Advisory Report - Mid Year 2009

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Robert Lowery of Coldwell Banker Commercial and The Costar Group have teamed up to provide the latest office market information for the Greater Houston area.

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Advisory Report - Mid Year 2009

  1. 1. The CoStar Office Report M I D - Y E A R 2 0 0 9 Houston Office Market
  2. 2. MID-YEAR 2009 – HOUSTON Houston Office Market Table of Contents Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C Terms & Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D Market Highlights & Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 CoStar Markets & Submarkets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Employment & Tenant Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Employment & Unemployment Analysis Tenant Profiles Inventory & Development Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Construction Activity Map Inventory & Development Analysis Select Top Deliveries Select Top Under Construction Properties Figures at a Glance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figures at a Glance by Class & Market Figures at a Glance by Class & Submarket Figures at a Glance Grouped by CBD vs Suburban Historical Figures at a Glance Leasing Activity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Leasing Activity Map Leasing Activity Analysis Select Top Lease Transactions Sales Activity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Sales Activity Analysis Select Top Sales Transactions Select Same Building Sales Select Land Sales Bellaire Market Analysis of Individual CoStar Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Downtown Market E Fort Bend Co/Sugar Land Market FM 1960 Market Greenway Plaza Market Gulf Freeway/Pasadena Market I-10 East Market Katy Freeway Market Kingwood/Humble Market NASA/Clear Lake Market North Belt Market Northeast Near Market Northwest Market Richmond/Fountainview Market San Felipe/Voss Market South Market South Hwy 35 Market South Main/Medical Center Market Southwest Market West Loop Market Westchase Market Woodlands Market ©2009 COSTAR GROUP, INC. THE COSTAR OFFICE REPORT A
  3. 3. HOUSTON – MID-YEAR 2009 Houston Office Market Table of Contents (Continued) B THE COSTAR OFFICE REPORT ©2009 COSTAR GROUP, INC.
  4. 4. MID-YEAR 2009 – HOUSTON Houston Office Market Methodology The CoStar Office Report, unless specifically stated otherwise, calculates office statistics using CoStar Group’s entire database of existing and under construction office buildings in each metropolitan area. Included are office, office condominium, office loft, office medical, all classes and all sizes, and both multi-tenant and single-tenant buildings, including owner-occupied buildings. CoStar Group's national database includes approximately 62.3 billion square feet of coverage in 2.4 million properties. All rental rates reported in the CoStar Office Report have been converted to a Full Service equivalent rental rate. For information on subscribing to CoStar’s Advisory reports, or for information on CoStar’s other products and services, please contact us at 1-877-7COSTAR, or visit our web site at www.costar.com © Copyright 2009 CoStar Group, Inc. All Rights Reserved. Although CoStar makes efforts to ensure the accuracy and reliability of the information contained herein, CoStar makes no guarantee, representation or warranty regarding the quality, accuracy, timeliness or completeness of the information. The publication is provided ‘as is’ and CoStar expressly disclaims any guarantees, representations or warranties of any kind, including those of MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. CoStar Group, Inc. 2 Bethesda Metro Center • Bethesda, MD USA 20814 • (800) 204-5960 • www.costar.com • NASDAQ: CSGP ©2009 COSTAR GROUP, INC. THE COSTAR OFFICE REPORT C
  5. 5. HOUSTON – MID-YEAR 2009 Houston Office Market Terms & Definitions Availability Rate: The ratio of available space to total rentable Deliveries: Buildings that complete construction during a specified space, calculated by dividing the total available square feet by the period of time. In order for space to be considered delivered, a total rentable square feet. certificate of occupancy must have been issued for the property. Available Space: The total amount of space that is currently Delivery Date: The date a building completes construction and being marketed as available for lease in a given time period. It receives a certificate of occupancy. includes any space that is available, regardless of whether the Developer: The company, entity or individual that transforms raw space is vacant, occupied, available for sublease, or available at land to improved property by use of labor, capital and entrepre- a future date. neurial efforts. Build-to-Suit: A term describing a particular property, developed Direct Space: Space that is being offered for lease directly from specifically for a certain tenant to occupy, with structural features, the landlord or owner of a building, as opposed to space being systems, or improvement work designed specifically for the needs offered in a building by another tenant (or broker of a tenant) of that tenant. A build-to-suit can be leased or owned by the ten- trying to sublet a space that has already been leased. ant. In a leased build-to-suit, a tenant will usually have a long term lease on the space. Existing Inventory: The square footage of buildings that have received a certificate of occupancy and are able to be occupied Buyer: The individual, group, company, or entity that has pur- by tenants. It does not include space in buildings that are either chased a commercial real estate asset. planned, under