Washington Area commercial real estate MARKET UPDATE

Transcription

1 Washington Area commercial real estate MARKET UPDATE A CohnReznick LLP Report Second Quarter 215

2 Table of Contents Executive Summary Economy Office Apartments Condominiums Retail Housing Observations on the Continuing Sustainability of Multifamily COHNREZNICK WASHINGTON AREA COMMERCIAL REAL ESTATE MARKET UPDATE july 215 ii

3 Executive Summary Executive Summary The Washington metro area has emerged relatively intact from several years of weak economic performance and is again showing signs of growth. The region posted a net gain of 61,6 jobs over the 12 months ending April 215, its largest month-over-year employment increase in more than four years. This strong job growth is due in no small part to the fact that after several years of reductions, both Federal employment and procurement are again on the rise. We expect the robust job growth trend to continue through the rest of the year and beyond. The region posted a net gain of 61,6 jobs over the 12 months ending April 215, its largest monthover-year employment increase in more than four years. The Washington office market is beginning to show small but positive improvements in early 215. Net absorption is positive and rents are up, albeit modestly. Investment activity is strong with high volume and record prices, and the demand for quality space is fueling leasing activity. The office market will continue adjusting to the new reality of lower aggregate demand as consolidations, shorter lease terms, and shadow space remain prevalent in the near term. Despite a large pipeline, the regional apartment market continues to be robust. Annual absorption continues to break records and vacancy remains below national levels. However, rent growth has been tepid, at best, in this highly competitive environment. Moderate rent declines are expected in 215, but as the regional job market continues to grow and as the pipeline slowly declines rents will begin to recover to long-term average growth by 218. COHNREZNICK WASHINGTON AREA COMMERCIAL REAL ESTATE MARKET UPDATE july 215 1

4 Executive Summary A shortage of condo product still persists in the Washington metro area. As a consequence, condo sales activity has slowed. There is evidence that prices for new condos are rising metro-wide, albeit at a slower pace. Sales activity is expected to see some gains as well, thanks to moderate conversion and switch activity. Recent local job growth in sectors with incomes that support the purchase of new condo units bode well for the market in the near term. The Washington metro area retail market continues to improve on a steady, if modest, track. Vacancy rates continue to decline and rents have been rising steadily since 21. Retail real estate in the region avoided disaster during the recession and the lackluster recovery that followed remarkable considering the pressures of slow job growth, stagnant wages, and booming online merchandising. Development activity highlights optimism among developers and their capital partners for retail centers to thrive throughout the region. The housing market in the Washington metropolitan area has shifted from rapid recovery to a more stable phase. Price growth stalled (year-over-year average sales price declined.4%.) even as sales activity rose to its highest level since the downturn, and time-on-market has been below the long-term average. The anticipated interest rate hike by the Federal Reserve before the end of 215 may also further spur sales activity as potential buyers act to take advantage of favorable mortgage rates while they are still at historical lows. In summary, the Washington area s commercial real estate markets are showing consistent, if modest, improvements in first half of 215. Demand remains strong in the apartment and retail markets. The condominium market is poised for healthy activity after a supply-constrained period. The single-family housing market is expected to see moderate price and volume growth, especially as the national and regional economy gain more traction. The Class A office market will benefit from tenant movements toward transit-oriented, high-quality buildings. 2

5 Economy NATIONAL ECONOMY Economic performance in the second quarter of 215 was mixed. Despite robust job growth, the economy contracted slightly, with real GDP at first quarter declining by.2%. This weakness was mainly due to shortterm factors, such as the harsh winter, and most major indicators remain positive at the mid-point of 215. Given these indicators, we believe that real GDP growth will rebound in the second quarter and through the balance of the year. Year-over-year job growth continues to be strong and the unemployment rate continues to edge down. Some ongoing concerns remain: inflation lingers below the Federal Reserve s target rate; wages continue to be relatively stagnant; and the number of chronically unemployed people those who have given up looking for work remain significant. Depending on how quickly or slowly these measures improve will likely impact the Fed s decision on when to increase the Federal Funds Rate. Despite these concerns, the national economy experienced an increase of 3.1 million new payroll jobs (not seasonally adjusted) during the 12 months ending April 215, with the private sector accounting for the overwhelming majority of that growth. Seasonally-adjusted job growth from January to April 215 averaged approximately 193, jobs per month. Meanwhile, the public sector has added jobs for 11 consecutive months after shedding jobs during the previous 46 months (month-over-year). While nearly all of this growth was at the state and local government level, the Federal government appears to have stopped cutting jobs: after 47 consecutive months of declines (month-over-year), Federal employment actually increased in each month between February and April of 214. We believe that real GDP growth will rebound in the second quarter and through the balance of the year. Year-over-year job growth continues to be strong and the unemployment rate continues to edge down. 3

