naiop mid-year forecast panel

1

NAIOPMID-YEAR

FORECAST PANELJULY 18, 2019

2

PANELISTS

MODERATOR

1

JUNIUS TILLERY

Executive Managing Director

Newmark Knight Frank 1410 Spring Hill Road Suite 600 McLean, VA 22102 [email protected] T 703.918.0238 F 703.883.9036 C 703.593.7677 Years of Experience 30 Years Areas of Specialization

Portfolio Management Defense/Aerospace Industry Expert Northern VA Tenant Representation Lease Negotiations Disposition Services

Professional Background Junius Tillery joined Newmark Knight Frank in 2014 as an executive managing director in the company’s McLean, Virginia, office, where he focuses on representing tenants throughout the Washington metropolitan area. Mr. Tillery has played an integral role in thousands of transactions totaling more than 100 million square feet, with an aggregate value well into the billions of dollars.

A 30-year industry veteran, Mr. Tillery has earned a reputation as a tireless representative of occupiers of space. He has represented local one-off transactions as well as national portfolio accounts in the acquisition and disposition of space. Mr. Tillery helps his clients find creative real estate solutions that contribute to their competitive advantage.

Mr. Tillery has a vast array of tenant advisory experience, having previously worked nine years apiece with the Trammell Crow Company and DTZ, where he acted as lead negotiator on some of the largest transactions in the market and was a perennial top producer at both firms.

Mr. Tillery began his career in 1989 at CB Richard Ellis, formerly Coldwell Banker Commercial, where he gained critical experience in landlord representation and investment sales. Partial List of Lease Transactions: 1850 Towers Crescent Plaza Tysons, VA, MicroStrategy, 213,000 SF

1100 N Glebe Road, Arlington, VA, CACI HQ, 120,000 SF

1300 17th Street N, Arlington, VA Promontory Interfinancial Network, 37,000 SF

4805 Stonecroft Boulevard, Chantilly, VA, TASC, 300,000 SF

2355 Dulles Corner Boulevard, Herndon, VA, NS2 HQ, 52,000 SF

Select Client List Alpine Group MicroStrategy

American Express Nexus Systems

Arlington Asset NS2 SAP

Clifton Larson Allen Promontory Interfinancial Network

CSRA Sapient Corporation

CACI

GDIT

TMA

Tata Communications

Harris Corp Tenable Software

Professional Achievements Service Provider Leadership, CoreNet Global, 2017

Corporate Real Estate Partnership, CoreNet Global, 2016

Brokerage Excellence for Corporate Advisory Services, Trammell Crow

NKF Perennial Top Producer

Education Mr. Tillery graduated with a Bachelor of Arts degree from the University of North Carolina, Chapel Hill.

JIM BOGNETPresident & CEO

Bognet Construction

MICHAEL BURKEVice President of

Real Estate & Development Convene

JUNIUS TILLERYExecutive Managing Director

Newmark Knight Frank

MATT NICHOLSONSenior Director

HFF/JLL

SPENCER STOUFFERExecutive Vice President & Chief Leasing OfficerCarr Properties

PROFESSIONAL PROFILE

www.hfflp.com

Matthew T. Nicholson Senior Director

1775 Pennsylvania Ave, NW 5th Floor Washington, DC 20006 T: (202) 533-2502 C: (410) 353-3041 [email protected] Specialty

▪ Investment Advisory & Equity Placement

▪ Office Properties

Select Clients ▪ AEW Capital Management ▪ Beacon Capital Partners ▪ Blackstone Group ▪ Brandywine Realty Trust ▪ Carr Properties ▪ Goldman Sachs ▪ Hines ▪ Invesco ▪ JP Morgan ▪ MRP Realty ▪ Normandy ▪ PGIM ▪ Rockpoint Group ▪ The Carlyle Group ▪ JBG Smith ▪ TH Real Estate ▪ Tishman Speyer ▪ UBS Realty Advisors ▪ USAA ▪ Washington REIT

Career Summary

Mr. Nicholson is a Senior Director in the Washington, DC office of HFF and a member of its Office Investment Advisory Team. He joined the firm in 2007 and has more than 12 years of commercial real estate experience. Mr. Nicholson specializes in the sale, finance and recapitalization of office properties in the DC metro and Mid-Atlantic region and has executed more than $11 billion in investment activity throughout his career.

