MARKETBEAT SERIES YEAR-END 2006
HOUSTON,TX
Research CUSHMAN & WAKEFIELD OF TEXAS, INC. 1330 Post Oak Boulevard, Suite 2700 Houston,TX 77056-3054 713-877-1700
TA B L E O F C O N T E N T S 2
Area Map
3
Office Market Overview
Bruce E. Mosler President and CEO
6
Office Submarket Review
Tony Marano CEO, Americas
9
Office Market Highlights
Scott Wegmann Executive Vice President
10
Office Market Statistics
Tim D. Relyea Vice Chairman
11
Industrial Market Overview
Maria T. Sicola Executive Managing Director
14
Industrial Submarket Review
Cynthia G. Jeter Managing Director
16
Industrial Market Highlights
Robert C. Hoefer Senior Associate
17
Industrial Market Statistics
18
Multi-Family Market Overview
20
Glossary/Major Market Definitions
RESEARCH/MARKETBEAT The award-winning MarketBeat Series profiles real estate conditions in strategic markets throughout the world. Cushman & Wakefield Research offers diverse products and services including real estate forecasts, market and submarket studies, retail research, demographic and economic trend analyses, and peer group studies. For more information on Cushman & Wakefield and our publications and services, refer to our website. http://www.cushmanwakefield.com
AWARD RECIPIENTS 2000, 2001, 2002, 2003, 2005, 2006
AWARD RECIPIENTS 1999, 2001, 2002
Houston,TX MarketBeat Series $325.00 Report prepared by Cushman & Wakefield, Inc. January 2007 Copyright © 2007 Cushman & Wakefield, Inc. All rights reserved. The data compiled in the Houston,TX MarketBeat Series is the legal property of Cushman & Wakefield, Inc. Reproduction or dissemination of the information contained herein is strictly prohibited without the expressed written consent of Cushman & Wakefield, Inc.This report contains information, including information available to the public, which has been relied upon by Cushman & Wakefield, Inc. on the assumption that it is accurate and complete without independent verification by Cushman & Wakefield, Inc. Cushman & Wakefield, Inc. accepts no responsibility if this should prove to be inaccurate or incomplete. No warranty or representation, express or implied, is made by Cushman & Wakefield, Inc. as to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions and changes in market conditions.
H O U S TO N A R E A M A P 90
Rayburn
Willis
L. Conroe
Navasota
North Cleveland
105
Panorama Village
Washington
Votaw
787
Cleveland
Conroe
146
Fostoria
LIBERTY
Todd Mission
Batson
Splendora
MONTGOMERY Magnolia
Hempstead
Oak Ridge North
Waller
6
159
S
Bellville
Peters
4 San Felipe
HARRIS
6
Katy
Sealy 10
5 Meadows Sugar Land Richmond
59
Rosenberg
146
Old River-Winfree Mont Belvieu
610
Channelview Galena Park 225
8
35
45 S Sam Houston Tollway E
Cove
10
Anahuac
Baytown CHAMBERS
Deer Park
Missouri City
5
La Porte
3
Pearland
6
4
Friendswood
Double Bayou
Seabrook League City
FORT BEND Pleak
45
Manvel Hungerford
90
90
288
Kendleton
Crosby
Pasadena
Wallis
59
2
Bellaire
Fulshear
36
Aldine
Houston 3 2 1
10
2100
59
oll Hardy T
9
Jersey Village
Devers
Humble
6
45
Dayton
0
196 FM-
60
290
WALLER
Kingwood
19
FM
Hardin
Liberty
1
249
90
321
Roman Forest
Tomball
Pine Island
36
Trinity R.
The Woodlands
6
Plum Grove
Woodbranch
7
Dickinson
Alvin
Needville
Texas City La Marque
BRAZORIA Bonney
Wharton
87
Liverpool
GALVESTON
Galveston
60
Danbury H lid
L k
OFFICE SUBMARKETS
INDUSTRIAL SUBMARKETS
1
Central Business District
6
North Belt
1
North
2
Richmond/Buffalo Speedway
7
Woodlands/Conroe
2
3
West Loop/Galleria
8
SW Houston/Fort Bend Co.
3
4
Katy Freeway
9
Northwest
5
Westheimer/Gessner
2
C U S H M A N & WA K E F I E L D M A R K E T B E AT Y E A R - E N D 2 0 0 6
4
South
Northeast
5
Southwest
Southeast
6
Northwest
O F F I C E M A R K E T OV E RV I E W T H E H O U S TO N E C O N O M Y The Houston economy continued its steady improvement throughout 2006, with the energy industry being a major stimulus for growth. Energy-related businesses, such as oil field and equipment services and engineering firms, also benefited from the record-earnings year reported by energy companies.The expansion of energy-related companies, followed by the financial industry, dominated the major leases and growth in the Houston office market in 2006. National economic indicators also reported 43 consecutive months of growth in the U.S. Purchasing Manager’s Index (PMI) recording 51.2% in October of 2006, although this steady trend was broken in November with a PMI of 49.5%.The International Monetary Fund released the projected U.S. Gross Domestic Product (GDP) results for 2006 at 3.4%, an increase from 2005’s 3.2%.The IMF is forecasting a slower growth rate for 2007, predicting a 2.9% increase. Texas employment growth of 2.1% outpaced the U.S. average of 1.3% in the 12-month period ending November of 2006. Job growth in Houston posted a 3.1% rise from November 2005 to November 2006. Houston’s employment growth was highest in the state for this period, with Austin second among Texas’ major cities at 2.8%. Natural resources, mining and construction experienced the highest sector increase over November 2005 job figures, increasing by 6.8% through November of 2006.This was followed by professional and business services, which increased by 5.9% since November of 2005. Houston’s unemployment rate has remained significantly higher than the national level for several years, but has generally declined steadily in 2006.The Houston unemployment rate was 4.5% in November, compared to Texas at 4.6%, and the national rate of 4.3%.
(psf/yr)
Citywide Overall Rental vs.Vacancy Rates $25.00
25.0%
$20.00
20.0%
$15.00
15.0%
$10.00
10.0%
$5.00
5.0%
$0.00
1998
1999
Class A Rent
2000
2001
2002
Class B Rent
2003
2004
Vacancy Rate
2005
2006
0.0%
Although the Houston economy has become diverse compared to the early 80s, the energy sector was once again the primary driver for expansion in 2006. A light hurricane season also assisted in increased energy production with little interruption in the Gulf of Mexico. Unlike last year’s supply production interrupted by hurricanes Katrina and Rita, this year’s production has had soaring rig counts with the late-December count at 1,723 – up considerably from the 1,471 at year-end 2005. While hurricanes Katrina and Rita were pivotal events for Houston’s economy in 2005, the energy industry was the major catalyst in 2006. Conflict in the Middle East and production disruption in Alaska surfaced during the traditional period of high demand in the summer months, causing record high fuel and energy prices. Early forecasts of continued high prices and even possible increases impacted the U.S. economy and almost every industry. Real estate felt the impact as landlords experienced rising energy costs and passed the expense on to tenants.This also resulted in an increase in transactions as companies tried to negotiate and lock in current rental rates before prices increased. The Federal Reserve interest rate was finally stabilized at 5.25% in second quarter of 2006, after continual increases since second quarter of 2004, where rates were at a 46-year low of 1.0%.This impacted the real estate industry, especially that of the housing market.The housing industry in Houston continued to perform well with as many as 50,000 single-family housing starts, compared to a significant downturn in the U.S. housing market. Although a mild housing downturn in the Houston market is likely in 2007, it should not be as severe as that seen across the nation. Capital markets reported the highest levels of sales on a price per square foot basis in Houston history during 2006, forecasted to continue to increase in 2007. Investors from all over the country invested or entered into the Houston market in 2006, as opportunities in the east and west coasts began to tighten.The largest deals were pension funds seeking to invest in Houston’s stable and growing real estate market. Houston is expected to continue to experience growth in 2007. Growth may slow slightly, but Texas and Houston will still perform above the national average in several industries and attract investors and companies as U.S. coastal markets continue to slow and post decreases in several key economic indicators.The energy industry and energy-related support industries will continue to drive the Houston economy and stimulate business expansion and consumer spending.
