MARKETVIEW Houston Office, Q4 2018 Houston’s absorption positive for the first time in 2018 Vacancy Rate Avg. Asking Rate Net Absorption Under Construction 18.6% $29.00 PSF 590,320 SF 2.23 MSF *Arrows indicate trend from previous quarter. Figure 1: Houston Office Market Trends MSF 60 25% 50 20% 40 15% 30 10% 20 10 5% 0 0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Direct SF Sublease SF Vacancy (%) Availability (%) Source: CBRE Research, Q4 2018. HOUSTON MARKET FINISHES 2018 STRONG EXPIRING SUBLEASE MEANS HIGHER VACANCY In a reversal of course, Houston saw positive net absorption overall in the fourth quarter for the first After peaking at 23.0% in Q2 2018, total availability time this year. Specifically, the consulting, dropped to 22.4% in the fourth quarter. While technology and energy industries all boasted positive availability declined, vacancy continued to climb and absorption. On the downside, the Energy Corridor peaked at 18.6%, partly a result of more than 1 struggled with 197,000 sq. ft. of negative absorption, million sq. ft. of sublease space expiring and largely due to Amec Foster Wheeler vacating all of becoming vacant rather than being absorbed. Energy Center I. The move followed a merger with Persistent sublease space rolling vacant will likely the Wood Group. put downward pressure on asking rents in the The fourth quarter saw wild movement in oil prices, coming quarters despite the early signs of recover. with West Texas Intermediate Crude (WTI) first peaking at $76.90/bbl on October 3rd and closing the FLIGHT TO QUALITY CONTINUES quarter at $45.41/bbl. Flight to quality persists in the major submarkets. Class A properties recently delivered or renovated NEW OFFICE SPACE with modern amenities continue to outperform their Q4 2018 saw deliveries of over 1 million sq. ft. of less modern peers with higher occupancy and rental office space. The North submarket captured the rates. With new construction Class A properties lion’s share of these deliveries. American Bureau of demanding premium rents, tenants are willing to pay Shipping and a new owner-occupied campus for for the added benefits of the latest technology and Hewlett-Packard Inc. accounted for a whopping efficiencies. 704,800 sq. ft. Q4 2018 CBRE Research © 2019 CBRE, Inc. | 1 MARKETVIEW HOUSTON OFFICE Figure 2: Houston Office Market Statistics Net Total Total Average Under Q4 2018 2018 YTD Sublease Deliveries Submarket Rentable Vacancy Availability Asking Rate Construction Net Net (SF) (SF) Area (%) (%) ($/PSF) (SF) Absorption Absorption CBD 42,343,647 15.4 19.7 1,820,123 40.48 1,884,925 100,561 -226,439 Class A 30,126,479 14.8 19.8 1,504,564 44.65 1,884,925 115,483 -240,180 Class B 11,362,895 17.5 20.2 314,208 31.35 -13,724 26,526 Allen Parkway Corridor 3,489,406 9.2 9.9 23,360 32.74 -41,645 -102,436 Class A 2,239,467 8.4 9.4 23,360 34.56 -13,546 -81,091 Class B 1,044,530 11.7 11.7 - 30.22 -25,315 -42,919 Clear Lake 5,408,326 21.4 21.5 5,185 18.48 2,368 -3,523 Class A 1,855,697 11.5 11.8 5,185 24.61 9,583 4,523 Class B 2,534,777 30.2 30.2 - 17.84 -9,040 10,627 East 2,261,420 10.6 11.2 6,513 18.73 -14,305 27,769 Class A 356,376 10.6 10.6 - 26.80 6,000 12,714 Class B 1,528,393 10.7 11.6 14,513 18.50 -26,302 -10,254 Energy Corridor 23,974,486 20.2 26.2 3,215,282 29.00 86,255 -197,158 -360,929 Class A 18,134,479 17.7 25.3 1,395,200 32.87 -107,926 -39,040 Class B 4,934,870 28.3 28.9 239,641 23.98 -94,349 -299,353 Far West 1,455,680 17.1 21.8 69,553 25.08 -1,204 54,365 Class A 666,230 11.1 20.5 62,657 27.11 6,208 64,120 Class B 671,015 24.5 25.6 6,896 25.25 -7,297 -3,717 FM 1960/Highway 249 7,065,511 16.3 17.6 86,166 19.75 156,000 80,655 -60,169 Class A 1,613,043 8.8 9.5 10,029 30.19 156,000 19,359 -35,700 Class B 4,130,056 19.3 20.8 64,793 20.04 6,412 -58,463 Greater Pearland 333,000 7.8 11.3 11,683 28.92 0 -14,435 Class A 250,000 3.7 8.4 11,683 30.88 0 1,913 Class B 80,000 20.4 20.4 - 27.80 0 -16,348 Greenway Plaza 11,858,290 18.0 26.0 949,583 33.50 188,547 146,581 232,289 Class A 6,219,744 17.6 32.2 907,006 37.25 65,672 210,461 Class B 3,348,258 13.6 14.7 37,088 29.56 52,819 7,688 Katy Freeway 6,073,695 12.7 14.1 83,025 33.77 -44,468 128,542 Class A 4,278,905 13.35 15.3 81,212 43.01 -40,215 82,366 Class B 692,659 7.3 7.3 - 18.41 16,919 104,602 Kingwood 947,942 11.8 11.8 - 20.98 -37 -16,436 Class A 351,676 20.5 20.5 - 21.26 6,255 -11,127 Class B 467,516 4.6 4.6 - 20.17 -6,267 -5,248 North 5,595,896 12.4 12.9 25,647 25.84 704,800 413,474 386,240 Class A 4,626,573 11.6 11.6 - - 704,800 399,276 404,121 Class B 932,423 16.8 19.6 25,647 25.84 8,406 -18,381 North Belt/Greenspoint 11,550,397 49.5 50.2 90,183 20.35 -349,961 -766,795 Class A 3,910,378 59.0 59.0 0 25.77 -212,095 -614,663 Class B 5,603,876 50.4 52.0 87,883 18.29 -51,134 -385,215 *Although Class C is not listed separately, totals are inclusive of all classes of data. Q4 2018 CBRE Research © 2019 CBRE, Inc. | 2 MARKETVIEW HOUSTON OFFICE Figure 2: Houston Office Market Statistics (continued) Net Total Total Average Under Q4 2018 2018 YTD Sublease Deliveries Submarket Rentable Vacancy Availability Asking Rate Construction Net Net (SF) (SF) Area (%) (%) ($/PSF) (SF) Absorption Absorption North Loop/Highway 290 7,982,880 21.2 21.3 8,341 20.74 -23,575 -204,840 Class A 2,137,544 36.1 36.1 0 24.80 -34,826 -234,892 Class B 4,515,189 18.7 18.8 8,341 17.44 4,736 43,342 South Main/Medical Center 2,584,022 8.2 8.0 - 23.03 4,368 -28,747 Class A 879,722 6.5 6.5 - 32.21 3,896 -4,436 Class B 630,845 6.5 6.5 - 21.93 751 397 Southwest Freeway 12,829,648 16.6 19.6 388,790 17.86 187,200 -22,724 -238,232 Class A 3,607,588 6.4 14.2 280,835 29.77 10,065 81,233 Class B 4,577,225 24.4 26.7 105,031 17.68 187,200 -55,669 -175,985 Westchase 19,667,654 22.0 27.8 1,150,127 26.25 187,011 -18,490 -78,765 Class A 7,442,779 19.8 31.3 854,453 39.23 -14,348 163,146 Class B 9,198,188 24.0 27.1 282,295 22.97 -2,251 -231,642 West Belt 6,043,748 16.0 24.2 496,819 27.97 52,529 -49,659 Class A 3,867,709 18.6 28.5 385,282 29.99 60,208 -17,673 Class B 2,113,975 11.8 17.1 111,537 23.34 -7,679 -31,986 West Loop/Galleria 33,342,663 17.3 20.9 1,207,963 33.67 104,579 247,331 16,489 Class A 17,541,341 15.3 20.5 917,108 39.32 235,287 290,686 Class B 12,355,738 20.9 22.9 252,516 27.88 -4,526 -262,808 Woodlands 8,339,812 8.5 9.3 67,805 31.54 256,020 197,128 Class A 6,333,614 7.2 7.8 34,577 34.35 255,059 131,311 Class B 1,644,397 13.8 15.8 33,228 27.29 4,309 53,501 Suburban Total 171,161,476 19.4 23.0 6,101,264 25.82 343,200 1,271,192 489,759 -882,144 Class A 86,312,865 17.2 22.9 4,941,845 33.46 156,000 1,271,192 653,912 407,972 Class B 61,003,930 22.3 25.0 1,059,766 21.64 187,200 -195,477 -1,333,162 Houston Total 213,505,123 18.6 22.4 7,921,387 29.00 2,228,125 1,271,192 590,320 -1,108,583 Class A 116,439,344 16.6 22.1 6,446,409 37.08 2,040,925 1,271,192 769,395 167,792 Class B 72,366,825 22.4 24.3 1,373,974 23.13 187,200 -209,201 -1,295,636 Source: CBRE Research, Q4 2018.