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A L E X A N D R I AThe State of the Market

YEAR END 2017

This publication is part of our research and data series on the City of Alexandria. This report is released twice a year and provides the latest updates on the City’s economy, the status of different development projects, insights into the office and retail markets, and residential sales patterns. With this information, we hope to provide a comprehensive snapshot of the City of Alexandria for real estate professionals, business owners, and the general public. If you would like an update on any of this information between our major publications, please feel free to reach out to us.

ALEXANDRIA Economic Development Partnership: The Source for Commercial Real Estate News

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Contact us for information on: • Development opportunities• Office/retail vacancies• Alexandria/submarket

statistics• Questions on economic

development topics

Alexandria Economic Development Partnership

625 N. Washington St., Ste. 400 Alexandria, Virginia 22314 (703) 739-3820

WWW.ALEXECON.ORG

Rendering of StonebridgeCarras’s mixed-use project in Eisenhower East, featuring Wegmans grocery store

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ALEXANDRIA DEVELOPMENT UPDATE

UPDATES ON DEVELOPMENT IN ALEXANDRIA• Total office vacancy at the end of 2017 remains above

average at 13.6%. Office vacancy in the region has not been below 10% since 2007, however, vacancy has steadily decreased every year since 2015. The market posted about 4.5 million square feet absorbed in 2017, which is the third highest amount for the year out of all major office markets in the nation. If these high levels of absorption continue, vacancy rates will continue to drop going forward into 2018.

• Investment sales volume in the D.C. Metro Area has continued to be strong, totaling $7.33 billion by the end of 2017. This is a 12.1% increase in investment sales compared to year-end of 2016. It is important to note that an increasingly large proportion of commercial real estate investment in the D.C. Metro Area (and the nation in general) is coming from foreign investors. Midway through 2017, 9.7% of all CRM investments over $5 million in the D.C. Metro Area were from foreign investors.

• Office construction levels are increasing, with about 11.4 million square feet of office under construction in the D.C. Metro Area at the end of 2017. This is a decrease from the peak level of 20.6 million square feet reported in 2007,

but it is higher than the average level of annual office construction (8.3 million square feet). These construction projects averaged 67% pre-leased upon delivery.

• Tenants continue to gravitate towards high quality buildings, and landlords of older or obsolete product are under increasing pressure to renovate their buildings to compete with new class A buildings. Since 2010, 28.6 million square feet of class B office product was removed from overall inventory, and of that number, 54% (or roughly 14.5 million square feet) was converted into class A space.

ALEXANDRIA OFFICE UPDATE

Regional Office Trends and Forecasts: The D.C. region is on the road to recovery

ALEXANDRIA OFFICE MARKETSource: Transwestern, CoStar Group

Alexandria Office IndicatorsChange from Mid-Year 2017

Vacancy

Net Absorption

Asking Rents

StonebridgeCarras is finalizing plans for a 1 million-square-foot, 5-acre mixed-use project on Blocks 4 and 5 of the former Hoffman Town Center (see GrowALX Development Map). The project will include up to 1,000 residential units including condominiums, apartments, and senior housing. The development will be anchored by an 84,000 square foot Wegmans, along with 120,000 square feet of additional retail on the first floor and over 40,000 square feet of commercial space on the second floor. It is anticipated that the development could include a gym, daycare, medical facilities, and co-working space.

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Direct Vacancy Rate: 15.5% This represents a 1.9% decrease from the fourth quarter 2016. Total vacancy (which includes sublets) within the City was 16.3%, which has remained unchanged since the fourth quarter 2016. Part of the direct vacancy decrease can be attributed to the removal of 200 Stovall Street from the office inventory, due to its conversion to a residential property.

Source: CoStar Group

Positive Absorption: 587,886 square feetThe National Science Foundation is the primary contributor of this absorption, fully occupying its newly completed headquarters at 2415 Eisenhower Ave in October.