H O U S TO N , T X
3
O F F I C E M A R K E T OV E RV I E W
The Houston office market experienced one of its strongest performing years in the last decade with class A space posting dramatic decreases in vacancy in four key submarkets.The Central Business District (CBD), the Katy Freeway (also known as the Energy Corridor), the West Loop/Galleria and the North Belt – all primarily with energy-related tenant transactions – posted limited availability by year-end 2006.The CBD posted the lowest overall class A vacancy rate in five years at 9.0%, while the Katy Freeway submarket ended 2006 at 6.3%, the North Belt at 1.4%, and the West Loop/Galleria at 12.2% vacancy in class A space. Leasing activity increased in 2006, recording a total of 19.9 million square feet (msf) of space leased, up from 2005’s 14.2 msf. Due to the increase in activity, vacancy also decreased in 2006, posting 14.7% across all classes compared to the 18.4% overall vacancy rate at year-end 2005. Class A overall vacancy dropped to 9.2%, the lowest since 2001. New construction was very active in 2006, with speculative space accounting for the majority of the 1.7 msf constructed.The Katy Freeway submarket experienced a flourish of activity from several energy-related companies such as Shell and British Petroleum.This activity contributed to the more than 1.0 msf constructed in this submarket during 2006, with an additional 930,733 square feet (sf) under construction. Investor sales activity slowed in 2006, with 8.7 msf exchanging hands compared to the 19.8 msf in 2005.This was attributed largely to the lack of available product.The Houston market has experienced new investors creating a large demand, leaving few buildings available to acquire. As this trend continues, construction will increase as investors seek opportunities in the Houston real estate market. Some 2006 forecasts anticipated growth to be stronger in the industrial markets than in office markets, but with the majority of job growth centered in the energy-related industries, steady growth is expected to continue. As companies are expanding energy-related support personnel, they are finding Houston to be an attractive location with housing and living costs well below the national average.
decreased and space tightened in all classes in the CBD, and this has driven overall rental rates in the CBD to $25.09 per square foot (psf) in class A space, compared to $20.43 psf at year-end 2005. Across all classes, rates rose to $20.75 psf, compared to $19.09 psf at year-end 2005. The overall vacancy rate in the CBD dropped to 13.3% by year-end 2006 from 21.8% at the end of 2005 – at that time one of the highest CBD vacancy rates in the nation. Class A vacancy fell dramatically to 9.0%, well below the 20.2% at year-end 2005. Significantly, sublease vacancy in the CBD dropped from more than 483,000 sf across all classes at year-end 2005 to almost 117,000 sf by the close of 2006. The CBD submarket experienced the greatest amount of leasing activity since Cushman & Wakefield began tracking data in 1988, with 5.4 msf leased.This reflected almost twice the leasing activity of 2005. Class A space accounted for 84.6% of the leased square footage, with 4.6 msf leased by year-end 2006. Energy-related companies led the CBD for the largest leases in 2006, with financial institutions at a close second. The Houston CBD remained the location of choice for many large energy companies, law firms, and accounting firms.The revitalization of several projects in the downtown area and the addition of the commuter rail have focused attention on not only traditional office space but on entertainment and residential developments as well. Large leases in 2006 included Chevron USA at 1400 Smith (1.3 msf) and at 1600 Smith (445,939 sf), EOG Resources at 1111 Bagby (224,000 sf), and JP Morgan Chase at 600 Travis (148,179 sf).
Overall Rental Rates vs. Vacancy Rates Central Business District Overall Rental vs.Vacancy Rates
(psf/yr)
H O U S TO N O F F I C E M A R K E T
C E N T R A L BU S I N E S S D I S T R I C T The Houston CBD has experienced one of its greatest comebacks in 2006, after suffering large blocks of space that were difficult to fill after a slowing economy, 9/11, and the Enron debacle.Vacancy
4
C U S H M A N & WA K E F I E L D M A R K E T B E AT Y E A R - E N D 2 0 0 6
$25.00
25.0%
$20.00
20.0%
$15.00
15.0%
$10.00
10.0%
$5.00
5.0%
$0.00
2004 Rental Rate
2005
2006
Vacancy Rate
2007
2008
0.0%
O F F I C E M A R K E T OV E RV I E W Overall absorption reflected the strong growth in the CBD, recording 2.8 msf of positive absorption in total by year-end. Class A space dominated the absorption total, posting 2.7 msf of positive absorption, the largest amount documented by Cushman & Wakefield historically.
(psf/yr)
Investor sales slowed in 2006 in Houston’s CBD, with only two major transactions recorded at year-end. Brookfield Properties closed on 1400 Smith (the former Enron building), a 1.3-msf class A property.The sale was accompanied by the announcement that Chevron USA had leased the entire building.The other major class A transaction that occurred in 2006 was the purchase of 5 Houston Center (580,875 sf) by Wells Real Estate Investment Trust.
Non-Central Business Overall Rental vs. VacancyDistrict Rates Overall Rental vs.Vacancy Rates $20.00
25.0%
$16.00
20.0%
$12.00
15.0%
$8.00
10.0%
$4.00
5.0%
$0.00
The CBD office market has experienced a record setting year in 2006 and may slow by comparison in 2007, but that will primarily be attributed to the lack of available space and product. Companies and investors are anxious to tap into the Houston market; the challenge in 2007 will be finding the opportunities to do so.The dramatic tightening of this submarket could spur new class A construction within the next two years, but finding suitable sites near the CBD core with tunnel connections could limit this possibility.
S U BU R B A N M A R K E T Houston’s non-CBD/suburban market experienced growth in 2006 as well, with non-CBD class A office space vacancy falling to levels not seen since 1998, at 9.3% overall by year-end 2006. Due to the expansion experienced in Houston in 2006, several submarkets had limited class A space available by year-end. Overall vacancy in class A space was lowest in the Montrose submarket (6.9%), the Westheimer/ Gessner submarket (5.4%), the Katy Freeway submarket (6.3%), the North Belt submarket (1.4%), and the Woodlands/Conroe submarket (4.1%). Additionally, Houston’s largest submarket outside the CBD, the West Loop/Galleria, saw a 7.2 percentage point drop in class A vacancy to 12.2% by year-end 2006, compared to 19.4% at year-end 2005. The lower vacancy posted in every office class in several suburban submarkets was further proof of the diversity of the Houston market and economy. Major oil and gas companies such as ExxonMobil, British Petroleum, ConocoPhillips, Shell Oil, and Citgo established the Katy Freeway submarket as an area that will continue to grow. Several energy and energy-related support companies announced expansions and sparked new construction in this submarket in 2006, with this activity continuing into 2007.
2004 Rental Rate
2005
2006
2007
2008
0.0%
Vacancy Rate
Overall absorption in the non-CBD submarkets totaled 3.2 msf, to end 2006 up slightly from 3.1 msf in 2005.The lowest absorption was reported by the NASA/Clear Lake submarket (negative 206,374 sf). In contrast, the Katy Freeway submarket posted significant positive absorption with 987,563 sf by year-end 2006. Other strong submarkets in 2006 were the Westheimer/Gessner (908,799 sf), West Loop/Galleria (854,112 sf), and North Belt (332,032 sf) submarkets. Across all classes, overall rental rates increased in 2006 to $17.48 psf, up from $16.74 psf at year-end 2005. Class A space in the suburbs posted $22.46 psf by the end of 2006, up from $20.47 psf at yearend 2005. New construction in suburban submarkets continued to gain momentum in 2006.The 838,298 sf of projects completed in 2005 was the most activity since 2002, but was considerably lower than the 1.7 msf completed in 2006.The largest completion in 2006 was the 300,000-sf building at Enclave Parkway in the Katy Freeway submarket. In total, the Katy Freeway submarket accounted for 1.0 msf (approximately 59.0%) of the total new construction in nonCBD submarkets, with an additional 930,733 sf under construction. The suburban market has experienced a strong year in 2006, and the pace doesn’t appear to be cooling going into first quarter 2007. The largest challenge for the growing non-CBD market will be the lack of large blocks of available class A space in the tight submarkets, and locating alternative class B and C space for those energy-related support companies that need to be near large energy companies in a particular submarket.
H O U S TO N , T X
5
OFFICE SUBMARKET REVIEW C E N T R A L BU S I N E S S D I S T R I C T • Overall vacancy dropped to 13.3% by year-end 2006, down from 21.8% at year-end 2005. Class A space decreased dramatically, dropping from 20.2% at year-end 2005 to 9.0% at year-end 2006.The significant decrease was primarily attributed to leases executed by Chevron USA at 1600 Smith (445,939 sf) and at the former Enron building at 1400 Smith (the entire building of 1.3 msf). (psf/yr)
• Rental rates closed the year at $20.75 psf overall, up from $19.09 psf at year-end 2005. Class A rates posted the largest increase at $25.09 psf for year-end 2006, up from $20.43 psf at year-end 2005.
