Year End 2010 Houston Outlook · 2016. 7. 18. · A market report for commercial real estate executives 1 Outlook Houston Metro Area Year-End 2010-75-50-25 0 25 50 Payroll Jobs in

A market report for commercial real estate executives

1

Outlook

Houston Metro Area Year-End 2010

-75

-50

-25

0

25

50

Payr

oll J

obs

in 0

00's

Was DFW Bos Phx Atl Hou S. Fla Den NY SF Bay LABasin

Chi

Payroll Job GrowthLarge Metro Areas

12 Months Ending October 2010

Source: Bureau of Labor Statistics, Delta Associates; December 2010.

HOUSTON METRO SNAPSHOT AT YEAR-END 2010

Economic Recovery on Track

12-month payroll job change turns positive through October 2010, at 6,200.

Unemployment rate: 8.2% in October 2010. National unemployment rate in October: 9.6%.

Outlook: Recovery to strengthen and job growth to increase.

Office Market Position Index Year-End 2010

Source: Delta Associates; December 2010.

Office Market Strengthening

Net absorption: 618,000 SF in 4th quarter. 2010 total: 715,000 SF.

Overall vacancy: 12.6%, down from 13.5% one year ago; among lowest in nation. Office asking rents: Relatively stable; concessions still driving effective rents down.Outlook: Significant improvement in 2011.

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

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

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

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

Expansion Phase Correction/Contraction Phase

AtlantaChicagoPhoenix

2

3

4

56

7 8

1

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

11.2% 11.2% 11.9%12.6% 13.1% 13.4%

13.9%15.2% 15.6% 15.8%

17.6%18.4%

21.7%

0%

5%

10%

15%

20%

25%

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

NationalVacancy Rate: 14.6%

Office Vacancy RatesSelected Metro Areas

Year-End 2010

Source: CoStar, Delta Associates; December 2010.


2Houston Metro Area Year-End 2010

OutlookTHE HOUSTON

METRO ECONOMY

RRecovery on Track

Metro Houston’s economic recovery is on track, with 12-month employment growth turning positive in October. The Energy sector remains strong and most of Houston’s core industries are experiencing improvement. During the 12 months ending October 2010, employment rose by 6,200 jobs in Houston, a 0.2% gain. This compares to national growth of 0.6% in the same period.

The Houston metro area unemployment rate was 8.2% in October 2010, compared to 8.8% in July and 8.1% one year ago. Meanwhile, the national unemployment rate was 9.6% in October 2010, down from 10.1% the previous year. The national rate rose to 9.8% in November 2010.

Metro Houston’s core industries continue to strengthen:Energy: Employment gains continue as steady oil prices support growth. Professional Services: Monthly job growth resumed in 2010 but employment is down modestly since August. Government sector is curbing costs; 12-month employment ending October 2010 is down 1,200. Manufacturing activity has increased for 13 consecutive months.Health Services: 8,800 jobs added in the 12 months ending October 2010. Trade: Air freight up 17.2% through October 2010, compared to the same period in 2009.

Payroll Job GrowthHouston Metro

1991 Through October 2010

Payr

oll J

obs

(000

’s)

Source: BLS, Delta Associates; December 2010.

20-Year AverageJob Growth =39,350/Year

*12 months ending October 2010.

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

LABasin

S. FlaSFBay

AtlChiPhxNYHouDFWDenBosWas

10/0910/10

Une

mpl

oym

ent R

ate

National Average*

Source: Bureau of Labor Statistics; December 2010.

9.6%10.1%

Unemployment RatesLarge Metro Areas

October 2010 vs. October 2009

* National average is seasonally adjusted.

Core IndustriesHouston MSA

2009

Note: Subcomponents of core industries were redefined in June 2007.Source: GMU Center for Regional Analysis, Delta Associates; December 2010.

Total GRP: $276 100%

Core Industries $ (Bil) % GRP

Total Core Industries: $196 71%Other $80 29%

GRP = Gross Regional Product

Energy $74 27%

Financial, Professional, Tech $37 13%

Construction $24 9%

Federal & State Government $22 8%

Manufacturing $17 6%

Medical/Educational $11 4%

Trade/Transportation $11 4%


3

Outlook


Houston Purchasing Managers Index2002 Through September 2010

35

40

45

50

55

60

65

70

Source: NAPM – Houston; December 2010.

Expa

nsio

nC

ontr

actio

n

Employment in Houston’s Mining sector increased by 3,700 jobs, or 4.2%, in the 12-month period ending in October 2010. In addition, the U.S. rotary rig count increased to 1,713 in early December 2010, after plummeting to an average of 1,089 in 2009. Crude oil prices near $90 per barrel are more than high enough for oil companies to support growth in Houston.

The Construction sector lost 4,700 jobs during the 12 months ending October 2010 – a 2.7% drop – the smallest 12-month decline since January 2009. Commercial and residential construction will likely pick up as Houston’s economy gains strength. Four years after construction began, work has resumed on the Westin Hotel at I-10 and Gessner Road across from Memorial City Mall. The hotel will have 267 rooms plus 29,000 SF of meeting space. The developer, MetroNational Corp., had stopped the project in the wake of Hurricane Ike, the financial crisis, and the recession. The opening is now set for April 2011.

Houston’s Manufacturing sector continues to recover: The Houston Purchasing Managers Index, a short-term leading indicator of production, rose to 53.6 in September 2010, from 52.4 in July. Manufacturing employment has begun to rebound, adding 2,600 jobs in the 12 months ending in October 2010, a 1.2% gain. This was the third consecutive month of positive 12-month job growth, after 17 straight months of losses since February 2009, when the current downward cycle began.

The Health Care sector continues to expand, adding 8,800 jobs in the 12 months ending in October 2010 – a 2.9% increase. Much of the job growth is occurring in suburban hospitals. Clear Lake Regional Medical Center will start a major renovation and expansion project in 2011 that will lead to new hiring in clinical and related service areas when it is finished in 2013. The project will add a 155,000 SF patient tower with surgical space and 30 intensive care beds. Additionally, 79,000 SF of space will be renovated, partly to expand the women’s and children’s services departments.

Trade/Transportation continues to bounce back in Houston. Houston’s airports handled 17.2% more air freight through October 2010 compared to the same period in 2009, and freight volume is on pace to surpass the previous peak volume experienced in 2008. Meanwhile, only 700 jobs were lost in this sector during the 12 months ending in October – a 0.1% drop and the smallest 12-month decline since January 2009. Whirlpool Corp. has announced plans to build a 1.5 million SF distribution center in Fort Bend County. The complex will be built in a new 800-acre intermodal business park that is being developed as a joint venture between Kansas City Southern

U.S. Rotary Rig Count1990 Through December 2010

300

500

700

900

1,100

1,300

1,500

1,700

1,900

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

Source: Baker Hughes, Inc.; December 2010. *YTD average as of 12/3/10.



Outlook

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Job Growth ForecastHouston Metro Area

2010 Through 2012

rce: Bureau of Labor Statistics, Delta Associates; December 2010.

Avg. Annual Growth 2004-06 = 59,100/annum Projected Avg. Annual

Growth 2010-12 = 34,900/annum

Office Absorption and EmploymentHouston Metro Area

1980 Through 2010

-100

-50

0

50

100

150

200

-4

-2

0

2

4

6

8

10

12

14

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

Ch

ang

e in

Em

plo

ymen

t (00

0's)

Net

Ab

sorp

tion

(Mill

ion

s o

f SF

)

rce: BLS, Delta Associates; December 2010. *12-month job growth through October 2010.

Job Growth

Net Absorption

Railway and CenterPoint Properties. Another rail-served project announced this year is Gulfport Distribution Center, a 60-acre industrial project at SH 225 and Beltway 8 in Pasadena that will be served by both Union Pacific Railroad and Burlington Northern Santa Fe Railway. The first phase will be a 440,000 SF spec building, with a 412,000 SF warehouse planned for phase two of the project.

