HOUSTON OFFICE | Q3 2018 Quarterly Market Report · Woodlands/Conroe CBD Millions (SF) Pre-Leased Space Available Space 3 0% 5% 10% 15% 20% 25% 30% Q3 2008 Q3 2009 Q3 2010 Q3 2011

HOUSTON OFFICE | Q3 2018

Quarterly Market ReportOCTOBER 2018

HOUSTON | AUSTIN | SAN ANTONIO

Market Indicators

Current Q3 2018

Prior Quarter Q2 2018

Year Ago Q3 2017

Vacant Direct 19.0% 19.3% 18.4%

Vacant Total 21.5% 21.8% 20.9%

Available Direct 22.9% 22.5% 22.1%

Available Total 26.3% 26.4% 26.0%

Net Absorption (SF) 789,803 622 -534,206

Leasing Activity (SF) 3,838,085 3,162,290 4,313,622

Construction (SF) 2,666,890 1,611,213 2,470,616

Deliveries (SF) 50,904 83,076 161,523

Avg Asking Rent (Gross) $28.93 $28.32

$27.97

Inventory (SF) 232,519,140 232,468,236 231,208,767

0%

5%

10%

15%

20%

25%

-4.0

-2.0

0.0

2.0

4.0

6.0

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Q32009

Q32010

Q32011

Q32012

Q32013

Q32014

Q32015

Q32016

Q32017

Q32018

Milli

ons

(SF)

Net Absorption Completions Vacancy

Supply & Demand

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EXECUTIVE SUMMARYOffice market vacancy decreases

Houston’s overall vacancy rate decreased to 21.5% in Q3 2018, down 30 basis points quarter-over-quarter and 60 basis points year-over-year. Net absorption ended Q3 2018 in positive territory at 789,803 sq. ft., a level not seen since the oil downturn in the second half of 2014. This was a substantial improvement from the -1,317,087 sq. ft. mark recorded in the first quarter. Direct space was responsible for positive 609,181 sq. ft., and sublease space represented positive 180,622 sq. ft. While overall occupancy in the Houston office market remains below 80%; the current rate of 78.5% represents the market’s highest quarterly level recorded this year. The overall average asking gross rent is up $0.61 at $28.93 per sq. ft. from last quarter, and $0.96 from a year ago, a 3.4% increase.

Houston’s economy continues to grow at a healthy pace

Employment indicators increased year over year as Houston employment grew 3.1% in August. Construction was the growth leader, adding 20,800 jobs, followed by professional and business services gaining the second-largest number of jobs at 16,800. All of the major industry sectors saw increased growth from August 2017 to August 2018. The unemployment rate in the metro fell slightly to 4.2% in August, the lowest seasonally adjusted unemployment rate for Houston since February 2008. In comparison, the U.S. and Texas both had unemployment rates of 3.9%. In addition, the price of West Texas Intermediate crude oil in September averaged $70 per barrel, although there hasn’t been any growth in the U.S. rig count over the past few months.

“There is still a

great opportunity

for office tenants to

take advantage of

the evolving market

and negotiate

favorable long-term

transactions.”

During Houston’s most recent oil downtown the Energy Corridor was among the submarkets that fared the worst. Now, somewhat more

favorable market conditions along with aggressive landlords willing to make deals have made this area one of the most active in the city—especially when it comes to large transactions.

While activity has not quite returned to the levels recorded earlier this decade, the submarket is starting to show signs of a recovery in 2018. For one, Occidental Petroleum has opted to relocate from Greenway Plaza and acquire Conoco Phillips’ old headquarters in the Energy Corridor. Another recent announcement saw Transocean deciding to lease the entire 300,000 sq. ft. at Enclave Place, on the heels of Schlumberger renewing and expanding to 226,000 sq. ft. at 1430 Enclave Parkway.

Energy Corridor leasing velocity has also been improving during the last two-to-three quarters. In fact, the Energy Corridor and Houston CBD accounted for 63% of leasing activity in the third quarter. This seems to be the first real sign of a market improvement in west Houston and looks to be driven primarily by the rebound in commodity prices.

