"Tenants across a wide set of industries

continue to carefully assess the ample array

of options available to them in this market.

Sublet supply pushed higher in the quarter,

but with oil and gas prices rising steadily,

there is a sense that the local economy has

turned the corner. In turn, the recent flight

to quality is likely to continue in the coming

quarters."

Brad Hauser, Research Director

Savills Studley Report Houston office sector Q3 2018

Savills Studley Research Houston

SUMMARYMarket HighlightsLEASING PUSHES HIGHERTenants leased 3.5 million square feet (msf) in the third quarter, a slight increase from the 3.2 msf leased in the second quarter, and above the long-term average of 2.8 msf leased per quarter. Leasing activity in the four most recent quarters totaled 13.5 msf, exceeding the market’s long-term average of 11.5 msf.

AVAILABILITY DECREASES The market’s overall and Class A availability rates both fell in the third quarter, dropping to 27.3% and 29.3%, respectively.

ASKING RENT STABLEAverage asking rent for the Houston market rose by 0.2% to $28.48. Year-on-year average asking rent was essentially unchanged. The Class A rate declined by 0.4% to $33.16 during the third quarter. SUBLEASE SUPPLY REMAINS ELEVATED Overall sublease supply remains substantial, totaling 8.5 msf as of early September but is down from the high mark of 11 msf. The addition of Occidental's Greenway campus pushed sublet supply up by over 800,000 sf.

02

Savills Studley Report | Houston

Tenants Enjoy Ample Space Options

Many U.S. office markets are benefiting from a protracted period of steady economic growth and restrained construction. Houston’s economy is still dealing with the negative impacts from the oil and gas supply glut, but the energy sector is on the mend. In addition to steady increases in gas prices, corporate tax reform is boosting investment in equipment and R&D. Exxon Mobil recently said it plans to invest $50 billion in its U.S. operations over the next five years, attributing increased spending in part to tax breaks enacted in the Tax Cuts and Jobs Act.

Tenants Using Restraint

Companies are still being cautious and restrained in their demand. Tenants have ample options to consider. The Houston market ended the third quarter with 51.2 msf of space available for lease with occupancy in the next 12 months – 4.0% more than two years ago. Space consolidation and new construction have contributed to availability rates that consistently exceed 25% in much of the market and approach 40% in West Houston. Based on the supply stats in early September, there were more than 150 existing buildings offering a contiguous block in excess of 50,000 sf and more than 75 with a block over 100,000 sf.

Flight to Quality

Newer product, ironically, fares better. Companies are willing to pay the higher face rent given the improved efficiency, stellar amenities and generous concessions these properties offer. Bank of America, for example, pre-leased 210,000 sf at Capitol Tower and will vacate 145,000 sf at 700 Louisiana. Waste Management is close to signing its new HQ lease, also at Capital Tower. Hines’ 609 Main Street, which delivered in 2017, is pulling tenants from other properties. Older buildings are suffering. Law firms have been active in these conditions – capturing premium space at reasonable costs. Vinson & Elkins committed to 208,000 sf at Hines & Ivanhoe Cambridge’s new tower on the former Houston Chronicle Site. The law firm will shed more than 80,000 sf in its move from 300,000 sf at 1001 Fannin. Hines took 155,000 sf at the same builiding and will relocate from Williams Tower in the Galleria. The new 47-story, 1- msf tower will deliver in 2021.