Representative Assignments PROPERTY LOCATION TYPE VALUE

1800 M Street Washington, DC Investment Advisory $435,500,000 Washington Harbour (2018) Washington, DC Investment Advisory $415,000,000 PNC Place Washington, DC Investment Advisory $392,000,000 Washington Harbour (2013) Washington, DC Investment Advisory $373,000,000 9911 Belward Campus Drive Rockville, MD Investment Advisory $322,500,000 7373 Wisconsin Avenue Bethesda, MD Equity Placement $300,000,000 1200 Nineteenth Street Washington, DC Investment Advisory $296,000,000 800 K & 801 Eye Streets Washington, DC Investment Advisory $275,000,000 Columbia Center (2015) Washington, DC Investment Advisory $258,000,000 Washington Harbour (2010) Washington, DC Investment Advisory $244,500,000 700 6th Street Washington, DC Investment Advisory $205,250,000 1350 Eye Street, NW Washington, DC Investment Advisory $200,000,000 1101 K Street, NW Washington, DC Investment Advisory $199,000,000 Potomac Center South (2011) Washington, DC Investment Advisory $199,000,000 2000 L Street Washington, DC Investment Advisory $192,000,000 NRC Headquarters North Bethesda, MD Investment Advisory $192,000,000 The Executive Building Washington, DC Investment Advisory $181,200,000 2550 M Street, NW (2018) Washington, DC Investment Advisory $167,000,000 1333 H Street (2015) Washington, DC Investment Advisory $162,500,000 425 I Street, NW Washington DC Investment Advisory $157,000,000 2550 M Street, NW (2014) Washington, DC Investment Advisory $156,000,000 Potomac Center North (2009) Washington, DC Investment Advisory $153,650,000 3 Bethesda Metro Center (2011) Bethesda, MD Investment Advisory $150,100,000 U.S. Mint Headquarters (2012) Washington, DC Investment Advisory $147,500,000 MeadWestvaco Headquarters Richmond, VA Investment Advisory $143,600,000

Professional Affiliations/Accreditations ▪ Steers Center for Global Real Estate at Georgetown University, Board Member ▪ DC Real Estate Group, Board Member ▪ Urban Land Institute (ULI)

Professional Designations

▪ Licensed Real Estate Salesperson – DC, MD & VA Education

▪ MBA, Georgetown University ▪ BA, Dartmouth College

James R. Bognet President & Chief Executive Officer, Bognet Construction President, JB Properties & Bognet Capital Partners

Jim founded Bognet Construction Associates in March 1998 and has grown the firm into a general contracting powerhouse in the Washington metropolitan region. With annual revenues of $158M, Bognet is ranked as the 7th Largest Interior Construction firm by the Washington Business Journal. The firm specializes in large commercial tenant interior and building repositioning projects up to 300,000 SF, and features a portfolio that spans some of Washington D.C.’s most visible organizations across every industry sector. As CEO, his responsibilities encompass the full breadth of the firm’s external and internal strategic planning and operations. In addition to Bognet Construction, Jim founded JB Properties and Bognet Capital Partners to manage a growing commercial real estate development portfolio. JB Properties and Bognet Capital Funds actively acquire, manage and re-develop commercial properties in the Washington metropolitan region.

Jim has been in the construction industry since childhood where he learned all aspects of construction from the field to the office while working in his family’s plumbing and general contracting business in Hazleton, Pennsylvania. He expanded his experience in the Washington region working for various firms in construction and development.

Jim has served on the Board of Directors for the Jubilee Housing Support Alliance, Ronald McDonald House Charities and as a member of the 2030 Group. He is currently a member of the National Association of Industrial and Office Properties Northern Virginia (NAIOP VA) and the Greater Washington Board of Trade.

Jim earned his Bachelor of Science degree in Mechanical Engineering at the Pennsylvania State University. He resides in Vienna, VA with his wife Jennifer and his children Rocco and Gianna.

3

CARR PROPERTIESSNAPSHOT

4

CARR PROPERTIESCOMPANY SNAPSHOT

• 17 operating properties• 4.0 million square feet• 95% leased• Four development projects • 82% Midatlantic/18% Boston

5

NOVA OFFICEMARKET DISCUSSION

6Source: BLS

-52

-9

36 3826

46

6474

94

118

41

9

55

7064

52

2413

-51

11

4337

2616

55 5950

36

21

-70

-50

-30

-10

10

30

50

70

90

110

130

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

YTD

Thou

sand

s

DC Metro Annualized Job Growth Historical Average: 38,000 Jobs

-4,450

-3,330

-1,650

-220

880

8,360

12,540

12,560

-10,000 0 10,000 20,000

Retail (288k)

Financial (156k)

Information (75k)

Federal Government (370k)

Manufacturing & Construction(210k)

Education & Healthcare (431k)

