trendlines® houston publication: redefining expectations in a gateway market

1

REDEFINING EXPECTATIONS IN A GATEWAY MARKET

SECTIONS 01 Summary 02 The National Economy

03 The Houston Metro Economy

04 The Houston Metro Office Market

05 The Houston Metro Industrial Market

06 Office and Industrial Investment Trends

07 The Houston Metro Multifamily Market

08 The Houston Metro Retail Market

2FOREWORD NOVEMBER 2014

We are pleased to provide you with this 14th annual edition of TrendLines: Trends

in Metro Houston Commercial Real Estate. This is a collaborative publication of

Transwestern and its research affiliate, Delta Associates. Our purposes are to distill the

trends of 2014 and to shed light on pivotal forces and issues that we believe will affect

the region’s economy and commercial real estate in 2015 and beyond.

Through the 3rd quarter of 2014, the Metro Houston commercial real estate market’s

performance ranked among the best in the nation. Across the board, employment

growth is driving demand for the various types of commercial real estate space.

In particular, job growth in the Energy and Education/Health sectors is sustaining

demand for office space, while Trade/Transportation job growth is supporting demand

for industrial space. The retail market is expanding along with Houston’s population,

as new residents bring with them additional demand for goods and services, as well as

a need for new residential units.

The Houston region’s economic strength is reflected in declining vacancy rates for

office and retail space. Industrial vacancy has been edging higher along with new

construction, but rents continue to rise with demand for warehouse/distribution space,

spurred by activity at the Port of Houston. The multifamily vacancy rate has been

stable but the average effective rent has risen for 19 consecutive quarters, a function

of demand that remains high by historical standards.

Houston’s investment sales market has remained strong in 2014, as investors

domestic and foreign are now regarding it as a solid alternative to the traditional

gateway markets. Houston’s office and industrial returns are among the highest in the

nation over the past 12 months. Capital is seeking yield and showing confidence in

Houston’s long-term prospects for continued economic vitality.

We expect to find significant opportunities in our industry in the period ahead, as

national economic growth has been gaining traction and capital continues to flow into

Houston. In 2015, we expect:

� Strong job growth in Metro Houston, though with modest deceleration from this year’s rapid growth rate. We expect to have seen a gain of approximately 102,000 payroll jobs during 2014, once the year is complete, followed by an increase of 95,000 jobs in 2015 and 80,000 jobs in 2016. These projections are supported by the robust performance of the Energy and Education/Health sectors and likely growth in Houston’s Trade/Transportation and Construction sectors over the next two years. Deceleration of job growth is likely given how far ahead of the nation’s performance Houston has been recently, but Houston is likely to remain a national leader in job creation during 2015 and 2016.

� Stabilizing vacancy rates, as new construction delivers across the major property types, but continuing increases in rent as demand remains sturdy.

� Modest downward pressure on cap rates, as an abundance of capital seeks deals in Houston, though pricing may plateau in 2015-16 as job growth decelerates and interest rates rise.

We hope the following information provides insight into our collective opportunities.

All the professionals at Transwestern and Delta Associates look forward to helping you

interpret the material in this report, and to being your service partner in the successes

we are confident you will achieve in the period ahead. We offer you our best wishes

for a successful 2015.

Kevin RobertsPresident, Southwest

Alexander (Sandy) Paul, CREExecutive Vice President

To our friends, clients and colleagues:

TRANSWESTERN DELTA ASSOCIATES








3TRANSWESTERN WOULD LIKE TO THANK OUR 2014 SPONSORS

Locke Lord LLP is a full-service, national law firm with offices in Atlanta, Austin, Chicago, Dallas, Hong Kong, Houston, London, Los Angeles, New Orleans, New York, Sacramento, San Francisco and Washington, D.C. Our team of nearly 650 attorneys has earned a solid national reputation in complex litigation, regulatory and transactional work. We serve our clients’ interests first, and these clients range from Fortune 500 and middle market public and private companies to start-ups and emerging businesses. Locke Lord’s team builds collaborative relationships and crafts creative solutions to solve problems - all designed and executed with long-term strategic goals in mind. Among Locke Lord’s many strong practice areas are appellate, aviation, bankruptcy/restructuring, business litigation, class action litigation, corporate, employee benefits, energy, environmental, financial services, health care, insurance and reinsurance, intellectual property, international, labor and employment, litigation, mergers and acquisitions, private equity, public law, real estate, regulatory, REIT, tax, technology, and white collar criminal defense and internal investigations.

In Houston, please contact Jimmy Erwin, Reno Hartfiel or Karen Highfield for property related transactions in Texas and the rest of the United States. Chicago Title Commercial offers customers the most comprehensive and accurate real estate related services in the nation. You can rely on Chicago Title, with its rich history of over 160 years, to provide assurance and security for all your real estate transactions and title insurance needs.

Since the formation of D.E. Harvey Builders 57 years ago, the company has rapidly grown to be a recognized leader in the Houston building industry. Currently, the company maintains offices in Houston, Texas, Austin, Texas, San Antonio, Texas and Washington, D.C. All facets of the commercial construction markets are being served. Our people and the projects they manage represent a culture, philosophy and history based on community service. From the very beginning, we have worked hard to become an integral part of the communities we have helped to build. Our philosophy is based on 3 words: Innovation, Quality, Integrity. Harvey takes pride in taking great care of their clients by treating them as partners. With a solid foundation of past accomplishments we continually strive to build trusting relationships with our clients and for excellence in our performance. Our work is visible evidence of our concern for the environment, for education, for healthcare, and for the economy. At Harvey, we care enough to exceed the needs of our clients and society in everything we do.

Specializing in sustainable architecture, interior design, and master planning, Kirksey designs high-performance, healthy buildings for all of our clients. Our firm is organized into focused practice groups — Commercial, Community/Religious, Education, Healthcare, Hospitality, Interior Architecture, Renovation, Residential, Retail, and Science & Technology — each supported by departments of Design, EcoServices, Information Technology, Project Delivery, and Marketing. We’ve been shaping the Houston skyline since 1971 and have designed over 75 office buildings in the past ten years alone. We create environments that encourage collaboration and innovation, promote corporate culture, and foster growth. Headquartered on our own corporate campus in Houston, Texas we are a group of designers and creatives committed to our clients, our community, and our earth.

J.P. Morgan is a leader in financial services, offering solutions to clients in more than 100 countries with one of the most comprehensive global product platforms available. We have been helping our clients to do business and manage their wealth for more than 200 years. Our business has been built upon our core principle of putting our clients’ interests first. J.P. Morgan is part of JPMorgan Chase & Co. (NYSE: JPM), a global financial services firm with assets of $2.3 trillion.

Amegy Bank is a leading Texas bank with nearly $14 billion in assets. Founded in 1990, Amegy has a strong tradition of relationship banking, local decision making and financial expertise. Amegy specializes in banking businesses of all sizes, and has the resources to provide financing, investment management, treasury management solutions, international banking, as well as other specialized services. Equally important, the bank offers individuals and families a wide range of depository, lending, mortgage, wealth management, trust and brokerage services. With more than 80 locations across Houston, Dallas and San Antonio, Amegy is dedicated to serving Texas communities, families and businesses.








http://www.lockelord.com/

http://www.chicagotitlecommercial.com/

http://www.harveybuilders.com/

http://www.kirksey.com/

https://www.jpmorgan.com/pages/jpmorgan

https://www.amegybank.com/about-us/houston

4

Ben SteinBen Stein is the most famous economics teacher in America. His comedic role as the droning economics teacher in “Ferris Bueller’s Day Off” has been ranked as one of the fifty most famous scenes in movie history. In real life, Ben Stein is a powerful speaker on economics, politics, education, and history. Like his father, Herbert Stein, he is considered one of the great humorists on political economy.

Stein has a bachelor’s with honors in economics from Columbia, studied economics at the graduate level at Yale, and is a graduate of Yale Law School (valedictorian of his class by election of his classmates in 1970).

His background includes being a poverty lawyer in New Haven, a trade regulation lawyer for the FTC, a speech writer for both Presidents Nixon and Ford (He did NOT write the line, “I am not a crook....”), a columnist and an editorial writer for The Wall Street Journal, and a teacher of law and economics at UC Santa Cruz (undergrad) and Pepperdine (law school and undergrads).

He has written or co-written roughly 30 books with his brilliant colleague Phil DeMuth. Most concentrated on investing and many of them have been New York Times bestsellers. Their book, “Yes, You Can Time The Market” has become a landmark of using price theory for securities market analysis.

He wrote a column about economics for The New York Times for several years, roughly 2004-2009.

He co-hosted the show “Win Ben Stein’s Money” with Jimmy Kimmel, which won seven Emmys, including best game show host. (Surely making him the only well known economist to win an Emmy....). Presently, he writes a column for The American Spectator and for NewsMax, and is a regular commentator on Fox News and on CBS Sunday Morning, as well as a frequent commentator on CNN.

He lives in Los Angeles with his wife of 45 years, Alexandra, two dogs and six cats.

Acknowledgments

The editor, Alexander (Sandy) Paul, CRE, wishes to acknowledge and thank Joshua Cohen at Delta Associates, as well as Rachel Alexander and Rachel Andrae at Transwestern, for their research contributions to this publication. Thanks also to the creative team at Transwestern led by Gregorio Barrera, and to Cyndi McNeill and Krystle Phillips for their help with this project. Finally, thanks to Gregory Leisch, CRE, for his insights on the economy and commercial real estate markets.

Representations

Delta Associates is responsible for the analysis and interpretation of economic and market data in this publication. Commercial real estate market data is provided by Transwestern’s internal research staff. Although the information contained herein is based on sources that Delta Associates (DA) and Transwestern (TW) believe to be reliable, DA and TW make no representation or warranty that such information is accurate or complete. All prices, yields, analyses, computations, and opinions expressed are subject to change without notice. Under no circumstances should any such information be considered representations or warranties of DA or TW of any kind. Any such information may be based on assumptions that may or may not be accurate, and any such assumption may differ from actual results. This report should not be considered investment advice.

SPECIAL THANK YOU TO OUR KEYNOTE SPEAKER








SECTION 01 | SuMMARy 5

SUMMARYSECTION ONE









ENERGy

9,800 jobs added in the 12 months ending

September 2014, a 9.0% increase.

We expect Houston metro job growth to total approximately 102,400 in 2014 and remain in the 80,000 to 95,000 per year range in 2015 and 2016, well above the long-term

average. Houston has been so far ahead of the nation’s growth rate that some deceleration is likely over the next two years.

NATIONAL ECONOMy GAINING TRACTION AS REFLECTED By RENEWED STRENGTH IN LABOR MARKET

The U.S. economy in 2014 has experienced growth at the slow and steady pace we have become accustomed to during the recovery from the Great Recession. The most recent

GDP reading, from the 2nd quarter of the year, was strong, but most economists believe the overall set of current and leading indicators suggests that growth will settle in at a

slower rate for the balance of 2014 and into 2015.

Looking forward, we expect to see payroll employment growth continue, the unemployment rate to decline further (though with some short-term volatility as more job seekers

re-enter the labor market), and household net worth to increase from a slow rise in home and stock values. On balance, we look for this recovery to continue on its slow but

steady course through 2018 or so, barring a catastrophic geo-political event.

CONSTRuCTION

13,500 jobs added in the 12 months

ending September 2014, a 7.1% increase.

MANuFACTuRING

8,500 jobs added in the 12 months ending

September 2014, a 3.4% increase.

EDuCATION & HEALTH SERVICES



TRADE & TRANSPORTATION



Specifically, we believe the economic outlook is as follows:

Houston’s vibrant regional economy is expanding

The Houston metro area continued to experience strong economic conditions throughout 2014. Houston’s payroll employment rose by 4.3% over the 12 months ending in

September, the largest percentage increase among major metros in the nation and well above the national growth rate of 1.9%. The 12-month employment growth of 119,400

jobs through September 2014 is third-most in the U.S. among large metros.

� Real GDP growth: 2.5% in 2014; approximately 3.0% in 2015.

� Payroll jobs: 2.6 million added in 2014, slightly outpacing the 2013 total.

� Housing: Price appreciation around 6% to 7% in 2014, off last year’s performance.

� Unemployment rate: Hovering around 6.0% for the balance of 2014.

� Federal Funds Rate: 0% to 0.25% through year-end 2015.

� Long-term interest rates: Edging higher during the rest of 2014.

� Inflation: Around 2.0% for all of 2014 as consumer demand strengthens; edging higher in 2015.









Leasing velocity stays strong in Houston’s office market

The Houston office market has continued to fire on all cylinders throughout 2014. Vacancy is down, rental rates are up, and absorption is

strong with job creation driving leasing activity. Tenants continue to make significant commitments to quality space in an effort to recruit

and retain employees in the competitive job market.

Houston’s office market is expected to sustain its positive momentum in the period ahead with the robust job market and vibrant economy

driving growth. While the development pipeline is significant, we expect the high level of demand in Houston to translate into positive

absorption as these projects deliver.

We do anticipate the overall vacancy rate for all classes of space will increase over the next two years, rising to the low-11% range from

9.9% today. This accounts for space still vacant at delivery and the effects of the flight to quality on Class B and C space. Rents should

continue rising modestly through 2014 and 2015, especially for Class A product.

Warehouse/Distribution sector continues to dominate Houston’s industrial market growth

The Houston metro’s increasing visibility and strong distribution channels are resulting in high levels of absorption of industrial space.

Houston remains one of the top major metro areas for overall industrial demand. For example, while the Houston industrial inventory is

less than half the size of the New York/Northern New Jersey market’s inventory, Houston has outpaced that market in 2014 absorption. We

expect this trend to continue as a number of large projects, some with preleasing, are set to deliver and demand remains high.

Houston’s overall industrial vacancy rate will likely edge up into the low-5% range over the next 12 months, from 4.6% today, as strong

demand continues but more new supply is delivered. The development pipeline is expected to continue at this level in the period ahead

given the market’s strong demand and low vacancy rate. In the near term, if construction remains in check, industrial rents will rise, and

market conditions will turn further in favor of owners. The Houston industrial market is one of the healthiest in the U.S. and one of the best-

positioned for future rent growth, given its low vacancy rate and strengthening drivers of demand, such as shipping activity at the Port of

Houston.

Investor interest in Houston office assets remains high; industrial returns are strong

Nationally, year-to-date office sales through August 2014 were $69.1 billion, above sales of $54.4 billion during the same time period in

2013. Sales are strong for U.S. office assets, but well below peak levels in 2007, which totaled $214.0 billion. While Houston’s sales are

off last year’s pace, we expect to see continued strength through the remainder of 2014 and throughout 2015. With one of the nation’s

strongest local economies, driven by healthy growth in a wide variety of sectors, especially the Energy sector, Houston’s office assets will

continue to spark investor interest.

Well-located Class B office assets in Houston continue to receive significant interest from investors as a result of the highly competitive

Class A investment market. With Class A investment activity very strong, pricing for well-located Class B assets is expected to continue to

improve as competition for these properties increases. We expect overall cap rates in Houston to trend downward slightly in the months

ahead as the Class B office market improves and high investor interest in Houston’s office assets continues. Additionally, the recent

decrease in 10-year treasury rates should fuel continued yield compression in the near-term. In the current interest rate environment, even

a material increase in rates should be able to be absorbed without significantly altering current pricing metrics. However, Houston office

pricing may plateau in 2015-16 as job growth decelerates and interest rates rise.









National industrial investment sales are ahead of last year’s volume during the comparable time period. Year-

to-date sales through August 2014 totaled $31.7 billion, which compares to $28.7 billion for the comparable

period in 2013. Sales volume has steadily increased each year since 2009 and we expect this trend to

continue in 2014 once the year closes. The Houston market has continued to experience strong industrial

investment sales. Sales appear low in comparison to the robust sales volume of 2013, but they remain

high on a historical basis and industrial product has continued to deliver strong returns in 2014. With the

completion of the Panama Canal expansion set for early 2016, we expect to see demand for industrial space

increase around the Port of Houston. Industrial returns in Houston measured 14.23% over the 12 months

ending in June 2014, compared to the national average of 12.63%. Among major industrial markets, only

Dallas and New York performed better.

Houston is now considered a gateway city by the investor community, and many investment funds have

allocated capital ready to invest. This, coupled with a lack of quality product on the market, will continue

to keep downward pressure on Houston industrial cap rates as long as interest rates remain low. Investor

demand for industrial properties in Houston will remain strong with the abundance of capital (core and

value-add funds) chasing industrial product.

Flurry of multifamily activity continues

Houston remains a safe and attractive market for multifamily investment with its long-term job market success

and the nation’s sixth-lowest median age of housing inventory. Currently, there are over 24,000 units under

construction and another 18,000 proposed. Houston has absorbed 14,760 units over the first three quarters

of 2014, and rental rates have increased 7.1% this year on an annualized basis.

