Houston Office Market 2Q 2018

Q2 2018 | HOUSTON OFFICE MARKET

Office Market Still Struggling as Signs of Recovery Emerge Office Using Job Growth on the Rise

OVERVIEW TRENDLINES With Fatigue on the Rise, is Increased Activity on the Way? 5-YEAR TREND CURRENT QUARTER The office market displayed mixed results over the second quarter, as leasing activity increased and office-using job growth picked up mo- JOB GROWTH mentum; however, total availability and direct vacancy both continued to soften. The increase in vacancy and availability was due to a combi- 37k jobs Office-using* jobs nation of tenants leasing attractive sublease offerings, thereby increas- gained over the year ing direct vacancy upon move, as well as through an additional wave of sublease listings that increased total availability by 0.8%. Of note, Occidental Petroleum (Oxy) listed approximately 800,000 SF of sublease ABSORPTION space in 3 and 5 Greenway Plaza with term through 2026. Oxy is leaving -1.5M SF its longtime Greenway Plaza space and will relocate into its new build- YTD 2018 absorption ing in 2020, at which time the prime Greenway Plaza sublease will be for all classes of space available for occupancy.

Absorption through mid-year continued in the red, recording negative DIRECT VACANCY 1.5 million SF year-to-date, and marking seven out of the past eight quarters in negative territory. Class A properties have posted negative 16.2% absorption for 6 of the past 8 quarters, leading to financial fatigue in the Increased 0.3% over the quarter market. This is especially pronounced in product built prior to 2000 as leasing activity has been markedly in favor of either new construction or heavily discounted, attractive sublease offerings. With over 9.0M SF TOTAL AVAILABILITY of sublease space currently available, spec construction on the rise and 23.7% proposed buildings anticipating landing lead tenants, the near-term Increased 0.8% over future for the leasing environment continues to be one of the most chal- the quarter lenging in Houston’s history.

Despite these bumps in the road, office-related job growth is back on UNDER CONSTRUCTION the rise. Nearly 80,000 jobs were created over the 12 months ending in May, of which, 37,000 jobs were created in the office-using employment 1.8 msf sectors*. Additionally, oil prices remain elevated in the mid-upper $60s Under construction at mid-year 2018 to low $70s, which is likely to translate into further job growth. As such, the long-term outlook on the Houston market remains bright despite the challenges the market is currently experiencing. RENTAL RATE DEMAND $30.78 psf Sublease Expirations Drive Negative Absorption Rental rate for all classes of space Quarterly absorption for all classes of space totaled negative 515,000 SF, bringing year to date cumulative absorption to negative 1.5 million

* Office-using employment sectors include: Professional and Business Services, Information, and Financial Activities. Q2 2018 | HOUSTON | OFFICE MARKET

SF. Class A absorption totaled negative 66,000 SF while Class B absorption recorded negative 477,000 SF for the second quarter. North Total Available Space Houston District drove the negative absorption with the submarket Houston Metro | Q2 2018 having cumulative space give backs totaling just under 400,000 SF SUBLEASE % OF % TOTAL SUBMARKET between Class A and B properties. This was due in part to the expiration SPACE (SF) SUPPLY AVAILABLE of ExxonMobil’s lease of 253,000 SF at 233 Benmar, Exterran vacating CBD 2,345,723 5.4% 28.4% 147,000 SF at 16666 Northchase, and the expiration of Insperity’s 87,000 Energy Corridor 2,269,839 6.3% 26.3% SF lease at 263 N Sam Houston Pky. Westchase 1,392,048 8.8% 29.0% Net direct absorption still faces headwinds as approximately 400,000 SF of sublease space is set to expire over the balance of the year and Greenway Plaza 927,042 6.3% 25.8% value-conscious tenants look to attractive sublease alternatives, vacating West Belt 603,961 11.3% 37.2% direct space in the process. That said, Q2 saw office-using employment All of Houston 9,141,135 3.8% 23.7% growth, and the first round of tenants in the market expanding their leases in lieu of renewing. As such, it is anticipated that absorption will begin to move into positive territory towards the end of the year as leasing velocity continues to improve and the availability of viable sublease alternatives wanes, pushing activity back to direct space.

VACANCY Office Under Construction Sublease Space Exceeds 9.0 Million SF Houston Metro | Q2 2018 # OF % PRE- SUBMARKET SF The total availability rate for all classes of space rose to 23.7% over the BLDGS LEASED second quarter, a 0.8% increase from 22.9% recorded at the close of the CBD 1 778,344 27. 0% first quarter. The increase in availability can be attributed to several large FM 1960/Hwy 249 1 156,000 0.0% additions of sublease space. Oxy listed over 800,000 SF of sublease on Woodlands 4 854,800 82.5% the market in Greenway Plaza between two buildings as it looks to build a corporate campus. Additionally, GE listed 182,000 SF (Westway III, Total 6 1,789,144 54.1% Class A) for sublease through December 2022 in the West Belt market. The CBD was also in on the mix with EP Energy listing 124,000 SF (1001 Louisiana, Class A) through August 2025, while Vistra Energy listed 104,000 SF (601 Travis, Class B) through April 2022. Total sublease space for the market sits at 9.1 million SF, the majority of which is in the Class A market with 7.5 million SF available. AVERAGE OFFICE RENTS Direct vacancy increased to 16.2% for all classes of space over the Houston Metro Area quarter, up 0.3% from the first period. Class A vacancy remained Overall Class A Class B unchanged recording 15.7% at mid-year, while Class B increased to $40 17.7%, from 17.1% over the same period. The submarkets recording $35 the lowest vacancies are Kingwood Humble - 3.4%, South Main/Medical Center - 3.6% and Northeast - 5.0%. As over 1.0 million SF of sublease $30 space is set to expire over the next 18 months, expect to see further $25 increases in direct vacancy throughout the metro. $20 SUPPLY AND DEVELOPMENT Speculative Projects Break Ground $15 07 08 09 10 11 12 13 14 15 16 17 18* SOURCE: CoStar, Transwestern The development pipeline currently sits at 1.8 million SF across the metro *Through Q2 2018 following the groundbreaking of two speculative construction buildings in North Houston. CityPlace I in Springwoods Village broke ground late in the second quarter, a 150,000 SF Class A building anticipated to deliver

in Q2 2019. Additionally, Chasewood Crossing broke ground Comparative Office Investment Sales Volume on its next phase, Chasewood Crossing Three, the third of Select Metro Areas six proposed Class A office buildings at the office park. The Atlanta Dallas Denver Houston 156,000 SF speculative building broke ground on June 28 $8 and will be located at 19350 State Hwy 249 with occupancy $7 in 14 months. $6

The largest developments under construction are Capitol $5 Tower (CBD, 778,000 SF - 36% leased to Bank of America $4 and Quantum Energy), CityPlace 2 (The Woodlands, 326,000 SF - 100% Leased to ABS) and HP’s build-to-suit campus (The $3 Sales Volume in Billions Woodlands, two 189,000 SF buildings). With strong tenant $2 demand for new construction, it is anticipated that several $1 additional buildings will break ground in the near term. $0 07 08 09 10 11 12 13 14 15 16 17 18* RENTAL RATES SOURCE: Real Capital Analytics, Transwestern ,*Through Q2 2018 Rental Rates Soften in Q2 Overall asking rates for all classes of space totaled $30.78 per SF gross over the second quarter, a 0.5% decrease from the first quarter, but up 0.3% over the same period last year. Landlords continue to maintain face rents as long as possible, Average Office Sale Price Houston Metro Area but concession packages remain hefty and prevalent with free rents and high TI allowances still being offered. Class A rental Average Sale Price Per SF $250 rates dropped 0.8% over the quarter and 0.6% year-over-year to $36.00 per SF gross. Class B rates were $22.25 per SF gross $200 at mid-year which is a 1.5% increase over the quarter and over the year. $150 INVESTMENT SALES Portfolio Activity Decreases $100 Sales in the second quarter slowed, recording $254.3 million, down from the $715.7 million in the first quarter. The $50 largest sale of the quarter was the longtime listed former Halliburton campus in Westchase. The campus is situated $0 07 08 09 10 11 12 13 14 15 16 17 18* on approximately 49 acres and consists of a 570,000 SF (NRA), three story office building. Garden Capital Partners, a SOURCE: Real Capital Analytics, Transwestern,*Through Q2 2018 group led by Lawrence Wong acquired the property for an undisclosed price. Plans for the former campus have yet to be announced, but it is anticipated that the campus will

Notable Q2 Sales Transactions

BUILDING SUBMARKET SF SELLER BUYER

10200 Bellaire Blvd Westchase 568,458 Halliburton Garden Capital Partners

Cameron Management and TRC Capital Partners and 1001 McKinney CBD 375,440 Silverpeak Real Estate Partners Amstar America

950 & 952 Echo Ln Katy Freeway East 189,162 Velocis Fund I Metropolitan Custom Homes

E Ft Bend Co/ Three Sugar Creek 154,263 Radler Enterprises WEDGE Group Sugar Land

SOURCE: Real Capital Analytics, Transwestern

be a redevelopment opportunity infusing mixed-use Office Absorption and Employment components. Also of note this quarter, 1001 McKinney traded Houston Metro Area hands after only six months on the market. A partnership between TRC Capital Partners and Amstar America Net Absorption (Thousands of SF) Payroll Job Growth (in Thousands) 9000 120 purchased the property from Silverpeak Real Estate Partners 7700 100 and Cameron Management. 6400 80

OUTLOOK 5100 60 Office Market Looks to Recovery in 2019 3800 40 The Houston office sector has had its fair share of headwinds 2500 20 throughout the past few years, with the collapse and slow 1200 0 rebuild of the energy sector and a major hurricane bringing -100 -20 business to a standstill late in 2017. Through this, the office -1400 -40 -2700 sector has been exposed to increases in vacancy and avail- -60 -4000 -80 ability along with falling rental rates. Despite these setbacks, 07 08 09 10 11 12 13 14 15 16 17 18* Houston has shown resiliency, creating nearly 80,000 jobs *12-month job growth through May 2018, net absorption YTD through Q2 2018 over the past year (37,000 office-using jobs). With oil prices SOURCE: Bureau of Labor Statistics, Transwestern stabilizing in the mid-upper $60s, and corporate profits up tangibly, companies are looking once again to expand their operations. In the coming quarters, it is anticipated to see an increase in direct vacancy as sublease space expires and rolls to direct vacancy. However, leasing activity will continue to pick up through the balance of the year and into 2019 as job growth continues and oil prices remain stable. Overall, the Houston office market should look to begin creating positive absorption either late in 2018 or beginning in 2019.

Notable Q2 Lease Transactions

BUILDING SF LEASE TYPE BUILDING SUBMARKET

Schlumberger 226,000 Renewal/Expansion 1430 Enclave Katy Freeway West

Harris County Veterans Service Office 118,896 New 500 Jefferson CBD

Acclara Solutions 82,941 New Remington Square III West Belt

Sidley Austin 80,000 Renewal/Expansion Wells Fargo Plaza CBD

WildHorse Resources 71,746 New 920 Memorial City Way Katy Freeway East

Kiewit 52,834 Sublease Energy Tower IV Katy Freeway West

Enable Midstream Partners 48,000 Sublease One Shell Plaza CBD

GTC Technology International 41,846 New Ashford VII Katy Freeway West

Simmons and Company International 31,000 New 609 Main at Texas CBD

WHY OUR METHODOLOGY IS THE BEST INDICATOR OF CURRENT MARKET CONDITIONS We include owner occupied and single-tenant buildings in our inventory, vacancy and absorption statistics to capture more market activity than many of our competitors. This allows us to better correlate changes in the market with changes in employment. As single-tenant space does compete with multi-tenant space, we believe it is critical to understand all components of the market. The inclusion of single-tenant and owner-occupied space tends to yield lower vacancy rates and higher absorption totals than some of our competitors’ results, but our coverage of the market is more comprehensive.

Houston Office Market Indicators - All Space Direct Direct Total Net Net Submarket Total Inventory SF Available Vacancy Vacancy Availability Under Absorption Absorption Bldgs Immediately Q1 2018 Q2 2018 Q2 2018 Construction Q2 2018 YTD 2018 Conroe 13 923,053 78,803 7.2% 8.5% 9.1% - (12,529) (10,889) CBD 62 43,805,061 7,656,718 17.6% 17.5% 28.4% 778,344 50,438 (612,541) Midtown 31 5,610,731 602,349 10.9% 10.7% 13.7% - 6,018 17,169 Downtown 93 49,415,792 8,259,067 16.8% 16.7% 26.7% 778,344 56,456 (595,372) FM 1960/Champions 23 1,900,475 283,097 14.4% 14.9% 17.7% - (10,201) 14,060 FM 1960/Hwy 249 37 5,148,638 581,685 10.7% 11.3% 13.9% 156,000 (32,320) (52,120) FM 1960/I-45 North 15 1,325,458 440,531 30.5% 33.2% 34.1% - (36,440) (80,633) FM 1960 75 8,374,571 1,305,313 14.6% 15.6% 18.0% 156,000 (78,961) (118,693) Greenway Plaza 48 11,119,304 1,600,116 14.4% 14.4% 25.8% - (23,880) 86,854 Gulf Freeway/Pasadena 34 2,730,236 419,446 15.1% 15.4% 18.1% - (6,066) (12,867) Katy Far West 26 2,770,222 363,928 12.9% 13.1% 14.2% - (26,542) (26,384) Katy Freeway East 59 9,599,223 847,137 9.0% 8.8% 13.9% - 62,877 73,765 Katy Freeway West 141 26,663,998 4,751,365 17.4% 17.8% 30.7% - (100,917) (298,937) Katy Fwy / Energy Corridor 200 36,263,221 5,598,502 15.1% 15.4% 26.3% - (38,040) (225,172) Kingwood/Humble 10 1,134,389 38,672 2.8% 3.4% 3.4% - (6,746) (1,938) NASA/Clear Lake 53 5,612,825 1,147,188 20.0% 20.4% 21.0% - (22,881) (65,177) North District / IAH 20 2,759,860 732,234 26.5% 26.5% 28.4% - (1,095) 26,164 North District / N Belt West 75 10,140,974 4,690,244 42.7% 46.3% 52.5% - (363,000) (312,715) North District / North Belt 95 12,900,834 5,422,478 39.2% 42.0% 47.3% - (364,095) (286,551) Northeast 11 1,372,336 67,997 5.0% 5.0% 8.7% - 1,523 241 North Loop West 29 3,926,668 748,250 15.9% 19.1% 24.4% - (121,011) (110,560) Northwest Far 30 3,339,715 815,714 24.0% 24.4% 27.7% - (15,466) (27,505) Northwest Near 9 803,866 43,156 4.7% 5.4% 5.6% - (5,397) (5,173) Northwest 68 8,070,249 1,607,120 18.1% 19.9% 23.9% - (141,874) (143,238) South Main/Medical Center 46 10,108,558 363,854 3.6% 3.6% 4.9% - 4,976 (8,587) E Fort Bend Co/Sugar Land 45 6,099,037 393,047 6.8% 6.4% 15.0% - 25,872 (2,894) Southwest Beltway 8 39 5,373,738 981,959 18.1% 18.3% 26.3% - (9,515) (106,131) Southwest/Hillcroft 36 4,321,807 723,044 18.8% 16.7% 21.3% - 90,194 101,940 Southwest Fwy / Sugar Land 120 15,794,582 2,098,050 14.0% 13.3% 20.6% - 106,551 (7,085) The Woodlands 105 17,507,873 1,435,837 8.0% 8.2% 9.8% 854,800 (31,476) 5,124 West Belt 36 5,353,385 844,210 17.8% 15.8% 37.2% - 116,541 (4,495) Bellaire 30 4,288,748 364,961 7.9% 8.5% 11.2% - (24,797) (39,603) Galleria/Uptown 58 16,769,706 2,235,652 13.1% 13.3% 19.6% - (29,228) 136,609 Post Oak Park 27 4,581,030 1,121,586 24.6% 24.5% 32.0% - 6,822 (76,961) Richmond/Fountainview 11 829,982 62,686 7.9% 7.6% 8.2% - 3,003 (4,762) Riverway 16 2,868,522 523,630 19.0% 18.3% 21.5% - 21,796 63,059 San Felipe/Voss 33 5,054,896 1,028,108 20.0% 20.3% 25.0% - (22,393) (70,599) West Loop 175 34,392,884 5,336,623 15.4% 15.5% 20.9% - (44,797) 7,743 Westchase 89 17,587,124 3,057,799 17.4% 17.4% 29.0% - (3,159) (55,251) TOTAL - Houston 1,297 241,431,438 39,045,003 15.9% 16.2% 23.7% 1,789,144 (514,999) (1,461,737)

SOURCE: CoStar, Transwestern NOTE: Includes buildings 50,000 SF RBA and greater; does not include buildings owned by the government.

Houston Office Market Indicators - Class A Direct Direct Total Net Net Submarket Total Inventory SF Available Vacancy Vacancy Availability Under Absorption Absorption Bldgs Immediately Q1 2018 Q2 2018 Q2 2018 Construction Q2 2018 YTD 2018 Conroe 2 128,832 18,422 10.1% 14.3% 14.3% - (5,411) (5,411) CBD 37 34,126,465 4,790,791 14.1% 14.0% 25.8% 778,344 29,628 (432,458) Midtown 8 2,486,094 340,182 14.4% 13.7% 16.6% - 18,959 33,937 Downtown 45 36,612,559 5,130,973 14.1% 14.0% 25.2% 778,344 48,587 (398,521) FM 1960/Champions 1 150,000 - 0.0% 0.0% 8.1% - - - FM 1960/Hwy 249 17 3,729,412 369,230 9.3% 9.9% 12.1% 156,000 (22,316) (41,333) FM 1960/I-45 North 2 206,705 66,850 22.3% 32.3% 32.3% - (20,712) (12,338) FM 1960 20 4,086,117 436,080 9.6% 10.7% 13.0% 156,000 (43,028) (53,671) Greenway Plaza 20 7,393,627 1,136,974 15.3% 15.4% 31.6% - (24,038) 155,812 Gulf Freeway/Pasadena ------Katy Far West 15 1,604,772 356,970 22.1% 22.2% 24.1% - (20,206) (21,649) Katy Freeway East 24 5,767,926 631,962 10.8% 11.0% 15.5% - 41,897 75,963 Katy Freeway West 72 18,763,739 2,887,981 15.1% 15.4% 31.6% - (44,513) (47,043) Katy Fwy / Energy Corridor 96 24,531,665 3,519,943 14.1% 14.3% 27.8% - (2,616) 28,920 Kingwood/Humble 2 144,312 7,466 5.2% 5.2% 5.2% - - 1,927 NASA/Clear Lake 15 2,028,136 210,799 8.9% 10.4% 11.1% - (31,072) (87,664) North District / IAH 8 1,213,677 525,390 43.4% 43.3% 45.2% - 813 34,839 North District / N Belt West 17 4,334,837 2,512,106 53.6% 58.0% 64.9% - (191,185) (196,216) North District / North Belt 25 5,548,514 3,037,496 51.3% 54.7% 60.6% - (190,372) (161,377) Northeast 3 642,223 21,702 3.4% 3.4% 3.4% - 1,523 (3,422) North Loop West 6 1,240,544 341,495 21.3% 27.5% 41.6% - (76,908) (59,529)

Northwest Far 4 797,237 346,383 41.5% 43.4% 54.3% - (15,461) (19,550) Northwest Near ------Northwest 10 2,037,781 687,878 29.2% 33.8% 46.6% - (92,369) (79,079) South Main/Medical Center 15 4,558,989 183,952 4.3% 4.0% 5.8% - 12,979 10,885 E Fort Bend Co/Sugar Land 20 3,774,860 236,471 6.9% 6.3% 15.8% - 27,186 7,721 Southwest Beltway 8 3 566,699 106,839 18.4% 18.9% 19.5% - (2,294) (2,020) Southwest/Hillcroft 6 1,487,219 349,030 24.3% 23.5% 35.0% - 12,387 18,133 Southwest Fwy / Sugar Land 29 5,828,778 692,340 12.5% 11.9% 21.1% - 37,279 23,834 The Woodlands 53 12,789,181 960,077 7.8% 7.5% 8.9% 854,800 23,433 81,575 West Belt 23 4,095,634 601,275 17.4% 14.7% 37.9% - 111,710 (11,942) Bellaire 8 1,475,481 195,367 12.4% 13.2% 19.5% - (13,446) (23,883) Galleria/Uptown 35 13,427,477 1,847,621 13.9% 13.8% 20.4% - 27,007 171,767 Post Oak Park 9 2,617,868 806,519 31.7% 30.8% 40.9% - 23,215 (31,124) Richmond/Fountainview ------Riverway 5 1,885,813 363,968 20.0% 19.3% 22.6% - 13,397 58,403 San Felipe/Voss 3 1,720,793 434,750 27.1% 25.3% 26.6% - 31,613 3,754 West Loop 60 21,127,432 3,648,225 17.6% 17.3% 23.6% - 81,786 178,917 Westchase 33 9,959,357 1,850,396 18.9% 18.6% 33.3% - 25,437 (69,365) TOTAL - Houston 466 143,117,909 22,500,968 15.7% 15.7% 25.4% 1,789,144 (66,378) (410,231)

SOURCE: CoStar, Transwestern NOTE: Includes buildings 50,000 SF RBA and greater; does not include buildings owned by the government.

Houston Office Market Indicators - Class B Direct Direct Total Net Net Submarket Total Inventory SF Available Vacancy Vacancy Availability Under Absorption Absorption Bldgs Immediately Q1 2018 Q2 2018 Q2 2018 Construction Q2 2018 YTD 2018 Conroe 10 691,631 60,381 7.7% 8.7% 9.5% - (7,118) (5,478) CBD 23 9,458,542 2,842,770 30.1% 30.1% 38.3% - 20,810 (180,083) Midtown 20 2,953,870 204,175 6.6% 6.9% 10.1% - (9,366) (15,089) Downtown 43 12,412,412 3,046,945 24.5% 24.5% 31.6% - 11,444 (195,172) FM 1960/Champions 20 1,630,279 271,316 16.0% 16.6% 19.2% - (10,201) 15,901 FM 1960/Hwy 249 18 1,315,714 212,455 14.8% 16.1% 19.7% - (18,428) (14,487) FM 1960/I-45 North 11 968,736 324,887 31.9% 33.5% 34.8% - (15,728) (70,730) FM 1960 49 3,914,729 808,658 19.5% 20.7% 23.2% - (44,357) (69,316) Greenway Plaza 26 3,585,380 415,952 11.6% 11.6% 13.4% - (1,019) (69,169) Gulf Freeway/Pasadena 28 2,266,967 336,160 14.4% 14.8% 18.1% - (10,663) (11,509) Katy Far West 10 1,046,188 6,958 0.1% 0.7% 0.7% - (6,336) (4,735) Katy Freeway East 26 2,879,196 195,023 7.4% 6.8% 14.4% - 19,065 (1,677) Katy Freeway West 66 7,658,745 1,822,499 22.9% 23.8% 28.8% - (56,404) (217,786) Katy Fwy / Energy Corridor 92 10,537,941 2,017,522 18.6% 19.1% 24.9% - (37,339) (219,463) Kingwood/Humble 8 990,077 31,206 2.5% 3.2% 3.2% - (6,746) (3,865) NASA/Clear Lake 37 3,531,671 936,389 26.7% 26.5% 27.0% - 8,191 22,487 North District / IAH 11 1,493,858 206,844 13.7% 13.8% 15.7% - (1,908) (8,675) North District / N Belt West 46 4,789,317 1,958,313 37.0% 40.9% 47.4% - (186,611) (138,610) North District / North Belt 57 6,283,175 2,165,157 31.5% 34.5% 39.8% - (188,519) (147,285) Northeast 6 554,309 41,327 7.5% 7.5% 11.1% - - 3,663 North Loop West 21 2,568,003 390,653 14.0% 15.2% 16.6% - (30,514) (39,877) Northwest Far 23 2,295,051 469,331 20.4% 20.4% 21.5% - (5) (7,955) Northwest Near 7 623,533 43,156 6.1% 6.9% 7.3% - (5,397) (5,173) Northwest 51 5,486,587 903,140 15.8% 16.5% 17.6% - (35,916) (53,005) South Main/Medical Center 19 4,020,231 141,463 3.3% 3.5% 4.8% - (7,722) (16,583) E Fort Bend Co/Sugar Land 24 2,250,177 156,576 6.9% 7.0% 14.0% - (1,314) (10,615) Southwest Beltway 8 31 4,449,155 838,558 18.7% 18.8% 28.5% - (8,751) (106,582) Southwest/Hillcroft 19 1,794,770 293,981 19.3% 16.4% 16.6% - 52,573 79,336 Southwest Fwy / Sugar Land 74 8,494,102 1,289,115 15.7% 15.2% 22.1% - 42,508 (37,861) The Woodlands 50 4,438,007 475,760 9.3% 10.7% 13.0% - (54,909) (76,451) West Belt 13 1,257,751 242,935 19.3% 19.3% 34.9% - 4,831 7,447 Bellaire 18 2,429,761 134,418 5.2% 5.5% 6.4% - (9,252) (12,051) Galleria/Uptown 22 3,266,437 388,031 10.2% 11.9% 16.7% - (56,235) (35,158) Post Oak Park 16 1,803,120 315,067 16.6% 17.5% 21.9% - (16,393) (45,837) Richmond/Fountainview 7 570,270 56,172 10.8% 9.9% 10.8% - 5,543 (3,104) Riverway 9 870,153 157,208 19.3% 18.1% 21.4% - 10,853 6,310 San Felipe/Voss 30 3,334,103 593,358 16.3% 17.8% 24.2% - (54,006) (74,353) West Loop 102 12,273,844 1,644,254 12.5% 13.4% 17.5% - (119,490) (164,193) Westchase 52 7,133,914 1,176,766 16.2% 16.5% 24.5% - (24,495) 13,427 TOTAL - Houston 727 88,918,916 15,740,088 17.1% 17.7% 22.4% - (477,655) (1,027,061)

SOURCE: CoStar, Transwestern NOTE: Includes buildings 50,000 SF RBA and greater; does not include buildings owned by the government.

Houston Office Market Indicators - Asking Rental Rates % Change % Change % Change % Change Q2 2017 Q1 2018 Over Q2 2018 Q2 2017 Q1 2018 Over Q2 2018 Submarket Y-O-Y Y-O-Y Class B Class B Quarter Class B Class A Class A Quarter Class A Class B Class A Class B Class A Conroe $23.20 8.7% $23.49 7.4% $25.22 $31.05 -6.3% $31.09 -6.4% $29.09 CBD $30.83 -2.3% $29.47 2.2% $30.12 $44.99 -0.2% $44.85 0.1% $44.89 Midtown $35.36 -10.8% $31.53 0.0% $31.53 $34.49 0.7% $34.70 0.1% $34.73 Downtown $31.45 -3.5% $29.77 1.9% $30.34 $44.15 0.5% $44.30 0.1% $44.36 FM 1960/Champions $13.91 5.6% $15.05 -2.4% $14.69 - - - - - FM 1960/Hwy 249 $19.90 -8.4% $18.67 -2.3% $18.24 $27.93 0.0% $27.98 -0.2% $27.93 FM 1960/I-45 North $18.17 0.9% $18.43 -0.5% $18.34 $24.12 3.6% $25.00 0.0% $25.00 FM 1960 $17.06 -0.4% $17.30 -1.9% $16.98 $27.13 1.2% $27.60 -0.6% $27.45 Greenway Plaza $26.13 4.7% $26.91 1.7% $27.36 $38.38 3.9% $39.83 0.1% $39.87 Gulf Freeway/Pasadena $21.72 5.8% $22.65 1.4% $22.97 - - - - - Katy Far West - - $27.50 0.0% $27.50 $28.87 0.8% $28.83 0.9% $29.09 Katy Freeway East $27.69 -6.1% $26.29 -1.1% $26.01 $40.75 -0.2% $40.27 1.0% $40.67 Katy Freeway West $23.61 -3.9% $22.53 0.7% $22.69 $36.64 -1.0% $36.12 0.4% $36.28 Katy Fwy / Energy Corridor $24.19 -4.9% $22.89 0.5% $23.00 $37.23 -0.8% $36.86 0.2% $36.92 Kingwood/Humble $23.07 1.3% $23.99 -2.6% $23.37 $31.94 -0.4% $31.82 0.0% $31.82 NASA/Clear Lake $17.95 6.8% $18.67 2.7% $19.16 $24.45 -1.4% $24.44 -1.4% $24.10 North District / IAH $16.23 -7.2% $14.84 1.5% $15.06 $21.91 1.3% $22.58 -1.7% $22.20 North District / N Belt West $16.62 -0.8% $16.53 -0.3% $16.49 $25.48 -9.2% $24.83 -6.8% $23.13 North District / North Belt $16.58 -1.4% $16.37 -0.2% $16.35 $24.79 -7.4% $24.42 -6.0% $22.96 Northeast $22.71 0.0% $22.71 0.0% $22.71 - - - - - North Loop West $22.67 3.4% $23.60 -0.7% $23.44 $26.55 -0.5% $26.54 -0.4% $26.42 Northwest Far $16.23 -6.5% $15.43 -1.6% $15.18 $18.92 3.5% $19.58 0.1% $19.59 Northwest Near $19.04 1.4% $19.30 0.0% $19.31 - - - - - Northwest $18.75 0.8% $18.98 -0.4% $18.89 $22.91 1.1% $23.59 -1.8% $23.17 South Main/Medical Center $23.05 9.5% $25.34 -0.5% $25.22 $33.86 -2.1% $33.97 -2.4% $33.15 E Fort Bend Co/Sugar Land $21.88 13.7% $24.29 2.4% $24.88 $32.34 0.1% $32.47 -0.3% $32.36 Southwest Beltway 8 $18.63 2.5% $18.47 3.3% $19.09 $21.17 0.0% $21.10 0.3% $21.16 Southwest/Hillcroft $17.41 -3.9% $16.54 1.2% $16.73 $19.57 1.7% $19.89 0.0% $19.90 Southwest Fwy / Sugar Land $18.80 2.6% $18.72 3.0% $19.29 $24.12 -0.2% $24.21 -0.5% $24.09 The Woodlands $25.32 5.0% $25.86 2.8% $26.59 $35.18 -6.7% $35.31 -7.1% $32.82 West Belt $24.18 1.1% $24.57 -0.5% $24.44 $33.65 0.1% $33.29 1.2% $33.69 Bellaire $23.29 4.5% $23.35 4.2% $24.33 $27.79 1.5% $28.04 0.6% $28.20 Galleria/Uptown $28.59 0.2% $28.82 -0.6% $28.64 $39.24 -0.2% $39.16 0.0% $39.15 Post Oak Park $26.51 4.4% $26.00 6.4% $27.67 $39.04 -6.6% $36.72 -0.7% $36.47 Richmond/Fountainview $19.80 -4.7% $19.30 -2.2% $18.87 - - - - - Riverway $25.36 1.8% $25.63 0.7% $25.81 $33.25 0.0% $33.15 0.3% $33.25 San Felipe/Voss $25.10 3.3% $26.03 -0.4% $25.92 $36.54 -0.6% $36.11 0.6% $36.31 West Loop $25.61 3.6% $26.12 1.5% $26.53 $37.61 -1.3% $37.15 0.0% $37.13 Westchase $18.48 6.4% $20.03 -1.8% $19.67 $36.93 -3.2% $35.88 -0.3% $35.76 TOTAL - Houston $21.92 1.5% $21.92 1.5% $22.25 $36.23 -0.6% $36.30 -0.8% $36.00

CONTACT METHODOLOGY Stuart Showers Rachel Hornbeak Jenni Woodruff The information in this report is the result of a compilation of information on office, industrial, retail, multifamily and healthcare properties located Director of Research Research Analyst Research Analyst in the Houston metropolitan area. This report includes single-tenant, 713.270.3380 713.272.1216 713.270.7700 multi-tenant and owner-user properties and excludes properties owned [email protected] [email protected] [email protected] and occupied by a government agency.

Transwestern is a privately held real estate firm of collaborative entrepreneurs who deliver a higher level of personalized service – the Transwestern Experience. Specializing in Agency Leasing, Tenant Advisory, Capital Markets, Asset Services and Research, our fully integrated global enterprise adds value for investors, owners and occupiers of all commercial property types. We leverage market insights and operational expertise from members of the Transwestern family of companies specializing in development, real estate investment management and research. Based in Houston, Transwestern has 35 U.S. offices and assists clients through more than 211 offices in 36 countries as part of a strategic alliance with BNP Paribas Real Estate. Experience Extraordinary at transwestern.com and @Transwestern.

Copyright ©2018 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 various 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. REAL ESTATE OUTLOOK HOUSTON OFFICE MARKET FIRST QUARTER 2018

Office Market Off to a Slow Start in 2018 Direct Vacancy and Sublease Supply Rise

OVERVIEW NET ABSORPTION AND VACANCY RATE TRENDS HOUSTON METRO AREA Sublease Space Spills Back Over 9.0 Million SF The Houston office sector is off to a slow start in 2018 as the market Net Absorption Direct Vacancy Total Availability 8000 25% continues to find its footing following the energy downturn and 7000 6000 recent construction cycle. Direct vacancy and availability rates both 5000 20% 4000 saw increases over the quarter. Vacancy rate increases were due to a 3000 combination of downsizing tenants, subleases expiring and tenants 2000 15% 1000 vacating direct space for sublease alternatives. Availability was pushed In Thousands 0 -1000 10% upwards by new sublease offerings on the market. After dropping to -2000 -3000 8.7 million SF, sublease space spilled back over 9.0 million SF in the -4000 5% first quarter as Technip put up 375,000 SF (Energy Corridor) and Hess 07 08 09 10 11 12 13 14 15 16 17 18*

Energy added 123,000 SF (CBD) as the year ended. Additional energy Note: Delivery of preleased space SOURCE CoStar, Transwestern *Through Q1 2018 related sublease offerings are anticipated to come online as the year counts as positive net absorption progresses. CONTIGUOUS BLOCKS OF AVAILABLE SPACE HOUSTON METRO The first quarter saw several large renewals, led by Apache's extension of 524,000 SF in Post Oak Central, further postponing any potential Class A Direct Class A Sublet Class B Direct Class B Sublet for their long-discussed build-to-suit project. Also of note, Williams 200 renewed for 353,944 SF in Williams Tower (Galleria/Uptown). Market fundamentals are likely to soften further through the first half of the 150 year as additional fallout continues to avail itself. However, an uptick 100 in the second half of the year is anticipated as sustained oil prices begin to translate into job growth. Furthermore, the long-term outlook 50 on Houston remains bright, underscored by the heightened level of 0 investor activity in the market. 25,000 SF 50,000 SF 100,000 SF 200,000 SF

SOURCE CoStar, Transwestern *At Q1 2018

Notable Q1 Leases

TENANT SF LEASE TYPE BUILDING SUBMARKET

Apache Corporation 524,342 Lease Extension 1990 & 2000 Post Oak Blvd Galleria/Uptown Williams 353,944 Renewal Williams Tower Galleria/Uptown Dashiell Corporation 79,308 Renewal/Expansion 12301 Kurland Dr Gulf Freeway/Pasadena Hunting Energy Services 62,137 Renewal 16825 Northchase Dr Greenspoint/N Belt West PFS Group 54,891 Renewal 2600 N Loop Fwy W North Loop West NextEra Energy 50,283 Renewal 601 Travis CBD HOUSTON METRO MARKET FIRST QUARTER 2018

NET ABSORPTION Absorption Stays in the Red Total Available Space The office market continues to experience fallout from the energy Houston Metro | Q1 2018 downturn with negative absorption of 946,738 SF for all classes of space over the first quarter. Class A absorption was negative 343,853 SUBLEASE % OF % OF TOTAL SF and Class B space recorded negative 549,406 SF. There were several SUBMARKET SPACE (SF) SUPPLY AVAILABLE large move outs that occurred during the first quarter that drove CBD 2,186,786 5.0% 18.0% Katy Fwy/Energy negative absorption. United Airlines vacated 200,000 SF (1801 Smith, 2,584,916 7.1% 27.7% CBD) followed by NRG at 145,000 SF (1000 Main, CBD), Baker Hughes Corridor Westchase 1,353,204 7.7% 26.4% at 128,000 SF (America Tower, Midtown) and Cameron at 128,000 SF (Westway One, West Belt). The first half of 2018 is likely to experience West Loop 885,406 2.6% 12.2% additional negative absorption as 1.0 million SF of sublease space is set N Houston District 687,027 6.8% 11.4% to expire over the balance of 2018. It is anticipated that absorption will All of Houston 9,059,105 3.8% 16.1% start to see a rebound in the second half of the year as higher energy trading prices begin to result in office using job growth.

DIRECT VACANCY & TOTAL AVAILABILITY Hess and Technip Push Availability Upwards

The overall office availability rate (all space marketed as available for AVERAGE OFFICE RENTS HOUSTON METRO AREA lease, both direct and sublet) increased 0.5% over the quarter, closing Q1 at 23.2%. After seeing a decrease in sublease space towards the Overall Class A Class B end of the year, sublease space jumped back over 9.0 million SF at $40 the close of the first quarter. This was driven by Technip listing 375,000 $35 SF of space on the sublease market in Energy Tower II (Katy Freeway West, Class A) and Hess putting an additional 123,000 SF online in 1501 $30 McKinney (CBD, Class A). Class A availability was 25.1%, up from 24.1% at the close of 2017 and Class B total availability was 21.7%, unchanged $25 quarter-over-quarter. $20 Overall direct vacancy saw a 0.5% increase over the quarter ending at 15.9%. Class A direct vacancy closed the quarter at 15.8%, up 0.5% over $15 07 08 09 10 11 12 13 14 15 16 17 18* the quarter. Class B direct vacancy increased by 0.6% over the same Note: All classes of office space SOURCE CoStar, Transwestern *Through Q1 2018 period, ending the first quarter at 16.9%. With 1.0 million SF of sublease space set to expire by the end of 2018, direct vacancy will continue to increase over the course of the year.

