DISTRICT OF COLUMBIA OFFICE MARKET

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1 REAL ESTATE OUTLOOK DISTRICT OF COLUMBIA OFFICE MARKET Robust market conditions during Q4 Leasing activity on the rise in Q4 powered by associations and non-profits The District of Columbia experienced strong conditions during the fourth quarter of 2015, as net absorption registered positive 707,000 SF and the direct vacancy rate declined 20 basis points to 8.7%. Although this gain represents healthy growth, net absorption for all of 2015 at 841,000 SF is below the 10-year average of 1.3 million SF. Given improving conditions, asking rents climbed 1.1% during 2015 to $50.26 PSF at December Overall the flight to quality remains a trend. With limited options for new space, we expect ground breakings to occur over the next 24 months. OFFICE TRENDS 10-YEAR TREND DIRECT 8.7% Vacancy rate down YTD ECONOMY Healthy year-over-year job growth driven by professional/business services Payroll employment increased 8,100 in the District of Columbia during the 12 months ending October 2015, which is nearly double the 20-year annual average of 4,800. The professional/business services sector was the main driver in job growth over the past 12 months, adding 5,300 new jobs, above the 20- year average of 2,300. RENTAL RATES 841,000 SF Strong absorption YTD $50.24 PSF Up 0.9% YTD The District of Columbia s unemployment rate is 6.7% at October 2015, down from 7.7% one year ago. The current unemployment rate is below the 10-year average of 7.8%. This compares to the Washington metro area unemployment rate of 4.3% and the national rate of 5.0% at October. UNDER CONSTRUCTION 3.7 Million SF Pipeline expanding We expect conditions to pick up during 2016 and 2017, as consumer and business confidence strengthens to fuel the District of Columbia s economy. Through 2019, we expect job growth to average 11,800. We expect the health, technology, construction, and food services industries to fuel job growth in the period ahead. OFFICE AND DEMAND Demand gains traction during Q4 The direct vacancy rate was 8.7% at the end of the fourth quarter of 2015, down from 8.9% the quarter prior. The Class A vacancy rate decreased by 100 basis points during the past three months to 7.9%. JOB GROWTH 8,100 jobs During 12-months ending October 2015

2 DISTRICT OF COLUMBIA OFFICE MARKET UNEMPLOYMENT RATE UNITED STATES WASHINGTON METRO AREA DISTRICT OF COLUMBIA 12% 10% 8% 6% Net absorption totaled positive 707,000 SF during the fourth quarter of Class A space contributed positive 746,000 SF and Class B/C space accounted for negative 38,000 SF during the past three months. Given the growth during the past three months, net absorption totaled positive 841,000 SF during This pace is still below the 10-year annual average of 1.3 million SF. 4% 2% 0% PAYROLL JOB GROWTH * At October 2015 SOURCE Bureau of Labor Statistics, Transwestern. The positive net absorption was concentrated in the CBD and NoMa submarkets, with positive 353,000 SF and 264,000 SF, respectively. In the CBD, the World Bank leased 88,000 SF at 1825 Eye Street, NW. In NoMa, the Department of Justice signed a deal at 175 N Street, NE for 336,000 SF, which was offset slightly by the U.S. Department of Labor vacating 31,000 SF at 800 N. Capitol Street, NW and 10,000 SF at 820 1st Street, NE. 3% 2% 1% 0% -1% -2% -3% -4% UNITED STATES WASHINGTON METRO AREA DISTRICT OF COLUMBIA The East End submarket had the weakest quarter in terms of net absorption with negative 86,000 SF during the last three months, as a couple of notable move outs occurred. For example, Millennium Challenge Corporation moved out of 94,000 SF at th Street, NW and the U.S. Treasury vacated 74,000 SF at th Street, NW. -5% * 12 months ending October 2015 SOURCE Bureau of Labor Statistics, Transwestern. DISTRICT OF COLUMBIA OFFICE NET AND NET IN MILLIONS DIRECT RATE During 