PMRG Q3 Houston Office Market Report

$500

Market Glance AT A Q3 2011

HOUSTON OFFICE
Market Glance
AT A
MARKET REPORT
THIRD QUAR TER 2011

PAGE

PROPERT Y SER VICES Y |SER VICES | DEVELOPMENT | INVESTMENT
PROPERT DEVELOPMENT | INVESTMENT

Q3 2011 Market Glance AT A

E CO NO M I C OV E RV I E W

Houston ranks as the nation’s top economic performer and continues to outpace the nation-
at-large in terms of economic and employment growth. The combination of elevated oil
prices, new opportunities in the oil shale plays and the re-opening of drilling in the Gulf
of Mexico have fueled employment growth in Houston’s core industries within the past
year. For the 12 months ending August 2011, the Houston-Sugar Land-Baytown metro area
added 65,600 jobs, a 2.6 percent increase in employment according to estimates released
by the Texas Workforce Commission (TWC). The sectors leading the recovery with annual
job growth include professional and business services (14,400 jobs), manufacturing (11,600
jobs), construction (10,400 jobs) and mining (8,700 jobs).

Despite the depressed national economy, Houston’s economic outlook remains positive
with the majority of the jobs that were shed during the recession and downturn expected
TA B LE OF CON T E N TS to be regained by end of 2011. According to the Greater Houston Partnership, the private
sector has already recouped 81.8 percent of all private jobs lost during the economic
Economic Overview.............................................................................. 2 downturn since January 2010. Houston’s economy is expected to recover at an above-
Office Market Assessment..................................................................3 average pace in the coming year, as elevated oil prices boost energy businesses and the
national recovery gradually firms. However, several factors could temper that growth—an
Net Absorption & Occupancy..........................................................4
uncertain regulatory future in the oil industry, weak natural gas prices, and government
Rental Rates & Leasing Activity........................................................5 budget woes.
Construction...............................................................................................6
Submarket Statistics & Methodology..........................................7 Employment Trends
Our Team.......................................................................................................8
120 6%
Thousands

100
4%
80
60 2%
40
20 0%
0
-2%
-20
-40 -4%
-60
-80 -6%
00 01 02 03 04 05 06 07 08 09 10 11F 12F
FOR INFORMATION:
Wade Bowlin Jobs Added Annual % Change
Executive Vice President
Managing Director Source: U.S. Bureau of Labor Statistics, Moody's Sector
Employment Growth by Analytics
(713) 209--5753
HEALTH
wbowlin@pmrg.com Current 12-Months Annual (Improving
Reading Prior Reading Change or Declining)
Ariel Guerrero Mining 90.7 82 10.6%
Construction 183.3 172.9 6.0%
Vice President, Research
Manufacturing 230.3 218.7 5.3%
(713) 209-5704 Trade, Transportation & Utilities 526.6 518.9 1.5%
aguerrero@pmrg.com Information 29.7 31.8 -6.6%
Financial Activities 136.7 135.9 0.6%
Professional & Business Services 380.4 366 3.9%
Education & Health Services 317.2 309.9 2.4%
Leisure & Hospitality 244.2 239.1 2.1%
PAGE

