3Q'14 NAI Houston Office Market Report

Page 1

Office Market Report

3Q’14


“Overall the Houston office market remains on solid footing. However, the absorption figures reported for the 3rd Quarter of 2014 indicate a possible slowdown in leasing activity. Vacancy rates remain stable around 11%, and new buildings being delivered to the market during the quarter had significant preleasing (67% on average) in place. Major concerns for the coming months include the impact of lower oil prices on capital budgets for E and P companies and the possible slowdown in the global economy. In summary, I don’t foresee a major shift in the market, however clearly activity has slowed from earlier this year and 2013.” Dan Boyles | Partner, NAI Houston

The Houston Office Market

Economic Outlook

Due to another modest decrease in vacancy rates, the third quarter of 2014 saw a decline in vacant office space in the Houston metropolitan area, which has continued since late 2010. In turn, rental rates increased though only slightly since the second quarter of 2014. Overall, the office market has remained stable since the prior quarter.

The U.S. economy, while continuing to positively respond from the downturn, is showing signs of looking better than previously thought. Positive outlook is carried largely by improvements in the gross domestic product, unemployment, and business spending, while a slightly negative outlook is carried by energy and trade, and slowdowns in other world economies such as Europe, China, Brazil, and Japan.

At the end of the third quarter of 2014, the office vacancy rate for combined Class A and B space of the Houston market stands at 10.8%, a decrease of 0.2% since the second quarter. This vacancy rate approximates the low of 10.7% seen prior to the economic downturn of spring 2008. Average quoted prices for rental rates persisted from the second to the third quarter at approximately $34 and $21 per square foot for Class A and Class B, respectively. Vacancy of Class A properties throughout Houston rose by ~0.6% to 9.8% over the third quarter, following net absorption that totaled positive 1,235,454 square feet. Class A vacancy rates at the end of the third quarter were 0.4% lower than they were at the same time a year ago. Vacancy of Class B properties throughout Houston remains stable, not having shifted more than 1% since first quarter of 2012. From the second to the third quarter of 2014, vacancy moved upward by 0.3% to 13.1%, as a result of net positive absorption. During the third quarter, a total of 36 new buildings were delivered, adding 1,649,183 square feet of office space to the Houston market. Total inventory for the city now stands at 278,279,122 square feet of space --- 117,229,597 square feet of which are housed within 375 Class A buildings and 121,039,348 square feet of which are housed in 2,688 Class B buildings. With 17,249,698 square feet of Class A construction and 360,535 square feet of Class B construction, a total of 17,610,233 square feet of office space are currently under construction in the Houston market at the end of the third quarter.

The positive outlook on the national economy is supported largely by numbers for gross domestic product (GDP), unemployment, business spending, and housing. GDP is anticipated to be 3.5% growth rate for the third quarter of 2014 (compared to -2.1% from first quarter 2014), with a 3.0% growth rate for the fourth quarter of 2014 and into early 2015. Unemployment continues to decline, dropping to 5.9% in September 2014, and is anticipated to hover around 6% in the near term and possibly drop toward 5.6% in late 2015. Job growth in Texas continues to be among the highest across states, with unemployment in August 2014 at a projected low of 5.3%. Business spending is now picking up by a gain of about 4.5%, but is anticipated to increase by 7% in 2015. Both increased manufacturing and new equipment purchases to support production are underlying increased business spending, though businesses show a general sentiment to spend more to expand their capacity. As of late September 2014, the Houston Business Cycle Index shows the city’s economic growth up by 4.7% from last year. Housing recovery continues, though irregular, with low inventory driving pent up demand. Energy and trade dominant the negative outlook on the U.S. economy. Export trades continue to make small increases, though slowdowns in other world economies will likely hamper this in time. The trade deficit this year will increase slightly from last year to ~$500 billion. While projections are for U.S. dependency on foreign energy to decline, the U.S. will not be a net energy exporter for a decade or more. Though the U.S. is seeing key advances in the domestic oil and gas industry, declines in oil prices as measured by West Texas Intermediate (WTI) are not likely to reverse in the near term.