6 Economy During the 12-month period ending April 215, the top four sectors in job gains were Professional/Business Services, Education/Health Services, Leisure/Hospitality, and Retail Trade. These four sectors added about 2. million new jobs, accounting for 65% of net new employment. Job gains were positive across all major super sectors and eight of the 13 sectors added at least 149, payroll jobs over the year. The unemployment rate (seasonally adjusted) declined to 5.4% as of April 215, down from 6.2% one year earlier. This decline occurred despite the labor force increasing 1.1% during the same period. In general, we anticipate that the unemployment rate will gradually edge down over the balance of 215 as hiring accelerates and uncertainty dissipates. A chronic area of concern regarding the national economy is the national average hourly wage. In April 215 the average hourly wage rose 2.3% from one year prior. By comparison, data available from March 27 before the Great Recession show that the average hourly wage increased by 3.% or more during each month compared with the same month one year prior. The final estimate of real GDP growth for the first quarter of 215 came in at -.2%. The decline stemmed from slowing growth in personal consumption expenditures, lower nonresidential fixed investment, decreased state and local government spending, and a drop in net exports. According to the most recent report from the Federal Reserve Bank of Philadelphia s Survey of Professional Forecasters, real GDP growth is forecasted to be 2.5% in the second quarter of 215, 3.1% in the third quarter, and 2.9% in the fourth quarter, for an overall growth rate of 2.4% in 215. Looking further ahead, real GDP is predicted to average 2.8% in 216, 2.8% in 217, and 2.5% in 218. We expect that the national economic conditions will show continued improvement through the latter portion of 215. GDP should rebound from a weak first quarter, payrolls are edging higher, and the unemployment rate continues to decline. There is still some slack in the economy, though, particularly in terms of the large number of underemployed workers and slow wage growth. Specifically, we believe the economic outlook is as follows: Real GDP growth: 2.5% in 215. Payroll jobs: 2.6 million added in 215; similar to last year s total. Housing: Price appreciation around 3% to 5% in 215. Unemployment rate: 5.2% to 5.6% in

7 Economy REGIONAL ECONOMY The Washington metro area has emerged relatively intact from several years of weak economic performance and is again showing signs of growth. The region posted a net gain of 61,6 jobs over the 12 months ending April 215, representing its largest month-over-year employment increase in more than four years. This strong job growth is due in no small part to the fact that after several years of reductions, Federal employment and procurement are again on the rise. Over the next 12 months, additional Federal hiring is expected in several departments, including Defense, Health and Human Services, and Homeland Security, though this will be at least partially offset by workforce reductions in other agencies such as Treasury. We expect the robust job growth trend to continue through the rest of the year and beyond. See Figure 1. PAYROLL JOB GROWTH Selected Metro Areas 12 Months Ending April 215 Figure 1 THOUSANDS OF NEW PAYROLL JOBS LA Basin NY SF Bay DFW Atl South FL Hou Wash Chi Phx Bos Denver Source: Bureau of Labor Statistics, Delta Associates; July 215. PAYROLL JOB GROWTH Washington Metro Area 12 Months Ending April 215 Figure 2 Professional/Business Services Education/Health State and Local Government Retail Trade Leisure/Hospitality Construction/Mining+69,2 Transportation/Utilities Federal Government Other Services Wholesale Trade Financial Activities Information -3,6 Manufacturing -6, -2, 2, 6, 1, 14, 18, JOB CHANGE Source: Bureau of Labor Statistics, Delta Associates; July 215. Over the past year, the top four sectors for job growth in the Washington metro area have been Professional/ Business Services, Education/Health, State/Local Government, and Retail/Trade; these sectors gained 51, jobs over the 12 months ending April 215. The Professional/Business Services sector has rebounded from net job losses in 214 to lead the metro in job gains over the first four months of 215. This is significant for the regional economy because Professional/Business Services sector jobs tend to have higher-than-average wages and generate demand for office space. Three sectors lost jobs over the past year Information, Manufacturing, and Financial Activities but none of these sectors lost more than 1,4 jobs. See Figure 2. The region s unemployment rate has declined steadily from its post-recession peak of 7.1% and its April 214 level of 4.7% percent to just 4.3% in April 215. This compares favorably with the national (seasonally adjusted) rate of 5.4% in April 215. We expect the Washington metro area s unemployment rate to hover around 5% for the remainder of 215, as new jobs are created concurrently with labor force growth. 5

8 Economy Gross Regional Product (GRP) for the Washington metro area is expected to reach $51.7 billion in 215 a 5.5% increase from the estimated $475.5 billion in 214. While the Federal government remains the largest contributor to the Washington area economy, its share of spending is shrinking. Federal government spending currently accounts for approximately 35% of GRP. By 218, we expect this share to be reduced to 29%, as private sector economic growth will accelerate while Federal spending will remain relatively flat. With the weak growth of 213 and 214 in the past, the Washington metro area is poised for another expansion cycle. We expect job growth in the region to ramp up to about 36, in 215, 49, in 216, and then peak at about 58, net new jobs in 217. This expansion cycle will be driven by the region s private sector, generating demand for housing and commercial space. 6

