Market Report. Washington, DC 4th Quarter cushmanwakefield.com

Transcription

1 Market Report Washington, DC 4th Quarter 2017 cushmanwakefield.com

2 Contents DC Metropolitan Area Overview...3 Washington, DC & Map Core (CBD/East End) Capitol Hill/NoMa...9 West End/Georgetown...10 Southwest/Capitol Riverfront Appendix...13 Tables Methodology & Definitions...23 About Cushman & Wakefield...24 Cushman & Wakefield 2

3 Washington, DC Metropolitan Area The past 12 months proved to be another strong year for economic performance in the Washington, DC metropolitan region (DC metro). For a third straight year, job growth far exceeded the historical average, adding 56,300 nonfarm payroll positions in 2017 only slightly off the 2015 and 2016 totals of 57,000 per year. Job growth was led by the office-intensive Professional and Business Services sector, which grew by 16,300 jobs in Job creation in other office-using sectors was flat to negative: employment in Financial Services ended the year up 700, in Federal Government down 500 and in Information down 2,500 jobs. Among non-office-using sectors, the Education and Healthcare, and Leisure and Hospitality sectors experienced strong gains of over 13,000 positions each. The District of Columbia (DC) added 10,000 jobs while Northern Virginia (NoVA) and Suburban Maryland (SMD) both added 23,000. While job growth and the overall economy continued to surge, overall net absorption continued to erode compared to historical averages. The DC metro region absorbed 1.9 million square feet (msf) of space in 2017, well off the 2.6 msf that the region has averaged every year since The regional vacancy rate was 17.8%, relatively unchanged from year-end DC accounted for 600,000 square feet (sf) of absorption and a 12.4% vacancy rate, NoVA registered 1.0 msf of absorption and a vacancy rate of 21.5% and SMD had 130,000 sf of absorption with vacancy ending the year at 19.4%. While technology, consumer goods and real estate firms executed several notable new leases in 2017, most large new transactions were executed by organizations that are typically on the top deals list in the DC metro region: federal agencies, law firms, not-for-profits and federal contractors. The federal government s leasing arm the General Services Administration (GSA) was responsible for the largest lease of the year in each of the three DC metro jurisdictions, with the Federal Communications Commission leasing 473,000 sf in DC, the Transportation Security Administration leasing 625,000 sf in Northern Virginia, and the Department of Homeland Security leasing 575,000 sf in Suburban Maryland. These three cases demonstrate that the government will continue to consolidate large requirements in submarkets that offer quality development at a relative value compared to pricier, traditional government enclaves. New supply in the core downtown submarkets of DC continues to be a concern for overall market fundamentals looking forward. The Central Business District (CBD), East End, and Capitol Hill/NoMa are expected to deliver over 7.0 msf of office space in the next 24 months, 4.8 msf of which is currently under construction. Among those projects that are currently under construction, 2.5 msf 51% is already preleased. Expect vacancy rates and concessions to rise in these submarkets as tenants continue to seek the top floors while velocity on lesser space in new developments remains modest, at best. On the flipside, the transit-oriented suburban submarkets have been relatively supply-constrained with under-construction projects nearing 80.0% preleased. This supply constraint is subject to change as a plethora of high-profile, large tenants are currently active in the market with limited existing quality space options left to accommodate them. This will benefit developers like Carr Properties, The Meridian Group and JBG Smith, all of whom have risked spec development. The next 12 to 18 months should see two or more developments getting underway in Reston/Herndon, one likely in Tysons, and an active market for projects that recently broke ground in Bethesda. WASHINGTON, DC METRO Economic Indicators Q4 16 Q4 17 DC Metro Employment 3.2M 3.3M DC Metro Unemployment 3.8% 3.6% U.S. Unemployment 4.6% 4.1% Market Indicators Q4 16 Q4 17 Overall Vacancy 17.8% 17.8% Net Absorption 1.4M 1.9M Under Construction 8.4M 10.0M Average Asking Rent (FS) $35.85 $37.54 Net Absorption/Asking Rent 4Q TRAILING AVERAGE 1,500 1, Washington, DC Metropolitan Area NET ABSORPTION - DELIVERIES - VACANCY 12-Month Forecast 12-Month Forecast $39 $39 $38 $38 $37 $37-1,000 $ Net Absorption, SF (thousands) Asking Rent, $ PSF Net Absorption Deliveries 20% 16% 12% 8% 4% 0% Vacancy Rate cushmanwakefield.com 3

