Summary. Houston. Dallas. The Take Away

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2 Summary The Take Away The first quarter of 2017 was marked by continued optimism through multiple Texas metros as job growth remained positive and any negatives associated with declining oil prices were offset by overall strengthening economies within the state and top tier rankings for the cities across a variety of Best of lists. Houston Houston s beginning to 2017 was marked with more optimism throughout all areas of CRE in comparison to the bleaker beginnings of the prior year. Within the office market, sublease space continuing to contract along with several large lease transactions of greater than 50,000 square feet spread throughout the Houston submarkets show a market continuing to rebound from the recent downturn. Industrially, Houston s performance remained robust with a continued focus on the Port of Houston and near-by areas in terms of transaction volume. Retail remained the strongest overall performer within Houston s CRE markets as multiple large users continue to occupy both existing and new developments as retail s remains focused on desirable locations near existing or new residential developments. While Houston s Class A multi-family continued a prolonged struggle in terms of lease up and vacancy rates, Class B and C properties remained stronger performers across a variety of metrics. This, combined with continued strength in single family home sales, allows the residential market to see silver linings among any clouds. Dallas Dallas s overall CRE markets continued at record paces in the first quarter of However, within both the office and multi-family sectors, the question of peaking and overbuilding has been raised recently as rents are reaching all time highs, and within the office market, vacancies are reaching record lows. This is a topic that will be closely monitored in the upcoming 12 to 18 months and must be taken into account in any discussions of the Dallas market. Within the retail sector of the city, a combination of long term stable lease up, continued big box retail focus on high value locations and a robust new development pipeline will help to ensure a productive and strong Dallas industrial markets saw nearly 9 million square feet of leasing during the first quarter, showing continued and diversified strength within that sector. Page 2 2

3 Texas Metropolitan Statistical Areas Continued San Antonio San Antonio s first quarter performance in 2017 continues to highlight the relative strengths of the market, such as its retail and industrial record rental and occupancy rates, as the city s growth in terms of an emerging distribution center and continued drawing power in terms of tourist income helping to maintain these positions of strength. The continued struggle of the office market in the city, with rising vacancy rates and a continued decline in leasing activity over the past 12 months show an area of commercial real estate in the city that can be leveraged by savvy investors and tenants in the market to their advantage during the upcoming year. Multi-family real estate within San Antonio continues to hold steady in terms of market metrics, with rental rates and occupancy level ticking up, and construction starts maintaining their prior year mark to help maintain an equilibrium in the market. Austin Austin s desirability in terms of relocations, job growth and economic expansion helped its commercial real estate sectors to start 2017 from a position of strength. Multi-family within the city continued to be the market leader thanks to sub 5 percent vacancy and rental rates exceeding $1,000 on average. Austin s office sector saw occupancy levels matching the first quarter of 2016 s marks, and while absorption and transaction volume tracked lower, construction starts continued to exceed prior years marks and several large lease-ups took place during the quarter, highlighted by Oracle s 550,000 square foot new lease. Austin continues to see a strongly performing retail sector, as vacancy levels remained at all time record lows of sub 4 percent with rental rates in turn continuing to rise as space remains at a premium for both big-box and other occupiers. Austin s industrial sector continues to lag, but saw quarterly metrics that reflect an active and stable market with strong growth potential in the upcoming year. The term strong growth potential applies across all of the major Texas markets for 2017, as the upcoming year will be one to watch in terms of performance across all sectors. 3 Page 3

4 Current MSA Population Major Texas Metro Populations Source: Census.gov Released March 24, 2017 One Year Increase in MSA Population Source: Census.gov Released March 24, 2017 Page 44

5 Texas MSAs Population One Year Percentage Increase Source: Census.gov Released March 24, 2017 Page 55

6 Employment (Major Texas Metros) Unemployment Rate Year over Year Job Increase Job Increase Percentage Page 66

7 Office Market Summary Current Occupancy Current Occupancy First Quarter 2017 Absorption Amount of Space Currently Under Construction Page 77

