Legal Industry: Bigger No Longer Better

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1 MARKET REPORT DISTRICT OF COLUMBIA OFFICE First Quarter 2017 Legal Industry: Bigger No Longer Better After a strong end to 2016, leasing activity in the beginning of 2017 started with a whimper. Just two leases were signed over 100,000 square feet in the first quarter. Among the top 10 deals, all but one relocation resulted in a reduction of space. The largest downsize came from Akin, Gump, Strauss, Hauer & Feld, LLP who will give back nearly 100,000 square feet upon moving to Alexander Court at 2001 K Street NW in early Despite the lack of growth amongst tenants looking for space in the market, construction remained at a fevered pace, the most since Just over 5.7 million square feet was under construction with just over half of the space already committed. With both the local and national economy in question as the new administration begins to implement its agenda, it remains to be seen whether the District can continue to resist rising vacancy. Economic Market Indicators Q Year-End Projection NET RENTAL During the first quarter of 2017, the District of Columbia s economy was estimated to have grown by 1.30 percent, and is on track to grow another 0.9 percent by the end of the year. This is lower than the projected growth for either Northern Virginia or Suburban Maryland, and it compares with 1.45 percent growth during As the District s economy continued to expand, the office-using sectors added 1,125 jobs. This put the office-using job growth on pace to add another 3,645 positions by year s end. This would be less than the 5,601 office-using jobs created in Unfortunately, the bulk of the new jobs created were in the public sector, specifically by the Federal Government. Since they are still trying to reduce their footprint, these jobs had minor positive impact on the office market. During the first quarter, 1,126 new jobs were created by the Federal Government. In contrast, the private, office-using sectors, contracted employment by 381 jobs. Only the professional and business services sectors of the economy expanded, adding 807 new jobs collectively. Payrolls in two of the most important sectors of the District s economy, as it relates to absorption, contracted during the first quarter. Legal service firms shed 492 jobs, and the advocacy sector shed 481 jobs. Private sector, officeusing jobs are expected to rebound over the remaining three quarters in 2017, adding about 3,645 new jobs. While both economic growth and, to a lesser extent, office-using employment growth point towards higher levels of absorption, there is still a lot of volatility in the economy. Demand growth in the District is dependent upon Congress s ability to pass legislation. Despite both houses of Congress and the White House controlled by one party, not much work has been accomplished on the Hill in Direct Asking Rental Rates $65 $60 $55 $50 $45 $40 $35 Class A Class B Class C

2 District of Columbia-Office Market Q TENANT ADDRESS LEASE TYPE SUBMARKET-CLASS LEASED SPACE Akin, Gump, Strauss, Hauer, & Feld LLP 2001 K Street, NW Relocation/Consolidation CBD - A 182,994 Urban Institute 500 L'Enfant Plaza, SW Relocation/Consolidation Southwest - A 121,000 Paul Hastings LLP 2050 M Street, NW Relocation/Consolidation CBD - A 97,000 GSA - Surface Transportation Board (STB) 395 E Street, SW Renewal Southwest - A 73,889 JLL 2020 K Street, NW Relocation/Consolidation CBD - A 70,651 Quinn, Emanuel, Urquhart & Sullivan LLP 1300 Eye Street, NW Relocation/Expansion East End - A 68,078 Hughes, Hubbard & Reed LLP 1775 Eye Street, NW Renewal/Expansion CBD - A 53,188 GSA - Social Security Administration (SSA) 250 E Street, SW Relocation/Consolidation Southwest - A 48,076 Motion Picture Association of America (MPAA) 1301 K Street, NW New East End - A 27,854 National Parks Conservation Association (NPCA) 777 6th Street, NW Renewal East End - A 27,742 Demand After strong demand growth for office space during the fourth quarter of 2016, net absorption at the start of 2017 did not build upon the previous quarter. During the first quarter, 47,269 square feet of space was returned to the market. The previous five quarters have shown little consistency, making it difficult to distinguish a trend. The downsizing of the Federal Government footprint, and the majority of tenants giving back space on new leases, produced yearly negative net absorption for three out of the past four years. This compares to the 2009 to 2012 timeframe when net absorption averaged 1.5 million square feet per year. The downsizing in leases signed this quarter does not bode well for future demand. Akin Gump, as stated before, is giving back close to 100,000 square feet and Paul Hastings is relinquishing almost 20,000 square feet. The midsized firms, however, showed signs of growth with both Quinn Emanuel and Hughes Hubbard expanding by roughly 14,000 and 19,000 square feet, respectively. Supply The redevelopment of the District continued to occur as nearly 800,000 square feet of new construction and renovations broke ground in the first quarter. Three buildings, totaling just under 240,000 square feet, delivered in the first quarter of This includes the newest trophy office building to the market located at 1000 F Street, NW in the East End submarket. It also holds the distinction of being the smallest trophy building in the District at 94,273 square feet. The building overlooks the infamous Ford s Theater and was designed by Shalom Baranes with the intent of not overshadowing the iconic landmark. For that reason, the top floors recede back. Another interesting architectural element was incorporating a variety of exterior building materials to integrate the project into the neighborhood. This differs from the more commonly used all glass facade in newer trophy projects. At the end of the first quarter of 2017, 5.7 million square feet was under development. This is nearly double what was under construction at the beginning of 2015 and constitutes the most construction activity in the market since the first quarter of 2009, when 6.5 million square feet was in development. A sizable portion currently under construction is set to deliver in the second half of Six buildings alone are expected to deliver just over 1.6 million square feet, with roughly half of the space committed. Vacancy Rates Despite minor negative net absorption in the first quarter of 2017, overall vacancy decreased by eight basis points due to 390,286 square feet that was demolished. The direct vacancy rate decreased by 20 basis points in the first quarter to 10.3 percent, while sublet vacancy rose by eight basis points to 0.8 percent. Positive absorption fueled a decrease in vacant Class A space, dropping it by 16 basis points to end the quarter at 12.2 percent, the lowest in five quarters. The combined Class B and C vacancy rate increased from 9.4 to 9.5 percent F Street, NW

