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TRANSCRIPT
1/22/2018
1
Office observationsMetro DC Q4 2017
The Metro Washington office market posted 117,299 s.f. of occupancy losses in 2017, shifting occupancy close to a historical low (83%). The
stagnancy in the market in 2017 is not new: the broader market has posted less than 1 m.s.f. of occupancy gains for seven years in a row and
in nine of the past 10 years. Further, while supply held steady through 2014, levels have begun to pop recently: Q4 construction levels (12.4
m.s.f.) reached their highest point since 2008. The forecast broadly is not likely to shift greatly from today as slower demand caused by limited
near-term lease expirations, limited economic diversification outside of the core government and contractor drivers and a dysfunctional
Congress will keep supply-demand fundamentals relatively flat. This market environment will fuel limited rent growth and the continued
escalation of concessions in the majority of locations and product types. Market segments that will go against the grain and cause challenges for tenants include the Bethesda-CBD, parts of Rockville Pike, the emerging
eastern markets of DC and new construction along the Silver Line in Northern Virginia.
John SikaitisManaging Director, Research
1/22/2018
2
A market of some winners and more losers
Emerging market vacancy will drop
below 10% in 2019; rents will grow as
demand diversifies and the feds will face
some rent sticker shock ahead
DC
VA
The Bethesda construction pipeline
just broke ground and already 40% of
the space is preleased with rates
approaching $70 p.s.f. FS
MD
Source: JLL Research
Vacant space within the Class B&C core market has dropped 20% since Q1 2014
and rents have jumped 9%; more of
the same will follow in 2018
5.5 m.s.f. of core Trophy / A space is under development with preleasing of
46%. Rents will drop, but construction could
continue as only 4 buildings have top-
down availability
Vacancy in the core Trophy / A space
heads to 20%, fueling continued record
concessions, which are approaching the $150 p.s.f. TI mark with 20 months of
abatement (15 yrs)
As Bethesda Trophy rents establish
records, rent growth will trickle down to
the B market, which along with traffic
and parking, could fuel tenant move-
outs
With NoBe vacancy levels along
Rockville Pike approaching 25%,
this market segment will benefit most
from Bethesda-CBD migration
Vacancy across the market hit a record
high in Q4 at 20.9%; only two major
submarkets (Old Town & Reston) posted
vacancy below 15%, creating opportunity for nearly all tenants
Metro is king as Metro-accessible
office space commands a 34% rent
premium to non-Metro-accessible
buildings. In Tysons, that rent premium is
more than 47%
Absorption is likely to jump in Rosslyn in
2018 due to expected move-ins, yet, vacancy at the extremes of RB remain at 29%
Drive-up office park vacancy rates have increased from 4.9% in 2000 to 21.8% in
2017 with some of the most exposed markets approaching 35-45%
PGC vacancy has fallen 28% since Q2
2015. With emerging markets in DC establishing new pricing highs, look here as a release valve for the feds
4Source: JLL Research, U.S. Bureau of Labor Statistics
Metro DC employment and unemployment
48,900 jobs were added over the past 12 months, 19% higher than the rate of growth in November 2016 and 14% higher than the average monthly job growth since January 2013
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
-100.0
-50.0
0.0
50.0
100.0
150.0
Un
em
plo
yme
nt
rate
(%
)
12
-mo
nth
ne
t ch
an
ge
(th
ou
san
ds) Annual employment change, measured
monthly 48,900 jobs
3.6% unemployment
1/22/2018
3
5Source: JLL Research, U.S. Bureau of Labor Statistics
Metro DC employment vs. office occupancy
Despite 289,900 jobs added across the region since 2009, only 1.4 m.s.f. of occupancy gains have been realized, equating to 20 s.f. for every job added
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
12
-mo
nth
% c
ha
ng
e
Metro DC employment change Metro DC occupancy change
0%
1.5%
• Law firms: 24% giveback• Government: 16% giveback• Contractors: 21% giveback
6Source: JLL Research, U.S. Bureau of Labor Statistics
Net absorption per job
Despite moderate job creation, each new office job created in Metro DC today is generating minimal or no net absorption
0
500
1000
1500
2000
2500
3000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Ab
sorp
tion
pe
r jo
b a
dd
ed
(s.
f.)
