HOUSTON, TX METRO AREA MARKET SUMMARY206.188.3.84/webfiles/Houston/LOW RES - Market Report -...

MARKET SUMMARYHOUSTON, TX METRO AREA

Cresa Houston

5599 San Felipe, Suite 500

Houston, Texas 77056

713.402.5800

cresa.com/houston

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TABLE OF CONTENTS 01

02

03

04

05

MARKET AT-A-GLANCE

RENTAL RATES & VACANCY

LEASING ACTIVITY

CONSTRUCTION & DELIVERIES

NET ABSORPTION

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 1Q’2014, 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. 08

06

07

MARKET OUTLOOK

SUBMARKET SNAPSHOTS

HOUSTON ECONOMY

1.9%

0.1%

0.9%

$6.23 net Industrial 4.1%

$9.38 net Flex 6.7%

$6.59 net Industrial + Flex 4.3%

0.1%

0.2%

0.0%

$32.93 Suburban: Class A 10.5%

$21.04 Suburban: Class B 12.8%

$26.64 Suburban: Class A + B 11.8%

$42.31 CBD: Class A 9.2%

$28.23 CBD: Class B 7.6%

$39.21 CBD: Class A + B 8.7%

1.2%

0.2%

0.9%

1000 Main 837,000 SF CBD Sale Office

1301 Fannin 784,000 SF CBD Sale Office

Westgate II & III 411,000 SF Katy Fwy. West Sale Office

Niagara Bottling 207,000 SF Southwest Lease Ind.

Direct Energy 192,000 SF Greenway Plaza Extension Office

Dunavant 186,000 SF Southeast Expansion Ind.

Professional Packaging 172,000 SF Southwest Lease Ind.

Swift Energy 120,000 SF Greenspoint Relocation Office

Bristow Group 115,000 SF Westchase Lease Office

Nabors Industries 98,000 SF North Belt Expansion Office

Gardere 75,000 SF CBD Renewal Office

HOUSTON MARKETAT-A-GLANCE

The answer to the question of what will happen in the

Oil & Gas industry and how it will affect Houston remains

unanswered as worldwide job cuts and reduced capital

budgets continue, and M&A activity begins to take place.

Most experts agree that Houston will not experience a

major downturn, as the city has benefited from significant

economic growth in the recent past and economic

indicators continue to see positive numbers. However,

even though absorption remained strong in 1Q’15 due to

move-ins from leases executed at the top of the market in

2014, expect the numbers to turn in the second quarter.

The office and, to a lesser degree, industrial markets, will

see fundamentals decline in the months to follow and into

2016, with the market transitioning favorably for tenants.

TENANT’S PERSPECTIVE

MARKET TRENDS

Increases in both vacancy and space available for sublease are expected to continue, while rates hold or experience small declines.

Tenants are holding off on large commitments on space or signing shorter-term leases in anticipa-tion of declining rental rates.

Landlord concessions continue to increase in order to remain competitive and retain tenants, especially in the west Houston submarkets.

Stricter construction financing, high labor costs, and a slowing energy economy have put a pause on proposed construction; however, Houston still leads the nation in development activity.

Half of the 15.2 MSF under construction is multi-tenant space, 23.5% of which is pre-leased at an average weighted gross asking rental rate of $42.50.

Large blocks of direct and sublease space are coming on the market daily due to M&A activity in Exploration & Production and the Oil & Gas Service sectors.

RECENT TRANSACTIONS RENTAL & VACANCY RATES

Tenant Size Submarket Type Sector Avg. Rate Vacancy Rate Margin from Q4

01

CBD 46,136,464 $39.21 $29.03 7.5% 1.1% 32 (50,870) 234,829 124,135 0 1,463,258

Suburban 210,346,814 $26.64 $26.52 11.1% 0.7% 557 1,647,811 8,732,086 2,515,636 4,912,504 13,966,116

E Fort Bend Co/Sugar Land 8,416,271 $24.64 $22.97 10.8% 2.2% 30 319,883 (862) 105,009 0 155,272

FM 1960 12,396,007 $19.88 $23.76 13.4% 0.4% 29 216,479 114,409 120,646 21,794 1,141,400

Galleria/West Loop 28,224,787 $32.58 $29.87 8.9% 0.9% 69 494,949 (19,299) 364,998 0 1,237,021

North Belt 12,423,300 $24.87 $17.62 20.4% 0.7% 24 (256,150) (697,094) 221,704 0 68,950

Greenway Plaza 10,623,499 $33.09 $22.84 7.8% 0.2% 45 112,993 (200,756) 383,715 0 833,275

Katy Freeway 34,860,251 $31.24 $27.30 8.5% 0.7% 82 2,656,831 351,596 331,911 1,314,589 4,376,990

Midtown 6,503,941 $29.34 $25.21 10.0% 0.0% 20 91,815 14,276 75,066 0 167,562

Northwest 13,654,677 $22.71 $21.05 15.1% 0.9% 33 334,773 599,974 98,195 1,043,344 108,633

South Main / Medical Ctr 9,395,070 $26.84 $19.99 10.7% 0.0% 19 132,430 (207,304) 47,004 0 0

Westchase 16,054,464 $31.01 $32.54 9.2% 1.7% 44 531,923 (306,506) 317,037 0 1,545,000

Woodlands 16,598,194 $28.91 $31.99 5.9% 0.4% 21 3,219,342 1,652,526 32,744 1,613,399 2,005,727

Other Suburban 41,196,353 $20.20 $24.54 14.0% 0.2% 141 876,818 346,851 417,607 247,378 2,326,286

Total 256,607,273 $28.35 $26.92 10.5% 0.8% 589 8,971,190 1,596,941 2,639,771 4,912,504 15,429,374

