3Q 2018 Houston Office Market Report

MARKET AT A GLANCE HOUSTON OFFICE MARKET REPORT THIRD QUARTER 2018

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MARKET AT A GLANCE Q3 | 2018 HOUSTON OFFICE MARKET

ECONOMIC OVERVIEW

Houston’s economy has accelerated over the past year as the energy industry continues to recover following a two-year oil bust that hit bottom in 2016 and the construction industry shows no sign of slowing in post-Hurricane Harvey rebuilding. Houston employers have expanded their payrolls by 110,200 jobs over the past 12 months ending in August 2018, representing a 3.7% increase for the period. The largest annual employment gains have occurred in professional & business services (35,000 jobs), construction (28,900 jobs) and trade, transportation & utilities (17,300 jobs). Meanwhile, the metro area’s unemployment rate has fallen 80 basis points to 4.2% over the prior 12 months to reach its lowest seasonally adjusted unemployment rate since February 2008.

The energy sector maintained its strong momentum during the third quarter as sustained global economic growth, OPEC supply cuts, the restoration of Iran sanctions TABLE OF CONTENTS are just some of the factors that have contributed to the turnaround. West Texas Economic Overview...... 2 Intermediate (WTI) crude oil price has enjoyed its strongest rally in eight years, starting the year in the low $60 range and rising to $75 per barrel to reach its highest level Office Market Assessment...... 3 since November 2014. The combination of rising prices and record production has translated into solid profits for Houston’s energy companies, which, in turn, is boosting Net Absorption & Occupancy...... 4 manufacturing, professional services and other sectors connected to oil and gas. Even though oil and gas production increased for the eighth consecutive quarter, it has come Rental Rates & Leasing Activity...... 5 nowhere close to generating a recovering of all the jobs lost following the oil bust since energy production has become much more efficient through advancing technologies Construction...... 6 allowing for a smaller workforce. Submarket Statistics & Methodology...... 7 Updated 10/1/2018

The PMRG Team...... 8

EMPLOYMENTEmployment TrendsTRENDS

120 5% 100 80 3% 60 Thousands 40 20 1% 0 -20 -1% -40 -60 FOR INFORMATION: -80 -3% -100 -120 -5% WADE BOWLIN '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 18F19F President Central Division Jobs Added Annual % Change Updated 9/30/2018 713.209.5753 Source: U.S. Bureau of Labor Statistics, Moody's Analytics, University of Houston's Center for Regional Forecasting [email protected] EMPLOYMENTEmployment GROWTH Growth BYby SECTORSector 12-MONTHS HEALTH JOHN SPAFFORD CURRENT PRIOR ANNUAL (Improving Executive Vice President READING READING CHANGE or Declining) Director of Leasing Mining 80.3 78.4 2.4% Up 713.209.5823 Construction 243.3 214.4 13.5% Up Manufacturing 230.9 221.3 4.3% [email protected] Up Trade, Transportation & Utilities 635.6 618.3 2.8% Up Information 31.3 32.2 -2.8% Down ARIEL GUERRERO Financial Activities 164.0 160.3 2.3% Up Senior Vice President, Research Professional & Business Services 519.4 484.4 7.2% Up 713.209.5704 Education & Health Services 393.4 386.1 1.9% Up Leisure & Hospitality 327.4 323.0 1.4% [email protected] Up Other Services 111.5 109.9 1.5% Up Government 386.0 384.6 0.4% Up Totals 3,123.1 3,012.9 3.7% Up Source:Source: U.S. U.S. Bureau Bureau of of Labor Labor Statistics. Statistics; Employment Employment Data as of August 2018 2018 (P) AllAll Employees, Employees, Inin Thousands PAGE 2 PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MARKET AT A GLANCE Q3 | 2018 HOUSTON OFFICE MARKET

OFFICE MARKET ASSESSMENT

Houston’s office market demonstrated encouraging signs of turning the corner with 110,227 SF of direct net absorption during the third quarter, but still remains at 1.1 million SF of occupancy losses year-to-date. The Class A market witnessed modest quarterly gains totaling 16,635 SF, but has registered positive absorption in four of the previous five quarters totaling just over 600K SF of direct space. The flat quarterly absorption in the Class A sector resulted from large corporate consolidations involving Shell Oil (120K SF), McDermott International (205K SF) and Comerica (100K SF), which returned a combined 425K SF to the market. However, the Class A sector is showing stronger signs of stabilization with trophy and new construction projects leading in the recovery and outperforming the broader market as the flight to quality trend persists. The Class B sector managed to break a streak of four consecutive quarters of occupancy losses with 73,963 SF of direct net absorption, but the year-to-date total remains firmly in negative territory with nearly 1.3 million SF of occupancy losses. The largest tenant EMPLOYMENT FORECAST: movement in the Class B sector involved Harris County Veterans Service taking 119K Houston’s economy will continue to expand as SF in the CBD, while McDermott International vacated 151K SF in Westchase. rebounding energy exploration drives gains in manufacturing and residential re¬construction rises amid growth in income and rebuilding after Hurricane Although Houston’s office market continues to be weighed down by a significant vacant Harvey. The employment outlook remains strong with inventory, there are positive signs that the market has begun its expected recovery. an average of 90,000 new jobs forecasted per year Leasing activity has demonstrated signs of picking up over the past year with the bulk through 2019, according to Moody’s Analytics. of the transactions involving early lease renewals and subleases as tenants are taking advantage of the opportunity to strike a deal early and lock-in today’s rental rates. Large CRUDE OIL PRICE FORECAST: tenants with leases expiring in 2019 to 2021 are already evaluating opportunities in The average price of West Texas Intermediate crude the market, including proposed new construction projects that could hinder the office oil (WTI) traded for $70.23 a barrel in September market’s recovery. Large deal activity will account for a larger share of the leasing 2018, up 41% compared to the prior year. The U.S. volume going forward but could result in additional blocks of space coming back on the Energy Information Administration has recently raised market as some tenants may right size or consolidate. its forecast on WTI oil price to average $67.03 in 2018 and $67.36 in 2019. FORECAST DIVERSIFIED ECONOMIC DRIVERS: • As vacancy rates remain elevated, landlords are offering generous concession The region has become more diversified but the packages to attract tenants while maintaining rental rates, but the increased energy sector still accounts for almost half of the local economy. The Port of Houston is the 10th competition will put some pressure on rents primarily in lower quality buildings. largest port in the world and ranks first nationally in • Landlords will face additional challenges as many sublease listings will roll over to international waterborne tonnage handled. The Texas direct space as their agreements expire, further impacting the direct occupancy Medical Center is the largest of its kind in the world – rates. On the bright side, landlords that receive direct space are back in the driver with a local economic impact of $10 billion per year. seat and no longer have to compete with tenants willing to sublease their premises at very low recovery rates. • With the “flight to quality” trend remaining prevalent, property owners will continue Updated 10/7/2018to focus upon significant capital improvement programs to enhance their assets to remain competitive with both new office developments as well as existing buildings within their direct competitive set. Office Market Trends OFFICE MARKET TRENDS MARKET TREND INDICATORS

10,000 90% Current Change from Previous 12-month Quarter Quarter Year Forecast 8,000 88% Direct Occupancy 81.1% 6,000 86% Trailing 12 mos. Direct -978,726 Net Absorption 4,000 84% Under Construction 3,506,216 2,000 82% in Thousands of SF Direct Asking Rents $29.33 0 80%

-2,000 78% '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18F'19F

Direct Net Absorption Completions Direct Occupancy

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT PAGE 3 MARKET AT A GLANCE Q3 | 2018 HOUSTON OFFICE MARKET

NET ABSORPTION & OCCUPANCY

• The CBD posted 68,142 SF of direct absorption, largely due to Harris County Veterans Services taking 119K SF of Class B space at 500 Jefferson. The Class A sector witnessed occupancy losses as Shell Oil gave up 126K SF at One Shell Plaza, but 609 Main continued to capture the bulk to the gains with move-ins by RBC Capital (57K SF) and Simmons & Company (31K SF). • The Galleria office market recorded 51,731 SF of direct net absorption, driven by 80,817 SF of leasing gains within the Class A sector. The Class A market has absorbed 302,824 SF of direct space year-to-date, causing direct occupancy rates to climb 130 basis points to 82.5% since 4Q17. • The Katy Freeway/Energy Corridor witnessed 137,125 SF of direct net absorption. The Class A sector accounted for 147K SF of occupancy gains as small to medium- sized energy-related companies expanded their footprints. • Greenway Plaza posted 77,502 SF of direct net absorption, with the majority of the gains taking place in newly built product, which helped push Class A direct Even though office-using employment growth has occupancy up by 90 basis points to 81.9%. strengthened over the past year, Houston’s office • North Houston/North Belt recorded 127,409 SF of direct net absorption, but has leasing market is expected to take some time to suffered nearly 485K SF of occupancy losses year-to-date. CityNorth 2 featured recover due to the abundance of sublease and the largest move-ins by US Legal Support and Hunting Energy Services. shadow space that will need to be backfilled. • Northwest Freeway posted 107,150 SF of occupancy losses due to Comerica Trophy and Class A buildings are expected to lead in the recovery and outperform the broader market leaving behind over 100K SF at Brookhollow Central and relocating their HQ. as the flight to quality trend persists. • The Woodlands witnessed negative 78,860 SF of direct net absorption, with the Class A sector accounting for 105K SF of occupancy losses as McDermott WADE BOWLIN International gave up over 205K SF at 2103 Research Forest Drive after selling President their two buildings to Howard Hughes. Central Division • Westchase recorded 285,707 SF of occupancy losses, causing occupancy levels to drop 460 basis points to 76.8%. The largest direct vacancies involved McDermott Updated 9/30/18 Updated 9/30/2018 International (151K SF), Dresser-Rand Group (55K SF) and Geokinetics (52K SF). SUBMARKET OCCUPANCY RANKING Submarket Occupancy Ranking DIRECTDirect NET ABSORPTION Net Absorption VS. vs.COMPLETIONS Completions Occ. Y-O-Y % Rank Submarket Rate Change 3,500 1 S. Main / Medical Center / South 93.6% 3.6% 3,000 2 Richmond / Fountainview 89.3% -2.4% 2,500 3 Fort Bend / Sugar Land 89.3% 1.6% 2,000 4 Bellaire 88.3% 1.1% 1,500 1,000 5 Kingwood / Humble 88.3% -0.2% 500 6 Baytown & I-10 East 88.0% -0.7% 0 In In of Thousands SF 7 Midtown / Allen Parkway 87.5% 1.5% -500 8 Gulf Freeway / Pasadena 86.4% 0.5% -1,000 9 The Woodlands / Conroe 85.6% 1.8%Updated 9/30/2018-1,500 Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Q1 18 Q3 18 10 Galleria / Uptown 83.0% 0.0% 11 Katy/Grand Parkway West 82.8% 4.4% Direct Net Absorption Completions 12 Greenway Plaza 82.8% -2.9% Direct Occupancy Rates 13 Central Business District 82.6% -1.2% DIRECT OCCUPANCY RATES 14 FM 1960 81.2% -1.2% 88% 15 Katy Freeway 81.0% -0.2% 16 Southwest Beltway 8 / Hillcroft 80.4% -4.1% 86% 17 NASA / Clear Lake 80.0% 0.8% 18 San Felipe / Voss 79.5% -3.2% 84% 19 Northwest Freeway / North Loop W 77.9% -3.0% 82% 20 West Belt 77.3% -3.2% 21 Westchase 76.8% -6.6% 80% 22 North Houston / IAH / N Belt 55.6% -3.0% 78% Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Q1 18 Q3 18

Class A Class B

PAGE 4 PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MARKET AT A GLANCE Q3 | 2018 HOUSTON OFFICE MARKET

RENTAL RATES & LEASING ACTIVITY

• Citywide Class A full-service gross asking rents rose by $0.08 to $35.02 per SF during the third quarter and have modestly improved by 0.5% year-over-year, but concessions such as free rent and tenant improvement allowances remain elevated. • Class B asking rents slightly increased by $0.11 to $22.02 per SF (gross) during the third quarter and have moved up 1.9% or $0.40 over the prior 12 months largely due to newly built and renovated product coming online. • Sublease inventory declined by 971,886 SF to 8.7 million SF during the third quarter and has dropped by 28.7% since its peak of 12.1 million SF in 3Q16. The reduction has resulted from a significant volume of sublease deals inked, spaces returning to the landlord via expirations, and some tenants opting to retain or warehouse their space by withdrawing sublease listings. • The largest sublease deals recently inked include Exelon Corp. taking 94K SF at the Kinder Morgan Building, BP taking 86K SF at West Memorial Place 2, and Sheridan Production taking 59K SF at 1360 Post Oak Blvd. After rising steadily over the past few years, • Sublease inventory represents 14.7% of the total space available and accounts concessions to tenants have begun to plateau but for 3.8% of the citywide rentable inventory, with the largest share of sublease remain at elevated levels due to the many space availability found in the Katy Freeway/Energy Corridor (24.1%), CBD (22.8%), options available. These aggressive concession Westchase (14.6%) and Greenway Plaza (11.4%). packages include significant free rent periods, abated or discounted parking, higher improvement • Sublease inventory is expected to fall below its 13-year average of 5.1 million SF allowances and a commitment to provide enhanced by 2021, with approximately half of the sublease options greater than 10K SF set building amenities. to expire within 3 years. • Leasing activity for deals above 10K SF has been primarily concentrated in the JOHN SPAFFORD CBD (26.7%), Galleria/Uptown (19.5%), and Katy Fwy/Energy Corridor (18.1%) Executive Vice President, Director of Leasing Updated 9/30/2018over the prior 12 months, which have collectively accounted for 6.4 million SF or Central Division 64% of the market’s leasing volume. Updated 9/30/18 SUBMARKET RENTAL RATE RANKING Submarket Rental Rate Ranking RENTALRental Rates RATES ($/SF/Yr. Full Service) Rental Y-O-Y % ($/SF/Yr. Full Service) Rank Submarket Rate Change $36 1 Central Business District $41.84 2.4% $34 2 Galleria / Uptown $35.17 1.0% $32 3 Greenway Plaza $33.00 -1.7% $30 4 San Felipe / Voss $30.00 2.6% $28 $26 5 Midtown / Allen Parkway $29.93 -3.8% $24 6 Katy Freeway $29.72 -2.5% $22 7 The Woodlands / Conroe $29.51 -3.4% $20 8 Katy/Grand Parkway West $29.05 4.0% $18 9 Fort Bend / Sugar Land $28.50 7.7% Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Q1 18 Q3 18 Updated 9/30/2018 10 West Belt $28.43 5.0% Class A Class B 11 Westchase $26.73 -11.6% 12 S. Main / Medical Center / South $26.64 -2.1% DIRECTTotal LEASING Leasing ACTIVITY Activity 13 Bellaire $26.01 7.7% RollingRolling 12-Months 12-Months 14 Kingwood / Humble $23.10 -2.1% 16,000 15 Gulf Freeway / Pasadena $21.96 0.4% 14,000 16 NASA / Clear Lake $21.46 5.1% 12,000 17 Northwest Freeway / North Loop W $21.18 0.7% 10,000 18 FM 1960 $20.03 3.7% 8,000 19 North Houston / IAH / N Belt $19.16 -6.7% 6,000 20 Baytown & I-10 East $18.58 3.4% In Thousands of SF 4,000 21 Richmond / Fountainview $17.66 1.7% 2,000 22 Southwest Beltway 8 / Hillcroft $17.39 1.2% 0 Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Q1 18 Q3 18

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT PAGE 5 MARKET AT A GLANCE Q3 | 2018 HOUSTON OFFICE MARKET

CONSTRUCTION

• Office construction levels have tapered off dramatically to a 6-year low with only 673K SF delivered since the beginning of the year. Developers completed only two office buildings totaling 51K SF in 3Q18, with an additional 548K SF slated to deliver by year-end 2018. • There is just over 3.5 million SF of office space currently under construction, with 44.1% of this space preleased. The largest concentration of office construction is found in the CBD (1.9M SF) and The Woodlands (934K SF), which account for 80.4% of Houston’s office development pipeline. • Since hitting a cyclical low early in 2018, office construction levels increased for the second consecutive quarter as developers have broken ground on nine office RECENT ANNOUNCEMENTS projects totaling nearly 1.8 million SF since the beginning of the year. • Hines began construction on their newest downtown tower, a 47-story, 1.1 million • The largest lease transactions during the SF office project at 801 Texas Avenue, which is slated to deliver for occupancy by third quarter involved law firm Vinson & Elkins late 2021. Law firm Vinson & Elkins inked a 16-year lease for 212K SF on the top securing a 16-year lease for 212K SF and seven floors and they will relocate from 1001 Fannin. Hines also secured a 155K Hines committing to 155K SF to help kick-start SF lease for their own corporate offices with plans to relocate from Williams Tower. construction on Hines’ new 1 million-square-foot • Another noteworthy project underway in the CBD includes Skanska’s 778,344 SF office tower. Capitol Towers anchored by Bank of America, which is scheduled to deliver by • EY recently secured a 121K SF renewal at 5 mid-year 2019. The largest construction projects in the suburbs consist of build- Houston Center with plans to relocate within the to-suit projects for American Bureau of Shipping and HP near Springwoods Village building to the upper floors. set to deliver by late 2018/early 2019. • Constellation, a subsidiary of Exelon Corp, inked • Even though construction activity is winding down from its recent boom that the largest sublease deal during the quarter resulted in over 23 million SF of new product delivered over the past five years, the for 94K SF of Class A space at 1001 Louisiana flight to quality and increasing demand for amenity-rich options are trends that will Street in downtown. remain prevalent in the office market. • Houston Forensic Science Center plans to move • New construction will remain a valid alternative, as tenants appear willing to pay into 83K SF of Class B space at 500 Jefferson. Updateda premium 9/30/2018 for high quality office buildings that offer the latest workplace trends HFSC signed a 30-year lease, which they will as they seek to retain and attract the most skilled employees. However, significant begin occupying between March and October pre-leasing will be required for any new development to move forward in the near future. 2019. Construction Pipeline • Cornerstone Home Lending renewed 64K SF of Class A space at 1177 West Loop S. • Texas Capital Bank leased 61K SF at Four Oaks 10,000 CONSTRUCTION PIPELINE Place, bringing 1330 Post Oak Blvd up to 83% leased. TCB will begin occupancy during 2Q19. 8,000 • Sheridan Production Co LLC signed a 59K SF sublease deal taking part of BHP Billiton’s space 6,000 marketed at Four Oaks Place, with plans to move in by year-end. • Exterran Energy Solutions secured a new 12- 4,000

year deal for 59K SF of Class A space at 11000 In Thousands of SF Equity Drive in the West Belt submarket, with 2,000 plans to take occupancy in early 2019. • Kirkland & Ellis expanded their space at 609 0 Main by an additional 56K SF during the quarter, Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Q1 18 Q3 18 bringing the building up to 69% leased. Under Construction Delivered • Cardtronics, Inc. inked a long-term deal for 54K Updated 9/30/18 SF of Class A space at Two BriarLake Plaza in SIGNIFICANT PROJECTS UNDER CONSTRUCTION the Westchase submarket, which commences in SIGNIFICANT PROJECTS UNDER CONSTRUCTION % PRE- TARGET early 2019. PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT(S) LEASED DEVELOPER COMPLETION • Nextera Energy, Inc. secured a 50K SF Class B 801 Texas Avenue 1,106,581 CBD Vinson & Elkins; Hines 33% Hines 4Q 2021 lease renewal at 601 Travis through 2021. Capitol Tower 778,344 CBD Bank of America; Quantum 34% Skanska 2Q 2019 CityPlace 2* 326,800 Woodlands ABS 94% Patrinely Group 4Q 2018 • WildHorse Resources signed a new lease for HP Building 1* 189,000 Woodlands HP 100% Patrinely Group 1Q 2019 48K SF at the Cobalt Center in the Katy Freeway HP Building 2* 189,000 Woodlands HP 100% Patrinely Group 1Q 2019 submarket, which commences during the fourth Chasewood Crossing Three 156,000 FM 1960 N/A 0% Greenwood Properties 3Q 2019 quarter. CityPlace 1 149,500 Woodlands N/A 5% Patrinely Group 2Q 2019 The Cannon 120,000 Katy Freeway The Cannon (co-working) 100% United Constrctors of Texas 1Q 2019 • Texas Children’s Health Centers inked a lease Hedwig Place 102,474 Katy Freeway Memorial Plastic Surgery 45% Stream / AMD Global 1Q 2019 renewal for 42K SF at Sugar Land Medical Northeast Medical Tower II 100,000 Kingwood/Humble N/A 0% Health Trust of America 4Q 2018 Building II. Note: * Build-to-suit; Corporate owned office buildings (excluded from competitive statistics & above table)

PAGE 6 PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MARKET AT A GLANCE Q3 | 2018 HOUSTON OFFICE MARKET

SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Direct Completions Under Submarket Inventory SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 38,959,426 8,933,121 1,972,777 82.6% 68,142 -180,843 0 1,884,925 $44.58 $29.89 Galleria / Uptown 23,879,741 4,627,483 620,815 83.0% 51,731 186,874 0 0 $37.54 $27.86 Greenway Plaza 10,874,197 1,935,077 987,612 82.8% 77,502 -77,139 0 0 $35.94 $26.71 Katy Freeway 31,033,796 7,415,277 2,083,816 81.0% 137,125 -141,598 0 222,474 $35.23 $21.94 Westchase 15,734,992 4,317,435 1,264,882 76.8% -285,707 -415,110 0 0 $31.54 $21.96 North Houston / IAH / N Belt 12,699,535 6,100,160 121,057 55.6% 127,409 -484,899 0 0 $22.16 $15.47 Northwest Freeway / N Loop West 8,958,894 2,127,212 25,041 77.9% -107,150 -180,031 0 20,000 $23.38 $19.75 NASA / Clear Lake & SE Outlier 6,690,901 1,423,764 6,277 80.0% -29,243 14,754 0 51,614 $29.98 $20.01 Fort Bend / Sugar Land / SW Outlier 7,439,482 946,041 315,065 89.3% 52,875 74,768 20,800 69,451 $31.48 $26.32 Richmond / Fountainview 1,290,299 138,847 12,120 89.3% -5,869 -35,686 0 0 - $18.19 San Felipe / Voss 5,261,820 1,217,814 82,057 79.5% 9,429 -66,150 0 0 $36.13 $25.50 Bellaire 2,951,174 373,537 101,472 88.3% 52,745 -14,421 0 0 $29.37 $24.16 Midtown / Allen Parkway 5,898,444 972,928 52,244 87.5% -40,650 -42,899 0 37,500 $32.99 $27.28 FM 1960 9,462,817 1,965,353 68,321 81.2% -7,979 -118,788 29,904 186,000 $27.56 $18.10 Kingwood / Humble / NE Outlier 1,357,491 161,227 4,339 88.3% 8,306 -8,193 0 100,000 $29.63 $22.72 Southwest Beltway 8 / SW / Hillcroft 9,946,194 2,371,192 103,456 80.4% 2,025 53,268 0 0 $19.55 $17.09 S. Main / Medical Center / South 9,308,465 761,299 94,528 93.6% 35,177 304,887 0 0 $32.69 $23.41 The Woodlands / Conroe 11,963,964 1,900,131 159,006 85.6% -78,860 85,849 0 934,252 $32.48 $26.91 Gulf Freeway / Pasadena 3,467,382 511,534 10,555 86.4% 5,820 32,488 0 0 - $22.71 Baytown / I-10 East 1,113,476 160,035 0 88.0% 15,878 -6,746 0 0 - $18.67 Katy / Grand Parkway West 2,840,298 477,221 85,169 82.8% 7,652 114,965 0 0 $29.47 $26.97 West Belt 5,005,752 1,278,834 485,835 77.3% 13,869 -199,720 0 0 $29.74 $23.67 Totals 226,138,540 50,115,522 8,656,444 81.1% 110,227 -1,104,370 50,704 3,506,216 $35.02 $22.02

Please note: 800 Bell, the former Exxon headquarters building in the Houston CBD, is excluded from competitive office inventory statistics since Shorenstein Properties’ plans to redevelop the 1.3 million sq. ft. Class B office building has been placed on hold.

METHODOLOGY

TOTAL INVENTORY: The total inventory includes all single and multi-tenant leased 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 that is being 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 sq. ft.

Wade Bowlin John Spafford Brad Sinclair Kim Grizzle-Shapiro Mike Martin President Executive Vice President, Executive Vice President, Senior Vice President, Senior Vice President, Central Division Director of Leasing Leasing Leasing Leasing 713.209.5753 713.209.5823 713.209.5965 713.209.5940 713.209.5710 [email protected] [email protected] [email protected] [email protected] [email protected]

Marci Phillips Michael Sieger Amanda App Courtney Buckout Angelina Hsieh Senior Vice President, Vice President, Vice President, Leasing Manager Leasing Manager Leasing Leasing Leasing 713.209.5959 713.209.5737 281.444.6434 713.209.5930 713.209.5724 [email protected] [email protected] [email protected] [email protected] [email protected]

Blaine Sinclair Livy White Madeline Gregory Ariel Guerrero James Decman Leasing Manager Leasing Manager Leasing Manager Senior Vice President, Research Manager 713.209.5794 713.209.5979 713.209.5734 Director of Research 713.209.5971 [email protected] [email protected] [email protected] 713.209.5704 [email protected] [email protected]

ABOUT PMRG Madison Marquette merged operations with PMRG in June 2018 to create a new leader in commercial real estate. The firm offers PMRG’s leasing, property management, investment management and development services, combined with Madison Marquette’s specialized development, investment and marketing expertise. The company provides leasing and management services to a diverse portfolio Doug Berry Vice President, of 330 assets in 24 states and manages an investment portfolio valued at over $6 billion. The Creative Director combined company is headquartered in Washington, DC with a major presence in Houston, TX. With 713.209.5897 600 professionals in 12 regional markets, the merged firm is a member of the Capital Guidance group [email protected] of companies. For additional information, visit www.pmrg.com.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE

HOUSTON OFFICE MARKET REPORT SECOND QUARTER 2018

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q22018OFFICE MARKET ECONOMIC OVERVIEW

After a two-year oil bust that hit bottom in 2016, Houston’s economy is showing signs of a recovery with 79,200 jobs created over the past 12 months ending in May 2018, representing a 2.6% increase for the period. The largest annual gains in employment growth were in professional & business services (33,600 jobs) and trade, transportation & utilities (13,700 jobs), followed by construction (11,400 jobs), which surged at the end of 2017. While these employment statistics suggest a robust economy following 62,900 jobs created in 2017, local economists estimate that roughly 36,500 of the jobs added were temporary and part of the post-Hurricane Harvey rebuilding efforts.

The energy sector continues its recovery as sustained global economic growth, OPEC supply cuts, the restoration of Iran sanctions, and declining output in Venezuela and Libya are just some of the factors that have contributed to the turnaround. During TABLE OF CONTENTS the first half of 2018, the West Texas Intermediate (WTI) crude oil price enjoyed its Economic Overview...... 2 strongest rally in eight years, starting the year in the low $60 range and rising to over $73 per barrel to reach its highest level since late 2014. The combination of rising Office Market Assessment...... 3 prices and record production has translated into solid profits for Houston’s energy companies, which, in turn, is boosting manufacturing, professional services and other Net Absorption & Occupancy...... 4 sectors connected to oil and gas. However, the energy sector has come nowhere close to recovering all the jobs lost following the oil bust since energy production has Rental Rates & Leasing Activity...... 5 become much more efficient through advancing technology allowing for a smaller workforce. Construction...... 6

Submarket Statistics & Methodology...... 7 Updated 7/11/2018

The PMRG Team...... 8

EMPLOYMENTEmployment TrendsTRENDS

120 5% 100 80 3% 60 Thousands 40 20 1% 0 -20 -1% -40 -60 -80 -3% FOR INFORMATION: -100 -120 -5% WADE BOWLIN '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 18F19F

President Jobs Added Annual % Change Central Division Source: U.S. Bureau of Labor Statistics, Moody's Analytics, University of Houston's Center for Regional Forecasting 713.209.5753 Updated 7/3/18 [email protected] EMPLOYMENTEmployment GROWTH Growth BYby SectorSECTOR JOHN SPAFFORD 12-MONTHS HEALTH CURRENT ANNUAL (Improving Executive Vice President PRIOR READING READING CHANGE or Declining) Director of Leasing Mining 79.3 78.0 1.7% Up 713.209.5823 Construction 229.5 218.1 5.2% Up [email protected] Manufacturing 227.2 218.7 3.9% Up Trade, Transportation & Utilities 626.7 613.0 2.2% Up Information 31.6 32.5 -2.8% Down ARIEL GUERRERO Financial Activities 162.3 158.0 2.7% Up Senior Vice President, Research Professional & Business Services 510.5 476.9 7.0% Up 713.209.5704 Education & Health Services 388.4 386.7 0.4% Up [email protected] Leisure & Hospitality 326.1 322.0 1.3% Up Other Services 111.4 111.2 0.2% Up Government 415.2 413.9 0.3% Up Totals 3,108.2 3,029.0 2.6% Up 2 Source: U.S. Bureau of Labor Statistics. Employment Data as of May 2018 (P)

PAGE Source: U.S. Bureau of Labor Statistics; Employment Data as of May 2018 AllAll Employees, Employees, Inin ThousandsThousands PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON OFFICE MARKET Q22018

OFFICE MARKET ASSESSMENT

Despite the positive economic momentum, Houston’s office market fundamentals remained soft with negative 798,231 SF of direct net absorption during the second quarter, bringing the year-to-date total to over 1.2 million SF of occupancy losses. The Class A market posted 133,728 SF of occupancy losses, breaking a streak of three consecutive quarters of positive absorption, but has managed to record 586,065 SF of direct net absorption over the prior 12 months. The largest occupancy losses in the Class A sector resulted from lease expirations by Exxon Mobil and NALCO Champion, which added a combined 583K SF of direct vacant space to the market. The Class B sector suffered 600,448 SF of occupancy losses in 2Q18, pushing the year-to-date total further into negative territory with over 1.3 million SF of red ink. The largest vacancies involved Exterran Holdings and Worley Parsons returning a combined 299K SF to the market. EMPLOYMENT FORECAST: Although Houston’s office market continues to be weighed down by a glut of Houston’s economy performed better than expected space available, there are a few submarkets showing some signs of stabilization or with 62,900 jobs created in 2017, up 37% from improvement. Leasing activity has increased totaling 16.9M SF over the trailing 12 the initial 46,000 jobs estimated. Looking ahead, Houston’s economic forecast looks promising as months, which is up 11.3% over its cyclical low in 2016. Select submarkets such as economists are projecting up to 46K to 70K jobs in the CBD and Galleria have largely contributed to the uptick in leasing activity as 2018, with the higher end of the forecast assumption tenants are taking advantage of the expanded opportunities to strike a deal early based on whether crude prices can stay above the and lock-in reduced rental rates. Large tenants with leases expiring in 2019 to $60/barrel mark. 2021 are already evaluating opportunities in the market, including proposed office construction projects that could hinder the office market’s recovery. Going forward, CRUDE OIL PRICE FORECAST: large deal activity will account for a larger share of the leasing volume but could result West Texas Intermediate crude oil (WTI) traded in additional blocks of space coming back on the market as some tenants may right between $65.81 and $74.13 a barrel in June 2018 size or consolidate. versus $46.02 to $48.32 per barrel in June 2017. The U.S. Energy Information Administration has forecasted WTI oil price to average $65.95 in 2018 FORECAST and $62.04 in 2019. DIVERSIFIED ECONOMIC DRIVERS: • As vacancy rates remain elevated, landlords are offering generous concession The region has become more diversified but the packages to attract tenants while keeping rental rates steady, but the increased energy sector still accounts for almost half of the competition could put pressure on rents primarily within lower quality buildings. local economy. The Port of Houston is the 10th • Landlords will face additional challenges as many sublease listings will roll largest port in the world and ranks first nationally over to direct space as their agreements expire, further impacting the direct in international waterborne tonnage handled. The occupancy rates. On the bright side, landlords that receive direct space are back Texas Medical Center is the largest of its kind in the in the driver seat and no longer have to compete with tenants willing to sublease world – with a local economic impact of $10 billion their premises at very low recovery rates. per year. • With the “flight to quality” trend remaining prevalent, owners will continue to Updated 7/11/2018focus upon significant capital improvement programs to enhance their assets to remain competitive with both new office developments as well as existing buildings within their direct competitive set in order to retain and attract tenants. Office Market Trends OFFICE MARKET TRENDS MARKET TREND INDICATORS

10,000 90% Current Change from Previous 12-month Quarter Quarter Year Forecast 8,000 88% Direct Occupancy 81.2% 6,000 86% Trailing 12 mos. Direct -1,426,524 4,000 84% Net Absorption Under Construction 2,256,339 2,000 82% in Thousands of SF in Thousands 0 80% Direct Asking Rents $29.13

-2,000 78% '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18F'19F

Direct Net Absorption Completions Direct Occupancy

3 PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q22018OFFICE MARKET NET ABSORPTION & OCCUPANCY

• The CBD posted 45,219 SF of quarterly losses, but the Class A sector recorded 107,833 SF of direct absorption as Talos Energy expanded into 98K SF at Three Allen Center. The Class B sector suffered 158,102 SF of occupancy losses due to vacancies by Interactive Response Tech (90K SF) and Amegy Bank (35K SF). • Midtown posted 39,781 SF of direct net absorption, driven by 68,717 SF of leasing gains within the Class A sector. The largest gains involved iQor occupying 36K SF at Central Square, while Energy & Minerals and Timmons Advisors occupied a combined 22K SF at San Felipe Place. • The Woodlands witnessed 62,930 SF of direct absorption as the Class A sector accounted for 82,067 SF of the leasing gains. The majority of the growth occurred in newly built projects, including APTIM leasing 27K SF at Three Hughes Landing. • The Southwest submarket featured 120,101 SF of quarterly gains, largely due to AT&T Wireless moving into 73K SF at Southwest Corporate Center. • Greenway Plaza posted 140,527 SF of occupancy losses in 2Q18, largely due Even though office employment growth has to NALCO Champion’s 129K SF sublease space at Phoenix Tower expiring and demonstrated signs of strengthening over the returning to the landlord. The largest move-ins involved Hancock Whiney Bank past year, Houston’s office leasing market will take and other tenants collectively occupying 42K SF at Kirby Collection. quite some time to heal due to the abundance • Westchase recorded 107,244 SF of occupancy losses, with the bulk of the negative of sublease and shadow space that will need to absorption due to Worley Parson’s 94K SF lease expiring at 10500 Richmond. be backfilled. Trophy and Class A buildings will lead in the recovery and outperform the broader • The Katy Fwy/Energy Corridor posted 40,008 SF of occupancy losses, but the market as the flight to quality trend persists. Class A sector recorded 52,569 SF of leasing gains. The largest move-ins included FairNodal (47K), Solaris Management (24K) and Envoy Mortgage (40K). WADE BOWLIN • North Houston/North Belt posted negative 593,101 SF of direct net absorption, President bringing the year-to-date total up to 612,308 SF of occupancy losses. The largest Central Division direct vacancies resulted from lease expirations by Exxon Mobil totaling 453K SF at CityNorth 1 and Eight Greenspoint, while Exterran gave back a combined Updated 7/3/18 Updated 7/3/2018 205K SF at 16666 Northchase Drive and Belchase Bldg. SUBMARKET OCCUPANCY RANKING Submarket Occupancy Ranking Occ. Y-O-Y % DIRECT NETDirect ABSORPTION Net Absorption VS. vs. COMPLETIONS Completions Rank Submarket Rate Change 1 S. Main / Medical Center / South 93.3% 2.9% 3,500 2 Richmond / Fountainview 89.7% -0.3% 3,000 2,500 3 Fort Bend / Sugar Land 88.8% 2.7% 2,000 4 Kingwood / Humble 88.4% -1.6% 1,500 5 Midtown / Allen Parkway 87.0% 0.2% 1,000 500 6 Bellaire 86.6% -2.9% 0 In Thousands of SF In 7 Baytown & I-10 East 86.4% -0.6% -500 8 Gulf Freeway / Pasadena 86.2% 0.2% -1,000 -1,500 9 The Woodlands / Conroe 85.9% 2.9% Q2 15 Q4 15 Q2 16 Q4 16 Q2 17 Q4 17 Q2 18 10 Galleria / Uptown 82.9% -0.9% Updated 7/3/2018 11 Central Business District 82.7% -0.8% Direct Net Absorption Completions 12 Greenway Plaza 82.0% -3.4% 13 FM 1960 81.4% -2.5% DIRECTDirect OCCUPANCY Occupancy Rates RATES 14 Westchase 81.4% -1.7% 15 Katy/Grand Parkway West 81.1% 4.6% 88% 16 Katy Freeway 80.8% -0.9% 86% 17 Southwest Beltway 8 / Hillcroft 80.3% -3.9% 18 San Felipe / Voss 79.4% -3.3% 84% 19 Northwest Freeway / North Loop W 79.3% -1.6% 20 NASA / Clear Lake 78.2% -1.2% 82% 21 West Belt 77.1% -3.0% 80% 22 North Houston / IAH / N Belt 53.9% -5.7% 78% Q2 15 Q4 15 Q2 16 Q4 16 Q2 17 Q4 17 Q2 18

4 Class A Class B PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON OFFICE MARKET Q22018 RENTAL RATES & LEASING ACTIVITY

• Citywide Class A full-service gross asking rents slipped by $0.10 to $34.94 per SF during the quarter and have declined by 0.3% year-over-year, while concessions such as free rent and tenant improvement allowances remain elevated. • Class B asking rents slightly increased by $0.34 to $21.91 per SF (gross) during the second quarter and have moved up 1.4% or $0.80 over the prior 12 months largely due to newly built and renovated product coming online. • Due to an abundance of space options available, concessions remain elevated throughout the market with attractive concession packages and tenant improvement allowances offered in order to maintain the highest face rents. • Sublease inventory increased during the quarter by 156,596 SF to 9.6 million SF, due to recent additions by Occidental Petroleum (814K SF at Greenway Plaza), GE Oil & Gas (182K SF at Westway III) and EP Energy (125K SF at 1001 Louisiana). • Despite its second consecutive quarterly increase, Houston’s office sublease availability has declined by 20.7% since its peak of 12.1 million SF in 3Q16. The reduction has resulted from a significant volume of sublease deals inked, spaces After rising steadily over the past few years, returning to the landlord via expirations and some tenants opting to retain their concessions to tenants have begun to plateau but space by withdrawing sublease listings. remain at elevated levels due to the many space • Sublease inventory represents 17.6% of the total space available and accounts options available to tenants. These aggressive concession packages include significant free for 4.3% of the citywide rentable inventory, with the largest share of sublease rent periods, abated or discounted parking and availability found in the Katy Freeway/Energy Corridor (25.5%), CBD (24.4%), enhanced building amenities. Westchase (14.1%) and Greenway Plaza (10.4%). • Sublease inventory is expected to fall below its 13-year average of 5.0 million SF JOHN SPAFFORD by 2021, with half of the options greater than 10K SF set to expire within 3 years. Executive Vice President, Director of Leasing • Leasing activity for deals above 10K SF has been primarily concentrated in the Central Division CBD (29%), Galleria/Uptown (20.5%), and Katy Fwy/Energy Corridor (14.6%) Updated 7/3/2018 over the prior 12 months, which have collectively accounted for 6.3 million SF or Updated 7/3/18 64% of the market’s leasing volume. SUBMARKET RENTAL RATE RANKING Submarket Rental Rate Ranking RENTALRental RatesRATES Rental Y-O-Y % ($/SF/Yr.($/SF/Yr. FullFull ServiceService)) Rank Submarket Rate Change $36 1 Central Business District $40.75 0.1% $34 2 Galleria / Uptown $35.86 2.1% $32 3 Greenway Plaza $32.77 -3.2% $30 $28 4 Katy Freeway $30.38 -1.0% $26 5 Midtown / Allen Parkway $30.22 -2.3% $24 6 San Felipe / Voss $29.66 0.7% $22 7 The Woodlands / Conroe $29.56 -3.9% $20 8 Katy/Grand Parkway West $29.19 5.3% $18 9 Westchase $28.85 -3.6% Q2 15 Q4 15 Q2 16 Q4 16 Q2 17 Q4 17 Q2 18 10 West Belt $28.41 2.7% Updated 7/3/2018 Class A Class B 11 S. Main / Medical Center / South $27.38 -2.2% 12 Fort Bend / Sugar Land $26.96 2.2% DIRECTTotal LEASING Leasing ACTIVITY Activity 13 Bellaire $26.42 9.3% RollingRolling 12-Months 12-Months 14 Kingwood / Humble $22.87 -3.5% 16,000 15 Gulf Freeway / Pasadena $21.80 0.5% 14,000 16 Northwest Freeway / North Loop W $21.21 0.9% 12,000 17 NASA / Clear Lake $20.88 4.2% 10,000 18 FM 1960 $20.03 3.0% 8,000 19 North Houston / IAH / N Belt $19.55 -5.4% 6,000 20 Baytown & I-10 East $18.21 0.9%

In Thousands of SF In 4,000 21 Southwest Beltway 8 / Hillcroft $17.24 1.3% 2,000 22 Richmond / Fountainview $17.10 -3.9% 0 Q2 15 Q4 15 Q2 16 Q4 16 Q2 17 Q4 17 Q2 18

Class A Class B 5 PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q22018OFFICE MARKET

CONSTRUCTION

• Developers completed only three office buildings totaling 157,000 SF during the second quarter, which were already 54.1% pre-leased. Since the beginning of the year, developers have delivered only 647,000 SF of new office construction, with an additional 670,000 SF slated to deliver by year-end 2018 (excluding corporate-owned projects). • Construction levels have tapered off dramatically to their lowest level in 6 ½ years with only 2.2 million SF of competitive office space currently under construction, with 54.6% of this space already preleased. • The submarkets with the largest concentration of office construction underway include the CBD (778K SF) and The Woodlands (778K SF), which collectively RECENT ANNOUNCEMENTS account for 69% of Houston’s office development pipeline. • The largest construction project currently underway includes Skanska’s 778,344 • Law firm Vinson & Elkins is close to signing a SF Capitol Towers project anchored by Bank of America in the CBD, with expected lease for approximately 250K SF, which would delivery by mid-year 2019. Other noteworthy projects underway include build- help kick start construction on Hines’ proposed to-suit projects for American Bureau of Shipping and HP near Springwoods 1 million SF office tower. Village set to deliver by late 2018/early 2019. • Harris County Veterans Services Office signed • Developers have broken ground on seven office projects totaling 493K SF since a 119K SF lease at 500 Jefferson, bringing the the beginning of the year, primarily comprised of smaller buildings. The largest downtown building up to 68% leased. ground breaking during the second quarter involved Greenwood Properties’ • Gulf Interstate Engineering inked a 115K SF lease Chasewood Crossing Three, a 156K SF speculative office project in the FM 1960 renewal for 6 years at 16010 Barkers Pointe Ln. Area. • Energy XXI Services secured an 85K SF lease • Even though office construction activity is winding down from its recent boom renewal at One City Centre in the CBD. that resulted in the delivery of over 23 million SF of competitive space over the • Acclara Solutions signed an 83K SF lease at past five years, the flight to quality and tenant demand for amenity-rich options Remington Square III, bringing the building to are trends that will remain prevalent throughout 2018. 91% leased. • New construction will remain a valid alternative, as tenants appear willing to pay • Carrizo Oil & Gas signed an 83K SF lease a premium for high quality office buildings that offer the latest workplace trends as they seek to retain and attract the most skilled employees. However, significant extension at One Allen Center, with plans to Updated 7/3/2018 give back a full floor. pre-leasing will be required for any new development to move forward in the • Law firm Sidley Austin signed a long-term lease near future. renewal that expands its footprint by over 60% to 81K SF at Wells Fargo Plaza. Construction Pipeline • Law firm Haynes & Boone, LLP secured a 70K CONSTRUCTION PIPELINE SF lease renewal at LyondellBasell Tower. 12,000 • Morgan Stanley renewed and expanded their lease up to 64K SF at Williams Tower with plans 10,000 to consolidate from Galleria Tower 2. • Constellation Energy Partners signed a 62K SF 8,000 lease at the Kinder Morgan Building, with plans to relocate from 4 Houston Center. 6,000 • Kiewit Engineering inked a 53K SF sublease 4,000 deal from BASF Corp. at Energy Tower IV. In Thousands of SF In • Schlumberger recently signed a 51K SF new 2,000 lease at 1430 Enclave after subleasing this space from Technip a few years ago. 0 • Enable Midstream Partners signed a 48K SF Q2 15 Q4 15 Q2 16 Q4 16 Q2 17 Q4 17 Q2 18 sublease deal at One Shell Plaza, with plans to relocate from 1111 Louisiana. Updated 7/3/18 Under Construction Delivered • US legal Support signed a 43K SF lease at SIGNIFICANT PROJECTS UNDER CONSTRUCTION CityNorth 2, with plans to relocate from 363 SIGNIFICANT PROJECTS UNDER CONSTRUCTION% PRE- TARGET North Belt. PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT(S) LEASED DEVELOPER COMPLETION • GTC Technology International signed a 42K SF Capitol Tower 778,344 CBD Bank of America; Quantum 36% Skanska 2Q 2019 lease at Ashford VII, expanding their footprint CityPlace 2* 326,800 Woodlands ABS 94% Patrinely Group 4Q 2018 HP Building 1* 189,000 Woodlands HP 100% Patrinely Group 1Q 2019 by a full floor. HP Building 2* 189,000 Woodlands HP 100% Patrinely Group 1Q 2019 • Atlantia Resources signed a 42K SF sublease Chasewood Crossing Three 156,000 FM 1960 N/A 0% Greenwood Properties 3Q 2019 deal at Energy Crossing II. The Cannon 120,000 Katy Freeway The Cannon (co-working) 100% United Constrctors of Texas 1Q 2019 Hedwig Place 102,474 Katy Freeway Memorial Plastic Surgery 45% Stream / AMD Global 1Q 2019 6 Northeast Medical Tower II 100,000 Kingwood/Humble N/A 0% Health Trust of America 3Q 2018

PAGE Note: * Build-to-suit; Corporate owned office buildings (excluded from competitive statistics & above table)

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT AT A HOUSTON MAR KET GLANCE OFFICE MARKET Q22018

SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Direct Completions Under Submarket Inventory SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 39,098,333 8,244,579 2,345,837 82.7% -45,219 -248,985 0 778,344 $44.09 $29.21 Galleria / Uptown 23,922,062 4,672,665 617,495 82.9% -51,827 135,143 0 0 $37.91 $27.86 Greenway Plaza 10,855,350 2,041,296 1,005,973 82.0% -140,527 -154,641 0 0 $36.37 $25.96 Katy Freeway 31,028,912 7,497,561 2,455,529 80.8% -40,008 -278,723 0 222,474 $35.70 $21.97 Westchase 15,164,720 3,369,077 1,356,420 81.4% -107,244 -129,403 0 0 $35.28 $19.61 North Houston / IAH / N Belt 12,481,184 6,168,827 97,035 53.9% -593,101 -612,308 0 0 $22.60 $16.06 Northwest Freeway / N Loop West 8,938,028 2,165,016 60,088 79.3% -18,990 -72,881 0 20,000 $23.54 $19.47 NASA / Clear Lake & SE Outlier 6,863,547 1,581,318 16,351 78.2% -11,891 43,997 0 51,614 $28.70 $19.53 Fort Bend / Sugar Land / SW Outlier 7,429,138 898,498 358,458 88.8% 45,624 21,893 23,520 90,251 $30.45 $25.04 Richmond / Fountainview 1,222,468 136,970 0 89.7% -7,575 -29,817 0 0 - $17.54 San Felipe / Voss 5,261,708 1,217,909 79,369 79.4% -627 -75,579 0 0 $36.35 $25.97 Bellaire 2,951,174 404,180 89,182 86.6% -54,806 -67,166 0 0 $29.23 $23.67 Midtown / Allen Parkway 5,888,760 884,258 54,867 87.0% 39,781 -2,249 0 0 $32.77 $27.78 FM 1960 9,571,470 1,922,849 64,230 81.4% -23,471 -110,809 0 215,904 $27.43 $18.00 Kingwood / Humble / NE Outlier 1,436,286 172,537 318 88.4% -26,406 -16,499 0 100,000 $29.63 $22.56 Southwest Beltway 8 / SW / Hillcroft 9,960,567 2,385,528 107,066 80.3% 120,101 51,243 0 0 $18.81 $17.15 S. Main / Medical Center / South 9,338,490 708,360 89,850 93.3% 22,512 269,710 50,000 0 $32.44 $26.54 The Woodlands / Conroe 11,715,114 1,776,041 199,688 85.9% 62,930 164,709 0 777,752 $32.30 $26.47 Gulf Freeway / Pasadena 3,461,835 568,741 10,555 86.2% 52,946 26,668 83,076 0 - $22.76 Baytown / I-10 East 1,096,564 159,898 0 86.4% -1,316 -22,624 0 0 - $18.23 Katy / Grand Parkway West 2,743,561 498,462 66,253 81.1% 29,963 107,313 0 0 $29.46 $29.19 West Belt 5,004,209 1,594,079 553,766 77.1% -49,080 -213,589 0 0 $29.63 $23.70 Totals 225,433,480 49,068,649 9,628,330 81.2% -798,231 -1,214,597 156,596 2,256,339 $34.94 $21.91

METHODOLOGY

PROPERTY SERVICESPROPERTY | SERVICES DEVELOPMENT | DEVELOPMENT | INVESTMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON OFFICE MARKET Q22018

Marci Phillips Michael Sieger Courtney Buckout Angelina Hsieh Blaine Sinclair Senior Vice President, Vice President, Leasing Manager Leasing Manager Leasing Manager Leasing Leasing 713.209.5959 713.209.5737 713.209.5794 281.444.6434 713.209.5930 [email protected] [email protected] [email protected] [email protected] [email protected]

Livy White Madeline Gregory Ariel Guerrero James Decman Doug Berry Leasing Manager Leasing Manager Senior Vice President, Research Manager Vice President, 713.209.5979 713.209.5734 Director of Research 713.209.5971 Creative Director [email protected] madeline.gregory@ 713.209.5704 [email protected] 713.209.5897 pmrg.com [email protected] [email protected]

ABOUT PMRG Madison Marquette merged operations with PMRG in June 2018 to create a new leader in commercial real estate. The firm offers PMRG’s leasing, property management, investment management and development services, combined with Madison Marquette’s specialized development, investment and marketing expertise. The company provides leasing and management services to a diverse portfolio of 330 assets in 24 states and manages an investment portfolio valued at over $6 billion. The combined company is headquartered in Washington, DC with a major presence in Houston, TX. With 600 professionals in 12 regional markets, the merged firm is a member of the Capital Guidance group of companies. For additional information, visit www.pmrg.com.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON OFFICE MARKET REPORT FIRST QUARTER 2018

PROPERTY SERVICES DEVELOPMENT INVESTMENT HOUSTON AT A Q1 OFFICE MARKET MAR KET GLANCE 2018 ECONOMIC OVERVIEW

The Houston metro economy continues to recover and shake off the oil bust with 67,100 jobs created over the past 12 months ending in February 2018, representing a 2.2% increase for the period. While the latest employment statistics suggest a robust economy, much of the growth occurred during the fourth quarter as firms hired additional employees to assist with Hurricane Harvey recovery efforts. The largest gains in annual employment growth were in professional & business services (25,400 jobs) and trade, transportation & utilities (12,400 jobs), followed by construction (9,300 jobs), which surged at the end of the year due to post-Hurricane Harvey rebuilding.

The energy sector’s recovery has shown signs of moving to firmer ground as oil prices have risen as high as $65 per barrel, inventories of petroleum products are falling and energy firms are reporting solid profits after years of losses. Even though the TABLE OF CONTENTS U.S. rig count has more than doubled since its low in May 2016, the energy sector Economic Overview...... 2 has recouped only 7,400 of the total lost jobs, following nearly two years of layoffs and hiring freezes. The WTI crude oil price enjoyed its strongest rally in eight years Office Market Assessment...... 3 over the first quarter of 2018 on the back of sustained demand by the recovering world economy, geopolitical uncertainty in the Middle East and predictions that OPEC Net Absorption & Occupancy...... 4 members would hold firm with their production cuts. This provides incentive to a U.S. energy industry that is gaining momentum in ramping up oil production. Houston’s Rental Rates & Leasing Activity...... 5 fortunes will depend on whether drilling rigs can keep working in Texas oil fields well into 2018, providing sales and orders for production companies, manufacturers and Construction...... 6 energy service firms that employ tens of thousands across the region. Submarket Statistics & Methodology...... 7 Updated 4/1/2018

The PMRG Team...... 8 EMPLOYMENTEmployment Trends TRENDS

120 5% 100 80 3% 60 Thousands 40 FOR INFORMATION: 20 1% 0 -20 -1% WADE BOWLIN -40 -60 President -80 -3% Central Division -100 -120 -5% 713.209.5753 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 18F19F [email protected] Jobs Added Annual % Change

JOHN SPAFFORD Source: U.S. Bureau of Labor Statistics, Moody's Analytics, University of Houston's Center for Regional Forecasting Executive Vice President Director of Leasing EMPLOYMENT GROWTH BY SECTOR 713.209.5823 12-MONTHS HEALTH [email protected] CURRENT PRIOR ANNUAL (Improving READING READING CHANGE or Declining) Mining 78.7 77.0 2.2% ARIEL GUERRERO Construction 223.5 214.2 4.3% Senior Vice President, Research Manufacturing 222.7 217.9 2.2% 713.209.5704 Trade, Transportation & Utilities 622.3 609.9 2.0% [email protected] Information 31.6 32.2 -1.9% Financial Activities 161.4 157.4 2.5% Professional & Business Services 497.1 471.7 5.4% Education & Health Services 385.3 382.9 0.6% Leisure & Hospitality 315.1 309.1 1.9% Other Services 108.1 108.2 -0.1% Government 412.7 410.9 0.4% Totals 3,058.5 2,991.4 2.2% 2

PAGE Source: U.S. Bureau of Labor Statistics; Employment Data as of February 2018 All Employees, in Thousands PROPERTY SERVICES | DEVELOPMENT | INVESTMENT AT A HOUSTON MAR KET GLANCE OFFICE MARKET Q1 2018

OFFICE MARKET ASSESSMENT

Houston’s office market fundamentals remained soft with negative 512,531 SF of direct net absorption during the first quarter of 2018, following nearly 1.7 million SF of occupancy losses in all of 2017. On the positive note, the Class A market managed to record its third consecutive quarterly gain with 267,981 SF of direct net absorption during the first quarter. Despite the modest gains, the Class A sector’s direct occupancy level slipped 10 basis points to 80.6% during the quarter and has fallen by 200 basis points over the prior 12 months largely due to construction deliveries outpacing demand. Meanwhile, the Class B sector reported negative 747,193 SF of direct net absorption during the first quarter, after suffering nearly 1.2 million SF of occupancy losses in 2017. As a result, Class B direct occupancy rates declined by 70 basis points to 82.1% during the quarter and have dropped 80 basis points over the past 12 months. EMPLOYMENT FORECAST: The office market continues to be weighed down by a glut of available space, Houston created 62,900 jobs in 2017 according but there is a renewed sense of optimism that has led to increased tour activity to the benchmark revisions issued in early March as tenants are coming off the sidelines. Select submarkets such as the CBD and by the Texas Workforce Commission, which is a 37% jump over the initial 46,000 jobs estimated. Galleria have experienced a significant uptick in leasing activity as tenants realize Looking ahead, Houston’s economic forecast looks that now is an opportune time to strike a deal early and lock-in reduced rental rates promising as economists are projecting 46K to 70K on a lease. Large tenants with leases expiring in 2019 to 2021 are already evaluating jobs in 2018, with the higher end of the forecast opportunities in the market, including proposed office construction projects that assumption based on whether crude prices can stay could hinder the office market’s recovery. Going forward, large deal activity is above the $60/barrel mark. expected to account for a larger share of the leasing volume but could result in additional blocks of space coming back on the market as some tenants may right CRUDE OIL PRICE FORECAST: size or consolidate from multiple locations. West Texas Intermediate crude oil (WTI) traded between $60.98 and $65.49 a barrel in March 2018 versus $47.00 to 53.82 per barrel in March 2017. FORECAST The U.S. Energy Information Administration has forecasted WTI oil price to average $58.17 in 2018 and $57.51 in 2019. • Houston’s office leasing market fundamentals are likely to remain soft as additional M&A activity in the energy sector could result in companies bringing DIVERSIFIED ECONOMIC DRIVERS: additional blocks of space on the market due to redundancies. The region has become more diversified but the • Landlords will face additional challenges as many sublease listings will roll energy sector still accounts for almost half of the over to direct space as their agreements expire, further impacting the direct local economy. The Port of Houston is the 10th occupancy rates. On the bright side, landlords that receive direct space are back largest port in the world and ranks first nationally in the driver seat and no longer have to compete with tenants willing to sublease in international waterborne tonnage handled. The their premises at very low recovery rates. Texas Medical Center is the largest of its kind in the • With the “flight to quality” trend remaining prevalent, property owners continue world – with a local economic impact of $10 billion per year. to focus upon significant capital improvement programs to enhance their assets Updated 4/1/2018to remain competitive with both new office developments as well as existing buildings within their direct competitive set in order to retain and attract tenants.

