Transcript Document

Commercial Market
Now and Then
Petch Gibbons
January 26, 2011
Tell ‘em what you’re going to tell ‘em!
Washington, DC

Positive Absorption Hit Record Levels
- Occupancy Levels Increasing by 4.3 Million SF
- Federal Government Activity and Spending

Sales Activity and Values Soared
- The World Bank at 1225 Connecticut Ave NW for $216 Million ($900 psf)

Lots of tenants hunkering down
Northern Virginia

The Tale of Two Markets; One Inside the Beltway; One Outside

Investors Lured by Financially Stable, Fully Leased, Quality Office Properties

Slow and Steady Recovery is Projected for Northern Virginia in 2011 with Tighter
Markets Inside the Beltway
Suburban Maryland

Bethesda Brings Suburban Maryland Office Market into Solid Recovery Mode

Government/Contractors Responsible for The Largest Transactions.

Southern Montgomery County Leads the Office Market Recovery in 2011
A Record-Breaking Year for Absorption Downtown
while the Suburbs turn Positive
Absorption (msf)
Government Activity was Responsible for
Most of the Demand in 2010 in all Markets
Private Sector Activity Led by:
 Law firms (Core DC markets)
 Consulting, Technology (Northern VA)
 Consulting, Accounting (Suburban MD)
* Overall absorption is defined as the change in occupied built space
for a given period of time, including sublease space within five years.
Source: Cushman & Wakefield Research
3
Downtown Absorption will return to more
Normal Historical Levels in 2011 and 2012
* Absorption (msf)
The Leasing Momentum Will Continue
Into 2011, but will Taper Off During the
Second Half of the Year.
Employment Growth Will Begin To Pick Up
in 2011 and 2012:
Averages: (Over 5 yrs)
DC:
1.3 msf
NoVA:
1.6 msf
Sub MD: 24,000 sf
* Overall absorption is defined as the change in occupied built space
for a given period of time, including sublease space within five years.
Source: Cushman & Wakefield Research
4
Historical Available Sublease Space
The Amount of Sublease Space Declined Markedly
across all Markets.
•Downtown -24.1%
•Northern VA -35.4%
•Suburban MD -44.7%
Noteworthy Subleases
Deloitte
1919 N Lynn St
Rosslyn
320,000 SF
Scitor Corporation
12010 Sunset Hills Rd
Reston/Herndon
40,252 SF
National
Association of
Child Care
Resource &
Referral Agencies
(NACCRRA)
1515 North
Courthouse Road
Arlington Metro
Corridor
36,068 SF
The Sierra Club
50 F Street NW
Capitol Hill/NoMa
30,000 SF
Source: Cushman & Wakefield Research
5
Top Lease Transactions
Downtown
Building
Submarket
Tenant
SF
400 7th St. SW
Southwest
SEC
900,000
1001 Pennsylvania Ave. NW
East End
Crowell & Moring (renewal, expansion)
375,089
1750 & 1776 K St. NW
CBD
Wiley Rein LLP (renewal)
335,240
425 Eye St. NW
East End
Department of Veterans Affairs
285,434
700 2nd St. NE
Capitol Hill / NoMa
SEC
200,100
Building
Submarket
Tenant
SF
Melpar Office Complex
Merrifield/Route 50
GSA – Medical Command HQ
668,285
Patriots Park
Reston/Herndon
GSA – Defense Intelligence Agency
523,482
John Marshall I & III
Tysons Corner/McLean
Booz Allen Hamilton (renewal)
463,225
Waterview
Rosslyn
Deloitte
320,000
Building
Submarket
Tenant
SF
Shady Grove Life Sciences Center
North Rockville
National Cancer Institute
575,000
7700-7720 Hubble Dr.
Greenbelt
TRAX International (on behalf of NASA)