01 HOUSTON MARKET AT-A-GLANCE

MAJOR SUBMARKET STATS | CLASS A + B OFFICE

Submarket Inventory SFDirectRate

SubleaseRate

Direct Vacancy

SubleaseVacancy

LeasingDeals

LeasingSF

AbsorptionQtly

AbsorptionYTD

SF Delivered

SF Under Construction

SUBMARKET MAP

GALLERIA

$32.589.8%

G

REENWAY

$33.098.0%

M

ED CENTER

$26.8410.7%

CBD

$39.218.7%

KATY FWY

$31.249.2%

W

ESTCHASE

$31.0110.9%

E. F

ORT BEND CO

$24.6413.1%

N

ORTH BELT

$24.8721.1%

N

ORTHWEST

$22.7116.1%

FM 1960

$19.8813.8%

MIDTOWN

$29.3410.1%

TH

E

WOODLAND

S

$28.916.4%

$

%

Rental Rate

Vacancy Rate

AREA OVERVIEW

02

RENTAL RATES& VACANCY

Overall, rental rates for Class A and B citywide are holding

steady but starting to see small decresases in some key

submarkets. Year-over-year The Woodlands was the only

submarket to see a decrease in rate. Demand for space has

slowed a bit and citywide vacancy increased by 0.8% (80

basis points) year-over-year to 11.2%.

RENTAL RATES

• Rental rates are the highest they have been in Houston’s history.

• Rates have seen a 2.7% year-over-year increase, from $27.60

gross PSF in 1Q’14 to $28.35 in 1Q’15. Between 4Q’14 and

1Q’15, there was a modest 0.6% increase in rates.

• Class B rates showed the largest increase, 3.3% between 1Q’14

and 1Q’15, to $21.48 gross PSF; Class A rates increased by

1.2% to $34.88 gross PSF. Class B rates also showed a larger

increase quarter-over-quarter, indicating an increase in demand

for value options.

• In 1Q’15, the highest rates were found in the central submarkets

(the CBD, Greenway Plaza, Galleria/West Loop) and out west

(Katy Freeway and Westchase).

VACANCY

• Citywide, in Class A and B buildings, vacancy rates increased

by 0.8% (30 basis points) year-over-year to 11.2%; quarter-

over-quarter, vacancy rates increased by 0.9%.

• At 11.2% for Class A and B, the vacancy rate is 40 basis points

above the citywide five-year average of 11.6%.

• Year-over-year, Class A vacancy rates increased, while Class B

decreased by 0.5 percentage points.

• In 1Q’15, the lowest vacancy rates (below 9%) were in

Greenway Plaza (7.8%), Woodlands (5.9%), CBD (7.5%), and

Katy Freeway (8.5%).

02 RENTAL RATES & VACANCY

HISTORICAL DIRECT AVERAGE RATES HISTORICAL TOTAL VACANT AVAILABLE

SUBMARKET RENTAL RATES 1Q’15 SUBMARKET VACANCY RATES 1Q’15

The Woodlands

Midtown

Westchase

Katy Freeway

Galleria

Greenway Plaza

CBD

Houston

Medical Center

$0

Rental Rate Houston Avg Rate

Sugar Land

North Belt

Northwest

FM 1960

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

Medical Center

Westchase

Houston

Sugar Land

FM 1960

Northwest

North Belt

Midtown

Galleria

0%

Vacancy Rate Houston Avg Rate

Katy Freeway

CBD

Greenway Plaza

The Woodlands

5% 10% 15% 20%

1Q ‘08 1Q ‘09 1Q ‘10 1Q ‘11 1Q ‘12 1Q ‘13 1Q ‘14

$40.00

$35.00

$30.00

$25.00

$20.00

$15.00

$10.00

$5.00

$0.00

Class A Class B Houston Average Rate Class A Class B Houston Average Rate

16%

14%

12%

10%

8%

6%

4%

2%

0%

1Q ‘08 1Q ‘09 1Q ‘10 1Q ‘11 1Q ‘12 1Q ‘13 1Q ‘141Q ‘15 1Q ‘15

03

LEASING ACTIVITY

Lease transaction volume slowed sharply in 1Q’15 to 2.63

MSF leased compared to the previous quarter, which was

more than 4 MSF. Between 2010 and 2014, leasing activity

averaged over 20.9 MSF annually. The slowdown in leasing

activity is mainly due to the uncertainty of where oil prices

will land.

LEASING ACTIVITY NOTES

• Lease transaction volume also fell below the 15-year quarterly

average of 4.4 MSF.

• The 1st quarter only saw 2.6 MSF leased, far below the quarterly

average of the previous 5 years of over 5.2 MSF leased.

• The total number of deals was also down to 589 – lower than

the previous 36 quarters and lower when compared to the 15-

year quarterly average of 806.

• Average deal size (5,053 SF in 1Q’15) is also lower compared to

the previous four quarters and the 15-year average.

TOP 10 TRANSACTIONS HISTORICAL LEASING ACTIVITY

‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14

25

20

15

10

5

4,500

4,000

3,500

3,000

2,500

Milli

ons

Total SF Leased Total Deals

Nabors Industries 98,000 North Belt Expansion

Gardere 75,000 CBD Renewal

General Electric 72,000 FM 1960/Hwy 249 Expansion

Lennar Homes 67,500 North Belt Lease

Superior Energy Services 64,000 FM 1960/Hwy 249 Lease

Regions Bank 62,000 Greenway Plaza Lease

LTD Financial Services 62,000 Southwest Renewal

Direct Energy 192,000 Greenway Plaza Extension

Swift Energy 120,000 Greenspoint Relocation

Bristow Group 115,000 Westchase Lease

Tenant SF Building Submarket

Millions

1 2 30

North Belt

The Woodlands

Westchase

Katy Freeway

Galleria

CBD

Greenway Plaza

Northwest

FM 1960

Sugar Land

Midtown

Medical Center

2014 Leasing Q1’15 Leasing

SUBMARKET COMPARISON

Leasing activity dwindled starting in 4Q’15. The Galleria. Greenway Plaza, Katy Freeway, and Westchase saw the most activity during the first quarter of 2015.

