-demand balance in the metro area will continue to favor the developer, with too little new condominium unit supply and rising prices. At the same time, there is a dearth of resale listings. As a result, new unit prices are likely to rise and development opportunities are likely to persist throughout the Washington metro area through 2017.

CONDOMINIUMS

% C

HA

NG

E


8.8%

-8%

-4%

0%

4%

8%

12%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

EFFECTIVE NEW CONDOMINIUM SALES PRICE CHANGE Washington Metro Area | Year-End 2014 Figure 2

CONDOMINIUMS ACTIVELY MARKETING OR UNDER CONSTRUCTION Washington Metro Area | Year-End 2014 Figure 3


3,281

0

2,000

4,000

6,000

8,000

10,000

12/08 12/09 12/10 12/11 12/12 12/13 12/14

MA

RK

ET R

ATE

UN

ITS


CONDOMINIUMS

SUMMARY OF CONDOMINIUM MARKET INDICATORSWashington Metro Area | Year-End 2014

New Unit Sales1 - Q4 2014

2014

2013

New Unit Average Price per SF

% Change in Avg . Effective PSF since Dec 2013

Concessions as % of Asking Price at Dec 2014

1“Sold” units defined as a binding contract of sale with deposit.Includes multifamily rental conversions, but excludes age-restricted and townhouse properties. These sales are net of contract fall-outs.


CURRENT INDICATORS

Unsold Units in Projects Currently Marketing or Under Construction

Planned to Deliver within 36 Months

Total 36 Month Pipeline

Planned/Rumored Long Term

Planned Condominium or Rental

DEVELOPMENT PIPELINE NUMBER OF UNITS

3,281

3,212

6,493

7,401

51,176

MA

RK

ET R

ATE

UN

ITS


0

3,500

7,000

6,600 / year

2,409

3,281

Demand Under Construction Planned*

*Accounts for attrition.

CONDOMINIUM DEMAND AND DELIVERIES IN NEXT THREE YEARS Washington Metro Area | Year-End 2014

CONDOMINIUM DEMAND AND DELIVERIES IN NEXT 3 YEARSWashington Metro Area | Year-End 2014

CONDOMINIUM UNIT DELIVERIES Washington Metro Area | Year-End 2014


0

4,000

8,000

12,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Column1

N o r m a l i z e d D e m a n d R a n g e

MA

RK

ET R

ATE

UN

ITS

CONDOMINIUM UNIT DELIVERIESWashington Metro Area | Year-End 2014

312

1,476

1,907

$360

8 .8%

1 .6%

HIGHLIGHTS



The retail real estate market in the Washington metro area showed consistent, if modest, improvement throughout 2014. The decline in vacancy rates continues, while shopping center rents have been rising steadily since 2010. These trends are expected to gather momentum in 2015 and 2016, especially as retail spending gets a boost from rising consumer sentiment, strong national employment reports, and falling gas prices while the rise of Washington as a destination for living, working, and shopping will continue to present unique opportunities for retailers in the region.

VACANCY

Based on our annual year-end survey of 300 Washington grocery-anchored shopping centers, the metro-wide vacancy rate for grocery-anchored shopping centers edged down to 4.6% at year-end 2014, from 4.7% one year ago . See Figure 1 .

Meanwhile, vacancy rates in neighborhood and community shopping centers remain elevated relative to their pre-recession averages across the metro area, though they have been declining steadily since 2012. The average vacancy rate for shopping centers in the suburbs of Washington at 4th quarter 2014 was 6.9%, unchanged since the 3rd quarter 2014 .

RETAIL

Source: Delta Associates’ Market Maker Survey, Delta Associates; January 2015.

VA

CA

NC

Y R

ATE

4.9%

4.7%

4.6%

4.5%

4.8%

5.0%

2012 2013 2014

GROCERY-ANCHORED SHOPPING CENTER VACANCY RATES Washington Metro Area | Year-End 2014 Figure 1


PIPELINE

At year-end 2014, there was 2.9 million SF of shopping center space under construction across all shopping center types in the Washington metro area suburbs. As of November 2014, there were 13 notable grocery-anchored shopping centers, totaling 2.6 million SF, under construction in the metro area. Planned shopping centers – defined as space for which permitting is completed and ground break is all that remains to take place – total 6.4 million SF. The total of proposed shopping centers – for which no permits or financing have been applied – is 7.4 million SF.

