Savills Studley Washington DC Q1 2016 Office Sector Report

Information about Savills Studley Washington DC Q1 2016 Office Sector Report

Published on June 3, 2016

Author: savillsstudley

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1. Savills Studley Report Washington, DC office sector Q1 2016 Savills Studley Research Washington, DC SUMMARY Market Highlights WASHINGTON, DC Following record-setting quarterly leasing in the fourth quarter of 2015, Washington, DC posted just 1.59 msf of total activity this quarter. The overall availability rate was flat at 12.5%. Concessions continue to be granted at exceptionally high levels, with tenants receiving packages valued at an average of $135.57 psf. The market remains firmly in favor of the tenant and there is little evidence to suggest that the pendulum will swing back toward the landlord any time in the near future. NORTHERN VIRGINIA Office leasing conditions remained very tenant favorable in the Virginia suburbs to begin 2016. While the overall availability rate posted a slight decrease, 36.3 msf of office space is still available throughout the region. Total leasing activity fell dramatically from year-end 2015, posting a 49.7% quarter-over-quarter decline. Average asking rents dropped by $0.20 psf, representing a 0.6% decline relative to the previous quarter. SUBURBAN MARYLAND Office leasing fundamentals remained largely unchanged in Suburban Maryland to begin 2016. Total leasing activity decreased by 28.1% quarter-over-quarter; however, the overall availability rate was unchanged at 18.8%. Average asking rents inched down by 1.6%, ending the first quarter at $26.05 psf. “While landlords and their agents continue to be hopeful that the market is turning in their favor, we don’t see any real indication that will be the case any time soon. That landlords continue to be eager to lock down their existing tenants with early renewals and to be so aggressive trying to get new ones shows us that they know that, too.” Tom Fulcher, Executive Vice President, Co-Regional Manager

2. 02 Savills Studley Report | Washington, DC Market Tightens At Top, Remains Highly Tenant- Friendly Elsewhere The Washington, DC office market is currently highly bifurcated. Trophy quality assets and new construction are in high demand. In contrast, while owners of non-trophy Class A and Class B product are scrambling to attract long-term tenants by making significant capital improvements to their properties and awarding generous concession packages. As a result, early restructures and renewals slowed this quarter and a majority of tenants chose to relocate to take advantage of a highly competitive market with plenty of quality options. The overall availability rate was static at 12.5%, and while the Class A rate fell by 1.1 pp year-over-year, a large segment of that space was pre-leased in projects that were waiting for a significant tenant to sign before beginning construction. Cleary Gottlieb’s deal for roughly 115,000 sf at 2112 Pennsylvania Avenue, N.W. is one such deal, and the firm received an ample concession package as part of its commitment. Apart from Cleary’s lease in new construction, Washington, DC’s market put forth an extremely lackluster performance. The absence of a marquee lease this quarter is of note, as high- profile leases by the likes of Advisory Board Company, Fannie Mae and the Department of Justice were responsible for the market’s elevated leasing activity last year. As one of few bright spots, the co-working sector has been markedly active, with firms like WeWork, Regus, MakeOffices, and Spaces taking roughly 216,000 sf combined throughout the core and NoMa and surpassing last year’s leasing total within the first three months of the year. Tenants Firmly In The Driver’s Seat To Begin 2016 Northern Virginia experienced a dramatic slowdown in total leasing volume to begin the new year, posting a 49.7% decrease in the number of square feet leased relative to the previous quarter. The drop off in leasing activity put downward pressure on asking rents, which ended the first quarter at $30.63 psf, a 0.6% decline from the rate of $30.83 psf at year-end 2015. Renewals and early lease restructures continued to dominate the leasing landscape, led by CACI’s renewal of 220,551 sf at Commonwealth Centre in Chantilly. Asurion also renewed its lease for 105,620 sf at Two and Three Vintage Park in Sterling and Sinclair Television Group signed a short-term renewal for 100,000 sf at the Twin Towers in Rosslyn. Despite the decline in leasing activity, the overall availability rate inched down to 21.5% during the first quarter; representing a quarter-over- quarter decrease of 0.3 pp. Source: Bureau of Labor Statistics 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 0.68 0.70 0.72 0.74 0.76 0.78 0.80 Millions WDC. Office Emp. WDC. (% Annual Change) U.S. (% Annual Change) Office-Using Employment Trends $56.28 $55.20 $32.37$32.46 $27.02$26.21 $10 $20 $30 $40 $50 $60 $70 2016 1Q2015 4Q2015 3Q2015 2Q2015 1Q2014 4Q ($/sf) Class A Rental Rate Trends Washington, DC Virginia Maryland Class A Asking Rent Trends 12.6% 14.2% 22.6% 23.6% 22.9% 21.9% 0% 5% 10% 15% 20% 25% 30% 2016 1Q2015 4Q2015 3Q2015 2Q2015 1Q2014 4Q (%) Class A Availability Rate Trends Washington, DC Virginia Maryland Class A Availability Rate Trends

