RESEARCH MARKET REPORT

NORTHERN VIRGINIA OFFICE | Q3 2017

State of the Economy p.2

Leasing Activity p.3

Development Pipeline p.4

Market Outlook p.5

Market Breakdown p.6

IN THIS ISSUE

NORTHERN VIRGINIA | OFFICE MARKET REPORT | Q3 2017 | COLLIERS INTERNATIONAL2

During the third quarter of 2017, the recovery in the Northern Virginia Office market slowed as new demand for space flattened. After registering four quarters of solid growth, net absorption turned slightly negative as federal consolidations and the remaining effects of BRAC impacted the market. While these hold-overs from last cycle played out, the private sector and federal intelligence agencies continued to occupy and lease additional space in the market, pointing to a continuation of the recovery started in 2016.

Economy

The market recovery commenced with the end of Sequestration and the resumption of increased federal spending. However, after a significant increase in fiscal year 2016, government spending by federal agencies in Northern Virginia shrank in 2017. Since the beginning of October 2016, $384.7 billion in contracts were awarded to companies in Northern Virginia. This is significantly down from fiscal year 2016, when $460.4 billion was awarded. This decrease in spending has slowed the employment growth in the office using sectors of the economy. So far in 2017, about 3,860 new jobs were created. This compares to 9,600 office-using jobs created during the first three quarters of 2016.

Q3 2017 Office Market All Classes Class A Class B & C

Vacancy Rate 18.0% 18.4% 17.7%

Change from Q2 2017(basis points) 62 126 9

Absorption (Square Feet) -65,991 159,001 -224,992

New Construction (Millions Square Feet) 1.57 1.55 0.02

Under Construction (Millions Square Feet) 3.73 3.25 0.48

Asking Rents Per Square Foot Per Year

Direct Asking Rates $31.98 $36.25 $28.98

Change from Q2 2017 -$0.23 -$0.50 -$0.06

Summary Statistics

Spike in Vacancy Due to DeliveriesMiles Rodnan RESEARCH ANALYST | NORTHERN VIRGINIA

Market Indicators2018 Year-End Projection

VACANCY

Q3 2017

NET ABSORPTION

CONSTRUCTION

RENTAL RATE

MARKET SNAPSHOTRECOVERY HITS SPEED BUMP BUT NEW DEVELOPMENTS ALREADY WELL LEASED

Demand Flat: -65K sf of absorption

Delivered Space: 1.57 MSF, 71.4% leased

Under Construction: 3.73 MSF, 66% leased

DEM

AND

SUPP

LY

$25.00

$27.50

$30.00

$32.50

$35.00

$37.50

Class A Class B Class C

Direct Asking Rental Rates By Class

$25.00

$27.50

$30.00

$32.50

$35.00

$37.50

Class A Class B Class C

Direct Asking Rental Rates By Class

$36.25

$29.60

$26.52

Source: Colliers International, CoStar Group

NORTHERN VIRGINIA | OFFICE MARKET REPORT | Q3 2017 | COLLIERS INTERNATIONAL 3

Demand

Demand for office space in Northern Virginia was largely flat, with just 65,991 square feet of space returned during the third quarter of 2017. This breaks the four-quarter trend of positive absorption.

While absorption overall was flat, demand for Class A and Class C product increased across the Northern Virginia market. Class A space accounted for 159,001 square feet of positive net absorption for the quarter. This compares to 430,423 square feet absorbed last quarter, and brings the 2017 year-to-date total to 1.77 million square feet. Demand was the greatest for Class C product, with 177,573 square feet taken off the market. This is the fourth straight quarter of positive demand for Class C product, bringing the year-to-date total up to 235,980 square feet.

In contrast, demand for Class B space fell this quarter with tenants giving back 402,565 square feet to the market. The return of this space brought the Class B year-to-date total down to negative 556,932 square feet of absorption.