construction or under renovation. Cap Rate: Short for capitalization rate. The Cap Rate is a calcula- Flex Building: A type of building designed to be versatile, which tion that reflects the relationship between one year’s net operating may be used in combination with office (corporate headquarters), income and the current market value of a particular property. research and development, quasi-retail sales, and including but The Cap Rate is calculated by dividing the annual net operating not limited to industrial, warehouse, and distribution uses. A typi- income by the sales price (or asking sales price). cal flex building will be one or two stories with at least half of the CBD: Abbreviation for Central Business District. (See also: rentable area being used as office space, have ceiling heights of 16 Central Business District) feet or less, and have some type of drive-in door, even though the door may be glassed in or sealed off. Central Business District: The designations of Central Business District (CBD) and Suburban refer to a particular geographic area Full Service Rental Rate: Rental rates that include all operating within a metropolitan statistical area (MSA) describing the level expenses such as utilities, electricity, janitorial services, taxes and of real estate development found there. The CBD is characterized insurance. by a high density, well organized core within the largest city of a Gross Absorption: The total change in occupied space over a given MSA. given period of time, counting space that is occupied but not Class A: A classification used to describe buildings that generally space that is vacated by tenants. Gross absorption differs from qualify as extremely desirable investment-grade properties and leasing Activity, which is the sum of all space leased over a certain command the highest rents or sale prices compared to other period of time. Unless otherwise noted Gross Absorption includes buildings in the same market. Such buildings are well located direct and sublease space. and provide efficient tenant layouts as well as high quality, and in Growth in Inventory: The change in size of the existing square some buildings, one-of-a-kind floor plans. They can be an archi- footage in a given area over a given period of time, generally due tectural or historical landmark designed by prominent architects. to the construction of new buildings. These buildings contain a modern mechanical system, and have above-average maintenance and management as well as the best Industrial Building: A type of building adapted for such uses as quality materials and workmanship in their trim and interior fit- the assemblage, processing, and/or manufacturing of products tings. They are generally the most attractive and eagerly sought from raw materials or fabricated parts. Additional uses include by investors willing to pay a premium for quality. warehousing, distribution, and maintenance facilities. The pri- mary purpose of the space is for storing, producing, assembling, Class B: A classification used to describe buildings that generally or distributing product. qualify as a more speculative investment, and as such, command lower rents or sale prices compared to Class A properties. Such Landlord Rep: (Landlord Representative) In a typical lease trans- buildings offer utilitarian space without special attractions, and action between an owner/landlord and tenant, the broker that have ordinary design, if new or fairly new; good to excellent represents the interests of the owner/landlord is referred to as the design if an older non-landmark building. These buildings typical- Landlord Rep. ly have average to good maintenance, management and tenants. Leased Space: All the space that has a financial lease obligation. They are less appealing to tenants than Class A properties, and It includes all leased space, regardless of whether the space is may be deficient in a number of respects including floor plans, currently occupied by a tenant. Leased space also includes space condition and facilities. They lack prestige and must depend being offered for sublease. chiefly on a lower price to attract tenants and investors. Leasing Activity: The volume of square footage that is commit- Class C: A classification used to describe buildings that gener- ted to and signed under a lease obligation for a specific building ally qualify as no-frills, older buildings that offer basic space and or market in a given period of time. It includes direct leases, command lower rents or sale prices compared to other buildings subleases and renewals of existing leases. It also includes any in the same market. Such buildings typically have below-average pre-leasing activity in planned, under construction, or under maintenance and management, and could have mixed or low renovation buildings. tenant prestige, inferior elevators, and/or mechanical/electrical systems. These buildings lack prestige and must depend chiefly Market: Geographic boundaries that serve to delineate core areas on a lower price to attract tenants and investors. that are competitive with each other and constitute a generally accepted primary competitive set of areas. Markets are building- Construction Starts: Buildings that began construction during a type specific, and are non-overlapping contiguous geographic specific period of time. (See also: Deliveries) designations having a cumulative sum that matches the boundar- Contiguous Blocks of Space: Space within a building that is, or is ies of the entire Region (See also: Region). Markets can be further able to be joined together into a single contiguous space. subdivided into Submarkets. (See also: Submarkets) D THE COSTAR OFFICE REPORT ©2009 COSTAR GROUP, INC.
