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Commercial Real Estate Market Trends in DC Metro Area

This report highlights the current trends in the commercial real estate market in the DC Metro Area, including positive absorption, sales activity, and government influence. It also discusses the recovery in Northern Virginia and suburban Maryland, as well as key factors impacting the market in 2011.

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Commercial Real Estate Market Trends in DC Metro Area

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  1. Commercial MarketNow and Then Petch Gibbons January 26, 2011

  2. Tell ‘em what you’re going to tell ‘em! Washington, DC • Positive Absorption Hit Record Levels - Occupancy Levels Increasing by 4.3 Million SF - Federal Government Activity and Spending • Sales Activity and Values Soared - The World Bank at 1225 Connecticut Ave NW for $216 Million ($900 psf) • Lots of tenants hunkering down Northern Virginia • The Tale of Two Markets; One Inside the Beltway; One Outside • Investors Lured by Financially Stable, Fully Leased, Quality Office Properties • Slow and Steady Recovery is Projected for Northern Virginia in 2011 with Tighter Markets Inside the Beltway Suburban Maryland • Bethesda Brings Suburban Maryland Office Market into Solid Recovery Mode • Government/Contractors Responsible for The Largest Transactions. • Southern Montgomery County Leads the Office Market Recovery in 2011

  3. A Record-Breaking Year for Absorption Downtown while the Suburbs turn Positive Absorption (msf) • Government Activity was Responsible for Most of the Demand in 2010 in all Markets • Private Sector Activity Led by: • Law firms (Core DC markets) • Consulting, Technology (Northern VA) • Consulting, Accounting (Suburban MD) * Overall absorption is defined as the change in occupied built space for a given period of time, including sublease space within five years. Source: Cushman & Wakefield Research 3

  4. Downtown Absorption will return to more Normal Historical Levels in 2011 and 2012 The Leasing Momentum Will Continue Into 2011, but will Taper Off During the Second Half of the Year. Employment Growth Will Begin To Pick Up in 2011 and 2012: Averages: (Over 5 yrs) DC:    1.3 msf NoVA: 1.6 msf Sub MD: 24,000 sf * Absorption (msf) * Overall absorption is defined as the change in occupied built space for a given period of time, including sublease space within five years. Source: Cushman & Wakefield Research 4

  5. Historical Available Sublease Space • The Amount of Sublease Space Declined Markedly across all Markets. • Downtown -24.1% • Northern VA -35.4% • Suburban MD -44.7% • Noteworthy Subleases Source: Cushman & Wakefield Research

  6. Top Lease Transactions Downtown Northern VA Suburban MD Source: Cushman & Wakefield Research 6

  7. Other Renewals Source: Cushman & Wakefield Research 7

  8. Vacancy Rates remained Elevated from their Pre-Recession Levels… Submarkets with low 2010 vacancy rates: Source: Cushman & Wakefield Research 8

  9. …but will Continue to Inch Down in 2011 and 2012 Very Few Construction Completions Help Vacancy Rates Tighten. In Downtown and Suburban Maryland Vacancy Rates Will Remain Well Above10-year Averages: Source: Cushman & Wakefield Research 9

  10. While Construction Deliveries Plummeted in the Suburban Markets, over 2.5 msf was Delivered Downtown Noteworthy Completions (over 350,000 sf) Source: Cushman & Wakefield Research

  11. Very few Projects are in the Pipeline Noteworthy Projects (completions through 2012) Source: Cushman & Wakefield Research

  12. Class A Asking Rents hit Bottom Downtown… Concessions begin to Contract (Only In Prime, Core Properties) Institutional Owners are Becoming Less Generous. 2010 Class A Concessions (10-yr +deals) Source: Cushman & Wakefield Research 12

  13. …and will Increase by 4-5% by 2012 in all Areas. Concession Packages will Continue to Tighten in Quality Space, Causing a Jump in Net Effective Rents in 2011 in Some Submarkets. Submarkets with Highest Class A Asking Rents in 2010: Source: Cushman & Wakefield Research 13

  14. Metro Area Historical Sales Sales Volume vs. % of Total Inventory Sold Source: Cushman & Wakefield Sonnenblick Goldman & Cushman & Wakefield Research

  15. Historical Sales Activity Source: Cushman & Wakefield Sonnenblick Goldman & Cushman & Wakefield Research

  16. 2010 Significant Office Building Sales Source: Cushman & Wakefield Sonnenblick Goldman & Cushman & Wakefield Research

  17. Metro DC Sales Volume by Buyer Type Institutional Investment Managers: INVESCO, Edge Fund Advisors Institutional Pension Funds: TIAA-CREF REITS:First Potomac Realty Trust, PS Business Parks Source: Cushman & Wakefield Sonnenblick Goldman & Cushman & Wakefield Research

  18. Trends to Watch in 2011 • Slow and steady recovery in Northern Virginia and Suburban Maryland. Downtown returns to normal. • Tenants will continue to hold occupancy costs down. • Investors widen their nets outside Downtown, but remain focused on well-located, class A product with good financials. Source: Cushman & Wakefield Research

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