MARKET REPORT

OFFICE
Houston Metro Area Q2/19
Vacancy Forecast to Increase Although Demand
Appears to be Heading in Right Direction Office 2019 Outlook

Space demand on the rise; diversifying economy helping office owners. CONSTRUCTION:
Leasing activity in Houston is improving as significant vacancy jumps
Following the completion of 1.5 million
witnessed a few years ago have turned into minimal movements. A growing
square feet in 2018, developers pick up
number of white-collar positions is further diversifying the economy and
boosting demand for office space, highlighted by an abundance of STEM 2.1 MILLION SQ. FT.
will be completed
the pace this year. Construction will be
concentrated near the core and western
jobs throughout the metro as well as more startups planting roots in
parts of the market.
trendy urban neighborhoods. With the market still adjusting to improving
dynamics, rent growth has yet to reflect increased office demand. Houston’s
average asking rent will remain just below $30 per square foot; however,
outlying suburbs will continue to see strong growth rates as their rapidly
VACANCY:
expanding populations support more business relocations to these areas. Market vacancy is set to rise for the
seventh year in a row, moving up to 20.7
Office development projected to increase across the board. Office 10 BASIS POINT
increase in vacancy
percent. Last year, the reading climbed
construction is set to rise this year amid strong development surrounding 20 basis points.
the core as well as in outer-ring submarkets. The largest delivery in 2019
will be the 35-story Capitol Tower in downtown, accounting for almost
800,000 square feet. Additionally, the Woodlands and Northwest Houston
are expected to receive a few large business parks. As overall construction
RENTS:
rises this year, medical office development will also increase, comprising Rent growth will remain relatively stag-
nant, nominally declining to $28.81 per
-0.5% DECREASE
more than a quarter of completions and supporting Houston’s prominent
healthcare industry. This is headlined by several medical office parks square foot by year end. This follows a 0.2
in Sugar Land and a pair of 100,000-plus square-foot deliveries in areas in asking rents percent boost in 2018.
relatively closer to the city center.

Investment Trends
• As one of Houston’s primary business districts, Greater Greenspoint
Local Office Yield Trends continues to attract a wide range of investors. In-state and out-of-
h state institutional buyers remain the primary players as price tags
12.0% exceed $10 million for numerous assets. This area remains on its
improving path as investors make space and operational upgrades,
10.5% further stabilizing these properties.
Average Rate

• Neighborhoods surrounding downtown Houston provided buyers

9.0%
with plenty of value-add options, enticing those seeking to bolster the
area’s live-work-play dynamic. With innovative office spaces having
7.5%
a big impact on younger generations, revamping these buildings can
6.0%
help attract talent, potentially decreasing vacancy rates and improving
* 01 03 05 07 09 11 13 15 17 19* property performance.

• Assets along western side of the Beltway were highly sought after by pri-
vate investors. With many employers seeking proximity to some of the
Sales Trends
metro’s fastest-growing suburbs, space demand throughout this stretch
Sales Price Growth
stays relatively strong.
* Cap rates trailing 12 months through 1Q19
er Square Feet

Sources: CoStar$240
Group, Inc.; Real Capital Analytics 30%
Year-over-Y

$180 15%
 Employment Trends
1Q19 – 12-Month Trend
Local Office Yield Trends
Employment Growth Office-Using Emp. Growth EMPLOYMENT
12% 12.0% 2.5% increase in total employment Y-O-Y
Year-over-Year Change

6% 10.5% • Employment growth picked up over the past 12 months

as Houston organizations added 77,000 new workers. The

Average Rate
0% 9.0% manufacturing and professional and business services segments
each staffed more than 17,000 employees.
-6% 7.5%
• Accelerated hiring activity depressed the market unemployment
rate 50 basis points to 4.1 percent on an annual basis.
-12% 6.0%
09 10 11 12 13 14 15 16 17 18 19* 01 03 05 07 09 11 13 15 17 19*

Office Supply and Demand Sales Trends

Completions Absorption Sales CONSTRUCTION
Price Growth
15
Average Price per Square Feet 1.5 million
$240 30%
square feet completed Y-O-Y

Year-over-Year Growth
Square Feet (millions)

