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 tothe 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 $484 million in Q1 2020. The primary 2021 2017 2018 2019 2020 capital composition for buyers so far 6 in 2021 has been made up of 91.0% 5 private investors and 9.0% institutional. Billions ($) For sellers, the majority was 53.7% private investors and 43.0% institutional. 4

CONSTRUCTION BREAKTHROUGH OF 3 TEXAS TOWER A major milestone in the construction of 2 the 47-story office tower recently took place changing the downtown Houston 1 skyline with the structural topping 0 out at 1.2 million-sq.-ft. The topping J F M A M J J A S O N D out occurred several weeks ahead of Source: Real Capital Analytics schedule, with completion scheduled in the fourth quarter. The tower broke ground before the pandemic, and the office market uncertainty that followed. QUARTERLY LEASING ACTIVITY OVER 100,000 SF Texas Tower is 40% preleased with tenants including Hines, Vinson & Elkins and DLA Piper law firms. Across the street from Texas Tower a 46-story apartment Galleria/West Loop high rise at 414 Milam St. is being built. Westchase That project previously was called The Preston but was renamed Brava in CBD

November, scheduled to open in 2022. Greenspoint/North Belt

LEASING ACTIVITY Energy Corridor The number of offices leases signed in Woodlands/Conroe

Houston dropped by 33% in 2020 (3,110 Southwest deals) compared with 2019 (4,650 deals), 0 50 100 150 200 250 300 350 400 450 500 as tenants delayed leasing decisions Thousands (SF) during the pandemic. The amount of signed lease transactions during the first quarter was 2.1 million sq. ft.—down from Source: Real Capital Analytics the previous quarter’s 3.1 million sq. ft., and down more than 60% from one year OVERALL GROSS ASKING RENT ($PSF) ago at 5.5 million sq. ft. The largest leases signed in Q1 2021—which is comprised of both new leases and renewals— include Buckeye Partners inking a new CBD Katy Freeway deal for 73,075 sq. ft. in Park Place River Galleria/West Loop Greenway Plaza Oaks at 4200 Westheimer, and Academy Midtown Woodlands/Conroe of Accelerated Learning leasing 38,337 Katy/Grand Pkwy W Sugar Land/E Ft Bend sq. ft. of space at 5999-6057 Savoy Dr. Pearland/South Medical Center in the Southwest/Hillcroft submarket. The Westchase Energy Corridor largest transactions during 2020 include Bellaire West Belt North Loop West Occidental renewing 801,967 sq. ft. of Kingwood/Humble Gulf Fwy/Pasadena space at 5 Greenway Plaza, and Enterprise FM 1960/Hwy 249 NASA/Clear Lake/SE Products Partners renewing 512,345 sq. Northeast Greenspoint/North Belt ft. in Enterprise Plaza at 1100 Louisiana St. Southwest Northwest

