RESEARCH

3Q11 Washington, D.C. Metro Area Office market

3Q11

Washington, D.C. Metro Area Office market

Washington, D.C. Metro Area

Key indicators in the Washington, D.C. metro area office market remained positive in the third quarter of 2011. The average asking rent in the market finished the quarter at a historical high of $36.06/sf, a 1.2% increase over the $35.64/sf average reported in the second quarter and a 0.4% increase over the $35.90/sf average reported one year ago. The market posted the eighth consecutive quarter of positive absorption, at 379,965 square feet, which brought the year-to-date net total to 1.1 million square feet. Through the first three quarters of the year a total of 19.6 million square feet of office space was leased, compared to the first three quarters of 2010 when 21.9 million square feet of space was leased. The vacancy rate was 14.7% at the end of the quarter, unchanged from the second quarter and lower than the 15.1% rate one year ago. A total of 4.3 million square feet of new office space was under construction in the quarter, an increase over the 3.4 million square feet level one year ago, although still well below the pre-recession peak of over 13 million square feet. The one property added to the office inventory in the third quarter was the 414,029 square-foot 1015 Half Street SE in the Capitol Riverfront submarket.
Table 1 Figure 2 $35.00 3Q10 4Q10 1Q11 2Q11 3Q11
Rent (Price/SF) Vacancy (%)

Figure 1

Weighted Average Asking Rent & Vacancy

$36.25 $36.00 $35.75 $35.50 $35.25 16.0% 15.5% 15.0% 14.5% 14.0% 13.5%

Net Absorption (SF)

1,400,000 1,120,000 840,000 560,000 280,000 0 3Q10 4Q10 1Q11 2Q11 3Q11

Key Indicators
Total Inventory (SF) Average Asking Rent (Price/SF) Total Direct Sublet Vacancy Rate (%) Total Direct Sublet Net Absorption (SF) 3Q11 2Q11 1Q11 Under Construction (SF) 322,948,751 $36.06 $36.63 $31.51 14.7% 13.5% 1.2% 379,965 425,086 262,238 4,303,920
Figure 3

Newmark Knight Frank ModernTrax Forecast

$36.50 $36.25 $36.00

Table 2

Year Over Year

3Q10 Vacancy Rate (%) Average Asking Rent (Price/SF) 15.1% $35.90 3Q11 14.7% $36.06 % Change -2.6% 0.4%

$35.75 $35.50 $35.25 4Q10 1Q11 2Q11 3Q11 4Q11

Actual Rent (Price/SF) Forecasted Rent (Price/SF)

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Washington, D.C.
The Washington, D.C. office market finished the third quarter of 2011 with an average asking rental rate of $49.56/sf, up from $49.42/sf in the second quarter and $49.26/sf one year ago. The vacancy rate finished the third quarter at 12.7%, higher than the 12.6% rate reported in the second quarter, although an improvement on the 13.6% rate reported one year ago. Absorption in Washington, D.C. was positive for the eighth consecutive quarter at 139,106 square feet, bringing the 2011 year-to-date net total for the market to 1.8 million square feet. The West End submarket, the submarket with the second lowest inventory total in Washington, D.C., accounted for 222,888 square feet of net absorption in the third quarter and posted positive absorption totals in each of the last six quarters. The improved conditions in the market led to a decline of 650 basis points in the vacancy rate, which finished the quarter at 11.7% - a noticeable improvement over the 18.3% rate reported in the second quarter, although still slightly higher than the 11.5% rate reported one year ago. The average asking rent for office space in the West End submarket was $42.70/sf, a 1.9% increase over the $41.90/sf second quarter average, although 8.5% off the peak of $46.66/sf in the fourth quarter of 2007.
Figure 2 $49.50 $49.25 $49.00 $48.75 3Q10 4Q10 1Q11 2Q11 3Q11
Rent (Price/SF) Vacancy (%)

Figure 1

Weighted Average Asking Rent & Vacancy

$50.00 $49.75 14.0% 13.6% 13.2% 12.8% 12.4% 12.0%

Net Absorption (SF)

900,000 720,000 540,000 360,000 180,000 0 3Q10 4Q10 1Q11 2Q11 3Q11

Table 1

Key Indicators
Total Inventory (SF) Average Asking Rent (Price/SF) Total Direct Sublet Vacancy Rate (%) Total Direct Sublet Net Absorption (SF) 3Q11 2Q11 1Q11 Under Construction (SF) 116,639,517 $49.56 $50.37 $42.93 12.7% 11.7% 1.1% 139,106 223,626 716,285 1,219,914
Figure 3

