TRENDLINES

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Identifying Opportunities During the Recovery

Trends in Washington Commercial Real Estate
A Collaborative Publication of Delta Associates,
Partners in Excellence with Transwestern

© 2010. All Rights Reserved.

You may neither copy nor disseminate this report. If quoted, proper attribution is required.
To order your copy of TrendLines, contact the Publications Administrator at 703.836.5700.

Foreword
To our friends, clients and colleagues:
We are pleased to provide you this thirteenth annual edition of TrendLines®:
Trends in Washington Commercial Real Estate. This is a collaborative
publication of Transwestern and its research affiliate, Delta Associates. Our
purposes are to distill the trends of 2009 and to shed light on pivotal forces
and issues that we believe will affect the region’s economy and commercial
real estate in 2010 and beyond.
2009 was a challenging year. Capital was in short supply as many loans
came due. Owners cut rental rates to maintain occupancy and as a
consequence values declined in all commercial product types. Only Class
A apartment assets did not see a decline in occupancy during the year. And
yet condominiums performed as we projected last year: an improvement
in performance over 2008.
Despite the hardships, the Washington real estate market survived 2009
better than any other major metro market. The Federal government
ramped up hiring, and is scheduled to continue that trend in 2010.
Investors domestic and foreign have come to Washington and bid down
cap rates at the end of the year. And many owners have used the downturn
to position assets with improvements to compete better and operate more
efficiently.
We believe 2010 is a unique opportunity to:
„ Buy assets at below replacement cost with low-cost debt or with
readily available equity.
„ Reposition existing under-performing assets, whether yours or others,
to draft-up in the coming recovery.
„ Position now for development in the next cycle – for delivery in 2010
through 2013, depending on the product type.
The difficulties of 2009 give this annual publication, TrendLines, even
greater importance. It can shed light on the path forward during a
Thomas Nordlinger
President, Mid-Atlantic Region
February 2010
challenging time in our industry. What are the signposts to look for in the
period ahead, indicators that can shape our approach to the future? We
address this topic in Section One of this report. With regard to overall
market performance, our expectations for 2010 include:
„ National and Regional Economy: A stabilizing job market, with
consistent growth beginning in 2010.
„ Office Market: Rising vacancy through mid-2011, followed by a need
for spec development by 2013 as demand returns. Many tenant-driven
opportunities before then thanks to BRAC, GSA, and corporate moves.
„ Retail and Flex/Industrial Markets: Stabilization in 2010; spec
development warranted by 2012.
„ Rental Apartment Market: Rising vacancy and declining rents
through 2010, but improvement in 2011 as supply and demand return
to balance. Rent spikes in some submarkets by 2013 as product
shortages emerge.
„ Condominium Market: Price increases in some submarkets this year,
with some conversions due to product shortages.
„ Capital Markets: Gradually rising volumes as credit and product
begin to reappear. Values likely will decline further in 2010 as property
performance remains a challenge in many areas.
„ Overall: More opportunities in our industry in 2010 than we found in
2009. The volatility will continue to require patience, cash, vision and
an appetite for risk.
Thank you for your interest in our research and other services, including
brokerage, property management, investment sales, and development.
We look forward to helping you interpret everything you see in the market,
and to being your service partner in the period ahead. Best wishes for a
successful 2010.
Gregory H. Leisch, CRE
Chief Executive
To Our Clients and Business Associates:

As a leader in our business community for more than 30 years, Beers + Cutler is once again proud to support
TrendLines. But this year, you may notice something a bit different about our presence at TrendLines.
Since we convened last February, Beers + Cutler has merged with Baker Tilly. While the name has changed,
our level of commitment and dedication to our clients’ business needs remains the same. The team of
talented professionals that has built trusted partnerships with our clients over the years will continue to
work with them in the future.
All of us are excited about this new opportunity and new chapter in the history of our firm. Jim Beers and
John Cutler started something very special back in 1976 when they came together to create their own firm.
Over the years, we have all taken pride in ensuring the Beers + Cutler name stood for the highest levels of
service and quality in the delivery of tax, assurance and consulting services. As the marketplace evolves,
we believe becoming part of a national firm with a greater breadth and depth of resources will serve our
real estate clients well and position us for continued success.
While our region has fared better than many areas around the country, the past 18 months have been
like no other period in recent memory, and there is no doubt that the turbulent economy has significantly
impacted the local real estate market. However, the Washington region continues to be well-positioned
to thrive long term.
As the unpredictable market continues, we will be right here with you, advising on ways to navigate
through this difficult environment and gain a competitive edge. Serving as business and tax advisors to
the real estate industry since the mid-1970’s, we draw upon our experiences with many of the region’s top
companies to assist in creating tax-efficient ownership structures and developing planning alternatives.
We also identify opportunities by being experts in the industries we serve and in the areas of Federal and
state tax laws that impact our clients.
We look forward to continuing our work with the entrepreneurs who are the foundation of the Metro
Washington real estate industry, as well as investors – foreign and domestic – who recognize our area as
one of the most desirable markets in the United States.
To learn more about how we can help you manage your business in today’s changing marketplace, please
contact us.
Very truly yours,

Kelly P. Toole
Partner
703.923.8215
kelly.toole@bakertilly.com
Dear TrendLines Participant:

PNC is once again proud to sponsor the 2010 TrendLines® report, the premier resource for our region’s
commercial real estate professionals.
In today’s rapidly evolving real estate environment, having access to timely market knowledge is critical
to running your business. For years, the TrendLines report has been such a source, delivering a valuable
overview of the Washington, D.C. real estate market.
Equally critical is having confidence in your lender, an institution that has experienced varied economic
cycles and has always been available to its customers. PNC is one of those lenders.
PNC has been part of the Washington, D.C. real estate community for decades, delivering one of the
industry’s broadest platforms of products and services – including construction, interim, and permanent
financing, along with access to the capital markets, treasury management services and the comprehensive
capabilities of PNC Real Estate, from multifamily debt and equity expertise to best-in-class third party loan
servicing, asset management and technology solutions for the commercial real estate industry provided
by Midland Loan Services, Inc.
With our acquisition of National City Corporation, PNC is now one of the nation’s top five banks by deposits
and branches. Our strength lies not only in our size, but in the innovative way in which we deliver products
and solutions to help you achieve your goals.
To learn how we can bring ideas, advice and solutions to you, call us or visit www.pnc.com/realestate.
Sincerely,

Michael N. Harreld William R. Lynch III

President Senior Vice President
PNC Bank – Greater Washington Area PNC Real Estate Finance
202.835.5513 202.835.4513
m.harreld@pnc.com william.lynch@pnc.com
 TRENDLINES
®

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Identifying
Opportunities During
the Recovery

Acknowledgments: The editor, Gregory H. Leisch, CRE, wishes to acknowledge

and thank this project’s research team at Delta Associates: Alexander (Sandy)
Paul, President of the Transwestern Support Group and National Research
Director; and Elizabeth Norton, Mid-Atlantic Research Director. The creative
design team at Transwestern and the administrative staff at Delta have our
gratitude. Most of all, our appreciation is hereby expressed to the dozens of
industry leaders who spent their valuable time responding to questions about
the future of our industry here in the Washington area.

Representations: Although the information contained herein is based on sources

that Delta Associates (DA) and Transwestern (TW) believe to be reliable, DA and
TW make no representation or warranty that such information is accurate or
complete. All prices, yields, analyses, computations, and opinions expressed
are subject to change without notice. Under no circumstances should any such
information be considered representations or warranties of DA or TW of any
kind. Any such information may be based on assumptions that may or may not
be accurate, and any such assumption may differ from actual results. This report
should not be considered investment advice.

TrendLines®: Trends in Washington Commercial Real Estate was designed in-house

by Ji Chang, Lauren Dean, and Brent Weigelt for Transwestern and Delta Associates.
Table of Contents

Section One Identifying Opportunities During the Recovery 9

Section Two The National Economy 25

Section Three The Washington Area Economy 39

Section Four The Washington Area Office Market 51

Section Five The Washington/Baltimore Flex/Industrial Market 63

Section Six The Washington Area Apartment Market 71

Section Seven The Washington Area Condominium Market 83

Section Eight The Washington Area Retail Market 91

Section Nine Capital Markets and Investment Trends 103

Section Ten TrendSetter Award Recipients 111

Identifying Opportunities During the Recovery 7

 Identifying Opportunities
During the Recovery

9
Identifying Opportunities
During the Recovery

The purpose of TrendLines® is to distill the trends of 2009 and shed light on pivotal issues that shape
our commercial real estate opportunities in the Washington marketplace in 2010 and beyond. With many
describing 2009 as annus horribilis, perhaps just surviving the year was enough. But we view events of 2009
as having set up 2010 as a year with remarkable opportunities.

While it is always instructive to review the year past – and we do in this TrendLines – we prefer to use this
opportunity to look ahead. Specifically, how can we in the real estate industry identify profitable opportunities
during the recovery, and position ourselves now for intermediate and long-term success?

In this chapter, we identify three opportunities and four signposts
to watch, so as to know if we are on track. The balance of this report
drills down to each property type to get more specific about trends and
opportunities for each.
First, let’s take a macro view of trends of the past year and decade as a
background to our overall identification of opportunities and signposts.
2009: Began as a Year of Hope; Concluded with
“Let’s Hope This Year Just Ends”
The nation entered 2009 with a financial hangover from the year prior.
However, a handful of positive indicators gave hope to the nation that
2009 would be a year of positive change:
„ The 44th president was sworn into office at the beginning of 2009
on the slogan “Yes We Can,” replacing a leadership with one of the
worst approval ratings in history.
„ The American Recovery and Reinvestment Act (ARRA), a $787 billion
economic stimulus plan, was signed into law in February – making a
promise to create or save 3.5 million jobs over the next two years.
„ To aid the ailing automobile industry, in July the government enacted
a car allowance rebate, “Cash for Clunkers,” which provided $3 billion
in incentives for vehicle trade-ins.
The hope of the early part of the year was consumed by some difficult
realities:
„ Only $257 billion of the $787 billion in stimulus money had been
allocated by year-end, according to Recovery.gov.

10 Section One
American Recovery and Reinvestment Act
Overview of Funding
Source: Recovery.gov, Delta Associates; January 2010.
Payroll Job Losses
Large Metro Areas | 12 Months Ending November 2009
Source: Bureau of Labor Statistics, Delta Associates; January 2010.
Identifying Opportunities During the Recovery
„ Bernie Madoff stole $65 billion from
investors in an elaborate Ponzi scheme.
„ Bankruptcy filings increased to 1.4 million
in 2009, a 32% rise from 2008.
„ Unemployment continued to rise, from
7.4% at December 2008 to 10.0% at
December 2009.
„ Foreclosures increased 21% in 2009, to 2.8
million properties receiving at least one
foreclosure filing, according to RealyTrac.
„ Total retail sales declined 6.2% in 2009.
Washington Fared Better But Did
Not Escape
The Washington metro area experienced its
share of economic pain in 2009, as evidenced
by modest job losses. However, these losses
were the fewest of any major metro area in the
nation.
And our real estate industry has seen an increase
in distressed commercial real estate assets, but
ranks well below Manhattan and South Florida
in dollar volume per capita. Yet the industry
feels the sting of the bankruptcy of General
Growth Properties and Opus East.
In fact, a handful of companies, most with a large
employee base located here already, relocated
headquarters to the area in the past 15 months.
Those companies include: Hilton, Volkswagen,
Computer Sciences Corporation, SAIC, and
most recently Northrop Grumman.
11
2000-2009: The Lost Decade Distressed Commercial Real Estate Value Per Capita
Nationally, But Not in Washington November 2009

Some observers have summed up the past 10

years as the lost decade nationally. By most
economic measures, compared to the previous
four decades, the aughts (2000-2009) ranked
the worst:

„ Job growth was flat – the worst showing of

any decade since the 1930s.
„ Real GDP grew just 18% – half that of the
next-worst decade.
„ The Dow declined 8% and household net
worth declined 4% – the worst showing of
any comparative decade, all of which were
positive. Note: Excludes Manhattan at $3,742 per capita.
Includes properties in default or foreclosure, and lender REO. Value based on loan amount.
Source: Real Capital Analytics, graphic by Delta Associates; January 2010.
Comparably, the Washington metro area
flourished. The region’s job base grew by 16%,
compared to only 0.2% growth nationally during
the past ten years.
National Economic Indicators of the Past Five Decades
Household
And the Washington metro area grew more Job Growth GDP* Net Worth* Dow Jones
jobs during the decade, as a percentage of
1960s + 31% + 53% + 44% + 18%
its base, than any other major metro area. The
Washington metro area was followed in growth 1970s + 27% + 38% + 28% + 4%
by Houston and Phoenix. 1980s + 20% + 35% + 42% + 234%
1990s + 20% + 39% + 58% + 309%
The local stock market index, comprised of
over 200 companies located in the Washington 2000s + 0% + 18% - 4% - 8%
metro area, experienced growth during the past
*Adjusted for inflation
decade. According to the Bloomberg DC Area Source: Washington Post, Delta Associates; January 2010.
Index, stocks gained roughly 19% during this
time period, compared to an 8% decline in the
Dow Jones.
But looking at value change from 2000 to today, the Washington metro area experienced the largest
Much has been written about the housing gains in housing value during the past ten years, compared to other large metro areas. The New York
bubble and the resulting decline in prices – both and Philadelphia markets round out the top three in housing gains, behind Washington.
nationally and locally. With declines reported
quarterly, one cannot get a sense of the bigger So, by many economic measures, Washington outperformed the nation and every other major metro
picture. area during the past decade, thanks to the presence of the Federal government, which spends money
during good national economic times and bad. We also experienced a flourishing private sector
that in some measure draws its lifeblood from the Federal establishment via outsourcing – Federal
contracting. There was no lost decade here.

12 Section One
That is a brief review of what went wrong – and, to a lesser extent, what went right – during the past What Is “Recovery”?
decade. What is ahead during the recovery, and how can smart investors capitalize? To understand
opportunities in a recovery, first, what is a “recovery”? We often hear talk of economic “recovery,” but
we rarely hear the word defined. What do those
making predictions mean when they say “the
Payroll Job Change economy will recover by [a frequently shifting,
January 2000 to November 2009 speculative date of one’s choice]”? Let’s examine
a few possible definitions of “recovery.” After
all, if we are giving advice on opportunities in
recovery, we should have a notion of the time
period involved. And do we mean “recovery”
or “recovered”? After all, a recovery is a time
period with a beginning and an end.

Does “economic recovery” mean job growth

has resumed?

As the beginning of recovery, job growth is

traditionally late in the game. Job growth
follows other signals – like positive GDP growth,
another sign that recovery has begun. But if job
growth is a sign that we are in recovery, this is a
fairly easy prediction to make. We are confident
Source: Bureau of Labor Statistics, Delta Associates; January 2010. that job growth will resume nationally and in the
Washington metro in 2010 – although it may in
fact have resumed nationally in late 2009, as the
Bureau of Labor Statistics recorded a net gain
Dow Jones Industrial Average of 4,000 jobs based on preliminary statistics
for November. However, BLS is infamous for
re-benchmarking prior period statistics, so
December is still in doubt when the numbers
are finalized.

Creating jobs certainly is an important element

of recovery, but most analysts would not accept
some net job growth as a definition of recovery.
It is merely a start. Keep in mind that we can
be in recovery but not recovered – just as the
recession was a drawn-out process, so too will
be the recovery period.

Note: Through December 2009.

Source: Dow Jones, Delta Associates; January 2010.

Identifying Opportunities During the Recovery 13

House Price Index Change Does “economic recovery” mean a return to
2000 to 2009 the long-term average growth rate for GDP
(gross domestic product)?

The long-term average annual growth rate

for U.S. GDP is between 2.5% and 3.0%. GDP
growth is likely to be choppy for the next
few quarters, as the effects of the Federal
government’s various stimulus programs taper.
We expect GDP growth to reach the long-
term growth rate on a consistent basis by 2011.
However, unlike previous recovery periods such
as 1983 or 1992, there is not likely to be a burst
of growth in the near future. We are looking
at gradual improvement as consumer spending,
which comprises over two-thirds of the economy,
slowly increases. So, 2011 is an important year
Purchase Only Indexes. for the commercial real estate industry, as GDP
Source: FHFA, Delta Associates; January 2010.
growth drives the creation of jobs and pushes
down unemployment. Eventually these factors
create demand for commercial real estate.
U.S. Economic Trends and Forecast
1981 – 2014
Does “economic recovery” mean a meaningful
decline in the unemployment rate? And if so,
what is “meaningful”?

Economists typically describe a 5% unemploy-

ment rate as the “frictional unemployment rate”
for the U.S., or the rate at which full employment
is occurring. This is because even in a robust
economy, some workers will be unemployed for
a brief period of time as they search for a more
desirable job. However, this means that a 5%
unemployment rate is essentially a best-case
scenario in most economic cycles. What is a
reasonable rate of unemployment?

Of course, to someone who is looking for work,

there may be no such thing as a reasonable level
of unemployment. However, in the aggregate,
and in particular when coming off a severe
recession, most observers probably would see a
Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Delta Associates; January 2010.
6-7% unemployment rate as significant progress.

But for commercial real estate, employment growth is a crucial element of recovery, because jobs fill
office space and apartments, and they create consumer confidence to get shoppers back into retail
space. So 2010 is a pivotal point in our industry.

14 Section One
It would be a meaningful decline from a current
level of 10% – a level that is likely to rise further
before beginning its cyclical decline by mid-
2010. We see a 300-400 basis-point decline in
unemployment, which would translate into 4-5
million new jobs nationally, as “meaningful”
progress. It is the kind of progress that would
reflect a major boost in confidence by hiring
managers that a robust part of the cycle has
returned. It is likely to be late 2012 or early 2013
before we achieve this kind of decline in the
unemployment rate.
If that bar seems too high, and we define
“meaningful” simply as a consistent decline in
employment, even at a slow pace, then we put
recovery at 2011, as shown in the graph on the
previous page. We expect the unemployment
rate to peak in the first half of 2010, and gain
traction next year as consumer confidence
rises, pumping more money into the economy
and leading to job growth. In 2010, any
improvement in unemployment is likely to be
modest, since as conditions improve, many of
those who gave up searching for work will return
to the labor market, increasing competition for
available jobs. But by 2011, the hiring trend
will be obvious. Slow, but clear. So 2011 will
be an important milepost in the commercial
real estate industry, as unemployment declines
enough to:
„ Induce added apartment occupancy by
encouraging un-doubling
„ Add to retail spending via an increase in
consumer confidence
„ Increase office absorption due to job
growth
Does “economic recovery” mean all of the
jobs lost during the recession have been
regained?
This definition of recovery sets a very high bar,
particularly given the number of jobs lost during
the recent downturn: 7.2 million. Considering
that most observers expect the next few years
to be a “slow-growth” period, it is likely to
take until 2013 or beyond before all of those
persons are put back to work. During the four-
year period from 2004-07, the U.S. created 7.9
million jobs – and this was considered a rather
robust part of the economic cycle.
Of course, it is not all of the actual jobs that were
lost that will come back – in many cases, the
positions lost in 2008 and 2009 will never return,
such as many manufacturing jobs. Instead, other
positions will be created to replace them, often
requiring new or different skills, and making the
rehiring of laid off workers less likely. Those
seeking work not only need to find employment
opportunities, they need a skills match with the
positions for which they are applying.
But 2013 will be a key year for the commercial
real estate industry, as the re-hiring of the 7.2
million workers will herald more normalized
times for:
„ The office market, as supply/demand
conditions will approach equilibrium
„ Retail and industrial/distribution markets,
which will get a boost from consumers who
go back to their old ways of spending
„ Personal wealth accumulation, which will
be on track to encourage consumers to
buy homes/condominiums and travel
more freely
To which definition of “recovery” do we
subscribe?
We are not sure it matters: By all of these
definitions it appears that between 2010 and
2013 the national economy will move through
recovery at which time we can declare it
recovered by 2013.
Identifying Opportunities During the Recovery
When Will We See Opportunities?
Following the logic above, we believe that
the most meaningful opportunities of a cycle
are found at the confluence of:
„ The bottom of the real estate cycle
and
„ The beginning of the economic
recovery
That would be 2010, in our opinion.
What About Recovery for Washington
Commercial Real Estate?
Our take is that the local industry’s recovery
began in 2009 for some product types and
that all product types will be in recovery in
2010 to one degree or another. 2009 did not
feel much like recovery, but by July or August
there were early signs of it:
„ It starts with the sobering realization that
there is no place for construction starts
for spec product – and there were virtually
none in 2009.
„ Equity began to re-enter the market, and
investment sales perked up in the second
half of the year. In fact, by year-end our
broker clients were reporting a shortage of
listings.
„ Cap rates seemed to have peaked during
the summer months, at least for all but
office buildings.
„ The rate of distressed assets hitting the
market slowed.
„ Even the office market, which struggled
with dis-absorption throughout the year,
pulled into the positive by year-end. The
Washington metro area was the only major
metro area to finish in the positive in 2009.
15
When Will Washington Area Markets Transition?
Source: Delta Associates; January 2010.
„ The condominium and apartment markets
showed signs of life with improved 2009
absorption over 2008. And product short-
age is likely to emerge in select submarkets
by 2010 and 2012, respectively.
„ At year-end 2009, the housing market saw
a 2.2% increase in home prices on a trailing
12-month basis, the first increase since the
4th quarter of 2007. Washington was one
of the few major metro areas in the nation
to see housing price increases in 2009.
„ Emerging Trends and AFIRE again put the
Washington metro at the head of lists of
areas for which their respondents target
investment.
The recovery period ends (and the robust
part of the cycle begins) when we reach
landlord market conditions, defined as
long-term average rent growth. We believe
landlord conditions will arrive from 2010-14 –
a wide range that can be narrowed as follows
based on product type:
16 Section One
„ 2010 for condominiums
„ 2012 for apartments, industrial and retail
„ 2013 for office product (in many
submarkets)
As far as the specifics on why we believe these
dates for the return of “landlord conditions,”
see the property-specific chapters that follow.
Now that we have defined “recovery,” what are
the opportunities we see in the period ahead?
And what are the signposts we should be
looking for to know if we are on course?
Identifying Opportunities in
Washington During The Recovery
#1: Selectively accumulate assets at below
replacement cost while prices and interest
rates are low.
Here is our thesis:
„ Commercial property values have declined
30% to 45% from the cyclical high of 2007,
depending on the metric.
„ And values are somewhere near their
cyclical low point. If you try to time the
bottom perfectly, you will miss it.
„ Values are well below replacement cost.
„ Values will rise in the period ahead.
Not sure if it is 2012 or 2014 that robust
increases will be seen in Washington, but
both cap rates and property performance
will cooperate.
„ Interest rates are lower today than they will
be for the next five years or more.
„ Real estate is an inflation hedge and
inflation will be higher in the intermediate
future than it has been in the recent past.
„ There is an unprecedented amount of
equity on the sidelines looking to buy.
Use it.
#2: Invest in repositioning existing under-
performing assets, whether yours or others
to be acquired.
Here is our thesis:
„ If they are your assets, values are too low
to sell – you should be a holder/buyer at
these prices.
„ Stress and distress are putting some deals
on the market for acquisition/improvement.
Buy location and make improvements that
fit.
„ And as market fundamentals improve
over the next three years for all property
types, you would be well served to make
investments that draft up in asset class.
„ Contractors need work. And competition
makes renovation work cheap compared
to 2007.
Cyclical Fluctuation in Value #3: Position now for development into the
U.S. Commercial Real Estate – 1988 Through 2014 next cycle.