Houston’s Residential Real Estate market appears to be recovering from the housing downturn, although sales activity remains volatile. The Houston Association of Realtors reported a 23% drop in single-family home sales in October 2010 compared to October 2009, the fourth straight month of declining home sales since the Federal homebuyer tax credit expired. Despite the sales slowdown, prices are holding up. The average single-family sale price in October 2010 was $208,459 – 5.6% higher than in October 2009. This is the highest October average price that Houston has ever seen, though price change has been variable across the pricing spectrum.

THE HOUSTON METRO AREA ECONOMIC OUTLOOK

Metro Houston’s economy will likely experience steady growth in the early stages of 2011, before gaining steam in the second half of the year and into 2012. Continued growth in the traditional Energy industries and expansion of Renewable Energy businesses, bolstered by renewed strength in the Consumer and Professional Services sectors, will fuel stronger growth in 2011-12. As a result, we expect annual job growth in the 45,000 to 80,000 range in 2011-12.

THE HOUSTON METRO OFFICE MARKET

Market Strengthening at Year-End

The Houston metro office market continued to strengthen in the 4th quarter of 2010, due to job growth in several economic sectors. As a result, absorption of office space remained positive as companies leased more space, the vacancy rate continued to decline and asking rents held relatively steady.

Houston Airport SystemAir Freight


ource: Houston Airport System; December 2010.

Long-Term Average770 million lbs/Annum

* YTD annualized.

600,000

700,000

800,000

900,000

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


5

Outlook


Net Absorption of Office Spaceand Direct Vacancy Rate Trends

Houston Metro Area1998 Through 2010

0%

2%

4%

6%

8%

10%

12%

14%

16%

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

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

Dire

ct V

acan

cy R

ate

Net

Abs

orpt

ion

in 0

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of S

F

Net Absorption Vacancy Rate

Note: Delivery of pre-leased space counts as positive net absorption.Source: Vacancy – Delta Associates’ analysis of CoStar data;Net Absorption - Delta Associates; December 2010.

Net Absorption Stays Positive

Net absorption of office space totaled 618,000 SF in the 4th

quarter of 2010, on the heels of 491,000 SF in the 3rd quarter. Weatherford International’s huge deal in the Galleria drove absorption there, while broad leasing activity fueled absorption in the Woodlands. In all of 2010, net absorption totaled 715,000 SF, compared to negative 586,000 SF in 2009.

Net Absorption (SF) in Selected Submarkets: Q4 2010 All of 2010 Downtown 143,000 (144,000) Galleria 198,000 321,000 Woodlands/Conroe 195,000 256,000 SW Fwy/Sugar Land (108,000) (557,000)

Available sublease space declined by 454,000 SF in the Houston metro in the 4th quarter of 2010 and by 702,000 SF in all of 2010. Sublease space now totals 1.6 million SF, 0.7% of the standing inventory.

Class A net absorption led the way in the 4th quarter of 2010, and also led for the full year.

Class A, B, and C net absorption (SF): Q4 2010 All of 2010 Class A 644,000 388,000 Class B 32,000 (21,000) Class C (58,000) 348,000

Notable Q4 2010 leases:

Weatherford International leased 335,000 SF at 2000 St. James Place in the Galleria submarket.

Invesco renewed 335,000 SF at 11 Greenway Plaza in the Greenway Plaza submarket.

How the Multi-Tenant Market ComparesTo Our Market Coverage

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

Multi-Tenant Entire MarketInventory 202.6 MSF 244.5 MSF Overall vac. (incl. sublet): 15.1% 12.6% Q4 2010 net absorption 1,347,000 SF 618,000 SF

Why This Methodology Is the Best IndicatorOf Current Market Conditions

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



Outlook

0%

5%

10%

15%

20%

25%

30%

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

Office Vacancy RateHouston Metro Area

1983 Through 2010

Source: CoStar, Delta Associates; December 2010.

Mustang Engineering renewed a 249,000 SF lease at 17404 Katy Freeway in Katy Freeway West.

BG Group leased 164,000 SF at MainPlace in the CBD. Macquarie Bank renewed 56,000 SF at 500 Dallas Street in

the CBD. Valerus Compression renewed a 50,000 SF lease at 919

Milam Street in the CBD. Carlson Wagonlit Travel renewed a 32,000 SF lease at 4801

Woodway Drive in the Riverway submarket. FMA Alliance leased 32,000 SF at 12339 Cutten Road in the

FM 1960 / Champions submarket.

VVacancy Continues to Decline

The overall office vacancy rate (including sublet space) in the Houston metro dropped to 12.6% at year-end 2010, from 12.9% in the 3rd quarter and 13.5% one year ago. The direct vacancy rate is 11.9% at year-end 2010, down from 12.1% in the 3rd

quarter and 12.6% a year ago.

The overall Class A vacancy rate fell to 12.2% at year-end 2010, from 12.8% in the 3rd quarter. The direct Class A vacancy rate is 11.3% at year-end 2010, down from 11.9% in the 3rd quarter.

Overall year-end 2010 vacancy rates for all classes in selected submarkets:

South Main/Medical Center 7.1% West Loop 9.7% Downtown 10.8% Katy Fwy/Energy Corridor 12.8% FM 1960 16.8%

The overall office vacancy rate (including sublet space) in the Houston metro will likely decline gradually in the period ahead, as steady growth prevails. We expect overall vacancy to drop below 12% over the next two years, as the economy strengthens and demand for space outpaces the delivery of new supply.

Note: 3rd quarter 2010 vacancy rates were revised due to the reclassification of a portion of 20555 SH 249 in the FM 1960 / Highway 249 submarket. Buildings 12/13 have been reclassified as publicly owned due to changes in the CoStar database and have been removed from our inventory.


7

Outlook


$21.41

$14.86

$11.70 $11.92

$19.18

$18.11

$10

$12

$14

$16

$18

$20

$22

$24

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

Average Office RentsHouston Metro Area

1982 Through 2010(All Classes of Space)

Source: Delta Associates’ analysis of CoStar data; December 2010.

Office Construction Holding Steady

There is 2.5 million SF of office space under construction or renovation in the Houston metro area at year-end 2010, up slightly from 2.4 million SF in the 3rd quarter but down from 3.1 million SF one year ago. Space under construction at year-end 2010 is 58% pre-leased, compared to 47% in the 3rd quarter and 42% a year ago.

There are two major projects under construction in the CBD: The Hess Tower and Hines Interests’ building at MainPlace, which is now 27% pre-leased.

Office Space Under Construction or Renovation Houston Metro Area

Year-End 2010Submarket SF % Pre-leasedCBD 1,817,237 60.9% Conroe 123,530 100.0% E Ft Bend Co/Sugar Land 80,000 0.0% FM 1960 / Hwy 249 156,000 0.0% Balance of Houston 339,047 64.9% Total 2,515,814 57.6%

Source: Delta Associates’ analysis of CoStar data; Dec. 2010.

Office space deliveries (excluding renovations) totaled 144,977 SF in the 4th quarter of 2010 and 777,000 SF for the year. New space delivered during 2010 was 51% leased upon delivery, compared to 6.2 million SF delivered in 2009, at 43% leased at delivery.

Office Asking Rents Holding Steady

Asking rents for all classes of office space slipped slightly in the final quarter of 2010 in metro Houston, but held relatively steady during the year. Class A asking rents edged up 1.3% for the year, while Class B asking rents ticked down 0.3%. Effectiverents – after concessions – experienced downward pressure of 20% or more in some submarkets over the past year. Landlords are trying to hold face rents stable to position their properties better for the upcoming expansion cycle, but are making concessions on effective rents to fill vacant space.

Asking rents average $25.77/SF, full service, for Class A buildings and $18.30/SF, full service, for Class B buildings. These are metro-wide averages; better buildings in more desirable submarkets are outperforming these market-wide averages.



Outlook

$0

$1

$2

$3

$4

2003 2004 2005 2006 2007 2008 2009 2010

Bill

ions

of $

DFW

Source: Real Capital Analytics, graphic by Delta Associates; December 2010.

PhoenixHouston

Denver

Comparative Investment Sales VolumeOffice Product

2003 – 2010

$25

$50

$75

$100

$125

$150

$175

$200

2002 2003 2004 2005 2006 2007 2008 2009 2010

$97$87

$128$141 $138

$148

$168

$50

$180

Aver

age

Sale

Pric

e Pe

r SF

Source: Real Capital Analytics, graphic by Delta Associates; December 2010.

