Houston Office Market

Houston Office Market

1Q 2016Market Report

2

Information contained herein is provided, in part, from third party sources including: CoStar Group, Greater Houston Partnership, Bureau of Economic Analysis, Bauer College of Business, University of Houston - Institute for Regional Forecasting, U.S. Census Bureau, Perryman Group, Institute for Supply Management – Houston, Houston Association of Realtors, National Association of Realtors, C2ER Cost of Living Index 3Q’2015, Baker Hughes U.S. Rig Count Reports.

Even though obtained from sources deemed reliable, no warranty or representation, expressed or implied, is made as to the accuracy of the information herein.

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Section 1

Houston Market At-A-Glance

Section 2

Rental Rates

Section 3

Vacancy Rates

Section 4

Sublease Space

Section 5

Leasing Activity

Section 6

New Deliveries

Section 7

New Construction

Section 8

Net Absorption

Section 9

Submarket Updates

Section 10

Houston Economic Overview

Table of Contents

4

01

Houston: we still have a problem. After optimism earlier in the year due to a small surge in the price of oil, expectations for a recovery in the near future have dwindled as OPEC has reported that output continues to increase, yet no decision to curb production has come to fruition.

As sublease space and vacancies continue to rise, rental rates and absorption continue to fall. Merger and

acquisition activity and job cuts are still rampant in the energy sector and are expected to continue to add to the problem of excess space in the foreseeable future, as will the building completions that are adding vacant space to the market.

Fortunately, we are in a tenant’s market, which bodes well for increased tenant concessions such as free rent, parking, and favorable improvement allowances.

Houston Market At-A-Glance

5

$35.25 Houston: A 11.7%

$21.67 Houston: B 12.6%

$29.05 Houston: A+B 12.2%

0.2%

0.1%

0.1%

0.1%

0.2%

0.0%

$32.71 Suburban: A 12.5%

$21.10 Suburban: B 12.1%

$26.97 Suburban: A+B 12.3%

0.8%

0.4%

0.6%

$45.38 CBD: A 9.3%

$29.46 CBD: B 16.2%

$41.87 CBD: A+B 11.6%

01HOUSTON MARKET AT-A-GLANCE

Tenants can benefit from increased concessions (free rent, parking, etc.), particularly in the suburban submarkets to the west.

Leasing velocity remains low following a substantial drop in activity in ‘15. Activity in 1Q’16 was down by half from the previous quarter.

Asking rates still nearly flat - only a $0.03 decline in 1Q’16. Landlords continue to protect face rates for building valuation purposes.

Despite bleak predictions for the office market and local economy in 2016, Houston is resilient and its long-term outlook is positive with local non-farm employment continuing to expand.

Sublease space hit an all-time high in 1Q’16 when it increased by 1.5 MSF. The largest contributors to this glut of space include energy companies such as Shell, Marathon, Technip, and Apache.

Quarterly leasing activity was the slowest it’s ever been in recorded history; however, a few large lease transactions still took place such as United Airlines’ 225,000 SF and BASF’s 110,000 SF.

Tenant’s Perspective Market Trends

United Airlines 225,000 CBDNew Lease

BASF 110,000 Katy FwyNew Lease

Linde North America 50,000 Katy Fwy Expansion

Citibank 49,730 Galleria Renewal

USI 46,902 Katy FwyNew Lease

Bureau Veritas 43,600 GreenspointNew Lease

NGKF 39,000 GalleriaNew Lease

Pattern Energy 34,901 CBDNew Lease

Delta General 34,000 Bellaire Renewal

Hughes Watters Askanase

25,000 CBDNew Lease

Recent Transactions Rental & Vacancy Rates

Tenant SF Submarket Type Avg.Rate Vacancy Rate Change

6

Major Submarket Stats | Class A + B Office

Submarket Map | Class A + B Office

GALLERIA

$35.4012.0%

G

REENWAY

$35.0010.8%

M

ED CENTER

$27.6110.0%

CBD

$41.6510.8%

KATY FWY

$31.2912.1%

W

ESTCHASE

$31.6113.5%

E. F

ORT BEND CO

$24.458.3%

N

ORTH BELT

$21.7830.8%

N

ORTHWEST

$20.2116.9%

FM 1960

$19.8014.2%

MIDTOWN

$32.4111.1%

TH

E

WOODLAND

S

$29.389.0%

$

%

Rental Rate

Vacancy Rate

Area Overview

WEST BELT

$27.5815.8%

Gross Rental Rate Vacant Available Total Net Absorption Leasing Activity

SFDelivered

Under ConstructionSubmarket Inventory (SF) Direct Sub. Direct Sub. Total Quarter YTD 2015 Deals SF

CBD 47,913,523 $41.87 $30.49 11.6% 1.9% 13.4% 163,559 (148,163) 31 196,541 406,600 1,171,658

Suburban 221,781,590 $26.97 $24.03 12.3% 1.0% 13.3% 1,513,568 3,702,290 689 2,195,204 1,439,538 5,426,765

E Fort Bend Co 8,672,674 $25.45 $19.89 7.9% 0.5% 8.3% 68,172 251,216 30 78,232 0 90,250

FM 1960 11,706,953 $19.80 $18.20 13.0% 1.2% 14.2% 6,263 (33,044) 44 84,718 5,625 20,000

Galleria / W. Loop 23,041,157 $35.40 $28.68 11.1% 0.9% 12.0% 64,676 (179,507) 54 211,014 0 1,285,000

