texas office, q4 2015 new supply and demand set a high bar ... · dallas/ft. worth : strong rent...

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New supply and demand set a high bar for the Lone Star in 2015

Texas Office, Q4 2015

Q4 2015 CBRE Research © 2016 CBRE, Inc. | 1

Vacancy Rate 16.8%

Net Absorption 3,162,051 SF

Under Construction 16,920,242 SF

Completions 5,765,638 SF

Texas office aggregates the Austin, Dallas/Ft. Worth, Houston and San Antonio markets. Arrows indicate change from previous quarter.

Deliveries Outpace Absorption Texas was busy filling space in 2015, but even busier installing curtain wall, as annual net absorption for the year yielded more than 13 million sq. ft. amidst an annual delivery total of just under 20 million sq. ft. across the state’s major office markets. Over half of those ribbon-cutting ceremonies took place in Houston, where the remaining pipeline is much more muted compared to 12 months ago. Announcements for corporate relocations and campus projects throughout the state should continue to drive absorption throughout 2016. Office-Using Job Growth The three primary job sectors that comprise office-using employment all posted job gains for the 12 months ending December 2015, for an annual growth rate of 2.0%, or 50,700 jobs added. Professional and Business Services, which includes industries such as legal, accounting, architecture, engineering, computer design services and advertising, is the driving force behind this expansion, adding not only the highest number of jobs (44,800) but growing at the fastest rate (2.8%).

Flight of the Texas Crane Construction underway tapered down throughout 2015 and ended the year with just under 17 million sq. ft. in progress; the annual delivery total, however, yielded almost 20 million sq. ft. for 2015 – more than double the 8.9 million sq. ft. introduced to the Texas markets in 2014. Houston and Dallas account for 44% and 40% of the 16.9 million sq. ft. underway across the major metros although the pipeline for both of those markets has contracted over the last 12 months, particularly in Houston. Preleasing in primary markets hovered slightly above 50%, while ranging between 18%-25% in non-primary markets.

Source: Bureau of Labor Statistics, Seasonally Adjusted, February 2016.

Figure 2: Year-over-Year Jobs Added (000’s), December 2015

Figure 1: 2015 Texas Annual Deliveries & Absorption by Market

Source: CBRE Research, Q4 2015.

44.80

3.6 2.3

Professional andBusiness Services

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Financial Activities

50.7 K Jobs

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Houston

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Figure 4: Metropolitan Office Employment

For the 68th consecutive month, Texas recorded positive annualized growth for total nonfarm employment,

yielding 1.4% year-over-year, or about 166,900 new jobs, for the year ending December 2015. Leisure and Hospitality was the fastest-growing employment sector statewide for this year-over-year period, expanding by

4.6%, or 55,300 jobs in the last 12 months, whereas Education and Healthcare was the numeric leader in job

growth, at 68,300 jobs added. Nationally, nonfarm employment grew by 1.9%, or about 2.7 million new jobs, for the same time period. At a market level, the four major office hubs in Texas all reported positive growth for the

12 months ending December2015. Austin experienced the most significant gains, at 3.8%, followed by San

Antonio at 3.5%, Dallas/Fort Worth at 2.9% and Houston at 0.8%.

Office employment, as shown in Figure 3, exceeded the overall nonfarm growth rate for the state and was

positive for all major office metro areas with the exception of Houston, which contracted by half a percentage point year-over-year. In line with the nonfarm gains mentioned above, Austin led the other metros in year-over-

year office growth, at 6.7%, due to accelerated activity in the Professional and Business Services sector, which

had the highest growth of any other office industry across all Texas markets.

Figure 3: Office Employment Breakdown, December 2015 (000’s)

Industry Austin-

Round Rock Dallas-Fort Worth-

Arlington

Houston-The Woodlands-Sugar

Land

San Antonio- New Braunfels

Texas

Information 26.3 82.0 34.0 22.4 207.8

Y-o-Y Growth (%) 1.9 0.6 4.3 2.3 1.8

Financial Activities 54.3 279.8 144.1 87.4 715.5

Y-o-Y Growth (%) 3.2 2.8 (3.5) 5.2 0.3

Professional and Business Services 165.4 578.9 470.8 131.1 1,620.9

Y-o-Y Growth (%) 8.7 4.5 0.1 6.2 2.8

Total Office 246.0 940.7 648.9 240.9 2,544.2

Y-o-Y Growth (%) 6.7 3.6 (0.5) 5.5 2.0

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ABSORPTION AND VACANCY AUSTIN: The Capital City of Texas posted a robust 557,940 sq. ft. of absorption in Q4 2015, yielding a record 2.7 million sq. ft. for the year. About 75% of the quarterly demand was concentrated within the Northwest and Southwest submarkets. Vacancy remains tight across the metro and finished the quarter in the single digits, at 8.2%. The tightest vacancy of the market is confined within the CBD where vacancy is 6.5% with virtually no available big blocks of contiguous space. DALLAS/FT. WORTH: For the 22nd consecutive quarter, the Metroplex posted positive net absorption. Following a six-year high for single quarterly absorption in Q3 2015, DFW closed out 2015 with 605,714 sq. ft. for the quarter and a record-breaking 5.2 million sq. ft. for the year. Vacancy remained flat over the quarter at 17.7%, a pre-recessionary level for North Texas and a 70 basis point decline from year-end 2014. HOUSTON: Houston maintained its positive absorption streak of 20 quarters with 1.2 million sq. ft. of net absorption posted in Q4 2015, resulting in 4.8 million sq. ft. for the year. Similar to last quarter, the vast majority of the Q4 2015 absorption was driven by two oil and gas firms occupying nearly one million sq. ft. of space within single-tenant completions. Outside of single-tenant deliveries and build-to-suits, Houston’s competitive leasing market contracted by roughly one million sq. ft. this year. SAN ANTONIO: While annual absorption reached its highest post-recession level in Q4 2015, it was just 51,175 sq. ft. shy of breaking its all-time record set back in 2007. In total, 927,391 sq. ft. of absorption was posted in 2015, with vacancy flat year-over-year due to speculative space in new deliveries that was incorporated into existing inventory throughout the year.


TEXAS OFFICE

Figure 6: Vacancy Rates

Figure 5: Net Absorption

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Figure 7: Overall Office Asking Rate, Gross, Annual

AUSTIN: The metro-wide average asking rental rate in Austin reached an all-time high over the quarter, increasing by $0.28 to close out the year at $31.81 per sq. ft. Austin still retains the highest office rental rate average in Texas and has risen by about 28% since Q3 2011. In line with its tight vacancy, the CBD is the scene for prime rental rates, with an average asking rate topping $40.00 per sq. ft. With some of these downtown Class A properties leasing at a triple net rate, the Austin CBD is now seeing cases of $60.00 per sq. ft. full service rents once operating expenses are taken into account. DALLAS/FT. WORTH: Strong rent growth preceded the DFW office leasing market as it entered into 2016. The overall lease rate increased from $21.22 per sq. ft. to $21.90 per sq. ft. during Q4 2015 and is up 5.9% year-over-year. Class A quoted rents followed a similar trajectory, rising from $26.44to $26.50 per sq. ft. , yet are down marginally by 0.4% for the year. Uptown and Preston Center, the metro’s two most expensive office submarkets, are now commanding $38.80 per sq. ft. and $36.86 per sq. ft. in Class A rents, respectively. Additionally, many newer office projects are quoting triple net rates, which can easily factor in an additional $15 per sq. ft.

HOUSTON: Despite escalating rent concessions, the overall gross asking rate average for the Bayou City continued to rise over the quarter, increasing by $0.93 per sq. ft. to $28.67 per sq. ft., representing a significant growth of 11.2% year-over-year. Class A rents increased to $37.73 per sq. ft. over the quarter, while Class B dropped to $23.98 per sq. ft. The geographic pockets that experienced the most considerable rental rate hikes include office buildings within the Far West, Greenway Plaza and Katy Freeway, where the average asking rate rose by no less than 20% on a year-over-year basis. SAN ANTONIO: Rental rate growth in San Antonio was a prominent trend in 2015. The market average asking rate closed out the year at $21.20 per sq. ft., surpassing its previous record high from the prior quarter despite the slight drop in the Class A average. Year-over-year, the market-wide average is up by 4.2%. Rates within the CBD drove the overall increase in rents once again as the downtown quoted average rose by $0.55 per sq. ft. over the quarter, finishing the year at $20.86 per sq. ft. Class B and C ended the year with averages of $20.50 per sq. ft. and $17.30 per sq. ft., respectively.


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TEXAS OFFICE

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CONSTRUCTION AUSTIN: New office demand was a prominent theme in Austin in 2015. The 657,307 sq. ft. of new deliveries for the quarter pushed the total near 2.75 million sq. ft. for the year, the highest annual completion volume the market has seen since 2008. A little less than two million sq. ft. remained in the pipeline at the close of Q4 2015, with nearly half of that confined within the CBD. As of year-end, the pre-leased rate for projects under construction was about 25%. DALLAS/FT. WORTH: The five projects that delivered in Q4 2015 totaled 1.3 million sq. ft. with about three-fourths of that space already preleased. For the year, DFW has added 5.2 million sq. ft. to its inventory which mirrors the amount of absorption posted in 2015. The elevated amount of new construction does not appear to be decelerating any time soon as another 1.3 million sq. ft. of projects broke ground in Q4 2015, bringing the total pipeline to 6.8 million sq. ft. with nearly half (46.5%) pre-committed. Far North Dallas is still the primary hotbed for development activity, with three million sq. ft. of projects underway, including Liberty Mutual’s million-sq.-ft. campus in West Plano.

HOUSTON: The office pipeline in Houston continued to cool over the quarter, but the market still leads the state in office square footage underway with 7.4 million sq. ft. under construction among 22 office projects. The 52.4% pre-leased rate of these developments was unwavering even after 3.7 million sq. ft. of projects rolled off the pipeline in Q4 2015. Combined with the three previous quarters, there were 11.3 million sq. ft. of office deliveries for 2015, the highest level of new construction the market has seen since 1983. Most of this activity was concentrated within the CBD, West Loop/Galleria and West Houston submarkets. SAN ANTONIO: 2015 marked a particularly strong year for new construction in San Antonio. After seeing 129,000 sq. ft. come online in Q4 2015, the annual total amounted to over 650,000 sq. ft., with another 769,458 sq. ft. of projects underway. The Landmark I development broke ground over the quarter as expected, which will add 165,000 sq. ft. of Class A space to the Northwest submarket. This area is one of three submarkets in San Antonio where office construction activity was taking place as of year-end 2015.

Figure 8: Construction

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DFW HoustonSource: CBRE Research, Q4 2015.