2015, associations and non-profits represented the largest share of leasing activity at 24% of total leasing for new or relet deals. This was primarily due to the International Food Policy Research Institute leasing 100,000 SF at 1310 L Street, NW in the East End. Following was the government sector at 19% of total activity, primarily to the Department of Justice deal mentioned earlier % 9% 8% 7% 6% 5% 4% * At fourth quarter 2015 We expect asking rents to rise 1.5% to 2.0% during However, rents should rise at a greater rate for top tier space, as trophy office is projected to rise 3.0% to 3.5% during OFFICE SUPPLY AND DEVELOPMENT Pipeline expanding There was one delivery during the fourth quarter of Boston Properties delivered 479,000 SF at 601 Massachusetts Avenue NW in the East End. This building was 84% pre-leased at delivery, with Arnold & Porter in 384,000 SF. The law firm vacated 435,000 SF at th Street, NW. The pipeline at December 2015 totaled 3.7 million SF at 20% pre-leased, up from 2.4 million SF at 32% one year ago. This compares to the 10-year average prelease rate of 48%. Notably, Property Group Partners started construction on 200 and 250 Massachusetts Avenue, NW in the Capitol Hill submarket. The buildings total 460,000 and 560,000 SF respectively and are currently 0% pre-leased. These buildings are part of the Capitol Crossing mixed-use project, which will deliver just over 2.0 million SF of office, retail, and residential combined. 2 REAL ESTATE OUTLOOK DISTRICT OF COLUMBIA OFFICE MARKET Q4 2015

3 DISTRICT OF COLUMBIA OFFICE MARKET Several new projects are gearing up to start construction. Notably, Douglas Development plans to break ground in the near-term on a 720,000 SF office building at 655 New York Avenue, NW in the East End. The Advisory Board pre-leased 500,000 SF of this project for its new headquarters. The consulting firm will vacate approximately 300,000 SF at 2445 M Street, NW and th Street, NW in the West End submarket by 2019 when the project delivers. In addition, Carr Properties plans to start 838,000 SF at th Street, NW in the East End by December Fannie Mae will move their headquarters into 685,000 SF at this location when it delivers by It is currently 80% pre-leased. OFFICE PROJECTED SUPPLY VS. DEMAND Overall vacancy rate to edge down We project the overall office vacancy rate in the District of Columbia to edge down to the mid- 8% range by December 2017 from 9.2% today. We expect the overall vacancy rate to decline on average 50 basis points per year through year-end This compares to a 120 basis point decline per year during the past two recovery periods. DISTRICT OF COLUMBIA OFFICE ASKING RENTAL RATES * At fourth quarter 2015 DISTRICT OF COLUMBIA OFFICE DEVELOPMENT PIPELINE MILLION SF $65 $60 $55 $50 $45 $40 $35 $30 $25 $20 $15 CLASS A CLASS B/C COMPLETED UNDER CONSTRUCTION PRE-LEASED UNDER CONSTRUCTION AVAILABLE The decline in vacancy is sluggish compared to past recovery periods due to several factors. The first is tenant uncertainty. Although the federal government has signed a budget deal that will alleviate some of the sequestration pressures, the deal is a short-term solution to a longer term problem as the looming deficit remains an issue. We expect tenants to gain greater certainty about the economy over the next two years and therefore be more apt to lease office space. The second factor is densification. Tenants that are leasing office space are typically reducing the amount of square feet leased per employee by approximately 20% * * Completed YTD OFFICE RENTAL RATES Asking rents rise 1.1% in 2015 The average asking rental rate for all classes of office space in the District of Columbia increased 0.8% during the fourth quarter of The average REAL ESTATE OUTLOOK DISTRICT OF COLUMBIA OFFICE MARKET Q

