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Market ReportNorthern Virginia | 2nd Quarter 2017

Cushman & Wakefield | 2

DC Metropolitan Area Overview..............................................................................3

Northern Virginia & Map........................................................................................4-6

Alexandria ........................................................................................................................7

RB Corridor.......................................................................................................................8

Crystal City/Pentagon City .......................................................................................9

Tysons Corner....................... .......................................................................................10

Reston/Herndon ...........................................................................................................11

50-66.................................................................................................................................12

Route 28 South/Chantilly..........................................................................................13

Loudoun County ..........................................................................................................14

Appendix..........................................................................................................................15

Tables..........................................................................................................................15-24

Methodology & Definitions......................................................................................25

About Cushman & Wakefield.................................................................................26

Contents

cushmanwakefield.com | 3

Washington, DC Metropolitan Area

WASHINGTON, DC METRO

Economic IndicatorsQ2 16 Q2 17 12-Month

Forecast

DC Metro Employment 3.23M 3.28M

DC Metro Unemployment 3.8% 3.6%

U.S. Unemployment 4.9% 4.4%

Market IndicatorsQ2 16 Q2 17 12-Month

Forecast

Overall Vacancy 17.9% 17.5%

Net Absorption 830K 600K

Under Construction 6.76M 9.79M

Deliveries 2.19M 432K

Average Asking Rent (FS) $36.19 $39.63

Continued Musical ChairsFollowing a record start in the first quarter of the year, the Washington, DC metropolitan region’s (DC Metro) economy continued to grow in the second quarter of 2017. The Bureau of Labor Statistics (BLS) reported nearly 20,000 net new jobs from January through June 2017, and will easily surpass the Washington region’s historical average of 36,000 annual net new jobs. Cushman & Wakefield forecasts an annualized 52,000 net new nonfarm jobs by year-end 2017. Suburban Maryland led the region with 10.100 net new jobs since January, 1,480 of which were in the office-using sectors, followed by Northern Virginia, which recorded 6,100 net new jobs (2,000 in office -using sectors) and Washington, DC with 3,400 net new jobs (with office-using employment contracting by 500 jobs.). Overall, education and healthcare, retail, construction, and professional and business services lead job growth with 12,580, 5,315, 2,870, and 2,610 jobs, respectively.

Across the region, the headline-making story has been the development pipeline. With a wave of construction expected to kick-off in downtown Bethesda, and new and renovated development already well-underway in the District of Columbia and Northern Virginia, the development pipeline is expected to bring a total of 15.0 million square feet (msf) of Class A product to the DC Metro by 2021. At the close of the second quarter, 44.4% of the pipeline was preleased, leaving a number of large blocks available for tenants. The overall vacancy rate for existing product in the DC Metro area closed the second quarter of 2017 at 18.1%, which is expected to continue to climb as new product is delivered to the market.

While the bulk of new leasing activity was comprised of existing tenants shifting within the market, the DC Metro did have a number of green shoots during the first half of 2017, particularly from non-traditional office users. Marriott officially executed its lease to relocate the hotelier’s headquarters to 7750 Wisconsin Avenue in downtown Bethesda. Nestle’s announced plans to relocate its headquarters from California to Northern Virginia and its subsequent expansion, has helped to chip away at vacancy in Rosslyn . In the District of Columbia, a confidential technology firm committed to nearly 74,000 square feet (sf) at Terrell Square (575 7th Street, NW), expanding the company’s existing footprint in DC by nearly 20,000 square feet (sf). Overall, new leasing activity for the DC Metro closed the quarter at 6.4 msf of year-to-date leasing, the bulk of which occurred in the District of Columbia (3.0 msf), followed by Northern Virginia (2.4 msf), and then Suburban Maryland (1.0 msf).

For the region, year-to-date net absorption remained positive for the DC Metro region, though down from the second quarter of 2016. Overall net absorption for the first half of 2017 closed the second quarter of 2017 at 600,401 sf, a 26.9% decline since the same period last year as tenants continue to seek out efficiencies on their relocations.

Though year-over-year absorption slipped and long-term vacancy rates are expected to rise, asking rents continued to hold across the region and were bolstered as landlords continued to offer peak concession rates in a bid to incentivize tenant relocations in lieu of dropping rates. On average, tenants can expect to receive an average of 1 month abatement per year of term, and generous tenant improvement allowances across the DC Metro. With the wave of deliveries expected to hit the market, landlords are expected to continue to face stiff competition as tenants continue their flight to quality and efficiency in a round of musical chairs.

Net Absorption/Asking Rent 4Q TRAILING AVERAGE

Washington, DC Metropolitan Area NET ABSORPTION - DELIVERIES - VACANCY

0%

4%

8%

12%

16%

20%

-6

-4

-2

0

2

4

6

8

10

05 06 07 08 09 10 11 12 13 14 15 16 17

Vac

ancy

Rat

e

MS

F

Net Absorption Deliveries Vacancy Rate

$36

$37

$37

$38

$38

$39

$39

-1,000-800-600-400-200

0200400600800

1,0001,2001,400

2011 2012 2013 2014 2015 2016 2017

Net Absorption, SF (thousands) Asking Rent, $ PSF


Northern Virginia

Overall Vacancy

Large Blocks of Contiguous Space

Net Absorption/Asking Rent 4Q TRAILING AVERAGE

$28

$29

$30

$31

$32

$33

$34

-800

-600

-400

-200

0

200

400

2011 2012 2013 2014 2015 2016 2017Net Absorption, SF (thousands) Asking Rent, $ PSF

Market IndicatorsQ2 16 Q2 17 12-Month

Forecast

Overall Vacancy 21.60% 20.80%

Net Absorption 371k 650k

Under Construction 3.1M 4.7M

Deliveries 160K 0K

Average Asking Rent $32.70 $32.16

10%

12%

14%

16%

18%

20%

22%

24%

2011 2012 2013 2014 2015 2016 2017

0 20 40 60 80

Alexandria

Arlington

Tysons Corner

Reston/Herndon

50/66

Springfield/Newington

Route 28 South

Loudoun County

# of Blocks

25-50k SF

50-100k SF

100-150k SF

150-200k SF

200k+ SF

EconomyThe Washington, DC metropolitan region continues to experience strong job growth, adding a total of 50,100 net new nonfarm payroll jobs between May 2016 and May 2017 . Northern Virginia (NoVA) accounted for 20,400 of those new jobs – 41% of the total. In addition, 69% of the office-using employment growth in the region – 11,840 of 17,190 total jobs – took place in Northern Virginia.