HOUSTON, T X Select Top Office Leases (In terms of square footage)

• Energy XXI Services: One City Centre – 171,216 SF Renewal/Expansion (CBD) • Sasol North America: Woodbranch Plaza IV - 168,050 SF (Katy Freeway West) • GE Oil & Gas: Beltway @ Clay – 150,000 SF (FM 1960/Hwy 249) • Memorial Development: Once Allen Center - 111,566 SF (CBD) • Motiva Enterprises: One Allen Center – 109,373 SF (CBD) • EMAS: City Centre 5 - 100,000 SF (Katy Freeway West) • JGC America: 3151 Briarpark Dr. - 77,625 SF (Westchase) • Pacific Drilling: 11700 Katy Freeway - 77,296 SF (Katy Freeway West) • Gardere Wynee Sewell: 1000 Louisiana - 74,975 SF (CBD) • IHI: One EldridgePlace - 61,455 SF (Katy Freeway West) • NetIQ: 515 Post Oak Blvd – 55,380 SF (Post Oak Park) • Blinds.com: 10255 Richmond – 55,470 SF (Westchase) • Phillips 66: 3010 Briarpark Dr. - 53,245 SF (Westchase) • Clear Channel Communications: 2000 West Loop - 50,180 SF (Galleria/Uptown) • Coats Rose: 9 Greenway - 50,000 SF (Greenway Plaza) • HOK: Phoenix Tower - 49,018 SF (Greenway Plaza) • National Oilwell Varco: 2500 CityWest - 47,136 SF (WestChase) • Hoover Slovacek, LLP: Galleria Tower II - 44,644 SF (Galleria/Uptown) • Science Application International: 2400 Nasa Parkway – 40,000 SF (NASA/Clear Lake)

Select Largest Deliveries • Anadarko Tower 2 – 31 stories, 550,000 SF. Owned and occupied by Anadarko. (Woodlands) • Energy Tower III – 17 stories, 428,831 SF. Fully occupied by Technip. (Katy Freeway) • 11910 Katy Fwy – 14 stories, 375,000 SF. 100% occupied. (Katy Freeway) • 200 N Dairy Ashford Rd – 375,000 SF. Delivers. (Katy Freeway) • Two Briarlake Plaza – 337,888 SF. Delivers. (Westchase) • Energy Crossing II – 8 stories, 321,508 SF. 87% occupied. (Katy Freeway) • 17320 Katy Fwy – 4 stories, 186,375 SF. 100% occupied by Mustang Engineering. (Katy Freeway) • 11340 FM 2920 – 3 stories, 140,000 SF. 100% occupied by Baker Hughes. (Woodlands) • 3990 Rogerdale Rd. – 3 stories, 125,000 SF. 100% occupied by C&J Energy Services. (Westchase) • 13411 Hilliard St. – 4 stories, 120,000 SF. 100% occupied by the United States Coast Guard. (NASA/Clear Lake)

Selected Top Construction (All delivery dates listed are according to current estimates)

• ConocoPhillips – 546,604 SF. Delivers 2Q 2015. (Katy Freeway) • Southwestern Energy HQ – 515,000 SF. Delivers 4Q 2014. (Woodlands) • Noble Energy Center II – 456,000 SF. Delivers 2Q 2015. (FM 1960) • Air Liquide Center South – 452,370 SF. Delivers 4Q 2015. (Katy Freeway) • Energy Tower IV – 428,831 SF. Delivers 4Q 2014. (Katy Freeway) • Hilcorp Energy Tower – 406,600 SF. Delivers 1Q 2015. (Downtown) • 3737 Buffalo Speedway – 400,000 SF. Delivers 1Q 2015. (Greenway Plaza)

