Federal Perspective United States 2013

Transcription

1 Federal Perspective United States 2013 The next four years: a time for compromise A long and deeply divided campaign season ended with a decisive victory for President Obama. While the nation faced considerable challenges during the first four years of the Obama presidency, an equally difficult road lies ahead for the president s second term, as issues related to sequestration and future tax and spending policies remain pending and unresolved. For an industry dependent upon clear political direction, federally leased real estate faces a similarly challenging future, as policymakers and government leaders map the future of agency budgets and space planning for the years ahead. The artificial freeze in federal leasing activity must subside, and agencies will be forced to make space decisions with a renewed sense of urgency in 2013 and beyond. Compromise and consensus will be essential to moving forward in addressing federal real estate challenges and establishing solutions for the future.

2 2 Federal Perspective United States 2012 Jones Lang LaSalle Fiscal challenges drastically reduced the rate of federal leasing activity in Given an aggressive push to rein in federal real estate expenditures, agencies are now facing new mandates to increase space efficiency. However, a general lack of funding for consolidations and retrofits has precluded federal tenants from implementing meaningful changes.

3 Jones Lang LaSalle Federal Perspective United States Jones Lang LaSalle Government Investor Services Jones Lang LaSalle s Government Investor Services (GIS) team is the most experienced government real estate advisory practice in the country. Backed by the strength of Jones Lang LaSalle s global full-service platform, GIS is dedicated to serving the complex and intersecting needs of private sector landlords and government agencies. Our wide-ranging experience, coupled with Jones Lang LaSalle s extensive service offerings, makes GIS exceptionally qualified to handle your government real estate needs of any size, in any locality.

4 4 Federal Perspective United States 2012 Jones Lang LaSalle As a result of the artificial stagnation of lease activity in 2012, we anticipate accelerated deal flow in 2013 and 2014, compounded by a high number of lease expirations associated with the government s response to September 11, 2001.

5 Jones Lang LaSalle Federal Perspective United States By the numbers $1.2 billion New GSA lease awards FY 2011 (Q2) $45.9 million New GSA lease awards FY 2012 (Q2) 96% Year-over-year reduction in new GSA lease awards 171,396,917 s.f. GSA-leased office space nationwide 97% GSA renewal probability FY % GSA renewal probability FY % Approximate share of U.S. office space occupied by GSA 44,610,609 s.f. GSA leases expiring through year-end 2013 National GSA lease expirations by year (s.f. of lease expirations) 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000, Source: GSA property database, Jones Lang LaSalle

6 6 Federal Perspective United States 2012 Jones Lang LaSalle National overview Gridlock within the 112th Congress yielded a dramatic pullback in the rate of new federal leasing activity. Lease awards in fiscal year 2012 fell 96.0 percent year over year, as unprecedented scrutiny of the General Services Administration (GSA) and bipartisan support for reining in federal real estate expenditures handcuffed government decision-makers and left agencies uncertain of their future space planning needs and capabilities. Without clarity on agency budgets or adequate funding to implement moves, consolidations and restacks federal tenants were forced to delay space decisions or execute short-term renewals to ride out the uncertainty. New GSA lease awards fell from $1.2 billion in fiscal year 2011 to just $45.9 million in the comparable period of With the campaign season now over, and a wave of pending GSA lease expirations approaching, officials will be forced to address the government s precarious commercial real estate situation with a greater sense of urgency. Inaction over the past 12 months resulted in a significant increase in the number of federal leases in holdover. With 44.6 million square feet of GSA leases rolling through year-end 2013, it has become clear that federal officials must reach a compromise and stop deferring space decisions. Although uncertainty related to future spending priorities and agency budgets will likely continue to present headwinds to the market until a long-term federal budget is passed, sequestration and the rapidly approaching debt ceiling will force lawmakers to address and resolve lingering federal real estate decisions in What is sequestration? Sequestration is a component of the Budget Control Act of 2011, signed into law by President Obama on August 2, 2011, which seeks to reduce government spending by implementing across-the-board cuts Under sequestration, if Congress fails to produce a deficit reduction bill with at least $1.2 trillion in cuts by January 2, 2013, automatic spending cuts will be triggered Federal discretionary spending could drop by as much as 12.1 percent, unless new legislation is enacted to prevent the plan from being implemented Cuts apply equally to defense and other discretionary spending programs, but special exemptions are made for Veterans Affairs, Social Security, Medicaid and military employee pay Austerity The renewed focus on government austerity stands in sharp contrast to much of the past decade, when accelerated levels of federal spending and unprecedented expansion of the federal boosted demand for federally leased space. As a sense of spending fatigue swept over the nation, belt-tightening within the GSA was seen as a necessary first step to address the rising federal budget deficit. Since little has been done thus far to address the structural issues behind the deficit and mounting federal debt, governmentleased real estate remains a prime target for expense reduction. Agencies should take immediate steps to make better use of remaining real property assets as measured by utilization and occupancy rates... and produce no less than $3 billion in cost savings from the sale of assets and reduced operating, maintenance and energy expenses. President Obama Federal belt-tightening: the push for efficiency in new real estate prospectuses Former historical average s.f./employee New prospectus s.f./employee Size of requirement (s.f.) Government (historical average) Department of Labor FDA NIH FCC National Science Foundation National Park Service HHS Veterans Affairs Naval Intelligence 100,000 SF 134,000 SF 352,717 SF 64,745 SF 667,759 SF 158,000 SF 104,000 SF 181,000 SF 183,000 SF USAID 392,302 SF Source: General Services Administration, Jones Lang LaSalle

