National Presence. Local Focus

Transcription

1 National Presence. Local Focus Washington, DC Regional Quarterly Overview 4Q Metropolitan Washington, DC Office Market Statistics revealed that in the fourth quarter, the Metropolitan Washington, DC office market continued to show signs of recovery for the fourth consecutive quarter since year-end The market currently consists of approximately 395 million square feet of office space and spans the District of Columbia, Northern Virginia, and Suburban Maryland. According to the US Bureau of Labor Statistics, the region gained 49,000 new jobs over the course of. While most markets struggled to weather the national recession, the Washington, DC region experienced growth fueled by federal spending and procurement. Whether this growth will be sustainable over the next year is still in question because of a greater focus on trimming the $1 trillion national deficit. Washington, DC s unemployment rate decreased to 9.8% in the fourth quarter from 9.9% at the end of the third quarter, Maryland s rate stayed the same at 7.3% and Northern Virginia s remained at 4.8%. At the same time, the U.S. rate decreased to 9.4% from 9.7%. Once again, the GSA was responsible for a great deal of space leased in the fourth quarter, which benefited all DC, MD and VA markets. Total Vacancy Rate DC 11.2% VA 12.6% MD 14.3% Lincoln Property Company tracks two types of vacancy; direct and total vacancy. For the third consecutive quarter, both vacancy rates declined, primarily due to increased government demand in the market. In addition, the private sector is showing signs of growth, hence the reason why we have witnessed more expansions signed this quarter as well as relocations. The direct vacancy rate in the Washington, DC office market decreased in the fourth quarter of to 10.0%, which represents a 0.5% decrease from the third quarter. The direct vacancy rate slightly decreased in Suburban Maryland to 13.0% from 13.2% and Northern Virginia s rate stayed the same at 11.6%. The total vacancy rates experienced similar trends this quarter as The District decreased to 11.2% from 11.9%, Northern Virginia dropped down slightly from 12.8% to 12.6%, and Suburban Maryland decreased to 14.3% from 14.7%. 14% 12% 10% 8% 6% 4% 2% 0% Direct Vacancy Historical Chart '02 '03 '04 '05 '06 '07 '08 '09 '10 Washington, DC Northern Virginia Surburban Maryland 101 Constitution Avenue Suite 325 East Washington, DC Wilson Boulevard Suite 200 Arlington, VA

2 Washington, DC Regional Quarterly Overview Net Absorption ytd DC 3.6 Mil sf NOVA 987,662 sf MD 878,417 sf The Washington, DC metropolitan area experienced approximately 1.57 million square feet of total net absorption over the course of the fourth quarter. The District registered 927,898 square feet of total net absorption, Suburban Maryland witnessed 358,013 square feet, and Northern Virginia recorded 287,344 square feet. Sublease space accounted for much of the positive absorption that was witnessed this year. Large blocks of sublease space that were put on the market in 2009 were gradually occupied over. 4Q Construction DC 1.94 Mil sf NOVA 2.87 Mil sf MD 358,440 sf In the fourth quarter of, fourteen office buildings (6 in DC, 7 in VA, and 1 in MD) in the metropolitan region were under construction totaling 5.2 million square feet. Construction pricing has also been increasing slightly as contractors have become busier and some building materials have increased in price. For example, there was recently a 5-10% price increase in ceiling and insulation materials. There is still some instability in the subcontractor trades and owners and tenants should exercise caution and due diligence when selecting contractors for projects. 4Q Deliveries DC 0 sf NOVA 213,473 sf MD 0 sf Two buildings delivered during the fourth quarter (0 in DC and MD, and 2 in VA) adding 213,473 square feet of new office supply to the region. Clarendon Center North & South Wilson Boulevard & 3030 Clarendon Boulevard delivered 213,473 square feet to the Clarendon/Courthouse submarket. The buildings are 40% leased in total. After a year of minimal deliveries, we should see this trend start to reverse as we begin to see an uptick in new building construction due to improvements in market fundamentals.