Largest Lease Transaction: USDA, 131,000 square feet

The largest lease transaction in the City in 2017 was a federal government relocation by the USDA, who signed a 15-year lease at 1320 Braddock Place for 131,000 square feet. The building will be nearly 100% leased at the time of occupancy, slated for April 2018. The USDA is moving to this new location in part due to its proximity to Metro, and will leave its long-time location at 3101 Park Center Drive in the West End.

Average Office Rents Rise in Traditionally Strongest Submarkets

Carlyle rents increased from $39.52 per sf to $40.32 per sf and Old Town rents rose from $32.56 per sf to $32.76 per sf. Average office rents in Carlyle have increased 30.4% over the last five years, which is the greatest five year increase of any submarket within the City.

Immediately south of Blocks 4 and 5, Perseus-TD.C. has begun converting the 610,000-square-foot office building at 200 Stovall Street into a nearly 700,000 square foot mixed use development. It is slated to consist of 520 residential units, 26,000 square feet of retail, and about 20,000 square feet of amenity space. The building’s bottom three floors are planned to be partially converted into 250 resident parking spaces.

Planning continues to move forward for Carr Properties’ redevelopment of the Crowne Plaza Hotel. The existing hotel will be converted into either 153 apartment units or 97 residential condominiums, and 41 townhomes will be built on the hotel’s existing parking lot. A 7,000-square-foot arts facility will also be built on the parking lot, which will serve as the new location for a professional theater company.

Development in Potomac Yard continues to ramp up. The new headquarters for the National Industries for the Blind remains under construction, with a delivery date slated in the second quarter of 2018. Earlier in the year, the project became 100% leased upon delivery, with Kaiser Permanente signing a pre-lease to occupy the remaining 42,000 square feet in the building. In addition, the American Physical Therapy Association has proposed a plan for a new 110,000-square-foot headquarters adjacent to the NIB’s new building that is currently under review by the City. Both organizations were originally located within the City and have opted to construct new headquarters to remain within Alexandria.

City Council has approved changes to the Braddock Metro Station Small Area Plan to allow the development of a new Sunrise Senior Living facility. The concept plan would involve the redevelopment of the office building located at 400 N Washington Street, and the facility would consist of 91 units.

IDI Group is moving forward with plans to build an 18-unit luxury multifamily building at 211 Strand Street on a currently vacant parking lot and retail center. The concept plan calls for 11,000 square feet of first floor retail. IDI Group also plans to add two additional multifamily units to the adjacent 205 Strand Street.

7Formerly occupied by the American Diabetes Association, 1701 N Beauregard Street was purchased by the Alexandria City Public Schools in April 2017 for conversion into an elementary school. Construction is underway and is to be completed in time for the 2018-2019 school year. This will be Alexandria’s first school conversion project.

Class B/C Office Inventory Removed, Washington Metro Area 2010 - 2020

Source: Transwestern, CoStar Group

Demolished to build new office

Renovated to Class A

Renovated to another property type

1320 Braddock Place, where the USDA plans to move into 131,000 square feet of office directly adjacent to the Braddock Road Metro Station.

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ALEXANDRIA OFFICE UPDATE

REGIONAL OFFICE TREND: COWORKING

ALEXANDRIA RETAIL UPDATE

• In 2018, vacancies are expected to increase to 12% due to a jump in store closures, but it is expected that year-end vacancies will decline to 11%.

• In store sales are forecasted to grow 2.1% and e-commerce sales are expected to grow 15%. This is the same level of e-commerce growth experienced in 2016 and 2017.

• The major players of the online sales market continue to dominate; Amazon finished out the year representing 40% of all online sales. Although they control a much smaller share of the market by comparison, Walmart saw its online sales jump 50% in 2017. Walmart’s success can in part be attributed to their strategy of providing discounts to online shoppers who pick up their purchases in stores.

