EXECUTIVE SUMMARY

VACANCY RATE AT 24.4%The overall vacancy rate in the Houston office market was up 30 basis points quarter-over-quarter, and up 210 basis points year-over-year. The vacancy rate for Class A properties is at 26.8%. Overall net absorption totaled negative 864,000 sq. ft. Of the 4.5 million sq. ft. currently under construction, 51.7% of that space has been spoken for. The overall Houston average asking full-service rent is at $29.16 per sq. ft.—down from one year ago at $29.27 per sq. ft.—while Class A space in the Central Business District is averaging $41.35 per sq. ft. While the aggregate numbers for the Houston office market aren’t anything to write home about, there are pockets of positivity when drilling down into the submarket arena: notably, Katy Freeway East—the 10th-largest by inventory of Houston’s 23 submarkets—features the smallest vacancy rate among all submarkets, at only 10.9%. Additionally, Katy Freeway East 91,344 sq. ft. of year-to-date positive net absorption paced all submarkets, and it did so while posting the metro’s 4th-highest average asking rent of $33.64 per sq. ft.

HOUSTON ECONOMIC INDICATORSThe most recent data show continued economic recovery in Houston. In April, payrolls and the labor force increased, unemployment was down, and the weight of COVID on the region continued to decline. Baker Hughes reports the oil and gas rig count rose by 5 to 475 in the week to July 2, its highest since April 2020. That put the total rig count up 212, or 81%, over this time last year. West Texas Intermediate prices for August settled up 2.4%, or $1.76, at $75.23 a barrel, hitting its highest level since October 2018—climbing more than 50% on the year after starting 2021 at around $48.50 per barrel. Demand has increased as people take to the roads amid the economic reopening.

HOUSTON OFFICE | Q2 2021 QUARTERLY MARKET REPORT

JULY 2021

While the Houston Office market fundamentals may be lackluster, the economic recovery in Houston remains positive

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MARKET INDICATORS

CURRENT Q2 2021

PRIOR QUARTER Q1 2021

PRIOR YEAR Q2 2020

Vacant Total 24.4% 24.1% 22.3%

Vacant Direct 22.9% 22.7% 21.2%

Available Total 29.2% 29.0% 26.2%

Available Direct 26.1% 26.1% 24.1%

Net Absorption (SF) -863,812 -946,930 -1,193,387

Leasing Activity (SF) 2,345,238 2,435,509 4,356,669

Construction (SF) 4,503,079 4,108,684 4,242,526

Deliveries (SF) 45,000 105,400 523,092

Avg Asking Rent (Gross) $29.16 $29.27 $29.36

Inventory (SF) 241,141,994 241,096,994 240,269,564

SUPPLY & DEMAND

10%

12%

14%

16%

18%

20%

22%

24%

26%

-2

-1

0

1

2

3

4

5

6

Q22011

Q22012

Q22013

Q22014

Q22015

Q22016

Q22017

Q22018

Q22019

Q22020

Q22021

Mill

ions

(SF)

Net Absorption Deliveries Vacancy

MARKET OVERVIEW

NET ABSORPTION REMAINS NEGATIVEDuring the second quarter, Houston’s office market continued to see the number of tenants moving out of space outpace the number of tenants moving into space. The aggregate effect of the total net occupancy for the second quarter of 2021 was negative 865,000 sq. ft., raising the overall vacancy rate to 24.4%. The amount of total office inventory that is being marketed for lease also increased quarter-over-quarter, elevating the availability rate to 29.2%. The difference between this figure and the vacancy rate reflects expected future move-outs. Space being marketed for sublease represents 8.1 million sq. ft., or 11.4% of the 71.7 million-sq.-ft. total availability figure. The Central Business District vacancy rate is at 28.7%, up 50 basis points from this time last quarter at 28.2%, while the Energy Corridor vacancy rate is at 28.0%, up 20 basis points from 27.8% in Q1 2021.

OFFICE DEVELOPMENTOffice construction is at 4.5 million sq. ft across 19 buildings, with 2.2 million sq. ft. (48.3%) available for lease. The Central Business District, Medical Center and Katy Freeway East account for 1.8 million sq. ft., or over 80% of the total space available. Hines’ Texas Tower is expected to deliver in Q4 2021 and is 40% preleased. Outside of downtown, of the 789,000 sq. ft. underway in the Medical Center submarket, the 512,000-sq.-ft. Horizon Tower life sciences building is being built in Texas A&M Innovation Plaza. Other office buildings under construction in the Katy Freeway East submarket include Marathon Oil’s 440,000-sq.-ft. future headquarters in CityCentre; and Village Tower II, a 150,000-sq.-ft. office building at 9655 Katy Freeway. The Medical Center market has an overall vacancy rate of 11.3%, while the Katy Freeway East market has a vacancy rate of 10.9% compared to the metro’s overall average of 24.4%.

