Signs of Recovery Ahead

Research & Forecast Report Northern Virginia Office Market Fourth Quarter 2015 Signs of Recovery Ahead Audrey Hinkle Research Analyst Northern Virginia In recent years, fiscal uncertainty has created softness in the Northern Virginia market. Since the implementation of the Sequestor, government contractors have reduced the amount of space they leased impacting the entire market. However, with the government loosening the cap on federal spending activity, the Northern Virginia office market saw significant demand growth for the first year since 2011. During the fourth quarter, 60 leases were signed over 10,000 square feet, 25 percent more than were signed in the third quarter. With strengthening demand for space during the fourth quarter of 2015, absorption totaled 877,930 square feet. Such strong absorption in the fourth quarter was preliminary indicator of the Northern Virginia Market s improvement. Government contractors lead the region in largest leases signed, accounting for six of the ten largest. Three of these constituted new or additional space. These leases will generate almost a quarter of a million square feet of net absorption over the next two years. In addition, government agencies and contractors that were once consolidating the Department of Defense and Booz Allen Hamilton to name two renewed two of their leases in the fourth quarter with no contraction. The other large contractor leases executed were of the same size as opposed to contraction, which have plagued the market in 2014 and early 2015. Though, Arlington, specifically the Rosslyn-Ballston (R-B) Corridor, may not be signing deals with the government, the numerous attempts to attract start-up and tech companies to the area are starting to pay off. In fact, the R-B Corridor saw positive demand for the quarter with 77,601 square feet of space absorbed. In contrast, 179,702 square feet was returned during the third quarter. A large portion of leases signed in the R-B Corridor were executed by technology sector companies. These, however, were all less than 50,000 square feet in size. Market Indicators Relative to prior period VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE Note: Construction is the change in under development. *Projected 2015 Q4 2016* Summary Statistics 2015 Q4 Regional Office Market All Classes Class A Class B & C Vacancy Rate 17.6% 17.9% 17.3% Change from 2015 Q3 (Basis Points) Absorption (Square Feet) New Construction (Square Feet) Under Construction (Million Square Feet) Asking Rates Per Square Foot/Year -4.5-4.9-4.1 877,930 540,337 337,593 115,664 95,000 20,664 4.17 4.01 0.16 Direct Asking Rate $31.42 $34.67 $28.51 Change from 2015 Q3 0.3% 0.2% 0.0%

Recently, tech start-ups have leased collaborative space, as well as introduced workplace initiatives offering the option for employees to work remotely. Therefore, their need for large blocks of contiguous space is less than that of government contractors which require secured space and additional workrooms. Therefore, although the amount of business in the technology sector is growing in the market, it will have less of an impact on the leasing market than the recovering government contracting industry. Economics The office-using economy demonstrated growth during the fourth quarter of 2015. The seasonal adjusted office-using growth rate grew 0.72 percent since last quarter, generating over 11,000 jobs in Northern Virginia. Since the fourth quarter of 2014, seasonally adjusted job growth has occurred in the financial activities, professional and business services, and government sectors. Source: Colliers International, CoStar Group Northern Virginia s office using economy has created 17,000 new jobs during 2015, which shows significant improvement from 2014 numbers when only 8,200 jobs were created for the year. The overall growth in jobs this year points towards a market recovery as all the jobs lost under Sequestration have been recovered. Absorption Not just government contractor demand in Northern Virginia increased in the fourth quarter. A number of private sector companies and smaller technology companies increased their