SUBURBAN MARYLAND OFFICE MARKET

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1 REAL ESTATE OUTLOOK SUBURBAN MARYLAND OFFICE MARKET Office market begins year on a positive note Modest demand, rental rates inch up The Suburban Maryland office market registered positive net absorption of 95,000 SF in the first quarter of 2018, and the direct vacancy rate decreased accordingly to 14.4%. Asking rents increased 0.6%, bringing them to $26.92 PSF at March This quarter s positive absorption and decrease in vacancy rates foreshadow our anticipated gradual improvement in the office market throughout ECONOMY Payroll employment up 0.7% Nationally, job creation accelerated in Q and will likely remain robust throughout 2018, bolstered by tax reform that boosted the cash flow many U.S. employers can invest in hiring and wages. Fears that the central bank will throttle the recovery to avoid runaway inflation in 2018 should prove unfounded for two reasons: Wage growth decelerated in the fourth quarter and will remain muted, exerting only mild inflationary pressure; and U.S. businesses lack pricing power, so costs will increase only gradually. With inflation at or below the Federal Reserve s target annual rate of about 2%, policymakers will likely continue to exercise restraint, tightening reins on the economy without triggering a recession this year. Locally, payroll employment increased by 7,300 jobs during the 12 months ending January 2018 in Suburban Maryland, which is above the 10-year annual average of 3,100. The leisure/hospitality sector was the leader in growth, contributing 4,000 new jobs to the economy. The education/health sector followed with 3,800 new jobs added during the same period. Finally, the nonprofit sector added 2,400 new jobs. OFFICE TRENDS 10-YEAR TREND DIRECT RENTAL RATES UNDER CONSTRUCTION 14.4% Vacancy rate edges down 95,000 SF Moderate start to 2018 $26.92 PSF Up 0.6% in Q1 1,126,000 SF Pipeline static The Suburban Maryland unemployment rate was 4.6% at January 2018, up from 4.3% one year prior. The unemployment rate is below the 10-year average of 5.9%. This compares to the Washington metro area unemployment rate of 3.8% and the national rate of 4.1% at January We expect healthy economic conditions to continue during 2018 buoyed by consumer and business confidence. Through 2022, we expect job growth to average 16,200 jobs per year, accounting for 45% of the metro total. We expect the health care/social assistance, government, and professional/scientific/technical sectors to fuel job growth in the period ahead. JOB GROWTH 7,300 jobs 12-months ending January 2018

2 SUBURBAN MARYLAND OFFICE MARKET UNEMPLOYMENT RATE UNITED STATES WASHINGTON METRO AREA SUBURBAN MARYLAND 12% 10% 8% 6% 4% 2% OFFICE AND DEMAND Class A struggles, Class B improves The direct vacancy rate in Suburban Maryland was 14.4% at March 2018, down 10 basis points from December The rate remains above the 10-year average vacancy rate of 13.8%. The Class A vacancy rate increased 40 basis points to 11.1% and the Class B/C market decreased by 20 basis points to 15.3%. 0% SOURCE: Bureau of Labor Statistics, Transwestern. Net absorption totaled positive 95,000 SF during the first quarter of Class B led with positive 161,000 SF in net absorption while Class A lagged at negative 67,000 SF. PAYROLL JOB GROWTH 3% 2% 1% 0% -1% -2% -3% -4% -5% UNITED STATES WASHINGTON METRO AREA SUBURBAN MARYLAND * *12-months ending January 2018 SOURCE: Bureau of Labor Statistics, Transwestern. SUBURBAN MARYLAND OFFICE NET AND The Bethesda/Chevy Chase submarket led the market with a second consecutive quarter of positive absorption totaling 69,000 SF in the first three months of 2018, which brings it to positive 161,000 SF since October This was due to limited move-outs and two medium sized deals, which included Wells Fargo signing for 17,300 SF at 3 Bethesda Metro Center and RBC Capital Markets taking 16,200 SF at 5425 Wisconsin Avenue. In the first quarter of 2018, the trade/transportation/utilities sector represented the largest share of leasing activity at 22%, followed closely by the financial services sector at 21%. Notable first quarter deals include the aforementioned Wells Fargo and RCB