• Demand for well-located retail in urban and suburban markets remains high, particularly for second generation restaurant space over 2,500 square feet. This indicates that tenants are willing to wait for the right space rather than settle for a sub-optimal location.

• Retailers are demanding shorter term leases (3-5 years);

10-year leases are becoming less common in favor of flexibility.

• Mixed-use developments continue to be popular. The accepted formula for success in a mixed-used environment is trending towards 70% food, entertainment and lifestyle experiences, and 30% retail shops.

• 2017 saw increased focus on experiential retail concepts and event marketing in brick and mortar space. A survey by Buxton Real Estate Analytics revealed that 65% of brands interviewed believed live events and experiential programs (such as educational classes) are directly related to sales, and that 70% of event attendees become regular customers. Such programs are increasingly common, as they provide first-hand and often personalized experiences to customers that cannot be replicated in purely online marketplaces.

• Retail during the 2017 holiday season showed a historically strong performance, with $691.6 billion in total sales and a 5.5% increase in sales over the same period in 2016.

REGIONAL AND ALEXANDRIA RETAIL MARKETSources: American Marketing Association, Buxton, Cushman & Wakefield

• An increase in the vacancy rate (5.3%) along King Street follows the Asana Partners’ acquisition of PMA Properties portfolio. Middle King Street (7.5%) where Asana has a larger concentrated portfolio appears slower to lease. Asana’s approach is to thoughtfully curate a balanced mix of tenants that will complement one another. Newcomers will include Warby Parker, Conte’s Bike Shop, and drybar.

• Visa reports that the City of Alexandria collects the majority (71%) of its consumption tax revenue (restaurant, lodging and sales) from non-residents, especially by those visitors who live within the D.C. area. Data indicates 43% of consumption taxes were paid by visitors from the D.C. area but not from Alexandria, and 28% were paid from visitors from outside the D.C. area.

• The National Science Foundation lease in Eisenhower East has created demand for retail. CVS and Dunkin Donuts have leased space within the NSF facility, while Wegmans will be the anchor tenant of a large mixed use development by StonebridgeCarras next door. Construction is expected to begin mid-2018.

• Carlyle Vitality featured highly successful pop-up beer gardens, holiday festivals, coffee cafes, painting in the park as well as a cinema series and exercise classes. More pop-up events are expected in 2018 and beyond.

National Retail Trends and Forecasts

Restaurant concepts continue to show a large interest in Alexandria. New concepts from local restaurateurs include: • Urban 116 – 116 King, owners of Mason Social • Sancerre - 1725 Duke Street, owners of Grand Cru• Hummingbird - Hotel Indigo, owners of Society Fair,

Eamonns• Mia’s Italian Kitchen and Theismann’s, Alexandria

Restaurant Partners• Sweet Fire Donna’s (expansion), Tequila and Taco,

Whiskey & Oyster - Homegrown Restaurant Group

One of the most significant trends in the office real estate market is the increasing prevalence of coworking space. Coworking spaces within the D.C. Metro Area have rapidly expanded over the last few years, with coworking providers occupying about 2 million square feet of office space by the end of 2017. This is a dramatic increase from 2010, when coworking providers only occupied roughly 751,000 square feet across the D.C. region. Coworking space has become more enticing to office landlords, particularly those who own older buildings that may lack the amenities of new construction projects. About 77% of coworking space in the D.C. area is currently located within older Class A office buildings that have been recently renovated.

It is also becoming increasingly common for agreements to be put in place to allow other, more traditional tenants that share a building with coworking providers to be given the opportunity to share the conference areas and other amenities of a coworking space, or even use it as overflow space for their employees. Overall, coworking is a relatively young real estate trend that has exploded over the last few years, and has introduced a new, more collaborative and free-flowing office environment that is making a rapid expansion into the D.C. Metro Area, including in the City of Alexandria.