RENTAL RATES Rents Increase Over Q1 Overall asking rates for the Houston metro area increased slightly over Office Under Construction the quarter to $30.99 PSF full service as compared to $30.66 PSF full Houston Metro | Q1 2018 service at the end of 2017. Rental rates for both classes of space saw an NUMBER % PRE- SUBMARKET SF increase in the first quarter. Class A rental rates increased 1.1% to $36.26 OF BLDGS LEASED PSF full service and Class B rates increased 0.3% to $21.81 PSF full CBD 1 778,344 32% service. Despite the recent increases in rental rates, the market remains Woodlands 3 704,800 97% in the tenants favor as generous concession packages continue to be Total 4 1,483,144 63% offered. The submarkets with the highest full service asking rents are the Central Business District (Class A - $44.64 PSF), Katy Fwy East (Class A, $40.77 PSF), and Greenway Plaza (Class A - $39.60 PSF). The most value friendly Class A submarkets include Northwest Far ($19.58 PSF), Southwest/Hillcroft ($19.89 PSF) and Southwest/Beltway 8 ($21.10 PSF).

2 REAL ESTATE OUTLOOK HOUSTON METRO Q1 2018 SUPPLY AND DEVELOPMENT COMPARATIVE OFFICE INVESTMENT SALES VOLUME SELECT METRO AREAS Build-to-Suit Projects Driving Activity

Construction activity continues to dwindle in the Houston Atlanta Dallas Denver Houston market following the close of the recent development cycle. $8

High availability and increasing vacancy have developers $7 hesitant to build without a significant prelease commitment. $6 At the close of the first quarter, the construction pipeline totaled 1.5 M SF as 63% preleased. Currently, there are four $5 developments under construction which include Capitol $4 Tower (CBD, 778,000 SF - 32% leased to Bank of America $3 Sales Volume in Billions and Quantum Energy), CityPlace 2 (The Woodlands, 326,000 $2 SF - 100% Leased to ABS) and HP's Build-to-Suit Campus $1 (The Woodlands, two-189,000 SF buildings). $0 Three deliveries occurred in the first quarter, the most notable 07 08 09 10 11 12 13 14 15 16 17 18* of these was the Kirby Collection, a 246,989 SF mixed-use SOURCE Real Capital Analytics, Transwestern ,*Through Q1 2018 property in Greenway Plaza delivered at 44% preleased. Tillman Fertitta’s, The Post Oak a 104,579 SF mixed-use property in Galleria/Uptown delivered at 68% preleased. Also AVERAGE OFFICE SALE PRICE HOUSTON METRO AREA of note, Grandway West IV a 72,045 SF building in Katy Far West delivered at 93% preleased. Despite the vast amount Average Sale Price Per SF of space on the market, potential exists for an additional 3-4 $250 buildings to break ground over the year as tenants remain enamored with new construction given the efficiencies, $200 amenities and ability to impact employee retention. $150 INVESTMENT MARKET

Investors Keep Eyes on Houston $100 Sales were robust for the quarter totaling $715.7 million, driven largely by the closing of several notable portfolio $50 sales. Brookhollow Central (3-building campus totaling 797,971 SF) was purchased by Hertz Investment Group for $0 07 08 09 10 11 12 13 14 15 16 17 18* approximately $70.5 million. Other notable transactions SOURCE Real Capital Analytics, Transwestern,*Through Q1 2018 include, Loop Central's acquisition by Griffin Partners (3-building portfolio totaling 575,000 SF, undisclosed price) and The Offices at Pin Oak Park's acquisition by Norvin Healthcare Properties (5-building portfolio totaling 504,721 SF, $110.0 million). These figures represent assets for which pricing information could be obtained.

Notable Q1 Transactions BUILDING SUBMARKET SF SALE PRICE SELLER BUYER

Brookhollow Central North Loop West 797,971 $70,500,000 Parmenter Realty Partners Hertz Investment Group (3-bldg Campus) Loop Central Bellaire 575,000 N/A TIER REIT Griffin Partners (3-bldg Campus) The Offices at Pin Oak Bellaire 504,721 $110,000,000 Griffin Partners Norvin Healthcare Properties Park (5-bldg Campus)

One Northwest Centre Northwest Far 151,835 N/A Boxer Property ManhattanLife

SOURCE Real Capital Analytics, Costar, Transwestern

REAL ESTATE OUTLOOK HOUSTON METRO Q1 2018 3 HOUSTON METRO MARKET FIRST QUARTER 2018

Investors are maintaining a watchful eye on the Houston OFFICE ABSORPTION AND EMPLOYMENT HOUSTON METRO AREA office market as the long-term outlook of the city is highly desirable. Of particular interest are well located urban infill Net Absorption (Thousands of SF) Payroll Job Growth (in Thousands) properties that can be renovated to compete alongside new 9000 120 construction. While distressed assets are always of interest 7700 100 to investors, this ownership cycle has been well capitalized 6400 80 5100 60 and able to weather the downturn. However, as sublease 3800 40 space converts to direct space pushing vacancy ever higher, 2500 20 fatigue could begin setting in. 1200 0 -100 -20 OUTLOOK -1400 -40 Despite Speed Bumps, Future Still Bright -2700 -60 The Houston office market has had its fair share of turbulence -4000 -80 over the past few years as it begins to recover from the 07 08 09 10 11 12 13 14 15 16 17 18* impacts of a hurricane and the downturn of the energy *12-month job growth through Feb 2018, net SOURCE Bureau of Labor Statistics, Transwestern market. The Houston economy has seen diversification absorption YTD through Q1 2018 outside of the energy sector resulting job growth, but it hasn't translated to office using employment. However, with energy prices sustaining in the low-mid $60s and the professional and business services sector picking up steam Multi-tenant market vs Transwestern comprehensive (9,700 jobs created in the first two months of 2018), the office market coverage sector could begin to experience a slow and measured recovery starting in the second half of 2018 and on into 2019. MULTI-TENANT ENTIRE MARKET

While office market fundamentals may weaken in the short Inventory 198.6 MSF 241.0 MSF term with over 1.0 million SF of sublease space set to expire, Total Availability 22.0% 23.2% the long term outlook for the Houston market remains Q1 2018 Net Absorption (813,083) SF (946,738) SF strong. This prognosis is underscored by the heightened investment activity in the market with major transactions such as Houston Center, Brookhollow Central and Greenway Plaza changing hands. Look for job growth to become more robust throughout the year with office using employment trending upwards in the second half. As it stands several employers are already in expansion mode such as Amazon, SABIC, Zenith Energy and KPMG. Look for this list to increase as more companies right their books on the backs of $60 oil.

4 REAL ESTATE OUTLOOK HOUSTON METRO Q1 2018 Houston Office Market Indicators - All Space

DIRECT DIRECT *TOTAL 12 MONTH TOTAL SF AVAILABLE UNDER NET ABSORPTION SUBMARKET INVENTORY VACANCY VACANCY AVAILABILITY ROLLING BLDGS IMMEDIATELY CONSTRUCTION Q1 2018 Q4 2017 Q1 2018 Q1 2018 ABSORPTION Conroe 13 923,053 44,407 5.0% 4.8% 12.3% 1,640 27,712

CBD 62 43,785,846 7,742,833 16.2% 17.7% 27.8% 778,344 (662,979) (1,024,139) Midtown 32 5,664,375 585,288 10.5% 10.3% 12.7% - 11,151 125,340 Downtown 94 49,450,221 8,328,121 15.5% 16.8% 26.1% 778,344 (651,828) (898,799) FM 1960/Champions 23 1,900,382 272,803 15.6% 14.4% 16.6% - 24,261 69,415 FM 1960/Hwy 249 37 5,148,719 549,446 10.3% 10.7% 14.0% - (19,800) (85,196) FM 1960/I-45 North 15 1,325,458 404,091 27.2% 30.5% 31.0% - (44,193) (62,311) FM 1960 75 8,374,559 1,226,340 14.2% 14.6% 17.3% - (39,732) (78,092) Greenway Plaza 48 11,142,797 1,574,839 12.9% 14.1% 18.3% - 110,734 (19,479) Gulf Freeway/Pasadena 33 2,642,527 413,671 15.4% 15.7% 18.5% - (6,801) (122,321) Katy Far West 27 3,022,554 360,718 11.8% 11.9% 12.4% - 158 217,177 Katy Freeway East 59 9,599,223 861,920 9.1% 9.0% 14.8% - 10,888 66,536 Katy Freeway West 141 26,641,167 4,569,920 16.4% 17.2% 29.7% - (198,020) (515,792) Katy Fwy / Energy Corridor 200 36,240,390 5,431,840 14.5% 15.0% 25.8% - (187,132) (449,256) Kingwood/Humble 10 1,134,389 31,926 3.2% 2.8% 2.8% - 4,808 10,020 NASA/Clear Lake 53 5,612,056 1,123,538 19.3% 20.0% 21.0% - (42,296) (67,265) North District / IAH 20 2,759,860 731,139 27.5% 26.5% 27.9% - 27,259 (150,184) North District / N Belt West 75 10,146,197 4,324,054 43.0% 42.6% 59.4% - 50,285 (558,250) North District / North Belt 95 12,906,057 5,055,193 39.7% 39.2% 52.6% - 77,544 (708,434) Northeast 11 1,370,813 67,997 4.9% 5.0% 8.7% - (1,282) 109,742 North Loop West 29 3,925,538 591,012 15.3% 15.1% 21.9% - 10,451 35,480 Northwest Far 30 3,339,715 800,248 23.6% 24.0% 24.7% - (12,039) (8,314) Northwest Near 9 803,866 37,759 4.7% 4.7% 5.0% - 224 3,789 Northwest 68 8,069,119 1,429,019 17.7% 17.7% 21.4% - (1,364) 30,955 South Main/Medical Center 46 10,108,558 346,733 3.3% 3.4% 4.7% - (13,563) 108,585 E Fort Bend Co/Sugar Land 45 6,097,508 437,082 6.7% 7.2% 14.3% - (28,766) (36,314) Southwest Beltway 8 41 5,513,131 972,533 15.9% 17.6% 23.1% - (96,616) (150,154) Southwest/Hillcroft 36 4,321,807 813,238 19.1% 18.8% 22.9% - 11,746 (124,606) Southwest Fwy / Sugar Land 122 15,932,446 2,222,853 13.2% 14.0% 19.7% - (113,636) (311,074) The Woodlands 97 16,687,906 1,396,112 8.6% 8.4% 10.0% 704,800 36,600 194,005 West Belt 37 5,398,069 900,642 14.4% 16.7% 33.2% - (121,036) (35,615) Bellaire 29 4,271,294 447,559 10.1% 10.5% 13.7% - (14,806) (79,692) Galleria/Uptown 58 16,758,663 2,164,941 13.3% 12.9% 19.8% - 165,837 (91,852) Post Oak Park 27 4,581,030 1,165,541 23.6% 25.4% 31.7% - (83,783) (248,024) Richmond/Fountainview 11 829,982 65,689 7.0% 7.9% 8.6% - (7,765) 42,318 Riverway 16 2,868,522 545,426 20.5% 19.0% 22.6% - 41,263 (179,375) San Felipe/Voss 33 5,059,884 1,010,703 19.2% 20.0% 23.3% - (48,206) (175,889) West Loop 174 34,369,375 5,399,859 15.6% 15.7% 21.1% - 52,540 (732,514) Westchase 89 17,589,501 3,057,017 17.1% 17.4% 29.2% - (52,092) (175,291) TOTAL - Houston 1,292 240,974,390 38,410,825 15.4% 15.9% 23.2% 1,483,144 (946,738) (2,899,944)

SOURCE CoStar, Transwestern NOTE Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government * Total Availability represents all space currently being marketed for lease (Direct, Sublet, Under Construction and delivering within 12 months) regardless of vacancy.

REAL ESTATE OUTLOOK HOUSTON METRO Q1 2018 5 HOUSTON METRO MARKET FIRST QUARTER 2018

Houston Office Market Indicators - Class A

CBD 37 34,126,465 4,870,808 12.9% 14.3% 26.0% 778,344 (462,086) (874,937) Midtown 8 2,486,094 359,141 15.0% 14.4% 17.3% - 14,978 24,902 Downtown 45 36,612,559 5,229,949 13.1% 14.3% 25.4% 778,344 (447,108) (850,035) FM 1960/Champions 1 150,000 0 0.0% 0.0% 0.0% - - - FM 1960/Hwy 249 17 3,729,412 346,914 8.8% 9.3% 10.3% - (19,017) (39,900) FM 1960/I-45 North 2 206,705 46,138 26.4% 22.3% 22.3% - 8,374 (17,013) FM 1960 20 4,086,117 393,052 9.4% 9.6% 10.5% - (10,643) (56,913) Greenway Plaza 20 7,417,120 1,111,539 14.0% 15.0% 20.6% - 179,850 74,568 Gulf Freeway/Pasadena ------Katy Far West 15 1,628,104 360,096 21.7% 22.1% 23.0% - (1,443) 198,543 Katy Freeway East 24 5,767,926 625,765 11.5% 10.8% 17.4% - 34,066 21,677 Katy Freeway West 72 18,759,363 2,839,092 15.1% 15.1% 30.7% - (2,530) (359,626) Katy Fwy / Energy Corridor 96 24,527,289 3,464,857 14.3% 14.1% 27.6% - 31,536 (337,949) Kingwood/Humble 2 144,312 7,466 6.5% 5.2% 5.2% - 1,927 1,927 NASA/Clear Lake 15 2,028,136 179,727 6.1% 8.9% 9.7% - (56,592) (65,227) North District / IAH 8 1,213,677 526,203 46.2% 43.4% 44.9% - 34,026 (137,988) North District / N Belt West 17 4,336,484 2,311,861 53.2% 53.3% 76.3% - (5,031) (317,723) North District / North Belt 25 5,550,161 2,838,064 51.7% 51.1% 69.5% - 28,995 (455,711) Northeast 3 640,700 21,702 2.6% 3.4% 3.4% - (4,945) (21,702) North Loop West 6 1,240,544 264,587 22.7% 21.3% 41.1% - 17,379 75,193 Northwest Far 4 797,237 330,922 41.0% 41.5% 44.4% - (4,089) (2,487) Northwest Near ------Northwest 10 2,037,781 595,509 29.9% 29.2% 42.4% - 13,290 72,706 South Main/Medical Center 15 4,558,989 196,931 4.4% 4.3% 6.5% - (2,094) 85,665 E Fort Bend Co/Sugar Land 20 3,773,331 281,820 7.0% 7.5% 15.0% - (19,465) (75,859) Southwest Beltway 8 3 566,699 104,545 18.5% 18.4% 18.5% - 274 (55,590) Southwest/Hillcroft 6 1,487,219 361,417 24.7% 24.3% 36.3% - 5,746 (110,376) Southwest Fwy / Sugar Land 29 5,827,249 747,782 12.6% 12.8% 20.8% - (13,445) (241,825) The Woodlands 45 11,977,463 983,510 8.7% 8.2% 9.6% 704,800 58,142 182,210 West Belt 23 4,095,444 712,795 14.4% 17.4% 35.1% - (123,652) (36,625) Bellaire 8 1,476,268 182,708 11.7% 12.4% 18.9% - (10,437) (17,124) Galleria/Uptown 35 13,416,434 1,833,145 14.0% 13.7% 21.0% - 144,760 (116,984) Post Oak Park 9 2,617,868 866,867 31.0% 33.1% 40.2% - (54,339) (109,199) Richmond/Fountainview ------Riverway 5 1,885,813 377,365 22.4% 20.0% 24.3% - 45,006 (175,876) San Felipe/Voss 3 1,720,793 466,363 26.1% 27.1% 27.9% - (27,859) (101,205) West Loop 60 21,117,176 3,726,448 17.7% 17.6% 24.1% - 97,131 (520,388) Westchase 33 9,961,734 1,878,210 17.9% 18.9% 32.1% - (94,802) (242,659) TOTAL - Houston 458 142,339,166 22,460,648 15.3% 15.8% 25.1% 1,483,144 (343,853) (2,217,178)

SOURCE CoStar, Transwestern Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government. * Total Availability represents all space currently being marketed for lease (Direct, Sublet, Under Construction and delivering within 12 months) regardless of vacancy.

6 REAL ESTATE OUTLOOK HOUSTON METRO Q1 2018

Houston Office Market Indicators - Class B

DIRECT DIRECT *TOTAL NET 12 MONTH TOTAL SF AVAILABLE UNDER SUBMARKET INVENTORY VACANCY VACANCY AVAILABILITY ABSORPTION ROLLING BLDGS IMMEDIATELY CONSTRUCTION Q4 2017 Q1 2018 Q1 2018 Q1 2018 ABSORPTION Conroe 10 691,631 31,396 4.8% 4.5% 14.5% - 1,640 31,475 CBD 23 9,439,327 2,848,868 28.1% 30.2% 34.9% - (200,893) (140,691) Midtown 20 2,955,580 171,730 5.6% 5.8% 7.9% - (5,723) 98,542 Downtown 43 12,394,907 3,020,598 22.7% 24.4% 28.5% - (206,616) (42,149) FM 1960/Champions 20 1,630,186 261,022 17.6% 16.0% 18.6% - 26,102 74,856 FM 1960/Hwy 249 18 1,315,795 194,108 15.1% 14.8% 24.4% - 3,941 (49,924) FM 1960/I-45 North 11 968,736 309,159 26.2% 31.9% 32.7% - (55,002) (50,569) FM 1960 49 3,914,717 764,289 18.9% 19.5% 24.0% - (24,959) (25,637) Greenway Plaza 26 3,585,380 414,933 9.6% 11.6% 12.9% - (68,150) (96,368) Gulf Freeway/Pasadena 27 2,179,493 326,023 14.9% 15.0% 18.4% - (846) (123,694) Katy Far West 11 1,275,188 622 0.2% 0.0% 0.0% - 1,601 18,634 Katy Freeway East 26 2,879,196 214,088 6.7% 7.4% 13.6% - (20,742) 44,940 Katy Freeway West 66 7,640,290 1,689,943 20.0% 22.1% 27.4% - (161,382) (122,058) Katy Fwy / Energy Corridor 92 10,519,486 1,904,031 16.4% 18.1% 23.6% - (182,124) (77,118) Kingwood/Humble 8 990,077 24,460 2.8% 2.5% 2.5% - 2,881 8,093 NASA/Clear Lake 37 3,530,902 943,811 27.1% 26.7% 27.8% - 14,296 (2,038) North District / IAH 11 1,493,858 204,936 13.3% 13.7% 15.0% - (6,767) (12,196) North District / N Belt West 46 4,792,893 1,777,572 37.9% 37.1% 51.6% - 48,001 (231,104) North District / North Belt 57 6,286,751 1,982,508 32.1% 31.5% 42.9% - 41,234 (243,300) Northeast 6 554,309 41,327 8.1% 7.5% 11.1% - 3,663 136,412 North Loop West 21 2,566,873 323,912 12.3% 12.6% 13.5% - (9,363) (52,640) Northwest Far 23 2,295,051 469,326 20.1% 20.4% 20.6% - (7,950) (5,827) Northwest Near 7 623,533 37,759 6.1% 6.1% 6.4% - 224 (16,107) Northwest 51 5,485,457 830,997 14.8% 15.1% 15.7% - (17,089) (74,574) South Main/Medical Center 19 4,020,231 111,644 2.6% 2.8% 3.6% - (8,861) 7,279 E Fort Bend Co/Sugar Land 24 2,250,177 155,262 6.5% 6.9% 13.7% - (9,301) 39,545 Southwest Beltway 8 33 4,588,548 829,896 16.0% 18.1% 24.6% - (97,831) (73,374) Southwest/Hillcroft 19 1,794,770 346,554 20.8% 19.3% 18.5% - 26,763 18,436 Southwest Fwy / Sugar Land 76 8,633,495 1,331,712 14.5% 15.4% 20.5% - (80,369) (15,393) The Woodlands 50 4,429,758 412,602 8.8% 9.3% 11.9% - (21,542) 11,795 West Belt 14 1,302,625 187,847 14.6% 14.4% 27.2% - 2,616 1,010 Bellaire 17 2,411,520 231,774 9.5% 9.6% 11.4% - (2,799) (68,757) Galleria/Uptown 22 3,266,437 331,796 10.8% 10.2% 15.2% - 21,077 25,132 Post Oak Park 16 1,803,120 298,674 14.9% 16.6% 22.1% - (29,444) (138,825) Richmond/Fountainview 7 570,270 61,715 9.3% 10.8% 11.8% - (8,647) 20,316 Riverway 9 870,153 168,061 18.8% 19.3% 22.0% - (4,543) (7,711) San Felipe/Voss 30 3,339,091 544,340 15.7% 16.3% 21.0% - (20,347) (74,684) West Loop 101 12,260,591 1,636,360 13.0% 13.3% 17.4% - (44,703) (244,529) Westchase 52 7,133,914 1,152,271 16.7% 16.2% 26.6% - 37,922 68,342 TOTAL - Houston 729 89,188,912 15,117,431 16.3% 16.9% 21.7% - (549,406) (661,760)

REAL ESTATE OUTLOOK HOUSTON METRO Q1 2018 7 Houston Office Market Indicators - Asking Rental Rates % CHANGE % CHANGE % CHANGE % CHANGE Q1 2017 Q4 2017 OVER Q1 2018 Q1 2017 Q4 2017 OVER Q1 2018 SUBMARKET Y-O-Y Y-O-Y CLASS B CLASS B QUARTER CLASS B CLASS A CLASS A QUARTER CLASS A CLASS B CLASS A CLASS B CLASS A Conroe $24.33 -9.1% $21.92 0.9% $22.11 $31.05 0.1% $31.09 0.0% $31.09 CBD $30.53 -3.4% $30.25 -2.5% $29.50 $44.20 1.0% $44.72 -0.2% $44.64 Midtown $33.25 -3.9% $32.26 -0.9% $31.95 $34.79 -0.1% $34.49 0.8% $34.76 Downtown $30.97 -3.8% $30.46 -2.2% $29.80 $43.32 1.7% $43.90 0.4% $44.07 FM 1960/Champions $13.77 8.4% $14.95 -0.2% $14.92 - - - - - FM 1960/Hwy 249 $20.24 -2.8% $19.74 -0.3% $19.68 $27.98 0.0% $27.77 0.7% $27.98 FM 1960/I-45 North $18.02 2.3% $18.36 0.4% $18.43 $23.69 5.2% $25.00 0.0% $25.00 FM 1960 $17.12 3.5% $17.66 0.3% $17.71 $27.34 0.9% $27.33 1.0% $27.59 Greenway Plaza $26.05 2.3% $26.76 -0.4% $26.65 $37.78 4.9% $37.42 5.8% $39.60 Gulf Freeway/Pasadena $21.91 3.4% $21.89 3.5% $22.66 - - - - - Katy Far West - - - - - $29.27 -1.5% $28.82 0.0% $28.83 Katy Freeway East $27.32 -3.8% $26.26 0.1% $26.29 $41.01 -0.6% $41.42 -1.6% $40.77 Katy Freeway West $23.79 -4.7% $23.11 -1.8% $22.69 $38.01 -3.9% $36.68 -0.3% $36.56 Katy Fwy / Energy Corridor $24.28 -5.1% $23.44 -1.7% $23.04 $38.45 -3.0% $37.51 -0.5% $37.33 Kingwood/Humble $23.41 2.5% $23.25 3.2% $23.99 $31.94 -0.4% $31.82 0.0% $31.82 NASA/Clear Lake $17.86 4.4% $18.41 1.2% $18.64 $24.43 0.0% $24.49 -0.2% $24.44 North District / IAH $16.59 -10.5% $15.51 -4.3% $14.84 $21.34 5.5% $22.51 0.3% $22.58 North District / N Belt West $17.42 -9.7% $15.54 1.3% $15.74 $26.43 -7.2% $24.72 -0.3% $24.65 North District / North Belt $17.34 -9.8% $15.53 0.7% $15.64 $25.36 -4.4% $24.33 -0.2% $24.29 Northeast $22.71 0.0% $22.71 0.0% $22.71 - - - - - North Loop West $23.16 -3.7% $21.94 1.6% $22.29 $26.48 0.2% $26.56 -0.1% $26.54 Northwest Far $15.90 -3.0% $15.19 1.6% $15.43 $18.89 3.5% $19.54 0.2% $19.58 Northwest Near $18.13 9.0% $19.72 0.2% $19.76 - - - - - Northwest $18.81 -2.4% $17.98 2.1% $18.36 $22.84 3.2% $23.83 -1.0% $23.59 South Main/Medical Center $23.06 7.2% $23.50 5.2% $24.71 $34.28 -0.9% $33.59 1.1% $33.97 E Fort Bend Co/Sugar Land $22.37 8.6% $23.41 3.8% $24.30 $31.81 0.8% $31.88 0.6% $32.08 Southwest Beltway 8 $18.33 0.6% $18.54 -0.5% $18.44 $21.14 -0.2% $20.93 0.8% $21.10 Southwest/Hillcroft $17.66 -6.4% $16.72 -1.1% $16.54 $19.57 1.6% $19.73 0.8% $19.89 Southwest Fwy / Sugar Land $18.82 -0.6% $18.60 0.6% $18.70 $23.90 1.5% $24.01 1.0% $24.25 The Woodlands $25.55 1.6% $25.90 0.2% $25.96 $35.23 0.2% $35.27 0.1% $35.31 West Belt $21.62 13.7% $24.58 0.0% $24.57 $32.29 3.0% $33.38 -0.2% $33.29 Bellaire $23.41 2.9% $24.12 -0.1% $24.10 $27.61 1.6% $27.81 0.9% $28.04 Galleria/Uptown $28.81 0.0% $28.66 0.5% $28.82 $39.33 -0.4% $39.59 -1.0% $39.19 Post Oak Park $27.37 -9.3% $24.99 -0.7% $24.82 $40.11 -9.8% $36.64 -0.3% $36.52 Richmond/Fountainview $19.25 0.3% $19.51 -1.1% $19.30 - - - - - Riverway $26.42 -3.0% $25.65 -0.1% $25.63 $33.10 0.4% $33.13 0.3% $33.25 San Felipe/Voss $24.96 4.2% $25.79 0.9% $26.02 $36.38 -0.7% $35.82 0.8% $36.11 West Loop $25.84 -0.1% $25.77 0.2% $25.82 $37.80 -1.8% $37.35 -0.6% $37.12 Westchase $18.45 9.6% $19.85 1.9% $20.23 $37.29 -3.2% $36.12 0.0% $36.12 TOTAL - Houston $22.03 -1.0% $21.74 0.3% $21.81 $36.05 0.6% $35.85 1.1% $36.26 CONTACT Stuart Showers Rachel Hornbeak Jennifer Woodruff Director of Research Research Analyst Research Analyst 713.270.3380 713.272.1216 713.270.7700 [email protected] [email protected] [email protected]

METHODOLOGY The information in this report is the result of a compilation of information on office, industrial, retail, multifamily and healthcare properties located in the Houston metropolitan area. This report includes single-tenant, multi-tenant and owner-user properties and excludes properties owned and occupied by a government agency.

Copyright © 2018 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 various 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. REAL ESTATE OUTLOOK HOUSTON OFFICE MARKET YEAR-END 2017

Office Market Signals Recovery The Rise of Co-Working in Houston

OVERVIEW NET ABSORPTION AND VACANCY RATE TRENDS HOUSTON METRO AREA Availability Continues to Decline as Co-Working Rises Net Absorption Direct Vacancy Total Availability The Houston office market ended 2017 on a strong note, as total 8000 25% availability declined for the second straight quarter, the investment 7000 6000 market remained hot, and WTI crude prices settled above $60 per 5000 20% 4000 barrel. Despite absorption remaining negative for the fourth quarter, 3000 citywide availability declined by 0.5%, ending the year at 22.8%. This 2000 15% 1000 change was largely attributable to the reduction in sublease supply 0 -1000 10% (-900k square feet) as tenants Motiva (Saudi Aramco), Stewart Title, -2000 Empyrean Benefits Solutions, and several others opted for sublease -3000 -4000 5% alternatives. At the end of the year, sublease space totaled 8.9 M SF 06 07 08 09 10 11 12 13 14 15 16 17 with 1.3 M SF set to expire over the next 12 months. Late year activity Note: Delivery of preleased space SOURCE CoStar, Transwestern *Through Q4 2017 also saw the rise of co-working space throughout the market. Several counts as positive net absorption providers such as WeWork, Spaces, The Cannon and The Work Lodge announced or opened locations, pushing co-working space totals CONTIGUOUS BLOCKS OF AVAILABLE SPACE HOUSTON METRO past 500k SF with both urban and suburban alternatives. The quick Class A Direct Class A Sublet Class B Direct Class B Sublet expansion of co-working space has both providers and landlords 200 taking notice. In December, Brookfield Properties and Onex made an indicative proposal on IGW, the holding company of Regus and Spaces, 150 as Brookfield Asset Management looks to gain a foothold in the co- working market. Additionally, Servcorp, announced that they will pivot 100 into a co-working strategy in order to capitalize on the trend. 50

NET ABSORPTION 0 Quarterly Absorption Flat After Down Year 25,000 SF 50,000 SF 100,000 SF 200,000 SF

Cumulative annual absorption totals of negative 3.9 million square feet SOURCE CoStar, Transwestern *Through Q4 2017 highlight the delayed impacts of the energy downturn. However, the Notable Q4 Leases

TENANT SF LEASE TYPE BUILDING SUBMARKET

Motiva (Saudi Aramco) 173,000 Sublease Two Allen Center CBD Stewart Title 156,151 Sublease 1360 Post Oak Galleria/Uptown Empyrean Benefits* 106,904 Sublease 3010 Briarpark Dr Westchase Talos Energy 98,000 Relocation/Expansion Three Allen Center CBD TransCanada 82,916 Expansion Bank of America Center CBD

* Empyrean leveraged sublease alternative with minimal remaining term to execute direct deal. HOUSTON METRO MARKET YEAR-END 2017

fourth quarter saw negative absorption of only 51,628 SF. This represents Total Available Space a marked improved over the recent quarter totals of -2.1M SF (1Q 2017), -1.1 M SF (2Q 2017), and -0.6 M SF (3Q 2017). Class A absorption for the Houston Metro | Q4 2017 fourth quarter totaled -86,067 SF, bringing the 2017 annual absorption for the property class to -3.1 M SF. Class B absorption for the fourth SUBLEASE % OF % TOTAL quarter was positive 82,959 SF with Class B annual absorption totaling SUBMARKET SPACE (SF) SUPPLY AVAILABLE negative 791,000 SF. CBD 2,067,450 4.7% 18.4%

DIRECT VACANCY & TOTAL AVAILABILITY Katy Fwy West 1,924,169 7.2% 26.3% Total Availability Declines, Vacancy Increases Westchase 1,445,315 8.2% 28.0% The overall office availability rate (all space marketed as available for West Loop 932,700 2.7% 12.8% lease, both direct and sublet) decreased 0.5% over the quarter, ending N Houston District 905,617 7.0% 14.2% the year at 22.8%. The fourth quarter saw several tenants (Stewart Title, Empyrean Benefits Solutions and Saudi Aramco) opt to leverage All of Houston 8,935,719 3.7% 16.2% sublease alternatives. In total, sublease supply decreased by 894,000 SF over the quarter. Class A availability finished the year at 24.0%, down by AVERAGE OFFICE RENTS HOUSTON METRO AREA 0.4% over the quarter. Class B availability decreased by 0.7% over the period, ending the year at 22.2%. Overall Class A Class B $40 While decreases in sublease space triggered declines in availability, vacancy continued to rise over the quarter. Overall direct vacancy $35 ended 2017 at 15.5%, increasing by 1.7% year-over-year. Class A direct vacancy ended the year at 15.2%, up 2.1% annually and 0.1% over the $30 quarter. Class B direct vacancy increased by 1.1% year-over-year, ending $25 2017 at 16.7%. With 1.3 million SF of sublease space set to expire over the next 12 months, direct vacancy is anticipated to continue increasing $20 through the first half of 2018. This is especially pronounced in the North Houston District where 868,845 SF is set to expire by end of year 2018. $15 06 07 08 09 10 11 12 13 14 15 16 17 RENTAL RATES Note: All classes of office space SOURCE CoStar, Transwestern *Through Q4 2017 Asking Rates Level Off Overall asking rates for the Houston metro area decreased marginally over the quarter, finishing 2017 at $30.59 PSF full service. Class A rates declined by 1.9% over the year, closing at $35.83 PSF full service, while Office Under Construction Class B asking rates declined by 4.0%, ending at $21.78 PSF full service. Houston Metro | Q4 2017 Though there are signs of improvement, the market remains firmly in NUMBER % PRE- SUBMARKET SF the tenants favor with credit grade tenants able to attain generous OF BLDGS LEASED concession packages. The submarkets with the highest gross asking CBD 1 778,344 32% rents are the Central Business District (Class A - $45.17 PSF), the Katy Woodlands 3 704,800 97% Fwy East (Class A, $42.41 PSF), and Galleria/Uptown (Class A - $39.26 South 2 300,000 7% PSF). West Loop 1 104,579 70% SUPPLY AND DEVELOPMENT Kingwood 1 100,000 0% Construction Pipeline After the delivery of 33.0M SF over the past seven years, construction FM 1960 1 73,000 100% activity has slowed greatly. Considering the number of large blocks Katy 1 72,045 51% and total space available for lease, developers are wary of additional Total 7 2,032,768 67% speculative construction. Still, as tenants strive to retain talent and attain efficiency both in their space footprint as well as their operating expenses, the potential for additional construction tethered to a lead tenant or build-to-suit remains in play. At year end, the Houston area

2 REAL ESTATE OUTLOOK HOUSTON METRO Q4 2017 construction pipeline totaled 2.1 M SF with 33.0% available for COMPARATIVE OFFICE INVESTMENT SALES VOLUME SELECT METRO AREAS lease. Houston's largest office developments currently under construction are Capitol Tower (CBD, 778,000 SF - 27% leased Atlanta Dallas Denver Houston to Bank of America), CityPlace 2 (The Woodlands, 326,000 $8 SF - 100% Leased to ABS) and HP's Build-to-Suit Campus $7 (The Woodlands, two-189,000 SF buildings). Notable fourth $6 quarter deliveries include The Kirby Collection, a mixed-use $5 project with a significant office component (Greenway Plaza, $4 188,547 SF, 21% leased) and Members Choice Credit Union $3 (Katy Fwy West, 86,265 SF, 62% leased). Sales Volume in Billions $2

INVESTMENT MARKET $1

Investments Rebound Sharply Over 2017 $0 Houston investment activity rebounded sharply in 2017, as 06 07 08 09 10 11 12 13 14 15 16 17* annual sales totaled $3.8 billion, marking the highest total SOURCE Real Capital Analytics, Transwestern ,*Through Q4 2017 since registering $4.6 billion in 2013. Regardless of elevated vacancy figures, the strength in the underlying fundamentals of the market have investors buying into Houston's future. Of particular interest to investors are well located urban infill AVERAGE OFFICE SALE PRICE HOUSTON METRO AREA properties with upside available through renovation and Average Sale Price Per SF lobby/service activation. Notable properties that traded over $250 the course of 2017 include Greenway Plaza (4.9 M SF, $210 PSF), Houston Center (4.2 M SF, $218 PSF) and Greenspoint $200 Place (2.0 M SF, undisclosed). $150 Sales for the quarter totaled $1.3 billion, bolstered by the closing of Houston Center, as Brookfield Properties officially $100 acquired the 4.2 M SF Class A property portfolio for $875 million. The fourth quarter saw another iconic property trade $50 hands, as M-M Properties and Baupost Group were reported as having acquired Marathon Oil Tower, a 41-story 1.2 M $0 SF Class A office building for $175.0 M from CBRE Global 06 07 08 09 10 11 12 13 14 15 16 17 SOURCE Real Capital Analytics, Transwestern,*Through Q4 2017 Investors. These figures represent assets for which pricing information could be obtained.

Notable Q4 Transactions BUILDING SUBMARKET SF SALE PRICE SELLER BUYER

Marathon Oil Tower Galleria/Uptown 1,197,300 $175.0 million CBRE Global Investors M-M Properties/Baupost Group

Westchase Park Plaza Westchase 232,108 $24.0 million Parmenter Realty Partners Hertz Group

Nitya Tower Greenway Plaza 207,562 Undisclosed TA Realty Nitya (FKA Norfolk Tower)

5757 Woodway San Felipe/Voss 162,888 Undisclosed Fuller Realty Braun Enterprises/ Harbert Mgmt

SOURCE Real Capital Analytics, HFF, Transwestern

REAL ESTATE OUTLOOK HOUSTON METRO Q4 2017 3 HOUSTON METRO MARKET YEAR-END 2017

OUTLOOK OFFICE ABSORPTION AND EMPLOYMENT HOUSTON METRO AREA A Return To Normal or More of the Same in 2018?