‘15

04

CONSTRUCTION &DELIVERIES

Nearly eight MSF was delivered across Houston during 2014

(buildings over 75,000 SF), and the momentum was even

stronger in 1Q’15 with more than 4.9 MSF – the highest

quarterly delivery rate in the past 15 years. Despite a huge

run up in construction costs, there is another 18.7 MSF un-

der construction across the Houston area.

DELIVERIES (BLDGS. OVER 100.000 SF)

• Nearly 3.8 MSF can be attributed to 9 buildings with more than

100,000 SF

• Of the 4.9 million SF delivered in 1Q’15, roughly 72.0% was

leased at the time of completion.

• The tenancy profile of approximately one third of the buildings

(3) delivered in 1Q’15 was single tenant, corporate users, taking

62.2% of the space delivered and equating to 2.3 MSF.

• 1Q’15 saw the most SF delivered over the past 15 years.

• The areas to the north and west saw the most building

completions, including Katy Freeway, Northwest Far, and The

Woodlands.

PROPOSED DEVELOPMENT

• There is an additional 23.7 MSF proposed, most of

which, given current economic conditions, will not come

out of the ground this year, particularly through at least

the next two quarters.

• The submarkets that have the most proposed

development include: Katy Freeway (5.1 MSF), the CBD

(5.1 MSF), and The Woodlands (4.2 MSF).

04CONSTRUCTION & DELIVERIES1Q’15 MAJOR DELIVERIES

11750 Katy Fwy

Katy Fwy429,157 SF

39.4% LeasedMulti-Tenant

5150 Westway Park Blvd

Northwest Far640,000 SF

100% LeasedCyrus One

15375 Memorial Dr

Katy Fwy429,157 SF


1540 N Mason Rd

Katy Fwy200,000 SF

100% LeasedAcademy Sports

5060 Westway Park Blvd



23125 Interstate 45 N

The Woodlands1,500,000 SF100% LeasedExxonMobil

5775 N Sam Houston Pky



755 Town & Country Blvd

Katy Fwy254,489 SF


DELIVERIES BY SUBMARKET 2014

Galleria/Uptown 0 0 0.0%

Katy Freeway 4 1,217,793 45.5%

Westchase 0 0 0.0%

Woodlands 1 1,500,000 100.0%

Northwest 3 1,043,344 62.5%

Other 0 0 0.0%

Total 8 3,761,137 71.9%

Submarket Bldgs SF % Leased

DELIVERIES BY SUBMARKET 1Q’15

Galleria/Uptown 2 50,000 0.0%

Katy Freeway 11 2,368,280 132.1%

Westchase 5 938,948 41.8%

Woodlands 15 3,799,956 102.1%

Northwest 1 127,794 61.1%

Other 4 631,384 41.9%

Total 38 7,916,362 1.0%

Submarket Bldgs SF % Leased

04

14.5 MSF

2Q’15 2017

CONSTRUCTION AT-A-GLANCE

SLATED OFFICE DELIVERY

PRE-LEASEDPERCENTAGE

Combined both multi-tenant and single tenant (for just multi-tenant projects, the pre-leased percent-age is 25%)

64%

SINGLE TENANTCONSTRUCTION

There is 7.6 MSF of single-tenant space under construction compared to 6.9 MSF of multi-tenant space

53%

• At the end of the 1Q’15, Houston had more than 15.4 MSF

of office space under construction in 84 buildings. Of these

buildings, 39 are 100,000 SF or greater and encompass over

14.5 MSF.

• The tenancy profile of 52.7% of the buildings currently

under construction is single tenant, corporate users totaling

approximately 7.6 MSFin 36 buildings.

• Multi-tenant buildings over 100,000 SF, which account for

47.3% of inventory under construction, are 24.6% pre-leased

with a weighted average rent of 41.75% gross PSF with

operating expenses of approximately $13.00/SF.

