BoyarMiller Breakfast Forum: The Houston Commercial Real Estate Markets – What’s Ahead for 2016

www.boyarmiller.com

The Houston Commercial Real Estate Markets: What’s Ahead for 2016

Breakfast Forum

December 10, 2015

www.boyarmiller.com

Real Estate Market OverviewJimmy HintonHFF

BoyarMiller Breakfast Forum – December 10, 2015

Disclaimer

Forward-Looking Statements

Certain statements in this presentation are “forward-looking statements” within the meaning of the federal securities laws. Statements about our beliefs and expectations and statements containing the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend” and similar expressions constitute forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause results and performance in future periods to be materially different from any future results or performance suggested in forward-looking statements in this presentation. Investors, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. Any forward-looking statements speak only as of the date of this presentation and, except to the extent required by applicable securities laws, HFF (the Company) expressly disclaims any obligation to update or revise any of them to reflect actual results, any changes in expectations or any change in events. If the Company does update one or more forward-looking statements, no inference should be drawn that it will make additional updates with respect to those or other forward-looking statements.

Industry and Market Data

In this presentation, we rely on and refer to information and statistics regarding economic conditions, trends, and our market in the sectors of that market in which we compete. In particular, we have obtained general industry information and statistics from certain third-party sources. We believe that these sources of information and estimates are reliable and accurate, but we have not independently verified them.

Enron

December 2001 – Bankruptcy

Source: Associated Press

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

Offi

ce A

vaila

bilit

y (M

illio

ns o

f SF)

December 2001 – Start Of A Four-Year Hangover

Source: Associated Press, CoStar, HFF Research

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwiT27G708rJAhXuqYMKHZpmAXEQjRwIBw&url=http://www.ntokoumenta.gr/enron-%CE%B7-%CE%BA%CE%B1%CF%84%CE%AC%CF%81%CF%81%CE%B5%CF%85%CF%83%CE%B7-%CF%84%CE%BF%CF%85-%CE%B3%CE%AF%CE%B3%CE%B1%CE%BD%CF%84%CE%B1/&psig=AFQjCNG_wHbKecC7wxbfNvhL-qMZjrrLQQ&ust=1449608704299151

July 2003 – 8.6MSF Of Office Vacancy

Late 2005 – Clouds Begin To Part

Source: Photainable

2005/2006 – Vacancy Tightens, Rents Expand

Source: Photainable

1999

Q1

1999

Q2

1999

Q3

1999

Q4

2000

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2000

Q2

2000

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2001

Q1

2001

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2001

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Q1

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Q1

2015

Q2

2015

Q3

2015

Q4

$10

$12

$14

$16

$18

$20

$22

$24

$26

$28

$30

0%

5%

10%

15%

20%

25%

Rent

PSF

(Net

) Vacancy (%)

Rapid Expansion GFC & Recovery

Rapid Expansion

Enron

Bear Stearns Sold For $2/Share

Source: Fortune

“Governing Event” Prevented Overheating Prior To GFC

Source: HFF Research

2006

1

2006

2

2006

3

2006

4

2007

1

2007

2

2007

3

2007

4

2008

1

2008

2

2008

3

2008

4

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1

2009

2

2009

3

2009

4

2010

1

2010

2

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3

2010

4

2011

1

2011

2

2011

3

2011

4

2012

1

2012

2

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3

2012

4

2013

1

2013

2

2013

3

2013

4

2014

1

2014

2

2014

3

2014

4

2015

1

2015

2

2015

3

80

100

120

140

160

180

200

220

CA - San Francisco CA - Los Angeles CO - Denver IL - ChicagoTX - Houston DC - Washington NY - New York

Capi

tal A

ppre

ciatio

n In

dex

- Jan

200

6 =

100

Shallow Correction + Parabolic Expansion = Outsized Returns

Source: HFF Research, National Council of Real Estate Investment Fiduciaries

Houston Has Afforded CRE Investors+7.88% of EXTRA Alpha Compounding Annually Since 2006

TOTAL RETURN OF ~285% IN LESS THAN TEN YEARS

Divergent Capital Flows

J F M A M J J A S O N D$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Office

2015 2014 2013 2012

Volu

me

(Mill

ions

)

Office

Source: Real Capital Analytics


$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Multi-Housing

2015 2014 2013 2012

Volu

me

(Mill

ions

)

Multi-housing


Industrial



$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Industrial

2015 2014 2013 2012

Volu

me

(Mill

ions

)


$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Retail

2015 2014 2013 2012

Volu

me

(Mill

ions

)

