Relationships in Real Estate
HOUSTON OFFICE MARKET — 1st QTR 2015 Houston’s second place rank in Fortune 500 headquarter locations, coupled with one of the healthiest population and employment growth rates among major U.S. cities, has resulted in one of the most stable commercial real estate markets in the nation over the past ten (10) years. Houston’s population growth, affordable housing and cost of living, young educated work force and a thriving energy industry, Houston faired the 2008 global recession better than all of the nation’s largest employment bases, and Houston was first to recover all jobs lost in the recession. The overall office market turned positive in 2010 with absorption just under 2 million square feet citywide. The citywide total absorption from 2011 through 2014 totals just over 21,300,000 square feet. This year started strong for the overall market with total citywide absorption just over 1.7 million square feet through the first quarter 2015.

The Houston office market continues to benefit with the growing local economy supported by energy, the Port of Houston and the medical sectors of the economy. The overall citywide vacancy rate is 11.6%, which is up from 10.8% at year end 2014. We anticipate rental rates to continue to level off in the central, northern and western submarkets for the second half of 2015. As shown below, the outlook for positive job growth (projected at 2.8% for 2015 and increases to 3% in 2016) and limited new office supply over the next two (2) years.
Houston is the energy capital of the world so with the price of oil decreasing from $100.00 per barrel to $40.00 per barrel from August 2014 to March of 2015, the industry reacted quickly. Capital spending for new exploration and production were diminished across the board anywhere from 10%-50% in 2015. This has forced the reduction in new drilling programs and oil service providers to adjust their work forces. The bright spot in this decline has created an expansion with the midstream companies (storage pipeline) and downstream companies (refining and distribution). In addition, with a continued low natural gas has created a 90billion dollar renovation and expansion in the petrochemical industry along the Gulf Coast.

There is currently 17 million square feet of office properties under construction citywide. Just over 8.5 million square feet represent build to suit properties. Mainly the new Exxon Mobil campus (3.5 million square feet), Anadarko’s 600,000 square foot addition to their headquarters, as well as Southwest Energy (600,000 square feet), Nobel (500,000 square feet), Phillips 66 (1,100,000 square feet), Shell (600,000) and BP (200,000 square feet), all have buildings recently completed or close to completion. The remaining 8.5 million square feet that is currently under construction is 70% preleased. Most of the new construction is located in the western submarkets (Westchase and Energy Corridor) as well as The Woodlands submarket in north Houston. There is another 4 million square feet of recently proposed office projects that were announced in the last half of 2014, most all of these projects have been put on a hold status.

Absorption continues to be steady in the first quarter 2015. Most of the positive absorption occurred in the Energy Corridor (348,287 square feet) and The Woodlands (1,656,550 square feet). The submarket that has the most negative absorption was Greenspoint with 575,000 square feet vacated by Exxon. This was anticipated by Exxon and more space will be vacated this year as well as they continue to take occupancy at their new corporate campus south of the Woodlands.

 

Houston Citywide Office Market
1⁵t Qtr 2015

Class	Inventory	Total Vacancy	Overall Vacancy	YTD Net Absorption	Avg. Asking Rate
A	124,970,209	14,294,775	11.4%	1,313,875	$34.45
B	122,265,003	15,282,573	12.5%	279,077	$21.45
C	39,584,306	3,600,248	9.1%	113,889	$16.51
Total	286,819,518	33,177,596	11.6%	1,706,841	$27.46

 

Rental Rates

Citywide rental rates increased on all asset classes through year end 2013, ending the year at an all time high of $25.43 per square foot. Through year end 2014, the citywide average increased to $27.24 per square foot and through the first quarter 2015, rental rates have increased to $27.46 per square feet. Class A rental rates have decreased slightly to $34.45 per square foot, which is down from $34.51 per square foot at year end 2014. The Class B market had a slight improvement going from $21.35 per square foot at year end 2014 to $21.45 per square foot through the first quarter 2015. The Class C market increased from $16.38 per square foot at year end 2014 to $16.51 per square foot through the first quarter 2015. With limited and decreasing new supply under construction, expect rent rates to hold steady in all northern and western submarkets through 2015.