7 Jones Lang LaSalle Federal Perspective United States Congressional scrutiny The push for austerity in Congress has increased the level of scrutiny federal agencies face over their leasing decisions. In the 113th Congress, Rep. Bill Shuster (R-Pa.) is expected to take John Mica s (R-Fla.) Chairman position on the Transportation and Infrastructure Committee. Rep. Shuster, unlike Rep. Mica, has not shown the same zeal as Rep. Mica on government real estate issues. He has also shown indications of supporting GSA more than Mica. If Rep. Shuster does not demonstrate the same vigor for cracking down on real estate issues as Mica, expect that task and authority will fall toward Rep. Jeff Denham (R-Ca.). Denham, now in his second term as chair of the House Subcommittee on Economic Development, Public Buildings and Emergency Management, will likely aggressively assert his leadership as he has done in the past. Expect him to champion the Civilian Property Realignment Act (CPRA, H.R. 1734), legislation that he wrote and sponsors. He is also a co-sponsor of the Public Buildings Reform Act. Key issues championed in both bills will continue to be at the forefront of the subcommittee s agenda: no net new growth in prospectuses, space reduction (upward of 1.5 percent of the GSA portfolio per year through 2016), rental rate reduction and the standardization of utilization rates. Looking ahead The dramatic swings experienced in the initial expansion, and subsequent pullback, of federal leasing activity during the first four years of President Obama s tenure will likely moderate over his second term, as deal flow returns to normalized levels. Recent trends in federal leasing activity appear to indicate that pent-up demand is accumulating and more action will occur in Although the volume of signed leases should experience a reversion to the mean, the rate of growth in the federal government s overall footprint is expected to remain flat or trend downward. Executive orders limiting the size of transactions; new mandates requiring offsets of new leases with consolidations or disposals; and stipulations on increased utilization rates suggest that the days of federal real estate expansion are over at least temporarily. As of the date of this memorandum, agencies shall not increase the size of their civilian real estate inventory unless those costs are offset through consolidation, co-location, or disposal of space from the inventory of that agency Office of Management and Budget Acting Director Jeffrey Zients Despite the tempered outlook for the near term, the federal government remains a large and stable segment of the nation s office market. Comprising approximately 4.6 percent of all leased space nationwide, the GSA exerts a sizable influence over the country s tenant footprint. The tendency of government agencies to remain in their space for over 30 years also functions as a stabilizing force for office markets across the country. As lawmakers establish a clear and decisive strategy in the years ahead to address the nation s broader fiscal situation, federal agencies should once again receive the clarity they need to make long-term space decisions. Ultimately, regardless of the direction that federal spending patterns take, the federal government will resume leasing activity and remain a vital segment of the U.S. office market, ensuring the strength and stability of a key segment of the country s tenant base.