4 DISTRICT OF COLUMBIA OFFICE MARKET asking rent was $50.24 PSF at December 2015, up from $49.83 PSF three months prior. Class A office rents averaged $53.69 PSF, while Class B/C rents averaged $43.05 PSF. During 2015 asking rents for all classes of space increased 1.1%. We expect asking rents to rise 1.5% to 2.0% during However, rents should rise at a greater rate for top tier space, as trophy office is projected to rise 3.0% to 3.5% during Landlords continue to offer generous concession packages in order to compete for tenants with TI s averaging $90.00 PSF and free rent averaging 11.4 months for a typical 10-year term on a new lease. This is up compared to 2014, when TI s averaged $85.00 PSF and free rent average 10.9 months. Tenant improvement packages are higher in the East End at $94.00 PSF, compared to the CBD at $85.00 PSF. We expect concession packages to remain elevated during 2016, but should edge down slightly from the 2015 average. The exception is trophy, given rising demand and limited availability for top tier space. OFFICE INVESTMENT MARKET Pricing elevated for quality assets The District of Columbia investment market experienced healthy conditions in 2015, as the investment sales volume totaled $3.4 billion or $702 PSF. Investors focused capital on Class A assets, as this class represented 68% of the total sales volume during The East End and CBD captured most of the investment capital, taking 37% and 35% of the total volume for the District. During all of 2014, sales totaled $4.0 billion or $544 PSF. The average sales price was boosted during 2015 by the record breaking sale of America s Square (51 Louisiana Avenue, NW and 300 New Jersey Avenue, NW) in the Capitol Hill submarket for $500 million, or $1,083 PSF. Investors continue to target quality assets and are willing to pay a high price tag. The average cap rate was 5.4% during 2015, compared to 5.7% during all of The Class A cap rate was 4.8% during OFFICE MARKET OUTLOOK Market to strengthen further in 2016 and 2017 We expect improving market conditions during 2016 and into 2017, as job growth gains traction and tenants gain confidence in the economy. We expect the vacancy rate to decline to the mid-8% range by year-end 2017, as demand rises. With tenants demanding newer product with efficient floor plates, we expect several property owners to demolish and rebuild or renovate in order to compete. However, caution should be exerted with regard to the pipeline to prevent an District of Columbia Office Market Indicators SUBMARKET INVENTORY UNDER CONSTRUCTION Q4 NET 2015 NET DIRECT SUBLEASE SPACE OVERALL AVERAGE RATE PSF CBD 39,270, , , , % 0.6% 7.2% $51.59 East End 47,608, ,513 (86,000) (219,000) 9.7% 0.4% 10.1% $54.09 Capitol Hill 5,111,638 1,254,841 26,000 77, % 0.3% 11.1% $51.77 NoMa 10,567, , , , % 0.5% 9.7% $46.59 Capitol Riverfront 4,984, ,000 10,000 40, % 0.2% 13.2% $41.31 Southwest 11,480, , , , % 0.1% 7.8% $48.51 Georgetown 2,964,995 16,591 6,000 12, % 0.6% 5.2% $41.21 West End 4,008,325 0 (36,000) (173,000) 11.2% 0.4% 11.6% $51.79 Uptown 10,624, ,000 (43,000) 10.0% 0.8% 10.8% $40.32 Total 136,619,764 3,664, , , % 0.5% 9.2% $ REAL ESTATE OUTLOOK DISTRICT OF COLUMBIA OFFICE MARKET Q4 2015

5 DISTRICT OF COLUMBIA OFFICE MARKET oversupply. We expect asking rents to rise 1.5% to 2.0% during Stronger growth will be seen in top tier product. District of Columbia Office Market Indicators PROPERTY CLASS INVENTORY UNDER CONSTRUCTION Q4 NET 2015 NET DIRECT SUBLEASE SPACE OVERALL AVERAGE RATE PSF Class A 31,998,334 3,167, ,000 1,064, % 0.4% 8.3% $53.69 Class B/C 104,621, ,108 (38,000) (223,000) 9.0% 0.5% 9.5% $43.05 Total 136,619,764 3,664, , , % 0.5% 9.2% $50.24 District of Columbia Office Market Notable Lease Transactions TENANT DEAL TYPE ADDRESS SUBMARKET SQUARE FEET GSA - U.S. Department of Justice Pre-lease 150 M Street, NE NoMa 475,000 GSA - U.S. Department of Justice New Lease 175 N Street, NE NoMa 336,000 Steptoe & Johnson Renewal 1330 Connecticut