HOUSTON...Q2 2019 HOUSTON MARKET REPORT OFFICE & INDUSTRIAL 2900 Weslayan Street, Ste 620 Houston,...

Q2 2019

HOUSTONMARKET REPORT

OFFICE & INDUSTRIAL

2900 Weslayan Street, Ste 620 Houston, TX 77027.

[email protected]

CONTENTS OFFICE MARKET REPORT

2 OVERVIEW

3 LEASING

5 RENT

7 SALES

8 PAST SOLD SUMMARY

6 HOUSTON OFFICE SUBMARKETS MAP

INDUSTRIAL MARKET REPORT

13 OVERVIEW

14 LEASING

16 RENT

18 SALES

19 PAST SOLD SUMMARY

20 HOUSTON INDUSTRIAL SUBMARKETS MAP

NOTE: The data provided within this report is sourced from CoStar Group, Inc.

OFFICE MARKET REPORT

A return to positive net absorption and positive rent growth in 2018 were very welcome signs. Houston is also seeing the office vacancy rate compress lower from an early 2018 peak of nearly 17% thanks to a limited supply pipeline and steady tenant demand, though it’s still among the highest vacancies in large U.S. metros.

Houston’s significant space availability means that landlords must continue to offer free rent and concessions to attract tenants. And as tenants continue to absorb the large wave of new supply that delivered over the past several years, rent growth remains quite low by historical standards.

The current building boom has put pressure on older assets. As in other markets that experienced a large amount new construction this cycle, CoStar expects a wave of renovations as older assets try to compete. However, the new supply should satisfy key occupiers that are driven by quality buildings as part of their strategy to attract and retain talent in the midst of a tight national labor market.

The largest cluster of energy companies and the largest medical center in the world should keep large employers in Houston, even if growth moving forward is projected to be slower than in the recent oil boom years. Meanwhile, the planned TMC | 3 collaborative research campus and The Ion innovation hub in Midtown Houston both offer the promise of a burgeoning tech scene.

2.8 M12 Mo Deliveries in SF

16.6%Vacancy Rate

1.0%12 Mo Rent Growth

2.5 M12 Mo Net Absorption in SF

OVERVIEW

KEY INDICATORS

Current Quarter RBA Vacancy RateMarket

RentAvailability

RateNet Absorption

SFDeliveries

SFUnder

Construction

4 & 5 Star 148,001,151 18.1% $33.55 23.7% (52,504) 54,840 2,473,944

3 Star 134,118,977 17.2% $24.26 19.4% (92,419) 0 551,913

1 & 2 Star 49,981,225 10.3% $20.80 12.6% 28,953 0 32,984

Market 332,101,353 16.6% $27.92 20.3% (115,970) 54,840 3,058,841

Annual Trends 12 Month Historical Avg.

Forecast Avg. Peak When Trough When

Vacancy Change (YOY) -0.1% 13.0% 14.9% 16.7% 2018 Q2 8.9% 1999 Q1

Net Absorption SF 2.5 M 3,171,000 3,699,067 9,673,805 2006 Q4 (4,020,569) 2017 Q3

Deliveries SF 2.8 M 5,204,524 3,449,854 13,770,890 2015 Q2 1,278,682 2010 Q4

Rent Growth 1.0% 1.7% 1.0% 14.4% 2008 Q1 -6.3% 2009 Q4

Sales Volume $1.5 B $1.7B N/A $5.0B 2013 Q3 $250.8M 2009 Q4

LEASINGWith employers hiring again, demand for office space has returned, albeit slowly. Large move-ins last quarter included the American Bureau of Shipping’s occupancy of 300,000 SF at CityPlace 2 in Springwoods Village. Asurion moved into more than 125,000 SF at the Legacy at Fallbrook in the West Belt Submarket, and BP moved into 85,000 SF in West Memorial Place 2 in Katy Freeway West.

Altogether, net absorption totaled about 500,000 SF last quarter, representing the third consecutive quarter of positive demand after two years of losses. CoStar’s forecast calls for demand to pick up, and average about 1 million SF per quarter, fairly in line with Houston’s average.

Houston also recorded some significant leases last quarter, including welcome signings by two energy tenants: Honeywell for 115,000 SF in CityWestPlace Building 1 in Westchase and Direct Energy for 105,000 SF at 2 Houston Center in the CBD.

The beleaguered Energy Corridor will soon welcome two new tenants: CAM Integrated Solutions signed for 59,000 SF at 17000 Katy Freeway for a reported $17/SF, and Olin will move into 54,000 SF at 16290 Katy Freeway at a rate of $31/SF on a full-service basis.

Total leasing volume last quarter reached 3.5 million SF, and this total is expected to rise above 4.5 million SF once all leases have been reported.

Last quarter, The Woodlands accounted for nearly 1 million SF of positive absorption. The Woodlands Submarket also leads net absorption among all Houstonarea submarkets since 2010, accounting for nearly 40% of the Houston metro’s net absorption this cycle.

