MARKETBEAT

OFFICE SNAPSHOT
SUBURBAN MARYLAND
A Cushman & Wakefield Research Publication

Q3 2013

Job growth in the Washington, D.C. metropolitan area continues to fall behind the national average. Since the beginning of the year, national employment has grown by 1.1% compared to 0.7% in the D.C. area, and the gap may widen further due to the government shutdown and impending approach of the debt ceiling. Three sectors have experienced stable growth throughout the year: leisure/ hospitality, education/health, and office-using professional/business services. Unemployment rates in Montgomery and Prince Georges counties have dipped from 5.1% to 5.0% and 6.6% to 6.3%, respectively. Leasing activity in Suburban Maryland has picked up compared to last years depressed levels. Year-to-date, leasing in the market totals 1.4 million square feet (msf) a 46.9% increase over the 952,000 sf leased by this time last year. Leasing velocity saw a substantial slowdown in Montgomery County, however, falling 38.0% from Q2, but remained stable in Prince Georges County thanks to a lease for 44,000 sf with Prince Georges Community College in Hyattsville. Additionally, Healthy Directions LLC executed a deal for 31,193 sf in Rock Spring Park. Renewals also contributed to Q3s activity with the U.S. Food and Drug Administration re-upping on four leases totaling 220,000 sf in the Pike Corridor and I-270/Rockville submarkets. Year-to-date overall net absorption in Suburban Maryland is highly positive at 250,194 sf with continued positive absorption in Montgomery now more than offsetting negative absorption in PG. Large move-ins at 9711 Washingtonian Boulevard by Steben & Co., Business Suites, and Medical Funding Services, as well as occupancies in Bethesda/Chevy Chase contributed to positive absorption. Repositioned properties, with the exception of 7550 Wisconsin Avenue in Bethesda which still sits completely vacant, continue to benefit from tenant flight to quality overall class A absorption totals 429,777 sf so far this year.

ECONOMIC OVERVIEW

High-profile tenants continue to downsize and return space to the market in light of soft office market indicators. The majority of new deals signed are under 10,000 sf, and most tenants seeking space in the market look to occupy less in buildings with high-quality finishes and amenities. Although leasing activity has improved this year, it has started to slope downward and will likely decline throughout the remainder of the year. For the foreseeable future, Suburban Maryland will remain a tenants market; landlords will need to stay aggressive on deal terms moving forward. STATS ON THE GO
Q3 2012 Overall Vacancy Direct Asking Rents (psf/yr) YTD Leasing Activity (sf) 17.9% $26.65 952,449 Q3 2013 18.6% $26.69 1,399,353 Y-O-Y 12 MONTH CHANGE FORECAST 0.7pp 0.2% 46.9%

OUTLOOK

LEASING ACTIVITY EXCEEDS LAST YEARS LEVELS

DIRECT RENTAL VS. VACANCY RATES

$29.00 $28.00 psf/yr $27.00 $26.00 $25.00 $24.00 2009 2010 2011 2012 Q3 2013 18.5% 17.5% 16.5% 15.5% 14.5%

DIRECT GROSS RENTAL RATE

DIRECT VACANCY RATE

OVERALL OCCUPIER ACTIVITY

3.0 2.5 2.0 1.5 1.0 0.5 0.0

REPOSITIONING DOMINATES OFFICE LANDSCAPE

Due to stagnant vacancy rates and expectations of a slowing office market in Suburban Maryland, many landlords have opted to reposition their properties or alter construction plans. Success stories, such as B.F. Sauls 7700 Old Georgetown Road, seem to have inspired similar projects MRP Realty and Rockpoint Group, who purchased Bethesdas Air Rights Center in a joint venture earlier this year, are planning to rebrand the buildings as Bethesda Crossing, and Boston Properties has scrapped plans for an 850,000-sf office park along Sam Eig Highway in favor of 400 residential units, a health club, and 320,000 sf of office space.
Cushman & Wakefield of Maryland, Inc. 7475 Wisconsin Avenue Bethesda, MD 20814 www.cushmanwakefield.com/knowledge

msf

2.6

2.7

2.6

1.1

2009

2010

2011

2012

2013 YTD

LEASING ACTIVITY

For more information, contact: Paula Munger, Regional Research Director 703 847 2785 paula.munger@cushwake.com

The market terms and definitions in this report are based on NAIOP standards. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by our principals. 2013 Cushman & Wakefield, Inc. All rights reserved.

