trendlines® houston publication: redefining expectations in a gateway market
DESCRIPTION
Transwestern and its research affiliate, Delta Associates, hosted the 14th annual TrendLines® event on Nov. 13, 2014. Executive Vice President Sandy Paul gave a presentation covering the national economy, the Houston metro economy and all major property types of commercial real estate.TRANSCRIPT
1
REDEFINING EXPECTATIONS IN A GATEWAY MARKET
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
2FOREWORD NOVEMBER 2014
We are pleased to provide you with this 14th annual edition of TrendLines: Trends
in Metro Houston Commercial Real Estate. This is a collaborative publication of
Transwestern and its research affiliate, Delta Associates. Our purposes are to distill the
trends of 2014 and to shed light on pivotal forces and issues that we believe will affect
the region’s economy and commercial real estate in 2015 and beyond.
Through the 3rd quarter of 2014, the Metro Houston commercial real estate market’s
performance ranked among the best in the nation. Across the board, employment
growth is driving demand for the various types of commercial real estate space.
In particular, job growth in the Energy and Education/Health sectors is sustaining
demand for office space, while Trade/Transportation job growth is supporting demand
for industrial space. The retail market is expanding along with Houston’s population,
as new residents bring with them additional demand for goods and services, as well as
a need for new residential units.
The Houston region’s economic strength is reflected in declining vacancy rates for
office and retail space. Industrial vacancy has been edging higher along with new
construction, but rents continue to rise with demand for warehouse/distribution space,
spurred by activity at the Port of Houston. The multifamily vacancy rate has been
stable but the average effective rent has risen for 19 consecutive quarters, a function
of demand that remains high by historical standards.
Houston’s investment sales market has remained strong in 2014, as investors
domestic and foreign are now regarding it as a solid alternative to the traditional
gateway markets. Houston’s office and industrial returns are among the highest in the
nation over the past 12 months. Capital is seeking yield and showing confidence in
Houston’s long-term prospects for continued economic vitality.
We expect to find significant opportunities in our industry in the period ahead, as
national economic growth has been gaining traction and capital continues to flow into
Houston. In 2015, we expect:
� Strong job growth in Metro Houston, though with modest deceleration from this year’s rapid growth rate. We expect to have seen a gain of approximately 102,000 payroll jobs during 2014, once the year is complete, followed by an increase of 95,000 jobs in 2015 and 80,000 jobs in 2016. These projections are supported by the robust performance of the Energy and Education/Health sectors and likely growth in Houston’s Trade/Transportation and Construction sectors over the next two years. Deceleration of job growth is likely given how far ahead of the nation’s performance Houston has been recently, but Houston is likely to remain a national leader in job creation during 2015 and 2016.
� Stabilizing vacancy rates, as new construction delivers across the major property types, but continuing increases in rent as demand remains sturdy.
� Modest downward pressure on cap rates, as an abundance of capital seeks deals in Houston, though pricing may plateau in 2015-16 as job growth decelerates and interest rates rise.
We hope the following information provides insight into our collective opportunities.
All the professionals at Transwestern and Delta Associates look forward to helping you
interpret the material in this report, and to being your service partner in the successes
we are confident you will achieve in the period ahead. We offer you our best wishes
for a successful 2015.
Kevin RobertsPresident, Southwest
Alexander (Sandy) Paul, CREExecutive Vice President
To our friends, clients and colleagues:
TRANSWESTERN DELTA ASSOCIATES
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
3TRANSWESTERN WOULD LIKE TO THANK OUR 2014 SPONSORS
Locke Lord LLP is a full-service, national law firm with offices in Atlanta, Austin, Chicago, Dallas, Hong Kong, Houston, London, Los Angeles, New Orleans, New York, Sacramento, San Francisco and Washington, D.C. Our team of nearly 650 attorneys has earned a solid national reputation in complex litigation, regulatory and transactional work. We serve our clients’ interests first, and these clients range from Fortune 500 and middle market public and private companies to start-ups and emerging businesses. Locke Lord’s team builds collaborative relationships and crafts creative solutions to solve problems - all designed and executed with long-term strategic goals in mind. Among Locke Lord’s many strong practice areas are appellate, aviation, bankruptcy/restructuring, business litigation, class action litigation, corporate, employee benefits, energy, environmental, financial services, health care, insurance and reinsurance, intellectual property, international, labor and employment, litigation, mergers and acquisitions, private equity, public law, real estate, regulatory, REIT, tax, technology, and white collar criminal defense and internal investigations.
In Houston, please contact Jimmy Erwin, Reno Hartfiel or Karen Highfield for property related transactions in Texas and the rest of the United States. Chicago Title Commercial offers customers the most comprehensive and accurate real estate related services in the nation. You can rely on Chicago Title, with its rich history of over 160 years, to provide assurance and security for all your real estate transactions and title insurance needs.
Since the formation of D.E. Harvey Builders 57 years ago, the company has rapidly grown to be a recognized leader in the Houston building industry. Currently, the company maintains offices in Houston, Texas, Austin, Texas, San Antonio, Texas and Washington, D.C. All facets of the commercial construction markets are being served. Our people and the projects they manage represent a culture, philosophy and history based on community service. From the very beginning, we have worked hard to become an integral part of the communities we have helped to build. Our philosophy is based on 3 words: Innovation, Quality, Integrity. Harvey takes pride in taking great care of their clients by treating them as partners. With a solid foundation of past accomplishments we continually strive to build trusting relationships with our clients and for excellence in our performance. Our work is visible evidence of our concern for the environment, for education, for healthcare, and for the economy. At Harvey, we care enough to exceed the needs of our clients and society in everything we do.
Specializing in sustainable architecture, interior design, and master planning, Kirksey designs high-performance, healthy buildings for all of our clients. Our firm is organized into focused practice groups — Commercial, Community/Religious, Education, Healthcare, Hospitality, Interior Architecture, Renovation, Residential, Retail, and Science & Technology — each supported by departments of Design, EcoServices, Information Technology, Project Delivery, and Marketing. We’ve been shaping the Houston skyline since 1971 and have designed over 75 office buildings in the past ten years alone. We create environments that encourage collaboration and innovation, promote corporate culture, and foster growth. Headquartered on our own corporate campus in Houston, Texas we are a group of designers and creatives committed to our clients, our community, and our earth.
J.P. Morgan is a leader in financial services, offering solutions to clients in more than 100 countries with one of the most comprehensive global product platforms available. We have been helping our clients to do business and manage their wealth for more than 200 years. Our business has been built upon our core principle of putting our clients’ interests first. J.P. Morgan is part of JPMorgan Chase & Co. (NYSE: JPM), a global financial services firm with assets of $2.3 trillion.
Amegy Bank is a leading Texas bank with nearly $14 billion in assets. Founded in 1990, Amegy has a strong tradition of relationship banking, local decision making and financial expertise. Amegy specializes in banking businesses of all sizes, and has the resources to provide financing, investment management, treasury management solutions, international banking, as well as other specialized services. Equally important, the bank offers individuals and families a wide range of depository, lending, mortgage, wealth management, trust and brokerage services. With more than 80 locations across Houston, Dallas and San Antonio, Amegy is dedicated to serving Texas communities, families and businesses.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
4
Ben SteinBen Stein is the most famous economics teacher in America. His comedic role as the droning economics teacher in “Ferris Bueller’s Day Off” has been ranked as one of the fifty most famous scenes in movie history. In real life, Ben Stein is a powerful speaker on economics, politics, education, and history. Like his father, Herbert Stein, he is considered one of the great humorists on political economy.
Stein has a bachelor’s with honors in economics from Columbia, studied economics at the graduate level at Yale, and is a graduate of Yale Law School (valedictorian of his class by election of his classmates in 1970).
His background includes being a poverty lawyer in New Haven, a trade regulation lawyer for the FTC, a speech writer for both Presidents Nixon and Ford (He did NOT write the line, “I am not a crook....”), a columnist and an editorial writer for The Wall Street Journal, and a teacher of law and economics at UC Santa Cruz (undergrad) and Pepperdine (law school and undergrads).
He has written or co-written roughly 30 books with his brilliant colleague Phil DeMuth. Most concentrated on investing and many of them have been New York Times bestsellers. Their book, “Yes, You Can Time The Market” has become a landmark of using price theory for securities market analysis.
He wrote a column about economics for The New York Times for several years, roughly 2004-2009.
He co-hosted the show “Win Ben Stein’s Money” with Jimmy Kimmel, which won seven Emmys, including best game show host. (Surely making him the only well known economist to win an Emmy....). Presently, he writes a column for The American Spectator and for NewsMax, and is a regular commentator on Fox News and on CBS Sunday Morning, as well as a frequent commentator on CNN.
He lives in Los Angeles with his wife of 45 years, Alexandra, two dogs and six cats.
Acknowledgments
The editor, Alexander (Sandy) Paul, CRE, wishes to acknowledge and thank Joshua Cohen at Delta Associates, as well as Rachel Alexander and Rachel Andrae at Transwestern, for their research contributions to this publication. Thanks also to the creative team at Transwestern led by Gregorio Barrera, and to Cyndi McNeill and Krystle Phillips for their help with this project. Finally, thanks to Gregory Leisch, CRE, for his insights on the economy and commercial real estate markets.
Representations
Delta Associates is responsible for the analysis and interpretation of economic and market data in this publication. Commercial real estate market data is provided by Transwestern’s internal research staff. Although the information contained herein is based on sources that Delta Associates (DA) and Transwestern (TW) believe to be reliable, DA and TW make no representation or warranty that such information is accurate or complete. All prices, yields, analyses, computations, and opinions expressed are subject to change without notice. Under no circumstances should any such information be considered representations or warranties of DA or TW of any kind. Any such information may be based on assumptions that may or may not be accurate, and any such assumption may differ from actual results. This report should not be considered investment advice.
SPECIAL THANK YOU TO OUR KEYNOTE SPEAKER
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 01 | SuMMARy 5
SUMMARYSECTION ONE
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 01 | SuMMARy 6
ENERGy
9,800 jobs added in the 12 months ending
September 2014, a 9.0% increase.
We expect Houston metro job growth to total approximately 102,400 in 2014 and remain in the 80,000 to 95,000 per year range in 2015 and 2016, well above the long-term
average. Houston has been so far ahead of the nation’s growth rate that some deceleration is likely over the next two years.
NATIONAL ECONOMy GAINING TRACTION AS REFLECTED By RENEWED STRENGTH IN LABOR MARKET
The U.S. economy in 2014 has experienced growth at the slow and steady pace we have become accustomed to during the recovery from the Great Recession. The most recent
GDP reading, from the 2nd quarter of the year, was strong, but most economists believe the overall set of current and leading indicators suggests that growth will settle in at a
slower rate for the balance of 2014 and into 2015.
Looking forward, we expect to see payroll employment growth continue, the unemployment rate to decline further (though with some short-term volatility as more job seekers
re-enter the labor market), and household net worth to increase from a slow rise in home and stock values. On balance, we look for this recovery to continue on its slow but
steady course through 2018 or so, barring a catastrophic geo-political event.
CONSTRuCTION
13,500 jobs added in the 12 months
ending September 2014, a 7.1% increase.
MANuFACTuRING
8,500 jobs added in the 12 months ending
September 2014, a 3.4% increase.
EDuCATION & HEALTH SERVICES
21,300 jobs added in the 12 months
ending September 2014, a 6.3% increase.
TRADE & TRANSPORTATION
16,200 jobs added in the 12 months
ending September 2014, a 2.9% increase.
Specifically, we believe the economic outlook is as follows:
Houston’s vibrant regional economy is expanding
The Houston metro area continued to experience strong economic conditions throughout 2014. Houston’s payroll employment rose by 4.3% over the 12 months ending in
September, the largest percentage increase among major metros in the nation and well above the national growth rate of 1.9%. The 12-month employment growth of 119,400
jobs through September 2014 is third-most in the U.S. among large metros.
� Real GDP growth: 2.5% in 2014; approximately 3.0% in 2015.
� Payroll jobs: 2.6 million added in 2014, slightly outpacing the 2013 total.
� Housing: Price appreciation around 6% to 7% in 2014, off last year’s performance.
� Unemployment rate: Hovering around 6.0% for the balance of 2014.
� Federal Funds Rate: 0% to 0.25% through year-end 2015.
� Long-term interest rates: Edging higher during the rest of 2014.
� Inflation: Around 2.0% for all of 2014 as consumer demand strengthens; edging higher in 2015.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 01 | SuMMARy 7
Leasing velocity stays strong in Houston’s office market
The Houston office market has continued to fire on all cylinders throughout 2014. Vacancy is down, rental rates are up, and absorption is
strong with job creation driving leasing activity. Tenants continue to make significant commitments to quality space in an effort to recruit
and retain employees in the competitive job market.
Houston’s office market is expected to sustain its positive momentum in the period ahead with the robust job market and vibrant economy
driving growth. While the development pipeline is significant, we expect the high level of demand in Houston to translate into positive
absorption as these projects deliver.
We do anticipate the overall vacancy rate for all classes of space will increase over the next two years, rising to the low-11% range from
9.9% today. This accounts for space still vacant at delivery and the effects of the flight to quality on Class B and C space. Rents should
continue rising modestly through 2014 and 2015, especially for Class A product.
Warehouse/Distribution sector continues to dominate Houston’s industrial market growth
The Houston metro’s increasing visibility and strong distribution channels are resulting in high levels of absorption of industrial space.
Houston remains one of the top major metro areas for overall industrial demand. For example, while the Houston industrial inventory is
less than half the size of the New York/Northern New Jersey market’s inventory, Houston has outpaced that market in 2014 absorption. We
expect this trend to continue as a number of large projects, some with preleasing, are set to deliver and demand remains high.
Houston’s overall industrial vacancy rate will likely edge up into the low-5% range over the next 12 months, from 4.6% today, as strong
demand continues but more new supply is delivered. The development pipeline is expected to continue at this level in the period ahead
given the market’s strong demand and low vacancy rate. In the near term, if construction remains in check, industrial rents will rise, and
market conditions will turn further in favor of owners. The Houston industrial market is one of the healthiest in the U.S. and one of the best-
positioned for future rent growth, given its low vacancy rate and strengthening drivers of demand, such as shipping activity at the Port of
Houston.
Investor interest in Houston office assets remains high; industrial returns are strong
Nationally, year-to-date office sales through August 2014 were $69.1 billion, above sales of $54.4 billion during the same time period in
2013. Sales are strong for U.S. office assets, but well below peak levels in 2007, which totaled $214.0 billion. While Houston’s sales are
off last year’s pace, we expect to see continued strength through the remainder of 2014 and throughout 2015. With one of the nation’s
strongest local economies, driven by healthy growth in a wide variety of sectors, especially the Energy sector, Houston’s office assets will
continue to spark investor interest.
Well-located Class B office assets in Houston continue to receive significant interest from investors as a result of the highly competitive
Class A investment market. With Class A investment activity very strong, pricing for well-located Class B assets is expected to continue to
improve as competition for these properties increases. We expect overall cap rates in Houston to trend downward slightly in the months
ahead as the Class B office market improves and high investor interest in Houston’s office assets continues. Additionally, the recent
decrease in 10-year treasury rates should fuel continued yield compression in the near-term. In the current interest rate environment, even
a material increase in rates should be able to be absorbed without significantly altering current pricing metrics. However, Houston office
pricing may plateau in 2015-16 as job growth decelerates and interest rates rise.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 01 | SuMMARy 8
National industrial investment sales are ahead of last year’s volume during the comparable time period. Year-
to-date sales through August 2014 totaled $31.7 billion, which compares to $28.7 billion for the comparable
period in 2013. Sales volume has steadily increased each year since 2009 and we expect this trend to
continue in 2014 once the year closes. The Houston market has continued to experience strong industrial
investment sales. Sales appear low in comparison to the robust sales volume of 2013, but they remain
high on a historical basis and industrial product has continued to deliver strong returns in 2014. With the
completion of the Panama Canal expansion set for early 2016, we expect to see demand for industrial space
increase around the Port of Houston. Industrial returns in Houston measured 14.23% over the 12 months
ending in June 2014, compared to the national average of 12.63%. Among major industrial markets, only
Dallas and New York performed better.
Houston is now considered a gateway city by the investor community, and many investment funds have
allocated capital ready to invest. This, coupled with a lack of quality product on the market, will continue
to keep downward pressure on Houston industrial cap rates as long as interest rates remain low. Investor
demand for industrial properties in Houston will remain strong with the abundance of capital (core and
value-add funds) chasing industrial product.
Flurry of multifamily activity continues
Houston remains a safe and attractive market for multifamily investment with its long-term job market success
and the nation’s sixth-lowest median age of housing inventory. Currently, there are over 24,000 units under
construction and another 18,000 proposed. Houston has absorbed 14,760 units over the first three quarters
of 2014, and rental rates have increased 7.1% this year on an annualized basis.
With the enduring velocity of job creation, Houston should continue to experience success across all
multifamily asset classes. Houston’s population growth is likely to continue in the years ahead, with job
opportunities drawing new residents to the region. This influx of new residents is likely to support steady
demand for rental units, helping to keep the vacancy rate in check even as new supply continues to deliver.
