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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.
3
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
7
$15
$20
$25
$30
$35
$40
2010
Q1
2010
Q3
2011
Q1
2011
Q3
2012
Q1
2012
Q3
2013
Q1
2013
Q3
2014
Q1
2014
Q3
2015
Q1
2015
Q3
2016
Q1
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)
(2.0)
(1.0)
0.0
1.0
2.0
3.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
YTD
201
6
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
Q3
2012
Q1
2012
Q3
2013
Q1
2013
Q3
2014
Q1
2014
Q3
2015
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)
0.0
2.0
4.0
6.0
8.0
10.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
YTD
201
6
Class A Class B Houston TotalVacancy Rate Houston Avg. Rate
5%
7%
9%
11%
13%
15%
2010
Q1
2010
Q3
2011
Q1
2011
Q3
2012
Q1
2012
Q3
2013
Q1
2013
Q3
2014
Q1
2014
Q3
2015
Q1
2015
Q3
2016
Q1
Class A Vacancy Class B Vacancy Houston Avg. Vacancy
9
0.0%
1.0%
2.0%
3.0%
4.0%
$4
$12
$20
$28
$36
2010
Q1
2010
Q2
2010
Q3
2010
Q4
2011
Q1
2011
Q2
2011
Q3
2011
Q4
2012
Q1
2012
Q2
2012
Q3
2012
Q4
2013
Q1
2013
Q2
2013
Q3
2013
Q4
2014
Q1
2014
Q2
2014
Q3
2014
Q4
2015
Q1
2015
Q2
2015
Q3
2015
Q4
2016
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
11
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
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
YTD
201
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
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
YTD
201
6
Class A Class B Houston Total ProjectedMSF Delivered
5%
7%
9%
11%
13%
15%
2010
Q1
2010
Q3
2011
Q1
2011
Q3
2012
Q1
2012
Q3
2013
Q1
2013
Q3
2014
Q1
2014
Q3
2015
Q1
2015
Q3
2016
Q1
Class A Vacancy Class B Vacancy Houston Avg. Vacancy
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
240,470 SF0.2% LeasedMulti-Tenant
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
226,511 SF28.6% LeasedMulti-Tenant
Delivers 1/2017
3773 RichmondGreenway Plaza
210,000 SF37.4% LeasedMulti-Tenant
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
400,000 SF90.2% LeasedMulti-Tenant
Delivers 2/2017
Notable New Construction
3200 KirbyGreenway Plaza
188,696 SF0.0%
Multi-TenantDelivers 12/2017
17
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
YTD
201
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
$10
$20
$30
$40
$50
2010
Q1
2010
Q2
2010
Q3
2010
Q4
2011
Q1
2011
Q2
2011
Q3
2011
Q4
2012
Q1
2012
Q2
2012
Q3
2012
Q4
2013
Q1
2013
Q2
2013
Q3
2013
Q4
2014
Q1
2014
Q2
2014
Q3
2014
Q4
2015
Q1
2015
Q2
2015
Q3
2015
Q4
2016
Q1
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)
(1.0)
0.0
1.0
2.0
3.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
YTD
201
6
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
0
70
140
210
280
350
420
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
YTD
201
6
Total SF Leased Total Deals
Mill
ions
SF
20
4
3
1
2
2
3
1
1
4
2
3
1
4
3
54
213
5
1
2
4 5
3
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
22
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$8
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$24
$32
$40
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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:
• 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.
23
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201
6
Total SF Leased Total Deals
(1.5)
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YTD
201
6
YTD Absorption SF Delivered
Rental Rate
$26.78/SF
Vacancy Rate
10.6%
Rental Rate
$37.82/SF
Vacancy Rate
11.8%
Net Absorption
-1K SF
Construction
0 SF
Net Absorption
29K SF
Construction
1.29 MSF
1Q 2016
Class A1Q 2016
Class B
Absorption & Deliveries | Class A + B Leasing Activity | Class A + B
09GALLERIA SUBMARKET UPDATEM
illio
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Office Snapshot
24
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09 GALLERIA SUBMARKET UPDATE
4
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Under Construction Proposed Development
1500 Post Oak Blvd.600,000 SF | 100% Leased
1717 West Loop South380,000 SF | 74.2% Leased
7401 Katy Fwy.225,000 SF
Largest Tenants Recent Leases Signed
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
Largest Sublease Spaces Largest Blocks of Space
1360 Post Oak Blvd159,751 SF
5555 San Felipe108,204 SF
1330 Post Oak Blvd101,130 SF
2800 Post Oak Blvd46,466 SF
1330 Post Oak Blvd40,452 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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Class A Rate Class B Rate Class A Vacancy Class B Vacancy
Rent vs Vacancy | Class A + B
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.