Capital Markets deals as well as Supernus Pharmaceuticals pre-lease at 700 Quince Orchard, which serves as a newly renovated home for the developer of central nervous system diseases come NET IN MILLIONS DIRECT RATE * 18% 16% 14% 12% 10% 8% 6% 4% At first quarter OFFICE RENTAL RATES Asking rents up across all classes Average asking rents in the Suburban Maryland office increased 0.6% during the first quarter to $26.92 PSF. Although Class A office rents inched up just 0.1% to $29.49 PSF, Class B/C rents increased 0.7% to $24.57 PSF. Concession packages remain elevated. For deals signed during the first quarter of 2018, tenant improvement allowances averaged $66 PSF with 11.5 months of free rent for a typical 10-year term on a new lease. This compares to $63 PSF and 10 months during OFFICE SUPPLY AND DEVELOPMENT Pipeline holds steady above one million SF There were no deliveries in the first quarter of 2018 and little change to the existing pipeline of 1.1 million SF of office space under construction or under renovation in six buildings. The pipeline is currently 50% pre-leased, which is just below the 10-year average pre-lease rate of 52%. Measured by SF, the majority of the pipeline is concentrated in Bethesda/Chevy Chase at 4747 Bethesda 2 REAL ESTATE OUTLOOK SUBURBAN MARYLAND OFFICE MARKET Q1 2018

3 SUBURBAN MARYLAND OFFICE MARKET Avenue and 7272 Wisconsin Avenue; however, the four other projects in the pipeline, which represent 466,000 SF of development across Montgomery County and Prince George s County, are scheduled to deliver by year-end. OFFICE INVESTMENT MARKET Investment sales limited in Q1 Investment sales in the first quarter consisted of ten trades. Most notably, Piedmont Office Realty Trust sold both 6720-A and 6720-B Rockledge Drive to Bridge Commercial Real Estate for $38.4 million and $48.6 million (both at $203 PSF), respectively. In addition, StonebridgeCarras closed for $8 million, or $372 PSF, on the police station at 7359 Wisconsin Avenue, which it purchased from the Montgomery County Government and is planned to be the future site of a 220-room hotel. Sales volume in in the first quarter of 2018 totaled $113 million, or $151 PSF. In 2017 that total was $869 million, or $167 PSF, split relatively evenly between Class A and Class B/C assets. SUBURBAN MARYLAND CONTIGUOUS BLOCK ANALYSIS NUMBER OF BUILDINGS - Q NUMBER OF BUILDINGS - Q ,000 SF 20,000 SF 50,000 SF 100,000 SF SUBURBAN MARYLAND OFFICE ASKING RENTAL RATES CLASS A CLASS B/C $40 $35 $30 $25 $20 $ * At first quarter SUBURBAN MARYLAND OFFICE DEVELOPMENT PIPELINE MILLION SF 2.5 COMPLETED UNDER CONSTRUCTION PRE-LEASED UNDER CONSTRUCTION AVAILABLE * *Under Construction YTD. REAL ESTATE OUTLOOK SUBURBAN MARYLAND OFFICE MARKET Q

4 SUBURBAN MARYLAND OFFICE MARKET OFFICE MARKET OUTLOOK Office market to steadily improve throughout 2018 Nationally, healthy office market fundamentals should support continued, moderate rent growth through mid-year 2018 despite an increasingly cautious outlook that will slow the pace of investment and absorption. Job creation and a tapering construction pipeline will keep supply in step with demand and help to stabilize the national vacancy rate near the 10-year low that it reached in the fourth quarter of Expect a trend toward shorter lease terms to reduce the burden of lease obligations on balance sheets when new accounting rules take effect at year-end. While perceptions of an approaching cyclical peak will deter some investors away from the office sector and into industrial and other assets considered more resilient during recessions, the search for better yields will continue to drive demand for opportunistic, value-add office deals in secondary markets. Locally in Suburban Maryland, we expect market conditions to improve at a steady pace throughout The overall vacancy rate (inclusive of sublease space) should decline to the high-13% range by year-end 2019, from 14.9% today. Although we expect leasing activity to continue the modest progress achieved in the first quarter of 2018, growth will remain muted compared to past recovery cycles due in part to tenant densification and consolidations. As a result, the Suburban Maryland market will remain in