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Figure 10: Top Sale Transactions

Market Transaction Size

(SF) Buyer Address/Building Name Submarket

AUSTIN 911,579 Accesso Partners 7700 Parmer Far Northwest

DALLAS/FT. WORTH 1,530,957 TriGate Capital Comerica Bank Tower Dallas CBD

HOUSTON 550,000 Prime Asset Management Houston Chronicle Building CBD

SAN ANTONIO 196,348 Hartman One Technology Center, LLC 7411 John Smith Northwest

Figure 9: Top Lease Transactions


(SF) Tenant Address/Building Name Submarket

AUSTIN 93,973 Natera 13011 McCallen Pass East

DALLAS/FT. WORTH 50,000 Weaver Field St & Cedar Springs Rd Uptown/Turtle Creek

HOUSTON 524,000 Apache Corporation Post Oak Central West Loop/Galleria

SAN ANTONIO 51,298 Time Warner Cable 10130 Hwy 151 Far West



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Figure 11: Capital Markets and Office Sales

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Source: Real Capital Analytics , CBRE Research, Q4 2015.

Texas Sales Activity: Capital markets throughout the state closed out Q4 2015 with the highest sales volume of the year; more than 17.1 million sq. ft. of transactions trading hands from October through December, an increase from 14.3 million sq. ft. last quarter. Investment activity picked up in non-primary markets over the quarter, totaling 3.5 million sq. ft. in Q4 2015, more than double the square footage from last quarter and 20% of the quarterly total across all major markets. More than one-fourth of the total square footage transacted occurred within a CBD, also a higher share than last quarter. Note: Non-primary market data might occasionally account for locations outside of CBRE market boundaries such as Corpus Christi and Harlingen, TX.

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Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

CONTACTS

Robert C. Kramp Director of Research & Analysis [email protected] E. Michelle Miller Research Operations Manager [email protected] Lauren Paris Senior Research Analyst, DFW +1 214 979 6587 [email protected] Patrick Loewe Research Coordinator, Austin +1 512 499 4939 [email protected] Julia Burman Research Coordinator, DFW +1 214 979 6530 [email protected] Cammie Moise Senior Research Analyst, Houston +1 713 881 0947 [email protected] Nicholas Ianetta Research Coordinator, San Antonio +1 210 253 6019 [email protected] To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/researchgateway.

TEXAS OFFICE

CBRE OFFICES Austin 100 Congress, Suite 500 Austin, TX 78701 Dallas 2100 McKinney, Suite 700 Dallas, TX 75201

Houston 2800 Post Oak, Suite 2300 Houston, TX 77056 San Antonio 200 Concord Plaza, Suite 800 San Antonio, TX 78216

Texas totals, including vacancy, represent aggregate data from Austin, Dallas/Fort Worth, Houston, and San Antonio markets.

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Four new Empire State Buildings in 2015 — in Texas



Vacancy Rate 16.5%

Net Absorption 3,830,119 SF

Under Construction 20,355,318 SF

Completions 3,072,077 SF

Texas office aggregates the Austin, Dallas/Ft. Worth, Houston and San Antonio markets. Arrows indicate change from previous quarter.

Absorption Reaches New Heights In Q3 2015 alone, the four major metro areas of Texas posted over 3.8 million sq. ft. in net absorption, resulting in more than 10 million sq. ft. year-to-date, which is the equivalent in size to almost four Empire State Buildings. In comparison to 12 months ago, the year-to-date total for 2014 was 8.3 million sq. ft. Many of the Texas office markets have seen record levels of absorption by some measure in 2015 and are monitoring related fundamentals to gauge what might be in store for the coming year. Office-Using Job Growth The three primary job sectors that comprise office-using employment have all posted job gains for the 12 months ending September 2015, for an annual growth rate of 1.9%, or 46,200 jobs added. Professional and Business Services, which includes industries such as legal, accounting, architecture, engineering, computer design services and advertising, contributed to the vast majority of these job gains, taking into account many large relocations and expansions throughout the state.

Construction Across the State Current construction underway has tapered down throughout 2015, yet still exceeds the 20 million sq. ft. mark. Houston still makes up more than half of the quad-market total pipeline, but is down significantly from this time last year, from 17.3 million sq. ft. to 10.7 million sq. ft. Across all markets in Q3 2015, new groundbreakings did not compensate for deliveries rolling off the pipeline. Collectively, new completions totaled just over three million sq. ft., a 20% drop from last quarter, but a 73% spike from Q3 2014.

Source: Bureau of Labor Statistics, Seasonally Adjusted, November 2015.

Figure 2: Year-over-Year Jobs Added (000’s), September 2015

Figure 1: Texas Office Absorption Year-to-Date by Market


4.6 MSF

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Figure 4: Metropolitan Office Employment

For the 65th consecutive month, Texas recorded positive annualized growth for total nonfarm employment,

yielding 1.9% year-over-year, or about 225,000 new jobs, for September 2015. Nationally, nonfarm employment grew by 2.0%, or 2.8 million new jobs, for the same time period. At a market level, the four major office hubs in

Texas all reported positive growth for the 12 months ending September 2015. San Antonio experienced the most

significant gains, at 3.7%, followed by Dallas/Fort Worth at 3.2%, Austin at 3.0% and Houston at 1.2%. Leisure and Hospitality was the fastest-growing employment sector statewide for this year-over-year period, expanding

by 5.4%, or 65,200 jobs in the last 12 months, whereas Education and Healthcare was the numeric leader in job

growth, at just under 80,000 jobs added.

Office employment, as shown in Figure 3, exceeded the overall nonfarm growth rate for the state and was

positive across the board for all major office metro areas. In line with the nonfarm gains mentioned above, San Antonio led the other metros in year-over-year office growth, at 6.1%, due to accelerated activity in the

Professional and Business Services sector, which had the highest growth of any other office industry across all

markets. Austin was another metro with annual office growth eclipsing 5%, followed by DFW at 3.9% and Houston at 0.1%.

Figure 3: Office Employment Breakdown, September 2015 (000’s)

Industry Austin-

Round Rock Dallas-Fort Worth-

Arlington

Houston-The Woodlands-Sugar

Land

San Antonio- New Braunfels

Texas

Information 26.2 82.9 34.7 22.4 208.3

Y-o-Y Growth (%) 3.4 1.0 6.4 2.8 2.5


Y-o-Y Growth (%) 2.4 3.5 (3.3) 6.2 0.3

Professional and Business Services 160.7 565.9 471.7 129.4 1,596.1

Y-o-Y Growth (%) 6.6 4.5 0.7 6.7 2.5

Total Office 240.5 925.0 650.3 238.4 2,510.6

Y-o-Y Growth (%) 5.3 3.9 0.1 6.1 1.9

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ABSORPTION AND VACANCY AUSTIN: The Capital City of Texas posted its highest single quarter of absorption in almost three years, recording 649,339 sq. ft. for the quarter and 1.5 million sq. ft. year-to-date. After two consecutive quarters of rising vacancy, Q3 2015 witnessed total vacancy compression of 100 basis points, closing the quarter at 10.9% and falling below 11% for the second time in CBRE market history. DALLAS/FT. WORTH: For the 21st consecutive quarter, the Metroplex posted positive net absorption. Q3 2015 marked the largest yield of net absorption for a single quarter in DFW in over six years, breaking last quarter’s record. Year-to-date, the 4.6 million sq. ft. of market-wide absorption has already surpassed the entire annual total for 2014. Additionally, vacancy for the quarter compressed even further to 17.7% – the first time the market has seen sub-18% vacancy since 2008. HOUSTON: Houston absorption totaled 1.5 million sq. ft. in Q3 2015, slightly higher than the previous quarter, bringing the year-to-date yield to 3.6 million sq. ft. The bulk of current quarter absorption stems from several large oil and gas occupancies in build-to-suits and single tenant deliveries. In turn, vacancy dipped by 20 basis points to close Q3 2015 at 13.2%, the first decrease of 2015 as sublease space has expanded considerably throughout the year. SAN ANTONIO: Net absorption in the Alamo City is approaching a record high for 2015. The year-to-date net absorption of 848,610 sq. ft. is only 129,000 sq. ft. shy of meeting the annual record high set in 2007. Despite posting 210,974 sq. ft. for Q3 2015, vacancy remained flat at 15.4% due to vacant deliveries, but is still the lowest level the area has seen since 2007.


TEXAS OFFICE



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2014 YTD Q3 2015Source: CBRE Research, Q3 2015.

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TEXAS OFFICE

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Figure 7: Overall Office Asking Rate, Gross, Annual

AUSTIN: The overall average asking rental rate in Austin rebounded over the quarter, increasing by $0.20 to close out Q3 2015 at $31.53 per sq. ft. Austin still retains the highest office rental rate average in Texas and has risen by 21% since Q3 2011. Class A rates have shown consistently prominent growth throughout this time period, with Class B following suit with a notable spike between year-end 2014 and Q3 2015. The CBD is home to the highest rates within the metro, with the average rising $0.24 since Q2 2015 and topping $40.00 per sq. ft. Suburban rates closed the quarter at $29.61 per sq. ft. after increasing by $0.91 per sq. ft. in a single quarter. DALLAS/FT. WORTH: DFW rent growth has maintained its momentum despite a recoiling of Class A rents over the quarter. The overall lease rate increased to $21.22 per sq. ft. in Q3 2015 and is up 4% year-over-year. After spiking by $2.00 per sq. ft. last quarter, the average Class A rent retracted back to $26.44 per sq. ft. likely due to prime space taken off the market. Submarkets like Uptown, Las Colinas and Far North Dallas all continue to be strong contributors to overall rental rate growth in North Texas. Once expenses are factored in, rents for some of the newer, high-profile available space in Uptown are pushing $50.00 per sq. ft., an unprecedented price point for the market.

HOUSTON: The overall gross asking rate average for the Bayou City continued to rise over the quarter, increasing by $0.17 per sq. ft. to $27.74 per sq. ft. This represents a 6.3% growth rate year-over-year. Despite the escalation in rents, landlords are becoming more aggressive by offering additional concessions as leasing activity has seen a measurable slowdown, concurrent with an increasing supply. Class A rents experienced a more pronounced quarterly increase, rising by $0.26 per sq. ft. to land at $37.07 per sq. ft. at the close of September. Pinpointing this growth by submarket, office buildings along the FM 1960/Highway 249 Corridor, Westchase and Southwest Freeway displayed the most considerable percentage hike in rates over the quarter, all rising by at least 2.0% since Q2 2015. SAN ANTONIO: Rental rate growth slowed somewhat in Q3 2015, but was still enough to push the overall average asking rate over the $21.00 sq. ft. for the first time in CBRE history, finishing the quarter at $21.09 per sq. ft. Similarly, the Class A average rate eclipsed the $26.00 per sq. ft. mark after increasing by $0.31 per sq. ft. over the quarter and closing out Q3 2015 at $26.04 per sq. ft. Class B and Class C both rose by $0.20 per sq. ft. and $0.18 per sq. ft., respectively. The CBD was the most significant rent growth driver for the quarter after experiencing quarterly rental rate growth of 1.7% from Q2 2015.