3 Washington, DC Regional Quarterly Overview Investment Sales Investment sales activity increased significantly in the fourth quarter. Owners, many of whom bought during the recent downturn, fed the appetite of domestic and foreign investors for assets in the DC region, both downtown and suburban. Many sellers have experienced unexpectedly high valuations, tempting many others to consider testing the market. Land prices show signs of recovery in stronger submarkets and talk of new development, even on a spec basis, increases as vacancy rates show signs of improvement across most submarkets. The National Restaurant Association marketed its property at th Street, NW and received offers in excess of $225 per square foot for a site that can accommodate 170,000 square feet of development. If that closes, the market will see additional land trades and other aging buildings will be considered for demolition during this upturn in the cycle. Other activity in 2011 will likely revolve around debt restructurings and other recapitalization transactions, since even with the uptick in values, many assets financed during the last peak in valuations have not fully recovered from the downturn and debt levels remain relatively high by today s underwriting standards. With an excess of new capital chasing fewer deals, and with most institutional investors eager to make investments in the DC region, deal flow should be robust. Address Submarket Price Buyer Seller Class % Leased 1225 Connecticut Avenue, NW CBD, DC $216 Million $900 psf World Bank Brookfield Properties Corporation A 100% 3101 Wilson Boulevard Clarendon/Courthouse, VA $112.6 Million $530 psf Heitman MRP/Angelo Gordon A 100% 520 and 530 Gaither Road North Rockville, MD $85 Million $ psf First Potomac Realty Trust Prudential Real Estate Investors A 100% and 5.7% Government The Federal Government continued to drive tenant activity in the fourth quarter of in Metropolitan Washington, DC. While there were numerous renewals in all jurisdictions, most new space was acquired in the District of Columbia, most notably the NOMA submarket. The GSA/Department of Veterans Affairs expanded into 124,000 square feet at 1100 First Street, NE, and 56,000 square feet at 90 K Street, NE, which also picked up 27,000 square feet of growth for the Equal Employment Opportunity Commission. The Federal Retirement Thrift Investment Board leased space to relocated from the East End to 77 K Street, NE, and the Department of Homeland Security expanded by 53,000 square feet in Portals III in Southwest DC. With the new Congress coming in January, the pace of new Government leasing would seem hard to sustain, but there continue to be large procurements on the street which will land in 2011, most notably the Department of Homeland Security for 1,400,000 square feet, which can go to DC, MD or VA, 500,000 square feet for the State Department in Washington, DC, and 500,000 square feet in Montgomery County, MD for the NIH s NIAID division. One big policy change in the fourth quarter was the requirement for all new GSA leases to be in buildings that are Energy Star rated 75 or higher. We will see how this policy gets implemented in 2011.

4 National Presence. Local Focus Washington, Dc 4Q Market Summary The Washington, DC office market consists of 776 buildings over 25,000 square feet for a total inventory of approximately 136 million square feet. The fourth quarter of demonstrated signs of economic improvement as the unemployment rate in the District decreased to 9.8% according to the Department of Labor. Employers continued to create jobs this past quarter and it is predicted that this trend will continue in The commercial real estate market witnessed what is believed to be the beginning of a shift from a tenant s market towards a landlord s market. Office vacancy rates decreased in the fourth quarter to 11.2% total vacancy in the District of Columbia. This reduction, in combination with no buildings delivering this past quarter, has allowed landlords to begin to reclaim the market, although tenants still have the stronger hand in most submarkets. According to Costar, average total rental rates increased to $49.01 FS, up from $47.85 FS in the fourth quarter of Two leases were signed in excess of 100,000 square feet this quarter. CSOSA renewed for 143,000 square feet at 633 Indiana Avenue, NW, and GSA/The Department of Veterans Affairs will move into 124,000 square feet at 1100 First Street, NE. 4Q DC Highlights Direct Vacancy Rate: 10.0 % Total Vacancy Rate: 11.2% Under Construction: 1.94 Million sf Direct Net Absorption: 884,486 SF Total Net Absorption: 927,898 SF % Pre-leased: 59% Total Rental Rate: $49.01 psf FS Total Leasing Activity: 1.73 Million sf Deliveries: 0 sf 101 Constitution Avenue Suite 325 East Washington, DC Wilson Boulevard Suite 200 Arlington, VA