With the enduring velocity of job creation, Houston should continue to experience success across all

multifamily asset classes. Houston’s population growth is likely to continue in the years ahead, with job

opportunities drawing new residents to the region. This influx of new residents is likely to support steady

demand for rental units, helping to keep the vacancy rate in check even as new supply continues to deliver.

Houston’s retail sector thriving

Houston’s 174.8 million SF multi-tenant retail market continues to gain momentum and further growth is

anticipated in the period ahead. The region’s retail sector added 6,100 jobs over the 12 months ending in

September, a 2.2% increase. Retail employment should continue to rise as consumer spending remains high

and the regional economy flourishes. Local job growth has led Houston to best all major metro areas except

Chicago in net absorption of retail space through the first three quarters of 2014, at 1.53 million SF.

A growth cycle in the retail market should continue in the period ahead, making investment, especially in

grocery-anchored centers, very attractive. Retail and restaurant tenants are flocking to urban infill locations as

metro job growth has caused residential construction to ramp up.








SECTION 02 | THE NATIONAL ECONOMy 9

THE NATIONAL ECONOMY

SECTION TWO









ECONOMy GAINING TRACTION AS REFLECTED By RENEWED STRENGTH IN LABOR MARKET

According to Federal Reserve Chair Janet Yellen’s semiannual Monetary Policy Report,

the national economy continues to see improvement, but the recovery from the

Great Recession is still in progress. This is partially based on the unemployment rate

being above the Federal Open Market Committee’s (FOMC) longer-run normal level

estimate and the labor force participation rate appearing weaker than expected.

Despite these current shortcomings, the national economy is likely to continue

experiencing moderate growth over the next few years. Economic expansion likely will

be spurred by supportive monetary policy, modestly rising home prices and equity

values, stronger foreign growth, and a decreased drag from fiscal policy.

Until the FOMC sees a significant increase in stability in the labor market, we can

expect it to continue utilizing monetary policies to support economic growth. For

example, the FOMC has continuously reaffirmed its stance on maintaining the Federal

Funds Rate at 0% to 0.25%. The road to a complete recovery has been slow, but there

has been continued progress despite bumps along the way.

JOB GROWTH

2014 a year of increasing momentum in labor market

The national economy added 2.7 million new payroll jobs (not seasonally adjusted)

during the 12 months ending September 2014, with the private sector accounting

for the majority of net additions (the public sector added 65,000 positions). Recent

month-to-month gains (seasonally adjusted) have been fairly strong except for a slight

dip during August:

� April 2014: 304,000 (revised from an initial reading of 282,000)

� May 2014: 229,000 (revised from 217,000)

� June 2014: 267,000 (revised from 298,000)

� July 2014: 243,000 (revised from 209,000)

� August 2014: 180,000 (preliminary)

� September 2014: 248,000 (preliminary)

PAYROLL JOB GROWTH

UNITED STATES | YEAR-OVER-YEAR

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

Mar.10

May10

Jul.10

Sep.10

Nov.10

Jan.11

Mar.11

May11

Jul.11

Sep.11

Nov.11

Jan.12

Mar.12

May12

Jul.12

Sep.12

Nov.12

Jan.13

Mar.13

May.13

Jul.13

Sep.13

Nov.13

Jan.14

Mar.14

May.14

Jul.14

Sep.14

Private Sector Public Sector

THOU

SAND

S OF

NEW

PAY

ROLL

JOBS

Source: Bureau of Labor Statistics, Delta Associates; November 2014. Note: Data are not seasonally adjusted.

BASELINE BUDGET PROJECTIONS

UNITED STATES

FEDE

RAL D

EFIC

IT ($

BIL

LION

S)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

-1,200

-1,000

-800

-600

-400

-200

0

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

Deficit % of GDP

DEFI

CIT A

S A

% O

F REA

L GDP

Baseline budget projections as of April 2014. Source: Congressional Budget Office, Delta Associates; November 2014.









The public sector has now added jobs for six consecutive months after shedding jobs

for the previous 44, and all of this growth stems from state and local governments.

The Federal government continues to cut its workforce as it faces budget shortfalls

and rising liabilities. Of note, these cuts are being achieved primarily through attrition

rather than layoffs. One benefit of Federal austerity and an enduring economy is

deficit reduction. The Congressional Budget Office (CBO) projects that in 2015, the

Federal budget deficit will be 31% smaller than it was in 2013. Of note, the U.S. will still

be running a deficit – we are not paying down debt, just increasing it at a slower rate

– but that is still substantial progress in two years. In its April 2014 update, the CBO

reported that 2014 will be the fifth consecutive year that the deficit’s share of the GDP

has decreased. The CBO projects the budget deficit in 2014 will be $492 billion, which

is 2.8% of GDP and is nearly a third less than the $680 billion deficit in 2013. However,

after 2015, the deficit will stop shrinking and will reach approximately $1 trillion from

2022 through 2024. This will be caused by our aging population, rising health care

costs, an expansion of Federal subsidies for health insurance, and growing interest

payments on the Federal debt.

The top four sectors in job gains were Professional/Business Services, Education/

Health Services, Leisure/Hospitality and Construction/Mining – adding a total of 1.8

million new jobs and accounting for over 66% of net new employment. Leisure/

Hospitality and Retail Trade employment continue to grow at a healthy rate, though

retail jobs have less of a multiplier effect than many others due to their low wages.

Some sectors have experienced weaker recoveries than others. Specifically, the

manufacturing, financial services and information industries have lagged behind while

some other sectors have either matched their pre-recession levels or surpassed them.

Job losses were confined to the Federal Government over the past year, with a total

net loss of 34,000. Of note, while the Federal Government continues to shed jobs, the

rate of loss is slowing.

uNEMPLOyMENT AND WAGES

Significant reduction in initial unemployment claims this year

Overall, initial unemployment claims have steadily fallen since their peak in March

of 2009. As of early-October 2014, initial claims stood at 287,750 based on a four-

week seasonally-adjusted moving average, falling 12.2% from the same period

one year ago. This compares to the 15-year average of 379,800. We expect initial

unemployment claims to continue declining gradually through the end of the year in

concert with improving labor market conditions.

PAYROLL JOB GROWTH

INITIAL UNEMPLOYMENT CLAIMS

UNITED STATES | 12 MONTHS ENDING SEPTEMBER 2014

UNITED STATES | FOUR-WEEK MOVING AVERAGE

-100,000

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

JOB

CHAN

GE

Professional/ Business Services

Education/ Health

Services

Leisure/ Hospitality

Construction/ Mining

RetailTrade

Manufact. Transport./ Utilities

Wholesale Trade

State/Local Government

Financial Activities

Other Services

Information Federal Government

Mar09

Jun09

Sep09

Dec09

Mar10

Jun10

Sep10

Dec10

Mar11

Jun11

Sep11

Dec11

Mar13

Jun13

Sep13

Mar14

Jun14

Sep14

Dec13

Mar12

Jun12

Sep12

Dec12

250,000

300,000

350,000

400,000

450,000

500,000

550,000

600,000

650,000

700,000 Peak in Initial Unemployment Claims (Week of 3/28/09) = 659,250

15-Year Average = 379,800

INIT

IAL U

NEM

PLOY

MEN

T CLA

IMS

(Week of 10/4/14) = 287,750

Source: Bureau of Labor Statistics, Delta Associates; November 2014. Note: Data are not seasonally adjusted.

Source: Bureau of Labor Statistics, Delta Associates; November 2014. Note: Data are seasonally adjusted.









The unemployment rate (seasonally adjusted) declined to 5.9% as of September 2014 from

7.2% one year earlier. Earlier in the year, the unemployment rate was declining in part because

of workers dropping out of the labor force, but more recently the rate has been driven more

by new jobs being created. In general, we anticipate that the unemployment rate will gradually

decline over the next year as the economic expansion continues, hiring accelerates, and

uncertainty dissipates. In the short term unemployment may tick up slightly as the current

increase in hiring might encourage even more people to rejoin the labor force.

One indicator of the economy that has not seen significant growth as of late is the national

average hourly wage. In September 2014 the hourly wage only increased slightly to $24.53, a

2.0% increase since one year prior. By comparison, in 2007 the national hourly wage increased

by at least 3.0% during each month compared with the same month one year prior. The slow

growth in wages is an indicator that the jobs being created are in lower-paying industries.

Even if people are finding jobs, they are likely to be underemployed, meaning job seekers are

taking jobs that are below the education levels they have earned.

As of August 2014, overall there were 2.0 potential applicants for every job opening. This is

well below the July 2009 peak of 6.7 applicants for every job and also less than the 10-year

average of 3.2. However, there are still many sectors that have significantly more potential

applicants than jobs available. This gap is most apparent in the construction sector, where for

every job opening, there are 6.5 potential applicants as of August 2014. This gap is forcing

many unemployed construction workers to revamp their skill sets in order to be hirable in

other sectors – even though employment in the construction sector is increasing. This need

to learn new skills applies to workers in virtually all industries, which might help explain

why so many people have dropped out of the labor force since the Great Recession. While

the construction industry has the highest unemployed workers to job openings ratio, other

industries also have a significant oversupply of candidates. Importantly, the oversupply in

construction is declining, with the ratio down from 7.0 just three months earlier and 9.5 a year

earlier. In comparison, the Professional and Business Services sector has just 1.5 applicants per

job opening.

GROSS DOMESTIC PRODuCT (GDP)

Volatility in 2014, but signs suggest steady growth in 2015

Real GDP contracted for the first time in three years, by a revised 2.1% annualized rate during

the 1st quarter of 2014, but bounced back and increased by an annualized rate of 4.6% (the

government’s third estimate) during the 2nd quarter of 2014. The increase in real GDP growth

during the 2nd quarter stemmed from a rise in personal consumption expenditures, private

inventory investment, exports, nonresidential fixed investment, state and local government

UNEMPLOYMENT RATE

AVERAGE HOURLY EARNINGS

NUMBER OF UNEMPLOYED VS. JOB OPENINGS

UNITED STATES

12-MONTH PERCENTAGE GROWTH | 2007- SEPTEMBER 2014

12-MONTH AVERAGE ENDING AUGUST 2014

0%

2%

4%

6%

8%

10%

12%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

U.S.

UNE

MPL

OYM

ENT R

ATE

0%

1%

2%

3%

4%

5%

2007* 2008 2009 2010 2011 2012 2013 2014

Average 2007 - 2008 = 3.3%

Average 2009 - 2014 = 2.1%

12 -

MON

TH P

ERCE

NTAG

E GR

OWTH

0

200

400

600

800

1,000

1,200

1,400

1,600Number of Job Openings Number of Unemployed

THOU

SAND

S OF

JOBS

ConstructionMining Retail Trade

GovernmentFinancial Activities

Other Services

Information Professional/ Business Services

Education/ Health

Services

Leisure/ Hospitality

Manufact.Transport./ Utilities

Note: Through September 2014; seasonally adjusted; shaded bars represent recessions. Source: Bureau of Labor Statistics, Delta Associates; November 2014.

* Data available starting March 2007. Source: Bureau of Labor Statistics, Delta Associates; November 2014.

Note: Based on 12-month trailing average. Data are not seasonally adjusted. Source: Bureau of Labor Statistics, Delta Associates; November 2014.









spending, and residential fixed investment. According to the most recent report from

the Federal Reserve Bank of Philadelphia, economists predict that real annualized GDP

growth will be 3.0% in the 3rd quarter of 2014, 3.1% in the 4th quarter, and 2.1% in

2014 overall. Looking further ahead, real GDP growth is predicted to average 3.1% in

2015, 2.9% in 2016, and 2.8% in 2017.

Nevertheless, global economic growth could face near-term constraints from a

combination of current account deficits/weak currencies in emerging economies and

questions about the rate of future growth in China. And, of course, there are always

worries about geo-political events.

CORPORATE PROFITS

Maintaining record levels in 2014

U.S. corporate profits totaled $2.11 trillion during the 2nd quarter of 2014 on an

annualized basis, virtually unchanged from the 2nd quarter of 2013. Overall, corporate

profits have been trending upwards since 2008. We expect that record corporate

profits will gradually decline over the next few years as uncertainty fades, businesses

increase their capital expenditures, and M&A activity ramps up. We have already seen

a number of large acquisitions in 2014 including Facebook’s $19 billion purchase of

WhatsApp, Google’s $3.2 billion deal for Nest Labs, and Apple’s $3 billion acquisition

of Beats Electronics.

HOuSING MARKET

Price growth easing as lender requirements remain a challenge for first-time buyers

Home prices in the 20 major metro areas increased 6.8% during the 12 months ending

July 2014, the most recent data available, according to S&P/Case-Shiller. The housing

market is slowing nationally on a year-over-year basis, and is now more in line with

the pace of overall economic growth. Inventory, which had been very low in some

metro areas, is gradually normalizing, easing pricing pressure. Also, first-time buyers,

important to the long-term growth of the housing market, continue to face challenges

in making required down payments and qualifying for mortgages.

The number of U.S. homes sold declined slightly to 5.05 million (on an annualized

basis) in August 2014 from 5.14 million one month earlier. The 5.05 million-unit pace is

5.3% below the 5.33 million-unit pace from the same period a year ago. The average

existing home sales price was $265,200 in August 2014 according to the National

Association of Realtors, approximating the pre-recession value of $268,200 in 2006.

GDP PERCENT CHANGE

U.S. CORPORATE PRE-TAX PROFITS

UNITED STATES

20-Year Average = 2.5%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Q411

Q112

Q212

Q312

Q412

Q113

Q213

Q313

Q413

Q114

Q214

ANNU

AL G

DP C

HANG

E IN

200

9 – C

ONST

ANT D

OLLA

RS

$0

$20

$40

$60

$80

$100

$120

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

Corporate Profits S&P 500 12-Month EPS

CORP

ORAT

E PR

OFIT

S IN

TRIL

LION

S

S&P

500

12-M

ONTH

EPS

Note: Annualized. Source: Bureau of Economic Analysis, Delta Associates; November 2014.

Note: Seasonally adjusted at annual rates. *Data through June 2014. Source: Bureau of Economic Analysis, Multpl.com, Delta Associates; November 2014.









FEDERAL INTERVENTION AND INFLATION

Quantitative easing ending, but Fed’s efforts to promote recovery continue

While the Federal Reserve’s third round of quantitative easing (QE3) is

winding down, the Fed plans to keep short-term interest rates at their

current range of 0% to 0.25% until labor market conditions, indicators

of inflation pressures and inflation expectations, and readings on

financial developments improve further.

The Fed is buying $15 billion in bonds per month as of October, down

from $85 billion per month earlier in the process. For commercial real

estate investors, we perceive the tapering decision as a net positive.

The Fed’s decision to end QE3 sheds light on the improving prospects

of the U.S. economy, and it should remove a portion of the all-too-

familiar uncertainty that has plagued business decision-making and

capital investment for some time.

How will markets react going forward? Volatility has increased this fall

for U.S. stocks, and we expect some short-term volatility to continue,

especially in emerging economies that benefited from record-low

borrowing rates.

Regarding inflation, prices increased 1.7% during the 12 months

ending August 2014. The personal consumption expenditure price

index (PCEPI), which takes into account changes in consumption

habits as people substitute away from some goods and services

towards others, rose 1.5% during the 12 months ending August 2014.

The slight increase in prices stems partially from the rise in costs for

food, especially meats, poultry, fish, and eggs. Meat prices are rising

due to droughts in the central United States, which has significantly

cut down hay production, leaving ranchers with less food for cattle. As

a result ranchers are reducing cattle production, cutting supply while

demand remains unchanged. We expect inflation to be contained in

the near-term due to modest wage growth, coupled with the fact that

price pressure tends to lag economic growth by a year or more. Given

all this, coupled with appropriate monetary measures, inflation looks

soft and should hover near 2.0% during the balance of 2014.

ANNUAL CHANGE IN EXISTING HOME SALE PRICES

U.S. EXISTING HOME SALES VS. SALES PRICE

UNITED STATES

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

PERC

ENT C

HANG

E FO

R M

EDIA

N PR

ICE

OF S

INGL

E - F

AMIL

Y HO

MES

2008 2009 2010 2011 2012 2013 2014

$200,000

$210,000

$220,000

$230,000

$240,000

$250,000

$260,000

$270,000

$280,000

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

2006 2007 2008 2009 2010 2011 2012 2013 2014*

Number of Existing Home Sales** Average Existing Home Sales Price

NUM

BER

OF S

ALES

- TH

OUSA

NDS

OF U

NITS

AVER

AGE

SALE

S PR

ICE

Note: Data reflect 20-city composite index through July 2014. Source: S&P/Case-Shiller, Delta Associates; November 2014.

*Data as of August 2014. ** Seasonally adjusted annual sales rate. Source: National Association of Realtors, Delta Associates; November 2014.