However, while in this instance one submarket has strengthened, another has taken a significant hit. Greenway Plaza, which remained one of the strongest and most stable submarkets throughout the downturn now finds itself with several large blocks of space coming available. In addition to the news of the Occidental and Transocean move-outs, Sheridan Production will vacate about 72,000 sq. ft. at 9 Greenway Plaza. While it maintained a vacancy rate of under 18% for most of the downturn, Greenway now runs the risk of seeing rates soar to over 25%.

Even though the Houston market is beginning to show signs of stability, these large tenant moves show that there is still a great opportunity for office tenants to take advantage of the evolving market and negotiate favorable long-term transactions.

Broker’s PerspectiveQuarterly Market Report

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Michael MannellaAssociate

NAI Partners

MARKET OVERVIEWPositive net absorption in Q3 2018

During the third quarter of 2018, Houston’s office market saw an increase in the number of tenants moving into space compared to previous quarters this year. The aggregate effect of these net occupancy gains was just under 800,000 sq. ft. of positive absorption. That increased demand has led to vacant office space falling to 21.5%, or to put it another way: about 750,000 sq. ft. less of office product lies empty. The amount of total office inventory that is being marketed for lease dropped by 10 basis points quarter-over-quarter to 26.3%. The distinction between this figure and the vacancy rate reflects expected future move-outs. Space being marketed for sublease represents 8.5 million sq. ft. of the 61.9 million-sq.-ft. total availability figure.

Plans to break ground on a 15-story office building

Office construction is at 2.6 million sq. ft. across nine buildings with 63.6% of the space available for lease. Capitol Tower at 800 Capitol St. is still on schedule for a delivery date in mid-2019. Also under construction is City Place 2, at 1701 City Plaza Dr. in the Woodlands, a 10-story, 326,800-sq.-ft. office building, at 93.9% leased with a scheduled delivery date of October 2018; and City Place 1, at 1700 City Plaza Dr., a 5-story, 149,500-sq.-ft. available office building with a scheduled delivery date of April 2019. In addition, plans to break ground on a 15-story, Class A office building are underway, offering 200,000 sq. ft. of office space and ground-floor retail. It will be located at Westheimer Road and Mid Lane in the Galleria submarket, adjacent to River Oaks District. The development, named Park Place, is scheduled to begin construction in January 2019, with a projected completion date in the second quarter of 2020. The building’s design includes plans to keep 3.7 acres open as green space.

Chevron’s 30-acre campus on the West Loop finds buyer

SLS Properties has purchased the 30-acre vacant Chevron campus along the West Loop at 4800 Fournace Place in Bellaire. The former Chevron site includes two office buildings; a 10-story, 452,000-sq.-ft. office tower and a 95,000-sq.-ft. building. It is reported that plans are to build a four-level parking garage and lease the buildings to multiple tenants. The property is less than two miles south of the Galleria and occupies some Loop 610 frontage. Real Capital Analytics data reports year-to-date office sales volume for 2018 in the Greater Houston area at $2.2 billion, resulting in a year-over-year change of -43.5%. The buyer composition is made up of 46% institutional, 40% private, 8.0% cross-border, and the remaining 6.0% REIT/listed and user/other.

Net Absorption Direct & Sublease

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Q32008

Q32009

Q32010

Q32011

Q32012

Q32013

Q32014

Q32015

Q32016

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Q32018

Milli

ons

(SF)

Direct Sublease

Construction by Submarket

0.0 0.5 1.0 1.5 2.0

Midtown

Sugar Land/E Ft Bend

NASA/Clear Lake

FM 1960/Hwy 249

Woodlands/Conroe

CBD

Millions (SF)

Pre-Leased Space Available Space

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0%

5%

10%

15%

20%

25%

30%

Q32008

Q32009

Q32010

Q32011

Q32012

Q32013

Q32014

Q32015

Q32016

Q32017

Q32018

Direct Sublease

26.3%

Availability Rates

Quarterly Market ReportHOUSTON OFFICE | Q3 2018

Leasing activity up, NAI Partners Sublease Index down

Leasing activity during the third quarter of 2018 was at 3.8 million sq. ft., up 21.4% quarter over quarter, and dropping 11.0% compared to the amount of activity year-over-year. Class A space fulfilled 2.2 million sq. ft., while Class B space realized 1.5 million sq. ft., with direct space representing 89.3% of all transactions.