Houston’s retail sector thriving
Houston’s 174.8 million SF multi-tenant retail market continues to gain momentum and further growth is
anticipated in the period ahead. The region’s retail sector added 6,100 jobs over the 12 months ending in
September, a 2.2% increase. Retail employment should continue to rise as consumer spending remains high
and the regional economy flourishes. Local job growth has led Houston to best all major metro areas except
Chicago in net absorption of retail space through the first three quarters of 2014, at 1.53 million SF.
A growth cycle in the retail market should continue in the period ahead, making investment, especially in
grocery-anchored centers, very attractive. Retail and restaurant tenants are flocking to urban infill locations as
metro job growth has caused residential construction to ramp up.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 02 | THE NATIONAL ECONOMy 9
THE NATIONAL ECONOMY
SECTION TWO
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 02 | THE NATIONAL ECONOMy 10
ECONOMy GAINING TRACTION AS REFLECTED By RENEWED STRENGTH IN LABOR MARKET
According to Federal Reserve Chair Janet Yellen’s semiannual Monetary Policy Report,
the national economy continues to see improvement, but the recovery from the
Great Recession is still in progress. This is partially based on the unemployment rate
being above the Federal Open Market Committee’s (FOMC) longer-run normal level
estimate and the labor force participation rate appearing weaker than expected.
Despite these current shortcomings, the national economy is likely to continue
experiencing moderate growth over the next few years. Economic expansion likely will
be spurred by supportive monetary policy, modestly rising home prices and equity
values, stronger foreign growth, and a decreased drag from fiscal policy.
Until the FOMC sees a significant increase in stability in the labor market, we can
expect it to continue utilizing monetary policies to support economic growth. For
example, the FOMC has continuously reaffirmed its stance on maintaining the Federal
Funds Rate at 0% to 0.25%. The road to a complete recovery has been slow, but there
has been continued progress despite bumps along the way.
JOB GROWTH
2014 a year of increasing momentum in labor market
The national economy added 2.7 million new payroll jobs (not seasonally adjusted)
during the 12 months ending September 2014, with the private sector accounting
for the majority of net additions (the public sector added 65,000 positions). Recent
month-to-month gains (seasonally adjusted) have been fairly strong except for a slight
dip during August:
� April 2014: 304,000 (revised from an initial reading of 282,000)
� May 2014: 229,000 (revised from 217,000)
� June 2014: 267,000 (revised from 298,000)
� July 2014: 243,000 (revised from 209,000)
� August 2014: 180,000 (preliminary)
� September 2014: 248,000 (preliminary)
PAYROLL JOB GROWTH
UNITED STATES | YEAR-OVER-YEAR
-3,000
-2,000
-1,000
0
1,000
2,000
3,000
Mar.10
May10
Jul.10
Sep.10
Nov.10
Jan.11
Mar.11
May11
Jul.11
Sep.11
Nov.11
Jan.12
Mar.12
May12
Jul.12
Sep.12
Nov.12
Jan.13
Mar.13
May.13
Jul.13
Sep.13
Nov.13
Jan.14
Mar.14
May.14
Jul.14
Sep.14
Private Sector Public Sector
THOU
SAND
S OF
NEW
PAY
ROLL
JOBS
Source: Bureau of Labor Statistics, Delta Associates; November 2014. Note: Data are not seasonally adjusted.
BASELINE BUDGET PROJECTIONS
UNITED STATES
FEDE
RAL D
EFIC
IT ($
BIL
LION
S)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
-1,200
-1,000
-800
-600
-400
-200
0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Deficit % of GDP
DEFI
CIT A
S A
% O
F REA
L GDP
Baseline budget projections as of April 2014. Source: Congressional Budget Office, Delta Associates; November 2014.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 02 | THE NATIONAL ECONOMy 11
The public sector has now added jobs for six consecutive months after shedding jobs
for the previous 44, and all of this growth stems from state and local governments.
The Federal government continues to cut its workforce as it faces budget shortfalls
and rising liabilities. Of note, these cuts are being achieved primarily through attrition
rather than layoffs. One benefit of Federal austerity and an enduring economy is
deficit reduction. The Congressional Budget Office (CBO) projects that in 2015, the
Federal budget deficit will be 31% smaller than it was in 2013. Of note, the U.S. will still
be running a deficit – we are not paying down debt, just increasing it at a slower rate
– but that is still substantial progress in two years. In its April 2014 update, the CBO
reported that 2014 will be the fifth consecutive year that the deficit’s share of the GDP
has decreased. The CBO projects the budget deficit in 2014 will be $492 billion, which
is 2.8% of GDP and is nearly a third less than the $680 billion deficit in 2013. However,
after 2015, the deficit will stop shrinking and will reach approximately $1 trillion from
2022 through 2024. This will be caused by our aging population, rising health care
costs, an expansion of Federal subsidies for health insurance, and growing interest
payments on the Federal debt.
The top four sectors in job gains were Professional/Business Services, Education/
Health Services, Leisure/Hospitality and Construction/Mining – adding a total of 1.8
million new jobs and accounting for over 66% of net new employment. Leisure/
Hospitality and Retail Trade employment continue to grow at a healthy rate, though
retail jobs have less of a multiplier effect than many others due to their low wages.
Some sectors have experienced weaker recoveries than others. Specifically, the
manufacturing, financial services and information industries have lagged behind while
some other sectors have either matched their pre-recession levels or surpassed them.
Job losses were confined to the Federal Government over the past year, with a total
net loss of 34,000. Of note, while the Federal Government continues to shed jobs, the
rate of loss is slowing.
uNEMPLOyMENT AND WAGES
Significant reduction in initial unemployment claims this year
Overall, initial unemployment claims have steadily fallen since their peak in March
of 2009. As of early-October 2014, initial claims stood at 287,750 based on a four-
week seasonally-adjusted moving average, falling 12.2% from the same period
one year ago. This compares to the 15-year average of 379,800. We expect initial
unemployment claims to continue declining gradually through the end of the year in
concert with improving labor market conditions.
PAYROLL JOB GROWTH
INITIAL UNEMPLOYMENT CLAIMS
UNITED STATES | 12 MONTHS ENDING SEPTEMBER 2014
UNITED STATES | FOUR-WEEK MOVING AVERAGE
-100,000
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
JOB
CHAN
GE
Professional/ Business Services
Education/ Health
Services
Leisure/ Hospitality
Construction/ Mining
RetailTrade
Manufact. Transport./ Utilities
Wholesale Trade
State/Local Government
Financial Activities
Other Services
Information Federal Government
Mar09
Jun09
Sep09
Dec09
Mar10
Jun10
Sep10
Dec10
Mar11
Jun11
Sep11
Dec11
Mar13
Jun13
Sep13
Mar14
Jun14
Sep14
Dec13
Mar12
Jun12
Sep12
Dec12
250,000
300,000
350,000
400,000
450,000
500,000
550,000
600,000
650,000
700,000 Peak in Initial Unemployment Claims (Week of 3/28/09) = 659,250
15-Year Average = 379,800
INIT
IAL U
NEM
PLOY
MEN
T CLA
IMS
(Week of 10/4/14) = 287,750
Source: Bureau of Labor Statistics, Delta Associates; November 2014. Note: Data are not seasonally adjusted.
Source: Bureau of Labor Statistics, Delta Associates; November 2014. Note: Data are seasonally adjusted.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 02 | THE NATIONAL ECONOMy 12
The unemployment rate (seasonally adjusted) declined to 5.9% as of September 2014 from
7.2% one year earlier. Earlier in the year, the unemployment rate was declining in part because
of workers dropping out of the labor force, but more recently the rate has been driven more
by new jobs being created. In general, we anticipate that the unemployment rate will gradually
decline over the next year as the economic expansion continues, hiring accelerates, and
uncertainty dissipates. In the short term unemployment may tick up slightly as the current
increase in hiring might encourage even more people to rejoin the labor force.
One indicator of the economy that has not seen significant growth as of late is the national
average hourly wage. In September 2014 the hourly wage only increased slightly to $24.53, a
2.0% increase since one year prior. By comparison, in 2007 the national hourly wage increased
by at least 3.0% during each month compared with the same month one year prior. The slow
growth in wages is an indicator that the jobs being created are in lower-paying industries.
Even if people are finding jobs, they are likely to be underemployed, meaning job seekers are
taking jobs that are below the education levels they have earned.
As of August 2014, overall there were 2.0 potential applicants for every job opening. This is
well below the July 2009 peak of 6.7 applicants for every job and also less than the 10-year
average of 3.2. However, there are still many sectors that have significantly more potential
applicants than jobs available. This gap is most apparent in the construction sector, where for
every job opening, there are 6.5 potential applicants as of August 2014. This gap is forcing
many unemployed construction workers to revamp their skill sets in order to be hirable in
other sectors – even though employment in the construction sector is increasing. This need
to learn new skills applies to workers in virtually all industries, which might help explain
why so many people have dropped out of the labor force since the Great Recession. While
the construction industry has the highest unemployed workers to job openings ratio, other
industries also have a significant oversupply of candidates. Importantly, the oversupply in
construction is declining, with the ratio down from 7.0 just three months earlier and 9.5 a year
earlier. In comparison, the Professional and Business Services sector has just 1.5 applicants per
job opening.
GROSS DOMESTIC PRODuCT (GDP)
Volatility in 2014, but signs suggest steady growth in 2015
Real GDP contracted for the first time in three years, by a revised 2.1% annualized rate during
the 1st quarter of 2014, but bounced back and increased by an annualized rate of 4.6% (the
government’s third estimate) during the 2nd quarter of 2014. The increase in real GDP growth
during the 2nd quarter stemmed from a rise in personal consumption expenditures, private
inventory investment, exports, nonresidential fixed investment, state and local government
UNEMPLOYMENT RATE
AVERAGE HOURLY EARNINGS
NUMBER OF UNEMPLOYED VS. JOB OPENINGS
UNITED STATES
12-MONTH PERCENTAGE GROWTH | 2007- SEPTEMBER 2014
12-MONTH AVERAGE ENDING AUGUST 2014
0%
2%
4%
6%
8%
10%
12%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
U.S.
UNE
MPL
OYM
ENT R
ATE
0%
1%
2%
3%
4%
5%
2007* 2008 2009 2010 2011 2012 2013 2014
Average 2007 - 2008 = 3.3%
Average 2009 - 2014 = 2.1%
12 -
MON
TH P
ERCE
NTAG
E GR
OWTH
0
200
400
600
800
1,000
1,200
1,400
1,600Number of Job Openings Number of Unemployed
THOU
SAND
S OF
JOBS
ConstructionMining Retail Trade
GovernmentFinancial Activities
Other Services
Information Professional/ Business Services
Education/ Health
Services
Leisure/ Hospitality
Manufact.Transport./ Utilities
Note: Through September 2014; seasonally adjusted; shaded bars represent recessions. Source: Bureau of Labor Statistics, Delta Associates; November 2014.
* Data available starting March 2007. Source: Bureau of Labor Statistics, Delta Associates; November 2014.
Note: Based on 12-month trailing average. Data are not seasonally adjusted. Source: Bureau of Labor Statistics, Delta Associates; November 2014.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 02 | THE NATIONAL ECONOMy 13
spending, and residential fixed investment. According to the most recent report from
the Federal Reserve Bank of Philadelphia, economists predict that real annualized GDP
growth will be 3.0% in the 3rd quarter of 2014, 3.1% in the 4th quarter, and 2.1% in
2014 overall. Looking further ahead, real GDP growth is predicted to average 3.1% in
2015, 2.9% in 2016, and 2.8% in 2017.
Nevertheless, global economic growth could face near-term constraints from a
combination of current account deficits/weak currencies in emerging economies and
questions about the rate of future growth in China. And, of course, there are always
worries about geo-political events.
CORPORATE PROFITS
Maintaining record levels in 2014
U.S. corporate profits totaled $2.11 trillion during the 2nd quarter of 2014 on an
annualized basis, virtually unchanged from the 2nd quarter of 2013. Overall, corporate
profits have been trending upwards since 2008. We expect that record corporate
profits will gradually decline over the next few years as uncertainty fades, businesses
increase their capital expenditures, and M&A activity ramps up. We have already seen
a number of large acquisitions in 2014 including Facebook’s $19 billion purchase of
WhatsApp, Google’s $3.2 billion deal for Nest Labs, and Apple’s $3 billion acquisition
of Beats Electronics.
HOuSING MARKET
Price growth easing as lender requirements remain a challenge for first-time buyers
Home prices in the 20 major metro areas increased 6.8% during the 12 months ending
July 2014, the most recent data available, according to S&P/Case-Shiller. The housing
market is slowing nationally on a year-over-year basis, and is now more in line with
the pace of overall economic growth. Inventory, which had been very low in some
metro areas, is gradually normalizing, easing pricing pressure. Also, first-time buyers,
important to the long-term growth of the housing market, continue to face challenges
in making required down payments and qualifying for mortgages.
The number of U.S. homes sold declined slightly to 5.05 million (on an annualized
basis) in August 2014 from 5.14 million one month earlier. The 5.05 million-unit pace is
5.3% below the 5.33 million-unit pace from the same period a year ago. The average
existing home sales price was $265,200 in August 2014 according to the National
Association of Realtors, approximating the pre-recession value of $268,200 in 2006.
GDP PERCENT CHANGE
U.S. CORPORATE PRE-TAX PROFITS
UNITED STATES
20-Year Average = 2.5%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
Q107
Q207
Q307
Q407
Q108
Q208
Q308
Q408
Q109
Q209
Q309
Q409
Q110
Q210
Q310
Q410
Q111
Q211
Q311
Q411
Q112
Q212
Q312
Q412
Q113
Q213
Q313
Q413
Q114
Q214
ANNU
AL G
DP C
HANG
E IN
200
9 – C
ONST
ANT D
OLLA
RS
$0
$20
$40
$60
$80
$100
$120
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
Corporate Profits S&P 500 12-Month EPS
CORP
ORAT
E PR
OFIT
S IN
TRIL
LION
S
S&P
500
12-M
ONTH
EPS
Note: Annualized. Source: Bureau of Economic Analysis, Delta Associates; November 2014.
Note: Seasonally adjusted at annual rates. *Data through June 2014. Source: Bureau of Economic Analysis, Multpl.com, Delta Associates; November 2014.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 02 | THE NATIONAL ECONOMy 14
FEDERAL INTERVENTION AND INFLATION
Quantitative easing ending, but Fed’s efforts to promote recovery continue
While the Federal Reserve’s third round of quantitative easing (QE3) is
winding down, the Fed plans to keep short-term interest rates at their
current range of 0% to 0.25% until labor market conditions, indicators
of inflation pressures and inflation expectations, and readings on
financial developments improve further.
The Fed is buying $15 billion in bonds per month as of October, down
from $85 billion per month earlier in the process. For commercial real
estate investors, we perceive the tapering decision as a net positive.
The Fed’s decision to end QE3 sheds light on the improving prospects
of the U.S. economy, and it should remove a portion of the all-too-
familiar uncertainty that has plagued business decision-making and
capital investment for some time.
How will markets react going forward? Volatility has increased this fall
for U.S. stocks, and we expect some short-term volatility to continue,
especially in emerging economies that benefited from record-low
borrowing rates.
Regarding inflation, prices increased 1.7% during the 12 months
ending August 2014. The personal consumption expenditure price
index (PCEPI), which takes into account changes in consumption
habits as people substitute away from some goods and services
towards others, rose 1.5% during the 12 months ending August 2014.
The slight increase in prices stems partially from the rise in costs for
food, especially meats, poultry, fish, and eggs. Meat prices are rising
due to droughts in the central United States, which has significantly
cut down hay production, leaving ranchers with less food for cattle. As
a result ranchers are reducing cattle production, cutting supply while
demand remains unchanged. We expect inflation to be contained in
the near-term due to modest wage growth, coupled with the fact that
price pressure tends to lag economic growth by a year or more. Given
all this, coupled with appropriate monetary measures, inflation looks
soft and should hover near 2.0% during the balance of 2014.
ANNUAL CHANGE IN EXISTING HOME SALE PRICES
U.S. EXISTING HOME SALES VS. SALES PRICE
UNITED STATES
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
PERC
ENT C
HANG
E FO
R M
EDIA
N PR
ICE
OF S
INGL
E - F
AMIL
Y HO
MES
2008 2009 2010 2011 2012 2013 2014
$200,000
$210,000
$220,000
$230,000
$240,000
$250,000
$260,000
$270,000
$280,000
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
2006 2007 2008 2009 2010 2011 2012 2013 2014*
Number of Existing Home Sales** Average Existing Home Sales Price
NUM
BER
OF S
ALES
- TH
OUSA
NDS
OF U
NITS
AVER
AGE
SALE
S PR
ICE
Note: Data reflect 20-city composite index through July 2014. Source: S&P/Case-Shiller, Delta Associates; November 2014.
