1Q 2011 Houston Outlook - Transwestern · Houston’s Residential Real Estate market is recovering...

A market report for commercial real estate executives

1

Outlook

Houston Metro Area First Quarter 2011

HOUSTON METRO SNAPSHOT AT 1ST QUARTER 2011

Economic Growth Accelerating

12-month payroll job growth at 56,600 through January 2011; 2nd in nation.

Unemployment rate: 8.8% in January 2011. National unemployment rate in January: 9.0%.

Outlook: Regional economy to strengthen over the next several years.

-25

0

25

50

75

Payr

oll J

obs

in 0

00's

DFW Hou Chi Was NY Bos SF Bay Den LABasin

Phx S. Fla Atl

Payroll Job GrowthLarge Metro Areas

12 Months Ending January 2011

Source: Bureau of Labor Statistics, Delta Associates; March 2011.

Office Market Position Index 1st Quarter 2011

Expansion Phase Correction/Contraction Phase

AtlantaChicagoPhoenix

2

3

4

56

7 8

1

HOUSTONAustinBaltimoreBostonDallas/Ft. WorthDenverLos AngelesNew YorkOrange CountySan AntonioSan FranciscoS. FloridaWashington

Source: Delta Associates; March 2011.

Office Market Strengthening

Net absorption: 1.3 million SF in 1st quarter. Overall vacancy: 12.9%, down from 13.6% at 1st

quarter 2010. Office asking rents: Relatively stable; concessions still driving effective rents down.Outlook: Significant improvement in 2011.

10.9% 11.1%12.0%

12.9% 13.0% 13.3%13.8%

15.2% 15.2% 15.4%

17.3%18.1%

21.3%

0%

5%

10%

15%

20%

25%

Bos NY Was Hou LA SF Bay Den S Fla OC Chi Atl DFW Phx

NationalVacancy Rate: 14.3%

Office Vacancy RatesSelected Metro Areas

1st Quarter 2011

Source: CoStar, Delta Associates; March 2011.

The Houston metro office market is strengthening, suggesting the following strategies:

Tenants: Renegotiate and extend leases soon; seek to lock in favorable terms; consider relocation to desired submarkets and upgrading space, before market conditions begin to favor landlords in 2012.

Developers: Opportunities are expanding in select submarkets. Enter strategically; begin to eye properties to maximize return in upcoming expansion cycle, with renovation/construction starts in 2011 and beyond.

Investors: Selectively pursue quality buildings with limited short-term vacancy risk. Buy undervalued assets. Buy debt in a loan-to-own strategy.


2Houston Metro Area First Quarter 2011

Outlook

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60

80

100

120

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 *

Payroll Job GrowthHouston Metro

1991 Through January 2011

Payr

oll J

obs

(000

’s)

Source: BLS, Delta Associates; March 2011.

20-Year AverageJob Growth =38,420/Year

*12 months ending January 2011.

2%

3%

4%

5%

6%

7%

8%

9%10%

11%

12%

13%

14%

Was Bos DFW Hou NY Phx Chi Den SFBay

Atl S. Fla LABasin

Jan-10Jan-11

Une

mpl

oym

ent R

ate

National Average*

Source: Bureau of Labor Statistics; March 2011.

9.0%9.7%

Unemployment RatesLarge Metro Areas

January 2011 vs. January 2010

* National average is seasonally adjusted.

Core IndustriesHouston MSA

2010

Note: Subcomponents of core industries were redefined in June 2007.Source: GMU Center for Regional Analysis, Delta Associates; March 2011.

Total GRP: $283 100%

Core Industries $ (Bil) % GRP

Total Core Industries: $201 71%Other $82 29%

GRP = Gross Regional Product

Energy $76 27%

Financial, Professional, Tech $38 13%

Construction $25 9%

Federal & State Government $23 8%

Manufacturing $17 6%

Medical/Educational $11 4%

Trade/Transportation $11 4%

THE HOUSTON METRO ECONOMY

Economy Strengthens Through the Winter

Metro Houston’s economy strengthened through the winter, with 12-month employment growth at 56,600 through January 2011, the 2nd most in the nation. Houston’s employment rose by 2.3%, compared to national growth of 0.8% in the same period. The Energy sector is fueling growth and most of Houston’s core industries are experiencing improvement.

The Houston metro unemployment rate was 8.8% in January 2011, even with a year ago. Because local unemployment rates are not seasonally adjusted and January traditionally means post-holiday layoffs, we expect Houston’s unemployment rate to decline in the months ahead. The national unemployment rate was 9.0% in January 2011, down from a cyclical peak of 10.1% in October 2009.

Metro Houston’s core industries continue to strengthen:Energy: Soaring oil prices are boosting local businesses, which in turn are supporting growth region-wide. With continuing unrest in the Middle East we expect oil prices to remain volatile. Professional Services: 12,700 jobs added over the 12 months ending January 2011. Construction: Projects are moving forward as financing opens up; 12-month job change is now positive after declining since the summer of 2008. Manufacturing activity has expanded for 16 consecutive months.Trade: Air freight rose 14.1% in 2010.


3

Outlook


U.S. Rotary Rig Count1990 Through February 2011

300

500

700

900

1,100

1,300

1,500

1,700

1,900

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*

Source: Baker Hughes, Inc.; March 2011. *YTD average as of 2/25/11.

Employment in Houston’s Mining sector increased by 6,100 jobs, or 7.9%, in the 12-month period ending in January 2011. In addition, the U.S. rotary rig count was at 1,699 in late February 2011, after plummeting to an average of 1,089 in 2009. With crude oil prices around $100 per barrel, oil companies are generating ample revenue to support growth in Houston.

The Construction sector added 1,200 jobs during the 12 months ending January 2011 – a 0.7% increase – the second straight 12-month increase after falling for 27 periods in a row. Commercial and residential construction will likely pick up as Houston’s economy gains strength. Construction on a new stadium for Major League Soccer’s Houston Dynamo is now underway. Texas Southern University will also play football there. The site is near U.S. 59 and Minute Maid Park in downtown Houston, and the project should be finished by April 2012. Greystar Real Estate Partners is breaking ground shortly on a 300-unit garden apartment project in the Grogan’s Mill section of The Woodlands. Located at 2500 South Millbend Drive, the project should be completed in about 12 months.

Houston’s Manufacturing sector continues to expand: The Houston Purchasing Managers Index, a short-term leading indicator of production, rose to 58.2 in January from 53.6 in September. Manufacturing employment continues to rebound, adding 3,000 jobs over the 12 months ending in January 2011, a 1.4% gain. This was the fourth consecutive month of positive 12-month job growth, after 19 straight periods of losses since February 2009, when the current downward cycle began.

The Education and Health Care sector continues to swell, adding 10,200 jobs in the 12 months ending in January 2011 – a 3.4% increase. Much of the job growth is occurring in suburban hospitals, such as the new Texas Children’s Hospital West Campus, which opened in West Houston in March 2011. The 515,000 SF hospital at I-10 and Barker Cypress includes a pediatric emergency center, two operating rooms, and an outpatient clinic. Meanwhile, the Menninger Clinic is breaking ground on a 144-bed mental health facility on South Main Street near the Texas Medical Center.

Trade/Transportation continues to bounce back in Houston. Houston’s airports handled 14.1% more air freight in 2010 than they did in 2009, and freight volume surpassed the previous peak volume experienced in 2008. Meanwhile, 8,600 jobs were added in this sector during the 12 months ending in January, a 1.7% increase. Companies in Houston’s trade sector are well-positioned to benefit from the expansion of the Panama Canal, which is due by 2014. For example, Gulf Intermodal Services, a container transportation firm, is building its new headquarters and a container yard in La Porte. The site is located between the Port of Houston’s Barbours Cut and Bayport container terminals. Improvements to the Panama Canal will also open up

Houston Purchasing Managers Index2002 Through January 2011

35

40

45

50

55

60

65

70

Source: NAPM – Houston; March 2011.

Expa

nsio

nC

ontr

actio

n



Outlook

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Job Growth ForecastHouston Metro Area

2011 Through 2013

Source: Bureau of Labor Statistics, Delta Associates; March 2011.

20-Year Average = 38,420/annum

Projected Avg. Annual Growth 2011-13 =

60,000/annum

Office Absorption and EmploymentHouston Metro Area

1980 Through 1st Quarter 2011

-100

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0

50

100

150

200

-4-202468

101214

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*

Cha

nge

in E

mpl

oym

ent

(000

's)

Net

Abs

orpt

ion

(Mill

ions

of

SF)

Source: BLS, Delta Associates; March 2011. *12-month job growth through October 2010.

Job Growth

Net Absorption

*Employment as of January 2011;absorption as of 1st quarter 2011.

new opportunities for the Houston region in the natural gas trade, although liquefaction plants and other infrastructure investments will be required. Battleground Oil Specialty Terminal Co. plans to start construction in July 2011 on a new $400 million black-oil terminal in La Porte. The facility will have an initial capacity of 7.8 million barrels, with two deepwater docks, 12 barge spots, 12 rail spots, and pipeline connections.

