We Respectfully Disagree - Final

8/16/2019 We Respectfully Disagree - Final

1/11

WE

RESPECTFULLY DISAGREE.


2/11

INTRODUCTIONSavills Studley Perspective

Recently, several of our competitors have produced reports and provided commentary to the local media suggesting that the Washington, DC Metro omarket is “turning in the landlord’s favor.” We respectfully disagree. In fact, there is little evidence that the region’s tenant-favorable climate is changintime soon. This document seeks to present a data-driven perspective on the current state of the market based on a comprehensive analysis of the loc

economy, leasing metrics, development trends and transaction data. This report reflects Savills Studley’s commitment to providing unbiased and in-demarket knowledge to tenants and addresses the following claims made by our competitors:

“Tenants still have the upper hand, but

not for long”

• “Overall, tenants continue to have the upper

hand in lease negotiations but the market istightening and that leverage won’t last long.”

• “We expect the office market to become more

competitive in late 2016 or early 2017.”

“DC office market is turning in the

landlord’s favor”

• “Fundamentals in Washington, DC’s office

market have shifted to the extent that Cresabelieves it is turning into a landlord’s market inmany sectors.”

• “The federal government will return to themarket this year after a barely-there activity levelin 2015.”

• “There is an estimated 24M SF of leasesexpiring in the DC metro through 2018,

which will cause the vacancy rate to dropsubstantially.”

“Broad-based recovery taking hold

across DC Region CRE Market”

• “An uptick in tenant demand and the

emergence of rent growth for the first timeyears have provided a tailwind to the markincreasing both owner and investor confid

in the region.”

• “When we see a resurgence in leasing actmarkets such as Crystal City, we know we

the midst of a broad-based recovery.”

• “The improving suburban leasing market,

interest rates and availability of capital willcontinue to drive demand among investorssuburban Washington locations.”

Source: Bisnow DC, 3/1/2016 Source: GlobeSt.com, 2/17/2016 Source: CityBizLis


3/11

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


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JOB GROWTH BY SECTORWashington, DC Metro Region

I

, ,

Information

Financial Activities

Trade, Transportation & Utilitie

Government

Leisure & Hospitality

Manufacturing

Other

Mining, Logging & Constructio

Educational & Health Services

Professional & Business Servi

“For the first time in three years, the DCarea saw a major rebound in the localeconomy in 2015, fueled by the creationof 62,000 new jobs - well above the 20-year annual average of 42,000 - usheringin signs of stabilization in the officemarket.”

“The driver behind these trends, ofcourse, is the area’s job growth, whichis now 40% higher than the five-yearaverage. This growth has been led bythe professional and business services,scientific and technical services, and legalservices sectors.”

“Metro DC hit an inflection pointstart of the year, as strong emplo

growth drove occupancy gains tthe regional office market.”

In an office market where tenants generally seek to reducetheir real estate costs by reducing their footprint, positiveemployment growth is no longer the strong indicator of

a turning office market that it once was. The two largestusers of office space, Legal Services and Government & Public Administration, are widely recognized as two sectors working

to modernize their real estate s trategies by reducing the overallamount of space occupied and the amount of space utilized byindividual users, and while our competitors would argue that theProfessional & Business Services sector is filling the void, datashows it is not growing at the level necessary to counteract thelarge-scale consolidation seen throughout the market.

Source: Bisnow DC, 3/1/2016 Source: GlobeSt.com, 2/17/2016 Source: CityBizL

-2,800

400

2,500

4,300

5,800

7,900

8,400

9,500

16,500

18,100

-5,000 0 5,000 10,000 15,000 20,000

Information

Manufacturing

Financial Activities

Other

Trade, Transportation & Utitilities

Mining, Logging & Construction

Government

Educational & Health Services

Leisure & Hospitality

Professional & Business Services

DC METRO EMPLOYMENT GROWTH, 2015 SECTOR-SPECIFIC JOB GROWTH AS % OF TOTAL GROWTH

56.8% of job growth came fromnon-office using sectors

COMPETITOR TAKESSAVILLS STUDLEY PERSPECTIVE


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SUPPLY & DEMAND TRENDSHistorical Availability & Net Absorption

S q u a r e F o o t a g e i n T h o u s a n d s

S q u a r

e F o o t a g e i n T h o u s a n d s

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Washington DC Northern Virginia Suburban Maryland

“Tenant-favorable conditions won’t last long, so tenants looking to upgradedo so soon, the WLS survey warns. ‘We expect the office market to becomcompetitive in Northern Virginia in late 2016 or early 2017.’”

“When we see a resurgence in leasing activity in markets such as Crystal Cenclaves outside the Capital Beltway, we know we’re in the midst of a broarecovery.”

