We Respectfully Disagree - Final

WE
RESPECTFULLY
DISAGREE.
INTRODUCTION
Savills Studley Perspective
Recently, several of our competitors have produced reports and provided commentary to the local media suggesting that the Washington, DC Metro office
market is turning in the landlords favor. We respectfully disagree. In fact, there is little evidence that the regions tenant-favorable climate is changing any
time soon. This document seeks to present a data-driven perspective on the current state of the market based on a comprehensive analysis of the local
economy, leasing metrics, development trends and transaction data. This report reflects Savills Studleys commitment to providing unbiased and in-depth
market knowledge to tenants and addresses the following claims made by our competitors:
Tenants still have the upper hand, but

not for long
DC office market is turning in the

landlords favor
Broad-based recovery taking hold

across DC Region CRE Market
Overall, tenants continue to have the upper

hand in lease negotiations but the market is
tightening and that leverage wont last long.
Fundamentals in Washington, DCs office

market have shifted to the extent that Cresa
believes it is turning into a landlords market in
many sectors.
An uptick in tenant demand and the

emergence of rent growth for the first time in
years have provided a tailwind to the market,
increasing both owner and investor confidence
in the region.
We expect the office market to become more

competitive in late 2016 or early 2017.
The federal government will return to the

market this year after a barely-there activity level
in 2015.
There is an estimated 24M SF of leases
expiring in the DC metro through 2018,
which will cause the vacancy rate to drop
substantially.
Source: Bisnow DC, 3/1/2016
Source: GlobeSt.com, 2/17/2016
When we see a resurgence in leasing activity in

markets such as Crystal City, we know were in
the midst of a broad-based recovery.
The improving suburban leasing market, low
interest rates and availability of capital will
continue to drive demand among investors for
suburban Washington locations.
Source: CityBizList, 10/5/2015
TABLE OF CONTENTS
01.
Local Economy: Job Growth by Sector, Washington, DC Metro Region
02.
Supply & Demand Trends: Availability & Net Absorption
03.
Supply & Demand Trends (cont.): Average Time On Market
04.
Rental Rate Trends: Average Asking Rent
05.
Rental Rate Trends (cont.): Effective Rents & Concession Values
06.
Office Development Trends: Historical & Current Pipeline
07.
Sector Leasing Trends: Federal Government
08.
Savills Studley: Company Overview
JOB GROWTH BY SECTOR

Washington, DC Metro Region
DC METRO EMPLOYMENT GROWTH, 2015
SECTOR-SPECIFIC JOB GROWTH AS % OF TOTAL GROWTH
Professional & Business Services
18,100
Leisure & Hospitality
16,500
Educational & Health Services
9,500
Government
Information
56.8%
8,400
Mining, Logging & Construction
7,900
Trade, Transportation & Utitilities
of job growth came from

non-office using sectors
5,800
Other
400

Information -2,800
-5,000
Government
Other
2,500
Manufacturing
Trade, Transportation & Utilities
Manufacturing
4,300
Financial Activities
5,000
SAVILLS STUDLEY PERSPECTIVE

In an office market where tenants generally seek to reduce
their real estate costs by reducing their footprint, positive
employment growth is no longer the strong indicator of
a turning office market that it once was. The two largest
users of office space, Legal Services and Government & Public
Administration, are widely recognized as two sectors working
to modernize their real estate strategies by reducing the overall
amount of space occupied and the amount of space utilized by
individual users, and while our competitors would argue that the
Professional & Business Services sector is filling the void, data
shows it is not growing at the level necessary to counteract the
large-scale consolidation seen throughout the market.
10,000
15,000
20,000
COMPETITOR TAKES
Information
Trade, Transportation & Utitilities
Government
For the first time in three years, the DC

area saw a major rebound in the local
economy in 2015, fueled by the creation
of 62,000 new jobs - well above the 20year annual average of 42,000 - ushering
in signs of stabilization in the office
market.
Manufacturing
Other
The driver behind these trends, of

course, is the areas job growth, which
is now 40% higher than the five-year
average. This growth has been led by
the professional and business services,
scientific and technical services, and legal
services sectors.
Metro DC hit an inflection point at the

start of the year, as strong employment
growth drove occupancy gains throughout
the regional office market.
01
SUPPLY & DEMAND TRENDS