Avenue, NW CBD 212,000 International Monetary Fund Renewal 1919 Pennsylvania Avenue NW CBD 103,000 Department of Disability Services New Lease 250 E Street, SW Southwest 102,000 International Food Policy Research Institute New Lease 1201 Eye Street NW East End 102,000 Federal Aviation Administration Renewal 950 L'Enfant Plaza, SW Southwest 100,000 SOURCE CoStar, County Newsletters, Washington Business Journal, Washington Post, Transwestern. District of Columbia Office Market Construction Activity SUBMARKET SQUARE FEET UNDER CONSTRUCTION/RENOVATION PERCENT PRE-LEASED CBD 681,736 35% East End 515,513 57% Capitol Hill 1,254,841 0% NoMa 375,000 30% Capitol Riverfront 235,000 0% Southwest 585,904 14% Georgetown 16,591 0% Total 3,664,585 20% CONTACT Elizabeth Norton Managing Research Director Mid-Atlantic elizabeth.norton@transwestern.com Ben Fish Research Associate Mid-Atlantic ben.fish@transwestern.com METHODOLOGY The information in this report is the result of a compilation of information on office properties located in the District of Columbia. This report includes single-tenant, multi-tenant and owner-user office properties 15,000 SF and larger, excluding properties owned by a government agency K Street NW, Suite 1000 Washington, DC T F Copyright 2016 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 DISTRICT OF COLUMBIA FLEX/INDUSTRIAL MARKET Flex/industrial stagnant during Q4 Vacancy edges up in Q4 The District of Columbia flex/industrial market experienced sluggish conditions during the fourth quarter of 2015, as the direct vacancy rate increased 10 basis points and net absorption was negative 10,000 SF. We expect the market to tighten slightly through 2016, as some leasing activity will occur and no new product is under construction. Conversion of obsolete flex/industrial product to alternative uses will also help tighten the market. FLEX/INDUSTRIAL TRENDS 10-YEAR TREND DIRECT 7.3% Vacancy up slightly YTD ECONOMY Healthy year-over-year job growth driven by professional/business services Payroll employment increased 8,100 in the District of Columbia during the 12 months ending October 2015, which is nearly double the 20-year annual average of 4,800. The professional/business services sector was the main driver in job growth over the past 12 months, adding 5,300 new jobs, above the 20- year average of 2,300. The District of Columbia s unemployment rate is 6.7% at October 2015, down from 7.7% one year ago. The current unemployment rate is below the 10-year average of 7.8%. This compares to the Washington metro area unemployment rate of 4.3% and the national rate of 5.0% at October. We expect conditions to pick up during 2016 and 2017, as consumer and business confidence strengthens to fuel the District of Columbia s economy. Through 2019, we expect job growth to average 11,800. We expect the health, technology, construction, and food services industries to fuel job growth in the period ahead. RENTAL RATES JOB GROWTH (20,000) SF Muted demand YTD $12.18 PSF Asking rents up YTD 8,100 jobs During 12-months ending October 2015

7 DISTRICT OF COLUMBIA FLEX/INDUSTRIAL MARKET FLEX/INDUSTRIAL AND DEMAND Muted conditions The direct vacancy was 7.3% at December 2015, up 10 basis points from three months prior. The direct vacancy rate is slightly above the 10-year average of 7.2%. Flex/warehouse product had a vacancy rate at 7.8% at December There is currently no availability for bulk warehouse or flex/r&d product in the District of Columbia. Net absorption totaled negative 10,000 SF during the past three months. The only notable deal was at V Street, NE where Country Vintner signed a lease for 10,000 SF. During 2015, net absorption totaled negative 20,000 SF, which is below the 10-year annual average absorption of positive 8,000 SF. Given the limited amount of available land in the District of Columbia, we expect some flex/industrial product