HOUSTON OFFICE | Q4 2020 Quarterly Market Report JANUARY 2021 Supply & Demand EXECUTIVE SUMMARY Net Absorption Completions Vacancy 6 24% Vacancy rate ends 2020 at 23.3% 5 21% Millions (SF) The overall vacancy rate in the Houston office market was up 30 basis points quarter-over- 4 18% quarter, and up 220 basis points year-over-year. 3 15% The vacancy rate for Class A properties is at 25.6%, and Class B at 21.7%. In the fourth quarter, overall 2 12% net absorption totaled negative 671,000 sq. ft.— Class A represented negative 717,000 sq. ft. of 1 9% that tally, while Class B registered 86,000 sq. ft. Of the 4.2 million sq. ft. currently under construction, 0 6% 46.0% of that space has been spoken for. Of the -1 3% 21 properties completed in 2020, totaling 1.5 million sq. ft., 45.7% of that space is leased. The -2 0% Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 overall Houston average asking full-service rent is 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 at $29.91 per sq. ft.—up slightly from one year ago at $29.80 per sq. ft.—while Class A space in the Central Business District is averaging $43.52 Market Indicators per sq. ft. Current Prior Quarter Year Ago Q4 2020 Q3 2020 Q4 2019 Vacant Total 23.3% 23.0% 21.1% Houston economic indicators Vacant Direct 22.1% 21.8% 19.8% According to the Federal Reserve Bank of Dallas, earlier estimates for metro Houston’s pandemic Available Total 28.0% 27.3% 25.4% job losses were at 353,600 jobs from February Available Direct 25.2% 24.9% 22.9% to April 2020. However, revised data released Net Absorption (SF) -670,941 -1,639,286 730,281 in November show a net drop of 366,800 jobs. Leasing Activity (SF) 2,334,871 2,489,797 5,050,551 The bulk of the additional job losses occurred in Construction (SF) 4,233,633 4,121,836 3,772,493 professional and business services, which shed Deliveries (SF) 28,800 656,872 73,000 40,900 jobs versus 27,400 in the earlier estimate. Since April, Houston has added back 147,500 jobs, Avg Asking Rent (Gross) $29.91 $29.35 $29.80 as local employment data indicate improvement in Inventory (SF) 241,262,697 241,233,897 239,794,487 October. While considerable uncertainty remains in the outlook for Houston’s energy jobs, the biggest job losses in the sector are likely in the past. www.naipartners.com HOUSTON OFFICE | Q4 2020 Quarterly Market Report MARKET OVERVIEW Availability Rates Decreased negative net absorption in Q4 2020 Direct Sublease During the fourth quarter, Houston’s office market saw 30% a 60% decrease in the amount of space that tenants 28.0% were moving out of compared to the third quarter of 25% 2020, which tallied an aggregate of negative 1,639,286 sq. ft. of net absorption—the highest quarterly total 20% since NAI Partners began recording this data. The aggregate effect of the total net absorption for the entire 15% year of 2020 was negative 4.2 million sq. ft., raising the overall vacancy rate to 23.3%. The amount of total office 10% inventory that is being marketed for lease also increased quarter-over-quarter, lifting the availability rate to 28.0%. 5% The difference between this figure and the vacancy rate reflects expected future move-outs. Space being 0% marketed for sublease represents 7.2 million sq. ft., or Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 10.4% of the 68.8 million-sq.-ft. total availability figure. The Central Business District vacancy rate is at 27.2%, up 60 basis points from this time last quarter at 26.6%, while the Energy Corridor vacancy rate is at 27.4%, up 60 basis points from 26.8% in Q3 2020. Net Absorption Direct Sublease Total Office development 3.0 2.5 Office construction is at 4.2 million sq. ft across 20 buildings, with 2.3 million sq. ft. (54.0%) available for Millions (SF) 2.0 lease. The Central Business District, Medical Center 1.5 and Katy Freeway East account for 1.8 million sq. ft., 1.0 or 77.6% of the total space available. Hines’ Texas 0.5 Tower is expected to deliver in Q4 2021 and is 40% 0.0 preleased. Outside of downtown, of the 789,000 sq. ft. underway in the Medical Center submarket, the -0.5 512,000-sq.-ft. Horizon Tower life sciences building is -1.0 being built in Texas A&M Innovation Plaza. Other office -1.5 buildings under construction in the Katy Freeway East -2.0 submarket include Marathon Oil’s 440,000-sq.-ft. future Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 headquarters in CityCentre; and Village Tower II, a 150,000-sq.