Historical Availability & Net Absorption
HISTORICAL AVAILABILITY, 10-YEAR PERIOD
Supply continues to outpace demand in DCs suburbs as the inventory of available

space has steadily increased over the past 10 years, particularly in Northern
Virginia, where total availability has increased by 19.6M square feet since 2006.
Square Footage in Thousands
40,000
35,000
Despite a moderate decline in availability in the District during 2015, the

amount of available space still sits at 13.6M square feet - more than double
the amount of space available 10 years ago. Competing firms have spoken
about an uptick in tenant activity and improving leasing fundamentals, but
absorption figures are not demonstrative of a significant improvement as the
market only absorbed 693,793 square feet in 2015.
30,000
25,000
20,000
15,000
If the highest single year of net absorption was projected out and compared with
the amount of available space in each jurisdiction:
DC would have 5 years of inventory
Northern Virginia would have 7 years of inventory
Suburban Maryland would have 15 years of inventory
10,000
5,000
0
2006
2007
2008
2009
Washington DC
2010
2011
2012
Northern Virginia
2013
2014
2015
Suburban Maryland
COMPETITOR TAKES
HISTORICAL NET ABSORPTION, 10-YEAR PERIOD

6,000
Tenant-favorable conditions wont last long, so tenants looking to upgrade should

do so soon, the WLS survey warns. We expect the office market to become more
competitive in Northern Virginia in late 2016 or early 2017.
Square Footage in Thousands
5,000
4,000
3,000
2,000
1,000
0
When we see a resurgence in leasing activity in markets such as Crystal City and
enclaves outside the Capital Beltway, we know were in the midst of a broad-based
recovery.
-1,000
-2,000
-3,000
-4,000
2006
2007
2008
2009
Washington DC
2010
2011
Northern Virginia
2012
2013
2014
2015
Suburban Maryland
02
SUPPLY & DEMAND TRENDS

Average Time On Market
AVERAGE MONTHS ON MARKET, OVERALL
35
In the Trophy market, a landlords market is all but already here.
30
But even outside of the Trophy market, competition is tightening.
28
25

Muted demand and limited net growth in each jurisdiction has resulted in a significant increase in
the amount of time it takes for space to lease.
When comparing the average time it took to lease space 10 years ago vs. 2015, space
is languishing on the market for nearly twice as long in DC, more than twice as long in
Northern Virginia, and nearly three times as long in Suburban Maryland.
21
20
17
15
10
5
0
2006
When isolating Class A space, time on market is actually higher than when the market is
examined in its entirety.
2007
2008
2009
Washington DC
2010
2011
2012
Northern Virginia
2013
2014
2015
Suburban Maryland
AVERAGE MONTHS ON MARKET, CLASS A ONLY

35
30
29
25
23
20
19
15
10
5
0
2006
2007
2008
Washington DC
2009
2010
2011
Northern Virginia
2012
2013
2014
2015
Suburban Maryland
03
RENTAL RATE TRENDS

