Manulife US REIT - Annual Report 2021

MANULIFE US REIT 68 Washington D.C. (CBD) • Regional employment is only 1.5% below the peak seen in February 2020, while unemployment has fallen to 3.6%. This is among the strongest labor markets of any primary city. • Traditionally counter-cyclical due to the presence of the federal government, D.C. is struggling to absorb a significant amount of new supply as federal tenants shift more aggressively to remote work. • Although it will be largely delivered by the end of 2022, a wave of new construction in recent years has yet to be absorbed and will keep conditions soft in the absence of high-growth and expanding tenants. Office Market Trends Washington, D.C. and in particular the CBD submarket continued to experience softening conditions on the back of a combination of the COVID-19 pandemic, ample new supply and a lack of high-growth tenant industries to absorb space being delivered and given back from relocating users. Vacancy rose to 21.5% in the CBD, above the district-wide average of 18.5%, while net absorption totalled nearly -1.1 million sq ft. The CBD is particularly prone to flight to quality, albeit at a slower pace than peer gateways given the trends toward consolidation from key occupiers. Net absorption in buildings delivered since 2015 has been positive at 173,582 sq ft, equating to a rate of roughly 13.2% of inventory. This is somewhat less divergent than D.C. as a whole, however, which saw absorption of 1.9 million sq ft in 2015-present vintage, aided by expansion in new developments at theWharf, UnionMarket and the Ballpark on the urban fringe. Net absorption negative for the fifth year in a row 1.0 25% 20% 5% 15% 10% 0% 0.0 0.5 -0.5 -1.0 -1.5 2008 2009 2012 2013 2016 2017 2010 2011 2014 2015 2018 2019 2020 2021 Net absorption (m.s.f.) Total vacancy (%) Overall market statistics Forecast YTD net absorption (s.f.) -2,056,454 Under construction (s.f.) 1,703,154 Total vacancy (%) 18.5% Sublease vacancy (s.f.) 3,396,577 Asking rent ($ p.s.f.) US$59.82 Concessions Rising Table refers to overall market, while charts refer to Manulife submarkets The pipeline is thinning; to be delivered by 2024 2022 2024 2023 2025 CBD Rest of market (D.C. only) 611,562 197,324 334,000 560,268 2008 2009 2012 2013 2016 2017 2010 2011 2014 2015 2018 2019 2020 2021 Class A cap rates see little movement without large deals 8% 7% 6% 5% 4% 3% CBD Class A cap rate (%) Independent Market Report By JLL as at 31 December 2021