Leisure & Hospitality (321k)

Professional & Business Services(742k)

# of Jobs

Job Growth by Sector (YOY)

Historical Net New Nonfarm Jobs and Industry Breakout

DC METRO JOB GROWTH

354,000 Jobs Created

7

Office Leasing Fundamentals

Q2 2019YTD Deliveries: 450k SF YTD Net Absorption: 591k SFVacancy: 20.3%

4%

6%

8%

10%

12%

14%

16%

18%

20%

22%

24%

-3

-2

-1

0

1

2

3

4

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Vaca

ncy

Rat

e

Squa

re F

eet (

Milli

ons)

New Deliveries Net Absorption Average Deliveries: 1.5 msfAverage Absorption 175k SF Vacancy Rate Average Vacancy: 17%

* Source: Cushman & Wakefield

NORTHERNVIRGINIA

8

11

24 Months AgoRate $42.00 Vacancy 14.2%

TodayRate $45.00 FSVacancy 1.8%

Greensboro Station

*Buildings less than .25mi from metro and recently renovated

Takeaways

Metro located buildings gaining the most leasing activity

Vacancy tied to Metro focused buildings on “The Hill” is approx. 6.0%

Buildings not on Metro are being forced to reestablish themselves

New Development has been successful, and has created an opportunity for thenext generation of trophy quality product

24 Months AgoRate $35.00 - $36.00Vacancy 13.4%


Eastboro

24 Months AgoRate $32.00 - $34.00 Vacancy 18%

June 2018 (Purchase Date)Rate $35.00 - $36.00Vacancy 15.7%

TodayRate $40.00 - $43.00 Vacancy 9.5%

Greensboro Park8280 Greensboro Drive

24 Months AgoRate $36.00 - $37.00Vacancy 30.1%


Asking Rate Analysis – Market is TighteningASKING RATE ANALYSISMARKET IS TIGHTENING

9

NOVA DEMAND

HEAD WINDS• Efficiency • Government not growing• Flight to quality impact on commodity

TAIL WINDS• Amazon• Best region within the DMV• Silver line – phase 2

10

COWORKINGDISCUSSION

11Cushman & Wakefield | JP Morgan

Total and as a Percent of Inventory by Market

2.4

1.3

0.2

3.9

2.1%

1.0%

0.4%

1.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

DC NoVA SMD TotalMetro

% o

f Tot

al In

vent

ory

Squa

re F

eet

Mill

ions

Total CoWorking SF % of Inventory

2,378,350 61.4%

1,270,774 32.8%

221,950 5.7%

DC NoVA SMD

3.9 MSF Total1.3% of Inventory


COWORKINGFOOTPRINT


• Vs. Market

2,110,681

992,784

1,481,771 1,482,504

741,374

208,704

604,230

393,126

957,267

747,714

2,319,385

1,597,014

1,874,897

2,439,771

1,489,088

9.0%

37.8%

21.0%

39.2%

50.2%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

2015 2016 2017 2018 YTD 2019

CoW

orki

ng%

of T

otal

Lea

sing

Rest of Market Absorption Coworking Total Absorption Total Absorption % Coworking

DC METRO COWORKING ABSORPTION


• By CoWorking SF

954,108762,704

349,304320,005

259,349229,645

181,311166,321

108,29897,44093,412

86,61983,586

46,05643,88037,726

East EndCBD

RB CorridorTysons

Uptown DCReston/Herndon

Capitol Hill/NoMAOld Town

Bethesda/CCGreater MoCo

RiverfrontI-395/Springfield

West End/GeorgetownCrystal

SouthwestFairfax/Merrifield

0 200,000 400,000 600,000 800,000 1,000,000 1,200,000


TOPSUBMARKETS

14

COWORKING

HEAD WINDS• Stats related to shorter term leases• Capital markets issues re financing or sale• What happens in a downturn

TAIL WINDS• All the net positive absorption• Can help land bigger tenants• Less spec suites for landlords

15

CONSTRUCTIONPRICING

16

BASE

11

2016 PROJECT COSTSProject Uses Per RSF % of Total

Land Cost $ 81 14.5%

Government 18 3.3%

Hard Constructions Costs 295 52.5%

Soft Construction Costs 30 5.3%

Tenant Improvements 75 13.4%

Leasing Commissions 32 5.7%

Recordation Tax/Loan Fees 4 0.8%

Interest Expense 20 3.6%

Lease-Up NOI 5 0.9%

Net Project Costs $ 561 100.00%

2019 PROJECT COSTSProject Uses Per RSF % of Total

Land Cost $ 81 12.6%

Government 22 3.3%

Hard Constructions Costs 341 52.9%

Soft Construction Costs 31 4.7%

Tenant Improvements 103 15.9%

Leasing Commissions 34 5.3%

Recordation Tax/Loan Fees 3 0.5%

Interest Expense 15 2.3%

Lease-Up NOI 15 2.4%

Net Project Costs $ 645 100.00%

$14.9%3 YEAR INCREASE

$84 SF

17

CONSTRUCTION PRICING

HEAD WINDS• Net effective rent compression• Cost to build out

TAIL WINDS• Govern new development• High replacement cost - compared to existing• Current build out has value

