2016 STATE OF THE INDUSTRY

Houston Commercial Real Estate

To Our Readers, Commercial real estate is such a dynamic industry in Houston and reflects our local

economy to the rest of the nation. It is an important part of our practice and as business

partners to our clients, we strive to stay informed about market conditions. One way

we accomplish that is to bring together industry leaders who share their perspectives

on anticipated 2016 activity in the office, retail, industrial and mixed-use sectors—

as a glimpse of Houston’s overall business environment.

We delved into the office market ourselves this year to evaluate new space options

that will meet the current and future needs of our firm. In January, we are moving

into new space at One Grove Street, an office building in the Kirby Grove mixed-used

development by Midway.

No doubt that understanding market trends supported the process of investigating

space options for our firm. But even if you are not relocating, having a pulse on Houston’s

real estate market provides a strong foundation for strategic business decisions.

I hope you will enjoy reading the insights from Houston real estate industry leaders and

our own commercial real estate practice team. Feel free to contact us for more information

about our real estate capabilities – and come visit us soon at our new offices.

Sincerely,

CHRIS HANSLIK

Firm Chairman

CONTACT

4265 San Felipe, Suite 1200

Houston, Texas 77027

713.850.7766

Visit boyarmiller.com

TABLE OF CONTENTS

03 : State of the Industry

04 : Expert Insights

Real Estate Market Overview

Retail, Office & Mixed-Use Development

Industrial Market

07 : Attorney Insights

Today’s Commercial Real Estate Landscape:

Planning for Uncertainty

10 : Practice Leaders

LEARN MORE ABOUT THE FORUM

MULTI - FAMILYMIXED -USE

PAGE 03

2016 Houston Commercial Real Estate Market

Optimism with a pause.

INDUSTRIAL

Urbanization of

Houston emerging

Extremely

healthy market

+ Petrochemical drives activity

+ Panama Canal opens growth

vs.cost & convenience experience

RETAILOFFICE

94.6%

Occupancy increased to >3

under way

million sq ft

Transaction Volumes Plateau

5,000 units

planned in central

business district

40% of space

traded hands

over the last

4 5.2 million sq ft in 2016

Amenities + Connectivity

Drives value

Sublease activity is strong

yrs

WHAT ARE WE SEEING?

• IT’S A GOOD SCENARIO

Our CRE market needs to cool off and let other markets

catch up. So the drop in oil prices gives us a little pause,

and that’s okay; it comes at a good time. We don’t see

a negative scenario, but rather a plateau and that is a

reasonably healthy environment.

• INVESTORS STILL LOVE HOUSTON

Foreign capital continues to flow into Houston, and

Canada has always been one of the largest investors.

New investors are engaging Houston with fervor

including Israel and Asia, particularly South Korea.

• JOB GROWTH SLOWS; POPULATION GROWTH

REMAINS STEADY

We expect to add 33,000 jobs in 2015. For the next year,

job growth will be a little higher toward the back half of

the year. We continue to add 100,000 new residents

each year.

• PETROCHEMICAL INDUSTRY ROCKS

There are more manufacturing jobs here than anywhere

in the country—mostly in the petrochemical industry

and the manufacturing of steel drill pipe. We are not

losing jobs in petrochemical, we are shifting them to

the east part of town.

Real Estate Market Overview

“ I have a sanguine market outlook; on balance we’re in a good place.” JIMMY HINTON, Managing Director, Research – HFF

PAGE 04

Jimmy Hinton works with HFF’s executive management team to assist in investor

relations and to inform both HFF staff and firm clients with in-depth analysis of

economic, property and capital market trends. He is also responsible for providing

extensive market reports, client presentations and deal-specific analysis for debt

placement and investment sales assignments. Jimmy’s responsibilities include

substantial interaction with pension funds, life insurance companies, regional

and CMBS lenders, REITs, foreign investors and private equity funds.

Expert Insights

WHAT ARE WE SEEING?

• TAKING A HEALTHY PAUSE

A year and a half ago, the real estate market was

growing at an unsustainable rapid pace. This pause

in the market is a positive and comes at a good time.

• INVESTING IN PEOPLE

Office space used to be viewed as a cost with the

CFO in meetings keeping an eye on the budget. Now,

the HR director is in the room and office space is being

considered an investment in hiring and retaining the

best people.

• TWO CATEGORIES OF RETAIL

Successful retail is based either on cost and conve-

nience, or on creating an experience. The retail market

is strong and occupancy has increased to 94.6 percent.

• MIXED USE ADDS VALUE

There are several mixed-use developments coming on

market including the River Oaks District, Generation

Park and Hughes Landing in The Woodlands. These

are attractive because they have desirable amenities

and connectivity.