Greenway Plaza 11,162,492 $35.00 $24.65 10.8% 0.1% 10.8% 159,816 253,665 30 89,525 0 398,696

Katy Freeway 35,483,353 $31.29 $20.84 10.1% 2.0% 12.1% 127,056 719,170 92 405,313 0 1,256,585

Midtown 6,760,830 $32.41 $27.77 10.9% 0.2% 11.1% (11,319) 20,848 21 78,831 0 5,800

North Belt 12,124,086 $21.78 $15.39 27.8% 3.0% 30.8% (44,718) (467,667) 37 137,094 0 0

Northwest 9,151,058 $20.21 $17.71 16.5% 0.5% 16.9% (69,378) 52,661 46 118,527 8,480 15,000

San Felipe / Voss 5,306,393 $29.66 $21.67 11.8% 0.3% 12.1% 1,447 23,181 19 62,356 0 0

Medical Center 9,449,331 $27.61 $15.79 10.0% 0.0% 10.0% 12,362 74,212 19 40,890 0 0

West Belt 6,449,666 $27.58 $24.66 14.6% 1.1% 15.8% 131,757 146,527 3 14,972 0 0

Westchase 16,828,023 $31.61 $31.61 11.2% 2.4% 13.5% 190,750 380,301 53 186,846 445,000 1,286,000

Woodlands 18,464,133 $29.38 $28.91 8.3% 0.7% 9.0% 129,679 761,774 55 143,905 150,000 541,673

Other Suburban 47,181,441 $21.22 $22.21 13.2% 0.2% 13.4% 747,005 1,698,953 186 542,981 830,433 527,761

TOTAL 269,695,113 $29.05 $25.12 12.2% 1.2% 13.3% 1,677,127 3,554,127 720 2,391,745 1,846,138 6,598,423

S

AN FELIPE

$29.6612.1%

01 HOUSTON MARKET AT-A-GLANCE

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$15

$20

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$40

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Class A Rate Class B Rate Houston AB Rate

$0 $10 $20 $30 $40 $50

FM 1960

Northwest

North Belt

Sugar Land

West Belt

Medical Center

Houston

Woodlands

San Felipe/Voss

Katy Freeway

Westchase

Midtown

Greenway Plaza

Galleria/W. Loop

CBD

In the first quarter of 2016, asking rental rates for Class A and B citywide experienced an incremental decrease for the second consecutive month, following three years of increases. Even though face rates remain high, actual rates at which deals were done decreased, and the value of concession packages increased.

Rental Rates

02

Historical Direct Rental Rates Submarket Rental Rates 1Q’16

• In 3Q’15 rental rates were the highest they have been in Houston’s history, however have decreased slightly over the past two quarters.

• Over the past year, rental rates have seen a 1.9% increase ($0.54), from $28.41 PSF gross in 1Q’15 to $29.05 in 1Q’16.

• Submarkets that saw the largest increases in rental rates include Midtown (10.4%), CBD (6.4%), and Galleria (6.2%).

• Rental rates are expected to increase slightly throughout 2016 due to the instability of the price of oil.

Rental Rate Trends

(3.0)

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YTD Absorption SF DeliveredRental Rate Houston Avg. Rate

8

0% 5% 10% 15% 20% 25% 30%

Sugar Land

Woodlands

Medical Center

Katy Freeway

Greenway Plaza

Midtown

Galleria/W. Loop

Westchase

CBD

San Felipe/Voss

Houston

FM 1960

West Belt

Northwest

North Belt

5%

7%

9%

11%

13%

15%

2010

Q1

2010

Q3

2011

Q1

2011

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2012

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Q1

2015

Q3

2016

Q1

Class A Vacancy Class B Vacancy Houston Avg. Vacancy

Demand for space continued to slow and citywide vacancy increased by 1.2% (120 basis points) year-over-year to 12.2%. Coupled with the delivery of nearly 15 million square feet of office space since 2015 and 6.6 million square feet due to be delivered in the coming years, vacancy is sure to continue its upward trend in the near future.

03

Vacancy Trends

• Larger increases in vacancy have been felt in Class A properties as many tenants are looking for value options.

• Vacancy has jumped from 11.0% to 12.2% over a year.

• The submarkets that experienced the biggest year-over-year increases in vacancy were North Belt (5.5%), West Belt (3.9%), and Greenway Plaza at 3.2%.

• The only submarkets to experience a decrease in vacancy year-over-

year are Sugar Land (-2.7%), FM 1960 (-1.4%), Medical Center (-1.0%), and San Felipe/Voss (-0.1%).

• The submarkets with the highest vacancy rates in 1Q’16 were West Belt (14.6%), Northwest (16.5%), and North Belt (27.8%).

Vacancy Rates

Historical Vacancy Vacancy By Submarket

(2.0)

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Class A Class B Houston TotalVacancy Rate Houston Avg. Rate

5%

7%

9%

11%

13%

15%

2010

Q1

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Q1


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0.0%

1.0%

2.0%

3.0%

4.0%

$4

$12

$20

$28

$36

2010

Q1

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Q2

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Q1

Office Gross Rent Sublet Total Available Percent Sublet

0.0 0.5 1.0 1.5 2.0 2.5

MidtownMedical Center

San Felipe/VossNorthwest

Greenway PlazaSugar Land

West BeltOther Suburban

FM 1960WoodlandsNorth Belt

Galleria/W. LoopWestchase

Katy FreewayCBD

There is currently 9.3 MSF of space on the sublease market (in 347 class A&B buildings) Sublease space is continuing to hit the market, and total available sublease space has surpassed the amount of total available direct space.

