Compromise and clarity needed to drive DC office market growth in post-election period. NAIOP Annual Forecast February 6, 2013

Transcription

1 Compromise and clarity needed to drive DC office market growth in post-election period NAIOP Annual Forecast February 6, 2013

2 Prolonged uncertainty election outcome is determined, but many issues remain unresolved Source: Jones Lang LaSalle 2

3 Policy-driven market Metro DC office net absorption trends with number of bills enacted into law Bills enacted Net absorption SF Source: United States Senate, Jones Lang LaSalle

4 Republican or Democrat, the Metro DC office market thrives under single-party rule Aggregate net absorption (SF) Trailing 12 years Source: Jones Lang LaSalle 4

5 Metro DC office market performance is heavily tied to the activities of contractors and the federal government Local government Law firms/ lobbying Professional services and gov t contractors Banking/finance Associations/non-profits Health care/education Federal government Office tenant base by industry/sector Percent Law firms/lobbying 16.4% Professional services/contractors * 37.3% Banking/finance 5.2% Associations/non-profits 8.8% Health care/education 7.5% Local government 2.1% Federal leased* 22.7% * Sectors most impacted by gov t austerity 60.0% 5

6 Renewals growing in prevalence in today s market Renewals: 39% Historical average Historically, renewals have accounted for 39 percent of gross leasing activity in Metro DC Renewals New relocations Expansion Sublease New Relocations: 52% Renewals: 54% Past 18 months Over the past 18 months, renewals have accounted for 54 percent of gross leasing activity in Metro DC Renewals New relocations Expansion Sublease New Relocations: 41% Source: Jones Lang LaSalle lease database; includes new relocations 10,000 SF and above 6

7 Concentration of industries creating leading/lagging submarkets, with growth in non-traditional segments Industry Employment base Most affected regional office markets to date Defense contractors Rightsizing Fairfax County, Arlington County, Loudoun County Federal government Rightsizing Arlington County, Washington, DC Law firms Stable (but becoming more efficient) CBD, East End Financial Services Stable Bethesda/Chevy Chase, Tysons Corner Telecom Stable Reston-Herndon Biotech / pharmaceutical Stable I-270 Corridor Non-profit / association Stable Alexandria, Washington, DC Consulting Stable Tysons Corner, Washington, DC Accounting / insurance Stable CBD, Tysons Corner Lobbying / government affairs Stable Capitol Hill, East End Consumer technology Growing Reston-Herndon, East End Green energy Growing Rosslyn-Ballston Media Growing East End Health care Growing West End Source: Jones Lang LaSalle 7

8 2013 Metro Washington, DC Office Clock Landlord-favorable market Tenant-favorable market Prince George s County, Frederick County, Loudoun County, Prince William County Peaking market Rising market Falling market Bottoming market Bethesda-Rock Spring, I-395 Corridor Crystal City, Toll Road, Tysons Corner, Route 28 South, Fairfax Center, NoMa, Southeast, Georgetown, West End, Uptown, I-270 Corridor, Silver Spring Old Town Alexandria, CBD, East End, Southwest Capitol Hill, Merrifield, Rosslyn-Ballston Corridor, Springfield Bethesda-CBD, Chevy Chase, Rockville Pike Source: Jones Lang LaSalle 8

9 Northern Virginia office market dynamics SF in millions Prime vacancy Net absorption 16% 14% Market Statistics MSF market (1,166 buildings) % 12% 10% 15.6% prime vacancy rate 17.2% total vacancy rate Class A: 13.6% prime; $32.87 PSF Class B: 19.6% prime; $31.45 PSF Source: Jones Lang LaSalle ,318,642 SF % 6% 4% 2% 0% Construction: 3,004,556 SF (22.8% preleased) Market Trends Government contractors consolidating as they await continued guidance on sequestration and future levels of federal spending Uncertainty surrounding scope of future budget cuts making it difficult for tenants to make long-term space decisions; leasing activity down significantly Nat l Geospatial Intelligence Agency and TRICARE creating new clusters of demand in Springfield and Merrifield, respectively 9