Office Market Trends OFFICE MARKET TRENDS MARKET TREND INDICATORS

10,000 90% Current Change from Previous 12-month Quarter Quarter Year Forecast 8,000 88% Direct Occupancy 81.7% 6,000 86% Trailing 12 mos. Direct -1,120,041 4,000 Net Absorption 84% Under Construction 1,901,245 2,000 in Thousands of SF 0 82% Direct Asking Rents $29.17

-2,000 80% '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18F'19F

Direct Net Absorption Completions Direct Occupancy

3 PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON AT A Q1 OFFICE MARKET MAR KET GLANCE 2018 NET ABSORPTION & OCCUPANCY

• The Galleria/Uptown submarket recorded 186,970 SF of direct net absorption gains during the quarter, with the Class A sector accounting for all of the leasing gains. The largest occupancy gains involved WeWork and BKD taking a combined 90K SF at Galleria Tower. • South Houston posted 247,198 SF of direct net absorption compliments of Lonza Group’s relocation into their new 250,000 SF build-to-suit at 14905 Kirby Drive. • The Woodlands continues to be a bright spot with 101,779 SF of direct net absorption during the quarter, after recording a market leading 371,154 SF of occupancy gains in 2017. The Class A sector recorded 88,921 SF of the quarterly gains primarily taking place in newly-built product. • The Midtown submarket posted negative 138,195 SF of direct absorption, with nearly two-thirds of the losses taking place in the Class A sector. The largest vacancy resulted from Baker Hughes leaving behind 128K SF at America Tower. • West Belt posted 164,509 of occupancy losses, causing the submarket’s direct Even though office-using employment growth occupancy level to drop to 78.0%. The quarterly losses resulted from Cameron has finally returned, Houston’s office leasing International leaving behind 129K SF space at Westway One while EDF Trading market will take quite some time to heal due to vacated 54K SF at Concourse at Westway due to their relocation to the CBD. the abundance of sublease and shadow space. • The CBD recorded negative 203,765 SF of direct net absorption during the first Future leasing demand is expected to remain quarter, which comes on the heels of 912,647 SF occupancy losses in 2017. The constrained until energy firms start hiring again and begin to backfill their excess space before largest movement involved United Airlines taking possession of 238K SF at expanding into additional space. 609 Main as the company consolidated leaving behind nearly 335K SF vacant combined at 1600 Smith and 600 Jefferson. WADE BOWLIN • The Katy Freeway/Energy Corridor submarket recorded negative 238,715 SF of President direct net absorption, which caused the submarket’s direct occupancy level to Central Division drop to its lowest level in over 20 years. The largest direct vacancies included WoodGroup, Keppel FloaTEC, and Strategy Engineering, while FMCTechnip Updated 4/1/18 Updated 4/1/2018 decided to place 376K SF of sublease space on the market. SUBMARKET OCCUPANCY RANKING Submarket Occupancy Ranking Occ. Y-O-Y % DIRECTDirect NET ABSORPTION Net Absorption VS. vs. COMPLETIONS Completions Rank Submarket Rate Change 1 S. Main / Medical Center / South 93.6% 4.0% 3,500 3,000 2 Kingwood / Humble 90.4% 0.8% 2,500 3 Richmond / Fountainview 90.4% 2.8% 2,000 4 Fort Bend / Sugar Land 88.4% 2.1% 1,500 5 Bellaire 86.7% -2.3% 1,000 500 6 Baytown & I-10 East 86.5% 5.3% 0 In In of Thousands SF 7 Midtown / Allen Parkway 86.1% 0.6% -500 8 Gulf Freeway / Pasadena 86.0% -0.8% -1,000 9 The Woodlands / Conroe 85.4% 2.1% -1,500 Q1 15 Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Q1 18 10 Greenway Plaza 83.8% -2.4%Updated 4/1/2018

11 Galleria / Uptown 83.1% -0.3% Direct Net Absorption Completions 12 Central Business District 82.9% -3.5% 13 Westchase 82.1% -1.0% DIRECTDirect OCCUPANCYOccupancy Rates RATES 14 FM 1960 81.3% -2.1% 15 Katy/Grand Parkway West 81.1% 5.4% 90% 16 Katy Freeway 80.9% -1.8% 88% 17 Southwest Beltway 8 / Hillcroft 80.2% -3.9% 18 Northwest Freeway / North Loop W 79.8% -0.7% 86% 19 San Felipe / Voss 79.5% -3.8% 20 NASA / Clear Lake 78.3% -2.3% 84% 21 West Belt 78.0% -2.2% 82% 22 North Houston / IAH / N Belt 58.8% -5.5% 80% Q1 15 Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Q1 18

4 Class A Class B PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT AT A HOUSTON MAR KET GLANCE OFFICE MARKET Q1 2018 RENTAL RATES & LEASING ACTIVITY

• Citywide Class A full-service gross asking rents slightly increased by $0.32 to $35.04 per SF during the first quarter and have moved up 1.8% or $0.61 over the prior 12 months largely due to rising operating expenses and the addition of new product to the available inventory. • Class B asking rents declined by $0.25 to $21.57 per SF (gross) during the first quarter and are currently $0.15 below their level recorded 12 months ago. • Despite the overall increase in weighted average asking rents, concessions remain elevated throughout the market with attractive concession packages and tenant improvement allowances offered in order to maintain the highest face rents. • Sublease inventory rose by 310,644 SF to 9.4 million SF during the quarter, largely attributed to TechnipFMC placing 375,937 SF of sublease space on the market in Energy Tower II. • In spite of its first quarterly increase in 18 months, sublease availability has managed to drop by 22.4% since its peak of 12.1 million SF in 3Q16. The reduction Concessions to tenants are continuing even though has resulted from a significant volume of sublease deals inked, spaces returning quoted rental rates have remained relatively steady. to the landlord via expirations and some tenants opting to retain their space by These aggressive concession packages include withdrawing sublease listings. significant free rent periods, abated or discounted parking and enhanced building amenities • Sublease inventory represents 17.2% of the total space available and accounts for 4.2% of the citywide rentable inventory, with the largest share found in the JOHN SPAFFORD Katy Freeway/Energy Corridor (27.7%), CBD (23.8%) and Westchase (14.6%). Executive Vice President, Director of Leasing • Nearly 5.2 million SF or 61.6% of the sublease spaces greater than 10,000 SF Central Division are set to expire within 3 years. • Leasing activity for deals 10K SF or larger has been primarily concentrated Updated 4/1/2018in the Galleria/Uptown (30.0%), CBD (16.8%) and Katy Fwy/Energy Corridor (12.5%) over the prior 6 months, which have collectively accounted for nearly 3 Updated 4/1/18 million SF or 59% of the overall market’s leasing volume. SUBMARKET RENTAL RATE RANKING Submarket Rental Rate Ranking Rental Rates RENTAL RATES Rental Y-O-Y % ($/SF/Yr.($/SF/Yr. Full Full Service Service)) Rank Submarket Rate Change $36 1 Central Business District $41.10 1.6% $34 2 Galleria / Uptown $36.45 4.8% $32 $30 3 Greenway Plaza $33.44 0.5% $28 4 Katy Freeway $30.02 -2.6% $26 5 Midtown / Allen Parkway $29.96 -3.1% $24 6 San Felipe / Voss $29.73 -1.0% $22 7 The Woodlands / Conroe $29.29 -4.7% $20 8 Westchase $28.81 -3.3% $18 9 West Belt $27.92 4.3% Q1 15 Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Q1 18 Updated 4/1/2018 10 S. Main / Medical Center / South $27.84 2.4% Class A Class B 11 Katy/Grand Parkway West $27.75 0.6% 12 Fort Bend / Sugar Land $26.79 1.4% Total Leasing Activity 13 Bellaire $24.29 -1.8% DIRECT LEASINGRolling 12- MonthsACTIVITY Rolling 12-Months 14 Kingwood / Humble $22.92 -3.2% 16,000 15 Gulf Freeway / Pasadena $22.21 3.4% 14,000 16 Northwest Freeway / North Loop W $21.45 0.5% 12,000 17 North Houston / IAH / N Belt $20.31 -3.3% 10,000 18 NASA / Clear Lake $20.26 2.8% 8,000 19 FM 1960 $19.87 3.3% 6,000 20 Richmond / Fountainview $17.19 0.8% In Thousands of SF 4,000 21 Southwest Beltway 8 / Hillcroft $17.08 1.2% 2,000 22 Baytown & I-10 East $16.92 -8.1% 0 Q1 15 Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Q1 18

Class A Class B 5 PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON AT A Q1 OFFICE MARKET MAR KET GLANCE 2018

CONSTRUCTION

• Developers completed six office buildings totaling 498,849 SF during the first quarter, which were already 83.6% pre-leased. Over the trailing 12 months, developers have completed nearly 2.7 million SF of new office construction (excluding corporate-owned projects). • The construction pipeline has tapered off dramatically to its lowest level in six years with only 1.9 million SF of competitive office space under construction, of which 53.9% is preleased. • The submarkets with the largest concentration of office construction underway include the CBD (778K SF) and The Woodlands (727K SF), which collectively account for 79.2% of Houston’s office development pipeline. RECENT ANNOUNCEMENTS • The largest construction project underway is Skanska’s 778,344 SF Capitol Tower project in the CBD, which commenced construction last year with a 210,000 SF • Apache Corp. signed a 524K SF lease renewal prelease commitment by Bank of America. for 5 years at Post Oak Central One & Three, • There are also two significant build-to-suit projects underway near Springwoods replacing its 26-month extension signed in 2Q17. Village including HP’s two-building campus totaling 378,000 SF and American • PFS Group secured a 55K SF lease renewal at Bureau of Shipping’s 303,000 SF building at CityPlace 2 which are both slated to 2600 North Loop Freeway West. deliver by late 2018/early 2019. • FairfieldNodal leased 47K SF at Air Liquide • The largest construction projects to deliver during the first quarter included Center South with expected occupancy in 2Q18. Lonza Group’s 250,000 SF build-to-suit in South Houston and Tilman Fertita’s • City of Houston Housing Department signed a mixed-use luxury high-rise development dubbed The Post Oak, which includes 44K lease and IQOR secured a 35K SF lease at 104,579 SF of boutique office space in the Galleria. Central Square located at 2100 Travis Street. • Even though Houston’s office construction activity is winding down from its • KHOU 11 leased 43K SF at 5718 Westheimer recent boom that resulted in the delivery of over 23 million SF of competitive Road with plans to occupy space early next year space over the past five years, the flight to quality and tenant demand for after being displaced from its longtime home on amenity-rich options are trends that will continue throughout 2018. Allen Parkway during Hurricane Harvey. • New construction will remain a valid alternative, as tenants appear willing to pay • AMD Global recently broke ground on a 102K SF a premium for high quality office buildings that offer the latest workplace trends Class A medical office building currently 65% Updatedas they seek 4/17/2018 to retain and attract the most skilled employees. However, significant pre-leased, which is the first project to break pre-leasing will be required for any new development to move forward in the ground in Hedwig Village in 30 years. near future. • Occidental Petroleum is evaluating the possibility of acquiring ConocoPhillips’ 1.4 Construction Pipeline million SF campus on 62 acres that will become CONSTRUCTION PIPELINE entirely vacant with their relocation to Energy 12,000 Center Four later this year. Occidental currently leases 961K SF in the Greenway submarket. 10,000 • Lincoln Property plans to invest $100 million into its recently acquired 2 million SF, six-building 8,000 Greenspoint Place portfolio. Renovations will 6,000 kick off in the newly dubbed CityNorth campus with work on the buildings’ exteriors and 4,000

lobbies, adding an outdoor running track and In Thousands of SF creating a 6K SF open-concept hub dubbed 2,000 Third Place. • Halliburton plans to auction off its Oak Park 0 Campus at 10200 Bellaire Blvd in April. The Q1 15 Q3 15 Q1 16 Q3 16 Q1 17 Q3 17 Q1 18 48-acre site includes a 605K SF office building Under Construction Delivered that has been marketed as a redevelopment opportunity since late 2016 as the company consolidated to their North Belt campus. SIGNIFICANT PROJECTS UNDER CONSTRUCTION • Hewlett Packard Enterprises has placed their % PRE- TARGET 74-acre campus in Northwest Houston on the PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT(S) LEASED DEVELOPER COMPLETION market for sale, which includes 2 million SF of Capitol Tower 778,344 CBD Bank of America; Quantum 32% Skanska 2Q 2019 office, manufacturing and laboratory space at CityPlace 2* 326,800 Woodlands ABS 94% Patrinely Group 4Q 2018 1145 Compaq Center W. Drive. HP Building 1* 189,000 Woodlands HP 100% Patrinely Group 1Q 2019 HP Building 2* 189,000 Woodlands HP 100% Patrinely Group 1Q 2019 Hedwig Place 102,474 Katy Freeway Memorial Plastic Surgery 45% Stream / AMD Global 1Q 2019 Northeast Medical Tower II 100,000 Kingwood/Humble N/A 0% Health Trust of America 3Q 2018 6

PAGE Note: * Build-to-suit; Corporate owned o ce buildings (excluded from competitive statistics & above table)

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT AT A HOUSTON MAR KET GLANCE OFFICE MARKET Q1 2018

SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE TOTALDIRECT SPACE NET AVAILABLE ABSORPTION CONSTRUCTIONDIRECT NET ABSORPTION ASKING RENTCONSTRUCTION ASKING RENT Total Total Direct DirectCompletions Under Completions Under Submarket Submarket Inventory SF Direct SubleaseInventory Occupancy SF DirectCurrent Qtr.SubleaseYear To DateOccupancyCurrent QtrCurrentConstruction Qtr. Year To DateClass ACurrentClass Qtr B Construction Class A Class B Central Business District Central39,079,118 Business District8,247,571 2,245,36239,079,11882.9% 8,247,571-203,766 2,245,362-203,766 82.9%0 -203,766778,344 -203,766$44.32 0$29.02 778,344 $44.32 $29.02 Galleria / Uptown Galleria23,962,518 / Uptown 4,765,072 681,06123,962,51883.1% 4,765,072186,970 681,061186,970 83.1%104,579 186,970 0 186,970$38.48 104,579$26.71 0 $38.48 $26.71 Greenway Plaza Greenway10,855,627 Plaza 2,034,311 151,33510,855,62783.8% 2,034,311-14,114 151,335-14,114 83.8%0 -14,114 0 -14,114$36.43 0$26.80 0 $36.43 $26.80 Katy Freeway Katy 31,005,490Freeway 7,105,079 2,616,79931,005,49080.9% 7,105,079-238,715 2,616,799-238,715 80.9%0 -238,715102,474 -238,715$35.52 0$21.99 102,474 $35.52 $21.99 Westchase Westchase15,165,731 3,267,464 1,379,76715,165,73182.1% 3,267,464-22,159 1,379,767-22,159 82.1%0 -22,159 0 -22,159$35.22 0$19.68 0 $35.22 $19.68 North Houston / IAH / N Belt North12,484,884 Houston / IAH6,241,747 / N Belt 693,18812,484,88458.8% 6,241,747-19,207 693,188-19,207 58.8%0 -19,207 0 -19,207$23.93 0$16.08 0 $23.93 $16.08 Northwest Freeway / N Loop West Northwest8,980,174 Freeway / 2,054,962N Loop West 50,8768,980,17479.8% 2,054,962-53,891 50,876-53,891 79.8%0 -53,891 0 -53,891$24.19 0$19.48 0 $24.19 $19.48 NASA / Clear Lake & SE Outlier NASA7,189,260 / Clear Lake & SE1,631,337 Outlier 17,3407,189,26078.3% 1,631,33755,888 17,34055,888 78.3%0 55,888 0 55,888$26.64 0$19.11 0 $26.64 $19.11 Fort Bend / Sugar Land / SW Outlier Fort Bend7,375,217 / Sugar Land880,498 / SW Outlier 396,6457,375,21788.4% 880,498-23,731 396,645-23,731 88.4%28,625 -23,731113,771 -23,731$30.16 28,625$24.94 113,771 $30.16 $24.94 Richmond / Fountainview Richmond1,248,968 / Fountainview126,700 0 1,248,96890.4% 126,700-22,242 0-22,242 90.4%0 -22,242 0 -22,242 - 0$17.53 0 - $17.53 San Felipe / Voss San Felipe5,199,756 / Voss 1,141,628 74,5265,199,75679.5% 1,141,628-74,952 74,526-74,952 79.5%0 -74,952 0 -74,952$35.91 0$24.81 0 $35.91 $24.81 Bellaire Bellaire3,371,221 486,346 98,3763,371,22186.7% 486,346-12,360 98,376-12,360 86.7%0 -12,360 0 -12,360$25.09 0$23.99 0 $25.09 $23.99 Midtown / Allen Parkway Midtown5,893,641 / Allen Parkway854,947 52,0585,893,64186.1% 854,947-138,195 52,058-138,195 86.1%0 -138,195 0 -138,195$32.31 0$27.62 0 $32.31 $27.62 FM 1960 FM 19609,541,609 1,953,822 56,1799,541,60981.3% 1,953,822-87,338 56,179-87,338 81.3%43,600 -87,33829,904 -87,338$26.93 43,600$18.04 29,904 $26.93 $18.04 Kingwood / Humble / NE Outlier Kingwood1,436,286 / Humble / 144,487 NE Outlier 1,7541,436,28690.4% 144,4879,907 1,7549,907 90.4%0 9,907100,000 9,907$29.63 0$22.69 100,000 $29.63 $22.69 Southwest Beltway 8 / SW / Hillcroft Southwest9,905,378 Beltway 82,181,287 / SW / Hillcroft 127,6369,905,37880.2% 2,181,287-68,858 127,636-68,858 80.2%0 -68,858 0 -68,858$19.07 0$16.55 0 $19.07 $16.55 S. Main / Medical Center / South S. Main9,261,442 / Medical Center639,749 / South 110,6669,261,44293.6% 639,749247,198 110,666247,198 93.6%250,000 247,19850,000 247,198$33.55 250,000$26.70 50,000 $33.55 $26.70 The Woodlands / Conroe The Woodlands11,846,444 / Conroe1,768,332 222,37711,846,44485.4% 1,768,332101,779 222,377101,779 85.4%0 101,779726,752 101,779$33.13 0$25.53 726,752 $33.13 $25.53 Gulf Freeway / Pasadena Gulf Freeway3,379,050 / Pasadena586,258 10,5553,379,05086.0% 586,258-26,278 10,555-26,278 86.0%0 -26,278 0 -26,278 - 0$23.37 0 - $23.37 Baytown / I-10 East Baytown1,096,564 / I-10 East 156,704 0 1,096,56486.5% 156,704-21,308 0-21,308 86.5%0 -21,308 0 -21,308 - 0$16.77 0 - $16.77 Katy / Grand Parkway West Katy /2,896,314 Grand Parkway 539,597West 64,3662,896,31481.1% 539,59777,350 64,36677,350 81.1%72,045 77,350 0 77,350$27.59 72,045$34.33 0 $27.59 $34.33 West Belt West 4,997,893Belt 1,562,780 379,2764,997,89378.0% 1,562,780-164,509 379,276-164,509 78.0%0 -164,509 0 -164,509$29.55 0$23.09 0 $29.55 $23.09 Totals Totals226,172,585 48,370,678 9,430,142226,172,58581.7%48,370,678-512,531 9,430,142-512,531 81.7%498,849 -512,5311,901,245-512,531$35.04 498,849$21.57 1,901,245 $35.04 $21.57

METHODOLOGY

PROPERTY SERVICESPROPERTY | SERVICES DEVELOPMENT | DEVELOPMENT | INVESTMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON OFFICE MARKET Q1 2018

Marci Phillips Michael Sieger Allie Hubbard Courtney Buckout Angelina Hsieh Senior Vice President, Vice President, Vice President, Leasing Manager Leasing Manager Leasing Leasing Leasing 713.209.5959 713.209.5737 281.444.6434 713.209.5930 713.209.5975 [email protected] [email protected] [email protected] [email protected] [email protected]

Blaine Sinclair Livy White Madeline Gregory Ariel Guerrero James Decman Leasing Manager Leasing Manager Leasing Manager Senior Vice President, Research Manager 713.209.5794 713.209.5979 713.209.5734 Director of Research 713.209.5971 [email protected] [email protected] madeline.gregory@ 713.209.5704 [email protected] pmrg.com [email protected]

PMRG’s portfolio, including projects managed for third parties, includes commercial office buildings, mixed-use centers, corporate headquarters, industrial buildings, medical facilities, high-rise multifamily buildings and re- appropriated military facilities. Doug Berry Vice President, Our goal is to generate exceptional returns for our clients and investors by focusing on real estate fundamentals. Creative Director For additional information, visit www.pmrg.com. 713.209.5897 [email protected] MAR KET AT A GLANCE

HOUSTON OFFICE MARKET REPORT FOURTH QUARTER 2017

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q4 Office Market Q4 2017 2017 ECONOMIC OVERVIEW

The Houston metro economy continues to expand at a steady pace as payroll employment rebounds strongly in the wake of Hurricane Harvey. Houston continues to shake off the oil bust with 48,500 jobs created over the past 12 months ending in November 2017, representing a 1.6% increase for the period. Three industry sectors accounted for most of the annual growth—professional & business services (13,600 jobs); manufacturing (13,000 jobs); and education and health services (9,800 jobs). With oil prices climbing near $60 a barrel and a thriving national economy adding more support, the local job market has significantly improved, following nearly two years of layoffs and hiring freezes.

Even though the number of rigs working in oil fields across the U.S. has more than doubled since the summer of 2016, Houston’s energy employment growth has remained TABLE OF CONTENTS flat. On a positive note, the energy sector’s recovery has shown signs of moving to firmer ground as oil prices are rising, inventories of petroleum products are falling and energy Economic Overview...... 2 firms are reporting solid profits after years of losses. In addition, OPEC and non-OPEC Office Market Assessment...... 3 countries led by Russia agreed to extend crude production until the end of 2018 despite Net Absorption & Occupancy...... 4 losing market share. WTI crude oil prices increased 15.4% over the fourth quarter on the Rental Rates & Leasing Activity...... 5 back of geopolitical turmoil in the Middle East and in anticipation of this agreement. This Construction...... 6 provides incentive to a U.S. energy industry that is gaining momentum in ramping up oil production. Houston’s fortunes will depend on whether drilling rigs can keep working Submarket Statistics & Methodology...... 7 Updated 10/2/2017 in Texas oil fields well into 2018, providing sales and orders for production companies, Our Team...... 8 manufacturers and energy service firms that employ tens of thousands across the region.

Employment Trends

120 5% 100 80 3% FOR INFORMATION: 60 Thousands 40 20 1% 0 -20 -1% WADE BOWLIN -40 President -60 -80 -3% Central Division -100 -120 -5% 713.209.5753 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17F18F19F [email protected] Jobs Added Annual % Change Updated 12/27/17 JOHN SPAFFORD Source: U.S. Bureau of Labor Statistics, Moody's Analytics, University of Houston's Center for Regional Forecasting Executive Vice President Employment Growth by Sector Director of Leasing HEALTH 713.209.5823 12-MONTHS CURRENT PRIOR ANNUAL (Improving [email protected] READING READING CHANGE or Declining) Mining 86.6 85.7 1.1% Up ARIEL GUERRERO Construction 213.4 215.4 -0.9% Down Manufacturing 230.9 217.9 6.0% Up Senior Vice President, Research Trade, Transportation & Utilities 618.1 618.3 0.0% Down 713.209.5704 Information 32.0 33.1 -3.3% Down [email protected] Financial Activities 160.6 155.9 3.0% Up Professional & Business Services 486.6 473.0 2.9% Up Education & Health Services 395.5 385.7 2.5% Up Leisure & Hospitality 315.7 314.4 0.4% Up Other Services 107.9 107.2 0.7% Up Government 422.8 415.0 1.9% Up Totals 3,070.1 3,021.6 1.6% Up 2 Source: U.S.U.S. Bureau Bureau of of Labor Labor Statistics. Statistics; Employment Employment Data Data as of as November of November 2017 2017 (P) 3 PAGE PAGE All Employees, In in Thousands Thousands PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q4 Office Market Q4 2017 2017 OFFICE MARKET ASSESSMENT

Houston’s office market fundamentals remain soft but demonstrated encouraging signs of turning the corner with 125,644 Sf of positive direct net absorption during the fourth quarter, the largest quarterly absorption gain since 2015. Despite the modest gains, the office sector has a steep hill to climb after recording its largest negative absorption reading in over a decade with 1.6 million SF of occupancy losses in 2017. The Class A market managed to stay afloat with 111,366 SF of direct net absorption during the fourth quarter with its second consecutive quarterly gain, but still ended the year with 354,925 SF of occupancy losses for 2017. The Class A direct occupancy rate slightly declined by 40 basis points to 80.7% during the quarter, and has plunged by 210 basis points over the prior 12 months as new supply outpaced demand. Meanwhile, the Class B sector reported negative 30,689 SF of direct net absorption during the quarter, and suffered nearly 1.2 million SF of occupancy losses since the beginning of the year. As HOUSTON JOB GROWTH: a result, Class B direct occupancy rates declined 10 basis points to 82.8% during the The Greater Houston Partnership forecasts that Houston quarter and have dropped 120 basis points over the past 12 months. will gain 45,500 overall jobs in 2018. Meanwhile, Dr. Bill Gilmer with University of Houston’s Institute for Although leasing activity has demonstrated signs of picking up over the past year, Regional Forecasting has issued a best-case forecast scenario that Houston could add 69,900 jobs in 2018 if Houston’s office market continues to experience softness as leasing volume during the a sustained drilling rebound takes place, which would quarter failed to surpass its 10-year quarterly average for the eighth consecutive quarter. translate into an annual growth rate of 2%, matching On a positive note, there is a sense of renewed optimism resulting in increased tour the historical average of the past 25 years. activity as tenants are coming off the sidelines. Certain submarkets such as the CBD have experienced a significant uptick in leasing activity this past year as tenants realize CRUDE OIL PRICE FORECAST: that now is a favorable time to strike a deal and lock-in reduced rental rates on a lease. West Texas Intermediate crude oil (WTI) has traded between $45 and $60/bbl over most of the past year, FORECAST rebounding from the bottom of that range during the summer months to end December at just under $60/ bbl. The U.S. Energy Information Administration has • Houston’s office leasing market fundamentals are expected to remain soft as the forecasted WTI oil price to average $50/bbl in the first- energy sector will likely see continued M&A activity that could bring additional half of 2018 and $54/bbl in the second-half. blocks of space on the market due to redundancies. • Landlords will face additional challenges as many sublease listings will roll over to DIVERSIFIED ECONOMIC DRIVERS: direct space as their agreements expire, further impacting the direct occupancy The region has become more diversified but the rates. On the bright side, landlords that receive direct space are back in the driver energy sector still accounts for almost half of the local seat and no longer have to compete with tenants willing to sublease their premises economy. The Port of Houston is the 10th largest port at very low recovery rates. in the world and ranks first nationally in international • With the “flight to quality” trend remaining prevalent, property owners will continue waterborne tonnage handled. The Texas Medical to focus upon significant capital improvement programs to enhance their assets to Center is the largest of its kind in the world – with a Updated 12/27/2017remain competitive with both new office developments as well as existing buildings local economic impact of $10 billion per year. within their direct competitive set - all in order to retain and attract tenants. MARKET TREND INDICATORS Office Market Trends Current Change from Previous 12-month Quarter Quarter Year Forecast 10,000 90% Direct Occupancy 82.1% 8,000 88% Trailing 12 mos. Direct Net -1,661,338 Absorption 6,000 86% Under Construction 2,246,791 4,000 84% Direct Asking Rents $29.01 2,000 in Thousands of SF in Thousands 0 82%

-2,000 80% '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17F'18F'19F

2 3 PAGE Direct Net Absorption Completions Direct Occupancy PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q4 Office Market Q4 2017 2017 NET ABSORPTION & OCCUPANCY

• The Katy Freeway/Energy Corridor led all submarkets with 163,561 SF of direct net absorption gains during the quarter, with the bulk of the quarterly gains taking place as tenants moved into the new office projects. • The Woodlands continues to be a bright spot with 100,556 SF of direct net absorption during the quarter, pushing the yearly total to 371,154 SF. The Class A sector accounted for 84,959 SF of the quarterly growth. • Greenspoint/North Belt managed to post 67,671 SF of quarterly absorption growth but remains an underperforming submarket with 770,706 SF of occupancy losses in 2017. The submarket’s direct occupancy now stands at 58.6%, down 690 basis points year-over-year. • The Fort Bend/Sugar Land submarket posted 55,903 SF of quarterly absorption, bringing the yearly total to 151,107 SF. The majority of the leasing gains occurred Even though office-using employment growth is expected to steadily in Class B properties due to the relative tightness in the Class A sector. improve throughout 2018, Houston’s office market will take quite • Westchase posted 22,128 SF of quarterly absorption gains, with losses in Class B some time to heal due to the abundance of sublease and shadow properties dampening the 54,093 SF gains experienced within the Class A sector. space. As a result, future leasing demand will remain constrained The occupancy growth largely resulted from Lockton’s relocation into 116,250 SF until energy firms start hiring again and begin to backfill their space at 3657 Briarpark Drive, delivered during the quarter. before expanding into additional space • The CBD recorded negative 91,282 SF of direct net absorption during the fourth quarter, bringing the yearly occupancy losses up to 912,647 SF. The CBD Class A WADE BOWLIN direct occupancy rate has plunged by 490 basis points since year-end 2016 largely President due to the addition of new inventory and tenant downsizings. Central Division • The San Felipe/Voss submarket recorded negative 121,195 SF of direct net absorption as the Class A sector accounted for 69,236 SF of the losses. The largest Updated 12/27/17 Updated 12/27/2017vacancies involved Lockton leaving behind 84,000 SF at San Felipe Plaza and EMS SUBMARKET OCCUPANCY RANKING giving back 22,638 Sf at 2000 Bering. Submarket Occupancy Ranking Occ. Y-O-Y % Direct Net Absorption vs. Completions Rank Submarket Rate Change 1 S. Main / Medical Center / South 93.1% 4.0% 3,500 2 Richmond / Fountainview 92.6% 4.3% 3,000 2,500 3 Kingwood / Humble 90.4% 1.4% 2,000 4 Fort Bend / Sugar Land 88.8% 3.0% 1,500 5 Baytown & I-10 East 88.5% 4.5% 1,000 500 6 Midtown / Allen Parkway 88.1% 1.8% 0 In Thousands of SF In 7 Bellaire 87.8% -1.1% -500 8 Gulf Freeway / Pasadena 86.8% -0.1% -1,000 -1,500 9 Greenway Plaza 83.9% -2.3% Q4 14 Q2 15 Q4 15 Q2 16 Q4 16 Q2 17 Q4 17 10 The Woodlands / Conroe 84.3% 1.4%Updated 12/27/2017 11 Central Business District 83.6% -4.4% Direct Net Absorption Completions 12 Westchase 82.8% -1.1% 13 FM 1960 82.4% -1.4% Direct Occupancy Rates 14 Galleria / Uptown 82.6% -2.7% 15 San Felipe / Voss 80.7% -2.7% 92% 16 Katy Freeway 81.7% -1.3% 90% 17 West Belt 81.3% 2.3% 88% 18 Southwest Beltway 8 / Hillcroft 80.7% -3.3% 19 Northwest Freeway / North Loop W 79.7% -1.8% 86% 20 Katy/Grand Parkway West 79.6% 3.0% 84% 21 NASA / Clear Lake 78.4% -3.5% 82% 22 Greenspoint / IAH / N Belt 58.6% -6.9% 80% Q4 14 Q2 15 Q4 15 Q2 16 Q4 16 Q2 17 Q4 17

4 Class A Class B 5 PAGE PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q4 Office Market Q4 2017 2017 RENTAL RATES & LEASING ACTIVITY

• Citywide Class A full-service gross asking rents slightly decreased by $0.12 to $34.72 per SF during the fourth quarter but remain 1.0% or $0.33 above their level recorded 12 months ago largely due to new product being added to the inventory. • Class B asking rents slightly increased by $0.20 to $21.82 per SF (gross) during the fourth quarter but remain $0.15 below their level recorded 12 months ago. • Despite the overall increase in weighted average asking rents, concessions remain elevated throughout the market with attractive concession packages and tenant improvement allowances offered in order to maintain the highest face rents. • Sublease inventory declined by 1.1 million SF to 9.1 million SF during the quarter, and has dropped by 24.9% since its peak of 12.1 million SF in 3Q16. • Sublease inventory represents 16.6% of the total space available and accounts for 4.0% of the citywide rentable inventory, with the largest share found in the Katy Freeway/Energy Corridor (25.2%), CBD (22.6%) and Westchase (15.9%) submarkets. Concessions to tenants are continuing even though quoted rental rates • The reduction in sublease inventory has resulted from a significant volume of have remained relatively steady. These aggressive concession packages sublease deals being inked, spaces returning to the landlord via expirations and include significant free rent periods, abated or discounted parking and some tenants opting to retain their space by withdrawing their sublease listings. enhanced building amenities • Sublease space availability will remain a concern with just over 4.4 million SF or 54% of the sublease spaces greater than 10,000 SF still set to expire within 3 years. JOHN SPAFFORD • Leasing activity for deals 10K SF or larger was primarily concentrated in the CBD Executive Vice President, Director of Leasing (18.2%), Galleria/Uptown (16.3%) and Katy Fwy/Energy Corridor (15.9%), which Central Division collectively accounted for half of the quarterly leasing activity. Updated• 12/27/2017There were 13 large leases exceeding the 100K SF mark, which collectively accounted for 34.9% of the cumulative SF leased above 10K SF in 2017. Most Updated 12/27/17 notably, the CBD accounted for 6 large deals above 100K SF last year. SUBMARKET RENTAL RATE RANKING Rental Rates Submarket Rental Rate Ranking ($/SF/Yr. Full Service) Rental Y-O-Y % Rank Submarket Rate Change $36 $34 1 Central Business District $41.00 1.5% $32 2 Galleria / Uptown $35.39 1.0% $30 3 Greenway Plaza $33.10 -0.4% $28 4 Katy Freeway $30.94 -0.4% $26 5 Midtown / Allen Parkway $30.66 -3.4% $24 6 San Felipe / Voss $29.24 -2.7% $22 7 The Woodlands / Conroe $28.70 -6.4% $20 8 Westchase $28.62 -4.2% $18 Q4 14 Q2 15 Q4 15 Q2 16 Q4 16 Q2 17 Q4 17 9 Katy/Grand Parkway West $28.48 -0.1% 10 West Belt $28.18 4.5% Updated 12/27/2017 Class A Class B 11 S. Main / Medical Center / South $27.68 3.3% 12 Fort Bend / Sugar Land $26.82 4.2% Total Leasing Activity 13 Bellaire $24.11 -1.9% Rolling 12-Months 14 Kingwood / Humble $22.79 0.5% 16,000 15 Gulf Freeway / Pasadena $21.89 2.1% 14,000 16 Northwest Freeway / North Loop W $21.83 2.3% 12,000 17 NASA / Clear Lake $20.55 3.8% 10,000 18 Greenspoint / IAH / N Belt $20.50 -4.7% 8,000 19 FM 1960 $19.66 1.4% 6,000 20 Baytown & I-10 East $18.14 -1.9% In Thousands of SF In 4,000 21 Southwest Beltway 8 / Hillcroft $17.73 4.6% 2,000 22 Richmond / Fountainview $17.56 2.0% 0 Q4 14 Q2 15 Q4 15 Q2 16 Q4 16 Q2 17 Q4 17

4 Class A Class B 5 PAGE PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q4 Office Market Q4 2017 2017 CONSTRUCTION

• Construction levels have tapered off dramatically to their lowest level in six years with only 2.2 million SF of competitive office space currently under construction, of which 62.4% is preleased (excluding corporate-owned projects). • The submarkets with the largest concentration of office construction underway include the CBD (778K SF), The Woodlands (705K SF), and S. Main/Medical Center (300K SF), which collectively account for 79.4% of Houston’s office development pipeline. • The largest construction project currently underway is Skanska’s 778,344 SF Capitol Tower project in the CBD, which started construction earlier in 2017 with a 210,000 SF prelease commitment by Bank of America. • There are also two significant build-to-suit projects underway near Springwoods Village including HP’s two-building campus totaling 378,000 SF and American RECENT ANNOUNCEMENTS Bureau of Shipping’s 303,000 SF building at CityPlace 2 which are both slated to • The largest lease transaction during the fourth deliver by late 2018/early 2019. quarter involved Stewart Title leasing 156,000 SF • Developers completed seven office buildings totaling 602,468 SF during the fourth of Class A office space from BHP Billiton at 1360 quarter, which were already 49.2% pre-leased. For the entire year, developers Post Oak Blvd. The move will occur at mid-year delivered nearly 2.8 million SF of new office construction (excluding corporate- 2019 and will result in a relocation from Post Oak owned projects), down from nearly 3.8 million SF delivered in the prior year. Central. • The largest construction projects to deliver during the fourth quarter included • Talos Energy secured a 97,934 SF lease at Three the 188,547 SF office component of the Kirby Collection mixed-use project in Allen Center, which will result in an expansion the Greenway submarket and the 187,011 SF Lockton Place office project in the and relocation within the complex after acquiring Westchase submarket. Stone Energy in a nearly $2B merger. • Even though Houston’s office construction activity is winding down from its recent • Cigna signed a 91,130 SF lease at Brookhollow boom that resulted in the delivery of nearly 22.7 million SF over the past five years, Central I in the North Loop/Northwest submarket, the flight to quality and tenant demand for amenity-rich options are trends that with expected occupancy by mid-year 2018. Updatedwill continue 12/27/2017 into 2018. • An undisclosed call center has leased 76,500 SF at • New construction will remain a valid alternative for large companies still willing Southwest Corporate Center. to pay higher rents in brand new office buildings that offer the latest workplace • WeWork, a co-working office space company, trends. However, significant pre-leasing will be required for any new development opened its first Houston location in the Galleria Updatedto move 7/6/2015 forward in the near future.Construction Pipeline with a 60,011 SF lease at Galleria Tower I. In addition, Westlake Chemical Corp. recently leased 14,000 50,588 SF within the same building. • RBC Capital Markets signed a 56,584 SF lease at 609 12,000 Construction Pipeline Main at Texas, which will result in a consolidation 10,000 and relocation from two office locations in the 14,000 Galleria. 8,000 • Law firm Chamberlain Hrdlicka recently signed a 12,0006,000 long-term lease renewal for 55,178 SF at Two Allen 10,000 Center in the CBD. Thousands of SF In 4,000 • Wood Mackenzie signed a 53,285 SF lease renewal 8,0002,000 at San Felipe Plaza. • Envoy Mortgage secured a 40,000 SF lease at 6,0000 Block 10 West Office Park. Q4 14 Q2 15 Q4 15 Q2 16 Q4 16 Q2 17 Q4 17

In Thousands of SF In 4,000 • Par Pacific Holdings, Inc. signed a 37,236 SF lease Under Construction Delivered at CityCentre Five, which will result in a relocation Updated2,000 12/27/17 from a nearby location in the Memorial City area. • Quantum Energy Partners secured a pre-lease SIGNIFICANT0 PROJECTS UNDER CONSTRUCTION Q2 12 Q4 12 Q2 13 Q4 13 Q2% PRE- 14 Q4 14 Q2TARGET 15 commitment at Capitol Tower, taking the top PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT(S) LEASED DEVELOPER COMPLETION floor totaling 31,400 SF. The private equity and Capitol Tower 778,344 UnderCBD ConstructionBank of AmericaDelivered 31% Skanska 2Q 2019 venture capital firm plans to occupy this space in Springwoods Village - CityPlace 2* 326,800 Woodlands ABS 94% Patrinely Group 4Q 2018 November 2019 in a relocation from Five Houston Lonza Houston* 250,000 S Main/Med Center Lonza Group 100% Pinchal & Co. 1Q 2018 Center. HP Building 1* 189,000 Woodlands HP 100% Patrinely Group 1Q 2019 HP Building 2* 189,000 Woodlands HP 100% Patrinely Group 1Q 2019 The Post Oak 104,579 Galleria / Uptown Landry's 70% Tellepsen Builders 1Q 2018 Northeast Medical Tower II 100,000 Kingwood/Humble N/A 0% Health Trust of America 3Q 2018 6 7 PAGE Note: * Build-to-suit; Corporate owned office buildings (excluded from competitive statistics & above table) PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q4 Office Market Q4 2017 2017 SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Direct Completions Under Submarket Inventory SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 38,767,891 7,186,894 2,058,028 83.6% -91,282 -912,647 0 778,344 $44.43 $29.27 Galleria / Uptown 23,859,655 4,591,101 753,933 82.6% -13,090 -26,376 0 104,579 $37.47 $26.80 Greenway Plaza 10,887,649 2,035,666 170,274 83.9% -30,376 -58,549 188,547 0 $35.90 $27.36 Katy Freeway 31,085,842 6,737,820 2,302,290 81.7% 163,561 -45,324 86,255 0 $36.80 $22.58 Westchase 15,157,979 3,225,192 1,445,924 82.8% 22,128 -78,253 187,011 0 $34.45 $19.83 Greenspoint/ IAH / N Belt 12,502,305 6,313,344 916,344 58.6% 67,671 -700,706 0 0 $24.07 $16.07 Northwest Freeway / N Loop West 9,055,327 2,162,373 33,486 79.7% -74,302 -126,174 0 0 $24.61 $19.62 NASA / Clear Lake & SE Outlier 7,144,928 1,653,836 22,494 78.4% -19,773 -162,194 25,000 0 $27.29 $19.22 Fort Bend / Sugar Land / SW Outlier 7,320,123 851,584 181,816 88.8% 55,903 151,107 23,600 84,119 $31.17 $24.49 Richmond / Fountainview 1,218,024 118,682 0 92.6% 11,376 35,876 0 0 - $18.51 San Felipe / Voss 5,199,756 1,066,003 72,255 80.7% -121,195 -177,232 0 0 $35.86 $23.79 Bellaire 3,532,239 496,688 107,486 87.8% 22,328 15,051 0 0 $25.64 $23.96 Midtown / Allen Parkway 5,893,641 917,149 61,020 88.1% 56,575 32,322 0 0 $32.54 $28.98 FM 1960 9,438,998 1,874,147 121,996 82.4% -4,216 -122,498 43,600 102,904 $27.08 $17.89 Kingwood / Humble / NE Outlier 1,456,683 157,638 1,414 90.4% 8,488 69,308 0 100,000 $23.00 $22.50 Southwest Beltway 8 / SW / Hillcroft 9,888,392 2,074,641 104,577 80.7% -133,684 -172,440 0 0 $18.96 $17.53 S. Main / Medical Center / South 8,990,597 671,840 99,548 93.1% 42,484 59,283 48,455 300,000 $33.46 $26.26 The Woodlands / Conroe 11,699,361 1,926,334 227,674 84.3% 100,556 371,154 0 704,800 $32.77 $25.39 Gulf Freeway / Pasadena 3,382,062 577,289 8,045 86.8% 28,561 94,934 0 0 - $22.62 Baytown / I-10 East 1,096,564 138,373 1,699 88.5% 11,111 5,257 0 0 - $16.26 Katy / Grand Parkway West 2,673,667 543,787 70,664 79.6% -12,694 70,399 0 72,045 $28.01 $34.50 West Belt 4,995,893 1,533,308 358,531 81.3% 35,514 16,364 0 0 $29.74 $23.91 Totals 225,247,576 46,853,689 9,119,498 82.1% 125,644 -1,661,338 602,468 2,246,791 $34.72 $21.82

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Direct Completions Under Y-O-Y % Property Type Inventory SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Asking Rent Change Class A 122,738,295 27,338,964 7,134,440 80.7% 111,366 -354,925 461,813 2,246,791 $34.72 1.0% Class B 87,404,232 17,544,341 1,811,059 82.8% -30,689 -1,182,388 140,655 0 $21.82 -0.7% Class C 15,105,049 1,970,384 173,999 88.7% 44,967 -124,025 0 0 $17.78 3.8% Totals 225,247,576 46,853,689 9,119,498 82.1% 125,644 -1,661,338 602,468 2,246,791 $29.01 1.9% Please note: 800 Bell, the former Exxon headquarters building in the Houston CBD, is excluded from competitive office inventory statistics since Shoren- stein Properties’ plans to redevelop the 1.3 million sq. ft. Class B office building has been placed on hold. METHODOLOGY

6 7 PAGE PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE Q4 2017

Wade Bowlin John Spafford Brad Sinclair Kim Grizzle-Shapiro Mike Martin President - Central Division Executive Vice President, Executive Vice President, Senior Vice President, Senior Vice President, 713.209.5753 Director of Leasing Leasing Leasing Leasing [email protected] 713.209.5823 713.209.5965 713.209.5940 713.209.5710 [email protected] [email protected] [email protected] [email protected]

Blaine Sinclair Ariel Guerrero James Decman Doug Berry Leasing Manager Senior Vice President, Research Manager Vice President, 713.209.5794 Director of Research [email protected] Creative Director [email protected] 713.209.5704 713.209.5897 [email protected] [email protected]

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON OFFICE MARKET REPORT SECOND QUARTER 2017

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON Q2 Office Market Q2 2017 2017 ECONOMIC OVERVIEW

Houston’s economic indicators signal a modest growth is occurring with 45,300 jobs created over the past 12 months ending in May 2017. This 12-month job growth represents a 1.5% increase, slightly below the 20-year average of 48,500 jobs. Four industry sectors accounted for most of the annual growth—professional & business services (11,600 jobs), government, primarily public education (12,000 jobs), food services & dining establishments (10,200 jobs) and health care (7,100 jobs). Job losses were concentrated in oil and gas extraction (-5,400), construction (-5,300), and wholesale trade (-3,800).

The energy sector appears to be on the road to recovery. West Texas Intermediate oil prices have risen from their 12-year low of $26/bbl in February 2016 to $46/bbl at the end of June. Spurred by the price recovery, drilling activity has more than doubled since 2Q16. Key operational and technology improvements are helping the shale oil industry to TABLE OF CONTENTS endure low oil prices. Oil and gas companies that have survived the two-year downturn have become leaner by drastically cutting operating expenses, paying off debt and Economic Overview...... 2 increasing cash flow. According to law firm Haynes and Boone, only nine firms have filed Office Market Assessment...... 3 for bankruptcy year-to-date, which is a significant improvement compared to the 29 firms Net Absorption & Occupancy...... 4 that filed during the same period last year. The U.S. Energy Information Administration Rental Rates & Leasing Activity...... 5 has forecasted WTI oil prices to average $51/bbl this year and up to $55/bbl in 2018. In Construction...... 6 addition, OPEC and 11 non-OPEC countries agreed in late May to extend existing crude production targets until the end of March 2018. Despite possible short-term constraints Submarket Statistics & Methodology...... 7 Updated 6/20/2017 of capital, rig, and labor availability, the market is poised for a new chapter of growth, Our Team...... 8 driven by activity in the Permian basin.

Employment Trends

120 5% 100 FOR INFORMATION: 80 3% 60 Thousands 40 20 1% 0 WADE BOWLIN -20 -1% -40 President -60 Central Division -80 -3% -100 713.209.5753 -120 -5% [email protected] '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17F 18F

Jobs Added Annual % Change JOHN SPAFFORD Updated 6/26/17 Executive Vice President Source: U.S. Bureau of Labor Statistics, Moody's Analytics, University of Houston's Center for Regional Forecasting Director of Leasing Employment Growth by Sector 713.209.5823 12-MONTHS HEALTH CURRENT ANNUAL (Improving [email protected] PRIOR READING READING CHANGE or Declining) Mining 86.7 88.4 -1.9% Down ARIEL GUERRERO Construction 215.9 221.2 -2.4% Down Senior Vice President, Research Manufacturing 231.8 223.1 3.9% Up Trade, Transportation & Utilities 600.4 605.5 -0.8% Down 713.209.5704 Information 32.0 32.7 -2.1% Down [email protected] Financial Activities 156.0 154.5 1.0% Up Professional & Business Services 477.6 466.0 2.5% Up Education & Health Services 388.7 379.0 2.6% Up Leisure & Hospitality 329.2 317.3 3.8% Up Other Services 111.7 109.0 2.5% Up Government 418.9 406.9 2.9% Up Totals 3,048.9 3,003.6 1.5% Up 2 Source:Source: U.S.U.S. Bureau ofof Labor Labor Statistics. Statistics; Employment Employment Data Data as of as May of May 2017 2017 (P) 3 PAGE AllAll Employees, Employees, Inin Thousands PAGE PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON Q2 Office Market Q2 2017 2017 OFFICE MARKET ASSESSMENT

Although Houston’s economic recovery is underway and the worst of the energy slump appears to be behind us, it will take additional time for the office leasing market to recover. Since the office market typically lags the economy by up to 12 months, it should come as no surprise that Houston’s office market fundamentals remained soft with negative 395,583 SF of direct net absorption during the second quarter, bringing the year-to-date total to over 1.4 million SF of occupancy losses. The Class A market took a hit with 484,701 SF of direct net absorption losses during the second quarter, largely attributed to Noble Energy’s 206,553 SF lease expiring at Northborough Tower. New construction deliveries and tenant departures caused Class A direct occupancy rates to drop by 140 basis points to 81.1% during the quarter and a decline of 290 basis points over the prior 12 months. The Class B sector reported 127,425 SF of positive direct net absorption during the quarter, with the largest occupancy resulting from Kinder Morgan HOUSTON JOB GROWTH: moving into an 82,800 SF office build-to-suit delivered at 300 Beltway Green. Despite the The Greater Houston Partnership forecasts that Houston quarterly gain, Class B direct occupancy rates declined 10 basis points to 82.8% during will gain 29,700 overall jobs in 2017, while University of the quarter and 150 basis points over the past 12 months. Houston’s Institute for Regional Forecasting has issued a best case scenario of up to 54,300 jobs gained in 2017, followed by a strong addition of 79,600 jobs in While leasing activity has remained light for the past two years, increasing tour activity 2018. has demonstrated signs of renewed tenant interest and optimism leading to an actual increase in leasing volume during the first-half of 2017. Recent significant leases signed SUBLEASE SPACE DECLINES: include Apache’s 546,452 SF short-term extension at Post Oak Central One & Three, Bank Houston’s office sublease market has exhibited signs of of America’s 209,447 SF pre-lease commitment at Capitol Tower, and Motiva Enterprises’ stabilization with its third consecutive quarterly decline 204,500 SF lease to expand its headquarters office by 15% at One Allen Center. since hitting a cyclical high of 12.1 million SF in 3Q 2016. During the second quarter, sublease inventory declined FORECAST by 64,563 SF to 11.1 million SF, but still remains well above its 12-year average of 4.6 million SF.