8 8 Federal Perspective United States 2012 Jones Lang LaSalle GSA concentrations GSA leased inventory > 1.5 M > 750 K > 400 K Seattle 14.8% vacant $27.97 p.s.f. Although is declining, high-tech industry growth is offsetting that contraction and driving occupancy growth. Portland Seattle San Francisco 12.7% vacant $50.36 p.s.f. Private sector tenant demand remains sturdy with a new wave of technology firms in the market. Given the recent rise in rents, investor interest is reaching frenzied levels. Boise Los Angeles 17.5% vacant $31.23 p.s.f. Although the regional economy appears to be on a slow path to recovery, the office market remains relatively stagnant. Sacramento San Francisco Fresno Salt Lake City Fort Collins Denver Colorado Springs San Diego 16.4% vacant $25.56 p.s.f. Las Vegas High concessions are still commonplace in lease negotiations and in some cases have even increased a bit, but tenants should be cautious with landlords expecting a boost in the office market. Los Angeles San Diego Phoenix Tucson Albuquerque Oklahoma City Phoenix 25.6% vacant $20.52 p.s.f. El Paso Due to an overall vacancy rate still hovering over 25.0 percent, it is anticipated that the majority of the Phoenix office market will remain tenant favorable in San Antonio Austin Denver 15.2% vacant $22.26 p.s.f. Dallas 21.7% vacant $20.76 p.s.f. Houston 15.8% vacant $27.38 p.s.f. Anchorage Energy-related demand has stabilized the market and rental rates continue to trend upward. Robust net absorption and leasing activity have significantly decreased the total vacancy rate, with gains stemming from the region s burgeoning energy sector. Rapid expansion within the oil and gas industry continues to fuel aggressive growth and investment demand. Honolulu

9 Jones Lang LaSalle Federal Perspective United States Chicago 19.6% vacant $27.14 p.s.f. Cleveland 19.0% vacant $19.00 p.s.f. Boston 19.9% vacant $30.30 p.s.f. Rents and vacancy are expected to remain steady with only minor fluctuations in the coming quarters. With a handful of large tenants actively looking for space, and over 1.8 million square feet of new product in the development pipeline, the office landscape is expected to change dramatically over the next year. Market performance remains highly bifurcated by geography, with Cambridge and tech-focused areas gaining momentum and other market segments languishing. New York 10.6% vacant $58.40 p.s.f. Election results suggest more regulation of the financial industry is likely, which may restrict tenant demand in the quarters ahead. Minneapolis Boston Philadelphia 15.5% vacant $23.90 p.s.f. Omaha Kansas City Buffalo Milwaukee Detroit Chicago Cleveland Pittsburgh Columbus Indianapolis Cincinnati St. Louis Louisville New York Newark Philadelphia Baltimore Washington, DC Richmond Norfolk/Hampton Roads Market tightness in the CBD is creating pent-up demand, and organic growth in the healthcare and education segments is driving deal flow across the market. Baltimore 15.7% vacant $22.35 p.s.f. Federal government demand continues to drive activity in the suburbs, with Fort Meade and Aberdeen Proving Ground serving as the primary receiving zones of expansion. Tulsa Dallas/Fort Worth Memphis Nashville Huntsville Birmingham Atlanta Charlotte Washington, DC 15.0% vacant $35.51 p.s.f. Government gridlock continues to stymie leasing activity. Tenants are opting primarily for renewals, consolidations or contractions as they wait out potential sequestration. Houston New Orleans Jacksonville Tampa Orlando Norfolk/Hampton Roads 17.5% vacant $18.38 p.s.f. A pullback in defense spending could leave the contractor-heavy Hampton Roads market vulnerable. Miami 19.1% vacant $31.33 p.s.f. Atlanta 20.0% vacant $20.08 p.s.f. Fort Lauderdale Miami Charlotte 16.9% vacant $20.99 p.s.f. Although some fundamentals are tightening, the Miami market is expected to remain tenant-favorable over the next 12 months. While a certain degree of confidence has returned to the marketplace, office fundamentals remain essentially flat. Premier submarkets with strong amenities and quality assets continue to receive high demand, but overall market performance remains highly variable on a submarket-bysubmarket basis.