Overall Rental vs. Vacancy Rates
• Overall absorption was heavily affected by the large spaces leased by Chevron in 2006.The CBD recorded its largest gain on record with 2.8 msf of positive absorption for 2006, significantly higher than the 728,769 sf in 2005.
$27.50
25.0%
$22.00
20.0%
$16.50
15.0%
$11.00
10.0%
$5.50
5.0%
$0.00
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1999
Class A Rent
2000
2001
Class B Rent
2002
2003
2004
2005
2006
0.0%
Vacancy Rate
R I C H M O N D / BU F FA L O S P E E DWAY • The Richmond/Buffalo Speedway submarket direct vacancy had remained below 10.0% in class A space dating back to first quarter 1992, but after second quarter 2005 it increased to as high as 24.0% by year-end 2005.This vacancy increase was largely attributed to El Paso Energy leaving Greenway Plaza and relocating in the CBD. Class A space recovered dramatically in 2006, however, ending the year with a 13.3% direct vacancy rate. (psf/yr)
• Overall absorption in this submarket ended 2006 with a positive 276,533 sf across all classes.The dramatic improvement from the 297,618 sf of negative absorption recorded in 2005 provided evidence of the strong recovery of this submarket.
Overall Rental vs. Vacancy Rates
• Overall rental rates were indicative of the improvement in this submarket. Class A ended 2006 at $20.29 psf and class B at $19.05 psf, up from $20.24 psf and $18.74 psf at year-end 2005, respectively.
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$15.00
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$10.00
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2003
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WEST LOOP/GALLERIA • With 23.5 msf of inventory, the West Loop/Galleria is the second largest submarket in Houston after the CBD.The area has several amenities such as shopping, premium hotels, and entertainment that significantly impact this submarket’s vitality. Enhancements to mobility as road construction projects were completed this year should contribute to this submarket’s success in 2007.
• Vacancy overall continued to decline in this submarket, dropping to 13.9% across all classes by year-end 2006, down from 17.7% at yearend 2005.This submarket has recorded steady vacancy decreases since its record high vacancy rate of 24.7% in second quarter of 2004.
(psf/yr)
• Overall rental rates in class A space climbed to $22.42 psf by year-end 2006, up from $19.95 psf at year-end 2005. Class A rates have almost reached the average suburban class A rate of $22.46 psf after languishing for several years.
Overall Rental vs. Vacancy Rates $25.00
25.0%
$20.00
20.0%
$15.00
15.0%
$10.00
10.0%
$5.00
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$0.00
1998
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Class A Rent
6
C U S H M A N & WA K E F I E L D M A R K E T B E AT Y E A R - E N D 2 0 0 6
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2001
Class B Rent
2002
2003
2004
Vacancy Rate
2005
2006
0.0%
OFFICE SUBMARKET REVIEW K AT Y F R E E WAY • The Katy Freeway submarket continued to attract energy and energyrelated companies. Overall vacancy across all classes dropped to 10.2% and class A space was at 6.3% vacant by year-end 2006. Sublease space was almost non-existent with only a 0.1% vacancy rate across all classes.
$30.00
25.0%
$24.00
20.0%
• Overall rental rates continued to climb in this submarket, ending 2006 at $19.08 psf across all classes and at $25.37 psf for class A space.This was one of the highest class A rates in the city.
$18.00
15.0%
$12.00
10.0%
$6.00
5.0%
(psf/yr)
• New construction was very active in this submarket for 2006 with 1.0 msf of projects completed by year-end.All but a 300,000-sf project by the Sysco Corporation were speculative projects anticipating further growth and expansion by the energy sector.Almost all newly completed speculative projects were pre-leased to some extent, with a vacancy rate of 46.0%.
Overall Rental vs. Vacancy Rates
$0.00
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2000
2001
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2003
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2005
2006
0.0%
Vacancy Rate
WESTHEIMER/GESSNER • This submarket is the third largest of the non-CBD submarkets. This area includes the Westchase District, which has a very active management district and several economic and tax-oriented programs to stimulate business growth and development.
(psf/yr)
• Overall rental rates for class A space in this submarket ended 2006 at $26.12 psf, comparable to other premier submarkets, including the CBD ($25.09 psf).The overall vacancy in this submarket was at 11.6% at year-end 2006, down from 16.3% at year-end 2005. Class A space posted a 5.4% vacancy rate by year-end 2006, down from 10.8% at year-end 2005.
Overall Rental vs. Vacancy Rates
• Overall absorption was very strong, ending 2006 with 908,799 sf of positive absorption – a 40% increase over the total in 2005.This was one of the highest totals outside the CBD in 2006.
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$12.00
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1998
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N O RT H B E LT • The North Belt submarket is home to George Bush Intercontinental Airport and Greenspoint, one of the most concentrated areas of office space in Houston.This area has an aggressive management district, a Tax Increment Reinvestment Zone (TIRZ), and several other entities that assist in stimulating business development and growth in the area.
$25.00
25.0%
$20.00
20.0%
• The overall vacancy in this submarket was one of the lowest in the city at 13.0% across all classes and at 1.4% for class A at year-end 2006. Class B space in this submarket was also very strong, posting a 12.2% overall vacancy rate, one of the lowest in the city.
$15.00
15.0%
$10.00
10.0%
$5.00
5.0%
• Overall rental rates in this area remained competitive city-wide, ending 2006 at $15.07 psf, compared to $15.05 psf at year-end 2005. Class A rates increased to $21.89 psf at year-end 2006, compared to $20.45 psf at year-end 2005.
(psf/yr)
Overall Rental vs. Vacancy Rates
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2006
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H O U S TO N , T X
7
OFFICE SUBMARKET REVIEW WO O D L A N D S / C O N RO E Overall Rental vs. Vacancy Rates
• In 2006, the completion of 21 Waterway added 73,440 sf of new office space to this submarket, which quickly reached almost full occupancy during the year. Another 268,000 sf will be completed at 24 Waterway by 2008. Both buildings were developed by The Woodlands Development Company.
(psf/yr)
• Situated primarily in Montgomery County north of Houston, the Woodlands/Conroe submarket commanded some of the highest class A rental rates citywide, ending 2006 at $26.28 psf.This submarket has remained consistently one of Houston’s more aggressive office submarkets for recruiting new companies.
• Overall absorption in class A space totaled 67,016 sf in 2006, despite virtually no class A space available to absorb.The overall vacancy rate for class A space has dropped to 4.1%, essentially leaving few options for high-end users looking for space in this submarket.
$30.00
30.0%
$24.00
24.0%
$18.00
18.0%
$12.00
12.0%
$6.00
6.0%
$0.00
1998
1999
Class A Rent
2000
2001
Class B Rent
2002
2003
2004
2005
2006
0.0%
Vacancy Rate
S W H O U S TO N / F O RT B E N D C O U N T Y Overall Rental vs. Vacancy Rates
• With an overall class A vacancy rate of 11.8% at year-end 2006, this submarket had one project of 153,000 sf under construction at yearend, with approximately 718,000 sf proposed for delivery by late 2007 and early 2008.
• This submarket encompasses portions of Fort Bend County, an area noted for residential, retail, and business growth for well over a decade.
(psf/yr)
• Overall rental rates in this submarket across all classes rose to $16.66 psf, primarily due to rising class B rates, which have reached $20.10 psf.
• Overall absorption totaled 113,867 sf across all classes, with class B recording 145,671 sf of positive absorption for the year. Class C properties lost ground with a negative 53,092 sf of overall absorption for the year.
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N O RT H W E S T Overall Rental vs. Vacancy Rates
• With less than 1.0 msf of class A space in total, the year-end 2006 class A overall vacancy reached 22.3%, an improvement over the 35.9% at year-end 2004 and the 27.8% at year-end 2005. Class B overall vacancy at year-end 2006 was 20.4% and class C was 25.4%. • At year-end 2006, the first new construction for several years was underway with an expected completion in mid to late 2007 of 159,000 sf.