Coworking in Alexandria

Alexandria has a burgeoning coworking market, particularly with the upcoming addition of ALX Community at 106 North Lee Street. The former location of Hannelore’s Bridal, Founder’s Hall LLC purchased the building in March 2017. The building is undergoing a full renovation, and will host the ALX Community coworking space on the second floor, along with a juice bar, yoga studio, and a pop-up retail space on the first floor. For more information see: www.alxcommunity.com.

Some coworking spaces have formed partnerships with training and educational services to improve the overall experience for their customers and to help target specific types of users. Capitol Post, a local coworking provider located at 625 North Washington Street, hosts Bunker Labs D.C., a non-profit, veteran-led

organization designed to educate and mentor military veterans and spouses on entrepreneurship and careers. These two organizations work hand in hand to provide veterans space to operate their businesses, as well as additional resources to ensure that their business continues to thrive. For more information see: www.thecapitolpost.com.

The e-lofts community is a full live-work-play environment that consists of 200 live-work units, where tenants can run their businesses and live under the same roof, while having access to all of the amenities of an office building. E-lofts is located at 4501 Ford Avenue in the West End, which was converted from an aging office building in 2016. By offering apartments, pure coworking space, and hybrid live/work lofts, e-lofts caters to a wide variety of users who would normally shy away from leasing standard office or residential space. The community is an example of creative repositioning that is becoming more common as older office buildings outside of downtown areas can no longer compete with more ideally located, newer office product. For more information see: www.e-lofts.com/.

In addition to locally based coworking providers, Alexandria is also home to a number of providers with a regional or even national presence. GSD Work Club at 2312 Mt Vernon Avenue in Del Ray hosts both coworking space as well as rent-able conference rooms and event space. Chicago-based Level Offices has a location at 950 North Washington Street that features amenities including an espresso bar and local beer on tap. Carr Workplaces also has two coworking locations within Old Town, one at 1765 Duke Street and another at 1800 Diagonal Road.

Sources: GCUC

Alexandria Office IndicatorsChange from Mid-Year 2017

Alexandria Retail IndicatorsChange from Mid-Year 2017

Sources: Visit Alexandria

Other Restaurants Coming Soon

Vacancy

Net Absorption

Asking Rents

Potomac YardCAVAFive Guys&Pizza

Old TownBDoughnutTandoori NightsBrut Wine BarMisha’s Coffee (waterfront)

Del RaySecret Garten RestaurantCharlie’s on the Avenue

Old Town NorthOak SteakhouseWest AlexandriaGlory Days GrillSmoking Kow BBQ

Vacancy

Net Absorption

Asking Rents

Rendering of ALX Community, a coworking space with a juice bar and yoga studio at 106 N. Lee Street

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POP-UP RETAIL

ALEXANDRIA RETAIL UPDATE

Operating under the AEDP Pop-up ALX program, Alexandria has capitalized on the pop-up retail trend by hosting six successful pop-up shops with clothing, food, and art between November 2016 and January 2018. Pop-up ALX is an initiative supported by the City of Alexandria to facilitate pop-ups citywide, streamline the necessary approvals for opening a pop-up, and to align retailers with opportunities in the Alexandria market.

A worldwide trend, pop-ups can last anywhere from a few hours to several months and are intended to create excitement in the retail market and drive foot traffic and sales by offering customers a short window of opportunity to purchase items that are otherwise not available in the local market. In addition to being a boon for the retailers, communities of all sizes use pop-ups to fill vacant storefronts in order to attract longer-term tenants and to keep areas with storefront vacancies lively.

Over the last fourteen months, Alexandria’s main shopping corridors have been enlivened by pop-ups. The 116 King Pop-up shop brought new energy to lower King Street during their three iterations – the 2016/2017 and the 2017/2018 holiday shopping season and again in summer 2017 with seasonal offerings. Also during the holiday 2017/2018 season, Scrooge’s Sweater Emporium had a vintage Christmas sweater pop-up at 115 S. Union Street. The arts have had a strong

presence at 104 S. Union Street, which has served as an art gallery for several artists with more planned for 2018. As for food, Salt Bagel popped-up in the Dairy Godmother space during the winter months when the Del Ray custard shop was closed for the season.