Katy Freeway West accounted for 650,000 SF of absorption last quarter, a welcome return after a few soft years. Since 2010, West Houston submarkets such as Katy Freeway West and East, Katy/Grand Parkway West, the West Belt, and Westchase accounted for nearly half of net absorption in the metro. The CBD posted nearly 500,000 SF of positive absorption last quarter, which was quite a welcome sign, as Downtown Houston lost more than 10 million SF of tenants since 2010. It appears that tenants are gravitating towards newer office space, whether in suburban or downtown areas.

NET ABSORPTION, NET DELIVERIES & VACANCY

VACANCY RATE

AVAILABILITY RATE

RENTHouston’s rents have stabilized over the past year after suffering losses in 2016 and 2017—the same years when most markets were posting their strongest rent growth. Houston office rents are set to continue their recovery into the forecast, with rent growth accelerating over the next three years in the CoStar Base Case. However, rents are forecast to grow by less than 1% annually, half the projected rate of inflation.

Rent growth has varied across Houston’s submarkets. The NASA/Clear Lake Submarket’s rents grew by 3.5% last year. The submarket is home to a diverse array of aerospace, medical device manufacturing, healthcare, and government tenants, which has helped the submarket

bounce back quicker from the oil downturn. North Loop West and Riverway, both relatively affordable submarkets near the Galleria/Uptown area, experienced nearly 2% year-over-year rent growth, rounding out the top three submarkets, although barely keeping pace with inflation.

The adjacent Greenspoint/N Belt West and Greenspoint/IAH Submarkets remain the hardest-hit submarkets, posting rent losses of 3% and 5% respectively over the past year. These two submarkets still have the highest vacancy rates in the Houston metro at 45% and 25%. And they were both largely impacted by ExxonMobil’s move to its new campus in Springwoods Village.

MARKET RENT GROWTH (YOY)

MARKET RENT PER SQUARE FOOT

SALESHouston’s recorded trailing 12-month office transaction volume totalled $1.5 billion as of 19Q3.

Houston cap rates tend to be a bit higher than the national average, typical of a large, affordable Sunbelt market with little zoning and abundant land. And a large amount of value-add portfolio deals traded in 2017.

Generally, Houston trades right in line with the national average, though cap rates have drifted higher since the energy slump.

In January, Granite Properties acquired from TIER REIT the three properties in Eldridge Place in the Energy Corridor totaling nearly 825,000 SF for $78.4 million, or about $95/SF. These were collectively approximately 70% occupied at the time of sale.

In April 2019, Houston-based Patrinely Group sold the nearly 340,000-SF HP Buildings 1 and 2 in Springwoods Village to Washington, D.C.-based Northridge Capital for an undisclosed price. CoStar estimates that they paid around $109 million at a 7% cap rate. The buildings,

which delivered in 18Q4, are leased to HP Inc. for 12 years.

Also in April 2019, a joint venture between Houstonbased Hicks Ventures and New York-based Taconic Capital Advisors acquired the 340,000-SF building at 1177 West Loop in Post Oak Park from Dallas-based Spire Realty Group for an undisclosed price. CoStar estimates that they paid around $78.5 million at a 6.4% cap rate. At the time of sale, the property was 73% occupied.

Lastly, in April of this year, Austin-based CapRidge Partners acquired from Houston-based Unilev Management Corporation a three-property portfolio in the San Felipe/Voss Submarket, including two adjacent buildings totaling 540,000 SF. These properties also sold for an undisclosed price, although CoStar estimates that they paid around $96 million at a 7.4% cap rate.

CoStar estimates that prices have risen about 3% over the past year. However, rising cap rates and slowing rent growth will limit value gains over the forecast to less than 6%.

SALES VOLUME & MARKET SALE PRICE PER SF

PAST SOLD SUMMARY

674Sale Comparables

$209Avg. Price/SF


7.5%Avg. Cap Rate

SALE COMPARABLE LOCATIONS

KEY INDICATORS

Sales Attributes Low Average Median High

Sale Price $68,000 $10,669,927 $1,085,000 $404,700,000

Price Per SF $25 $209 $159 $969

Cap Rate 4.7% 7.5% 7.4% 12.5%

Time Since Sale in Months 0.2 6.1 5.7 12.0

Property Attributes Low Average Median High

Building SF 541 34,642 6,597 554,385

Stories 1 2 1 30

Typical Floor SF 541 11,186 5,690 110,877

Vacancy Rate At Sale 0% 18.2% 0% 100%

Year Built 1910 1985 1983 2019

Star Rating 2.6

HOUSTON MAP OFFICE SUBMARKETS

Inventory 12 Month Deliveries Under Construction

No. Submarket Bldgs SF (000) % Market Rank Bldgs SF (000) Percent Rank Bldgs SF (000) Percent Rank

1 Austin County 44 263 0.1% 44 0 0 0% - 0 - - -2 Baytown 137 1,638 0.5% 36 0 0 0% - 0 - - -3 Bellaire 92 5,243 1.6% 21 0 0 0% - 1 5 0.1% 174 CBD 161 51,441 15.5% 1 1 781 1.5% 2 2 1,274 2.5% 15 Conroe 260 2,689 0.8% 30 1 4 0.1% 23 1 11 0.4% 15

