Tenant advisor newsletter 10 2010

The Tenant Advisor

Inside this issue:

Office Space Density: The New Workspace Metric

The CRE Market Cycle

A Long Road Back for the Office Market

So What Cities are Creating Jobs?

View the Tenant Advisor on the Web

www.coydavidson.com

Plus: Houston Office Market Report 3Q 2010

OCT / NOV 2010

Contents

Office Space Density: The New Workspace Metric Doing More with Less

The CRE Market Cycle Understanding Market Cycles in Commercial Real Estate

A Long Road Back for the Office Market The Recession may be over, but Recovery in the Office Market could take awhile

So What Cities are Creating Jobs? Which Cities are Leading the Recovery in Job Creation

Houston Office Market Report 3Q 2010

Houston Suburban Office Market Continues to Outpace CBD

All articles contained herein are the opinion of the author and not those of either Colliers Appelt Womack Inc. or Colliers International (collectively, "Colliers"). Colliers neither endorses, sponsors nor necessary shares the opinions of the author, regardless of whether any article is posted by any employee, officer, agent, or representative of Colliers. Colliers has not authorized or verified any statement of fact made in a article, and any such statement does not constitute a statement of fact by Colliers. Colliers is not responsible for the monitoring or filtering of this newsletter, nor does Colliers claim ownership or control over any the newsletter content

Coy Davidson

Senior Vice President

Office Services Group

Direct: 713.830.2128

[email protected]

www.coy.davidson.com

The 4th Quarter is here and the end is rapidly approaching to a year which has still

been challenging with an economy that is improving, but struggling to gain steam

both locally in Houston, as well as Nationally

As companies wrestle with the new economy, many are taking a closer look at

their real estate as a means to not only control costs but also to increase

productivity. Understanding where we are in the real estate market cycle and the

projected duration of the current market phase will play an important role in

developing an effective real estate strategy for your workplace going forward.

The current economic climate offers tremendous opportunities for office tenants to

secure attractive leasing terms and minimize occupancy costs for several years to

come. Texas is leading the way in new job creation, and in Houston, where the

recession’s impact was not as severe, the current state of office market

fundamentals would suggest the window of opportunity for office tenants could

close sooner than many parts of the country.

I am pleased to provide you with current issue of the of my newsletter, which is

tailored to the corporate office space user and addresses these topics. You can

view all these articles and other related topics on my blog “The Tenant Advisor” at

www.coydavidson.com.

I hope you find the content informative.

About Me:

I assist corporate users and businesses with their office space and facility requirements,

identifying optimal, cost effective locations, structuring transactions and corporate real

estate strategy that compliments their business objectives.

I have over twenty years experience in commercial real estate experience specializing in

corporate real estate services, tenant representation and office leasing. I practice in the

Houston office of Colliers International, a global real estate services firm and industry leader

with 480 offices worldwide.

My background includes assisting a wide variety of corporate office and industrial space

users with a focus on the Houston and Austin office markets. I have served clients in

additional U.S markets including, Dallas, San Antonio, Seattle, Phoenix, St. Louis,

Cleveland, Denver and Miami.

Step one to improving space utilization is typically to eliminate surplus space through subleasing, lease terminations, consolidating locations and selling non-productive real estate a s s e t s . H i s t o r i c a l l y occupancy costs have been benchmarked in terms of three primary metrics:

After a company has gone through the disposition of surplus space process and aligned these metrics to acceptable levels based on their new employee count, what is next?

Improving Space Utilization

Numerous industry studies have shown that the aver-age maximum utilization rate throughout the day for most office space is just 48 percent. A great deal has been written lately about the design of workspace and how companies are looking to do more with less office space. While this trend in some industries began prior to the latest economic downturn, the recession has caused companies to take a more aggressive posture towards office space density.

Office density: is defined as the space (per square foot) per workstation. Office d e n s i t y e x c l u d e s accounting for support spaces and is calculated on a net rentable basis. A higher office density means a lower space per work-station and a lower density means more space per workstation.

Measuring office density helps to identi fy a benchmark for office efficiency in addition to assist with monitoring new office use techniques.

Workplace Trends

The general trend of the open plan workplace, where managers give up their private offices and join their employees in a more open office environment is b e c o m i n g m o r e

commonplace. Open plan environments have grown in adoption partly due to the perceived cost saving, increased flexibility and the premise this strategy e n h a n c e s t e a m collaboration, productivity and communication.

Big Four professional services firm Deloitte is starting the build-out of its new 166,000-square-foot San Francisco head-quarters and expects to expand the 1,500 person San Francisco office by 10 percent in the next year, the new office will represent a 42 percent decline in

square footage from the 285,000 square feet the firm currently occupies.

There is no one size fits all when it comes to office space. How a company utilizes office space is driven by the activities of the organization. For example, Law f i rms typically have a higher ratio of private offices than other industries. In Houston, the energy capital of the world,

we saw many companies in the oil gas sector take the open office space approach and while some have retained that strategy, oth-ers have trended back to a more traditional office layout with private offices for senior managers. I would note for energy companies, real estate occupancy costs as a percentage of revenues is much lower than most industries.

Whatever strategy a company takes in regards to its office space design, calculating "office density" is the workspace metric that is now in vogue.

Off ice Space Densi ty : The New Workspace Metr ic

The Tenant Advisor

“The general trend of the open office plan where managers give up their private offices and join their employees in a more open office environment is becoming more commonplace.”