9 Economy HIGHLIGHTS GDP PERCENT CHANGE United States payroll job growth United States Year-Over-Year United States ANNUAL GDP CHANGE IN 29 CONSTANT DOLLARS 6% 4% 2% % -2% -4% -6% -8% -1% Q1 7 Q3 7 Q1 8 Q3 8 Q1 9 Q3 9 Q1 1 Q3 1 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q % Q3 Q % OF TOTAL 3,5 3, 2,5 2, 1,5 1, 5-5 Jan. 13 Mar. 13 May. 13 Private Sector Jul. 13 Sep. 13 Nov. 13 Jan. 14 Public Sector Mar. 14 May. 14 Jul. 14 Sep. 14 Nov. 14 Jan. 15 Mar. 15 Note: Annualized. Source: Bureau of Economic Analysis, Delta Associates; July 215. Note: Data are not seasonally adjusted. Source: Bureau of Labor Statistics, Delta Associates; July 215. share of grp Washington Metro Area 215 Projection PAYROLL JOB growth Washington Metro Area 34% 3% 5% 5% $52 Billion 5% 15% 35% Federal Spending Technology Building Industry International Business Health/Education Hospitality Other THOUSANDS OF NEW PAYROLL JOBS Year Projected Average = 47,3/Year Source: Dr. Dr. Stephen Fuller, Fuller, Delta U.S. Associates; Conference October of 214. Mayors, Delta Associates; July 215. Source: Bureau of Labor Statistics, Delta Associates; July

10 Office SUMMARY AND FORECAST The Washington metro area s office market struggled somewhat in the second quarter of 215. Overall office space absorption was relatively weak, but Class A office space recorded a modest amount of absorption. Office demand in the Washington metro area continues to be driven by private sector tenants in search of smaller, higher quality spaces at reduced prices. More notably, Class A buildings in denser, transit-accessible submarkets have been outperforming the market as a whole. The two ongoing trends of densification (reduction in space leased per worker) and flight to quality are likely to continue in the near term, although they have begun to wane. Also, as Federal austerity measures begin to wind down, there should be revived GSA leasing activity in the market. By 217, resurgent job growth should boost demand for office space, though most demand will remain concentrated in the District of Columbia and in the most desirable Metrorail-served suburban submarkets. Another cause for optimism is the investment sales market, which continues to experience high volume and rising per-square foot (SF) prices. Several high profile properties changed hands during the first half of 215, including a two-building sale in the District with a price in excess of $1,/SF. The combined effects of rising demand and increased investor confidence should build meaningful market momentum in 216 and real traction by 217. NET ABSORPTION Net absorption in the Washington metro area totaled negative 195, SF in the second quarter of 215, significantly less than the positive 259, SF recorded in the first quarter. Class A space recorded nominal positive absorption of 6, SF, still less than the positive 247, SF recorded in the 1st quarter. Negative absorption in Northern Virginia for all classes of space (-31, SF) and Class A space (-187, SF) dragged down the region s numbers significantly. The quarterly average absorption for the entire metro area year-to-date is positive 3,5 SF, well behind the 213 and 214 quarterly average of 273,5 SF. 8

11 Office Recent patterns of office space absorption have been largely determined by location and class of properties. Since the recent recession, prospective tenants have been taking advantage of depressed rents by leasing space in higher-quality buildings near transit, but they are reducing their space usage. See Figure 1. VACANCY The Washington area s direct vacancy rate at the end of the 2nd quarter of 215 is 11.2%, up slightly from 11.% one year prior. The Washington metro still maintains one of the lowest vacancy rates among large markets in the United States. New York City has the lowest vacancy rate at 6.2% (exclusive of Northern New Jersey and Long Island). The Washington area s direct Class A vacancy rate as of the 2nd quarter 215 is 13.4%, which is unchanged from the 2nd quarter of 214. See Figure 2. PIPELINE There is 4.4 million SF of office space under construction in the Washington metro area as of June 215. The majority of the space currently under construction (2.4 million SF, or 54%) is in Northern Virginia, with much of it concentrated along the new Metro Silver Line. There is 31.9 million SF of office space planned in the Washington metro area as of June 215 and 65.8 million SF proposed. Given current market conditions, we do not expect many of the planned projects to deliver within the next two years. OFFICE NET ABSORPTION Washington Metro Area 211 Second Quarter 215 Figure 1 NET ABSORPTION (THOUSANDS OF SF) OFFICE VACANCY RATES Select Markets Second Quarter 215 Figure 2 DIRECT VACANCY RATE 25% 2% 15% 1% 5% 2, 1,5 1, , *First half of 215. Source: Delta Associates; July * National Vacancy Rate: 13.2% 11.2% % NYC SF Bos Was LA Hou Mia Den OC Chi Atl Dal Phx Note: Includes owner-occupied and single-tenant space. Source: Delta Associates; July 215. EFFECTIVE RENTS The average effective office rent increased to $29.93 per SF as of the second quarter of 215, up.35% from the first quarter of 215. Notably, rents in the metro area increased more in the first half of 215 (up.6%) than they did in all of 214 (total growth 1.3%). Overall, the market will remain favorable for tenants, though less so into 216 and beyond. We expect concession packages to remain elevated in 215, as many tenants remain hesitant to lease additional space, and the battle to secure large tenants is likely to be very competitive. However, we believe the window of opportunity to secure reduced rents on quality Class A space is closing, particularly in the region s top submarkets. 9