6E Fort Bend Co/Sugar Land

416 10,031 3.0% 11 13 144 1.4% 4 13 276 2.7% 3

7 FM 1960/Champions 261 4,430 1.3% 23 1 13 0.3% 15 0 - - -8 FM 1960/Hwy 249 431 8,947 2.7% 13 8 68 0.8% 8 32 358 4.0% 29 FM 1960/I-45 North 111 2,538 0.8% 31 0 0 0% - 0 - - -10 Galleria/Uptown 66 16,848 5.1% 5 0 0 0% - 0 - - -11 Greenspoint/IAH 57 3,197 1.0% 28 0 0 0% - 0 - - -12 Greenspoint/N Belt West 119 11,037 3.3% 9 0 0 0% - 0 - - -13 Greenway Plaza 276 13,129 4.0% 7 0 0 0% - 0 - - -14 Gulf Freeway/Pasadena 645 8,112 2.4% 14 1 10 0.1% 19 0 - - -15 I-10 East 137 1,377 0.4% 40 2 3 0.2% 24 0 - - -16 Katy Freeway East 260 11,590 3.5% 8 1 2 0% 25 1 102 0.9% 917 Katy Freeway West 262 28,597 8.6% 2 2 126 0.4% 5 1 4 0% 1918 Katy/Grand Parkway West 441 6,249 1.9% 18 17 103 1.7% 6 3 21 0.3% 1419 Kingwood/Humble 232 3,648 1.1% 26 3 162 4.4% 3 2 57 1.6% 1120 Liberty County 73 353 0.1% 43 0 0 0% - 0 - - -21 Midtown 573 9,824 3.0% 12 2 12 0.1% 16 3 202 2.1% 522 NASA/Clear Lake 532 10,397 3.1% 10 5 56 0.5% 10 2 74 0.7% 1023 North Loop West 354 6,619 2.0% 16 3 31 0.5% 12 3 105 1.6% 724 Northeast Near 149 2,259 0.7% 32 0 0 0% - 0 - - -25 Northeast Outlier 86 937 0.3% 41 1 8 0.9% 20 0 - - -26 Northwest Far 130 4,398 1.3% 24 0 0 0% - 0 - - -27 Northwest Near 56 1,528 0.5% 37 2 64 4.2% 9 0 - - -28 Northwest Outlier 267 1,811 0.5% 34 13 69 3.8% 7 4 24 1.3% 1329 Outlying Chambers County 23 84 0% 46 1 7 8.8% 21 0 - - -30 Outlying Montgomery Cnty 206 1,429 0.4% 39 2 12 0.8% 17 1 5 0.3% 1731 Outlying Waller County 22 116 0% 45 0 0 0% - 0 - - -32 Post Oak Park 43 4,681 1.4% 22 0 0 0% - 1 207 4.4% 433 Richmond/Fountainview 117 2,187 0.7% 33 0 0 0% - 0 - - -34 Riverway 24 3,091 0.9% 29 0 0 0% - 0 - - -35 San Felipe/Voss 50 5,338 1.6% 20 0 0 0% - 0 - - -36 South 267 3,240 1.0% 27 2 51 1.6% 11 2 103 3.2% 837 South Hwy 35 157 846 0.3% 42 1 15 1.8% 14 0 - - -38 South Main/Medical Center 241 13,621 4.1% 6 0 0 0% - 0 - - -39 Southeast Outlier 349 4,008 1.2% 25 0 0 0% - 1 7 0.2% 1640 Southwest Beltway 8 191 7,457 2.2% 15 0 0 0% - 0 - - -41 Southwest Far 91 1,453 0.4% 38 0 0 0% - 0 - - -42 Southwest Outlier 216 1,750 0.5% 35 2 7 0.4% 22 1 27 1.5% 1243 Southwest/Hillcroft 109 5,342 1.6% 19 0 0 0% - 0 - - -44 The Woodlands 646 23,022 6.9% 3 16 1,045 4.5% 1 4 197 0.9% 645 West Belt 112 6,302 1.9% 17 2 11 0.2% 18 0 - - -46 Westchase 138 19,004 5.7% 4 1 19 0.1% 13 0 - - -