Average Office Sale PriceHouston Metro

2002 Through 2010

Metro-wide asking rents will likely hold relatively stable in early 2011, while significant concessions continue to be offered. Rents will likely begin to gain traction in the latter half of 2011 and into 2012 as vacancy continues to drop and demand for space increases. At the submarket level, asking rents may continue to be volatile, with landlords reacting quickly to changes in market fundamentals. As market conditions improve later in 2011, we will likely see a pullback in concessions.

IInvestment Sales: Increasing

We recorded $998 million in office investment sales (for which pricing information could be obtained) in metro Houston during 2010. Sales totaled only $126 million during 2009.

We expect this uptick in sales activity to accelerate in 2011 as market conditions strengthen. In addition, a loosening of the credit markets should allow for more investment sales activity during the year.

The average sales price of the closed transactions in 2010 for which we have pricing information is $180 per SF. The average sale price in 2009 of $50 per SF was particularly low because most of the sales involved older Class B and C buildings or distressed assets. By contrast, in 2010, pricing was elevated by a handful of high-priced sales, such as Heritage Plaza in the CBD and the Chase Bank Building in Bellaire. Pricing remains volatile due to the limited number of transactions, but increased demand is putting upward pressure on pricing.

Selected 2010 Office Sales in Houston Metro:

Property/Submarket Sale Price/Buyer

1111 Bagby Street $321.5 million ($295/SF) CBD Brookfield Office Properties

910 Travis Street $56.0 million ($103/SF) CBD M-M Properties

6330 W. Loop South $51.2 million ($175/SF) Bellaire Beacon Investment Properties

3900 Essex Lane $34.0 million ($144/SF) Post Oak Park Beacon Investment PropertiesSource: Real Capital Analytics; Dec. 2010.

The weighted average cap rate on a trailing 12-month basis for core Houston office assets was 9.1% in October 2010, based on a limited number of transactions. However, on more recent trades cap rates have declined below 8% for quality, Class A assets. Core cap rates will likely hold in the 7-8% range in 2011 as market conditions continue to strengthen, capital markets stabilize and more investors look to include real estate in their portfolio mix.

Houston Metro Core Office AssetsCap Rates


4%

5%

6%

7%

8%

9%

10%

11%

2002 2003 2004 2005 2006 2007 2008 2009 2010*

Cap

Rat

e*

Source: Real Capital Analytics, graphic by Delta Associates; December 2010. *Rolling 12-month average through Oct. 2010.

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


9

Outlook


THE HOUSTON METRO AREA OFFICE MARKET OUTLOOK

The Houston metro office market will likely experience significant improvement in 2011 as the economic recovery strengthens. As businesses gradually ramp up leasing activity in the period ahead, vacancy will continue to decline, likely dropping below 12% in 2012 as demand outpaces new supply. As a result, rents will likely begin to gain traction, likely in the latter half of 2011, but particularly in 2012 as vacancy continues to drop and demand for space increases. Office market conditions may turn quickly in the landlord’s favor in 2012, as vacancy declines and the pipeline of new supply (presently just 1% of the standing inventory) remains limited.



OutlookSUMMARY OF OFFICE MARKET INDICATORS - ALL SPACE

HOUSTON METRO AREA2007 THROUGH 2010

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

Submarket Bldgs All Bldgs. 1/ All Bldgs. 2/ 2007 2008 2009 2010 w/ Sublet Renovation 2007 2008 2009 Q4 2010 All of 2010Central Business District 4/ 110 46,255,734 4,301,783 9.2% 8.9% 8.9% 9.3% 10.0% 1,817,237 531,000 414,000 (71,000) 93,000 (166,000)Midtown 106 7,212,574 1,060,248 11.7% 10.1% 15.0% 14.7% 16.0% - 19,000 306,000 (481,000) 50,000 22,000

Downtown 216 53,468,308 5,362,032 9.6% 9.1% 9.8% 10.0% 10.8% 1,817,237 550,000 720,000 (552,000) 143,000 (144,000)I-45 North 42 2,270,142 406,355 14.0% 16.7% 15.5% 17.9% 19.8% - 56,000 144,000 28,000 (2,000) (35,000)FM 1960 / Champions 71 2,958,692 550,317 19.6% 23.0% 21.2% 18.6% 18.9% - (73,000) (66,000) 33,000 (6,000) 77,000 FM 1960 / Highway 249 4/ 110 5,995,028 887,264 32.9% 37.9% 14.4% 14.8% 14.8% 156,000 150,000 (159,000) (312,000) 39,000 120,000

FM 1960 223 11,223,862 1,843,936 25.8% 31.1% 16.2% 16.9% 16.8% 156,000 133,000 (81,000) (251,000) 31,000 162,000 North Belt West/Greenspoint 87 10,658,423 1,417,570 10.7% 10.1% 13.7% 13.3% 14.7% - 91,000 91,000 (330,000) 0 42,000Greenspoint / IAH 30 2,728,268 302,838 10.1% 6.5% 10.2% 11.1% 11.1% 100,000 75,000 131,000 (215,000) (49,000) (47,000)

Greenspoint / North Belt 117 13,386,691 1,720,408 10.6% 9.5% 13.1% 12.9% 14.0% 100,000 166,000 222,000 (545,000) (49,000) (5,000)Greenway Plaza 98 12,138,902 1,395,974 8.4% 10.5% 11.4% 11.5% 12.7% 23,030 277,000 (142,000) (127,000) 97,000 (12,000)Gulf Freeway/Pasadena 109 4,572,000 534,924 12.7% 15.7% 13.6% 11.7% 12.1% - 130,000 (89,000) 170,000 9,000 106,000

Katy Freeway East 4/ 111 8,848,947 752,160 7.7% 7.7% 11.4% 8.5% 8.7% - 97,000 312,000 1,042,000 (9,000) 331,000Katy Freeway West 162 19,771,172 2,807,506 5.8% 4.9% 14.4% 14.2% 14.6% - 621,000 1,073,000 (364,000) 10,000 108,000

Katy Fwy / Energy Corridor 273 28,620,119 3,559,667 6.4% 5.7% 13.4% 12.4% 12.8% - 718,000 1,385,000 678,000 1,000 439,000Kingwood / Humble 4/ 49 2,385,306 200,366 9.9% 6.4% 7.3% 8.4% 8.5% - 44,000 198,000 (26,000) 17,000 17,000 NASA / Clear Lake 155 8,689,845 651,738 9.6% 9.0% 8.7% 7.5% 7.8% 100,000 181,000 253,000 70,000 35,000 104,000Northeast 46 2,067,508 219,156 17.7% 18.1% 14.9% 10.6% 11.4% - (6,000) 148,000 (66,000) (2,000) 82,000

North Loop West 4/ 71 5,497,896 1,193,043 15.6% 18.1% 18.7% 21.7% 22.0% - 80,000 (147,000) (36,000) (11,000) (178,000)Northwest Near 23 1,584,574 155,288 17.3% 17.2% 17.2% 9.8% 9.8% - (53,000) (2,000) - 3,000 87,000Northwest Far 96 7,828,050 1,495,158 14.3% 15.6% 20.5% 19.1% 19.3% - 417,000 173,000 748,000 47,000 110,000

Northwest 190 14,910,520 2,843,489 15.2% 16.8% 19.5% 19.1% 19.3% - 444,000 24,000 712,000 39,000 19,000South Main / Medical Center 87 10,173,247 712,127 9.1% 8.7% 6.3% 7.0% 7.1% - 144,000 328,000 244,000 10,000 (71,000)

Southwest / Hillcroft 59 4,743,707 910,792 19.1% 20.3% 20.6% 19.2% 19.6% 60,004 (77,000) (18,000) (60,000) 14,000 65,000Southwest Beltway 8 4/ 100 7,710,413 1,279,929 9.1% 14.9% 14.2% 16.6% 18.8% - 361,000 (259,000) 17,000 (131,000) (190,000)East Ft Bend Co. / Sugar Land 4/ 148 8,851,671 1,672,966 10.8% 16.3% 13.9% 18.9% 19.0% 80,000 435,000 400,000 179,000 9,000 (432,000)