demand for office space. These smaller move-ins accounted for the majority of this quarters 877,000 square feet of net absorption. Smaller tenants of note that moved into new space included Stanley Martin, Blue Canopy and Pulte. The largest move-ins this quarter included SRA International which occupied 150,000 square feet at 15036 Conference Center Drive, and Capital One, which moved into 135,000 square feet at 1750 Tysons Boulevard. Source: Colliers International, CoStar Group As noted, the R-B Corridor has continued to struggle even before the contraction in government spending and relocation of contractors to areas with cheaper space. During 2015, the area continued to see demand contract, but at a slower pace than in recent history. During 2015, 84,000 square feet of space was returned to the R-B Corridor. This compares to almost 700,000 square feet returned in 2014. Crystal City had the greatest demand for the year with net absorption totaling 545,000 square feet. With the lower cost of space, and its proximity to both the District and the Pentagon, the area became a popular destination for government agencies and contractors throughout the year. Areas outside the beltway with lower priced space remained competitive in the market. Route 28 Corridor South had almost a half million square feet absorbed for the year. Source: Colliers International, CoStar Group 2 Northern Virginia Office Market Research & Forecast Report Fourth Quarter 2015 Colliers International

Move-ins in Route 28 Corridor South have been closely tied with National Intelligence and has largely been driven by defense contractors throughout the year. However, private sector tenants have been active in the market too. Overall in 2015, net absorption totaled 941,716 square feet of absorption, the most since 2009. Last year, 609,000 square feet of space was given back to the market. Vacancy With demand for office space strong during the year and lower levels of new supply, the overall vacancy rate decreased 40 basis points since the start of the year. At 17.6 percent, the vacancy rate in Northern Virginia still remained higher than previous years, and was the second highest recorded at yearend in past eleven years. With a moderate amount of speculative development currently under construction, demand for space must remain high in order for vacancy to continue decreasing over the next few quarters. were build-to-suits. While some developers may not risk constructing speculatively, those that have are developing in close proximity to Metro and well established amenities. This quarter, three developments commenced. The largest was Reston Station, a 375,000-square-foot speculative office building located adjacent to the Reston-Wiehle Metro station. Comstock, the developer, plans to move their headquarters to this building upon completion. No other leases have been signed. In 2015, nine buildings delivered. Of the 755,000 square feet constructed, 39.5 percent was leased upon delivery. Vacancy decreased in all but one county in Northern Virginia during the quarter. In Loudoun County, the vacancy rate rose from 15.9 percent to 16.4 percent. This rise in vacancy was due in part to the delivery of 95,000 square feet of medical office space at 24430 Gum Springs Road, which was completely vacant upon delivery. Development Even with the decreased demand for office space in recent years, development activity remained strong during 2015. Developers broke ground on six projects during the year for a total of about one million square feet of office space. However in past years, developers were more likely to build on speculative basis. In contrast, the majority of developments that started in 2015 Source: Colliers International, CoStar Group 3 Northern Virginia Office Market Research & Forecast Report Fourth Quarter 2015 Colliers International