SUBMARKET INVENTORY

SUBMARKET RENT

Gross Asking Rents 12 Month Asking Rent Annualized Quarterly RentNo. Market Per SF Rank Growth Rank Growth Rank1 Austin County $21.65 32 1.6% 12 -0.6% 322 Baytown $21.25 35 1.7% 9 -0.6% 303 Bellaire $25.24 17 2.6% 4 -0.7% 374 CBD $35.71 1 1.1% 21 3.5% 35 Conroe $22.11 29 0.7% 27 -0.5% 246 E Fort Bend Co/Sugar Land $26.96 13 -0.1% 37 1.3% 97 FM 1960/Champions $18.76 43 -1.0% 40 -0.9% 398 FM 1960/Hwy 249 $24.94 18 -1.0% 41 -0.6% 339 FM 1960/I-45 North $20.26 37 -2.1% 42 1.3% 1010 Galleria/Uptown $31.92 2 -0.4% 38 1.8% 711 Greenspoint/IAH $18.79 42 -2.7% 45 -0.2% 1912 Greenspoint/N Belt West $18.40 45 -3.0% 46 2.9% 513 Greenway Plaza $29.72 7 0.7% 26 -1.2% 4214 Gulf Freeway/Pasadena $21.27 34 0.4% 32 -0.7% 3515 I-10 East $20.06 38 1.6% 11 -0.5% 2816 Katy Freeway East $30.77 5 2.8% 3 -0.2% 1817 Katy Freeway West $30.60 6 3.3% 1 0.9% 1118 Katy/Grand Parkway West $28.42 9 0.9% 24 -0.3% 2119 Kingwood/Humble $24.13 21 0.1% 36 -0.1% 1520 Liberty County $21.29 33 1.2% 19 -0.5% 2521 Midtown $29.43 8 2.2% 6 1.5% 822 NASA/Clear Lake $23.82 24 2.9% 2 -1.2% 4323 North Loop West $23.31 25 0.8% 25 -0.2% 1724 Northeast Near $23.88 23 0.5% 30 -1.1% 4125 Northeast Outlier $24.23 20 1.6% 13 -0.4% 2226 Northwest Far $19.68 40 0.1% 35 -1.2% 4427 Northwest Near $19.65 41 -0.5% 39 -0.8% 3828 Northwest Outlier $24.54 19 0.9% 23 -0.9% 4029 Outlying Chambers County $22.94 26 1.5% 14 -0.6% 3130 Outlying Montgomery Cnty $22.09 30 1.6% 10 -0.6% 2931 Outlying Waller County $21.83 31 1.1% 22 -0.5% 2632 Post Oak Park $31.56 4 0.3% 33 2.5% 633 Richmond/Fountainview $19.70 39 1.4% 17 -0.1% 1634 Riverway $27.66 12 1.5% 15 13.0% 135 San Felipe/Voss $26.53 15 2.2% 5 -1.9% 4536 South $26.18 16 0.5% 31 -0.4% 2337 South Hwy 35 $20.32 36 1.2% 20 -0.5% 2738 South Main/Medical Center $27.92 11 1.4% 16 0.3% 1339 Southeast Outlier $22.36 27 0.2% 34 -0.6% 3440 Southwest Beltway 8 $18.42 44 -2.2% 43 0.7% 1241 Southwest Far $23.88 22 2.0% 7 -0.7% 3642 Southwest Outlier $22.24 28 1.2% 18 5.4% 243 Southwest/Hillcroft $17.31 46 -2.3% 44 -0.3% 2044 The Woodlands $31.61 3 0.6% 29 0.2% 1445 West Belt $28.06 10 0.6% 28 -8.7% 4646 Westchase $26.60 14 1.7% 8 3.0% 4

SUBMARKET VACANCY & NET ABSORPTION

Vacancy 12 Month Absorption

No. Submarket SF Percent Rank SF % of Inv RankConstrct.

Ratio1 Austin County 15,318 5.8% 6 (7,688) -2.9% 33 -2 Baytown 114,353 7.0% 8 125 0% 30 -3 Bellaire 841,464 16.0% 30 3,209 0.1% 27 -4 CBD 9,812,900 19.1% 36 677,507 1.3% 2 1.15 Conroe 278,452 10.4% 19 (12,580) -0.5% 35 -6 E Fort Bend Co/Sugar Land 1,122,192 11.2% 21 71,766 0.7% 11 1.97 FM 1960/Champions 610,212 13.8% 25 (2,962) -0.1% 31 -8 FM 1960/Hwy 249 1,176,075 13.1% 23 (273,182) -3.1% 46 -9 FM 1960/I-45 North 685,086 27.0% 44 (41,307) -1.6% 37 -10 Galleria/Uptown 2,589,453 15.4% 29 261,258 1.6% 5 -11 Greenspoint/IAH 835,934 26.1% 43 (58,377) -1.8% 39 -12 Greenspoint/N Belt West 5,009,585 45.4% 45 29,574 0.3% 20 -13 Greenway Plaza 1,810,164 13.8% 26 149,299 1.1% 6 -14 Gulf Freeway/Pasadena 804,933 9.9% 15 111,681 1.4% 8 0.115 I-10 East 88,615 6.4% 7 44,131 3.2% 16 -16 Katy Freeway East 1,198,250 10.3% 18 82,010 0.7% 10 -17 Katy Freeway West 7,039,130 24.6% 41 322,712 1.1% 4 0.418 Katy/Grand Parkway West 633,795 10.1% 17 149,284 2.4% 7 0.319 Kingwood/Humble 395,866 10.9% 20 92,348 2.5% 9 0.820 Liberty County 8,551 2.4% 1 (5,545) -1.6% 32 -21 Midtown 981,162 10.0% 16 (134,398) -1.4% 42 -22 NASA/Clear Lake 1,500,556 14.4% 27 58,325 0.6% 14 1.023 North Loop West 1,121,795 16.9% 31 (23,209) -0.4% 36 -24 Northeast Near 126,314 5.6% 5 2,790 0.1% 28 -25 Northeast Outlier 33,129 3.5% 2 33,704 3.6% 18 0.226 Northwest Far 846,861 19.3% 37 23,772 0.5% 22 -27 Northwest Near 231,273 15.1% 28 (41,451) -2.7% 38 -28 Northwest Outlier 237,317 13.1% 22 58,364 3.2% 13 0.829 Outlying Chambers County - - - 7,867 9.4% 26 0.930 Outlying Montgomery Cnty 132,298 9.3% 14 12,488 0.9% 24 0.431 Outlying Waller County 8,242 7.1% 11 (8,242) -7.1% 34 -32 Post Oak Park 1,186,098 25.3% 42 1,900 0% 29 -33 Richmond/Fountainview 177,374 8.1% 12 14,428 0.7% 23 -34 Riverway 671,379 21.7% 39 (145,343) -4.7% 43 -35 San Felipe/Voss 1,144,244 21.4% 38 (88,225) -1.7% 40 -36 South 227,956 7.0% 9 37,135 1.1% 17 1.437 South Hwy 35 36,219 4.3% 3 9,404 1.1% 25 1.638 South Main/Medical Center 733,722 5.4% 4 (109,078) -0.8% 41 -39 Southeast Outlier 282,544 7.0% 10 59,086 1.5% 12 -40 Southwest Beltway 8 1,342,697 18.0% 34 (229,844) -3.1% 45 -41 Southwest Far 251,032 17.3% 32 31,756 2.2% 19 -42 Southwest Outlier 230,123 13.2% 24 26,757 1.5% 21 0.243 Southwest/Hillcroft 950,641 17.8% 33 53,801 1.0% 15 -44 The Woodlands 2,059,807 8.9% 13 1,063,017 4.6% 1 1.045 West Belt 1,180,080 18.7% 35 331,619 5.3% 3 046 Westchase 4,253,932 22.4% 40 (161,906) -0.9% 44 -