120,000
45 W. Gude Dr.
North Rockville
Montgomery County Board of Education
113,845
7501 Wisconsin Ave.
Bethesda/Chevy Chase
The Reznick Group
105,000
Northern VA
Suburban MD
Source: Cushman & Wakefield Research
6
Other Renewals
Building
Submarket
Tenant
SF
Booz Allen Hamilton
(renewal)
Computer Sciences Corporation
(renewal)
John Marshall I & III
Tysons Corner/McLean
Washington Technology Park
Route 28 South/Chantilly
Hunters Branch
Fairfax/Oakton/
Vienna
ICF Consulting (renewal/expansion)
201,707
Southwest
Department of Health & Human Services
185,120
Southwest
National Transportation Safety Board
179,519
370 L'Enfant Plaza SW
470-490 L'Enfant Plaza SW
463,225
257,485
Source: Cushman & Wakefield Research
7
Vacancy Rates remained Elevated from
their Pre-Recession Levels…
Submarkets with low 2010 vacancy rates:
East End
10.4%
Ballston
4.2%
Bethesda/Chevy Chase
10.5%
Source: Cushman & Wakefield Research
8
…but will Continue to Inch Down in 2011 and 2012
Very Few Construction Completions Help Vacancy
Rates Tighten.
In Downtown and Suburban Maryland Vacancy
Rates Will Remain Well Above10-year Averages:
10 Year Average Vacancy Rate
Downtown
7.9%
Northern VA
12.9%
Suburban MD
12.3%
Source: Cushman & Wakefield Research
9
While Construction Deliveries Plummeted in the Suburban
Markets, over 2.5 msf was Delivered Downtown
SF
DELIVERED
% OF
INVENTORY
2,523,171
2.4%
Northern VA
270,000
0.2%
Suburban MD
313,130
0.6%
Downtown
Noteworthy Completions (over 350,000 sf)
Two Constitution
Square
Capitol Hill/NoMa
590,000 SF
90 K Street NE
Capitol Hill/NoMa
413,000 SF
800 17st Street
NW
CBD
365,000 SF
Source: Cushman & Wakefield Research
10
Very few Projects are in the Pipeline
Total SF
Under
Construction
Downtown
% Vacant
1,366,006
58%
Northern VA
744,610
30%
Suburban MD
358,440
0%
Noteworthy Projects (completions through 2012)
2200 Pennsylvania
Ave. NW
CBD
431,000 SF
Founders Square
Phase I
Ballston
400,000 SF
1015 Half St. SE
Capitol River Front
392,000 SF
1000 Connecticut
Ave. NW
CBD
374,000 SF
North Bethesda
Center Bldg I
North Bethesda
358,000 SF
Source: Cushman & Wakefield Research
11
Class A Asking Rents hit Bottom Downtown…
Concessions begin to Contract (Only In Prime,
Core Properties)
Institutional Owners are Becoming Less
Generous.
2010 Class A Concessions (10-yr +deals)
Average Free Rent
Average TIs
Downtown
7.4 months
$72/sf
Northern VA
7.9 months
$50/sf
Suburban MD
10.3 months
$52/sf
Source: Cushman & Wakefield Research
12
…and will Increase by 4-5% by 2012 in all Areas.
Concession Packages will Continue to Tighten in
Quality Space, Causing a Jump in Net Effective
Rents in 2011 in Some Submarkets.
Submarkets with Highest Class A Asking Rents in 2010:
CBD
$60.83
• 800 Connecticut Ave. NW, 1875 K St. NW
(over $70/sf)
Rosslyn
$48.22
• 1000 & 1100 Wilson Blvd (over $50/sf)
Bethesda/Chevy Chase
$39.21
• 2 Bethesda Metro Center, 7200 Wisconsin Ave.
(over $40/sf)
Source: Cushman & Wakefield Research
13
Metro Area Historical Sales
$ Billions
Sales Volume vs. % of Total Inventory Sold
$20
20,0%
$15
15,0%
$10
10,0%
$5
5,0%
$0
0,0%
2000
2001
2002
2003
2004
2005
Total Sales Volume
2006
2007
2008
2009
2010
% of Total Inventory
Source: Cushman & Wakefield Sonnenblick Goldman & Cushman & Wakefield Research