tenant favor in the near-term. Select submarkets with a relatively low vacancy rate, controlled pipeline and no significant move-outs on the horizon are poised to recover first. We expect asking rents to rise 1% to 2% during The vacancy rate will remain elevated, which will keep rent growth conservative and concession packages elevated. The exception is top-tier space, for which there is rising demand and limited availability. Due to the expansion of new office product in Bethesda, we expect pre-leasing at these major projects to drive top-tier rent growth. Suburban Maryland Office Market Indicators SUBMARKET INVENTORY UNDER CONSTRUCTION Q1 NET YTD NET DIRECT SUBLEASE SPACE TOTAL AVERAGE RATE PSF Bethesda/Chevy Chase 11,504, ,000 69,000 69, % 1.6% 7.8% $39.03 North Bethesda 10,765, ,000 65, % 0.2% 18.3% $28.42 Rockville 8,483,331 0 (25,000) (25,000) 12.7% 0.2% 12.9% $29.57 North Rockville 12,380, ,000 37, % 1.0% 16.6% $27.76 Gaithersburg 6,386, ,000 32, % 0.4% 12.5% $22.54 Germantown 2,730, ,000 11, % 0.2% 15.1% $24.88 Kensington/Wheaton 1,333, ,000 17, % 0.0% 26.7% $25.10 Silver Spring 6,824, ,724 5,000 5, % 0.9% 11.0% $28.12 North Silver Spring/Rt. 29 3,492, ,000 28, % 0.1% 9.0% $23.05 Montgomery County Total 63,900, , , , % 0.7% 13.5% $29.22 Beltsville/Calv./Coll. Park 6,135,212 0 (6,000) (6,000) 20.1% 0.0% 20.1% $22.70 Laurel 2,579,823 0 (57,000) (57,000) 12.4% 0.6% 13.0% $20.76 Greenbelt 3,016,041 0 (9,000) (9,000) 26.5% 0.1% 26.6% $21.64 Lanham/Landover/Largo 4,944, ,000 (69,000) (69,000) 25.0% 0.5% 25.5% $20.88 Bowie/Marlboro/South P.G. 4,982,613 93,100 (10,000) (10,000) 14.0% 0.1% 14.1% $21.23 Prince George's County Total 21,658, ,100 (151,000) (151,000) 19.8% 0.2% 20.0% $21.57 Frederick County 6,858, ,000 7, % 0.0% 11.3% $22.30 Total 92,416,979 1,125,824 95,000 95, % 0.5% 14.9% $ REAL ESTATE OUTLOOK SUBURBAN MARYLAND OFFICE MARKET Q1 2018

5 SUBURBAN MARYLAND OFFICE MARKET Suburban Maryland Office Market Indicators PROPERTY CLASS INVENTORY UNDER CONSTRUCTION Q1 NET YTD DIRECT SUBLEASE SPACE OVERALL AVERAGE RATE PSF Class A 20,417,542 1,125,824 (67,000) (67,000) 11.1% 0.5% 11.6% $29.49 Class B/C 71,999, , , % 0.5% 15.8% $24.57 Total 92,416,979 1,125,824 95,000 95, % 0.5% 14.9% $26.92 Suburban Maryland Office Market Notable Lease Transactions TENANT DEAL TYPE ADDRESS SUBMARKET SQUARE FEET Supernus Pharmaceuticals Pre-Lease 700 Quince Orchard Road Gaithersburg 118,800 AECOM Renewal Seneca Meadows Highway Gaithersburg 80,000 Federal Emergency Management Agency Renewal 6511 Americas Boulevard Beltsville/Calv./Coll. Park 55,000 TESST College of Technology Renewal 4600 Powder Mill Road Beltsville/Calv./Coll. Park 40,000 OPIS New Lease 2099 Gaither Road North Rockville 36,600 PlantronicsKPL Sublease 7700 Old Georgetown Road Bethesda/Chevy Chase 25,000 Howard Insurance Agency New Lease 6900 Wisconsin Avenue Bethesda/Chevy Chase 21,900 SOURCE: CoStar, County Newsletters, Washington Business Journal, Washington Post, Transwestern. Suburban Maryland Office Market Construction Activity SUBMARKET SQUARE FEET UNDER CONSTRUCTION/RENOVATION PERCENT PRE-LEASED Bethesda/Chevy Chase 660,000 32% Silver Spring 121, % Lanham/Landover/Largo 251,000 70% Bowie/Marlboro/South P.G. 93,100 60% Total 1,125,824 50% SOURCE: CoStar, Transwestern CONTACT Elizabeth Norton Managing Research Director Mid-Atlantic elizabeth.norton@transwestern.com Brandt Scheidemantel Research Associate Mid-Atlantic brandt.scheidemantel@transwestern.com METHODOLOGY The information in this report is the result of a compilation of information on office properties located in Suburban Maryland. This report includes single-tenant, multi-tenant and owner-user office properties 15,000 SF and larger, excluding properties owned by a government agency Rockledge Drive, Suite 500A Bethesda, Maryland T Copyright 2018 Transwestern. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. The information contained in this report was gathered by Transwestern from CoStar and other primary and secondary sources believed to be reliable. Transwestern, however, makes no representation concerning the accuracy or completeness of such information and expressly disclaims any responsibility for any inaccuracy contained herein.