04

Sublease Space

Sublease Trends

• This space has an average gross rental rate of $25.20. Sublease rental rates decreased over several quarters (down nearly $3 year-over-year).

• This space has an average time on the market of 14.5 months (this number is trending upward).

• The submarkets with the most sublease space are CBD (2.28 MSF), Katy Freeway (2.27 MSF), and Westchase (1.11 MSF).

Large Blocks of Sublease Space

• There are 97 buildings in the Houston market that have large blocks of sublease space (20,000 SF+).

• Available space of this size has nearly doubled year-over-year.

• This equates to 7.7 MSF (~83%) of total sublease space and has an average gross rental rate of $25.93.

• The average time on the market for this dataset is 14.5 months.

Sublease Space By Submarket

Sublease Space Historical

10

05

Leasing Activity

Lease transaction volume slowed significantly in 2015 to less than 13 million square feet and continued in 2016 with only 2.4 million square feet, the slowest quarter on record in terms of total SF leased. The total number of deals however, surpassed the amount of deals in the previous four quarters, meaning that smaller leases are being signed.

• The total number of deals in 2015 was down – lower than the previous five years. The total number of deals crept up in 1Q’16, however, the average deal size (SF) is the lowest on record (3,335 SF).

• There were more than 780 deals done in 1Q’16 for a total of 2.6 million square feet.

• 1Q’16 was historically the slowest quarter on record in terms of leasing activity. The slowdown in leasing

activity is mainly due to the uncertainty of oil prices, coupled with the delivery of product that has not been leased.

• The submarkets with the most activity include Galleria/West Loop, Katy Freeway, and Westchase.

• West Belt, Medical Center, and FM 1960 experienced the lowest amount of leasing activity.

Leasing Activity Trends

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0.0

0.5

1.0

1.5

2.0

2.5

Q1'16 Q2 - Q4'2015

0

1,000

2,000

3,000

4,000

5,000

0.0

5.0

10.0

15.0

20.0

25.0

2001

2002

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6

Total SF Leased Total Deals

05LEASING ACTIVITY

Top 10 Transactions Historical Leasing Activity

United Airlines 225,000 CBDNew Lease

BASF 110,000 Katy FwyNew Lease

Linde North America 50,000 Katy Fwy Expansion

Citibank 49,730 Galleria Renewal

USI 46,902 Katy FwyNew Lease

Bureau Veritas 43,600 GreenspointNew Lease

NGKF 39,000 GalleriaNew Lease

Pattern Energy 34,901 CBDNew Lease

Delta General 34,000 Bellaire Renewal

Hughes Watters Askanase

25,000 CBDNew Lease

Tenant SF Submarket Type

Submarket Comparison

Leasing activity sputtered to start 2016, posting the slowest quarter on record. The Galleria/West Loop, Katy Freeway, and Westchase submarkets saw the most activity during the first quarter of 2016.

Mill

ions

Mill

ions

SF

12

06

New Deliveries

More than 1.8 MSF was delivered across Houston during the first quarter of 2016. This is in stark contrast to 2015 which saw a record in space delivered with more than 13 MSF in 123 buildings.

• There were six building completions (more than 100,00 SF) totaling more than 1.4 million square feet in the first quarter of 2016.

• Of the 1.4 MSF delivered in 1Q’16, 100% was leased at the time of completion.

• The tenancy profile of all of the buildings delivered in 1Q’16 was single tenant, corporate users.

New Deliveries Trends

Greenway Plaza 2 648,275 41.8%

Katy Freeway 3 1,279,433 59.4%

West Belt 1 200,000 0.0%

Woodlands 3 969,707 16.7%

Total 9 3,097,415 57.9%

Submarket No. SF % Leased

FM 1960 2 770,000 100.0%

Katy Freeway 9 2,543,657 73.3%

Southwest 5 1,381,977 70.8%

West Belt 1 206,754 15.0%

Woodlands 2 2,000,000 100.0%

Total 19 6,902,388 81.8%

Submarket No. SF % Leased

4Q 2015 Deliveries By Submarket 1Q 2016 Deliveries By Submarket

13450 LockwoodNortheast Near

704,958 SF100% Leased

FMC Technologies

1111 MainCBD

406,600 SF100% Leased

Hilcrop Energy

13

06NEW DELIVERIES

Other Notable Deliveries

10353 RichmondWestchase445,000 SF

100% LeasedNOV

2255 E Mossy Oaks BlvdThe Woodlands

150,000 SF50.0% Leased

Medical

27700 Highway 290Northwest Outlier

165,754 SF34.6% Leased

Medical

14

New Construction

• There is an additional 25.8 MSF proposed in 24 properties (more than 100,000 SF), most of which, given current economic conditions, will not come out of the ground until at least the end of 2016.

• The submarkets that have the most proposed development include: Katy Freeway (4.8 MSF), CBD (4.6 MSF), and Northeast Near (4.5 MSF).

Proposed Construction

• At the quarter’s end, Houston had approximately 6.6 MSF of office space under construction in 48 buildings. Of these, 17 are at least 100,000 SF and encompass more than 5.9 MSF.

