Houston office market Sublease and activity overview September, 2016
What you need to know about the current state of the Houston office sublease market 1. 2. 3. 11.9 million square feet of sublease space now available Largest blocks of sublease space located in Energy Corridor, CBD, Galleria, and Greenspoint Over 5 million SF of sublease inventory here for the long term (5+ years of term remaining) Velocity of subleases coming to market not slowing Significant subleases added in 2016 include Shell, BHP Billiton, BG Group and Marathon Oil bringing over 5 million SF to market Subleases not being absorbed Sublease space coming to market five times faster than it s being leased Only a handful of spaces larger than 20,000 SF leased so far this year; 2015 activity similar Only two percent of current subleases will revert to direct basis in 2016 Average sublease signed this year is tiny smaller tenants taking advantage of options Source: JLL Research 2
Sublease space inventory overview
CBD and the Energy Corridor (Katy Freeway, Westchase) lead in sublease space availability The Woodlands 452,233 s.f. Other 1,717,495 s.f. CBD 2,657,349 s.f. Greenspoint 970,562 s.f. Galleria 1,172,319 s.f. Westchase 1,496,446 s.f. Katy Fwy East 425,489 s.f. Katy Fwy West 3,043,193 s.f. Source: JLL Research *This dataset reviews all sublease availabilities in office properties within the Houston market. 4
2006 1Q 2006 2Q 2006 3Q 2006 4Q 2007 1Q 2007 2Q 2007 3Q 2007 4Q 2008 1Q 2008 2Q 2008 3Q 2008 4Q 2009 1Q 2009 2Q 2009 3Q 2009 4Q 2010 1Q 2010 2Q 2010 3Q 2010 4Q 2011 1Q 2011 2Q 2011 3Q 2011 4Q 2012 1Q 2012 2Q 2012 3Q 2012 4Q 2013 1Q 2013 2Q 2013 3Q 2013 4Q 2014 1Q 2014 2Q 2014 3Q 2014 4Q 2015 1Q 2015 2Q 2015 3Q 2015 4Q 2016 1Q 2016 2Q 2016 3Q SF of Sublease Available Sublease space in Houston s top submarkets more than double the average inventory 11,000,000 10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 Greenspoint Sublet Total Avail SF CBD Sublet Total Avail SF Katy Fwy Sublet Total Avail SF Greenway Sublet Total Avail SF Woodlands Sublet Total Avail SF Westchase Sublet Total Avail SF Galleria Sublet Total Avail SF OPEC Thanksgiving Meeting 0 Source: JLL Research *This dataset reviews all sublease availabilities in Class A and B properties within the top seven office submarkets, regardless of size. 5
January, 2015 February, 2015 March, 2015 April, 2015 May, 2015 June, 2015 July, 2015 August, 2015 September, 2015 October, 2015 November, 2015 December, 2015 January, 2016 February, 2016 March, 2016 April, 2016 May, 2016 June, 2016 July, 2016 August, 2016 SF of sublease space available Oil Key volatility Ideas to sending remember shockwaves in 2015 through (and 2016) market: on average, 587,000 SF of subleases coming online monthly 2,500,000 2,000,000 2,137,058 1,687,399 1,500,000 1,000,000 929,894 500,000 131,870 699,607 464,855 222,366 706,302 520,099 235,338 279,284 636,607 278,564 211,084 155,414 235,714 593,277 514,731 661,898 440,638 0 Source: JLL Research *This dataset reviews all sublease availabilities in Class A and B properties within office submarkets in Houston. 6
Sublease overhang will not remedy in the short term: 4.6 million SF of sublease options have 5+ years remaining More than 10 years term remaining 1,399,587 12% Negotiable 1,089,883 9% Less than 6 months term remaining 586,344 6 months to 1 year term 5% remaining 523,094 4% 1 year to 2 years term remaining 2,022,877 17% 5 years to 10 years term remaining 3,165,257 27% 2 years to 5 years term remaining 3,148,114 26% Source: JLL Research *This dataset reviews all sublease availabilities in office properties within the Houston market. 7
Tenants did not flock to sublease opportunities in 2015; leasing activity among subleases was very light Subleases signed in 2015 148 Subleases signed in 2015 above 20,000 SF 16 Multi-floor subleases signed in 2015 Fewer than 10 Total sublease space leased in 2015 1.24 million SF Average deal size 8,378 SF Top industry taking sublease space Energy Source: JLL Research 8
Tenants currently taking advantage of sublease opportunities are smaller in size; only twelve full floors leased YTD Subleases signed in 2016 191 Subleases signed in 2016 above 20,000 SF 12 Subleases signed in 2016 above 10,000 SF 35 Multi-floor subleases signed in 2016 3 Total sublease space leased in 2016 1,186,842 SF Average deal size 6,213 SF Source: JLL Research 9
Overall leasing activity consistently weak, will impact absorption of sublease space and new construction 8,000,000 6,000,000 10-Yr Average Quarterly Leasing Activity OPEC Thanksgiving Meeting 4,000,000 2,000,000 0 2010 2011 2012 2013 2014 2015 2016 Source: JLL Research 10
Challenges arising in the market
M&A Activity leaves uncertainty in the market?? Impact will continue to be felt in the Houston office market via space contractions and consolidations Full M&A impact on market typically delayed by 6-12 months 2016-2017 could see additional major players involved, especially if oil prices continue to remain around $50/bbl 12