The Market


Largest Contiguous Space Available Address 800 Bell St

SF 1,314,350

Submarket

Address

CBD

2800 N Loop Fwy W

147,183

North Loop West

2050 W Sam Houston Pky S

146,199

Westchase

1201 Louisiana St

145,352

CBD

515 Post Oak Blvd

144,905

Post Oak Park

13401 N I-45

143,410

Greenspoint/N Belt West

2700 Post Oak Blvd

140,618

Galleria/Uptown

16001 Park Ten Place Dr

136,950

Katy Freeway West

1709 Dryden Rd

131,120

South Main/Medical Center

11929 W Airport Blvd

122,545

E Fort Bend Co/Sugar Land

17001 Northchase Dr

450,244

Greenspoint/N Belt West

12450 Greenspoint Dr

356,468

Greenspoint/N Belt West

600 Gemini St

300,000

NASA/Clear Lake

275,584

Greenspoint/N Belt West

253,562

Greenspoint/N Belt West

16825 Northchase Dr 233 Benmar Dr

SF

Submarket

11450 Compaq Center West Dr

248,782

FM 1960/Hwy 249

909 Fannin St

234,333

CBD

16200 Park Row

230,277

Katy Freeway West

2727 North Loop W

120,993

North Loop West

5051 Westheimer Rd

120,723

Galleria/Uptown

8900 Lakes at 610 Dr

119,527

South Main/Medical Center

16945 Northchase Dr

228,572

Greenspoint/N Belt West

4005 Technology Dr

220,966

Southwest Far

2425 West Loop South

215,299

Post Oak Park

2350 N Sam Houston Pky E

116,746

Greenspoint/IAH

3 Greenway Plz

207,441

Greenway Plaza

1000 Louisiana St

114,066

CBD

111,250

Post Oak Park

10496 Old Katy Rd

207,000

Katy Freeway East

1233 West Loop S

100 Glenborough Dr

204,198

Greenspoint/N Belt West

1333 West Loop S

111,250

Post Oak Park

820 Fannin St

111,112

CBD

11700 Katy Fwy

198,676

Katy Freeway West

811 Louisiana St

188,695

CBD

10700 N I-45 Fwy

109,470

Greenspoint/N Belt West

6464 Savoy Dr

182,566

Southwest/Hillcroft

811 Main St

106,005

CBD

2707 N Loop W

180,321

North Loop West

14100 Southwest Fwy

104,391

1150 Gemini St

158,627

NASA/Clear Lake

E Fort Bend Co/ Sugar Land

5251 Westheimer Rd

158,084

Galleria/Uptown

16676 Northchase Dr

101,111

1575 Sawdust Rd

153,810

Woodlands

Greenspoint/N Belt West

5959 Corporate Dr

153,273

Southwest Beltway 8

2115 Winnie St

100,000

Southeast Outlier

1430 Enclave Pky

152,790

Katy Freeway West

Vacancy

Sublease Space

• Decreased to 10.8% to end 3Q 2014 citywide for Class A & B buildings. • Class A projects reported a 9.8% Vacancy Rate citywide.

• Inventory of sublease space available citywide has increased in Class A & B buildings by 129,722 SF, to a total of 1,908,439 SF at the end of Q3.

• Class B projects reported a 13.1% Vacancy Rate citywide.

Total Net Absorption

• Overall Vacancy Rates downtown decreased to 10.0%.

• 2014 YTD: 5,626,298 SF All Classes

Rental Rates

• Class A buildings had a net positive absorption of 1,235,454 SF; Class B buildings had a net negative absorption of 61,582 SF.

(Building Classes A and B Combined)

• Average Rental Rates: $27 per SF • Landlord concessions such as free rent and parking charge abatements are on the decline.

New Construction

(Building Classes A and B Combined)

• Ending 3Q 2014, there were 17,610,233 SF of new office buildings under construction. • By comparison, 3Q 2013 had 11,233,902 SF of new office buildings under construction.


