Savills Studley Report Washington, DC office sector Q2 2015

Savills Studley Research Washington, DC

SUMMARYMarket Highlights

WASHINGTON, DCWashington, DC’s office market remains very much in favor of the tenant as they seek early renewals and restructures in an effort to increase efficiency and save money, which is in turn driving the District’s leasing activity. Leasing totals increased 44% over the same period last year due to this trend but leasing activity is expected to slowly return to subdued levels in the coming quarters.

NORTHERN VIRGINIA The overall availability rate inched down by 0.3 pp and average asking rents increased by 0.2%. The majority of leasing activity remained concentrated in trophy and Class A buildings

with proximity to Metro. Until demand spreads to the region’s sizeable inventory of commodity product, market conditions will remain firmly in the tenant’s favor.

SUBURBAN MARYLANDAvailability rates and average asking rents in Suburban Maryland remained largely unchanged. Total leasing volume declined by 49.6% relative to the first quarter, with particularly pronounced decline in Prince George’s County, where total activity decreased by 73.0% quarter-over-quarter.

“DC continues to be a tenant-favorable

market. More and more, the Washington

area’s office tenants are striking deals early,

either to restructure their leases or commit

to a move, to take advantage of both rent

savings and spaces that offer a new way of

working.”

Tom Fulcher,

Executive Vice President,

Co-Regional Manager

02

Savills Studley Report | Washington, DC

Tenants Continue to Capitalize on the District’s Favorable Conditions

The District’s office market continues to sit firmly in favor of tenants as leasing was again driven by renewals and early restructures, including sizeable deals done by high-profile law firms and federal agencies, such as Kirkland & Ellis’ 189,000 sf deal at 1301 Pennsylvania Avenue NW. DC’s leasing activity totaled nearly 2.7 MSF this quarter, which is down 31.0% from Q1 totals; this was mostly due to the lack of a lease the size of Q1’s Fannie Mae deal and a number of current tenants downsizing. As is almost always the case in the District, leasing was focused in the CBD and East End markets; however, activity in submarkets like Southwest and Capitol Riverfront has begun to pick up as government agencies and contractors have recognized these areas as viable options. DC’s availability rate, after a dip to 13.6% last quarter, is in excess of 14.0% again, and asking rents and tenant improvement allowances remain elevated as a result.

Associations and nonprofits are taking full advantage of the District’s market conditions and have leased nearly 1.1 MSF in the first half of 2015 – more than in any other six-month period since 2011. Association leasing has already surpassed 2014 annual totals and is on pace to post the highest figure in the industry’s recent local history. While the current trend in Washington, DC is for tenants to downsize, many associations and nonprofits are choosing to do the opposite; notable tenants such as the New America Foundation, Urban Land Institute, and American Rivers are making substantial additions to their office space. The largest nonprofit lease of the second quarter, the National League of Cities and National Association of Counties’ lease of 81,000 SF at Republic Square II, took place in NoMa. Other significant deals this year include the American Council of Life Insurers’ 53,000 SF deal at 101 Constitution and the Edison Electric Institute’s renewal of 77,000 SF at Market Square East.

Northern Virginia Availability Down Despite Slower Leasing Northern Virginia experienced a slowdown in overall leasing activity during the second quarter, posting a 15.4% decrease in the amount of square feet leased relative to last quarter. Despite the drop-off in total leasing volume, the region saw an up-tick in the number of new leases and expansions, which pushed the region’s overall availability rate down to 21.8%, a 0.3 pp decrease relative to the first quarter. The largest lease of the quarter was signed by Capital One for 135,996 sf at 1750 Tysons Boulevard in the Tysons area. Capital

Source: Bureau of Labor Statistics

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

0.69

0.70

0.71

0.72

0.73

0.74

0.75

0.76

0.77

0.78

0.79Millions

WDC. Office Emp. WDC. (% Annual Change) U.S. (% Annual Change)

