Metro Forecast Report

Washington, DC 2012 Office Sector

Forecast Actual

2006
Office Sector

2007 23.0 8.9 4.2 9.7% 7.9 $35 $12.5

2008 15.5 8.2 1.1 11.2% 7.6 $35 $12.5

2009 -36.5 -0.3 -2.3 13.9% 9.9 $35 $2.3

2010 10.6 20.7 5.7 13.0% 4.0 $34 $4.3

2011 17.9 13.5 1.2 13.0% 1.3 $35 $7.2

2012 17.4 13.0 2.8 12.9% 2.8 $37 $5.4

2013 33.1 13.2 3.5 12.6% 3.5 $38 $6.8

2014 42.0 16.8 4.3 12.2% 4.3 $39 $8.4

Total Employment (000s) c Office-Using Employment (000s) c Net Absorption (mil) Vacancy New Deliveries (mil) Asking Rents Investment Sales ($vol, bil)
Source: Cassidy Turley National Research c = change, year over year

42.5 17.5 6.5 9.1% 8.9 $33 $14.1

DC Region: Slow but Steady Growth in 2012

Economy
The Washington D.C. regions economy showed steady growth in 2011, although slower than that seen in 2010. After D.C.s real gross regional product (GRP) grew at a 3.3% annual rate in 2010, final 2011 figures are expected to be in the 2% to 2.5% range. Through December of 2011, regional employment grew by 17,900 non-farm payrolls1, which is more than the 10,900 jobs added in 2010. The metro unemployment rate was 5.5% in December the lowest unemployment figure for any major metropolitan area. The Professional & Business Services sector, a key user of office space, accounted for the largest job gain (+11,900 jobs metro-wide) of any sector during 2011. The Financial Activities sector added 2,500 jobsthe first positive figure since 2006, and downtown law payrolls grew by 700the first increase in three years. With the focus on reducing federal spending, federal government employment remains a drag on overall employment figures. In 2012, the private sector will continue adding jobs at a steady pace. Specifically, the Professional & Business Services (which includes IT), Healthcare and Education sectors will be winners, and the Financial Activities sector will also see gains. The Federal Government workforce will shrink mostly through attrition and retirement. In early 2011, net demand for office space shifted from the public to the private sector. Expect the private sector to continue to drive demand, albeit at subdued levels, during the next 1218 months. Net absorption will return to more normalized levels in 2013-2014 as the private sector gains momentum and government demand begins to improve. Vacancy rates will remain relatively stable over the next three years as slower demand is coupled with limited new supply. There are some exceptionssuch as the North Bethesda submarketwhere vacancy spikes will be the result of large tenants vacating for new space in other submarkets. Rents have increased slightly across the region in conjunction with stabilizing incentives (free rent, TI allowances). Rental increases for the next two years will remain in the 1.5% to 2.5% range, below the 15-year average of 3.0%. Until there are more considerable declines in vacancy rates, significant rental increases will not occur across the D.C. Metro until 2013/2014. D.C. Metros supply pipeline of new buildings will continue to remain thin compared to the historical 20-year average of 7.3 million square feet. Expect additional new developments to be announced, although the availability of construction financing may dictate the number of shovels in the ground. Whereas investment sales activity reached an accelerated pace in 2011, expect sales volume to revert back towards historical norms in 2012. Investors will continue to seek stability in D.C.s core office properties and prime locations.
Updated January 2012

Outlook
The D.C. regional economy will continue to grow in 2012, albeit slowly, driven by private sector expansion. Employment gains and net leasing activity will be subdued in 2012 as much uncertainty remains surrounding federal deficit reduction measures and the upcoming primary elections in November. Strong employment growth will not occur until 2013-2014. However, office market performance in the region may surprise us. Contrary to popular belief, net leasing activity does not always slow down during an election year. In two of the past four election years, net office demand has increased. Additionally, businesses are planning for future growth as evidenced by less sublease space on the market. One thing is certain: we are in for quite an interesting 2012.
1

