Third Quarter: Demand for Office Space Grew in 3Q, but Falling Employment Points to Slower Growth Ahead

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1 OFFICE NORTHERN VIRGINIA MARKET REPORT Third Quarter: Demand for Office Space Grew in 3Q, but Falling Employment Points to Slower Growth Ahead Updated May MARKET INDICATORS (p) VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE MARKET OVERVIEW During the third quarter, two major factors have kept the office market soft in Northern Virginia. First and foremost, government contractors continued to consolidate in the face of anemic discretionary federal spending. During the quarter, SAIC sold three buildings on their headquarters campus in Tysons Corner for $82.9 million, and leased back all 641,900 square feet of space. Of this space, they will return 425,334 square feet in 2014 and retain just one of the three towers. Leidos, an SAIC spinoff, leased 130,039 square feet at Reston Town Center and will vacate some of the space at the SAIC Tysons Campus. This will result in nearly 300,000 square feet of negative absorption. Other contractors have also committed to significant consolidations. Harris Corporation signed a 161,359-square-foot lease in Reston in order to consolidate several locations, and Northrop Grumman announced that they will vacate Reston Overlook and fold those operations into their campus in Tysons Corner. Secondly, tenants are being more efficient with their space. This has allowed them to lease less space at a higher price per square foot, while spending less total money on rent. Both the private and public sectors have been shrinking their utilization rates by implementing a number of workplace strategies, like telework and hoteling, open floor designs, and collaboration oriented layouts. During the third quarter, the US Fish & Wildlife Service leased 182,721 square feet of space at 5275 Leesburg Pike in the I-395 Corridor submarket. Maintaining approximately the same number of employees, they will be vacating 280,000 square feet of space in the R-B Corridor when they relocate in SUMMARY STATISTICS VACANCY RATE: 15.6% 16.6% ABSORPTION YTD: -1,910,458 SF 6,945 SF DELIVERIES YTD: 779,762 SF 1,825,006 SF UNDER 4,110,335 SF 3,079,238 SF CONSTRUCTION: ECONOMIC OVERVIEW Budget cuts associated with Sequestration and political uncertainty have impacted the Northern Virginia economy. Last quarter, it was reported that overall employment was still increasing and that the office-using sectors were leading the improvement. That shifted during the third quarter. Over the 12 months ending August, total employment fell 1.0 percent to 1.76 million jobs in Northern Virginia, and office-using employment fell 0.4 percent to 792,300 jobs. Most of these job losses have occurred recently. Between the beginning of the year and the end of August, the office-using employment in the Northern Virginia economy decreased 1.9 percent. Mass layoffs associated with the funding of government programs were directly responsible for this decrease. During the 12 month period, the employment in government sectors of the economy fell by 1.6 percent, and professional and business services employment dropped 0.2 percent. Employment gains in technology and information services helped offset some of the losses. These sectors grew 3.0 percent to 40,600 jobs during the time period. ASKING RENTS/SF: $32.38 $

