MAR KET GLANCE HOUSTON OFFICE MARKET REPORT SECOND QUARTER 2018 PROPERTY SERVICES DEVELOPMENT INVESTMENT AT A

Transcription

1 AT A REPORT SECOND QUARTER

2 Q2 AT A ECONOMIC OVERVIEW After a two-year oil bust that hit bottom in 2016, Houston s economy is showing signs of a recovery with 79,200 jobs created over the past 12 months ending in May, representing a 2.6% increase for the period. The largest annual gains in employment growth were in professional & business services (33,600 jobs) and trade, transportation & utilities (13,700 jobs), followed by construction (11,400 jobs), which surged at the end of While these employment statistics suggest a robust economy following 62,900 jobs created in 2017, local economists estimate that roughly 36,500 of the jobs added were temporary and part of the post-hurricane Harvey rebuilding efforts. TABLE OF CONTENTS Economic Overview...2 Office Market Assessment...3 Net Absorption & Occupancy...4 Rental Rates & Activity...5 Construction...6 The energy sector continues its recovery as sustained global economic growth, OPEC supply cuts, the restoration of Iran sanctions, and declining output in Venezuela and Libya are just some of the factors that have contributed to the turnaround. During the first half of, the West Texas Intermediate (WTI) crude oil price enjoyed its strongest rally in eight years, starting the year in the low $60 range and rising to over $73 per barrel to reach its highest level since late The combination of rising prices and record production has translated into solid profits for Houston s energy companies, which, in turn, is boosting manufacturing, professional services and other sectors connected to oil and gas. However, the energy sector has come nowhere close to recovering all the jobs lost following the oil bust since energy production has become much more efficient through advancing technology allowing for a smaller workforce. Submarket Statistics & Methodology...7 The PMRG Team...8 FOR INFORMATION: WADE BOWLIN President Central Division wbowlin@pmrg.com JOHN SPAFFORD Executive Vice President Director of jspafford@pmrg.com ARIEL GUERRERO Senior Vice President, Research aguerrero@pmrg.com 2 Thousands EMPLOYMENT TRENDS Employment Trends '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 18F 19F Jobs Added Annual % Change Source: U.S. Bureau of Labor Statistics, Moody's Analytics, University of Houston's Center for Regional Forecasting EMPLOYMENT Employment GROWTH Growth BY by Sector SECTOR 12-MONTHS CURRENT PRIOR ANNUAL READING READING CHANGE Mining % Construction % Manufacturing % Trade, Transportation & Utilities % Information % Financial Activities % Professional & Business Services % Education & Health Services % Leisure & Hospitality % Other Services % Government % Totals 3, , % Source: U.S. Bureau of Labor Statistics. Employment Data as of May (P) Source: U.S. Bureau of Labor Statistics; Employment Data as of May All Employees, in Thousands 5% 3% 1% -1% -3% -5% HEALTH (Improving or Declining)

3 AT A ASSESSMENT Q2 Despite the positive economic momentum, Houston s office market fundamentals remained soft with negative 798,231 SF of direct net absorption during the second quarter, bringing the year-to-date total to over 1.2 million SF of occupancy losses. The Class A market posted 133,728 SF of occupancy losses, breaking a streak of three consecutive quarters of positive absorption, but has managed to record 586,065 SF of direct net absorption over the prior 12 months. The largest occupancy losses in the Class A sector resulted from lease expirations by Exxon Mobil and NALCO Champion, which added a combined 583K SF of direct vacant space to the market. The Class B sector suffered 600,448 SF of occupancy losses in 2Q18, pushing the year-to-date total further into negative territory with over 1.3 million SF of red ink. The largest vacancies involved Exterran Holdings and Worley Parsons returning a combined 299K SF to the market. Although Houston s office market continues to be weighed down by a