4 Washington, DC Economy The Washington D.C. metropolitan region posted another year of strong job growth in 2017, adding over 54,000 net new jobs year-over-year (YOY), 50% above the historical average. The regional unemployment rate remains one of the strongest in the country among major metro areas sitting at 3.6%, 50 basis points (bps) below the national average. Particularly appealing to the real estate industry were the 12,000 nonfarm payroll jobs added in 2017 in the Professional & Business Services sector the second largest job gain in any sector for the region, trailing only the Education & Healthcare sector and 3,200 of those payrolls were in the District of Columbia (the District) alone. Market Indicators Q4 16 Q4 17 Overall Vacancy 12.1% 12.4% Net Absorption 786K 592K Under Construction 3.5M 5.7M Average Asking Rent $52.97 $ Month Forecast Market Overview The fourth quarter of 2017 registered the highest quarter of new leasing activity in 2017, closing at more than 2.1 million square feet (msf), and boosting the annual total to over 6.5 msf, 24.4% above the 10-year average. While this figure was certainly buoyed by seven relocations greater than 100,000 sf, the District still witnessed 662 new lease executions in 2017, the highest figure of the decade. The General Services Administration (GSA) once again signed the largest new lease of the quarter, taking 431,785 square feet (sf) to relocate the Pension Benefit Guaranty Corporation (PBGC) to The Portals at th Street, SW. The PBGC will backfill space left by the Federal Communications Commission (FCC) once the agency vacates the space in Inextricably, the PBGC lease was the second largest relocation of 2017, bested only by the FCC s execution in the first quarter of the year to move into 473,000 sf in its new home at 45 L Street, NE upon the project s completion. The District registered nearly 600,000 sf of net move-ins throughout the year, approximately 40% of which hit the books in the fourth quarter. While this figure is about 35% below the 10-year average, many of the largest leases to sign in 2017 have not yet taken occupancy. This phenomenon, along with deliveries of new supply to the market, resulted in a slight uptick of the District s overall vacancy rate rising 30 bps YOY to close 2017 at 12.4%. Vacancy should continue to rise in 2018 as only 66.3% of the 3.2 msf set to come online in the next 12 months has been pre-leased. Concession packages have remained elevated for long-term, Class A deals, clearing 12 months of abatement and some tenant improvement allowance packages reaching $130 per square foot (psf), as landlords chase the few large, near-term expirations that remain in the market. To offset these upfront costs, lease terms have frequently reached 15 years to allow rents to escalate aggressively over the tenant s lifespan in the building. Tenants have also been accepting higher face rates in exchange for these concessions and more efficient floorplates, resulting in a 3.8% rise in overall rental rates across the city throughout 2017, closing the fourth quarter at an average of exactly $55.00 psf. Overall Net Absorption/Overall Asking Rent District of Columbia, 4Q Trailing Average 1,000 Overall Vacancy Rate 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% Net Absorption, Th.SF Asking Rent, $ PSF $55.00 $54.00 $53.00 $52.00 $51.00 $50.00 $49.00 $48.00 $47.00 $ % Outlook The pipeline of new supply delivering to the city, particularly in the Core submarkets (CBD & East End), will continue to grab headlines in the Washington D.C. office market for years to come. With 5.7 msf currently under construction and another 2.6 msf slated to break ground in the next 18 to 24 months, asking rates should begin to pull back as landlords chase limited demand, especially for the lower floors of new projects in the CBD. In fact, at the close of 2017 average Class A rates in Capitol Hill/ NoMa surpassed those in the CBD for the first time this decade. As livework-play developments continue to sprout up around Nationals Park and the Southwest Waterfront, look for the District s emerging submarkets to increasingly compete with the Core markets for key tenant requirements in the coming years. New Leasing Activity Millions YTD'17 Capitol Hill/NoMa East End CBD West End/Georgetown Uptown Southwest Capitol Riverfront Cushman & Wakefield 4

5 Washington, DC Submarkets UPTOWN NORTHEAST WEST END/ GEORGETOWN CBD 1 EAST END 50 NOMA CAPITOL HILL DISTRICT OF COLUMBIA VIRGINIA 395 SOUTHWEST CAPITOL RIVERFRONT/ SOUTHEAST 295 cushmanwakefield.com 5

6 Top Transactions Key Lease Transactions Q PROPERTY SF TENANT TRANSACTION TYPE SUBMARKET th Street, SW 431,785 GSA Pension Benefit Guaranty Corporation Relocation Southwest 2100 Pennsylvania Avenue, NW 285,000 WilmerHale Relocation CBD 1275 First Street, NE 173,000 GSA Peace Corps Relocation Capitol Hill/NoMa 1601 K Street, NW 126,910 K&L Gates LLP Renewal CBD th Street, SW 99,150 GSA U.S. Department of Homeland Security Renewal Southwest th Street, SW 86,000 GSA Department of Housing and Urban Development Renewal Southwest Key Sales Transactions Q PROPERTY SF SELLER/BUYER PRICE / $PSF SUBMARKET 1800 M Street, NW 585,545 PGIM / Columbia Property Trust & Allianz $421,000,000 / $719 CBD 370 L Enfant Plaza SW 407,248 CIM Group / Meadow Partners & Georgetown Companies $126,800,000 / $311 Southwest 64 New York Avenue NE 355,034 ASB Capital / Brookfield Asset Management $186,300,000 / $525 Capitol Hill/NoMa Washington, DC Office Market Net Absorption - Deliveries - Vacancy, Fourth Quarter 2017 Washington, DC Office Market Inventory by Class, Fourth Quarter % 40 23% 21% % 8% 4% Vacancy Rate % 17% 15% 13% 11% 9% 7% Vacancy Rate Net Absorption Deliveries Vacancy Rate 0% 0 Capitol Hill/ NoMa East End CBD West End/ Uptown Southwest Capitol Georgetown Riverfront Class A Class B Class C Vacancy % DC Overall Vacancy 5% Cushman & Wakefield 6

7 Core (CBD/East End) CBD Market Indicators *Arrows = Current Qtr Trend Vacancy 9.8% Net Absorption 71,799 SF Under Construction 2,497,828 SF Deliveries 0 SF Asking Rent $54.72 FS The construction pipeline across the Core market of the District of Columbia (comprised of the CBD and East End) continued to grab headlines as one of the region s top stories. With nearly 5.5 million square feet (msf) under construction or proposed for speculative redevelopment, the pipeline projected to deliver within the next three years accounts for roughly 15.0% of current downtown Class A competitive inventory. These buildings will continue to push the top end of the market as landlords offer record concession packages to lure tenants away from competing projects while simultaneously striking high contract rates. Of the current ground-up developments under construction, 70.0% had been pre-leased at the close of However, a number of large block availabilities still remain, including a full-building availability of nearly 102,000 sf at 1701 Rhode Island Avenue, NW. The most noteworthy construction event throughout the Core during the second half of 2017 was the delivery of 220,000 sf of renovated space at 2000 K Street, NW, as Tishman Speyer modernized the building with four column-free floors and a new facade with floor-to-ceiling glass. While the project delivered before any leases were fully executed, several high-profile tenants have since signed on for a total of nearly 70,000 sf. In a stark contrast to all other ongoing projects in the area, these tenants will be moving into space in the lower half of the building, leaving the top floors available. As more new construction continues to come online, vacancy rates will continue to rise, particularly since the handful of large, nearterm lease expirations that remain in the market are rumored to be evaluating space on the top floors of projects that have yet to break ground. Partially as a result of the aforementioned development, overall vacancy for the Core ticked upward slightly to close 2017 at 11.9%, a 20- basis points (bps) rise year-over-year (YOY). Further, the Core experienced over 100,000 sf of negative absorption in the fourth quarter of the year, the first quarter in which moveouts outpaced move-ins in the area since Law firm rightsizing and relocations have been particularly damaging to fundamentals in the East End recently. The fourth quarter of 2017 alone saw Skadden give back nearly 108,000 sf at th Street, NW, while Weil, Gotshal & Manges LLP vacated 64,000 sf at 1300 Eye Street, NW for a similar amount of space at Brookfield s recently renovated 2001 M Street, NW. Overall, the Core still registered 232,777 sf of positive absorption in 2017, although that figure was still about 30.0% below the 10-year running average for the area. Leasing activity within the Core has remained constant despite all the ongoing redevelopments as tenants continue to chase peak concessions and favorable market conditions. Over 1.2 msf of new leases were signed in the fourth quarter of 2017, raising the annual total to over 4.0 msf, 8.6% above the submarkets five-year running average. Leading the way was the largest private-sector deal city-wide all year: WilmerHale executed a lease to relocate to new space at 2100 Pennsylvania Avenue, NW upon the project s delivery, estimated to occur in Bates White, Goodwin Procter, and Morrison & Foerster all also signed leases in the latter half of 2017 in the 80,000-sf range to take down the top several floors of new construction. Bates White will relocate from 1300 Eye Street, NW in the East End to Alexander Court (2001 K Street, NW) in the first quarter of Full Service PSF Net Absorption Deliveries Vacancy (CBD) New Leasing Activity (CBD) Q1 Q2 Q3 Q4 Asking Rent (CBD) $70 $65 16% 12% 0.5 8% % % Net Absorption Deliveries Vacancy Rate $60 $55 $50 $45 $40 $ Class A Class B, $ PSF Vacancy Rate cushmanwakefield.com 7

