The Washington DC office market saw limited growth in the third quarter of 2012, with net absorption of only 12,000 square feet. Vacancy rates fell slightly to 10.3% despite uncertainty around elections and government spending keeping demand cautious. Average asking rents rose modestly by 1.2% over the quarter. Small to mid-size private sector tenants such as law firms and non-profits drove the limited demand while the public sector remained stalled awaiting policy decisions. No new supply was delivered in the quarter and vacancy is expected to remain flat with modest rental growth over the next 18 months due to a lack of significant demand drivers.

1. Office Market Snapshot
Washington, DC • Third Quarter • 2012
Market Tracker Vacancy Net Absorption Deliveries Asking Rent
*Arrows = Current Qtr Trend 10.3% 12,000 SF 0 SF $50.17 FS
Uncertainty Slows Office Market Recovery
Uncertainty surrounding the elections, tax reform and government spending kept Washington, DC office
market tenants cautious during the third quarter of 2012. The limited momentum of the first half of
2012 continued into the third quarter, as only 12,000 square feet was absorbed. This mere ”drop in the
bucket” demand brought the year-to-date total net absorption to a negative 34,000 square feet. Still,
despite the slower pace of growth, and with new supply in check, vacancy fell slightly to 10.3% following
three consecutive quarters at 10.4%. Average asking rents rose modestly by 58 cents, or 1.2%, over the
quarter to $50.17 per square foot on a full service basis, and by 80 cents, or 1.6%, year over year.
WASHINGTON, DC OFFICE
Small and mid-size tenants drove demand for office space. Those tenants– primarily private sector ones
Economic Indicators – were a diverse mix of law firms, government affairs offices, education-related entities, executive suites
and non-profits. Gross leasing activity remained stable over the quarter, with the bulk of activity
Q3 12 Q3 11 occurring in the core submarkets of the East End and the Central Business District (CBD). Tenants
continued to adopt cautious and defensive leasing approaches, either cutting down on their average
DC Metro Employment 2.5M 2.4M square foot per employee or growing conservatively. Only a handful of transactions represented net
growth. Aside from a couple of lease renewals, demand from the public sector remained stymied with
DC Metro Unemployment 5.5% 6.0% both landlords and tenants awaiting policy decisions and greater government budget clarity. However,
during the third quarter a few agencies downsized into already leased spaces, as total public sector net
U.S. Unemployment 8.2% 9.7% absorption totaled a negative 140,000 square feet – the second lowest quarterly level in at least three
years.
U.S. CCI 65.64 50.26
Amid the vast majority of tenants finding creative solutions to reduce space requirements, a handful
found it advantageous to expand their real estate footprints. Georgetown University, for example, signed
the top non-renewal lease in the District during the third quarter which accounted for approximately
Net Absorption 90,000 square feet of net growth. Offsetting that, however, was law firm Dewey & LeBoeuf’s return of
about 125,000 square feet to the East End submarket, the result of the firm’s bankruptcy. The
5.0 non-profit United Nations Foundation signed the second largest non-renewal lease of the quarter for
4.0 85,000 square feet, accounting for over 35,000 square feet of net growth in the CBD submarket.
Square Feet (mil)
3.0
In a chronic-uncertainty-plagued environment in which landlords compete for a finite set of tenants in
2.0
the market, some landlords, looking to increase occupancy levels, assumed several millions of dollars of
1.0
lease liability in order to secure a tenant. A few large law firms, in fact, are (as of the writing of this
0.0
report) in lease negotiations for this reason, with leases likely to be signed in the next couple of
-1.0
quarters.
2007 2008 2009 2010 2011 YTD
2012
No new office supply was delivered to the Washington, DC office market in the third quarter of 2012.
However, four office projects totaling 480,000 square feet are scheduled to deliver by the end of 2012,
37% of which was available at the end of the third quarter. The remaining development pipeline will
Vacancy Rate deliver approximately 1.5 million square feet to the District of Columbia in 2013, 32% of which was
preleased at the end of the quarter. Look for MRP Realty to break ground on a speculative basis next
quarter on approximately 111,000 square feet at 900 G Street, NW scheduled to deliver mid-2014.
13%
12%
11%
Forecast
10% Historical Average • Potential cuts in government spending and the consolidation of multiple leased spaces into single
9% locations may ultimately reduce the government’s space needs.
8%
7% • Concerns over the effects of mandated federal spending cuts in early 2013 on local businesses will
6% remain a factor in hiring decisions.