5 Washington, DC Quarterly Overview Vacancy Rate In the fourth quarter, direct and total vacancy rates both decreased. Direct vacancy shrunk to 10% this past quarter from 10.7% in third quarter. At year-end 2009 direct vacancy measured 10.8%. Total vacancy decreased as well, dropped to 11.2% from 11.8% in the third quarter. A large decrease was seen between the year-end 2009 total vacancy rate (12.1%) and fourth quarter (11.2%). The largest decrease this past year was in the Southwest submarket, with direct vacancy rates dropping from 24.5% in fourth quarter 2009 to 17.8% in fourth quarter due to GSA activity at Patriots Plaza and The Portals. Other submarkets also witnessed large direct vacancy decreases; Georgetown/ West End decreased from 11.3% at year-end 2009 to 7.4% in the fourth quarter and the Capitol Riverfront decreased from 15.5% at year-end 2009 to 11.1% in the fourth quarter. Overall, six out of eight submarkets in the downtown market saw decreases in direct vacancy rates since the third quarter. The other two submarkets had direct vacancy rates that remained the same. Washington Direct Vacancy Rates CBD - 7.8% CBD/EE Class-A % Cap Hill/ NoMa % Southwest % East End - 8.5% CBD/EE Class-B - 5.8% West End/Georgetown - 7.4% Capitol Riverfront % Absorption and Gross Leasing Absorption rates increased in the fourth quarter to 927,898 square feet, nearly reaching the 998,007 square feet absorption rate witnessed in second quarter. With each of the four quarters having positive net absorption (over 800,000 square feet), surpassed the absorption rates of the last five year-end totals. One can expect strong positive absorption to continue next year as large tenants who leased blocks of space in begin to move in during early Despite a large drop in leasing activity in the fourth quarter (1.73 million square feet compared to 3.07 million sf in the third quarter), finished off with the highest yearly leasing activity (9.95 million square feet) since 2003, mainly due to significant GSA leasing activity. 4Q Significant Sales Transactions 1225 Connecticut Avenue, NW Seller: Brookfield Buyer: The World Bank $ PSF Purchase by Tenant 1111 Pennsylvania Avenue, NW Seller: Shorenstein Realty Buyer: INVESCO $ PSF 1750 H Street NW Seller: National Treasury Employees Union Buyer: First Potomac Realty Trust $ PSF

6 Washington, DC Quarterly Overview Construction At the end of the fourth quarter, there were six buildings under construction totaling 1,935,112 square feet, of which 59% are pre-leased Connecticut Avenue, NW is under construction in the CBD and is currently 62% preleased to Arent Fox. This building is expected to deliver 4Q Pennsylvania Avenue, NW is under construction in the West End and is currently 71% pre-leased to Hunton & Williams, Danaher, and Vinson & Elkins. In NOMA, 1111 North Capitol Street, NE broke ground this past quarter and began construction on the 100% pre-leased 450,000 square feet NPR building Half Street, SE in the Capitol Riverfront submarket remains 100% vacant as construction continues. In the East End submarket, two buildings are currently under construction: 1307 L Street, NW and th Street, NW L Street, NW broke ground this quarter and is expected to deliver in the third quarter of The 75,000 square foot building is owned and will be 100% DC Historical Stats occupied by New York University. The National Association of Manufacturers signed a 41,732 square foot lease at th 6 14 Street, NW this past quarter. The building is expected to deliver in the fourth quarter 2011 and is 22% pre-leased. SF (Millions) Potential Space Available There is currently 15.1 million square feet of vacant space in 3 8 the District of Columbia, of which approximately 1.52 million 2 6 square feet is sublease space. This is the smallest amount of 1 4 sublease space since the end of the first quarter 2009 and a 12% 0 2 decrease from the third quarter. Approximately 18.8 million square feet is being marketed for lease within the next '02 '03 '04 '05 '06 '07 '08 '09 YTD'10 months. This includes pending lease expirations, new construction, buildings under renovation, and proposed buildings which Delivery Net Absorption Total Vacancy Rate have not yet begun construction. Outlook The General Services Administration and the DC Government remained the most active tenants in the Washington, DC commercial real estate market over the past 12 months. The government was able to take advantage of favorable lease opportunities in NoMa, Southwest, and the Capitol Riverfront and is responsible for the majority of the lease activity witnessed this year. As the economy continues to recover, we expect the GSA leasing to gradually slow and for private sector leasing slowly to emerge from its slumber of the past 24 months. Total absorption will be significant in 2011 as the market benefits from the leasing activity of. The inventory of large blocks of space remaining in the market is expected to diminish over the next 18 months. With little new construction in the market and most of the new developments of 2008 and 2009 leased, large tenants are going to see fewer options available. Smaller and mid-size tenants should continue to benefit in their negotiations with landlords as options in the city are plentiful in that size range among both Class-A and Class-B markets. Vacancy Rate (%) 4Q Significant Lease Transactions CSOSA 143, Indiana Avenue, NW Renewal GSA - Department of Veterans Affairs 124,000 sf st Street, NE New Lease GSA - FEMA 71,914 sf 395 E Street, SW Renewal

