Effects of energy downturn begin to show up in Houston industrial numbers.

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HOUSTON INDUSTRIAL MARKET MONITOR
FOURTH QUARTER 2015
Partnership. Performance.
Economic Overview
Most energy analysts projected oil to begin rebounding
by year-end 2015, but after a few false starts throughout
the year, the price of oil ended 2015 in the low $30/bbl.-
range. Over-supply concerns will likely keep the price of oil
depressedinatleastthenearfuture.TheEnergyInformation
Administration (EIA) expects oil to average $51/bbl. in
2016, although the price of oil remains first and foremost
unpredictable. Energy companies, particularly those that
are over-leveraged, are targets for either bankruptcy or
merger and acquisition activity. These companies made
cuts in both jobs and budgets in 2015, which is expected
to continue into 2016. The Greater Houston Partnership
(GHP) is projecting that Houston’s energy industry will
shed 9,000 jobs in 2016, which will primarily be made up
of office-using white collar jobs. Houston fell to No. 30
in the Urban Land Institute’s (ULI) Emerging Trends in Real Estate forecast for 2016 due to the downturn in the energy
industry. The ULI ranked Houston as the top market a year ago in its 2015 forecast. However, health care, education, and
the petrochemical industry have slightly offset contraction in the struggling upstream and midstream energy industry and
manufacturing sector. Additionally, the Leisure and Hospitality sector continues to perform well with 19,800 jobs added in
the past year. These sectors are expected to continue adding jobs in 2016.
Houston gained 23,700 jobs in the last 12 months ending in November, a 0.8% increase in employment. Job growth in
Houston was positive, but down considerably from prior years. The GHP forecasts that Houston will add 20,000-30,000
jobs in 2016. The unemployment rate registered 4.9% in November, still below the national unemployment rate of 5.0%.
TheHoustonPurchasingManagersIndex(PMI)fellto43.3inDecember. Readingsbelow50indicatecontractioninregional
production in the short term. This is the 12th consecutive month to report contraction. Health care was reported to be
the only sector of the economy showing significant strength, while wholesale trade, durable goods manufacturing, and oil
and gas exploration were causing the greatest concerns.
*Nov. '14 ‐ Nov. '15
Houston Job Growth
‐150,000
‐100,000
‐50,000
0
50,000
100,000
150,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*
Houston added 23,700 jobs in the last 12
months ending in November, representing a
0.8% increase in employment.
Job growth is expected to shift from West to
East Houston.
Economic sectors reporting growth in the
last 12 months include Leisure & Hospitality
(6.7%), Health Care (4.2%), Information (3.4%),
Government (2.7%), and Construction (1.9%).
Houston’s residential real estate market
ended 2015 with the second-highest sales
volume, behind 2014.
The price of oil averaged $42.17/bbl. in the
fourth quarter.
The Houston PMI registered 43.3 in
December, indicating contraction in regional
production in the short term.
Houston Job Growth
Effects of energy downturn begin to show up in Houston industrial numbers
Although absorption slowed to below-average in the second half of the year, over 8.9 msf was recorded in 2015. Vacancy
continued to rise due to new product deliveries and low leasing velocity.

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0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
YE09 YE10 YE11 YE12 YE13 YE14 YE15
Vacancy Rates
Houston Industrial Market Monitor Fourth Quarter 2015
NOTABLE FOURTH QUARTER ACTIVITY:
• City Park East, located in the Northeast submarket, recorded
significant renewals in the fourth quarter. Exel, a logistics and
supply chain company, renewed its lease totaling 906,339 sf
and Michelin Tire renewed its 663,821-sf lease.
• Fedex announced plans to open a new 800,000-sf ground
facility in the Northwest submarket, located off of the Grand
Parkway expansion. It will be Fedex’s largest ground facility in
Texas with an estimated completion date of August 2017.
• Dunavant, a logistics and supply chain company, preleased
two buildings totaling 565,760 at Bay Area Business Park Phase
II. The company additionally leases 365,000 sf in Phase I of the
park.
• GE Oil and Gas renewed its 261,990-sf lease at Port North West
in the Northwest submarket.
• Jacobson Warehouse Co. renewed its 210,000-sf lease at
Williamsport DC in the Southeast submarket.
Industrial Market Overview
The effects of the energy downturn began to show up in the Houston industrial numbers in the fourth quarter. Although
positive, absorption slowed in the second half of 2015. The fourth quarter was the first time since 2011 when quarterly
absorption registered less than one million square feet. However, over 8.9 msf was absorbed in 2015, the most to occur
since 2008. Vacancy continued to slowly increase. However, the industrial market experienced years of supply struggling
to meet demand, resulting in an incredibly tight market with sound fundamentals. Vacancy still ranks among some of
the lowest in the U.S. Asking rates appreciated substantially through much of 2015, but asking rate growth stalled in the
fourth quarter. Leasing activity is down by 38% from 2014. A large percentage of these leases are renewals, rather than
expansion in the market. Leasing activity isn’t expected to pick up in the near future, which will affect absorption going
forward. Houston’s industrial development pipeline has remained conservative and is well pre-leased, which will dampen
the effect of new space hitting the market.
ABSORPTION & DEMAND
Absorption continued to slow in the fourth quarter, indicating
that the industrial market is starting to feel the impact from
falling oil prices. Over 28.0 msf was leased in 2014, one of the
most active years on record (this includes renewals). The strong
leasing activity in 2014 resulted in substantial space gains
throughout the first half of 2015. For the first time since 2011,
the Houston industrial market recorded less than one million
square feet of quarterly net absorption. The market absorbed
869,200 sf in the fourth quarter, totaling over 8.9 msf at year-end
2015. This is the most yearly absorption to be recorded since
2008. 4Q15 marks the 20th consecutive quarter of positive net
absorption, 17 quarters of which Houston absorbed over one
million square feet. Submarkets that recorded negative net
absorption in the fourth quarter include the Northwest (-335,689
sf), CBD Inner Loop (-152,704 sf), and the Northeast (-56,409 sf).
The Southeast submarket led Houston in absorption in the fourth
quarter with 630,844 sf. All submarkets recorded yearly positive
absorption. 2015 leasing activity is down by 38% compared
$‐
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
YE09 YE10 YE11 YE12 YE13 YE14 YE15
Asking Rents
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
YE09 YE10 YE11 YE12 YE13 YE14 YE15
Net Absorption

