MARKETBEAT

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

Q4 2012

ECONOMIC OVERVIEW
The Washington Metropolitan Areas unemployment rate slipped to 5.2% in October, its lowest level since the end of 2008. The education/health services sector and the leisure/hospitality sector remained the engines of employment growth, adding nearly 20,000 jobs combined. Officeusing employment is forecast to end the year with an additional 6,500 jobs, representing a modest 0.9% gain. The Districts unemployment rate also reached a four-year low, dropping to 8.4%. While there are some firms expanding (Allen & Overy) or entering the market for the first time (Linklaters LLP and Drexel University), LivingSocial recently announced plans to lay off up to 400 employees, about 40% of those in the District. Earlier in the year, the tech giant negotiated a $32.5-million tax incentive package contingent upon keeping its headquarters in the District and adding 1,000 jobs over a four-year period. While long-term plans remain unclear, LivingSocial has announced that it will begin to sublease some of its space in the East End submarket.

The Districts overall vacancy rate has crept up steadily since the middle of 2011, to 13.0% currently, a 1.1 percentage point increase during 2012. Class A vacancy rates experienced some ups and downs throughout the year, but ended essentially flat at 14.7%. Overall absorption closed the year at negative 566,844 sf, due mainly to weakness in class B and class C properties. Class A direct absorption was flat in the Core markets of the CBD and East End, with positive absorption in the CBD washing out negative absorption in the East End. While total square feet leased in the Non-core markets dropped by 46% from last years level, occupancies by tenants which signed STATS ON THE GO
Q4 2011 Overall Vacancy Direct Asking Rents (psf/yr) YTD Leasing Activity (sf) 11.9% $50.63 4,847,048 Q4 2012 13.0% $51.58 5,151,572 Y-O-Y 12 MONTH CHANGE FORECAST 1.1pp 1.9% 6.3%

STRONG FINAL QUARTER FOR LEASING

Due to several large deals closing during the fourth quarter, total leasing activity beat last years level, with approximately 5.2 million square feet (msf) of new leases. Covington & Burling, LLPs 420,000-sf lease closed at Hines City Center project, set to deliver in 2013. Arnold & Porter, LLP signed for 376,000 sf in Boston Properties new development site at 601 Massachusetts Ave. NW, slated for a 2015 delivery. Three government agencies (Federal Trade Commission, National Endowment for the Arts, and National Endowment for the Humanities) consolidated into 372,299 sf at Constitution Center in Southwest. Communications firm and government contractor, Intelsat, sold its headquarters in the Uptown submarket and leased back about 350,000 sf on a short-term basis until it relocates to Tysons Corner. While these four deals represented 1.5 msf of new activity, its important to note that with the exception of the Covington deal, no net growth was generated. The aforementioned General Services Administration (GSA) leases backfilled vacant space that was already under lease by the Federal government; Intelsat did not change its occupancy footprint, plus it will be leaving the District once its new headquarters is completed in 2014; and Arnold & Porter downsized. Renewals accounted for 38% of total leasing activity, down from 47% in 2011. Tenants will make a move if it results in more space efficiency and flexibility, and ultimately, costs savings. For some tenants, particularly larger law firms, the inefficiencies associated with staying in place during a retrofit have prompted them to move, although typically reducing their footprints.
Cushman & Wakefield of Washington D.C,, Inc.

DIRECT RENTAL VS. VACANCY RATES

$52.00 $51.00 psf/yr $50.00 $49.00 $48.00 2008 2009 2010 2011 2012 14.0% 12.0% 10.0% 8.0% 6.0% 4.0%

DIRECT GROSS RENTAL RATE

DIRECT VACANCY RATE

LEASING ACTIVITY
6.0 5.0 4.0 3.0 2.0 1.0 0.0

msf

5.2

4.5

5.8

4.8

2008

2009

2010

2011

2012

LEASING ACTIVITY

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

For more information, contact: Paula Munger, Regional Research Director 703 448 1200 paula.munger@cushwake.com

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.