For condominiums and apartments, that

translates to:

„ Convert apartments to condominiums in

select submarkets as early as 2010.
„ Build boutique-size condominium deals in
select submarkets as early as 2010 – if you
can find a lender.
„ Start construction on apartments in select
submarkets in 2010-11 for delivery in 2012.
More broadly throughout the metro for
delivery in 2013.

For the balance of commercial real estate, that

Source: NCREIF, Delta Associates; January 2010.
translates to:

„ Begin construction of retail, office and

Recommended Development Activities in the Washington Area industrial in 2012 in select submarkets.
Sooner if tenant-driven. And there are
significant tenant-driven opportunities
thanks to BRAC and the appetite of GSA.

If you do not own entitled land, given the high

barriers to entry in the Washington metro area,
you are already late to the party.

Four Signposts to Keep Us on Track

We believe that four signposts stand out

as especially important indicators of how
to modulate your plans vis-à-vis these
opportunities:

1. Job growth
2. GDP growth
3. Real estate values
Source: Delta Associates; January 2010. 4. Mortgage interest rates

These are the ones we are watching most closely

in 2010 and beyond.

Identifying Opportunities During the Recovery 17

#1: Job growth: Jobs are essential to the U.S. Payroll Job Change
commercial real estate market.

Approximately 7.2 million jobs have been

eliminated since the start of the recession in
December 2007 – a 5.2% decline. This calculates
to an average loss of 302,000 jobs per month.
When job losses began, office absorption
stopped nationally and slowed to a trickle in the
Washington metro area.

For the past five months job losses have

moderated below the monthly average of
302,000, a positive indicator that the worst of
the recession is over and we are on the road to
recovery.

Another positive indication of job recovery is

Source: Bureau of Labor Statistics, Delta Associates; January 2010.
the rise in temporary help. According to the
American Staffing Association index, employers
have been increasing the demand for temporary
help since July 2009. Companies first test their American Staffing Association Index
confidence in the economy by hiring temporary
labor – indicating a demand for help, but also an
unsteadiness of the duration of demand. Once
confidence is gained, we expect temporary
staffing to level off and companies to slowly
start to fill full-time positions. We expect this to
occur by mid-year 2010.

One of the single best barometers of recovery

is initial unemployment claims, which peaked in
April 2009 – indicating the recession likely has
been over for months. In each of the past five
recessions, dating back to 1975, the recession’s
end has coincided with the peak in the four-
week moving average in initial unemployment
claims. Source: American Staffing Association, Delta Associates; January 2010.

This observation, made by Robert J. Gordon

(a member of the Business Cycle Dating
In each case, the recession ended within a month of the peak in initial claims. The peak in claims
Committee of the National Bureau of Economic
during the 2007-2009 recession was in early April 2009. It is unlikely that another peak will occur
Research, the agency that determines when
during the current cycle, as layoffs have been decelerating.
recessions began and ended), is startling in its
simplicity.
Look for job growth: Meaningful office and industrial absorption is sure to follow.

18 Section One
Duration of Recent Recessions Consumer spending is 70% of the GDP. The
University of Michigan’s monthly index of
Duration Peak in Initial End of consumer sentiment is a valuable measure, as
of Recession Unemployment Claims Recession it provides a look into the consumer mindset –
indicating if consumers are confident enough to
16 Months February 1975 March 1975
part with their money. The index rose to 72.5 in
6 Months June 1980 July 1980 December 2009 – rising unevenly since the low
16 Months October 1982 November 1982 of 56.3 in February 2009.
8 Months March 1991 March 1991
The index remains below the long-term average
8 Months October 2001 November 2001
of 88.2 and low enough to hamper robust
Source: Smart Money via MSN.com, NBER, BLS, St. Louis Fed, Delta Associates; January 2010.
spending. However, we believe spending will
rise slowly in 2010, as the nation has a pent-up
demand for goods, which will help keep GDP
growth in positive territory.

U.S. Initial Unemployment Claims

Look for GDP growth above 2.5%: Mean-
Four-Week Moving Average | December 2007 to December 2009
ingful retail and housing market progress will
follow.

Note: Data is seasonally adjusted.

Source: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis, Delta Associates; January 2010.

#2: GDP growth: It reflects greater economic
activity, creating jobs and a sense of consumer
confidence that drives the retail and housing
markets.
After four straight quarters of decline, the GDP
increased 2.2% (at an annualized rate) during
the 3rd quarter of 2009.
We believe the GDP experienced the last of its
cyclical decline during the 2nd quarter of 2009.
The GDP likely rose during the 4th quarter to
a similar level as experienced during the 3rd
quarter, once the numbers are finalized, as the
Federal stimulus and capital injections work
their way further into the economy.

Identifying Opportunities During the Recovery 19

#3: Real estate values: When rising, higher GDP Percent Change
values drive capital into the market. Rising 2007 – 2009
values are a barometer of the health of the real
estate market, bubbles aside.

While investment sales struggled in 2009,

commercial real estate investment remains a
solid long-term play. Over the past five-year
and ten-year periods, real estate outperformed
stocks and bonds, with annual total returns of
6.16% and 7.84%, respectively. Only during the
past 12 months, concurrent with the recent bull
market on Wall Street, did stocks outperform
real estate. This is why the institutions have not
re-allocated out of real estate in this cycle like
they did in 1990, and why our recovery should
be faster than during previous cycles.
Source: Bureau of Economic Analysis, Delta Associates; January 2010.
What is driving values today? Nationally, office
vacancy rose 180 basis points during 2009. In
the Washington region, vacancy rose 240 basis
points last year. Similar trends have occurred in Consumer Sentiment
other product types. These trends are causing
property performance to deteriorate, affecting
both income returns and the perceived value of
capital assets in the marketplace.

In addition, rents have been declining both

nationally and locally, across the various product
types. Apartment rents have held up well, with
just a 2% decline locally over the past year,
compared to a 6.9% decline for office space.
Nevertheless, values have been hurt by a weaker
income stream and a lack of available credit,
which has reduced the number of bidders for
available properties.

As shown in the accompanying graph, *Through December 2009.

the current cycle saw core values decline Source: University of Michigan, St. Louis Fed, Delta Associates; January 2010.

approximately 30% during this cycle – in a two-

year period. While we expect values to decline

20 Section One
further in early 2010, we may hit bottom by the end of the year. A total decline of 40% would We believe values will begin to stabilize by late
approximate the decline from the early 1990s – but that decline occurred over a six-year period. 2010, given the improvement in overall economic
This time around, the market was faster down, and should be faster to recover. Values should conditions. But importantly, those who wait until
begin rebounding by 2011, meaning that now is the time to beat competitors into the market. it is apparent that values are stabilizing will be
entering the market too late to achieve maximum
The MIT Transactions-Based Index for commercial property values indicates that values are back value. Based on a combination of factors, we
to 2004 levels as shown in the accompanying graph. believe now is the ideal time to buy commercial real
estate product in the Washington area:

Investment Alternatives „ NOI will be at its low point in late 2010 or early
Commercial Real Estate vs. Stocks vs. Bonds | 12 Months Ending September 2009 2011.
„ The cost of financing is not likely to get any
lower – for more on mortgage rates, see the
following section.
„ The availability of financing should improve
during 2010 as lenders become more
convinced of an economic recovery.
„ Cap rates are already leveling off locally, based
on our proprietary Market Maker Survey (see
Section Nine of this report).

Look for commercial real estate values to hit

bottom in 2010, if they have not already. All of
Source: NCREIF, Delta Associates; January 2010. these indicators suggest that now is the time to
enter the market in order to beat competitors to
prime assets and achieve the best combination of
Commercial Property Values low pricing and low interest rates.
United States | 1999 Through 2009

Note: December 2000 = 100.

Source: MIT, Morgan Stanley, Delta Associates; January 2010.

Identifying Opportunities During the Recovery 21

#4: Mortgage interest rates: When low, they U.S. Treasury Supply
can facilitate a recovery. 1993 – 2011

A critical ingredient for enlivening the

commercial real estate market moving forward
is the availability of credit at terms that are
attractive to borrowers. What is likely to happen
in the credit markets in 2010 and beyond?

We believe that the availability of credit will

increase in 2010, but that interest rates will
increase 100 to 300 basis points in the next
12 to 36 months. What impact will this have on
the commercial real estate recovery?

Long-term mortgage rates are likely to rise due

to government deficit spending, as the Federal
government will have to offer higher interest
rates to creditors to continue attracting capital.
At the same time, the buyers of debt, such
as China, are easing back on their purchases Note: 2009-11 is estimated.
Source: U.S. Treasury, Morgan Stanley, Delta Associates; January 2010.
of American treasuries, which will drive the
government to increase interest rates in order to
make U.S. treasuries more attractive. Mortgage
rates for commercial properties will follow suit.
Look for mortgage interest rates to increase. With it, cap rates that began to settle down at
The likely increase in mortgage rates is a the end of 2009 will likely not decline much in 2010-11 even if good product is in short supply
signpost that investors should be watching as some brokers threaten. And cash will remain king for at least another year. In addition, it
closely. While availability of debt will remain a is possible that development lending will remain lean into the early part of the development
problem during 2010, those who have access cycle, creating spikes in rents in 2012-15.
to credit should be prepared to act quickly this
year before rates become less attractive.
* * * * *

We hope the information in this report assists you in making informed decisions to meet your
particular business objectives in 2009 and beyond. Best wishes for success in the period ahead.

22 Section One
Identifying Opportunities During the Recovery 23
2 The
National Economy

25
The
National Economy

Downturn Has Ended; Slow Recovery Underway Implications for commercial real estate?

Last year in the TrendLines report we said that the recession would end in mid-2009. Given the „ Office and industrial space, filled by
downward-spiral of the economy at the time, many readers found this a wildly optimistic view. The employees, will be slow to materialize. We
good news is: That prognostication appears on target. The bad news is: Other than the fear factor, it believe it will be until 2011-2012 before
appears to have made little difference in the quality of the economic climate. a meaningful reduction is seen in the
unemployment rate. It will be after 2012
So this is recovery! before we rehire the 7.2 million workers
who lost their jobs in this recession.
The national economy experienced a turbulent year, as 4.2 million jobs were eliminated during „ The retail sector will take a few years to
the 12 months ending December 2009 and unemployment climbed to 10.0%. Despite the distress recover, as consumer confidence is low,
experienced during 2009, we believe the recession ended about mid-year, although official word has indicating fear in parting with disposable
not come as of this writing. Although we expect further decline in the labor market, as unemployment income.
lags, we believe a handful of indicators show the recession has ended:
„ Apartments, on the other hand, are
in demand, as demographics support
„ Job losses have moderated with a loss of only 85,000 jobs during December 2009 – compared
household formations and we witness a
to the peak of job cuts at 741,000 during January 2009.
structural shift from homeownership to
„ Temporary help – an indicator of recovery – has been steadily rising since July 2009. rental.
„ GDP increased 2.2% during the 3rd quarter of 2009 – rising for the first time in four quarters.
„ The leading economic indicators index has increased 7.2% since its low in March 2009. Components of a Recovery
„ Claims for unemployment insurance peaked in April 2009 and are declining.
Worker productivity (output per hour) jumped
8.1% during the 12 months ending September
Although the national recession has ended, warning signs suggest a slow growth recovery: 2009, as companies experienced a rise in profits
stemming from reduced employee costs. This
„ Increased worker productivity which in turn is leading to reduced job growth. is the highest increase experienced since the
„ Reduced consumer sentiment that is depressing consumer spending. 9.7% rise during the 12 months ending 3rd
„ A high personal savings rate that is also contributing to dampened consumer activity. quarter of 2003 and compares to the long-term

26 Section Two
average of 2.0%. Productivity typically spikes at the U.S. Productivity
end of a recession due to companies significantly Employee Output per Hour
reducing costs – by eliminating workers and reducing
or capping salaries and overhead costs.

The spike in productivity during the 3rd quarter,

coupled with reduced costs, should encourage
companies to ease layoffs and start hiring temporary
staff until they regain confidence to hire full-time staff.
A rise in temporary employment indicates companies
need workers in order to keep up with demand, but
do not want to hire full-time staff until they are certain
economic recovery has real traction.

Temporary help has been steadily rising since July

2009, according to the American Staffing Association
index. We believe temporary employment will
continue to rise through 2010, as companies test
their confidence in the economy. After confidence
has been gained, we expect temporary staffing to Source: Bureau of Labor Statistics; January 2010.

level off and companies to slowly start to fill full-time

positions.
American Staffing Association Index
Rising productivity and the hiring of temporary
workers are both good signs for the economy.
However, consumer spending drives job growth, as it
accounts for two-thirds of the GDP. Although showing
signs of modest gains, spending remains limited.

The University of Michigan’s monthly index of

consumer sentiment is a valuable measure, as
it provides a look into the consumer mindset –
indicating if consumers are confident enough to part
with their money. The index rose to 72.5 in December
2009 – rising unevenly since the low of 56.3 in
February 2009. Although the index is on the rise,
it has been wavering as consumers remain unsure
about the economy. In addition, the index remains
below the long-term average of 88.2 and low enough Source: ASA; January 2010.

to hamper robust spending.

The lack of consumer spending is reflected in the
personal savings rate, which has jumped to 4.5% at
September 2009 from 1.7% in 2007. A rise in 1.0%
of savings equals $100 billion lost in discretionary
spending.
We believe it will take time for consumers
to regain confidence in the economy – not
until material job gains are felt and consumer
wealth is regained. Until that time, consumers
will likely refrain from spending on non-
essential items. Given the unemployment
rate likely will not decline until mid-2010, we
believe consumers will not regain spending
confidence until mid-2010 – and even then
spending will be sporadic until 2011. Not
until 2012 or later will spending be robust –
as consumers regain the $14 trillion in wealth
that evaporated during the housing and
stock market corrections of 2006-08.

The National Economy 27

Consumer Sentiment Economic Outlook

„ GDP: negative 2.5% in 2009 once the numbers are

finalized; positive 2.5% in 2010.
„ Payroll jobs: modest job gains in 2010.
„ The housing market: Stabilization in early 2010,
leading to traction by late 2010. Some local
markets, like Washington, sooner.
„ Long-term interest rates: up 100 to 300 basis
points in the next 12 to 36 months.
„ Inflation: Not a meaningful factor in the short-run.

Federal Intervention in the Economy

*Through December 2009.
Source: University of Michigan, Federal Reserve Bank of St. Louis; January 2010. The American Recovery and Reinvestment Act (ARRA),
more commonly known as the 2009 Stimulus Program,
was signed into law on February 17, 2009, at a cost
to taxpayers of $787 billion. Under this program,
Personal Savings Rate
President Obama plans to save or create 3.5 million
jobs nationally. Of the $787 billion, the largest share,
$288 billion, is devoted to tax relief, with another $144
billion set aside to aid government budget crunches at
the state and local levels.

Only $257 billion of the $787 billion stimulus money has

been allocated so far, according to Recovery.gov. This
funding has reportedly created or saved over 640,000
jobs. These positive signs should continue through
2011 as more of the stimulus money filters through the
economy.

There has been some discussion of inflation worries. We

*Third quarter 2009 at annualized rate.
Note: shaded bars represent recessions.
Source: Bureau of Economic Analysis; January 2010.
Recovery will be slow-paced, with the worst performance behind us. We expect to see more
bankruptcies and foreclosures, as we are not fully out of the woods. High worker productivity,
coupled with low consumer confidence and restrained spending means few new jobs in the
near-term.
believe this is an intermediate to long-term problem
and not a short-term issue due to the lack of pricing
pressure in the economy until 2011 or 2012. The Fed
has promised to do what it takes to get the economy
back on track while balancing the issue of inflation.
We believe the Fed will start to increase short-term
rates modestly during 2010 to head off inflation. And
long-term rates we believe will rise as much as 100 to
300 basis point in the next 12 to 36 months – further
dampening economic activity and pricing pressure.

Now, for a look at the components that make up

our economy:

28 Section Two
U.S. Economic Trends and Forecast American Recovery and Reinvestment Act
1981 – 2014 Overview of Funding

Source: Recovery.gov; January 2010.

Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Delta Associates; January 2010.

Federal Funds Rate GDP Percent Change

2007 – 2009

*Unchanged since December 16, 2008. Note: Annualized.

Source: Federal Reserve Board; January 2010. Source: Bureau of Economic Analysis; January 2010.

Gross Domestic Product (GDP)
After four straight quarters of decline, the GDP increased 2.2% (annualized
rate) during the 3rd quarter of 2009, compared to declining a revised 0.7%
during the 2nd quarter.
We expect GDP to rise by a similar level during the 4th quarter, once the
numbers are finalized, as Federal stimulus and capital injections work their
way further into the economy. However, for the year, we expect the GDP to
decline 2.7%. The GDP should rebound with 2.5% growth in 2010, 90% of
the long-term average.

The National Economy 29

Leading Economic Indicators Index U.S. Payroll Job Change

Note: Index has been re-benchmarked, with 2004 as the base year.
Source: The Conference Board; January 2010.
Source: Bureau of Labor Statistics; January 2010.

Index of Leading Economic Indicators U.S. Payroll Job Change

12 Months Ending December 2009
The index of leading economic indicators has increased for the eighth
consecutive month – rising to 104.9 in November 2009. The index is above
the 99.2 experienced one year ago and has risen 7.2% since its low in
March 2009 – both positive signs for the economy.

This index suggests recovery is unfolding and economic conditions should

continue to improve through 2010. However, we expect growth to be slow
through 2010.

Payroll Jobs

Approximately 7.2 million jobs have been eliminated since the start of the
recession in December 2007 – a 5.2% decline.

On a month-to-month basis, the peak in job losses was experienced during

Source: Bureau of Labor Statistics; January 2010.
January 2009. Since January, the nation continued to shed jobs, but at a
reduced rate. Most notably, the nation shed only 85,000 jobs in December,
after a slight gain of 4,000 in November. This compares to the monthly
average of 302,000 jobs lost since the start of the recession. „ A decline in demand for goods.
„ Gains in productivity due to automation.
Not all sectors are cutting jobs, as the Health/Education sector added
376,000 new jobs during the 12 months ending December 2009. The „ Continued off-shoring of manufacturing due to lower production
manufacturing sector experienced the most job cuts during this period – costs overseas.
1.3 million jobs – due to:

30 Section Two
An indicator of market health, the Purchasing Managers’ Index (PMI) was Purchasing Managers’ Index
at 55.9 in December 2009, compared to 32.9 one year earlier. The PMI has
risen above 50 (an indication of expansion) for the past five months, the first
time since January 2008. We expect the demand for goods and services
will remain slow during 2010, as consumers gradually regain confidence.

Business inventories grew at an above-average pace during 2004 through

2008. However, with the recession hampering consumer spending,
businesses have been working to reduce stockpiles. During the 12 months
ending the 3rd quarter 2009, companies slashed inventories by 13.4%. With
reduced inventories, the supply/demand ratio will gradually balance.

Unemployment Rate

The U.S. unemployment rate is 10.0% at December 2009, up from 7.4%

one year ago. The under-employed rate is 17.3%. This rate includes
employees working part-time and overqualified workers taking a lower-
skilled position. Source: Institute for Supply Management; January 2010.

U.S. Total Business Inventories U.S. Unemployment Rate

Note: Seasonally adjusted. Note: Through December 2009; seasonally adjusted; shaded bars represent recessions.
Source: U.S. Census; January 2010. Source: Bureau of Labor Statistics; January 2010.

We anticipate the unemployment rate will continue to edge up during the
1st quarter – before declining slowly during the balance of 2010. Of note,
although economic recovery is underway, unemployment is a lagging
indicator.
Unemployment Claims
Initial unemployment claims peaked in April 2009 – indicating the
recession is over by the single best barometer. In each of the past five
recessions, dating back to 1975, the recession’s end has coincided with the
peak in the four-week moving average in initial unemployment claims.
This observation, made by Robert J. Gordon (a member of the Business
Cycle Dating Committee of the National Bureau of Economic Research,
the agency that determines when recessions began and ended), is
startling in its simplicity.