Northern Virginia—Office Market—Leasing Activity | Q3 2017TENANT ADDRESS LEASE TYPE LEASED SPACE (SF)

Transportation Security Administration (TSA) Springfield Center Drive Prelease/Relocation 625,000

State Department 1701 N Fort Meyer Drive Renewal 279,996

GDIT 3150 Fairview Park Drive Relocation 216,000

Capital One 8020 Towers Crescent Drive Renewal 178,712

US Department of Agriculture (USDA) 1320 Braddock Place Relocation 136,023

Capital One 8000 Towers Crescent Drive Renewal 81,751

CSRA 12180 Sunrise Valley Drive Relocation 64,319

State Department 1200 Wilson Boulevard Expansion 55,793

Digital Globe 2325 Dulles Corner Boulevard Renewal 46,988

Hogan Lovells LLP 8350 Broad Street Relocation 44,517

McGuire Woods 1750 Tysons Boulevard Renewal 41,828

Nestle US 1812 N Moore Street Expansion 38,000

U.S. Trade and Development Agency (USTDA) 1101 Wilson Boulevard Relocation 35,994

-1,000

-500

0

500

1,000

1,500

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Thou

sand

s SF

Net Absorption

Source: Colliers International, CoStar Group

NORTHERN VIRGINIA | OFFICE MARKET REPORT | Q3 2017 | COLLIERS INTERNATIONAL4

Supply

There is a lot of new demand expected from tenants that have committed to space in product currently under construction. Of the 3.73 million square feet of space under construction, 66.0 percent is pre-leased, with the vast majority of committed space coming from tenants expanding in the market. This includes the Navy Federal Credit Union’s 148,098-square-foot expansion at 1041 Electric Avenue in Vienna, the Federal Government’s 480,000-square-foot build-to-suit at 13900 Air and Space Museum Parkway in Route 28 Corridor South, and the 975,000-square-foot phase III building for Capitol One on their campus in Tysons Corner.

During the quarter, six buildings delivered, bringing 1.57 million square feet of new office product to the market. Of this space, 71.4 percent was leased upon completion. While some of these deliveries included new demand to the market, most incuded relocations that resulted in more space given back than was occupied. One of the buildings that constituted new demand to the market was the 240,000-square-foot build-to-suit for the Federal Government on Stonecroft Boulevard in the Route 28 Corridor South submarket. Arguably the most significant delivery was the 700,000-square-foot National Science Foundation headquarters located at 2415 Eisenhower Avenue in the Carlyle/King Street Metro submarket. They relocated out of approximately the same amount of space from Ballston. Reston Station, a 368,413-square-foot building, adjacent to the Wielhe Metro station in Reston, also delivered this quarter. The building was built on a speculative basis, and while a number of tenants toured the location, the building delivered completely vacant.

0.00.20.40.60.81.01.21.41.61.8

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2014

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Mill

ions

SF

Deliveries

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

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Mill

ions

SF

Under Construction

Source: Colliers International, CoStar Group

Source: Colliers International, CoStar Group

Source: Colliers International, CoStar Group

NORTHERN VIRGINIA | OFFICE MARKET REPORT | Q3 2017 | COLLIERS INTERNATIONAL 5

Vacancy With new supply outpacing new demand, the overall vacancy rate increased 62 basis points to end the quarter at 18.0 percent. The direct vacancy jumped considerably from 16.2 percent to 17.2 percent during the quarter.

Vacancy rose in both Class A and B space, while it dropped in Class C product. Vacancy in the Class A market increased from 17.1 percent to 18.4 percent during the quarter, primarily due to the delivery of new office product. The Class B vacancy increased slightly from 19.7 to 20.0 percent because of falling demand. It fell in Class C product, decreasing from 12.1 percent to 11.5 percent.

Rental Rates

During the quarter, the direct average asking rate fell from $32.21 to $31.98 per square foot. While down from last quarter, asking rates are still $0.61 higher than compaired to the same time last year when the rate was $31.37 per square foot.

Class A product was the only sector where the rental rate fell, dropping from $36.75 to $36.25 per square foot during the quarter. This compares to the same time last year when it stood at $34.83 per square foot.

Both the Class B and C direct asking rates remained relatively flat, rising slightly from $29.59 to $29.60 and from $26.49 to $26.52 per square foot, respectively. While flat for the quarter, the rates for both sectors decreased from a year ago when they stood at $29.68 and $26.70 per square foot.

Outlook

While slower job growth has resulted in flat demand for office space during the third quarter, many non-government related organizations are bringing new jobs to the region. As a result, the Northern Virginia economy is expected to add about 26,000 new office-using jobs over the next six quarters. Assuming these projections are not reduced as a result of slower Federal spending, these jobs should produce more than three million square feet of new demand for office space.

