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

MID-YEAR 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.

Rendering of Perseus Realty’s planned conversion at 200 Stovall Street

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ALEXANDRIA DEVELOPMENT UPDATE

UPDATES ON DEVELOPMENT IN ALEXANDRIA: WEST END FEATURE

• Rent growth – increase of over 5% for new office product but remaining flat for existing Class A and B product.

• New construction wins over all catagories of real estate with office absorption growth since 2010. Flex/industrial and office are leading development, absorbing 8 million and 7 million square feet, respectively.

• Office vacancy is beginning to stabilize regionally at 16% while flex/industrial continues to be the hotbed for leasing demand, followed by multi-family and retail.

• Office vacancy within ½ mile of metro is 14.8% with 1.2% rent growth in these areas.

• Asking rents for new construction have grown but stabilized for all other classes, indicating a demand for newer construction.

• Office relocations out of D.C. continue, as tenants see the value opportunity across the river to gain space efficiencies and newer construction at more affordable rates.

• The market for industrial space is slow and steady, with a very low vacancy rate regionally at 6.9%, indicating that local inventory is diminished.

ALEXANDRIA OFFICE UPDATE

Regional Office Trends and Forecasts

ALEXANDRIA OFFICE MARKETSource: AEDP, Cushman, GSA

Alexandria Office IndicatorsChange from Year-End 2016

Vacancy

Net Absorption

Asking Rents

The Gateway Alexandria, 4600 King Street - work began on the 5.2 acre mixed-use site in the location of the first Five Guys restaurant and former Jefferson hospital and medical offices. In late 2016, Weingarten finalized the purchase of the 585,000 SF site from Abrahamson Properties. Plans are approved for 110,000 SF of retail, including a 62,000 SF Harris Teeter, and 352 luxury apartment units including 74 affordable homes. 87,000 SF of office space will also be developed as part of the project. Development could be complete as soon as Q1 2019.

Mid-Year 2017 Mid-Year 2016 Change

Vacancy Rate 16.6% 16.5% +.1%

Rental Rate $33.19 per SF $32.56 per SF + 1.9%

Net Absorption 565,817 SF (17,142) SF 548,675

SF

Office SF Per Worker ShrinkingSource: CoStar Market Analytics

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2Monday Properties, a Rosslyn-based real estate investment firm, recently (Q2 2017) acquired the five-building Beauregard Office Park, currently occupied by tenants including Inova Health Systems, Virginia Hospital Center, the City of Alexandria, and DXC Technologies. Monday plans to upgrade 1500, 1600, 1800, and 1900 N. Beauregard Street, roughly 200,000 SF of office and redevelop 2000 N. Beauregard Street into new apartments. The properties were part of the Duke Realty portfolio that recently transferred to special servicer C-III Asset Management. The project is near shopping centers, hotels, and restaurants.

Alexandria City Public Schools embarks on its first office to school conversion at 1701 N. Beauregard Street, an office building formerly occupied by the American Diabetes Association, which moved to Crystal City several years ago. Purchase of this 100% vacant building was completed in Spring 2017 for $15,000,000 from the special servicer C-III Asset Management. The school hopes to accommodate elementary school-aged children by school year 2018-2019.

4Landmark Mall is moving forward with redevelopment plans. Howard Hughes now owns the Macy’s site and is finalizing negotiations to facilitate development on the Sears site. The mall officially closed January 31st, 2017. Howard Hughes is working to redesign the 52-acre site with the focal point entrance at the intersection of Duke St. & I-395.

5Greenhill Properties at South Pickett/Van Dorn/Edsall - Greenhill has proposed a new Coordinated Development District (CDD) of 7 parcels totaling 3.1 million SF. Plans call for a network of new streets with a mix of dense commercial, residential, and retail uses, and a new public square. A multi-modal bridge is also planned to connect the development over the train tracks to Eisenhower Ave. This is a 5 - 10 year, multi-phased plan encompassing 24 acres. Greenhill is working with the City on a concept plan, which proposes 2,400 residential units, a 150 key hotel, 300,000 SF of retail, 200,000 SF of office, and cultural/community uses.