Supply continues to outpace demand i n DC’s suburbs as the inventory of aspace has steadily increased over the past 10 years, particularly in Norther Virginia, where total availability has increased by 19.6M square feet since 2

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

amount of available space still sits at 13.6M square feet - more than d

the amount of space available 10 years ago. Competing firms have spoabout an uptick in tenant activity and improving leasing fundamentals, butabsorption figures are not demonstrative of a significant improvement

market only absorbed 693,793 square feet in 2015.

If the highest single year of net absorption was projected out and comparethe 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

-4,000

-3,000

-2,000-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Washington DC Northern V irginia Suburban Maryland

Source: Bisnow D

Source: CityBizLis

HISTORICAL AVAILABILITY, 10-YEAR PERIOD

HISTORICAL NET ABSORPTION, 10-YEAR PERIOD

COMPETITOR TAKES

SAVILLS STUDLEY PERSPECTIVE


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SUPPLY & DEMAND TRENDS Average Time On Market

• Muted demand and limited net growth in each jurisdiction has resulted in a significant increase inthe 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.

• When isolating Class A space, time on market is actually higher than when the market isexamined in its entirety.

“In the Trophy market, a landlord’s market is all but already here.”

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

0

5

10

15

20

25

30

35

2006 2007 2008 2009 2010 2011 2012 2013 2014


Source: GlobeSt.com, 2/17/2016

AVERAGE MONTHS ON MARKET, OVERALL

AVERAGE MONTHS ON MARKET, CLASS A ONLY


0

5

10

15

20

25

30

35

2006 2007 2008 2009 2010 2011 2012 2013 2014



7/11


8/11

RENTAL RATE TRENDSEffective Rent and Concession Values

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00

$80.00

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Total Rent Tenant Effective Rent Landlord Effective Rent

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00$45.00

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Total Rent Tenant Effective Rent Landlord Effective Rent

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

HISTORICAL EFFECTIVE RENT, WASHINGTON, DC

HISTORICAL EFFECTIVE RENT, NORTHERN VIRGINIA HISTORICAL CONCESSION VALUES, NORTHERN VIRGINIA

HISTORICAL CONCESSION VALUES, WASHINGTON, DC

E f f e c t i v e R e n t P S

F

E f f e c t i v e R e n t P S F

C o n c e s s i o n V a l u e P

S F

C o n c e s s i o n V a l u e P S F

SAVILLS STUDLEY PERSPE

EFFECTIVE RENTS

Despite a subtle increase in a

rents, total rents actually decrby 3.8% in DC and 1.8% in No

Virginia, and landlord effectiv

rents fell 14.6% in DC and 14

Northern Virginia in 2015. Thein effective rents can be attributelevated concessions, which rearecord highs in both Northern Vand the District in 2015.

CONCESSIONS

Renewals and restructures accofor much of the year’s activity, bmore tenants relocated to capita

very favorable lease terms. Freeperiods inched higher and tenimprovement allowances incr

Concessions in the Virginia subto $102.00 psf in 2015, a sharpfrom the $92.00 psf posted in 2the District saw an approximatepsf boost to $135.17 psf.


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OFFICE DEVELOPMENT TRENDSHistorical & Current Pipeline

3,187

4 , 4

8 1

4 , 3

0 3

3,445

7 , 6

8 0

1 3 , 9

3 3

1 9 , 8

2 3

2 0 , 1

6 1

1 4 , 3

8 6

1 3 , 5

3 0

1 2 , 9

9 8

1 4 , 3

2 4

1 7 , 0

5 3

1 5 , 9

5 4

1 4 , 4

1 0

1 2 , 0

1 9

6 , 6

2 8

3,950

4 , 9

0 3

7 , 3

5 2

5 , 7

3 8 6

, 9 6 7 8

, 4 3 7

0

5,000

10,000

15,000

20,000

25,000

NEW OFFICE CONSTRUCTION, WASHINGTON, DC METRO

“Some, but not all, of this pressure will be countered by an influx of ‘high quality’ space currently in theconstruction pipeline. There is 4.0M square feet of space under development now - the most since 2008.”

“A separate JLL data point finds that the metro DC area’s office pipeline is entering the year 58.5% pre-leased, which is significantly above the long-term average of 47.3%. This among other reasons leads JLLMarket Research Director Scott Homa to conclude that supply is moving to better align with demand anda more balanced tenant-landlord dynamic is on the horizon.”

S F U n d e r C o n s t r u c t i o n ( T h o u s a n d s )

NEW OFFICE CONSTRUCTION AS A PERCENTAGE OF ALL CONSTRUCTION


Source: CityBizList, 10/5/2015

COMPETITOR TAKES

The higher-than-average percentage of DC’s pipeline that is pre-leased is not necessarily

indicative of a recovering market. Rather, it’s a sign that the development community is generallyunwilling 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.

