Mar ket Glance. AT A AT Market Glance HOUSTON OFFICE MARKET REPORT

Transcription

1 AT A AT Market Glance HOUSTON OFFICE MARKET REPORT THIRD FOURTH QUARTER PROPERTY PROPERTY SERVICES SERVICES DEVELOPMENT DEVELOPMENT INVESTMENT INVESTMENT

2 Q4 213 AT A ECONOMIC OVERVIEW The shale boom and subsequent re-emergence of the U.S. as the leader in petroleum production have placed Houston at the center of the rapidly changing global energy markets. As a result, Houston s economy has expanded robustly with 354,2 net new jobs created since its post-recessionary trough in early 21, reaching its highest number of total nonfarm jobs on record. In the 12 months ending November 213, Houston has created 86,2 jobs, representing a 3.1% annual increase. During the same period, Houston s unemployment rate has fallen to 5.6% to reach its lowest point since December 28, the month prior to Houston entering the Great Recession. TABLE OF CONTENTS Economic Overview... 2 Office Market Assessment...3 Net Absorption & Occupancy...4 Rental Rates & Activity...5 Construction...6 Submarket Statistics & Methodology...7 Our Team...8 Although there are signs that the rapid acceleration of Houston s energy sector is easing, the energy industry still remains very active. The frenetic pace of job growth experienced over the past few years couldn t be sustained indefinitely as the area has experienced a shortage in skilled labor and housing. The easing of the employment throttle began at midyear 213 and should continue into the early part of 214 as the region moves toward a still robust yet sustainable pace of job growth. According to the Greater Houston Partnership, the Houston metro area is forecasted to end the year with 8, more jobs than 212 and is projected to add 69,8 jobs in 214. Several factors will drive job growth in 214, which include the ramp-up in construction at area chemical plants, the backlog of projects at local engineering firms, growing consumer confidence, and sustained population and income growth. Employment Trends FOR INFORMATION: Wade Bowlin Managing Director (713) wbowlin@pmrg.com Thousands F 14F 15F Jobs Added Annual % Change 6% 4% 2% % -2% -4% -6% John Spafford Director of (713) jspafford@pmrg.com Ariel Guerrero Senior Vice President, Research (713) aguerrero@pmrg.com 2 Source: U.S. Bureau of Labor Statistics, Greater Houston Partnership, Moody's Analytics Employment Growth by Sector Current 12-Months Annual Reading Prior Reading Change Mining % Construction % Manufacturing % Trade, Transportation & Utilities % Information % Financial Activities % Professional & Business Services % Education & Health Services % Leisure & Hospitality % Other Services % Government % Source: U.S. Bureau of Labor Statistics. Employment Data as of November 213 Source: U.S. Bureau of Labor Statistics. Employment Data as of November 213, All Employees, in Thousands HEALTH (Improving or Declining)

3 AT A Q4 213 OFFICE MARKET ASSESSMENT Solid employment growth continued to fuel Houston s office leasing market with 1.6 million sq. ft. of direct space absorbed during the quarter, bringing the annual tally to just over 5.1 million sq. ft. Most impressively, 48% of the citywide absorption growth occurred in new buildings delivered in 213. Class A product accounted for the bulk of the demand with nearly 1.2 million sq. ft. of direct absorption growth during the final quarter, pushing the annual total to nearly 4.3 million sq. ft., which surpasses last year s annual gain of 3.1 million sq. ft. Class A direct occupancy rates increased by 4 basis points to 9.6% as demand kept pace with space deliveries during the quarter and has moved up 1 basis points within the past year to match its highest level since year-end 27. Class B product benefitted from the tightness in the Class A sector with 52,32 sq. ft. of occupancy gains recorded during the quarter and 984,78 sq. ft. absorbed in 213. Class B direct occupancy improved by 3 basis points to 84.6% during the quarter but remained unchanged from the prior year as space deliveries kept pace with demand. The booming Katy Freeway/Energy Corridor remained a hotbed for new construction and leasing activity, accounting for just over 1.7 million sq. ft. of the direct absorption growth for the year. The energy sector has been the key driver, fueling demand throughout the city as oil and gas service companies are generating ample revenue to support expansion. Of the top 25 citywide transactions signed for the year, 84% were new leases, expansions or renewals by energy-related firms, representing 7.5 million sq. ft. of activity. The largest recent lease transaction involved ExxonMobil preleasing 482,972 sq. ft. at Hughes Landing in the Woodlands. In addition, ConocoPhillips has preleased the remaining space at Energy Center Four, bringing its total lease for the complex to 1.2 million sq. ft. Other recent notable transactions involved new leases and expansions by Statoil Gulf Services, Petroleum Geo-Services and Sasol North America. FORECAST Future rent growth will likely come from the Class A segment of the market as businesses continue to prefer more efficient, higher quality space in well-located areas with great infrastructure and amenities. Since tenants are demanding more amenities and controlled environments for recruitment and retention purposes, there are numerous old buildings undergoing renovations to reposition and modernize in order to keep up with the quality of the new construction. Some of the amenity upgrades include efficient and modernized work environments, attractive lobbies, state-of-the-art fitness centers and cafes. Office Market Trends Houston Ranks 1st in Job Growth: The Houston region has led the top five major U.S. metropolitan areas in job recovery since December 211. Houston has recovered more than 231% of all jobs lost during the recent recession a higher percentage than any other major metro area. Home to 26 Fortune 5 Companies: Houston ranks third among metropolitan statistical areas in the number of Fortune 5 headquarters behind only New York (71) and Chicago (29). With more than 5, energy related firms, Houston is widely considered to be the Energy Capital of the world. Houston Economic Outlook: Houston s strong employment and population growth propelled by further expansion in energy, healthrelated and distribution industries will lead to aboveaverage gains for the metro area. Houston is poised for long-term expansion as job growth is forecasted to average 2.76% from 212 to 215, well above the average of 2.2% annual growth since 199. Current Quarter Direct Occupancy 87.6% Market Trend Indicators Change from Previous Quarter Year 12-month Forecast 8, 9% Direct Net Absorption 1,63,922 in Thousands of SF 6, 4, 2, 88% 86% 84% 82% Under Construction 6,691,682 Direct Asking Rents $ , F 15F 8% 3 Direct Net Absorption Completions Direct Occupancy