Class A & B Office Buildings, Citywide | Past 9 Quarters Absorption & Deliveries Class A Net Absorption

4,000,000

Class A RBA Delivered

Class B Net Absorption

Class B RBA Delivered

3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 (500,000)

2012 3Q

2012 4Q

2013 1Q

2013 2Q

2013 3Q

2013 4Q

2014 1Q

2014 2Q

2014 3Q

Vacancy Rates 16.0%

Direct Vacant % Class A

Direct Vacant % Class B

14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

2012 3Q

2012 4Q

2013 1Q

2013 2Q

2013 3Q

2013 4Q

2014 1Q

2014 2Q

2014 3Q

Rental Rates $36.00

Avg Direct Rate Class A

Avg Direct Rate Class B

$34.00 $32.00 $30.00 $28.00 $26.00 $24.00 $22.00 $20.00 $18.00 $16.00 $14.00 $12.00 $10.00

2012 3Q

2012 4Q

2013 1Q

2013 2Q

2013 3Q

2013 4Q

2014 1Q

2014 2Q

2014 3Q

New Construction 20,000,000

RBA Under Const Class A

18,000,000

RBA Under Const Class B

16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 -

2012 3Q

2012 4Q

2013 1Q

2013 2Q

2013 3Q

2013 4Q

2014 1Q

2014 2Q

2014 3Q

5


Select Sales: Property Address

Sale Price

Sale Date

Price Per SF

1111 Bagby St (Sold with 430 Lamar Ave)

$416,025,257

2/20/14

$340.07

3040 Post Oak

$126,000,000

8/19/14

$294.75

580 Westlake Park Blvd.

$120,000,000

7/25/14

$263.83

3050 Post Oak

$100,000,000

5/19/14

$295.29

8 West Centre

$76,000,000

9/12/14

$334.74

10333 Richmond Ave.

$46,300,000

7/8/14

$211.72

13131 Dairy Ashford Rd(Sold with 13135 Dairy Ashford Rd)

$41,416,864

4/15/14

$202.24

13135 Dairy Ashford Rd (Sold with 13131 Dairy Ashford Rd)

$41,416,864

4/15/14

$202.24

9801 Westheimer Rd

$29,000,000

3/19/14

$137.36

6001 Rogerdale Rd

$27,425,000

5/15/14

$181.62

363 N Sam Houston Pky E

$24,100,000

5/6/14

$62.39

5300 W Sam Houston Pky N

$21,650,000

1/10/14

$214.27

222 Benmar Dr

$16,100,000

5/30/14

$81.21

7700 San Felipe St

$15,500,000

2/13/14

$153.90

12012 Wickchester Ln

$15,000,000

1/14/14

$137.02

2900 Weslayan St

$14,075,000

2/25/14

$102.96

16010 Barkers Point Ln

$13,950,000

3/11/14

$115.62

$9,674,743

2/20/2014

$178.07

430 Lamar Ave (Sold with 1111 Bagby St)

Office Space: Changes in Class A and B Year-over-Year: 3Q13 vs. 3Q14 NET ABSORPTION

VACANCY RATE

CONSTRUCTION

ASKING RATES

Quarter-over-Quarter: 2Q14 vs. 3Q14 NET ABSORPTION

VACANCY RATE

CONSTRUCTION

ASKING RATES

Leased and Unleased Square Footage in Deliveries Since 2009 7,000,000 Un-Leased

Leased

Square Feet

6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0

2009

2010

2011

2012

2013

2014


CLASS A & B

Total Employment Growth

Office Space

Office Square Footage per Employee by Industry Million Square Feet 0

50

100

150

200

250

300

350

400

450

LAW FIRMS AGRI-MINING/UTIL RETAILERS/WHOLES SERVICES TRANSPORTATION FINANCE/INS/RE COMMUNICATIONS BUSINESS-SERVICE ENGINEERS/ARCHIT GOVERNMENT ACCOUNTANTS MANUFACTURING MEDICAL