UNDER CONSTRUCTION

2015 7 2,743,079 35.9% 100%

2016 7 4,900,492 64.1% 100%

2017 0 NA NA NA

Single Tenant Bldgs. SF % of Devs. % Leased

Total 14 7,643,571 52.7% 100%

2015 19 4,165,821 60.6% 30.5%

2016 5 2,324,014 33.8% 0.9%

2017 1 380,000 5.5% 71.4%

Multi-Tenant Bldgs. SF % of Devs. % Leased

Total 25 14,513,406 47.3% 64.3%

CONSTRUCTION BY SUBMARKET

FM 1960

Galleria

CBD

Westchase

The Woodlands

Other

Katy Freeway

Greenway Plaza

Northwest

0

SF Leased SF Unleased

Midtown

Sugar Land

1 MSF 2 MSF 3 MSF 4 MSF

Delivered Projected

1 MSF

0

HISTORICAL CONSTRUCTION

2 MSF

3 MSF

4 MSF

5 MSF

6 MSF

7 MSF

8 MSF

9 MSF

‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17

CONSTRUCTION & DELIVERIES

04CONSTRUCTION & DELIVERIES2014 1Q’15 UNDER CONSTRUCTION

915 Eldridge PkwyKaty Fwy West

526,637 SF0.0% LeasedMulti-Tenant

Delivers 4/2016


600,000 SF100% LeasedConocoPhillipsDelivers 9/2015

1500 Post Oak BlvdGalleria

600,000 SF100% LeasedBHP Billiton

Delivers 10/2016

Noble Energy Center IIFM 1960

456,000 SF100% LeasedNoble Energy

Delivers 6/2015

9811 Katy FwyKaty Fwy East

526,637 SF58.5%

Multi-TenantDelivers 11/2015

Subsea Ln @ W Lake HoustonNortheast Near1,700,000 SF100% Leased

FMC TechnologiesDelivers 6/2016

ExxonMobil Phase IIIThe Woodlands

500,000 SF100% LeasedExxonMobil

Delivers 6/2015

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

825 Town & CountryKaty Fwy East


Delivers 7/2015

3737 Buffalo SpeedwayGreenway Plaza


Delivers 8/2015


546,604 SF100% LeasedConocoPhillipsDelivers 9/2015

05

HISTORICAL NET ABSORPTION SUBMARKET COMPARISON

NET ABSORPTION

The 1st quarter saw total net absorption of 1.6 MSF, which

is a healthy quarterly average especially given the amount of

deliveries. The Woodlands had the highest net absorption

followed by the Northwest and Katy Freeway submarkets.

• Abosprtion in 2014 at 9.0 MSF was historically the highest it’s

been in the past 15 years.

• The Woodlands’ total net absorption in 1Q’15 was nearly 1.7

MSF. The Northwest and Katy Freeway submarkets followed

with 600,000 SF and 352,00 SF, respectively.

• The submarkets with the most negative net obsorption in 1Q’15

were the North Belt (-700,000) and Westchase (-300,000 SF).

UNDER CONSTRUCTION

0 MSF

(2) MSF

2 MSF

4 MSF

6 MSF

8 MSF

10 MSF

‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15

Class A Class B Houston Total Absorption

0 MSF(2) MSF 2 MSF 4 MSF

1Q’15 2014

Sugar Land

FM 1960

CBD

Northwest

Katy Freeway

The Woodlands

Galleria

Midtown

Westchase

Greenway Plaza

Medical Center

North Belt

06

SUBMARKET SNAPSHOTS

06

CBDSUBMARKET 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.

MARKET TRENDS

MARKET DRIVERS


• The direct average rental rate (Class A&B) declined between

4Q’14 and 1Q’15 by $0.55; however, the rate is still considerably

above the five-year average of $33.83 at $39.21.

• Following a year of the lowest vacancy over the past five years,

the overall vacancy rate jumped back up to 8.7%.

• Subleases space has held steady in the CBD, unlike other major

submarkets.

• Unstable price of oil expected to continue to have an impact

on office rents and vacancy for the remainder of 2015.

• One multi-tenant building, which is over one million square

feet, is expected to be delivered by the end of 2015; this space

was being developed to help meet the rising demand, which

may taper off this year.

• Due to the instability of the price of oil, increases in concessions

are occurring.

• Tenants will need to continue to monitor the price of oil due to

its correlation with demand for CBD space.

• Tenants will continue to compete for well-located premier

office space, however, there are now more deals to be made.

$28.23$0.03 vs

4Q’14

0.2% vs 4Q’14

80K SF vs 4Q’14

Class A Class B

SF00K SF vs

4Q’14

OFFICE SNAPSHOT

Avg. Rental Rate Avg. Rental Rate

Vacancy Vacancy

Absorption Absorption

Construction Construction

$42.31$0.58 vs

4Q’14

%9.21.2% vs

4Q’14

108K SF vs 4Q’14

SF1.5M1.5M SF vs

4Q’14

SF-58KSF7,431

%7.6

0CBD SUBMARKET UPDATE

NEW DEVELOPMENT MAP 100,000 SF+Proposed Under Construction

2

5

7

4

6

3

3

6

4

7

1 2

5

1

1600 Louisiana1.7 MSF

0.0% Leased

5 Allen Center1.0 MSF

0.0% Leased

Hilcorp Energy Tower406,600 SF

100% Leased

6 Houston Center633,482 SF

4.0% Leased

Capitol Tower748,800 SF

0.0% Leased

609 Main1.1 MSF

0.0% Leased

1 Market Square750,000 SF

0.0% Leased

06 CBD SUBMARKET UPDATE

TOP 5 EMPLOYERS

8,600 Employees 7,000 Employees 4,892 Employees 3,826 Employees 2,958 Employees

TOP 5 LEASES SIGNED IN 1Q’15

75,000 SF 24,260 SF 20,000 SF 13,000 SF 10,000 SF

TOP 5 SUBLEASE SPACES

811 Main 500 Jefferson Three Allen Ctr 500 Jefferson Fulbright Tower

106,005 SF 97,953 SF 84,508 SF 77,629 SF 73,971 SF

TOP 5 LARGEST BLOCKS OF SPACE

800 Bell 2 Houston Center Two Shell Plaza Two Shell Plaza Total Plaza

1.3 MSF 234,333 SF 188,695 SF 159,665 SF 124,083 SF

UndisclosedShannon, Martin,

Finkelstein & Alvarado

GALLERIASUBMARKET 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

increasingly tight, particularly in Class A buildings.

$25.60$0.19 vs

4Q’14

1.2% vs 4Q’14

58K SF vs 4Q’14

Class A Class B

SF29K16K SF vs

4Q’14

OFFICE SNAPSHOT MARKET TRENDS

MARKET DRIVERS


• The direct average rental rate (Class A&B) has essentially

remained flat over the past three quarters. 4Q’14 and 1Q’15 by

$0.24; however, the rate is still higher than the five-year average

of $28.67 at $32.58. Quarter to quarter, Class A rates saw a

small decline of $0.19, or -0.5%

• Vacancy rates have also been somewhat flat – at 9.8% in 1Q’15

for Class A&B combined, and 9.6% the previous two quarters.

• Subleases space has held steady in the Galleria, unlike the

major submarkets in west Houston.