Market OverviewThanks to 650,000 SF of absorption in Q2 2017 – NoVA’s largest quarterly figure in over five years – the market’s vacancy rate dipped to 20.8%. That is the lowest vacancy rate since the third quarter of 2014. Its impact has been felt across the office spectrum as all three building classes saw vacancies decrease over the past few years. Class A product alone experienced 425,472 SF of absorption in the second quarter, and currently maintains a 19.0% vacancy rate.

Positive absorption for the quarter can be attributed to a number of large move-ins: Ellucian, CDW, and Volkswagen occupied a combined 160,000 SF at 2003 Edmund Halley Drive; Applied Predictive moved into 98,000 SF at 4250 North Fairfax Drive; and WeWork took 92,000 SF at 1775 Tysons Boulevard. Rental rates for all classes have remained relatively unchanged over the past few years, as the decrease in rates due to lease-up of expensive Class A and new construction product counteracts rent increases in Silver Line hot spots and in certain Rosslyn-Ballston Corridor buildings.

Nestle’s market-moving 206,000-SF first-quarter 2017 lease was bested in the second quarter by Amazon Web Services’ (AWS)* 400,000-SF blockbuster deal at 13200 Woodland Park in Herndon—space formerly occupied by Booz Allen Hamilton. This deal represents significant net new growth in the Toll Road market, as AWS augments its current 230,000-SF footprint at 12900 Worldgate Drive. AWS and its Fortune 12 tech-company parent have been active in the data center space in Loudoun County, but the new deal signals a desire to bolster AWS’s digital presence with a physical one. Renewals again figured prominently in the second quarter of 2017, accounting for 12 of the top 15 leases of the quarter, with contractors and GSA users accounting for the top ten renewals.

No new buildings broke ground or were completed in the second quarter, as delivery of Marymount’s project at 1000 North Glebe Road was pushed back to the third quarter of this year. With the number of large blocks decreasing in Silver Line-walkable buildings, the build-versus-hold debate may be hitting a tipping point.

OutlookAWS’s 400,000-SF lease in Herndon represents the largest private-sector deal in a non-owner-occupied building since CEB Inc. signed for 625,000 SF in Rosslyn’s Waterview building in 2004. A recent expansion by another West Coast tech behemoth in downtown Washington, DC represents an increase in the industry’s ties to government and growing lobbying activities, and a handful of additional well-known technology firms are in the market for the first time. Northern Virginia’s formula of highly educated workers, pro-business policies, and affordable real estate compared to tech hubs San Francisco, Boston, and New York, may further accelerate this tech industry growth, bolstered by potential contract dollars related to the upgrade of legacy federal computer systems.

*According to public media reports


Northern Virginia Office SubmarketsNorthern Virginia Office Submarkets

HERNDON

RESTON

LOUDOUN

AL GONK IAN PARKWAY

LOUDO

UN COU

NTY

FAIR

FAX

COUN

TY

POTOMACRIVER

MARYL

AND

DISTR

ICT OF

COLU

MBIA

VIRGINIA

VIRGINIA

MARYLAND

WASHINGTONDULLES

INTERNATIONALAIRPORT

395

95

123

123

7

7

29

1

29

29

50

50

50 50

236

28

28

FAIRFAX COUNTYPRINCE WILLIAM COUNTY

ARLINGTO

N COUNTY

FAIRFA

X COUNTY

VIENNA

RONALDREAGAN

WASHINGTON NATIONALAIRPORT

495

66

metro

metro

metro

metro

metro

6666

metro

PENTAGON

COURT HOUSE

CLARENDON

BALLSTONVIRGINIA SQUARE - GMU

metro

KING STREET

metro

metro

metro

metro

ROSSLYN

metro

metro

metro

286

267

495

metro

metrometrometro

267

267metro

metro

metro

286

metro

WASHINGTON, DC

FAIRFAX COUNTY

LOUDOUN COUNTY

PRINCE WILLIAM COUNTY

ARLINGTON COUNTY

metro

metro

metro

metro

FRANCONIA/SPRINGFIELD

VAN DORNSTREET

EISENHOWERAVENUE

EAST FALLSCHURCH

WEST FALLSCHURCH

DUNN LORING/MERRIFIELD

TYSONSCORNER

SPRINGHILL

WIEHLE - RESTONEAST

RESTON TOWNCENTER

HERNDON

PHASE I

INNOVATIONCENTER

DULLESAIRPORT

ROUTE 606

ROUTE772

PHASE II2016

MCLEANGREENSBORO

NATIONALAIRPORT

MARYLAND

CRYSTAL CITY

OLD TOWNALEXANDRIA

TYSONS

MERRIFIELD

FAIRFAX CENTERROUTE 28 SOUTH

RESTON

HERNDON

LOUDOUN

EISENHOWERAVENUE

SPRINGFIELD/NEWINGTON

I-395 CORRIDOR

R-B CORRIDOR


Northern Virginia Office MarketInventory and Vacancy by Submarket, Second Quarter 2017

