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HOUSTON OFFICE | Q1 2021 QUARTERLY MARKET REPORT Office Market Anxiously Awaiting Much Needed “Return to the Office”

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HOUSTON OFFICE | Q1 2021 QUARTERLY MARKET REPORT Office Market Anxiously Awaiting Much Needed “Return to the Office” HOUSTON OFFICE | Q1 2021 QUARTERLY MARKET REPORT Office Market anxiously awaiting much needed “return to the office” APRIL 2021 SUPPLY & DEMAND EXECUTIVE SUMMARY Net Absorption Deliveries Vacancy 5 28% VACANCY RATE AT 23.8% 4 24% The overall vacancy rate in the Houston office market was up 30 basis points Millions (SF) quarter-over-quarter, and up 230 basis 3 20% points year-over-year. The vacancy rate for Class A properties is at 26.2%, and 2 16% Class B at 22.1%. In the first quarter, overall net absorption totaled negative 1 12% 798,000 sq. ft.—Class A represented negative 494,000 sq. ft. of that tally, while 0 8% Class B registered negative 229,000 sq. ft. Of the 4.1 million sq. ft. currently under -1 4% construction, 45.6% of that space has been spoken for. Of the two properties -2 0% completed so far in 2021, totaling 105,400 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 sq. ft., 66,130 sq. ft. of that space has 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 been leased. The overall Houston average asking full-service rent is at $29.29 per sq. ft.—basically unchanged from one MARKET INDICATORS year ago at $29.28 per sq. ft.—while Class A space in the Central Business District is averaging $41.72 per sq. ft. CURRENT PRIOR QUARTER PRIOR YEAR Q1 2021 Q4 2020 Q1 2020 HOUSTON ECONOMIC INDICATORS Vacant Total 23.8% 23.5% 21.5% Houston ended 2020 behind the nation in its comeback from the COVID-19- Vacant Direct 22.5% 22.3% 20.4% driven job collapse. Houston added 118,800 jobs from April 2020 to January Available Total 28.7% 28.0% 25.6% 2021, roughly one-third of the 354,000 jobs lost from February to April 2020. Available Direct 25.9% 25.2% 23.5% The closing spot price for West Texas Intermediate averaged $59.04 per Net Absorption (SF) -797,954 -895,178 -707,073 barrel in February 2021, up 16.8% from $50.54 for the same period in 2020. Leasing Activity (SF) 2,063,923 3,109,789 5,495,999 Baker Hughes reports 403 drilling rigs were working in the U.S. during the first Construction (SF) 4,130,684 4,126,095 3,878,237 week of March 2021. That’s down from Deliveries (SF) 105,400 28,800 260,446 790 rigs the same week in March last year. The rig count has inched up steadily Avg Asking Rent (Gross) $29.29 $29.87 $29.28 since bottoming at 244 in mid-August. However, it remains well below its recent Inventory (SF) 242,072,238 241,966,838 240,721,716 peak of 1,083 in late December 2018. www.naipartners.com HOUSTON OFFICE BROKER’S QUARTERLY MARKET REPORT PERSPECTIVE Q1 2021 As we head into the second quarter of 2021, more than one full year after the white- collar workforce of Houston was sent home to work from makeshift home-offices, “Until we see a the office leasing industry is anxiously awaiting a hopeful large-scale return to the office. When NAI Partners’ Q1 2020 Office Market Report came out this time last large-scale return year, the statistics weren’t pretty (although not that this was much of a change from to the office (or at what they’ve been for the last few years). Little did we know, they were about to get much worse. least comfortabili- The challenges of the last year (from every angle) are well-documented and anyone ty around bringing reading this is aware of the difficulties facing an office market without demand for offices while the vast majority of office workers sit at home. However, as of this writing employees back), more than 1.4 million Harris County residents have had at least one vaccine shot and it’s impossible to that number is climbing rapidly. Many companies are making plans for their return to the office and having discussions around what that return looks like. know what long- Until we see a large-scale return to the office (or at least comfortability around bringing term impacts the employees back), it’s impossible to know what long-term impacts the pandemic will have on our industry. That said, there are some things I think I know: pandemic will have • For those comfortable with exploring a lease transaction with any significant on our industry.” level of term, deal economics are more aggressive than we have possibly ever seen. Concession packages (free rent and Tenant Improvement Allowance) and rental rates have both improved greatly in the tenants’ favor in the