8 Core (Continued...) East End Market Indicators *Arrows = Current Qtr Trend Vacancy 13.8% Net Absorption 160,978 SF Under Construction 1,017,201 SF Deliveries 0 SF Asking Rent $59.12 FS Both the Goodwin Procter and Morrison & Foerster leases, on the other hand, allowed developers to kick off their new projects. The law firms will thus be waiting a bit longer to take occupancy in their new homes at 1900 N Street, NW and 2100 L Street, NW, respectively. In the face of rising vacancy, direct rental rates in the Core have actually also risen 4.2% year-over-year (YOY), closing the fourth quarter of 2017 at $59.68 per square foot (psf) on a full service (FS) basis. However, this phenomenon is largely due to concession packages reaching unprecedented levels, seemingly with no downturn in sight. Tenant Improvement allowances for new, long-term, Class A leases averaged over $100 psf, with some rumored to have reached $150 psf or higher. Abatement too has followed suit, with the same deal described above typically clearing one year of free rent with ease. Essentially, landlords have raised both face rates and concessions in conjunction in order to strengthen financials toward the back end of these leases, thus keeping the average net effective rental rate relatively flat. Net Absorption Deliveries Vacancy (East End) Net Absorption Deliveries Vacancy Rate New Leasing Activity (East End) 16% 12% 8% 4% 0% Vacancy Rate Q1 Q2 Q3 Q4 Outlook Five new projects totaling over 2.4 msf of new product are set to deliver to the Core in 2018 alone. Four of these are in the CBD, with the Advisory Board s new home at 655 New York Avenue, NW being the lone East End delivery slated for All told, these projects are 72.0% pre-leased, but over 670,000 sf of availability still remained at year-end Class A vacancy will surely rise in the near-term as a result, with worst-case projections calling for up to a 20.1% rate in high-end space across the Core. Availabilities will be abundant in large blocks of second-generation space in the East End left behind by law firms as they migrate to trophy CBD developments. Additionally, as these highprofile firms lease up space on a top-down basis, the supply across the lower floors of these buildings will significantly outpace the limited number of near-term expirations in the market. Class B inventory also will continue to shrink as product is removed for redevelopment, forcing tenants to explore options in both D.C. s emerging submarkets as well as Northern Virginia in several instances. Asking Rent (East End) $65 $60 Full Service PSF $55 $50 $45 $40 $ Class A Class B, $ PSF Cushman & Wakefield 8

9 Capitol Hill/NoMa Market Indicators *Arrows = Current Qtr Trend Vacancy 14.8% Net Absorption (86,869) SF Under Construction 1,965,552 SF Deliveries 156,581 SF Asking Rent $58.77 FS The Capitol Hill/NoMa submarket experienced one of its strongest years of the decade in terms of new lease executions. This was due in large part to the recent pipeline of new developments sprouting up north of Massachusetts Avenue that offer tenants particularly General Service Administration (GSA) tenants who are restricted by rent caps core-quality product at non-core pricing. New leasing activity in 2017 totaled nearly 1.1 million square feet (msf), the 1.0 msf milestone for only the second time since 2010, and clearing the running annual average by over 60.0%. The 330,617 square feet (sf) of new leases signed in the fourth quarter of the year were buoyed by two deals in particular. The first phase of Capitol Crossing landed the American Petroleum Institute (API) as its anchor tenant, as API signed for nearly 75,000 sf at 200 Massachusetts Avenue, NW and will take occupancy upon the project s delivery in mid Later in the quarter, the GSA executed a lease for 173,000 sf on behalf of the Peace Corps to relocate the agency from its current home in the Central Business District (CBD) to secondgeneration space at 1275 First Street, NE previously used as swing space for the GSA s headquarters. Factoring in the 473,000 sf of new space GSA committed to in the first quarter of 2017 for the Federal Communications Commission (FCC) relocation to another ongoing project at 45 L Street, NE upon its delivery in 2019, these three lease executions accounted for two-thirds of all new leasing activity in 2017 across the submarket. In addition to new homes for the API and FCC, progress continued at the build-to-suit U.S. Department of Justice headquarters at 150 M Street, NE, as well as a second building as part of the first phase of Capitol Crossing about 530,000 sf of additional speculative space. At the tail end of the pipeline, the 156,000-sf office project at 700 Pennsylvania Avenue, SE, delivered in the fourth quarter of 2017 with one floor pre-leased to The Yard a co-working group. Several additional tenants are rumored to be in the market, as ownership seeks occupancy for the remaining 79.9% of available space. As a result of 700 Pennsylvania Avenue, SE having come online with a remaining 125,000-sf yet to be leased, the overall vacancy rate in the Capitol Hill/NoMa submarket ticked upward 40 basis points (bps) from the third quarter of 2017 to close the fourth quarter at 14.8%. The rate now sits 160 bps higher year-over year (YOY), as it gradually increased during each quarter of the year. Helping to offset the new space coming online was the District of Columbia Government growing its footprint by about 20,000 sf, as it relocated to 164,110 sf at st Street, NE. Additionally, Amtrak s relocation of its office functions from Union Station (a property not tracked in Cushman & Wakefield s competitive office inventory) to 1 Massachusetts Avenue, NW brought roughly 85,000 sf of net growth to the submarket, despite the railroad service reportedly shrinking its actual footprint by about 20,000 sf. In the face of increased vacancy, rental rates have continued to rise, both as new product chasing top-of-submarket rents delivers in Capitol Hill/NoMa as well as lower rent space around the Capitol Building leases up. The overall rental rate for the submarket has risen 7.9% YOY to close the fourth quarter of 2017 at $58.77 per square foot (psf) on a full service basis. Class A rates have experienced an even more pronounced spike, jumping 11.9% YOY to close the year at $65.84 psf. Landlords have also been increasingly aggressive with their concession packages, opting to give cash up front in exchange for higher face rates and thus stronger financials towards the back end of the lease term. This practice has curbed net effective rental rate growth and has become a widespread phenomenon across the city in recent years. Net Absorption Deliveries Vacancy (Capital Hill/NoMa) New Leasing Activity (Capital Hill/NoMa) Asking Rent (Capital Hill/NoMa) Full Service PSF $65 $60 $55 $50 $45 $40 Outlook Net Absorption Deliveries Vacancy Rate With the delivery of the first office building at the mixed-use Capitol Crossing development that will connect the Capitol Hill/NoMa submarket to the East End in the second quarter of the year, 2018 should be an eventful year for Washington, D.C. s largest emerging market. Since this is the only purely speculative project currently under construction in the submarket, vacancy rates are expected to remain in check. Landlords of second-generation space stemming from the area s last construction boom prior to the turn of the decade could be faced with unique challenges as tenants chase the latest options in the market. However, locations that offer tenants unique-to-d.c. views such as the Capitol Building will consistently continue to command high-watermark rents. 24% 20% 16% 12% Q1 Q2 Q3 Q4 $ Class A Class B, $ PSF 8% 4% 0% Vacancy Rate cushmanwakefield.com 9