Office-Using Employment Trends

$55.05$54.44

$32.52$32.30

$26.53$26.20

$0

$10

$20

$30

$40

$50

$60

2015 2Q 2015 1Q 2014 4Q 2014 3Q 2014 2Q 2014 1Q

($/sf) Class A Rental Rate Trends

Washington, DC Virginia Maryland

Class A Asking Rent Trends

14.4%15.1%

23.0%

22.2% 22.1%

22.5%

0%

5%

10%

15%

20%

25%

30%

2015 2Q 2015 1Q 2014 4Q 2014 3Q 2014 2Q 2014 1Q

(%) Class A Availability Rate Trends

Washington, DC Virginia Maryland

Class A Availability Rate Trends

savills-studley.com/research 03

Q2 2015

Tenant Sq Feet Address Market AreaKirkland & Ellis* 188,678 1301 Pennsylvania Ave NW East End/Convention CenterUS Department of Health & Human Services 186,880 370 L'Enfant Promenade SW SouthwestCapital One 135,996 1750 Tysons Blvd Fairfax CountyM.C. Dean, Inc. 69,025 22980 Indian Creek Dr Loudoun/Stafford/Prince WilliamAccenture* 63,324 12018 Sunrise Valley Dr Fairfax CountyCozen O'Connor 60,000 1200 19th St NW Central Business DistrictDC Department of Human Services & Mental Health 53,556 64 New York Ave NE NoMaBDO USA, LLP 53,382 8401 Greensboro Dr Tysons CornerACLI* 52,670 101 Constitution Ave NW Capitol HillLivingSocial 52,500 1455 New York Ave NW East End/Convention CenterSum of Top 10 Leases 916,011 Sum of 2nd Quarter Leasing Activity 5.4 MSF

One’s lease backfilled a significant portion of the space left behind by Deloitte when it relocated to Tysons Tower last year. The decrease in availability led to a slight increase in Northern Virginia’s overall asking rent, which inched up by 0.2%, ending the quarter at $30.74 psf.

Maryland Office Market Flat Amid Dramatic Decrease in DemandTenant-friendly conditions persisted as little changed in Suburban Maryland’s office market during the second quarter. The overall availability rate inched down by 0.1 pp and average asking rents increased by just 1.0% relative to the first quarter. The region’s availability rate of 18.4% remained significantly above the 10-year average of 14.6%. Demand for office space continued to be subdued throughout Suburban Maryland as leasing activity posted a dramatic decline, particularly in Prince George’s County, where total volume decreased by 73.0% quarter-over-quarter.

Submarket FocusThe nature of Washington, DC’s Southwest submarket is rapidly changing and the area is beginning to attract a greater number of tenants than at any other point in recent history. Massive projects, such as The Wharf and National Square, are well under way and transforming the submarket, making it more attractive to prospective tenants by adding improved amenities and offering attractive rental rates and concessions. The submarket has already seen an influx of new tenants this year, boosting leasing activity to 550,000 sf year-to-date – a 95% increase over the same period last year. Much of the submarket’s leasing activity this year has been due to large government renewals but new leasing is breathing life into the area; The Corporation for National & Community Service recently signed a 15-year deal for 85,000 sf at Independence Square and Veracity Engineering, an FAA contractor, committed to 10 years in 34,000 sf at the recently renovated L’Enfant Plaza. Southwest’s overall availability rate is slightly elevated at 12.3% due to large blocks of available space in Class B buildings, but the Class A availability rate has experienced steady decline since Q1 2014, falling 1.7 pp in the ensuing year and a half.

Reston put forth a strong performance in the second quarter, posting 86,000 sf of net absorption. Direct vacancy decreased by 0.4 pp relative to the first quarter and average asking rents rose by $0.10 psf. Reston continues to benefit from a growing tech sector as Blue Canopy, Perfect Sense Digital, Daon, Blackboard, Thundercat Technology and Trustwave all inked leases during the past three months. While Reston Town Center continues to attract strong demand from tenants, leasing expanded south of the Toll Road as WalMart

signed a lease for 43,302 sf at Parkridge Center V and National Court Reporters Association lleased 20,287 sf at Reston Plaza I.

Leasing fundamentals in the North Rockville area fluctuated slightly during the second quarter as the overall availability rate inched down by 0.1 pp, ending the quarter at 21.3%. Several tenants signed new leases, including Turning Point Global Solutions, which will relocate from 1355 Piccard Drive into 22,782 sf at 2273 Research Boulevard. Shady Grove Orthopedics leased 13,410 sf at 9601 Blackwell Road.

OutlookTenants are choosing to make early changes to their leases in increasing numbers in an effort to lock down favorable rental rates and concession packages. This is not likely to change as landlords look to secure long-term tenants. The mainstays of Washington, DC’s office-using contingent will continue to drive leasing as law firms, nonprofits and associations, and federal

agencies rightsize and consolidate.

While Northern Virginia’s overall availability rate and asking rents improved slightly during the second quarter, leasing fundamentals are likely to remain largely unchanged throughout the remainder of the year. Trophy and Class A properties, particularly properties with proximity to Metro, will continue to capture a significant share of leasing activity, but until demand begins spilling over to Class A- and Class B product, the leasing landscape will remain firmly in the tenant’s favor.

Tenant-friendly conditions will persist in Suburban Maryland for the foreseeable future as anemic demand will result in a continuation of the elevated level of availability seen throughout the region. Competition among landlords to capture what little activity there is in the market will result in opportunities for tenants to lock in generous concessions and favorable lease terms throughout the remainder of the year.