• The tenancy profile of 28.4% of the space (100,000 SF+) currently under

construction is single tenant, corporate users totaling 1.7 MSF in two buildings.

• Multi-tenant buildings with more than 100,000 SF, which accounts for 71.6% of inventory under construction (4.3 MSF), are 28.6% pre-leased with a weighted average rent of $44.41 PSF gross.

Construction Trends

At the end of the first quarter of 2016, there was more than 6.6 MSF under construction in the Greater Houston area.

07

15

There is 1.7 MSF of single-tenant space under construction compared to 4.3 MSF of multi-tenant space

Pre-Leased

PercentageSingle Tenant

Construction

Combined both multi-tenant and single tenant (for just multi-tenant projects, the pre-leased percentage is 28.6%).

49% 28%

07NEW CONSTRUCTION

2016 2 1,700,000 100.0% 100.0%

2017 0 NA NA NA

ST Total 2 1,700,000 28.4% 100.0%

Single Tenant No. SF% of Devs.

% Leased

2016 10 3,168,369 73.9% 17.5%

2017 5 1,763,471 26.1% 60.1%

MT Total 15 4,287,693 71.6% 28.6%

Multi-Tenant No. SF% of Devs.

% Leased

There are currently 17 buildings larger than 100,000 SF under construction in Houston for a total of 5,987,693 SF. Only 48.9% of the space is pre-leased.

Historical Construction Construction By Submarket

New Construction At-A-Glance

0.0

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14.0

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(2.0)

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Class A Class B Houston Total ProjectedMSF Delivered

5%

7%

9%

11%

13%

15%

2010

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2011

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Q1


0.0 0.4 0.8 1.2 1.6

Gulf Fwy/Pasadena

Katy/Grand ParkwayWest

Greenway Plaza

Woodlands

CBD

Katy Freeway West

Galleria/West Loop

Westchase

SF Leased SF Unleased Millions

16

07 NEW CONSTRUCTION

915 Eldridge PkwyKaty Fwy West

526,637 SF0.0% LeasedMulti-Tenant

Delivers 4/2016

25700 Interstate 45The Woodlands


Delivers 6/2016

1500 Post Oak BlvdGalleria

600,000 SF100% LeasedBHP Billiton

Delivers 10/2016

10353 RichmondWestchase445,000 SF

100% LeasedMulti-Tenant

Delivers 2/2016

480 Wildwood ForestThe Woodlands

201,933 SF0.1%

Multi-TenantDelivers 7/2016

10100 Katy FwyKaty Fwy East


Delivers 1/2017

3773 RichmondGreenway Plaza


Delivers 4/2016

2101 Citywest BlvdWestchase

1,100,000 SF100% Leased

Phillips 66Delivers 6/2016

609 Main StCBD

1,057,668 SF0.0% LeasedMulti-Tenant

Delivers 12/2016

15377 Memorial DrKaty Fwy West

428,565 SF48.8 LeasedMulti-Tenant

Delivers 7/2016

1717 West Loop SouthPost Oak Park


Delivers 2/2017

Notable New Construction

3200 KirbyGreenway Plaza

188,696 SF0.0%

Multi-TenantDelivers 12/2017

17

(2.0)

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6

Class A Class B Houston Total

(1.0) (0.5) 0.0 0.5 1.0 1.5

CBD

North Belt

Galleria/W. Loop

San Felipe/Voss

Northwest

Midtown

Medical Center

Greenway Plaza

Sugar Land

Westchase

FM 1960

West Belt

Katy Freeway

Woodlands

Q1'16 Q2 - Q4'2015

Total net absorption in the first quarter was very strong at nearly 1.7 MSF. The submarkets that experienced the most positive absorption in the first quarter with over 150,000 SF each are Westchase, CBD and Greenway Plaza.

Net Absorption

08

Historical Net Absorption Submarket Comparison

• Absorption in 2014 at 9.3 MSF was historically the highest it’s been in the past 15 years. 2015 ended with a respectable 3.2 MSF absorbed.

• The Woodlands & Katy Freeway outweigh all submarkets in terms of total net absorption in the TTM ending 1Q’16 with more than 1.1 MSF and nearly 700,000 SF, respectively.

• CBD and North Belt were the worst performing submarkets in this time period with approximately 770,000 SF and 629,000 SF of negative absorption, respectively.

• The submarkets with the most negative net absorption in 1Q’16 and were Midtown, North Belt, and Northwest.

Absorption Notes

Mill

ions

Millions

18

0%

4%

8%

12%

16%

20%

$0

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$50

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Class A Rate Class B Rate Class A Vacancy Class B Vacancy

Rent vs Vacancy | Class A + B

09

Market Trends:

• Following several quarters of increases, the average rental rate (Class A&B) has decreased $0.66 since 3Q 2015. This rate, however, remains at a near historic high level at $42.10 PSF gross.

• The vacancy rate is 11.1%; this figure is also above-average for the submarket, which in the past five years has averaged 8.4%.

• Available sublease space in this submarket ended 4Q’15 with a near all-time high with over 1.5 million SF. At the end of 1Q’16, however, this number surpassed 2.3 million SF, cementing its place as the worst quarter on record.

Market Drivers:

• Unstable price of oil expected to continue to have an impact on office rents and vacancy throughout 2016.

• Asking rates will remain high, as landlords don’t correct down as quickly as they correct up. Landlords protect these face rates for building valuation purposes.