10 West End/Georgetown West End/Georgetown Market Indicators *Arrows = Current Qtr Trend Vacancy 8.2% Net Absorption 141,036 SF Under Construction 0 SF Deliveries 0 SF Asking Rent $48.45 FS The overall vacancy rate for office space in the West End/ Georgetown submarket plummeted in the fourth quarter of 2017, dropping 220 basis points (bps) to close the year at 8.2%. Washington D.C. s westernmost submarket is now the secondtightest in the District of Columbia, trailing only the Capitol Riverfront on the other side of the city. Fueling this decline was the Aspen Institute s move into roughly 90,000 square feet (sf) at 2300 N Street, NW, helping to chip away at the full-building vacancy left behind by Pillsbury, which vacated in Across the street at rd Street, NW, Fox Architects took occupancy of its 17,603-sf space, which was signed for earlier in A handful of smaller move-outs resulted in overall net absorption in the fourth quarter of 2017 totaling 80,332 sf, bringing the yearend total to 141,036 sf. The year was a fairly quiet one in terms of leasing activity across the submarket, with the aforementioned Fox Architects relocation representing the only new lease executed for over 10,000 sf throughout The largest lease signed during the fourth quarter of 2017 was Reese Communications 26,000-sf renewal at 1055 Thomas Jefferson Avenue, NW. Several leases smaller than 8,000 sf each combined to register a total of 42,874 sf of new leasing activity for the quarter. All told, West End/ Georgetown experienced 121,613 sf of new leases sign in 2017, nearly 40.0% below the submarket s 10-year average and the smallest annual total since As vacant space in West End/Georgetown has dwindled and the relatively cheaper product has leased up, overall rental rates for the submarket rose 7.2% year-over-year (YOY), sitting at an average of $51.22 per square foot (psf) on a full service basis at the close of Landlords remain in a favorable position to maintain high asking rates on their limited remaining availabilities. In fact, with nearly 200,000 sf of total vacancy, 2300 N Street, NW is the only competitive building in the submarket with a contiguous block of immediate availability greater than 10,000 sf. Renovations at the former White House Garage at nd Street, NW are projected to be completed in the latter half of 2018, which could bring another large block of vacancy to the market. The project would be the first delivery of office space to the submarket since 2006, bucking the recent trend of owners converting office buildings into multifamily or mixed-use projects. Over 50,000 sf of future availability is currently being marketed at the project, which has made the shortlists for several high-profile users. This potential vacancy along with the planned moveout of 1025 Thomas Jefferson by American Institutes of Research could have vacancy spiking in late 2018/early Outlook A renaissance seems to be taking place in the West End, as several of these office-to-residential conversions and new multifamily developments are set to change the landscape of the commercial market and revitalize the area in Of note are: the redevelopment and repurposing of nd Street, NW into a multifamily project; 2501 M Street, NW, which is adding 60 Class A, multifamily units, and has landed Nobu as its high-end retail tenant; EastBanc s projects on Squares 37 and 50 will bring over 250 multifamily units, a 21,000-sf library, 10,000 sf of retail space, a fire station and a squash club. Net Absorption Deliveries Vacancy (WE/Gtown) % 16% 0.0 8% 4% % Net Absorption Deliveries Vacancy Rate New Leasing Activity (WE/Gtown) Q1 Q2 Q3 Q4 Asking Rent (WE/Gtown) $68 $63 Full Service PSF 12% $58 $53 $48 $43 $38 $ Class A Class B, $ PSF Vacancy Rate Cushman & Wakefield 10

