3Q’15 MARKET SUMMARY HOUSTON, TX METRO AREA Cresa Houston 5599 San Felipe, Suite 500 Houston, Texas 77056 713.402.5800 cresa.com/houston Connect with us and get up-to-date information: Cresa : The Tenant’s Advantage Facebook.com/ cresa Follow us! @cresahouston
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3Q’15 MARKET SUMMARYHOUSTON, TX METRO AREA
Cresa Houston5599 San Felipe, Suite 500Houston, Texas 77056713.402.5800
cresa.com/houston
Connect with us and get up-to-date information:
Cresa : The Tenant’s Advantage
Facebook.com/cresa
Follow us!@cresahouston
TABLE OF CONTENTS01
02
04
05
06
MARKET AT-A-GLANCE
RENTAL RATES
LEASING ACTIVITY
SUBLEASE SPACE
CONSTRUCTION & DELIVERIES
Information contained herein is provided, in part, from third party sources including: CoStar
Group, Greater Houston Partnership, Bureau of Economic Analysis, Bauer College of
Business, University of Houston - Institute for Regional Forecasting, U.S. Census Bureau,
Perryman Group, Institute for Supply Management – Houston, Houston Association of
Realtors, National Association of Realtors, C2ER Cost of Living Index 3Q’2015, Baker
Hughes U.S. Rig Count Reports.
Even though obtained from sources deemed reliable, no warranty or representation,
expressed or implied, is made as to the accuracy of the information herein.
09
07
08
SUBMARKET SNAPSHOTS
NET ABSORPTION
SALES ACTIVITY
03 VACANCY RATES
11
10
MARKET OUTLOOK
HOUSTON ECONOMY
1.7%
0.3%
1.3%
$45.12 CBD: Class A 8.4%
$28.02 CBD: Class B 15.6%
$41.73 CBD: Class A + B 10.8%
0.1%
0.1%
0.1%
$35.37 Houston: Class A 10.2%
$21.73 Houston: Class B 12.6%
$29.06 Houston: Class A + B 11.4%
0.1%
0.2%
0.1%
$32.90 Suburban: Class A 10.8%
$21.73 Suburban: Class B 12.6%
$27.08 Suburban: Class A + B 11.6%
WesternGeco 554,385 Westchase Renewal
Texas Children's Health Plan 139,244 Bellaire Lease
EMAS 93,600 Westchase Sublease
WD Vonn Gonten 73,000 Katy Fwy Lease
Pannell Kerr Forster of Texas 65,416 San Felipe/Voss Lease
Jones and Carter 55,676 Bellaire Sublease
MRC Global 50,237 CBD Sublease
Quantlab Financial 46,098 Greenway Plaza Lease
Brock Holdings III 38,240 Gulf Fwy/Pasadena Lease
PMC Sierra 33,370 FM 1960/Hwy 249 Lease
HOUSTON MARKETAT-A-GLANCE
With West Texas crude prices slipping below $45/bbl in 3Q’15, the
downturn that has characterized Houston’s economic landscape
this year, is expected to last longer than originally anticipated – at
least through 2016.
There is good news for tenants, however, as the Houston office
market remains tenant favorable, especially in terms of increased
tenant concessions such as longer periods of free rent, free parking,
and larger tenant improvement allowances. Sublease space and
large blocks saw some high figures in the third quarter, even though
rental rates continue to climb slowly.
Given the cyclical nature of the economy, over the long term, the
Houston office market will return to a balanced supply and demand,
but in the interim, prolonged job cuts continue to have an impact.
TENANT’S PERSPECTIVE
MARKET TRENDS
Even though asking rates are increasing, rates at which deals were done decreased, coupled with attractive concession packages.
Houston today is a tenant-favorable market. Many, however, are delaying making large commitments on space or opting for shorter-term leases.
Landlord concessions remain in the tenant’s favor, in order to stay competitive and retain tenants, especially in the suburban submarkets.
More layoffs, bankruptcies, and M&A activity are expected in the oil industry as budgets are slashed, rig counts and drilling permits decline, and exports reduced (due to an appreciating dollar)..
Total non-farm employment increased 1.3% year-over-year in August 2015 – sectors that experienced decreases in employment include manufacturing, construction, and mining and logging.
Regardless of rates increasing slightly, other fundamentals have weakened – including higher vacancy rates, less absorption, construction, and leasing activity, and increased sublease space.