• Anemic demand and elevated availability throughout the DC market has put a damper on new officeconstruction in recent years.

• Not only is new office construction well below the historical average, but it is also making up a muchsmaller percentage of the region’s overall development pipeline.

• This trend is illustrative of the development community’s lack of confidence in the current leasingenvironment, an oversaturated office market, and a demonstrated preference for developing otherasset types - p rimarily multifamily.

• Most developers who are seeking to create mixed-use, live/work/play environments are kicking off thefirst phases of construction with multifamily and retail as they await the return of landlord-favorablemarket conditions before developing any office product.

Historical Avg. = 10.2M SF


3 0 . 4

%

2 9 . 8

% 3 2 . 9

%

3 2 . 8

%

2 5 . 1

%

2 1 . 8

%

1 9 . 6

%

1 4

. 9 %

1 6 . 7

%

1 7 . 2

%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


10/11

SECTOR LEASING TRENDSFederal Government

FEDERAL GOVERNMENT OFFICE LEASING, WASHINGTON, DC REGION

“The federal government will return to the marketthis year after a barely-there activity level in 2015. There is an estimated 24M square feet of leases

expiring in the DC Metro area t hrough 2018, whichwill cause the vacancy rate to drop substantially.”

“The U.S. Transportation Security Administrationlease in the third quarter and a series of transactionsby other federal agencies, including the U.S.Marshals Service, DHS, HHS and FBI earlier thisyear have accounted for 36.6% of all transactionvelocity in the Washington region leasing market.”

S F L e a s e d

AGENCY

Federal Communications Commission

Department of Justice - Drug Enforcement Agency

Environmental Protection Agency

Federal Election Comission

Department of State

Department of Veteran Affairs

CURRENT RSFPROPOSED

MAX RSF % CHANGE CURRENT USFPROPOSED

MAX USF % CHANGE LEASE EXPIRATION

659,030

503,776

453,651

136,957

110,294

86,927

473,000

575,000

326,057

105,000

115,000

97,000

-28.2%

14.1%

-28.1%

-23.3%

4.3%

11.6%

272

192

275

292

209

161

180

192

196

218

195

184

-33.8%

0.0%

-28.7%

-25.3%

-6.7%

14.3%

October 2017

September 2018

March/April 2016

September 2017

October 2017

June 2017

2016 FEDERAL PROSPECTUS LEASES


Source: CityBizList, 10/5/2015

5 , 2

2 3 , 9

8 1

2 , 8

1 1 , 0

1 0

5 , 0

0 4 , 1

5 6

3 , 1

4 3 , 7

0 0

5 , 1

7 0 , 0

8 9

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

2011 2012 2013 2014 2015

COMPETITOR TAKESSAVILLS STUDLEY PERSPECTIVE

It is farily obvious that the federal governmentwas far from “barely there” in 2015 as ourcompetitor notes; the Department of Justice’s

lease for 839,000 square feet at Three & FourConstitution Square was the largest deal inthe region last year and possibly the largestfederal deal since 2001. Furthermore, federalleasing of 5.1 million square feet was the highestposted since 2011. However, despite expectedhigh levels of activity, the GSA is expected tocontinue its “Freeze The Footprint” initiativeto maintain or reduce its occupied space andshrink its footprint throughout the region. Thebelow table reflects this policy and identifiessignificant federal prospectuses for 2016. Assuming proposed benchmarks are met,space occupied by these six agencies will becut by 13.3%, or 259,578 square feet.


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SAVILLS STUDLEY Company Overview

Thomas M. Fulcher Jr., Executive Vice

President, Co-Regional Manager

(202) [email protected]

Victoria Mechlin, Public Relations

Manager


Anthony Jones, Research Manager,

Suburban Washington


Jared Emery, Research Manager,

Washington, DC

(202) 540-5510 [email protected]

ABOUT THE FIRM

Savills Studley is the leading commercial real estate services firmspecializing in tenant representation. Founded in 1954, the firmpioneered the conflict-free business model of representing onlytenants in their commercial real estate transactions. Today, supportedby high quality market research and in-depth analysis, Savills Studleyprovides strategic real estate solutions to organizations across allindustries. The firm’s comprehensive commercial real estate platformincludes brokerage, project management, capital markets, consultingand corporate services. With 28 offices in the U.S. and a heritage ofinnovation, Savills Studley is well-known for tenacious client advocacyand exceptional service. The firm is part of London-headquarteredSavills plc, the premier global real estate service provider with over30,000 professionals and over 700 locations around the world.

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We Respectfully Disagree - Final

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