RESEARCH & FORECAST REPORT HOUSTON OFFICE MARKET www.colliers.com/texas Houston’s office market construction pipeline increases to 17.8M SF Houston’s strong economy continues to spur office development with over 17.8M SF currently under construction. Over 1.7M SF of new inventory delivered during Q2, bringing 2014 year-to-date delivered inventory to 3.7M SF. Our forecast projects another 4.5M SF of new inventory will be completed by year-end 2014. Much of the construction activity is tied to the energy industry and includes office buildings that Shell Oil, ExxonMobil, BHP, Phillips 66, and Southwestern Energy will occupy once completed. Houston’s office market posted 1.6M SF of positive net absorption in Q2 2014, pushing year-to-date 2014 net absorption to a positive 2.2M SF. The citywide average rental rate increased 1.0% from $26.25 per SF to $26.52 per SF over the quarter and 6.4% from $24.93 per SF to $26.52 per SF over the year. The average CBD rental rate increased 8.5%, while the average suburban rental rate increased 6.4% over the year. The Houston metropolitan area added 93,300 jobs between May 2013 and May 2014, an annual increase of 3.3% over the prior year’s job growth. Local economists have forecasted 2014 job growth to remain strong, expecting between 68,000 and 72,000 new jobs. Houston’s unemployment fell to 5.0% from 6.1% one year ago. Houston area home sales were down by 7.3% between May 2013 and May 2014, the first decline in the past 34 months. The reduction was due to a lack of inventory. Houston’s economy is expected to remain strong in 2014 due to healthy job growth and continued expansion in the energy sector. Q2 2014 | OFFICE MARKET Q2 2013 Q2 2014 NET ABSORBTION (SF) 485K 1.6M AVERAGE VACANCY 12.7% 11.8% AVERAGE RENTAL RATE $24.93 $26.52 DELIVERED INVENTORY (SF) 608K 1.7M CLASS A RENTAL RATE CBD SUBURBAN $36.86 $29.87 $40.54 $32.17 CLASS A VACANCY CBD SUBURBAN 10.9% 9.9% 9.8% 9.3% UNEMPLOYMENT 5/13 5/14 HOUSTON 6.1% 5.0% TEXAS 6.3% 5.1% U.S. 7.3% 6.1% JOB GROWTH & UNEMPLOYMENT (Not Seasonally Adjusted) JOB GROWTH ANNUAL CHANGE # OF JOBS ADDED HOUSTON 3.3% 93.3K TEXAS 3.4% 375.3K U.S. 1.8% 2.4M OFFICE MARKET INDICATORS New Supply Net Absorption Vacancy NEW SUPPLY, ABSORPTION AND VACANCY RATES
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RESEARCH & FORECAST REPORTHOUSTON OFFICE MARKET
www.colliers.com/texas
Houston’s office market construction pipeline increases to 17.8M SF Houston’s strong economy continues to spur office development with over 17.8M SF currently under construction. Over 1.7M SF of new inventory delivered during Q2, bringing 2014 year-to-date delivered inventory to 3.7M SF. Our forecast projects another 4.5M SF of new inventory will be completed by year-end 2014. Much of the construction activity is tied to the energy industry and includes office buildings that Shell Oil, ExxonMobil, BHP, Phillips 66, and Southwestern Energy will occupy once completed.
Houston’s office market posted 1.6M SF of positive net absorption in Q2 2014, pushing year-to-date 2014 net absorption to a positive 2.2M SF.
The citywide average rental rate increased 1.0% from $26.25 per SF to $26.52 per SF over the quarter and 6.4% from $24.93 per SF to $26.52 per SF over the year. The average CBD rental rate increased 8.5%, while the average suburban rental rate increased 6.4% over the year.
The Houston metropolitan area added 93,300 jobs between May 2013 and May 2014, an annual increase of 3.3% over the prior year’s job growth. Local economists have forecasted 2014 job growth to remain strong, expecting between 68,000 and 72,000 new jobs. Houston’s unemployment fell to 5.0% from 6.1% one year ago. Houston area home sales were down by 7.3% between May 2013 and May 2014, the first decline in the past 34 months. The reduction was due to a lack of inventory.
Houston’s economy is expected to remain strong in 2014 due to healthy job growth and continued expansion in the energy sector.