• Tenant consolidations and downsizings coupled with several remaining new DIVERSIFIED ECONOMIC DRIVERS: construction deliveries could push the citywide direct occupancy rate down to The region’s economy has become more diversified approximately 81.6% by year-end 2017, absent any significant new leasing. over the years but the energy sector still accounts for • Landlords will continue to face challenges as many sublease listings begin to roll almost half of the local economy. The Port of Houston over to direct space as their leases expire, further impacting direct occupancy rates. is the 10th largest port in the world – and ranks first in On the bright side, landlords that receive direct space are back in the driver seat and the U.S. in international waterborne tonnage handled. no longer have to compete with tenants willing to sublease their premises at very The Texas Medical Center is the largest of its kind in the low recovery rates. world – with a local economic impact of $10 billion per • Even though office-using employment growth is expected to return by 2018, future year. leasing demand from the energy sector will likely remain suppressed with the Updated 6/27/2017abundance of sublease and shadow space that must be dealt with before tenants lease additional space. MARKET TREND INDICATORS Office Market Trends Current Change from Previous 12-month Quarter Quarter Year Forecast 10,000 90% Direct Occupancy 82.3% 8,000 88% Trailing 12 mos. Direct Net -2,262,714 6,000 Absorption 86% Under Construction 3,302,163 4,000 84% Direct Asking Rents $28.88 2,000 in Thousands of SF in Thousands 0 82%

-2,000 80% '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17F'18F

2 3 PAGE Direct Net Absorption Completions Direct Occupancy PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON Q2 Office Market Q2 2017 2017 NET ABSORPTION & OCCUPANCY

• The Galleria/Uptown area led the market with 117,280 SF of direct occupancy gains during the quarter. The Class A sector solely accounted for growth with the largest quarterly gains taking place in BHP Billiton Petroleum’s newly delivered 600,000 SF build-to-suit building as the firm consolidated from two buildings at Four Oaks Place. • The Woodlands witnessed 96,289 SF of direct net absorption during the quarter. The Class A sector accounted for 100,547 SF of the quarterly growth, with the largest occupancy gains involving Jones & Carter taking 27,025 SF in Sierra Pines II and Huntsman moving into 25,315 SF at Waterway Plaza II. • The South Main/Medical Center submarket posted 85,303 SF of positive direct absorption during the quarter. The largest move-ins occurred in Museum Medical Tower as Vital Allergy & Asthma Center took 24,762 SF of Class A space. Even though leasing activity is expected to increase due to ongoing • The Katy Freeway/Energy Corridor submarket recorded 135,245 SF of negative lease expirations and restructurings, it should only translate into direct absorption during the second quarter. The bulk of the losses occurred in modest growth in the near term since there are many companies the Class A sector as ConocoPhillips left behind 155,050 SF at The Office at Park 10. still reluctant to expand their workforce and make significant capital • The CBD experienced a shuffling of tenants with the largest occupancy gains investment. taking place at the recently completed 609 Main as McKinsey & Co., Hogan Lovells and Russell Reynolds relocated within the submarket. However, space reductions WADE BOWLIN by Energy XXI, Wells Fargo, and ENI Petroleum among others largely contributed President to 151,907 SF of negative direct absorption during the second quarter. Central Division • Greenspoint/North Belt recorded negative 552,261 SF of direct net absorption as the Class A sector accounted for 445,724 SF of the losses. The largest direct vacancies resulted from Noble Energy’s 206,553 SF lease expiring at Northborough Updated 7/3/17 Updated 6/27/2017 Tower and Weatherford International giving back 91,527 SF at World Houston SUBMARKETSubmarket OCCUPANCY Occupancy RANKING Ranking Plaza. Occ. Y-O-Y % Direct Net Absorption vs. Completions Rank Submarket Rate Change 1 S. Main / Medical Center / South 90.4% 2.9% 3,500 2 Richmond / Fountainview 90.0% 1.0% 3,000 3 Kingwood / Humble 90.0% 0.9% 2,500 2,000 4 Bellaire 89.5% -1.7% 1,500 5 Baytown & I-10 East 87.0% 2.4% 1,000 6 Midtown / Allen Parkway 86.8% 1.3% 500 0 7 Fort Bend / Sugar Land 86.2% -1.4% Thousands of SF In -500 8 Gulf Freeway / Pasadena 86.0% 1.8% -1,000 9 Greenway Plaza 85.4% -1.2% -1,500 Q2 14 Q4 14 Q2 15 Q4 15 Q2 16 Q4 16 Q2 17 10 Southwest Beltway 8 / Hillcroft 84.2% 0.5%Updated 6/27/2017 11 FM 1960 83.9% 1.1% Direct Net Absorption Completions 12 Galleria / Uptown 83.8% -3.5% 13 Central Business District 83.5% -5.0% Direct Occupancy Rates 14 Westchase 83.1% -2.7% 15 The Woodlands / Conroe 83.0% -0.8% 92% 16 San Felipe / Voss 82.6% -2.9% 17 Katy Freeway 81.7% -1.1% 90% 18 Northwest Freeway / North Loop W 80.8% 0.4% 88% 19 West Belt 80.0% -1.3% 86% 20 NASA / Clear Lake 79.4% -4.8% 21 Katy/Grand Parkway West 76.5% 3.5% 84% 22 Greenspoint / IAH / N Belt 59.6% -10.0% 82% 80% Q2 14 Q4 14 Q2 15 Q4 15 Q2 16 Q4 16 Q2 17

4 5 PAGE Class A Class B PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON Q2 Office Market Q2 2017 2017 RENTAL RATES & LEASING ACTIVITY

• Citywide Class A full-service gross asking rents slightly increased by $0.63 to $35.06 per square foot during the second quarter of 2017 and have improved by 3.6% or $1.22 over the past 12 months largely due to the combination of new product being added to the inventory and landlords fighting to hold on to face rates. • Class B asking rents declined $0.11 to $21.61 per square foot (gross) during the second quarter but have slightly moved up 0.4% or $0.09 over the prior 12 months. • Even though face rates have remained relatively steady with the addition of new inventory commanding higher rents and increased taxes inflating operating expenses, actual effective rates at which leases are being inked have subsided, and the value of concession packages has increased. • Houston’s sublease inventory declined by 64,563 SF to 11.1 million SF, but still remains well above its 12-year average of 4.6 million SF. The quarterly reduction in sublease inventory largely resulted from Noble Energy returning 204,198 SF of Concessions such as free rent and higher tenant improvement allowances space to the landlord within Northborough Tower. have become more widely offered to tenants even though quoted rental • Sublease inventory represents 19.1% of the total space available and accounts rates have remained steady. Concessions are expected to be around for for 4.9% of the citywide rentable inventory, with the largest share of sublease the long haul until the office market reaches a healthy balance between availability found in the Katy Freeway/Energy Corridor (23.0%) and the CBD (22.7%). supply and demand. • The large sublease inventory is likely to decline with just over 6 million SF or 42.4% of the sublease spaces greater than 10,000 SF expiring within 3 years, which will JOHN SPAFFORD keep direct vacancy elevated well above its 30-year historical average of 15.8%. Executive Vice President, Director of Leasing Central Division • Small and mid-sized leases (10K to 50K SF) accounted for 40% of the cumulative Updated 6/27/2017space leased during the first-half of 2017 above the 10,000 SF. threshold, which is comprised of 81 lease transactions. Meanwhile, leasing activity above the 50,000 SF Updated 6/27/17 mark picked up with 16 deals closed totaling 2.3 million SF during the same period. SUBMARKETSubmarket Rental RENTAL Rate Ranking RATE RANKING Rental Rates ($/SF/Yr. Full Service) Rental Y-O-Y % Rank Submarket Rate Change $36 1 Central Business District $40.72 5.5% $34 2 Galleria / Uptown $35.13 -0.6% $32 3 Greenway Plaza $33.86 3.2% $30 $28 4 Midtown / Allen Parkway $30.94 -4.1% $26 5 The Woodlands / Conroe $30.75 2.3% $24 6 Katy Freeway $30.68 1.2% $22 7 Westchase $29.92 -4.9% $20 8 San Felipe / Voss $29.45 -2.1% $18 9 S. Main / Medical Center / South $28.01 3.6% Q2 14 Q4 14 Q2 15 Q4 15 Q2 16 Q4 16 Q2 17 10 Katy/Grand Parkway West $27.72 2.9% Updated 6/27/2017 11 West Belt $27.67 16.4% Class A Class B 12 Fort Bend / Sugar Land $26.37 4.5% Total Leasing Activity 13 Bellaire $24.17 -2.8% Rolling 12-Months 14 Kingwood / Humble $23.71 4.8% 16,000 15 Gulf Freeway / Pasadena $21.69 -0.6% 14,000 16 Northwest Freeway / North Loop W $21.02 2.0% 12,000 17 Greenspoint / IAH / N Belt $20.67 -2.2% 10,000 18 NASA / Clear Lake $20.03 1.7% 8,000 19 FM 1960 $19.45 -1.2% 6,000 20 Baytown & I-10 East $18.04 1.2%

In Thousands of SF In 4,000 21 Richmond / Fountainview $17.80 -0.7% 2,000 22 Southwest Beltway 8 / Hillcroft $17.02 1.5% 0 Q2 14 Q4 14 Q2 15 Q4 15 Q2 16 Q4 16 Q2 17

4 5 PAGE Class A Class B PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON Q2 Office Market Q2 2017 2017 CONSTRUCTION

• Developers delivered just over 2.0 million SF of new office construction during the first-half of 2017 (excluding corporate-owned projects). During the second quarter of 2017, developers completed four office buildings totaling 1,374,454 SF, which were already 47% pre-leased. • The largest construction project to deliver was 609 Main at Texas, a 1,056,658 SF tower in the CBD submarket, which has secured multiple large leases this past year bringing the building to 50.9% leased. • Leasable office space (excluding corporate-owned projects) currently under construction stands at over 3.3 million SF, with 46.9% of this space already preleased. • Many developers have placed proposed projects on hold, allowing the construction pipeline to drop by 72.1% since hitting its peak of 12.2 million SF of leasable office product that was underway in 3Q 2014. RECENT ANNOUNCEMENTS • Although construction levels have tapered off dramatically, an additional 1.8 • Skanska’s Capitol Tower at 811 Rusk has begun million SF of new product is still scheduled to deliver during the second-half of construction as Bank of America secured a 210,000 2017. Looking ahead, citywide direct occupancy levels will continue to slide as new SF pre-lease commitment to anchor the 778,344 SF supply is expected to outpace demand for the remainder of 2017, with only 43.3% project. The 35-story office tower is expected to be of this new space pre-leased. complete during the first-half of 2019. • The submarkets with the largest concentration of office construction underway • HP signed a 378,000 SF pre-lease commitment include the CBD (778K SF), The Woodlands (705K SF), and South Main/Medical in Springwoods Village that has kick-started Center (372K SF), which accounts for 56% of Houston’s office development pipeline. construction on a two-building campus with • While the construction pipeline appears to be winding down, the flight to quality delivery scheduled for the final quarter of 2018. HP’s continues but any new construction will require significant pre-leasing to move new campus will house about 2,400 employees. Updatedforward 6/30/2017 in the foreseeable future. Build to suit projects such as American Bureau • Thor Equities topped off their 13-story office tower of Shipping and HP’s office projects near Springwoods Village illustrate this trend. at the Kirby Collection in the Greenway submarket Updated 7/6/2015 in 2016 and is expected to complete the 188,547 SF project by 3Q 2017. The office building will be a Construction Pipeline part of a luxury mixed use development. Construction Pipeline • DC Partners, along with Tianqing Real Estate 14,000 Development, recently announced plans for a 6-acre mixed use development in the Midtown 14,00012,000 submarket. Along with a 200,000 SF office tower, the project also plans to include a luxury hotel, 12,00010,000 housing and retail. Construction is expected to 8,000 begin in early 2018. 10,000 • Allianz Real Estate America delivered BHP Billiton 8,0006,000 Tower at 1500 Post Oak Blvd late last year. BHP

Billiton finally moved into the entire 593,850 SF Thousands of SF In 6,0004,000 tower during the second quarter of 2017 after their

In Thousands of SF In 4,000 interior build-out was completed. 2,000 • Patrinely Group broke ground on CityPlace 2 2,0000 during the first quarter, which will be a part of a Q2 14 Q4 14 Q2 15 Q4 15 Q2 16 Q4 16 Q2 17 mixed-use community in North Houston called 0 Springwoods Village. American Bureau of Shipping Q2 12 Q4 12Under Q2 13 Construction Q4 13 Q2Delivered 14 Q4 14 Q2 15 signed a 303,000 SF pre-lease commitment last Updated 6/26/17 year with the build-to-suit project slated to deliver Under Construction Delivered in October 2018. SIGNIFICANT PROJECTS UNDER CONSTRUCTION • Whitestone REIT recently completed the purchase % PRE- TARGET of BLVD Place, the 217K SF mixed-use development PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT(S) LEASED DEVELOPER COMPLETION on South Post Oak in Uptown. Whitestone plans to Capitol Tower 778,344 CBD Bank of America 27% Skanska 2Q 2019 eventually build a six-story mid-rise with 91K SF of Springwoods Village - CityPlace 2 326,800 Woodlands ABS 94% Barker Patrinely Group 4Q 2018 office space atop 46K SF of retail space on a 1.4 acre Lonza Houston 250,000 S Main/Med Ctr Lonza Group 100% Pinchal & Co. 4Q 2017 HP Building 1 & 2 189,000 Woodlands HP 100% Patrinely Group 4Q 2018 tract that was included in the acquisition. Kirby Collection 188,547 Greenway Plaza N/A 0% Thor Equities 3Q 2017 Lockton Place 187,011 Westchase Lockton; Triten 78% Triten RE Partners 4Q 2017 One Grand Crossing - Bldg 1 171,538 Katy/Grand Pky W N/A 0% Trammell Crow Co. 4Q 2017 The Post Oak 104,579 Galleria / Uptown N/A 6% Tellepsen Builders 4Q 2017 6 7 PAGE Note: * Build-to-suit; Corporate owned office buildings (excluded from competitive statistics & above table) PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON Q2 Office Market Q2 2017 2017 SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Completions Under Submarket SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 38,715,451 7,380,604 2,513,276 83.5% -151,907 -964,531 1,056,658 778,344 $44.22 $28.95 Galleria / Uptown 23,852,271 4,399,713 1,124,731 83.8% 117,280 178,464 0 104,579 $37.18 $27.23 Greenway Plaza 10,650,766 1,879,103 211,330 85.4% -56,915 -77,056 0 188,547 $37.09 $26.60 Katy Freeway 30,937,094 6,583,816 2,544,351 81.7% -135,245 -109,696 0 136,255 $37.35 $22.77 Westchase 14,967,365 3,137,300 1,531,456 83.1% -8,542 -115,726 0 187,011 $36.09 $19.82 Greenspoint/ IAH / N Belt 12,440,829 6,087,263 890,977 59.6% -552,261 -636,887 0 0 $24.28 $17.00 Northwest Freeway / N Loop West 9,066,901 1,988,842 37,279 80.8% 20,469 -34,160 0 0 $23.82 $19.36 NASA / Clear Lake & SE Outlier 7,329,735 1,799,988 62,826 79.4% -16,663 -65,932 63,000 25,000 $27.02 $18.67 Fort Bend / Sugar Land / SW Outlier 7,313,220 1,045,721 198,512 86.2% 3,937 36,106 0 271,399 $31.12 $23.98 Richmond / Fountainview 1,264,032 187,626 0 90.0% 31,830 23,085 0 0 - $18.90 San Felipe / Voss 5,242,429 1,100,995 103,672 82.6% -12,964 -7,590 0 0 $36.29 $23.57 Bellaire 3,536,966 516,232 120,858 89.5% 24,600 30,537 0 0 $26.00 $23.49 Midtown / Allen Parkway 5,893,641 1,011,848 148,417 86.8% 56,677 20,656 0 0 $33.87 $27.87 FM 1960 9,399,023 1,817,928 290,752 83.9% 27,194 16,437 0 43,600 $27.12 $17.51 Kingwood / Humble / NE Outlier 1,456,656 161,076 8,730 90.0% 4,222 6,115 0 183,862 $29.63 $23.45 Southwest Beltway 8 / SW / Hillcroft 9,996,556 2,038,450 123,696 84.2% 41,899 4,540 0 0 $19.11 $16.56 S. Main / Medical Center / South 8,949,520 897,185 91,323 90.4% 85,303 46,917 0 372,183 $31.53 $26.47 The Woodlands / Conroe 11,786,125 2,099,348 324,456 83.0% 96,289 156,575 171,996 704,800 $36.47 $25.37 Gulf Freeway / Pasadena 3,380,603 654,588 33,910 86.0% 46,041 68,158 82,800 0 $23.00 $22.33 Baytown / I-10 East 1,096,564 158,944 1,699 87.0% -3,529 -23,965 0 0 - $15.88 Katy / Grand Parkway West 2,555,745 587,143 24,464 76.5% 21,738 40,276 0 306,583 $28.09 $31.25 West Belt 4,985,770 1,271,197 679,251 80.0% -35,036 -41,734 0 0 $30.10 $21.52 Totals 224,817,262 46,804,910 11,065,966 82.3% -395,583 -1,449,411 1,374,454 3,302,163 $35.06 $21.61

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Completions Under Y-O-Y % Property Type SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Asking Rent Change Class A 122,030,720 26,685,579 8,676,227 81.1% -484,701 -711,194 1,228,654 2,912,580 $35.06 3.6% Class B 87,524,507 18,183,302 2,356,068 82.8% 127,425 -661,309 145,800 389,583 $21.61 0.4% Class C 15,262,035 1,936,029 33,671 89.1% -38,307 -76,908 0 0 $17.16 -0.5% Totals 224,817,262 46,804,910 11,065,966 82.3% -395,583 -1,449,411 1,374,454 3,302,163 $28.88 4.0%

Please note: 800 Bell, the former Exxon headquarters building in the Houston CBD, is excluded from competitive office inventory statistics since Shoren- stein Properties’ plans to redevelop the 1.3 million sq. ft. Class B office building has been placed on hold. METHODOLOGY

6 7 PAGE PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q2 2017

Wade Bowlin John Spafford Brad Sinclair Kim Grizzle-Shapiro Mike Martin President - Central Division Executive Vice President Executive Vice President Senior Vice President Senior Vice President 713.209.5753 Director of Leasing Leasing Leasing Leasing [email protected] 713.209.5823 713.209.5965 713.209.5940 713.209.5710 [email protected] [email protected] [email protected] [email protected]

Michael Sieger Marci Phillips Courtney Buckout Allie Hubbard Angelina Hsieh Vice President Senior Vice President Leasing Manager Vice President Leasing Manager Leasing Leasing 713.209.5959 Leasing 713.209.5737 713.209.5930 281.444.6434 [email protected] 713.209.5975 [email protected] [email protected] [email protected] [email protected]

ABOUT PMRG Headquartered in Houston, Texas, PMRG is one of the nation’s leading real estate companies focusing on comprehensive property services, development and acquisitions. With a strategic presence in 30 markets, PMRG provides the highest quality services to its clients and investors. PMRG’s clients and investors include large financial institutions, advisors and high net worth individuals. By capitalizing on the team’s experience and expertise, PMRG has the ability to undertake large and challenging management, leasing, Blaine Sinclair Doug Berry Ariel Guerrero development and acquisition projects. Leasing Manager Vice President Senior Vice President 713.209.5794 Creative Director Research PMRG’s portfolio, including projects managed for third parties, [email protected] 713.209.5897 713.209.5704 includes commercial office buildings, mixed-use centers, corporate [email protected] [email protected] headquarters, industrial buildings, medical facilities, high-rise multifamily buildings and re-appropriated military facilities.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE

HOUSTON OFFICE MARKET REPORT FIRST QUARTER 2017

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q1 Office Market Q1 2017 2017 ECONOMIC OVERVIEW

The Houston metro economy has endured a volatile energy industry creating 18,700 jobs in 2016 according to the benchmark revisions issued in early March by the Texas Workforce Commission, which is approximately 3,000 jobs higher than the original estimate. The revised employment data confirms deep and widespread damage in the oil industry, with 77,200 oil-related jobs lost since December 2014 following the collapse of oil prices and record low drilling activity. Nevertheless, Houston’s economic resilience to these steep losses with no downturn in total employment has been quite remarkable. A strong U.S. economy, robust population growth and the $50 billion in petrochemical plant expansions have helped provide broad support for many local businesses that are not tied to exploration and production.

Energy firms that survived the two-year downturn have become leaner by drastically TABLE OF CONTENTS cutting their operating expenses, paying off debt and increasing cash flow. According to the energy research firm Wood Mackenzie, if oil prices are able to hold at or above $55 Economic Overview...... 2 per barrel, these companies could even see profits in 2017. Fortunately, WTI crude oil Office Market Assessment...... 3 prices have steadily increased from their 12-year low of $26/bbl in February 2016 to $50/ Net Absorption & Occupancy...... 4 bbl at the end of March 2017. Oil has traded around the $50 a barrel since OPEC agreed in Rental Rates & Leasing Activity...... 5 late November to curb production for the first time in eight years, but there is a lingering Construction...... 6 uncertainty around their ability to achieve the targeted production cuts for the first half of 2017. Should markets support higher oil prices, the pace of recovery in the rig count Submarket Statistics & Methodology...... 7 Updated 4/4/2017 and the jobs that follow could accelerate. However, this does not mean that oil prices will Our Team...... 8 rise enough to give Houston’s economy a shot in the arm for potentially two more years.

Employment Trends

120 6% 100 FOR INFORMATION: 80 4%

Thousands 60 40 2% 20 WADE BOWLIN 0 0% President -20 -40 -2% Central Division -60 713.209.5753 -80 -4% [email protected] '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17F 18F

Jobs Added Annual % Change JOHN SPAFFORD Updated 3/30/17 Executive Vice President Source: U.S. Bureau of Labor Statistics, Moody's Analytics, University of Houston's Center for Regional Forecasting Director of Leasing Employment Growth by Sector 713.209.5823 12-MONTHS HEALTH CURRENT PRIOR ANNUAL (Improving [email protected] READING READING CHANGE or Declining) Mining 87.3 93.9 -7.0% Down ARIEL GUERRERO Construction 216.8 219.3 -1.1% Down Manufacturing 226.8 230.3 -1.5% Senior Vice President, Research Down Trade, Transportation & Utilities 602.1 606.6 -0.7% Down 713.209.5704 Information 32.7 32.2 1.6% Up [email protected] Financial Activities 153.8 153.7 0.1% Up Professional & Business Services 468.9 467.3 0.3% Up Education & Health Services 386.4 375.7 2.8% Up Leisure & Hospitality 315.2 304.4 3.5% Up Other Services 106.9 107.4 -0.5% Down Government 414.8 401.6 3.3% Up Totals 3,011.7 2,992.4 0.6% Up 2 Source:Source: U.S. U.S. Bureau Bureau of Laborof Labor Statistics. Statistics; Employment Employment Data Data as of as February of February 2017 2017(P) 3 PAGE PAGE AllAll Employees, Employees, In inThousands Thousands PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q1 Office Market Q1 2017 2017 OFFICE MARKET ASSESSMENT

Houston’s office market continues to experience the remnants of the energy downturn even though there are positive indicators suggesting that the worst may be in the rear- view mirror. Since the office market lags the overall economy by up to 12 months, it should come as no surprise that Houston’s office market fundamentals remained soft with negative 1,053,828 sq. ft. of direct net absorption during the first quarter following 977,163 sq. ft. of occupancy losses in all of 2016. The Class A market took a hit with 226,493 sq. ft. of direct net absorption losses during the first quarter, largely attributed to Freeport McMoran vacating 355,908 sq. ft. at 717 Texas. New construction deliveries and tenant departures caused Class A direct occupancy rates to drop by 30 basis points to 82.5% during the quarter, and plunged by 250 basis points over the prior 12 months. The Class B sector reported 788,734 sq. ft. of negative direct net absorption during the quarter, with KBR’s 316,326 sq. ft. lease termination at 500 Jefferson and Alliance Wood HOUSTON JOB GROWTH: Group Engineering’s 110,480 sq. ft. lease expiration at Parkview I both contributing. As The Greater Houston Partnership forecasts that Houston a result, Class B direct occupancy rates declined 110 basis points to 82.9% during the will gain 29,700 overall jobs in 2017, while University of quarter and 140 basis points over the past 12 months. Houston’s Institute for Regional Forecasting has issued a best case scenario of 27,000 jobs gained in 2017, followed by a strong addition of 74,800 jobs in 2018. While leasing activity in early 2017 remains relatively slow, increasing tour activity has demonstrated signs of renewed tenant interest and optimism likely leading to an actual SUBLEASE SPACE DECLINES: increase in leasing volume during the latter part of 2017. Recent lease transactions During the first quarter, sublease availability declined signed include HP’s 378,000 sq. ft. pre-lease commitment to kick-start construction on a by 678,989 sq. ft. to 11.1 million sq. ft. – its second two-building campus, Targa Resources’ 127,734 sq. ft. lease at 811 Louisiana, IHS securing consecutive quarterly decline since hitting its cyclical a 89,692 sq. ft. lease at 1401 Enclave, Crestwood Partners’ 54,215 sq. ft. sublease at 811 high of 12.1 million sq. ft. in 3Q 2016, but still remains Main Street and McKinsey and Co.’s 35,788 sq. ft. new lease at 609 Main at Texas. well above its 10-year historic average of 4.1 million sq. ft. Total space availability increased by 4.6 million sq. ft. over the past 12 months largely due to newly delivered FORECAST office space and added sublease space in 2016.

• Absent any significant new leasing, tenant consolidations and downsizings coupled DIVERSIFIED ECONOMIC DRIVERS: with several remaining new construction deliveries could push the citywide direct The region’s economy has become more diversified occupancy rate down to around 81.6% by year-end 2017 - its lowest level since 1995. over the years but the energy sector still accounts for • Landlords will face additional challenges as many sublease listings will begin to almost half of the local economy. The Port of Houston roll over to direct space as their agreements expire, further impacting the direct is the 10th largest port in the world – and ranks first occupancy rates. On the bright side, landlords that receive direct space are back in nationally in international waterborne tonnage the driver seat and no longer have to compete with tenants willing to sublease their handled. The Texas Medical Center is the largest of its premises at very low recovery rates. kind in the world – with a local economic impact of • Even though office-using employment growth is expected to return by 2018, future $10 billion per year. Updated 4/4/2017demand from the energy sector will likely remain suppressed with the abundance of sublease and shadow space that can be absorbed before leasing additional space. MARKET TREND INDICATORS Office Market Trends Current Change from Previous 12-month Quarter Quarter Year Forecast 10,000 90% Direct Occupancy 83.1% 8,000 88% Trailing 12 mos. Direct Net -1,914,234 Absorption 6,000 86% Under Construction 3,298,213 4,000 84% Direct Asking Rents $28.50 2,000 in Thousands of SF 0 82%

-2,000 80% '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17F'18F

2 3 PAGE Direct Net Absorption Completions Direct Occupancy PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q1 Office Market Q1 2017 2017 NET ABSORPTION & OCCUPANCY

• The Galleria/Uptown area led the market with 61,184 sq. ft. of occupancy gains during the quarter. The Class A sector accounted for the bulk of the quarterly absorption with 37,311 sq. ft., with the largest gains taking place in Amegy Bank’s newly delivered headquarters building. • The Woodlands witnessed 60,286 sq. ft. of direct net absorption during the quarter. The Class A sector accounted for 112,594 sq. ft. of the quarterly growth, which countered losses in the Class B sector. The largest Class A occupancy gains involved Webber taking 46,614 sq. ft. of space in 1725 Hughes Landing Boulevard. • The Katy Freeway/Energy Corridor recorded 25,569 sq. ft. of positive direct absorption during the quarter. The Class A sector recorded 215,959 sq. ft. of positive absorption driven by tenant move-ins in newly delivered product such as BASF (109,578 SF at Energy Tower IV) and Cemex (80,000 SF at 10100 Katy Fwy). Even though leasing activity is expected to increase due to ongoing • Greenspoint/North Belt recorded quarterly occupancy losses of 84,626 sq. ft., with lease expirations and restructurings, it should only translate into the Class B sector accounting for 38,017 sq. ft. of the vacancies. The largest vacancy modest growth in the near term since there are many companies in the submarket occurred when Corinthian Colleges (Everest Institute) vacated still reluctant to expand their workforce and make significant capital 27,600 sq. ft. of space in 255 Northpoint Drive. investment. • The Westchase submarket posted 107,184 sq. ft. of negative absorption during the quarter. Class A properties witnessed 106,898 sq. ft. of losses, causing the WADE BOWLIN submarket’s direct occupancy level to drop to its lowest level since 2003. President • The CBD was hit hardest with 812,624 sq. ft. of negative direct absorption during Central Division the first quarter of 2017. The largest vacancies resulted from Freeport McMoran and KBR giving up a combined 633,000 sq. ft. of space at 717 Texas and 500 Jefferson through lease buy-outs. Updated 3/30/17 Updated 4/3/2017 SUBMARKET OCCUPANCY RANKING

Occ. Y-O-Y % Direct Net Absorption vs. Completions Rank Submarket Rate Change 1 Kingwood / Humble 89.6% 0.9% 3,500 2 S. Main / Medical Center / South 89.6% 2.5% 3,000 2,500 3 Bellaire 89.0% -1.6% 2,000 4 Richmond / Fountainview 87.6% -0.4% 1,500 5 Gulf Freeway / Pasadena 86.8% 0.5% 1,000 6 Central Business District 86.4% -2.1% 500 0 In Thousands of SF 7 Fort Bend / Sugar Land 86.4% 0.0% -500 8 Greenway Plaza 86.2% -0.8% -1,000 9 Midtown / Allen Parkway 85.5% 0.9% -1,500 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 Q1 17 10 Southwest Beltway 8 / Hillcroft 84.1% 1.2%Updated 3/31/2017 11 FM 1960 83.4% 0.2% Direct Net Absorption Completions 12 Galleria / Uptown 83.3% -4.6% 13 The Woodlands / Conroe 83.3% -2.5% Direct Occupancy Rates 14 San Felipe / Voss 83.3% -3.7% 15 Westchase 83.1% -3.6% 92% 16 Katy Freeway 82.7% -2.0% 90% 17 Baytown & I-10 East 81.2% -3.2% 18 NASA / Clear Lake 80.6% -2.7% 88% 19 Northwest Freeway / North Loop W 80.5% 0.7% 86% 20 West Belt 80.2% -1.2% 84% 21 Katy/Grand Parkway West 75.7% 0.1% 22 Greenspoint / IAH / N Belt 64.3% -5.5% 82% 80% Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 Q1 17

4 5 PAGE Class A Class B PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q1 Office Market Q1 2017 2017 RENTAL RATES & LEASING ACTIVITY

• Citywide Class A full-service gross asking rents slightly increased by $0.04 to $34.43 per square foot during the first quarter of 2017 and have improved by 0.5% or $0.18 over the past 12 months as landlords attempt to hold on to face rates in-spite of sluggish market conditions. • Class B asking rents fell $0.25 to $21.72 per square foot (gross) during the first quarter but have increased by 1.0% or $0.22 over the prior 12 months. • Even though face rates have remained relatively steady, actual effective rates at which deals are being done have subsided, and the value of concession packages (free rent and tenant improvement allowances) have increased. • Houston’s sublease inventory decreased by 678,989 sq. ft. to 11.1 million sq. ft. – its second consecutive quarterly decline since hitting its cyclical high in 3Q 2016. The quarterly reduction largely resulted from Freeport McMoran and KBR terminating a combined 633,300 sq. ft. of space that was available for sublease in the CBD Concessions such as free rent and higher tenant improvement allowances submarket. Unfortunately, this space is all now available for direct lease. are more prevalent in the office market as leasing volume remains • Sublease inventory represents 20.1% of the total space available and accounts for sluggish at year-end and landlords fight to maintain rental rate levels. 5.0% of the citywide total rentable inventory, with the largest share of sublease availability found in the Katy Freeway/Energy Corridor (24.3%) and CBD (19.3%). JOHN SPAFFORD • The large sublease inventory is likely to decline in the coming years with just over Executive Vice President, Director of Leasing 4.4 million square feet expiring within 3 years, but this only contributes to the Central Division increasing direct vacancy rate. • Small and mid-sized leases (10,000 to 50,000 sq. ft.) have accounted for 64% of the Updated 3/31/2017cumulative space leased in the trailing 12 months above the 10,000 sq. ft. threshold, which is comprised of 229 lease transactions. Meanwhile, there have only been 23 Updated 3/30/17 lease transactions closed above the 50,000 sq. ft. mark during the same period. SUBMARKETSubmarket Rental RENTAL Rate Ranking RATE RANKING Rental Rates ($/SF/Yr. Full Service) Rental Y-O-Y % Rank Submarket Rate Change $36 1 Central Business District $40.47 3.6% $34 2 Galleria / Uptown $34.78 -1.5% $32 3 Greenway Plaza $33.27 0.5% $30 $28 4 Midtown / Allen Parkway $30.93 -3.5% $26 5 Katy Freeway $30.82 2.4% $24 6 The Woodlands / Conroe $30.72 8.0% $22 7 San Felipe / Voss $30.03 1.2% $20 8 Westchase $29.79 -5.2% $18 9 Katy/Grand Parkway West $27.58 -0.4% Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 Q1 17 10 S. Main / Medical Center / South $27.18 -0.6% Updated 3/31/2017 11 West Belt $26.78 -3.3% Class A Class B 12 Fort Bend / Sugar Land $26.41 5.7% Total Leasing Activity 13 Bellaire $24.73 2.6% Rolling 12-Months 14 Kingwood / Humble $23.67 1.5% 16,000 15 Gulf Freeway / Pasadena $21.47 -1.1% 14,000 16 Northwest Freeway / North Loop W $21.34 3.2% 12,000 17 Greenspoint / IAH / N Belt $21.00 -1.7% 10,000 18 NASA / Clear Lake $19.71 0.2% 8,000 19 FM 1960 $19.23 -0.9% 6,000 20 Baytown & I-10 East $18.41 24.1%

In Thousands of SF In 4,000 21 Richmond / Fountainview $17.06 -3.9% 2,000 22 Southwest Beltway 8 / Hillcroft $16.87 1.7% 0 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 Q1 17

4 5 PAGE Class A Class B PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q1 Office Market Q1 2017 2017 CONSTRUCTION

• Developers have delivered just under 3.6 million sq. ft. of new office construction over the prior 12-months (excluding corporate-owned projects). During the first quarter of 2017, three office buildings delivered totaling 639,422 sq. ft., and these were already 68.3% pre-leased. • The largest construction project to deliver during first quarter was Amegy Bank’s 380,000 sq. ft. office building in the Galleria/Uptown submarket, which has secured three full floor leases this past year bringing the building to 90.2% leased. • Leasable office space (excluding corporate-owned projects) still under construction stands at over 3.2 million sq. ft., with 47.7% of this space already preleased. • Many developers have placed proposed projects on hold, allowing construction activity to drop by 73.9% since hitting its peak of 12.2 million sq. ft. of leasable office product underway in 3Q 2014. RECENT ANNOUNCEMENTS • Although construction levels have tapered off dramatically, an additional 2.6 • MetroNational delivered a 238,173 sq. ft. office million sq. ft. of new product is still set to deliver in 2017, with 609 Main at Texas building in the Katy Freeway East submarket – representing nearly one-half of this total. Looking ahead, citywide direct occupancy during the quarter. The Class A project is anchored levels will continue to slide as new supply is expected to outpace demand through by CEMEX USA (80,000 sq. ft.) and is 36.4% leased. 2017, with only 46% of the new space pre-leased. • Allianz Real Estate America delivered BHP Billiton • The submarkets with the largest concentration of office construction underway Tower at 1500 Post Oak Blvd during the third include the CBD (1.1M SF), The Woodlands (499K SF), and Katy/Grand Parkway West quarter. BHP Billiton plans to occupy the entire (260K SF), which combined account for 57.2% of Houston’s office development 593,850 sq. ft. tower during the second quarter of pipeline. 2017 after their interior build-out is complete. • While the construction pipeline appears to be winding down, the flight to quality • The largest construction project currently Updatedcontinues 3/31/2017 but any new construction will require significant pre-leasing to move underway is Hines’ 609 Main at Texas, which will forward in the foreseeable future. Build to suit projects such as American Bureau deliver in April 2017. The 1 million sq. ft. tower Updatedof Shipping 7/6/2015 and HP’s office projects near Springwoods Village illustrate this trend. recently secured several pre-lease commitments including United Airlines for 237,708 sq. ft., Orrick, Construction Pipeline Herrington & Sutcliffe (56,806 sq. ft.) and Hogan Construction Pipeline Lovells US (43,072 sq. ft.). In addition, Kirkland & Ellis 14,000 expanded by taking an additional floor and a half on top of its previous 62,000 sq. ft. commitment. 14,00012,000 • Thor Equities topped off their 13-story office tower at the Kirby Collection in the Greenway submarket 12,00010,000 in 2016 and is expected to complete the 188,547 8,000 sq. ft. project by the third quarter of 2017. The 10,000 office building will be a part of a luxury mixed use 8,0006,000 development.

• Patrinely Group broke ground on CityPlace 2 Thousands of SF In 6,0004,000 during the first quarter, which will be a part of a

In Thousands of SF In 4,000 mixed-use community in North Houston called 2,000 Springwoods Village. American Bureau of Shipping 2,0000 signed a 303,000 sq. ft. pre-lease commitment last Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 Q1 17 year with the build-to-suit project slated to deliver 0 in October 2018. Q2 12 Q4 12Under Q2 13 Construction Q4 13 Q2Delivered 14 Q4 14 Q2 15 • HP also signed a 378,000 sq. ft. pre-lease Updated 3/30/17 commitment in Springwoods Village that will kick- Under Construction Delivered start construction on a two-building campus in SIGNIFICANT PROJECTS UNDER CONSTRUCTION early 2017 with delivery scheduled for the second % PRE- TARGET half of 2018. HP’s new campus will house about PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT(S) LEASED DEVELOPER COMPLETION 609 Main at Texas 1,056,658 CBD Kirkland & Ellis; United Airlines 50% Hines 2Q 2017 2,400 employees. Springwoods Village - CityPlace 2* 326,800 Woodlands American Bureau of Shipping 94% Patrinely Group 4Q 2018 • Skanska is expected to soon break ground on their Lonza Houston* 250,000 S Main/Med Center Lonza Group 100% Pinchal & Co. 4Q 2017 750,000 sq. ft. Capitol Towers project in the CBD as Kirby Collection 188,547 Greenway Plaza N/A 0% Thor Equities 3Q 2017 Bank of America is close to finalizing their lease for Lockton Place* 187,011 Westchase Lockton; Triten 100% Triten RE Partners 4Q 2017 210,000 sq. ft. The Woodlands Medical Plaza 4 171,996 Woodlands N/A 0% Undisclosed 2Q 2017 One Grand Crossing - Bldg 1 171,538 Katy/Grand Pky W N/A 0% Trammell Crow Co. 1Q 2018 The Post Oak 104,579 Galleria / Uptown N/A 0% Tellepsen Builders 4Q 2017 6 7 PAGE

Note: * Build-to-suit; Corporate owned office buildings (excluded from competitive statistics & above table) PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q1 Office Market Q1 2017 2017 SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Completions Under Submarket SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 38,051,838 6,387,955 2,143,310 86.4% -812,624 -812,624 0 1,056,658 $43.10 $31.03 Galleria / Uptown 23,841,616 4,311,498 1,224,619 83.3% 61,184 61,184 380,000 104,579 $36.96 $27.54 Greenway Plaza 10,737,300 1,914,829 194,055 86.2% -20,141 -20,141 0 188,547 $36.55 $26.51 Katy Freeway 31,196,615 6,681,887 2,705,161 82.7% 25,549 25,549 238,173 136,255 $37.17 $23.14 Westchase 14,969,491 3,037,335 1,476,943 83.1% -107,184 -107,184 0 187,011 $36.15 $19.88 Greenspoint/ IAH / N Belt 12,423,658 5,725,283 1,137,577 64.3% -84,626 -84,626 0 85,000 $24.39 $17.24 Northwest Freeway / N Loop West 9,011,039 1,880,246 50,160 80.5% -54,629 -54,629 0 0 $23.66 $19.89 NASA / Clear Lake & SE Outlier 7,260,095 1,623,638 80,130 80.6% -49,269 -49,269 0 25,000 $27.39 $18.11 Fort Bend / Sugar Land / SW Outlier 7,338,220 1,080,380 180,363 86.4% 32,169 32,169 21,249 225,799 $31.27 $23.68 Richmond / Fountainview 1,264,437 209,730 0 87.6% -8,745 -8,745 0 0 - $17.39 San Felipe / Voss 5,242,429 1,014,257 108,561 83.3% 5,374 5,374 0 0 $36.42 $23.96 Bellaire 3,540,187 495,970 88,197 89.0% 5,937 5,937 0 0 $27.26 $23.54 Midtown / Allen Parkway 5,893,641 1,048,122 166,213 85.5% -36,021 -36,021 0 0 $34.06 $28.29 FM 1960 9,381,891 1,891,326 285,781 83.4% -10,757 -10,757 0 0 $27.33 $17.47 Kingwood / Humble / NE Outlier 1,449,750 165,034 8,730 89.6% 1,893 1,893 0 0 $29.63 $23.42 Southwest Beltway 8 / SW / Hillcroft 10,016,151 2,011,278 109,811 84.1% -37,359 -37,359 0 0 $18.93 $16.38 S. Main / Medical Center / South 9,075,507 973,919 98,642 89.6% -38,386 -38,386 0 323,728 $29.71 $26.38 The Woodlands / Conroe 11,611,547 1,979,926 355,742 83.3% 60,286 60,286 0 498,796 $36.18 $25.00 Gulf Freeway / Pasadena 3,294,132 636,885 27,610 86.8% 22,117 22,117 0 82,800 $30.59 $22.35 Baytown / I-10 East 1,096,564 229,851 1,699 81.2% -20,436 -20,436 0 0 - $16.81 Katy / Grand Parkway West 2,556,012 642,375 39,909 75.7% 18,538 18,538 25,052 259,590 $28.07 $29.04 West Belt 5,048,078 1,328,144 647,316 80.2% -6,698 -6,698 0 0 $29.80 $20.75 Totals 224,300,198 45,269,868 11,130,529 83.1% -1,053,828 -1,053,828 664,474 3,173,763 $34.43 $21.72

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Completions Under Y-O-Y % Property Type SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Asking Rent Change Class A 120,399,773 25,301,604 8,939,397 82.5% -226,493 -226,493 618,173 2,791,983 $34.43 0.5% Class B 88,381,695 18,022,609 2,153,596 82.9% -788,734 -788,734 46,301 381,780 $21.72 1.0% Class C 15,518,730 1,945,655 37,536 89.0% -38,601 -38,601 0 0 $17.48 5.0% Totals 224,300,198 45,269,868 11,130,529 83.1% -1,053,828 -1,053,828 664,474 3,173,763 $28.50 2.1%

6 7 PAGE PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE Q1 2017

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE

HOUSTON OFFICE MARKET REPORT THIRD QUARTER 2016

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q3 Office Market Q3 2016 2016 ECONOMIC OVERVIEW

Despite the deep losses experienced in the oil & gas industry over the past two years, the Houston economy has continued to create jobs though at a much slower pace. The Houston area as a whole has managed to create 14,200 new jobs over the past 12 months ending August 2016, representing a 0.5% increase in total employment. Since the oil bust began in 2014, the region has been able to harness momentum from other healthy sectors - such as petrochemicals, refineries, construction and healthcare - which has helped offset the losses in energy and energy-related manufacturing. Solid growth in the U.S. economy, coupled with strong expansion in east Houston led by booming petrochemical construction, have provided broad support for many local businesses that are not tied to exploration and production.

Since the oil bust began, major energy companies have experienced plunging earnings TABLE OF CONTENTS and have reported extensive budget cuts and widespread layoffs as the core mining- related industry jobs have now fallen by more than 20% (61,000 jobs) in Houston. The Economic Overview...... 2 number of bankruptcies in the oil industry, tracked by Haynes and Boone, continues Office Market Assessment...... 3 to climb suggesting that more job losses in the industry are still to come. Fortunately, Net Absorption & Occupancy...... 4 oil prices have trended upwards, increasing from their 12-year low of $26 per barrel Rental Rates & Leasing Activity...... 5 in February to $45/bbl at the end of the quarter. A small recovery in the overall North Construction...... 6 American rig count is also underway thanks predominately to significant growth in the Permian Basin. However, uncertainty will continue in the energy sector stemming from Submarket Statistics & Methodology...... 7 Updated 9/29/2016 the slowed pace of global economic growth and its impact on oil demand, as well as the Our Team...... 8 response of non-OPEC producers to sustained low oil prices.

Employment Trends

120 6% 100 FOR INFORMATION: 80 4%

Thousands 60 40 2% 20 WADE BOWLIN 0 0% Executive Vice President -20 -40 -2% Managing Director -60 713.209.5753 -80 -4% [email protected] '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16F '17F

Jobs Added Annual % Change JOHN SPAFFORD Executive Vice President Source: U.S. Bureau of Labor Statistics, Moody's Analytics, University of Houston's Center for Regional Forecasting Director of Leasing Employment Growth by Sector 713.209.5823 12-MONTHS HEALTH CURRENT ANNUAL (Improving [email protected] PRIOR READING READING CHANGE or Declining) Mining 87.3 98.6 -11.5% ARIEL GUERRERO Construction 214.9 218.6 -1.7% Senior Vice President, Research Manufacturing 230.0 242.8 -5.3% Trade, Transportation & Utilities 621.0 615.0 1.0% 713.209.5704 Information 30.3 32.7 -7.3% [email protected] Financial Activities 155.5 152.3 2.1% Professional & Business Services 465.0 474.2 -1.9% Education & Health Services 385.1 370.0 4.1% Leisure & Hospitality 327.6 306.3 7.0% Other Services 108.4 108.0 0.4% Government 368.3 360.7 2.1% Totals 2,993.4 2,979.2 0.5% 2 Source: U.S. Bureau of Labor Statistics; Employment Data as of August 2016

PAGE 3 All Employees, in Thousands PAGE PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q3 Office Market Q3 2016 2016 OFFICE MARKET ASSESSMENT

Houston continues to feel the effects of the energy sector’s downturn, which has cast a shadow of uncertainty over the office leasing market creating sluggish demand and rising sublease availabilities on top of numerous new office buildings entering the market. During the third quarter of 2016, Houston’s office leasing market fundamentals softened further as the citywide Class A direct occupancy level declined by 60 basis points to 83.4%, reaching its lowest level since 2005. Although pre-lease commitments in newly-built projects managed to keep Class A direct absorption levels slightly in positive territory, new supply has consistently outpaced demand in nine of the previous ten quarters. As a result of the steep supply/demand imbalance, Class A direct occupancy levels have dropped by 370 basis points year-over-year and plunged by 760 basis points since their cyclical peak of 91.0% in early 2014. The largest quarterly occupancy gains involved Regions Bank, USI Insurance, and Loomis Armored US moving into large blocks HOUSTON ECONOMIC OUTLOOK: of Class A space, which overshadowed BP vacating 148,674 sq. ft. at Three Westlake Park. The Greater Houston Partnership forecasts that Houston Meanwhile, Class B direct occupancy rates remained flat at 84.3% during the quarter, will gain 21,900 overall jobs in 2016, while University of but have still fallen 70 basis points over the past 12 months. Houston’s Institute for Regional Forecasting has issued a best case scenario of 7,400 jobs lost in 2016, followed by a modest gain of 10,300 jobs in 2017 and a strong Overall leasing activity declined for the seventh consecutive quarter as energy firms’ addition of 97,200 jobs in 2018. office space decisions have been put on hold, dropping overall transaction volume to its lowest level since 2009. The dramatic decline in leasing volume is also attributed SUBLEASE SPACE REACHES RECORD HIGH: to small and mid-sized leases accounting for the bulk of the activity. Only four lease Sublease availability has soared by 4.5 million sq. ft. transactions above the 100,000 sq. ft. mark have been signed year-to-date, with three since the third quarter of 2015 to 12.1 million sq. ft., an of these deals taking place in new construction projects, including American Bureau of increase of 59.0% and well above the 10-year historic Shipping’s 303,137 sq. ft. deal at CityPlace 2, United Airlines’ 237,708 sq. ft. lease at 609 average of 4.1 million sq. ft. Total space availability has Main Street and Lockton’s 127,875 sq. ft. pre-lease commitment at 3657 Briarpark. significantly increased by 7.2 million sq. ft. within the past 12 months, primarily due to sublease space and newly delivered office space. FORECAST DIVERSIFIED ECONOMIC DRIVERS: • New supply is expected to outpace demand for the fourth consecutive year through The region’s economy has become more diversified 2017, which could push the citywide direct occupancy rate down to approximately over the years but the energy sector still accounts for 82.5% by year-end 2017 - its lowest level since 1995. almost half of the local economy. The Port of Houston • Current oil market conditions suggest downsizing will continue and additional is the 10th largest port in the world – and ranks first sublease blocks will hit the market due to job cuts, bankruptcies and merger and nationally in international waterborne tonnage acquisition activity, adding to the oversupply problem. handled. The Texas Medical Center is the largest of its • Even though office-using employment growth is expected to return by 2018, kind in the world – with a local economic impact of future leasing demand from the energy sector will likely remain suppressed, as $10 billion per year. Updated 9/29/2016there will be an abundance of sublease and shadow space that can be absorbed before tenants take down additional space. MARKET TREND INDICATORS Office Market Trends Current Change from Previous 12-month Quarter Quarter Year Forecast 10,000 90% Direct Occupancy 84.2% 8,000 88% Trailing 12 mos. Direct Net Absorption 1,146,218 6,000 86% Under Construction 3,125,612 4,000 84% 2,000 Direct Asking Rents $28.15 in Thousands of SF in Thousands 0 82%

-2,000 80% '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16F '17F

PAGE 3 Direct Net Absorption Completions Direct Occupancy PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q3 Office Market Q3 2016 2016 NET ABSORPTION & OCCUPANCY

• The Woodlands submarket led the market with 123,760 sq. ft. of direct net absorption recorded during the quarter as the Class A sector accounted for 96,854 sq. ft. of the growth. However, the direct occupancy rate has dropped by 350 basis points to 82.7% since year-end 2015 due to new construction deliveries. • The Katy Freeway/Energy Corridor submarket recorded the highest occupancy losses of the quarter with 194,754 sq. ft. of negative direct absorption, with the majority of the tenant departures coming from its Class B sector totaling 157,911 sq. ft. The Class A direct occupancy rate has significantly dropped by 500 basis points to 83.1% over the past 12 months to reach its lowest level since mid-year 2010. • Greenspoint/North Belt recorded 67,487 sq. ft. of positive absorption, with the Class B sector accounting for 45,090 sq. ft. of the gains. The Class A sector posted modest quarterly gains but has experienced 243,065 sq. ft. of occupancy losses year-to- Houston office leasing market fundamentals will remain soft as the date, causing Class A direct occupancy to drop to 62.0% - the lowest level on record. continuing trend of consolidation and space optimization by office • The Galleria/Uptown area reported a 60,126 sq. ft. occupancy gains during the users and the completion of numerous developments add downward quarter bringing its year-to-date total to 17,084 sq. ft. of positive absorption. The pressure on occupancy levels into 2017. Class B sector accounted for 82,707 sq. ft. of absorption gains year-to-date with the bulk of the growth due to Stage Stores’ 168,000 sq. ft. occupancy early in 2016. WADE BOWLIN • The Greenway Plaza submarket accounted for 50,384 sq. ft. of direct net absorption Executive Vice President, Managing Director gains during the quarter largely due to Regions Bank moving into 62,363 sq. ft. Central Division of new space at Regions Financial Center. The Class A direct net absorption tally increased by 91,995 sq. ft. to 266,221 sq. ft. for the year, with the bulk of the gains taking place in new product delivered in recent quarters. Updated 9/22/2016 • Westchase posted 78,414 sq. ft. of negative direct absorption during the quarter as Class A properties witnessed 174,673 sq. ft. of losses. The Class B sector benefitted Updated 9/29/2016 SUBMARKETSubmarket OCCUPANCY Occupancy RANKING Ranking from Neighbors Health System occupying 99,088 sq. ft. at 10800 Richmond Ave. Occ. Y-O-Y % Direct Net Absorption vs. Completions Rank Submarket Rate Change 1 S. Main / Medical Center / South 89.1% 3.0% 3,500 2 Richmond / Fountainview 88.5% -1.3% 3,000 3 Kingwood / Humble 88.3% 2.5% 2,500 4 Central Business District 88.3% -1.4% 2,000 5 Bellaire 88.1% -4.1% 1,500 6 Gulf Freeway / Pasadena 86.9% 0.0% 1,000

7 Fort Bend / Sugar Land 86.3% -0.2% Thousands of SF In 500 8 Midtown / Allen Parkway 85.9% 1.6% 0 9 Galleria / Uptown 85.3% -3.5% -500 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 10 Greenway Plaza 85.2% -3.7%Updated 9/29/2016

11 Westchase 85.2% -1.6% Direct Net Absorption Completions 12 San Felipe / Voss 85.1% -1.4% 13 Southwest Beltway 8 / Hillcroft 84.2% 1.3% Direct Occupancy Rates 14 Baytown & I-10 East 83.4% -6.0% 15 NASA / Clear Lake 83.2% -0.6% 92% 16 Katy Freeway 83.2% -4.0% 17 FM 1960 83.2% -2.6% 90% 18 The Woodlands / Conroe 82.7% -7.6% 88% 19 West Belt 81.0% -1.3% 86% 20 Northwest Freeway / North Loop W 80.9% 1.7% 21 Katy/Grand Parkway West 74.6% -1.9% 84% 22 Greenspoint / IAH / N Belt 69.6% -2.3% 82% 80% Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 4

PAGE 5 Class A Class B PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q3 Office Market Q3 2016 2016 RENTAL RATES & LEASING ACTIVITY

• Citywide Class A full-service gross asking rents declined by $0.47 to $34.31 per square foot during the third quarter of 2016 and have slipped by 0.3% or $0.11 over the past 12 months. Meanwhile, Class B asking rents remained relatively flat – reflecting a $0.09 quarterly increase to $21.61 per square foot (gross) during the third quarter and have returned to their level recorded a year ago. • Even though face rates remain relatively steady buoyed by the addition of new inventory commanding higher rents and increased taxes inflating operating expenses, actual effective rates at which deals are being done have decreased, and the value of concession packages increased. • During the third quarter, Houston’s sublease inventory increased by 947,153 sq. ft. to reach an all-time high of just over 12.1 million sq. ft., which is more than triple its 10-year historic average of nearly 4.0 million sq. ft. Sublease inventory accounts for 28.1% of the total space available and 5.4% of the total rentable inventory, with the As office leasing volume remains sluggish and the number of space largest share found in the Katy Fwy/Energy Corridor (29.6%) and the CBD (23.4 %). options continue to grow, asking rents have begun to adjust while more • The largest contributors to this glut of sublease space include Conoco Phillips, Shell concessions are being offered to stimulate leasing activity and combat Oil, BP and BHP Billiton, which account for 28% of the citywide sublease availability. potential increased vacancies. • The trailing 12-month leasing volume stood at 12.6 million sq. ft., which remains 30% below its 10-year historical level. However, the total number of deals surpassed JOHN SPAFFORD the average number of lease transactions signed in the prior four quarters, meaning Executive Vice President, Director of Leasing that smaller leases have accounted for a larger share of the leasing activity. Central Division • Small and mid-sized deals (10,000 to 50,000 SF) have accounted for 71% of the Updated 9/29/2016cumulative sq. ft. leased year-to-date above the 10,000 sq. ft. threshold, which is comprised of 154 leases. Meanwhile, there have only been 12 lease transactions Updated 9/22/2016 inked citywide year-to-date above the 50,000 sq. ft. mark. SUBMARKETSubmarket Rental RENTAL Rate Ranking RATE RANKING Rental Rates Rental Y-O-Y % ($/SF/Yr. Full Service) Rank Submarket Rate Change $36 1 Central Business District $39.95 5.7% $34 2 Galleria / Uptown $35.28 3.8% $32 3 Greenway Plaza $33.27 13.2% $30 4 The Woodlands / Conroe $31.65 9.6% $28 $26 5 Midtown / Allen Parkway $31.31 -2.1% $24 6 Westchase $30.78 2.3% $22 7 Katy Freeway $30.32 -1.0% $20 8 San Felipe / Voss $30.11 -3.2% $18 9 Katy/Grand Parkway West $27.08 0.4% Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 Updated 9/29/2016 10 S. Main / Medical Center / South $26.94 -0.3% 11 Fort Bend / Sugar Land $25.29 0.2% Class A Class B 12 Bellaire $24.88 4.4% Total Leasing Activity 13 West Belt $24.16 -13.7% Rolling 12-Months 14 Kingwood / Humble $22.56 -2.7% 16,000 15 Gulf Freeway / Pasadena $21.42 -2.9% 14,000 16 Greenspoint / IAH / N Belt $21.09 -8.3% 12,000 17 Northwest Freeway / North Loop W $21.01 -5.4% 10,000 18 NASA / Clear Lake $19.54 -2.4% 8,000 19 FM 1960 $19.31 -1.0% 6,000 20 Baytown & I-10 East $18.48 22.1%

In Thousands of SF In 4,000 21 Richmond / Fountainview $18.24 8.6% 2,000 22 Southwest Beltway 8 / Hillcroft $16.77 3.6% 0 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 4

PAGE 5 Class A Class B PAGE PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q3 Office Market Q3 2016 2016 CONSTRUCTION

• Within the competitive leasing market, 7 new office buildings were completed during the quarter totaling 1,575,831 sq. ft., which was only 64.2% pre-leased. Nearly 7.1 million sq. ft. of new office construction has been completed within the trailing 12 months (excluding corporate-owned projects). • Leasable office space currently under construction stands at nearly 3.4 million sq. ft., with 43.0% of this space already preleased (excluding corporate-owned projects). The good news is many developers have placed their proposed projects on hold, allowing construction activity to drop by 66.5% since the peak of 12.2 million sq. ft. of competitive leased product that was underway in 3Q 2014. • The Houston office market currently has nearly 3.3 million sq. ft. of leasable product set to deliver in 2017 followed by the addition of a single 326,800 sq. ft. building delivering in 2018. With only 49.2% of this space pre-leased, direct occupancy levels RECENT ANNOUNCEMENTS will continue to slide as new supply is expected to outstrip demand through 2017. • Allianz Real Estate America delivered BHP Billiton • The submarkets with the largest concentration of office construction underway Tower at 1500 Post Oak Blvd during the third include the CBD (1.1M SF), Galleria/Uptown (520K SF) and Katy Freeway (374K SF), quarter. BHP Billiton will begin occupancy of the which combined account for 62.4% of Houston’s office development pipeline. 593,856 sq. ft. tower by late 2016/early 2017 when • The largest construction project underway involves Hines’ 609 Main at Texas, which their build-out is complete, but approximately recently secured several more pre-lease commitments following the initial 62,000 sq. ft. 482,000 sq. ft. of their former space has now been lease with Kirkland & Ellis. United Airlines finalized their 237,708 sq. ft. commitment during placed on the sublease market at Four Oaks Place. the quarter, as well as Orrick, Herrington & Sutcliffe (56,806 sq. ft.) and Hogan Lovells US (43,072 sq. ft.). The 1 million sq. ft. tower is slated for an early 2017 delivery. • Griffinartners P completed the construction of Updated 9/29/2016 The Partnership Tower in the CBD during the third quarter. The 115,000 sq. ft., Class A project was 100% Updated 7/6/2015 pre-leased and the tenants have already moved-in. • American Midstream committed to 50,929 sq. ft. Construction Pipeline of StatOil’s sublease space within CityWestPlace Building 4, with plans to move-in by year-end 2016. Construction Pipeline • TechSpace Holding signed a 46,092 sq. ft. deal 14,000 during at CityWestPlace Building 1. The business services company plans to occupy during 2Q 2017. 14,00012,000 • Musket Corporation committed to 45,228 sq. ft. 10,000 at America Tower in the Midtown submarket. The 12,000 logistics company plans to occupy by mid-2017. 10,0008,000 • Cosco Container Lines Americas, Inc. renewed their lease for 38,561 sq. ft. at the Intercontinental Center 8,0006,000 in the Greenspoint submarket.