11 Southwest/Capitol Riverfront Southwest Market Indicators *Arrows = Current Qtr Trend Vacancy 13.1% Net Absorption 134,224 SF Under Construction 461,023 SF Deliveries 211,787 Asking Rent $46.09 FS In a development that is sure to alter the landscape of Washington D.C. for decades to come, the first phase of The Wharf delivered 211,787 square feet (sf) of office space at 800 Maine Avenue, SW in the fourth quarter of The project was 70.5% pre-leased upon its completion, with several high-profile private sector tenants taking occupancy including the American Psychiatric Association, Van Scoyoc Associates, and co-working firm MakeOffices. A second building at The Wharf 1000 Maine Avenue, SW is projected to deliver another 246,000 sf to the Southwest submarket in the second quarter of 2018, with 63.2% of the space already spoken for. Vertical progress also continued at 500 L Enfant Plaza, SW, which has been 65.0% pre-leased to nonprofit think tank The Urban Institute, as JBG SMITH targets a fourth quarter of 2018 delivery. Farther east, the Capitol Riverfront submarket awaits delivery of its first new office product since M Street, SE, which is set to bring 215,616 sf online in the first quarter of In large part due to the developments outlined above, the Southwest submarket has become bifurcated between buildings that cater to private versus public sector tenants and their contractors. Five of the six largest new private sector leases signed in 2017 were for space in one of these new projects, forcing landlords of second-generation space to chase smaller requirements. Another potentially troubling sign for the area is the continued willingness of the General Services Administration (GSA) to execute short-term renewals for large federal government agencies in the submarket as more efficient options are explored. The two largest government renewals executed in 2017 (totaling over 400,000 sf) were for just three and four years on behalf of the Department of Education and the Department of Homeland Security (DHS), respectively. While several smallerscale renewals have been executed for 10 years or longer, this trend should certainly be kept in mind moving forward, particularly as GSA lease requirements increasingly involve multi-jurisdictional searches for large headquarter relocations that often require existing lease expirations to be aligned. While it appears that the GSA will be vacating multiple large blocks in Southwest moving forward, the possibility of these spaces being backfilled by other federal government agencies (particularly ones currently scattered across multiple spaces in the Core) certainly remains, especially given the submarket s proximity to existing headquarters and non-core pricing. Republic Properties Portals II building at th Street, SW landed the largest new lease of the fourth quarter of 2017 across the entire District of Columbia, as the GSA executed a deal to relocate the Pension Benefit Guaranty Corporation (PBGC) from its current East End offices. PBGC will take occupancy of over 430,000 sf once the Federal Communications Commission (FCC) vacates the property in 2019 upon delivery of its new headquarters in NoMa. The Capitol Riverfront submarket captured only one new lease of over 10,000 sf in the fourth quarter of 2017: South Capitol Bridge Builders, a joint venture between Granite Construction and Archer Western, was awarded the $441 million contract to build the replacement for the Frederick Douglass Memorial Bridge that spans the Anacosita River. Accordingly, the firm opened an office at th Street, SE just steps from the bridge. Despite experiencing a slow quarter, the submarket surpassed its fiveyear annual average of new leasing activity by over 60.0% in 2017, largely due to the District of Columbia Government s lease for 118,720 sf at 1015 Half Street, SE, in the third quarter of the year. Even as tenant improvement work is ongoing in the space, Net Absorption Deliveries Vacancy (Capitol Riverfront) % 24% 0.5 8% 4% % Net Absorption Deliveries Vacancy Rate New Leasing Activity (Capitol Riverfront) Q1 Q2 Q3 Q4 Asking Rent (Capitol Riverfront) $60 $55 Full Service PSF $50 $45 $40 $ Class A Class B, $ PSF cushmanwakefield.com 11 20% 16% 12% Vacancy Rate

12 Southwest/Capitol Riverfront (Cont.) Capitol Riverfront Market Indicators *Arrows = Current Qtr Trend Vacancy 6.9% Net Absorption 193,116 SF Under Construction 215,616 SF Deliveries 0 SF Asking Rent $46.09 FS which will become occupied in phases throughout 2018, the Capitol Riverfront boasts the lowest overall vacancy rate in the city. The figure sat at a mere 6.9% at the close of 2017, due in part to obsolete office product at 1900 Half Street, SW being slated for multifamily conversion and thus removed from competitive inventory. Additionally, new leasing activity chipped away at existing product that delivered in the earlier part of this decade and limited speculative construction helped keep vacancy rates in check. Positive absorption also aided in driving the vacancy rate downward by an astonishing 700 basis points (bps) year-overyear (YOY). Capitol Riverfront registered 193,116 sf of net move-ins during 2017, over twice its annual average and the largest figure for any submarket in Washington, D.C. The largest market-mover in 2017 was the co-working firm WeWork, which opened a nearly 70,000-sf location at 80 M Street, SE. The Southwest submarket also experienced over 100,000 sf of positive absorption, although its total of 134,224 sf was more in line with the submarket s fiveyear average. In the fourth quarter of 2017 alone, the Southwest submarket witnessed 115,290 sf of space absorbed, activity stemming from both the delivery of 800 Maine Avenue, SW, as well as the GSA s relocation of Social Security Administration offices from 2100 M Street, NW, in the CBD to 52,720 sf at 250 E Street, SW. With the removal of 1900 Half Street, SW, from office inventory as Douglas Development converts the structure into a mixeduse, residential development, all competitive office buildings in Capital Riverfront have now been constructed since the turn of the century. In a low-vacancy environment with such similar available product, rental rates have risen accordingly. The average direct rental rate in the submarket rose 5.5% YOY, closing 2017 at $49.48 per square foot (psf) on a full service basis. While this figure remains the lowest in the city, the spread between rates in Capital Riverfront and the other emerging markets has narrowed drastically in recent years. The average rental rate in Southwest has also risen YOY, although the 2.5% jump in direct Class A space was inflated by the delivery of 800 Maine Avenue, SW, which came online with about 63,000 sf of space drastically above what is available in other projects. As The Wharf leases up, it would not be surprising to see Southwest rental rates slip behind those in Capital Riverfront before long. Outlook In addition to the upcoming pipeline of office-focused developments, 14 residential buildings are currently under construction in Capitol Riverfront/Southwest, with an additional 20 projects set to break ground by the end of Retailers have naturally taken note of the expansion in both the residential and entertainment offerings in the area and have begun to look to the waterfront to introduce their new concepts to the city. Local high-end restaurateur Mike Isabella recently opened his newest location at The Wharf and popular local beer garden Dacha has announced plans to open a second location near Nationals Park. As the submarkets continue to draw high-end retailers and residents, developers in the area continue to create true work-play-live environments. Net Absorption Deliveries Vacancy (Southwest) New Leasing Activity (Southwest) Q1 Q2 Q3 Q4 Asking Rent (Southwest) $50 Full Service PSF 20% 16% 12% 8% 0.0 4% % Net Absorption Deliveries Vacancy Rate $45 $40 $ All Classes Class A, $ PSF Vacancy Rate Cushman & Wakefield 12