  6. 6. MID-YEAR 2009 – HOUSTON Houston Office Market Multi-Tenant: Buildings that house more than one tenant at a Seller: The individual, group, company, or entity that sells a par- given time. Usually, multi-tenant buildings were designed and ticular commercial real estate asset. built to accommodate many different floor plans and designs for SF: Abbreviation for Square Feet. different tenant needs. (See also: Tenancy). Single-Tenant: Buildings that are occupied, or intended to be Net Absorption: The net change in occupied space over a given occupied by a single tenant. (See also: Build-to-suit and Tenancy) period of time. Unless otherwise noted Net Absorption includes direct and sublease space. Sublease Space: Space that has been leased by a tenant and is being offered for lease back to the market by the tenant with Net Rental Rate: A rental rate that excludes certain expenses that the lease obligation. Sublease space is sometimes referred to as a tenant could incur in occupying office space. Such expenses sublet space. are expected to be paid directly by the tenant and may include janitorial costs, electricity, utilities, taxes, insurance and other Submarkets: Specific geographic boundaries that serve to delin- related costs. eate a core group of buildings that are competitive with each other and constitute a generally accepted primary competitive New Space: Sometimes called first generation space, refers to set, or peer group. Submarkets are building type specific (office, space that has never been occupied and/or leased by a tenant. industrial, retail, etc.), with distinct boundaries dependent on Occupied Space: Space that is physically occupied by a tenant. different factors relevant to each building type. Submarkets are It does not include leased space that is not currently occupied non-overlapping, contiguous geographic designations having a by a tenant. cumulative sum that matches the boundaries of the Market they are located within (See also: Market). Office Building: A type of commercial building used exclusively or primarily for office use (business), as opposed to manufactur- Suburban: The Suburban and Central Business District (CBD) ing, warehousing, or other uses. Office buildings may sometimes designations refer to a particular geographic area within a metro- have other associated uses within part of the building, i.e., retail politan statistical area (MSA). Suburban is defined as including all sales, financial, or restaurant, usually on the ground floor. office inventory not located in the CBD. (See also: CBD) Owner: The company, entity, or individual that holds title on a Tenancy: A term used to indicate whether or not a building is given building or property. occupied by multiple tenants (See also: Multi-tenant) or a single tenant. (See also: Single-tenant) Planned/Proposed: The status of a building that has been announced for future development but not yet started Tenant Rep: Tenant Rep stands for Tenant Representative. In a construction. typical lease transaction between an owner/landlord and tenant, the broker that represents the interests of the tenant is referred to Preleased Space: The amount of space in a building that has been as a Tenant Rep. leased prior to its construction completion date, or certificate of occupancy date. Time On Market: A measure of how long a currently available space has been marketed for lease, regardless of whether it is Price/SF: Calculated by dividing the price of a building (either vacant or occupied. sales price or asking sales price) by the Rentable Building Area (RBA). Under Construction: The status of a building that is in the process of being developed, assembled, built or constructed. A building is Property Manager: The company and/or person responsible for considered to be under construction after it has begun construc- the day-to-day operations of a building, such as cleaning, trash tion and until it receives a certificate of occupancy. removal, etc. The property manager also makes sure that the vari- ous systems within the building, such as the elevators, HVAC, and Vacancy Rate: A measurement expressed as a percentage of the electrical systems, are functioning properly. total amount of physically vacant space divided by the total amount of existing inventory. Under construction space generally Quoted Rental Rate: The asking rate per square foot for a par- is not included in vacancy calculations. ticular building or unit of space by a broker or property owner. Quoted rental rates may differ from the actual rates paid by Vacant Space: Space that is not currently occupied by a tenant, tenants following the negotiation of all terms and conditions in regardless of any lease obligation that may be on the space. a specific lease. Vacant space could be space that is either available or not avail- RBA: Abbreviation for Rentable Building Area. (See also: able. For example, sublease space that is currently being paid for by a tenant but not occupied by that tenant, would be considered Rentable Building Area) vacant space. Likewise, space that has been leased but not yet Region: Core areas containing a large population nucleus, that occupied because of finish work being done, would also be con- together with adjacent communities have a high degree of eco- sidered