glut of space available, there are a few submarkets showing some signs of stabilization or improvement. activity has increased totaling 16.9M SF over the trailing 12 months, which is up 11.3% over its cyclical low in Select submarkets such as the CBD and Galleria have largely contributed to the uptick in leasing activity as tenants are taking advantage of the expanded opportunities to strike a deal early and lock-in reduced rental rates. Large tenants with leases expiring in 2019 to 2021 are already evaluating opportunities in the market, including proposed office construction projects that could hinder the office market s recovery. Going forward, large deal activity will account for a larger share of the leasing volume but could result in additional blocks of space coming back on the market as some tenants may right size or consolidate. FORECAST As vacancy rates remain elevated, landlords are offering generous concession packages to attract tenants while keeping rental rates steady, but the increased competition could put pressure on rents primarily within lower quality buildings. Landlords will face additional challenges as many sublease listings will roll over to direct space as their agreements expire, further impacting the direct occupancy rates. On the bright side, landlords that receive direct space are back in the driver seat and no longer have to compete with tenants willing to sublease their premises at very low recovery rates. With the flight to quality trend remaining prevalent, owners will continue to focus upon significant capital improvement programs to enhance their assets to remain competitive with both new office developments as well as existing buildings within their direct competitive set in order to retain and attract tenants. EMPLOYMENT FORECAST: Houston s economy performed better than expected with 62,900 jobs created in 2017, up 37% from the initial 46,000 jobs estimated. Looking ahead, Houston s economic forecast looks promising as economists are projecting up to 46K to 70K jobs in, with the higher end of the forecast assumption based on whether crude prices can stay above the $60/barrel mark. CRUDE OIL PRICE FORECAST: West Texas Intermediate crude oil (WTI) traded between $65.81 and $74.13 a barrel in June versus $46.02 to $48.32 per barrel in June The U.S. Energy Information Administration has forecasted WTI oil price to average $65.95 in and $62.04 in DIVERSIFIED ECONOMIC DRIVERS: The region has become more diversified but the energy sector still accounts for almost half of the local economy. The Port of Houston is the 10th largest port in the world and ranks first nationally in international waterborne tonnage handled. The Texas Medical Center is the largest of its kind in the world with a local economic impact of $10 billion per year. TRENDS MARKET TREND INDICATORS in Thousands of SF 10,000 8,000 6,000 4,000 2, % 88% 86% 84% 82% 80% Direct Occupancy Trailing 12 mos. Direct Net Absorption Under Construction Current Quarter 81.2% -1,426,524 2,256,339 Direct Asking Rents $29.13 Change from Previous Quarter Year 12-month Forecast -2,000 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18F'19F 78% Direct Net Absorption Completions Direct Occupancy 3

4 Q2 AT A NET ABSORPTION & OCCUPANCY Even though office employment growth has demonstrated signs of strengthening over the past year, Houston s office leasing market will take quite some time to heal due to the abundance of sublease and shadow space that will need to be backfilled. Trophy and Class A buildings will lead in the recovery and outperform the broader market as the flight to quality trend persists. WADE BOWLIN President Central Division SUBMARKET OCCUPANCY RANKING Submarket Occupancy Ranking Rank Submarket Occ. Rate Y-O-Y % Change 1 S. Main / Medical Center / South 93.3% 2.9% 2 Richmond / Fountainview 89.7% -0.3% 3 Fort Bend / Sugar Land 88.8% 2.7% 4 Kingwood / Humble 88.4% -1.6% 5 Midtown / Allen Parkway 87.0% 0.2% 6 Bellaire 86.6% -2.9% 7 Baytown & I-10 East 86.4% -0.6% 8 