Retail


Retail

Source: ACCRA Cost of Living Index, 3Q 2015; average annual wages, salaries and proprietor earnings adjusted for cost of living using BEA Regional Price Parities (80%) and variation in Census median home value among the 53 regions (20%). Data Sources: EMSI 2015.2 Employment Data, U.S. Bureau of Economic Analysis Regional Price Parities, U.S. Census American Community Survey

Global Capital Seeking Houston

Source: Real Capital Analytics, HFF Research

What To Expect

2006 2006 2006 2007 2007 2008 2008 2008 2009 2009 2010 2010 2011 2011 2011 2012 2012 2013 2013 2013 2014 2014 2015 2015 2016

-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

Professional/Scientific/Technical Manufacturing Mining/Logging

YoY

Empl

oym

ent C

hang

e (T

hous

ands

)Concentration Of Layoffs

Source: Texas Workforce Commission, HFF Research

-17.2k since Nov 2014 -5.7k since July 2015-6.2k since June 2015

Petrochemical Industry

Source: HFF Research, Company Filings, Forbes, Houston Chronicle, Houston Business Journal. Greater Houston Partnership, Department of Commerce

Relativity – Growth Since Bottom

Source: Bureau of Labor Statistics, HFF Research

20102010

20102010

20102010

20112011

20112011

20112011

20122012

20122012

20122012

20132013

20132013

20132013

20142014

20142014

20142014

20152015

20152015

201595

100

105

110

115

120 119.7 120.0

110.8

112.6

Houston United States

Empl

oym

ent I

ndex

- Ja

n 20

10 =

100

Houston out of the gate strongly in 2010But rest of United States has grown has grown 6x faster than Houston since YE2014

Relativity – Are Things That Bad?

Source: Bureau of Labor Statistics, HFF Research

RANKINGS (by Absolute Growth) Total Jobs Total Change Total Jobs Total Change

Rank Metropolitan Statistical Area October 14 October 15 Absolute Percent Rank Metropolitan Statistical Area October 14 October 15 Absolute Percent National 141,000,000 143,739,000 2,739,000 1.94% National 141,000,000 143,739,000 2,739,000 1.94%

1 New York-Northern New Jersey-Long Island 9,245,800 9,402,900 157,100 1.70% 26 Philadelphia-Camden-

Wilmington 2,816,500 2,848,100 31,600 1.12%

2 Los Angeles-Long Beach-Santa Ana 5,798,800 5,925,100 126,300 2.18% 27 Las Vegas-Paradise 895,100 926,100 31,000 3.46%3 Dallas-Fort Worth-Arlington 3,324,700 3,423,100 98,400 2.96% 28 Indianapolis-Carmel 1,007,800 1,036,100 28,300 2.81%4 Atlanta-Sandy Springs-Marietta 2,539,900 2,628,000 88,100 3.47% 29 Columbus 1,026,000 1,051,600 25,600 2.50%5 San Francisco-Oakland-Fremont 2,217,700 2,292,000 74,300 3.35% 30 Nashville 891,300 916,600 25,300 2.84%6 Washington-Arlington-Alexandria 3,138,900 3,206,000 67,100 2.14% 31 Cincinnati-Middletown 1,054,800 1,076,500 21,700 2.06%7 Seattle-Tacoma-Bellevue 1,869,200 1,926,300 57,100 3.05% 32 Salt Lake City 665,800 686,800 21,000 3.15%8 San Jose-Sunnyvale-Santa Clara 1,020,800 1,074,300 53,500 5.24% 33 Sacramento-Arden-Arcade 899,300 920,300 21,000 2.34%

9 Miami-Fort Lauderdale-Pompano Beach 2,454,900 2,507,600 52,700 2.15% 34 Cleveland-Elyria-Mentor 1,048,000 1,068,300 20,300 1.94%

10 Chicago-Naperville-Joliet 4,559,600 4,611,300 51,700 1.13% 35 Kansas City 1,029,300 1,048,100 18,800 1.83%11 Boston-Cambridge-Quincy 2,621,200 2,672,000 50,800 1.94% 36 Louisville-Jefferson County 638,900 654,200 15,300 2.39%12 Phoenix-Mesa-Scottsdale 1,883,700 1,932,000 48,300 2.56% 37 Pittsburgh 1,177,200 1,191,300 14,100 1.20%13 Riverside-San Bernardino-Ontario 1,306,400 1,349,600 43,200 3.31% 38 St. Louis 1,331,700 1,345,400 13,700 1.03%14 Orlando 1,123,400 1,166,400 43,000 3.83% 39 Oklahoma City 624,400 637,200 12,800 2.05%15 San Diego-Carlsbad-San Marcos 1,364,400 1,404,600 40,200 2.95% 40 Jacksonville 629,200 641,900 12,700 2.02%16 Detroit-Warren-Livonia 1,920,400 1,959,100 38,700 2.02% 41 Newark-Union 1,194,900 1,205,600 10,700 0.90%