HOUSTON OFFICE QUARTERLY MARKET REPORT

Q2 2021

NET ABSORPTION

CONSTRUCTION BY SUBMARKET

AVAILIBILITY RATES

0.0 0.3 0.5 0.8 1.0 1.3 1.5 1.8

Pearland/South

Galleria/West Loop

FM 1960/Hwy 249

Midtown

Woodlands/Conroe

Katy Freeway East

Medical Center

CBD

Millions (SF)

Pre-Leased Space Available Space

-2.0

-1.0

0.0

1.0

2.0

3.0

Q22011

Q22012

Q22013

Q22014

Q22015

Q22016

Q22017

Q22018

Q22019

Q22020

Q22021

Mill

ions

(SF)

Direct Sublease Total

29.2%

0%

5%

10%

15%

20%

25%

30%

35%

Q22011

Q22012

Q22013

Q22014

Q22015

Q22016

Q22017

Q22018

Q22019

Q22020

Q22021

Direct Sublease

INVESTMENT SALES TRENDS

Real Capital Analytics data reports quarterly office sales volume for Q2 2021 in the Greater Houston area at $275 million. The year-over-year change in volume is up 150% from $110 million in Q2 2020. The primary capital composition for buyers so far in 2021 has been made up of 78.5% private investors and 8.7% institutional. For sellers, the majority was 60.7% private investors and 32.3% institutional.

DOWNTOWN HOUSTON’S NEWEST OFFICE SKYSCRAPER

Construction has commenced on 1550 on the Green, a 375,000-sq. ft. office tower overlooking the Discovery Green Park in downtown Houston. The 28-story tower is located at 1550 Lamar St. and is said to ultimately be renamed after its anchor tenant, law firm Norton Rose Fulbright. The tower represents the first phase in a broader 3.5-acre mixed-use development that will include residential and retail covering three city blocks. Construction is scheduled to be completed by 2024. The office project is commencing at a time when Houston’s already soft office market faces additional struggles from the pandemic. Downtown Houston’s office vacancy rate is hovering close to 29%, which is higher than the Galleria/West Loop area’s 25% vacancy rate and higher than the metropolitan area’s average of 24%.

LEASING ACTIVITY

Quarterly leasing velocity—which is comprised of both new leases and renewals—stood at 2.3 million sq. ft. during the second quarter—down slightly from 2.4 million sq. ft. in Q1 2021. Year-over-year, Q2 2020 leasing activity registered at 4.4 million sq. ft. Top transactions during the second quarter included Catholic Charities signing a 7th floor sublease for 37,321 sq. ft. at 5599 San Felipe St., and Xavier Educational Academy signing a new lease for 32,000 sq. ft. at 1001 West Loop South, both in the Galleria/West Loop submarket. Concho Resources renewed 27,767 sq. ft. at 1001 Fannin St. in the CBD, and AES Drilling Fluids inked a new deal for 27,614 sq. ft. at 575 N. Dairy Ashford in the Energy Corridor.

AVERAGE ASKING RENTS

The Houston overall full-service average rates are at $29.16 per sq. ft., down from last quarter at $29.29, and from one year ago at $29.36 per sq. ft. Asking rates for overall Class A space are $34.12 and Class B are $22.90 per sq. ft. Rent growth has varied across Houston’s submarkets. Asking rents in the Greenway Plaza submarket averaged $34.62 per sq. ft., which is 19% higher than the metro average as a whole and ranked number two—only behind the CBD at $38.73—among Houston submarkets as of the end of the second quarter 2021.

