Savills Studley Research Houston Savills Studley Report Houston office sector Q3 2018 SUMMARY Market Highlights LEASING PUSHES HIGHER ASKING RENT STABLE Tenants leased 3.5 million square feet (msf) Average asking rent for the Houston "Tenants across a wide set of industries in the third quarter, a slight increase from market rose by 0.2% to $28.48. Year-on- continue to carefully assess the ample array the 3.2 msf leased in the second quarter, year average asking rent was essentially and above the long-term average of 2.8 msf unchanged. The Class A rate declined by of options available to them in this market. leased per quarter. Leasing activity in the 0.4% to $33.16 during the third quarter. Sublet supply pushed higher in the quarter, four most recent quarters totaled 13.5 msf, exceeding the market’s long-term average SUBLEASE SUPPLY REMAINS ELEVATED but with oil and gas prices rising steadily, of 11.5 msf. Overall sublease supply remains substantial, there is a sense that the local economy has totaling 8.5 msf as of early September but AVAILABILITY DECREASES is down from the high mark of 11 msf. The turned the corner. In turn, the recent flight The market’s overall and Class A availability addition of Occidental's Greenway campus to quality is likely to continue in the coming rates both fell in the third quarter, dropping pushed sublet supply up by over 800,000 sf. to 27.3% and 29.3%, respectively. quarters." Brad Hauser, Research Director Savills Studley Report | Houston Tenants Enjoy Ample Space Office-Using Employment Trends Options Millions Many U.S. office markets are benefiting from 0.80 7% a protracted period of steady economic growth and restrained construction. 0.70 5% Houston’s economy is still dealing with 0.60 3% the negative impacts from the oil and gas supply glut, but the energy sector is on the 0.50 1% mend. In addition to steady increases in 2009 gas prices, corporate tax reform is boosting 0.40 -1% investment in equipment and R&D. Exxon 0.30 -3% Mobil recently said it plans to invest $50 billion in its U.S. operations over the next 0.20 -5% five years, attributing increased spending in part to tax breaks enacted in the Tax Cuts 0.10 -7% and Jobs Act. 2010 2011 2012 0.00 2013 2014 2015 2016 2017 2018 -9% Hou. Off. Emp. Hou - % Ann. Ch. Off. Emp. U.S. - % Ann. Ch. Off. Emp Tenants Using Restraint Source: Bureau of Labor Statistics^ Companies are still being cautious and restrained in their demand. Tenants have Availability Rate Trends ample options to consider. The Houston Availability Rate Trends market ended the third quarter with 51.2 msf of space available for lease with occupancy 35% in the next 12 months – 4.0% more than two 29.3% years ago. Space consolidation and new 30% construction have contributed to availability rates that consistently exceed 25% in 25% much of the market and approach 40% in 20.6% 24.4% West Houston. Based on the supply stats 20% in early September, there were more than 150 existing buildings offering a contiguous 15% block in excess of 50,000 sf and more than 14.7% 75 with a block over 100,000 sf. 10% Flight to Quality 5% Class A Class B & C Newer product, ironically, fares better. 0% Companies are willing to pay the higher Q3 '13 Q3 '14 Q3 '15 Q3 '16 Q3 '18 Q3 '18 face rent given the improved efficiency, stellar amenities and generous concessions these properties offer. Bank of America, for example, pre-leased 210,000 sf at Asking Rent Trends ($/sf) Capitol Tower and will vacate 145,000 sf Rental Rate Trends ($/sf) at 700 Louisiana. Waste Management is close to signing its new HQ lease, also $40 at Capital Tower. Hines’ 609 Main Street, $33.16 which delivered in 2017, is pulling tenants $35 $31.40 from other properties. Older buildings are suffering. Law firms have been active in $30 these conditions – capturing premium $25 space at reasonable costs. Vinson & Elkins committed to 208,000 sf at Hines & Ivanhoe $20 Cambridge’s new tower on the former $20.77 Houston Chronicle Site. The law firm will $15 $18.81 shed more than 80,000 sf in its move from 300,000 sf at 1001 Fannin. Hines took $10 155,000 sf at the same builiding and will relocate from Williams Tower in the Galleria. $5 Class A Class B & C The new 47-story, 1- msf tower will deliver $0 in 2021. Q3 '13 Q3 '14 Q3 '15 Q3 '16 Q3 '18 Q3 '18 The delivery of new product and surplus 02 Q3 2018 of available space is stoking the amenities race between landlords. Some landlords are Availability Rate Comparison Rental Rate Comparison ($/sf) stealing a