First Quarter 2019 / Office Market Report Houston Quick Stats Positive absorption and lower vacancy rates $36.63 psf for class A. Concessions are recorded in the first quarter are encouraging available, especially in submarkets with large 72,600 signs of progress in Houston’s office market. amounts of available space. Jobs created during the 12 Direct net absorption remained positive for months ending February 2019 the third consecutive quarter, with the most Newer, modern buildings are driving many recent 12-month total a positive 790,000 sf. older class A properties to invest in major This positive momentum builds confidence upgrades with amenities to attract and retain 4.2% for Houston’s office market recovery. quality tenants. Downtown’s Houston Center February unemployment rate and Allen Center are working on significant in Houston, down from 4.7% in Vacancy rates have shown consistent improvements, which has already resulted in February 2018 improvement during the last two years. The increased leasing activity for Houston Center. first-quarter direct vacancy rate of 15.9% The flight-to-quality factor – firms opting represents the lowest recorded since first- for office efficiency in newer properties – is 7.2 quarter 2017’s 15.6% rate. keeping availability high as firms leave larger, Msf of sublease space now vacant office spaces behind. listed on the sublease market, Local employment growth has been steady, down from a high of 11 msf in with the unemployment rate dropping to Absorption and Demand 2016 4.2% in February from January’s 4.5% and last February’s 4.7%. For the 12 months Direct positive net absorption returned to ending February 2019, the Houston the office market for a third consecutive 15.9% metro area created 72,600 jobs, a 1.9% quarter, with 386,929 sf recorded during the Direct vacancy in Houston’s increase year-over-year, according to Texas first quarter. Overall class A and C properties office market Workforce Commission statistics. The leading reported direct net gains during the first job growth sector was durable goods quarter, with class A properties recording the manufacturing with 15,200 new jobs. highest absorption of 470,931 sf. Suburban 2.5 properties led in class A absorption, Msf under construction Overall rental rates are also trending higher recording a positive 520,704 sf compared to each quarter with the current asking rate the Central Business District’s (CBD) class A at $30.73 per square foot (psf) overall and negative absorption of 49,773 sf. Partnership. Performance. avisonyoung.com Houston First Quarter 2019 / Office Market Report Broken down by submarkets, the decreased slightly this quarter for class Although no buildings were completed Woodlands submarket recorded the A properties to 17.6% from 17.9%, and during first quarter, one new property, highest positive absorption of 408,796 for class C, which is now 7.7% vacant. Park Place River Oaks, sf during the first quarter, primarily Class B properties maintained the broke ground. The due to American Bureau of Shipping’s same 17.9% vacancy rate of the 207,202-sf property occupancy of the company’s new previous quarter. 2.5 msf in the West Loop 303,137-sf offices in CityPlace 2. This UNDER submarket is reported Comparing submarkets, the Northeast is the second consecutive quarter the CONSTRUCTION 21% preleased with Near submarket (defined as being Woodlands submarket recorded the completion in March inside Beltway 8) boasts the lowest largest gains due to occupancies in 2020. vacancy rate at 4% and the Greenspoint Springwoods Village; during fourth submarket came in with the highest quarter, HP moved into its two new Three properties are scheduled rate at 44.8%. However, Greenspoint is buildings totaling 378,402 sf. for completion during the second making some headway recuperating quarter: CityPlace 1 and City Place in Other large movement in class A from several large moveouts during the Springwoods Village located in the properties during the first quarter last few years including Exxon Mobil, Woodlands submarket and Capitol included Asurion’s occupancy of Noble Energy and most recently, the Tower in the CBD. 129,966 sf in Legacy at American Bureau of Shipping. Vacancy Fallbrook in the West rates in all other submarkets range from Asking Rates Belt submarket and 5.2% to 21.9%. 