RENTS

Effective rents at neighborhood and community centers continue to climb slowly, with average effective rents rising 1.8% in Washington suburban centers at year-end 2014. The average effective rent per square foot in the metro area was $24.07, compared to $23.65 at year-end 2013. Meanwhile, rental rates at grocery-anchored centers in Washington rose 2.3% in 2014, after rising 2.2% in 2013. Metro-wide average in-line tenant rents were $33.52 per SF at year-end 2014, compared to $32.76 per SF at year-end 2013. We expect Class A urban space to generate the strongest rent growth as income and employment increasingly become concentrated near mixed-use projects in core areas of the Washington region .

INVESTMENT SALES

Grocery-anchored shopping center investment sales volume in 2014 reached $309.2 million ($370/SF) after totaling $643.9 million ($201/SF) in all of 2013. Investors remain most interested in grocery-anchored centers because of their high level of foot traffic and steady performance throughout the various stages of the economic cycle.

RETAIL

We expect Class A urban space to generate the strongest rent growth as income and employment increasingly become concentrated near mixed-use projects in core areas of the Washington region .


RETAIL

HIGHLIGHTS


THO

USA

ND

S O

F

SQU

AR

E FE

ET

2,857

6,391

7,418

0

4000

8000


PIPELINE OF ALL SHOPPING CENTER TYPES Washington Metro Area Suburbs | Year-End 2014

PIPELINE OF ALL SHOPPING CENTER TYPESWashington Metro Area Suburbs | Year-End 2014

$0

$400

$800

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

SALE

S IN

MIL

LIO

NS

Source: Real Capital Analytics, graphic by Delta Associates; January 2015. *January through November 2014. Note: Excludes properties under contract.

$309

GROCERY-ANCHORED SHOPPING CENTER INVESTMENT SALES Washington Metro Area | Year-End 2014

GROCERY-ANCHORED SHOPPING CENTER INVESTMENT SALES Washington Metro Area Suburbs | Year-End 2014

GROCERY-ANCHORED SHOPPING CENTER SCALE Washington Metro Area | Year-End 2014

Source: Delta Associates; January 2015. Note: Estimate; in millions of SF.

31.5

23.7 2.1

Northern VA

Suburban MD

The District

Total = 57.3 MSF in 320 Centers

GROCERY-ANCHORED SHOPPING CENTER SCALE Washington Metro Area | Year-End 2014

Source: Delta Associates’ Market Maker Survey, REIS, Delta Associates; January 2015.

EFFE

CTI

VE

REN

T

PER

SF $23.49 $23.66 $24.07

$32.04 $32.76 $33.52

$0

$5

$10

$15

$20

$25

$30

$35

$40

2012 2013 2014

Neighborhood/Community Grocery-Anchored

SHOPPING CENTER EFFECTIVE RENT PER SQUARE FOOT Washington Metro Area | Year-End 2014

SHOPPING CENTER EFFECTIVE RENT PER SQUARE FOOTWashington Metro Area Suburbs | Year-End 2014



Housing market conditions during the 4th quarter of 2014 breathed some life into the slowing Washington area housing market recovery. Home prices increased 4.0% compared with the 4th quarter of 2014 while sales volume rose 1.9% over the year. However, these rates are slower when compared to the price and sales volume growth in 2013. The days-on-market average stood at 58 days during the 4th quarter of 2014, up 9 days from a year earlier but still below the long-term average of 63 days. Steady price gains in recent years plus improving economic growth helped increase months of available inventory in the Washington area, a trend that was seen throughout 2014. As supply constraints in the market continue to ease, local price growth likely will remain in the modest range of 2% to 4% per annum in the intermediate term. Over the long term, however, owning a home in the Washington area has been a solid investment, with price growth of 161% over the past 20 years.