6 REAL ESTATE OUTLOOK SUBURBAN MARYLAND FLEX/INDUSTRIAL MARKET Flex/industrial market healthy in Q1 Net absorption positive and rents rise The Suburban Maryland flex/industrial market performed well in the first quarter of 2018, registering positive net absorption of 323,000 SF. The direct vacancy rate edged down 20 basis points to 7.6%. Asking rents increased 0.7% during the first quarter to $8.37 PSF. The pipeline as of March 2018 totaled 322,000 SF, of which 0% is pre-leased. ECONOMY Payroll employment up 0.7% Nationally, job creation accelerated in Q and will likely remain robust throughout 2018, bolstered by tax reform that boosted the cash flow many U.S. employers can invest in hiring and wages. Fears that the central bank will throttle the recovery to avoid runaway inflation in 2018 should prove unfounded for two reasons: Wage growth decelerated in the fourth quarter and will remain muted, exerting only mild inflationary pressure; and U.S. businesses lack pricing power, so costs will increase only gradually. With inflation at or below the Federal Reserve s target annual rate of about 2%, policymakers will likely continue to exercise restraint, tightening reins on the economy without triggering a recession this year. Locally, payroll employment increased by 7,300 jobs during the 12 months ending January 2018 in Suburban Maryland, which is above the 10-year annual average of 3,100. The leisure/hospitality sector was the leader in growth, contributing 4,000 new jobs to the economy. The education/health sector followed with 3,800 new jobs added during the same period. Finally, the nonprofit sector added 2,400 new jobs. The Suburban Maryland unemployment rate was 4.6% at January 2018, up from 4.3% one year prior. The unemployment rate is below the 10-year average of 5.9%. This compares to the Washington metro area unemployment rate of 3.8% and the national rate of 4.1% at January FLEX/INDUSTRIAL TRENDS 10-YEAR TREND DIRECT RENTAL RATES 7.6% UNDER CONSTRUCTION JOB GROWTH Vacancy decreases to start ,000 SF Healthy demand in Q1 $8.37 PSF Asking rents up 0.7% 322,000 SF Pipeline decreases slightly 7,300 jobs 12-months ending January 2018

7 SUBURBAN MARYLAND FLEX/INDUSTRIAL MARKET SUBURBAN MARYLAND FLEX/INDUSTRIAL NET AND NET IN MILLIONS DIRECT RATE 12% * SUBURBAN MARYLAND FLEX/INDUSTRIAL ASKING RENTAL RATES $14 $12 $10 $8 $6 BULK WAREHOUSE FLEX/WAREHOUSE FLEX/R&D 11% 10% 9% 8% 7% 6% 5% 4% *At first quarter We expect healthy economic conditions to continue during 2018 buoyed by consumer and business confidence. Through 2022, we expect job growth to average 16,200 jobs per year, accounting for 45% of the metro total. We expect the health care/social assistance, government, and professional/scientific/technical sectors to fuel job growth in the period ahead. FLEX/INDUSTRIAL AND DEMAND Modest activity in Q1 The direct vacancy rate was 7.6% at March 2018, down 20 basis points from three months prior. This compares favorably to the 10-year average of 9.7%. Net absorption totaled positive 323,000 SF during the first quarter of In 2017 the yearly total net absorption was 1.1 million SF, which is significantly higher than the 10-year annual absorption average of 632,000 SF. Prince George s County experienced the greatest positive net absorption due primarily to La-Z-Boy s 221,000 SF lease at Queens Court. Frederick County also registered positive net absorption due to Goodwill taking 108,000 SF in Suite C at Matan s Wedgewood West development. $4 $2 $ * *At first quarter SUBURBAN MARYLAND FLEX/INDUSTRIAL DEVELOPMENT PIPELINE MILLION SF COMPLETED UNDER CONSTRUCTION PRE-LEASED UNDER CONSTRUCTION AVAILABLE * *Completed YTD. 2 REAL ESTATE OUTLOOK SUBURBAN MARYLAND FLEX/INDUSTRIAL MARKET Q1 2018

