Q3 2012 OFFICE WSHINGTON, DC WSHINGTON, DC MRKET REPORT Third Quarter: Market Softens as Election pproaches MRKET OVERVIEW The District registered negative net absorption for the third quarter of 2012, the first time in over three years the region posted negative numbers. Drop off in absorption for the third quarter has been evident throughout 2012 but remains positive for the year. Partially due to the general malaise of the Washington, DC market and partially due to the impending election, deals completed during the quarter also remained below historic levels. Updated May 2012 MRKET INDICTIONS Q3 2012 Q4 2012 (p) NET CONSTRUCTION RENTL RTE UPDTED SUMMRY STTISTICS Q3 2011 Q3 2012 RTE: 10.7% 10.3% YTD: 1,009,391 598,826 DELIVERIES YTD: 963,649 385,791 UNDER CONSTRUCTION: 556,962 1,700,000 SKING RENTS/SF: $49.29 $49.86 During the last 12 months, the Federal Government has been inactive in the market and signed only one significant deal - a short term lease renewal at 601 New Jersey venue, NW. On the heels of last quarter s letter of intent (LOI) for Covington urling at City Center, two more sizable LOIs were signed by law firms also in build-to-suit developments. International law firm rnold & Porter, LLP is reported to be at LOI for the former NPR headquarters site at 635 Massachusetts venue, NW for over 300,000 square feet. nother international law firm, Pillsbury Winthrop Shaw Pittman, LLP, is rumored to be at LOI for roughly 105,000 square feet at the former National Restaurant ssociation building located at 1200 17th Street, NW, and is expected to start redevelopment shortly. ll three of these potential deals are going into new build-to-suit developments and exiting aging downtown product. For the most part, they are taking relatively the same amount of space but should become far more efficient in their space use in their new locations. ECONOMIC OVERVIEW September job growth accounted for 114,000 new jobs nationally and, for the first time in 44 months, the unemployment rate dipped below 8% to end at 7.8%. When looking at the underemployed and those who have stopped looking for jobs, the number is slightly less optimistic and unchanged at 14.7%. Healthcare continued to be the most significant employer of new positions, with 44,000 jobs added in September. Washington, DC reached a similar milestone during the third quarter of 2012, dipping below 9% unemployment for the first time since February 2009. Unlike the national numbers, the District saw a significant increase in both employment and the labor force, making the decrease in the unemployment rate more impressive. RECENT SLES TRNSCTIONS PROPERTY SUMRKET SLE PRICE SIZE SF PRICE/SF UYER SELLER 409 3rd Street, SW Southwest $200,000,000 420,122 $476 WOC LLC Vornado 607 14th Street, NW (Westory) East End $159,359,500 270,158 $590 Carr Properties DEK Immobilien Investment 975 F Street, NW (Carroll Square) East End $121,392,500 178,200 $681 GLL Real Estate Partners Seaton enkowski www.colliers.com/washingtondc
RECENT LESE TRNSCTIONS 1,000,000 Square Feet 800,000 600,000 400,000 200,000 TENNT DDRESS SUMRKET SQURE FOOTGE TYPE Federal Trade Short Term 601 New Jersey ve, NW Capitol Hill 217,308 Commission Renewal 0-200,000 Q1 2010 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Georgetown University 650 Massachusetts ve, NW East End 91,225 Relocation -400,000 United Nations Foundation 1750 Pennsylvania ve, NW CD 83,996 Relocation Square Feet 10.8% 10.7% 10.5% 10.4% 10.3% 10.2% 10.1% 10.0% 9.9% Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 DELIVERIES 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 RENTL RTES Washington, DC s $60.00 $50.00 $40.00 CD was the most significant reason for negative absorption in the Central usiness District, illustrated by the exit of the Department of griculture from 1800 M Street, NW. The East End also saw significant negative absorption, although in this case it took place primarily in the class market. Historically a strong absorption driver for the city, the class East End market lost the Center for Military History when it moved out of 64,000 square feet to Fort elvoir in Fairfax County. dditionally, Deloitte gave back a floor in the Thurman rnold building at 555 12th Street, NW and caused just less than 60,000 square feet of negative absorption. Gallup 901 F St, NW East End 77,000 Renewal Cooley LLP 1299 Pennsylvania ve, NW East End 75,260 Relocation With just over 200,000 square feet of negative absorption