Gulf Freeway / Pasadena 86.2% 0.2% 9 The Woodlands / Conroe 85.9% 2.9% 10 Galleria / Uptown 82.9% -0.9% 11 Central Business District 82.7% -0.8% 12 Greenway Plaza 82.0% -3.4% 13 FM % -2.5% 14 Westchase 81.4% -1.7% 15 Katy/Grand Parkway West 81.1% 4.6% 16 Katy Freeway 80.8% -0.9% 17 Southwest Beltway 8 / Hillcroft 80.3% -3.9% 18 San Felipe / Voss 79.4% -3.3% 19 Northwest Freeway / North Loop W 79.3% -1.6% 20 NASA / Clear Lake 78.2% -1.2% 21 West Belt 77.1% -3.0% 22 North Houston / IAH / N Belt 53.9% -5.7% The CBD posted 45,219 SF of quarterly losses, but the Class A sector recorded 107,833 SF of direct absorption as Talos Energy expanded into 98K SF at Three Allen Center. The Class B sector suffered 158,102 SF of occupancy losses due to vacancies by Interactive Response Tech (90K SF) and Amegy Bank (35K SF). Midtown posted 39,781 SF of direct net absorption, driven by 68,717 SF of leasing gains within the Class A sector. The largest gains involved iqor occupying 36K SF at Central Square, while Energy & Minerals and Timmons Advisors occupied a combined 22K SF at San Felipe Place. The Woodlands witnessed 62,930 SF of direct absorption as the Class A sector accounted for 82,067 SF of the leasing gains. The majority of the growth occurred in newly built projects, including APTIM leasing 27K SF at Three Hughes Landing. The Southwest submarket featured 120,101 SF of quarterly gains, largely due to AT&T Wireless moving into 73K SF at Southwest Corporate Center. Greenway Plaza posted 140,527 SF of occupancy losses in 2Q18, largely due to NALCO Champion s 129K SF sublease space at Phoenix Tower expiring and returning to the landlord. The largest move-ins involved Hancock Whiney Bank and other tenants collectively occupying 42K SF at Kirby Collection. Westchase recorded 107,244 SF of occupancy losses, with the bulk of the negative absorption due to Worley Parson s 94K SF lease expiring at Richmond. The Katy Fwy/Energy Corridor posted 40,008 SF of occupancy losses, but the Class A sector recorded 52,569 SF of leasing gains. The largest move-ins included FairNodal (47K), Solaris Management (24K) and Envoy Mortgage (40K). North Houston/North Belt posted negative 593,101 SF of direct net absorption, bringing the year-to-date total up to 612,308 SF of occupancy losses. The largest direct vacancies resulted from lease expirations by Exxon Mobil totaling 453K SF at CityNorth 1 and Eight Greenspoint, while Exterran gave back a combined 205K SF at Northchase Drive and Belchase Bldg. In Thousands of SF 3,500 3,000 2,500 2,000 1,500 1, ,000-1,500 88% 86% 84% 82% 80% DIRECT NET ABSORPTION VS. COMPLETIONS Direct Net Absorption vs. Completions Direct Net Absorption DIRECT OCCUPANCY RATES Completions 78% 4 Class A Class B

5 AT A RENTAL RATES & LEASING ACTIVITY Q2 Citywide Class A full-service gross asking rents slipped by $0.10 to $34.94 per SF during the quarter and have declined by 0.3% year-over-year, while concessions such as free rent and tenant improvement allowances remain elevated. Class B asking rents slightly increased by $0.34 to $21.91 per SF (gross) during the second quarter and have moved up 1.4% or $0.80 over the prior 12 months largely due to newly built and renovated product coming online. Due to an abundance of space options available, concessions remain elevated throughout the market with attractive concession packages and tenant improvement allowances offered in order to maintain the highest face rents. Sublease inventory increased during the quarter by 156,596 SF to 9.6 million SF, due to recent additions by Occidental Petroleum (814K SF at Greenway Plaza), GE Oil & Gas (182K SF at Westway III) and EP Energy (125K SF at 1001 Louisiana). Despite its second consecutive quarterly increase, Houston s office sublease availability has declined by 20.7% since its peak of 12.1 million SF in 3Q16. The reduction has resulted from a significant volume of sublease deals inked, spaces returning to the landlord via expirations and some tenants opting to retain their space by