10 10 Federal Perspective United States 2012 Jones Lang LaSalle 2013 US Federal Employment Existing federal government > 50,000 > 25,000 > 5,000 Seattle 35, % San Francisco 32,400-1, % Seattle Los Angeles San Diego 58,700 46,500 Salt Lake City -1, San Francisco Denver -2.8% -0.9% Las Vegas Las Vegas Salt Lake City 12, , Los Angeles San Diego Phoenix Albuquerque 4.3% -2.5% Phoenix Denver Albuquerque Austin Austin 21,600 28,100 15,400 11,400 San Antonio % -1.4% -4.5% 7.5% San Antonio Dallas Houston Kansas City Minneapolis Chicago 35,700 44,900 27,400 27,600 20,300 54, , % -1.8% -0.7% -0.7% -1.0% -3.6%

11 Jones Lang LaSalle Federal Perspective United States Federal government employment temperature (based on 12-month change in ) Hot Neutral Cold Very cold Detroit 27, Minneapolis Boston -2.8% Detroit New York Boston Cleveland Kansas City Chicago Indianapolis Cleveland Philadelphia Baltimore Washington, DC Norfolk/Hampton Roads 38, % 18, % Dallas/Fort Worth Atlanta Charlotte Jacksonville Baltimore 52, % Philadelphia 53, % New York 109,200-2, % Houston Tampa Orlando Atlanta 46,100 Norfolk/Hampton Rds 53,300 Existing federal government Washington, DC 381,100 Miami , % 1.5% -0.8% Indianapolis Miami Tampa Orlando Jacksonville Charlotte 16,100 33,400 22,500 12,000 17,200 6, % -1.8% -1.3% 0.0% 1.8% 0.0%

12 12 Federal Perspective United States 2012 Jones Lang LaSalle United States property clock Most U.S. office markets remain in stagnant position This diagram illustrates Jones Lang LaSalle s estimate of each prime office market s position within its individual rental cycle. Markets can move around the clock at different speeds and directions. The position is not necessarily representative of investment or development market prospects. The 6:00 position on the clock represents what is broadly viewed as the bottom of the market. Houston, San Francisco Silicon Valley Seattle Austin, Pittsburgh Dallas Denver Boston, Indianapolis, New York Jacksonville Orlando, Washington, DC, West Palm Beach Minneapolis, Orange County, Philadelphia, Richmond Los Angeles, Oakland-East Bay, San Antonio, United States Atlanta, Baltimore, Charlotte, Chicago, Cincinnati, Cleveland, Columbus, Fairfield County, Hampton Roads, Miami, Portland, Raleigh-Durham Detroit, Fort Lauderdale, New Jersey, Sacramento, San Diego, St. Louis Phoenix, Tampa, Westchester County Source: Jones Lang LaSalle

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14 14 Federal Perspective United States 2012 Jones Lang LaSalle United States market profiles Atlanta Atlanta s economy showed encouraging signs at the onset of 2012, with the unemployment rate dropping to 8.5 percent in April, the lowest since the start of the recession. Nevertheless, slow employment since then has been one of many indicators that all point to Atlanta lagging behind other major metros on the road to recovery. Metro demand remained positive into the third quarter, as 1.0 million square feet of office space was absorbed. This year is shaping up to be improved from 2011 demand velocity. Barring any unforeseen large block move-outs during the fourth quarter, Atlanta should record somewhere around 3.0 million square feet of absorption in That would be the most demand headway made since The Department of Health and Human Services has a large presence in the Atlanta market. HHS has eight leases that total almost three quarters of a million square feet in the immediate Atlanta area. The Atlanta federal real estate market is anchored by the Centers for Disease Control and Prevention headquarters. Chicago The typical summer ease in activity was not seen during the third quarter of Deal velocity picked up, with several sizeable and much talked-about transactions finally coming to a close. Five tenants larger than 100,000 square feet signed leases during the quarter and transactions were dominated by the middle market. An emerging trend throughout the year has been suburban tenants evaluating options downtown. Though there have been instances of this type of activity in the past, more suburban tenants of all sizes are testing the waters for either downtown relocations or branch offices. Encouraging news is coming in from employment forecasts, which project further gains from the professional and business services sector. The next question is whether those added office workers will translate into added space needs. Total federal market presence 4,749,491 r.s.f. / 69 leases Total federal market presence 1,894,850 r.s.f. / 70 leases Federal leases executed in the past 24 months 391,207 r.s.f. / 15 leases Federal leases executed in the past 24 months 170,717 r.s.f. / 7 leases Federal leases expiring in the next 24 months 867,104 r.s.f. / 11 leases Federal leases expiring in the next 24 months 146,342 r.s.f. / 13 leases Dallas & Fort Worth Denver The Dallas and Fort Worth office markets gained positive traction with higher than average net absorption and rising average asking rates in early As occupancy has increased for most submarkets, market fundamentals have begun to shift more from tenant-favorable to neutral conditions. With overall rising asking rates and limited construction currently underway, a landlord market is anticipated for some submarkets sometime within the next year. The markets contains a variety of sizes of government leases with the largest Dallas-located federal lease held by the Social Security Administration at 315,649 square feet and Fort Worth dominated by the Federal Aviation Administration. The Department of Housing and Urban Development, Federal Bureau of Investigation, Department of Homeland Security and Immigration and Naturalization Service also have significant leased assets in these markets. Employment gains in the Denver metro area have been driven by growth in the oil and gas industry for several quarters, and these gains are likely to continue, which will help stabilize economic growth over the mid-term. This positive momentum should accelerate office demand throughout the remainder of the year and into 2013, increasingly yielding a landlord-favorable market across market segments into next year. The Denver market is home to a variety of federal agencies, but the Department of the Interior, Department of Agriculture and Department of Justice continue to hold the largest footprints. As the threat of across-the-board budget cuts in January of 2013 looms over federal agencies, many agency user groups look to finding savings in their real estate portfolios. Both the Department of the Interior and the Department of Agriculture are among the agencies that stand to see the most savings through consolidating into regional headquarters. Total federal market presence 2,826,858 r.s.f / 63 leases Total federal market presence 1,477,851 r.s.f. / 47 leases Federal leases executed in the past 24 months 348,230 r.s.f / 15 leases Federal leases executed in the past 24 months 133,564 r.s.f. / 9 leases Federal leases expiring in the next 24 months 886,496 r.s.f / 40 leases Federal leases expiring in the next 24 months 518,804 r.s.f. / 20 leases