for the District, vacancy rates climbed slightly to end the quarter at 10.3%. The Communications Workers Union downsized nearly 100,000 square feet in Capitol Hill and created a significant vacancy bump in the third quarter. increased by 300 basis points to finish at 11.5%, pushing Capitol Hill from the lowest vacancy to the highest amongst the core submarkets. The East End is currently the only submarket that is below the average vacancy rate in the District, an unusual occurrence for this submarket. DELIVERIES ND CONSTRUCTION There were no significant deliveries in the third quarter of 2012 in Washington, DC, although several projects are currently under construction, including the CityCenter project in the East End submarket. The two other projects with significant tenants at LOI are expected to start demolition as soon as the ink is dry, with completion scheduled for early 2015. oth of these projects, for rnold & Porter and Pillsbury, are expected to be complete tear-downs followed by new ground up construction. RENTL RTES While asking rents in the District rose by nearly 70 cents per square foot from the second quarter of 2012, concession packages followed suit and essentially kept net effective rents flat. In addition to the typical tenant improvement allowances and rental abatement we continued to see, there was an increase in ownership buying out new tenants remaining leases. Three significant deals done this quarter all contained elements wherein the new landlord assumed over a million dollars in the remaining lease term. In the case of Cooley s transaction at the Warner building, it is reported that Vornado will take 54,000 square feet of lease obligation through 2018. $30.00 $20.00 $10.00 $0.00 P. 2 COLLIERS INTERNTIONL
LOOKING FORWRD With two more massive laws firms at LOI on new development projects, there are concerns that backfilling the space left behind may be more difficult than initially anticipated. Other than the above-mentioned law firms that are signing nearly three years before their leases expire, there is relatively little action in the market. This will likely continue in the near future as large well-funded tenants are finding extremely favorable market conditions and the smart ones are locking in early for a long time. Interestingly, looking forward, despite the DC market seeing very slow tenant activity, the appetite for new construction remains high. Large scale redevelopment projects like the Wharf in Southwest Washington, DC are likely going speculative on the construction of one of their office buildings. Similar speculative construction exists in the NoMa submarket as well with 165 N Street, NE. The 400,000 square foot project currently has no signed deals and started vertical construction in September. The goal behind both of these projects is to be among the first projects that have significant space available when the Federal leasing pipeline is turned back on. WSHINGTON, DC CORE MRKETS CD 12.7% $55.60 8.1% $43.68 1.6% $42.59 C Rental Rental $57.49 $57.49 4.1% 4.1% P. 3 COLLIERS INTERNTIONL 8.8% 8.8% 15.9% 15.9% 7.7% 7.7% $57.63 $57.63
3rd Quarter 2012 Washington, DC Market Stats EXISTING PROPERTIES CTIVITY RENTS Submarket/ ldgs R Direct Sublease Prior Qtr Leasing ctivity SF Net bsorption Current Qtr SF Net bsorption YTD Weighted vg sking Lease CD 99 22,773,919 11.5% 1.2% 12.7% 13.2% 215,656 134,010 425,001 $55.60 157 19,444,602 7.3% 0.7% 8.1% 7.1% 296,876 (141,198) (277,261) $43.68 C 33 1,426,716 1.5% 0.1% 1.6% 2.1% 6,060 6,630 1,273 $42.59 289 43,645,237 9.3% 0.9% 10.3% 10.3% 518,592 (558) 149,013 $50.94 EST END 116 32,982,928 9.2% 0.6% 9.2% 338,596 (215,773) (74,005) $57.49 110 11,493,609 9.3% 1.2% 10.8% 107,450 30,893 (184,195) $44.82 C 41 1,871,274 4.1% 0.0% 4.1% 4.1% 12,917 146 (3,392) $43.58 267 46,347,811 9.0% 0.7% 9.7% 9.4% 458,963 (184,734) (261,592) $52.50 11 2,569,300 8.1% 0.7% 8.8% 3.1% 6,061 (147,469) (98,797) $57.63 28 2,116,406 15.4% 0.5% 15.9% 14.9% 2,097 (14,774) (34,657) C 27 634,084 7.2% 0.5% 7.7% 8.4% 7,465 4,451 (11,751) 66 5,319,790 10.9% 0.6% 11.5% 8.5% 15,623 (157,792) (145,205) $53.90 NOM 25 8,228,275 9.9% 0.5% 10.4% 12.3% 7,051 152,154 477,692 $49.34 10 1,220,191 16.8% 0.0% 16.8% 16.2% 0 (6,800) (15,704) $29.62 C 6 135,184 13.2% 0.0% 13.2% 9.0% 0 (4,500) (4,500) $25.00 41 9,583,650 10.8% 0.4% 11.2% 12.8% 7,051 140,854 457,488 $45.50 WEST END 11 2,422,098 6.4% 1.3% 7.7% 7.6% 26,106 (2,785) (8,502) $43.23 13 1,098,817 10.7% 0.0% 10.7% 10.5% 