INDUSTRIAL MARKET REPORT

Houston’s industrial market continues to ride the wave of e-commerce and plastics industry growth, although sluggish demand from the upstream energy sector has provided a counterbalance to prevent the local industrial market from overheating.

Houston has grown in prominence from a market reliant on energy-related industrial demand (particularly for crane-served upstream oil and gas and fabricated metals manufacturing tenants) to a true regional distribution center serving its growing population base. As of 19Q2, it ranked in the top 10 among U.S. metros in terms of trailing 12-month net absorption and inventory size. The northwestern and southeastern parts of the metro remain the strongest areas for Houston’s industrial growth, as the northwest is located close to Houston’s growing population base and the southeast is located near the Port of Houston.

E-commerce and logistics activity in Houston is strong. Amazon completed a 1-million-SF facility in early 2018,

and Amazon and FedEx each completed distribution facilities exceeding 800,000 SF in late 2017. All three of these buildings are located on the west side of town, and more build-to-suits are in the pipeline. Several of the metro’s largest leases signed over the past two years have been in logistics facilities, including IKEA (1,000,000 SF), Ravagos Americas (712,000 SF), Emser Tile (600,000 SF), Best Buy (550,000 SF), and Vinmar International (500,000 SF).

Houston’s industrial market in 2018 and into 2019 has been marked by large portfolio trades, a trend repeated nationally, as large institutional investors remain underallocated to the industrial property type. Industrial vacancies have compressed faster than the other property types this cycle, as a paradigm shift to ecommerce caused a surge in industrial demand in most major U.S. metros, and Houston was no exception. With high investor demand for industrial properties, cap rates on Houston industrial transactions also compressed to a record low 6.6% on average in 2018.

16.9 M12 Mo Deliveries in SF

6.3%Vacancy Rate


8.5 M12 Mo Net Absorption in SF

OVERVIEW

KEY INDICATORS

Current Quarter RBA Vacancy RateMarket

RentAvailability

RateNet Absorption

SFDeliveries

SFUnder

Construction

Logistics 472,190,502 6.7% $6.86 11.2% (155,491) 261,451 12,874,805

Specialized Industrial 109,516,153 2.5% $7.99 4.5% (81,344) 0 1,286,390

Flex 52,874,399 10.3% $10.17 13.5% (243,393) 0 312,015

Market 634,581,054 6.3% $7.32 10.3% (480,228) 261,451 14,473,210

Annual Trends 12 Month Historical Avg.

Forecast Avg. Peak When Trough When

Vacancy Change (YOY) 0.9% 6.3% 7.0% 9.3% 2004 Q1 4.3% 1999 Q1

Net Absorption SF 8.5 M 8,904,372 10,680,670 19,341,438 2005 Q2 (309,245) 2013 Q3

Deliveries SF 16.9 M 10,449,699 14,190,294 17,204,336 2019 Q2 3,337,143 2011 Q1

Rent Growth 2.3% 2.2% 1.3% 9.4% 2000 Q2 -2.1% 2010 Q3

Sales Volume $1.5 B $494.1M N/A $1.7B 2019 Q1 $126.4M 1999 Q4

LEASINGHouston’s structurally low vacancy rate of 6.3% is below the 20-year historical average and is in line with its peer set, although it exceeded the U.S. average by approximately 100 basis points in 19Q2. The vacancy rate is also up more than 100 basis points after the height of the shale boom in mid-2015. Meanwhile, strong trailing 12-month net absorption of approximately 8,500,000 SF ranked Houston in the top 10 U.S. industrial markets as of 19Q2. E-commerce growth has created significant demand for industrial space in Houston this cycle. Strong demand from port-related trade and exports, particularly petrochemicals and plastics, also continues to created the need for Houston industrial real estate.