64501 Ford Ave. - Novus Residences converted a formerly BRAC occupied defense building to their eLofts concept, a live/work building with ample community space.

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*As of 17Q1O�ce SF Per Worker

The square foot space requirement per worker has been steadily declining for the past seven years. As companies move to new, more expensive, and highly amenitized office space, tenants make up for this increased cost in a reduction in overall space per worker.

• Carlyle (9.3% vacancy) and Old Town (12.3% vacancy) continue to be Alexandria’s strongest markets because of their proximity to metro and amenities.

• Rental rates are averaging $40.86 per sf in Carlyle and $34 per sf in Old Town.

• Delivery of the NSF building in August added almost 700,000 sf of new office inventory to the Alexandria market.

• Several obsolete office buildings throughout the city are poised for conversion: plans have been submitted to convert 200 Stovall to residential and 1701 N. Beauregard to a City elementary school. There are other potential office conversions on the horizon, including 2000 N. Beauregard Street, which is currently undergoing concept plans to convert to residential.

• Northern Virginia health care companies are absorbing Class B office space, and that trend can be seen in Alexandria’s West End neighborhood. Monday properties bought the Duke Realty portfolio in the West End, with the intent to maintain and grow the health care industry’s footprint here, mixed with multi-family development.

• The Boat US headquarters at 880 S. Pickett Street is under contract to a self-storage facility. The property is expected to sell for $13.1 million.

Office Metrics by Location

Vacancy Rate(Q2 2017)

Annual Rent Growth

Since 2010

Within 1/2 mile

Mixed-Use

Northern Virginia

14.8%

1.2%

9.3%

1.8%

15.9%

0.8%

These variances in vacancy rates illustrate the trend of office users in the region, who are increasingly drawn to centrally located, amenitized buildings found near metro in mixed-use spaces.

Source: AEDP, CoStar

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ALEXANDRIA OFFICE UPDATE

OFFICE CONVERSIONS

ALEXANDRIA RETAIL UPDATE

• In 2017, eCommerce represents approximately 10% of all retail sales, indicating it is not as great of a threat to the retail market as previously thought.

• eCommerce retailers continue to move rapidly into brick and mortar stores. However, it’s hard for brick and mortar retailers to go in the other direction as many retail stores struggle to find a niche in the multichannel world.

• Online apparel retailers often offer cutting edge fashion on a more timely basis in their physical stores than traditional brand competitors thanks to their e-commerce sales allowing them to respond to and even dictate trends.

• Chipotle pioneered a concept in fast food that is being replicated across other fast-casual brands like Sweetgreen and CAVA.

• Walmart sales have been flat for 5 years, indicating waning demand for the retail giant.

• There is a growing trend in European-style food halls (sometimes known as food markets) – according to Cushman & Wakefield, the number of food halls nationally

is set to rise from 140 in 2016 to about 200 by 2019. These food halls serve as places for young entrepreneurs and food artists to test their concepts and express new ideas.

• Also trending are ‘grocerants’, or cafes within supermarkets offering more than a quick bike. They are becoming more common eating and social destinations in communities.

• Big box retailers are closing locations across the country as trends continue to shift demand away, including:

1. JC Penny closing 140 stores

2. Macy’s closing nearly 70 stores

3. Sears shutting down a combined 150 stores

• Many significant, notable retail closures have been stores in weak “C” class malls. The market is still strong for high-quality retailers in upscale malls.

• Growth brands to watch: Gap and H&M are growing rapidly, while brands including Starbucks, Urban Outfitters, and Cheesecake Factory are testing larger format locations in more productive markets and malls.