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TEXAS OFFICE

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CONSTRUCTION AUSTIN: The Austin market reported 339,890 sq. ft. among two new deliveries for the quarter, surpassing two million sq. ft. of new product coming online so far this year. This is the highest amount of completions introduced to the market in a given year since 2008, 2.8 million sq. ft. of new product was added to the total office inventory. Deliveries for Q3 2015 were 28% preleased at time of completion with at least 94,000 sq. ft. of actual move-ins scheduled by the end of the year. DALLAS/FT. WORTH: New completions for Q3 2015 yielded just under two million sq. ft. among 13 projects with a combined preleasing rate of 66.5%. Aggregated with the previous two quarters, DFW has added 3.9 million sq. ft. to its inventory in 2015. The increase in new completions did not slow down the pace of new starts, as 11 projects slated for 2.4 million sq. ft. broke ground over the quarter. As of Q3 2015, the DFW pipeline had 29 projects underway which will total 6.8 million sq. ft. when completed. Preleasing rose slightly from 50% to 54.3%. Far North Dallas remains the primary submarket hub for new construction, accounting for over half of the market’s pipeline now that Liberty Mutual’s one-million sq. ft. build-to-suit is in progress.

HOUSTON: The office pipeline in Houston has dialed back in recent quarters, but the market still leads the state in office square footage under construction. In Q3 2015, that figure totaled 10.7 million sq. ft. among 32 buildings with 52.4% of that future space pre-leased. Out of these developments, 13 projects are speculative and 9.2% preleased at the close of September. The CBD, Greenway Plaza, West Loop/Galleria and West Houston are the primary driving submarkets of the metro’s construction activity. Q3 2015 recorded 581,250 sq. ft. of completions, which brings the year-to-date total to five million sq. ft. SAN ANTONIO: In Q3 2015, two new deliveries came online within the San Antonio market, totaling 160,000 sq. ft. with 17% preleased. For the year, more than 530,000 sq. ft. of new office product has hit the market, with another 733,458 sq. ft. underway and at least 165,000 sq. ft. set to break ground before year-end. The projects under construction fall within three submarkets: North Central, Far North Central and Northwest. It was also announced over the quarter that world-renowned architecure firm Pelli Clarke Pelli has been selected to design the new Frost Bank Tower within the CBD, which is set to begin construction in fall 2016. The project will be the first downtown office tower for San Antonio since 1989. Figure 8: Construction

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DFW HoustonSource: CBRE Research, Q3 2015.

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TEXAS OFFICE



(SF) Buyer Address/Building Name Submarket

AUSTIN 366,638

(Two Buildings) Deutsche/Tier Reit

11800 Domain Blvd 11501 Alterra Pkwy

Northwest

DALLAS/FT. WORTH 1,431,770 CBRE Global Investors Galleria Towers Far North Dallas

HOUSTON 428,385 Lincoln Property Galleria Place I & II West Loop/Galleria

SAN ANTONIO 205,251

(Two Buildings) KBS Reit III, Inc 17806 & 17802 W I-10 Northwest



(SF) Tenant Address/Building Name Submarket

AUSTIN 99,047 Logitech Barton Skyway Southwest

DALLAS/FT. WORTH 232,000 Geico Insurance 2280 N Greenville Ave Richardson/Plano

HOUSTON 179,028 Texas Children’s Health Plan 6330 West Loop South West Loop/Galleria

SAN ANTONIO 45,137 Accenture 10931 Laureate Dr Northwest



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Figure 11: Capital Markets and Office Sales

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Sales Volume (Millions SF)

Source: Real Capital Analytics , CBRE Research, Q3 2015.

Texas Sales Activity: The capital markets landscape experienced higher activity from Q2 2015 to Q3 2015 in terms of sales volume; more than 14.3 million sq. ft. of transactions trading hands from July through September, an increase from 12.5 million sq. ft. last quarter. More square footage changed hands in primary markets than the combined total of Q2 2015, with about 12.7 million sq. ft. originating out of DFW and Houston in Q3 2015. Investment activity slowed significantly in non-primary markets over the quarter, totaling 1.6 million sq. ft. in Q3 2015 compared to 4.8 million sq. ft. in Q2 2015. More than 18% of the total square footage transacted over the quarter occurred within a CBD. Note: Non-primary market data might occasionally account for locations outside of CBRE market boundaries such as Corpus Christi and Harlingen, TX.

MARKETVIEW


CONTACTS

Robert C. Kramp Director of Research & Analysis [email protected] E. Michelle Miller Research Operations Manager [email protected] Lauren Paris Senior Research Analyst, DFW +1 214 979 6587 [email protected] Mark Rodgers Research Coordinator, Austin +1 512 499 4939 [email protected] Julia Burman Research Coordinator, DFW +1 214 979 6530 [email protected] Cammie Moise Senior Research Analyst, Houston +1 713 881 0947 [email protected] Nicholas Ianetta Research Coordinator, San Antonio +1 210 253 6019 [email protected] To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/researchgateway.

TEXAS OFFICE

CBRE OFFICES Austin 100 Congress, Suite 500 Austin, TX 78701 Dallas 2100 McKinney, Suite 700 Dallas, TX 75201

Houston 2800 Post Oak, Suite 2300 Houston, TX 77056 San Antonio 200 Concord Plaza, Suite 800 San Antonio, TX 78216

Texas totals, including vacancy, represent aggregate data from Austin, Dallas/Fort Worth, Houston, and San Antonio markets.

MARKETVIEW

Positive net absorption sustained; new completion activity accelerates



Vacancy Rate 15.2%

Texas Office aggregates the Austin, Dallas/Ft. Worth, Houston and San Antonio markets. Arrows indicate change from previous quarter



Net Absorption 2.7 MSF

Avg. Asking Rate $24.33 Per Sq. Ft.

Completions 4.7 MSF

• The aggregate office vacancy for the major Texas markets rose over Q1 2015, increasing by 40 basis points (bps) since Q4 2014, although not all markets witnessed upward movement in vacancy.

• Accelerated new completion activity coupled with slower construction starts caused the construction pipeline to dip this quarter, with about 23 million sq. ft. of active projects in Q1 2015 vs. the 29 million sq. ft. at the end of 2014.

• Total net absorption for Q1 2015 yielded approximately 2.7 million sq. ft., slightly higher than the amount of net absorption posted in Q4 2014 among the four major Texas office markets.

• The state unemployment rate dropped from the previous quarter, at 4.3% in February 2015 and is

down from 5.7% in February 2014. At 150 bps lower than the U.S., the Texas unemployment rate has been below the national rate for 74 consecutive months.

• In March, Texas was awarded another Governor's Cup for 2014 based on total project activity for the year. Texas was the #1 ranking state in the country with 689 projects, exceeding its top ranking of 657 projects in 2013.

• Year-over-year sales volume among the major Texas office markets yielded approximately $2.3 billion in Q1 2015, about 45% higher than transaction volume in Q1 2014. The combined market average for price per sq. ft. also increased throughout Q1 2015, along with a downward shift in cap rates.

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MARKETVIEW


TEXAS OFFICE

Figure 2: Comparative Unemployment

Source: Bureau of Labor Statistics, Non-Seasonally Adjusted Annual Rate, April 2015.

The Texas office market closed out Q1 2015 with mixed signals in terms of overall fundamentals, yet continued to add jobs despite sustained lows in oil prices. Its central location, robust population growth, skilled and diverse workforce, low taxes and pro-business environment have been a consistent boon for the office market. The state continues to experience healthy employment growth and is a vital component of the nation's growth, as the state accounted for nearly one-fifth of the country's payroll gains over the last year and is home to 52 Fortune 500 headquarters. The Texas unemployment rate is another barometer of its strength as a labor market as it has outperformed the national level for 74 consecutive months. ECONOMIC CONDITIONS / DEMOGRAPHICS

The Texas unemployment rate fell from 4.6% in Q4 2014 to 4.3% in February and is down from 5.7% 12 months ago. The state unemployment rate is also 150 bps below the national rate in of 5.8% as of February 2015. In terms of jobs added, the seasonally adjusted year-over-year job growth rate for the state was 3.2% through February 2015, which equates to 366,200 nonagricultural jobs over the 12-month period, resulting in a total employment of nearly 11.8 million. The

construction sector posted the highest percentage growth out of the major industries in Texas, with 7.1%

year-over-year growth and 44,800 jobs added for the 12 months ending February 2015. Companies that fall within the Trade, Transportation & Utilities category reported 88,200 jobs added for this same time period, the highest volume of new jobs for any major industry, followed by Professional & Business Services with 63,600 jobs added. Over the past decade, the number of Texas residents has increased by nearly 4.3 million residents and recent studies suggest this fast-paced growth to be a long-term trend for the state. A new report released by the Office of the State Demographer projects Texas to double in size by 2050 (based on the 2010 Census), yielding a population of 54.4 million by 2050 if the migration patterns of 2000-2010 continue throughout that timeframe. Forbes recently featured all four Texas major markets among the top 20 fastest-growing large metro areas in the country, with Houston as the fastest-growing metro in the nation. Texas is also the only state in the U.S. that has three cities of over one million people (Houston, Dallas and San Antonio). With Houston’s energy hub, the critical mass of corporate headquarters in Dallas, San Antonio’s diverse economy and rich culture, and Austin’s notoriety as one of the nation’s strongest high-tech centers, each metro area contributes to the state's industry diversity in a unique way.

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Figure 3: Industry Employment Breakdown (000’s)

Industry Austin Dallas

Fort Worth Houston San Antonio Texas

Mining, Logging & Constr. 50.7 201.4 319.8 57.1 990.3

Manufacturing 58.1 262.6 254.8 45.7 883.9

Trade, Trans. & Utilities 159.9 695.7 602.1 165.1 2,373.3

Information 25.6 81.8 33.2 21.6 205.8


Prof. & Bus. Services 148.7 547.0 466.2 125.7 1,579.2

Educ. & Health Services 109.4 411.6 361.5 148.2 1,559.2

Leisure & Hosp. Services 107.2 334.9 290.4 116.4 1,223.1

Other Services 40.2 115.3 103.6 34.8 413.1

Government 173.2 411.6 386.1 165.7 1,837.3

Total Nonfarm Employment 925.6 3,333.3 2,965.7 964.8 11,778.6


Source: Bureau of Labor Statistics, April 2015.