PRICES

The average price of a Washington-area home sold in the 4th quarter of 2014 was $466,216 — an increase of 4.0% from one year earlier. There was a noticeable slowdown from last year’s overall increase of 8.0% as home prices in Washington increased only 3.1% for all of 2014. Price gains are likely to decelerate as the number of active listings in the region increases. This slowdown in price growth could, however, ease the affordability obstacle for potential Washington area homebuyers, helping boost the demand for housing in the near term . Washington area price growth trails the average growth rate of other major U.S. metros. See Figure 1 .

HOUSING

3.1%

-12%

-8%

-4%

0%

4%

8%

12%

PR

ICE

CH

AN

GE

Source: MRIS, Delta Associates; January 2015.

HOME SALES AVERAGE PRICE CHANGE Washington Metro Area Figure 1


UNIT VOLUME

Unit volume sold in the 4th quarter of 2014 increased 1.9% from a year earlier. Though sales bounced back at year-end, overall sales volume in 2014 slowed, slipping 4.8% compared to the sales volume increase of 10.8% in 2013. Easing supply constraints and declining investor demand may have contributed to this slowdown. Interest rates have remained low, which could motivate some would-be homebuyers for a last round of purchases before the expected modest increases in mortgage rates in the second half of 2015 .

MONTHS OF INVENTORY

Despite the recent lackluster regional job growth and the slowdown in price gains, positive momentum in the national economy and reduction of regional economic uncertainty have encouraged Washington area residents to bring more inventory onto the market. The metro area averaged 2.4 months of for-sale inventory during the 4th quarter of 2014, with active listings up 24.4% from year-end 2013 . See Figure 2 .

DAYS ON MARKET

Homes in the Washington area averaged 58 days on the market, up 9 days from one year earlier but still below the 10-year average of 63 days. The rise in days on market over the year is driven by a rising number of listings in the area. Potential homebuyers are now deciding among a greater array of listings at more moderate prices, which may partly explain the longer time to closing. See Figure 3 .

HOUSING

HOME PRICE CHANGE AND INVENTORY Washington Metro Area | Year-End 2014 Figure 2

0

3

6

9

12

15

-30%

-15%

0%

15%

30%

04 05 06 07 08 09 10 11 12 13 1412

-MO

NTH

PR

ICE

CH

AN

GE

MO

NTH

S O

F INV

EN

TOR

Y*

Source: MRIS, Delta Associates; January 2015. *Months of inventory at current sales pace for last month in each quarter.

ANNUAL AVERAGE DAYS ON MARKET Existing Houses | Washington Metro Area | Year-End 2014 Figure 3

27

105

58

0

40

80

120

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

DA

YS



HOUSING

HIGHLIGHTS

SUMMARY OF HOUSING MARKET INDICATORSWashington Metro Area | Year-End 2014

Average Sales Price

Comparison at Q4 2013

Sales (Units)


Average Days on Market


Sales Pace (Months)1


For-Sale Listings

1Sales pace at December 2014. Pace is ratio of total for-sale inventory to current month’s sales.Source: MRIS, Delta Associates; January 2015.

CURRENT INDICATORS CHANGE YEAR-OVER-YEAR

4 .0%

1 .9%

9

0 .3

$466,216

$448,089

14,409

14,139

58

49

2 .4

2 .1

12,782

161%

0%

50%

100%

150%

200%

PRICE CHANGES IN PURCHASE-ONLY INDEXES Select Large Metro Areas | 1994 – 3rd Quarter 2014

PR

ICE

CH

AN

GE

S Source: FHFA, Delta Associates; January 2015. Note: Price change at 3rd quarter of respective year; seasonally adjusted.