Meanwhile, the vacancy rate continued to inch up in 19Q2 as new supply continued to outpace demand.

The largest leases signed year-to-date as of 19Q2 include Home Depot, for 771,000 SF in Hines’ Grand National Business Park in the Hwy 290/Tomball Pky Submarket for 20 years; Plantgistix, for 337,000 SF in National Property Holdings LP’s rail-served Cedar Crossing Industrial Park in Baytown; and Builders FirstSource, for 284,000 SF in Invesco’s 11711 Clay Road building in the Northwest Inner Loop Submarket. CoStar forecasts Houston’s industrial vacancy rate to remain below 8% from 2020–25.

NET ABSORPTION, NET DELIVERIES & VACANCY

VACANCY RATE

AVAILABILITY RATE

RENTHouston ranks middle-of-the-pack among major U.S. metros in terms of asking rents, likely due to an abundance of land, a lack of zoning, and a comparatively easy entitlement/permitting process that combine to create relatively low barriers to entry for new industrial development in Houston.

Asking rents have grown by approximately 2.3% this year. Cumulatively, rents have grown more than 20% this cycle. Much of this growth can be attributed to the early part of the cycle between 2011 and 2015, when cumulative gains exceeded 15%. Growth slowed thereafter during the oil downturn. It regained its footing in 2017, in tandem with an economic recovery in the energy space and a surge in e-commerce activity nationally.

Rising land costs, rising interest rates, and competition among developers for alternative uses as Houston’s population grows outward could constrain industrial development and thus lead to stronger rent increases in the future. Developers have managed to keep supply and demand for industrial space relatively in check,

as evidenced by a large amount of new build-to-suits. Save for a significant slowdown in the global economy, since Houston’s industrial demand seems to have largely decoupled from the oil and gas industry, it appears that Houston’s industrial market has a lot of runway.

The submarkets experiencing with the highest rents as of 19Q2 included Southwest Inner Loop (approximately $9.55/SF), Northeast Hwy 321 ($9.50/SF), and The Woodlands/Conroe ($9.40/SF). And submarkets that had some of the lowest included Northeast Inner Loop ($5.20/SF), Southeast Outer Loop ($5.40/SF), and Downtown Houston ($5.50/SF). The great variability in rental rate and rental rate growth projections seems to be directly related to both submarket vacancy and land values. And the submarkets mentioned above—at both the low and high ends of the rent spectrum—are also generally smaller submarkets that are statistically outliers. The larger submarkets, where a lot of development and leasing activity are occurring, are neither too hot nor too cold in terms of rent growth.

MARKET RENT GROWTH (YOY)

MARKET RENT PER SQUARE FOOT

SALESIndustrial transaction activity in Houston remains redhot, similar to what is being experienced in several large U.S. metros. A staggering 1,300 industrial transactions took place in 2018. Institutional buyers now make up the majority of the buyer pool, at 38% in 2018, versus 33% for REIT/Public, 15% private, and 8% private equity. A majority of deals occurred for product at the lower end of the quality spectrum. The average rating for deals that traded in 2018 was 2 Star, and the average year built was 1988. Nearly two-thirds of the deals that traded were rated 1 & 2 Star, versus 23% 3 Star and only 8% 4 & 5 Star. And nearly 20% of transactions took place in just two Houston submarkets: East-Southeast Far (near the Port of Houston) and Northwest Inner Loop (a hotbed of logistics activity near the growing population center).

Houston ranked in the top 20 among U.S. metros for trailing 12-month industrial investment sales volume as of 19Q2, with $16 billion in confirmed trades. However, this figure should be taken with a grain of salt, as Texas is a non-disclosure state, and this amount is likely much higher.

Of the 35 largest trades in Houston this past year, 25 (approximately three-fourths) were part of portfolio deals. This comes as institutional investors are seeking to increase their industrial allocations in a major way across the U.S. by acquiring portfolios. They are targeting the positive tailwinds that have driven gains across the sector, namely the growth in e-commerce. And Houston, as the U.S.’s fifth-largest metro/fourthlargest city, has seen a corresponding uptick in industrial space demand.

In November 2018, Montreal-based Ivanhoé Cambridge acquired U.S. logistics company IDI Logistics and all of its assets from a Brookfield-sponsored real estate fund for $3.5 billion. This included eight properties in Houston at the Central Green Corporate Center and the North Houston Logistics Center (all 3 and 4 Star space built in the 2000s). Two months after this acquisition, Ivanhoé Cambridge entered into a 50-50 joint venture partnership with Toronto-based Oxford Property Group for these assets. This acquisition represented Oxford’s first logistics acquisition in the United States.

The Blackstone Group completed the acquisition of Gramercy Property Trust (GPT) in October 2018 in a deal valued at $7.6 billion. As of June 2018, GPT reported owning 355 properties totaling 81,134,150 SF. The portfolio was reported at 96.7% occupancy. The estimated cap rate based on net income annualized was 5.61%. This trade included eight properties in Houston totaling nearly 800,000 SF.

