Q3 2010 | OFFICE MARKET HOUSTON OFFICE MARKET RESEARCH & FORECAST REPORT Houston Suburban Office Market Continues to Outpace CBD Houston’s office market at the close of 3Q2010 showed a slight improvement from the previous quarter, with a stronger performing suburban sector, compared to the Central Business District (CBD). Although leasing activity picked up, vacancy increased slightly. Year-over-year change in office occupancy citywide was moderate with 83.3 percent occupancy at the end of the third quarter compared to 83.8 percent in the same quarter last year. Quoted rental rates citywide for Class A space MARKET INDICATORS decreased 0.4 percent, with the CBD Class A decreasing 2.0 percent to $35.16 per square foot, while Q3-09 Q3-10 suburban Class A space decreased a minimal 0.2 percent to $27.30 per square foot. Net absorption NET ABSORPTION (SF) also showed the combined suburban markets outperforming the CBD. While the CBD’s year-to-date net 6k (26k) absorption was negative 553,516 square feet, the suburban markets’ combined net absorption was positive at 242,261 square feet. Even with weak pockets scattered citywide, the suburban market CITYWIDE AVERAGE VACANCY trends continue to indicate this sector will plateau sooner, and will likely lead the office market 16.2% 16.6% recovery. CITYWIDE AVERAGE RENTAL RATE Looking forward, several key events are contributing to a more cautious outlook for the local downtown $22.82 $23.11 office market over the next 6–12 months. The recently approved merger between Houston-based CLASS A RENTAL RATE Continental Airlines and Chicago-based United Airlines expected to close by year-end will not CBD $37.45 $35.16 negatively impact CBD Class A occupancy in the near-term. According to a source close to the deal, Continental’s lease doesn’t expire until 2014 and the space will not be offered for sublease for 12-24 SUBURBAN $26.84 $27.30 months. The top concern for the CBD Class A market is the completion of speculative new CLASS A VACANCY construction. Hines’ 972,474-square-foot MainPlace is currently 10 percent leased and expected to be CBD 8.8% 10.1% completed by February 2011. Securing an anchor tenant before final delivery, however, remains a SUBURBAN 18.4% 19.3% possibility as was the case with the only other new office building underway downtown—Trammell Crow Company’s 844,763-square-foot Hess Tower—100 percent pre-leased to Hess Corporation and scheduled to open in October 2010. UNEMPLOYMENT 08/09 08/10 According to the Texas Labor Market Review, Texas MSA’s have experienced job gains in six out of HOUSTON 8.2% 8.7% eight months so far this year. Although Houston isn’t the top performing MSA in Texas, Houston TEXAS 8.0% 8.3% continues to be recognized as one of the strongest metros in the U.S. for business activity, with the U.S. 9.7% 9.6% employment sector reporting marked improvement from this time last year. In the 12 months ending in August 2010, Houston’s job loss totaled 18,300, significantly below the 100,000 jobs lost in 2009, with JOB GROWTH % # the local MSA projected to end 2010 with positive job growth. The area’s above-average population (0.9k) HOUSTON -0.04% growth spurring the need for increased services is also a positive contributing factor in Houston’s TEXAS 1.3% 129k strong long-term outlook. U.S. -0.1% (183k) ABSORPTION, NEW SUPPLY & VACANCY RATES 2,500,000 17% 2,000,000 15% 1,500,000 Absorption 1,000,000 13% 500,000 11% New Supply 0 9% -500,000 7% Vacancy -1,000,000 5% www.colliers.com/houston RESEARCH & FORECAST REPORT | Q3 2010 | HOUSTON OFFICE MARKET OCCUPANCY & AVAILABILITY ABSORPTION & DEMAND CBD VS. SUBURBAN With the exception of suburban Class B properties, Houston recorded negative net absorption of CLASS A OFFICE VACANCY occupancy levels citywide have decreased at a 25,586 square feet in the third quarter, compared slow pace over the past year. Houston’s office to 248,351 square feet negative net absorption at 20.0% occupancy for all property classes averaged 83.3 the same time last year. City-wide year-to-date 18.0% percent in the second quarter, compared to 83.8 net absorption is negative 311,225 square feet 16.0% 14.0% percent this time last year. Despite the incremental with CBD Class A product contributing most of 12.0% decreases, however, the ongoing softness in the that with year-to-date negative net absorption of 10.0% employment sector is not likely to reverse current 435,872 square feet, followed by CBD Class B 8.0% occupancy trends in the near future. with negative net absorption at 131,085 square 6.0% In the CBD, top-tier