MARKET REPORT

OFFICE
Washington, D.C,. Metro Area Q2/19
Office Landscape Continues to Transform in Central
D.C. Even as Amazon Heralds Change in Arlington Office 2019 Outlook

More diverse array of tenants drive office demand as Amazon claims CONSTRUCTION:
more space. Washington, D.C., is becoming a more dynamic office market
The development pipeline expands from
as technology companies and coworking enterprises join government
last year when 5.5 million square feet of
agencies and federal contractors as major leasers. The We Company,
owner of WeWork, has taken up the most space inside the District so far 6.2 MILLION SQ. FT.
will be completed
office space was delivered. About 350,000
square feet of new space will be medical
this year, followed closely by competitor Convene. In northern Virginia,
offices, located in Virginia and Maryland.
Amazon’s commitment to building a second headquarters is already influ-
encing both leasing activity and development plans. More tech firms are
moving into or near National Landing, while some properties in the area
VACANCY:
are being scheduled for redevelopment, including the soon-to-be former
TSA headquarters. The e-commerce giant has also added to its footprint The net absorption of office space will
surpass 6 million square feet for the sec-
in Crystal City by 47,500 square feet and has detailed its first construction
project, a 2.1 million-square-foot campus in Metropolitan Park. 20 BASIS POINT
decrease in vacancy
ond year in a row, lowering the vacancy
rate to 17.3 percent.
Development expands in central D.C., fewer openings elsewhere. The
market’s expanding construction pipeline is concentrated in the District
this year, with more than 4 million square feet expected to open here by
year end. Major upcoming deliveries include Four Constitution Square
RENTS:
and Sentinel Square III in NoMa, parts of an ongoing development wave in The average asking rent will climb to
$38.18 per square foot in 2019. Last year
the area. Across the Potomac in northern Virginia, the pace of develop-
ment is slowing, with less than 1 million square feet left to be finalized in 1.2% INCREASE monthly rates advanced 1.1 percent, led
by appreciation in northern Virginia.
2019. Supply additions in suburban Maryland will surpass those of last in asking rents

year but remain modest relative to other sections of the market. Activity is
focused in Bethesda and New Carrollton.

Investment Trends
• Washington, D.C.’s central business district and adjacent East End have
Local Office Yield Trends become more common targets for institutional investors over the past
h year. Low vacancy with premium tenants sustain stable cash flows that
11.0% support sub-5 percent cap rates and drive sale prices above $500 per
square foot on average.
9.5%
• Scenic Old Town Alexandria holds many Class B properties that appeal
Average Rate

to investors in the $1 million to $10 million tranche, supporting elevated

8.0%
trading activity. While buyers still focus on assets along King Street, the
6.5% future Virginia Tech satellite campus in Potomac Yard may draw more
attention to the submarket’s north end. Technology companies may wish
5.0% to move close to where they can recruit talent, increasing tenant demand.
* 01 03 05 07 09 11 13 15 17 19*
• Investors seeking above-market returns may find opportunities near
the I-270 between Rockville and Gaithersburg. Several Class B and C
assets have changed hands with cap rates of 7 percent and above. Buyers
Sales Trends
seeking medical office properties will also find options in the area, just
Sales Price Growth
north of the National Institutes of Health campus in Bethesda.
* Cap rates trailing 12 months through 1Q19
er Square Feet

Sources: CoStar$400
Group, Inc.; Real Capital Analytics 30%
Year-over-Y

$300 15%
 Employment Trends 1Q19
Local Office – 12-Month
Yield Trends Trend
Employment Growth Office-Using Emp. Growth EMPLOYMENT
4% 11.0%
0.9% increase in total employment Y-O-Y
Year-over-Year Change

2% 9.5%
• A partial government shutdown to start the year contributed

Average Rate
to a small slowdown in hiring for the 12-month period ended
0% 8.0%
in March. In that time, metro employers added 30,700 jobs,
compared with 34,200 hires from the previous annual period.
-2% 6.5%
• The leisure and hospitality as well as the business and
-4% 5.0% professional service sectors added over 30,000 positions
09 10 11 12 13 14 15 16 17 18 19* combined,
01 03 helping
05 07 offset
09 contractions
11 13 15 in17other
19* industries.

Office Supply and Demand Sales Trends

Completions Absorption Sales CONSTRUCTION
Price Growth
15
Average Price per Square Feet
$400 30%
5.7 million square feet completed Y-O-Y

Year-over-Year Growth
Square Feet (millions)

10
$300 • Annual deliveries increased by 1.9 million
15%over the past four

quarters as several high-profile projects were completed.

5
$200 0%
• Major arrivals included Capital One Tower at 975,000 square feet
0 $100 and the 438,000-square-foot Boro Tower, both in Tysons Corner.
-15%
The Central Place Tower in Rosslyn also opened, along with
-5 $0 Midtown Center and part of Capital Crossing
-30% in D.C. All of these
09 10 11 12 13 14 15 16 17 18 19* 09properties
10 11 12were
13 over
14 400,000
15 16 17square
18 19**
feet in size.