• Developers are bringing some space to the market to help meet the increases in demand – one large multi-tenant building delivered in January 2016 adding more inventory to the CBD, thereby increasing the vacancy rate.

CBD Submarket Update

The CBD Submarket is the city’s largest submarket with nearly 36.5 million square feet of Class A and B space. The long-term viability of the CBD as the city’s premier submarket has been ensured as a result of the massive $5 billion public/private investment in downtown since early 2000.

19

(3.0)

(2.0)

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YTD Absorption SF Delivered

Rental Rate

$29.35/SF

Vacancy Rate

16.1%

Rental Rate

$45.64/SF

Vacancy Rate

8.7%

Net Absorption

-77K SF

Construction

0 SF

Net Absorption

373K SF

Construction

1.17 MSF

1Q 2016

Class A1Q 2016

Class B

Absorption & Deliveries | Class A + B Leasing Activity | Class A + B

09CBD SUBMARKET UPDATE

Office Snapshot

Mill

ions

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70

140

210

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350

420

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SF

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54

213

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09 CBD SUBMARKET UPDATE

2

5

5

21

Under Construction Proposed Development

609 Main1.1 MSF | 27.2% Leased

Hiscorp Energy Tower406,600 SF | 100% Leased

1600 Louisiana1.7 MSF

Five Allen Center1.0 MSF

One Market Square750,000 SF

Capitol Tower750,000 SF

Central Post District727,265 SF

Largest Tenants Recent Leases Signed

Chevron3.4 MSF

Centerpoint943,139 SF

KBR900,960 SF

Hess844,763 SF

Shell809,690 SF

United Airlines225,000 SF

Bracewell189,100 SF

Gardere75,000 SF

Kirkland & Ellis62,000 SF

UBS51,703 SF

Largest Sublease Spaces Largest Blocks of Space

One Shell Plaza572,850 SF

One Shell Plaza183,312 SF

1111 Bagby137,099 SF

500 Jefferson78,140 SF

Three Allen Center90,467 SF

800 Bell1.3 MSF

2 Houston Center234,333 SF

600 Jefferson192,984 SF

Two Shell Plaza188,695 SF

Two Shell Plaza159,665 SF

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CBD Submarket Map

700 Avenida Americas115,000 SF | 100% Leased

09CBD SUBMARKET UPDATE

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Market Trends:

• The average rental rate (Class A&B) has fluctuated since the beginning of 2015, however this rate is now at a historical high at $35.40 PSF gross.

• At 1Q’16 the vacancy rate was 11.1%. The vacancy rate has continuously increased the past two years.

• The amount of sublease space in this submarket has more doubled since a year ago to 1,021,791 SF.

• The submarket experienced more than 600,000 square feet of negative net absorption in 2015, a major decrease from the previous two years which posted over 400,000 SF each of positive absorption.

Market Drivers:

• Unstable price of oil has not had a large impact on office asking rents in this submarket, however landlord concessions have increased significantly and other factors such as vacancy rates, sublease space availability, absorption, and leasing activity have been affected.

• Volatility in the energy markets could affect large tenants such as Apache, Bechtel, Marathon, Schlumberger, and Williams.

• Face rates will remain high, as landlords don’t correct down as quickly as they correct up.

Galleria Submarket Update

The Galleria area has historically been one of Houston’s most popular submarkets, providing tenants great access and amenities. With the metro area’s nation-leading job growth over the past few years, this submarket has grown increas-ingly tight, particularly in Class A buildings.

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Rental Rate

$26.78/SF

Vacancy Rate

10.6%

Rental Rate

$37.82/SF

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-1K SF

Construction

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Construction

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09GALLERIA SUBMARKET UPDATEM

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Office Snapshot

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09 GALLERIA SUBMARKET UPDATE

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1500 Post Oak Blvd.600,000 SF | 100% Leased

1717 West Loop South380,000 SF | 74.2% Leased

7401 Katy Fwy.225,000 SF


Marathon Oil697,086 SF

Apache Corporation514,292 SF

Bechtel Corporation441,523 SF

BHP Billiton431,227 SF

Weatherford International305,755 SF

Apache Corporation355,506 SF

Stage Stores168,901 SF

UBS PaineWebber60,708 SF

Capital One Bank58,000 SF

US Capital Advisors43,261 SF


1360 Post Oak Blvd159,751 SF

5555 San Felipe108,204 SF




5251 Westheimer158,084 SF

Five Post Oak Park142,665 SF

2700 Post Oak140,618 SF

1333 West Loop South111,250 SF

1233 West Loop South111,250 SF

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Galleria Submarket Map

1885 Saint James Place165,000 SF | 0.0% Leased3

River Oaks District Phase II190,000 SF2

1601 Hollyhurst140,000 SF | 100% Leased4

09GALLERIA SUBMARKET UPDATE

26

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09

Market Trends:

• The average rental (Class A&B) increased $0.65 between 4Q’15 and 1Q’16 to $31.61, still at a historically high level.

• Overall, the vacancy rate increased by 1.6 percentage points to 11.2%. This rate fluctuated in 2015, ranging from 8.7% to 9.6%.

• Sublease space increased an additional 40,000 SF in the 1st quarter, increasing 428,262 SF year-over-year.

• Leasing activity slowed in the 1st quarter to 176,531 SF – down more than 200,000 SF from the previous quarter. Leasing activity in 1Q’16 was the slowest it’s been since 1Q’2010.