0 (2,055) (3,783) $41.96 C 5 625,060 0.0% 0.0% 0.0% 0.0% 0 0 0 $36.54 29 4,145,975 6.6% 0.8% 7.3% 7.2% 26,106 (4,840) (12,285) $40.66 DISTRICT OF COLUMI GEORGETOWN 10 1,746,450 13.2% 1.2% 14.4% 18.3% 32,628 67,686 101,719 $42.56 32 1,450,143 8.8% 0.1% 8.9% 4.6% 2,224 (62,403) (77,898) $39.73 C 14 290,813 8.7% 0.0% 8.7% 5.6% 4,555 (8,801) (8,428) $39.02 56 3,487,406 11.0% 0.6% 11.6% 11.5% 39,407 (3,518) 15,393 $41.47 SOUTHWEST 23 8,897,849 12.2% 4.3% 16.5% 16.3% 19,099 (15,580) 334,979 $51.01 13 3,206,035 3.3% 0.0% 3.3% 2.2% 0 (34,315) (54,930) $45.66 C 1 18,742 0.0% 0.0% 0.0% 0.0% 0 0 0-37 12,122,626 3.2% 13.0% 12.5% 19,099 (49,895) 280,049 $50.29 CPITOL RIVERFRONT 10 3,713,085 18.8% 0.7% 19.5% 19.1% 24,950 (12,292) (47,226) $46.48 3 1,179,698 7.3% 0.0% 7.3% 7.3% 0 0 0 $39.00 C 2 50,210 21.3% 0.0% 21.3% 10.0% 0 (5,663) (4,955) $32.60 15 4,942,993 16.1% 0.5% 16.6% 16.2% 24,950 (17,955) (52,181) $43.75 UPTOWN 12 2,370,794 5.1% 1.1% 6.2% 7.4% 24,553 27,296 145,023 $41.65 106 6,158,214 6.2% 0.2% 6.4% 7.3% 37,192 55,982 43,625 $35.81 C 109 2,554,118 5.0% 0.2% 5.2% 4.8% 26,357 (8,717) (20,502) $33.08 227 11,083,126 5.7% 0.4% 6.1% 6.8% 88,102 74,561 168,146 $37.09 WSHINGTON D.C. 317 85,704,698 10.4% 1.2% 11.6% 11.6% 694,700-12,753 1,255,884 $53.80 472 47,367,715 8.1% 0.6% 8.8% 8.3% 445,839-174,670-604,803 $42.69 C 238 7,606,201 4.3% 0.1% 4.4% 4.2% 57,354-16,454-52,255 $37.47 1,027 140,678,614 9.3% 0.9% 10.3% 10.1% 1,197,893 (203,877) 598,826 $49.86 P. 4 COLLIERS INTERNTIONL
DEFINITIONS OF KEY TERMS FOUND IN THIS REPORT Deliveries: uildings that complete construction during a specified period of time. In order for space to be considered delivered, a certificate of occupancy must have been issued for the property. Direct Space: Space that is being offered for lease directly from the landlord or owner of a building, as opposed to space being offered in a building by another tenant (or broker of tenant) trying to sublet a space that has already been leased. Existing Inventory: The square footage of buildings that have received a certificate of occupancy and are able to be occupied by tenants. It does not include space in buildings that are either planned, under construction or under renovation. Leasing ctivity: The volume of square footage that is committed to and signed under a lease obligation for a specific building or market in a given period of time. It includes direct leases, subleases and renewals of existing leases. It also includes any pre-leasing activity in planned, under construction, or under renovation buildings. Net bsorption: The net change in occupied space over a given period of time. Unless otherwise noted, Net bsorption includes direct and sublease space. Weighted verage sking s: Weighted by the total square feet available for direct lease. Data is based on Full Service Gross rents, and includes all costs associated with occupying the space, including taxes, insurance, maintenance, janitorial service and utilities. Reports on an annual per square foot basis. Rentable uilding rea (R): The total square footage of a building that can be occupied by, or assigned to a tenant for the purpose of determining a tenant s rental obligation. This report tracks buildings with 10,000 square feet or more of speculative space. Includes competitive space in, and C single and multitenant buildings. Excludes buildings that were built with the intent to house only medical users and government owner-occupied buildings. Sublease Space: Space that has been leased by a tenant and is being offered for lease back to the market by the tenant with the lease obligation. Sublease space is sometimes referred to as sublet space. Vacant Space: Space that is not currently occupied by a tenant, regardless of any lease obligation that may be on the space. Inventory: Includes all existing multi- or single-tenant leased and owner-occupied office properties greater than or equal to 10,000 square feet (net rentable area). Does not include medical or government buildings. 522 offices in 62 countries on 6 continents United States: 147 Canada: 37 Latin merica: 19 sia Pacific: 165 EME: 118 $1.8 billion in annual revenue 1,250 million square feet under management Over 12,300 professionals COLLIERS INTERNTIONL WSHINGTON DC OFFICE: 1625 Eye Street, NW Suite 700 Washington, DC 20006 TEL +1 202 534 3000 FX +1 202 331 1526 www.colliers.com/washingtondc RESERCHER: NDREW WELLMN TEL +1 202 534 3632 andrew.wellman@colliers.com ccelerating success.