Colliers DC YE Report 2014 V11

Transaction Volume/Type:
2014 office Investment sales volume was up 36% over 2013 volume: $6.5 B vs. $4.8 B; with 2014 recording 58 transactions vs 2013’s
56 transactions. Core assets traded at higher valuations than at the peak of the last cycle, aided by continued low interest rates, significant
amounts of available capital, and a general lack of meaningful alternative investment opportunities. And interestingly, we estimate that
capitalization rates for the core assets actually declined nearly 50 basis points in 2014 against those trades in 2013 – the declining yield
of the 10 Year treasury throughout the course of 2014 no doubt was an influential difference maker in this downshift in capitalization rate.
(link to list of office sales in the three area Washington, DC markets; link for a side by side comparison of the 10 Year treasury Rates 2013/2014).
what does 2015 hold in terms of transaction Volume
and Pricing?
With the sustained period of weak market fundamentals, including
the costs associated with all lease transactions, and tenants’ desires
to forsake larger footprints in exchange for workplace efficiencies
(read: a focus on newer product), many owners with leasing
exposure continue to carefully evaluate their investment strategies.
low interest rates and a lack of reinvestment opportunities favor a
continuation of owners holding product; however, should leasing
market/demand continue to remain flat, we see more secondary /
tertiary assets coming to market.
As far as pricing is concerned, generalizing is an art form given
that real estate investment strategies are so asset specific, but
we see no near term adjustments in core pricing (in fact further
capitalization rate compression is a possibility); however, we do
see more of a balance between seller and buyer expectations.
will the Capital Markets and leasing Markets ever be at Parity?
to the dismay of many investors, the capital markets continue to
run ahead of the leasing markets in Washington. With the Federal
Government being the largest anchor tenant here, there is a sense
of investment security associated with the market, and as such
many investors have been willing to accept a lower rate of return
as compared with other markets where they might invest.
However, as this market has continued its efforts to transition
from government-centric dependence to a more broad based
economy, there has been a great deal of stress on real estate. In
fact, the market has never experienced such a prolonged period
of increasing vacancies and flat to negative absorption. the
pressure on some real estate assets has led to concern on the
part of owners of those assets: do they want to continue to invest
in their properties given their current basis and the transaction
costs associated with leasing? Investors recognize the weakened
market fundamentals; and while there is an overall sense of
optimism for the longer term, underwriting standards reflect the
realities of the current market: modest rent growth, significant
concessions for leases, longer absorption periods, and so forth.
Not all assets are created equal but we do believe that should
this down-cycle continue for a longer period of time, the leasing
and capital markets will become more fully at parity.
CollieRs wAshington dC | 2015 Mid-winteR
INVestMeNt sAles RepoRt
COLLIERS INTERNATIONAL | P. 1
Core Core Plus Value Add
Volume Cap Rate $/sf Volume Cap Rate $/sf Volume Cap Rate $/sf
DC $1,416 M 4.76% $804 $2,050 M 5.11% $478 $566 M 7.27% $328
NoVA $345 M 5.34% $355 $1,398 M 6.69% $304 $235 M N/A $142
MD $566 M 6.53% $661 $46 M 8.50% $212 $66 M 7.60% $92

CollieRs wAshington dC | 2015 Mid-winteR | inVestMent sAles RePoRt
Investor Activity:
43% of the total transaction volume in the downtown Washington,
DC market has involved foreign investors (link to Foreign Investment
Activity). the continued influx of foreign capital (26 buildings
bought by offshore investors in the last 5 years) along with a bevy
of dry powder (over $250 billion in ready cash worldwide between
ReIts and private equity real estate funds, per Deloitte’s 2015
outlook) will keep demand for institutional-quality assets high. the
offshore capital sources are formidable competitors for the highest
quality properties. Note that Jamestown just closed on its +$500
million ($1,083/sf) acquisition of 51 louisiana Avenue/300 New
Jersey Avenue. While ‘preservation of capital’ is often cited as a
motivating factor for many of these investors, the yield levels
available in the Washington DC market – even for the trophy assets
- are often as much as 50% higher than those available in other
major cities around the globe (e.g. london, Hong Kong, tokyo).
low interest rates enable borrowers to positively leverage equity
– even on the core asset trades that are selling at initial
capitalization rates of +/- 4.25%.
2013-2014 washington, dC Metropolitan Area - Buyer Profiles
0
2
4
6
8
10
12
14
16
18
2013 2014
PrivatePension
Fund/Life
Co.
Equity/Opportunity
Fund
REIT
Foreign
Developer
Other/User

