Market Smart Washington, D.C. Office Report 3rd quarter 2008 An aggressive office development cycle in the D.C. region coincided with one of the most severe financial crises in decades, leading to softening market fundamentals throughout most submarkets and product types. The outlook for economic growth deteriorated and leasing activity in the region fell below historical averages. Meanwhile, space options for tenants increased approximately 30 percent since the beginning of 2007, while rents have begun to slide with concession packages increasing. As the government takes a more active role in the coming months with the bailout, the D.C. region may benefit with expansions stemming from the Treasury, FDIC and SEC most likely. However, more than 5 million square feet of development yet to deliver will likely keep leverage on the side of tenants for the next couple years.
National Research Ben Breslau Vice President + 67 53 4233 Jarrett Pohle Analyst + 303 260 67 Regional Research John Sikaitis Vice President, Director of Research + 202 79 5839 Scott Homa Research Manager + 202 79 5732 Justine Morrison Senior Research Analyst + 202 79 5793 Brent Mathis Research Analyst + 703 287 0483 Andrew Wellman Research Analyst + 202 79 5873 David Garber Research Analyst + 202 79 570 WWW.JONESLANGLASALLE.COM 2008 Jones Lang LaSalle IP, Inc. All rights reserved. No part of this publication may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of Jones Lang LaSalle. The information contained in this document has been compiled from sources believed to be reliable. Jones Lang LaSalle or any of their affiliates accept no liability or responsibility for the accuracy or completeness of the information contained herein and no reliance should be placed on the information contained in this document. JONES LANG LASALLE MARKET SMART 2
Uncertainties create conservatism throughout the market at the end of the third quarter A lame duck Administration, coupled with uncertainties regarding the upcoming presidential and congressional elections and the worst financial and economic crisis in a generation, clouded market conditions throughout the Metropolitan Washington region at the end of the third quarter of 2008. Tenants delayed decisions and sat on the sidelines, leading to slower leasing activity, tepid tour volume, extended deal length and negotiations and a heightened incident of renewals. While market conditions slowed to a standstill as conservatism swept through the office market, job growth in the region was resilient. Although the country has lost 760,000 over the past nine months, job growth in the D.C. region has actually increased from several months ago as the cushion of the government and its contractor base allowed the Metro D.C. economy to add 44,600 jobs in the 2 months ending August 2008. Additionally, unemployment remained 2 full percentage points below the national average at 4. percent. Over the past six months, as the national economy slowed, Metro D.C. s job growth accelerated, nearly doubling the 22,000 jobs created in the 2 months ending March 2008 by reaching its current level of 44,600 jobs. The job creation should fuel additional office sector requirements in the first half of 2009 even as most metropolitan areas around the country have recently experienced contracting payrolls and occupancy declines. Despite significant job creation, an aggressive development cycle in all three jurisdictions coincided with the slowdown in demand, shifting leverage to tenants in the vast majority of product types and locations over the past few quarters, which will undoubtedly linger for the coming quarters into the latter part of 2009, at a minimum. In the third quarter of 2008, the Metro D.C. market posted a decline in overall occupancy for only the second time in the past six years. Occupancy declines largely stemmed from the addition of sublease space from financial-related companies in Chevy Chase, Silver Spring and Bethesda, along with Tysons Corner and Fairfax Center in Northern Virginia, as well as government contractor space coming back to the market in Northern Virginia. In total, the Metro D.C. office market posted negative net absorption of 98,3 square feet in the third quarter, shifting occupancy gains throughout 2008 down to.8 million square feet. From left to right: Ben Breslau, Scott Homa, Brent Mathis, Justine Morrison, Jarrett Pohle, John Sikaitis, Andrew Wellman. Not pictured: David Garber. JONES LANG LASALLE MARKET SMART 3
As occupancy has stalled or grown at slower levels, supply has increased substantially due to increased development activity. New supply has outpaced occupancy gains by a four to one ratio in 2008 as 7.2 million square feet have been added to the market in 2008. Since the beginning of 2007, the same trend illustrated that 2. million square feet of new supply has been added to the market, while tenant demand has driven only 3. million square feet of occupancy gains. As a result of this stretched supply-demand imbalance, tenant s available space options have skyrocketed 34.5 percent since the beginning of 2007. From the vacancy perspective, vacancy rates region-wide have shifted up from 8. percent at the beginning of 2007 to 0.5 percent at the end of the third quarter of 2008. When tacking on sublease space, total vacancy rates shifted up from 9.5 percent at the beginning of 2006 to 2 percent at the end of the third quarter. Rental rates, which have grown over the past five years, have begun to demonstrate signs of softening in certain markets, while flat out declining in markets where new supply issues have altered market dynamics greatest. Overall, the Metro D.C. average rent decreased slightly in the third quarter from $35.06 per square foot in the second quarter to $34.96 per square foot in the third quarter. While asking rents remained only slightly depressed, net effective rents were down more than 3 to 5 percent, depending on the product and location type. The greatest net effective declines have been realized in the Toll Road markets in Northern Virginia and the I-270 Corridor in Suburban Maryland, where tenant improvement packages and free rent in new developments have eclipsed $65.00 per square foot and six to 2 months of free, respectively, at a minimum. Significant softening in net effective rents was also evidenced in the Commodity Class A market in the core markets of the CBD and East End, where numerous additional options have delivered or will deliver to the market over the coming quarters. As a result, the vast majority of these buildings, that were quoting $58.00 to $60.00-per-square-foot rents at the end