Vacancy Rate Trends

Metro United States VACANCY
20%
50 basis point decrease in vacancy Y-O-Y
18%
• Leasing activity continues at an elevated pace in 2019, driving the
Vacancy Rate

metrowide vacancy rate down to 17.4 percent in March, its lowest

16%
level in more than five years.

14% • Multiple submarkets in northern Virginia reported falling

availability, including declines of more than 200 basis points in
12% East Falls Church, Southeast Fairfax County and other areas.
09 10 11 12 13 14 15 16 17 18 19*

Asking Rent Trends

Metro United States RENTS
14%
1.2% increase in the average asking rent Y-O-Y
Year-over-Year Change

7%
• The average asking rent reached $37.86 per square foot at the end of
the first quarter, led by a 1.7 percent growth rate inside the District.
0%
Over the previous 12-month period, the metro rate rose 1.6 percent.

-7% • Declining vacancy in Downtown D.C. contributed to a 3.3 percent

appreciation in marketed rates. Average asking rent improved by
-14% similar margins along the Dulles Corridor in northern Virginia and in
09 10 11 12 13 14 15 16 17 18 19* East Prince George’s County in Maryland.

* Forecast
Source: CoStar Group, Inc.
Demographic Highlights

2019 Forecast Job growth Population Age 20-34* Sq. Ft. Per Office Worker*

Metro 1.3% Metro 21.4% Metro 389

U.S. Average 1.3% U.S. Average 20.6% U.S. Average 215

Office Square footage*

37.2% Urban

2019 Office-Using Job growth Population of Age 25+ U.S. Average 32.0%

Percent with Bachelor Degree+**

Metro 1.5% 62.8% Suburban
U.S. Average 1.7% Metro 48.7% U.S. Average 68.0%
U.S. Average 29.9%
*1Q19
**2018

SUBMARKET TRENDS SALES TRENDS

Cap Rates Remain Stable as
Lowest Vacancy Rates 1Q19*
Employment Trends Competition Drives Sale
Local Price
Office YieldAppreciation
Trends
Employment Growth Office-Using Emp. Growth • Trade velocity stayed at about the same level year over year in March.
Y-O-Y Average
4% Vacancy Y-O-Y % Competition over listings helped lift the average sale price to $312 per
11.0%
Submarket Basis Point Asking
Rate Change
Change Rent square foot at the end of the first quarter, a 5.7 percent increase from
Year-over-Year Change

2% the first quarter

9.5% of 2018.
Average Rate

Woodbridge/I-95 Corridor 9.3% -180 $24.05 3.0%

• Despite rising prices, cap rates remain flat in the low-6 percent zone
0% 8.0%
Manassas/Route 29/I-66 9.5% 30 $21.87 0.4% on average, with above-market returns reported more often in Mary-
land and Virginia than inside the District.
-2% 6.5%
Leesburg/Route 7 Corridor 9.8% -210 $26.45 0.6%
Outlook: Amazon’s HQ2 is increasing the competition for assets in Ar-
-4% lington and Fairfax
5.0% County, impacting prices. Recent trades have already
Charles County 09 1010.6%
11 12 150
13 14 $23.00
15 16 17 0.5%
18 19* 01 03 HQ2
05 as07 09 acquisition
11 13 15consideration.
17 19*
cited proximity to Amazon a major

E Prince George’s County 11.6% 10 $22.89 4.7%

Office Supply and Demand Sales Trends

Capitol Hill Area 12.0% -110 $51.03 -1.7%
Completions Absorption Sales Price Growth
Greater Fredericksburg 15 12.9% -230 $22.70 -0.7%
Average Price per Square Feet

$400 30%
Year-over-Year Growth
Square Feet (millions)