3 Rental Rates During the first quarter of 2017, the direct average rental rate in the District increased by over a dollar to $54.22 per square foot. The largest increase occurred in Class A rental rates, which rose by $1.02 to $59.81 per square foot gross. The Class B rental rates was the only segment of the market to decrease in the first quarter, falling by 21 cents to end the quarter at $44.53 per square foot. Outlook Development activity will continue to have a major impact on the DC office market. A majority of the space under construction has already been leased. However, there will be a considerable amount of space that gets vacated when those tenants occupy these new projects. The commodity A market will be the hardest hit as the majority of tenants moving into new spaces will vacate this type of product. While the legal industry has seen significant downsizing, it has been largely in massive law firms, while mid-sized and smaller firms have increased their footprints. Both Akin Gump and Paul Hastings, examples of large law firms, downsized by 100,000 square feet and 20,000 square feet, respectively. In contrast, Quinn Emanual and Hughes Hubbard, both mid-sized law firms, increased their office space - a good example of this trend. Given the considerable number of legal tenants in this size range, market fundamentals are expected to tighten. District of Columbia Office Market Deliveries Q PROJECT DEVELOPMENT TYPE SUBMARKET CLASS DELIVERY DATE RENTAL BASE AREA % COMMITTED th Street, NW Renovation CBD - A Q , % 1000 F Street, NW Speculative East End - T Q , % 4049 S. Capitol Street, SW BTS Southeast - B Q , % District of Columbia Office Market Under Development Q PROJECT DEVELOPMENT TYPE SUBMARKET CLASS DELIVERY DATE RENTAL BASE AREA % COMMITTED 700 Pennsylvania Avenue, NW Speculative Capitol Hill - A Q ,920 SF 31.5% 2000 K Street, NW Speculative CBD - T Q ,199 SF 2.8% th Street, NW Renovation Uptown - B Q ,140 SF 0.0% The Wharf Building I Maine Avenue, SW Speculative Southwest - A Q ,450 SF 64.0% 1441 L Street, NW Renovation East End - A Q ,071 SF 0.0% th Street, NW Renovation CBD - B Q ,654 SF 53.2% 1800 Eye Street, NW BTS CBD - B Q ,690 SF 100.0% 2001 K Street, NW Redevelopment CBD - A Q ,417 SF 57.4% Capitol Crossing Massachusetts Avenue, NW Speculative Capitol Hill - A Q ,800 SF 0.0% 2112 Pennsylvania Avenue, NW Pre-Committed CBD - T Q ,000 SF 48.4% 99 M Street, SE Speculative Capitol Riverfront - A Q ,000 SF 8.3% Mount Vernon Place th Street, NW Pre-Committed East End - A Q ,000 SF 69.3% th Street, NW Speculative Condo Midtown Center - Fannie Mae th Street, NW CBD - B Q ,618 SF 8.7% Pre-Committed CBD - T Q ,721 SF 86.9% Square New York Avenue, NW Pre-Committed East End - T Q ,024 SF 83.8% Capitol Crossing Massachusetts Avenue, NW The Wharf Building II Maine Avenue, SW Speuclative Captitol Hill - A Q ,157 SF 0.0% Pre-Committed Southwest - T Q ,560 SF 35.6% YMCA Site Rhode Island Avenue, NW Redevelopment CBD - A Q ,850 SF 0.0% One M - 1 M Street, SE BTS Captitol Riverfront -A Q ,000 SF 100.0%