of 2007, were marketing rents in the low to mid-$ s per square foot at the end of 2008 with several months of free rent and a minimum tenant improvement allowance of $65.00 per square foot. The District has been characterized by a tale of three markets the core CBD and East End product, outlying core product and emerging market product with respect to both supply and demand market fundamentals. Trophy market dynamics remained very tight and were expected to maintain tightness due to the stable and growing tenant base of law firms, lobbying firms and government affairs offices. As a result, vacancy measured.7 percent with rents growing marginally at 3 percent. However, Commodity Class A space continued to flood the market within the CBD and East End, leaving vacancy at the end of the third quarter hovering near 3 percent, offering tenants an abundance of large and small options. Finally, the Southwest, NoMa and Southeast continued to reel from lack of demand and an exorbitant amount of new supply hitting the market with minimal preleasing to date. As a result, vacancies in these submarkets finished the quarter in the double digits and could realistically double over the next 24 months with more than 6 million square feet under construction and minimal preleasing to date. In total, the District had more than 0. million square feet under construction with just 24 percent of the space preleased, which will lead to record high vacancy levels over the short term and downward pressure on rents. In Northern Virginia, net absorption tailed off after a gain of.8 million square feet during the first half of the year. 48,337 square feet of negative net absorption during the third quarter resulted primarily from outflows in Fairfax County, where Merrifield, Route 28 South, Reston and Herndon registered the most significant losses. Vacancy increase and negative net absorption outside the Beltway was fueled by consolidations, downsizings and an increase in sublease space. 2.3 million square feet were available for sublease in Northern Virginia at the end of the third quarter, an increase of 6.0 percent over the past three months. JONES LANG LASALLE MARKET SMART 4
As a result, vacancy rates continued to rise in outlying markets, particularly the Toll Road and Route 28 Corridor, where new construction activity has exceeded tenant demand. However, dynamics inside the Beltway remained tight, with Alexandria and Arlington County still supply-constrained. These two jurisdictions had direct vacancy rates of 7.6 percent at the end of the third quarter as premium locations and Trophy buildings continued to outperform the broader market, with Reston Town Center, the Rosslyn-Ballston Corridor and Tysons Trophy assets garnering the highest rents and lowest vacancy rates across the region. In comparison, other parts of Fairfax, Loudoun and Prince William Counties displayed vacancy levels of 3.7 percent. New supply will continue to remain in an issue going forward as planned fourth quarter 2008 deliveries totaled 923,40 square feet, and were just 9.5 percent preleased. The full pipeline through 20 totaled 3.0 million square feet, of which 9.9 percent was preleased. Suburban Maryland s market remained slow with demand concentrated in the urban markets of Chevy Chase, Bethesda and Silver Spring, where market fundamentals remained tight. However, along the I-270 Corridor, Rockville Pike and in Prince George s County, demand levels remained depressed, while new supply continued to deliver to the market. As a result, rents levels have declined and space options continued to jump. A promise of increased life science dollars in 2009 and 200 are now unlikely as well as the vast majority of federal spending initiatives is likely to be funneled to the Treasury, SEC and FDIC, agencies located in the CBD, NoMa and the RB Corridor, respectively. Unlike most office markets around the country, which are preparing for significant amounts of disposition space to be returned to the market, or at the very least, a substantial reduction in tenant demand, the Metropolitan Washington, D.C. dynamic is different. Times of peril precipitate a renewed focus on oversight and governance, as the nation turns to the federal government for solutions and safeguards. Government grows in times of crisis. There was a reason why in the last economic downturn, the Metro D.C. economy continued to grow, while other metropolitan areas experienced significant job losses. The infusion of federal procurement dollars into the local economy helped generate thousands of jobs across the region, and consistently kept unemployment rates between.6 and 2.0 percent lower than national averages. Requirements that agencies like the FDIC, SEC and Treasury are likely to generate as part of their enhanced role in financial oversight and regulation will provide a cushion to offset potential losses in other sectors. Organic growth among federal agencies themselves is likely to be augmented by requirements among government contractors and support service providers, similar to past expansions. While this scenario certainly provides a unique benefit to the region, it will not completely bail the region out of its current condition. Rather, a new equilibrium must be achieved based on Metro D.C. s unique supply and demand characteristics. JONES LANG LASALLE MARKET SMART 5
Whites Ferry Rd Hunter Mill Rd 6th St NW curity Blvd Odenton Rd WASHINGTON, D. C. 3Q 2008 Washington, D.C. Regional Definitions The Washington, D.C. region is composed of three distinct areas: District of Columbia, known as the region s CBD, and Northern Virginia and Suburban Maryland, known as the Suburban markets. These markets are further divided into many submarkets. District of Columbia: Suburban Submarkets: Northern Virginia includes Arlington, Fairfax, Loudoun and Prince William counties, as well as the cities of Alexandria, Fairfax, Falls Church, Manassas City and Manassas City Park. Suburban Maryland includes Frederick, Montgomery and Prince George s counties. Frederick County Comus Rd Ridge Rd Woodfield Rd Damascus Rd Woodbine Rd Roxbury Mills Rd Frederick Rd BaltimoreNational Pike Old Frederick Rd Baltimore National Pike Frederick Ave Edmondson Ave Wilkens A Baltimore Rd Frederick Rd Cedar Grove Rd New Hampshire Ave Clarksville Pike Montgomery Rd Waterloo Rd Southwest Blvd Harbo Darnestown Rd Beallsville Rd Bucklodge Rd Boyds Clarksburg Rd Clopper Rd Germantown Dwight Eisenhower Hwy Great Seneca Hwy Brink Rd Montgomery Village Ave Snouffers School Rd Burnham Rd Little Patuxent Pkwy Muncaster Mill Rd Olney Laytonsville Rd Ashton Rd Patuxent Pkwy Guilford