27
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201
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201
6
Total SF Leased Total Deals
Rental Rate
$20.28/SF
Vacancy Rate
9.3%
Rental Rate
$37.89/SF
Vacancy Rate
12.9%
Net Absorption
-57K SF
Construction
186K SF
Net Absorption
248K SF
Construction
1.10 MSF
1Q 2016
Class A1Q 2016
Class B
Absorption & Deliveries | Class A + B Leasing Activity | Class A + B
09WESTCHASE SUBMARKET UPDATEM
illio
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Office Snapshot
28
09 WESTCHASE SUBMARKET UPDATE
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Under Construction Proposed Development
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
Largest Tenants Recent Leases Signed
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
Largest Sublease Spaces Largest Blocks of Space
2000 West Sam Houston Pky502,410 SF
3010 Briarpark Dr160,356 SF
2103 CityWest Blvd150,439 SF
2107 CityWest Blvd103,018 SF
2050 West Sam Houston Pky55,830 SF
2101 CityWest Blvd314,316 SF
3600 West Sam Houston Pky150,000 SF
2050 West Sam Houston Pky107,088 SF
2103 CityWest Blvd103,016 SF
10800 Richmond Ave99,088 SF
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Westchase Submarket Map
09WESTCHASE SUBMARKET UPDATE
30
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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:
• 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.
31
(1.0)
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201
6
YTD Absorption SF Delivered
0
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201
6
Total SF Leased Total Deals
Rental Rate
$23.80/SF
Vacancy Rate
13.2%
Rental Rate
$36.26/SF
Vacancy Rate
8.6%
Net Absorption
-82K SF
Construction
0 SF
Net Absorption
209K SF
Construction
1.26 MSF
1Q 2016
Class A1Q 2016
Class B
Absorption & Deliveries | Class A + B Leasing Activity | Class A + B
09KATY FREEWAY SUBMARKET UPDATEM
illio
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Office Snapshot
32
09 KATY FREEWAY SUBMARKET UPDATE
543
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Under Construction Proposed Development
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
Largest Tenants Recent Leases Signed
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
Largest Sublease Spaces Largest Blocks of Space
Three Westlake Park215,861 SF
Two Westlake Park192,975 SF
10777 Clay Rd189,285 SF
16290 Katy Freeway155,050 SF
Three WestLake Park148,674 SF
13501 Katy Freeway331,707 SF
1414 Enclave300,907 SF
Two WestLake Park205,304 SF
9811 Katy Freeway181,427 SF
17000 Katy Freeway174,469 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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Class A Rate Class B Rate Class A Vacancy Class B Vacancy
Rent vs Vacancy | Class A + B
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.
35
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201
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YTD Absorption SF Delivered
0
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201
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Total SF Leased Total Deals
Rental Rate
$25.07/SF
Vacancy Rate
8.2%
Rental Rate
$35.84/SF
Vacancy Rate
8.7%
Net Absorption
8K SF
Construction
99K SF
Net Absorption
86K SF
Construction
442K SF
1Q 2016
Class A1Q 2016
Class B
Absorption & Deliveries | Class A + B Leasing Activity | Class A + B
09THE WOODLANDS SUBMARKET UPDATEM
illio
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Office Snapshot
36
09 THE WOODLANDS SUBMARKET UPDATE
54
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The Woodlands Submarket Map
Under Construction Proposed Development
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
Largest Tenants Recent Leases Signed
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
Undisclosed25,000 SF
Undisclosed25,000 SF
Newfield Exploration24,910 SF
Largest Sublease Spaces Largest Blocks of Space
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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*33 total buildings are being proposed.
09THE WOODLANDS SUBMARKET UPDATE
38
Houston EconomyRemains Resilient
Despite sagging oil prices, Houston’s diversified economy is resilient and should bounce back.
10
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
20.9%
19.3%
18.3%
4.6%
10.5%
1.5%
0.1%
11.9%
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
09HOUSTON ECONOMIC OVERVIEW
20162006 2007 2008 2009 2010 2011 2012 2013
30
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70
2014 2015
6th
42
10 HOUSTON ECONOMIC OVERVIEW
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.
$300
$250
$200
$150
$100
$50
$0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Exports Imports
Billi
ons
$47$58
$72
$90$75
$95
$119$127 $129 $132
$89
$92$104$113
$151
$117
$149$147
$123$122
$86
$110
43
10HOUSTON ECONOMIC OVERVIEW
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
10 HOUSTON ECONOMIC OVERVIEW
Energy & Oil
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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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WTI Spot Price CBD Energy Corridor Woodlands
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10 HOUSTON ECONOMIC OVERVIEW
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
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10HOUSTON ECONOMIC OVERVIEW
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
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