12 Office Steady but moderate increases in rent will likely continue for the remainder of the year. We expect it will not be until 216 before the Washington metro area experiences more material gains in rent. Competition for large tenants is likely to remain fierce in the near-term and concession packages are expected to remain elevated in 215. INVESTMENT SALES VOLUME Investment sales totaled $3.5 billion during the first half of 215, compared to $4.5 billion during the first half of 214. Sales prices averaged $389/SF in the Washington metro area during the first half of the year. This compares to $374/SF one year prior. 1

13 Office highlights SUMMARY OF OFFICE MARKET INDICATORS Washington Metro Area Second Quarter 215 CURRENT INDICATORS all classes class a 1 Rentable Building Area (SF) 2 46,2, ,739,68 Vacant Available (SF) 45,433,946 23,396,972 Direct Vacancy Rate 11.2% 13.4% Net Absorption (SF) - Q2 215 (195,) 6, , 2,897, 213 1,831, 822, % Rent Change Q Q % -- investment sales ytd all classes Number of Transactions 65 Total Sales $3,523,, Average Price per SF $389 development pipeline all classes class a 1 Under Construction (SF) 3 4,373,564 4,33,294 OFFICE PROJECTS IN THE PIPELINE Washington Metro Area Second Quarter 215 IN THOUSANDS OF SF 7, 35, Source: REIS, Delta Associates; July 215. Under Construction Planned Proposed No VA Sub MD The District OFFICE DEMAND AND DELIVERIES IN NEXT TWO YEARS Washington Metro Area Second Quarter 215 projections for june 217 all classes Direct Available Space (SF) After Proj. Demand 43,7, Direct Vacancy Rate 1.6% 1 Class 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. 2 Does not include buildings under construction or buildings owned by the government. 3 Source: REIS. IN MILLIONS OF SF Demand Under Construction Planned Source: Delta Associates; July 215. Source: Delta Associates; July

14 Apartments SUMMARY AND FORECAST Shifts in demographics and lifestyle preferences benefit the apartment market, where annual absorption records continue to be broken (four quarters in a row now) and vacancy remains below national levels. However, rent growth has been tepid, at best, in this highly competitive environment. As the regional job market improves, the Class A apartment market is poised for growth in the period ahead, although an elevated pipeline persists throughout the region. 215 could continue to see declines in rent growth, but, as the 36-month development pipeline slowly declines, rents will likely begin to rise and recover to long-term average rates by 218. ABSORPTION The region continues to experience record setting absorption, as 13,8 Class A units were absorbed during the past 12 months more than double the Washington area s 1-year average. Unlike past dynamics, Class A absorption was not at the expense of the Class B market, which also experienced positive absorption of 2,684 units. A steady supply of new apartments continues to attract the increasing number of Millennial households in the metro area that tend to/prefer to rent rather than own. In recent years, there has also been an increase in the types of jobs and income categories that tend to generate demand for rental apartments rather than ownership housing. Since 211, the share of renter households in the metro area has been on the rise. 12

15 Apartments These trends will likely continue through the end of this decade. As a result, these factors are expected to produce solid Class A apartment absorption, supporting our projected annual demand of about 1,3 Class A units over the next three years. See Figure 1 and 2. Annual absorption records continue to be broken (four quarters in a row now) and vacancy remains below national levels. VACANCY Washington metro area stabilized vacancy for all classes of apartments is 3.7%, 5 basis points lower than a year ago. Despite the high volume of new product, the June 215 vacancy rate for Class A apartments in the metro area remains unchanged from a year ago at 4.1%. In particular, mid- and high-rise vacancy is down 13 basis points while low-rise vacancy is up 9 basis points. Given the projected delivery schedule of pipeline projects, the region-wide vacancy rate for stabilized Class A apartment properties will likely edge upward from 4.1% today to the mid 5% range before declining to approximately 3.8% by the second quarter of 218. See Figure 3. RENTER HOUSEHOLDS Washington Metro vs. United States Figure 1 PERECENT OF TOTAL HOUSEHOLDS NET ABSORPTION OF UNITS 37% 35% 33% 31% 29% ANNUAL CLASS A APARTMENT NET ABSORPTION Washington Metro Area Second Quarter 215 Figure 2 16, 14, 12, 1, 8, 6, 4, 2, Washington Metro 27% * YEARLY AVERAGE *As of first quarter 215. Source: REIS, Delta Associates; July 215. U.S. 35.8% 13,8 RENTS Overall, rents have held up surprisingly well despite the increased competition over the past couple of years, thanks to record regional absorption. Effective rents for all classes of investment-grade apartments rose by.6% over the last 12 months. Class A rents declined by.1% while Class B rents rose by 1.7%. For Class A, rent performance of low-rise product continues to outperform mid- and highrise product, with low-rise Class A rents increasing by 1.% while mid- and high-rise rents decreased by 1.6%. Regional Class A rents likely will decline in 215 due to the large slate of scheduled deliveries compared to projected demand. Rents are expected to begin to rise in 216 and rent growth to recover to the 2.5% 3.5% range by 217 as growth in 218 approaches long-term rates. Source: Delta Associates; July 215. APARTMENT VACANCY RATES Major Apartment Markets All Classes of Apartments Figure 3 VACANCY RATE 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% 3.7% NY LA Phi Chi Wash Phx Balt DFW Atl Hou *First quarter data except for Washington, which is as of second quarter 215. Source: REIS, Delta Associates; July