In Thousands of SF In 6,0004,000 • Law firm Andrews Myers, P.C. secured a 30,192 sq. ft. lease at the newly constructed 1885 St. James

In Thousands of SF In 4,0002,000 Place, with expected occupancy by year-end 2017. • The Amegy Bank Headquarters building currently 2,0000 under construction at 1717 W Loop South has Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Q3 16 0 secured three full floor leases year-to-date which Q2 12 Q4 12Under Q2 Construction13 Q4 13 Q2Delivered 14 Q4 14 Q2 15 include Centaurus, Charter Title Company and Updated 9/29/2016 Higman Marine Services, bringing the 380,000 sq. Under Construction Delivered ft. building to 90.2% leased. SIGNIFICANT PROJECTS UNDER CONSTRUCTION • Halliburton announced their decision to sell their % PRE- TARGET 48-acre campus in the Westchase submarket. The PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT(S) LEASED DEVELOPER COMPLETION Oak Park campus, located at 10200 Bellaire Blvd, 609 Main at Texas 1,056,658 CBD United Airlines; 3 law firms 39% Hines 1Q 2017 Future Amegy Bk HQ 380,000 Galleria / Uptown Amegy Bank 90% Hines 1Q 2017 includes a 568,000 sq. ft. office building. 10100 Katy Fwy 238,173 Katy Freeway CEMEX USA 34% MetroNational 1Q 2017 • Chevron recently announced plans to vacate their One Grand Crossing - Bldg 1 222,465 Katy/Grand Pky West N/A 23% Trammell Crow Co. 3Q 2017 28-acre campus in the Bellaire submarket. Located Kirby Collection 191,805 Greenway Plaza N/A 0% Thor Equities 4Q 2017 inside Loop 610, the site represents one of the Lockton Place** 186,000 Westchase Lockton; Triten 100% Triten Real Estate Partners 4Q 2017 largest parcels of land currently available in the The Woodlands Medical Plaza 4 172,000 Woodlands N/A 0% Undisclosed 1Q 2017 Houston area. The Post Oak 140,000 Galleria / Uptown Landry's 25% Tellepsen Builders 4Q 2017 Lonza Houston** 100,000 S. Main/Medical Cntr Lonza Group 100% Pinchal & Co. 4Q 2017 18211 Katy Fwy 86,255 Katy Freeway Members Choice Credit Union 57% Undisclosed 4Q 2017 6 Note: * Corporate owned office buildings (excluded from competitive statistics); ** Build-to-suit

PAGE 7 PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q3 Office Market Q3 2016 2016 SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Completions Under Submarket SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 37,774,153 5,543,252 2,839,314 88.3% -4,459 -358,633 115,000 1,056,658 $43.28 $30.47 Galleria / Uptown 23,537,888 4,061,843 1,172,319 85.3% 60,126 17,084 593,856 520,000 $37.60 $26.79 Greenway Plaza 10,749,513 1,644,873 198,676 85.2% 50,384 153,633 182,000 191,805 $37.00 $26.21 Katy Freeway 30,947,519 6,376,070 3,596,878 83.2% -194,754 -229,517 385,532 374,428 $35.98 $23.51 Westchase 14,966,773 2,611,116 1,483,259 85.2% -78,414 -91,105 0 186,000 $36.99 $20.02 Greenspoint/ IAH / N Belt 12,532,731 5,742,397 974,111 69.6% 67,487 -73,131 0 83,157 $24.68 $16.89 Northwest Freeway / N Loop West 8,882,414 1,949,066 82,039 80.9% 52,550 72,168 0 0 $23.89 $19.49 NASA / Clear Lake & SE Outlier 7,117,748 1,534,941 58,534 83.2% -72,553 -76,349 0 28,500 $26.90 $17.95 Fort Bend / Sugar Land / SW Outlier 7,316,011 1,144,165 110,290 86.3% -73,458 78,301 0 286,064 $30.26 $23.09 Richmond / Fountainview 1,267,827 203,863 0 88.5% -6,446 -6,825 0 0 - $19.48 San Felipe / Voss 5,279,210 994,366 45,785 85.1% -24,319 -101,446 0 0 $36.27 $23.60 Bellaire 3,570,587 495,183 108,584 88.1% -107,622 -156,930 0 0 $27.08 $23.73 Midtown / Allen Parkway 5,877,278 871,077 65,143 85.9% 17,023 68,455 0 0 $34.07 $28.18 FM 1960 9,339,690 1,891,022 338,428 83.2% 21,947 32,543 0 0 $27.56 $17.59 Kingwood / Humble / NE Outlier 1,451,626 200,318 8,730 88.3% -6,857 70,830 28,000 0 $31.13 $22.40 Southwest Beltway 8 / SW / Hillcroft 10,016,181 2,097,444 79,864 84.2% 52,445 102,352 0 0 $18.92 $16.44 S. Main / Medical Center / South 9,426,486 1,137,892 18,010 89.1% 24,166 75,946 0 100,000 $28.35 $26.87 The Woodlands / Conroe 11,683,606 2,090,065 405,216 82.7% 123,760 233,302 271,443 172,000 $36.43 $25.29 Gulf Freeway / Pasadena 3,326,396 614,527 51,552 86.9% 65,057 50,854 0 0 $30.59 $22.33 Baytown / I-10 East 1,144,042 213,332 0 83.4% 4,881 9,604 0 0 - $16.89 Katy / Grand Parkway West 2,633,645 653,747 52,370 74.6% 41,359 100,547 0 127,000 $27.89 $26.18 West Belt 5,039,362 1,181,678 459,839 81.0% -3,110 6,045 0 0 $27.81 $20.18 Totals 223,880,686 43,252,237 12,148,941 84.2% 9,193 -22,272 1,575,831 3,125,612 $34.31 $21.61

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Completions Under Asking Y-O-Y % Property Type SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Rent Change Class A 119,201,050 23,762,302 9,485,635 83.4% 37,991 -122,066 1,478,321 2,973,612 $34.31 0.3% Class B 88,772,488 17,411,405 2,606,540 84.3% -19,895 96,896 97,510 152,000 $21.61 0.0% Class C 15,907,148 2,078,530 56,766 89.0% -8,903 2,898 0 0 $17.33 6.4% Totals 223,880,686 43,252,237 12,148,941 84.2% 9,193 -22,272 1,575,831 3,125,612 $28.15 1.7% Please note: 800 Bell, the former Exxon headquarters building in the Houston CBD, is excluded from competitive office inventory statistics since Shoren- stein Properties’ plans to redevelop the 1.3 million sq. ft. Class B office building has been placed on hold. METHODOLOGY

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PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE Q3 2016

Wade Bowlin John Spafford Brad Sinclair Kim Grizzle-Shapiro Mike Martin Executive Vice President Executive Vice President Executive Vice President Senior Vice President Senior Vice President Managing Director Director of Leasing Leasing Leasing Leasing 713.209.5753 713.209.5823 713.209.5965 713.209.5940 713.209.5710 [email protected] [email protected] [email protected] [email protected] [email protected]

Michael Sieger Marci Phillips Courtney Buckout Allie Hubbard Angelina Hsieh Vice President Vice President Leasing Manager Leasing Manager Leasing Manager Leasing Leasing 713.209.5959 713.209.5975 713.209.5737 713.209.5930 281.444.6434 [email protected] [email protected] [email protected] [email protected] [email protected] ABOUT PMRG Headquartered in Houston, Texas, PMRG is one of the nation’s leading real estate companies focusing on comprehensive property services, development and acquisitions. With a strategic presence in 30 markets, PMRG provides the highest quality services to its clients and investors. PMRG’s clients and investors include large financial institutions, advisors and high net worth individuals. By capitalizing on the team’s experience and expertise, PMRG has the ability to undertake large and challenging management, leasing, development and acquisition projects.

PMRG’s portfolio, including projects managed for third parties, includes commercial office Doug Berry Ariel Guerrero buildings, mixed-use centers, corporate headquarters, industrial buildings, medical facilities, Vice President Senior Vice President high-rise multifamily buildings and re-appropriated military facilities. Creative Director Research 713.209.5897 713.209.5704 Our goal is to generate exceptional returns for our clients and investors by focusing on real [email protected] [email protected] estate fundamentals. For additional information, visit www.pmrg.com.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE

HOUSTON OFFICE MARKET REPORT SECOND QUARTER 2016

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q2 Office Market Q2 2016 2016 ECONOMIC OVERVIEW

The Houston economy has remained relatively resilient despite the deep losses experienced in the local energy industry over the past two years, but the lingering slump is starting to spread to other sectors. The pace of employment growth has significantly slowed, but the Houston area as a whole has still managed to create 5,100 new jobs over the past 12 months ending May 2016, representing a 0.2% increase. The region has been able to harness momentum from other sectors – such as petrochemicals, refineries, healthcare and construction – which has helped offset the losses in energy and energy- related manufacturing.

As a result of continued low oil prices, energy companies have reported extensive budget cuts and have experienced plunging earnings, shrinking cash and widespread layoffs over the past year. Smaller independent energy companies, particularly those that are TABLE OF CONTENTS highly leveraged, have become targets for merger and acquisition activity. Fortunately, oil prices have trended upwards, increasing from a 12-year low of $26 per barrel in Economic Overview...... 2 February to the upper $40s, with brief periods above the $50 per barrel mark over recent Office Market Assessment...... 3 months. The North American rig count appears to have bottomed out in late May, and Net Absorption & Occupancy...... 4 layoff announcements have subsided, though not entirely halted. The worst may be over Rental Rates & Leasing Activity...... 5 for the oil industry, which is welcome news, since the broader economy has started to show stress. Uncertainty will continue in the beleaguered energy sector stemming from Construction...... 6 Updated 7/5/2016 the slowed pace of global economic growth and its impact on oil demand, as well as the Submarket Statistics & Methodology...... 7 responsiveness of non-OPEC producers to sustained low oil prices. Our Team...... 8 Employment Trends

120 6% 100 80 4% FOR INFORMATION:

Thousands 60 40 2% 20 WADE BOWLIN 0 0% -20 Executive Vice President -40 -2% Managing Director -60 713.209.5753 -80 -4% '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16F '17F [email protected] Jobs Added Annual % Change JOHN SPAFFORD Updated 7/5/2016 Executive Vice President Source: U.S. Bureau of Labor Statistics, University of Houston's Center for Regional Forecasting Director of Leasing Employment Growth by Sector 713.209.5823 12-MONTHS HEALTH CURRENT ANNUAL (Improving [email protected] PRIOR READING READING CHANGE or Declining) Mining 87.3 100.7 -13.3% Down ARIEL GUERRERO Construction 219.0 216.3 1.2% Up Senior Vice President, Research Manufacturing 231.2 248.5 -7.0% Down Trade, Transportation & Utilities 612.2 609.2 0.5% Sideways 713.209.5704 Information 31.3 32.5 -3.7% Down [email protected] Financial Activities 153.3 151.1 1.5% Up Professional & Business Services 457.0 470.3 -2.8% Down Education & Health Services 383.6 366.1 4.8% Up Leisure & Hospitality 319.2 302.8 5.4% Up Other Services 106.9 106.7 0.2% Up Government 394.1 385.8 2.2% Up Totals 2,995.1 2,990.0 0.2% Sideways 2 Source:Source: U.S.U.S. BureauBureau of Labor Statistics. Statistics; Employment Employment Data Data as as of ofMay May 2016 2016 (P)

PAGE 3 PAGE AllAll Employees, Employees, inIn Thousands PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q2 Office Market Q2 2016 2016 OFFICE MARKET ASSESSMENT

The prolonged energy sector downturn has cast a shadow of uncertainty over Houston’s office leasing market within the past 18 months due to sluggish demand, rising sublease availabilities and an abundance of new office buildings entering the market. Houston’s office leasing market fundamentals continued to soften but managed to record 85,292 sq. ft. of direct occupancy gains during the second quarter after posting their first negative absorption reading since 2010 in the prior quarter.. The Class A market experienced negative 77,324 sq. ft. of direct net absorption, bringing the year-to-date total to negative 160,057 sq. ft. of occupancy loss. The largest losses during the quarter resulted from Mustang Engineering, Newfield Exploration Company and StatOil leaving behind large blocks of space, which overshadowed BASF’s relocation into 109,578 sq. ft. of new space at Energy Tower IV. Accordingly, the Class A direct occupancy rate dropped by 100 basis points to 84.0% and has plummeted by 310 basis points within the past 12 HOUSTON ECONOMIC OUTLOOK: months as a result of the steep supply/demand imbalance. Meanwhile, the Class B sector The Greater Houston Partnership forecasts that Houston broke its negative absorption streak with 154,607 sq. ft. of positive absorption growth will gain 21,900 overall jobs in 2016, while University of during the quarter, bringing the year-to-date gain to 116,791 sq. ft. Despite the quarterly Houston’s Institute for Regional Forecasting has issued gain, Class B direct occupancy rates remained flat at 84.3% during the quarter due to a best case scenario of 7,400 jobs lost in 2016, followed by a modest gain of 10,300 jobs in 2017 and a strong new supply outpacing demand, but have fallen 50 basis points over the past 12 months. addition of 97,200 jobs in 2018.

Overall leasing activity has declined for the sixth quarter in a row as energy firms’ office SUBLEASE SPACE REACHES RECORD HIGH: space decisions have been put on hold, dropping overall transaction volume to its lowest Sublease availability has risen by 3.7 million sq. ft. to 11.2 level since 2009. The largest lease transaction in the quarter involved the American million sq. ft. since mid-year 2015, which is an increase Bureau of Shipping pre-lease commitment to kick-off construction on a 326,800 sq. ft. of 50.2% and well above its 10-year historic average of CityPlace 2 building in Springwoods Village, which will begin construction early in 2017. 4.1 million sq. ft. Total space availability has significantly increased by 6.1 million sq. ft. within the past 12 months, primarily due to sublease space and newly delivered FORECAST office space.

• New supply is expected to continue to outpace demand for the third consecutive DIVERSIFIED ECONOMIC DRIVERS: year, which could push the citywide direct occupancy rate down to approximately The region’s economy has become more diversified 83.0% by year-end 2016 - its lowest level in 20 years. over the years but the energy sector still accounts for • The supply of sublease space, currently at its highest level in decades, will remain a almost half of the local economy. The Port of Houston growing concern as energy firms continue to dump excess space onto the market. is the 10th largest port in the world – and ranks first Conditions suggest that downsizing will continue and additional sublease blocks will nationally in international waterborne tonnage hit the market due to looming bankruptcies and merger and acquisition activity. handled. The Texas Medical Center is the largest of its • Even though office-using employment growth is expected to return by 2018, future kind in the world – with a local economic impact of leasing demand from the energy sector will likely remain suppressed, as there will be $10 billion per year. Updated 7/5/2016an abundance of sublease and shadow space that can be absorbed before tenants take down additional space. Updated 7/5/2016 Market Trend Indicators MARKET TREND INDICATORS Office Market Trends Current Change from Previous 12-month Change from Previous 12-month Quarter Quarter Year Forecast Quarter Year Forecast 10,000 90% Direct Occupancy 84.5% Down Down Down 8,000 88% Trailing 12 mos. Direct Net Absorption 2,156,220 Down Up Down 6,000 86% Under Construction 4,085,373 Down Down Down 4,000 84% 2,000 Direct Asking Rents $27.77 Down Up Down in Thousands of SF in Thousands 0 82%

-2,000 80% '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16F '17F

PAGE 3 Direct Net Absorption Completions Direct Occupancy PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q2 Office Market Q2 2016 2016 NET ABSORPTION & OCCUPANCY

• The Fort Bend/Sugar Land submarket led the market with 85,043 sq. ft. of positive absorption, with the bulk of the growth taking place in the Class A sector with 100,933 sq. ft. absorbed. This is solely attributed to North American University moving into 111,275 sq. ft. at the Oasis Medical Office Building. • The CBD has recorded the highest direct occupancy losses with 354,174 sq. ft. of negative absorption year-to-date. However, the submarket managed to report modest absorption gains during the second quarter with 17,495 sq. ft. of growth, thanks to Mitsubishi Motors and Genesis Energy each taking a full floor within LyondellBasell Tower and 919 Milam, respectively. • The Katy Freeway/Energy Corridor submarket recorded 32,256 sq. ft. of negative direct absorption during the quarter, with the majority of the losses coming from its Class A sector which reported 76,104 sq. ft. of occupancy losses. The largest Houston office leasing market fundamentals will remain soft as the vacancy involved Mustang Engineering leaving behind 174,469 sq. ft. of space at continuing trend of consolidation and space optimization by office 17000 Katy Freeway. users and the completion of numerous developments will add • The Galleria/Uptown area reported a 38,844 sq. ft. occupancy loss during the downward pressure on occupancy levels in 2016. quarter - its third consecutive quarterly loss - bringing its year-to-date total to 43,042 sq. ft. of negative absorption. The Class A sector has accounted for the bulk WADE BOWLIN of the occupancy losses year-to-date with 108,910 sq. ft. becoming vacant. Executive Vice President, Managing Director • Greenspoint/North Belt recorded 56,653 sq. ft. of negative absorption, with Central Division the Class A sector accounting for 168,585 sq. ft. of losses. The largest move-out involved Newfield Exploration Company vacating 150,019 sq. ft. at 363 North Belt. • The Westchase submarket posted 112,862 sq. ft. of negative direct absorption Updated 6/30/2016 during the quarter. Class A properties witnessed 109,539 sq. ft. of losses, largely due to National Oilwell Varco and StatOil vacating large blocks of Class A space. Updated 7/5/2016 SUBMARKETSubmarket OCCUPANCY Occupancy RANKING Ranking Occ. Y-O-Y % Direct Net Absorption vs. Completions Rank Submarket Rate Change 1 Bellaire 91.1% -0.4% 3,500 2 Kingwood / Humble 89.0% 2.2% 3,000 3 Richmond / Fountainview 89.0% -0.6% 2,500 4 Central Business District 88.5% -1.5% 2,000 5 Fort Bend / Sugar Land 87.6% -0.1% 1,500 6 S. Main / Medical Center / South 87.5% 1.0% 1,000

7 Galleria / Uptown 87.3% -1.8% Thousands of SF In 500 8 Greenway Plaza 86.6% -2.2% 0 9 Westchase 85.8% 0.0% -500 Q2 13 Q4 13 Q2 14 Q4 14 Q2 15 Q4 15 Q2 16 10 San Felipe / Voss 85.5% -1.0%Updated 7/5/2016

11 Midtown / Allen Parkway 85.5% 0.4% Direct Net Absorption Completions 12 Baytown & I-10 East 84.6% -5.5% 13 NASA / Clear Lake 84.2% 1.0% Direct Occupancy Rates 14 Gulf Freeway / Pasadena 84.2% -2.2% 15 The Woodlands / Conroe 83.8% -5.4% 92% 16 Southwest Beltway 8 / Hillcroft 83.7% 0.3% 17 FM 1960 82.8% -1.3% 90% 18 Katy Freeway 82.8% -3.5% 88% 19 West Belt 81.3% -0.5% 86% 20 Northwest Freeway / North Loop W 80.4% 1.2% 21 Katy/Grand Parkway West 73.0% -5.5% 84% 22 Greenspoint / IAH / N Belt 69.6% -5.1% 82% 80% Q2 13 Q4 13 Q2 14 Q4 14 Q2 15 Q4 15 Q2 16 4

PAGE 5 Class A Class B PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q2 Office Market Q2 2016 2016 RENTAL RATES & LEASING ACTIVITY

• Citywide Class A full-service gross asking rents declined by $0.41 to $33.84 per square foot during the second quarter and have slipped by 0.9% or $0.31 since 2015. • Class B asking rents remained relatively flat – reflecting a $0.02 quarterly increase to $21.52 per square foot (gross) during the quarter but are 0.4% or $0.08 per square foot below their level at year-end 2015. • Net rental rates (face rates) have remained relatively steady over the past year, buoyed by the addition of new construction inventory which commands higher net rents. • Actual effective rent growth has come to a screeching halt in recent quarters as many landlords are offering more concessions such as rent abatement and TI allowances (in lieu of reducing asking rents) due the added sublease inventory and existing vacancy. • Houston’s sublease inventory has jumped by 5 million sq. ft. to nearly 11.2 million sq. ft. since the beginning of 2015, which is more than double its 10-year historic average of about 4.0 million sq. ft. Sublease inventory currently accounts for 21.4% the total As office leasing volume remains sluggish and the number of space space available and 5.0% of the total rentable inventory, with the largest shares in the options continue to grow, asking rents have begun to adjust while more Katy Freeway/Energy Corridor (29.8%) and the CBD (22.0%). concessions are being offered to stimulate leasing activity and combat • The sublease glut has created opportunities for tenants seeking high quality space potential increased vacancies. at a discount, but only 28% of the sublease blocks greater than 10,000 sq. ft. expire within three years, which makes them less competitive with direct space for most JOHN SPAFFORD tenants seeking long term leases. Approximately 31% of the citywide sublease space Executive Vice President, Director of Leasing being marketed is currently sitting vacant. Central Division • Class A leasing velocity over the past 12 months has declined by 47.1% from the prior Updated 7/5/2016 year, largely due to companies delaying leasing decisions in an uncertain economy, as well as a lower volume of expiring leases and few expansions occurring. Updated 6/30/2016 SUBMARKET RENTAL RATE RANKING Rental Rates Submarket Rental Rate Ranking ($/SF/Yr. Full Service) Rental Y-O-Y % Rank Submarket Rate Change $36 1 Central Business District $38.58 3.1% $34 2 Galleria / Uptown $35.33 6.2% $32 $30 3 Greenway Plaza $32.81 11.0% $28 4 Midtown / Allen Parkway $32.27 18.6% $26 5 Westchase $31.46 4.8% $24 6 Katy Freeway $30.33 2.9% $22 7 San Felipe / Voss $30.08 -1.3% $20 8 The Woodlands / Conroe $30.06 3.9% $18 9 S. Main / Medical Center / South $27.04 -0.3% Q2 13 Q4 13 Q2 14 Q4 14 Q2 15 Q4 15 Q2 16 Updated 7/5/2016 10 Katy/Grand Parkway West $26.95 0.3% 11 Fort Bend / Sugar Land $25.24 4.1% Class A Class B 12 Bellaire $24.86 2.9% Direct Leasing Activity Rolling 12-Months 13 West Belt $23.77 -15.5% 14 Kingwood / Humble $22.62 -1.0% 16,000 15 Gulf Freeway / Pasadena $21.82 -1.5% 14,000 16 Greenspoint / IAH / N Belt $21.13 -8.1% 12,000 17 Northwest Freeway / North Loop W $20.61 -7.1% 10,000 18 NASA / Clear Lake $19.69 -0.5% 8,000 19 FM 1960 $19.68 2.7% 6,000 20 Richmond / Fountainview $17.92 8.1% In Thousands of SF In 4,000 21 Baytown & I-10 East $17.83 19.3% 2,000 22 Southwest Beltway 8 / Hillcroft $16.77 4.9% 0 Q2 13 Q4 13 Q2 14 Q4 14 Q2 15 Q4 15 Q2 16

PAGE 5 Class A Class B PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q2 Office Market Q2 2016 2016 CONSTRUCTION

• Within the competitive leasing market, developers completed 10 new office buildings during the quarter totaling over 1,324,153 sq. ft., of which was only 15.4% pre-leased. Developers have delivered nearly 2.2 million sq. ft. during the first-half of 2016 and more than 6.4 million sq. ft. of new office construction over the past 12 months (excluding corporate-owned projects). • Leasable office space currently under construction stands at nearly 4.1 million sq. ft., with 57.3% of this space already preleased (excluding corporate-owned projects). If there is a silver lining, it is that many developers have placed their proposed projects on hold, allowing construction activity to drop by 66.5% since the peak of 12.2 million sq. ft. of competitive leased product underway in 3Q 2014. RECENT ANNOUNCEMENTS • The Houston office market currently has 2.8 million sq. ft. of non-owner occupied RECENT ANNOUNCEMENTS buildings set to deliver during the second-half of 2016, and with only 56.9% of • Phillips 66 has started to move into their newly-built this space pre-leased, direct occupancy rates are expected to slide further. 1,100,000 sq. ft. Class A office headquarters campus • The submarkets with the largest concentration of office construction underway at 2331 CityWest Boulevard. The new campus will include the CBD (1.17M SF), Galleria/Uptown (1.12M SF), and Katy Freeway/ house 2,200 employees who were spread out Energy Corridor (705K SF) which collectively account for 73.4% of Houston’s office temporarily in six different Houston locations. (This development pipeline. new project is corporate-owned and excluded Updated• After 7/5/2016significant increases in construction costs in Houston over the past few from our statistical analysis) years, developers are expecting those costs to begin their decline with majority • Allianz Real Estate America is nearing completion Updatedof new 7/6/2015 projects scheduled for completion in the coming quarters. of BHP Billiton Tower in Four Oaks Place. BHP Billiton will begin occupancy of the 496,608 sq. ft. tower Construction Pipeline during the third quarter of 2016 when the building is completed. Construction Pipeline • Trammell Crow Company completed construction 14,000 on Energy Center Five, adding 524,744 sq. ft. of Class A vacant space to the Katy Freeway/Energy 14,00012,000 Corridor submarket. J. Beard Real Estate Company 12,00010,000 also completed its Havenwood Office Park project in The Woodlands during the quarter. The Class A 10,0008,000 building added 240,470 sq. ft. to the submarket. • Nelson Murphree Legacy Partners delivered 1885 8,0006,000 Saint James Place during the second quarter. The

In Thousands of SF In 6,0004,000 Class A building is currently approximately 4% leased and adds 165,000 sq. ft. of space to the In Thousands of SF In 4,0002,000 Galleria/Uptown submarket. • Construction was completed on The Urban 2,0000 Q2 13 Q4 13 Q2 14 Q4 14 Q2 15 Q4 15 Q2 16 Companies’ Grandway West - Building 2 during the 0 second quarter. Located in the Katy/Grand Parkway Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 Q4 14 Q2 15 West submarket, the Class A, 124,295 sq. ft. building Under Construction Delivered Updated 7/5/2016 is currently 68.2% leased. Under Construction Delivered • The largest construction project underway involves SIGNIFICANT PROJECTS UNDER CONSTRUCTION Hines’ 609 Main At Texas which is close to securing % PRE- TARGET its second pre-lease commitment from United PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT LEASED DEVELOPER COMPLETION Airlines, who plans to take 237,308 sq. ft. of space, 609 Main at Texas 1,056,658 CBD Kirkland & Ellis; United Airlines 28% Hines 4Q 2016 following a 62,000 sq. ft. pre-lease commitment by BHP Billiton BTS** 600,000 Galleria / Uptown BHP Billiton 100% Transwestern 3Q 2016 West Memorial Place II 428,565 Katy Freeway IHI E&C 48% Skanska 3Q 2016 Kirkland & Ellis. The 1 million sq. ft. tower is slated for Future Amegy Bk HQ 380,000 Galleria / Uptown Amegy Bank 90% Hines 1Q 2017 a late 2016/early 2017 delivery. 10100 Katy Fwy 226,511 Katy Freeway CEMEX USA 29% MetroNational 1Q 2017 • USAA recently broke ground on Lockton Place - Regions Financial Center 210,000 Greenway Plaza Regions Bank 51% TRC Capital/Hansen Partners 3Q 2016 a 186,000 sq. ft. office building in the Westchase Wildwood Corporate Centre II 201,933 Woodlands N/A 0% Archway Properties 3Q 2016 submarket. The Class A building, is already 80% pre- Kirby Collection 188,696 Greenway Plaza N/A 0% Thor Equities 4Q 2017 leased with Lockton taking 120,000 sq. ft. of space Lockton Place 186,000 Westchase Lockton; Triten 80% Triten RE Partners; USAA 2Q 2017 upon delivery in the second quarter of 2017. The Post Oak 140,000 Galleria / Uptown N/A 0% Tellepsen Builders 4Q 2017 The George R. Brown 115,000 CBD GHP, Visitors Bureau 100% Houston First Corporation 4Q 2016 Lonza Houston 100,000 S. Main/Med. Center Lonza 100% Pinchal & Company 4Q 2017 6 Note: * Corporate owned office buildings (excluded from competitive statistics); ** Build-to-suit

PAGE 7 PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q2 Office Market Q2 2016 2016 SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Completions Under Submarket SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 37,795,468 5,330,036 2,466,552 88.5% 17,495 -354,174 0 1,171,658 $42.35 $29.36 Galleria / Uptown 23,051,129 3,904,909 1,292,320 87.3% -38,844 -43,042 165,000 1,120,000 $37.65 $26.52 Greenway Plaza 10,567,513 1,538,727 197,184 86.2% -45,153 103,249 0 398,696 $36.08 $26.91 Katy Freeway 30,535,183 5,733,881 3,335,974 83.0% -32,256 -34,763 601,509 705,076 $35.47 $24.08 Westchase 14,980,159 2,628,577 1,347,066 85.8% -112,862 -12,691 0 186,000 $37.75 $19.55 Greenspoint/ IAH / N Belt 12,529,021 5,636,876 765,061 69.6% -56,653 -140,618 0 0 $25.07 $16.90 Northwest Freeway / N Loop West 8,986,439 2,018,835 77,491 80.4% 62,404 19,618 0 0 $23.89 $18.86 NASA / Clear Lake & SE Outlier 7,113,697 1,460,797 45,630 84.2% 65,445 -3,796 0 28,500 $27.17 $17.99 Fort Bend / Sugar Land / SW Outlier 7,299,402 1,063,432 134,132 87.6% 85,043 151,759 25,000 40,000 $28.33 $23.01 Richmond / Fountainview 1,265,227 214,239 6,105 89.0% 14,942 -379 0 0 - $19.35 San Felipe / Voss 5,279,210 1,029,417 46,488 85.5% -83,554 -77,127 0 0 $36.03 $23.50 Bellaire 3,570,587 439,170 49,775 91.1% 9,828 -49,308 0 0 $27.05 $23.81 Midtown / Allen Parkway 5,876,669 926,985 57,138 85.5% 53,664 51,432 0 0 $34.74 $29.24 FM 1960 9,326,622 1,915,604 365,426 82.8% 3,619 10,596 20,000 0 $27.37 $17.76 Kingwood / Humble / NE Outlier 1,474,999 179,738 8,730 89.0% 27,136 77,687 25,000 0 $31.13 $22.48 Southwest Beltway 8 / SW / Hillcroft 10,034,846 2,143,861 61,394 83.7% 52,819 49,907 0 0 $18.86 $16.39 S. Main / Medical Center / South 9,425,546 1,307,662 18,010 87.5% 18,535 51,780 0 100,000 $28.44 $26.98 The Woodlands / Conroe 11,428,445 2,019,142 448,237 83.8% 29,698 109,542 240,470 271,443 $35.05 $24.80 Gulf Freeway / Pasadena 3,326,396 633,250 49,132 84.2% -16,794 -14,203 102,000 0 $30.59 $22.65 Baytown / I-10 East 1,143,821 194,213 0 84.6% -6,474 4,723 0 0 - $15.65 Katy / Grand Parkway West 2,633,645 650,139 55,510 73.0% 43,219 59,188 145,174 64,000 $27.71 $26.10 West Belt 5,034,747 1,170,890 374,433 81.3% -5,965 9,155 0 0 $27.80 $20.12 Totals 222,678,771 42,140,380 11,201,788 84.5% 85,292 -31,465 1,324,153 4,085,373 $33.84 $21.52

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Completions Under Asking Y-O-Y % Property Type SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Rent Change Class A 117,732,894 22,667,386 8,767,371 84.0% -77,324 -160,057 1,131,274 3,911,863 $33.84 -0.6% Class B 88,985,196 17,370,199 2,381,821 84.3% 154,607 116,791 192,879 173,510 $21.52 -0.1% Class C 15,960,681 2,102,795 52,596 88.9% 8,009 11,801 0 0 $17.24 6.7% Totals 222,678,771 42,140,380 11,201,788 84.5% 85,292 -31,465 1,324,153 4,085,373 $27.77 2.1% Please note: 800 Bell, the former Exxon headquarters building in the Houston CBD, is excluded from competitive office inventory statistics since Shoren- stein Properties plans to eventually redevelop 1.3 million sq. ft. Class B office building that could be ready for December 2017 occupancy at the earliest. METHODOLOGY

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PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE Q2 2016

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE

HOUSTON OFFICE MARKET REPORT FIRST QUARTER 2016

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q1 Office Market Q1 2016 2016 ECONOMIC OVERVIEW

Houston’s economy has been the beneficiary of a booming energy sector in recent years, but the pace of employment growth has significantly slowed in response to the reset in the global energy markets. As anticipated, major oil companies have made reductions in both jobs and budgets after a year of collapsing oil prices. Smaller independent energy companies, particularly those that are over-leveraged, have become prime targets for merger and acquisition activity, which will likely result in more cuts to operations and employment and could have further spillover effects on the rest of the regional economy. Despite the energy sector cutbacks, Houston’s economy has still managed to create 9,000 new jobs over the past 12 months ending February 2016.

With West Texas Intermediate (WTI) crude oil prices hovering in the mid-$30s, Houston is bracing itself for an extended downturn. The U.S. Energy Information Administration’s TABLE OF CONTENTS (EIA) latest Short-Term Energy Outlook projects WTI crude oil prices to average $34 a barrel in 2016 and $40 in 2017. The lowering of their price forecast reflects oil Economic Overview...... 2 production that has been more resilient than expected in a low-price environment and Office Market Assessment...... 3 reduced expectations for oil demand growth. Additional uncertainty stems from the Net Absorption & Occupancy...... 4 pace of global economic growth and its contribution to oil demand growth, and the Rental Rates & Leasing Activity...... 5 responsiveness of non-OPEC producers to sustained low oil prices. On a positive note, the ban on exporting oil that has been in place since 1975 has recently been lifted and Construction...... 6 Updated 1/4/2016 is expected to create and preserve jobs, spur economic growth in the region, lower Submarket Statistics & Methodology...... 7 gasoline prices, and leverage Houston’s position as the nation’s top exporting metro. Our Team...... 8 Employment Trends

120 6% 100 80 4% FOR INFORMATION:

Thousands 60 40 2% 20 WADE BOWLIN 0 0% -20 Executive Vice President -40 -2% Managing Director -60 713.209.5753 -80 -4% '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16F '17F [email protected] Jobs Added Annual % Change JOHN SPAFFORD Updated 4/4/2016 Executive Vice President Source: U.S. Bureau of Labor Statistics, Moody's Analytics Director of Leasing Employment Growth by Sector 713.209.5823 12-MONTHS HEALTH [email protected] CURRENT PRIOR ANNUAL (Improving READING READING CHANGE or Declining) Mining 89.3 107.0 -16.5% Down ARIEL GUERRERO Construction 221.5 214.4 3.3% Up Senior Vice President, Research Manufacturing 234.3 257.4 -9.0% Down 713.209.5704 Trade, Transportation & Utilities 609.9 604.6 0.9% Up [email protected] Information 31.8 32.0 -0.6% Down Financial Activities 151.4 149.7 1.1% Up Professional & Business Services 459.0 470.3 -2.4% Down Education & Health Services 377.8 361.6 4.5% Up Leisure & Hospitality 309.0 288.3 7.2% Up Other Services 105.4 105.2 0.2% Up Government 394.2 384.1 2.6% Up 2 Source:Source: U.S. BureauBureau of of Labor Labor Statistics. Statistics; Employment Employment Data Data as of as February of February 2016 2016 (P)

PAGE 3 AllAll Employees, In in Thousands Thousands PAGE PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q1 Office Market Q1 2016 2016 OFFICE MARKET ASSESSMENT

The prolonged downturn impacting the energy industry has also dampened Houston’s office leasing market with slower demand, rising sublease availabilities and a flood of new office buildings entering the market. During the first quarter of 2016, Houston’s office leasing market recorded 116,757 sq. ft. of direct negative absorption, the first negative quarterly absorption reading since 2010. The Class A market experienced negative 82,733 sq. ft. of direct net absorption with the largest occupancy losses resulting from BMC Software, Hilcorp Energy, and Transocean leaving behind large blocks of space. These new vacancies offset National Oilwell Varco’s move into 455,000 sq. ft. at Millennium Tower II in Westchase. The Class B sector experienced its fifth consecutive quarterly loss with a net 37,816 sq. ft. of negative absorption. The Class A direct occupancy rate dropped by 70 basis points to 85.0% and has plummeted by 320 basis points within the past 12 months due to the steep supply/demand imbalance. Meanwhile, Class B direct HOUSTON ECONOMIC OUTLOOK: occupancy rates remained flat at 84.3% during the quarter. The Greater Houston Partnership forecasts that Houston will gain 21,900 overall jobs in 2016, while University of Overall leasing activity has experienced a significant slow-down as energy firms’ office Houston’s Institute for Regional Forecasting anticipates space decisions have been put on hold amid cost cutting and downsizing, dropping 27,000 new jobs in 2016, followed by a strong recovery with 91,700 jobs created in 2017. overall transaction volume to its lowest level since 2009. However, some tenants are opting for shorter-term leases while they evaluate their business viability and future space SUBLEASE SPACE REACHES RECORD LEVEL: needs. The majority of the leasing activity has come from non-energy tenants testing the Sublease availability has risen by 3.1 million sq. ft. to waters and seeking extraordinary value from leases with generous concessions. During nearly 9.3 million sq. ft. since early 2015, which is more the first quarter, the largest lease transactions involved United Airlines committing to than double its 10-year historic average. Most notably, 225,000 sq. ft. of new space at 609 Main at Texas, Citigroup signing a lease for 49,730 sq. total space availability has significantly increased by 5.7 ft. at Galleria Tower I, and USI Insurance leasing 46,902 sq. ft. at Air Liquide Center South. million sq. ft. within the past 12 months primarily with sublease space and newly delivered office space.

FORECAST DIVERSIFIED ECONOMIC DRIVERS: The region’s economy has become more diversified • Looking ahead, new supply is expected to continue outpacing demand for the third over the years but the energy sector still accounts for consecutive year, which could push the citywide direct occupancy rate down to almost half of the local economy. The Port of Houston approximately 83.0% by year-end 2016 – its lowest level in 20 years. is the tenth largest port in the world – and ranks • The supply of sublease space will remain a concern as energy firms dump excess first nationally in international waterborne tonnage space on the market, currently at its highest level in decades. Additional sublease handled. The Texas Medical Center is the largest of its space will hit the market during the first-half of 2016 due to looming bankruptcies kind in the world – with a local economic impact of and merger and acquisition activity, many of which have been announced recently. $10 billion per year. • Even though office-using job growth is expected to return in 2017, future leasing demand from the energy sector will likely remain suppressed as there will be an Updated 4/4/2016abundance of sublease and shadow space that can be absorbed before tenants take MARKET TREND INDICATORS down additional space. Current Change from Previous 12-month Office Market Trends Quarter Quarter Year Forecast Direct Occupancy 84.9% 10,000 90% Trailing 12 mos. Direct Net Absorption 2,608,306 8,000 88% Under Construction 5,260,332 6,000 86% 4,000 Direct Asking Rents $27.92 84% 2,000 in Thousands of SF in Thousands 0 82%

-2,000 80% '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16F '17F

PAGE 3 Direct Net Absorption Completions Direct Occupancy PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q1 Office Market Q1 2016 2016 NET ABSORPTION & OCCUPANCY

• Greenway Plaza led all submarkets with 148,402 sq. ft. of direct net absorption during the quarter. The Class A market posted 147,398 sq. ft. of direct net absorption, with the bulk of the occupancy gains attributed to multiple tenants moving into deliveries in 3737 Buffalo Speedway and One Grove Street. • The Westchase submarket posted a net 100,171 sq. ft. of direct absorption during the quarter. Class A properties witnessed 170,522 sq. ft. of growth, largely due to National Oilwell Varco moving into 455,000 sq. ft. of new space at Millennium Tower II, while BMC Software consolidated their space at CityWestPlace and left behind 305,827 sq. ft. at 2101 CityWest Blvd. • The Woodlands also experienced some positive growth with 79,844 sq. ft. of direct net absorption recorded during the quarter as the Class A sector accounted for 73,050 sq. ft. of the growth. The quarterly gains resulted from CHI St. Luke’s Health The continuing trend of consolidation and space optimization by moving into 50,000 sq. ft. in the Springwoods Village Medical Office Building. office users and the completion of numerous developments will add • The CBD recorded the highest direct occupancy losses this past quarter with downward pressure on occupancy levels in 2016. 371,669 sq. ft. of negative absorption during the quarter. The largest new vacancy involved Hilcorp Energy Company leaving behind 145,352 sq. ft. at Total Plaza and WADE BOWLIN relocating to their corporate-owned project. Executive Vice President, Managing Director • The Galleria/Uptown submarket remained relatively flat with 4,198 sq. ft. of losses Central Division during the quarter. This was largely due to Class A (-91,639 sq. ft.) losses reversing gains experienced within the Class B market (87,441 sq. ft.). The largest Class B move-in involved Stage Stores taking 168,901 sq. ft. within 2425 West Loop South. • Greenspoint/North Belt recorded 83,965 sq. ft. of negative absorption, with Updated 4/4/2016 virtually all of the losses taking place in the Class A sector. The largest move-out included Highmount Exploration & Production vacating approximately 20,000 sq. SUBMARKETSubmarket OCCUPANCY Occupancy RANKING RankingUpdated 1/4/2016 ft. at Four Greenspoint Place. Occ. Y-O-Y % Rank Submarket Rate Change Direct Net Absorption vs. Completions 1 Bellaire 90.5% -1.1% 2 Kingwood / Humble 88.7% 0.3% 3,500 3 Central Business District 88.5% -1.3% 3,000 4 Richmond / Fountainview 88.0% -1.1% 2,500 5 Galleria / Uptown 87.9% -2.8% 2,000 6 S. Main / Medical Center / South 87.1% 1.0% 1,500 7 Greenway Plaza 87.0% -1.9% 1,000 In Thousands of SF In 500 8 San Felipe / Voss 86.9% -2.5% 0 9 Westchase 86.7% 1.2% -500 10 Fort Bend / Sugar Land 86.4% -0.8%Updated 1/4/2016 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 11 Gulf Freeway / Pasadena 86.3% 0.1% 12 The Woodlands / Conroe 85.8% -4.4% Direct Net Absorption Completions 13 Katy Freeway 84.7% -4.6% Direct Occupancy Rates 14 Midtown / Allen Parkway 84.6% -4.4% 15 Baytown & I-10 East 84.4% -6.7% 92% 16 NASA / Clear Lake 83.3% 0.3% 17 FM 1960 83.2% -0.3% 90% 18 Southwest Beltway 8 / Hillcroft 82.9% 0.6% 88% 19 Northwest Freeway / North Loop W 79.8% -1.3% 86% 20 Greenspoint / IAH / N Belt 69.8% -4.5% 84% 82% 80% Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 4

PAGE 5 Class A Class B PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q1 Office Market Q1 2016 2016 RENTAL RATES & LEASING ACTIVITY

• Citywide Class A full-service gross asking rents remained relatively flat during the first quarter of 2016 at $34.25 per square foot – reflecting a nominal $0.10 increase – and have improved by 0.1% or $0.03 over the prior 12 months. • Class B asking rents slipped by $0.10 to $21.50 per square foot (gross) during the first quarter but are still 0.4% or $0.09 above their level recorded 12 months ago. • Net rental rates (face rates) have remained steady within the past year, buoyed by the addition of new inventory with higher quoted rates pushing up the weighted average. Increases in property taxes are also keeping gross rents from dropping. • Although quoted asking rents are up compared to 12 months ago, actual effective rent growth has come to a screeching halt in recent quarters and many landlords are offering more concessions such as rent abatement and TI allowances due to the added sublease inventory and existing vacancy rather than reduce asking rents. • Houston’s sublease inventory has risen by 3.1 million sq. ft. to nearly 9.3 million sq. ft. Office leasing volume and occupancy levels have declined but not yet since early 2015, which is more than double its 10-year historic average of nearly 4.0 enough to significantly impact rents. However, increased sublease space million sq. ft. Sublease inventory accounts for 23.0% the total space available but only availability have caused concessions to rise as energy companies that accounts for 4.2% of the total rentable inventory, with the largest share of sublease tied up space anticipating future growth look to right-size in the near availability found in the Katy Freeway/Energy Corridor (24.8%) and the CBD (23.8%). term. • Only 30% of the sublease blocks greater than 10,000 sq. ft. expire within three years, which makes them less competitive with direct space for most tenants seeking long JOHN SPAFFORD term leases. Nearly 37% of the citywide sublease space being marketed is vacant. Executive Vice President, Director of Leasing Central Division • Class A leasing velocity over the past 12 months has declined by 63.2% from the Updated 1/4/2016 prior year, which is largely due to many companies delaying leasing decisions in an uncertain economy as well as the lower volume of lease expirations. Updated 4/6/2016 SUBMARKET RENTAL RATE RANKING Rental Rates Submarket Rental Rate Ranking ($/SF/Yr. Full Service) Rental Y-O-Y % Rank Submarket Rate Change $36 1 Central Business District $39.06 4.8% $34 2 Galleria / Uptown $35.30 7.6% $32 $30 3 Greenway Plaza $33.11 14.6% $28 4 Midtown / Allen Parkway $32.05 8.4% $26 5 Westchase $31.44 2.7% $24 6 Katy Freeway $30.11 1.6% $22 7 San Felipe / Voss $29.67 -1.9% $20 8 The Woodlands / Conroe $28.45 0.8% $18 9 S. Main / Medical Center / South $27.34 4.4% Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Updated 1/4/2016 10 Fort Bend / Sugar Land $24.98 2.7% 11 Bellaire $24.11 2.6% Class A Class B 12 Kingwood / Humble $23.31 5.7% Direct Leasing Activity Rolling 12-Months 13 Gulf Freeway / Pasadena $21.71 -2.3% 14 Greenspoint / IAH / N Belt $21.36 -10.6% 16,000 15 Northwest Freeway / North Loop W $20.67 -7.2% 14,000 16 NASA / Clear Lake $19.67 -0.4% 12,000 17 FM 1960 $19.40 1.6% 10,000 18 Richmond / Fountainview $17.75 10.4% 8,000 19 Southwest Beltway 8 / Hillcroft $16.59 1.8% 6,000 20 Baytown & I-10 East $14.83 -4.0%

In Thousands of SF In 4,000 2,000 0 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16

PAGE 5 Class A Class B PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON MAR KET AT A GLANCE Q1 Office Market Q1 2016 2016 CONSTRUCTION

• Within the competitive leasing market, developers completed 5 new office buildings during the quarter totaling over 835,779 sq. ft. which was already 65.5% pre-leased. Developers have delivered just over 7.3 million sq. ft. of new office construction within the past 12 months (excluding corporate-owned projects). • Leasable office space currently under construction stands at nearly 5.3 million sq. ft., with 45.1% of this space already preleased (excluding corporate-owned projects). With the inclusion of corporate-owned projects, the market has nearly 6.5 million sq. ft. still underway, with 55.4% of this space either pre-leased or committed by an owner/user. • The Houston office market currently has 4.1 million sq. ft. of non-owner occupied buildings set to deliver by the end of 2016, and with only 44.8% of this space pre- RECENT ANNOUNCEMENTS leased, direct occupancy rates are expected to slide further. RECENT ANNOUNCEMENTS • The submarkets with the largest concentration of office construction underway • BMS Management delivered 455,000 sq. ft. of Class include Galleria/Uptown (1.29M SF), Katy Freeway/Energy Corridor (1.26M SF) A space to the Westchase submarket during the and the CBD (1.17M SF), which together account for 70.6% of Houston’s office first quarter. The 24-story building is fully leased by development pipeline. National Oilwell Varco, which plans to consolidate • After significant increases in construction costs in Houston over the past few much of its office space spread out throughout Updatedyears, 1/4/2016 developers are expecting those costs to decline with projects that will be Houston into the new Millennium Tower II in the completed in the coming quarters. coming months. Updated 7/6/2015 • Hines completed the construction of Hilcorp Construction Pipeline Energy’s 406,600 sq. ft. tower in the CBD during the quarter. The energy company has begun moving into the space, leaving behind a large block of 14,000 Construction Pipeline space within Total Plaza. (Hilcorp Energy Tower is corporate-owned and is excluded from our 12,000 statistics.) 14,000 10,000 • McCord Development delivered the first phase of 12,000 their up to 1.7 million sq. ft. campus at Generation 8,000 Park during the quarter. The first phase consists of 10,000 two office buildings totaling 555,700 sq. ft. owned 6,000 by FMC Technologies. Within the next 10 years, 8,000

In Thousands of SF In 4,000 FMC plans to consolidate all of its 10 Houston 6,000 facilities, including its corporate headquarters, into 2,000

the campus. (These buildings are corporate owned Thousands of SF In 4,000 and excluded from our statistics.) 2,0000 • The largest construction project underway involves Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Q1 16 Hines’ 609 Main At Texas which has recently secured 0 its second pre-lease commitment from United Under Construction Delivered Updated 4/4/201Q26 12 Q4 12 Q2 13 Q4 13 Q2 14 Q4 14 Q2 15 Airlines, who plans to take 225,000 sq. ft. of space, following a 62,000 sq. ft. pre-lease commitment by SIGNIFICANT PROJECTS UNDER CONSTRUCTIONUnder Construction Delivered Kirkland & Ellis. The 1 million sq. ft. tower is slated for % PRE- TARGET a late 2016/early 2017 delivery. PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT LEASED DEVELOPER COMPLETION • MetroNational recently broke ground on a 240,000 Phillips 66* 1,100,000 Westchase Phillips 66 100% HOK/Gilbane Building Co. 2Q 2016 sq. ft. office building located across I-10 from its 609 Main at Texas 1,056,658 CBD United Airlines; Kirkland & Ellis 27% Hines 4Q 2016 Memorial City mixed-use project, with completion BHP Billiton BTS** 600,000 Galleria / Uptown BHP Billiton 100% Transwestern 4Q 2016 projected by mid-year 2017. CEMEX will anchor the Energy Center Five 524,328 Katy Freeway N/A 0% Trammell Crow Co. 2Q 2016 project with an 80,000 sq. ft. pre-lease commitment West Memorial Place II 428,565 Katy Freeway IHI E&C 49% Skanska 2Q 2016 recently signed for their U.S. headquarters. Future Amegy Bk HQ 380,000 Galleria / Uptown Amegy Bank 74% Hines 1Q 2017 Havenwood Office Park 240,470 Woodlands N/A 0% J. Beard/Everson Dev. 2Q 2016 • Triten Real Estate Partners broke ground on an 10100 Katy Fwy 226,511 Katy Freeway CEMEX USA 29% MetroNational Corp. 2Q 2017 186,000 sq. ft. office building at 3657 Briarpark in Regions Financial Center 210,000 Greenway Plaza Regions Bank 51% TRC Capital/Hansen Partners 2Q 2016 Westchase during the first quarter. The eight-story Wildwood Corp. Centre II 201,933 Woodlands N/A 0% Archway Properties 3Q 2016 building is 80% pre-leased by Lockton and Triten, Kirby Collection 188,696 Greenway Plaza N/A 0% Thor Equities 4Q 2017 with delivery slated for mid-2017. 3657 Briarpark 186,000 Westchase Lockton; Triten 80% USAA / Triten 2Q 2017 1885 Saint James Place 165,000 Galleria / Uptown N/A 4% Nelson Murphree Legacy 2Q 2016 6 Note: * Corporate owned office buildings (excluded from competitive statistics); ** Build-to-suit

PAGE 7 PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE HOUSTON Q1 Office Market Q1 2016 2016 SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Completions Under Submarket SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 37,941,335 5,155,370 2,204,878 88.5% -371,669 -371,669 0 1,171,658 $43.17 $29.40 Galleria / Uptown 22,875,852 3,650,213 1,021,791 87.9% -4,198 -4,198 0 1,285,000 $37.72 $26.01 Greenway Plaza 10,564,002 1,521,575 193,895 87.0% 148,402 148,402 0 398,696 $36.60 $27.30 Katy Freeway 29,937,196 5,099,237 2,293,653 84.7% -2,507 -2,507 0 1,256,169 $36.10 $23.55 Westchase 15,062,196 2,628,155 1,107,605 86.7% 100,171 100,171 445,000 186,000 $37.89 $20.28 Greenspoint/ IAH / N Belt 12,529,021 5,365,861 681,477 69.8% -83,965 -83,965 0 0 $25.96 - Northwest Freeway / N Loop West 8,942,283 2,048,263 66,461 79.8% -42,786 -42,786 165,754 0 $24.06 $18.67 NASA / Clear Lake & SE Outlier 7,113,528 1,397,465 58,783 83.3% -69,241 -69,241 0 0 $26.49 - Fort Bend / Sugar Land / SW Outlier 7,274,402 1,121,100 212,469 86.4% 66,716 66,716 0 65,000 $27.99 $22.44 Richmond / Fountainview 1,285,487 218,454 6,105 88.0% -15,321 -15,321 0 0 - $19.29 San Felipe / Voss 5,279,210 918,085 52,680 86.9% 6,427 6,427 0 0 $35.43 $23.70 Bellaire 3,571,386 439,732 117,267 90.5% -59,136 -59,136 0 0 $27.97 $22.96 Midtown / Allen Parkway 5,876,669 931,324 19,702 84.6% -2,232 -2,232 0 0 $34.85 - FM 1960 9,355,875 1,823,080 357,505 83.2% 6,977 6,977 0 20,000 $27.16 $17.37 Kingwood / Humble / NE Outlier 1,449,424 170,744 8,730 88.7% 50,551 50,551 0 25,000 $31.23 $22.67 Southwest Beltway 8 / SW / Hillcroft 10,034,846 2,104,768 70,344 82.9% -2,912 -2,912 0 0 $18.78 $16.20 S. Main / Medical Center / South 9,415,146 1,380,278 14,960 87.1% 33,245 33,245 47,500 0 $29.23 $27.12 The Woodlands / Conroe 11,227,770 1,693,449 474,835 85.8% 79,844 79,844 150,000 511,913 $32.43 $24.74 Gulf Freeway / Pasadena 3,264,977 602,987 30,132 86.3% 2,591 2,591 0 102,000 $30.59 $22.57 Baytown / I-10 East 1,143,821 196,982 0 84.4% 11,197 11,197 0 0 - $15.81 Katy / Grand Parkway West 2,488,471 607,448 34,277 75.6% 15,969 15,969 27,525 238,896 $28.18 $32.07 West Belt 4,899,786 1,202,116 231,232 81.1% 15,120 15,120 0 0 $31.32 $21.12 Totals 221,532,683 40,276,686 9,258,781 84.9% -116,757 -116,757 835,779 5,260,332 $34.25 $21.50

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Completions Under Asking Y-O-Y % Property Type SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Rent Change Class A 116,325,111 20,974,910 7,110,019 85.0% -82,733 -82,733 808,254 4,863,943 $34.25 0.1% Class B 89,075,697 17,117,883 2,100,256 84.3% -37,816 -37,816 27,525 396,389 $21.50 0.4% Class C 16,131,875 2,183,893 48,506 88.4% 3,792 3,792 0 0 $16.65 2.5% Totals 221,532,683 40,276,686 9,258,781 84.9% -116,757 -116,757 835,779 5,260,332 $27.92 2.6% Please note: 800 Bell, the former Exxon headquarters building in the Houston CBD, is excluded from competitive office inventory statistics since Shoren- stein Properties plans to eventually redevelop 1.3 million sq. ft. Class B office building that could be ready for December 2017 occupancy at the earliest. METHODOLOGY

PAGE 7 PAGE

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE Q1 2016

Michael Sieger Marci Phillips Courtney Buckout Allie Hubbard Ariel Guerrero Vice President Vice President Leasing Manager Leasing Manager Senior Vice President Leasing Leasing 713.209.5959 713.209.5975 Research 713.209.5930 281.444.6434 [email protected] [email protected] 713.209.5704 [email protected] [email protected] [email protected] ABOUT PMRG Headquartered in Houston, Texas, PMRG is one of the nation’s leading real estate companies focusing on comprehensive property services, development and acquisitions. With a strategic presence in 30 markets, PMRG provides the highest quality services to its clients and investors. PMRG’s clients and investors include large financial institutions, advisors and high net worth individuals. By capitalizing on the team’s experience and expertise, PMRG has the ability to undertake large and challenging management, leasing, development and acquisition projects.