• The unstable price of oil has not had a large impact on office

rents and vacancy yet, however landlords have been giving in

on concessions.

• There are a few multi-tenant buildings currently under

construction that were being developed to help meet rising

demand, which has tapered off a bit this year.

• Due to the instability of the price of oil, increases in concessions

are occurring.

• Tenants will continue to compete for well-located premier

office space; however, there are now more deals to be made.


Vacancy Vacancy



$35.41$0.19 vs

4Q’14

%4.90.5% vs

4Q’14

1.7M30K SF vs

4Q’14

SF2.0M1.3M SF vs

4Q’14

%8.1

SF SF-19K

06

GALLERIA SUBMARKET UPDATE06

Proposed Under Construction

2

1

1

1500 Post Oak600,000 SF

100% Leased

NEW DEVELOPMENT MAP

2

1885 St James Place165,000 SF

0.0% Leased

3

1717 W Loop Fwy S380,000 SF

74.2% Leased

4

4444 Westheimer92,021 SF

36.4% Leased

3

4

06GALLERIA SUBMARKET UPDATE

TOP 5 EMPLOYERS



58,000 SF 39,000 SF 33,500 SF 29,990 SF 23,864 SF


Galleria Tower II 5151 San Felipe Williams Tower 1800 West Loop S. 1775 St. James

80,200 SF 62,523 SF 46,466 SF 39,626 SF 33,322 SF


5251 Westheimer Five Post Oak Park 2700 Post Oak 2425 West Loop S. 1233 West Loop S.

141,848 SF 140,618 SF 123,779 SF 111,250 SF158,084 SF

WESTCHASE SUBMARKET UPDATE0606

WESTCHASESUBMARKET UPDATE

The Westchase District’s roots trace back to the early 1960’s,

evolving from farmland into a 2,460 acre master-planned

community bustling with commercial activity. More than

500,000 people reside within five miles of this submarket,

giving area employers a large and well-educated workforce.

$20.14$0.50 vs

4Q’14

0.5% vs 4Q’14

93K SF vs 4Q’14

Class A Class B

SF00 SF vs

4Q’14

OFFICE SNAPSHOTMARKET TRENDS

MARKET DRIVERS


• The average rental (Class A&B) rate declined marginally between

1Q’15 and 1Q’14 (–0.5%), however, it is still at a historically high

level at $31.01.

• The vacancy rate increased by 2.4 percentage points to 10.9%

due to an increase in sublease space.

• Absorption decreased significantly in the first quarter of 2015.

1Q’15 absorption totaled nearly (306,506) SF.

• Leasing activity slowed, seeing about a third of the activity from

the previous year.

• Price of oil expected will have an impact on office rents and

vacancy for the remainder of 2015.

• Vacancy is the highest it’s been since 4Q’2010 due to the

instability in the price of oil.

• The 1.5 million SF under construction is 100% leased, adding

no vacant space to inventory.

• Due to the low price of oil, increases in concessions are

continuing.

• The market is currently tenant favorable.


Vacancy Vacancy



$38.42$0.57 vs

4Q’14

%11.20.0% vs

4Q’14

554K SF vs 4Q’14

SF1.5M0K SF vs

4Q’14

SF77KSF-383K

%10.6

0606WESTCHASE SUBMARKET UPDATE

Proposed Under Construction

4

1

3

5

23

4

5

2

1

CityWest 6387,200 SF

0.0% Leased

CityWest 5306,900 SF

0.0% Leased

2101 CityWest1.1 MSF

100% Leased

10353 Richmond445,000 SF

100% Leased

6004 Rogerdale158,607 SF

0.0% Leased

NEW DEVELOPMENT MAP 100,000 SF+

06 WESTCHASE SUBMARKET UPDATE

TOP 5 EMPLOYERS

2,344 Employees 1,700 Employees 1,277 Employees 1,100 Employees 930 Employees


100,000 SF 39,471 SF 25,000 SF 25,000 SF 17,472 SF


CityWestPlace Bldg. 4 CityWestPlace Bldg. 2 10500 Richmond Two BriarLake Plaza Westchase Corp. Ctr.

176,193 SF 103,018 SF 93,614 SF 97,441 SF 31,563 SF


CityWestPlace Bldg. 1 Two BriarLake Plaza Westchase Park II Richmond Park 2900 Wilcrest Dr

107,088 SF 100,000 SF 99,087 SF 69,454 SF119,427 SF

Undisclosed Undisclosed Undisclosed

• Vacancy has increased significantly due to two factors – 1.3

MSF delivered in the first quarter and the unstable price of oil.

• Price of oil expected will have an impact on office rents and

vacancy for the remainder of 2015.

• Approximately 4.4 MSF under construction will drive vacancy

up further as space is delivered (only 23.9% of multi-tenant

new construction is pre-leased); this space was originally being

developed to help meet the rising demand, which is already

tapering off this year.

06

The Energy Corridor has long been one of Houston’s most

desirable submarkets and is dominated by large tenants in

the 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.

MARKET TRENDS

MARKET DRIVERS


• The direct average rental rate (Class A&B) stayed almost flat

between 4Q’14 and 1Q’15 increasing a mere 0.3% to $31.24.

• The vacancy rate increased by 2.2 percentage points to 9.2%

since the last quarter.

• Subleases space nearly doubled since the end of the last

quarter.

• Competition for space should remain until most new

construction is delivered.

• The majority of the space being vacated is obsolete and will

need to be repositioned.