1.4

SUBURBAN MARYLAND
SUBMARKET INVENTORY OVERALL VACANCY RATE 14.8% 11.7% 20.3% 23.5% 10.1% 24.7% 21.2% 23.7% DIRECT VACANCY RATE 13.7% 10.5% 18.8% 23.1% 9.1% 22.9% 20.8% 23.1% YTD LEASING ACTIVITY 131,451 85,431 386,315 29,132 289,365 136,267 13,608 28,792 UNDER CONSTRUCTION 570,998 0 0 0 220,400 0 0 0 YTD CONSTRUCTION COMPLETIONS 535,677 0 0 194,000 0 0 0 0 YTD DIRECT NET ABSORPTION 106,167 (33,488) (21,897) 69,403 147,286 41,804 49,798 (34,956) YTD OVERALL NET ABSORPTION 101,488 (43,524) 74,003 61,851 167,366 12,032 49,798 (40,781) OVERALL WTD. AVG ALL CLASSES GROSS RENTAL RATE* $27.54 $26.72 $29.08 $24.98 $38.27 $30.97 $22.85 $24.22 DIRECT WTD. AVG. CLASS A GROSS RENTAL RATE* $32.63 $29.94 $33.30 $28.89 $45.29 $32.41 $25.05 $24.00

Pike Corridor Silver Spring I-270/Rockville Germantown Bethesda/Chevy Chase Rock Spring Park Gaithersburg North Silver Spring

10,202,272 4,877,684 9,464,827 1,908,759 8,386,443 4,055,404 2,122,113 1,055,127

MONTGOMERY COUNTY
Beltsville/College Park Laurel Greenbelt Landover/Lanham Bowie Oxon Hill/Suitland

42,072,629
4,378,140 928,694 2,837,971 2,786,065 780,082 1,816,428

16.7%
24.7% 15.5% 29.7% 27.7% 19.4% 18.2%

15.5%
24.4% 15.5% 28.9% 27.4% 18.6% 18.2%

1,100,361
114,562 0 115,035 16,272 22,069 31,054

791,398
57,000 0 0 0 0 0

729,677
0 0 0 0 0 0

324,117
(215,873) (7,132) (15,398) 25,844 48,184 37,665

382,233
(225,670) (7,132) (7,626) 25,844 44,880 37,665

$29.03
$20.91 $18.71 $21.23 $20.63 $24.99 $23.31

$33.12
$24.41 $19.50 $22.92 $21.82 $28.61 $23.69

PRINCE GEORGES COUNTY TOTALS

13,527,380

24.6%

24.2%

298,992

57,000 848,398

0 552,440

(126,710) 197,407

(132,039) 250,194

$21.16 $26.50

$22.88 $31.04

55,600,009 18.6%

17.6% 1,399,353

* RENTAL RATES REFLECT ASKING $PSF/YEAR

MARKET HIGHLIGHTS
SIGNIFICANT Q3 2013 LEASE TRANSACTIONS 2094 & 2098 Gaither Road, Rockville* 401 North Washington Street, Rockville** 4235 28th Avenue, Marlow Heights* SUBMARKET I-270/Rockville Pike Corridor Oxon Hill/Suitland Pike Corridor Pike Corridor Beltsville/College Park I-270/Rockville SUBMARKET Oxon Hill/Suitland Bethesda/Chevy Chase Gaithersburg SUBMARKET N/A TENANT U.S. Food & Drug Administration The Emmes Corporation Prince Georges County Department of Social Services U.S. Food & Drug Administration U.S. Food & Drug Administration Prince Georges Community College A. Morton Thomas & Associates BUYER Prince Georges County Fairmont Building LLC Emergent Biosolutions MAJOR TENANT N/A MAJOR TENANT National Institute of Allergy and Infectious Diseases (NIAID) N/A N/A ASRC Federal Holding Co. BUILDING CLASS B A B A B B A PURCHASE PRICE / $PSF $25,000,000/$118 $46,100,000/$377 $10,500,000/$78 COMPLETION DATE N/A COMPLETION DATE Q2 2014 Q2 2014 Q3 2014 Q2 2014
*RENEWAL RENEWAL NOT INCLUDED IN LEASING ACTIVITY STATISTICS

SQUARE FEET 102,480 97,177 79,132 61,902 55,728 44,000 37,414 SQUARE FEET 212,558 122,390 135,000 BUILDING SQUARE FEET N/A BUILDING SQUARE FEET 490,998 220,400 80,000 57,000

11919 Rockville Pike, Rockville* 5630 Fishers Lane, Rockville* 6505 Belcrest Road, Hyattsville 800 King Farm Boulevard, Rockville*** SIGNIFICANT Q3 2013 SALE TRANSACTIONS Washington Plaza, Upper Marlboro 7735 Old Georgetown Road, Bethesda 400 Professional Drive, Gaithersburg SIGNIFICANT Q3 2013 CONSTRUCTION COMPLETIONS N/A

SIGNIFICANT PROJECTS UNDER CONSTRUCTION SUBMARKET 5601 Fishers Lane, Rockville 4500 East West Highway, Bethesda 11800 Grand Park Avenue, Rockville 7000 Muirkirk Road, Beltsville
***SUBLEASE

Pike Corridor Bethesda/Chevy Chase Pike Corridor Beltsville/College Park

**RENEWAL AND EXPANSION RENEWAL NOT INCLUDED IN LEASING ACTIVITY STATISTICS

Cushman & Wakefield of Maryland, Inc. 7475 Wisconsin Avenue Bethesda, MD 20814 www.cushmanwakefield.com/knowledge

For more information, contact: Paula Munger, Regional Research Director 703 847 2785 paula.munger@cushwake.com

The market terms and definitions in this report are based on NAIOP standards. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by our principals. 2013 Cushman & Wakefield, Inc. All rights reserved.