17 San Antonio-New Braunfels 958,800 996,900 38,100 3.97% 42 Milwaukee-Waukesha-West Allis 855,800 865,700 9,900 1.16%

18 Portland-Vancouver-Hillsboro 1,091,300 1,128,400 37,100 3.40% 43 Virginia Beach-Norfolk-Newport News 753,200 762,500 9,300 1.23%

19 Tampa-St. Petersburg-Clearwater 1,220,100 1,257,200 37,100 3.04% 44 Hartford 572,400 581,400 9,000 1.57%20 Charlotte-Gastonia-Rock Hill 1,084,800 1,120,500 35,700 3.29% 45 Raleigh-Cary 568,700 577,400 8,700 1.53%21 Denver-Aurora-Broomfield 1,362,600 1,397,300 34,700 2.55% 46 Providence 575,800 584,200 8,400 1.46%22 Minneapolis-St. Paul-Bloomington 1,919,500 1,953,700 34,200 1.78% 47 Buffalo-Niagara Falls 562,900 570,600 7,700 1.37%23 Baltimore-Towson 1,359,600 1,393,100 33,500 2.46% 48 Richmond 635,400 641,600 6,200 0.98%24 Houston-Sugar Land-Baytown 2,967,500 3,000,600 33,100 1.12% 49 Memphis 621,100 624,400 3,300 0.53%25 Austin-Round Rock-San Marcos 924,300 956,400 32,100 3.47% 50 New Orleans-Metairie-Kenner 566,500 567,100 600 0.11%

YE Employment Growth Prediction

Source: Jimmy Hinton

+33,250

Houston

Dallas-F

ort W

orth

New York

Los Angeles

Washington DC

Dallas-F

ort W

orth

Miami-Fort L

auderdale

Atlanta

Phoenix

San Francisco

SeattleAusti

n

Riversi

de-San Bernardino

Denver

Orlando

San Antonio

Boston

San Diego

Charlotte

Oakland

-

100,000

200,000

300,000

400,000

500,000

600,000

0%

2%

4%

6%

8%

10%

12%

14% 569,764

528,116

525,473

433,383

397,505

373,577

365,184

327,595

296,222

258,669

231,669

227,010

217,039

210,776

187,007

186,144

179,759

168,118

163,302

162,964

Absolute Growth Percentage Growth

Population Growth – Embrace It!

Source: Census Bureau, HFF Research

“Party Like It’s 1999”

199119911992199319941995199619961997199819992000200120012002200320042005200620062007200820092010201120112012201320142015-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

United States Houston

YoY

Empl

oym

ent C

hang

e (%

)

Source: Bureau of Labor Statistics, Texas Workforce Commission, HFF Research

Asian Financial Crisis reduces WTI to $10/brl, broader economic expansion

prevents negative YoY job growth

WTI below $40/brl

www.boyarmiller.com

Retail & Office Markets/Mixed-Use DevelopmentJonathan BrinsdenMidway

midwaycompanies.com |midwaycompanies.com |

THE HOUSTON COMMERCIAL REAL ESTATE MARKETS – WHAT’S AHEAD FOR 2016

DECEMBER 10, 2015


HOUSTON MACRO

Oil Prices – Lower for Longer

Jobs – 30-40k in 2015, 20k in 2016, Moving West to East

Diversification

The Long View

Real Estate – Timing is Positive


REAL ESTATE IS A MICRO BUSINESS

SITE

SITE

SITE

SITE

SUB-TRADE

TRADE AREA

CITY


HOUSTON’S URBAN CORE

URBAN CORE

OFFICE


BIG PICTURE OFFICE

Densification of Knowledge Workers

Cost vs. People Investment

Amenities & Connectivity

Rapid Obsolescence of Product

Business Clarity vs. Flexible Lease Terms

Co-Working Environments


HOUSTON OFFICE

Oil Prices

Development Pipeline Decline

Sublease Space

Businesses Continue to Operate & Evolve

Flight to Quality (Real Estate is a Micro Business)