2 MARKET REPORT OFFICE NORTHERN VIRGINIA Per Square Foot SF Thousands 17% 16% 15% 14% SF Thousands ABSORPTION -1,000-1,200 VACANCY RENTAL RATES $40 $35 $30 $25 $20 $15 $ $5 $ DELIVERIES 1, Class A Class B Class C ABSORPTION While most of the Federal Government and its associated contractors have been shrinking their demand for office space, national intelligence agencies have been growing and occupying more space. During the third quarter of, the headquarters of the Director of National Intelligence relocated from Tysons Corner to Reston and occupied the entire 182,424-square-foot building at Sunrise Valley. The building they vacated in Tysons Corner was backfilled by another undisclosed intelligence-related tenant. This one event contributed nearly half of the 375,636 square feet of net absorption recorded during the quarter, and helped push demand into positive territory for the year. Other sectors of the economy also contributed to this quarter s increase. Evolent Health moved into 29,157 square feet at 800 North Glebe Road, while Capitol One continued to expand, occupying an additional 24,656 square feet at 8000 Towers Crescent. Flight to Efficiency continued to funnel demand into Class A Space. During the quarter, Class A net absorption totaled 362,609 square feet, while 12,360 square feet of space was returned to the Class B market. Most of the leases conducted in the third quarter point towards lower absorption in the near future. Of the ten largest leases signed, half were consolidations. Only the ThreatTrack Security s lease at Sunrise Valley Drive will result in positive absorption (78,622 square feet). The remaining four largest leases were renewals. VACANCY With new supply outpacing new demand for space, the overall vacancy rate in Northern Virginia increased from 16.4 percent to 16.6 percent during the quarter. This is the highest it has been since the fourth quarter of With the addition of a number of buildings delivering completely vacant, the largest vacancy rate increase was in Class A space. It rose from 16.0 to 16.3 percent. The Class B vacancy rate remained unchanged at 18.3 percent. The majority of the vacancy is available on a direct basis, as sublease space only accounted for 2.6 percent of the space on the market. However, sublease space has been on the rise, and increased 60 basis points during the quarter. The amount of available sublease space is at the highest level since the metric was first tracked in RENTAL RATES The direct average asking rate decreased during the third quarter, falling from $32.38 to $31.78 per square foot. Realignment of expectations for expensive space in the inner suburbs, coupled with the removal of trophy space in the outer suburbs, helped drive this decrease. As a result, asking rental rates decreased in 21 of the 28 submarkets. Rental rates remained flat in another two. The largest decreases occurred in the Vienna and Rosslyn submarkets, where rates fell $3.44 to $19.43 and $2.92 to $44.20 per square feet, respectively. Asking rates rose in four submarkets with Tysons Corner and Clarendon/Courthouse posting the highest increases. Their direct average asking rates increased $0.79 to $31.97, and $0.64 to $42.28 per square foot, respectively. DELIVERIES AND CONSTRUCTION Developers have become much more cautious when commencing new projects. Going forward, it is expected that some prelease will be in place before a project commences. The only exception will be renovations. As tenants move out, most landlords will modernize and update their buildings in order to