The National Economy 31

Duration of Recent Recessions In each case, the recession ended within a month
of the peak in initial claims. The peak in claims
Duration of Recession Peak in Initial Unemployment Claims End of Recession during the 2007-2009 recession was in early
16 Months February 1975 March 1975 April 2009. Although it is possible another peak
could occur, the pattern of previous recessions
6 Months June 1980 July 1980
suggests that the April peak will not be reached
16 Months October 1982 November 1982 again during the 2007-2009 contraction, as
8 Months March 1991 March 1991 layoffs have been decelerating.
8 Months October 2001 November 2001
Inflation
Source: Smart Money via MSN.com, NBER, BLS, St. Louis Fed, Delta Associates; January 2010.

Consumer prices declined 0.2% during the 12

U.S. Initial Unemployment Claims months ending October 2009. Prices reached a
Four-Week Moving Average | December 2007 to December 2009 recent low in April 2009 and have been steadily
rising since – at a 1.7% rate.

We believe that inflation will be controlled at

0.5% to 1.0% during 2009, when the numbers
are finalized, as companies work to get rid
of high inventories and consumer spending
remains lackluster. As consumer confidence
returns, the Fed will watch for inflationary effects
on commodity prices. In the intermediate and
long term we expect inflation to be an issue but
not in the short-term.

Energy Prices

Note: Data is seasonally adjusted. Oil prices are starting to rise again, after sinking
Source: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis, Delta Associates; January 2010.
to a cyclical low of $39 per barrel in February
2009. Since this bottom, prices have increased
U.S. Inflation 90% to $75 a barrel in December 2009 and even
higher at this writing.

As prices dropped, OPEC cut oil production

by three million barrels a day in order to regain
supply/demand balance. This reduction set
supply below the current demand levels and
prompted prices to rise. The cartel’s preferred
price range is $60 to $80 per barrel.

*12-months percentage change through October 2009.

Source: Bureau of Labor Statistics; January 2010.

32 Section Two
Oil Prices
Note: 12 month averages of WTI NYMEX prices.
Source: GASearch; January 2010.
Dow Jones Industrial Average
Note: Through December 2009.
Source: Dow Jones; January 2010.
Gas prices have increased to $2.61 per gallon
at this writing, a 62% rise during the past year.
Although gas prices have increased, the price
of gas remains lower than the recent peak of
over $4.00 a gallon during the summer of 2008.
We expect oil prices to average $70 to $80 per
barrel in 2010.
Stock Market
The stock market is not the economy. But many
believe it is a leading indicator – a predictor of
economic conditions in 12 months or so. The
Dow Jones peaked in late 2007 and bottomed
out in March 2009, with the Dow at 6,547.
Since hitting bottom, the Dow has increased
approximately 59%, as investors are starting to
regain confidence and stocks were at bargain
rates, allowing buyers to reap the rewards of the
next economic expansion. To sustain this bull
market, profits need to follow.
Mortgage Rates
The 30-year fixed mortgage rate is currently
under 5% – a boon to home buyers. A low interest
rate, coupled with the first-time home buyer
tax credit – now expanded to move-up buyers,
has sparked a jump in mortgage applications.
However, tight underwriting requirements have
kept some buyers out of the market.
New Housing Construction and Sales
New homes sold at an annualized rate of 430,000
units during October 2009, up 5% from one year
earlier. Notably, new home sales have increased
31% from the low of 329,000 units sold at an
annualized rate during January 2009.
Sales prices on new homes declined to an
average of $261,000 per unit in October 2009,
down 4.7% from one year earlier. However,
prices have risen 6.4% from the cyclical low of
$245,200 during January 2009.
The National Economy 33
Mortgage Rates
30-Year Fixed Rate
*At December 2009.
Source: Freddie Mac; January 2010.
U.S. Existing Home Sales vs. Sales Price
*Annualized sales rate at October 2009.
Source: National Association of Realtors; January 2010.
Existing Home Sales
Now we are talking progress! Existing homes sold at an annualized rate
of 6.1 million units during October 2009, up 24% from one year ago. The
current inventory is at a 7.0 months supply, down from 10.2 months one
year ago.
Sales prices on existing homes declined to an average of $218,100 per
unit, down 5.0% from one year ago. However, prices have risen 5.5% from
the cyclical low of $206,700 during January 2009.
34 Section Two
U.S. New Home Sales vs. Sales Price
*Annualized sales rate at October 2009.
Source: U.S. Census; January 2010.
Annual Change in Existing Home Sale Prices
*12 month ending September 2009.
Source: National Association of Realtors; January 2010.
According to the National Association of Realtors (NAR), price changes
during the 12 months ending September 2009 ranged from a low of -34.5%
(Las Vegas) to a high of +0.2% (Houston).
We believe housing sales will continue to rise through 2010, given low
interest rates and the home buyer tax credit – now extended through
Spring 2010. With the inventory declining, prices should start to stabilize
during the first part of next year and gain traction soon after. Many local
markets, like Washington, are already seeing the early stages of a housing
market recovery.
Federal Budget Deficit Federal Budget Deficit

The Federal budget deficit climbed to $459

billion during 2008, as spending exceeded
revenues. The deficit was boosted by the $168
billion Economic Stimulus Act of 2008.

The Congressional Budget Office (CBO)

anticipates, with the most recent projections,
the U.S. budget deficit for 2009 will total
$1.59 trillion. The deficit will balloon this year,
as the government foots the bill for TARP, the
auto bailout, and the American Recovery and
Reinvestment Act, among other programs.

*Projected by CBO as of August 2009. U.S. Trade Deficit

Source: OMB, CBO; January 2010.

When annualized, the trade deficit through

September 2009 retracted to $361 billion,
U.S. Trade Deficit compared to $677 billion in 2008. Annualized
exports declined 17% from 2008, compared to
imports which declined 26%.

We expect exports to decline notably during

2009, once the numbers are finalized, as our
global partners experience a steeper and
longer recession compared to the U.S. Imports
should decline as well, as American consumers
demanded fewer goods.

*Through September 2009 annualized.

Source: U.S. Census Bureau, Bureau of Economic Analysis; January 2010.

The National Economy 35

Economic Outlook National Payroll Job Growth Summary

We believe the national economy reached The U.S. economy shed 4.2 million payroll jobs over the 12 months ending December 2009. This
the bottom during the middle of 2009 represents a decline of 3.1%. The pace of job change has been rapid, as 7.2 million jobs have been
– concluding this economic downturn. cut since the start of the recession. However, job losses have moderated, as the recession has ended
Although recovery is underway, we are not out and a slow recovery is underway.
of the woods yet, as we predict unemployment,
a lagging indicator, will continue to edge up into
2010. In addition, we expect more bankruptcies
and foreclosures, as the financial markets remain U.S. Payroll Job Growth
unsettled.
Job Change %Change
The stimulus spending is starting to have an
2009* -4,164,000 -3.1%
impact. Greater gains will be felt during 2010, as
more stimulus money is disbursed. We believe 2008 -558,000 -0.4%
the 4th quarter GDP will grow at the same level 2007 1,527,000 1.1%
achieved during the 3rd quarter. However, for
2006 2,397,000 1.8%
the year, we expect the GDP to decline 2.5%.
The GDP should rebound with 2.5% growth in 2005 2,276,000 1.7%
2010, about 90% of the long-term average. 2004 1,423,000 1.1%
2003 -344,000 -0.3%
High worker productivity, coupled with
low consumer confidence and restrained 2002 -1,489,000 -1.1%
spending, means few new jobs will be 2001 36,000 0.0%
created in the recovery period that will last
through 2012. *Change for 12 months ending in December 2009; others are comparisons of annual averages. Note that BLS has rebenchmarked figures since
their initial publication; the figures presented above are the most recent estimates.

Until job growth resumes, consumer spending

cannot return to robust levels, thereby
creating a protracted and anemic recovery.

36 Section Two
12-Month Payroll Employment Change Through November 2009

Job Change Job Change

Metro Area # % Metro Area # %
Jacksonville (2,500) -5.2% Minneapolis-St. Paul (52,700) -3.0%
Austin (4,300) -0.5% Boston (Metropolitan NECTA) (53,100) -2.1%
San Antonio (6,200) -0.7% Las Vegas (60,400) -6.7%
New Orleans (7,000) -1.3% South Florida
Columbus (OH) (10,000) -1.1% West Palm Beach/Boca Raton (15,900) -2.9%
Memphis (13,500) -2.1% Miami/Miami Beach/Kendall (24,400) -2.3%
Washington, DC (15,300) -0.5% Fort Lauderdale (24,800) -3.3%
Oklahoma City (15,400) -2.6% Subtotal South Florida (65,100) -2.8%

Raleigh-Durham (20,300) -2.7% Seattle (68,500) -3.9%

Kansas City (22,200) -2.2% Philadelphia (80,900) -2.9%

Baltimore (25,800) -2.0% Houston (88,900) -3.4%

Nashville (26,100) -3.4% Phoenix (110,200) -6.0%

Pittsburgh (26,600) -2.3% Atlanta (117,100) -4.9%

Salt Lake City (29,400) -4.6% San Francisco Bay Area

Indianapolis (33,300) -3.6% Oakland/Fremont/Hayward (34,900) -3.4%

Cincinnati (33,600) -3.2% San Jose/Sunnyvale/Santa Clara (42,700) -4.7%

Charlotte (37,500) -4.4% San Francisco/San Mateo/Redwood City (48,200) -3.4%

St. Louis (38,100) -2.8% Subtotal Bay Area (125,800) -4.3%

(43,300) -3.3% Detroit (Detroit/Warren/Livonia) (128,600) -6.8%

San Diego
(43,900) -5.0% New York (186,100) -2.2%
Sacramento
(44,000) -4.1% Chicago (186,600) -4.1%
Orlando
Cleveland (45,500) -4.3% LA Basin
(50,700) -1.7%
Orange Co. (Santa Ana/Anaheim/Irvine) (53,000) -3.6%
Dallas/Ft. Worth
Riverside/San Bernardino/Ontario (55,200) -4.6%
Denver-Boulder (51,300) -3.7%
Los Angeles/Long Beach/Glendale (141,900) -3.5%
Tampa-St. Pete (51,900) -4.3%
Subtotal LA Basin (250,100) -3.7%
Portland (OR) (52,200) -5.0%

Source: Bureau of Labor Statistics, Delta Associates; January 2010.

The National Economy 37

3 The
Washington Area Economy

39
The
Washington Area Economy
Slow Regional Recovery Underway Since 1st Half 2009, as Federal Although conditions remain sluggish, the worst condi-
Initiatives Stimulate the National Economy; Area Holding Up tions appear to be behind us, and a slow recovery is
underway, as suggested by the following indicators,
Better than the Nation
among others:

Two years ago in TrendLines we declared the region to be resilient, yet we observed that
„ Retail sales, for nondurable goods, bottomed out
the local economy had peaked for this cycle in 2004. Last year we described the Washington
during the 1st quarter. Although still sluggish,
metro area as recession-resistant, as the nation tumbled into recession. This year we observe
sales increased during the 2nd and 3rd quarters.
that in 2009 the region suffered its first recession since 1990, losing jobs. Yet, we believe the
Washington metro area economy experienced a shallow and short-lived recession in 2009 „ The metro area unemployment rate peaked in
and was in recovery by the Spring of the year. June 2009 at 6.5% and has declined to 6.1% in
November 2009 (the most recent statistic available
at this writing).
Payroll Job Growth
„ Consumer confidence in the South Atlantic
Washington Area | 1981 Through November 2009
bottomed out in the 1st quarter of 2009 at 20.8 and
has risen to 23.9 during the 3rd quarter. This pattern
is paralleled by the Greater Washington Board of
Trade’s Consumer Confidence Index that shows
the regional index bottomed out in December
2008.
„ The Washington Metro area Index of Lead-ing
Economic Indicators bottomed out in the 1st
quarter of 2009 and is up since.

We believe GRP may have declined as much as 0.5%

during 2009, once the numbers are finalized. This
decline is less severe compared to the projected
national decline of 2.5%. The decline locally is due largely
to retail and construction – the two hardest hit industries
*12 months ending in November 2009. in the metro area, which are taking longer to recover.
Source: BLS, Delta Associates; January 2010.

40 Section Three
Although sluggish conditions remain as a slow recovery is underway, Washington maintains one Despite a net job loss of 15,300 payroll positions in
of the strongest economic bases in the nation. the metro area, four of the twelve sectors grew jobs
over the past 12 months. The region continues
„ Payroll Employment: 3.0 million at November 2009. to grow high-end jobs even as it sheds low-end
„ Job Growth: negative 15,300 during the 12 months ending November 2009. jobs. The top three sectors leading job growth are
Government, Education/Health, and Professional/
„ Unemployment Rate: 6.1% at November 2009, up from 4.3% one year ago. Business Services – with a total of 27,000 new jobs
„ Coincident Index: 104.0 at September 2009 – up from the bottom at 103.8 in February added to the economy in these three sectors.
2009.
„ Leading Index: 107.0 at September 2009, the same level as one year ago. The Government sector gained 17,300 jobs during
the last 12 months, with 76% of these jobs created in
„ Inflation: prices decreased 0.8% during the 12 months ending September 2009. the Federal government.
„ Housing Prices: increased 2.2% during 2009.
Source: BLS, GMU-CRA, MRIS; January 2010.
The Education and Health sector gained 5,200
jobs in the previous 12 months, with most of these
positions in the health field.
Jobs
The Professional and Business Services sector
With 3.0 million payroll jobs, the Washington metro area ranks the fourth largest job base among gained 4,500 jobs during the last 12 months.
metro areas, behind New York, the LA Basin and Chicago.
The greatest number of jobs lost during the past 12
Payroll employment declined 15,300 in the Washington metro area over the 12 months ending months occurred during the month of January 2009
November 2009. This represents a decline of 0.5%, compared to the national decline of 3.5% with 59,900 jobs cut during the month. We believe
during this period. this was a deep loss because (1) the National Bureau
of Economic Research (NBER) declared in December
2008 the country was in a recession, spooking
employers who then eliminated workers, and (2) the
Payroll Job Change
retail sector eliminated holiday staff.
Washington Metro Area | 12 Months Ending November 2009
However, the Washington metro area has grown
jobs since January 31, 2009 – adding 50,700
new jobs. The Government and Professional/
Business Services added 32,600 and 12,400 new jobs,
respectively, since January 2009.

While January is typically a poor month for job growth

because of seasonal layoffs, we believe the monthly
trend in 2009 is a legitimate source of optimism for
the year ahead.

Despite job losses that have occurred over the

past year, the metro area is holding up well
compared to other large metro areas, which have
experienced notable declines. For example, over the
past year, the LA Basin and Chicago metros shed
Source: Bureau of Labor Statistics, Delta Associates; January 2010. over 437,000 jobs combined – 3.7% and 4.1% of their
workforce, respectively.

The Washington Area Economy 41

Trends in Employment by Major Sector Unemployment Rate
Washington Metro Area | In 000’s of Payroll Jobs
The Washington area unemployment rate was
November 2009 12-Month Change 15-Year Annual Average 6.1% at November 2009, up from 4.3% one year
ago. This compares to the national rate of 10.0%
Government 688.1 17.3 4.0
in November and December 2009.
Edu./Health 351.3 5.2 8.3
Prof./Bus. Svs. 692.6 4.5 20.3 The Washington metro area has the lowest
259.5 0.5 5.4 unemployment rate among large metro areas.
Leisure/Hosp.
Although the region’s unemployment rate has
Transport/Util. 62.6 -0.4 0.0 risen 180 basis points over the past year, the rise
Other 183.7 -1.5 4.5 is less severe compared to other metro areas
Whole. Trade 67.3 -2.3 0.6 such as San Francisco Bay and Los Angeles,
which experienced a rise of 370 and 330 basis
Manufacturing 57.3 -2.6 -0.4
points during the past 12 months.
Financial 146.7 -5.3 1.7
Information 84.3 -5.9 0.6
Retail Trade 258.6 -9.1 2.6
Constr./Mining 154.0 -15.7 4.5
Total 3006.0 -15.3 52.1

Source: BLS, Delta Associates; January 2010.

Payroll Job Change Unemployment Rates

12 Months Ending November 2009 Large Metro Areas | November 2008 vs. November 2009

Source: Bureau of Labor Statistics; January 2010. Source: Bureau of Labor Statistics; January 2010.

42 Section Three
Coincident and Leading Indices Index of Coincident Economic Indicators
Washington MSA
The Washington Metro Area Coincident
Index, which represents the current state of the
area economy, was 104.0 in September 2009,
below the 20-year average of 107.9. However,
the index remains above the low of 103.8
experienced in February.

The following factors contributed to the rise

in the Coincident Index since February – as
the local economy slowly recovers from the
recession:

„ Retail sales, for nondurable goods,

bottomed out during the 1st quarter –
although still sluggish, sales increased on
average 6.5% during the 2nd quarter, and
0.6% during the 3rd quarter.
Source: GMU Center for Regional Analysis, Delta Associates; January 2010.
„ Although consumer confidence in the
South Atlantic region ticked down to 23.9
during the 3rd quarter, from 24.4 during
Index of Leading Economic Indicators
the 2nd quarter, it is above the low of 20.8
Washington MSA
experienced during the 1st quarter.

The Leading Index, which forecasts Washing-

ton area economic performance over the next
18 months, is 107.0 at September 2009. This is
above the cyclical low of the 1st quarter, but
matches the level achieved one year ago. How-
ever, it is above the 20-year average of 102.6.

Consumer Price Index

Overall inflation in the Washington/Baltimore

region was -0.8% during the 12 months ending
September 2009, compared to the annual
average of 4.5% in 2008. However, prices have
increased 2.4% since January 2009.
Source: GMU Center for Regional Analysis, Delta Associates; January 2010.

Money and demand for goods are stronger here

compared to the nation, as prices decreased
1.3% nationwide during the 12 months ending
September 2009, but have risen 2.3% since
January 2009.

The Washington Area Economy 43

Although prices continue to rise for food, shelter, and medical care, prices Consumer Price Index (CPI)
dropped notably for gas over the past year. However, in recent months, Washington/Baltimore Region
the price of gas has risen again, as supply has been cut to better match
demand.

We expect prices rose just slightly in the Washington/Baltimore region

during 2009, when the numbers are finalized, as recession-conscious
consumers continued to tighten belts. And we expect inflation to remain
tame in 2010 as well.

Housing Prices

The average price of a Washington-area home is $376,188 in the 4th quarter

of 2009. The metro-wide price of homes sold in the 4th quarter of 2009 was
down 2.7% from the 3rd quarter of 2009, but it was 2.2% higher than in the
4th quarter of 2008. This is the first time metro-wide prices have risen on a
trailing 12-month basis since the 4th quarter of 2007.
Source: U.S. Commerce Department, Delta Associates; January 2010.
The Washington metro area median home price was 2.9 times the median
household income during the 3rd quarter of 2009 – just above the nation
at 2.8. So, even with high housing prices, housing in the region is no less
affordable due to higher incomes.

Washington metro home prices increased an average of 9.5% per year
from 2000 to 2006, outpacing the average annual income growth of 2.5%
during the same period. Prices started to decline in 2007 due to the Credit
Crunch and fell further at the onset of the national recession, as the credit
markets froze and job losses increased foreclosures.
Housing became more affordable as the metro area nearly matched that of
the national average for affordability among major metros. The New York
metro area is the least affordable with a ratio of 6.6.
The Washington housing market has entered the recovery phase of
the cycle in 2009. We expect that a combination of continued Federal
impact on the Washington housing market and a recovering labor market
will continue to bring gains to the Washington housing market in 2010,
particularly in the Core (the District, Arlington and Alexandria). The pace
of the recovery may be uneven, but in early 2010, we expect that renewed
demand will yield yearly price gains, particularly in the Core, where
inventory is more limited and demand is strongest, but extending to the
Outer suburbs by late 2010/early 2011.

Housing Market Indicators

Washington Metro Area | At Year-End 2009

Change vs. Last Quarter Change vs. Q4 2008

Q4 Avg. Sales Price $376,188 2.7% 2.2%
Q4 Sales (units) 14,549 12.3% 18.9%
Q4 Days on Market 72 9 32
Sales Pace* 5.3 Months 0.1 Months 2.0 Months

*Sales pace is ratio of total for-sale inventory to current month’s sales.

Source: MRIS, Delta Associates; January 2010.

44 Section Three
Ratio of Median Home Price to Median Household Income Gross Regional Product (GRP)
Washington Metro Area Select Metro Area | 2008

*Third quarter 2009

Source: NAHB/Wells Fargo Opportunity Index, Delta Associates; January 2010.
Source: Dr. Stephen Fuller, Delta Associates; January 2010.

Federal Spending – Per Capita Region’s Core Industries

Select Metro Areas | 2008
The Washington area’s gross regional product (GRP) was $401.3 billion in
2008, an increase of 4.7% from revised 2007 figures. Data for 2009 is not
yet available.

The Washington metro area ranked 9th in population, yet was the nation’s
4th largest economy among major metros during 2008. Only New York,
Los Angeles and Chicago outsized the Washington metro area economy.

The Washington metro area ranks number one in terms of Federal

spending per capita. During 2008, the Federal spending per capita in the
Washington metro totaled $25,860, well ahead of the $9,042 spent per
capita nationwide. For procurement spending, the Washington metro
obtained $12,756 procurement dollars per capita in 2008, compared to
$1,620 nationwide.