16 Apartments PIPELINE APARTMENT DEVELOPMENT PIPELINE The pipeline of likely deliveries over the next 36 months Washington Metro Area Second Quarter 215 Figure 4 continues on a slow cyclical decline, down to 37,247 45, units as of the second quarter. Since 213, the 36-month 37,247 pipeline has hovered between 37, and 4, units, but it will likely shrink to a more healthy level 3, over the next 12 to 24 months as financial feasibility becomes more difficult in the face of rising construction 15, costs and relatively flat rents. Most of the pipeline decline will come from projects that delay starting construction. Only 1% of the 21,848 units currently under construction (but not yet leasing) metro-wide * are of a scale suitable for switching to condominiums *As of second quarter 215. Source: Delta Associates; July 215. before delivery. Approximately 2,934 units at 12 projects started construction in the first quarter. In total, an estimated 15,121 units are slated for delivery over the next year, a 6% increase over the 14,231 units delivered over the last 12 months. Deliveries are expected to slow to 9,517 units in the following 12-month period, more consistent with the absorption rate in recent years. See Figure 4. MARKET RATE UNITS PLANNED AND U/C INVESTMENT SALES The Washington investment sales market experienced an increase in Class A sales activity in 214, with $1.78 billion of multifamily Class A building sales (seven low-rise properties and 11 mid-/high-rise properties), up 6% from 213. The average per unit price for 214 sales was 1.% lower than 213 for low-rise units (at $23,88); high-rise per-unit prices were up 7.7% from 213 (at $459,6). It is expected that sales volume in 215 will surpass 214. Through June 215, we note $1.48 billion of multifamily Class A building transaction volume in 14 trades. Meanwhile, a total of 15 multifamily land sales closed in 214, totaling $22 million, with the capacity for more than 4,2 multifamily units, compared with $282 million in sales during 213 with the capacity for more than 4,2 units. So far in 215, at least one $18 million multifamily land sale has been recorded. CAP RATES Based on response from Delta Associates 214 Market Maker Survey participants, apartment cap rates held steady at cyclical lows in 214 due to record absorption counterbalancing a near-record level of pipeline. The survey indicated that apartments remain in favor as an asset class. We expect cap rates to edge up in the near future due to macroeconomic conditions, expectations for rising interest rates, and a crowded pipeline set to deliver in

17 Apartments highlights SUMMARY OF APARTMENT MARKET INDICATORS Washington Metro Area Second Quarter 215 CLASS A APARTMENT DEMAND AND DELIVERIES IN NEXT three YEARS Washington Metro Area Second Quarter 215 CURRENT INDICATORS class a class b Effective Rents $1,919 $1,61 Comparison at 6/14 $1,95 $1,578 Rent Increase/Annum -.1% 1.7% Since June Vacancy Rate 4.1% 3.2% Comparison at 6/14 4.1% 4.4% Net Absorption MARKET RATE UNITS IN THOUSANDS Demand Under Construction Planned 5,71 1,333 / year 31,546 Q Q ,484 Q Q2 14 8,639 Development Pipeline Class A Deliveries Q Q ,231 Projected Deliveries Q Q ,121 Q Q2 17 9,517 Q Q2 18 3,345 Starts Q ,934 Q Q2 15 1, Month Pipeline At 6/215 37,247 At 6/214 39,962 projections for june 218 Class A Available Unites 41,894 Stabilized Vacancy 3.8% Source: Delta Associates; July 215. ANNUAL CLASS A APARTMENT RENT GROWTH Washington Metro Area PERCENT EFFECTIVE RENT CHANGE 1% 8% 6% 4% 2% % -2% -4% *Annual rent change at Second Quarter 215 is -.1%. Source: Delta Associates; July Same-store (comparable unit) rent comparison. Source: Delta Associates; July

18 Condominiums SUMMARY AND FORECAST A shortage of condo product still persists in the Washington metro area. As a consequence, condo sales activity has slowed. Determining same-store price change in this supply-constrained market has also become difficult. Almost two thirds of the units introduced to the market over the past 12 months have been sold, leaving a small inventory of units for comparison. Still, there is evidence that prices for new condos continue to rise metro-wide, albeit at a slower pace. Sales activity is expected to see some gains as well, thanks to moderate conversion and switch activity. Recent local job growth in sectors with incomes that support the purchase of new condo units such as Professional/Business Services and Education/Health will likely bode well for the market in the near term. NEW CONDOMINIUM SALES ACTIVITY Washington Metro Area Second Quarter 215 Figure 1 NET SALES Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Source: Delta Associates; July SALES VOLUME In what is typically the strongest quarter of the year, sales volume metro-wide is down. The Washington metro area saw 345 net sales in the second quarter, down 7% from the first quarter. Sales over the past 12 months also declined 4% from the prior 12-month period. It is important to keep in mind that product shortage has hampered sales volume in the region, and not rather than weak demand. However, there are over 2, condo units in the pre-marketing stage; most of these units are expected to begin sales over the next few months. As more condominium product is brought to market, new unit sales will likely reach the 1,6 to 2, range in 215. See Figure 1. 16