Over the same six quarters, all the 3.73 million square feet currently under construction should deliver. As a result, vacancy rates should rise, as new supply continues to outpace demand. The Class A and B markets will continue to see the bulk of the increase; Class A because of the new supply and Class B because of falling demand. A number of additional projects are expected to break ground, but little purely speculative development is anticipated.

$31.00

$31.20

$31.40

$31.60

$31.80

$32.00

$32.20

$32.40

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$/SF

Direct Asking Rental Rate

15.0%

15.5%

16.0%

16.5%

17.0%

17.5%

Q4

2014

Q1

2015

Q2

2015

Q3

2015

Q4

2015

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2016

Q2

2016

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2016

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Perc

enta

ge

Vacancy Rate

Source: Colliers International, CoStar Group

Source: Colliers International, CoStar Group

Source: Colliers International, CoStar Group

NORTHERN VIRGINIA | OFFICE MARKET REPORT | Q3 2017 | COLLIERS INTERNATIONAL6

Northern Virginia—Office Market—Class A | Q3 2017

MARKET EXISTING INVENTORY (SF)

NEW SUPPLY (SF)

YTD NEW SUPPLY (SF)

UNDER CONSTRUCTION

(SF)

ABSORPTION (SF)

YTD ABSORPTION

(SF)

OVERALL VACANCY

RATE

DIRECT ASKING RATE

ALEXANDRIA CITYCarlyle/King St Metro 5,763,447 700,000 700,000 - 661,115 658,768 10.4% $41.22

Eisenhower Ave Corridor 128,000 - - - - - 0.0% n/a

I-395 Corridor* 2,674,222 - - - -4,555 55,188 40.5% $33.15

Old Town 745,672 - - 100,000 6,301 2,999 12.4% $31.48

Alexandria City Total 7,526,806 700,000 700,000 100,000 667,416 678,868 18.2% $39.72

ARLINGTON COUNTY/FALLS CHURCH CITYCrystal City/Pentagon City 4,130,646 - - - 56,934 146,690 18.9% $40.38

Falls Church** 85,000 - - - - - 0.0% n/a

Rosslyn/Ballston Corridor 14,715,019 166,767 166,767 727,781 -751,570 -309,288 24.3% $44.29

Arlington County/Falls Church Total 19,461,954 166,767 166,767 727,781 -699,191 -146,843 22.8% $42.97

FAIRFAX COUNTY/FAIRFAX CITYAnnandale 200,000 - - - - -22,152 40.6% $31.50

Fairfax/Oakton 4,065,325 - - 149,098 -64,307 -54,203 24.6% $30.24

Herndon 7,141,205 - - - -60,632 -57,762 23.3% $32.95

McLean - - - - - - n/a n/a

Merrifield 4,602,284 - - - -55,856 -39,575 23.5% $33.57

Reston 11,080,340 368,413 368,413 - 53,098 297,280 11.0% $34.81

Route 28 Corridor South 9,010,397 240,000 240,000 480,000 305,722 603,573 8.9% $28.05

Springfield/Huntington 2,298,732 - - - -4,247 -6,900 34.8% $37.28

Tysons Corner 14,543,400 - 340,000 1,555,419 -19,684 271,857 14.9% $37.24

Vienna 216,324 - - 235,000 -28,378 -28,378 21.4% n/a

Fairfax Area Total 54,411,253 608,413 948,413 2,419,517 125,716 986,072 16.9% $33.64

LOUDOUN COUNTYLeesburg/West Loudoun 470,939 - - - -1,557 72,505 11.6% $28.50

Route 28 Corridor North 5,236,983 - - - 10,865 57,223 19.3% $24.94

Route 7 Corridor 1,112,203 71,466 71,466 - 67,713 58,663 16.5% $28.47

Loudoun County Total 6,820,125 71,466 71,466 - 77,021 188,391 18.3% $25.59

PRINCE WILLIAM COUNTY/MANASSAS CITY/MANASSAS PARKManassas 73,000 - - - - 5,712 11.0% $18.00

Route 29/I-66 Corridor 624,325 - 73,500 - 2,956 64,463 3.2% $24.97

Woodbridge 323,172 - - - -14,917 -11,463 34.2% $26.50

Prince William Area Total 1,020,497 - 73,500 - -11,961 58,712 13.6% $26.11

NORTHERN VIRGINIA TOTAL 89,240,635 1,546,646 1,960,146 3,247,298 159,001 1,765,200 18.4% $36.25

* I-395 is split between Arlington County, Fairfax County and Alexandria City** Falls Church is split between Fairfax County and Falls Church City

