caitaiing on a transforming...current q3 18 2019p* direct vacancy 16.4% 16.2% - 16.9% rental rates...

C A P I T A L I Z I N G O N A

TRANSFORMINGCOMMERCIAL REAL ESTATE MARKET

TABLE OF CONTENTSPrevious Page

Summary

The National Economy

The Houston Metro Economy

The Houston Metro Office Market

The Houston Metro Industrial Market

The Houston Metro Multifamily Market

The Houston Metro Retail Market

The Houston Metro Healthcare Market

Next Page

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You may neither copy nor disseminate this report. If quoted, proper attribution is required.

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T H A N K Y O U T O O U R 2 0 1 8 S P O N S O R S

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WELCOME NOVEMBER 2018

To our friends, clients and colleagues:We are pleased to provide you with the 18th annual edition of our TrendLines® publication. Our purpose is to examine current trends and forces influencing the region’s economy and their effect on the Houston commercial real estate market.

Through the third quarter of 2018, the Houston metro economy has displayed marked improvements after weathering the impacts of both Hurricane Harvey and the 2014 oil crash. As energy has recovered over the past year and stabilized with WTI trading in the mid-to-high $70's, we have seen the job market turn sharply positive. As of September, year-over-year job growth totaled 128,700, marking an all-time record high for the metro. Rig count is up by 143 year-over-year, and the Permian Basin is producing over 3.3 million barrels per day and is forecast to reach 5.4 million b/d by 2023, a tremendous benefit to the regional economy. The strengthening of the energy sector only further compliments the ongoing diversification and transformation Houston has displayed over recent years.

In the commercial real estate sector, the economy sets a favorable environment for the future, although each property type has its own unique set of market conditions. The Office market has continued to be impacted by high direct vacancy (16.4%) and total availability (23.9%) as demand for new construction and tenant right sizing add to the headwinds of sublease offerings. In this competitive market, co-working and hospitality are influencing renovations in second generation office buildings that focus on the tenant experience. The Industrial sector has been charged by an expanded Port of Houston, continued petrochemical activity and the transformation of retail, as e-commerce influences not just one but multiple verticals and is driving year to date absorption to an impressive 5.4MSF. Speculative construction is on the rise as demand currently out paces supply, and a limited number of available quality land positions is placing upward pressure on rents in a sector that remains incredibly bullish.

Multifamily has seen a full recovery from the construction boom of 2015, as occupancy has again moved past the stabilized threshold of 90%, and rising interest rates along with changing lifestyle preferences position the sector favorably for the long term. Despite the headlines questioning the future of Retail, the sector has continued to perform remarkably well in Houston as high population and job growth creates opportunities in both urban and suburban settings. Vacancy of 5.4% in the sector underscores the strength of the market. The Healthcare sector, while undergoing transformation at the operational level, has seen continued growth in the market, propelled by high population growth and an aging baby boomer cohort. Medical office vacancy currently stands at a healthy 11.4% and the construction pipeline is robust with just under 4.0 MSF of hospital and medical office under construction.

We expect to find a wealth of opportunities throughout our industry in the period ahead as job numbers trend up and the underlying fundamentals of the market drive growth in all sectors. In 2019, we expect:

• Gains of approximately 80,000 - 100,000 payroll jobs during 2019 as a stabilized energy sector adds to the diversified base of the economy .

• Continued strength in the retail, industrial, healthcare and multifamily sectors as population growth, low cost of living, and strong job growth continue to fuel these sectors in their respective growth cycles.

• An improving office market that sees positive annual absorption in 2019 and improvements across all metrics for well positioned properties.

The Transwestern Family of Companies looks forward to continued opportunities to partner with you to create value in this world class city. We look forward to helping you interpret not only the material in this report but everything you see in the market and to being your service partner.

Kevin Roberts

President, Southwest

TRANSWESTERN

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RepresentationsAlthough the information contained herein is based on sources that Transwestern (TW) believes to be reliable, TW makes 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 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.

Former executive at Tesla Motors, Apple Computer and GAP Inc., George

Blankenship brings 30 years of real estate and international strategy

experience to his audiences. In his executive capacities at Tesla Motors,

Blankenship successively served as vice president of design and store

development, vice president of worldwide sales and ownership experience,

and vice president of worldwide retail. Prior to his achievements at

Tesla, Blankenship served as the senior executive of real estate at Apple.

Recognized as the architect of Apple’s brand-building retail methodology, he

formulated and executed one of the most successful retail growth strategies

in history. Blankenship has also functioned as a real estate consultant for

Microsoft and served as a senior executive for real estate strategy at GAP Inc.

Patrick Jankowski is a regional economist and senior vice president of research at the

Greater Houston Partnership. He oversees the research department which provides data

analysis, economic forecasting and mapping functions for the Partnership.