19 Condominiums PRICES The average effective price per square foot for same-store new condo sales in the metro area rose by 2.1% over the past 12 months. As the inventory of fresh units stabilizes, price increases will remain moderate because fewer newly built, desirable units are available to dilute the effect on average price of lower-quality units (those that face the dumpster or have poor floor plans). Percentage price increases are expected to be in the mid-single digits over the next 24 to 36 months. See Figure 2. CONCESSIONS Concession rates have increased by 6 basis points metro-wide since June 214. Concessions now average approximately 2.2% of asking price in the metro area. PIPELINE The number of unsold units in projects currently marketing or under construction (and not yet marketing) is 3,854 units as of June, up nearly 2% since March and the most since 21. This is partially due to a slight increase in conversion and switch activity throughout the metro area, including the largest condo switch so far in this cycle. Approximately 1,9 condo units in 3 projects started construction in 214 the highest annual total since the middle of the last decade. An estimated additional 1,924 units will start construction in 215, excluding conversions not already announced. However, the number of units planned to begin sales within the next 36 months decreased slightly to 3,258 units before attrition, with a majority located in the core areas of the region. The supply-demand balance in the Washington region will continue to favor the developer in most areas, with a still-limited new condo unit supply and rising prices. At the same time, there appears to be a dearth of resale listings. As a result, we foresee new unit prices rising and improved development opportunities in many parts of the metro area through 217. See Figure 3. EFFECTIVE NEW CONDOMINIUM SALES PRICE CHANGE Washington Metro Area Second Quarter 215 Figure 2 % CHANGE 9% 6% 3% % -3% -6% Source: Delta Associates; July % CONDOMINIUMS ACTIVELY MARKETING OR UNDER CONSTRUCTION Washington Metro Area Second Quarter 215 Figure 3 UNSOLD MARKET RATE UNITS 4,5 3, 1,5 Source: Delta Associates; July ,854 6/1 6/11 6/12 6/13 6/14 6/15 17

20 Condominiums highlights SUMMARY OF CONDOMINIUM MARKET INDICATORS Washington Metro Area Second Quarter 215 CONDOMINIUM DEMAND AND DELIVERIES IN NEXT three YEARS Washington Metro Area Second Quarter 215 CURRENT INDICATORS New Unit Sales months ending June 215 1,48 12 months ending June 214 1,543 New Unit Average Price per SF $36 % Change in Avg. Effective PSF since June % Concessions as % of Asking Price at June % MARKET RATE UNITS 7, 3,5 Demand Under Construction Planned* 6,6 / year 1,578 3,854 Development Pipeline Number of Units Unsold Units in Projects Currently Marketing or Under Construction 3,854 Planned to Deliver within 36 Months 3,258 Total 36 Month Pipeline 7,112 Planned/Rumored Long-Term 7,564 *Accounts for attrition. Source: Delta Associates; July 215. CONDOMINIUM UNIT DELIVERIES Washington Metro Area Second Quarter 215 Planned Condominium or Rental 52,365 12, Column1 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. Source: Delta Associates; July 215. MARKET RATE UNITS 8, 4, Normalized Demand Range Source: Delta Associates; July

21 Retail SUMMARY AND FORECAST The Washington metro area retail market continues to improve on a steady, if modest, track. Vacancy rates continue to decline and rents have been rising steadily since 21. Retail real estate in the region avoided disaster during the recession and lackluster recovery remarkable considering the pressures of slow job growth, stagnant wages, and booming online merchandising. More recently, the Washington metro area economy is experiencing an expansion with strong job growth and a resumption of Federal procurement. This bodes well for consumers and retail real estate. Development activity throughout the metro area mixeduse projects in the core, renovations of older centers in mature suburbs, and plans for new centers in the outer suburbs highlights optimism among developers and their capital partners for retail centers to thrive throughout the region. With an inventory of 73.3 million SF, the Washington metro area suburbs have 16.3 SF per capita of neighborhood/community shopping center space a significant drop from just a few years ago and another indication of the region s capacity to absorb more of the basic neighborhood/community retail space that is in the pipeline. VACANCY Vacancy rates in neighborhood and community centers remain high relative to pre-recession averages across the metro area, although they have been declining gradually since 212. The vacancy rate for shopping centers in the Washington suburbs at second quarter of 215 was at 7.%, a decline of about 1 basis points from 7.1% at second quarter

