Cranes are Lifting Skylines and Future Vacancy

MARKET REPORT NORTHERN VIRGINIA OFFICE Fourth Quarter 2016 Cranes are Lifting Skylines and Future Vacancy Northern Virginia continued to see increased demand in the fourth quarter, although 2016 numbers do not reflect that. Almost all indicators are positive, but how will rental and vacancy rates fair as the 4.8 million square feet of office space under construction starts delivering? Economics During 2016, the Northern Virginia economy grew by 3.5 percent and generated nearly 30,000 new jobs. Of this growth, 57.4 percent or 16,800 positions were created in office-using sectors of the economy. While this was impressive growth, major industries within the area were unable to fully engage in the leasing market. Market Indicators VACANCY 2017 (Projected) NET ABSORPTION The Government Contracting sector of the economy is the largest and most influential of these industries. While employment has been growing and there is every expectation that procurement spending will increase by about five percent in 2017, political infighting on Capitol Hill continues to create uncertainty as to how the government will be funded and exactly what its spending priorities will be. Until Congress clarifies some of these uncertainties, contractors are expected to be very reluctant to engage the leasing market. There are a few events in the near future which will provide indications as to how productive and collaborative Congress will be. The debt ceiling debate expected this coming spring will be the first litmus test. The second will be the fiscal year 2018 budget debate in the fall. The success of Congress to effectively pass legislation will help communicate where the opportunities exist for contractors, and will allow them to better plan for their businesses. Inventory By Class Class A 50.3% Class B 35.4% CONSTRUCTION Summary Statistics Office Market All Classes Class A Class B & C 18.0% 18.5% 17.5% Change from Q3 (basis points) Absorption (Square Feet) New Construction (Square Feet) Under Construction (Million Square Feet) Asking Rents Per Square Foot Per Year RENTAL RATE -35-15 -55 505,861 147,405 358,456 35,700-35,700 4.80 4.49 0.32 Direct Asking Rates $31.51 $34.97 $28.34 Change from $0.07 $0.37 -$0.24 Class C 14.3%

Demand Under Construction Northern Virginia saw a drop in demand in 2016, with 328,958 square feet of space given back to the market. There is good news, however. The second half of the year showed promise with two quarters of positive net absorption in a row, taking 505,861 square feet off the market in the fourth quarter alone. These events were not enough to pull 2016 net absorption out of the red as the first half of the year accounted for 1,208,671 square feet of negative absorption. (Million SF) 5.0 4.5 4.0 3.5 3.0 Net Absorption (Thousands SF) The fourth quarter was the only quarter in 2016 that saw positive net absorption in all three building classes. Demand for Class A space increased with 147,405 square feet occupied during the fourth quarter, compared to 626,585 square feet last quarter and 260,207 square feet year ago during the last quarter of 2015. Class B space had the largest demand, totaling 264,544 square feet during the fourth quarter. This was major increase over the third quarter, which registered 11,537 square feet of absorption, but closely mirrored the fourth quarter of 2015, which saw 260,357 taken off the market. Class C space saw 93,913 square feet absorbed during the fourth quarter. This was a positive jump compared to the third quarter when 264,235 square feet was added back to the market. While demand in Northern Virginia was positive, a drop in absorption was registered in both Loudoun County and Alexandria City. While it was minimal in Alexandria City, which gave back 5,819 square feet to the market during the fourth quarter, Loudoun saw a much larger drop in demand. The county saw 123,993 square feet given back. This compared to 325,633 square feet occupied in the third quarter of 2016. Net Absorption By Class 800 600 400 200 0-200 -400-600 -800 Supply Construction activity remained high, ending the fourth quarter with 4.80 million square feet under construction, the highest since 2013, when the market had 4.83 million square feet being constructed. Tenants flocked towards new space in the market, continuing demand for new Class A space. Two buildings broke ground during the fourth quarter. The larger of the two was the Boro Loft at 1640 Boro Place, which will total 143,606 square feet. Contrary to what has happened in the past, this building broke ground on a speculative basis and is positioning itself as a slightly more economical option to the Boro Class A Class B Class C Tower. Additionally, the National Institute for the Blind s building broke ground at 3000 Potomac Avenue in the Old Town Alexandria submarket. The Institute owns the building and will occupy 58,000 square feet of the 100,000 square foot building. Crystal Square 3 which is located at 1770 Crystal Drive, formally 1750 Crystal Drive started renovations which will be completed during the second quarter of 2018. Renovations commenced following the U.S. Marshalls move-out. Loudoun County was home to the only delivery during the fourth quarter, One Loudoun Marblehead Office Park-Phase II at 20745 Williamsport Place. This, 35,700-square-foot medical office building, entered the market 51.0 percent leased, which is comprised of a mix of both medical and technology tenants. (Thousands SF) 2.5 Deliveries 1,400 1,200 1,000 800 600 400 200 0 Vacancy The continued growth in demand for office space led to a drop in overall vacancy rates, which fell 35 basis points from 18.4 percent to 18.0 percent during the fourth quarter. Vacancy rates were observed falling in all classes of space. Class A Vacancy dropped 15 basis points since the last quarter to 18.5 percent and the combined Class B & C vacancy rate fell 55 basis points to end the quarter at 17.5 percent. Even with the increase in demand, a continued shift towards efficient space and 4.8 million square feet of space under construction are likely to create a floor for vacancy rates that will be hard to break.