Houston’s Residential Real Estate market is recovering from the housing downturn, although sales activity remains volatile. The Houston Association of Realtors reported a 7.5% increase in single-family home sales volume in January 2011, compared to January 2010. This was the first increase in sales since June 2010. Prices rose as well: The average single-family sale price in January 2011 was $196,879 – 2.2% higher than in January 2010. This is the highest average price that Houston has ever seen in January, though price change has been variable across the pricing spectrum.

THE HOUSTON METRO AREA ECONOMIC OUTLOOK

Metro Houston’s economy will likely experience stronger growth over the next several years, as the national economic recovery matures into a sustained growth cycle. Strength in the Energy and Professional Services sectors, underpinned by a recovering consumer sector, will fuel greater expansion locally over the next several years. As a result, we expect annual job growth in the 55,000 to 90,000 range in 2011-13.

THE HOUSTON METRO OFFICE MARKET

Market Activity Escalating

Office market activity ramped up in the Houston metro in the 1st

quarter of 2011, as the economy strengthened and job growth, particularly in Professional Services, surged. As a result, office space leasing increased substantially, especially in the Energy Corridor, and investment sales activity is accelerating.

Net Absorption Jumps

Net absorption of office space totaled 1.3 million SF in the 1st

quarter of 2011, compared to 715,000 SF in all of 2010. Deliveries of new buildings in the CBD and Katy Freeway West helped drive absorption in those submarkets.

600,000

700,000

800,000

900,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

Houston Airport SystemAir Freight


Source: Houston Airport System; March 2011.

Air

Frei

ght(

000

lbs)

Long-Term Average784 million lbs/Annum

* YTD annualized.


5

Outlook


Net Absorption (SF) in Selected Submarkets: Q1 2011 All of 2010 Downtown 380,000 (144,000) Katy Freeway West 612,000 108,000 Northwest 88,000 19,000 Greenway Plaza 85,000 (12,000)

Available sublease space was essentially unchanged in the Houston metro in the 1st quarter of 2011. Sublease space totals 1.6 million SF, or 0.7% of the standing inventory.

Class A space accounted for nearly all of the net absorption in the 1st quarter of 2011.

Net absorption by class (SF): Q1 2011 All of 2010 Class A 1,250,000 388,000 Class B 39,000 (21,000) Class C 21,000 348,000

Notable Q1 2011 leases:

Fulbright & Jaworski renewed 229,676 SF at 1301 McKinney in the CBD.

Schlumberger renewed 155,000 SF at 1325 Dairy Ashford Road in the Katy Freeway West submarket.

Net Absorption of Office Spaceand Direct Vacancy Rate Trends

Houston Metro Area1998 Through 1st Quarter 2011

0%

2%

4%

6%

8%

10%

12%

14%

16%

-3,000-2,000-1,000

01,0002,0003,0004,0005,0006,0007,0008,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1Q 11

Dire

ct V

acan

cy R

ate

Net

Abs

orpt

ion

in 0

00s

of S

F

Net Absorption Vacancy Rate

Note: Delivery of pre-leased space counts as positive net absorption.Source: Vacancy – Delta Associates’ analysis of CoStar data;Net Absorption - Delta Associates; March 2011.

How the Multi-Tenant Market ComparesTo Our Market Coverage

Vacancy and absorption in the Houston metro area often are reported by brokerage firms on multi-tenant buildings only. We include owner-occupied and single-tenant buildings as well, on the basis of immediate availability, to capture more market activity. We exclude government-owned space. As a point of comparison, below is data for the Houston multi-tenant office market:

Multi-Tenant Entire MarketInventory: 203.5 MSF 247.8 MSF Overall vac. (incl. sublet): 15.2% 12.9% Q1 2011 net absorption: 525,400 SF 1,310,000 SF

Why This Methodology Is the Best IndicatorOf Current Market Conditions

We include owner-occupied and single-tenant buildings in our inventory, vacancy, and absorption statistics. Doing so allows us to capture more market activity than many of our competitors, and to better correlate changes in the market with changes in employment. As single-tenant space does compete with multi-tenant space, we believe it is critical to understand all components of the market. We also offer wider geographic coverage than some of our competitors. The result is that the inclusion of single-tenant and owner-occupied space tends to yield lower vacancy rates and higher absorption totals than our competitors’ results, but our coverage of the market is more comprehensive.



Outlook

0%

5%

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15%

20%

25%

30%

83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 *

Office Vacancy RateHouston Metro Area


Source: CoStar, Delta Associates; March 2011 *As of 1st quarter 2011.

Occidental Oil & Gas Corporation leased 81,565 SF at 5 Greenway Plaza in the Greenway Plaza submarket.

Lloyd’s Register leased 72,317 SF at 1330 Enclave Parkway in the Katy Freeway West submarket.

Cameron International Corp. renewed 66,750 SF at 1333 W. Loop Freeway S. in the Post Oak Park submarket.

Worley Parsons Group leased 60,032 SF at 575 N. Dairy Ashford in Katy Freeway West.

National Processing Company renewed 54,126 SF at 20405 SH 249 in the FM 1960/Highway 249 submarket.

Wilbros United States Holdings Inc. renewed and also expanded by 44,178 SF at Five Post Oak Park in the Post Oak Park submarket.

Alta Mesa Holdings leased 41,307 SF at 15021 Katy Freeway in Katy Freeway West.

Genesis Energy renewed 31,085 SF at 919 Milam in the CBD.

VVacancy Holds Steady

The overall office vacancy rate (including sublet space) in the Houston metro is 12.9% in the 1st quarter of 2011. This rate is unchanged from year-end 2010, but is down from 13.6% one year ago. The direct vacancy rate is 12.2% at 1st quarter 2011, down from 12.3% at year-end 2010 and 12.6% one year ago.

The overall Class A vacancy rate is 13.1% at the 1st quarter of 2011, down from 13.3% at year-end 2010 and 13.8% one year ago. The direct Class A vacancy rate is 12.4%, down from 12.5% at year-end 2010 and 12.5% one year ago.

Overall 1st quarter 2011 vacancy rates for all classes in selected submarkets:

South Main/Medical Center 6.9% West Loop 10.0% Katy Fwy/Energy Corridor 11.2% Downtown 11.6% FM 1960 25.9%

The overall office vacancy rate (including sublet space) in the Houston metro will likely decline steadily over the next two years, as increased demand outpaces a limited pipeline of new supply. We expect overall vacancy to decline into the mid-11% range over the next two years.

Note: The vacancy rate reflects inventory changes, per CoStar, that added 1.3 million SF of existing, vacant space in the FM 1960/Highway 249 submarket. These changes regard the HP/Lone Star College campus. The year-end 2010 Houston metro overall vacancy rate was revised to 12.9% from 12.6%; the direct rate was revised to 12.3% from 11.9%. Class A data was revised in kind.


7

Outlook


$21.46

$14.86

$11.70 $11.92

$19.18

$18.11

$10

$12

$14

$16

$18

$20

$22

$24

82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*

Average Office RentsHouston Metro Area

1982 Through 1st Quarter 2011(All Classes of Space)

Source: Delta Associates’ analysis of CoStar data; March 2011. *As of 1st quarter 2011.

Construction Pipeline Declines

There is 1.6 million SF of office space under construction or renovation in the Houston metro area at the end of the 1st

quarter of 2011, down from 2.5 million SF at year-end 2010 and 2.8 million SF a year ago. Space under construction in the 1st

quarter of 2011 is 87% pre-leased, compared to 58% at year-end 2010 and 48% a year ago.

The 845,000 SF Hess Tower is the only major project under construction in the CBD. Hines Interests’ MainPlace project (also known as BG Group Place for its anchor tenant) delivered in the 1st quarter of 2011 and is now 51% leased.

Office Space Under Construction or Renovation Houston Metro Area

1st Quarter 2011Submarket SF % Pre-leasedCBD 844,763 100.0% Conroe 108,530 100.0% Greenspoint/IAH 100,000 100.0% FM 1960 / Hwy 249 195,069 20.0% NASA/Clear Lake 100,000 65.0% Balance of Houston 217,929 91.2% Total 1,566,291 86.6%

Source: Delta Associates’ analysis of CoStar data; March 2011.

Office deliveries (excluding renovations) totaled 1.3 million SF in the 1st quarter of 2011, compared to 777,000 SF in all of 2010. Space delivered in the 1st quarter, including MainPlace at 972,000 SF, was 48% leased at delivery.

Office Asking Rents Stabilizing

Asking rents for all classes of office space rose slightly in the 1st

quarter of 2011 in metro Houston. Class A asking rents edged up 0.4% for the quarter, while Class B asking rents remained essentially unchanged. Effective rents – after concessions – experienced downward pressure of 20% or more in some submarkets over the past year. Landlords are trying to hold face rents stable to position their properties better for the upcoming expansion cycle, but are making concessions on effective rents to fill vacant space.