There is quite a bit of discussion lately regarding where commercial real estate is in the market cycle and the fact that the most recent recession has been officially declared as having ended in in July of 09. However, at this point the labor market has yet to

show any significant improvement. As a result of facing the prospect of a jobless recovery for some time, the road back for the office market could be long.

A Look at the Market Cycle

Recession Phase: The phase following contraction, characterized by very low demand and high levels of supply that were added during the previous two phases. Typically involves high vacancies, negative rental growth and high overall cap rates.

Recovery Phase: The phase following the market bottom, characterized by t i g h t e n i n g m a r k e t conditions and a shift in supply/demand balance leading to reduced vacancy rates, more balanced rental growth, and a stabilization of overall cap rates.

Expansion Phase: The phase following recovery, characterized by strong demand and increasingly tight market conditions leading to low vacancy rates, robust rental growth and decreasing overall cap rates.

Contraction Phase: The phase following the market peak, characterized by softening market conditions and a shift in the supply/demand balancing leading to increasing vacancy rates, slowing rental growth and rising overall cap rates.

So Where is the Office Sector in the Market Cycle?

Historically the office market lags any shifts in the general economy by 2-3 quarters. So while a modest recovery may very well have begun, it has yet to appear in the office employment numbers in any significant way.

Employment performance is mixed among major office markets and as a r e s u l t s o m e h a v e performed better than others over the last year. In some markets rents and vacancies are bottoming out while in others rents are still falling with vacancies rates still creeping upward. We will be seeing the 3rd quarter market reports soon, but I think it is an accurate statement to say that office markets around the country are either still in the recession phase or in the early stages of recovery. In either case given the employment outlook, the expansion phase does not appear to be on the horizon anytime soon.

The CRE Market Cyc le

The Tenant Advisor

“ Historically the office market lags any shifts in the generally economy by 2-3 quarters. So while a modest recovery may very well have begun, it has yet to appear in the office employment numbers in a significant way”

The Houston Office Market

The Recession is Officially Declared Over

The National Bureau of Economic Research, an independent group of economists, released a statement in September saying economic data now clearly point to the economy turning higher last summer. That makes the 18-month recession that started in December 2007 the longest and deepest downturn for the U.S. economy since the Great Depression.

A jobless recovery does not bode well for the office market

Despite the end of the economic downturn, nonfarm payrolls are still down 329,000 from their level at the recession’s official end 15 months ago, and the slow growth in recent months means that the unemployed still have a long road ahead. The recession was not only long but also deep as only 9% of the jobs lost during the recession have come back.

Many economists estimate that output needs to grow over the long run by about 2.5 percent to keep the unemployment rate, now at 9.6 percent, constant. The economy grew at an annual

rate of just 1.6 percent in the second quarter of this year, and many believe growth will not be much better in the third quarter.

A white paper released recently from the Federal Reserve Bank of San Francisco, suggests strong U.S. productivity rates are likely to continue well into the future, creating another hurdle for s igni f icant improvement in the labor market.

The Good and Bad News for the Office Sector

A significant improvement to market fundamentals for the U.S. office sector is entirely dependent on a substantial and sustained upturn in office employment. The good news for office property owners is that once growth in office employment begins to sustain itself, these gains will not be offset by any increase in supply to the office inventory. There has been very little new office inventory come out of the ground since the downturn began back in December of 2007.

The bad news for office building owners is that substantial and sustained i n c r e a s e i n o f f i c e

employment does not appear to be on the horizon as hope for a sharp recovery diminishes. Many forecasters are predicting 9 plus percent unemployment even through the next presidential election. Further complicating matters is corporations are reluctant to hire with so much uncertainty in the economy despite the fact they are recording strong profits and sitting on large piles of cash reserves. There is also a growing trend of companies increasingly looking for ways to do more with less in regards to their office space and facilities in order to remain competitive.

What about the Houston Office Market?

D e s p i t e s o m e w e l l documented issues exclusive of the National Economy, the Houston office market is in a better position for a quicker recovery to pre-recession market fundamentals than many major markets around the country. Propped up by the Energy Industry, Houston has only experienced approximately 1.4 million square feet of negative office space absorption since the beginning of 2009 when the market began to feel the downturn.

The impact of the recession has certainly made its mark on the Houston office market, but the damage just hasn't been as severe as compared to other cities. So in effect Houston should have a shorter road back, but just like the rest of the country we are dependent on sustained growth in office employment before that full recovery can occur.

A Long Road Back for the Off ice Market

The Tenant Advisor

“A significant improvement to market fundamentals for the U.S. office sector is entirely dependent on a substantial and sustained upturn in office employment. The good news for office property owners is once growth in office employment begins, these gains will not be offset by any increase in supply to the office inventory.”

shows Boston, MA led the nation with 36,600 new jobs created in the past 12 months followed by Dallas, TX (28,700), Washington, DC (20,500), Austin, TX (18,700), and St. Louis, MO (7,500).

No Surge Coming

While it is encouraging to see some cities posting year-over-year gains in jobs, for the vast majority of metropolitan areas employment gains are still a long way off. The past several months have been marked by a loss of jobs at

the national level, although if losses in the public sector are ignored the opposite is true. Indeed, private sector employment has now increased month-over-month for the past nine months. While a major surge in nationwide jobs is highly unlikely in the short term, the data suggests that moderate g rowth i s occur r ing . Hopefully a more robust recovery will prevail and shortly lead to more cities in the plus column than in the negative column.