5.2

leases last year, such as the Federal Housing Finance Agency and McDermott Will & Emery LLP, resulted in positive absorption in class A properties of about 388,000 sf. Another bright spot in the D.C. market was the absorption of space vacated by dissolved law firms. While the former Howrey space at 1299 Pennsylvania Ave. NW remained a drag on vacancy rates for over a year, a steady stream of leases throughout the year absorbed some of the excess space. Cooley, LLP signed leases totaling nearly 88,000 sf while Quinn Emanuel Urquhart & Sullivan, LLP took about 15,000 sf. Some of the former Dewey & LeBoeuf, LLP space at 1101 New York Ave. NW did not stay on the market very long. Allen & Overy took 53,343 sf, and the National Retail Federation leased 31,091 sf , both completed during the fourth quarter.

manager, purchased 2175 K St. NW for $86.4 million, $633 psf. Deka expects to increase its holdings in the area over the next twelve months, given D.C.s stability and prospects for strong growth. Although the fiscal cliff was averted as it relates to tax cuts, the debate over the Federal debt ceiling and automatic budget cuts will continue over the coming months, prolonging the uncertainty in the marketplace. Until fundamentals bottom out and start improving, many investors will remain cautious. Approximately $2.0 billion of transactions were marketed but did not close in 2012 due to gaps in buyer and seller price expectations. Part of the buyer/seller gap is based on the underwriting of short-term rent growth and lower renewal rents than in-place rents. Still, The D.C. market will present some good opportunities in 2013 for investors who can wait for 2-3 years for stronger fundamentals. Development meets the 3-5 year horizons and should continue to generate strong interest, while the commodity office product will continue to lag behind.

RENTS SHOW SIGNS OF WEAKENING

Direct average asking rents have either flattened out or decreased in all submarkets with the exception of the CBD. The former Holland & Knight space at 2099 Pennsylvania Ave. NW was added to the market during the fourth quarter at approximately $65 psf triple net, causing upward pressure on the overall asking rent for the entire market, which closed the year up 1.8% to $50.60 psf. While some landlords remain reluctant to drop asking rents, concession packages have reached levels previously not seen. Tenant Improvement (TI) packages in some Trophy buildings hit $100-$130 psf on a 10-15 year deal, with free rent ranging from 6 to 9 months. There were also several lease assumptions throughout the year including the aforementioned Cooley deal, with the landlord assuming the remainder of its 5-year lease, as well as well as the United Nations Foundation, whose deal at 1750 Pennsylvania Ave. NW included a $2.3 million lease buyout. While concessions have appeared to top out, they are expected to hold firm through 2013.

OUTLOOK
2013 began with Congress and the Administration reaching an agreement on the Bush-era tax cuts, and the financial markets responded accordingly. The good news is that consumers will have more cash in their pockets which, coupled with the fact that many households have already pared down their debts, bodes well for increased consumer spending. The bad news is that the uncertainty surrounding Federal budget cuts was not alleviated, as those discussions were put off for two months while another deal is attempted. U.S. GDP growth for 2013 is now forecast at 2.0%, the same level as 2012, with the first half of the year particularly slow due to this fiscal drag. As some of these uncertainties lift, private sector growth is expected to be stronger during the second half of the year due to strong corporate profits finally being put to work for growth initiatives, low interest rates, and improving credit conditions. Employment is still expected to increase in the D.C. Metro region in 2013, but at a much slower pace, with about half the jobs expected to be created as in 2012. Office-using employment is forecast to remain flat, with healthier growth returning in 2014. The District office market is expected to witness more of the same in 2013, that is, increasing vacancy rates due to continued downsizing by tenants, lackluster leasing activity, and decreases in rents. There are, of course, exceptions just as there were over the past year with some properties achieving high occupancy rates and solid longer-term rent growth. WASHINGTON D.C. OFFICE FORECAST ALL CLASSES
$55.00 $53.00 psf/yr $51.00 $49.00 $47.00 $45.00 2011 2012 2013 F 2014 F 2015 F
OVERALL GROSS RENTAL RATE