The NAI Partners Sublease Index—measured by the amount of sublease space as a percentage of total available space—decreased 60 basis points to 13.9% in September. This is the lowest the Index has measured since it was at 13.3% in Q1 2015—two quarters after the start of the oil downturn when the index registered at 9.4%. Space being marketed for sublease as of Q3 2018 represented 8.5 million sq. ft., compared to this time last quarter at 9.4 million sq. ft., a decrease of about 900,000 sq. ft. More significant is the 30.0% drop in sublease availability since the third quarter of 2016, when it reached its peak of 12.2 million sq. ft.

The decline has resulted from a number of sublease deals signed, including Exelon Corp. inking a 93,813-sq.-ft. deal from Kinder Morgan at 1001 Louisiana St. downtown in August, Kiewit Engineering Group inking a 52,834-sq.-ft. agreement from BASF Corp. at Energy Tower IV in June, and 47,958 sq. ft. of sublease space being taken off the market at 5444 Westheimer Rd. by Fiesta Mart LLC, near the Galleria in March. Other factors contributing to the decrease include space being returned to the landlord through lease expirations, and tenants choosing to hang on to their space and removing sublease listings.

Rain or shine, average asking rents continue to grow

The market saw overall full-service average rates increase $0.61 to $28.93 per sq. ft. from last quarter, and $0.96 from a year ago. Although concessions such as free rent and tenant improvement allowances make posted rents less meaningful as a market indicator, the price of Houston’s office space is climbing noticeably. The highest-quality space, with the best location, and ease of accessibility will generate the highest rents. Asking rates for Class A space in the CBD are at an average of $43.29 per sq. ft. The buildings with the most of available Class A office space in the CBD include 801 Texas Ave., JP Morgan Chase, 2 Houston Center, Capitol Tower, and 1600 Smith St. These three existing buildings, and two under construction comprise 3.8 million sq. ft. with 49.4% or 2.8 million sq. ft. of superior available space for lease. In the third quarter of this year, the average asking full-service gross rate for space in these buildings was $45.37 per sq. ft.

Historical Average Gross Asking Rent

$35.39

$23.86

$21.87

$18.79

$10

$15

$20

$25

$30

$35

$40

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Class A Direct Class A Sublease Class B Direct Class B Sublease

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Quarterly Market Report

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Total Leasing Activity by Submarket over 150,000 SF - Q3 2018

0 100 200 300 400 500 600 700 800

Greenway Plaza

Katy Freeway

FM 1960/Hwy 249

Greenspoint/North Belt

Westchase

West Belt

Energy Corridor

Galleria/West Loop

CBD

Thousands (SF)

0

1

2

3

4

5

6

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

Billio

ns (S

F)

2018 2014 2015 2016 2017

Cumulative Monthly Sales Volume Houston OfficeYear-to-date volume ($): 2,164,929,726, Year-over-year chg: -43.5%Source: Real Capital Analytics

MARKET OVERVIEWSubmarket Stats

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

Total Inventory (SF)

Total Vacancy

(%)

Total Availability

(%)

Q3 2018 Net Absorption

(SF)

2018 YTD Net

Absorpiton (SF)

Q3 2018 Leasing Activity

(SF)

Under Construction

(SF)

Overall Gross Avg Asking

Rent ($/PSF)

Houston Market Total 232,519,140 21.5 26.3 789,803 -526,662 3,838,085 2,666,890 28.93

Class A 121,461,861 24.4 30.3 444,363 478,782 2,190,434 2,606,339 33.22

Class B 94,218,024 19.7 23.2 300,300 -974,869 1,506,749 60,551 21.74


Total Inventory

(SF)

Total Vacancy

(%)

Total Availability

(%)


(SF)

2018 YTD Net

Absorpiton (SF)


(SF)

Under Construction

(SF)


Rent ($/PSF)