13 Appendix Table Summaries Metro Washington Office Market Summary 13 Employment Data 13 Office Availability, Vacancy, and Net Absorption 14 Trailing 12-Month Data 15 Historical Year-End Data 16 Market Statistics by Class Survey of New Office Space by Submarket Methodology & Definitions 23 Metro Washington Office Market Summary: Fourth Quarter 2017p Inventory Total Vacant Space Metro Washington Current Employment Data Vacancy Rate Q 2017 Absorption Year to Date Absorption Washington, DC 13, 12. % Northern Virginia % Suburban Maryland 59, 1 % Regional Totals % Nonfarm Employment (Jan- 2016) Nonfarm Employment (Jan- 2017p) Jobs Added/ Lost* Percent Change Washington, DC % Northern Virginia 1,433,7 1. % Suburban Maryland 9 1,0 2. % Regional Totals 3 3,2 1.6% SOURCE: U.S. Bureau of Labor Statistics (Not seasonally adjusted) * Average per year to date p - preliminary cushmanwakefield.com 13

14 Appendix Office Availability, Vacancy, and Net Absorption, Fourth Quarter 2017p Total Inventory New/ Relet Space Vacant Sublet Space Vacant Total Space Vacant Vacancy Rate (%) New/ Relet Space Absorption Sublet Space Absorption Total Absorption CBD 3,, 3 9. % East End 37, 13. % ( ) West End/ Georgetown 5,097,432 % Capitol Hill/NoMa 13, 1, 14. % Southwest % Capitol Riverfront/ Southeast % Uptown 4,153, % TOTAL 108, ( ) 2 p - preliminary p - preliminary Cushman & Wakefield 14

15 Appendix Trailing 12-Month Data Total Inventory Vacancy Rate (%) Total Absorption 1st Qtr nd Qtr rd Qtr th Qtr st Qtr nd Qtr rd Qtr th Qtr st Qtr nd Qtr rd Qtr th Qtr 2017 CBD 33,010,557 32,958,557 33,180,675 33,180, % 9.4% 9.9% 9.8% (150,088) 136,358 20,895 64,634 East End 37,563,231 37,563,231 37,411,702 37,411, % 13.4% 13.3% 13.8% 197,970 21, ,958 (172,166) West End/ Georgetown 5,097,432 5,097,432 5,097,432 5,097, % 9.7% 10.4% 8.2% 28,361 31, ,332 Capitol Hill/NoMa 13,639,903 13,639,903 13,639,903 13,796, % 14.1% 14.4% 14.8% (76,300) (42,224) (67,212) 98,867 Southwest 10,931,247 10,931,247 10,931,247 11,143, % 13.1% 12.3% 13.1% (38,180) (26,770) 83, ,290 Capitol Riverfront/ Southeast 4,074,326 4,074,326 3,596,764 3,596, % 12.0% 7.5% 6.9% 67, ,639 15,719 25,147 Uptown 4,153,673 4,153,673 4,153,673 4,153, % 22.0% 21.7% 21.1% 13,994 (77,151) 2,336 21,542 TOTAL 108,470, ,418, ,011, ,379, % 12.3% 12.3% 12.4% 43, , , ,646 p - preliminary cushmanwakefield.com 15

16 Appendix Historical Year-End Data Total Inventory Vacancy Rate (%) Total Absorption p CBD 33,080,283 33,057,458 33,482, % 9.3% 9.3% 9. % 721, , ,073 East End 36,940,570 37,686,959 37,671,390 37, 11.7% 12.0% 13.0% 13. % 487, ,436 (538,596) West End/ Georgetown 5,097,432 5,097,432 5,097,432 5,097, % 11.2% 10.9% % (181,106) 54,773 11,998 Capitol Hill/NoMa 13,249,755 13,249,755 13,639,903 13, 13.4% 12.2% 13.2% 14. % 153, ,215 54,178 ( ) Southwest 10,667,091 10,667,091 10,931, % 10.8% 12.6% 13.1% 232, ,406 76,721 Capitol Riverfront/ Southeast 4,674,326 4,674,326 4,074, % 15.4% 13.9% % (81,409) 162, ,706 Uptown 3,751,857 4,014,207 4,153,673 4,153, % 23.2% 20.5% 2 % (370,052) (28,187) 83,230 ) TOTAL 107,461, ,447, ,050, , 13.0% 11.6% 12.1% 12. % 962,536 1,884, ,310 p - preliminary Cushman & Wakefield 16

17 Market Statistics Washington, DC Fourth Quarter 2017 Market Statistics Buildings Total Inventory (SF) New/Relet Vacancy (%) Sublet Vacancy (%) Total Vacancy* (%) Net Absorption Current QTR (SF) Under Construction (SF) Average Asking Rent (FS) CBD Class A 54 13,285, % 0.9% 11.9% 139,322 2,067,494 $65.07 B 54 10,668, % 0.9% 6.6% $48.82 C 75 9,225, % 1.9% 10.6% (75,254) - TOTAL ,180, % 1.2% 9.9% 9.8% 64,634 2,067,494 $44.38 $54.72 East End Class A 79 23,188, % 2.1% 14.7% (149,394) 1,017,201 $62.54 B 38 8,206, % 0.7% 14.2% (24,722) - $57.18 C 42 6,016, % 0.4% 9.6% 1,950 - TOTAL ,411, % 1.5% 13.8% (172,166) 1,017,201 $43.49 $59.12 West End/Georgetown Class A 7 1,437, % 1.0% 18.2% 70,942 0 $59.92 B 10 1,938, % 1.6% 6.1% 16,388 - $43.59 C 14 1,721, % 0.2% 2.1% (6,998) - TOTAL 31 5,097, % 0.9% 8.2% 80,332 0 $42.99 $48.45 Capitol Hill/NoMa Class A 25 7,534, % 0.7% 16.5% 155,166 1,965,552 $65.84 B 18 5,122, % 0.4% 11.8% (67,541) - $48.71 C 10 1,138, % 0.0% 16.6% 11,242 - TOTAL 53 13,796, % 0.5% 14.8% 98,867 1,965,552 $51.50 $58.77 Southwest Class A 20 8,400, % 0.3% 12.9% 95, ,023 $51.49 B 7 1,593, % 0.3% 18.6% 20,053 - $44.47 C 6 1,149, % 0.0% 6.9% TOTAL 33 11,143, % 0.3% 13.1% 115, ,023 $46.11 $46.09 * Total Vacancy - the vacancy rate is calculated using the combined total of relet, sublet and new vacant space. cushmanwakefield.com 17