NATIONAL ECONOMIC OuTLOOK

Improving traction likely to continue in 2015

The U.S. economy in 2014 has experienced growth at the

slow and steady pace we have become accustomed to during

the recovery from the Great Recession. The most recent

GDP reading, from the 2nd quarter of the year, was strong,

but most economists believe the overall set of current and

leading indicators suggests that growth will settle in at a

slower rate for the balance of 2014 and into 2015. Looking

forward, we expect to see payroll employment growth

continue, the unemployment rate to decline further (though

with some short-term volatility as more job seekers re-enter

the labor market), and household net worth to increase from

a slow rise in home and stock values. On balance, we look

for this recovery to continue on its slow but steady course

through 2018 or so, barring a catastrophic geo-political event.

Specifically, we believe the economic outlook is as follows:

� Real GDP growth: 2.5% in 2014; approximately 3.0% in 2015.

� Payroll jobs: 2.6 million added in 2014, slightly outpacing the 2013 total.

� Housing: Price appreciation around 6% to 7% in 2014, off last year’s performance.

� Unemployment rate: Hovering around 6.0% for the balance of 2014.

� Federal Funds Rate: 0% to 0.25% through year-end 2015.

� Long-term interest rates: Edging higher during the rest of 2014.

� Inflation: Around 2.0% for all of 2014 as consumer demand strengthens; edging higher in 2015.

U.S. INFLATION RATE AND PERSONAL CONSUMPTION EXPENDITURES

SELECTED U.S. GOVERNMENT INTEREST RATES

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

INTE

REST

RAT

ES (%

)

Federal Funds Rate 10-Year Treasury 30-Year Treasury

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

PERC

ENTA

GE C

HANG

E

U.S. Inflation Rate (CPI-U) Personal Consumption Expenditure Price Index

Note: Federal Funds Rate unchanged since December 16, 2008. 30-Year Treasury not issued between Q2 2002-2005. Source: Federal Reserve Economic Data (FRED), Delta Associates; November 2014.

Note: CPI-U and PCEPI through August 2014. 12-month seasonally-adjusted percentage change. Source: Federal Reserve Economic Database (FRED), Delta Associates; November 2014.








SECTION 03 | THE HOuSTON METRO ECONOMy 16

THE HOUSTON METRO ECONOMY

SECTION THREE









HOuSTON ECONOMy OVERVIEW

Job growth outperforms expectations

The Houston metro area continued to experience strong economic conditions throughout

2014. Houston’s payroll employment rose by 4.3% over the 12 months ending in September,

the largest percentage increase among major metros in the nation and well above the national

growth rate of 1.9%. The 12-month employment growth of 119,400 jobs through September

2014 is third-most in the U.S. among large metros. The three most impactful drivers for job

growth over the past year are energy, construction and engineering services. According to the

U.S. Bureau of Economic Analysis (BEA), Houston’s economy grew 5.2% in 2013, the fastest

of any major metro in the U.S. The BEA estimated the Houston MSA’s gross domestic product

at $517.4 billion which would make it the world’s 25th largest economy if it were a sovereign

country.

uNEMPLOyMENT

The Houston area’s unemployment rate was 5.4% in August, down from 6.3% a year earlier.

The national unemployment rate was 6.1% in August, down from 7.2% a year earlier.

Houston’s core industries continue to drive growth:ENERGy

9,800 jobs added in the 12 months ending September 2014, a 9.0% increase.

CONSTRuCTION


MANuFACTuRING


EDuCATION & HEALTH SERVICES


TRADE & TRANSPORTATION


PAYROLL JOB GROWTH

PAYROLL JOB GROWTH

LARGE METRO AREAS | 12 MONTHS ENDING SEPTEMBER 2014

HOUSTON METRO AREA

0

20

40

60

80

100

120

140

LA Basin NY Hou DFW SF Bay S. Fl Atl Bos Chi Den Phx Was

PAYR

OLL J

OBS

IN TH

OUSA

NDS

119.4

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

1993-2013 AverageJob Growth = 47,400/Year

-80

-60

-40

-20

0

20

40

60

80

100

120

140

ANNU

AL JO

B GR

OWTH

(IN

THOU

SAND

S)

Source: Bureau of Labor Statistics, Delta Associates; November 2014.

*12-month job growth through September 2014. Source: Bureau of Labor Statistics, Delta Associates; November 2014.

Houston’s payroll employment grew 4.3% over the 12 months ending in September, the largest percentage increase among major metros in the U.S.









ENERGy

Energy sector employment grew by 9,800 jobs during the 12 months ending in September, a 9.0% increase.

The U.S. rotary rig count was at 1,918 at mid-October, up 179 from the same time last year.

Benchmark crude oil prices stood at $85 per barrel for Brent and $83 for WTI at mid-October.

The energy sector and rig count have remained strong and steady despite the decline in oil

prices in recent weeks.

Houston-based Cheniere Energy is set to expand its Louisiana LNG facility with a $6 billion

investment and an additional 120 jobs, for a total project value of $18 billion. This expansion

will take the project from four liquefaction trains to six and is expected to complete

construction in 2019. Additionally, Houston-based Biofuels Power Corp. is planning to

construct a gas-to-liquid facility to demonstrate how natural gas can be converted into crude

oil profitably. The new plant, located in southwest Houston, will allow Biofuels Power to take

advantage of the large supply and low costs of natural gas in the U.S.

CONSTRuCTION

Construction sector employment expanded by 13,500 jobs during the 12 months ending in September, a 7.1% increase.

Houston led the country with more construction jobs added than any other major U.S. market

from September 2013 to September 2014. This growth is being driven by the high, sustained

demand for all types of commercial space in the metro, as well as hotel and residential. Over

the 12 months ending in August, the City of Houston issued a record $7.8 billion in building

permits, a huge 39.2% increase from permits issued the previous year. August marked the sixth

consecutive month of record-setting building permit issuance.

The biggest challenges for the construction sector continue to be rising material costs and

labor shortages. Costs have been increasing steadily since 2012, but jumped significantly in

2014 according to Kirksey Architecture’s 2014 report on construction costs.

MANuFACTuRING

Manufacturing sector employment grew by 8,500 jobs over the 12 months ending in September, a gain of 3.4%.

The Houston Purchasing Managers Index, a short-term leading indicator of production,

dropped slightly to 55.6 in August from 56.4 in July. Notwithstanding the deceleration of

growth, this was the 60th consecutive month of expansion for the indicator (meaning a reading

over 50).

UNEMPLOYMENT RATES

PAYROLL JOB CHANGE IN PERCENTAGE TERMS

LARGE METRO AREAS | 12 MONTHS ENDING SEPTEMBER 2014

LARGE METRO AREAS | AUGUST 2014 VS. AUGUST 2013

4.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Hou DFW SF Bay S. Fl Den Phx Atl LA Basin Bos NY Chi Was

PERC

ENT C

HANG

E IN

PAY

ROLL

JOBS

0%

2%

4%

6%

8%

10%

Den Bos SF Bay Hou DFW Was Phx NY S Fl Chi LA Basin Atl

UNEM

PLOY

MEN

T RAT

E

August 2014 August 2013

National Rate

6.1%

7.2%


Note: National rate is seasonally adjusted. Source: Bureau of Labor Statistics, Delta Associates; November 2014.









Manufacturing is booming in Houston with demand for new refineries and pipelines helping to drive

manufacturing growth along with low electricity costs and increased foreign investment. As a recent example,

Teadit North America, a gasket manufacturer in Pasadena, has seen business increase more than two-fold

over the last five years. In order to sustain such growth, the manufacturer moved into a new 111,000 SF facility

nearly 70% bigger than its previous operation. In addition, Mitsubishi Caterpillar Forklift America, Inc. is shifting

production of its forklifts that handle shipping containers from Japan to Houston. Rising demand for forklifts

able to load and unload these containers at the Port of Houston led the company to make the production

move.

EDuCATION AND HEALTH SERVICES

Education and Health Services sector employment increased by 21,300 jobs over the 12 months ending in September, a gain of 6.3%.

The Lone Star College System opened its new Energy and Manufacturing Institute in August of this year.

Located at the University Park campus in northwestern Houston, the new institute will focus on preparing

students for the boom in job openings in the oil and gas manufacturing industries. The curriculum will be

focused on training students for skill-based trades so they can fill the growing need for electricians, machinists

and welders, in addition to many other trades.

In the health sector, the Texas Medical Center (TMC) has launched a life science innovation center, or business

accelerator, called TMCx to bring more healthcare startups to Houston. The accelerator will house legal

experts, investors and mentors, among others, to turn academic research into the next new drug or medical

device. In a recent announcement, Johnson & Johnson Innovation committed to establishing a business

incubator for entrepreneurship at TMCx, which will be its fifth “J-Lab” facility in the U.S.

TRADE AND TRANSPORTATION

Trade/Transportation employment expanded by 16,200 jobs during the 12 months ending in September, a 2.9% increase.

The Houston-Galveston Customs District handled over $173.7 billion in foreign trade in the first eight months

of the year, up 5.2% from the same period in 2013. The Port of Houston had a banner month in July with a

record level of operating revenues, $24 million, and more steel moving through the Port than in any month

since July 2008. Container traffic also is on pace to surpass last year’s record total of 2.0 million TEUs.

The Houston Airport System is also poised to break a record with international passenger numbers up 10.6%

Year-to-date through August, setting a pace to hit 10 million passengers by year-end. Air freight also is on a

record pace of 425,000 metric tons for 2014. In other transportation news, voters will decide in November

whether to begin diverting half the state’s annual oil and gas production tax collections into the State Highway

Fund to advance road construction and maintenance projects throughout Texas. If Proposition 1 passes,

the Houston metro could receive an additional $221 million in transportation funding, according to Texas

Infrastructure Now.

HOUSTON MANUFACTURING OUTLOOK

U.S. ROTARY RIG COUNT

02004006008001,0001,2001,4001,6001,8002,000

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

Gas Misc. Oil

ANNU

AL A

VERA

GE W

ORKI

NG R

IGS

Source: Baker Hughes Inc., Delta Associates ; November 2014. *Count as of 10/17/2014.

Source: ISM– Houston, Delta Associates; November 2014. *Through August 2014.

30

35

40

45

50

55

60

65

70

INDE

X

2009 2010 2011 2012 2013 2014*

EXPA

NSIO

NCO

NTRA

CTIO

N

PURCHASING MANAGERS INDEX

Note: TEUs = 20-foot-equivalent container units. Source: Houston Port Authority, Delta Associates; November 2014. *Through September 2014, annualized.

2003-2013 Average1.7 million TEU/annum

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

03 04 05 06 07 08 09 10 11 12 13 14*

TOTA

L TEU

S

HOUSTON PORT AUTHORITY

CONTAINER TRAFFIC









HOuSING

Home sales continue to rise

The Houston Association of Realtors reported 6,490 single-family home sales in

September 2014, up 7.0% over last year. The average single-family home sale price

was $269,440 in September, an 8.2% increase year-over-year. The median price

was $196,000, up 7.7% from September 2013. The inventory of homes was equal

to a 2.9-month supply, much lower than the 5.5 months of supply nationally. Strong

employment growth continues to fuel housing demand, pushing sale prices higher

and keeping inventory low.

HOuSTON ECONOMy OuTLOOK

Economic growth to remain robust into 2015

The Houston metro area’s economy has continued to experience robust growth in

2014. Looking forward, the Greater Houston Partnership (GHP) has announced a plan

to fill 296,000 middle-skill job openings within the next three years. GHP calls the

initiative UpSkill Houston and plans to partner with businesses, schools, community

colleges, and social services to help fill jobs that require more than a high school

diploma. Middle-skill positions are growing quickly and likely will continue to do so

over the next few years. These jobs supply industries such as oil and gas with the

skilled labor needed to handle the shale boom and petrochemical growth. However,

Houston’s employment growth is broad, and economic indicators point to continued

growth across all major sectors in the period ahead. A sustained rise in investments

along the Houston Ship Channel signals the Panama Canal’s 2016 expansion

completion date is quickly approaching, creating more opportunities for Houston’s

future.

We expect job growth to total approximately 102,400 in 2014 and remain in the

80,000 to 95,000 per year range in 2015 and 2016, well above the long-term average.

Houston has been so far ahead of the nation’s growth rate that some deceleration is

likely over the next two years.

JOB FORECAST

HOUSTON AIRPORT SYSTEM

Source: Houston Airport System, Delta Associates ; November 2014. *Through August 2014, annualized.


AIR FREIGHT

HOUSTON METRO AREA

2003-2013 Average380,000 metric tons/annum

300,000

325,000

350,000

375,000

400,000

425,000

450,000

03 04 05 06 07 08 09 10 11 12 13 14*

AIR

FREI

GHT (

MET

RIC

TONS

)

Average Annual Growth2005-2007 = 87,500/annum

Projected Average Annual Growth 2014-2016 =

92,300/annum

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

03 04 05 06 07 08 09 10 11 12 13 14 15 16

ANNU

AL JO

B GR

OWTH

We expect job growth to total around 104,200 for 2014, surpassing previous estimates.








SECTION 04 | THE HOuSTON METRO OFFICE MARKET 21

THE HOUSTON METRO OFFICE MARKET

SECTION FOuR









OFFICE MARKET OVERVIEW

Leasing velocity stays strong

The Houston office market has continued to fire on all cylinders throughout 2014.

Vacancy is down, rental rates are up, and absorption is strong with job creation driving

leasing activity. Tenants continue to make significant commitments to quality space in

an effort to recruit and retain employees in the competitive job market.

DEMAND

Net absorption exceeds last year’s total

Net absorption of office space in the Houston metro area totaled 4.8 million SF

during the first nine months of 2014, edging past last year’s 12-month total. The 2014

absorption is largely attributable to Class A space which has recorded 4.1 million SF of

positive absorption year-to-date. Class B space, showing effects of the long-term flight

to quality in the market, recorded only 846,000 SF year-to-date.

Notable 2014 leases:

� National Oilwell Varco – 415,000 SF prelease, Millennium Tower II, Westchase submarket

� American Bureau of Shipping – 258,735 SF renewal and expansion, One and Two Greenspoint Place, Greenspoint/North Belt submarket

� Air Liquide – 222,000 SF prelease, Air Liquide Center North and South, Energy Corridor submarket

� Energy XXI – 171,016 SF renewal and expansion, One City Centre, CBD submarket

� General Electric – 150,000 SF prelease, Westway Plaza, Energy Corridor submarket

� Memorial Production Partners – 111,566 SF new lease, One Allen Center, CBD submarket

� Technip – 104,024 SF prelease, Energy Tower IV, Energy Corridor submarket

Robust job growth, boosted by a continuously strong energy sector, has helped make

Houston the national leader in office space absorbed this year. Houston ranked eighth

during the same period one year prior and is currently followed by Dallas/Fort Worth

and Atlanta.

NET ABSORPTION OF OFFICE SPACE AND VACANCY RATE TRENDS

OFFICE VACANCY RATES

Source: Transwestern’s analysis of CoStar data; November 2014. Note: Delivery of preleased space counts as positive net absorption.

Source: Transwestern’s analysis of CoStar data; November 2014.

HOUSTON METRO | 2005 – 3RD QUARTER 2014


4%

6%

8%

10%

12%

14%

16%

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD 2014

DIRE

CT V

ACAN

CY R

ATE

NET A

BSOR

PTIO

N IN

THOU

SAND

S OF

SF

5.9%6.7%

8.5%

9.9% 10.0%

12.0%12.5%

13.2% 13.5% 13.6% 13.8%

16.5%

19.4%

0%

5%

10%

15%

20%

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

OVER

ALL V

ACAN

CY R

ATE

National Vacancy Rate: 11.2%

Houston is the national leader in office space absorbed thus far in 2014.









VACANCy

Vacancy edges down

The overall office vacancy rate (including sublet) is 9.9% for the third quarter, down from 10.8%

at year-end 2013. Direct vacancy is 9.3%, down from 10.1% at year-end 2013.

Overall Class A vacancy is at 7.8%, down from 8.1% at year-end 2013. The direct Class A

vacancy rate is 7.1%, unchanged from year-end 2013. Overall Class B vacancy ticked down to

12.4%, from 13.0% at the end of 2013. The direct Class B vacancy rate is 11.8%, down from

12.4% at year-end 2013.

The overall office vacancy rate (including sublet) in the Houston metro will likely rise

moderately over the next two years as the majority of space now under construction delivers.

While we expect demand to remain at high levels, the current development pipeline will have

an impact on vacancy rates. Given this, we expect an overall vacancy rate in the low-11% range

in two years. However, compared to similarly-sized metro areas, Houston will still maintain one

of the lowest vacancy rates.

SuPPLy AND DEVELOPMENT

Pipeline steady through Q3

There is over 17.1 million SF of office space under construction in the Houston area as of

the third quarter, compared to 16.7 million SF at year-end 2013. This space is currently 66%

preleased, compared to 69% preleased at year-end 2013.