Of note, effective rents are rising in the Energy Corridor and Galleria/West Loop. While vacancy may rise in the CBD due to newly-delivered space, effective rental rates there should remain stabilized because of the overall increase in demand during 2011 and the rising effective rents in premier submarkets. Tenants’ financial incentive to leave the CBD has been somewhat diminished.



Outlook

$0

$1

$2

$3

$4

2003 2004 2005 2006 2007 2008 2009 2010 2011*

Bill

ions

of $

DFW

Source: Real Capital Analytics, graphic by Delta Associates; March 2011.

PhoenixHouston

Denver

Comparative Investment Sales VolumeOffice Product

2003 – 1st Quarter 2011

*As of 1st quarter 2011.

$25

$50

$75

$100

$125

$150

$175

$200

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

$97$87

$128$141 $138

$148

$168

$50

$180$164

Aver

age

Sale

Pric

e Pe

r SF

Source: Real Capital Analytics, graphic by Delta Associates; March 2011.

Average Office Sale PriceHouston Metro


*As of 1st quarter 2011.

Houston Metro Core Office AssetsCap Rates


4%

5%

6%

7%

8%

9%

10%

11%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

Cap

Rat

e*

Source: Real Capital Analytics, graphic by Delta Associates; March 2011. *Rolling 12-month average through Jan. 2011.

Note: Data reflects change in methodology by RCA between 3rd and 4th quarters in 2009.

Asking rents average $25.87/SF, full service, for Class A buildings and $18.31/SF, full service, for Class B buildings. These are metro-wide averages; better buildings in more desirable submarkets are outperforming these market-wide averages.

Metro-wide asking rents will likely hold stable through mid-2011, as significant concessions continue to be offered. Rents will likely begin to gain traction in the second half of 2011 and into 2012 as vacancy continues to decline and demand for space increases. At the submarket level, asking rents may continue to be volatile, with landlords reacting quickly to changes in market fundamentals. As market conditions improve throughout 2011 we will see reduced concessions.

IInvestment Sales: Increasing

We recorded $583 million in office investment sales (for which pricing information could be obtained) in metro Houston during the 1st quarter of 2011. Sales totaled $998 million during all of 2010.

We anticipate accelerating sales activity during 2011 as market conditions strengthen and credit markets loosen.

The average sales price of the closed transactions in the 1st

quarter of 2011 for which we have pricing information is $164 per SF, with a range of $128 to $216 per SF. In comparison, the average sales price in 2010 was $180 per SF, which was elevated by a handful of high-priced sales. Pricing remains volatile due to the limited number of transactions, but increased demand is putting upward pressure on pricing.

The sale of Lakes on Post Oak, Galleria Towers, and Two Westlake Park reflect the increasing interest in Houston office assets. We expect pricing to edge higher during the balance of 2011.

Selected Q1 2011 Office Sales in Houston Metro:

Property/Submarket Sale Price/Buyer

Lakes on Post Oak $176.1 million ($147/SF) Galleria Five Mile Capital/Crocker Ptns.

Galleria Office Towers $176.0 million ($162/SF) Galleria Unilev Capital

Two Westlake Park $80.0 million ($176/SF) Katy Freeway West KBS REIT

2001 Kirby Drive $36.5 million ($216/SF) Midtown L&B Realty Advisors

11210 Equity Drive $31.0 million ($215/SF) Northwest Far Wells Real Estate

Source: Real Capital Analytics; March 2011.


9

Outlook


The weighted average cap rate on a trailing 12-month basis for core Houston office assets has declined to 8.2% in January 2011, based on a limited number of transactions, from a cyclical high of 10.0% in late 2009. On recent trades, cap rates have fallen to the 7.0-7.25% range for quality, Class A assets. Trophy properties are now trading in the 6.25-7.0% range. Core cap rates will likely hold in the 7% range in 2011 as market conditions continue to strengthen, capital markets stabilize, and more investors look to include real estate in their portfolio mix.

THE HOUSTON METRO AREA OFFICE MARKET OUTLOOK

The Houston metro office market will likely experience significant improvement in 2011 as the economic recovery strengthens. As businesses gradually ramp up leasing activity in the period ahead, vacancy will continue to decline, likely dropping into the mid-11% range over the next two years, as demand outpaces new supply. As a result, rents will likely begin to gain traction in the latter half of 2011, but particularly in 2012 as vacancy continues to decline and demand for space increases. Office market conditions may turn quickly in the landlord’s favor in 2012, as vacancy declines and the pipeline of new supply (presently just 0.6% of the standing inventory) remains limited.

Office submarkets likely to outperform in 2011, with declining vacancy and rising rents, include:

Houston CBD Katy Freeway/Energy Corridor South Main/Medical Center West Loop Woodlands/Conroe



OutlookSUMMARY OF OFFICE MARKET INDICATORS - ALL SPACE

HOUSTON METRO AREA2008 THROUGH 1ST QUARTER 2011

Total SF Avail. Vacancy SF UnderTotal Rentable SF Immediately Rate Constr. or

Submarket Bldgs All Bldgs. 1/ All Bldgs. 2/ 2008 2009 2010 Q1 2011 w/ Sublet Renovation 2008 2009 2010 1st Q 2011Central Business District 111 47,228,208 4,958,962 8.9% 8.9% 9.3% 10.5% 11.1% 844,763 414,000 (71,000) (166,000) 315,000Midtown 106 7,212,574 995,335 10.1% 15.0% 14.7% 13.8% 15.0% - 306,000 (481,000) 22,000 65,000

Downtown 217 54,440,782 5,954,297 9.1% 9.8% 10.0% 10.9% 11.6% 844,763 720,000 (552,000) (144,000) 380,000I-45 North 42 2,270,142 426,787 16.7% 15.5% 17.9% 18.8% 20.7% - 144,000 28,000 (35,000) (20,000)FM 1960 / Champions 71 2,958,692 565,110 23.0% 21.2% 18.6% 19.1% 19.6% - (66,000) 33,000 77,000 (15,000) FM 1960 / Highway 249 3/ 125 7,648,557 2,233,379 37.9% 14.4% 30.4% 29.2% 29.8% 195,069 (159,000) (312,000) 120,000 92,000

FM 1960 238 12,877,391 3,225,276 31.1% 16.2% 25.5% 25.0% 25.9% 195,069 (81,000) (251,000) 162,000 57,000 North Belt West/Greenspoint 87 10,658,423 1,417,570 10.1% 13.7% 13.3% 13.3% 14.9% - 91,000 (330,000) 42,000 0Greenspoint / IAH 30 2,728,268 256,457 6.5% 10.2% 11.1% 9.4% 9.4% 100,000 131,000 (215,000) (47,000) 46,000

Greenspoint / North Belt 117 13,386,691 1,674,027 9.5% 13.1% 12.9% 12.5% 13.8% 100,000 222,000 (545,000) (5,000) 46,000Greenway Plaza 98 12,138,902 1,311,001 10.5% 11.4% 11.5% 10.8% 12.1% 23,030 (142,000) (127,000) (12,000) 85,000Gulf Freeway/Pasadena 109 4,572,000 557,784 15.7% 13.6% 11.7% 12.2% 12.6% - (89,000) 170,000 106,000 (23,000)

Katy Freeway East 111 8,848,947 699,067 7.7% 11.4% 8.5% 7.9% 8.0% - 312,000 1,042,000 331,000 53,000Katy Freeway West 163 20,017,572 2,442,144 4.9% 14.4% 14.2% 12.2% 12.6% - 1,073,000 (364,000) 108,000 612,000

Katy Fwy / Energy Corridor 274 28,866,519 3,141,211 5.7% 13.4% 12.4% 10.9% 11.2% - 1,385,000 678,000 439,000 665,000Kingwood / Humble 50 2,408,235 199,884 6.4% 7.3% 8.4% 8.3% 8.4% - 198,000 (26,000) 17,000 23,000 NASA / Clear Lake 3/ 168 9,470,423 748,163 9.0% 8.7% 7.5% 7.9% 8.1% 100,000 253,000 70,000 104,000 (38,000)Northeast 46 2,067,508 233,628 18.1% 14.9% 10.6% 11.3% 11.8% - 148,000 (66,000) 82,000 (14,000)

North Loop West 71 5,497,896 1,160,056 18.1% 18.7% 21.7% 21.1% 21.3% - (147,000) (36,000) (178,000) 33,000Northwest Near 23 1,584,574 163,211 17.2% 17.2% 9.8% 10.3% 10.3% - (2,000) - 87,000 (8,000)Northwest Far 96 7,828,050 1,432,533 15.6% 20.5% 19.1% 18.3% 18.5% - 173,000 748,000 110,000 63,000