*Data as of August 2014. ** Seasonally adjusted annual sales rate. Source: National Association of Realtors, Delta Associates; November 2014.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 02 | THE NATIONAL ECONOMy 15
NATIONAL ECONOMIC OuTLOOK
Improving traction likely to continue in 2015
The U.S. economy in 2014 has experienced growth at the
slow and steady pace we have become accustomed to during
the recovery from the Great Recession. The most recent
GDP reading, from the 2nd quarter of the year, was strong,
but most economists believe the overall set of current and
leading indicators suggests that growth will settle in at a
slower rate for the balance of 2014 and into 2015. Looking
forward, we expect to see payroll employment growth
continue, the unemployment rate to decline further (though
with some short-term volatility as more job seekers re-enter
the labor market), and household net worth to increase from
a slow rise in home and stock values. On balance, we look
for this recovery to continue on its slow but steady course
through 2018 or so, barring a catastrophic geo-political event.
Specifically, we believe the economic outlook is as follows:
� Real GDP growth: 2.5% in 2014; approximately 3.0% in 2015.
� Payroll jobs: 2.6 million added in 2014, slightly outpacing the 2013 total.
� Housing: Price appreciation around 6% to 7% in 2014, off last year’s performance.
� Unemployment rate: Hovering around 6.0% for the balance of 2014.
� Federal Funds Rate: 0% to 0.25% through year-end 2015.
� Long-term interest rates: Edging higher during the rest of 2014.
� Inflation: Around 2.0% for all of 2014 as consumer demand strengthens; edging higher in 2015.
U.S. INFLATION RATE AND PERSONAL CONSUMPTION EXPENDITURES
SELECTED U.S. GOVERNMENT INTEREST RATES
0
1
2
3
4
5
6
7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
INTE
REST
RAT
ES (%
)
Federal Funds Rate 10-Year Treasury 30-Year Treasury
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
PERC
ENTA
GE C
HANG
E
U.S. Inflation Rate (CPI-U) Personal Consumption Expenditure Price Index
Note: Federal Funds Rate unchanged since December 16, 2008. 30-Year Treasury not issued between Q2 2002-2005. Source: Federal Reserve Economic Data (FRED), Delta Associates; November 2014.
Note: CPI-U and PCEPI through August 2014. 12-month seasonally-adjusted percentage change. Source: Federal Reserve Economic Database (FRED), Delta Associates; November 2014.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 03 | THE HOuSTON METRO ECONOMy 16
THE HOUSTON METRO ECONOMY
SECTION THREE
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 03 | THE HOuSTON METRO ECONOMy 17
HOuSTON ECONOMy OVERVIEW
Job growth outperforms expectations
The Houston metro area continued to experience strong economic conditions throughout
2014. Houston’s payroll employment rose by 4.3% over the 12 months ending in September,
the largest percentage increase among major metros in the nation and well above the national
growth rate of 1.9%. The 12-month employment growth of 119,400 jobs through September
2014 is third-most in the U.S. among large metros. The three most impactful drivers for job
growth over the past year are energy, construction and engineering services. According to the
U.S. Bureau of Economic Analysis (BEA), Houston’s economy grew 5.2% in 2013, the fastest
of any major metro in the U.S. The BEA estimated the Houston MSA’s gross domestic product
at $517.4 billion which would make it the world’s 25th largest economy if it were a sovereign
country.
uNEMPLOyMENT
The Houston area’s unemployment rate was 5.4% in August, down from 6.3% a year earlier.
The national unemployment rate was 6.1% in August, down from 7.2% a year earlier.
Houston’s core industries continue to drive growth:ENERGy
9,800 jobs added in the 12 months ending September 2014, a 9.0% increase.
CONSTRuCTION
13,500 jobs added in the 12 months ending September 2014, a 7.1% increase.
MANuFACTuRING
8,500 jobs added in the 12 months ending September 2014, a 3.4% increase.
EDuCATION & HEALTH SERVICES
21,300 jobs added in the 12 months ending September 2014, a 6.3% increase.
TRADE & TRANSPORTATION
16,200 jobs added in the 12 months ending September 2014, a 2.9% increase.
PAYROLL JOB GROWTH
PAYROLL JOB GROWTH
LARGE METRO AREAS | 12 MONTHS ENDING SEPTEMBER 2014
HOUSTON METRO AREA
0
20
40
60
80
100
120
140
LA Basin NY Hou DFW SF Bay S. Fl Atl Bos Chi Den Phx Was
PAYR
OLL J
OBS
IN TH
OUSA
NDS
119.4
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
1993-2013 AverageJob Growth = 47,400/Year
-80
-60
-40
-20
0
20
40
60
80
100
120
140
ANNU
AL JO
B GR
OWTH
(IN
THOU
SAND
S)
Source: Bureau of Labor Statistics, Delta Associates; November 2014.
*12-month job growth through September 2014. Source: Bureau of Labor Statistics, Delta Associates; November 2014.
Houston’s payroll employment grew 4.3% over the 12 months ending in September, the largest percentage increase among major metros in the U.S.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 03 | THE HOuSTON METRO ECONOMy 18
ENERGy
Energy sector employment grew by 9,800 jobs during the 12 months ending in September, a 9.0% increase.
The U.S. rotary rig count was at 1,918 at mid-October, up 179 from the same time last year.
Benchmark crude oil prices stood at $85 per barrel for Brent and $83 for WTI at mid-October.
The energy sector and rig count have remained strong and steady despite the decline in oil
prices in recent weeks.
Houston-based Cheniere Energy is set to expand its Louisiana LNG facility with a $6 billion
investment and an additional 120 jobs, for a total project value of $18 billion. This expansion
will take the project from four liquefaction trains to six and is expected to complete
construction in 2019. Additionally, Houston-based Biofuels Power Corp. is planning to
construct a gas-to-liquid facility to demonstrate how natural gas can be converted into crude
oil profitably. The new plant, located in southwest Houston, will allow Biofuels Power to take
advantage of the large supply and low costs of natural gas in the U.S.
CONSTRuCTION
Construction sector employment expanded by 13,500 jobs during the 12 months ending in September, a 7.1% increase.
Houston led the country with more construction jobs added than any other major U.S. market
from September 2013 to September 2014. This growth is being driven by the high, sustained
demand for all types of commercial space in the metro, as well as hotel and residential. Over
the 12 months ending in August, the City of Houston issued a record $7.8 billion in building
permits, a huge 39.2% increase from permits issued the previous year. August marked the sixth
consecutive month of record-setting building permit issuance.
The biggest challenges for the construction sector continue to be rising material costs and
labor shortages. Costs have been increasing steadily since 2012, but jumped significantly in
2014 according to Kirksey Architecture’s 2014 report on construction costs.
MANuFACTuRING
Manufacturing sector employment grew by 8,500 jobs over the 12 months ending in September, a gain of 3.4%.
The Houston Purchasing Managers Index, a short-term leading indicator of production,
dropped slightly to 55.6 in August from 56.4 in July. Notwithstanding the deceleration of
growth, this was the 60th consecutive month of expansion for the indicator (meaning a reading
over 50).
UNEMPLOYMENT RATES
PAYROLL JOB CHANGE IN PERCENTAGE TERMS
LARGE METRO AREAS | 12 MONTHS ENDING SEPTEMBER 2014
LARGE METRO AREAS | AUGUST 2014 VS. AUGUST 2013
4.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Hou DFW SF Bay S. Fl Den Phx Atl LA Basin Bos NY Chi Was
PERC
ENT C
HANG
E IN
PAY
ROLL
JOBS
0%
2%
4%
6%
8%
10%
Den Bos SF Bay Hou DFW Was Phx NY S Fl Chi LA Basin Atl
UNEM
PLOY
MEN
T RAT
E
August 2014 August 2013
National Rate
6.1%
7.2%
Source: Bureau of Labor Statistics, Delta Associates; November 2014.
Note: National rate is seasonally adjusted. Source: Bureau of Labor Statistics, Delta Associates; November 2014.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 03 | THE HOuSTON METRO ECONOMy 19
Manufacturing is booming in Houston with demand for new refineries and pipelines helping to drive
manufacturing growth along with low electricity costs and increased foreign investment. As a recent example,
Teadit North America, a gasket manufacturer in Pasadena, has seen business increase more than two-fold
over the last five years. In order to sustain such growth, the manufacturer moved into a new 111,000 SF facility
nearly 70% bigger than its previous operation. In addition, Mitsubishi Caterpillar Forklift America, Inc. is shifting
production of its forklifts that handle shipping containers from Japan to Houston. Rising demand for forklifts
able to load and unload these containers at the Port of Houston led the company to make the production
move.
EDuCATION AND HEALTH SERVICES
Education and Health Services sector employment increased by 21,300 jobs over the 12 months ending in September, a gain of 6.3%.
The Lone Star College System opened its new Energy and Manufacturing Institute in August of this year.
Located at the University Park campus in northwestern Houston, the new institute will focus on preparing
students for the boom in job openings in the oil and gas manufacturing industries. The curriculum will be
focused on training students for skill-based trades so they can fill the growing need for electricians, machinists
and welders, in addition to many other trades.
In the health sector, the Texas Medical Center (TMC) has launched a life science innovation center, or business
accelerator, called TMCx to bring more healthcare startups to Houston. The accelerator will house legal
experts, investors and mentors, among others, to turn academic research into the next new drug or medical
device. In a recent announcement, Johnson & Johnson Innovation committed to establishing a business
incubator for entrepreneurship at TMCx, which will be its fifth “J-Lab” facility in the U.S.
TRADE AND TRANSPORTATION
Trade/Transportation employment expanded by 16,200 jobs during the 12 months ending in September, a 2.9% increase.
The Houston-Galveston Customs District handled over $173.7 billion in foreign trade in the first eight months
of the year, up 5.2% from the same period in 2013. The Port of Houston had a banner month in July with a
record level of operating revenues, $24 million, and more steel moving through the Port than in any month
since July 2008. Container traffic also is on pace to surpass last year’s record total of 2.0 million TEUs.
The Houston Airport System is also poised to break a record with international passenger numbers up 10.6%
Year-to-date through August, setting a pace to hit 10 million passengers by year-end. Air freight also is on a
record pace of 425,000 metric tons for 2014. In other transportation news, voters will decide in November
whether to begin diverting half the state’s annual oil and gas production tax collections into the State Highway
Fund to advance road construction and maintenance projects throughout Texas. If Proposition 1 passes,
the Houston metro could receive an additional $221 million in transportation funding, according to Texas
Infrastructure Now.
HOUSTON MANUFACTURING OUTLOOK
U.S. ROTARY RIG COUNT
02004006008001,0001,2001,4001,6001,8002,000
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
Gas Misc. Oil
ANNU
AL A
VERA
GE W
ORKI
NG R
IGS
Source: Baker Hughes Inc., Delta Associates ; November 2014. *Count as of 10/17/2014.
Source: ISM– Houston, Delta Associates; November 2014. *Through August 2014.
30
35
40
45
50
55
60
65
70
INDE
X
2009 2010 2011 2012 2013 2014*
EXPA
NSIO
NCO
NTRA
CTIO
N
PURCHASING MANAGERS INDEX
Note: TEUs = 20-foot-equivalent container units. Source: Houston Port Authority, Delta Associates; November 2014. *Through September 2014, annualized.
2003-2013 Average1.7 million TEU/annum
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
03 04 05 06 07 08 09 10 11 12 13 14*
TOTA
L TEU
S
HOUSTON PORT AUTHORITY
CONTAINER TRAFFIC
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 03 | THE HOuSTON METRO ECONOMy 20
HOuSING
Home sales continue to rise
The Houston Association of Realtors reported 6,490 single-family home sales in
September 2014, up 7.0% over last year. The average single-family home sale price
was $269,440 in September, an 8.2% increase year-over-year. The median price
was $196,000, up 7.7% from September 2013. The inventory of homes was equal
to a 2.9-month supply, much lower than the 5.5 months of supply nationally. Strong
employment growth continues to fuel housing demand, pushing sale prices higher
and keeping inventory low.
HOuSTON ECONOMy OuTLOOK
Economic growth to remain robust into 2015
The Houston metro area’s economy has continued to experience robust growth in
2014. Looking forward, the Greater Houston Partnership (GHP) has announced a plan
to fill 296,000 middle-skill job openings within the next three years. GHP calls the
initiative UpSkill Houston and plans to partner with businesses, schools, community
colleges, and social services to help fill jobs that require more than a high school
diploma. Middle-skill positions are growing quickly and likely will continue to do so
over the next few years. These jobs supply industries such as oil and gas with the
skilled labor needed to handle the shale boom and petrochemical growth. However,
Houston’s employment growth is broad, and economic indicators point to continued
growth across all major sectors in the period ahead. A sustained rise in investments
along the Houston Ship Channel signals the Panama Canal’s 2016 expansion
completion date is quickly approaching, creating more opportunities for Houston’s
future.
We expect job growth to total approximately 102,400 in 2014 and remain in the
80,000 to 95,000 per year range in 2015 and 2016, well above the long-term average.
Houston has been so far ahead of the nation’s growth rate that some deceleration is
likely over the next two years.
JOB FORECAST
HOUSTON AIRPORT SYSTEM
Source: Houston Airport System, Delta Associates ; November 2014. *Through August 2014, annualized.
Source: Bureau of Labor Statistics, Delta Associates; November 2014.
AIR FREIGHT
HOUSTON METRO AREA
2003-2013 Average380,000 metric tons/annum
300,000
325,000
350,000
375,000
400,000
425,000
450,000
03 04 05 06 07 08 09 10 11 12 13 14*
AIR
FREI
GHT (
MET
RIC
TONS
)
Average Annual Growth2005-2007 = 87,500/annum
Projected Average Annual Growth 2014-2016 =
92,300/annum
-80,000
-60,000
-40,000
-20,000
0
20,000
40,000
60,000
80,000
100,000
120,000
03 04 05 06 07 08 09 10 11 12 13 14 15 16
ANNU
AL JO
B GR
OWTH
We expect job growth to total around 104,200 for 2014, surpassing previous estimates.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 04 | THE HOuSTON METRO OFFICE MARKET 21
THE HOUSTON METRO OFFICE MARKET
SECTION FOuR
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 04 | THE HOuSTON METRO OFFICE MARKET 22
OFFICE MARKET OVERVIEW
Leasing velocity stays strong
The Houston office market has continued to fire on all cylinders throughout 2014.
Vacancy is down, rental rates are up, and absorption is strong with job creation driving
leasing activity. Tenants continue to make significant commitments to quality space in
an effort to recruit and retain employees in the competitive job market.
DEMAND
Net absorption exceeds last year’s total
Net absorption of office space in the Houston metro area totaled 4.8 million SF
during the first nine months of 2014, edging past last year’s 12-month total. The 2014
absorption is largely attributable to Class A space which has recorded 4.1 million SF of
positive absorption year-to-date. Class B space, showing effects of the long-term flight
to quality in the market, recorded only 846,000 SF year-to-date.
Notable 2014 leases:
� National Oilwell Varco – 415,000 SF prelease, Millennium Tower II, Westchase submarket
� American Bureau of Shipping – 258,735 SF renewal and expansion, One and Two Greenspoint Place, Greenspoint/North Belt submarket
� Air Liquide – 222,000 SF prelease, Air Liquide Center North and South, Energy Corridor submarket
� Energy XXI – 171,016 SF renewal and expansion, One City Centre, CBD submarket
� General Electric – 150,000 SF prelease, Westway Plaza, Energy Corridor submarket
� Memorial Production Partners – 111,566 SF new lease, One Allen Center, CBD submarket
� Technip – 104,024 SF prelease, Energy Tower IV, Energy Corridor submarket
Robust job growth, boosted by a continuously strong energy sector, has helped make
Houston the national leader in office space absorbed this year. Houston ranked eighth
during the same period one year prior and is currently followed by Dallas/Fort Worth
and Atlanta.
NET ABSORPTION OF OFFICE SPACE AND VACANCY RATE TRENDS
OFFICE VACANCY RATES
Source: Transwestern’s analysis of CoStar data; November 2014. Note: Delivery of preleased space counts as positive net absorption.
Source: Transwestern’s analysis of CoStar data; November 2014.
HOUSTON METRO | 2005 – 3RD QUARTER 2014
HOUSTON METRO | 2005 – 3RD QUARTER 2014
4%
6%
8%
10%
12%
14%
16%
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD 2014
DIRE
CT V
ACAN
CY R
ATE
NET A
BSOR
PTIO
N IN
THOU
SAND
S OF
SF
5.9%6.7%
8.5%
9.9% 10.0%
12.0%12.5%
13.2% 13.5% 13.6% 13.8%
16.5%
19.4%
0%
5%
10%
15%
20%
NY SF Bay Bos Hou Den LA Chi Atl DFW Was S Fla Phx Phx
OVER
ALL V
ACAN
CY R
ATE
National Vacancy Rate: 11.2%
Houston is the national leader in office space absorbed thus far in 2014.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 04 | THE HOuSTON METRO OFFICE MARKET 23
VACANCy
Vacancy edges down
The overall office vacancy rate (including sublet) is 9.9% for the third quarter, down from 10.8%
at year-end 2013. Direct vacancy is 9.3%, down from 10.1% at year-end 2013.