RECENT TRANSACTIONS RENTAL & VACANCY RATES
Tenant Size (SF) Submarket Type Avg. Rate Vacancy Rate Margin from Q2
01
01 HOUSTON MARKET AT-A-GLANCE
MAJOR SUBMARKET STATS | CLASS A + B OFFICE
SUBMARKET MAP | CLASS A + B OFFICE
GALLERIA
$34.839.6%
G
REENWAY
$32.398.1%
M
ED CENTER
$27.2210.2%
CBD
$41.6510.8%
KATY FWY
$32.2310.0%
W
ESTCHASE
$30.269.0%
E. F
ORT BEND CO
$25.239.0%
N
ORTH BELT
$23.6325.0%
N
ORTHWEST
$20.0816.4%
FM 1960
$19.3012.4%
MIDTOWN
$32.0011.0%
TH
E
WOODLAND
S
$30.475.5%
$
%
Rental Rate
Vacancy Rate
AREA OVERVIEW
WEST BELT
$27.9411.3%
Gross Rental Rate Vacant Available Total Net Absorption Leasing ActivitySF
DeliveredUnder
ConstructionSubmarket Inventory (SF) Direct Sub. Direct Sub. Total Quarter YTD 2015 Deals SF
Jones and Carter 55,676 6330 W. Loop South Bellaire
MRC Global 50,237 1301 McKinney CBD
Quantlab Financial 46,098 3 Greenway Plaza Greenway Plaza
Brock Holdings III 38,240 4440 SH 225 Gulf Fwy/Pasadena
PMC Sierra 33,370 11450 Compaq Ctr. W. FM 1960/Hwy 249
Tenant SF Building Submarket
YTD‘15
0 0
Q2’15 Q3’15
1 20
West Belt
CBD
Greenway Plaza
Galleria/W. Loop
Westchase
Katy Freeway
Sugar Land
North Belt
Northwest
The Woodlands
FM 1960
Midtown
SUBMARKET COMPARISON
Leasing activity dwindled starting in 4Q’14. Katy Freeway, The Galleria, and Westchase submarkets saw the most activity during the second quarter of 2015.
Medical Center
Q4’14 Q1’15
05
SUBLEASE SPACE
There is currently 7.8 MSF of space on the sublease market.
Sublease space is continuing to hit the market as the amount
of space available has more than doubled year-over-year.
NOTES
• This space has an average gross rental rate of $25.30. Sublease
rental rates have decreased over the past several quarters.
• This space has an average time on the market of 14.4 months.
• The submarkets with the most sublease space are Katy Freeway
(2.3 MSF), CBD (1.5 MSF), and Westchase (924 KSF).
LARGE BLOCKS OF SUBLEASE SPACE
• There are 87 buildings in the Houston market that have large
blocks of sublease space (20,000 SF+)
• Available space of this size has more than tripled year-over-year.
• This equates to 6.2 MSF (~79%) of total sublease space and has
an average gross rental rate of $25.87.
• Average time on the market for this dataset is 11.0 months
HISTORICAL SUBLEASE SPACE
$33
$29
$25
$21
$17
10%
8%
6%
4%
2%
Gross Rent Total Available
$13 0%
SUBLEASE SPACE BY SUBMARKET
‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15
Other
The Woodlands
Galleria
Greenspoint
Westchase
CBD
Katy Freeway
FM 1960
0
SF Available
1 MSF 2 MSF0.5 MSF 1.5 MSF 2.5 MSF
Greenway
Northwest
Sugar Land
06
CONSTRUCTION &DELIVERIES
Nearly 1.2 MSF was delivered across Houston during 3Q’15.
This was preceded by a year of record deliveries equating
to nearly 13 MSF. There was an additional 12.9 MSF under
construction across the Houston area at the end of the third
quarter.
DELIVERIES (BLDGS. OVER 100.000 SF)
• There were five building completions totaling 853,000 square feet
in the third quarter (buildings with more than 100,000 SF).
• Of the 853,000 SF delivered in 3Q’15, roughly 36% was leased at
the time of completion.
• The tenancy profile of two of the buildings delivered in 3Q’15 was
single tenant, corporate users, taking 27% of the space delivered
and equating to 233,000 SF.
• 1Q’15 saw the most SF delivered in a single quarter over the past
15 years.
• Completions were dispersed across Houston with one building
each in the E. Fort Bend Co./Sugar Land, Southwest Far, Katy
Freeway, Midtown, and Katy/Grand Parkway submarkets.