VACANCY & AVAILABILITYHouston’s citywide vacancy rate fell 10 basis points between quarters to 11.8% from 11.9%, and dropped by 90 basis points annually from 12.7% in Q2 2013. Between quarters, the average suburban vacancy rate remained at 11.9%, while the average CBD vacancy rate decreased 70 basis points from 12.0% to 11.3%. The average CBD Class A vacancy rate decreased 80 basis points between quarters from 10.6% to 9.8%, and the average CBD Class B vacancy rate fell 60 basis points from 12.2% to 11.6%. The average suburban Class A vacancy rate increased 90 basis points from 8.4% to 9.3%, and the average suburban Class B vacancy rate fell 30 basis points from 14.7% to 14.4% between quarters.
Of the 1,646 existing office buildings in our survey, only 43 have 100,000 SF of contiguous space available for lease or sublease. Further, only 17 have 200,000 SF of contiguous space available. Citywide, available sublease space totals 3.9 million SF or 1.9% of Houston’s total office inventory, but only 1.7 million SF of this sublease space is currently vacant.
ABSORPTION & DEMANDHouston’s office market posted 1.6M SF of positive net absorption, a significant improvement over the 485,000 SF of positive net absorption posted in the same quarter one year ago.
Suburban Class A space posted the largest gain, with 949,000 SF of positive net absorption, the majority of which occurred in Westchase, E. Fort Bend/Sugar Land, The Woodlands and Katy Freeway submarkets.
Some of the larger tenants that moved into new space during Q2 include: Energy XXI Services (171,000 SF) moved into One City Centre in the CBD submarket; Texas Instruments (159,999 SF) moved into 13905 University Blvd located in the E Ft Bend/Sugar Land submarket; Noble (Gulf of Mexico) Inc. (88,510 SF) moved into Granite Briarpark Green in the Westchase submarket; and Jacobs Engineering (81,818 SF) moved into Jacobs Plaza in the Katy Freeway submarket.
RENTAL RATESThe citywide average rental rate increased 1.0% from $26.25 per SF to $26.52 per SF over the quarter and 6.4% from $24.93 per SF to $26.52 per SF over the year. Average citywide Class A rents increased 1.8% and Class B rents increased 1.0% over the quarter.
The Class A average rental rate in the CBD increased 4.9% from $38.66 per SF to $40.54 per SF between quarters, while the suburban Class A average rental rate increased 0.7% from $31.95 per SF to $32.17 per SF. The average Class B rental rate in the CBD rose 1.9%, while the average suburban Class B rental rate increased 1.1% between quarters.
QUOTED GROSS RENTAL RATES FOR EXISTING TOP PERFORMING OFFICE BUILDINGS
BUILDING NAME ADDRESS SUBMARKET RBA (SF)YEAR BUILT
% LEASED AVAIL. SF
RENT ($/SF) OWNER
600 Travis 600 Travis CBD 1,656,529 1982/ 2012
94.30% 155,299 $46.80 Hines
Heritage Plaza 1111 Bagby CBD 1,359,266 1986 98.90% 32,950 $50.71 AEW Capital Management and Brookfield Office Properties, Inc.
BG Group Place 811 Main CBD 972,474 2011 96.50% 143,333 $48.71 NPS of Korea
CityCentre Three 842 W Sam Houston Pky N Katy Freeway 120,211 2012 94.70% 6,349 $45.96 Midway T & C Land Investors
Williams Tower 2800 Post Oak Blvd West Loop/Galleria 1,476,973 1983 99.10% 81,987 $48.36 Invesco Real Estate
BBVA Compass Plaza 2200 Post Oak Blvd West Loop/Galleria 312,574 2013 77.50% 70,244 $46.50 RS Post Oak Perennial LP
LEASING ACTIVITYHouston’s office leasing activity reached 3.0 million SF in Q2 2014 with transactions including renewals, expansions, subleases, and pre-leases in buildings currently under construction.
TOP TRANSACTIONS
LEASES
BUILDING NAME/ADDRESS SUBMARKET SF TENANT LEASE DATE
One City Centre CBD 171,016 Energy XXI Services1,2 Apr-14
One Allen Center CBD 109,373 Motiva Enterprises3 May-14
Fulbright Tower CBD 89,011 Key Energy Services Apr-14
3831 Technology Forest Dr The Woodlands 70,561 Kiewit Energy Group Apr-14
12000 Aerospace Ave NASA/Clear Lake 30,236 Inspectorate American General2 May-14
West Loop I Bellaire 29,704 Synergy Healthcare1 Apr-14
600 Travis CBD 21,791 IHS Global2 May-14
Lakes on Post Oak Galleria/Uptown 19,799 Sinpoec USA1,2 Apr-14
Lakes on Post Oak Galleria/Uptown 19,625 Zimmerman, Axelrad, Myer, Stern & Wise Apr-14
American General Center Midtown 12,352 Ebanks Horne Rota Moos Apr-14
SALES ACTIVITYHouston’s office investment sales activity included 45 sales transactions with a total sales volume of approximately $157 million, averaging $153 per SF. Listed below are a few significant transactions that closed in Q2 2014.