Overall Class A vacancy is at 7.8%, down from 8.1% at year-end 2013. The direct Class A
vacancy rate is 7.1%, unchanged from year-end 2013. Overall Class B vacancy ticked down to
12.4%, from 13.0% at the end of 2013. The direct Class B vacancy rate is 11.8%, down from
12.4% at year-end 2013.
The overall office vacancy rate (including sublet) in the Houston metro will likely rise
moderately over the next two years as the majority of space now under construction delivers.
While we expect demand to remain at high levels, the current development pipeline will have
an impact on vacancy rates. Given this, we expect an overall vacancy rate in the low-11% range
in two years. However, compared to similarly-sized metro areas, Houston will still maintain one
of the lowest vacancy rates.
SuPPLy AND DEVELOPMENT
Pipeline steady through Q3
There is over 17.1 million SF of office space under construction in the Houston area as of
the third quarter, compared to 16.7 million SF at year-end 2013. This space is currently 66%
preleased, compared to 69% preleased at year-end 2013.
The Energy Corridor and The Woodlands submarkets continue to account for a large portion
of the development activity, about 10.2 million SF. The largest projects under construction
include ExxonMobil’s 3.0 million SF campus in The Woodlands submarket, Phillips 66’s 1.1
million SF campus in the Westchase submarket, and 609 Main at Texas in the CBD submarket
at 1.0 million SF.
Deliveries totaled 5.1 million SF through the third quarter of 2014, after totaling 1.4 million
SF through the first three quarters of 2013. The largest projects include Anadarko Tower 2 in
The Woodlands with all 550,000 SF of the project occupied by the owner, and the 428,831 SF
Energy Tower III, which was all leased to Conoco upon delivery.
The amount of office space under construction nationally has risen sharply in the past year.
Nationally, 100.9 million SF of office space is under construction today, compared to 71.8
million SF one year ago. Houston leads the nation with 17.1 million SF under construction,
representing 7.6% of the current metro office inventory.
OFFICE VACANCY RATE
OFFICE SPACE UNDER CONSTRUCTION
Source: Transwestern’s analysis of CoStar data; November 2014. *As of 3rd quarter 2014.
Source: Transwestern’s analysis of CoStar data; November 2014.
HOUSTON METRO | 2005 – 3RD QUARTER 2014
SELECT METRO AREAS | 3RD QUARTER 2014
9.3%
8%
9%
10%
11%
12%
13%
14%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
DIRE
CT V
ACAN
CY R
ATE
U/C Nationally= 100.9 Million SF
MIL
LION
S OF
SF
0
2
4
6
8
10
12
14
16
18
Hou SF Bay NY DFW Bos Was Chi Phx Den LA Atl S Fla
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 04 | THE HOuSTON METRO OFFICE MARKET 24
RENTAL RATES
Rent growth continues
Asking rental rates for all classes of office space have increased 3.6% to $27.28 from year-end
2013. This is the second-highest percentage increase among comparable metro areas. New
York is the only metro area to record a larger percentage increase in asking rents this year.
Class A rents are up 5.5% to $34.52 per SF, full service, and Class B rents are up 4.2% to $20.80
per SF, full service, from the close of last year. These are metro-wide averages; newer buildings
in more desirable submarkets are outperforming these market averages.
Metro-wide asking rents should continue trending upward through the end of the year and
into 2015 as demand for space remains high. Class A rents are climbing at a faster rate than
Class B rents due to the flight to quality in the market, with stronger demand for newer space.
Further, with the volume of new construction and recent deliveries pushing rates for new space
higher, Class A rents should see consistent growth in the period ahead.
INVESTMENT MARKET
For in-depth analysis of Houston’s office investment market, please see Section Six of this report.
OFFICE MARKET OuTLOOK
Vacancy rate likely to rise over next two years, but overall conditions to remain strong
Houston’s office market is expected to sustain its positive momentum in the period ahead with
the robust job market and vibrant economy driving growth. While the development pipeline is
significant, we expect the high level of demand in Houston to translate into positive absorption
as these projects deliver. The pipeline, including planned space expected to start construction
soon, is at 8.8% of standing inventory. However, after removing owner-occupied campuses
(such as ExxonMobil, Phillips 66 and Shell), the development pipeline equals 6.1% of inventory
– elevated, but more manageable.
We do anticipate the overall vacancy rate for all classes of space will increase over the next
two years, rising to the low-11% range. This accounts for space still vacant at delivery and the
effects of the flight to quality on Class B and C space. Rents should continue rising modestly
through 2014 and 2015, especially for Class A product.
Office submarkets likely to outperform the market in the months ahead include: Energy
Corridor, The Woodlands, Galleria and the Central Business District.
AVERAGE CHANGE IN ASKING RENT
AVERAGE OFFICE RENTS
Source: Transwestern’s analysis of CoStar data; November 2014.
Source: Transwestern’s analysis of CoStar data; November 2014. Note: All classes of office space.
SELECT METRO AREAS | JANUARY - SEPTEMBER 2014
HOUSTON METRO | 2005 – 3RD QUARTER 2014
ASKI
NG R
ENT,
$/SF
, FS
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
NY Hou DFW Phx SF Bay Den LA Basin S Fla Atl Was Chi Bos
$27.28
$16
$18
$20
$22
$24
$26
$28
05 06 07 08 09 10 11 12 13 14*
ASKI
NG R
ENT,
$/SF
, FS
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 04 | THE HOuSTON METRO OFFICE MARKET 25
OFFICE MARKET INDICATORS - ALL SPACEHOUSTON METRO AREA | 2011 THROUGH THIRD QUARTER 2014
SuBMARKET TOTAL BLDGS INVENTORy SF AVAILABLE
IMMEDIATELy
DIRECT VACANCy
2011
DIRECT VACANCy
2012
DIRECT VACANCy
2013
DIRECT VACANCy
Q3 2014
VACANCy WITH SuBLET
uNDER CONSTRuCTION
NET ABSORPTION
2011
NET ABSORPTION
2012
NET ABSORPTION
2013
NET ABSORPTION
Q3 2014
NET ABSORPTION
yTD 2014
Central Business District 86 47,512,974 3,325,908 9.5% 8.7% 9.2% 7.0% 7.8% 1,463,600 1,552,000 385,000 (240,000) 143,000 477,000
Midtown 31 5,298,182 535,116 13.2% 13.4% 8.7% 10.1% 10.2% 167,562 108,000 (14,000) 339,000 58,000 37,000
Downtown 117 52,811,156 3,861,025 10.0% 9.3% 9.1% 7.3% 8.0% 1,631,162 1,660,000 371,000 99,000 201,000 514,000 FM 1960 / I-45 North 15 1,371,988 142,687 16.3% 14.6% 14.2% 10.4% 10.4% - 36,000 38,000 10,000 (7,000) 49,000
FM 1960 / Champions 22 1,850,305 484,780 20.2% 23.4% 22.7% 26.2% 26.2% - (47,000) (95,000) 21,000 11,000 (10,000)
FM 1960 / Highway 249 46 5,327,919 634,022 26.2% 16.0% 14.4% 11.9% 12.8% 768,000 134,000 752,000 61,000 21,000 197,000
FM 1960 83 8,550,212 1,261,489 22.9% 17.5% 16.9% 14.8% 15.3% 768,000 123,000 695,000 92,000 25,000 236,000 North Belt West/Greenspoint 74 10,036,449 1,666,051 13.8% 13.0% 16.2% 16.6% 17.5% - (28,000) 85,000 (342,000) (171,000) (82,000)
Greenspoint / IAH 21 2,754,531 289,226 12.6% 12.7% 10.7% 10.5% 11.4% - (42,000) 11,000 151,000 17,000 21,000
Greenspoint / North Belt 95 12,790,980 1,955,276 13.6% 12.9% 14.9% 15.3% 16.2% - (70,000) 96,000 (191,000) (154,000) (61,000)Greenway Plaza 48 10,416,013 802,033 9.8% 9.7% 9.1% 7.7% 7.8% 660,437 232,000 12,000 145,000 10,000 170,000 Gulf Freeway/Pasadena 31 2,380,307 207,087 12.6% 10.2% 10.5% 8.7% 8.7% - (41,000) 109,000 (13,000) - 17,000 Katy Freeway East 58 8,431,050 556,449 7.3% 7.9% 7.7% 6.6% 7.1% 1,077,752 105,000 364,000 709,000 17,000 65,000
Katy Freeway West 138 23,210,062 1,346,184 9.6% 5.7% 3.6% 5.8% 6.9% 4,592,436 1,144,000 847,000 1,027,000 20,000 1,728,000
Katy Fwy / Energy Corridor 196 31,641,112 1,902,633 8.9% 6.4% 4.9% 6.0% 7.0% 5,670,188 1,249,000 1,211,000 1,736,000 37,000 1,793,000 Kingwood / Humble 9 881,561 60,828 7.3% 6.4% 7.5% 6.9% 6.9% - 47,000 20,000 21,000 - 72,000 NASA / Clear Lake 62 6,996,599 1,056,486 10.6% 12.8% 16.8% 15.1% 15.2% 55,000 (140,000) (212,000) (386,000) 49,000 189,000 Northeast 15 1,155,562 184,890 12.3% 12.6% 13.3% 16.0% 16.0% - (35,000) (6,000) 11,000 (1,000) 68,000 North Loop West 29 4,133,495 673,760 24.9% 18.4% 18.6% 16.3% 17.7% - (175,000) 358,000 (115,000) 79,000 (6,000)
Northwest Near 13 1,319,023 21,104 10.4% 8.5% 9.4% 1.6% 1.6% - (10,000) 30,000 (16,000) (4,000) 61,000
Northwest Far 54 6,410,285 679,490 12.2% 10.3% 10.0% 10.6% 10.9% 1,193,336 540,000 149,000 166,000 (19,000) (2,000)
Northwest 96 11,862,803 1,374,354 16.7% 13.1% 13.0% 11.6% 12.2% 1,193,336 355,000 537,000 35,000 56,000 53,000 South Main / Medical Center 49 10,469,072 858,464 6.9% 5.9% 8.2% 8.2% 8.2% - 12,000 112,000 (177,000) 4,000 94,000 Southwest / Hillcroft 35 4,269,911 772,854 16.0% 14.9% 15.5% 18.1% 18.1% - 152,000 52,000 (29,000) 21,000 (36,000)
Southwest Beltway 8 43 5,620,512 1,180,308 19.2% 21.1% 22.0% 21.0% 21.0% - (433,000) 112,000 (65,000) (124,000) (171,000)
East Ft Bend Co. / Sugar Land 43 6,186,653 692,905 16.6% 15.3% 10.8% 11.2% 13.1% 57,000 227,000 116,000 520,000 (6,000) 203,000
Southwest Fwy / Sugar Land 121 16,077,076 2,646,067 17.4% 17.2% 15.8% 16.5% 17.2% 57,000 (54,000) 280,000 426,000 (109,000) (4,000)Bellaire 29 4,374,993 249,375 10.3% 10.2% 6.2% 5.7% 6.3% - (156,000) 5,000 189,000 (4,000) 38,000
Post Oak Park 28 4,226,059 684,622 9.9% 17.1% 15.7% 16.2% 16.2% 98,938 62,000 (344,000) (38,000) (17,000) 15,000
Galleria 55 15,804,024 1,058,870 9.0% 8.3% 7.4% 6.7% 7.8% 600,000 (31,000) 31,000 707,000 181,000 197,000
Riverway 16 2,868,495 269,639 10.4% 10.3% 9.1% 9.4% 9.6% - (28,000) 4,000 37,000 (9,000) 3,000
Richmond / Fountainview 11 819,689 218,037 9.9% 19.4% 18.1% 26.6% 26.6% - (58,000) 12,000 23,000 7,000 (29,000)
San Felipe / Voss 33 5,041,885 478,979 10.6% 11.4% 10.2% 9.5% 9.8% - 33,000 (45,000) 66,000 5,000 58,000
West Loop 172 33,135,145 2,959,521 9.7% 11.0% 9.8% 8.9% 9.6% 698,938 (178,000) (337,000) 984,000 163,000 282,000 Westchase 85 15,515,357 1,272,259 11.4% 7.2% 7.4% 8.2% 8.6% 1,817,000 203,000 694,000 (31,000) (31,000) 189,000 The Woodlands 79 10,229,637 501,252 6.7% 3.9% 4.0% 4.9% 5.7% 4,565,837 420,000 439,000 857,000 138,000 1,170,000 Conroe 13 903,345 98,465 7.1% 9.9% 12.1% 10.9% 10.9% - (27,000) 201,000 (37,000) 2,000 44,000 TOTAL - Houston 1,271 225,815,937 21,002,128 11.5% 10.3% 10.1% 9.3% 9.9% 17,116,898 3,756,000 4,222,000 3,571,000 390,000 4,826,000 Vacancy Rate with Sublet Space 12.0% 10.7% 10.8% 9.9%SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Does not include buildings under construction or owned by the government
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 04 | THE HOuSTON METRO OFFICE MARKET 26
OFFICE MARKET INDICATORS - CLASS A SPACEHOUSTON METRO AREA | 2011 THROUGH THIRD QUARTER 2014
SuBMARKET TOTAL BLDGS INVENTORy SF AVAILABLE
IMMEDIATELy
DIRECT VACANCy
2011
DIRECT VACANCy
2012
DIRECT VACANCy
2013
DIRECT VACANCy
Q3 2014
VACANCy WITH SuBLET
uNDER CONSTRuCTION
NET ABSORPTION
2011
NET ABSORPTION
2012
NET ABSORPTION
2013
NET ABSORPTION
Q3 2014
NET ABSORPTION
yTD 2014
Central Business District 33 31,444,591 1,792,342 7.0% 6.3% 6.7% 5.7% 6.7% 1,463,600 1,406,000 212,000 (121,000) 94,000 311,000
Midtown 6 2,033,134 223,645 10.4% 6.0% 7.6% 11.0% 11.0% 167,562 9,000 82,000 (30,000) 71,000 8,000
Downtown 39 33,477,725 2,015,986 7.2% 6.3% 6.8% 6.0% 7.0% 1,631,162 1,415,000 294,000 (151,000) 165,000 319,000 FM 1960 / I-45 North 1 204,821 - 8.2% 0.0% 0.0% 0.0% 0.0% - 21,000 28,000 - - -
FM 1960 / Champions 1 150,000 - 0.0% 0.0% 0.0% 0.0% 0.0% - - - - - -
FM 1960 / Highway 249 19 3,499,186 468,891 52.3% 23.0% 19.9% 13.4% 14.6% 768,000 22,000 702,000 85,000 7,000 146,000
FM 1960 21 3,854,007 468,891 44.3% 19.5% 17.6% 12.2% 13.3% 768,000 43,000 730,000 85,000 7,000 146,000 North Belt West/Greenspoint 17 4,343,919 495,207 5.0% 6.0% 9.1% 11.4% 11.6% - (70,000) (38,000) (115,000) (135,000) (101,000)
Greenspoint / IAH 7 1,093,667 118,116 12.2% 11.3% 10.9% 10.8% 12.9% - (22,000) 8,000 91,000 21,000 -
Greenspoint / North Belt 24 5,437,586 613,323 6.2% 7.0% 9.5% 11.3% 11.9% - (92,000) (30,000) (24,000) (114,000) (101,000)Greenway Plaza 15 6,190,406 352,853 12.6% 8.5% 6.8% 5.7% 5.8% 660,437 104,000 179,000 105,000 (12,000) 99,000 Gulf Freeway/Pasadena - - - 25.0% 15.8% 15.8% 0.0% 0.0% - 2,000 5,000 - - - Katy Freeway East 17 4,246,830 118,911 7.5% 6.9% 3.1% 2.8% 3.4% 1,077,752 32,000 442,000 674,000 (34,000) 14,000