PRICE CHANGES IN PURCHASE-ONLY INDEXESSelect Large Metro Areas | 1994 – 3rd Quarter 2014

FOR-SALE LISTINGS Existing Houses | Washington Metro Area | Year-End 2014

LIST

ING

S


12,782

0

20,000

40,000

Dec02

Dec03

Dec04

Dec05

Dec06

Dec07

Dec08

Dec09

Dec10

Dec11

Dec12

Dec13

Dec14

FOR-SALE LISTINGS Existing Houses | Washington Metro Area Year-End 2014

-30%

-15%

0%

15%

30%

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

Washington Metro Area U.S. 20 MSA Composite

PERCENT CHANGE IN HOME PRICES Washington Metro vs. United States | Year-End 2014

% C

HA

NG

E

Source: S&P/Case-Shiller, Delta Associates; January 2015. *12 months ending October 2014. Note: Seasonally adjusted purchase-only index

PERCENT CHANGE IN HOME PRICESWashington Metro vs . United States Year-End 2014



Washington metro area flex/industrial market conditions accelerated during the fourth quarter of 2014. The rise of e-commerce continues to fuel growth in the market, particularly near transportation nodes suitable for distribution facilities. As a result, rents and occupancy climbed. Net absorption also remained positive while the direct vacancy rate declined as interest from single-user tenants, in part, fueled warehouse/distribution demand. Further driving prices and transaction activity near all-time highs during 2014 was investor sentiment that continued to climb for industrial product. We expect these investors to continue extending their capital into less traditional submarkets and value-add opportunities in 2015 and 2016. Of note, our flex/industrial classification consists of Warehouse/Distribution facilities and Flex/R&D buildings. Warehouse/Distribution includes facilities primarily used for storage and/or distribution of goods. Flex/R&D are buildings containing a minimum total office percentage of 25% and consisting of either Warehouse/Distribution and/or specialty industrial

spaces such as Research & Development and High-Tech space .

NET ABSORPTION

Flex/industrial net absorption was positive during 2014, totaling 905,000 SF for the whole region. This compares to 1.0 million SF of absorption during 2013. The majority of the positive absorption during the past 12 months was mostly driven by Warehouse/Distribution product. Retail, especially online sales, is driving demand for distribution space in this region. With a higher than average median household income and a large population of tech-hungry Millennials, the Washington region is a top target for online retailing in addition to brick-and-mortar stores. We believe flex/industrial product will continue to outperform other property types in 2015 in the Washington region and at the national level, as property fundamentals continue to improve.

FLEX/INDUSTRIAL


VACANCY

The direct flex/industrial vacancy rate declined to 9.4% at year-end 2014, from 10.2% at mid-year 2014 and from 9.9% a year ago. The regional flex/industrial direct vacancy rate likely will tick down to 9.0% by year-end 2015, from 9.4% today as we project demand to outpace new supply by approximately 300,000 SF over the next year.

PIPELINE

The amount of flex/industrial space under construction in the region was 1.6 million SF at year-end 2014, with an additional 1.6 million SF planned and 3.7 million SF proposed. A dwindling supply of developable land and large blocks of vacant space led to a revival in build-to-suits for large users seeking customizable space. With the flight to quality still a major driver of new lease activity, we foresee that more projects will get the green light even with no space commitments in place, though construction financing can remain a hurdle for projects at more challenging locations. We expect more groundbreakings throughout the region in the coming year, particularly for those developers armed with capital . See Figure 1 .

RENTS

Flex/industrial effective rents in the Washington suburbs increased 1.2% during 2014, compared to a 1.6% increase during 2013 . Effective rent growth will be gradual as tenants remain cautious regarding future economic growth as we move into 2015. Tenants are also ever more cognizant of real estate costs, and we anticipate that some large users may opt to downsize or seek more efficient space as leases near expiration. Despite these concerns, we expect the average effective rent will rise 1.0% to 2.0% during 2015, similar to the pace of rent growth observed in the market over the last few years.

FLEX/INDUSTRIAL

FLEX/INDUSTRIAL PROJECTS IN THE PIPELINE Washington Metro Area Suburbs | Year-End 2014 Figure 1


0

2,500

5,000

No VA Sub MD


IN T

HO

USA

ND

S O

F SF

With the flight to quality still a major driver of new lease activity, we foresee that more projects will get the green light even with no space commitments in place, though construction financing can remain a hurdle for projects at more challenging locations .