Historical Average Gross Rental Rates
(2010 – 1″ Qtr 2015)

CIA.	2010	2011	2012	2013	2014	1st Qtr 2015
A	$28.55	$29.75	$31.02	$32.12	$34.51	$34.45
B	$18.74	$19.14	$19.70	$20.35	$21.35	$21.45
C	$15.64	$15.50	$15.69	$16.16	$16.38	$16.51
Avg. Total	$22.77	$23.01	$24.24	$25.43	$27.24	$27.46

Historical Average Gross Rental Rates

 

Net Absorption

The overall citywide absorption through year end 2014 was extremely strong with over 7.7 million square feet of positive absorption. The submarket leaders in positive absorption were the CBD, Energy Corridor, Westchase and The Woodlands. The first quarter absorption remains strong with just over 1.7 million square feet absorbed in the first three (3) months of 2015. We expect absorption to decrease in 2015 as the effects of the oil prices and staffing local of upstream exploration companies.

Tenants moving into large blocks of space in the first quarter included PGS (125,000 square feet in Energy Corridor), and Cheniere Energy (187,000 square feet at Pennzoil Place in the CBD). With a manageable amount of new office development currently under construction and stable employment growth projected, the Houston office market is well positioned to maintain current rental rates in the office market through 2015 and into 2016.

Office Summary

National and international investors continue to be drawn to Houston due to its strong economic fundamentals, which are being driven by solid future employment, population growth, energy and medical sectors as well as one of the busiest ports in the country. The main economic drivers for 2015 will be energy, mergers and consolidations, petrochemical expansion, the medical sector and the expansion and growth of the Port of Houston.

• Houston is the fifth largest office market in US
• Citywide net absorption totaled positive 1.7 million square feet in first quarter 2015
• Citywide average rental rates are $27.46 per square foot (8.8% increase from first quarter 2014)
• Citywide sublease space totals 2,046,000 square feet
• 2 million square feet is expected to deliver in 2015

2015 Office Market Outlook

• Protecting occupancy and maintaining quoted and effective rental rates is the focus for 2015
• The main driver for office demand is job growth, estimated to be 60,000-70,000 new jobs in 2015
• The petrochemical sector, healthcare and the Port will be main drivers for job growth
• Fundamentals remain stable in major submarkets
• Positive job growth and preleased space will drive positive absorption in 2015 (estimated 6 million square feet)
• Increase in property taxes in 2013 and 2014 has increased operating expenses across all asset classes

2015 Office Market Highlights

• Cheniere Energy moves into 187,000 square feet at Pennzoil Place
• PGS moves in 125,000 square feet at West Memorial Park I
• CB&I signs lease for 100,000 square feet at 3600 W Sam Houston
• Statoil puts 300,000 square feet on sublease market in Westchase — 8 years remaining
• Worley Parsons puts 275,000 square feet on sublease market in Bellaire
• INVESCO sells 1000 Main for $520 per square foot to Metzler — new CBD record price per square foot

2014 Office Market Highlights

• 60 acre Springwoods mixed use development- construction start
• Foster Wheeler is in the market for 100,000 square feet
• Mason Creek II (130,000 square feet) breaks ground in Energy Corridor- March 2015 completion
• Phillips 66 broke ground on a 1.1 million square feet corporate office- first quarter 2016 completion
• Baker Hughes announces a new 500,000 square feet building in Springwoods
• Hines breaks ground on 609 Main St. in CBD (one million square feet)- first quarter 2017 completion
• Transwestern preleases Pinnacle West in the Energy Corridor- 1.5 million square feet
• Chevron puts 1.7 million square feet in CBD building on hold until 2016
• Trammell Crow goes “spec” on Energy Centre Five in the Energy Corridor
• Statoil renews for 500,000 square feet at City West (now subleasing 300,000 square feet)
• Air Liquide signs for 300,000 square feet with Metro National near Memorial City
• NOV campus under construction in Westchase (approximately 417,000 square feet)
• Shell Oil completes 600,000 square feet on campus
• Skanska starts construction on West Memorial Park II — third quarter 2014
• Mustang Engineering moves into 300,000 square feet at Westgate
• Anadarko completed 450,000 square foot campus expansion
• Repsol moves in to 200,000 square feet in Woodlands