Availability Rate Comparison Rental Rate Comparison

Major Transactions

$53.99

$53.45

$52.24

$50.52

$49.79

$46.90

$45.82

$40.94

$40.87

$39.57

$38.54

$31.81

$31.12

$30.74

$27.96

$27.90

$25.49

$23.22

$20.60

$0 $10 $20 $30 $40 $50 $60

Capitol Hill

E End/Cnv Ctr

West End

CBD

Washington, DC

Southwest

NoMa

Capitol Riverfront

Uptown

Georgetown

Arlington County

US Index

Alexandria

Northern Virginia

Fairfax County

Montgomery Cty

Suburban MD

Ldn/Stffrd/Pr Wm

Pr George's Cty

($/sf)

Overall Rental Rate Comparison8.9%

12.2%

12.2%

12.3%

12.4%

14.0%

14.7%

15.5%

16.3%

16.4%

16.4%

16.6%

18.0%

18.4%

20.2%

21.8%

21.9%

22.0%

24.2%

0% 5% 10% 15% 20% 25%

Georgetown

CBD

NoMa

Southwest

Capitol Hill

Washington, DC

Capitol Riverfront

Ldn/Stffrd/Pr Wm

E End/Cnv Ctr

West End

US Index

Montgomery Cty

Uptown

Suburban MD

Pr George's Cty

Northern Virginia

Fairfax County

Alexandria

Arlington County

(%)

Availability Rate Comparison

*Savills Studley Deal

Savills Studley Report | Washington, DC

04

Submarket Total

SF(1000's)

Last12 Months

5 Year Average

ThisQuarter

%Change

fromLast Qtr.

LastQuarter

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

LastQuarter

YearAgo

ThisQuarter

%Change

fromLast Qtr.

LastQuarter Yr Ago

Capitol Hill 5,776 292 329 717 -4.8% 753 828 12.4% -0.6% 13.0% 14.3% $53.99 4.3% $51.75 $54.25Capitol Hill - Class A 2,136 201 136 342 -6.9% 367 399 16.0% -1.2% 17.2% 18.7% $59.07 8.5% $54.45 $58.69Capitol Riverfront 5,343 354 N/A 784 -7.1% 844 866 14.7% -1.1% 15.8% 16.2% $40.94 -0.1% $40.99 $41.49Capitol Riverfront - Class A 4,088 351 N/A 564 -9.6% 624 646 13.8% -1.5% 15.3% 15.8% $42.32 -0.2% $42.41 $43.02NoMa 12,001 818 N/A 1,469 -0.6% 1,479 1,544 12.2% -0.1% 12.3% 12.9% $45.82 0.2% $45.73 $46.53NoMa - Class A 9,661 805 N/A 1,010 -0.3% 1,013 1,001 10.5% 0.0% 10.5% 10.4% $51.76 -0.9% $52.21 $52.15East End/Convention Center 42,972 5,663 3,098 7,006 7.2% 6,536 6,871 16.3% 1.1% 15.2% 16.0% $53.45 0.3% $53.27 $52.59East End/Convention Center - Class A 29,821 4,453 2,252 4,953 6.7% 4,642 4,896 16.6% 1.0% 15.6% 16.4% $57.64 -0.9% $58.19 $56.99Central Business District 38,664 3,653 2,867 4,712 1.3% 4,650 5,438 12.2% 0.2% 12.0% 14.1% $50.52 0.8% $50.14 $49.97Central Business District - Class A 14,572 2,095 1,401 2,177 6.6% 2,042 2,266 14.9% 0.9% 14.0% 15.5% $57.16 -0.3% $57.30 $55.59West End 3,863 226 139 632 5.0% 601 631 16.4% 0.8% 15.6% 16.3% $52.24 -2.7% $53.67 $51.85West End - Class A 2,646 184 109 534 6.0% 503 533 20.2% 1.1% 19.0% 20.2% $52.24 -2.7% $53.67 $51.85Georgetown 2,743 151 185 245 -11.2% 276 329 8.9% -1.1% 10.1% 12.0% $39.57 -3.9% $41.17 $41.72Georgetown - Class A 1,190 62 88 52 -13.0% 60 128 4.4% -0.7% 5.0% 10.8% $44.78 0.4% $44.62 $44.46Southwest 12,852 690 1,145 1,579 5.4% 1,499 1,275 12.3% 0.6% 11.7% 9.9% $46.90 -0.8% $47.26 $49.84Southwest - Class A 8,813 559 789 931 1.6% 916 1,034 10.6% 0.2% 10.4% 11.7% $49.00 0.0% $49.00 $51.16Uptown 6,303 152 392 1,132 -2.0% 1,156 1,016 18.0% -0.4% 18.3% 16.1% $40.87 -0.1% $40.93 $39.47Uptown - Class A 602 0 59 18 -51.5% 9,661 47 3.0% -3.2% 6.2% 7.8% $46.00 -5.2% $46.82 $46.00Fairfax County 100,889 4,850 6,909 22,100 -1.5% 22,442 21,409 21.9% -0.3% 22.2% 21.2% $27.96 -0.1% $27.98 $27.63Fairfax County - Class A 60,660 3,725 4,833 14,502 -3.5% 15,034 13,662 23.9% -0.9% 24.8% 22.5% $30.15 0.5% $30.01 $29.54Alexandria 15,495 1,202 831 3,407 -3.7% 3,863 3,523 22.0% -0.9% 22.8% 22.7% $31.12 0.6% $30.95 $30.90Alexandria - Class A 7,868 309 457 1,265 -1.8% 1,288 1,192 16.1% -0.3% 16.4% 15.2% $29.28 -2.6% $30.07 $30.23Arlington County 37,176 2,729 2,475 9,001 1.0% 8,909 8,842 24.2% 0.2% 24.0% 23.8% $38.54 -0.9% $38.90 $39.14Arlington County - Class A 22,364 1,801 1,637 5,337 -8.2% 5,817 5,538 23.9% -2.1% 26.0% 24.8% $39.83 -0.7% $40.10 $40.13Loudoun/Stafford/Prince William 14,993 504 636 2,323 -5.5% 2,459 2,638 15.5% -0.9% 16.4% 17.6% $23.22 -0.7% $23.39 $22.96Loudoun/Stafford/Prince William - Class A 6,202 320 379 1,218 -7.6% 1,319 1,432 19.6% -1.6% 21.3% 23.1% $25.48 -0.1% $25.52 $25.05Montgomery County 60,026 2,077 3,506 9,980 2.0% 9,784 10,303 16.6% 0.3% 16.3% 17.2% $27.90 0.3% $27.82 $27.71Montgomery County - Class A 31,570 1,287 2,431 5,775 4.0% 5,553 5,798 18.3% 0.7% 17.6% 18.4% $29.73 0.3% $29.65 $29.67Prince George's County 23,802 992 872 4,811 -5.5% 5,091 5,184 20.2% -1.2% 21.4% 21.8% $20.60 0.4% $20.51 $20.57Prince George's County - Class A 11,534 830 569 3,132 -2.9% 3,225 3,355 27.2% -0.8% 28.0% 29.1% $20.62 0.3% $20.56 $20.69