8 Retail Market Summary Current Occupancy First Quarter 2017 Absorption Amount of Space Currently Under Construction Page 88

9 Industrial Market Summary Current Occupancy First Quarter 2017 Absorption Amount of Space Currently Under Construction Page 99

10 Multifamily Market Summary Current Occupancy First Quarter 2017 Absorption Amount of Space Currently Under Construction Page 10 10

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12 Q10 Kinghorn, Driver, Hough Q1 Houston Update Office Houston s office market began 2017with mixed results. Sublease space continues to contract but more than 11 million square feet remain available. rates continued to increase and stand at 16% direct and nearly 21% when sublease is factored. However, signs of recovery can be seen as several large lease transactions were announced, including Targa, Indigo, and HP. On the sales front, transaction volume and overall dollar amounts rebounded from prior year lows, as investors have begun to look to Houston s recovering economy and long term potential when examining transactional opportunities. During the quarter, an average transaction included $252 per square foot and sub 6.5 percent cap rates across all building classes. Industrial The industrial market within Houston continues to be a solid performer in While vacancy levels flattened slightly in 2017, overall leasing activity and rental rates continued to rise. With both chemical companies and oil and gas based business on the rise, and 3PL and retailer demand continuing to stay at prior year levels, the industrial market within Houston from an ownership and landlord perspective remains strong. In terms of sales volume, nearly 7 million square feet of property traded hands during the quarter, and cap rates fell overall across all property types to below 6.4 percent. Investors are realizing that Houston s industrial strength makes this is a desirable market to look to in Retail Houston s retail market continues to be a market leader with vacancy rates holding at 5.0%, with any available top tier properties being below 2 percent. Retail rates continued to climb with overall rates reaching nearly $17.00 across all property types. While several large users did vacate the Houston market during the start of 2017, the nearly 1.2 million square feet of space created was immediately backfilled thanks to such new users as Total Wine and Spirits and others. Additionally, continued rooftop expansions in the suburban areas of town continue to drive a need for big-box retailers and grocers to occupy the nearly 3 million square feet of under construction space. On the sales front, transaction volume, PSF basis and cap rates all remained fairly unchanged. Multifamily The over-saturation of the Houston multi-family market continued as 2017 began. While occupancy levels rose slightly, this mainly occurred in Class B and C assets that benefited from the continued chemical-related job growth and rental needs. Class A properties continued to see higher levels of vacancy and rent concessions, as almost 22,000 new units remain under construction and set to deliver over the next 12 months. Overall rental rates remained slightly elevated to just over $1,000 on average. In terms of sales transactions, the market was robust during the first quarter as 17 transactions took place with an average cap of 6.5 percent across all property types and an average per unit price of over $104, West Loop South Suite Houston, TX Houston San Antonio

13 Office Retail $32.00 $28.00 $24.00 $20.00 $16.00 $12.00 $8.00 $4.00 $0.00 Houston vs Rent $18.00 $16.00 $14.00 $12.00 Houston vs Rent 7.0% 5.0% 3.0% 1.0% Industrial Multifamily Houston vs Rent Houston vs Rent $8.00 $6.00 $4.00 $2.00 $ Q % 5.0% 3.0% 1.0% $1, $1, $ $ $ $ $ $ $ $