Northeast/Southeast 10 13.6% 10 $28.06 -23.2%

$300 15%

S Prince George’s County5 14.7% -160 $24.22 1.1%

$200 0%

SE Montgomery County 0 15.4% 0 $27.75 0.9%

$100 -15%

Overall Metro 17.4% -50 $37.86 1.2%

-5 $0 -30%
09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19**

* Includes 10 out of a total 21 submarkets with more than 1 million square feet of office inventory ** Trailing 12 months through 1Q19 over previous time period
Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Vacancy Rate Trends
Metro United States
 1Q19* Office Acquisitions CAPITAL MARKETS
By Buyer Type
Cross-Border, By DAVID G. SHILLINGTON, President,
11.6%
Marcus & Millichap Capital Corporation
Other, 6.0%
Equity Fund • Ongoing trade concerns weigh on growth outlook; Fed plots next
& Institutions, 32.9% steps. Amid rising trade tensions between the U.S. and China and
slowing global growth, the outlook has turned more cautious. Mar-
ket volatility, along with a flight to safety trade, has flattened the
yield curve dramatically, with the 10-Year Treasury trading below
Private, 45.1%
Listed/REITs, 4.4% 2.2 percent. This has pushed the broader yield curve into inversion,
a closely watched precursor to a potential recession. Meanwhile,
many measures of the domestic economy remain buoyant, includ-
Office Mortgage Originations ing continued job and wage growth, historically low unemployment
By Lender and muted inflationary pressure. These conditions have prompted
Salt Lake City Office: Tampa Office:
a dichotomy, with Federal Reserve officials signaling more accom-
100%
Phil Brierley Regional Manager Ryan Nee District
modative policies. The impending end of quantitative tightening in
Manager
Percent of Dollar Volume

111 South Main Street, Suite 500 201 North Franklin St., Suite 1100
Salt Lake75%
City, UT 84111 September,
Tampa, FL 33602coupled with potential cuts to the Fed funds rate in the
Nat'l Bank/Int'l Bank
(801) 736-2600 | phil.brierley@marcusmillichap.com
Reg'l/Local Bank second
(813) half| nee.ryan@marcusmillichap.com
387-4700 of the year, highlight the shift in Fed policy. As a result,
50% CMBS long-term interest rates are likely to remain subdued, with Fed
Financial/Insurance policy leaning toward accommodation.
Pvt/Other
San Antonio
25% Office:

Craig R. Swanson Vice President/Regional Manager • Conservative underwriting balances abundant marketplace
Toronto Office:
8200 IH 100%
W, Suite 603 liquidity. While debt availability for office assets remains widely
San Antonio, TX 78230
14 15 16 17 18 Mark A. Paterson Broker of Record | Vice President/Regional Manager
(210) 343-7800 | craig.swanson@marcusmillichap.com available from a wide range of sources including local, regional and
200 King Street W., Suite 1210
* Trailing 12 months through 1Q19
national
Toronto, ON banks
M5H 3T4and insurance companies, sentiment surrounding
(416) 585-4646of
the health | mark.paterson@marcusmillichap.com
the economy has fallen somewhat in recent months.
Include sales $2.5 million and greater
Sources: CoStar Group, Inc.; Real Capital Analytics Lenders remain broadly cautious in underwriting, with loan-to-
San Diego Office: value (LTV) ratios typically in the 55 to 70 percent range, depend-
ing on the borrower, asset and location. The conservative approach
Spencer Moyer Regional Manager
4660 La
National Jollaand
Office Village Drive, Suite
Industrial Group900 has filtered into a focus on proven property results, with much less
San Diego, CA 92122
willingness to lend against pro forma rents. This has prompted
Alan L.373-3100
(858) Pontius | spencer.moyer@marcusmillichap.com Vancouver Office:
Senior Vice President, National Director | National Office and Industrial Group
investors to turn toward short-term mezzanine debt and bridge
Rene
loansH. to Palsenbarg
cover capitalBroker of Record | Regional Manager
improvements, while seeking long-term
Tel: (415) 963-3000 | al.pontius@marcusmillichap.com
400 Burrard Street, Suite 1020
solutions
Vancouver, BConce
V6C 3A6returns have been solidified. Construction origina-
Prepared and edited by (604) 675-5200 | rene.palsenbarg@marcusmillichap.com
tion remains muted, with lenders focusing on core locations with
Cody Young
proven demand.
Research Associate | Research Services
San Francisco Office:
For information on national office trends, contact:
Ramon Kochavi First Vice President/Regional Manager
John Chang
750 Battery Street, Fifth Floor
Senior
SanVice President,
Francisco, National Director | Research Services
CA 94111
Tel:(415)
(602)963-3000
707-9700| |ramon.kochavi@marcusmillichap.com
john.chang@marcusmillichap.com Washington, D.C., Office:

Matthew Drane Regional Manager

Price: $250 7200 Wisconsin Avenue, Suite 1101
Bethesda, MD 20814
© Marcus & Millichap (202) 536-3700 | matthew.drane@marcusmillichap.com
San Jose Office: 2019 | www.MarcusMillichap.com

Steven J. Seligman First Vice President/Regional Manager

2626 Hanover Street
Palo Alto, CA 94304
(650) 391-1700 | steven.seligman@marcusmillichap.com

West Palm Beach Office:

Ryan
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain Nee First
accurate Vice President/Regional
and complete Manager
information; however, no representation, warranty or guarantee,
express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level5900 North Andrews
employment growthAve., Suite 100based on the last month of the quarter/year. Sales data
is calculated
Fort Lauderdale, FL 33309
includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide
(954) 245-3400 | ryan.nee@marcusmillichap.com
specific investment advice and should not be considered as investment advice.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; Moody’s Analytics; Real Capital Analytics; TWR/Dodge Pipeline; U.S. Census Bureau