The delivery of new product and surplus

Source: Bureau of Labor Statistics^

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80Millions

Hou. Off. Emp. Hou - % Ann. Ch. Off. Emp. U.S. - % Ann. Ch. Off. Emp

Office-Using Employment Trends

$33.16$31.40

$20.77$18.81

$0

$5

$10

$15

$20

$25

$30

$35

$40

Q3 '18 Q3 '18 Q3 '16 Q3 '15 Q3 '14 Q3 '13

Rental Rate Trends ($/sf)

Class A Class B & C

Asking Rent Trends ($/sf)

29.3%

14.7%

24.4%20.6%

0%

5%

10%

15%

20%

25%

30%

35%

Q3 '18 Q3 '18 Q3 '16 Q3 '15 Q3 '14 Q3 '13

Availability Rate Trends

Class A Class B & C

Availability Rate Trends

savills-studley.com/research 03

Q3 2018

Tenant Sq Feet Address Market AreaSchlumberger 250,000 1430 Enclave Pky Katy FreewayBank of America 210,000 800 Capitol CBDVinson & Elkins 208,000 801 Texas CBDHines 155,000 801 Texas CBDErnst & Young 120,827 5 Houston Center CBDPIMA Medical Institute 64,818 11125 Equity Drive West BeltCity of Houston 64,000 2100 Travis CBDKirkland & Ellis 54,000 609 Main St CBDCardtronics 53,544 2050 W Sam Houston Pky West BeltExterran Energy 44,894 11000 Equity Dr West BeltSum of Top 10 Leases 1,225,083 Sum of 3rd Qtr Leasing Activity 3.5 MSF

of available space is stoking the amenities race between landlords. Some landlords are stealing a page from the hospitality sector – adding multiple dining options, fitness centers and in some buildings entire amenity floors. Collaboration space and conference centers are becoming the norm. Hines’ new building will feature a public garden on the 11th floor. Heritage office buildings, those constructed prior to 2000, face an imperative to renovate or significantly overhaul interior space buildouts, while also adding amenities. Companies that fill in some of the vacant space at existing buildings can generally negotiate generous concessions. Tenant retention efforts are also intensifying. Landlords are willing to offer significant free rent to companies that renew in place. Haynes and Boone renewed its 72,903- sf lease at Downtown’s LyondellBasell Tower. Brookfield bought the building last December and plans to upgrade shared amenities.

Surge in Sublet Space

The deep pool of sublet space is undercutting pricing across the market. There were 8.5 msf of sublet space available for lease (5.5 msf vacant) including a number of big blocks at the close of the quarter. The third quarter brought some major additions to sublet supply. Dynegy Inc. listed 103,000 sf at 601 Travis and Linn Energy put a block of nearly 65,000 sf on the market at 600 Travis. Acquired by Vista Energy Corp in 2017, Dynegy announced plans to cut 308 jobs shortly afterwards. The musical chairs triggered by the release of sublet space started in the first half of the year. Enable Midstream Partners relocated its office from 1111 Louisiana to 910 Louisiana in a 48,000-sf sublease from Shell Oil. Crestwood Equity is vacating space in BofA Center and will move into 90,000 sf of sublet space in 811 Main.

Some of the sublet space was absorbed during the summer. Kiewit Engineering Group sublet 52,834 sf at Energy Center IV. The engineering company will relocate from The Woodlands at 3831 Technology Forest Boulevard. Investment firm Sheridan Production sublet the top three floors totaling 60,000 sf at 1360 Post Oak. BHP Billiton put the space on the market after moving to its new headquarters at 1500 Post Oak. Meanwhile, Sheridan put its 71,346 sf space at 9 Greenway Plaza on the market.

It would take about 16 leases the size of Kiewit’s to absorb the 800,000 sf of sublet

space that Occidental Petroleum put on the market in Greenway Plaza this summer. This includes 746,070 sf at 5 Greenway Plaza and 67,525 sf in 3 Greenway. Oxy is moving to a new owned property in West Houston which is the ConocoPhillips headquarters at 600 N. Dairy.