The Energy Corridor and The Woodlands submarkets continue to account for a large portion

of the development activity, about 10.2 million SF. The largest projects under construction

include ExxonMobil’s 3.0 million SF campus in The Woodlands submarket, Phillips 66’s 1.1

million SF campus in the Westchase submarket, and 609 Main at Texas in the CBD submarket

at 1.0 million SF.

Deliveries totaled 5.1 million SF through the third quarter of 2014, after totaling 1.4 million

SF through the first three quarters of 2013. The largest projects include Anadarko Tower 2 in

The Woodlands with all 550,000 SF of the project occupied by the owner, and the 428,831 SF

Energy Tower III, which was all leased to Conoco upon delivery.

The amount of office space under construction nationally has risen sharply in the past year.

Nationally, 100.9 million SF of office space is under construction today, compared to 71.8

million SF one year ago. Houston leads the nation with 17.1 million SF under construction,

representing 7.6% of the current metro office inventory.

OFFICE VACANCY RATE

OFFICE SPACE UNDER CONSTRUCTION

Source: Transwestern’s analysis of CoStar data; November 2014. *As of 3rd quarter 2014.



SELECT METRO AREAS | 3RD QUARTER 2014

9.3%

8%

9%

10%

11%

12%

13%

14%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

DIRE

CT V

ACAN

CY R

ATE

U/C Nationally= 100.9 Million SF

MIL

LION

S OF

SF

0

2

4

6

8

10

12

14

16

18

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









RENTAL RATES

Rent growth continues

Asking rental rates for all classes of office space have increased 3.6% to $27.28 from year-end

2013. This is the second-highest percentage increase among comparable metro areas. New

York is the only metro area to record a larger percentage increase in asking rents this year.

Class A rents are up 5.5% to $34.52 per SF, full service, and Class B rents are up 4.2% to $20.80

per SF, full service, from the close of last year. These are metro-wide averages; newer buildings

in more desirable submarkets are outperforming these market averages.

Metro-wide asking rents should continue trending upward through the end of the year and

into 2015 as demand for space remains high. Class A rents are climbing at a faster rate than

Class B rents due to the flight to quality in the market, with stronger demand for newer space.

Further, with the volume of new construction and recent deliveries pushing rates for new space

higher, Class A rents should see consistent growth in the period ahead.

INVESTMENT MARKET

For in-depth analysis of Houston’s office investment market, please see Section Six of this report.

OFFICE MARKET OuTLOOK

Vacancy rate likely to rise over next two years, but overall conditions to remain strong

Houston’s office market is expected to sustain its positive momentum in the period ahead with

the robust job market and vibrant economy driving growth. While the development pipeline is

significant, we expect the high level of demand in Houston to translate into positive absorption

as these projects deliver. The pipeline, including planned space expected to start construction

soon, is at 8.8% of standing inventory. However, after removing owner-occupied campuses

(such as ExxonMobil, Phillips 66 and Shell), the development pipeline equals 6.1% of inventory

– elevated, but more manageable.

We do anticipate the overall vacancy rate for all classes of space will increase over the next

two years, rising to the low-11% range. This accounts for space still vacant at delivery and the

effects of the flight to quality on Class B and C space. Rents should continue rising modestly

through 2014 and 2015, especially for Class A product.

Office submarkets likely to outperform the market in the months ahead include: Energy

Corridor, The Woodlands, Galleria and the Central Business District.

AVERAGE CHANGE IN ASKING RENT

AVERAGE OFFICE RENTS


Source: Transwestern’s analysis of CoStar data; November 2014. Note: All classes of office space.

SELECT METRO AREAS | JANUARY - SEPTEMBER 2014


ASKI

NG R

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6%

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$27.28

$16

$18

$20

$22

$24

$26

$28

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$/SF

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OFFICE MARKET INDICATORS - ALL SPACEHOUSTON METRO AREA | 2011 THROUGH THIRD QUARTER 2014

SuBMARKET TOTAL BLDGS INVENTORy SF AVAILABLE

IMMEDIATELy

DIRECT VACANCy

2011

DIRECT VACANCy

2012

DIRECT VACANCy

2013

DIRECT VACANCy

Q3 2014

VACANCy WITH SuBLET

uNDER CONSTRuCTION

NET ABSORPTION

2011

NET ABSORPTION

2012

NET ABSORPTION

2013

NET ABSORPTION

Q3 2014

NET ABSORPTION

yTD 2014

Central Business District 86 47,512,974 3,325,908 9.5% 8.7% 9.2% 7.0% 7.8% 1,463,600 1,552,000 385,000 (240,000) 143,000 477,000

Midtown 31 5,298,182 535,116 13.2% 13.4% 8.7% 10.1% 10.2% 167,562 108,000 (14,000) 339,000 58,000 37,000

Downtown 117 52,811,156 3,861,025 10.0% 9.3% 9.1% 7.3% 8.0% 1,631,162 1,660,000 371,000 99,000 201,000 514,000 FM 1960 / I-45 North 15 1,371,988 142,687 16.3% 14.6% 14.2% 10.4% 10.4% - 36,000 38,000 10,000 (7,000) 49,000

FM 1960 / Champions 22 1,850,305 484,780 20.2% 23.4% 22.7% 26.2% 26.2% - (47,000) (95,000) 21,000 11,000 (10,000)

FM 1960 / Highway 249 46 5,327,919 634,022 26.2% 16.0% 14.4% 11.9% 12.8% 768,000 134,000 752,000 61,000 21,000 197,000

FM 1960 83 8,550,212 1,261,489 22.9% 17.5% 16.9% 14.8% 15.3% 768,000 123,000 695,000 92,000 25,000 236,000 North Belt West/Greenspoint 74 10,036,449 1,666,051 13.8% 13.0% 16.2% 16.6% 17.5% - (28,000) 85,000 (342,000) (171,000) (82,000)

Greenspoint / IAH 21 2,754,531 289,226 12.6% 12.7% 10.7% 10.5% 11.4% - (42,000) 11,000 151,000 17,000 21,000

Greenspoint / North Belt 95 12,790,980 1,955,276 13.6% 12.9% 14.9% 15.3% 16.2% - (70,000) 96,000 (191,000) (154,000) (61,000)Greenway Plaza 48 10,416,013 802,033 9.8% 9.7% 9.1% 7.7% 7.8% 660,437 232,000 12,000 145,000 10,000 170,000 Gulf Freeway/Pasadena 31 2,380,307 207,087 12.6% 10.2% 10.5% 8.7% 8.7% - (41,000) 109,000 (13,000) - 17,000 Katy Freeway East 58 8,431,050 556,449 7.3% 7.9% 7.7% 6.6% 7.1% 1,077,752 105,000 364,000 709,000 17,000 65,000

Katy Freeway West 138 23,210,062 1,346,184 9.6% 5.7% 3.6% 5.8% 6.9% 4,592,436 1,144,000 847,000 1,027,000 20,000 1,728,000

Katy Fwy / Energy Corridor 196 31,641,112 1,902,633 8.9% 6.4% 4.9% 6.0% 7.0% 5,670,188 1,249,000 1,211,000 1,736,000 37,000 1,793,000 Kingwood / Humble 9 881,561 60,828 7.3% 6.4% 7.5% 6.9% 6.9% - 47,000 20,000 21,000 - 72,000 NASA / Clear Lake 62 6,996,599 1,056,486 10.6% 12.8% 16.8% 15.1% 15.2% 55,000 (140,000) (212,000) (386,000) 49,000 189,000 Northeast 15 1,155,562 184,890 12.3% 12.6% 13.3% 16.0% 16.0% - (35,000) (6,000) 11,000 (1,000) 68,000 North Loop West 29 4,133,495 673,760 24.9% 18.4% 18.6% 16.3% 17.7% - (175,000) 358,000 (115,000) 79,000 (6,000)

Northwest Near 13 1,319,023 21,104 10.4% 8.5% 9.4% 1.6% 1.6% - (10,000) 30,000 (16,000) (4,000) 61,000

Northwest Far 54 6,410,285 679,490 12.2% 10.3% 10.0% 10.6% 10.9% 1,193,336 540,000 149,000 166,000 (19,000) (2,000)

Northwest 96 11,862,803 1,374,354 16.7% 13.1% 13.0% 11.6% 12.2% 1,193,336 355,000 537,000 35,000 56,000 53,000 South Main / Medical Center 49 10,469,072 858,464 6.9% 5.9% 8.2% 8.2% 8.2% - 12,000 112,000 (177,000) 4,000 94,000 Southwest / Hillcroft 35 4,269,911 772,854 16.0% 14.9% 15.5% 18.1% 18.1% - 152,000 52,000 (29,000) 21,000 (36,000)

Southwest Beltway 8 43 5,620,512 1,180,308 19.2% 21.1% 22.0% 21.0% 21.0% - (433,000) 112,000 (65,000) (124,000) (171,000)

East Ft Bend Co. / Sugar Land 43 6,186,653 692,905 16.6% 15.3% 10.8% 11.2% 13.1% 57,000 227,000 116,000 520,000 (6,000) 203,000

Southwest Fwy / Sugar Land 121 16,077,076 2,646,067 17.4% 17.2% 15.8% 16.5% 17.2% 57,000 (54,000) 280,000 426,000 (109,000) (4,000)Bellaire 29 4,374,993 249,375 10.3% 10.2% 6.2% 5.7% 6.3% - (156,000) 5,000 189,000 (4,000) 38,000

Post Oak Park 28 4,226,059 684,622 9.9% 17.1% 15.7% 16.2% 16.2% 98,938 62,000 (344,000) (38,000) (17,000) 15,000

Galleria 55 15,804,024 1,058,870 9.0% 8.3% 7.4% 6.7% 7.8% 600,000 (31,000) 31,000 707,000 181,000 197,000

Riverway 16 2,868,495 269,639 10.4% 10.3% 9.1% 9.4% 9.6% - (28,000) 4,000 37,000 (9,000) 3,000

Richmond / Fountainview 11 819,689 218,037 9.9% 19.4% 18.1% 26.6% 26.6% - (58,000) 12,000 23,000 7,000 (29,000)

San Felipe / Voss 33 5,041,885 478,979 10.6% 11.4% 10.2% 9.5% 9.8% - 33,000 (45,000) 66,000 5,000 58,000

West Loop 172 33,135,145 2,959,521 9.7% 11.0% 9.8% 8.9% 9.6% 698,938 (178,000) (337,000) 984,000 163,000 282,000 Westchase 85 15,515,357 1,272,259 11.4% 7.2% 7.4% 8.2% 8.6% 1,817,000 203,000 694,000 (31,000) (31,000) 189,000 The Woodlands 79 10,229,637 501,252 6.7% 3.9% 4.0% 4.9% 5.7% 4,565,837 420,000 439,000 857,000 138,000 1,170,000 Conroe 13 903,345 98,465 7.1% 9.9% 12.1% 10.9% 10.9% - (27,000) 201,000 (37,000) 2,000 44,000 TOTAL - Houston 1,271 225,815,937 21,002,128 11.5% 10.3% 10.1% 9.3% 9.9% 17,116,898 3,756,000 4,222,000 3,571,000 390,000 4,826,000 Vacancy Rate with Sublet Space 12.0% 10.7% 10.8% 9.9%SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Does not include buildings under construction or owned by the government









OFFICE MARKET INDICATORS - CLASS A SPACEHOUSTON METRO AREA | 2011 THROUGH THIRD QUARTER 2014


IMMEDIATELy

DIRECT VACANCy

2011

DIRECT VACANCy

2012

DIRECT VACANCy

2013

DIRECT VACANCy

Q3 2014

VACANCy WITH SuBLET

uNDER CONSTRuCTION

NET ABSORPTION

2011

NET ABSORPTION

2012

NET ABSORPTION

2013

NET ABSORPTION

Q3 2014

NET ABSORPTION

yTD 2014

Central Business District 33 31,444,591 1,792,342 7.0% 6.3% 6.7% 5.7% 6.7% 1,463,600 1,406,000 212,000 (121,000) 94,000 311,000

Midtown 6 2,033,134 223,645 10.4% 6.0% 7.6% 11.0% 11.0% 167,562 9,000 82,000 (30,000) 71,000 8,000

Downtown 39 33,477,725 2,015,986 7.2% 6.3% 6.8% 6.0% 7.0% 1,631,162 1,415,000 294,000 (151,000) 165,000 319,000 FM 1960 / I-45 North 1 204,821 - 8.2% 0.0% 0.0% 0.0% 0.0% - 21,000 28,000 - - -

FM 1960 / Champions 1 150,000 - 0.0% 0.0% 0.0% 0.0% 0.0% - - - - - -

FM 1960 / Highway 249 19 3,499,186 468,891 52.3% 23.0% 19.9% 13.4% 14.6% 768,000 22,000 702,000 85,000 7,000 146,000

FM 1960 21 3,854,007 468,891 44.3% 19.5% 17.6% 12.2% 13.3% 768,000 43,000 730,000 85,000 7,000 146,000 North Belt West/Greenspoint 17 4,343,919 495,207 5.0% 6.0% 9.1% 11.4% 11.6% - (70,000) (38,000) (115,000) (135,000) (101,000)

Greenspoint / IAH 7 1,093,667 118,116 12.2% 11.3% 10.9% 10.8% 12.9% - (22,000) 8,000 91,000 21,000 -

Greenspoint / North Belt 24 5,437,586 613,323 6.2% 7.0% 9.5% 11.3% 11.9% - (92,000) (30,000) (24,000) (114,000) (101,000)Greenway Plaza 15 6,190,406 352,853 12.6% 8.5% 6.8% 5.7% 5.8% 660,437 104,000 179,000 105,000 (12,000) 99,000 Gulf Freeway/Pasadena - - - 25.0% 15.8% 15.8% 0.0% 0.0% - 2,000 5,000 - - - Katy Freeway East 17 4,246,830 118,911 7.5% 6.9% 3.1% 2.8% 3.4% 1,077,752 32,000 442,000 674,000 (34,000) 14,000

Katy Freeway West 62 14,773,817 694,369 6.5% 2.3% 0.9% 4.7% 5.0% 4,592,436 1,095,000 484,000 631,000 146,000 1,728,000

Katy Fwy / Energy Corridor 79 19,020,647 813,281 6.7% 3.5% 1.5% 4.3% 4.6% 5,670,188 1,127,000 926,000 1,305,000 112,000 1,742,000 Kingwood / Humble 1 86,665 26,259 45.5% 45.5% 31.3% 30.3% 30.3% - (70,000) - 13,000 - 1,000 NASA / Clear Lake 15 2,127,855 89,370 13.8% 10.1% 6.9% 4.2% 4.3% 55,000 (27,000) 71,000 65,000 49,000 60,000 Northeast - - - 0.0% 0.0% - 0.0% 0.0% - - - - - - North Loop West 5 1,058,820 253,058 24.7% 25.3% 26.6% 23.9% 28.4% - 21,000 (6,000) (14,000) (31,000) 28,000

Northwest Near 1 237,384 - 0.0% 0.0% 0.0% 0.0% 0.0% - - - - - -

Northwest Far 16 2,681,063 187,674 12.8% 5.6% 7.1% 7.0% 7.2% 1,193,336 268,000 182,000 110,000 (13,000) 3,000

Northwest 22 3,977,267 440,732 15.3% 10.7% 11.9% 11.1% 12.4% 1,193,336 289,000 176,000 96,000 (44,000) 31,000 South Main / Medical Center 16 4,618,943 258,661 8.3% 5.5% 5.6% 5.6% 5.6% - 96,000 124,000 (5,000) 43,000 74,000 Southwest / Hillcroft 6 1,485,352 182,698 19.8% 15.2% 11.9% 12.3% 12.3% - 67,000 66,000 48,000 (1,000) (6,000)

Southwest Beltway 8 3 573,500 109,539 15.4% 16.2% 22.0% 19.1% 19.1% - 19,000 (5,000) (34,000) 2,000 17,000

East Ft Bend Co. / Sugar Land 20 4,066,127 451,340 26.5% 22.2% 12.3% 11.1% 11.9% 57,000 52,000 159,000 395,000 (8,000) 189,000

Southwest Fwy / Sugar Land 29 6,124,979 743,577 23.8% 19.8% 13.2% 12.1% 12.7% 57,000 138,000 220,000 409,000 (7,000) 200,000 Bellaire 7 1,203,314 68,589 7.2% 24.0% 10.8% 5.7% 7.4% - (14,000) (199,000) 157,000 25,000 50,000

Post Oak Park 6 1,911,398 292,444 5.5% 8.2% 18.0% 15.3% 15.3% 98,938 (53,000) (50,000) 36,000 (25,000) 51,000

Galleria 30 11,982,940 802,857 8.0% 8.4% 7.8% 6.7% 8.1% 600,000 (19,000) (44,000) 403,000 135,000 202,000

Riverway 5 1,885,813 145,208 8.0% 9.1% 7.5% 7.7% 7.7% - 10,000 (23,000) 32,000 (15,000) (4,000)