Approximately one-third of the Washington metro GRP is generated by

the Federal government – the region’s most important core industry. A
Source: Consolidated Funds Report, Dr. Stephen Fuller, Delta Associates; January 2010. core industry is one that imports capital and exports a good or service.
Total Federal spending in the Washington metro area was up in 2008 to
$134.8 billion, a 7.8% increase from 2007.

The performance of the Washington area’s core industries bolsters the

area during economic downturns.

The Washington Area Economy 45

Core Economic Sectors - In Current Year Dollars GRP Change
Washington Metro Area Washington Metro Area

2008 Substate Area 2009

GRP in Billions $ %GRP Northern Virginia -1.0%
Total Federal $s $134.8 33.6% Suburban Maryland -0.5%
Portion Procurement $66.5 16.6% District 1.0%
Technology $60.0 14.9% Total Metro Area -0.5%
Building Industry $23.1 5.8%
Source: Dr. Stephen Fuller; January 2010.
Int’l Business $18.8 4.7%
Hospitality $7.8 1.9%
Other $156.8 39.1%
National Recession Washington Metro Area GRP Change
Total GRP $401.3 100.0%
12/07 - 6/09 0.0%

Note: Figures are estimates. Procurement figures do not include US Postal Service and FAA purchases. 3/01 - 11/01 2.5%
Source: Dr. Stephen Fuller, Delta Associates; January 2010.
7/90 - 3/91 0.2%
7/81 - 11/82 3.1%
1/80 - 7/80 2.3%

Source: BEA, Dr. Stephen Fuller; January 2010.

We expect GRP in the metro area edged down 0.5% during 2009, once Federal Procurement Spending
the numbers are finalized. This compares favorably to our projection of the Washington Metro Area
national gross domestic product change of negative 2.5% in 2009.

During past national recessionary periods, the Washington metro economy

has grown. During the last four periods of national GDP contraction, ranging
six to sixteen months, the Washington metro area GRP grew 0.2% to 3.1%. We
believe this recession will be different, as retail spending and construction –
the two hardest hit industries in the metro area – are taking longer to recover
than originally anticipated. With this, we expect GRP to have declined slightly
for this recession.

The most important element of Federal spending in the metro area economy
is procurement — the Federal government’s purchase of goods and services
from the private sector. Spending increased notably during 2008 by 10% to
$66.5 billion – above the 15-year annual average of 7.5%. The rise in spending
was due, in part, to an increase in funds flowing from the Department of
Homeland Security. Procurement funding increased 37% in this agency,
compared to the average increase of 20% per annum.
*Estimate.
Source: Dr. Stephen Fuller, Delta Associates; January 2010.

46 Section Three
Procurement spending is projected to rise 13.2% Consumer Confidence Index
in 2009, once the numbers are finalized, to $75.3 Greater Washington Area
billion in current year dollars, accounting for
53% of all Federal funds flowing into the area
economy. This level of procurement spending
supports about 550,000 private sector jobs.

Procurement funding will build upon already-

established government initiatives to increase
the concentration of Federal government
contractors in the Washington area. While
there has been some speculation about
the Obama Administration tightening the
rules on government contracting, it is our
judgment that it is unlikely to reduce the
amount spent, even if it reduces the rate of
growth in spending.

Regional Consumer
Source: Greater Washington Board of Trade, Delta Associates; January 2010.
Confidence Index

Consumer confidence is on the rise in the metro

area, according to the Washington Region
Consumer Confidence Index
Confidence Index by the Greater Washington Greater Washington Area
Board of Trade.

The index increased four points to 60 at

November 2009, from 56 at April 2009. The
District experienced the greatest rise, to 67,
from 59 in April 2009.

Consumers are also more confident in job

security, as 25% believe their company will
expand jobs in the near-term, up from 22%
in December 2008. Those believing their
companies would eliminate jobs declined to
15% in November 2009, from 24% in December
2008.

Source: Greater Washington Board of Trade, Delta Associates; January 2010.

The Washington Area Economy 47

Households Age 25-34 with Income $100K+ Local Recovery Efforts
Top 10 Counties
Only 10.8% of jobs expected to be saved or
created locally through the American Recovery
County Total HH Age 25-34 $100K+ % Age 25-34 $100K+
and Reinvestment Act have been so far. The
Loudoun County, VA 104,327 10,494 10.06% Federal government estimated that a total of
Arlington County, VA 92,693 8,172 8.82% 65,000 jobs would be saved or created in the
San Francisco County, CA 332,596 26,026 7.83% metro area through stimulus dollars. However,
to date just over 7,000 jobs have been saved
New York County, NY 768,292 58,448 7.61%
or created. This is not surprising, as not all
Douglas County, CO 102,379 7,403 7.23% the funds have been spent and the funding is
Forsyth County, GA 59,296 4,128 6.96% through 2011. We expect job creation through
Alexandria City, VA 65,453 4,372 6.68% the stimulus act to pick up pace during 2010.

Delaware County, OH 62,451 4,151 6.65%

Washington Area Economic Outlook
Scott County, MN 45,157 2,975 6.59%
Broomfield County, CO 20,834 1,360 6.53% We expect the Washington metro area
economy to slowly recover during 2010; it
Source: The Nielsen Company; January 2010.
will pick up steam thereafter. We believe the
local economy hit bottom during the 1st half of
2009 and recovery is now underway. However,
Young and Affluent in the Metro Area to Help with Recovery we expect the speed of recovery to be slow, as
consumers and companies remain cautious.
A larger share of young and affluent households resides in the Washington metro area, compared
to other U.S. counties, according to the Nielsen Company. Loudoun County ranks first with 10% of We expect consumer confidence will edge up
its population young (between the age of 25 to 34) and affluent (making $100,000 or more). This moderately during 2010. Consumer confidence
compares to only 2.2% of young and affluent households nationally. is currently very low and will remain challenged
until healthy job growth is reported.
We expect the younger consumer to help pull the regional economy through the recovery. Given
consumer spending is two-thirds of the GRP, retail sales is a heavyweight in economic health.

According to the Greater Washington Board of Trade, younger generations are more confident about
the economy compared to older generations, as the younger consumer has time to recoup money
lost during the recession. This is no doubt a boon to the area, as the Washington metro has a larger
share of young and affluent residents living here. We expect those closer to retirement to remain
more cautious about spending in the next two years.

With consumers stashing cash during the recession, a rebound in spending is anticipated during 2010
– riding upon the economic recovery and pent-up demand for goods.

Retail spending is projected to rise 5.5% in the Washington metro area during 2010, according to
Woods & Poole. This is above the 25-year annual average of 3.5%. The 2010 sales total is expected to
mirror what spending totaled back in 2004. This will help boost the GRP in the metro area.

48 Section Three
Consumer Confidence Index Total Jobs Created or Saved Through the American Recovery and
Greater Washington Area Reinvestment Act
Washington Metro Area

Source: Greater Washington Board of Trade, Delta Associates; January 2010. *Delta Associates’ estimate based on state-wide job creation and regional population share.
Source: Recovery.gov, Delta Associates; January 2010.

Payroll Job Growth We believe GRP may have declined 0.5% during 2009, once the numbers
Washington Metro Area | 2000 Through 2012 are finalized. This decline is less severe compared to the national decline
of 2.5%. The decline locally is due to retail spending and construction –
the two hardest hit industries in the metro area, which are taking longer to
recover. Conditions should stabilize in 2010 with a GRP rise of 2.7%. This
compares to the national GDP rise of a projected 2.5%.

Given these factors, in consultation with Dr. Stephen Fuller of George

Mason University, we estimate that 24,500 payroll jobs were eliminated
in the metro area in 2009, once the numbers are finalized. We expect
the Suburban Maryland and Northern Virginia substate areas eliminated
17,800 and 11,200 positions, respectively. The District likely added 4,500
new jobs as the government staffed up in 2009.

Note: Data restated since 2000 consistent with redefinition of metro area in March 2005.
Source: Dr. Stephen Fuller, Delta Associates; January 2010.
Job growth will resume in 2010, with 24,900 new jobs and gain
steam in 2011 with 34,900 new jobs. It is not until 2012 or 2013 that
we are likely to return to job growth numbers that parallel historic levels
– 52,000 annual average. This level of performance is likely to be among
the strongest in the nation among metro areas. And it provides plenty of
job and population growth to support a recovering and eventually robust
housing and commercial real estate market in the period ahead. Just
where are these opportunities? Read on . . .

The Washington Area Economy 49

4
The Washington Area
Office Market

51
The Washington Area
Office Market

Market Fundamentals Deteriorate Largest U.S. Office Markets

Further, Yet Sturdy Compared to the 2009
Nation; Prospects of “Normalized”
Market Conditions by 2013

In the 2006 TrendLines report, when we predicted

vacancy rates would rise and rents would decline
by 2008, we had no idea that these fundamentals
would also be compounded in 2009 by a decline in
absorption due to a severely weakened economy.
Even though the Washington metro area office market
finished the year with modest positive absorption,
taken together these factors have conspired to raise
the regional vacancy rate in 2009 to the highest rate
seen since the early 1990s.

The regional office market struggled through the

lowest absorption year in 40 years, as government,
health care, and contractors boosted absorption
Note: Excludes New York at 1 billion SF.
with notable lease deals. Although overall vacancy Source: CoStar, Delta Associates; January 2010.
increased 240 basis points during the past year, it
remains lower than most large metro areas due to
the stabilizing influence of the Federal government.
Given rising vacancy, average net effective rents Despite weak conditions, the metro area remains one of the top performing markets in the
declined 6.9% in 2009. Construction levels have nation.
declined notably, but remain elevated at this point in
the cycle – particularly in the District. Supply/demand fundamentals are expected to return to equilibrium by 2013 for the metro
area around which time the regional rental rate will be increasing at the long-term average of
3.8%. Select submarkets with stronger fundamentals will experience this sooner.

52 Section Four
National Context Washington metro has the fourth-lowest overall
vacancy rate among large metro areas in the
The Washington metro area is the 3rd largest office market in the nation, behind New York and Los United States. The New York metro area holds
Angeles/Orange County. the lowest overall vacancy rate in the nation, at
10.7% – at least for now.

While lower Manhattan has been hit hard

Office Vacancy Rates by financial firms putting space back on the
Selected Metro Areas | Year-End 2009 market, the New York metro vacancy rate has
been bolstered by the suburbs.

The Washington metro area ranked first among

the nation’s large metro areas in net absorption
during 2009, with positive 630,000 SF. The
Federal government, the engine that never
stops, helped buoy the metro area during the
downturn, while other large metros suffered
negative absorption.

2009 Office Market Highlights

„ Net absorption: 630,000 SF, compared to

3.4 million SF in 2008.
„ Sublease space: Increased by 1.2 million
SF. Sublease space represents 1.4% of the
standing inventory compared to 3.4% at
the peak of 2002.
Net Absorption of Office Space
Selected Metro Areas | 2009 „ Overall vacancy rate: 13.0%, up from
10.6% one year ago. Fourth lowest rate in
the nation.
„ Direct vacancy rate: 11.6%, up from 9.3%
one year ago.
„ Pipeline (U/C and U/R): 5.7 million SF,
down from 15.4 million SF one year ago.
„ Pipeline pre-lease rate: 48%, compared
to 26% a year ago.
„ Average Effective Rents: Down 6.9%,
compared to an increase of 0.1% in 2008.
„ Investment sales: $2.0 billion compared
to $3.7 billion in 2008. Average sale price:
$276/SF.

Source (For Both): CoStar, Delta Associates; January 2010.

The Washington Area Office Market 53

Net Absorption of Office Space Net Absorption of Office Space
Washington Metro Area | 1980 Through 2009 Washington Metro Area | 2009

Source: Delta Associates; January 2010.

Source: Delta Associates; January 2010.

Net Absorption: 630,000 SF Net Absorption of Office Space And Change in Sublease Space
2008 vs. 2009 (000s of SF)
Net absorption of office space in the Washington metro area totaled
630,000 SF, compared to 3.4 million SF in 2008 and the long-term average Direct Space Net Sublease Space Absorbed
of 7.5 million SF.
Absorption or (Returned)
Market 2008 2009 2008 2009
Northern Virginia and the District experienced positive net absorption NOVA 2,333 360 (386) (348)
during 2009, as government, health care, and government contractors
Sub MD 524 (649) (21) (113)
signed notable deals in these sub-state areas. Suburban Maryland
experienced negative net absorption, as demand could not keep pace District 546 919 0 (706)
with tenants vacating large blocks of space. For instance: Total 3,403 630 (407) (1,167)

„ Lockheed Martin vacated 180,000 SF at 6560 Rock Spring Drive in the Source: Delta Associates; January 2010.

North Bethesda submarket.

„ Verizon vacated 123,000 SF at 3901 Calverton Boulevard in the
Beltsville/ Calverton/College Park submarket. Gross Leasing Volume Down; Favors
Government & Business Services
Sublease space increased 1.2 million SF during 2009, compared to rising
407,000 SF in 2008. Sublease space currently represents 1.4% of standing
We estimate gross leasing activity totaled 24.5 million SF during 2009,
inventory. This compares to a level of 3.4% during the peak of the 2001-
below the 10-year average of 31.2 million SF. Large renewals continue to
02 downturn. While sublease space is impacting lease rates and market
dominate the market, as tenants remain skeptical about expanding during
conditions in select submarkets, it is not as market wide concern nor is it
the recession. We expect renewals to dominate through 2010 as well.
expected to become such in this cycle.

The most notable non-renewal deal of the year was during the 2nd quarter,
Net absorption of Class A space totaled 2.8 million SF in the Washington
with the Raytheon Company’s lease of 600,000 SF in AOL’s former space at
metro area during 2009, compared to 4.3 million SF during 2008.
22110-22270 Pacific Boulevard in Loudoun County.

54 Section Four
Gross Leasing Activity
Washington Metro Area | 2000 Through 2009
*Estimate.
Source: CoStar, Delta Associates; January 2010.
Office Leasing Activity by Sector
Washington Metro Area | 2005 – 2009
*Legal, Financial, Business Services.
Source: CoStar, Delta Associates; January 2010.
Despite the national recession, gross leasing activity in the Washington
metro area increased 12.3% in 2008 compared to 2007, due in part to
numerous renewal deals by the Government as tenants wait to relocate to
bases under the Base Realignment and Closure (BRAC) decision. However,
the tech/telecom sector experienced a notable rise in leasing due in part
to procurement spending, which increased 10.0% during the year.
Although we expect procurement to rise 13.2% during 2009, compared
to 2008, once the numbers are finalized, leasing has tallied below 2008
levels given the worst of the recession was felt during the past year. Given
this, tenants will re-arrange space in the near-term, sometimes doubling-
up employees in office space, until they are comfortable enough with their
economic future to lease expansion space.
The share of gross leasing activity has increased in the past year by
government and legal/finance/business services. This is consistent with
the growth in jobs in these categories.
Vacancy Rate: Up to 13.0%
The Washington area’s overall vacancy rate is 13.0% at year-end 2009,
up from 10.5% one year ago. This is the highest rate seen since the early
1990s.
The Washington metro area direct vacancy rate increased to 11.6% at
December 2009, from 9.3% one year ago.
The Washington area overall Class A vacancy rate is 14.5% at year-end
2009, up from 11.9% one year ago. The Washington area direct Class A
vacancy rate is 12.6% at December 2009.
Vacancy Rates and Vacant Space (All Classes)
Washington Metro Area | December 2008 vs. December 2009
Vacancy Rate December 2008 December 2009
Direct 9.3% 11.6%
Sublet 1.2% 1.4%
Vacant Space (Millions of SF)
Direct 36.0 45.7
Sublet 4.6 5.8
Source: CoStar, Delta Associates; January 2010.
The Washington Area Office Market 55
Construction and Pre-Leasing Elevated; Leasing on Recent Deliveries and Projects U/C or U/R
Starts Halted Washington Metro Area | 2007 – 2012

There is 5.7 million SF of office space under construction or

renovation in the Washington metro area at December 2009,
down from 15.3 one year ago.

48% of the space under construction is pre-leased at December

2009, up from 26% a year ago.

Office Space Under Construction

Washington Metro Area | Millions of Square Feet

December December December

Substate Area 2007 2008 2009
8.0 3.4 0.4 Note: Recent deliveries are based on % leased upon delivery.
NOVA Source: CoStar, Delta Associates; January 2010.
Sub MD 3.3 2.3 0.6
District 9.3 9.6 4.8
Construction Starts
Total 20.6 15.3 5.7 Washington Metro Area | 2002 Through 2009
Source: CoStar, Delta Associates; January 2010.

Pre-lease rates on recent deliveries in the Washington metro area

have eased over the last few years. However, projects delivering
during 2010 and 2011/2012 have picked up tenants, as pre-leasing
is currently 49% and 45%, respectively. These pre-lease rates are
on par with the 10-year average pre-lease rate of 55%.

Notably, the GSA pre-leased 288,000 SF at One Constitution

Square in the NoMa submarket during the 4th quarter, as it plans to
take this space short-term as its headquarters building undergoes
a green renovation – compliments of the stimulus package.

Construction starts of office space in the Washington metro area Source: CoStar, Delta Associates; January 2010.
have slowed down to a trickle – totaled 2.1 million SF during 2009,
compared to 7.8 million SF in 2008.

Given the credit crisis, developers are finding it difficult to either
start construction or continue construction that has broken ground.
Only all-cash projects or projects with notable pre-leasing in place
appear to be breaking ground at this time.
One project of note likely will start construction early in 2010.
Armed with the recent deal with the Defense Advanced Research
Projects Agency (DARPA) to fully lease the new office project, the Shooshan
Companies intends to develop a 353,000 SF office building at 675 N. Randolph
Street in the RCB Corridor of Arlington, Virginia.
Approximately 11.7 million SF of office space, including renovations, delivered in
the Washington metro area during 2009 at 23% leased. During 2008, 10.7 million SF
delivered at 36% leased upon delivery.

56 Section Four
Projected Supply vs. Demand: Vacancy to Decline by Office Space Deliveries
December 2011 Washington Metro Area | 1980 Through 2009

We project the overall vacancy rate will decrease over the next two years,
from 13.0% today to approximately 12.6% by December 2011.

We project vacancy to rise in the District due to elevated pipeline. Vacancy

in Suburban Maryland and Northern Virginia should experience a slight
decline, as the level of construction has declined notably.

We expect overall vacancy outside the Beltway to tick down to 14.6% at

December 2011, from 15.9% today due to the notable reduction in pipeline
projects. However, we project the overall vacancy rate inside the Beltway to
edge up to 11.1% over the next 24 months, from 10.8% today, due to the
high construction levels in the District.
Note: Delivery totals include renovations.
Source: CoStar, Delta Associates; January 2010.

Office Space Demand and Deliveries Office Space Demand and Deliveries
Washington Metro Area | 24 Months Ending December 2011 Washington Metro Area | 24 Months Ending December 2011

Source: Delta Associates; January 2010. Source: Delta Associates; January 2010.

Rents: Declined in 2009; Cyclical
Increases Expected by 2012
The average effective office rent declined 6.9%
during 2009, compared to ticking up 0.1%
during 2008. Rents declined at a faster pace
outside the Beltway, by 7.8% during the year,
as vacancy remains high. Rents declined 6.0%
inside the Beltway during the same period.
Concessions to tenants increased during 2009,
as competition to sign tenants intensified.
The average TI cost for space increased to
approximately $45.00/SF, for all classes of
space. The average free rent offering rose to 4.0
months at December 2009.
We project rents will decline 5.0% to 7.0%
during 2010, as vacancy remains elevated.
However, better buildings in better submarkets
will outperform these averages.
By 2012 we expect rents to begin their cyclical
increase.

The Washington Area Office Market 57

Investment Sales: Cap Rates Up; Prices Down; Volume
Uptick in Second Half of 2009
Investment sales were limited during 2009, as tight credit, a large bid/
ask gap, and moderating property performance kept investors on the
sidelines. Sales volume totaled $2.0 billion during 2009, compared to $3.7
billion during 2008.
Investment sales increased in the Washington metro area during the 2nd
half of the year as investors tip-toed back into the market. A total of 23
transactions closed during the last six months of the year, compared to 16
sales completed during the 1st half.
The volume during the 2nd half totaled $1.2 billion, compared to $801
million during the 1st half. Given distressed assets coming to the market,
investors looking for deals with long-term stability prospects have targeted
the Washington metro market.
Sales prices averaged $276/SF in the Washington area during 2009,
compared to $431/SF in 2008. The decline in average sales price was due
to few transactions during the past 12 months, plus investors’ concern
about future near-term market performance.
Loan defaults remain a concern in the Washington metro area. However,
distressed assets remain relatively low in the metro area compared to the
nation. The Washington metro area makes up only 1.6% of the nation’s
distressed assets. This compares to New York at 8.3% and South Florida at
5.3%. So far, only $1.1 billion of office assets has come under distress in the
Washington metro area. We expect this total to remain relatively low.
The average cap rate for core office assets in the Washington metro area,
on a 12-month trailing basis, is 8.1%, up from 6.5% one year ago, according
to Real Capital Analytics. We expect this trend to continue in the near-term
but we believe most of the rise in cap rates is behind us for this cycle.
Investment Returns: Among Best in Nation
The yield on Washington area office assets for the 12 month period ending
September 2009 was second in the U.S., behind only Houston. Total
returns are, of course, negative due to asset value declines which offset
current returns/cash flow. Total returns realized in the Washington office
market were negative 18.76% for the 12 months ending September 2009.
The Washington area return compares favorably to the national return of
negative 24.52% and all other major metros except Houston.
We expect the metro area to remain a desirable destination for investors’
cash in the long-run. Although transactions started to rise during the
2nd half of the year, we believe total sales will be limited through 2010,
although higher than in 2009.
NCREIF Return Index1
Office Properties
Metro Area 12-Month Total Return at 3rd Quarter 20091
Houston -16.16%
Washington -18.76%
Wash. CBD -18.51%

Cap Rates for Core Office Assets Wash. Suburbs -19.06%

Washington Metro Area | 2002 Through October 2009 Atlanta -19.19%
Dallas -20.74%
Chicago -20.93%
Denver -22.99%
National Average -24.52%
Los Angeles -25.08%
Phoenix -25.55%
San Francisco -26.10%
New York -32.87%
Boston -34.27%

1
NCREIF compiles return based on its members’ $87.7 billion office portfolios. The index includes both
*Trailing 12 months current income and capital appreciation returns.
Source: Real Capital Analytics, graphic by Delta Associates; January 2010. Source: Delta Associates, based on data in NCREIF’s 3rd Quarter 2009 Real Estate Performance Report.

