Q2:11. Transwestern Outlook WASHINGTON, D.C.

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1 11 Office Property Owners Invest in Renovating Older Product to Class A; Vacancy Edges Up as Rents Edge Down; Investment Sales Strong and Net Absorption Notable The District of Columbia office market experienced stable market conditions during the 1st half of. Although net absorption was positive during the past six months, overall vacancy edged up 10 basis points from year-end 2010 due to deliveries. Despite steady leasing activity, tenants vacating space acted as a drag on net absorption. Effective rents edged down during the past six months, as concession packages remained elevated. Better buildings in stronger submarkets are seeing effective rent growth. Property owners looking to compete with Class A product are planning to renovate older stock to attract tenants. We expect renovations to increase over the next 12 months delivering during 2013/2014 when the market transitions to landlord favor. Investment sales continue to excel as investors are scooping up quality, well located assets in the District. Second Quarter Market Highlights: Net absorption: 586,000 SF during the 1st half, compared to 2.3 million SF in the 1st half of 2010 and 5.1 million SF during all of Overall vacancy rate: 8.6%, down from 10.0% one year ago. Direct vacancy rate: 7.5%, down from 8.8% one year ago. Sublease space: Increased 126,000 SF during the 1st half. Sublease space is just 1.1% of the inventory. Pipeline (U/C and U/R): 2.6 million SF, down from 3.2 million SF one year ago. Pipeline pre-lease rate: 40%, down from 43% one year ago. Effective Rents: Down 0.8%, compared to declining 7.0% during all of Investment sales: $2.1 billion ($498/SF) during the 1st half, compared to $266 million ($423/SF) in the 1st half of SECOND QUARTER

2 OFFICE NET ABSORPTION District of Columbia 1997 Through First Half Net Absorption in 000s of SF 6,000 5,000 4,000 3,000 2,000 1, * Source: Delta Associates; June. 15-Year Annual Absorption Average = 2.0 Million SF *First half. NET ABSORPTION The District of Columbia absorbed 239,000 SF during the 2nd quarter of, compared to 348,000 SF during the 1st quarter. This compares to the 15-year quarterly average of 496,000 SF. During the 1st half of, net absorption totaled 586,000 SF, compared to 2.3 million SF during the 1st half of Net absorption totaled 5.1 million SF during 2010, well above the 2.0 million SF 15-year annual average, as GSA took large blocks of space off the market. Absorption was boosted during the 1st half of by a pre-leased delivery and several large leases Pennsylvania Avenue, NW delivered 433,000 SF at 83% preleased in the West End submarket. NET ABSORPTION OF OFFICE SPACE District of Columbia Submarkets First Half West End Southwest Cap Hill/Riverfront/NoMa Uptown Georgetown East End CBD Source: Delta Associates; June. GROSS LEASING ACTIVITY District of Columbia 2000 Through First Half Gross SF Leased (in millions) , , , , , ,000 Square Feet * Source: CoStar, Delta Associates; June. 15 -Year Average = 10.0 Million SF *Annualized estimate. Note: Data updated each quarter. Federal Housing Finance Agency leased 335,000 SF at 400 7th Street, SW in the Southwest submarket. Mathematica Policy Research leased 125,000 SF at st Street, NE in the NoMa submarket. Holland & Knight leased 123,000 SF at th Street, NW in the CDB submarket. However, a handful of move-outs in the CBD and East End submarkets negatively impacted the net absorption total. Howrey vacated 333,000 SF at 1299 Pennsylvania Avenue, NW in the East End submarket. Bureau of Land Management vacated 94,000 SF at 1620 L Street, NW in the CBD submarket. Department of Justice vacated 79,000 SF at 1100 Vermont Avenue, NW in the East End submarket. Ross, Dixon & Bell vacated 49,000 SF at 2001 K Street, NW in the CBD submarket. Sublease space represents 1.1% of the District s standing inventory, with 1.3 million SF of sublease space on the market. Sublease space availability increased 69,000 SF during the 2nd quarter of, after rising 57,000 SF during the 1st quarter. Sublease space decreased 353,000 SF during all of Net absorption of Class A space totaled 564,000 SF during the 2nd quarter of, compared to 252,000 SF during the 1st quarter. During the 1st half of, Class A net absorption totaled 817,000 SF, compared to 2.2 million SECOND QUARTER