2
Other Services 96 92.2 4.1%
Government 360.5 362.6 -0.6%

Source: U.S. Bureau of Labor Statistics, Employment Data as of August 2011

PROPERT Y SER VICES | DEVELOPMENT | INVESTMENT

O F FICE MAR K E T AS S E S S M E N T

Houston’s office leasing market continued its healthy growth driven by the city’s thriving
energy industry. As the nation’s top economic performer, solid employment growth
has fueled leasing demand with over 2.6 million square feet of direct space absorbed
within the past year. The bulk of the demand over the last year has occurred within the
Class A sector with over 2 million square feet of direct absorption. The Class B sector
has also benefited with 636,131 square feet absorbed over the same 12-month period.
While oil prices remain at a level that makes exploration profitable and drilling activity
approaching its pre-recessionary peak, oil and gas service companies have been ramping
up their operations which have largely contributed to the rise in leasing demand, along
with most ancillary businesses to the industry. Growth is occurring from energy-related
firms such as BP, Carrizo Oil & Gas, Inc., Occidental Energy Marketing, Inc. and Worley
Parsons. BP recently leased the entire 305,000-square-foot, Three Eldridge Place building Houston Leads Nation in Job Growth: The Houston
in the thriving Energy Corridor as the energy firm plans to relocate more jobs to Houston. metropolitan area ranks first in the U.S. by posting the
This new lease transaction comes on the heels of BP’s lease renewal in June for a total largest year-over-year employment gain by any of the
of 725,000 square feet in the Three Westlake and Four Westlake office buildings, which 100 major metros according to the latest data released
expands its footprint to over 2.3 million square feet in west Houston. With a return in for August 2011. In 2010, Houston ranked first in the
tenant confidence, the leasing market is continuing its shift towards a landlord favorable U.S. by posting the largest 5 year employment gain as
setting in the strongest submarkets as rental rates are increasing, vacancies are tightening, reported by the U.S. Bureau of Labor Statistics.
and quality space options diminish.
Home to 23 Fortune 500 Companies: Houston ranks
third among metropolitan statistical areas in the
FO REC AST number of Fortune 500 headquarters behind only
New York (74) and Chicago (27). With more than 5,000
• Office market fundamentals should steadily improve resulting from corporate reloca- energy related firms, Houston is widely considered to
tions and expansions, particularly in the energy sector, as companies are attracted to be the Energy Capital of the world.
the area’s business-friendly environment with relatively lower business costs and a
well-educated labor force. Houston Economic Outlook: Houston’s historically
• Since speculative construction remains at a virtual standstill, it will allow occupancy strong employment and population growth propelled
levels to return to healthy levels as leasing activity resumes and current space inven- by further expansion in energy, health-related and
tory is absorbed at a steady clip. distribution industries should lead to above-average
• Houston is expected to remain resilient as commodity prices stabilize or strengthen, gains for the metro area. Houston is poised for long-
and will continue to fare better than most cities in terms of job recoveries due to its term expansion as job growth in Houston is forecasted
high concentration of energy-related jobs. to rise 2.6% in 2011 and 3.0% in 2012, according to
Moody’s Analytics.

Office Market Trends Market Trend Indicators

8,000 90% Current Change from Previous 12-month
Quarter Quarter Year Forecast
6,000 88% Occupancy 84.6% si
in Thousands of SF

4,000 86% Direct Absorption 754,108 up

2,000 84% Construction 1,401,719

0 82% Asking Rents $22.94

-2,000 80%
02 03 04 05 06 07 08 09 10 11F 12F
PAGE

3
Direct Net Absorption Completions Direct Occupancy



NE T A B S O R P TI O N & O CC UPA N C Y

• Houston’s office market posted its fifth consecutive quarter of positive absorption with
754,138 square feet of direct space absorbed during the third quarter, bringing the
year-to-date total to nearly 2.1 million square feet.
• The CBD enjoyed a strong performance with 359,223 square feet of direct absorption
during the third quarter, due primarily to Hess Corporation’s expansion and relocation
into their new 844,763-square-foot office tower. The CBD now accounts for nearly half
of the citywide year-to-date absorption gains with a robust 930,247 square feet.
• The top performing suburban submarket is the Katy Freeway/Energy Corridor with
520,691 square feet of direct absorption year-to-date, which accounts for 52 percent
of the growth in the suburbs. The largest lease transaction during the quarter occurred
at Three Eldridge Place as BP leased the entire 305,000-square-foot building, which will
further boost the absorption totals once occupancy takes place by year-end.
“Improved leasing velocity in the market accompanied • The Woodlands, Greenway Plaza and Katy Freeway/Energy Corridor accounted for a
by a muted construction pipeline within the past year cumulative direct absorption total of 558,654 square feet during the third quarter. The
has allowed occupancy levels to improve in most of the largest tenant move-ins included The Art Institute occupying 104,671 square feet at
submarkets,” said Wade Bowlin, Executive Vice President, 4140 Southwest Freeway, Newfield Exploration taking 76,836 square feet at 4 Waterway
Managing Director, Central Division. Square, Lloyd’s Register moving into 74,847 square feet at 1330 Enclave Pkwy and
Modec moving into 67,943 square feet at The Offices at Park 10.
• The Uptown/Galleria submarket posted the largest quarterly occupancy loss with
202,122 square feet of negative direct net absorption, largely resulting from The Art
Institute’s relocation to the Greenway Plaza submarket and leaving behind 94,164
Submarket Occupancy Ranking square feet at 1900 Yorktown.
Occ. Y-O-Y %
Rank Submarket Rate Change
1 Baytown & I-10 East 89.3% -0.80% Direct Net Absorption vs. Completions
2 Kingwood / Humble 89.2% 3.00%
2,400
3 San Felipe / Voss 88.9% -0.10%
2,000
4 South & S. Main / Medical Center 88.6% 0.60%
1,600
5 Richmond / Fountainview 88.5% -4.40%
In Thousands of SF