Richmond / Fountainview - - - - - - 0.0% 0.0% - - - - - -

San Felipe / Voss 3 1,714,929 193,787 14.6% 17.9% 14.0% 11.3% 11.5% - 7,000 (57,000) 67,000 19,000 47,000

West Loop 51 18,698,394 1,502,884 8.3% 10.4% 9.6% 8.0% 9.1% 698,938 (69,000) (373,000) 695,000 139,000 346,000 Westchase 27 7,652,646 596,906 11.6% 5.1% 6.0% 7.8% 8.4% 1,817,000 363,000 473,000 (60,000) 84,000 180,000 The Woodlands 27 5,457,743 327,465 4.5% 2.2% 2.0% 6.0% 7.1% 4,565,837 303,000 178,000 718,000 179,000 982,000 Conroe 2 128,832 10,951 2.9% 5.8% 10.1% 8.5% 8.5% - (4,000) (4,000) (5,000) 2,000 2,000 TOTAL - Houston 368 116,853,695 8,261,139 10.1% 7.9% 7.1% 7.1% 7.8% 17,116,898 3,618,000 2,969,000 3,246,000 603,000 4,081,000 Vacancy Rate with Sublet Space 10.8% 8.3% 8.1% 7.8%SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Does not include buildings under construction or owned by the government









OFFICE MARKET INDICATORS - CLASS B SPACEHOUSTON METRO AREA | 2011 THROUGH THIRD QUARTER 2014


IMMEDIATELy

DIRECT VACANCy

2011

DIRECT VACANCy

2012

DIRECT VACANCy

2013

DIRECT VACANCy

Q3 2014

VACANCy WITH SuBLET

uNDER CONSTRuCTION

NET ABSORPTION

2011

NET ABSORPTION

2012

NET ABSORPTION

2013

NET ABSORPTION

Q3 2014

NET ABSORPTION

yTD 2014

Central Business District 38 14,511,526 1,117,388 11.1% 9.7% 10.2% 7.7% 7.9% - 194,000 194,000 (69,000) 44,000 143,000

Midtown 19 2,883,347 141,284 7.5% 9.7% 7.1% 4.9% 5.0% - 28,000 (86,000) 101,000 (6,000) 62,000

Downtown 57 17,394,873 1,258,672 10.3% 9.7% 9.5% 7.2% 7.4% - 222,000 108,000 32,000 38,000 205,000 FM 1960 / I-45 North 12 1,016,244 142,274 16.6% 14.9% 14.1% 14.0% 14.0% - 20,000 27,000 13,000 (6,000) 3,000

FM 1960 / Champions 20 1,632,335 484,803 25.0% 28.8% 28.0% 29.7% 29.7% - (51,000) (92,000) 19,000 11,000 4,000

FM 1960 / Highway 249 23 1,609,602 138,426 11.6% 12.2% 13.5% 8.6% 8.6% - 141,000 34,000 (36,000) 10,000 41,000

FM 1960 55 4,258,181 765,503 16.9% 17.9% 18.1% 18.0% 18.0% - 110,000 (31,000) (4,000) 15,000 48,000 North Belt West/Greenspoint 44 4,595,553 932,897 17.9% 17.1% 21.0% 20.3% 22.1% - 112,000 44,000 (205,000) (32,000) (14,000)

Greenspoint / IAH 13 1,608,539 151,203 13.6% 14.2% 11.5% 9.4% 9.4% - (52,000) 4,000 54,000 (3,000) 28,000

Greenspoint / North Belt 57 6,204,092 1,084,100 16.9% 16.4% 18.2% 17.5% 18.8% - 60,000 48,000 (151,000) (35,000) 14,000 Greenway Plaza 27 3,764,733 256,002 5.4% 7.2% 7.8% 6.8% 6.8% - 17,000 (109,000) (24,000) 23,000 49,000 Gulf Freeway/Pasadena 25 1,929,273 187,139 14.9% 11.4% 11.9% 9.7% 9.7% - (20,000) 100,000 (15,000) - 27,000 Katy Freeway East 29 3,064,396 429,015 7.8% 10.6% 15.9% 14.0% 14.7% - 25,000 (86,000) 16,000 34,000 49,000

Katy Freeway West 73 8,194,731 696,552 13.3% 9.6% 7.0% 8.5% 11.0% - (4,000) 355,000 359,000 (172,000) (62,000)

Katy Fwy / Energy Corridor 102 11,259,127 1,125,568 12.0% 9.8% 9.3% 10.0% 12.0% - 21,000 269,000 375,000 (138,000) (13,000)Kingwood / Humble 8 794,896 34,975 6.2% 4.9% 7.1% 4.4% 4.4% - 56,000 18,000 11,000 - 94,000 NASA / Clear Lake 43 4,511,246 992,474 10.3% 13.6% 21.1% 22.0% 22.2% - 27,000 (225,000) (500,000) (32,000) 147,000 Northeast 10 742,591 104,705 18.6% 18.5% 19.8% 14.1% 14.1% - (45,000) 2,000 8,000 15,000 101,000 North Loop West 21 2,879,098 420,348 28.2% 19.2% 18.4% 14.6% 15.0% - (5,000) 320,000 25,000 104,000 (17,000)

Northwest Near 8 802,294 6,418 13.2% 10.5% 6.3% 0.8% 0.8% - (1,000) 23,000 34,000 2,000 31,000

Northwest Far 35 3,481,795 487,451 13.3% 13.9% 12.6% 14.0% 14.5% - (13,000) (26,000) 52,000 - (13,000)

Northwest 64 7,163,187 914,218 19.3% 15.7% 14.1% 12.8% 13.2% - (19,000) 317,000 111,000 106,000 1,000 South Main / Medical Center 18 3,991,862 550,877 6.6% 7.4% 14.5% 13.8% 13.8% - 69,000 (39,000) (301,000) (64,000) (11,000)Southwest / Hillcroft 16 1,598,169 445,889 20.5% 21.0% 23.5% 27.9% 27.9% - 9,000 (10,000) (42,000) 6,000 (43,000)

Southwest Beltway 8 32 4,413,473 1,098,955 21.9% 20.5% 25.5% 24.9% 24.9% - (367,000) 90,000 (58,000) 26,000 (29,000)

East Ft Bend Co. / Sugar Land 21 1,906,526 244,035 10.1% 11.4% 10.5% 12.8% 17.1% - 174,000 (62,000) 134,000 (4,000) 48,000

Southwest Fwy / Sugar Land 69 7,918,168 1,788,879 17.0% 17.0% 19.0% 22.6% 23.6% - (184,000) 18,000 34,000 28,000 (24,000)Bellaire 18 2,781,223 125,155 10.0% 5.8% 5.1% 4.5% 4.7% - (164,000) 121,000 21,000 11,000 22,000

Post Oak Park 20 2,154,619 396,450 13.6% 24.5% 18.8% 18.4% 18.6% - 31,000 (289,000) 151,000 4,000 48,000

Galleria 24 3,745,292 247,189 12.4% 10.2% 6.4% 6.6% 7.1% - (8,000) 91,000 282,000 49,000 (15,000)

Riverway 9 870,126 123,558 16.2% 13.8% 12.8% 14.2% 14.7% - (38,000) 26,000 10,000 5,000 2,000

Richmond / Fountainview 7 559,977 177,513 11.4% 28.2% 24.1% 31.7% 31.7% - (24,000) 16,000 36,000 2,000 5,000

San Felipe / Voss 30 3,326,956 282,791 8.0% 7.4% 7.5% 8.5% 8.9% - 36,000 22,000 (4,000) (10,000) (19,000)

West Loop 108 13,438,193 1,352,656 11.3% 12.5% 10.1% 10.1% 10.4% - (167,000) (13,000) 496,000 61,000 43,000 Westchase 53 7,301,615 664,447 11.8% 8.4% 8.8% 9.1% 9.3% - (166,000) 267,000 (30,000) (146,000) (31,000)The Woodlands 50 4,491,209 175,157 8.6% 5.4% 5.7% 3.9% 4.3% - 82,000 249,000 137,000 (40,000) 174,000 Conroe 9 619,727 87,382 9.0% 13.5% 12.6% 14.1% 14.1% - (22,000) 204,000 8,000 - 22,000 TOTAL - Houston 755 95,782,973 11,342,754 12.6% 12.1% 12.6% 11.8% 12.4% - 41,000 1,183,000 187,000 (169,000) 846,000 Vacancy Rate with Sublet Space 13.0% 12.6% 13.1% 12.4%SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Does not include buildings under construction or owned by the government









ASKING RENTAL RATE ANALYSIS OF CLASS A & B OFFICE BUILDINGSHOUSTON METRO AREA | 2011 THROUGH THIRD QUARTER 2014

SuBMARKET 2011 CLASS A 2011 CLASS B 2012 CLASS A 2012 CLASS B 2013 CLASS A 2013 CLASS B Q3 2014 CLASS A Q3 2014 CLASS B% CHANGE

12/13-09/14 CLASS A

% CHANGE 12/13-09/14

CLASS B

Central Business District $36.68 $23.61 $38.18 $25.06 $39.32 $25.99 $42.86 $27.96 9.0% 7.6%

Midtown $28.77 $22.49 $30.12 $24.07 $30.32 $26.03 $36.01 $26.87 18.8% 3.2%

Downtown $35.61 $23.49 $37.09 $24.96 $38.10 $25.99 $42.10 $27.84 9.9% 7.1%FM 1960 / I-45 North - $15.20 - $16.71 - $18.06 - $18.06 - 0.0%

FM 1960 / Champions - $11.36 - $12.79 - $13.19 - $13.66 - 3.6%

FM 1960 / Highway 249 $25.35 $21.22 $24.34 $20.39 $25.71 $20.80 $27.01 $20.69 5.1% -0.5%

FM 1960 $25.35 $13.90 $24.34 $14.92 $25.71 $15.48 $27.01 $15.75 5.1% 1.8%North Belt West/Greenspoint $20.73 $15.95 $23.76 $16.44 $29.51 $15.63 $30.23 $15.72 2.4% 0.6%

Greenspoint / IAH $20.72 $16.25 $20.47 $16.38 $21.36 $16.34 $21.62 $15.22 1.2% -6.9%

Greenspoint / North Belt $20.73 $15.99 $22.85 $16.43 $27.24 $15.73 $28.57 $15.65 2.3% -0.5%Greenway Plaza $28.70 $21.43 $30.22 $23.29 $32.11 $23.72 $36.50 $24.97 13.7% 5.3%Gulf Freeway/Pasadena - $21.14 - $20.71 - $21.61 - $21.98 - 1.7%Katy Freeway East $33.97 $17.74 $35.45 $21.38 $35.52 $21.79 $36.90 $23.14 3.9% 6.2%

Katy Freeway West $32.40 $18.80 $31.62 $19.55 $33.69 $20.52 $35.17 $22.56 4.4% 9.9%

Katy Fwy / Energy Corridor $32.73 $18.30 $32.44 $20.41 $34.08 $21.12 $35.40 $22.78 4.3% 8.5%Kingwood / Humble $30.10 $19.28 $32.13 $18.50 $32.13 $19.00 $32.13 $19.00 0.0% 0.0%NASA / Clear Lake $24.40 $19.42 $23.57 $19.40 $23.58 $18.33 $24.72 $18.78 4.8% 2.5%Northeast - $16.70 - $17.05 - $16.57 - $17.04 - 2.8%North Loop West $23.13 $16.84 $25.18 $16.57 $23.81 $18.25 $26.74 $20.29 12.3% 11.2%

Northwest Near - $14.96 - $15.51 - $15.60 - $16.75 - 7.4%

Northwest Far $24.63 $16.04 $22.10 $17.35 $25.71 $16.77 $26.11 $18.39 1.6% 9.7%

Northwest $23.79 $16.44 $23.83 $16.93 $24.64 $17.52 $26.47 $19.25 7.5% 10.4%South Main / Medical Center $29.75 $23.86 $29.72 $23.42 $28.54 $24.00 $28.14 $24.77 -1.4% 3.2%Southwest / Hillcroft $21.16 $14.24 $21.24 $14.61 $21.75 $14.18 $22.18 $13.93 2.0% -1.8%

Southwest Beltway 8 $25.11 $16.18 $24.70 $16.37 $23.24 $16.68 $22.13 $16.68 -4.8% 0.0%

East Ft Bend Co. / Sugar Land $27.78 $18.83 $27.22 $19.98 $26.68 $21.32 $26.84 $21.35 0.6% 0.1%

Southwest Fwy / Sugar Land $25.75 $16.05 $25.37 $16.41 $24.95 $16.67 $25.00 $16.63 0.2% -0.3%Bellaire $24.34 $20.86 $25.06 $20.43 $25.86 $21.08 $26.49 $22.22 2.4% 5.4%

Post Oak Park $32.32 $21.17 $32.48 $24.40 $35.43 $26.36 $35.89 $27.11 1.3% 2.8%

Galleria $31.22 $22.71 $34.36 $23.90 $35.70 $26.70 $36.84 $27.26 3.2% 2.1%

Riverway $26.55 $19.91 $29.57 $22.02 $30.82 $23.72 $31.88 $24.98 3.4% 5.3%

Richmond / Fountainview - $15.47 - $16.20 - $16.64 - $17.62 - 5.9%

San Felipe / Voss $31.77 $19.99 $32.70 $20.96 $32.44 $22.40 $33.81 $22.37 4.2% -0.1%

West Loop $30.69 $20.40 $32.89 $21.99 $34.25 $23.68 $35.31 $24.25 2.9% 2.8%Westchase $26.83 $17.80 $34.27 $18.22 $35.38 $19.75 $37.31 $20.87 5.5% 5.7%The Woodlands $34.69 $22.75 $35.37 $23.79 $35.95 $23.38 $37.14 $26.80 3.3% 14.6%Conroe $30.67 $19.52 $29.54 $23.96 $28.42 $25.73 $28.40 $25.14 -0.1% -2.3%TOTAL - Houston $29.99 $18.60 $31.56 $19.46 $32.71 $19.96 $34.52 $20.80 5.5% 4.2%SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Does not include buildings under construction or owned by the government








SECTION 05 | THE HOuSTON METRO INDuSTRIAL MARKET 29

THE HOUSTON METRO INDUSTRIAL MARKET

SECTION FIVE









INDuSTRIAL MARKET OVERVIEW

Warehouse/Distribution sector continues to dominate

Net absorption of industrial space totaled 6.9 million SF during the

first three quarters of 2014. The Houston metro’s increasing visibility

and strong distribution channels are resulting in high absorption and

steady development of warehouse space.

In terms of demand for industrial space, Houston remains one of the

top major metro areas. For example, while the Houston industrial

inventory is less than half the size of the New York/Northern New

Jersey market’s inventory, Houston has outpaced that market in 2014

absorption. We expect this trend to continue as a number of large

projects, some with preleasing, are set to deliver and demand remains

high.

Notable 2014 leases:

� HD Supply Holdings – 497,867 SF prelease, Greens Crossing I, North Far submarket

� B&G Foods Inc. – 267,170 SF new lease, DCT Airtex Industrial Center, North Far submarket

� Gulf Winds International - 243,000 SF build-to-suit lease, 5300 Highway 146, East-Southeast Far submarket

� Lennox International – 190,000 SF prelease, DCT Northwest Crossroads Logistics Centre, Northwest Far submarket

� Sunbelt Supply – 185,168 SF lease, Commerce Corporate Center, East- Southeast Far submarket

� Fresh-Pak Corp. – 168,238 SF renewal and expansion, Port Northwest, Northwest Far submarket

� DB Schenker - 150,000 SF prelease at Kenswick AirFreight & Logistics Centre, North Far submarket

NET ABSORPTION OF INDUSTRIAL SPACE AND DIRECT VACANCY RATE TRENDS

LARGEST U.S. INDUSTRIAL MARKETS

Source: Transwestern’s analysis of CoStar data; November 2014. *January-September 2014.



2014

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

05 06 07 08 09 10 11 12 13 14*

DI

RECT

VAC

ANCY

RAT

E

NET A

BSOR

PTIO

N IN

THOU

SAND

S OF

SF

Net Absorption Vacancy Rate

MIL

LION

S OF

SF

0

400

800

1,200

1,600

2,000

LA Basin Chi NY/ NNJ Phi DFW Atl Det Hou SF Bay

Houston remains one of the top major metro areas for industrial demand, a trend expected to continue.









VACANCy

Industrial vacancy up marginally

The overall industrial vacancy rate (including sublet space) is 4.6% as of the third

quarter of 2014, up marginally from 4.3% at the end of 2013. The direct vacancy rate

also is 4.6%, up from 4.2% at the end of 2013. (There is little sublet space available in

Houston’s industrial market.) All sectors of space recorded positive absorption, but

Warehouse/Distribution experienced an increase in vacancy since year-end 2013.