INVESTMENT SALES

Flex/industrial investment sales volume totaled $608 million in the Washington region during 2014, which compares with $405 million in sales during 2013 . Sales prices averaged $114/SF in 2014 compared with $82/SF in 2013 . Investors with cash likely will continue taking advantage of purchasing flex/industrial assets in the Washington market, given its long-term growth prospects and stable nature . Due to improving market conditions and firm pricing, we also anticipate that investors will move down the risk spectrum at a measured pace, snapping up older and lower-tier product if good buying opportunities present themselves .

CAP RATES

Capital is fluid for the metro area flex/industrial market and investors are paying top-dollar for stable properties. The average cap rates for Warehouse/Distribution product fell to the high-6% to low-7% range in 2014 (with some product trading in the mid-5% range) as prices continue to bid higher . Average cap rates for Flex/R&D properties fell to the low-to-mid-7% range over the year. We suspect that the average cap rate will hold in the low-7% range even if there is a modest increase in interest rates, as cap rates generally lag changes in overall interest rates .

FLEX/INDUSTRIAL

We suspect that the average cap rate will hold in the low-7% range even if there is a modest increase in interest rates .


FLEX/INDUSTRIAL

SUMMARY OF OFFICE MARKET INDICATORSWashington Metro Area | Year-End 2014

Rentable Building Area (SF)1

Vacant Available (SF)

Direct Vacancy Rate

Net Absorption (SF) - 2014

2013

% Rent Change 2013 - 2014

120,275,647

11,338,209

9 .4%

905,000

1,011,000

1 .2%

1Includes buildings 10,000 SF RBA and greater. Does not include buildings under construction or buildings owned by the government.2Source: REIS.3Pipeline equals buildings under construction and those planned that may deliver by year-end 2015.


CURRENT INDICATORS ALL CLASSES

INVESTMENT SALES YTD ALL CLASSES

52

$608,450,000

$114

FLEX/INDUSTRIAL NET ABSORPTION Washington Metro Area | Year-End 2014


IN T

HO

USA

ND

S O

F SF

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2011 2012 2013 2014

FLEX/INDUSTRIAL NET ABSORPTIONWashington Metro Area | Year-End 2014

IN M

ILLI

ON

S O

F SF

FLEX/INDUSTRIAL DEMAND AND DELIVERIES IN NEXT ONE YEAR Washington Metro Area | Year-End 2014


0

1

2

3Demand Under Construction Planned

2.3 0.4

1.6

FLEX/INDUSTRIAL DEMAND AND DELIVERIES IN NEXT ONE YEARWashington Metro Area | Year-End 2014

Number of Transactions

Total Sales

Average Price per SF

Under Construction (SF)2 1,577,432

DEVELOPMENT PIPELINE ALL CLASSES


122,301,579

13,364,141

9 .0%

Pipeline and Direct Inventory (SF)3

Direct Available Space (SF) After Proj. Demand

Direct Vacancy Rate

HIGHLIGHTS


FURTHER INSIGHTS FROM COHNREZNICKBy David KesslerCommercial Real Estate Industry Practice – National Director

Mixed-use developments continue to command significant attention from real estate investors. Just before Thanksgiving, I had the privilege of moderating a panel discussion on current mixed-use trends at the Bisnow Multifamily Annual Conference in Washington, DC.

While I put several different questions to the panel during our 40-minute discussion, most of the responses circled around a central theme: The interest in multifamily isn’t ultimately driven by economics—although those have to make sense—but rather by a renewed appreciation of what makes for a livable community and the power of urban planning in creating that community. Building a community where people want to live more than pays for itself in the premium that landlords can command for a place people enjoy calling home and in the higher rate of renewed leases.

Today, the opportunity to build livable communities has given rise to what the panelists frankly referred to as an “amenities arms race.” But like most arms races, this is seen to be a losing strategy. Instead, the consensus was that enduring design, tasteful aesthetics and quality service will trump having an extra dog run on the roof every time. Indeed, I think the rise of hotel-like service reflects more than the popularity of a new “feature.” Rather, it reflects an important step in the evolution of our understanding about the communities we build: ultimately, it’s not stuff but experiences that matter. Millennials (and their Boomer parents) have consciously embraced that mantra in how they spend their time and money, and the developments that are most successful reflect that. The challenge in providing hotel-level service is the increased staff needed to do so. This, in turn, requires not just more revenue but more occupants, which means larger developments.