1,200
6 Greenway Plaza 87.5% 2.30%
800
7 NASA / Clear Lake 87.1% -3.70%
400
8 The Woodlands / Conroe 87.0% 3.40%
0
9 Katy Freeway 86.3% 2.60%
-400
10 Galleria/Uptown 86.8% -0.60% -800
11 Bellaire 86.5% -1.50% Q3 08 Q1 09 Q3 09 Q1 10 Q3 10 Q1 11 Q3 11
12 Greenspoint IAH / N Belt 85.4% -0.50%
13 Westchase 85.2% 1.80% Direct Net Absorption Completions

14 Central Business District 84.9% -1.90%
15 Midtown / Allen Parkway 84.1% 2.60% Direct Occupancy Rates
16 Gulf Freeway / Pasadena 83.5% 0.30%
17 Southwest 81.4% 0.00% 90%
18 Fort Bend / Sugar Land 79.4% 0.90% 88%
19 Northwest Freeway 77.7% 0.60%
20 FM 1960 72.9% 0.70% 86%

84%

82%
PAGE

4 80%
Q3 08 Q1 09 Q3 09 Q1 10 Q3 10 Q1 11 Q3 11

Class A Class B


R ENTAL R AT E S & LE AS I N G AC TI V I T Y

• Sustained leasing activity has leveled the playing field in many submarkets for
landlords as overall asking rental rates increased marginally for the first time in three
years after reaching bottom during the previous quarter.
• The average asking rental rate for Class A space available improved $0.29 to $29.37
per square foot, while Class B rents moved up $0.11 to $19.31 per square foot during
the third quarter.
• Rent growth was seen in four out of the six major submarkets during the third quarter,
but the asking rental rate figures do not reflect the negotiated discounts, incentives
and concessions being offered by landlords in the marketplace.
• The best performing submarkets such as the CBD, Galleria/Uptown and Katy/Freeway/
Energy Corridor have seen landlords raise asking rates and offer fewer concessions,
particularly in the Class A sector, but tenants will continue to have leverage in second
and third generational product. “In the coming year, landlords will continue to press the
• Asking rental rates are expected to moderately rise as available sublease space market by pulling back on concessions and raising rents
inventory declines even further and quality space availability options diminish. in the top performing submarkets,” said John Spafford,
• Leasing activity has picked up as tenants are more willing to make long-term Executive Vice President, Director of Leasing.
decisions and are expanding or relocating to the local market. An increase in tenant
confidence and a high volume of future lease expirations should foster sustained
leasing activity into 2012 and 2013.
• Leasing activity and demand will also gain steam from enhanced corporate
confidence, increasingly strong balance sheets and companies’ productivity levels
approaching peaks will prompt hiring across industries.
Submarket Rental Rate Ranking
Rental Y-O-Y %
Rank Submarket Rate Change
Rental Rates
($/SF/Yr. Full Service)
1 Central Business District $30.52 2.1%
2 Galleria/Uptown $26.36 -2.3%
$32
3 Greenway Plaza $25.17 -0.9%
$30
4 Fort Bend / Sugar Land $24.52 -3.6%
$28
5 San Felipe / Voss $24.29 4.5%
$26 6 South & S. Main / Medical Center $24.04 0.6%
$24 7 Midtown / Allen Parkway $23.97 2.5%
$22 8 Katy Freeway $23.61 1.7%
$20 9 Kingwood / Humble $23.12 10.0%
$18 10 Westchase $22.41 -12.0%
Q3 08 Q1 09 Q3 09 Q1 10 Q3 10 Q1 11 Q3 11 11 The Woodlands / Conroe $22.04 -5.9%
12 Bellaire $20.87 -1.0%
Class A Class B
13 NASA / Clear Lake $20.21 0.6%
14 Gulf Freeway / Pasadena $19.48 1.5%
Direct Leasing Activity
Rolling 12-Months 15 FM 1960 $18.89 -4.6%
20,000
16 Northwest Freeway $18.31 -6.4%
17 Greenspoint IAH / N Belt $16.62 0.8%
15,000 18 Southwest $15.86 5.1%
In Thousands of SF