So What Ci t ies are Creat ing Jobs? By: Ross Moore, Chief E c o n o m i s t , C o l l i e r s International USA.

Despite all the gloom and doom surrounding the jobs market, a few cities around the country are now showing posit ive year-over-year growth. While this group is fairly small, it is growing every month as the economy expands (albeit slowly) and employers feel the need to add to their payrolls. September 2010 data from the Bureau of Labor Statistics shows on a year-over-year basis employment was up 0.3%. A limited number of cities are now showing a modest gain in jobs on an annual basis, however, many are still either showing losses or no change relative to a year ago.

So Who is Leading the Country?

The top three cities for job growth for the year ending August 2010 (metro level data lagged by one month) were Austin, TX (2.5 percent), Boston, MA (1.5 percent) and Dallas/Ft. Worth, TX (1.0 percent). This top three list is probably not a surprise to many particularly the two Texas cities but Boston might be an eye-opener to some. Boston, however, has benefited from a diverse economic base and an economy based on knowl-edge and learning. At the other end of the spectrum with notable metropolitan areas job losses over the last yea r i nc l ude ; Reno , Sacramento, Fresno, San Francisco-Oakland-Fremont and Las Vegas. In absolute terms, the August jobs report

“The top three cities for job growth for the year ending August 2010 were Austin, Boston and Dallas/Fort Worth” While Houston has yet to record positive job growth on a year-over-year basis, many have projected it will before year-end.

The Tenant Advisor

www.colliers.com/houston

Q3 2010 | OFFICE MARKET

RESEARCH & FORECAST REPORTHOUSTON OFFICE MARKET

Houston Suburban Office Market Continues to Outpace CBDHouston’s office market at the close of 3Q2010 showed a slight improvement from the previousquarter, with a stronger performing suburban sector, compared to the Central Business District (CBD).Although leasing activity picked up, vacancy increased slightly. Year-over-year change in officeoccupancy citywide was moderate with 83.3 percent occupancy at the end of the third quartercompared to 83.8 percent in the same quarter last year. Quoted rental rates citywide for Class A spacedecreased 0.4 percent, with the CBD Class A decreasing 2.0 percent to $35.16 per square foot, whilesuburban Class A space decreased a minimal 0.2 percent to $27.30 per square foot. Net absorptionalso showed the combined suburban markets outperforming the CBD. While the CBD’s year-to-date netabsorption was negative 553,516 square feet, the suburban markets’ combined net absorption waspositive at 242,261 square feet. Even with weak pockets scattered citywide, the suburban markettrends continue to indicate this sector will plateau sooner, and will likely lead the office marketrecovery.

Looking forward, several key events are contributing to a more cautious outlook for the local downtownoffice market over the next 6–12 months. The recently approved merger between Houston-basedContinental Airlines and Chicago-based United Airlines expected to close by year-end will notnegatively impact CBD Class A occupancy in the near-term. According to a source close to the deal,Continental’s lease doesn’t expire until 2014 and the space will not be offered for sublease for 12-24months. The top concern for the CBD Class A market is the completion of speculative newconstruction. Hines’ 972,474-square-foot MainPlace is currently 10 percent leased and expected to becompleted by February 2011. Securing an anchor tenant before final delivery, however, remains apossibility as was the case with the only other new office building underway downtown—TrammellCrow Company’s 844,763-square-foot Hess Tower—100 percent pre-leased to Hess Corporation andscheduled to open in October 2010.

According to the Texas Labor Market Review, Texas MSA’s have experienced job gains in six out ofeight months so far this year. Although Houston isn’t the top performing MSA in Texas, Houstoncontinues to be recognized as one of the strongest metros in the U.S. for business activity, with theemployment sector reporting marked improvement from this time last year. In the 12 months ending inAugust 2010, Houston’s job loss totaled 18,300, significantly below the 100,000 jobs lost in 2009, withthe local MSA projected to end 2010 with positive job growth. The area’s above-average populationgrowth spurring the need for increased services is also a positive contributing factor in Houston’sstrong long-term outlook.

MARKET INDICATORSQ3-09 Q3-10

NET ABSORPTION (SF)

6k (26k)

CITYWIDE AVERAGE VACANCY

16.2% 16.6%

CITYWIDE AVERAGE RENTAL RATE

$22.82 $23.11

CLASS A RENTAL RATE

CBD $37.45 $35.16

SUBURBAN $26.84 $27.30

CLASS A VACANCY

CBD 8.8% 10.1%

SUBURBAN 18.4% 19.3%

UNEMPLOYMENT 08/09 08/10

HOUSTON 8.2% 8.7%

TEXAS 8.0% 8.3%

U.S. 9.7% 9.6%

JOB GROWTH % #

HOUSTON -0.04% (0.9k)

TEXAS 1.3% 129k

U.S. -0.1% (183k)

5%

7%

9%

11%

13%

15%

17%

-1,000,000

-500,000

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Absorption

New Supply

Vacancy

ABSORPTION, NEW SUPPLY & VACANCY RATES

RESEARCH & FORECAST REPORT | Q3 2010 | HOUSTON OFFICE MARKET

$26.00

$28.00

$30.00

$32.00

$34.00

$36.00

$38.00

$40.00

Q3-09 Q4-09 Q1-10 Q2-10 Q3-10

CLASS A OFFICE RENTS

CBD RENTS SUBURBAN RENTS

4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%20.0%

Q3-09 Q4-09 Q1-10 Q2-10 Q3-10

CBD VS. SUBURBAN

CLASS A OFFICE VACANCY

CBD VACANCY SUBURBAN VACANCY

QUOTED GROSS RENTAL RATES FOR TOP PERFORMING OFFICE BUILDINGS

BUILDING NAME ADDRESS SUBMARKET RBA (SF) YEAR BUILT LEASED AVAIL. SF RENT ($/SF) OWNER

Wells Fargo Plaza 1000 Louisiana CBD 1,721,242 1983 94.6% 157,326 $40.96 Metropolitan Life Insurance Co.