Office market forecast - looking ahead into 2016 and 2017 Vacancy Nearly 3 million SF of new deliveries remains un-leased; this combined with space contractions and M&A activity may push vacancy over 20% market wide Rents Published market rents flatten; street-level deals will offer significantly discounted market rents with owners focusing on maintaining occupancy rather than high rates Concessions Thanks to weak deal velocity and cautious tenants in the market, landlords will continue to offer increased concessions (flexible lease terms, free rent, tenant improvements) Key takeaways While oil prices are still recovering Deal velocity continues slowdown, contract rents will fall; landlord concessions increase Spec construction will remain on hold due to weak demand, lending tightening Job reductions continue as E&P/energy service companies slash headcounts M&A activity expected to increase (combination of debt issues for small and mid-size companies and oil prices around $50/bbl) Why this matters Short term leases will be the focus in 2016 More and more sublease space will arrive to market, may grow to 13 million SF by 2017 Market will continue to be tenant-favorable 13
Top themes impacting the office CRE market 1. 2. 3. Sublease space continues its mount Over 11.9 million SF of sublease options now available across the Houston office market Sublease supply is currently double the ten-year historical average, while demand continues to lag behind New deliveries add pressure to vacancy Over 1.0 million square feet has delivered without preleasing commitments in 2016 As a result, total vacancy ticked up to 18.5 percent during Q2 Leasing demand unable to keep pace with supply Failed to surpass 1.5 million square feet in total leasing activity for the first time in the last 15 years Availability is over 26.6 percent, meaning one in four floors is available marketwide Source: JLL Research 14
Houston vs. major U.S. markets
Sublease by industry Houston energy tenant give-back comprises overwhelming majority of sublease inventory Energy Technology Professional business services Insurance Financial activities Life sciences Healthcare Law firms All other industries Industry Sublease space (s.f.) Energy 7,434,269 Technology 1,930,890 Professional business services 1,152,658 Insurance 1,003,866 Financial activities 963,145 Life sciences 880,741 Healthcare 876,666 Law firms 749,442 All other industries 3,744,972 Total sublease 18,736,649 Source: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston 16
Sublease by submarket Houston energy submarkets experiencing highest rates of sublease activity Katy Freeway West (Houston) CBD (Houston) Westchase (Houston) West Loop (Chicago) Central North (Chicago) Shady Grove (Suburban Maryland) Central Loop (Chicago) Waltham/Watertown (Boston) Western East/West Corridor (Chicago) Financial District (New York) Rosslyn (Northern Virginia) El Segundo (Los Angeles) Reston (Northern Virginia) South Financial District (San Francisco) Back Bay (Boston) Near North (Chicago) Columbus Circle (New York) Penn Plaza/Garment (New York) 957,903 823,199 656,827 626,251 592,820 577,158 538,808 418,169 405,144 304,598 276,985 253,476 244,053 238,330 226,156 213,441 1,875,783 2,604,790 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 Sublease space (s.f.) Source: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston 17
Sublease space by industry and market Houston far exceeds other gateway markets in subleases over 50,000 SF Energy Technology Professional services Insurance Financial activites Life sciences Healthcare Law firms All other industries Houston New York Chicago Washington, DC Los Angeles San Francisco Boston Seattle 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 9,000,000 Sublease space (s.f.) Source: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston 18
Sublease space by block size (s.f.) Sublease by block size Most sublease space found in 100,000-249,999 s.f. blocks as anchor tenants move to new supply in gateway markets 9,000,000 250,000+ s.f. 100,000-249,999 s.f. 75,000-99,999 s.f. 50,000-74,999 s.f. < 50,000 s.f. 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 Houston New York Chicago Washington, DC Los Angeles San Francisco Boston Seattle Source: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston 19
Sublease space (s.f.) Sublease by time on market 15.4 m.s.f. has been listed for two years or less, coinciding within downturn in oil pricing 10,000,000 9,814,738 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,611,713 4,000,000 3,000,000 2,000,000 1,000,000 975,216 972,847 967,070 1,284,993 0 > 1 month 1-11 months 12-23 months 24-35 months 36-47 months 48+ months Source: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston 20