4 Q4 213 AT A NET ABSORPTION & OCCUPANCY Strong leasing demand stemming from business growth and expansion in the energy sector have pushed Class A occupancy rates above the 9% mark in all of the premier submarkets, which has translated into a wave of new construction to meet growing demand, said Wade Bowlin,, Managing Director, Central Division. Submarket Occupancy Ranking Rank Submarket Occ. Rate Y-O-Y % Change 1 Katy Freeway 93.2% 1.9% 2 The Woodlands / Conroe 91.8% -.5% 3 Bellaire 9.8% 3.7% 4 Greenway Plaza 9.1%.7% 5 Galleria / Uptown 89.1%.9% 6 Westchase 89.% -1.4% 7 Midtown / Allen Parkway 89.% 6.9% 8 Central Business District 88.6% -.1% 9 San Felipe / Voss 88.6%.8% 1 Gulf Freeway / Pasadena 88.5% 2.2% 11 Baytown & I-1 East 87.7% -1.5% 12 Kingwood / Humble 87.4% -.9% 13 S. Main / Medical Center / South 87.4% -1.5% 14 Fort Bend / Sugar Land 86.4% 5.2% 15 Northwest Freeway / North Loop W 84.5%.8% 16 Greenspoint / IAH / N Belt 82.6% -2.3% 17 Richmond / Fountainview 82.4% -.8% 18 NASA / Clear Lake 81.1% -5.7% 19 FM % 6.% 2 Southwest Beltway 8 / Hillcroft 78.6% -1.7% The Katy Freeway/Energy Corridor was the top performing submarket with 661,377 sq. ft. of direct absorption during the quarter, pushing the annual total to just over 1.7 million sq. ft. The Class A market accounted for 516,454 sq. ft. of quarterly demand primarily taking place in new product with move-ins by Geico (135,716 sf ), TGS-Nopec (97,295 sf ), Subsea 7 (96,292 sf ) and Houston Offshore Engineering (64,15 sf ). Uptown/Galleria recorded 16,644 sq. ft. of quarterly absorption, bringing the annual total to 779,112 sq. ft. The quarterly absorption was evenly split between Class A and B properties with 84,146 and 77,546 sq. ft., respectively. The largest occupancy gain occurred in the Class B sector, compliments of Burns & McDonnell s recent renewal/ expansion at 17 West Loop South. The Fort Bend/Sugar Land submarket recorded 237,944 sq. ft. of direct absorption during the quarter, bringing the annual total to 446,153 sq. ft. The Class A market accounted for the bulk of the occupancy gains compliments of recent leasing success by PMRG at Sugar Creek on the Lake. The Northwest Freeway/North Loop submarket posted 142,56 sq. ft. of direct absorption, with the Class B sector accounting for the majority of the quarterly leasing gains as Endurance International moved into 61,56 sq. ft. at 55 Mitchelldale and PSF Group occupied 54,891 sq. ft. at 26 N Loop Fwy. The Woodlands posted 111,118 sq. ft. of direct absorption during the quarter, bringing the annual total to 875,265 sq. ft. The largest occupancy gains involved ChevronPhillips and Savannah Energy moving into new space at Research Forest Lakeside Bldg. 4. Greenspoint/North Belt recorded 88,367 sq. ft. of direct absorption during the quarter, but ended with 234,362 sq. ft. of occupancy losses for the year as several energy firms relocated into higher quality buildings in other submarkets. In Thousands of SF 2,4 2, 1,6 1, % 9% Direct Net Absorption vs. Completions Q4 1 Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 Direct Net Absorption Direct Occupancy Rates Completions 88% 86% 84% 4 82% 8% Q4 1 Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 Class A Class B