Heritage Plaza 1111 Bagby CBD 1,149,635 1986 90.4% 110,365 $40.53 Goddard Investment Group

1100 Louisiana 1100 Louisiana CBD 1,265,332 1980 99.7% 17,605 $39.74 Enterprise Products Partners

One Eldridge Place 777 N. Eldridge Pkwy. Energy Corridor 239,417 1985/2001 91.4% 20,590 $29.50 Behringer Harvard

Offices at Park 10 16290 Katy Freeway Energy Corridor 157,000 2006 97.8% 3,428 $29.00 Franklin Street Properties

Minute Maid Building 2150 Town Square Place E. Fort Bend 185,000 2008 78.3% 40,145 $28.50 Planned Community Developers

Wells Fargo Tower 1300 Post Oak Blvd. Galleria 491,254 1983 93.6% 31,440 $33.00 TIAA-CREF

Five Post Oak Park 4400 Post Oak Pkwy. Galleria 567,396 1982 95.1% 27,802 $32.83 Shorenstein Company

Marathon Oil Tower 5555 San Felipe Galleria 1,178,750 1983 92.9% 83,616 $28.71 Hanover Real Estate Partners

11 Greenway Plaza 11 Greenway Greenway 745,956 1978 91.1% 66,390 $29.15 Crescent Real Estate Equities

One BriarLake Plaza 2000 W. Sam Houston Westchase 502,410 2000 95.8% 21,101 $39.73 Behringer Harvard

Waterway Square 4 Waterway Ave. Woodlands 232,364 2009 45.6% 126,406 $36.73 The Woodlands Development Co.

OCCUPANCY & AVAILABILITYWith the exception of suburban Class B properties,occupancy levels citywide have decreased at aslow pace over the past year. Houston’s officeoccupancy for all property classes averaged 83.3percent in the second quarter, compared to 83.8percent this time last year. Despite the incrementaldecreases, however, the ongoing softness in theemployment sector is not likely to reverse currentoccupancy trends in the near future.

In the CBD, top-tier properties’ resilience wanedbetween quarters, inching up into double-digitvacancy, with Class A occupancy at 89.9 percent,compared to 91.2 percent one year ago. In sharpcontrast, the CBD Class B posted 76.9 percentoccupancy, down from 78.3 percent 12 monthsearlier.

While the overall suburban occupancy rateremained relatively flat between quarters, double-digit vacancy continued for all suburban propertyclasses at midyear. Suburban Class A occupancyfell to 80.7 percent at the end of the third quarterfrom 87.4 percent last year. By comparison,suburban Class B occupancy rose a modest 0.1percent to 83.5 during the same period.

Citywide, a total of 56 office properties had100,000 square feet or more available for lease inboth direct and sublease space—16 of thoseproperties have over 200,000 square feetavailable—at the end of the third quarter. Subleasespace totaled 3.8 million square feet, including 2million square feet of vacant space and 1.8 millionsquare feet of subleases available for occupancyover the next 12 months. The largest subleasespace being marketed is Devon Energy’s space,281,755 square feet in Two Allen Center and186,462 square feet in Three Allen Center(available for occupancy 4/2011) in the CBD. InWestchase, 2103 CityWestPlace has the largestsuburban sublease space available, 128,770 squarefeet.

ABSORPTION & DEMANDHouston recorded negative net absorption of25,586 square feet in the third quarter, comparedto 248,351 square feet negative net absorption atthe same time last year. City-wide year-to-datenet absorption is negative 311,225 square feetwith CBD Class A product contributing most ofthat with year-to-date negative net absorption of435,872 square feet, followed by CBD Class Bwith negative net absorption at 131,085 squarefeet. In contrast, suburban Class A and B havemanaged to maintain modest positive netabsorption year-to-date with 72,499 and 101,149square feet, respectively.

Prevailing economic uncertainty is likely tocontinue negatively impacting overall absorptionlevels through the end of 2010.

RENTAL RATESAfter declining during the first two quarters of2010, rental rates for all property classesremained relatively flat between quarters.

On a year-over-year basis, CBD Class A averagequoted rental rates actually fell by 6.1 percent to$35.16 per square foot (from $37.45), whilesuburban Class A rates increased 1.7 percent to$27.30 per square foot. CBD Class B ratesposted a 1.8 percent increase to $23.87 persquare foot (from $23.46), while suburban ClassB rates fell 0.4 percent to $17.88 per square footon a full-service basis. While supply continues tooutpace demand, the current office tenants’market is expected to continue through the end ofthe year.

2COLLIERS INTERNATIONAL | P.


SALES ACTIVITYInvestment sales activity in the third quarter remained at a slow pace witha handful of suburban properties changing hands. Year-to-date through thethird quarter, office transactions totaled 29 with a total dollar volume of$948 million, averaging $205 per square foot with an 8.4 percentcapitalization rate.

