1/22/2018

1

Office observationsMetro DC Q4 2017

The Metro Washington office market posted 117,299 s.f. of occupancy losses in 2017, shifting occupancy close to a historical low (83%). The

stagnancy in the market in 2017 is not new: the broader market has posted less than 1 m.s.f. of occupancy gains for seven years in a row and

in nine of the past 10 years. Further, while supply held steady through 2014, levels have begun to pop recently: Q4 construction levels (12.4

m.s.f.) reached their highest point since 2008. The forecast broadly is not likely to shift greatly from today as slower demand caused by limited

near-term lease expirations, limited economic diversification outside of the core government and contractor drivers and a dysfunctional

Congress will keep supply-demand fundamentals relatively flat. This market environment will fuel limited rent growth and the continued

escalation of concessions in the majority of locations and product types. Market segments that will go against the grain and cause challenges for tenants include the Bethesda-CBD, parts of Rockville Pike, the emerging

eastern markets of DC and new construction along the Silver Line in Northern Virginia.

John SikaitisManaging Director, Research

1/22/2018

2

A market of some winners and more losers

Emerging market vacancy will drop

below 10% in 2019; rents will grow as

demand diversifies and the feds will face

some rent sticker shock ahead

DC

VA

The Bethesda construction pipeline

just broke ground and already 40% of

the space is preleased with rates

approaching $70 p.s.f. FS

MD

Source: JLL Research

Vacant space within the Class B&C core market has dropped 20% since Q1 2014

and rents have jumped 9%; more of

the same will follow in 2018

5.5 m.s.f. of core Trophy / A space is under development with preleasing of

46%. Rents will drop, but construction could

continue as only 4 buildings have top-

down availability

Vacancy in the core Trophy / A space

heads to 20%, fueling continued record

concessions, which are approaching the $150 p.s.f. TI mark with 20 months of

abatement (15 yrs)

As Bethesda Trophy rents establish

records, rent growth will trickle down to

the B market, which along with traffic

and parking, could fuel tenant move-

outs

With NoBe vacancy levels along

Rockville Pike approaching 25%,

this market segment will benefit most

from Bethesda-CBD migration

Vacancy across the market hit a record

high in Q4 at 20.9%; only two major

submarkets (Old Town & Reston) posted

vacancy below 15%, creating opportunity for nearly all tenants

Metro is king as Metro-accessible

office space commands a 34% rent

premium to non-Metro-accessible

buildings. In Tysons, that rent premium is

more than 47%

Absorption is likely to jump in Rosslyn in

2018 due to expected move-ins, yet, vacancy at the extremes of RB remain at 29%

Drive-up office park vacancy rates have increased from 4.9% in 2000 to 21.8% in

2017 with some of the most exposed markets approaching 35-45%

PGC vacancy has fallen 28% since Q2

2015. With emerging markets in DC establishing new pricing highs, look here as a release valve for the feds

4Source: JLL Research, U.S. Bureau of Labor Statistics

Metro DC employment and unemployment

48,900 jobs were added over the past 12 months, 19% higher than the rate of growth in November 2016 and 14% higher than the average monthly job growth since January 2013

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

-100.0

-50.0

0.0

50.0

100.0

150.0

Un

em

plo

yme

nt

rate

(%

)

12

-mo

nth

ne

t ch

an

ge

(th

ou

san

ds) Annual employment change, measured

monthly 48,900 jobs

3.6% unemployment

1/22/2018

3

5Source: JLL Research, U.S. Bureau of Labor Statistics

Metro DC employment vs. office occupancy

Despite 289,900 jobs added across the region since 2009, only 1.4 m.s.f. of occupancy gains have been realized, equating to 20 s.f. for every job added

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

12

-mo

nth

% c

ha

ng

e

Metro DC employment change Metro DC occupancy change

0%

1.5%

• Law firms: 24% giveback• Government: 16% giveback• Contractors: 21% giveback

6Source: JLL Research, U.S. Bureau of Labor Statistics

Net absorption per job

Despite moderate job creation, each new office job created in Metro DC today is generating minimal or no net absorption

0

500

1000

1500

2000

2500

3000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Ab

sorp

tion

pe

r jo

b a

dd

ed

(s.

f.)