7


Submarket Reports Class A Existing Inventory Submarket

Vacancy

# Blds

Total RBA SF

Direct SF

Under Const SF

Quoted Rates

7

1,203,314

102,268

0

$25.51

Downtown

39

33,477,725

2,783,648

1,631,830

$42.30

E Fort Bend Co/Sugar Land

20

3,837,058

522,411

57,000

$26.67

FM 1960

21

3,854,007

487,759

768,000

$27.04

Greenway Plaza

16

6,224,406

479,320

648,275

$35.86

Gulf Freeway/Pasadena

1

22,706

526

0

$27.59

I-10 East

0

0

0

0

$0.00

81

19,104,517

990,210

5,679,708

$33.57

2

131,665

35,936

0

$31.98

NASA/Clear Lake

15

2,023,551

103,382

0

$24.56

North Belt

24

5,438,248

646,048

0

$28.34

0

0

0

0

$0.00

23

4,030,032

467,696

1,357,222

$25.48

Richmond/Fountainview

0

0

0

0

$0.00

San Felipe/Voss

3

1,720,793

202,143

0

$35.15

South

2

250,000

0

100,000

$27.19

South Hwy 35

0

0

0

0

$0.00

15

4,508,415

262,197

0

$28.13

Southwest

9

2,058,852

297,095

0

$17.56

West Loop

42

16,080,891

1,486,547

699,826

$35.63

Westchase

29

7,805,674

1,033,776

1,817,000

$37.24

Woodlands

26

5,457,743

457,845

4,490,837

$34.11

375

117,229,597

10,358,807

17,249,698

$34.28

Bellaire

Katy Freeway Kingwood/Humble

Northeast Near Northwest

South Main/Medical Center

Totals


Submarket Reports Class B Existing Inventory Submarket

Vacancy

# Blds

Total RBA SF

Direct SF

Under Const SF

Quoted Rates

32

3,019,949

151,798

0

$22.33

Downtown

167

19,658,592

1,809,012

0

$27.17

E Fort Bend Co/Sugar Land

225

4,441,607

496,182

13,060

$22.39

FM 1960

355

8,450,673

1,339,147

39,170

$17.13

47

4,141,880

316,718

13,575

$24.60

149

3,380,865

404,939

0

$20.50

25

731,906

88,219

0

$16.45

319

13,387,994

1,216,655

137,755

$22.53

69

1,657,962

101,841

104,223

$21.05

208

5,645,216

1,158,310

4,500

$18.61

North Belt

77

6,636,466

1,220,013

0

$16.37

Northeast Near

27

662,292

120,062

0

$19.58

159

8,547,044

1,369,348

3,106

$20.25

Richmond/Fountainview

26

953,495

220,199

0

$17.07

San Felipe/Voss

38

3,573,005

301,772

0

$21.70

South

80

1,614,169

199,899

0

$26.87

South Hwy 35

33

350,280

8,082

0

$15.60

South Main/Medical Center

64

4,838,288

523,663

0

$24.44

Southwest

143

7,671,713

1,859,605

0

$16.48

West Loop

63

7,088,200

868,186

0

$26.26

Westchase

73

7,888,629

729,104

0

$20.31

Woodlands

284

7,339,781

537,881

13,400

$26.34

2,663

121,680,006

15,040,635

328,789

$21.08

Bellaire

Greenway Plaza Gulf Freeway/Pasadena I-10 East Katy Freeway Kingwood/Humble NASA/Clear Lake