286s.f. per job added
pre-2010 20s.f. per job added
since 2009
289,900Jobs added since 2009
1/22/2018
4
7
Metro DC office clock – Q4 2017
Source: JLL Research
Peakingphase
Fallingphase
Risingphase
Bottomingphase
CBD, Capitol Crossing
Capitol Hill
Georgetown, I-270 Corridor
East End
West End, Frederick County, Silver Spring
Upper Northwest, Springfield
The Wharf, Bethesda CBD, Chevy Chase
Downtown core markets are approaching peak due to oversupply; suburban transit-oriented markets are tightening and will see more development, while suburban off-transit markets are soft
Southwest, Loudoun County
Prince George’s County, Rock Spring Park
Ballpark, Toll Road
Fairfax Center
Crystal City, Old Town, Prince William County
Washington, DC
Northern Virginia
Suburban Maryland
NoMa, RB Corridor, Tysons, Rockville Pike
Route 28 South
Dupont-Logan-Shaw
METRO DC, Merrifield
8
Metro DC office leasing by footprint
Despite increased frequency of expansions and growth in certain sectors, 1/3 of all leases involve contractions in Q4
Source: JLL Research
56.0%
45.0%
42.0%
33.0%
20.0%
18.0%
0.0%
11.0%
19.0%
29.0%
17.0%
50.0%
46.0%
33.0%
36.0%
29.0%
50.0%
30.0%
36.0%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Finance and real estate
Contractor
Law firm
Nonprofit
Government
Other
Technology
Share of quarterly leasing activity (% of lease count)
Growing Stable Shrinking
1/22/2018
5
9Source: JLL Research
Metro DC office supply
The change in annual supply levels have decreased more than 85% from 2010-2017 compared to 2000-2009
258,
519,
107
273,
073,
170
281,
379,
388
286,
113,
757
292,
253,
840
294,
525,
919
300,
860,
134
305,
475,
779
313,
181,
353
323,
690,
628
324,
913,
244
325,
384,
504
325,
908,
093
329,
445,
326
331,
877,
795
331,
559,
923
332,
209,
594
332,
232,
492
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,000
350,000,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Tota
l exi
stin
g s
up
ply
(s.
f.)
76 m.s.f. change in supply; 7.6 m.s.f. per year
8.5 m.s.f. change in new supply; 1.1. m.s.f. per year
10Source: JLL Research
Metro DC office supply by class and area
While Trophy and Class A supply levels have nearly doubled across each market, Class B and C supply levels have largely declined over time, presenting challenges for cost-conscious tenants
138%
-2%
-28%
82%
3%
-17%
68%
-1%
-23%-40.0%
0.0%
40.0%
80.0%
120.0%
160.0%
Wa
shin
gto
n D
C T
rop
hy
&C
lass
A
Wa
shin
gto
n D
C C
lass
B
Wa
shin
gto
n D
C C
lass
C
No
rth
ern
VA
Tro
ph
y &
Cla
ss A
No
rth
ern
VA
Cla
ss B
No
rth
ern
VA
Cla
ss C
Su
bu
rba
n M
D C
lass
Tro
ph
y &
Cla
ss A
Su
bu
rba
n M
D C
lass
B
Su
bu
rba
n M
D C
lass
C
Ch
an
ge
in s
up
ply
20
17
-20
00
(%
)
1/22/2018
6
11
0
500,000
1,000,000
1,500,000
2,000,000
2,500,0002
001
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Fut
ure
an
nou
nce
d
s.f.
con
vert
ed
fro
m o
ffice
to o
the
r u
ses
Suburban Maryland Washington, DC Northern Virginia
Metro DC office conversions
Over the past 2.5 years, more office product has been converted than in the prior 10 years combined; will the DC Council introduce a law that incentivizes conversions from office to MF?
Source: JLL Research
12Source: JLL Research
Legislation & Metro DC office net absorption
The 115th Congress is on historical pace to be the least effective in modern history, meaning this Congress is on track to pass the least legislation. Through the end of 2017, the 115th Congress has only enacted 97 bills into law
-10,000,000
-5,000,000
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
0
100
200
300
400
500
600
700
800
Ne
t ab
sorp
tion
(s.f.