Market Drivers:

• The unstable price of oil will continue to have an impact on office rents and vacancy well into 2016, particularly in submarkets in west Houston, that are home to the highest concentration of energy companies.

• The 1.3 million SF under construction is 100% leased, adding no vacant space to inventory.

• Face rates will remain high, as landlords don’t correct down as quickly as they correct up.

Westchase Submarket Update

The Westchase District’s roots trace back to the early 1960s, evolving from farmland into a 2,460-acre master-plannedcommunity bustling with commercial activity. More than 500,000 people reside within five miles of this submarket,giving area employers a large, well-educated employee pool.

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Rental Rate

$20.28/SF

Vacancy Rate

9.3%

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$37.89/SF

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12.9%

Net Absorption

-57K SF

Construction

186K SF

Net Absorption

248K SF

Construction

1.10 MSF

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Class A1Q 2016

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09WESTCHASE SUBMARKET UPDATEM

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09 WESTCHASE SUBMARKET UPDATE

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2101 CityWest1.1 MSF | 0.0% Leased

3657 Briarpark Dr186,000 SF | 100% Leased

CityWest 6387,200 SF

CityWest 5306,900 SF

6004 Rogerdale158,607 SF


Phillips 661.1 MSF

Halliburton845,427 SF

National Oilwell Varco654,733 SF

WesternGeco554,385 SF

Statoil430,677 SF

WesternGeco554,385 SF

BMC Software225,000 SF

CB&I100,000 SF

Zachry Engineering50,000 SF

Ignite Restaurant Group49,024 SF


2000 West Sam Houston Pky502,410 SF

3010 Briarpark Dr160,356 SF

2103 CityWest Blvd150,439 SF







10800 Richmond Ave99,088 SF

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Westchase Submarket Map

09WESTCHASE SUBMARKET UPDATE

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Market Trends:

• The average rental rate (Class A&B) has experienced a decrease of $0.97 since 3Q’15 but remain above the $30/SF mark at $31.29/SF.

• At 1Q’15 the vacancy rate was 10.1%. Vacancy has hovered above double digits for consecutive quarters.

• The amount of sublease space in this submarket has more than doubled in the past year to 2.3 MSF, the highest of any submarket in Houston.

• At the end of 1Q’16, there were only four significant buildings under construction. This is in stark contrast to 18 months ago when 17 buildings were being developed.

Market Drivers:

• Vacancy has increased significantly due to several factors, including more than four million SF delivered in 2015.

• The effects on the submarket from the current economic conditions in Houston have been felt. Leasing activity has slowed, and the amount of sublease space on the market has increased significantly.

• The declining price of oil has had the biggest impact on the energy-heavy submarkets such as Energy Corridor, and is expected to continue into 2016.

Katy Freeway Submarket Update

The Energy Corridor has long been one of Houston’s most desirable submarkets and is dominated by large tenants inthe E&P and engineering sectors. This market is driven by the price of oil and natural gas. Large users like BP, Conoco,and Shell drive market demand.

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$23.80/SF

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13.2%

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$36.26/SF

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8.6%

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-82K SF

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209K SF

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1.26 MSF

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09KATY FREEWAY SUBMARKET UPDATEM

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09 KATY FREEWAY SUBMARKET UPDATE

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915 North Eldridge Pky524,328 SF | 0.0% Leased

15377 Memorial Dr428,565 SF | 49% Leased

13501 Katy Freeway400,000 SF

Gateway Park Tower514,500 SF

Gateway Park II190,900 SF

Gateway Park III190,900 SF

Gateway Park IV187,500 SF


Shell1.9 MSF

BP1.1 MSF

Mustang Engineering773,260 SF

Sysco596,500 SF

ConocoPhillips546,604 SF

IHI171,426 SF

BASF109,578 SF

Cemex80,000 SF

WD Von Gonten & Co.73,000 SF

Schlumberger51,153 SF


Three Westlake Park215,861 SF

Two Westlake Park192,975 SF

10777 Clay Rd189,285 SF


Three WestLake Park148,674 SF


1414 Enclave300,907 SF

Two WestLake Park205,304 SF



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Katy Freeway Submarket Map

10100 Katy Freeway226,511 SF | 81% Leased

9230 Katy Freeway76,765 SF | 29% Leased4

*17 total buildings are proposed.

09KATY FREEWAY SUBMARKET UPDATE

34

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09

Market Trends:

• In general, the average rental rate (Class A&B) has increased, but remained in the $28.00 - $30.00 range the past two years and sits at $30.71 PSF gross.

• In 1Q’16 the vacancy rate increased to 8.5%, double what it was two years ago. Over the past five years vacancy has averaged 5.9%.

• Available sublease space in this submarket ended 4Q’15 with a near all-time high of more than 480,000 SF. This is 150,000 SF more than a year earlier.

• Development has slowed significantly – there are only two significant buildings under construction

Market Drivers:

• Unstable price of oil expected to continue to have an impact on office rents and vacancy for the remainder of 2016.

• Demand has come from corporate relocations and expansions in the energy, medical and chemical sectors.

• Recent headquarter moves and expansions have improved access and drive times, spurring additional development of other office, retail, hotel, and residential projects.

The Woodlands Submarket Update

With several construction cranes dotting the horizon and expanded/new corporate headquarters including Exxon, South-west Energy, and Anadarko, small and medium-sized tenants in The Woodlands are finding themselves squeezed for space and shocked by increases in rental rates.

