Houston’s Office Market First Quarter 2010Henry Hagendorf, CCIM, LEED APVP, Office and Healthcare Investments
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Really Bad Things Effecting the Office Market
• Job Growth: A little locally but none nationally. Worse in other cities/states/countries
• Houston Recovery: Tied to the Texas recovery which is tied to the U.S. recovery which is tied to the Global economy – we seem to be getting better but the U.S. and Global economies are reportedly getting worse
• Credit Markets: Not fully recovered
• Continental Airlines Merger: Merger with United will be bad for the CBD and other submarkets
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Really Bad News Effecting The Office Market
• EXXON: Consolidation and relocation will hurt the Greenspoint submarket
• NASA: Apparently no longer a friend of Washington. Crucial to the Clear Lake area and surrounding submarkets
• Oil Prices: $80 per barrel is supposed to be really good news for Houston – right? Why no need for more office space?
• BP Oil Spill: HUGE but TBD
• Patient Protection and Affordable Care Act – dba: Healthcare Reform – Tax Increases?????
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Source: BLS, Grubb & Ellis
2008-09
2001
1981-82
Job Losses Related To Recessions
1990-91
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3
4
5
6
7
8
9
10
11
1980 1985 1990 1995 2000 2005 2010
Per
cen
t
Source: BLS, Grubb & Ellis
Unemployment Rate
Houston 8.5%
Note: Houston’s unemployment is lower than the National average
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-80
-60
-40
-20
0
20
40
60
80
100
120
00 02 04 06 08 10
Th
ou
san
ds
Source: BLS, University of Houston Institute for Regional Forecasting
Annual Job Gains / Lost, Houston
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Houston Office Statistics
Source: Grubb & Ellis
First Quarter 2010
Class Total SF Vacant SF Vacant % 1Q 2010 NetAbsorption
Average Asking Rent
A 84,305,024 12,844,640 15.2% (928,539)Chevron-Fluor-ABB
$29.65
B 66.979,757 12,545,919 18.7% 84,509 $19.85
C 17,308,844 2,920,856 16.9% 114,397 $15.33
Total 168,593,625 28,311415 16.8%
(729,633) $23.53
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Net Absorption vs. Vacancy Rate
-417,231
-2,906,419
-1,502,706
345,196
2,310,133
5,936,141
-729,633
-2,409,560
2,127,935
6,092,128
3,033,324
4,000,000
3,000,000
2,000,000
1,000,000
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1Q10
5%
7%
9%
11%
13%
15%
17%
19%
21%
Net Absorption Vacancy Rate
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Office Vacancy Rates by Class
Source: Grubb & Ellis
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Performance by Top Office Building Owners
Owner RBA Direct Available
Direct Vacancy
Annual % Change
Hines 8,778,075 1,823,224 11.0% +0.8%
Brookfield 8,465,430 958,491 6.0% -0.9%
Behringer Harvard 3,862,073 655,271 15.1% +7.4%
Thomas Properties Group
3,823,021 836,173 10.9% +1.8%
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Class A
0% 10% 20% 30% 40%
Greenspoint
NASA/Clear Lake
CBD
Uptown/Galleria
Citywide
Greenway
Allen Parkway
Katy Freeway
Westchase
The Woodlands
FM 1960
Sugar Land
Northwest Fwy
Source: Grubb & Ellis
Class B
0% 10% 20% 30%
Clear Lake
Greenway
Uptown/Galleria
The Woodlands
Westchase
Gulf Freeway
Katy Freeway
Citywide
Sugar Land
CBD
Greenspoint
FM 1960
Northwest Fwy
Office Vacancy Rates by Submarket2010-Q1 Winners & Losers
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Average Citywide Asking Rents
Average $/SF/Year Full Service Gross
$29.65
* As of 1st Quarter 2010
Note: Class A rates are $10/SF or 50% higher than Class B rates. There does not seem to be a noticeable flight to quality.