$0 $5 $10 $15 $20 $25 $30 $35 $40

4 HOUSTON OFFICE MARKET OVERVIEW QUARTERLY MARKET REPORT SUBMARKET STATS Q1 2021

CBD Total 39,782,856 28.2 35.2 -127,993 -127,993 160,269 1,270,856 39.03 Class A 31,700,199 28.4 34.7 -148,406 -148,406 102,602 1,270,856 41.72 Class B 7,369,317 28.9 40.1 20,413 20,413 57,667 0 29.09 Bellaire Total 4,581,562 11.5 22.1 5,224 5,224 91,611 0 26.25 Class A 1,655,252 13.7 18.4 1,779 1,779 40,540 0 28.99 Class B 2,607,802 8.4 24.6 3,795 3,795 30,905 0 26.03 Energy Corridor Total 23,148,082 27.8 34.6 -58,893 -58,893 129,976 0 26.47 Class A 14,533,232 27.6 35.6 -86,232 -86,232 38,980 0 31.98 Class B 8,283,344 28.7 33.7 32,390 32,390 88,469 0 20.76 FM 1960/Hwy 249 Total 10,938,678 24.9 32.0 3,942 3,942 81,248 48,000 21.51 Class A 3,637,845 19.9 34.2 -18,301 -18,301 18,424 0 28.68 Class B 6,321,821 27.7 31.5 18,501 18,501 57,961 48,000 18.95 Galleria/West Loop Total 29,237,304 24.4 31.2 -47,711 -47,711 406,127 77,189 33.81 Class A 20,576,658 26.6 34.4 -74,567 -74,567 297,422 77,189 36.55 Class B 8,610,646 19.3 23.4 26,856 26,856 108,705 0 24.89 Greenspoint/North Belt Total 11,651,726 49.1 49.6 -83,400 -83,400 138,198 0 18.01 Class A 5,136,707 66.1 67.8 -10,489 -10,489 27,548 0 19.68 Class B 5,355,189 39.6 39.1 -74,953 -74,953 84,556 0 15.55 Greenway Plaza Total 10,811,165 20.9 25.2 -23,619 -23,619 92,896 0 33.64 Class A 6,935,172 23.4 28.3 2,622 2,622 21,703 0 35.43 Class B 3,438,818 17.3 20.2 -18,698 -18,698 69,736 0 29.99 Gulf Fwy/Pasadena Total 3,781,545 18.9 18.4 19,929 19,929 42,949 0 22.55 Class A 105,782 2.0 2.0 -837 -837 0 0 32.03 Class B 2,958,584 19.5 19.9 34,986 34,986 35,709 0 21.68 Katy Freeway Total 10,032,851 12.0 16.5 -18,261 -18,261 85,649 767,059 34.00 Class A 6,287,057 13.4 18.8 -30,120 -30,120 65,503 767,059 41.49 Class B 2,484,662 9.9 12.7 21,633 21,633 9,006 0 23.18 Katy/Grand Pkwy W Total 3,413,371 20.1 25.8 -10,347 -10,347 28,749 0 30.90 Class A 2,203,489 27.7 34.3 -22 -22 27,838 0 31.59 Class B 1,060,620 7.2 11.7 -10,325 -10,325 911 0 26.60 Kingwood/Humble Total 1,401,419 13.9 16.0 5,229 5,229 23,351 0 23.82 Class A 258,342 25.0 14.3 2,697 2,697 13,027 0 28.41 Class B 1,060,210 11.8 17.2 2,532 2,532 10,324 0 22.74 Medical Center Total 9,559,640 10.0 16.7 -51,161 -51,161 78,939 788,780 27.84 Class A 3,609,973 12.2 26.2 -9,805 -9,805 29,305 672,280 34.15 Class B 4,895,399 8.6 10.3 -33,346 -33,346 41,624 116,500 24.71