Top Transactions

Northern Virginia Office MarketNet Absorption - Deliveries - Vacancy, Second Quarter 2017

0%

5%

10%

15%

20%

25%

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

07 08 09 10 11 12 13 14 15 16 17

Va

can

cy R

ate

Sq

ua

re F

ee

t, 0

00

’s


0%

5%

10%

15%

20%

25%

30%

0

5

10

15

20

25

30

Alexandria RB Corridor Crystal City Tysons Reston/Herndon 50/66 Rte. 28 South Loudoun

Va

can

cy R

ate

MS

F

Leased Vacant Vacancy Rate

Key Sales Transactions Q2 2017

Key Lease Transactions Q2 2017

PROPERTY SF TENANT TRANSACTION TYPE SUBMARKET

13200 Woodland Park Drive 400,000 Amazon Web Services* New Lease Reston/Herndon

1320 Braddock Place 131,000 GSA - USDA New Lease Old Town

4050 Legato Road 92,000 Accenture/ASM Research Renewal Fairfax/Oakton/Vienna

PROPERTY SF SELLER / BUYER PRICE / $PSF SUBMARKET

1919 North Lynn Street - Waterview Tower 634,000 Paramount Group / Morgan Stanley $459,250,000 / $724 Rosslyn

1801 North Lynn Street 350,000 Morgan Stanley / GSA $240,000,000 / $686 Rosslyn

7901 Jones Branch Drive - Shenandoah Building 197,000 TIAA-CREF / Rockpoint Group $55,250,000 / $281 Tysons


Alexandria

0%

5%

10%

15%

20%

25%

30%

-600

-400

-200

0

200

400

600

800

07 08 09 10 11 12 13 14 15 16 17

Vaca

ncy

Rat

e

Squ

are

Fee

t, 00

0’s

Net Absorption Deliveries Vacancy Rate Old Town Vacancy Rate

Vacancy in Old Town is 9.2%, and for Greater Alexandria (Old

Town, Eisenhower and I-395 submarkets) 23.9%—both rates

unchanged from one year ago. Old Town boasts the lowest

vacancy rate of any Northern Virginia submarket, with Clarendon

the second tightest at 15.7%. Class A vacancy in Old Town stands

at a very healthy 7.2%, a rate also unchanged from one year ago.

There were no leases recorded in the Eisenhower submarket and

only 8,357 square feet (sf) of leasing activity in the I-395 Corridor.

However, Old Town captured Northern Virginia’s second-largest

lease of the quarter (behind Amazon’s 400,000-sf lease in

Herndon) as the GSA/U.S. Department of Agriculture (USDA)

signed for 131,000 sf at Braddock Metro Center 2. Two other

notable leases were Wyndham Resort’s renewal of 14,140 sf at 1737

King Street and National Association of Drug Court Professionals’

(NADCP) new lease for 10,442 sf at 625 N Washington Street.

Move-in and move-out activity among tenants occupying greater

than 15,000 sf was light in the second quarter of 2017. Alexandria’s

asking rents have remained steady in the $31-$33 per square foot

(psf) range on a full-service basis over the past five years. Class

A asking rents in Old Town declined 4.2% from the first quarter

of the year, mainly due to a price reduction at 1900 Duke Street.

Alexandria experienced a flurry of sales activity in the second

quarter, as Monday Properties purchased a five-property,

290,000-sf portfolio from Duke Realty for $25.9 million ($89/sf).

Buildings in the sale included 1500, 1600, 1800, 1900 and 2000

North Beauregard Street. Monday Properties has stated it intends

to complete extensive enhancements to amenities, common areas

and landscaping of those buildings originally built in the 1970s.

There were two other second-quarter sales: Kassabian Realty

purchased the National School Boards Association Building

(1980 Duke Street) from Normandy Real Estate Partners for $19.0

million ($404/sf), and JER Partners sold 1701 North Beauregard

Street to Alexandria City Public Schools for $15.0 million ($126/sf)

which desires to convert this office building and adjacent parking

garage into a school and playground.

Outlook

As construction on the fully leased 3000 Potomac Avenue office building adjacent to the future Potomac Yard Metro station continues, and with the National Science Foundation set to move into its 700,000-sf headquarters building in the Eisenhower submarket by the end of this year, these periphery sections of Alexandria will bring an influx of office workers and daytime spenders to the market.

Market Indicators*Arrows = Current Qtr Trend

Asking Rent

Net Absorption – Deliveries – Vacancy

New Leasing Activity

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MS

F

Q1 Q2 Q3 Q4

$25

$27

$29

$31

$33

$35

$37

$39

2012 2013 2014 2015 2016 2017

Ful

l Ser

vice

PS

F

Class A Class B

Asking Rent$31.22 FS

Net Absorption10,865 SF

Vacancy23.9%

Deliveries0 SF

Under Construction720,000 SF


RB Corridor

0%

5%

10%

15%

20%

25%

-800-600-400-200

0200400600800

1,000

07 08 09 10 11 12 13 14 15 16 17

Vac

ancy

Rat

e

Squ

are

Fee

t, 00

0’s


The Rosslyn-Ballston (RB) Corridor began 2017 with a strong 80,372 square feet (sf) of positive absorption in the first quarter followed by an even stronger 262,063 sf in the second. Ballston accounted for 147,000 sf of that absorption, with Applied Predictive occupying 98,000 sf at 4250 North Fairfax Drive, DRT Strategies taking 14,000 sf at 4401 North Fairfax Drive, and Systems & Technology Research moving into 10,000 sf at 901 North Stuart Street. After hitting a 10-year high of 21.7% in the second quarter of 2016, Ballston’s vacancy continues to decrease, declining to 17.2% at the end of Q2 2017. The largest physical occupancy was that of Regus Spaces, which took 44,000 sf at 1101 Wilson Boulevard in Rosslyn.