286s.f. per job added

pre-2010 20s.f. per job added

since 2009

289,900Jobs added since 2009

1/22/2018

4

7

Metro DC office clock – Q4 2017

Source: JLL Research

Peakingphase

Fallingphase

Risingphase

Bottomingphase

CBD, Capitol Crossing

Capitol Hill

Georgetown, I-270 Corridor

East End

West End, Frederick County, Silver Spring

Upper Northwest, Springfield

The Wharf, Bethesda CBD, Chevy Chase

Downtown core markets are approaching peak due to oversupply; suburban transit-oriented markets are tightening and will see more development, while suburban off-transit markets are soft

Southwest, Loudoun County

Prince George’s County, Rock Spring Park

Ballpark, Toll Road

Fairfax Center

Crystal City, Old Town, Prince William County

Washington, DC

Northern Virginia

Suburban Maryland

NoMa, RB Corridor, Tysons, Rockville Pike

Route 28 South

Dupont-Logan-Shaw

METRO DC, Merrifield

8

Metro DC office leasing by footprint

Despite increased frequency of expansions and growth in certain sectors, 1/3 of all leases involve contractions in Q4

Source: JLL Research

56.0%

45.0%

42.0%

33.0%

20.0%

18.0%

0.0%

11.0%

19.0%

29.0%

17.0%

50.0%

46.0%

33.0%

36.0%

29.0%

50.0%

30.0%

36.0%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Finance and real estate

Contractor

Law firm

Nonprofit

Government

Other

Technology

Share of quarterly leasing activity (% of lease count)

Growing Stable Shrinking

1/22/2018

5

9Source: JLL Research

Metro DC office supply

The change in annual supply levels have decreased more than 85% from 2010-2017 compared to 2000-2009

258,

519,

107

273,

073,

170

281,

379,

388

286,

113,

757

292,

253,

840

294,

525,

919

300,

860,

134

305,

475,

779

313,

181,

353

323,

690,

628

324,

913,

244

325,

384,

504

325,

908,

093

329,

445,

326

331,

877,

795

331,

559,

923

332,

209,

594

332,

232,

492

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Tota

l exi

stin

g s

up

ply

(s.

f.)

76 m.s.f. change in supply; 7.6 m.s.f. per year

8.5 m.s.f. change in new supply; 1.1. m.s.f. per year

10Source: JLL Research

Metro DC office supply by class and area

While Trophy and Class A supply levels have nearly doubled across each market, Class B and C supply levels have largely declined over time, presenting challenges for cost-conscious tenants

138%

-2%

-28%

82%

3%

-17%

68%

-1%

-23%-40.0%

0.0%

40.0%

80.0%

120.0%

160.0%

Wa

shin

gto

n D

C T

rop

hy

&C

lass

A

Wa

shin

gto

n D

C C

lass

B

Wa

shin

gto

n D

C C

lass

C

No

rth

ern

VA

Tro

ph

y &

Cla

ss A

No

rth

ern

VA

Cla

ss B

No

rth

ern

VA

Cla

ss C

Su

bu

rba

n M

D C

lass

Tro

ph

y &

Cla

ss A

Su

bu

rba

n M

D C

lass

B

Su

bu

rba

n M

D C

lass

C

Ch

an

ge

in s

up

ply

20

17

-20

00

(%

)

1/22/2018

6

11

0

500,000

1,000,000

1,500,000

2,000,000

2,500,0002

001

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

Fut

ure

an

nou

nce

d

s.f.

con

vert

ed

fro

m o

ffice

to o

the

r u

ses

Suburban Maryland Washington, DC Northern Virginia

Metro DC office conversions

Over the past 2.5 years, more office product has been converted than in the prior 10 years combined; will the DC Council introduce a law that incentivizes conversions from office to MF?

