Washington AMERICAS MarketBeat Office Q32013

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MARKETBEAT
OFFICE SNAPSHOT
WASHINGTON, D.C.
A Cushman & Wakefield Research Publication

Q3 2013

ECONOMIC OVERVIEW
After much speculation throughout the third quarter, October 1st marked the end of hope that the U.S. Congress and Administration would agree on a budget to fund the current fiscal year, resulting in the shutdown of a number of government operations. On top of this, the debt ceiling debate is right around the corner. The impact on the market may be relatively minimal in the near term, but the longer both of these issues remain unsolved, the more negative the impact on the U.S. and local economy.

confidence in the market and demand continues to outpace supply for well positioned, core assets. Buyers are willing to accept low initial returns and wait out the current down cycle.

OUTLOOK
The current government dysfunction will only further fuel the uncertainty that has held back the private sector in the Washington market over the past two years, and could continue to delay pent up federal leasing decisions, and potentially, rent payments. Until both debates are resolved, tenants in D.C. will remain in a holding pattern, keeping market fundamentals at their current, below par, standing. STATS ON THE GO
Q3 2012 Overall Vacancy Direct Asking Rents (psf/yr) YTD Leasing Activity (sf) 12.7% $51.17 2,912,182 Q3 2013 13.7% $51.00 2,436,892 Y-O-Y 12 MONTH CHANGE FORECAST 1.0pp -0.3% -16.3%

FUNDAMENTALS CONTINUE TO WEAKEN
Vacancy has ticked up again this quarter, and at 13.7% overall, marks the third consecutive quarter of a 1.0 percentage point (pp) yearover-year increase. Total overall absorption is a mere 72,590 square feet (sf); class A space accounts for nearly all positive activity, pointing to a market bifurcation between the performance of Trophy/A and B/C class assets. Holding fairly flat at $51.00, the direct average asking rental rate has seen slight contractions in both Q2 and Q3 this year, as asking rates begin to drop in class A buildings.

RENEWALS DOMINATE STAGNANT LEASING ACTIVITY
With just under 750,000 sf of new deals and 1.1 million square feet (msf) of renewals signed during the third quarter, renewals currently account for 45% of total leasing activity year to date. Seven of the 10 largest deals signed this quarter were renewals, including Sidley Austin LLP’s 288,000-sf deal at 1501 K Street NW, in which the firm gave back approximately 30,000 sf immediately. A handful of new deals are currently pending that could help to balance out activity if finalized over the remainder of the year. The largest, and only, new lease over 50,000 sf signed was Berkeley Research Group’s deal at 1800 M Street NW. The global consulting firm is taking nearly 60,000 sf at the newly repositioned building, which just underwent $20 million in renovations. With such tepid demand, more owners of aging inventory may need to invest in upgrades to differentiate their buildings and win in the battle for the limited pool of tenants in the market that are willing to take on the capital expenditures associated with relocation.

DIRECT RENTAL VS. VACANCY RATES
$52.00 $51.00 psf/yr $50.00 $49.00 $48.00 2009 2010 2011 2012 Q3 2013 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0%

DIRECT GROSS RENTAL RATE

DIRECT VACANCY RATE

LEASING ACTIVITY
6.0 5.0 4.0 3.0 2.0 1.0 0.0

RESILIENT SALES MARKET DESPITE DOWNTURN
After a slower start to 2013, sales took off in Q3 with nine properties trading hands, totaling over $1.5 billion in sales volume. Pricing has hit peak levels for quality, and two sales broke the $800 per square foot (psf) mark – 1200 19th Street NW and 700 14th Street NW. Cap rates remain in the 4.5% - 6.0% range. Despite the lackluster market fundamentals, recent activity suggests long-term
Cushman & Wakefield of Washington D.C,, Inc.

msf

4.5

5.8

4.8

5.2

2009

2010

2011
LEASING ACTIVITY

2012

2013 YTD

2001 K Street NW Washington, DC 20006 www.cushmanwakefield.com/knowledge

For more information, contact: Paula Munger, Regional Research Director 703 448 1200 [email protected]

The market terms and definitions in this report are based on NAIOP standards. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by our principals. © 2013 Cushman & Wakefield, Inc. All rights reserved.

