2016 Trends in Washington Commercial Real Estate A Region in Transition S1 S2 S3 S4 S5 S6 S7 S8 S9 S10 A Region in Transition A Collaborative Publication of Delta Associates and Transwestern. © 2016. All Rights Reserved. You may neither copy nor disseminate this report. If quoted, proper attribution is required. To order your copy of TrendLines, contact the Publications Administrator at 202.778.3100. 2 Foreword To our friends, clients and colleagues: We are pleased to share this 19th annual edition of major efforts emerged in 2015 that will help guide the TrendLines: Trends in Washington Commercial Real conversation about how the region will grow and prosper Estate, a collaborative effort of Delta Associates and in the future: the Roadmap for the Washington Region’s Transwestern’s research group. In this report, we review Economic Future led by George Mason University and the results of 2015 and shed light on the forces and issues the 2030 Group; and the Global Cities Initiative by the that we anticipate will shape the region’s economy and Metropolitan Washington Council of Governments, the S1 commercial real estate markets in 2016 and beyond. Greater Washington Board of Trade, and the Consortium PHILLIP M. MCCARTHY of Universities of the Washington Metropolitan Area. As expected, 2015 was a year of economic expansion Executive Managing S2 These initiatives, if widely embraced by local jurisdictions in the Washington area, due in no small part to the Director - Market Leader and the private sector, can change the approach to S3 stabilization of federal government employment and Mid-Atlantic Region economic development and improve the region’s procurement after several years of cutbacks. The S4 chances of fostering sustainable economic growth private side of the regional economy — particularly the and a flourishing real estate market. S5 professional and business services sector — picked up the slack and the region recorded the most significant Overall, we expect 2016 to be a year of continued S6 job growth in a decade. In response to a growing growth, but also a year of rapid change. To succeed in S7 economy, market conditions improved for all major the marketplace, real estate developers, owners, and property types during 2015 — trends that are poised investors must understand how these changes will KEITH A. FOERY S8 to continue during 2016. influence investment and development opportunities. This report highlights major changes afoot not just in the Executive Managing S9 Though market fundamentals in the Washington area are Washington region, but nationally and globally as well. Director - Market Leader strengthening, we detect a transition in forces that will S10 With this in mind, we have subtitled this report A Region Mid-Atlantic Region power economic and real estate market growth in the in Transition. future. Historically, the federal government drove growth in the Washington area, through its employment, leasing, Over the years, we have been fortunate to work with the and contracting activity. But the federal presence in the individuals and organizations contributing the success region, although stabilized, is unlikely to grow significantly of the Washington area’s economy and its real estate in the foreseeable future as a share of the overall markets. Thank you for your business. We appreciate your economy. As a result, the private sector will lead the interest in our consulting and other services — including current expansion cycle, relying more than ever before on brokerage, property management, investment sales, and innovation, international trade, and regional cooperation. development — and we look forward to being your real estate service partner in the period ahead. Best wishes The region’s public and private sector leaders have for a successful 2016. already identified the need to change the way that business is done in the Washington metro area. Two DAVID WEISEL, CRE Chief Executive Officer 3 To our valued clients, colleagues, and business associates: Dear TrendLines® Recipient, Baker Tilly is proud to continue our partnership and support of TrendLines® as In today’s rapidly evolving real estate environment, access to timely and accurate market Washington, DC’s leading real estate accounting and advisory firm. information is vital to running your business successfully. The TrendLines® Report has delivered a valuable overview of the Washington, D.C., real estate market for many years. This year marks the nineteenth annual TrendLines® conference, and with it, a longstanding tradition of informative and forward-thinking conversations among PNC Real Estate is happy to continue sponsoring this premier resource for our region’s the Washington, DC real estate community. Companies and institutions investing commercial real estate professionals. The Real Estate Banking segment of PNC Real in the region’s real estate rely on TrendLines® as the premier resource for Estate has been a major participant in the Washington, D.C., marketplace since 1987. development and investment opportunities. Just