withdrawing sublease listings. Sublease inventory represents 17.6% of the total space available and accounts for 4.3% of the citywide rentable inventory, with the largest share of sublease availability found in the Katy Freeway/Energy Corridor (25.5%), CBD (24.4%), Westchase (14.1%) and Greenway Plaza (10.4%). Sublease inventory is expected to fall below its 13-year average of 5.0 million SF by 2021, with half of the options greater than 10K SF set to expire within 3 years. activity for deals above 10K SF has been primarily concentrated in the CBD (29%), Galleria/Uptown (20.5%), and Katy Fwy/Energy Corridor (14.6%) over the prior 12 months, which have collectively accounted for 6.3 million SF or 64% of the market s leasing volume. In Thousands of SF RENTAL Rental Rates RATES ($/SF/Yr. Full Service) Service) $36 $34 $32 $30 $28 $26 $24 $22 $20 $18 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Class A Class B DIRECT Total LEASING ACTIVITY Activity Rolling 12-Months After rising steadily over the past few years, concessions to tenants have begun to plateau but remain at elevated levels due to the many space options available to tenants. These aggressive concession packages include significant free rent periods, abated or discounted parking and enhanced building amenities. JOHN SPAFFORD Executive Vice President, Director of Central Division SUBMARKET RENTAL RATE RANKING Submarket Rental Rate Ranking Rank Submarket Rental Rate Y-O-Y % Change 1 Central Business District $ % 2 Galleria / Uptown $ % 3 Greenway Plaza $ % 4 Katy Freeway $ % 5 Midtown / Allen Parkway $ % 6 San Felipe / Voss $ % 7 The Woodlands / Conroe $ % 8 Katy/Grand Parkway West $ % 9 Westchase $ % 10 West Belt $ % 11 S. Main / Medical Center / South $ % 12 Fort Bend / Sugar Land $ % 13 Bellaire $ % 14 Kingwood / Humble $ % 15 Gulf Freeway / Pasadena $ % 16 Northwest Freeway / North Loop W $ % 17 NASA / Clear Lake $ % 18 FM 1960 $ % 19 North Houston / IAH / N Belt $ % 20 Baytown & I-10 East $ % 21 Southwest Beltway 8 / Hillcroft $ % 22 Richmond / Fountainview $ % Class A Class B 5

6 Q2 AT A CONSTRUCTION RECENT ANNOUNCEMENTS Law firm Vinson & Elkins is close to signing a lease for approximately 250K SF, which would help kick start construction on Hines proposed 1 million SF office tower. Harris County Veterans Services Office signed a 119K SF lease at 500 Jefferson, bringing the downtown building up to 68% leased. Gulf Interstate Engineering inked a 115K SF lease renewal for 6 years at Barkers Pointe Ln. Energy XXI Services secured an 85K SF lease renewal at One City Centre in the CBD. Acclara Solutions signed an 83K SF lease at Remington Square III, bringing the building to 91% leased. Carrizo Oil & Gas signed an 83K SF lease extension at One Allen Center, with plans to give back a full floor. Law firm Sidley Austin signed a long-term lease renewal that expands its footprint by over 60% to 81K SF at Wells Fargo Plaza. Law firm Haynes & Boone, LLP secured a 70K SF lease renewal at LyondellBasell Tower. Morgan Stanley renewed and expanded their lease up to 64K SF at Williams Tower with plans to consolidate from Galleria Tower 2. Constellation Energy Partners signed a 62K SF lease at the Kinder Morgan Building, with plans to relocate from 4 Houston Center. Kiewit Engineering inked a 53K SF sublease deal from BASF Corp. at Energy Tower IV. Schlumberger recently signed a 51K SF new lease at 1430 Enclave after subleasing this space from Technip a few years ago. Enable Midstream Partners signed a 48K SF sublease deal at One Shell Plaza, with plans to relocate from 1111 Louisiana. US legal Support signed a 43K SF lease at CityNorth 2, with plans to relocate from 363 North Belt. GTC Technology International signed a 42K SF lease at Ashford VII, expanding their footprint by a full floor. Atlantia Resources signed a 42K SF sublease deal at Energy Crossing II. 6 Developers completed only three office buildings totaling 157,000 SF during the second quarter, which were already 54.1% pre-leased. Since the beginning