National Press Club: DCBIA DC Office Leasing Outlook

DCBIA Commercial Real
Estate Update

October 11, 2012

© Copyright 2012 Cassidy Turley. All rights reserved.

Big Pause in the Economy
DC Metro: Total Nonfarm Employment, 000’s

2480
Office Trends:
2470
• No new demand for space

2460 • Vacancy inching up

• Rents are flat to falling
2450
• Shift to short-term
2440 renewals
Minimal job growth since
February • Confidence is at a low
2430
• BRAC headwind is here
2420
1

M 2
A 2
A 1

O 1

Ja 1

A 2
Se 1

Ju 2

2
Fe 2
11

M 2

12
D 1
-1

-1
-1
l-1

1

-1

l-1
-1

-1

-1

-1
1

1
n-
p-
n-

b-

n-
ct

pr
ar

ay
ug

ug
ec
ov
Ju

Ju
Ju

N

DC Metro Employment, 000's
Sources: BLS

© Copyright 2012 Cassidy Turley. All rights reserved. 2

Employment Growth/Decline by Industry
DC Metro, Aug 12 vs. Aug 11, Rolling 3 Month Av.

(Industry Total Employment Level)

Source: Bureau of Labor Statistics


Fiscal Cliff Scenario
Real GDP, Annualized %
Under current law, the fiscal drag from
spending cuts & tax increases will sink the
US into recession in 2013

Source: Cassidy Turley Research


Fed Expects NO Cliff
Real GDP, Annualized %
Under current law, the fiscal drag from
spending cuts & tax increases will sink the
6% US into recession in 2013

4%

2%

0%

-2%

-4%

-6%
2010Q1
2010Q2
2010Q3
2010Q4
2011Q1
2011Q2
2011Q3
2011Q4
2012Q1
2012Q2
2012Q3
2012Q4
2013Q1
2013Q2
2013Q3
2013Q4
2014Q1
2014Q2
2014Q3
2014Q4
Fiscal Cliff Fed Baseline


Consensus Expects NO Cliff
GDP, Annualized %

Source: U.S. Bureau of Economic Analysis (BEA); National Association of Business Economics (NABE)


Federal Spending Slows, but NO Cliff

DC Metro: Federal Outlays, billions $
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0

Reagan Bush I Clinton Bush II Obama Obama/Romney
Republican Controlled House Democrat Controlled House Light Colored Bar = Opposite Party President
Sources: Consolidated Federal Funds Report; GMU Center for Regional Analysis, Cassidy Turley


Despite all of this…
DC Metro share of US GDP

DC Metro Rankings:
#1 Lowest Unemployment

#1 Educated Workforce

#1 Real Estate Market by ULI

#2 Job Growth Since 2000

#3 Population/Net Migration



There is Strength
Household balance sheets looking much better

Source: U.S. Board of Governors of the Federal Reserve System, U.S. Bureau of Economic Analysis


There is Strength
Median Existing Home Prices: % Year-over-Year Change

DC US
Growth Growth

2.5 yrs

Source: National Association of Realtors®, Moody’s


There is Strength
Job Growth: % Chg. August 2012 over August 2011

Strong
Growth

Moderate
Growth

Below U.S.
Growth


DC Metro Job Growth Forecast

20 Year Historical Average

Source: Bureau of Labor Statistics, George Mason University, Moody’s, Cassidy Turley


DC Metro Office Leasing


Washington Metro
Deliveries – Net Absorption – Vacancy

18 16%
16
14%
14
12%
Square Feet (millions)

12

Vacancy Rate
10 10%
8
8%
6
4 6%

2
4%
0

2012f

2013f

2014f
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011
2%
-2

-4 0%

New Deliveries Net Absorption Vacancy Rate

10 Yr Avg. Deliveries 7.9m sq ft 10 Yr Avg. Net Abs 3.4m sq ft
f= forecast


Leasing Activity Slows
DC Metro Gross Leasing Activity, millions sq. ft.
45

40

35
Square Feet (mill.)

30

25

20

15

10

5

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD YTD
2011 2012
Annual Avg. Gross Absorption: 25.9 MSF
Source: CoStar, Cassidy Turley Research


New Space Dominates
2007 – Q3 2012, millions sq. ft.

20

15

10
Square Feet (mill.)

5

0
District Northern VA Suburban MD

-5

-10

-15

Total New Delivered New Space Absorption Relet Space Absorption


Office Vacancy: Winners/Losers
Percentage point change, 3Q 12 vs 3Q 11

Clarendon/Courthouse -4.1

Fairfax Center -2.2
North Rockville -1.9
50/66 -1.3
Improved
Route 28 South -1.2
Herndon 3.2
Deteriorated
Ballston 3.5
Route 7 5.5
I-395 9.9
Crystal City 13.5

-5 0 5 10 15
*submarkets >1.5m sq ft


Effective Office Rents
Per Square Foot, Full Service
$45
$42.46
$40

$35

$30
$26.36
$25
$21.55
$20
2000 1Q

2001 1Q

2002 1Q

2003 1Q

2004 1Q

2005 1Q

2006 1Q

2007 1Q

2008 1Q

2009 1Q

2010 1Q

2011 1Q

2012 1Q
DC VA MD
Source: REIS, Cassidy Turley Research


Washington, DC
Deliveries – Net Absorption – Vacancy

7 14%

6 12%
Square Feet (million)

5 10%

Vacancy Rate
4 8%

3 6%

2 4%

1 2%

0 0%

f

f

f
00

01

02

03

04

05

06

07

08

09

10

11

12

13

14
20

20

20

20

20

20

20

20

20

20

20

20

20

20

20
New Deliveries Net Absorption Vacancy Rate

f= forecast Annual 10 Yr Avg. Delivered: Annual 10 Yr Avg. Net Absorption:
Source: Cassidy Turley Research 2.5 MSF 1.5 MSF


Transaction Distribution
District of Columbia: # of Transactions


Demand shifts back to the “Core”
Net Absorption (sq. ft.) & Vacancy Rates
12.5% 9.8% 10.1% 4.1% 10.8% 6.9% 17.3% 7.4%
500,000

400,000

300,000

200,000

100,000

0
CBD East End West End/ Capitol Hill NoMA SW Capitol Uptown
-100,000 Georgetown Riverfront/
SE

-200,000

-300,000

2011 YTD 2012


DC Metro Outlook
Next 18 Months
• Weak job growth overall, though growth in
– Lobbying, Corporate government relations
– Healthcare
– IT & Finance (suburbs)
• Federal government & contractor reductions
• Flat to falling effective rents
• Strong demand/pricing for trophy properties

2014 & Beyond
• Return to normalcy:
– 30-40k annual job growth
– 4-5m sq ft annual office demand
– Eroding vacancy
– 3%+ rent growth


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