3 OFFICE LEASING ACTIVITY BY SECTOR District of Columbia SF during the 1st half of Class A net absorption totaled 3.9 million SF during % 80% Tech and Telecom Tenants with cash and demand for office space are taking the opportunity while rental rates remain low to upgrade to Class A space. For instance: % of Space Leased 60% 40% 20% Government Associations Professional* Other Rothwell, Figg, Ernst & Manbeck inked a deal for 49,000 SF of Class A space at th Street, NW. This tenant will relocate from Class B space at 1425 K Street, NW. 0% Gross Leasing Activity (SF) 10.2 M 7.5 M 8.7 M 9.8 M 11.0 M *Legal, Financial, Business Services. Source: CoStar, Delta Associates; June. Note: Includes renewals. Navigant Consulting inked a deal for 74,000 SF of Class A space at th Street, NW. This tenant will relocate from Class B space at 1801 K Street, NW. GROSS LEASING BUILDINGS WITH CONTIGUOUS BLOCKS OF AVAILABLE SPACE District of Columbia June Number of Office Buildings ,000 SF 20,000 SF 50,000 SF 100,000 SF 150,000 SF Minimum Size of Contiguous Blocks of Space Source: CoStar, Delta Associates; June. Note: Includes buildings under construction or renovation. BLOCKS OF AVAILABLE SPACE OVER 100,000 SF TOP FIVE BUILDINGS District of Columbia June Address SF Submarket 1015 Half Street, SE 414,000 Capitol Riverfront 400 C Street, SW 392,000 Southwest 1801 K Street, NW 200,000 CBD 64 New York Avenue, NE 356,000 NoMa 1299 Penn Avenue, NW 294,000 East End Source: CoStar, Delta Associates; March We estimate that gross leasing activity will total 11.4 million SF in, above the 15-year average of 10.0 million SF, as private leasing activity picks up pace. The most notable deal during the 2nd quarter was the Skadden, Arps, Slate, Meagher & Flom renewal/expansion of 415,000 SF at 1440 New York Avenue, NW, th Street, NW, and 1420 New York Avenue, NW in the East End. The most notable non-renewal was Holland & Knight taking 123,000 SF off the market at th Street, NW in the CBD. Government leasing activity remained elevated during 2010 at 46% of all SF leased (inclusive of renewals) in the District during the year, compared to 48% during 2009, and 30% during Comparably, leasing from professional businesses was 31% during 2010, the same as 2009, but a decline from 40% in We expect the share of government leasing to decline during. Leasing activity from the private sector should pick up pace during, as 10,500 new jobs are projected to be added to the District during. There are 256 buildings with blocks of available contiguous space over 10,000 SF at June, down from 271 one year ago. There are 29 buildings with blocks of available space over 100,000 SF at June, down from 40 buildings one year ago. The Federal government was active in taking large blocks of space off the market in the emerging submarkets during 2010 taking advantage of lowered rent rates and generous concession packages. The largest block of available space in the District of Columbia is 414,000 SF at 1015 Half Street, SE in the Capitol Riverfront submarket. The project SECOND QUARTER

4 DIRECT OFFICE VACANCY RATE District of Columbia 1997 Through First Quarter 10% 9% is under construction, after stalling due to financial woes, and should deliver during the summer of. Also notable is 400 C Street, SW with 392,000 SF available. The Federal government currently leases this space and plans to vacate by the start of Direct Office Vacancy Rate 8% 7% 6% 5% 4% 3% 2% MY VACANCY The District s overall vacancy rate edged up to 8.6% at mid-year, from 8.4% the quarter prior, but is down from 10.0% one year ago. The direct vacancy rate in the District is 7.5% at June, up from 7.4% three months prior, but is down from 8.8% one year ago. Source: CoStar, Delta Associates; June. VACANCY RATES AND VACANT SPACE (ALL CLASSES) District of Columbia March 2010 vs. March The District s overall Class A vacancy rate decreased to 9.3% at June, from 9.5% three months prior, and 11.5% one year ago. The Class A direct vacancy rate is 8.1%, down from 8.3% three months prior, and 10.3% one year ago. June 2010 June Vacancy Rate Direct 8.8% 7.5% Sublet 1.2% 1.1% Vacant Space (Millions of SF) Direct Sublet The emerging submarkets, which include Capitol Riverfront, NoMa and Southwest, have a direct vacancy rate of 7.5% at June, down notably from 15.5% one year ago. The vacancy rate has declined quickly in the emerging submarkets, as the government has taken large blocks of space off the market. This has positioned these submarkets as competitive players, with 8.3 million SF of office space remaining planned for the NoMa submarket and 8.7 million SF in Capitol Riverfront. Source: CoStar, Delta Associates; March. NET OFFICE ABSORPTION AND VACANCY BY SUBMARKET District Of Columbia Inventory (SF) Net Absorption (SF) 1 st Quarter Vacancy Submarket 1 st Qtr Q1 Direct w/sublet CBD 39,598,267 (368,000) 282, ,000 (396,000) 7.9% 9.2% East End 44,620, ,000 (183,000) 737,000 (357,000) 7.5% 8.8% Capitol Hill 4,741,747 10, ,000 35,000 14, % 6.5% NoMa 10,859,411 (21,000) 494,000 1,392, , % 9.2% Cap. Riverfront 3,353,345 98, , ,000 40, % 7.0% Southwest 14,322, , ,000 1,992, , % 6.6% Georgetown 2,964,995 (71,000) (41,000) 68,000 (15,000) 9.2% 10.3% West End 4,106,385 7,000 (18,000) 165, , % 8.5% Uptown 8,350,990 (33,000) (230,000) (66,000) 205, % 8.1% District 132,918, , ,000 5,075, , % 8.6% Source: CoStar, Delta Associates; March. SECOND QUARTER