-ft. office building at 9655 Katy Freeway. The Medical Center market has an overall vacancy rate of 8.9%, while the Katy Freeway East market has a vacancy rate of 12.3% compared to the metro’s overall Construction by Submarket average of 23.3%. Total Under Construction: 4,233,633 SF Pre-Leased Space Available Space CBD Investment sales trends Medical Center Real Capital Analytics data reports quarterly office sales Katy Freeway volume for Q4 2020 in the Greater Houston area at $344 million. The quarter-over-quarter change in volume is up Woodlands/Conroe close to 40% from $247 million in Q3 2020. The primary Midtown capital composition for buyers in 2020 has been made Galleria/West Loop up of 64.1% private investors and 31.2% institutional. Pearland/South For sellers, the majority was 36.3% private investors, FM 1960/Hwy 249 31.7% REIT/listed, and 19.4% institutional. Katy/Grand Parkway W 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 Millions (SF) www.naipartners.com 3 HOUSTON OFFICE | Q4 2020 Quarterly Market Report Houston’s largest life sciences sale NAI Partners arranged the sale of five buildings totaling 260,950 sq. ft. at 8800 Technology Forest Drive, located Cumulative Monthly Sales Volume Houston Office Source: Real Capital Analytics in The Woodlands, TX. The main building on the former Lexicon Pharmaceuticals campus is a 128,400-sq.-ft. Class A office property with laboratory space. Additional 2020 2016 2017 2018 2019 properties on the site include a 1-story flex property 6 with lab and office space, as well as two special-use facilities. This is the single-largest commercial real Billions (SF) 5 estate sales transaction in the Life Sciences sector in 4 the Greater Houston area in 2020. NAI Partners’ Dan Boyles and Jon Silberman represented the seller, 3 Lexicon Pharmaceuticals. Lexicon will be relocating its corporate headquarters to a new location in The 2 Woodlands. Multiple major life sciences and innovation developments are in the works throughout Houston, 1 including TMC3, which is owned by the Texas Medical 0 Center; Rice University’s The Ion project; Hines and J F M A M J J A S O N D 2ML Real Estate Interests’ Levit Green; and Medistar Corp.’s Innovation Tower, as well as the forthcoming Texas A&M Innovation Plaza development, which will include medical office and lab space within its Horizon Tower. Quarterly Leasing Activity Over 100,000 SF Leasing activity CBD The volume of signed lease transactions during the fourth quarter was 2.3 million sq. ft.—down slightly Galleria/West Loop by about 150,000 sq. ft. from the previous quarter, although down more than 50% from one year ago at 5.1 million sq. ft. The largest leases signed in Q4 2020— Westchase which is comprised of both new leases and renewals— include TC Pipelines renewal/expansion of 320,788 sq. Energy Corridor ft. in TC Energy Center at 700 Louisiana St., and Vroom, an online automobile retailer, leased a new 102,492 sq. Woodlands/Conroe ft. of space at 3600 W. Sam Houston Parkway S. in Westchase Park II. The largest transactions during 2020 Midtown include Occidental renewing 801,967 sq. ft. of space 0 100 200 300 400 500 at 5 Greenway Plaza, and Enterprise Products Partners Thousands (SF) renewing 512,345 sq. ft. in Enterprise Plaza at 1100 Louisiana St. Overall Gross Avg Asking Rent ($PSF) Average asking rents CBD Midtown The Houston overall full-service average rates are at Greenway Plaza Galleria/West Loop $29.91 per sq. ft., up from last quarter at $29.35, and Katy Freeway Woodlands/Conroe from one year ago at $29.80 per sq. ft. Asking rates Katy/Grand Pkwy W Sugar Land/E Ft Bend for overall Class A space are $35.04 and Class B Pearland/South are $23.12 per sq. ft. Rent growth has varied across Westchase Medical Center Houston’s submarkets. Asking rents in the Midtown West Belt Energy Corridor submarket averaged $37.89 per sq. ft., which is 27% Bellaire North Loop West higher than the metro average as a whole and ranked Kingwood/Humble number two—only behind the CBD—among Houston Gulf Fwy/Pasadena NASA/Clear Lake/SE submarkets as of the end of 2020. FM 1960/Hwy 249 Northeast Greenspoint/North Belt Northwest Southwest $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 www.naipartners.com 4 HOUSTON OFFICE | Q4 2020 Quarterly Market Report MARKET OVERVIEW Submarket Stats 2020 Q4 2020 Overall Total Total Q4 2020 Net YTD Net Leasing Under Gross Avg Submarket Statistics Total Inventory Vacancy Availability Absorption Absorpiton Activity Construction Asking Rent (Total reflects Class A/B/C) (SF) (%) (%) (SF) (SF) (SF) (SF) ($/PSF) Houston Market Total 241,262,697 23.3 28.0 -670,941 -4,157,107 2,334,871 4,233,633 29.91 Class A 130,982,061 25.6 31.6 -717,20 3 -2,404,896 1,310,846 3,408,375 35.04 Class B 9 6,317,767 21.7 25.2 86,274 -1,380,831 938,809 825,258 23.12 2020 Q4 2020 Overall Total Total Total Q4 2020 Net YTD Net Leasing Under Gross Avg Submarket Statistics Inventory Vacancy Availability Absorption Absorpiton Activity Construction Asking Rent (Total reflects Class A/B/C) (SF) (%) (%) (SF) (SF) (SF) (SF) ($/PSF) CBD Total 39,841,491 27.2