HOUSTON, TEXAS Q2 2013 - MARKET REPORT KEY MARKET INDICATORS Supply Vacancy Rate Under Construcon YTD Net Absorpon Class A Asking Rent Class B Asking Rent This report is a compilation of both our market insight and other professionals within our market. In addition to data obtained from individual owners, managers, leasing agents, public reports, reporting agencies and Costar; it is considered to be accurate at the time of publication. Furthermore, it is intended for informational purposes only and should not be relied on by any party without further independent verification. Reproduction of this report in whole or part is permitted only with written consent of iCORE Global, LLC. Data from this report may be cited with proper acknowledgment given. AT A GLANCE HOUSTON MID YEAR 2013 HOUSTON OFFICE MARKET 2ND QUARTER 2013 While remaining very acve the Houston Market is taking a breather compared to the last several quarters of record seng stascs. The city wide mid-year absorpon was posive at 580,000 square feet, but down from the 2,500,000 in mid-2012, and 2,900,000 in the second half of 2012. If we annualized this we would be looking at approximately 1,100,000 for 2013 versus the 5,200,000 for 2012. In our opinion this is a combinaon of catching up with previous record quarters, and some significant leasing in new projects which have not been completed so the absorpon is not yet recorded. The Class A market provided most of the absorpon with a posive 576,000 square feet, Class B, 56,000 square feet, and Class C a negave 50,000 square feet. The Central Business District was a negave 336,000 square feet, and the Suburban market a posive 917,000 square feet. These lower trend stascs, however, are not reflected in the asking rental rates. The averaged quoted rate for exisng inventory is $24.44. Breaking this down, the average in Central Business District was $33.02, and $22.89 in the suburbs. By class of space Class A was $31.33, Class B, $19.90, and Class C, $15.75. The most interesng trend in this market, however, is the significant new construcon of approximately 7M square feet, for the most part delivering in the Suburbs in 2014, along with approximately 1M square feet that delivered in the first half of 2013. The average rental rates on these properes is $35- $42 per square foot per year. This set of new rents sets a delta of $10-15 per square foot per year over the average market rate. In spite of that, this new inventory is leasing rapidly and placing a posive upward pull on rental rates. TENANT & LANDLORD PERSPECTIVE TENANTS If you read the other comments on this page, the market is not working in the tenants’ advantage. Many Class A tenants are faced with limited expansion and an increase in rents 30-50%. This has made the Class B absorpon pick up, liming those opons as potenal soluons. Tenants are faced with a very compeve job market, so their space and locaon is an important factor to consider. There connues to be a lot of scruny on the layout and design and allocated space per employee. Collaborave working environments are the trend. In our opinion, tenants should start their space review early and plan on paying higher rents. LANDLORDS The sales acvity is high, capitalizaon rates falling, and record pricing is being achieved. Vacancy is low, new construcon acve, rates are rising. We do see increases in operang expenses, for the most part, due to higher wage costs, insurance, and taxes. This posive direcon has made the landlords less willing to deal, reducing inducements, increasing rates, charging more for parking. At this point there is sll some ability to get reasonable improvement allowances. In the exisng inventory, large conguous space is limited, hence the acvity in the space under construcon. In our opinion, this landlord market benefit will sele down as the “catch up” connues and the new inventory delivers. 2012 / 2013 METRO VACANCY 12.2% / 11.9% LEASE RATES $23.64 / $24.44 MID YEAR NET ABSORPTION 2.9M SF / .58M SF CLASS A RENT $30.73 / $31.33 CLASS B RENT $19.37 / $19.90 THINGS TO WATCH: • The rent difference in new construcon and exisng Class A • Record sales price PSF and effects on rental rates • How tenants adjust to fewer opons / higher costs • Landlords’ take it or leave it markeng atude