of the year, developers have delivered only 647,000 SF of new office construction, with an additional 670,000 SF slated to deliver by year-end (excluding corporate-owned projects). Construction levels have tapered off dramatically to their lowest level in 6 ½ years with only 2.2 million SF of competitive office space currently under construction, with 54.6% of this space already preleased. The submarkets with the largest concentration of office construction underway include the CBD (778K SF) and The Woodlands (778K SF), which collectively account for 69% of Houston s office development pipeline. The largest construction project currently underway includes Skanska s 778,344 SF Capitol Towers project anchored by Bank of America in the CBD, with expected delivery by mid-year Other noteworthy projects underway include buildto-suit projects for American Bureau of Shipping and HP near Springwoods Village set to deliver by late /early Developers have broken ground on seven office projects totaling 493K SF since the beginning of the year, primarily comprised of smaller buildings. The largest ground breaking during the second quarter involved Greenwood Properties Chasewood Crossing Three, a 156K SF speculative office project in the FM 1960 Area. Even though office construction activity is winding down from its recent boom that resulted in the delivery of over 23 million SF of competitive space over the past five years, the flight to quality and tenant demand for amenity-rich options are trends that will remain prevalent throughout. New construction will remain a valid alternative, as tenants appear willing to pay a premium for high quality office buildings that offer the latest workplace trends as they seek to retain and attract the most skilled employees. However, significant pre-leasing will be required for any new development to move forward in the near future. In Thousands of SF 12,000 10,000 8,000 6,000 4,000 2,000 0 CONSTRUCTION PIPELINE Under Construction Delivered SIGNIFICANT PROJECTS UNDER CONSTRUCTION PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT(S) LEASED DEVELOPER COMPLETION Capitol Tower 778,344 CBD Bank of America; Quantum 36% Skanska 2Q 2019 CityPlace 2* 326,800 Woodlands ABS 94% Patrinely Group 4Q HP Building 1* 189,000 Woodlands HP 100% Patrinely Group 1Q 2019 HP Building 2* 189,000 Woodlands HP 100% Patrinely Group 1Q 2019 Chasewood Crossing Three 156,000 FM 1960 N/A 0% Greenwood Properties 3Q 2019 The Cannon 120,000 Katy Freeway The Cannon (co-working) 100% United Constrctors of Texas 1Q 2019 Hedwig Place 102,474 Katy Freeway Memorial Plastic Surgery 45% Stream / AMD Global 1Q 2019 Northeast Medical Tower II 100,000 Kingwood/Humble N/A 0% Health Trust of America 3Q Note: * Build-to-suit; Corporate owned office buildings (excluded from competitive statistics & above table)

7 SUBMARKET STATISTICS AT A Q2 Submarket TOTAL SPACE AVAILABLE Total Inventory SF Direct Sublease DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Direct Completions Under Occupancy Current Qtr. Year To Date Current Qtr Construction Class A Class B Central Business District 39,098,333 8,244,579 2,345, % -45, , ,344 $44.09 $29.21 Galleria / Uptown 23,922,062 4,672, , % -51, , $37.91 $27.86 Greenway Plaza 10,855,350 2,041,296 1,005, % -140, , $36.37 $25.96 Katy Freeway 31,028,912 7,497,561 2,455, % -40, , ,474 $35.70 $21.97 Westchase 15,164,720 3,369,077 1,356, % -107, , $35.28 $19.61 North Houston / IAH / N Belt 12,481,184 6,168,827 97, % -593, , $22.60 $16.06 Northwest Freeway / N Loop West 8,938,028 2,165,016 60, % -18,990-72, ,000 $23.54 $19.47 NASA / Clear Lake & SE Outlier 6,863,547 1,581,318 16, % -11,891 43, ,614 $28.70 $19.53 Fort Bend / Sugar Land / SW Outlier 7,429, , , % 45,624 21,893 23,520 90,251 $30.45 $25.04 Richmond / Fountainview 1,222, , % -7,575-29, $17.54 San Felipe / Voss 5,261,708 1,217,909 79, % , $36.35 $25.97 Bellaire 2,951, ,180 89, % -54,806-67, $29.23 $23.67 Midtown / Allen Parkway 5,888, ,258 54, % 39,781-2, $32.77 $27.78 FM ,571,470 