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WASHINGTON, D.C.
SUBMARKET INVENTORY OVERALL VACANCY RATE 11.6% 13.0% 13.6% 9.8% 15.2% 19.5% 16.1% DIRECT VACANCY RATE 11.2% 11.9% 12.1% 8.2% 11.5% 19.0% 15.1% YTD LEASING ACTIVITY UNDER CONSTRUCTION/ RENOVATION 624,367 590,000 290,237 0 0 0 0 YTD YTD DIRECT CONSTRUCTION/ NET ABSORPTION RENOVATION COMPLETIONS 138,552 99,107 592,736 196,181 0 98,000 0 0 136,163 58,645 92,342 (118,881) (203,754) 45,315 YTD OVERALL NET ABSORPTION OVERALL WTD. AVG ALL CLASSES GROSS RENTAL RATE* $48.21 $53.45 $50.79 $41.65 $37.43 $49.86 $43.08 DIRECT WTD. AVG. CLASS A GROSS RENTAL RATE* $57.61 $64.33 $62.33 $52.45 $42.65 $51.11 $47.76

Capitol Hill / NoMa East End CBD West End / Georgetown Uptown Southwest Capitol Riverfront

12,614,172 36,708,570 33,325,370 5,194,432 3,912,915 10,765,786 4,674,326

155,047 777,067 1,205,090 158,464 59,466 43,142 38,616

117,514 45,115 90,207 100,094 (114,820) (194,751) 29,231

TOTALS

107,195,571 13.7% 12.5%

2,436,892

1,504,604

1,025,469

108,937

72,590

$50.05

$59.21

* RENTAL RATES REFLECT ASKING $PSF/YEAR

MARKET HIGHLIGHTS
SIGNIFICANT Q3 2013 LEASE TRANSACTIONS 1501 K Street NW* 1441 L Street NW* 1800 G Street NW* 1120 20th Street NW* 1800 M Street NW 601 Pennsylvania Avenue NW* 1828 L Street NW* SIGNIFICANT Q3 2013 SALE TRANSACTIONS 3000 & 3050 K Street NW 700 12th Street NW 2000 L Street NW 1200 19 Street NW 700 14 Street NW/1420 New York Avenue NW SIGNIFICANT Q3 2013 CONSTRUCTION COMPLETIONS 440 1st Street NW (Renovation) SIGNIFICANT PROJECTS UNDER CONSTRUCTION 601 Massachusetts Avenue NW 175 N Street NE 1050 First Street NE 1200 17th Street NW SIGNIFICANT PROPOSED PROJECTS
th th

SUBMARKET CBD East End CBD CBD CBD East End CBD SUBMARKET West End / Georgetown East End CBD CBD East End SUBMARKET Capitol Hill / NoMa SUBMARKET East End Capitol Hill / NoMa Capitol Hill / NoMa CBD SUBMARKET Capitol Hill / NoMa CBD

TENANT Sidley Austin LLP GSA – Bureau of Economic Analysis The World Bank AT&T Berkeley Research Group America’s Health Insurance Plans DCI Group BUYER National Pension Service of Korea / Principal Financial Group Jamestown Rockrose Development Corp. Fosterlane Realty Paramount Group MAJOR TENANT Associated Builders & Contractors MAJOR TENANT Arnold & Porter N/A N/A Pillsbury Winthrop Shaw Pittman LLP MAJOR TENANT N/A Miller & Chevalier (LOI)

BUILDING CLASS A C C B B B B PURCHASE PRICE / $PSF $373,000,000/$669 $307,500,000/$730 $192,000,000/$467 $296,000,000/$886 $183,000,000/$815 COMPLETION DATE Q3 2013 COMPLETION DATE Q3 2015 Q4 2013 Q4 2013 Q2 2014 COMPLETION DATE Q1 2016 Q1 2016

SQUARE FEET 287,669 176,071 86,076 83,368 58,602 55,543 38,230 SQUARE FEET 557,961 421,235 411,165 334,175 224,558 BUILDING SQUARE FEET 138,552 BUILDING SQUARE FEET 478,000 345,000 279,367 168,140 BUILDING SQUARE FEET 340,652 127,825

1150 1st Street NE 900 16th Street NW

* RENEWAL - NOT INCLUDED IN LEASING ACTIVITY STATISTICS

Cushman & Wakefield of Washington D.C,, Inc.

2001 K Street NW Washington, DC 20006 www.cushmanwakefield.com/knowledge

For more information, contact: Paula Munger, Regional Research Director 703 448 1200 [email protected]

The market terms and definitions in this report are based on NAIOP standards. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by our principals. © 2013 Cushman & Wakefield, Inc. All rights reserved.

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