Katy Freeway West 62 14,773,817 694,369 6.5% 2.3% 0.9% 4.7% 5.0% 4,592,436 1,095,000 484,000 631,000 146,000 1,728,000
Katy Fwy / Energy Corridor 79 19,020,647 813,281 6.7% 3.5% 1.5% 4.3% 4.6% 5,670,188 1,127,000 926,000 1,305,000 112,000 1,742,000 Kingwood / Humble 1 86,665 26,259 45.5% 45.5% 31.3% 30.3% 30.3% - (70,000) - 13,000 - 1,000 NASA / Clear Lake 15 2,127,855 89,370 13.8% 10.1% 6.9% 4.2% 4.3% 55,000 (27,000) 71,000 65,000 49,000 60,000 Northeast - - - 0.0% 0.0% - 0.0% 0.0% - - - - - - North Loop West 5 1,058,820 253,058 24.7% 25.3% 26.6% 23.9% 28.4% - 21,000 (6,000) (14,000) (31,000) 28,000
Northwest Near 1 237,384 - 0.0% 0.0% 0.0% 0.0% 0.0% - - - - - -
Northwest Far 16 2,681,063 187,674 12.8% 5.6% 7.1% 7.0% 7.2% 1,193,336 268,000 182,000 110,000 (13,000) 3,000
Northwest 22 3,977,267 440,732 15.3% 10.7% 11.9% 11.1% 12.4% 1,193,336 289,000 176,000 96,000 (44,000) 31,000 South Main / Medical Center 16 4,618,943 258,661 8.3% 5.5% 5.6% 5.6% 5.6% - 96,000 124,000 (5,000) 43,000 74,000 Southwest / Hillcroft 6 1,485,352 182,698 19.8% 15.2% 11.9% 12.3% 12.3% - 67,000 66,000 48,000 (1,000) (6,000)
Southwest Beltway 8 3 573,500 109,539 15.4% 16.2% 22.0% 19.1% 19.1% - 19,000 (5,000) (34,000) 2,000 17,000
East Ft Bend Co. / Sugar Land 20 4,066,127 451,340 26.5% 22.2% 12.3% 11.1% 11.9% 57,000 52,000 159,000 395,000 (8,000) 189,000
Southwest Fwy / Sugar Land 29 6,124,979 743,577 23.8% 19.8% 13.2% 12.1% 12.7% 57,000 138,000 220,000 409,000 (7,000) 200,000 Bellaire 7 1,203,314 68,589 7.2% 24.0% 10.8% 5.7% 7.4% - (14,000) (199,000) 157,000 25,000 50,000
Post Oak Park 6 1,911,398 292,444 5.5% 8.2% 18.0% 15.3% 15.3% 98,938 (53,000) (50,000) 36,000 (25,000) 51,000
Galleria 30 11,982,940 802,857 8.0% 8.4% 7.8% 6.7% 8.1% 600,000 (19,000) (44,000) 403,000 135,000 202,000
Riverway 5 1,885,813 145,208 8.0% 9.1% 7.5% 7.7% 7.7% - 10,000 (23,000) 32,000 (15,000) (4,000)
Richmond / Fountainview - - - - - - 0.0% 0.0% - - - - - -
San Felipe / Voss 3 1,714,929 193,787 14.6% 17.9% 14.0% 11.3% 11.5% - 7,000 (57,000) 67,000 19,000 47,000
West Loop 51 18,698,394 1,502,884 8.3% 10.4% 9.6% 8.0% 9.1% 698,938 (69,000) (373,000) 695,000 139,000 346,000 Westchase 27 7,652,646 596,906 11.6% 5.1% 6.0% 7.8% 8.4% 1,817,000 363,000 473,000 (60,000) 84,000 180,000 The Woodlands 27 5,457,743 327,465 4.5% 2.2% 2.0% 6.0% 7.1% 4,565,837 303,000 178,000 718,000 179,000 982,000 Conroe 2 128,832 10,951 2.9% 5.8% 10.1% 8.5% 8.5% - (4,000) (4,000) (5,000) 2,000 2,000 TOTAL - Houston 368 116,853,695 8,261,139 10.1% 7.9% 7.1% 7.1% 7.8% 17,116,898 3,618,000 2,969,000 3,246,000 603,000 4,081,000 Vacancy Rate with Sublet Space 10.8% 8.3% 8.1% 7.8%SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Does not include buildings under construction or owned by the government
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 04 | THE HOuSTON METRO OFFICE MARKET 27
OFFICE MARKET INDICATORS - CLASS B SPACEHOUSTON METRO AREA | 2011 THROUGH THIRD QUARTER 2014
SuBMARKET TOTAL BLDGS INVENTORy SF AVAILABLE
IMMEDIATELy
DIRECT VACANCy
2011
DIRECT VACANCy
2012
DIRECT VACANCy
2013
DIRECT VACANCy
Q3 2014
VACANCy WITH SuBLET
uNDER CONSTRuCTION
NET ABSORPTION
2011
NET ABSORPTION
2012
NET ABSORPTION
2013
NET ABSORPTION
Q3 2014
NET ABSORPTION
yTD 2014
Central Business District 38 14,511,526 1,117,388 11.1% 9.7% 10.2% 7.7% 7.9% - 194,000 194,000 (69,000) 44,000 143,000
Midtown 19 2,883,347 141,284 7.5% 9.7% 7.1% 4.9% 5.0% - 28,000 (86,000) 101,000 (6,000) 62,000
Downtown 57 17,394,873 1,258,672 10.3% 9.7% 9.5% 7.2% 7.4% - 222,000 108,000 32,000 38,000 205,000 FM 1960 / I-45 North 12 1,016,244 142,274 16.6% 14.9% 14.1% 14.0% 14.0% - 20,000 27,000 13,000 (6,000) 3,000
FM 1960 / Champions 20 1,632,335 484,803 25.0% 28.8% 28.0% 29.7% 29.7% - (51,000) (92,000) 19,000 11,000 4,000
FM 1960 / Highway 249 23 1,609,602 138,426 11.6% 12.2% 13.5% 8.6% 8.6% - 141,000 34,000 (36,000) 10,000 41,000
FM 1960 55 4,258,181 765,503 16.9% 17.9% 18.1% 18.0% 18.0% - 110,000 (31,000) (4,000) 15,000 48,000 North Belt West/Greenspoint 44 4,595,553 932,897 17.9% 17.1% 21.0% 20.3% 22.1% - 112,000 44,000 (205,000) (32,000) (14,000)
Greenspoint / IAH 13 1,608,539 151,203 13.6% 14.2% 11.5% 9.4% 9.4% - (52,000) 4,000 54,000 (3,000) 28,000
Greenspoint / North Belt 57 6,204,092 1,084,100 16.9% 16.4% 18.2% 17.5% 18.8% - 60,000 48,000 (151,000) (35,000) 14,000 Greenway Plaza 27 3,764,733 256,002 5.4% 7.2% 7.8% 6.8% 6.8% - 17,000 (109,000) (24,000) 23,000 49,000 Gulf Freeway/Pasadena 25 1,929,273 187,139 14.9% 11.4% 11.9% 9.7% 9.7% - (20,000) 100,000 (15,000) - 27,000 Katy Freeway East 29 3,064,396 429,015 7.8% 10.6% 15.9% 14.0% 14.7% - 25,000 (86,000) 16,000 34,000 49,000
Katy Freeway West 73 8,194,731 696,552 13.3% 9.6% 7.0% 8.5% 11.0% - (4,000) 355,000 359,000 (172,000) (62,000)
Katy Fwy / Energy Corridor 102 11,259,127 1,125,568 12.0% 9.8% 9.3% 10.0% 12.0% - 21,000 269,000 375,000 (138,000) (13,000)Kingwood / Humble 8 794,896 34,975 6.2% 4.9% 7.1% 4.4% 4.4% - 56,000 18,000 11,000 - 94,000 NASA / Clear Lake 43 4,511,246 992,474 10.3% 13.6% 21.1% 22.0% 22.2% - 27,000 (225,000) (500,000) (32,000) 147,000 Northeast 10 742,591 104,705 18.6% 18.5% 19.8% 14.1% 14.1% - (45,000) 2,000 8,000 15,000 101,000 North Loop West 21 2,879,098 420,348 28.2% 19.2% 18.4% 14.6% 15.0% - (5,000) 320,000 25,000 104,000 (17,000)
Northwest Near 8 802,294 6,418 13.2% 10.5% 6.3% 0.8% 0.8% - (1,000) 23,000 34,000 2,000 31,000
Northwest Far 35 3,481,795 487,451 13.3% 13.9% 12.6% 14.0% 14.5% - (13,000) (26,000) 52,000 - (13,000)
Northwest 64 7,163,187 914,218 19.3% 15.7% 14.1% 12.8% 13.2% - (19,000) 317,000 111,000 106,000 1,000 South Main / Medical Center 18 3,991,862 550,877 6.6% 7.4% 14.5% 13.8% 13.8% - 69,000 (39,000) (301,000) (64,000) (11,000)Southwest / Hillcroft 16 1,598,169 445,889 20.5% 21.0% 23.5% 27.9% 27.9% - 9,000 (10,000) (42,000) 6,000 (43,000)
Southwest Beltway 8 32 4,413,473 1,098,955 21.9% 20.5% 25.5% 24.9% 24.9% - (367,000) 90,000 (58,000) 26,000 (29,000)
East Ft Bend Co. / Sugar Land 21 1,906,526 244,035 10.1% 11.4% 10.5% 12.8% 17.1% - 174,000 (62,000) 134,000 (4,000) 48,000
Southwest Fwy / Sugar Land 69 7,918,168 1,788,879 17.0% 17.0% 19.0% 22.6% 23.6% - (184,000) 18,000 34,000 28,000 (24,000)Bellaire 18 2,781,223 125,155 10.0% 5.8% 5.1% 4.5% 4.7% - (164,000) 121,000 21,000 11,000 22,000
Post Oak Park 20 2,154,619 396,450 13.6% 24.5% 18.8% 18.4% 18.6% - 31,000 (289,000) 151,000 4,000 48,000
Galleria 24 3,745,292 247,189 12.4% 10.2% 6.4% 6.6% 7.1% - (8,000) 91,000 282,000 49,000 (15,000)
Riverway 9 870,126 123,558 16.2% 13.8% 12.8% 14.2% 14.7% - (38,000) 26,000 10,000 5,000 2,000
Richmond / Fountainview 7 559,977 177,513 11.4% 28.2% 24.1% 31.7% 31.7% - (24,000) 16,000 36,000 2,000 5,000
San Felipe / Voss 30 3,326,956 282,791 8.0% 7.4% 7.5% 8.5% 8.9% - 36,000 22,000 (4,000) (10,000) (19,000)
West Loop 108 13,438,193 1,352,656 11.3% 12.5% 10.1% 10.1% 10.4% - (167,000) (13,000) 496,000 61,000 43,000 Westchase 53 7,301,615 664,447 11.8% 8.4% 8.8% 9.1% 9.3% - (166,000) 267,000 (30,000) (146,000) (31,000)The Woodlands 50 4,491,209 175,157 8.6% 5.4% 5.7% 3.9% 4.3% - 82,000 249,000 137,000 (40,000) 174,000 Conroe 9 619,727 87,382 9.0% 13.5% 12.6% 14.1% 14.1% - (22,000) 204,000 8,000 - 22,000 TOTAL - Houston 755 95,782,973 11,342,754 12.6% 12.1% 12.6% 11.8% 12.4% - 41,000 1,183,000 187,000 (169,000) 846,000 Vacancy Rate with Sublet Space 13.0% 12.6% 13.1% 12.4%SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Does not include buildings under construction or owned by the government
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 04 | THE HOuSTON METRO OFFICE MARKET 28
ASKING RENTAL RATE ANALYSIS OF CLASS A & B OFFICE BUILDINGSHOUSTON METRO AREA | 2011 THROUGH THIRD QUARTER 2014
SuBMARKET 2011 CLASS A 2011 CLASS B 2012 CLASS A 2012 CLASS B 2013 CLASS A 2013 CLASS B Q3 2014 CLASS A Q3 2014 CLASS B% CHANGE
12/13-09/14 CLASS A
% CHANGE 12/13-09/14
CLASS B
Central Business District $36.68 $23.61 $38.18 $25.06 $39.32 $25.99 $42.86 $27.96 9.0% 7.6%
Midtown $28.77 $22.49 $30.12 $24.07 $30.32 $26.03 $36.01 $26.87 18.8% 3.2%
Downtown $35.61 $23.49 $37.09 $24.96 $38.10 $25.99 $42.10 $27.84 9.9% 7.1%FM 1960 / I-45 North - $15.20 - $16.71 - $18.06 - $18.06 - 0.0%
FM 1960 / Champions - $11.36 - $12.79 - $13.19 - $13.66 - 3.6%
FM 1960 / Highway 249 $25.35 $21.22 $24.34 $20.39 $25.71 $20.80 $27.01 $20.69 5.1% -0.5%
FM 1960 $25.35 $13.90 $24.34 $14.92 $25.71 $15.48 $27.01 $15.75 5.1% 1.8%North Belt West/Greenspoint $20.73 $15.95 $23.76 $16.44 $29.51 $15.63 $30.23 $15.72 2.4% 0.6%
Greenspoint / IAH $20.72 $16.25 $20.47 $16.38 $21.36 $16.34 $21.62 $15.22 1.2% -6.9%
Greenspoint / North Belt $20.73 $15.99 $22.85 $16.43 $27.24 $15.73 $28.57 $15.65 2.3% -0.5%Greenway Plaza $28.70 $21.43 $30.22 $23.29 $32.11 $23.72 $36.50 $24.97 13.7% 5.3%Gulf Freeway/Pasadena - $21.14 - $20.71 - $21.61 - $21.98 - 1.7%Katy Freeway East $33.97 $17.74 $35.45 $21.38 $35.52 $21.79 $36.90 $23.14 3.9% 6.2%
Katy Freeway West $32.40 $18.80 $31.62 $19.55 $33.69 $20.52 $35.17 $22.56 4.4% 9.9%
Katy Fwy / Energy Corridor $32.73 $18.30 $32.44 $20.41 $34.08 $21.12 $35.40 $22.78 4.3% 8.5%Kingwood / Humble $30.10 $19.28 $32.13 $18.50 $32.13 $19.00 $32.13 $19.00 0.0% 0.0%NASA / Clear Lake $24.40 $19.42 $23.57 $19.40 $23.58 $18.33 $24.72 $18.78 4.8% 2.5%Northeast - $16.70 - $17.05 - $16.57 - $17.04 - 2.8%North Loop West $23.13 $16.84 $25.18 $16.57 $23.81 $18.25 $26.74 $20.29 12.3% 11.2%
Northwest Near - $14.96 - $15.51 - $15.60 - $16.75 - 7.4%
Northwest Far $24.63 $16.04 $22.10 $17.35 $25.71 $16.77 $26.11 $18.39 1.6% 9.7%
Northwest $23.79 $16.44 $23.83 $16.93 $24.64 $17.52 $26.47 $19.25 7.5% 10.4%South Main / Medical Center $29.75 $23.86 $29.72 $23.42 $28.54 $24.00 $28.14 $24.77 -1.4% 3.2%Southwest / Hillcroft $21.16 $14.24 $21.24 $14.61 $21.75 $14.18 $22.18 $13.93 2.0% -1.8%
Southwest Beltway 8 $25.11 $16.18 $24.70 $16.37 $23.24 $16.68 $22.13 $16.68 -4.8% 0.0%
East Ft Bend Co. / Sugar Land $27.78 $18.83 $27.22 $19.98 $26.68 $21.32 $26.84 $21.35 0.6% 0.1%
Southwest Fwy / Sugar Land $25.75 $16.05 $25.37 $16.41 $24.95 $16.67 $25.00 $16.63 0.2% -0.3%Bellaire $24.34 $20.86 $25.06 $20.43 $25.86 $21.08 $26.49 $22.22 2.4% 5.4%
Post Oak Park $32.32 $21.17 $32.48 $24.40 $35.43 $26.36 $35.89 $27.11 1.3% 2.8%
Galleria $31.22 $22.71 $34.36 $23.90 $35.70 $26.70 $36.84 $27.26 3.2% 2.1%
Riverway $26.55 $19.91 $29.57 $22.02 $30.82 $23.72 $31.88 $24.98 3.4% 5.3%
Richmond / Fountainview - $15.47 - $16.20 - $16.64 - $17.62 - 5.9%
San Felipe / Voss $31.77 $19.99 $32.70 $20.96 $32.44 $22.40 $33.81 $22.37 4.2% -0.1%
West Loop $30.69 $20.40 $32.89 $21.99 $34.25 $23.68 $35.31 $24.25 2.9% 2.8%Westchase $26.83 $17.80 $34.27 $18.22 $35.38 $19.75 $37.31 $20.87 5.5% 5.7%The Woodlands $34.69 $22.75 $35.37 $23.79 $35.95 $23.38 $37.14 $26.80 3.3% 14.6%Conroe $30.67 $19.52 $29.54 $23.96 $28.42 $25.73 $28.40 $25.14 -0.1% -2.3%TOTAL - Houston $29.99 $18.60 $31.56 $19.46 $32.71 $19.96 $34.52 $20.80 5.5% 4.2%SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Does not include buildings under construction or owned by the government
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 05 | THE HOuSTON METRO INDuSTRIAL MARKET 29
THE HOUSTON METRO INDUSTRIAL MARKET
SECTION FIVE
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 05 | THE HOuSTON METRO INDuSTRIAL MARKET 30
INDuSTRIAL MARKET OVERVIEW
Warehouse/Distribution sector continues to dominate
Net absorption of industrial space totaled 6.9 million SF during the
first three quarters of 2014. The Houston metro’s increasing visibility
and strong distribution channels are resulting in high absorption and
steady development of warehouse space.
In terms of demand for industrial space, Houston remains one of the
top major metro areas. For example, while the Houston industrial
inventory is less than half the size of the New York/Northern New
Jersey market’s inventory, Houston has outpaced that market in 2014
absorption. We expect this trend to continue as a number of large
projects, some with preleasing, are set to deliver and demand remains
high.