Market Statistics Northern Virginia Office Market All Classes 2015 Q4 MARKET ALEXANDRIA CITY EXISTING INVENTORY NEW SUPPLY ) 2015 NEW SUPPLY UNDER CONSTRUCTION ABSORPTION 2015 ABSORP- TION OVERALL VACANCY RATE DIRECT ASKING RENTAL RATE Eisenhower Ave Corridor 5,225,172 - - 700,000-2,764-24,671 11.1% $39.76 I-395 Corridor* 9,125,177 - - - 52,174-218,980 36.7% $30.23 Old Town 8,971,677 - - - 2,876-10,805 10.9% $33.21 Alexandria City Total 18,540,207 - - 700,000 19,967-90,531 17.6% $33.51 Arlington County/Falls Church City Crystal City/Pentagon City 13,455,252 - - - 50,646 545,424 20.1% $38.06 Falls Church** 2,279,708 - - - 63,509 51,497 13.5% $22.49 Rosslyn/Ballston Corridor 24,088,337-259,331 719,548 77,601-91,287 22.7% $41.24 Arlington County/Falls Church Total Fairfax County/Fairfax City 40,019,968-259,331 719,548 155,824 484,125 21.1% $39.44 Annandale 1,871,540 - - - -21,581-71,411 14.2% $25.04 Fairfax/Oakton 13,424,127 20,664 20,664-21,650-123,597 15.3% $24.47 Herndon 12,144,146 - - - -47,237-57,737 12.2% $27.70 McLean 1,558,716 - - - 16,407-335 10.0% $32.09 Merrifield 9,845,682-27,000 - -49,826-156,899 15.2% $31.25 Reston 18,926,619 - - 368,413 56,070 196,501 14.2% $27.67 Route 28 Corridor South 14,146,897-150,000 159,300 291,171 455,321 18.4% $25.47 Springfield 6,972,786 - - - 30,648 193,253 22.8% $30.39 Tysons Corner 28,460,257 - - 1,787,613 207,711-143,826 17.5% $31.38 Vienna 1,542,256 - - - 45,721 31,082 14.9% $24.40 Fairfax Area Total 113,478,174 20,664 197,664 2,315,326 618,985 179,936 16.9% $28.59 Loudoun County Leesburg/West Loudoun 2,140,339 95,000 95,000 237,773 8,047 35,043 15.6% $24.54 Route 28 Corridor North 9,689,107-134,467 182,000-39,476 46,585 20.3% $23.70 Route 7 Corridor 4,710,682-68,375 15,000 29,969 120,981 8.7% $25.29 Loudoun County Total 16,540,128 95,000 297,842 434,773-1,460 202,609 16.4% $24.00 Prince William County/Manassas City/Manassas Park Manassas 1,976,949 - - - -4,206 22,102 11.6% $20.84 Route 29/I-66 Corridor 2,585,112 - - - 69,588 109,621 9.2% $18.21 Woodbridge 2,523,451 - - - 19,232 33,854 12.1% $23.44 Prince William Area Total 7,085,512 - - - 84,614 165,577 10.9% $20.50 Northern Virginia Total 195,663,989 115,664 754,837 4,169,647 877,930 941,716 17.6% $31.42 * I-395 Corridor extends into Arlington County, Fairfax County and Alexandria City. Jurisdictional totals reflect the portion of I-395 Corridor they contain. ** The Falls Church submarkets includes all of Falls Church City and extends into Fairfax County. Jurisdictional totals reflect the portion of Falls Church they contain. 4 Northern Virginia Office Market Research & Forecast Report Fourth Quarter 2015 Colliers International

Market Statistics Northern Virginia Office Market Class A 2015 Q4 MARKET ALEXANDRIA CITY EXISTING INVENTORY NEW SUPPLY ) 2015 NEW SUPPLY UNDER CONSTRUCTION ABSORPTION 2015 ABSORP- TION OVERALL VACANCY RATE DIRECT ASKING RENTAL RATE Eisenhower Ave Corridor 3,713,509 - - 700,000 2,206-9,541 10.7% $42.14 I-395 Corridor* 4,256,284 - - - 37,877-179,193 43.2% $31.28 Old Town 3,515,453 - - - -4,280 32,656 15.2% $36.36 Alexandria City Total 9,152,043 - - 700,000 4,157-40,444 21.4% $37.51 Arlington County/Falls Church City Crystal City/Pentagon City 6,166,474 - - - 29,251 386,778 22.7% $40.92 Falls Church** 128,250 - - - 1,265 5,326 2.9% $29.50 Rosslyn/Ballston Corridor 15,531,126-259,331 719,548-10,827 57,863 23.2% $43.30 Arlington County/Falls Church Total Fairfax County/Fairfax City 22,357,139-259,331 719,548 24,759 468,981 22.9% $42.10 Annandale 200,000 - - - -14,862-14,862 28.1% $31.50 Fairfax/Oakton 4,949,540 - - - 17,130 18,859 12.8% $29.17 Herndon 7,940,924 - - - -55,361 82,344 9.3% $30.23 McLean - - - - - - n/a n/a Merrifield 5,378,369 - - - -70,524-176,068 19.0% $32.60 Reston 11,085,261 - - 368,413 123,427 18,149 12.5% $30.95 Route 28 Corridor South 8,903,878-150,000 159,300 201,116 446,272 15.7% $27.33 Springfield 2,435,400 - - - -21,218 115,037 36.6% $39.34 Tysons Corner 13,726,487 - - 1,787,613 228,642 114,594 13.3% $37.19 Vienna 406,324 - - - 32,324 32,450 3.3% n/a Fairfax Area Total 56,828,097-150,000 2,315,326 467,250 502,127 15.3% $31.80 Loudoun County Leesburg/West Loudoun 746,018 95,000 95,000 95,000 6,766 25,590 17.9% $25.64 Route 28 Corridor North 5,435,778 - - 182,000-8,620 16,285 20.9% $25.28 Route 7 Corridor 1,040,737 - - - 27,915 64,308 20.1% $26.03 Loudoun County Total 7,222,533 95,000 95,000 277,000 26,061 106,183 20.5% $25.41 Prince William County/Manassas City/Manassas