8 SUBURBAN MARYLAND FLEX/INDUSTRIAL MARKET FLEX/INDUSTRIAL RENTAL RATES Rents up 0.7% during Q1 Flex/industrial asking rents averaged $8.37 PSF at March Montgomery County experienced the greatest increase in rents at 2.1%. Frederick County also increased, though by just 0.3% and finally Prince George s County rents decreased nominally to $7.08. FLEX/INDUSTRIAL SUPPLY AND DEVELOPMENT Pipeline contracts due to Q1 deliveries Two buildings delivered during the first quarter of In Frederick County, Matan delivered 131,000 SF at Wedgewood West in building C, which was 82% pre-leased to Goodwill, and Rockpoint Commercial completed 49,500 SF at 4400 Georgia Pacific Boulevard, which was 0% pre-leased. Projects under construction or renovation in the Suburban Maryland flex/industrial market totaled 322,000 SF at 0% preleased at March Notably, Jackson Shaw Company has 167,000 SF under construction at 7501 Andrews Federal Campus Drive, which will be the second building in the 80-acre business campus. In addition, Atapco Properties has 46,000 SF under construction at 9300 Alaking Court. Both projects are set to deliver in FLEX/INDUSTRIAL INVESTMENT MARKET Strong activity in Q1 There were seven flex/industrial investment sales during the fourth quarter. Notably, Brennan Investment Group purchased the 680,000 SF bulk warehouse in Frederick County for $38 million, or $56 PSF. In addition, Terreno Realty Corporation disposed of the 139,000 SF property at 1000 Hampton Park Boulevard in Prince George s County for $20.3 million, or $146 PSF. Investment sales during the first quarter of 2018 totaled $89.1 million, or $81 PSF. In 2017 total sales volume was $223 million, or $100 PSF. FLEX/INDUSTRIAL MARKET OUTLOOK Vacancy to edge down, rents to bump up Six years of rent gains and more than seven years of a steadily falling U.S. vacancy rate underscore the market s voracious appetite for industrial real estate. Look for the national vacancy rate, which fell to 5.9% in the fourth quarter of 2017, to edge lower. Rents may begin to flatten if deliveries of new construction outpace demand as expected in the coming year. Some investors will retreat from asset prices they believe are nearing a peak, and the search for better yields will drive demand for opportunistic, value-add deals in secondary markets. Industrial will attract investors seeking assets favorably positioned to weather an eventual recession. Indeed, the growth of distribution networks to support ecommerce and lastmile delivery will likely sustain industrial demand for another three to five years. REAL ESTATE OUTLOOK SUBURBAN MARYLAND FLEX/INDUSTRIAL MARKET Q