(psf/yr)
• Although one of Houston’s mid-sized submarkets with 7.1 msf of office inventory, this area offers the attraction of a mid- to near-center location, with rental rates comparable to those of submarkets farther from the core of Houston. Composed primarily of class B space (63.9%), rental rates across all classes averaged $15.94 psf at year-end 2006, with class B rates of $16.53 psf and class A rates of $19.00 psf.
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2005
2006
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OFFICE MARKET HIGHLIGHTS SIGNIFICANT 2006 NEW LEASE TRANSACTIONS Building 1400 Smith Heritage Plaza 7909 Parkwood Circle Intellicenter
Submarket Central Business District Central Business District SW Houston/Fort Bend Co. Katy Freeway
Tenant Chevron USA EOG Resources National Oil Well Varco LP St. Paul Travelers
Square Feet 1,258,867 224,000 197,484 150,063
Building Class A A B A
Buyer Square Feet Brookfield Properties 1,258,867 Strategic Real Estate Advisors 955,406 Wells Real Estate Investment Trust II, Inc. 580,875 Equastone 280,435
Purchase Price Undisclosed Undisclosed $166,000,000 Undisclosed
SIGNIFICANT 2006 SALE TRANSACTIONS Building 1400 Smith Three & Four WestLake Park 5 Houston Center 11757 Katy Freeway
Submarket Central Business District Katy Freeway Central Business District Katy Freeway
SIGNIFICANT 2006 CONSTRUCTION COMPLETIONS Building Sysco BTS/Enclave Parkway 17404 Katy Freeway Oak Park Office Center II Offices at Park Ten, Phase II
Submarket Katy Freeway Katy Freeway Westheimer/Gessner Katy Freeway
Major Tenant Sysco Corporation Mustang Engineering Men’s Wearhouse N/A
Square Feet 300,000 250,000 206,362 156,468
Completion Date 10/06 12/06 7/06 12/06
Square Feet 330,397 318,557 268,263 174,471
Completion Date 1/08 4/08 1/08 8/07
Building Class A A A A
Possession Date 1/08 Immediate Immediate 1/08
SIGNIFICANT PROJECTS UNDER CONSTRUCTION Building Energy Center Granite Westchase II 24 Waterway 17000 Katy Freeway
Submarket Katy Freeway Westheimer/Gessner Woodlands/Conroe Katy Freeway
Major Tenant N/A Petrobras America, Inc. N/A N/A
SIGNIFICANT LEASE AVAILABILITIES Building Energy Center Fulbright Tower Nine Greenway Plaza 24 Waterway
Submarket Katy Freeway Central Business District Richmond/Buffalo Speedway Woodlands/Conroe
Direct/ Sublease Direct Direct Direct Direct
Available Square Feet 330,397 323,656 320,147 268,263
H O U S TO N , T X
9
O F F I C E M A R K E T S TAT I S T I C S Market/ Submarket CBD Total
Overall Direct No. of Vacancy Vacancy Inventory Bldgs. Rate Rate
YTD YTD YTD YTD Direct Wtd. Leasing Under Construction Direct Overall Avg. Class A Activity Construction Completions Absorption Absorption Rental Rate*
36,161,292
60
13.3%
13.0%
5,391,651
0
0
2,412,708
2,775,157
$25.26
South Main
2,467,315
22
22.8%
22.8%
137,606
0
0
(133,830)
(129,380)
N/A
Richmond/Buffalo Speedway
9,638,207
55
17.7%
16.8%
1,399,923
0
0
319,426
276,533
$20.29
Montrose
3,157,091
22
9.0%
7.4%
267,782
0
0
44,098
39,680
$28.00
23,508,850
106
13.9%
13.0%
2,698,431
0
0
878,541
854,112
$22.85
SW Houston/ Fort Bend Co.
8,657,830
68
16.8%
14.3%
866,160
152,732
25,289
121,621
113,867
$21.98
Gulf Freeway/ Pasadena
1,428,140
27
15.7%
15.7%
91,895
0
0
104,678
105,363
N/A
NASA/Clear Lake
4,842,265
58
18.0%
17.9%
411,823
0
0
(205,346)
(206,374)
$20.24
15,669,242
131
10.2%
10.1%
2,191,324
930,733
1,008,006
942,852
987,563
$25.47
Westheimer/Gessner 13,024,205
89
11.6%
11.1%
2,453,802
318,557
498,362
936,546
908,799
$26.12
San Felipe/Voss
5,327,952
38
17.9%
17.7%
727,657
0
0
4,006
83,831
$22.00
Richmond/ Fountainview
1,028,226
19
21.0%
20.8%
144,699
0
0
(1,244)
(3,314)
N/A
Southwest Freeway/ Hillcroft
3,061,730
27
27.5%
26.8%
305,711
0
0
(115,674)
(99,978)
N/A
Northwest
7,117,100
69
21.9%
21.6%
764,707
159,175
0
(128,511)
(151,603)
$19.00
North Belt
10,749,542
81
13.0%
12.3%
1,237,888
135,000
0
308,764
332,032
$21.89
FM 1960
3,941,311
58
23.4%
22.1%
386,935
0
103,183
(76,447)
(63,494)
$23.97
Woodlands/Conroe
2,911,674
35
13.0%
12.6%
301,059
268,263
73,440
96,020
126,265
$27.10
East/Northeast
1,056,434
20
10.0%
10.0%
118,669
21,498
0
26,337
26,337
$25.00
117,587,114
925
15.2%
14.5%
14,506,071
1,985,958
1,708,280
3,121,837
3,200,239
$22.93
153,748,406
985
14.7%
14.1%
19,897,722 1,985,958
1,708,280
5,534,545
5,975,396
$23.90
West Loop/Galleria
Katy Freeway
Non-CBD Total
TOTAL
* Rental rates reflect $psf/year
10
C U S H M A N & WA K E F I E L D M A R K E T B E AT Y E A R - E N D 2 0 0 6
I N D U S T R I A L M A R K E T OV E RV I E W T H E H O U S TO N E C O N O M Y Houston’s economy, as it relates to the industrial space market, has continued to see steady growth throughout 2006, with some deceleration in the second half of the year.The unemployment rate for the Houston MSA in November was 4.5%, down from 5.6% in November of 2005. In comparison, the Texas unemployment rate in November was 4.6%, and the U.S. rate was 4.3%. Primary economic drivers continue to be the energy industries, the Port of Houston and foreign trade, and new construction. Although job growth is not highly correlated to the performance of industrial space trends, the manufacturing job sector’s growth during 2005 and the first half of 2006 has corresponded to some of the first significant direct absorption in the manufacturing sector since 2001.While the number of manufacturing jobs has fallen since peaking in June of 2006, the number of manufacturing jobs remains higher than in November of 2005 (a 1.0% increase). The natural resources, mining, and construction sectors have continued to produce new jobs for the past two years, increasing by 6.8% over the 12-month period ending November 2006.This is consistent with the rapid resurgence of the energy and energyrelated industries, and the pace of new housing construction (approximately 50,000 single family homes in 2006) in Houston. The construction sector could be susceptible to a housing market slowdown in 2007; however, industrial and commercial new construction may alleviate some of this effect as the office market tightens and new supply becomes feasible.
Space inSpace Projects Under Construction in Projects Under Construction 5.0
(msf)
4.0 3.0 2.0 1.0 0.0
1998
1999
2000
Preleased Space
2001
2002
Available Space
2003
2004
2005
2006
Houston’s Purchasing Manager’s Index in November was 58.9, down from 62.2 in October and the peak of 67.9 in January of 2006. Despite this drop, November’s figure still indicates strong growth expected at least through the first part of 2007 (any figure above 50 indicates economic expansion). According to the National Association of Purchasing Management-Houston, 40% of respondents for November noted increased sales over the previous month and 38% reported higher production levels. In general, Houston’s economy is expected to subside somewhat in 2007, due primarily to the slow down in the U.S. economy and possible shortages in skilled labor (especially in oil-related fields). Alleviating this, however, is a weaker dollar abroad (which stimulates exports through the Port) and the strong performance of energy and energy-related industries. Predictions of a job growth rate at approximately 2.5% in 2007 should easily outperform the national economy as a whole. A slow down in leasing activity that has occurred throughout 2006 in the industrial market could mean more leverage for tenants as landlords attempt to fill space completed or due for completion in 2007.