58 Section Four
Office Market Outlook: Identifying Opportunities Overall Office Vacancy
During the Recovery Outside the Beltway

The Washington metro area market should remain one of the best
performing office markets in the nation. We believe the recession
bottomed out locally during the first half of 2009 and a recovery is
underway. Recovery will be slow during 2010, as the Federal government’s
oversight activities begin to ramp up hiring and office leasing. However,
meaningful growth will not be felt until 2011. And “normalized” office
market conditions will not be felt until 2013.

„ We expect vacancy to rise inside the Beltway, peaking at 12.5% in

2010, as a greater amount of spec product is set to deliver at that
time. After peaking in 2010, vacancy should start to decline, not
falling below the rent equilibrium zone (a zone where rents tend to
neither rise nor fall) until 2014.

Source: Delta Associates; January 2010.

Overall Office Vacancy

Inside the Beltway

Office Rent Growth per Year

Washington Metro Area

Source: Delta Associates; January 2010.

„ We believe vacancy outside the Beltway to have peaked at year-end Source: Delta Associates; January 2010.
2009 at 15.9%, as most projects have already delivered. We expect
vacancy to decline slowly during 2010 and 2011. However, we do not
expect vacancy to reach the rent equilibrium zone until 2015 or so, as
we believe demand will be softer outside the Beltway compared to
inside the Beltway.
„ We project rents will decline by 5.0% to 7.0% in 2010 – with concession
offerings limiting effective rents. We expect available space to remain
elevated in 2010, keeping rents down. By 2012 rents should gain
traction, and return to the long-term average increase of 3.8% by 2013.

The Washington Area Office Market 59

We project sublease vacancy will rise during the 1st half of 2010, but it should not rise to the levels
experienced during the last downturn. Submarkets with large shares of leasing by the financial sector
should feel the pinch of rising sublease space impacting rents. These submarkets include Bethesda/
Chevy Chase and Tysons Corner.

The District could attract a few suburban tenants, as the emerging submarkets of NoMa, Southwest,
and Capitol Riverfront deliver spec construction at lowered rents. Tenants looking to trade up could
choose these submarkets.

We anticipate limited investment sales into 2010 – with the exception of all-cash transactions, as
lending remains modest. With stressed and distressed assets arriving to the market, sales volume
should increase in the near-term as potential buyers take advantage of reduced prices.

Overall, the long-term outlook for the metro area remains positive, driven by the continued
activity of the Federal government. We expect the Washington metro office market to remain
among the best performers in the nation.

As a result, the successful investor/developer will:

1. Selectively accumulate assets at below replacement cost while prices and interest rates are low.
2. Invest in repositioning older, under-performing assets at superior locations for delivery in 2013
or sooner if tenancy is not a risk until 2013 or beyond.
3. Develop and deliver new projects before 2013 only on a tenant-driven (pre-leased) basis or
sooner in the few submarkets where supply/demand fundamentals warrant.
4. Position now for development throughout the metro area in 2013 and beyond as more
“normalized” conditions return to the market.

60 Section Four
The Washington Area Office Market 61
 The Washington/Baltimore
Flex/Industrial Market

63
The Washington/Baltimore
Flex/Industrial Market

Regional Market Contracted in 2009; Stabilization Largest U.S. Flex/Industrial Markets 2009
Expected In 2010 2009

The Washington/Baltimore flex/industrial market contracted during 2009

with 2.3 million SF of negative absorption.

„ Market conditions held up better in the Baltimore metro area than

in the Washington metro, as a handful of large bulk warehouse lease
deals kept absorption only modestly negative during the year.
„ The Washington metro experienced a larger share of tenants
vacating space – with fewer large lease deals to offset the loss.

Rents declined over the past 12 months as property owners competed

for tenants.

Source: CoStar, Delta Associates; January 2010.

The amount of space in the construction pipeline is down, which will help
stabilize the market during 2010. However, a handful of spec construction
projects started in the Baltimore metro area in 2009, as the area prepares
some older product in the Baltimore area, there is little manufacturing in
for BRAC-related tenants.
this region.

Overall, flex/industrial conditions are weak in the Washington/Baltimore

The Washington/Baltimore region’s overall vacancy rate, at 11.4%, is just
region, but should regain solid footing in 2010 due to the relative strength
above the national average of 10.0%.
of the Baltimore market.

Net Absorption Down

National Context
Flex/industrial net absorption totaled negative 2.3 million SF in the
The Washington/Baltimore flex/industrial market, at 356 million SF, is a
Washington/Baltimore region during 2009, compared to 4.4 million SF
mid-scale market where the primary function is regional distribution and
during 2008. This compares to the 10-year average of 4.0 million SF per
accommodation of R&D and low-cost office uses. With the exception of
annum.

64 Section Five
2009 Market Highlights Flex/Industrial Vacancy Rate
Select Metro Areas | Year-End 2009
„ Net absorption: Negative 2.3 million SF, compared to positive 4.4
million SF in 2008.
„ Sublease space: Increased by 217,000 SF. Available sublease space
represents 0.9% of standing inventory.
„ Overall vacancy rate: 11.4%, up from 10.1% one year ago.
„ Under construction: 1.1 million SF, down from 3.5 million SF one year
ago.
„ 41% of the space under construction is pre-leased, up from
30% a year ago.
„ Rents: Down 4.3%, compared to rising 0.3% in 2008.
„ Investment sales: $136.9 million. Average sales price: $58/SF.

Net absorption during 2009 fell into the negative, as demand could not
keep pace with tenants vacating space. Although there were some gains Source: CoStar, Delta Associates; January 2010.
in leasing of bulk warehouse space, it was offset by tenants vacating flex/
warehouse and flex/R&D space.

Leasing of bulk warehouse space was fairly healthy, as: Flex/Industrial Net Absorption
Washington/Baltimore Region | 1997 Through 2009
„ Sun Products Corporation leased 503,000 SF at 1900 Clark Road in
Harford County.
„ IDX Corporation leased 434,000 SF at 8901 Snowden River Parkway in
the Columbia submarket.
„ Hhgregg leased 393,000 SF at 14301 Mattawoman Drive in Prince
George’s County.
„ Parcorini Metals leased 135,000 SF at 7700 Rolling Mill Road in the
Baltimore County East submarket.

However, numerous tenants vacated flex/warehouse and flex/R&D space.

For instance:

„ IDX Corporation vacated 196,000 SF at 1710 Midway Road in the BWI

submarket.
„ HBO vacated 121,000 SF at 8855 McGaw Road in the Columbia sub- Source: Delta Associates; January 2010.
market.
„ Edge Technologies vacated 45,000 SF of flex/warehouse space at
8003-8039 Laurel Lakes Court in Prince George’s County.
„ Northrop Grumman vacated 98,000 SF of flex/R&D space at 9310-9370
Gaither Road in Montgomery County.

The Washington/Baltimore Flex/Industrial Market 65

Type of Flex/Industrial Inventory & Absorption Gross Leasing Activity
Washington/Baltimore Region | 2009 Washington/Baltimore Region | 2000 - 2009

Inventory at 12/2009 Net Absorption

(millions of SF) 2009
Type of Space SF % SF
Bulk Warehouse 110.5 31% (88,000)
Flex/Warehouse 212.3 60% (1,259,000)
Flex/R&D 33.6 9% (947,000)
Total Flex/Industrial 356.4 100% (2,294,000)

Source: Delta Associates; January 2010.

Sublease space increased 217,000 SF during 2009, compared to

increasing 753,000 SF during 2008. Sublease space represents 0.9% of *Estimate.
the standing inventory. Source: CoStar, Delta Associates; January 2010.

Location of Flex/Industrial Inventory & Absorption Buildings with Contiguous Blocks of Available Space
Washington/Baltimore Region | 2009 Washington/Baltimore Region | December 2009

Inventory at Net Absorption (000s of SF)

12/2009
(millions of SF) Direct Space Including Sublet
Metro SF % SF % SF %
Wash. 177.7 50% (1,904) NA (1,964) NA
Balt. 178.7 50% (390) NA (547) NA
Total 356.4 100% (2,294) NA (2,511) NA

Source: Delta Associates; January 2010.

Net absorption of newer space (built after 1987) totaled negative 1.1
million SF during 2009, compared to 5.2 million during 2008. For newer
space, the Washington metro area absorbed negative 836,000 SF and
Note: Includes buildings under construction or renovation.
the Baltimore metro area absorbed negative 240,000 SF. Source: CoStar, Delta Associates; January 2010.

Gross Leasing Activity Down

We estimate gross leasing activity in the Washington/Baltimore region The most notable lease deal in the region during 2009 was Sun
totaled 17.1 million SF during 2009, below the 10-year average of 20.9 Products Corporation’s lease of 503,000 SF at 1900 Clark Road in the
million SF. Harford County submarket of the Baltimore metro area. The most
notable deal in the Washington metro area was Hhgregg’s lease of

66 Section Five
393,000 SF of bulk warehouse space at 14301 Mattawoman Drive in Flex/Industrial Vacancy Rate
Prince George’s County. Washington/Baltimore Region | 1998 Through 2009

There are 1,114 buildings with contiguous blocks of available space over
10,000 SF in the Washington/Baltimore region. This compares to 963
buildings one year ago. The largest block of space is 1.1 million SF at 2800
Eastern Boulevard in the Baltimore metro area.

Vacancy Rate Up

The region’s overall flex/industrial vacancy rate increased to 11.4% at year-

end 2009, from 10.1% one year ago. The Baltimore area’s overall vacancy
rate is 190 basis points lower than the Washington area’s rate.

The region’s direct flex/industrial vacancy rate was 10.5% at December

2009, up from 9.3% one year ago.
Source: CoStar, Delta Associates; January 2010.

The region’s overall vacancy rate for newer product (built since 1987)
increased to 13.1% at year-end, from 10.7% one year ago. The region’s
Direct Flex/Industrial Vacancy Rates
direct vacancy rate for newer product is 11.9%, up from 9.5% a year ago.
Washington/Baltimore Region | All Space

Construction Activity Way Down

Year-End Year-End Year-End
The amount of flex/industrial space under construction in the region is 1.1 Market 1996 2000 2009
million SF at year-end 2009, down from 3.5 million SF one year ago. Wash/Balt Region 12.3% 7.3% 10.5%
Wash/Balt Subs. 10.4% 6.1% 10.6%
Space under construction is 41% pre-leased at December 2009, up from
30% one year ago. The Washington area’s pre-lease rate is 55%, compared Balt/Wash Corr. 10.8% 7.5% 10.9%
to the Baltimore area’s at 2%. Wash. Metro Area 10.5% 6.2% 11.3%
Balt. Metro Area 14.5% 8.4% 9.6%
Only a handful of projects started construction during 2009. Ground-
breakings totaled 696,000 SF during the past year, compared to 4.0 million Source: CoStar, Delta Associates; January 2010.
SF in 2008. Notably, 260,000 SF started in the Baltimore metro area during
the 2nd half of the year, as the area prepares for an influx of BRAC-related
tenants by September 2011.
Flex/Industrial Space Under Construction and Pre-Leased
Year-End 2008 and Year-End 2009 | (Millions of SF)
Pre-lease rates at delivery are starting to rise in the Washington/Baltimore
region, after declining through 2009. With 1.1 million SF due to deliver
during 2010, developers have been more judicious on breaking ground on At 12/2008 At 12/2009
spec projects, which has allowed pre-lease rates to rise. SF % Pre- SF % Pre-
Metro Area U/C leased U/C leased
1.8 million SF of flex/industrial space delivered in the region during 2009, Washington 2.2 28% 0.8 55%
compared to 7.3 million SF in 2008.
Baltimore 1.3 33% 0.3 2%
25% of the space delivered during the past year was leased upon delivery, Regional Total 3.5 30% 1.1 41%
compared to 24% during 2008.
Source: CoStar, Delta Associates; January 2010.

The Washington/Baltimore Flex/Industrial Market 67

Supply v. Demand: Vacancy to Decline; Leasing on Recent Deliveries and Projects U/C or U/R
Rents to Rise in 2011 Washington/Baltimore Region | 2006 Through 2010

The regional flex/industrial vacancy rate likely will tick down to 11.0%
by year-end 2010, from 11.4% today. The overall vacancy rate will edge
down 40 basis points, as we project demand to outpace new supply by
approximately 1.0 million SF.

Although demand is likely to remain below average during 2010, given

the construction pipeline has been cut substantially over the past year,
demand is likely to exceed new supply modestly.

We expect more progress in 2011, with the vacancy rate declining towards
the equilibrium zone (10.3% to 10.5%), heralding the resumption of region-
wide rent growth.

Rents Tick Down for the First Time Since 2003

Note: Recent deliveries are based on % leased upon delivery.
Source: CoStar, Delta Associates; January 2010.
Flex/industrial rents in the Washington/Baltimore region declined 4.3%
during 2009, after rising 0.3% during 2008.

Rent growth for each product type experienced decline during 2009. Rents
declined most notably for flex/R&D space, as overall vacancy increased
Flex/Industrial Space
Deliveries and Pre-Leasing | Washington/Baltimore Region | 2009
the most, at 260 basis points over the past year, for this product type.

The Washington metro area experienced stronger rent declines of 4.9% Millions of SF
during 2009, as overall vacancy climbed 190 basis points since year-end Market Delivered % Pre-leased
2008. Rent decline in the Baltimore metro area was lower at 3.5%, as overall Washington 1.5 20%
vacancy ticked up 70 basis points. 0.3 46%
Baltimore
We expect flex/industrial rents to edge down during 2010, as the region Regional Total 1.8 25%
slowly recovers from the national recession. We anticipate rents will Source: CoStar, Delta Associates; January 2010.
tick down by 2.0% to 3.0% in 2010, as the economy gradually recovers.
However, during 2011 we expect rents to gain slight traction as the region-
wide vacancy rate continues to decline.

68 Section Five
 Investment Sales
Projected Year-End 2010 Vacancy Rates
Washington/Baltimore Region | Flex/Industrial Market | (Millions of SF) Flex/industrial investment sales volume totaled $137 million in the
Washington/Baltimore region during 2009, compared to $564 million in
Wash. Balt. Regional 2008.
Metro Metro Total
Inventory Sales prices averaged $58/SF for the 15 transactions that closed during the
year. This compares to $102/SF for 45 transactions in 2008.
Inventory at 12/09 177.1 178.7 356.4
Pipeline Thru 12/101 1.1 0.5 1.5 We expect limited investment sales activity, though possibly some
Inventory at 12/10 178.7 179.2 357.9 distressed sales, during 2010. With low prices, few deals on the market,
and tight credit markets, we expect a low volume of transactions again
Supply2 vs. Demand
in 2010. Regardless, investors will remain interested in the Washington/
Vacant Space at 12/09 21.9 18.6 40.5 Baltimore flex/industrial market, given its long-term, stable nature.
New Supply Thru 12/10 1.1 0.5 1.5
Avail. Space at 12/10 22.9 19.1 42.0 The Flex/Industrial Market Outlook:
Demand Thru 12/10 1.7 0.8 2.5 Identifying Opportunities During the Recovery
Vacant Space at 12/10 21.2 18.3 39.5
Flex/industrial market conditions in the Washington/Baltimore area should
Vacancy Rate2 stabilize during 2010 Demand should remain steady in the Baltimore
Vacancy at 12/09 12.3% 10.4% 11.4% metro area, as tenants start to lease space due to BRAC relocation.
Vacancy at 12/10 11.9% 10.2% 11.0%

1
Conditions in the Washington metro area should remain sluggish, as
Pipeline equals buildings under construction and those planned that may deliver by year-end 2010.
2
Includes sublet space. tenants are hesitant to lease space until improving business conditions
Source: CoStar, Delta Associates; January 2010.
are felt.

Rent traction should return region-wide by 2011.

Rent Decline by Product Type
Washington/Baltimore Region | 2009 Given this background, the successful investor/developer will:
1. Selectively accumulate assets in 2010 at below replacement cost
while prices and interest rates are low.
% Change
Submarket December 2008 to December 2009 2. Invest in repositioning existing under-performing assets.
Bulk Warehouse -4.1% 3. Position now for development of new projects in 2011 in select
-4.3% locations in the Baltimore market and 2012 in select submarkets in
Flex/Warehouse
the Washington metro.
Flex/R&D -4.8%

Source: CoStar, Delta Associates; January 2010.

The Washington/Baltimore Flex/Industrial Market 69

6
The Washington Area
Apartment Market

71
The Washington Area
Apartment Market

Class A Absorption Continues Record Pace While Vacancy National Context

Edges Down; Pipeline Continues to Shrink with Product
Shortage Now on the Horizon Though 9th in population, with an inventory of
approximately 518,600 units, the Washington metro
area is the third largest apartment market in the U.S.,
The Class A apartment market did not get the memo about conditions in the commercial real
behind New York and Los Angeles.
estate market. While net effective rents did edge lower by 2.0% over the year due to elevated
concessions, all other indicators showed improvement and set the stage for the coming
The Washington metro wide vacancy rate is 4.3% at
recovery.
year-end 2009. The national rate is nearly double this
rate at 7.6%.
The Washington metro area continues to be one of the best apartment markets in the
nation due to:
The metro-wide absorption of Class A and Class B
units in 2009 was 6,061 – the highest of any metro
1. A job market, that while losing lower wage earners, is still adding higher wage earners –
area in the nation. And this compares to a national
those who occupy Class A apartments.
total of negative 41,118 units. The Washington metro
2. A transient work force that has produced a large pool of renters by choice. total of Class A unit absorption set another record –
3. A demographic trend that is turning would-be purchasers into renters. 7,955 units absorbed in 2009.

However, we are in the midst of a more competitive apartment market due to deliveries Net effective rental rates for all classes of apartments
outpacing demand for the past 18 months. While several quarters of weaker performance are in the Washington metro area declined 2.0% during
ahead for the Washington metro, the groundwork is being laid for stronger market conditions 2009. On the other hand, rents declined 3.7%
in 2011 and 2012, and an emerging product shortage by 2012 in select submarkets and nationally. Class A rents in the Washington metro
widespread shortages in 2013. area declined 1.7% in 2009.

„ The pipeline of supply continues to decline from its peak in the fourth quarter of 2007.
„ Annualized Class A absorption exceeds 7,900 – the highest of any metro market in the
nation.

72 Section Six
2009 Washington Metro Apartment Apartment Vacancy Rates
Market Highlights: Major Apartment Marktes | 2009

„ The region’s stabilized vacancy rate for Class

A apartments is 3.6% – down from 4.4% a year
ago. For all investment grade apartments (Class
A and B) it is 4.3%, the same as a year ago. With
the national rate at 7.6%, this is one of the lowest
vacancy rates of any metro area in the nation.
„ Rents edged down over the past twelve months
for Class A units – 1.7% – compared to growth
of 0.1% during the preceding year. For all
investment grade product – Class A and Class
B units – rents declined 2.0% since December
2008.
„ Annual net absorption was strong, at 7,955
units for Class A product – maintaining a nation-
leading pace. With Class B dis-absorption,
The largest 171 apartment markets in the U.S.
1/
6,061 Class A and B apartments combined were *Mid-year 2009 data except Washington, Baltimore, and Philadelphia are as of year-end 2009.
absorbed in 2009. Source: REIS, Delta Associates; January 2010.

Average monthly absorption at new projects

slipped to 14 units per project per month from
15 last year, as the cumulative effects of product
Annual Net Absorption Class A & B Apartments
delivered in 2009 impacted lease-up pace. Major Apartment Markets
However, several projects are stabilizing: over
the last year projects in lease-up have declined
from 51 to 37.
„ Concessions at Class A projects continued to
edge higher. At year-end 2009, concessions
were 7.2% of face rent, compared to 5.7% of
face rent at year-end 2008. This upward trend
began in the first quarter of 2007, as the market
became more competitive.
„ Pipeline: After rising from a historically low
18,000 units in 2005, the pipeline ballooned to
36,951 units in December 2007, largely driven
by the reversion of condominium projects. In
the first quarter of 2008, the pipeline began its
cyclical decline, and has continued downward
to a new historical low of 16,606 as of year-
end 2009. We believe this downward trend will
continue over the next year due to the difficulty Wash = 12 months ending 12/09.
All other markets are 12 months ending 6/09.
of obtaining development credit. It is now 1/
The largest 171 apartment markets in the U.S.
below equilibrium and will result in product Source: REIS and Delta Associates; January 2010.

shortages by 2012.

The Washington Area Apartment Market 73

Effective Rental Rate and Vacancy Rate Rents
All Types and Classes of Apartments | Washington Metro Area
Net effective rents for Class A and Class B
apartments combined decreased over the
year by 2.0%. This decrease was driven by
rent declines in both the Class A and Class B
markets.