(%) 19.0% 18.5% 18.0% 17.5% 17.0% 16.5% 16.0% Rental Rates During the fourth quarter, the direct average asking rate increased from $31.44 to $31.51 per square foot. This compares to the same time last year when the direct average asking rate was $31.42 per square foot. The increase was largely impacted due to Class A rates rising by 37 cents, ending at $34.97 per square foot. Class B rates saw a 10 cent drop over the quarter, ending at $28.91 per square foot. In the Northern Virginia market, landlords are in an arms race to amenitize their buildings to attract tenants. Often these tenants are not considering buildings that do not have amenities that the workforce now views as necessary even if they are not utilized. This race to amenitize did not have a drastic effect on rental rates, but they position buildings to compete with the other product in the market, especially as vacancy rates remain high. Direct Asking Rental Rate ($/SF) $32.50 $32.25 $32.00 $31.75 $31.50 $31.25 $31.00 Outlook After a rough start during the first half of year, fundamentals in Northern Virginia tightened during the second half of the year. Demand increased, rental rates rose in Class A space as tenants continue to move to newer, nicer space and vacancy rates saw a drop in all three classes. Was there anything to have concern about? Looking at the amount of construction underway leads to some pause; 4.8 million square feet hitting the market in the near future. While a lot of this space is pre-committed, at the end of the fourth quarter, two buildings are under construction on a speculative basis. If they don t have significant leasing upon delivery, this will bring a considerable amount of vacant space on the market. Another concern with so much space coming online is that the pre-leased space in the new construction will pull those tenants out of other buildings within the market causing vacancies in existing product. Even with an increased demand, it will be difficult to offset the impact of new supply on vacancy. 2016 ended on a high note and the future looks better, just maybe not for vacancy rates. ARMS RACE FOR AMENITIES With vacancy on the rise in the Northern Virginia market, the need to stand out from the competition has never been more crucial. This has created an arms race to develope new high-end amenities to attract and retain tenants whether it s towel service to rooftop decks to high-tech conference center. AMENITIES REQUIRED To be in the running, properties need to have on-site amenities to meet growing list of tenant requirements. METRO ACCESS Metro access continues to be a top tenant requirement limiting the number of possible spaces. Either a property has metro access or not. KEEPING UP WITH TRENDS Amenity trends continue to shift creating a need for more and more amenities. 5 MOST REQUESTED AMENITIES Conference Center Tenant Lounge Cafe / Food Service Fitness Center Collaborative Spaces