Park Manassas 163,000 - - - 1,556-10,574 19.8% $25.95 Route 29/I-66 Corridor 603,825 - - - 11,948 14,633 2.8% $26.60 Woodbridge 470,434 - - - 4,606-17,110 11.0% $28.62 Prince William Area Total 1,237,259 - - - 18,110-13,051 8.2% $27.23 Northern Virginia Total 96,797,071 95,000 504,331 4,011,874 540,337 1,023,796 17.9% $34.67 * I-395 Corridor extends into Arlington County, Fairfax County and Alexandria City. Jurisdictional totals reflect the portion of I-395 Corridor they contain. ** The Falls Church submarkets includes all of Falls Church City and extends into Fairfax County. Jurisdictional totals reflect the portion of Falls Church they contain. 5 Northern Virginia Office Market Research & Forecast Report Fourth Quarter 2015 Colliers International

Market Statistics Northern Virginia Office Market Class B & C 2015 Q4 MARKET ALEXANDRIA CITY EXISTING INVENTORY NEW SUPPLY ) 2015 NEW SUPPLY UNDER CONSTRUCTION ABSORPTION 2015 ABSORP- TION OVERALL VACANCY RATE DIRECT ASKING RENTAL RATE Eisenhower Ave Corridor 1,511,663 - - - -4,970-15,130 12.1% $24.88 I-395 Corridor* 4,868,893 - - - 14,297-39,787 31.1% $29.25 Old Town 5,456,224 - - - 7,156-43,461 8.1% $30.19 Alexandria City Total 9,388,164 - - - 15,810-50,087 14.0% $28.61 Arlington County/Falls Church City Crystal City/Pentagon City 7,288,778 - - - 21,395 158,646 17.9% $36.02 Falls Church** 2,151,458 - - - 62,244 46,171 14.1% $22.41 Rosslyn/Ballston Corridor 8,557,211 - - - 88,428-149,150 21.8% $38.57 Arlington County/Falls Church Total Fairfax County/Fairfax City 17,662,829 - - - 131,065 15,144 18.9% $36.77 Annandale 1,671,540 - - - -6,719-56,549 12.5% $23.10 Fairfax/Oakton 8,474,587 20,664 20,664-4,520-142,456 16.7% $23.50 Herndon 4,203,222 - - - 8,124-140,081 17.9% $22.47 McLean 1,558,716 - - - 16,407-335 10.0% $32.09 Merrifield 4,467,313-27,000-20,698 19,169 10.5% $27.45 Reston 7,841,358 - - - -67,357 178,352 16.5% $25.24 Route 28 Corridor South 5,243,019 - - - 90,055 9,049 23.1% $23.02 Springfield 4,537,386 - - - 51,866 78,216 15.4% $22.87 Tysons Corner 14,733,770 - - - -20,931-258,420 21.3% $29.03 Vienna 1,135,932 - - - 13,397-1,368 19.0% $24.40 Fairfax Area Total 56,650,077 20,664 47,664-151,735-322,191 18.6% $26.06 Loudoun County Leesburg/West Loudoun 1,394,321 - - 142,773 1,281 9,453 14.4% $24.14 Route 28 Corridor North 4,253,329-134,467 - -30,856 30,300 19.4% $19.87 Route 7 Corridor 3,669,945-68,375 15,000 2,054 56,673 5.5% $23.22 Loudoun County Total 9,317,595-202,842 157,773-27,521 96,426 13.2% $21.09 Prince William County/Manassas City/Manassas Park Manassas 1,813,949 - - - -5,762 32,676 10.9% $19.72 Route 29/I-66 Corridor 1,981,287 - - - 57,640 94,988 11.1% $17.44 Woodbridge 2,053,017 - - - 14,626 50,964 12.3% $21.98 Prince William Area Total 5,848,253 - - - 66,504 178,628 11.5% $19.31 Northern Virginia Total 98,866,918 20,664 250,506 157,773 337,593-82,080 17.3% $28.51 * I-395 Corridor extends into Arlington County, Fairfax County and Alexandria City. Jurisdictional totals reflect the portion of I-395 Corridor they contain. ** The Falls Church submarkets includes all of Falls Church City and extends into Fairfax County. Jurisdictional totals reflect the portion of Falls Church they contain. 6 Northern Virginia Office Market Research & Forecast Report Fourth Quarter 2015 Colliers International

Deliveries Northern Virginia Office Market 2015 Q4 PROJECT DEVELOPMENT TYPE SUBMARKET CLASS DELIVERY DATE Canfield Village 4290 Chain Bridge Road RENTAL BASE AREA % COMMITTED Speculative Condos Fairfax City B October 2015 20,664 41.6% Stone Spring Hospital Center 24430 Gum Spring Road Speculative Medical Condos Leesburg/West Loudoun A December 2015 95,000 0.0% Under Construction Northern Virginia Office Market 2015 Q4 PROJECT DEVELOPMENT TYPE SUBMARKET CLASS DELIVERY DATE COPT - Phase 2 4870 Stonecroft Boulevard RENTAL BASE AREA % COMMITTED Build-to-suit Route 28 Corridor South A January 2016 150,000 100% 1775 Tysons Boulevard Speculative Tysons Corner A January 2016 476,913 26.0% 22318 Glenn Drive Build-to suit Route 28 North August 2015 182,000 100% Mitre 4 7598 Coleshire Drive NSF Headquarters 1 2415 Eisenhower Avenue Marymount 1000 N Glebe Road Reston