CBD Total 39,087,288 24.2 32.2 125,128 -223,987 682,333 1,884,925 40.76

Class A 28,234,895 22.3 32.2 -16,820 -178,027 563,723 1,884,925 43.29

Class B 10,195,292 29.8 33.3 141,948 -51,460 118,610 0 28.79

Bellaire Total 3,445,909 10.8 13.8 48,258 -39,844 75,571 0 25.60

Class A 1,475,481 11.5 15.3 48,309 26,267 50,779 0 28.32

Class B 1,519,102 11.0 14.2 -709 -65,940 23,932 0 24.47

Energy Corridor Total 21,116,853 31.7 38.5 49,247 87,173 472,680 0 28.38

Class A 14,118,072 31.8 40.1 44,529 252,060 274,716 0 32.09

Class B 6,517,992 32.4 36.2 15,335 -112,595 181,202 0 21.82

FM 1960/Hwy 249 Total 10,469,093 18.5 22.2 57,731 -56,780 209,352 156,000 20.20

Class A 2,951,510 18.8 24.5 -20,652 -43,891 24,381 156,000 27.87

Class B 6,378,627 18.5 21.9 79,335 -32,307 172,915 0 18.12

Galleria/West Loop Total 28,840,432 19.8 22.7 90,235 259,100 505,842 0 33.72

Class A 19,576,864 20.8 23.2 157,157 548,624 356,353 0 36.66

Class B 9,189,028 17.8 21.7 -66,164 -286,947 149,153 0 26.71

Greenspoint/North Belt Total 11,894,081 48.1 51.6 155,794 -189,813 221,725 0 18.97

Class A 5,199,525 66.5 68.4 17,672 -108,955 90,400 0 22.01

Class B 5,082,575 36.7 42.7 98,549 -98,306 80,054 0 15.16

Greenway Plaza Total 11,321,724 17.1 25.6 80,719 -97,943 174,964 0 31.42

Class A 7,429,743 18.9 31.6 57,979 -38,277 112,630 0 32.75

Class B 3,444,519 14.3 15.0 9,191 -66,170 51,119 0 26.67

Gulf Fwy/Pasadena Total 3,907,157 15.9 17.2 12,296 18,346 33,207 0 22.72

Class A 105,782 28.3 28.3 0 53,101 0 0 -

Class B 2,805,762 14.6 14.9 13,411 3,275 33,207 0 22.69

Katy Freeway Total 9,990,654 10.7 13.2 101,791 187,346 187,230 0 27.85

Class A 5,990,474 13.0 14.0 101,801 134,792 147,199 0 37.88

Class B 2,649,442 8.1 14.9 -2,721 59,127 33,286 0 19.17

Katy/Grand Pkwy W Total 3,421,528 15.6 17.7 15,043 245,052 45,685 0 29.17

Class A 2,203,205 22.2 24.8 18,481 256,470 39,317 0 29.57

Class B 1,027,131 3.0 4.3 -4,138 -15,432 4,038 0 27.01

Kingwood/Humble Total 1,382,627 14.3 15.2 655 -40,434 11,692 0 22.79

Class A 189,312 17.9 21.3 0 -24,482 0 0 27.92

Class B 1,005,843 14.8 15.3 -887 -47,702 10,892 0 22.58

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Total Inventory

(SF)

Total Vacancy

(%)

Total Availability

(%)


(SF)

2018 YTD Net

Absorpiton (SF)


(SF)

Under Construction

(SF)


Rent ($/PSF)