Among the most significant transactions closed in the third quarter are:

American National Insurance acquired the 153,345-square-foot ThreeSugar Creek from Harry M. Green Interests for $28.5 million ($186 persquare foot). Located in the E Ft Bend/Sugar Land submarket, the buildingwas completed in 2007, and at the time of sale was 45 percent leased toAetna.

Healthcare Trust of America acquired a 176,000-square-foot medicaloffice building located at 7900 Fannin in the Medical Center fromStonehenge Development for $45.5 million ($257 per square foot).

Lincoln Property Co acquired Energy Crossing from M&I Bank. The six-story building located on I-10 at Hwy 6 was purchased with the adjacent5.5 acres of land that is designed for additional office space as well as a1.2 acre retail parcel. The sales price was not disclosed.

LEASING ACTIVITYHouston’s office leasing activity reached 3.2 million square feet in the thirdquarter, compared to 3.9 million square feet in the same quarter last year.Although still below levels before the recession, an increasing number ofoffice tenants are renewing lease commitments with better concessionpackages or relocating to buildings/submarkets offering more attractiveterms.

Significant new office leases (non-renewal) signed in the third quarterinclude:

Weatherford International leased 335,000 Sq. Ft. at 2000 St. JamesPlace, relocating from 515 Post Oak, both located in the Galleriasubmarket. Aker Solutions leased 133,417 Sq. Ft. at 3010 Briarpark,relocating from 3600 Briarpark, both located in the Westchasesubmarket.

The largest office lease renewal signed in the third quarter wasMustang Engineering’s early renewal of 248,872 square feet in TenWest Corporate Center II located in the Katy Freeway submarket.

Shell Oil Company signed the largest sublease during the quarter,300,000 Sq. Ft. in 1000 Main located in the CBD submarket.

SIGNIFICANT SALES TRANSACTIONS CLOSED IN THE Q3 2010

BUILDING NAME SUBMARKET RBA (SF) YEAR BUILT BUYER SELLER SALE

PRICE $/SF CLOSED

7900 Fannin St. Medical Center 176,000 2004 Healthcare Trust of America Stonehenge Development $45.4M $257 06/2010Three Sugar Creek Ft Bend/Sugar Land 153,345 2007 American National Insurance Harry M. Green Interests $28.5M $186 07/20105050 Westheimer Galleria/Uptown 162,909 1965 Black Forest Ventures LLC Stanford Financial Group $12.2M $172 07/2010

2010 TOP OFFICE LEASES (YTD)

BUILDING NAME/ADDRESS SUBMARKET SF TENANT LEASE DATE

KBR Tower CBD 883,487 KBR* 02/2010

2000 St. James Place West Loop/Galleria 335,000 Weatherford International 09/2010

1000 Main CBD 300,000 Shell Oil Co. 09/2010

Cullen Center CBD 291,536 KBR** 02/2010

Ten West Corporate Center II Katy Freeway 248,872 Mustang Engineering** 09/2010

Once Commerce Green Greenspoint 205,000 Nabors Corporate Services, Inc.** 08/2010

Galleria Tower II West Loop/Galleria 193,000 Southern Union 09/2010

Two Eldridge Place Katy Freeway 190,000 McDermott** 09/2010

Pinnacle Westchase Westchase 133,417 Aker Solutions 08/2010

Post Oak Central III West Loop/Galleria 130,846 SUEZ Energy** 05/2010

Wells Fargo Plaza CBD 122,896 U.S. General Services Administration 04/2010

5150 Westway Park Blvd. Northwest 92,420 CyrusOne 03/2010

Two Westlake Park Katy Freeway 92,000 BP** 09/2010

Williams Tower West Loop/Galleria 78,841 Rowan Cos.** 08/2010

Park Towers West Loop/Galleria 75,000 Cooper Cameron** 08/2010

2500 CityWest Westchase 68,000 TGS-NOPEC Geophysical 08/2010

*Renewal of 695,000 SF and expansion of 187,687 SF, **Renewal



INVENTORY DIRECT VACANCY SUBLEASE VACANCY VACANCY VACANCY RATE (%) NET ABSORPTION (SF) RENTAL RATE

CLASS TOTAL (SF) (SF) RATE (%) (SF) RATE (%) TOTAL (SF) Q3-2010 Q2-2010 Q3-2010 YTD AVG ($/SF)