18 Market Statistics Washington, DC Fourth Quarter 2017 Market Statistics Buildings Total Inventory (SF) New/Relet Vacancy (%) Sublet Vacancy (%) Total Vacancy* (%) Net Absorption Current QTR (SF) Under Construction (SF) Average Asking Rent (FS) Capitol Riverfront Class A 10 3,596, % 0.5% 6.9% 21, ,616 $46.09 B % 0.0% 0.0% 0 - N/A C % 0.0% 0.0% 0 - TOTAL 10 3,596, % 0.5% 6.9% 21, ,616 N/A $46.09 Uptown Class A 2 367, % 2.5% 9.1% 6,689 0 $51.43 B 9 2,011, % 1.6% 33.9% 6,599 - $43.29 C 21 1,774, % 0.9% 9.0% 11,859 - TOTAL 32 4,153, % 1.4% 21.1% 25,147 0 $37.81 $42.60 Washington, DC Class A ,811, % 1.2% 13.6% 339,349 5,726,886 $62.24 B ,542, % 0.8% 12.1% (48,657) - $49.51 C ,025, % 1.0% 9.6% (57,046) - TOTAL ,379, % 1.1% 12.4% 233,646 5,726,886 $43.85 $55.00 * Total Vacancy - the vacancy rate is calculated using the combined total of relet, sublet and new vacant space. Cushman & Wakefield 18

19 Washington, DC Survey of Office Space Under Construction/Under Renovation BUILDING ADDRESS 2112 Penn Avenue, NW th Street, NW (Midtown Center - Fannie Mae) 2001 K Street, NW (Alexander Court) 1701 Rhode Island Avenue, NW OWNER/DEVELOPER RENTAL RATE STATUS DELIVERY DATE RENTABLE BUILDING AREA AVAILABLE SPACE PERCENT PRELEASED) MAJOR TENANTS Skanska USA N/A U/C 1Q18 240, ,403 48% Cleary Gottlieb Carr Properties N/A U/C 1Q18 810,000 43,000 95% Fannie Mae Rockrose Development Corporation/Spitzer Enterprises N/A U/C 1Q18 526, ,693 60% Cornerstone Research, Akin Gump Alcion Ventures/Akridge N/A U/C 3Q18 101, ,848 0% N/A 1900 N Street, NW JBG Smith N/A U/C 2Q19 257, ,184 31% Goodwin Procter th Street, NW Akridge N/A U/R 4Q18 101, ,650 0% N/A TOTAL 2,169, ,782 66% BUILDING ADDRESS 1301 Penn Avenue, NW 655 New York Avenue, NW) OWNER/DEVELOPER Quadrangle Development Corporation Douglas Development Corporation RENTAL RATE STATUS DELIVERY DATE RENTABLE BUILDING AREA AVAILABLE SPACE PERCENT PRELEASED) MAJOR TENANTS N/A U/C 1Q19 276,397 88,563 68% Kirkland & Ellis N/A U/C 2Q18 740, ,028 70% Advisory Board 800 K Street, NW The Meridian Group N/A U/R 1Q19 114, ,6233 0% N/A 909 E Street, NW Douglas Development Corporation N/A U/R 1Q18 36,900 36,900 0% N/A 1441 L Street, NW S.C. Herman & Associates $55-$63 FS U/R 3Q18 206, ,799 0% N/A TOTAL 1,375, ,913 52% Status Operating Expense and Real Estate Tax Base U/C = Under Construction FS = Full Service NN = Plus Electric & Char U/R = Under Renovation N = Plus Electric NT = Plus Taxes NNN = Net of all Operating Expenses and Taxes cushmanwakefield.com 19

20 Washington, DC Survey of Office Space Under Construction/Under Renovation Capitol Hill/ NoMa BUILDING ADDRESS OWNER/DEVELOPER RENTAL RATE STATUS DELIVERY DATE RENTABLE BUILDING AREA AVAILABLE SPACE PERCENT PRELEASED MAJOR TENANTS 150 M Street NE Metlife N/A U/C 2Q19 475, % Department of Justice 200 Massachusetts Avenue, NW Property Group Partners U/C Q1 % N/A U/C Q18 % Property Group Partners N/A U/C 3Q1 532, ,209 0% 250 Massachusetts Avenue, NW Total 1, 2% Southwest/Capitol Riverfront BUILDING ADDRESS OWNER/DEVELOPER RENTAL RATE STATUS DELIVERY DATE RENTABLE BUILDING AREA AVAILABLE SPACE PERCENT PRELEASED MAJOR TENANTS The Wharf 1000 Maine Avenue, SW 500 L'Enfant Plaza, SW PN Hoffman / Madison Marquette The JBG Companies N/A U/C 2Q18 246,000 % Fish & Richardson N/A U/C Q1 2 5% Urban Institute 99 M Street, SE Skanska N/A U/C 1Q18 215,616 Total % Washington, DC Summary RENTABLE BUILDING AREA AVAILABLE SPACE PERCENT PRELEASED 2017 DELIVERIES 3 % 2018 DELIVERIES 3, 1,7 5% 2019 DELIVERIES % TOTAL CURRENTLY UNDER CONSTRUCTION/RENOVATION Status Operating Expense and Real Estate Tax Base U/C = Under Construction FS = Full Service NN = Plus Electric & Char U/R = Under Renovation N = Plus Electric NT = Plus Taxes NNN = Net of all Operating Expenses and Taxes 5 % Cushman & Wakefield 20