19 Richmond / Fountainview $15.59 -0.8%
10,000 20 Baytown & I-10 East $14.78 3.9%

5,000
PAGE

0 5
Q3 08 Q1 09 Q3 09 Q1 10 Q3 10 Q1 11 Q3 11



CO N S TRUC TI O N

• Office space under construction currently stands at roughly 1.4 million square feet,
the lowest level in over a decade. Developers delivered approximately 1.1 million
square feet during the third quarter but there were a few new projects with pre-
leasing commitments to break ground.
• The largest construction delivery during the third quarter was Trammel Crow’s Hess
Tower (formerly called Discovery Green) in the CBD. Hess Corporation became
the sole occupant in the 844,763-square-foot Class A building as the energy giant
vacated approximately 428,870 square feet at One Allen Center.
• Developers have several new proposed office projects on the drawing boards but
are not expected to move forward with any speculative office construction without
significant preleasing in place. However, a continuing trend toward equilibrium
between supply and demand may create opportunities in select submarkets.
RECENT ANNOUNCEMENTS
• ExxonMobil’s new corporate office campus in north Construction Pipeline
Houston is under construction to accommodate
approximately 8,000 employees currently working
in a variety of locations in the Houston area. The 10,000
complex will be located on a 385-acre wooded 9,000
site on company-owned land near the intersection 8,000
of I-45 and the Hardy Toll Road. Employees will
In Thousands of SF

move in phases as the buildings are constructed,
7,000
beginning as early as 2014 with full occupancy 6,000
expected by 2015. 5,000
4,000
• Nexen Petroleum U.S.A. Inc. plans to move its 3,000
headquarters from Plano to Houston as the energy 2,000
company consolidates hundreds of employees
from both cities into a new office building that will 1,000
be developed by Metro National Corp. Nexen plans 0
to lease approximately 250,000 square feet in the Q3 08 Q1 09 Q3 09 Q1 10 Q3 10 Q1 11 Q3 11
new 14-story, 331,513-square-foot office tower at
945 Bunker Hill Road in West Houston.

• A joint venture of Redstone Cos. and Stream Realty SIGNIFICANT PROJECTS UNDER CONSTRUCTION
Partners recently broke ground on a 22-story office % PRE- TARGET
project on Post Oak Blvd. The Redstone building will PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT LEASED DEVELOPER COMPLETION
be anchored by the BBVA Compass bank, which has 945 Bunker Hill Rd 331,513 Katy Freeway Nexen 57% MetroNational Corporation 3Q 2012
leased 150,000 square feet of the building’s 312,000
2200 Post Oak Blvd 306,012 Galleria / Uptown BBVA Compass 51% Stream Realty / Redstone Cos. 2Q 2013
square feet.
Nassau Bay Town Square - Saturn Three 264,000 NASA/Clear Lake & SE Outlier N/A 0% Griffin Partners, Inc. 4Q 2012
• Hines has begun discussions on the future CityCentre Three 120,228 Katy Freeway TAMU Mays 46% Midway Companies 3Q 2012
development of another office tower in downtown CityCentre Four 120,000 Katy Freeway N/A 0% Midway Companies 4Q 2012
on Block 69 at Main Street and Texas Avenue but Nassau Bay Town Square - Saturn One 102,000 NASA/Clear Lake & SE Outlier Various Tenants 60% Griffin Partners, Inc. 4Q 2011
this project will not commence construction until Halliburton North Belt Campus* 100,000 Greenspoint / IAH / N Belt Halliburton 100% D.E. Harvey Builders 1Q 2013
an anchor tenant is secured.
Medical Arts Center III 95,000 The Woodlands / Conroe Undisclosed 22% PISULA Development, LLC 2Q 2012
* Owner-occupied (excluded from competitive statistics)