page from the hospitality sector Medical Center / South 9.4% CBD $38.70 – adding multiple dining options, fitness US Index $34.37 Bellaire 11.8% centers and in some buildings entire amenity Greenway Plaza $32.77 Pasadena / Baytown floors. Collaboration space and conference 15.0% West Loop / Galleria $32.27 Midtown centers are becoming the norm. Hines’ new 15.5% Midtown $32.03 I-10 / NE / Kingwood 16.7% Woodlands $29.45 building will feature a public garden on the Houston Region $28.48 Woodlands 19.7% 11th floor. Katy Freeway $28.29 US Index 18.1% N Loop W / 290 Near $27.54 Greenway Plaza Heritage office buildings, those constructed 21.4% Westchase $25.91 N Loop W / 290 Near 21.5% Bellaire $25.34 prior to 2000, face an imperative to renovate Northwest / 290 Far Southwest / Sugar Land 21.4% $22.44 or significantly overhaul interior space Pasadena / Baytown $19.52 West Loop / Galleria 21.9% buildouts, while also adding amenities. I-10 / NE / Kingwood $19.20 NASA / Clear Lake Companies that fill in some of the vacant 23.5% North Belt / Greenspoint $19.05 FM 1960 space at existing buildings can generally 26.3% Southwest / Sugar Land $18.93 Houston Region 27.3% NASA / Clear Lake $18.42 negotiate generous concessions. Tenant Medical Center / South $17.64 CBD 28.2% retention efforts are also intensifying. FM 1960 $15.63 Northwest / 290 Far 30.4% Landlords are willing to offer significant Type Westchase free rent to companies that renew in place. 33.6% New $31.09 Katy Freeway 33.6% Existing Direct $28.15 Haynes and Boone renewed its 72,903- Sublet North Belt / Greenspoint 51.7% $19.28 sf lease at Downtown’s LyondellBasell $0 $10 $20 $30 $40 Tower. Brookfield bought the building last 0% 10% 20% 30% 40% 50% December and plans to upgrade shared amenities. Major Transactions Surge in Sublet Space Tenant Sq Feet Address Market Area Schlumberger 250,000 1430 Enclave Pky Katy Freeway The deep pool of sublet space is Bank of America 210,000 800 Capitol CBD undercutting pricing across the market. Vinson & Elkins 208,000 801 Texas CBD There were 8.5 msf of sublet space available Hines 155,000 801 Texas CBD for lease (5.5 msf vacant) including a number Ernst & Young 120,827 5 Houston Center CBD of big blocks at the close of the quarter. The PIMA Medical Institute 64,818 11125 Equity Drive West Belt third quarter brought some major additions City of Houston 64,000 2100 Travis CBD Kirkland & Ellis 54,000 609 Main St CBD to sublet supply. Dynegy Inc. listed 103,000 Cardtronics 53,544 2050 W Sam Houston Pky West Belt sf at 601 Travis and Linn Energy put a block Exterran Energy 44,894 11000 Equity Dr West Belt of nearly 65,000 sf on the market at 600 Sum of Top 10 Leases 1,225,083 Sum of 3rd Qtr Leasing Activity 3.5 MSF Travis. Acquired by Vista Energy Corp in 2017, Dynegy announced plans to cut 308 jobs shortly afterwards. The musical chairs space that Occidental Petroleum put on the business park called Pintail Crossing west triggered by the release of sublet space market in Greenway Plaza this summer. of Katy on a site located between Amazon’s started in the first half of the year. Enable This includes 746,070 sf at 5 Greenway 1-msf distribution center and Igloo Product’s Midstream Partners relocated its office from Plaza and 67,525 sf in 3 Greenway. Oxy headquarters and distribution center. 1111 Louisiana to 910 Louisiana in a 48,000- is moving to a new owned property in sf sublease from Shell Oil. Crestwood Equity West Houston which is the ConocoPhillips Investors Take the Long View is vacating space in BofA Center and will headquarters at 600 N. Dairy. move into 90,000 sf of sublet space in 811 Investors continue to display a lot of faith Main. Industrial Sector More Challenging in the long-term value prospects for quality office product in Houston. Office property Some of the sublet space was absorbed Of note, while the development pipeline sales volume has dropped off a bit in the last during the summer. Kiewit Engineering for office product is being reined in, few months, though. Amstar's $68.1 million Group sublet 52,834 sf at Energy Center the industrial market is much tighter, acquisition of 1001 McKinney in June was IV. The engineering company will relocate rationalizing some major new park one of a handful of sales completed in the from The Woodlands at 3831 Technology construction. Hines unveiled plans to last several months. Forest Boulevard. Investment firm Sheridan develop a 107-acre business park in Production sublet the top three floors northwest Houston.