HOUSTON OFFICE QUARTERLY MARKET REPORT

Q2 2021

QUARTERLY LEASING ACTIVITY OVER 100,000 SF

OVERALL GROSS ASKING RENT ($PSF)

CUMULATIVE MONTHLY SALES VOLUME

0

1

2

3

4

5

6

J F M A M J J A S O N D

Billi

ons

($)

Source: Real Capital Analytics

2021 2017 2018 2019 2020

0 50 100 150 200 250 300 350 400

West Belt

Woodlands/Conroe

North Loop West

Southwest

FM 1960/Hwy 249

CBD

Katy Freeway East

Energy Corridor

Galleria/West Loop

Thousands (SF)

$0 $5 $10 $15 $20 $25 $30 $35 $40

NorthwestSouthwest

Greenspoint/North BeltNortheast

FM 1960/Hwy 249NASA/Clear Lake/SE

Gulf Fwy/PasadenaKingwood/Humble

North Loop WestWest Belt

BellaireEnergy Corridor

WestchasePearland/SouthMedical Center

Sugar Land/E Ft BendKaty/Grand Pkwy WWoodlands/ConroeGalleria/West LoopKaty Freeway East

MidtownGreenway Plaza

CBD

Statistically speaking, the Houston multi-tenant office market is hitting historical highs in vacancy. Standing at almost 25%, Houston has the highest vacancy in the country. All market indicators are well above (or below) historical 10-year averages. Demand and activity continue to be sluggish but recently we have seen an uptick in both, which provides some glimmer of hope we are starting to feel the bottom of this cycle. So where are we going from here?

The office market is driven by job growth and more specifically office occupying jobs. The good news is that according to the Greater Houston Partnership, metro Houston added almost 50,000 new jobs in the first six months of 2021. The bad news is that the largest industry (oil and gas) of office occupying jobs, is still losing jobs. Some areas such as Professional/Business Services have recouped 50% or more of their pre-pandemic job numbers, but this is clearly not enough to move the needle in the Houston office market. Until we see growth in the oil and gas industry the Houston office market will struggle to recover. The efforts on behalf of our city leaders to further diversify the Houston economy will take some time to manifest and as such I believe office market demand in Houston will remain well below historical averages for the remainder of this year and likely well into 2022.

Despite the slow market, there are some submarkets in Houston that are performing relatively well with vacancy rates significantly below the metro average of 24.4%:

Katy Freeway East – 10.9%

Medical Center – 11.3%

Pearland/South – 12.9%

Bellaire – 13.5%

NASA/Clear Lake – 14.7%

Many tenants looking in these submarkets become frustrated as they have read the headlines regarding the market and are not getting the concessions and cooperation they expect as the landlords are far less negotiable due to the fundamentals in that submarket. As such is it important to remember that Houston is a very large office market consisting of over 20 submarkets and hundreds of landlords, each with its own unique set of market variables. My suggestion is don’t read the headlines but discuss with your trusted commercial real estate advisor as market conditions in your area may be far different than what you see in the newspaper.

In summary, the recent market activity and deal announcements have provided a sense that the office market is picking up, however the spread of the Covid-19 Delta variant, the push back of office openings, and the possibility of future lockdowns could severely hamper any recent gains. We truly are living in a “wait and see” environment making it extremely difficult to predict near-term or long-term trends.

HOUSTON

HOUSTON OFFICE BROKER’S PERSPECTIVE

HOUSTON OFFICE QUARTERLY MARKET REPORT

Q2 2021

DAN BOYLESOffice

MARKET OVERVIEW SUBMARKET STATS

Submarket Statistics (Total reflects Class A/B/C)

Total Inventory (SF)

Total Vacancy (SF)

Total Availability (%)

Q2 2021 Net Absorpiton (SF)

2021 YTD Net Absorpiton (SF)

Q2 2021 Leasing Activity (SF)

Under Construction (SF)

Overall Gross Avg Asking Rent ($/PSF)

Houston Market Total 241,141,994 24.4 29.2 -863,812 -1,810,742 2,345,238 4,503,079 29.16

