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HOUSTON SUBMARKET REPORT MID-YEAR 2016 Houston Metro SNAPSHOT VACANCY RATES In the second quarter, 2.5 million SF of space delivered to the market at 54% preleased. Net absorption for Class A space totaled 813,000 SF, while Class A Overall Class A Direct Class B Overall Class B Direct Class B recorded negative 19,000 SF of absorption. Class A direct vacancy rose to 12.4% and overall was 14.6%, and Class B vacancy grew marginally 16% to 14.2% for direct and 15.2% for overall. Rents for both classes of space 14% increased with Class A reaching $35.13 per SF gross, and Class B rents were $21.53 per SF gross. Rental rates are anticipated to remain flat or fall 12% slightly in the period ahead and concession packages offered by landlords are becoming more prevalent in order to backfill large blocks of vacant 10% space. Over 1.5 million SF of sublease space was put on the market during 8% the second quarter, bringing the total to 10.6 million SF. Sublease levels are likely to reach 11.0 million SF by the end of 2016. Market fundamentals 6% 2013 2014 2015 Q2 2016 in the office sector will continue to see softness for the next 18-36 months, as the economy remains uncertain. SIGNIFICANT LEASES SIGNED NET ABSORPTION American Bureau of Shipping - 326,800 SF prelease, CityPlace 2, The Woodlands submarket Houston A Houston B 6,000,000 Lockton Companies - 120,000 SF prelease, Lockton Place, Westchase 5,000,000 submarket 4,000,000 Tudor, Pickering, Holt & Co. - 88,874 SF renewal, Heritage Plaza, CBD 3,000,000 submarket 2,000,000 RSM Global - 54,021 SF renewal and expansion, Four Oaks Place, 1,000,000 Galleria submarket 0 Patterson-UTI Energy, Inc. - 35,553 SF new lease, Remington Square -1,000,000 III, West Belt submarket -2,000,000 2013 2014 2015 Q2 2016 NOTABLE INVESTMENT SALES Greenspoint Park - three building portfolio, 352,125 SF total, Class B, acquired by Lincoln Property Co. for approximately $11.8 million, RENTAL RATES (FSG) 6.0% cap rate Houston A Houston B The Atrium Building & The Churchill Building - two building portfolio, $36.00 185,884 SF total, Class B, purchased by Stone Mountain Properties for an estimated $18.75 million, 10.4% cap rate $32.00 16430 Park Ten Place - 110,452 SF, Class B, acquired by First Service Credit Union for approximately $11.6 million $28.00 LARGEST PROJECTS UNDER CONSTRUCTION $24.00 609 Main at Texas - 47 stories, 1,057,000 SF, 27% preleased to United Airlines and Kirkland & Ellis, Q4 2016 delivery $20.00 BHP Billiton Tower - 30 stories, 600,000 SF, 100% preleased to BHP $16.00 2013 2014 2015 Q2 2016 Billiton, Q3 2016 delivery West Memorial Place II - 14 stories, 428,565 SF, 37% preleased to IHI E&C, Q3 2016 delivery Copyright © 2016 Transwestern. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. The information contained in this report was gathered by Transwestern from CoStar and other primary and secondary sources believed to be reliable. Transwestern, however, makes no representation concerning the accuracy or completeness of such information and expressly disclaims any responsibility for any inaccuracy contained herein. HOUSTON SUBMARKET REPORT MID-YEAR 2016 Central Business District SNAPSHOT VACANCY RATES Overall leasing activity in the CBD has slowed significantly with only one lease signed over 50,000 SF. Tudor, Pickering, Holt & Co. renewed their Class A Overall Class A Direct Class B Overall Class B Direct 88,874 SF lease in Heritage Plaza. Sublease space continues to affect 20% vacancy and now there is nearly 2.0 million SF of sublease space on the market. The is the third consecutive quarter of increasing vacancy for 16% Class A space with direct vacancy reaching 8.7% and 11.0% for overall. Class B vacancy jumped to 17.2% for direct and 18.6% for overall. Rental 12% rates continue to decrease as demand for space remains weak. Class A 8% rents were down 1.8% from year-end to $43.08 per SF gross and Class B rents dropped 1.2% over the same period to $28.33 per SF gross. 