Class A Class B

OFFICE SNAPSHOT

Avg. Rental Rate

Vacancy

Absorption

Construction

$36.17$0.71 vs

4Q’14

%8.33.4% vs

4Q’14

607K SF vs 4Q’14

SF4.4M1.1 MSF vs

4Q’14

SF213K

KATY FREEWAYSUBMARKET UPDATE

Avg. Rental Rate

Vacancy

Absorption

Construction

$24.15$1.05 vs

4Q’14

%10.70.3% vs

4Q’14

0K SF vs 4Q’14

SF 23K200K SF vs

4Q’14

SF138K

WESTCHASE SUBMARKET UPDATE

1

06 KATY FREEWAY SUBMARKET UPDATE

NEW DEVELOPMENT MAP 100,000 SF+Under Construction

8

8

10

65

4

4

1

119

3

3

2

2 7 910

7

65

21700 Merchants Way127,955 SF

0.0% Leased

16200 Park Row146,429 SF

54.3% Leased

15377 Memorial Dr389,709 SF

4.7% Leased

1414 Enclave300,907 SF

0.0% Leased

915 N Eldridge Pky524,448 SF

0.0% Leased


100% Leased


100% Leased

201 N Dairy Ashford336,000 SF

100% Leased

12120 Wickchester Ln171,475 SF

100% Leased

825 Town & Country227,063 SF

62.3% Leased

12

9807 Katy Fwy143,830 SF

100% Leased

9811 Katy Fwy452,370 SF

55.2% Leased

1211

06KATY FREEWAY SUBMARKET UPDATE

TOP 5 EMPLOYERS



40,589 SF 34,611 SF 27,259 SF 27,194 SF 27,031 SF


Three Westlake Park 16290 Katy Fwy. Three Westlake Park Two WestLake Park Two WestLake Park

215,861 SF 155,050 SF 155,044 SF 85,065 SF 67,334 SF


13501 Katy Fwy 11750 Katy Fwy 10496 Old Katy Rd 750 Town & Country 11700 Katy Fwy

331,707 SF 260,249 SF 207,000 SF 172,907 SF 161,940 SF

06

THE WOODLANDSSUBMARKET UPDATE

With several construction cranes dotting the horizon and

expanded/new corporate headquarters including Exxon,

Southwest Energy, and Anadarko, small and medium-sized

tenants in The Woodlands are finding themselves squeezed

for space and shocked by increases in rental rates.

$25.60$0.19 vs

4Q’14

1.2% vs 4Q’14

58K SF vs 4Q’14

Class A Class B

SF29K16K SF vs

4Q’14

OFFICE SNAPSHOT

MARKET TRENDS

MARKET DRIVERS


• Both Class A and B rates have been experiencing a fluctuation,

most of which has been downward. Quarter-over-quarter, rates

declined by 5.6% (Class A) and 2.1% (Class B).

• Absorption has kept pace with deliveries, however leasing

activity in the first quarter of 2015 was the lowest it’s been in

the last 15 years, contributing to increasing vacancy rates.

• Of the 1.9 MSF currently under construction (buildings 100,000

SF+), 711,285 SF is classified as multi-tenant. This space is

only 7% pre-leased and will add a glut of availability and will

drive the vacancy rate up upon delivery in late 2015.

• Demand has come from corporate relocations and expansions

in energy, medical and chemical sectors.

• Rates for Class B space have not declined as rapidly,

presumably due to service companies looking for value space

that is near the new corporate headquarters.

• Recent headquarter moves and expansions have improved

access and drive times, spurring additional development of

other office, retail, hotels, and residential projects.

• Unstable price of oil expected to have an impact on office

rents and vacancy for the remainder of 2015.

• Increases in concessions are likely to continue.

• With higher vacancies, more space options are now available.


Vacancy Vacancy



$32.80$0.63 vs

4Q’14

%4.90.5% vs

4Q’14

1.7M40K SF vs

4Q’14

SF2.0M 1.2M SF vs

4Q’14

%8.1

SF SF-19K

06THE WOODLANDS SUBMARKET UPDATE

NEW DEVELOPMENT MAPUnder Construction

1

123

4

6

5

4

3

6

2

5

1735 Hughes Landing331,840 SF

100% Leased


100% Leased


0.0% Leased

25700 Interstate 45240,470 SF

0.0% Leased

Springwoods Village150,000 SF

33.3% Leased

ExxonMobil Campus Phase III500,000 SF

100% Leased

TOP 5 EMPLOYERS


TOP 5 LEASES SIGNED IN 2014

515,000 SF 500,000 SF 95,000 SF 40,000 SF 25,576 SF


Technology Forest Blvd. 4

10101 Woodloch Forest

Two Hughes Landing Town Center I 4055 Technology Forest Blvd.

50,580 SF 25,879 SF 25,576 SF 24,331 SF 23,894 SF


Sierra Pines II 2455 Tech. Forest 2001 Timberloch 128 Vision Park Blvd. 2700 Research Forest

93,557 SF 87,855 SF 50,000 SF 46,310 SF153,810 SF

THE WOODLANDS SUBMARKET UPDATE06

HOUSTON ECONOMYFACTS & FIGURES

In 2014, Houston’s economy was booming, translating to

the highest level of construction the area had seen since the

boom of the 1980s and the highest total on record for build-

ing permits. During this time, leasing activity was also robust

across all commercial real estate sectors.

Employment growth in the energy and education sectors

drove the demand for office space, but declining oil prices

have now caused a pause in the market. Regardless of the

slow-down, the market remains at historical healthy levels

and local economists believe Houston real estate will largely

be unscathed.

The following pages detail the state of the Houston economy

at the end of the first quarter of 2015.

07FORTUNE 500 COMPANIES

Houston ranks third among US metropolitanareas in Fortune 500 headquarters, with 26 companies based in the Houston MSA. More than 88% of these companies are in some way related to the energy industry.