Retail, Office & Mixed-Use Development

“ Houston is on the front end of its urbanization.” JONATHAN BRINSDEN, CEO – Midway

Jonathan Brinsden guides Midway’s overall business strategy and operations.

He joined Midway’s development team in 2001, was named COO in 2008 and

CEO in 2013. He is a member of the Urban Land Institute Global Board of Directors,

Board of Trustees and the Governance Committee, and past Chair of ULI Houston.

Jonathan holds a Master of Science in Land and Real Estate Development,

a Bachelor of Science in Construction Science and a Bachelor of Science in

Environmental Design, all from Texas A&M University.

EXPERT INSIGHTS : PAGE 05

Industrial Market

“ It is great to say that the industrial market in Houston is extremely healthy.” TREY ODOM, Founder and CEO – AVERA Companies

EXPERT INSIGHTS : PAGE 06

Trey Odom is the Founder and CEO of AVERA Companies, a fully integrated,

partnership-driven, real estate development, construction and investment firm.

AVERA is one of the most active firms in the United States, leading the industry

in office and industrial development. Trey has over 28 years of experience in

the commercial real estate industry, beginning with a successful career at CBRE

where he specialized in the industrial real estate market, concentrating on

industrial facility sales, leasing and National client representation.

WHAT ARE WE SEEING?

• SINCE 2002, THE INDUSTRIAL MARKET HAS GOTTEN

STRONGER WITH LARGER DEALS

Houston is in a wonderful spot right now with no

anticipated changes the next couple of years.

While deal size has dropped a little, there are still

decent size projects under way.

• PANAMA CANAL EXPANSION PROJECT FUELS GROWTH

The Panama Canal’s Third Set of Locks Project will

double the capacity of the canal next year by creating

a new lane of traffic and allowing more and larger ships

to service the Port of Houston. In preparation, the Port

of Houston has expanded its container ship capacity

by 37.5 percent – and all of this propels industrial growth

for the city.

• VACANCY DROPS

This time last year the city’s industrial vacancy was

5.4 percent and now it has dropped to 4.7 percent.

New development is down so while rent prices are

stable right now, we may see an increase.

• CAPITAL RATES STAY IN THE 5.0-5.5 RANGE

Capital in industrial real estate remains under-

allocated to core industrial areas. We will see the

year-end momentum continue through 2016 with

a bullish outlook ahead.

Houston has benefited from five years of robust

growth, and while there is optimism that the

current economic climate will not reach the

same depths as earlier busts, it is clear that

the keyword for the near-future is uncertainty.

How can those in the real estate industry adjust

to this “new normal?” We have identified four

issues – which span the phases of development

from planning to completion – to keep in mind

when planning for uncertainty.

FLEXIBILITY IN CHANGING DEVELOPMENT PLANS

A developer who plans ahead understands the need

to adjust the uses of a project as market forces shift.

What once was intended to be a luxury apartment tower

that seemed like a home run opportunity in 2014 may

now be best suited for a mix of mid-rise apartments and

medical offices.

Ideally, a developer will have a flexible investor partner who

shares the same goals for the project, but to ensure such

flexibility, developers should seek the ability to revise devel-

opment plans and to require a timely response from an

investor partner. A developer will also want the opportunity

to dissolve the venture if an investor is not willing to change

the proposed development (or for a variety of other reasons).

In such an event, the developer should seek the right to

have the first opportunity to purchase the underlying prop-

erty and should be careful to provide adequate time to find

a replacement investor to provide the capital necessary to

make the acquisition.

PAGE 07

Attorney Insights

Today’s Commercial Real Estate Landscape: Planning for Uncertainty

BLAKE ROYAL, Shareholder, Business Group

HILARY TYSON, Counsel, Business Group

FORCE MAJEURE

Delays may fall under the definition of a force majeure event,

and that may relieve a party of its obligation to perform

certain obligations within the specific time frame required

under the terms of an agreement. Due to unexpected

constricting of the availability of labor force, construction

materials and supplies, it is important for parties involved in

the development of a real estate project consider options

for the terms of force majeure provisions in an agreement.

Force majeure events typically will be defined to include

a laundry list of events that are outside of the control of

the party whose duty it is to perform. These most typically

include acts of God, acts of war or civil disturbances,

epidemics, governmental action or inaction, fire, earth-

quakes, storms, or unavailability of labor, materials,

power or communication. The list of matters that qualify

as force majeure events may be qualified generally to

matters outside of the control (or reasonable control)

of the party required to perform, or can be expanded

to include other matters that may be within some control

of the performing party (i.e. disputes with contractors.)

In drafting force majeure provisions in an agreement,

the parties should examine the terms by which a party

may be entitled to an extension of a deadline for perfor-

mance due to force majeure events. The parties should

consider whether an excuse of force majeure delay

should be specified as permitted in the definition of

specific deadlines in the contract, or whether it is more

appropriate to apply the excuse of force majeure delay

to all deadlines in the agreement, with carve outs for

specific deadlines that will not be extended due to force

majeure events (i.e. the time period in which a party is

required to make a payment.)