Washington D.C. Total 130,518 12,000 9,101 18,276 2.7% 17,792 18,797 14.0% 0.4% 13.6% 14.4% $49.79 0.5% $49.53 $49.74Washington D.C. Total - Class A 73,527 8,708 5,646 10,580 3.7% 10,204 10,949 14.4% 0.5% 13.9% 14.9% $55.05 -0.3% $55.21 $54.69Northern Virginia Total 168,582 9,286 10,851 36,831 -1.4% 37,349 36,412 21.8% -0.3% 22.2% 21.6% $30.74 0.2% $30.67 $30.70Northern Virginia Total - Class A 97,094 6,154 7,317 22,322 -4.8% 23,458 21,824 23.0% -1.2% 24.2% 22.5% $32.52 0.5% $32.35 $32.35Suburban Maryland Total 80,299 3,069 4,401 14,792 -0.6% 14,875 15,487 18.4% -0.1% 18.5% 19.3% $25.49 1.0% $25.24 $25.21Suburban Maryland Total - Class A 40,215 2,117 3,024 8,907 1.5% 8,779 9,153 22.1% 0.3% 21.8% 22.8% $26.53 0.7% $26.35 $26.27Greater Washington D.C. Total 379,399 24,354 24,353 69,898 -0.2% 70,017 70,696 18.4% 0.0% 18.5% 18.6% $34.85 1.4% $34.37 $34.94Greater Washington D.C. Total - Class A 210,836 16,980 15,987 41,809 -1.5% 42,441 41,926 19.8% -0.3% 20.1% 19.9% $37.15 1.8% $36.49 $37.09

LeasingActivity

AvailableSF

AvailabilityRate

Asking RentsPer SF

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(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded.

The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2015 Savills Studley

Savills StudleyWashington, DC1201 F Street, N.W.,Suite 500Washington, DC 20004-1225(202) 628-6000

Washington, DC Region Co-Branch ManagersThomas M. Fulcher Jr., EVP - tfulcher@savills-studley.comLois A. Zambo, Vice Chairman - lzambo@savills-studley.com Richard P. Rome, EVP - rrome@savills-studley.comDavid Lipson, EVP - dlipson@savills-studley.comWilliam P. Quinby, EVP - bquinby@savills-studley.comGary Stein, EVP - gstein@savills-studley.com

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