Southwest Fwy / Sugar Land 307 21,305,791 3,863,686 12.2% 16.6% 15.5% 18.1% 19.1% 140,004 719,000 123,000 136,000 (108,000) (557,000)Bellaire 42 4,748,537 332,398 8.7% 5.0% 6.9% 7.0% 7.4% - 143,000 181,000 (90,000) (14,000) (4,000)Post Oak Park 34 4,771,860 534,448 9.1% 10.1% 12.2% 11.2% 11.8% - 99,000 (44,000) (97,000) (10,000) 47,000Galleria 4/ 57 15,258,806 1,342,775 7.2% 8.0% 13.9% 8.8% 9.2% - 340,000 (132,000) (767,000) 198,000 321,000Riverway 22 3,086,415 293,209 10.3% 7.1% 7.7% 9.5% 10.1% - 15,000 148,000 (72,000) (15,000) 12,000Richmond / Fountainview 44 1,783,906 119,522 21.2% 11.7% 11.0% 6.7% 6.7% 56,013 (287,000) 232,000 (23,000) (14,000) 76,000 San Felipe / Voss 43 5,489,762 614,853 8.7% 7.4% 9.9% 11.2% 11.7% - 388,000 66,000 (127,000) (38,000) (71,000)

West Loop 242 35,139,286 3,237,205 9.0% 7.8% 11.1% 9.2% 9.7% 56,013 698,000 451,000 (1,176,000) 107,000 381,000Westchase 108 15,513,952 1,970,272 7.2% 8.2% 12.3% 12.7% 13.3% - 312,000 565,000 (258,000) 93,000 (62,000)

The Woodlands 128 9,349,066 925,558 4.1% 6.3% 9.5% 9.9% 11.5% - 252,000 512,000 303,000 178,000 258,000Conroe 4/ 39 1,524,861 108,265 7.8% 8.1% 6.6% 7.1% 7.1% 123,530 (8,000) (4,000) 102,000 17,000 (2,000)

Woodlands / Conroe 167 10,873,927 1,033,823 4.7% 6.5% 9.2% 9.5% 10.9% 123,530 244,000 508,000 405,000 195,000 256,000

TOTAL - Houston 2,387 244,469,264 29,148,803 10.2% 10.9% 12.6% 11.9% 12.6% 2,515,814 4,754,000 4,613,000 (586,000) 618,000 715,000

Vacancy Rate with Sublet Space 10.9% 11.7% 13.5% 12.6%

1/ Includes buildings 15,000 SF RBA and greater. Does not include buildings under construction or buildings owned by the government.2/ Does not include sublet space.3/ Greenspoint/IAH is a new CoStar submarket formed from N. Belt East and a portion of Kingwood/Humble.4/ Submarket space inventory and/or vacancy adjusted per changes in CoStar database.

Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; December 2010.

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

Net Absorption (SF)

Year-End 2010Direct Vacancy Rate

at End of:

Year-End 2010


11

Outlook


SUMMARY OF OFFICE MARKET INDICATORS - CLASS A SPACE 1/


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

Submarket Bldgs All Bldgs. 1/ All Bldgs. 2/ Rate 2/ w/ Sublet Renovation 2007 2008 2009 Q4 2010 All of 2010Central Business District 29 28,383,377 1,703,003 6.0% 7.0% 1,817,237 585,000 (31,000) 107,000 57,000 (198,000) Midtown 4/ 4 1,829,725 199,440 10.9% 16.4% - (28,000) 169,000 (313,000) 0 2,000

Downtown 33 30,213,102 1,902,443 6.3% 7.6% 1,817,237 557,000 138,000 (206,000) 57,000 (196,000)I-45 North 4/ 2 347,015 50,317 14.5% 18.2% - 3,000 (6,000) (1,000) (2,000) (15,000)FM 1960 / Champions 1 150,000 - 0.0% 0.0% - 19,000 - - - - FM 1960 / Highway 249 4/ 15 2,023,760 289,398 14.3% 14.4% 156,000 174,000 (257,000) (299,000) 61,000 102,000

FM 1960 18 2,520,775 339,715 13.5% 14.1% 156,000 196,000 (263,000) (300,000) 59,000 87,000North Belt West/Greenspoint 18 4,518,360 185,253 4.1% 5.5% - 12,000 (43,000) 13,000 (18,000) (18,000) Greenspoint / IAH 3/ 4/ 4 744,018 68,450 9.2% 9.2% 100,000 18,000 66,000 (28,000) 11,000 67,000

Greenspoint / North Belt 22 5,262,378 253,702 4.8% 6.0% 100,000 30,000 23,000 (15,000) (7,000) 49,000Greenway Plaza 17 6,170,634 808,353 13.1% 15.2% - 195,000 (98,000) (85,000) 62,000 44,000Gulf Freeway/Pasadena 1 52,362 14,818 28.3% 28.3% - - - 50,000 - 8,000

Katy Freeway East 4/ 14 3,555,614 312,894 8.8% 8.9% - 82,000 222,000 812,000 18,000 357,000 Katy Freeway West 59 12,542,750 2,132,268 17.0% 17.1% - 341,000 1,193,000 (9,000) 55,000 77,000

Katy Fwy / Energy Corridor 73 16,098,364 2,445,162 15.2% 15.3% - 423,000 1,415,000 803,000 73,000 434,000Kingwood / Humble 4/ 2 280,000 26,040 9.3% 9.3% - - 90,000 - - - NASA / Clear Lake 11 1,291,440 95,567 7.4% 7.8% 100,000 (10,000) 12,000 (3,000) 12,000 (43,000) Northeast - - - 0.0% 0.0% - - 155,000 - - -

North Loop West 5 1,054,498 280,496 26.6% 26.7% - 76,000 27,000 (137,000) 17,000 1,000 Northwest Near 1 237,384 - 0.0% 0.0% - - - - - - Northwest Far 18 2,844,910 924,596 32.5% 32.5% - 206,000 (133,000) 597,000 46,000 37,000

Northwest 24 4,136,792 1,205,092 29.1% 29.2% - 282,000 (106,000) 460,000 63,000 38,000South Main / Medical Center 14 3,916,577 301,576 7.7% 7.7% - 277,000 17,000 134,000 39,000 39,000

Southwest / Hillcroft 5 1,275,997 320,275 25.1% 26.7% - - (9,000) (54,000) (1,000) (78,000) Southwest Beltway 8 3 573,152 106,606 18.6% 22.2% - 74,000 134,000 (109,000) 53,000 42,000East Ft Bend Co. / Sugar Land 22 3,705,430 1,033,815 27.9% 28.2% - 96,000 185,000 (46,000) 22,000 (372,000)

Southwest Fwy / Sugar Land 30 5,554,579 1,460,696 26.3% 27.2% - 170,000 310,000 (209,000) 74,000 (408,000)Bellaire 11 1,489,020 122,100 8.2% 9.6% - 86,000 (41,000) (2,000) 1,000 (3,000) Post Oak Park 9 2,498,115 127,404 5.1% 6.1% 85,000 (32,000) 111,000 (22,000) (10,000)Galleria 28 12,050,099 951,958 7.9% 8.4% - 119,000 (2,000) (463,000) 217,000 229,000Riverway 8 2,038,628 173,283 8.5% 9.5% - (14,000) 173,000 (54,000) 0 27,000Richmond / Fountainview - - - - - - - - - - - San Felipe / Voss 3 1,714,029 257,104 15.0% 15.2% - 69,000 (5,000) (77,000) 12,000 (46,000)

West Loop 59 19,789,891 1,631,849 8.2% 8.9% - 345,000 93,000 (485,000) 208,000 197,000Westchase 28 7,962,249 1,242,111 15.6% 16.0% - 217,000 253,000 (253,000) (56,000) (111,000)

The Woodlands 19 3,653,894 405,582 11.1% 12.4% - (23,000) 412,000 128,000 58,000 248,000Conroe 4/ 1 60,000 - 0.0% 0.0% - - - - - -

Woodlands / Conroe 20 3,713,894 405,582 10.9% 12.2% - (23,000) 412,000 128,000 58,000 248,000

TOTAL - Houston 352 107,317,170 12,132,707 11.3% 12.2% 2,173,237 2,659,000 2,451,000 19,000 644,000 388,000

1/ Class A buildings per CoStar that are greater than 50,000 SF. Does not include buildings under construction or owned by the government.2/ Does not include sublet space.3/ Greenspoint/IAH is a new CoStar submarket formed from N. Belt East and a portion of Kingwood/Humble.4/ Submarket space inventory and/or vacancy adjusted per changes in CoStar database.