Leasing activity in the RB Corridor was a lower-than-average 76,154 sf during the second quarter, as the top three deals were all renewals: GSA/U.S. Department of Homeland Security renewed for 77,000 sf at 4601 North Fairfax Drive, Raytheon/BBN Technologies re-committed to 43,277 sf at 1300 North 17th Street and Language Associates extended its 41,364-sf lease at 1901 North Fort Myer Drive. The largest new deal of the quarter was that of Insight Global which signed for 24,346 sf at 1001 North 19th Street in Rosslyn.

From 2015 to 2016, direct rental rates in the RB Corridor declined 7.0%, as the corridor had to contend with an extended period of high vacancy. However, rental rates rose 4.1% in the first two quarters of 2017, to $42.53 per square foot (psf) on a full-service basis —a healthy bucking of the previous trend. Concessions in the RB Corridor have increased steadily over the past five years and are currently at all-time highs, but declining vacancy may halt this trend over the next six to twelve months.

The most significant sales transaction of the quarter was Morgan Stanley’s purchase of Waterview Office Tower (1919 North Lynn Street) from Paramount Group REIT for $459.3 million ($724/sf). About half of the 647,000-sf building is due to be vacated in January 2018 as Gartner (formerly CEB) moves into its under-construction future headquarters building at 1201 Wilson Boulevard. Rosslyn captured the other major office sale of the quarter, as the GSA purchased 1801 North Lynn Street from Morgan Stanley and JBG for $240 million ($686/sf). The Bureau of Diplomatic Security currently occupies the entire building.


Asking Rent



0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MS

F

Q1 Q2 Q3 Q4

$32$34$36$38$40$42$44$46$48$50

2012 2013 2014 2015 2016 2017

Full

Serv

ice P

SF

Class A Class B



Vacancy21.0%

Deliveries0 SF


OutlookOne of Northern Virginia’s most significant leases of the past several years transpired in the first quarter of 2017: Nestlé USA announced plans to relocate its headquarters from Los Angeles to Rosslyn, and will move into 206,000 sf at 1812 North Moore Street. This development spurred interest from some larger regional tenants in the market, many of which are taking a closer look at the submarket as Nestlé diversifies the primary tenant base away from consultancies, and as Central Place Plaza and its retail delivers.


Crystal City/Pentagon City

0%

5%

10%

15%

20%

25%

30%

-2,000

-1,500

-1,000

-500

0

500

1,000

07 08 09 10 11 12 13 14 15 16 17

Vaca

ncy

Rate

Square

Feet, 0

00’s


Over the past five years, Class A product has registered 819,000 square feet (sf) of positive absorption. Class B product registered 607,000 sf of negative absorption during the same time period, as tenants have expressed a preference for new and renovated buildings. The overall vacancy rate currently stands at 22.0%, equal to the five-year running average. However, Class A vacancy is a healthier 17.2%, much lower than its five-year running average of 22.7%.

The most significant deal of the quarter was Raytheon’s 70,000-sf renewal and 16,000-sf expansion at 2450 Crystal Drive. There were a handful of smaller leases: the Cobalt Company and Mission1st Group signed new leases of 9,600 sf and 5,000 sf, respectively, at 2511 Jefferson Davis Highway, and Trident Maritime Systems signed a 5,500-sf new lease at 2001 Jefferson Davis Highway.

There were no notable physical moves or significant office sales transactions in the second quarter of 2017, and rental rates for all classes remained virtually unchanged from Q1 2017.


Asking Rent



0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MS

F

Q1 Q2 Q3 Q4

$32

$34

$36

$38

$40

$42

$44

2012 2013 2014 2015 2016 2017

Full

Serv

ice P

SF

Class A Class B


Net Absorption(25,534 SF)

Vacancy22.0%

Deliveries0 SF


Outlook

The completed merger of Vornado Realty Trust and JBG into JBG Smith is bringing a new set of development professionals to the Crystal City submarket. JBG Smith executives have labeled the submarket a “top priority” as they plan to be proactive with a new set of demolition and redevelopment.


Tysons Corner

0%

5%

10%

15%

20%

25%

-800

-600

-400

-200

0

200

400

600

800

1,000

07 08 09 10 11 12 13 14 15 16 17

Va

can

cy R

ate

Sq

ua

re F

ee

t, 0

00

’s


Tysons’ vacancy rate ticked up to 21.6% in Q2 2017, up from 21.5% in the first quarter. The high velocity of move-ins and move-outs in the second quarter were nearly evenly matched, resulting in a negative 31,000 square feet (sf) of absorption. Mitre vacated the entire 152,000 sf at 1550 Westbranch Drive, and is now in the market for swing space as its existing four-building campus is at capacity. Grant Thornton vacated 28,000 sf at 2010 Corporate Drive in a move to Rosslyn’s Twin Towers. Ernst & Young relocated from 110,000 sf at 8484 Westpark Drive to 124,000 sf at Tysons’ newest office building—1775 Tysons Boulevard—while WeWork moved into its 92,000-sf space in that same building.

Year-to-date leasing activity in Tysons stands at 375,000 sf, slightly below the five-year running average. The largest leasing transactions of the second quarter of 2017 included: BAE, which renewed for 30,000 sf at 8201 Greensboro Drive; The Media Trust, which signed a 26,000-sf sublease at 1660 International Drive; DMI, which leased 23,000 sf at 1600 International Drive; and Executive Office Suites, which took over 19,000 sf of Carr Workplaces’ former space at 8200 Greensboro Drive.

Asking rental rates for all classes have remained relatively unchanged over the past few years, as the decrease in rates due to lease-up of expensive Class A and new construction product has offset rent increases in the Hill/Greensboro Drive minimarket.

