Q1 2013 | OFFICE MARKET HOUSTON OFFICE MARKET RESEARCH & FORECAST REPORT HOUSTON’S OFFICE MARKET BUILDING ON A BOOM – 9.4M SF UNDER CONSTRUCTION Houston’s strong job growth continues to boost Houston’s office market in Q1 2013. Although leasing momentum slowed in the first quarter, vacancy MARKET INDICATORS levels only increased 10 basis points between quarters, and decreased by Q1 2012 Q1 2013 120 basis points on an annual basis. Absorption slowed too, due to a lack of CITYWIDE NET quality blocks of space. Houston’s office market posted only 76,000 SF of ABSORPTION (SF) 1.3M 76K positive net absorption in the first quarter, much less than the 1.3M SF posted in the same quarter one year ago. Absorption will pick up ) CITYWIDE AVERAGE momentum again later in the year when some of the 9.4 million SF of office VACANCY 15.1% 13.9% space under construction is delivered. The citywide average rental rate increased slightly from $23.70 per SF to CITYWIDE AVERAGE $23.86 per SF over the year; however, some of the top-performing Class A RENTAL RATE $23.70 $23.86 rental rates increased by as much as 8.5% to 10.0%. CLASS A RENTAL RATE The Houston metropolitan area added 118,700 jobs between February 2012 CBD $36.43 $36.86 and February 2013, an astounding annual increase of 4.5% over the prior SUBURBAN $27.82 $28.43 year’s job growth. Further, Houston’s unemployment fell to 6.3% from 7.3% one year ago, which bolstered annual Houston area home sales by CLASS A VACANCY 17.1%. CBD 12.8% 11.9% SUBURBAN 13.6% 11.2% With continued expansion in the energy industry and a strong housing market, Houston’s economy is expected to remain healthy for both the near and long-term. ABSORPTION, NEW SUPPLY & VACANCY RATES JOB GROWTH & UNEMPLOYMENT 2,500,000 (Not Seasonally Adjusted) 17.0% 2,000,000 UNEMPLOYMENT 2/12 2/13 15.0% Houston 7.3% 6.3% 1,500,000 Texas 7.2% 6.5% 13.0% 1,000,000 U.S. 8.7% 8.1% 11.0% 500,000 ANNUAL # OF JOBS 9.0% JOB GROWTH CHANGE ADDED 0 Houston 4.5% 118.7K -500,000 7.0% Texas 3.3% 355.6K -1,000,000 5.0% U.S. 1.7% 2.2M Net Absorption New Supply Vacancy www.colliers.com/houston RESEARCH & FORECAST REPORT | Q1 2013 | HOUSTON OFFICE MARKET VACANCY & AVAILABILITY only 76,000 SF of positive net absorption in the first quarter, much less than the 1.3M SF posted CBD VS. SUBURBAN Although Houston’s overall average vacancy in the same quarter one year ago. Absorption rate increased 10 basis points between CLASS A OFFICE VACANCY will pick up momentum again later in the year quarters, vacancy decreased by 120 basis 20.0% when some of the 9.2 million SF of office space points to 13.9% on an annual basis. Between under construction is delivered. 18.0% quarters, the average CBD vacancy rate 16.0% increased by 30 basis points to 14.0% from CBD Class A space posted the largest loss, with 14.0% 13.7%, as additional sublease space was added 286,000 SF of negative net absorption, mostly to the market. On a year-over-year basis, the due to the addition of sublease space vacated by 12.0% average CBD vacancy rate decreased by 110 Devon. Some of the larger tenants that moved 10.0% basis points from 15.1%. Between quarters, the into new space or expanded into additional 8.0% average suburban vacancy rate increased by 10 space during the first quarter include Energy 6.0% basis points to 13.9% from 13.8%, and Transfer, moving into 220,000 SF in Travis 4.0% decreased 130 basis points from 15.2% over Tower which they purchased in late 2011; Noble the year. Energy moved into 497,124 SF in 20555 Hwy 249; Wood Group Mustang moved into 170,000 The CBD Class A vacancy rate increased by 210 SF in Westgate 2 and Subsea 7 Inc. moved into CBD VACANCY SUBURBAN VACANCY basis points to 11.9% from 9.8% between 100,000 SF in Westgate 1. UHY Advisors TX, quarters. The CBD Class B vacancy rate LLC relocated to 90,000 SF in 2929 Allen decreased more significantly moving 560 basis Parkway from 85,000 SF in 12 Greenway Plaza. CLASS A OFFICE RENTS points to 14.6% from 20.2%. The suburban Class A vacancy rate decreased by 20 basis RENTAL RATES $40.00 points between quarters to 11.2% from 11.4% The average citywide rental rate increased to $38.00 and suburban the Class B vacancy rate $23.86 from $23.70 per square foot on an increased by 20 basis points to 16.3% from $36.00 annual basis, but decreased between quarters 16.1%. $34.00 from $23.97 per square foot. The CBD Class A Of the 1,716 buildings in the Houston office average quoted rental rate decreased to $36.86 $32.00 market, only 43 have 100,000 SF of contiguous from $37.02 from per square foot between $30.00 space available for lease or sublease. Further, quarters, while the