7 National Presence. Local Focus Northern Virginia 4Q Market Summary The Northern Virginia office market, which consists of 176 million square feet in Arlington, Alexandria, Fairfax, and Loudoun counties, has shown improvements in market fundamentals in each succeeding quarter since the end of the first quarter. While most office markets around the country either struggled or remained stagnant, Northern Virginia and Washington, DC experienced a year of improvement in all leasing categories, except direct vacancy which has remained the same since year-end Much of this may be attributed to the fact that the Washington, DC region gained 49,000 jobs in, compared to 50,000 jobs dropped in the area in In fact, as national unemployment rates have just begun to decrease (from 9.8% to 9.4%) Northern Virginia s rate has held steady at 4.8%. All four major Northern Virginia counties have experienced either a decrease in unemployment or no change since the end of the third quarter with Alexandria having a 4.6% rate, Arlington a 3.9% rate, Fairfax realizing a 4.6% rate, and Loudoun experiencing a 4.4% unemployment rate. Northern Virginia s total vacancy decreased from the third quarter to the fourth quarter as firms continued to absorb sublet blocks and expand into vacant space. While most rental rates outside the beltway have remained flat throughout, rates inside the beltway have increased. At year s end, the average asking rental rate for the overall Northern Virginia market has increased to $30.15 psf from $29.79 psf third quarter, and is up from $29.95 psf at the end of the fourth quarter These improvements in fundamentals have resulted in a revival of development plans, and we will see construction commence in core supply-constrained markets in Total leasing volume tapered off from the profusion of leasing activity experienced in the third quarter, but there were still 2.2 million square feet leased with two leases signed in excess of 100,000 square feet. The contractor Scitor inked the largest lease of the quarter as it signed a relet lease of 158,413 square feet at One Discovery Square at 1 Sunset Hills Drive in the Reston submarket; Time Warner signed a lease of 120,000 square feet at Dulles View 2551 & 2553 Dulles View Drive in the Herndon submarket; Jacobs Engineering renewed its lease of 96,000 square feet at Three Ballston Plaza 1100 North Glebe Road in the Ballston submarket; Sallie Mae signed a 95,000 square foot sublease at Reston Crossing at 2001 & 2003 Edmund Halley Drive; and Verizon renewed its lease of 81,618 square feet at Campus Pointe 1880 Campus Commons Drive in the Reston submarket. 4th Quarter Construction Start 1776 Wilson Boulevard 126,939 square feet 0% Leased NOVA Highlights Direct Vacancy Rate: 11.6% Direct Net Absorption: 279,818 sf Total Net Absorption: 987,662 sf Gross Leasing Activity: 12.3 Million sf Average Direct Rental Rate: $30.15 psf FS Under Construction: 2.87 Million sf Pre-Leased: 87% Deliveries: 1.39 Million sf 101 Constitution Avenue Suite 325 East Washington, DC Wilson Boulevard Suite 200 Arlington, VA