His observations and analysis on the local, regional and U.S. economic trends have

appeared in over 35 newspapers, magazines, radio and television broadcasts, including

ABC Radio, The Atlantic, Bloomberg Business, CBS Radio, CNNMoney, Financial Times,

Forbes, Houston Business Journal, Houston Chronicle, Los Angeles Times, NPR, PBS

Nightly Business Report, Reuters, The New York Times, Newsweek, and USA Today.

Jankowski is president of The Houston Economics Club, a past board member of the

National Association for Business Economics, and a past board member of the Council

for Community and Economic Research.

Prior to working as an economist, Jankowski worked as a business writer for Houston

Magazine, Houston City Magazine, Houston Engineer and Houston Business Journal. He

holds an Energy Certificate from the University Of Texas McCombs School Of Business

Executive Education Program. He received his bachelor’s degree in economics from The

University of Texas at Austin.

AcknowledgmentsKevin Roberts, President-Southwest, wishes to acknowledge and thank the project’s research team: Stuart Showers, Director of Market Research, Rachel Hornbeak, Research Analyst and Jennifer Woodruff, Research Analyst and the creative team: Shannon Bedinger, Vice President, Marketing & Communications; Gregorio Barrera, Creative Director; Averegine Sanchez, Graphic Designer, Kathryn Litchfield, Graphic Designer and Weston Woodfin (Intern). Your time and effort is invaluable to this process.

SPECIAL THANK YOU TO OUR SPEAKERS

Making Houston Greater .

Mr. George BlankenshipTESLA MOTORS | APPLE | GAP INC

Patrick JankowskiGREATER HOUSTON PARTNERSHIP

Senior Vice President, Research

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OUTLOOKS 1

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Current Q3 18 2019P*

Direct Vacancy 16.4% 16.2% - 16.9%

Rental Rates$35.83/SF FS $35.50-$36.00

Absorption YTD-1.3M SF 1.0M-2.5M SF

Market Drivers2019 Projection Considerations

80-100K2019 (est.)

Payroll jobs added$69.562019 WTI Avg

Price Per Barrel*

100K2019 (est.)

Population Growth

OfficeStrong growth in office using job

categories will result in positive

annual absorption for 2019 as the

market recovers from the worst of

the energy downturn.

MultifamilyA boost in activity from Hurricane

Harvey shortened the oversupply

absorption period. The next few

years should bode well for the

sector as interest rates rise.

HealthcareStrong population growth and

an aging demographic position

the healthcare real estate as a

high quality investment over the

near-to-mid term.

RetailCore retail holdings such as

Mixed-Use/Lifestyle, Grocery-

Anchored and Power Centers will

continue to be in demand with

low vacancy and rising rents.

IndustrialE-Commerce, warehouse/distribution

and the resins market continue to

push industrial to new highs through

2019. Construction should continue

to increase due to lack of available

quality alternatives.

Houston has enjoyed a remarkable 2018 propelled by strong job growth, increased industry diversification, and energy markets stabilizing in a range that allows profitability. These factors loom large when looking to the future, as Houston's underlying fundamentals, such as low cost of living and high household growth, paint the city as an internationally competitive market on the ascent. That said, each commercial real estate vertical has its own unique demand drivers, market conditions and challenges/opportunities. The following document delves into the current state of each use as well as a look to the near future.

HOUSTON OUTLOOK


Direct Vacancy 5.4% 5.6%-6.0%

Rental Rates$15.94/SF NNN $16.00/SF NNN

Absorption2.3M SF 2.5-3.5M SF


Occupancy 90.0% 89.9-90.3%

Rental Rates$1.17/SF $1.19-$1.21/SF

Absorption YTD9,199 units 10-15,000 units


Direct Vacancy 5.0% 6.0% -7.0%

Rental Rates$6.84/SF NNN $6.90-$7.00/SF

Absorption YTD2.2M SF 7.0-10.0M SF


Direct Vacancy 11.4% 11.0-13.0%

Rental Rates$27.48/SF $28.00-$29.15/SF

Absorption YTD79,148 SF 250K-500K SF

* Source: EIA Short Term Forecast* P indicates projected

HOUSTON OUTLOOK

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THE NATIONAL ECONOMY

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NATIONAL ECONOMIC OVERVIEWEconomic Output Strengthens, Propelled by Surge in Corporate ProfitsThe national economy continued its hot streak in the third quarter of 2018. Job growth

was strong during the quarter, with the economy adding 2.43 million new jobs over the

12-month period ending August 2018, at a monthly average of just over 200,000. Monthly

job growth in August also just crested the 200,000-mark with 201,000 net additions.

Federal job losses continue to be a drag on the overall labor market but has shown signs

of easing in recent months.

The four-week average of initial unemployment claims continued its downward trend in the

third quarter to a new 48-year low of 205,750. Average 12-month hourly earnings growth

climbed to 2.9% in August 2018, matching a 9-year high. As long predicted, employers

are finding that they’re having to increase compensation to attract and retain the most

talented workforce in an ever-tightening labor market.