to be converted to alternate uses which will aid in lowering the vacancy rate. DISTRICT OF COLUMBIA FLEX/INDUSTRIAL NET AND * At fourth quarter 2015 DISTRICT OF COLUMBIA FLEX/INDUSTRIAL ASKING RENTAL RATES $14 $13 $12 $11 NET IN MILLIONS DIRECT RATE 10% 9% 8% 7% 6% 5% 4% FLEX/INDUSTRIAL SUPPLY AND DEVELOPMENT No notable projects, as developers focus on the suburbs There are no notable projects under construction or renovation in the District of Columbia flex/industrial market at December Given the limited amount of available land in the District of Columbia, we expect some flex/industrial product to be converted to alternate uses, particularly in the emerging submarkets of NoMa and Capitol Riverfront. As flex/industrial product is converted to alternate uses, the market will continue to tighten. Earlier in 2015, a 233,484 SF flex/industrial building at rd Street, NE was repositioned to make way for the Uline Arena mixeduse project in the NoMa submarket. $10 $9 $8 $7 $6 * At fourth quarter 2015 FLEX/INDUSTRIAL PROJECTED SUPPLY VS. DEMAND Overall vacancy rate to decline We project the overall vacancy rate will decline in the District of Columbia from 7.2% today to the mid-6% range by year-end The decline will be due in part to light leasing activity as well as the conversion of industrial product to alternate uses. We expect the market to continue to tighten as conversions take place. 2 REAL ESTATE OUTLOOK DISTRICT OF COLUMBIA FLEX/INDUSTRIAL MARKET Q4 2015

8 DISTRICT OF COLUMBIA FLEX/INDUSTRIAL MARKET FLEX/INDUSTRIAL RENTAL RATES Rents rise Flex/industrial asking rents increased to $12.18 PSF at December of 2015, up 5.1% from year-end Flex/industrial asking rents in the District are prone to volatility given the limited availability of space on the market. Currently, there is only 728,000 SF of available space at December We expect asking rents to rise during 2016 as the vacancy rate is low enough to justify rent growth. FLEX/INDUSTRIAL INVESTMENT MARKET Investment interest rises in 2015 There were four notable investment sales totaling $139.9 million in the District of Columbia during Most recently, Douglas Development and Jemal Real Estate purchased 2130 Queens Chapel Road, NE for $5.9 million or $243 PSF. However, the boost in sales volume was due to Terreno Realty Corporation purchasing the V Street Industrial Park, a portfolio of 10 buildings, for $115 million or $145 PSF during the first quarter. Investment sales volume totaled $13.8 million during We expect the investment market to be modest through 2016, as many investors focus on suburban assets. FLEX/INDUSTRIAL MARKET OUTLOOK Market to tighten slightly We expect the District of Columbia flex/industrial market to tighten through Although demand will remain light, we expect it will be enough to push the overall vacancy rate down to the mid-6% range by year-end As developers convert product to alternate uses, the market will further tighten in 2016 and into District of Columbia Flex/Industrial Market Indicators PROPERTY TYPE INVENTORY UNDER CONSTRUCTION Q4 NET 2015 NET DIRECT SUBLEASE SPACE OVERALL AVERAGE RATE PSF Bulk Warehouse 203, % 0.0% 0.0% N/A Flex/Warehouse 9,385,638 0 (10,000) (20,000) 7.8% 0.0% 7.8% $12.18 Flex/R&D 379, % 0.0% 0.0% N/A Total 9,969,113 0 (10,000) (20,000) 7.3% 0.0% 7.3% $12.18 CONTACT Elizabeth Norton Managing Research Director Mid-Atlantic elizabeth.norton@transwestern.com Ben Fish Research Associate Mid-Atlantic ben.fish@transwestern.com METHODOLOGY The information in this report is the result of a compilation of information on flex/industrial properties located in the District of Columbia. This report includes single-tenant, multitenant and owner-user office properties 15,000 SF and larger, excluding properties owned by a government agency K Street NW, Suite 1000 Washington, DC T F Copyright 2016 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.