Prologis’ acquisition of DCT Industrial in August 2018 accounted for 29 trades in Houston and totaled 459 properties across the United States for $8.5 billion. The subject properties were overall 97.1% occupied at the time of sale, and the overall in-place cap rate was reported at 4.6%. The buyer assumed a total of $1.8 billion of debt, $850 million of which was paid off at closing, with multiple lenders.

SALES VOLUME & MARKET SALE PRICE PER SF

PAST SOLD SUMMARY

1,217Sale Comparables

$79Avg. Price/SF


6.9%Avg. Cap Rate

SALE COMPARABLE LOCATIONS

KEY INDICATORS

Sales Attributes Low Average Median High

Sale Price $16,461 $4,487,425 $1,400,000 $61,619,859

Price Per SF $0.14 $79 $79 $600

Cap Rate 4.0% 6.9% 7.0% 22.0%

Time Since Sale in Months 0.2 6.7 7.3 12.0

Property Attributes Low Average Median High

Building SF 1,066 33,565 12,500 928,035

Ceiling Height 8’ 20’4” 20’ 75’

Docks 0 6 0 330

Vacancy Rate At Sale 0% 14.9% 0% 100%

Year Built 1891 1989 1985 2019

Star Rating 2.2

HOUSTON MAP INDUSTRIAL SUBMARKETS

Inventory 12 Month Deliveries Under Construction

No. Submarket Bldgs SF (000) % Market Rank Bldgs SF (000) Percent Rank Bldgs SF (000) Percent Rank

1 Austin County 37 2,114 0.3% 27 1 128 6.0% 13 0 - - -2 CBD-NW Inner Loop 522 12,697 2.0% 22 0 0 0% - 0 - - -3 Downtown Houston 908 31,930 5.0% 5 0 0 0% - 0 - - -4 East I-10 Outer Loop 218 14,059 2.2% 19 1 10 0.1% 19 0 - - -5 East-Southeast Far 2,221 77,080 12.1% 1 43 6,385 8.3% 1 20 2,600 3.4% 26 Hwy 290/Tomball Pky 670 25,673 4.0% 10 14 1,412 5.5% 4 2 32 0.1% 157 Hwy 59/Hwy 90 (Alt) 1,047 26,193 4.1% 9 5 554 2.1% 8 19 1,114 4.3% 58 Liberty County 67 1,410 0.2% 29 0 0 0% - 0 - - -9 North Fwy/Tomball Pky 953 28,450 4.5% 6 11 615 2.2% 6 18 3,111 10.9% 110 North Hardy Toll Road 856 38,260 6.0% 4 13 1,718 4.5% 3 23 1,701 4.4% 411 North Inner Loop 197 5,323 0.8% 25 0 0 0% - 0 - - -12 North Outer Loop 1,091 24,880 3.9% 11 2 118 0.5% 14 2 374 1.5% 913 Northeast Hwy 321 113 1,851 0.3% 28 0 0 0% - 0 - - -14 Northeast Hwy 90 650 20,661 3.3% 14 8 478 2.3% 10 5 991 4.8% 615 Northeast I-10 171 4,447 0.7% 26 0 0 0% - 1 11 0.2% 1816 Northeast Inner Loop 192 12,231 1.9% 23 0 0 0% - 0 - - -17 Northwest Hwy 6 429 13,023 2.1% 21 30 578 4.4% 7 7 281 2.2% 1218 Northwest Inner Loop 1,793 64,409 10.1% 2 4 117 0.2% 15 1 22 0% 1719 Northwest Near 827 20,128 3.2% 15 1 12 0.1% 18 4 32 0.2% 1620 Northwest Outliers 637 27,885 4.4% 7 33 2,475 8.9% 2 31 1,744 6.3% 321 South Hwy 35 1,785 40,162 6.3% 3 8 116 0.3% 16 5 106 0.3% 1322 South Inner Loop 409 13,313 2.1% 20 0 0 0% - 0 - - -23 Southeast Outer Loop 423 18,043 2.8% 16 0 0 0% - 2 702 3.9% 824 Southwest Far 612 15,546 2.4% 17 11 1,100 7.1% 5 20 870 5.6% 725 Southwest Inner Loop 452 7,505 1.2% 24 0 0 0% - 0 - - -26 Southwest Outer Loop 697 14,931 2.4% 18 2 16 0.1% 17 1 5 0% 1927 Sugar Land 517 22,837 3.6% 12 4 192 0.8% 12 7 324 1.4% 1128 The Woodlands/Conroe 1,160 21,966 3.5% 13 35 393 1.8% 11 32 366 1.7% 1029 West Outer Loop 824 27,572 4.3% 8 15 512 1.9% 9 3 88 0.3% 14