3. savills-studley.com/research 03 Q1 2016 Tenant Sq Feet Address Market Area 2U, Inc 252,950 7900 Harkins Rd Prince George's County CACI 220,551 14360 & 14370 Newbrook Dr Fairfax County WeWork 117,000 655 15th St NW East End/Convention Center GSA - Bureau of Prisons 115,341 370 L'Enfant Plz SW Southwest Cleary Gottlieb 114,958 2112 Pennsylvania Ave NW Central Business District Asurion 105,620 45365 Vintage Park Plz & 22894 Pacific Blvd Loudoun/Stafford/Prince William Universal Service Administrative Company 102,348 700 12th St NW East End/Convention Center Sinclair Television Group 100,000 1100 Wilson Blvd Arlington County U.S. Citizenship and Immigration Services 67,389 2675 Prosperity Ave Fairfax County Opower 63,000 2311 Wilson Blvd Arlington County Sum of Top 10 Leases 1,259,157 Sum of 1st Quarter Leasing Activity 4.0 MSF New Year, Little Change In Suburban Maryland The Suburban Maryland office market saw little change during the first quarter. Average asking rents decreased by 1.6% relative to the previous quarter but remained 3.2% higher than the average rate one year ago. The overall availability rate held steady at 18.8%, representing no change from the rate at year- end 2015. Despite posting a slight decrease, overall leasing activity remained relatively strong and the region experienced moderate net growth to begin 2016. In the largest lease of the quarter, 2U Inc. leased 252,950 sf at 7900 Harkins Road in Lanham, backfilling space that was vacated by CSC. 2U will relocate from its current location in Landover in early 2017, expanding by 185,000 sf in the process. Submarket Focus Washington, DC’s Southwest submarket ended 2015 on a high note and, despite just one large lease for 115,341 sf completed by the Federal Bureau of Prisons this quarter, the submarket is poised for a breakout. Southwest is rapidly becoming a preferred destination for federal agencies looking for high-quality space without the downtown core price tag, and they are followed by government contractors, nonprofits and associations, and burgeoning tech firms. The Wharf development, which will add nearly 1.0 msf of office space to the area upon completion, is scheduled to deliver its first phase in mid-2017 and is the primary component of the rejuvenation of the District’s largest waterfront community. The submarket’s overall availability rate of 9.7% is the third lowest in Washington, DC and has fallen by 2.0 pp over the past year due to robust GSA activity; since the first quarter of 2015, federal agencies have leased more than 810,000 sf in Southwest. These agencies currently have prospectuses totaling nearly 1.7 msf in the DC pipeline for 2016, which could result in further activity in the area. The Tysons area posted a strong performance to begin the year, tallying 186,006 sf in total leasing activity. Tysons continued to benefit from an active tech sector; Computer Sciences Corporation, Kuatro Technologies, Allied Soft, Spry Methods and Binary Fountain all signed leases during the first quarter totaling 94,501 sf, or roughly 51.0% of all space leased. The increase in leasing activity put downward pressure on the overall availability rate, which inched down by 0.4 pp and ended the first quarter at 28.4%. Silver Spring began the new year on a positive note, posting 52,954 sf in total net absorption. The up-tick in demand resulted in a significant decrease in the overall availability rate, which declined by 1.8 pp relative to the fourth quarter of 2015. Silver Spring Metro Plaza landed several leases during the first quarter including one signed by Merchant Link, which expanded its footprint by 25,857 sf at Silver Spring Metro Plaza I. At Silver Spring Metro Plaza III, Senior Service America, Inc. leased 21,155 sf and Nexight Group took 9,010 sf. Outlook Washington, DC’s office market still sits firmly on the side of the tenant and office fundamentals will reflect that as the year progresses. Landlords will need to continue to renovate and reposition their product to meet demands for trophy-quality space and will be required to spend cash up front to attract the larger, long-term tenants they desire. Apart from a few select cases, most tenants will downsize and consolidate to save money on real estate costs and will look to lock down a new deal up to five years before their lease expiration date to take advantage of a favorable market with generous concession packages. Office leasing conditions are expected to remain tenant-favorable in Northern Virginia for the medium to long term as there is little to suggest that the pendulum is swinging back in the landlord’s favor. While the local economy has shown signs of improvement in recent quarters, overall availability remains elevated, intensifying competition among landlords to attract what little activity exists in the marketplace. Tenants will remain firmly in the driver’s seat as concessions are expected to remain at or near record highs throughout the balance of 2016. Suburban Maryland’s market fundamentals will continue to soften throughout the remainder of the year, sustaining the current tenant-friendly leasing environment seen throughout much of the region. The supply of available space is expected to outpace demand for the near to medium term, putting downward pressure on asking rents. Availability Rate Comparison Rental Rate Comparison Major Transactions $57.48 $55.95 $54.08 $51.63 $51.19 $47.35 $46.73 $42.18 $41.50 $41.47 $38.85 $32.74 $31.86 $30.63 $28.08 $27.75 $26.05 $23.28 $21.44 $0 $10 $20 $30 $40 $50 $60 Capitol Hill E End/Cnv Ctr West End CBD Washington, DC Southwest NoMa Georgetown Capitol Riverfront Uptown Arlington County US Index Alexandria Northern Virginia Montgomery Cty Fairfax County Suburban MD Ldn/Stffrd/Pr Wm Pr George's Cty ($/sf) Overall Rental Rate Comparison 8.2% 9.2% 9.7% 10.1% 11.8% 12.1% 12.5% 14.7% 15.2% 17.0% 17.2% 17.3% 18.8% 18.8% 19.6% 21.5% 22.0% 22.0% 22.7% 0% 5% 10% 15% 20% 25% Georgetown NoMa Southwest CBD Capitol Hill West End Washington, DC Ldn/Stffrd/Pr Wm E End/Cnv Ctr US Index Uptown Montgomery Cty Suburban MD Capitol Riverfront Pr George's Cty Northern Virginia Fairfax County Alexandria Arlington County (%) Availability Rate Comparison