4% Continental Airlines, Plains Exploration and BG Group put large blocks of space on the market in the second quarter, leaving 13 large blocks over 0% 2013 2014 2015 Q2 2016 125,000 SF available for lease. Absorption for both Class A and B space remains positive through mid-year, reaching 69,000 SF. SIGNIFICANT LEASES SIGNED NET ABSORPTION Tudor, Pickering, Holt & Co. - 88,874 SF renewal, Heritage Plaza CBD A CBD B Castex - 23,441 SF renewal, Three Allen Center 400,000 CSL Capital Management - 12,708 SF sublease, Wells Fargo Plaza 0 CONSTRUCTION ACTIVITY 609 Main at Texas - 47 stories, 1,057,000 SF, 27% preleased to United -400,000 Airlines and Kirkland & Ellis, Q1 2017 delivery -800,000 LARGE BLOCKS OF SPACE BEING MARKETED (125,000 SF+) -1,200,000 800 Bell, Floors 1-46, 1,314,350 SF (Exxon) 609 Main at Texas, Floors 12-46, 756,873 SF (new construction) -1,600,000 2013 2014 2015 Q2 2016 One Shell Plaza, 350,000 SF sublease, term through 12/2025 (Shell) 1600 Smith, Floors 5-16, 280,593 SF (Continental Airlines) RENTAL RATES (FSG) 2 Houston Center, Floors 4-10, 280,181 SF (Shell) CBD A CBD B 600 Jefferson, Floors 11-19, 192,984 SF (United Airlines) $45.00 811 Louisiana, Floors 10-15, 188,695 SF (Shell) 717 Texas, Floors 23-28, 165,246 SF sublease, term through 08/2018 $40.00 (Freeport McMoRan) $35.00 BG Group Place, Floors 29-34, 164,051 SF sublease, term through 12/2026 (BG Group) $30.00 811 Louisiana, Floors 18-22, 159,665 SF (Shell) $25.00 Total Plaza, Floors 10-15, 145,352 SF (Hilcorp) Pennzoil Place, Floors 6-12 and 14, 140,270 SF (Cheniere Energy) $20.00 2013 2014 2015 Q2 2016 BG Group Place, Floors 22-26, 135,206 SF sublease, term through 12/2026 (BG Group) Copyright © 2016 Transwestern. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. The information contained in this report was gathered by Transwestern from CoStar and other primary and secondary sources believed to be reliable. Transwestern, however, makes no representation concerning the accuracy or completeness of such information and expressly disclaims any responsibility for any inaccuracy contained herein. HOUSTON SUBMARKET REPORT MID-YEAR 2016 Energy Corridor SNAPSHOT VACANCY RATES With the majority of tenants tied to the energy sector, the Energy Corridor experienced another slow quarter. Class A direct vacancy increased to Class A Overall Class A Direct Class B Overall Class B Direct 12.3%, and overall was 16.8%, while Class B vacancy rose to 15.0% for 20% direct and 17.0% for overall at second quarter. Class A vacancy saw a large jump due to BP and Conoco putting over 1.0 million SF of sublease 16% space on the market. Conoco’s space has a term through May 2028 and 12% BP’s space has a term through June 2023. Rental rates for Class A space fell to $36.54 per SF gross and Class B dropped to $22.60 per SF gross 8% from year-end 2015. There were three smaller leases signed in the second 4% quarter as large transaction activity has weakened. The only delivery was Energy Center Five, a 525,000 SF speculative building. The construction 0% 2013 2014 2015 Q2 2016 pipeline in the Energy Corridor is shrinking with only two projects under construction totaling 655,000 SF. The Energy Corridor will remain weak as the energy downturn continues to have an affect on overall market fundamentals. NET ABSORPTION SIGNIFICANT LEASES SIGNED Energy Corridor A Energy Corridor B Texas Mutual - 23,451 SF new lease, Air Liquide Center South 3,500,000 Audimation Services - 17,859 SF sublease, 1250 Woodbranch Park 3,000,000 2,500,000 Kimley-Horn and Associates - 15,837 SF new lease, 11700 Katy Frwy 2,000,000 INVESTMENT SALES 1,500,000 16430 Park Ten Place - 110,452 SF, Class B, acquired by First Service 1,000,000 Credit Union for approximately $11.6 million 500,000 LARGE BLOCKS OF SPACE BEING MARKETED (200,000 SF+) 0 -500,000 2013 2014 2015 Q2 2016 Energy Center IV, Floors 1-22, 597,628 SF sublease, term through 05/2028 (Conoco) Four WestLake, Floors 1-20, 559,094 SF sublease, term through 06/2023 (BP) RENTAL RATES (FSG) Energy Center V, Floors 1-18, 524,474 SF (new construction) Energy Corridor A Energy Corridor B 13501 Katy Frwy, Floors 1-3, 320,000 SF (Exxon) $40.00 Enclave Place, Floors 1-11, 300,907 SF (new) $35.00 Energy Center II, Floors 1-12, 257,659 SF sublease, negotiable term $30.00 (Worley Parsons) $25.00 Three Westlake, Floors 3-9 & 14-17, 242,052 SF sublease, term through 02/2019 (Conoco) $20.00 Two Westlake, Floors 7-15, 205,304 SF (Conoco) $15.00 West Memorial Place II, Floors 2, 9-14, 199,997 SF (new construction) $10.00 2013 2014 2015 Q2 2016 CONSTRUCTION ACTIVITY 10100 Katy Frwy - Six stories, 226,511 SF, 35% preleased to Cemex, Q2 2017 delivery West Memorial Place II - 14 stories, 428,565 SF, 37% preleased to IHI E&C, Q3 2016 delivery Copyright © 2016 Transwestern.
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