vacant space. nomic and social integration. Regions are further divided into Weighted Average Rental Rate: Rental rates that are calculated by market areas, called Markets. (See also: Markets) factoring in, or weighting, the square footage associated with each Relet Space: Sometimes called second generation or direct space, particular rental rate. This has the effect of causing rental rates refers to existing space that has previously been occupied by on larger spaces to affect the average more than that of smaller another tenant. spaces. The weighted average rental rate is calculated by taking Rentable Building Area: (RBA) The total square footage of a the ratio of the square footage associated with the rental rate on building that can be occupied by, or assigned to a tenant for the each individual available space to the square footage associated purpose of determining a tenant’s rental obligation. Generally with rental rates on all available spaces, multiplying the rental rate RBA includes a percentage of common areas including all hall- by that ratio, and then adding together all the resulting numbers. ways, main lobbies, bathrooms, and telephone closets. Unless specifically specified otherwise, rental rate averages include both Direct and Sublet available spaces. Rental Rates: The annual costs of occupancy for a particular space quoted on a per square foot basis. Year Built: The year in which a building completed construction and was issued a certificate of occupancy. Sales Price: The total dollar amount paid for a particular property at a particular point in time. YTD: Abbreviation for Year-to-Date. Describes statistics that are cumulative from the beginning of a calendar year through what- Sales Volume: The sum of sales prices for a given group of build- ever time period is being studied. ings in a given time period. ©2009 COSTAR GROUP, INC. THE COSTAR OFFICE REPORT E
  7. 7. MID-YEAR 2009 – HOUSTON Houston Office Market OVERVIEW Houston’s Vacancy Increases to 14.0% Net Absorption Negative (97,834) SF in the Quarter T he Houston Office market ended the second quarter 2009 to positive 561,307 square feet in the first quarter 2009, positive with a vacancy rate of 14.0%. The vacancy rate was up 535,427 in the fourth quarter 2008, and positive 458,075 in the over the previous quarter, with net absorption totaling third quarter 2008. negative (97,834) square feet in the second quarter. Vacant The Class-B office market recorded net absorption of sublease space increased in the quarter, ending the quarter at positive 50 square feet in the second quarter 2009, compared to 2,507,243 square feet. Rental rates ended the second quarter at negative (776,885) square feet in the first quarter 2009, positive $23.26, a decrease over the previous quarter. A total of 21 build- 432,122 in the fourth quarter 2008, and negative (297,800) in the ings delivered to the market in the quarter totaling 1,474,991 third quarter 2008. square feet, with 4,679,094 square feet still under construction at The Class-C office market recorded net absorption of nega- the end of the quarter. tive (31,402) square feet in the second quarter 2009 compared to negative (13,263) square feet in the first quarter 2009, negative Absorption (142,817) in the fourth quarter 2008, and negative (276,882) in Net absorption for the overall Houston office market was the third quarter 2008. negative (97,834) square feet in the second quarter 2009. That Net absorption for Houston’s central business district was compares to negative (228,841) square feet in the first quarter negative (65,279) square feet in the second quarter 2009. That 2009, positive 824,732 square feet in the fourth quarter 2008, compares to negative (173,228) square feet in the first quarter and negative (116,607) square feet in the third quarter 2008. 2009, positive 51,217 in the fourth quarter 2008, and negative Tenants moving out of large blocks of space in 2009 include: (170,292) in the third quarter 2008. American Natural Resources Company moving out of 402,000 Net absorption for the suburban markets was negative square feet at 1001 Louisiana St, United States Government (32,555) square feet in the second quarter 2009. That compares moving out of 151,500 square feet at Park on the Bayou, and to negative (55,613) square feet in first quarter 2009, positive Landmark Graphics International Inc moving out of 140,000 773,515 in the fourth quarter 2008, and positive 53,685 in the square feet at 15150 Memorial Dr. third quarter 2008. Tenants moving into large blocks of space in 2009 include: Tetra Technologies, Inc moving into 188,160 square feet at 25021 Vacancy I-45, Mustang Engineering, LP moving into 174,295 square feet The office vacancy rate in the Houston market area increased at 17000 Katy Fwy; and Worley Parsons Group Inc moving into to 14.0% at the end of the second quarter 2009. The vacancy 141,000 square feet at 575 N Dairy Ashford. rate was 13.4% at the end of the first quarter 2009, 12.5% at The Class-A office market recorded net absorption of nega- the end of the fourth quarter 2008, and 12.3% at the end of the tive (66,482) square feet in the second quarter 2009, compared third quarter 2008. Vacancy Rates by Class 1999-2009 A B C Total Market 20% 18% 16% 14% Vacancy Rate 12% 10% 8% 6% 4% 2% 0% 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 1q 3q 1q 3q 1q 3q 1q 3q 1q 3q 1q 3q 1q 3q 1q 3q 1q 3q 1q 3q 1q Source: CoStar Property® Absorption & Deliveries ©2009 COSTAR GROUP, INC. THE COSTAR OFFICE REPORT U.S. Vacancy Comparison 1 Past 8 Quarters Past 8 Quarters