last year. Engage the market this year if you can. • Office design will become more functional. Tenants are looking at their office designs more analytically than ever, and that will lead to exciting changes in how we use our offices. The office is a critical component of a company’s culture, and is key to collaboration, training, and mentoring. The office is not going anywhere, but it will change. • Houston has a very long road ahead to healthy market conditions. With a market that was overbuilt prior to the pandemic, it’s hard to imaging climbing JOE BRIGHT out of the realm of 20%- to 30% Vacancy/Availability. The best thing for our VICE PRESIDENT, NAI PARTNERS market would be to repurpose much of our older product to rebalance the supply and demand equation. Most owners won’t be imaginative enough for that, so Houston will continue to lag behind other major metros when it comes to occupancy and rental rates. Hopefully, our next Quarterly Market Report will celebrate the return to the office, the return of office demand, and the end of this notorious time in history. Until then, we hope everyone stays well. Please don’t hesitate to contact our team at NAI Partners to discuss your office situation. We would love to be a resource for you. MARKET OVERVIEW HOUSTON OFFICE QUARTERLY MARKET REPORT NET ABSORPTION REMAINS Q1 2021 NEGATIVE During the fourth quarter, Houston’s office AVAILIBILITY RATES market saw a 60% decrease in the amount Direct Sublease of space that tenants were moving out of 35% compared to the third quarter of 2020, which tallied an aggregate of negative 30% 28.7% 1,639,286 sq. ft. of net absorption—the highest quarterly total since NAI Partners 25% began recording this data. The aggregate effect of the total net absorption for the 20% entire year of 2020 was negative 4.2 million sq. ft., raising the overall vacancy 15% rate to 23.3%. The amount of total office 10% inventory that is being marketed for lease also increased quarter-over-quarter, 5% lifting the availability rate to 28.0%. The difference between this figure and the 0% vacancy rate reflects expected future Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 move-outs. Space being marketed for 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 sublease represents 7.2 million sq. ft., or 10.4% of the 68.8 million-sq.- NET ABSORPTION ft. total availability figure. The Central Business District vacancy rate is at 27.2%, up 60 basis points from this time Direct Sublease Total last quarter at 26.6%, while the Energy 3.0 Corridor vacancy rate is at 27.4%, up 2.5 60 basis points from 26.8% in Q3 2020. Millions (SF) 2.0 1.5 OFFICE DEVELOPMENT 1.0 Office construction is at 4.1 million sq. 0.5 ft across 18 buildings, with 2.3 million sq. ft. (54.4%) available for lease. The 0.0 Central Business District, Medical Center -0.5 and Katy Freeway East account for 1.8 -1.0 million sq. ft., or over 80% of the total -1.5 space available. Hines’ Texas Tower is -2.0 expected to deliver in Q4 2021 and is 40% Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 preleased. Outside of downtown, of the 789,000 sq. ft. underway in the Medical Center submarket, the 512,000-sq.- ft. Horizon Tower life sciences building CONSTRUCTION BY SUBMARKET is being built in Texas A&M Innovation Plaza. Other office buildings under construction in the Katy Freeway East submarket include Marathon Oil’s Pre-Leased Space Available Space 440,000-sq.-ft. future headquarters CBD in CityCentre; and Village Tower II, a Medical Center 150,000-sq.-ft. office building at 9655 Katy Freeway Katy Freeway. The Medical Center market Woodlands/Conroe has an overall vacancy rate of 10.0%, while the Katy Freeway East market has Midtown a vacancy rate of 12.0% compared to the Galleria/West Loop metro’s overall average of 23.8% Katy Pearland/South Freeway. The Medical Center market FM 1960/Hwy 249 has an overall vacancy rate of 10.0%, 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 while the Katy Freeway East market has Millions (SF) a vacancy rate of 12.0% compared to the metro’s overall average of 23.8%. 3 INVESTMENT SALES TRENDS HOUSTON OFFICE Real Capital Analytics data reports QUARTERLY MARKET REPORT quarterly office sales volume for Q1 Q1 2021 2021 in the Greater Houston area at $256 million. The year-over-year CUMULATIVE MONTHLY SALES VOLUME change in volume is down 47% from $484 million in Q1 2020. The primary 2021 2017 2018 2019 2020 capital composition for buyers so far 6 in 2021 has been made up of 91.0% 5 private investors and 9.0% institutional.
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