Manulife US REIT - Annual Report 2021

MANULIFE US REIT 58 • Northern Virginia continues to drive office market activity throughout the Metro D.C. region, providing a competitive advantage for local owners. • Zeta Associates’ 210,190-square-foot renewal provided an injection of confidence into Fairfax, which has struggled with tenant attraction and retention due to its ageing inventory and lower levels of connectivity. • Affordability and proximity to skilled workers remain selling points for Fairfax Center and Fairfax City, although tenants will have to navigate a market with no new supply that meets newer preferences. • With no construction underway, vacancy is unlikely to rise much further in the absence of a significant move- out, while rents will stay firm. Office Market Trends Fairfax Center and Fairfax City saw a significant burst in tenant and investment activity in the second half of the year after numerous quarters of minimal movement. Zeta Associates, a subsidiary of Lockheed Martin, renewed its 210,190-square-foot lease at WillowWood III and IV, the largest single deal seen in the submarkets in years and underscoring its appeal to the aerospace, defense and contracting tenants who drive demand throughout Northern Virginia. In addition to Zeta Associates’ signing, numerous county government transactions took place. The Fairfax County Board of Supervisors and Economic Development Agency renewed (the former through a blend-and-extend deal) a combined 83,626 sq ft at 10777 Main Street and WillowWood Plaza, respectively, with the county renewing a further 17,075 sq ft at 12015 Lee Highway for ancillary functions. Overall market statistics Forecast YTD net absorption (s.f.) -3,725,576 Under construction (s.f.) 1,639,033 Total vacancy (%) 22.9% Sublease vacancy (s.f.) 2,350,174 Asking rent ($ p.s.f.) US$35.85 Concessions Stable Occupancy losses slowed sharply in 2021 0.2 35% 20% 10% 0% 0.0 -0.2 -0.4 -1.6 2008 2009 2012 2013 2016 2017 2010 2011 2014 2015 2018 2019 2020 2021 Net absorption (m.s.f.) Total vacancy (%) There is limited new construction in Fairfax 2008 2009 2012 2013 2016 2017 2010 2011 2014 2015 2018 2019 2020 2021 Class A cap rates have had little movement this cycle 9% 8% 7% 6% CBD Class A cap rate (%) 2022 2024 2023 2025 Fairfax Rest of Northern Virginia 1,639,033 Northern Virginia (Fairfax Center And Fairfax City) Table refers to overall market, while charts refer to Manulife submarkets Independent Market Report By JLL as at 31 December 2021