Rd Scaggsville Rd Columbia Pike Snowden River Pkwy Do Darnestown Rd River Rd Seneca Rd River Rd Darnestown Rd Shady Grove Rd Frederick Rd Gude Dr Montgomery Montgomery County Norbeck Rd Viers Mill Rd Georgia Ave Layhill Rd New Hampshire Ave Spencerville Columbia Pike Sandy Rd Baltimore Washington Blvd Laurel Baltimore Washington Pkwy Patuxent Frwy Telegraph Rd An Loundoun County Washington Dulles International Airport Leesburg Hwy Herndon Pkwy Fairfax Pkwy MONTGOMERY LOUDOUN Fox Mill Rd Baron Cameron Ave Dulles Airport Access Rd Lee Hwy Braddock Rd Lawyers Rd Georgetown Hunter Mill Rd Fairfax County Leesburg Hwy Chain Bridge Rd Little River Tpk 93 Braddock Rd Rolling 7 236 89 90 495 29 495 Back Lick Rd Falls Rd Annandale 93 270 97 Democracy Blvd 6 Bradley Tree Rd Dolly Madison Hwy Lee Hwy Wilson Blvd 9 Clara Barton Pkwy George Wash. Mem. Pkwy Columbia Pike Henry G Shirley Mem Hwy 87 85 495 Constitution Ave Independence Ave County 66 George 20 Arlington Blvd Randolph Rd River Rd Rockville Pike 355 93 295 93 9 Greenbelt Rd Prince George s 90 Millitary Rd MONTGOMERY 29 DISTRICT OF COLUMBIA 20 Arlington Mason Dr Glebe Rd 20 395 Walter Reed 236 95 Wisconsin Ave Connecticut Ave ARLINGTON 7 Alexandria 29 Jefferson Davis Hwy University Blvd Georgia Ave Sligo Creek Pkwy District of Columbia Capitol St New Hampshire Ave Michigan Rhode Island Ave New York Ave Riggs South Dakota Penna Ave Anacosta Frwy Benning Rd Bladensburg Rd Washington DISTRICT OF National COLUMBIA Airport PRINCE GEORGE S 295 Powder Mill Rd County E Capitol St Suitland Pkwy Branch Ave 5 Edmonston Ave Martin L King Jr Hwy 24 4 95 95 Landover Rd Lanham Severn Rd John Hanson Hwy Bowie Rd Enterprise Rd Annapolis Rd Largo Rd Bowie Rd Blue Star Mem Hwy Defen Central Ave Old Mill Rd VIRGINIA MARYLAND Woodyard Rd Prince William County Ox Rd Franconia Springfield Pkwy 95 Richmond Hwy Mt Vernon Mem Pkwy 235 George Washington Mem Pkwy Indian Head Hwy 20 Piscataway Rd 223 5 Blue Star Mem Hwy Croom Rd Aquasco Brandywine Rd Prince William Pkwy PRINCE WILLIAM Gunston Rd CHARLES Accokeek Rd JONES LANG LASALLE MARKET SMART 6
Washington, D.C. Space Statistics CBD Year-End 2007 Net YTD Net Vacancy % Absorption Absorption YTD Net Vacancy % Quoted (Including YTD Current (Including (Including Absorption (Including Gross Under Subleases) Completions Stock Subleases) Subleases) (% of Stock) Subleases) Rents Construction Capitol Hill 3.49% 0 4,488,800 6,447-6,230-0.4% 3.63% $59.9 525,437 Central Business District 5.78% 380,27 34,29,746 63,383-203,356-0.59% 7.43% $.73 2,20,795 East End 6.%,080,34 35,577,562 242,370 639,330.80% 7.0% $52.43,208,03 Georgetown 6.0% 0 2,29,668 3,20 5,77 0.7% 5.39% $43.9 0 NoMa.39% 323,870 6,373,74 27,38 53,036 0.83% 5.34% $48.69 2,234,795 Southeast 9.8% 0 3,52,940-8,483 35,202.2% 8.69% $45.97 932,89 Southwest 4.47% 0 9,2,044 80,888 44,02.56% 2.90% $.6 2,606,606 Uptown 4.45% 0 5,374,325-3,95-0,027-0.9% 4.64% $38.24 0 West End 2.36% 0 3,225,574 3,599-7,284-0.54% 2.90% $45.29 430,900 CBD Market Totals 7.52%,784,428 03,843,400 535,59 6,490 0.63% 8.36% $.8 0,49,365 Northern Virginia Arlington 9.62% 85,82 32,628,758 73,56 722,35 2.2% 9.% $37.39,044,752 Alexandria 5.57% 340,955 3,36,433-29,597 42,453.08% 6.99% $33.83 249,905 Fairfax 2.62% 2,322,326 86,0,040-474,607-44,63-0.05% 4.94% $30.09,89,758 Loudoun 4.22% 593,0 8,378,45-24,823 36,790.63% 2.68% $25.5 294,200 Prince William 7.30% 334,000,78,396 37,74 36,325 7.76% 5.05% $24.86 204,000 Northern Virginia Totals.40% 4,406,22 42,026,042-48,337,273,540 0.90% 3.35% $3.47 2,982,65 Suburban Maryland Montgomery 0.74% 739,982 49,006,578-267,64-63,343-0.33% 2.3% $3.2,595,087 Prince George s 24.9% 75,000 4,37,785-56,337 44,300 0.3% 24.28% $23.24 448,6 Frederick 7.44% 86,800,769,977 8,94 2,685 0.72%.27% $24.96 322,044 Suburban Maryland Totals 3.60% 90,782 64,94,340-35,757-06,358-0.6% 4.89% $28.32 2,365,292 Market Totals 0.% 7,092,422 30,783,782-98,3,87,672 0.58% 2.00% $34.96 5,497,272 JONES LANG LASALLE MARKET SMART 7
WASHINGTON, D.C. CBD MARKET SMART District of Columbia Central Business District East End Southwest
District of Columbia Office Market Boundaries Massachusetts Av Georgetown M St 0 Rock Creek and Potomac Pkwy K St NW 29 29 Rock Creek and Potomac Pkwy Theodore Roosevelt Mem. Bridge Whitehurst Fwy 66 West End 66 Arlington Memorial Bridge Boundary Dr 23rd St NW Connecticut Av Virginia Av Independence Av George Washington Memorial Pkwy CBD Florida Av Connecticut Av Pennsylvania Av Constitution Av New Hampshire Av E St NW 7th St NW Kutz Bridge Uptown K St NW Pennsylvania Av Rhode Island Av 5th St NW Vermont Av Raoul Walleburg Pl 4th St NW 4th St NW Massachusetts Av New York Av Francis Case Mem. Bridge Vermont Av 9th St NW East End 9th St NW Pennsylvania Av Independence Av 395 Maine Av 6th St NW 6th St NW New Jersey Av K St NW Madison Dr Jefferson Dr Southeast Fwy K St NE 395 Massachusetts Av 395 Florida Av NoMa New York Av New York Av New Jersey Av Constitution Av Canal St Louisiana Av S. Capitol St N. Capitol Av N. Capitol Av Delaware Av Capitol Hill New Jersey Av Rhode Island Av Maryland Av Massachusetts Av Constitution Av E. Capitol St Independence Av North Carolina Av Southeast Fwy Pennsylvania Av Florida Av Jefferson Davis Hwy Southwest Southeast 27 395 Anacostia Fw Henry Shirley Memorial Hwy JONES LANG LASALLE MARKET SMART 9
Washington, D.C. Office Market Boundaries Capitol Hill Includes Massachusetts Avenue properties running south to Independence Avenue. The area, which includes the U.S. Capitol, runs from 3rd Street, NW to 2nd Street, NE. Central Business District Bordered by P Street, NW to the north, 5th Street, NW to the east, Constitution Avenue to the south and 23rd Street, NW to the west. East End Bordered by P Street, NW to the north, 4th Street, NW to the east, Constitution Avenue to the south and 5th Street, NW to the west. Georgetown Bordered by P Street, NW to the north, Rock Creek Parkway to the east, Georgetown University to the west and the Potomac River to the south. Southwest Bordered by Independence Avenue to the north, 4th Street, SW and the Washington Channel to the west, the Anacostia River to the south and South Capitol Street to the east. Southeast Bordered by Independence Avenue to the north, South Capitol Street to the west, the Anacostia River to the south and Pennsylvania Avenue, SE to the east. Uptown All commercial development occurring north of P Street is considered the Uptown District. Most Uptown development is clustered around Metrorail Stations on Connecticut and Wisconsin Avenues. West End From 23rd Street to Rock Creek Parkway and from P Street to Constitution Avenue. NoMa Includes areas north of Massachusetts Avenue, but not on Massachusetts Avenue, to R Street, NW, extending from 3rd Street, NW to 2nd Street, NE. JONES LANG LASALLE MARKET SMART 0