appear more favorable in the competition for tenants in the market. At the end of the third quarter, 12 buildings totaling 3.1 million square feet were under construction. Of this space, 48.5% was committed. Only one of the projects being constructed is being built on a purely speculative basis. With no preleasing in place, the 538,092-square-foot building at 1812 North Moore Street in Rosslyn will deliver during the fourth quarter of completely vacant. During the third quarter of, six buildings in four projects delivered, adding 913,906 square feet to the market. The two buildings at Belvoir Corporate Campus and the two buildings at One Loudoun delivered completely vacant. These deliveries added 242,472 and 108,000 square feet of vacant space to the Springfield/Burke and Route 7 Corridor submarkets, respectively. The redevelopment of 1400 Crystal Drive in the Crystal City submarket also completed during the quarter. Decisive Analytics committed to 8.0% of the 308,856-square-foot building. P. 2 COLLIERS INTERNATIONAL

3 MARKET REPORT OFFICE NORTHERN VIRGINIA SIGNIFICANT DELIVERIES Development Pipeline Deliveries, Under Construction ADDRESS SUBMARKET RBA LEAD TENANT 1400 Crystal Drive Crystal City 308,856 Decisive Analytics Belvoir Corporate Springfield/ Campus Burke 242,472 None One Loudoun Route 7 Corridor 108,000 None Total Development RBA (Thousands SF) Sycolin Rd Sunrise Valley Dr 9321 Sanger St 2511 Jefferson Davis Hwy 5680 King Centre Dr Penrose Blvd 1500 Cornerside Blvd 1400 Crystal Dr Lee Rd 7951 Loisdale Rd 7961 Loisdale Rd Exchange St Exchange St 601 S Clarke St 4040 N Fairfax Dr Richmond Hwy 6420 Beulah St 1812 N Moore St 3001 Washington Blvd Washington Blvd 3580 Joseph Siewick Dr 7900 Tysons One Pl Eisenhower Ave 3443 Historic Sulley Way Jones Branch Dr Deliveries Under Construction Availability SIGNIFICANT CONSTRUCTION PROJECTS PROJECT SUBMARKET RBA DELIVERY DATE LEAD TENANT 1812 N. Moore Street Rosslyn 538,092 None Monument View Crystal City 329,000 Boeing Gunston Commerce Center (BTS) Springfield/Burke 40,000 Five Guys Webb Building (Renovation) Ballston 184,215 None 6420 Beulah Street Springfield/Burke 35,002 New Associates 3001 & 3003 Washington Boulevard Clarendon/Courthouse 302, Center for Naval Analysis (CNA) 3580 Joseph Siewick Drive Fairfax Center 112, Medical Office Tysons Tower Tysons Corner 524, Intelsat, Deloitte Hoffman Tower 1 (Renovation) Eisenhower Avenue 328, None Dulles Discovery BD4 (BTS) Route 28 Corridor 374, Central Intelligence Agency (CIA) 7940 Jones Branch Drive Tysons Corner 308, LMI P. 3 COLLIERS INTERNATIONAL

4 MARKET REPORT OFFICE NORTHERN VIRGINIA RECENT LEASE TRANSACTIONS TENANT ADDRESS SUBMARKET SIZE SF TYPE Bureau of Diplomatic Security 1801 N. Lynn Street Rosslyn 343,311 Renewal Department of Defense (DoD) 5611 Columbia Pike I-395 Corridor 244,248 Renewal US Fish & Wildlife Services 5275 Leesburg Pike I-395 Corridor 182,721 Relet/Consolidation Harris Corporation 2235 Monroe Street Reston 151,359 Relet/Consolidation SALES ACTIVITY During the third quarter of, two transactions were closed for office properties 10,000 square feet and greater. Interestingly enough, both were user sales and included a lease back prevision. Meridian purchased three buildings totaling 618,704 square on SAIC s corporate campus in Tysons Corner. The buyer paid $84 million for the property. SAIC will stay in one of the buildings for an extended term. Likewise, Bernstein Management Company purchased the 