387k sf Overall average asking rates have WeWork’s 55,400 DIRECT NET Direct availability citywide increased increased slightly to $30.73 psf gross sf at 1725 Hughes POSITIVE ABSORPTION from 20.4% last quarter to 21.0% this from the previous quarter’s $30.42 psf Landing in The quarter. Fluctuating in the 20% range and 3.9% from the $29.59 recorded Woodlands. For class during the last 12 months, availability year-over-year. Asking rates have been B, the Houston Forensic overall including sublease space is now relatively stable and reported in the Science Center moved into 83,800 sf at at 24.0%. Leasing activity slowed during $29-$30 psf range during the last 500 Jefferson downtown. the first quarter to 3.1 msf, and no five years. Throughout the downturn, building completions took place during The solid leasing activity in the newest landlords have offered various the first quarter. buildings in the CBD indicates that the concessions ranging as high as year- long rent abatements and allowances flight-to-quality trend continues to Total available sublease space dipped dominate the market. Capitol Tower, to 7.2 msf from fourth quarter’s 7.4 covering the full cost of tenant scheduled for delivery in June, is msf, representing a improvement construction. almost 80% preleased. 609 Main, the 31% decrease of Asking rates for the different submarkets newest 1.1-msf tower started in the sublease space range from $16.39 psf in the Southwest downturn and completed in 2017, recorded in 2017. 15.9% to $43.67 in the CBD. The suburban steadily signs up tenants. Developed Total sublease VACANCY RATE submarkets with the highest rates by Hines, 609 Main was 49% preleased space represents include the West Loop, Greenway Plaza when it delivered to the market and is about 13% of the and the Woodlands. currently 86% leased with more deals 54.9 msf available, and reportedly underway. five submarkets represent 79% of all Class A rates overall are up to $36.63 psf sublease space available. Vacancy & Availability and gaining ground over first quarter Construction 2018’s $35.02 psf. CBD properties are The direct vacancy rate decreased 40 currently quoting the highest class basis points to 15.9% during the first The construction pipeline remains A rates on record at $43.67 psf, while quarter from 16.3% last quarter. Vacancy limited, with eight buildings totaling average CBD sublease rates are about improved overall during the last 12 2.5 msf under construction and 39.6% half the direct rate at $21.87 psf. months, decreasing from 2018’s first preleased. The CBD represents about Average suburban class A rates are quarter rate of 16.7%. Vacancy rates 75% of the total square footage. currently $32.22 psf. Partnership. Performance. avisonyoung.com Asking Rates First-Quarter Highlights $32 Deloitte US renewed its 204,210-sf Asurion occupied 129,966 sf in lease in Heritage Plaza and will be Legacy at Fallbrook, 10720 W. Sam $31 renovating the space. Houston Parkway in the West Belt submarket. $30 Three tenants are taking over about 65% of the former CB&I space American Bureau of Shipping in Lake Front North in Hughes moved into its 303,127-sf space in $29 Landing in The Woodlands. Arena CityPlace 2, 1701 City Plaza Drive, Energy has leased 87,231 sf in in the Woodlands submarket, $28 YE14 YE15 YE16 YE17 YE18 YTD19 Building 1 at 2103 Research Forest. representing the largest absorption Entergy and Exxon Mobil have during the first quarter. Vacancy Rate leased 54,000 sf and 26,000 sf, One office building, Park Place 17% respectively, in Building 2 at 2107 Research Forest. CB&I sold the River Oaks, broke ground during two buildings totaling 257,025 sf first quarter. The new building will 14% last year after being acquired by add 207,200 sf to the West Loop McDermott International. submarket in March 2020. 11% 8% YE14 YE15 YE16 YE17 YE18 YTD19 Trends to Watch Net Absorption With its central location within the U.S. and the Americas, Houston 8m is an important office base. The Oil The price of oil has fluctuated between following are regional updates for $50 to $65 recently after a high in the 6m key economic indicators. $70s in October 2018. 4m 2m Employment Purchasing 0m Employment grew 1.9%, creating The Purchasing Manager’s Index 72,600 jobs for the 12 months ending (PMI) registered 64 in March 2019, its -2m February 2019. highest reading in six years, up from YE14 YE15 YE16 YE17 YE18 YTD19 56.1 in February. Partnership. Performance. avisonyoung.com Houston First Quarter 2019 / Office Market Report Construction Timeline 20m 15m 10m 5m 0m 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD19 Deliveries (sf) Under Construc�on (sf) Select Under Construction Building Building Rentable Projected Name Address Building Area % Preleased Delivery Submarket Texas Tower 845 Texas Avenue 1,106,581 32.8% October 2021 CBD Capitol Tower 800 Capitol Street 780,593 79.6% June 2019 CBD Park Place | River Oaks* 4200 Westheimer Road 207,202 21.0% March 2020 West Loop Chasewood Crossing Three 19350 State Highway 249 156,000 0.0% August 2019 FM 1960 CityPlace 1 1700 City Plaza Drive 149,500 18.0% June 2019 Woodlands City Place 1401 Lake Plaza Drive 48,840 45.2% May 2019 Woodlands Buffalo Heights 3663 Washington Avenue 35,363 0.0% September 2019 Midtown *Broke ground Q1 2019 Select First-Quarter Lease Transactions Building Building Tenant Name Address Size (sf) Submarket Hunton Andrews Kurth* JP Morgan Chase Building 600 Travis Street 134,763 CBD Asurion Legacy at Fallbrook 10720 W.