Northwest

Totals

9


Submarket Reports Total Office Existing Inventory Submarket

Vacancy

# Blds

Total RBA SF

Direct SF

Under Const SF

Quoted Rates

39

4,223,263

254,066

0

$24.11

Downtown

206

53,136,317

4,592,660

1,631,830

$36.68

E Fort Bend Co/Sugar Land

245

8,278,665

1,018,593

70,060

$24.34

FM 1960

376

12,304,680

1,826,906

807,170

$19.66

63

10,366,286

796,038

661,850

$30.68

150

3,403,571

405,465

0

$19.89

25

731,906

88,219

0

$16.34

400

32,492,511

2,206,865

5,817,463

$28.77

71

1,789,627

137,777

104,223

$21.73

NASA/Clear Lake

223

7,668,767

1,261,692

4,500

$19.57

North Belt

101

12,074,714

1,866,061

0

$22.61

27

662,292

120,062

0

$17.96

182

12,577,076

1,837,044

1,360,328

$21.41

Richmond/Fountainview

26

953,495

220,199

0

$15.88

San Felipe/Voss

41

5,293,798

503,915

0

$29.60

South

82

1,864,169

199,899

100,000

$22.76

South Hwy 35

33

350,280

8,082

0

$16.89

South Main/Medical Center

79

9,346,703

785,860

0

$24.67

Southwest

152

9,730,565

2,156,700

0

$16.07

West Loop

105

23,169,091

2,354,733

699,826

$32.92

Westchase

102

15,694,303

1,762,880

1,817,000

$31.08

Woodlands

310

12,797,524

995,726

4,504,237

$30.17

3,038

238,909,603

25,399,442

17,578,487

$27.98

Bellaire

Greenway Plaza Gulf Freeway/Pasadena I-10 East Katy Freeway Kingwood/Humble

Northeast Near Northwest

Totals


Methodology | Definitions | Submarket Map

22

Absorption (Net)

9

The change in occupied space in a given time period.

Available Square Footage

4

Net rentable area considered available for lease; excludes sublease space.

11

6

12

290

Average Asking Rental Rate

13

Rental rate as quoted from each building’s owner/ management company. For office space, a full service rate was requested; for retail, a triple net rate requested; for industrial, a NN basis.

90

90

8

59

290

7

90

10

21

Westheimer

99 ston Tollway

West Park Hou

Class A Product is office space of steel and concrete construction, built after 1980, quality tenants, excellent amenities & premium rates. Class B product is office space built after 1980, fair to good finishes & wide range of tenants.

19

Sam Houston Tollway

Building Class

6

59

15 20 2 5 14 1

10

6

225

18

6

3

Direct Vacancy

Fo rt Bend Tollway

90

288

59

45

16

10

Space currently available for lease directly with the landlord or building owner.

Market Size Includes all existing and under construction office buildings (office, office condo, office loft, office medical, all classes and all sizes, both multi-tenant and single-tenant, including owner-occupied buildings) within each market.

17

Overall Vacancy All physically unoccupied lease space, either direct or sublease.

SF/PSF Square foot/per square foot, used as a unit of measurement.

Sublease Arrangement in which a tenant leases rental property to another, and the tenant becomes the landlord to the subtenant.

Sublease Space Total square footage being marketed for lease by the tenant.

Sublease Vacancy Space currently available in the market for sublease with an existing tenant within a building acting as the landlord.

1. B ellaire

12. N ortheast Near

2. D owntown - CBD + Midtown

13. N orthwest = North Loop West + Northwest Far_ Northwest Near

3. E Fort Bend Co/Sugar Land 4. F m 1960 + FM 1960/Champions + Fm 1 960/Hwy 249 + FM 1960/I-45 North 5. G reenway Plaza 6. G ulf Freeway/Pasadena 7. I -10 East 8. K aty Freeway = Katy Freeway East + Katy Freeway West 9. K ingwood/Humble 10. N asa/Clear Lake 11. N orth Belt = North Belt East + North Belt West/Greenspoint

14. R ichmond 15. S an Felipe/Voss 16. S outh 17. S outh Hwy 35 18. S outh Main/Medical Center 19. S outhwest = Southwest Beltway 8 + Southwest/Hillcroft 20. W estloop = Galleria/Uptown + Riverway + Post Oak Park 21. W estchase = Westchase East + Westchase West 22. Woodlands

RBA (Rentable Building Area) Expressed in square feet, this area includes the usable area and its associated share of the common areas. 11


3Q’14

MARKETING & RESEARCH TEAM

Office Market Report J. Nathaniel Holland, Ph.D Chief Research and Data Scientist

Steven Cox Director of Property Research

Nuance Stone Sr. Director of Marketing and Research

1900 West Loop South, Suite 500 Houston, TX 77027 tel 713 629 0500

www.naihouston.com Sources: NAI Houston Research, CoStar, Federal Reserve Bank of Dallas, Greater Houston Partnership, Houston Chronicle, Houston Association of Realtors he information contained herein has been given to us by sources we deem reliable. We have no reason to doubt its accuracy, however, we T do not make any guarantees. All information should be verified before relying thereon.


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