74,822-square-foot office building at 2901 Telestar Court from the National Association of Insurance & Financial Advisors for $16 million or $ per square foot. The seller leased back 26,000 square feet. This, coupled with existing leases in place, allowed the property to trade at a 7.6% cap. LOOKING FORWARD The political uncertainty stemming out of Washington, DC has, and will, continue to impede growth in Northern Virginia. The heavy handed cuts associated with the Sequester have already impacted the office-using side of the economy. With the Federal Government shutdown in October and political brinksmanship over another debt ceiling debate, uncertainty will continue to create headwinds to any office recovery in in Northern Virginia. Moody s has already questioned if a number of major defense contractors have enough reserves to weather a prolonged government shut down. Some of the companies on the list include SRA International, Artel, TASC, Lockheed Martin and Booz Allen Hamilton. Even where the economy is growing, flight to efficiency and the associated reduction in utilization rates will slow demand growth for office space. Tenants will continue to save money by shrinking their leasing footprint and moving into higher quality space. With development activity still high, vacancy rates are expected to continue to increase. Landlords will continue to offer historically high incentives to attract and retain tenants, especially for assets that are neither as well positioned nor have as many amenities as more desirable locations. NORTHERN VIRGINIA EXISTING PROPERTIES VACANCY ACTIVITY ABSORPTION RENTS Submarket/Class Bldgs RBA Direct NORTHERN VIRGINIA CLASS A TOTALS Sublease Total Total Prior Qtr Leasing Activity SF* Net Absorption Current Qtr SF Net Absorption YTD Weighted Avg Asking Lease Northern Virginia ,681, % 1.6% 16.3% 16.0% 2,649, , ,517 $36.03 NORTHERN VIRGINIA CLASS B TOTALS Northern Virginia ,767, % 0.8% 18.3% 18.3% 745,564 (12,360) (233,366) $29.59 NORTHERN VIRGINIA CLASS C TOTALS Northern Virginia ,064, % 0.4% 13.1% 13.2% 12,342 25,387 (18,206) $24.55 NORTHERN VIRGINIA CLASS A,B,C TOTALS Northern Virginia 2, ,513, % 1.1% 16.6% 16.4% 3,407, ,636 6,945 $31.78 *Leases 10,000 sf & greater P. 4 COLLIERS INTERNATIONAL

5 MARKET REPORT OFFICE NORTHERN VIRGINIA FAIRFAX COUNTY NORTHERN VIRGINIA EXISTING PROPERTIES VACANCY ACTIVITY ABSORPTION RENTS Submarket/Class Bldgs RBA Direct Sublease Total Total Prior Qtr Leasing Activity SF Net Absorption Current Qtr SF Net Absorption YTD Weighted Avg Asking Lease ANNANDALE A 1 200, % 0.9% 15.3% 15.3% $31.50 B 8 381, % 1.5% 10.9% 12.5% - 6,335 7,215 $23.40 C 44 1,239, % 0.0% 10.6% 10.0% - (7,249) (7,528) $22.07 Subtotal 53 1,821, % 0.4% 11.2% 11.1% - (914) (313) $24.36 FAIRFAX A 28 4,439, % 3.0% 13.2% 13.2% 37,429 (86) (79,843) $30.21 B 78 4,686, % 0.8% 18.2% 18.2% 15,463 (2,441) 27,298 $24.85 C 88 2,479, % 0.2% 7.5% 7.7% - 6,275 1,290 $19.35 Subtotal ,605, % 1.5% 14.0% 14.0% 52,892 3,748 (51,255) $26.73 FALLS CHURCH A 2 128, % 0.0% 1.5% 1.5% - - 1,905 $29.00 B 34 1,576, % 3.1% 19.8% 14.9% - (77,748) (23,907) $24.79 C , % 0.2% 14.1% 13.1% - (7,126) 18,553 $20.56 Subtotal 69 2,408, % 2.1% 17.2% 13.6% - (84,874) (3,449) $23.64 MCLEAN A - - n/a n/a n/a n/a n/a B , % 2.6% 11.2% 10.8% - (2,206) (13,181) $34.97 C 47 1,048, % 0.4% 8.2% 7.5% - (8,327) (13,435) $27.63 Subtotal 60 1,547, % 1.1% 9.2% 8.5% - (10,533) (26,616) $29.59 HERNDON A 47 7,940, % 1.6% 11.5% 12.0% 27,771 36, ,837 $28.97 B 51 3,201, % 