Below is a list of all Fortune 500 companies headquartered in the Houston MSA as of the end of 2014:

Phillips 66#6

ConocoPhillips #47

Enterprise Products #56

Sysco#63

Plains GP Holdings #70

Halliburton #103

NOV#131

Baker Hughes #132

Apache #179

Marathon Petroleum #188

Anadarko #202

EOG Resources #203

Kinder Morgan #206

Waste Management#207

Cameron #286

Group 1 Automotive #307

CenterPoint Energy#333

KBR #360

FMC Technologies #368

Targa Resources#395

Quanta Services #396

Calpine #414

Spectra Energy#461

MRC #478

Buckeye Partners #485

Noble Energy #491

Job growth in the Washington MSA has been

challenged by the contraction of the federal government.

Any improvement in the job growth rate will have to be

fueled by the private sector.





Houston has benefitted from four years of exceptional

growth. Due to this rapid economic expansion, the city

now ranks fourth in the nation in GDP producing more

than $533 billion annually.

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 25th largest

economy. The city of Houston also has a GDP greater

than 42 states.

07 HOUSTON ECONOMY FACTS & FIGURES

New York CIty$1.4 Trillion

Los Angeles$792 Billion

Chicago$586 Billion

Houston$533 Billion

Venezuela$438 Billion

Norway$512 Billion

US GDP RANKING

WORLD GDP RANKING





Houston’s economic growth is expected to increase in

2015, albeit at a much slower pace; and is projected to

double between 2015 and 2040. Houston’s GDP also

is projected to top $1.1 trillion by the end of 2027. The

adjacent graph shows the city’s economic makeup.

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%

Houston’s economy contracted for

the second consecutive month in

February, registering 49.3 at the end

of the month. The decline in PMI was

expected given the continued decline

in oil prices.

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

Houston ranks third in lowest overall

cost of living among the nation’s 20

most populous metropolitan areas,

with costs 17.4% below the average

for this group. Houston’s housing

costs are 32.9% below this group’s

average.

Houston’s overall after-taxes living

costs are 5.2% lower than the US

average, largely due to affordable

housing prices that are 6.0% below

the national average.

COST OF LIVING

07HOUSTON ECONOMY FACTS & FIGURES

2005 2007 2008 2009 2010 2011 2012 2013

30

40

50

60

70

2014 20152006

50-Point Baseline PMI Reading

PMI Reading

Mining

Construction

Manufacturing

Trade

Transportation, Utilities, Warehousing

Information

Finance, Insurance, Real Estate

Services

Government

Agriculture


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 145 publicly traded oil and gas exploration and

production firms based in the US are located in Houston.

In December 2014, the city held 31.7% of the nation’s

202,000 jobs in oil and gas extraction and 11.6% of the

453,400 total jobs in support activities for mining.

In 2015, The Greater Houston Partnership estimates that

9,300 jobs could be cut, but may increase more as layoffs

and budget cuts are announced.

WHAT EXACTLY CAUSED THE DROP IN OIL PRICES?

The drop in oil prices is due to many factors but generally because supply is much higher than demand.

Since 2010, prices hovered in the $100 per barrel range – because of increasing oil consumption in countries like China, and because of conflicts in key oil nations like Iraq – with production not being able to keep up with the increased demand.

These high oil prices led to an increase in drilling, but then demand began to taper off across Europe, Asia, and the U.S. Unused oil was just being stockpiled away, causing the dramatic decrease in prices, and with OPEC states not agreeing to cut production, the price of oil continues to fall.

There could also soon be a storage problem, and other countries could be releasing more supply into the market, potentially driving prices down further.

WTI reached a high of $108 in June 2014 before falling

30.6% to $75 in November 2014 (prices began falling in

September). The price continued to drop, registering $47.60

at the end of the first quarter of 2015.

The increase in domestic production has greatly reduced

U.S. dependence on foreign oil. EIA forecasts that WTI will

average $55.02 in 2015 and $71.00 in 2016. Other experts

expect the price to drop as low as $20.00 per barrel.

OIL PRICES

ENERGY & OIL

84

86

88

90

92

94

96

-3

-2

-1

0

2

3

1

MB/D MB/D

1Q’09 3Q’10 1Q’12 3Q’13 1Q’15

OIL DEMAND SUPPLY BALANCE

Oil Stock Change Oil Demand Oil Supply

There is a correlation between the

success of the energy industry and

office rental rates, as well as leased

space, in Houston. As the price of

oil increases or decreases, Class A

rents usually follow suit, typically with

a six-month lag.

With the price of oil seeing a dramatic

decrease, landlord concessions have

increased while rents are starting to

decrease slightly.

RENT VS THE PRICE OF OIL

The number of U.S. oil and gas rigs in

use fell at the end of March 2015, by

790 to 1,028.

The number of drilling rigs in the US

fell for the 17th consecutive week in

March, indicating that lower profits

are causing producers to cut costs,

according to Baker Hughes.

Rig count is expected to continue to

fall, at a much slower pace now, until

mid-2015.

OIL RIG COUNT

Oil Price Rental Rates

Oil Price Rental Rates

Previous Year Current Year

Rig Count

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

$0

$40

$80

$120

$160

2013 2014

$20

$24

$28

$32

$36

Expanding

Stable

Contracting

Jan. Feb. March April May June July Aug. Sep. Oct. Nov. Dec.

1650

1700

1750

1800

1850

1900

1950



POPULATION

Houston is the fourth largest city (2.2 million residents) and

fifth largest MSA in the nation, with approximately 6.3 million

residents.

The MSA also led the nation in population growth in 2014,

adding 156,371 residents.

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 projected

to swell by four million residents by the end of 2040.

POPULATION GROWTH

NEW ARRIVALS

2015 2040

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.

X


Substantial diversification in Houston’s economy in the last

30 years has reduced its vulnerability to downturns in the

upstream energy sector.