5 DIRECT OFFICE VACANCY RATE District of Columbia March Direct Office Vacancy Rate 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 7.7% OFFICE SPACE UNDER CONSTRUCTION OR RENOVATION District of Columbia March Submarket SF % Pre-Leased East End 748,000 22% CBD 739,000 48% Capitol Riverfront 414,000 0% NoMa 330, % Capitol Hill 286,000 46% Uptown 121,000 60% Total: 2,638,000 40% Source: CoStar, Delta Associates; June. EFFECTIVE RENT CHANGES BY CLASS OF SPACE Downtown Washington December 2010 to June Submarket Rent Change Class A -0.7% Class B -0.9% Class C -1.0% Source: CoStar, Delta Associates; June. 7.5% 7.6% CBD/East End Emerging Submarkets Georgetown/West End Source: CoStar, Delta Associates; June. District of Columbia Average = 7.5% Note: Emerging Submarkets include Capitol Riverfront, NoMa, and Southwest. CONSTRUCTION There is 2.6 million SF of office space under construction or renovation in the District at June, down from 3.2 million SF one year ago. 40% of space under construction or renovation at June is pre-leased, compared to 43% one year ago. Two projects started construction during the 2nd quarter of. Hines broke ground on 463,000 SF in two buildings within the CityCenterDC project in the East End. The two office buildings will be a part of a large mixed-use project which upon completion will include 335,000 SF of retail, up to a 400-room hotel, 674 residential units, and an additional 500,000 SF of office space. Three projects started on 526,000 SF during the 1st quarter of. Starts during the 1st half of totaled 989,000 SF, surpassing the 911,000 SF of starts during all of With tenant demand focused on Class A assets, coupled with a dwindling stock of available large blocks of new space, property owners are focusing efforts to renovate Class B space to compete with the Class A market. We expect renovations on older product to ramp up, particularly in the CBD and East End, over the next 12 months, with delivery plans in 2013/2014 when the market transitions to landlord favor. For instance: Hines plans to renovate 307,000 SF of Class B space at 2100 M Street NW in the CBD once a pre-lease is inked. Hines will add 83,000 SF in three new stories to the asset. Brookfield plans to start renovations by year-end on 229,000 SF of Class B space at 2001 M Street, NW. The company plans to deliver the project by MRP Realty plans to start renovations by year-end on 94,000 SF of Class B space at 624 9th Street, NW in the East End submarket adding an additional 9,000 SF. By 2012, Hoffman and Madison Marquette plan to break ground on Phase I of The Wharf in the Southwest submarket. Delivery of the 1st phase is anticipated by The Graduate School USA has inked a 200,000 SF deal at the new mixed-use development site. Upon complete build-out, the SECOND QUARTER