Station On Plaza 1900 Reston Metro Drive Central Place Tower/CEB Tower 1201 Wilson Boulevard Capital One Campus Building 3 Capital One Drive N Build-to-suit Tysons Corner A October 2016 340,000 100% Build-to-suit Eisenhower Avenue Corridor A January 2017 700,000 97.4% Build-to-suit Ballston A April 2017 166,767 69.4% Speculative Reston A June 2017 368,413 1.4% Pre-Committed Rosslyn A February 2018 552,781 64.6% Build-to-suit Tysons Corner A August 2018 975,000 100% Largest Leases Northern Virginia Office Market 2015 Q4 TENANT ADDRESS LEASE TYPE LEASED SAPCE Raytheon Company 22110-22270 Pacific Boulevard Renewal 666,377 Department of Defense (DoD) 2521 S Clark Street Renewal 353,631 LMI 7940 Jones Branch Drive Sale/Leaseback 161,641 Capital One 7900 Westpark Drive New 136,000 Fairfax County Public Schools 8270 Willow Oaks Corporate Drive New 122,948 Booz Allen Hamilton, Inc. 575 Herndon Parkway Renewal 116,343 Carfax, Inc. 5860 Trinity Center Parkway Renewal/Expansion 103,789 Amazon Web Services 12900 Worldgate Drive Expansion 83,000 AECOM 3101 Wilson Boulevard Expansion 69,411 Front Point 1595 Spring Hill Road Renewal 62,000 7 Northern Virginia Office Market Research & Forecast Report Fourth Quarter 2015 Colliers International

This was a significantly lower amount of supply than what delivered last year when 2,254,510 square feet delivered in Northern Virginia. Of the space delivered in 2014, 56.1 percent was leased at delivery. Rental Rates For the fourth quarter in a row, the direct average asking rental rate increased in Northern Virginia, which was driven by high confidence in Class A product. The average Class A asking rate was $34.67 per square foot for the quarter, up from $34.61 per square foot in the third quarter of 2015. For the quarter, the direct average rental rate across all classes was $34.42 per square foot, up from the previous quarter when it was $31.32 per square foot. Areas outside the beltway continued to have lower asking rental rates than those submarkets closer to DC. It is not surprising that the highest rates were seen in Arlington, which averaged $39.44 per square foot for the quarter. Although vacancy remains high in these areas, landlords continued to maintain higher asking rental rates. Tenants were able lease Class A or trophy space in submarkets a little farther from the District than those adjacent for lower rates. For example, Class A rental rates in Rosslyn were $39.70 per square foot for the quarter; in comparison, Tysons Corner s average rate was $31.38 per square foot. Outlook Though it may seem that there is only room for growth in the market, fiscal uncertainty will continue to negatively affect leasing in the Northern Virginia. Because Northern Virginia still relies highly on government contractors, if Congress acts imprudently, final budget decisions (or lack of) could once again negatively impact demand in the market. Landlords should be aware that until a budget is in place, contractors and government agencies may not be willing to pay premium rental rates or even to make long term commitments let alone take on additional space. As Northern Virginia is a popular tech hub for the east coast; smaller leases from non-government related tenants will continue through out the market and drive demand in the market. While, commencement of speculative development has slowed, there are still speculative projects set to deliver. If demand for high-end space near Metro stays strong, then speculative projects like 1775 Tysons Boulevard and Reston Station will remain successful. Landlords on average offered one month of rental abatement for every year within the lease to compete for tenants. Tenant improvement packages have ranged between $70 to $80 per square foot on a ten year lease. FOR MORE INFORMATION Robert Hartley Director of Research Greater Washington, DC +1 703 394 4852 robert.hartley@colliers.com CONTRIBUTORS Audrey Hinkle Research Analyst Northern Virginia Copyright 2016 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. Colliers International Greater Washington, DC 8045 Leesburg Pike Suite 401 Vienna, VA 22182 +1 703 394 4800 colliers.com/washingtondc