Notable 2014 leases:
� HD Supply Holdings – 497,867 SF prelease, Greens Crossing I, North Far submarket
� B&G Foods Inc. – 267,170 SF new lease, DCT Airtex Industrial Center, North Far submarket
� Gulf Winds International - 243,000 SF build-to-suit lease, 5300 Highway 146, East-Southeast Far submarket
� Lennox International – 190,000 SF prelease, DCT Northwest Crossroads Logistics Centre, Northwest Far submarket
� Sunbelt Supply – 185,168 SF lease, Commerce Corporate Center, East- Southeast Far submarket
� Fresh-Pak Corp. – 168,238 SF renewal and expansion, Port Northwest, Northwest Far submarket
� DB Schenker - 150,000 SF prelease at Kenswick AirFreight & Logistics Centre, North Far submarket
NET ABSORPTION OF INDUSTRIAL SPACE AND DIRECT VACANCY RATE TRENDS
LARGEST U.S. INDUSTRIAL MARKETS
Source: Transwestern’s analysis of CoStar data; November 2014. *January-September 2014.
Source: Transwestern’s analysis of CoStar data; November 2014.
HOUSTON METRO | 2005 – 3RD QUARTER 2014
2014
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
05 06 07 08 09 10 11 12 13 14*
DI
RECT
VAC
ANCY
RAT
E
NET A
BSOR
PTIO
N IN
THOU
SAND
S OF
SF
Net Absorption Vacancy Rate
MIL
LION
S OF
SF
0
400
800
1,200
1,600
2,000
LA Basin Chi NY/ NNJ Phi DFW Atl Det Hou SF Bay
Houston remains one of the top major metro areas for industrial demand, a trend expected to continue.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 05 | THE HOuSTON METRO INDuSTRIAL MARKET 31
VACANCy
Industrial vacancy up marginally
The overall industrial vacancy rate (including sublet space) is 4.6% as of the third
quarter of 2014, up marginally from 4.3% at the end of 2013. The direct vacancy rate
also is 4.6%, up from 4.2% at the end of 2013. (There is little sublet space available in
Houston’s industrial market.) All sectors of space recorded positive absorption, but
Warehouse/Distribution experienced an increase in vacancy since year-end 2013.
Houston’s vacancy rate ranks as second-lowest among major metro areas, edged out
by the LA Basin’s 3.0% vacancy rate. We expect Houston to retain one of the lowest
vacancy rates in the nation as demand for industrial space in Houston will remain high,
especially as the Panama Canal expansion nears completion and activity at the Port of
Houston continues to increase.
Houston’s overall industrial vacancy rate will likely edge up into the low-5% range over
the next 12 months, as strong demand continues but more new supply is delivered.
The development pipeline is expected to continue at this level in the period ahead
given the market’s strong demand and low vacancy rate.
SuPPLy AND DEVELOPMENT
Pipeline increasing
There is 5.2 million SF of industrial space under construction in the Houston area as
of the third quarter of 2014, up significantly from 2.1 million SF at year-end 2013.
The space now under construction is 18% preleased. The Northwest Far and North
Far submarkets account for 88% of this space, about 4.6 million SF, and warehouse/
distribution product comprises 96% of the space under construction.
The largest project under construction is a 441,000 SF warehouse/distribution facility
in Beltway Crossing Northwest in the Northwest Far submarket. With the development
pipeline at only 1.9% of standing inventory (including planned space likely to deliver
in the next year), investors continue to break ground on new projects. Despite the
increase in construction over the past year, development activity remains controlled
compared to other large markets such as Dallas/Fort Worth and Chicago.
INDUSTRIAL VACANCY RATES
NET ABSORPTION OF INDUSTRIAL SPACE
Source: Transwestern’s analysis of CoStar data; November 2014.
Source: Transwestern’s analysis of CoStar data; November 2014.
SELECT METRO AREAS | JANUARY – SEPTEMBER 2014
SELECT METRO AREAS | 3RD QUARTER 2014
MIL
LION
S OF
SF
0
1
2
3
4
5
6
7
8
9
10
11
12
13
LA Basin DFW Chi Hou Was/Bal NY/NNJ
OVER
ALL V
ACAN
CY R
ATE
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
LA Basin Hou DFW NY/NNJ Chi Was/Bal
Houston’s overall industrial vacancy rate for the third quarter ranks second-lowest among major metro areas.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 05 | THE HOuSTON METRO INDuSTRIAL MARKET 32
RENTAL RATES
Asking rents edge higher
Asking rental rates for all industrial property types averaged $5.93 per SF triple net
in the third quarter, up from $5.83 per SF triple net at year-end 2013. Quoted base
rents for new distribution space are between $4.92 and $5.24 triple net and typically
include an initial allowance of $5.00-$6.00 per SF for improvements.
Sustained high demand should support moderate rent increases for the period ahead,
particularly in the warehouse/distribution sector. The Houston industrial market is
one of the healthiest in the U.S. and one of the best-positioned for future rent growth,
given its low vacancy rate and strengthening drivers of demand, such as shipping
activity at the Port of Houston.
INVESTMENT MARKET
For in-depth analysis of Houston’s industrial investment market, please see Section Six
of this report.
INDuSTRIAL MARKET OuTLOOK
Strong performance likely to continue in 2015
For the period ahead, we expect continued strong performance from the Houston
industrial market. Vacancy likely will tick up as construction accelerates to meet
demand. In the near term, if construction remains in check, industrial rents will rise,
and market conditions will turn further in favor of owners.
Industrial submarkets likely to outperform the market in the months ahead include:
North, Northwest, South, Southeast and West. As the Houston economy continues to
far outpace the nation’s, the need for industrial space will continue to grow over the
intermediate to long-term.
INDUSTRIAL SPACE UNDER CONSTRUCTION
AVERAGE CHANGE IN INDUSTRIAL ASKING RENT
Source: Transwestern’s analysis of CoStar data; November 2014.
Source: Transwestern’s analysis of CoStar data; November 2014.
SELECT METRO AREAS | 3RD QUARTER 2014
MIL
LION
S OF
SF
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
DFW Chi Was/Bal Hou NY/NNJ LA Basin
ASKI
NG R
ENT,
$/SF
, FS
0%
2%
4%
6%
8%
10%
12%
LA Basin NY/NNJ Chi DFW Hou Was/Bal
SELECT METRO AREAS | JANUARY – SEPTEMBER 2014
The Houston industrial market is one of the healthiest in the U.S. and one of the best-positioned for future rent growth.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 05 | THE HOuSTON METRO INDuSTRIAL MARKET 33
SUMMARY OF INDUSTRIAL MARKET INDICATORS - ALL SPACEHOUSTON METRO AREA | 2011 THROUGH THIRD QUARTER 2014
SuBMARKET INVENTORy SF AVAILABLE IMMEDIATELy
DIRECT VACANCy
2011
DIRECT VACANCy
2012
DIRECT VACANCy
2013
DIRECT VACANCy
Q3 2014
VACANCy WITH SuBLET
uNDER CONSTRuCTION
NET ABSORPTION
2011
NET ABSORPTION
2012
NET ABSORPTION
2013
NET ABSORPTION
Q3 2014
NET ABSORPTION
yTD 2014
Central Business District
Flex/R & D 583,281 48,412 8.4% 8.0% 9.9% 8.3% 8.3% - (5,000) 4,000 (14,000) 12,000 11,000
Manufacturing 6,137,612 30,688 4.3% 1.4% 0.8% 0.5% 0.5% - 64,000 166,000 35,000 - -
Warehouse/Distribution 23,497,545 1,456,848 4.8% 6.4% 6.3% 6.2% 6.2% - 120,000 (477,000) 63,000 - -
Total - Central Business District 30,218,438 1,535,948 4.8% 5.6% 5.4% 5.1% 5.1% - 179,000 (307,000) 84,000 12,000 11,000
East-Southeast Far
Flex/R & D 1,850,546 122,136 9.5% 12.2% 8.9% 6.6% 6.6% - 54,000 (72,000) 97,000 67,000 39,000
Manufacturing 6,195,146 315,952 0.5% 6.4% 5.5% 5.1% 5.1% - 202,000 (279,000) 54,000 2,000 129,000
Warehouse/Distribution 36,732,918 3,122,298 8.2% 8.3% 7.8% 8.5% 8.5% 117,334 965,000 695,000 213,000 688,000 1,041,000
Total - East-Southeast Far 44,778,610 3,560,387 7.5% 8.3% 7.6% 8.0% 8.0% 117,334 1,221,000 344,000 364,000 757,000 1,209,000
North Far
Flex/R & D 8,088,974 598,584 9.3% 8.9% 8.0% 7.4% 7.4% - 214,000 90,000 200,000 (40,000) 110,000
Manufacturing 7,459,233 96,970 2.7% 2.1% 2.7% 1.3% 1.3% - (17,000) 15,000 (11,000) - 88,000
Warehouse/Distribution 42,608,620 3,579,124 4.3% 4.3% 4.7% 8.4% 8.4% 1,662,963 1,021,000 828,000 2,010,000 21,000 1,076,000
Total - North Far 58,156,827 4,274,678 4.8% 4.6% 4.9% 7.4% 7.4% 1,662,963 1,218,000 933,000 2,199,000 (19,000) 1,274,000
North Near
Flex/R & D 1,097,470 98,772 22.9% 18.9% 12.3% 9.0% 9.0% - (92,000) 48,000 185,000 5,000 39,000
Manufacturing 3,163,704 113,893 0.9% 0.3% 5.4% 3.6% 3.6% 120,000 58,000 16,000 (134,000) - 62,000
Warehouse/Distribution 13,243,267 940,272 4.8% 3.6% 5.0% 7.1% 7.1% - 298,000 456,000 (67,000) 26,000 383,000
Total - North Near 17,504,441 1,152,938 5.4% 4.1% 5.5% 6.6% 6.6% 120,000 264,000 520,000 (16,000) 31,000 484,000
Northeast Far
Flex/R & D 22,500 0 2.7% 0.0% 0.0% 0.0% 0.0% - - 3,000 - - -
Manufacturing 182,720 0 0.0% 0.0% 0.0% 0.0% 0.0% - - - - - -
Warehouse/Distribution 859,481 0 0.7% 1.2% 0.8% 0.0% 0.0% - (5,000) (5,000) 6,000 - 4,000
Total - Northeast Far 1,064,701 0 0.7% 1.0% 0.7% 0.0% 0.0% - (5,000) (2,000) 6,000 - 4,000
SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Does not include buildings under construction or owned by the government
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 05 | THE HOuSTON METRO INDuSTRIAL MARKET 34
SUMMARY OF INDUSTRIAL MARKET INDICATORS - ALL SPACEHOUSTON METRO AREA | 2011 THROUGH THIRD QUARTER 2014
SuBMARKET INVENTORy SF AVAILABLE IMMEDIATELy
DIRECT VACANCy
2011
DIRECT VACANCy
2012
DIRECT VACANCy
2013
DIRECT VACANCy
Q3 2014
VACANCy WITH SuBLET
uNDER CONSTRuCTION
NET ABSORPTION
2011
NET ABSORPTION
2012
NET ABSORPTION
2013
NET ABSORPTION
Q3 2014
NET ABSORPTION
yTD 2014
Northeast Near
Flex/R & D 419,469 26,007 8.3% 10.5% 6.8% 6.2% 6.2% - 2,000 (18,000) 33,000 13,000 19,000
Manufacturing 5,931,399 0 0.8% 0.4% 0.4% 0.0% 0.0% - 244,000 23,000 - - 24,000
Warehouse/Distribution 23,710,810 497,927 3.5% 3.4% 2.6% 2.1% 2.1% 40,000 113,000 65,000 256,000 119,000 44,000
Total - Northeast Near 30,061,678 523,934 3.1% 3.1% 2.3% 1.7% 1.7% 40,000 359,000 70,000 289,000 132,000 87,000
Northwest Far
Flex/R & D 4,798,524 143,956 5.4% 5.3% 4.0% 3.0% 3.4% 44,000 38,000 75,000 71,000 (4,000) 74,000
Manufacturing 8,871,218 159,682 3.7% 2.9% 5.1% 1.8% 1.8% - 31,000 51,000 149,000 144,000 323,000
Warehouse/Distribution 44,664,582 2,143,900 3.4% 2.6% 3.2% 4.8% 4.8% 2,847,792 1,203,000 801,000 1,732,000 300,000 1,048,000
Total - Northwest Far 58,334,324 2,447,538 3.6% 2.9% 3.5% 4.2% 4.2% 2,891,792 1,272,000 927,000 1,952,000 440,000 1,445,000
Northwest Near
Flex/R & D 10,791,131 863,290 9.7% 8.9% 8.4% 8.0% 8.4% - 93,000 92,000 195,000 54,000 116,000
Manufacturing 9,289,566 269,397 3.3% 0.6% 0.7% 2.9% 2.9% - (144,000) 256,000 (10,000) (46,000) (210,000)
Warehouse/Distribution 66,788,433 2,003,653 4.3% 3.9% 3.2% 3.0% 3.1% - 530,000 871,000 1,092,000 283,000 835,000
Total - Northwest Near 86,869,130 3,136,341 4.8% 4.1% 3.5% 3.6% 3.7% - 479,000 1,219,000 1,277,000 291,000 741,000
South Far
Flex/R & D 1,303,105 24,759 10.5% 9.3% 2.9% 1.9% 1.9% - 8,000 21,000 110,000 21,000 (7,000)
Manufacturing 6,675,011 66,750 1.8% 1.8% 3.0% 1.0% 1.0% - 61,000 - (53,000) 80,000 393,000
Warehouse/Distribution 21,371,268 555,653 2.9% 3.6% 3.1% 2.6% 2.7% 219,841 521,000 17,000 208,000 231,000 563,000
Total - South Far 29,349,384 647,162 3.1% 3.6% 3.1% 2.2% 2.3% 219,841 590,000 38,000 265,000 332,000 949,000
South Near
Flex/R & D 689,156 128,183 18.1% 21.2% 22.8% 18.6% 18.6% - (12,000) (25,000) (12,000) 34,000 45,000
Manufacturing 1,509,616 101,144 3.6% 3.8% 8.2% 6.7% 6.7% - 3,000 (2,000) (75,000) - 39,000
Warehouse/Distribution 9,955,560 338,489 2.5% 3.4% 4.5% 3.4% 3.4% - (86,000) (109,000) (134,000) 50,000 132,000
Total - South Near 12,154,332 567,816 3.5% 4.4% 5.9% 4.7% 4.7% - (95,000) (136,000) (221,000) 84,000 216,000
SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Does not include buildings under construction or owned by the government
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 05 | THE HOuSTON METRO INDuSTRIAL MARKET 35
SUMMARY OF INDUSTRIAL MARKET INDICATORS - ALL SPACEHOUSTON METRO AREA | 2011 THROUGH THIRD QUARTER 2014
SuBMARKET INVENTORy SF AVAILABLE IMMEDIATELy
DIRECT VACANCy
2011
DIRECT VACANCy
2012
DIRECT VACANCy
2013
DIRECT VACANCy
Q3 2014
VACANCy WITH SuBLET
uNDER CONSTRuCTION
NET ABSORPTION
2011
NET ABSORPTION
2012
NET ABSORPTION
2013
NET ABSORPTION
Q3 2014
NET ABSORPTION
yTD 2014
Southeast Near
Flex/R & D 363,962 40,036 20.2% 15.3% 12.2% 11.0% 11.0% - 6,000 25,000 15,000 4,000 (16,000)
Manufacturing 9,947,061 0 0.0% 0.0% 0.4% 0.0% 0.0% - 14,000 - (31,000) 30,000 40,000
Warehouse/Distribution 20,423,140 469,732 2.3% 1.6% 2.7% 2.3% 2.3% - 118,000 207,000 (324,000) 82,000 363,000
Total - Southeast Near 30,734,163 509,768 2.1% 1.4% 2.3% 1.7% 1.7% - 138,000 232,000 (340,000) 116,000 387,000
Southwest Far
Flex/R & D 1,502,099 130,683 24.1% 25.6% 24.4% 8.7% 8.7% 26,250 (26,000) (23,000) 187,000 (9,000) 84,000
Manufacturing 1,580,397 137,495 4.4% 5.5% 8.8% 8.7% 8.7% - 64,000 (15,000) (33,000) 28,000 15,000
Warehouse/Distribution 6,012,739 222,471 4.8% 4.2% 2.4% 3.7% 3.7% - 81,000 100,000 195,000 (24,000) (57,000)
Total - Southwest Far 9,095,235 490,648 7.7% 7.4% 6.6% 5.4% 5.4% 26,250 119,000 62,000 349,000 (5,000) 42,000
Southwest Near
Flex/R & D 6,602,139 382,924 6.4% 8.7% 7.5% 5.8% 5.8% - 5,000 (186,000) 180,000 53,000 114,000
Manufacturing 4,608,887 142,875 2.7% 2.1% 2.9% 3.1% 3.1% - 35,000 113,000 (31,000) 5,000 (4,000)
Warehouse/Distribution 27,355,768 875,385 4.2% 3.1% 2.2% 3.2% 3.2% 90,000 385,000 795,000 842,000 109,000 (110,000)
Total - Southwest Near 38,566,794 1,401,184 4.4% 3.9% 3.1% 3.6% 3.6% 90,000 425,000 722,000 991,000 167,000 -
Sugar Land
Flex/R & D 3,082,022 141,773 9.6% 7.4% 5.1% 4.6% 4.7% - 64,000 65,000 105,000 (12,000) (12,000)
Manufacturing 2,510,135 45,182 0.0% 0.0% 0.0% 1.8% 1.8% - 12,000 96,000 - (45,000) (45,000)
Warehouse/Distribution 12,353,402 926,505 6.1% 5.1% 4.5% 7.5% 7.5% 31,000 65,000 167,000 140,000 25,000 74,000
Total - Sugar Land 17,945,559 1,113,461 5.9% 4.9% 4.1% 6.2% 6.2% 31,000 141,000 328,000 245,000 (32,000) 17,000
Houston
Flex/R & D 41,194,378 2,749,516 9.7% 9.7% 8.3% 6.7% 6.8% 70,250 349,000 99,000 1,352,000 198,000 616,000
Manufacturing 74,061,705 1,480,030 2.1% 1.8% 2.6% 2.0% 2.0% 120,000 627,000 440,000 (140,000) 198,000 854,000
Warehouse/Distribution 349,577,533 17,132,257 4.4% 4.2% 4.1% 4.9% 4.9% 5,008,930 5,329,000 4,411,000 6,232,000 1,910,000 5,396,000
Total - Houston 464,833,616 21,361,803 4.6% 4.3% 4.2% 4.6% 4.6% 5,199,180 6,305,000 4,950,000 7,444,000 2,306,000 6,866,000
Vacancy Rate with Sublet Space 4.7% 4.4% 4.3% 4.6%
SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Does not include buildings under construction or owned by the government
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 06 | OFFICE AND INDuSTRIAL INVESTMENT TRENDS 36
OFFICE AND INDUSTRIAL INVESTMENT TRENDS
SECTION SIX
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 06 | OFFICE AND INDuSTRIAL INVESTMENT TRENDS 37
INVESTMENT SALES OF OFFICE BUILDINGS
REAL ESTATE RETURNS VS. OTHER INVESTMENT OPTIONS
AVERAGE CORE OFFICE ASSET CAP RATE
OFFICE INVESTMENT SALES MARKET OVERVIEW
Investor interest in Houston office assets remains high
Nationally, year-to-date sales through August 2014 were $69.1 billion, above sales of $54.4 billion
during the same time period in 2013. Sales are strong for U.S. office assets, but well below peak levels
in 2007, which totaled $214.0 billion. While Houston’s sales are off last year’s pace, we expect to see
continued strength through the remainder of 2014 and throughout 2015. With one of the nation’s
strongest local economies, driven by healthy growth in a wide variety of sectors, especially the Energy
sector, Houston will continue to spark investor interest.
