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.