Year-End 2010

Net Absorption (SF)



OutlookSUMMARY OF OFFICE MARKET INDICATORS - CLASS B SPACE 1/

HOUSTON METRO AREA 2007 THROUGH 2010

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

Submarket Bldgs All Bldgs. 1/ All Bldgs. 2/ Rate 2/ w/ Sublet Renovation 2007 2008 2009 Q4 2010 All of 2010Central Business District 41 13,812,760 1,726,595 12.5% 12.7% - 269,000 326,000 (171,000) 14,000 (9,000)Midtown 50 3,908,556 320,502 8.2% 8.2% - (6,000) 135,000 (13,000) 4,000 (23,000)

Downtown 91 17,721,316 2,047,097 11.6% 11.7% - 263,000 461,000 (184,000) 18,000 (32,000)I-45 North 22 1,606,441 285,946 17.8% 19.9% - 69,000 (49,000) (17,000) (5,000) (36,000)FM 1960 / Champions 47 2,424,240 555,151 22.9% 23.3% - (84,000) (36,000) 29,000 (2,000) 56,000FM 1960 / Highway 249 74 3,205,391 467,987 14.6% 15.3% - 225,000 336,000 66,000 10,000 24,000

FM 1960 143 7,236,072 1,309,085 18.1% 19.0% - 210,000 251,000 78,000 3,000 44,000North Belt West/Greenspoint 4/ 45 4,504,579 991,007 22.0% 23.7% - 44,000 115,000 (379,000) 5,000 1,000Greenspoint / IAH 3/ 18 1,760,081 188,329 10.7% 10.7% - 97,000 56,000 39,000 (55,000) (111,000)

Greenspoint / North Belt 63 6,264,660 1,179,336 18.8% 20.0% - 141,000 171,000 (340,000) (50,000) (110,000)Greenway Plaza 34 4,143,389 265,177 6.4% 6.4% 23,030 29,000 (16,000) 41,000 8,000 (21,000)Gulf Freeway/Pasadena 58 2,883,887 409,512 14.2% 14.6% - 89,000 (82,000) 213,000 0 24,000

Katy Freeway East 42 3,094,523 266,129 8.6% 9.0% - 100,000 96,000 (46,000) (28,000) (20,000)Katy Freeway West 84 7,602,927 729,881 9.6% 10.3% - 282,000 21,000 (93,000) (15,000) 61,000

Katy Fwy / Energy Corridor 126 10,697,450 996,010 9.3% 9.9% - 382,000 117,000 (139,000) (43,000) 41,000Kingwood / Humble 30 1,713,396 140,498 8.2% 8.3% - 39,000 117,000 (7,000) 21,000 16,000 NASA / Clear Lake 87 5,574,371 373,483 6.7% 7.0% - 84,000 176,000 77,000 6,000 123,000 Northeast 27 1,276,209 192,708 15.1% 15.7% - 37,000 82,000 46,000 (5,000) 19,000

North Loop West 37 3,556,405 878,432 24.7% 25.1% - 28,000 (241,000) 150,000 (4,000) (197,000)Northwest Near 11 852,394 112,516 13.2% 13.2% - (47,000) 17,000 (2,000) 16,000 62,000Northwest Far 4/ 53 4,411,940 573,552 13.0% 13.3% - 165,000 159,000 249,000 13,000 29,000

Northwest 101 8,820,739 1,564,500 17.7% 18.0% - 146,000 (65,000) 397,000 25,000 (106,000)South Main / Medical Center 4/ 34 3,796,173 311,286 8.2% 8.4% - (172,000) 417,000 46,000 19,000 (117,000)

Southwest / Hillcroft 19 1,676,297 392,253 23.4% 23.4% 60,004 (269,000) 26,000 (59,000) 12,000 49,000Southwest Beltway 8 62 5,594,887 1,096,598 19.6% 22.2% - 338,000 (424,000) 51,000 (201,000) (230,000)East Ft Bend Co. / Sugar Land 99 4,243,498 555,898 13.1% 13.1% 80,000 352,000 209,000 176,000 30,000 141,000

Southwest Fwy / Sugar Land 180 11,514,682 2,044,750 17.8% 19.0% 140,004 421,000 (189,000) 168,000 (159,000) (40,000)Bellaire 17 2,549,773 76,493 3.0% 3.0% - 89,000 251,000 17,000 (13,000) 9,000Post Oak Park 21 2,039,749 405,910 19.9% 20.2% - (47,000) (13,000) (123,000) 18,000 (6,000)Galleria 4/ 25 2,855,505 382,638 13.4% 13.6% - 282,000 (167,000) (344,000) (40,000) 113,000Riverway 14 1,039,510 130,978 12.6% 12.6% - 18,000 (28,000) (2,000) (18,000) (20,000)Richmond / Fountainview 14 870,347 74,850 8.6% 8.6% 56,013 (149,000) 104,000 20,000 (1,000) 1,000San Felipe / Voss 36 3,569,141 321,223 9.0% 9.7% - 321,000 67,000 (48,000) (39,000) (28,000)

West Loop 127 12,924,025 1,392,092 10.8% 11.1% 56,013 514,000 214,000 (526,000) (93,000) 69,000Westchase 4/ 62 6,958,160 716,690 10.3% 11.2% - 87,000 236,000 21,000 160,000 44,000

The Woodlands 90 5,174,141 470,847 9.1% 11.1% - 267,000 92,000 175,000 119,000 29,000Conroe 19 853,484 80,227 9.4% 9.4% 123,530 (6,000) (5,000) 106,000 3,000 (4,000)

Woodlands / Conroe 109 6,027,625 551,074 9.1% 10.9% 123,530 261,000 87,000 281,000 122,000 25,000

TOTAL - Houston 1,272 107,552,154 13,493,297 12.5% 13.2% 342,577 2,531,000 1,977,000 172,000 32,000 (21,000)

1/ Class B per CoStar, and buildings under 50,000 SF even if CoStar classified them as Class A. Does not include buildings under construction or owned by the government.2/ Does not include sublet space.3/ Greenspoint/IAH is a new CoStar submarket formed from N. Belt East and a portion of Kingwood/Humble.4/ Submarket space inventory and vacancy adjusted per changes in CoStar database.



Year-End 2010

Net Absorption (SF)


13

Outlook


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

2007 THROUGH 2010

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

Central Business District $29.18 $23.75 $30.04 $25.21 $29.20 $23.94 $29.95 $24.97 2.6% 4.3%Midtown $24.61 $21.42 $28.32 $22.75 $26.37 $22.29 $23.54 $22.36 -10.7% 0.3%

Downtown $28.91 $22.59 $29.95 $23.98 $28.89 $22.89 $29.23 $23.73 1.2% 3.7%I-45 North $21.40 $18.42 $22.31 $17.66 $20.93 $16.20 $20.22 $15.18 -3.4% -6.3%FM 1960 / Champions - $15.70 - $15.66 - $14.68 - $13.40 - -8.7%FM 1960 / Highway 249 $24.65 $17.99 $27.46 $20.22 $27.21 $19.94 $27.38 $20.21 0.6% 1.3%

FM 1960 $24.44 $16.99 $27.21 $18.09 $26.92 $17.45 $26.96 $16.65 0.1% -4.6%North Belt West / Greenspoint $21.66 $17.08 $20.45 $16.84 $20.96 $16.54 $20.07 $15.80 -4.2% -4.5%Greenspoint / IAH $20.08 $16.64 $21.75 $16.38 $21.17 $16.26 $23.23 $15.24 9.7% -6.2%