Market Statistics Market Existing Inventory New Supply YTD New Supply Under Construction Absorption YTD Absorption Overall Direct Asking Rental Rate Alexandria City Eisenhower Ave Corridor 3,713,509 - - 700,000 4,099 6,107 10.6% $42.04 I-395 Corridor* 4,256,284 - - - -6,046-64,768 44.8% $31.25 Old Town 3,515,453 - - 100,000 16,814 14,477 14.8% $37.44 Alexandria City Total 9,152,043 - - 800,000 11,595-51,460 22.0% $36.26 Arlington County/Falls Church City Crystal City/Pentagon City 6,166,474 - - - -32,411 259,968 18.5% $41.03 Falls Church** 128,250 - - - 866 1,501 1.8% n/a Rosslyn/Ballston Corridor 15,531,436 - - 894,548 15,603 164,739 22.2% $43.92 Arlington County/Falls Church Total 22,357,449 - - 894,548-12,670 427,689 20.9% $42.97 Fairfax County/Fairfax City Annandale 200,000 - - - - -2,703 29.5% $31.50 Fairfax/Oakton 4,953,571 - - 149,098-205,409-422,905 24.0% $27.77 Herndon 7,940,924 - - - -77,401-721,425 20.3% $30.02 McLean - - - - - - n/a n/a Merrifield 5,378,369 - - - 57,369-88,196 19.3% $33.82 Reston 10,980,309 11,085,261 - - 368,413 141,836 190,566 10.8% $32.59 $32.51 Route 28 Corridor South 9,063,178-159,300-87,158 391,533 12.9% $27.42 Springfield 2,435,400 - - - 82,965 77,424 33.4% $37.45 Tysons Corner 14,203,400-476,913 1,895,419 225,243 289,310 14.2% $37.06 Vienna 406,324 - - 235,000 - -4,501 4.4% n/a Fairfax Area Total 57,363,389 57,463,341-636,213 2,647,930 311,761-285,102 17.1% $32.20 $32.21 Loudoun County Leesburg/West Loudoun 746,018 - - - -121 1,876 17.7% $26.77 Route 28 Corridor North 5,551,877-182,000 - -201,655 71,717 19.5% $25.05 Route 7 Corridor 1,040,737 - - 71,466 43,786 38,578 16.4% $26.66 Loudoun County Total 7,338,632-182,000 71,466-157,990 112,171 18.9% $25.29 Prince William County/Manassas City/Manassas Park Manassas 163,000 - - - 10,764-7,530 24.4% $25.87 Route 29/I-66 Corridor 603,825 - - 73,500 1,198 6,211 1.8% $25.83 Woodbridge 470,434 - - - -17,253-47,468 21.0% $26.87 Prince William Area Total 1,237,259 - - 73,500-5,291-48,787 12.1% $26.53 Northern Virginia Total 97,448,772 97,553,724-818,213 4,487,444 147,405 154,511 18.5% $34.97 * I-395 is split between Arlington County, Fairfax County and Alexandria City ** Falls Church is split between Fairfax County and Falls Church City

Market Statistics Market Existing Inventory New Supply YTD New Supply Under Construction Absorption YTD Absorption Overall Direct Asking Rental Rate Alexandria City Eisenhower Ave Corridor 1,511,663 - - - -8,363 39,878 9.4% $24.48 I-395 Corridor* 4,868,893 - - - 18,376-29,002 31.7% $29.17 Old Town 5,441,224 - - - -23,006-82,030 9.7% $30.72 Alexandria City Total 9,373,164 - - - -17,414-47,902 14.5% $28.77 Arlington County/Falls Church City Crystal City/Pentagon City 6,807,375 - - 242,100-251 -522,393 19.8% $34.02 Falls Church** 2,151,458 - - - 15,623 53,195 11.7% $22.09 Rosslyn/Ballston Corridor 8,557,211 - - - 114,658 92,460 20.7% $39.10 Arlington County/Falls Church Total 17,181,426 - - 242,100 130,328-419,107 19.1% $35.91 Fairfax County/Fairfax City Annandale 1,671,540 - - - 6,180-12,676 13.3% $22.17 Fairfax/Oakton 8,474,587 - - - -752-109,871 18.0% $23.50 Herndon 4,203,262 - - - 35,846 3,213 17.8% $23.64 McLean 1,558,716 - - - 13,194 12,910 9.2% $31.60 Merrifield 3,314,794 - - - 19,678-56,667 15.9% $26.75 Reston 7,626,358 - - - 6,437 33,244 17.2% $26.67 Route 28 Corridor South 5,273,019-30,000-153,989 64,638 22.0% $23.31 Springfield 4,533,217 - - - 29,524 58,103 14.2% $23.31 Tysons Corner 14,450,847 - - - -74,923-380,075 22.3% $28.65 Vienna 966,445 - - - -14,527-15,421 6.4% $24.82 Fairfax Area Total 54,856,019-30,000-178,769-383,485 19.2% $26.42 Loudoun County Leesburg/West Loudoun 1,561,621-167,300-40,045 226,464 9.0% $22.83 Route 28 Corridor North 4,154,230 - - 20,000-13,782-42,515 20.1% $21.50 Route 7 Corridor 3,296,564 