PMRG’s portfolio, including projects managed for third parties, includes commercial office buildings, mixed-use centers, corporate headquarters, industrial buildings, medical facilities, high-rise multifamily buildings and re-appropriated military facilities. Doug Berry Vice President Our goal is to generate exceptional returns for our clients and investors by focusing on real estate fundamentals. For additional Creative Director information, visit www.pmrg.com. 713.209.5897 [email protected]

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT MAR KET AT A GLANCE

HOUSTON OFFICE MARKET REPORT FOURTH QUARTER 2015

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q4 FOR INFORMATION: Our Team...... 8 Methodology...... 7 & Statistics Submarket Construction...... 6 LeasingActivity...... 5& Rates Rental &Occupancy...... 4Net Absorption Assessment...... 3 Market Office 2 Economic Overview...... TABLE OF CONTENTS [email protected] (713) 209.5704 Senior Vice President, Research [email protected] (713) 209.5823 Director ofLeasing ExecutivePresident Vice [email protected] (713) 209.5753 Managing Director ExecutivePresident Vice ARIEL GUERRERO JOHN SPAFFORD WADE BOWLIN PAGE 2015 2 PROPERTY SERVICES |DEVELOPMENT |INVESTMENT PROPERTY Updated 1/4/2016 All Employees, in Thousands Source: U.S. Bureau ofLaborStatistics; Employment Data asofNovember 2015 All Employees, InThousands Source: U.S.Bureau ofLaborStatistics.EmploymentData asofNovember2015(P) rfsinl&Bsns evcs495413-0.4% 471.3 0.3% Government Other Services 469.5 612.4 Leisure &Hospitality Education &HealthServices 614.1 Professional &BusinessServices -4.9% Financial Activities Information Trade, Transportation&Utilities 113.4 Manufacturing Construction Mining 107.9 Updated 12/29/2015 position asthenation’s metro. top exporting jobs, spur economic growth inthe region, lower gasolineprices, andleverage Houston’s been inplacesince1975hasrecently to andisexpected create beenlifted andpreserve by oilsupplyfrom otherregions. oilthathas Onapositive note, thebanonexporting Moody’s thatU.S. expects oilproductioncoulddrop some, itwillbemore thanoffset to contributed thelowered ofsanctions dueto thelifting forecast.market Although global liquidsinventories andtheincreasing the crudeoilentering volumes ofIranian growth in emerging continuing (albeit slowing) supply growth,markets, increases in crudeoilto $40from $48perbarrel over in2016. Concerns thepaceofeconomic WTI continuedsoftening.economy canexpect Moody’s recently slashed itsforecast for With West tradinginthemid-$30’s, crudeoilprices Texas theHouston (WTI) Intermediate spillover effectsand couldhave onthe further rest ofthe regional economy. acquisition activity, result whichwilllikely inmore cutsto operationsandemployment those that are over-leveraged,particularly have targets become prime for merger and 2015, representing a0.8%annualincrease. Smallerindependentenergy companies, still managedto create jobsover 23,700 new thepast12monthsendingNovember ayearin bothjobsandbudgetsafter ofvolatile oilprices, butHouston’s economy has the globalenergy As markets. anticipated, majoroilcompanieshave announcedcuts years, butthepaceofjobgrowth hassignificantly slowed in response to the reset in Houston’s ofaboomingenergy in sector recent economy hasbeenthebeneficiary ECONOMIC OVERVIEW Source: U.S.BureauofLaborStatistics,Moody'sAnalytics Thousands 100 120 -80 -60 -40 -20 20 40 60 80 0 0 0 0 0 0 0 1 1 1 1 1 1F1F1F18F '15F'16F'17F '14 '13 '12 '11 '10 '09 '08 '07 '06 '05 '04 Employment GrowthbySector Jobs Added MAR KET GLANCE CURRENT READING Employment Trends 9. 8. 2.7% -1.2% 6.7% 383.9 4.2% 104.9 289.0 -2.6% 394.1 359.8 103.6 308.5 148.8 -6.0% 374.9 1.9% 144.9 257.4 209.1 242.0 213.1 383. 3.4% 32.7 33.8 12-MONTHS READING PRIOR ATA Annual % Change % Annual ANNUAL CHANGE or Declining) (Improving HEALTH

-4% -2% 0% 2% 4% 6% Down Down Down Down Down Up Up Up Up Up Up Updated 7/6/2015 • • • FORECAST Luke’s EpiscopalHealthSystem’s’ Street. 139,424sq.leaserenewal at3100Main ft. include theBracewell &Giulianirenewal oftheir189,021leaseatPennzoil Place, andSt. largeBuildings, throughtransactions leaseextension signed 2019.Other aone-year the ApacheCorp. whooccupiesatotal of505,526sq.withinthePost ft. OakCentral while othersare leaserestructures. thissentiment, moving withearly forward Reflecting leasingdecisions.long-term However, sometenants are leases optingfor short-term ascompaniesare asignificant hasexperienced slow-down delayingLeasing their activity rates declinedby 130basispointsto 84.3%overB direct occupancy thepast12months. Meanwhile, Class the past12monthsasaresult hittingthemarket. inventory ofthenew rates plungedby 380basispoints to 85.7%within in2015,directoccupancy absorption 534,095 sq. Even recorded ft. thoughtheClassAsector over 3.1millionsq. ofdirect net ft. thequarter,with 210,184sq.oflossesduring ft. bringing theannualClassBlossto for future to thedownturn. expansionprior counteredThe ClassBsector thesegains influenced by leasessigned by Exxon-Mobil, AirLiquide, andStatOil, that were tiedup gainswere significantly butthequarterly 1,336,022 sq.ofdirectnetabsorption, ft. quarter, bringingtallyto theyearly over 2.7millionsq. ft. experienced The ClassAmarket thefourth managed to post1,168,490sq.ofpositive during directnetabsorption ft. intheenergy sector,Despite theuncertainties Houston’s still officeleasingmarket to additionaldownward contributing completed themarket andentering pressure. with slower subleaseavailabilities, demandandrising officebuildingsbeing andnew The effects of the oil and gas slump have dampenedHouston’s market office leasing ASSESSMENT OFFICE MARKET

in Thousands of SF 10,000 -2,000 increased levels in12to 18months. is activity projected totenants to return delaying officeleasingdecisions, market volume in2017through ofleasesexpiring 2019andthepentupdemand from Leasing result of asteep supply/demandimbalance. projected to drop to 83.0%by 2016–theirlowest year-end level in20years -asa rates plungedby 220basispointsto 85.4%in2015andaredirect occupancy Af energy sector, to whichwillcausesubleaseavailability rise. additional cor inthe somesoftening yearaheadwith isexpected toexperience The officemarket 2,000 4,000 6,000 8,000 ter enjoying three years above their 20-year averagehistorical of 86.7%, citywide 0 activity has dropped to its lowestactivity level since 2009.However, with a high PROPERTY SERVICES |DEVELOPMENT |INVESTMENT PROPERTY Direct Net Absorption 0 0 0 0 0 0 1 1 1 1 1 1 '16F'17F'18F '15 '14 '13 '12 '11 '10 '09 '08 '07 '06 '05 '04 porate layoffs within the as well asmerger andacquisitionactivity MAR KET GLANCE Office Market Trends Office Completions ATA Direct Occupancy

80% 82% 84% 86% 88% 90% Direct AskingRents Under Construction T Direct Occupanc Houston’s for Institute Regional Forecasting. 86,300 jobsin2018,according to of theUniversity by astrong with77,600jobsin2017.and recovery Houston will gain21,900overall jobsin2016,followed The Greater Houston Partnership forecasts that year. of $10 billion per – with world a local economic impact handled. The Texas Center Medical isthelargest inthe tonnage waterborne first nationallyininternational –andranks intheworld is thetenth largest port just over halfofthelocaleconomy. The PortofHouston over theyears buttheenergy stillaccountsfor sector The region’s economy hasbecomemore diversified tototal 675,328sq. for netabsorption ft. 2015. figuresoffice direct spaceabsorption decreasesthe to thecitywide addedsubleaseinventory of thisnewly than doubleits10-year average. historic The application 2014,whichismore7.8 millionsq.sinceyear-end ft. by 3millionsq. to hasrisen nearly Sublease availability ft. SUBLEASE SPACE REACHES RECORD LEVEL: HOUSTON ECONOMIC OUTLOOK: DIVERSIFIED ECONOMIC DRIVERS: aln 2ms ietNtAsrto 2,749,986 railing 12mos.DirectNetAbsorption y MARKETINDICATORS TREND Market TrendIndicators 5,404,809 Quarter Current $27.82 85.4% ure Year Quarter Change fromPrevious Q4 2015 12-month 3 Forecast

PAGE Q4 SUBMARKET OCCUPANCY RANKING Central Division Executive Vice President, ManagingDirector downward pressure levels in2016. onoccupancy office users andthe completionofnumerous developments willadd The continuing trend of consolidation and space optimization by WADE BOWLIN 2015 akSubmarket Rank PAGE Updated 1/4/2016 9NrhetFewy/NrhLo 99 -5.9% 3.9% 79.9% Greenspoint/ IAH/NBelt 82.9% NorthwestFreeway/North LoopW 20 19 NASA/ClearLake 18 FM1960 SouthwestBeltway8/Hillcroft 17 16 Kingwood/Humble 15 Midtown/AllenParkway 14 KatyFreeway 13 GreenwayPlaza 12 TheWoodlands/Conroe 11 SanFelipe/Voss 10 .Mi eia etr/Suh8.%-0.9% 87.3% FortBend/Sugar Land GulfFreeway/ Pasadena 9 S.Main/MedicalCenter South 8 Galleria/Uptown 7 Baytown&I-10East 6 Westchase 5 CentralBusinessDistrict 4 Richmond/Fountainview 3 Bellaire 2 1 4 Submarket OccupancyRanking 86 5.0% 88.6% -0.2% 92.2% 03 -9.5% -0.3% 70.3% -0.2% 82.5% -5.7% 82.7% -4.7% 84.1% -6.8% 84.4% -5.7% 84.9% -3.4% 85.1% -2.3% 86.2% 0.3% 86.7% -1.4% 86.8% -2.5% 87.0% -2.8% 88.1% 88.2% -0.1% 2.9% 89.6% 90.6% Rate Occ. Updated 1/4/2016 PROPERTY SERVICES |DEVELOPMENT |INVESTMENT PROPERTY Y-O-Y % Change Updated 1/4/2016 NET ABSORPTION&OCCUPANCYNET • • • • • •

moving 234,510sq. atAirLiquideCenter into Building. nearly ft. –South to gainsattributed Air Liquide withthe bulk of theoccupancy net absorption, The largest move-in involvedThe largest move-in 26,198sq. at1301Fannin ft. taking Virtis Office Tower. total to absorption 38,646sq. ofpositivebringing theyear-to-date absorption. ft. TowerGalleria I. lossinvolvedoccupancy AirLiquideleaving behind213,613sq.ofspaceat ft. oflosses,ft. overshadowing themodestgainsinClassBsector. The largest 221,022 sq. experienced sq. of negative Class A properties direct absorption. ft. vacating approximately 189,800sq.at396 ft. W Greens Road. with187,264sq.the ClassBsector ft. included Exxon-Mobil The largest move-out place in 216,065 sq. of negative with the bulk of the losses taking absorption, ft. Greenspoint/Nor spaceatCityWestPlace ofnew ft. Building2. witnessed 234,352sq.ofgrowth, ft. largely dueto Statoil moving into 322,877sq. thequarter.during Accounting of thegains, for ClassAproperties themajority The combined 487,804sq. within1725&1735HughesLandingBoulevard. ft. ofthegrowth.ft. gainsresulted fromThe quarterly ExxonMobil moving into a thequarter, during absorption accounted astheClassAsector for 465,544sq. The absor Freeway/Energy with504,094sq. ofdirectnet The ft. Katy ledthemarket Corridor The CBDr The G

80% 82% 84% 86% 88% 90% 92% In Thousands of SF 1,000 1,500 2,000 2,500 3,000 3,500 Westchase posted overall 296,110sq.ofpositive absorption direct ft. market Woodlands cameinsecondandrecorded 423,933sq.ofdirect net ft. 500 41 21 41 21 41 21 Q415 Q215 Q414 Q214 Q4 13 Q2 13 Q4 12 ption during thequarter.ption during posted ofdirect 564,462sq. The ft. ClassAmarket alleria/Uptown area with194,121 alsoposted asignificant lossthisquarter 0 41 21 41 21 41 21 Q415 Q215 Q414 Q214 Q413 Q213 Q4 12 ecorded 53,263 sq. ft. of direct occupancy gains during thequarter, gainsduring ecorded 53,263sq.ofdirectoccupancy ft. th Belt recorded the highest occupancy loss this quarter with recordedth Belt lossthisquarter thehighestoccupancy Direct NetAbsorption Direct Net Absorption vs. Completions vs. Absorption Direct Net Direct Occupancy Rates Direct Occupancy Class A MAR KET GLANCE ATA Completions Class B

Updated 1/4/2016 Updated 1/4/2016 RENTAL RATES &LEASING ACTIVITY

In Thousands of SF • • • • • • •

10,000 12,000 14,000 16,000 $18 $20 $22 $24 $26 $28 $30 $32 $34 $36 2,000 4,000 6,000 8,000 f rents gross remained asking relatively ClassAfull-service the flatduring Citywide companies delaying leasing decisions in an uncertain economy.companies delaying leasingdecisionsinanuncertain year, whichislargely dueto thelower volume ofleaseexpirationscoupledwithmany Class Aleasingvelocit leases. longterm space for mosttenants seeking remaininga term inexcess of5years, themlesscompetitive withdirect whichmakes Only 37%ofthelarge contiguousblocksofsubleasespace(40,000SForg Freeway/EnergyKaty (28.7%)andCBD(19.5%). Corridor total available inventory, with the largest shares found of sublease availability in the 3.6 millionsq.Subleasespacecurrently accountsfor ft. 3.6%oftheofficemarket’s 2014,whichismoresince year-end thandoubleits10-year average historic ofnearly Houston rent abatement and TI allowances dueto and vacancy. the added sublease inventory has cometo ascreeching haltandlandlords are offering more concessionssuchas r Although asking alargershare proportionate ofavailable space. andtaking to themarket Energy (12.2%),whichhaslargely Corridor resulted from spacedelivering highquality Freeway/growth withthelargest annualrentplaceintheKaty increases taking Within thepast12months buthave movedquarter up1.6%or$0.35persquare foot 12months. theprior during r Class Basking but have improved by 0.2%or$0.07persquare foot 2014. sinceyear-end ourth quarter of2015at$34.15persquare foot quarter amere –reflecting $0.05decrease– ourth 41 21 41 21 41 21 Q415 Q215 Q414 Q214 Q413 Q213 Q4 12 0 41 21 41 21 41 21 Q415 Q215 Q414 Q214 Q413 Q213 Q4 12 ’s by 3.0millionsq.to hasrisen over subleaseinventory ft. 7.8millionsq. ft. PROPERTY SERVICES |DEVELOPMENT |INVESTMENT PROPERTY ents slippedby $0.01to $21.60persquare foot (gross) the during ental rates are upcompared to 12monthsago, rent actual growth y over thepast12months hasdeclinedby 50.7%from theprior Class A ($/SF/Yr.Service Full , 90% of the Houston submarkets have rent , 90%oftheHoustonexperienced submarkets MAR KET GLANCE Direct Leasing Activity Direct Leasing Class A Rental Rates Rolling 12-Months ATA ) Class B Class B reater) have

term. tied upspace anticipating future growth lookto right-size inthenear availability have concessions caused to riseasenergy companies that enough to significantlyrents. impact However, increased subleasespace levels leasingOffice volumeand haveoccupancy declinedbutnot yet Central Division Executive Vice President, Director ofLeasing JOHN SPAFFORD akSubmarket Rank Updated 1/4/2016 9SuhetBlwy8/Hlcot$62 2.6% $16.22 Baytown&I-10East SouthwestBeltway8/Hillcroft 20 19 Richmond/Fountainview 18 FM1960 11.2% 17 NASA/Clear Lake 16 Greenspoint/ IAH/NBelt $22.52 15 GulfFreeway /Pasadena NorthwestFreeway /NorthLoopW 14 13 Kingwood/Humble 12 Bellaire 11 FortBend/Sugar Land 10 .Mi eia etr/Suh$73 4.7% $27.37 S.Main/MedicalCenterSouth TheWoodlands/Conroe 9 SanFelipe/Voss 8 KatyFreeway 7 Westchase 6 GreenwayPlaza 5 Midtown/Allen Parkway 4 Galleria/Uptown 3 CentralBusiness District 2 1 SUBMARKET RENTAL RATE RANKING Submarket RentalRateRanking Rental 2.40.6% $23.84 3.1% 1.8% $29.26 12.2% $30.42 2.0% $30.62 6.3% $30.78 7.7% $31.53 3.9% $31.63 1.6% $34.26 $38.56 1.9-7.5% 5.8% $15.49 2.5% $16.66 0.3% $19.57 -6.1% $19.66 1.2% $21.84 0.8% $21.88 $23.49 7.1% $26.01 Rate Q4 2015 Y-O-Y % Change 5

PAGE • • • • • • • RECENT ANNOUNCEMENTS Q4 RECENT ANNOUNCEMENTS 2015

PAGE 6 Energy submarket. Corridor Katy 227,063 sq.officebuildingin the Freeway/ ft. Greenway andCityCentre Five, Plaza submarket, a a 248,275 sq. Class A office building inthe ft. the quarter, whichconsisted ofOneGrove Street, Midwa the buildingsfullyleasedby Exxon Mobil. development totaling of 970,739sq.withtwo ft., three buildings within their Hughes Landing The have space. already beguntaking Class Aofficebuildingis42%leasedand tenants Speedway inNovember 2015. The 385,000sq. ft. PM R 267,507 sq. ofspace. ft. and BrunelEnergy, whichhasalready moved into sq. southtower ft. iscurrently leased by AirLiquide Air LiquideCenter thequarter. during The 452,370 Metr of2016. the 599,978spaceinsecondquarter leased by ConocoPhillips, whichplansto move into Four quarter. thefourth during The buildingisfully Trammell Cr Willie G’s Seafood. restaurantsLandry’s –Mastro’s and Steakhouse of unitsandtwo salon, 22residential apartment hotel rooms,addition to story atwo 240 luxury in will add140,000sq. ofClassAofficespace ft. submarket. When completed, the development mixed use tower 36-story in the Galleria/Uptown Tilman F A officebuilding. amenities, accompaniedby an186,000sq.Class ft. of residential units complete with community completion in2017,theprojectwillhave anarray Upon Collection. dubbedtheKirby submarket, pr Thor Equities broke ground on their mixed-use oject during the quarter intheGreenway thequarter during Plaza oject oNational delivered thesecond phaseofthe Woodlands Co. Development completed y also completed multiple projects during y alsocompleted multipleprojectsduring ealty Group ealty completed 3737Buffalo ertitta brokeground on ertitta The Post a Oak, ow Company delivered Energy Center PROPERTY SERVICES |DEVELOPMENT |INVESTMENT PROPERTY Updated 7/6/2015 Updated 1/4/2016 CONSTRUCTION In Thousands of 10,000SF 12,000 14,000 uueAeyB Q3000Glei ponAeyBn 74% Transwestern 1Q2016 Gensler/BMSManagement AmegyBank 100% 100% Woodlands Galleria/Uptown NationalOilwellVarco CBD KatyFreeway 240,470 BHPBilliton 380,000 Westchase KatyFreeway Havenwood OfficePark 389,709 Future AmegyBkHQ Galleria/Uptown 406,600 445,000 524,328 West MemorialPlaceII 600,000 Hilcorp EnergyTower* Millennium TowerII** Energy CenterFive BHP BillitonBTS** PROJECT NAME ein iaca etr2000Gena lz ein ak10 h esoeGop2Q2016 TheRedstoneGroup 100% RegionsBank Woodlands GreenwayPlaza Note: *Corporateownedoffice buildings(excludedfromcompetitivestatistics); **Build-to-suit 201,933 210,000 Wildwood CorporateII Regions FinancialCenter M ehoois ,0,0 igodHml M ehoois10 codDvlpet1Q2016 Kirby Collection McCordDevelopment CBD 100% 1,056,658 FMCTechnologies Kingwood/Humble 1,700,000 609 MainatTexas Phillips 66** FMC Technologies* Updated 1/4/201 SIGNIFICANT PROJECTSUNDERCONSTRUCTION

In Thousands of 10,000SF 12,000 14,000 • • • • • • 2,000 4,000 6,000 8,000

2,000 4,000 6,000 8,000 quarter, withthelargest projectbeingthe600,000sq. Energy new ft. Center Four. accounted for deliveries thispast Energy submarket 42.0%ofthenew Corridor 8.2millionsq.ofwhich62.5%iscurrentlyto pre-leased. nearly ft., Freeway/The Katy bringingtotal theyearly buildings totaling over thequarter 3.3millionsq.during ft. with projectsthatwillbecompleted inthecomingquarters. developers areacloseeye to seewhetherthosecostsbegin keeping to decline (22.9%)ofthat spacehasalreadyft. beenpre-leased. accountingforconstruction, 20.8%ofHouston’s development pipeline. 255,064sq. rates areleased, to expected slidefurther. occupancy buildings set to deliver by the end of 2016, and with only 37.5% of this space pre- The Houst projects). of thisspacealready preleased (excluding corporate-owned stands at approximatelycurrently under construction 5.4million sq. with 37.8% ft., or committed by an owner/user.this space eitherpre-leased space for lease Office projects –with61.2%of –includingcorporate-owned sq. underconstruction ft. Houston hasslippedintherank Within thecompetitiv and4.0millionsq.for ft. theentire thequarter year.of thedeliveriesduring office buildings accounted for 328,804 projects ft. included.sq. Corporate-owned quar the deliveredDevelopers officespaceduring 3.7millionsq.ofnew fourth nearly ft. Af The K 0 0 ter significant increases costs in Houston in construction over the past few years, ter, bringing total theyearly to over 12.2millionsq. withcorporate-owned ft. 21 41 21 41 21 41 Q215 Q414 Q2 14 Q413 Q2 13 Q412 Q2 12 41 21 41 21 41 21 Q415 Q215 Q4 14 Q214 Q4 13 Q213 Q4 12 aty Freeway/Energyaty stillhasover 1.1millionsq.under submarket ft. Corridor 6 on office market currently has 4.7 million sq. ft. of non-owner occupied currently has4.7million ft.ofnon-owner sq. on officemarket ,0,0 Westchase 1,100,000 IE(F UMRE MAJORTENANT SUBMARKET SIZE (SF) 8,1 Greenway Plaza 186,813 e leasing market, developers completed office 13new e leasingmarket, Under Construction Under Construction MAR KET GLANCE Construction Pipeline Construction Pipeline ings to fourth in the nation with nearly 8.6million inthenationwithnearly ings to fourth icr nry100% Hilcorp Energy ikad&Els7% Kirkland &Ellis hlis6 0%HKGlaeBidn o 2Q2016 HOK/Gilbane BuildingCo. 100% Phillips 66 IHI E&C N/A N/A N/A N/A ATA ESDDEVELOPER LEASED % PRE- 49% %Taml rwC.2Q2016 0% TrammellCrowCo. 0% %AcwyPoete 3Q 2016 ArchwayProperties 0% 0% Delivered Delivered J. BeardRECo./EversonDev. Thor Equities Skanska Hines Hines Hines COMPLETION

2Q 2016 1Q 2017 1Q 2016 4Q 2016 4Q 2016 3Q 2017 1Q 2016 T ARGET stein Properties plansto eventually redevelop 1.3millionsq. ClassBofficebuildingthatcouldbe attheearliest. ft. ready for2017occupancy Please note: 800Bell, buildingintheHouston theformer CBD, Exxon headquarters isexcluded from competitive statisticssinceShoren office - inventory STATISTICSSUBMARKET Totals Class C Class B Class A Property Type Submarket otws rea opWs 220492781419297.%1545134001574$67 $19.54 $26.76 165,754 0 163,470 125,405 79.9% 189,249 2,728,134 12,200,479 NASA /ClearLake&SEOutlier Northwest Freeway/NLoopWest Greenspoint/ IAH/NBelt Westchase Katy Freeway Greenway Plaza Galleria /Uptown Central BusinessDistrict otBn ua ad/S ule ,2,3 ,5,6 6,3 68 44014244,6 489$78 $23.99 $27.83 84,879 46,764 174,244 24,420 86.8% 166,139 1,052,363 7,729,331 Richmond /Fountainview Fort Bend/SugarLandSWOutlier otws eta W/Hlcot1,3,6 ,7,5 9008.%5,2 0,4 0 408,441 50,724 82.9% 19,050 Totals Baytown /I-10East 2,177,852 Gulf Freeway/Pasadena The Woodlands/Conroe 10,138,765 S. Main/MedicalCenterSouth Southwest Beltway8/SWHillcroft Midtown /AllenParkway Bellaire San Felipe/Voss Kingwood /HumbleNEOutlier FM 1960 METHODOLOGY DIRECT ASKING RENTS:DIRECT UNDER CONSTRUCTION: NET ABSORPTION:DIRECT OCCUPANCYDIRECT RATE: SUBLEASESPACE: Space that hasbeenleasedby atenant andisbeingoffered for leasebackto themarket by thetenant withtheleaseobligation. SPACE:DIRECT TOTAL SPACE AVAILABLE: TOTAL INVENTORY: PROPERTY SERVICES |DEVELOPMENT |INVESTMENT PROPERTY Space that isbeingoffered for from leasedirectly thelandlord orowner ofabuilding. space Under construction isnotincludedinspace available figures. The total inventory includesallsingleandmulti-tenant leasedoffice buildingswithat least20,000square feet ofgross rentable square footage. The asking rent quoted full-service for available space expressed indollarspersq. ft. Office buildingswhichhaveOffice commenced asevidenced construction by site excavation orfoundation work. Available space currently beingmarketed whichiseitherphysically vacant oroccupied. The netchange inoccupied space direct over agiven periodoftime. Direct space physicallyDirect occupied dividedby thetotal rentable inventory. MAR KET GLANCE T T otal Inventory otal Inventory 1,2,6 81774776808.%11840279963371354489$78 4.4% $27.82 5,404,809 3,337,123 2,749,986 1,168,490 85.4% 7,776,860 38,127,714 218,125,361 1,7,8 98190591638.%13602312403206852887$41 0.2% $34.15 5,218,847 3,240,648 3,112,440 1,336,022 85.7% 5,901,623 19,821,960 114,773,888 1,2,6 81774776808.%11840279963371354499$41 $21.60 $34.15 5,404,909 3,337,123 2,749,986 1,168,490 85.4% 7,776,860 38,127,714 218,125,361 724991,9,2 ,5,5 43 2014-3,9 6451592$16 1.6% $21.60 0 185,962 171,641 96,475 42,652 -534,095 89.1% -210,184 84.3% 20,679 1,854,558 2,107,726 16,198,028 16,066,554 87,284,919 4668024383106128.%2610765604500$70 $19.93 $37.03 445,000 $25.82 $26.53 $23.93 $28.71 $34.83 $36.51 $35.67 $43.60 68,950 0 396,813 1,285,000 1,114,819 1,171,658 -1,012,620 648,275 1,402,395 716,596 -216,065 0 0 1,728,472 296,110 -152,419 70.3% 504,094 -476,675 55,603 88.6% 731,189 38,646 84.9% -194,121 85.1% 1,066,132 5,044,971 53,263 88.1% 2,235,276 2,483,803 200,853 12,261,143 89.6% 5,409,909 659,846 14,666,840 1,583,112 31,624,335 1,518,321 3,469,099 10,665,263 4,532,552 22,875,511 37,434,076 085371549040498.%4393554790796246$54 $25.41 $35.47 642,486 970,739 575,477 423,933 86.2% 490,409 1,544,980 10,825,357 032942189229868.%-468596720000$65 $17.13 $26.51 0 200,000 579,637 -24,688 82.7% 269,816 2,148,952 10,322,904 ,8,4 ,0,9 0998.%-4113,1 0 30,513 -14,181 82.5% 40,919 1,305,392 6,485,548 ,9,9 ,3,4 8948.%1507-5230 -15,223 105,087 87.3% 0 18,974 33,743 1,334,645 10,105 9,291,291 90.6% 6,105 179,708 1,224,637 ,5,7 3,3 82 1,2 4,4 0 0 -40,244 25,598 -13,421 0 88.2% 4,341 10,262 87.0% 0 0 0 201 2,522 0 88,704 131,935 -8,150 84.1% 544,447 -42,270 1,052,477 -118,486 -3,277 3,325,542 9,959 84.4% 23,227 92.2% 25,605 226,133 86.7% 98,613 1,352,112 27,883 959,953 405,455 5,853,982 864,319 3,550,784 5,244,984 SF SF Direct Sublease Direct Sublease TOTAL SPACEAVAILABLE TOTAL SPACEAVAILABLE ATA cuac urn t.YearToDate CurrentQtr. Occupancy YearToDate CurrentQtr. Occupancy Direct Direct

DIRECT NETABSORPTION DIRECT NETABSORPTION Completions Completions Current Qtr Current Qtr CONSTRUCTION CONSTRUCTION Construction Construction 750$91 $27.43 $29.10 47,500 600$04 $23.34 $30.42 26,000 $22.62 $31.95 25,000 Under Under 1.20.2% $16.42 0 2.2$16.98 $26.82 0 2.3$18.38 $26.33 0 1.6$15.98 $18.46 0 0 0 $28.85 $33.63 $23.47 $26.95 $23.77 $35.63 0 0 0 Asking ClassB Class A Rent ASKING RENT ASKING RENT $18.21 - $17.03 - Q4 2015 Y-O-Y % Change 7

PAGE MAR KET AT A GLANCE Q4 2015

Wade Bowlin John Spafford Brad Sinclair Kim Grizzle-Shapiro Mike Martin Executive Vice President Executive Vice President Executive Vice President Senior Vice President Vice President Managing Director Director of Leasing Leasing Leasing Leasing (713) 209-5753 (713) 209-5823 (713) 209-5965 (713) 209-5940 (713) 209-5710 [email protected] [email protected] [email protected] [email protected] [email protected]

Michael Sieger Marci Phillips Courtney Buckout Allie Hubbard Ariel Guerrero Vice President Vice President Leasing Manager Leasing Manager Senior Vice President Leasing Leasing (713) 209-5959 (713) 209-5975 Research (713) 209-5930 (281) 444-6434 [email protected] [email protected] (713) 209-5704 [email protected] [email protected] [email protected] ABOUT PMRG Headquartered in Houston, Texas, PM Realty Group (PMRG) is one of the nation’s leading real estate companies focusing on comprehensive property services, development and acquisitions. With a strategic presence in 30 markets, PMRG provides the highest quality services to its clients and investors. PMRG’s clients and investors include large financial institutions, advisors and high net worth individuals. By capitalizing on the team’s experience and expertise, PMRG has the ability to undertake large and challenging management, leasing, development and acquisition projects.

PMRG’s portfolio, including projects managed for third parties, includes commercial office buildings, mixed- Kristen Burney Doug Berry use centers, corporate headquarters, industrial buildings, medical facilities, high-rise multifamily buildings Vice President Vice President and re-appropriated military facilities. Director of Marketing Creative Director (713) 209-5910 (713) 209-5897 Our goal is to generate exceptional returns for our clients and investors by focusing on real estate fundamentals. For additional information, visit www.pmrg.com. [email protected] [email protected]

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON OFFICE

AT A MARKET REPORT AT A MarMarket ket GlanceGlance THIRD QUARTER 20132015

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q3 2015 Mar ket AT A Glance

ECONOMIC OVERVIEW

Houston’s economy has been a beneficiary of a booming energy sector in recent years, but the pace of employment growth has significantly slowed in response to the reset in the global energy markets. As anticipated, lower crude oil prices have forced many energy- related companies to trim jobs, but Houston’s economy has still created 38,400 new jobs over past 12 months ending August 2015, representing a 1.3% annual increase. However, these employment figures are somewhat misleading since much of the job growth occurred last year and employment levels remain 22,200 jobs below their peak in December.

Major oil companies have announced cuts in both jobs and budgets after a year of volatile oil prices. Smaller independent energy companies, particularly those that are over-leveraged, are prime targets for merger and acquisition activity. With West Texas Intermediate crude oil prices trading in the mid-$40s, Houston is bracing itself for a prolonged downturn. Earlier this TABLE OF CONTENTS year, the U.S. Energy Information Administration (EIA) forecasted crude oil to rise to $55 by September, but without a significant decline in output over the summer, the EIA was forced Economic Overview...... 2 to push the timeline for $55 per barrel pricing to the middle of 2016. Concerns over the Office Market Assessment...... 3 pace of economic growth in emerging markets, continuing (albeit slowing) supply growth, Net Absorption & Occupancy...... 4 increases in global liquids inventories and the possibility of increasing volumes of Iranian Rental Rates & Leasing Activity...... 5 crude oil entering the market contributed to the changed forecast. Ongoing consolidation Construction...... 6 Updatedin the energy 10/5/2015 sector will result in more cuts to operations and employment, and those will have further spillover effects on the rest of the regional economy. As a result, the Houston Submarket Statistics & Methodology...... 7 metro area economy is expected to show small net jobs losses through the middle of next Our Team...... 8 year. Employment Trends

120 6% 100 80 4%

Thousands 60 40 2% FOR INFORMATION: 20 0 0% Wade Bowlin -20 Executive Vice President -40 -2% Managing Director -60 -80 -4% (713) 209--5753 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15F '16F '17F [email protected] Jobs Added Annual % Change John Spafford UpdatedSource: 10/4/2015 U.S. Bureau of Labor Statistics, Greater Houston Partnership, PMRG Research Executive Vice President Director of Leasing Employment Growth by Sector (713) 209--5823 12-MONTHS HEALTH [email protected] CURRENT PRIOR ANNUAL (Improving READING READING CHANGE or Declining) Mining 110.0 111.7 -1.5% Down Ariel Guerrero Construction 203.0 206.7 -1.8% Down Senior Vice President, Research Manufacturing 246.5 257.0 -4.1% Down (713) 209-5704 Trade, Transportation & Utilities 608.7 602.3 1.1% Up [email protected] Information 34.0 32.9 3.3% Up Financial Activities 144.7 149.3 -3.1% Down Professional & Business Services 479.2 471.5 1.6% Up Education & Health Services 364.9 352.3 3.6% Up 2

PAGE Leisure & Hospitality 311.9 290.1 7.5% Up Other Services 106.5 104.5 1.9% Up Government 361.0 353.7 2.1% Up Source: U.S. Bureau of Labor Statistics; Employment Data as of August 2015 AllSource: Employees, U.S. Bureau in Thousands of Labor Statistics. Employment Data as of August 2015 (P) PROPERTYAll Employees, SERVICES In Thousands | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q3 2015

OFFICE MARKET ASSESSMENT

The Houston office leasing market has been one the most active in the country over the past four years, but growth has tapered significantly and some softness is occurring due to slower demand, rising sublease availabilities, and a flood of new office buildings entering the market. Despite the uncertainties in the energy sector, Houston’s office leasing market has held up and managed to post 1,019,195 sq. ft. of positive direct net absorption during the third quarter, bringing the year-to-date tally to nearly 1.6 million sq. ft. The Class A market experienced 1,046,727 sq. ft. of occupancy gains, with over half of the quarterly gains attributed to ConocoPhillips moving into 546,604 sq. ft. in the recently delivered Energy Center Three. The Class B sector countered these gains with 81,547 sq. ft. of losses during the quarter, bringing the year-to-date loss to 323,911 sq. ft. Even though the Class A sector has recorded nearly 1.8 million sq. ft. of direct net absorption for the year, direct occupancy levels have dropped a total of 300 basis points Houston Economic Outlook: to 87.1% within the past 12 months as a result of the steep supply/demand imbalance. The Greater Houston Partnership anticipates that Meanwhile, Class B direct occupancy rates have only declined by 10 basis points to Houston will gain 20,000 to 30,000 overall jobs this 85.0% over the past 12 months. year, while University of Houston’s Regional institute for Regional Forecasting has a dimmer outlook, projecting only 13,000 new jobs in 2015. Leasing activity has slowed significantly compared to its swift pace experienced within the past few years as companies are delaying their long-term leasing decisions. As a Sublease Space Reaches Record Level: result of the economic uncertainty, some tenants are opting for short-term leases Sublease availability has risen by 2.9 million sq. ft. to over while others are moving forward with early lease restructures. The largest transactions 7.6 million sq. ft. since year-end 2014, which is more signed during the third quarter involved The Texas Children’s Health Plan committing to than double its 10-year historic average. The application 139,244 sq. ft. of sublease space at 6330 West Loop South, with plans to take the space of this newly added sublease inventory to the office early next year. CEMEX USA also signed an 80,000 sq. ft. lease at 10100 Katy Freeway – a direct space absorption results in an overall citywide planned building set to begin construction next quarter. In addition, law firm Kirkland negative absorption of (47,700) sq. ft. year-to-date. & Ellis leased the top two and one half floors of 609 Main at Texas, totaling 70,000 sq. ft. Diversified Economic Drivers: The energy sector now contributes only 40% of the FORECAST local economy. The Port of Houston is the tenth • As a result of a steep supply/demand imbalance, direct occupancy rates are projected largest port in the world – and ranks first nationally in to decline by 250 basis points to 85.1% by year-end 2015, reaching its lowest level international waterborne tonnage handled. The Texas since 2011, after enjoying three years above its 20-year historical average of 86.8%. Medical Center is the largest in the world – with a local • A steady influx of new product coming online and rise in sublease availability will economic impact of $10 billion per year. provide tenants increased opportunities to upgrade their space or expand in the year ahead. • Leasing activity has dropped to its lowest level since 2009. However, with a high Updated 10/4/2015 volume of leases expiring in 2017 through 2019 and the pent up demand from Market Trend Indicators Updated 7/6/2015tenants delaying office leasing decisions, market activity is expected to return to increased levels in 12 to 18 months. Current Change from Previous 12-month Change from Previous 12-month Quarter Quarter Year Forecast Quarter Year Forecast Office Market Trends Direct Occupancy 86.3% Sideways Down Down

10,000 90% Trailing 12 mos. Direct Net Absorption 2,122,264 Down Down Down

8,000 88% Under Construction 8,128,861 Down Down Down 6,000 86% Direct Asking Rents $27.69 Up Up Down 4,000 84% 2,000 in Thousands of SF in Thousands 0 82% 3 -2,000 80% PAGE '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15F '16F '17F

Direct Net Absorption Completions Direct Occupancy

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q3 2015 Mar ket AT A Glance

NET ABSORPTION & OCCUPANCY

• The Katy Freeway/Energy Corridor led the market with 604,146 sq. ft. of direct net absorption during the quarter. The Class A market posted 674,802 sq. ft. of direct net absorption, largely due to ConocoPhillips moving into nearly 550,000 sq. ft. at Energy Center Three. In addition, Det Norske Veritas occupied roughly 47,250 sq. ft. in the second phase of their built-to-suit project and Microsoft took 40,589 sq. ft. at Town Centre One recently delivered. • The Westchase market ranked second and recorded 141,193 sq. ft. of positive direct absorption overall during the quarter. Class A properties accounted for the majority of the gains, reporting 114,043 sq. ft. of positive net absorption, largely attributed to CB&I occupying 100,000 sq. ft. of new space at Westchase Park II. • The Woodlands posted 107,067 sq. ft. of occupancy gains during the third quarter, absorbing 63,531 sq. ft. of space within the Class A sector. The quarterly gains resulted “Low energy prices have pushed some tenants into a from NewField Exploration Group moving into 24,910 sq. ft. at 24 Waterway and Hunt “wait and see” posture allowing smaller to medium Guillot taking 26,189 sq. ft. of space at 8401 New Trails Drive. sized tenants to enter the market sooner and lease • Greenspoint/North Belt continued to feel the effects of large tenant move-outs spaces that would have previously been unattainable with 193,543 sq. ft. of negative direct absorption, as the Class A sector accounted due to competition from larger firms,” said Wade Bowlin, for the majority of the losses with 108,937 sq. ft. The largest move-outs occurred at Executive Vice President, Managing Director, Central Two Greenspoint as Exxon-Mobil vacated roughly 63,000 sq. ft. while Swift Energy left Division. behind 123,678 sq. ft. and relocated into 113,801 sq. ft. at Five Greenspoint. Equifax Updated 10/4/2015 also moved out of 73,251 sq. ft. of Class B space at Bridgewood II. • The CBD recorded 85,625 sq. ft. of direct occupancy losses during the quarter, Submarket Occupancy Ranking bringing the year-to-date absorption total to 14,617 sq. ft. of negative absorption. Occ. Y-O-Y % The largest move-out involved Gardere Wynne Sewell downsizing by 36,031 sq. ft. Rank Submarket Rate Change during the quarter. 1 Bellaire 92.3%Updated 0.6% 10/4/2015 2 The Woodlands / Conroe 90.4% 0.8% 3 Richmond / Fountainview 89.8% 5.0% Direct Net Absorption vs. Completions 4 Central Business District 89.7% -0.3%

5 Baytown & I-10 East 89.4% -0.4% 2,400 6 Greenway Plaza 88.9% -1.8% 2,000 7 Galleria / Uptown 88.8% -1.2% 8 Katy Freeway 87.2% -4.4% 1,600 9 Gulf Freeway / Pasadena 86.9% -1.6% 1,200 10 Westchase 86.8% -0.3% 800 11 Fort Bend / Sugar Land 86.5% 0.1% Thousands of SF In 400 12 San Felipe / Voss 86.5% -3.4% 13 S. Main / Medical Center / South 86.1% -2.3% 0 Updated 10/4/2015 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 14 Kingwood / Humble 85.8% -3.7%

15 FM 1960 85.8% 3.8% Direct Net Absorption Completions 16 Midtown / Allen Parkway 84.2% -3.6% Direct Occupancy Rates 17 NASA / Clear Lake 83.8% 0.7% 18 Southwest Beltway 8 / Hillcroft 82.9% 4.9% 92% 19 Northwest Freeway / North Loop W 79.2% -5.9% 20 Greenspoint / IAH / N Belt 71.9% -10.3% 90% 88% 86% 84% 4 82% PAGE 80% Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q3 2015

RENTAL RATES & LEASING ACTIVITY

• Weaker leasing demand has yet to slow rent growth as citywide Class A full-service gross asking rents increased slightly by $0.14 to $34.20 per square foot – only $0.02 below its peak recorded during the first quarter – and have improved by 0.4% or $0.14 per sq. ft. since third quarter 2014. However, much of this growth can be attributed to new building deliveries impacting the weighted average numbers. • Class B asking rents rose by $0.07 to $21.61 per square foot (gross) during the quarter and have moved up 2.2% or $0.47 per square foot during the prior 12 months. • Nearly two-thirds of the submarkets have experienced rent growth, largely due to high quality space deliveries taking a larger proportionate share of available space. • Rent growth has considerably slowed and is expected to remain flat for the remainder of 2015. However, concessions such as rent abatement and TI allowances will continue to rise as a result of the added sublease inventory and existing vacancy. • Houston’s sublease inventory has risen by 2.9 million sq. ft. to over 7.6 million sq. ft. “Office leasing volume and occupancy levels have since year-end 2014, which is more than double its 10-year historic average of nearly declined in 2015 but not enough to significantly impact 3.6 million sq. ft. Sublease space currently accounts for 3.6% of the office market’s total rents. However, increased sublease space availability available inventory, with the largest share of sublease availability found in the Katy will cause concessions to rise as energy companies that Freeway/Energy Corridor (29.2%) and CBD (19.2%). tied up space anticipating future growth look to right- • Only 35.7% of the large contiguous blocks of sublease space (40,000 SF or greater) have size in the near term,” said John Spafford, Executive Vice a term remaining in excess of 5 years, which makes them less competitive with direct President, Director of Leasing. space for most tenants seeking long term leases. Updated 10/4/2015 Updated• 10/4/2015Class A leasing velocity over the past 12 months has declined by 75.6% from the prior year, which is largely due to the lower volume of lease expirations coupled with many Submarket Rental Rate Ranking companies delaying leasing decisions in an uncertain economy. Rental Y-O-Y % Rank Submarket Rate Change Rental Rates 1 Central Business District $37.79 -0.8% ($/SF/Yr. Full Service) 2 Galleria / Uptown $33.98 2.8% $36 3 Midtown / Allen Parkway $31.97 8.6% $34 4 San Felipe / Voss $31.12 4.6% $32 5 Katy Freeway $30.64 13.5% $30 6 Westchase $30.09 -1.7% $28 7 Greenway Plaza $29.39 -2.2% $26 8 The Woodlands / Conroe $28.87 -1.7% $24 9 S. Main / Medical Center / South $27.02 9.2% $22 10 Fort Bend / Sugar Land $25.25 2.3% $20 11 Bellaire $23.83 0.1% $18 12 Kingwood / Humble $23.19 0.7% Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Updated 10/4/2015 13 Greenspoint / IAH / N Belt $23.00 -0.5% 14 Northwest Freeway / North Loop W $22.21 10.4% Class A Class B 15 Gulf Freeway / Pasadena $22.06 3.3% Direct Leasing Activity Rolling 12-Months 16 NASA / Clear Lake $19.99 3.4% 17 FM 1960 $19.50 3.7% 16,000 18 Richmond / Fountainview $16.80 8.5% 14,000 19 Southwest Beltway 8 / Hillcroft $16.18 0.4% 12,000 20 Baytown & I-10 East $15.13 -6.9% 10,000 8,000 6,000

In Thousands of SF In 4,000 2,000 5 PAGE 0 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q3 2015 Mar ket AT A Glance

CONSTRUCTION

• Developers delivered nearly 1 million sq. ft. of new space during the third quarter, bringing the year-to-date total to nearly 8.8 million sq. ft. with corporate-owned projects included. Corporate-owned office buildings accounted for 133,000 sq. ft. of the deliveries during the quarter and 3.7 million sq. ft. year-to-date. • Within the competitive leasing market, developers completed over 878,959 sq. ft. in 7 new office buildings which were already 23.1% pre-leased. The Katy Freeway/Energy Corridor submarket accounted for 39.6% of the new deliveries this past quarter. The largest new project was the 300,907 sq. ft. Enclave Place developed by PMRG. • Houston currently ranks second behind New York City with nearly 11.5 million sq. ft. under construction – including corporate-owned projects – with 64.2% of this space either pre-leased or committed by an owner/user. Office space for lease currently under construction stands at approximately 8.1 million sq. ft., with 49.4% of this space already RECENT ANNOUNCEMENTS preleased (excluding corporate-owned projects). • The Houston office market is expected to round-out the year with an additional 3.1 • MetroNational recently announced plans to begin million sq. ft. of non-owner-occupied buildings delivered during the fourth quarter, developing a 240,000 sq. ft. office building located Updatedwhich should 10/4/2015 cause occupancy rates to slide further as 51.7% of this new space remains across I-10 from its Memorial City mixed-use project, unleased. with completion projected for fall 2016. CEMEX will • The Katy Freeway/Energy Corridor submarket still has over 2.5 million sq. ft. under anchor the project with an 80,000 sq. ft. pre-lease Updatedconstruction, 7/6/2015 accounting for 31.0% of Houston’s office development pipeline. recently signed for their U.S. headquarters. Construction Pipeline • InSite Realty and Urban Cos. recently secured a pre- lease commitment for over 21,000 sq. ft. of space, allowing the developer to move forward on Phase II 14,000 Construction Pipeline of their Grandway West project. Upon delivery, the 12,000 project will add 130,200 sq. ft. to the market. 14,000 • Piedmont Office Realty Trust finished construction 10,000 on Enclave Place, a speculative 300,907 sq. ft. 12,000 high-rise in the Katy Freeway submarket, which is 8,000 currently completely vacant. 10,0006,000 • Hines recently delivered San Felipe Place, a 167,562 8,000

sq. ft. Class A office building within the Midtown Thousands of SF In 4,000 submarket. Multiple tenants have already moved 6,0002,000 into 48,095 sq. ft. of space.

• Freeway Properties delivered 151,187 sq. ft. of Class Thousands of SF In 4,000 0 A office space during the third quarter, and US Silica 2,000 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 Q3 15 Company has already moved into 17,464 sq. ft. • Archway Properties commenced construction on Updated0 10/5/2015 Under Construction Delivered Wildwood Corporate Centre II during the second Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 Q4 14 Q2 15 quarter, which will add 201,000 sq. ft. of space to SIGNIFICANT PROJECTS UNDER CONSTRUCTION % PRE- TARGET the market when it delivers in July 2016. Under Construction Delivered PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT LEASED DEVELOPER COMPLETION • Houston First Corporation’s downtown office FMC Technologies* 1,700,000 Kingwood/Humble FMC Technologies 100% McCord Development 1Q 2016 building broke ground early this year. The fully Phillips 66* 1,100,000 Westchase Phillips 66 100% HOK/Gilbane Building Co. 2Q 2016 leased 115,000 sq. ft. project will be occupied by 609 Main at Texas 1,056,658 CBD Kirkland & Ellis 7% Hines 4Q 2016 the Greater Houston Partnership and the Visitors BHP Billiton BTS** 600,000 Galleria / Uptown BHP Billiton 100% Transwestern 4Q 2016 Bureau and will deliver in October 2016. Energy Center Four 600,000 Katy Freeway ConocoPhillips 100% Trammell Crow Co. 4Q 2015 • J. Beard Real Estate Co. broke ground early this year Energy Center Five 524,328 Katy Freeway N/A 0% Trammell Crow Co. 2Q 2016 on Havenwood Office Park, a 240,470 sq. ft. Class A Air Liquide Center South 452,370 Katy Freeway Air Liquide 59% MetroNational 4Q 2015 office building slated to deliver by November 2015. Millennium Tower II** 445,000 Westchase National Oilwell Varco 100% Gensler/BMS Management 1Q 2016 • Skanska is underway on Phase 2 of their 12-acre Hilcorp Energy Tower* 406,600 CBD Hilcorp Energy 100% Hines 1Q 2016 West Memorial Place project, which will deliver by 3737 Buffalo Speedway 400,000 Greenway Plaza Solvay America 39% PM Realty Group 4Q 2015 mid-2016. IHI Corp recently secured a pre-lease West Memorial Place II 389,709 Katy Freeway IHI E&C 49% Skanska 2Q 2016 commitment to occupy 158,050 sq. ft. Future Amegy Bk HQ 380,000 Galleria / Uptown Amegy Bank 74% Hines 1Q 2017 6 1735 Hughes Landing** 331,840 Woodlands Exxon/Mobil 100% Woodlands Development Co 2Q 2016 PAGE Three Hughes Landing 320,815 Woodlands N/A 0% Woodlands Development Co 4Q 2015 1725 Hughes Landing** 317,052 Woodlands Exxon/Mobil 100% Woodlands Development Co 2Q 2016 One Grove Street 248,275 Greenway Plaza Vitol Inc.; BoyarMiller 63% Midway 4Q 2015 Note: * Corporate owned office buildings (excluded from competitive statistics); ** Build-to-suit

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q3 2015

SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Completions Under Submarket SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 37,341,947 4,369,693 1,466,750 89.7% -85,625 -14,617 - 1,171,658 $42.72 $28.16 Galleria / Uptown 22,973,042 3,594,064 628,121 88.8% 53,794 -282,554 92,021 1,145,000 $36.55 $26.31 Greenway Plaza 10,124,867 1,335,449 199,370 88.9% 15,645 -208,022 - 858,275 $33.48 $25.79 Katy Freeway 30,223,491 4,833,664 2,230,304 87.2% 604,146 1,224,378 348,157 2,523,419 $36.29 $24.11 Westchase 14,669,957 2,363,563 912,621 86.8% 141,193 420,486 - 445,000 $36.74 $19.97 Greenspoint/ IAH / N Belt 12,481,424 5,042,094 755,127 72.8% -193,543 -796,555 - 68,950 $28.76 $16.98 Northwest Freeway / N Loop West 12,067,054 2,682,693 205,605 80.1% 83,978 38,065 - 0 $26.49 $19.12 NASA / Clear Lake & SE Outlier 6,485,548 1,230,437 94,582 83.8% 56,820 44,694 20,032 0 $24.84 $19.42 Fort Bend / Sugar Land / SW Outlier 7,668,553 1,067,668 176,248 86.5% 46,121 149,824 151,187 46,764 $27.01 $24.22 Richmond / Fountainview 1,224,637 212,815 0 89.8% 1,445 23,638 - 0 - $18.38 San Felipe / Voss 5,236,196 873,302 36,547 86.5% -523 -141,713 - 0 $36.40 $24.01 Bellaire 3,550,784 379,554 146,218 92.3% 26,991 -4,873 - 0 $26.58 $23.64 Midtown / Allen Parkway 5,897,764 1,122,123 17,381 84.2% 70,231 130,974 167,562 0 $33.68 $29.48 FM 1960 10,122,904 1,803,968 282,241 85.8% 99,709 604,325 - 200,000 $26.74 $16.64 Kingwood / Humble / NE Outlier 1,231,601 178,572 1,229 85.8% -13,008 10,061 - 0 $31.95 $21.83 Southwest Beltway 8 / SW / Hillcroft 10,138,765 2,091,691 68,965 82.9% -39,336 357,717 - 0 $18.52 $15.93 S. Main / Medical Center / South 9,291,291 1,373,681 18,478 86.1% 45,231 -120,310 100,000 0 $28.98 $26.84 The Woodlands / Conroe 9,870,669 1,129,871 373,696 90.4% 107,067 151,544 - 1,669,795 $34.98 $25.58 Gulf Freeway / Pasadena 3,324,842 530,015 26,578 86.9% 10,292 21,257 - 0 $27.59 $23.52 Baytown / I-10 East 1,052,477 124,671 0 89.4% -11,433 -26,823 - 0 - $15.80 Totals 214,977,813 36,339,588 7,640,061 86.3% 1,019,195 1,581,496 878,959 8,128,861 $34.20 $21.61

Please note: 800 Bell, the former Exxon headquarters building in the Houston CBD, is excluded from competitive office inventory statistics since Shorenstein Properties plans to eventually redevelop 1.3 million sq. ft. Class B office building that could be ready for 2017 occupancy at the earliest.