Class A 131,657,648 26.8 33.2 -468,798 -1,034,355 1,139,472 4,395,279 34.12

Class B 96,621,028 22.1 25.7 -525,898 -501,912 996,020 837,300 22.90

CBD Total 39,668,770 28.7 35.0 -184,739 -339,418 174,940 1,645,856 38.73

Class A 31,700,199 28.7 35.3 -131,545 -306,637 118,735 1,645,856 41.35

Class B 7,395,231 29.9 36.2 -53,194 -32,781 62,662 0 29.14

Bellaire Total 4,578,919 13.5 20.7 -2,667 2,557 91,531 0 25.70

Class A 1,655,252 13.0 17.0 10,856 12,635 9,384 0 29.50

Class B 2,610,349 12.5 22.5 -6,320 -2,525 81,296 0 25.17

Energy Corridor Total 23,137,872 28.0 35.6 -46,406 -102,871 247,145 0 26.31

Class A 14,824,333 29.0 37.4 -67,199 -130,305 102,522 0 31.79

Class B 7,982,033 26.9 33.1 16,426 28,118 137,503 0 19.81

FM 1960/Hwy 249 Total 11,174,568 24.6 30.9 -66,256 -62,314 156,400 112,395 21.01

Class A 3,637,845 19.1 34.4 26,549 8,248 32,334 64,395 28.66

Class B 6,557,711 27.4 29.2 -84,415 -65,914 122,911 48,000 18.72

Galleria/West Loop Total 29,210,503 25.0 32.2 -129,893 -172,065 376,940 77,189 33.50

Class A 20,549,857 27.0 36.1 -51,748 -120,776 264,100 77,189 35.98

Class B 8,610,646 20.2 23.0 -80,830 -53,974 109,370 0 24.98

Greenspoint/North Belt Total 11,729,983 49.3 50.1 30,182 -38,218 56,963 0 17.90

Class A 4,919,180 66.1 67.2 20,982 10,493 25,353 0 19.45

Class B 5,650,973 41.6 42.0 -7,082 -67,035 14,187 0 16.11

Greenway Plaza Total 10,816,214 23.5 25.9 -276,316 -307,730 36,409 0 34.62

Class A 6,940,221 27.0 29.3 -240,592 -245,765 11,585 0 37.27

Class B 3,438,818 18.2 20.6 -33,977 -52,675 20,257 0 28.80

Gulf Fwy/Pasadena Total 3,841,966 16.0 16.2 4,176 19,645 16,228 0 23.38

Class A 105,782 2.0 2.0 0 -837 0 0 32.03

Class B 3,123,305 18.7 18.3 3,502 13,574 14,978 0 23.63

Katy Freeway East Total 9,915,526 10.9 14.9 115,116 91,344 226,424 767,059 33.64

Class A 6,167,005 12.2 17.3 105,766 70,135 193,215 767,059 41.77

Class B 2,484,662 8.7 11.0 7,053 28,686 32,585 0 22.73

Katy/Grand Pkwy W Total 3,516,056 21.1 25.9 -26,052 -66,023 57,143 0 30.97

Class A 2,306,174 28.7 34.4 -22,465 -52,111 45,875 0 31.57

Class B 1,060,620 7.6 11.0 -3,587 -13,912 11,268 0 27.53

Kingwood/Humble Total 1,401,165 15.1 17.1 -17,080 -11,851 19,867 0 23.98

Class A 258,342 22.2 11.9 7,247 9,944 6,000 0 28.57

Class B 1,060,210 11.8 17.2 2,532 2,532 10,324 0 22.74

Medical Center Total 9,559,640 11.3 17.4 -80,587 -186,008 52,883 788,780 30.24

Class A 3,609,973 12.7 27.3 -18,907 -28,712 1,280 788,780 34.07

Class B 4,895,399 8.6 10.3 -33,346 -33,346 41,624 116,500 24.71

HOUSTON OFFICE QUARTERLY MARKET REPORT

Q2 2021

MARKET OVERVIEW SUBMARKET STATS

HOUSTON OFFICE QUARTERLY MARKET REPORT

Q2 2021

Submarket Statistics (Total reflects Class A/B/C)

Total Inventory (SF)

Total Vacancy (SF)

Total Availability (%)

Q2 2021 Net Absorpiton (SF)

2021 YTD Net Absorpiton (SF)

Q2 2021 Leasing Activity (SF)

Under Construction (SF)

Overall Gross Avg Asking Rent ($/PSF)