Source: JLL Research

12Source: JLL Research

Legislation & Metro DC office net absorption

The 115th Congress is on historical pace to be the least effective in modern history, meaning this Congress is on track to pass the least legislation. Through the end of 2017, the 115th Congress has only enacted 97 bills into law

-10,000,000

-5,000,000

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

0

100

200

300

400

500

600

700

800

Ne

t ab

sorp

tion

(s.f.

)

Pu

blic

bill

s

public bills enacted into law Metro DC net absorption

1/22/2018

7

13

-10,000,000

-5,000,000

0

5,000,000

10,000,000

15,000,000

20,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Tota

l ne

t ab

sorp

tion

(s.

f.)

Suburban Maryland Northern Virginia Washington, DC

Metro DC office net absorption by area

Broken down regionally by Suburban MD, Northern VA and Washington DC, none of the markets have been immune from the fundamental change in tenant demand patterns, but DC has experienced occupancy growth in seven of the past nine years

Source: JLL Research

14Source: JLL Research

2017 office net absorption by county

DC, Loudoun and Prince George’s County drove the majority of office gains in 2017, while the inner suburbs of Montgomery and Arlington posted nearly 1.5 million s.f. of occupancy losses, mainly due to conversion activity, a positive sign for balancing the market

450,861

-21,690

-1,060,713

6,960

412,442

93,648 60,400

-463,500

387,199

-1,200,000

-1,000,000

-800,000

-600,000

-400,000

-200,000

0

200,000

400,000

600,000

Washington,DC

Alexandria Arlington Fairfax Loudoun PrinceWilliam

Frederick Montgomery PrinceGeorge's

Tota

l ne

t ab

sorp

tion

(s.

f.)

1/22/2018

8

15

20.9%

12.0%

17.0%

0%

5%

10%

15%

20%

25%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Tota

l va

can

cy

Suburban Maryland Northern Virginia Washington, DC Metro DC

Metro DC office total vacancy

Source: JLL Research

Only Suburban Maryland has seen a meaningful shift downward in vacancy the past 36 months; DC will see vacancy climb over the next 24 months due to its development pipeline

16Source: JLL Research

2017 total vacancy by county

Only Frederick and Washington, DC posted vacancy rates below that of the overall U.S. vacancy rate of 15.0%

12.0%

19.0%

22.7%

21.1%

16.6%15.6%

9.1%

16.3%

23.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Washington,DC

Alexandria Arlington Fairfax Loudoun PrinceWilliam

Frederick Montgomery PrinceGeorge's

Tota

l va

can

cy (

%)

1/22/2018

9

17

Metro vs. Non-Metro office fundamentals

Source: JLL Research

Metro-accessible locations dominate non-Metro-accessible locations from a performance standpoint

x

Inventory237 m.s.f.

Inventory96 m.s.f.

Total vacancy15.3%

Total vacancy21.1%

Direct rent$47.73 p.s.f.

Direct rent$27.55 p.s.f.

Under construction

11.1 m.s.f.

Under construction

1.2 m.s.f.

73% premium

-580 bps

71% of market

9x

Metro DC Office Investment Sales

Office Investment Sales Observations

Q4 2017

1/22/2018

10

19

Metro DC investment sales observations

Investment volume ends the year above 2016, below 2015• 2017 investment sales reached the 3rd highest level this decade, split fairly

evenly between the suburbs and downtown

• Washington, DC set a pricing record in the 2nd quarter when 900 16th

Street, NW traded at $1252 p.s.f.

1

2

Local investors fuel activity in the Class B market• While foreign capital flows into the highest-quality assets, local investors

and developers focus on lower-quality and/or underleased buildings where they can add significant value

3

Office investment salesSource: JLL Research

Foreign investment at record levels• Downtown, foreign investment volume reached an all-time high in 2017,

totaling $2.8B, or 61% of total volume.