Northwest 190 14,910,520 2,755,800 16.8% 19.5% 19.1% 18.5% 18.7% - 24,000 712,000 19,000 88,000South Main / Medical Center 87 10,173,247 701,954 8.7% 6.3% 7.0% 6.9% 6.9% - 328,000 244,000 (71,000) 10,000

Southwest / Hillcroft 59 4,743,707 887,073 20.3% 20.6% 19.2% 18.7% 19.1% 60,004 (18,000) (60,000) 65,000 24,000Southwest Beltway 8 3/ 97 7,334,337 1,012,139 14.9% 14.2% 16.6% 13.8% 15.5% 25,000 (259,000) 17,000 (190,000) (37,000)East Ft Bend Co. / Sugar Land 148 8,851,671 1,619,856 16.3% 13.9% 18.9% 18.3% 18.5% - 400,000 179,000 (432,000) 53,000

Southwest Fwy / Sugar Land 304 20,929,715 3,519,068 16.6% 15.5% 18.1% 16.8% 17.6% 85,004 123,000 136,000 (557,000) 40,000Bellaire 42 4,748,537 427,368 5.0% 6.9% 7.0% 9.0% 9.8% - 181,000 (90,000) (4,000) (95,000)Post Oak Park 34 4,771,860 548,764 10.1% 12.2% 11.2% 11.5% 12.5% - (44,000) (97,000) 47,000 (14,000)Galleria 57 15,258,806 1,266,481 8.0% 13.9% 8.8% 8.3% 8.6% - (132,000) (767,000) 321,000 76,000Riverway 22 3,086,415 339,506 7.1% 7.7% 9.5% 11.0% 11.6% - 148,000 (72,000) 12,000 (46,000)Richmond / Fountainview 44 1,783,906 146,280 11.7% 11.0% 6.7% 8.2% 8.2% 56,013 232,000 (23,000) 76,000 (27,000) San Felipe / Voss 43 5,489,762 592,894 7.4% 9.9% 11.2% 10.8% 11.4% - 66,000 (127,000) (71,000) 22,000

West Loop 242 35,139,286 3,321,293 7.8% 11.1% 9.2% 9.5% 10.0% 56,013 451,000 (1,176,000) 381,000 (84,000)Westchase 108 15,513,952 1,908,216 8.2% 12.3% 12.7% 12.3% 12.9% - 565,000 (258,000) (62,000) 62,000

The Woodlands 128 9,349,066 934,907 6.3% 9.5% 9.9% 10.0% 11.6% 53,882 512,000 303,000 258,000 (9,000)Conroe 40 1,539,861 101,631 8.1% 6.6% 7.1% 6.6% 6.6% 108,530 (4,000) 102,000 (2,000) 22,000

Woodlands / Conroe 168 10,888,927 1,036,537 6.5% 9.2% 9.5% 9.5% 10.9% 162,412 508,000 405,000 256,000 13,000

TOTAL - Houston 2,416 247,784,098 30,288,140 10.9% 12.6% 12.3% 12.2% 12.9% 1,566,291 4,613,000 (586,000) 715,000 1,310,000

Vacancy Rate with Sublet Space 11.7% 13.5% 12.9% 12.9%

1/ Includes buildings 15,000 SF RBA and greater. Does not include buildings under construction or buildings owned by the government.2/ Does not include sublet space.3/ Submarket space inventory and/or vacancy adjusted per changes in CoStar database.

Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; March 2011.

Delta Associates, the research affiliate of Transwestern, is headquartered at:500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: 703-836-5700; DeltaAssociates.com

Net Absorption (SF)

1st Quarter 2011Direct Vacancy Rate

at End of:

1st Quarter 2011


11

Outlook


SUMMARY OF OFFICE MARKET INDICATORS - CLASS A SPACE 1/


Total SF Available Vacancy SF UnderTotal Rentable SF Immediately Vacancy Rate Constr. or

Submarket Bldgs All Bldgs. 1/ All Bldgs. 2/ Rate 2/ w/ Sublet Renovation 2008 2009 2010 1st Q 2011Central Business District 30 29,355,851 2,319,112 7.9% 8.7% 844,763 (31,000) 107,000 (198,000) 356,000 Midtown 4 1,829,725 199,440 10.9% 15.5% - 169,000 (313,000) 2,000 0

Downtown 34 31,185,576 2,518,552 8.1% 9.1% 844,763 138,000 (206,000) (196,000) 356,000I-45 North 2 347,015 52,052 15.0% 18.6% - (6,000) (1,000) (15,000) (2,000)FM 1960 / Champions 1 150,000 - 0.0% 0.0% - - - - - FM 1960 / Highway 249 3/ 17 3,471,902 1,711,648 49.3% 49.5% 156,000 (257,000) (299,000) 102,000 35,000

FM 1960 20 3,968,917 1,763,700 44.4% 44.9% 156,000 (263,000) (300,000) 87,000 33,000North Belt West/Greenspoint 18 4,518,360 207,845 4.6% 6.9% - (43,000) 13,000 (18,000) (23,000) Greenspoint / IAH 4 744,018 55,801 7.5% 7.5% 100,000 66,000 (28,000) 67,000 13,000

Greenspoint / North Belt 22 5,262,378 263,646 5.0% 7.0% 100,000 23,000 (15,000) 49,000 (10,000)Greenway Plaza 17 6,170,634 721,964 11.7% 14.0% - (98,000) (85,000) 44,000 86,000Gulf Freeway/Pasadena 1 52,362 14,818 28.3% 28.3% - - 50,000 8,000 -

Katy Freeway East 14 3,909,747 324,509 8.3% 8.4% - 222,000 812,000 357,000 20,000 Katy Freeway West 60 12,785,224 1,713,220 13.4% 13.5% - 1,193,000 (9,000) 77,000 662,000

Katy Fwy / Energy Corridor 74 16,694,971 2,037,729 12.2% 12.3% - 1,415,000 803,000 434,000 682,000Kingwood / Humble 2 280,000 80,640 28.8% 28.8% - 90,000 - - (55,000) NASA / Clear Lake 11 1,291,440 147,224 11.4% 11.9% 100,000 12,000 (3,000) (43,000) (52,000) Northeast - - - 0.0% 0.0% - 155,000 - - -

North Loop West 5 1,054,498 287,878 27.3% 27.4% - 27,000 (137,000) 1,000 (7,000) Northwest Near 1 237,384 - 0.0% 0.0% - - - - - Northwest Far 18 2,844,910 853,473 30.0% 30.0% - (133,000) 597,000 37,000 71,000

Northwest 24 4,136,792 1,141,351 27.6% 27.6% - (106,000) 460,000 38,000 64,000South Main / Medical Center 14 3,916,577 270,244 6.9% 6.9% - 17,000 134,000 39,000 31,000

Southwest / Hillcroft 5 1,275,997 320,275 25.1% 26.7% - (9,000) (54,000) (78,000) - Southwest Beltway 8 3 573,152 106,606 18.6% 22.2% - 134,000 (109,000) 42,000 0East Ft Bend Co. / Sugar Land 22 3,705,430 1,037,520 28.0% 28.4% - 185,000 (46,000) (372,000) (4,000)

Southwest Fwy / Sugar Land 30 5,554,579 1,464,402 26.4% 27.4% - 310,000 (209,000) (408,000) (4,000)Bellaire 11 1,489,020 134,012 9.0% 11.1% - (41,000) (2,000) (3,000) (12,000) Post Oak Park 9 2,498,115 119,910 4.8% 6.5% - (32,000) 111,000 (10,000) 7,000Galleria 28 12,050,099 903,757 7.5% 7.9% - (2,000) (463,000) 229,000 48,000Riverway 8 2,038,628 207,940 10.2% 11.2% - 173,000 (54,000) 27,000 (35,000)Richmond / Fountainview - - - - - - - - - - San Felipe / Voss 3 1,714,029 272,531 15.9% 15.9% - (5,000) (77,000) (46,000) (15,000)

West Loop 59 19,789,891 1,638,149 8.3% 9.0% - 93,000 (485,000) 197,000 (7,000)Westchase 28 7,962,249 1,082,866 13.6% 14.1% - 253,000 (253,000) (111,000) 159,000

The Woodlands 19 3,653,894 438,467 12.0% 12.5% - 412,000 128,000 248,000 (33,000)Conroe 1 60,000 - 0.0% 0.0% - - - - -

Woodlands / Conroe 20 3,713,894 438,467 11.8% 12.3% - 412,000 128,000 248,000 (33,000)

TOTAL - Houston 356 109,980,260 13,583,753 12.4% 13.1% 1,200,763 2,451,000 19,000 388,000 1,250,000

1/ Class A buildings per CoStar that are greater than 50,000 SF. Does not include buildings under construction or owned by the government.2/ Does not include sublet space.3/ Submarket space inventory and/or vacancy adjusted per changes in CoStar database.