CBD

A 26,726,873 2,282,115 8.5% 407,328 1.5% 2,689,443 10.1% 9.3% (194,016) (435,872) $35.16

B 8,816,266 1,974,148 22.4% 61,710 0.7% 2,035,858 23.1% 23.0% (4,442) (131,085) $23.87

C 1,426,156 781,947 54.8% 0 0.0% 781,947 54.8% 54.0% (11,827) 13,441 $16.15

TOTAL 36,969,295 5,038,210 13.6% 469,038 1.3% 5,507,248 14.9% 14.3% (210,285) (553,516) $29.87

SUBURBAN

A 68,523,499 12,509,859 18.3% 725,597 1.1% 13,235,456 19.3% 19.6% 221,943 72,499 $27.30

B 69,810,068 10,796,668 15.5% 778,415 1.1% 11,366,648 16.3% 16.3% (34,158) 101,149 $17.88

C 19,303,683 2,174,524 11.3% 36,615 0.2% 2,127,764 11.0% 11.3% (3,086) 68,613 $14.73

TOTAL 157,637,250 25,481,051 16.2% 1,540,627 1.0% 26,729,868 17.0% 17.1% 184,699 242,261 $21.77

OVERALL

A 95,250,372 14,791,974 15.5% 1,132,925 1.2% 15,924,899 16.7% 16.6% 27,927 (363,373) $28.92

B 78,626,334 12,770,816 16.2% 840,125 1.1% 13,402,506 17.1% 17.0% (38,600) (29,936) $18.65

C 20,729,839 2,956,471 14.3% 36,615 0.2% 2,909,711 14.0% 14.2% (14,913) 82,054 $14.94

TOTAL 194,606,545 30,519,261 15.7% 2,009,665 1.0% 32,237,116 16.6% 16.5% (25,586) (311,225) $23.11


CLASS TOTAL (SF) (SF) RATE (%) (SF) RATE (%) TOTAL (SF) Q3-2010 Q3-2010 YTD AVG ($/SF)

ALLEN PARKWAY

A 1,217,048 211,890 17.4% 120,877 9.9% 332,767 27.3% (1,191) 16,824 $28.44

B 3,081,442 218,692 7.1% 2,636 0.1% 221,328 7.3% 4,470 (36,202) $23.21

C 1,164,650 408,533 35.1% 0 0.0% 408,533 35.1% 1,779 12,563 $19.39

TOTAL 5,463,140 839,115 15.4% 123,513 2.3% 962,628 17.6% 5,058 (6,815) $24.83

BAYTOWN

B 525,544 4,600 0.9% 0 0.0% 4,600 0.9% 0 800 $18.08

C 60,396 2,603 4.3% 0 0.0% 2,603 4.3% 2,184 2,184 $15.76

TOTAL 585,940 7,203 1.2% 0 0.0% 7,203 1.2% 2,184 2,984 $17.24

BELLAIRE

A 1,389,252 114,770 8.3% 28,288 2.0% 143,058 10.3% (21,339) (27,924) $22.54

B 952,823 44,060 4.6% 60,131 6.3% 104,191 10.9% (60,486) (53,624) $19.19

C 546,968 47,592 8.7% 0 0.0% 47,592 8.7% (7,111) (15,391) $15.09

TOTAL 2,889,043 206,442 7.1% 80,419 3.1% 294,841 10.2% (88,936) (96,939) $20.55

CONROE

A 60,000 0 0.0% 0 0.0% 0 0.0% 0 0 -

B 192,859 14,282 7.4% 0 0.0% 14,282 7.4% 112 6,264 $16.24

C 157,335 4,275 2.7% 0 0.0% 4,275 2.7% 0 0 $15.00

TOTAL 410,194 18,557 4.5% 0 0.0% 18,557 4.5% 112 6,264 $15.79

E. FORT BEND

A 3,535,437 1,094,685 31.0% 15,069 0.4% 1,109,754 31.4% 31,178 (452,768) $27.15

B 2,061,851 311,867 15.1% 2,999 0.1% 314,866 15.3% (20,295) 5,103 $18.29

C 163,968 2,820 1.7% 0 0.0% 2,820 1.7% 810 5,272 $17.50

TOTAL 5,761,256 1,409,372 24.5% 18,068 0.3% 1,427,440 24.8% 11,693 (442,393) $23.73

HOUSTON OFFICE MARKET SUMMARY (CBD, SUBURBAN & CITYWIDE)