15 Jones Lang LaSalle Federal Perspective United States Los Angeles The Los Angeles economy remains in a state of arrested development. Third quarter leasing activity followed two distinct patterns one of renewals and contractions, the other one of growth and expansion. The downtown Central Business District, which has a large concentration of banking and law tenants, saw mostly renewals with some space give-backs. We also anticipate new space demand to be concentrated on the Westside driven by smaller tenants operating in technology and entertainment niches. The market contains a variety of sizes of Government leases, concentrated mostly around the Central Business District. The largest federal lease are held by the United States Corps of Engineers in 145,653 r.s.f. and United State Secret Service in 94,145 r.s.f. Total federal market presence Federal leases executed in the past 24 months Federal leases expiring in the next 24 months 1,485,078 r.s.f. / 76 leases 393,536 r.s.f. / 27 leases 529,124 r.s.f. / 32 leases Miami After remaining relatively flat for the last two years, direct vacancy was down by nearly 1.0 percentage point and registered below the 19.0 percent mark for the first time in nine quarters. Positive absorption, which exceeded 500,000 square feet during the first three quarters of 2012 should meet, or perhaps beat, 2011 s 670,000 square feet. This is a significant improvement over the negative absorption posted for three of the four previous years. New occupancy gains occurred by a wide margin across Class A buildings, split nearly evenly between the CBD and Suburban sectors. Most improved on the pricing front was the Class B segment, where both CBD and a majority of suburban markets showed increases, thanks to declining vacancies. The Port of Miami is the eleventh largest cargo container port in the United States and is known as the Cruise Capital of the World, with over 4.0 million visitors traveling through the port in Mirroring this high traffic coming into the city, border enforcement agencies such as Customs and Border Protection, Immigration and Customs Enforcement, Drug Enforcement Agency and Customs and Immigration Services have large presences in the market. Border protection agencies occupy over 758,000 r.s.f. in Miami and the surrounding area. New York Total federal market presence Federal leases executed in the past 24 months Federal leases expiring in the next 24 months 1,649,769 r.s.f. / 56 leases 164,043 r.s.f. / 11 leases 299,697 r.s.f. / 12 leases Rents and vacancy remained stable in the third quarter of 2012 in a market that seems to have stalled in the months leading up to the election. At 11.6 percent, the Midtown Class A vacancy rate is up slightly from 11.5 perfect in the second quarter. Law firm Dewey & LeBoeuf played a large part in this increase after the firm filed for bankruptcy in early 2012 and vacated 475,000 square feet at 1301 Avenue of the Americas. With a direct asking rent of $ per square foot, the Plaza District remains the nation s top and largest enclave of trophy-quality buildings. It was Midtown South, however, that showed the only positive absorption and lower vacancy of the major New York markets in the third quarter. Vacancy moved from 7.6 percent to 7.0 percent from June as the result of several deals, including the New York Genome Center s 172,000 square foot lease at 101 Avenue of the Americas in midtown South s Hudson Square submarket. The lack of clarity both in the world economy and on domestic policy is widely expected to stem actively among Wall Street firms and related industries into the final months A contrary view holds that a number of large deals circling the market could provide a boost to fourth-quarter results. Vacancy will remain mostly stable, except for Downtown, where the rising rate has been anticipated by the market for some time. Rents are not expected to see significant gains until 2013 and 2014, when forecasted employment growth and a lack of new inventory in some submarkets could drive rents substantially higher. Phoenix Despite a 46.0 percent drop-off in leasing activity in the third quarter of 2012, when only 986,000 square feet was leased in comparison to 1.82 million square feet in the previous quarter, deals signed in early 2012 netted some substantial occupancy growth as just over a half million square feet of positive net absorption was recorded. Class A space led the way, making up two-thirds of overall net absorption. Despite these gains, rents remained flat, with some landlords even lowering rents in a bid to attract tenants in a market rife with options. The largest federal leases are held by the Federal Bureau of Investigation and Internal Revenue Service. Total federal market presence 3,958,302 r.s.f. / 122 leases Total federal market presence 1,482,998 r.s.f / 53 leases Federal leases executed in the past 24 months 383,288 r.s.f. / 15 leases Federal leases executed in the past 24 months 451,258 r.s.f / 18 leases Federal leases expiring in the next 24 months 1,191,476 r.s.f. / 46 leases Federal leases expiring in the next 24 months 391,024 r.s.f / 15 leases