Average Asking Rent
AVERAGE ASKING RENT (FULL SERVICE)
Average asking rent has increased because of high rates at select new
projects, most of which arent yet completed. Many buildings that
are not trophy class or new construction remain stagnant or have
reduced their rates. As a metric for evaluating the strength of the
market, average asking rent does not take into account the reality that
achieved rents are often lower than the advertised asking rent, and that,
to get the desired rents, landlords often have to offer ever-increasing
concession packages that result in a depressed effective rent.
$50.37
$49.61
$46.43
$48.16
$47.43
$48.95
$47.12
$42.34
$26.47
$30.81
$25.13
$25.24
$30.83
$31.07
$24.85
$30.70
$25.94
$30.22
$25.59
$28.29
$28.26
$26.58
$29.87
$25.47
$20.00
$24.87
$28.21
$30.00
$27.65
COMPETITOR TAKES
$29.95
$40.00
$51.52
$50.00
$49.28
$60.00
DC: In CBD, East End and Georgetown, substantial market growth

is narrowing the window for quality space with generous rents and
concessions.
Suburban MD: Rents will rise moderately except for close-in submarkets
and in the biotech corridor where material gains are likely this year.
Northern VA: Vacancy is stabilizing and compressing in certain
submarkets. Overall rents should increase moderately.
$10.00
$0.00
2006
2007
Washington DC
2008
2009
2010
Northern Virginia
2011
2012
2013
Suburban Maryland
2014
2015
An uptick in tenant demand and the emergence of rent growth for the
first time in years have provided a tailwind to the market, increasing both
owner and investor confidence in the region.
04
RENTAL RATE TRENDS
HISTORICAL CONCESSION VALUES, WASHINGTON, DC
$80.00
$160.00
EFFECTIVE RENTS
$70.00
$140.00
Despite a subtle increase in asking

rents, total rents actually decreased
by 3.8% in DC and 1.8% in Northern
Virginia, and landlord effective
rents fell 14.6% in DC and 14.1% in
Northern Virginia in 2015. The decline
in effective rents can be attributed to
elevated concessions, which reached
record highs in both Northern Virginia
and the District in 2015.
$60.00
$50.00
$40.00
$30.00
$20.00
$10.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$0.00
2006
2007
2008
Total Rent
2009
2010
2011
Tenant Effective Rent
2012
2013
2014
2015
$0.00
2006
Landlord Effective Rent
2007
2008
2009
2010
2011
2012
2013
2014
2015
HISTORICAL EFFECTIVE RENT, NORTHERN VIRGINIA
HISTORICAL CONCESSION VALUES, NORTHERN VIRGINIA
$45.00
$120.00
Concession Value PSF
$40.00
Effective Rent PSF
HISTORICAL EFFECTIVE RENT, WASHINGTON, DC
Concession Value PSF
Effective Rent PSF
Effective Rent and Concession Values
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
$5.00
$0.00
2006
2007
Total Rent
2008
2009
2010
Tenant Effective Rent
2011
2012
2013
2014
2015
$100.00
$80.00
$60.00
$40.00
CONCESSIONS
Renewals and restructures accounted
for much of the years activity, but
more tenants relocated to capitalize on
very favorable lease terms. Free rent
periods inched higher and tenant
improvement allowances increased.
Concessions in the Virginia suburbs rose
to $102.00 psf in 2015, a sharp increase
from the $92.00 psf posted in 2014, and
the District saw an approximate $3.00
psf boost to $135.17 psf.
$20.00
$0.00
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Landlord Effective Rent
05
OFFICE DEVELOPMENT TRENDS