1st Quarter 2011

Net Absorption (SF)



OutlookSUMMARY OF OFFICE MARKET INDICATORS - CLASS B SPACE 1/

HOUSTON METRO AREA 2008 THROUGH 1ST QUARTER 2011

Total SF Available Vacancy SF UnderTotal Rentable SF Immediately Vacancy Rate Constr. or

Submarket Bldgs All Bldgs. 1/ All Bldgs. 2/ Rate 2/ w/ Sublet Renovation 2008 2009 2010 1st Q 2011Central Business District 41 13,812,760 1,726,595 12.5% 12.7% - 326,000 (171,000) (9,000) 0Midtown 50 3,908,556 285,325 7.3% 7.3% - 135,000 (13,000) (23,000) 35,000

Downtown 91 17,721,316 2,011,920 11.4% 11.5% - 461,000 (184,000) (32,000) 35,000I-45 North 22 1,606,441 305,224 19.0% 21.1% - (49,000) (17,000) (36,000) (19,000)FM 1960 / Champions 47 2,424,240 572,121 23.6% 24.2% - (36,000) 29,000 56,000 (17,000)FM 1960 / Highway 249 74 3,205,391 403,879 12.6% 13.7% 39,069 336,000 66,000 24,000 64,000

FM 1960 143 7,236,072 1,281,224 17.7% 18.9% 39,069 251,000 78,000 44,000 28,000North Belt West/Greenspoint 45 4,504,579 968,484 21.5% 22.8% - 115,000 (379,000) 1,000 23,000Greenspoint / IAH 18 1,760,081 191,849 10.9% 10.9% - 56,000 39,000 (111,000) (4,000)

Greenspoint / North Belt 63 6,264,660 1,160,333 18.5% 19.5% - 171,000 (340,000) (110,000) 19,000Greenway Plaza 34 4,143,389 273,464 6.6% 6.9% 23,030 (16,000) 41,000 (21,000) (8,000)Gulf Freeway/Pasadena 58 2,883,887 409,512 14.2% 14.7% - (82,000) 213,000 24,000 0

Katy Freeway East 42 3,094,523 228,995 7.4% 7.6% - 96,000 (46,000) (20,000) 37,000Katy Freeway West 84 7,602,927 790,704 10.4% 11.5% - 21,000 (93,000) 61,000 (61,000)

Katy Fwy / Energy Corridor 126 10,697,450 1,019,699 9.5% 10.4% - 117,000 (139,000) 41,000 (24,000)Kingwood / Humble 31 1,736,325 140,642 8.1% 8.2% - 117,000 (7,000) 16,000 23,000NASA / Clear Lake 87 5,574,371 334,462 6.0% 6.3% - 176,000 77,000 123,000 39,000Northeast 27 1,276,209 213,127 16.7% 17.5% - 82,000 46,000 19,000 (20,000)

North Loop West 37 3,556,405 817,973 23.0% 23.2% - (241,000) 150,000 (197,000) 60,000Northwest Near 11 852,394 121,040 14.2% 14.2% - 17,000 (2,000) 62,000 (9,000)Northwest Far 53 4,411,940 582,376 13.2% 13.5% - 159,000 249,000 29,000 (9,000)

Northwest 101 8,820,739 1,521,389 17.2% 17.5% - (65,000) 397,000 (106,000) 42,000South Main / Medical Center 34 3,796,173 303,694 8.0% 8.1% - 417,000 46,000 (117,000) 8,000

Southwest / Hillcroft 19 1,676,297 370,462 22.1% 22.1% 60,004 26,000 (59,000) 49,000 22,000Southwest Beltway 8 3/ 60 5,248,629 829,283 15.8% 17.8% 25,000 (424,000) 51,000 (230,000) (47,000)East Ft Bend Co. / Sugar Land 99 4,243,498 483,759 11.4% 11.4% - 209,000 176,000 141,000 72,000

Southwest Fwy / Sugar Land 178 11,168,424 1,683,504 15.1% 16.0% 85,004 (189,000) 168,000 (40,000) 47,000Bellaire 17 2,549,773 196,333 7.7% 7.7% - 251,000 17,000 9,000 (120,000)Post Oak Park 21 2,039,749 430,387 21.1% 21.3% - (13,000) (123,000) (6,000) (24,000)Galleria 25 2,855,505 339,805 11.9% 12.2% - (167,000) (344,000) 113,000 43,000Riverway 14 1,039,510 145,531 14.0% 14.1% - (28,000) (2,000) (20,000) (15,000)Richmond / Fountainview 14 870,347 87,905 10.1% 10.1% 56,013 104,000 20,000 1,000 (13,000)San Felipe / Voss 36 3,569,141 289,100 8.1% 9.0% - 67,000 (48,000) (28,000) 32,000

West Loop 127 12,924,025 1,489,062 11.5% 11.9% 56,013 214,000 (526,000) 69,000 (97,000)Westchase 62 6,958,160 814,105 11.7% 12.6% - 236,000 21,000 44,000 (97,000)

The Woodlands 90 5,174,141 444,976 8.6% 11.3% 53,882 92,000 175,000 29,000 26,000Conroe 20 868,484 77,295 8.9% 8.9% 108,530 (5,000) 106,000 (4,000) 18,000

Woodlands / Conroe 110 6,042,625 522,271 8.6% 11.0% 162,412 87,000 281,000 25,000 44,000

TOTAL - Houston 1,272 107,243,825 13,178,407 12.3% 12.9% 365,528 1,977,000 172,000 (21,000) 39,000

1/ Class B per CoStar, and buildings under 50,000 SF even if CoStar classified them as Class A. Does not include buildings under construction or owned by the government.2/ Does not include sublet space.3/ Submarket space inventory and/or vacancy adjusted per changes in CoStar database.



1st Quarter 2011

Net Absorption (SF)


13

Outlook


ASKING RENTAL RATE ANALYSIS OF CLASS A & B OFFICE BUILDINGSHOUSTON METRO AREA

2008 THROUGH 1ST QUARTER 2011

Submarket Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B

Central Business District $30.04 $25.21 $29.20 $23.94 $29.95 $24.97 $29.74 $23.76 -0.7% -4.8%Midtown $28.32 $22.75 $26.37 $22.29 $23.54 $22.36 $24.03 $21.86 2.1% -2.2%

Downtown $29.95 $23.98 $28.89 $22.89 $29.23 $23.73 $29.18 $22.68 -0.2% -4.4%I-45 North $22.31 $17.66 $20.93 $16.20 $20.22 $15.18 $19.97 $15.60 -1.3% 2.8%FM 1960 / Champions - $15.66 - $14.68 - $13.40 N/A $13.13 - -2.0%FM 1960 / Highway 249 $27.46 $20.22 $27.21 $19.94 $27.38 $20.21 $27.13 $20.07 -0.9% -0.7%

FM 1960 $27.21 $18.09 $26.92 $17.45 $26.96 $16.65 $26.69 $16.52 -1.0% -0.8%North Belt West / Greenspoint $20.45 $16.84 $20.96 $16.54 $20.07 $15.80 $20.02 $15.71 -0.3% -0.5%Greenspoint / IAH $21.75 $16.38 $21.17 $16.26 $23.23 $15.24 $22.94 $15.33 -1.2% 0.5%

Greenspoint / North Belt $20.48 $16.80 $20.58 $16.51 $20.49 $15.72 $20.26 $15.67 -1.1% -0.4%Greenway Plaza $25.84 $21.48 $25.49 $20.95 $23.61 $21.50 $23.88 $21.99 1.1% 2.2%Gulf Freeway/Pasadena - $18.13 - $18.43 $24.25 $19.95 $24.25 $19.49 0.0% -2.3%

Katy Freeway East $23.74 $18.88 $23.05 $18.71 $25.35 $17.87 $25.08 $17.35 -1.1% -2.9%Katy Freeway West $24.77 $19.91 $24.23 $18.47 $24.46 $18.76 $24.07 $18.69 -1.6% -0.4%

Katy Freeway / Energy Corridor $25.39 $19.47 $24.79 $18.36 $25.31 $18.36 $25.01 $18.24 -1.2% -0.7%Kingwood / Humble - $17.72 $27.50 $16.17 $29.50 $16.49 $25.50 $16.23 -13.6% -1.5%NASA / Clear Lake $21.31 $20.43 $20.83 $21.44 $21.29 $20.46 $21.26 $20.51 -0.1% 0.2%Northeast - $14.41 - $13.75 - $13.67 N/A $13.79 - 0.8%

North Loop West $21.31 $16.40 $20.51 $15.65 $20.96 $15.62 $21.11 $16.06 0.7% 2.8%Northwest Near - $15.00 - $14.89 - $14.84 N/A $14.61 - -1.6%Northwest Far $23.25 $15.85 $25.19 $14.41 $26.79 $14.29 $26.72 $14.11 -0.3% -1.3%