5 AT A Q4 213 RENTAL RATES & LEASING ACTIVITY In Thousands of SF Citywide Class A full-service gross asking rents jumped by $.55 to $32.71 per square foot during the quarter and have increased by 5.3% or $1.64 since year-end 212. Class B rents increased by $.73 to $2.64 per square foot during the quarter and have moved up 4.8% or $.94 per square foot over the past 12 months. The quarterly spike in Class A gross rental rates was largely attributed to the delivery of new product as well as increased taxes inflating operating expenses. The largest quarterly increases occurred in Katy Freeway (5.9%), Westchase (3.5%), Galleria/Uptown (2.%) and CBD (1.8%). Solid office leasing demand combined with limited high quality space options have impressively pushed citywide Class A asking rents upward by $3.63 or 12.5% since its cyclical low at mid-year 211, reaching its highest level on record. Meanwhile, Class B rents have moderately improved by $1.53 or 8.% since its cyclical low late in 21. Asking rental rates are expected to moderately rise in the next 12 months, largely resulting from increased operating expenses and rising construction costs. As the spread between Class A and B rental rates widens, more Class A tenants will consider Class B building options to offset the higher real estate occupancy costs. velocity has slowed down from the swift pace experienced in 212 due in large part to the tightness in the Class A sector, but leasing activity should remain strong as many firms are evaluating potential expansions, relocations and renewals well in advance of their lease expirations. With nearly 9 million sq. ft. of active tenant space requirements and 26 tenants in the market looking for over 1, sq. ft., leasing activity is expected to remain strong in 214. $34 $32 $3 $28 $26 $24 $22 $2 $18 Q4 1 Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q , 14, 12, 1, 8, 6, 4, 2, Class A Rental Rates ($/SF/Yr. Full Service) Direct Activity Rolling 12-Months Class B Q4 1 Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 Sustained demand for quality space should result in increasing rental rates and declining concessions in the top performing submarkets as companies enter the market sooner to avoid diminishing choices of quality space, said John Spafford,, Director of. Submarket Rental Rate Ranking Rank Submarket Rental Rate Y-O-Y % Change 1 Central Business District $ % 2 Galleria / Uptown $ % 3 Westchase $ % 4 Greenway Plaza $ % 5 The Woodlands / Conroe $ % 6 Midtown / Allen Parkway $ % 7 San Felipe / Voss $ % 8 Katy Freeway $ % 9 Fort Bend / Sugar Land $ % 1 S. Main / Medical Center / South $ % 11 Bellaire $ % 12 Kingwood / Humble $22.9.3% 13 Greenspoint / IAH / N Belt $ % 14 Gulf Freeway / Pasadena $ % 15 NASA / Clear Lake $ % 16 FM 196 $ % 17 Northwest Freeway / North Loop W$ % 18 Southwest Beltway 8 / Hillcroft $ % 19 Baytown & I-1 East $ % 2 Richmond / Fountainview $ % 5 Class A Class B