After suffering through the worst of the effects of the energy Net Absorption (Thousands of SF) Payroll Job Growth (in Thousands) downturn, the Houston office market appears poised to 9000 120 begin a tangible recovery in 2018 as WTI prices have settled 7700 100 6400 over $60 per barrel, more favorable corporate tax rates are 80 5100 60 set to kick in and a strong national economy has consumer 3800 40 confidence near 20-yr highs. Diversification in industries 2500 20 such as healthcare, petrochemical, distribution and retail/ 1200 0 hospitality have helped offset many of the jobs lost through -100 -20 the energy downturn; however, there is little doubt that the -1400 -40 market needs a return to form for energy or the emergence -2700 -60 -4000 -80 to help alleviate the vacant and available supply. As such, 06 07 08 09 10 11 12 13 14 15 16 17 the late year surge in crude prices is especially notable. Still, job growth in the sector will require prices to maintain in the *12-month job growth through Nov 2017, net SOURCE Bureau of Labor Statistics, Transwestern absorption YTD through Q4 2017 $60's for the balance of 2018. Considering current market conditions, overall market activity is projected to remain light over the first half of 2018 with the second quarter seeing direct vacancy crest. Tangible Multi-tenant market vs Transwestern improvement should begin in the second half of 2018, as job comprehensive market coverage growth stimulates absorption. All core metrics are forecast to improve, with availability and vacancy deceasing, while MULTI-TENANT ENTIRE MARKET absorption returns to positive absorption. Additionally, the quick rise of co-working should continue to benefit landlords Inventory 200.4 MSF 241.8 MSF (in the short-run) as their demand for space increases co- Overall Vacancy 20.7% 17.0% working market totals significantly and helps to reduce 2017 Net Absorption (2,035,970) SF (3,990,948) SF direct available supply. With all signs pointing up, the only headwinds remaining for the Houston office market center around the energy sector and the highly unpredictable nature of crude prices.

4 REAL ESTATE OUTLOOK HOUSTON METRO Q4 2017 Houston Office Market Indicators - All Space

DIRECT VACANCY TOTAL TOTAL SF AVAILABLE UNDER NET ABSORPTION NET ABSORPTION SUBMARKET INVENTORY VACANCY W/ SUBLET AVAILABILITY BLDGS IMMEDIATELY CONSTRUCTION Q4 2017 YTD 2017 Q4 2017 Q4 2017 Q4 2017 Conroe 13 920,281 46,047 5.0% 5.5% 10.9% 3,851 53,302 Central Business District 62 43,786,269 7,045,527 16.1% 18.2% 25.6% 778,344 (32,095) (1,497,427) Midtown 32 5,664,375 596,439 10.5% 11.0% 15.2% - 43,141 95,984 Downtown 94 49,450,644 7,641,966 15.5% 17.3% 24.5% 778,344 11,046 (1,401,443) FM 1960 / Champions 23 1,900,382 311,155 16.4% 16.4% 19.3% - 24,690 26,029 FM 1960 / Highway 249 37 5,148,719 506,126 9.8% 10.1% 14.8% - (22,272) (31,811) FM 1960 / I-45 North 15 1,325,458 359,898 27.2% 27.4% 33.8% - 2,096 (33,870) FM 1960 75 8,374,559 1,177,179 14.1% 14.3% 18.8% - 4,514 (39,652) Greenway Plaza 48 11,095,766 1,435,116 12.9% 13.4% 19.2% 188,547 (21,878) (132,883) Gulf Freeway/Pasadena 33 2,642,527 406,870 15.4% 15.4% 19.8% - 2,337 18,561

Katy Far West 27 3,022,554 355,537 11.8% 12.2% 16.3%- 72,045 72,527 210,342 Katy Freeway East 59 9,593,191 835,819 8.7% 9.5% 15.1% - 108,144 (28,725) Katy Freeway West 141 26,653,982 4,371,900 16.4% 18.9% 27.5% 86,255 68,590 (506,214) Katy Frwy / Energy Corridor 200 36,247,173 5,207,719 14.4% 16.4% 24.2% 86,255 176,734 (534,939) Kingwood / Humble* 11 1,234,389 36,734 3.0% 3.0% 11.1% - (6,544) (3,370) NASA / Clear Lake 53 5,612,060 1,081,246 19.3% 19.6% 22.4% - (75,664) (105,105) North District / IAH 20 2,759,860 758,398 27.5% 27.9% 29.7% - 8,687 (168,035) North District / North Belt W 75 10,164,618 4,374,339 43.0% 45.8% 54.5% - (191,752) (539,042) North District / North Belt 95 12,924,478 5,132,737 39.7% 41.9% 49.2% - (183,065) (707,077) Northeast 11 1,370,813 66,715 4.9% 4.9% 8.7% 115,601 134,053 111,024 North Loop West 29 3,925,538 635,231 16.2% 16.2% 25.6% - 8,644 (30,745) Northwest Near 10 1,041,250 37,983 3.6% 3.6% 3.9% - (9,024) (19,992) Northwest Far 30 3,339,250 788,209 23.6% 23.9% 26.2% - (48,433) 7,734 Northwest 69 8,306,038 1,461,423 17.6% 17.7% 23.1% - (48,813) (43,003) South Main / Medical Center 47 10,360,561 643,463 6.2% 6.3% 5.4% - (26,907) (20,467) E Fort Bend Co / Sugar Land 45 6,097,508 408,316 6.7% 7.9% 11.9% 187,200 49,518 20,664 Southwest Beltway 8 41 5,513,131 875,917 15.9% 16.0% 22.0% 60,000 (61,484) (75,884) Southwest / Hillcroft 36 4,321,807 781,234 18.1% 18.4% 21.8% - (97,368) (135,444) Southwest Fwy / Sugar Land 122 15,932,446 2,065,467 13.0% 13.5% 18.1% 247,200 (109,334) (190,664) The Woodlands 96 16,520,878 1,518,816 9.2% 9.6% 11.3% 515,800 90,461 45,806 West Belt 37 5,398,069 739,318 13.7% 19.5% 32.5% - 55,489 130,767 Bellaire 28 4,298,130 415,853 9.7% 10.0% 14.2% - 13,353 (40,033) Galleria / Uptown 58 16,760,379 2,226,099 13.3% 15.9% 20.0% 104,579 (32,718) (474,135) Post Oak Park 27 4,581,030 1,081,758 23.6% 26.0% 31.3% - (55,975) (345,980) Richmond / Fountainview 11 829,982 140,424 16.9% 16.9% 9.2% - 16,778 45,748 Riverway 16 2,868,522 586,689 20.5% 21.4% 23.6% - 8,196 (248,593) San Felipe / Voss 33 5,060,157 904,582 17.9% 18.3% 23.1% - 12,586 (79,132) West Loop 173 34,398,200 5,355,405 15.6% 17.3% 21.3% 104,579 (37,780) (1,142,125) Westchase 89 17,588,552 3,004,925 17.1% 20.4% 29.3% 187,011 (92,655) (240,022) TOTAL - Houston 1,293 241,399,988 37,376,683 15.5% 17.0% 22.8% 2,295,382 (51,628) (3,990,948)

SOURCE CoStar, Transwestern NOTE Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government

REAL ESTATE OUTLOOK HOUSTON METRO Q4 2017 5 HOUSTON METRO MARKET YEAR-END 2017

Houston Office Market Indicators - Class A

Central Business District 37 34,126,465 4,408,722 12.9% 15.3% 23.1% 778,344 (52,539) (1,204,462) Midtown 8 2,486,094 374,119 15.0% 15.9% 22.7% - 20,663 (2,642) Downtown 45 36,612,559 4,782,841 13.1% 15.4% 23.1% 778,344 (31,876) (1,207,104) FM 1960 / Champions 1 150,000 0 0.0% 0.0% 0.0% - FM 1960 / Highway 249 17 3,729,412 304,377 8.2% 8.3% 10.5% - (8,063) 4,642 FM 1960 / I-45 North 2 206,705 54,512 26.4% 26.4% 26.4% - (25,387) FM 1960 20 4,086,117 358,889 8.8% 8.9% 10.9% - (8,063) (20,745) Greenway Plaza 20 7,356,944 1,040,932 14.1% 14.7% 22.6% 188,547 (49,011) (71,427) Gulf Freeway/Pasadena - Katy Far West 15 1,628,104 353,314 21.7% 22.6% 29.7% 72,045 72,527 193,309 Katy Freeway East 24 5,761,894 622,842 10.8% 11.8% 17.7% - 34,175 (93,761) Katy Freeway West 72 18,772,178 2,836,562 15.1% 18.5% 27.5% 86,255 18,490 (272,395) Katy Frwy / Energy Corridor 96 24,534,072 3,459,404 14.1% 16.9% 25.2% 86,255 52,665 (366,156) Kingwood / Humble 2 144,312 9,393 6.5% 6.5% 6.5% - (1,927) NASA / Clear Lake 15 2,028,136 123,135 6.1% 6.9% 11.4% - (20,574) (37,640) North District / IAH 8 1,213,677 560,229 46.2% 46.2% 47.7% - 3,144 (162,606) North District / North Belt W 17 4,334,810 2,306,830 53.2% 58.8% 68.9% - (93,801) (241,865) North District / North Belt 25 5,548,487 2,867,059 51.7% 56.0% 64.2% - (90,657) (404,471) Northeast 3 640,700 16,757 2.6% 2.6% 2.6% - 15,708 (16,757) North Loop West 6 1,240,544 281,966 22.7% 22.7% 45.1% - 73,260 44,624 Northwest Near 1 237,384 0 0.0% 0.0% 0.0% - 0 Northwest Far 4 797,237 326,833 41.0% 41.5% 45.2% - (587) 8,922 Northwest 11 2,275,165 608,799 26.8% 26.9% 40.4% - 72,673 53,546 South Main / Medical Center 16 4,810,992 199,524 4.1% 4.3% 7.0% - (19,979) (35,724) E Fort Bend Co / Sugar Land 20 3,773,331 262,355 7.0% 7.9% 11.1% 94,200 15,402 (34,789) Southwest Beltway 8 3 566,699 104,819 18.5% 18.5% 18.5% - (21,864) (56,219) Southwest / Hillcroft 6 1,487,219 323,413 21.7% 22.5% 29.0% - (59,216) (94,964) Southwest Fwy / Sugar Land 29 5,827,249 690,587 11.9% 12.6% 16.4% 94,200 (65,678) (185,972) The Woodlands 44 11,788,463 1,127,756 9.6% 10.0% 11.2% 704,800 92,137 59,383 West Belt 23 4,095,444 589,143 14.4% 20.2% 31.5% - 54,361 84,360 Bellaire 8 1,470,637 172,271 11.7% 12.4% 19.8% - (4,637) 13,214 Galleria / Uptown 35 13,417,845 1,873,326 14.0% 17.1% 21.2% 104,579 (47,817) (481,631) Post Oak Park 9 2,617,868 812,528 31.0% 35.2% 40.1% - (2,057) (261,131) Richmond / Fountainview - Riverway 5 1,885,813 422,371 22.4% 23.8% 25.3% - (13,397) (246,622) San Felipe / Voss 3 1,720,793 380,589 22.1% 22.1% 28.6% - 16,710 8,580 West Loop 60 21,112,956 3,661,085 17.3% 20.0% 24.4% 104,579 (51,198) (967,590) Westchase 33 9,961,734 1,783,408 17.9% 23.5% 32.4% 187,011 (107,175) (225,435) TOTAL - Houston 459 142,580,266 21,685,037 15.2% 17.5% 24.0% 2,026,781 (86,067) (3,152,186)

SOURCE CoStar, Transwestern NOTE Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government

6 REAL ESTATE OUTLOOK HOUSTON METRO Q4 2017 Houston Office Market Indicators - Class B

DIRECT VACANCY TOTAL NET NET TOTAL SF AVAILABLE UNDER SUBMARKET INVENTORY VACANCY W/ SUBLET AVAILABILITY ABSORPTION ABSORPTION BLDGS IMMEDIATELY CONSTRUCTION Q4 2017 Q4 2017 Q4 2017 Q4 2017 YTD 2017 Conroe 10 688,859 33,036 4.8% 5.5% 11.8% - 3,851 57,065 Central Business District 23 9,439,750 2,613,648 27.7% 28.6% 35.2% - 20,444 (284,454) Midtown 20 2,955,580 166,007 5.6% 5.8% 8.2% - 22,478 104,939 Downtown 43 12,395,330 2,779,655 22.4% 23.1% 28.8% - 42,922 (179,515) FM 1960 / Champions 20 1,630,186 301,215 18.5% 18.5% 21.9% - 24,690 29,629 FM 1960 / Highway 249 18 1,315,795 198,049 15.1% 15.5% 27.1% - (17,001) (51,033) FM 1960 / I-45 North 11 968,736 254,157 26.2% 26.6% 35.4% - 2,096 (12,827) FM 1960 49 3,914,717 753,421 19.2% 19.5% 27.0% - 9,785 (34,231) Greenway Plaza 26 3,598,525 346,783 9.6% 9.9% 11.7% - 23,846 (63,217) Gulf Freeway/Pasadena 27 2,179,493 325,177 14.9% 14.9% 20.3% - (6,828) 10,711 Katy Far West 11 1,275,188 2,223 0.2% 0.2% 0.7% - 0 17,033 Katy Freeway East 26 2,879,196 193,346 6.7% 7.4% 14.1% - 90,941 56,998 Katy Freeway West 66 7,640,290 1,528,561 20.0% 20.2% 27.9% - 50,100 (233,819) Katy Frwy / Energy Corridor 92 10,519,486 1,721,907 16.4% 16.7% 24.1% - 141,041 (176,821) Kingwood / Humble 9 1,090,077 27,341 2.5% 2.5% 11.7% - (4,617) (3,370) NASA / Clear Lake 37 3,530,906 958,111 27.1% 27.2% 28.9% - (55,090) (67,465) North District / IAH 11 1,493,858 198,169 13.3% 14.0% 16.2% - 5,543 (5,429) North District / North Belt W 46 4,811,988 1,825,573 37.9% 38.6% 47.7% - (80,040) (272,404) North District / North Belt 57 6,305,846 2,023,742 32.1% 32.8% 40.2% - (74,497) (277,833) Northeast 6 554,309 44,990 8.1% 8.1% 11.7% 115,601 118,345 132,749 North Loop West 21 2,566,873 348,317 13.6% 13.6% 16.7% - (60,171) (71,180) Northwest Near 7 623,533 37,983 6.1% 6.1% 6.5% - (9,024) (19,992) Northwest Far 23 2,294,586 461,376 20.1% 20.3% 22.4% - (47,846) (1,188) Northwest 51 5,484,992 847,676 15.5% 15.6% 17.9% - (117,041) (92,360) South Main / Medical Center 19 4,020,231 408,389 10.2% 10.2% 4.5% - 1,212 26,705 E Fort Bend Co / Sugar Land 24 2,250,177 145,961 6.5% 8.2% 13.6% - (60,171) 55,453 Southwest Beltway 8 33 4,588,548 732,065 16.0% 16.1% 23.3% 60,000 (22,384) (4,072) Southwest / Hillcroft 19 1,794,770 373,317 20.8% 20.9% 22.0% (24,980) (16,356) Southwest Fwy / Sugar Land 76 8,633,495 1,251,343 14.5% 15.0% 20.5% 153,000 (13,248) 35,025 The Woodlands 50 4,451,730 391,060 8.8% 9.3% 12.5% - (1,676) (13,577) West Belt 14 1,302,625 150,175 11.5% 17.4% 35.7% - 1,128 46,407 Bellaire 16 2,443,987 212,075 8.7% 8.8% 11.8% - 10,766 (57,361) Galleria / Uptown 22 3,266,742 352,773 10.8% 11.1% 15.6% - 15,099 7,496 Post Oak Park 16 1,803,120 269,230 14.9% 14.9% 21.4% - (53,918) (84,849) Richmond / Fountainview 7 570,270 135,568 23.8% 23.8% 11.2% - 11,990 26,598 Riverway 9 870,153 163,518 18.8% 19.1% 23.1% - 19,493 (12,232) San Felipe / Voss 30 3,339,364 523,993 15.7% 16.3% 20.2% - (4,124) (87,712) West Loop 100 12,293,636 1,657,157 13.5% 13.8% 17.3% - (694) (208,060) Westchase 52 7,132,965 1,190,193 16.7% 17.1% 26.6% - 14,520 (779) TOTAL - Houston 729 89,372,410 14,912,379 16.7% 17.1% 22.2% 268,601 82,959 (791,533)

SOURCE CoStar, Transwestern NOTE Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government

REAL ESTATE OUTLOOK HOUSTON METRO Q4 2017 7 Houston Office Market Indicators - Asking Rental Rates % CHANGE % CHANGE % CHANGE % CHANGE Q4 2016 Q4 2016 Q3 2017 Q3 2017 OVER OVER Q4 2017 Q4 2017 SUBMARKET Y-O-Y Y-O-Y CLASS A CLASS B CLASS A CLASS B QUARTER QUARTER CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B Conroe $31.05 $23.53 0.1% -6.8% $31.05 $22.92 0.1% -4.4% $31.09 $21.92 Central Business District $45.00 $31.10 0.4% -3.3% $45.16 $29.58 0.0% 1.7% $45.17 $30.08 Midtown $34.31 $33.44 0.4% -1.9% $34.49 $33.65 -0.1% -2.5% $34.44 $32.81 Downtown $44.27 $31.58 0.2% -3.6% $44.29 $30.18 0.1% 0.8% $44.35 $30.43 FM 1960 / Champions - $13.77 - 4.8% - $14.04 - 2.8% - $14.43 FM 1960 / Highway 249 $27.84 $21.74 -0.2% -11.9% $27.94 $19.48 -0.6% -1.7% $27.78 $19.15 FM 1960 / I-45 North $23.69 $17.33 5.5% 5.9% $25.00 $18.07 0.0% 1.6% $25.00 $18.36 FM 1960 $27.09 $17.39 1.0% -1.0% $27.44 $17.01 -0.3% 1.3% $27.35 $17.22 Greenway Plaza $37.89 $26.22 -1.9% 3.3% $38.12 $26.92 -2.4% 0.6% $37.19 $27.08 Gulf Freeway/Pasadena - $21.50 - 1.8% - $21.82 - 0.3% - $21.89 Katy Far West - - - - $28.73 - 0.3% - $28.82 - Katy Freeway East $41.92 $27.20 1.2% -2.2% $42.80 $28.10 -0.9% -5.3% $42.41 $26.61 Katy Freeway West $39.24 $23.22 -6.5% -0.5% $36.72 $23.25 -0.1% -0.7% $36.68 $23.10 Katy Frwy / Energy Corridor $39.49 $23.85 -4.7% -1.6% $37.83 $23.93 -0.5% -1.9% $37.64 $23.46 Kingwood / Humble $31.73 $20.61 0.3% 12.8% $31.94 $20.36 -0.4% 14.2% $31.82 $23.25 NASA / Clear Lake $24.80 $19.58 -1.2% -6.3% $24.50 $18.24 0.0% 0.6% $24.49 $18.36 North District / IAH $22.28 $16.57 3.8% -6.4% $23.09 $15.27 0.2% 1.5% $23.13 $15.51 North District / North Belt W $25.22 $16.81 -1.5% -1.5% $25.37 $16.41 -2.1% 0.9% $24.85 $16.55 North District / North Belt $24.67 $16.79 -0.6% -2.0% $24.93 $16.29 -1.6% 0.9% $24.53 $16.45 Northeast - $22.71 - 0.0% - $22.71 - 0.0% - $22.71 North Loop West $26.17 $22.77 1.5% -3.6% $26.84 $21.84 -1.1% 0.4% $26.56 $21.94 Northwest Near $19.26 $15.69 1.5% -3.1% $19.48 $15.25 0.3% -0.4% $19.54 $15.19 Northwest Far - $18.38 - 7.3% - $19.71 - 0.1% - $19.72 Northwest $22.83 $18.71 4.4% -3.9% $23.34 $17.83 2.1% 0.8% $23.83 $17.98 South Main / Medical Center $32.34 $26.99 3.9% -12.9% $34.27 $27.87 -2.0% -15.7% $33.59 $23.50 E Fort Bend Co / Sugar Land $30.70 $22.73 2.3% 3.0% $31.52 $22.40 -0.4% 4.5% $31.41 $23.41 Southwest Beltway 8 $23.83 $15.92 -12.2% 16.5% $21.15 $18.92 -1.0% -2.0% $20.93 $18.54 Southwest / Hillcroft $19.50 - 1.3% - $19.58 $17.26 0.9% -3.1% $19.76 $16.72 Southwest Fwy / Sugar Land $27.30 $20.73 -11.7% -10.3% $24.07 $19.02 0.1% -2.2% $24.10 $18.60 The Woodlands $36.55 $23.65 -10.8% 9.5% $32.33 $25.18 0.9% 2.9% $32.62 $25.90 West Belt $27.12 $16.64 19.5% 47.7% $32.58 $21.86 -0.5% 12.4% $32.42 $24.58 Bellaire $27.68 $23.52 0.5% 2.5% $27.67 $23.56 0.5% 2.3% $27.81 $24.12 Galleria / Uptown $38.16 $29.16 2.9% -1.7% $39.14 $28.35 0.3% 1.1% $39.26 $28.66 Post Oak Park $39.70 $28.43 -7.3% -7.8% $38.75 $26.33 -5.0% -0.5% $36.79 $26.20 Richmond / Fountainview - $17.76 - 9.8% - $19.70 - -0.9% - $19.51 Riverway $34.74 $26.61 -4.6% -3.6% $33.10 $25.30 0.1% 1.3% $33.13 $25.65 San Felipe / Voss $35.90 $25.70 -0.2% 0.3% $36.50 $25.22 -1.8% 2.3% $35.82 $25.79 West Loop $37.13 $25.92 0.0% 0.3% $37.61 $25.56 -1.3% 1.7% $37.12 $26.00 Westchase $36.45 $20.01 -0.9% -0.7% $36.79 $19.26 -1.8% 3.2% $36.12 $19.87 TOTAL - Houston $36.66 $22.68 -1.9% -4.0% $36.30 $21.85 -1.0% -0.3% $35.94 $21.78 CONTACT Stuart Showers Rachel Hornbeak Jennifer Woodruff Director of Research Research Analyst Research Analyst 713.270.3380 713.272.1216 713.270.7700 [email protected] [email protected] [email protected]

Copyright © 2017 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 various 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. REAL ESTATE OUTLOOK HOUSTON OFFICE MARKET THIRD QUARTER 2017

Hurricane Harvey Takes a Toll on Houston Sublease space decreases by 930K SF

OVERVIEW NET ABSORPTION AND VACANCY RATE TRENDS Harvey Delays Office Recovery Slightly HOUSTON METRO AREA While the office market has been under storm clouds for several Net Absorption Net Absorption Vacancy Rate 8000 quarters, the third quarter saw Hurricane Harvey eclipse the sun and 7000 pour over five feet of water on the Houston Metro area. Initial reports 6000

SF In Thousands 5000 on the storm's capital impacts were significantly exaggerated as 4000 3000 they were tethered to estimates based upon flood maps. However, a 2000 detailed review indicated that the storm damaged just under 70 office 1000 0 buildings with a net rentable area impact of 2.0 million square feet, or -1000 -2000 0.8% of total supply, significantly less than initially anticipated. A lack -3000 -4000 of strong winds spared most office buildings from significant harm, 06 07 08 09 10 11 12 13 14 15 16 17* leaving property damages mostly to parking garages, first and sub- Note: Delivery of preleased space SOURCE CoStar, Transwestern *Through Q3 2017 floors as well as minor roof leaks. Of the properties damaged, over 75% counts as positive net absorption were fully operational within two weeks of the event. The most tangible impact that Harvey had upon the Houston office market was essentially CONTIGUOUS BLOCKS OF AVAILABLE SPACE HOUSTON METRO delaying the sectors recovery for an additional quarter. Class A Direct Class A Sublet Class B Direct Class B Sublet 200

NET ABSORPTION 150 2017 Year-to-Date Absorption Totals Negative 3.9M SF Year-to-date absorption totals of negative 3.9 million square feet 100 continue to highlight the delayed impacts of the energy downturn as well as the trend of companies striving for efficiency and reducing 50 their space footprint. Absorption for the quarter totaled negative 0 732,000 square feet and was equally distributed among classes. Class 25,000 SF 50,000 SF 100,000 SF 200,000 SF

A properties totaled negative 360,000 square feet with the West Loop SOURCE CoStar, Transwestern *Through Q3 2017

Notable Q3 Leases

TENANT SF LEASE TYPE BUILDING SUBMARKET

NRG Energy 431,307 Sublease One Shell Plaza CBD McDermott 186,000 Sublease Westway Plaza II West Belt USCIS 100,020 Renewal Northpoint Plaza North District EDF Trading 60,000 New Lease 601 Travis CBD HOUSTON METRO MARKET THIRD QUARTER 2017

and Central Business District primarily accounting for the negative absorption. Class B finished the third quarter with negative 398,000 Total Available Space square feet of absorption, due to space give backs in the Houston Houston Metro | Q3 2017 North District and the West Loop submarkets. SUBMARKET SUBLEASE % OF % TOTAL DIRECT VACANCY & TOTAL AVAILABILITY SUBMARKET SPACE (SF) SUPPLY AVAILABLE

Total Availability Declines While Vacancy Rises Energy Corridor 2,386,277 6.6% 25.3% The overall office availability rate (all space marketed as available for lease, both direct and sublet) decreased 0.3% over the quarter, ending CBD 2,178,987 5.0% 25.8% at 23.3%. Class A properties drove the decrease, declining by 0.5% to Westchase 1,543,705 8.8% 29.0% finish the period at 24.4%. While Class B properties ticked up marginally, Galleria 842,634 5.0% 21.3% finishing at 23.0%. North District 877,698 6.8% 48.8% Direct vacancy rose for the twelfth consecutive quarter, up 0.3% and All of Houston 9,829,433 4.1% 23.3% closing at 15.4% overall. Class A properties saw vacancy increase by 0.2%, ending at 15.1%, while Class B properties were up 0.4% to 16.7%. Currently, over 1.5 million SF of sublease space is set to expire over the AVERAGE OFFICE RENTS HOUSTON METRO AREA next 12 months, equating to roughly 20% of total sublease supply. This is especially pronounced in the North Houston District where 868,845 Overall Class A Class B $40 SF is set to expire by end of year 2018. As more sublease space expires city-wide, vacancy rates will continue to trend up. $35

RENTAL RATES $30 Asking Rates Continue to Ascend Overall asking rates for the Houston Metro area increased by 1.5% over $25 the quarter and 2.0% over the year, finishing the period at $30.92 PSF full service. Despite the increase in asking rates, concessions remain $20 elevated throughout the market with generous concession packages $15 and tenant improvement allowances being offered in order to maintain 06 07 08 09 10 11 12 13 14 15 16 17* the highest rent figures. Note: All classes of office space SOURCE CoStar, Transwestern *Through Q3 2017 Class A rates closed the quarter up 0.6% (+$0.20), ending at $35.83 PSF full service, while Class B asking rates declined by 1.2%, ending at $21.97 PSF full service. The submarkets with the highest asking rents are the Katy Fwy East ($45.00 PSF), the Central Business District ($44.35 Office Under Construction PSF) and Galleria/Uptown ($38.83 PSF). Houston Metro | Q3 2017 NUMBER % PRE- SUBMARKET SF SUPPLY AND DEVELOPMENT OF BLDGS LEASED Development Pipeline Remains in Check CBD 1 778,344 27.0% Houston area construction activity has slowed greatly due to both the Woodlands 2 515,800 100.0% delivery of over 33.0M SF in the past seven years and the downturn E Fort Bend Co/Sugar 3 247,200 30.1% in the energy sector. Given the ample amount of space currently on Land the market for lease, developers are wary of additional speculative Greenway Plaza 1 188,547 0.0% construction. Still, as tenants strive to retain talent and attain efficiency Westchase 1 187,011 80.9% both in their space footprint as well as their operating expenses, Northeast 1 115,601 100.0% the potential for additional construction tethered to a lead tenant West Loop 1 104,579 46.8% remains high. Specifically, in core office submarkets such as the CBD, the Woodlands and West Loop. At the close of the third quarter, the Energy Corridor 1 86,255 61.5% Houston construction pipeline totaled 2.3 million square feet and is Katy 1 72,045 50.8% currently 52.5% preleased. Total 12 2,295,382 52.5%

2 REAL ESTATE OUTLOOK HOUSTON METRO Q3 2017 The largest projects currently under construction are Capitol COMPARATIVE OFFICE INVESTMENT SALES VOLUME SELECT METRO AREAS Tower (CBD, 778,000 SF - 27% leased to Bank of America),

CityPlace 3 (The Woodlands, 328,000 SF - 100% Leased to Atlanta Dallas Denver Houston HP), CityPlace 2 (The Woodlands, 326,000 SF - 100% Leased $8 to ABS) and The Kirby Collection, a mixed-use project with $7 a significant office component (Greenway Plaza, 212,000 SF, $6

0% preleased). $5

INVESTMENT MARKET $4 Houston Investment Market is Red-Hot $3 Sales Volume in Billions Harvey had little impact on Houston's investment market $2 as a flurry of activity took place throughout the quarter. $1 The underlying fundamentals of the market are strong and $0 stabilization in the energy sector should begin to avail itself 06 07 08 09 10 11 12 13 14 15 16 17* over the next 9-12 months, keeping sentiment positive SOURCE Real Capital Analytics, Transwestern ,*Through Q3 2017 amongst the investor community. Sales for the quarter (including the under contract Houston Center), totaled $1.4 billion and were comprised of 15 transactions. AVERAGE OFFICE SALE PRICE HOUSTON METRO AREA The most significant transaction of the third quarter was Brookfield Properties acquisition of Houston Center Average Sale Price Per SF from JPMorgan Asset Management. The four building $250 portfolio located in Houston's Central Business District totals over 4.0 million square feet and is under contract for $200 approximately $875 million. Additionally, Bank of America corporation acquired Energy Center IV from Trammell Crow $150 Company for $275 million or $461.00 PSF (6.0% cap rate). $100 The 597,000 square foot Class A facility is located in the Katy Fwy West submarket and is under long-term lease to $50 ConocoPhillips.

The market remains full of potential with a plethora of $0 06 07 08 09 10 11 12 13 14 15 16 17* well located infill properties representing value add SOURCE Real Capital Analytics, Transwestern,*Through Q3 2017 opportunities to investors. As such, investment activity should remain strong through the balance of 2017. These figures represent assets for which pricing information could be obtained.

Notable Q3 Transactions BUILDING SUBMARKET SF SALE PRICE SELLER BUYER

$875.0 million Houston Center CBD 4,200,000 JPMorgan Asset Management Brookfield Asset Management (under contract) Lincoln Property Co & H.I.G. Realty Greenspoint Plaza North District 2,080,000 N/A Northwestern Mutual Partners joint venture

Energy Center IV Katy Freeway West 597,000 $275.0 million Trammell Crow Company Bank of America Corporation

1700 W Loop S Galleria/Uptown 272,941 $52.0 million Bridge Investment Group Lingerfelt Commonwealth Partners

SOURCE Real Capital Analytics, HFF, Transwestern

REAL ESTATE OUTLOOK HOUSTON METRO Q3 2017 3 HOUSTON METRO MARKET THIRD QUARTER 2017

OUTLOOK OFFICE ABSORPTION AND EMPLOYMENT HOUSTON METRO AREA Light at the End of the Tunnel?

The Houston office market has been in limbo for several Net Absorption (Thousands of SF) Payroll Job Growth (in Thousands) quarters as office using job growth has been all but non- 9000 120 existent following the energy sector downturn. Large swaths 7700 100 of expiring sublease space compete head-to-head with 6400 80 5100 direct vacant blocks and recent activity has been a shuffling 60 3800 40 of tenants as opposed to expansionary. While diversification 2500 20 in industries such as healthcare, petrochemical, distribution 1200 0 and retail/hospitality have helped offset many of the jobs -100 -20 lost in the energy sector, there is little doubt that the market -1400 -40 needs a return to form for crude prices or the emergence -2700 -60 -4000 -80 of an alternative industry to help alleviate the vacant and 06 07 08 09 10 11 12 13 14 15 16 17* available supply. As such, eyes will continue to focus upon Houston's strategy to support Tech growth, North American *12-month job growth through May 2017, net SOURCE Bureau of Labor Statistics, Transwestern absorption YTD through Q2 2017 crude inventories, OPEC’s willingness to maintain production cuts, and the resulting impacts to the spot price of WTI. Overall market activity is projected to remain flat through the remainder of the year as leasing activity continues Multi-tenant market vs Transwestern to fall below historical averages. Tenants with near term comprehensive market coverage expirations are in a favorable market to extend early and lock in favorable terms. The energy sector will continue to MULTI-TENANT ENTIRE MARKET see Mergers and acquisitions at a rapid pace leaving the potential for additional blocks of space to be brought on- Inventory 199.2 MSF 241.8 MSF line due to redundancies. Overall Vacancy 21.0% 17.1% Q3 Net Absorption (291,372) SF (3,993,708) SF

4 REAL ESTATE OUTLOOK HOUSTON METRO Q3 2017 Houston Office Market Indicators - All Space

DIRECT VACANCY TOTAL TOTAL SF AVAILABLE UNDER NET ABSORPTION NET ABSORPTION SUBMARKET INVENTORY VACANCY W/ SUBLET AVAILABILITY BLDGS IMMEDIATELY CONSTRUCTION Q3 2017 YTD 2017 Q3 2017 Q3 2017 Q3 2017 Conroe 13 920,281 49,898 5.4% 5.9% 9.8% 116 49,451

Central Business District 62 43,693,078 7,023,493 16.1% 17.9% 25.8% 778,344 (62,154) (1,473,646) Midtown 32 5,664,375 639,580 11.3% 11.8% 17.3% - (32,479) 52,843 Downtown 94 49,357,453 7,663,073 15.5% 17.2% 24.8% 778,344 (94,633) (1,420,803)

FM 1960 / Champions 23 1,900,382 335,845 17.7% 17.7% 21.5% - (26,340) 1,339 FM 1960 / Highway 249 37 5,148,719 483,854 9.4% 11.1% 15.9% - (9,937) (9,539) FM 1960 / I-45 North 15 1,325,458 361,994 27.3% 27.8% 34.2% - (48,238) (35,966) FM 1960 75 8,374,559 1,181,693 14.1% 15.2% 20.0% - (84,515) (44,166) Greenway Plaza 48 11,095,766 1,413,238 12.7% 13.2% 19.4% 188,547 4,920 (111,005) Gulf Freeway/Pasadena 33 2,642,527 294,851 11.2% 11.2% 17.4% - 2,042 16,224

Katy Far West 27 2,954,733 360,241 12.2% 12.7% 16.7%- 72,045 15,234 137,815 Katy Freeway East 60 9,674,691 935,320 9.7% 10.1% 16.4% - (81,816) (136,869) Katy Freeway West 141 26,654,315 4,484,804 16.8% 20.5% 28.5% 86,255 (95,822) (540,187) Katy Frwy / Energy Corridor 201 36,329,006 5,420,124 14.9% 17.7% 25.3% 86,255 (177,638) (677,056) Kingwood / Humble* 11 1,234,389 30,190 2.4% 2.4% 2.6% - 6,497 3,174 NASA / Clear Lake 53 5,613,374 1,006,896 17.9% 18.8% 22.6% - 25,788 (30,925) North District / IAH 20 2,759,860 767,085 27.8% 28.0% 30.6% - (16,346) (176,722) North District / North Belt W 75 10,184,568 4,290,148 42.1% 44.8% 53.7% - (155,687) (434,901) North District / North Belt 95 12,944,428 5,057,233 39.1% 41.2% 48.8% - (172,033) (611,623) Northeast 11 1,370,813 85,167 6.2% 6.2% 10.0% 115,601 (32,465) (23,029)

North Loop West 29 3,955,285 673,622 17.0% 17.1% 20.9% - 3,436 (39,389) Northwest Far 30 3,339,250 739,776 22.2% 22.3% 27.9% - 30,761 56,167 Northwest Near 12 1,290,803 28,959 2.2% 2.5% 3.4% - 1,153 (10,968) Northwest 71 8,585,338 1,442,357 16.8% 16.9% 21.0% - 35,350 5,810 South Main / Medical Center 47 10,338,924 616,556 6.0% 6.1% 7.9% - 19,648 6,440 E Fort Bend Co / Sugar Land 47 6,284,708 457,834 7.3% 8.9% 15.9% 187,200 (46,534) (28,854) Southwest Beltway 8 41 5,546,947 814,433 14.7% 14.8% 22.9% 60,000 16,526 (14,400) Southwest / Hillcroft 36 4,321,807 612,462 14.2% 14.9% 23.7% - 5,889 (29,672) Southwest Fwy / Sugar Land 124 16,153,462 1,884,729 11.7% 12.5% 20.4% 247,200 (24,119) (72,926) The Woodlands 96 16,485,335 1,609,344 9.8% 10.1% 12.4% 515,800 23,886 (44,655) West Belt 37 5,387,946 784,684 14.6% 19.3% 36.7% - 26,910 75,278 Bellaire 28 4,302,857 433,933 10.1% 10.3% 14.9% - (75,343) (53,386) Galleria / Uptown 58 16,833,939 2,266,941 13.5% 16.6% 21.3% 104,579 (128,316) (441,417) Post Oak Park 27 4,581,030 1,025,783 22.4% 23.8% 28.5% - (76,997) (290,005) Richmond / Fountainview 11 829,982 157,202 18.9% 18.9% 10.7% - 12,883 28,970 Riverway 16 2,868,522 594,885 20.7% 22.1% 24.4% - (20,378) (256,789) San Felipe / Voss 33 5,060,157 917,168 18.1% 18.0% 24.5% - (74,428) (91,718) West Loop 173 34,476,487 5,395,912 15.7% 17.5% 21.9% 104,579 (362,579) (1,104,345) Westchase 89 17,585,648 2,873,713 16.3% 20.5% 29.0% 187,011 55,368 (147,367) TOTAL - Houston 1,298 241,850,469 37,169,899 15.4% 17.1% 23.3% 2,295,382 (732,223) (3,993,708)