8 Northern Virginia Quarterly Overview Vacancy Rate The direct vacancy rate in the Northern Virginia office market remained at 11.6% over the past quarter and has remained at 11.6% since year-end Total vacancy decreased from 12.8% to 12.6% and has also decreased from 13% since year-end NOVA Direct Vacancy Rates Alexandria % Crystal City - 9.2% Fairfax % Loudoun County % Merrifield % R-B Corridor - 4.7% Reston/Herndon % Rt. 28 North - 15% Rt. 28 South % Springfield % Tysons Corner % Absorption The Northern Virginia office market experienced 287,344 square feet of positive net absorption from the end of the third quarter to the end of the fourth quarter, with 211,157 square feet being absorbed sublease space. Total net absorption for the year tallied 987,662 square feet at year-end as compared to 854,911 square feet absorbed at year-end Northern Virginia witnessed a quarter of tenant relocations and expansions, providing evidence that private sector growth is sustainable. Sales Northern Virginia experienced another quarter of increased sales volume from 2009 levels as there were nine significant sales transactions in the fourth quarter. Competition for buildings on the market has resurfaced, and although buyers are looking mostly at occupied buildings in core markets, there have been several more risky and opportunistic purchases in Northern Virginia. Northrop Grumman closed on the sale of 2980 Fairview Park Drive for $101.3 million ($303 psf) from ING Office Fund. The defense contractor will move its headquarters here from Los Angeles, California in the summer of Heitman purchased the fully leased Hartford Building at 3101 Wilson Boulevard in Clarendon/ Courthouse for $112.6 million ($530 psf) from MRP Realty and Angelo Gordon & Co. PS Business Parks added to its Tysons presence as it acquired seven buildings on 39.2 contiguous acres from DLJ Real Estate Capital Partners. The buildings were sold for $140 million and are currently 61.9% leased. There were also purchases of two fully vacant buildings illustrating that buyers have confidence in improved market conditions. Corporate Office Properties Trust (COPT) purchased 3120 Fairview Park Drive for $43 million ($235 psf) in the Merrifield submarket from Fairview Property Investments. LaSalle Investment Management purchased Mission Ridge I & II & Conference Center Drive in the Route 28 South submarket for $40.5 million ($130 psf) from Capmark Bank. 4Q Significant Lease Transactions Scitor 158,413 sf One Discovery Square - 1 Sunset Hills Road Relet Lease Time Warner 120,000 sf Dulles View & 2553 Dulles View Drive New Lease Jacobs Engineering 96,000 sf Three Ballston Plaza N Glebe Road Renewal Lease

9 Northern Virginia Quarterly Overview SF (Millions) Construction At the close of the fourth quarter, there were seven buildings that were under construction in Northern Virginia for a total of 2.87 million square feet, of which 87% was pre-leased. Developers are starting to establish their presence in the Northern Virginia market once again. One office project officially broke ground in the fourth quarter in the Rosslyn-Ballston Corridor. Skanska USA is constructing the future 126,936 square foot Class-A office building at 1776 Wilson Boulevard and will deliver in the second quarter Monday Properties 1812 North Moore Street broke ground in the fourth quarter in Rosslyn, however it is not being counted in the under construction statistics since Monday is only committed to finishing the parking garage at this point. Two buildings delivered this past quarter: Clarendon Center North & South Wilson Boulevard & 3030 Clarendon Boulevard delivered 213,473 square feet to the Clarendon/Courthouse submarket. The buildings are 40% leased in total NOVA Historical Stats '02 '03 Delivery '04 '05 '06 Net Absorption '07 '08 '09 YTD'10 Total Vacancy Rate Vacancy Rate (%) Outlook The Washington, DC region has emerged from the national recession as the best performing commercial office market in the country. Northern Virginia in particular has shown that it belongs in the top echelon of high-performing submarkets within the nation. With that being said, there are factors we must be cognizant of that may weaken this continued recovery. The federal government has been the key player in buoying the office market during the commercial real estate slump through leasing space directly, as well as fueling growth within the contractor community. It is uncertain though what kind of impact the government will have going forward. Federal spending and procurement represent one-third of the DC region s economy, and both areas will take a hit in order to compensate for the $1 trillion national deficit. Most recently, Defense Secretary Robert Gates has ordered spending cuts by over $78 billion over the next five years. Specifically, he said he would slash the number of private military contractors by one-third, freeze civilian salaries, and raise health care premiums for military retirees and families. Northern Virginia will start to feel the impact from BRAC by late 2011 as agencies begin transferring workers to Fort Belvoir, Fort Meade, and Quantico Station. And although unemployment is improving, the rate of improvement is not what economists had hoped for. Some firms are still reluctant to hire because they are not completely confidant in the economy s recovery. Although there are challenges that lay ahead for Northern Virginia, there are enough signs that would lead one to believe that the market will continue to improve. Private sector hiring is on the rise, and firms are as diverse as ever leading to a decrease in dependency on the federal government. The commercial mortgage market is making a comeback as institutions gain confidence in the market s recovery. Northern Virginia witnessed the first signs of speculative construction in over a year as 1776 Wilson Boulevard broke ground and Monday Properties 1812 North Moore Street moved forward with the excavation and the garage. Although some BRAC relocations in late 2011 will impact the region, many tenant relocations have been delayed with 900,000 square feet of relocations having been extended through 2012 and additional leases totaling 2.3 million square feet have been extended through 2013 or later. Northrop Grumman s headquarters purchase at 2980 Fairview Park in Merrifield signifies the strength of the area, and may influence other high-profile corporations to take a look at Northern Virginia as a potential nesting ground for their operations. In conclusion, Northern Virginia will be faced with some potential setbacks, but ultimately, the market should improve as it builds upon the strides that were made in.

