RENTAL RATES
As of 3rd quarter 2007, the average direct asking rent in Washington, DC was $54.15 psf on a full service basis, up from $52.64 in the 2nd quarter and $48.67 one year ago. Rents have increased dramatically in the Class A sector due to tightening vacancy and an appreciation in the level of investment sales. Trophy buildings are commanding rents between $65 and $75 psf. Overall asking rates are highest in the East End where office space averages $57.56 psf; however, Class A rates are the highest in the Central Business District (CBD), averaging $62.22 psf. The biggest rent spike during the 3rd quarter occurred in the Capitol Hill submarket. Asking rates average $53.48 psf, a 9.4% increase since the 2nd quarter.

CONSTRUCTION ACTIVITY
There are 20 buildings totaling 5.7 million sf under construction, and another 2.2 million sf in five buildings under renovation as of 3rd quarter 2007 with a pre-lease rate of 16%, including 1.7 million sf underway in both NoMa and the Ballpark District. Three buildings totaling approximately 1.1 million sf broke ground during the quarter; all three are speculative construction projects. Washington, DC's inventory increased by approximately 623,000 sf during the 3rd quarter due to the delivery of 1152 15th Street NW, a 390,000 sf Class A office building which delivered 56% pre-leased to law firm Orrick LLP and financial services firm Merrill Lynch. Three buildings totaling 892,542 sf are scheduled to deliver during the 4th quarter.

NET ABSORPTION
Total net absorption for the quarter was 404,112 sf, down from 991,996 sf in the last period. This downward trend can mainly be attributed to tenants vacating large blocks of space in the West End and Uptown submarkets. Despite the decrease in overall net absorption, the CBD and East End submarkets continued to post healthy levels of net absorption, ending the 3rd quarter at 224,565 sf and 434,144 sf, respectively.

VACANCY RATE
As of 3rd quarter 2007 the overall vacancy rate in Washington, DC was 5.7%, down 20 basis points since the 2nd quarter. Vacancy rates dropped across the board in every submarket except for the West End and Southwest. The West End's vacancy rate increased almost five percentage points to 10.9% due to the Bureau of National Affairs' departure to Crystal City, and Southwest's vacancy rate increased 100 basis points to 10.3% due to the delivery of Clark Enterprises' 425 3rd Street SW, which added an additional 232,000 sf of vacant space to the market. The CBD had the lowest vacancy rate, dropping 60 basis points to 3.3%. The Class A vacancy rate climbed 20 basis points to end the quarter at 6.7%, while the Class B vacancy rate continued to decrease, dropping from 5.2% to 4.5% during the 3rd quarter as tenants priced out of premium space sought lower cost alternatives.

MARKET OUTLOOK
Washington, DC's vacancy rate could increase one to two percentage points throughout 2007 and the first half of 2008 due to the 2.02 million sf of space scheduled to deliver over the next six months, only 27% of which is currently pre-leased. Regardless of a slight bump in vacancy, a higher level of institutional ownership in Washington, DC relative to the past could mean a resistance to rent pricing corrections. This, paired with consistent demand and competition for space in the Class A and B markets, will continue to bolster rents. The Class B market will remain competitive and in demand, and, as a result landlords will continue to raise rents.

RENTAL RATES
Average asking rates for direct office space across Northern Virginia increased slightly during the quarter to $31.20 psf, at a 7% annualized rate of growth. Class A direct asking rents averaged $33.30 psf, up from $31.45 one year ago. Class A direct rents were highest in the Rosslyn/Ballston Corridor at $37.29 psf, followed closely by Tysons Corner which averaged $36.27 psf. These numbers help illustrate the continuing trend that these submarkets command the highest rents due to location, employee and amenity bases, a relative lack of vacant inventory and strong tenant demand. Conversely, the Dulles Corridor, averaged $31.77 psf for Class A space. Rents in this sector have plateaued due in part to a build-up of new space over the last 18 months and heavy construction through year-end 2008.

CONSTRUCTION ACTIVITY
Construction starts continued to slow down in the 3rd quarter, with a total of 51 projects representing 6.2 million sf under construction in the Northern Virginia market, 72% of which is currently vacant. In addition, seven buildings totaling 0.9 million sf are under renovation. There were 11 deliveries in the 3rd quarter representing 1.02 million sf, only 17% of which was pre-leased at time of delivery. Similarly, during the 4th quarter, 1.0 million sf is expected to deliver, and at current pre-lease rates, will add 782,000 sf of vacant space. More importantly, two-thirds of this space is located in the Dulles Corridor, contributing to a rise in vacancy and keeping downward pressure on rents.