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Construction

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86K SF

Construction

442K SF

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09THE WOODLANDS SUBMARKET UPDATEM

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09 THE WOODLANDS SUBMARKET UPDATE

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The Woodlands Submarket Map


Havenwood Office Park240,470 SF | 0.0% Leased

Wilwood Corporate Centre II201,933 SF | 0.0% Leased

10 Waterway Avenue500,000 SF

Superblock East654,119 SF

Superblock West400,000 SF

CityPlace I & II385,900 SF

Energy Crossing North288,000 SF


ExxonMobil2.5 MSF

Anadarko1.6 MSF

Southwestern Energy515,000 SF

US Oncology367,879 SF

CB&I270,000 SF

Woodlands Development Co25,576 SF

Undisclosed25,300 SF



Newfield Exploration24,910 SF


2445 Technology Forest149,988 SF

10101 Woodloch Forest Dr25,879 SF

1450 Lake Robbins Dr24,331 SF

1330 Lake Robbins Dr24,260 SF

25025 N I-45 Fwy20,225 SF

1780 Hughes Landing313,343 SF

1725 Hughes Landing162,120 SF

1575 Sawdust Rd132,581 SF

2001 Timberloch90,539 SF

8800 Technology Forest88,688 SF

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09THE WOODLANDS SUBMARKET UPDATE

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Houston EconomyRemains Resilient

Despite sagging oil prices, Houston’s diversified economy is resilient and should bounce back.

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38

Houston Economic Overview

39

Houston EconomyRemains Resilient

As expected, the first quarter continued to experience more of the same in the economy – low oil prices, job losses and layoffs in the energy sector, increased M&A activity, and falling rig counts and drilling permits.

As a result, job growth has been less than exciting (although still positive), home sales and construction have slowed, and other economic indicators show that Houston is

experiencing an economic challenge that includes an extended downturn.

On the bright side, however, the U.S. economy is strong, and local economists agree that the Houston economy in resilient and will bounce back.

The following pages detail the state of the Houston economy at the end of the first quarter of 2016.

10HOUSTON ECONOMIC OVERVIEW

39

40

4thGDP U.S. Ranking

Economy Facts & Figures

26thGDP World Ranking

Houston benefited from four years of exceptional growth and due to this rapid economic expansion, the city now ranks fourth in the nation in GDP producing more than $525 billion annually.

New York CIty$1.6 Trillion

Los Angeles$867 Billion

Chicago$611 Billion

Houston$525 Billion

If Houston were a country, its economy would be larger than those of Argentina and Norway, according to the World Bank, and would rank as the world’s 26th largest economy.

Venezuela$438 Billion

Norway$512 Billion

Real Gross Area Product in Houston is expected to grow at an average annual rate of 3.37% from 2015 to 2020. Houston’s economic growth is projected to more than double during this time period. Growth rates are higher in services, manufacturing, mining, and finance, insurance, and real estate.

Economic Growth

Mining

Construction

Manufacturing

Trade

Transportation, Utilities, Warehousing

Information

Finance, Insurance, Real Estate

Services

Government

Agriculture

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5.7%7.2%

09 HOUSTON ECONOMIC OVERVIEW

41

According to the C2ER Cost of Living 2016 Annual Average Index, Houston ranks sixth in lowest overall cost of living among the nation’s 20 most populous metropolitan areas, with costs 25.9% below the average for this group. Houston’s housing costs are 58.8% below this group’s average.

Houston’s overall after-taxes living costs are 1.8% lower than the US average.

Cost of Living

Houston’s PMI registered 45.9 in March 2016. Houston’s PMI has fallen below the neutral point of 50 for 15 consecutive months.

Any reading below 50 signifies an overall contraction in production. Houston’s PMI had held at or above the 50 point mark for 64 consecutive months.

PMI Rating


20162006 2007 2008 2009 2010 2011 2012 2013

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Population

Houston is the fourth largest city (2.2 million residents) and fifth largest MSA in the nation, with approximately 6.5 million residents. The MSA led the nation in population growth in 2014, adding 156,371 residents.

New Arrivals

The city of Houston is one of the fastest growing cities in the U.S. 35,202 residents moved to Houston in 2014. That is one new resident every 15 minutes. In the MSA, there is approximately one new resident every 5 minutes.

Population Growth

Houston is anticipated to lead the nation in population and employment growth between 2015 and 2040, adding 125,000 new residents in 2015. The population is project-ed to swell by nearly four million residents by the end of 2040.

Foreign Trade

In 2015, more than $196.4 billion in foreign trade passed through the Houston-Galveston Customs District, down 22.2% from the $252.5 billion handled in 2014, ranking it the seventh busiest district. Exports were down 15.6% and imports decreased 29.3%.

The value of trade through the Houston-Galveston Customs District fell 26.5% in 1Q’16 compared to 1Q’15. The value of exports fell 19.1% and the value of imports fell 34.7%. According to the Greater Houston Partnership,

slower global growth, lower commodity prices, the strong dollar, and the need to import less crude account for much of the decline.

Nationwide, trade was off 5.7% in Q1. Twenty-five of the nation’s 32 busiest customs districts (defined as those which handled $20 billion or more in trade last year) reported traffic declines as well.