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17 Jones Lang LaSalle Federal Perspective United States Up Down No change Up Down No change United States key economic indicators 12-month forecast Metro DC key economic indicators 12-month forecast Gross domestic product 1.3% Unemployment rate 7.9% Employment 133,500,000 Employment 12 month percent change 1.4% P&B services 12 month percent change 3.0% Financial 12 month percent change 1.12% Information 12 month percent change -0.6% Federal government 12 month percent change -1.1% Consumer price index 2.0% Gross metro product 1.5% Unemployment rate 5.3% Employment 3,037,200 Employment 12 month percent change 1.4% P&B services 12 month percent change 1.6% Financial 12 month percent change 2.7% Information 12 month percent change -1.0% Federal government 12 month percent change -0.8% Consumer price index 2.8% Data as of November 2012 Data as of November 2012 Leasing and lease construction awards Annualized award dollars (in Billions) $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: Federal Procurement Data System (FPDS.gov); data is annualized and seasonally-adjusted

18 18 Federal Perspective United States 2012 Jones Lang LaSalle Mid-Atlantic region overview Metro DC region Metro DC region at a glance Metro DC region GSA lease expirations by year s.f. ( 000) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Source: General Services Administration Suburban Maryland lease expirations s.f. ( 000) Montgomery Prince George's Anne Arundel Frederick 3,000 2,500 2,000 1,500 1, Source: General Services Administration Given its high concentration of federal tenancies, the metro DC office market remains vulnerable to sequestration which could severely cut the federal budget in early 2013 and have dramatic downstream implications for GSAleased space. Recently, as federal agencies in metro DC faced heightened political pressure to cut spending, leasing activity has slowed and become concentrated in short-term renewals. Agencies focused on financial regulation were an exception, as activity remained brisk in that area: the Federal Reserve entered the market with a 170,000-square-foot requirement in the CBD and a variety of other financial regulatory groups including the Office of the Comptroller of the Currency, Federal Trade Commission and Federal Housing Finance Agency prepared for consolidations into Constitution Center in Southwest. Washington, DC Loudoun Fairfax Montgomery D.C. Arlington MD Region Washington, DC NoMa/Capitol Hill 2012 total GSA leased inventory* 24,260,005 s.f. 4,844,833 s.f. Trailing 12 month change Forecasted 12 month change VA Prince William Alexandria Prince George s CBD East End Southwest 3,068,268 s.f. 7,343,052 s.f. 6,768,487 s.f. Within a generally stagnant marketplace, the federal government accounted for some of the largest leases in the Washington, DC market in However, unlike 2010 and other stretches in which single-party rule of the White House and Congress enabled the rapid expansion of the footprint of federal agencies across the market, virtually all transaction activity fell into short-term renewals, sublets or consolidations and resulted in no net growth in the market. The two largest leases of the third quarter of 2012 were signed by the U.S. Federal Trade Commission: a 358,000-square-foot lease assumption at 400 7th Street, SW in which the agency will backfill space originally leased by the Securities and Exchange Commission and a 217,308-square-foot renewal at 601 New Jersey Avenue, NW. Despite this activity, unclear budgets and federal mandates to hold or contract footprints should keep overall public sector demand restrained heading into 2013 and likely beyond. Southeast Uptown and periphery Washington, DC lease expirations s.f. ( 000) 4,000 3,000 2,000 1,000 1,849,622 s.f. 340,743 s.f. Source: GSA property database, Jones Lang LaSalle *Excludes federal leased space by agencies with independent leasing authority Source: General Services Administration