District of Columbia Quarter in Review The combination of the late summer doldrums coupled with companies prolonging real estate decisions due to the uncertainty regarding the national economy, financial markets and upcoming election yielded muted private sector leasing activity through the third quarter of 2008. However, while the majority of occupancy gains were generated by law firms, consulting companies and government affairs offices over the past three years, the federal government ignited portions of the real estate market during the third quarter with several new leases sprinkled throughout the city s office market. A 35,000-square-foot Department of Homeland Security (DHS) lease in NoMa, a 5,000-square-foot DHS move-in at the 9 L Enfant Plaza, the Holocaust Museum s 36,0-square-foot move into the Portals, two 60,000-square-foot move-ins by the DHS and Department of Veterans Affairs at 77 H Street, NW and the short-term 0,000-square-foot move-in of the Office of Presidential Transition at 4 5th Street, NW led to the lion s share of occupancy gains in the third quarter. An additional private sector move-in that produced occupancy gains was Blackboard s expansion and move to the East End to more than 0,000 square feet at 6 Massachusetts Avenue, NW. In total, the market posted 535,59 square feet of positive net absorption in the third quarter, shifting the 2008 total to 6,490 square feet. As a result of the occupancy gains and limited new deliveries to the market, the total vacancy rate shifted down for the first time in seven quarters, from 8.7 percent to 8.4 percent, while the direct vacancy rate was also down 30 basis points to 7.5 percent. Despite positive net absorption in the third quarter and through the first three quarters of 2008, the market remained soft, offering tenants numerous space options across all submarkets. At the beginning of 2007, tenants had 6 options greater than,000 square feet in the Class A market with the city, 0 of which were located within the CBD and East End submarkets. At the end of the third quarter of 2008, tenant s options for,000 square feet increased to 30 options city-wide and to 9 options in the CBD and East End. Since the beginning of 2007, the prime vacancy rate has increased from 5.7 percent to 7.5 percent at the close of the third quarter as new supply has outpaced occupancy gains by a rate of more than three to one. Since the beginning of 2007, supply has increased by 3 million square feet, while occupancy gains during the same timeframe totaled 856,03 square feet, illuminating how much new development has changed the city s leasing market dynamics, while also shifting increased leverage to tenants. Submarket Boundaries Map Massachusetts Av M St K St NW 29 29 Theodore Roosevelt Mem. Bridge Rock Creek and Potomac Pkwy Whitehurst Fwy Rock Creek and Potomac Pkwy 66 66 Arlington Memorial Bridge K St NW Madison Dr Jefferson Dr Southeast Fwy 395 0 Boundary Dr Jefferson Davis Hwy 27 395 Henry Shirley Memorial Hwy 23rd St NW Connecticut Av Virginia Av Constitution Av Independence Av George Washington Memorial Pkwy Florida Av Connecticut Av Pennsylvania Av New Hampshire Av E St NW 7th St NW K St NW Pennsylvania Av Rhode Island Av New York Av 5th St NW 4th St NW 9th St NW Pennsylvania Av Independence Av Kutz Bridge 4th St NW Massachusetts Av Vermont Av Vermont Av Raoul Walleburg Pl Francis Case Mem. Bridge 9th St NW 6th St NW Maine Av 6th St NW New Jersey Av Florida Av New York Av K St NE 395 Massachusetts Av New Jersey Av Constitution Av 395 Canal St Louisiana Av S. Capitol St N. Capitol Av N. Capitol Av Delaware Av New Jersey Av Rhode Island Av Maryland Av E. Capitol St Massachuset North Carolina Av Key Market Indicators Stock 03,843,400 SF Direct Net Absorption 406,380 SF Direct Vacancy Rate 7.52% Average Asking Rent $.8 Under Construction 0,49,365 SF Southeast Fwy JONES LANG LASALLE MARKET SMART
District of Columbia Development Activity The inability to secure financing and line up credit have put a temporary halt on developments breaking ground within the District; however, activity still remained rampant through the third quarter. Only one building, 77 K Street, NE, delivered in the third quarter. The 323,870-square-foot development by ING and Brookfield delivered vacant to the market adding another large block of vacant space to the NoMa inventory. Through September, seven projects totaling.8 million square feet have delivered to the market in D.C. However, only 36 percent of that space delivered with prelease commitments, leading to elevated vacancy rates city-wide. Projected to deliver in the fourth quarter of 2008 were five additional developments. The two Trophy developments, 0 K Street, NW and 55 F Street, NW, were percent and 60 percent preleased at quarter s end, respectively, while the other three developments including 29 20th Street, NW (vacant), 225 Connecticut Avenue, NW (LOI for entire building with the World Bank) and 00 M Street, SE (36 percent preleased) near the Ballpark, displayed lower levels of preleasing activity. In total, there was 0. million square feet of space under construction at the end of the third quarter, a record for the city. With less than a quarter of the space preleased (24 percent preleased), we can expect vacancy levels to increase substantially over the short term. The submarkets that will have the greatest supply issues over the coming quarters remained Southwest, Southeast and NoMa. The combined submarkets had 5.8 million square feet under construction with 2 percent of the space preleased. However, if you withdraw the two build-to-suit opportunities for the Department of Justice in NoMa and the D.C. Government in Southwest, a mere 80,000 square feet (Parsons lease in Southeast) was preleased. Average Rental Rates (Class A vs. Class B) $60 $ $40 $30 $20 $0 $0 New Deliveries / Net Absorption / Vacancy Rates % OF STOCK OR VACANCY 2% 0% 8% 6% 4% 2% 0% 05 Class A Rental Rates Class B Rental Rates 05 06 06 New Deliveries (% of Stock) Net Absorption (% of Stock) 07 07 Vacancy Class A Vacancy Class B 3Q/08 3Q/08 JONES LANG LASALLE MARKET SMART 2