Industrial Sector More Challenging

Of note, while the development pipeline for office product is being reined in, the industrial market is much tighter, rationalizing some major new park construction. Hines unveiled plans to develop a 107-acre business park in northwest Houston. Adjacent to the Sam Houston Race Park, Hines plans to construct more than 1.5 msf of industrial/logistics space as well as an amenity center and business class hotel. The project, to be called Grand National Business Park, will be constructed in two phases. Leasing activity at Pinto Business Park is very active. Hines also has plans for a 150-acre

business park called Pintail Crossing west of Katy on a site located between Amazon’s 1-msf distribution center and Igloo Product’s headquarters and distribution center. Investors Take the Long View

Investors continue to display a lot of faith in the long-term value prospects for quality office product in Houston. Office property sales volume has dropped off a bit in the last few months, though. Amstar's $68.1 million acquisition of 1001 McKinney in June was one of a handful of sales completed in the last several months.

Availability Rate Comparison Rental Rate Comparison ($/sf)

Major Transactions

$38.70$34.37

$32.77$32.27$32.03

$29.45$28.48$28.29

$27.54$25.91$25.34

$22.44$19.52$19.20$19.05$18.93$18.42

$17.64$15.63

$31.09$28.15

$19.28

$0 $10 $20 $30 $40

CBDUS Index

Greenway PlazaWest Loop / Galleria

MidtownWoodlands

Houston RegionKaty Freeway

N Loop W / 290 NearWestchase

BellaireNorthwest / 290 Far

Pasadena / BaytownI-10 / NE / Kingwood

North Belt / GreenspointSouthwest / Sugar Land

NASA / Clear LakeMedical Center / South

FM 1960

NewExisting Direct

Sublet

Type

9.4%

11.8%

15.0%

15.5%

16.7%

19.7%

18.1%

21.4%

21.5%

21.4%

21.9%

23.5%

26.3%

27.3%

28.2%

30.4%

33.6%

33.6%

51.7%

0% 10% 20% 30% 40% 50%

Medical Center / South

Bellaire

Pasadena / Baytown

Midtown

I-10 / NE / Kingwood

Woodlands

US Index

Greenway Plaza

N Loop W / 290 Near

Southwest / Sugar Land

West Loop / Galleria

NASA / Clear Lake

FM 1960

Houston Region

CBD

Northwest / 290 Far

Westchase

Katy Freeway

North Belt / Greenspoint

Savills Studley Report | Houston

04 @SavillsStudleywww.savills-studley.com

Please contact us for further information

(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded. ^Unless otherwise noted, source for data is Savills Studley.The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2018 Savills Studley

Savills Studley333 Clay Street, Suite 3700 Houston, TX 77002(713) 522-5300

Co-Branch ManagersMark W. O'Donnell - Vice Chairman, Region Leader, modonnell@savills-studley.comW. Derrell Curry - EVP, dcurry@savills-studley.comKyle Kelley - EVP, kkelley@savills-studley.comDrew Morris - EVP, dmorris@savills-studley.com

Brad Hauser - Regional Director, Research, bhauser@savills-studley.com

Map Submarket Total

SF(1000's)

Last 12 Months

ThisQuarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

YearAgo

ThisQuarter

%Change

fromLast Qtr.