10
$180 • After approximately 2.4 million square feet
15% was completed
during the prior period, construction dropped considerably. The
5
$120 Woodlands claimed more than half of the 0%metro’s total over the

past year.
0 $60 -15%
• Nearly 1.8 million square feet is underway, spearheaded by the
-5 $0
Capitol Tower in downtown Houston, which -30%
includes almost
09 10 11 12 13 14 15 16 17 18 19* 09800,000
10 11 square
12 13 feet
14 of15office
16 space.
17 18 19**

Vacancy Rate Trends

Metro United States VACANCY
24%
10 basis point decrease in vacancy Y-O-Y
18% • Market vacancy decreased 10 basis points in the past year to 20.7
Vacancy Rate

percent. Availability among all asset classes declined marginally

12%
during that time.

6% • Availability in the CBD continues to rise as the area’s vacancy

rate now sits at 23.2 percent. Conversely, suburban vacancy
0% dropped for the second consecutive quarter, falling 40 basis
09 10 11 12 13 14 15 16 17 18 19* points to 20.1 percent since last March.

Asking Rent Trends

Metro United States RENTS:
14%
0.8% increase in the average asking rent Y-O-Y
Year-over-Year Change

7% • The average asking rent rose nominally to $29.09 per square foot on
an annual basis. The measure has stayed virtually unchanged for the
0% past three years.

-7%
• Houston’s southern submarkets recorded some of the strongest
rental growth rates, led by Southeast and Southwest Outlier as well as
-14%
Gulf Freeway/Pasadena.
09 10 11 12 13 14 15 16 17 18 19*

* Forecast
Source: CoStar Group, Inc.
Demographic Highlights

2019 Forecast Job growth Population Age 20-34* Sq. Ft. Per Office Worker*

Metro 3.2% Metro 21.5% Metro 326

U.S. Average 1.3% U.S. Average 20.6% U.S. Average 215

Office Square footage*

20.2% Urban

2019 Office-Using Job growth Population of Age 25+ U.S. Average 32.0%

Percent with Bachelor Degree+**

Metro 4.0% 79.8% Suburban
U.S. Average 1.7% Metro 30.8% U.S. Average 68.0%

U.S. Average 29.9% *1Q19

**2018

SUBMARKET TRENDS SALES TRENDS

Investors Still Targeting Value-Add,
Lowest Vacancy Rates 1Q19*
Employment Trends Boosting Deal Flow inOffice
Local the Process
Yield Trends
Employment Growth Office-Using Emp. Growth • The strong pursuit of value-add assets increased trading activity 22
Y-O-Y Average
12% Vacancy Y-O-Y % percent year
12.0% over year; however, sales volume dropped nearly 40
Submarket Basis Point Asking
Rate Change
Change Rent percent during that span.
Year-over-Year Change

6% 10.5%
• With investor demand remaining steady throughout Southeast Texas,
Baytown 5.8% -20 $17.76 -17.5%
Average Rate

Houston’s average cap rate dipped 10 basis points since last March to
0% 9.0%
South Main-Medical Center 5.8% 40 $26.58 -6.5% 6.7 percent. Additionally, the average price per square foot increase
almost 7.0 percent to $198.
-6% 7.5%
Southeast Outlier 9.0% -450 $20.68 4.7%
Outlook: While buyers are eager to enter the market, some investors will
-12% remain on the
6.0%sidelines until the right deal is found, looking to capitalize
Richmond-Fountainview 09 10 9.7%
11 12 -50
13 14 $17.49
15 16 17 1.8%
18 19*
on the high upside many
01 Houston
03 05 office
07 09properties
11 13 obtain.
15 17 19*

Northeast Near 10.4% -140 $17.77 -4.6%

Office Supply and Demand Sales Trends

Woodlands 10.5% 20 $31.43 3.7%
Completions Absorption Sales Price Growth

Gulf Freeway-Pasadena 15 12.1% -210 $22.09 5.5%

Average Price per Square Feet

$240 30%
Year-over-Year Growth
Square Feet (millions)