Northwest $22.76 $16.07 $24.11 $15.13 $25.41 $15.07 $25.38 $15.20 -0.1% 0.9%South Main / Medical Center $30.49 $23.33 $29.16 $22.13 $27.65 $21.88 $28.00 $21.47 1.3% -1.9%

Southwest / Hillcroft $28.41 $13.86 $22.73 $13.91 $22.39 $13.76 $22.37 $13.42 -0.1% -2.5%Southwest Beltway 8 $18.83 $16.77 $18.08 $17.06 $15.83 $16.45 $15.96 $17.12 0.8% 4.0%East Fort Bend County / Sugar Land $22.28 $19.62 $22.99 $19.77 $23.03 $18.47 $22.90 $19.15 -0.6% 3.7%

Southwest Freeway / Sugar Land $22.17 $16.38 $21.96 $16.58 $21.72 $15.93 $21.64 $16.32 -0.4% 2.5%Bellaire $24.65 $20.15 $24.28 $16.33 $23.13 $14.77 $23.03 $17.09 -0.4% 15.7%Post Oak Park $30.74 $17.84 $29.67 $15.84 $30.91 $15.77 $31.04 $15.86 0.4% 0.6%Galleria $30.52 $21.80 $26.90 $22.41 $28.01 $20.32 $26.74 $20.03 -4.6% -1.4%Riverway $27.11 $20.05 $25.01 $20.90 $25.47 $20.19 $25.19 $19.62 -1.1% -2.9%Richmond / Fountainview - $15.50 - $15.39 - $16.69 N/A $16.77 - 0.5%San Felipe / Voss $29.87 $20.65 $30.19 $19.36 $29.94 $19.45 $30.41 $19.24 1.6% -1.1%

West Loop $29.71 $20.02 $27.14 $19.35 $27.81 $18.78 $27.09 $18.97 -2.6% 1.0%Westchase $23.50 $19.51 $23.88 $19.26 $26.72 $18.89 $26.62 $19.35 -0.4% 2.4%

The Woodlands $23.69 $20.99 $22.49 $20.34 $22.76 $20.11 $23.11 $20.71 1.6% 3.0%Conroe - $18.38 - $14.57 - $14.91 N/A $17.10 - 14.7%

Woodlands / Conroe $23.69 $20.55 $22.49 $19.46 $22.76 $19.34 $23.11 $20.26 1.6% 4.8%

Houston Total: $26.96 $18.76 $25.44 $18.35 $25.77 $18.30 $25.87 $18.31 0.4% 0.1%

Note: Rents for properties using triple net terms have been grossed up to full service by applying operating expense data. Rents ref lect full service equivalent.Note: Due to small submarket sample sizes in some cases, particularly in Class A, rent increases and decreases may be magnif ied relative to other submarkets.

Source: Delta Associates analysis of CoStar data; March 2011.


Average Asking Rent ($'s/SF, GFS) At End Of:2010 12/10 - 3/112008 Q1 2011

% Change2009



OutlookTHE HOUSTON METRO INDUSTRIAL MARKET

MMarket Pauses in Q1

Net absorption of industrial space in the Houston metro totaled negative 360,000 SF in the 1st quarter of 2011, compared to positive 721,000 SF in the 4th quarter of 2010 and 4.3 million SF in all of 2010. Net absorption in SF:

Q1 2011 All of 2010 Warehouse/Dist.: (510,000) 3,679,000 Manufacturing: 134,000 (57,000) Flex/R&D: 16,000 706,000

Notable leases during the 1st quarter of 2011:

American Packing & Crating leased 140,782 SF at 404-900 N. Witter Street in the East Southeast Far submarket.

Palmer Logistics leased 135,500 SF at 13001 Bay Area Blvd. in the East Southeast Far submarket.

Max Movers renewed 103,800 SF at 1203-1221 N. Post Oak Rd. in the Northwest Near submarket.

Brook Furniture Rental leased 43,050 SF at 14900 Hempstead Hwy. in the Northwest Near submarket.

Supreme Electrical leased 37,000 SF at 1187 Brittmoore Rd. in the Northwest Far submarket.

Industrial Vacancy Rate Ticks Up; Still Among Lowest in Nation

The overall Houston metro area industrial vacancy rate edged up to 5.7% in the 1st quarter of 2011, from 5.6% at year-end 2010, but is down from 6.2% one year ago. The direct industrial vacancy rate is 5.5% in the 1st quarter of 2011, compared to 5.4% at year-end 2010 and 6.0% a year ago.

Vacancy by product type at the 1st quarter of 2011:

Direct Overall Warehouse/Dist.: 5.5% 5.7% Manufacturing: 2.7% 2.8% Flex/R&D: 9.7% 9.8%

Houston’s industrial vacancy rate will likely decline steadily in the period ahead, as demand for space increases in the face of a miniscule product pipeline. Vacancy will continue to decline until the development of new product escalates and catches up to demand. We project overall vacancy will reach 5% one year from now.

Why This Methodology Is the Best IndicatorOf Current Market Conditions

We include owner-occupied and single-tenant buildings in our inventory, vacancy, and absorption statistics. Doing so allows us to capture more market activity than many of our competitors, and to better correlate changes in the market with changes in employment. As single-tenant space does compete with multi-tenant space, we believe it is critical to understand all components of the market. We also include flex space in our industrial market analysis, and offer wider geographic coverage than some of our competitors. The result is that the inclusion of single-tenant and owner-occupied space, as well as flex space, tends to yield lower vacancy rates and higher absorption totals than our competitors’ results, but our coverage of the market is more comprehensive.


15

Outlook


CConstruction Pipeline: Shrinking

There is 571,000 SF of industrial space under construction in metro Houston as of the 1st quarter of 2011. This compares to 668,000 SF at year-end 2010 and 1.5 million SF a year ago. Space under construction today is 48% pre-leased, compared to 52% at year-end 2010 and 87% one year ago.

Industrial Asking Rents Retreat Modestly in Q1

Industrial asking rents declined modestly in the 1st quarter of 2011, as leasing activity in the warehouse/distribution market stalled over the winter.

Base rents are still under pressure, but a limited pipeline of new supply should start to support modest rent increases. We are still seeing free rent of 3-6 months, higher TI packages, and base rents that are below proforma. However, concessions are retreating across the Houston market.

Houston’s industrial asking rents will likely increase moderately in 2011, as demand increases – particularly in the distribution sector – and the vacancy rate continues to decline. Concessions likely will burn off during the year.

How the Multi-Tenant Market ComparesTo Our Market Coverage

Vacancy and absorption in the Houston metro area often are reported by brokerage firms on multi-tenant buildings only. We also include owner-occupied and single-tenant buildings, on the basis of immediate availability, in order to capture more market activity. We exclude government-owned space. As a point of comparison, below are data for the Houston multi-tenant industrial market:

Multi-Tenant Entire MarketInventory: 221.3 MSF 512.8 MSF Overall vac. (incl. sublet): 11.1% 5.7% Q1 2011 net absorption: (1,164,000) SF (360,000) SF



Outlook

Investment Sales: Rising Activity

We recorded the sale of 29 assets during the 1st quarter of 2011 in the Houston industrial market, including portfolio sales. Recorded sales volume remains relatively modest, at $74 million in the 1st quarter, although the market is picking up after just $124 million in sales during all of 2010. Of note, these totals only include transactions for which pricing information has been made public.

Among the most significant sales was the purchase by Cabot Properties of a Granite Properties industrial portfolio. The purchase by Cabot included 24 buildings spread among 11 assets. The 11 industrial assets comprise 1.2 million SF of space.

Cap rates for Class A industrial distribution space have dipped as low as 7.0-7.25%, while Class B industrial cap rates are in the 8% range. Industrial cap rates have declined recently based on the abundance of equity capital seeking industrial product, low interest rates, and the limited opportunities available in the market.

Investment sales volume should continue to rise in 2011 and beyond, as credit becomes more available and demand for this asset class increases. In particular, gradually rising consumer spending should lead to more demand for distribution space, attracting investor interest. Increased trade activity at the Port of Houston is helping to generate interest in Houston industrial assets.

METRO HOUSTON INDUSTRIAL MARKET OUTLOOK

The Houston metro industrial market will likely experience significantly stronger conditions as the year progresses, as economic growth picks up and the consumer sector expands. Vacancy will likely decline steadily during the year, as demand increases and the pipeline of new product remains limited. As a result, industrial rents will likely edge up, with concessions burning off, as market conditions quickly begin to turn in the landlord’s favor over the next 12-24 months.