Given the growth in the size of rental complexes and the importance of reinforcing a sense of community, it is not surprising that developers are looking at new ways of blurring the boundaries between the development and the surrounding neighborhood. Whatever tactics developers choose, they continually return to the big picture: How do their projects, in terms of the design of the residences and the quality of the retail, affect the surrounding area? This holistic perspective may be one of the most powerful attributes of the current mixed-use resurgence, significantly increasing the chances that the projects being built today will not only be economically attractive, but also leave a positive legacy—and example—for the next generation.

Given the growth in the size of rental complexes and the importance of reinforcing a sense of community, it is not surprising that developers are looking at new ways of blurring the boundaries between the development and the surrounding neighborhood .

MIXED-USE LEADERS KEEP THEIR EYES ON THE BIG PICTURE

https://www.bisnow.com/bmac/

https://www.bisnow.com/bmac/


As one of the top 10 largest accounting firms in the nation, CohnReznick provides a full array of services to the commercial real estate industry. Our clients include such institutional investors as private equity funds and pension funds investing in real estate, as well as public and private real estate companies including commercial and residential property owners and operators, hotels and resorts, real estate developers, construction companies, homebuilders and land developers .

CohnReznick’s National Commercial Real Estate Industry Practice manages complex, high profile engagements employing a broad range of sophisticated financial skill sets and precise, closely coordinated teamwork. We offer the technical knowledge, sizable resources and in-depth infrastructure of a national firm, but at reasonable and competitive fee levels, consistently utilizing senior-level engagement team members who provide clients with the personal service they deserve and have come to expect.

Our real estate professionals are comprised of highly experienced thought leaders who understand the broadest range of accounting, tax and business issues across all sectors of the commercial real estate industry. From concept through development and implementation, we focus our energies into providing keen insights, proven, success-oriented strategies and close personal service .

CohnReznick provides services to a broad cross-section of the real estate industry including: • Public and Private Real Estate Companies • Private Equity Funds • Pension Funds Investing in Real Estate • Commercial and Residential Property Owners and Operators • REITs • Hotels and Resorts • Real Estate Developers • Construction Companies • Land Developers • Homebuilders • Lenders • Nonprofits • Municipalities • Community Redevelopment Groups • Local Governments

For more information on CohnReznick’s National Commercial Real Estate Industry Practice, please visit www.cohnreznick.com/commercialrealestate

David Kessler, CPACommercial Real Estate Industry Practice – National DirectorCohnReznick LLP7501 Wisconsin Avenue, Suite 400EBethesda, MD 20814-6583 301-652-9100www.cohnreznick.com

COHNREZNICK

www.cohnreznick.com/commercialrealestate

www.cohnreznick.com


This publication on the Washington metro area economy and commercial real estate market is a production of CohnReznick LLP in consultation with Delta Associates .

Delta Associates 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:

• Valuation of partial interests in commercial real estate assets . • Consulting, research and advisory services for commercial real estate projects, including market studies, market

entry strategies, asset performance enhancement studies, pre-acquisition due diligence, and financial and fiscal impact analyses.

• Litigation support, including dispute resolution, from forensic fact-finding to mediation and expert witness services. Damages, material adverse change, and contract disputes are specialties.

• Subscription data for select metro regions for office, industrial, retail, condominium, and apartment markets.

For more information on Delta Associates, please visit DeltaAssociates.com .

Delta’s Washington Area Commercial Real Estate Market Update team includes: • Gregory H. Leisch, CRE, Chief Executive • David Weisel, CRE, President, Consulting Division • Alexander (Sandy) Paul, CRE, Executive Vice President • Rachelle Sarmiento, Associate • Michele Frazzetta, Graphic Designer

© 2015. All rights reserved. You may neither copy nor disseminate this report. If quoted, proper attribution is required.

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.

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DELTA ASSOCIATES

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CohnReznick LLP © 2015This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you and anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

CohnReznick is an independent member of Nexia International

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Washington Area Commercial Real Estate Market Update