)
Pu
blic
bill
s
public bills enacted into law Metro DC net absorption
1/22/2018
7
13
-10,000,000
-5,000,000
0
5,000,000
10,000,000
15,000,000
20,000,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Tota
l ne
t ab
sorp
tion
(s.
f.)
Suburban Maryland Northern Virginia Washington, DC
Metro DC office net absorption by area
Broken down regionally by Suburban MD, Northern VA and Washington DC, none of the markets have been immune from the fundamental change in tenant demand patterns, but DC has experienced occupancy growth in seven of the past nine years
Source: JLL Research
14Source: JLL Research
2017 office net absorption by county
DC, Loudoun and Prince George’s County drove the majority of office gains in 2017, while the inner suburbs of Montgomery and Arlington posted nearly 1.5 million s.f. of occupancy losses, mainly due to conversion activity, a positive sign for balancing the market
450,861
-21,690
-1,060,713
6,960
412,442
93,648 60,400
-463,500
387,199
-1,200,000
-1,000,000
-800,000
-600,000
-400,000
-200,000
0
200,000
400,000
600,000
Washington,DC
Alexandria Arlington Fairfax Loudoun PrinceWilliam
Frederick Montgomery PrinceGeorge's
Tota
l ne
t ab
sorp
tion
(s.
f.)
1/22/2018
8
15
20.9%
12.0%
17.0%
0%
5%
10%
15%
20%
25%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Tota
l va
can
cy
Suburban Maryland Northern Virginia Washington, DC Metro DC
Metro DC office total vacancy
Source: JLL Research
Only Suburban Maryland has seen a meaningful shift downward in vacancy the past 36 months; DC will see vacancy climb over the next 24 months due to its development pipeline
16Source: JLL Research
2017 total vacancy by county
Only Frederick and Washington, DC posted vacancy rates below that of the overall U.S. vacancy rate of 15.0%
12.0%
19.0%
22.7%
21.1%
16.6%15.6%
9.1%
16.3%
23.5%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
Washington,DC
Alexandria Arlington Fairfax Loudoun PrinceWilliam
Frederick Montgomery PrinceGeorge's
Tota
l va
can
cy (
%)
1/22/2018
9
17
Metro vs. Non-Metro office fundamentals
Source: JLL Research
Metro-accessible locations dominate non-Metro-accessible locations from a performance standpoint
x
Inventory237 m.s.f.
Inventory96 m.s.f.
Total vacancy15.3%
Total vacancy21.1%
Direct rent$47.73 p.s.f.
Direct rent$27.55 p.s.f.
Under construction
11.1 m.s.f.
Under construction
1.2 m.s.f.
73% premium
-580 bps
71% of market
9x
Metro DC Office Investment Sales
Office Investment Sales Observations
Q4 2017
1/22/2018
10
19
Metro DC investment sales observations
Investment volume ends the year above 2016, below 2015• 2017 investment sales reached the 3rd highest level this decade, split fairly
evenly between the suburbs and downtown
• Washington, DC set a pricing record in the 2nd quarter when 900 16th
Street, NW traded at $1252 p.s.f.
1
2
Local investors fuel activity in the Class B market• While foreign capital flows into the highest-quality assets, local investors
and developers focus on lower-quality and/or underleased buildings where they can add significant value
3
Office investment salesSource: JLL Research
Foreign investment at record levels• Downtown, foreign investment volume reached an all-time high in 2017,
totaling $2.8B, or 61% of total volume.