The submarket was home to several significant sales transactions in the second quarter. Rockpoint Group continued to add to its Tysons portfolio, purchasing the three-building Tysons Dulles Plaza complex for $130.3 million ($270/sf) from KBS REIT, as well as the Shenandoah Building (7901 Jones Branch Drive) for $55.3 million ($281/sf) from TIAA-CREF. Westport Capital purchased the virtually empty 2000 Corporate Ridge for $24.5 million ($96/sf) from LNR Partners, and plans for an extensive renovation.


Asking Rent



0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MS

F

Q1 Q2 Q3 Q4

$25

$30

$35

$40

$45

$50

2012 2013 2014 2015 2016 2017

Ful

l Ser

vice

PS

F

Class A Class B


Net Absorption(31,055 SF)

Vacancy21.6%

Deliveries0 SF

Under Construction1,555,419 SF

OutlookWith Rockpoint Group purchasing four more Tysons office buildings in the second quarter, this Boston-based real estate private equity firm now owns nine office buildings in Tysons. PS Business Parks also owns nine office buildings, followed by Meridian Group with seven, and Lerner with six. This attraction of laser-focused private equity money could be a good bellwether for the attractiveness of this evolving submarket.


Reston/Herndon

0%

5%

10%

15%

20%

25%

-500

0

500

1,000

1,500

2,000

2,500

07 08 09 10 11 12 13 14 15 16 17

Vaca

ncy

Rate

Square

Feet, 0

00’s


Vacancy in the Reston/Herndon submarket is 16.6%, unchanged from one year ago, although the rate is slightly below the five-year average of 17.0%. The submarket’s sublet vacancy rate—at 2.1%—is the second-highest in Northern Virginia (after that of the Route 28 South submarket), a factor which provides opportunity for value-conscious tenants and also competition for landlords with direct space on the market.

Amazon Web Services (AWS) signed a 400,000-square-foot (sf) blockbuster, widely reported lease at 13200 Woodland Park in Herndon—space formerly occupied by Booz Allen Hamilton. This represents the largest private-sector lease in a non-owner-occupied building in Northern Virginia in over 10 years, as AWS augments its current 230,000-sf footprint at 12900 Worldgate Drive. AWS and its Fortune 12 tech-company parent have been active in the data center space in Loudoun County, but the new deal signals a desire to bolster this digital presence with a physical one. The next-largest deals of the quarter in Reston/Herndon were Micropact’s 42,000-sf renewal at 12901 Worldgate Drive, the GSA’s 20,000 sf renewal at 12825 Worldgate Drive, and Penn State University’s 19,700-sf new lease at 1850 Centennial Park Drive.

One location captured three move-ins during Q2 2017: Ellucian (97,000 sf), CDW (32,000 sf) and Volkswagen (32,000 sf) occupied 2003 Edmund Halley Drive. Other notable move-ins included Iron Bow taking over 46,000 sf at 2303 Dulles Station Boulevard and SAP occupying 26,000 sf at 2355 Dulles Corner Boulevard. Cox relocated from 94,000 sf at 3080 Centreville Road to less than half that footprint at 13900 Lincoln Park Drive, and K12 put 33,000 sf of sublet space on the market at 13241 Woodland Park Drive. Rents in all classes remained virtually unchanged from a year ago.


Asking Rent



0.00

0.50

1.00

1.50

2.00

2.50

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MS

F

Q1 Q2 Q3 Q4

$20

$22

$24

$26

$28

$30

$32

2012 2013 2014 2015 2016 2017

Ful

l Ser

vice

PS

F

Class A Class B



Vacancy16.6%

Deliveries0 SF


OutlookThe Reston/Herndon submarket’s makeup of highly educated workers, technology and contractor firms, exposure to private business and public contracts, and affordable real estate—compared to downtown Washington, DC, San Francisco, Boston, and New York—are all factors which may add further fuel to the fire of tech industry growth.


Route 50/66

0%

5%

10%

15%

20%

25%

30%

-800

-600

-400

-200

0

200

400

07 08 09 10 11 12 13 14 15 16 17

Va

can

cy R

ate

Sq

ua

re F

ee

t, 0

00

’s

Net Absorption Deliveries

Merrifield Vacancy Rate Fairfax/Oakton/Vienna Vacancy Rate

The Merrifield submarket’s vacancy rate declined from 21.9% in Q1 2017 to 20.3% in the second quarter, mainly due to Inova’s 42,000-square-foot (sf) expansion at 8111 Gatehouse Road. Still, the current vacancy rate is still above the five-year running average of 18.5%.

The Fairfax/Oakton/Vienna submarket’s vacancy rate moved the other direction, experiencing a slight uptick from 23.8% in Q1 2017 to 24.3% in Q2 2017. The increase was due primarily to Siemens vacating 38,000 sf at 4401 Fair Lakes Court as the company consolidates into other offices in Crystal City and Reston. This submarket’s current vacancy rate is well above its five-year running average of 18.7% and nearly matches the 10-year high of 24.7% registered in the fourth quarter of 2016.

The five largest deals of the quarter were all renewals: Accenture/ASM renewed for 92,000 sf at 4050 Legato Road, CGI for 42,500 sf at 11325 Random Hills Road, Leidos for 39,000 sf at 2650 Park Tower Drive, Serco for 32,000 sf at 11781 Lee Jackson Highway, and New Editions for 10,000 sf at 103 West Broad Street. The largest new lease was signed by ASRC Federal for 10,000 sf at 2941 Fairview Park Drive.