ALTERNATIVE INVESTMENT STRATEGIES
Real estate remains a solid long-term play
The stock market has been robust since the Great Recession, but recent volatility has reminded
investors to diversify their assets. Real estate has proven to be a strong investment as it has successfully
recovered from declines during the housing bubble and recession. Also, in the long term, real estate
investments have outperformed both stocks and bonds. In the last 10 years as of June 2014 the
NAREIT Equity REIT Index saw a 9.67% increase. The NCREIF Property Index increased 8.63% during
the same period, while stocks (as measured by the S&P 500) only rose 7.78%. Direct investment in real
estate remains attractive at this point in the cycle compared to the alternatives, especially considering
the recent uncertainty in the stock market. Nationally, we have continued to see economic growth and
job creation, which will support demand for office space, even as owners deal with the headwinds
created by tenants’ densification of space (a reduction in the SF leased per worker).
After peaking in 2009, U.S. office cap rates began their decline and have trended lower since, though
they have plateaued over the last couple of years. The mean cap rate in the U.S. in 2014 is 6.9%
for core office assets, the same as in 2013 and down from 7.1% in 2012, according to Real Capital
Analytics. We believe cap rates will remain largely unchanged through the remainder of 2014 and into
2015 as market conditions remain stable.
Based on the NCREIF Property Index, total returns have edged up in 2014 compared to the year prior.
While Houston has seen a small decline in returns compared to 2013, its 2014 returns remain among
the highest in the nation. Houston’s average office asset return is 14.56% over the 12 months ending
June 2014 after a return of 15.92% for the 12 months ending June 2013. The returns in Houston
led all other major metro areas except Denver, and are well above the national average of 10.29%.
This robust performance can be attributed largely to demand for office space by the Energy sector,
Houston’s most important core industry.
Sources: Real Capital Analytics, graphic by Delta Associates; November 2014. *Through August.
Sources: NCREIF, Delta Associates; November 2014.
Sources: Real Capital Analytics, graphic by Delta Associates; November 2014. *Through August.
UNITED STATES | 2002 THROUGH AUGUST 2014
MID-YEAR 2014
UNITED STATES | 2004 THROUGH AUGUST 2014
$0$20$40$60$80$100$120$140$160$180$200$220$240
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD 2014*
BILL
IONS
OF $
0%
5%
10%
15%
20%
25%
1-YEAR 3-YEAR 5-YEAR 10-YEAR
NAREIT Equity REIT IndexNCREIF Property Index
Stocks (S&P 500)Bonds (Barclays Capital Government)
TOTA
L RET
URN/
YEAR
Real Estate: Alternatives:
4%
5%
6%
7%
8%
9%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
AVER
AGE
CAP
RATE
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 06 | OFFICE AND INDuSTRIAL INVESTMENT TRENDS 38
NCREIF RETURN INDEX1 FOR OFFICE PROPERTIES
METRO AREA 12-MONTH TOTAL RETuRN AT 2ND QuARTER 2014
Denver 17.01%
Houston 14.56%
San Francisco 14.56%
Dallas 14.38%
Los Angeles 13.68%
Phoenix 12.45%
National Average 10.29%
Boston 9.92%
Atlanta 9.24%
New York 8.97%
Chicago 8.23%
Washington 6.72%
1 NCREIF compiles return based on its members’ $139.5 billion office portfolios. The index includes both current income and capital appreciation returns. Source: Delta Associates, based on data in NCREIF’s 2nd Quarter 2014 Real Estate Performance Report.
COMPARATIVE INVESTMENT SALES VOLUME
OFFICE SALES VOLuME
Houston tracking below last year’s total but comparable with peer markets
The Houston metro area recorded $2.6 billion in total office investment sales transactions
in 2014 through the third quarter of the year. These are assets for which pricing information
could be obtained.
Although sales volume is tracking significantly below the approximately $5.4 billion recorded
in 2013, investor interest in Houston remains at high levels as lucrative market conditions,
driven by one of the nation’s strongest local economies, continue to fuel a positive outlook for
the Energy Capital. The shale revolution has given local energy companies the confidence
and incentive to expand their workforces, which translates into greater interest in Houston
office assets.
Houston’s office sales volume year-to date puts it on par with Dallas/Fort Worth and Denver.
Over the past few years, investors have begun to consider Houston as a “gateway market.”
While Houston’s office sales volume still does not match the volume of the largest coastal
markets, investors foreign and domestic have started to take greater interest in Houston due to
its strong economy and the high returns its office assets are producing.
OFFICE PRICING
Upward pricing pressure continues for quality office assets
Nationally, the average sales price has edged up in 2014 to $238/SF through the first eight
months of the year, compared to $226 for all of 2013. Following the recession, pricing
returned to peak levels in Houston faster than in many other major markets around the
country. Improved market conditions, driven by one of the strongest local economies in the
nation, continues to fuel investor interest in the Energy Capital of the World. In addition to the
shale revolution, hydraulic fracturing and alternative fuel activities are driving energy firms to
take more office space in Houston, in some cases consolidating operations from other parts of
the country. This is putting upward pressure on pricing of quality office assets.
Overall, office pricing in Houston averaged $204 per SF in 2014 through the third quarter,
compared to $213 per SF for all of 2013. With the exception of 2009 – the low point of the
downturn – values in Houston have generally been on an upward trajectory. Values likely will
increase in the period ahead, as market conditions continue to strengthen, rents rise, and
competition increases for Houston’s assets. However, some plateauing is likely as job growth
begins to decelerate and as office tenants increasingly look to keep occupancy costs in check,
possibly taking some froth out of the office investment sales market.
Source: Real Capital Analytics per Transwestern, graphic by Delta Associates; November 2014. *Through 3rd quarter 2014.
OFFICE BUILDINGS | 2009 – 3RD QUARTER 2014
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
$5.0
$5.5
$6.0
2009 2010 2011 2012 2013 2014*
BILL
IONS
OF $
Hou Den DFW
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 06 | OFFICE AND INDuSTRIAL INVESTMENT TRENDS 39
The average cap rate in the third quarter for Houston office assets was 6.4%,
down from an average of 7.3% at year-end 2013. However, there is a wide
range of cap rates depending on the locations and characteristics of the
properties being traded. Most notably, Class A properties generally command
much lower yields than Class B due to a variety of factors including quality
of the asset, appreciation potential and investor profile. However, due to
the rapid increase in rental rates across much of the city during the last 12-
24 months, the Class B sector has witnessed substantial in-place cap rate
compression because of leases that have not yet rolled to market rates.
ACTIVE PLAyERS IN THE OFFICE MARKET
Most active firms represent varied sources of capital
The top investors in Houston office assets this year include some of the most
prominent firms in the industry.
� Invesco
� TIAA-CREF
� AEW
� Clarion Partners
� TA Realty
� KBS
� MetLife
OFFICE INVESTMENT SALES MARKET OuTLOOK
Competition increasing for Houston’s Class B office assets
Well-located Class B office assets in Houston continue to receive significant
interest from investors as a result of the highly competitive Class A investment
market. Thus, pricing for well-located Class B assets is expected to continue
to improve as competition for these properties increases. We expect overall
cap rates in Houston to trend downward slightly in the months ahead as the
Class B market improves and high investor interest in Houston’s office assets
continues. Additionally, the recent decrease in 10-year treasury rates should
fuel continued yield compression in the near-term. In the current interest rate
environment, even a material increase in rates should be able to be absorbed
without significantly altering current pricing metrics. However, pricing may
plateau in 2015-16 as job growth decelerates and interest rates rise.
AVERAGE CORE OFFICE ASSET SALES PRICE
AVERAGE OFFICE SALES PRICE
OFFICE INVESTMENT SALES VOLUME
Sources: Real Capital Analytics, graphic by Delta Associates; November 2014.
Sources: Real Capital Analytics, graphic by Delta Associates; November 2014. *Through August.
Source: Real Capital Analytics per Transwestern, graphic by Delta Associates; November 2014. *Through 3rd quarter 2014.
SELECT METRO AREAS | JANUARY THROUGH AUGUST 2014
UNITED STATES | 2004 THROUGH AUGUST 2014
HOUSTON METRO | 2002 – 3RD QUARTER 2014
NY SF Bay LA Was/Bal Bos Chi DFW Hou Den Atl$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
MIL
LION
S OF
$
$100
$125
$150
$175
$200
$225
$250
$275
2005 2006 2007 2008 2009 2010 2011 2012 2013YTD
2014*$
PER
SF
$97 $87
$128 $129 $125 $139
$174
$58
$174
$214
$188
$213 $204
$25
$50
$75
$100
$125
$150
$175
$200
$225
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
AVER
AGE
SALE
S PR
ICE
PER
SF
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 06 | OFFICE AND INDuSTRIAL INVESTMENT TRENDS 40
INDuSTRIAL INVESTMENT SALES MARKET OVERVIEW
Houston’s industrial returns outpacing the nation’s
National industrial investment sales are ahead of last year’s volume during the comparable time
period. Year-to-date sales through August 2014 totaled $31.7 billion, which compares to $28.7 billion
for the comparable period in 2013. Sales volume has steadily increased each year since 2009 and we
expect this trend to continue in 2014 once the year closes.
The Houston market has continued to experience strong industrial investment sales. Sales appear
low in comparison to the robust sales volume of 2013, but they remain high on a historical basis and
industrial product has continued to deliver strong returns in 2014. With the completion of the Panama
Canal expansion set for early 2016, we expect to see demand for industrial space increase around the
Port of Houston.
Returns on investments in industrial assets showed continued strength in 2014. The Houston industrial
market has been one of the best in the country compared to similar markets. Returns in Houston
measured 14.23% over the 12 months ending in June 2014, compared to the national average of
12.63%. Among major industrial markets, only Dallas and New York performed better.
INDuSTRIAL SALES VOLuME
Houston remains a hidden gem when comparing fundamentals to sales volume
The Houston industrial market achieved total sales volume of $786 million through the third quarter of
2014, behind the 2013 pace, which was $1.1 billion during the comparable period. These are assets
for which pricing information could be obtained. Despite the Houston industrial market’s low vacancy
rate and robust performance, it remains overshadowed as an investment alternative by larger, coastal
industrial markets such as the LA Basin and New York/Northern New Jersey. The success of the Port of
Houston and the fundamentals of Houston’s industrial market suggest increasing sales volume in the
period ahead.
INDuSTRIAL PRICING
Average price rising on strong market fundamentals
Overall, industrial pricing has averaged $63 per SF this year in Houston, compared to $55 per SF one
year prior. Houston’s industrial assets remain a bargain on a per SF basis compared with some of its
peer markets.
As of late 2014, Houston industrial cap rates cover a wide range depending on the type and class of
product sold. Class A properties are selling in the 5-6% range, while Class B product is trading in the
7-9% range. Of note, well-located Class A distribution projects are currently trading in the low-5%
range, and in some cases, well-positioned Class A assets are dipping in to the high-4% range.
INVESTMENT SALES OF INDUSTRIAL BUILDINGS
INDUSTRIAL INVESTMENT SALES
NCREIF RETURN INDEX1 FOR INDUSTRIAL PROPERTIES
METRO AREA 12-MONTH TOTAL RETuRN AT 2ND QuARTER 2014
Dallas 15.19%
New York 14.43%
Houston 14.23%
National Average 12.63%
Denver 12.39%
Atlanta 12.27%
Los Angeles 10.65%
Chicago 10.15%
Washington 9.78%1 NCREIF index includes both current income and capital appreciation returns. Source: NCREIF, Delta Associates; November 2014.
Sources: Real Capital Analytics, graphic by Delta Associates; November 2014. *Through August.
Source: Real Capital Analytics per Transwestern, graphic by Delta Associates; November 2014. *Through 3rd quarter 2014.
UNITED STATES | 2002 THROUGH AUGUST 2014
HOUSTON METRO | 2002 THROUGH 3RD QUARTER 2014
$0$5$10$15$20$25$30$35$40$45$50$55$60$65
2002 2003 20052004 2006 2007 2008 2009 2010 2011 2012 2013 2014*
BILL
IONS
OF $
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
MIL
LION
S OF
$
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 06 | OFFICE AND INDuSTRIAL INVESTMENT TRENDS 41
ACTIVE PLAyERS IN THE INDuSTRIAL MARKET
Major sources of capital are active in Houston’s industrial market
The top investors in Houston industrial assets this year include
some of the most prominent firms in the industry.
� Clarion
� TA Realty
� Stockbridge
� Prologis
� Invesco
� Liberty
� TIAA-CREF
� Duke
� Cornerstone
� IIT
INDuSTRIAL INVESTMENT SALES MARKET OuTLOOK
Abundance of capital likely to keep downward pressure on cap rates
Houston is now considered a gateway city by the investor
community, and many investment funds have allocated capital
ready to invest. This, coupled with a lack of quality product
on the market, will continue to keep downward pressure on
Houston industrial cap rates as long as interest rates remain low.
Investor demand for industrial properties in Houston will remain strong with the abundance of capital (core and value-add funds) chasing product based on the strength of the market and vibrant Houston economy.
INDUSTRIAL INVESTMENT SALES VOLUME
AVERAGE INDUSTRIAL SALES PRICES
Sources: Real Capital Analytics, graphic by Delta Associates; November 2014.
Sources: Real Capital Analytics, graphic by Delta Associates; November 2014.
SELECT METRO AREAS | JANUARY THROUGH AUGUST 2014
SELECT METRO AREAS | JANUARY THROUGH AUGUST 2014
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
LA Basin NY/NNJ SF Bay Chi DFW Was/Bal Atl Den Hou
MIL
LION
S OF
$
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
AtlChiDFWHouDenWas/BalLA BasinNY/NNJSF Bay
$ PE
R SF
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 07 | THE HOuSTON METRO MuLTIFAMILy MARKET 42
THE HOUSTON METRO MULTIFAMILY MARKET
SECTION SEVEN
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 07 | THE HOuSTON METRO MuLTIFAMILy MARKET 43
MuLTIFAMILy MARKET OVERVIEW
Flurry of activity continues
Houston remains a safe and attractive market for multifamily investment with its long-term job market success
and the nation’s sixth-lowest median age of housing inventory. Currently, there are over 24,000 units under
construction and another 18,000 proposed. Houston has absorbed 14,760 units over the first three quarters of
2014, and rental rates have increased 7.1% this year on an annualized basis. With the enduring velocity of job
creation, Houston should continue to experience success across all multifamily asset classes.