„ High-rise Class A product, almost exclu-

sively inside the Beltway, decreased 2.1%
while Class A gardens, largely outside the
Beltway, declined 1.6%. This is an inverse
pattern compared to prior years.
„ There are currently 14 low-rise projects
containing over 4,200 units in lease-up.
Several projects reached stabilization at
year-end 2009, reducing the number of
mid- to high-rise projects in lease-up to 23
– containing over 6,100 units.
Source: Delta Associates; January 2010.

Vacancy
Concessions for All Class A Properties Washington metro area vacancy rate for all
Washington Metro Area
classes of apartments was flat, remaining at 4.3%
at year-end 2009. The vacancy rate for Class A
Year-End 2006 Year-End 2007 Year-End 2008 Year-End 2009 apartments declined – moving down to 3.6%,
No. VA 2.7% 5.8% 5.3% 6.8% from 4.4% a year ago. This rate remains elevated
for the Washington metro area but it continues
Sub. MD 2.1% 3.4% 6.0% 7.3%
to be among the lowest in the nation.
District 2.7% 3.3% 6.3% 8.7%
Metro-Wide 2.4% 4.8% 5.7% 7.2% The stabilized vacancy rate remains elevated –
flat since year-end 2008 at 4.3%. However, only
in the first quarter of 2009 did rents for Class A
product begin to decline – for the first time since
Concessions for Class A Properties Currently Filling 2003.
Washington Metro Area
Concessions
Year-End 2006 Year-End 2007 Year-End 2008 Year-End 2009
No. VA 6.0% 9.5% 12.8% 14.9% Concessions rose for all Class A projects, from
5.7% at year-end 2008 to 7.2% at year-end 2009.
Sub. MD 6.0% 8.4% 12.0% 15.0%
Concessions for all Class A properties (that
District 5.4% 7.9% 7.8% 17.8% is, those filling up as well as those replacing
Metro-Wide 5.9% 9.0% 11.5% 15.7% turnover) are the highest they have been since
2003. See the accompanying table for details at
the substate level.
Source (For Both): Delta Associates; January 2010.

74 Section Six
Concessions for projects currently filling up,
and not yet stabilized, are the highest we have
ever recorded. See the accompanying table for
details at the substate level.
Concession rates are up due to the large
number of projects in lease up, currently 37.
However, this number is a decline from a peak
of 54 projects in lease-up in the first quarter of
2009. Approximately 54% of the 10,322 units
in projects leasing up have been absorbed,
compared to 49% of 14,640 units in lease-up at
year-end 2008.
Pipeline
The pipeline is shrinking: During 2007, the
pipeline grew significantly in response to
the robust performance of the apartment
market, available development financing, and
reprogrammed condominium projects. The
metro-wide pipeline peaked in the fourth
quarter of 2007, with declines registered across
the region throughout 2008 and 2009.
„ The District’s 36-month pipeline of
projects has declined to 3,683 units as
of December 2009 – a 48% decrease
from its peak. This figure includes only
those units that are under construction
as well as those we believe are probable
to move forward as planned and deliver
within 36 months. Vacancy, at 3.6%, is up
from 3.0% one year ago. The rent story in
the District is a tale of two cities. In total,
effective rents have declined by 1.3%.
However, when projects in the Capitol
Riverfront submarket are removed from
District totals, effective rents in the
remainder of the city have increased by
2.1%. Projected deliveries for the next 12
months stand at 822 units – a 30% decline
from deliveries during the preceding 12
months. Given recent demand patterns
and limited future supply over the next
A Word About Our Definition of Vacancy Rate
We sometimes hear from apartment developers and managers that their portfolio vacancy rate
is 200 to 400 basis points higher than the numbers we report, which places them under unfair
investor scrutiny. As a result, we thought it appropriate to describe here our term “vacancy.”
When we conduct our quarterly surveys, we obtain information on “units available to lease”
– that is, physical vacancy. Obtaining the information this way, of course, may produce several
important differences from “vacancy” as reported in your financial statements. Simply stated,
the difference can be characterized as:
Delta’s Definition: Available units to lease
Operating Statement Vacancy: Economic vacancy
Our definition (available units) may therefore be understated compared to yours (economically
vacant) by our exclusion of units occupied by non-paying tenants (which we cannot know), and
of units not available for lease, such as employee units and model apartments. We estimate that
this adds about 100 to 150 basis points to your definition of vacancy, as compared to ours. Our
vacancy rate may also be understated, compared to yours, by our exclusion of what at present
are economically vacant, on-notice units for which a lease to occupy in the future has been
signed (hence, they are not currently available to lease). We estimate that this potentially adds
another 150 to 200 basis points to your definition of vacancy, as compared to ours.
24 months, the District should begin to see an easing of downward rent pressure before other
substate areas. months, the District should begin to see an easing of downward rent pressure
before other substate areas.
„ Northern Virginia’s 36-month pipeline declined to 7,830 units at year-end 2009 – a 54% decrease
from the peak at year-end 2007. Projected deliveries for 2010 are down 27% over the 2009 totals.
We expect supply to exceed anticipated demand through 2010, with stabilized vacancy likely
edging up in 2010 and into early 2011.
Rent trends over the past twelve months:
■ Down 3.2% for all investment grade apartments.
■ Down 2.1% for Class A garden apartments.
■ Up 1.7% for Class A high-rise apartments.
The Washington Area Apartment Market 75
„ Suburban Maryland’s pipeline grew to
over 12,700 units by the peak at year-end
2007 but has declined by 60% to 5,093 at
year-end 2009. Approximately 1,245 units
are expected to deliver in this substate
area over the next twelve months, down
28% from the preceding year. Current
stabilized vacancy stands at 3.8%, the
highest in the metro area, driven upward
due to a higher concentration of job losses
in this area. Recent deliveries and project-
ed additional supply will maintain pressure
on occupancy and rental rates throughout
2010. However, with just two new project
starts in 2009 conditions should begin
to improve in 2011 as the local economy
firms up.
Suburban Maryland net effective rent
growth over the past twelve months:
Absorption
The Washington area’s Class A apartment absorption has been extremely strong over the past year
– 7,955 units. Absorption has been consistently strong at between 4,300 and 6,500 units per annum
over the past twelve years. What then is driving this strong Class A absorption pace even amid an
economic downturn that includes overall job losses?
„ The lingering for-sale housing downturn is readjusting the renter vs. owner ratio back toward
historical norms – perhaps even overshooting the norm during this recession.
„ The Washington economy continues to add well-paying jobs, even as losses at the lower end
of the pay scale occur. These well-paid wage earners rent Class A apartments. These jobs are
concentrated inside the Beltway, helping to fill the large number of Class A high-rise projects
delivering there.
„ The large number of projects in lease-up places no structural limit on absorption that a more
limited supply has in years past.
„ High concessions are buying absorption at newly leasing Class A properties – over half are
offering specials equal to or exceeding two months of free rent. In select submarkets, newly
leasing projects are very competitive with Class B rents, causing move-ups to Class A units from
Class B units. The resulting rent compression is causing elevated vacancy in Class B projects.

■ Down 0.5% for all investment grade

apartments.
Market Rate Apartment Development Pipeline
■ Down 1.0% for Class A garden
Washington Metro Area | 1999 Through 2009
apartments.
■ Down 4.6% for Class A high-rise
apartments.

Source: Delta Associates; January 2010.

76 Section Six
Annual Net Apartment Absorption
Class A and B Units | Washington Metro Area
Source: Delta Associates; January 2010.
Absorption Pace Per Project Per Month
For Projects in Initial Lease-Up | Washington Metro Area
Source: Delta Associates; January 2010.
These factors have led to the absorption of
7,955 Class A units in the past twelve months.
Concurrently, jobs losses in economic sectors
which consist of Class B renters, coupled with
move-ups to Class A properties due to rent
compression, have resulted in the dis-absorption
of over 1,800 Class B units during 2009. So while
Class A absorption remains near record highs,
total unit absorption totaled 6,061 units over
the past twelve months – closer to the historical
norm of 4,700 units per annum.
Resumption of overall job growth in 2010 should
positively impact the apartment market in
general and continued job growth in the Class
A renter demographic should positively impact
Class A apartment absorption in 2010.
Per-project monthly absorption has been
impacted by deliveries over the past 18 months,
gradually declining to the current pace of 14
units per month. The number of projects in
active lease-up has been declining, and is
currently 37 projects.
When Will the Market be on the
Upswing Again?
Metro-wide rent trends are likely to be negative
through mid-2010 as projects currently under
construction continue to deliver. As deliveries
slow in late 2010, rent growth will gradually
return to the market. Stabilized vacancy rates
will likely peak in the 2010 before edging
downward, with particular speed in the first
half of 2012. To take advantage of the market
“sweet spot,” position now for delivery in
early 2012, or even deliver in 2011 in select
submarkets.
The Washington Area Apartment Market 77
Class A Apartment Unit Starts Annual Class A Apartment Unit Deliveries
Washington Metro Area | 2008 Through 2009 Washington Metro Area | 2008 Through 2010

Source: Delta Associates; January 2010. Source: Delta Associates; January 2010.

Supply compared to demand? The tightening credit markets have Projected Deliveries
impacted development throughout the region, bringing construction Projects Currently Under Construction
starts to a near standstill for most of 2009. The “materialization rate” for Washington Metro Area | 2010 Through 2011
units that were to have begun construction over the preceding year is just
6%, with only 1,073 units starting construction in 2009.

The difficult task of securing development financing will continue to

hamper new projects during 2010 in our view. While frustrating in the
near term, this tightening of the development spigot will improve supply/
demand balance and the health of the Washington apartment market over
the intermediate term. In our judgment, a product shortage will emerge
by late 2011 in select submarkets and metro-wide by 2012.

Apartment unit deliveries will continue their cyclical decline from 6,417 in
2009 to an estimated 4,635 units in 2010 – a 28% decrease.

However, with numerous projects already under construction and delivering

over the next nine months, we anticipate that supply will outpace demand
in the short run.

Source: Delta Associates; January 2010.

Close monitoring of the overall health of the Washington economy will be
increasingly important during this period as job growth is key to producing
these results. Continued growth of high-income jobs will be necessary to
sustain and fill the large number of projects delivering over the next nine
months.

78 Section Six
Summary of Washington Apartment Indicators Demand and Supply Projections, Class A Apartment Market
Washington Metro Area | December 2009 Through December 2012
NoVa SubMD District Metro-Wide
Net Absorption Class A & B:
2009 2,541 1,611 1,909 6,061
2008 3,404 2,384 505 6,293
2007 1,001 380 606 1,987
Deliveries:
2009 3,510 1,737 1,170 6,417
2010 2,568 1,245 822 4,635
2011 513 677 738 1,928
2012 2,182 1,232 1,232 4,646
Starts
4Q 2009 46 0 289 335
2009 477 307 289 1,073
1
Probable supply after projected attrition.
36-month Pipeline: 1/ 2
Includes unleased units at projects in lease-up.
Source: Delta Associates; January 2010.
At 12/31/09 7,830 5,093 3,683 16,606
At 12/31/08 11,884 9,411 5,902 27,197
At 12/31/07 17,120 12,706 7,126 36,952

1/
Class A Apartment Vacancy Rate
Includes vacant units in projects leasing up, units under construction, and units expected to begin con-
struction and deliver in the next 36 months. Washington Metro Area | 2002 Through 2012

Rent Projections

We expect stabilized vacancy rates in Northern Virginia, Suburban

Maryland, and the District to be below 1.5% at year-end 2012.

We believe that supply will come into equilibrium with demand at the metro
level in late 2011 or early 2012. Given the projected delivery schedule of
projects currently under construction, we expect the region-wide vacancy
rate for stabilized Class A apartment properties to edge up to the mid-4%
range in 2010 before declining to 1.1% by year-end 2012. The 36-month
projection now extends beyond the peak vacancy of this cycle when the
pipeline’s low materialization rate and the subsequent improvement of
supply/demand balance begins to impact the market.

Source: Delta Associates; January 2010.

The Washington Area Apartment Market 79

Class A rents will continue to give up some ground in 2010 at the metro
level. As deliveries slow to a crawl in the later part of 2010, rents will gain
traction in 2011, though well below the long term average of 3.6% per
annum. Rents will slightly exceed the long-term average in 2012 in select
submarkets with a spike in rents in 2013, and better projects in stronger
submarkets will vastly outperform these market averages.
Annual Class A Apartment Rent Growth
Washington Metro Area | 2000 Through 2013
Source: Delta Associates; January 2010.
80 Section Six
Washington Investment Sales: Total Volume
Off Despite Late Year Uptick; Cap Rates
Appear to Have Peaked
2009 was significantly off the pace of prior record-setting sales years.
In 2007, we identified $1.95 billion in multifamily Class A building sales
volume. That total declined to $885 million in sales volume on twelve
transactions 2008. In 2009, we noted just $504.8 million of multifamily
Class A building sales (four garden properties, and four mid/high-rise
properties). Most of this volume came at the end of the year.
The average per-unit prices for 2009 closed sales were 34% to 41% lower
than at the peak of the market in 2007. We believe this confirms that
cap rates are up by a similar amount trough-to-peak. Cap rates on 2009
sales were too spotty to draw a conclusion about rates. However, based
on our year-end 2009 Market Maker Survey, cap rates for apartments
appear to have peaked in the spring/early summer of 2009 at 7.44%
(all classes and types of apartments) and declined at year-end 2009 to
7.15%. By type, at year-end 2009:
Class A high-rise: 6.61%
Class A suburban garden: 7.09%
Class B suburban garden: 7.75%
Overall: 7.15%
We believe that cap rates will hold in this pattern for a while. Price
increases may now have to be earned the old-fashioned way, by
performance enhancement. We believe the apartment segment is
a winner in the turmoil that follows this credit crunch, with home
ownership rates edging down from their cyclical high of 70%. If
homeownership rates continue to decrease, it is a reflection of strong
demand for apartment units in conjunction with limited availability of
credit. In turn, demand for this asset class among investors should
remain strong.
We have observed a meaningful increase in pre-sale activity among
our clients. We believe this foretells heightened sales activity in
the next twelve months. Little wonder: prices are meaningfully below
replacement cost – a time to accumulate assets.
Apartment Market Outlook: Identifying Opportunities During the Recovery

In this phase of the real estate cycle, the successful investor/developer will:

1. Selectively accumulate assets at below replacement cost while prices and interest rates are
low.
2. Invest in repositioning existing under-performing assets.
3. Develop new projects before 2012 only with superior design features at premier sites within
submarkets that will outperform the overall market.
4. Position now for development in 2012 as the metro area develops a supply shortage.

Superior design features: As the mixed-use moniker becomes more prevalent at projects across
the region, what was once seen as a niche is increasingly common. Merely adding first floor retail to
an otherwise common project will yield diminishing differentiation in this market. We feel creative
approaches to place-making, partnered with bold design, and designing for niches is essential
– niches such as student housing, seniors housing, mid-market housing in some locations and up-
market housing at others.

Superior locations: Not just transit access, but those submarkets with superior supply/demand
fundamentals are keys to success in the period ahead. And by our analysis there are many submarkets
with good supply/demand fundamentals that warrant attention and development before the metro
“sweet spot” of 2012.

Timing: Except for a half-dozen submarkets that will be ready sooner, most successful developments
will deliver in 2012 and beyond. With entitlements especially difficult in the region, it is not too soon
to be positioning for the next round of development – in 2012 in most areas and even before then in
select submarkets.

The Washington Area Apartment Market 81

 The Washington Area
Condominium Market

83
The Washington Area
Condominium Market

Sales Volume Up; Pipeline Down, With New Product 2009 Condominium Market Overview
Shortages Expected in 2010 in Select Submarkets
Sales volume: Over the past few quarters,
Given the free-fall of 2008, many in the TrendLines audience snickered last year when we condominium sales volume in the Washington metro
stated that prices would gain traction in 2009 in select submarkets and that sales volume would area has accelerated. For 2009 it totaled 2,350 units
improve in 2009 over 2008. And we said this with the headwind of job losses in the metro area. – a level not seen since 2007. Several factors have
Nevertheless: played a role in the increase in sales activity:

„ Prices increased 0.9% in Arlington and Alexandria. „ Interest rates remained near historic lows at
year-end and were below 6% throughout 2009.
„ Metro-wide volume increased 34%, to 2,350 units in 2009.
Near the end of the year, FHA rules were
relaxed to allow the new condominium pre-sale
Let’s hope our tarot cards are working two years in a row:
requirement to drop from 70% to 30%.
„ Price traction will likely spread to a few more submarkets in 2010, including the District. „ Since January 31, the metro area has been
growing jobs, mostly in sectors that support
„ Volume should increase in 2010 over that of 2009 – perhaps to 2,400 to 2,700 units.
condominium ownership.
„ Select submarkets are anticipated to experience product shortages in 2010, triggering
„ The first-time home buyer credit helped bring
condominium conversions in the next six to 18 months, and new product construction as
more buyers to the market. The tax credit was
soon as prices rise to support new development and a lender can be found.
extended until April 2010 and expanded to
include the move-up market, which should fuel
National Context more demand in the first half of 2010.
„ Contract kick-outs are returning to more
The Washington metro area is the fifth largest condominium market in the nation, with normalized levels, since building deliveries
approximately 220,300 units. Only the nation’s three largest cities (New York, Los Angeles, dropped off in 2009. A typical kick-out rate is
and Chicago), plus the popular second-home location of Miami, have a larger inventory of 15%-20%, whereas when the market was severely
condominiums than the Washington area. oversupplied, cancellation rates were sometimes
higher than 50%.

84 Section Seven
„ Prices continue to decline metro-wide, but in some submarkets, Net New1 Unit Sales By Jurisdiction
the declines are moderating. Buyers sense that the market may be 2009
recovering and are taking advantage of lower prices before they start
to increase. Submarket # of Units Sold2

Loudoun/Prince William 707

Prices: Net effective sales prices (after concessions) are down, but the
District of Columbia 524
declines are moderating in the District and Northern Virginia.
Arlington/Alexandria 439
„ Effective new condominium prices were down 5.8% metro-wide from Montgomery 273
2008. But, Arlington/Alexandria was up 0.9% and the District was
Fairfax/Falls Church 202
down just 3.7%.
Anne Arundel/Howard 185
„ Re-sale prices declined by 2.8% during the past 12 months. Prices
are up in all Northern Virginia jurisdictions, while Suburban Maryland Prince George’s 20
suffers from double-digit price declines. Metro Total 2,350
1
Includes conversions; 2Net number of binding contracts executed
Concessions: Metro-wide, concessions are down, averaging 3.6% of the Source: Delta Associates, January 2010.
purchase price at year-end 2009 (down 60 basis points from one year ago).

Pipeline: At year-end 2009 there were 6,071 unsold new condominium

units actively marketing in the metro area, a decline of about 40% from a
year ago. This represents 2.6 years’ worth of inventory on the market at New Condominium Activity by Sales Firm
current rates of sales velocity. Arlington/Alexandria and the District are Washington Metro Area | 2009
below the metro average and are approaching levels considered “product
shortage.”

Sales pace: Projects that have sold out in the past two years have averaged
about three sales per month.

Sales Volume Elevated in the District and

Northern Virginia

In 2009, there were a total of 2,350 sales, which is an increase of 34% from
2008. A disproportionate share of this increase came in the District and
Northern Virginia. Lower sales figures in Suburban Maryland are perhaps
explained by a lack of job growth in that substate area compared to the
District or Northern Virginia. The most sales during 2009 occurred in
Loudoun/Prince William (attributable to first-time buyers) and the District
(thanks to government job growth).
Source: Delta Associates; January 2010.
Two firms accounted for 44% of all new unit sales in 2009 – McWilliams|Ballard
and The Mayhood Company.

The Washington Area Condominium Market 85

Highest Prices in the District;
Price Decline is Moderating in
Northern Virginia
The average effective price per square foot for “same-
store” new condominium sales declined by 5.8% from
a year ago. Price declines were most severe in Prince
George’s County, where prices dropped by 18.2%.
Concessions Down
Concession rates declined everywhere from a year ago except in Northern Virginia. The
lowest concession rate in the metro area is in Arlington/Alexandria at 2.3%. Conversely,
the highest concession rate in the metro area is in the District at 4.8%.
Effective New Condominium Sales Price Change
Washington Metro Area | 12-Month Change

New Condominium Price Change

2009
Price Change
Jurisdiction Group Asking Effective
Suburban MD -7.7% -6.9%
Northern VA -5.3% -6.2%
The District -3.6% -3.7%
Metro Average -5.5% -5.8%

Note: “Same store” sales.

Source: Delta Associates, January 2010.

However, prices increased in Arlington and Alexandria – Source: Delta Associates; January 2010.

0.9% – as the inventory of available product dwindles.

The region’s highest effective prices per square foot are New Condominium Prices Per SF*
found in the District and Arlington/Alexandria, whereas Washington Metro Area | Year-End 2009
the lowest are found in Loudoun/Prince William and Anne
Arundel/Howard.

Concessions as a Percent of Average Sales Price

by Substate Area
Year-End 2008 and Year-End 2009
% of Sales Price
Substate Area YE 2008 YE 2009
Suburban MD 4.9% 3.5%
Northern VA 2.4% 3.0%
The District 5.3% 4.8%
Wash. Metro Avg. 4.2% 3.6%
*Reflects prices of condominium projects currently selling, so averages should not be
Source: Delta Associates, January 2010. compared from quarter to quarter since locations of projects change each quarter.
Source: Delta Associates; January 2010.

86 Section Seven
36-Month Condominium Market Pipeline 36-Month Pipeline Stabilizes; Years
Washington Metro Area | 2008 Through 2009 of Supply Dwindles; Pace on the Rise

The number of unsold condominium units in

projects currently marketing now stands at 6,071
units, the lowest since 2004. In addition, there
are 5,176 units planned with sales scheduled to
begin within the next 36 months. After more
than three straight years of decline, the entire
36-month pipeline has edged upwards for the
first time since the first quarter of 2006.