I N D U S T R I A L M A R K E T OV E RV I E W In 2005, Houston’s industrial market recorded more than 10.0 msf of direct absorption and saw vacancy rates drop by more than 2.0 percentage points.This was by far one of Houston’s best performing years on the industrial front, with more than 7.0 msf of new construction and increases in rental rates across all product types. Although 2006 will not match the performance of 2005, this year has also seen robust growth in new construction, strong direct absorption, and increased investor interest. Other measures during 2006 have remained somewhat static, with vacancy and rental rates on the whole showing little movement by year-end. One of the most important factors in Houston’s industrial market in 2006 was new construction. At year-end 2006, 5.4 msf were completed during the year, with a vacancy rate of 71.4% and an average asking rental rate of $5.26 psf net.Warehouse/distribution space accounted for 4.8 msf of that total, with an average asking rental rate of $4.39 psf net. New construction was clustered into three main areas of the city: the Southeast-Far (1.9 msf), Northwest-Far (1.6 msf), and North-Far (1.3 msf) submarkets. These submarkets were also where large developers such as Trammell Crow, Clay Development, and ProLogis had most of their projects. Under construction projects were similarly divided among these submarkets, with 3.8 msf due for completion in 2007.Vacancy in under construction projects was 64.7%, with an average asking rental rate of $5.01 psf net.
H O U S TO N , T X
11
I N D U S T R I A L M A R K E T OV E RV I E W The most notable trend in new construction in 2006 (beginning in 2005) was the shift in location for the bulk of new construction projects.While the traditionally active submarkets such as the Northwest-Far and North-Far (positioned to take advantage of increased cargo through George Bush Intercontinental Airport) continued to produce sufficient demand to warrant new construction, the majority of new construction seen in 2006 has taken place in the Southeast-Far submarket, with institutional developers taking the lead in starting new projects.The primary reason for this is the desire to take advantage of the Port of Houston and the increase in cargo tonnage (the Port totaled a record 215 million tons of cargo in 2005, and 2006 is expected to at least meet or exceed this figure). Additionally, the Bayport Container Terminal is expected to finally begin operation sometime in first quarter 2007, after construction delays pushed that date back from mid-2006.
$5.00
35.0
$4.00
28.0
$3.00
21.0
$2.00
14.0
$1.00
7.0
$0.00
1998
1999
Rental Rate
2000
2001
2002
2003
2004
2005
2006
(msf)
(psf/yr)
Citywide Direct Net Rental Rates Available Direct Net Rental Rates vs. vs. Available Space Space
Direct vacancy across all product types fell slightly to 9.1% by yearend 2006, only a 0.5 percentage point drop from year-end 2005. However, given the amount of new construction that came on-line during 2005 and 2006, this small drop remained encouraging as space was absorbed at a rate great enough to offset new supply. Manufacturing space showed the greatest decrease in vacancy from 8.3% at year-end 2005 to 6.4% by year-end 2006, while warehouse/distribution space fell from 9.3% to 9.1%, and office service space fell from 13.7% to 13.4%. Not all areas had the same trend, with submarkets having large amounts of new construction, such as the Northwest-Far submarket, increasing vacancies by 1.6 percentage points across all product types to 9.3%, and 3.4 percentage points in warehouse/distribution space to 10.4%. In the Southeast-Far submarket, which has seen some of the largest new projects this year, vacancy more than doubled to 10.3% from 4.6% at year-end 2005, and warehouse/distribution space rose from 3.6% to 13.5% vacant in this same period.
0.0
Available Space
The size of these projects in the Southeast-Far submarket has also changed the characteristics of development for the Houston market, considering the average size of a warehouse project in the Houston area is less than 100,000 sf. Institutional developers have traditionally constructed projects in the 200,000 sf size range. The average size of new construction in the Southeast-Far area during 2006 (including all built and under-construction projects) approached 300,000 sf, with large projects such as Clay Development’s 900,000-sf speculative distribution center on the extreme end of this trend (and Wal-Mart’s 4.0-msf development of 2005). Developers are hoping to position Houston’s southeast region as a distribution area, with the Port as the primary driver of demand. How these speculative projects fare in 2007 should, to a large degree, test that hypothesis; for other than the notable
12
exceptions of build-to-suit projects such as Home Depot and WalMart, Houston has typically not been a market associated with large distribution hubs. Much of the traffic that comes through Houston’s Port is immediately trucked or railed to other locations, minimally affecting the industrial warehouse market. However, companies that require more numerous, but smaller, distribution centers across the country could very well find Houston an attractive alternative, with access to south Texas, Austin, New Orleans, and even El Paso.With the Southeast-Far submarket vacancy in completed or under construction projects in 2006 at 79.3%, the southeast area of the city will be an important area to watch during 2007.
Rental rates in all product types increased compared to 2005, peaking in the third quarter of 2006, only to experience little change in fourth quarter and ending the year in a slight decline. Both manufacturing and office service space increased by $0.40 psf net compared to year-end 2005, ending 2006 at $3.14 psf and $6.68 psf net, respectively.Warehouse/distribution space increased over 2005 by $0.29 psf net to end 2006 at $3.99 psf net citywide. The general trend in most submarkets has followed this same pattern, with increases compared to year-end 2005. Direct absorption during 2006 totaled almost 4.1 msf, with positive absorption evenly distributed across quarters. Although far below the 10.3 msf absorbed in 2005 (4.0 msf of which was accounted for in two large project completions), absorption through 2006 greatly exceeded that recorded in the four years prior to 2005. Most of this absorption was accounted for in warehouse/distribution space, with 3.1 msf absorbed. Manufacturing space recorded 526,206 sf of new occupancies in 2006, the most direct absorption for this product type since 2001. Manufacturing absorption took place
C U S H M A N & WA K E F I E L D M A R K E T B E AT Y E A R - E N D 2 0 0 6
I N D U S T R I A L M A R K E T OV E RV I E W primarily in the Northwest-Far and Southeast-Mid submarkets, but was fairly broad based across the city, due to both leasing and user sales activity. On a citywide basis, submarkets that accounted for the bulk of direct absorption were the southeast submarkets (a combined total of 1.4 msf), the North-Far submarket (393,423 sf), and the northwest submarkets (a combined total of 1.5 msf).The only submarket recording a significant negative direct absorption was the South-Near submarket (235,905 sf). Submarkets with the most new construction generally recorded the most direct absorption during the year. Investor interest in Houston’s industrial market was strong in 2006. Almost 10.0 msf of investor purchases took place throughout the year, twice the yearly average of investment sales activity from 2000 to 2005.While warehouse/distribution accounted for the majority of properties sold, of note is the 2.0 msf of investment sales in office service space.This represents a three-fold increase on the average amount of investment space sold in this product type in the last five years. Large purchases of warehouse/distribution space included AMB Property Corporation’s purchase of the renamed AMB IAH Airfreight Center in the North-Far submarket totaling 925,000 sf in six buildings. Significant amounts of investment sales occurred in the Northeast-Near submarket (1.8 msf) and the Southwest-Far submarket (1.5 msf). Sales of industrial space to users were also higher than average for the year, with 4.4 msf changing ownership. In all, more than 14.3 msf of industrial property was sold during 2006. Leasing activity slowed significantly during 2006.The total space leased was almost 16.5 msf.This is a fairly dramatic decrease in activity compared to 2005 (21.8 msf leased), and has been consistent throughout all of 2006. Strong areas of the city, including
$10.00
40.0
$8.00
32.0
$6.00
24.0
$4.00
16.0
$2.00
8.0
$0.00
LAND While often overlooked, land availability and prices are a significant factor in Houston’s industrial market.The land market in Houston over the past two years has been extremely active, with sales to both users and developers of all product types. Prices have continued to increase significantly in the past 12-18 months, with the inner loop area at an all-time high.There is a shortage of quality industrial sites near the Port, in the northwest and west areas of the city, and close-in locations. Much of the land in Houston has increased in price so significantly that industrial development has become cost prohibitive.The area west of the city between Highway 290 and Interstate 10 has gone to commercial development, and prices in other areas (from the northeast to east of the CBD) dictate various uses from retail to office to residential.This has essentially pushed much of the industrial development sites outside Beltway 8 (as far as Katy in some cases) on the west and beyond F.M. 1960 in the northwest.When the improvements to Interstate 10 on the west side of Houston are completed, this trend will continue. In the northeast part of the city, the connection of Highway 90 to Loop 610 within the next two years could create even higher demand in that area as well.