SOURCE CoStar, Transwestern NOTE Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government

REAL ESTATE OUTLOOK HOUSTON METRO Q3 2017 5 HOUSTON METRO MARKET THIRD QUARTER 2017

Houston Office Market Indicators - Class A

DIRECT VACANCY TOTAL NET NET TOTAL SF AVAILABLE UNDER SUBMARKET INVENTORY VACANCY W/ SUBLET AVAILABILITY ABSORPTION ABSORPTION BLDGS IMMEDIATELY CONSTRUCTION Q3 2017 Q3 2017 Q3 2017 Q3 2017 YTD 2017 Conroe 2 128,832 13,011 10.1% 10.1% 14.3% - (3,763) (3,763)

Central Business District 37 34,033,274 4,366,244 12.8% 14.9% 23.3% 778,344 (99,593) (1,160,237) Midtown 8 2,486,094 394,782 15.9% 16.8% 25.0% - (20,358) (23,305) Downtown 45 36,519,368 4,761,026 13.0% 15.1% 23.4% 778,344 (119,951) (1,183,542)

FM 1960 / Champions 1 150,000 0.0% 0.0% 0.0% - FM 1960 / Highway 249 17 3,729,412 296,314 7.9% 8.4% 10.5% - 19,013 12,705 FM 1960 / I-45 North 2 206,705 54,512 26.4% 26.4% 26.4% - (25,387) FM 1960 20 4,086,117 350,826 8.6% 9.0% 10.9% - 19,013 (12,682) Greenway Plaza 20 7,356,944 991,921 13.5% 13.9% 22.4% 188,547 25,460 (22,416) Gulf Freeway/Pasadena 0 ------Katy Far West 15 1,560,283 358,018 22.9% 23.8% 31.1% 72,045 15,234 120,782

Katy Freeway East 24 5,761,894 648,374 11.3% 11.6% 18.4% - (56,676) (127,936) Katy Freeway West 72 18,772,511 2,846,601 15.2% 20.1% 28.1% 86,255 (10,403) (290,885) Katy Frwy / Energy Corridor 96 24,534,405 3,494,975 14.2% 18.1% 25.8% 86,255 (67,079) (418,821) Kingwood / Humble 2 144,312 7,466 5.2% 5.2% 6.5% - 1,927 1,927 NASA / Clear Lake 15 2,028,136 102,561 5.1% 7.3% 13.6% - 12,699 (17,066) North District / IAH 8 1,213,677 563,373 46.4% 46.9% 48.6% - (12,657) (165,750) North District / North Belt W 17 4,334,810 2,213,029 51.1% 56.7% 66.5% - 14,091 (148,064) North District / North Belt 25 5,548,487 2,776,402 50.0% 54.5% 62.6% - 1,434 (313,814) Northeast 3 640,700 32,465 5.1% 5.1% 5.1% - (32,465) (32,465)

North Loop West 6 1,240,544 355,226 28.6% 28.8% 30.2% - 10,736 (28,636)

Northwest Near 4 797,237 326,246 40.9% 41.4% 42.7% - (10,157) 9,509 Northwest Far 1 237,384 - 0.0% 0.0% 0.0% - Northwest 11 2,275,165 681,472 30.0% 30.2% 31.4% - 579 (19,127) South Main / Medical Center 16 4,810,992 179,545 3.7% 3.9% 6.3% - 18,818 (15,745) E Fort Bend Co / Sugar Land 21 3,867,531 277,757 7.2% 9.4% 14.8% 94,200 (44,458) (50,191) Southwest Beltway 8 3 566,699 82,955 14.6% 14.6% 16.3% - (34,000) (34,355) Southwest / Hillcroft 6 1,487,219 225,793 15.2% 17.3% 35.2% - (1,392) 2,656 Southwest Fwy / Sugar Land 30 5,921,449 586,505 9.9% 11.9% 20.1% 94,200 (79,850) (81,890) The Woodlands 44 11,752,920 1,219,960 10.4% 10.8% 12.3% 704,800 (15,665) (32,754) West Belt 23 4,085,321 633,381 15.5% 19.9% 34.8% - 26,910 29,999 Bellaire 8 1,470,637 167,634 11.4% 11.9% 21.3% - (1,882) 17,851 Galleria / Uptown 35 13,491,405 1,899,069 14.1% 18.0% 22.8% 104,579 (106,168) (433,814) Post Oak Park 9 2,617,868 810,471 31.0% 33.5% 37.9% - (37,037) (259,074) Riverway 0 ------Richmond / Fountainview 5 1,885,813 408,974 21.7% 23.6% 25.6% - (19,644) (233,225) San Felipe / Voss 3 1,720,793 397,299 23.1% 22.2% 31.7% - (39,729) (8,130) West Loop 60 21,186,516 3,683,447 17.4% 20.3% 25.5% 104,579 (204,460) (916,392) Westchase 33 9,958,830 1,637,676 16.4% 23.4% 32.4% 187,011 40,941 (118,260) TOTAL - Houston 460 142,538,777 21,510,657 15.1% 17.7% 24.5% 2,026,781 (360,218) (3,036,029)

SOURCE CoStar, Transwestern NOTE Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government

6 REAL ESTATE OUTLOOK HOUSTON METRO Q3 2017 Houston Office Market Indicators - Class B

TOTAL SF AVAILABLE DIRECT VACANCY TOTAL UNDER NET NET SUBMARKET INVENTORY BLDGS IMMEDIATELY VACANCY W/ SUBLET AVAILABILITY CONSTRUCTION ABSORPTION ABSORPTION Q3 2017 Q3 2017 Q3 2017 Q3 2017 YTD 2017 Conroe 10 688,859 36,887 5.4% 6.0% 10.4% - 3,879 53,214 Central Business District 23 9,439,750 2,634,092 27.9% 28.7% 35.1% - 37,439 (304,898) Midtown 20 2,955,580 188,485 6.4% 6.5% 10.3% - (12,121) 82,461 Downtown 43 12,395,330 2,822,577 22.8% 23.4% 29.2% - 25,318 (222,437) FM 1960 / Champions 20 1,630,186 325,905 20.0% 20.1% 24.4% - (16,400) 4,939 FM 1960 / Highway 249 18 1,315,795 181,048 13.8% 19.0% 31.3% - (29,458) (34,032) FM 1960 / I-45 North 11 968,736 256,253 26.5% 27.1% 35.9% - (48,238) (14,923) FM 1960 49 3,914,717 763,206 19.5% 21.4% 29.6% - (94,096) (44,016) Greenway Plaza 26 3,598,525 370,629 10.3% 10.8% 12.6% - (20,540) (87,063) Gulf Freeway / Pasadena 27 2,179,493 203,993 9.4% 9.4% 16.9% - 3,951 17,539 Katy Far West 11 1,275,188 2,223 0.2% 0.2% 0.7% - 17,033 Katy Freeway East 26 2,879,196 284,287 9.9% 10.6% 17.4% - (26,811) (33,943) Katy Freeway West 66 7,640,290 1,631,426 21.4% 21.8% 30.1% - (85,419) (249,302) Katy Fwy / Energy Corridor 92 10,519,486 1,915,713 18.2% 18.7% 26.6% - (112,230) (283,245) Kingwood / Humble 9 1,090,077 22,724 2.1% 2.1% 2.1% - 4,570 1,247 NASA / Clear Lake 37 3,532,220 904,335 25.6% 25.6% 28.1% - 13,089 (12,375) North District / IAH 10 1,343,858 203,712 15.2% 15.2% 18.9% - (3,689) (10,972) North District / North Belt W 46 4,831,938 1,853,094 38.4% 39.0% 47.4% - (193,747) (279,975) North District / North Belt 56 6,175,796 2,056,806 33.3% 33.8% 41.2% - (197,436) (290,947) Northeast* 6 554,309 47,734 8.6% 8.6% 12.2% 115,601 14,404 North Loop West 21 2,596,620 317,893 12.2% 12.3% 16.8% - (8,437) (11,009) Northwest Near 23 2,294,586 413,530 18.0% 18.0% 25.8% - 40,918 46,658 Northwest Far 9 873,086 28,959 3.3% 3.6% 5.1% - 1,153 (10,968) Northwest 53 5,764,292 760,382 13.2% 13.2% 18.6% - 33,634 24,681 South Main / Medical Center 19 4,025,606 409,601 10.2% 10.2% 11.5% - 830 25,493 E Fort Bend Co / Sugar Land 25 2,343,177 180,077 7.7% 8.3% 18.3% 93,000 (2,076) 21,337 Southwest Beltway 8 33 4,622,364 709,681 15.4% 15.5% 24.7% 60,000 53,262 18,312 Southwest / Hillcroft 19 1,794,770 315,337 17.6% 17.7% 20.9% 7,281 (21,376) Southwest Fwy / Sugar Land 77 8,760,311 1,205,095 13.8% 14.0% 22.2% 153,000 58,467 18,273 The Woodlands 50 4,451,730 389,384 8.7% 9.0% 13.3% - 39,551 (11,901) West Belt 14 1,302,625 151,303 11.6% 17.4% 42.4% - - 45,279 Bellaire 16 2,448,714 227,568 9.3% 9.4% 11.9% - (73,461) (68,127) Galleria 22 3,266,742 367,872 11.3% 11.6% 15.7% - (22,148) (7,603) Post Oak Park 16 1,803,120 215,312 11.9% 11.9% 17.3% - (39,960) (30,931) Riverway 7 570,270 147,558 25.9% 25.9% 12.9% - (969) 14,608 Richmond / Fountainview 9 870,153 183,011 21.0% 21.3% 24.6% - (534) (31,725) San Felipe / Voss 30 3,339,364 519,869 15.6% 15.8% 20.8% - (34,699) (83,588) West Loop 100 12,298,363 1,661,190 13.5% 13.7% 17.0% - (171,771) (207,366) Westchase 52 7,132,965 1,204,713 16.9% 17.5% 25.7% - 14,427 (15,299) TOTAL - Houston 731 89,659,892 14,928,495 16.7% 17.1% 23.0% 268,601 (398,357) (957,486)

SOURCE CoStar, Transwestern NOTE Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government

REAL ESTATE OUTLOOK HOUSTON METRO Q3 2017 7 Houston Office Market Indicators - Asking Rental Rates % CHANGE % CHANGE % CHANGE % CHANGE Q3 2016 Q3 2016 Q2 2017 Q2 2017 OVER OVER Q3 2017 Q3 2017 SUBMARKET Y-O-Y Y-O-Y CLASS A CLASS B CLASS A CLASS B QUARTER QUARTER CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B Conroe $31.05 $24.50 0.0% -6.4% $31.05 $22.87 0.0% 0.2% $31.05 $22.92 Central Business District $45.53 $31.29 -2.6% -5.5% $44.39 $30.75 -0.1% -3.8% $44.35 $29.58 Midtown $34.47 $33.08 0.1% 4.4% $34.49 $35.36 0.0% -2.3% $34.49 $34.54 Downtown $44.72 $31.59 -2.8% -4.2% $43.53 $31.39 -0.1% -3.6% $43.47 $30.26 FM 1960 / Champions - $14.00 - 0.3% - $13.75 - 2.1% - $14.04 FM 1960 / Highway 249 $27.59 $21.62 1.3% -9.9% $27.93 $19.90 0.1% -2.1% $27.94 $19.48 FM 1960 / I-45 North $23.69 $17.67 5.5% 2.3% $24.12 $18.17 3.6% -0.6% $25.00 $18.07 FM 1960 $26.93 $17.31 1.9% -1.7% $27.13 $17.00 1.2% 0.1% $27.44 $17.01 Greenway Plaza $36.81 $25.97 1.9% 3.6% $36.97 $26.43 1.5% 1.8% $37.50 $26.91 Gulf Freeway/Pasadena - $21.21 - 2.9% - $21.72 - 0.5% - $21.82 Katy Far West - - - - $27.17 - -1.2% - $26.85 - Katy Freeway East $42.90 $27.57 4.9% 1.8% $43.67 $27.54 3.1% 1.9% $45.00 $28.06 Katy Freeway West $39.43 $23.30 -6.0% 4.4% $36.30 $25.34 2.0% -4.0% $37.05 $24.32 Katy Frwy / Energy Corridor $39.75 $23.97 -4.8% 3.7% $36.81 $25.65 2.8% -3.2% $37.85 $24.84 Kingwood / Humble $30.94 $18.75 3.2% 8.6% $31.94 $23.07 0.0% -11.8% $31.94 $20.36 NASA / Clear Lake $24.59 $19.33 2.9% -5.8% $25.23 $17.95 0.3% 1.5% $25.29 $18.22 North District / IAH $22.71 $16.86 1.7% -9.4% $21.91 $16.23 5.4% -5.9% $23.09 $15.27 North District / North Belt W $26.03 $16.58 -2.5% -1.0% $25.48 $16.62 -0.4% -1.3% $25.37 $16.41 North District / North Belt $25.44 $16.61 -2.0% -1.9% $24.79 $16.58 0.6% -1.7% $24.93 $16.29 Northeast - $22.71 - 0.0% - $22.71 0.0% $22.71 North Loop West $26.21 $22.22 2.4% -1.7% $26.55 $22.08 1.1% -1.1% $26.84 $21.84 Northwest Near $19.39 $16.99 0.5% -10.3% $18.92 $14.80 3.0% 3.0% $19.48 $15.25 Northwest Far - $18.50 - 5.1% - $19.49 - -0.2% - $19.45 Northwest $22.94 $19.46 1.8% -8.4% $22.91 $17.70 1.9% 0.7% $23.34 $17.82 South Main / Medical Center $32.09 $26.74 6.8% 4.2% $33.86 $27.80 1.2% 0.2% $34.27 $27.87 E Fort Bend Co / Sugar Land $30.14 $23.10 3.1% -3.1% $31.31 $21.88 -0.8% 2.4% $31.06 $22.40 Southwest Beltway 8 - $15.37 - 23.9% $20.20 $18.76 -0.1% 1.6% $20.18 $19.05 Southwest / Hillcroft $19.50 - 0.4% - $19.57 $17.41 0.1% -0.8% $19.58 $17.27 Southwest Fwy / Sugar Land $27.30 $21.16 -12.8% -9.7% $23.66 $18.88 0.6% 1.2% $23.80 $19.10 The Woodlands $36.35 $22.80 1.3% 8.6% $36.70 $24.91 0.3% -0.7% $36.82 $24.75 West Belt $27.12 $16.68 20.1% 31.0% $32.28 $24.18 0.9% -9.6% $32.58 $21.86 Bellaire $27.70 $23.63 -0.1% -0.3% $27.79 $23.29 -0.4% 1.2% $27.67 $23.56 Galleria / Uptown $38.81 $25.60 0.1% 10.7% $38.77 $28.59 0.2% -0.9% $38.83 $28.35 Post Oak Park $39.59 $27.96 -5.0% -5.8% $37.95 $26.51 -0.9% -0.7% $37.61 $26.33 Riverway - $17.72 - 11.2% - $18.28 - 7.8% - $19.70 Richmond / Fountainview $34.74 $26.02 -4.7% -2.8% $33.25 $25.36 -0.4% -0.2% $33.10 $25.30 San Felipe / Voss $36.21 $25.25 0.8% -0.1% $36.54 $25.10 -0.1% 0.5% $36.50 $25.22 West Loop $37.44 $24.85 -0.9% 2.9% $37.14 $25.20 -0.1% 1.4% $37.10 $25.56 Westchase $36.68 $20.06 0.3% -3.7% $36.93 $19.43 -0.4% -0.6% $36.79 $19.32 TOTAL - Houston $36.95 $22.56 -3.0% -2.6% $35.63 $22.24 0.6% -1.2% $35.83 $21.97

CONTACT METHODOLOGY Stuart Showers Rachel Hornbeak The information in this report is the result of a compilation of information on office, Director of Research Research Analyst industrial, retail, multifamily and healthcare properties located in the Houston 713.270.3380 713.272.1216 metropolitan area. This report includes single-tenant, multi-tenant and owner-user [email protected] [email protected] properties and excludes properties owned and occupied by a government agency.

One Step Forward, Two Steps Back Ofﬁ ce market working to ﬁ nd way back up

OVERVIEW NET ABSORPTION AND VACANCY RATE TRENDS Rising Crude Inventories Slow Recovery HOUSTON METRO AREA After a promising start to the year, the Houston ofﬁ ce market Net Absorption Net Absorption Vacancy Rate 8000 encountered additional headwinds during the second quarter as the 7000 burgeoning oil recovery slowed due to rising North American crude 6000

SF In Thousands Thousands SF In 5000 inventories. For the second consecutive period, negative absorption 4000 surpassed one million square feet with overall year to date totals just 3000 2000 under negative 2.5M SF. Direct vacancy rates and total availability 1000 increased by 0.4% over the period, ending at 15.1% and 23.6%, 0 -1000 respectively. On a positive note, sublease supply continued to decline -2000 -3000 and now stands at 10.8M SF for the market area. Despite the temporary 06 07 08 09 10 11 12 13 14 15 16 17* set back, investor sentiment for the Houston market remains positive Note: Delivery of preleased space SOURCE CoStar, Transwestern *Through Q2 2017 as long term fundamentals including population growth, industry counts as positive net absorption diversiﬁ cation, pro-business environment and low cost of living remain in place. Driven by the delivery of over 33.0M SF since 2010, many well CONTIGUOUS BLOCKS OF AVAILABLE SPACE HOUSTON METRO located second generation buildings are undergoing renovations in Class A Direct Class A Sublet Class B Direct Class B Sublet order to remain competitive with newer options and appealing to a 200 changing workforce that contains ﬁ ve generations. 150 NET ABSORPTION

Year-to-Date Absorption a Negative 2.5M SF 100 Through the second quarter, the ofﬁ ce sector continued to experience negative absorption due to slow leasing activity, expiring sublease 50 listings, and companies continuing to reduce their space footprint. 0 Class A properties drove negative absorption for the quarter, totaling a 25,000 SF 50,000 SF 100,000 SF 200,000 SF negative 1.5M SF. Class B properties seemed to ﬁ nd their footing this SOURCE CoStar, Transwestern *Through Q2 2017 quarter, after three consecutive periods in the red, absorption totaled

Notable Q2 Leases

TENANT SF LEASE TYPE BUILDING SUBMARKET Apache 524,000 Renewal/Extension 2000 Post Oak Blvd Galleria/Uptown Bank of America 209,000 Prelease Capitol Tower Central Business District Motiva Enterprises 204,500 Renewal/Expansion One Allen Center Central Business District Winstead PC 66,000 Renewal/Contraction JPMorgan Chase Tower Central Business District HOUSTON METRO MARKETET MID-YEAR 2017

a positive 210,000 SF, lowering direct vacancy by 0.5%. The Central Business District was the most heavily impacted submarket this quarter Total Available Space with absorption totaling a negative 290,000 SF as impacts from the Houston Metro | Q2 2017 energy downturn continue to present themselves. SUBMARKET SUBLEASE % OF % TOTAL SUBMARKET SPACE (SF) SUPPLY AVAILABLE DIRECT VACANCY & TOTAL AVAILABILITY Class A Stumbles, Class B Improves Energy Corridor 2,480,480 6.8% 24.7% The overall offi ce availability rate (all space marketed as available for CBD 2,504,810 5.7% 27.0% lease) increased 0.4% over the quarter, closing mid-year at 23.6%. Total Westchase 1,530,831 8.7% 28.9% availability trended up across the board, with Class A and B properties Galleria 1,002,692 6.0% 22.4% recording 25.1% and 22.9%, respectively. Direct vacancy increased by 0.4% over the period, fi nishing at 15.1%. North District 890,977 6.8% 46.9% Class A properties saw vacancy increase by 0.9%, ending at 14.9%, while All of Houston 10,772,877 4.4% 23.6% Class B properties reversed course with vacancy decreasing from 16.5% to 16.2%. Until the energy sector fi nds it's balance between supply and AVERAGE OFFICE RENTS HOUSTON METRO AREA demand, total availability and direct vacancy are projected to continue to rise over the short-term. Overall Class A Class B $40 RENTAL RATES Asking Rates Soften $35 Overall asking rates declined by 0.6% over the quarter, but are still up 2.8% year-over-year, currently $29.91 PSF full service. Class A rates $30 closed the quarter down 1.7% (-$0.60), ending at $35.86 PSF full service. $25 Class B asking rates dropped by 1.1%, ending at $21.82 PSF full service. Considering the large amount of supply that still needs to be absorbed, $20 asking rates should continue to decrease over the near-to-mid term as more exposure hits the market. Financial concessions continue to play $15 06 07 08 09 10 11 12 13 14 15 16 17* a signifi cant role in large user lease transactions. Note: All classes of offi ce space SOURCE CoStar, Transwestern *Through Q2 2017

SUPPLY AND DEVELOPMENT Construction Ticks Up The delivery of over 33.0M SF over the past seven years hasn't dampened Offi ce Under Construction tenants appetite for new construction. The challenge of becoming more Houston Metro | Q2 2017 effi cient from a space use perspective combined with recruiting and NUMBER % PRE- SUBMARKET SF engaging fi ve generations in the workforce has kept new construction OF BLDGS LEASED a valid alternative for large tenants, even in this down market. This has CBD 1 778,344 27% also put pressure on landlords of existing product, to look to enhance The Woodlands 3 704,800 97% their features, amenities and service offerings in order to remain South Main/Med Ctr 1 250,000 100% competitive. Early this quarter, both Bank of America and HP looked to new construction to fi ll their space requirement's. Bank of America inked SW Fwy/Sugar Land 3 247,200 30% a lease as the lead tenant in Skanska's Capitol Tower, gaining naming Greenway Plaza 1 188,547 0% rights and taking 210,00 SF of the 778,000 SF Class A building located Westchase 1 104,579 78% in the Central Business District. HP leased a two building, build-to-suit, West Loop 1 104,579 6% totaling 378,000 SF in Springwoods Village. Springwoods Village also includes the Exxon Mobil headquarters, Southwestern Energy and CHI Kingwood/Humble 1 100,000 100% St Lukes. Additional construction is underway for ABS as they follow Energy Corridor 1 86,255 55% Exxon north from Greenspoint. Northeast 1 85,000 61%

Katy Far West 1 72,045 51%

Total 13 2,803,781 57%

2 REAL ESTATE OUTLOOK HOUSTON METRO Q2 2017 The largest projects currently under construction are Capitol COMPARATIVE OFFICE INVESTMENT SALES VOLUME SELECT METRO AREAS Tower (CBD, 778,000 SF - 27% leased to Bank of America),

CityPlace 3 (The Woodlands, 328,000 SF - 100% leased to Atlanta Dallas Denver Houston HP), CityPlace 2 (The Woodlands, 326,000 SF - 100% Leased $8 to ABS) and The Kirby Collection, a new mixed-use project $7 with a large ofﬁ ce component (Greenway Plaza, 212,000 SF). $6 The current preleased percentage of properties currently $5 under construction is 57%. $4

INVESTMENT MARKET $3 Sales Volume in Billions Interest in Houston continues to increase $2 Investment activity continues to pick up throughout the $1

Houston metro, regardless of the setback in the energy $0 sector. The underlying fundamentals of the market are 06 07 08 09 10 11 12 13 14 15 16 17* strong and stabilization in the energy sector should avail SOURCE Real Capital Analytics, Transwestern ,*Through Q2 2017 itself over the next 9-12 months, creating positive sentiment amongst investors. Sales for the quarter totaled $946 million, comprised of 20 transactions, up 408% year-over- year, when there was just $186.3 million in investment sales. AVERAGE OFFICE SALE PRICE HOUSTON METRO AREA

Early in the quarter, Canada Pension Plan Investment Average Sale Price Per SF $250 Board (CPPIB) and TH Real Estate/Silverpeak Real estate completed a transaction to acquire a 49.5% stake in $200 Greenway Plaza & Phoenix Tower (5.0 MSF) from Parkway Inc. Shortly thereafter, CPPIB doubled down and acquired $150 the remainder of Greenway Plaza along with Parkway's outright operations and remaining portfolio in Houston (8.7 $100 MSF). The size and nature of these transactions underscore the belief in the long term viability of the Houston offi ce $50 market. As market activity continues to trend up, so to have price $0 06 07 08 09 10 11 12 13 14 15 16 17* per square foot trade averages. Offi ce sales averaged SOURCE Real Capital Analytics, Transwestern,*Through Q2 2017 $172/SF, an increase of 11% quarter-over-quarter. Cap rates also compressed slightly, down 0.1% and settling at 7.9% for the period. These fi gures represent assets for which pricing information could be obtained.

Notable Q2 Transactions

BUILDING SUBMARKET SF SELLER BUYER

Greenway Plaza Portfolio Greenway Plaza 5,013,052 Parkway TH Real Estate/CPPIB

Noble Energy Center II FM 1960 470,623 Trammel Crow CalSTRS

Lingerfelt Commonwealth 1700 West Loop South Galleria/Uptown 272,941 The ROC Fund Partners

Bellaire Atrium I & II Bellaire 350,000 Braun Properties SLS Properties

SOURCE Real Capital Analytics, HFF, Transwestern

REAL ESTATE OUTLOOK HOUSTON METRO Q2 2017 3 HOUSTON METRO MARKETET MID-YEAR 2017

OUTLOOK OFFICE ABSORPTION AND EMPLOYMENT HOUSTON METRO AREA Patience and Energy

The Houston metro area has been lauded for how Net Absorption (Thousands of SF) Payroll Job Growth (in Thousands) diversiﬁ cation has helped to mitigate the effects of the 8500 energy downturn. Growth in industries such as healthcare, 7125 petrochemical, distribution and retail/hospitality have helped 5750 offset many of the jobs lost in the energy sector. However, 4375 as those sectors wind down their growth cycles, it leaves little doubt that a true recovery for ofﬁ ce will be tethered to 3000 stabilization and return to form in the energy sector. As such, 1625 continued focus will be placed upon North American crude 250 inventories, OPEC’s willingness to maintain production cuts, -1125 and the resulting impacts to the spot price of WTI. -2500 06 07 08 09 10 11 12 13 14 15 16 17* Overall market activity is projected to remain muted through *12-month job growth through May 2017, net SOURCE Bureau of Labor Statistics, Transwestern the third quarter with rising vacancy and falling asking rates. absorption YTD through Q2 2017 Insulated suburban submarkets such as Sugar Land and The Woodlands will continue to perform above market standards, while areas such as the Energy Corridor and Central Business District face the majority of the headwinds left to navigate. Multi-tenant market vs Transwestern comprehensive market coverage

MULTI-TENANT ENTIRE MARKET

Inventory 198.8 MSF 242.4 MSF Overall Vacancy 18.5% 15.1% Q2 Net Absorption (1,749,399 SF) (2,471,884) SF

4 REAL ESTATE OUTLOOK HOUSTON METRO Q2 2017 Houston Ofﬁ ce Market Indicators - All Space

DIRECT VACANCY TOTAL TOTAL SF AVAILABLE UNDER NET ABSORPTION NET ABSORPTION SUBMARKET INVENTORY VACANCY W/ SUBLET AVAILABILITY BLDGS IMMEDIATELY CONSTRUCTION Q2 2017 YTD 2017 Q2 2017 Q2 2017 Q2 2017 Conroe 13 920,281 50,012 5.4% 5.9% 9.8% 22,105 49,155 Central Business District 63 43,801,444 7,001,939 16.0% 17.6% 27.0% 778,344 (287,121) (852,838) Midtown 33 5,732,875 607,101 10.6% 10.7% 18.5% - 103,527 85,322 Downtown 96 49,534,319 7,609,040 15.4% 16.8% 26.0% 778,344 (183,594) (767,516) FM 1960 / Champions 23 1,902,678 309,505 16.3% 16.7% 20.3% - 35,009 27,679 FM 1960 / Highway 249 37 5,148,719 473,917 9.2% 10.8% 15.7% - (10,002) 398 FM 1960 / I-45 North 15 1,325,558 313,756 23.7% 23.9% 33.2% - 29,632 12,272 FM 1960 75 8,376,955 1,097,178 13.1% 14.2% 19.5% - 54,639 40,349 Greenway Plaza 48 11,095,766 1,418,158 12.8% 13.0% 20.1% 188,547 (48,337) (111,363) Gulf Freeway/Pasadena 33 2,639,729 286,893 10.9% 10.9% 17.4% - 1,659 14,182 Katy Far West 31 3,336,693 405,475 12.2% 12.2% 21.5%- 72,045 129,525 122,581 Katy Freeway East 59 9,579,919 853,504 8.9% 9.2% 14.4% - 62,126 (55,053) Katy Freeway West 142 26,741,830 4,455,878 16.7% 20.0% 28.4% 86,255 (388,091) (589,050) Katy Frwy / Energy Corridor 201 36,321,749 5,309,382 14.6% 17.2% 24.7% 86,255 (325,965) (644,103) Kingwood / Humble* 10 1,134,389 36,687 3.2% 3.2% 3.2% 100,000 (748) (3,323) NASA / Clear Lake 59 6,090,505 1,061,248 17.4% 18.2% 22.6% - 12,869 (81,741) North District / IAH 20 3,025,888 750,739 24.8% 25.0% 28.0% - (169,784) (160,376) North District / North Belt W 74 10,092,359 4,108,595 40.7% 45.1% 52.6% - (354,093) (264,294) North District / North Belt 94 13,118,247 4,859,334 37.0% 40.4% 46.9% - (523,877) (424,670) Northeast 11 1,335,012 52,702 3.9% 3.9% 11.1% 85,000 9,436 9,436 North Loop West 29 3,955,192 677,058 17.1% 17.3% 20.7% - 12,856 (42,825) Northwest Far 30 3,339,250 770,537 23.1% 23.2% 28.1% - 20,140 25,406 Northwest Near 12 1,270,907 30,112 2.4% 2.6% 4.0% - (8,460) (12,121) Northwest 71 8,565,349 1,477,707 17.3% 17.4% 21.1% - 24,536 (29,540) South Main / Medical Center 48 10,508,924 636,204 6.1% 6.1% 7.8% 250,000 98,395 (13,208) E Fort Bend Co / Sugar Land 47 6,284,708 411,300 6.5% 8.1% 15.5% 187,200 (10,532) 17,680 Southwest Beltway 8 41 5,546,947 856,936 15.4% 15.6% 23.9% 60,000 (9,472) (31,627) Southwest / Hillcroft 36 4,319,940 616,292 14.3% 14.3% 24.2% - (31,193) (33,502) Southwest Fwy / Sugar Land 124 16,151,595 1,884,528 11.7% 12.3% 20.7% 247,200 (51,197) (47,449) The Woodlands 95 16,295,661 1,633,230 10.0% 10.4% 13.3% 704,800 (79,330) (68,541) West Belt 37 5,385,858 811,594 15.1% 20.5% 32.9% - 29,817 48,368 Bellaire 29 4,352,857 358,590 8.2% 8.6% 14.7% - 4,025 21,957 Galleria / Uptown 58 16,752,995 2,138,625 12.8% 16.3% 22.4% 104,579 (188,254) (313,101) Post Oak Park 27 4,581,030 948,786 20.7% 21.5% 26.4% - (31,269) 166,992 Richmond / Fountainview 11 829,982 170,085 20.5% 20.5% 22.0% - 20,200 16,087 Riverway 16 2,868,522 574,507 20.0% 20.9% 23.7% - (208,456) (236,411) San Felipe / Voss 33 5,060,157 883,459 17.5% 17.6% 24.1% - (12,831) (17,290) West Loop 174 34,445,543 5,074,052 14.7% 16.7% 22.3% 104,579 (416,585) (361,766) Westchase 89 17,585,648 2,929,081 16.7% 20.7% 28.9% 187,011 (83,786) (202,735) TOTAL - Houston 1,309 242,842,223 36,632,505 15.1% 16.8% 23.6% 2,803,781 (1,330,438) (2,471,884)

SOURCE CoStar, Transwestern NOTE Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government

REAL ESTATE OUTLOOK HOUSTON METRO Q2 2017 5 HOUSTON METRO MARKETET MID-YEAR 2017

Houston Ofﬁ ce Market Indicators - Class A

Northwest Near 4 797,237 316,089 39.6% 40.1% 43.8% - 12,247 19,666 Northwest Far 1 237,384 - 0.0% 0.0% 0.0% - 0 0 Northwest 11 2,275,165 682,051 30.0% 30.4% 32.3% - (13,935) (19,706) South Main / Medical Center 16 4,810,992 198,363 4.1% 4.1% 6.4% 250,000 88,920 (34,563) E Fort Bend Co / Sugar Land 21 3,867,531 233,299 6.0% 8.3% 14.1% 94,200 (27,338) (5,733) Southwest Beltway 8 3 566,699 48,955 8.6% 8.6% 16.3% - 0 (355) Southwest / Hillcroft 6 1,485,352 222,342 15.0% 15.0% 34.4% - (11,572) 6,107 Southwest Fwy / Sugar Land 30 5,919,582 504,596 8.5% 10.0% 19.4% 94,200 (38,910) 19 The Woodlands 43 11,561,902 1,204,295 10.4% 10.8% 13.2% 704,800 (76,136) (17,089) West Belt 23 4,085,321 660,291 16.2% 20.7% 34.1% - (8,385) 3,089 Bellaire 8 1,470,637 165,752 11.3% 12.1% 23.7% - (168) 19,733 Galleria / Uptown 35 13,410,461 1,792,901 13.4% 17.7% 24.2% 104,579 (199,358) (327,646) Post Oak Park 9 2,617,868 773,434 29.5% 30.9% 35.5% - (15,766) 157,963 Riverway 5 1,885,813 389,330 20.6% 21.7% 24.7% - - - Richmond / Fountainview ------(187,841) (213,581) San Felipe / Voss 3 1,720,793 398,289 23.1% 23.2% 31.0% - 2,683 31,599 West Loop 60 21,105,572 3,519,706 16.7% 19.8% 26.2% 104,579 (400,450) (331,932) Westchase 33 9,958,830 1,678,617 16.9% 23.8% 32.4% 187,011 (81,353) (159,201) TOTAL - Houston 460 142,346,566 21,220,968 14.9% 17.3% 25.1% 2,550,781 (1,547,839) (1,897,076)

SOURCE CoStar, Transwestern NOTE Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government

6 REAL ESTATE OUTLOOK HOUSTON METRO Q2 2017 Houston Ofﬁ ce Market Indicators - Class B

DIRECT VACANCY TOTAL NET NET TOTAL SF AVAILABLE UNDER SUBMARKET INVENTORY VACANCY W/ SUBLET AVAILABILITY ABSORPTION ABSORPTION BLDGS IMMEDIATELY CONSTRUCTION Q2 2017 Q2 2017 Q2 2017 Q2 2017 YTD 2017 Conroe 10 688,859 40,766 5.9% 6.6% 10.9% - 22,105 49,155 Central Business District 23 9,473,998 2,712,131 28.6% 29.4% 35.8% - (3,954) (339,402) Midtown 21 3,024,080 176,364 5.8% 6.0% 9.6% - 93,908 94,582 Downtown 44 12,498,078 2,888,495 23.1% 23.7% 29.5% - 89,954 (244,820) FM 1960 / Champions 20 1,632,482 309,505 19.0% 19.5% 23.7% - 28,669 21,339 FM 1960 / Highway 249 18 1,315,795 151,590 11.5% 16.7% 29.7% - (8,406) (4,574) FM 1960 / I-45 North 11 968,836 208,015 21.5% 21.8% 32.2% - 50,675 33,315 FM 1960 49 3,917,113 669,110 17.1% 19.1% 27.8% - 70,938 50,080 Greenway Plaza 26 3,598,525 350,089 9.7% 10.0% 12.9% - (31,524) (61,961) Gulf Freeway / Pasadena 27 2,186,695 207,944 9.5% 9.5% 17.3% - 1,587 13,588 Katy Far West 14 1,570,188 2,223 0.1% 0.1% 11.5% - 17,033 17,033 Katy Freeway East 26 2,865,924 257,476 9.0% 9.7% 17.8% - (11,720) (7,132) Katy Freeway West 67 7,727,805 1,611,032 20.8% 21.3% 29.4% - 88,586 (149,525) Katy Fwy / Energy Corridor 93 10,593,729 1,868,508 17.6% 18.2% 26.3% - 76,866 (156,657) Kingwood / Humble 8 990,077 27,294 2.8% 2.8% 2.8% 100,000 (748) (3,323) NASA / Clear Lake 42 3,912,140 942,452 24.1% 24.1% 27.9% - 18,643 (50,492) North District / IAH 10 1,343,858 200,023 14.9% 14.9% 18.7% - (7,283) (7,283) North District / North Belt W 45 4,739,729 1,633,481 34.5% 38.6% 44.0% - (102,653) (71,308) North District / North Belt 55 6,083,587 1,833,504 30.1% 33.4% 38.4% - (109,936) (78,591) Northeast* 5 438,708 47,734 10.9% 10.9% 17.8% - 14,404 14,404 North Loop West 21 2,596,527 309,456 11.9% 12.0% 15.8% - 25,238 (2,572) Northwest Near 23 2,294,586 454,448 19.8% 19.8% 25.7% - 7,893 5,740 Northwest Far 9 873,086 30,112 3.4% 3.8% 5.9% - (8,460) (12,121) Northwest 53 5,764,199 794,016 13.8% 13.8% 18.2% - 24,671 (8,953) South Main / Medical Center 19 4,025,606 410,431 10.2% 10.2% 11.6% - 10,098 24,663 E Fort Bend Co / Sugar Land 25 2,343,177 178,001 7.6% 8.1% 18.4% 93,000 16,806 23,413 Southwest Beltway 8 33 4,622,364 788,920 17.1% 17.2% 25.9% 60,000 (7,313) (35,651) Southwest / Hillcroft 19 1,794,770 322,618 18.0% 18.1% 22.8% (20,890) (28,657) Southwest Fwy / Sugar Land 77 8,760,311 1,289,539 14.7% 14.9% 23.3% 153,000 (11,397) (40,895) The Woodlands 50 4,453,074 428,935 9.6% 10.0% 14.4% - (3,194) (51,452) West Belt 14 1,300,537 151,303 11.6% 19.8% 29.0% - 38,202 45,279 Bellaire 17 2,498,714 154,107 6.2% 6.3% 10.0% - 3,658 5,334 Galleria 22 3,266,742 345,724 10.6% 10.9% 15.7% - 11,104 14,545 Post Oak Park 16 1,803,120 175,352 9.7% 9.7% 15.6% - (15,503) 9,029 Riverway 7 570,270 146,589 25.7% 25.7% 27.6% - 17,720 15,577 Richmond / Fountainview 9 870,153 182,477 21.0% 21.7% 24.5% - (22,127) (31,191) San Felipe / Voss 30 3,339,364 485,170 14.5% 14.7% 20.5% - (15,514) (48,889) West Loop 101 12,348,363 1,489,419 12.1% 12.3% 17.0% - (20,662) (35,595) Westchase 52 7,132,965 1,219,140 17.1% 17.3% 25.5% - 3,329 (29,726) TOTAL - Houston 739 90,262,754 14,660,902 16.2% 16.9% 22.9% 253,000 210,369 (548,263)