suburban Class A average $28.00 only 19 have 200,000 SF of contiguous space quoted rental rate increased to $28.43 from available. Citywide, available sublease space $28.20 per square foot. The average CBD Class $26.00 totals 3.7 million SF or 1.9% of Houston’s total B quoted rental rate decreased to $24.77 from office inventory, of which 1.6 million SF is $25.00persquarefoot,whiletheaverage currently vacant. suburban Class B quoted rental rate increased to $18.79 from $18.75 per square foot over the CBD RENTS SUBURBAN RENTS ABSORPTION & DEMAND quarter. Absorption slowed too, due to a lack of quality blocks of space. Houston’s office market posted QUOTED GROSS RENTAL RATES FOR EXISTING TOP PERFORMING OFFICE BUILDINGS YEAR AVAIL. RENT BUILDING NAME ADDRESS SUBMARKET RBA (SF) LEASED OWNER BUILT SF ($/SF) 717 Texas 717 Texas CBD 696,228 2003 100.0% 76,892 $43.79 Hines 5 Houston Center 1401 McKinney St CBD 600,000 2002 95.3% 33,843 $43.66 Wells Real Estate Funds 1000 Main 1000 Main St CBD 837,161 2003 96.2% 180,833 $42.00 INVESCO Realty Advisers, Inc. Heritage Plaza 1111 Bagby CBD 1,089,266 1986 99.6% 40,400 $42.00 Brookfield Office Properties BG Group Place 811 Main CBD 972,474 2011 91.1% 86,917 $45.64 CalPERS/Hines Williams Tower 2800 Post Oak Blvd West Loop/Galleria 1,476,973 1983 98.9% 16,926 $47.12 Invesco Real Estate Marathon Oil Tower 5555 San Felipe West Loop/Galleria 1,168,805 1983 95.0% 88,616 $36.60 Hanover Real Estate Partners CityCentre Three 842 W Sam Houston Pky N Katy Freeway 120,211 2012 74.3% 30,950 $40.00 Midway T & C Land Investors San Felipe Plaza 5847 San Felipe St San Felipe/Voss 980,472 1984 87.0% 135,086 $38.00 Thomas Properties Group, L.P. One BriarLake Plaza 2000 W Sam Houston Pky Westchase 502,410 2000 98.1% 63,659 $44.55 Behringer Harvard Holdings 4 Waterway Square The Woodlands Development 4 Waterway Ave The Woodlands 232,364 2008 100.0% 42,838 $41.72 Place Company, L.P. Note: Avail. SF includes direct and sublet space. Source: CoStar Property COLLIERS INTERNATIONAL | P. 2 RESEARCH & FORECAST REPORT | Q1 2013 | HOUSTON OFFICE MARKET SALES ACTIVITY Houston’s office investment sales activity increased between quarters with 57 properties changing hands compared to 33 in the previous quarter. According to CoStar Comps, total transaction sales volume for office space in Houston was approximately $892.3 million, averaging $260 per SF. Some of the more significant transactions that closed during the first quarter are listed below. Q1 2013 SIGNIFICANT SALES TRANSACTIONS – (100,000 SF or greater) SUB- YEAR SALE CAP BUILDING NAME RBA (SF) BUYER SELLER $/SF CLOSED MARKET BUILT PRICE RATE West Loop/ Williams Tower 1,479,764 1983 Invesco RE Hines REIT $412M $278 6.0% 3/2013 Galleria JP Morgan Asset West Loop/ 1974/ Post Oak Central 1,279,759 Cousins Properties Management JV GE $233M $182 7.5% 2/2013 Galleria 1981 Pension Trust 800 Bell CBD 1,258,000 1962 Shorenstein Properties ExxonMobil Corp $50M $40 N/A 1/2013 LEASING ACTIVITY Houston’s office leasing activity reached 2.7 million SF in the first quarter, about half of the amount of activity posted in the previous quarter. Below is a list of Q1 2013 top lease transactions. Q1 2013 TOP OFFICE LEASES Building name/address Submarket SF Tenant Lease date 10001 Richmond Ave Westchase 554,385 Western Geophysical1 Jan-13 Noble Energy Center Two FM 1960 456,000 Noble Energy4 Jan-13 Two Allen Center CBD 315,814 Chevron3 Jan-13 San Felipe Plaza San Felipe/Voss 166,136 Ensco International1 Dec-12 Waterway Plaza I The Woodlands 158,598 Huntsman International LLC1 Dec-12 Sugar Creek on the Lake E Fort Bend/Sugar Land 156,617 Undisclosed - Confidential Mar-13 16290 Katy Freeway Katy Freeway 144,000 Conoco Phillips3 Jan-13 8 West Centre Katy Freeway 106,801 Cameron International Corp.4 Jan-13 11 Greenway Plaza Greenway Plaza 86,733 Camden Property Trust4 Jan-13 BG Group Place CBD 75,737 Baker Hostetler Jan-13 3009 Post Oak Blvd West Loop/Galleria 49,000 Datacert Inc.4 Jan-13 Dairy Ashford Plaza Katy Freeway 36,832 Dow Chemical Company Jan-13 1021 Main CBD 28,000 Energy XXI Services2 Jan-13 13430 Northwest Fwy Northwest Far 26,527 RICOH Americas Corporation Jan-13 Williams Tower West Loop/Galleria 23,110 Community Bancorp1 Jan-13 America Tower Allen Parkway 22,229 Huron Consulting Services1 Feb-13 Waterway Plaza II The Woodlands 18,543 Steptoe & Johnson LLP Jan-13 Dairy Ashford Plaza Katy Freeway 17,927 Petrofac Inc Jan-13 One Westway Northwest Far 15,945 Cbeyond Jan-13 Columbia Centre Westchase 12,800 First Continental Mortgage3 Jan-13 1Renewal 2Expansion 3Sublease 4Pre-lease/proposed or under construction COLLIERS INTERNATIONAL | P.