District of Columbia Demand Demand levels remained significantly depressed from averages as private sector tenants have opted to take a wait-and-see approach, due to the looming financial crisis and election. As a result, deals have taken a longer time to close with many resulting in short-term renewals. Withstanding several government deals, the vast majority of activity has stemmed from users 3,0-square-foot to 2,000-square-foot size range. Any tenant larger than 20,000 square feet is most likely roaming the market with a lease expiration of 200 or later. We expect several areas of government and related lobbying and government contracting work to stem from the credit crunch and unraveling of Wall Street. The SEC and Department of Treasury are two agencies that will need to bulk up in order to increase government regulation on Wall Street and oversee transfer and future sale of the bad loans the government is in the process of purchasing. Another agency, the Federal Housing Finance Agency, was just created at the end of July to oversee Freddie and Fannie, and will undoubtedly need office space over the short term. While markets like NYC are likely to see significant downsizing in the current environment, D.C. will likely not be one of them as the current financial crisis is likely to add to the government s occupancy in the city. Rental Rates Rent growth has all but stopped in nearly all segments of the market in D.C. as available space options continued to flood the market. At the end of the third quarter, the average asking rent had dropped from $.6 per square foot in the second quarter to $.8 per square foot in the third quarter. While Trophy and Class B rents have held steady, Commodity Class A rents within the CBD and East End have dropped 3.8 percent during 2008 to $55.44 per square foot. In addition to rents stabilizing and/or declining depending on the market segment, tenant improvement (TI) packages and rent abatement have increased as well with a $65.00-per-square-foot TI package and three to six months of rent abatement the norm for a new deal. Looking Ahead The Washington, D.C. market remained a market in flux through the third quarter of 2008. While below-average demand levels coupled with aggressive new supply levels will lead to vacancy increases over the short term, the prospects of a market recovery from the landlord perspective appeared far better at the end of September, compared to three or six months ago. The Washington, D.C. market has historically benefited from times of national crisis around the country, regardless of the cause. The current economic crisis will provide similar cushioning to the city s office market with additional government requirements bound to be released over the coming quarters. JONES LANG LASALLE MARKET SMART 3
District of Columbia Significant Lease Transactions World Bank 776 G Street, NW 48,684 SF Large Availabilities 425 Eye Street, NW Class B 392,020 SF Seyfarth Shaw 975 F Street, NW 76,789 SF 030 5th Street, NW Class A 328,28 SF SAIC 20 Vermont Avenue, NW 75,000 SF 77 K Street, NE Class A 323,870 SF Recent Sales Transactions 40 K Street, NW Class B 24,706 SF $432 / SF 666 th Street, NW Class B 09,959 SF $373 / SF JONES LANG LASALLE MARKET SMART 4
Central Business District Quarter in Review Concerns and fears of an ever-weakening economy spread throughout the market in the third quarter. Lack of certainty regarding the election and the economy put many deals on hold and tenants that did complete deals continued to renew at existing locations with little expansion. In times of crisis and question, private sector tenants tend to shed or maintain occupancy levels, while government entities grow in order to provide a stimulus to the economy. After three years of stagnant government activity, the federal government took down a sizeable block of space, helping to push vacancy levels down throughout the submarket. After the Corporate Executive Board vacated more than 200,000 square feet of space at 77 H Street, NW, the Department of Veterans Affairs and the Department of Homeland Security each leased 60,000 square feet in the building. Those two leases, which accounted for net new growth to the market, helped increase occupancy levels up within the CBD. The submarket posted 63,383 square feet of net absorption in the third quarter, yet still displayed occupancy declines of 203,356 square feet for the year, largely caused by the Corporate Executive Board s move to Rosslyn. Relative to other submarkets within the District, vacancy levels in the CBD continued to remain tight as both the direct and total vacancy rates dropped by basis points to 6.3 percent and 7.4 percent, respectively. However, Class A options remained elevated at the end of the third quarter as vacancy was down, but measured 9.2 percent with several large blocks of contiguous space available. As a result of the increased space options, average asking rents for Class A space fell for the second time in three quarters to $54.66 per square foot, a. percent decrease from the beginning of the year. Looking Ahead Over the short term, the pendulum that has shifted in favor of tenants in recent quarters will likely push further in their favor as the CBD s development pipeline remained active. Through 2009,.5 million square feet of space will deliver the submarket with only 27 percent of that space preleased at the end of the third quarter. Rents, which have stabilized and even dropped in some Commodity Class A properties, are likely to decline further until demand catches up with the new supply to the market. One area of new demand that will likely come to the CBD or East End submarket over the coming months is expansion from the Treasury Department. Congress $700 billion bailout plan was approved and called for the creation of the Office of Financial Stability to monitor the purchase of Wall Street s troubled assets. While the agency is not likely to have as significant an effect on the market as say, a Department of Homeland Security, it will provide stimulus and growth to the market in uncertain times. Submarket Boundaries Map Massachusetts Av Georgetown M St K St NW 29 29 Theodore Roosevelt Mem. Bridge 0 Rock Creek and Potomac Pkwy Whitehurst Fwy 27 Rock Creek and Potomac Pkwy 66 West End 66 Arlington Memorial Bridge Boundary Dr Jefferson Davis Hwy Henry Shirley Memorial Hwy 23rd St NW Connecticut Av Virginia Av Constitution Av Independence Av George Washington Memorial Pkwy CBD 395 Florida Av Connecticut Av Pennsylvania Av Key Market Indicators Stock Direct Net Absorption New Hampshire Av E St NW 7th St NW Kutz Bridge Uptown K St NW Pennsylvania Av Rhode Island Av 5th St NW Vermont Av Raoul Walleburg Pl 4th St NW 4th St NW Massachusetts Av New York Av Francis Case Mem. Bridge Vermont Av 9th St NW East End 9th St NW Pennsylvania Av Independence Av 395 Maine Av 6th St NW 6th St NW New Jersey Av K St NW Madison Dr Jefferson Dr Southeast Fwy 395 Massachusetts Av 395 Florida Av NoMa New York Av New Jersey Av Southwest Constitution Av Capitol Hill Canal St Louisiana Av S. Capitol St N. Capitol Av N. Capitol Av Delaware Av New Jersey Av Rhode Island Av K St NE Maryland Av E. Capitol St Massachuset North Carolina Av Southeast Fwy Southeast 34,29,746 SF 65,758 SF Direct Vacancy Rate 6.29% Average Asking Rent $.73 Under Construction 2,20,795 SF JONES LANG LASALLE MARKET SMART 5