5 HOUSTON OFFICE MARKET OVERVIEW QUARTERLY MARKET REPORT SUBMARKET STATS Q1 2021

Q1 2021 2021YTD Overall Total Total Total Net Net Q4 2020 Under Gross Avg Submarket Statistics Inventory Vacancy Availability Absorpiton Absorpiton Leasing Construction Asking Rent (Total reflects Class A/B/C) (SF) (SF) (%) (SF) (SF) Activity (SF) (SF) ($/PSF) Midtown Total 6,808,930 16.0 19.6 34,883 34,883 37,272 458,000 33.08 Class A 2,359,037 18.3 26.7 26,475 26,475 17,866 458,000 37.90 Class B 3,828,976 14.3 14.5 -2,154 -2,154 10,005 0 28.32 NASA/Clear Lake/SE Total 7,620,259 16.0 18.8 -1,666 -1,666 62,267 0 21.38 Class A 2,224,352 15.6 19.2 -32 -32 32,389 0 26.54 Class B 4,760,609 16.6 19.4 5,416 5,416 27,934 0 19.03 North Loop West Total 4,633,312 21.5 20.4 -50,378 -50,378 50,268 0 24.11 Class A 1,428,893 28.6 29.9 6,590 6,590 22,077 0 27.85 Class B 2,716,572 18.8 16.2 -56,482 -56,482 26,102 0 21.62 Northeast Total 2,379,242 13.1 14.1 -16,030 -16,030 2,688 0 19.56 Class A 184,834 16.0 17.9 -3,600 -3,600 0 0 26.03 Class B 1,438,847 14.0 13.3 -2,401 -2,401 2,160 0 21.34 Northwest Total 3,970,760 20.5 22.1 -31,941 -31,941 54,051 0 16.59 Class A 797,877 32.0 33.5 -10,900 -10,900 38,943 0 19.47 Class B 2,408,229 20.8 21.2 -15,041 -15,041 15,108 0 15.24 Pearland/South Total 1,783,406 11.9 12.6 12,468 12,468 11,379 48,000 28.93 Class A 672,270 2.6 4.6 7,383 7,383 0 48,000 29.79 Class B 860,529 19.9 20.2 -5,795 -5,795 11,379 0 29.02 Southwest Total 11,782,987 20.4 23.4 -24,679 -24,679 106,035 0 17.04 Class A 1,626,245 24.6 28.9 27,767 27,767 5,537 0 17.67 Class B 8,019,722 22.7 25.9 -37,272 -37,272 86,229 0 17.32 Sugar Land/E Ft Bend 6,822,377 16.8 24.4 -89,566 -89,566 43,960 0 30.07 Class A 3,870,419 15.9 24.3 -62,444 -62,444 6,105 0 34.08 Class B 2,869,588 18.1 24.8 -23,934 -23,934 35,554 0 25.08 West Belt Total 5,418,021 28.2 32.5 -24,128 -24,128 44,010 0 26.19 Class A 3,680,245 28.6 34.3 -4,890 -4,890 19,626 0 27.03 Class B 1,625,147 29.2 29.5 -19,238 -19,238 24,384 0 24.48 Westchase Total 15,892,603 29.3 33.2 16,657 16,657 164,293 0 26.84 Class A 8,913,268 29.2 33.4 92,142 92,142 122,149 0 32.16 Class B 6,802,425 30.1 33.7 -70,442 -70,442 42,144 0 22.17 Woodlands/Conroe Total 16,620,142 21.1 23.8 -236,513 -236,513 127,738 672,800 31.24 Class A 9,727,904 21.1 24.2 -200,575 -200,575 67,494 0 32.77 Class B 6,420,427 21.4 23.6 -25,317 -25,317 56,056 672,800 30.61 Suburban Total 202,289,382 23.0 27.5 -669,961 -669,961 1,903,654 2,859,828 26.80 Class A 100,424,853 25.9 31.7 -345,359 -345,359 912,476 2,022,528 31.17 Class B 88,828,166 21.5 24.5 -249,289 -249,289 874,961 837,300 22.14

6 HOUSTON OFFICE MARKET OVERVIEW QUARTERLY MARKET REPORT HOUSTON OFFICE SUBMARKETS Q1 2021

1. CBD 2. Bellaire 3. Energy Corridor 4. FM 1960/ Hwy 249 5. Galleria/West Loop 6. Greenspoint/North Belt 7. Greenway Plaza 8. Gulf Fwy/Pasadena 99 9. Katy Freeway

99 10. Katy/Grand Pkwy W

6 59 11. Kingwood/Humble 12. Medical Center 6

99 13. Midtown 290 90 14. NASA/Clear Lake/SE 90

59 290 90 15. North Loop West 10 10 16. Northeast 10 Sam Houston Tollway

Westheimer 99 17. N o r thwe s t

West Park Houston Tollway 225 18. Pearland/South

45 19. Southwest F 288

59 o r

90 B e 20. Sugar Land/E Ft Bend n

a y 21. West Belt 22. Westchase 23. Woodlands/Conroe

Information and data within this report were obtained from sources deemed to be reliable. No warranty or representation is made to guarantee its accuracy.

7 HOUSTON OFFICE QUARTERLY MARKET REPORT Q1 2021

HOUSTON + 713 629 0500 LETA WAUSON 1360 Post Oak Blvd #1900 DIRECTOR OF RESEARCH Houston, Texas 77056 [email protected] tel 713 275 9618 WWW.NAIPARTNERS.COM