Houston’s vacancy rate ranks as second-lowest among major metro areas, edged out

by the LA Basin’s 3.0% vacancy rate. We expect Houston to retain one of the lowest

vacancy rates in the nation as demand for industrial space in Houston will remain high,

especially as the Panama Canal expansion nears completion and activity at the Port of

Houston continues to increase.

Houston’s overall industrial vacancy rate will likely edge up into the low-5% range over

the next 12 months, as strong demand continues but more new supply is delivered.

The development pipeline is expected to continue at this level in the period ahead

given the market’s strong demand and low vacancy rate.


Pipeline increasing

There is 5.2 million SF of industrial space under construction in the Houston area as

of the third quarter of 2014, up significantly from 2.1 million SF at year-end 2013.

The space now under construction is 18% preleased. The Northwest Far and North

Far submarkets account for 88% of this space, about 4.6 million SF, and warehouse/

distribution product comprises 96% of the space under construction.

The largest project under construction is a 441,000 SF warehouse/distribution facility

in Beltway Crossing Northwest in the Northwest Far submarket. With the development

pipeline at only 1.9% of standing inventory (including planned space likely to deliver

in the next year), investors continue to break ground on new projects. Despite the

increase in construction over the past year, development activity remains controlled

compared to other large markets such as Dallas/Fort Worth and Chicago.

INDUSTRIAL VACANCY RATES

NET ABSORPTION OF INDUSTRIAL SPACE



SELECT METRO AREAS | JANUARY – SEPTEMBER 2014


MIL

LION

S OF

SF

0

1

2

3

4

5

6

7

8

9

10

11

12

13

LA Basin DFW Chi Hou Was/Bal NY/NNJ

OVER

ALL V

ACAN

CY R

ATE

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

LA Basin Hou DFW NY/NNJ Chi Was/Bal

Houston’s overall industrial vacancy rate for the third quarter ranks second-lowest among major metro areas.









RENTAL RATES

Asking rents edge higher

Asking rental rates for all industrial property types averaged $5.93 per SF triple net

in the third quarter, up from $5.83 per SF triple net at year-end 2013. Quoted base

rents for new distribution space are between $4.92 and $5.24 triple net and typically

include an initial allowance of $5.00-$6.00 per SF for improvements.

Sustained high demand should support moderate rent increases for the period ahead,

particularly in the warehouse/distribution sector. The Houston industrial market is

one of the healthiest in the U.S. and one of the best-positioned for future rent growth,

given its low vacancy rate and strengthening drivers of demand, such as shipping

activity at the Port of Houston.

INVESTMENT MARKET

For in-depth analysis of Houston’s industrial investment market, please see Section Six

of this report.

INDuSTRIAL MARKET OuTLOOK

Strong performance likely to continue in 2015

For the period ahead, we expect continued strong performance from the Houston

industrial market. Vacancy likely will tick up as construction accelerates to meet

demand. In the near term, if construction remains in check, industrial rents will rise,

and market conditions will turn further in favor of owners.

Industrial submarkets likely to outperform the market in the months ahead include:

North, Northwest, South, Southeast and West. As the Houston economy continues to

far outpace the nation’s, the need for industrial space will continue to grow over the

intermediate to long-term.

INDUSTRIAL SPACE UNDER CONSTRUCTION

AVERAGE CHANGE IN INDUSTRIAL ASKING RENT




MIL

LION

S OF

SF

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

DFW Chi Was/Bal Hou NY/NNJ LA Basin

ASKI

NG R

ENT,

$/SF

, FS

0%

2%

4%

6%

8%

10%

12%

LA Basin NY/NNJ Chi DFW Hou Was/Bal

SELECT METRO AREAS | JANUARY – SEPTEMBER 2014

The Houston industrial market is one of the healthiest in the U.S. and one of the best-positioned for future rent growth.









SUMMARY OF INDUSTRIAL MARKET INDICATORS - ALL SPACEHOUSTON METRO AREA | 2011 THROUGH THIRD QUARTER 2014

SuBMARKET INVENTORy SF AVAILABLE IMMEDIATELy

DIRECT VACANCy

2011

DIRECT VACANCy

2012

DIRECT VACANCy

2013

DIRECT VACANCy

Q3 2014

VACANCy WITH SuBLET

uNDER CONSTRuCTION

NET ABSORPTION

2011

NET ABSORPTION

2012

NET ABSORPTION

2013

NET ABSORPTION

Q3 2014

NET ABSORPTION

yTD 2014

Central Business District

Flex/R & D 583,281 48,412 8.4% 8.0% 9.9% 8.3% 8.3% - (5,000) 4,000 (14,000) 12,000 11,000

Manufacturing 6,137,612 30,688 4.3% 1.4% 0.8% 0.5% 0.5% - 64,000 166,000 35,000 - -

Warehouse/Distribution 23,497,545 1,456,848 4.8% 6.4% 6.3% 6.2% 6.2% - 120,000 (477,000) 63,000 - -

Total - Central Business District 30,218,438 1,535,948 4.8% 5.6% 5.4% 5.1% 5.1% - 179,000 (307,000) 84,000 12,000 11,000

East-Southeast Far

Flex/R & D 1,850,546 122,136 9.5% 12.2% 8.9% 6.6% 6.6% - 54,000 (72,000) 97,000 67,000 39,000

Manufacturing 6,195,146 315,952 0.5% 6.4% 5.5% 5.1% 5.1% - 202,000 (279,000) 54,000 2,000 129,000

Warehouse/Distribution 36,732,918 3,122,298 8.2% 8.3% 7.8% 8.5% 8.5% 117,334 965,000 695,000 213,000 688,000 1,041,000

Total - East-Southeast Far 44,778,610 3,560,387 7.5% 8.3% 7.6% 8.0% 8.0% 117,334 1,221,000 344,000 364,000 757,000 1,209,000

North Far

Flex/R & D 8,088,974 598,584 9.3% 8.9% 8.0% 7.4% 7.4% - 214,000 90,000 200,000 (40,000) 110,000

Manufacturing 7,459,233 96,970 2.7% 2.1% 2.7% 1.3% 1.3% - (17,000) 15,000 (11,000) - 88,000

Warehouse/Distribution 42,608,620 3,579,124 4.3% 4.3% 4.7% 8.4% 8.4% 1,662,963 1,021,000 828,000 2,010,000 21,000 1,076,000

Total - North Far 58,156,827 4,274,678 4.8% 4.6% 4.9% 7.4% 7.4% 1,662,963 1,218,000 933,000 2,199,000 (19,000) 1,274,000

North Near

Flex/R & D 1,097,470 98,772 22.9% 18.9% 12.3% 9.0% 9.0% - (92,000) 48,000 185,000 5,000 39,000

Manufacturing 3,163,704 113,893 0.9% 0.3% 5.4% 3.6% 3.6% 120,000 58,000 16,000 (134,000) - 62,000

Warehouse/Distribution 13,243,267 940,272 4.8% 3.6% 5.0% 7.1% 7.1% - 298,000 456,000 (67,000) 26,000 383,000

Total - North Near 17,504,441 1,152,938 5.4% 4.1% 5.5% 6.6% 6.6% 120,000 264,000 520,000 (16,000) 31,000 484,000

Northeast Far

Flex/R & D 22,500 0 2.7% 0.0% 0.0% 0.0% 0.0% - - 3,000 - - -

Manufacturing 182,720 0 0.0% 0.0% 0.0% 0.0% 0.0% - - - - - -

Warehouse/Distribution 859,481 0 0.7% 1.2% 0.8% 0.0% 0.0% - (5,000) (5,000) 6,000 - 4,000

Total - Northeast Far 1,064,701 0 0.7% 1.0% 0.7% 0.0% 0.0% - (5,000) (2,000) 6,000 - 4,000

SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Does not include buildings under construction or owned by the government











DIRECT VACANCy

2011

DIRECT VACANCy

2012

DIRECT VACANCy

2013

DIRECT VACANCy

Q3 2014

VACANCy WITH SuBLET

uNDER CONSTRuCTION

NET ABSORPTION

2011

NET ABSORPTION

2012

NET ABSORPTION

2013

NET ABSORPTION

Q3 2014

NET ABSORPTION

yTD 2014

Northeast Near

Flex/R & D 419,469 26,007 8.3% 10.5% 6.8% 6.2% 6.2% - 2,000 (18,000) 33,000 13,000 19,000

Manufacturing 5,931,399 0 0.8% 0.4% 0.4% 0.0% 0.0% - 244,000 23,000 - - 24,000

Warehouse/Distribution 23,710,810 497,927 3.5% 3.4% 2.6% 2.1% 2.1% 40,000 113,000 65,000 256,000 119,000 44,000

Total - Northeast Near 30,061,678 523,934 3.1% 3.1% 2.3% 1.7% 1.7% 40,000 359,000 70,000 289,000 132,000 87,000

Northwest Far

Flex/R & D 4,798,524 143,956 5.4% 5.3% 4.0% 3.0% 3.4% 44,000 38,000 75,000 71,000 (4,000) 74,000

Manufacturing 8,871,218 159,682 3.7% 2.9% 5.1% 1.8% 1.8% - 31,000 51,000 149,000 144,000 323,000

Warehouse/Distribution 44,664,582 2,143,900 3.4% 2.6% 3.2% 4.8% 4.8% 2,847,792 1,203,000 801,000 1,732,000 300,000 1,048,000

Total - Northwest Far 58,334,324 2,447,538 3.6% 2.9% 3.5% 4.2% 4.2% 2,891,792 1,272,000 927,000 1,952,000 440,000 1,445,000

Northwest Near

Flex/R & D 10,791,131 863,290 9.7% 8.9% 8.4% 8.0% 8.4% - 93,000 92,000 195,000 54,000 116,000

Manufacturing 9,289,566 269,397 3.3% 0.6% 0.7% 2.9% 2.9% - (144,000) 256,000 (10,000) (46,000) (210,000)

Warehouse/Distribution 66,788,433 2,003,653 4.3% 3.9% 3.2% 3.0% 3.1% - 530,000 871,000 1,092,000 283,000 835,000

Total - Northwest Near 86,869,130 3,136,341 4.8% 4.1% 3.5% 3.6% 3.7% - 479,000 1,219,000 1,277,000 291,000 741,000

South Far

Flex/R & D 1,303,105 24,759 10.5% 9.3% 2.9% 1.9% 1.9% - 8,000 21,000 110,000 21,000 (7,000)

Manufacturing 6,675,011 66,750 1.8% 1.8% 3.0% 1.0% 1.0% - 61,000 - (53,000) 80,000 393,000


Total - South Far 29,349,384 647,162 3.1% 3.6% 3.1% 2.2% 2.3% 219,841 590,000 38,000 265,000 332,000 949,000

South Near

Flex/R & D 689,156 128,183 18.1% 21.2% 22.8% 18.6% 18.6% - (12,000) (25,000) (12,000) 34,000 45,000

Manufacturing 1,509,616 101,144 3.6% 3.8% 8.2% 6.7% 6.7% - 3,000 (2,000) (75,000) - 39,000

Warehouse/Distribution 9,955,560 338,489 2.5% 3.4% 4.5% 3.4% 3.4% - (86,000) (109,000) (134,000) 50,000 132,000

Total - South Near 12,154,332 567,816 3.5% 4.4% 5.9% 4.7% 4.7% - (95,000) (136,000) (221,000) 84,000 216,000












DIRECT VACANCy

2011

DIRECT VACANCy

2012

DIRECT VACANCy

2013

DIRECT VACANCy

Q3 2014

VACANCy WITH SuBLET

uNDER CONSTRuCTION

NET ABSORPTION

2011

NET ABSORPTION

2012

NET ABSORPTION

2013

NET ABSORPTION

Q3 2014

NET ABSORPTION

yTD 2014

Southeast Near

Flex/R & D 363,962 40,036 20.2% 15.3% 12.2% 11.0% 11.0% - 6,000 25,000 15,000 4,000 (16,000)

Manufacturing 9,947,061 0 0.0% 0.0% 0.4% 0.0% 0.0% - 14,000 - (31,000) 30,000 40,000

Warehouse/Distribution 20,423,140 469,732 2.3% 1.6% 2.7% 2.3% 2.3% - 118,000 207,000 (324,000) 82,000 363,000

Total - Southeast Near 30,734,163 509,768 2.1% 1.4% 2.3% 1.7% 1.7% - 138,000 232,000 (340,000) 116,000 387,000

Southwest Far

Flex/R & D 1,502,099 130,683 24.1% 25.6% 24.4% 8.7% 8.7% 26,250 (26,000) (23,000) 187,000 (9,000) 84,000

Manufacturing 1,580,397 137,495 4.4% 5.5% 8.8% 8.7% 8.7% - 64,000 (15,000) (33,000) 28,000 15,000

Warehouse/Distribution 6,012,739 222,471 4.8% 4.2% 2.4% 3.7% 3.7% - 81,000 100,000 195,000 (24,000) (57,000)

Total - Southwest Far 9,095,235 490,648 7.7% 7.4% 6.6% 5.4% 5.4% 26,250 119,000 62,000 349,000 (5,000) 42,000

Southwest Near

Flex/R & D 6,602,139 382,924 6.4% 8.7% 7.5% 5.8% 5.8% - 5,000 (186,000) 180,000 53,000 114,000

Manufacturing 4,608,887 142,875 2.7% 2.1% 2.9% 3.1% 3.1% - 35,000 113,000 (31,000) 5,000 (4,000)

Warehouse/Distribution 27,355,768 875,385 4.2% 3.1% 2.2% 3.2% 3.2% 90,000 385,000 795,000 842,000 109,000 (110,000)

Total - Southwest Near 38,566,794 1,401,184 4.4% 3.9% 3.1% 3.6% 3.6% 90,000 425,000 722,000 991,000 167,000 -

Sugar Land

Flex/R & D 3,082,022 141,773 9.6% 7.4% 5.1% 4.6% 4.7% - 64,000 65,000 105,000 (12,000) (12,000)

Manufacturing 2,510,135 45,182 0.0% 0.0% 0.0% 1.8% 1.8% - 12,000 96,000 - (45,000) (45,000)


Total - Sugar Land 17,945,559 1,113,461 5.9% 4.9% 4.1% 6.2% 6.2% 31,000 141,000 328,000 245,000 (32,000) 17,000

Houston

Flex/R & D 41,194,378 2,749,516 9.7% 9.7% 8.3% 6.7% 6.8% 70,250 349,000 99,000 1,352,000 198,000 616,000

Manufacturing 74,061,705 1,480,030 2.1% 1.8% 2.6% 2.0% 2.0% 120,000 627,000 440,000 (140,000) 198,000 854,000

Warehouse/Distribution 349,577,533 17,132,257 4.4% 4.2% 4.1% 4.9% 4.9% 5,008,930 5,329,000 4,411,000 6,232,000 1,910,000 5,396,000

Total - Houston 464,833,616 21,361,803 4.6% 4.3% 4.2% 4.6% 4.6% 5,199,180 6,305,000 4,950,000 7,444,000 2,306,000 6,866,000

Vacancy Rate with Sublet Space 4.7% 4.4% 4.3% 4.6%









SECTION 06 | OFFICE AND INDuSTRIAL INVESTMENT TRENDS 36

OFFICE AND INDUSTRIAL INVESTMENT TRENDS

SECTION SIX









INVESTMENT SALES OF OFFICE BUILDINGS

REAL ESTATE RETURNS VS. OTHER INVESTMENT OPTIONS

AVERAGE CORE OFFICE ASSET CAP RATE

OFFICE INVESTMENT SALES MARKET OVERVIEW

Investor interest in Houston office assets remains high

Nationally, year-to-date sales through August 2014 were $69.1 billion, above sales of $54.4 billion

during the same time period in 2013. Sales are strong for U.S. office assets, but well below peak levels

in 2007, which totaled $214.0 billion. While Houston’s sales are off last year’s pace, we expect to see

continued strength through the remainder of 2014 and throughout 2015. With one of the nation’s

strongest local economies, driven by healthy growth in a wide variety of sectors, especially the Energy

sector, Houston will continue to spark investor interest.

ALTERNATIVE INVESTMENT STRATEGIES

Real estate remains a solid long-term play

The stock market has been robust since the Great Recession, but recent volatility has reminded

investors to diversify their assets. Real estate has proven to be a strong investment as it has successfully

recovered from declines during the housing bubble and recession. Also, in the long term, real estate

investments have outperformed both stocks and bonds. In the last 10 years as of June 2014 the

NAREIT Equity REIT Index saw a 9.67% increase. The NCREIF Property Index increased 8.63% during

the same period, while stocks (as measured by the S&P 500) only rose 7.78%. Direct investment in real

estate remains attractive at this point in the cycle compared to the alternatives, especially considering

the recent uncertainty in the stock market. Nationally, we have continued to see economic growth and

job creation, which will support demand for office space, even as owners deal with the headwinds

created by tenants’ densification of space (a reduction in the SF leased per worker).

