WASHINGTON, DC OFFICE After posting job losses in the first quarter of 2014, the District of Columbia economy showed signs of life in the second quarter and has added 1,900 jobs since the beginning of the year. The District of Columbia’s unemployment rate stands at 7.5%, down from 8.5% one year ago and at its lowest level since the financial crisis. While many of the job gains have been in the non-office-using Leisure & Hospitality sectors, the Professional & Business Services sectors have added 1,700 jobs since the start of 2014. This bodes well for the District of Columbia’s office market. However, the Federal Government, a significant occupier of office space, has shed 2,100 jobs during the same time period. With a new budget in place and reductions in discretionary spending projected to come to an end, the contraction of the Federal Government workforce should be close to over. As consumer confidence continues to improve, expect more positive job gains through the second half of 2014.

The District of Columbia office market was bifurcated in the second quarter of 2014. While transaction volume was above average, a few large tenant vacancies caused absorption to continue the negative trajectory that began in the first quarter. Net absorption registered a negative 321,500 square feet (sf) in the second quarter, bringing the year to date total to a negative 431,800 sf. The downturn was due primarily to three significant move-outs in the emerging and peripheral submarkets of West End/Georgetown, Uptown and Southwest. At the same time, the core submarkets – the Central Business District (CBD) and East End - performed quite well in the second quarter, together registering over 400,000 sf of absorption. Because of the core versus non-core submarket divergence, the overall District of Columbia vacancy rate was essentially flat, increasing only 0.2 percentage points over the quarter to 11.2%. As expected, asking rents also remained flat over the quarter, decreasing $0.31 to $50.35 per square foot (psf), full service.

Office construction activity continues to be below average. As of the second quarter of 2014, 1.5 million square feet (msf) of office space is either under construction or complete renovation in the District of Columbia, with a preleased rate of 54%. This is well below the District’s ten-year average of 4.6 msf under construction with 2.5 msf delivered annually. However, the District appears to be ramping up for another wave of construction. Despite lackluster leasing in the emerging markets, several developers are considering breaking ground on a speculative basis in a play to attract federal agencies and law firms, both of which have a surge of lease expirations in 2017.

Setting aside the dismal absorption totals through the first half of 2014, it should be noted that transaction volume in the District of Columbia is up 16% from the past four-quarter’s average. With most of the anticipated large move-outs already completed, a continued increase in transaction volume in the second half of 2014

could bring the growth needed to balance out the first half of the year.

Overall Vacancy

Net Absorption/Asking Rent 4Q TRAILING AVERAGE

WASHINGTON, DC

Office Market SnapshotSecond Quarter • 2014

Market Indicators2Q 13 2Q 14 12-Month

Forecast

Overall Vacancy 10.3% 11.2%

Net Absorption 123K (321K)

Under Construction 1.6M 1.5M

Average Asking Rent $49.29 $50.35

Economic IndicatorsQ2 14 Q2 13 12-Month

Forecast

DC Metro Employment 3.08M 3.08M

DC Metro Unemployment 4.8% 5.5%

U.S. Unemployment 6.3% 7.5%

$47

$48

$49

$50

$51

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

2010 2011 2012 2013 2014

Net Absorption, MSF Asking Rent, $ PSF

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

2010 2011 2012 2013 2014

Historical Average = 10.6%

Economy

Market Overview

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Key Sales Transactions 2Q 14

TOTAL

BLDGSINVENTORY

SUBLET

VACANT

TOTAL

VACANT

VACANCY

RATE

AVAILABILITY

RATE

CURRENT

ABSORPTION

YTD

ABSORPTION

UNDER

CONSTRUCTION

AVERAGE

ASKING RENT

Submarket

CBD 251 38,705,167 298,228 4,347,282 11.2% 15.3% 250,489 189,503 296,594 $49.60

East End 201 39,506,894 247,924 4,180,680 10.6% 18.4% 154,930 92,424 794,373 $54.18

West End/Georgetown 59 6,019,052 21,986 689,824 11.5% 17.9% (228,624) (360,523) 0 $48.14

Capitol Hill 44 4,642,579 31,798 308,439 6.6% 17.4% 29,186 (13,618) 0 $55.47

NoMa 39 10,289,374 8,756 1,544,934 15.0% 16.4% 4,452 45,689 0 $47.11

Southwest 34 13,382,559 23,382 1,365,318 10.2% 14.7% (130,380) (176,379) 342,000 $48.17

Capitol Riverfront/Southeast 11 3,736,758 13,679 480,567 12.9% 17.1% 61,715 216,038 0 $42.23

Uptown 97 6,489,940 11,449 847,466 13.1% 21.0% (463,223) (424,902) 74,349 $40.24

WASHINGTON, DC MARKET TOTALS

TOTAL 736 122,772,323 657,202 13,764,510 11.2% 16.9% (321,455) (431,768) 1,507,316 $50.35

PROPERTY SF SELLER/BUYER PRICE SUBMARKET

Tech World Plaza: 800 K and 801 Eye Streets, NW 758,338 The JBG Companies / Meridian Group $325,000,000 East End

1775 Eye Street, NW 184,918 AEW Capital Management / Washington Real Estate Investment Trust $104,500,000 CBD

999 E Street, NW 174,072 UrbanAmerica LP / Princeton Holdings LLC $95,163,966 East End

Tower Building: 1401 K Street, NW 124,706 Guardian Realty Investors / First Potomac Realty Trust $58,000,000 East End

Key Lease Transactions 2Q 14

PROPERTY SF TENANT TRANSACTION TYPE SUBMARKET

555 13th Street, NW 384,700 Hogan Lovells Renewal East End

1301 K Street, NW 248,300 Washington Post Relet East End

1201 Eye Street, NW 219,800 GSA- U.S. National Park Service Renewal East End

1800 G Street, NW 164,000 GSA- U.S. Department of Veterans Affairs Renewal CBD

1301 K Street, NW 79,500 Reed Smith Renewal East End

1625 Eye Street, NW 71,300 Laborers' International Union of North America Relet CBD

5301 Wisconsin Avenue, NW 63,200 Boies, Schiller & Flexner Renewal Uptown

1310 G Street, NW 60,300 GSA- Alcohol and Tobacco Tax and Trade Bureau Renewal East End

1722 Eye Street, NW 54,800 GSA- U.S. Department of the Treasury Relet CBD

1025 F Street, NW 48,400 GSA- U.S. Environmental Protection Agency Renewal East End

WASHINGTON, DC

Office Market SnapshotSecond Quarter • 2014

Bethany Schneider

Research Analyst

2101 L Street, NW, Suite 700

Washington, DC 20037

Tel: 202.463.2100

Fax: 202.223.2989

Email: bethany.schneider@cassidyturley.com

The information contained within this report is gathered from multiple sources considered to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy.

Copyright © 2014 Cassidy Turley. All rights reserved.

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