Market

Net Rentable

Area (SF)

Sublease Availability

(SF)

Total Availability

(SF)

Total Vacancy

Rate (%)

Net Absorption

(SF)

Asking Rates Construction

Average Annual ($/SF)

Delivered Buildings

(SF)

Under Construction

(SF)

Total Class A Class B

Austin 43,665,210 564,845 6,533,950 11.5 442,682 $31.66 $36.27 $24.48 881,095 288,552

Dallas/Ft. Worth 218,268,879 6,322,725 51,810,944 18.3 1,216,398 $20.70 $27.00 $18.53 1,533,210 6,340,914

Houston 201,947,638 5,109,546 30,520,137 12.6 577,700 $27.17 $37.27 $23.01 2,090,305 15,894,915

San Antonio 27,343,961 393,111 5,465,913 15.5 426,409 $20.67 $25.12 $20.27 160,500 746,977

Figure 4: Texas Market Snapshot

MARKETVIEW

VACANCY

Unlike Q4 2014, the aggregate vacancy for the major Texas office markets rose in Q1 2015, increasing 40 bps from 14.8% to 15.2% quarter-over-quarter. The year-over-year variance in vacancy is also 40 bps, with Q1 2014 as the lower of the two periods, as the metric has fluctuated throughout the last four quarters. Since mid-2011, the combined, weighted vacancy for the four markets has dropped by 410 bps, buoyed by more than 38 million sq. ft. of positive net absorption during that timeframe. Austin, which had the highest vacancy of the four major markets in 2009, now has the lowest after falling from its peak of 24.9% to now sit at 11.5%. LEASE RATES

Despite the uptick in vacancy, the quad-market average asking lease rate rose throughout Q1 2015 as well. The weighted average for quoted lease rates in Texas increased from $24.09 per sq. ft. in Q4 2014 to $24.33 per sq. ft. on a gross basis in Q1 2015. Year-over-year rental rate growth as of Q1 2015 was 4.2% for the total market average, with Class A rates increasing at an even faster pace for the same time period, at 7.3%. From an individual market perspective, Austin has witnessed the highest rental rate growth, at 10.7% year-over-year, followed by Houston at 8.5%. DELIVERED CONSTRUCTION

New completions in Q1 2015 totaled about half of the amount of deliveries in the previous quarter, posting 4.7 million sq. ft. compared to 9.4 million sq. ft. at year-end 2014. The Houston market continues to account for the majority of this activity, although this proportion declined from 62% to 45% over the quarter. Of the 2.1 million sq. ft. of new construction in Houston, 53% was pre-leased at time of delivery. The office pipeline for Texas also declined in Q1 2015, falling from 29.3 million sq. ft. in Q4 2014 to now sit at 23.2 million sq. ft., with a pre-committed rate of 65%. Q1 2015 CBRE Research © 2015 CBRE, Inc. | 4

TEXAS OFFICE


Figure 6: Asking Rates, Gross Avg. Annual



Figure 7: Delivered Construction


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TEXAS OFFICE



(SF) Tenant Address Submarket

Austin 247,000 Multiple 11044 Research Blvd Northwest

Dallas/Ft. Worth 238,051 Libitzky Property Companies Canal Centre Las Colinas

Houston 797,360 Neutrality Partners 1301 Fannin CBD

San Antonio 120,147 CPA 17 - Global LLC 20880 Stone Oak Pky* Far North Central




Austin 203,750 Indeed 6500 N.Capital of Texas Hwy Northwest

Dallas/Ft. Worth 119,611 NEC Corporation Royal Ridge V Las Colinas

Houston 191,893 Direct Energy* 12 Greenway Plaza Greenway Plaza

San Antonio 120,147 iHeart Comunications 20880 Stone Oak Pky** Far North Central



*Renewal ** Sale/Leaseback

*Sale/Leaseback

Figure 8: Average Sale Price Figure 9: Sales Volume

CAPITAL MARKETS

Sales volume for office assets throughout the four major Texas office markets totaled approximately $2.3 billion among 93 properties for Q1 2015, about 45% higher than the transaction volume of Q1 2014, according to data from Real Capital Analytics (RCA). The 12-month trailing price per sq. ft. averaged $208, a 7% increase from the prior trailing period ending in Q1 2014, accompanied by falling cap rates, with Q1 2015 averages ranging from 6.5% to 7.4% across the key Texas office markets. For Q1 2015, Houston had the highest sale price per sq. ft. among the major Texas office markets, at $392 per sq. ft., while Dallas/Fort Worth continued to lead the state in sales volume for Q1 2015, at nearly $4.3 billion. Pricing and cap rate figures are based on well-qualified deals that have been confirmed, approximated or assumed by local professionals and gathered by RCA.

Source: Real Capital Analytics, Q1 2015. Source: Real Capital Analytics, Q1 2015.

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MARKETVIEW


CONTACTS

Lynn Cirillo Lauren Paris Patrick Loewe Research Operations Manager Senior Research Analyst Research Coordinator, Austin +1 713 577 1771 +1 214 979 6587 +1 512 499 4939 [email protected] [email protected] [email protected]

Angie Hamilton Nick Ianetta Research Analyst, Houston Research Coordinator, San Antonio +1 713 881 0960 +1 210 253 6019 [email protected] [email protected] CBRE OFFICES

Austin Dallas Houston Downtown 100 Congress, Suite 500 2100 McKinney, Suite 700 700 Louisiana, Suite 700 Austin, TX 78701 Dallas, TX 75201 Houston, TX 77002 Houston Galleria San Antonio 2800 Post Oak, Suite 2300 200 Concord Plaza, Suite 800 Houston, TX 77056 San Antonio, TX 78216

TEXAS OFFICE

MARKETVIEW

Texas office vacancy continues to fall despite rise in new completions



Vacancy Rate 14.8%

*Arrows indicate change from previous quarter. Figure 1: Net Absorption


Net Absorption 2.6 MSF

Avg. Asking Rate 24.09 $/SF

Completions 2.6 MSF

• Overall office vacancy in Texas continued to decline

throughout Q4 2014, albeit marginally, falling by 10 basis points (bps) since Q3 2014. Year-over-year, the collective vacancy for the state is down by 20 bps despite adding more than 2.8 million sq. ft. in inventory in 2014.

• Completion activity picked up over the quarter, while the collective under construction pipeline for Texas simultaneously expanded; the Q4 2014 benchmarks for these metrics are 143.3% and 41.7% higher, respectively, for 2014.

• Total net absorption for the quarter yielded 2.6 million sq. ft., contributing to an annual total of over 10 million sq. ft. for the four major Texas office markets.

• The state unemployment rate dropped from the previous quarter, at 4.6% in November, and is down from 5.8% in November 2013. At 90 bps lower than the United States, the Texas unemployment rate has been equal to or below the national rate for 95 consecutive months.

• The Federal Reserve projects 2.2% job growth for Texas in 2015, which equates to an additional 235,000 to 295,000 jobs throughout the state.

• The November 2014 edition of the Moody's Précis® U.S. State report ranks Texas as the #1 state in the country for vitality and employment growth from 2013-2018. The Professional Services sector, an office-using industry, is also expected to grow at an above-average rate in 2015.

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TEXAS OFFICE

Figure 2: Comparative Unemployment

Source: Bureau of Labor Statistics, Non-Seasonally Adjusted Annual Rate, January 2015.

The Texas office market closed out 2014 in a favorable position as the regional economy continues to grow. Its central location, robust population growth, skilled and diverse workforce, low taxes and pro-business environment have been a consistent boon for the office market. The state continues to experience healthy employment growth and is a vital component of the nation's growth, as the state accounted for nearly one-fifth of the country's payroll gains over the last year and is home to 52 Fortune 500 headquarters. The Texas unemployment rate is another barometer of its strength as a labor market as it has either met or outperformed the national level for 95 consecutive months. As a result of these indicators, the major metropolitan areas of Austin, Dallas/Fort Worth, Houston and San Antonio sustained improving fundamentals throughout Q4 2014. ECONOMIC CONDITIONS / DEMOGRAPHICS

The Texas unemployment rate fell from 5.3% in Q3 2014 to 4.6% in November, and is down from 5.8% 12 months ago. The state unemployment rate is also 90 bps below the national rate in November, at 5.5%. In terms of jobs added, the seasonally adjusted year-over-year job growth rate for the

state was 3.9% in November, which equates to 441,200 nonagricultural jobs over the past year, for total employment of over 11.7 million at the close of November 2014. The major office-using industry of Professional & Business Services continued to post considerable growth for the same time period, at 4.5%, adding the largest number of jobs out of any other sector for the 12 months ending November 2014. The Mining & Logging supersector grew at a rate of 10.2% for this time period, outpacing all other Texas industries. Over the past decade, the state’s population has increased by nearly 4.3 million and is projected to house as many as 55.2 million residents by 2050, if migration patterns continue according to a 2013 study conducted by the Office of the State Demographer. Forbes recently featured all four Texas major markets among the top 20 fastest-growing large metro areas in the country, with Houston as the fastest-growing metro in the nation. Texas is also the only state in the U.S. that has three cities of over one million people (Houston, Dallas and San Antonio). With Houston’s energy hub, the critical mass of corporate headquarters in Dallas, San Antonio’s diverse economy and rich culture, and Austin’s notoriety as one of the nation’s strongest high-tech centers, each metro area contributes to the state's industry diversity in a unique way.

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TEXAS OFFICE


Industry Austin Dallas

Fort Worth Houston San Antonio Texas


Manufacturing 53.8 256.3 262.1 46.2 891.9

Transp., Whs. & Utilities 15.3 163.0 142.2 24.5 585.1

Information 24.5 79.8 33.8 21.6 211.3


Prof. & Bus. Services 145.0 526.5 449.0 116.6 1545.5

Retail Trade 99.8 327.6 291.6 104.2 1269.3

Wholesale Trade 47.1 182.8 155.2 33.0 507.8

Educ. & Health Services 102.1 398.7 363.5 142.8 1563.0

Leisure & Hosp. Services 109.4 330.8 290.2 122.4 1207.3

Other Services 40.2 118.7 103.5 35.0 406.2

Government 171.9 405.8 383.1 161.6 1854.2


Total Nonfarm Employment 906.4 3240.4 2942.8 940.1 11742.2


Source: Bureau of Labor Statistics, January 2015.