• The vast majority (86%) of foreign investment volume was contentrateddowntown, and 71% came from Asian companies
20
Sales volume vs. cap rate
Investment sale activity on pace to exceed 2016 levels and reach the 2nd highest level since 2006
Source: JLL Research. Sale data includes portfolio recapitalizations
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
$0
$2,000,000,000
$4,000,000,000
$6,000,000,000
$8,000,000,000
$10,000,000,000
$12,000,000,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD2017
Washington, DC Northern Virginia Suburban Maryland Average cap rate
Office investment sales
1/22/2018
11
21
Metro DC sales activity by market
Source: JLL Research
32.8%
21.6%
36.2%
9.4%
0%
10%
20%
30%
40%
50%
60%
2013 2014 2015 2016 2017
Washington, DC downtown Washington, DC outside downtown
Northern Virginia Suburban Maryland
Downtown (CBD & East End) activity as well as Northern Virginia drove sales activity, comprising 79.9% of volume to date in 2017
Office investment sales
22
Metro DC regional cap rates
Average cap rates have remained relatively flat in recent quarters, but have begun to tick down in Bethesda due to heightened demand due to new tenants and developments
Source: JLL Research
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD2017
Washington, DC
Northern Virginia
Suburban Maryland
10-year Treasury
6.9%
6.3%
5.0%
Office investment sales
1/22/2018
12
23
Share of Metro DC investment by buyer type
Source: JLL Research
Foreign, 38%
Institutional (national),
34%
Private investment company (national),
11%
Private investment company or individual
(local), 12%
User, 5%
2016
Foreign, 39%
Institutional (national),
30%
Private investment company (national),
15%
Private investment company or individual
(local), 12%User, 3%
2017
At year’s close, composition of the buyer pool ended up similar to 2016
Office investment sales
24
Domestic investment
Northern Virginia
Suburban Maryland
Washington, DC
52.3%Located in
Washington, DC in 2017
YTD
Foreign investment volume
The safe haven of Washington, DC attracts foreign capital, most seeking long-term holds
Source: JLL Research
Foreign investment
61% of 2017 YTD total sales volume regionally across Metro DC
39% of 2017 YTD total sales volume regionally across Metro DC
Office investment sales
86.2%Located in
Washington, DC in 2017
YTD
1/22/2018
13
25
Federally leased cap rates
Cap rates on government-tenanted buildings vary greatly based on remaining lease term
Source: JLL Research; sales in Metro DC area, 2015-2017
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
0 2 4 6 8 10 12
Ca
p r
ate
Term remaining on federal government lease (years)
26
Federally leased cap rates
Cap rate compression for federally leased assets in Washington, DC has stabilized around 5.0%
Source: JLL Research
5.2%
6.7%
7.1%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Washington, DC Northern Virginia Suburban Maryland
Office investment sales
1/22/2018
14
27
Metro DC investment sales trends to watch
As DC ascends the ranks as a target for foreign
capital, Trophy and well-leased Class A product will
see a growing pool of buyers
Source: JLL Research
Congress’s continued failure to pass a budget will dampen Northern Virginia contractor leasing, and in
turn, investor interest
Bethesda should become an attractive target for capital as upcoming
developments add to its high-quality offerings
Demand for high-quality product could fuel
additional redevelopment, and in turn, Class B and C
sales
RB will see large uptick in offerings due to the leasing market rebound underway and projected tightening in
vacancy
Prince George’s will attract more interest as value-
driven leasing decisions like US CIS drive demand
Office investment sales
With minimal political legislation outside of tax reform implementation expected in 2018, growth in the market will mainly be limited to the life
sciences market in upper Montgomery County; growing federal government new construction market in Prince George’s County; flight to urban market in the Bethesda-CBD; high-growth residential markets of Ballpark, Wharf, Union Market and NoMa; affordable B+, B, B- and
C+ market of the CBD and East End. And the biggest wild card? Northern Virginia. Not only will a 10% increase in FY 2018 defense
spending spur additional leasing (has to come up as 2017 was one of the slowest leasing velocity markets in 20 years) but the market has the
deepest pool of STEM talent regionally, which will spur organic growth from high-growth existing tenants, mainly on the Toll Road, and deeper consideration from companies outside the market that are challenged by talent in their hometown markets, mainly in the Arlington County and the
Toll Road.
John SikaitisManaging Director, Research
1/22/2018
15
© 2018 Jones Lang LaSalle IP, Inc. All rights reserved. The information contained in this document is proprietary to JLL and shall be used solely for the purposes of evaluating this proposal. All such documentation and information remains the property of JLL and shall be kept confidential. Reproduction of any part of this document is authorized only to the extent necessary for its evaluation. It is not to be shown to any third party without the prior written authorization of JLL. All information contained herein is from sources deemed reliable; however, no representation or warranty is made as to the accuracy thereof.