Newmark Knight Frank ModernTrax Forecast

$50.00 $49.75 $49.50

Table 2

Year Over Year

3Q10 Vacancy Rate (%) Average Asking Rent (Price/SF) 13.6% $49.26 3Q11 12.7% $49.56 % Change -6.6% 0.6%

$49.25 $49.00 $48.75 4Q10 1Q11 2Q11 3Q11 4Q11

Actual Rent (Price/SF) Forecasted Rent (Price/SF)

3Q11

Washington, D.C. Metro Area Office market

Northern Virginia
The Northern Virginia office market experienced negative 63,090 square feet of net absorption in the third quarter of 2011, which brought the yearto-date net total for the market to negative 119,461 square feet. The vacancy rate increased to 15.4%, up from 15.3% in the second quarter and one year ago, and well above the pre-recession low of 10.8% in mid-2006. The average asking rent for office space in Northern Virginia reached $31.02/sf in the quarter, a 3.1% improvement on the $30.09/sf average in the second quarter and a 4.8% improvement on the $29.60/sf average reported one year ago. The Rosslyn submarket experienced the largest setback in Northern Virginia in the third quarter with negative 241,127 square feet of net absorption. Through the first three quarters of the year, the Rosslyn submarket experienced a net total of negative 569,048 square feet of absorption. The vacancy rate in Rosslyn spiked to 12.1%, up sharply from the 9.3% rate reported in the second quarter and the 5.9% rate reported one year ago. The average asking rent for office space in the submarket finished the third quarter at $40.11/sf, down 2.3% from the historical high of $41.07/sf in the second quarter, although 1.1% higher than the $39.67/sf average from one year ago.
Figure 2 Figure 1

Weighted Average Asking Rent & Vacancy

$31.35 $30.80 $30.25 $29.70 $29.15 $28.60 3Q10 4Q10 1Q11 2Q11 3Q11
Rent (Price/SF) Vacancy (%)

15.8% 15.6% 15.4% 15.2% 15.0% 14.8%

Net Absorption (SF)

540,000 270,000 0 -270,000 -540,000 -810,000 3Q10 4Q10 1Q11 2Q11 3Q11

Table 1

Key Indicators
Total Inventory (SF) Average Asking Rent (Price/SF) Total Direct Sublet Vacancy Rate (%) Total Direct Sublet Net Absorption (SF) 3Q11 2Q11 1Q11 Under Construction (SF) 151,201,378 $31.02 $31.57 $27.07 15.4% 14.0% 1.4% -63,090 458,206 -514,577 2,333,446
Figure 3

Newmark Knight Frank ModernTrax Forecast

$31.50 $31.00 $30.50

Table 2

Year Over Year

3Q10 Vacancy Rate (%) Average Asking Rent (Price/SF) 15.3% $29.60 3Q11 15.4% $31.02 % Change 0.7% 4.8%

$30.00 $29.50 $29.00 4Q10 1Q11 2Q11 3Q11 4Q11

Actual Rent (Price/SF) Forecasted Rent (Price/SF)

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Maryland
For the fifth quarter out of the last seven, absorption in Maryland was positive as 303,949 square feet of space was taken up, bringing the yearto-date net total into positive territory at 107,733 square feet. The vacancy rate finished the quarter at 17.1%, an improvement on the 17.6% rate reported in the second quarter and the 17.5% rate reported one year ago. The average asking rent in the market was $27.64/sf in the third quarter, down from $27.74/sf in the second quarter and still below the peak of $29.19/sf reported in the third quarter of 2008. The Bethesda & Chevy Chase submarket was one of only two submarkets in Maryland to post negative net absorption in the third quarter at negative 111,280 square feet. Year-to-date, a net total of negative 187,876 square feet of net absorption has taken place in the submarket. The vacancy rate increased to 12.6%, up from 11.3% in the second quarter and well above the pre-recession low of 7.1% in the first quarter of 2007. Average asking rents in the submarket reached their highest point in almost two years, finishing at $34.96/sf, compared to $34.69/sf in the second quarter and $34.21/sf one year ago.
Figure 2 $27.75 $27.50 $27.25 $27.00 3Q10 4Q10 1Q11 2Q11 3Q11
Rent (Price/SF) Vacancy (%)