The successful effects of these pop-up shops have been increased vibrancy in the retail scene, an opportunity for brands to test the Alexandria market, and a way to help entrepreneurs expand their business presence with a brick and mortar store. Moving forward in 2018, there will be a three-tiered approach to growing the Pop-up ALX program. First, AEDP is actively seeking retail space from landlords and property managers that is available for rent on a short term basis. These spaces will be marketed as part of the Pop-up ALX program to potential pop-ups to demonstrate Alexandria’s variety of spaces to accommodate their physical requirements. Second, AEDP will be increasing regional marketing efforts to businesses that are interested in opening an additional location or their first brick and mortar in our area. Third, the response from the Alexandria community to pop-up concepts and the entrepreneurs has been exhilarating. AEDP will provide a means for the community to get involved in the pop-up program and offer ways for Alexandrians to donate their time and talent to the program. All of this information and more can be found on the Pop-up ALX program website - www.growalx.com/popup/.

• The Washington D.C. region added 50,900 jobs in 2017, which is lower than the 55,600 new jobs added in 2016. This has generated a tepid 1.5% job growth rate for the D.C. region. The job growth rate is predicted to continue to slow, with an average of 40,300 jobs per year added to the D.C. region through 2021.

• The Washington D.C. region’s unemployment rate decreased to 3.7% in 2017, which is the 9th lowest unemployment rate compared to the nation’s 24 largest metro regions. This rate is unchanged from what was reported in 2016.

• The primary drivers of job growth in the D.C. region continue to be various service industries. The strongest job sector was the education and health services sector, which added about 15,000 jobs to the region in 2017.

• The federal government continues to downsize in the D.C. region, with roughly 4,200 positions removed in 2017. However, this loss was partially mitigated by continuing job growth within state and local governments.

• Defense contract awards within the region are down 28% compared to their peak levels reported in 2011. Despite this overall decrease, the volume of federal cybersecurity contract awards has more than doubled since 2011. Northern Virginia averages a 33% annual share of all cybersecurity contract awards nationally and will continue to benefit from the steadily increasing importance of the cybersecurity sector.

• The Stephen S. Fuller Institute for Research on the Washington Region’s Economic Future projects that higher wages, stimulus due to the new federal tax law, and high consumer confidence (among other factors) will drive a strong U.S. economy in 2018. However, there is still a need for the D.C. region to pivot away from economic dependence on the federal government in order to maintain strong private sector growth beyond 2018.

ALEXANDRIA ECONOMIC INDICATORS

ALEXANDRIA ECONOMIC INDICATORS

ECONOMIC TRENDS IN THE D.C. REGION

Source: Delta Associates, JLL Research, The Stephen S. Fuller Institute for Research on the Washington Region’s Economic Future

Source: Bureau of Labor Statistics

Alexandria Economic Indicators

Change from Mid-Year 2017

Jobs

Median Wages

Unemployment

Year End 2017

Year-End 2016

Change

Unemployment Rate 2.6% 2.8% -.2%

Average Weekly Wages

$1,389(Q2 2017)

$1,423 -2.39%

Job Count 94,831(June 2017)

94,885 -0.06%

Alexandria Retail IndicatorsChange from Mid-Year 2017

The unemployment rate in Alexandria remained essentially unchanged between 2016 and 2017, remaining low both in Alexandria and across the region.