(msf)
(psf/yr)
Citywide Direct Net Rental Rates vs. Available Space Direct Net Rental Rates vs. Available Space
the Northwest-Far, Southwest-Far, North-Far, and the southeast submarkets, experienced some degree of slow-down during the year.This is significant as new construction begins to come on-line. Totaling the 2006 completions and under construction projects, as well as the proposed buildings for 2007, more than 10.2 msf of new product will come onto the market, with approximately 7.4 msf available. At current rates of absorption that is almost a two-year supply.With slowing demand reflected in less leasing activity, the improvement in vacancy seen over the past four years could come to a halt, with tenants finding significant concessions in negotiations with landlords.
1998
1999
MF Rent
2000 OS Rent
2001
2002
W/D Rent
2003
2004
2005
2006
0.0
Available Space
H O U S TO N , T X
13
INDUSTRIAL SUBMARKET REVIEW N O RT H • Anchored by George Bush Intercontinental Airport, the North submarket is one of the most accessible areas of the city, with several major highways passing through the region. Many logistics firms and freight forwarding companies have a significant presence in this submarket to be near the airport.
5.0
$8.00
4.0
$6.00
3.0
$4.00
2.0
$2.00
1.0
(psf/yr)
$10.00
• Leasing activity for the year was lower compared to historical totals at 2.1 msf in 2006. Major transactions included Vintage Sports Cards at 410 South Trade Center Parkway (82,000 sf) and House of Forgings Inc. at 16844 Air Center Boulevard (70,000 sf).
$0.00
1998
1999
2000
2001
OS Rent
MF Rent
2002
2003
W/D Rent
2004
2005
2006
(msf)
• More than 1.3 msf were completed in 2006, making this one of the most active submarkets citywide.Virtually all of this construction was speculative, with a vacancy rate of 80.3%. Despite this influx of new space, the direct vacancy rate across all product types remained almost unchanged from 2005 levels at 10.6%.
Direct Net Rental Rates vs. Available Space
0.0
Available Space
N O RT H E A S T • This is Houston’s smallest submarket with 22.4 msf of industrial inventory.Very little new construction has taken place in this submarket, with most buildings approaching 20-30 years in age. Heavily industrialized, it remains one of the few areas of the city with close-in industrial parks, such as Railwood,Wallisville, and Eastwood Industrial Parks. (psf/yr)
• Leasing activity was average for this submarket in 2006, with slightly more than 934,000 sf leased through the year. Direct absorption was positive, totaling 67,913 sf, with manufacturing space accounting for almost all new occupancies in 2006.
$7.50
5.0
$6.00
4.0
$4.50
3.0
$3.00
2.0
$1.50
1.0
$0.00
(msf)
• Direct vacancy ended 2006 at 6.0%, the lowest in the city, with rental rates also some of the lowest citywide at an average of $2.85 psf net. Available manufacturing space was virtually absent from this submarket, with a vacancy of 1.7%, while warehouse/distribution space was also tight at 7.4% vacant.
Direct Net Rental Rates vs. Available Space
1998
1999
2000 OS Rent
MF Rent
2001
2002
W/D Rent
2003
2004
2005
2006
0.0
Available Space
SOUTHEAST • The Southeast submarket boasts the Port of Houston and access to the Houston Ship Channel throughout its area.This submarket has seen some of the most intense development in the past several years, with large distribution centers for companies such as Home Depot and Wal-Mart constructed to take advantage of proximity to the Port.
• Direct vacancy across all product types remained unchanged compared to year-end 2005 at 8.9%.This is due to 1.4 msf of positive absorption recorded.Warehouse/distribution direct vacancy increased from 7.8% at year-end 2005 to 8.6% at year-end 2006.
(psf/yr)
$10.00
7.5
$8.00
6.0
$6.00
4.5
$4.00
3.0
$2.00
1.5
$0.00
1998
1999
MF Rent
14
C U S H M A N & WA K E F I E L D M A R K E T B E AT Y E A R - E N D 2 0 0 6
2000 OS Rent
2001
2002
W/D Rent
2003
2004
2005
Available Space
2006
0.0
(msf)
• Almost 1.9 msf were completed in this submarket in 2006, with a vacancy rate of 87.1%.The vast majority of this was warehouse/ distribution space intent on taking advantage of increased traffic through Houston’s Port and the opening of the Bayport Container Terminal in early 2007.
Direct Net Rental Rates vs. Available Space
INDUSTRIAL SUBMARKET REVIEW SOUTH • This submarket was the only area citywide in 2006 to record negative direct absorption at 189,835 sf. Direct vacancy remained virtually unchanged from year-end 2005 to end 2006 at 9.6%; however, rental rates increased to $3.62 psf net across all product types.
(psf/yr)
• Leasing activity increased over 2005 levels to 1.2 msf, but both 2005 and 2006 remained below the average leasing levels in this submarket historically. Major transactions in 2006 included a 236,000-sf lease by Transport Management Consultants, Inc. and a 106,000-sf lease by Allied Fittings, Inc., both at 2750-2798 Holmes Road.
$7.50
5.0
$6.00
4.0
$4.50
3.0
$3.00
2.0
$1.50
1.0
$0.00
1998
1999
2000
2001
OS Rent
MF Rent
2002
2003
W/D Rent
2004
2005
2006
(msf)
• In 2006, 258,200 sf of new construction were completed in several smaller projects in this submarket.Vantage Companies completed five speculative buildings ranging in size from 12,000 sf to 20,000 sf, while Clay Development completed three buildings totaling 182,000 sf.
Direct Net Rental Rates vs. Available Space
0.0
Available Space
SOUTHWEST • The Southwest submarket has several municipalities with aggressive growth strategies to attract new business and stimulate expansion for existing business in commercial, retail, residential and industrial development. Fort Bend County has consistently shown strong growth for more than a decade.
(psf/yr)
• Direct absorption totaled 360,195 sf through 2006; however, warehouse/ distribution space totaled more than 825,000 sf, with both manufacturing and office service space recording negative absorption for the year. Direct vacancy rates across all product types fell by 1.0 percentage point compared to year-end 2005 at 8.6%, but, again, this drop was related to warehouse/distribution space which dropped by 4.0 percentage points to 7.1% at year-end 2006.
$10.00
5.0
$8.00
4.0
$6.00
3.0
$4.00
2.0
$2.00
1.0
$0.00
1998
1999
2000
2001
OS Rent
MF Rent
2002
2003
W/D Rent
2004
2005
(msf)
• New construction activity dropped compared to prior years, with 171,700 sf of completions in 2006.These were primarily smaller, office service projects ranging in size from 23,000 to 35,000 sf.
Direct Net Rental Rates vs. Available Space
0.0
2006
Available Space
N O RT H W E S T • The Northwest submarket is by far Houston’s largest submarket with 107.4 msf, almost double the size of the next largest submarket. Massive amounts of industrial space have been constructed in this area over the past decade, with more than 20.8 msf of new construction between 1995 and 2005.
• Despite the large amount of new space added, demand remained steady in this submarket, with direct vacancy at year-end 2006 at 9.1%, dropping slightly from 9.7% at year-end 2005.Vacant manufacturing space was virtually non-existent with a 2.1% vacancy rate.
(psf/yr)
$7.50
15.0
$6.00
12.0
$4.50
9.0
$3.00
6.0
$1.50
3.0
$0.00
1998
1999
MF Rent
2000 OS Rent
2001
2002
W/D Rent
2003
2004
2005
2006
(msf)
• Almost 1.8 msf of new construction were completed in 2006, with a vacancy rate of 48.0%. Another 1.7 msf were under construction, with a vacancy of 53.6%. Direct absorption totaled 1.5 msf for the year (the highest citywide), much of which was directly related to occupancy in these new completions.
Direct Net Rental Rates vs. Available Space
0.0
Available Space
H O U S TO N , T X
15
INDUSTRIAL MARKET HIGHLIGHTS SIGNIFICANT 2006 NEW LEASE TRANSACTIONS Building 5100 N. Sam Houston Parkway W. 2135 Highway 6 2750-2798 Holmes
Submarket Northwest-Far Southwest-Far South-Near
3405 Navigation
Southeast-Near
Tenant National Oilwell Varco LP Hoover Materials Handling Transport Management Consultants, Inc. Trans-Hold, Inc.