Figure 1

Weighted Average Asking Rent & Vacancy

$28.25 $28.00 18.5% 18.0% 17.5% 17.0% 16.5% 16.0%

Net Absorption (SF)

480,000 320,000 160,000 0 -160,000 -320,000 3Q10 4Q10 1Q11 2Q11 3Q11

Table 1

Key Indicators
Total Inventory (SF) Average Asking Rent (Price/SF) Total Direct Sublet Vacancy Rate (%) Total Direct Sublet Net Absorption (SF) 3Q11 2Q11 1Q11 Under Construction (SF) 55,107,856 $27.64 $27.91 $24.75 17.1% 15.9% 1.2% 303,949 -256,746 60,530 750,560
Figure 3

Newmark Knight Frank ModernTrax Forecast

$27.93 $27.74 $27.55

Table 2

Year Over Year

3Q10 Vacancy Rate (%) Average Asking Rent (Price/SF) 17.5% $27.38 3Q11 17.1% $27.64 % Change -2.3% 0.9%

$27.36 $27.17 $26.98 4Q10 1Q11 2Q11 3Q11 4Q11

Actual Rent (Price/SF) Forecasted Rent (Price/SF)

3Q11

Washington, D.C. Metro Area Office market

According to the U.S. Bureau of Labor Statistics (BLS), total nonfarm employment in the Washington, D.C. metropolitan area increased by 1,900 jobs in the 12 months ending in August 2011, indicating a 0.1% change, although 20,000 jobs were lost in the month of August alone. The unemployment rate was 6.2% in August, unchanged from July and slightly lower than the 6.3% rate reported in August 2010. The Consumer Price Index (CPI) for the metropolitan area increased 4.1% in the 12 months ending in August. For the U.S. overall, the BLS reported that total nonfarm employment increased 1.0%, or 1.3 million jobs, in the 12 months ending August 2011. The unemployment rate was 9.1%, compared to 9.1% in July 2011 and 9.6% in August 2010. The CPI increased 3.8% for the 12 months ending in August.
Figure 4 Figure 6 Figure 5

Consumer Price Index, 12-Month % Change

6.3% 4.2% 2.1% 0.0% -2.1% -4.2% Jul-07 Jul-08
United States

Jul-09

Jul-10
Washington, D.C.

Jul-11

Total Nonfarm Employment, 12-Month % Change

1.5% 0.0% -1.5% -3.0% -4.5% -6.0% Aug-07 Aug-08
United States

Unemployment Rate
12.5% 10.0% 7.5% 5.0% 2.5% 0.0%

Aug-09

Aug-10
Washington, D.C.

Aug-11

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

United States

Washington, D.C.

Table 3

Select Lease Transactions

Tenant National Institute of Allergy and Infectious Diseases Choice Hotels International NJVC ManTech International Corporation Kelley Drye & Warren Address 5601 Fishers Ln 121 Rockville Pike 14295 Park Meadow Dr 2251 Corporate Park Dr 3050 K St NW Submarket Rockville Rockville Chantilly Herndon Georgetown Square Feet 490,998 136,362 124,399 109,736 107,000

Table 4

Select Sales Transactions

Address 3 Bethesda Metro Ctr 1200 1st St NE 1616 N Fort Myer Dr 1340 Braddock Pl 6400-6402 Arlington Blvd Submarket Bethesda/Chevy Chase NoMa Rosslyn Old Town Alexandria Falls Church Square Feet 368,400 291,838 303,262 386,927 399,049 Sale Price $150,100,000 $149,500,000 $145,500,000 $101,000,000 $84,600,000 Price/SF $407 $512 $480 $261 $212