SIGNIFICANT TRANSACTIONS
SALES 100,000 SF OR GREATER
BUILDING NAME SUBMARKET RBA (SF) YEAR BUYER SELELRSALE PRICE $/SF CLOSED
Sugar Creek I & II E Fort Bend/ Sugar Land
409,168 2000 & 2009
Stockdale Capital Partners & Brener International Group, LLC
Granite Properties, Inc. $82.7M $202 Apr-14
Oak Park Office Center III
Westchase 151,000 2008 The Mallick Group & Keating Investments
1800 Bering West Loop/ Galleria 170,881 1982/ 2005 KBS Realty Advisors Harbert Management Corp JV Fuller Realty Partners
$27.8M $162 Jun-14
1Renewal 2Expansion/Extension 3Sublease 4Pre-lease/proposed or under construction
CITY TO WATCH
The Urban Land Institute ranked Houston the number two city to watch in 2014 in its “Emerging Trends in Real Estate 2014”, due to increased interest from foreign investors.
DEVELOPMENT PIPELINEHouston’s construction pipeline continues to expand with 17.8 million SF under construction at the end of Q2 2014. Build-to-suit projects make up 59.1% of the 17.8M SF, and the remaining 7.3M SF of spec office space under construction is approximately 17.4% pre-leased. The table below includes office buildings under construction with an RBA of 50,000 SF or greater.
BUILDING NAME ADDRESS SUBMARKET SF PRE-LEASED DEVELOPER EST.
DELIVERY
ExxonMobil Campus 23125 I-45 S Woodlands 3,000,000 100.0% Gilbane Building Company Jul-14Phillips 66 2101 Citywest Blvd Westchase 1,100,000 100.0% W.S. Bellows Construction Company Jun-16609 Main at Texas 609 Main St CBD 1,057,668 0.0% Hines Feb-17
CyrusOne West Campus Expansion 5150 Westway Park Blvd Northwest Far 640,000 100.0% CyrusOne Mar-15Energy Center Four - ConocoPhillips 925 N Eldridge Pky Katy Freeway West 600,000 100.0% Trammell Crow Company Dec-16BHP Biliton Petroleum 1500 Post Oak Blvd Galleria/Uptown 600,000 100.0% Transwestern Oct-16Energy Center Three - ConocoPhillips 935 N Eldridge Pky Katy Freeway West 546,604 100.0% Trammell Crow Company May-15Southwestern Energy HQ Interstate 45 & Grand Pky Woodlands 515,000 100.0% Patrinely Group, L.L.C. Dec-14Noble Energy Center II SH 249 & Louetta Rd FM 1960/Hwy 249 456,000 100.0% Trammell Crow Company Jun-15Air Liquide Center- South 9811 Katy Fwy Katy Freeway East 452,370 37.8% Anslow Bryant Construction Ltd. Nov-15Energy Tower IV 11750 Katy Fwy Katy Freeway West 428,831 12.1% Mac Haik Realty LLC Dec-14Millennium Tower II 10353 Richmond Ave Westchase 417,000 100.0% BMS Management, Inc. Sep-15Hilcorp Energy Tower 1110 Main St CBD 406,600 100.0% Hines Jul-153737 Buffalo Speedway 3737 Buffalo Speedway Ave Greenway Plaza 400,000 22.9% PM Realty Group Jan-15Shell Woodcreek Phase 3 - B1 201 N Dairy Ashford Rd Katy Freeway West 336,000 100.0% Hines Mar-15Shell Woodcreek Phase 3 - B2 201 N Dairy Ashford Rd Katy Freeway West 336,000 100.0% Hines Mar-15Shell Woodcreek Phase 4 201 N Dairy Ashford Rd Katy Freeway West 336,000 100.0% Hines Mar-15West Memorial Place 15375 Memorial Dr Katy Freeway West 334,147 40.8% Skanska Commercial Development Jan-15Hughes Landing on Lake Woodlands - Bldg 1 1735 Hughes Landing Blvd Woodlands 331,840 100.0% The Woodlands Development Company Mar-15Hughes Landing on Lake Woodlands - Bldg 2 1725 Hughes Landing Blvd Woodlands 317,052 100.0% The Woodlands Development Company Mar-15Beltway @ Clay 4425 W Sam Houston Pky N FM 1960/Hwy 249 314,000 48.4% Transwestern Apr-15Enclave Place 1414 Enclave Parkway Katy Freeway West 300,907 0.0% PM Realty Group Aug-15Westchase Park II 3600 W Sam Houston Pky S Westchase 300,000 0.0% PM Realty Group Dec-14Beltway Lakes Phase III 5775 N Sam Houston Pky E Northwest Far 271,384 0.0% Radler Enterprises, Inc. Sep-14Beltway Lakes Phase IV 5725 N Sam Houston Pky W Northwest Far 271,384 0.0% Radler Enterprises, Inc. Mar-15Kirby Grove 3801 Eastside Dr Greenway Plaza 260,437 39.6% Midway Companies Aug-15Town Centre I 700 Town & Country Blvd Katy Freeway East 254,489 0.0% Moody Rambin Jan-15Mustang Engineering 17325 Park Row Rd Katy Freeway West 225,885 100.0% Transwestern Jul-14Legacy at Fallbrook 10720 W Sam Houston Pky N Northwest Far 206,754 0.0% Liberty Property Trust Jan-15CityCentre Five 825 Town & Country Katy Freeway East 195,842 49.6% Midway Companies Apr-15Jacobs Plaza 12140 Wickchester Ln Katy Freeway West 173,608 54.9% PM Realty Group Aug-14Woodbranch Plaza IV 12120 Wickchester Ln Katy Freeway West 171,475 100.0% PM Realty Group Apr-15San Felipe Place 2229 San Felipe Midtown 170,038 11.7% Hines Jul-15Sierra Pines II 1575 Sawdust Rd Woodlands 153,810 0.0% Stream Realty Partners Aug-14Katy Ranch Phase I 24275 Katy Fwy Southwest Outlier 151,187 0.0% Freeway Properties Mar-15Park Ten Center 1 16200 Park Row Katy Freeway West 150,000 25.9% Lincoln Property Company Jul-14Park Ten Center 2 16200 Park Row Katy Freeway West 150,000 0.0% Lincoln Property Company Sep-14Air Liquide Center- North 9807 Katy Fwy Katy Freeway East 143,830 61.4% Anslow Bryant Construction Ltd. May-15Beltway 8 Corporate Centre 5060 Westway Park Blvd Northwest Far 130,451 0.0% Panattoni Development Dec-14Mason Creek Office Center II 21700 Merchants Way Katy Freeway West 127,955 0.0% Myers Crow & Saviers, LTD. Mar-15Phase IV 2707 Commerce Center Blvd Southwest Outlier 125,000 0.0% Vista Companies Jun-15Greenhouse Road at Park Row 2051 S Greenhouse Rd Katy Freeway West 114,345 19.0% D'Agostino Companies Oct-14CGG Corporate Campus Phase 6 10300 Town Park Dr Westchase 106,992 100.0% Hines Sep-14River Oaks District - Office 4444 Westheimer Rd Post Oak Park 99,826 0.9% Oliver McMillan Jan-15Bldg 1 Grand Pky & Franz Rd @ Katy
Fort Bend RdKaty Freeway West 86,800 0.0% The Urban Companies Nov-14
Blvd Place 1 1 Blvd Pl Galleria/Uptown 83,073 95.6% Wulfe & Co. Jul-14Black Forest Technology Park 2829 Technology Forest Blvd Woodlands 81,865 1.3% Black Forest Ventures Nov-14Vision Park 128 Vision Park Blvd Woodlands 75,000 0.0% D'Agostino Companies Jul-14Phase III 2717 Commerce Center Blvd Southwest Outlier 73,796 66.7% Vista Equities Group Inc. Oct-14South Building 460 Wildwood Forest Dr Woodlands 64,535 22.6% Archway Properties Jul-141801 Binz Street 1801 Binz St South Main/Medical
Center52,362 65.1% Balcor Commercial LLC Jul-14
Sea Scout Base Galveston 7509 Broadway St Southeast Outlier 50,000 100.0% Jacob White Nov-14
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