Square Feet 377,750 358,739 235,810
Property Type Warehouse/Distribution Manufacturing Warehouse/Distribution
186,699
Warehouse/Distribution
Square Feet 925,500 358,739 346,515 191,250
Purchase Price Undisclosed Undisclosed Undisclosed Undisclosed
Square Feet 900,000 315,628 210,000 192,000
Completion Date 11/06 12/06 8/06 12/06
Square Feet 412,665 377,750 312,000 300,000
Completion Date 6/07 5/07 1/07 6/07
SIGNIFICANT 2006 SALE TRANSACTIONS Building AMB IAH Airfreight Center 2135 Highway 6 8855 Citypark Loop 250 Portwall, Phase II
Submarket North-Far Southwest-Far Northeast-Near Northeast-Near
Buyer AMB Property Corp. Lovett Commercial Sealy City Park Partners LP Carson Companies
SIGNIFICANT 2006 CONSTRUCTION COMPLETIONS Building 359 Old Underwood Road 850 Greens Parkway 11427 Highway 225, Building 2 5250 N. Sam Houston Parkway W.
Submarket Southeast-Far North-Far Southeast-Far Northwest-Far
Property Type Warehouse/Distribution Warehouse/Distribution Warehouse/Distribution Warehouse/Distribution
SIGNIFICANT PROJECTS UNDER CONSTRUCTION Building 1701 South 16th Street 5100 N. Sam Houston Parkway W. 10525 Red Bluff Road 1921 South 16th Street
Submarket Southeast-Far Northwest-Far Southeast-Far Southeast-Far
Property Type Warehouse/Distribution Warehouse/Distribution Warehouse/Distribution Warehouse/Distribution
SIGNIFICANT LEASE AVAILABILITIES Building 7611 Railhead Lane 1701 South 16 Street 8760 Clay Road 7301-7401 Security Way
16
Submarket Northwest-Far Southeast-Far Northwest-Far Northwest-Far
Direct/ Sublease Direct Direct Direct Direct
Available Square Feet 454,177 412,665 330,000 323,650
C U S H M A N & WA K E F I E L D M A R K E T B E AT Y E A R - E N D 2 0 0 6
Property Type Warehouse/Distribution Warehouse/Distribution Warehouse/Distribution Warehouse/Distribution
Possession Date Immediate 6/07 Immediate 4/07
I N D U S T R I A L M A R K E T S TAT I S T I C S Overall Vacancy Rate
YTD Leasing Activity
YTD Direct Weighted Average Overall Net Rental Rate* Absorption HT** MF OS W/D
Inventory
Central Business District
1,123,130
36
22.2%
44,650
0
0
38,500
38,500
N/A
N/A
N/A $3.77
North-Near
6,986,121
128
4.0%
190,905
0
0
170,210
170,210
N/A
N/A
N/A $1.83
North-Mid
6,809,258
185
12.0%
214,550
0
23,625
106,560
106,560
N/A
$3.87
$2.16 $2.64
North-Far
21,119,109
386
14.1%
1,240,922
129,434
1,272,123
393,423
546,914
N/A
$4.72
$5.66 $5.29
4,574,351
76
5.1%
412,739
0
10,000
196,419
196,419
N/A
North Total
39,488,839
775
10.9%
2,059,116
129,434
1,305,748
866,612
1,020,103
N/A
$4.14
$5.87 $4.76
Northeast-Near
17,959,693
203
7.4%
895,903
0
0
(3,408)
42,802
N/A
$2.20
$3.15 $2.95
Northeast-Far
4,479,316
85
1.0%
38,500
24,000
0
71,321
71,321
N/A
N/A
N/A $1.98
Northeast Total
22,439,009
288
6.1%
934,403
24,000
0
67,913
114,123
N/A
$2.20
$3.15 $2.91
Southeast-Near
36,151,189
605
7.3%
879,693
0
0
497,592
300,227
N/A
$2.10
$3.13 $2.71
Southeast-Mid
9,596,402
154
14.0%
613,046
0
0
433,131
433,131
N/A
$1.85
N/A $4.22
Southeast-Far
19,950,813
221
10.3%
792,292
1,958,404
1,852,500
501,000
515,160
N/A
$1.54
$7.34 $3.81
Southeast Total
65,698,404
980
9.2%
2,285,031
1,958,404
1,852,500
1,431,723
1,248,518
N/A
$1.96
$5.63 $3.42
South-Near
24,021,103
448
9.9%
1,080,684
0
0
(235,905)
(237,838)
N/A
$3.19
$5.27 $3.46
South-Far
9,221,572
194
9.2%
114,170
0
258,200
46,070
46,070
N/A
$2.89
$8.25 $4.53
South Total
33,242,675
642
9.7%
1,194,854
0
258,200
(189,835)
(191,768)
N/A
$2.94
$6.51 $3.62
5,662,125
168
3.1%
139,415
0
0
160,249
160,249
N/A
N/A
$4.67 $3.86
Southwest-Far
30,148,607
653
10.0%
2,140,662
0
171,700
199,946
159,038
N/A
$5.08
$7.43 $5.43
Southwest Total
35,810,732
821
8.9%
2,280,077
0
171,700
360,195
319,287
N/A
$5.08
$7.37 $5.27
West-Far
23,936,098
459
9.7%
1,346,516
140,000
123,462
522,176
511,315
N/A
N/A
$7.03 $3.96
Northwest-Near
29,250,234
531
8.9%
2,102,856
20,000
0
339,146
388,689
N/A
$5.20
$6.41 $3.76
Northwest-Far
54,194,664
943
10.7%
4,207,554
1,543,943
1,640,199
616,884
786,622
N/A
$3.36
$7.18 $4.11
Northwest Total
107,380,996
1,933
10.0%
7,656,926
1,703,943
1,763,661
1,478,206
1,686,626
N/A
$4.50
$6.95 $4.00
305,183,785
5,475
9.5%
16,455,057 3,815,781
5,351,809
4,053,314
4,235,389
N/A
$3.14
$6.68 $3.99
Market/Submarket
North-Montgomery County
Southwest-Near
TOTAL
Under Construction
YTD YTD Construction Direct Completions*** Absorption
No. of Bldgs.
N/A $11.71 $7.67
* Rental rates reflect $psf/year ** HT inventory does not exist in this market *** Completions do not include expansions HT = High Tech
MF = Manufacturing
OS = Office Service
W/D = Warehouse/Distribution
H O U S TO N , T X
17
M U LT I - FA M I LY M A R K E T OV E RV I E W The Houston multi-family market was normalizing after an artificially inflated fourth quarter in 2005 created by the influx of hurricane Katrina evacuees to the city. As federally funded housing vouchers expired this year, the Houston area occupancy rate decreased to 89.75% at the end of the third quarter 2006 and was expected to finish the year at 90.50%.This was up 160 basis points from year-end 2005, yet despite this, the occupancy rate at third quarter 2006 showed improvement compared to the pre-Katrina figure in the first half of 2005. Absorption rates in 2006 decreased as evacuees relocated out of the city, but compensating for this, job and population growth have remained strong this year and asking rents have increased along with profits.This was motivating investors to return to the fundamentals of buying on actuals instead of pro forma. While overall occupancy dropped 0.66 percentage points from third quarter 2005 to third quarter 2006, these figures must be interpreted in relationship to the extreme number of hurricane evacuees who moved to Houston during the third quarter of 2005. In July of 2005, the overall occupancy rate rested just above 87.00%. As of third quarter 2006, occupancy was at 89.75%, a full 2.86 percentage points higher than pre-Katrina rates and revealing an actual rise in occupancy. Additionally, class A units gained 1.08 percentage points during third quarter, ending with occupancy of 92.04%. Class B assets ended third quarter at 90.53%, while class C assets recorded 87.57%, a loss of 1.74 percentage points compared to second quarter. Class D properties reported the lowest occupancy in third quarter of 84.63%.