Market

Net Rentable

Area (SF)

Sublease Availability

(SF)

Total Availability

(SF)

Total Vacancy

Rate (%)

Net Absorption

(SF)

Asking Rates Construction

Average Annual ($/SF)

Delivered Buildings

(SF)

Under Construction

(SF)

Total Class A Class B

Austin 42,784,115 650,863 6,025,311 10.6 318,635 29.56 34.78 22.89 143,331 3,569,216

Dallas/Ft. Worth 218,591,600 5,492,392 51,480,659 18.4 343,496 20.68 26.61 18.41 1,035,636 7,154,214

Houston 199,151,013 4,150,037 27,232,558 11.6 1,688,407 25.79 36.13 23.02 1,179,041 17,602,665

San Antonio 27,009,525 434,994 5,483,256 15.9 201,343 20.34 24.66 20.12 197,015 960,080

Figure 4: Texas Market Snapshot

MARKETVIEW

VACANCY

The collective office vacancy rate for the major Texas markets continued to decline in Q4 2014, dropping slightly by 10 bps since last quarter, and 20 bps since Q4 2013 despite adding 2.8 million sq. ft. in deliveries over the last 12 months. Since the beginning of 2012, the aggregate vacancy for the four markets has dropped by 370 bps, buoyed by more than 25 million sq. ft. of positive net absorption during that timeframe. Austin, which had the highest vacancy of the four major markets in 2009, now has the lowest after falling from its peak of 24.9% to now sit at 10.6%. LEASE RATES

The aggregate average for quoted lease rates in Texas witnessed yet another uptick in Q4 2014, averaging $24.09 per sq. ft. on a gross basis and up by $0.13 per sq. ft. from the previous quarter. The year-over-year pace of this rental rate growth has picked up significantly from 1.1% in Q3 2014 to 4.3% in Q4 2014. From an individual market perspective, Austin has witnessed the highest rental rate growth, at 5.0% year-over-year, followed by Houston at 4.8%, Dallas/Fort Worth at 4.2% and San Antonio at 2.6%. Over the quarter, the Class A average rose more prominently than the overall quad-market average, increasing by 4.8% to $30.55 per sq. ft. by year-end. DELIVERED CONSTRUCTION

Deliveries in Q4 2014 exceeded the previous quarter, posting 2.6 million sq. ft. at year-end and more than 9.4 million sq. ft. for 2014. The Houston market accounted for about 62% of the new delivery activity in 2014, with 53%, or 622,776 sq. ft., already pre-leased in that market. Under construction activity, also led by Houston, remained relatively flat in Q4 2014 with 29.3 million sq. ft. in the pipeline, which is about 42% more square footage than at this point last year. As of year-end, more than 17 million sq. ft. of the pipeline, or about 60%, was pre-committed. Q4 2014 CBRE Research © 2015 CBRE, Inc. | 4

TEXAS OFFICE


Figure 6: Asking Rates, Gross Avg. Annual



Figure 7: Delivered Construction


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AUSTIN 90,267 Scher Investments 3600 B N Capital Of Texas

Hwy Southwest

DALLAS/FT. FORTH 465.703 KBS Realty 14901, 5000 Quorum Dr. &

15301 Spectrum Dr. Far North Dallas

HOUSTON 449,087 Stream Realty Partners/DRA Advisors 600 Jefferson CBD

SAN ANTONIO 533,465 Clarion Partners / Griffin Partners* 300 Convent St CBD




AUSTIN 137,615 Bazaarvoice 10901 Stonelake Blvd. Northwest

DALLAS/FT. FORTH 157,568 EnLink One Art Plaza Dallas CBD

HOUSTON 230,000 Stewart Information Services* 1990 Post Oak West Loop

SAN ANTONIO 42,262 IBEX 12449 Silicon Dr Northwest



*Renewal

*Bought by two investment companies

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Figure 8: Average Sale Price Figure 9: Sales Volume

CAPITAL MARKETS

Office sales volume throughout Texas totaled approximately $7.9 billion among 225 properties for the trailing 12-months through Q4 2014, yet this amount is down by 28% compared to the prior 12-month period, according to data from Real Capital Analytics (RCA). In Q4 2014 alone, however, volume was up by 15% from the previous quarter, from about $2.2 billion to $2.5 billion. The 12-month trailing price per sq. ft. averaged $186, a 1% increase from last year, accompanied by falling cap rates, which averaged 7.0% and down by 5 bps from the prior 12 months. At year-end, Austin had the highest average sale price per sq. ft. among the major Texas office markets, at $259 per sq. ft., with Dallas/Fort Worth leading the state in sales volume for Q4 2014, at nearly $3.5 billion. Pricing and cap rate figures are based on well-qualified deals that have been confirmed, approximated or assumed by local professionals and gathered by RCA.

Source: Real Capital Analytics, Q4 2014. Source: Real Capital Analytics, Q4 2014.

MARKETVIEW


CONTACTS

Lynn Cirillo Lauren Paris Patrick Loewe Research Operations Manager Senior Research Analyst Research Coordinator, Austin +1 713 577 1771 +1 214 979 6587 +1 512 499 4939 [email protected] [email protected] [email protected]

Angie Hamilton Nick Ianetta Research Analyst, Houston Research Coordinator, San Antonio +1 713 881 0960 +1 210 253 6019 [email protected] [email protected] CBRE OFFICES

Austin Dallas Houston Downtown 100 Congress, Suite 500 2100 McKinney, Suite 700 700 Louisiana, Suite 700 Austin, TX 78701 Dallas, TX 75201 Houston, TX 77002 Houston Galleria San Antonio 2800 Post Oak, Suite 2300 200 Concord Plaza, Suite 800 Houston, TX 77056 San Antonio, TX 78216

TEXAS OFFICE

Texas Office MarketView

CBRE Global Research and Consulting Q2 2014

Texas continues to prove through its commercial office market that it is a major contender and highly sought after destination for residents and businesses alike. As a result of its central location, robust population growth, skilled and diverse workforce, low taxes and pro-business environment, Texas consistently wins business. The state continues to experience healthy employment growth and is a vital component of the nation’s post-recession recovery, as the state has accounted for one-third of the country’s payroll gains over the past decade. More recently, Texas gained 383,100 jobs throughout the 12 months ending May 2014 and is projected to grow at a 2.8% annual rate throughout 2014 by Moody’s Analytics, translating to the third fastest job growth in the nation. As a result of these indicators, the major metropolitan areas of Austin, Dallas/Fort Worth, Houston and San Antonio continued to witness positive net absorption, rising lease rates and increasing construction momentum throughout the state.

As a key component to the state’s economic strength, the housing market continues to improve throughout 2014. According to the Real Estate Center at Texas A&M University, the year-to-date benchmark through May 2014 has surpassed the same metric for 2013 at $1.8 billion with the number of sales edging out last year’s count by only 168 homes. At just under $250,000, the average home price for May of 2014 is 6.9% higher on a year-over-year basis. Months inventory of existing homes edged up to 3.7, the highest point since October 2013, although still low considering the market equilibrium is closer to six months supply. Texas also continues to show improving foreclosure metrics. In Texas, one in every 2,753 housing units is in foreclosure, less than half the frequency as the U.S. rate of one in every 1,228 according to data from RealtyTrac. Both bank-owned and auction foreclosure filings throughout the state

were down year-over-year by 41.0% and 11.8%, respectively, while pre-foreclosures remained flat.

As the state’s population approaches 27 million people, Texas holds its notoriety for being fast-growing and has dominated the nation in population growth. Over the past decade, the number of Texas residents has increased by nearly 4.3 million and is projected to house as many as 55.2 million residents by 2050, if migration patterns continue according to a 2013 study conducted by the Office of the State Demographer. Recent Census Bureau data revealed that among cities with a population of 50,000 residents or more, seven of the top 15 fastest growing cities are in Texas. Three of these cities are located within 30 miles of Austin, including the fastest growing city in the country, San Marcos. Frisco, a part of the Dallas/Fort Worth metro area, took the #2 spot. As the only state in the U.S. that has three cities of over one million people (Houston, Dallas and San Antonio), each metro area contributes to the state’s industry diversity in a unique way. Houston is a global hub for the thriving energy industry with one of the busiest ports in the country and a significant biomedical research and aerospace presence. Dallas’s central location makes it a key financial and logistics hub, while also having strong concentrations in telecommunications and manufacturing. San Antonio holds much of its economic base in the tourism, health, and biotech industries, but has also experienced strong and growing activity related to exploration and production in the Eagle Ford shale. Austin is a hub for high-tech activity, including semiconductor manufacturing and software.

Figure 1: Quick Stats (as compared to Q1 2014)

AustinDallas

Ft. Worth HoustonSan

Antonio

Net Absorption $ $ # $

Asking Rates # # # #

Under Construction # $ # #

Vacancy # # # $

Hot Topics• For the 12 months ending May 2014, Texas has

added nearly 400,000 net jobs, making it the largest year-over-year job increase in Texas in almost 17 years. This change equates to a growth rate of 3.4%, the fastest pace for the state since November 2012.

• Average asking rental rates rose once again for all four major markets, increasing at a 5.7% paceyear-over-year, for an average of $23.70 in the state.

• Despite an uptick in deliveries, the collective under construction pipeline for Texas continued to expand, now totaling over 24 million sq. ft. ofactive projects. This is more than double the amount of construction activity one year ago.

• The state unemployment rate continued its descent to 5.1% at the close of May 2014, its lowest point in nearly six years. This rate is 120basis points (bps) lower than the national average.

• Sales volume throughout Texas remained flat, increasing by 1% statewide year-over-year and totaling more than $10.2 billion for the past 12 months, based on trailing data from Real CapitalAnalytics.

• Texas took the top rank for location desirability among job seekers according to a July 2014 report from Indeed Hiring Lab. Additionally, thestate also led the nation for job searches within the oil and mining industries.

• According to A Texas Eye on the Dollars, an estimated $21 billion in federal stimulus money isbeing distributed throughout the state, with the Health & Human Services and Education categories each accounting for more than one-third of the total funds awarded.

TEXAS LOGGED THE HIGHEST AMOUNT OF YEAR-OVER-YEAR EMPLOYMENT GROWTH IN NEARLY 17 YEARS AT THE CLOSE OF MAY 2014, AN INDICATION OF CONTINUED OFFICE EXPANSION FOR THE STATE.

Figure 2: Net Absorption, Sq. Ft.

Directional arrows based on change from the previous quarter. Data reflects market totals.


CONSTRUCTION24,125,983 Sq. Ft.

DELIVERIES2,842,243 Sq. Ft.