• The vast majority (86%) of foreign investment volume was contentrateddowntown, and 71% came from Asian companies

20

Sales volume vs. cap rate

Investment sale activity on pace to exceed 2016 levels and reach the 2nd highest level since 2006

Source: JLL Research. Sale data includes portfolio recapitalizations

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

$0

$2,000,000,000

$4,000,000,000

$6,000,000,000

$8,000,000,000

$10,000,000,000

$12,000,000,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD2017

Washington, DC Northern Virginia Suburban Maryland Average cap rate

Office investment sales

1/22/2018

11

21

Metro DC sales activity by market

Source: JLL Research

32.8%

21.6%

36.2%

9.4%

0%

10%

20%

30%

40%

50%

60%

2013 2014 2015 2016 2017

Washington, DC downtown Washington, DC outside downtown

Northern Virginia Suburban Maryland

Downtown (CBD & East End) activity as well as Northern Virginia drove sales activity, comprising 79.9% of volume to date in 2017

Office investment sales

22

Metro DC regional cap rates

Average cap rates have remained relatively flat in recent quarters, but have begun to tick down in Bethesda due to heightened demand due to new tenants and developments

Source: JLL Research

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD2017

Washington, DC

Northern Virginia

Suburban Maryland

10-year Treasury

6.9%

6.3%

5.0%

Office investment sales

1/22/2018

12

23

Share of Metro DC investment by buyer type

Source: JLL Research

Foreign, 38%

Institutional (national),

34%

Private investment company (national),

11%

Private investment company or individual

(local), 12%

User, 5%

2016

Foreign, 39%

Institutional (national),

30%

Private investment company (national),

15%

Private investment company or individual

(local), 12%User, 3%

2017

At year’s close, composition of the buyer pool ended up similar to 2016

Office investment sales

24

Domestic investment

Northern Virginia

Suburban Maryland

Washington, DC

52.3%Located in

Washington, DC in 2017

YTD

Foreign investment volume

The safe haven of Washington, DC attracts foreign capital, most seeking long-term holds

Source: JLL Research

Foreign investment

61% of 2017 YTD total sales volume regionally across Metro DC

39% of 2017 YTD total sales volume regionally across Metro DC

Office investment sales

86.2%Located in

Washington, DC in 2017

YTD

1/22/2018

13

25

Federally leased cap rates

Cap rates on government-tenanted buildings vary greatly based on remaining lease term

Source: JLL Research; sales in Metro DC area, 2015-2017

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

0 2 4 6 8 10 12

Ca

p r

ate

Term remaining on federal government lease (years)

26

Federally leased cap rates

Cap rate compression for federally leased assets in Washington, DC has stabilized around 5.0%

Source: JLL Research

5.2%

6.7%

7.1%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Washington, DC Northern Virginia Suburban Maryland

Office investment sales

1/22/2018

14

27

Metro DC investment sales trends to watch

As DC ascends the ranks as a target for foreign

capital, Trophy and well-leased Class A product will

see a growing pool of buyers

Source: JLL Research

Congress’s continued failure to pass a budget will dampen Northern Virginia contractor leasing, and in

turn, investor interest

Bethesda should become an attractive target for capital as upcoming

developments add to its high-quality offerings

Demand for high-quality product could fuel

additional redevelopment, and in turn, Class B and C

sales

RB will see large uptick in offerings due to the leasing market rebound underway and projected tightening in

vacancy

Prince George’s will attract more interest as value-

driven leasing decisions like US CIS drive demand

Office investment sales

With minimal political legislation outside of tax reform implementation expected in 2018, growth in the market will mainly be limited to the life

sciences market in upper Montgomery County; growing federal government new construction market in Prince George’s County; flight to urban market in the Bethesda-CBD; high-growth residential markets of Ballpark, Wharf, Union Market and NoMa; affordable B+, B, B- and

C+ market of the CBD and East End. And the biggest wild card? Northern Virginia. Not only will a 10% increase in FY 2018 defense

spending spur additional leasing (has to come up as 2017 was one of the slowest leasing velocity markets in 20 years) but the market has the

deepest pool of STEM talent regionally, which will spur organic growth from high-growth existing tenants, mainly on the Toll Road, and deeper consideration from companies outside the market that are challenged by talent in their hometown markets, mainly in the Arlington County and the

Toll Road.

John SikaitisManaging Director, Research

1/22/2018

15

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