HOUSTON SUBURBAN OFFICE MARKET SUMMARY





FM 1960

A 2,267,021 1,487,314 65.6% 2,071 0.1% 1,489,385 65.7% 36 33,500 $26.12

B 4,669,277 962,648 20.6% 61,797 1.3% 1,024,445 21.9% (27,535) 39,590 $15.55

C 762,145 62,778 8.2% 2,463 0.3% 65,241 8.6% 7,640 24,546 $14.50

TOTAL 7,698,443 2,512,740 32.6% 66,331 0.9% 2,579,071 33.5% (19,859) 97,636 $19.37

GREENWAY

A 6,167,603 973,500 15.8% 136,251 2.2% 1,109,751 18.0% 25,077 (42,338) $27.27

B 2,551,339 254,628 10.0% 1,459 0.1% 256,087 10.0% 22,356 (7,678) $21.16

C 924,839 262,270 28.4% 0 0.0% 262,270 28.4% 1,456 (15,215) $16.92

TOTAL 9,643,781 1,490,398 15.5% 137,710 1.4% 1,628,108 16.9% 48,889 (65,231) $25.07

GULF FREEWAY/PASADENA

A 75,066 23,414 31.2% 6,273 8.4% 29,687 39.5% 547 547 $28.03

B 1,709,790 194,162 11.4% 13,481 0.8% 207.643 12.1% (19,388) 2,751 $19.74

C 1,126,564 106,867 9.5% 3,590 0.3% 110,457 9.8% 18,672 7,372 $14.23

TOTAL 2,911,420 324,443 11.1% 23,344 0.8% 347,787 11.9% (169) 10,670 $18.77

I-10 EAST

B 274,672 79,131 28.8% 9,260 3.4% 88,391 32.2% 2,349 9,343 $13.84

C 157,955 0 0.0% 6,536 4.1% 6,536 4.1% (6,526) (6,526) $11.91

TOTAL 432,627 79,131 18.3% 15,796 3.7% 94,927 21.9% (4,187) 2,817 $13.63

KATY FREEWAY

A 11,071,761 2,445,653 22.1% 23,979 0.2% 2,469,632 22.3% 112,513 271,539 $28.17

B 6,904,995 811,017 11.7% 75,872 1.1% 886,889 11.7% (16,625) 301,226 $18.31

C 1,813,421 189,948 10.5% 1,522 0.1% 191,470 10.6% 5,596 18,476 $15.06

TOTAL 19,790,177 3,446,618 17.4% 101,373 0.5% 3,547,991 17.9% 101,484 591,241 $23.56

KINGWOOD/HUMBLE

A 158,640 25,904 16.3% 0 0.0% 25,904 16.3% 4,800 4,800 $29.50

B 1,795,933 184,857 10.3% 3,741 0.2% 188,598 10.3% (15,801) 35,365 $20.42

C 663,736 27,108 4.1% 0 0.0% 27,108 4.1% (445) 650 $14.91

TOTAL 2,618,309 237,869 9.1% 3,741 0.1% 241,610 9.2% (11,446) 40,815 $19.88

NASA/CLEAR LAKE

A 809,372 81,818 10.1% 6,214 0.8% 88,032 10.9% 6,025 3,714 $21.92

B 3,174,855 205,620 6.5% 19,807 0.6% 225,427 7.0% 4,804 33,902 $21.39

C 1,228,410 169,703 13.8% 13,047 1.1% 182,750 14.9% (3,314) (6,681) $15.73

TOTAL 5,212,637 457,141 8.8% 39,068 0.7% 496,209 9.5% 7,515 30,935 $20.51

NORTH BELT/GREENSPOINT

A 4,618,495 239,116 5.2% 62,232 1.3% 301,348 6.5% 13,960 43,168 $19.38

B 5,288,025 1,303,011 24.6% 152,713 2.9% 1,455,724 27.5% (101,948 (144,038) $15.69

C 1,346,611 212,993 15.8% 9,457 0.7% 222,450 16.5% (8,709) (29,184) $13.32

TOTAL 11,253,131 1,755,120 15.6% 224,402 2.0% 1,979,522 17.6% (96,697) (130,054) $16.04

NORTHEAST/OUTLIER

B 265,773 39,918 15.0% 0 0.0% 39,918 15.0% (348) 7,616 $15.33

C 149,813 12,506 8.3% 0 0.0% 12,506 8.3% 4,403 (3,266) $12.00

TOTAL 415,586 52,424 12.6% 0 0.0% 52,424 12.6% 4,055 4,350 $14.31






NORTHWEST

A 3,724,724 1,322,400 35.5% 1,404 0.0% 1,323,804 35.5% 30,976 83,828 $25.33

B 6,710,072 1,473,546 22.0% 26,567 0.4% 1,500,113 22.4% 38,607 (64,757) $15.37

C 1,546,532 83,458 5.4% 0 0.0% 83.458 5.4% 10,405 39,402 $12.22

TOTAL 11,981,328 2,879,404 24.0% 27,971 0.2% 2,907,375 24.3% 79,988 58,473 $19.73

NORTHWEST OUTLIER

A 89,750 0 0.0% 0 0.0% 0 0.0% 0 0 -

B 135,457 1,594 1.2% 0 0.0% 1,594 1.2% 0 5,978 $17.70

TOTAL 225,207 1,594 0.7% 0 0.0% 1,594 0.7% 0 5,978 $17.70

RICHMOND/FOUNTAINVIEW

B 761,420 72,286 9.5% 0 0.0% 72,286 9.5% 4,327 6,295 $15.83

C 693,325 36,949 5.3% 0 0.0% 36,949 5.3% (1,478) 14,292 $14.73

TOTAL 1,454,745 109,235 7.5% 0 0.0% 109,235 7.5% 2,849 20,587 $15.56

SAN FELIPE/VOSS

A 1,741,228 272,931 15.7% 2,688 0.2% 275,619 15.8% 3,658 (26,530) $29.48

B 3,271,828 302,666 9.3% 24,839 0.7% 326,505 10.0% (23,195) 8,297 $19.78C 161,393 21,403 13.3% 0 0.0% 21,403 13.3% 265 497 $17.40