TRADE VOLUME1% Y-o-Y

UNEMPLOYMENT5.1%

JOB GROWTH383,100 Y-o-Y

VACANCY16.0%

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Figure 3: Market Snapshot

ECONOMIC CONDITIONS/DEMOGRAPHICSThe statewide unemployment rate for Texas edged down once again for both the quarter and the year, dropping from 6.4%, to 5.1% over the last 12 months. This is the lowest rate for the state in nearly six years as it continues to outperform the nation. On a year-over-year basis, the seasonally adjusted annual job growth rate for the state was 3.4%, which equates to 383,100 nonagricultural jobs over the past year, for total employment of over 11.5 million at the close of May 2014. Similar to last quarter, the Mining and Logging supersector outpaced all other major industries in year-over-year growth, gaining jobs at an even higher rate of 7.4% rate for the 12 months ending May 2014. The major office-using industry of Professional & Business Services registered considerable growth for the same time period, at 4.6%, in addition to Construction at 4.3%, Information at 4.0%, and Financial Activities at 2.9%, all industries that are currently impacting the office sector. The Lone Star State was one of the first states to return to its pre-recession employment peak in 2011, and continues to exceed that level as it has consistently registered job gains for four years.

Average AnnualGross Asking Ratesper Sq. Ft.

Construction

Market RBAAvailable Sublease

Sq. Ft.

Total Available Space

Sq. Ft.

Total Vacant Space

Sq. Ft.Vacancy Absorption

Net Sq. Ft.Market Average Class A Class B

DeliveredBuildings

Sq. Ft.

Under Construction

Sq. Ft.

AUSTIN 42,475,999 890,648 6,754,224 5,008,677 11.8% 153,061 $28.82 $33.44 $22.75 0 2,365,934

DALLAS/FT. WORTH 218,040,253 4,914,701 49,985,586 40,690,826 18.7% 410,163 $20.07 $24.15 $17.94 927,163 4,993,837

HOUSTON 197,038,507 3,831,538 27,456,232 27,456,202 12.0% 1,556,906 $25.91 $37.69 $22.29 1,915,080 16,322,252

SAN ANTONIO 26,774,635 39,570 5,436,879 4,498,552 16.8% 276,155 $20.00 $24.07 $19.73 0 443,960

Figure 4: Unemployment Rates


Source: Bureau of Labor Statistics, Metro Areas, Not Seasonally Adjusted, Annual Rates, June 2014.


Source: Bureau of Labor Statistics, July 2014.

INDUSTRY Austin Dallas Ft. Worth Houston San Antonio Texas

Mining, Logging & Constr. 46.4 181.8 309.1 50.1 947.7 928.0

Manufacturing 53.3 258.1 258.5 46.3 883.4 880.7

Transp., Whs. & Utilities 159.2 661.2 582.1 160.2 2321.0 2293.2

Information 23.9 81.0 33.1 21.1 208.0 205.3

Financial Activities 49.2 252.6 144.9 76.8 699.3 691.4

Prof. & Bus. Services 143.6 511.7 440.2 114.2 1515.5 1494.4

Educ. & Health Services 101.3 390.5 347.4 141.5 1528.1 1511.0

Leisure & Hosp. Services 104.4 332.2 281.7 121.2 1188.3 1173.9

Other Services 39.1 121.1 102.5 34.7 402.6 404.8

Government 170.4 397.7 377.7 160.8 1837.9 1833.9

Total Nonfarm Employment 890.7 3187.7 2877.2 926.9 11531.8 11416.6

Total Nonfarm Employment 863.9 2217.6 945.3 2829.4 897.2 11,346.9

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VACANCY Collective office vacancy in Texas witnessed an uptick dur-ing Q2 2014, increasing by 120 bps since last quarter, at the onset of more construction deliveries to the market. With vacancy at 16.0% statewide, all major markets experienced vacancy increases with the exception of San Antonio. Since the beginning of 2012, the aggregate vacancy for the four markets has dropped by 250 bps with two of the four major metro areas (Austin and Houston) at or below pre-recession levels. Total net absorption for the quarter yielded 2.4 million sq. ft., bringing the year-to-date total to nearly 4.6 million sq. ft. Last year, annual absorption totaled nearly 10 million sq. ft., marking the highest year of annual net absorption for Texas since 2006.

LEASE RATES, OVERALL Despite the rise in vacancy, the Texas aggregate aver-age for quoted lease rates witnessed another uptick in Q2 2014, averaging $23.70 per sq. ft. on a gross basis and up by $0.34 per sq. ft. from the previous quarter. This aver-age has climbed by 5.7% throughout the last 12 months. The Class A average rose from $28.33 to $29.84 with the strongest annual growth in Houston, where Class A rates have jumped by 12.9% over the past year. Class B rose at a similar pace, from $19.86 to $20.68 from Q2 2013 to Q2 2014. Across Texas, the spread for average asking lease rates stayed about the same at $8.82 per sq. ft., with Austin on the high-end at $28.82 per sq. ft. and San Antonio on the low end at $20.00 per sq. ft.

CONSTRUCTIONConstruction activity throughout the state continues to rise in Q2 2014 as the pipeline expanded once again even as deliveries picked up from the previous quarter. The total amount of projects under construction for major metropoli-tan areas now exceeds 24 million sq. ft., which is more than double the square footage in the pipeline at this point last year. Of this 24 million sq. ft., 64.4% is pre-leased. Addi-tionally, the Houston market alone accounts for more than two-thirds of the current pipeline square footage. Quarterly deliveries for the state continued to pick up steam as well, with over 2.8 million sq. ft. of new completions compared to 1.7 million sq. ft. last quarter and approximately 650,000 sq. ft. 12 months ago.

Figure 6: Vacancy

Figure 7: Lease Rates, Overall





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Capital flow throughout Texas has remained somewhat flat as 1% year-over-year growth in sales volume was posted through Q2 2014, according to trailing 12-month data from Real Capital Analytics (RCA). More than $10.2 billion and nearly 400 office properties have transacted in this 12-month timeframe throughout the State of Texas. The 12-month trailing price per square foot averaged $169, a 4% drop from last year, accompanied by falling cap rates, which averaged 7.3% for the prior 12 months and down by 5 bps. Private buyers now comprise the majority of deal volume over the trailing 12-month period, accounting for 48% of transaction activity, while 37% stemmed from institutional trades and the remaining 15% from REITs. Pricing and cap rate figures are based on well-qualified deals that have been confirmed, approximated or assumed by local professionals and gathered by RCA.

Figure 9: Average Price per Sq. Ft. Figure 10: Sales Volume



Source: Real Capital Analytics, Q2 2014.Source: Real Capital Analytics, Q2 2014.


*Renewal

** Expansion

***Renewal/Expansion

Market Sq. Ft. Tenant Address Submarket

AUSTIN 120,000 ARM 5707 Southwest Parkway Southwest

DALLAS/FT. WORTH 300,000 7-Eleven Ranch Trail & Hackberry Road Las Colinas

HOUSTON 171,016 Energy XXI 1021 Main CBD

SAN ANTONIO 128,700 Harland Clarke 15955 La Cantera Parkway Northwest


AUSTIN 433,024 Cousins Properties Inc. 816 Congress CBD

DALLAS/FT. WORTH 1,200,266 Goddard Investment Group 1445 Ross Avenue Dallas CBD

HOUSTON 386,277 CWCapital Asset Management 363 N Sam Houston Parkway E North Belt

SAN ANTONIO 150,495 Amarillo Tower Ltd 6243 W IH-10 Northwest


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CONTACTSFor more information about this Texas Office MarketView, please contact:

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Lynn CirilloResearch Operations ManagerCBRE Americas [email protected]

Lauren ParisSenior Research Analyst, Dallas+1 214 979 [email protected]

Angie BauerResearch Analyst, Houston+1 713 881 [email protected]

Nick IanettaResearch Coordinator, Austin+1 512 499 [email protected]

Veronica GonzalesResearch Coordinator, San Antonio+1 210 253 [email protected]

TEXAS RESEARCH

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GLOBAL RESEARCH AND CONSULTING This report was prepared by the CBRE U.S. Research Team which forms part of CBRE Global Research and Consulting – a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe.

Additional U.S. research produced by Global Research and Consulting can be found at www.cbre.us/research.

DISCLAIMER

Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we

have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and

completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot

be reproduced without prior written permission of CBRE.

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The Texas office market set the tone for 2014 on a favorable note, as its robust economy and employment climate continue to be driving forces behind the commercial real estate landscape. In the words of Texas Governor Rick Perry, “Texas is crushing it.” As a result of its central location, robust population growth, skilled workforce, low taxes and pro-business environment, Texas proves to be a desirable destination for residents and businesses alike. The state continues to experience healthy employment growth and is a vital component of the nation’s post-recession recovery, as the state has accounted for one-third of the country’s payroll gains over the past decade. More recently, Texas gained 310,000 jobs throughout the twelve months ending March 2014 and is projected to grow at a 2.75% annual rate throughout 2014 by Moody’s Analytics, for the third fastest job growth in the nation. Correlated to these indicators, positive net absorption and falling vacancy remain prevalent themes for the major metropolitan areas of Austin, Dallas/Fort Worth, Houston and San Antonio, along with rising lease rates and amplified construction activity throughout the state.

As another undercurrent to the state’s economic vitality, the housing market continues to improve at record-breaking strength. Sales volume has cooled in typical fashion as compared to the stronger summer months, but was still higher on a year-over-year basis as of March 2014. At $5.3 billion, home sales exceeded the previous 12-month benchmark of $4.8 in March 2013 based on data from the Real Estate Center at Texas A&M University. Additionally, Q1 2014 sales totaled approximately $12.5 billion compared to $11.1 billion in Q4 2013. Months inventory has been hovering around 3.3 to 3.4 months since December 2013, marking the lowest amount of supply on record (since 1990) and indicative of further housing starts. The median listing

price of $178,000 for March 2014 is the result of an increase over the last several months, and is 8.1% higher than 12 months ago. Texas also continues to show improving foreclosure metrics - the Q1 2014 U.S. Home Equity & Underwater Report released by RealtyTrac® listed two of the top Texas markets, Houston and DFW, within the “Top 5 Metros for Foreclosure Equity”, with 54% and 51% of foreclosed homes reporting equity, respectively.

As the state’s population approaches 27 million people, Texas holds its notoriety for being fast-growing and has dominated the nation in population growth. Over the past decade, the number of Texas residents has increased by nearly 4.3 million and is projected to house as many as 55.2 million residents by 2050 if these migration patterns continue according to a 2013 study conducted by the Office of the State Demographer. From a metro area perspective, Houston and Dallas/Fort Worth had more growth throughout the past decade than any of the nation’s other 365 metro areas, each with expansions of about 1.2 million new residents. As the only state in the U.S. that has three cities of over one million people (Houston, Dallas and San Antonio), each metro area contributes to the state’s industry diversity in a unique way. Houston is a global hub for the thriving energy industry with one of the busiest ports in the country and a significant biomedical research and aerospace presence. Dallas’s central location makes it a key financial and logistics hub, while also having strong concentrations in telecommunications and manufacturing. San Antonio holds much of its economic base in the tourism, health, and biotech industries, but has also experienced strong and growing activity related to exploration and production in the Eagle Ford shale. Austin is a hub for high-tech activity, including semiconductor manufacturing and software.