19 Jones Lang LaSalle Federal Perspective United States Mid-Atlantic region overview Northern Virginia Outside the Beltway Loudoun Fairfax Montgomery D.C. Arlington MD Region Northern Virginia VA Outside Beltway 2012 total GSA leased inventory* 19,529,157 s.f. 5,930,227 s.f. Trailing 12 month change Forecasted 12 month change VA Prince William Alexandria Prince George s Prince William Fairfax County Falls Church 297,767 s.f. 3,023,333 s.f. 2,307,533 s.f. Despite its large federal presence, submarkets outside the Beltway witnessed a dearth of government leasing throughout Occupancy changes were primarily the result of leases signed in previous periods. Over 8,000 jobs were relocated to Fort Belvoir after the National Geospatial-Intelligence Agency (NGA) relocated to Springfield. TRICARE also moved into 688,281 square feet at 7700 Arlington Boulevard in Merrifield in early 2012 resulting in the single largest GSA occupancy change of the year nationwide. The Office of the Director of National Intelligence (DNI) made headlines in late 2012 for reaching a tentative deal to lease nearly 183,000 square feet at Patriots Park in Reston. DNI will join the Defense Intelligence Agency at the park and take down the last of three buildings vacated by NGA under BRAC. Loudoun Northern Virginia (outside the Beltway) lease expirations s.f. ( 000) 1,400 1,200 1, ,594 s.f. Source: GSA property database, Jones Lang LaSalle *Excludes federal leased space by agencies with independent leasing authority Fairfax Loudoun Source: General Services Administration Prince William Inside the Beltway VA Loudoun Fairfax Prince William Montgomery D.C. Arlington Alexandria Prince George s MD Arlington County experienced a noteworthy setback in occupancy due to BRAC in 2012, as the government vacated more than 1.0 million square feet of space. Class B and C office product in Crystal City experienced 60.0 percent of the scheduled occupancy losses. By way of example, the Army and Air Force Exchange vacated 329,000 square feet at 2511 Jefferson Davis Highway, and the Administrative Assistant to the Secretary of the Army moved out of 110,500 square feet at 1421 Jefferson Davis Highway. Short-term renewals were prevalent, and the Department of Labor inked one of the largest transactions of 2012 a threeyear, 91,000 square foot lease at 1100 Wilson Boulevard in Rosslyn. Region Northern Virginia Arlington Alexandria Northern Virginia (outside the Beltway) lease expirations s.f. ( 000) 2,500 2,000 1,500 1, total GSA leased inventory* 19,529,157 s.f. 9,520,433 s.f. 4,078,497 s.f. Source: GSA property database, Jones Lang LaSalle Trailing 12 month change Arlington Source: General Services Administration Forecasted 12 month change *Excludes federal leased space by agencies with independent leasing authority Alexandria