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with 2014, which will impact absorption in 2016.
VACANCY & AVAILABILITY
New deliveries outpaced absorption in the fourth quarter,
causing vacancy to increase by 40 basis points to 4.6%.
This still ranks among some of the lowest vacancies in
the U.S. Vacancy registered 4.3% at this point last year.
With vacancy at historically-low levels, it will take time for
the market as a whole to feel the impact of low leasing
velocity. Vacancy is expected to slowly increase in 2016,
particularly in the North and Northwest submarkets where
a high concentration of manufacturing, warehouse, and
distribution properties that serve Houston’s upstream,
midstream, and service companies are located. Vacancy
in the Northwest submarket increased by 50 basis points
from the previous quarter to 5.0%. The North submarket
has the highest vacancy in Houston, registering 7.2% in the
fourth quarter. Vacancy in the Southeast is up by 50 basis
points from the previous quarter but remains low at 3.3%.
ASKING RATES
Aftersignificantappreciationthroughout2015,askingrates
began to level out in the fourth quarter. Asking rates are
expected to remain relatively flat throughout 2016. Asking
rates decreased by $0.03 per square foot (psf) from the
previous quarter to $6.42 psf NNN. Year-over-year, asking
rates have increased by 9.7%. The rental rate appreciation
in 2015 was experienced across the different Houston
geographic sectors to varying degrees. In the Southeast
market, where industrial properties are benefitting from
the downstream petrochemical boom, rental rate growth
has been substantial with an increase of 5.2% from the
previous quarter. Most notably, this is a submarket that
has been plagued by years of high vacancy and negative
rental rate growth. Asking rates fell in the Northwest
and Southwest submarkets from the previous quarter by
1.8% and 3.4%, respectively. Even though asking rates fell
in the Northwest, it continues to be the most expensive
submarket in Houston with an asking rate of $7.64 psf.
CONSTRUCTION
Construction activity tapered off slightly in the fourth
quarter with 9.1 msf underway. Daikin Industries, a major
HVAC manufacturer, broke ground on its 4-msf campus in
the Northwest in 2015. The new development accounts
for nearly 45% of total industrial construction in Houston.
The company is consolidating operations at the new
location which is set to deliver in mid-2016. Although
energy service companies and manufacturers (both
heavily located in the Northwest) are dampening new
development, supply and logistics companies are drawn
to the area due to the Grand Parkway, Houston’s new third
major highway loop. Fedex announced that it will open a
new 800,000-sf facility in Cypress, located off of the Grand
Parkway expansion. It will be Fedex’s largest ground
facility in Texas and will employ 400 people. The new
facility has an estimated completion date of August 2017.
Construction activity in the Southeast submarket
increased significantly in 2015. Over 2.2 msf delivered in
2015 with another 1.8 msf currently under construction.
Bay Area Business Park Phase 2 broke ground in 2015,
consisting of four buildings totaling 830,000 sf. When
Phase 2 is complete, the park will total more than 2.0
msf, making it the largest park in the Southeast. The
development is capitalizing on the surge in petrochemical
activity with two of the buildings able to handle
hazardous materials. The new phase broke ground on
Houston Industrial Market Monitor Fourth Quarter 2015
Houston Industrial Development Timeline
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTD
Delivered YE Under Construction

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Tenant Name Building Submarket Square Feet
Exel City Park East Northeast 906,339
Michelin Tire City Park East Northeast 663,821
Dunavant Bay Area Business Park Southeast 565,760
Jeannie Tobin, Research Director
512.913.4438
jeannie.tobin@avisonyoung.com
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NOTABLE BUILDINGS UNDER CONSTRUCTION
• Daikin Manufacturing & Distribution Center (4,000,000 sf). Northwest.
• Bay Area Business Park Phase 2 (830,000 sf). Southeast.
• Aldi Distribution Center (650,000 sf). Southwest.
• Fallbrook 1 (500,400 sf). North.
• Port 225 Building 4 (394,489 sf). Southeast.
• 14151 E Hillcroft St Phase I (240,000 sf). Southwest.
• FloWorks (225,000 sf). South.
• Gateway Southwest Industrial Park Bldg. 2 (217,440 sf). Southwest.
• Prologis Greens Parkway (213,218 sf). North.
• Port 225 Building 6 (205,015 sf). Southeast.
• Fallbrook 2 (193,000 sf). North.
Houston Industrial Market Monitor Fourth Quarter 2015
Trends to Watch
Employment: Houston added 23,700 jobs in the 12 months ending in November.
Active Markets: Southeast, Northwest, North
Market Drivers: Petrochemical Industry, Health Care, Retail
a speculative basis but has leased quickly. Dunavant, a
logistics and supply chain company, preleased 565,760
sf of Phase II. The company will occupy this space in
addition to the 365,000 sf it leases in Phase I of the park.
The Houston market delivered 10.6 msf of new space in
2015. 7.7msfwasdeliveredin2013and9.1msfwasdelivered
in 2014. Despite the energy downturn, space in Houston’s
industrial market remains very tight. The conservative
development pipeline will add much needed space to
alleviate the tight market and has yet to be overbuilt.