21 Washington, DC Survey of New Office Space 2017 Deliveries BUILDING ADDRESS OWNER/DEVELOPER STATUS RENTAL RATE SUBMARKET RENTABLE BUILDING AREA NEW SPACE AVAILABLE VACANCY RATE (AS OF CURRENT QUARTER) PERCENT LEASED UPON DELIVERY th Street NW Tishman Speyer Delivered 1Q17 $ $71.00 FS CBD 101, , % H Street NW MRP Realty Delivered 1Q17 $ $81.00 FS East End 265,084 67,460 75% 25% 700 Pennsylvania Avenue SE EastBanc, Inc. / Stanton Development Delivered 4Q17 $ $55.00 NNN Capitol Hill/ NoMa 156, ,096 20% 80% 800 Maine Avenue SE PN Hoffman Delivered 4Q17 $ $46.00 NNN Southwest 211,787 68,148 68% 32% TOTAL 735, , Deliveries BUILDING ADDRESS OWNER/DEVELOPER STATUS RENTAL RATE SUBMARKET RENTABLE BUILDING AREA NEW SPACE AVAILABLE VACANCY RATE (AS OF CURRENT QUARTER)* 1000 F Street, NW Douglas Development Corporation Delivered 4Q16 $ $90.00 FS East End 86,114 75,323 87% rd Street, NE (Uline Arena) Douglas Development Corporation Delivered 4Q16 $ $58.00 FS Capitol Hill/NoMa 174, ,294 79% 600 Massachusetts Avenue, NW Oxford Properties/Gould Property Delivered 4Q16 $45.00 NNN East End 351,098 29,283 9% Florida Avenue, NW (Manhattan Laundry) Douglas Development Corporation Delivered 3Q16 $61.00 FS Uptown 82,919 11,564 14% 1800 K Street, NW ) RREEF / Prudential Property Company Delivered 3Q16 $ $66.00 FS CBD 201, ,229 82% 660 N Capitol Street, NW Republic Properties Corporation Delivered 2Q16 $ $76.00 FS Capitol Hill 196, ,087 52% 2001 M Street, NW Brookfield Office Properties Delivered 2Q16 $ $80.00 FS CBD 261, ,690 77% th Street, NW The JBG Companies Delivered 1Q16 $ $83.00 FS East End 127,825 28,380 22% 500 D Street,SW (National Square Columbia Funding Corp ) Delivered 1Q16 $ $55.00 FS Southwest 341, , % Total 1,778,628 1,107,961 62% Operating Expense and Real Estate Tax Base *Vacancy rate for new office space- does not include relet or sublet space available FS = Full Service NN = Plus Electric & Char N = Plus Electric NT = Plus Taxes NNN = Net of all Operating Expenses and Taxes cushmanwakefield.com 21

22 Washington, DC Survey of New Office Space 2015 Deliveries BUILDING ADDRESS OWNER/DEVELOPER STATUS RENTAL RATE SUBMARKET RENTABLE BUILDING AREA NEW SPACE AVAILABLE VACANCY RATE (AS OF CURRENT QUARTER)* PERCENT LEASED UPON DELIVERY 601 Massachusetts Avenue, NW Boston Properties Delivered 3Q15 $53.50 NNN East End 472,754 12,009 3% 84% 900 G Street, NW ASB Real Estate Investments / MRP Realty, Inc Delivered 1Q15 $47.00-$53.00 NNN East End 104,541 4,391 4% 40% Total 577,295 16,400 3% Operating Expense and Real Estate Tax Base *Vacancy rate for new office space- does not include relet or sublet space available FS = Full Service NN = Plus Electric & Char N = Plus Electric NT = Plus Taxes NNN = Net of all Operating Expenses and Taxes Cushman & Wakefield 22

23 Methodology & Definitions Methodology Market statistics are calculated from a base building inventory made up of office properties deemed to be competitive in the typical Washington, DC office market. Single-tenant buildings and privately-owned buildings in which the federal government leases space are included. Generally, owneroccupied and federally-owned buildings are not included. Older buildings unfit for occupancy or ones that require substantial renovation before tenancy are generally not included in the competitive inventory. Vacant space is defined as space that is physically vacant and available immediately. Sublet space still occupied by the tenant is not counted as vacant space. Explanation of Terms Total Inventory: The total amount of office space (in buildings greater than 10,000 square feet) that can be rented by a Fourth party. New Space Vacant: First generation, never-occupied office space in newly constructed or substantially renovated buildings, being actively marketed by a landlord. Relet Space Vacant: Secondgeneration, unoccupied office space being actively marketed by a landlord. (Space that is marketed but largely occupied is not counted as vacant space.) Sublet Space Vacant: Secondgeneration, unoccupied space being actively marketed by a tenant. (Sublet space that is marketed but still occupied is not counted as vacant space.) Total Space Vacant: The sum of new, relet, and sublet space that is unoccupied and being actively marketed. Vacancy Rate: The amount of unoccupied space (new, relet, and sublet) expressed as a percentage of total inventory. (Total Space Vacant divided by Total Inventory.) Total Space Available: The total amount of space, both vacant and occupied, being actively marketed for lease by a tenant or landlord. (This includes space that is currently occupied but marketed for future availability.) Availability Rate: The total amount of space being actively marketed for lease (both vacant and occupied) expressed as a percentage of total inventory. (Total Space Available divided by Total Inventory.) Absorption: The net change in occupied space between two points in time. (Total occupied space in the previous quarter minus total occupied space in the current quarter, quoted on a net, not gross, basis.) New/Relet/Sublet Absorption: The net change in occupied new, relet, and sublet space between two quarters. Total Absorption: The net change in total occupied (new, relet, and sublet) space between two quarters. New Leasing Activity: The sum of all square footage underlying any leases between two quarters. This includes pre-leasing activity as well as expansion. It does not include renewals. Disclaimer This report and other research materials may be found on our website at This is a research document of Cushman & Wakefield in Washington, DC. Questions related to information herein should be directed to the Research Department at Information contained herein has been obtained from sources deemed reliable and no representation is made as to the accuracy thereof. About Cushman & Wakefield Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and live. Our 43,000 employees in more than 60 countries help investors and occupiers optimize the value of their real estate by combining our global perspective and deep local knowledge with an impressive platform of real estate solutions. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $5 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit or on Twitter. cushmanwakefield.com 23