20 20 Federal Perspective United States 2012 Jones Lang LaSalle Mid-Atlantic region overview Suburban Maryland Suburban Maryland at a glance Region Suburban Maryland Montgomery Prince George s Frederick Anne Arundel/Howard 2012 total GSA leased inventory* 9,270,020 s.f. 6,549,284 s.f. 2,136,963 s.f. 273,487 s.f. 310,286 s.f. Source: GSA property database, Jones Lang LaSalle Trailing 12-month change Forecasted 12-month change *Excludes federal leased space by agencies with independent leasing authority Suburban Maryland lease expirations s.f. ( 000) Montgomery Prince George's Anne Arundel Frederick 3,000 2,500 2,000 1,500 1, Source: General Services Administration Montgomery County The headline lease in Montgomery County was the NOAA renewal in Silver Spring for 1.0 million square feet. NIH also signed a pair of large leases in Rock Spring Park, ensuring the continued federal presence within that submarket. Elsewhere, the renewal of the FDA was solidified at 1401 Rockville Pike for 100,522 square feet. Additionally, NIH signed a new 15-year lease for 75,056 square feet at 9800 Medical Center Drive in Rockville, and NIAID renewed 57,608 square feet at Fernwood Drive. In addition to the recent leasing activity, the federal government had 1,427,998 square feet under construction in Montgomery County at the end of the third quarter: NIAID, Nuclear Regulatory Commission, and National Cancer Institute all moved forward with their build-to-suits. Loudoun Fairfax Baltimore Montgomery MD D.C. Arlington Alexandria Prince George s Prince George s County Prince George s County s soft market conditions were not enriched by any major federal leasing in In fact, hopes for a federal market savior were dashed by the decision by GSA to renew the Department of Health and Human Services last year in Montgomery County, despite several protests and a reevaluation mandated by the Government Accountability Office. The most recent claim was in August 2012, when One Largo Metro LLC sued GSA in federal court, requesting reimbursement from the government of the company s proposal costs and legal fees. One of the few developments of 2012 was located in College Park. The NOAA building was completed in the second half of NOAA s new facility notwithstanding, the federal sector continued to largely shun Prince George s County in favor of other nearby jurisdictions, particularly Montgomery County. Given the competitive pricing of Prince George s County and abundant metroproximate development sites, the area makes perfect sense for future government consolidations at least on paper yet, shrinking budgets may preclude any significant new projects over the immediate years ahead. VA Loudoun Fairfax Prince William Montgomery MD D.C. Arlington Alexandria Prince George s

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22 22 Federal Perspective United States 2012 Jones Lang LaSalle Top 10 market predictions Significant new legislation regarding disposal will be passed. Bipartisan attention to cost reduction and government efficiency will continue. Actual execution will occur. Pent-up real estate requirements will move forward, creating significant activity nationwide. Relocation is a real risk. Smaller leases are subject to absorption and consolidation. Larger leases are subject to space reduction and reconfiguration. In general, federal buildings are at 100 percent occupancy and cannot provide the level of absorption necessary to meet consolidation requirements. Consequently, leasing will continue. Hoteling, teleworking, flexiplace and open plan space initiatives will continue to be implemented, threatening in-place renewals. Agencies will invest in analysis of space needs (Program of Requirements) to justify requirements, further lengthening the lease process. Incumbent owners must be proactive start early to assess compliance and implement test-fit options to allow GSA to mobilize and deliver quickly. Small, costly, niche agencies are at risk to be eliminated. Issues and agencies to watch Cyber security Department of Defense Department of Homeland Security Healthcare Internal Revenue Service Department of Health and Human Services Human services Department of Veterans Affairs Energy sector Department of Energy Republicans and Democrats will recognize the value of compromise. We are optimistic about the future.

23 Jones Lang LaSalle Federal Perspective United States As the federal government seeks to reduce costs and maximize space efficiency, agencies are embracing progressive tactics to rightsize their footprints. By implementing open floor plans and shared workspaces and encouraging more telecommuting, net occupancy levels of federally leased space are expected to remain stable or decline.

24 1801 K Street, NW Suite 1000 Washington, DC About Jones Lang LaSalle Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2011 global revenue of $3.6 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 2.1 billion square feet worldwide. LaSalle Investment Management, the company s investment management business, is one of the world s largest and most diverse in real estate with $47 billion of assets under management. For further information, please visit About Jones Lang LaSalle Research Jones Lang LaSalle research team delivers intelligence, analysis, and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our 300 professional researchers track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. Contact information Government Investor Services Joseph Brennan Managing Director joseph.brennan@am.jll.com Lucy Kitchin Senior Vice President lucy.kitchin@am.jll.com Research Scott Homa Vice President, Mid-Atlantic Research scott.homa@am.jll.com Hillary Johnson Senior Vice President hillary.johnson@am.jll.com Art Turowski Senior Vice President arthur.turowski@am.jll.com 2013 Jones Lang LaSalle IP, Inc. All rights reserved. No part of this publication may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of Jones Lang LaSalle. The information contained in this document has been compiled from sources believed to be reliable. Jones Lang LaSalle or any of their affiliates accept no liability or responsibility for the accuracy or completeness of the information contained herein and no reliance should be placed on the information contained in this document.