SOURCE CoStar, Transwestern NOTE Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government

REAL ESTATE OUTLOOK HOUSTON METRO Q2 2017 7 Houston Ofﬁ ce Market Indicators - Asking Rental Rates

% CHANGE % CHANGE % CHANGE % CHANGE Q2 2016 Q2 2016 Q1 2017 Q1 2017 OVER OVER Q2 2017 Q2 2017 SUBMARKET Y-O-Y Y-O-Y CLASS A CLASS B CLASS A CLASS B QUARTER QUARTER CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B Conroe $31.05 $24.32 0.0% -15.7% $31.05 $23.95 0.0% -14.5% $31.05 $20.49 Central Business District $43.46 $31.39 3.9% -7.7% $45.49 $30.35 -0.8% -4.6% $45.14 $28.97 Midtown $35.12 $33.55 -2.3% -0.9% $34.49 $33.51 -0.5% -0.8% $34.31 $33.25 Downtown $42.32 $31.74 4.8% -6.7% $44.62 $30.89 -0.6% -4.1% $44.36 $29.61 FM 1960 / Champions - $13.67 - -1.7% - $13.41 - 0.3% - $13.44 FM 1960 / Highway 249 $27.12 $18.39 3.1% -0.1% $27.95 $18.34 0.0% 0.2% $27.95 $18.38 FM 1960 / I-45 North $25.00 $17.09 0.0% -0.8% $25.00 $17.02 0.0% -0.4% $25.00 $16.94 FM 1960 $26.91 $15.47 2.1% 1.3% $27.66 $15.67 -0.7% 0.0% $27.47 $15.67 Greenway Plaza $36.29 $27.11 2.6% -0.8% $36.61 $26.28 1.8% 2.4% $37.25 $26.91 Gulf Freeway/Pasadena - $22.09 - -4.6% - $21.03 - 0.2% - $21.08 Katy Far West $29.07 - -7.8% - $29.38 - -8.8% - $26.79 - Katy Freeway East $42.28 $26.55 -2.5% 6.3% $41.56 $28.28 -0.8% -0.2% $41.23 $28.22 Katy Freeway West $38.23 $24.06 -4.1% -2.0% $37.70 $23.96 -2.7% -1.6% $36.67 $23.58 Katy Frwy / Energy Corridor $38.64 $24.56 -4.0% -1.2% $38.09 $24.56 -2.7% -1.2% $37.08 $24.27 Kingwood / Humble $30.94 $18.75 3.2% 31.2% $31.94 $23.07 0.0% 6.7% $31.94 $24.61 NASA / Clear Lake $24.52 $17.56 8.1% 1.7% $25.21 $17.71 5.1% 0.9% $26.50 $17.87 North District / IAH $22.23 $15.30 -1.1% 7.0% $20.48 $16.87 7.3% -3.0% $21.98 $16.37 North District / North Belt W $20.66 $16.14 20.3% 4.6% $26.54 $17.57 -6.3% -4.0% $24.86 $16.87 North District / North Belt $20.91 $16.04 16.1% 4.8% $25.54 $17.49 -4.9% -3.9% $24.29 $16.82 Northeast - $22.71 - 0.0% - $22.71 - 0.0% - $22.71 North Loop West $26.17 $21.11 1.3% 6.4% $26.39 $22.87 0.5% -1.8% $26.52 $22.46 Northwest Near $19.37 $15.45 -2.7% -9.3% $18.90 $15.31 -0.2% -8.5% $18.86 $14.02 Northwest Far - $17.35 - 12.6% - $19.03 - 2.7% - $19.53 Northwest $22.70 $18.40 1.0% -5.0% $22.72 $18.96 0.9% -7.8% $22.93 $17.48 South Main / Medical Center $31.19 $26.56 8.0% 3.9% $34.26 $27.13 -1.7% 1.8% $33.69 $27.61 E Fort Bend Co / Sugar Land $30.23 $22.01 1.9% 1.0% $31.08 $22.21 -0.8% 0.1% $30.82 $22.23 Southwest Beltway 8 $20.93 $16.97 -11.3% 2.5% $20.37 $17.77 -8.9% -2.2% $18.57 $17.38 Southwest / Hillcroft $19.14 $16.02 2.5% 6.5% $19.49 $12.97 0.7% 31.6% $19.62 $17.07 Southwest Fwy / Sugar Land $24.01 $17.45 5.4% 3.1% $25.33 $17.36 -0.1% 3.7% $25.30 $18.00 The Woodlands $34.64 $24.30 7.2% 1.8% $36.83 $24.53 0.8% 0.8% $37.13 $24.73 West Belt $31.96 $19.90 0.2% 12.0% $31.59 $19.28 1.4% 15.6% $32.04 $22.30 Bellaire $28.69 $22.20 -1.9% 3.4% $27.87 $22.91 1.0% 0.2% $28.15 $22.95 Galleria / Uptown $38.31 $24.82 1.2% 17.0% $37.82 $29.02 2.5% 0.1% $38.76 $29.04 Post Oak Park $39.20 $27.46 -1.8% -0.6% $40.57 $27.42 -5.1% -0.5% $38.51 $27.28 Riverway - $17.83 - 1.5% - $18.17 - -0.4% - $18.10 Richmond / Fountainview $33.57 $26.11 -1.4% -3.2% $32.87 $26.78 0.6% -5.7% $33.09 $25.26 San Felipe / Voss $35.10 $24.41 1.7% 1.0% $35.58 $24.90 0.4% -1.0% $35.70 $24.66 West Loop $37.02 $24.07 0.5% 4.4% $37.25 $25.29 -0.1% -0.7% $37.20 $25.11 Westchase $39.65 $19.81 -5.9% -2.7% $37.61 $19.35 -0.9% -0.3% $37.29 $19.29 TOTAL - Houston $34.59 $21.77 3.7% 0.2% $36.46 $22.06 -1.7% -1.1% $35.86 $21.82

CONTACT METHODOLOGY Stuart Showers Rachel Hornbeak The information in this report is the result of a compilation of information on ofﬁ ce, Director of Research Research Analyst industrial, retail, multifamily and healthcare properties located in the Houston 713.270.3380 713.272.1216 metropolitan area. This report includes single-tenant, multi-tenant and owner-user [email protected] [email protected] properties and excludes properties owned and occupied by a government agency.

Office Market Beginning to Show Signs of Improvement Sublet Supply Decreases

OVERVIEW NET ABSORPTION AND VACANCY RATE TRENDS Sublease space on the decline for first time since 2012 HOUSTON METRO AREA As the long and grinding year of 2016 came to a close, sentiment Net Absorption (Thousands of SF) Direct Vacancy Rate Total Availability surrounding the Houston office sector took a positive turn as several 8,000 23% 7,000 21% indicators point to the beginnings of a market rebound. Unfortunately, 6,000 19% these indicators occurred primarily on the economic side with factors 5,000 17% such as oil, jobs and PMI gaining ground, whereas office metrics have 4,000 15% generally continued to weaken following the recent downturn. One core 3,000 13% 2,000 11% metric that showed visible improvement was total available sublease 1,000 9% space. The decline in the fourth quarter, marked the first decrease 0 7% -1,000 5% since 2012, and sublease space closed the year at 11.6M SF available 05 06 07 08 09 10 11 12 13 14 15 16 after peaking with over 12.5M SF available in the third quarter. Sublease Note: Delivery of preleased space SOURCE CoStar, Transwestern *Through Q4 2016 space reductions were triggered through various scenarios making it counts as positive net absorption difficult to determine if the decline is the beginning of a trend or simply a short-term break from an endless supply of space. ConocoPhillips CONTIGUOUS BLOCKS OF AVAILABLE SPACE HOUSTON METRO represented the largest reduction in sublease availability (597k SF) as Class A Direct Class A Sublet Class B Direct Class B Sublet they opted to retain their Energy Corridor listing in order to consolidate 180 operations from an aging multi-building campus. Alternatively, tenants 160 such as Thompson & Knight and Breitburn Energy looked to leverage 140 sublease availability to lock in favorable terms at high-quality Class A 120 locations. A trend that will continue given the extended term, credit 100 80 worthy nature and desirable locations of many sublease offerings. 60 40 NET ABSORPTION 20 Absorption continues to fall short 0 25,000 SF 50,000 SF 100,000 SF 200,000 SF

In the fourth quarter, impacts of the energy downturn are still being SOURCE CoStar, Transwestern *Through Q4 2016 realized as quarterly net absorption for all classes of office was again negative, posting -737,000 SF, with Class A coming in at -230,000 SF.

Notable Q4 Leases

TENANT SF LEASE TYPE BUILDING SUBMARKET

Breitburn Energy Partners 109,476 Sublease Heritage Plaza CBD ABM Industries, Inc. 63,000 New 14141 Southwest Fwy East Fort Bend Co/Sugar Land Thompson & Knight 60,628 Sublease 811 Main St CBD Diamond McCarthy, LLP 46,840 New 2 Houston Center CBD HOUSTON METRO MARKET YEAR-END 2016

For the year, absorption managed to post positive totals with the broad market absorbing a total of 588,000 SF driven by preleased deliveries Total Available Space earlier in the year. The Class A market recorded 1.4M SF of positive absorption for the year, while Class B felt the impacts of flights to quality Houston Metro | Q4 2016 SUBLEASE % SUBMARKET and posted negative absorption of -1.0 M SF year end 2016. Leasing SPACE (SF) SUBLEASE activity is beginning to ramp up throughout the market, but quarterly Energy Corridor 3,130,327 8.4% absorption for the next 3-6 months will lag this activity, leading way to negative absorption totals in early 2017. CBD 2,469,302 5.2%

VACANCY & AVAILABILITY Westchase 1,406,051 8.0% Total availability decreases Galleria 1,158,965 7.0% The overall office availability rate (all space marketed as available for North District 1,147,254 8.7% lease) declined modestly over the quarter, down -0.1%, to finish the year All of Houston 11,649,891 4.6% at 21.9% - a direct result of the decrease in available sublease supply. Total availability for Class A & B properties closed the year at 23.3% and 21.2%, respectively. Direct vacancy increased by 0.3%, finishing at 14.2%, and should continue to rise as sublease space and more efficient AVERAGE OFFICE RENTS HOUSTON METRO AREA new construction serve as desirable alternatives for leasing activity, Asking Rents ($/SF Gross) Class A Class B leaving vacant direct space in its wake. $36 $35.50 $34 Overall vacancy was 16.1% at year end, up 0.1% from the previous $32 quarter and 2.1% year-over-year. Class A overall vacancy closed up 0.2% $30 to end the year at 16.4%, while Class B followed suit, increasing by 0.4% $28 over the quarter and ending the year at 16.4% vacant. As the market $26 moves forward in stabilization mode, vacancy rates are projected to rise $24 $21.95 as overall availability decreases. $22 RENTAL RATES $20 $18 Face rates don't tell the full story $16 05 06 07 08 09 10 11 12 13 14 15 16* Asking rates for the office market continued their familiar ascent over Note: All classes of office space SOURCE CoStar, Transwestern *At Q4 2016 2016, displaying increases across both Class A & B properties. These increases were generated through a combination of new high-quality buildings being added to supply in addition to landlords attempting to hold on to face rates in-spite of market conditions. Regardless of Office Under Construction the situation, concessions play a significant part in deal activity and Houston Metro | Q4 2016 are particularly impactful in large lease transactions where tenant NUMBER % PRE- SUBMARKET SF improvement allowances and rent abatements are core negotiations. OF BLDGS LEASED Class A rents increased 0.5% year-over-year to $35.50 per SF gross, CBD 1 1,056,658 38% while Class B rents increased by 3.2% to $21.95 per SF gross from the West Loop 2 484,579 71% close of the year. Energy Corridor 2 324,428 41% SUPPLY AND DEVELOPMENT Katy 2 234,538 0% Development cycle continues to shift downward There were no new office buildings delivered in the fourth quarter as Greenway Plaza 1 212,878 11% Houston continues to wind down its most recent construction cycle Sugar Land 2 187,200 7% with a total of 2.9 million SF of office space under construction. All Westchase 1 186,000 100% properties currently under development are anticipated to deliver Kingwood 1 100,000 100% in 2017. This level of activity is a stark contrast from the 7.2 million SF under construction in the fourth quarter of 2015 and even further Northeast 1 85,000 92% from the 16.6 million SF ending 2014. In total, Houston has delivered Gulf Frwy/Pasadena 1 82,800 100% approximately 25.0 million SF of office since the beginning of 2014. Total 14 2,954,081 46%

2 REAL ESTATE OUTLOOK HOUSTON METRO YE 2016 While the construction rate is slowing precipitously, the COMPARATIVE OFFICE INVESTMENT SALES VOLUME SELECT METRO AREAS demand for efficient new construction continues, but will require anchor tenants such as HP and Bank of America who Sales Volume in Billions Atl Dal Den Hou are both looking at new facilities and more efficient space $6.0 utilization. $5.0 The largest projects currently under construction are 609 Main (CBD, 1.1 million SF) and Amegy Bank’s new $4.0 headquarters located at 1717 West Loop South (Post Oak Park, 380,000 SF). The preleased percentage of properties $3.0 currently under construction is 45% and is anticipated to increase further prior to delivery through the 2017 calendar $2.0 year. $1.0

INVESTMENT MARKET $0.0 05 06 07 08 09 10 11 12 13 14 15 16* Investment activity picks up SOURCE Real Capital Analytics, Transwestern ,*Through Q4 2016 Investment activity turned up in the final quarter of 2016 as deal volume in the metro recorded $851.0 million in office sales, more than doubling the total from the third quarter, while down 48% on a year-over-year basis. In October, the AVERAGE OFFICE SALE PRICE HOUSTON METRO AREA previously announced Cousins merger/acquisition/spin-off Average Sale Price Per SF of Parkway Properties and their Galleria, Greenway Plaza, $250 and Westchase assets was made final (~8.7M RSF). While $203 this was a portion of a larger 35 property portfolio trade, the $200 Houston properties will be spun off into their own local REIT, HoustonCo, that is positioned for additional acquisitions. $150 Additionally, the Columbia Portfolio traded over the quarter as Spear Street Capital acquired 5 Houston Center, 5 Post $100 Oak Park and Energy Center I for approximately $272 million, or $232 per SF. These Class A assets are strategically located $50 in core Houston submarkets and offer Spear Street a value add opportunity through enhancing building features and $0 05 06 07 08 09 10 11 12 13 14 15 16* amenities, elevating the offerings. This strategy will continue SOURCE Real Capital Analytics, Transwestern,*Through Q4 2016 to be emulated throughout the market. Pricing per square foot averages acted in line with deal activity as quarter over quarter averages were up (162%) while year-over-year averages declined (-61%), coming in at $221/SF. Cap rates were flat over the quarter, currently averaging 8.0%. These figures represent assets for which pricing information could be obtained. Notable Q4 Transactions BUILDING SUBMARKET SF SELLER BUYER

5 Houston Center CBD 580,875 Columbia Property Trust Spear Street Capital, LLC

5 Post Oak Park Post Oak Park 567,264 Columbia Property Trust Spear Street Capital, LLC

Katy Fwy / Energy Center I 332,000 Columbia Property Trust Spear Street Capital, LLC Energy Corridor

SOURCE Real Capital Analytics, HFF, Transwestern

REAL ESTATE OUTLOOK HOUSTON METRO YE 2016 3 HOUSTON METRO MARKET YEAR-END 2016

OUTLOOK OFFICE ABSORPTION AND EMPLOYMENT HOUSTON METRO AREA Steady as she goes

Sentiment in the Houston office market is becoming Net Absorption (Thousands of SF) Payroll Job Growth (in Thousands) positively optimistic as more signs point to having reached 8,000 125 the bottom of the energy downturn and beginning a 7,000 100 recovery. Factors such as positive job creation through a 6,000 75 challenging 2016, crude prices stabilizing as OPEC agreed to production limits, and a pro-energy/business friendly 5,000 50 administration being elected to office have resulted in 4,000 25 an upbeat market. That being said, enthusiasm should be 3,000 0 tempered as recovery will be a slow process that won’t always 2,000 -25 move in an upward trajectory. There are still several areas 1,000 -50 limiting the speed of recovery; overall job growth for 2017 0 -75 is projected to be well below healthy market norms (~20k in -1,000 05 06 07 08 09 10 11 12 13 14 15 16 -100 2017), the Petrochemical boom on the east side is waning, *12-month job growth through November 2016, SOURCE Bureau of Labor Statistics, Transwestern net absorption through Q4 2016 and while stabilizing in the high $40’s to low $50’s - short term energy forecasts show limited potential for additional increases through 2017. Additionally, the market has a total of 54 million SF of space marketed as available with 32 million occurring in Class A properties – a 4 to 5 year supply Multi-tenant market vs Transwestern with job creation at typical levels of 60k per year. Simply put, comprehensive market coverage the recovery will be slow and measured until once again, the MULTI-TENANT ENTIRE MARKET energy engine moves into high gear. Inventory 196.8 MSF 248.4 MSF Overall Vacancy 18.9% 15.4% Q4 Net Absorption 394,220 SF (383,000) SF

4 REAL ESTATE OUTLOOK HOUSTON METRO YE 2016 Houston Office Market Indicators - All Space

DIRECT DIRECT VACANCY **TOTAL ***NET NET TOTAL SF AVAILABLE UNDER SUBMARKET INVENTORY VACANCY VACANCY W/ SUBLET AVAILABILITY ABSORPTION ABSORPTION BLDGS IMMEDIATELY CONSTRUCTION 2015 Q4 2016 Q4 2016 Q4 2016 Q4 2016 YTD 2016 Central Business District 87 48,149,909 6,066,889 12.5% 12.6% 15.0% 20.6% 1,056,658 (48,000) (61,000) Midtown 33 5,759,744 863,962 14.9% 15.0% 15.4% 17.6% - (4,000) 0 Downtown 120 53,909,653 6,930,850 12.8% 12.9% 15.0% 20.3% 1,056,658 (52,000) (61,000) FM 1960 / I-45 North 15 1,371,988 263,422 17.4% 19.2% 24.8% 32.3% - (25,000) (69,000) FM 1960 / Champions 22 1,850,305 346,007 20.4% 18.7% 19.1% 20.5% - 31,000 69,000 FM 1960 / Highway 249 41 5,480,177 613,780 10.5% 11.2% 13.1% 17.8% - (38,000) 78,000 FM 1960 78 8,702,470 1,223,209 13.7% 14.1% 16.2% 20.7% - (32,000) 78,000

North Belt Wst / North District 75 10,146,273 3,652,658 35.5% 36.0% 43.0% 51.0% - (51,000) (490,000) North District / IAH 22 3,025,888 577,945 16.5% 19.1% 19.3% 29.1% - (121,000) (136,000) North District / North Belt 97 13,172,161 4,230,603 31.1% 32.1% 37.6% 46.0% - (172,000) (626,000) Greenway Plaza 51 10,972,137 1,398,947 13.2% 12.8% 13.0% 21.4% 212,878 48,000 (21,000) Gulf Freeway/Pasadena 35 2,556,929 301,718 10.0% 11.8% 11.9% 17.6% 82,800 (46,000) 53,000 Katy Far West 44 3,413,879 467,701 13.6% 13.7% 13.7% 16.1% 234,538 (3,000) 125,000

Katy Freeway East 64 9,607,363 900,210 9.1% 9.4% 10.5% 15.2% 238,173 (28,000) 44,000 Katy Freeway West 144 26,928,244 4,330,062 16.1% 16.1% 17.6% 28.1% 86,255 17,000 (479,000) Katy Frwy / Energy Corridor 208 36,535,607 5,230,272 14.3% 14.3% 15.7% 24.7% 324,428 (11,000) (435,000) Kingwood / Humble* 9 1,028,382 32,908 3.8% 3.2% 3.2% 3.4% 100,000 6,000 39,000 NASA / Clear Lake 63 7,986,993 1,277,919 15.4% 16.0% 16.5% 20.3% - (48,000) (24,000) Northeast 17 1,751,048 267,910 15.3% 15.3% 15.3% 17.5% 85,000 0 540,000 North Loop West 29 3,955,192 707,979 18.0% 17.9% 19.0% 20.3% - 4,000 (134,000) Northwest Near 13 1,270,907 17,793 0.6% 1.4% 1.4% 2.2% - (10,000) (8,000) Northwest Far 31 3,257,388 791,545 23.2% 24.3% 25.3% 28.2% - (36,000) (52,000) Northwest 73 8,483,487 1,517,317 17.4% 17.9% 18.8% 20.6% - (42,000) (194,000) South Main / Medical Center 49 10,285,936 874,305 7.9% 8.5% 8.5% 8.5% - (62,000) (30,000) Southwest / Hillcroft 35 4,173,106 592,581 15.9% 14.2% 14.2% 22.9% - 70,000 127,000 Southwest Beltway 8 43 5,541,068 886,571 15.1% 16.0% 16.0% 22.4% - (50,000) 44,000 E Fort Bend Co / Sugar Land 45 6,098,103 500,044 8.1% 8.2% 9.4% 13.5% 187,200 (6,000) 79,000 Southwest Fwy / Sugar Land 123 15,812,277 1,979,196 12.6% 12.5% 13.0% 19.1% 187,200 14,000 250,000 West Belt 37 5,372,564 902,591 16.3% 16.8% 21.2% 27.1% - (27,000) 118,000 Bellaire 29 4,356,078 383,335 8.4% 8.8% 9.0% 13.0% - (19,000) (104,000) Post Oak Park 29 4,201,030 781,392 18.1% 18.6% 19.2% 28.1% 380,000 (21,000) (80,000) Galleria 57 16,637,761 1,702,043 9.8% 10.2% 11.2% 21.8% 104,579 (78,000) 418,000 Riverway 16 2,868,495 352,825 12.6% 12.3% 12.9% 22.9% - 9,000 (31,000) Richmond / Fountainview 11 829,760 181,717 22.8% 21.9% 21.9% 23.2% - 7,000 (10,000) San Felipe / Voss 33 5,060,157 656,808 11.7% 13.0% 13.2% 20.9% - (63,000) (172,000) West Loop 175 33,953,281 4,058,120 11.5% 12.0% 12.6% 21.4% 484,579 (165,000) 21,000 Westchase 89 17,400,763 2,836,324 15.2% 16.3% 20.2% 26.3% 186,000 (191,000) 263,000 The Woodlands 94 16,040,349 1,690,653 10.9% 10.5% 11.1% 13.8% - 61,000 506,000 Conroe 13 972,477 99,193 8.7% 10.2% 10.2% 10.6% - (15,000) (14,000) TOTAL - Houston 1,375 248,350,393 35,319,736 13.9% 14.2% 15.9% 21.9% 2,954,081 (737,000) 588,000

** Total availability reflects all space being marketed as available for lease regardless of current occupancy status ** *Absorption methodology has been updated for existing buildings to reflect tenant occupancies REAL ESTATE OUTLOOK HOUSTON METRO YE 2016 5 HOUSTON METRO MARKET YEAR-END 2016

Houston Office Market Indicators - Class A

DIRECT VACANCY **TOTAL ***NET TOTAL SF AVAILABLE UNDER NET ABSORPTION SUBMARKET INVENTORY VACANCY W/ SUBLET AVAILABILITY ABSORPTION BLDGS IMMEDIATELY CONSTRUCTION YTD 2016 Q4 2016 Q4 2016 Q4 2016 Q4 2016 Central Business District 34 32,309,408 3,295,560 10.2% 13.1% 19.7% 1,056,658 (65,000) (104,000) Midtown 7 2,494,696 447,798 18.0% 19.1% 23.7% - 21,000 88,000 Downtown 41 34,804,104 3,743,358 10.8% 13.5% 20.0% 1,056,658 (44,000) (16,000) FM 1960 / I-45 North 2 206,705 33,693 16.3% 16.3% 25.0% - 0 1,000 FM 1960 / Champions 1 150,000 0 0.0% 0.0% 0.0% - 2,000 0 FM 1960 / Highway 249 18 3,883,421 423,293 10.9% 11.7% 13.1% - (12,000) 95,000 FM 1960 21 4,240,126 456,986 10.8% 11.5% 13.2% - (10,000) 96,000

North Belt Wst / North District 17 4,351,282 1,750,956 40.2% 50.8% 68.9% - 3,000 (214,000) North District / IAH 8 1,213,677 399,300 32.9% 32.9% 52.7% - (39,000) (69,000) North District / North Belt 25 5,564,959 2,150,256 38.6% 46.9% 65.4% - (36,000) (283,000) Greenway Plaza 18 7,233,315 1,012,664 14.0% 14.1% 20.6% 212,878 30,000 54,000 Gulf Freeway/Pasadena - 0 0 0.0% 0.0% 0.0% - 0 0 Katy 21 1,599,646 436,703 27.3% 27.3% 32.3% 171,538 (3,000) 140,000

Katy Freeway East 23 5,497,995 559,146 10.2% 11.6% 16.1% 238,173 (5,000) 70,000 Katy Freeway West 74 19,046,855 3,028,450 15.9% 20.2% 27.7% 86,255 19,000 (468,000) Katy Frwy / Energy Corridor 97 24,544,850 3,587,596 14.6% 18.3% 25.1% 324,428 14,000 (398,000) Kingwood / Humble 2 144,312 9,380 6.5% 6.5% 6.5% - 2,000 20,000 NASA / Clear Lake 16 2,185,962 139,902 6.4% 8.0% 10.7% - 4,000 (75,000) Northeast 1 555,700 0 0.0% 0.0% 0.0% 85,000 0 556,000 North Loop West 6 1,240,544 326,263 26.3% 29.5% 33.3% - (10,000) (18,000) Northwest Near 1 237,384 0 0.0% 0.0% 0.0% - 0 0 Northwest Far 16 797,138 322,044 40.4% 40.9% 44.9% - 0 (61,000) Northwest 23 2,275,066 648,307 28.5% 30.4% 33.9% - (10,000) (79,000) South Main / Medical Center 16 4,560,992 218,928 4.8% 5.0% 5.4% - (23,000) (36,000) Southwest / Hillcroft 6 1,485,352 227,259 15.3% 15.3% 31.1% - (14,000) 6,000 Southwest Beltway 8 3 566,699 48,736 8.6% 8.6% 16.0% - (49,000) 31,000 East Ft Bend Co. / Sugar Land 21 3,773,926 294,366 7.8% 9.4% 11.2% 94,200 (11,000) (15,000) Southwest Fwy / Sugar Land 30 5,825,977 570,361 9.8% 10.8% 16.7% 94,200 (74,000) 22,000 West Belt 23 4,071,180 679,887 16.7% 20.3% 27.1% - (4,000) 138,000 Bellaire 7 1,194,304 146,899 12.3% 13.0% 23.7% - 14,000 (66,000) Post Oak Park 8 2,237,868 586,321 26.2% 28.6% 39.9% 380,000 (22,000) (93,000) Galleria 32 13,295,227 1,390,681 10.5% 11.8% 23.8% 104,579 (64,000) 489,000 Riverway 5 1,885,813 198,010 10.5% 11.7% 23.6% - 11,000 (10,000) Richmond / Fountainview - 0 0 0.0% 0.0% 0.0% - 0 0 San Felipe / Voss 3 1,720,793 269,304 15.7% 16.1% 29.9% - (3,000) (22,000) West Loop 55 20,334,005 2,591,216 12.7% 14.1% 26.1% 484,579 (64,000) 298,000 Westchase 31 9,772,089 1,573,306 16.1% 23.1% 30.2% 186,000 (88,000) 868,000 The Woodlands 41 11,306,590 1,283,298 11.4% 11.8% 13.2% - 69,000 162,000 Conroe 2 128,832 9,276 7.2% 7.2% 7.2% - 7,000 2,000 TOTAL - Houston 463 139,147,705 19,111,423 13.7% 16.4% 23.3% 2,615,281 (230,000) 1,469,000

SOURCE CoStar, Transwestern NOTE Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government * Inventory and number of buildings adjusted per changes in CoStar ** Total availability reflects all space being marketed as available for lease regardless of current occupancy status ** *Absorption methodology has been updated for existing buildings to reflect tenant occupancies

6 REAL ESTATE OUTLOOK HOUSTON METRO YE 2016

Houston Office Market Indicators - Class B

DIRECT VACANCY **TOTAL ***NET NET TOTAL SF AVAILABLE UNDER SUBMARKET INVENTORY VACANCY W/ SUBLET AVAILABILITY ABSORPTION ABSORPTION BLDGS IMMEDIATELY CONSTRUCTION Q4 2016 Q4 2016 Q4 2016 Q4 2016 YTD 2016 Central Business District 38 14,766,772 2,584,185 17.5% 19.3% 23.0% - 15,000 (59,000) Midtown 19 3,177,347 190,641 6.0% 6.0% 10.2% - (25,000) (19,000) Downtown 57 17,944,119 2,774,826 15.5% 16.9% 20.7% - (10,000) (78,000) FM 1960 / I-45 North 12 1,016,244 248,980 24.5% 24.5% 33.1% - (21,000) (60,000) FM 1960 / Champions 20 1,632,335 346,055 21.2% 21.7% 23.5% - 28,000 69,000 FM 1960 / Highway 249 20 1,444,701 169,030 11.7% 16.2% 29.7% - (29,000) (24,000) FM 1960 52 4,093,280 764,065 18.7% 20.5% 28.1% - (22,000) (15,000)

North Belt Wst / North District 45 4,776,290 1,377,960 28.9% 34.3% 40.1% - (55,000) 35,000 North District / IAH 11 1,343,858 192,172 14.3% 14.3% 16.4% - (78,000) (74,000) North District / North Belt 56 6,120,148 1,570,131 25.7% 29.9% 34.9% - (133,000) (39,000) Greenway Plaza 27 3,598,525 241,821 6.7% 7.0% 22.3% - 17,000 (50,000) Gulf Freeway / Pasadena 29 2,556,929 301,718 11.8% 11.9% 17.6% 82,800 (46,000) 53,000 Katy 20 1,623,729 32,475 2.0% 2.0% 2.0% 63,000 (3,000) 19,000 Katy Freeway East 29 2,990,865 257,214 8.6% 9.6% 18.4% - (22,000) (12,000) Katy Freeway West 73 7,957,438 1,583,530 19.9% 21.4% 29.6% - 0 (255,000) Katy Fwy / Energy Corridor 102 10,948,303 1,840,745 16.8% 18.2% 26.5% - (22,000) (267,000) Kingwood / Humble 7 884,070 23,870 2.7% 2.7% 3.0% 100,000 4,000 19,000 NASA / Clear Lake 43 5,305,317 1,140,643 21.5% 22.2% 23.2% - (53,000) (11,000) Northeast* 10 862,177 202,612 23.5% 23.5% 25.4% - 0 (57,000) North Loop West 20 2,596,527 379,093 14.6% 14.8% 14.9% - 18,000 28,000 Northwest Near 8 873,086 18,335 2.1% 2.1% 3.2% - (10,000) (8,000) Northwest Far 24 2,212,823 502,311 22.7% 23.5% 25.3% - (33,000) 14,000 Northwest 52 5,682,436 899,739 23.1% 16.2% 17.2% - (25,000) 34,000 South Main / Medical Center 18 4,025,606 627,995 15.6% 15.7% 15.7% - (36,000) 4,000 Southwest / Hillcroft 16 1,647,936 294,981 17.9% 17.9% 22.3% - 84,000 117,000 Southwest Beltway 8 32 4,616,485 791,727 17.2% 17.0% 24.4% - (4,000) 39,000 East Ft Bend Co. / Sugar Land 24 2,250,177 204,766 9.1% 9.9% 17.8% 93,000 2,000 6,000 Southwest Fwy / Sugar Land 72 8,514,598 1,291,474 15.2% 15.3% 22.2% 93,000 82,000 162,000 West Belt 14 1,301,384 227,742 17.5% 24.4% 26.8% - (27,000) (24,000) Bellaire 18 2,781,223 200,248 7.2% 7.2% 8.9% - (30,000) (58,000) Post Oak Park 18 1,803,120 187,524 10.4% 10.7% 16.0% - 2,000 138,000 Galleria 22 3,266,742 318,507 9.8% 10.0% 14.3% - (16,000) (76,000) Riverway 9 870,126 151,402 17.4% 17.9% 23.0% - (1,000) (23,000) Richmond / Fountainview 7 570,048 162,464 28.5% 28.5% 29.3% - 11,000 (3,000) San Felipe / Voss 30 3,339,364 432,448 13.0% 13.1% 16.3% - (60,000) (150,000) West Loop 104 12,630,623 1,452,593 11.5% 11.7% 15.2% - (94,000) (172,000) Westchase 53 7,134,821 1,248,594 17.5% 17.6% 22.5% - (100,000) (614,000) The Woodlands 51 4,453,074 432,839 9.7% 10.9% 16.0% - (7,000) 28,000 Conroe 9 688,859 90,241 13.1% 13.1% 13.6% - (22,000) (15,000) TOTAL - Houston 776 98,367,998 15,164,120 15.4% 16.4% 21.2% 338,800 (497,000) (1,023,000)

SOURCE CoStar, Transwestern NOTE Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government

* Inventory and number of buildings adjusted per changes in CoStar ** Total availability reflects all space being marketed as available for lease regardless of current occupancy status ** *Absorption methodology has been updated for existing buildings to reflect tenant occupancies REAL ESTATE OUTLOOK HOUSTON METRO YE 2016 7 Houston Office Market Indicators - Asking Rental Rates

% CHANGE % CHANGE 2013 2013 2014 2014 2015 2015 2016 2016 SUBMARKET 12/15-12/16 12/15-12/16 CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B Central Business District $39.32 $25.99 $42.71 $28.13 $43.87 $28.66 $43.47 $29.36 -0.9% 2.4% Midtown $30.32 $26.03 $34.36 $27.17 $34.73 $27.39 $34.09 $27.59 -1.8% 0.7% Downtown $38.47 $25.99 $41.26 $28.03 $42.28 $28.57 $42.35 $29.24 0.1% 2.3% FM 1960 / I-45 North - $18.06 - $18.20 $25.00 $17.65 $23.69 $17.70 -5.2% 0.3% FM 1960 / Champions - $13.19 - $13.55 - $13.80 $0.00 $13.76 - -0.3% FM 1960 / Highway 249 $25.67 $20.80 $26.56 $20.62 $26.87 $20.73 $27.09 $20.75 0.8% 0.1% FM 1960 $25.71 $15.52 $26.56 $15.74 $26.73 $15.99 $26.84 $16.59 0.4% 3.7% North Belt West / Greenspoint $29.51 $15.63 $30.26 $15.59 $28.29 $14.92 $28.38 $14.49 0.3% -2.9% Greenspoint / IAH $21.36 $16.34 $21.65 $15.80 $21.77 $15.97 $21.75 $15.78 -0.1% -1.2% Greenspoint / North Belt $28.27 $15.73 $28.85 $15.62 $27.22 $15.03 $27.15 $14.65 -0.3% -2.6% Greenway Plaza $32.11 $23.72 $35.04 $25.34 $35.92 $25.89 $35.44 $26.07 -1.3% 0.7% Gulf Freeway / Pasadena - $21.61 - $22.35 - $22.35 $0.00 $22.74 - 1.7% Katy $31.58 $23.20 $32.26 $23.71 $32.94 $24.01 $32.89 $23.94 -0.2% -0.3% Katy Freeway East $35.52 $21.79 $36.65 $23.26 $38.02 $23.89 $37.78 $22.81 -0.6% -4.5% Katy Freeway West $33.69 $20.52 $35.98 $22.73 $37.19 $23.13 $36.66 $22.98 -1.4% -0.6% Katy Fwy / Energy Corridor $33.92 $21.12 $36.15 $22.90 $37.40 $23.25 $36.83 $22.96 -1.5% -1.3% Kingwood / Humble $32.13 $19.00 $32.13 $19.54 $32.55 $18.75 $32.09 $18.88 -1.4% 0.7% NASA / Clear Lake $23.58 $18.33 $25.01 $18.62 $25.01 $18.82 $24.58 $18.32 -1.7% -2.7% Northeast - $16.57 - $17.32 - $17.29 $0.00 $17.18 - -0.6% North Loop West $23.81 $18.25 $26.76 $20.50 $26.97 $20.81 $26.90 $21.31 -0.3% 2.4% Northwest Near - $15.60 - $16.40 - $16.63 $0.00 $17.11 - 2.9% Northwest Far $19.04 $15.31 $19.29 $16.66 $19.38 $16.70 $19.14 $16.61 -1.2% -0.5% Northwest $21.83 $16.72 $22.30 $18.50 $22.44 $18.32 $23.05 $18.60 2.7% 1.5% South Main / Medical Center $28.54 $24.00 $29.09 $25.09 $29.19 $25.26 $29.40 $25.23 0.7% -0.1% Southwest / Hillcroft $21.75 $14.18 $21.98 $13.81 $22.04 $14.10 $21.62 $14.39 -1.9% 2.1% Southwest Beltway 8 $23.24 $16.68 $22.45 $16.43 $22.45 $16.23 $22.60 $16.62 0.7% 2.4% East Ft Bend Co. / Sugar Land $28.53 $21.32 $28.34 $21.60 $29.13 $21.49 $29.50 $21.68 1.3% 0.9% Southwest Fwy / Sugar Land $24.95 $16.67 $24.57 $16.56 $25.05 $16.12 $25.77 $16.91 2.9% 4.9% West Belt $30.35 $23.21 $31.42 $23.83 $32.02 $23.89 $31.86 $23.86 -0.5% -0.1% Bellaire $25.86 $21.08 $26.80 $22.09 $26.96 $22.14 $26.91 $22.39 -0.2% 1.1% Post Oak Park $35.43 $26.36 $35.94 $27.43 $36.51 $27.76 $37.11 $28.08 1.6% 1.2% Galleria $35.70 $26.70 $37.04 $27.49 $38.00 $27.40 $37.52 $27.40 -1.3% 0.0% Riverway $30.82 $23.72 $32.10 $25.12 $33.14 $25.66 $33.14 $25.68 0.0% 0.1% Richmond / Fountainview - $16.64 - $17.54 - $17.83 - $17.75 - -0.4% San Felipe / Voss $32.44 $22.40 $34.54 $23.41 $35.19 $23.50 $34.92 $23.76 -0.8% 1.1% West Loop $34.14 $23.68 $35.63 $24.43 $36.44 $24.46 $36.22 $24.45 -0.6% 0.0% Westchase $35.38 $19.75 $38.70 $21.51 $38.98 $21.23 $38.08 $21.23 -2.3% 0.0% The Woodlands $35.95 $23.38 $39.56 $25.63 $40.56 $25.39 $39.98 $25.48 -1.4% 0.4% Conroe $28.42 $25.73 $28.40 $25.08 $29.35 $24.77 $29.12 $23.86 -0.8% -3.7% TOTAL - Houston $32.71 $19.96 $34.49 $20.88 $35.31 $21.28 $35.50 $21.95 0.5% 3.2%

SOURCE CoStar, Transwestern NOTE Rents for properties using triple net terms have been grossed up to full service with operating expense data, rents reflect full service equivalent

CONTACT METHODOLOGY Stuart Showers Rachel Andrae The information in this report is the result of a compilation of information on office, Director of Research Research Analyst industrial, retail, multifamily and healthcare properties located in the Houston 713.270.3380 713.272.1216 metropolitan area. This report includes single-tenant, multi-tenant and owner-user [email protected] [email protected] properties and excludes properties owned and occupied by a government agency.