14 Q10 Kinghorn, Driver, Hough Q1 San Antonio Update Office The office market in San Antonio began 2017 with a whimper, as rental rates ticked down from year end 2016 numbers, while vacancy levels and absorption began to creep slightly higher. Approximately 1.5 million square feet remain under construction, but with slowing pre-leasing and very limited leasing overall, vacancy levels are expected to increase during the rest of the year. On the sales front, the picture was slightly more promising, as the quarter saw nearly 1.2 million square feet of transactions take place with an average of $155 per square foot and cap rates remaining near 6.5% across all property types. Of particular interest to investors remain core assets within the downtown area as well as suburban Class A assets with tenant-attracting amenities. Industrial San Antonio saw a slow down within the industrial market during early Flattening rental rates and vacancy levels continue to indicate a cooling market in terms of tenant activity and this is further shown through a 15 percent drop in leasing velocity from the prior quarter. Sales wise, the transaction volume fell to a nearly four year low in terns of number of transactions and total dollars trading hands. On an average price per square foot basis, industrial property within San Antonio traded at below $75, and cap rates have begun to hover at or near 7 percent overall across the property types. This outlook however does not include multi-tenant stabilized buildings, which remain the investment of choice when they are able to be brought to market. Retail San Antonio s retail market began to show signs of lagging during the first quarter of 2017, especially in terms of sales transactions and volume. While the market remains fairly insulated overall thanks to the continued draw of both millennials and tourist dollars to the region, other metrics indicate a looming struggle. Overall transaction volume was down nearly 80 percent relative to the prior quarter, but on par with the first quarter of On the little transactional volume that occurred, per square foot pricing remained north of $200, and cap rates creeped closer to 7 percent across all property types. With less and less investor activity combined with negative absorption and creeping vacancy levels, the sector is poised for a challenging Multifamily San Antonio s multi-family sector stayed fairly flat in comparison to YE Absorption of greater than 4,000 units, occupancy levels of nearly 95 percent, rental rates greater than $980 and other metrics indicate a robust market. However, the over 7,000 units still under construction will require continued job growth similar the past 24 months to ensure no future occupancy issues arise. Sales volume and transactions were sparse during the quarter, with only a handful of transactions taking place. However, metrics within the sales sector show that investors are willing to pay premium prices for stabilized properties within the city proper and affluent suburbs as per square foot prices reached $100 and cap rates compressed to below 6.5% West Loop South Suite Houston, TX Houston San Antonio

15 Office Retail San Antonio vs Rent $ % $ % 10.5% $ % $ % $16.00 $14.00 $12.00 San Antonio vs Rent 7.0% 5.0% 3.0% 1.0% $8.00 $6.00 $4.00 $2.00 $0.00 Industrial San Antonio vs Rent % 7.0% 5.0% 3.0% 1.0% $1, Multifamily San Antonio vs Rent $ $ $ $ $ $ $ $ % 7.0% 5.0% 3.0% 1.0%

16 Q10 Kinghorn, Driver, Hough Q1 Austin Update Office Austin s office markets saw 2017 start off strong as leasing remained robust. While much of the focus remained tech based, Austin s diverse economy allowed for a greater spread in terms of tenant transactions. Rental rates remain on par with the prior year and with continuing sub 9% vacancy and 3 million square feet of under construction developments, demand should not wane. Sales transactions started 2017 strongly as well, with average PSF just below $270 across all building classes and cap rates remaining at or near 6.2%, furthering the metro s desirability. In terms of investment opportunities, the Austin office market remains one of interest as investors focus on core assets with desirable tenant bases as well as up and coming areas of the city. Industrial Continued demand combined with minimal available new space caused the Austin industrial market to operate from a position of strength during the first quarter. Sub 5 percent vacancy over the past 18 months, limited new construction starts and rents above $10 per square foot are all indicative of a rising market for landlords. After a slight downturn in the number of trades taking place during the 4 th quarter of 2016, 2017 saw a return to an active investment market for the industrial sector. Average transaction metrics for the quarter saw a per square foot average of $85, which is up nearly 25% year over year and cap rates that average 6.4%. In terms of value, the industrial market in Austin should be a prime consideration for investors in Retail The retail sector continued in 2017 to be a strong performer for Austin, with vacancy rates below 4 percent throughout the market and rental rates holding above $20 per square foot on average. Big box grocery and other chain stores continue to be dominant users of the new and existing space and the quarter saw with more than 600,000 square feet of leasing activity occur, putting it on pace to exceed 2016 s total. A strong start to the year was also reflected in sales transaction metrics, including a rumored $465 PSF price for an HEB anchored center in the market. Overall, the quarter saw cap rates compress to below on average and an average PSF of just below $300 on the 14 transactions that took place in the past 90 days. Multifamily Millennial demand continues to drive the Austin multi-family market and the metrics for the quarter reflect the same. rates remain the lowest in the state s major metros and rental rates continue a climb towards $1,300. While there is some concern over a plateau in the market, the relatively low number of 11,000 units under construction has helped assuage any over-development concerns. Investors are mirroring the tenants demands in terms of location, amenities and value in terms of acquisitions, but the number of transactions taking place during the quarter were below the prior year s average. However, this can be viewed as positive news as owners view the market as a strong long term hold in terms of investments West Loop South Suite Houston, TX Houston San Antonio