One notable sales transaction of the quarter was the purchase of 11320 Random Hills Road by Boyd Watterson from Colony Realty Partners for $23.5 million ($169/sf). This is a significant discount from the $40.5 million price that Colony Realty Partners paid for its original purchase of the property in November 2005. Several other properties traded in the second quarter at significant discounts, including 6910 Richmond Highway ($7.1 million, a 71.2% discount from the Q4 2006 sales price), 3076 Pender Drive ($5.6 million, a 39.4% discount from the Q1 2007 sales price), and 3702 Pender Drive ($5.6 million, a 63.8% discount from the Q4 2006 sales price).


Asking Rent



0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MS

F

Q1 Q2 Q3 Q4

$22

$24

$26

$28

$30

$32

$34

2012 2013 2014 2015 2016 2017

Ful

l Ser

vice

PS

F

Merrifield/Route 50 Fairfax/Oakton/Vienna



Vacancy22.6%

Deliveries0 SF


OutlookIt should be noted that most of these properties were purchased at the top of the investment cycle, and the discounts were significant. This may indicate lagging investor demand for buildings in the I-66 corridor that lack walkable retail amenities.


Route 28 South/Chantilly

0%

5%

10%

15%

20%

25%

30%

-600

-400

-200

0

200

400

600

800

1,000

1,200

07 08 09 10 11 12 13 14 15 16 17

Va

can

cy R

ate

Sq

ua

re F

ee

t, 0

00

’s


Absorption in the Route 28 South submarket was strong in the second quarter—totaling 239,000 square feet (sf). Vacancy declined further to 17.7%, a year-over-year decrease of 640 basis points (BP) and its lowest level since the third quarter of 2012. This positive absorption can be attributed to a 160,000-sf, full-building move-in at 4870 Stonecroft Boulevard, a 44,000-sf move-in by SOC at 3975 Virginia Mallory Drive, and a 42,000-sf move-in by Cox Communications at 13900 Lincoln Park Drive.

Leasing activity for the second quarter came in at a moderate 69,000 sf, mainly due to three leases: L3 Technologies signing for 21,000 sf at 14100 Park Meadow Drive, AbleVets for 21,000 sf at 15049 Conference Center Drive, and Intergraph for 17,000 sf at 14291 Park Meadow Drive. There were also two large renewals, as the DEA re-committed to 72,000 sf at 14560 Avion Parkway, and Fulcrum IT renewed for 61,000 sf at 5870 Trinity Parkway. Direct asking rental rates in the submarket have remained virtually unchanged over the past three years, and currently stand at $25.84 per square foot (psf) on a full service basis for all classes and $27.55 psf for Class A space.

Colony Realty Partners sold Vencore’s headquarters building—Stonegate II (15052 Conference Center Drive)—to Gramercy for $27.8 million ($197/sf), a 37.0% discount from the original Q3 2007 sales price of $44.0 million.


Asking Rent



0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MS

F

Q1 Q2 Q3 Q4

$18

$20

$22

$24

$26

$28

$30

2012 2013 2014 2015 2016 2017

Ful

l Ser

vice

PS

F

Class A Class B



Vacancy17.7%

Deliveries0 SF


Outlook

President Trump’s proposed Defense budget marks an increase in funding from that proposed by the Obama administration. The proposed Defense budget saw further increases from the House Armed Services Committee and those increases garnered initial passage by the full House of Representatives. These addition Defense dollars could benefit the multiple federal agencies and associated contractors in the Route 28 South submarket. Final passage of the budget has yet to take place, but the indicators are bullish.


Loudoun County

0%

5%

10%

15%

20%

25%

-100

0

100

200

300

400

500

600

07 08 09 10 11 12 13 14 15 16 17

Vaca

ncy

Rate

Square

Feet, 0

00’s


The Loudoun County submarket began 2017 with a strong 68,411 square feet (sf) of positive absorption in the first quarter, followed by 34,285 sf of absorption in the second. Small-to-medium sized tenants accounted for the majority of move-ins in the second quarter. The submarket’s vacancy rate hit 14.7% in the second quarter of 2017—the lowest rate in over 10 years. Class A vacancy declined from 15.9% a year ago to 12.2% at the end of Q2 2017, as tenants expressed a preference for newer and higher-quality buildings. This Class A vacancy is extremely healthy, and is the third-lowest in Northern Virginia after Old Town and Ballston.

The largest lease of the quarter was that of DRS Technologies, which signed for 40,000 sf at 21345 Ridgetop Circle, followed by Epsilon Data Management, which signed for 12,000 sf at 19775 Belmont Executive Plaza.

Rental rates for all classes remained virtually unchanged from both the first quarter of the year as well as the second quarter of 2016. The most significant sales transaction of the quarter was Kaiser Permanente’s purchase of its Ashburn Medical Center at 43480 Yukon Drive for $14.1 million ($236/sf) from The Lenkin Company.


Asking Rent



0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MS

F

Q1 Q2 Q3 Q4

$16

$18

$20

$22

$24

$26

$28

2012 2013 2014 2015 2016 2017

Ful

l Ser

vice

PS

F

Class A Class B



Vacancy14.7%

Deliveries0 SF


Outlook

Many active tenants in the Loudoun County submarket have indicated a preference for Class A office space with retail amenities, leading to lease-up in office projects in and adjacent to One Loudoun, Loudoun Station and other walkable projects. With Class A vacancy declining, some medium-to-large tenants have expressed difficulty in finding blocks of space in amenity-rich sections of the submarket.