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 various 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. REAL ESTATE OUTLOOK HOUSTON OFFICE MARKET THIRD QUARTER 2016

Office Market Struggling to Gain Traction in Down Economy Sublease space continues to impact vacancy

OVERVIEW NET ABSORPTION AND VACANCY RATE TRENDS Office sector scuffles to find footing after downturn HOUSTON METRO AREA The Houston office market continues to struggle as the local economy Net Absorption (Thousands of SF) Direct Vacancy Rate remains uncertain, pinned to the turmoil in the energy sector and 8,000 15% ambiguity surrounding the pending election cycle. Currently, tenants 7,000 14% 6,000 13% are hesitant to make long-term leasing decisions until clarity avails 5,000 12% itself in both the energy markets and governmental policy. Vacancy 4,000 11% is on an upward trajectory as sublease space continues to be added 3,000 10% to the market, particularly in submarkets traditionally occupied by 2,000 9% 1,000 8% the energy tenants. The significant decline in leasing activity paired 0 7% with the increasing supply of available sublease space pushed net -1,000 05 06 07 08 09 10 11 12 13 14 15 16* 6% absorption into the red during the third quarter. Market conditions Note: Delivery of preleased space SOURCE CoStar, Transwestern *Through Q3 2016 currently favor the tenant as landlords must leverage significant counts as positive net absorption concession packages to compete in a sea of available space alternatives, especially for large users 20,000 SF and up. CONTIGUOUS BLOCKS OF AVAILABLE SPACE HOUSTON METRO

NET ABSORPTION Class A Direct Class A Sublet Class B Direct Class B Sublet Absorption pushes red in the ledger 160 Net absorption for all classes of office ran red for the third quarter 140 totaling a net negative 397,000 SF. Year-to-date totals were more 120 100 favorable coming in at 1.3 million SF, but are still well below historical 80 averages. The Class A market recorded 429,000 SF of positive 60 absorption for the quarter, while Class B recorded a sixth consecutive 40 quarter of negative absorption at 795,000 SF. Following several 20 quarters of positive absorption driven by preleased deliveries, 0 25,000 SF 50,000 SF 100,000 SF 200,000 SF the office market experienced its first quarter of overall negative SOURCE CoStar, Transwestern *Through Q3 2016 absorption since mid-year 2015. Absorption over the final quarter of 2016 is anticipated to be minimal to slightly negative as true recovery appears most likely to begin in mid-2017 at the earliest.

Notable Q3 Leases

TENANT SF LEASE TYPE BUILDING SUBMARKET

Lloyd's Register 86,892 Renewal 1330 Enclave Parkway Katy Freeway West Orrick, Herrington & Sutcliffe 56,731 Prelease 609 Main at Texas CBD Hogan Lovells 43,000 Prelease 609 Main at Texas CBD Lockheed Martin Corporation 40,742 Renewal Two Corporate Plaza NASA/Clear Lake HOUSTON METRO MARKET THIRD QUARTER 2016

VACANCY Sublease space nearly reaches 12.0 million SF Total Available Space The overall office vacancy rate (including sublet) was 15.6% at third quarter, up from 14.7% at second quarter. Direct vacancy was 13.8%, Houston Metro | Q3 2016 SUBLEASE % up from 13.1% last quarter. Total available sublease space grew by SUBMARKET SPACE (SF) SUBLEASE 1.2 million SF this quarter to 11.9 million SF on the market. Also, in the third quarter, Shell announced they were vacating their entire Energy Corridor 3,575,660 9.6% space in One Shell Plaza, which totals approximately 800,000 SF, CBD 2,757,005 5.8% after initially only marketing 350,000 SF of space. FMC Technologies, Westchase 1,485,336 8.5% WorleyParsons, NOV, and Freeport-McMoRan also put over 900,000 Galleria 1,092,267 8.3% SF of combined sublease space on the market. With the continuation of space reductions through a slow market, sublease space will likely Greenspoint 982,267 5.9% exceed 12.0 million SF by year-end. The submarkets that will continue All of Houston 11,868,908 4.8% to be affected by large amounts of sublease space are the Energy Corridor, CBD, Westchase, and the Galleria due to the strong oil and gas presence in those markets. Class A overall vacancy was 15.5% at third quarter, up from 14.6% at AVERAGE OFFICE RENTS HOUSTON METRO AREA second quarter, and Class A direct was 13.0%, up from 12.4% over the same period. Class B overall vacancy was 16.1%, a jump from 15.2% at Asking Rents ($/SF Gross) mid-year, and Class B direct vacancy rose to 15.0%, from 14.2% over $30 $28.60 the same period. Looking ahead, vacancies are anticipated to increase $28 further as leasing velocity remains low and companies continue to put $26 sublease space on the market. $24 RENTAL RATES $22 Concession packages increasing While overall face rents increased modestly year-over-year, the $20 underlying value of concession packages being offered foretells a $18 different story. Class A rents declined 0.2% year-over-year to $35.24 $16 05 06 07 08 09 10 11 12 13 14 15 16* per SF gross, and Class B rents carried the increase in face rents, Note: All classes of office space SOURCE CoStar, Transwestern *At Q3 2016 rising by 1.2% to $21.53 per SF gross from the close of the year. In the current, tenant-favored market, landlords are offering significant concession packages with generous tenant improvement packages and free rent in order to entice prospective tenants. Rental rates have not seen a sharp decline, as rate decreases typically lag behind other indicators due to landlords maintaining face rents for as long Office Under Construction as possible. As competitive spaces grow in number throughout the Houston Metro | Q3 2016 NUMBER % PRE- market, the value of the concessions in nearing its ceiling and declines SUBMARKET SF OF BLDGS LEASED in rates will begin to show through most areas. CBD 1 1,056,658 38% SUPPLY AND DEVELOPMENT West Loop 2 520,000 75% Development cycle comes to a close Houston is nearing the completion of its most recent development Energy Corridor 2 324,428 40% phase as there was a total of 2.6 million SF of office space under Katy 2 285,465 18% construction in the third quarter, as compared to 3.7 million SF Greenway Plaza 1 191,802 48% just three months earlier. This space was 48% preleased, a metric Westchase 1 186,000 100% that remains unchanged from the second quarter. There are no other buildings anticipated to deliver in 2016, with all 2.6 million Total 9 2,564,356 48% SF anticipated to deliver by the end of 2017. The CBD is the only remaining submarket with over 1.0 million SF in the pipeline.

2 REAL ESTATE OUTLOOK HOUSTON METRO Q3 2016 The largest projects under construction are 609 Main (CBD, COMPARATIVE OFFICE INVESTMENT SALES VOLUME SELECT METRO AREAS 1.1 million SF) and Amegy Bank’s new headquarters located at 1717 West Loop South (Post Oak Park, 380,000 SF). Sales Volume in Billions Atl Dal Den Hou There were 1.4 million SF of deliveries at 62% preleased in $6.0 the third quarter. The preleased percentage is significantly $5.0 lower than the first quarter’s 92% due to only one owner- occupied project delivering. The largest project deliveries $4.0 include BHP’s new headquarters (Galleria, 600,000 SF) and West Memorial Place II (Katy Freeway West, 385,532 SF). $3.0

INVESTMENT MARKET $2.0 Investment opportunities feeling the burn The investment landscape is changing quickly as the metro $1.0 recorded $122.4 million in office sales during the third $0.0 05 06 07 08 09 10 11 12 13 14 15 16* quarter, a decline of 27% over the previous quarter. Small or SOURCE Real Capital Analytics, Transwestern ,*Through Q3 2016 mid-size assets accounted for most of the sales activity, as large transaction sales have declined dramatically over the past year. Pricing per square foot averages took a major hit AVERAGE OFFICE SALE PRICE HOUSTON METRO AREA for the period, averaging $56 per SF as compared to $158 per SF at second quarter due mainly to the quality and size Average Sale Price Per SF of assets traded. The majority of single-property sales were $250 smaller, Class B and C assets. The average cap rate was 7.8%, up from the second quarter average of 7.6%. These $200 figures represent assets for which pricing information could be obtained. $150 Owners are still hesitant to market their properties through $100 the changing scope of the office market and the disparity $56 in pricing expectations. The number of listings in 2016 has been lower than historical averages as owners are $50 sourcing deals off market to keep lower pricing from being $0 05 06 07 08 09 10 11 12 13 14 15 16* advertised. Additionally, investors are exercising more SOURCE Real Capital Analytics, Transwestern,*Through Q3 2016 conservative underwriting projections throughout the office sector in order to maintain financial viability. However, the long-term outlook for Houston remains bright as it still remains one of the nation’s largest economies.

Notable Q3 Transactions BUILDING SUBMARKET SF SELLER BUYER

9720 Cypresswood FM 1960/Hwy 249 83,077 Torchlight Loan Services, LLC Vista Equities Group, Inc.

6464 Savoy Southwest/Hillcroft 182,658 Younan Properties Ridgepoint Jr LLC

SOURCE Real Capital Analytics, HFF, Transwestern

REAL ESTATE OUTLOOK HOUSTON METRO Q3 2016 3 HOUSTON METRO MARKET THIRD QUARTER 2016

OUTLOOK OFFICE ABSORPTION AND EMPLOYMENT HOUSTON METRO AREA Baby steps on a soft floor

The combination of the downturn in the energy sector and Net Absorption (Thousands of SF) Payroll Job Growth (in Thousands) the over-zealous nature of our most recent development 8,000 125 cycle, the Houston office market is in a transition state 7,000 100 as signs begin to point that we may have hit our floor. 6,000 75 Availability from the new deliveries along with blocks 5,000 50 of space being added via the sublease market present 4,000 25 lingering reminders as their impact on market fundamentals 3,000 0 displays itself. The current energy market has reached the bottom with job cuts and even found a floor in price 2,000 -25 per barrel; however, it may still take the office market 1,000 -50 an additional 12 to 18 months to see the return of office 0 -75 demand. Job growth for Houston is anticipated to remain -1,000 05 06 07 08 09 10 11 12 13 14 15 16* -100 flat or slightly positive for the year with impacts from the *12-month job growth through August 2016, net SOURCE Bureau of Labor Statistics, Transwestern absorption through Q3 2016 Super Bowl having little impact on office leasing. The metro’s current development is 48% preleased and these projects are all anticipated to deliver by the end of 2017. Looking ahead, tenants will continue to adopt a Multi-tenant market vs Transwestern wait-and-see approach as they debate the impacts of the comprehensive market coverage upcoming Presidential election and policies that follow the winning candidate coupled with the continued volatility in MULTI-TENANT ENTIRE MARKET the oil markets. Rental rates will likely remain flat or decline as a large abundance of space needs to be absorbed. Inventory 209.5 MSF 248.4 MSF Development activity will taper off as developers hold off Overall Vacancy 17.6% 15.6% on new projects and wait for the next development upcy- Q3 Net Absorption 13,723,349 SF (397,000) SF cle to break ground. With more sublease space hitting the market, vacancy rates will continue to impacted and trend upward.

4 REAL ESTATE OUTLOOK HOUSTON METRO Q3 2016 Houston Office Market Indicators - All Space

DIRECT DIRECT VACANCY NET NET TOTAL SF AVAILABLE UNDER SUBMARKET INVENTORY VACANCY VACANCY WITH SUBLET ABSORPTION ABSORPTION BLDGS IMMEDIATELY CONSTRUCTION 2015 Q3 2016 Q3 2016 Q3 2016 YTD 2016 Central Business District 87 47,919,574 5,804,977 11.3% 12.1% 14.6% 1,056,658 (112,000) (43,000) Midtown 33 5,759,744 859,930 15.0% 14.9% 15.3% - 44,000 4,000 Downtown 120 53,679,318 6,664,907 11.7% 12.4% 14.7% 1,056,658 (68,000) (39,000) FM 1960 / I-45 North 15 1,371,988 238,726 14.2% 17.4% 17.7% - (16,000) (44,000) FM 1960 / Champions 22 1,850,305 427,420 24.0% 23.1% 23.1% - 30,000 17,000 FM 1960 / Highway 249 41 5,470,993 708,494 11.8% 13.0% 15.4% - (3,000) 83,000 FM 1960 78 8,693,286 1,374,640 14.8% 15.8% 17.4% - 11,000 56,000

North Belt West / Greenspoint 75 10,105,399 3,242,823 30.6% 32.1% 36.7% - 33,000 (156,000) Greenspoint / IAH 22 3,076,008 502,005 16.1% 16.3% 16.3% - 6,000 (7,000) Greenspoint / North Belt 97 13,181,407 3,744,827 27.2% 28.4% 31.9% - 39,000 (163,000) Greenway Plaza 51 11,246,288 1,483,385 11.3% 13.2% 13.4% 191,805 126,000 170,000 Gulf Freeway/Pasadena 35 2,699,502 460,535 14.0% 17.1% 17.1% - (7,000) 5,000 Katy 44 3,383,389 613,070 15.9% 18.1% 18.1% 285,465 6,000 29,000

Katy Freeway East 64 9,681,026 879,037 9.1% 9.1% 10.0% 238,173 (76,000) 71,000 Katy Freeway West 144 27,416,975 4,425,648 11.3% 16.1% 19.9% 86,255 (102,000) (521,000) Katy Frwy / Energy Corridor 208 37,098,001 5,304,685 10.7% 14.3% 17.3% 324,428 (178,000) (450,000) Kingwood / Humble* 9 1,025,047 70,728 9.3% 6.9% 6.9% - 9,000 24,000 NASA / Clear Lake 63 7,051,599 892,027 13.4% 12.7% 13.2% - (50,000) 53,000 Northeast 17 1,711,262 261,823 17.9% 15.3% 15.3% - (51,000) 501,000 North Loop West 29 4,133,495 563,395 13.9% 13.6% 14.5% - (22,000) 12,000 Northwest Near 13 1,319,023 7,914 0.8% 0.6% 0.6% - 7,000 3,000 Northwest Far 31 3,430,620 829,181 23.8% 24.2% 24.7% - 48,000 (11,000) Northwest 73 8,883,138 1,400,490 15.8% 15.8% 16.4% - 33,000 4,000 South Main / Medical Center 49 10,469,072 944,310 9.2% 9.0% 9.1% - (2,000) 19,000 Southwest / Hillcroft 35 4,269,911 677,635 17.2% 15.9% 15.9% - 14,000 58,000 Southwest Beltway 8 43 5,620,512 864,435 16.8% 15.4% 15.4% - (21,000) 80,000 E Fort Bend Co / Sugar Land 45 6,376,248 492,246 7.1% 7.7% 8.9% - (64,000) (43,000) Southwest Fwy / Sugar Land 123 16,266,671 2,034,316 13.1% 12.5% 13.0% - (71,000) 95,000 West Belt 37 4,902,573 779,509 16.5% 15.9% 21.5% - (5,000) 29,000 Bellaire 29 4,374,993 365,749 6.4% 8.4% 8.6% - (66,000) (86,000) Post Oak Park 29 4,294,059 807,283 16.7% 18.8% 19.7% 380,000 (33,000) (91,000) Galleria 57 16,569,024 1,617,137 8.6% 9.8% 11.0% 140,000 565,000 502,000 Riverway 16 2,868,495 361,430 11.2% 12.6% 13.0% - 11,000 (40,000) Richmond / Fountainview 11 819,689 197,545 22.9% 24.1% 24.1% - (10,000) (10,000) San Felipe / Voss 33 5,041,885 591,917 9.6% 11.7% 12.0% - (47,000) (108,000) West Loop 175 33,968,145 3,941,062 10.1% 11.6% 12.4% 520,000 420,000 167,000 Westchase 89 17,467,349 2,391,280 9.2% 13.7% 17.6% 186,000 (645,000) 621,000 The Woodlands 94 15,790,858 1,724,362 8.0% 10.9% 11.8% - 36,000 222,000 Conroe 13 903,345 78,591 8.8% 8.7% 8.7% - 0 1,000 TOTAL - Houston 1,375 248,420,250 34,164,549 12.2% 13.8% 15.6% 2,564,356 (397,000) 1,344,000

REAL ESTATE OUTLOOK HOUSTON METRO Q3 2016 5 HOUSTON METRO MARKET THIRD QUARTER 2016

Houston Office Market Indicators - Class A

DIRECT VACANCY NET TOTAL SF AVAILABLE UNDER NET ABSORPTION SUBMARKET INVENTORY VACANCY WITH SUBLET ABSORPTION BLDGS IMMEDIATELY CONSTRUCTION YTD 2016 Q3 2016 Q3 2016 Q3 2016 Central Business District 34 31,851,191 2,857,052 9.0% 12.2% 1,056,658 (96,000) 106,000 Midtown 7 2,494,696 469,003 18.8% 19.9% - 45,000 67,000 Downtown 41 34,345,887 3,326,055 9.7% 12.8% 1,056,658 (51,000) 173,000 FM 1960 / I-45 North 2 206,705 33,693 16.3% 16.3% - 0 1,000 FM 1960 / Champions 1 150,000 2,100 1.4% 1.4% - 0 (2,000) FM 1960 / Highway 249 18 3,883,421 510,282 13.1% 14.1% - (3,000) 102,000 FM 1960 21 4,240,126 546,074 12.9% 13.8% - (3,000) 101,000

North Belt West / Greenspoint 17 4,343,919 1,750,599 40.3% 45.3% - (2,000) (217,000) Greenspoint / IAH* 8 1,213,677 336,189 27.7% 27.7% - (1,000) (4,000) Greenspoint / North Belt 25 5,557,596 2,086,788 37.5% 41.5% - (3,000) (221,000) Greenway Plaza 18 7,020,681 1,012,382 14.4% 14.5% 191,805 134,000 245,000 Gulf Freeway/Pasadena - 0 0 0.0% 0.0% - 0 0 Katy 21 1,581,714 506,148 32.0% 32.0% 222,465 8,000 32,000

Katy Freeway East 23 5,496,806 554,078 10.1% 11.1% 238,173 (87,000) 75,000 Katy Freeway West 74 18,980,730 2,820,536 14.9% 19.4% 86,255 57,000 (246,000) Katy Frwy / Energy Corridor 97 24,477,536 3,374,615 13.8% 17.5% 324,428 (30,000) (171,000) Kingwood / Humble 2 140,977 28,195 20.0% 20.0% - 0 2,000 NASA / Clear Lake 16 2,182,855 38,855 1.8% 3.4% - 5,000 16,000 Northeast 1 555,700 0 0.0% 0.0% - 0 556,000 North Loop West 6 1,252,947 166,642 13.3% 15.4% - 0 12,000 Northwest Near 1 237,384 0 0.0% 0.0% - 0 0 Northwest Far 16 801,764 323,913 40.4% 41.6% - 0 (61,000) Northwest 23 2,292,095 490,555 21.4% 23.0% - 0 (49,000) South Main / Medical Center 16 4,618,943 191,224 4.1% 4.3% - 7,000 18,000 Southwest / Hillcroft 6 1,485,352 213,594 14.4% 14.4% - 11,000 20,000 Southwest Beltway 8 3 573,500 49,321 8.6% 8.6% - 0 30,000 East Ft Bend Co. / Sugar Land 21 4,122,722 345,896 8.4% 10.1% - (61,000) (42,000) Southwest Fwy / Sugar Land 30 6,181,574 608,811 9.8% 11.0% - (50,000) 8,000 West Belt 23 4,066,013 674,958 16.6% 19.9% - (8,000) 27,000 Bellaire 7 1,203,314 162,447 13.5% 14.3% - (72,000) (80,000) Post Oak Park 8 2,213,527 557,809 25.2% 26.5% 380,000 (42,000) (71,000) Galleria 32 12,747,940 1,272,244 10.0% 11.3% 140,000 572,000 565,000 Riverway 5 1,885,813 203,668 10.8% 11.3% - 8,000 (14,000) Richmond / Fountainview - 0 0 0.0% 0.0% - 0 0 San Felipe / Voss 3 1,714,929 265,814 15.5% 15.9% - 14,000 (19,000) West Loop 55 19,765,523 2,461,982 12.5% 13.6% 1,120,000 480,000 381,000 Westchase 31 9,604,638 1,234,196 12.9% 19.8% - (91,000) 1,101,000 The Woodlands 41 11,018,964 1,317,868 12.0% 12.8% 201,933 31,000 243,000 Conroe 2 128,832 16,362 12.7% 12.7% - 0 (5,000) TOTAL - Houston 463 137,779,654 17,915,069 13.0% 15.5% 2,315,356 429,000 2,457,000

6 REAL ESTATE OUTLOOK HOUSTON METRO Q3 2016 Houston Office Market Indicators - Class B

DIRECT VACANCY NET NET TOTAL SF AVAILABLE UNDER SUBMARKET INVENTORY VACANCY WITH SUBLET ABSORPTION ABSORPTION BLDGS IMMEDIATELY CONSTRUCTION Q3 2016 Q3 2016 Q3 2016 YTD 2016 Central Business District 38 14,511,526 2,519,201 17.4% 18.8% - (17,000) (149,000) Midtown 19 3,177,347 165,222 5.2% 5.2% - 22,000 6,000 Downtown 57 17,688,873 2,684,423 15.2% 16.4% - 5,000 (143,000) FM 1960 / I-45 North 12 1,016,244 227,639 22.4% 22.7% - (11,000) (39,000) FM 1960 / Champions 20 1,632,335 423,591 26.0% 26.0% - 30,000 18,000 FM 1960 / Highway 249 20 1,444,701 156,028 10.8% 16.8% - 0 (17,000) FM 1960 52 4,093,280 807,257 19.7% 21.9% - 19,000 (38,000) North Belt West / Greenspoint 45 4,664,503 1,292,067 27.7% 33.0% - 35,000 89,000 Greenspoint / IAH 11 1,693,378 148,171 8.8% 8.8% - 6,000 (3,000) Greenspoint / North Belt 56 6,357,881 1,440,238 22.7% 26.6% - 41,000 86,000 Greenway Plaza 27 3,764,733 271,061 7.2% 7.5% - 0 (70,000) Gulf Freeway / Pasadena 29 2,248,468 406,973 18.1% 18.1% - (7,000) 24,000 Katy 20 1,611,171 29,001 1.8% 1.8% 63,000 (2,000) (5,000) Katy Freeway East 29 3,064,396 240,555 7.9% 8.8% - 11,000 11,000 Katy Freeway West 73 8,194,731 1,600,431 19.5% 21.5% - (158,000) (278,000) Katy Fwy / Energy Corridor 102 11,259,127 1,840,986 16.4% 18.0% - (147,000) (267,000) Kingwood / Humble 7 884,070 35,363 4.0% 4.0% - 9,000 20,000 NASA / Clear Lake 43 4,511,246 924,805 20.5% 20.5% - (54,000) 36,000 Northeast* 10 861,956 202,560 23.5% 23.5% - (53,000) (57,000) North Loop West 20 2,536,907 366,583 14.5% 14.7% - (22,000) 1,000 Northwest Near 8 802,294 7,221 0.9% 0.9% - 6,000 3,000 Northwest Far 24 2,381,429 504,863 21.2% 21.5% - 48,000 51,000 Northwest 52 5,720,630 878,667 15.4% 15.6% - 32,000 55,000 South Main / Medical Center 18 3,991,862 690,592 17.3% 17.3% - (8,000) 4,000 Southwest / Hillcroft 16 1,598,169 367,579 23.0% 23.0% - 1,000 32,000 Southwest Beltway 8 32 4,413,473 752,938 17.1% 17.2% - (25,000) 45,000 East Ft Bend Co. / Sugar Land 24 2,247,136 148,760 6.6% 7.3% - (3,000) (1,000) Southwest Fwy / Sugar Land 72 8,258,778 1,269,278 15.4% 15.6% - (27,000) 76,000 West Belt 14 1,261,839 194,323 15.4% 27.2% - 3,000 3,000 Bellaire 18 2,781,223 170,211 6.1% 6.1% - 5,000 (28,000) Post Oak Park 18 1,891,123 228,826 12.1% 12.6% - 10,000 (21,000) Galleria 22 3,307,175 305,914 9.3% 10.6% - (5,000) (61,000) Riverway 9 870,126 155,753 17.9% 17.9% - 3,000 (24,000) Richmond / Fountainview 7 559,977 148,954 26.6% 26.6% - (10,000) (3,000) San Felipe / Voss 30 3,326,956 370,956 11.2% 11.3% - (62,000) (90,000) West Loop 104 12,736,580 1,380,612 10.8% 11.3% - (59,000) (227,000) Westchase 53 7,301,615 1,137,592 15.6% 15.9% 186,000 (553,000) (480,000) The Woodlands 51 4,566,209 436,530 9.6% 10.9% - 6,000 (29,000) Conroe 9 689,737 68,284 9.9% 9.9% - 0 7,000 TOTAL - Houston 776 97,808,055 14,698,544 15.0% 16.1% 249,000 (795,000) (1,005,000)

SOURCE CoStar, Transwestern NOTE Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government

REAL ESTATE OUTLOOK HOUSTON METRO Q3 2016 7 Houston Office Market Indicators - Asking Rental Rates

% CHANGE % CHANGE 2013 2013 2014 2014 2015 2015 Q3 2016 Q3 2016 SUBMARKET 12/15-09/16 12/15-09/16 CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B Central Business District $39.32 $25.99 $42.71 $28.13 $43.87 $28.66 $43.05 $28.36 -1.9% -1.0% Midtown $30.32 $26.03 $34.36 $27.17 $34.73 $27.39 $34.15 $27.39 -1.7% 0.0% Downtown $38.10 $25.99 $41.93 $28.03 $42.28 $28.57 $41.80 $28.30 -1.2% -1.0% FM 1960 / I-45 North - $18.06 - $18.20 $25.00 $17.65 $25.00 $17.22 0.0% -2.4% FM 1960 / Champions - $13.19 - $13.55 - $13.80 - $13.86 - 0.4% FM 1960 / Highway 249 $25.67 $20.80 $26.56 $20.62 $26.87 $20.73 $27.28 $20.41 1.5% -1.5% FM 1960 $25.71 $15.52 $26.56 $15.74 $26.73 $15.99 $27.03 $16.07 1.1% 0.5% North Belt West / Greenspoint $29.51 $15.63 $30.26 $15.59 $28.29 $14.92 $27.90 $13.97 -1.4% -6.4% Greenspoint / IAH $21.36 $16.34 $21.65 $15.80 $21.77 $15.97 $21.87 $15.43 0.5% -3.4% Greenspoint / North Belt $27.24 $15.73 $28.95 $15.62 $27.22 $15.03 $26.93 $14.12 -1.1% -6.1% Greenway Plaza $32.11 $23.72 $35.04 $25.34 $35.92 $25.89 $35.95 $25.63 0.1% -1.0% Gulf Freeway / Pasadena - $21.61 - $22.35 - $22.35 - $21.65 - -3.1% Katy $30.56 $23.20 $32.26 $23.71 $32.94 $24.01 $32.71 $24.03 -0.7% 0.1% Katy Freeway East $35.52 $21.79 $36.65 $23.26 $38.02 $23.89 $38.08 $24.07 0.2% 0.8% Katy Freeway West $33.69 $20.52 $35.98 $22.73 $37.19 $23.13 $36.21 $22.27 -2.6% -3.7% Katy Fwy / Energy Corridor $34.08 $21.12 $36.06 $22.90 $37.40 $23.25 $36.52 $22.51 -2.4% -3.2% Kingwood / Humble $32.13 $19.00 $32.13 $19.54 $32.55 $18.75 $32.01 $18.89 -1.7% 0.7% NASA / Clear Lake $23.58 $18.33 $25.01 $18.62 $25.01 $18.82 $24.86 $18.01 -0.6% -4.3% Northeast - $16.57 - $17.32 - $17.29 - $17.38 - 0.5% North Loop West $23.81 $18.25 $26.76 $20.50 $26.97 $20.81 $26.90 $20.79 -0.3% -0.1% Northwest Near - $15.60 - $16.40 - $16.63 - $16.63 - 0.0% Northwest Far $19.04 $15.31 $19.29 $16.66 $19.38 $16.70 $19.16 $16.04 -1.1% -4.0% Northwest $21.83 $16.72 $23.67 $18.50 $22.44 $18.32 $21.79 $18.03 -2.9% -1.6% South Main / Medical Center $28.54 $24.00 $29.09 $25.09 $29.19 $25.26 $29.20 $25.14 0.0% -0.5% Southwest / Hillcroft $21.75 $14.18 $21.98 $13.81 $22.04 $14.10 $22.12 $14.11 0.4% 0.1% Southwest Beltway 8 $23.24 $16.68 $22.45 $16.43 $22.45 $16.23 $22.51 $16.07 0.3% -1.0% East Ft Bend Co. / Sugar Land $26.68 $21.32 $27.09 $21.60 $28.02 $21.49 $28.46 $21.29 1.6% -0.9% Southwest Fwy / Sugar Land $24.95 $16.67 $25.17 $16.56 $25.05 $16.12 $25.75 $16.11 2.8% -0.1% West Belt $30.35 $23.21 $31.42 $23.83 $32.02 $23.89 $32.27 $23.69 0.8% -0.8% Bellaire $25.86 $21.08 $26.80 $22.09 $26.96 $22.14 $26.97 $22.12 0.0% -0.1% Post Oak Park $35.43 $26.36 $35.94 $27.43 $36.51 $27.76 $36.28 $27.74 -0.6% -0.1% Galleria $35.70 $26.70 $37.04 $27.49 $38.00 $27.40 $37.60 $27.09 -1.1% -1.1% Riverway $30.82 $23.72 $32.10 $25.12 $33.14 $25.66 $32.99 $25.30 -0.5% -1.4% Richmond / Fountainview - $16.64 - $17.54 - $17.83 - $17.78 - -0.3% San Felipe / Voss $32.44 $22.40 $34.54 $23.41 $35.19 $23.50 $34.93 $23.46 -0.7% -0.2% West Loop $34.25 $23.68 $35.40 $24.43 $36.44 $24.46 $35.93 $24.40 -1.4% -0.2% Westchase $35.38 $19.75 $38.70 $21.51 $38.98 $21.23 $38.41 $20.97 -1.5% -1.2% The Woodlands $35.95 $23.38 $39.56 $25.63 $40.56 $25.39 $40.35 $25.01 -0.5% -1.5% Conroe $28.42 $25.73 $28.40 $25.08 $29.35 $24.77 $29.22 $24.58 -0.4% -0.8% TOTAL - Houston $32.71 $19.96 $34.49 $20.88 $35.31 $21.28 $35.24 $21.53 -0.2% 1.2%

SOURCE CoStar, Transwestern NOTE Rents for properties using triple net terms have been grossed up to full service with operating expense data, rents reflect full service equivalent

CONTACT METHODOLOGY Rachel Andrae Kevin Roberts The information in this report is the result of a compilation of information on office, Research Analyst President, Southwest industrial, retail, multifamily and healthcare properties located in the Houston 713.272.1216 713.270.3347 metropolitan area. This report includes single-tenant, multi-tenant and owner-user [email protected] [email protected] properties and excludes properties owned and occupied by a government agency.

Energy Downturn Hits Office Market Hard Fundamentals weakening as expected

OVERVIEW NET ABSORPTION AND VACANCY RATE TRENDS Leasing velocity remains down HOUSTON METRO AREA While the overall Houston economy is adding jobs, major office Net Absorption (Thousands of SF) Direct Vacancy Rate demand drivers like upstream energy and engineering are accruing 8,000 14% further losses. This is in stark contrast to downstream energy which 7,000 13% 6,000 12% is booming on the east side of the metro with over $53 billion in 5,000 11% construction either underway or planned. Vacancy is on the rise as 4,000 10% upstream companies continue to reduce workforces, downsize and 3,000 9% cut costs across the board. Net absorption stayed in the black through 2,000 8% 1,000 7% first quarter as deliveries were largely preleased, but rent growth 0 6% finally tapered off, and concession packages remain high. Houston -1,000 05 06 07 08 09 10 11 12 13 14 15 16* 5% has firmly become a tenant's market, and conditions will become even Note: Delivery of preleased space SOURCE CoStar, Transwestern *Through Q1 2016 more tenant-favorable as the year progresses. counts as positive net absorption

NET ABSORPTION CONTIGUOUS BLOCKS OF AVAILABLE SPACE HOUSTON METRO Deliveries still driving positive absorption Net absorption for all classes of space totaled 996,000 SF at first Class A Direct Class A Sublet Class B Direct Class B Sublet quarter, fueled largely by preleased deliveries. Class A recorded 1.2 160 million SF of positive absorption for the quarter, and Class B recorded 140 a fourth quarter in a row of negative absorption at 191,000 SF. Though 120 Class AA demand has given way to a more value office trend recently, 100 80 Class B space is still suffering the effects of the previous flight-to- 60 quality trend. Absent the volume of new deliveries, overall and Class 40 A net absorption would have been negative 758,000 SF and negative 20 539,000 SF, respectively. The largest move-out by far this quarter was 0 25,000 SF 50,000 SF 100,000 SF 200,000 SF

BMC in Westchase, while most others were in the small to mid-range. SOURCE CoStar, Transwestern *Through Q1 2016

Notable Q1 Leases

TENANT SF LEASE TYPE BUILDING SUBMARKET

United Airlines 225,000 Prelease 609 Main at Texas CBD Linde Processing Plants 50,380 New Linde Plaza Katy Freeway West Citigroup 49,730 New Galleria Tower I Galleria USI Insurance 46,902 New Air Liquide Center Katy Freeway East Bureau Veritas 43,602 New Greenspoint Park North Belt West/Greenspoint HOUSTON METRO MARKET FIRST QUARTER 2016

VACANCY Vacancy rises with low demand Total Available Space The overall office vacancy rate (including sublet) was 13.8% at first quarter, unchanged from year-end. Direct vacancy was 12.5%, up Houston Metro | Q1 2016 SUBLEASE % % TOTAL from 12.2% last quarter. Total available sublease space continues to SUBMARKET SPACE (SF) SUBLEASE AVAILABLE grow, adding more than 940,000 SF this quarter to hit 8.7 million SF on the market. Sublease space is expected to continue rising over the Energy Corridor 2,289,000 6.3% 21.1% course of 2016 and hit the 10 million SF range by the end of the year. CBD 1,803,000 3.8% 20.1% Energy companies comprise the majority of sublease space on the Westchase 1,107,000 6.8% 20.0% market, accounting for 78% of the total. Total available space for lease Greenspoint 684,000 5.2% 41.8% in several submarkets is markedly higher than what is reported as vacant in statistics. Submarkets like the Energy Corridor and Galleria Galleria 888,000 5.6% 18.5% will continue to experience increasing downside pressure and rising All of Houston 8,688,000 3.6% 20.4% availability rates as the energy downturn cuts deep into fundamentals. Class A overall vacancy was 12.9% at first quarter, down just slightly from 13.0% at year-end, and Class A direct was 11.5%, up from 11.1% AVERAGE OFFICE RENTS HOUSTON METRO AREA over the same period. Vacant available space declined over this period Asking Rents ($/SF Gross) as deliveries were 92% preleased, adding 1.8 million SF of occupied $30 Class A space to the existing inventory. Vacancy rates will continue $28.39 trending upward in the period ahead as demand remains low and $28 space still under construction delivers. $26 $24 RENTAL RATES Rents begin to slip in 2016 $22 Asking rental rates for all classes of office space have increased 0.7% $20 from year-end to $28.39 per SF gross. Class A rents were down 0.6% $18 to $35.09 per SF gross, and Class B rents rose 0.1% to $21.30 per SF $16 05 06 07 08 09 10 11 12 13 14 15 16* gross from the close of the year. Asking rents reached a tipping point Note: All classes of office space SOURCE CoStar, Transwestern *Through Q1 2016 at the end of 2015 and should trend downward in the period ahead. Rent declines lagged behind other indicators as landlords worked to maintain face rents as long as possible. Concessions are prevalent, especially in Class A, with free rent and improvement packages Office Under Construction dramatically increasing. Houston Metro | Q1 2016 % PRE- SUBMARKET SF SUPPLY AND DEVELOPMENT LEASED Pipeline continues to cool West Loop 1,285,000 71% There was 5.9 million SF of office space under construction at first Energy Corridor 1,179,475 23% quarter, as compared to 7.2 million SF at year-end. This space was 49% preleased, as compared to 61% at the end of 2015. The majority of the Westchase 1,100,000 100% construction pipeline, 4.8 million SF, is currently scheduled to deliver in CBD 1,056,658 27% the remaining three quarters of 2016. The Woodlands 511,913 10%

There is no longer a standout submarket for construction activity, as Greenway Plaza 398,696 27% the Energy Corridor, Westchase, CBD and Galleria all have around FM 1960/Hwy 249 165,754 27% one million SF under construction. The Energy Corridor is the most vulnerable for negative performance given the current state of the Katy 124,017 18% oil and gas market and a construction pipeline only 23% preleased. Gulf Freeway/Pasadena 102,000 83% The biggest projects under construction are Phillips 66's campus in Total 5,923,513 49% Westchase at 1.1 million SF and 609 Main at Texas in the CBD at 1.0 million SF.