22 Retail PIPELINE OF ALL SHOPPING CENTER TYPES Washington Metro Area Suburbs Second Quarter 215 Figure 1 THOUSANDS OF SQUARE FEET ,633 Source: REIS, Delta Associates; July ,546 1,299 Under Construction Planned Proposed PIPELINE As of second quarter 215, there is 2.6 million SF of shopping center space under construction across all shopping center types in the Washington metro area suburbs. Overall, there is 6.5 million SF of planned (i.e., permitting completed, awaiting groundbreaking) shopping centers throughout the Washington suburbs. Proposed centers for which permits and financing have yet to be secured total 1.3 million SF. See Figure 1. Twelve grocery-anchored shopping centers are under construction in the metro area, totaling 1.6 million SF, and many more in the planning stages. RENTS Rents in neighborhood and community centers have been climbing slowly but steadily since 21. Average effective rent rose in Washington suburban centers by 2.1% from 213 to 214. Average effective rent in the metro area was $24.35 per SF at second quarter 215. This compares to the average of $23.78 per SF at second quarter 214. INVESTMENT SALES There were two notable investment sales of grocery-anchored shopping centers during the second quarter of 215. In the Washington metro area suburbs, investment sales of grocery-anchored shopping totaled $483 million (averaging $285 per SF) in the first half of 215, surpassing the 214 total of $323 million ($353 per SF). See Retail Highlights. 2

23 Retail highlights Neighborhood/community shopping center effective rent per square foot Washington Metro Area Suburbs Second Quarter 215 Neighborhood/community shopping center space per capita Washington Metro Area Suburbs Second Quarter 215 EFFECTIVE RENT PER SF $24.5 $24. $23.5 $23.49 $23.66 $24.14 $24.35 SF/CAPITA $ * * *As of June 215. Source: REIS, Delta Associates; July *As of June 215. Source: REIS, Census Bureau, Delta Associates; July 215. neighborhood/community SHOPPING CENTER vacancy rates Washington Metro Area Suburbs Second Quarter 215 Grocery-Anchored Shopping Center INVESTMENT Sales Washington Metro Area Suburbs VACANCY RATE 8.5% 8.% 7.5% 7.% 8.% 7.8% 7.% 7.% THOUSANDS OF SQUARE FEET 8 4 2,633 6,546 1, % * *As of June 215. Source: REIS, Delta Associates; July 215. Source: REIS, Delta Associates; July 215. Under Construction Planned Proposed 21

24 Housing SUMMARY AND FORECAST The housing market in the Washington metropolitan area has shifted from rapid recovery to a more stable phase. During the second quarter of 215, year-over-year average sales price declined.4%. Price growth stalled even as sales activity rose to its highest level since the downturn, and time-on-market has been below the long-term average. Months-of-inventory still remained lower than the historic average, but it is expected to ease as more listings come online. As the inventory crunch continues to ease, local price growth likely will remain in the more modest range of 1% to 3% annually in the short term. Favorable regional economic trends strong job growth, low unemployment rates, and the return of Federal procurement bode well for the housing market. The anticipated interest rate hike by the Federal Reserve before the end of 215 may also further spur sales activity as potential buyers act to take advantage of favorable mortgage rates while they are still at historical lows. PRICES Price growth in the region rose steadily since 29, but has slowed in recent months. In the second quarter of 215, the average sale price for a Washington area home declined.4% from a year ago. This rate compares to the year-overyear growth of 3.2% at second quarter 214. It is the first decline in average price since the fourth quarter of 211. Price growth likely will remain at modest levels as listings continue to increase in the near term. Prospects for the Washington metro area housing market in the longer term remain positive. Despite the recent slight price depreciation, the regional housing market is among the most stable in the nation. Since 1995, according to the FHFA, average prices in the Washington region have grown about 8.8% annually. See Figure 1. PRICE CHANGES IN PURCHASE-ONLY INDICES Select Large Metro Areas Figure 1 PRICE CHANGES 225% 15% 75% % 176% Note: Price change at first quarter of respective year; seasonally adjusted. Source: FHFA, Delta Associates; July

25 Housing UNIT VOLUME Sales activity typically peaks this time of the year, but recent sales volume is noteworthy. Unit volume sold during the second quarter of 215 increased 1.9% from one year ago. The first half of 215 registered the highest six-month sales volume the region has seen since 26. This contrasts with sluggish sales in 214. Washington area homebuyers are likely acting to take advantage of more reasonable prices and the still-low interest rates before both go up. As job growth especially concentrated in sectors with incomes that support the purchase of for-sale housing units outpaces price gains, sales activity is likely to continue at a robust pace. HOME PRICE CHANGE AND INVENTORY Washington Metro Area Second Quarter 215 Figure 2 MONTHS OF INVENTORY The metro area has an average of 2.4 months of forsale inventory at the end of second quarter 215. This compares to the 1.7 months of inventory in the second quarter of 213, the peak of the housing market recovery. Active listings were up 1% and at the highest level (2,94) since the second quarter of 26, but months of supply remains below the long-term average of 3.9 months as demand kept pace. See Figure MONTH PRICE CHANGE 3% 15% % -15% -3% *Months of inventory at current sales pace for last month in each quarter. Source: MRIS, Delta Associates; July MONTHS OF INVENTORY* DAYS ON MARKET Homes in the Washington area averaged 47 days on the market in the second quarter of 215, down 22 days from one year ago and below the 1-year average of 69 days. Strong sales this quarter were a key factor in the decline in time on market over the year. Despite a larger selection of listings, pent-up demand from Washington area buyers remains strong. The availability of relatively moderatelypriced homes might have prompted some buyers to close on sales faster than normal, locking in lower prices and relatively low interest rates. See Figure 3. ANNUAL AVERAGE DAYS ON MARKET Existing Houses Washington Metro Area Figure 3 DAYS * *As of Second Quarter 215. Source: MRIS, Delta Associates; July