METHODOLOGY Total Inventory: The total inventory includes all single and multi-tenant leased 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 that is being 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. 7 PAGE Direct Asking Rents: The quoted full-service asking rent for available space expressed in dollars per sq. ft.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q3 2015

Michael Sieger Marci Phillips Courtney Knightstep Allie Hubbard Ariel Guerrero Vice President Vice President Leasing Manager Leasing Manager Senior Vice President Leasing Leasing (713) 209-5959 (713) 209-5975 Research (713) 209-5930 (281) 444-6434 [email protected] [email protected] (713) 209-5704 [email protected] [email protected] [email protected]

ABOUT PMRG Headquartered in Houston, Texas, PM Realty Group (PMRG) is one of the nation’s leading real estate companies focusing on comprehensive property services, development and acquisitions. With a strategic presence in 30 markets, PMRG provides the highest quality services to its clients and investors. PMRG’s clients and investors include large financial institutions, advisors and high net worth individuals. By capitalizing on the team’s experience and expertise, PMRG has the ability to undertake large and challenging management, leasing, development and acquisition projects.

PMRG’s portfolio, including projects managed for third parties, includes commercial office buildings, mixed- Kristen Burney Doug Berry use centers, corporate headquarters, industrial buildings, medical facilities, high-rise multifamily buildings Vice President Vice President and re-appropriated military facilities. Director of Marketing Creative Director (713) 209-5910 (713) 209-5897 Our goal is to generate exceptional returns for our clients and investors by focusing on real estate [email protected] [email protected] fundamentals. For additional information, visit www.pmrg.com.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON OFFICE

AT A MARKET REPORT AT A MarMarket ket GlanceGlance THIRDSECOND QUA QUARTERRTER 2013 2015

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q2 2015 Mar ket AT A Glance

ECONOMIC OVERVIEW

Houston’s economy has been a beneficiary of a booming energy sector in recent years, but the pace of employment growth has slowed this year in response to the reset in the global energy markets. As anticipated, lower crude oil prices have forced many energy-related companies to trim jobs, but Houston’s economy has still created 62,300 new jobs over past 12 months ending May 2015, representing a 2.1% annual increase. However, it is important to note that much of this growth occurred in the latter part of 2014.

The U.S. shale boom that has brought the country closer to energy self-sufficiency than at any time since the 1980s will continue to face uncertainty with lower oil prices, mergers/ acquisitions and falling stock prices. On a positive note, West Texas Intermediate crude prices appear to have stabilized around the $60 per barrel mark over the past two months since hitting its low of $43 in mid-March 2015, and the rig count has recently appeared to have TABLE OF CONTENTS bottomed out. However, oil prices still remain well below the $65 to $80 per barrel range, which many companies consider the profitability point to start drilling again. Despite the Economic Overview...... 2 uncertainty, Houston’s economy should continue to grow in 2015, but at a much slower rate Office Market Assessment...... 3 than the past few years. Job growth projections for 2015 vary widely, from 20,000 to 30,000 Net Absorption & Occupancy...... 4 by the Greater Houston Partnership to over 65,000 jobs by Moody’s Analytics. The majority of Rental Rates & Leasing Activity...... 5 the growth is expected to occur in industries such as health care, construction, professional Construction...... 6 Updatedbusiness services, 7/7/2015 retail and food services categories with job losses expected in the energy categories including exploration and production, oil field services and oilfield equipment Submarket Statistics & Methodology...... 7 manufacturing. Our Team...... 8 Employment Trends

120 6% 100 80 4%

Thousands 60 40 2% FOR INFORMATION: 20 0 0% Wade Bowlin -20 Executive Vice President -40 -2% Managing Director -60 -80 -4% (713) 209--5753 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15F '16F '17F [email protected] Jobs Added Annual % Change John Spafford UpdatedSource: 6/30/2015 U.S. Bureau of Labor Statistics, Moody's Analytics Executive Vice President Director of Leasing Employment Growth by Sector (713) 209--5823 12-MONTHS HEALTH [email protected] CURRENT PRIOR ANNUAL (Improving READING READING CHANGE or Declining) Mining 108.4 108.6 -0.2% Down Ariel Guerrero Construction 205.9 203.6 1.1% Up Senior Vice President, Research Manufacturing 249.5 253.0 -1.4% Down (713) 209-5704 Trade, Transportation & Utilities 608.2 590.4 3.0% Up [email protected] Information 33.7 33.1 1.8% Up Financial Activities 147.3 147.5 -0.1% Down Professional & Business Services 469.6 463.2 1.4% Up Education & Health Services 364.3 349.1 4.4% Up 2

PAGE Leisure & Hospitality 306.9 290.3 5.7% Up Other Services 104.4 104.7 -0.3% Down Government 387.1 379.5 2.0% Up Source: U.S. Bureau of Labor Statistics. Employment Data as of May 2015, AllSource: Employees, U.S. Bureau in Thousands of Labor Statistics. Employment Data as of May 2015 (P) PROPERTYAll Employees, SERVICES In Thousands | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q2 2015

OFFICE MARKET ASSESSMENT

The Houston office leasing market has been one the most active in the country over the past four years, but growth has tapered and some softness is occurring due to slower demand and a flood of new office buildings entering the market. Nevertheless, Houston’s office leasing market has held up and managed to post 537,378 sq. ft. of positive direct net absorption during the second quarter, bringing the trailing 12-month total to just under 2 million sq. ft. During the second quarter, the Class A market experienced 687,731 sq. ft. of occupancy gains largely driven by recent completions which included tenants upgrading their office space such as Noble Energy, Sasol and GE Energy to name a few. However, construction deliveries outpaced demand for the fourth consecutive quarter causing Class A direct occupancy levels to fall 110 basis points to 87.1% during the quarter. Meanwhile, the Class B sector experienced 176,721 sq. ft. of losses, causing direct occupancy levels to decline by 60 basis points to 84.8% during the Houston Still Ranks 1st in Job Growth: quarter. The largest vacancy resulted from Exxon-Mobil leaving behind 331,707 sq. ft. at The Houston region has led the major U.S. metropolitan 13501 Katy Freeway as the energy firm continued to consolidate into their corporate- areas in job recovery since December 2011. Houston owned campus in North Houston. has recovered more than 297% of the 153,800 jobs lost Leasing activity has slowed compared to its swift pace experienced within the past during the recession – a higher percentage than any other major metro area. few years, which is primarily attributed to the lower volume of lease expirations and companies delaying their long-term leasing decisions. As a result of the economic Home to 26 Fortune 500 Companies: uncertainty, some tenants are opting for short-term leases while others are moving Houston ranks third among metropolitan statistical forward with early lease restructures. The largest transactions signed during the second areas in the number of Fortune 500 headquarters quarter involved Transocean renewing their 255,413 sq. ft. lease at 4 Greenway Plaza, behind only New York (72) and Chicago (30). With more Stage Stores securing a 168,901 sq. ft. lease at 2425 West Loop South and IHI E&C than 5,000 energy related firms, Houston is considered committing to 158,050 sq. ft. at West Memorial Place Phase II – which is set to deliver to be the Energy Capital of the world. during the second quarter of 2016. Houston Economic Outlook: As the current down-cycle continues, the robust job FORECAST growth of recent years should transition to modest • With slower office employment growth anticipated, Houston’s office market should growth. Construction will move forward on the experience slower direct absorption growth, which could decline below the 20- ethane crackers, chemical plants and liquefied natural year historical average of 2.5 million sq. ft. gas terminals planned for the region. Houston is • With supply exceeding demand during the second-half of 2015, direct occupancy projected to add another 125,000 residents, driving rates should return to their long-term norm after enjoying three years of above consumer-related industries. Hobby Airport will open average levels. its International Terminal in 2015, funneling more • A steady influx of new product coming online and rise in sublease availability will travelers through the region. provide tenants numerous opportunities to upgrade their space or expand in the Updated 6/30/2015 years ahead. Market Trend Indicators Updated 7/6/2015 Current Change from Previous 12-month Change from Previous 12-month Quarter Quarter Year Forecast Quarter Year Forecast Office Market Trends Direct Occupancy 86.2% Down Down Down

10,000 90% Trailing 12 mos. Direct Net Absorption 1,996,148 Down Down Sideways

8,000 88% Under Construction 9,266,579 Down Down Down 6,000 86% Direct Asking Rents $27.21 Up Up Sideways 4,000 84% 2,000 in Thousands of SF in Thousands 0 82% 3 -2,000 80% PAGE '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15F '16F '17F

Direct Net Absorption Completions Direct Occupancy

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q2 2015 Mar ket AT A Glance

NET ABSORPTION & OCCUPANCY

• FM 1960 was the leading submarket during the quarter with 440,787 sq. ft. of direct absorption growth overall. The absorption growth was directly attributable to Noble Energy moving into 456,000 sq. ft. of newly constructed space at Noble Energy Center II, as the firm left behind roughly 207,000 sq. ft. of sublease space in Greenspoint. • The Katy Freeway/Energy Corridor followed closely behind with 354,331 sq. ft. of direct net absorption during the quarter. The Class A market posted 656,168 sq. ft. of direct net absorption, with the bulk of the gains taking place in recently delivered product. The largest move-in involved GE Oil & Gas occupying roughly 222,490 sq. ft. at Westway Plaza. • Greenspoint/North Belt followed up a lackluster quarter with 85,314 sq. ft. of positive direct absorption during the quarter. The Class A sector accounted for 128,369 sq. ft. of quarterly gains largely due to Nabors Industries taking 98,400 sq. ft. of expansion “Low energy prices have pushed some tenants into a space at One Commerce Green Building. “wait and see” posture allowing smaller to medium • The Central Business District recorded 35,989 sq. ft. of direct occupancy gains during sized tenants to enter the market sooner and lease the quarter, bringing the year-to-date absorption total to 71,008 sq. ft. The Class A spaces that would have previously been unattainable market recorded nominal occupancy losses during the quarter, but has still managed due to competition from larger firms,” said Wade Bowlin, to record 50,809 sq. ft. of direct absorption year-to-date. Executive Vice President, Managing Director, Central • The Woodlands posted 48,978 sq. ft. of occupancy losses during the quarter, but has Division. still absorbed 114,678 sq. ft. of space year-to-date. The quarterly losses resulted from Updated 6/30/2015 Repsol USA moving out of 87,900 sq. ft. of Class B space at 2001 Timberloch Place and American Financial & Automotive Services vacating 24,910 sq. ft. at 24 Waterway. Submarket Occupancy Ranking • The Galleria/Uptown submarket posted 365,362 sq. ft. of negative direct absorption Occ. Y-O-Y % during the quarter. The Class A market accounted for 295,953 sq. ft. of quarterly losses, Rank Submarket Rate Change while Class B recorded 69,409 sq. ft. of negative absorption. The dismal performance was partially attributable to Telecheck First Data vacating 118,787 sq. ft. at Galleria 1 Bellaire 91.5%Updated -2.4% 7/1/2015 2 Baytown & I-10 East 90.1% -0.4% Place I. 3 Central Business District 90.0% 0.2% Direct Net Absorption vs. Completions 4 Richmond / Fountainview 89.5% 7.4%

5 The Woodlands / Conroe 89.2% 0.0% 2,400 6 Galleria / Uptown 89.1% -0.5% 2,000 7 Greenway Plaza 88.8% -1.9% 8 Fort Bend / Sugar Land 87.7% 0.5% 1,600 9 Kingwood / Humble 86.9% -2.1% 1,200 10 S. Main / Medical Center / South 86.5% -2.7% 800 11 San Felipe / Voss 86.5% -2.8% Thousands of SF In 400 12 Gulf Freeway / Pasadena 86.3% -1.8% 13 Katy Freeway 86.3% -6.9% 0 Updated 7/1/2015 Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 Q4 14 Q2 15 14 Westchase 85.8% -4.4%

15 Midtown / Allen Parkway 85.1% -1.5% Direct Net Absorption Completions 16 FM 1960 84.1% 2.6% Direct Occupancy Rates 17 Southwest Beltway 8 / Hillcroft 83.4% 4.7% 18 NASA / Clear Lake 83.2% 1.3% 92% 19 Northwest Freeway / North Loop W 79.2% -5.2% 20 Greenspoint / IAH / N Belt 74.7% -8.5% 90% 88% 86% 84% 4 82% PAGE 80% Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 Q4 14 Q2 15

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q2 2015

RENTAL RATES & LEASING ACTIVITY

• As a result of slower leasing activity, citywide Class A full-service gross asking rents remained relatively flat at $34.06 per square foot – reflecting a $0.16 decrease since hitting its peak in the prior quarter – and have subsided by 0.3% or $0.09 per sq. ft. since mid-year 2014. • Class B asking rents rose by $0.13 to $21.54 per square foot (gross) during the quarter and have moved up 2.6% or $0.54 per square foot during the prior 12 months. • Within the past 12 months, 60% of the Houston submarkets have experienced rent growth with the largest annual rent increases taking place in the San Felipe/Voss (11.5%), Katy Freeway/Energy Corridor (11.2%) and South Main/Medical Center (9.5%), while Greenspoint (-5.1%) has recorded the largest rent decline. • Asking rental rates are expected to remain flat during the second-half of 2015, but concessions such as rent abatement and TI allowances will be increasing as a result of the added sublease inventory and existing vacancy. “Office leasing volume and occupancy levels have • Houston’s sublease inventory has risen by 2.7 million sq. ft. to nearly 7.5 million sq. ft. shown a slight decline in 2015 but not enough to since year-end 2014, which accounts for 17.2% of the total space available but only significantly impact rents. However, increased sublease accounts for 3.5% of the total rentable inventory. space availability could cause concessions to slightly • Class A leasing velocity over the past 12 months has declined by 31.7% from the prior rise as energy companies that tied up space anticipating year, which is largely due to the lower volume of lease expirations coupled with many future growth look to right-size in the short-term,” said companies delaying leasing decisions in an uncertain economy. However, with a high John Spafford, Executive Vice President, Director of volume of leases expiring in 2017 through 2019 and the pent up demand from tenants Leasing.Updated 6/30/15 Updated 7/1/2015delaying office leasing decisions, market activity is expected to return to increased levels in 2016 and 2017. Submarket Rental Rate Ranking Rental Y-O-Y % Rank Submarket Rate Change Rental Rates 1 Central Business District $37.43 0.0% ($/SF/Yr. Full Service) 2 Galleria / Uptown $33.27 2.5% $36 3 San Felipe / Voss $30.47 11.5% $34 4 Westchase $30.01 1.8% $32 5 Greenway Plaza $29.55 -1.0% $30 6 Katy Freeway $29.48 11.2% $28 7 The Woodlands / Conroe $28.92 0.6% $26 8 Midtown / Allen Parkway $27.21 -8.2% $24 9 S. Main / Medical Center / South $27.12 9.5% $22 10 Fort Bend / Sugar Land $24.25 -1.8% $20 11 Bellaire $24.15 -1.3% $18 12 Greenspoint / IAH / N Belt $23.00 -5.1% Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 Q4 14 Q2 15 Updated 7/1/2015 13 Kingwood / Humble $22.85 -1.0% 14 Northwest Freeway / North Loop W $22.19 7.3% Class A Class B 15 Gulf Freeway / Pasadena $22.16 9.2% Direct Leasing Activity Rolling 12-Months 16 NASA / Clear Lake $20.07 3.8% 17 FM 1960 $19.17 4.0% 16,000 18 Richmond / Fountainview $16.57 9.3% 14,000 19 Southwest Beltway 8 / Hillcroft $15.98 -3.8% 12,000 20 Baytown & I-10 East $14.94 -7.2% 10,000 8,000 6,000

In Thousands of SF In 4,000 2,000 5 PAGE 0 Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 Q4 14 Q2 15

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q2 2015 Mar ket AT A Glance

CONSTRUCTION

• Developers delivered nearly 2.9 million sq. ft. of new space during the second quarter, including corporate-owned projects. These corporate-owned office buildings accounted for 632,026 sq. ft. of the construction deliveries, which included phase III of Exxon-Mobil’s campus (500k sf) and Medical Plaza II (100k sf). • Within the competitive leasing market, developers delivered over 2.2 million sq. ft. in 12 new office buildings which are already 79.3% pre-leased. The Katy Freeway/Energy Corridor accounted for 57.5% of the new deliveries this past quarter. • Houston continues to lead the nation with just over 12.7 million sq. ft. under construction – including corporate-owned projects – with 58.4% of this space either pre-leased or committed by an owner/user. • The Katy Freeway/Energy Corridor submarket still has nearly 3.0 million sq. ft. under construction, accounting for 23.4% of Houston’s office development pipeline. RECENT ANNOUNCEMENTS • Office lease space currently under construction stands at nearly 9.3 million sq. ft., with 42.8% of this space already preleased (excluding corporate-owned projects). During the • PM Realty Group delivered the second phase of second-half of 2015, Houston’s office market is projected to deliver nearly 4.6 million sq. Woodbranch Park in the Energy Corridor, with Sasol Updatedft. of non-owner-occupied 7/6/2015 buildings, with 39.5% of this space already pre-leased. North America occupying the entire 171,567 sq. ft. • After significant increases in construction costs in Houston over the past few years, Class A building during the second quarter. developers will keep a close eye to see if those costs begin to decline with a backlog of • Trammell Crow, delivered the 546,604 sq. ft. Updatedprojects 7/6/2015 that will be completed during the second-half of 2015. Energy Center Three, which is 100% leased by Construction Pipeline ConocoPhillips with their expected occupancy in August 2015. • Archway Properties began construction for 14,000 Construction Pipeline Wildwood Corporate Centre II during the second 12,000 quarter, which will add 201,000 sq. ft. of space to 14,000 the market when it delivers in July 2016 10,000 • Houston First Corporation’s downtown office 12,000 building recently broke ground early this year. The 8,000 fully leased 115,000 sq. ft. project will be occupied 10,0006,000 by the Greater Houston Partnership and the Visitors 8,000

Bureau. Thousands of SF In 4,000 • Amegy Bank broke ground on their new 6,0002,000 headquarters, a 380,000 sq. ft. office building in

the Galleria along West Loop 610 South. Amegy Thousands of SF In 4,000 0 is expected to occupy 270,000 sq. ft. when the 2,000 Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 Q4 14 Q2 15 building delivers in February 2017, leaving four floors available for lease to third party tenants. Updated0 7/6/2015 Under Construction Delivered • FMC Technologies has begun construction on Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 Q4 14 Q2 15 Phase I of their new campus, a 1.7 million sq. ft. SIGNIFICANT PROJECTS UNDER CONSTRUCTION % PRE- TARGET Class A project situated on the northeast corner Under Construction Delivered PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT LEASED DEVELOPER COMPLETION of Beltway 8 and Lake Houston Pkwy. Phase II is on 609 Main at Texas 1,056,658 CBD N/A 0% Hines 4Q 2016 hold and Phase I is slated to deliver in early 2016. BHP Billiton BTS** 600,000 Galleria / Uptown BHP Billiton 100% Transwestern 4Q 2016 • J. Beard Real Estate Co. broke ground early this year Energy Center Four 600,000 Katy Freeway ConocoPhillips 100% Trammell Crow Co. 3Q 2015 on Havenwood Office Park, a 240,470 sq. ft. Class Energy Center Five 524,448 Katy Freeway N/A 0% Trammell Crow Co. 2Q 2016 A office building. Located in The Woodlands along Air Liquide Center - South 452,370 Katy Freeway Air Liquide 58% MetroNational 4Q 2015 Interstate 45, the 100 % spec-project is slated to Millennium Tower II** 445,000 Westchase National Oilwell Varco 100% Gensler/BMS Management 1Q 2016 deliver by November 2015. Hilcorp Energy Tower* 406,600 CBD Hilcorp Energy 100% Hines 1Q 2016 • Skanska began construction on Phase 2 of their 3737 Buffalo Speedway 400,000 Greenway Plaza Solvay America 39% PM Realty Group 3Q 2015 12-acre West Memorial Place project late last year West Memorial Place II 389,709 Katy Freeway IHI E&C 49% Skanska 2Q 2016 in the Energy Corridor. Currently 49% leased, this Future Amegy Bank HQ 380,000 Galleria / Uptown Amegy Bank 74% Hines 1Q 2017 14-story building will add 390,000 sq. ft. of new 1735 Hughes Landing Blvd 331,840 Woodlands Exxon/Mobil 100% The Woodlands Development Co 2Q 2016 space to the market when it delivers in early 2016. Three Hughes Landing 320,815 Woodlands N/A 0% The Woodlands Development Co 4Q 2015 6 1725 Hughes Landing Blvd 317,052 Woodlands Exxon/Mobil 100% The Woodlands Development Co 2Q 2016 PAGE Enclave Place 300,907 Katy Freeway N/A 0% PM Realty Group 3Q 2015 Kirby Grove - 2925 Richmond 248,275 Greenway Plaza Vitol Inc; Boyar Miller 62% Midway 3Q 2015 Havenwood Office Park 240,470 Woodlands N/A 0% J Beard Real Estate Co 4Q 2015 Note: * Corporate owned office buildings (excluded from competitive statistics); ** Build-to-suit

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q2 2015

SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Completions Under Submarket SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 37,016,612 4,362,681 1,443,007 90.0% 35,989 71,008 0 1,171,658 $42.32 $28.02 Galleria / Uptown 22,921,281 3,608,415 621,044 89.1% -365,362 -336,348 0 1,237,021 $35.95 $26.61 Greenway Plaza 10,124,867 1,293,548 202,700 88.8% -31,454 -223,667 0 833,275 $34.60 $25.52 Katy Freeway 29,780,315 4,645,882 1,913,071 86.3% 354,331 620,232 1,303,864 2,978,456 $34.93 $23.86 Westchase 14,671,009 2,257,379 988,077 85.8% 47,759 279,293 0 445,000 $38.45 $19.94 Greenspoint/ IAH / N Belt 12,486,614 4,868,358 800,237 74.7% 85,314 -603,012 0 68,950 $29.20 $15.83 Northwest Freeway / N Loop West 12,243,779 2,851,063 187,960 79.2% -6,773 -45,913 367,441 0 $26.38 $19.27 NASA / Clear Lake & SE Outlier 6,462,687 1,219,911 95,893 83.2% -18,143 -12,126 0 20,032 $25.22 $19.83 Fort Bend / Sugar Land / SW Outlier 7,514,401 999,129 171,018 87.7% 42,222 103,703 0 218,830 $25.92 $23.83 Richmond / Fountainview 1,220,711 168,380 0 89.5% 9,232 22,193 0 0 - $18.63 San Felipe / Voss 5,236,196 871,785 29,834 86.5% -150,739 -141,190 0 0 $35.92 $23.62 Bellaire 3,549,940 426,431 338,647 91.5% -4,632 -31,864 0 0 $26.40 $23.62 Midtown / Allen Parkway 5,730,202 943,490 17,554 85.1% 67,058 60,743 0 167,562 $32.21 $25.95 FM 1960 10,229,048 1,931,561 260,404 84.1% 440,787 504,616 456,000 356,000 $26.86 $16.73 Kingwood / Humble / NE Outlier 1,231,601 184,863 876 86.9% 25,997 23,069 51,154 0 $31.96 $21.74 Southwest Beltway 8 / SW / Hillcroft 10,138,956 2,148,147 49,620 83.4% 76,753 397,053 0 0 $18.52 $15.72 S. Main / Medical Center / South 9,191,291 1,396,414 16,003 86.5% 36,392 -165,541 0 100,000 $28.96 $27.32 The Woodlands / Conroe 9,870,306 1,108,985 314,227 89.2% -101,508 44,477 0 1,669,795 $35.43 $25.06 Gulf Freeway / Pasadena 3,265,647 555,039 7,354 86.3% 4,252 10,965 0 0 $27.59 $23.84 Baytown / I-10 East 1,052,477 135,172 0 90.1% -10,097 -15,390 0 0 - $15.62 Totals 213,937,940 35,976,633 7,457,526 86.2% 537,378 562,301 2,178,459 9,266,579 $34.06 $21.54

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Completions Under Y-O-Y % Property Type SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Asking Rent Change Class A 109,636,453 17,087,529 5,305,092 87.1% 687,731 729,691 2,075,305 9,129,193 $34.06 -0.3% Class B 87,704,040 16,388,880 2,137,464 84.8% -176,721 -242,364 103,154 137,386 $21.54 2.6% Class C 16,597,447 2,500,224 14,970 87.2% 26,368 74,974 0 0 $16.16 -1.5% Totals 213,937,940 35,976,633 7,457,526 86.2% 537,378 562,301 2,178,459 9,266,579 $27.21 2.7%

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q2 2015

PMRG’s portfolio, including projects managed for third parties, includes commercial office buildings, mixed- Kristen Burney Doug Berry use centers, corporate headquarters, industrial buildings, medical facilities, high-rise multifamily buildings Vice President Vice President and re-appropriated military facilities. Director of Marketing Creative Director (713) 209-5910 (713) 209-5897 Our goal is to generate exceptional returns for our clients and investors by focusing on real estate [email protected] [email protected] fundamentals. For additional information, visit www.pmrg.com.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON OFFICE MARKET REPORT Market AT A Glance FIRST QUARTER 2015

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q1 2015 Mar ket AT A Glance

ECONOMIC OVERVIEW

Bolstered by job gains in energy, manufacturing and other key industries, the Houston metro area has created 465,300 net new jobs since the bottom of the recession. This remarkable expansion has translated into 3.0 jobs gained for every one lost during the recession. Despite the recent slide in oil prices, Houston’s economy has continued to grow with 96,700 new jobs created during the past 12 months ending February 2015, representing a 3.4% annual increase.

The U.S. shale boom that has brought the country closer to energy self-sufficiency than at any time since the 1980s will face uncertainty with low oil prices, mergers/acquisitions and falling stock prices in the year ahead. Since peaking at $107 per barrel in June 2014, West Texas intermediate commodity prices have declined to a low of $43 ($/bbl) in mid-March 2015, but have since risen 20% to $52 (S/bbl) through early April. The plunge in oil prices has TABLE OF CONTENTS resulted in significant cuts in domestic oil exploration and production. However, the refiners, petrochemicals and other industries that use petroleum as feedstock are enjoying expanded Economic Overview...... 2 profit margins and providing some counterbalance to reduced oil field activity. Despite the Office Market Assessment...... 3 uncertainty, Houston’s economy should continue to grow in 2015, but at a slower rate than Net Absorption & Occupancy...... 4 the past few years. According to the Greater Houston Partnership, Houston is projected to Rental Rates & Leasing Activity...... 5 add 62,900 jobs in 2015, but job losses are expected in exploration and production, oil field Construction...... 6 Updatedservices and 7/8/2014 oilfield equipment manufacturing. The majority of Houston’s job growth should Updatedoccur outside 4/6/2015 the traditional economic base in industries such as health care, construction, Submarket Statistics & Methodology...... 7 professional business services, retail and food services. Our Team...... 8 Employment Trends Employment Trends 120 6% 120100 6% 4% 10080 4% Thousands 8060 2% 40 Thousands 60 2% FOR INFORMATION: 4020 0% 200 0% -2% Wade Bowlin -200 -2% Executive Vice President -20-40 -4% -60 Managing Director -40 -4% -60-80 -6% (713) 209--5753 -80 03 04 05 06 07 08 09 10 11 12 13 14F 15F 16F -6% [email protected] '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15F '16F Jobs Added Annual % Change Updated 3/30/2015 Jobs Added Annual % Change John Spafford Source: U.S. Bureau of Labor Statistics, UH Institute for Regional Forecasting, Moody's Analytics Executive Vice President Source: U.S. Bureau of Labor Statistics, UH Institute for Regional Forecasting, Moody's Analytics Director of Leasing Employment Growth by Sector (713) 209--5823 12-MONTHS HEALTH CURRENT PRIOR ANNUAL (Improving [email protected] READING READING CHANGE or Declining) Mining 113.5 106.7 6.4% Up Ariel Guerrero Construction 205.8 196.9 4.5% Up Senior Vice President, Research Manufacturing 253.7 251.8 0.8% Up (713) 209-5704 Trade, Transportation & Utilities 603.6 584.6 3.3% Up Information 33.3 33.0 0.9% Up [email protected] Financial Activities 148.2 145.9 1.6% Up Professional & Business Services 465.0 450.3 3.3% Up Education & Health Services 361.0 344.9 4.7% Up 2

PAGE Leisure & Hospitality 291.2 274.4 6.1% Up Other Services 103.7 102.1 1.6% Up Government 387.4 378.4 2.4% Up Source: U.S. Bureau of Labor Statistics. Employment Data as of February 2015, AllSource: Employees, U.S. Bureau in Thousands of Labor Statistics. Employment Data as of February 2015 PROPERTYAll Employees, SERVICES In Thousands | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q1 2015

OFFICE MARKET ASSESSMENT

After just over four years of robust office space demand totaling 16.7 million sq. ft. of direct net absorption, Houston’s office leasing market has experienced slower growth in recent months as a result of the uncertainty in the energy markets. However, the main factor contributing to slower office market growth has been new supply and corporate office space users – such as Exxon-Mobil, Shell Oil, Halliburton, Southwestern Energy - relocating from just over 2.1 million sq. ft. of leased space into new corporate- owned office space developed within the past 6 months. Nevertheless, Houston’s office leasing market still managed to post 24,923 sq. ft. of direct space absorbed during the first quarter, bringing the trailing 12-month absorption tally to just under 2.4 million sq. ft. During the first quarter, the Class A market experienced a 41,960 sq. ft. occupancy gains despite Exxon-Mobil (592k sf), Southwestern Energy Company (241k sf) and MD Anderson (210k sf) moving out of a combined 1.04 million sq. ft. of leased product and Houston Ranks 1st in Job Growth: relocating to new corporate-owned projects. Despite the setback, the Class A sector The Houston region has led the major U.S. metropolitan still managed to record nearly 1.4 million sq. ft. of direct absorption growth over the areas in job recovery since December 2011. Houston past 12 months, which would have reached the 3.8 million sq. ft. mark by excluding the has recovered more than 297% of the 153,800 jobs lost aforementioned relocations to corporate-owned projects. during the recession – a higher percentage than any other major metro area. Although large-lease deal activity has slowed compared to its swift pace experienced Home to 26 Fortune 500 Companies: within the past few years, there have been several significant leases signed in recent Houston ranks third among metropolitan statistical months. The largest transactions during the first quarter involved Direct Energy signing areas in the number of Fortune 500 headquarters a 191,893 sq. ft. lease extension at 12 Greenway Plaza, Swift Energy securing a 120,000 behind only New York (72) and Chicago (30). With more sq. ft. lease at Five Greenspoint Place and an undisclosed engineering firm committing than 5,000 energy related firms, Houston is considered to 102,000 sq. ft. at Westchase Park II. Other noteworthy deals which occurred in the CBD to be the Energy Capital of the world. involved Enervest’s renewal at First City Tower, Linn Energy’s long term extension at 600 Travis and EP Energy’s short-term extension at Kinder Morgan Tower. Houston Economic Outlook: Houston has enough momentum going into 2015 for growth to continue, albeit at a much slower pace. FORECAST Construction will go forward on the ethane crackers, • With slower office employment growth anticipated on the horizon, Houston’s chemical plants and liquefied natural gas terminals office market will experience healthy but slower direct absorption growth - but planned for the region. Houston will add another should still exceed the 20-year historical average of 2.5 million sq. ft. 125,000 residents, driving consumer-related industries. • Although a large percentage of Houston’s office construction coming online in the Hobby Airport will open its International Terminal in coming year is significantly pre-leased, the roughly 46% of space that hasn’t been 2015, funneling more travelers through the region. spoken for will likely cause overall direct occupancy rates to decline slightly in the coming quarters. Updated 3/30/2015 • A steady influx of new product coming online and rise in sublease availability will Market Trend Indicators Updated 4/6/2015provide tenants numerous opportunities to upgrade their space or expand in the Current 12-month 12-month year ahead. Change from Previous Change from Previous Quarter Quarter Year Forecast Quarter Year Forecast Office Market Trends Direct Occupancy 86.9% Down Down Down

Trailing 12 mos. Direct Net Absorption 2,398,501 Down Up Down 10,000 90% Under Construction 11,087,900 Down Up Down 8,000 88% 6,000 Direct Asking Rents $27.20 Up Up Sideways 86% 4,000 84% 2,000 in Thousands of SF in Thousands 0 82% 3 -2,000 80% PAGE 03 04 05 06 07 08 09 10 11 12 13 '14 15F 16F

Direct Net Absorption Completions Direct Occupancy

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q1 2015 Mar ket AT A Glance

NET ABSORPTION & OCCUPANCY

• The CBD recorded 35,019 sq. ft. of positive direct absorption during the quarter, and has absorbed 278,387 sq. ft. over the past 12-months. The Class A market posted 52,580 sq. ft. of quarterly absorption, bringing the trailing 12-month total up to 153,343 sq. ft. The quarterly gains primarily resulted from Cheniere Energy Partners taking 97,434 sq. ft. of expansion space at Pennzoil Place – North Tower. • The Katy Freeway/Energy Corridor, which absorbed 629,473 sq. ft. over the prior 12 months, remained one of the top performing submarkets with 265,901 sq. ft. of direct space absorbed during the quarter. The largest move-ins involved Petroleum Geo- Services relocating into 121,918 sq. ft. at West Memorial Place and Technip occupying 103,987 sq. ft. at Energy Tower IV. • Galleria/Uptown posted 29,014 sq. ft. of quarterly direct absorption, bringing the trailing 12-month total to 296,367 sq. ft. The Class A sector of this submarket accounted “Low energy prices have pushed some tenants into a for 36,676 sq. ft. of quarterly absorption, compliments of Capital One moving into “wait and see” posture allowing smaller to medium 58,061 sq. ft. at 5444 Westheimer. sized tenants to enter the market sooner and lease • The Woodlands, leading the market with 653,167 sq. ft. of net gains recorded over spaces that would have previously been unattainable the past 12 months, posted 145,985 sq. ft. of direct absorption during the quarter. The due to competition from larger firms,” said Wade Bowlin, most significant occupancy gains involved multiple tenants taking a total of 102,304 Executive Vice President, Managing Director, Central sq. ft. at Two Hughes Landing. DivisionUpdated 3/30/2015 • Westchase recorded 127,244 sq. ft. of direct net absorption overall during the quarter. Class A product accounted for 182,425 sq. ft. of absorption, largely due to move-ins by Submarket Occupancy Ranking Bristow, U. S. Fire Insurance Co., Galliano Marine Service, Marsh & Mclennan and Kemira. Occ. Y-O-Y % • Greenspoint/North Belt reported 688,326 sq. ft. of negative direct absorption during Rank Submarket Rate Change the quarter, bringing the loss total to 1,072,757 sq. ft. in the trailing 12 months. The Class A sector took the biggest hit with 595,207 sq. ft. of losses as Exxon-Mobil vacated 1 Bellaire 91.6% 0.3% 241,567 sq. ft. at Four Greenspoint Place and 143,410 sq. ft. at 13401 North Freeway. 2 Baytown & I-10 East 91.1%Updated 3.0% 4/6/2015 3 Galleria / Uptown 90.7% 0.7% 4 The Woodlands / Conroe 90.2% -2.8% Direct Net Absorption vs. Completions 5 Central Business District 89.8% 0.6% 6 San Felipe / Voss 89.4% 1.0% 2,400

7 Katy Freeway 89.2% -4.4% 2,000 8 Richmond / Fountainview 89.1% 7.5% 1,600 9 Midtown / Allen Parkway 89.0% 1.4% 10 Greenway Plaza 88.9% -1.1% 1,200 11 Kingwood / Humble 88.4% -2.3% 800 In Thousands of SF In 12 Fort Bend / Sugar Land 87.2% 0.7% 400 13 Gulf Freeway / Pasadena 86.2% -1.2% 0 14 S. Main / Medical Center / South 86.1% -2.9% Updated 4/6/2015 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 15 Westchase 85.5% -3.6% 16 FM 1960 83.5% 3.1% Direct Net Absorption Completions 17 NASA / Clear Lake 83.0% 0.8% Direct Occupancy Rates 18 Southwest Beltway 8 / Hillcroft 82.2% 5.4% 19 Northwest Freeway / North Loop W 81.1% -3.7% 92% 20 Greenspoint / IAH / N Belt 74.3% -8.2% 90% 88% 86% 84% 4 82% PAGE 80% Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q1 2015

RENTAL RATES & LEASING ACTIVITY

• Citywide Class A full-service gross asking rents remained relatively flat at $34.22 per sq. ft. – reflecting a $0.14 increase since year-end 2014 – but have still improved by 1.5% or $0.51 since 12 months ago. Class B rents increased by $0.16 to $21.40 per sq. ft. (gross) during the quarter and have moved up 2.3% or $0.49 during the past 12 months. • Sustained office leasing demand and new construction deliveries have pushed citywide Class A asking rents upward by $5.14 per sq. ft. or 17.7% since their cyclical low recorded at mid-year 2011. Similarly, Class B rates have jumped 12.0% or $2.30 since their cyclical low recorded during the fourth quarter of 2010. • Within the past 12 months, 35% of the Houston submarkets have experienced rent growth exceeding the 5% mark, with the largest annual rent increases taking place in the Katy Freeway/Energy Corridor (11.9%), Northwest Freeway/North Loop (11.0%), Midtown/Allen Parkway (9.9%), San Felipe/Voss (8.5%), Medical Center/South Main (6.1%) and Westchase (5.5%). “Office leasing volume and occupancy levels will slightly • Asking rental rates are expected to modestly increase during the first-half of 2015, decline in 2015 but not enough to significantly impact which will be largely due to the delivery of new product at higher rental rates as well as rents. However, increased sublease space availability increased taxes inflating operating expenses. could cause concessions to slightly rise as energy • Sublease availability has increased by 48.8% to nearly 6.2 million sq. ft. within the past companies that tied up space anticipating future 6 months but only represents 2.9% of rentable inventory. The increased sublease growth look to right-size in the short-term,” said John inventory provides expanded opportunities for tenants seeking space at a discount. Spafford,Updated Executive3/30/15 Vice President, Director of Leasing. • Class A leasing velocity over the past 12 months has declined to 8.6 million sq. ft., a Updated 4/6/201525.6% drop from the prior year, but is only 0.6% below the 10-year historical average. Submarket Rental Rate Ranking The annual decline has been largely attributed to the tightness in the Class A sector and Rental Y-O-Y % uncertainty in the energy sector, but leasing activity still remains active. Rank Submarket Rate Change 1 Central Business District $37.27 4.5% Rental Rates 2 Galleria / Uptown $32.81 2.3% ($/SF/Yr. Full Service) 3 Westchase $30.61 5.5% $36 4 San Felipe / Voss $30.23 8.5% $34 5 Katy Freeway $29.64 11.9% $32 6 Midtown / Allen Parkway $29.58 9.9% $30 7 Greenway Plaza $28.89 2.1% $28 8 The Woodlands / Conroe $28.23 3.6% $26 9 S. Main / Medical Center / South $26.18 6.1% $24 10 Fort Bend / Sugar Land $24.33 -0.5% $22 11 Greenspoint / IAH / N Belt $23.89 -5.5% $20 12 Bellaire $23.49 -3.5% $18 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 13 Northwest Freeway / North Loop W $22.28 11.0% Updated 4/6/2015 14 Gulf Freeway / Pasadena $22.23 8.3% Class A Class B 15 Kingwood / Humble $22.06 -4.0% Direct Leasing Activity 16 NASA / Clear Lake $19.82 4.0% Rolling 12-Months 17 FM 1960 $19.10 2.6% 16,000 18 Southwest Beltway 8 / Hillcroft $16.29 -2.3% 14,000 19 Richmond / Fountainview $16.08 4.7% 12,000 20 Baytown & I-10 East $15.45 -5.6% 10,000 8,000 6,000

In Thousands of SF In 4,000 2,000 5 PAGE 0 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q1 2015 Mar ket AT A Glance

CONSTRUCTION

• Developers delivered just over 4.8 million sq. ft. of new space during the first quarter, including corporate-owned projects. Corporate-owned office buildings accounted for just over 2.9 million sq. ft. of the construction deliveries, which included phase II of Exxon-Mobil’s campus (1.5 million sf); CyrusOne’s campus expansion (640k sf) and Southwestern Energy (515k sf) to name a few. • Within the competitive leasing market, developers delivered nine new office buildings totaling nearly 1.9 million sq. ft., which was already 31% pre-leased. West Houston accounted for 59% of the deliveries this past quarter with Katy Freeway/Energy Corridor contributing 1.1 million sq. ft. The largest delivery involved the 429,157 sq. ft. Energy Tower IV. Northwest Houston accounted for 32% of the deliveries with 610,098 sq. ft. • Houston continues to lead the nation with just under 15.5 million sq. ft. under construction – including corporate-owned projects – with 64.3% of this space either RECENT ANNOUNCEMENTS pre-leased or committed by an owner/user. The Katy Freeway/Energy Corridor submarket currently has more than 4.5 million sq. ft. under construction, accounting for • Amegy Bank broke ground on their new Updated 4/6/2015 29.5% of Houston’s office development pipeline. headquarters, a 380,000 sq. ft. Class A office building • Office competitive leased space currently under construction stands at nearly 11.1 in the Galleria along West Loop South. Amegy million sq. ft., with 50.2% of this space already preleased (excluding corporate-owned Bank is expected to take approximately 270,000 Updatedprojects). 7/3/2013 In 2015, Houston’s office market is projected to deliver nearly 8.7 million sq. ft. sq. ft. when the building delivers in February 2017 Construction Pipeline of non-owner-occupied buildings – 47.0% of this space is already pre-leased. leaving four floors available to third party tenants. • FMC Technologies has begun construction on 14,000 Phase I of their new campus, a 1.7 million sq. ft. Construction Pipeline Class A project situated on the northeast corner 12,000 of Beltway 8. Although Phase II is on hold, Phase I will include a mix of office space, industrial space, 7,00010,000 outside storage yards and a parking garage and is 6,0008,000 slated to deliver in early 2016. • J. Beard Real Estate Co. broke ground on Havenwood 5,0006,000 Office Park, a 240,470 sq. ft. Class A office building. 4,000 Located in The Woodlands, the spec-project is Thousands of SF In 4,000 slated to deliver by November of this year. 3,0002,000 • Skanska began construction on Phase 2 of their

12-acre West Memorial Place project last quarter in Thousands of SF In 2,000 0 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 Q1 15 the Energy Corridor. This 14-story building will add 1,000 390,000 sq. ft. of new space to the market when it delivers in early 2016. Updated0 4/6/2015 Under Construction Delivered • Patrinely Group, CDC Houston and USAA Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 announced details for CityPlace, a 60-acre mixed- SIGNIFICANT PROJECTS UNDER CONSTRUCTION use development located in Springwoods Village. Under Construction Delivered% PRE- TARGET The initial phase of CityPlace will include two PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT LEASED DEVELOPER COMPLETION Class A office buildings with a combined total of 609 Main at Texas 1,056,658 CBD N/A 0% Hines 4Q 2016 386,000 sq. ft. Phase I is slated to break ground in BHP Billiton BTS* 600,000 Galleria / Uptown BHP Billiton 100% Transwestern 4Q 2016 the summer months. Energy Center Four 600,000 Katy Freeway ConocoPhillips 100% Trammell Crow Co. 3Q 2015 • PM Realty Group delivered Westchase Park II at Energy Center Three 546,604 Katy Freeway ConocoPhillips 100% Trammell Crow Co. 2Q 2015 the end of 2014. The 300,000 sq. ft. Class A office Energy Center Five 526,637 Katy Freeway N/A 0% Trammell Crow Co. 2Q 2016 building is 50% leased with leases in negotiation to Noble Energy Center II* 456,000 FM 1960 Noble Energy 100% Trammell Crow Co. 2Q 2015 Air Liquide Center - South 452,370 Katy Freeway Air Liquide 59% MetroNational 4Q 2015 potentially bring the building to 100%. Millennium Tower II* 445,000 Westchase National Oilwell Varco 100% Gensler/BMS Management 1Q 2016 • Trammell Crow Co. and Prudential Real Estate 3737 Buffalo Speedway 400,000 Greenway Plaza Solvay America 23% PM Realty Group 3Q 2015 Investors begun construction on One Grand West Memorial Place II 389,709 Katy Freeway N/A 0% Skanska 1Q 2016 Crossing, a speculative office building in a mixed- 1717 W Loop Fwy S 380,000 Galleria / Uptown Amegy Bank 74% Hines 1Q 2017 use development in west Houston. The Class A 1735 Hughes Landing Blvd* 331,840 Woodlands Exxon/Mobil 100% The Woodlands Development Co 2Q 2016 172,000 sq. ft. project will be completed in 4Q 2015. Three Hughes Landing 320,815 Woodlands N/A 0% The Woodlands Development Co 4Q 2015 6 1725 Hughes Landing Blvd* 317,052 Woodlands Exxon/Mobil 100% The Woodlands Development Co 2Q 2016 PAGE Westway Plaza 314,000 Katy Freeway GE Oil and Gas; Tesco 100% Transwestern 2Q 2015 Enclave Place 300,907 Katy Freeway N/A 0% PM Realty Group 3Q 2015 Note: Corporate owned office buildings excluded from competitive statistics; *Build-to-suit

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q1 2015

SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Direct Completions Under Submarket Inventory SF Direct Sublease Occupancy Current Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 37,024,505 4,395,062 1,421,940 89.8% 35,019 278,387 0 1,056,658 $41.96 $28.23 Galleria / Uptown 22,768,124 3,323,544 518,765 90.7% 29,014 296,367 0 1,237,021 $35.25 $26.76 Greenway Plaza 10,247,446 1,301,731 236,291 88.9% -192,213 -5,193 0 833,275 $34.75 $22.47 Katy Freeway 28,487,173 3,971,315 1,450,393 89.2% 265,901 629,473 1,104,593 4,020,141 $35.65 $23.41 Westchase 14,656,498 2,326,904 677,132 85.5% 231,534 127,244 0 445,000 $38.41 $20.14 Greenspoint/ IAH / N Belt 12,546,974 4,536,637 510,656 74.3% -688,326 -1,072,757 0 68,950 $30.18 $16.51 Northwest Freeway / N Loop West 12,039,654 2,766,504 240,512 81.1% -39,140 192,967 610,098 160,633 $26.61 $19.09 NASA / Clear Lake & SE Outlier 6,457,493 1,300,927 75,637 83.0% 6,017 147,428 0 20,032 $25.50 $19.48 Fort Bend / Sugar Land / SW Outlier 7,575,464 1,018,586 134,457 87.2% 61,481 193,042 0 197,951 $25.98 $24.07 Richmond / Fountainview 1,243,803 173,370 0 89.1% 12,961 85,455 0 0 - $19.11 San Felipe / Voss 5,235,510 823,169 34,265 89.4% 9,549 70,174 0 0 $35.82 $23.37 Bellaire 3,549,940 367,006 358,197 91.6% -27,232 76,207 0 0 $26.58 $21.97 Midtown / Allen Parkway 5,436,202 606,690 12,063 89.0% -6,315 139,507 0 167,562 $33.07 $28.62 FM 1960 9,768,005 1,954,757 87,929 83.5% 63,829 301,208 0 1,126,000 $27.06 $16.74 Kingwood / Humble / NE Outlier 1,180,447 155,351 0 88.4% -2,928 42,425 0 70,000 $32.13 $20.93 Southwest Beltway 8 / SW / Hillcroft 10,192,394 2,139,502 71,856 82.2% 320,300 373,556 0 0 $17.73 $16.41 S. Main / Medical Center / South 9,212,891 1,389,439 22,967 86.1% -201,933 -174,855 0 100,000 $28.99 $26.40 The Woodlands / Conroe 9,949,655 1,087,555 317,192 90.2% 145,985 653,167 87,999 1,584,677 $34.13 $25.22 Gulf Freeway / Pasadena 3,265,647 612,067 7,354 86.2% 6,713 34,457 78,000 0 $27.59 $23.67 Baytown / I-10 East 1,052,477 133,885 0 91.1% -5,293 10,242 0 0 - $15.49 Totals 211,890,302 34,384,001 6,177,606 86.9% 24,923 2,398,501 1,880,690 11,087,900 $34.22 $21.41

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q1 2015

PMRG’s portfolio, including projects managed for third parties, includes commercial office buildings, mixed- Kristen Burney Doug Berry use centers, corporate headquarters, industrial buildings, medical facilities, high-rise multifamily buildings Vice President Vice President and re-appropriated military facilities. Director of Marketing Creative Director (713) 209-5910 (713) 209-5897 Our goal is to generate exceptional returns for our clients and investors by focusing on real estate [email protected] [email protected] fundamentals. For additional information, visit www.pmrg.com.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON OFFICE

AT A MARKET REPORT AT A MarMarket ket GlanceGlance THIRD QUARTER 20132014

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q3 2014 Mar ket AT A Glance

ECONOMIC OVERVIEW

Due to gains in energy, manufacturing and other key industries, Houston’s economy continues to enjoy high employment growth. The Houston metro area has created 107,400 new jobs within the past 12 months ending August 2014, representing a 4.0% annual increase. Since early 2010, the metro area has gained 420,700 net new jobs. This remarkable recovery means 2.7 jobs have been created for every one lost during the recession. The unemployment rate in August stood at 5.4%, far below the national average of 6.1%. Although Houston has reached its highest number of total nonfarm jobs on record in the previous quarter, its sustained growth continues to surpass that figure.