2 REAL ESTATE OUTLOOK HOUSTON METRO Q1 2016 Deliveries dropped off significantly in the first quarter with COMPARATIVE OFFICE INVESTMENT SALES VOLUME SELECT METRO AREAS the metro recording just 1.9 million SF added to the market at 92% preleased. Of the six buildings delivered this quarter, Sales Volume in Billions Atl Dal Den Hou three were owner-occupied and one was single-tenant, $6.0 which was reflected in the high preleased percentage. The largest projects delivered include FMC Technologies' $5.0 campus at 510,000 SF in the Northeast submarket and $4.0 Millennium Tower II at 445,000 SF in Westchase. $3.0 INVESTMENT MARKET

Volume falls off in Q1 $2.0 The metro recorded just $214.6 million in office sales transactions during the first quarter, further evidence that $1.0 large asset transactions have tapered off. Sales for 2015 $0.0 05 06 07 08 09 10 11 12 13 14 15 16* totaled a revised $3.2 billion. Pricing averaged $113 per SF SOURCE Real Capital Analytics, Transwestern ,*Through Q1 2016 this quarter, as compared to $330 per SF at fourth quarter and $239 per SF for all of 2015. Average prices were down sizably as sales this quarter were largely comprised of smaller Class B and C assets. The average cap rate was AVERAGE OFFICE SALE PRICE HOUSTON METRO AREA

7.3%, down from a revised fourth quarter average of 7.6%. Average Sale Price Per SF Cap rates for all of 2015 averaged 7.2% These figures $250 represent assets for which pricing information could be obtained. $200 The energy downturn and corresponding economic $150 uncertainty have caused a disparity in pricing expectations, $113 leaving some owners hesitant to list. There is a significant bid-ask spread as buyers and sellers of office assets work $100 to adjust expectations in a down economy. Marathon Oil Tower was taken off the market in the first quarter as $50 offers came in lower than expected. As the office sector in Houston is expected to get worse before seeing a recovery, $0 05 06 07 08 09 10 11 12 13 14 15 16* SOURCE Real Capital Analytics, Transwestern,*Through Q1 2016 fewer buildings are being listed for sale. Deals in 2016 are more likely to be sourced off market as owners try to keep lower pricing from being advertised.

Notable Q1 Transactions BUILDING SUBMARKET SALE PRICE CAP RATE SELLER BUYER

5300 Memorial Midtown $31.5 million ($205/SF) 7.6% Parkway Properties Equus Capital Partners

Town & Country Central I Katy Freeway East $26.0 million ($175/SF) 7.7% Parkway Properties Equus Capital Partners

Songy Highroads & EDENS 5433 Westheimer Galleria $15.2 million ($123/SF) 6.4% Urban Meridian joint venture

SOURCE Real Capital Analytics, HFF, Transwestern

REAL ESTATE OUTLOOK HOUSTON METRO Q1 2016 3 HOUSTON METRO MARKET FIRST QUARTER 2016

OUTLOOK OFFICE ABSORPTION AND EMPLOYMENT HOUSTON METRO AREA Market in for rough road ahead

The office sector is experiencing the most fallout by far in Net Absorption (Thousands of SF) Payroll Job Growth (in Thousands) the current economic conditions as workforce reductions, 8,000 125 M&A activity, cost cutting and downsizing by energy 7,000 100 companies further weakens fundamentals. Tenants and landlords must frequently adjust to changing market 6,000 75 conditions as bankruptcy filings and sublease space steadily 5,000 50 grows. Some of these market realities have not yet caught 4,000 25 up with statistics as office metrics lag behind companies' 3,000 0 real estate decisions. The office market will likely be 2,000 -25 extremely challenging for several years, and the full impact 1,000 -50 will not be realized until oil prices stabilize, and energy 0 -75 companies hit bottom and begin to recover. -1,000 05 06 07 08 09 10 11 12 13 14 15 16* -100

*12-month job growth through February 2016, SOURCE Bureau of Labor Statistics, Transwestern The metro’s current development pipeline is 49% net absorption through Q1 2016 preleased, and a slower economy will limit further leasing activity in this space. Additionally, many of these tenants will vacate large blocks of space when they move to occupy new buildings. With tepid demand expected in the period Multi-tenant market vs Transwestern ahead, we anticipate the overall vacancy rate for all classes comprehensive market coverage of space to increase over the next two years, climbing to the high-17% range. As development activity drops off, MULTI-TENANT ENTIRE MARKET Houston's strong net absorption will go with it allowing a different picture of the market to emerge. Asking rents Inventory 190.1 MSF 244.5 MSF will fall with better deals coming for tenants in the market. Overall Vacancy 16.4% 13.8% This is not the 1980s, but it is arguably the toughest office Q1 Net Absorption 1.4 MSF 996,000 SF market since that time.

4 REAL ESTATE OUTLOOK HOUSTON METRO Q1 2016 Houston Office Market Indicators - All Space

DIRECT DIRECT VACANCY NET TOTAL SF AVAILABLE UNDER SUBMARKET INVENTORY VACANCY VACANCY WITH SUBLET ABSORPTION BLDGS IMMEDIATELY CONSTRUCTION 2015 Q1 2016 Q1 2016 Q1 2016 Central Business District 87 47,919,574 5,625,758 11.3% 11.7% 13.6% 1,056,658 136,000 Midtown 33 5,759,744 851,290 15.0% 14.8% 15.0% - 13,000 Downtown 120 53,679,318 6,477,048 11.7% 12.1% 13.8% 1,056,658 149,000 FM 1960 / I-45 North 15 1,371,988 215,402 14.2% 15.7% 15.9% - (21,000) FM 1960 / Champions 22 1,850,305 453,325 24.0% 24.5% 24.5% - (9,000) FM 1960 / Highway 249 40 5,305,239 606,919 11.8% 11.4% 14.0% 165,754 19,000 FM 1960 77 8,527,532 1,275,646 14.8% 15.0% 16.6% 165,754 (11,000)

North Belt West / Greenspoint 75 10,105,399 3,096,294 30.6% 30.6% 34.0% - (9,000) Greenspoint / IAH 22 3,076,008 519,845 16.1% 16.9% 17.2% - (25,000) Greenspoint / North Belt 97 13,181,407 3,616,140 27.2% 27.4% 30.1% - (34,000) Greenway Plaza 50 11,064,288 1,349,843 11.3% 12.2% 12.3% 398,696 121,000 Gulf Freeway/Pasadena 34 2,597,502 400,015 14.0% 15.4% 15.4% 102,000 (36,000) Katy 43 3,259,094 514,937 15.9% 15.8% 15.9% 124,017 3,000

Katy Freeway East 63 9,604,261 835,571 9.1% 8.7% 9.5% 226,511 38,000 Katy Freeway West 142 26,506,699 3,127,790 11.3% 11.8% 14.5% 952,964 (133,000) Katy Frwy / Energy Corridor 205 36,110,960 3,963,361 10.7% 11.0% 13.2% 1,179,475 (95,000) Kingwood / Humble* 9 1,025,047 84,054 9.3% 8.2% 8.2% - 11,000 NASA / Clear Lake 63 7,051,599 849,013 13.4% 12.0% 12.4% - 96,000 Northeast 16 1,665,562 206,530 17.9% 12.4% 12.4% - 510,000 North Loop West 29 4,133,495 565,049 13.9% 13.7% 14.4% - 10,000 Northwest Near 13 1,319,023 6,595 0.8% 0.5% 0.8% - 4,000 Northwest Far 31 3,430,620 864,516 23.8% 25.2% 25.6% - (47,000) Northwest 73 8,883,138 1,436,160 15.8% 16.2% 16.7% - (33,000) South Main / Medical Center 49 10,469,072 975,718 9.2% 9.3% 9.3% - (13,000) Southwest / Hillcroft 35 4,269,911 713,075 17.2% 16.7% 16.9% - 23,000 Southwest Beltway 8 43 5,620,512 883,544 16.8% 15.7% 15.8% - 61,000 E Fort Bend Co / Sugar Land 45 6,376,248 418,919 7.1% 6.6% 7.1% - 31,000 Southwest Fwy / Sugar Land 123 16,266,671 2,015,539 13.1% 12.4% 12.7% - 115,000 West Belt 37 4,902,573 808,925 16.5% 16.5% 17.8% - - Bellaire 29 4,374,993 320,249 6.4% 7.3% 7.7% - (40,000) Post Oak Park 29 4,294,059 760,048 16.7% 17.7% 18.6% 380,000 (43,000) Galleria 55 15,804,024 1,408,139 8.6% 8.9% 9.9% 905,000 (54,000) Riverway 16 2,868,495 332,745 11.2% 11.6% 12.3% - (11,000) Richmond / Fountainview 11 819,689 193,447 22.9% 23.6% 23.6% - (6,000) San Felipe / Voss 33 5,041,885 463,853 9.6% 9.2% 9.4% - 20,000 West Loop 173 33,203,145 3,478,482 10.1% 10.5% 11.2% 1,285,000 (134,000) Westchase 88 16,367,349 1,734,939 9.2% 10.6% 13.0% 1,100,000 178,000 The Woodlands 92 15,348,455 1,335,316 8.0% 8.7% 9.3% 511,913 169,000 Conroe 13 903,345 79,494 8.8% 8.8% 8.8% - - TOTAL - Houston 1,362 244,506,057 30,601,159 12.2% 12.5% 13.8% 5,923,513 996,000

REAL ESTATE OUTLOOK HOUSTON METRO Q1 2016 5 HOUSTON METRO MARKET FIRST QUARTER 2016

Houston Office Market Indicators - Class A

DIRECT VACANCY NET TOTAL SF AVAILABLE UNDER SUBMARKET INVENTORY VACANCY WITH SUBLET ABSORPTION BLDGS IMMEDIATELY CONSTRUCTION Q1 2016 Q1 2016 Q1 2016 Central Business District 34 31,851,191 2,720,092 8.5% 9.7% 1,056,658 243,000 Midtown 7 2,494,696 508,918 20.4% 20.7% - 27,000 Downtown 41 34,345,887 3,229,010 9.4% 10.5% 1,056,658 270,000 FM 1960 / I-45 North 2 206,705 35,140 17.0% 17.0% - - FM 1960 / Champions 1 150,000 2,100 1.4% 1.4% - (2,000) FM 1960 / Highway 249 17 3,717,667 429,391 11.6% 12.4% 165,754 17,000 FM 1960 20 4,074,372 466,630 11.5% 12.2% 165,754 15,000

North Belt West / Greenspoint 17 4,343,919 1,570,761 36.2% 41.0% - (37,000) Greenspoint / IAH* 8 1,213,677 348,325 28.7% 29.6% - (16,000) Greenspoint / North Belt 24 5,557,596 1,919,086 34.5% 38.5% - (53,000) Greenway Plaza 17 6,838,681 946,473 13.8% 13.8% 398,696 129,000 Gulf Freeway/Pasadena - - - 0.0% 0.0% - - Katy 20 1,457,419 412,450 28.3% 28.4% 124,017 1,000

Katy Freeway East 22 5,420,041 487,804 9.0% 10.0% 226,511 65,000 Katy Freeway West 72 18,070,454 1,751,027 9.7% 12.3% 952,964 (87,000) Katy Frwy / Energy Corridor 94 23,490,495 2,238,831 9.5% 11.8% 1,179,475 (22,000) Kingwood / Humble 2 140,977 28,195 20.0% 20.0% - 2,000 NASA / Clear Lake 16 2,182,855 58,937 2.7% 4.2% - (4,000) Northeast 1 510,000 - 0.0% 0.0% - 510,000 North Loop West 6 1,252,947 175,413 14.0% 16.2% - 3,000 Northwest Near 1 237,384 - 0.0% 0.0% - - Northwest Far 16 801,764 311,886 38.9% 40.0% - (49,000) Northwest 23 2,292,095 487,299 21.3% 22.8% - (46,000) South Main / Medical Center 16 4,618,943 229,100 5.0% 5.0% - (19,000) Southwest / Hillcroft 6 1,485,352 230,230 15.5% 16.3% - 3,000 Southwest Beltway 8 3 573,500 53,336 9.3% 9.3% - 26,000 East Ft Bend Co. / Sugar Land 21 4,122,722 281,582 6.8% 7.1% - 23,000 Southwest Fwy / Sugar Land 30 6,181,574 565,147 9.1% 9.5% - 52,000 West Belt 23 4,066,013 701,387 17.3% 17.8% - - Bellaire 7 1,203,314 90,249 7.5% 9.2% - (8,000) Post Oak Park 8 2,213,527 509,111 23.0% 24.0% 380,000 (22,000) Galleria 30 11,982,940 1,067,680 8.9% 9.8% 905,000 4,000 Riverway 5 1,885,813 198,010 10.5% 11.5% - (9,000) Richmond / Fountainview - - - 0.0% 0.0% - - San Felipe / Voss 3 1,714,929 222,941 13.0% 13.4% - 24,000 West Loop 53 19,000,523 2,087,991 11.0% 11.9% 1,285,000 (11,000) Westchase 30 8,504,638 1,046,070 12.3% 16.7% 1,100,000 189,000 The Woodlands 39 10,576,561 915,930 8.7% 9.2% 442,403 202,000 Conroe 2 128,832 10,951 8.5% 8.5% - - TOTAL - Houston 451 133,967,461 15,343,487 11.5% 12.9% 5,752,003 1,215,000

6 REAL ESTATE OUTLOOK HOUSTON METRO Q1 2016 Houston Office Market Indicators - Class B

DIRECT VACANCY NET TOTAL SF AVAILABLE UNDER SUBMARKET INVENTORY VACANCY WITH SUBLET ABSORPTION BLDGS IMMEDIATELY CONSTRUCTION Q1 2016 Q1 2016 Q1 2016 Central Business District 38 14,511,526 2,477,117 17.1% 18.5% - (107,000) Midtown 19 3,177,347 184,286 5.8% 6.1% - (13,000) Downtown 57 17,688,873 2,661,404 15.0% 16.3% - (120,000) FM 1960 / I-45 North 12 1,016,244 209,346 20.6% 21.0% - (21,000) FM 1960 / Champions 20 1,632,335 448,892 27.5% 27.5% - (7,000) FM 1960 / Highway 249 20 1,444,701 135,802 9.4% 16.5% - 3,000 FM 1960 52 4,093,280 794,040 19.4% 22.0% - (25,000) North Belt West / Greenspoint 45 4,664,503 1,324,719 28.4% 31.4% - 56,000 Greenspoint / IAH* 11 1,693,378 154,267 9.1% 9.1% - (9,000) Greenspoint / North Belt 56 6,357,881 1,478,986 23.3% 25.5% - 47,000 Greenway Plaza 27 3,764,733 213,084 5.7% 5.9% - (12,000) Gulf Freeway / Pasadena 28 2,146,468 364,900 17.0% 17.0% 102,000 (36,000) Katy 20 1,611,171 23,040 1.4% 1.6% - 1,000 Katy Freeway East 29 3,064,396 260,474 8.5% 9.3% - (9,000) Katy Freeway West 73 8,194,731 1,371,798 16.7% 19.6% - (50,000) Katy Fwy / Energy Corridor 102 11,259,127 1,632,272 14.5% 16.8% - (59,000) Kingwood / Humble* 7 884,070 45,972 5.2% 5.2% - 9,000 NASA / Clear Lake 43 4,511,246 861,648 19.1% 19.1% - 99,000 Northeast* 10 861,956 145,671 16.9% 16.9% - - North Loop West 20 2,536,907 360,241 14.2% 14.3% - 8,000 Northwest Near 8 802,294 6,418 0.8% 1.2% - 3,000 Northwest Far 24 2,381,429 553,920 23.3% 23.5% - 2,000 Northwest 52 5,720,630 920,580 16.1% 16.3% - 13,000 South Main / Medical Center 18 3,991,862 687,798 17.2% 17.2% - 7,000 Southwest / Hillcroft 16 1,598,169 383,561 24.0% 24.0% - 16,000 Southwest Beltway 8 32 4,413,473 764,414 17.3% 17.4% - 34,000 East Ft Bend Co. / Sugar Land* 24 2,247,136 139,322 6.2% 7.1% - 9,000 Southwest Fwy / Sugar Land 72 8,258,778 1,287,297 15.6% 15.9% - 59,000 West Belt 14 1,261,839 196,847 15.6% 19.2% - - Bellaire 18 2,781,223 180,779 6.5% 6.5% - (39,000) Post Oak Park 18 1,891,123 228,826 12.1% 12.8% - (21,000) Galleria 22 3,307,175 302,937 9.2% 10.7% - (58,000) Riverway 9 870,126 130,519 15.0% 15.0% - 2,000 Richmond / Fountainview 7 559,977 145,034 25.9% 25.9% - 1,000 San Felipe / Voss 30 3,326,956 285,453 8.6% 8.8% - (4,000) West Loop 104 12,736,580 1,273,548 10.0% 10.6% - (119,000) Westchase 53 7,301,615 676,860 9.3% 9.5% - (20,000) The Woodlands 51 4,566,209 441,552 9.7% 10.7% 69,510 (34,000) Conroe 9 689,737 76,561 11.1% 11.1% - (1,000) TOTAL - Houston 775 97,706,055 13,782,057 14.1% 15.1% 171,510 (191,000)

REAL ESTATE OUTLOOK HOUSTON METRO Q1 2016 7 HOUSTON METRO MARKET FIRST QUARTER 2016

Houston Office Market Indicators - Asking Rental Rates

% CHANGE % CHANGE 2013 2013 2014 2014 2015 2015 Q1 2016 Q1 2016 SUBMARKET 12/15-03/16 12/15-03/16 CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B Central Business District $39.32 $25.99 $42.71 $28.13 $43.87 $28.66 $43.39 $28.66 -1.1% 0.0% Midtown $30.32 $26.03 $34.36 $27.17 $34.73 $27.39 $34.32 $27.64 -1.2% 0.9% Downtown $38.10 $25.99 $41.93 $28.03 $42.28 $28.57 $41.82 $28.59 -1.1% 0.1% FM 1960 / I-45 North - $18.06 - $18.20 $25.00 $17.65 $25.00 $17.52 0.0% -0.7% FM 1960 / Champions - $13.19 - $13.55 - $13.80 - $13.91 - 0.8% FM 1960 / Highway 249 $25.67 $20.80 $26.56 $20.62 $26.87 $20.73 $27.07 $20.50 0.7% -1.1% FM 1960 $25.71 $15.52 $26.56 $15.74 $26.73 $15.99 $26.92 $15.98 0.7% -0.1% North Belt West / Greenspoint $29.51 $15.63 $30.26 $15.59 $28.29 $14.92 $28.00 $14.15 -1.0% -5.2% Greenspoint / IAH $21.36 $16.34 $21.65 $15.80 $21.77 $15.97 $22.18 $15.67 1.9% -1.9% Greenspoint / North Belt $27.24 $15.73 $28.95 $15.62 $27.22 $15.03 $27.05 $14.31 -0.6% -4.8% Greenway Plaza $32.11 $23.72 $35.04 $25.34 $35.92 $25.89 $35.90 $25.83 -0.1% -0.2% Gulf Freeway / Pasadena - $21.61 - $22.35 - $22.35 - $21.49 - -3.8% Katy $30.56 $23.20 $32.26 $23.71 $32.94 $24.01 $32.65 $24.28 -0.9% 1.1% Katy Freeway East $35.52 $21.79 $36.65 $23.26 $38.02 $23.89 $38.16 $24.10 0.4% 0.9% Katy Freeway West $33.69 $20.52 $35.98 $22.73 $37.19 $23.13 $36.62 $22.76 -1.5% -1.6% Katy Fwy / Energy Corridor $34.08 $21.12 $36.06 $22.90 $37.40 $23.25 $37.00 $22.97 -1.1% -1.2% Kingwood / Humble $32.13 $19.00 $32.13 $19.54 $32.55 $18.75 $32.00 $18.75 -1.7% 0.0% NASA / Clear Lake $23.58 $18.33 $25.01 $18.62 $25.01 $18.82 $25.04 $18.03 0.1% -4.2% Northeast - $16.57 - $17.32 - $17.29 - $17.46 - 1.0% North Loop West $23.81 $18.25 $26.76 $20.50 $26.97 $20.81 $26.84 $20.81 -0.5% 0.0% Northwest Near - $15.60 - $16.40 - $16.63 - $16.63 - 0.0% Northwest Far $19.04 $15.31 $19.29 $16.66 $19.38 $16.70 $19.35 $15.96 -0.2% -4.4% Northwest $21.83 $16.72 $23.67 $18.50 $22.44 $18.32 $22.37 $17.88 -0.3% -2.4% South Main / Medical Center $28.54 $24.00 $29.09 $25.09 $29.19 $25.26 $29.38 $25.21 0.7% -0.2% Southwest / Hillcroft $21.75 $14.18 $21.98 $13.81 $22.04 $14.10 $22.00 $14.10 -0.2% 0.0% Southwest Beltway 8 $23.24 $16.68 $22.45 $16.43 $22.45 $16.23 $22.70 $16.34 1.1% 0.7% East Ft Bend Co. / Sugar Land $26.68 $21.32 $27.09 $21.60 $28.02 $21.49 $28.29 $21.19 1.0% -1.4% Southwest Fwy / Sugar Land $24.95 $16.67 $25.17 $16.56 $25.05 $16.12 $25.20 $16.16 0.6% 0.2% West Belt $30.35 $23.21 $31.42 $23.83 $32.02 $23.89 $32.02 $23.89 0.0% 0.0% Bellaire $25.86 $21.08 $26.80 $22.09 $26.96 $22.14 $26.98 $22.02 0.1% -0.5% Post Oak Park $35.43 $26.36 $35.94 $27.43 $36.51 $27.76 $36.06 $27.73 -1.2% -0.1% Galleria $35.70 $26.70 $37.04 $27.49 $38.00 $27.40 $37.65 $27.40 -0.9% 0.0% Riverway $30.82 $23.72 $32.10 $25.12 $33.14 $25.66 $33.00 $25.51 -0.4% -0.6% Richmond / Fountainview - $16.64 - $17.54 - $17.83 - $17.82 - -0.1% San Felipe / Voss $32.44 $22.40 $34.54 $23.41 $35.19 $23.50 $35.03 $23.40 -0.5% -0.4% West Loop $34.25 $23.68 $35.40 $24.43 $36.44 $24.46 $36.12 $24.40 -0.9% -0.3% Westchase $35.38 $19.75 $38.70 $21.51 $38.98 $21.23 $38.86 $21.35 -0.3% 0.6% The Woodlands $35.95 $23.38 $39.56 $25.63 $40.56 $25.39 $40.80 $25.44 0.6% 0.2% Conroe $28.42 $25.73 $28.40 $25.08 $29.35 $24.77 $29.40 $24.77 0.2% 0.0% TOTAL - Houston $32.71 $19.96 $34.49 $20.88 $35.31 $21.28 $35.09 $21.30 -0.6% 0.1% SOURCE CoStar, Transwestern NOTE Rents for properties using triple net terms have been grossed up to full service with operating expense data, rents reflect full service equivalent

8 REAL ESTATE OUTLOOK HOUSTON METRO Q1 2016 Houston Office Market Indicators - Asking Rental Rates

2013 2014 2015 2016 % CHANGE 12/15-03/16 SUBMARKET CLASS AA CLASS AA CLASS AA CLASS AA CLASS AA

Central Business District $50.04 $52.75 $54.29 $53.50 -1.5% Galleria $46.95 $48.76 $49.44 $48.20 -2.5%

SOURCE CoStar, Transwestern NOTE Class AA asking rents have been further broken out for two submarkets due to the large differential in rental rates for Class A. assets

CONTACT METHODOLOGY Rachel Alexander Kevin Roberts The information in this report is the result of a compilation of information on office, Director of Market Research President, Southwest industrial, retail, multifamily and healthcare properties located in the Houston 713.270.3344 713.270.3347 metropolitan area. This report includes single-tenant, multi-tenant and owner-user [email protected] [email protected] properties and excludes properties owned and occupied by a government agency.

Recent office leases North Belt West/ Office MarketI ndicators - All Space Direct OVERALL Asking Rental Greenspoint :: Bureau Veritas Total sf aVAILABLE SF Under q4 2015 Net Submarket INVENTORY Vacancy Vacancy Rates (fsg) Bldgs iMMEDIATELY Construction Absorption 43,602 SF new lease at Rate Rate CLASS A CLASS B

Greenspoint Park Downtown (CBD & Midtown) 119 53,272,718 6,218,674 11.7% 13.5% 1,463,258 (1,853,000) $42.28 $28.57

FM 1960 (FM 1960/I-45 N, FM 1960/ 77 8,527,532 1,264,383 14.8% 16.0% - 448,000 $26.73 $15.99 Galleria :: NGKF Champions & FM 1960/Hwy 249) 38,582 SF new lease at 2 BLVD Greenspoint/North Belt (North Belt West/Greenspoint & Greenspoint/IAH) 97 13,181,407 3,582,437 27.2% 30.4% - (1,209,000) $27.22 $15.03 Place Greenway Plaza 49 10,816,013 1,222,209 11.3% 11.5% 458,275 (51,000) $35.92 $25.89

North Belt West/ Gulf Freeway/Pasadena 34 2,597,502 363,650 14.0% 14.0% - 65,000 - $22.35

Greenspoint :: White Oak Katy 43 3,259,094 518,196 15.9% 16.1% 124,017 461,000 $32.94 $24.01 Operating Katy Frwy/Energy Corridor 205 36,110,960 3,869,245 10.7% 13.2% 914,037 2,572,000 $37.40 $23.25 22,378 SF new lease at 4 (Katy Freeway East & Katy Freeway West) Greenspoint Place Kingwood/Humble 8 789,674 73,440 9.3% 9.3% - (16,000) $32.55 $18.75 NASA/Clear Lake 63 7,051,599 944,914 13.4% 13.8% - - $25.01 $18.82 Recent office sales Northeast 15 1,155,562 206,846 17.9% 17.9% 1,000,000 (23,000) - $17.29 Midtown :: 5300 Memorial Northwest 73 8,883,138 1,402,282 15.8% 16.5% - (43,000) $22.44 $18.32 155,179 SF, Class B (North Loop West, Northwest Near & Northwest Far) Buyer: Equus Investment South Main/Medical Center 49 10,469,072 963,155 9.2% 9.2% - (105,000) $29.19 $25.26 Southwest Frwy/Sugar Land Partnership X Fund (SW/Hillcroft, SW Beltway 8 & E Ft Bend Co/Sugar Land) 123 16,266,671 2,129,477 13.1% 13.4% - 595,000 $25.05 $16.12 Seller: Parkway Properties West Belt 37 4,902,573 808,925 16.5% 17.6% - 690,000 $32.02 $23.89

West Loop (Bellaire, Post Oak Park, Galleria, 173 33,203,145 3,344,513 10.1% 11.6% 1,285,000 (296,000) $36.44 $24.46 Katy Freeway East :: Town & Riverway, Richmond/Fountainview & San Felipe/Voss) Country Central I Westchase 87 15,922,349 1,468,041 9.2% 12.5% 1,545,000 76,000 $38.98 $21.23

148,434 SF, Class B The Woodlands 90 15,048,455 1,203,876 8.0% 8.7% 442,503 2,470,000 $40.56 $25.39 Buyer: Equus Investment Conroe 13 903,345 79,494 8.8% 8.8% - 73,000 $29.35 $24.77 Partnership X Fund Seller: Parkway Properties Total - Houston 1,355 242,360,809 29,663,756 12.2% 13.8% 7,231,990 3,854,000 $35.31 $21.28 Source: Transwestern analysis of CoStar data, includes buildings 50,000 SF RBA and greater, excluding government owned buildings

OFFICE LEASE STATISTICS Office Sales Statistics Houston MSA United States Overall Vacancy Rates Asking Rental Rates (FSG) Last Last Quarter Trailing 12 Trailing 12 Quarter Quarter 14% $29.00 to Date Months Months (q4 2015) (q4 2015) Volume $78.2 $811.7 $3,010.7 $40,801.4 $147,581.9 13% $28.00 ($ Mil)

No. of 5 25 140 1,531 5,914 12% $27.00 Properties

11% $26.00 Total SF 515,328 3,144,932 16,345,163 176,994,635 645,941,847

Average N/A $320 $259 $239 $249 10% $25.00 Price/SF Average 9% Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 $24.00 Cap Rate N/A 7.6% 7.2% 6.6% 6.7% 12 13 13 13 13 14 14 14 14 15 15 15 15 (Yield) Source: Transwestern analysis of CoStar data, includes buildings 50,000 SF RBA and greater, excluding government owned buildings Source: Real Capital Analytics HOUSTON Office Market Fbuare r y 2016

1 4 7 5 1

6 3 5 8 249 2 4 2 290 2

4 3 90 3

6 2

1 5

10 10

4 6 1 See 3 2 Inner Loop 610 1 6 Map 8 99 1 2

3 2

59 45

288 35 4

INNER LOOP southeast NOH RT SOUTHWEST 1. CBD 1. Gulf Frwy/Pasadena 1. The Woodlands 1. Southwest/Hillcroft 2. South Main/Medical Center 2. NASA/Clear Lake 2. FM 1960/ I-45 North 2. Southwest Beltway 8 3. Galleria 3. Southeast Outlier 3. North Belt West/Greenspoint 3. E Fort Bend Co/Sugar Land

4. Riverway NOH RT WEST WEST 4. Southwest Outlier 5. Midtown 1. Northwest Near 1. San Felipe/Voss NO RTheast 6. Greenway Plaza 2. Northwest Far 2. Richmond/Fountainview 1. Northeast Near 7. Post Oak Park 3. FM 1960/Hwy 249 3. Westchase 2. Greenspoint/IAH 8. Bellaire 4. FM 1960/Champions 4. Katy Freeway East 3. Kingwood/Humble 9. North Loop West 5. Northwest Outlier 5. Katy Freeway West 4. Northeast Outlier 6. West Belt 6. Katy

MARKET WATCH HOUSTON office MARKET February 2016 HOUSTON Office Market February 2016

A BOut TRANSWESTERN

Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, research and sustainability. The fully integrated global enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. As a member of the Transwestern family of companies, the firm capitalizes on market insights and operational expertise of independent affiliates specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 180 offices in 37 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate.

Transwestern was founded in Houston, Texas in 1978, and Houston remains the corporate headquarters today. As one of the preeminent commercial real estate firms in Houston, we offer a comprehensive menu of real estate services designed to provide owners, tenants and investors with the optimum solutions for their unique requirements. Transwestern has seasoned veterans in every area of expertise with the integrity, experience and creativity to be the best partner for its clients. Transwestern’s Houston office currently employs over 400 team members and has been an innovator in the Houston market for 38 years.

SEATTLE

MINNEAPOLIS BOSTON DETROIT MILWAUKEE GREENWICH NEW YORK CHICAGO NEW JERSEY SAN FRANCISCO WALNUT CREEK SALT LAKE SILICON CITY BETHESDA BALTIMORE DENVER VALLEY WASHINGTON DC NORTHERN ST. LOUIS VIRGINIA

LOS ANGELES OKLAHOMA ORANGE COUNTY CITY SAN DIEGO PHOENIX TRANSWESTERN ATLANTA FORT DALLAS WORTH LOCATIONS

HOUSTON AUSTIN SAN ANTONIO NEW ORLEANS ORLANDO FORT LAUDERDALE MIAMI-DADE

HOUSTON CONTACTS Eric Anderson Michelle Wogan Monte Calvert Justin Leighton Margaret Ann Cook Executive Vice President - Office Executive Vice President - Office Senior Vice President - Office Managing Director - Tenant Advisory Vice President - Tenant Advisory 713.407.8704 713.270.3348 713.272.1234 713.272.1227 713.272.1223 [email protected] [email protected] [email protected] [email protected] [email protected] Doug Little David Lee Greg Tilton Ken Page Michael Snodgrass Senior Managing Director - Office Senior Vice President - Office Vice President - Office Managing Director - Tenant Advisory Managing Director - Structured Finance 713.272.1284 713.270.3335 713.270.3386 713.270.3361 713.270.3342 [email protected] [email protected] [email protected] [email protected] [email protected] David Baker Paul Wittorf Louann Pereira Bobbie Bozarth Jan Sparks Executive Vice President - Office Senior Vice President - Office Vice President - Office Senior Vice President - Tenant Advisory Managing Director - Structured Finance 713.407.8701 713.407.8709 713.272.1267 713.272.1221 713.270.3398 [email protected] [email protected] [email protected] [email protected] [email protected]

Contact Methodology Rachel Alexander Kevin Roberts The information in this report is the result of a compilation of publicly available Director of Market Research President, Southwest data from a variety of commercial and government sources. 713.270.3344 713.270.3347 [email protected] [email protected]

1900 West Loop South, Suite 1300 T 713.270.7700 F 713.270.6285 Houston, Texas 77027 www.transwestern.net/houston

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. Mat rke Watch HOUSTON Office December 2015

Recent office leases Galleria :: Apache Office Market Indicators - All Space Direct OVERALL Asking Rental 524,000 SF lease extension Total sf aVAILABLE SF Under q3 2015 Net Submarket INVENTORY Vacancy Vacancy Rates (fsg) Bldgs iMMEDIATELY Construction Absorption through 12/2019 at Post Oak Rate Rate CLASS A CLASS B

Central Downtown (CBD & Midtown) 119 53,272,718 6,255,676 11.7% 13.3% 1,463,258 (33,000) $42.97 $28.65

FM 1960 (FM 1960/I-45 N, FM 1960/ 74 7,834,745 1,131,743 14.4% 15.0% - 512,000 $26.92 $15.85 CBD :: Bracewell & Giuliani Champions & FM 1960/Hwy 249) 189,061 SF renewal at Pennzoil Greenspoint/North Belt (North Belt West/Greenspoint & Greenspoint/IAH) 96 13,112,457 3,282,294 25.0% 28.1% 68,950 (423,000) $28.07 $15.65 Place Greenway Plaza 48 10,416,013 946,816 9.1% 9.3% 858,275 74,000 $35.77 $25.94

Katy Freeway West :: G&A Gulf Freeway/Pasadena 34 2,597,502 368,845 14.2% 14.2% - 26,000 - $22.75

Partners Katy 22 1,379,013 224,779 16.3% 16.5% 124,017 123,000 $33.09 $24.01 30,065 SF new lease at Westgate I Katy Frwy/Energy Corridor (Katy Freeway East & Katy Freeway West) 207 34,736,090 3,663,164 10.5% 13.6% 2,288,929 (70,000) $37.49 $23.53 Recent office sales Kingwood/Humble 8 789,674 73,440 9.3% 9.3% - (4,000) $32.13 $18.75

Katy Freeway West :: Energy NASA/Clear Lake 63 7,051,599 944,914 13.4% 13.9% - (7,000) $24.84 $18.75 Center Three Northeast 15 1,155,562 190,668 16.5% 16.5% 1,000,000 (1,000) - $17.34 549,000 SF, Class A Northwest 73 8,883,138 1,420,636 16.0% 16.7% - (49,000) $22.57 $18.34 Buyer: ConocoPhillips (North Loop West, Northwest Near & Northwest Far) Seller: Trammell Crow Co & South Main/Medical Center 49 10,469,072 984,093 9.4% 9.5% - 42,000 $29.11 $25.59 Southwest Frwy/Sugar Land Principal Real Estate Investors (SW/Hillcroft, SW Beltway 8 & E Ft Bend Co/Sugar Land) 122 16,266,671 2,145,487 13.2% 13.5% - 227,000 $25.23 $16.14 joint venture West Belt 36 4,702,573 564,309 12.0% 13.5% 200,000 127,000 $32.22 $23.94

West Loop (Bellaire, Post Oak Park, Galleria, 172 33,203,145 3,119,154 9.4% 10.2% 1,145,000 148,000 $36.34 $24.34 Galleria :: 2200 Post Oak Riverway, Richmond/Fountainview & San Felipe/Voss) 326,200 SF, Class A Westchase 87 15,922,349 1,370,914 8.6% 11.4% 1,545,000 (18,000) $39.14 $21.03

Buyer: Corporación Masaveu The Woodlands 87 14,077,716 709,517 5.0% 5.5% 1,411,795 51,000 $40.56 $25.30 Seller: Stream, TRC Capital Conroe 13 903,345 89,431 9.9% 9.9% - - $29.55 $24.17 Partners & L&B Realty Advisors joint venture Total - Houston 1,327 236,773,382 27,485,878 11.6% 13.0% 10,105,224 725,000 $35.35 $21.27 Source: Transwestern analysis of CoStar data, includes buildings 50,000 SF RBA and greater, excluding government owned buildings

OFFICE LEASE STATISTICS Office Sales Statistics Houston MSA United States Overall Vacancy Rates Asking Rental Rates (FSG) Last Last Quarter Trailing 12 Trailing 12 Quarter Quarter 13% $29.00 to Date Months Months (q3 2015) (q3 2015) Volume $566.6 $466.5 $3,016.4 $36,202.0 $148,221.5 ($ Mil) 12% $28.00 No. of 11 34 141 1,515 5,940 Properties 11% $27.00 Total SF 2,054,058 3,233,416 16,057,528 161,242,546 631,572,481

Average 10% $26.00 $247 $122 $223 $245 $245 Price/SF Average Cap Rate N/A 7.6% 7.0% 6.7% 6.8% 9% Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 $25.00 (Yield) Source: Transwestern analysis of CoStar data, includes buildings 50,000 SF RBA and greater, excluding government owned buildings Source: Real Capital Analytics HOUSTON Office Market Decee mb r 2015

4 1 7 5 1 3

6 5 6 3 8 249 2 2 290 4

2 4 90 3 3

6 2 1

1 5

10 10 6 4 1 See 610 3 2 Inner Loop

1 99 6 Map 8 1 2

2 3 59 45

288 35 4

MARKET WATCH HOUSTON office MARKET December 2015 HOUSTON Office Market December 2015

A BOut TRANSWESTERN

Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, research and sustainability. The fully integrated global enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. As a member of the Transwestern family of companies, the firm capitalizes on market insights and operational expertise of independent affiliates specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 180 offices in 38 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate.