1.4% 17.4% 17.8% 30,263 11,969 (29,067) $23.05 C , % 0.0% 11.8% 12.3% - 3,700 6,091 $17.97 Subtotal ,928, % 1.4% 13.1% 13.6% 58,034 51, ,861 $25.93 MERRIFIELD A 29 5,492, % 2.8% 15.9% 14.9% 40,402 (70,781) (288,215) $32.83 B 31 3,167, % 0.8% 11.7% 11.1% 26,000 (15,984) 17,644 $27.13 C 43 1,279, % 0.0% 11.3% 10.2% - (15,181) (972) $25.78 Subtotal 103 9,939, % 1.8% 14.0% 13.1% 66,402 (101,946) (271,543) $30.21 SPRINGFIELD A 16 2,358, % 7.0% 38.5% 32.2% - 14,400 (41,399) $39.63 B 43 1,988, % 0.3% 12.8% 13.2% 57,114 7,631 (7,170) $22.09 C 80 2,501, % 0.2% 11.8% 11.7% 12,342 (3,393) (32,828) $21.11 Subtotal 139 6,848, % 2.6% 21.3% 18.7% 69,456 18,638 (81,397) $27.53 TYSONS CORNER A 49 12,347, % 1.2% 9.7% 10.7% 838, , ,314 $41.78 B ,276, % 0.8% 19.0% 19.2% 194,517 28,097 50,873 $28.11 C 39 2,364, % 0.0% 25.3% 26.7% - 32,754 14,388 $23.12 Subtotal ,987, % 0.9% 15.4% 16.1% 1,033, , ,575 $31.97 VIENNA A 2 406, % 0.0% 13.4% 12.8% - (2,518) (2,518) n/a B 4 367, % 0.0% 1.9% 2.4% - 1,830 2,985 $8.00 C , % 0.0% 24.9% 26.7% - 14,095 7,273 $22.86 Subtotal 38 1,542, % 0.0% 16.4% 17.3% - 13,407 7,740 $19.43 FAIRFAX COUNTY A ,968, % 2.0% 15.7% 15.6% 1,807, , ,993 $33.42 B ,641, % 1.0% 17.7% 17.6% 703,898 (31,463) (43,711) $26.58 C ,428, % 0.4% 14.5% 14.9% 12,342 66,044 33,385 $21.85 Subtotal 1, ,037, % 1.4% 16.2% 16.2% 2,523, , ,667 $28.89 P. 5 COLLIERS INTERNATIONAL

6 MARKET REPORT OFFICE NORTHERN VIRGINIA LOUDOUN COUNTY ALEXANDRIA COUNTY ARLINGTON COUNTY NORTHERN VIRGINIA EXISTING PROPERTIES VACANCY ACTIVITY ABSORPTION RENTS Submarket/Class Bldgs RBA Direct Sublease Total Total Prior Qtr Leasing Activity SF Net Absorption Current Qtr SF Net Absorption YTD Weighted Avg Asking Lease R-B CORRIDOR A 60 15,117, % 1.3% 11.8% 12.0% 730,876 38,567 (124,323) $45.18 B 44 7,251, % 0.3% 21.7% 20.2% 11,138 (104,136) (182,450) $40.54 C 30 1,459, % 0.9% 13.3% 11.7% - (22,716) (18,566) $36.53 Subtotal ,828, % 1.0% 14.9% 14.5% 742,014 (88,285) (325,339) $42.40 CRYSTAL/PENTAGON CITIES A 18 5,841, % 0.9% 27.2% 23.7% 56,475 31,077 73,832 $43.04 B 12 3,453, % 1.2% 28.3% 27.6% (12,480) $40.65 C 18 3,985, % 0.5% 14.2% 14.1% - (3,671) (25,819) $34.42 Subtotal 48 13,279, % 0.8% 23.6% 21.9% 56,475 28,090 35,533 $41.11 ARLINGTON COUNTY A 81 21,484, % 1.2% 16.2% 15.3% 27,434 69,644 (152,542) $44.20 B 59 10,785, % 0.6% 23.8% 22.8% 30,528 (101,305) (208,431) $40.48 C 63 6,178, % 0.5% 13.0% 12.5% - (27,938) (58,946) $34.44 Subtotal ,448, % 0.9% 17.8% 17.0% 57,962 (59,599) (419,919) $41.70 OLD TOWN ALEXANDRIA A 35 3,580, % 2.4% 17.1% 16.6% 27,434 (18,015) 32,605 $36.01 B 101 4,053, % 0.4% 11.9% 12.9% 10,010 44,069 (675) $30.29 C 51 1,103, % 0.2% 7.7% 6.3% - (15,608) (12,313) $25.98 Subtotal 187 8,737, % 1.2% 13.5% 13.6% 37,444 10,446 19,617 $32.58 EISENHOWER AVE/I-395 CORRIDOR A 25 7,570, % 0.1% 22.5% 22.9% 200,458 30,815 (323,388) $34.58 B 44 4,792, % 0.6% 30.1% 30.7% 275,766 29,407 (27,261) $31.30 C 51 1,645, % 0.2% 9.3% 9.5% - 3,717 (1,216) $22.34 Subtotal % 0.3% 23.5% 24.0% 476,224 63,939 (351,865) $31.92 ALEXANDRIA A 52 8,823, % 1.0% 16.2% 16.3% 27,434 4,172 (214,328) $35.56 B 134 7,335, % 0.3% 20.2% 21.2% 30,528 71,869 2,918 $29.63 C 76 1,788, % 0.4% 10.7% 10.3% - (6,639) 4,733 $24.07 Subtotal ,947, % 0.7% 17.3% 17.7% 57,962 69,402 (206,677) $31.10 EASTERN LOUDOUN A 58 6,517, % 0.4% 23.3% 21.6% 27,501 (30,506) (103,235) $25.38 B 129 7,035, % 0.4% 12.5% 13.0% - 35,188 (18,566) $19.15 C , % 0.0% 4.2% 4.2% ,465 $16.29 Subtotal ,138, % 0.3% 17.2% 16.6% 27,501 4,732 (120,336) $22.41 LOUDOUN A 68 7,168, % 0.3% 22.5% 21.3% 27,501 1,585 (67,647) $25.58 B 145 7,534, % 0.3% 13.0% 13.7% - 53,562 12,405 $19.35 C 56 1,419, % 0.2% 8.4% 7.6% - (11,080) (12,140) $21.72 Subtotal ,121, % 0.3% 16.8% 16.5% 27,501 44,067 (67,382) $22.63 P.W. CO. PRINCE WILLIAM COUNTY A 19 1,237, % 3.2% 12.9% 13.8% - 10,938 27,041 $26.62 B 106 3,470, % 0.5% 15.7% 15.6% - (5,023) 3,453 $21.56 C 105 2,250, % 0.4% 8.9% 9.2% - 5,000 14,762 $18.95 Subtotal 230 6,958, % 1.0% 13.0% 13.2% - 10,915 45,256 $21.76 P. 6 COLLIERS INTERNATIONAL

7 MARKET REPORT KEY TERMS OFFICE NORTHERN VIRGINIA DEFINITIONS OF KEY TERMS FOUND IN THIS REPORT Deliveries: Buildings that complete construction during a specified period of time. In order for space to be considered delivered, a certificate of occupancy must have been issued for the property. Direct Space: Space that is being offered for lease directly from the landlord or owner of a building, as opposed to space being offered in a building by another tenant (or broker of tenant) trying to sublet a space that has already been leased. Existing Inventory: The square footage of buildings that have received a certificate of occupancy and are able to be occupied by tenants. It does not include space in buildings that are either planned, under construction or under renovation. Leasing Activity: The volume of square footage that is committed to and signed under a lease obligation for a specific building or market in a given period of time. It includes direct leases, subleases and renewals of existing leases. It also includes any pre-leasing activity in planned, under construction, or under renovation buildings. Rentable Building Area (RBA): The total square footage of a building that can be occupied by, or assigned to a tenant for the purpose of determining a tenant s rental obligation. This report tracks buildings with 10,000 square feet or more of speculative space. Includes competitive space in Class A, B and C single and multitenant buildings. Excludes buildings that were built with the intent to house only medical users and government owner-occupied buildings. Sublease Space: Space that has been leased by a tenant and is being offered for lease back to the market by the tenant with the lease obligation. Sublease space is sometimes referred to as sublet space. Vacant Space: Space that is not currently occupied by a tenant, regardless of any lease obligation that may be on the space. Inventory: Includes all existing multi- or single-tenant leased and owner-occupied office properties greater than or equal to 10,000 square feet (net rentable area). Does not include government-owned buildings. 482 offices in 62 countries on 6 continents United States: 140 Canada: 42 Latin America: 20 Asia: 38 EMEA: 85 Australia/New Zealand: 157 $2 billion in annual revenue 1.12 billion square feet under management Over 13,500 professionals RESEARCHERS: Robert Hartley TEL robert.hartley@colliers.com Andrew Wellman TEL andrew.wellman@colliers.com Net Absorption: The net change in occupied space over a given period of time. Unless otherwise noted, Net Absorption includes direct and sublease space. Weighted Average Asking Rental s: Weighted by the total square feet available for direct lease. Data is based on Full Service Gross rents, and includes all costs associated with occupying the space, including taxes, insurance, maintenance, janitorial service and utilities. Reports on an annual per square foot basis. Accelerating success.