Medical Center Total 9,276,391 5.0 8.1 56,872 26,803 32,720 0 26.27

Class A 2,800,434 6.7 12.4 46,290 37,965 0 0 33.33

Class B 5,080,021 3.9 6.4 9,124 4,953 25,178 0 22.25

Midtown Total 5,580,503 13.9 18.9 -41,394 -5,259 52,608 37,500 30.02

Class A 2,006,668 18.5 25.6 -5,377 93,796 772 37,500 33.02

Class B 2,964,569 10.5 14.9 -32,396 -97,129 50,736 0 27.46

NASA/Clear Lake/SE Total 7,874,164 18.4 21.1 18,861 60,736 30,181 51,614 21.51

Class A 1,991,833 12.8 14.2 -3,811 -25,062 3,987 51,614 29.65

Class B 4,993,948 22.3 23.3 25,391 83,979 18,181 0 19.93

North Loop West Total 4,484,514 22.6 22.1 -118,036 -171,991 115,011 0 23.89

Class A 1,188,544 41.9 39.7 -111,259 -125,122 46,711 0 26.21

Class B 2,828,990 16.6 16.3 53 -49,524 67,219 0 22.35

Northeast Total 2,319,675 10.7 14.0 55,018 54,432 14,026 0 18.40

Class A 122,923 17.7 17.7 0 10,881 0 0 -

Class B 1,442,313 12.4 15.6 60,197 50,110 11,981 0 18.88

Northwest Total 3,952,543 22.2 26.2 25,313 14,380 47,432 0 17.68

Class A 797,237 44.1 54.5 -5,202 -15,003 8,107 0 19.05

Class B 2,277,443 18.5 20.4 34,066 76,225 39,325 0 16.76

Pearland/South Total 1,806,346 8.2 8.8 -12,488 11,215 1,525 0 27.83

Class A 674,270 4.3 4.3 0 809 0 0 30.10

Class B 881,469 9.0 10.2 2,912 -11,494 1,525 0 27.16

Southwest Total 11,880,547 18.8 23.8 -28,360 -75,962 109,330 0 17.23

Class A 2,055,792 22.8 28.6 -213 49,508 17,764 0 19.55

Class B 7,199,165 20.4 25.9 -47,315 -117,122 76,131 0 16.95

Sugar Land/E Ft Bend 6,776,140 9.9 15.0 99,163 -19,395 126,666 38,599 26.26

Class A 3,614,860 10.5 17.9 30,642 -76,477 25,863 0 26.98

Class B 2,886,562 9.9 12.6 66,460 55,021 98,742 38,599 25.28

West Belt Total 5,326,104 28.2 32.2 179,581 -228,516 308,661 0 26.21

Class A 3,569,700 29.7 35.2 176,413 -171,684 233,347 0 29.43

Class B 1,668,775 26.5 27.4 3,168 -56,832 75,314 0 19.05

Westchase Total 15,588,856 28.0 35.1 -245,897 -497,640 241,060 0 26.07

Class A 8,788,607 30.0 38.0 -92,441 -251,119 141,226 0 29.63

Class B 6,623,339 25.8 31.9 -153,456 -251,308 99,834 0 21.91

Woodlands/Conroe Total 12,776,011 14.6 17.4 64,273 156,319 138,584 498,252 29.65

Class A 6,376,130 19.4 21.4 865 72,608 53,159 476,300 32.46

Class B 5,556,117 10.7 14.2 48,946 52,709 84,175 21,952 26.73

Suburban Total 193,431,852 20.9 25.1 664,675 -302,675 3,155,752 781,965 25.94

Class A 93,226,966 24.7 29.8 461,183 656,809 1,626,711 721,414 30.43

Class B 84,022,732 18.5 21.9 158,352 -923,409 1,388,139 60,551 21.06

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

90

90

90

59

45

Sam H

ouston Tollway

West Park Houston Tollway

Westheimer99

99

99

99

288

6

6

6

Fort Bend Tollway

10

10

10

90

225

59

59

290

290

MARKET OVERVIEWHouston Office Submarkets

1. CBD

2. Bellaire

3. Energy Corridor

4. FM 1960

5. Galleria/West Loop

6. Greenspoint/North Belt

7. Greenway Plaza

8. Gulf Fwy/Pasadena

9. Katy Freeway

10. Katy/Grand Pkwy W

11. Kingwood/Humble

12. Medical Center

13. Midtown

14. NASA/Clear Lake/SE

15. North Loop West

16. Northeast

17. Northwest

18. Pearland/South

19. Southwest

20. Sugar Land/E Ft Bend

21. West Belt

22. Westchase

23. Woodlands/Conroe


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Quarterly Market ReportOCTOBER 2018

NAI Partners Houston Office 1900 West Loop South, Suite 500 Houston, TX 77027

tel 713 629 0500

www.naipartners.com

Leta WausonDirector of Research

[email protected] 713 275 9618

Documents

HOUSTON OFFICE | Q3 2018 Quarterly Market Report · Woodlands/Conroe CBD Millions (SF) Pre-Leased Space Available Space 3 0% 5% 10% 15% 20% 25% 30% Q3 2008 Q3 2009 Q3 2010 Q3 2011