Woodlands

Northwest

Greenway Plaza

Land

lord

Lev

erag

eTenant LeverageGreenspoint

Peaking market

Falling market

Bottoming market

Rising market

Katy Freeway ,Westchase

Overall HoustonCBD, Galleria

2015 SUBMARKET OFFICE

Source: JLL Research


2014 OFFICE MARKET DEVELOPMENT

212

1

23

4

3

4

2

1

6 2014 Total : 17.8M SFLeased: 68%


CURRENT OFFICE MARKET DEVELOPMENT

36

22

2

3

21

5 Current Total: 9.6M SFLeased: 58.8%


CURRENT OFFICE MARKET DEVELOPMENT

SQUARE FEET LEASED

2015 2.7M SF 2016 5.2M SF 2017 1.7M SF

Total 9.6M SF 58.8% Leased

Less 3.8M SF (Build to Suit + Owner/User)

Total 5.8M SF(Under Construction)

32% Leased


CITYCENTRE NORTH


CURRENT OFFICE MARKET CONDITIONS


CURRENT OFFICE MARKET CONDITIONS_SUBLEASE SPACE


CURRENT OFFICE MARKET CONDITIONS_SUBLEASE SPACE


For the total Houston market, tracking Class A & B, full floor and larger subleases, the information depicts:The remaining lease term on each sublease listing.Total number of sublease listings within each time frame.Total amount of sublease space available within each time frame.

CURRENT OFFICE MARKET CONDITIONS_SUBLEASE SPACE (cont.)

RETAIL

midwaycompanies.com |

BIG PICTURE RETAIL

The US is Over Retailed

Brutally Competitive

Faster Obsolescence

Cost & Convenience vs. Experience

Online

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EXPERIENCEPRICE

RETAIL MARKET

It’s all about Time


RETAIL SALES

Jan-92Oct-

92Jul

-93Ap

r-94Jan

-95Oct-

95Jul

-96Ap

r-97Jan

-98Oct-

98Jul

-99Ap

r-00Jan

-01Oct-

01Jul

-02Ap

r-03Jan

-04Oct-

04Jul

-05Ap

r-06Jan

-07Oct-

07Jul

-08Ap

r-09Jan

-10Oct-

10Jul

-11Ap

r-12Jan

-13Oct-

13Jul

-14Ap

r-15

0%

10%

20%

30%

40%

50%

60%

70%

% of Retail Sales

GroceryDe-part-mentWarehouseE-Com-merce

DEPARTMENT

E-COMMERCE

GROCERY

WAREHOUSE

% O

F RE

TAIL

SAL

ES

Latest Data as of May 2015 | Source: Census


HOUSTON RETAIL

Occupancy increased to 94.6%, rents averaging $15.14 PSF NNN—highest they have been since 2008

Suburban Areas accounting for much of the retail growth, despite a few urban infill projects, retail follows rooftops

Significant construction activity in Katy & North Houston due to Grand Parkway expansion and new ExxonMobil campus

Growth in Grocery-anchored centers


2015 CURRENT RETAIL MARKET_RECENTLY COMPLETED / DEVELOPMENT / PROPOSED

Source: CoStar, Inc., HFF ResearchHFF makes no guarantee of the information provided in this report, but believes it to be accurate and from a reliable source.

182

34

5

4

2

26

11

6

2


GROCERY DISCOUNT LIFESTYLE OTHER TOTAL

# SF # SF # SF # SF # SF

Delivered 12 1,303,000

7 805,000

2 428,000 1 235,000

22

2,771,000

Under Construction 9

1,141,000 10 4,113,000 1 175,000 0

-

20

5,429,000

Proposed 8 1,062,000 11 2,290,000 0 - 0

-

19

3,352,000

Total 29

3,506,000

28 7,208,000

3 603,000

1 235,000

61

11,552,000

2015 CURRENT RETAIL MARKET_RECENTLY COMPLETED / DEVELOPMENT / PROPOSED


HOUSTON RETAIL

MARKET OCCUPANCY


MARKET RENTS

ANNUAL RENTRATE GROWTH

HOUSTON RETAIL


COMPLETIONS &NET ABSORPTION

HOUSTON RETAIL

MIXED-USE


Three or more significant revenue-producing uses

Significant physical & functional integration of project components in conformance with a coherent plan & scale of uses

BIG PICTURE MIXED-USE


INVESTMENT PHILOSOPHY

+ Purpose + Demographics + Mixed-Use / Synergies + Risk < Reward

+ Exponential + Highly Productive Workforce + Experience [Place] + Capital Availability

+ Relationship + Transportation / Infrastructure + Connectivity / Walkability + Cost Basis

+ Human Capital + Scarcity / Density + Innovative + Income Growth

+ Financial Capital + Man-made Amenities + Differentiated + Exit Strategy

+ Competition + Natural Amenities + Design + Long-Term Value

STRATEGICOPPORTUNITY

GENERATIONALREAL ESTATE

REMARKABLEPLACE

INVESTMENTDISCIPLINE+ + +

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