SEATTLE

MINNEAPOLIS BOSTON DETROIT MILWAUKEE GREENWICH NEW YORK CHICAGO NEW JERSEY SAN FRANCISCO WALNUT CREEK SALT LAKE SILICON CITY BETHESDA BALTIMORE DENVER VALLEY WASHINGTON DC NORTHERN ST. LOUIS VIRGINIA

LOS ANGELES OKLAHOMA ORANGE COUNTY CITY SAN DIEGO PHOENIX TRANSWESTERN ATLANTA FORT DALLAS WORTH LOCATIONS

HOUSTON AUSTIN SAN ANTONIO NEW ORLEANS ORLANDO FORT LAUDERDALE MIAMI-DADE

1900 West Loop South, Suite 1300 T 713.270.7700 F 713.270.6285 Houston, Texas 77027 www.transwestern.net/houston

Copyright © 2015 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. Mat rke Watch HOUSTON Office Sep tember 2015

recent office leases Westchase :: EMAS Office Market Indicators - All Space Direct OVERALL Asking Rental 93,614 SF sublease at 10500 Total sf aVAILABLE SF Under q2 2015 Net Submarket INVENTORY Vacancy Vacancy Rates (fsg) Bldgs iMMEDIATELY Construction Absorption Richmond Ave Rate Rate CLASS A CLASS B CBD :: MRC Global Downtown (CBD & Midtown) 118 53,105,156 6,055,164 11.4% 12.8% 1,630,820 (1,393,000) $42.31 $27.97 FM 1960 (FM 1960/I-45 N, FM 1960/ 73 7,378,745 1,187,411 16.1% 16.6% 456,000 25,000 $26.75 $15.96 50,237 SF sublease at Fulbright Champions & FM 1960/Hwy 249) Tower Greenspoint/North Belt (North Belt West/Greenspoint & Greenspoint/IAH) 96 13,112,457 2,859,304 21.8% 23.3% 68,950 (104,000) $28.41 $15.73 Post Oak Park :: Rockwater Greenway Plaza 48 10,416,013 1,020,769 9.8% 10.0% 858,275 (31,000) $35.35 $25.61 Energy Gulf Freeway/Pasadena 34 2,597,502 394,820 15.2% 15.5% - 53,000 N/A $22.49

32,000 SF new lease at 515 Post Katy 19 993,616 56,636 5.7% 6.0% 238,147 2,000 $33.06 $23.89 Oak Blvd Katy Frwy/Energy Corridor (Katy Freeway East & Katy Freeway West) 206 34,435,183 3,291,654 9.6% 11.4% 2,589,956 547,000 $36.98 $23.12 R ecent office sales Kingwood/Humble 8 789,674 69,491 8.8% 8.8% - (11,000) $31.96 $19.70

Galleria :: Galleria Place I & II NASA/Clear Lake 63 7,051,599 937,863 13.3% 13.4% - 7,000 $25.22 $18.79 396,445 SF total, two building Northeast 15 1,155,562 189,512 16.4% 16.4% 1,000,000 (5,000) N/A $16.89 portfolio Northwest 73 8,883,138 1,371,240 15.4% 15.8% - (6,000) $22.26 $18.41 Buyer: Lincoln Property Co (North Loop West, Northwest Near & Northwest Far) Seller: Songy Highroads & South Main/Medical Center 49 10,469,072 1,025,969 9.8% 9.8% - 10,000 $29.31 $25.07 Southwest Frwy/Sugar Land Carlyle Group joint venture (SW/Hillcroft, SW Beltway 8 & E Ft Bend Co/Sugar Land) 122 16,133,671 2,240,240 13.9% 14.1% 133,000 85,000 $25.49 $16.25 E Fort Bend Co/Sugar Land :: West Belt 36 4,702,573 691,278 14.7% 15.8% 200,000 411,000 $32.11 $23.95 West Loop (Bellaire, Post Oak Park, Galleria, 172 33,135,145 3,198,149 9.7% 10.5% 1,213,000 (204,000) $35.95 $24.23 Comerica Bank Building Riverway, Richmond/Fountainview & San Felipe/Voss) 193,988 SF, Class A Westchase 87 15,922,349 1,353,400 8.5% 11.5% 1,545,000 32,000 $39.05 $21.93

Buyer: Equus Capital Partners The Woodlands 87 14,077,716 760,197 5.4% 5.9% 1,411,795 378,000 $40.34 $25.93 Seller: Parkway Properties Conroe 13 903,345 89,432 9.9% 9.9% - 49,000 $28.40 $25.00

Total - Houston 1,319 235,262,516 26,792,529 11.4% 12.5% 11,344,943 (155,000) $34.95 $21.04

Source: Transwestern analysis of CoStar data, includes buildings 50,000 SF RBA and greater, excluding government owned buildings

OFFICE LEASE STATISTICS Office Sales Statistics Houston MSA United States Overall Vacancy Rates Asking Rental Rates (FSG) Last Last Quarter Trailing 12 Trailing 12 Quarter Quarter 13% $29.00 to Date Months Months (q2 2015) (q2 2015) Volume $342.2 $687.1 $3,286.6 $36,207.5 $144,335.0 ($ Mil) 12% $28.00 No. of 25 36 142 1,466 5,726 Properties 11% $27.00 Total SF 2,231,175 3,564,730 17,693,588 157,252,312 612,912,653

Average 10% $26.00 N/A $208 $229 $239 $245 Price/SF Average Cap Rate N/A 7.0% 6.9% 6.8% 6.8% 9% Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 $25.00 (Yield) Source: Transwestern analysis of CoStar data, includes buildings 50,000 SF RBA and greater, excluding government owned buildings Source: Real Capital Analytics HOUSTON Office Market Sepe temb r 2015

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INNER LOOP southeast NORTH SOUTHWEST 1. CBD 1. Gulf Frwy/Pasadena 1. The Woodlands 1. Southwest/Hillcroft 2. South Main/Medical Center 2. NASA/Clear Lake 2. FM 1960/ I-45 North 2. Southwest Beltway 8 3. Galleria 3. Southeast Outlier 3. North Belt West/Greenspoint 3. E Fort Bend Co/Sugar Land

4. Riverway NORTHWEST WEST 4. Southwest Outlier 5. Midtown 1. Northwest Near 1. San Felipe/Voss NORTHEAST 6. Greenway Plaza 2. Northwest Far 2. Richmond/Fountainview 1. Northeast Near 7. Post Oak Park 3. FM 1960/Hwy 249 3. Westchase 2. Greenspoint/IAH 8. Bellaire 4. FM 1960/Champions 4. Katy Freeway East 3. Kingwood/Humble 9. North Loop West 5. Northwest Outlier 5. Katy Freeway West 4. Northeast Outlier 6. West Belt 6. Katy

MARKET WATCH HOUSTON office MARKET September 2015 HOUSTON Office Market September 2015

A BOut TRANSWESTERN

Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, research and sustainability. The fully integrated global enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. As a member of the Transwestern family of companies, the firm capitalizes on market insights and operational expertise of independent affiliates specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 180 offices in 38 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate.

SEATTLE

MINNEAPOLIS BOSTON DETROIT MILWAUKEE GREENWICH NEW YORK CHICAGO NEW JERSEY SAN FRANCISCO WALNUT CREEK SALT LAKE SILICON CITY BETHESDA BALTIMORE DENVER VALLEY WASHINGTON DC NORTHERN ST. LOUIS VIRGINIA

LOS ANGELES OKLAHOMA ORANGE COUNTY CITY SAN DIEGO PHOENIX TRANSWESTERN ATLANTA FORT DALLAS WORTH LOCATIONS

HOUSTON AUSTIN SAN ANTONIO NEW ORLEANS ORLANDO FORT LAUDERDALE MIAMI-DADE

1900 West Loop South, Suite 1300 T 713.270.7700 F 713.270.6285 Houston, Texas 77027 www.transwestern.net/houston

recent office leases Greenway Plaza :: Transocean Office MarketI ndicators - All Space Direct OVERALL Asking Rental 255,413 SF lease renewal at 4 Total sf aVAILABLE SF Under 1Q2015 Net Submarket INVENTORY Vacancy Vacancy Rates (fsg) Bldgs iMMEDIATELY Construction Absorption Greenway Plaza Rate Rate CLASS A CLASS B Post Oak Park :: Stage Stores Downtown (CBD & Midtown) 117 52,811,156 4,367,602 8.3% 9.3% 1,630,820 (464,000) $42.61 $28.20 FM 1960 (FM 1960/I-45 N, FM 1960/ 73 7,378,745 1,212,565 16.4% 16.9% 456,000 (37,000) $26.65 $15.87 168,901 SF new lease at 2425 Champions & FM 1960/Hwy 249) West Loop South Greenspoint/North Belt (North Belt West/Greenspoint & Greenspoint/IAH) 96 13,112,457 2,755,213 21.0% 21.6% 68,950 (451,000) $28.47 $15.69 CBD :: Virtus Greenway Plaza 48 10,416,013 989,521 9.5% 9.7% 833,275 (219,000) $35.37 $25.51 26,198 SF new lease at 1301 Gulf Freeway/Pasadena 33 2,538,307 388,361 15.3% 15.6% - (19,000) N/A $22.50

Fannin Katy 18 993,616 58,623 5.9% 5.9% 238,147 69,000 $32.90 $23.85 Katy Frwy/Energy Corridor Galleria :: Behavioral (Katy Freeway East & Katy Freeway West) 202 33,445,319 2,848,944 8.5% 9.3% 4,065,758 926,000 $36.83 $23.14 Recognition Software Kingwood/Humble 8 789,674 58,436 7.4% 7.4% - (1,000) $32.13 $19.65 20,761 SF new lease at 1900 NASA/Clear Lake 63 7,051,599 1,001,327 14.2% 14.3% - 0 $25.16 $18.81 West Loop South Northeast 15 1,155,562 184,890 16.0% 16.0% 1,000,000 (1,000) N/A $17.17 recent office sales Northwest (North Loop West, Northwest Near & Northwest Far) 73 8,883,138 1,375,622 15.5% 16.3% - (6,000) $23.43 $18.35 North Belt West/ South Main/Medical Center 49 10,469,072 1,036,438 9.9% 9.9% - (178,000) $29.24 $25.04 Greenspoint :: 400 North Belt Southwest Frwy/Sugar Land 122 16,133,671 2,325,454 14.4% 15.2% 133,000 267,000 $25.51 $16.59 231,000 SF, Class A (SW/Hillcroft, SW Beltway 8 & E Ft Bend Co/Sugar Land) Buyer: Hartman Management West Belt 33 4,073,132 472,483 11.6% 13.4% 829,387 197,000 $32.06 $23.89 West Loop (Bellaire, Post Oak Park, Galleria, 172 33,135,145 2,993,959 9.0% 10.0% 1,243,938 (14,000) $35.59 $24.51 Seller: Parkway Properties Riverway, Richmond/Fountainview & San Felipe/Voss) Katy Freeway West :: Mason Westchase 87 15,922,349 1,385,244 8.7% 12.5% 1,545,000 159,000 $38.91 $21.35 Creek I The Woodlands 86 13,577,716 665,308 4.9% 5.3% 1,710,177 1,565,000 $40.22 $25.84 135,716 SF, Class A Conroe 13 903,345 138,212 15.3% 15.3% - 14,000 $28.42 $25.20

Buyer: Nicola Crosby Total - Houston 1,308 232,790,016 24,258,202 10.4% 11.4% 13,754,452 1,807,000 $35.00 $21.08 Seller: TA Realty Source: Transwestern analysis of CoStar data, includes buildings 50,000 SF RBA and greater, excluding government owned buildings

OFFICE LEASE STATISTICS Office Sales Statistics Houston MSA United States Overall Vacancy Rates Asking Rental Rates (NNN) Last Last Quarter Trailing 12 Trailing 12 Quarter Quarter 12% $30.00 to Date Months Months (1Q15) (1Q15) Volume $341.6 $1,001.4 $3,173.8 $34,305.3 $130,480.1 ($ Mil)

11% $28.00 No. of 16 26 133 1,173 4,792 Properties

Total SF 1,853,972 3,709,496 17,268,906 125,477,786 543,484,596 10% $26.00 Average $268 $393 $231 $285 $250 Price/SF Average Cap Rate 7.1% 6.1% 7.1% 6.6% 6.8% 9% 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 $24.00 (Yield) Source: Transwestern analysis of CoStar data, includes buildings 50,000 SF RBA and greater, excluding government owned buildings Source: Real Capital Analytics Mat rke Watch HOUSTON Office Marc h 2015

recent office leases Greenway Plaza :: Direct Office MarketI ndicators - All Space

Energy Direct OVERALL Asking Rental Total sf aVAILABLE SF Under 2014 Net Submarket INVENTORY Vacancy Vacancy Rates (fsg) 191,893 SF lease extension at Bldgs iMMEDIATELY Construction Absorption Rate Rate 12 Greenway Plaza CLASS A CLASS B Downtown (CBD & Midtown) 117 52,811, 156 3,808,043 7.2% 7.9% 1,881,830 567,000 $41.93 $28.03 North Belt W/Greenspoint :: FM 1960 (FM 1960/I-45 N, FM 1960/ 73 7,378,745 1,174,782 15.9% 16.4% 612,000 296,000 $26.56 $15.74 Swift Energy Champions & FM 1960/Hwy 249) Greenspoint/North Belt 96 13,112,457 2,304,046 17.6% 18.1% - (456,000) $28.95 $15.62 113,801 SF new lease at Five (North Belt West/Greenspoint & Greenspoint/IAH) Greenspoint Place Greenway Plaza 48 10,416,013 770,785 7.4% 7.7% 648,275 210,000 $35.04 $25.34 CBD :: Gardere Wynne Sewell Gulf Freeway/Pasadena 31 2,380,307 211,847 8.9% 9.2% 158,000 12,000 N/A $22.35 74,975 SF renewal at Wells Katy 16 906,816 40,807 4.5% 4.5% 237,987 61,000 $32.26 $23.71 Fargo Plaza Katy Frwy/Energy Corridor (Katy Freeway East & Katy Freeway West) 197 31,755,526 2,085,465 6.6% 7.1% 6,044,762 1,794,000 $36.06 $22.90 Greenway Plaza :: Regions Kingwood/Humble 8 789,674 57,646 7.3% 7.3% - 69,000 $32.13 $19.54 Bank 64,750 SF prelease at 3773 NASA/Clear Lake 63 7,051,599 1,001,327 14.2% 14.4% - 299,000 $25.01 $18.62 Richmond Ave Northeast 15 1,155,562 183,734 15.9% 15.9% - 69,000 N/A $17.32 Northwest 13 8,883,138 1,369,371 15.4% 16.1% - 20,000 $23.67 $18.50 Westchase :: Zachry Group (North Loop West, Northwest Near & Northwest Far) 50,000 SF new lease at South Main/Medical Center 49 10,469,072 910,809 8.7% 8.7% - 42,000 $29.09 $25.09 Westchase Park II Southwest Frwy/Sugar Land (SW/Hillcroft, SW Beltway 8 & E Ft Bend Co/Sugar Land) 122 16,133,671 2,592,553 16.1% 16.7% 133,000 106,000 $25.17 $16.56 recent office sales West Belt 30 3,469,788 65,926 1.9% 4.0% 1,429,222 (17,000) $31.42 $23.83 Westchase :: Honeywell West Loop (Bellaire, Post Oak Park, Galleria, 172 33,135,145 2,980,529 9.0% 9.7% 863,938 261,000 $35.40 $24.43 Building Riverway, Richmond/Fountainview & San Felipe/Voss) 157,000 SF, Class B Westchase 87 15,922,349 1,560,390 9.8% 10.7% 1,517,000 308,000 $38.70 $21.51 Buyer: Michael Klein The Woodlands 83 11,894,637 547,153 4.6% 5.2% 3,081,971 2,789,000 $39.56 $25.63 Seller: Parkway Properties, Inc. Total - Houston 1,293 228,569,000 21,816,976 9.5% 10.2% 16,607,985 6,412,000 $34.49 $20.88

Source: Transwestern analysis of CoStar data, includes buildings 50,000 SF RBA and greater, excluding government owned buildings

OFFICE LEASE STATISTICS Office Sales Statistics Houston MSA United States Last Last Overall Vacancy Rates Asking Rental Rates (NNN) Quarter Trailing 12 Trailing 12 Quarter Quarter to Date Months Months 13% $30.00 (4Q14) (4Q14) Volume $470.9 $731.4 $2,678.3 $36,513.6 $118,541.9 ($ Mil)

12% $28.00 No. of 16 39 120 1,366 4,509 Properties

11% $26.00 Total SF 2,297,278 5,059,102 15,860,782 161,963,394 533,813,593

Average N/A $194 $213 $225 $237 10% $24.00 Price/SF Average Cap Rate N/A 7.0% 7.2% 6.7% 6.8% 9% 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 $22.00 (Yield) Source: Transwestern analysis of CoStar data, includes buildings 50,000 SF RBA and greater, excluding government owned buildings Source: Real Capital Analytics HOUSTON Office Market Mr a ch 2015

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MARKET WATCH HOUSTON office MARKET MARCH 2015 HOUSTON Office Market March 2015

A BOut TRANSWESTERN

Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, research and sustainability. The fully integrated global enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. As a member of the Transwestern family of companies, the firm capitalizes on market insights and operational expertise of independent affiliates specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 180 offices in 38 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate.

SEATTLE

MINNEAPOLIS BOSTON DETROIT MILWAUKEE GREENWICH NEW YORK CHICAGO NEW JERSEY SAN FRANCISCO WALNUT CREEK SALT LAKE SILICON CITY BETHESDA BALTIMORE DENVER VALLEY WASHINGTON DC NORTHERN ST. LOUIS VIRGINIA

LOS ANGELES OKLAHOMA ORANGE COUNTY CITY SAN DIEGO PHOENIX TRANSWESTERN ATLANTA FORT DALLAS WORTH LOCATIONS

HOUSTON AUSTIN SAN ANTONIO NEW ORLEANS ORLANDO FORT LAUDERDALE MIAMI-DADE

HOUSTON CONTACTS Eric Anderson Michelle Wogan Monte Calvert Ken Page Bobbie Bozarth Executive Vice President - Office Executive Vice President - Office Senior Vice President - Office Managing Director - Investment Sales Senior Vice President - Tenant Advisory 713.407.8704 713.270.3348 713.272.1234 713.270.3361 713.272.1221 [email protected] [email protected] [email protected] [email protected] [email protected] Doug Little David Lee Greg Tilton Scott Myers Michael Snodgrass Senior Managing Director - Office Senior Vice President - Office Vice President - Office Vice President - Investment Sales Managing Director - Structured Finance 713.272.1284 713.270.3335 713.270.3386 713.270.3384 713.270.3342 [email protected] [email protected] [email protected] [email protected] [email protected] David Baker Paul Wittorf Louann Pereira Justin Leighton Jan Sparks Executive Vice President - Office Senior Vice President - Office Vice President - Office Managing Director - Tenant Advisory Managing Director - Structured Finance 713.407.8701 713.407.8709 713.272.1267 713.272.1227 713.270.3398 [email protected] [email protected] [email protected] [email protected] [email protected]

Contact Methodology Rachel Alexander The information in this report is the result of a compilation of publicly available data from a variety of Director of Market Research commercial and government sources. 713.270.3344 [email protected]

1900 West Loop South, Suite 1300 T 713.270.7700 F 713.270.6285 Houston, Texas 77027 www.transwestern.net/houston

recent office leases Greenspoint/North Belt :: Office Market Indicators - All Space

Nabors Industries Direct Overall Asking Rental Total sf aVAILABLE SF Under 3Q2014 Net Submarket INVENTORY Vacancy Vacancy Rates (fsg) 314,000 SF renewal & expansion Bldgs iMMEDIATELY Construction Absorption Rate Rate at One Commerce Green CLASS A CLASS B Downtown (CBD & Midtown) 117 52,811,156 3,861,025 7.3% 8.0% 1,631,162 201,000 $42.10 $27.84

Westchase :: Bristow Group FM 1960 83 8,550,212 1,261,489 14.8% 15.3% 768,000 25,000 $27.01 $15.75 (I-45 N, FM 1960/Champions & FM 1960/Hwy 249) 115,000 SF new lease at Greenspoint/North Belt 95 12,790,980 1,955,276 15.3% 16.2% (154,000) $28.57 $15.65 CityWestPlace 4 (North Belt West/Greenspoint & Greenspoint/IAH) Greenway Plaza 48 10,416,013 802,033 7.7% 7.8% 660,437 10,000 $36.50 $24.97

Energy Corridor :: GE Gulf Freeway/Pasadena 31 2,380,307 207,087 8.7% 8.7% $21.98 72,177 SF prelease at Westway Katy Frwy/Energy Corridor 196 31,641,112 1,902,633 6.0% 7.0% 5,670,188 37,000 $35.40 $22.78 Plaza (Katy Freeway East & Katy Freeway West) Kingwood/Humble 9 881,561 60,828 6.9% 6.9% $32.13 $19.00 recent office sales NASA/Clear Lake 62 6,996,599 1,056,486 15.1% 15.2% 55,000 49,000 $24.72 $18.78 CBD :: 600 Jefferson Northeast 15 1,155,562 184,890 16.0% 16.0% (1,000) $17.04 449,087 SF, Class B Northwest 96 11,862,803 1,374,354 11.6% 12.2% 1,193,336 56,000 $26.47 $19.25 Sale price: $69 million approx (North Loop West, Northwest Near & Northwest Far) Buyer: Stream Realty & DRA South Main/Medical Center 49 10,469,072 858,464 8.2% 8.2% 4,000 $28.14 $24.77 Advisors joint venture Southwest Frwy/Sugar Land 121 16,077,076 2,646,067 16.5% 17.2% 57,000 (109,000) $25.00 $16.63 Seller: Brookfield Property (SW/Hillcroft, SW Beltway 8 & E Ft Bend Co/Sugar Land) West Loop (Bellaire, Post Oak Park, Galleria, 172 33,135,145 2,959,521 8.9% 9.6% 698,938 163,000 $35.31 $24.25 Partners Riverway, Richmond/Fountainview & San Felipe/Voss) Westchase 85 15,515,357 1,272,259 8.2% 8.6% 1,817,000 (31,000) $37.31 $20.87

The Woodlands 79 10,229,637 501,252 4.9% 5.7% 4,565,837 138,000 $37.14 $26.80

Total - Houston 1,271 225,815,937 21,002,128 9.3% 9.9% 17,116,898 390,000 $34.52 $20.80

Source: Transwestern analysis of CoStar data, includes buildings 50,000 SF RBA and greater, excluding government owned buildings

OFFICE LEASE STATISTICS Office Sales Statistics Houston MSA United States Overall Vacancy Rates Asking Rental Rates (NNN) Last Last Quarter Trailing 12 Trailing 12 Quarter Quarter to Date Months Months 6.0% $6.50 (3Q14) (3Q14) Volume $366.5 $743.9 $3,490.6 $31,478.1 $121,717.1 5.5% $6.25 ($ Mil)

No. of 5.0% $6.00 17 35 124 1,155 4,399 Properties 4.5% $5.75 Total SF 3,032,563 4,952,494 20,533,638 132,949,791 563,297,307 4.0% $5.50 Average $173 $175 $206 $249 $240 3.5% $5.25 Price/SF Average 3.0% 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 $5.00 Cap Rate 7.9% 7.3% 7.6% 6.8% 6.9% (Yield) Source: Transwestern analysis of CoStar data, includes buildings 50,000 SF RBA and greater, excluding government owned buildings Source: Real Capital Analytics HOUSTON Office Market De ec mb r 2014

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INNER LOOP southeast NORTH SOUTHWEST 1. CBD 1. Gulf Frwy/Pasadena 1. The Woodlands 1. Southwest/Hillcroft 2. S. Main/Medical Center 2. NASA/Clear Lake 2. FM 1960/ I-45 North 2. Southwest Beltway 8 3. Galleria 3. Southeast Outlier 3. N. Belt West/Greenspoint 3. Fort Bend Co. Sugar Land

MARKET WATCH HOUSTON office MARKET december 2014 HOUSTON Office Market December 2014

A BOut TRANSWESTERN

Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, research and sustainability. The fully integrated global enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. As a member of the Transwestern family of companies, the firm capitalizes on market insights and operational expertise of independent affiliates specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 180 offices in 38 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate.

Transwestern was founded in Houston, Texas in 1978, and Houston remains the corporate headquarters today. As one of the preeminent commercial real estate firms in Houston, we offer a comprehensive menu of real estate services designed to provide owners, tenants and investors with the optimum solutions for their unique requirements. Transwestern has seasoned veterans in every area of expertise with the integrity, experience and creativity to be the best partner for its clients. Transwestern’s Houston office currently employs over 385 team members and has been an innovator in the Houston market for 36 years.

SEATTLE

MINNEAPOLIS BOSTON DETROIT MILWAUKEE GREENWICH NEW YORK CHICAGO NEW JERSEY SAN FRANCISCO WALNUT CREEK SALT LAKE SILICON CITY BETHESDA BALTIMORE DENVER VALLEY WASHINGTON DC NORTHERN ST. LOUIS VIRGINIA

LOS ANGELES OKLAHOMA ORANGE COUNTY CITY SAN DIEGO PHOENIX TRANSWESTERN ATLANTA FORT DALLAS WORTH LOCATIONS

HOUSTON AUSTIN SAN ANTONIO NEW ORLEANS ORLANDO FORT LAUDERDALE MIAMI-DADE

1900 West Loop South, Suite 1300 T 713.270.7700 F 713.270.6285 Houston, Texas 77027 www.transwestern.net/houston

Copyright © 2014 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. Mat rke Watch HOUSTON Office s eptember 2014

recent office leases Katy :: Det Norske Veritas Office Market Indicators - All Space

47,250 SF prelease at 22535 Direct Overall Asking Rental Total sf aVAILABLE SF Under 2Q2014 Net Submarket INVENTORY Vacancy Vacancy Rates (fsg) Colonial Pkwy Bldgs iMMEDIATELY Construction Absorption Rate Rate CLASS A CLASS B Energy Corridor :: Venari Downtown (CBD & Midtown) 117 52,811,156 4,204,382 8.0% 8.8% 1,626,638 219,000 $41.62 $27.66 FM 1960 83 8,550,212 1,287,043 15.1% 15.2% 770,000 65,000 $27.41 $15.32 Resources (I-45 N, FM 1960/Champions & FM 1960/Hwy 249) 28,655 SF new lease at West Greenspoint/North Belt (North Belt West/Greenspoint & Greenspoint/IAH) 95 12,790,980 1,801,184 14.1% 14.8% 50,000 $29.72 $15.91 Memorial Place Greenway Plaza 48 10,416,013 812,449 7.8% 7.9% 660,437 (10,000) $36.58 $24.31

Energy Corridor :: Tesco Gulf Freeway/Pasadena 31 2,380,307 207,087 8.7% 8.8% (2,000) $21.02 Corporation Katy Frwy/Energy Corridor 193 31,114,355 1,412,594 4.5% 5.0% 5,355,552 621,000 $35.49 $22.81 26,510 SF prelease at Westway (Katy Freeway East & Katy Freeway West) Kingwood/Humble 9 881,561 60,828 6.9% 6.9% 104,223 87,000 $32.13 $19.00 Plaza NASA/Clear Lake 62 6,996,599 1,105,463 15.8% 15.9% 55,000 $24.47 $18.57 recent office sales Northeast 15 1,155,562 183,734 15.9% 15.9% 31,000 $17.22 Energy Corridor :: Two Northwest 96 11,862,803 1,429,703 12.1% 12.5% 1,079,973 $27.10 $20.24 Westlake Park (North Loop West, Northwest Near & Northwest Far) 454,843 SF, Class A South Main/Medical Center 48 10,419,072 812,688 7.8% 7.8% 52,362 (10,000) $28.41 $24.63 Southwest Frwy/Sugar Land Sale price: $120 million (SW/Hillcroft, SW Beltway 8 & E Ft Bend Co/Sugar Land) 121 16,077,076 2,751,158 17.1% 17.1% 57,000 233,000 $25.02 $16.78 Buyer: PIMCO & Hicks Ventures West Loop (Bellaire, Post Oak Park, Galleria, Riverway, Richmond/Fountainview & San Felipe/Voss) 171 33,093,069 3,081,093 9.3% 10.0% 741,014 92,000 $35.12 $24.04 Seller: KBS REIT II Westchase 85 15,515,357 1,241,229 8.0% 8.7% 1,923,992 185,000 $37.07 $20.85 Woodlands/Conroe (The Woodlands & Conroe) 90 10,914,637 520,745 7.7% 8.2% 4,639,102 290,000 $32.48 $25.97 Total - Houston 1,264 224,978,759 20,911,380 9.3% 9.8% 17,065,293 1,851,000 $34.65 $20.77

Source: Transwestern analysis of Costar data - Houston office buildings 15,000 SF and greater, excluding government owned buildings

OFFICE LEASE STATISTICS Office Sales Statistics Houston MSA United States Overall Vacancy Rates Asking Rental Rates (fsg) Last Last Quarter Trailing 12 Trailing 12 Quarter Quarter to Date Months Months 13% $30.00 (2Q14) (2Q14) Volume $507.0 $631.8 $4,460.0 $27,688.5 $115,720.0 ($ Mil) 12% $28.00 No. of 21 31 117 992 4,148 Properties 11% $26.00 Total SF 3,161,606 3,539,705 24,372.927 118,247,868 547,450,507

10% $24.00 Average $162 $200 $212 $244 $236 Price/SF Average 9% $22.00 Cap Rate 6.5% 8.8% 7.7% 6.9% 6.9% 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 (Yield) Source: Transwestern analysis of CoStar data- Houston office buildings 15,000 SF and greater, excluding government owned buildings Source: Real Capital Analytics HOUSTON Office Market seeptemb r 2014

4 1 7 5 1 3

6 5 6 3 8 249 2 2 290 4

2 4 90 3 3

2 1

1 5

10 10

4 1 See 610 3 2 Inner Loop

1 99 6 Map 8 1 2

2 3 59 45

288 35 4

MARKET WATCH HOUSTON office MARKET september 2014 HOUSTON Office Market september 2014

A BOut TRANSWESTERN

Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, research and sustainability. The fully integrated global enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. As a member of the Transwestern family of companies, the firm capitalizes on market insights and operational expertise of independent affiliates specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 181 offices in 40 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate.

Transwestern was founded in Houston, Texas in 1978, and Houston remains the corporate headquarters today. As one of the preeminent commercial real estate firms in Houston, we offer a comprehensive menu of real estate services designed to provide owners, tenants and investors with the optimum solutions for their unique requirements. Transwestern has seasoned veterans in every area of expertise with the integrity, experience and creativity to be the best partner for its clients. Transwestern’s Houston office currently employs over 385 team members and has been an innovator in the Houston market for 36 years.

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Recent Office Leases CBD :: Key Energy (renewal) Office MarketI ndicators - All Space Direct Overall Asking Rental 89,000 SF in Fulbright tower Total sf aVAILABLE SF Under 1Q2014 Net Submarket INVENTORY Vacancy Vacancy Rates (fsg) Bldgs iMMEDIATELY Construction Absorption Rate Rate Energy Corridor :: IHI E&C CLASS A CLASS B Downtown (CBD & Midtown) 218 55,285,545 4,956,476 9.0% 9.8% 2,347,138 94,000 $32.84 $26.34 International Corporation FM 1960 241 12,192,643 1,885,105 15.5% 15.8% 511,500 146,000 $25.55 $17.76 61,455 SF in One Eldridge Place (I-45 N, FM 1960/Champions & FM 1960/Hwy 249) Greenspoint/North Belt 126 13,842,997 2,026,125 14.6% 16.3% 43,000 $28.71 $18.44 San Felipe/Voss :: Texas (North Belt West/Greenspoint & Greenspoint/IAH) Greenway Plaza 99 12,166,960 936,856 7.7% 7.7% 660,437 170,000 $29.52 $21.54 American Title 50,000 SF at 2000 Bering Gulf Freeway/Pasadena 110 4,637,000 468,337 10.1% 10.2% 47,700 19,000 $27.84 $21.24 Katy Frwy/Energy Corridor (Katy Freeway East & Katy Freeway West) 299 34,197,744 1,627,045 4.8% 5.2% 3,825,722 1,135,000 $26.25 $20.98 Recent Office Sales Kingwood/Humble 46 1,822,176 151,241 8.3% 8.9% 196,110 (15,000) $30.10 $17.51 Greenspoint/North Belt NASA/Clear Lake 172 9,763,387 1,474,271 15.1% 15.3% 87,772 140,000 $23.82 $19.43 West :: Eight Greenspoint Plaza Northeast 47 2,097,508 241,213 11.5% 11.5% 36,400 38,000 $14.61 Northwest 182 15,315,476 1,997,198 13.2% 13.5% 1,019,000 (3,000) $25.07 $18.45 198,257 SF, Class A (North Loop West, Northwest Near & Northwest Far) Sale price undisclosed South Main/Medical Center 88 11,135,712 812,907 7.3% 7.3% 52,362 100,000 $26.44 $26.30 Buyer: Stream Realty & Southwest Frwy/Sugar Land (SW/Hillcroft, SW Beltway 8 & E Ft Bend Co/Sugar Land) 312 21,171,123 3,480,431 16.4% 17.1% 342,000 (128,000) $20.93 $16.53 AllianceBernstein US RE West Loop (Bellaire, Post Oak Park, Galleria, Riverway, Richmond/Fountainview & San Felipe/Voss) 242 35,754,835 3,354,376 9.4% 10.1% 956,094 27,000 $31.88 $21.58 Seller: ExxonMobil Corporation Westchase 112 16,063,203 1,268,993 7.9% 8.6% 2,261,880 35,000 $32.62 $19.52 Woodlands/Conroe (The Woodlands & Conroe) 200 14,052,916 613,479 4.4% 5.2% 4,411,323 784,000 $25.90 $24.48 Total - Houston 2,494 259,499,225 25,294,053 9.7% 10.3% 16,755,438 2,585,000 $29.34 $20.17

Source: Transwestern analysis of Costar data - Houston office buildings 15,000 SF and greater, excluding government owned buildings

OFFICE LEASE STATISTICS Office Sales Statistics

Overall Vacancy Rates Asking Rental Rates (fsg) Houston MSA United States Last Last Quarter Trailing 12 Trailing 12 Quarter Quarter 14% $26.00 to Date Months Months (1Q14) (1Q14) Volume $378.8 $726.7 $5,025.8 $23,463.6 $109,548.5 13% $25.00 ($ Mil)

No. of 26 16 114 950 3,948 12% $24.00 Properties

11% $23.00 Total SF 2,921,761 2,966,083 26,038,184 118,028,587 529,788,492

Average 10% $22.00 N/A $278 $234 $230 $229 Price/SF Average 9% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 $21.00 Cap Rate N/A 6.8% 7.4% 6.8% 6.9% (Yield) Source: Transwestern analysis of CoStar data- Houston office buildings 15,000 SF and greater, excluding government owned buildings Source: Real Capital Analytics