26 Housing highlights SUMMARY OF HOUSING MARKET INDICATORS Washington Metro Area Second Quarter 215 Home Sales Average PRICE CHANGES Washington Metro Area 12% CURRENT INDICATORS Change Year- Over-Year Average Sales Price $486, % Comparison at Q2 214 $488,153 Sales (Units) 2,94 1.9% Comparison at Q ,113 PRICE CHANGE 8% 4% % -4% -.4% Average Days on Market % Comparison at Q Sales Place (Months) Comparison at Q For Sale Listings 18,423-12% *As of Second Quarter 215. Source: MRIS, Delta Associates; July Sales pace at June 215. Pace is ratio of total for-sale inventory to current month s sales. Source: MRIS, Delta Associates; July 215. PERCENT CHANGE IN HOME PRICES Washington Metro vs. United States Second Quarter 215 FOR-SALE LISTINGS Existing Houses Washington Metro Area Second Quarter % Washington Metro Area U.S. 2 MSA Composite 45, % CHANGE % LISTINGS 3, 15, -25% * Jun 2 Jun 3 Jun 4 Jun 5 Jun 6 Jun 7 Jun 8 Jun 9 Jun 1 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 *12 months ending July 215. Note: Seasonally adjusted purchase-only index Source: S&P/Case-Shiller, Delta Associates; July 215. Source: MRIS, Delta Associates; July

27 Article Observations on the Continuing Sustainability of Multifamily By David Kessler Commercial Real Estate Industry Practice National Director Given the ominous, often-raised red flags about overbuilding, the multifamily sector continues to outperform other sectors by a significant margin. According to fourth quarter 214 data from CBRE for the country s 64 largest markets, absorption is at a four-year high, even given the fact that new units coming on line is at its highest level since 28. Rents are up by a healthy 5.3% year-over-year, and multifamily acquisitions reached a record $34 billion in the fourth quarter. What s sustaining multifamily s forward momentum? Simply put, there continue to be way too many positive trends and market conditions going for multifamily for the long-expected bubble to burst anytime soon. The demographics alone have their own set of tailwinds both from the millennials perspective as well as the boomers. The migration to life in the inner city, along with all the amenities, attractions, and conveniences that lifestyle affords, makes for consistent, almost voracious demand in most trendy, mixed-use urban markets. Continued flat-lined interest rates mean builders, developers, and investors have almost unfettered access to capital for the right kinds of deals. Finally, stabilized property fundamentals in most markets also fuels the continued enthusiasm for multifamily. So where then, does caution come into play? Even if these trends remain strong, indefinite success cannot be taken for granted. Top-of-the-line amenities and seductive marketing can fill an individual development, but turning apartment living into a lifestyle product brings the fickleness of fashion into the equation. Meaning, today s hot property can suddenly find itself on the defensive when an even sexier development goes up down the street. Not only will the older property have greater competition in attracting tenants, but it can t assume it will be able to retain a high percentage of the ones it has which is, of course, one of the foundations of maximizing return on investment. As a result, even with rent increases and low vacancy rates, concessions like one, two, or even three months free rent are commonplace. So for the present, while the fundamentals remain in the landlord s favor, competition among properties remains strong. If the multifamily market ever does slacken, the competition for tenants will become even fiercer. But even in today s developer s market, those who ultimately succeed are those who recognize that no matter how well they are doing, there will always be mitigating factors to consider in either staying the course, or taking a fresh look at all aspects of your current investment strategy. 25

28 About As one of the top 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 David Kessler, CPA Commercial Real Estate Industry Practice National Director CohnReznick LLP 751 Wisconsin Avenue, Suite 4E Bethesda, MD COHNREZNICK WASHINGTON AREA COMMERCIAL REAL ESTATE MARKET UPDATE july

29 About 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 serving the commercial real estate industry for 35 years. The firm s main practice areas are: 1. Consulting, research, and advisory services for all property types throughout the United States (including market feasibility studies, highest and best use analysis, market entry strategies, asset performance enhancement studies, market due diligence, white papers on special topics, valuation analysis, and litigation support); and 2. Subscription publications for selected metro areas for the apartment, condominium, office, retail, and housing markets. For more information on Delta Associates, please visit DeltaAssociates.com. Delta s Washington Area Commercial Real Estate Market Update team includes: Rachelle Sarmiento, Senior Associate: Rachelle.Sarmiento@DeltaAssociates.com or david Weisel, CRE, Chief Executive Sallie Drumheller, Graphic Designer 215. 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 K Street, NW, Suite 11 Washington, DC Info@DeltaAssociates.com COHNREZNICK WASHINGTON AREA COMMERCIAL REAL ESTATE MARKET UPDATE july

30 CohnReznick is an independent member of Nexia International CohnReznick LLP 215 This 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.