As the center of the global petroleum industry, Houston has continued to benefit from sustained high global oil prices and the worldwide boom in natural gas exploration. Since late January, U.S. crude stocks have risen as tensions between Russia and Ukraine as well TABLE OF CONTENTS as the conflicts in Iraq have kept global oil prices strong. As of October 2, 2014, U.S. crude stood at $90.73 per barrel, well above the $65 per barrel minimum many analysts believe is Economic Overview...... 2 required to sustain a vital oil industry. According to the University of Houston’s Institute for Office Market Assessment...... 3 Regional Forecasting, the Houston metro area was initially forecasted to add 65,000 jobs Net Absorption & Occupancy...... 4 in 2014, but this number has recently been revised upwards to 89,000 jobs for this year. Rental Rates & Leasing Activity...... 5 Driven by growth in housing and non-residential construction, as well as a revival in energy Construction...... 6 Updatedexploration, 7/8/2014 Houston can expect its solid expansion to continue for the remainder of 2014. UpdatedHouston’s business-friendly10/6/2014 environment combined with its lower business costs and well- Submarket Statistics & Methodology...... 7 noeducated changes labor force has encouraged corporate relocations and expansions throughout the Our Team...... 8 city, largely benefiting related manufacturing and professional services. Employment Trends Employment Trends 120 6% 100120 6% 4% 10080 4% Thousands 6080 2% 40 Thousands 60 2% FOR INFORMATION: 2040 0% 200 0% -2% Wade Bowlin -200 -2% Executive Vice President -40-20 -4% -60 Managing Director -40 -4% -80-60 -6% (713) 209--5753 -80 03 04 05 06 07 08 09 10 11 12 13 14F 15F 16F -6% [email protected] 03 04 05 06 07 08 09 10 11 12 13 14F 15F 16F Jobs Added Annual % Change Updated 10/01/2014 Jobs Added Annual % Change John Spafford Source: U.S. Bureau of Labor Statistics, UH Institute for Regional Forecasting, Moody's Analytics Executive Vice President Source: U.S. Bureau of Labor Statistics, UH Institute for Regional Forecasting, Moody's Analytics Director of Leasing Employment Growth by Sector (713) 209--5823 12-MONTHS HEALTH CURRENT ANNUAL (Improving [email protected] PRIOR READING READING CHANGE or Declining) Mining 117.8 108.9 8.2% Up Ariel Guerrero Construction 201.4 190.5 5.7% Up Senior Vice President, Research Manufacturing 262.2 252.8 3.7% Up (713) 209-5704 Trade, Transportation & Utilities 584.8 570.8 2.5% Up Information 33.3 32.8 1.5% Up [email protected] Financial Activities 147.1 144.4 1.9% Up Professional & Business Services 447.6 431.6 3.7% Up Education & Health Services 354.4 335.4 5.7% Up 2

PAGE Leisure & Hospitality 287.6 276.9 3.9% Up Other Services 102.4 98.9 3.5% Up Government 357.8 346.0 3.4% Up Source:Source: U.S. BureauBureau of of Labor Labor Statistics. Statistics. Employment Employment Data Data as ofas August of August 2014 2014, AllAll Employees, Inin Thousands Thousands PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q3 2014

OFFICE MARKET ASSESSMENT

With roughly 900,000 sq. ft. of positive net absorption during the third quarter, the trailing 12-month direct absorption total increased to nearly 5.1 million sq. ft. in the Houston office market. Class A product accounted for the majority of the demand with 827,691 sq. ft. of direct absorption growth, bringing the trailing 12-month total to nearly 4 million sq. ft. The Class B sector experienced a 16,157 sq. ft. loss this quarter largely due to URS and Verizon moving out of Class B space in the Westchase and Southwest/Beltway 8 submarkets, respectively. During the third quarter, the Class A direct occupancy rate decreased 50 basis points to 90.4% as new supply slightly outpaced demand. Within the past 12 months, Class A direct occupancy rates have still increased overall a total of 20 basis points. Class B occupancy has also been affected by new supply coming online, subsiding 30 basis points to 85.1% during the quarter. However, this sector’s occupancy rate has climbed 80 basis points since the third quarter of last year. Houston Ranks 1st in Job Growth: The Houston region has led the major U.S. metropolitan For more than three years, Houston’s office market has demonstrated consistently rising areas in job recovery since December 2011. Houston occupancy rates, as energy companies have been strategically positioning themselves to has recovered more than 274% of the 153,800 jobs lost locate and secure prime office space needed to support U.S. oil exploration, production during the recession – a higher percentage than any other major metro area. and transport operations. While many of the growing energy firms have already secured their space, a larger share of leasing activity has begun to spring from small-to-medium- Home to 26 Fortune 500 Companies: sized engineering and technical firms supporting the oil & gas industry. Although Houston ranks third among metropolitan statistical large deal leasing activity has slowed slightly compared to a year ago, there have been areas in the number of Fortune 500 headquarters several significant leases signed in recent months which will boost the absorption totals behind only New York (72) and Chicago (30). With more in the coming quarters. West Houston featured the largest lease transactions of the than 5,000 energy related firms, Houston is considered third quarter, and it remains the hotbed of new construction and leasing activity as the to be the Energy Capital of the world. energy sector continues to drive leasing demand. By example, Technip committed to 98,660 sq. ft. at Energy Tower IV, Pacific Drilling secured 77,296 sq. ft. at Energy Tower I, Houston Economic Outlook: and JGC America, Inc. leased 77,625 sq. ft. at Granite Briarpark Green. Houston’s strong employment and population growth propelled by further expansion in energy, health- related and distribution industries will lead to above- FORECAST average gains for the metro area. Houston is poised for long-term expansion as annual job growth is • Strong leasing demand will continue to drive rental rates higher, creating a more forecasted to average 2.7% from 2013 to 2016, well landlord favorable setting in the most desirable submarkets. However, a wave of above the 2.2% annual average since 1990. new construction will deliver in the coming quarters to alleviate the difficulty in finding quality space. • Although the premier submarkets such as CBD, Galleria, and Greenway will continue Updated 10/1/2014 to perform strongly, new construction in West Houston will remain competitive, Market Trend Indicators Updated 10/6/2014offering modern, high quality offices at comparatively lower rates. Current Change from Previous 12-month Change from Previous 12-month Quarter Quarter Year Forecast Quarter Year Forecast Office Market Trends Direct Occupancy 87.8% Down up up

8,000 90% Direct Net Absorption 893,079 up up up

6,000 88% Under Construction 12,180,122 up up up

4,000 86% Direct Asking Rents $26.70 up up up 2,000 84% in Thousands of SF in Thousands 0 82% 3 -2,000 80% PAGE 03 04 05 06 07 08 09 10 11 12 13 14F 15F 16F

Direct Net Absorption Completions Direct Occupancy

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q3 2014 Mar ket AT A Glance

NET ABSORPTION & OCCUPANCY

• The Central Business District recorded 72,227 sq. ft. of direct absorption during the third quarter. The Class A market accounted for 16,271 sq. ft. and Class B space posted 57,485 sq. ft. of absorption during the quarter. Leasing activity has slowed down due to the tightness in the Class A sector, which has caused Class A rental rates to increase by $0.82 to $43.00 per sq. ft. (gross) to reach a record high. • Galleria/Uptown rebounded from a lackluster quarter with 160,906 sq. ft. of direct absorption during the third quarter. The Class A market accounted for 112,302 sq. ft. of absorption, with Class B following closely behind absorbing 49,371 sq. ft. The largest occupancy gains occurred in the recently delivered 1 Blvd. Place with Frost Bank occupying 57,712 sq. ft. • Westchase reported 35,966 sq. ft. of aggregate negative absorption during the quarter. Class A product posted 119,013 sq. ft. of absorption growth, led by CGG Veritas moving “Class A space remains the preferred choice among into 106,992 sq. ft. of new expansion space at 10300 Town Park Drive. Class B product growing firms as this sector has accounted for 82% or countered these gains with 156,764 sq. ft. of negative direct absorption, resulting from 10.2 million sq. ft. of the citywide absorption growth URS’ relocation to the Offices at Greenhouse in the Energy Corridor. since the beginning of 2012,” said Wade Bowlin, • The Katy Freeway/Energy Corridor, which absorbed over 1.1 million sq. ft. during the Executive Vice President, Managing Director, Central first-half of 2014, had a temperate third quarter only absorbing 97,848 sq. ft. of direct Division. space. The most notable move-ins occurred in recently delivered projects as Mustang Updated 10/1/2014 Engineering occupied 225,885 sq. ft. at Westgate III, URS took down 131,244 sq. ft. at Offices at Greenhouse and Jacobs Engineering moved into 95,317 sq. ft. at Jacobs Submarket Occupancy Ranking Plaza developed by PM Realty Group. Occ. Y-O-Y % • The Woodlands took the lead as the top performing submarket with 320,471 sq. ft. Rank Submarket Rate Change of direct absorption during the third quarter. The most significant occupancy gains involved Repsol moving into 200,000 sq. ft. at Research Forest Lakeside 5, while Devon 1 Bellaire 91.7% 2.5% Energy also moved into 63,259 sq. ft. at 460 Wildwood Forest Drive. 2 Katy Freeway 91.6%Updated -0.3% 10/1/2014 3 Greenway Plaza 90.7% 1.3% 4 Central Business District 90.0% 1.8% Direct Net Absorption vs. Completions 5 Galleria / Uptown 90.0% 1.5% 6 San Felipe / Voss 89.9% 1.7% 2,400 7 Baytown & I-10 East 89.8% 2.8% 2,000 8 The Woodlands / Conroe 89.6% -0.7% 1,600 9 Kingwood / Humble 89.5% 1.9% 10 Gulf Freeway / Pasadena 88.5% 2.1% 1,200 11 S. Main / Medical Center / South 88.4% 1.6% 800 In Thousands of SF In 12 Midtown / Allen Parkway 87.8% -1.3% 400 13 Westchase 87.1% -4.2% 0 14 Fort Bend / Sugar Land 86.4% 2.9% Updated 10/1/2014 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 15 Northwest Freeway / North Loop W 85.1% 1.1% 16 Richmond / Fountainview 84.8% 1.0% Direct Net Absorption Completions 17 NASA / Clear Lake 83.1% 2.1% Direct Occupancy Rates 18 Greenspoint / IAH / N Belt 82.2% -0.1% 19 FM 1960 82.0% 2.9% 92% 20 Southwest Beltway 8 / Hillcroft 78.0% -1.7% 90% 88% 86% 84% 4 82% PAGE 80% Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q3 2014

RENTAL RATES & LEASING ACTIVITY

• After reaching their highest level on record in the prior quarter, citywide Class A full- service gross asking rents remained relatively flat at $34.06 per sq. ft. – reflecting a mere $0.01 decrease – during the quarter but have still increased by 5.9% or $1.90 over the past year. Meanwhile, Class B rents increased by $0.14 to $21.14 per sq. ft during the quarter and have moved up 6.2% or $1.23 per square foot during the past 12 months. • The slight quarterly decline in Class A rental rates was largely attributable to Exxon’s looming vacancy in the Greenspoint submarket, which saw a significant rate reduction during the quarter. • Sustained office leasing demand combined with shrinking options for high quality space have pushed citywide Class A asking rents upward by $4.98 or 17.1% since their cyclical low recorded at mid-year 2011. Similarly, Class B rates have jumped 10.6% or $2.03 since their cyclical low recorded during Q4 2010. • Asking rental rates are expected to steadily rise in the next 12 months as quality space “Sustained demand for quality space should result in options remain limited, but relief is on the way with new product nearing completion. rising rental rates and declining concessions in the top As the spread between Class A and B rental rates widens, more Class A tenants will performing submarkets as companies enter the market consider Class B building options to offset the higher real estate occupancy costs, sooner to secure a greater number of options for quality though Class A space will remain the top choice for growing firms. space,” said John Spafford, Executive Vice President, • Class A leasing velocity declined for the fourth consecutive quarter to 6.9 million sq. ft., Director of Leasing. a 40% decrease from the same time last year, and is 15% below the 10-year historical Updated 10/1/2014 average. The annual decline is largely attributed to the tightness in the Class A sector, Updated 10/1/2014but leasing velocity should remain strong as many firms are still evaluating potential Submarket Rental Rate Ranking expansions, relocations and renewals well in advance of their lease expirations. Rental Y-O-Y % Rank Submarket Rate Change 1 Central Business District $38.08 10.9% Rental Rates 2 Galleria / Uptown $33.05 11.1% ($/SF/Yr. Full Service) 3 Westchase $30.60 16.2% $36 4 Greenway Plaza $30.04 10.4% $34 5 San Felipe / Voss $29.75 18.6% $32 6 Midtown / Allen Parkway $29.43 13.1% $30 7 The Woodlands / Conroe $29.37 9.2% $28 8 Katy Freeway $26.99 13.6% $26 9 S. Main / Medical Center / South $24.75 3.5% $24 10 Fort Bend / Sugar Land $24.69 -1.4% $22 11 Bellaire $23.81 2.9% $20 12 Greenspoint / IAH / N Belt $23.11 0.0% $18 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 13 Kingwood / Humble $23.04 0.4% Updated 10/1/2014 14 Gulf Freeway / Pasadena $21.35 7.4% Class A Class B 15 Northwest Freeway / North Loop W $20.11 10.5% Direct Leasing Activity 16 NASA / Clear Lake $19.34 0.9% Rolling 12-Months 17 FM 1960 $18.80 1.2% 16,000 18 Baytown & I-10 East $16.26 0.4% 14,000 19 Southwest Beltway 8 / Hillcroft $16.11 0.9% 12,000 20 Richmond / Fountainview $15.49 2.4% 10,000 8,000 6,000

In Thousands of SF In 4,000 2,000 5 PAGE 0 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q3 2014 Mar ket AT A Glance

CONSTRUCTION

• The volume of groundbreakings continued to increase during the third quarter of 2014, pushing office space under construction to a 30-year high of 12.7 million sq. ft., with 44% of this space already pre-leased (excluding corporate-owned projects). The market has approximately 19.7 million sq. ft. underway – including corporate-owned projects – with 64% of this space is either pre-leased or committed by owner/user. • With the inclusion of corporate-owned projects, developers have delivered 8,468,035 sq. ft. of new space year-to-date. The Katy Freeway/Energy Corridor submarket accounted for 43% of new product delivered, while The Woodlands contributed to 25% of the citywide construction deliveries this year. • In 2014, Houston’s office market is projected to deliver just over 5.6 million sq. ft. of non-owner-occupied buildings – 52% of this space is already pre-leased. The Katy Freeway submarket is expected to deliver 47% of the new product. The Woodlands and RECENT ANNOUNCEMENTS Westchase submarkets each are expected to receive approximately 17% of the new construction deliveries. • Midway plans to further expand CityCentre with Updated 10/1/2014 • With 24 buildings encompassing more than 6.7 million sq. ft. currently under construction, 740,000 sq. ft. of office space in two new towers. the Katy Freeway/Energy Corridor continues to lead Houston’s development pipeline. The 6.4 acre extension will also include a 270 unit • Class A occupancy rates in Houston’s premier submarkets continue to exceed the 90% multifamily high-rise, 22,000 sq. ft. of retail space, Updatedmark. 7/3/2013 Companies who are expanding are quickly securing their space in an effort to and one acre dedicated to central green space. Construction Pipeline avoid the soaring rental rates experienced during the previous expansion period. • Skanska acquired 14-acres of land with plans to build a master-planned, Class A office development 14,000 totaling up to 1 million sq. ft. in Springwood Village Construction Pipeline Parkway, adjacent to the Exxon Mobil campus. 12,000 • Landry’s announced plans for a new mixed-use project in the Galleria area. The 9-acre site will 7,00010,000 include Landry’s existing headquarters building 6,0008,000 and Post Oak Motor Cars Ltd., as well as a hotel tower, conference center, parking garage, surface 5,0006,000 parking, and additional buildings. 4,000 • Skanska begun construction on Phase 2 of their Thousands of SF In 4,000 12-acre West Memorial Place project in the Energy 3,0002,000 Corridor. This 14-story building will add 381,000 sq.

ft. of new space to the market. Thousands of SF In 2,000 0 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 Q3 14 • In Greenway Plaza, PM Realty Group is developing a 1,000 400,000 sq. ft. Class A office building at 3737 Buffalo Speedway, which will deliver in August 2015. PMRG Updated0 10/1/2014 Under Construction Delivered also recently broke ground on the second phase of Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Woodbranch Park in the Energy Corridor, as Sasol SIGNIFICANT PROJECTS UNDER CONSTRUCTION North America signed a pre-lease commitment to Under Construction Delivered% PRE- TARGET PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT LEASED DEVELOPER COMPLETION take the entire 171,567 sq. ft. Class A office building. 609 Main at Texas 1,057,658 CBD N/A 0% Hines 1Q 2017 • Hines is underway on their 48-story skyscraper at BHP Billiton - 1500 Post Oak* 600,000 Galleria / Uptown BHP Billiton 100% Transwestern 4Q 2016 609 Main Street, and is doing so on a speculative Energy Center Four 600,000 Katy Freeway ConocoPhillips 100% Trammell Crow Co. 3Q 2016 basis with no tenants officially secured. Energy Center Three 546,604 Katy Freeway ConocoPhillips 100% Trammell Crow Co. 2Q 2015 • Patrinely Group, CDC Houston and USAA Energy Center Five 526,637 Katy Freeway N/A 0% Trammell Crow Co. 2Q 2016 announced details for CityPlace, a 60-acre mixed- Noble Energy Center II 456,000 FM 1960 Noble Energy 100% Trammell Crow Co. 2Q 2015 use development located in Springwoods Village. Air Liquide Center - South 452,370 Katy Freeway Air Liquide 38% MetroNational 4Q 2015 The initial office component phase of CityPlace Energy Tower IV 428,831 Katy Freeway Spectrum Geo 12% Mac Haik 4Q 2014 will include two Class A office buildings with a Millennium II* 417,000 Westchase National Oilwell Varco 100% Harvey Builders 4Q 2015 combined total of 440,000 sq. ft. 3737 Buffalo Speedway 400,000 Greenway Plaza Solvay America 23% PM Realty Group 3Q 2015 • Trammell Crow has recently broken ground on West Memorial Place II 381,000 Katy Freeway N/A 0% Skanska 4Q 2015 Energy Center V, a speculative 500,000 sq. ft. office West Memorial Place 334,147 Katy Freeway Petroleum Geo Services 49% Skanska 1Q 2015 building with expected delivery by mid-year 2016. 1735 Hughes Landing Blvd 331,840 Woodlands Exxon/Mobil 100% The Woodlands Development Co 1Q 2015 6 1725 Hughes Landing Blvd 317,052 Woodlands Exxon/Mobil 100% The Woodlands Development Co 1Q 2015 PAGE Westway Plaza 312,000 Katy Freeway GE Oil & Gas 57% Transwestern 2Q 2015 Piedmont Enclave Place 300,760 Katy Freeway N/A 0% PM Realty Group 3Q 2015 Westchase Park II 300,000 Westchase N/A 0% PM Realty Group 4Q 2014 Note: Corporate owned office buildings excluded from competitive statistics; *Build-to-suit

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q3 2014

SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Current Completions Under Submarkets SF Direct Sublease Occupancy Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 37,523,225 4,152,216 995,188 90.0% 72,227 295,022 - 1,057,658 $43.00 $28.18 Galleria / Uptown 22,802,994 3,218,215 447,452 90.0% 160,906 340,024 83,073 856,142 $35.93 $27.15 Greenway Plaza 10,221,070 1,341,332 96,591 90.7% 22,849 109,255 - 648,275 $35.27 $25.14 Katy Freeway 26,918,253 3,106,199 749,562 91.6% 97,848 1,226,129 549,493 5,492,663 $33.53 $22.64 Westchase 14,291,448 1,767,011 313,054 87.1% -35,966 407,520 440,092 717,000 $38.31 $20.30 Greenspoint/ IAH / N Belt 12,556,362 4,737,887 506,216 82.2% -64,358 26,900 - - $29.02 $16.06 Northwest Freeway / N Loop West 11,634,694 2,249,747 185,558 85.1% 45,188 -18,918 - 988,606 $22.84 $19.45 NASA / Clear Lake & SE Outlier 6,536,657 1,222,858 89,161 83.1% 122,548 78,180 55,000 - $24.72 $18.47 Fort Bend / Sugar Land / SW Outlier 7,473,754 998,204 202,535 86.4% -12,915 51,197 24,000 369,979 $26.92 $22.91 Richmond / Fountainview 1,243,803 198,993 0 84.8% 31,971 33,892 - - -- $18.26 San Felipe / Voss 5,233,979 887,820 39,431 89.9% 39,287 76,397 - - $35.06 $23.08 Bellaire 3,561,950 364,454 58,113 91.7% 10,042 87,102 - - $26.49 $22.22 Midtown / Allen Parkway 5,436,202 701,489 33,728 87.8% 60,569 15,973 - 167,562 $33.90 $26.68 FM 1960 9,796,350 1,950,626 87,293 82.0% 66,271 223,827 31,320 456,000 $25.77 $16.64 Kingwood / Humble / NE Outlier 1,142,047 154,668 0 89.5% 5,565 47,826 - 36,400 $32.13 $20.91 Southwest Beltway 8 / SW / Hillcroft 10,179,818 2,422,924 63,688 78.0% -76,742 -238,349 - - $17.56 $16.16 S. Main / Medical Center / South 9,180,028 1,259,544 40,033 88.4% 22,221 144,033 50,000 100,000 $28.04 $25.17 The Woodlands / Conroe 9,732,865 1,115,698 243,644 89.6% 320,471 472,876 357,313 975,837 $34.65 $26.16 Gulf Freeway / Pasadena 3,139,733 522,115 248 88.5% 12,978 3,150 - - $27.59 $23.16 Baytown / I-10 East 1,125,170 133,370 0 89.8% -7,881 11,758 - - -- $16.45 Totals 209,730,402 32,505,370 4,151,495 87.8% 893,079 3,393,794 1,590,291 11,866,122 $34.06 $21.14

Total Inventory Direct Current Completions Under Asking Y-O-Y % Property Types SF Direct Sublease Occupancy Qtr. Year To Date Current Qtr Construction Rent Change Class A 104,503,723 14,398,481 2,777,894 90.4% 827,691 2,783,970 1,459,971 11,738,167 $34.06 5.9% Class B 88,114,728 15,455,630 1,363,341 85.1% -16,157 406,167 130,320 127,955 $21.14 6.2% Class C 17,111,951 2,651,259 10,260 86.4% 81,545 203,657 - 0 $16.29 1.7% Totals 209,730,402 32,505,370 4,151,495 87.8% 893,079 3,393,794 1,590,291 11,866,122 $26.70 7.6%

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q3 2014

PMRG’s portfolio, including projects managed for third parties, includes commercial office buildings, mixed- Kristen Burney Doug Berry use centers, corporate headquarters, industrial buildings, medical facilities, high-rise multifamily buildings Vice President Vice President and re-appropriated military facilities. Director of Marketing Creative Director (713) 209-5910 (713) 209-5897 Our goal is to generate exceptional returns for our clients and investors by focusing on real estate [email protected] [email protected] fundamentals. For additional information, visit www.pmrg.com.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON OFFICE

AT A MARKET REPORT AT A MarMarket ket GlanceGlance THIRDSECOND QUA QUARTERRTER 2013 2014

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q2 2014 Mar ket AT A Glance

ECONOMIC OVERVIEW

Houston’s economy continues to enjoy high employment growth, driven by gains in energy, manufacturing and other key industries. Employment growth has accelerated in recent months with the Houston metro area creating 93,300 new jobs within the 12 months ending May 2014, which represents a 3.0% annual increase. Houston’s May unemployment rate stood at 5.0%, which remains far below the national average of 6.3%. Since its post- recessionary trough in early 2010, the metro area has remarkably gained 407,300 net new jobs, or 2.6 jobs for every one lost during the recession, to reach its highest number of total nonfarm jobs on record. As the center of the global petroleum industry, Houston has continued to benefit from sustained high global oil prices and the worldwide boom in natural gas exploration. Since late January, U.S. crude stocks have risen as tensions between Russia and Ukraine and the conflicts in Iraq have kept global oil prices strong. As of July 1, 2014, U.S. crude for August TABLE OF CONTENTS delivery increased to $105.68 per barrel, well above the $65 per barrel minimum many analysts believe is required to sustain a vital oil industry. According to the University of Economic Overview...... 2 Houston’s Institute for Regional Forecasting, the Houston metro area is forecasted to add Office Market Assessment...... 3 86,000 jobs in 2014, 21,000 more than their original forecast. Houston’s solid expansion Net Absorption & Occupancy...... 4 should continue for the remainder of 2014, driven by growth in housing and non- Rental Rates & Leasing Activity...... 5 residential construction, as well as a revival in energy exploration. Related manufacturing Updated 7/8/2014 Construction...... 6 and professional services will also benefit from corporate relocations and expansions as companies are attracted to the metro area’s business-friendly environment with lower Submarket Statistics & Methodology...... 7 business costs and a well-educated labor force. Our Team...... 8 Employment Trends

120 6% 100 80 4%

Thousands 60 2% 40 FOR INFORMATION: 20 0% 0 Wade Bowlin -20 -2% Executive Vice President -40 -4% -60 Managing Director -80 -6% (713) 209--5753 03 04 05 06 07 08 09 10 11 12 13 14F 15F 16F [email protected] Jobs Added Annual % Change Updated 7/1/2014 John Spafford Source: U.S. Bureau of Labor Statistics, UH Institute for Regional Forecasting, Moody's Analytics Executive Vice President Employment Growth by Sector Director of Leasing HEALTH (713) 209--5823 12-MONTHS CURRENT PRIOR ANNUAL (Improving [email protected] READING READING CHANGE or Declining) Mining 111.9 105.8 5.8% Up Ariel Guerrero Construction 196.8 189.5 3.9% Up Senior Vice President, Research Manufacturing 257.7 250.5 2.9% Up Trade, Transportation & Utilities 578.0 560.7 3.1% Up (713) 209-5704 Information 32.9 32.2 2.2% Up [email protected] Financial Activities 144.4 141.9 1.8% Up Professional & Business Services 439.5 425.3 3.3% Up Education & Health Services 347.9 336.6 3.4% Up 2 Leisure & Hospitality 287.0 274.8 4.4% Up PAGE Other Services 103.0 99.0 4.0% Up Government 383.9 373.4 2.8% Up Source:Source: U.S. U.S. Bureau Bureau of of Labor Labor Statistics. Statistics. Employment Employment DataData as of May 20142014, All AllEmployees, Employees, in InThousands Thousands

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q2 2014

OFFICE MARKET ASSESSMENT

Similar to the first quarter, strong employment growth continued to drive office leasing demand citywide with roughly 1 million sq. ft. of direct net absorption during the second quarter, bringing the trailing 12-month occupancy gain total to nearly 6.2 million sq. ft. However, unlike the first quarter, the quarterly occupancy gains were more evenly spread across the market. During the second quarter, Class A product accounted for the majority of the demand with 688,113 sq. ft. of direct absorption growth. The Class B sector experienced a modest 252,970 sq. ft. of occupancy gains—an increase over the previous quarter and in line with its 2013 quarterly average of 246,177 sq. ft. Class A direct occupancy rates decreased 10 basis points to 90.9% as new construction deliveries slightly outpaced demand, but have increased 80 basis points within the past 12 months. Meanwhile, Class B direct occupancy rates improved by 70 basis points to 85.4% during the quarter and are up 80 basis points from a year ago. Houston Ranks 1st in Job Growth: The Houston region has led the major U.S. metropolitan For more than three years, Houston’s office market has demonstrated rising occupancy areas in job recovery since December 2011. Houston rates, as energy companies have elbowed one another to find prime office space has recovered more than 266% of the 153,100 jobs lost needed to support U.S. oil exploration, production and transport operations. While during the recession – a higher percentage than any other major metro area. many of the growing energy firms have already secured their space, a larger share of leasing activity has begun to shift to small-to-medium-sized engineering and technical Home to 26 Fortune 500 Companies: firms supporting the oil & gas industry. Although leasing activity has slowed slightly Houston ranks third among metropolitan statistical compared to a year ago, there have been several large leases signed in recent months areas in the number of Fortune 500 headquarters which will further boost the absorption totals in the coming quarters. The largest behind only New York (72) and Chicago (30). With more lease transactions occurred in the CBD during the quarter, which involved Memorial than 5,000 energy related firms, Houston is considered Resources Development securing a 125,000 sq. ft. of direct space and Motiva Enterprises to be the Energy Capital of the world. subleasing four floors totaling roughly 109,373 sq. ft. at One Allen Center. In addition, GE Oil & Gas recently inked a 150,000 sq. ft. pre-lease commitment to help kick start Houston Economic Outlook: construction on a 314,000 sq. ft. office building at Beltway @ Clay Road. Houston’s strong employment and population growth propelled by further expansion in energy, health- related and distribution industries will lead to above- FORECAST average gains for the metro area. Houston is poised for long-term expansion as annual job growth is • Strong leasing demand will continue to drive rental rates higher, creating a landlord forecasted to average 2.7% from 2013 to 2016, well favorable setting in the most desirable submarkets. However, a wave of new above the 2.2% annual average since 1990. construction will deliver in the coming quarters to alleviate the difficulty in finding quality space. • Although the premier submarkets such as CBD, Galleria, and Greenway will continue Updated 7/2/2014 to perform strongly, new construction in West Houston will remain competitive, Market Trend Indicators Updated 7/8/2014offering modern, high quality offices at comparatively lower rates. Current Change from Previous 12-month Change from Previous 12-month Quarter Quarter Year Forecast Quarter Year Forecast Office Market Trends Direct Occupancy 88.2% up up down

8,000 90% Direct Net Absorption 939,731 up up up

6,000 88% Under Construction 11,508,408 up up up

4,000 86% Direct Asking Rents $26.50 up up up 2,000 84% in Thousands of SF in Thousands 0 82% 3 -2,000 80% PAGE 03 04 05 06 07 08 09 10 11 12 13 14F 15F 16F

Direct Net Absorption Completions Direct Occupancy

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q2 2014 Mar ket AT A Glance

NET ABSORPTION & OCCUPANCY

• The Central Business District took the lead as the top performing submarket with 189,043 sq. ft. of direct absorption during the second quarter of 2014. The Class A market accounted for 96,439 sq. ft. of absorption during the quarter, with Class B following closely behind absorbing 90,676 sq. ft. The largest quarterly occupancy gain occurred when Mercer Human Resource Consulting occupied 54,535 sq. ft. at One Allen Center. • Westchase recorded 149,667 sq. ft. of direct absorption during the quarter. Class A product absorbed 202,503 sq. ft. of space, led by Noble Corporation moving into 88,510 sq. ft. at Granite Briarpark Green and National Oilwell Varco taking 47,136 sq. ft. at 2500 Citywest Blvd. Class B product countered these gains with 41,391 sq. ft. of negative direct absorption. • The Katy Freeway/Energy Corridor submarket, which absorbed over 1 million sq. ft. “Class A space remains the preferred choice among during the first quarter, had a modest quarter only absorbing 117,240 sq. ft. of direct growing firms as this sector has accounted for 82% or space. The most notable move-in included IHS moving into 46,568 sq. ft. at Enclave 9.3 million sq. ft. of the citywide absorption growth since Parkway. The Wallis State Bank Building delivered during the second quarter, with the beginning of 2012,” said Wade Bowlin, Executive Vice Atmos Energy and Wallis State Bank occupying nearly 50,000 sq. ft. of space combined. President, Managing Director, Central Division. • Greenway Plaza followed a lackluster first quarter by logging 96,165 sq. ft. of direct absorption. RealEC Technologies and Mitsubishi Heavy Industries America moved into Updated 7/1/2014 38,006 sq. ft. and 11,355 sq. ft., respectively, at 20 Greenway Plaza. Patterson & Sheridan, LLP also occupied 24,568 sq. ft. of Class A space at Weslayan Tower. Submarket Occupancy Ranking • The Woodlands submarket posted 68,703 sq. ft. of direct absorption during the second Occ. Y-O-Y % quarter. The most significant occupancy gain involved GeoSouthern Energy Corp.. Rank Submarket Rate Change taking 63,500 sq. ft. of Class A space at Wildwood Corporate Center. Schlumberger also moved into their sublease of 25,879 sq. ft. at 10101 Woodloch Forest. 1 Bellaire 93.9% 5.9% Updated 7/1/2014 2 Katy Freeway 93.2% 0.0% 3 Greenway Plaza 90.7% 2.1% Direct Net Absorption vs. Completions 4 Baytown & I-10 East 90.5% 2.3% 5 Westchase 90.2% -0.6% 2,400 6 Central Business District 89.8% 0.9% 7 Galleria / Uptown 89.6% 0.5% 2,000 8 San Felipe / Voss 89.3% 1.9% 1,600

9 The Woodlands / Conroe 89.2% -3.9% 1,200 10 S. Main / Medical Center / South 89.2% 0.4% 800

11 Kingwood / Humble 89.0% 2.2% Thousands of SF In 12 Gulf Freeway / Pasadena 88.1% 3.4% 400 13 Fort Bend / Sugar Land 87.2% 5.1% 0 Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 14 Midtown / Allen Parkway 86.6% -1.2% Updated 7/1/2014 15 Northwest Freeway / North Loop W 84.4% 1.3% Direct Net Absorption Completions 16 Greenspoint / IAH / N Belt 83.2% -0.4% 17 Richmond / Fountainview 82.1% -2.7% Direct Occupancy Rates 18 NASA / Clear Lake 81.9% 1.3% 19 FM 1960 81.5% 7.5% 92% 20 Southwest Beltway 8 / Hillcroft 78.7% -0.5% 90% 88% 86% 84% 4 82% PAGE 80% Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 Q2 14

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q2 2014

RENTAL RATES & LEASING ACTIVITY

• Citywide Class A asking rents increased $0.44 to $34.15 per sq. ft. during the quarter and have rose by 8.1% or $2.57 within the past 12 months, again reaching their highest level on record. Meanwhile, Class B rents rose by $0.08 to $21.00 per sq. ft. during the quarter and have moved up 5.6% or $1.12 per sq. ft. within the past 12 months. • The quarterly spike in rental rates can be partially attributed to the delivery of new product, increased taxes inflating operating expenses, and an increase in quoted rates for large blocks of space. The largest quarterly spikes in rental rates occurred in Midtown (10.1%), Greenway Plaza (5.5%), The Woodlands/Conroe (5.5%), and CBD (4.9%). • Sustained office leasing demand combined with shrinking options for high quality space have pushed citywide Class A asking rents upward by $5.06 or 17.3% since their cyclical low recorded at mid-year 2011. Similarly, Class B rates have jumped 10.8% or $2.05 since their cyclical low recorded during Q3 2010. • Asking rental rates are expected to steadily rise in the next 12 months as quality space “Sustained demand for quality space should result in options remain limited, but relief is on the way with new product nearing completion. rising rental rates and declining concessions in the top As the spread between Class A and B rental rates widens, more Class A tenants will performing submarkets as companies enter the market consider Class B building options to offset the higher real estate occupancy costs, sooner to secure a greater number of options for quality though Class A space will remain the top choice for growing firms. space,” said John Spafford, Executive Vice President, • Class A leasing velocity has declined for the third consecutive quarter to 8.1 million Director of Leasing. sq. ft., an 18% decrease from the same time last year, but still remains 17% above the Updated 7/2/2014 10-year historical average. The annual decline is largely attributed to the tightness in Updated 7/1/2014the Class A sector, but leasing velocity should remain strong as many firms are still Submarket Rental Rate Ranking evaluating potential expansions, relocations and renewals well in advance of their lease Rental Y-O-Y % expirations. Rank Submarket Rate Change 1 Central Business District $37.43 10.4% Rental Rates 2 Galleria / Uptown $32.45 13.5% ($/SF/Yr. Full Service) 3 Greenway Plaza $29.85 12.8% $34 4 Midtown / Allen Parkway $29.63 17.9% $32 5 Westchase $29.49 10.6% $30 6 The Woodlands / Conroe $28.74 18.2% $28 7 San Felipe / Voss $27.32 9.1% $26 8 Katy Freeway $26.52 24.9% $24 9 S. Main / Medical Center / South $24.77 8.2% $22 10 Fort Bend / Sugar Land $24.69 0.3% $20 11 Bellaire $24.47 4.9% $18 12 Greenspoint / IAH / N Belt $24.23 10.2% Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 13 Kingwood / Humble $23.08 3.1% Updated 7/2/2014 14 Northwest Fwy / North Loop W $20.68 10.7% Class A Class B 15 Gulf Freeway / Pasadena $20.30 4.4% Direct Leasing Activity 16 NASA / Clear Lake $19.34 1.1% Rolling 12-Months 17 FM 1960 $18.43 0.8% 16,000 18 Southwest Beltway 8 / Hillcroft $16.61 9.7% 14,000 19 Baytown & I-10 East $16.10 4.3% 12,000 20 Richmond / Fountainview $15.16 2.6% 10,000 8,000 6,000

In Thousands of SF In 4,000 2,000 5 PAGE 0 Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 Q2 14

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q2 2014 Mar ket AT A Glance

CONSTRUCTION

• The increased volume of groundbreakings during the second quarter of 2014 pushed the office space under construction to new high of 11.5 million sq. ft., with 49% of this space already pre-leased (excluding corporate-owned projects). With the inclusion of corporate-owned projects, the market has approximately 18.2 million sq. ft. underway, with 68% of this space either committed or pre-leased. • Developers delivered 2,038,512 sq. ft. of new space during the first-half of 2014. The Katy Freeway/Energy Corridor accounted for 59% of the new product delivered, while The Woodlands contributed to 23% of the citywide construction deliveries year-to-date. • Houston’s office market is projected to deliver just over 5.4 million sq. ft. of space (excluding owner-occupied buildings) in 2014, which is already 62% pre-leased. Katy Freeway will deliver 47% of the new product, and Westchase and The Woodlands will receive approximately 18% and 16% of the new construction deliveries, respectively. RECENT ANNOUNCEMENTS • The Katy Freeway/Energy Corridor continues to lead Houston’s development pipeline with 17 buildings encompassing more than 4.6 million sq. ft. currently under • In Greenway Plaza, PM Realty Group is developing a Updated 7/1/2014 construction. 400,000 sq. ft. Class A office building at 3737 Buffalo • With Class A occupancy rates exceeding or edging the 90% mark in the premier Speedway, which will deliver in August of 2015. submarkets, companies in expansion mode are quickly securing their space amidst PMRG also recently broke ground on Woodbranch Updatedfears 7/3/2013of future lofty rental rate increases as experienced during the previous expansion Park Phase II in the Energy Corridor, as Sasol North Construction Pipeline period. America signed a pre-lease commitment to take the entire 171,567 sq. ft. Class A office building. 14,000 • Hines has moved forward on their 48-story Construction Pipeline skyscraper at 609 Main Street in the CBD, and is 12,000 doing so on a speculative basis with no tenants officially secured. The 1 million sq. ft. office tower is 7,00010,000 slated for delivery in 2017. 6,0008,000 • Piedmont Office Realty Trust has recently begun construction on Enclave Place, a speculative 300,907 5,0006,000 sq. ft. high-rise in the Katy Freeway submarket 4,000 developed by PM Realty Group. Thousands of SF In 4,000 • Patrinely Group, CDC Houston and USAA 3,0002,000 announced details for CityPlace, a 60-acre mixed-

use development located in the Springwoods Thousands of SF In 2,000 0 Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 Q2 14 Village development, near the Exxon Mobil 1,000 corporate campus. The initial office component phase of CityPlace will include two Class A office Updated0 7/1/2014 Under Construction Delivered buildings with a combined total of 440,000 sq. ft. of Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 rentable space. SIGNIFICANT PROJECTS UNDER CONSTRUCTION • Trammell Crow announced that it will soon break Under Construction Delivered% PRE- TARGET ground on Energy Center V, a speculative 500,000 PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT LEASED DEVELOPER COMPLETION sq. ft. office building with expected delivery by mid- 609 Main at Texas 1,057,658 CBD N/A 0% Hines 1Q 2017 year 2016 In 2013, Houston-based ConocoPhillips BHP Billiton BTS** 600,000 Galleria / Uptown BHP Billiton 100% Transwestern 4Q 2016 preleased 1.2 million sq. ft. in Energy Centers III & IV, Energy Center Four 600,000 Katy Freeway ConocoPhillips 100% Trammell Crow Co. 3Q 2016 which are currently under construction. Energy Center Three 546,604 Katy Freeway ConocoPhillips 100% Trammell Crow Co. 2Q 2015 • In Westchase, BMS Management kicked off Noble Energy Center II 456,000 FM 1960 Noble Energy 100% Trammell Crow Co. 2Q 2015 construction on Millennium Tower II, as National Air Liquide Center - South 452,370 Katy Freeway Air Liquide 38% MetroNational 4Q 2015 Oilwell Varco pre-leased the entire 417,000 sq. ft. Energy Tower IV 428,831 Katy Freeway Spectrum Geo 12% Mac Haik 4Q 2014 development on Richmond Ave. Millennium II** 417,000 Westchase National Oilwell Varco 100% Gensler/BMS Management 4Q 2015 • Amegy Bank will build a new 350,000 sq. ft. 3737 Buffalo Speedway 400,000 Greenway Plaza Solvay America 23% PM Realty Group 3Q 2015 corporate headquarters on four acres of land in West Memorial Place 334,147 Katy Freeway Petroleum Geo Services 41% Skanska 1Q 2015 the Galleria area. Construction is expected to begin Two Briarlake Plaza 333,096 Westchase Samsung Engineering 52% Behringer Harvard REIT 3Q 2014 early in 2015 and conclude in the fall of 2016. 1735 Hughes Landing Blvd 331,840 Woodlands Exxon/Mobil 100% The Woodlands Development Co 1Q 2015 6 1725 Hughes Landing Blvd 317,052 Woodlands Exxon/Mobil 100% The Woodlands Development Co 1Q 2015 PAGE Clay Road @ Beltway 8 - Bldg 1 314,000 Katy Freeway GE 48% Transwestern 2Q 2015 Piedmont Enclave Place 300,760 Katy Freeway N/A 0% PM Realty Group 3Q 2015 Westchase Park II 300,000 Westchase N/A 0% PM Realty Group 4Q 2014 Note: Corporate owned office buildings excluded from competitive statistics; ** Build-to-suit

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q2 2014

SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Current Completions Under Submarkets SF Direct Sublease Occupancy Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 37,523,225 4,391,937 1,013,872 89.8% 189,043 222,795 - 1,057,658 $42.18 $27.98 Galleria / Uptown 22,697,227 3,351,670 463,542 89.6% -31,950 178,938 81,502 782,899 $35.71 $26.64 Greenway Plaza 10,221,070 1,343,147 48,823 90.7% 96,165 86,406 - 660,437 $35.95 $24.20 Katy Freeway 26,465,427 3,035,755 747,017 93.2% 117,240 1,128,281 262,109 4,634,003 $33.87 $22.18 Westchase 13,850,324 1,570,033 348,246 90.2% 149,667 443,486 - 1,157,088 $38.06 $20.40 Greenspoint/ IAH / N Belt 12,607,239 4,699,849 471,999 83.2% 36,975 91,258 - 0 $31.24 $16.12 Northwest Freeway / N Loop West 11,544,563 2,240,711 161,744 84.4% -43,672 -64,106 - 879,973 $23.32 $20.22 NASA / Clear Lake & SE Outlier 6,512,952 1,304,225 40,404 81.9% -14,878 -44,368 - 55,000 $24.47 $18.44 Fort Bend / Sugar Land / SW Outlier 7,457,718 1,066,975 216,221 87.2% 60,808 64,112 - 406,983 $26.82 $22.99 Richmond / Fountainview 1,233,732 238,891 0 82.1% 7,248 1,921 - 0 -- $17.34 San Felipe / Voss 5,227,251 746,267 60,130 89.3% 72,712 37,110 - 0 $33.15 $21.97 Bellaire 3,568,900 426,449 33,703 93.9% 62,204 77,060 - 0 $26.17 $22.23 Midtown / Allen Parkway 5,436,202 729,451 27,180 86.6% 13,556 -44,596 80,000 170,038 $33.29 $26.41 FM 1960 9,768,231 1,969,393 132,006 81.5% 73,803 157,556 55,500 487,320 $25.82 $16.24 Kingwood / Humble / NE Outlier 1,142,047 160,233 0 89.0% 3,048 42,261 - 36,400 $32.13 $20.88 Southwest Beltway 8 / SW / Hillcroft 10,179,673 2,480,531 43,118 78.7% 20,215 -161,607 - 0 $17.39 $16.85 S. Main / Medical Center / South 9,725,918 1,263,275 45,058 89.2% 23,657 121,812 - 52,362 $27.89 $24.92 The Woodlands / Conroe 9,440,744 1,161,180 248,459 89.2% 68,703 103,434 461,687 1,159,567 $35.31 $26.15 Gulf Freeway / Pasadena 3,139,733 506,105 4,315 88.1% 21,220 -9,828 - 0 $27.59 $21.72 Baytown / I-10 East 1,125,170 166,037 0 90.5% 13,967 18,120 - 0 -- $16.27 Totals 208,867,346 32,852,114 4,105,837 88.2% 939,731 2,450,045 940,798 11,539,728 $34.15 $21.00

Total Inventory Direct Current Completions Under Asking Y-O-Y % Property Types SF Direct Sublease Occupancy Qtr. Year To Date Current Qtr Construction Rent Change Class A 102,860,629 14,197,116 2,879,608 90.9% 688,113 1,907,308 940,798 11,508,408 $34.15 8.1% Class B 88,816,993 15,869,822 1,209,338 85.4% 252,970 422,144 - 31,320 $21.00 5.6% Class C 17,189,724 2,785,176 16,891 86.3% -1,352 120,593 - 0 $16.40 4.5% Totals 208,867,346 32,852,114 4,105,837 88.2% 939,731 2,450,045 940,798 11,539,728 $26.50 8.8%

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q2 2014

PMRG’s portfolio, including projects managed for third parties, includes commercial office buildings, mixed- Kristen Burney Doug Berry use centers, corporate headquarters, industrial buildings, medical facilities, high-rise multifamily buildings Vice President Vice President and re-appropriated military facilities. Director of Marketing Creative Director (713) 209-5910 (713) 209-5897 Our goal is to generate exceptional returns for our clients and investors by focusing on real estate [email protected] [email protected] fundamentals. For additional information, visit www.pmrg.com.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON OFFICE

AT A MARKET REPORT AT A MarMarket ket GlanceGlance THIRDFIRST QUAQUARTERRTER 20142013

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q1 2014 Mar ket AT A Glance

ECONOMIC OVERVIEW

The Houston metro area continues to enjoy high employment growth, driven by gains in energy, manufacturing and other key industries. In the 12 months ending February 2014, the Houston metro area created 77,000 new jobs, representing a 2.8% increase in employment. Houston’s February unemployment rate stood at 5.7%, which remains far below the national average of 7.0%. Since its post-recessionary trough in early 2010, the metro area has remarkably added 351,200 net new jobs to reach its highest number of total nonfarm jobs on record.

As the center of the global petroleum industry, Houston has benefitted from sustained high global oil prices and the worldwide boom in natural gas exploration. Since late January, U.S. crude stocks have risen week after week as tensions between Russia and the Ukraine have kept global oil prices strong. As of April 1, 2014, U.S. crude for May delivery TABLE OF CONTENTS settled at $99.74 per barrel, well above the $70 per barrel minimum many analysts believe is required to sustain a vital oil industry. Although there are signs that the rapid acceleration Economic Overview...... 2 of Houston’s energy sector is easing, the energy industry still remains very active. According Office Market Assessment...... 3 to the Greater Houston Partnership, the Houston metro area is forecasted to add 69,800 Net Absorption & Occupancy...... 4 jobs in 2014. Houston’s solid expansion will continue throughout 2014, driven by growth Rental Rates & Leasing Activity...... 5 in housing and non-residential construction, as well as a revival in exploration. Related Updated 4/1/2014 Construction...... 6 manufacturing and professional services will also benefit from corporate relocations and expansions as companies are attracted to the metro area’s business-friendly environment Submarket Statistics & Methodology...... 7 with lower business costs and a well-educated labor force. Our Team...... 8 Employment Trends

120 6% 100 80 4%

Thousands 60 2% 40 20 0% FOR INFORMATION: 0 -2% Wade Bowlin -20 -40 -4% Executive Vice President -60 Managing Director -80 -6% (713) 209--5753 03 04 05 06 07 08 09 10 11 12 13 14F 15F 16F [email protected] Jobs Added Annual % Change

John Spafford UpdatedSource: U.S.4/1/2014 Bureau of Labor Statistics, Greater Houston Partnership, Moody's Analytics Executive Vice President Employment Growth by Sector Director of Leasing (713) 209--5823 HEALTH Current 12-Months Annual (Improving [email protected] Reading Prior Reading Change or Declining) Mining 108.0 103.6 4.2% Up Ariel Guerrero Construction 197.7 188.1 5.1% Up Senior Vice President, Research Manufacturing 255.8 248.9 2.8% Up Trade, Transportation & Utilities 567.3 553.4 2.5% Up (713) 209-5704 Information 32.6 31.6 3.2% Up [email protected] Financial Activities 140.8 140.9 -0.1% Down Professional & Business Services 427.8 419.1 2.1% Up Education & Health Services 338.7 333.7 1.5% Up 2 Leisure & Hospitality 275.5 261.9 5.2% Up PAGE Other Services 99.9 97.3 2.7% up Government 382.8 371.4 3.1% Up Source: U.S. Bureau of Labor Statistics. Employment Data as of February 2014 Source: U.S. Bureau of Labor Statistics. Employment Data as of February 2014, All AllEmployees, Employees, in In Thousands Thousands

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q1 2014

OFFICE MARKET ASSESSMENT

Solid employment growth continued to fuel office leasing demand with over 1.5 million sq. ft. of direct net absorption during the quarter, bringing the trailing 12-month total to nearly 6.4 million sq. ft. Class A product accounted for the bulk of the demand with over 1.2 million sq. ft. of direct absorption growth during the quarter—outpacing the growth from the prior quarter. The Class B sector experienced a modest 169,174 sq. ft. of positive absorption—slower than its 2013 quarterly average of 246,177 sq. ft. Class A direct occupancy rates rose 40 basis points to 91.0% as demand slightly outpaced construction deliveries during the quarter. Within the past 12 months, Class A direct occupancy rates have moved up 130 basis points to match their highest level since 1Q 2000. Meanwhile, Class B direct occupancy rates improved by 10 basis points to 84.7% during the quarter and are up 50 basis points from a year ago. Houston Ranks 1st in Job Growth: The energy sector continued to drive leasing demand, with the largest leases going The Houston region has led the major U.S. metropolitan to engineering and technical firms supporting the oil & gas industry. West Houston areas in job recovery since December 2011. Houston has been a hotbed of new construction and leasing activity. With occupancy rates has recovered more than 229% of the 153,100 jobs lost exceeding 90% and rental rates still below the other premier submarkets, the booming during the recession – a higher percentage than any other major metro area. Katy Freeway/Energy Corridor dominated once again with over 1 million sq. ft. of direct net absorption during the quarter. The largest occupancy gains occurred in new Home to 26 Fortune 500 Companies: product delivered in the Energy Corridor, including: Technip (428,831 sf at Energy Tower Houston ranks third among metropolitan statistical III), Mustang Engineering (186,375 sf at Westgate II) and Modec International (168,414 areas in the number of Fortune 500 headquarters sf at Energy Crossing II). Westchase also saw impressive O&G related leasing activity, behind only New York (71) and Chicago (29). With more with 293,819 sq. ft. of absorption. Japanese engineering firm JGC Corp occupied 51,921 than 5,000 energy related firms, Houston is considered sq. ft. at Granite Briarpark Green—which delivered at the end of 2013. C&J Energy also to be the Energy Capital of the world. occupied 231,992 sq. ft. of newly delivered Class B space in Westchase. Houston Economic Outlook: Houston’s strong employment and population growth FORECAST propelled by further expansion in energy, health- related and distribution industries will lead to above- • Strong leasing demand will continue to drive rental rates higher, creating a average gains for the metro area. Houston is poised landlord favorable setting in the most pursued submarkets. However, a wave of for long-term expansion as annual job growth is new construction will deliver soon to alleviate the difficulty in finding quality space. forecasted to average by 2.7% from 2013 to 2016, well • Although the premier submarkets such as CBD, Galleria, and Greenway will continue above the average of 2.2% since 1990. to perform strongly, new construction in West Houston will remain competitive, offering modern, high quality offices at comparatively lower rates. • With tenants demanding more amenities and controlled environments for Updated 4/2/2014 recruitment and retention purposes, an increasing number of older buildings will Market Trend Indicators Updated 1/3/2014undergo renovations to reposition and better compete with newer buildings. Current Change from Previous 12-month Change from Previous 12-month Quarter Quarter Year Forecast Quarter Year Forecast Office Market Trends Direct Occupancy 87.9% up up sideways

8,000 90% Direct Net Absorption 1,559,285 up up up 6,000 88% Under Construction 9,682,951 up up up 4,000 86% Direct Asking Rents $26.10 up up up 2,000 84% in Thousands of SF in Thousands 0 82%

3 -2,000 80% PAGE 03 04 05 06 07 08 09 10 11 12 13 14F 15F 16F

Direct Net Absorption Completions Direct Occupancy

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q1 2014 Mar ket AT A Glance

NET ABSORPTION & OCCUPANCY

• The Katy Freeway/Energy Corridor remained the top performing submarket with 1,011,041 sq. ft. of direct absorption during the first quarter of 2014. The Class A market accounted for 982,082 sq. ft. of absorption during the quarter. The largest quarterly occupancy gains occurred in new product recently delivered, which involved Technip (428,831 sq. ft. at Energy Tower III), Mustang Engineering (186,375 sq. ft. at Westgate II) and Modec International (168,414 sq. ft. at Energy Crossing II). • Uptown/Galleria recorded 210,888 sq. ft. of direct absorption during the first quarter. Class A product accounted for virtually all of the absorption, with 214,021 sq. ft. of absorption offsetting some modest Class B occupancy losses. 3009 Post Oak Blvd welcomed the occupancies of Alliantgroup (124,558 sq. ft.) and Datacert (49,824 sq. ft.). • The CBD witnessed 33,752 sq. ft. of direct net absorption during the quarter. In spite of Shell Oil’s 321,143 sq. ft. vacancy at Pennzoil Place – North Tower, several move-ins “Class A space remains the preferred choice among by Seyfarth Shaw, Rosetta Resources, Plains Marketing and Munsch Hardt, helped to growing firms as this sector has accounted for 82% or counter some of the submarket’s occupancy losses. The most significant occupancy 8.9 million sq. ft. of the citywide absorption growth since gain involved Chevron taking 94,686 sq. ft. of expansion space at 1600 Smith. the beginning of 2012,” said Wade Bowlin, Executive Vice • The Westchase submarket saw an impressive 293,819 sq. ft. of absorption during the President, Managing Director, Central Division. quarter. C&J Energy’s build-to-suits accounted for most of the 214,824 sq. ft. of Class B absorption. Meanwhile, JCG America occupied 51,921 sq. ft. at Granite Briarpark Green, Updated 4/1/2014 and Texas Training occupied 23,882 sq. ft. at Westchase Park Plaza, pushing the Class A direct net absorption total to 76,057 sq. ft. Submarket Occupancy Ranking • The Woodlands submarket posted 83.702 sq. ft. of direct absorption during the Occ. Y-O-Y % quarter. The most significant occupancy involved Strike LLC taking 70,190 sq. ft. of Class A space at One Hughes Landing. Chevron-Phillips also took 49,492 sq. ft. of Class Rank Submarket Rate Change B space at Research Forest Lakeside – Bldg 2. 1 Katy Freeway 93.6% 1.4% Updated 4/1/2014 2 The Woodlands / Conroe 93.0% 0.8% 3 Bellaire 91.3% 3.3% Direct Net Absorption vs. Completions 4 Kingwood / Humble 90.7% 2.1%

5 Greenway Plaza 90.0% 1.8% 2,400 6 Galleria / Uptown 90.0% 1.6% 2,000 7 Central Business District 89.2% 0.6% 8 Westchase 89.1% -1.4% 1,600 9 S. Main / Medical Center / South 89.0% -0.2% 1,200 10 San Felipe / Voss 88.4% -0.1% 800 11 Baytown & I-10 East 88.1% 0.0% Thousands of SF In 400 12 Midtown / Allen Parkway 87.6% 3.4% 0 13 Gulf Freeway / Pasadena 87.4% 1.5% Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 14 Fort Bend / Sugar Land 86.5% 4.5% Updated 4/1/2014 15 Northwest Freeway / North Loop W 84.8% 1.7% Direct Net Absorption Completions 16 Greenspoint / IAH / N Belt 82.5% -1.6% 17 NASA / Clear Lake 82.2% -3.7% Direct Occupancy Rates 18 Richmond / Fountainview 81.6% -2.4% 19 FM 1960 80.4% 6.0% 92% 20 Southwest Beltway 8 / Hillcroft 76.8% -2.8% 90% 88% 86% 84%

4 82% PAGE 80% Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q1 2014

RENTAL RATES & LEASING ACTIVITY

• Citywide Class A full-service gross asking rents jumped by $1.00 to $33.71 per sq. ft. during the quarter and have increased by 7.4% or $2.32 within the past 12 months, again reaching their highest level on record. Class B rents slightly increased by $0.28 to $20.92 per sq. ft. during the quarter and have moved up 6.3% or $1.24 per square foot within the past 12 months. • The quarterly spike in rental rates was largely attributed to the delivery of new product at higher rental rates as well as increased taxes inflating operating expenses. The largest quarterly spikes in rental rates occurred in Greenspoint/North Belt (10.8%), San Felipe/ Voss (7.9%), Northwest Freeway (8.1%), Katy Freeway (6.3%) and Greenway (4.2%). • Solid office leasing demand combined with limited high quality space options have impressively pushed citywide Class A asking rents upward by $4.63 or 15.9% since the cyclical low recorded at mid-year 2011. Meanwhile, Class B rates have jumped 9.5% or $1.81 since their cyclical low recorded during Q4 2010. “Sustained demand for quality space should result in • Asking rental rates are expected to steadily rise in the next 12 months as quality space rising rental rates and declining concessions in the top options remain limited, but relief is on the way with new product nearing completion. performing submarkets as companies enter the market As the spread between Class A and B rental rates widens, more Class A tenants will sooner to secure a greater number of options for quality consider Class B building options to offset the higher real estate occupancy costs space,” said John Spafford, Executive Vice President, though Class A space remains the top choice for growing firms. Director of Leasing. • Class A leasing velocity has declined by 3% to 9.5 million sq. ft. compared to the same Updated 4/1/2014 time in the prior year, but remains 28.4% above the 10-year historical average. The slight Updated 4/1/2014annual decline is largely attributed to the tightness in the Class A sector, but leasing Submarket Rental Rate Ranking velocity should remain strong as many firms are still evaluating potential expansions, Rental Y-O-Y % relocations and renewals well in advance of their lease expirations. Rank Submarket Rate Change 1 Central Business District $35.67 4.6% Rental Rates 2 Galleria / Uptown $32.08 16.5% ($/SF/Yr. Full Service) 3 Westchase $29.01 8.0% $34 4 Greenway Plaza $28.29 6.9% $32 5 San Felipe / Voss $27.87 13.8% $30 6 The Woodlands / Conroe $27.24 15.8% $28 7 Midtown / Allen Parkway $26.92 4.4% $26 8 Katy Freeway $26.48 20.1% $24 9 Greenspoint / IAH / N Belt $25.28 37.1% $22 10 S. Main / Medical Center / South $24.67 5.1% $20 11 Fort Bend / Sugar Land $24.46 -4.3% $18 12 Bellaire $24.35 4.1% Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 13 Kingwood / Humble $22.98 3.9% Updated 4/2/2014 14 Gulf Freeway / Pasadena $20.53 3.8% Class A Class B 15 Northwest Freeway / North Loop W$20.07 9.0% Direct Leasing Activity 16 NASA / Clear Lake $19.06 -1.1% Rolling 12-Months 17 FM 1960 $18.61 3.2% 16,000 18 Southwest Beltway 8 / Hillcroft $16.68 4.4% 14,000 19 Baytown & I-10 East $16.37 3.4% 12,000 20 Richmond / Fountainview $15.36 4.8% 10,000 8,000 6,000

In Thousands of SF In 4,000 2,000 5 PAGE 0 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q1 2014 Mar ket AT A Glance

CONSTRUCTION

• Many significant groundbreakings during the first quarter of 2014 pushed the office space under construction to a staggering 30-year high of 9.7 million sq. ft., with 54% of this space already pre-leased. This figure excludes corporate owned office projects totaling 5.8 million sq. ft. underway. • Developers have delivered 1,174,414 sq. ft. of space year-to-date, all located in West Houston. The Katy Freeway/Energy Corridor accounted for 83% of the new product delivered, with the remainder being C&J Energy’s Class B build-to-suit in Westchase. • Houston’s office market is projected to deliver just over 5 million sq. ft. of space (excluding owner-occupied buildings) in 2014, which is nearly 50% pre-leased. Katy Freeway will deliver 49.1% of the new product, and The Woodlands and Westchase will each receive approximately 17% of the new construction deliveries. • The Katy Freeway/Energy Corridor continues to lead Houston’s development pipeline RECENT ANNOUNCEMENTS Updatedwith 16 4/1/2014 buildings encompassing nearly 4.2 million sq. ft. currently under construction. • With Class A occupancy rates exceeding or edging the 90% mark in the premier • In Greenway Plaza, PM Realty Group broke ground submarkets and job growth expected to continue at a healthy pace, companies in on a 400,000 sq. ft. Class A office building at 3737 Updatedexpansion 7/3/2013 mode are quickly securing their space amidst fears of future lofty rental rate Buffalo Speedway, which will deliver in August increases as experienced duringConstruction the previous expansion Pipeline period. of 2015. PMRG also broke ground on the second phase of Woodbranch Park in the Katy Freeway submarket, as Sasol North America recently signed 11,000 Construction Pipeline a pre-lease commitment to take the entire 171,567 10,000 sq. ft. Class A office building. 9,000 7,000 • Transwestern kicked off construction on BHP’s 8,000 600,000 sq. ft. build-to-suit at 1500 Post Oak Blvd 6,0007,000 in the Galleria submarket, which is scheduled to 6,000 deliver by year-end 2016. 5,0005,000 • In Westchase, BMS Management kicked off 4,0004,000 construction of Millennium Tower II, as National In Thousands of SF In 3,000 Oilwell Varco pre-leased the entire 417,000 sq. ft. 3,0002,000 development on Richmond Ave. 1,000