Central Business District Average Rental Rates (Class A vs. Class B) $60 $ $40 $30 $20 $0 New Deliveries / Net Absorption / Vacancy Rates % OF STOCK OR VACANCY 0% 8% 6% 4% 2% 0% $0 05 06 07 3Q/08-2% 05 06 07 3Q/08 Class A Rental Rates Class B Rental Rates New Deliveries (% of Stock) Net Absorption (% of Stock) Vacancy Class A Vacancy Class B Significant Lease Transactions Large Availabilities World Bank 776 G Street, NW 48,684 SF 030 5th Street, NW Class A 328,28 SF RTKL Associates 20 L Street, NW 63,403 SF 77 Pennsylvania Avenue, NW Class A 4,279 SF Department of Homeland Security 77 H Street, NW 60,000 SF International Square 8 K Street, NW Class A 3,233 SF JONES LANG LASALLE MARKET SMART 6
East End Quarter in Review The third quarter marked the first quarter in almost a year in which the East End did not deliver new space to the market. As a result, vacancy levels tightened; however, market fundamentals remained mixed. Leasing activity in the East End continued to slow as tour volume decreased, deals took longer to close and renewals ruled the market. Net absorption for the third quarter was substantial, but represented deals completed more than a year ago as move-ins were realized during the third quarter. Blackboard s move into 6 Massachusetts Avenue, NW for 22,9 square feet and the Office of Presidential Transition s move into 4 5th Street, NW for 0,000 square feet helped produce 242,370 square feet of net absorption during the third quarter, shifting occupancy gains up to 639,330 square feet for 2008. Elevated positive net absorption caused both direct and total third quarter vacancy rates to drop during the third quarter by 90 and 0 basis points to 6.3 percent and 7. percent, respectively. Uncertainties regarding the financial crisis helped push confidence and demand levels down and rents shifted down in response. At the end of the third quarter, the average asking rent decreased from $54.48 per square foot to $53.30 per square foot, a 2.2 percent decrease from the second quarter. In addition to rates dropping, tenant improvement packages and free rent have also increased with $70.00 tenant improvement packages and several months of free rent the norm for larger deals signed at new developments. Looking Ahead Vacancy will climb slightly in the fourth quarter as two new deliveries hit the market. While both 0 K Street, NW and 55 F Street, NW have preleasing levels above percent, both Trophy buildings will add vacant blocks to the market. 0 K Street, NW is a 36,574-square-foot building that was percent preleased to Knoll, Baker Daniels, Shell and GlaxoSmithKline at the end of the quarter. 55 F Street, NW, a 2,000-square-foot development, was 60 percent preleased to law firms, Bryan Cave, Simpson Thatcher and Shook Hardy & Bacon, at the end of the quarter. With limited parcels of available land in the core market to develop new buildings, the Mount Vernon Triangle is emerging as the City s next frontier. While the CityVista and 455 Massachusetts Avenue, NW developments have already delivered, Boston Properties recently closed on the NPR site for approximately $264 per FAR, while the Louis Dreyfus Property Group closed on the air rights above I-395 and the Donohoe Companies was selected by the city to develop a mixed-use residential, hotel, retail and arts space site at the corner of 5th and Eye Streets, NW. These developments will push the borders of the East End further east over the coming quarters, extending the core downtown market. Submarket Boundaries Map Massachusetts Av Georgetown M St K St NW 29 29 Theodore Roosevelt Mem. Bridge 0 Rock Creek and Potomac Pkwy Whitehurst Fwy 27 Rock Creek and Potomac Pkwy 66 West End 66 Arlington Memorial Bridge Boundary Dr Jefferson Davis Hwy Henry Shirley Memorial Hwy 23rd St NW Connecticut Av Virginia Av Constitution Av Independence Av George Washington Memorial Pkwy CBD 395 Florida Av Connecticut Av Pennsylvania Av Key Market Indicators Stock Direct Net Absorption New Hampshire Av E St NW 7th St NW Kutz Bridge Uptown K St NW Pennsylvania Av Rhode Island Av 5th St NW Vermont Av Raoul Walleburg Pl 4th St NW 4th St NW Massachusetts Av New York Av Francis Case Mem. Bridge Vermont Av 9th St NW East End 9th St NW Pennsylvania Av Independence Av 395 Maine Av 6th St NW 6th St NW New Jersey Av K St NW Madison Dr Jefferson Dr Southeast Fwy 395 Massachusetts Av 395 Florida Av NoMa New York Av New Jersey Av Southwest Constitution Av Capitol Hill Canal St Louisiana Av S. Capitol St N. Capitol Av N. Capitol Av Delaware Av New Jersey Av Rhode Island Av K St NE Maryland Av E. Capitol St Massachuset North Carolina Av Southeast Fwy Southeast 35,577,562 SF 49,052 SF Direct Vacancy Rate 6.34% Average Asking Rent $52.43 Under Construction,208,03 SF JONES LANG LASALLE MARKET SMART 7
East End Average Rental Rates (Class A vs. Class B) $60 $ New Deliveries / Net Absorption / Vacancy Rates % OF STOCK OR VACANCY 2% 0% $40 8% $30 $20 $0 6% 4% 2% 0% $0 05 06 07 3Q/08-2% 05 06 07 3Q/08 Class A Rental Rates Class B Rental Rates New Deliveries (% of Stock) Net Absorption (% of Stock) Vacancy Class A Vacancy Class B Significant Lease Transactions Large Availabilities Seyfarth Shaw 975 F Street, NW 76,789 SF 425 Eye Street, NW Class B 392,020 SF SAIC 20 Vermont Avenue, NW 75,000 SF 455 Massachusetts Avenue, NW Class A 24,46 SF Electronic Data Systems 800 K Street, NW 5,238 SF 0 K Street, NW Class A 7,605 SF Recent Sales Transactions 40 K Street, NW Class B 24,706 SF $432 / SF 666 th Street, NW Class B 09,959 SF $373 / SF JONES LANG LASALLE MARKET SMART 8