properties’ resilience waned feet. In contrast, suburban Class A and B have 4.0% between quarters, inching up into double-digit managed to maintain modest positive net absorption year-to-date with 72,499 and 101,149 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 vacancy, with Class A occupancy at 89.9 percent, compared to 91.2 percent one year ago. In sharp square feet, respectively. CBD VACANCY SUBURBAN VACANCY contrast, the CBD Class B posted 76.9 percent Prevailing economic uncertainty is likely to occupancy, down from 78.3 percent 12 months continue negatively impacting overall absorption earlier. levels through the end of 2010. While the overall suburban occupancy rate CLASS A OFFICE RENTS RENTAL RATES remained relatively flat between quarters, double- After declining during the first two quarters of $40.00 digit vacancy continued for all suburban property 2010, rental rates for all property classes $38.00 classes at midyear. Suburban Class A occupancy remained relatively flat between quarters. $36.00 fell to 80.7 percent at the end of the third quarter $34.00 from 87.4 percent last year. By comparison, On a year-over-year basis, CBD Class A average $32.00 suburban Class B occupancy rose a modest 0.1 quoted rental rates actually fell by 6.1 percent to $30.00 percent to 83.5 during the same period. $35.16 per square foot (from $37.45), while suburban Class A rates increased 1.7 percent to $28.00 Citywide, a total of 56 office properties had $27.30 per square foot. CBD Class B rates $26.00 100,000 square feet or more available for lease in posted a 1.8 percent increase to $23.87 per Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 both direct and sublease space—16 of those square foot (from $23.46), while suburban Class properties have over 200,000 square feet B rates fell 0.4 percent to $17.88 per square foot CBD RENTS SUBURBAN RENTS available—at the end of the third quarter. Sublease on a full-service basis. While supply continues to space totaled 3.8 million square feet, including 2 outpace demand, the current office tenants’ million square feet of vacant space and 1.8 million market is expected to continue through the end of square feet of subleases available for occupancy the year. over the next 12 months. The largest sublease space being marketed is Devon Energy’s space, 281,755 square feet in Two Allen Center and 186,462 square feet in Three Allen Center (available for occupancy 4/2011) in the CBD. In Westchase, 2103 CityWestPlace has the largest suburban sublease space available, 128,770 square feet. QUOTED GROSS RENTAL RATES FOR TOP PERFORMING OFFICE BUILDINGS BUILDING NAME ADDRESS SUBMARKET RBA (SF) YEAR BUILT LEASED AVAIL. SF RENT ($/SF) OWNER Wells Fargo Plaza 1000 Louisiana CBD 1,721,242 1983 94.6% 157,326 $40.96 Metropolitan Life Insurance Co. Heritage Plaza 1111 Bagby CBD 1,149,635 1986 90.4% 110,365 $40.53 Goddard Investment Group 1100 Louisiana 1100 Louisiana CBD 1,265,332 1980 99.7% 17,605 $39.74 Enterprise Products Partners One Eldridge Place 777 N. Eldridge Pkwy. Energy Corridor 239,417 1985/2001 91.4% 20,590 $29.50 Behringer Harvard Offices at Park 10 16290 Katy Freeway Energy Corridor 157,000 2006 97.8% 3,428 $29.00 Franklin Street Properties Minute Maid Building 2150 Town Square Place E. Fort Bend 185,000 2008 78.3% 40,145 $28.50 Planned Community Developers Wells Fargo Tower 1300 Post Oak Blvd. Galleria 491,254 1983 93.6% 31,440 $33.00 TIAA-CREF Five Post Oak Park 4400 Post Oak Pkwy. Galleria 567,396 1982 95.1% 27,802 $32.83 Shorenstein Company Marathon Oil Tower 5555 San Felipe Galleria 1,178,750 1983 92.9% 83,616 $28.71 Hanover Real Estate Partners 11 Greenway Plaza 11 Greenway Greenway 745,956 1978 91.1% 66,390 $29.15 Crescent Real Estate Equities One BriarLake Plaza 2000 W. Sam Houston Westchase 502,410 2000 95.8% 21,101 $39.73 Behringer Harvard Waterway Square 4 Waterway Ave. Woodlands 232,364 2009 45.6% 126,406 $36.73 The Woodlands Development Co. COLLIERS INTERNATIONAL | P. 2 RESEARCH & FORECAST REPORT | Q3 2010 | HOUSTON OFFICE MARKET SALES ACTIVITY Significant new office leases (non-renewal) signed in the third quarter Investment sales activity in the third quarter remained at a slow pace with include: a handful of suburban properties changing hands. Year-to-date through the Weatherford International leased 335,000 Sq. Ft. at 2000 St. James third quarter, office transactions totaled 29 with a total dollar volume of Place, relocating from 515 Post Oak, both located in the Galleria $948 million, averaging $205 per square foot with an 8.4 percent submarket.