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Table 5

Submarket Statistics
Total Inventory (SF) Washington, D.C. Capitol Hill Capitol Riverfront CBD East End Georgetown NoMa Southwest Uptown West End Northern Virginia Alexandria Annandale Ballston Chantilly Clarendon/Court House Crystal City Herndon Fairfax Falls Church Merrifield Oakton Old Town Alexandria Reston Rosslyn Route 28 North Springfield Tysons Corner Virginia Square Maryland Beltsville & Calverton Bethesda & Chevy Chase Gaithersburg & Germantown Greenbelt Landover & Lanham N. Bethesda & Potomac Rockville Silver Spring D.C. Metro Area 116,639,517 4,196,294 5,325,197 34,549,495 40,050,471 2,805,149 8,908,868 11,518,137 5,869,052 3,416,854 151,201,378 12,506,411 1,398,570 6,817,904 11,694,355 4,669,993 12,439,503 11,151,862 10,011,159 1,863,054 7,224,153 1,028,507 6,695,351 16,162,337 8,569,930 7,382,085 4,558,176 25,692,365 1,335,663 55,107,856 1,408,817 9,042,509 6,323,335 3,335,333 4,262,121 8,185,523 17,591,664 4,958,554 322,948,751 Qtrly Net Absorption (SF) 139,106 -1,886 2,320 53,612 70,607 -84,722 29,415 -75,531 -77,597 222,888 -63,090 -171,838 7,162 -34,544 43,372 107,515 -3,907 82,253 -44,441 -16,521 88,054 2,790 -118,200 -2,958 -241,127 145,560 52,425 51,554 -10,239 303,949 38,093 -111,280 123,591 -25,779 22,195 135,859 44,014 77,256 379,965 Direct Vacancy Rate 11.7% 11.4% 15.3% 11.4% 9.5% 14.0% 16.4% 15.9% 10.4% 9.0% 14.0% 13.6% 15.8% 5.8% 14.5% 13.1% 8.9% 14.2% 14.4% 9.6% 14.4% 25.2% 15.1% 18.7% 10.4% 16.2% 12.9% 16.4% 2.7% 15.9% 30.8% 10.5% 16.1% 25.6% 23.3% 15.0% 15.3% 11.9% 13.5% Sublet Vacancy Rate 1.1% 0.4% 0.1% 1.5% 1.2% 0.7% 0.1% 0.1% 1.1% 2.7% 1.4% 0.5% 1.6% 3.0% 1.4% 0.6% 0.6% 1.2% 1.5% 0.1% 1.7% 3.7% 2.0% 1.7% 1.7% 0.5% 0.4% 1.6% 2.1% 1.2% 0.0% 2.1% 1.4% 0.8% 0.6% 0.7% 1.0% 1.7% 1.2% Total Vacancy Rate 12.7% 11.7% 15.3% 13.0% 10.7% 14.7% 16.6% 16.0% 11.5% 11.7% 15.4% 14.1% 17.4% 8.7% 15.9% 13.7% 9.5% 15.4% 15.9% 9.7% 16.1% 28.9% 17.1% 20.4% 12.1% 16.7% 13.3% 18.0% 4.8% 17.1% 30.8% 12.6% 17.5% 26.4% 23.9% 15.7% 16.3% 13.6% 14.7% Direct Avg. Asking Rent (Price/SF) $50.37 $55.72 $45.57 $50.26 $54.90 $43.09 $47.08 $50.89 $37.09 $42.96 $31.57 $31.99 $25.21 $44.74 $26.36 $40.90 $39.94 $28.85 $25.92 $25.92 $31.72 $28.25 $33.46 $27.38 $41.73 $23.26 $29.79 $33.39 $43.66 $27.91 $20.01 $36.18 $22.79 $20.61 $20.72 $30.85 $30.75 $29.43 $36.63 Sublet Avg. Asking Rent (Price/SF) $42.93 $63.75 $47.00 $43.65 $42.30 $35.62 $41.76 $48.50 $38.88 $41.63 $27.07 $26.88 $18.60 $36.53 $18.58 $35.36 $33.93 $22.19 $21.91 $21.60 $24.38 $23.08 $30.47 $25.46 $34.47 $17.87 $32.02 $26.11 $42.21 $24.75 NA $29.39 $22.39 $20.81 $18.31 $24.75 $23.45 $26.34 $31.51 Total Avg. Asking Rent (Price/SF) $49.56 $56.19 $45.58 $49.15 $53.51 $42.69 $46.96 $50.88 $37.36 $42.70 $31.02 $31.37 $24.14 $42.72 $25.47 $39.81 $39.53 $28.27 $25.49 $25.82 $30.65 $27.55 $33.03 $27.04 $40.11 $23.19 $29.84 $32.57 $43.38 $27.64 $20.01 $34.96 $22.75 $20.62 $20.61 $30.27 $30.31 $29.09 $36.06

RESEARCH
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