REGIONAL AND ALEXANDRIA RETAIL MARKETSources: International Council of Shopping Centers

• Asana Partners is changing retail in Old Town by injecting private investment into buildings to create sustainable, long term tenancy. They have closed on PMA Properties portfolio and more recently on a portion of Route 66’s portfolio. Old Town is Asana’s tenth location nationally.

• Their first lease announcement is with Conte Bikes at 1100 King Street.

• The developer Edens is making a mark in Old Town North, with 50,000 sf of retail coming online by late 2018. The development will be anchored by West Elm, with a focus on neighborhood serving retail blended with popular quick serve concepts.

• Retail vacancy in Alexandria is approximately 6%, while closures around the city are being quickly filled by local investors:

• Carluccio’s closed at 100 King Street but was quickly leased by the Alexandria Restaurant Partners, who will open a causal Italian concept called Mia’s Italian Kitchen.

• Hannelores bridal store site is being redeveloped with multiple uses including co-working space, South Block Juicery, and smaller pop-up shops.

• Nikell’s & Scheffler sold their business to Lori’s Table, a new restaurant.

• Caboose Café has been replaced by the Snack Bar in Del Ray.

National Retail Trends and Forecasts

Nationally, brands planning to add stores in the next year include:

Retail• Blue Mercury• Lululemon• Warby Parker• Amazon pop-up kiosks

Restaurants • Starbucks• Shake Shack• Mission BBQ• MOD Pizza• Fresh Thyme Farmers

market

Grocers• Aldi• Whole Foods• Amazon Fresh• Wegmans• LiDL

Alexandria has a long history of mixed-use development. Long before the national mixed use development craze, Old Town was a walkable community with businesses and residents existing side by side and, in many cases, within the same buildings.

In light of the current economic environment and trends among retail and office occupiers, cities must rethink their policies on commercial development and their existing commercial properties. In recent years, Alexandria has seen several significant office building use conversions, including EYA’s stunning conversion of a dated owner-occupied office building on the waterfront (pictured to the right) and Novus Residences’ revolutionary live-work e-lofts project, a transformation of an old federal government agency office building on the west end of the City. CAS Riegler renovated a building with a long history as a cotton mill, warehouse, and office into 25 high-end apartments in the heart of Old Town North. Over the past few years, three office buildings in Alexandria have been converted to residential, raising their collective value by $143 million.

Spotting this trend, City Council commissioned a study on Office Obsolescence and Conversions. This study revealed that Alexandria has some of the most flexible zoning regulations in the region when it comes to allowable uses. As the lines between home and office become more and more blurred, it is important that cities reconsider strict zoning regulations by use, and Alexandria is already ahead of the curve.

The City Council will be considering new policies in early 2018 to encourage adaptive reuse of legacy office properties. The Council intends not only to address current market conditions, but also to improve city revenues, attract residents, and reflect the large capital investments being committed by developers.

According to recent city studies, many conversion projects have had a significant net positive impact on tax revenue. Further, the investment of capital into outdated and underutilized real estate can enhance neighborhoods and surrounding property.

Several future conversions are already in the planning stages, including the transformation of 1701 N. Beauregard St.

Alexandria will continue to consider conversions that are not by-right on a case by case basis, however, a new understanding and ability to model fiscal impacts means the city is likely to be more supportive of adaptive reuse in the future.

Sources: AEDP, Newmark Knight Frank

BEFORE: 601 N. FAIRFAX ST.

AFTER: THE ORONOCO WATERFRONT RESIDENCES

Alexandria Office IndicatorsChange from Year-End 2016

Alexandria Retail IndicatorsChange from Year-End 2016

Vacancy

Net Absorption

Asking Rents

Sources: AEDP

Vacancy

Net Absorption

Asking Rents

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POP-UP RETAIL

ALEXANDRIA RETAIL UPDATE

As retail stores close locations across the country, brands are reevaluating the purpose of brick-and-mortar stores. Long-term commercial leases are becoming less common as retailers look to become nimble in a fast-paced market led by e-commerce and experiential shopping. The average length of retail leases is down significantly, and landowners are taking a hit as retailers shy away from long-term commitments. In the search for alternatives to traditional brick-and-mortar storefronts, pop-ups have become a growing trend for retailing.