Appendix

Table Summaries

Metro Washington Office Market Summary15

Employment Data15

Office Availability, Vacancy, and Net Absorption16

Trailing 12-Month Data17

Historical Year-End Data18

Market Statistics by Class19-20

Survey of New Office Space by Submarket21-24

Methodology & Definitions25

Metro Washington Current Employment Data

Metro Washington Office Market Summary: Second Quarter 2017p

SOURCE: U.S. Bureau of Labor Statistics (Not seasonally adjusted)* Average per year to datep - preliminary

Inventory Total Vacant Space

Vacancy Rate

Q2 2017 Absorption

Year to Date Absorption

Washington, DC 108,148,369 13,346,910 12.3% 215,354 258,710

Northern Virginia 130,274,770 27,140,899 20.8% 650,110 455,553

Suburban Maryland 59,443,704 11,763,916 19.8% -199,232 -113,862

Regional Totals 297,866,843 52,251,725 17.5% 666,232 600,401

Nonfarm Employment

(Jan-Jun 2016)

Nonfarm Employment

(Jan-Jun 2017p)

Jobs Added/ Lost* Percent Change

Washington, DC 780,867 789,117 8,250 1.1%

Northern Virginia 1,433,750 1,459,700 25,950 1.8%

Suburban Maryland 987,383 1,011,600 24,217 2.5%

Regional Totals 3,218,750 3,270,567 51,817 1.6%


AppendixO

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AppendixH

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rica

l Yea

r-E

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Tota

l Offi

ce In

vent

ory

Offi

ce V

acan

cy R

ate

Tota

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bsor

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2015

2016

2017

p20

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2016

2017

p

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slyn

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pri

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wer

e up

dat

ed in

the

sec

ond

qua

rter

of

2012

wit

h ad

dit

iona

l inv

ento

ry.


Northern Virginia – 2nd Quarter 2017 Market Statistics

BuildingsTotal

Inventory(SF)

New/Relet Vacancy

(%)

Sublet Vacancy

(%)

Total Vacancy*

(%)

Net Absorption

Current QTR(SF)

Under Construction

(SF)

Average Asking Rent

(FS)

Alexandria

Class

A 46 7,855,196 20.0% 0.6% 20.7% 393 720,000 $34.16

B 64 6,746,020 31.1% 0.4% 31.5% (2,817) $28.91

C 27 1,872,209 9.1% 1.0% 10.1% 13,289 $24.88

TOTAL 137 16,473,425 23.3% 0.6% 23.9% 10,865 720,000 $31.22

RB Corridor

Class

A 49 12,757,247 17.9% 1.2% 19.0% 172,268 862,729 $44.25

B 35 6,227,522 21.8% 0.4% 22.2% 87,753 - $41.64

C 19 2,280,849 28.2% 0.5% 28.7% 2,072 - $35.43

TOTAL 103 21,265,618 20.1% 0.9% 21.0% 262,093 862,729 $42.40

Crystal City/Pentagon City

Class

A 25 7,794,322 16.9% 0.2% 17.2% (24,465) 100,000 $38.91

B 13 2,882,747 35.1% 0.1% 35.2% (1,069) $34.13

C - 0 0.0% 0.0% 0.0% - N/A

TOTAL 38 10,677,069 21.8% 0.2% 22.0% (25,534) 100,000 $36.71

Tysons

Class

A 52 13,255,289 20.5% 0.6% 21.1% (27,886) 1,555,419 $38.09

B 61 7,622,416 22.8% 0.5% 23.4% (21,841) $29.58

C 29 2,042,892 18.5% 0.1% 18.6% 18,672 $24.77

TOTAL 142 22,920,597 21.1% 0.6% 21.6% (31,055) 1,555,419 $31.94

Reston/Herndon

Class

A 106 17,967,174 14.3% 2.3% 16.6% 44,001 354,913 $29.86

B 63 5,589,260 15.1% 1.7% 16.8% 1,913 $25.15

C 15 674,403 12.5% 0.3% 12.8% 19,153 $18.03

TOTAL 184 24,230,837 14.4% 2.1% 16.6% 65,067 354,913 $27.99

* Vacancy Current - the vacancy rate is calculated using the combined total of vacant direct, sublease and new space.

Market Statistics


Northern Virginia – 2nd Quarter 2017 Market Statistics

Market Statistics

BuildingsTotal

Inventory(SF)

New/Relet Vacancy

(%)

Sublet Vacancy

(%)

Total Vacancy*

(%)

Net Absorption

Current QTR(SF)

Under Construction

(SF)

Average Asking Rent

(FS)

Merriield/Route 50

Class

A 20 3,616,798 27.4% 1.0% 28.4% (9,258) - $31.99

B 15 1,566,456 12.1% 1.4% 13.4% 100,292 $26.49

C 20 1,424,940 7.1% 0.0% 7.1% 18,992 $22.31

TOTAL 55 6,608,194 19.4% 0.9% 20.3% 110,026 - $29.91

Fairfax/Oakton/Vienna

Class

A 25 4,365,706 17.3% 0.3% 17.6% (5,808) 385,000 $30.07

B 47 4,410,647 28.5% 2.1% 30.6% (42,861) $23.89

C 12 733,114 26.2% 0.0% 26.2% 308 $23.22

TOTAL 84 9,509,467 23.2% 1.1% 24.3% (48,361) 385,000 $24.71

Route 28 South

Class

A 49 6,127,730 13.5% 1.2% 14.7% 233,540 665,000 $27.32

B 27 2,548,192 20.2% 4.9% 25.1% (11,945) $23.31

C - 0 0.0% 0.0% 0.0% - N/A

TOTAL 76 8,675,922 15.5% 2.3% 17.7% 221,595 665,000 $25.56

Loudoun County

Class

A 40 3,867,941 11.1% 1.1% 12.2% 33,434 72,000 $25.64

B 18 1,407,654 19.9% 1.8% 21.7% 851 $21.38

C - 0 0.0% 0.0% 0.0% - N/A

TOTAL 58 5,275,595 13.5% 1.2% 14.7% 34,285 72,000 $23.94

Northern Virginia

Class

A 427 79,919,628 17.9% 1.1% 19.0% 425,472 4,715,061 $34.96

B 350 39,611,961 23.9% 1.1% 25.0% 142,181 $29.82

C 143 10,743,181 18.6% 0.3% 19.0% 82,457 $28.08

TOTAL 920 130,274,770 19.8% 1.1% 20.8% 650,110 4,715,061 $32.16

* Vacancy Current - the vacancy rate is calculated using the combined total of vacant direct, sublease and new space.


