Houston office market –Sublease and activity overview

August, 2016

What you need to know about the current state of the Houston office sublease market

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11.7 million square feet of sublease space now available • Largest blocks of sublease space located in Energy Corridor, CBD, Galleria, and Greenspoint• Over 5 million SF of sublease inventory here for the long term (5+ years of term remaining)

Velocity of subleases coming to market not slowing• Significant subleases added in 2016 include Shell, BHP Billiton, BG Group and Marathon Oil

bringing over 5 million SF to market

Subleases not being absorbed• Sublease space coming to market five times faster than it’s being leased• Only a handful of spaces larger than 20,000 SF leased so far this year; 2015 activity similar• Only four percent of current subleases will revert to direct basis in 2016• Average sublease signed this year is tiny – smaller tenants taking advantage of options

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Source: JLL Research

Sublease space inventory overview

CBD and the Energy Corridor (Katy Freeway, Westchase) lead in sublease space availability

CBD2,379,857

Katy Fwy West3,038,209

Katy Fwy East444,715

Westchase1,374,620

Galleria1,057,805

Greenspoint932,737

Woodlands482,760

Other1,997,119

*This dataset reviews all sublease availabilities in office properties within the Houston market. 4

Source: JLL Research

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SF of

Sub

lease

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Greenspoint Sublet Total Avail SFCBD Sublet Total Avail SFKaty Fwy Sublet Total Avail SFGreenway Sublet Total Avail SFWoodlands Sublet Total Avail SFWestchase Sublet Total Avail SFGalleria Sublet Total Avail SF

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Sublease space in Houston’s top submarkets more than double the average inventory

Source: JLL Research

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*This dataset reviews all sublease availabilities in Class A and B properties within the top seven office submarkets, regardless of size.

131,870

1,687,399

699,607

464,855

222,366

706,302

520,099

235,338 279,284

636,607

278,564 211,084 155,414

929,894

235,714

593,277 514,731

2,137,058

350,887

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2015

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Key Ideas to remember in 2015 (and 2016)

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Oil volatility sending shockwaves through market: on average,580,000 SF of subleases coming online monthly

SF of

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ase s

pace

avail

able

*This dataset reviews all sublease availabilities in Class A and B properties within office submarkets in Houston. Source: JLL Research

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Sublease overhang will not remedy in the short term: 5.3 million SF of sublease options have 5+ years remaining

Source: JLL Research – This dataset reviews all sublease availabilities in office properties within the Houston market - Data pulled 7/13/2016

Less than 6 months term remaining424,003

4% 6 months to 1 year term remaining828,557

7%

1 year to 2 years term remaining1,613,483

14%

2 years to 5 years term remaining3,521,980

30%

5 years to 10 years term remaining3,474,676

30%

More than 10 years term remaining1,452,274

12%

Unknown term remaining392,849

3%

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Tenants did not flock to sublease opportunities in 2015; leasing activity among subleases was very light

Source: JLL Research

Subleases signed in 2015 above 20,000 SF

Multi-floor subleases signed in 2015

Average deal size

Subleases signed in 2015

Total sublease space leased in 2015

16

Fewer than 10

8,378 SF

148

1.24 million SF

Top industry taking sublease space Energy

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Tenants currently taking advantage of sublease opportunities are smaller in size; only seven full floors leased YTD

Source: JLL Research – data pulled 7/13/2016

Subleases signed in 2016 above 10,000 SF

Multi-floor subleases signed in 2016

Average deal size

Subleases signed in 2016

Total sublease space leased in 2016

21

1

5,732 SF

140

802,529 SF

Subleases signed in 2016 above 20,000 SF 7

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2010 2011 2012 2013 2014 2015 2016

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Overall leasing activity consistently weak, will impact absorption of sublease space and new construction

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10-Yr Average Quarterly Leasing Activity

Source: JLL Research

Challenges arising in the market

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M&A Activity leaves uncertainty in the market

• Impact will continue to be felt in the Houston office market via space contractions and consolidations• Full M&A impact on market typically delayed by 6-12 months• 2016-2017 could see additional major players involved, especially if oil prices continue to remain around $50/bbl

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While oil prices are still recovering… Why this matters…• Deal velocity continues slowdown, contract rents will fall;

landlord concessions increase• Spec construction will remain on hold due to weak demand,

lending tightening• Job reductions continue as E&P/energy service companies

slash headcounts• M&A activity expected to increase (combination of debt issues

for small and mid-size companies and oil prices around $50/bbl)

• Short term leases will be the focus in 2016 • More and more sublease space will arrive to market, may grow

to 13 million SF by 2017• Market will continue to be tenant-favorable

Office market forecast - looking ahead into 2016 and 2017

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Vacancy ConcessionsRentsNearly 3 million SF of new deliveries remains un-leased; this combined with space contractions and M&A activity may push vacancy over 20% market wide

Thanks to weak deal velocity and cautious tenants in the market, landlords will continue to offer increased concessions (flexible lease terms, free rent, tenant improvements)

Published market rents flatten; “street-level” deals will offer significantly discounted market rents with owners focusing on maintaining occupancy rather than high rates

Key takeaways

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Top themes impacting the office CRE market

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Sublease space continues its mount• Over 11.7 million SF of sublease options now available across the Houston office market• Sublease supply is currently double the ten-year historical average, while demand

continues to lag behind

New deliveries add pressure to vacancy• Over 1.0 million square feet has delivered without preleasing commitments in 2016• As a result, total vacancy ticked up to 18.5 percent during Q2

Leasing demand unable to keep pace with supply• Failed to surpass 1.5 million square feet in total leasing activity for the first time in the last

15 years• Availability is over 26.6 percent, meaning one in four floors is available marketwide

Source: JLL Research