After peaking in 2009, U.S. office cap rates began their decline and have trended lower since, though

they have plateaued over the last couple of years. The mean cap rate in the U.S. in 2014 is 6.9%

for core office assets, the same as in 2013 and down from 7.1% in 2012, according to Real Capital

Analytics. We believe cap rates will remain largely unchanged through the remainder of 2014 and into

2015 as market conditions remain stable.

Based on the NCREIF Property Index, total returns have edged up in 2014 compared to the year prior.

While Houston has seen a small decline in returns compared to 2013, its 2014 returns remain among

the highest in the nation. Houston’s average office asset return is 14.56% over the 12 months ending

June 2014 after a return of 15.92% for the 12 months ending June 2013. The returns in Houston

led all other major metro areas except Denver, and are well above the national average of 10.29%.

This robust performance can be attributed largely to demand for office space by the Energy sector,

Houston’s most important core industry.

Sources: Real Capital Analytics, graphic by Delta Associates; November 2014. *Through August.

Sources: NCREIF, Delta Associates; November 2014.


UNITED STATES | 2002 THROUGH AUGUST 2014

MID-YEAR 2014


$0$20$40$60$80$100$120$140$160$180$200$220$240

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD 2014*

BILL

IONS

OF $

0%

5%

10%

15%

20%

25%

1-YEAR 3-YEAR 5-YEAR 10-YEAR

NAREIT Equity REIT IndexNCREIF Property Index

Stocks (S&P 500)Bonds (Barclays Capital Government)

TOTA

L RET

URN/

YEAR

Real Estate: Alternatives:

4%

5%

6%

7%

8%

9%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

AVER

AGE

CAP

RATE









NCREIF RETURN INDEX1 FOR OFFICE PROPERTIES

METRO AREA 12-MONTH TOTAL RETuRN AT 2ND QuARTER 2014

Denver 17.01%

Houston 14.56%

San Francisco 14.56%

Dallas 14.38%

Los Angeles 13.68%

Phoenix 12.45%

National Average 10.29%

Boston 9.92%

Atlanta 9.24%

New York 8.97%

Chicago 8.23%

Washington 6.72%

1 NCREIF compiles return based on its members’ $139.5 billion office portfolios. The index includes both current income and capital appreciation returns. Source: Delta Associates, based on data in NCREIF’s 2nd Quarter 2014 Real Estate Performance Report.

COMPARATIVE INVESTMENT SALES VOLUME

OFFICE SALES VOLuME

Houston tracking below last year’s total but comparable with peer markets

The Houston metro area recorded $2.6 billion in total office investment sales transactions

in 2014 through the third quarter of the year. These are assets for which pricing information

could be obtained.

Although sales volume is tracking significantly below the approximately $5.4 billion recorded

in 2013, investor interest in Houston remains at high levels as lucrative market conditions,

driven by one of the nation’s strongest local economies, continue to fuel a positive outlook for

the Energy Capital. The shale revolution has given local energy companies the confidence

and incentive to expand their workforces, which translates into greater interest in Houston

office assets.

Houston’s office sales volume year-to date puts it on par with Dallas/Fort Worth and Denver.

Over the past few years, investors have begun to consider Houston as a “gateway market.”

While Houston’s office sales volume still does not match the volume of the largest coastal

markets, investors foreign and domestic have started to take greater interest in Houston due to

its strong economy and the high returns its office assets are producing.

OFFICE PRICING

Upward pricing pressure continues for quality office assets

Nationally, the average sales price has edged up in 2014 to $238/SF through the first eight

months of the year, compared to $226 for all of 2013. Following the recession, pricing

returned to peak levels in Houston faster than in many other major markets around the

country. Improved market conditions, driven by one of the strongest local economies in the

nation, continues to fuel investor interest in the Energy Capital of the World. In addition to the

shale revolution, hydraulic fracturing and alternative fuel activities are driving energy firms to

take more office space in Houston, in some cases consolidating operations from other parts of

the country. This is putting upward pressure on pricing of quality office assets.

Overall, office pricing in Houston averaged $204 per SF in 2014 through the third quarter,

compared to $213 per SF for all of 2013. With the exception of 2009 – the low point of the

downturn – values in Houston have generally been on an upward trajectory. Values likely will

increase in the period ahead, as market conditions continue to strengthen, rents rise, and

competition increases for Houston’s assets. However, some plateauing is likely as job growth

begins to decelerate and as office tenants increasingly look to keep occupancy costs in check,

possibly taking some froth out of the office investment sales market.

Source: Real Capital Analytics per Transwestern, graphic by Delta Associates; November 2014. *Through 3rd quarter 2014.

OFFICE BUILDINGS | 2009 – 3RD QUARTER 2014

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

$6.0

2009 2010 2011 2012 2013 2014*

BILL

IONS

OF $

Hou Den DFW









The average cap rate in the third quarter for Houston office assets was 6.4%,

down from an average of 7.3% at year-end 2013. However, there is a wide

range of cap rates depending on the locations and characteristics of the

properties being traded. Most notably, Class A properties generally command

much lower yields than Class B due to a variety of factors including quality

of the asset, appreciation potential and investor profile. However, due to

the rapid increase in rental rates across much of the city during the last 12-

24 months, the Class B sector has witnessed substantial in-place cap rate

compression because of leases that have not yet rolled to market rates.

ACTIVE PLAyERS IN THE OFFICE MARKET

Most active firms represent varied sources of capital

The top investors in Houston office assets this year include some of the most

prominent firms in the industry.

� Invesco

� TIAA-CREF

� AEW

� Clarion Partners

� TA Realty

� KBS

� MetLife

OFFICE INVESTMENT SALES MARKET OuTLOOK

Competition increasing for Houston’s Class B office assets

Well-located Class B office assets in Houston continue to receive significant

interest from investors as a result of the highly competitive Class A investment

market. Thus, pricing for well-located Class B assets is expected to continue

to improve as competition for these properties increases. We expect overall

cap rates in Houston to trend downward slightly in the months ahead as the

Class B market improves and high investor interest in Houston’s office assets

continues. Additionally, the recent decrease in 10-year treasury rates should

fuel continued yield compression in the near-term. In the current interest rate

environment, even a material increase in rates should be able to be absorbed

without significantly altering current pricing metrics. However, pricing may

plateau in 2015-16 as job growth decelerates and interest rates rise.

AVERAGE CORE OFFICE ASSET SALES PRICE

AVERAGE OFFICE SALES PRICE

OFFICE INVESTMENT SALES VOLUME

Sources: Real Capital Analytics, graphic by Delta Associates; November 2014.



SELECT METRO AREAS | JANUARY THROUGH AUGUST 2014



NY SF Bay LA Was/Bal Bos Chi DFW Hou Den Atl$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

MIL

LION

S OF

$

$100

$125

$150

$175

$200

$225

$250

$275

2005 2006 2007 2008 2009 2010 2011 2012 2013YTD

2014*$

PER

SF

$97 $87

$128 $129 $125 $139

$174

$58

$174

$214

$188

$213 $204

$25

$50

$75

$100

$125

$150

$175

$200

$225

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

AVER

AGE

SALE

S PR

ICE

PER

SF









INDuSTRIAL INVESTMENT SALES MARKET OVERVIEW

Houston’s industrial returns outpacing the nation’s

National industrial investment sales are ahead of last year’s volume during the comparable time

period. Year-to-date sales through August 2014 totaled $31.7 billion, which compares to $28.7 billion

for the comparable period in 2013. Sales volume has steadily increased each year since 2009 and we

expect this trend to continue in 2014 once the year closes.

The Houston market has continued to experience strong industrial investment sales. Sales appear

low in comparison to the robust sales volume of 2013, but they remain high on a historical basis and

industrial product has continued to deliver strong returns in 2014. With the completion of the Panama

Canal expansion set for early 2016, we expect to see demand for industrial space increase around the

Port of Houston.

Returns on investments in industrial assets showed continued strength in 2014. The Houston industrial

market has been one of the best in the country compared to similar markets. Returns in Houston

measured 14.23% over the 12 months ending in June 2014, compared to the national average of

12.63%. Among major industrial markets, only Dallas and New York performed better.

INDuSTRIAL SALES VOLuME

Houston remains a hidden gem when comparing fundamentals to sales volume

The Houston industrial market achieved total sales volume of $786 million through the third quarter of

2014, behind the 2013 pace, which was $1.1 billion during the comparable period. These are assets

for which pricing information could be obtained. Despite the Houston industrial market’s low vacancy

rate and robust performance, it remains overshadowed as an investment alternative by larger, coastal

industrial markets such as the LA Basin and New York/Northern New Jersey. The success of the Port of

Houston and the fundamentals of Houston’s industrial market suggest increasing sales volume in the

period ahead.

INDuSTRIAL PRICING

Average price rising on strong market fundamentals

Overall, industrial pricing has averaged $63 per SF this year in Houston, compared to $55 per SF one

year prior. Houston’s industrial assets remain a bargain on a per SF basis compared with some of its

peer markets.

As of late 2014, Houston industrial cap rates cover a wide range depending on the type and class of

product sold. Class A properties are selling in the 5-6% range, while Class B product is trading in the

7-9% range. Of note, well-located Class A distribution projects are currently trading in the low-5%

range, and in some cases, well-positioned Class A assets are dipping in to the high-4% range.

INVESTMENT SALES OF INDUSTRIAL BUILDINGS

INDUSTRIAL INVESTMENT SALES

NCREIF RETURN INDEX1 FOR INDUSTRIAL PROPERTIES

METRO AREA 12-MONTH TOTAL RETuRN AT 2ND QuARTER 2014

Dallas 15.19%

New York 14.43%

Houston 14.23%

National Average 12.63%

Denver 12.39%

Atlanta 12.27%

Los Angeles 10.65%

Chicago 10.15%

Washington 9.78%1 NCREIF index includes both current income and capital appreciation returns. Source: NCREIF, Delta Associates; November 2014.




HOUSTON METRO | 2002 THROUGH 3RD QUARTER 2014

$0$5$10$15$20$25$30$35$40$45$50$55$60$65

2002 2003 20052004 2006 2007 2008 2009 2010 2011 2012 2013 2014*

BILL

IONS

OF $

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

MIL

LION

S OF

$









ACTIVE PLAyERS IN THE INDuSTRIAL MARKET

Major sources of capital are active in Houston’s industrial market

The top investors in Houston industrial assets this year include

some of the most prominent firms in the industry.

� Clarion

� TA Realty

� Stockbridge

� Prologis

� Invesco

� Liberty

� TIAA-CREF

� Duke

� Cornerstone

� IIT

INDuSTRIAL INVESTMENT SALES MARKET OuTLOOK

Abundance of capital likely to keep downward pressure on cap rates

Houston is now considered a gateway city by the investor

community, and many investment funds have allocated capital

ready to invest. This, coupled with a lack of quality product

on the market, will continue to keep downward pressure on

Houston industrial cap rates as long as interest rates remain low.

Investor demand for industrial properties in Houston will remain strong with the abundance of capital (core and value-add funds) chasing product based on the strength of the market and vibrant Houston economy.

INDUSTRIAL INVESTMENT SALES VOLUME

AVERAGE INDUSTRIAL SALES PRICES





$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

LA Basin NY/NNJ SF Bay Chi DFW Was/Bal Atl Den Hou

MIL

LION

S OF

$

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

AtlChiDFWHouDenWas/BalLA BasinNY/NNJSF Bay

$ PE

R SF








SECTION 07 | THE HOuSTON METRO MuLTIFAMILy MARKET 42

THE HOUSTON METRO MULTIFAMILY MARKET

SECTION SEVEN









MuLTIFAMILy MARKET OVERVIEW

Flurry of activity continues

Houston remains a safe and attractive market for multifamily investment with its long-term job market success

and the nation’s sixth-lowest median age of housing inventory. Currently, there are over 24,000 units under

construction and another 18,000 proposed. Houston has absorbed 14,760 units over the first three quarters of

2014, and rental rates have increased 7.1% this year on an annualized basis. With the enduring velocity of job

creation, Houston should continue to experience success across all multifamily asset classes.

ABSORPTION

Absorption dips

Absorption was approximately 14,760 units year-to-date through September 2014, slightly below the 16,153

absorbed during the same period one year prior. While this year’s pace is below last year’s, it remains high by

historical standards. Submarkets with the highest absorption levels during the 3rd quarter of 2014 were: Katy/

Far West, at 494 units; Woodlands Far North, at 423 units; Medical Center/Bellaire, at 398 units; and Inner Loop

West/Greenway Plaza, at 392 units.

VACANCy

Vacancy remains consistent

The Houston multifamily market’s average vacancy rate was 9.0% as of the third quarter of 2014, identical to

the same period in 2013. During the third quarter, the largest vacancy declines occurred in these submarkets

(figures are on an annualized basis): Heights, at 26.1 percentage points; Inner Loop West, at 9.9 percentage

points; Medical Center/Bellaire, at 9.0 percentage points; and Conroe/Montgomery, at 5.7 percentage points.

Class B properties posted the lowest vacancy rates, averaging 6.3%, followed by Class C at 6.5%, Class D at

12.3% and Class A properties at 18.3%. The submarkets with the lowest vacancy rates as of the third quarter

were Galena Park/Jacinto City, at 1.7%; Friendswood/Pearland, at 4.6%; FM 1960/Copperfield, at 4.8%;

Gulfton/Bissonet, at 4.9%; and Lake Houston/Kingwood, at 5.1%.


Construction of communities still soaring

20,197 units, comprised of 73 communities, have delivered in the past twelve months and 24,562 units in

85 communities are currently under construction. Proposed construction is currently at 18,282 units, in 61

communities, of which 49% is concentrated in the following four submarkets: Montrose/Museum District, with

3,476 infill units; Katy/Far West, with 3,192 suburban units; West Memorial/Briar Forest, with 3,134 suburban

units; and Inner Loop West/Greenway Plaza, with 2,158 infill units.

NET ABSORPTION — ALL APARTMENT CLASSES

APARTMENT VACANCY RATE — ALL CLASSES

Source: ADS, Transwestern, Delta Associates; November 2014. *January through September 2014.

Source: ADS, Transwestern, Delta Associates; November 2014. *As of September 2014.

HOUSTON METRO | 2005 THROUGH SEPTEMBER 2014

HOUSTON METRO | 2005 THROUGH SEPTEMBER 2014

-10

0

10

20

30

40

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

THOU

SAND

S OF

UNI

TS

9.5%

16.1%

9.0%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

VACA

NCY

RATE









RENTAL RATES

Rents continue to grow

Nationally, rent growth has been consistent, but it was expected to be stronger during this time of

year due to seasonality. A lack of acceleration in income growth and an increase in supply created

more competition in the market. By comparison, Houston has experienced rent growth above the

national average during 2014 and the only major metro areas with stronger rent growth this year are

Dallas/Fort Worth and New York.

In Houston, average effective rents ended the quarter at $920 per unit, or $1.05 per SF, compared

to $857 per unit, $0.98 per SF at year-end 2013. Rental rates, on an annualized basis, have increased

7.1% since year-end 2013. In fact, the third quarter of 2014 marked the 19th consecutive quarter of

effective rental rate increases since the fourth quarter of 2009.

The submarkets registering the highest annualized rental rate growth during the third quarter

are Galena Park/Jacinto City at 22.2%; Lake Houston/Kingwood, at 19.6%; Westchase, at 15.5%;

Galveston/Brazoria, at 11.7%; and Bear Creek/Copperfield, at 18.2%. Concessions were reported in

24% of the market with the average special offered at 4.8%.

INVESTMENT MARKET

Transaction volume up

Apartment investment sales activity totaled $3.3 billion through the third quarter of 2014 for

transactions where pricing information was available. By comparison, recorded sales volume for

the same time period last year was $2.9 billion. Investment sales volume has increased each year

since 2009 and is on pace to continue that trend in 2014. As absorption levels remain high and rent

growth continues to surpass the national average, investors will continue to seek out opportunities

in Houston.

Unit sales volume continued to strengthen with 42,475 units sold year-to-date through September

2014, compared to 39,813 units sold during the same time frame in 2013. While sales velocity and

pricing are positive across all multifamily asset classes, assets with a value-add play continue to be

the most attractive deals to investors. Demand for multifamily assets, readily available debt and

projected rental increases across the market have kept cap rates in the 5-7% range.

MuLTIFAMILy MARKET OuTLOOK

Population growth will drive multifamily market forward

Houston’s population growth is likely to continue in the years ahead, with job opportunities drawing

new residents to the region. This influx of new residents is likely to support steady demand for

rental units, helping to keep the vacancy rate in check even as new supply continues to deliver.

ASKING RENT PERCENTAGE CHANGE

AVERAGE APARTMENT RENTAL RATE

Source: REIS, Delta Associates; November 2014.

Source: ADS, Transwestern, Delta Associates; November 2014.