Greenspoint / North Belt $21.07 $17.05 $20.48 $16.80 $20.58 $16.51 $20.49 $15.72 -0.5% -4.8%Greenway Plaza $22.95 $19.77 $25.84 $21.48 $25.49 $20.95 $23.61 $21.50 -7.3% 2.6%Gulf Freeway/Pasadena - $17.02 - $18.13 - $18.43 $24.25 $19.95 - 8.2%

Katy Freeway East $23.40 $17.47 $23.74 $18.88 $23.05 $18.71 $25.35 $17.87 10.0% -4.5%Katy Freeway West $26.60 $19.80 $24.77 $19.91 $24.23 $18.47 $24.46 $18.76 0.9% 1.6%

Katy Freeway / Energy Corridor $26.00 $19.06 $25.39 $19.47 $24.79 $18.36 $25.31 $18.36 2.1% 0.0%Kingwood / Humble - $17.37 - $17.72 $27.50 $16.17 $29.50 $16.49 7.3% 2.0%NASA / Clear Lake $22.21 $19.31 $21.31 $20.43 $20.83 $21.44 $21.29 $20.46 2.2% -4.6%Northeast - $13.80 - $14.41 - $13.75 - $13.67 - -0.5%

North Loop West $20.83 $16.42 $21.31 $16.40 $20.51 $15.65 $20.96 $15.62 2.2% -0.2%Northwest Near - $16.02 - $15.00 - $14.89 - $14.84 - -0.3%Northwest Far $21.45 $17.10 $23.25 $15.85 $25.19 $14.41 $26.79 $14.29 6.4% -0.8%

Northwest $21.28 $16.62 $22.76 $16.07 $24.11 $15.13 $25.41 $15.07 5.4% -0.4%South Main / Medical Center $26.73 $22.15 $30.49 $23.33 $29.16 $22.13 $27.65 $21.88 -5.2% -1.1%

Southwest / Hillcroft $21.72 $13.84 $28.41 $13.86 $22.73 $13.91 $22.39 $13.76 -1.5% -1.1%Southwest Beltway 8 $18.42 $15.34 $18.83 $16.77 $18.08 $17.06 $15.83 $16.45 -12.4% -3.6%East Fort Bend County / Sugar Land $21.74 $18.75 $22.28 $19.62 $22.99 $19.77 $23.03 $18.47 0.2% -6.6%

Southwest Freeway / Sugar Land $21.33 $15.51 $22.17 $16.38 $21.96 $16.58 $21.72 $15.93 -1.1% -3.9%Bellaire $21.61 $19.05 $24.65 $20.15 $24.28 $16.33 $23.13 $14.77 -4.7% -9.6%Post Oak Park $28.44 $17.75 $30.74 $17.84 $29.67 $15.84 $30.91 $15.77 4.2% -0.5%Galleria $27.14 $18.33 $30.52 $21.80 $26.90 $22.41 $28.01 $20.32 4.2% -9.3%Riverway $23.83 $20.16 $27.11 $20.05 $25.01 $20.90 $25.47 $20.19 1.8% -3.4%Richmond / Fountainview - $14.40 - $15.50 - $15.39 - $16.69 - 8.5%San Felipe / Voss $25.74 $18.79 $29.87 $20.65 $30.19 $19.36 $29.94 $19.45 -0.8% 0.5%

West Loop $26.46 $17.99 $29.71 $20.02 $27.14 $19.35 $27.81 $18.78 2.5% -3.0%Westchase $24.25 $18.63 $23.50 $19.51 $23.88 $19.26 $26.72 $18.89 11.9% -2.0%

The Woodlands $24.41 $23.09 $23.69 $20.99 $22.49 $20.34 $22.76 $20.11 1.2% -1.1%Conroe - $17.74 - $18.38 - $14.57 - $14.91 - 2.3%

Woodlands / Conroe $24.41 $21.97 $23.69 $20.55 $22.49 $19.46 $22.76 $19.34 1.2% -0.6%

Houston Total: $25.48 $18.37 $26.96 $18.76 $25.44 $18.35 $25.77 $18.30 1.3% -0.3%

Note: Rents for properties using triple net terms have been grossed up to full service by applying operating expense data. Rents ref lect full service equivalent.Note: Due to small submarket sample sizes in some cases, particularly in Class A, rent increases and decreases may be magnified relative to other submarkets.Note: CoStar changed market boundaries during Q3 2008. Rent comparisons to data published earlier w ill not be precise.

Source: Delta Associates analysis of CoStar data; December 2010.


% Change2007 2009

Average Asking Rent ($'s/SF, GFS) At End Of:2010 12/09 - 12/102008



OutlookTTHE HOUSTON METRO INDUSTRIAL MARKET

Net Absorption: Steady Growth

Net absorption of industrial space totaled 721,000 SF in the 4th

quarter of 2010 in the Houston metro. Net absorption totaled 4.3 million SF in all of 2010, compared to 3.9 million SF in 2009. Net absorption in SF:

Q4 2010 All of 2010 Warehouse/Dist.: 686,000 3,679,000 Manufacturing: 15,000 (57,000) Flex/R&D: 20,000 706,000

Notable leases during the 4th quarter of 2010:

Ram Chemical & Supply leased 139,600 SF at 13788 West Rd. in the Northwest Far submarket.

Cadeco Industries leased 135,296 SF at 5800 Clinton Drive in the CBD submarket.

Exel renewed 114,000 SF at 8503 Citypark Loop in the Northeast Near submarket.

Crossroads Distribution leased 105,930 SF at 2750-2798 Holmes Rd. in the South Far submarket.

Industrial Vacancy Rate Edges Down; Among Lowest in Nation

The overall Houston metro area industrial vacancy rate edged down to 5.6% at year-end 2010, from 5.7% in the 3rd quarter and 6.0% one year ago. The direct industrial vacancy rate is 5.4% at year-end 2010, down from 5.5% in the 3rd quarter and 5.8% a year ago.

Vacancy by product type at year-end 2010:

Direct Overall Warehouse/Dist.: 5.3% 5.5% Manufacturing: 2.9% 3.0% Flex/R&D: 10.0% 10.1%

Houston’s industrial vacancy rate will likely tighten further in 2011, as demand for space increases in the face of a miniscule product pipeline. Vacancy will continue to decline until the development of new product escalates and catches up to demand. We project overall vacancy will reach 5% one year from now.

Why This Methodology Is the Best IndicatorOf Current Market Conditions

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


15

Outlook


Construction Pipeline: Bumps Up

There is 668,000 SF of industrial space under construction in metro Houston at year-end 2010. This compares to 396,000 SF in the 3rd quarter and 1.7 million SF a year ago. Space under construction today is 52% pre-leased, compared to 47% in the 3rd quarter and 81% one year ago.

Industrial Asking Rents Rising; Effective Rents Remain Under Pressure

Industrial asking rents ticked up in the final quarter of 2010 as owners began to recognize improving conditions. For the year, industrial asking rents were down approximately 4%.

Base rents are still under pressure, particularly for new product built in the North, Northwest, and Port submarkets. We are still seeing free rent of 3-6 months, higher TI packages, and base rents that are below proforma.

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

How the Multi-Tenant Market ComparesTo Our Market Coverage

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

Multi-Tenant Entire MarketInventory: 221.9 MSF 511.9 MSF Overall vac. (incl. sublet): 10.4% 5.6% Q4 2010 net absorption: 365,000 SF 721,000 SF



Outlook

Investment Sales: Increasing

After recording only seven investment sales during the first half of 2010, the Houston industrial market saw five sales transactions during each of the 3rd and 4th quarters. While sales volume remains modest, it more than doubled during 2010 to $124 million, from $53 million in 2009. These figures include transactions for which pricing information has been made public.

Cap rates for Class A industrial distribution space are in the 7% range. Class B industrial cap rates are in the 8% range. Industrial cap rates have declined recently based on the abundance of equity capital seeking industrial product, low interest rates, and the limited opportunities available in the market.

Investment sales volume should continue to rise moving forward as credit becomes more available and demand for this asset class increases. In particular, gradually rising consumer spending should lead to more demand for distribution space, attracting investor interest.