10 National Presence. Local Focus Suburban Maryland 4Q Market Summary The suburban Maryland office market consists of 870 office buildings totaling approximately million square feet located in Montgomery and Prince George s Counties. During the fourth quarter, the direct vacancy rate in the suburban Maryland office market decreased to 13.0% and the total vacancy rate decreased to 14.3%. Over, suburban Maryland witnessed 487,799 square feet of direct net absorption. When including the absorption of sublet space, total net absorption in was a solid 878,417 square feet. This was a monumental step forward from the 2009 total net absorption of negative 1,100,788 square feet. The direct asking rental rates in the office market lowered by $0.18 over the fourth quarter to $25.90 per square foot FS. The Class-A rates dropped by $0.53 over the fourth quarter to $29.03 per square foot FS. In accordance with traditional supply and demand principles, rental rates are inversely proportionate to vacancy rates to a certain degree. Due to the unusually high vacancy levels over the past couple of years, the positive absorption has still not begun to drive the rental rates up as landlords have continued to drop rents to attract tenants and fill space. There are currently 96 existing office buildings, 67 in Montgomery and 29 in Prince George s, marketing contiguous blocks of space 30,000 square feet or greater in the suburban Maryland market accounting for 11% of the number of buildings in the market. Vacancy Rate The direct vacancy rate in the suburban Maryland market decreased by 0.3% over the fourth quarter ending at 13.0%. When sublet space is taken into account, the total vacancy rate over the fourth quarter decreased by 0.5% to 14.3%. Consistent with this encouraging trend, the direct vacancy rate for Class-A buildings also decreased over the fourth quarter from 14.3% to 13.9%, while the Class-A total vacancy rate closed the fourth quarter down 0.6% at 16.2%. There were no new deliveries to this market over the final three quarters of which have helped sustain stable vacancy rates throughout the market as existing product is absorbed. Maryland Office Sales 520 & 530 Gaither Road 347,462 square feet $85 Million ($ psf) MD Highlights Direct Vacancy Rate: 13.0 % Direct Net Absorption: 487,799 sf Total Net Absorption: 878,417 sf Gross Leasing Activity: 4.91 Million sf Average Direct Rental Rate: $25.90 psf FS Under Construction: 358,440 sf Pre-Leased: 100% 101 Constitution Avenue Suite 325 East Washington, DC Wilson Boulevard Suite 200 Arlington, VA