YearAgo

Bellaire 2,599 180 307 -59.2% 485 11.8% -17.1% 17.3% $25.34 0.4% $24.38Bellaire - Class A 1,169 92 186 -23.5% 270 15.9% -4.9% 19.7% $27.59 1.1% $24.86Central Business District 37,605 2,219 10,603 -0.9% 10,170 28.2% -0.3% 26.5% $38.70 -0.1% $39.32Central Business District - Class A 27,954 1,991 7,294 -0.3% 6,873 26.1% -0.1% 23.9% $41.16 -0.7% $42.78FM 1960 2,861 202 752 8.9% 690 26.3% 2.1% 24.1% $15.63 4.6% $15.36FM 1960 - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AGreenway Plaza 10,102 554 2,084 2.7% 1,935 20.6% 0.5% 19.2% $32.77 -2.5% $34.04Greenway Plaza - Class A 7,499 379 1,645 4.7% 1,502 21.9% 1.0% 20.0% $34.87 -2.7% $36.52I-10/NE/Kingwood 1,277 81 213 -1.8% 224 16.7% -0.3% 17.6% $19.20 8.9% $18.55I-10/Northeast/Kingwood - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AKaty Freeway 27,465 2,479 9,227 -4.3% 9,235 33.6% -1.5% 33.5% $28.29 -0.4% $27.45Katy Freeway - Class A 18,630 1,608 6,717 -7.0% 6,614 36.1% -2.7% 35.5% $31.65 0.5% $30.62Medical Center/South 1,525 67 143 -2.3% 161 9.4% -0.2% 10.5% $17.64 -0.4% $19.24Medical Center/South - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AMidtown 4,602 383 712 4.5% 914 15.5% 0.7% 19.9% $32.03 -2.3% $30.70Midtown - Class A 1,773 237 351 -6.8% 683 19.8% -1.5% 38.5% $34.08 1.2% $29.87North Belt/Greenspoint 10,943 736 5,656 -8.2% 6,692 51.7% -4.6% 60.7% $19.05 1.4% $20.38North Belt/Greenspoint - Class A 5,124 352 3,348 0.0% 3,841 65.3% 0.0% 75.0% $22.51 0.8% $23.70NASA/Clear Lake 4,459 128 1,047 -11.9% 1,229 23.5% -3.2% 27.3% $18.42 0.0% $19.31NASA/Clear Lake - Class A 1,625 23 178 -19.0% 199 11.0% -2.6% 12.2% $24.36 0.4% $24.51North Loop W/290 Near 4,677 372 988 -2.4% 898 21.1% -0.5% 19.2% $27.54 11.6% $24.63North Loop W/290 Near - Class A 1,189 65 503 -0.4% 381 42.3% -0.2% 32.1% $28.20 -0.9% $27.02Northwest/290 Far 10,893 1,097 3,307 -10.9% 3,496 30.4% -3.7% 32.1% $22.44 -3.8% $24.14Northwest/290 Far - Class A 6,317 700 2,056 -16.4% 2,105 32.5% -6.4% 33.3% $25.47 -4.1% $26.42Pasadena/Baytown 2,425 114 364 -11.7% 336 15.0% -2.0% 13.9% $19.52 -3.3% $19.89Pasadena/Baytown - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

$19 12Southwest/Sugar Land 13,497 602 2,893 0.3% 2,595 21.4% 0.1% 19.2% $18.93 1.1% $20.44Southwest/Sugar Land - Class A 4,986 159 1,074 2.7% 855 21.5% 0.6% 17.1% $22.52 5.5% $23.93West Loop/Galleria 30,038 2,699 6,574 1.9% 6,937 21.9% 0.4% 23.0% $32.27 -3.0% $33.22West Loop/Galleria - Class A 19,646 2,198 4,478 -0.4% 5,116 22.8% -0.1% 26.0% $35.68 -2.5% $36.48Westchase 14,679 891 4,926 4.1% 4,576 33.6% 1.3% 31.1% $25.91 -3.4% $27.70Westchase - Class A 8,736 486 3,370 2.2% 3,152 38.6% 0.8% 36.1% $30.68 -4.8% $32.06Woodlands 8,188 553 1,449 -10.0% 1,792 17.7% -2.0% 21.9% $29.45 0.2% $31.56Woodlands - Class A 5,072 304 940 -4.9% 1,230 18.5% -1.0% 24.3% $33.46 0.4% $38.18Greater Houston Total 187,837 13,358 51,245 -3.4% 52,365 27.3% -0.9% 27.7% $28.48 0.2% $28.48Greater Houston Total - Class A 109,998 8,619 32,226 -2.8% 32,887 29.3% -0.9% 29.6% $33.16 -0.4% $33.14

1

LeasingActivity

AvailableSF

AvailabilityRate

Asking Rents Per SF

2

9

10

3

4

7

8

5

6

16

1-17

11

12

13

14

17

15