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PT

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Nor

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(AS

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CU

RR

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QU

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PER

CEN

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ASED

U

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DEL

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Y

7940

Jon

es B

ranc

h D

rP

enta

gon

Fede

ral C

redi

t Uni

onD

eliv

ered

4Q

14N

/ATy

sons

296,

257

00%

53%

3001

-300

3 W

ashi

ngto

n B

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KB

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Adv

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ons

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Mac

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ns52

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%

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8

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47%

Ope

ratin

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stat

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ase

*Vac

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rate

for n

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pace

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uble

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ce a

vaila

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= F

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= P

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& C

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= N

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and

Taxe

s


MethodologyMarket statistics are calculated from a base building inventory made up of office properties deemed to be competitive in the typical Washington, DC office market. Single-tenant buildings and privately-owned buildings in which the federal government leases space are included. Generally, owner-occupied and federally-owned buildings are not included. Older buildings unfit for occupancy or ones that require substantial renovation before tenancy are generally not included in the competitive inventory. Vacant space is defined as space that is physically vacant and available immediately. Sublet space still occupied by the tenant is not counted as vacant space.

Explanation of TermsTotal Inventory: The total amount of office space (in buildings greater than 10,000 square feet) that can be rented by a Fourth party.

New Space Vacant: First generation, never-occupied office space in newly constructed or substantially renovated buildings, being actively marketed by a landlord.

Relet Space Vacant: Second-generation, unoccupied office space being actively marketed by a landlord. (Space that is marketed but largely occupied is not counted as vacant space.)

Sublet Space Vacant: Second-generation, unoccupied space being actively marketed by a tenant. (Sublet space that is marketed but still occupied is not counted as vacant space.)

Total Space Vacant: The sum of new, relet, and sublet space that is unoccupied and being actively marketed.

Vacancy Rate: The amount of unoccupied space (new, relet, and sublet) expressed as a percentage of total inventory. (Total Space Vacant divided by Total Inventory.)

Total Space Available: The total amount of space, both vacant and occupied, being actively marketed for lease by a tenant or landlord. (This includes space that is currently occupied but marketed for future availability.)

Availability Rate: The total amount of space being actively marketed for lease (both vacant and occupied) expressed as a percentage of total inventory. (Total Space Available divided by Total Inventory.)

Absorption: The net change in occupied space between two points in time. (Total occupied space in the previous quarter minus total occupied space in the current quarter, quoted on a net, not gross, basis.)

New/Relet/Sublet Absorption: The net change in occupied new, relet, and sublet space between two quarters.

Total Absorption: The net change in total occupied (new, relet, and sublet) space between two quarters.

New Leasing Activity: The sum of all square footage underlying any leases between two quarters. This includes pre-leasing activity as well as expansion. It does not include renewals.

Methodology & Definitions

Disclaimer

This report and other research materials may be found on our website at www.cushmanwakefield.com. This is a research

document of Cushman & Wakefield in Washington, DC. Questions related to information herein should be directed to the

Research Department at +1 202 463 2100. Information contained herein has been obtained from sources deemed reliable and

no representation is made as to the accuracy thereof.

About Cushman & Wakefield

Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and

live. Our 43,000 employees in more than 60 countries help investors and occupiers optimize the value of their real estate by

combining our global perspective and deep local knowledge with an impressive platform of real estate solutions. Cushman

& Wakefield is among the largest commercial real estate services firms with revenue of $5 billion across core services of

agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset

management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more,

visit www.cushmanwakefield.com or follow @CushWake on Twitter.

Core Services• Capital Markets

- Debt Placement- Investment Sales- Note Sales- Structured Finance

• Corporate Services- Facilities Management- Portfolio Administration- Project Management- Strategic Consulting- Transaction Management

• Project Leasing• Project and Development Services• Property Management• Tenant Representation

Practices and Specialties• Auction Services• Distressed Assets• Financial Advisory• Food and Beverage• Golf and Resort Properties• Government Contracting• Government Services• Healthcare• Higher Education• Hospitality• Law Firm• Life Sciences• Location Advisory and Incentives• Mission Critical• Net Lease• Not-for-profit• Private Client• Supply Chain • Sustainability Services

Real Estate Types• Industrial• Land• Multi-family• Office• Retail

Visit cushmanwakefield.com for more information on the full range of Cushman & Wakefield commercial real estate services or contact:

Nathan EdwardsRegional Director2101 L Street, NW, Suite 700Washington, DC 20037+1 202 463 2100

Summer NewmanAssociate Market Director2101 L Street, NW, Suite 700Washington, DC 20037+1 202 463 2100

Sam PrendergastResearch Analyst 1800 Tysons Boulevard, Suite 200Tysons Corner, VA 22102+1 703 448 1200

About Cushman & WakefieldCushman & Wakefield is a leading global real estate services firm that helps clients

transform the way people work, shop, and live. Our 43,000 employees in more than

60 countries help investors and occupiers optimize the value of their real estate by

combining our global perspective and deep local knowledge with an impressive

platform of real estate solutions. Cushman & Wakefield is among the largest

commercial real estate services firms with revenue of $5 billion across core services

of agency leasing, asset services, capital markets, facility services (C&W Services),

global occupier services, investment & asset management (DTZ Investors), project &

development services, tenant representation, and valuation & advisory. To learn more,

visit www.cushmanwakefield.com or follow @CushWake on Twitter.

Publication date: 8.1.2017

Copyright © 2016 Cushman & Wakefield. All rights reserved.

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