6 OFFICE CONSTRUCTION STARTS District of Columbia 2002 Through First Quarter 8,000 OVERALL VACANCY RATE VS. EFFECTIVE RENT CHANGE District of Columbia 16% Square Feet in 000's 7,000 6,000 5,000 4,000 3,000 2,000 1, * Overall Vacancy Rate 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% Rent Equilibrium Zone = 7.4% to 7.6% -6% Overall Vacancy Effective Rent Growth Source: CoStar, Delta Associates; June. *First half. -8% Source: CoStar, Delta Associates; June. project will include 1,200 residential units, 400,000 SF of office space, 200,000 SF of retail, and 625 hotel rooms. One project delivered during the 2nd quarter of. Boston Properties delivered 433,000 SF at 2200 Pennsylvania Avenue, NW in the West End submarket. During the 1st half of, 573,000 SF delivered at 81% pre-leased, compared to 2.0 million SF delivering at 71% pre-leased during the 1st half of A total of 3.2 million SF delivered during all of 2010, coming online at 71% pre-leased. PROJECTED SUPPLY V. DEMAND We project overall vacancy will edge down in the District from 8.6% today, to 8.4% by June We anticipate new supply will be in balance with demand through mid-year We believe the vacancy rate will tick down in the District of Columbia over the next two years, as the private sector ramps up leasing activity and the Federal government continues to take a handful of large blocks of space off the market albeit not as significantly as in Vacancy could edge up slightly during the balance of, as several projects are due to deliver to the market with subpar pre-lease rates. Most notably, 1015 Half Street, SE is projected to deliver 414,000 SF by year-end and is currently 0% preleased. In addition, many tenants who leased space during the downturn did so to consolidate not expand space. This could have an impact on vacancy during the remaining six months of as tenants vacate old space consolidating under their new leases. Regardless, with limited groundbreakings, demand gradually will be able to catch up to new supply over the next 24 months. We look to 2013 for a return to more normalized supply/ demand balance. RENTS Effective office rents, for all classes of space in Downtown Washington edged down 0.8% during the 1st half of. This decline is modest, compared to a decline of 7.0% during all of Class B and Class C effective rents declined at a faster clip SELECTED INVESTMENT SALES District of Columbia March Address/Submarket Penn Ave., NW East End Waterfront Station Southwest 1101 K. Street, NW East End Price/Buyer $615 million ($904/SF) Wells Real Estate $356 million ($561/SF) USAA Real Estate Company $200 million ($643/SF) Rockefeller Group Source: RCA, Delta Associates; June. SECOND QUARTER

7 during the 1st half of, as tenants are demanding Class A space. However, Class A effective rents continued to slip during the 1st half of, as demand remains light compared to the robust part of the business cycle and a handful of large blocks remain on the market. Despite the slight decline during the past six months, rent deterioration is ebbing. Property owners provided generous concession packages during 2010 in order to attract and keep tenants, as demand was light from private sector tenants and the amount of available space was elevated. Concession packages remained elevated during the 1st half of. However, we believe the amount offered will stabilize during the balance of. This, coupled with rising asking rents, will cause the change in effective rent during to be minimal Districtwide. Better buildings in stronger submarkets will outperform these city-wide averages especially trophy properties, which always hold up better during transition periods in the market. As the vacancy rate gets closer to the rent equilibrium zone during 2012, a zone where rents tend to neither rise nor fall, landlords will be eager to push rents up and limit concessions. We expect effective rents to increase 1.5% to 2.5% during 2012 despite vacancy remaining slightly elevated. Thereafter we expect rents to increase at or above the long-term average. INVESTMENT SALES Investment sales volume totaled $900 million during the 2nd quarter of, compared to $1.2 billion during the 1st quarter. During the 1st half of, sales totaled $2.1 billion, compared to $266 million during the 1st half of Sales volume totaled $2.9 billion during all of 2010 with the bulk of transactions closing during the second half of the year. Interest in quality, well-located District assets remains strong. The most notable deal of the 2nd quarter was the purchase of Waterfront Station at 1100/1101 Fourth Street, SW in the Southwest submarket. USAA Real Estate Company purchased this asset for $561/SF. The average sales price for transactions closing during the 1st half of was $498/SF, the same level achieved for all sales SECOND QUARTER CAP RATES FOR CORE OFFICE ASSETS District of Columbia 2002 Through January Cap Rate 9% 8% 7% 6% 5% Source: Real Capital Analytics, graphic by Delta Associates; June. that closed during The average sales price remains flat compared to 2010, despite Market Square trading for $904/SF, as several Class B deals were purchased during the past six months. Some of these Class B assets were purchased with renovation in mind. For instance, American Real Estate Partners purchased 1140 and th Street, NW for $40 million ($360/SF) with plans to upgrade this space to Class A in the near-term. Core cap rates, on a 12-month trailing basis, were 6.2% in April, according to Real Capital Analytics. This is a drop of 150 basis-points in the past year. With low interest rates and the solid fundamentals of the Washington metro area, we expect demand for District assets to remain strong during as equity-laden investors take advantage of this market putting continued upward pressure on pricing. Any further decline in cap rates during is likely to be modest. However, trophy assets will continue to trade at lower cap rates. Cap rates for recent Class A trades have been in the 5.0% range. Of note, Market Square traded at a 4.5% cap rate. LAND SALES Note: On a 12-month trailing basis. There were two notable office land sales, totaling $73.4 million, during the 1st half of. Notably, Skanska purchased 1.5 acres for $41.2 million at First and M Streets, NE in the NoMa submarket. The company is planning a 680,000 SF office project or a mix of office and hotel for the site.