Industrial submarkets likely to outperform in 2011, with declining vacancy and rising rents, include:

North Far Northwest Far Southwest Near


17

Outlook


SUMMARY OF INDUSTRIAL MARKET INDICATORS - ALL SPACEHOUSTON METRO AREA

2008 THROUGH 1ST QUARTER 2011

Total SF Avail. Vacancy SF UnderRentable SF Immediately Rate Constr. or

Submarket All Bldgs. 1/ All Bldgs. 2/ 2008 2009 2010 1st Q 2011 w/ Sublet Renovation 2008 2009 2010 1st Q 2011Central Business DistrictFlex/R & D 886,219 69,125 15.9% 13.9% 7.8% 7.8% 7.8% - (26,000) 13,000 45,000 - Manufacturing 4,933,227 261,461 1.7% 1.9% 5.6% 5.3% 5.3% - 78,000 (8,000) (184,000) 15,000 Warehouse/Distribution 29,871,212 1,613,045 4.5% 4.5% 5.2% 5.4% 5.4% - (284,000) (134,000) (209,000) (60,000)Total - Central Business District 35,690,658 1,943,632 4.4% 4.4% 5.3% 5.4% 5.4% - (232,000) (129,000) (348,000) (45,000)East-Southeast FarFlex/R & D 2,315,276 240,789 3.6% 17.8% 12.0% 10.4% 10.4% - 98,000 (4,000) 80,000 37,000Manufacturing 4,673,849 74,782 2.1% 4.0% 2.7% 1.6% 1.6% - (53,000) (50,000) 61,000 51,000 Warehouse/Distribution 40,658,144 4,757,003 13.3% 11.6% 11.4% 11.7% 11.8% - 3,489,000 2,053,000 (120,000) (116,000)Total - East-Southeast Far 47,647,269 5,072,573 12.0% 11.3% 10.6% 10.6% 10.7% - 3,534,000 1,999,000 21,000 (28,000)North FarFlex/R & D 3/ 7,470,032 791,823 12.5% 10.0% 10.9% 10.6% 11.0% 43,536 108,000 221,000 (197,000) 22,000Manufacturing 5,729,238 137,502 0.3% 1.0% 2.4% 2.4% 2.4% - 139,000 (27,000) (86,000) - Warehouse/Distribution 41,763,234 2,505,794 9.5% 9.2% 6.0% 6.0% 6.3% 77,010 2,088,000 613,000 1,163,000 41,000Total - North Far 54,962,504 3,435,119 9.1% 8.6% 6.3% 6.2% 6.5% 120,546 2,335,000 807,000 880,000 63,000North NearFlex/R & D 1,187,582 165,074 11.3% 12.2% 15.2% 13.9% 13.9% - (42,000) 24,000 (32,000) 15,000Manufacturing 2,626,374 23,637 11.1% 2.4% 3.1% 0.9% 0.9% - (69,000) 188,000 (19,000) 58,000 Warehouse/Distribution 14,833,737 697,186 5.0% 3.8% 4.1% 4.7% 4.7% 111,126 312,000 211,000 21,000 (89,000)Total - North Near 18,647,693 885,897 6.0% 4.0% 4.7% 4.8% 4.8% 111,126 201,000 423,000 (30,000) (16,000)Northeast FarFlex/R & D 96,952 2,036 2.9% 2.7% 2.7% 2.1% 2.1% - (6,000) - - 1,000 Manufacturing 196,600 - 0.0% 0.0% 0.0% 0.0% 0.0% - - - - - Warehouse/Distribution 1,109,830 - 0.0% 0.7% 0.3% 0.0% 0.0% - 5,000 (5,000) 4,000 3,000 Total - Northeast Far 1,403,382 2,036 0.7% 1.0% 0.4% 0.1% 0.1% - (1,000) (5,000) 4,000 4,000Northeast NearFlex/R & D 692,456 92,097 4.6% 0.5% 11.8% 13.3% 13.3% - 32,000 29,000 (78,000) (10,000) Manufacturing 5,937,172 178,115 0.7% 1.4% 4.9% 3.0% 3.0% - 299,000 (43,000) (141,000) 113,000Warehouse/Distribution 24,411,987 1,245,011 4.5% 2.0% 3.7% 5.1% 5.4% - 106,000 603,000 (173,000) (334,000)Total - Northeast Near 31,041,615 1,515,223 3.8% 1.9% 4.1% 4.9% 5.1% - 437,000 589,000 (392,000) (231,000)Northwest FarFlex/R & D 5,072,454 233,333 11.1% 13.8% 5.6% 4.6% 5.0% - (144,000) 3,000 566,000 51,000Manufacturing 6,256,764 250,271 3.8% 7.4% 4.2% 4.0% 4.0% - 123,000 (106,000) 299,000 13,000Warehouse/Distribution 45,176,618 2,258,831 3.8% 6.4% 5.1% 5.0% 5.1% 330,115 1,973,000 (7,000) 821,000 78,000Total - Northwest Far 56,505,836 2,742,434 4.6% 7.2% 5.0% 4.9% 5.0% 330,115 1,952,000 (110,000) 1,686,000 142,000Northwest NearFlex/R & D 11,504,223 1,230,952 10.5% 12.8% 10.5% 10.7% 10.8% - 159,000 (164,000) 297,000 (23,000) Manufacturing 9,025,427 261,737 1.0% 1.4% 1.7% 2.9% 2.9% - 20,000 21,000 (27,000) (108,000) Warehouse/Distribution 80,222,022 3,850,657 4.2% 5.3% 4.9% 4.8% 5.1% 9,039 412,000 (700,000) 320,000 80,000Total - Northwest Near 100,751,672 5,343,346 4.6% 5.7% 5.3% 5.3% 5.6% 9,039 591,000 (843,000) 590,000 (51,000)

See next page for balance of Houston Industrial Summary

Direct Vacancy Rateat End of: Net Absorption (SF)

Page 1 of 2

1st Quarter 20111st Quarter 2011



OutlookPage 2 of 2

(Cont'd)SUMMARY OF INDUSTRIAL MARKET INDICATORS - ALL SPACE


Total SF Avail. Vacancy SF UnderRentable SF Immediately Rate Constr. or

Submarket All Bldgs. 1/ All Bldgs. 2/ 2008 2009 2010 1st Q 2011 w/ Sublet Renovation 2008 2009 2010 1st Q 2011South FarFlex/R & D 1,709,126 188,004 18.0% 12.3% 11.0% 11.0% 11.0% - (52,000) 280,000 7,000 0Manufacturing 5,381,215 172,199 1.0% 2.1% 2.9% 3.2% 3.2% - 118,000 - (33,000) (16,000)Warehouse/Distribution 24,867,363 1,069,297 5.5% 4.4% 4.3% 4.3% 4.4% - (120,000) 226,000 33,000 - Total - South Far 31,957,704 1,429,499 5.1% 4.3% 4.4% 4.5% 4.6% - (54,000) 506,000 7,000 (16,000)South NearFlex/R & D 903,477 121,066 10.4% 7.8% 10.3% 13.4% 13.4% - 17,000 30,000 (25,000) (28,000) Manufacturing 1,503,143 57,119 5.3% 3.7% 3.8% 3.8% 3.8% - 10,000 15,000 (2,000) - Warehouse/Distribution 12,169,760 219,056 2.0% 3.8% 1.8% 1.8% 1.8% - 60,000 (220,000) 244,000 0Total - South Near 14,576,380 397,241 3.0% 4.1% 2.5% 2.7% 2.7% - 87,000 (175,000) 217,000 (28,000)Southeast NearFlex/R & D 544,967 113,898 14.5% 18.7% 21.3% 20.9% 20.9% - 11,000 (18,000) (16,000) 2,000 Manufacturing 6,986,955 13,974 0.5% 0.2% 0.2% 0.2% 1.1% - (35,000) 21,000 - - Warehouse/Distribution 29,507,769 708,186 2.8% 2.0% 2.7% 2.4% 2.5% - 100,000 175,000 (59,000) 89,000Total - Southeast Near 37,039,691 836,058 2.4% 1.8% 2.5% 2.3% 2.5% - 76,000 178,000 (75,000) 91,000Southwest FarFlex/R & D 1,759,804 124,946 26.2% 6.6% 7.9% 7.1% 7.1% - 88,000 222,000 (33,000) 14,000Manufacturing 1,229,734 47,960 6.6% 6.7% 3.8% 3.9% 3.9% - (60,000) 133,000 35,000 (1,000) Warehouse/Distribution 8,256,885 429,358 2.3% 5.8% 4.3% 5.2% 5.5% - 98,000 518,000 117,000 (56,000)Total - Southwest Far 11,246,423 602,264 6.0% 6.0% 4.8% 5.4% 5.6% - 126,000 873,000 119,000 (43,000)Southwest NearFlex/R & D 7,462,030 529,804 9.0% 7.6% 7.0% 7.1% 7.1% - 26,000 195,000 45,000 (7,000) Manufacturing 3,921,882 137,266 3.1% 4.9% 3.6% 3.5% 3.5% - (65,000) - 53,000 4,000Warehouse/Distribution 41,078,790 2,095,018 4.7% 7.1% 5.0% 5.1% 5.2% - 203,000 (574,000) 675,000 (32,000)Total - Southwest Near 52,462,702 2,762,088 5.3% 7.0% 5.2% 5.3% 5.3% - 164,000 (379,000) 773,000 (35,000)Sugar LandFlex/R & D 2,759,572 386,340 13.6% 13.6% 11.9% 14.0% 14.0% - 110,000 - 47,000 (58,000)Manufacturing 1,826,635 7,307 0.0% 0.0% 0.7% 0.4% 0.4% - - - (13,000) 5,000 Warehouse/Distribution 14,269,075 956,028 4.3% 4.6% 5.9% 6.7% 6.9% - 304,000 66,000 842,000 (114,000)Total - Sugar Land 18,855,282 1,349,675 5.4% 5.6% 6.3% 7.2% 7.3% - 414,000 66,000 876,000 (167,000)Total HoustonFlex/R & D 44,364,170 4,289,287 11.2% 11.2% 10.0% 9.7% 9.8% 43,536 379,000 831,000 706,000 16,000Manufacturing 60,228,215 1,623,329 1.9% 2.2% 2.9% 2.7% 2.8% - 505,000 144,000 (57,000) 134,000Warehouse/Distribution 408,196,426 22,404,470 5.4% 5.8% 5.3% 5.5% 5.7% 527,290 8,746,000 2,880,000 3,679,000 (510,000)Total - Houston 512,788,811 28,317,086 5.5% 5.8% 5.4% 5.5% 5.7% 570,826 9,630,000 3,855,000 4,328,000 (360,000)