SOLID RESULTS FOR CORE AND CORE-PLUS ASSETS

Sales transactions in the D.C. Metro region reached $5.6 billion in 2012, down from $7.5 billion in 2011. Sales of core and core-plus assets represented 73% of total volume and comprised nearly half of the total number of transactions closed. While some investors took a step back from Washington in 2012 due to weakening office market fundamentals, the capital markets in the District remained strong overall, a testament to the confidence in the long-term health of the market. In fact, District sales volumes were off by only 5% from last years level as both foreign and domestic investors clamored for some of the best-quality office buildings. 733 10th St. NW, which closed earlier in the year, fetched the highest per square foot (psf) price at $818. Jamestown Properties purchased the nearly fully-occupied property completed in 2011 from Skanska for $140 million. Following close behind was the sale of Hamilton Square (600 14th St. NW), bought by the California-based Commonwealth Partners on behalf of CalPERS for $198 million, or $797 psf. The 248,495-sf property is also nearly fully occupied. Several notable sales closed at the end of the year. The massive Constitution Center sold to a joint venture between MetLife and Clarion Partners, LLC for $734 million, approximately $526 psf. The 1.4-msf property at 400 7th St. SW reached fully-leased status during the fourth quarter when the GSA took about 372,000 sf for three agencies. Deka Immobilien Investment GmbH, a German fund

15.0% 13.0% 11.0% 9.0% 7.0% 5.0%

OVERALL VACANCY RATE

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 paula.munger@cushwake.com

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.

EAST END
At 10.9%, direct vacancy is at its highest level on record, increasing by 1.6 percentage points year-over-year. With just under 550,000 sf of negative overall net absorption, East End accounted for nearly all negative overall net absorption in D.C. in 2012. A flux of space returned to market this year, including McDermott Will & Emerys departure for NoMa this quarter, leaving over 230,000 sf vacant at 600 13th Street NW. Average direct asking rental rates have remained relatively flat year-over-year at $55.20. Class A direct asking rates increased by 1.6% from the end of 2011 to $63.88 psf with a large amount of trophy-quality space available.

EAST END DIRECT RENTAL VS. VACANCY RATES

$56.00 $55.50 psf/yr $55.00 $54.50 $54.00 2008 2009 2010 2011 2012 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0%

DIRECT GROSS RENTAL RATE

DIRECT VACANCY RATE

CBD
Vacancy has leveled off in the fourth quarter after increasing over most of 2012. Still, at 12.0%, overall vacancy is up by 1.7 percentage points from the end of 2011. Average direct asking rental rates remain persistently high, increasing by 4.5% year-over-year. Vacant blocks of quality space have kept the average up, including 178,000 sf at 2099 Pennsylvania Avenue NW where rates are up to $65.00 psf triple net. 1000 Connecticut Avenue NW, the only new construction to deliver in 2012, completed in the second quarter and is now nearly 100% leased with Bain and Company recently signing for 20,000 sf.

CBD DIRECT RENTAL VS. VACANCY RATES

$54.00 $53.00 psf/yr $52.00 $51.00 $50.00 2008 2009 2010 2011 2012 14.0% 12.0% 10.0% 8.0% 6.0% 4.0%

DIRECT GROSS RENTAL RATE

DIRECT VACANCY RATE

CAPITOL HILL / NOMA

After declining steadily since the end of 2009, direct vacancy has increased by 1.6 percentage points year-over-year to 10.6%. With the GSA favoring renewals and extensions this year, new leasing fell to 20% of last years level with only 167,707 sf leased. Renewals accounted for 79% of total leasing activity, with the State Services Organization renewing 237,848 sf at 400-444 N. Capitol Street NW and the Federal Trade Commission extending its 217,308-sf lease at 601 New Jersey Avenue NW for two years. Renovations at 500 N. Capitol Street NW completed in the fourth quarter. The 230,000-sf building was completely repositioned and lead tenant, law firm McDermott Will & Emery, has moved in.

CAPITOL HILL / NOMA LEASING ACTIVITY

1.5 1.0 0.5 0.0 2008 2009 2010 2011 2012

msf

NEW LEASING ACTIVITY

RENEWAL ACTIVITY

SOUTHWEST
Just over 400,000 sf of new leases were signed in Southwest this year, a 63% decrease from last years activity level. One lease alone accounted for the majority of activity as the GSA consolidated three agencies in 372,299 sf at Constitution Center. Overall vacancy remained relatively unchanged from this time last year, increasing by 0.3 percentage points to 17.2%. The average direct asking rent is beginning to contract, declining by 3.1% yearover-year to $51.91 psf. Five buildings traded hands in Southwest this year, including Constitution Center (400 7th Street SW) which sold in the fourth quarter to MetLife and Clarion Partners for $734,000,000, the highest overall price paid for a single asset in DC.