in the last three years, our D.C. office has provided more than $3.0 billion in new capital, including construction loans, bridge loans, lines of credit and permanent loans. During the past year, innovative steps have been taken to boost the area’s S1 economic growth with collaborative efforts throughout the DC metropolitan region. PNC Real Estate as a whole delivers one of the broadest platforms of products and S2 Our nation’s capital continues its gentrification with exciting new projects located services in the industry. Our capabilities include acquisition, construction and permanent in the SE and SW waterfront, as well as the expansion of the U Street, Shaw, and financing for public and private developers and investors; agency financing for S3 14th Street neighborhoods. Virginia has immensely benefitted from Metro’s Silver multifamily and seniors housing properties; debt and equity capital for the affordable S4 Line expansion and Maryland will open another casino this year at National Harbor. housing industry; and access to the capital markets and treasury management services. Accompanying these developments, the recovering economy will complement In addition, through Midland Loan Services, we provide third-party loan servicing, asset S5 our growth as a region and as such, major corporations are choosing our region management and technology solutions. for their headquarters. Together, these factors contribute to greater employment S6 PNC is one of the nation’s top banks by deposits, with $362 billion in assets and 2,600 opportunities, which increase our tax base for education and infrastructure. branches in 19 states and the District of Columbia as of September 30, 2015. Our S7 Baker Tilly is dedicated to the real estate community and is recognized for strength lies not only in our size, but in the innovative ways in which we deliver products S8 exceptional delivery of tax, assurance, and consulting services. Our professionals and solutions to help you achieve your business goals. look forward to continuing to advise the businesses and entrepreneurs who shape To learn how we can bring ideas, insight and solutions to you, call us or visit pnc.com/ S9 DC’s real estate industry. Our breadth and depth of resources focused on the real realestate. S10 estate industry help our clients maximize opportunities, implement actionable ideas, and minimize risk in an ever-changing landscape. Sincerely, Sincerely, BAKER TILLY VIRCHOW KRAUSE, LLP MICHAEL N. HARRELd WILLIAM R. LYNCH III President Senior Vice President PNC Bank – Greater Washington Area PNC Real Estate TODD STOKES, MANAGING PARtner – DC METRO AREA 202.835.5513 202.835.4513 Baker Tilly Virchow Krause, LLP [email protected] [email protected] 703.923.8236 [email protected] PNC is a registered mark of The PNC Financial Services Group, Inc. (“PNC”). © 2016 The PNC Financial Services Group, Inc. All rights reserved. Connect with us: bakertilly.com 4 Table of Contents Navigation Panel Section 1 A Region in Transition 7 Table of Contents Section 2 The National Economy 18 Previous Page Section 3 The Washington Area Economy 28 S1 S2 Section 4 The Washington Area Office Market 35 S3 S4 Section 5 The Washington/Baltimore Regional Flex/Industrial Market 44 S5 Sections Section 6 The Washington Area Apartment Market 50 S6 S7 Section 7 The Washington Area Condominium Market 60 S8 S9 Section 8 The Washington Area Retail Market 70 S10 Next Page Section 9 Capital Markets and Investment Trends 78 Section 10 2016 TrendSetter Award Recipients 87 5 A Region in Transition S1 S2 S3 Acknowledgments: The editor, David Weisel, CRE, wishes to acknowledge and thank the TrendLines team at Delta Associates: S4 David E. Versel, AICP, Senior Vice President; David Parham, Senior S5 Vice President; William Rich, Senior Vice President; Jonathan Chambers, Associate; and Dylan Jones, Associate. Special thanks S6 are due to Elizabeth Norton, Transwestern’s Managing Research S7 Director—Mid-Atlantic Region, who authored and reviewed sections of the report. The entire Delta Associates team made valuable S8 contributions in various ways. Ji Chang and his creative design team S9 at Transwestern who made the report visually attractive have our S10 gratitude. Finally, we greatly appreciate the dozens of industry leaders who contributed their insights about the future of the commercial real estate industry in the Washington area. Representations: Although the information contained herein is based on sources that Delta Associates (DA) and Transwestern (TW) believe to be reliable, DA and TW make no representation or warranty that such information is accurate or complete. All prices, yields, analyses, computations, and opinions expressed are subject to change without notice. Under no circumstances should any such information be considered representations or warranties of DA or TW of any kind. Any such information may be based on assumptions that may or may not be accurate, and any such assumption may differ from actual results. This report should not be considered investment advice.