Average Rental vs. Occupancy Rates
Absorption rates also normalized in 2006. According to O’Connor & Associates, class A properties have recorded positive absorption of 993 units for the 12-month period ending September 2006 (1,776 units absorbed in third quarter of this year). Class B and C both lost ground, totaling a negative 2,572 and 3,759 units, respectively. Undoubtedly, a major factor in these figures continues to be evacuees from Katrina relocating away from the city.The 12-month period ending in September 2005 totaled 25,207 units absorbed as a direct result of Katrina on Houston’s apartment market. The Houston housing market cooled briefly as the 30-year fixedrate mortgage (FRM) continued to steadily rise in the first half of the year, peaking at 6.76% in July 2006 (up from 5.70% the same period in 2005) and positively impacting the apartment market; however, the FRM has continued to fall each month since then, ending November at 6.24%, down from 6.33% in November last year. Additionally, local housing prices did not increase at the same rate as those in many other major metro areas, and the median home price in the Houston area is still considered affordable in relation to incomes, increasing the attractiveness of home buying. While these trends may not initially sound positive, profit gains in Houston’s multi-housing real estate market continued.Asking rents in Houston are on track to increase 3.0% to $724 per month by yearend 2006, while effective rents were projected to increase to $671 per month, up 3.8% from the end of 2005.While all classes recorded an increase year-over-year, class A recorded the largest increase of $0.032 psf to end third quarter at $1.093 psf. Class B and C ended third quarter at $0.812 psf and $0.687 psf, respectively. Decreasing occupancy rates impacted revenue, but owners were expected to retain higher profits compared to those prior to Katrina.
(psf/mo)
Overall Rental vs. Vacancy Rate $1.25
95.0%
$1.00
92.0%
$0.75
89.0%
$0.50
86.0%
$0.25
83.0%
$0.00
3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 Class A Rent Class D Rent
Source: O’Connor & Associates
18
Class B Rent
Class C Rent
All Classes Occupancy
Construction remained active in the multi-family market with 10 projects totaling 3,454 units completed by mid-year 2006. An additional 12,104 units were under construction at the end of third quarter. Active developers include Camden Property Trust, Sueba, and Trammel Crow Company. Areas of strongest growth were the Far West, the Woodlands area, and Midtown. Redevelopment of older class B and C properties has increased, especially inside Loop 610, as young professionals are choosing to rent closer to employment and entertainment centers.
80.0%
Houston’s strong economy continued to provide a reliable tenant base for investors, adding 75,000 jobs in the 12-month period ending November 2006 – a 3.1% growth rate. Professional and Business Services reported significant growth with 16,700 new
C U S H M A N & WA K E F I E L D M A R K E T B E AT Y E A R - E N D 2 0 0 6
M U LT I - FA M I LY M A R K E T OV E RV I E W jobs, a 6.8% increase. Other industries, including Natural Resources, Mining and Construction (6.8% growth) and Education and Health Services (3.4% growth) continued to create jobs citywide. Additionally, the Energy Corridor in west Houston is expanding tremendously. The sale of Houston multi-family dwellings increased in the last year by over 31%. One major transaction that occurred in the Houston market was the purchase of a 4,471-unit portfolio by TIAA-CREF from LF Immobilien Portfolio KG, which included 11 properties totaling 2,295 units in the Houston area.The remaining 2,176 units were located in Arizona.
Of the 53 submarkets, as determined by O’Connor & Associates, the strongest absorption in third quarter 2006 occurred in the Gulf Freeway submarket with 282 units absorbed.The strongest class A absorption was in the Pearland submarket with 241 units absorbed. In the class B market, the Gulf Freeway submarket had the strongest absorption with 134 units, and class C had the strongest absorption in the Katy submarket with 35 units absorbed. Weakest absorption was in the Sharpstown/Westwood submarket with a negative 500 units absorbed across all classes. In class A properties, the Braeswood submarket recorded the steepest loss of 37 units.The Far West recorded the largest negative absorption for class B product, with a negative 307 units, while class C absorbed a negative 302 units in the Sharpstown/Westwood submarket.
Houston Cap Rates
Overall Rental vs. Vacancy Rate 10.0% 8.0% 6.0%
7.1%
6.8%
7.2% 6.4%
6.2%
6.2%
Mar-06
Jun-06
7.3%
4.0% 2.0% 0.0%
Jun-05
Sep-05
Dec-05
Sep-06
Nov-06
Houston cap rates have been consistently above the national average of 5.2 percent for the past year. Rates ended in November 2006 at 7.3 percent, up from 6.8 percent third quarter 2005, according to Real Capital Analytics.These trends have attracted many out-of-state investors seeking above-average returns. As the market corrects itself, the overall outlook for Houston multi-housing is stable for 2007.Vacancy rates are expected to rise moderately in the next year as hurricane evacuees relocate out of the city, but with the positive increase in Houston area employment and the leveling off of new apartment construction, investors will continue to increase asking rents, ensuring continued profit gains.
Source: Real Capital Analytics
SIGNIFICANT 2006 SALE TRANSACTIONS Property Baybrook Village I, II, & III Camden Wilshire Sierra Vista Remington Park
Buyer Southern Cross Construction Venterra Realty Management GALP Sierra Vista, LP Investment Realty, Inc.
Seller Hudson Advisors Camden Property Trust StarPoint Properties, LLC Creekstone Companies
Year Built 1980 1982 1982 2001
Units 776 536 511 428
Source: O’Connor & Associates, Cushman & Wakefield, Inc.
H O U S TO N , T X
19
G L O S S A RY / M A J O R M A R K E T DEFINITIONS OFFICE Inventory: Includes all existing competitive office buildings that satisfy the rentable square footage cut-off size or larger. Government, medical, office condos, strip centers of mixed use and owner-occupied buildings are not included. Class A: Most prestigious buildings competing for premier office users with above average rents for the area. Buildings have high quality standard finishes, state-of-the-art systems, exceptional accessibility and suggest a definitive market presence.
Proposed: Projects which are in the planning stages and may, or may not, have been approved. Construction has not yet begun. Projects that require, and have not secured, a lead tenant to commence are not included. Leasing Activity: The sum of all completed transactions in a given period of time, including sublet space and pre-leasing but excluding renewals. Pre-Leasing Activity: The sum of all completed lease transactions in under construction, under renovation and proposed projects. Sales Activity: Existing building sale transactions executed during a period of time.
Class B: Buildings competing for a wide range of office users with average rents for the area. Building finishes are fair to good for the area and systems are adequate, but the buildings do not compete with class A at the same price.
Cap Rate: The percentage used to determine the value of income property through capitalization.
Class C: Buildings competing for tenants requiring functional space at below average rents for the area.
INDUSTRIAL
CBD: Central Business District. The “downtown” area. Non-CBD: The area around a city. The “suburban” area. Asking Rental Rates: Gross asking rates per square foot, weighted by the amount of square footage available.
OFFICE & INDUSTRIAL Direct Available Space: Space vacant and available through the building landlord. Sublease Space: Space vacant and available through the lessee to a third party for the remainder of the lessee’s term. Overall Vacancy Rate: Space vacant and available both directly and through sublease, divided by the inventory. Space in properties under construction or under renovation is not included. Direct Vacancy Rate: Space, vacant and available through the landlord, divided by the inventory. Space in properties under construction or under renovation is not included. Direct Absorption: The net change in occupied built space for a given period of time, excluding sublease space. Overall Absorption: The change in occupied built space for a given period of time, including sublease space. Construction Completions: Buildings that received their Certificate of Occupancy.Tenancy may not yet have taken place. Under Construction: Projects which are beyond site preparation. A Certificate of Occupancy has not been issued. Under construction projects do not include projects under renovation. 20
Manufacturing: Space designed for the manufacturing or production of goods versus space designed for the distribution of goods. Warehouse/Distribution: Industrial buildings designed for distribution with typical office finish from 0% to 30%, ceiling heights of 16’ to 32’, and dock-level loading. Maximum lot coverage allows for ample maneuvering areas and truck circulation. Office Service: Buildings with ceiling heights between 12’ to 15’, typical office finish from 30% to 100%, and rear-loading truck doors which are usually grade-level but may have some dock-level doors. Asking Rental Rates: Triple net asking rates per square foot, weighted by the amount of square footage available.
MAJOR MARKET DEFINITIONS CBD Office: This is the core downtown area of Houston with boundaries of Interstate 10 on the north, Interstate 45 on the west, U.S. 59 on the east, and Interstate 45 (Pierce elevated) on the south. Non-CBD Office: Composed of 17 office submarkets in the Greater Houston Area. Includes all of Harris county and portions of Montgomery, Fort Bend, and Galveston counties. Industrial: Comprises the Greater Houston Area, including all of Harris county and portions of Montgomery, Brazoria, Fort Bend, Galveston, and Chambers counties. Houston’s industrial market is divided into six major geographic submarkets: North, Northeast, Southeast, South, Southwest, and Northwest.
C U S H M A N & WA K E F I E L D M A R K E T B E AT Y E A R - E N D 2 0 0 6
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