Southwest Quarter in Review After tepid activity through 2006 and 2007, leasing activity and demand has intensified within Southwest s predominately tenanted federal government enclave throughout 2008. Following FEMA s 4,000-square-foot expansion at 300 D Street, SW and the Social Security Administration s lease at 400 Virginia Avenue, SW for 25,000 square feet in the second quarter, more leases and moves were realized in the third quarter that contributed to positive net absorption. In the third quarter, the administrative offices of the Holocaust Museum moved into 36,0 square feet at the Portals III, while Vertex Solutions moved into 3,000 square feet at the same building. Additionally, the Department of Homeland Security moved into 5,000 square feet at 9 L Enfant Plaza, with which another expansion at the building, helped offset the Holocaust Museum s move-out. As a result of these move-ins and additional velocity, the submarket absorbed approximately 80,888 square feet during the third quarter, shifting total occupancy gains in the submarket to 44,02 square feet through 2008. Vacancy rates decreased for the third consecutive quarter as no new deliveries have hit the market, falling from 3.7 percent to 2.8 percent during the third quarter. While activity has increased, large blocks of both existing and under-construction space dot the submarket. The Portals Phase III project at 20 Maryland Avenue, SW experienced some leasing, but had nearly 340,000 square feet of vacancy remaining. Potomac Center North, where ICE is scheduled to move-into over the next several months, still sits vacant, with rumors that ICE might not move in at all, amid word that another Homeland Security division could take the building. And finally, Clark s project at 425 3rd Street, SW remained fully vacant adding 249,334 square feet of vacant space. This excess vacancy has cooled rents in the Clark and Portals projects with the average rent for the submarket declining to $.22 per square foot in the third quarter from $5.4 per square foot at the end of the second quarter, a 2 percent drop. Submarket Boundaries Map Massachusetts Av Georgetown M St K St NW 29 29 Theodore Roosevelt Mem. Bridge 0 Rock Creek and Potomac Pkwy Whitehurst Fwy 27 Rock Creek and Potomac Pkwy 66 West End 66 Arlington Memorial Bridge Boundary Dr Jefferson Davis Hwy Henry Shirley Memorial Hwy 23rd St NW Connecticut Av Virginia Av Constitution Av Independence Av George Washington Memorial Pkwy CBD 395 Florida Av Connecticut Av Pennsylvania Av Key Market Indicators Stock Direct Net Absorption New Hampshire Av E St NW 7th St NW Kutz Bridge Uptown K St NW Pennsylvania Av Rhode Island Av 5th St NW Vermont Av Raoul Walleburg Pl 4th St NW 4th St NW Massachusetts Av New York Av Francis Case Mem. Bridge Vermont Av 9th St NW East End 9th St NW Pennsylvania Av Independence Av 395 Maine Av 6th St NW 6th St NW New Jersey Av K St NW Madison Dr Jefferson Dr Southeast Fwy 395 Massachusetts Av 395 Florida Av NoMa New York Av New Jersey Av Southwest Constitution Av Capitol Hill Canal St Louisiana Av S. Capitol St N. Capitol Av N. Capitol Av Delaware Av New Jersey Av Rhode Island Av K St NE Maryland Av E. Capitol St Massachuset North Carolina Av Southeast Fwy Southeast 9,2,044 SF 45,74 SF Direct Vacancy Rate 2.82% Looking Ahead Southwest s development pipeline is one of the biggest in the region. A combined 2.6 million square feet of space was under construction at quarter s end and projected to deliver through 2009. At the end of the quarter, 0,000 square feet of the space was accounted for, representing the District of Columbia s prelease of the Waterfront Town Center at 4th and M Streets, SW. Both Patriots Plaza and Constitution Center remained fully vacant. The absorption and lease-up of all of the aforementioned projects will largely be determined by the next Administration, which is not likely to create significant budget increases to any agencies besides Treasury, FDIC and SEC, three non-southwest agencies. Average Asking Rent $.6 Under Construction 2,606,606 SF JONES LANG LASALLE MARKET SMART 9
Southwest Average Rental Rates (Class A vs. Class B) $60 $ $40 $30 $20 $0 New Deliveries / Net Absorption / Vacancy Rates % OF STOCK OR VACANCY 40% 30% 20% 0% 0% $0 05 06 07 3Q/08-0% 05 06 07 3Q/08 Class A Rental Rates Class B Rental Rates New Deliveries (% of Stock) Net Absorption (% of Stock) Vacancy Class A Vacancy Class B Significant Lease Transactions Large Availabilities FEMA 20 Maryland Avenue, SW 5,300 SF Capitol View 425 3rd Street, SW Class A 232,334 SF USDA 370 L Enfant Plaza, SW 30,485 SF The Portals Phase III 20 Maryland Avenue, SW Class A 227,225 SF JONES LANG LASALLE MARKET SMART 20
SUBURBAN WASHINGTON, D.C. MARKET SMART Northern Virginia Suburban Maryland
Comus Rd Hunter Mill Rd George Washington Mem Pkwy 6th St NW WASHINGTON, D. C. 3Q 2008 Washington, D.C. Suburban Office Market Boundaries Ridge Rd Damascus Rd Woodbine Rd Roxbury Mills Rd Frederick Rd BaltimoreNational Pike Old Frederick Rd Baltimore National Pike Woodfield Rd Frederick Rd Cedar Grove Rd Clarksville Pike Baltimore Rd New Hampshire Ave Waterloo Rd Darnestown Rd Little Patuxent Pkwy Whites Ferry Rd Beallsville Rd Bucklodge Rd Boyds Clarksburg Rd Clopper Rd Germantown Dwight Eisenhower Hwy Great Seneca Hwy Brink Rd Montgomery Village Ave I-270 Corridor Snouffers School Rd Burnham Rd Muncaster Mill Rd Olney Laytonsville Rd Ashton Rd Patuxent Pkwy Guilford Rd Scaggsville Rd Columbia Pike Snowden River Pkwy Darnestown Rd Spencerville River Rd Seneca Rd River Rd Darnestown Rd Shady Grove Rd Frederick Rd Gude Dr Montgomery Norbeck Rd Viers Mill Rd Georgia Ave Layhill Rd New Hampshire Ave Columbia Pike Sandy Rd Baltimore Washington Blvd Laurel Baltimore Washington P MONTGOMERY Falls Rd Randolph Rd Bo Leesburg Hwy LOUDOUN Georgetown 89 Democracy Blvd 90 9 Bradley Tree Rd Bethesda / Chevy Chase Rockville Pike 270 87 85 495 355 9 University Blvd 93 97 6 Silver Spring Sligo Creek Pkwy 93 Powder Mill Rd 93 Edmonston Ave 295 Greenbelt Rd Washington Dulles International Airport Herndon Pkwy Fairfax Pkwy Rte. 28 South Corridor Fox Mill Rd Baron Cameron Ave Reston / Herndon Dulles Airport Access Rd Lee Hwy Braddock Rd Lawyers Rd Hunter Mill Rd Leesburg Hwy Chain Bridge Rd Little River Tpk 93 Braddock Rd Rolling 7 236 495 MONTGOMERY 495 66 Rosslyn / Ballston 29 Back Lick Rd Annandale Dolly Madison Hwy George Wash. Mem. Pkwy Wilson Blvd Clara Barton Pkwy Tysons Corner Lee Hwy Columbia Pike Henry G Shirley Mem Hwy River Rd 90 DISTRICT OF COLUMBIA 20 George 20 Arlington Blvd ARLINGTON 7 Alexandria Mason Dr Glebe Rd Walter Reed Wisconsin Ave Millitary Rd 29 Connecticut Ave 29 20 395 295 236 95 Jefferson Davis Hwy Georgia Ave Rhode Island Ave Capitol St New Hampshire Ave Penna Ave Anacosta Frwy Constitution Ave E Capitol St Independence Ave Washington National Airport Michigan New York Ave Riggs South Dakota Bladensburg Rd Benning Rd DISTRICT OF COLUMBIA PRINCE GEORGE S Prince George s County Suitland Pkwy Branch Ave Martin L King Jr Hwy 5 24 4 95 95 Landover Rd Lanham Severn Rd John Hanson Hwy Old Mill Rd VIRGINIA MARYLAND Woodyard Rd Franconia Springfield Pkwy Indian Head Hwy 95 20 Ox Rd Richmond Hwy Mt Vernon Mem Pkwy 235 Piscataway Rd 223 5 Blue Star Mem Hwy Aquasco Brandywine Rd Prince William Pkwy PRINCE WILLIAM Gunston Rd CHARLES Accokeek Rd JONES LANG LASALLE MARKET SMART 22