5%
• A lack of significant demand drivers and flat vacancy rates will keep overall asking rental rate
4%
2007 2008 2009 2010 2011 2012 increases modest to flat over the next 18 months.
• Growth is expected to remain subdued through 2013, with the private sector driving the bulk of
office demand in the near term. Tenants across industry sectors will likely continue a “wait and
see” approach to leasing decisions.
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2. Cassidy Turley Office Market Snapshot
Washington, DC • Third Quarter • 2012
UNDER
SUBLET TOTAL VACANCY CURRENT YTD AVERAGE
VACANT ABSORPTION ABSORPTION CONSTRUC-
TOTAL BLDG INVENTORY VACANT RATE ASKING RENT
TION
Submarket
CBD 252 38,801,607 453,362 4,865,751 12.5% 71,523 169,224 248,697 $51.00
East End 201 39,225,153 302,891 3,837,882 9.8% (88,133) (171,796) 539,644 $53.02
West End/Georgetown 59 6,019,052 27,939 607,164 10.1% 23,950 26,653 0 $41.20
Capitol Hill 42 4,272,688 20,871 174,251 4.1% (6,218) 13,462 336,085 $55.56
NoMa 37 9,636,850 21,349 1,036,731 10.8% (12,104) (21,891) 623,817 $45.78
Southwest 36 13,907,238 1,000 963,782 6.9% (30,117) (39,237) 0 $49.41
Capitol Riverfront/Southeast 11 3,736,758 17,200 646,748 17.3% 21,972 (25,749) 0 $46.48
Uptown 95 6,308,307 47,747 468,279 7.4% 30,686 15,541 196,013 $39.39
TOTAL 733 121,907,653 892,359 12,600,588 10.3% 11,559 (33,793) 1,944,256 $50.17
Key Lease Transactions 3Q 12
PROPERTY SF TENANT TRANSACTION SUBMARKET
601 New Jersey Avenue, NW 217,300 GSA - Federal Trade Commission (FTC) Renewal Capitol Hill
650 Massachusetts Avenue, NW 91,200 Georgetown University Relet East End
1750 Pennsylvania Avenue, NW 85,000 United Nations Foundation Relet CBD
901 F Street, NW 77,000 Gallup, Inc. Renewal East End
1299 Pennsylvania Avenue, NW 75,300 Cooley LLP Relet East End
1331 F Street, NW 62,100 GSA - Department of Justice (DoJ) Renewal East End
1100 New York Avenue, NW 41,300 Gilbert LLP Renewal East End
1025 Thomas Jefferson Street, NW 30,200 American Institutes for Research (AIR) Expansion West End/Georgetown
505 9th Street, NW 25,100 Solar Energy Industry Association (SEIA) Sublet East End
Key Sales Transactions 3Q 12
PROPERTY SF SELLER/BUYER PRICE SUBMARKET
409 3rd Street, SW 420,122 Vornado Realty Trust / Hobby Lobby Corporation $200,000,000 Southwest
607 14th Street, NW 270,158 DEKA Immobilien / New York Life Insurance Company $159,359,900 East End
975 F Street, NW 178,200 Akridge & Seaton Benkowski & Partners / GLL Real Estate $121,400,000 East End
1025 Thomas Jefferson Street, NW 315,628 NSP Ventures / The JBG Companies $80,500,000 Georgetown
300 D Street, SW 391,089 Vornado Realty Trust / Hobby Lobby Corporation $50,000,000 Southwest
1200 17th Street, NW 83,187 First Potomac Realty Trust / Mitsui Fudosan America $43,700,000 CBD
900 2nd Street, NE 115,394 Potomac Development Corporation / Fluorine, LLC $30,500,000 NoMA
Urmi Joshi
About Cassidy Turley Senior Research Analyst
Cassidy Turley is a leading commercial real estate services provider with more than 3,600 professionals in more than 60 offices 2101 L Street, NW
nationwide. The company represents a wide range of clients—from small businesses to Fortune 500 companies, from local non- Suite 700
profits to major institutions. The firm completed transactions valued at $22 billion in 2011, manages 455 million square feet on Washington, DC 20037
behalf of institutional, corporate and private clients and supports more than 28,000 domestic corporate services locations. Cassidy Tel: 202.463.2100
Fax: 202.223.2989
Turley serves owners, investors and tenants with a full spectrum of integrated commercial real estate services—including capital
Urmi.Joshi@cassidyturley.com
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