$19.85
$15.66
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Office Asking Rents – Class A
Average Class A $/SF/Year Full Service Gross* As of 1st Quarter 2010
$36.54
$27.96
Note: Average overall $29.65
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Office Asking Rents – Class B
Average Class B $/SF/Year Full Service Gross* As of 1st Quarter 2010
$25.85
$18.86
Note: Average overall $19.85
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Houston Sublease Space Available
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
4.66 MM
Note: Good News – The sublease market is not growing
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• Nearly 8.4 million SF (59 Buildings) of new construction has delivered since 2008
• Leasing activity within these new projects have been steady but cumulative vacancy is 50.7 percent vacant
• Only 1.8 million square feet of speculative construction underway i.e. MainPlace (10% leased), EcoCentre at Lake Pointe (under construction).
• Numerous potential troubled assets that have been recently delivered with vacancy exceeding 50%
Houston Office Construction Statistics
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Large Blocks of Space in New ProjectsTrophies or Train Wrecks
Simmons Vedder Partners
Simmons Vedder Partners
$22.50 NNN
168,621 SF
38.1%
Aug 2009
272,361 SF
Westchase Park Bldg 1
Granite PropertiesStream Realty PartnersCB Richard EllisTranswesternLeasing Company
Granite PropertiesOpus WestBehringer HarvardTranswestern Owner
$19.50 NNNNegotiable$22.50 NNN$22 – $24 NNN Quoted Rental Rate
123,906 SF192,771 SF305,528 SF350,000 SFDirect Space Available
39.5%19.4%0%0%Leased
Sep 2009Mar 2009Oct 2009 Year Built
210,968 SF239,114 SF305,528 SF350,000 SF Square Feet
Granite Towers Phase IIEnergy Crossing IThree Eldridge PlaceEldridge Oaks – Phase I
Sep 2009
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Houston Office Investment Trends
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Top 20 Office Investment Markets – Q1 2010
Source: Real Capital Analytics
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Houston Tenants Can Expect:
• Asking rents will hopefully bottom out late 2010 or early 2011.
• Net absorption: Remain in moderate negative territory as
businesses cut overhead and/or reduce their SF.
• Very aggressive landlords: Don’t loose a tenant and roll out the
red carpet for all good prospects.
• Sublease Options: Will continue to compete with landlords.
• Distressed Sales: Could have an impact on certain submarket
rents. Lower investment basis could allow new owners to ask for
even lower rents.
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Really Good News:
• Houston: Best office market in the U.S.
• Houston: Getting very positive press nationally and internationally and attracting global investor interest.
• Energy Prices: HIGH and getting HIGHER.
• Energy Demand: Increasing. Does the U.S. have the “@?<#$*%$” to meet the demand (offshore drilling?)
• U-Haul: Houston #1 out of 50 cities for one-way destination rentals.
• Labor Availability: Houston and Texas provide strong labor pools (and labor for your pools), strong infrastructure, low costs of living and a business friendly local and state government.
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Update on “Green” Buildings
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Houston LEED Office Building Inventory
Non LEED, 158,607,405
LEED Certified,
15,994,977
Inventory Breakdown
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Houston LEED Certified Office Space Trends
37
11
34
0
10
20
30
40
2006 2007 2008 2009
0
2,500,000
5,000,000
7,500,000
10,000,000
12,500,000
15,000,000
2006 2007 2008 2009
Total # Projects Achieving Certification Per Year
Total SF Achieving Certification per Year
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LEED Certified Office Buildings by Submarket
0
2,500,000
5,000,000
7,500,000
10,000,000
CBD Uptown/Galleria Katy Freeway Northwest Freeway
Woodlands
8 Buildings
3 Buildings6 Buildings
9 Buildings 1 Building
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Chase Tower1,683,893 SFLEED, GoldCBD
Williams Tower1,476,973 SFLEED, GoldUptown/Galleria
First City Tower1,333,312 SFLEED, GoldCBD
One & Two Shell1,792,214 SFLEED, GoldCBD
919 Milam542,919 SFLEED, SilverCBD
Houston LEED Certified Office Buildings
Houston’s Office Market First Quarter 2010Henry Hagendorf, CCIM, LEED APVP, Office and Healthcare Investments