4. Savills Studley Report | Washington, DC 04 Submarket Total SF (1000's) Last 12 Months 5 Year Average This Quarter % Change from Last Qtr. Last Quarter Year Ago This Quarter pp Change from Last Qtr. (1) Last Quarter Year Ago This Quarter % Change from Last Qtr. Last Quarter Yr Ago Capitol Hill 5,776 363 339 680 30.3% 522 753 11.8% 2.7% 9.0% 13.0% $57.48 -0.5% $57.75 $51.75 Capitol Hill - Class A 2,136 303 158 294 -0.2% 295 367 13.8% 0.0% 13.8% 17.2% $60.33 0.1% $60.27 $54.45 Capitol Riverfront 5,343 347 N/A 1,005 -2.3% 1,029 844 18.8% -0.4% 19.2% 15.8% $41.50 1.3% $40.98 $40.99 Capitol Riverfront - Class A 4,088 344 N/A 589 -3.9% 613 624 14.4% -0.6% 15.0% 15.3% $44.40 2.8% $43.19 $42.41 NoMa 12,001 1,128 N/A 1,109 9.1% 1,016 1,479 9.2% 0.8% 8.5% 12.3% $46.73 1.8% $45.89 $45.73 NoMa - Class A 9,661 1,069 N/A 736 6.9% 689 1,013 7.6% 0.5% 7.1% 10.5% $51.64 1.2% $51.04 $52.21 East End/Convention Center 42,972 4,859 3,486 6,545 0.0% 6,548 6,536 15.2% 0.0% 15.2% 15.2% $55.95 2.3% $54.70 $53.27 East End/Convention Center - Class A 29,821 3,613 2,572 4,705 -2.5% 4,825 4,642 15.8% -0.4% 16.2% 15.6% $60.34 2.2% $59.02 $58.19 Central Business District 38,664 3,420 3,031 3,898 -4.0% 4,060 4,650 10.1% -0.4% 10.5% 12.0% $51.63 1.5% $50.89 $50.14 Central Business District - Class A 14,572 2,401 1,613 1,529 -6.4% 1,634 2,042 10.5% -0.7% 11.2% 14.0% $57.30 0.1% $57.22 $57.30 West End 3,863 105 130 468 -12.4% 535 601 12.1% -1.7% 13.8% 15.6% $54.08 1.9% $53.09 $53.67 West End - Class A 2,646 85 106 468 -12.4% 535 503 17.7% -2.5% 20.2% 19.0% $54.08 1.9% $53.09 $53.67 Georgetown 2,743 196 199 226 4.9% 216 276 8.2% 0.4% 7.9% 10.1% $42.18 3.3% $40.82 $41.17 Georgetown - Class A 1,190 20 85 57 20.6% 47 60 4.8% 0.8% 3.9% 5.0% $46.21 1.0% $45.75 $44.62 Southwest 12,852 1,034 1,063 1,243 0.2% 1,240 1,499 9.7% 0.0% 9.6% 11.7% $47.35 0.1% $47.31 $47.26 Southwest - Class A 8,813 572 655 829 0.1% 828 916 9.4% 0.0% 9.4% 10.4% $48.71 -0.7% $49.06 $49.00 Uptown 6,303 225 386 1,081 -7.4% 1,168 1,156 17.2% -1.4% 18.5% 18.3% $41.47 1.6% $40.80 $40.93 Uptown - Class A 602 8 47 84 14.7% 9,661 37 14.0% 1.8% 12.2% 6.2% $46.00 0.8% $39.79 $46.82 Fairfax County 100,889 4,783 6,554 22,210 -1.1% 22,463 22,442 22.0% -0.2% 22.3% 22.2% $27.75 -0.7% $27.96 $27.98 Fairfax County - Class A 60,660 3,500 4,631 14,332 -3.6% 14,869 15,034 23.6% -0.9% 24.5% 24.8% $29.84 -0.4% $29.97 $30.01 Alexandria 15,495 951 904 3,414 2.0% 3,863 3,539 22.0% 0.4% 21.6% 22.8% $31.86 0.1% $31.84 $30.95 Alexandria - Class A 7,868 114 456 1,241 -0.1% 1,242 1,288 15.8% 0.0% 15.8% 16.4% $30.62 0.7% $30.40 $30.07 Arlington County 37,176 2,864 2,577 8,436 -2.9% 8,687 8,909 22.7% -0.7% 23.4% 24.0% $38.85 0.1% $38.80 $38.90 