Pop-ups come in a variety of forms, from providing online retailers with the opportunity to open a storefront, to bringing several brands together under the same roof in a collective pop-up, and both national and local retailers are participating. The one thing that they all have in common is that they are temporary, allowing retailers to test a market before opening a permanent store and providing an opportunity for landowners to test the potential sustainability and profitability of prospective tenants.

Over the 2016 holiday season, the Alexandria Economic Development Partnership (AEDP) sponsored the “Old Town Holiday Pop-up” at 116 King Street which featured more than 28 retail brands that co-located temporarily. Owner Jennifer Kearney Desiderio describes “the success of the pop-up is due to the freshness of the brands featured - pop-ups give an outlet to both the cutting-edge and the small guy who may not be able to provide the opportunity to touch and feel their products before buying. Additionally, the pop-up has helped identify gaps in the market, complementing the offerings in Alexandria while kicking it up a notch.”

Following a successful holiday season, the 116 King Street pop-up re-opened for the spring. Additionally, the former Hannelore’s space on N. Lee Street is now under construction and is planned to become home to a mixed-use project, including pop-up retail.

Following the success of the 116 King Street pop-up spring-line, AEDP received city funding to develop a program to facilitate pop-ups city-wide. The program will streamline the necessary approvals for opening a pop-up and align retailers with opportunities in the Alexandria market.

The goal of the program is to activate vacant storefronts, enhancing the existing vital retail community in Alexandria, and encouraging new retailers to come to Alexandria. Enhancing the existing retail community will create vibrancy and appeal to visit and revisit the city. The city will reap the benefits of employment opportunities, more tourism and spending in the city, higher sales tax receipts, and the potential to strengthen neighboring commercial property values and property taxes.

Visit new pop-ups in Q4 2017 at 104 S. Union Street and 115 S. Union Street in Old Town.

• The Washington, D.C. region added 48,300 new jobs in May 2017, below the 2017 first quarter average of 57,800. However, wage and salary employment growth increased by 1.1% between April 2016 and April 2017.

• Concern remains that the Washington region is not diversifying its economy away from the federal government to create high value-added jobs in the professional & business services sector. This sector has accounted for 23.2% of the region’s job growth since the recession, but has not increased its share of the total job base.

• An expected acceleration in federal spending, along with increases in wage and salary employment growth, consumer confidence, and retail sales suggest a positive economic outlook for the remainder of 2017.

• The Washington, DC region has seen net domestic outmigration since 2010; population growth has slowed from 1.9% in 2010 to 0.9% in 2016.

• The millennial share of the DC population has decreasesd slightly while it has grown across the rest of the country. A high cost of living and slow per capita income growth has contributed to this decline. However, DC remains the second most attractive city in the nation for millennials, considering career opportunities and amenities.

• Slow job growth has been attributed to a shortage of qualified labor in the region. Unemployment is low in the region at 3.4%, and the number of job openings is high.

ALEXANDRIA ECONOMIC INDICATORS

ALEXANDRIA ECONOMIC INDICATORS

ECONOMIC TRENDS IN THE DC REGION

Source: The Stephen S. Fuller Institute for Research on the Washington Region’s Economic Future; American University’s Kogod School of Business Greater Washington Index 2016: Millennials

Source: Bureau of Labor Statistics, Census.gov

Alexandria Economic Indicators

Change from Year-End 2016

Jobs

Median Wages

Unemployment

• The Stephen Fuller Institute for Research on the Washington Region’s Economic Future suggests that the region must deliberately invest in targeted initiatives that raises its profile as a great place to live, work, and invest.