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Hot Topics• Positive net absorption was reported for all

major Texas office markets and totaled nearly 3 million sq. ft. collectively for Q1 2014.

• Quoted rental rates rose for most major markets, only showing a decline in San Antonio.

• All four Texas office markets witnessed an increase in construction activity, totaling over 23 million sq. ft. in the pipeline at the end of Q1 2014.

• For the 12 months ending March 2014, Texas has added 310,000 net jobs as the statewide unemployment rate continues its descent to 5.5%, its lowest point in over five years.

• Sales volume throughout Texas grew by 31% year-over-year, totaling approximately $10.2 billion for the past 12 months, based on trailing data from Real Capital Analytics.

• Two of the top Texas markets, Houston and DFW, were placed within the Top 5 Metros for Foreclosure Equity in a recently released report by RealtyTrac®. Foreclosed properties in each of the two metro areas have more than 50% with equity.

• Texas earned the top rank of “Most Inbound State” for migration once again, as the annual Allied Van Lines Magnet States 2013 report awarded Texas with this title for the ninth consecutive year based on in-migration patterns.

COLLECTIVE VACANCY FOR MAJOR TEXAS MARKETS DIPS BELOW 15% IN Q1 2014 AS LEASE RATES AND CONSTRUCTION ACTIVITY GAIN MOMENTUM.






TRADE VOLUME31% Y-o-Y

UNEMPLOYMENT5.5%

JOB GROWTH310,000 Y-o-Y

VACANCY14.8%

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ECONOMIC CONDITIONS/DEMOGRAPHICSThe statewide unemployment rate for Texas fell once again for both the quarter and the year, dropping from 6.4% to 5.5% over the last 12 months, the lowest rate for the state in more than five years as it continues to outperform the nation. On a year-over-year basis, the seasonally adjusted annual job growth rate for the state was 2.8%, which equates to 310,000 nonagricultural jobs over the past year, for an employment total of over 11.4 million at the end of March 2014. The Mining and Logging supersector outpaced all other major industries in year-over-year growth, gaining jobs at a 5.8% rate for the 12 months ending March 2014. The major office-using industries of Professional & Business Services, Information and Financial Activities all registered considerable growth for the same time period, at 3.3%, 3.2% and 2.1%, respectively. The Lone Star State was one of the first states to return to its pre-recession employment peak in 2011, and continues to exceed that level as it has consistently registered job gains for four years.

Average AnnualGross Asking Rates (Per Sq. Ft.) Construction


Sq. Ft.


Sq. Ft.

Total Vacant Space



DeliveredBuildings

Sq. Ft.

Under Construction

Sq. Ft.

AUSTIN 42,444,966 712,219 6,764,159 4,983,921 11.7% 244,628 $28.59 $33.47 $22.00 0 1,831,682

DALLAS/FT. WORTH 223,983,970 4,727,956 49,804,726 37,994,207 17.9% 1,134,309 $20.06 $23.98 $17.54 476,748 5,224,045

HOUSTON 195,279,281 4,243,466 27,536,728 23,296,818 11.9% 1,262,231 $25.03 $36.38 $22.28 1,201,091 15,766,156

SAN ANTONIO 26,902,519 444,805 5,323,649 4,740,323 17.6% 353,227 $19.74 $24.25 $19.44 0 294,865



Source: Bureau of Labor Statistics, Metro Areas, Not Seasonally Adjusted, Annual Rates, April 2014.


Source: Bureau of Labor Statistics, April 2014.



Manufacturing 52.8 161.8 94.2 256.4 46.1 880.7


Information 23.6 67.6 13.1 32.7 21.2 205.3


Prof. & Bus. Services 139.0 394.6 107.5 432.6 111.3 1494.4

Educ. & Health Services 101.2 269.8 118.2 341.5 141.1 1511.0

Leisure & Hosp. Services 106.8 220.1 104.9 277.8 118.3 1173.9

Other Services 38.5 78.4 36.7 100.6 34.5 404.8

Government 173.2 273.6 129.2 383.9 163.1 1833.9

Total Nonfarm Employment 885.9 2215.0 930.7 2847.2 917.0 11416.6


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VACANCY Vacancy in Texas continues to be driven down by sustained positive net absorption, fueled by prolonged demand in the state’s largest office markets. Total net absorption for the quarter exceeded 3 million sq. ft., a 50% increase since last quarter and a strong start to 2014. Last year, annual absorption totaled nearly 10 million sq. ft., mark-ing the highest year of annual net absorption for Texas since 2006. Overall vacancy for the state shed another 30 basis points (bps) over the quarter and now sits at 14.8%. Since the beginning of 2012, the aggregate vacancy for the four markets has dropped by 250 bps and is expected to continue this declining trend. The Austin market in particular has improved substantially with vacancy now well below its pre-recession low, with Houston also nearing its previous cyclical low, matching levels from 2008.

LEASE RATES, OVERALL As tightening vacancy continues to put upward pressure on rental rates, the Texas market average for quoted lease rates witnessed another uptick in Q1 2014, averaging $23.36 per sq. ft. and up by $0.25 per sq. ft. from the pre-vious quarter. This average has climbed by 5.4% throughout the last 12 months. Across Texas, the spread for average asking lease rates widened to $8.85 per sq. ft., with Austin on the high-end at $28.59 per sq. ft. and San Antonio on the low end at $19.74 per sq. ft. Asking rates are expected to continue this rising trend in areas where supply is still constrained due to the slow churn of new speculative inven-tory.

CONSTRUCTIONTexas construction activity continues to proliferate as the pipeline expanded once again during Q1 2014, growing by about 3 million sq. ft. and exceeding 23 million sq. ft. in total projects actively under construction. This represents an increase of nearly one-third in a single quarter and more than triple the amount of pipeline activity since year-end 2012. More than two-thirds of the current pipeline stems from activity in Houston alone, which equates to almost 16 million sq. ft. Quarterly deliveries for the state gained momentum and translated to about 1.7 million sq. ft. of completions coming online in Q1 2014. According to the 2014 Construction Outlook Survey conducted by The As-sociated General Contractors of America, the majority of contractors surveyed expect dollar volume of office projects to be higher in 2014 than in 2013.

Figure 6: Vacancy






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Capital flow throughout Texas sustained its momentum for Q1 2014 with 31% year-over-year growth in sales volume, accord-ing to trailing 12-month data from Real Capital Analytics (RCA). This growth equates to nearly $10.2 billion in transactions and outpaces the North American annual growth rate of 28% with $103.3 billion in sales volume for the same timeframe. The 12-month trailing price per square foot averaged $182, a 1% increase from last year, accompanied by falling cap rates, which averaged 7.0% for the prior 12 months and down by 40 bps. Institutional buyers comprised the vast majority of deal volume over the trailing 12-month period, accounting for 73% of transaction activity, while 18% stemmed from private buyer trades and the remaining 8% from REITs. Pricing and cap rate figures are based on well-qualified deals that have been confirmed, approxi-mated or assumed by local professionals and gathered by RCA.

Figure 9: Average Price Per Sq. Ft. Figure 10: Sales Volume





*Renewal

** Expansion

***Renewal/Expansion


AUSTIN 103,000 Athena Health 800 W Cesar Chavez Street CBD

DALLAS/FT. WORTH 500,000 State Farm President George Bush Tnpke & Hwy. 75 Richardson/Plano

HOUSTON 258,735 American Bureau of Shipping*** Greenspoint Place 1 & 2 North Belt

SAN ANTONIO 77,063 SWBC 4500 Lockhill Road Northwest


AUSTIN 1,912,892 Parkway Properties, Inc. 600 Congress (5 buildings) CBD

DALLAS/FT. WORTH 1,200,000Olympic Property PartnersBDRC

1401 Elm Street Dallas CBD

HOUSTON 1,359,266 AEW Capital Management 1111 Bagby Street CBD

SAN ANTONIO 107,196 SWBC 4500 Lockhill Road Northwest


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Lynn CirilloResearch Operations ManagerCBRE Americas [email protected]

Lauren ParisSenior Research Analyst, Dallas+1 214 979 [email protected]




TEXAS RESEARCH

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GLOBAL RESEARCH AND CONSULTING This report was prepared by the CBRE U.S. Research Team which forms part of CBRE Global Research and Consulting – a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. Additional U.S. research produced by Global Research and Consulting can be found at www.cbre.us/research.

DISCLAIMER

Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we

have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and

completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be

reproduced without prior written permission of the CBRE Global Chief Economist.

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The Texas office market concluded 2013 on a favorable note, both for the quarter and for the year, as its booming economy and employment front continues to propel key variables in the commercial real estate arena. As a result of its central location, robust population growth, diverse workforce and pro-business environment, Texas continues to attract both residents and businesses alike. The state continues to experience healthy employment growth and is a vital component of the nation’s post-recession recovery, as the state has accounted for one-third of the country’s payroll gains over the past decade. More recently, Texas gained 274,200 jobs throughout the twelve months ending November 2013 and is projected to grow at a 2.8% annual rate throughout 2014 and have the third fastest job growth in the nation as forecasted by Moody’s Analytics. Appropriately, positive net absorption remains a widespread theme for the major metropolitan areas of Austin, Dallas/Fort Worth, Houston and San Antonio, totaling about 9.5 million sq. ft. for the year in just the office market alone. Additionally, falling vacancy, rising lease rates and accelerating construction activity continue to be prevalent themes for the vast majority of the state’s top markets.

As another undercurrent to the state’s economic vitality, the housing market continues to improve at record-breaking strength. After hitting a historical high of $6.8 billion in July 2013, sales volume cooled in typical fashion for the winter months, posting $4.8 billion in December 2013 and $13.8 billion for the quarter based on data from the Real Estate Center at Texas A&M University. Sales volume outperformed the previous two years for every month of 2013. From an annual perspective, Texas home sales totaled over $62 billion for 2013,

outpacing 2012 by 27% and 2011 by 54%. At year-end 2013, the inventory level is at the lowest point on record (since 1990) at 3.4 months supply. Additionally, Texas continues to show improving foreclosure metrics and had one of the most significant decreases in bank repossessions for 2013, down 56% from 2012, according to data released by RealtyTrac.