THE HOUSTON METRO INDUSTRIAL MARKET OUTLOOK

The Houston metro industrial market will likely experience significantly stronger conditions in 2011, as economic growth picks up and the consumer sector strengthens. Vacancy will likely continue to decline during the year, as demand increases and the pipeline of new product remains subdued. As a result, industrial rents will likely ratchet up, with concessions burning off, as market conditions quickly begin to turn in the landlord’s favor over the next 12-24 months.


17

Outlook


SUMMARY OF INDUSTRIAL MARKET INDICATORS - ALL SPACEHOUSTON METRO AREA

2007 THROUGH 2010

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

Submarket All Bldgs. 1/ All Bldgs. 2/ 2007 2008 2009 2010 w/ Sublet Renovation 2007 2008 2009 Q4 2010 All of 2010Central Business DistrictFlex/R & D 886,219 69,125 11.9% 15.9% 13.9% 7.8% 7.8% - 30,000 (26,000) 13,000 6,000 45,000 Manufacturing 4,933,227 276,261 3.5% 1.7% 1.9% 5.6% 5.6% - 5,000 78,000 (8,000) (178,000) (184,000) Warehouse/Distribution 29,871,212 1,553,303 3.1% 4.5% 4.5% 5.2% 5.2% - (29,000) (284,000) (134,000) 329,000 (209,000)Total - Central Business District 35,690,658 1,898,689 3.3% 4.4% 4.4% 5.3% 5.3% - 6,000 (232,000) (129,000) 157,000 (348,000)East-Southeast FarFlex/R & D 2,315,276 277,833 10.8% 3.6% 17.8% 12.0% 12.0% - (63,000) 98,000 (4,000) 134,000 80,000Manufacturing 4,673,849 126,194 0.1% 2.1% 4.0% 2.7% 2.7% - 45,000 (53,000) (50,000) (37,000) 61,000 Warehouse/Distribution 40,651,544 4,634,276 13.6% 13.3% 11.6% 11.4% 11.5% - 3,462,000 3,489,000 2,053,000 (285,000) (120,000)Total - East-Southeast Far 47,640,669 5,038,303 12.3% 12.0% 11.3% 10.6% 10.7% - 3,444,000 3,534,000 1,999,000 (188,000) 21,000North FarFlex/R & D 6,658,078 852,234 12.1% 12.5% 10.0% 12.8% 13.2% 52,400 375,000 108,000 221,000 (40,000) (197,000)Manufacturing 5,729,238 137,502 4.2% 0.3% 1.0% 2.4% 2.4% - (8,000) 139,000 (27,000) - (86,000) Warehouse/Distribution 41,719,434 2,503,166 6.8% 9.5% 9.2% 6.0% 6.4% 22,800 2,888,000 2,088,000 613,000 124,000 1,163,000Total - North Far 54,106,750 3,492,902 7.1% 9.1% 8.6% 6.5% 6.8% 75,200 3,255,000 2,335,000 807,000 84,000 880,000North NearFlex/R & D 1,187,582 180,512 5.2% 11.3% 12.2% 15.2% 15.2% - 30,000 (42,000) 24,000 (5,000) (32,000)Manufacturing 3/ 2,626,374 81,418 7.9% 11.1% 2.4% 3.1% 3.1% - 6,000 (69,000) 188,000 (21,000) (19,000) Warehouse/Distribution 14,833,737 608,183 3.5% 5.0% 3.8% 4.1% 4.1% - 851,000 312,000 211,000 0 21,000Total - North Near 18,647,693 870,113 4.1% 6.0% 4.0% 4.7% 4.7% - 887,000 201,000 423,000 (26,000) (30,000)Northeast FarFlex/R & D 96,952 2,618 0.0% 2.9% 2.7% 2.7% 2.7% - - (6,000) - - - Manufacturing 196,600 - 0.0% 0.0% 0.0% 0.0% 0.0% - - - - - - Warehouse/Distribution 3/ 1,109,830 3,329 0.9% 0.0% 0.7% 0.3% 0.3% - 4,000 5,000 (5,000) (3,000) 4,000 Total - Northeast Far 1,403,382 5,947 0.5% 0.7% 1.0% 0.4% 0.4% - 4,000 (1,000) (5,000) (3,000) 4,000Northeast NearFlex/R & D 692,456 81,710 9.2% 4.6% 0.5% 11.8% 11.8% - (17,000) 32,000 29,000 (23,000) (78,000) Manufacturing 5,937,172 290,921 4.4% 0.7% 1.4% 4.9% 4.9% - (92,000) 299,000 (43,000) 30,000 (141,000)Warehouse/Distribution 24,404,187 902,955 2.3% 4.5% 2.0% 3.7% 3.9% - 939,000 106,000 603,000 51,000 (173,000)Total - Northeast Near 31,033,815 1,275,586 2.9% 3.8% 1.9% 4.1% 4.3% - 830,000 437,000 589,000 58,000 (392,000)Northwest FarFlex/R & D 5,072,454 284,057 13.6% 11.1% 13.8% 5.6% 6.0% - (235,000) (144,000) 3,000 41,000 566,000Manufacturing 6,256,764 262,784 8.0% 3.8% 7.4% 4.2% 4.2% - (126,000) 123,000 (106,000) 245,000 299,000Warehouse/Distribution 45,142,493 2,302,267 6.0% 3.8% 6.4% 5.1% 5.1% 334,125 717,000 1,973,000 (7,000) 135,000 821,000Total - Northwest Far 56,471,711 2,849,109 6.9% 4.6% 7.2% 5.0% 5.1% 334,125 356,000 1,952,000 (110,000) 421,000 1,686,000Northwest NearFlex/R & D 11,504,223 1,207,943 9.9% 10.5% 12.8% 10.5% 10.7% - 257,000 159,000 (164,000) 23,000 297,000 Manufacturing 9,025,427 153,432 1.2% 1.0% 1.4% 1.7% 1.7% - 71,000 20,000 21,000 (36,000) (27,000) Warehouse/Distribution 80,222,022 3,930,879 3.9% 4.2% 5.3% 4.9% 5.2% - 1,468,000 412,000 (700,000) 0 320,000Total - Northwest Near 100,751,672 5,292,255 4.3% 4.6% 5.7% 5.3% 5.5% - 1,796,000 591,000 (843,000) (13,000) 590,000

See next page for balance of Houston Industrial Summary

at End of: Net Absorption (SF)

