MARKETBEAT

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

Q1 2013

ECONOMIC OVERVIEW
The Districts unemployment rate held steady at 8.6% from January to February and posted net growth of 3,300 jobs; 4,700 private sector jobs were added, while public sector payrolls were cut by 1,400. With sequestration currently taking effect, additional government job losses will hinder any significant growth over this year, yet signs point to a stabilizing private sector and increased economic clarity.

Government Pension Fund made its entrance into the U.S. market, purchasing a 49.9% interest stake in a portfolio of TIAA-CREF owned properties along the East Coast for $1.2 billion, two of which were in D.C. (the Evening Star Building and Franklin Square).

OUTLOOK
Vacancy is expected to increase further this year, but current concession levels coupled with a growing number of options in existing buildings will make it hard for tenants to resist taking advantage of a softer market, despite tepid first quarter demand. STATS ON THE GO
Q1 2012 Overall Vacancy Direct Asking Rents (psf/yr) YTD Leasing Activity (sf) 12.2% $50.76 1,266,873 Q1 2013 13.2% $51.65 878,579 Y-O-Y 12 MONTH CHANGE FORECAST 1.0pp 1.7% -30.6%

WEAKNESS IN CLASS B AND C KEEPS VACANCY UP

With little change over the last quarter, overall vacancy increased by one percentage point from the beginning of 2012 to 13.2%, marking the seventh consecutive quarter of rising vacancy. At 14.3% class A overall vacancy is unchanged year-over-year, but has decreased by 0.4 percentage points during this quarter as the flight to quality continues. Class B and C markets have seen overall vacancy increases of 3.6 and 3.3 percentage points, respectively, over one year. Asking rental rates remain persistently high, increasing year-over-year for all classes, though contractions have been seen in recent months. At $60.36 per square foot (psf), the class A direct average asking rental rate decreased by nearly 2.0% over the quarter, while class B direct rents have contracted by 1.1% year-over-year. Concessions in class A properties remain among the highest seen and are expected to hold throughout 2013, averaging over $90 psf in tenant improvements and around 12 months of free rent for new deals signed this quarter with terms at or exceeding 10 years.

DIRECT RENTAL VS. VACANCY RATES

$52.00 $51.00 psf/yr $50.00 $49.00 $48.00 2009 2010 2011 2012 Q1 2013 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0%

LEASING AND SALES OFF TO SLOW START

New leasing activity dropped by approximately 31% compared to the same period last year with just under 900,000 square feet (sf) leased this quarter. Nearly all activity was in the core submarkets (East End and CBD), as government and related demand has stalled in non-core markets with sequestration impacts. The appeal of new construction continues to reign supreme as deals officially signed for Pillsbury Winthrop Shaw Pittman LLP to take 105,687 sf at 1200 17th Street NW (cutting nearly half its current footprint) and the American Hospital Association taking 42,000 sf at CityCenter. Approximately 83% of space currently under construction in the core markets has been pre-leased to date. Investment sales started off 2013 at a much slower pace than last year with only four buildings trading this quarter. Still, interest and pricing remains high for core and core-plus assets. The Portrait Building (701 8th Street NW) sold to Clarion Partners for $98,500,000, or $733 psf, at an approximate 5% cap rate. Also notable, the Norwegian
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DIRECT GROSS RENTAL RATE

DIRECT VACANCY RATE

LEASING ACTIVITY
6.0 5.0 4.0 3.0 2.0 1.0 0.0

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 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.

0.9

WASHINGTON, D.C.
SUBMARKET INVENTORY OVERALL VACANCY RATE 11.3% 11.7% 14.1% 11.2% 11.0% 17.8% 16.7% DIRECT VACANCY RATE 10.9% 10.6% 12.4% 9.5% 7.0% 17.3% 16.2% YTD LEASING UNDER ACTIVITY CONSTRUCTION/RE NOVATION 15,837 247,429 525,055 59,527 9,527 11,039 10,165 752,477 524,830 290,237 0 98,000 0 0 YTD CONSTRUCTION/ RENOVATION COMPLETIONS 0 67,906 196,181 0 0 0 0 YTD DIRECT NET ABSORPTION YTD OVERALL NET ABSORPTION OVERALL WTD. AVG ALL CLASSES GROSS RENTAL RATE* $47.52 $53.87 $51.97 $41.52 $35.90 $50.01 $44.08 DIRECT WTD. AVG. CLASS A GROSS RENTAL RATE* $58.12 $63.38 $65.29 $52.45 $48.91 $51.16 $47.51

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

12,475,620 36,274,296 33,325,370 5,194,432 3,814,915 10,765,786 4,674,326

21,403 172,106 (51,617) 22,844 (32,435) (12,992) (2,361)

29,889 77,351 (50,639) 27,279 (36,323) (6,775) (2,361)

TOTALS

106,524,745 13.2% 11.9%

878,579

1,665,544

264,087

116,948

38,421

$50.58

$60.36

* RENTAL RATES REFLECT ASKING $PSF/YEAR

MARKET HIGHLIGHTS Significant Q1 2013 Lease Transactions

2550 M Street NW* 1801 K Street NW 1200 17 Street NW 101 Constitution Avenue NW* 800 North Capitol Street NW* 400 Virginia Avenue SW* 800 10 Street NW 1300 Eye Street NW* 800 17 Street NW
th th th

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

TENANT Patton Boggs LLP Federal Reserve Board Pillsbury Winthrop Shaw Pittman LLP Van Scoyoc Associates GSA Federal Maritime Commission Lockheed Martin American Hospital Association Wells Fargo Analysis Group BUYER Lone Star Funds Jordache Enterprises Clarion Partners MAJOR TENANT Covington & Burling LLP N/A N/A Pillsbury Winthrop Shaw Pittman LLP MAJOR TENANT Arnold & Porter LLP N/A N/A

BUILDING CLASS B A A A B B A A A PURCHASE PRICE / $PSF $71,782,500/$377 $104,300,920/$607 $98,500,000/$733 COMPLETION DATE Q2 2013 Q3 2013 Q4 2013 Q1 2015 COMPLETION DATE Q4 2015 Q2 2014 Q3 2014

SQUARE FEET 206,000 201,468 105,687 84,888 62,438 52,227 42,000 35,628 30,954 SQUARE FEET 190,643 171,920 134,448 BUILDING SQUARE FEET 524,830 345,000 278,817 168,140 BUILDING SQUARE FEET 478,000 340,652 112,000

Significant Q1 2013 Sale Transactions

1401 New York Avenue NW 1400 New York Avenue NW 701 8 Street NW
th

Significant Projects Under Construction

800 & 850 10 Street NW (CityCenter) 175 N Street NE 1050 First Street NE 1200 17 Street NW
th th

Significant Proposed Projects 601 Massachusetts Avenue NW 1150 1st Street NE 900 G 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 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.