  8. 8. HOUSTON – MID-YEAR 2009 Houston Office Market OVERVIEW Class-A projects reported a vacancy rate of 13.6% at the end quarter 2009. There was 1,952,211 square feet vacant at the end of the second quarter 2009, 12.6% at the end of the first quarter of the fourth quarter 2008 and 1,644,546 square feet at the end 2009, 11.4% at the end of the fourth quarter 2008, and 11.0% of the third quarter 2008. at the end of the third quarter 2008. Houston’s Class-A projects reported vacant sublease space Class-B projects reported a vacancy rate of 15.0% at the end of 1,505,479 square feet at the end of second quarter 2009, up of the second quarter 2009, 14.8% at the end of the first quarter from the 1,320,244 square feet reported at the end of the first 2009, 13.8% at the end of the fourth quarter 2008, and 13.7% quarter 2009. There were 1,034,056 square feet of sublease space at the end of the third quarter 2008. vacant at the end of the fourth quarter 2008, and 946,554 square Class-C projects reported a vacancy rate of 12.1% at the end feet at the end of the third quarter 2008. of the second quarter 2009 and at the end of first quarter 2009, Class-B projects reported vacant sublease space of 935,264 12.0% at the end of the fourth quarter 2008, and 11.7% at the square feet at the end of the second quarter 2009, up from the end of the third quarter 2008. 910,434 square feet reported at the end of the first quarter 2009. The overall vacancy rate in Houston’s central business dis- At the end of the fourth quarter 2008 there were 881,076 square trict at the end of the second quarter 2009 increased to 11.1%. feet, and at the end of the third quarter 2008 there were 662,346 The vacancy rate was 11.0% at the end of the first quarter 2009, square feet vacant. 10.6% at the end of the fourth quarter 2008, and 10.3% at the Class-C projects reported increased vacant sublease space end of the third quarter 2008. from the first quarter 2009 to the second quarter 2009. Sublease B C The Market Total vacancy rate in the suburban markets increased to vacancy went from 45,579 square feet to 66,500 square feet dur- 14.6% in the second quarter 2009. The vacancy rate was 14.0% ing that time. There was 37,079 square feet at the end of the at the end of the first quarter 2009, 13.0% at the end of the fourth fourth quarter 2008, and 35,646 square feet at the end of the quarter 2008, and 12.7% at the end of the third quarter 2008. third quarter 2008. Sublease vacancy in Houston’s central business district stood Largest Lease Signings at 498,186 square feet at the end of the second quarter 2009. The largest lease signings occurring in 2009 included: the It was 438,602 square feet at the end of the first quarter 2009, 844,763-square-foot lease signed by Hess at Hess Tower in 348,107 square feet at the end of the fourth quarter 2008, and the Downtown market; the 96,225-square-foot deal signed by 361,510 square feet at the end of the third quarter 2008. Washington Group International at Richmond Park Westchase in Sublease vacancy in the suburban markets ended the second the Westchase market; and the 85,748-square-foot lease signed by quarter 2009 at 2,009,057 square feet. At the end of the first ABB at 3700 W Sam Houston Pky S in the Westchase market. quarter 2009 sublease vacancy was 1,837,655 square feet, was Sublease Vacancy 1,604,104 square feet at the end of the fourth quarter 2008, and 03 2004 2004 The amount2006 vacant sublease space in 2008 Houston mar- 2005 2005 of 2006 2007 2007 2008 the 2009 was 1,283,036 square feet at the end of the third quarter 2008. q 1q ket increased3q 2,507,243 square feet by1qthe end of1q second 3q 1q to 1q 3q 1q 3q 3q the Rental Rates quarter 2009, from 2,276,257 square feet at the end of the first The average quoted asking rental rate for available office space, all classes, was $23.26 per square foot per year at the end U.S. Vacancy Comparison of the second quarter 2009 in the Houston market area. This Past 8 Quarters represented a 0.6% decrease in quoted rental rates from the end of the first quarter 2009, when rents were reported at $23.40 per Houston United States 16.0% square foot. The average quoted rate within the Class-A sector was 14.0% $28.69 at the end of the second quarter 2009, while Class-B rates 12.0% stood at $19.10, and Class-C rates at $16.67. At the end of the first quarter 2009, Class-A rates were $29.04 per square foot, Vacancy Rate 10.0% 8.0% Class-B rates were $19.18, and Class-C rates were $16.60. The average quoted asking rental rate in Houston’s CBD 6.0% was $30.18 at the end of the second quarter 2009, and $22.16 in 4.0% the suburban markets. In the first quarter 2009, quoted rates were 2.0% $30.67 in the CBD and $22.29 in the suburbs. 0.0% Deliveries and Construction 2007 3q 2007 4q 2008 1q 2008 2q 2008 3q 2008 4q 2009 1q 2009 2q During the second quarter 2009, 21 buildings totaling Source: CoStar Property• 1,474,991 square feet were completed in the Houston market 2 THE COSTAR OFFICE REPORT ©2009 COSTAR GROUP, INC.