As the state’s population approaches 27 million people, Texas holds its notoriety for being fast-growing and has dominated the nation in population growth. Over the past decade, the number of Texas residents has increased by nearly 4.3 million and is projected to house as many as 55.2 million residents by 2050 if these migration patterns continue. From a metro area perspective, Houston and Dallas/Fort Worth had more growth throughout the past decade than any of the nation’s other 365 metro areas, each with expansions of about 1.2 million new residents. As the only state in the U.S. that has three cities of over one million people (Houston, Dallas and San Antonio), each metro area contributes to the state’s industry diversity in a unique way. Houston is a global hub for the thriving energy industry with one of the busiest ports in the country and a significant biomedical research and aerospace presence. Dallas’s central location makes it a key financial and logistics hub, while also having strong concentrations in telecommunications and manufacturing. San Antonio holds much of its economic base in the tourism, health, and biotech industries, but has also experienced strong and growing activity related to exploration and production in the Eagle Ford shale. Austin is a hub for high-tech activity, including semiconductor manufacturing and software.


Austin Dallas Ft. Worth Houston San

Antonio

Net Absorption

Asking Rates

Under Construction

Vacancy

Hot Topics• Positive net absorption was once again

reported for all major Texas office markets during Q4 2013.

• Quoted rental rates showed differing patterns throughout the state as rates in some markets rose, while others declined.

• Even though not all markets saw a boost in construction activity, the collective Texas pipeline expanded by nearly one-third since Q3 2013. Over the last 12 months, the pipeline has more than tripled.

• As of November 2013, Texas has maintained positive annual growth for 44 consecutive months, adding 274,200 net jobs since the previous November. Unemployment for the state also dropped to 5.8%, its lowest point in nearly five years.

• Sales volume throughout Texas grew by 38% year-over-year, totaling approximately $10.4 billion for the past 12 months, based on trailing data from Real Capital Analytics.

• In December 2013, Forbes featured all of the major Texas metro areas in their “U.S. Regions to Watch in 2014” list in the order of Austin (#1), San Antonio (#2), Houston (#4) and Dallas (#6).

• In migration patterns secured Texas the #1 rank of Most Inbound State once again, as the annual Allied Van Lines Magnet States report for 2013 recently dubbed Texas this title for the ninth consecutive year.

MAJOR TEXAS OFFICE MARKETS COLLECTIVELY POSTED ANOTHER DROP IN VACANCY; ANNUAL NET ABSORPTION REACHES SEVEN-YEAR HIGH.






TRADE VOLUME38% YoY

UNEMPLOYMENT5.8%

JOB GROWTH274,200 YoY

VACANCY15.1%

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OFFICE FOURTH QUARTERMARKETVIEW


ECONOMIC CONDITIONS/DEMOGRAPHICSSince November 2012, the Texas unemployment rate has dropped from 6.0% to 5.8%, the lowest rate for the state in nearly five years as it continues to outperform the nation. On a year-over-year basis, the seasonally adjusted annual job growth rate for the state was 2.5%, a pace that has either been met or exceeded since January 2012 according to the Texas Workforce Commission. Additionally, Texas has added nearly 274,200 nonagricultural jobs over the past year, for an employment total of nearly 11.3 million at the end of November 2013. The Trade, Transportation & Utilities supersector outpaced all other major industries in monthly job gains for November 2013, adding an estimated 22,600 new jobs and marking the largest monthly increase in the history of its series for Texas. In terms of annual industry growth, the Professional & Business Services supersector recorded the strongest job gains with 79,700 jobs added, resulting in a 5.6% yearly growth rate. The Lone Star State was one of the first states to return to its pre-recession employment peak in 2011, and continues to exceed that level as it has consistently registered job gains for 44 months.

Average AnnualGross Asking Rates (Per Sq. Ft.) Construction


Sq. Ft.


Sq. Ft.

Total Vacant Space



DeliveredBuildings

Sq. Ft.

Under Construction

Sq. Ft.

AUSTIN 42,444,966 662,445 6,919,831 5,151,719 12.1% 205,463 $28.15 $33.32 $21.80 64,459 1,366,682

DALLAS/FT. WORTH 225,501,521 4,294,633 49,303,128 40,690,177 18.0% 436,746 $19.85 $23.64 $17.49 185,841 5,068,047

HOUSTON 193,551,155 4,158,634 26,986,051 22,827,417 11.8% 1,343,850 $24.62 $35.52 $21.84 756,383 14,233,706

SAN ANTONIO 27,151,901 422,434 6,007,609 5,174,402 19.1% 103,484 $19.82 $24.09 $19.36 43,500 0


Source: Bureau of Labor Statistics, Metro Areas, Not Seasonally Adjusted, Annual Rates, December 2013.


Source: Bureau of Labor Statistics, December 2013.



Manufacturing 51.2 161.7 98.8 253.1 45.9 872.9

Whsl. & Retail Trade 142.7 364.1 149.6 453.7 133.5 1,848.3


Information 22.8 65.0 13.5 33.1 21.1 205.6


Prof. & Bus. Services 138.2 400.9 109.5 428.5 111.8 1,505.3

Educ. & Health Services 100.5 270.4 122.9 347.1 136.9 1,517.4

Leisure & Hosp. Services 97.0 212.0 105.3 270.3 109.2 1,136.4

Other Services 36.4 75.8 33.6 93.6 33.8 387.5

Government 168.4 271.6 126.0 382.4 166.1 1,845.2


2%

3%

4%

5%

6%

7%

8%

9%

10%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Aus0n Dallas/Ft. Worth Houston San Antonio Texas US

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VACANCY Office vacancy in Texas continues to be driven down by sustained positive absorption, fueled by prolonged demand in most of the state’s largest markets. Total net absorp-tion for the quarter was positive and exceeded two million square feet, a reduced amount since last quarter, but this boosts the annual total to nearly 10 million sq. ft. of posi-tive net absorption when combined with the previous three quarters. This marks the highest year of annual absorption for Texas since 2006, with Houston and Dallas account-ing for 52% and 32% of the four-market total, respectively. Collective vacancy for the state shrunk by another 20 basis points (bps) over the quarter and now sits at 15.1%. Since the beginning of last year, the aggregate vacancy for the four markets has dropped by 220 bps and is expected to continue this declining trend. The Austin market in particular has improved substantially with vacancy now well below its pre-recession low, while Houston is nearing its previous vacancy.

LEASE RATES, OVERALL As falling vacancy continues to put upward pressure on rental rates, the quad-market average for quoted lease rates witnessed another uptick in Q4 2013, averaging $23.11 per sq. ft. and up by $0.33 per sq. ft. from the previous quarter. Throughout the last 12 months, this aver-age has climbed by more than 6% percent. Across Texas, the spread for average lease rates is currently $8.33 per sq. ft. and narrowing, interpolated by Austin at $28.15 per sq. ft. on the high-end and San Antonio at $19.82 per sq. ft. on the low end. Asking rates are expected to continue this rising trend while supply is still constrained due to the slow churn of new speculative inventory.

CONSTRUCTIONThe construction pipeline picked up momentum once again over Q4 2013, expanding by almost 4.5 million sq. ft. and exceeding 20 million sq. ft. in total projects actively under construction. This represents an increase of nearly one-third in a single quarter and more than triple the amount of pipeline activity since year-end 2012. Deliveries cooled down over the quarter with just over one million sq. ft. of new prod-uct coming to market, however, new completions for the year added up to nearly 5.5 million sq. ft., which is over five times the amount of completions introduced in 2012. Houston con-tinues to have the most active office construction pipeline in the state, now with over 14 million sq. ft. of projects in prog-ress, while Dallas/Fort Worth constitutes the majority of the remaining share with more than five million sq. ft. According to the 2014 Construction Outlook Survey conducted by The Associated General Contractors of America, the majority of contractors surveyed expect dollar volume of office projects to yield a higher amount in 2014.

Figure 6: Vacancy






(Gross, Annual Avg. Asking, Per Sq. Ft.)

Delivered (Sq. Ft.)

10%

12%

14%

16%

18%

20%

22%

24%

26%

2006 2007 2008 2009 2010 2011 2012 2013 Austin Dallas/Ft. Worth Houston San Antonio

$16

$18

$20

$22

$24

$26

$28

$30

2006 2007 2008 2009 2010 2011 2012 2013 Per Sq. Ft. Annually Austin Dallas/Ft. Worth Houston San Antonio

0

1,000

2,000

3,000

4,000

5,000

6,000

2007 2008 2009 2010 2011 2012 2013

000'

s

Sq. Ft.


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0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

000'

s

Austin Dallas/Ft Worth Houston San Antonio

$50

$70

$90

$110

$130

$150

$170

$190

$210

$230

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Austin Dallas/Ft Worth Houston San Antonio

Texas continued to prove its validity as a desirable investment option as it rounded out Q4 2013 with 38% year-over-year growth in sales volume, according to trailing 12-month data from Real Capital Analytics (RCA). This growth equates to nearly $10.4 billion in transactions and outpaces the North American annual growth rate of 22% with $97.6 billion in sales volume. The 12-month trailing price per sq. ft. averaged $188, a 7% increase from last year, accompanied by falling cap rates, which averaged 7.1% for the prior 12 months and down by about 30 bps. Pricing and cap rate figures are based on well-qualified deals that have been confirmed, approximated or assumed by local professionals and gathered by RCA. 2013 has seen a shift in capital flow for Texas as REITs have become the predominant buyer type instead of the private buyer majority from last year, based on annual buyer type data from RCA.

Figure 9: Average Price Per Sq. Ft. Figure 10: Sales Volume





*Renewal

** Expansion


AUSTIN 96,000 Spiceworks 3700 San Clemente Southwest

DALLAS/FT. WORTH 370,000 Santander 1601 Elm St. Dallas CBD

HOUSTON 581,000 Statoil City West Place 2 & 4 Westchase

SAN ANTONIO *38,931 University of Phoenix 8200 W IH-10 Northwest


AUSTIN 445,641 Smith Management, LLC 3420 Executive Center Dr. Northwest

DALLAS/FT. WORTH 1,350,267Ashkenazy Acquisition Corporation Barrow Street Capital

2711 N Haskell Ave. Central Expressway

HOUSTON 1,168,805 CBRE Global Investors 5555 San Felipe St. West Loop

SAN ANTONIO 618,017 Cole RE Investments 19100 Ridgewood Pkwy. North Central

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+FOLLOW US

Lynn CirilloResearch Operations Manager, TX, OK, NECBRE Americas Research2800 Post Oak, Suite 2300Houston, TX [email protected]

Lauren ParisSenior Research AnalystCBRE Dallas Research2100 McKinney, Suite 700Dallas, TX 75201+1 214 979 [email protected]




GLOBAL RESEARCH AND CONSULTING This report was prepared by the CBRE U.S. Research Team which forms part of CBRE Global Research and Consulting – a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe.DISCLAIMER Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of the CBRE Global Chief Economist.

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