REIT Performance / Interest Rates/Capitalization Rates:
As the calendar has turned to February 2015, we have passed
the six-year mark of near-zero interest rates. the rates must go
up - eventually - but given the tepid economic recovery here in
the Us, and weak economic signals coming from europe and
Asia, we do not see rates rising in a meaningful way in the near
future. the low rates were a major factor in ReIt performance
over the last year, as ReIt’s were broadly up 27.65% (VNQ),
easily outpacing the s&p’s 13.11% (spY) - impressive in its own
right. ReIt’s with strong oﬃce exposure in the Washington, DC
market also did well individually, with Vornado (VNo) up 30.93%,
Boston properties (BXp) up 28.17%, WRIt (WRe) up 17.3%,
Copt (oFC) up 17.30%, and Brandywine (BDN) up 14.06%.
With whispers of higher interest rates come rumors of higher
capitalization rates, and although they may rise slightly, they are
unlikely to climb rapidly. the increasing gap between treasuries
and capitalization rates (especially in the submarkets outside of
downtown Washington) has created enough of a buﬀer zone that
even when interest rates do eventually rise, there will be plenty
of room before capitalization rates feel much pressure.
At the peak of the market in 2006-2007, the spread between
10-year treasuries and capitalization rates here in Washington
DC hovered around 50 basis points; in 2014 that spread
approached 400 basis points. the longer the Fed has held rates
at historic lows, the less connected rates have been to traditional
market forces. once interest rates are allowed to rise again it
will be some time before those connections are reestablished,
and therefore some time as well before capitalization rates feel
any upward pressure from interest rates.
2000-2014 washington, dC Metropolitan Area - transaction Volume/spread between Cap Rate & safe Rate
$4.40
$4.22
$3.75
$6.29
$7.91
$10.36
$8.58
$6.66
$3.44
$1.69
$4.86
$7.43
$5.00
$4.81
$6.54
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
10.00%
$0.00
$2.00
$4.00
SalesVolume($Billions)
RatesofReturn$6.00
$8.00
$10.00
$12.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Sales Volume Avg. Wtd. Cap Rate 10 Year T-Bill
355BPs
Current Spread: 355 Bps
10-Year Average: 290 Bps