Historical & Current Pipeline
NEW OFFICE CONSTRUCTION, WASHINGTON, DC METRO

The higher-than-average percentage of DCs pipeline that is pre-leased is not necessarily
indicative of a recovering market. Rather, its a sign that the development community is generally
unwilling to build new office product until they have a significant pre-lease in place - a qualification that is
not indicative of confidence in the office market.
COMPETITOR TAKES
3,950
8,437
6,967
3,445
5,738
6,628
3,187
7,352
12,019
14,410
14,324
12,998
13,530
14,386
15,954
17,053
20,161
19,823
13,933
7,680
5,000
Historical Avg. = 10.2M SF
4,903
Most developers who are seeking to create mixed-use, live/work/play environments are kicking off the
first phases of construction with multifamily and retail as they await the return of landlord-favorable
market conditions before developing any office product.
10,000
4,303
This trend is illustrative of the development communitys lack of confidence in the current leasing
environment, an oversaturated office market, and a demonstrated preference for developing other
asset types - primarily multifamily.
15,000
4,481
Not only is new office construction well below the historical average, but it is also making up a much
smaller percentage of the regions overall development pipeline.
20,000
SF Under Construction (Thousands)
Anemic demand and elevated availability throughout the DC market has put a damper on new office
construction in recent years.
25,000
NEW OFFICE CONSTRUCTION AS A PERCENTAGE OF ALL CONSTRUCTION
Some, but not all, of this pressure will be countered by an influx of high quality space currently in the
construction pipeline. There is 4.0M square feet of space under development now - the most since 2008.
17.2%
14.9%
10.0%
16.7%
2009
25.1%
2008
15.0%
19.6%
2007
20.0%
21.8%
2006
32.8%
25.0%
32.9%
A separate JLL data point finds that the metro DC areas office pipeline is entering the year 58.5% preleased, which is significantly above the long-term average of 47.3%. This among other reasons leads JLL
Market Research Director Scott Homa to conclude that supply is moving to better align with demand and
a more balanced tenant-landlord dynamic is on the horizon.
29.8%
30.0%
30.4%
35.0%
2014
2015
5.0%
0.0%
2010
2011
2012
2013
06
SECTOR LEASING TRENDS

Federal Government
FEDERAL GOVERNMENT OFFICE LEASING, WASHINGTON, DC REGION

It is farily obvious that the federal government
was far from barely there in 2015 as our
competitor notes; the Department of Justices
lease for 839,000 square feet at Three & Four
Constitution Square was the largest deal in
the region last year and possibly the largest
federal deal since 2001. Furthermore, federal
leasing of 5.1 million square feet was the highest
posted since 2011. However, despite expected
high levels of activity, the GSA is expected to
continue its Freeze The Footprint initiative
to maintain or reduce its occupied space and
shrink its footprint throughout the region. The
below table reflects this policy and identifies
significant federal prospectuses for 2016.
Assuming proposed benchmarks are met,
space occupied by these six agencies will be
cut by 13.3%, or 259,578 square feet.
3,143,700
3,000,000
2,811,010
SF Leased
4,000,000
2,000,000
5,170,089
5,004,156
5,223,981
6,000,000
5,000,000
COMPETITOR TAKES
1,000,000
The U.S. Transportation Security Administration

lease in the third quarter and a series of transactions
by other federal agencies, including the U.S.
Marshals Service, DHS, HHS and FBI earlier this
year have accounted for 36.6% of all transaction
velocity in the Washington region leasing market.
The federal government will return to the market

this year after a barely-there activity level in 2015.
There is an estimated 24M square feet of leases
expiring in the DC Metro area through 2018, which
will cause the vacancy rate to drop substantially.
0
2011
2012
2013
2014
2015
2016 FEDERAL PROSPECTUS LEASES

CURRENT RSF
PROPOSED
MAX RSF
% CHANGE
CURRENT USF
PROPOSED
MAX USF
% CHANGE
LEASE EXPIRATION
Federal Communications Commission
659,030
473,000
-28.2%
272
180
-33.8%
October 2017
Department of Justice - Drug Enforcement Agency
503,776
575,000
14.1%
192
192
0.0%
September 2018
Environmental Protection Agency
453,651
326,057
-28.1%
275
196
-28.7%
March/April 2016
Federal Election Comission
136,957
105,000
-23.3%
292
218
-25.3%
September 2017
Department of State
110,294
115,000
4.3%
209
195
-6.7%
October 2017
Department of Veteran Affairs
86,927
97,000
11.6%
161
184
14.3%
June 2017
AGENCY
07
SAVILLS STUDLEY
Company Overview
ABOUT THE FIRM
Savills Studley is the leading commercial real estate services firm
specializing in tenant representation. Founded in 1954, the firm
pioneered the conflict-free business model of representing only
tenants in their commercial real estate transactions. Today, supported
by high quality market research and in-depth analysis, Savills Studley
provides strategic real estate solutions to organizations across all
industries. The firms comprehensive commercial real estate platform
includes brokerage, project management, capital markets, consulting
and corporate services. With 28 offices in the U.S. and a heritage of
innovation, Savills Studley is well-known for tenacious client advocacy
and exceptional service. The firm is part of London-headquartered
Savills plc, the premier global real estate service provider with over
30,000 professionals and over 700 locations around the world.
CONTACT
Thomas M. Fulcher Jr., Executive Vice
President, Co-Regional Manager
(202) 624-8527
tfuclher@savills-studley.com
Victoria Mechlin, Public Relations