  9. 9. 4% 2% MID-YEAR 2009 – HOUSTON 0% Houston Office Market 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 20 1q 3q 1q 3q 1q 3q 1q 3q 1q 3q 1 OVERVIEW Source: CoStar Property® area. This compares to 24 buildings totaling 2,471,039 square feet that were completed in the first quarter 2009, 31 buildings Absorption & Deliveries Past 8 Quarters totaling 1,719,219 square feet completed in the fourth quarter Net Absorption Deliveries 2008, and 1,155,110 square feet in 27 buildings completed in the 3.0 third quarter 2008. 2.47 There were 4,679,094 square feet of office space under con- 2.5 2.22 struction at the end of the second quarter 2009. 2.0 1.72 Some of the notable 2009 deliveries include: Memorial 1.63 1.47 Millions SF Hermann Tower, a 915,034-square-foot facility that delivered in 1.5 1.32 1.34 1.16 first quarter 2009 and is now 75% occupied, and Cemex Center, 1.0 0.91 0.88 0.85 0.82 a 336,000-square-foot building that delivered in second quarter 2009 and is now 50% occupied. 0.5 0.12 The largest projects underway at the end of second quarter 0.0 2009 were Main Place, a 972,474-square-foot building with 11% (0.12) (0.10) (0.23) of its space pre-leased, and Hess Tower, an 844,763-square-foot (0.5) 2007 3q 2007 4q 2008 1q 2008 2q 2008 3q 2008 4q 2009 1q 2009 2q facility that is 100% pre-leased. Source: CoStar Property• Inventory Total office inventory in the Houston market area amounted Total office building sales activity in 2009 was down com- to 254,603,655 square feet in 4,370 buildings as of the end of pared to 2008. In the first three months of 2009, the market saw the second quarter 2009. The Class-A office sector consisted of four office sales transactions with a total volume of $20,600,000. 106,126,184 square feet in 357 projects. There were 1,788 Class- The price per square foot averaged $63.25. In the same first three B buildings totaling 108,241,147 square feet, and the Class-C months of 2008, the market posted 21 transactions with a total sector consisted of 40,236,324 square feet in 2,225 buildings. volume of $190,591,470. The price per square foot averaged Within the Office market there were 404 owner-occupied build- $130.68. ings accounting for 22,025,454 square feet of office space. Cap rates have been higher in 2009, averaging 9.80% com- pared to the same period in 2008 when they averaged 7.66%. Sales Activity One of the largest transactions that has occurred within the Tallying office building sales of 15,000 square feet or larger, last four quarters in the Houston market is the sale of Williams Houston office sales figures fell during the first quarter 2009 in Tower in Houston. This 1,476,973-square-foot office building terms of dollar volume compared to the fourth quarter of 2008. sold for $271,500,000, or $183.82 per square foot. The property In the first quarter, four office transactions closed with a sold on 4/30/2008. total volume of $20,600,000. The four buildings totaled 325,672 square feet and the average price per square foot equated to $63.25 per square foot. That compares to eight transactions total- Reports compiled by: Alfredo Negron, Research Manager; Susie ing $238,668,529 in the fourth quarter 2008. The total square Hernandez, CoStar Research Associate; Martha Liriano, CoStar Research footage in the fourth quarter was 1,280,110 square feet for an Associate; and Nathan Collins, CoStar Research Associate. average price per square foot of $186.44. ©2009 COSTAR GROUP, INC. THE COSTAR OFFICE REPORT 3
  10. 10. HOUSTON – MID-YEAR 2009 Houston Office Market MARKETS CoStar Markets & Submarkets In analyzing metropolitan areas in the U.S., CoStar has developed geographic designations to help group properties together, called Regions, Markets and Submarkets. Regions are the equivalent of metropolitan areas, or areas containing a large population nucleus, that together with adjacent communities have a high degree of economic and social integration. Regions are then divided into Markets, which are core areas within a metropolitan area that are known to be competitive with each other in terms of attracting and keeping tenants. Markets are then further subdivided into smaller units called Submarkets, which serve to delineate a core group of buildings that are competitive with each other and constitute a generally accepted competitive set, or peer group. Markets Submarkets Bellaire Bellaire Downtown CBD* Midtown E Fort Bend Co/Sugar Land E Fort Bend Co/Sugar Land FM 1960 FM 1960/Champions FM 1960/Hwy 249 FM 1960/I-45 North Greenway Plaza Greenway Plaza Gulf Freeway/Pasadena Gulf Freeway/Pasadena I-10 East I-10 East Katy Freeway Katy Freeway East Katy Freeway West Kingwood/Humble Kingwood/Humble NASA/Clear Lake NASA/Clear Lake North Belt N Belt West/Greenspoint North Belt East Northeast Near Northeast Near Northwest North Loop West Northwest Far Northwest Near Richmond/Fountainview Richmond/Fountainview San Felipe/Voss San Felipe/Voss South South South Hwy 35 South Hwy 35 South Main/Medical Center South Main/Medical Center Southwest Southwest Beltway 8 Southwest/Hillcroft West Loop Galleria/Uptown Post Oak Park Riverway Westchase Westchase Woodlands Woodlands * Submarkets comprising the CBD. For statistics reference the CBD vs Suburban Figures at a Glance Page. 4 THE COSTAR OFFICE REPORT ©2009 COSTAR GROUP, INC.