ABSORPTION
Absorption dips
Absorption was approximately 14,760 units year-to-date through September 2014, slightly below the 16,153
absorbed during the same period one year prior. While this year’s pace is below last year’s, it remains high by
historical standards. Submarkets with the highest absorption levels during the 3rd quarter of 2014 were: Katy/
Far West, at 494 units; Woodlands Far North, at 423 units; Medical Center/Bellaire, at 398 units; and Inner Loop
West/Greenway Plaza, at 392 units.
VACANCy
Vacancy remains consistent
The Houston multifamily market’s average vacancy rate was 9.0% as of the third quarter of 2014, identical to
the same period in 2013. During the third quarter, the largest vacancy declines occurred in these submarkets
(figures are on an annualized basis): Heights, at 26.1 percentage points; Inner Loop West, at 9.9 percentage
points; Medical Center/Bellaire, at 9.0 percentage points; and Conroe/Montgomery, at 5.7 percentage points.
Class B properties posted the lowest vacancy rates, averaging 6.3%, followed by Class C at 6.5%, Class D at
12.3% and Class A properties at 18.3%. The submarkets with the lowest vacancy rates as of the third quarter
were Galena Park/Jacinto City, at 1.7%; Friendswood/Pearland, at 4.6%; FM 1960/Copperfield, at 4.8%;
Gulfton/Bissonet, at 4.9%; and Lake Houston/Kingwood, at 5.1%.
SuPPLy AND DEVELOPMENT
Construction of communities still soaring
20,197 units, comprised of 73 communities, have delivered in the past twelve months and 24,562 units in
85 communities are currently under construction. Proposed construction is currently at 18,282 units, in 61
communities, of which 49% is concentrated in the following four submarkets: Montrose/Museum District, with
3,476 infill units; Katy/Far West, with 3,192 suburban units; West Memorial/Briar Forest, with 3,134 suburban
units; and Inner Loop West/Greenway Plaza, with 2,158 infill units.
NET ABSORPTION — ALL APARTMENT CLASSES
APARTMENT VACANCY RATE — ALL CLASSES
Source: ADS, Transwestern, Delta Associates; November 2014. *January through September 2014.
Source: ADS, Transwestern, Delta Associates; November 2014. *As of September 2014.
HOUSTON METRO | 2005 THROUGH SEPTEMBER 2014
HOUSTON METRO | 2005 THROUGH SEPTEMBER 2014
-10
0
10
20
30
40
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
THOU
SAND
S OF
UNI
TS
9.5%
16.1%
9.0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
VACA
NCY
RATE
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 07 | THE HOuSTON METRO MuLTIFAMILy MARKET 44
RENTAL RATES
Rents continue to grow
Nationally, rent growth has been consistent, but it was expected to be stronger during this time of
year due to seasonality. A lack of acceleration in income growth and an increase in supply created
more competition in the market. By comparison, Houston has experienced rent growth above the
national average during 2014 and the only major metro areas with stronger rent growth this year are
Dallas/Fort Worth and New York.
In Houston, average effective rents ended the quarter at $920 per unit, or $1.05 per SF, compared
to $857 per unit, $0.98 per SF at year-end 2013. Rental rates, on an annualized basis, have increased
7.1% since year-end 2013. In fact, the third quarter of 2014 marked the 19th consecutive quarter of
effective rental rate increases since the fourth quarter of 2009.
The submarkets registering the highest annualized rental rate growth during the third quarter
are Galena Park/Jacinto City at 22.2%; Lake Houston/Kingwood, at 19.6%; Westchase, at 15.5%;
Galveston/Brazoria, at 11.7%; and Bear Creek/Copperfield, at 18.2%. Concessions were reported in
24% of the market with the average special offered at 4.8%.
INVESTMENT MARKET
Transaction volume up
Apartment investment sales activity totaled $3.3 billion through the third quarter of 2014 for
transactions where pricing information was available. By comparison, recorded sales volume for
the same time period last year was $2.9 billion. Investment sales volume has increased each year
since 2009 and is on pace to continue that trend in 2014. As absorption levels remain high and rent
growth continues to surpass the national average, investors will continue to seek out opportunities
in Houston.
Unit sales volume continued to strengthen with 42,475 units sold year-to-date through September
2014, compared to 39,813 units sold during the same time frame in 2013. While sales velocity and
pricing are positive across all multifamily asset classes, assets with a value-add play continue to be
the most attractive deals to investors. Demand for multifamily assets, readily available debt and
projected rental increases across the market have kept cap rates in the 5-7% range.
MuLTIFAMILy MARKET OuTLOOK
Population growth will drive multifamily market forward
Houston’s population growth is likely to continue in the years ahead, with job opportunities drawing
new residents to the region. This influx of new residents is likely to support steady demand for
rental units, helping to keep the vacancy rate in check even as new supply continues to deliver.
ASKING RENT PERCENTAGE CHANGE
AVERAGE APARTMENT RENTAL RATE
Source: REIS, Delta Associates; November 2014.
Source: ADS, Transwestern, Delta Associates; November 2014.
SELECT METRO AREAS | JANUARY THROUGH SEPTEMBER 2014
HOUSTON METRO | 1ST QUARTER 2011 THROUGH 3RD QUARTER 2014
0%
1%
2%
3%
4%
5%
Was LA Atl Phx Chi Hou DFW NY
National Average = 2.9%
PERC
ENTA
GE C
HANG
E
$1.05
$0.85
$0.90
$0.95
$1.00
$1.05
$1.10
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
RENT
($/S
F/M
ONTH
)
2011
7.1% increase on an annualized basis
2012 2013 2014
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 07 | THE HOuSTON METRO MuLTIFAMILy MARKET 45
HOUSTON MULTIFAMILY MARKET INDICATORS
SuBMARKETNuMBER OF APARTMENT
COMMuNITIES
NuMBER OF APARTMENT uNITS AVERAGE OCCuPANCy AVERAGE SF/uNIT AVERAGE EFFECTIVE
RENT/ MONTHAVERAGE EFFECTIVE
RENT/SFuNITS uNDER
CONSTRuCTIONuNITS ABSORBED
Q3 2014
1 Montrose/Museum District 54 13,434 87.8% 924 $1,632 $176.60 3,476 2602 Inner Loop West/Greenway Plaza 66 15,881 79.4% 960 $1,722 $179.20 2,158 3923 Medical Center/Bellaire 71 20,516 94.3% 877 $1,273 $145.20 1,392 3984 Heights 20 3,744 83.2% 842 $1,419 $168.50 1,283 1815 Inner Loop East 56 8,424 91.1% 822 $1,007 $122.50 1,654 1666 Northshore/Wood Forest 40 8,646 91.2% 812 $682 $84.00 0 -877 Eastex Frwy/Near Northeast 30 5,503 94.2% 929 $751 $80.80 0 -208 Northline/Aldine 61 9,956 94.4% 847 $651 $76.90 0 359 Greenspoint 37 9,473 89.3% 760 $589 $77.50 0 -1010 FM 1960 East/IAH Airport 46 8,600 93.7% 854 $765 $89.60 0 4711 Lake Houston/Kingwood 45 11,588 94.9% 932 $1,022 $109.70 264 -7612 Far East 28 4,743 88.3% 930 $772 $83.00 80 013 Brookhollow 94 20,492 92.8% 828 $756 $91.30 0 12214 Spring Branch 98 18,466 94.1% 917 $795 $86.70 573 -3015 Inwood/Northwest 39 7,256 93.7% 895 $723 $80.80 0 2116 FM 1960 West/ Champions 152 37,294 92.2% 878 $809 $92.10 384 25917 FM 1960 West/Steeplechase 73 19,332 92.2% 915 $970 $106.00 0 8118 Bear Creek/Copperfield 48 13,021 95.2% 881 $856 $108.50 342 -5619 Katy/Far West 67 17,677 89.9% 952 $1,135 $119.20 3,192 49420 Tomball/Far Northwest 25 5,131 63.4% 930 $1,122 $120.60 180 38221 Woodlands/Far North 53 15,799 82.2% 933 $1,140 $122.20 698 42322 Conroe/Montgomery 43 7,546 92.6% 899 $849 $94.40 0 9123 Hwy 288/South 58 13,216 88.3% 961 $962 $100.10 382 -3824 Gulfgate/Almeda Mall 95 21,956 94.0% 817 $686 $84.00 78 025 Galena Park/Jacinto City 3 320 98.3% 740 $721 $97.40 0 -326 Pasadena/Deer Park 113 21,862 92.0% 847 $717 $84.70 180 -10327 Friendswood/Pearland 29 5,541 95.4% 866 $897 $103.60 476 -6628 Clear Lake 97 24,520 93.8% 878 $934 $106.40 0 11629 Baytown 51 9,158 91.8% 849 $726 $85.50 240 4230 Galveston/Brazoria 134 20,715 89.7% 829 $738 $89.00 0 8531 Galleria 101 23,463 90.8% 893 $1,267 $141.90 1,791 22032 Woodlake/Westheimer 37 11,989 90.0% 883 $985 $111.60 714 2933 West Memorial/Briar Forest 83 25,487 87.5% 949 $1,112 $117.20 3,134 1434 Westchase 48 14,092 94.0% 835 $924 $110.70 562 -7535 Alief 113 27,276 84.3% 873 $775 $88.80 0 14236 Sharpstown/Westwood 105 25,194 90.6% 791 $606 $76.60 0 -8937 Gulfton/Bissonnet 58 16,901 95.1% 810 $670 $82.70 0 8038 Braeswood/Fondren SW 84 21,937 89.3% 839 $666 $79.40 0 639 Almeda/South Main 22 4,280 94.5% 848 $756 $89.20 0 2440 Fort Bend 47 12,577 89.7% 945 $1,146 $121.30 1,329 8741 Richmond/Rosenberg 28 4,536 93.7% 861 $869 $100.90 0 -5
Greater Houston 2,552 587,584 91.0% 876 $920 $105.00 24,562 3,539SOURCE Apartment Data Services, Transwestern
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 08 | THE HOuSTON METRO RETAIL MARKET 46
THE HOUSTON METRO RETAIL MARKET
SECTION EIGHT
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 08 | THE HOuSTON METRO RETAIL MARKET 47
RETAIL MARKET OVERVIEW
Retail sector thriving
Houston’s 174.8 million SF multi-tenant retail market continues to gain momentum and further growth
is anticipated in the period ahead. The region’s retail sector added 6,100 jobs over the 12 months
ending in September, a 2.2% increase. Retail employment should continue to rise as consumer
spending remains high and the regional economy flourishes.
Houston’s retail sector is supported by one of the nation’s best regional economies and high metro
area employment gains. Local job growth has led Houston to best all major metro areas except
Chicago in net absorption of retail space through the first three quarters of 2014, at 1.53 million SF.
Grocery-anchored properties and mixed-use projects continue to draw investors and drive new
retail development in Houston. In addition, there are major expansions underway at The Galleria and
Baybrook malls at a time when enclosed-mall construction is stagnant in the rest of the U.S. In fact,
Houston leads comparable metro areas with 1.03 million SF of retail space under construction.
VACANCy
Retail vacancy declines slightly
Retail vacancy is 9.7% at the third quarter of 2014, down slightly from 10.0% at year-end 2013. We
expect vacancy to remain steady or decline modestly in the period ahead as the demand increases but
construction activity ramps up. Both established Houston-area retailers and tenants new to the metro
are seeking unique, quality spaces to capitalize on the growing market.
Houston’s retail vacancy is higher than the national vacancy rate of 6.3%. However, compared to other
major metro areas, Houston’s vacancy rate falls in the middle of the pack.
RENTAL RATES
Rents on the rise
Retail rents for all classes of space increased to $17.26 per SF from $17.16 at year-end 2013, though
rents will vary greatly by a number of factors including property type and location. With occupancy
up and prime space in high demand, rents are on the rise, especially in well-located pad and end-cap
spaces. Retail rents will likely experience moderate growth through the end of 2014 and into 2015, as
consumer spending accelerates and market conditions remain strong.
NeighborhoodCenters
35% 33% 10% 10% 12%
CommunityCenters*
RegionalMalls**
Strip Centers Other
Total =174.8 Million SF
MULTI-TENANT RETAIL MARKET SCALE
RETAIL JOB GROWTH
NET ABSORPTION OF RETAIL SPACE
Source: U.S. Bureau of Labor Statistics, Delta Associates; November 2014. *12 months ending in September.
Source: Transwestern’s analysis of CoStar data; November 2014. *Includes power, lifestyle, outlet, and theme/festival centers. ** Includes regional and super regional centers.
Source: Transwestern’s analysis of CoStar data; November 2014.
HOUSTON METRO | 1997 – SEPTEMBER 2014
HOUSTON METRO – NOVEMBER 2014
SELECT METRO AREAS | JANUARY THROUGH SEPTEMBER 2014
-8-6-4-202468101214
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14*
JOBS
IN TH
OUSA
NDS
MIL
LION
S OF
SF
0
1
2
3
Chi Hou Atl DFW Phx S Fla LA Basin Bos Was SF Bay Den NY
RETAIL SPACE UNDER CONSTRUCTION
Source: Transwestern’s analysis of CoStar data; November 2014.
SELECT METRO AREAS | 3RD QUARTER 2014
MIL
LION
S OF
SF
0
1
2
Hou Chi Atl SF Bay DFW Phx Den
U/C Nationally= 53.3 Million SF
Houston leads comparable metro areas in retail space under construction.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
SECTION 08 | THE HOuSTON METRO RETAIL MARKET 48
GROSS SALES
Retail sales strong
The most recent data from the Texas Comptroller’s Office shows that gross retail sales in the Houston
metro are on pace for $124.1 billion in sales this year, compared to $116.4 billion recorded in
2013. Retail sales should continue to grow throughout the metro in the period ahead, in part due to
Houston’s growing population base and employment gains.
INVESTMENT MARKET
Transaction volume off last year’s pace
Retail investment sales activity totaled $982 million through the third quarter of 2014 for transactions
where pricing information was available. In comparison, recorded sales volume for the same time
period last year was $1.1 billion. While 2014 sales have been strong they are behind last year’s totals.
There was a high volume of sales in the latter half of 2013 as investors made a big push to close sales
before the year ended. This was due to investors wanting to avoid an increase in long-term capital
gains taxes that took effect in 2014.
RETAIL MARKET OuTLOOK
Retail sector likely to expand in 2015 as national chains seek market share in Houston
A growth cycle in the retail market should continue in the period ahead, making investment, especially
in grocery-anchored centers, very attractive. Retail and restaurant tenants are flocking to urban infill
locations as metro job growth has caused residential construction to ramp up. Neighborhoods such
as Montrose and The Heights should continue to see increased activity as investors commit capital in
high-performing areas.
Grocery chains are under construction in key locations throughout the metro, including HEB, Kroger,
Whole Foods, Trader Joe’s and Costco, further expanding their market presence. Also, fast-casual
concepts such as Mod Pizza, Torchy’s Tacos, Raising Cane’s and Chipotle are among many that are
quickly snatching up retail space. Mixed-use projects such as the River Oaks District development and
Uptown Park redevelopment are further defining the live-work-play dynamic in the Houston market.
RETAIL VACANCY RATE TRENDS
AVERAGE RETAIL RENTAL RATE
Source: Transwestern’s analysis of O’Connor & Associates data, Delta Associates; November 2014. Note: Data source has adjusted its inventory and restated its vacancy rates. *Through Q3 2014
Source: Transwestern’s analysis of O’Connor & Associates data, Delta Associates; November 2014. Note: Data source has adjusted its inventory and restated its rental rates. *Through Q3 2014
HOUSTON METRO | 2005 – Q3 2014
HOUSTON METRO | 2005 – Q3 2014
9.7%
9%10%11%12%13%14%15%16%17%
05 06 07 08 09 10 11 12 13 14*
VACA
NCY
RATE
$17.26
$16.00
$16.50
$17.00
$17.50
$18.00
$18.50
$19.00
05 06 07 08 09 10 11 12 13 14*
AVER
AGE
RENT
AL R
ATE
($ P
ER S
F)
GROSS RETAIL SALES
Source: Transwestern’s analysis of Texas Comptroller’s Office data, Delta Associates; November 2014. *First quarter 2014 annualized.
HOUSTON METRO | 2005 – 2014
$124.1
$60
$70
$80
$90
$100
$110
$120
$130
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
TOTA
L GRO
SS R
ETAI
L SAL
ES (I
N BI
LLIO
NS O
F DOL
LARS
)
The retail market growth cycle should continue in the period ahead, making investment very attractive.
SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market
CONTACT 49
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DELTA ASSOCIATES
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SECTIONS 01 Summary 02 The National Economy
03 The Houston Metro Economy
04 The Houston Metro Office Market
05 The Houston Metro Industrial Market
06 Office and Industrial Investment Trends
07 The Houston Metro Multifamily Market
08 The Houston Metro Retail Market