In Thousands of SF In 2,000 • Breaking ground at Memorial City were the 0 MetroNational North and South Buildings. The two 1,000 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 Q1 14 buildings combined will deliver 596,200 sq. ft. of Class A space in 4Q 2015. Air Liquide has preleased Updated0 4/1/2014 Under Construction Delivered 37.3% of the space across the two buildings. The Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 France-based industrial gas firm will occupy half of SIGNIFICANT PROJECTS UNDER CONSTRUCTION Under Construction Delivered the 144,000 sq. ft. North Building and one-third of % PRE- TARGET the 452,000 sq. ft. South Building. PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT LEASED DEVELOPER COMPLETION • Having cleared the site of the demolished BHP Billiton 600,000 Galleria / Uptown BHP Billiton 100% Transwestern 4Q 2016 10-story Macy’s building, Hines commenced the Energy Center Four 600,000 Katy Freeway ConocoPhillips 100% Trammell Crow Co. 3Q 2016 construction of a 406,600 sq. ft. tower at 1110 Main Energy Center Three 546,604 Katy Freeway ConocoPhillips 100% Trammell Crow Co. 2Q 2015 St. Hilcorp Energy will move in upon its completion Noble Energy Center II 456,000 FM 1960 Noble Energy 100% Trammell Crow Co. 2Q 2015 at year-end 2015. MetroNational South Bldg 452,370 Katy Freeway Air Liquide 33% MetroNational 4Q 2015 • In late February, Midway Cos. broke ground on Energy Tower IV 428,831 Katy Freeway N/A 6% Mac Haik 4Q 2014 CityCentre Five at 825 Town & Country Blvd. The Millennium II 417,000 Westchase National Oilwell Varco 100% Harvey Builders/Oakmont Group 4Q 2015 15-story, 195,842 sq. ft. building is 50% preleased. 3737 Buffalo Speedway 400,000 Greenway Plaza N/A 23% PM Realty Group 3Q 2015 • Amegy Bank recently acquired a 4-acre site at Two Briarlake Plaza 337,888 Westchase Samsung Engineering 51% Behringer Harvard REIT 2Q 2014 1717 W. Loop South near the Galleria, with plans West Memorial Place 334,147 Katy Freeway Petroleum Geo Services 37% Skanska 1Q 2015 to build its new Houston corporate headquarters. Westchase Park II 300,000 Westchase N/A 0% PM Realty Group 4Q 2014 Construction on Amegy’s new 350,000 sq. ft. Beltway Lakes Phase III 271,384 Northwest N/A 0% The Radler LP 3Q 2014 building is expected to begin early in 2015 and Beltway Lakes Phase IV 271,384 Northwest N/A 0% The Radler LP 1Q 2015 conclude in the fall of 2016. Kirby Grove 260,437 Greenway Plaza Vitol Incorporated 38% Midway 2Q 2015 6 Town Centre I 254,489 Katy Freeway N/A 0% Moody Rambin 1Q 2015 PAGE Westgate - Bldg 3 225,885 Katy Freeway Mustang Engineering 100% Transwestern 3Q 2014 Legacy at Fallbrook 208,013 Northwest N/A 0% Liberty Property Trust 1Q 2015 The Offices at Greenhouse 203,149 Katy Freeway URS 67% Stream Realty 2Q 2014 Note: Corporate owned office buildings excluded from competitive statistics

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q1 2014

SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Current Completions Under Submarkets SF Direct Sublease Occupancy Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 37,564,077 4,746,403 1,049,264 89.2% 33,752 33,752 - - $39.96 $27.40 Galleria / Uptown 22,615,728 3,249,886 427,352 90.0% 210,888 210,888 - 864,753 $35.28 $26.50 Greenway Plaza 10,244,035 1,178,865 38,197 90.0% -9,759 -9,759 - 660,437 $34.46 $24.13 Katy Freeway 26,119,158 2,854,032 760,514 93.6% 1,011,041 1,011,041 972,714 4,194,552 $33.07 $21.46 Westchase 13,843,237 1,802,372 237,399 89.1% 293,819 293,819 201,700 1,161,880 $37.42 $19.88 Greenspoint/ IAH / N Belt 12,388,256 4,502,266 611,856 82.5% 54,283 54,283 - 0 $32.58 $16.27 Northwest Freeway / N Loop West 11,542,430 2,195,132 159,973 84.8% -20,434 -20,434 - 877,132 $23.17 $19.46 NASA / Clear Lake & SE Outlier 6,559,098 1,306,656 45,755 82.2% -29,490 -29,490 - 55,000 $24.49 $18.26 Fort Bend / Sugar Land / SW Outlier 7,522,580 1,055,416 193,435 86.5% 3,304 3,304 - 182,000 $26.69 $22.65 Richmond / Fountainview 1,233,938 276,217 0 81.6% -5,327 -5,327 - 0 -- $17.72 San Felipe / Voss 5,226,836 788,620 68,614 88.4% -35,602 -35,602 - 0 $33.14 $22.79 Bellaire 3,568,900 408,106 21,684 91.3% 14,856 14,856 - 0 $26.51 $22.09 Midtown / Allen Parkway 5,356,202 697,482 37,126 87.6% -58,152 -58,152 - 250,038 $30.56 $25.57 FM 1960 9,724,931 1,978,909 130,198 80.4% 83,753 83,753 - 511,500 $25.81 $16.52 Kingwood / Humble / NE Outlier 1,168,699 137,615 14,920 90.7% 39,213 39,213 - 36,400 $32.13 $20.27 Southwest Beltway 8 / SW / Hillcroft 10,395,934 2,801,161 72,602 76.8% -181,822 -181,822 - 0 $16.92 $17.06 S. Main / Medical Center / South 9,749,568 1,403,454 34,399 89.0% 98,155 98,155 - 52,362 $27.76 $24.87 The Woodlands / Conroe 8,983,091 888,741 216,485 93.0% 83,702 83,702 - 836,897 $33.76 $26.20 Gulf Freeway / Pasadena 3,139,733 535,998 248 87.4% -31,048 -31,048 - 0 $27.82 $21.94 Baytown / I-10 East 1,125,170 182,149 0 88.1% 4,153 4,153 - 0 -- $16.54 Totals 208,071,601 32,989,480 4,120,021 87.9% 1,559,285 1,559,285 1,174,414 9,682,951 $33.71 $20.92

Total Inventory Direct Current Completions Under Asking Y-O-Y % Property Types SF Direct Sublease Occupancy Qtr. Year To Date Current Qtr Construction Rent Change Class A 101,722,080 13,812,827 2,785,453 91.0% 1,268,166 1,268,166 936,714 9,682,951 $33.71 7.4% Class B 89,174,655 16,307,263 1,322,484 84.7% 169,174 169,174 237,700 0 $20.92 6.3% Class C 17,174,866 2,869,390 12,084 86.3% 121,945 121,945 - - $16.52 3.6% Totals 208,071,601 32,989,480 4,120,021 87.9% 1,559,285 1,559,285 1,174,414 9,682,951 $26.10 8.6% METHODOLOGY Total Inventory: The total inventory includes all single and multi-tenant leased 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 that is being 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.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q1 2014

PMRG’s portfolio, including projects managed for third parties, includes commercial office buildings, mixed- Kristen Burney Doug Berry use centers, corporate headquarters, industrial buildings, medical facilities, high-rise multifamily buildings Vice President Vice President and re-appropriated military facilities. Director of Marketing Creative Director (713) 209-5910 (713) 209-5897 Our goal is to generate exceptional returns for our clients and investors by focusing on real estate [email protected] [email protected] fundamentals. For additional information, visit www.pmrg.com.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON OFFICE

AT A MARKET REPORT AT A MarMarket ket GlanceGlance THIRDFOURTH QUA QUARTERRTER 2013 2013

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q4 2013 Mar ket AT A Glance

ECONOMIC OVERVIEW

The shale boom and subsequent re-emergence of the U.S. as the leader in petroleum production have placed Houston at the center of the rapidly changing global energy markets. As a result, Houston’s economy has expanded robustly with 354,200 net new jobs created since its post-recessionary trough in early 2010, reaching its highest number of total nonfarm jobs on record. In the 12 months ending November 2013, Houston has created 86,200 jobs, representing a 3.1% annual increase. During the same period, Houston’s unemployment rate has fallen to 5.6% to reach its lowest point since December 2008, the month prior to Houston entering the Great Recession.

Although there are signs that the rapid acceleration of Houston’s energy sector is easing, the energy industry still remains very active. The frenetic pace of job growth experienced over the past few years couldn’t be sustained indefinitely as the area has experienced a TABLE OF CONTENTS shortage in skilled labor and housing. The easing of the employment throttle began at mid- year 2013 and should continue into the early part of 2014 as the region moves toward a still Economic Overview...... 2 robust yet sustainable pace of job growth. According to the Greater Houston Partnership, Office Market Assessment...... 3 the Houston metro area is forecasted to end the year with 80,000 more jobs than 2012 Net Absorption & Occupancy...... 4 and is projected to add 69,800 jobs in 2014. Several factors will drive job growth in 2014, Rental Rates & Leasing Activity...... 5 whichUpdated include 1/3/2014 the ramp-up in construction at area chemical plants, the backlog of projects Construction...... 6 at local engineering firms, growing consumer confidence, and sustained population and income growth. Submarket Statistics & Methodology...... 7 Our Team...... 8 Employment Trends

120 6% 100 80 4%

Thousands 60 2% 40 20 0% FOR INFORMATION: 0 -2% Wade Bowlin -20 -40 -4% Executive Vice President -60 Managing Director -80 -6% (713) 209--5753 03 04 05 06 07 08 09 10 11 12 13F 14F 15F [email protected] Jobs Added Annual % Change

John Spafford UpdatedSource: 1/3/2014 U.S. Bureau of Labor Statistics, Greater Houston Partnership, Moody's Analytics Executive Vice President Employment Growth by Sector Director of Leasing (713) 209--5823 HEALTH Current 12-Months Annual (Improving [email protected] Reading Prior Reading Change or Declining) Mining 107.5 103.6 3.8% Up Ariel Guerrero Construction 185.2 180.9 2.4% Up Senior Vice President, Research Manufacturing 253.1 248.2 2.0% Up Trade, Transportation & Utilities 588.6 561.6 4.8% Up (713) 209-5704 Information 33.1 32.0 3.4% Up [email protected] Financial Activities 140.0 140.4 -0.3% Down Professional & Business Services 428.5 407.5 5.2% Up Education & Health Services 347.1 335.2 3.6% Up 2 Leisure & Hospitality 270.3 262.1 3.1% Up PAGE Other Services 93.6 96.9 -3.4% Down Government 382.4 374.8 2.0% Up Source: U.S. Bureau of Labor Statistics. Employment Data as of November 2013 Source: U.S. Bureau of Labor Statistics. Employment Data as of November 2013, All AllEmployees, Employees, in In Thousands Thousands

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q4 2013

OFFICE MARKET ASSESSMENT

Solid employment growth continued to fuel Houston’s office leasing market with 1.6 million sq. ft. of direct space absorbed during the quarter, bringing the annual tally to just over 5.1 million sq. ft. Most impressively, 48% of the citywide absorption growth occurred in new buildings delivered in 2013. Class A product accounted for the bulk of the demand with nearly 1.2 million sq. ft. of direct absorption growth during the final quarter, pushing the annual total to nearly 4.3 million sq. ft., which surpasses last year’s annual gain of 3.1 million sq. ft. Class A direct occupancy rates increased by 40 basis points to 90.6% as demand kept pace with space deliveries during the quarter and has moved up 100 basis points within the past year to match its highest level since year-end 2007. Class B product benefitted from the tightness in the Class A sector with 520,302 sq. ft. of occupancy gains recorded during the quarter and 984,708 sq. ft. absorbed in 2013. Class B direct occupancy improved by 30 basis points to 84.6% during the quarter but Houston Ranks 1st in Job Growth: remained unchanged from the prior year as space deliveries kept pace with demand. The Houston region has led the top five major U.S. metropolitan areas in job recovery since December The booming Katy Freeway/Energy Corridor remained a hotbed for new construction 2011. Houston has recovered more than 231% of and leasing activity, accounting for just over 1.7 million sq. ft. of the direct absorption all jobs lost during the recent recession – a higher percentage than any other major metro area. growth for the year. The energy sector has been the key driver, fueling demand throughout the city as oil and gas service companies are generating ample revenue to Home to 26 Fortune 500 Companies: support expansion. Of the top 25 citywide transactions signed for the year, 84% were Houston ranks third among metropolitan statistical new leases, expansions or renewals by energy-related firms, representing 7.5 million areas in the number of Fortune 500 headquarters sq. ft. of activity. The largest recent lease transaction involved ExxonMobil preleasing behind only New York (71) and Chicago (29). With more 482,972 sq. ft. at Hughes Landing in the Woodlands. In addition, ConocoPhillips has than 5,000 energy related firms, Houston is widely preleased the remaining space at Energy Center Four, bringing its total lease for the considered to be the Energy Capital of the world. complex to 1.2 million sq. ft. Other recent notable transactions involved new leases and expansions by Statoil Gulf Services, Petroleum Geo-Services and Sasol North America. Houston Economic Outlook: Houston’s strong employment and population growth propelled by further expansion in energy, health- FORECAST related and distribution industries will lead to above- average gains for the metro area. Houston is poised • Future rent growth will likely come from the Class A segment of the market as for long-term expansion as job growth is forecasted businesses continue to prefer more efficient, higher quality space in well-located to average 2.76% from 2012 to 2015, well above the areas with great infrastructure and amenities. average of 2.2% annual growth since 1990. • Since tenants are demanding more amenities and controlled environments for recruitment and retention purposes, there are numerous old buildings undergoing renovations to reposition and modernize in order to keep up with the quality of the Updated 1/3/2014 new construction. Some of the amenity upgrades include efficient and modernized Market Trend Indicators Updated 1/3/2014work environments, attractive lobbies, state-of-the-art fitness centers and cafes. Current Change from Previous 12-month Quarter Quarter Year Forecast Office Market Trends Direct Occupancy 87.6% up up down

8,000 90% Direct Net Absorption 1,630,922 down up down 6,000 88% Under Construction 6,691,682 up up up 4,000 86% Direct Asking Rents $25.34 up up up 2,000 84% in Thousands of SF in Thousands 0 82%

3 -2,000 80% PAGE 03 04 05 06 07 08 09 10 11 12 13 14F 15F

Direct Net Absorption Completions Direct Occupancy

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q4 2013 Mar ket AT A Glance

NET ABSORPTION & OCCUPANCY

• The Katy Freeway/Energy Corridor was the top performing submarket with 661,377 sq. ft. of direct absorption during the quarter, pushing the annual total to just over 1.7 million sq. ft. The Class A market accounted for 516,454 sq. ft. of quarterly demand primarily taking place in new product with move-ins by Geico (135,716 sf), TGS-Nopec (97,295 sf), Subsea 7 (96,292 sf) and Houston Offshore Engineering (64,105 sf). • Uptown/Galleria recorded 160,644 sq. ft. of quarterly absorption, bringing the annual total to 779,112 sq. ft. The quarterly absorption was evenly split between Class A and B properties with 84,146 and 77,546 sq. ft., respectively. The largest occupancy gain occurred in the Class B sector, compliments of Burns & McDonnell’s recent renewal/ expansion at 1700 West Loop South. • The Fort Bend/Sugar Land submarket recorded 237,944 sq. ft. of direct absorption during the quarter, bringing the annual total to 446,153 sq. ft. The Class A market “Strong leasing demand stemming from business accounted for the bulk of the occupancy gains compliments of recent leasing success growth and expansion in the energy sector have by PMRG at Sugar Creek on the Lake. pushed Class A occupancy rates above the 90% mark in • The Northwest Freeway/North Loop submarket posted 142,560 sq. ft. of direct all of the premier submarkets, which has translated into absorption, with the Class B sector accounting for the majority of the quarterly leasing a wave of new construction to meet growing demand,” gains as Endurance International moved into 61,056 sq. ft. at 5005 Mitchelldale and PSF said Wade Bowlin, Executive Vice President, Managing Group occupied 54,891 sq. ft. at 2600 N Loop Fwy. Director,Updated Central 1/2/2014 Division. • The Woodlands posted 111,118 sq. ft. of direct absorption during the quarter, bringing the annual total to 875,265 sq. ft. The largest occupancy gains involved ChevronPhillips Submarket Occupancy Ranking and Savannah Energy moving into new space at Research Forest Lakeside – Bldg. 4. Occ. Y-O-Y % • Greenspoint/North Belt recorded 88,367 sq. ft. of direct absorption during the quarter, but ended with 234,362 sq. ft. of occupancy losses for the year as several energy firms Rank Submarket Rate Change Updated 1/3/2014relocated into higher quality buildings in other submarkets. 1 Katy Freeway 93.2% 1.9% 2 The Woodlands / Conroe 91.8% -0.5% 3 Bellaire 90.8% 3.7% Direct Net Absorption vs. Completions 4 Greenway Plaza 90.1% 0.7% 5 Galleria / Uptown 89.1% 0.9% 2,400 6 Westchase 89.0% -1.4% 2,000 7 Midtown / Allen Parkway 89.0% 6.9% 1,600 8 Central Business District 88.6% -0.1% 1,200 9 San Felipe / Voss 88.6% 0.8% 10 Gulf Freeway / Pasadena 88.5% 2.2% 800 In Thousands of SF In 11 Baytown & I-10 East 87.7% -1.5% 400

12 Kingwood / Humble 87.4% -0.9% 0 13 S. Main / Medical Center / South 87.4% -1.5% Q4 10 Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 14 Fort Bend / Sugar Land 86.4% 5.2% 15 Northwest Freeway / North Loop W 84.5% 0.8% Updated 1/3/2014 Direct Net Absorption Completions 16 Greenspoint / IAH / N Belt 82.6% -2.3% 17 Richmond / Fountainview 82.4% -0.8% Direct Occupancy Rates 18 NASA / Clear Lake 81.1% -5.7% 19 FM 1960 79.6% 6.0% 92% 20 Southwest Beltway 8 / Hillcroft 78.6% -1.7% 90% 88% 86% 84%

4 82% PAGE 80% Q4 10 Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q4 2013

RENTAL RATES & LEASING ACTIVITY

• Citywide Class A full-service gross asking rents jumped by $0.55 to $32.71 per square foot during the quarter and have increased by 5.3% or $1.64 since year-end 2012. Class B rents increased by $0.73 to $20.64 per square foot during the quarter and have moved up 4.8% or $0.94 per square foot over the past 12 months. • The quarterly spike in Class A gross rental rates was largely attributed to the delivery of new product as well as increased taxes inflating operating expenses. The largest quarterly increases occurred in Katy Freeway (5.9%), Westchase (3.5%), Galleria/Uptown (2.0%) and CBD (1.8%). • Solid office leasing demand combined with limited high quality space options have impressively pushed citywide Class A asking rents upward by $3.63 or 12.5% since its cyclical low at mid-year 2011, reaching its highest level on record. Meanwhile, Class B rents have moderately improved by $1.53 or 8.0% since its cyclical low late in 2010. • Asking rental rates are expected to moderately rise in the next 12 months, largely “Sustained demand for quality space should result in resulting from increased operating expenses and rising construction costs. As the increasing rental rates and declining concessions in the spread between Class A and B rental rates widens, more Class A tenants will consider top performing submarkets as companies enter the Class B building options to offset the higher real estate occupancy costs. market sooner to avoid diminishing choices of quality • Leasing velocity has slowed down from the swift pace experienced in 2012 due in large space,” said John Spafford, Executive Vice President, part to the tightness in the Class A sector, but leasing activity should remain strong Director of Leasing. as many firms are evaluating potential expansions, relocations and renewals well in Updated 1/2/2014 advance of their lease expirations. • With nearly 9 million sq. ft. of active tenant space requirements and 26 tenants in the Submarket Rental Rate Ranking market looking for over 100,000 sq. ft., leasing activity is expected to remain strong in Rental Y-O-Y % Updated 1/3/2014 2014. Rank Submarket Rate Change 1 Central Business District $34.98 4.1% Rental Rates 2 Galleria / Uptown $31.34 12.2% ($/SF/Yr. Full Service) 3 Westchase $28.61 6.0% $34 4 Greenway Plaza $27.14 5.0% $32 5 The Woodlands / Conroe $26.90 8.6% $30 6 Midtown / Allen Parkway $26.28 0.7% $28 7 San Felipe / Voss $25.82 2.9% $26 8 Katy Freeway $24.90 10.9% $24 9 Fort Bend / Sugar Land $24.58 -1.8% $22 10 S. Main / Medical Center / South $24.07 -0.5% $20 11 Bellaire $22.97 1.7% $18 12 Kingwood / Humble $22.90 0.3% Q4 10 Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 13 Greenspoint / IAH / N Belt $22.81 25.6% Updated 1/3/2014 14 Gulf Freeway / Pasadena $19.93 4.6% Class A Class B 15 NASA / Clear Lake $18.93 -4.2% 16 FM 1960 $18.83 -1.7% Direct Leasing Activity Rolling 12-Months 17 Northwest Freeway / North Loop W$18.56 2.3% 18 Southwest Beltway 8 / Hillcroft $16.58 3.7% 16,000 19 Baytown & I-10 East $16.25 -0.9% 14,000 20 Richmond / Fountainview $14.68 -2.8% 12,000 10,000 8,000 6,000

In Thousands of SF In 4,000 5 2,000 PAGE 0 Q4 10 Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13

Class A Class B PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q4 2013 Mar ket AT A Glance

CONSTRUCTION

• Developers delivered just over 3.5 million square feet in 2013, with nearly 62% of the new construction coming online in the Katy Freeway/Energy Corridor (1,267,261 sf), The Woodlands (894,359 sf) and Galleria/Uptown (615,110 sf). • During the fourth quarter, there were three office buildings delivered totaling 648,346 sq. ft., which included Granite Briarpark Green (302,551 sq. ft.), TGS-Nopec Geophysical Company’s 97,295 sq. ft. build-to-suit, and Westgate I (248,500 sq. ft.). • Office space under construction (excluding owner-occupied projects) totals nearly 6.7 million sq. ft., with nearly 49% of this new space already pre-leased. • The Katy Freeway/Energy Corridor currently boasts 14 projects totaling 3.6 million sq. ft. under construction, which is 54% pre-leased and accounts for 53% of the new construction citywide. • With Class A direct occupancy rates exceeding the 90% mark in the premier submarkets RECENT ANNOUNCEMENTS Updatedand job 1/3/2014 growth expected to continue at a healthy pace, companies in expansion mode are quickly securing their space amidst fears of future lofty rental rate increases as • ExxonMobil Corp. recently leased 478,000 sq. ft. of experienced during the previous expansion period. office space at Hughes Landing, which includes an Updated• Houston’s 7/3/2013 office market is projected to deliver roughly 4.5 million square feet in 2014, entire 300,000 sq. ft. Class A building and a portion which is already 48% pre-leased.Construction Pipeline of another, slated to deliver by summer 2016. • ConocoPhillips preleased the remaining space at Energy Center Four, bringing its total lease to 1.2 8,000 Construction Pipeline million sq. ft. and prompting the developer to start 7,000 a fifth building. Energy Center Five, a 500,000 sq. ft. 7,000 office tower will break ground in April 2014. 6,000 • Piedmont Office Realty Trust plans to build Enclave 6,0005,000 Place, a 302,000 sq. ft. Class A office building in the 5,0004,000 Energy Corridor. Construction is expected to begin in March and targeted to deliver by mid-year 2015. 4,0003,000

• Chevron Corp. announced plans to construct a Thousands of SF In 2,000 50-story, 1.7 million sq. ft. office tower at 1600 3,000 Louisiana but has recently placed the tower on the 1,000

In Thousands of SF In 2,000 back burner. The oil giant still plans to build the 0 tower but will not move forward until after 2014. 1,000 Q4 10 Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 • Phillips 66 broke ground on its new 1.1 million sq. Updated 1/3/2014 ft. corporate campus facility in Westchase, which 0 Under Construction Delivered Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 will house the company’s 1,800 Houston-area SIGNIFICANT PROJECTS UNDER CONSTRUCTION employees once delivered in about three years. Under Construction Delivered • Cameron International recently acquired a 24 acre % PRE- TARGET site along Beltway 8 in the Westchase District, with PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT LEASED DEVELOPER COMPLETION plans to eventually build a 1 million sq. ft. corporate Energy Center Three 546,604 Katy Freeway ConocoPhillips 100% Trammell Crow Co. 2Q 2015 campus. No immediate plans to start construction Noble Energy Center II 456,000 FM 1960 Noble Energy 100% Trammell Crow Co. 2Q 2015 have been announced. Energy Tower III 428,831 Katy Freeway Technip 100% Mac Haik 1Q 2014 • Clarion Partners and PM Realty Group recently Energy Tower IV 428,831 Katy Freeway N/A 0% Mac Haik 4Q 2014 broke ground on Westchase Park II, a 300,000 sq. 9801 Katy Fwy 400,000 Katy Freeway N/A 0% MetroNational Corporation 3Q 2015 ft., Class A+ office building, which will be adjacent Two Briarlake Plaza 337,888 Westchase Samsung Engineering 52% Behringer Harvard REIT 2Q 2014 to Westchase Park I at 3700 W. Sam Houston Pkwy. Energy Crossing II 321,508 Katy Freeway Atwood Oceanics, Modec 87% Lincoln Property 1Q 2014 The new Ziegler Cooper designed building plans to Westchase Park II 300,000 Westchase N/A 0% PM Realty Group 4Q 2014 achieve LEED Gold certification and is scheduled for completion by year-end 2014. Beltway Lakes Phase III 271,384 Northwest N/A 0% The Radler LP 3Q 2014 • Hines plans to break ground on a 1 million sq. ft. Kirby Grove 260,437 Greenway Plaza Vitol 41% Midway Companies 2Q 2015 office building at 609 Main in the CBD during the Town Centre I 254,489 Katy Freeway N/A 0% Moody Rambin 4Q 2014 first quarter of 2014. Westgate - Bldg 3 225,885 Katy Freeway Mustang Engineering 100% Transwestern 3Q 2014 The Offices at Greenhouse 203,149 Katy Freeway URS 67% Stream Realty 3Q 2014 6 Research Forest Lakeside - Bldg 5 200,000 Woodlands Repsol 100% Warmack Investments 2Q 2014 PAGE Two Hughes Landing 197,719 Woodlands N/A 0% The Woodlands Development Co 2Q 2014 Westgate - Bldg 2 186,375 Katy Freeway Mustang Engineering 100% Transwestern 3Q 2014 Jacobs Plaza 168,050 Katy Freeway Jacobs Engineering 45% PM Realty Group 2Q 2014 Sierra Pines II 153,810 Woodlands N/A 0% Stream Realty 3Q 2014

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q4 2013

SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Current Completions Under Submarkets SF Direct Sublease Occupancy Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 37,511,174 5,052,364 944,630 88.6% 41,946 303,692 - 0 $39.42 $25.97 Galleria / Uptown 22,746,174 2,988,637 442,889 89.1% 160,644 779,112 - 264,753 $34.39 $26.15 Greenway Plaza 10,168,659 1,176,958 92,123 90.1% 72,297 102,608 - 260,437 $32.06 $23.38 Katy Freeway 25,243,292 2,787,330 900,397 93.2% 661,377 1,756,529 345,795 3,558,682 $33.17 $20.93 Westchase 13,650,467 1,903,861 251,009 89.0% -38,922 257,986 302,551 848,336 $36.17 $19.40 Greenspoint/ IAH / N Belt 12,388,256 4,541,741 679,051 82.6% 88,367 -234,362 - 0 $28.94 $18.29 Northwest Freeway / N Loop West 11,790,496 2,013,822 290,065 84.5% 142,560 190,170 - 271,384 $22.06 $17.76 NASA / Clear Lake & SE Outlier 6,559,098 1,411,918 40,149 81.1% 17,543 -44,807 - 0 $23.60 $18.30 Fort Bend / Sugar Land / SW Outlier 7,475,174 1,094,341 195,618 86.4% 237,944 446,153 - 164,196 $26.70 $22.80 Richmond / Fountainview 1,264,970 280,674 0 82.4% -35,212 -40,394 - 0 - $17.61 San Felipe / Voss 5,353,198 772,705 81,455 88.6% 18,234 35,988 - 0 $32.44 $22.40 Bellaire 3,568,900 462,872 23,662 90.8% 58,792 49,294 - 0 $25.86 $21.08 Midtown / Allen Parkway 5,485,074 733,668 32,351 89.0% -23,874 154,605 - 80,000 $28.61 $25.70 FM 1960 9,773,606 2,193,976 145,955 79.6% 58,388 536,461 - 511,500 $25.72 $16.73 Kingwood / Humble / NE Outlier 1,168,699 176,915 14,920 87.4% -2,728 -1,052 - 0 $32.13 $20.40 Southwest Beltway 8 / SW / Hillcroft 10,388,811 2,926,480 74,202 78.6% -69,598 -140,594 - 0 $17.26 $16.97 S. Main / Medical Center / South 9,234,254 1,435,499 25,983 87.4% 53,376 44,041 - 52,362 $27.90 $24.28 The Woodlands / Conroe 8,986,361 915,148 218,132 91.8% 111,118 875,265 - 680,032 $33.77 $25.82 Gulf Freeway / Pasadena 3,143,541 518,777 6,521 88.5% 70,956 78,882 - 0 $29.37 $21.47 Baytown / I-10 East 1,121,687 189,588 0 87.7% 7,714 -6,252 - 0 - $16.40 Totals 207,021,891 33,577,274 4,459,112 87.6% 1,630,922 5,143,325 648,346 6,691,682 $32.71 $20.64

Total Inventory Direct Current Completions Under Asking Y-O-Y % Property Types SF Direct Sublease Occupancy Qtr. Year To Date Current Qtr Construction Rent Change Class A 100,627,153 13,359,375 2,796,874 90.6% 1,176,299 4,271,338 2,012,385 6,406,038 $32.71 5.3% Class B 88,522,488 17,068,760 1,640,313 84.6% 520,302 984,708 228,882 285,644 $20.64 4.8% Class C 17,872,250 3,149,139 21,925 85.1% -65,679 -112,721 - - $16.01 1.9% Totals 207,021,891 33,577,274 4,459,112 87.6% 1,630,922 5,143,325 2,241,267 6,691,682 $25.34 5.1% METHODOLOGY Total Inventory: The total inventory includes all single and multi-tenant leased 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 that is being 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.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q4 2013

PMRG’s portfolio, including projects managed for third parties, includes commercial office buildings, mixed-use centers, corporate headquarters, industrial buildings, medical facilities, high-rise multifamily buildings and re-appropriated military facilities. Doug Berry Creative Director Our goal is to generate exceptional returns for our clients and investors by focusing on real estate fundamentals. For additional information, visit (713) 209-5897 www.pmrg.com. [email protected]

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT HOUSTON OFFICE

AT A MARKET REPORT AT A MarMarket ket GlanceGlance THIRD QUARTER 2013

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q3 2013 Mar ket AT A Glance

ECONOMIC OVERVIEW

The Houston metro area continues to enjoy high employment growth driven by gains in energy, manufacturing and other key industries. The Houston metro area has created 80,700 jobs for the 12 months ending August 2013, representing a 3.0% annual increase. Over the same period, Houston’s unemployment rate has retreated 80 basis points to 6.1%, which remains far below the national average of 7.3%. Since its post-recessionary trough in early 2010, the metro area has remarkably added 306,100 net new jobs to reach its highest number of total nonfarm jobs on record.

As the center of the global petroleum industry, Houston has benefitted from sustained high global oil prices and the worldwide boom in natural gas exploration. Although global oil demand forecasts have been dialed down due to sluggish global economic conditions and the aversion of a U.S. military strike on Syria, prices remain well above the minimums TABLE OF CONTENTS required to sustain a vital oil industry. The U.S. Energy Information Administration projects the price of West Texas Intermediate crude (WTI), the U.S. benchmark for light, sweet crude, Economic Overview...... 2 to average $101 per barrel for the remainder of 2013 and to average $96 per barrel in 2014. Office Market Assessment...... 3 Houston’s solid expansion should continue for the remainder of the year, driven by growth Net Absorption & Occupancy...... 4 in housing and non-residential construction as well as a revival in exploration. Related Rental Rates & Leasing Activity...... 5 manufacturingUpdated 9/30/2013 and professional services will also benefit from corporate relocations and Construction...... 6 expansions as companies are attracted to the metro area’s business-friendly environment with lower business costs and a well-educated labor force. Submarket Statistics & Methodology...... 7 Our Team...... 8 Employment Trends

120 6% 100 80 4%

John Spafford UpdatedSource: 9/30/2013 U.S. Bureau of Labor Statistics, Greater Houston Partnership, Moody's Analytics Executive Vice President Director of Leasing Employment Growth by Sector (713) 209--5823 HEALTH Current 12-Months Annual (Improving [email protected] Reading Prior Reading Change or Declining) Mining 109.2 103.0 6.0% Ariel Guerrero Construction 188.5 180.3 4.5% Vice President, Research Manufacturing 251.3 245.4 2.4% (713) 209-5704 Trade, Transportation & Utilities 571.0 551.8 3.5% Information 32.7 31.8 2.8% [email protected] Financial Activities 143.4 140.8 1.8% Professional & Business Services 427.0 415.0 2.9% Education & Health Services 342.3 328.9 4.1% 2 Leisure & Hospitality 276.5 261.6 5.7% PAGE Other Services 93.7 96.7 -3.1% Government 345.7 345.3 0.1% Source:Source: U.S. U.S. BureauBureau of Labor Statistics. Statistics. Employment Employment Data Data as asof Augustof August 2013 2013, AllAll Employees, Employees, inIn Thousands

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q3 2013

OFFICE MARKET ASSESSMENT

Solid employment growth continued to fuel office leasing demand citywide with its largest quarterly occupancy gain on record totaling just over 2.1 million sq. ft. of direct net absorption, bringing the year-to-date total to nearly 3.7 million sq. ft. Class A product accounted for the bulk of the quarterly demand with nearly 2 million sq. ft. of direct absorption growth, pushing the year-to-date total to 3.1 million sq. ft., which has already surpassed last year’s annual gain. Class A direct occupancy rates slightly increased by 10 basis points to 90.2% as demand kept pace with space deliveries during the quarter and has moved up 110 basis points within the past year to reach a six year high. Class B product continued to benefit from the tightness in the Class A sector with 147,429 sq. ft. of direct absorption recorded during the quarter and 522,428 sq. ft. absorbed year- to-date. Class B direct occupancy rates declined by 30 basis points to 84.3% during the quarter as a result of new space deliveries outpacing demand but have experienced a Houston Ranks 1st in Job Growth: 50 basis point improvement within the past year. The Houston region has led the top five major U.S. metropolitan areas in job recovery since December The booming Katy Freeway/Energy Corridor remained a hotbed for new construction 2011. Houston has recovered more than 200% of and leasing activity, accounting for nearly 1.1 million sq. ft. of the direct absorption all jobs lost during the recent recession – a higher percentage than any other major metro area. growth for the year. Of the top 20 citywide transactions signed year-to-date, 85% were new leases, expansions or renewals by energy-related firms, representing 6.5 million sq. Home to 26 Fortune 500 Companies: ft. of activity. The largest recent lease transaction involved Statoil Gulf Services signing Houston ranks third among metropolitan statistical a 581,000 sq. ft. feet lease, which includes an extension of their 150,000 sq. ft. lease in areas in the number of Fortune 500 headquarters CityWestPlace Building 4 and an expansion to occupy the entire 431,000 sq. ft. Building behind only New York (71) and Chicago (29). With more 2 after Halliburton moves out in 2015. In addition, Petroleum Geo-Services signed a than 5,000 energy related firms, Houston is widely 122,000 sq. ft. lease at West Memorial Place, slated to deliver in early 2015. Other notable considered to be the Energy Capital of the world. transactions involved new leases and expansions by Burns McDonnell, Permian Mud Service, Inc., Strike LLC and Cameron’s land acquisition on the Sam Houston Tollway. Houston Economic Outlook: Houston’s strong employment and population growth propelled by further expansion in energy, health- FORECAST related and distribution industries will lead to above- average gains for the metro area. Houston is poised • Strong leasing demand will continue to drive rental rates higher in the most active for long-term expansion as job growth is forecasted to submarkets. However, a wave of new construction will deliver in the coming rise by 3.2% from 2012 to 2015, according to Moody’s quarters to alleviate the difficulty in finding quality space. Analytics. • Since tenants are demanding more amenities and controlled environments for recruitment and retention purposes, there are numerous old buildings undergoing renovations to reposition and modernize in order to keep up with the quality of the Updated 9/30/2013 new construction. Some of the amenity upgrades include efficient and modernized Market Trend Indicators Updated 9/30/2013work environments, attractive lobbies, state-of-the-art fitness centers and cafes. Current Change from Previous 12-month Quarter Quarter Year Forecast Office Market Trends Direct Occupancy 87.3% Sideways up up

8,000 90% Direct Net Absorption 2,143,733 up up up 6,000 88% Under Construction 5,869,077 Down up up 4,000 86% Direct Asking Rents $24.81 up up up 2,000 84% in Thousands of SF in Thousands 0 82%

3 -2,000 80% PAGE 03 04 05 06 07 08 09 10 11 12 13F 14F 15F

Direct Net Absorption Completions Direct Occupancy

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q3 2013 Mar ket AT A Glance

NET ABSORPTION & OCCUPANCY

• The Katy Freeway/Energy Corridor remained the top performing submarket with 723,577 sq. ft. of direct absorption during the quarter, with the bulk of the occupancy gains taking place in new product coming online totaling 907,343 sq. ft. The Class A market accounted for 639,231 sq. ft. of quarterly demand with recent move-ins by Murphy Oil (207,608 sq. ft.), Cameron International (138,000 sq. ft.), Newpark Drilling (103,575 sq. ft.) and Helix Energy (90,000 sq. ft.). • The FM 1960 Area recorded 491,088 sq. ft. of direct absorption during the quarter, compliments of Noble Energy occupying 497,447 sq. ft. of Class A space at Noble Energy Center One, in their relocation from the Greenspoint submarket. • The Woodlands posted 340,308 sq. ft. of direct absorption, with the majority of the quarterly gains taking place in new product delivered. Tailsman Energy USA, Inc. occupied 50,000 sq. ft. at Research Forest Lakeside – Bldg. 4 while Layne Christensen Co. “Strong leasing demand stemming from business (51,152 sq. ft.), PetroQuest Energy (13,042 sq. ft.), Summit Midstream (12,524 sq. ft.) and growth and expansion in the energy sector have Sterling Construction Company Inc. (12,340 sq. ft.) moved into One Hughes Landing. pushed Class A occupancy rates above the 90% mark in • The Northwest Freeway / North Loop submarket posted 176,071 sq. ft. of direct all of the premier submarkets, which has translated into absorption, largely attributed to the delivery of Sam Houston Crossing Phase II. The a wave of new construction to meet growing demand,” 159,056 sq. ft. building delivered 100% leased with Forum Energy Technologies said Wade Bowlin, Executive Vice President, Managing occupying 108,379 sq. ft. and Integrated Trade Systems moving into 35,556 sq. ft. Director,Updated Central 9/30/2013 Division. • Uptown/Galleria recorded 101,904 sq. ft. of direct absorption during the quarter, bringing the year-to-date total to 618,468 sq. ft. At the end of September, Skanska Submarket Occupancy Ranking delivered their 302,536 sq. ft. Class A office building at 3009 Post Oak Blvd, which is 92% Occ. Y-O-Y % leased. Skanska is currently the only occupant in the building, but Alliantgroup plans to occupy roughly 200,000 sq. ft. and Datacert intends to move into 49,824 sq. ft. Rank Submarket Rate UpdatedChange 9/30/2013 1 Katy Freeway 91.9% 0.7% 2 Westchase 91.3% 1.3% 3 The Woodlands / Conroe 90.3% -0.7% Direct Net Absorption vs. Completions 4 Greenway Plaza 89.4% -0.7% 5 Bellaire 89.2% 0.5% 2,400 6 Midtown / Allen Parkway 89.1% 6.8% 2,000 7 Galleria / Uptown 88.5% 0.7% 1,600 8 Central Business District 88.4% 1.2% 1,200 9 San Felipe / Voss 88.2% 1.5% 10 Kingwood / Humble 87.6% 0.4% 800 In Thousands of SF In 11 Baytown & I-10 East 87.0% -2.3% 400

12 S. Main / Medical Center / South 86.8% -2.3% 0 13 Gulf Freeway / Pasadena 86.4% 0.9% Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 14 Northwest Freeway / North Loop W 84.0% 2.4% 15 Richmond / Fountainview 83.8% 0.4% Updated 9/30/2013 Direct Net Absorption Completions 16 Fort Bend / Sugar Land 83.5% 3.2% 17 Greenspoint / IAH / N Belt 82.3% -2.6% Direct Occupancy Rates 18 NASA / Clear Lake 81.0% -4.7% 19 Southwest Beltway 8 / Hillcroft 79.7% -0.3% 92% 20 FM 1960 79.1% 6.7% 90% 88% 86% 84%

4 82% PAGE 80% Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13

Class A Class B

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q3 2013

RENTAL RATES & LEASING ACTIVITY

• Citywide Class A full-service gross asking rents increased by $0.58 to $32.16 per square foot during the quarter and have increased by 5.2% or $1.60 within the past 12 months. Class B rents slightly rose by $0.03 to $19.91 per square foot during the quarter and have moved up 1.0% or $0.20 per square foot over the past 12 months. • The quarterly spike in Class A rental rates was largely attributed to new construction coming online coupled with the shortage of high quality spaces available in existing buildings as the largest quarterly increases occurred in Katy Freeway (9.3%), Greenway (5.8%), The Woodlands (5.4%) and Galleria/Uptown (4.6%). • Solid office leasing demand combined with limited high quality space options have impressively pushed citywide Class A asking rents upward by $3.08 or 10.6% since its cyclical low at mid-year 2011, reaching its highest level on record. Meanwhile, Class B rents have moderately improved by $0.80 or 4.2% since its cyclical low late in 2010. • Asking rental rates are expected to steadily rise in the next 12 months as quality space “Sustained demand for quality space should result in options remain limited, but relief is on the way with new product nearing completion. increasing rental rates and declining concessions in the As the spread between Class A and B rental rates widens, more Class A tenants will top performing submarkets as companies enter the consider Class B building options to offset the higher real estate occupancy costs. market sooner to avoid diminishing choice of quality • Class A leasing velocity has declined by 30.6% to 8.9 million sq. ft. compared to the space,” said John Spafford, Executive Vice President, same time in the prior year, but remains 13.8% above the 10-year historical average. Director of Leasing. The dramatic annual decline is largely attributed to the tightness in the Class A sector, Updated 9/30/2013 but leasing velocity should remain strong as many firms are evaluating potential expansions, relocations and renewals well in advance of their lease expirations. Submarket Rental Rate Ranking Rental Y-O-Y % Updated 9/30/2013 Rank Submarket Rate Change 1 Central Business District $34.34 4.2% Rental Rates 2 Galleria / Uptown $29.76 7.2% ($/SF/Yr. Full Service) 3 Greenway Plaza $27.22 5.4% $34 4 The Woodlands / Conroe $26.89 5.9% $32 5 Westchase $26.34 6.6% $30 6 Midtown / Allen Parkway $26.02 -0.4% $28 7 San Felipe / Voss $25.09 2.4% $26 8 Fort Bend / Sugar Land $25.05 -1.1% $24 9 S. Main / Medical Center / South $23.92 -0.4% $22 10 Katy Freeway $23.75 6.1% $20 11 Bellaire $23.13 1.6% $18 12 Greenspoint / IAH / N Belt $23.10 32.2% Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 13 Kingwood / Humble $22.94 0.8% Updated 9/30/2013 14 Gulf Freeway / Pasadena $19.88 4.0% Class A Class B 15 NASA / Clear Lake $19.17 -2.5% 16 FM 1960 $18.58 -2.5% Direct Leasing Activity Rolling 12-Months 17 Northwest Freeway / North Loop W$18.20 -2.5% 18 Baytown & I-10 East $16.19 3.7% 16,000 19 Southwest Beltway 8 / Hillcroft $15.97 0.4% 14,000 20 Richmond / Fountainview $15.12 0.7% 12,000 10,000 8,000 6,000

In Thousands of SF In 4,000 5 2,000 PAGE 0 Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13

Class A Class B PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Q3 2013 Mar ket AT A Glance

CONSTRUCTION

• Developers have delivered nearly 3.1 million square feet year-to-date with roughly an additional 900,000 sq. ft. slated to deliver by year-end. Houston’s office market is projected to deliver roughly 4.2 million square feet in 2014, and this product is already 57% pre-leased. • There were numerous projects that delivered in the suburbs during the third quarter totaling 2.2 million square feet, with nearly 80% of the new construction coming online in the Katy Freeway (907,343 sf), The Woodlands (568,770 sf) and Galleria/Uptown (302,536 sf) to help temporarily alleviate the tightness in these submarkets. • Office space under construction (excluding owner-occupied projects) totals nearly 5.9 million sq. ft., with nearly 64% of this new space already pre-leased. • The Katy Freeway/Energy Corridor currently boasts 11 projects totaling 3.2 million square feet under construction, which accounts for 54% of the new construction RECENT ANNOUNCEMENTS citywide and is 80% pre-leased. Updated• With Class 7/3/2013 A occupancy rates exceeding the 90% mark in the premier submarkets and • Clarion Partners and PM Realty Group recently broke job growth expected to continue at a healthy pace, companies in expansion mode ground on Westchase Park II, a six-story, 300,000 sq. Updatedare quickly 7/3/2013 securing their space amidst fears of future lofty rental rate increases as ft., Class A+ office building, which will be adjacent experienced during the previous expansion period. to Westchase Park I at 3700 W. Sam Houston Pkwy. Construction Pipeline The new Ziegler Cooper designed building plans to achieve LEED Gold certification and is scheduled for 7,000 Construction Pipeline completion by year-end 2014. • Skanska has launched construction on a 12-story, 6,000 7,000 325,000 sq. ft. office building in the Energy Corridor, 5,000 which will be part of a larger complex. Skanska 6,000 is fully self-financing the West Memorial Place 4,000 project but has secured a 122,000 sq. ft. pre-lease 5,000 commitment by Petroleum Geo Services. The 3,000 project is on track to deliver early in 2015. 4,000

In Thousands of SF In 2,000 • Noble Energy broke ground on its 456,000 sq. ft. 3,000 office building in the FM 1960/SH 249 area. The 1,000

project is adjacent to Energy Center One, a 497,000 Thousands of SF In 2,000 0 sq. ft. office building leased last year. The new 1,000 Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 building is scheduled to deliver by mid-year 2015. • With the recent demolition of the 10-story former Updated 9/30/2010 3 Under Construction Delivered Macy’s building, HilCorp. Energy is rumored to Q3 10 Q1 11 Q3 11 Q1 12 Q3 12 Q1 13 Q3 13 be considering a new headquarters building at SIGNIFICANT PROJECTS UNDER CONSTRUCTION Under Construction Delivered 1110 Main St. Although HilCorp has not publicly % PRE- TARGET acknowledged its intentions to build, they would PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT LEASED DEVELOPER COMPLETION likely occupy at least 175,000 sq. ft. Energy Center Three 546,604 Katy Freeway ConocoPhillips 100% Trammell Crow Co. 2Q 2015 • Moody Rambin broke ground on its speculative Noble Energy - SH 249 & Louetta 456,000 FM 1960 Noble Energy 100% Trammell Crow Co. 2Q 2015 250,000 sq. ft. Town Centre I. The 10-story structure Energy Tower III 428,831 Katy Freeway Technip 100% Mac Haik 1Q 2014 on Town & Country Blvd at Queensbury Lane is Energy Tower IV 428,831 Katy Freeway N/A 0% Mac Haik 4Q 2014 scheduled for completion by year-end 2014. Two Briarlake Plaza 331,689 Westchase Samsung Engineering 51% Behringer Harvard REIT 2Q 2014 • Chevron Corp. plans to construct a 50-story, 1.7 Energy Crossing II 321,508 Katy Freeway Atwood Oceanics, Modec International 65% Lincoln Property 4Q 2013 million sq. ft. building at 1600 Louisiana in the Granite Briarpark Green 302,515 Westchase N/A 6% Hoar Construction 4Q 2013 CBD to accommodate the energy firm’s future Westchase Park II 300,000 Westchase 0% PM Realty Group 4Q 2014 expansion. The new downtown office tower is Town Centre I 254,489 Katy Freeway N/A 0% Moody Rambin 4Q 2014 anticipated to be complete by year-end 2016. Westgate - Bldg 1 248,500 Katy Freeway Subsea, Houston Offshore Engineering 68% Transwestern 4Q 2013 • Hines plans to break ground on a 1 million sq. ft. Westgate - Bldg 3 225,885 Katy Freeway Mustang Engineering 100% Transwestern 3Q 2014 office building at 609 Main in the CBD during the The Offices at Greenhouse 203,149 Katy Freeway URS 64% Stream Realty 3Q 2014 first quarter of 2014. Research Forest Lakeside - Bldg 5 200,000 Woodlands Repsol 100% Warmack Investments 2Q 2014 Two Hughes Landing 197,719 Woodlands N/A 0% The Woodlands Development Co 2Q 2014 6 Westgate - Bldg 2 186,375 Katy Freeway Mustang Engineering 100% Transwestern 3Q 2014

PAGE Jacobs Plaza - 12140 Wickchester Ln 168,050 Katy Freeway Jacobs Engineering 49% PM Realty Group 2Q 2014 Sierra Pines II 153,810 Woodlands 0% Stream Realty 3Q 2014 Blvd Place - Bldg 1 (mixed-use) 130,916 Galleria / Uptown Frost Bank 57% Wulfe & Co. 4Q 2013 LaCenterra Phase II 122,000 Southwest Outlier N/A 0% Transwestern 2Q 2015

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q3 2013

SUBMARKET STATISTICS

TOTAL SPACE AVAILABLE DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Total Inventory Direct Current Completions Under Submarkets SF Direct Sublease Occupancy Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 37,659,591 5,812,524 963,758 88.4% -15,177 332,802 - - $38.73 $25.69 Galleria / Uptown 22,739,856 3,076,209 480,538 88.5% 101,904 618,468 302,536 210,918 $33.71 $23.48 Greenway Plaza 10,168,659 1,287,720 93,489 89.4% 99,198 30,311 - - $31.99 $24.03 Katy Freeway 24,889,193 2,612,679 693,543 91.9% 723,577 1,095,152 907,343 3,169,182 $31.31 $20.37 Westchase 13,349,782 2,080,040 239,936 91.3% 73,637 296,908 - 1,122,355 $34.94 $18.89 Greenspoint/ IAH / N Belt 12,080,376 4,363,075 647,151 82.3% -139,951 -322,729 - - $29.43 $18.74 Northwest Freeway / N Loop West 12,205,736 2,149,177 262,267 84.0% 176,071 47,610 159,056 - $22.49 $17.07 NASA / Clear Lake & SE Outlier 6,619,427 1,429,360 19,996 81.0% -28,148 -62,350 - - $23.27 $19.00 Fort Bend / Sugar Land / SW Outlier 7,475,174 1,094,503 177,502 83.5% 160,179 208,209 79,306 161,196 $26.95 $22.96 Richmond / Fountainview 1,264,970 260,244 0 83.8% -15,366 -5,182 - - - $17.31 San Felipe / Voss 5,353,198 724,923 83,615 88.2% 42,838 17,754 - - $32.68 $21.61 Bellaire 3,584,209 514,500 23,662 89.2% -1,888 -9,498 - - $25.50 $21.13 Midtown / Allen Parkway 5,508,170 783,383 10,096 89.1% 51,157 178,479 - 80,000 $28.14 $25.11 FM 1960 9,774,606 2,237,983 119,847 79.1% 491,088 478,073 - 456,000 $25.44 $16.53 Kingwood / Humble / NE Outlier 1,168,746 162,572 16,249 87.6% 7,164 1,676 - - $32.13 $20.53 Southwest Beltway 8 / SW / Hillcroft 10,355,305 2,694,340 98,437 79.7% 71,069 -12,974 - - $17.38 $16.25 S. Main / Medical Center / South 9,244,691 1,447,419 24,540 86.8% 5,241 -9,335 224,256 53,362 $27.89 $23.74 The Woodlands / Conroe 9,022,686 942,700 198,566 90.3% 340,308 764,147 568,770 616,064 $34.43 $25.04 Gulf Freeway / Pasadena 3,181,915 572,224 6,521 86.4% 2,559 7,926 - - $29.37 $21.21 Baytown / I-10 East 1,121,687 198,305 0 87.0% -1,727 -13,966 - - - $16.86 Totals 206,767,977 34,443,880 4,159,713 87.3% 2,143,733 3,641,481 2,241,267 5,869,077 $32.16 $19.91

Total Inventory Direct Current Completions Under Asking Y-O-Y % Property Types SF Direct Sublease Occupancy Qtr. Year To Date Current Qtr Construction Rent Change Class A 99,085,172 13,895,563 2,678,899 90.2% 1,983,232 3,166,095 2,012,385 5,561,730 $32.16 5.2% Class B 89,417,070 17,298,672 1,456,989 84.3% 147,429 522,428 228,882 307,347 $19.91 1.0% Class C 18,265,735 3,249,645 23,825 84.4% 13,072 -47,042 - - $16.02 3.2% Totals 206,767,977 34,443,880 4,159,713 87.3% 2,143,733 3,641,481 2,241,267 5,869,077 $24.81 4.0% METHODOLOGY Total Inventory: The total inventory includes all single and multi-tenant leased 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 that is being 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.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT Mar ket AT A Glance Q3 2013

Michael Sieger Marci Phillips Randi Smith Courtney Knightstep Allie Hubbard Vice President Vice President Vice President Leasing Manager Leasing Manager Leasing Leasing Leasing (713) 209-5959 (713) 209-5975 (713) 209-5930 (281) 444-6434 (713) 209-5980 [email protected] [email protected] [email protected] [email protected] [email protected]

PMRG’s portfolio, including projects managed for third parties, includes commercial Ariel Guerrero Sommer Bukowski Doug Berry office buildings, mixed-use centers, corporate headquarters, industrial buildings, Vice President Senior Vice President Creative Director medical facilities, high-rise multifamily buildings and re-appropriated military Research Director of Marketing (713) 209-5897 facilities. (713) 209-5704 (713) 209-5810 [email protected] Our goal is to generate exceptional returns for our clients and investors by focusing [email protected] [email protected] on real estate fundamentals. For additional information, visit www.pmrg.com.

PROPERTY SERVICES | DEVELOPMENT | INVESTMENT