PROPOSED DEVELOPMENT
• There is an additional 29.5 MSF proposed in 240
properties, most of which, given current economic
conditions, will not come out of the ground until at least
the end of 2016.
• The submarkets that have the most proposed
development include: CBD (5.6 MSF), Katy Freeway (5.1
MSF), and The Woodlands (4.9 MSF).
Sugar Land 1 133,000 100.0%
Southwest 1 100,000 100.0%
Katy Freeway 1 300,907 0.0%
Midtown 1 167,562 28.7%
Katy/Grand Parkway 1 151,187 16.4%
Total 5 852,656 35.9%
Submarket Bldgs SF % Leased
FM 1960 2 770,000 100.0%
Katy Freeway 9 2,543,657 73.3%
Southwest 5 1,381,977 70.8%
West Belt 1 206,754 15.0%
Woodlands 2 2,000,000 100.0%
Total 19 6,902,388 81.8%
Submarket Bldgs SF % Leased
7705 Highway 90AE. Fort Bend Co./Sugar Land
133,000 SF100% Leased
Nalco Champion
270 Abner Jackson ParkwaySouthwest Far
100,000 SF100% Leased
Dow
1414 EnclaveKaty Freeway West
300,907 SF0.0% LeasedMulti-Tenant
2299 San FelipeMidtown
167,562 SF28.7% LeasedMulti-Tenant
24275 Katy FreewayKaty/Grand Parkway
151,187 SF16.4% LeasedMulti-Tenant
DELIVERIES BY SUBMARKET 1H’15 DELIVERIES BY SUBMARKET 3Q’15
As anticipated, the third quarter continued to see low oil
prices, job losses and layoffs in the energy sector, M&A
activity, and falling rig counts and drilling permits.
Growth has slowed in foreign markets causing the demand
for Houston’s exports to decrease.
On the bright side, however, the U.S. economy is strong,
and local economists agree that the Houston economy in
resilient and will bounce back.
On the jobs front, although lower than normal, the year
should end with positive employment figures.
The following pages detail the state of the Houston economy
at the end of the third quarter of 2015.
10FORTUNE 500 COMPANIES
Houston ranks third among US metropolitanareas in Fortune 500 headquarters, with 26 companies based in the Houston MSA. More than 88% of these companies are in some way related to the energy industry.
Below is a list of all Fortune 500 companies headquartered in the Houston MSA as of June 2015:
Phillips 66#7
ConocoPhillips #51
Enterprise Products #59
Sysco#61
Plains GP Holdings #67
Halliburton #96
Occidental Petroleum#115
Baker Hughes #119
NOV#127
Anadarko Petroleum #162
EOG Resources #167
Kinder Morgan #193
Waste Management #217
Apache#218
Marathon Oil #227
Cameron Int. #275
Group 1 Automotive#291
CenterPoint Energy #313
Targa Resources #329
Calpine#353
FMC Technologies #357
Quanta Services #361
Buckeye Partners#406
KBR #424
MRC Global #448
Spectra Energy #449
Job growth in the Washington MSA has been
challenged by the contraction of the federal government.
Any improvement in the job growth rate will have to be
fueled by the private sector.
Job growth in the Washington MSA has been
challenged by the contraction of the federal government.
Any improvement in the job growth rate will have to be
fueled by the private sector.
Houston benefited from four years of exceptional
growth and due to this rapid economic expansion, the
city now ranks fourth in the nation in GDP producing
more than $525 billion annually.
If Houston were a country, its economy would be larger
than those of Argentina and Norway, according to the
World Bank, and would rank as the world’s 26th largest
economy. The city of Houston also has a GDP greater
than 42 states.
10 HOUSTON ECONOMY FACTS & FIGURES
New York CIty$1.6 Trillion
Los Angeles$867 Billion
Chicago$611 Billion
Houston$525 Billion
Venezuela$438 Billion
Norway$512 Billion
US GDP RANKING
WORLD GDP RANKING
Job growth in the Washington MSA has been
challenged by the contraction of the federal government.
Any improvement in the job growth rate will have to be
fueled by the private sector.
Houston’s economy grew 1.8% (net of inflation) in 214,
a slowdown from the previous four years. Houston’s
economic growth is projected to double between 2015
and 2040. Houston’s GDP also is projected to top $1.1
trillion by the end of 2027. The adjacent graph shows
the city’s economic makeup.