The metro-wide inventory-to-sales ratio is at

2.6 years as of year-end 2009, compared to 5.9
years at year-end 2008. Currently, Arlington
County/City of Alexandria and the District have
the lowest inventory-to-sales ratios in the metro
area. Prices declined the least during 2009 in
Source: Delta Associates; January 2010.
the District; during the same time period, there
was a slight increase in prices in Arlington/
Alexandria.

Years of Condominium Supply Current Inventory-To-Sales Ratio

Washington Metro Area | 2008 Through 2010 Year-End 2009

Jurisdiction Group Inv./Sales Ratio

Arlington/Alexandria 1.4 years
District of Columbia 1.8 years
Central DC 1.8 years
Loudoun/Prince William 2.3 years
Wash. Metro Average 2.6 years
Anne Arundel/Howard 3.0 years
Fairfax/Falls Church 3.8 years
Montgomery 4.2 years
Prince George’s 22.0 years

Source: Delta Associates, January 2010.

Source: Delta Associates; January 2010.

The Washington Area Condominium Market 87

By the end of 2010, we project that the inventory-to-sales ratio will be close to what it is currently, after
dipping lower for a couple of quarters, and by that time, price traction should be taking hold in most
of the metro area. It appears that price traction may have already started in the Arlington/Alexandria
area. This is the only submarket where prices increased over the past year.

The trend of removing condominium units from the pipeline has slowed dramatically, as market
conditions are firming.

Projects that sold out during the past two years have averaged three units of sales per month. Actively
marketing projects are averaging about the same.

Condominium Market Outlook: Identifying Opportunities

During the Recovery

The Washington metro area currently has an inventory of 6,071 new condominium units to sell –
perhaps a 2.6-year inventory at current rates of net sales velocity. While prices declined 5.8% for new
units in 2009, we believe prices will trend higher in select submarkets in 2010.

Even as there is an increase in mortgage interest rates and the end of the home buyer tax credit
occurs in April 2010, there are other circumstances in play that will allow a net sales pace of 2,400 to
2,700 units per annum over the next two years.

„ Positive job growth projections in 2010 compared to job losses in 2009.

„ A better economic picture in general will boost consumer confidence.
„ A slowdown in the rate at which demographics shift from homeownership to rental.

With this, select jurisdictions will find equilibrium arriving quickly – it appears that equilibrium has
arrived in Arlington/Alexandria and will reach the District soon. As a result, it is entirely possible that
within the next 6 to 18 months, we may see a trend of apartment projects converting to condominiums
in select submarkets due to a tightened condominium pipeline and increased demand. Given enough
time for prices to rise, new development may commence in 2011, at least in select submarkets. This,
of course, presumes one can find a lender willing to lend on a condominium deal.

88 Section Seven
The Washington Area Condominium Market 89
8
The Washington Area
Retail Market

91
The Washington Area
Retail Market

Low Consumer Confidence and National Context

Increased Saving Rate Hampered
The Retail Market in 2009; Poised The Washington metro area has the second-lowest shopping center vacancy among large metro
areas at year-end 2009. Overall vacancy for all types of shopping centers was 5.7% in the metro area,
For Recovery
up from 4.5% one year ago. This compares favorably to the national average of 9.5% at December
2009.
The Washington metro area retail market
contracted during 2009, as consumers tightened
wallets due to uncertain economic conditions.
Shopping Center Vacancy - All Types
„ The vacancy in all shopping center Select Metro Areas | Year-End 2009
formats increased 120 basis points to
5.7%, as regional and lifestyle centers
suffered from tenants vacating space.
„ The stalwart grocery-anchored category,
with chronically low vacancy, moderated
in 2009, but vacancy remained healthier
compared to other types of centers:

■ Vacancy increased to 5.3% at year-

end 2009, from 3.7% last year.
■ Rents decreased 5.8% in 2009,
compared to rising 1.7% in 2008.

Despite these indicators, with consumers

stashing cash during the recession, a rebound
in spending is anticipated during 2010 – riding Note: Includes grocery and non-grocery anchored shopping centers.
Source: CoStar, Delta Associates; January 2010.
upon the economic recovery and pent-up
demand for goods.

92 Section Eight
Although vacancy has risen in the metro area Average Household Income
due to the economic slowdown, shopping
2000 2008 2013
center retail maintains a relatively low vacancy
rate. A low vacancy rate is maintained by steady Jurisdiction (Actual) (Est.) (Proj.)
population growth, high incomes, and the fact Washington Metro Area $80,600 $102,800 $118,400
that the metro area has lost the fewest jobs of U.S. $56,600 $67,900 $75,800
all major metro areas.
Source: Claritas Inc; January 2010.

Personal income in the Washington metro area

grew by 27.5% from 2000 to 2008, compared
to 19.9% nationally. By 2013, the Washington
metro area’s average household income is Retail Space per Capita
projected to rise 15.2%, compared to a rise of Washington Metro Area | 2009
11.6% nationally.

Retail Inventory

The Washington metro area has over 118

million SF of retail space, inclusive of all types of
retail, in over 1,000 shopping centers. Northern
Virginia is home to over half of the total metro
retail inventory.

The metro area has 25.0 SF of retail space per

capita, compared to the national average of
23.4. Although Northern Virginia and Suburban
Maryland are above the national average, the
District remains underserved at just 8.5 SF of
retail space per capita. Source: CoStar, Delta Associates; January 2010.

Grocery-Anchored Shopping Center

Market Conditions

Given the demand for groceries at all points
of the economic cycle, grocery-anchored
shopping centers maintain the greatest stability
compared to other retail property types. As a
result, the bulk of investor interest and therefore
our analysis in this section is focused on grocery-
anchored shopping centers.
Of the total retail inventory in the Washington
metro area, 55.9 million SF is located in 319
grocery-anchored shopping centers, which is
almost half of the total retail inventory in the
metro area.
We survey these centers each year to tabulate
vacancy and rent data. The charts following
summarize trends from 1999-2009.
The metro-wide vacancy rate for grocery-
anchored shopping centers increased over
the past year to 5.3% at year-end 2009, from
3.7% one year ago. The Suburban Maryland
vacancy rate at year-end 2009 was 5.4%, a rise
of 160 basis points over the past year. The
Northern Virginia vacancy rate was 5.3%, a rise
of 170 basis points since year-end 2008.
The inner and outer ring submarkets
experienced the steepest rise in vacancy during
the year, at 180 and 190 basis points, respectively.
The core submarkets experienced only a slight
rise in vacancy – at 10 basis points.
Rental rates at grocery-anchored centers
decreased 5.8% in 2009, after rising by 1.7%
in 2008. Metro-wide average in-line tenant rents
were $31.77/SF at year-end 2009. Suburban
Maryland rents were $32.25/SF, a 4.8% decline
from one year ago. Northern Virginia rents were
$31.29/SF, down 6.6% from year-end 2008.

The Washington Area Retail Market 93

Grocery-Anchored Shopping Centers Vacancy Rates for Grocery-Anchored Shopping Centers
Washington Metro Area | 2009 | Millions of Square Feet Washington Metro Area | 2009 vs. 2008

Jurisdiction 2009 2008

Core 4.5% 4.4%
Inner Ring 5.0% 3.2%
Outer Ring 6.9% 5.0%
Washington Metro Area 5.3% 3.7%

Core = DC, Arlington, Alexandria

Inner Ring = Fairfax, Montgomery, Prince George’s
Outer Ring = Loudoun, Prince William
Source: Delta Associates; January 2010.

The core submarkets experienced the least decline in asking rates during
2009, as there continues to be demand within the core and this area has
limited availability.

The inner and outer rings experienced steeper rent declines at 5.4% and
Note: Estimate.
7.4%, respectively, as these submarkets have less demand and a greater
Source: CoStar, Delta Associates; January 2010. amount of available inventory.

New development: There are nine notable grocery-anchored shopping

Grocery-Anchored Shopping Center Vacancy Rates centers, totaling 3.0 million SF, under construction or renovation in the
Washington Metro Area | 1999 Through 2009 metro area at year-end 2009. Two of the nine projects are creating or
renovating shopping centers around existing grocery stores.

There are additional stores in the planning stages that are not included in
the adjacent table, some of which may deliver as late as 2013.

Construction momentum has halted on shopping center development in

the metro area. Developing new projects has become a challenge with
tenant hesitancy, lackluster customer demand, and frozen credit markets.

We expect few projects to move forward in the near-term, with the exception
of projects with notable pre-leasing and financing in place. However, given
the long-term demand for goods in the metro area, we believe developers
will look to deliver new product by mid-2012, as the market transitions back
to landlord conditions.

Source: CoStar, Delta Associates; January 2010.

94 Section Eight
Grocery-Anchored Shopping Center Asking Rents Asking Rents Under Renovation
Washington Metro Area | 1999 Through 2009 Grocery-Anchored Shopping Centers | Washington Metro Area

Jurisdiction 2009 Yr % Chang

Core $37.05 -2.5%
Inner Ring $32.90 -5.4%
Outer Ring $27.02 -7.4%
Washington Metro $31.77 -5.8%

Core = DC, Arlington, Alexandria

Inner Ring = Fairfax, Montgomery, Prince George’s
Outer Ring = Loudoun, Prince William
Source: Delta Associates, January 2010.

Grocery Market Review

Source: Delta Associates; January 2010. The per store average sales volume for all grocers in the Washington metro
area was $24.4 million during 2009, a 4.3% increase from $23.4 million one
year ago. Wegmans surpassed all other food retailers, with $62.2 million
per store. However, this is a 24% decline from $81.4 million during 2008
Notable Grocery-Anchored Shopping Centers Under Construction
for Wegmans.
or Under Renovation
Washington Metro Area | Year-End 2009
Walmart scored top sales growth, as food sales increased by 11.2% in
2009, after a 1.4% rise in 2008. Giant Food experienced a healthy 4.2% rise
Shopping Center RBA Anchor during 2009.
Dulles Landing 700,000 Super Wal-Mart
685,000 Wegmans During 2008, traditional grocers outpaced organic/ specialty stores
Woodmore Towne Center
in average per store sales volume growth by 60 basis points, as these
Potomac Town Center 550,000 Wegmans1
companies reinvented themselves in order to compete with the organic/
Village at Leesburg 464,000 Wegmans1 specialty market.
North Bethesda Market 230,000 Whole Foods2
Given current economic conditions, consumers have shifted spending
Moorefield Village 150,000 Harris Teeter
towards super center/club stores in order to save money, however. During
Urbana Village Center 94,000 TBA 2009, super center/club stores outpaced organic/specialty and traditional
Goose Creek Village 73,000 Harris Teeter3 stores in average per store sales growth by 130 and 150 basis points,
respectively.
Adams Square Shopping Center 60,000 Giant1
Total 3,006,000 Walmart, although not a strong player in the Washington metro area,
1/
operates just over 3,500 stores nationwide, with 75% of these stores as
Building/renovating, using existing grocery store as an anchor.
2/
Relocating from existing store at Congressional Plaza. supercenters, which includes a full-service grocery store. The company
3/
Phase 1 only.
Source: CoStar, Washington Business Journal; Delta Associates, January 2010.
expanded supercenters by 7% nationwide during 2009, compared
to shuttering 8% of the traditional format stores. Given supercenters
experience better returns, the company has expanded this format by 34%
since 2005, compared to shuttering the same amount of the traditional
format stores. During 2010, the company plans to add 125-140 super-
center stores.

The Washington Area Retail Market 95

Target operates over 1,600 stores nationwide,
with 14% of these stores as SuperTarget,
which includes a full-service grocery store. In
order to compete with Walmart, Target has
expanded food options in 100 stores this year.
This expanded food option is labeled “PFresh,”
which offers about 60% of the items at
SuperTarget. During 2010, Target plans to add
expanded PFresh food sections to 350 stores.
Overall, grocery-anchored shopping centers
weather economic downturns better than
centers without a grocery anchor. However,
centers with a supercenter/club anchor tend
to perform better during slowdowns, as con-
sumers tend to shift preference to bargain
goods during lean times to save money.
We expect supercenter/club stores to grab
a larger share of shoppers from traditional
and organic/specialty stores during 2010, as
consumers remain price sensitive.
Retail Sales: Anticipated Rebound
Retail sales declined 3.5% in the Washington
metro area during 2008. This compares to
the national decline of 3.7%. Woods & Poole,
an economic forecasting firm, projects a 7.0%
decline in the metro area during 2009 once
the numbers are finalized. This compares to a
projected national decline of 7.6%.
With the threat of job loss looming during the
recession, the national savings rate climbed.
The rate currently resides at 3.3% at September
2009, above the 1.4% rate at the start of the
recession in December 2007.
Since December 2007, consumers have harbored
a total of $346 billion from retailers (based on a
1.4% savings rate). During this time, consumers
refrained from purchasing non-essential goods,
particularly big-ticket items, postponing pur-
chases until the economy improves.
The motor vehicle industry suffered the largest
sales decline in the Washington metro area at
14.9% during 2008. The projected decline for
this industry during 2009 is 15.9%. Electronics,
building supplies, home furnishings and clothing
also experienced notable declines during this
period, as consumers postponed spending on
these goods.
Notably, food/beverage and health/personal
care products have remained stable, as
consumers continue to demand these items
even during an economic slowdown.

With consumers stashing cash during the

recession, a rebound in spending is anticipated
Average per Store Grocery Sales Volume Average per Store Grocery Sales Growth during 2010 – riding upon the economic
Top Five | Washington Metro Area | 2009 Top Five | Washington Metro Area | 2009 recovery and pent-up demand for goods.
Retail spending is projected to rise 5.5% in
Store Sales (in millions) Store Sales Increase the Washington metro area during 2010,
according to Woods & Poole. This is above
Wegmans $62.2 Walmart 11.2%
the 25-year annual average of 3.5%. The 2010
Costco $47.4 Giant Food 4.2% sales total is expected to mirror what spending
Shoppers $33.1 Safeway 2.2% totaled back in 2004.
Sam’s Club $31.4 Shoppers 1.1%
The industries that suffered the greatest decline
Whole Foods $27.6 Harris Teeter 0.6% during the recession should experience notable
gains during 2010. The motor vehicle industry
should experience a rebound of 12.5% in the
Average per Store Sales Volume Growth – By Type metro area, according to Woods & Poole. Build-
Washington Metro Area ing supplies and home furnishings closely follow,
as consumers have pent-up demand for goods
they postponed purchasing during the downturn.
Type 2009 Growth 2008 Growth 2007 Growth
Supercenter/Club 3.5% 1.0% 1.6% Although a 5.5% rise in Washington metro area
Organic/Specialty 2.2% 4.0% 0.6% retail sales in projected during 2010, we believe
this spending will occur later in 2010, as retail
Traditional 2.0% 4.6% 1.9%
sales during the first six months of the year
Note (All): Includes only grocery stores with $2 million or more in sales; data through June 2009 annualized. should remain sluggish. This is reflected in the
Source (This Page): Food World, Delta Associates; January 2010.

96 Section Eight
Change in Total Retail Sales most recent Washington Region Confidence Index by the
Washington Metro Area | 2001 Through 2012 Greater Washington Board of Trade.

The consumer confidence index in the Washington

region increased four points to 60 at November 2009,
from 56 at April 2009. The District experienced the
greatest rise, to 67, from 59 in April 2009.

Despite a rise in confidence, few respondents plan to

purchase higher-priced items during the next six months
according to the survey:

„ 29% plan to spend more than $5,000 on home

improvement, up from 25% in April.
„ 30% plan to purchase a major item, on par with April
results.
„ 10% plan to purchase/lease a vehicle, on par with
April results.
Note: 2009 through 2012 are projections
Source: Woods & Poole, Delta Associates; January 2010.
With unemployment not expected to decline meaningfully
in 2010, as it is a lagging indicator, consumers will remain
conservative until they are certain about their job status.
Given this, we expect a large portion of consumers to
Retail Sales
concentrate spending at discounted/wholesale retailers
Washington Metro Area | 2010 Projections
in 2010 to maximize value.

Percent Increase
During 2010, we expect shopping centers anchored
Industry 2010 vs. 2009 by a grocer or drug chain to be successful. We also
Motor Vehicle 12.5% expect centers located in healthy micro-markets, such
Building Supplies 10.3% as Pentagon City and Potomac Yards, to remain stable.
Shopping centers with notable vacancies will have a hard
Home Furnishing 9.1%
time attracting new tenants, unless the center is located
Gas Stations 6.5% in a top performing submarket. If these centers fail to
Electronics 4.1% attract tenants over the next year or two, redevelopment
into a different use could occur.
Clothing 3.5%
Health/Personal Care 3.5% Look for the younger consumer to help pull up retail sales
Food/Beverage 2.1% over the next couple of years. According to the Greater
Washington Board of Trade, younger generations are
Total Retail 5.5%
more confident about the economy compared to older
generations. This is expected, as the younger consumer
Source: Woods & Poole, Delta Associates; January 2010.
has time to recoup money lost during the recession. We
expect those closer to retirement to remain timid about
spending in the next two years.

The Washington Area Retail Market 97

Consumer Confidence Index Consumer Confidence Index
Greater Washington Area | By Substate Greater Washington Area | By Age Group

Sources: Greater Washington Board of Trade, Delta Associates; January 2010. Sources: Greater Washington Board of Trade, Delta Associates; January 2010.

Investment Sales Grocery-Anchored Shopping Center Purchases

Washington Suburbs | 2000 Through 2009
Investment sales of grocery-anchored shopping centers in the Washington
metro area suburbs totaled $79 million during 2009, compared to $85
million on five notable transactions during 2008.

Spectrum Partners and Potomac Capital Advisors purchased Westgate

Shopping Center in Manassas for $25 million in July 2009. More recently,
Kimco Realty purchased Pentagon Center in Arlington for $54 million in
November 2009.

Grocery-anchored shopping centers are typically a favorite with investors

during soft economic periods, since everybody still patronizes grocers
during lean times. However, as the economy contracted, the retail sector
suffered as consumers tightened their spending on both essential and
non-essential items. In addition, borrowing is difficult, even with record-
low interest rates, simply because risk is being re-priced.
*Includes large portfolio sale by CalPERS.
Note: Excludes sales of regional malls and power centers; excludes properties under contract.
Source: Real Capital Analytics, CoStar, graphic by Delta Associates; January 2010.
While cap rates may have finished their cyclical increase, we believe values
will edge down during 2010 as asset performance remains challenged due
to rising vacancies and declining rents. Buyers with cash can be successful
in purchasing assets with low price tags. The investment worthiness of this
product type has increased, according to our annual Market Maker Survey.
Each year we survey those who shape the real estate industry, including

98 Section Eight
Investment Worthiness Index
Grocery Anchored Shopping Centers | Washington Metro Area
*A score below 5.0 is considered to have more interested sellers than interested buyers.
Source: Delta Associates’ Market Maker Survey; January 2010.
Grocery-Anchored Shopping Center – Cap Rate
Washington Metro Area | Each Year at October
Source: Delta Associates’ Market Maker Survey; January 2010.
developers and financial experts, here in the Washington
region. In 2009, our respondents scored grocery-
anchored shopping centers in the metro area at 6.2 for
investment worthiness, up from 4.3 in 2008. This product
type increased two spots to fifth place for investment
worthiness out of ten alternatives.
Our Market Maker survey respondents noted that cap
rates for grocery-anchored shopping centers have risen to
8.5% at October 2009, from 7.5% one year ago. However,
when surveyed at June 2009 respondents noted an 8.6%
rate, indicating a modest decline over the past four
months. Have cap rates peaked for this cycle?
Return Rates for Retail Properties
Total returns (cash flow plus appreciation) realized in the
Washington retail market were negative 12.72% for 12
months ending September 2009. Returns have declined
for all major metro areas. The Washington area return
compares favorably to the national return of negative
15.78%.
Although Washington area retail property performance
has suffered due the national recession, the decline
in investor value for Washington assets is less severe
compared with other metro areas.
We expect the Washington metro area to remain a
desirable destination for investors’ cash in the long-run.
However, transactions will be very limited through 2010
due to market conditions combined with a lack of credit.
The Washington Area Retail Market 99
Retail Market Outlook: Identifying NCREIF Return Index1 – Retail Properties
Opportunities During the Recovery Select Metro Areas

With this product type so sensitive to consumer sentiment, the Metro Area 12-Month Total Return at 3rd Quarter 20091
successful investor/developer will: Washington -12.72%
Chicago -13.88%
1. Selectively accumulate assets at below replacement cost
while prices and interest rates are low. Los Angeles -14.73%

2. Invest in repositioning existing under-performing assets. National Average -15.78%

3. Develop new projects before 2011 in select locations with Dallas -17.60%
good supply/demand fundamentals like the District of Phoenix -26.96%
Columbia.
1
4. Develop more broadly throughout the metro area after NCREIF compiles return based on its members’ $54.1 billion retail portfolios.
The index includes both current income and capital appreciation returns.
2011. Source: NCREIF, Delta Associates; January 2010.

We believe Washington metro area retail will remain success-

ful, even through economic downturns, if the center is: Recommended Development Activities
Washington Metro Area
„ Located within mixed-use or neighborhood centers in a
submarket with solid supply/ demand fundamentals.
„ Close to transit and jobs.
„ Focused on everyday necessities and amenities, such as
groceries, banking, and entertainment.

We believe retail is poised for a stronger recovery in the

Washington metro area than elsewhere, given high incomes and
projected job growth during 2010. However, we believe retail
Source: Delta Associates; January 2010.
sales will remain soft through most of 2010, with a modest rise
late in the year.