Average employment levels, January thru December, non-seasonally adjusted

Metro Forecast Report

Washington, DC 2012 Office Sector

The District: Office Market Forecast

Actual 2008 Vacancy CBD East End Capitol Hill/NoMa Southwest/Southeast Uptown West End/Georgetown District Net Absorption CBD East End Capitol Hill/NoMa Southwest/Southeast Uptown West End/Georgetown District Asking Rents ($) CBD East End Capitol Hill/NoMa Southwest/Southeast Uptown West End/Georgetown District $48 $50 $46 $49 $37 $44 $48 $48 $50 $46 $48 $37 $42 $48 $49 $52 $49 $50 $36 $42 $49 $49 $53 $49 $50 $37 $43 $50 $50 $54 $49 $51 $38 $43 $50 $50 $55 $51 $52 $38 $44 $51 $51 $56 $53 $53 $40 $46 $53 (205,000) 527,000 195,000 360,000 (57,000) (66,000) 754,000 (171,000) (466,000) 376,000 542,000 (139,000) (26,000) 116,000 125,000 312,000 1,346,000 2,136,000 (240,000) 195,000 3,874,000 456,000 (181,000) 572,000 54,000 (11,000) (91,000) 799,000 198,000 253,000 270,000 181,000 5,000 5,000 912,000 211,000 357,000 320,000 289,000 11,000 11,000 1,199,000 279,000 425,000 461,000 348,000 38,000 38,000 1,589,000 8.8% 7.5% 6.3% 7.5% 5.7% 11.7% 7.8% 12.2% 9.3% 10.7% 19.3% 7.1% 12.8% 11.7% 12.7% 9.2% 10.7% 8.2% 10.2% 9.5% 10.4% 12.5% 9.4% 8.9% 9.1% 9.3% 11.3% 10.4% 12.8% 8.8% 8.5% 8.1% 9.2% 11.2% 10.1% 12.5% 9.1% 9.1% 6.5% 10.7% 11.1% 10.0% 12.2% 8.0% 8.1% 5.8% 10.1% 10.5% 9.2% 2009 2010 2011 2012 Forecast 2013 2014

Metro Forecast Report

Washington, DC 2012 Office Sector

Northern Virginia: Office Market Forecast

Actual 2008 Vacancy Alexandria Arlington Tysons Corner Reston/Herndon 50/66 Route 28 S Loudoun Northern Virginia Net Absorption Alexandria Arlington Tysons Corner Reston/Herndon 50/66 Route 28 S Loudoun Northern Virginia 242,000 1,178,000 (120,000) 267,000 (801,000) 383,000 90,000 1,239,000 (276,000) 416,000 (843,000) (94,000) (611,000) (378,000) 73,000 (1,713,000) 140,000 522,000 (89,000) 255,000 310,000 260,000 362,000 1,760,000 (155,000) (780,000) (9,000) 333,000 223,000 334,000 (66,000) (120,000) 95,000 285,000 113,000 223,000 78,000 120,000 127,000 1,041,000 176,000 199,000 240,000 307,000 131,000 200,000 213,000 1,466,000 216,000 335,000 308,000 410,000 160,000 321,000 261,000 2,011,000 7.3% 9.2% 12.3% 16.1% 14.3% 18.3% 16.7% 12.9% 12.4% 8.6% 16.3% 16.9% 17.1% 19.5% 19.1% 14.8% 12.3% 7.9% 16.6% 16.0% 15.5% 17.4% 17.0% 14.0% 13.2% 10.6% 16.6% 14.9% 14.5% 15.5% 17.1% 14.2% 12.7% 11.7% 16.2% 14.2% 14.5% 15.2% 15.9% 14.0% 11.7% 13.3% 15.2% 13.2% 13.9% 14.9% 14.1% 13.7% 11.1% 12.7% 15.6% 12.4% 13.1% 14.4% 13.5% 13.2% 2009 2010 2011 2012 Forecast 2013 2014

Asking Rents ($) Alexandria Arlington Tysons Corner Reston/Herndon 50/66 Route 28 S Loudoun Northern Virginia $33 $34 $31 $31 $29 $28 $25 $31 $33 $37 $29 $29 $28 $26 $25 $30 $33 $39 $29 $27 $29 $26 $24 $30 $32 $40 $30 $27 $28 $26 $24 $30 $32 $40 $31 $28 $28 $26 $24 $31 $32 $40 $32 $29 $29 $27 $25 $32 $34 $41 $33 $30 $30 $28 $26 $33

Metro Forecast Report

Washington, DC 2012 Office Sector

Suburban Maryland: Office Market Forecast

Actual 2008 Vacancy Bethesda/Chevy Chase North Bethesda Rockville North Rockville Gaithersburg/Germantown Silver Spring Prince Georges County Suburban Maryland 6.7% 12.5% 11.3% 13.5% 17.9% 9.3% 17.8% 12.9% 10.5% 14.8% 16.0% 16.0% 17.7% 11.5% 18.8% 15.4% 9.9% 13.7% 14.5% 17.1% 14.2% 12.7% 19.6% 15.2% 9.7% 12.3% 14.2% 14.7% 15.3% 12.0% 21.0% 15.2% 10.9% 11.6% 13.8% 13.3% 14.5% 11.2% 21.9% 15.1% 9.4% 15.2% 13.6% 12.5% 14.9% 10.4% 21.6% 15.0% 9.6% 19.0% 13.1% 11.1% 13.7% 9.2% 21.2% 14.9% 2009 2010 2011
(1)