Manager
(202) 624-8539
vmechlin@savills-studley.com
Anthony Jones, Research Manager,

Suburban Washington
(703) 827-6283
ajones@savills-studley.com
Jared Emery, Research Manager,

Washington, DC
(202) 540-5510
jemery@savills-studley.com
08

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WE

Tenants still have the upper hand, but

DC office market is turning in the

Broad-based recovery taking hold

Overall, tenants continue to have the upper

Fundamentals in Washington, DCs office

An uptick in tenant demand and the

We expect the office market to become more

The federal government will return to the

Source: Bisnow DC, 3/1/2016

Source: GlobeSt.com, 2/17/2016

When we see a resurgence in leasing activity in

Local Economy: Job Growth by Sector, Washington, DC Metro Region

Supply & Demand Trends: Availability & Net Absorption

Supply & Demand Trends (cont.): Average Time On Market

Rental Rate Trends: Average Asking Rent

Rental Rate Trends (cont.): Effective Rents & Concession Values

Office Development Trends: Historical & Current Pipeline

Sector Leasing Trends: Federal Government

Savills Studley: Company Overview

JOB GROWTH BY SECTOR

SECTOR-SPECIFIC JOB GROWTH AS % OF TOTAL GROWTH

Professional & Business Services

Leisure & Hospitality

Educational & Health Services

Mining, Logging & Construction

Trade, Transportation & Utitilities

of job growth came from

Educational & Health Services

Leisure & Hospitality

Mining, Logging & Construction

Trade, Transportation & Utilities

SAVILLS STUDLEY PERSPECTIVE

For the first time in three years, the DC

The driver behind these trends, of

Metro DC hit an inflection point at the

Source: CityBizList, 10/5/2015

SUPPLY & DEMAND TRENDS

HISTORICAL AVAILABILITY, 10-YEAR PERIOD

Supply continues to outpace demand in DCs suburbs as the inventory of available

Square Footage in Thousands

Despite a moderate decline in availability in the District during 2015, the

HISTORICAL NET ABSORPTION, 10-YEAR PERIOD

Tenant-favorable conditions wont last long, so tenants looking to upgrade should

Square Footage in Thousands

Source: Bisnow DC, 3/1/2016

Source: CityBizList, 10/5/2015

SUPPLY & DEMAND TRENDS

But even outside of the Trophy market, competition is tightening.

SAVILLS STUDLEY PERSPECTIVE

AVERAGE MONTHS ON MARKET, CLASS A ONLY

RENTAL RATE TRENDS

AVERAGE ASKING RENT (FULL SERVICE)

DC: In CBD, East End and Georgetown, substantial market growth

Source: Bisnow DC, 3/1/2016

RENTAL RATE TRENDS

HISTORICAL CONCESSION VALUES, WASHINGTON, DC

Despite a subtle increase in asking

Tenant Effective Rent

Landlord Effective Rent

HISTORICAL EFFECTIVE RENT, NORTHERN VIRGINIA

HISTORICAL CONCESSION VALUES, NORTHERN VIRGINIA

Concession Value PSF

Effective Rent PSF