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Substantial diversification in Houston’s economy in the last 30 years has reduced its vulnerability to downturns in the upstream energy sector. This is evident in today’s economy as diversifying sectors now contribute to approximately 50% of Houston’s economy, up from 13% in the mid-1980s.

Drivers powering the rising economic diversification include:

The Texas Medical Center is the world’s largest medical complex, with 56 member institutions and 7.2 million annual patient visits.

Houston is one of the world’s largest petro-chemical producing centers and is home to the largest petro-chemical complex in the US.

The Port of Houston ranks first in the US in total tonnage (for 22 years straight) and waterborne cargo value.

Home to NASA, and a network of 50 organizations with ties to aerospace technology, Houston is a worldwide leader in the industry.

R&D is critical to NASA, the Texas Medical Center, the world’s largest con-centration of energy companies, and major universities.

Housing

In 2015 home sales began to falter as oil prices began to plummet and energy industry layoffs became the norm. Regardless, single-family home sales and total property sales represented the second most transactions in the history of Houston real estate, behind only 2014.

According to a Houston Association of Realtors (HAR) monthly report, despite continued strains in the oil patch, the Houston real estate market demonstrated more sustainable conditions in March.

The single-family home average price declined 1.6% to $272,658, while the median price rose 2.4% to $215,000. March sales of all property types in Houston totaled 7,375, down 1.0% from the same month last year. Total dollar volume for properties sold in March fell 2.5% to $1.9 billion.

Diversifying Sectors

44

Houston is the “Energy Capital of the World” with almost half of its economic activity driven by the energy industry.

The city is home to the largest concentration of human capital and infrastructure for energy research, development, and production in the nation.

Forty of the nation’s 134 publicly traded oil and gas exploration and production firms based in the US are located in Houston, including 10 of the top 25.

Houston holds nearly one third of the nation’s jobs in oil and gas extraction.

WTI reached a high of $108 in June 2014 before dropping significantly in the fall. The price continued to drop into the third quarter that year, registering in the low-$40s - a 62% decline.

The price of oil fluctuated in 2015 - opening the year at $52.72 and closing it at $37.13 - but never rose above $61.50. The first quarter of 2016 was tumultuous to say the least - prices plunged to their lowest point in 13 years, and then rose more than 40% just weeks later.

Ultimately, prices ended the quarter near where they started it - at just under $40 a barrel. Supply remains high and U.S. production is still going strong keeping demand and supply unbalanced. The U.S. Energy Information Administration’s (EIA) March 10, 2016 Short-Term Energy Outlook projects WTI crude oil prices to average approximately $41 a barrel in 2016 and $51 in 2017.

Oil Prices


Energy & Oil

45

Rent Vs The Price Of Oil

Oil Rig Count


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The average U.S. rig count for March 2016 was 478, down 54 from the 532 counted in February 2016, and down 632 from the 1,110 counted in March 2015.

There is a correlation between the success of the energy industry and office rental rates, as well as leased space, in Houston in the submarkets that have a strong energy tenancy. As the price of oil increases or decreases, Class A rents usually follow suit, typically with a six-month lag.

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According to the Greater Houston Partnership, Houston area employment peaked at over 2.9 million in December 2014 and has trended downward ever since. The Houston metro created 23,200 jobs in 2015, and 7,400 jobs in March 2016 less than March 2015.

Employment

• The total number of deals in 2015 was down – lower than the previous five years. The total number of deals crept up in 1Q’16, however, the average deal size (SF) is the lowest on record (3,335 SF).

• There were more than 780 deals done in 1Q’16 for a total of 2.6 million square feet.

• 1Q’16 was historically the slowest quarter on record in terms of leasing activity. The

slowdown in leasing activity is mainly due to the uncertainty of oil prices, coupled with the delivery of product that has not been leased.

• The submarkets with the most activity include Galleria/West Loop, Katy Freeway, and Westchase.

• West Belt, Medical Center, and FM 1960 experienced the lowest amount of leasing activity.

Non Farm Employment

47


Houston’s economic outlook in 2016 has turned negative. Once cautiously optimistic, forecasters no longer anticipate a recovery until the end of 2016.

Market Outlook

• 2016 will continue to be a tough year for the oil and gas industry.

• Worldwide job cuts, reduced capital budgets, reduced exploration expenditures, and M&A activity will continue adding to the already large number of subleases and blocks of space.

• Crude oil inventories remain high and domestic production remains elevated.

• Job losses will continue to occur in sectors most closely tied to energy.

• The office market will continue to remain soft as the glut of sublease space and large blocks

grows, with sublease space likely to exceed ten million SF this year.

• Office development has slowed, but with 6.0 million square feet of space coming online in the remained of 2016 and 2017, vacancy rates are anticipated to continue to increase.

• Leasing activity will continue to remain weak, particularly in the energy sector.

• Landlord concessions will increase more and rental rates (at which deals are done) will see bigger declines.

• A return to “normal” is anticipated in 2017.

2016 Outlook

Cresa © 2016. All rights reserved. The information contained herein is provided, in part, from third party sources. Even though obtained from sources deemed reliable, no warranty or representation, expressed or implied, is made as to the accuracy of the information herein. The value of this transaction to you depends on tax and other factors which should be evaluated by your tax, financial and legal advisors, You and your advisors should conduct a careful, independent investigation of the property to determine to your satisfaction the suitability of the property for your needs.

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1990 Post Oak Blvd.Houston, Texas 77056713.402.5800

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Houston Office Market