Drivers powering the rising economic diversification include:

DIVERSIFYING SECTORS

Healthcare accounts for one in every

ten jobs in the region and 9.5% of all

local payroll ($15.9 billion in 2013).

The sector is projected to add 9,600

jobs in 2015 in Houston.

Houston is one of the world’s largest

petrochemical producing centers and

the $15 billion petrochemical complex

at the Houston Ship Channel is the

largest in the US and second largest

worldwide.

The region’s geographic location

makes it an easily-accessed portal to

the global marketplace. The Port of

Houston ranks first in the US in total

tonnage (for 22 years straight) and

waterborne cargo value.

Home to the Johnson Space Center,

and a diverse network of 50 research

and education organizations with ties

to aerospace technology, Houston is

a worldwide leader in the aerospace

industry.

Research and development is critical

to NASA’s Johnson Space Center,

the Texas Medical Center, the world’s

largest concentration of energy and

petrochemical companies, and major

universities across the region.

ECONOMIC DIVERSIFICATION

Up from 13% in the mid-1980s, diversifying sectors now contribute to approximately 50% of Houston’s economy.

Oil

Other

Oil

Other

1986

2015

HEALTHCARE PETROCHEMICALS TRADE

AIR & SPACE TECHNOLOGY


Since the lows of the recession, Houston has led the nation

in job recovery (by creating 445,000 new jobs), adding three

jobs for every one lost. Overall employment in Houston has

increased by 19.4% since 2010.

EMPLOYMENT

NON-FARM EMPLOYMENT

• Total non-farm employment in the Houston MSA jumped to 2.96

million in December 2014, up 120,600 from one year earlier.

• From December 2013 to December 2014, local non-farm

employment rose 4.2%, well above the national rate of 2.0%.

• Among the 38 largest metropolitan areas in the country, Houston

ranked third in the rate of job growth and third in the number of

jobs added.

• December has the second largest annual employment gain and

the tenth fastest pace of job growth in the past 35 years.

• Layoffs are expected in the energy industry – concentrated more

in oilfield services (blue collar) then in exploration (white collar).

JOB RECOVERY

JOB GROWTH

Houston has led the nation in job recovery, adding three new jobs for each lost.

+Houston will account for 25% of all job growth in texas between 2012 and 2040.

JOBS JOBS JOBS JOBS

Houston Rest of Texas

NATIONAL JOBS COMPARISON

The Houston MSA holds more total jobs than 35 individualstates.

EMPLOYMENT VS OCCUPANCYEMPLOYMENT VS RENTAL RATE

3,500

3,000

2,500

2,000

1,500

1,000

$40

$32

$24

$16

$8

$0

3,500

3,000

2,500

2,000

1,500

1,000

95%

90%

85%

80%

75%

70%

Employment Houston Rate Class A Rate Employment Houston Occupancy Class A Occupancy

2012 2013 20142009 2010 20112006 2007 20082005 2012 2013 20142009 2010 20112006 2007 20082005

The Houston housing market experienced its best year

on record in 2014 and that is a reflection of the vitality

of the local economy. We expect the pace of sales to

normalize this year, which should finally enable inventory

levels to grow, restoring balance to the market.

- HAR Chair, Nancy Furst

“

HOUSING

Houston set a record in 2014 with 91,202 total residential

closings, as well record-breaking sales volume.

Houston’s average sales price for a single-family home is

$270,182, an 8.7% increase over the previous year.

Houston’s median house price is third lowest among the 10

largest U.S. metropolitan areas, however, the city ranked

fourth in median sales price gain since 2012.

The median price for a single-family home increased 10.6%

year-over-year, to $199,000.


FOREIGN TRADE

In 2014, more than $253.3 billion in foreign trade passed

through the Houston-Galveston Customs District, up 0.6%

from the $251.8 billion handled in 2013.

Exports accounted for a majority of the growth. Commodity

imports have declined for the past three consecutive years.

Future growth will slow due to the sluggish performance of

the global economy.

$40 $47$58

$72$90

$75$95

$119 $127 $129 $132$65

$89

$92$104$113

$151

$117

$149$147

$123 $122


08

MARKET OUTLOOK

The outlook for Houston in 2015 is positive on most fronts

but will ultimately depend on the stability of oil and gas prices

and geopolitical events. WIth additional layoffs in the energy

sector expected, a pause in the market during 2015 is likely

but won’t be felt across all sectors.

2015 OUTLOOK

• With a robust job market (62,000 jobs projected to be added in

2015) and an increasingly diversified economy, both overall and

within the energy industry, energy prices will not have as much

of an impact as in years past (i.e. the 1980s).

• We anticipate a slight pause in the market in the first two

quarters of 2015; however with a tremendous growth in jobs,

absorption, and rental rates over the past few years, a pause

in the market will not have a profound effect and won’t be felt

across all industry sectors.

• Development will slow down (if it’s not under construction

already, it likely won’t break ground in the first half 2015).

However, 2015 will see a glut of office space delivered to the

tune of 12.3 million SF, by far the largest number on record

(no data before 1999). Half (6.2 MSF) of the space estimated

for 2015 is for single-tenant use, and is 100% pre-leased. As

30.5% of the multi-tenant spec space is already pre-leaded,

vacancy rates will increase slightly.

• As new product hits the market, there will be more options for

tenants looking to expand, renew, or move.

• Due to these market conditions we expect landlord concessions

to increase and rental rates to flatten in 2015.

MARKET OUTLOOK

CONTACT US

Cresa Houston

5599 San Felipe, Suite 500

Houston, Texas

713.402.5800

Cresa © 2014. All rights reserved.

Permission is hereby granted for internal distribution by Cresa business partners. Other

reproduction by any means in whole or part without written permission is prohibited.

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