SOUTHWEST LEASING ACTIVITY

2.0 1.5 msf 1.0 0.5 0.0 2008 2009 2010 2011 2012

NEW LEASING ACTIVITY

RENEWAL ACTIVITY

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 paula.munger@cushwake.com

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.

WASHINGTON, D.C.
SUBMARKET INVENTORY OVERALL VACANCY RATE 11.1% 11.8% 13.7% 11.6% 10.0% 17.2% 16.7% DIRECT VACANCY RATE 10.6% 10.9% 12.0% 9.9% 6.1% 16.6% 16.1% YTD LEASING ACTIVITY UNDER CONSTRUCTION / RENOVATION 814,555 530,413 318,278 0 0 0 0 YTD CONSTRUCTION/ RENOVATION COMPLETIONS 229,112 0 594,325 0 0 0 0 YTD DIRECT NET ABSORPTION YTD OVERALL NET ABSORPTION OVERALL WTD. AVG ALL CLASSES GROSS RENTAL RATE* 13,687 (650,222) 5,406 68,389 37,067 19,555 (13,718) (16,007) (547,124) (11,344) 52,906 (28,857) (5,700) (10,718) $46.92 $54.31 $51.61 $42.50 $36.35 $51.38 $44.06 DIRECT WTD. AVG. CLASS A GROSS RENTAL RATE* $57.78 $63.88 $64.16 $57.30 $48.91 $54.82 $47.53

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

12,376,840 36,202,415 33,201,966 5,226,557 3,814,915 11,115,786 4,674,326

167,707 1,951,754 1,966,850 204,985 424,736 400,398 35,142

TOTALS

106,612,805 13.0%

11.8%

5,151,572

1,663,246

823,437

(519,836)

(566,844)

$50.60

$61.55

* RENTAL RATES REFLECT ASKING $PSF/YEAR

MARKET HIGHLIGHTS Significant 2012 Lease Transactions

600 19th Street NW 1301 New York Avenue NW, 1400 New York Avenue NW & 1331 F Street NW* 800 & 850 10th Street NW (CityCenter) 601 Massachusetts Avenue NW 400 7 Street SW
th

SUBMARKET CBD East End East End East End Southwest

TENANT U.S. Department of State U.S. Department of Justice Covington & Burling LLP Arnold & Porter LLP Federal Trade Commission/National Endowment for the Arts/National Endowment for the Humanities Intelsat (Sale-leaseback) U.S. General Services Administration U.S. Small Business Administration State Services Organization Federal Trade Commission (Short-term Extension) BUYER MetLife / Clarion Partners 601W Companies U.S. General Services Administration The Museum of the Bible The Museum of the Bible MAJOR TENANT Arent Fox McDermott Will & Emery LLP MAJOR TENANT Covington & Burling LLP N/A

BUILDING CLASS B C/B/B A A A

SQUARE FEET 463,151 450,457 420,000 376,000 372,299

3400 International Drive 1800 G Street NW* 409 3rd Street SW* 400-444 North Capitol Street NW* 601 New Jersey Avenue NW*

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

A C A B A PURCHASE PRICE / $PSF $734,000,000/$526 $85,000,000/$155 $99,594,779 / $195 $200,000,000/$476 $50,000,000 / $128 COMPLETION DATE Q2 2012 Q4 2012 COMPLETION DATE Q3 2013 Q4 2013

350,237 294,000 254,267 237,848 217,308 SQUARE FEET 1,396,147 549,000 511,500 420,122 391,000 BUILDING SQUARE FEET 370,545 229,112 BUILDING SQUARE FEET 462,507 399,996

Significant 2012 Sale Transactions

400 7th Street SW 3400 International Drive 2401 E Street NW 409 3rd Street SW 300 D Street SW

Significant Construction Completions

1000 Connecticut Avenue NW 500 N. Capitol Street NW**

Significant Projects Under Construction

800 & 850 10 Street NW (CityCenter) 165 N Street NE
th

* RENEWAL - NOT INCLUDED IN LEASING ACTIVITY STATISTICS ** RENOVATION COMPLETION

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 paula.munger@cushwake.com

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.