Kingwood-Humble 10 12.2% 40 $24.52 4.2%

$180 15%

Conroe 5 12.7% -230 $23.57 -1.1%

$120 0%

E Fort Bend Co-Sugar Land

0 14.3% -60 $28.07 1.4%
$60 -15%

Overall Metro 20.7% -10 $29.09 0.8%

-5 $0 -30%
09 10 11 12 13 14 15 16 17 18 19* 09 10 11 12 13 14 15 16 17 18 19**

* Includes submarkets with more than 100,000 square feet of inventory ** Trailing 12 months through 1Q19 over previous time period
Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics
Vacancy Rate Trends
Metro United States
 1Q19* Office Acquisitions CAPITAL MARKETS
By Buyer Type
Cross-Border, By DAVID G. SHILLINGTON, President,
11.6%
Marcus & Millichap Capital Corporation
Other, 6.0%
Equity Fund • Ongoing trade concerns weigh on growth outlook; Fed plots next
& Institutions, 32.9% steps. Amid rising trade tensions between the U.S. and China and
slowing global growth, the outlook has turned more cautious. Mar-
ket volatility, along with a flight to safety trade, has flattened the
yield curve dramatically, with the 10-Year Treasury trading below
Private, 45.1%
Listed/REITs, 4.4% 2.2 percent. This has pushed the broader yield curve into inversion,
a closely watched precursor to a potential recession. Meanwhile,
many measures of the domestic economy remain buoyant, includ-
Office Mortgage Originations ing continued job and wage growth, historically low unemployment
By Lender and muted inflationary pressure. These conditions have prompted
a dichotomy, with Federal Reserve officials signaling more accom-
100%
modative policies. The impending end of quantitative tightening in
Percent of Dollar Volume

September, coupled with potential cuts to the Fed funds rate in the
75% Nat'l Bank/Int'l Bank
Reg'l/Local Bank second half of the year, highlight the shift in Fed policy. As a result,
50% CMBS long-term interest rates are likely to remain subdued, with Fed
Financial/Insurance policy leaning toward accommodation.
Pvt/Other
25%

• Conservative underwriting balances abundant marketplace

0% liquidity. While debt availability for office assets remains widely
14 15 16 17 18
available from a wide range of sources including local, regional and
* Trailing 12 months through 1Q19
national banks and insurance companies, sentiment surrounding
Include sales $2.5 million and greater the health of the economy has fallen somewhat in recent months.
Sources: CoStar Group, Inc.; Real Capital Analytics Lenders remain broadly cautious in underwriting, with loan-to-
value (LTV) ratios typically in the 55 to 70 percent range, depend-
ing on the borrower, asset and location. The conservative approach
National Office and Industrial Group
has filtered into a focus on proven property results, with much less
willingness to lend against pro forma rents. This has prompted
Alan L. Pontius
Senior Vice President, National Director | National Office and Industrial Group
investors to turn toward short-term mezzanine debt and bridge
Tel: (415) 963-3000 | al.pontius@marcusmillichap.com loans to cover capital improvements, while seeking long-term
solutions once returns have been solidified. Construction origina-
Prepared and edited by tion remains muted, with lenders focusing on core locations with
Brandon Niesen
proven demand.
Research Associate | Research Services

For information on national office trends, contact:

John Chang Houston Office: Memphis Office:
Senior Vice President, National Director | Research Services
Ford Noe Regional Manager Jody McKibben Vic
Tel: (602) 707-9700 | john.chang@marcusmillichap.com Three Riverway, Suite 800 5100 Poplar Avenue, Suite
Houston, TX 77056 Memphis, TN 38137
Price: $250 (713) 452-4200 | ford.noe@marcusmillichap.com (615) 997-2860 | jody.mcki

© Marcus & Millichap 2019 | www.MarcusMillichap.com

Indianapolis Office: Miami Office:

Josh Caruana Vice President/Regional Manager Scott Lunine Vice Pre

600 E. 96th Street, Suite 500 5201 Blue Lagoon Drive, Su
Indianapolis, IN 46240 Miami, FL 33126
(317) 218-5300 | josh.caruana@marcusmillichap.com (786) 522-7000 | scott.luni
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee,
express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated based on the last month of the quarter/year. Sales data
includes transactions valued at $1,000,000 and greater unless otherwise noted. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide
specific investment advice and should not be considered as investment advice.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; Moody’s Analytics; Real Capital Analytics; TWR/Dodge Pipeline; U.S. Census Bureau
Milwaukee Office:
Kansas City Office:
Todd Lindblom Reg
Richard Matricaria Sr. Vice President/Division Manager 13890 Bishops Drive, Suite