1.57New Deliveries

(Million Square Feet)

-65,991Absorption

(Square Feet)

$31.98Direct Asking Rate

18.0%Vacancy Rate

THIRD QUARTER 2017

OVERALL QUICK STATS

NORTHERN VIRGINIA | OFFICE MARKET REPORT | Q3 2017 | COLLIERS INTERNATIONAL 7Inventory by Class

(Square Feet)

2,460Office Jobs Lost

3.73Under Construction

(Million Square Feet)

Northern Virginia—Office Market—Class B & C | Q3 2017

MARKET EXISTING INVENTORY (SF)

NEW SUPPLY (SF)

YTD NEW SUPPLY (SF)

UNDER CONSTRUCTION

(SF)

ABSORPTION (SF)

YTD ABSORPTION

(SF)

OVERALL VACANCY

RATE

DIRECT ASKING RATE

ALEXANDRIA CITYCarlyle/King St Metro 2,661,862 - - - -609,602 -620,441 33.2% $35.99

Eisenhower Ave Corridor 608,763 - - - 11,400 20,640 16.7% $23.63

I-395 Corridor* 6,215,955 - - - 31,202 39,891 34.5% $29.91

Old Town 4,954,688 - - - 13,378 7,921 10.8% $30.88

Alexandria City Total 11,443,984 - - - -596,191 -615,235 22.0% $31.12

ARLINGTON COUNTY/FALLS CHURCH CITYCrystal City/Pentagon City 8,843,203 - - 242,100 76,400 97,584 16.5% $35.04

Falls Church** 2,194,708 - - - 17,892 -14,401 12.2% $22.22

Rosslyn/Ballston Corridor 9,576,877 - - - 86,073 48,493 21.6% $39.33

Arlington County/Falls Church Total 20,280,170 - - 242,100 166,170 139,071 18.2% $36.41

FAIRFAX COUNTY/FAIRFAX CITYAnnandale 1,671,540 - - - 17,059 39,739 8.4% $21.59

Fairfax/Oakton 9,365,742 - - - 65,589 55,335 18.3% $24.22

Herndon 5,002,981 - - - -7,140 -94,393 18.5% $23.99

McLean 1,558,716 - - - 19,434 1,479 9.1% $32.04

Merrifield 4,117,181 - - - 12,166 113,525 12.9% $27.36

Reston 7,778,206 - - 179,152 -10,022 54,852 13.9% $26.85

Route 28 Corridor South 5,446,719 - - - -11,421 -171,415 22.9% $23.96

Springfield/Huntington 5,811,913 - - - 64,435 7,899 14.5% $23.04

Tysons Corner 14,454,336 - - - -8,136 69,211 21.8% $29.17

Vienna 1,156,610 - - - -77,114 -63,300 10.8% $27.66

Fairfax Area Total 59,695,846 - - 179,152 121,614 68,783 18.7% $26.24

LOUDOUN COUNTYLeesburg/West Loudoun 1,836,700 - - 63,000 3,073 39,930 5.8% $24.71

Route 28 Corridor North 4,369,124 20,000 20,000 - 8,037 21,031 16.7% $21.35

Route 7 Corridor 3,296,564 - - - 7,588 22,110 6.1% $24.53

Loudoun County Total 9,502,388 20,000 20,000 63,000 18,698 83,071 10.9% $22.36

PRINCE WILLIAM COUNTY/MANASSAS CITY/MANASSAS PARKManassas 1,904,309 - - - 7,014 -16,553 9.3% $21.62

Route 29/I-66 Corridor 2,035,714 - - - 59,884 72,546 7.1% $17.76

Woodbridge 2,239,279 - 39,000 - -2,181 -52,635 10.8% $22.71

Prince William Area Total 6,179,302 - 39,000 - 64,717 3,358 9.1% $20.22

NORTHERN VIRGINIA TOTAL 107,101,690 20,000 59,000 484,252 -224,992 -320,952 17.7% $28.98

* I-395 is split between Arlington County, Fairfax County and Alexandria City** Falls Church is split between Fairfax County and Falls Church City

Inventory By Class (SF)