6 Q4 213 AT A CONSTRUCTION RECENT ANNOUNCEMENTS ExxonMobil Corp. recently leased 478, sq. ft. of office space at Hughes Landing, which includes an entire 3, sq. ft. Class A building and a portion of another, slated to deliver by summer 216. ConocoPhillips preleased the remaining space at Energy Center Four, bringing its total lease to 1.2 million sq. ft. and prompting the developer to start a fifth building. Energy Center Five, a 5, sq. ft. office tower will break ground in April 214. Piedmont Office Realty Trust plans to build Enclave Place, a 32, sq. ft. Class A office building in the Energy Corridor. Construction is expected to begin in March and targeted to deliver by mid-year 215. Chevron Corp. announced plans to construct a 5-story, 1.7 million sq. ft. office tower at 16 Louisiana but has recently placed the tower on the back burner. The oil giant still plans to build the tower but will not move forward until after 214. Phillips 66 broke ground on its new 1.1 million sq. ft. corporate campus facility in Westchase, which will house the company s 1,8 Houston-area employees once delivered in about three years. Cameron International recently acquired a 24 acre site along Beltway 8 in the Westchase District, with plans to eventually build a 1 million sq. ft. corporate campus. No immediate plans to start construction have been announced. Clarion Partners and PM Realty Group recently broke ground on Westchase Park II, a 3, sq. ft., Class A+ office building, which will be adjacent to Westchase Park I at 37 W. Sam Houston Pkwy. The new Ziegler Cooper designed building plans to achieve LEED Gold certification and is scheduled for completion by year-end 214. Hines plans to break ground on a 1 million sq. ft. office building at 69 Main in the CBD during the first quarter of Developers delivered just over 3.5 million square feet in 213, with nearly 62% of the new construction coming online in the Katy Freeway/Energy Corridor (1,267,261 sf ), The Woodlands (894,359 sf ) and Galleria/Uptown (615,11 sf ). During the fourth quarter, there were three office buildings delivered totaling 648,346 sq. ft., which included Granite Briarpark Green (32,551 sq. ft.), TGS-Nopec Geophysical Company s 97,295 sq. ft. build-to-suit, and Westgate I (248,5 sq. ft.). Office space under construction (excluding owner-occupied projects) totals nearly 6.7 million sq. ft., with nearly 49% of this new space already pre-leased. The Katy Freeway/Energy Corridor currently boasts 14 projects totaling 3.6 million sq. ft. under construction, which is 54% pre-leased and accounts for 53% of the new construction citywide. With Class A direct occupancy rates exceeding the 9% mark in the premier submarkets and job growth expected to continue at a healthy pace, companies in expansion mode are quickly securing their space amidst fears of future lofty rental rate increases as experienced during the previous expansion period. Houston s office market is projected to deliver roughly 4.5 million square feet in 214, which is already 48% pre-leased. In Thousands of SF 8, 7, 6, 5, 4, 3, 2, 1, Q4 1 Q2 11 Q4 11 Q2 12 Q4 12 Q2 13 Q4 13 SIGNIFICANT PROJECTS UNDER CONSTRUCTION Construction Pipeline Under Construction PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT % PRE- LEASED Delivered DEVELOPER TARGET COMPLETION Energy Center Three 546,64 Katy Freeway ConocoPhillips 1% Trammell Crow Co. 2Q 215 Noble Energy Center II 456, FM 196 Noble Energy 1% Trammell Crow Co. 2Q 215 Energy Tower III 428,831 Katy Freeway Technip 1% Mac Haik 1Q 214 Energy Tower IV 428,831 Katy Freeway N/A % Mac Haik 4Q Katy Fwy 4, Katy Freeway N/A % MetroNational Corporation 3Q 215 Two Briarlake Plaza 337,888 Westchase Samsung Engineering 52% Behringer Harvard REIT 2Q 214 Energy Crossing II 321,58 Katy Freeway Atwood Oceanics, Modec 87% Lincoln Property 1Q 214 Westchase Park II 3, Westchase N/A % PM Realty Group 4Q 214 Beltway Lakes Phase III 271,384 Northwest N/A % The Radler LP 3Q 214 Kirby Grove 26,437 Greenway Plaza Vitol 41% Midway Companies 2Q 215 Town Centre I 254,489 Katy Freeway N/A % Moody Rambin 4Q 214 Westgate - Bldg 3 225,885 Katy Freeway Mustang Engineering 1% Transwestern 3Q 214 The Offices at Greenhouse 23,149 Katy Freeway URS 67% Stream Realty 3Q 214 Research Forest Lakeside - Bldg 5 2, Woodlands Repsol 1% Warmack Investments 2Q 214 Two Hughes Landing 197,719 Woodlands N/A % The Woodlands Development Co 2Q 214 Westgate - Bldg 2 186,375 Katy Freeway Mustang Engineering 1% Transwestern 3Q 214 Jacobs Plaza 168,5 Katy Freeway Jacobs Engineering 45% PM Realty Group 2Q 214 Sierra Pines II 153,81 Woodlands N/A % Stream Realty 3Q 214