Page 1 of 2

Year-End 2010Year-End 2010Direct Vacancy Rate



OutlookPage 2 of 2

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


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

Submarket All Bldgs. 1/ All Bldgs. 2/ 2007 2008 2009 2010 w/ Sublet Renovation 2007 2008 2009 Q4 2010 All of 2010South FarFlex/R & D 1,709,126 188,004 10.9% 18.0% 12.3% 11.0% 11.0% - (28,000) (52,000) 280,000 (32,000) 7,000Manufacturing 5,381,215 156,055 3.6% 1.0% 2.1% 2.9% 2.9% - (106,000) 118,000 - (54,000) (33,000)Warehouse/Distribution 24,867,363 1,069,297 4.9% 5.5% 4.4% 4.3% 4.3% - 140,000 (120,000) 226,000 152,000 33,000 Total - South Far 31,957,704 1,413,356 4.8% 5.1% 4.3% 4.4% 4.4% - 6,000 (54,000) 506,000 66,000 7,000South NearFlex/R & D 3/ 903,477 93,058 11.9% 10.4% 7.8% 10.3% 10.3% - (58,000) 17,000 30,000 (15,000) (25,000) Manufacturing 1,503,143 57,119 5.1% 5.3% 3.7% 3.8% 3.8% - 130,000 10,000 15,000 (2,000) (2,000) Warehouse/Distribution 12,169,760 219,056 2.5% 2.0% 3.8% 1.8% 1.8% - 329,000 60,000 (220,000) 85,000 244,000Total - South Near 14,576,380 369,233 3.5% 3.0% 4.1% 2.5% 2.6% - 401,000 87,000 (175,000) 68,000 217,000Southeast NearFlex/R & D 544,967 116,078 4.7% 14.5% 18.7% 21.3% 21.3% - 3,000 11,000 (18,000) (23,000) (16,000) Manufacturing 6,986,955 13,974 0.0% 0.5% 0.2% 0.2% 1.1% - 133,000 (35,000) 21,000 - - Warehouse/Distribution 29,507,769 796,710 3.1% 2.8% 2.0% 2.7% 2.7% - (50,000) 100,000 175,000 59,000 (59,000)Total - Southeast Near 37,039,691 926,762 2.5% 2.4% 1.8% 2.5% 2.7% - 86,000 76,000 178,000 36,000 (75,000)Southwest FarFlex/R & D 1,759,804 139,025 33.2% 26.2% 6.6% 7.9% 7.9% - 119,000 88,000 222,000 (9,000) (33,000)Manufacturing 3/ 1,229,734 46,730 1.8% 6.6% 6.7% 3.8% 3.8% - (22,000) (60,000) 133,000 46,000 35,000 Warehouse/Distribution 8,238,013 354,235 3.0% 2.3% 5.8% 4.3% 4.4% 20,000 76,000 98,000 518,000 107,000 117,000Total - Southwest Far 11,227,551 539,989 6.7% 6.0% 6.0% 4.8% 4.9% 20,000 173,000 126,000 873,000 144,000 119,000Southwest NearFlex/R & D 7,462,030 522,342 8.3% 9.0% 7.6% 7.0% 7.1% 186,595 254,000 26,000 195,000 (45,000) 45,000 Manufacturing 3,921,882 141,188 1.1% 3.1% 4.9% 3.6% 3.6% - (25,000) (65,000) - 35,000 53,000Warehouse/Distribution 41,069,655 2,053,483 4.3% 4.7% 7.1% 5.0% 5.2% - 496,000 203,000 (574,000) (82,000) 675,000Total - Southwest Near 52,453,567 2,717,013 4.7% 5.3% 7.0% 5.2% 5.4% 186,595 725,000 164,000 (379,000) (92,000) 773,000Sugar LandFlex/R & D 2,759,572 328,389 8.4% 13.6% 13.6% 11.9% 11.9% - 103,000 110,000 - 8,000 47,000Manufacturing 1,826,635 12,786 0.0% 0.0% 0.0% 0.7% 0.7% - 128,000 - - (13,000) (13,000) Warehouse/Distribution 3/ 14,269,075 841,875 5.4% 4.3% 4.6% 5.9% 6.0% 52,000 271,000 304,000 66,000 14,000 842,000Total - Sugar Land 18,855,282 1,183,051 5.2% 5.4% 5.6% 6.3% 6.4% 52,000 502,000 414,000 66,000 9,000 876,000Total HoustonFlex/R & D 43,552,216 4,342,929 10.8% 11.2% 11.2% 10.0% 10.1% 238,995 770,000 379,000 831,000 20,000 706,000Manufacturing 60,228,215 1,756,364 2.8% 1.9% 2.2% 2.9% 3.0% - 139,000 505,000 144,000 15,000 (57,000)Warehouse/Distribution 408,076,094 21,773,014 4.9% 5.4% 5.8% 5.3% 5.5% 428,925 11,562,000 8,746,000 2,880,000 686,000 3,679,000Total - Houston 511,856,525 27,872,307 5.1% 5.5% 5.8% 5.4% 5.6% 667,920 12,471,000 9,630,000 3,855,000 721,000 4,328,000

Vacancy Rate with Sublet Space 5.1% 5.7% 6.0% 5.6%

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



Net Absorption (SF)Direct Vacancy Rate

Year-End 2010

at End of:

Year-End 2010


19

Outlook


10%

11%

12%

13%

14%

15%

16%

17%

18%

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

Vaca

ncy

Rat

e

Vacancy Rate TrendsHouston Metro Retail Market

2000 Through 2010

Source: O’Connor & Associates, Delta Associates; December 2010.Note: Data source has expanded its inventory and restated its vacancy rates. * 3rd quarter 2010.

15.2%

$1.65

$1.59

$1.40

$1.50

$1.60

$1.70

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

Aver

age

Ren

tal R

ate

(Per

SF,

Per

Mon

th)

Average Rental RateHouston Metro Retail Market

2000 Through 2010

Source: O’Connor & Associates, Delta Associates; December 2010.Note: Data source has expanded its inventory and restated its rental rates. * 3rd quarter 2010.

-10

-5

0

5

10

15

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

Jobs

in 0

00s

Source: Bureau of Labor Statistics, Delta Associates; December 2010. *12 months ending October.

Retail Job GrowthHouston Metro


14-Year Average Job Growth = 3,000

Jobs/Annum

THE HOUSTON METRO RETAIL MARKET

Retail Sector Turning Around

Metro Houston’s retail market remained soft through the fall of 2010, due to continued consumer weakness. However, 6,000 retail jobs have been added in metro Houston since February 2010, which likely indicates material improvement in this sector on the horizon.

Retail Vacancy Declines

Houston’s retail vacancy rate declined to 15.2% in the 3rd quarter of 2010, from a revised 15.6% at mid-year and 15.6% one year earlier. We expect that vacancy will decline modestly in 2011, as the economy strengthens and consumer spending escalates.

Retail Rents Slipping

Retail rents in Houston averaged $1.59/SF/month in the 3rd

quarter of 2010, compared to $1.62/SF/month in the 2nd quarter and $1.65/SF/month in the 3rd quarter of 2009. Rents will likely trade in a narrow range into early 2011, due to continued volatility in consumer spending. Rents will likely begin to gain traction in the 2nd half of 2011, as consumer spending picks up and market conditions strengthen.

Retail Jobs Up Year-Over-Year

The Retail sector in metro Houston gained 500 jobs over the 12-month period ending in October 2010 – a 0.2% increase that followed a similar gain in September. These were the first positive 12-month periods for this sector since January 2009. Subsectors that added jobs: Department stores, clothing stores, building materials, health and personal care. Those that lost jobs: Motor vehicle parts, food and beverage stores, general merchandise. About 6,000 retail jobs have been added in Houston since the low point in February 2010. Retail employment should continue to increase as consumer spending rebounds in 2011.



Outlook

$55.3

$106.7

$89.7

$90.1

$50

$60

$70

$80

$90

$100

$110

2002 2003 2004 2005 2006 2007 2008 2009 2010*

Tota

l Gro

ss R

etai

l Sal

es(in

Bill

ions

of D

olla

rs)

Gross Retail SalesHouston Metro Area

2002 Through Mid-Year 2010

Source: Texas Comptroller’s Office, Delta Associates; December 2010. *Mid-year total annualized.

Retail Spending

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

Investment Sales Activity

Retail investment sales totaled $639 million in the Houston metro area during 2010. This total includes the sale in July of Walton Street Capital’s 37.5% interest in the 2.3 million SF Houston Galleria to its partners, CalPERS and Simon Property Company. Real Capital Analytics reported a sale price of $524 million for the partial interest, with the trade resulting in a cap rate of 5.8%.

Retail Market Will Likely Strengthen in 2011

The Houston retail market will likely experience modest improvement in 2011, as job growth picks up steam and the housing market strengthens, given consumers more confidence in their net worth and spending patterns. As consumer confidence rises, buyers will return to the stores and a cycle of growth in the retail market will likely ensue over the next several years.

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

© 2010. All rights reserved. You may neither copy nor disseminate this report. If quoted, proper attribution is required.

National Economy and Methodology

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


21

Outlook


DDelta Associates

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

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

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

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

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

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

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

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

Cyber Contacts Website: DeltaAssociates.com

General eMailbox: [email protected]

Report Author: David Parham Report Editor: Scott Price

Transwestern With 1,600 team members in major markets coast to coast, Transwestern operates through six distinct functional lines of business – agency leasing, property and facility management, investment services, tenant advisory, development and research – for a broad range of property types, including office, industrial, retail, healthcare and multifamily. In 2009, the firm completed leasing, sales, and finance transactions totaling $3.3 billion.

Within that same time period, Transwestern oversaw the leasing and management of 1,113 properties, representing 233 million square feet – leased and managed combined.

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

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

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

Documents

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