  11. 11. MID-YEAR 2009 – HOUSTON Houston Office Market EMPLOYMENT AND TENANT Total Employment by Industry Total Employment Growth Percent of Total Employment by Industry Total Number of Jobs Added Per Year 8% Natural Resources & Houston U.S. Average 4% 9% Mining 5.0% Construction 4.0% Manufacturing 14% 3.0% Trade, Transportation & Utilities Information 2.0% Percent Growth 20% Financial Activities 1.0% 4% Professional & Business 0.0% Services Education & Health -1.0% 9% Services 1% Leisure & Hospitality -2.0% 6% Other Services -3.0% 11% Government -4.0% 14% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Department of Labor, Bureau of Labor Statistics Source: Department of Labor, Bureau of Labor Statistics Office* Employment Growth Office* Employment Growth Cumulative Growth in Office* Jobs Over the Past 5 Years Number of Office* Jobs Added Per Year Employment Inventory Houston U.S. Average Market Growth Growth Difference 6.0% Atlanta -2.30% 6.30% -8.60% 5.0% Boston 0.70% 2.50% -1.80% 4.0% 3.0% Chicago -2.00% 3.50% -5.50% 2.0% Percent Growth Dallas/Ft Worth 10.10% 6.40% 3.70% 1.0% Denver 1.20% 4.60% -3.40% 0.0% Los Angeles -2.70% 2.30% -5.00% -1.0% -2.0% New York City 3.70% 1.00% 2.70% -3.0% Seattle/Puget Sound 6.70% 7.30% -0.60% -4.0% Tampa/St Petersburg -8.50% 7.90% -16.40% -5.0% Washington 3.10% 8.60% -5.50% -6.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Houston 8.80% 7.60% 1.20% Source: Department of Labor, Bureau of Labor Statistics. * Office employment is defined as jobs in the Information, Source: Department of Labor, Bureau of Labor Statistics Financial Activities, and Professional & Business Services industries Historical Unemployment Rates Houston U.S. Average 10.0% 9.0% 8.0% Percent Unemployment 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 1q 3q 1q 3q 1q 3q 1q 3q 1q 3q 1q 3q 1q 3q 1q 3q 1q 3q 1q 3q 1q Source: Department of Labor, Bureau of Labor Statistics. ©2009 COSTAR GROUP, INC. THE COSTAR OFFICE REPORT 5
  12. 12. HOUSTON – MID-YEAR 2009 Houston Office Market EMPLOYMENT AND TENANT Tenant by Size Range Tenants by Lease Expiration Based on Total Number of Tenants Based on Total Square Footage of Tenants 75,000 SF & Up 2.5% 2015 9.2% 50,000-74,999 SF 1.4% 2014 9.3% 25,000-49,999 SF 3.5% 2013 13.2% 10,000-24,999 SF 11.4% 2012 11.5% 5,000-9,999 SF 13.9% 2011 13.2% 2,500-4,999 SF 19.4% Up to 2,499 SF 47.9% 2010 13.6% 0% 10% 20% 30% 40% 50% 60% 0% 2% 4% 6% 8% 10% 12% 14% 16% Percentage of Tenants Percentage of Tenants Source: CoStar Tenant® Source: CoStar Tenant® Tenants by Industry SF Per Employee by Industry Based on Total Square Footage of Tenants Based on All Tenants Agri/Mining/Util 20.7% Law Firms 425.6 Finance/Ins/RE 15.6% Retailers/Wholes 351.7 Business-Service 9.2% Agri/Mining/Util 347.3 Manufacturing 8.9% Services 321.4 Retailers/Wholes 8.8% Manufacturing 309.5 Law Firms 8.3% Transportation 308.2 Services 7.7% Communications 289.0 Engineers/Archit 6.4% Finance/Ins/RE 287.8 Medical 6.2% Business-Service 259.1 Communications 2.4% Government 256.7 Transportation 2.2% Accountants 254.0 Government 2.0% Engineers/Archit 228.4 Accountants 1.7% Medical 167.5 0% 5% 10% 15% 20% 25% 0 50 100 150 200 250 300 350 400 450 Percentage of Tenants SF Per Employee Source: CoStar Tenant® Source: CoStar Tenant® 6 THE COSTAR OFFICE REPORT ©2009 COSTAR GROUP, INC.