10 Inside the Beltway office market dynamics SF in thousands 2,000 Prime vacancy Net absorption 15.8% 16% Market statistics 47.7 MSF market (215 buildings) 1,500 1,000 14% 12% 15.8% prime vacancy rate 17.1% total vacancy rate Class A: 14.1% prime; $39.48 PSF % 8% Class B: 22.4% prime; $37.23 PSF Construction: 1,349,924 SF (38.3% preleased) Market trends -1,000-1,500-2,000-2, ,027,126 SF % 4% 2% 0% BRAC relocations impacting Crystal City & Rosslyn, predominantly in Class B/C space Several large blocks coming back to the market now through 2014: TKC Communications (300K at th St), GSA (280k at 1777 N. Kent St), DIA (215k at 3100 Clarendon Blvd), DARPA (172k at 3701 N. Fairfax Dr), Northrop (96k at 1000 Wilson Blvd), ARC space (75k at 4100 N. Fairfax Dr) Source: Jones Lang LaSalle Outlook for 2013: uptick in vacancy, limited federal demand 10

11 Outside the Beltway office market dynamics SF in millions Prime vacancy Net absorption 15.5% 18% 16% 14% Market statistics MSF market 15.5% prime vacancy rate 17.3% total vacancy rate Class A: 14.1% prime; $30.17 PSF Source: Jones Lang LaSalle ,506 SF % 10% 8% 6% 4% 2% 0% Class B: 17.9% prime; $26.84 PSF Construction: 1,654,632 SF (11.3% preleased) Market trends Regional leasing activity remains particularly flat outside the Beltway due to changing workforce preferences that favor mass transit-served locations inside the Beltway Commodity Class A market saturated with vacancy; Class A direct asking rents likely to remain flat until supply-demand paradigm balances Silver Line extension and mixed-use construction set to transform Tysons Corner and Reston over the long term 11

12 Northern Virginia industrial market dynamics SF in thousands Prime vacancy Net absorption 11.1% Market statistics 33.4 MSF warehouse market (494 buildings) 11.1% prime vacancy rate 11.9% total vacancy rate Average asking rate: $8.34 PSF NNN Under construction: 153,000 SF (2 buildings) 613,608 SF Market trends Limited new construction and flight to quality helping to tighten the warehouse market Data centers, last-mile distribution facilities and airport-related demand driving leasing activity Strong area consumer base and supply constraints likely to serve as catalysts for the market Source: Jones Lang LaSalle 12

13 Looking ahead 13

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15 Dramatic pullback in speculative office construction activity Square feet under construction Source: Jones Lang LaSalle

16 Metro DC long term employment remains resilient despite political uncertainty Thousands of Jobs Metro DC typically creates 40,000 jobs per year. Although contraction within the federal workforce (caused by natural attrition and early retirements rather than layoffs) and rightsizing by government contractors has depressed job growth in key segments of the market, expansion remains strong in other sectors (e.g. health/education, professional & business services). 12-month change in non-farm employment Long-term average growth Source: Bureau of Labor Statistics, based on total non-farm employment, Jones Lang LaSalle 16

17 How we worked yesterday large perimeter offices, privacy, separation from colleagues T. Boone Pickens, founder BP Capital Lawyer s office, circa 1920 Photo sources: OfficeMuseum.com, Business Insider 17

18 How we work today open, dynamic, creative and collaborative spaces less is more! Tim Brown, CEO at IDEO Ilya Pozin, Founder at Ciplex the new school way Photo source: Business Insider 18

19 Why Metro DC? It s where the talent resides! We graduate college at a rate nearly double the national average. Our median household income is 67% greater than the U.S. My household spends $32,500 a year on retail purchases. 25% percent of my college-educated neighbors have also earned an advanced degree. 19

20 Our crystal ball says 1. Office vacancy rates will hover near their record highs throughout 2013, but a pullback in new construction will skew large vacancies into mostly second-generation buildings. 2. Industrial market fundamentals will outperform the office sector, largely due to the strength of the Metro DC consumer base. 3. Office tenant demand will remain subdued until Congress passes a long-term federal budget and reaches a compromise of future spending programs. Contractors, in particular, will remain apprehensive about making long-term real estate decisions as long as the threat of sequestration looms. 4. Termination clauses and/or sublease dispositions will remain prevalent as tenants look for ways to create flexibility, reduce overhead and increase efficiency. 5. Growth within consumer-oriented sectors of the economy will help to offset the effects of contraction elsewhere. Unparalleled workforce demographics and probusiness governance will help the region capture inbound tenant demand. Source: Jones Lang LaSalle 20

21 Scott Homa Director of Mid-Atlantic Research 1801 K Street, NW Suite 1000 Washington, DC Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof. 21