18

CAPITALMARKETS

19

$1.49

$1.76

$0.15

$1.08

$0.93

$0.47

$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

$1.4

$1.6

$1.8

$2.0

DC NOVA SMD

Billi

ons

Q1-Q2 2018 Q1-Q2 2019

CAPITAL MARKETSOFFICE VOLUME

20

URBAN VS. SUBURBAN CAP RATE SPREADS INCREASE 26 BPS YOY, HIGHEST JUMP SINCE 2010

| 8Real Capital Analytics, Q1 2019

0

50

100

150

200

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Urban v. Suburban Cap Rates & Spread Spread Urban Suburban

0

50

100

150

200

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Primary v. Secondary Cap Rates & Spread Spread Primary Secondary

-16 -81 102 12 14 0 11 -29 16 -15 26 -7 -84 97 -14 31 9 -25 0 0 -6 6

0

50

100

150

200

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

Q2 '18 Q3 '18 Q4 '18 Q1 '19

Trailing 4Q Urban v. Suburban Cap Rates & Spreads

0

50

100

150

200

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

Q2 '18 Q3 '18 Q4 '18 Q1 '19

Trailing 4Q Primary v. Secondary Cap Rates & Spreads

26 -29 -4 27 0 -12 42 -70

21

SINCE 2015, ANNUAL SUBURBAN VOLUME AVERAGED $25B MORE THAN URBAN VOLUME

HFF Research, Real Capital Analytics, Q1 2019

YoY Transaction Volume Change2010 2011 2012 2013 2014 2015 2016 2017 2018 Q1 2018 Q1 2019

Urban 280% 57% 12% 27% 23% 10% -8% -23% 8% -10% -20%Suburban 96% 25% 33% 31% 17% 27% -1% 3% -1% -3% -12%

| 6

$28$6

$23$36 $40 $51

$62 $69 $63$49 $52

$12 $10

$35

$13

$26

$32$42

$56

$65

$82$81

$84 $83

$18 $16

$63

$19

$48

$68

$82

$106

$127

$151$144

$132 $135

$30 $25

$0

$20

$40

$60

$80

$100

$120

$140

$160

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD1Q18

YTD1Q19

Billio

ns

Annual Transaction Volumes Urban Suburban

$9

$3 $1

$7

$23

$16

$7 $7 $7

$3

-$4

$3$5

$3

$14

$18

$35

$31

$5 $6

-5

0

5

10

15

20

25

30

35

40

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Q1'18

Q1'19

Billio

ns

Suburban / Urban Volume Spread Average 2015-2018

22

PANEL Q4. CAPITAL MARKETS

HEAD WINDS• Late cycle • Limited capital for core plus• Resi and industrial are favored

TAIL WINDS• Yield • Asset Allocation • Low interest rates

23

BIG BLOCK VACANCY

24

6248

37 36

52

29

68 74

48

-55

15253545556575

Reston/H

erndon 2013

Reston/H

erndon 2015

Reston/H

erndon 2018

Tysons 2

013

Tysons 2

015

Tysons 2

018

Arlington 2013

Arlington 2015

Arlington 2018

25 - 50k SF 50 - 100k SF 100 - 200k SF 200k SF+

Source: BLS

TYSONS, TOLL ROAD AND ARLINGTON LARGE BLOCKS

25

PANEL Q5. BIG BLOCK VACANCY

HEAD WINDS• Number of blocks across all of NOVA

TAIL WINDS• Number of blocks today vs 2017• Metro based blocks vs 2017• Tysons + Toll Road

26

Q&A

27

LIGHTNINGROUND

28

BIGGEST CHALLENGE FOR COMMERCIAL REAL ESTATE

• Coworking?• AI or automation? • Continued development leading to

oversupply?• Efficiency and work from home?

29

BIGGEST UPSIDE FOR INVESTORS IN COMMERCIAL REAL ESTATE

• If you amenitize it they will come• Development• Yield

www.carrprop.com

naiop mid-year forecast panel

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