SUBMARKET INVENTORY

SUBMARKET RENT

Gross Asking Rents 12 Month Asking Rent Annualized Quarterly RentNo. Market Per SF Rank Growth Rank Growth Rank1 Austin County $8.12 7 1.1% 29 -4.3% 262 CBD-NW Inner Loop $7.95 9 2.7% 2 -1.6% 103 Downtown Houston $5.47 27 3.1% 1 -4.1% 254 East I-10 Outer Loop $5.88 25 2.5% 3 -3.0% 245 East-Southeast Far $7.30 16 2.4% 5 -1.3% 66 Hwy 290/Tomball Pky $7.67 14 2.2% 14 -4.3% 277 Hwy 59/Hwy 90 (Alt) $7.72 12 2.2% 18 -1.3% 78 Liberty County $7.12 19 2.1% 26 -2.3% 209 North Fwy/Tomball Pky $7.84 10 2.3% 10 -2.7% 2210 North Hardy Toll Road $7.46 15 2.1% 25 -5.5% 2811 North Inner Loop $5.69 26 2.2% 17 -2.0% 1712 North Outer Loop $6.93 20 2.2% 15 -1.8% 1213 Northeast Hwy 321 $9.49 1 2.2% 19 -1.9% 1514 Northeast Hwy 90 $7.27 17 2.3% 11 -2.3% 2115 Northeast I-10 $6.84 22 2.1% 20 -1.8% 1316 Northeast Inner Loop $5.10 29 2.1% 21 -2.2% 1817 Northwest Hwy 6 $8.35 6 2.4% 6 -2.8% 2318 Northwest Inner Loop $7.14 18 2.2% 16 -1.3% 519 Northwest Near $6.84 21 2.0% 27 -1.4% 820 Northwest Outliers $8.51 5 2.1% 23 -1.3% 421 South Hwy 35 $6.74 23 2.1% 24 -10.0% 2922 South Inner Loop $6.35 24 2.4% 8 0.4% 123 Southeast Outer Loop $5.32 28 1.1% 28 -1.9% 1624 Southwest Far $8.03 8 2.3% 12 -1.9% 1425 Southwest Inner Loop $9.39 2 2.5% 4 -1.5% 926 Southwest Outer Loop $9.20 4 2.4% 7 -1.0% 327 Sugar Land $7.79 11 2.3% 13 -0.9% 228 The Woodlands/Conroe $9.37 3 2.1% 22 -2.2% 1929 West Outer Loop $7.72 13 2.3% 9 -1.6% 11

SUBMARKET VACANCY & NET ABSORPTION

Vacancy 12 Month Absorption

No. Submarket SF Percent Rank SF % of Inv RankConstrct.

Ratio1 Austin County 1,454 0.1% 1 701,735 33.2% 5 0.22 CBD-NW Inner Loop 653,979 5.2% 12 (467,891) -3.7% 26 -3 Downtown Houston 1,141,112 3.6% 6 (456,827) -1.4% 25 -4 East I-10 Outer Loop 494,287 3.5% 5 (82,697) -0.6% 19 -5 East-Southeast Far 5,542,986 7.2% 22 4,441,032 5.8% 1 1.06 Hwy 290/Tomball Pky 2,718,647 10.6% 28 (10,248) 0% 16 -7 Hwy 59/Hwy 90 (Alt) 912,132 3.5% 4 1,152,764 4.4% 4 08 Liberty County 113,239 8.0% 23 266,793 18.9% 10 -9 North Fwy/Tomball Pky 2,821,868 9.9% 27 544,089 1.9% 6 1.010 North Hardy Toll Road 2,125,833 5.6% 16 2,189,643 5.7% 2 0.811 North Inner Loop 378,000 7.1% 20 (4,981) -0.1% 15 -12 North Outer Loop 1,071,529 4.3% 8 (191,213) -0.8% 21 -13 Northeast Hwy 321 39,936 2.2% 2 39,649 2.1% 13 -14 Northeast Hwy 90 963,488 4.7% 10 (41,906) -0.2% 18 -15 Northeast I-10 233,203 5.2% 13 (159,202) -3.6% 20 -16 Northeast Inner Loop 842,410 6.9% 18 (496,512) -4.1% 27 -17 Northwest Hwy 6 1,115,507 8.6% 25 331,491 2.5% 9 0.618 Northwest Inner Loop 4,610,960 7.2% 21 (612,865) -1.0% 28 -19 Northwest Near 1,090,810 5.4% 15 (17,459) -0.1% 17 -20 Northwest Outliers 2,404,243 8.6% 26 1,775,351 6.4% 3 1.021 South Hwy 35 1,843,919 4.6% 9 (391,604) -1.0% 24 -22 South Inner Loop 812,681 6.1% 17 (269,251) -2.0% 23 -23 Southeast Outer Loop 461,098 2.6% 3 251,528 1.4% 11 -24 Southwest Far 1,690,357 10.9% 29 483,520 3.1% 7 2.225 Southwest Inner Loop 280,376 3.7% 7 (823,234) -11.0% 29 -26 Southwest Outer Loop 1,035,628 6.9% 19 4,854 0% 14 0.927 Sugar Land 1,222,744 5.4% 14 (222,284) -1.0% 22 -28 The Woodlands/Conroe 1,868,103 8.5% 24 101,945 0.5% 12 2.629 West Outer Loop 1,374,854 5.0% 11 448,501 1.6% 8 0.2

HOUSTON...Q2 2019 HOUSTON MARKET REPORT OFFICE & INDUSTRIAL 2900 Weslayan Street, Ste 620 Houston,...

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