Mid-Year 2017

Mid-Year 2016 Change

Unemployment Rate 3.0% 2.7% +.3%

Average Weekly Wages

$1,467 (Q1 2017)

$1,350 +8.6%

Job Count 93,174 (March 2017)

95,700 -2.6%

INSIDE THE 116 KING POP-UP STORE

Per capita personal income has grown relatively slowly in the D.C. region as a result of slow job growth in high-paying sectors. D.C also remains the 3rd most expensive metro area in the country.

2000-20016 2010-2015Los Angeles SF-OaklandMiami SeattlePhoenix DallasWashington, D.C. DetroitPhiladelphia ChicagoSF-Oakland HoustonBoston Los AngelesNew York MinneapolisSeattle PhiladelphiaMinneapolis BostonChicago PhoenixAtlanta AtlantaDallas MiamiDetroit Washington, D.C.

Per Capita Personal Income Growth RankSource: The Stephen S. Fuller Institute for Research on the Washington Region’s Economic Future

Professional and business services is projected to be the fastest growing sector over the next four years. Many of these will be tech-related jobs, for which there is currently a shortage of qualified labor.

Projected Job Growth, Northern Virginia 2017 - 2021Source: Transwestern

Alexandria Retail IndicatorsChange from Year-End 2016

Vacancy

Net Absorption

Asking Rents

The unemployment rate in Alexandria rose stayed essentially the same between 2016 and 2017, remaining low both in Alexandria and across the region.

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• Over 6,300 multi-family units have come online in the D.C. Metro region in 2017.

• At the end of Q2 2017, multi-family residential vacancy in the D.C region was 6.4%. This rate has stayed relatively stable since 2014.

• Apartment construction over the past 5 years has been increasingly concentrated in traditional office areas. As more people are interested in living in lively, downtown areas close to dining, shopping, and activity options, developers are building more residential options in those neighborhoods.

• Home values in the D.C. area are approximately twice the national average. Over half of millennials in the region do not believe they can afford to buy a home here, indicating high housing costs may deter younger people from making long term commitments in jobs in the D.C. area.

• High-end buildings are also facing pressure, as rent growth for the most expensive 30% of buildings has slowed since 2014, and rents have decreased for the most expensive 10% of buildings in 2016.

• The residential market in Alexandria remains strong; the average home sale price rose 4.21% from year-end 2016 to mid-year 2017. 1,575 homes have been sold so far in 2017, compared to 1,460 at the same time last year.

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ALEXANDRIA RESIDENTIAL UPDATEAlexandria Residential Indicators

Change from Year-End 2016

Units Sold

Average Days on Market

Median Sales Price

Source: CoStar Group, American University’s Kogod School of Business Greater Washington Index 2016: Millennials, Northern Virginia Association of Realtors

Residential Trends and Forecasts

ALEXANDRIA RESIDENTIAL MARKET• There is strong interest by developers in the

Alexandria multi-family residential market, with several projects under construction or in the approval process.

• The 505-unit luxury Parc Meridian building by Paradigm Companies near the Eisenhower Metrorail station delivered in Summer 2016 and is over 90% leased.

• A mixed-use development in Old Town North will feature 232 residential units developed by Gables, with a West Elm retail location achoring the project.

• Proposed residential projects include 142 multi-family units in Potomac Yard by Pulte, and the conversion of 200 Stovall Street (currently an empty office building) into 450 residential units and 26,000 SF of retail by Perseus Realty.

• 2000 N. Beauregard Street, owned by Monday Properties, is in concept to convert an office building to residential apartments.

Source: AEDP

PARC MERIDIAN BY PARADIGM COMPANIES, EISENHOWER

Source: CoStar Group

Construction of new housing in the D.C region is not keeping up with household formation. As demand continues to exceed supply, rent prices have risen faster than income since 2008.

Housing Construction & Household Formation (000s)

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