17 Office Austin vs Rent Retail Austin vs Rent $36.00 $32.00 $28.00 $24.00 $20.00 $16.00 $12.00 $8.00 $4.00 $ $24.00 $20.00 $16.00 $12.00 $8.00 $4.00 $ % 5.0% 3.0% 1.0% Industrial Multifamily $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 Austin vs Rent $1, $1, $1, $1, $1, $1, $1, $ $ $ $ $ Austin vs Rent 5.0% 3.0% 1.0%

18 Q10 Kinghorn, Driver, Hough Q1 Dallas Update Office Dallas office market continued to show signs of strength during the start to levels remain stable at below 15 percent across all property types, and multiple large users continue to take down existing and new blocks of leasable space as Dallas recent growth of 100,000 net new jobs are requiring companies to expand their footprints. Rental rates across all property types have risen nearly 5 percent each year over the past 4 years, and 2017 is projecting at or the same rate of rent growth. In turn, investors have continued to focus on the northern suburbs and Dallas proper in terms of acquisitions and the metrics play that out, with an average per square foot for the 26 transactions during the quarter of $330 and cap rates on average of 6.1%. Industrial Industrially, DFW started 2017 with mixed results. While absorption levels remained high at nearly 4.3 million square feet, and UPS led by taking down a 1 million square foot lease for new space, a combination of vacant new deliveries and other factors combined to trigger a rise in overall vacancy rates. The predominant market users remain 3PL firms who taking advantage of DFW s proximity to major transportation arteries and overall economic strength. During the first quarter of 2017, sales transactions echoed that market unease. In terms of volume, transactions reached a nearly 2 year high, but additional metrics such as cap rates climbing to 6.8% across all property types and per square foot sale prices declining nearly 15% show signs of caution in the market. Retail As a result of the continued job growth and strong economic prospects for the DFW area in 2017, the retail sector remained at near record levels during the first quarter. Occupancy rates overall remained above 95% across all property types, with premier anchored properties seeing vacancy rates approaching 3% in high traffic areas. Additionally, even with over 5.5 million square feet of new construction under way, rental rates remain at or near record highs. Cap rates have continued their prior 12 month decline and stand below 6.5 percent with Class A properties looking at rates closer to 6.2 or lower. On a per square foot basis, the 41 transactions that took place during the quarter averaged over $200 per square foot with a high water mark of nearly $360 per square foot. Multifamily Signs of an over-heated multi-family market were seen during the start to 2017 in Dallas. Overall vacancy rates increased nearly a full percent and absorption was down nearly 1,400 units over the same time in With nearly 40,000 new units remaining under construction in the DFW area, 2017 is poised to be a renter s year in terms of concessions and pricing as owners will be active to ensure occupancy at existing and new developments. Transactionally, the story continues the warning signs, as the volume and average sales price during the quarter were sharply lower than in prior years, even while cap rates compressed slightly and registered below 6 percent across all property levels West Loop South Suite Houston, TX Houston San Antonio

19 Office Dallas vs Rent Retail Dallas vs Rent $28.00 $24.00 $20.00 $16.00 $12.00 $8.00 $4.00 $ $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $ % 7.0% 5.0% 3.0% 1.0% Industrial Multifamily $6.00 $4.00 $2.00 $0.00 Dallas vs Rent. 1 1 $1, $1, $1, $ $ $ $ $ $ $ $ Dallas vs Rent 1 9.0% 7.0% 5.0% 3.0% 1.0%