Vacancy Rate with Sublet Space 5.7% 6.0% 5.6% 5.7%

1/ Does not include buildings under construction or buildings owned by the government.2/ Does not include sublet space.3/ Submarket space inventory/vacancy adjusted per changes in CoStar database.



1st Quarter 2011

Net Absorption (SF)Direct Vacancy Rate

1st Quarter 2011

at End of:


19

Outlook


10%

11%

12%

13%

14%

15%

16%

17%

18%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Vaca

ncy

Rat

e

Vacancy Rate TrendsHouston Metro Retail Market

2000 Through 2010

Source: O’Connor & Associates, Delta Associates; March 2011.Note: Data source has expanded its inventory and restated its vacancy rates.

14.8%

$1.61

$1.40

$1.50

$1.60

$1.70

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Aver

age

Ren

tal R

ate

(Per

SF,

Per

Mon

th)

Average Rental RateHouston Metro Retail Market

2000 Through 2010

Source: O’Connor & Associates, Delta Associates; March 2011.Note: Data source has expanded its inventory and restated its rental rates.

-8

-6

-4

-2

0

2

4

6

8

10

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*

Retail Job GrowthHouston Metro

1997 Through 2011

Source: Bureau of Labor Statistics, Delta Associates; March 2011. *12 months ending January.

THE HOUSTON METRO RETAIL MARKET

Retail Sector Improving

Metro Houston’s retail market experienced steady improvement in recent months, as the economy strengthened and job growth accelerated. The retail sector added 4,500 jobs over the past year in metro Houston, which likely indicates steady improvement forthcoming for this sector.

Retail Vacancy Declines

Houston’s retail vacancy rate declined to 14.8% at year-end 2010, from 15.4% at the end of the 3rd quarter. We expect that vacancy will decline modestly in 2011, as the consumer sector strengthens and businesses open more storefronts.

Retail Rents Edge Up

After bottoming out at $1.58/SF/month in the 3rd quarter of 2010, retail rents rebounded to $1.61/SF/month in the 4th quarter of 2010. Rents will likely experience modest appreciation in 2011, as consumer spending picks up and market conditions strengthen. Retail Job Growth Accelerating

The Retail sector gained 4,500 jobs in metro Houston over the 12-month period ending in January 2011 – a 1.7% increase. Subsectors that added jobs: motor vehicle parts, building materials, food and beverage stores, health and personal care, clothing and clothing accessories stores. Those that lost jobs: general merchandise stores and department stores. Retail employment should continue to increase as consumer spending rebounds in 2011.

Retail Spending

The most recent data from the Texas Comptroller’s Office show that retail sales through mid-year 2010 totaled $45.0 billion, which indicates that the total for the year will likely exceed $90 billion, given that 2nd half sales exceed 1st half sales. Houston had $89.7 billion in sales in 2009, compared to $106.7 billion in 2008.



Outlook

$55.3

$106.7

$89.7

$90.1

$50

$60

$70

$80

$90

$100

$110

2002 2003 2004 2005 2006 2007 2008 2009 2010*

Tota

l Gro

ss R

etai

l Sal

es(in

Bill

ions

of D

olla

rs)

Gross Retail SalesHouston Metro Area2002 Through 2010

Source: Texas Comptroller’s Office, Delta Associates; March 2011. *Mid-year total annualized.

© 2011. All rights reserved. You may neither copy nor disseminate this report. If quoted, proper attribution is required.

National Economy and Methodology

Please visit Transwestern.net for: Our national Economic Outlook Our methodology

Investment Sales Activity

We recorded little material sales activity in the Houston retail market in the 1st quarter of 2011. Retail investment sales totaled $820 million in the Houston metro area during 2010. This total includes the sale in July 2010 of Walton Street Capital’s 37.5% interest in the 2.3 million SF Houston Galleria to its partners, CalPERS and Simon Property Company. Real Capital Analytics reported a sale price of $524 million for the partial interest, with the trade resulting in a cap rate of 5.8%.

Retail Market Likely to Expand in Period Ahead

The Houston retail market will likely experience steady improvement in the period ahead, as job growth picks up and the consumer sector strengthens. As consumer confidence rises, buyers will return to the stores and a cycle of growth in the retail market will likely ensue over the next several years.

With the Houston metro area a national leader in job creation, we expect the Houston retail market to rebound faster than most other metro markets around the country.

Note on data contained herein Our inventory, vacancy, and absorption figures include owner-occupied and single-tenant buildings. We include these buildings to capture the entire market so that we may derive correlations between job growth and occupancy of inventory. Our reported vacancy rate is based on immediate availability. The vacancy rate for retail space is based on the total retail inventory minus space that is physically occupied.


21

Outlook


Delta Associates Delta Associates, the research affiliate of Transwestern, is a firm of experienced professionals offering valuation, consulting and data services to the commercial real estate industry for over 30 years. The firm’s practice is organized in four related areas:

1. Valuation services for partial interests in commercial real estate assets. 2. Consulting, research and advisory services for commercial real estate projects, including market studies, market

entry strategies, asset performance enhancement studies, pre-acquisition due diligence, and financial and fiscal impact analyses.

3. Distressed asset recovery services to include property performance analyses and enhancement studies, debt structuring evaluation and note valuations, portfolio assembly due diligence, valuations and litigation support.

4. Subscription data for selected metro regions for office, industrial, retail, condominium, and apartment markets. For further information about Delta Associates and to see all of our publications, please browse our web site at: DeltaAssociates.com.

Headquarters Gregory H. Leisch, CRE Chief Executive 500 Montgomery Street, Suite 600 Alexandria, VA 22314 703/836-5700; Fax: 703/836-5765 [email protected]

Transwestern Support Group Alexander (Sandy) Paul President, TSG 500 Montgomery Street, Suite 600 Alexandria, VA 22314 703/299-6373; Fax 703/836-5765 [email protected]

Consulting and Advisory Services David Weisel President, Consulting Division 500 Montgomery Street, Suite 600 Alexandria, VA 22314 703/535-3551; Fax: 703/836-5765 [email protected]

Cyber Contacts Website: DeltaAssociates.com

General eMailbox: [email protected]

Report Author: David Parham Report Editor: Scott Price

Transwestern With 1,680 team members in 28 markets across the U.S., Transwestern operates through six distinct functional lines of business – agency leasing, property and facility management, investment services, tenant advisory, development, and research. A diversified operating company, Transwestern is active in the real estate service, development and investment management businesses.

Our product specialties include office, industrial, retail, multifamily, and healthcare. In 2010, Transwestern oversaw the leasing and management of 1,216 properties, representing 255 million square feet - leased and managed combined.Within that same time period, the firm completed leasing, sales, and finance transactions totaling $4.3 billion.

Houston, Texas 1900 W. Loop SouthSuite 1300Houston, TX 77027Chip Clarke713.270.7700 [email protected]

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Transwestern Outlook is published quarterly by Transwestern and its research affiliate, Delta Associates. All information is from sources deemed reliable; however, no representation is made as to the accuracy thereof.

Sources: Baker Hughes, Brookings Institution, BLS, Census Bureau, CoStar, Forbes, George Mason University, Greater Houston Partnership, Houston Airport System, Houston Association of REALTORS, Houston Business Journal, Houston Chronicle,NAPM-Houston, O’Connor & Associates, Real Capital Analytics, Texas Comptroller.

1Q 2011 Houston Outlook - Transwestern · Houston’s Residential Real Estate market is recovering...

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