11 Suburban Maryland Quarterly Overview Absorption During the fourth quarter of, direct net absorption in the suburban Maryland office market was 188,071 square feet. When taking into account the 169,942 square feet of sublet net absorption, the market s fourth quarter total net absorption was 358,013 square feet, bringing the value to a strong 878,417 square feet. Montgomery and Prince George s County produced positive numbers in the fourth quarter which is an encouraging indicator for the market as a whole. Henry M. Jackson Foundation leased 122,107 square feet and Coventry Healthcare has recently leased 35,588 square feet of new space at Piedmont Point I 6720 Rockledge Drive, leaving the building 83.2% leased with 31,804 square feet remaining vacant. This 189,499 square foot Class-A office building is part of Rock Spring Park in the North Bethesda/Potomac submarket. Built in 2007 by Opus East, the building subsequently sold to Piedmont Office Realty Trust, the current ownership, in December of 2007 for $ psf. Montgomery County Public Schools leased the entire 108,588 square foot 45 West Gude Drive Rockville Corporate Center. Located in the North Rockville submarket, this Class-B building was built in 1987 and is owned by COPT. Relative to the volume of this market, several newly signed leases of this magnitude will substantially impact the absorption and provide stability, crucial to the suburban Maryland office market recovering to full strength in a timely matter. Maryland Direct Vacancy Rates Bethesda/Chevy Chase- 7.2 % North Bethesda % Rockville % North Rockville % Gaithersburg/Germantown % Prince George s Co % Construction At the close of the fourth quarter, one office building was under construction in suburban Maryland. Scheduled to deliver in October of 2012, North Bethesda Center 1 on Rockville Pike, a Class-A building owned by USAA Real Estate Company and developed by LCOR, consists of 358,440 square feet and is fully leased to the U.S. Nuclear Regulatory Commission to serve as its headquarters. Potential Space Available In addition to the 11.8 million square feet available immediately in suburban Maryland, 8.9 million square feet are being marketed as potentially available over the next 24 months. Donohoe Construction Co./ TIAA-CREF plan to redevelop Air Rights Center Bethesda into a 150,000 square foot office building at 7300 Pearl Street in Montgomery County s new Commercial/Residential Zone category. In Prince George s County, the county and the State of Maryland called for bids on the 39-acre parcel adjacent to the New Carrollton Metro Station and are in the process of selecting a firm in which to award the project. This site contains proposed/conceptual plans which allow for 2.5 million square feet of commercial space and 3,000 residential units. The State of Maryland will position the development to fit GSA building requirements to attract GSA tenants and government contractors as the BRAC initiative proceeds in Prince George s County.

12 Suburban Maryland Quarterly Overview Sales Activity There were several distinguished transactions on the sales front this quarter that should provide the standard and confidence in the market. Prudential Real Estate Investors sold 520 & 530 Gaither Road to First Potomac Realty Trust for $85,000,000 ($ psf) at an estimated 8.5% cap rate. This 40% leased Class-A office building portfolio in the North Rockville submarket totals 347,462 square feet, of which BAE Systems leases the entire 139,120 square feet of 520 while 530 currently stands vacant. Outlook The suburban Maryland commercial real estate market responded well throughout given the economic circumstances. During the previous year, this market has produced positive trends across the board in the major categories mentioned previously. These optimistic signs, one being a consistently decreasing vacancy rate each quarter of, are indicators of a strong foundation in which this market will have to build off in 2011 and beyond. Several leases of 100,000+ square feet and a relatively high SF (Millions) MD Historical Stats '02 '03 Delivery '04 '05 '06 Net Absorption '07 '08 '09 YTD'10 Total Vacancy Rate Vacancy Rate (%) number of approximately fifteen leases between 10,000 and 30,000 square feet that were signed over the fourth quarter will provide positive momentum heading into As rental rates took a dive during the rough economic climate creating a tenants market, these rates should slowly rebound over 2011 with positive absorption levels, an improving economy and minimal new space being delivered to the market. With no new vacant space coming to the market through the development pipeline in 2011, this market is setting up for success by providing itself a chance to catch up and build off its progress through steady absorption of the existing vacant space. As the private sector continues to rebound and the local and federal governments continue to play a considerable roll in this market by leasing up major blocks of space, as seen in through multiple 100,000+ square foot leases such as the Nuclear Regulatory Commission HQ, National Cancer Institute HQ and Montgomery County Public Schools, 2011 should witness an increase of activity and a stable marketplace on a dependable and newly rebuilt foundation stronger than any in the past.