Arlington County - Class A 22,364 1,503 1,632 5,179 1.0% 5,129 5,817 23.2% 0.2% 22.9% 26.0% $40.27 0.5% $40.05 $40.10 Loudoun/Stafford/Prince William 14,993 1,295 675 2,207 -1.7% 2,246 2,459 14.7% -0.3% 15.0% 16.4% $23.28 -1.7% $23.69 $23.39 Loudoun/Stafford/Prince William - Class A 6,202 1,087 459 1,211 -3.7% 1,258 1,319 19.5% -0.8% 20.3% 21.3% $25.34 -1.8% $25.81 $25.52 Montgomery County 60,026 2,130 3,299 10,414 1.1% 10,300 9,784 17.3% 0.2% 17.2% 16.3% $28.08 -1.2% $28.43 $27.82 Montgomery County - Class A 31,570 1,200 2,289 6,209 2.6% 6,051 5,553 19.7% 0.5% 19.2% 17.6% $29.46 -0.1% $29.51 $29.65 Prince George's County 23,802 1,053 925 4,663 -2.0% 4,760 5,091 19.6% -0.4% 20.0% 21.4% $21.44 -2.6% $22.00 $20.51 Prince George's County - Class A 11,534 683 628 2,999 -1.1% 3,031 3,225 26.0% -0.3% 26.3% 28.0% $21.50 -1.2% $21.75 $20.56 Washington D.C. Total 130,518 11,676 9,565 16,255 -0.5% 16,333 17,792 12.5% -0.1% 12.5% 13.6% $51.19 1.6% $50.37 $49.53 Washington D.C. Total - Class A 73,527 8,416 6,063 9,292 -2.6% 9,539 10,204 12.6% -0.3% 13.0% 13.9% $56.28 1.1% $55.66 $55.21 Northern Virginia Total 168,582 9,893 10,709 36,268 -1.3% 36,742 37,349 21.5% -0.3% 21.8% 22.2% $30.63 -0.6% $30.81 $30.67 Northern Virginia Total - Class A 97,094 6,204 7,178 21,964 -2.4% 22,498 23,458 22.6% -0.5% 23.2% 24.2% $32.37 -0.1% $32.41 $32.35 Suburban Maryland Total 80,299 3,182 4,247 15,077 0.1% 15,060 14,875 18.8% 0.0% 18.8% 18.5% $26.05 -1.6% $26.47 $25.24 Suburban Maryland Total - Class A 40,215 1,883 2,941 9,207 1.4% 9,082 8,779 22.9% 0.3% 22.6% 21.8% $27.02 -0.3% $27.11 $26.35 Greater Washington D.C. Total 379,399 24,751 24,521 67,600 -0.8% 68,135 70,017 17.8% -0.1% 18.0% 18.5% $35.15 0.0% $35.15 $34.37 Greater Washington D.C. Total - Class A 210,836 16,502 16,182 40,464 -1.6% 41,119 42,441 19.2% -0.3% 19.5% 20.1% $37.29 -0.2% $37.38 $36.49 Leasing Activity Available SF Availability Rate Asking Rents Per SF @SavillsStudleywww.savills-studley.com Please contact us for further information (1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded. The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2016 Savills Studley Savills Studley Washington, DC 1201 F Street, N.W., Suite 500 Washington, DC 20004-1225 (202) 628-6000 Washington, DC Region Co-Branch Managers Thomas M. Fulcher Jr., EVP - [email protected] Lois A. Zambo, Vice Chairman - [email protected] Richard P. Rome, EVP - [email protected] David Lipson, EVP - [email protected] William P. Quinby, EVP - [email protected] Gary Stein, EVP - [email protected] Savills Studley Suburban Washington 1600 Tysons Blvd. Suite 200 McLean, VA 22102-4865 (703) 442-9000

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