ALEXANDRIA RETAIL OPENINGS & CLOSINGS

TRENDING• Breweries• Cideries • Trampoline Parks• Bounce Houses• Swim Schools

OPENINGS• Penny Post• CVS at NSF• Goldfish swim school• Forge Industrial Works• Twist Boutique• American Field

CLOSURES• Brueggers Bagels• Burger Fi• BGR• Hunting Creek Steakhouse• Geranio Restaurant• La Cuisine• Duchess M• Pho Saigon• Nine West • Coco Blancoa• Fireflies Restaurant• Nichells & Scheffler

Payroll Job GrowthWashington, D.C. Metro Area, 12 months ending November 2017

Source: Delta, BLS

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

# of Jobs

Education & Health Services

Professional & Business Services

Leisure & Hospitality

Trade, Transportation & Utilities

Other Services

Mining, Logging & Construction

State & Local Government

Financial Activities

Manufacturing

Information

Federal Government

The primary drivers of job growth in the D.C. region continue to be various service industries. The strongest job sector was the education and health services sector, which added about 15,000 jobs to the region in 2017.

D.C. Metro Area Unemployment RateSource: Bureau of Labor Statistics

Vacancy

Net Absorption

Asking Rents

2.4%3.0% 2.8% 2.7% 2.8%

3.2%3.7%

6.4%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

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Interior of Penny Post, a paper goods store in Old Town, opened in October 2017

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• Over 14,500 multi-family units delivered in the D.C. Metro region in 2017.

• At the end of the fourth quarter 2017, the vacancy rate of multifamily units within the Washington D.C. Metro region was 6.3%. This is slightly above the five year average of 6.1%.

• Due to large amounts of construction deliveries within the region resulting in a high amount of supply within the residential market, apartment rent growth has been very low over the last few years. According to Delta Associates, the 36-month development pipeline for apartment units in the region remains high, at nearly 35,400 units. Because of continued, consistent deliveries, apartment rents will remain stable in the region for the foreseeable future.

• The demand for Class A apartments in the region remains historically high, but it has begun to slow down since its peak level in 2015. Roughly 13,200 apartments were newly occupied in 2015, whereas about 10,600 units were newly occupied in 2017. Despite this decrease, average annual demand is expected to remain above 10,000 units for the next three years.

• The median housing sales price in the Washington Metro Area has increased to $425,000 (as of

November 2017), which is the highest November price recorded in the last decade. This is also the fourteenth consecutive month of year-over-year housing price increases, which indicates a stable and strengthening regional housing market.

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ALEXANDRIA RESIDENTIAL UPDATEAlexandria Residential Indicators

Change from Mid-Year 2017

Units Sold

Average Days on Market

Median Sales Price

Source: Delta Associates

Residential Trends and Forecasts

ALEXANDRIA RESIDENTIAL MARKET

• The Alexandria residential market finished 2017 with a 4.9% vacancy rate, which is below the 5 year average of 5.8%.

• The Alexandria residential market continues to see steady growth in sales indicators for single family homes and condominiums.

Source: Delta Associates, Northern Virginia Association of Realtors

Source: Delta Associates

After a high in 2010, rent growth in the D.C. area has stabilized and even experienced slight negative growth in recent years. This has been accompanied by an increase in the residential development pipeline across the region.

36-month Apartment Pipeline and Rent Growth, Washington, D.C. Metro Area

-4%

-2%

0%

2%

4%

6%

8%

10%

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

36 Month Pipeline Rent Growth

Long-term Average Annual Rent Growth =

3.9%

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2017 2016 ChangeAverage home sold price $554,150 $528,724 + 4.8%

Average sold price, single family homes $766,072 $717,627 + 6.7%

Average sold price, condominiums $347,668 $326,930 + 6.3%

Total units sold 2,579 2,433 + 6.0%Average days on the market 42 51 - 17.7%

Alexandria Residential IndicatorsSource: Northern Virginia Association of Realtors

Rendering of The Strand, an 18-unit luxury multifamily building at 211 Strand Street with 11,000 square feet of first floor retail. IDI Group also plans to add two additional multifamily units to the adjacent 205 Strand Street.