7 AT A Q4 213 SUBMARKET STATISTICS Submarkets TOTAL SPACE AVAILABLE Total Inventory SF Direct Sublease Direct Occupancy DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT Current Qtr. Year To Date Completions Current Qtr Under Construction Class A Class B Central Business District 37,511,174 5,52, , % 41,946 33,692 - $39.42 $25.97 Galleria / Uptown 22,746,174 2,988, , % 16, , ,753 $34.39 $26.15 Greenway Plaza 1,168,659 1,176,958 92, % 72,297 12,68-26,437 $32.6 $23.38 Katy Freeway 25,243,292 2,787,33 9, % 661,377 1,756, ,795 3,558,682 $33.17 $2.93 Westchase 13,65,467 1,93, ,9 89.% -38, ,986 32, ,336 $36.17 $19.4 Greenspoint/ IAH / N Belt 12,388,256 4,541, , % 88, ,362 - $28.94 $18.29 Northwest Freeway / N Loop West 11,79,496 2,13,822 29, % 142,56 19,17-271,384 $22.6 $17.76 NASA / Clear Lake & SE Outlier 6,559,98 1,411,918 4, % 17,543-44,87 - $23.6 $18.3 Fort Bend / Sugar Land / SW Outlier 7,475,174 1,94, , % 237, , ,196 $26.7 $22.8 Richmond / Fountainview 1,264,97 28, % -35,212-4, $17.61 San Felipe / Voss 5,353, ,75 81, % 18,234 35,988 - $32.44 $22.4 Bellaire 3,568,9 462,872 23, % 58,792 49,294 - $25.86 $21.8 Midtown / Allen Parkway 5,485,74 733,668 32, % -23, ,65-8, $28.61 $25.7 FM 196 9,773,66 2,193, , % 58, , ,5 $25.72 $16.73 Kingwood / Humble / NE Outlier 1,168, ,915 14, % -2,728-1,52 - $32.13 $2.4 Southwest Beltway 8 / SW / Hillcroft 1,388,811 2,926,48 74, % -69,598-14,594 - $17.26 $16.97 S. Main / Medical Center / South 9,234,254 1,435,499 25, % 53,376 44,41-52,362 $27.9 $24.28 The Woodlands / Conroe 8,986, , , % 111, ,265-68,32 $33.77 $25.82 Gulf Freeway / Pasadena 3,143, ,777 6, % 7,956 78,882 - $29.37 $21.47 Baytown / I-1 East 1,121, , % 7,714-6, $16.4 Totals 27,21,891 33,577,274 4,459, % 1,63,922 5,143, ,346 6,691,682 $32.71 $2.64 Property Types METHODOLOGY Total Inventory SF Direct Sublease Direct Occupancy Total Inventory: The total inventory includes all single and multi-tenant leased office buildings with at least 2, 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. Current Qtr. Year To Date Completions Current Qtr Under Construction Class A 1,627,153 13,359,375 2,796, % 1,176,299 4,271,338 2,12,385 6,46,38 $ % Class B 88,522,488 17,68,76 1,64, % 52,32 984,78 228, ,644 $ % Class C 17,872,25 3,149,139 21, % -65, , $ % Totals 27,21,891 33,577,274 4,459, % 1,63,922 5,143,325 2,241,267 6,691,682 $ % Asking Rent Y-O-Y % Change Under Construction: Office buildings which have commenced construction as evidenced by site excavation or foundation work. 7 Direct Asking Rents: The quoted full-service asking rent for available space expressed in dollars per sq. ft.

8 AT A Q4 213 Wade Bowlin Managing Director (713) wbowlin@pmrg.com John Spafford Director of (713) jspafford@pmrg.com Brad Sinclair (713) bsinclair@pmrg.com Kim Grizzle-Shapiro Senior Vice President (713) kshapiro@pmrg.com Mike Martin Vice President (713) mmartin@pmrg.com Michael Sieger Vice President (713) msieger@pmrg.com Marci Phillips Vice President (281) mphillips@pmrg.com Courtney Knightstep Manager (713) cknightstep@pmrg.com Allie Hubbard Manager (713) ahubbard@pmrg.com Ariel Guerrero Senior Vice President Research (713) aguerrero@pmrg.com ABOUT PMRG Headquartered in Houston, Texas, PM Realty Group (PMRG) is one of the nation s leading real estate companies focusing on comprehensive property services, development and acquisitions. With a strategic presence in 3 markets, PMRG provides the highest quality services to its clients and investors. PMRG s clients and investors include large financial institutions, advisors and high net worth individuals. By capitalizing on the team s experience and expertise, PMRG has the ability to undertake large and challenging management, leasing, development and acquisition projects. Doug Berry Creative Director (713) dberry@pmrg.com PMRG s portfolio, including projects managed for third parties, includes commercial office buildings, mixed-use centers, corporate headquarters, industrial buildings, medical facilities, high-rise multifamily buildings and re-appropriated military facilities. Our goal is to generate exceptional returns for our clients and investors by focusing on real estate fundamentals. For additional information, visit