SELECT METRO AREAS | JANUARY THROUGH SEPTEMBER 2014

HOUSTON METRO | 1ST QUARTER 2011 THROUGH 3RD QUARTER 2014

0%

1%

2%

3%

4%

5%

Was LA Atl Phx Chi Hou DFW NY

National Average = 2.9%

PERC

ENTA

GE C

HANG

E

$1.05

$0.85

$0.90

$0.95

$1.00

$1.05

$1.10

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

RENT

($/S

F/M

ONTH

)

2011

7.1% increase on an annualized basis

2012 2013 2014









HOUSTON MULTIFAMILY MARKET INDICATORS

SuBMARKETNuMBER OF APARTMENT

COMMuNITIES

NuMBER OF APARTMENT uNITS AVERAGE OCCuPANCy AVERAGE SF/uNIT AVERAGE EFFECTIVE

RENT/ MONTHAVERAGE EFFECTIVE

RENT/SFuNITS uNDER

CONSTRuCTIONuNITS ABSORBED

Q3 2014

1 Montrose/Museum District 54 13,434 87.8% 924 $1,632 $176.60 3,476 2602 Inner Loop West/Greenway Plaza 66 15,881 79.4% 960 $1,722 $179.20 2,158 3923 Medical Center/Bellaire 71 20,516 94.3% 877 $1,273 $145.20 1,392 3984 Heights 20 3,744 83.2% 842 $1,419 $168.50 1,283 1815 Inner Loop East 56 8,424 91.1% 822 $1,007 $122.50 1,654 1666 Northshore/Wood Forest 40 8,646 91.2% 812 $682 $84.00 0 -877 Eastex Frwy/Near Northeast 30 5,503 94.2% 929 $751 $80.80 0 -208 Northline/Aldine 61 9,956 94.4% 847 $651 $76.90 0 359 Greenspoint 37 9,473 89.3% 760 $589 $77.50 0 -1010 FM 1960 East/IAH Airport 46 8,600 93.7% 854 $765 $89.60 0 4711 Lake Houston/Kingwood 45 11,588 94.9% 932 $1,022 $109.70 264 -7612 Far East 28 4,743 88.3% 930 $772 $83.00 80 013 Brookhollow 94 20,492 92.8% 828 $756 $91.30 0 12214 Spring Branch 98 18,466 94.1% 917 $795 $86.70 573 -3015 Inwood/Northwest 39 7,256 93.7% 895 $723 $80.80 0 2116 FM 1960 West/ Champions 152 37,294 92.2% 878 $809 $92.10 384 25917 FM 1960 West/Steeplechase 73 19,332 92.2% 915 $970 $106.00 0 8118 Bear Creek/Copperfield 48 13,021 95.2% 881 $856 $108.50 342 -5619 Katy/Far West 67 17,677 89.9% 952 $1,135 $119.20 3,192 49420 Tomball/Far Northwest 25 5,131 63.4% 930 $1,122 $120.60 180 38221 Woodlands/Far North 53 15,799 82.2% 933 $1,140 $122.20 698 42322 Conroe/Montgomery 43 7,546 92.6% 899 $849 $94.40 0 9123 Hwy 288/South 58 13,216 88.3% 961 $962 $100.10 382 -3824 Gulfgate/Almeda Mall 95 21,956 94.0% 817 $686 $84.00 78 025 Galena Park/Jacinto City 3 320 98.3% 740 $721 $97.40 0 -326 Pasadena/Deer Park 113 21,862 92.0% 847 $717 $84.70 180 -10327 Friendswood/Pearland 29 5,541 95.4% 866 $897 $103.60 476 -6628 Clear Lake 97 24,520 93.8% 878 $934 $106.40 0 11629 Baytown 51 9,158 91.8% 849 $726 $85.50 240 4230 Galveston/Brazoria 134 20,715 89.7% 829 $738 $89.00 0 8531 Galleria 101 23,463 90.8% 893 $1,267 $141.90 1,791 22032 Woodlake/Westheimer 37 11,989 90.0% 883 $985 $111.60 714 2933 West Memorial/Briar Forest 83 25,487 87.5% 949 $1,112 $117.20 3,134 1434 Westchase 48 14,092 94.0% 835 $924 $110.70 562 -7535 Alief 113 27,276 84.3% 873 $775 $88.80 0 14236 Sharpstown/Westwood 105 25,194 90.6% 791 $606 $76.60 0 -8937 Gulfton/Bissonnet 58 16,901 95.1% 810 $670 $82.70 0 8038 Braeswood/Fondren SW 84 21,937 89.3% 839 $666 $79.40 0 639 Almeda/South Main 22 4,280 94.5% 848 $756 $89.20 0 2440 Fort Bend 47 12,577 89.7% 945 $1,146 $121.30 1,329 8741 Richmond/Rosenberg 28 4,536 93.7% 861 $869 $100.90 0 -5

Greater Houston 2,552 587,584 91.0% 876 $920 $105.00 24,562 3,539SOURCE Apartment Data Services, Transwestern








SECTION 08 | THE HOuSTON METRO RETAIL MARKET 46

THE HOUSTON METRO RETAIL MARKET

SECTION EIGHT









RETAIL MARKET OVERVIEW

Retail sector thriving

Houston’s 174.8 million SF multi-tenant retail market continues to gain momentum and further growth

is anticipated in the period ahead. The region’s retail sector added 6,100 jobs over the 12 months

ending in September, a 2.2% increase. Retail employment should continue to rise as consumer

spending remains high and the regional economy flourishes.

Houston’s retail sector is supported by one of the nation’s best regional economies and high metro

area employment gains. Local job growth has led Houston to best all major metro areas except

Chicago in net absorption of retail space through the first three quarters of 2014, at 1.53 million SF.

Grocery-anchored properties and mixed-use projects continue to draw investors and drive new

retail development in Houston. In addition, there are major expansions underway at The Galleria and

Baybrook malls at a time when enclosed-mall construction is stagnant in the rest of the U.S. In fact,

Houston leads comparable metro areas with 1.03 million SF of retail space under construction.

VACANCy

Retail vacancy declines slightly

Retail vacancy is 9.7% at the third quarter of 2014, down slightly from 10.0% at year-end 2013. We

expect vacancy to remain steady or decline modestly in the period ahead as the demand increases but

construction activity ramps up. Both established Houston-area retailers and tenants new to the metro

are seeking unique, quality spaces to capitalize on the growing market.

Houston’s retail vacancy is higher than the national vacancy rate of 6.3%. However, compared to other

major metro areas, Houston’s vacancy rate falls in the middle of the pack.

RENTAL RATES

Rents on the rise

Retail rents for all classes of space increased to $17.26 per SF from $17.16 at year-end 2013, though

rents will vary greatly by a number of factors including property type and location. With occupancy

up and prime space in high demand, rents are on the rise, especially in well-located pad and end-cap

spaces. Retail rents will likely experience moderate growth through the end of 2014 and into 2015, as

consumer spending accelerates and market conditions remain strong.

NeighborhoodCenters

35% 33% 10% 10% 12%

CommunityCenters*

RegionalMalls**

Strip Centers Other

Total =174.8 Million SF

MULTI-TENANT RETAIL MARKET SCALE

RETAIL JOB GROWTH

NET ABSORPTION OF RETAIL SPACE

Source: U.S. Bureau of Labor Statistics, Delta Associates; November 2014. *12 months ending in September.

Source: Transwestern’s analysis of CoStar data; November 2014. *Includes power, lifestyle, outlet, and theme/festival centers. ** Includes regional and super regional centers.


HOUSTON METRO | 1997 – SEPTEMBER 2014

HOUSTON METRO – NOVEMBER 2014

SELECT METRO AREAS | JANUARY THROUGH SEPTEMBER 2014

-8-6-4-202468101214

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*

JOBS

IN TH

OUSA

NDS

MIL

LION

S OF

SF

0

1

2

3

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

RETAIL SPACE UNDER CONSTRUCTION



MIL

LION

S OF

SF

0

1

2

Hou Chi Atl SF Bay DFW Phx Den

U/C Nationally= 53.3 Million SF

Houston leads comparable metro areas in retail space under construction.









GROSS SALES

Retail sales strong

The most recent data from the Texas Comptroller’s Office shows that gross retail sales in the Houston

metro are on pace for $124.1 billion in sales this year, compared to $116.4 billion recorded in

2013. Retail sales should continue to grow throughout the metro in the period ahead, in part due to

Houston’s growing population base and employment gains.

INVESTMENT MARKET

Transaction volume off last year’s pace

Retail investment sales activity totaled $982 million through the third quarter of 2014 for transactions

where pricing information was available. In comparison, recorded sales volume for the same time

period last year was $1.1 billion. While 2014 sales have been strong they are behind last year’s totals.

There was a high volume of sales in the latter half of 2013 as investors made a big push to close sales

before the year ended. This was due to investors wanting to avoid an increase in long-term capital

gains taxes that took effect in 2014.

RETAIL MARKET OuTLOOK

Retail sector likely to expand in 2015 as national chains seek market share in Houston

A growth cycle in the retail market should continue in the period ahead, making investment, especially

in grocery-anchored centers, very attractive. Retail and restaurant tenants are flocking to urban infill

locations as metro job growth has caused residential construction to ramp up. Neighborhoods such

as Montrose and The Heights should continue to see increased activity as investors commit capital in

high-performing areas.

Grocery chains are under construction in key locations throughout the metro, including HEB, Kroger,

Whole Foods, Trader Joe’s and Costco, further expanding their market presence. Also, fast-casual

concepts such as Mod Pizza, Torchy’s Tacos, Raising Cane’s and Chipotle are among many that are

quickly snatching up retail space. Mixed-use projects such as the River Oaks District development and

Uptown Park redevelopment are further defining the live-work-play dynamic in the Houston market.

RETAIL VACANCY RATE TRENDS

AVERAGE RETAIL RENTAL RATE

Source: Transwestern’s analysis of O’Connor & Associates data, Delta Associates; November 2014. Note: Data source has adjusted its inventory and restated its vacancy rates. *Through Q3 2014

Source: Transwestern’s analysis of O’Connor & Associates data, Delta Associates; November 2014. Note: Data source has adjusted its inventory and restated its rental rates. *Through Q3 2014

HOUSTON METRO | 2005 – Q3 2014

HOUSTON METRO | 2005 – Q3 2014

9.7%

9%10%11%12%13%14%15%16%17%

05 06 07 08 09 10 11 12 13 14*

VACA

NCY

RATE

$17.26

$16.00

$16.50

$17.00

$17.50

$18.00

$18.50

$19.00

05 06 07 08 09 10 11 12 13 14*

AVER

AGE

RENT

AL R

ATE

($ P

ER S

F)

GROSS RETAIL SALES

Source: Transwestern’s analysis of Texas Comptroller’s Office data, Delta Associates; November 2014. *First quarter 2014 annualized.

HOUSTON METRO | 2005 – 2014

$124.1

$60

$70

$80

$90

$100

$110

$120

$130

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

TOTA

L GRO

SS R

ETAI

L SAL

ES (I

N BI

LLIO

NS O

F DOL

LARS

)

The retail market growth cycle should continue in the period ahead, making investment very attractive.








CONTACT 49

Atlanta

3340 Peachtree Road

Suite 1000

Atlanta, Georgia 30326

PHONE: 404.842.6600

FAX: 404.842.6601

Austin

901 MoPac Expressway South Bldg. 4

Suite 250

Austin, Texas 78746

PHONE: 512.328.5600

FAX: 512.328.9309

Baltimore

7160 Columbia Gateway Drive

Suite 210

Columbia, Maryland 21046

PHONE: 443.285.0770

FAX: 443.285.0660

Bethesda

6700 Rockledge Drive

Suite 500A

Bethesda, Maryland 20817

PHONE: 301.571.0900

FAX: 301.571.0903

Boston

75 State Street

18th floor

Boston, Massachusetts 02109

PHONE: 617.439.6000

FAX: 617.439.9707

Chicago

200 West Madison St.

Suite 3300

Chicago, Illinois 60606

PHONE: 312.881.7000

FAX: 312.881.7084

Dallas

5001 Spring Valley Road

Suite 400W

Dallas, Texas 75244

PHONE: 972.774.2500

FAX: 972.991.4247

Denver

4643 S. Ulster Street

Suite 300

Denver, Colorado 80237

PHONE: 303.639.3000

FAX: 303.407.1453

Detroit

32255 Northwestern Highway

Suite 218

Farmington Hills, Michigan 48334

PHONE: 248.932.2840

FAX: 248.932.1108

Fort Lauderdale

110 Tower

110 Southeast 6th Street

Fort Lauderdale, Florida 33301

PHONE: 954.607.1083

FAX: 954.761.2381

Fort Worth

100 Throckmorton Street

Suite 700

Fort Worth, Texas 76102

PHONE: 817.877.4433

FAX: 817.870.2826

Greenwich

67 Holly Hill Lane

Suite 200

Greenwich, Connecticut 06830

PHONE: 203.637.9300

FAX: 203.698.1022

Houston

1900 West Loop South

Suite 1300

Houston, Texas 77027

PHONE: 713.270.7700

FAX: 713.270.6285

Los Angeles

601 South Figueroa Street

Suite 2750

Los Angeles, California 90017

PHONE: 213.624.5700

FAX: 213.624.9203

MENA

Prince Turki Bin Abdullah Al-Saud St., Sulaimania Area , P.O. Box 2600

Riyadh, KSA 11461

PHONE: +966 (1) 292.24.22

FAX: +966 (1) 292.28.85

Miami

100 SE 2nd Street

Suite 3100

Miami, Florida 33131

PHONE: 305.808.7310

FAX: 305.808.7309

Milwaukee

234 W. Florida Street

Suite 310

Milwaukee, Wisconsin 53204

PHONE: 414.937.5030

FAX: 414.224.7780

Minneapolis

706 Second Avenue South

100 Baker Building

Minneapolis, Minnesota 55402

PHONE: 612.343.4200

FAX: 612.343.4201

New Jersey

300 Kimball Drive

1st Floor

Parsippany, New Jersey 07054

PHONE: 973.947.9200

FAX: 973.947.9199

New Orleans

935 Gravier Street

Suite 600

New Orleans, Louisiana 70112

PHONE: 504.528.9910

FAX: 504.528.9924

New York

600 Lexington Ave

10th Floor

New York, New York 10022

PHONE: 212.537.0370

FAX: 212.537.0380

Northern Virginia

8614 Westwood Center Drive

Suite 800

Vienna, Virginia 22182

PHONE: 703.821.0040

FAX: 703.734.2837

Oklahoma City

235 North MacArthur

Suite 500

Oklahoma City, Oklahoma 73127

PHONE: 405.789.0900

FAX: 405.789.0905

Orange County

2211 Michelson Drive

Suite 650

Irvine, California 92612

PHONE: 949.751.5700

FAX: 949.751.5701

Orlando

600 Northlake Blvd

Suite 110

Altamonte Springs, Florida 32701

PHONE: 407.253.3140

FAX: 407.253.3150

Phoenix

2415 E. Camelback Road

Suite 900

Phoenix, Arizona 85016

PHONE: 602.956.5000

FAX: 602.956.5333

Salt Lake City

11781 S. Lone Peak Pkwy

Suite 250

Draper, Utah 84020

PHONE: 801.972.5200

FAX: 801.972.5207

San Antonio

8200 IH-10 West

Suite 800

San Antonio, Texas 78230

PHONE: 210.341.1344

FAX: 210.377.2797

San Diego

6815 Flanders Drive

Suite 155

San Diego, California 92121

PHONE: 858.452.8668

FAX: 858.452.2585

San Francisco

Four Embarcadero Center

Suite 1400

San Francisco, California 94111

PHONE: 415.489.1821

FAX: 415.503.1580

Seattle

10800 NE 8th Street

Suite 150

Bellevue, Washington 98004

PHONE: 206.737.4300

FAX: 206.737.4301

Silicon Valley

2025 Gateway Place

Suite 328

San Jose, California 95110

PHONE: 408.843.4100

FAX: 408.437.1201

St. Louis

1001 Highlands Plaza Drive West

Suite 150

St. Louis, Missouri 63110

PHONE: 314.621.1414

FAX: 314.802.0802

Walnut Creek

500 Ygnacio Valley Road

Suite 100

Walnut Creek, California 94596

PHONE: 925.357.2000

FAX: 925.935.1717

Washington, D.C.

1700 K Street, NW

Suite 660

Washington, DC 20006

PHONE: 202.775.7000

FAX: 202.775.7009

TRANSWESTERN HOuSTON

1900 West Loop South, Suite 1300Houston, Tx 77027Phone: 713.270.7700 | Fax: 713.270.6285www.transwestern.com/Houston

DELTA ASSOCIATES

500 Montgomery St, Suite 600Alexandria, Va 22314Phone: 703.836.5700 | Fax: 703.836.5765www.DeltaAssociates.com