9 SUBURBAN MARYLAND FLEX/INDUSTRIAL MARKET Suburban Maryland Flex/Industrial Market Indicators SUBMARKET INVENTORY UNDER CONSTRUCTION Q1 NET YTD DIRECT SUBLEASE SPACE TOTAL AVERAGE RATE PSF Bulk Warehouse 19,474, , , , % 1.2% 11.7% $6.67 Flex/Warehouse 35,159, ,000 9, % 0.1% 5.4% $7.05 Flex/R&D 2,425, ,000 2, % 0.0% 13.6% $10.84 Prince George's County Total 57,060, , , , % 0.5% 7.9% $7.08 Bulk Warehouse 2,602,549 0 (21,000) (21,000) 8.8% 2.0% 10.8% $10.78 Flex/Warehouse 15,722,681 0 (39,000) (39,000) 8.8% 0.0% 8.9% $12.07 Flex/R&D 4,357,858 0 (9,000) (9,000) 7.1% 1.3% 8.4% $13.45 Montgomery County Total 22,683,088 0 (69,000) (69,000) 8.5% 0.5% 9.0% $12.19 Bulk Warehouse 5,641, ,043 4,000 4, % 0.0% 10.2% $5.51 Flex/Warehouse 9,610, ,000 42, % 0.1% 4.4% $8.41 Flex/R&D 1,775, ,000 4, % 0.3% 14.9% $9.75 Frederick County Total 17,027, ,043 50,000 50, % 0.1% 7.4% $7.59 Bulk Warehouse 27,718, , , , % 1.0% 11.3% $6.82 Flex/Warehouse 60,493, ,000 12, % 0.1% 6.1% $8.57 Flex/R&D 8,558,815 0 (3,000) (3,000) 10.5% 0.7% 11.2% $11.94 Suburban Maryland Total 96,770, , , , % 0.4% 8.1% $8.37 Note: Totals might not add due to rounding. SOURCE: CoStar, Transwestern 4 REAL ESTATE OUTLOOK SUBURBAN MARYLAND FLEX/INDUSTRIAL MARKET Q1 2018

10 SUBURBAN MARYLAND FLEX/INDUSTRIAL MARKET Suburban Maryland Flex/Industrial Market Indicators PROPERTY TYPE INVENTORY UNDER CONSTRUCTION Q1 NET YTD DIRECT SUBLEASE SPACE OVERALL AVERAGE RATE PSF Bulk Warehouse 27,718, , , , % 1.0% 11.3% $6.82 Flex/Warehouse 60,493, ,000 12, % 0.1% 6.1% $8.57 Flex/R&D 8,558,815 0 (3,000) (3,000) 10.5% 0.7% 11.2% $11.94 Total 96,770, , , , % 0.4% 8.1% $8.37 SOURCE: CoStar, Transwestern Suburban Maryland Flex/Industrial Market Notable Lease Transactions TENANT DEAL TYPE ADDRESS SUBMARKET SQUARE FEET Bluelinx Renewal 4300 George Pacific Boulevard Frederick County 580,300 La-Z-Boy New Lease Queens Prince George's County 220,800 SRS Distribution New Lease Tucker Street Prince George's County 29,700 SRS Distribution New Lease 6809 Bowman's Crossing Frederick County 29,000 Topline Countertops Inc Renewal 801 N. East Street Frederick County 16,700 Evergreen Graphics Inc Renewal Tucker Street Prince George's County 12,000 SOURCE: CoStar, County Newsletters, Washington Business Journal, Washington Post, Transwestern Suburban Maryland Flex/Industrial Market Construction Activity SUBMARKET SQUARE FEET UNDER CONSTRUCTION/RENOVATION PERCENT PRE-LEASED Prince George's County 213,033 0% Frederick County 109,043 0% Total 322,076 0% SOURCE: CoStar, Transwestern CONTACT Elizabeth Norton Managing Research Director Mid-Atlantic elizabeth.norton@transwestern.com Brandt Scheidemantel Research Associate Mid-Atlantic brandt.scheidemantel@transwestern.com METHODOLOGY The information in this report is the result of a compilation of information on flex/industrial properties located in Suburban Maryland. This report includes single-tenant, multi-tenant and owner-user flex/industrial properties 15,000 SF and larger, excluding properties owned by a government agency Rockledge Drive, Suite 500A Bethesda, Maryland T Copyright 2018 Transwestern. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. The information contained in this report was gathered by Transwestern from CoStar and other primary and secondary sources believed to be reliable. Transwestern, however, makes no representation concerning the accuracy or completeness of such information and expressly disclaims any responsibility for any inaccuracy contained herein.