Forecast 2012 2013 2014

Net Absorption Bethesda/Chevy Chase North Bethesda Rockville North Rockville Gaithersburg/Germantown Silver Spring Prince Georges County Suburban Maryland Asking Rents ($) Bethesda/Chevy Chase North Bethesda Rockville North Rockville Gaithersburg/Germantown Silver Spring Prince Georges County Suburban Maryland $37 $32 $33 $28 $24 $28 $23 $28 $36 $32 $29 $27 $24 $28 $22 $27 $34 $30 $30 $28 $24 $27 $21 $26 $35 $30 $30 $28 $24 $27 $21 $27 $36 $30 $31 $28 $24 $27 $22 $27 $37 $30 $33 $29 $24 $27 $22 $28 $41 $30 $34 $30 $24 $28 $22 $29 (17,000) (131,000) 52,000 22,000 (164,000) (165,000) (494,000) (897,000) (162,000) (238,000) (30,000) 110,000 29,000 (36,000) (359,000) (686,000) 32,000 87,000 127,000 (191,000) 209,000 (25,000) (133,000) 106,000 60,000 92,000 (74,000) 442,000 105,000 62,000 (135,000) 552,000 144,000 387,000 37,000 150,000 50,000 63,000 50,000 881,000 161,000 (360,000) 181,000 590,000 111,000 63,000 59,000 805,000 184,000 (373,000) 438,000 154,000 79,000 94,000 76,000 652,000

Note: Some buildings were reclassified in 2011, affecting inventory & vacancy rates

Metro Forecast Report

Washington, DC 2012 Office Sector

Contact Information
Researchers Information:
Cassidy Turley Jeffrey Kottmeier Director of Research 2101 L Street, NW Suite 700 Washington, DC 20037 Tel: 202-463-2100 Washington, DC Urmi Joshi Senior Research Analyst 2101 L Street, NW Suite 700 Washington, DC 20037 Tel: 202-463-2100 Northern Virginia Colin Hartley Market Analyst 2101 L Street, NW Suite 700 Washington, DC 20037 Tel: 202-463-2100

Disclaimer The information contained in this report was obtained from sources deemed reliable, but no warranty or representation is made to the accuracy thereof. The figures provided for the current quarter are preliminary, and all information contained in the report is subject to correction of errors and revisions based on additional data received. Methodology Market statistics are calculated from a base building inventory made up of office properties deemed to be competitive in the typical Washington, DC office market. Generally, owneroccupied and federally-owned buildings are not included. Single-tenant buildings and privatelyowned buildings in which the federal government leases space are included. Older buildings unfit for occupancy or ones that require substantial renovation before tenancy are generally not included in the competitive inventory. Vacant space is defined as space that is available immediately or three months (90 days) after the end of the quarter. Sublet space still occupied by the tenant is not counted as available space. Explanation of Terms Total Inventory: The total amount of office space (in buildings greater than 10,000 square feet) that can be rented by a third party. New Space Available: First generation, neveroccupied office space in newly constructed or substantially renovated buildings, being actively marketed by a landlord. Relet Space Available: Second-generation, unoccupied office space being actively marketed by a landlord. (Space that is marketed but largely occupied is not counted as available space.) Sublet Space Available: Second-generation, unoccupied space being actively marketed by a tenant. (Sublet space that is marketed but still occupied is not counted as available space.) Total Space Available: The sums of new, relet, and sublet space that is unoccupied and being actively marketed.

Vacancy Rate: The amount of unoccupied space (new, relet, and sublet) expressed as a percentage of total inventory. (Total Unoccupied Space divided by Total Inventory.) Absorption: The net change in occupied space between two points in time. (Total occupied space in the previous quarter minus total occupied space in the present quarter, quoted on a net, not gross, basis.) New Space Absorption: The net change in occupied new space between two quarters. Relet/Sublet Absorption: The net change in occupied relet and sublet space between two quarters. Total Absorption: The net change in total occupied (new, relet, and sublet) space between two quarters.

*All metro forecasts generated by Cassidy Turley National Research