35,700 35,700 15,000 7,734 15,175 6.7% $24.81 Loudoun County Total 9,012,415 35,700 203,000 35,000 33,997 199,124 13.3% $22.19 Prince William County/Manassas City/Manassas Park Manassas 1,814,309 - - - 10,674 63,280 7.4% $19.35 Route 29/I-66 Corridor 1,982,714 - - - -11,581 1,952 11.0% $19.26 Woodbridge 2,053,017 - - 39,000 33,683 102,674 7.3% $21.96 Prince William Area Total 5,850,040 - - 39,000 32,776 167,906 8.6% $19.85 Northern Virginia Total 96,273,064 35,700 233,000 316,100 358,456-483,464 17.5% $28.34 * I-395 is split between Arlington County, Fairfax County and Alexandria City ** Falls Church is split between Fairfax County and Falls Church City

Market Statistics Market Existing Inventory New Supply YTD New Supply Under Construction Absorption YTD Absorption Overall Direct Asking Rental Rate Alexandria City Eisenhower Ave Corridor 5,225,172 - - 700,000-4,264 45,985 10.2% $39.61 I-395 Corridor* 9,125,177 - - - 12,330-93,770 37.8% $30.30 Old Town 8,956,677 - - 100,000-6,192-67,553 11.7% $34.31 Alexandria City Total 18,525,207 - - 800,000-5,819-99,362 18.2% $33.51 Arlington County/Falls Church City Crystal City/Pentagon City 12,973,849 - - 242,100-32,662-262,425 19.2% $36.51 Falls Church** 2,279,708 - - - 16,489 54,696 11.1% $22.09 Rosslyn/Ballston Corridor 24,088,647 - - 894,548 130,261 257,199 21.7% $42.06 Arlington County/Falls Church Total 39,538,875 - - 1,136,648 117,658 8,582 20.1% $39.51 Fairfax County/Fairfax City Annandale 1,871,540 - - - 6,180-15,379 15.0% $24.98 Fairfax/Oakton 13,428,158 - - 149,098-206,161-532,776 20.2% $25.00 Herndon 12,144,186 - - - -41,555-718,212 19.4% $27.91 McLean 1,558,716 - - - 13,194 12,910 9.2% $31.60 Merrifield 8,693,163 - - - 77,047-144,863 18.0% $32.27 Reston 18,606,667 18,711,619 - - 368,413 148,273 223,810 13.4% $29.21 $29.32 Route 28 Corridor South 14,336,197-189,300-241,147 456,171 16.2% $25.16 Springfield 6,968,617 - - - 112,489 135,527 20.9% $30.49 Tysons Corner 28,654,247-476,913 1,895,419 150,320-90,765 18.3% $30.82 Vienna 1,372,769 - - 235,000-14,527-19,922 5.8% $24.82 Fairfax Area Total 112,324,360 112,219,408-666,213 2,647,930 490,530-668,587 18.1% $28.95 $28.92 Loudoun County Leesburg/West Loudoun 2,307,639-167,300-39,924 228,340 11.8% $23.72 Route 28 Corridor North 9,706,107-182,000 20,000-215,437 29,202 19.8% $23.79 Route 7 Corridor 4,337,301 35,700 35,700 86,466 51,520 53,753 9.1% $25.82 Loudoun County Total 16,351,047 35,700 385,000 106,466-123,993 311,295 15.8% $24.08 Prince William County/Manassas City/Manassas Park Manassas 1,977,309 - - - 21,438 55,750 8.8% $20.86 Route 29/I-66 Corridor 2,586,539 - - 73,500-10,383 8,163 8.8% $19.51 Woodbridge 2,523,451 - - 39,000 16,430 55,206 9.9% $24.18 Prince William Area Total 7,087,299 - - 112,500 27,485 119,119 9.2% $21.23 Northern Virginia Total 193,826,788 193,721,836 35,700 1,051,213 4,803,544 505,861-328,953 18.0% $31.50 $31.51 FOR MORE INFORMATION Dave Parker Regional Managing Director +1 202 728 3541 david.w.parker@colliers.com Robert Hartley Director of Research +1 703 394 4852 robert.hartley@colliers.com Miles Rodnan Research Analyst Washington, DC Copyright 2017 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 8045 Leesburg Pike, Suite 401 Tysons Corner, VA +1 703 394 4800 colliers.com/washingtondc 1 North American Research & Forecast Report Office Market Outlook Colliers International