Washington, D.C. Suburban Office Market Boundaries Northern Virginia Alexandria Bordered by Arlington County to the north, the Potomac River to the east, to the south and Van Dorn Street to the west. It also encompasses part of the I-395 Corridor. Reston / Herndon Bordered by Herndon Parkway and Baron Cameron Avenue to the north, Hunter Mill Road to the east, Lawyers Road, Hunter Station Road and Fox Mill Road to the south, and Centreville Road and McLearen Road to the southwest and Route 28 and the Fairfax County/Loudoun County line to the west. Rosslyn / Ballston Bordered by Interstate 66 to the north, George Washington Parkway to the east, Arlington Boulevard/Route to the south and Glebe Road to the west. Tysons Corner Bordered by Washington Dulles Toll Road and Lewinsville Road (between and Route 23) to the north, to the Washington Dulles Toll Road to the northeast, Magarity Road (Route 6) to the southeast and Old Courthouse Road and Interstate 7 to the southwest and west. Route 28 South Corridor Bordered by McLearen to the north, from Route 665 and Centreville Road and Stringfellow Road (Route 645) to the east, Route 29 to the south, and Pleasant Valley (Route 609) and Braddock Road (Route 620) and Fairfax County/Loudoun County line to the west. Suburban Maryland Bethesda / Chevy Chase Bordered by West Cedar Lane and to the north, Connecticut Avenue to the east, Western Avenue to the southeast, Massachusetts Avenue to the southwest and Goldsboro Road, Bradley Boulevard and Georgetown Road to the west. I-270 Corridor Situated in western Montgomery County, the I-270 Corridor comprises the following submarkets Potomac, North Bethesda, Rockville, North Rockville, Germantown and Gaithersburg. Bordered by Old Baltimore Road and Brink Road to the north, School Road, Rock Creek and Rockville Pike to the east, Capital Beltway to the south, Seven Locks Road to the west, the City of Rockville s southern boundary and Darnstown Road to the southwest and Germantown Road, Clopper Road and Clarksburg Road to the northwest. Prince George s County Bordered by the Patuxent River to the north and east, and continuing approximately 0 miles south of the to the south and the Potomac River, District of Columbia and Montgomery County to the west. Silver Spring Bordered by Dale Drive to the north and east, Sligo Avenue to the south, the District of Columbia border to the southwest and 6th Street to the west. JONES LANG LASALLE MARKET SMART 23
NORTHERN VIRGINIA MARKET SMART Northern Virginia Alexandria Arlington County Reston / Herndon Route 28 South Corridor Tysons Corner
Hunter Mill Rd 6th St NW WASHINGTON, D. C. 3Q 2008 Northern Virginia Quarter in Review A slowdown in leasing activity during the third quarter softened market conditions throughout Northern Virginia, impairing deal flow and substantially raising vacancy rates in outlying markets, where new construction activity exceeded tenant demand. The average deal cycle lengthened considerably, as tenants became more conservative and deliberate in their space planning. Incidents of renewal remained prevalent across the region, and combined with consolidations and measured expansions, net new growth pushed below historical averages. Landlord concessions rose measurably. With certain projects strained for occupancy, landlords offered record levels of tenant improvement allowances and rental abatement in the hopes of attracting users. Increased choice factored heavily in tenants advantage. Over 4.4 million square feet of new deliveries were added to the region s inventory year-to-date,. percent of which was preleased. An additional 3.0 million square feet remained in the pipeline at the end of the third quarter, 9.9 percent of which was committed. The 2008 new construction inventory represented the largest development boom in the area since 200. However, contrary to the ramp-up in post-9/ defense funding, Northern Virginia headed into late 2008 without a clear catalyst for additional growth. The nation grappled with the fallout of the credit crisis, and locally, the lame duck Administration and divided Congress refrained from enacting new measures to benefit Northern Virginia s broad contractor base. The prospect of additional financial oversight provided disproportionate benefits to the District, with the possible exception of the Federal Deposit Insurance Corporation in Ballston. In total, the region recorded negative net absorption of 48,337 square feet during the third quarter. Year-to-date net absorption fell to,273,540 square feet. A wave of consolidations and contractions outside the Beltway among defense contractors weighed on results, and the technology and defense-heavy clusters along the Dulles Toll Road, Route 28 Corridor and Merrifield experienced the brunt of the softness. Part of the decline was also due to an increase in sublease availability, primarily from the hard-hit financial sector. Across the region, sublease space on the market rose 6.0 percent over the past quarter, to 2.3 million square feet. Direct vacancy rates across Northern Virginia increased.9 percent since year-end 2007 and 0.6 percent over the past quarter to.7 percent. The contrast between inner and outer markets remained stark, with Alexandria and Arlington County featuring direct vacancy rates of 7.6 percent, relative to 3.7 percent for Fairfax, Loudoun and Prince William. Submarket Boundaries Map Washington Dulles International Airport Leesburg Hwy River Rd Herndon Pkwy Fairfax Pkwy Fox Mill Rd Prince William Pkwy Baron Cameron Ave Dulles Airport Access Rd Lee Hwy Braddock Rd Lawyers Rd Georgetown Hunter Mill Rd River Rd MONTGOMERY LOUDOUN Senec Leesburg Hwy Chain Bridge Rd PRINCE WILLIAM Little River Tpk Ox Rd 89 90 93 495 7 29 236 Braddock Rd 495 Rolling Old Mill Rd Franconia Springfield Pkwy Back Lick Rd Gunston Rd Falls Rd Annandale 93 270 97 Democracy Blvd 87 85 9 Bradley Tree Rd George Wash. Mem. Pkwy Dolly Madison Hwy Lee Hwy Wilson Blvd Montgomery Clara Barton Pkwy 495 355 9 20 29 66 George 20 Arlington Blvd ARLINGTON Columbia Pike Henry G Shirley Mem Hwy 7 Viers Mill Rd Randolph Rd River Rd 95 Rockville Pike Richmond Hwy Mason Dr 20 395 236 95 VIRGINIA Mt Vernon Mem Pkwy Glebe Rd Walter Reed Wisconsin Ave 235 CHARLES Georgia Ave 90 Millitary Rd MONTGOMERY DISTRICT OF COLUMBIA Connecticut Ave Jefferson Davis Hwy George Washington Mem Pkwy Layhill Rd Un Rhode Const Independence Key Market Indicators Stock 42,026,042 SF Direct Net Absorption -286,245 SF Direct Vacancy Rate.7% Average Asking Rent $3.47 Under Construction 2,982,65 SF JONES LANG LASALLE MARKET SMART 25