Midtown Total 6,188,130 17.2 22.7 12,296 48,348 66,488 436,000 34.02

Class A 2,359,037 18.5 26.1 -5,410 21,065 32,319 436,000 38.11

Class B 3,828,976 14.3 14.5 -2,154 -2,154 10,005 0 28.32

NASA/Clear Lake/SE Total 7,623,478 14.7 17.5 76,091 74,425 57,184 0 21.36

Class A 2,227,526 13.2 17.7 38,695 38,663 2,160 0 26.72

Class B 4,760,609 16.6 19.4 5,416 5,416 27,934 0 19.03

North Loop West Total 4,215,364 21.8 23.6 -66,680 -117,058 112,759 0 24.00

Class A 1,247,308 33.8 32.8 -36,569 -29,979 80,977 0 27.72

Class B 2,716,572 18.8 16.2 -56,482 -56,482 26,102 0 21.62

Northeast Total 2,512,428 17.4 14.0 -24,082 -40,112 47,300 0 18.13

Class A 184,834 23.6 23.6 -14,059 -17,659 0 0 26.03

Class B 1,438,847 14.0 13.3 -2,401 -2,401 2,160 0 21.34

Northwest Total 4,054,051 20.4 22.7 -9,885 -41,826 42,007 0 16.25

Class A 805,808 33.6 33.8 -15,421 -26,321 7,087 0 19.40

Class B 2,408,229 20.8 21.2 -15,041 -15,041 15,108 0 15.24

Pearland/South Total 1,783,406 12.9 12.0 -13,722 -1,254 27,999 48,000 28.16

Class A 672,270 3.8 4.6 -8,429 -1,046 0 48,000 29.87

Class B 860,529 19.9 20.2 -5,795 -5,795 11,379 0 29.02

Southwest Total 11,851,842 21.4 23.5 -9,158 -39,391 125,882 0 16.98

Class A 1,626,245 26.3 31.4 -5,717 16,496 688 0 17.55

Class B 8,019,722 22.7 25.9 -37,272 -37,272 86,229 0 17.55

Sugar Land/E Ft Bend 6,822,377 19.9 24.2 -58,112 -147,678 94,561 0 30.26

Class A 3,870,419 17.4 25.1 -55,350 -117,794 15,435 0 33.87

Class B 2,869,588 18.1 24.8 -23,934 -23,934 35,554 0 25.08

West Belt Total 5,418,021 27.8 32.4 24,639 511 101,568 0 25.32

Class A 3,680,245 28.3 34.1 10,911 6,021 91,707 0 26.71

Class B 1,625,147 29.2 29.5 -19,238 -19,238 24,384 0 24.48

Westchase Total 15,473,973 31.5 35.9 -192,735 -208,454 53,317 0 26.65

Class A 8,580,911 31.2 37.0 -69,134 23,008 37,780 0 32.44

Class B 6,802,425 30.1 33.7 -70,442 -70,442 42,144 0 22.17

Woodlands/Conroe Total 16,647,742 20.8 24.2 78,058 -165,301 103,300 627,800 31.34

Class A 9,728,882 20.8 23.8 52,741 -173,121 60,936 568,000 32.95

Class B 6,420,427 21.4 23.6 -25,317 -25,317 56,056 672,800 30.61

Suburban Total 201,473,224 23.6 28.0 -679,073 -1,471,324 2,170,298 2,857,223 26.66

Class A 99,957,449 26.2 32.5 -337,253 -727,718 1,020,737 2,749,423 31.26

Class B 89,225,797 21.5 24.5 -472,704 -469,131 933,358 837,300 22.14

HOUSTON OFFICE QUARTERLY MARKET REPORT

Q2 2021

MARKET OVERVIEW HOUSTON OFFICE SUBMARKETS

77

Information and data within this repor t were obtained from sources deemed to be reliable. No warranty or representation is made to guarantee its accuracy.

90

90

90

59

45

Sam H

ouston Tollway

West Park Houston Tollway

Westheimer99

99

99

99

288

6

6

6

Fort Bend Tollway

10

10

10

90

225

59

59

290

290

1. CBD

2. Bellaire

3. Energy Corridor

4. FM 1960/ Hwy 249

5. Galleria/West Loop

6. Greenspoint/North Belt

7. Greenway Plaza

8. Gulf Fwy/Pasadena

9. Katy Freeway East

10. Katy/Grand Pkwy W

11. Kingwood/Humble

12. Medical Center

13. Midtown

14. NASA/Clear Lake/SE

15. North Loop West

16. Northeast

17. Northwest

18. Pearland/South

19. Southwest

20. Sugar Land/E Ft Bend

21. West Belt

22. Westchase

23. Woodlands/Conroe

HOUSTON OFFICE QUARTERLY MARKET REPORTQ2 2021

LETA WAUSON DIRECTOR OF RESEARCH leta.wauson@naipar tners.com tel 713 275 9618

HOUSTON + 713 629 0500

1360 Post Oak Blvd #1900 Houston, Texas 77056

WWW.NAIPARTNERS.COM