ECONOMIC GROWTH
Mining
Construction
Manufacturing
Trade
Transportation, Utilities, Warehousing
Information
Finance, Insurance, Real Estate
Services
Government
Agriculture
20.9%
19.3%
18.3%
4.6%
10.5%
1.5%
0.1%
11.9%
5.7%7.2%
Houston’s PMI registered 47.3 at
the end of August, down from 49.1
in July. Houston’s PMI has fallen
below the neutral point of 50 for eight
consecutive months.
Any reading below 50 signifies an
overall contraction in production.
Houston’s PMI had held at or above
the 50 point mark for 64 consecutive
months.
PMI RATING
According to the C2ER Cost of Living
Index for Q2 2015, Houston ranks
third in lowest overall cost of living
among the nation’s 20 most populous
metropolitan areas, with costs 20.5%
below the average for this group.
Houston’s housing costs are 35.9%
below this group’s average.
Houston’s overall after-taxes living
costs are 7.2% lower than the US
average, largely due to affordable
housing prices that are 7.3% below
the national average.
COST OF LIVING
10HOUSTON ECONOMY FACTS & FIGURES
2005 2007 2008 2009 2010 2011 2012 2013
30
40
50
60
70
2014 20152006
50-Point Baseline PMI Reading
PMI Reading
7.2%
10 HOUSTON ECONOMY FACTS & FIGURES
Houston is the “Energy Capital of the World” with almost half
of its economic activity driven by the energy industry. The
city is home to the largest concentration of human capital
and infrastructure for energy research, development, and
production in the nation.
Forty of the nation’s 134 publicly traded oil and gas
exploration and production firms, based in the US are
located in Houston, including 10 of the top 24.
In December 2014, the MSA held one third of the nation’s
jobs in oil and gas extraction and over 16% of jobs in support
activities for mining.
WTI reached a high of $108 in June 2014 before dropping
significantly in the fall. The price continued to drop into the
third quarter, registering in the low-$40s. The quarter ended
at $45.06.
Supply remains high and U.S. production is still going strong.
EIA forecasts have been revised downward stating that WTI
prices will range from $32/bbl to $67/bbl in January 2016
- volatility in oil prices is expected, as economist agree that
there are too many uncertainties.
OIL PRICES
ENERGY & OIL
WHAT EXACTLY CAUSED THE DROP IN OIL PRICES?
The drop in oil prices is due to many factors
but generally because supply is much higher
than demand.
Since 2010, prices hovered in the $100 per
barrel range with production not being able
to keep up with the increased demand.
These high oil prices led to an increase in
drilling, but then demand began to taper off
across Europe, Asia, and the U.S. Unused oil
was just being stockpiled away, causing the
dramatic decrease in prices, and with OPEC
states not agreeing to cut production, the
price of oil continues to fall.
FALLOUT FROM THE SLUMP
• 150,300 - Number of oil and gas extraction, oil
field services and oil field manufacturing jobs in
Houston
• 176,162 - Number of energy jobs cut worldwide
in the past year
• 13% - U.S. oil and gas employment managers
who say they’ve frozen recruitment
• $200,000 - Average wage, including benefits
and other perks, for an energy worker in
Houston
• 50% - Oil and gas contract workers worldwide
who say their pay has been cut in the past year
*Sources: Swift Worldwide Resources, Rigzone.com, Greater Houston Partnership – August 22, 2015
There is a correlation between the
success of the energy industry and
office rental rates, as well as leased
space, in Houston in the submarkets
that have a strong energy tenancy.
As the price of oil increases or de-
creases, Class A rents usually follow
suit, typically with a six-month lag.
With the decrease in the price of oil,
landlord concessions have increased
significantly.
RENT VS THE PRICE OF OIL
The average U.S. rig count for
September 2015 was 848, down
35 from the 883 counted in August
2015, and down 1,082 from the
1,930 counted in September 2014.
The monthly drop in rigs in 2015
reversed for the first time in July.
September’s rig fall takes the rig
count once again into a downtrend,
set earlier in the year.
OIL RIG COUNT
WTI Spot Price CBD
Oil Price Rental Rates
2013 2014
Rig Count
10HOUSTON ECONOMY FACTS & FIGURES
$160
$140
$120
$100
$80
$0
$40
$60
$20
$50
$45
$40
$35
$30
$10
$20
$25
$14
2015
2,100
1,900
1,700
1,500
1,300
500
900
1,100
700
Jan. Feb. March April May June July Aug. Sep. Oct. Nov. Dec.