8 We expect land sales in the District to pick up pace during the balance of. Although the development climate should remain soft this year compared to robust years in the business cycle, developers will be looking to purchase land planning for the next round of development and delivering during 2013 and beyond, when the market transitions back to landlord favor. DISTRICT OF COLUMBIA OFFICE MARKET OUTLOOK We expect the District s office market to continue to improve during the balance of and beyond. The leasing activity by the Federal government has improved market conditions. However, this activity should remain light during, as compared to 2010, as fewer proposals for new space have been submitted to Congress. We expect the private sector to increase its share of leasing during the balance of. However leasing will remain restrained by this sector as shadow space is used first and some tenants look to right-size office space after downsizing in staff. We project vacancy will edge down to 8.4% by June 2013 from 8.6% today. However, vacancy could inch up during the remainder of as several projects deliver at below-average pre-lease rates. Thereafter, we expect vacancy to edge down to more normalized levels by 2013/2014. We believe the change in effective rents will be minimal during on a District-wide basis, as property owners are increasing asking rents and concession packages are stabilizing now that several large blocks of space have been taken off the market. Better buildings in stronger submarkets will outperform these city-wide averages especially trophy properties, which always hold up better during transition periods in the market. Overall, the outlook for the District remains positive, as the area currently retains one of the lowest vacancy rates and the most premier space options for tenants. The District also tops the list of investment targets for foreign and domestic buyers alike. The District Flex/Industrial Market: Stabilizing Conditions The District s flex/industrial market experienced improving conditions during the 1st half of. Net absorption of flex/ industrial space totaled positive 120,000 SF during the past six months, compared to negative 64,000 SF during all of The 10-year annual average absorption is negative 67,000 SF. The District s overall flex/industrial vacancy rate decreased to 12.5% at mid-year, from 13.5% at year-end 2010, and 13.4% one year ago. The direct vacancy rate was 12.5% at June. There are no notable projects under construction or renovation in the District at mid-year. We do not expect any notable groundbreakings in the near-term, as market conditions remain soft. However, we do anticipate two flex/industrial buildings to be converted to alternative uses in the near-term. National Public Radio demolished 1111 N. Capitol Street during the 1st half of and is currently constructing a 450,000 SF office project. B&B Realty purchased 50 Florida Avenue, NE, a 62,000 SF warehouse building in NoMa, and has plans to redevelop the site into a 300,000 SF residential building. We expect developers to redevelop flex/industrial space in the District to other uses in the near-term, particularly in the emerging submarkets of NoMa and Capitol Riverfront. Flex/industrial rents declined 1.7% in the District of Columbia during the 1st half of, after declining 2.4% during Flex/warehouse rents declined 2.1% during the past six months and flex/r&d rates experienced a rise of 1.4%, as there is limited space available within this product type. We expect the District s flex/industrial market to experience modestly improving conditions during the balance of. Although demand will remain light, we expect it will be enough to push overall vacancy from 12.5% today to 10.8% by June 2012, as the economy slowly improves. Although we expect vacancy to edge down over the next year, rents should decline by 1.5% to 2.5% in, as vacancy remains elevated. SECOND QUARTER

9 Outlook is published quarterly by Delta Associates, the Research Affiliate of Transwestern Commercial Services, the Washington/ Baltimore metropolitan area s largest full service real estate firm. Every effort has been made to ensure accuracy; however, Transwestern Commercial Services is not responsible for any errors or omissions. REGIONAL HEADQUARTERS 6700 Rockledge Drive Suite 400A Bethesda, MD WASHINGTON, DC 1700 K Street, NW Suite 600 Washington, DC NORTHERN VIRGINIA 8614 Westwood Center Drive Suite 800 Vienna, VA BALTIMORE-WASHINGTON CORRIDOR 8820 Columbia 100 Parkway Suite 310 Columbia, MD DELTA ASSOCIATES 500 Montgomery Street Suite 600 Alexandria, VA