Class A45.5%

Class C 14.7%

Class B39.9%

8 North American Research & Forecast Report | Q4 2014 | Office Market Outlook | Colliers International

Copyright © 2017 Colliers International.The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

Colliers International 7900 Tysons One Place, Suite 260McLean, VA 22102+1 703 394 4800colliers.com/washingtondc

FOR MORE INFORMATIONDavid Parker Regional Managing Director+1 202 728 3541david.w.parker@colliers.com

Northern Virginia—Office Market—All Classes | Q3 2017

MARKET EXISTING INVENTORY (SF)

NEW SUPPLY (SF)

YTD NEW SUPPLY (SF)

UNDER CONSTRUCTION

(SF)

ABSORPTION (SF)

YTD ABSORPTION

(SF)

OVERALL VACANCY

RATE

DIRECT ASKING RATE

ALEXANDRIA CITYCarlyle/King St Metro 8,425,309 700,000 700,000 - 51,513 38,327 17.6% $39.86

Eisenhower Ave Corridor 736,763 - - - 11,400 20,640 13.8% $23.63

I-395 Corridor* 8,890,177 - - - 26,647 95,079 36.3% $30.31

Old Town 5,700,360 - - 100,000 19,679 10,920 11.0% $30.94

Alexandria City Total 18,970,790 700,000 700,000 100,000 71,225 63,633 20.5% $33.86

ARLINGTON COUNTY/FALLS CHURCH CITYCrystal City/Pentagon City 12,973,849 - - 242,100 133,334 244,274 17.3% $36.71

Falls Church** 2,279,708 - - - 17,892 -14,401 11.7% $22.22

Rosslyn/Ballston Corridor 24,291,896 166,767 166,767 727,781 -665,497 -260,795 23.2% $42.20

Arlington County/Falls Church Total 39,742,124 166,767 166,767 969,881 -533,021 -7,772 20.5% $39.44

FAIRFAX COUNTY/FAIRFAX CITYAnnandale 1,871,540 - - - 17,059 17,587 11.8% $25.35

Fairfax/Oakton 13,431,067 - - 149,098 1,282 1,132 20.2% $25.95

Herndon 12,144,186 - - - -67,772 -152,155 21.4% $29.43

McLean 1,558,716 - - - 19,434 1,479 9.1% $32.04

Merrifield 8,719,465 - - - -43,690 73,950 18.5% $31.50

Reston 18,858,546 368,413 368,413 179,152 43,076 352,132 12.2% $30.69

Route 28 Corridor South 14,457,116 240,000 240,000 480,000 294,301 432,158 14.2% $25.73

Springfield/Huntington 8,110,645 - - - 60,188 999 20.3% $28.57

Tysons Corner 28,997,736 - 340,000 1,555,419 -27,820 341,068 18.3% $31.48

Vienna 1,372,934 - - 235,000 -105,492 -91,678 12.5% $27.66

Fairfax Area Total 114,107,099 608,413 948,413 2,598,669 247,330 1,054,855 17.8% $29.17

LOUDOUN COUNTYLeesburg/West Loudoun 2,307,639 - - 63,000 1,516 112,435 7.0% $25.46

Route 28 Corridor North 9,606,107 20,000 20,000 - 18,902 78,254 18.1% $23.67

Route 7 Corridor 4,408,767 71,466 71,466 - 75,301 80,773 8.7% $26.78

Loudoun County Total 16,322,513 91,466 91,466 63,000 95,719 271,462 14.0% $24.32

PRINCE WILLIAM COUNTY/MANASSAS CITY/MANASSAS PARKManassas 1,977,309 - - - 7,014 -10,841 9.3% $21.54

Route 29/I-66 Corridor 2,660,039 - 73,500 - 62,840 137,009 6.2% $18.10

Woodbridge 2,562,451 - 39,000 - -17,098 -64,098 13.8% $24.19

Prince William Area Total 7,199,799 - 112,500 - 52,756 62,070 9.8% $21.27

NORTHERN VIRGINIA TOTAL 196,342,325 1,566,646 2,019,146 3,731,550 -65,991 1,444,248 18.0% $31.98

Robert Hartley Director of Research+1 703 394 4852 robert.hartley@colliers.com

Miles RodnanResearch Analyst | Northern Virginia+1 703 394 4811 miles.rodnan@colliers.com