4 Summary Statistics Q Office Market All Classes Class A Class B & C Vacancy Rate 11.1% 12.2% 9.5% Change from Q (Basis Points) Absorption (Square Feet) New Construction (Square Feet) Under Construction (Million Square Feet) Asking Rates Per Square Foot Per Year , , , , , Direct Asking Rate $54.22 $59.81 $44.44 Q1 RENTAL S $59.81 CLASS A $44.44 CLASS B&C CLASS A CLASS B&C Change from Q $1.03 +$1.02 -$0.17 Demand/Supply Fundamentals % TOTAL OFFICE INVENTORY 143.2M SF (Sf In Millions) % 10% 9% Vacancy (%) 86.1M SF 57.1M SF TOTAL INVENTORY BY CLASS CLASS A: 60% CLASS B & C: 40% CLASS A: 63% CLASS B & C: 37% YtD % Absorption Supply Changes Overall Vacancy Rate

5 District of Columbia Office Market All Classes Q MARKET DISTRICT OF COLUMBIA EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER YTD OVERALL DIRECT ASKING Capitol Hill 5,315, ,172,877-92,799-92, % $57.02 Capitol Riverfront 5,030, ,000 20,846 20, % $42.68 CBD 44,043, , ,338 1,858, , , % $56.90 East End 47,349,427 94,273 94,273 1,042, , , % $59.65 Georgetown 3,191, ,161-1, % $50.63 NoMa 10,980, ,550 13,690 13, % $51.89 Southwest 11,867, , , , % $46.08 West End 4,478, ,632 41, % $47.77 Uptown 10,926, ,140-24,001-24, % $42.00 DISTRICT OF COLUMBIA TOTAL 143,183, , ,611 5,713,611-47,269-47, % $54.22 District of Columbia Office Market Class A Q MARKET DISTRICT OF COLUMBIA EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER YTD OVERALL DIRECT ASKING Capitol Hill 2,941, ,077-21,298-21, % $59.25 Capitol Riverfront 3,809, ,000 17,071 17, % $48.43 CBD 21,160, , ,338 1,814,631 44,094 44, % $64.45 East End 33,322,908 94,273 94,273 1,042, , , % $63.57 Georgetown 1,641, ,393 1, % $56.84 NoMa 9,001, ,550 13,690 13, % $52.89 Southwest 9,161, , , , % $46.81 West End 2,846, ,293 35, % $47.77 Uptown 2,193, ,177 16, % $45.87 DISTRICT OF COLUMBIA TOTAL 86,078, , ,611 5,116, , , % $59.81 District of Columbia Office Market Class B & C Q MARKET DISTRICT OF COLUMBIA EXISTING INVENTORY NEW SUPPLY YTD NEW SUPPLY UNDER YTD OVERALL DIRECT ASKING Capitol Hill 2,374, ,800-71,501-71, % $51.17 Capitol Riverfront 1,220, ,775 3, % $39.00 CBD 22,883, , , , % $48.27 East End 14,026, , , % $45.49 Georgetown 1,549, ,554-2, % $37.12 NoMa 1,979, % $29.58 Southwest 2,705, % $44.26 West End 1,632, ,339 6, % n/a Uptown 8,732, ,140-40,178-40, % $41.96 DISTRICT OF COLUMBIA TOTAL 57,105, , , , % $44.44

6 We are Global 447 offices in 68 countries on 6 continents FOR MORE INFORMATION: David Parker Regional Managing Director david.w.parker@colliers.com Robert Hartley Director of Research robert.hartley@colliers.com CONTRIBUTOR: Andrew Wellman Research Analyst $2.6 billion in annual revenue US* colliers.com/washingtondc 2.0 billion square feet under management 15,000 professionals and staff About Colliers International Colliers International Group Inc. (NASDAQ: CIGI; TSX: CIG) is a global leader in commercial real estate services with more than 15,000 professionals operating from 447 offices in 68 countries. With an enterprising culture and significant insider ownership, Colliers professionals provide a full range of services to real estate occupiers, owners and investors worldwide. Services include brokerage, global corporate solutions, investment sales and capital markets, project management and workplace solutions, property and asset management, consulting, valuation and appraisal services, and customized research and thought leadership. Colliers International has been ranked among the top 100 outsourcing firms by the International Association of Outsourcing Professionals Global Outsourcing for 10 consecutive years, more than any other real estate services firm. For the latest news from Colliers International, visit Colliers.com or follow us on Twitter (@ColliersIntl) and LinkedIn. colliers.com Copyright 2017 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.