SIGNIFICANT PROJECT COMPLETIONS
%
PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT LEASED DEVELOPER COMPLETION
BG Group Place / 811 Main St 972,474 Central Business District BG Group Plc 62% Hines Holdings Inc. 1Q 2011
Hess Tower / 1501 McKinney 844,763 Central Business District Hess Corporation 100% TCC Development 3Q 2011
PAGE

6 Chasewood Crossing II 156,000 FM 1960 N/A 0% Greenwood Corporations 3Q 2011
Research Forest Lakeside Building 2 68,500 The Woodlands / Conroe Tailsman Energy 100% Warmack & Co. 3Q 2011


S U BMARK E T S TAT I S T I C S
DIRECT NET
TOTAL SPACE AVAILABLE ABSORPTION CONSTRUCTION ASKING RENT
Total Direct Current Year To Completions Under
Submarkets Inventory SF Direct Sublease Occupancy Qtr. Date Current Qtr Construction Class A Class B
Central Business District 37,063,235 6,077,636 996,521 84.9% 359,223 930,247 844,763 - $36.21 $23.87
Galleria/Uptown 22,452,015 3,668,395 278,915 86.8% (202,122) (32,561) - 384,978 $29.33 $21.11
Greenway Plaza 9,696,885 1,334,460 117,956 87.5% 184,943 107,251 - - $28.21 $22.69
Katy Freeway 23,927,585 3,600,360 343,505 86.3% 172,191 520,691 - 451,741 $30.53 $19.69
Westchase 13,331,911 2,193,070 152,587 85.2% 38,537 120,394 - - $27.38 $18.24
Greenspoint IAH / N Belt 12,712,422 2,352,671 330,644 85.4% (34,023) (140,672) - - $20.95 $16.17
Northwest Freeway / NW Outlier 12,166,837 2,815,669 140,494 77.7% 64,429 132,228 - - $24.75 $16.46
NASA / Clear Lake & SE Outlier 7,181,198 1,572,849 68,600 87.1% (35,724) (232,707) 35,482 366,000 $24.32 $20.06
Fort Bend / Sugar Land & SW Outlier 7,751,570 1,731,779 151,917 79.4% 4,667 18,884 - - $27.12 $21.78
Richmond Fountainview 1,378,302 382,905 0 88.5% (12,250) (39,630) - - - $16.10
San Felipe / Voss 5,338,442 873,946 39,939 88.9% (20,290) (43,146) - - $31.70 $19.77
Bellaire 3,705,076 623,131 63,067 86.5% (35,900) (19,742) - - $23.37 $20.58
Midtown / Allen Parkway 5,989,870 1,176,759 29,841 84.1% 82,040 139,639 - - $28.77 $22.59
FM 1960 9,774,421 3,117,598 96,163 72.9% 27,061 103,234 156,000 - $24.55 $15.94
Kingwood / Humble & NE Outlier 1,538,008 203,598 24,340 89.2% 7,738 10,065 - - $31.60 $21.06
Southwest 10,509,752 2,728,833 92,032 81.4% 48,198 158,979 - - $16.35 $16.02
South & S. Main / Medical Center 9,139,312 1,328,961 46,379 88.6% (80,674) (106,580) - - $29.11 $22.94
The Woodlands / Conroe 8,539,616 1,136,347 100,784 87.0% 201,520 308,281 68,500 199,000 $28.23 $20.55
Gulf Freeway / Pasadena 3,478,589 800,846 13,275 83.5% (13,901) (5,130) - - $32.75 $21.36
Baytown & I-10 East 1,136,752 139,228 0 89.3% (1,525) (13,798) - - - $14.31
Totals 206,811,798 37,859,041 3,086,959 84.6% 754,138 1,915,927 1,104,745 1,401,719 $29.37 $19.31