TOTAL 5,174,449 597,000 11.5% 26,527 0.5% 623,527 11.5% (19,272) (17,736) $23.05

SOUTH

A 80,000 74,500 93.1% 0 0.0% 74,500 93.1% 0 5,500 $26.63

B 379,764 23,164 6.10% 0 0.00% 23,164 6.10% 3,740 6,650 $22.99

C 223,029 38,920 17.50% 0 0.00% 38,920 17.50% 3,300 3,300 $16.70

Total 682,793 145,584 21.30% 0 0.00% 145,584 21.30% -1,960 6,450 $23.39 SOUTH MAIN/MED CENTER

A 3,916,577 363,337 9.3% 0 0.0% 363,337 9.3% (1,196) (12,309) $30.92

B 3,791,116 328,347 8.7% 4,800 0.1% 333,147 8.8% 4,090 (101,287) $20.17

C 2,745,096 112,916 4.1% 0 0.0% 112,916 4.1% (26,745) 15,364 $17.28

TOTAL 10,452,789 804,600 7.7% 4,800 0.1% 809,400 7.7% (23,851) (98,232) $24.15

SOUTHEAST/OUTLIER

A 159,304 0 0.0% 0 0.0% 0 0.0% 0 0 -

B 456,504 73,177 16.0% 0 0.0% 73,177 16.0% (2,423) (1,698) $22.28

C 22,783 12,533 55.0% 0 0.0% 12,533 55.0% (12,533) (12,533) $24.00

TOTAL 638,591 85,710 13.4% 0 0.0% 85,710 13.4% (14,956) (14,231) $22.51

SOUTHWEST

A 1,505,805 432,270 28.7% 52,056 3.5% 484,326 32.2% 11,656 (19,623) $15.94

B 6,043,028 1,234,928 20.4% 158,895 2.6% 1,393,823 23.1% (41,313) (30,417) $15.63

C 2,475,389 259,768 10.5% 0 0.0% 259,768 10.5% 11,994 12,701 $11.96

TOTAL 10,024,222 1,926,966 19.2% 210,951 2.1% 2,137,917 21.3% (17,663) (37,339) $15.20

SOUTHWEST FAR/OUTLIER

A 87,710 2,371 2.7% 0 0.0% 2,371 2.7% 7,745 7,745 $28.00

B 616,117 77,253 12.5% 0 0.0% 77,253 12.5% 14,318 14,463 $26.84

C 128,735 0 0.0% 0 0.0% 0 0.0% 0 (3,000) -

TOTAL 832,562 79,624 9.6% 0 0.0% 79,624 9.6% 22,063 19,208 $27.00






WEST LOOP/GALLERIA

A 16,303,906 1,536,703 9.4% 187,307 1.1% 1,724,010 10.6% (41,296) 46,804 $29.95

B 5,545,754 1,217,757 22.0% 14,820 0.3% 1,232,577 22.2% (17,291) 75,609 $19.92

C 426,332 2,444 0.6% 0 0.0% 2,444 0.6% 7,430 20,950 $16.50

TOTAL 22,277,992 2,756,904 12.4% 202,127 0.9% 2,959,031 13.3% (51,157) 143,363 $26.45

WESTCHASE

A 7,636,999 1,329,788 17.4% 36,357 0.5% 1,366,145 17.9% 27,340 108,583 $30.03

B 5,374,721 937,457 17.4% 59,658 1.1% 997,115 18.6% 84,214 (9,884) $18.88

C 441,936 53,425 12.1% 0 0.0% 53,425 12.1% 5,476 475 $15.16

TOTAL 13,453,656 2,320,670 17.2% 96,015 0.7% 2,416,685 18.0% 117,030 99,174 $25.11

THE WOODLANDS

A 1,907,801 477,495 25.0% 44,531 2.3% 522,026 27.4% 11,454 27439 $28.42

B 3,275,109 426,000 13.0% 84,940 2.6% 510,940 15.6% 27,155 (8,518) $20.32

C 172,322 42,712 24.8% 0 0.0% 42,712 24.8% (17,635) (17,635) -

TOTAL 5,355,232 946,207 17.7% 129,471 2.4% 1,075,678 20.1% 20,974 18,322 $23.55


OFFICE DEVELOPMENT PIPELINEHouston’s development activity remained dormant in Q3 2010, with no new additions to the officebuildings already under construction. The 2M square feet under construction are as follows:Indermuehle & Company’s 19,130-square-foot Sugar Creek Office Park (E. Fort Bend Countysubmarket) and Caldwell Companies’ 15,367-square-foot Webster Office Building (NASA/ClearLake submarket).

Two CBD office projects—Hines’ 972,474-square-foot Main Place (slated for delivery by February2011) and Trammell Crow Company’s Hess Tower (formerly Discovery Tower, scheduled forcompletion by October 2010)—continue to be the sole high-profile buildings under construction atthe end of the third quarter. Notably, both downtown projects began construction before theeconomic downturn of late 2008. Developers have ventured to introduce new product in high-growth suburban markets, including a project in the East Fort Bend County submarket: NewlandCommunities’ 40,000-square-foot The Exchange at Telfair (expected by year-end 2010), whichwill be part of the planned mixed-use development for one of the area’s newest and mostsuccessful master-planned communities of the same name. Other suburban projects includeGreenwood Corporation’s 156,000-square-foot Chasewood Crossing II in the FM 1960-Highway249 submarket (scheduled for completion in April 2011), as well as Black Forest Ventures’70,000-square-foot Black Forest Park, located in The Woodlands submarket and slated fordelivery by November 2010. The German investment firm Black Forest Ventures (based in TheWoodlands) recently made news with the acquisition of the Stanford Financial Center in theGalleria submarket, and is considered by industry leaders likely to continue expanding in Houston.

SELECT OFFICE BUILDINGS UNDER CONSTRUCTION

BUILDING NAME ADDRESS SUBMARKET SF LEASED DEVELOPER EST. DELIVERY

MainPlace 811 Main St. CBD 972,474 10.1% Hines Holdings Inc. 02/2011

Hess Tower 1501 McKinney St. CBD 844,763 100.0% TCC Development 10/2010

Chasewood Crossing II 19450 State Hwy 249 FM 1960/Hwy 249 156,000 0.0% Greenwood Corporation 04/2011

Black Forest Park 4526 Research Forest Dr. The Woodlands 64,000 0.0% Black Forest Ventures 12/2010

The Exchange at Telfair University Blvd. & Hwy 59 E. Fort Bend 40,000 0.0% Newland Communities 12/2010

Total SF Under Construction 2,077,237

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