Leasing:
the flight to quality and efficiency continued through the end of 2014 throughout the MsA, especially in the District and Northern Virginia.
While absorption was negative across all three of the area jurisdictions (totaling negative 1.6 MM square feet), class B and C product were
hardest hit with negative absorption totaling 2.3 MM square feet. on the other hand, Washington, DC and Northern Virginia both had positive
class A absorption (totaling nearly 1.0 MM square feet).
With government spending remaining constricted and the flight
to efficiency and quality set to continue for at least the next
couple of years, strong positive net absorption and declining
vacancy rates seem to be a reach. this is especially true in
Northern Virginia, where the class B vacancy rate may inch
north of 20%. the tyson’s Corner, I-395 Corridor, and Route
28 south Corridor submarkets experienced the most negative
net absorption in class B (a total of - 1.0 MM square feet). And
although there are murmurs of positive adjustments coming to
the markets (e.g., more tenant activity on the Dulles toll Road,
Deltek’s forecast of more government contractor dollars flowing
into cyber-security and information software programming), the
stagnant situation leaves signs pointing to 2016, rather than
2015, as bringing real changes to the leasing market.
where is the best place to look for investment opportunities ?
For investors looking to take on more risk in order to achieve
higher returns than core product will deliver, investing in B
quality assets may yield the best results. the spreads between
the A rents and the B rents in Washington, DC and Northern
Virginia range between 12% and 20%. (link to Rental Rate charts)
there is currently no over-supply issue in any of the local markets
(link to Development pipeline), and it makes sense that as the
vacancy rates in the Class A / trophy space continue to decline,
there will be upward pressure on rental rates in the Class B space.
the risks here are that the Class B buildings do not afford the
efficiencies found in the newer, Class A product; however, if our
market does indeed begin to generate positive absorption, the
supply / demand law will benefit Class B buildings. location does
matter as assets situated in transit oriented locations are an
excellent insurance polity for these Class B kinds of investments.
(link to Washington, DC submarket leasing Reports)
existing PRoPeRties VACAnCy ACtiVity ABsoRPtion Rents
total Vacancy gross leasing net Absorption weighted Avg.
Class Bldgs. RBA Rate Q4 sF 2014 ytd sF Asking lease Rate
washington, dC
A 329 89,349,089 11.5% 1,199,413 647,720 $55.92
B 455 47,095,256 10.0% 490,957 -1,013,759 $43.66
C 233 7,496,696 4.5% - -35,308 $37.71
All 1,017 143,941,041 10.6% 1,690,370 -401,347 $51.10
northern Virginia
A 530 96,437,341 18.4% 1,434,268 249,501 $34.81
B 970 70,986,523 19.3% 152,319 -494,599 $29.51
C 869 28,607,225 13.2% - -497,636 $25.45
All 2,369 196,031,089 18.0% 1,586,587 -742,734 $31.62
suburban Maryland
A 266 44,100,617 17.4% 113,401 -145,462 $27.64
B 789 40,723,265 17.7% 137,486 -217,734 $23.82
C 308 8,964,485 7.6% - -113,361 $19.42
All 1,363 93,788,367 16.6% 250,887 -476,557 $25.54

colliers washington dc | 2015 Mid-winter | investMent sales rePort
Employment:
While the leasing market has been impacted by the flight to
quality and efficiency, that is really only half of the story. In
addition to placing employees in smaller spaces, companies are
simply using less employees. Office-using employment in the
District (including the federal government) rose gradually from
2004 until about 2008 and then experienced a major surge from
2009 up to 2011, but has been slowly declining since then. The
number of FIRE (financial services, insurance, and real estate)
and legal services jobs in particular (two traditionally major
users of DC office space) have been on the decline (Link to
Employment Chart). With the stagnation of federal spending and
the ongoing mandate from the federal government to consolidate
agencies into smaller spaces, there will be near term challenges
related to filling the large blocks of space vacated by law firms
and government tenants, particularly those b quality assets,
which may be in need of a major repositioning. That said,
Washington, DC is a market in transition, and while there are
near term pains, in the long run this market will be healthy.
Politics:
With the November elections, there has been some speculation
that an alignment of political parties in the Congress might spur
some positive activity in the local real estate markets. however,
our research indicates that political party affiliation and majority
rule in Congress or the White house do not necessarily
determine how the local markets may perform (Link to Political
Control chart). The fact is that our federal government is a great
anchor tenant, but as we are learning, our local economy needs
further diversification beyond the federal presence.
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FOR MORE INFORMATION, CONTACT:
WILLIAM E. KAYE
Executive Vice President | Investment Sales Group
bill.kaye@colliers.com
Office: +1 202 728 3515
Mobile: +1 202 465 1545
OWEN P. CLAYPOOL
Vice President | Investment Sales Group
owen.claypool@colliers.com
Office: +1 202 534 3607
Mobile: +1 202 531 9174
KAThRYN GILbERT
Marketing Specialist | Investment Sales Group
kathryn.gilbert@colliers.com
Office: +1 202 728 3533
Mobile +1 404 867 2610
RObERT hARTLEY
Director of Research | Washington, DC Metro Area
robert.hartley@colliers.com
Office: +1 703 394 4852
Mobile: +1 571 214 6820
ALEx VESPOLI
Research Associate | Investment Sales Group
alex.vespoli@colliers.com
Office: +1 202 534 3000

Colliers DC YE Report 2014 V11

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