100 Section Eight

The Washington Area Retail Market 101
9
Capital Markets and
Investment Trends

103
Capital Markets and
Investment Trends

Volume Off Sharply But Uptick Seen at Year-End;
Cap Rate Rise May Have Peaked
It was just two years ago that national investment sales set a record – for
example, $211 billion in office building sales in 2007. Re-pricing of risk, a
profound lack of credit, and a buy-sell price gap have put an end to all of
that.
National Investment Sales of Office Buildings
2001 Through 2009
Last year at this time we expected that sales would pick up toward the
end of 2009 due to the entry of distressed assets into the market. Our
expectations were unfulfilled for the most part. But sales volume did turn
up a bit, as buyers recognized that prices for the most part are well below
replacement cost and low enough to attract capital in a risk re-priced
world.
2009 transactions are characterized as all-cash, or assets with little market
risk, or foreign or REIT buyers, or impaired properties with high cap rates
or extraordinary discounts.
But several things became evident by the end of the year:

„ There is a bifurcated cap rate market: A lower rate for low-risk assets
and a higher rate for deals with hair.
„ There are more buyers than sellers. After all, at these prices, owners
are either underwater and can’t sell or are choosing to hold – in a
sense choosing to buy their own asset at these prices. As a result, the
rise in cap rates has paused. Stopped? We are not sure.
„ With today’s low mortgage interest rates (even with tough terms),
and with rates likely to rise over the next several years, there is an
increasing urgency to buy.
„ Capital has been attracted to those few markets with the best
fundamentals – with Washington at the head of that list.

*Estimate.
Source: Real Capital Analytics, graphic by Delta Associates; January 2010.

104 Section Nine

Investment Alternatives: Commercial Real Estate vs. Stocks vs. Bonds Real Estate: Exceptional Returns
12 Months Ending September 2009
While investment sales struggled in 2009, commercial real estate
investment remains a solid long-term play. Over the past five-year and ten-
year periods, real estate outperformed stocks and bonds, with annual total
returns of 6.16% and 7.84%, respectively. Only during the past 12 months,
during the recent bull market on Wall Street, did stocks outperform real
estate. This is why the institutions have not re-allocated out of real estate
in this cycle like they did in 1990.

So, who has been buying commercial real estate during this downturn? At
the national level, private equity was the greatest source of capital for 2009
office sales, with 33.2% of the total. Institutional and foreign buyers – who
tend to use little if any leverage – also were significant players in 2009, with
a combined 28.6% of office purchases.
Source: NCREIF, Delta Associates; January 2010.

The Washington Metro: Holding Up Better Than Others

Despite drastically reduced trading volume, the Washington metro area

Most Active Capital Sources remains among the world’s top investment markets for real estate.
Investments in U.S. Office Product | 2009
Office building sales in 2009 in the Washington area reached a total
volume of $2.0 billion. This total is 45% below the 2008 total of $3.7 billion.
However, this decline is less than that seen in other major markets, and is
more a function of the credit crisis and lack of product on the market than
it is a reflection of the desirability of Washington assets.

The yield on Washington area office assets for the 12-month reporting
period ending September 2009 was second in the U.S., behind only
Houston’s. Returns are, of course, negative due to asset value declines.

Over the long term, returns are more predictable in Washington than in
most other metro areas. This led to a flood of capital entering the market
from 2004-07. Because of the run-up in values for Washington assets
during that period – and the downturn in market conditions brought about
by the recession – returns have trended negative recently. However, total
returns remain ahead of the national average for all four major product
types, as shown in the accompanying graph.

Note: Excludes portfolio sales and properties under contract; through November 2009.
Source: Real Capital Analytics, graphic by Delta Associates; January 2010.

Capital Markets and Investment Trends 105

Total Returns for Office Assets
Selected Metro Areas | 12 Months Ending September 2009
Source: NCREIF, Delta Associates; January 2010.
Total Investment Returns: Core Commercial Real Estate
Washington Metro Area vs. U.S. | 12 Months Ending September 2009
Source: NCREIF, Delta Associates; January 2010.
106 Section Nine
Washington followed the pattern of other major markets in 2009,
experiencing dramatically reduced investment sales volume
as the credit crisis brought about risk re-pricing. However,
Washington’s stability continues to make it among the strongest
investment markets in the country. Washington far exceeded
the office investment sales volume in Los Angeles and Chicago,
markets of similar size and prominence.
Investors in Washington focused on office and multifamily
purchases in 2009 – to the extent credit and product was
available. Total volume for the four product types was $3.0
billion in 2009, down 56% from the $6.8 billion of asset value
that changed hands in 2008. Flex/industrial and retail sales were
particularly scarce in 2009 – we recorded less than $80 million of
investment sales for each of those product types.
After Rising Through June, Cap Rates May Have
Peaked; Evidence of Bifurcation
Last year in TrendLines we said that we expected cap rates to
rise as much in 2009 as they did in 2008, as investors demanded
higher returns for putting money at risk. Indeed, in the
Washington area, the average cap rate for core office assets rose
85 basis points in 2009, compared to 93 basis points in 2008. For
all product types combined, the average cap rate rose 77 basis
points in 2009, compared to 92 basis points in 2008.
Basis Point Change in
Product Type Cap Rate 10/08-10/09
Industrial/Distribution 112
Shopping Center 105
Hotels 100
Office 85
Apartments 39
Source: Annual survey by Delta Associates, conducted October 2009, of the region’s leading
commercial real estate players.
Comparative Investment Sales Volume: Office Buildings
Selected Metro Areas | 2000 Through 2009
But surprisingly, cap rates in the Washington area peaked
around mid-year, and then stabilized or even ticked down during
the second half of 2009. For example, the average cap rate for
apartment product declined 29 basis points from June 2009 to
October 2009. For other product types, see the accompanying
table.

Basis Point Change in

Product Type Cap Rate 6/09-10/09
Apartments -29
Industrial/Distribution -16

Note: Excludes whole-company transactions. Shopping Center -6

Source: Real Capital Analytics, graphic by Delta Associates; January 2010.
Office 13

Source: Surveys by Delta Associates, conducted June 2009 and October 2009, of the
region’s leading commercial real estate players.
Investment Sales
Washington Metro Area | 1999 Through 2009

This trend is attributable, we believe, to an absence of product

on the market relative to the number of buyers at the ready.
Prospective sellers simply can’t or won’t sell at these prices. And
with accounting rule changes, FDIC regulation changes, and
RIMIC rule changes, everyone seems anxious to avoid dumping
distress on the market – for now.

We have observed an increasingly bifurcated cap rate and pricing

structure:

„ A lower cap rate and higher prices for assets with lower
risk and coupon-like quality (credit tenants, long-term
leases, little vacancy, high quality location and finishes,
etc.).
„ A higher cap rate and lower prices for assets with risk and
Source: Real Capital Analytics, CoStar COMPS, graphic by Delta Associates; January 2010. value-add features (vacancy issues, short-term lease roll-
overs, lower-quality location and finishes, etc.).

Trophy properties and other well-leased product will see lower

cap rates and more buyer interest as a result of their stability and
consistent cash-flow, while distressed and high-vacancy product
will see higher cap rates, as buyers demand a greater initial return
in exchange for taking on greater risk.

Capital Markets and Investment Trends 107

Prices Decline to Levels Well Below Replacement Cost Cap Rates for Core Office Assets
Washington Metro Area | 2002 Through 2009
Volume has turned up at year-end in part because the marketplace realizes
that prices are well below replacement cost. And on a stable deal, it signals
a time to buy.

For example, since the peak of the market in 2007, Class A apartment
prices are down 41% for gardens and 34% for high-rise. This seems to
parallel the sum of cap rate decline and performance decline.

More to the point, values today are below replacement cost and this has
led to investors awakening at year-end 2009 to the fact it is time to buy
again. Hence, volume turned up significantly in the second half of the year.
For example, here are the facts for a Class A high-rise:

Average price per unit in 2009: $266,000 *Trailing 12 months; through November 2009.
Source: Real Capital Analytics, graphic by Delta Associates; January 2010.
Replacement cost in 2009 1/ $367,000

1/
$297,000 development cost plus $70,000 land cost
Source: Annual survey by Delta Associates, conducted October 2009, of the region’s leading
commercial real estate players.
Class A Garden and High-Rise Apartment
Average Sales Price | Washington Metro Area | 2007 Through 2009
Investment Sales Outlook

Cap Rates: In 2010, we expect cap rates to edge up nationally, but most
of the increase is likely behind us. Locally, we believe cap rates for most
product types peaked in 2009. Lower quality product and deals with hair
will see elevated cap rates continue into 2010 and beyond. For high-quality
deals we may see cap rates edge down.

Prices: Likely to decline further due to continued deterioration in asset

performance. In general, price appreciation in 2010 and beyond will be
earned the old-fashioned way – by asset performance enhancement. We
expect prices in Washington will decline another 5%-10% before reaching
bottom, which should happen in 2010-11.
*Through November 2009.
Source: Delta Associates; January 2010.
Volume: We expect a significant amount of the activity in 2010 to be “must-
sell,” as some stressed and distressed assets reach the market. Look for
volume in 2010 to exceed the 2009 total, anchored by cash deals, foreign
buyers, and trophy deals.

108 Section Nine

The Washington metro area will see more than its fair share of volume. Survey of Year-End Cap Rates
As happened in 2009, those with a stressed national portfolio will find Washington Metro Area | 2005 Through 2009
that they can sell a Washington asset to feed troubled assets elsewhere.
Therefore, the Washington metro will continue to see more than its fair
share of sales in the short run.

Despite the reduced volume, Washington commercial real estate assets

will remain among the most desirable in the country. Investors both
domestic and foreign will continue to look to Washington first when
seeking acquisitions. The stable nature of its tenant base, bolstered
by office space demand from the Federal government, will buoy
Washington values.

Source: Delta Associates’ Market Maker Survey; January 2010.

Cap Rates in Use at Year-End 2009 by Those Looking to Acquire Assets

Product Type All Respondents Developers of This Property Type

Apts.: High-Rise – Class A 6.61% 6.62%
Apts.: Suburban Garden – Class A 7.09% 7.10%
Office: CBD – Class A 7.25% 7.18%
Apts.: Suburban Garden – Class B 7.75% 7.77%
Office: CBD – Class B 8.16% 8.08%
Shopping Center: Grocery-Anchored – Class A 8.51% 8.42%
Office: Suburban – Class A 8.54% 8.53%
Industrial/Distribution: Class A 8.91% 9.07%
Office: Suburban – Class B 9.44% 9.40%
Hotels: Suburban – Class A 9.66% 10.18%

Note: Buyer’s cap rate, based on prior 12 months NOI, before reserves.
Source: Annual survey by Delta Associates, conducted October 2009, of the region’s leading commercial real estate players.

Capital Markets and Investment Trends 109

2010 TrendSetter
Award Recipients

111
2010 TrendSetter
Award Recipients
10
Each year, Transwestern and its research affiliate, Delta Associates, honor an individual, or individuals, who
have made a noteworthy contribution to the commercial real estate industry as a whole, and to the Washington
metropolitan area in particular.

This year our Private Sector honoree is Thomas S. Bozzuto, Chief Executive Officer of The Bozzuto Group.
We are also pleased to honor James E. Bennett, President and CEO of the Metropolitan Washington Airports
Authority, as our Public Sector TrendSetter of the Year.

112 Section Ten

Thomas S. Bozzuto
Chief Executive Officer
The Bozzuto Group

Since the formation of The Bozzuto Group in 1988, Tom Bozzuto has led the company’s
development, construction and management of almost a billion dollars of income producing
and for-sale housing. During his more than thirty-year career, he has overseen and been
responsible for the creation of more than 46,000 residential units with a conservatively
estimated value of nearly $7 billion. Partners, employees and residents are uniform in their
praise of The Bozzuto Group’s standards, integrity and commitment to providing quality
housing for all, from luxury homes and apartments to affordable housing residences.

The firm’s ongoing success in a difficult real estate environment is a testament to their
unique ability to combine design appeal, quality construction, property management
excellence, and award-winning service with unswerving dedication to the communities they
serve. The Bozzuto Group’s many civic, charitable and philanthropic activities underscore
their desire to improve the lives of the region’s citizens and families as they revitalize
homes and neighborhoods. For his principled and steadfast leadership, particularly in
a time of market turmoil, we’re very pleased to honor Tom Bozzuto as our 2010 Private
Sector TrendSetter of the Year.

James E. Bennett
President and CEO
Metropolitan Washington Airports Authority

Growing traffic congestion and the need to augment the region’s transportation
infrastructure have long been cited as among the chief obstacles to the Washington
area’s long term economic vitality. In 2009, after years of effort, final Federal approval was
secured to fund the first phase of the Metrorail extension to Dulles Airport and Loudoun
County. This critical project will expand access for residents, employers and employees
to the entire metro region; provide a viable, dependable alternative to automobile travel;
and encourage high-density, transit-oriented development around Metrorail stations.

As President and CEO of the Metropolitan Washington Airports Authority, the entity
charged with managing the Metrorail extension, James E. Bennett has been instrumental
in moving this project from dream to reality. Construction activity has begun in earnest,
financial planning for the funding of Phase II is proceeding on schedule, and smart growth
and responsible land use plans are being designed that will be essential to safeguarding
Washington’s future. For his tireless advocacy and resolute commitment to making this
project a reality, we’re very pleased to honor James E. Bennett as our 2010 Public Sector
TrendSetter of the Year.

2010 TrendSetter Award Recipients 113

Past TrendSetter Award Recipients
W. Christopher Smith, Jr.
2009 Private Sector
TrendSetter of the Year
CEO
William C. Smith & Co.
Milton Peterson
2006 TrendSetter of the Year
Chairman
The Peterson Companies
Douglas M. Duncan
2003 Public Sector
TrendSetter of the Year
County Executive
Montgomery County
Jeff rey T. Neal
2001 Entrepreneurial
TrendSetter of the Year
Principal
Monument Realty, LLC
114 Section Ten
Donald Wood
2009 Public Sector
TrendSetter of the Year
President & CEO
Federal Realty Investment Trust
F. Joseph Moravec
2005 Public Sector
TrendSetter of the Year
Commissioner
GSA Public Buildings Service
R. William Hard
2003 Private Sector
TrendSetter of the Year
Executive Vice President and
Principal-In-Charge, LCOR
Ray D’Ardenne
2000 TrendSetter of the Year
Chief Operating Officer
Lend Lease Real
Estate Investments
Oliver T. Carr, III
2008 TrendSetter of the Year
President & CEO
Carr Properties
John E. (Chip) Akridge
2005 Private Sector
TrendSetter of the Year
Chairman
Akridge Real Estate Services
Anthony A. Williams
2002 Public Sector
TrendSetter of the Year
Mayor
District of Columbia
Daniel T. McCaffery
1999 TrendSetter of the Year
President
CCR McCaffery
Developments
Benjamin Jacobs
2007 Private Company
TrendSetter of the Year
Managing Partner
The JBG Companies
Congressman Tom Davis
2004 Public Sector
TrendSetter of the Year
11th District of Virginia
U.S. House of Representatives
Robert Gladstone
2002 Private Sector
TrendSetter of the Year
Chairman
Quadrangle Development
Robert E. Burke
1998 TrendSetter of the Year
Executive Vice President,
Operations
Boston Properties
Michael Glosserman
2007 Private Company
TrendSetter of the Year
Managing Partner
The JBG Companies
Bryant F. Foulger
2004 Private Sector
TrendSetter of the Year
Principal and Vice President
Foulger-Pratt Companies
Thomas M. Garbutt
2001 Institutional
TrendSetter of the Year
Managing Director
TIAA-CREF
Raymond A. Ritchey
1998 TrendSetter of the Year
Executive Vice President,
Head of the Washington, D.C.
Office & National Director of
Acquisitions and Development
Boston Properties
Andrew Florance
2007 Public Company
TrendSetter of the Year
Founder, Director,
President & CEO
CoStar Group, Inc.
Clayton F. Foulger
2004 Private Sector
TrendSetter of the Year
Principal and Vice President
Foulger-Pratt Companies
Michael J. Darby
2001 Entrepreneurial
TrendSetter of the Year
Principal
Monument Realty, LLC
2009 Market Maker Survey Participants

Delta Associates thanks all of its 2009 Market Maker Survey participants, among whom are the following:

Abbey Road Property Group Kennedy Associates Real Estate Counsel

Akridge Kettler Management
Alliance Residential Kodiak Properties
Argo Investment Company LCOR Inc.
Boston Capital Lincoln Property Company
Bozzuto Group Metro Management Services
Broad Street Ventures Mid-City Finance Corp.
Clark Enterprises Inc. NV Commercial
Clark Realty Capital Panattoni Development Company
Colchester Land Company Paradigm Development Co.
Columbia Bank Potomac Investment Properties
Community Realty Company Prudential Investment Management Inc.
Donohoe Companies Quadrangle Development Corporation
DRI Partners Rappaport Companies
Elm Street Development RCDH
Equity Residential Roadside Development
Fairfield Residential Rosenthal Properties
First Potomac Realty Trust Seaton Benkowski & Partners
Gates Hudson Shooshan Company
General Growth Properties Sunburst Hospitality Corporation
Gimbert Associates Tower Companies
Green Light Retail Real Estate Services Transwestern
Hines Interests Ltd. Partnership Union Realty Partners
Holliday Fenoglio Fowler Velsor Properties
ING Real Estate Development U.S. VORNADO/Charles E. Smith
John B. Levy & Co. Washington Real Estate Investment Trust
Jonas B. Cooke Interests Woodfield Investments

2010 TrendSetter Award Recipients 115

 SUCCESS. Your goal. Our commitment.

In today’s challenging market it’s more important than ever to make sure you work
with a team that can deliver the results you need. With one of the broadest sets
of capabilities in the industry, we provide financial solutions and expertise to help
you plan and achieve your goals. To discover how we can help you, call Bill Lynch
at 202-835-4513 or visit pnc.com/realestate.

Real Estate Multifamily Tax Credit Midland Loan

Banking + Finance + Capital + Services

PNC is a registered service mark of The PNC Financial Services Group, Inc. (“PNC”). Lending products and services require credit approval and are provided by PNC Bank, National Association.
©2010 The PNC Financial Services Group, Inc. All rights reserved. CIB PDF 0110-024
 !
We’ve changed (sort of).
For over 30 years, you’ve known us as Beers + Cutler, one
of the Washington region’s leading accounting and consulting
firms. We have now joined forces with Baker Tilly. And while our
name is changing, our level of commitment and dedication
to our real estate clients remains the same.

Together with Baker Tilly, our strengthened industry expertise

will provide you with greater resources and services to meet
your tax, assurance and business advisory needs into the
future.

Today is a great day.

And tomorrow will be even better.

Accountants and Advisors

© 2010 Baker Tilly Virchow Krause, LLP

Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an
independently owned and managed member of Baker Tilly International. Connect with us: bakertilly.com
MARCH 23, 2010 — Grand Hyatt Washington
Special Rate for
8th Annual
TrendLines Attendees:
Enter trendlines2010 on the
registration form and save $50!
* code is case sensitive

Produced by Real Estate Forum and GlobeSt.com

This year, more than 500 attendees will gather to network and
gain relevant information on the following topics:
r What does 2010 and beyond hold for sectors and rising submarkets?
r The FDIC’s Asset Disposition Programs
r How Today’s Deals Are Being Made
r Trend
ding
g the D.C
C. Mark
kett (and
d wh
hatt job
b growtth from the sttimullus wiill mean))
r What’s happening in multifamily and how do you work with the GSEs?

CONFIRMED SPEAKERS INCLUDE: *Partial list edited due to size

Keynote Address

Bruce Baschuk Rich Brown Michael Darby Steve Fuller Jair Lynch Bob Murphy
J Street FDIC Monument George Mason Jair Lynch MRP Realty
Companies Realty University Development

Presidential Sponsors Hospitality Sponsor Media Sponsor Promotional Sponsors

Valerie Santos
Deputy Mayor for Planning
and Economic Development,
District of Columbia
Media Affiliate

The leading real estate networking conference for the WASHINGTON, DC metro-area commercial real estate market
REGISTRATION & AGENDA AT: www.RealShareConferences.com/WashingtonDC
Notes

119
Partners in Excellence

Transwestern is the Mid-Atlantic Region’s preeminent full-service commercial real estate firm.

Delta Associates, an affiliate, is a national provider of industry information, market analysis,

and feasibility consulting for commercial real estate.

Mid-Atlantic Headquarters Northern Virginia National Headquarters

6700 Rockledge Drive 8614 Westwood Center Drive 1900 West Loop South
Suite 400A Suite 800 Suite 1300
Bethesda, Maryland 20817 Vienna, Virginia 22182 Houston, Texas 77027
301.571.0900 703.821.0040 713.270.7700

Washington, DC Baltimore/Washington Corridor www.transwestern.net

1700 K Street, NW 6700 Alexander Bell Drive
Suite 660 Suite 350
Washington, DC 20006 Columbia, Maryland 21046
202.775.7000 301.621.8800 or 443.285.0700

Headquarters Headquarters
1121 14th Street, N.W. 500 Montgomery Street
Suite 800 Suite 600
Washington, DC 20005 Alexandria, Virginia 22314
Phone 202.833.3300 703.836.5700

www.driinc.com www.DeltaAssociates.com

Atlanta Detroit New Orleans Salt Lake City

Austin Fort Lauderdale Northern Virginia San Antonio
Baltimore Houston Oklahoma City San Diego
Bethesda Los Angeles Orange County San Francisco
Chicago Miami Orlando Washington, DC
Dallas Milwaukee Philadelphia
Denver Minneapolis-St. Paul Phoenix

120