DELAY DAMAGES

Once a project is under development, the timing of the

completion is typically critical to maximizing the project’s

overall success. In this regard, it is important to be clear

on deadlines and other benchmarks for completion of

certain phases of a project.

Liquidated damages or other damage provisions may

be incorporated into an agreement to provide restitution

of a party injured by the delays, and/or incentive for a

party to meet the timing requirements of an agreement.

In the event of a contractor delay, the parties should

consider whether it is appropriate to include provisions

for liquidated damages that reduce the contract price,

because damages an owner may have as a result of

a delay in completion of a project in many cases are

difficult to ascertain.

Although a construction contract may be drafted to provide

that no damages may be claimed by the contractor for

construction delays caused by the owner, some courts

have concluded that these no-damages-for-delay provi-

sions will not shield an owner from damages related to the

deliberate and wrongful interference with a contractors

work. In this regard, an owner should consider whether

the contractor may have a counter argument or a claim

for damages caused by the owner’s interference with

performance of the contractor’s work before attempting

to enforce delay damages.

ATTORNEY INSIGHTS : PAGE 08

One may also want to consider whether the party obligated

to perform has any duty to exercise due diligence or take

reasonable steps to avoid or overcome the force majeure

event before claiming a force majeure delay. An agree-

ment may also require the party obligated to perform

to provide written notice of a force majeure event and

require additional notice, upon the conclusion of such

force majeure event, as a condition to claiming an exten-

sion due to force majeure delay and/or cap the aggre-

gate number of days of force majeure delay that may

be claimed by a party with respect to a specific deadline.

CONTROLLING THE SPACE

We have discussed potential ways to mitigate exposure

for projects in the pre-development and development

phases, but uncertain economic times obviously also

effect established developments.

When tenants face economic difficulties, many seek

to reduce one of their largest overhead expenses – the

rent – by assigning or subleasing all or a portion of their

premises. When negotiating leases, landlords should

ensure that they have the ability to approve potential

assignees and subtenants and explicitly require that any

potential assignee or subtenant provide the same infor-

mation a landlord would utilize in vetting a new tenant.

Landlords should require broad approval rights, particu-

larly with regard to the credit-worthiness of a potential

replacement tenant. Conversely, tenants want flexibility;

most often in the form of having the ability to assign the

lease to a successor through an acquisition or merger

without having to obtain the approval of the landlord.

Tenants should also seek to limit the landlord’s approval

rights to “reasonable” objections and attempt to limit

financial objections to assignees with lower financial

capabilities than the current tenant.

ATTORNEY INSIGHTS : PAGE 09

“ A developer who plans ahead understands the need to adjust the uses of a project as market forces shift.”

BILL BOYAR

Founding Shareholder, Bus iness Group

Bill’s practice focuses on representing parties involved in

the acquisition, disposition, capitalization and financing

of assets and businesses on a national and international

level. He has served as lead counsel on numerous com-

plex, multi-party acquisitions and project financings,

with significant experience in corporate finance, private

equity, mergers and acquisitions, real estate and hospitality.

PAGE 10

Practice Leaders

CASSIE STINSON

Shareholder, Bus iness Group

Cassie Stinson’s practice is focused on commercial real

estate and finance, public/private projects, business

transactions and public law, with a particular emphasis

on complex projects and multi-party transactions. She

handles real estate acquisitions and dispositions; leasing;

project structuring, development, design and construc-

tion; formation of business and non-profit entities, corpo-

rate governance, and business contracts; and foreign

investment in US real estate and businesses.

LEE COLLINS

Shareholder, Bus iness Group

The goal of Lee Collins’ practice is to provide innovative

and value-driven solutions to the litigation-related problems

facing the client. This objective has been successfully

achieved through his direct and open communication with

the client, an early and immediate assessment of the issues,

strategic evaluation of the problem and its solution, and

aggressive representation.

PRACTICE LEADERS : PAGE 11

HILARY TYSON

Counsel, Bus iness Group

Hilary Tyson’s practice focuses on commercial real estate

and business transactions. She joined the firm and returned

to Houston in June 2015 after practicing in the Dallas area

for more than 11 years. She represents developers, home-

builders and equity investors in a wide range of real estate

related transactions including land acquisition and disposi-

tions, residential subdivision development, financing, entity

formation, and office development and leasing.

BLAKE ROYAL

Shareholder, Bus iness Group

Blake’s practice includes acquisitions and dispositions of

equity and assets, including recapitalization transactions

with venture capital and private equity funds; entity and

capital formation, including private placements, in domes-

tic and international jurisdictions; and general contractual

drafting and negotiation.