14
Historical Sales Activity
Historical Sales (Washington, DC Metro 2000 - 2010)
Year
Total Sales Volume
$/psf
Total SF
2000
$3,862,477,644
$184.48
20,937,241
9.3%
124
2001
$3,689,443,116
$215.74
17,101,617
7.2%
105
2002
$4,301,725,504
$218.12
19,721,592
8.0%
106
2003
$7,004,205,648
$232.03
30,187,153
11.9%
170
2004
$7,165,640,289
$259.75
27,586,452
10.6%
179
2005
$8,952,360,458
$332.70
26,908,083
10.4%
127
2006
$7,983,818,446
$318.59
25,059,900
9.3%
193
2007
$16,657,538,696
$371.04
44,894,497
16.4%
265
2008
$3,094,278,879
$438.73
7,052,858
2.5%
47
2009
$1,948,496,982
$318.23
6,122,950
2.1%
36
2010
$4,789,200,959
$311.35
15,381,962
5.3%
89
$69,449,186,621
$288.23
240,954,305
Total / Avg
% of Inventory
# of Bldgs
131
Source: Cushman & Wakefield Sonnenblick Goldman & Cushman & Wakefield Research
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2010 Significant Office Building Sales
ADDRESS
SALES PRICE
DATE
BUILT/RENOV
% LEASED
SALE DATE
NRSF
CAP
RATE
PRICE PSF
SELLER/
BUYER
COMMENTS
Downtown
World Bank
1225 Connecticut Ave. NW
Washington, DC
$216,000,000
1967/2008
100%
November-10
240,000
5.70%
$900
World Bank
Brookfield Office
exercised 2008 lease
Properties/The World option; highest psf
Bank
price Downtown
The Evening Star Building
1101 Pennsylvania Avenue NW
Washington, DC
$180,000,000
1898/1989
88%
June-10
219,627
5.80%
$820
KanAm/TIAA
1899 Pennsylvania Avenue NW
Washington, DC
$151,100,000
1915/2002
100%
September-10
186,462
5.60%
$810
KanAm/Paramount
Group
The Hartford Building
3101 Wilson Blvd.
Arlington, VA
$112,600,000
2003
100%
December-10
212,443
6.00%
$530
MRP JV Angelo
Prior sale June 2009
Gordon/Heitman, LLC for $71.5 million
One & Two Potomac Yard
2733 & 2777 Crystal Drive
Arlington, VA
$241,900,000
2006
97%
October-10
621,824
6.30%
$389
JPMorgan/USAA
Three Ballston Plaza
1100 N Glebe Road
Arlington, VA
$120,000,000
1990
92%
March-10
308,998
7.30%
$388
Massachusetts
Mutual/AEW
$27,500,000
1989
100%
December-10
104,025
NA
$264
WRIT/MedImmune,
LLC
$85,000,000
2009
520, 100%;
530, 11%
November-10
347,462
8.50%
$245
Perseus Realty/ First
Potomac Realty Trust 90% stake
$60,000,000
1984, 1985 &
1989
80%
March-10
350,388
NA
$171
BlackRock / PS
Business Parks
Northern Virginia
Suburban Maryland
Ridges at Quince Orchard
200 Orchard Ridge Dr.
Gaithersburg, MD
Redland Corporate Center
520 and 530 Gaither Rd.
Rockville, MD
Shady Grove Executive Center
9201-9231 Corporate Blvd
Rockville, MD
Purchased for
occupancy
Source: Cushman & Wakefield Sonnenblick Goldman & Cushman & Wakefield Research
16
Metro DC Sales Volume by Buyer Type
Institutional Investment Managers:
INVESCO, Edge Fund Advisors
Institutional Pension Funds:
TIAA-CREF
REITS:
First Potomac Realty Trust, PS
Business Parks
Source: Cushman & Wakefield Sonnenblick Goldman & Cushman & Wakefield Research
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Trends to Watch in 2011

Slow and steady recovery in Northern Virginia and
Suburban Maryland. Downtown returns to normal.

Tenants will continue to hold occupancy costs down.

Investors widen their nets outside Downtown, but remain
focused on well-located, class A product with good
financials.
Source: Cushman & Wakefield Research
18