NET ABSORPTION
Net absorption in the Northern Virginia region remained below historical averages in the 3rd quarter as the market absorbed 333,143 sf. Several large lease signings included Volkswagen of America, who will be relocating its North American headquarters to Herndon next year, and SRA International's lease renewal in Fairfax.

VACANCY RATE
As of 3rd quarter 2007, the overall vacancy rate in Northern Virginia was 9.9% (8.8% direct and 1.1% sublet) up one full percentage point from one year ago. The overall Class A vacancy rate was 10% (8.6% direct and 1.4% sublet) up from 9.2% last quarter, forced up as new, un-leased product came online. The delivery of large blocks of vacant space in the Dulles Corridor, which delivered 667,617 vacant square feet in the 3rd quarter, has contributed to a rise in vacancy of 180 basis points over the last year to 12.4% now. The Alexandria/Eisenhower Avenue submarket is the tightest in Northern Virginia with 5.4% vacancy, followed by the Rosslyn/Ballston Corridor with 7% vacancy and Tysons Corner at 9.2%.

MARKET OUTLOOK
The future of the market will be shaped by a variety of factors, including federal procurement spending, Base Realignment and Closure, the Metrorail expansion project, tenant spillover from new, vacant space to the west of the Beltway. Submarkets inside the Beltway with a strong historical commercial core, mainly the Rosslyn/Ballston Corridor, Old Town Alexandria and Tysons Corner, continue to experience low vacancy and increasing rental rates. With job creation leveling and vacancy creeping upward, the overall Northern Virginia market could be poised for moderate rental rate increases of 3-5% annually and a more conservative approach to future development.

RENTAL RATES
Despite an overall deterioration in leasing velocity, demand in the close-in core submarkets prevented a general dampening of average rental rates throughout the region. As of 3rd quarter 2007, the average direct office rental rate for Suburban Maryland was $26.40 psf, up from $25.94 last quarter and $25.40 one year ago. On a county basis, rates in Prince George's County continue to remain flat at $23.08, relatively unchanged over the last three quarters. Frederick experienced a marginal slide in average rents, ending the period at $23.24, down $0.36 over last quarter. Meanwhile, rents in Montgomery County increased more than 2% within the quarter, averaging $28.69 across all asset classes.

CONSTRUCTION ACTIVITY
There were three significant speculative deliveries in the 3rd quarter with an aggregate size of 527,000 sf, none of which has yet been leased. The 220,000 sf Irvington Four at King Farm was completed in North Rockville; the first phase of Opus Center at Rock Spring Park in North Bethesda delivered totaling 187,000 sf; and 5825 University Research Court, a 120,000 sf building in the M Square University of Maryland Research Park, all came online. There remains 2.1 million sf under construction, 13% of which is in Frederick, 59% in Montgomery and 28% in Prince George's. Of the total underway, over 800,000 sf or 40% is set to deliver by year's end.

NET ABSORPTION
Suburban Maryland net absorption totals reversed in 3rd quarter 2007, posting -277,952 sf and cancelling much of the gains realized in the 2nd quarter, as demand in northern Montgomery and Prince George's County continues to be relatively anemic. Demand was strongest along the I-270 Corridor, where the Class A and B market sectors absorbed 184,122 sf from North Bethesda to North Rockville. Year-to-date, overall net absorption for the region has been mostly flat, totaling 165,543 sf.

VACANCY RATE The delivery of more than a half million square feet of speculative development, all of it un-leased, forced direct vacancy higher in the 3rd quarter. The overall office vacancy rate for Suburban Maryland ended the period at 10.0% (8.7% direct, up 60 basis points, and 1.3% sublet). This new inventory had a dramatic effect on the Class A sector, pushing overall vacancy up from 9.4% last quarter to 10.8% now. Likewise, vacancy was up on a county level, as Prince George's led the region with a vacancy rate of 14.0%, up 110 basis points as demand slackened, and followed by marginal increases in Montgomery (8.8%) and Frederick (7.6%). Key close-in submarkets remain tight, as overall vacancy in Silver Spring maintained a 4.6% rate and competition for large premium blocks, as well as tenant movement in Bethesda/Chevy Chase, kept vacancy at 4.3%.

MARKET OUTLOOK
Given the substantial volume of speculative rentable area under construction in the Suburban Maryland market, and with leasing activity levels beneath the highs of the past several years, the region in aggregate will encounter increasing vacancy and stagnant rental rate growth over the near term of 12-24 months. Job growth will dampen some of the market's volatility, however, helping to suspend losses in leasing activity, especially in Montgomery County. Construction is slowing as well, as only a couple of new significant speculative projects broke ground in the 3rd quarter, both in tight submarkets.