Total Direct Current Year To Completions Under Asking Y-O-Y
Property Types Inventory SF Direct Sublease Occupancy Qtr. Date Current Qtr Construction Rent Change
Class A 95,561,589 14,508,028 2,067,873 86.2% 697,597 1,621,640 1,069,263 1,327,719 $29.37 -0.8%
Class B 91,239,954 19,285,332 892,094 83.2% 164,344 362,793 35,482 74,000 $19.31 1.0%
Class C 20,010,255 4,065,681 126,992 82.7% (107,803) (68,506) - - $15.65 4.8%
Totals 206,811,798 37,859,041 3,086,959 84.6% 754,138 1,915,927 1,104,745 1,401,719 $22.94 -0.6%
Note: Statistics include mult-tenant buildings containing 20,000 rentable square feet or greater, with the exception of under construction category, which includes build-to-suit,

M E THODOLOG Y
single-tenant buildings

Total Inventory: The total inventory includes all multi-tenant and single tenant office buildings with at least 20,000 square feet of gross rentable square
footage.

Total Space Available: Available space currently being marketed which is either physically vacant or occupied.

Direct Space: Space offered for lease directly from the landlord or owner of a building. Under construction space is not included in space available figures.

Sublease Space: Space that has been leased by a tenant and is being offered for lease back to the market by the tenant with the lease obligation.

Direct Occupancy Rate: Direct space physically occupied divided by the total rentable inventory.

Direct Net Absorption: The net change in occupied direct space over a given period of time.

Under Construction: Office buildings which have commenced construction as evidenced by site excavation or foundation work.

Direct Asking Rents: The quoted full-service asking rent for available space expressed in dollars per square foot.

PMRG has adjusted the methodology we use to track the competitive leasing market. Beginning Q3 2011, we now include single tenant leased buildings with at least
20,000 square feet but continue to exclude owner-occupied office buildings from our statistics. The historical data in this report may not be comparable to previously
published reports due to change in methodology but all historic data has been re-calculated to create a consistent trend line.
PAGE

7


Market Glance AT A
Q3 2011

Wade Bowlin John Spafford Brad Sinclair Kim Grizzle Mike Martin
Executive Vice President Executive Vice President Executive Vice President Vice President Vice President
Managing Director Director of Leasing Leasing Leasing Leasing
(713) 209-5753 (713) 209-5823 (713) 209-5965 (281) 265-9287 (713) 209-5710
wbowlin@pmrg.com jspafford@pmrg.com bsinclair@pmrg.com kgrizzle@pmrg.com mmartin@pmrg.com

Michael Sieger Marci Phillips Randi Smith Courtney Knightstep Allie Hubbard
Vice President Vice President Vice President Leasing Manager Leasing Manager
Leasing Leasing Leasing (281) 335-5662 (713) 209-5975
(713) 209-5930 (281) 444-6434 (713) 209-5980 cknightstep@pmrg.com ahubbard@pmrg.com
msieger@pmrg.com mphillips@pmrg.com rsmith@pmrg.com

A B O UT PM RG
Headquartered in Houston, Texas, PM Realty Group (PMRG) is one of the nation’s
leading providers of comprehensive real estate services to institutions, investors,
corporations, real estate investment trusts, government agencies and healthcare
providers. With a strategic presence in 30 markets, PMRG provides services to a
portfolio valued in excess of $30 billion.

PMRG focuses on creating value for its clients and offers a full spectrum of real estate
services, including property and facility management, leasing, marketing, investment
sales, construction management and engineering. In addition, PMRG partners with
Ariel Guerrero Sommer Bukowski clients in comprehensive development and joint venture investment programs.
Vice President Senior Vice President
Research Director of Marketing By capitalizing on the team’s expertise, exceptional properties, tenants, clients and
robust operating infrastructure, PMRG seeks, and ultimately creates, opportunities
(713) 209-5704 (713) 209-5810 that generate exceptional returns. For additional information, visit www.pmrg.com.
aguerrero@pmrg.com sbukowski@pmrg.com

PROPERT Y SER VICESY SER VICES | DEVELOPMENT | INVESTMENT
PROPERT | DEVELOPMENT | INVESTMENT

PMRG Q3 Houston Office Market Report

Recomendados

Recomendados

Más contenido relacionado

Similar a PMRG Q3 Houston Office Market Report

Similar a PMRG Q3 Houston Office Market Report (20)

Último

Último (20)

PMRG Q3 Houston Office Market Report