  13. 13. MID-YEAR 2009 – HOUSTON Houston Office Market INVENTORY & DEVELOPMENT Construction Highlights in Select CoStar Markets Color Coded by Under Construction Square Footage as a Percentage of Existing Inventory �� ���� ��� ���������� ���� � �� ������� ����� ������ ����� � �� ���������������� ��������� �� ��� �� ����� ���� ��������� ��� ���������� ���� � �� ��� ���������� ����� � �� ����� ������ ��� �� ����� ������ ���� � �� ��������� �� �� ��������� �� �� ���� ������� �� ��� ���������� ��� � �� ���� ���� ��� ����� ������ ��� � �� ��� ���������� ��� �� ��������� �� ��� ����� ������ ���� � �� ��������� �� �� �� �� �� �� �������� ��� ���������� ���� � �� ����� ������ ��� � �� ��������� �� ��� ��� �� �������� ����� ��� ���������� ��� �� ��������� ����� ������ ��� �� ��� ���������� ����� � �� ��� ��������� �� �� ����� ������ ����� � �� ��������� �� ��� �� ����� ������������ ������ ��� ���������� ��� � �� ��������� ����� ������ ��� �� ��������� �� �� ��� ���������� ��� �� ����� ������ ��� �� ��������� �� �� ������������ ������ ���� ���� ����� ����� �� ����� ����� �� ����� ����� �� ����� ���� ����� Source: CoStar Property® ©2009 COSTAR GROUP, INC. THE COSTAR OFFICE REPORT 7
  14. 14. HOUSTON – MID-YEAR 2009 Houston Office Market INVENTORY & DEVELOPMENT Historical Deliveries 1982 - 2009 Deliveries Average Delivered SF 30.0 24.8 25.0 23.2 20.0 Millions of SF 15.0 13.4 10.0 5.8 6.3 5.5 5.6 4.3 4.6 4.5 4.6 5.0 3.1 3.3 3.5 2.0 2.5 2.4 1.4 1.7 1.4 1.8 1.0 1.0 0.5 1.1 0.6 0.3 0.5 0.0 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: CoStar Property® * Future deliveries based on current under construction buildings. Construction Activity Markets Ranked by Under Construction Square Footage Under Construction Inventory Average Bldg Size Market # Bldgs Total RBA Preleased SF Preleased % All Existing U/C Downtown 3 1,838,112 959,876 52.2% 111,715 612,704 Katy Freeway 4 1,103,759 377,371 34.2% 72,331 275,940 Woodlands 7 641,364 92,357 14.4% 34,005 91,623 Westchase 1 270,000 102,600 38.0% 127,591 270,000 E Fort Bend Co/Sugar Land 6 234,597 43,754 18.7% 42,615 39,099 FM 1960 6 142,098 133,646 94.1% 30,310 23,683 Northwest 1 95,269 0 0.0% 46,324 95,269 Gulf Freeway/Pasadena 1 88,000 44,000 50.0% 19,258 88,000 NASA/Clear Lake 4 84,000 79,500 94.6% 32,570 21,000 South 1 80,000 0 0.0% 18,298 80,000 All Other 2 101,895 2,981 2.9% 64,357 50,947 Totals 36 4,679,094 1,836,085 39.2% 58,262 129,975 Source: CoStar Property® Recent Deliveries Future Deliveries Leased & Un-Leased SF in Deliveries Since 2005 Preleased & Un-Leased SF in Properties Scheduled to Deliver Leased Un-Leased Preleased Un-Leased 7.0 2,000 1,800 6.0 1,600 5.0 1,400 T Thousands of SF Millions of SF 1,200 4.0 1,000 3.0 800 2.0 600 400 1.0 200 0.0 0 2005 2006 2007 2008 2009 2009 3q 2009 4q 2010 1q 2010 2q Source: CoStar Property® Source: CoStar Property® 8 THE COSTAR OFFICE REPORT ©2009 COSTAR GROUP, INC.
  15. 15. MID-YEAR 2009 – HOUSTON Houston Office Market INVENTORY & DEVELOPMENT Historical Construction Starts & Deliveries Square Footage Per Quarter Starting and Completing Construction Construction Starts Deliveries 3.0 2.47 2.5 2.33 2.18 2.11 2.06 2.0 1.89 1.72 Millions of SF 1.63 1.63 1.50 1.48 1.47 1.5 1.31 1.34 1.35 1.24 1.16 1.03 0.92 0.91 0.88 1.0 0.77 0.71 0.65 0.5 0.37 0.29 0.23 0.04 0.0 2006 1q 2006 2q 2006 3q 2006 4q 2007 1q 2007 2q 2007 3q 2007 4q 2008 1q 2008 2q 2008 3q 2008 4q 2009 1q 2009 2q Source: CoStar Property® Recent Deliveries by Project Size Breakdown of Year-to-Date Development Based on RBA of Project Building Size # Bldgs RBA SF Leased % Leased Avg Rate Single-Tenant Multi-Tenant < 50,000 SF 28 458,885 174,091 37.9% $23.97 54,681 404,204 50,000 SF - 99,999 SF 5 333,061 163,671 49.1% $24.04 0 333,061 100,000 SF - 249,999 SF 8 1,347,465 527,421 39.1% $25.56 0 1,347,465 250,000 SF - 499,999 SF 3 891,585 552,808 62.0% $27.63 0 891,585 >= 500,000 SF 1 915,034 686,276 75.0% $23.00 0 915,034 Source: CoStar Property® Recent Development by Tenancy Existing Inventory Comparison Based on RBA Developed for Single & Multi Tenant Use Based on Total RBA 2009 Deliveries Currently Under Construction By Class By Space Type 16% 17% 1% 19% 42% 42% 99% 81% 83% Class A Class B Class C Multi Single Multi Single Multi Single Source: CoStar Property® Source: CoStar Property® ©2009 COSTAR GROUP, INC. THE COSTAR OFFICE REPORT 9

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