1,922,849 64, % -23, , ,904 $27.43 $18.00 Kingwood / Humble / NE Outlier 1,436, , % -26,406-16, ,000 $29.63 $22.56 Southwest Beltway 8 / SW / Hillcroft 9,960,567 2,385, , % 120,101 51, $18.81 $17.15 S. Main / Medical Center / South 9,338, ,360 89, % 22, ,710 50,000 0 $32.44 $26.54 The Woodlands / Conroe 11,715,114 1,776, , % 62, , ,752 $32.30 $26.47 Gulf Freeway / Pasadena 3,461, ,741 10, % 52,946 26,668 83, $22.76 Baytown / I-10 East 1,096, , % -1,316-22, $18.23 Katy / Grand Parkway West 2,743, ,462 66, % 29, , $29.46 $29.19 West Belt 5,004,209 1,594, , % -49, , $29.63 $23.70 Totals 225,433,480 49,068,649 9,628, % -798,231-1,214, ,596 2,256,339 $34.94 $21.91 Property Type TOTAL SPACE AVAILABLE Total Inventory SF Direct Sublease DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Completions Under Current Qtr Construction Asking Rent Direct Occupancy Current Qtr. Year To Date Class A 124,292,858 28,565,138 8,024, % -133, ,418 50,000 1,924,084 $ % Class B 86,306,084 18,327,796 1,569, % -600,448-1,347, , ,255 $ % Class C 14,834,538 2,175,715 34, % -64,055-97, $ % Totals 225,433,480 49,068,649 9,628, % -798,231-1,214, ,596 2,256,339 $ % Y-O-Y % Change Please note: 800 Bell, the former Exxon headquarters building in the Houston CBD, is excluded from competitive office inventory statistics since Shorenstein Properties plans to redevelop the 1.3 million sq. ft. Class B office building has been placed on hold. METHODOLOGY TOTAL INVENTORY: The total inventory includes all single and multi-tenant leased office buildings with at least 20,000 square feet of gross rentable square footage. TOTAL SPACE AVAILABLE: Available space currently being marketed which is either physically vacant or occupied. DIRECT SPACE: Space that is being offered for lease directly from the landlord or owner of a building. Under construction space is not included in space available figures. SUBLEASE SPACE: Space that has been leased by a tenant and is being offered for lease back to the market by the tenant with the lease obligation. DIRECT OCCUPANCY RATE: Direct space physically occupied divided by the total rentable inventory. DIRECT NET ABSORPTION: The net change in occupied direct space over a given period of time. UNDER CONSTRUCTION: Office buildings which have commenced construction as evidenced by site excavation or foundation work. DIRECT ASKING RENTS: The quoted full-service asking rent for available space expressed in dollars per sq. ft. PROPERTY SERVICES PROPERTY SERVICES DEVELOPMENT DEVELOPMENT INVESTMENT INVESTMENT

8 AT A Q2 Wade Bowlin President Central Division wbowlin@pmrg.com John Spafford Executive Vice President, Director of jspafford@pmrg.com Brad Sinclair Executive Vice President, bsinclair@pmrg.com Kim Grizzle-Shapiro Senior Vice President, kshapiro@pmrg.com Mike Martin Senior Vice President, mmartin@pmrg.com Marci Phillips Senior Vice President, mphillips@pmrg.com Michael Sieger Vice President, msieger@pmrg.com Courtney Buckout cbuckout@pmrg.com Angelina Hsieh ahsieh@pmrg.com Blaine Sinclair bcsinclair@pmrg.com Livy White livy.white@pmrg.com Madeline Gregory madeline.gregory@ pmrg.com Ariel Guerrero Senior Vice President, Director of Research aguerrero@pmrg.com James Decman Research Manager jdecman@pmrg.com Doug Berry Vice President, Creative Director dberry@pmrg.com ABOUT PMRG Madison Marquette merged operations with PMRG in June to create a new leader in commercial real estate. The firm offers PMRG s leasing, property management, investment management and development services, combined with Madison Marquette s specialized development, investment and marketing expertise. The company provides leasing and management services to a diverse portfolio of 330 assets in 24 states and manages an investment portfolio valued at over $6 billion. The combined company is headquartered in Washington, DC with a major presence in Houston, TX. With 600 professionals in 12 regional markets, the merged firm is a member of the Capital Guidance group of companies. For additional information, visit