Annualized real GDP growth surged to 4.2% in the second quarter, boosted heavily by net

exports. This was a big improvement from the comparatively lackluster 2.2% growth in the

first quarter. Consumer expenditure growth rebounded from a five-year low of 0.5% in Q1

to a more robust 3.8% in Q2, reclaiming the role of lead generator of economic growth.

Corporate profits totaled $2.25 trillion (annualized and seasonally adjusted) during the

second quarter of 2018. This was an increase of $72 million from the first quarter of 2018.

The sharp jump in profits can be attributed to stronger economic growth and the recent

corporate tax cuts. After plunging in the first quarter of the year, U.S. financial markets have

steadily regained their value since April. As of market close on September 20, the Dow

Jones Industrial Average stands at 26,657, and the S&P 500 is valued at 2,931—both new

record highs, and the first since January for the Dow.

Three-quarters of the way through the year, it appears that the economy still has plenty

of gas left in its tank. Nevertheless, many economists are growing wary of an impending

recession as some late-cycle indicators begin to emerge, most notably the flattening yield

curve. Despite the optimistic outlook, a potential trade war remains a major downside risk.

Most recently, in September the Trump administration announced a further $200 billion in

tariffs on Chinese imports. In more positive trade news, it appears that the U.S. and Mexico

have reached an agreement on changes to NAFTA, but Canada continues to balk at some

of the revisions.

Revolving Credit12-month percentage change

Payroll Job GrowthUnited States | Monthly

12-M

onth

Per

cent

Cha

nge

-15%

-10%

-5%

0%

5%

10%

15%

18*17161514131211100908070605040302010099

0

50

100

150

200

250

Aug 18Jun 18Apr 18Feb 18Dec 17Oct 17Aug 17

In T

hous

and

s

*12-month percentage change through Aug 2018, data not seasonally adjusted Source: Federal Reserve Board, Transwestern

Source: Federal Reserve Board, Transwestern *At Q3 2018

THE NATIONAL ECONOMy

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Job GrowthAs the economy continues to chug along, the labor market continues to flourish. Over the

12-month period ending August 2018, the U.S. economy added 2.43 million new jobs, at

a monthly average of just over 200,000. Monthly job growth in August also just crested the

200,000-mark with 201,000 net additions.

Payroll Job GrowthUnited States | Year-Over-Year

Payroll Job GrowthUnited States | 12 Months Ending August 2018

Tho

usan

ds

of N

ew P

ayro

ll Jo

bs

0

500

1000

1500

2000

2500Public SectorPrivate Sector

Aug 18

July 18

June 18

May 18

Apr 18

Mar 18

Feb 18

Jan18

Dec 17

Nov17

Oct17

Sep17

Aug 17

-100000 100000 300000 500000 700000

-100000 100000 300000 500000 700000

Professional/Business Services

Education/Health

Leisure/Hospitality

Construction/Mining

Financial Activities

Manufacturing

Other Services

Wholesale Trade

Transportation/Utilities

State and Local Government

Retail Trade

Federal Government

Information

0

Note: Data not seasonally adjusted Source: Bureau of Labor Statistics, Transwestern

Note: Data not seasonally adjusted Source: Bureau of Labor Statistics, Transwestern

The private sector continues to account for nearly all positive job growth, although job

losses in the federal sector seem to have flattened out in recent months. During the 12

months ending August 2018, private employers in the U.S. created 2.38 million net new

positions, supplemented by just 41,000 additions in the public sector. Federal job losses

continue to be a drag on the overall labor market; however, in the long term we believe

that federal workforce expansion is inevitable, despite the White House’s goal of near-term

contraction. As the population ages, demand for health workers and administrators will

grow. Federal positions related to cybersecurity and research are also projected to grow in

number. Expansion of defense-related agencies has actually been a priority of the current

administration.

Interestingly, the most recent 12-month job growth numbers show the state government

employment sector falling behind the federal sector. State workforces shrank by 21,000

over the 12 months ending August 2018, which is actually an improvement over the

51,000 state government jobs lost over the year ending April 2018. Local government’s

made up for the losses however, with 67,000 net new positions over the 12-month period

ending August.

Private sector job growth continues to be led by the Professional/Business Services and

Education/Health Services sectors, along with the Construction/Mining sector. The three

sectors combined added 1.4 million new jobs to the economy during the 12 months

ending August 2018. The Information sector, which lost 23,000 jobs during the period,

continued to be the only private employment sector with negative job growth.

208,000June 2018

147,000July 2018

201,000August 2018

Month-to-month gains

(seasonally adjusted)

from January to August

averaged approximately

232,400 jobs per month:


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Labor Force And WagesThe four-week average of initial unemployment claims continued its

downward trend in the third quarter to a new 48-year low of 205,750. The

figure marks the 182nd straight week of claims under the 300,000 threshold,

below which economists consider the job market to be in good health.

The national unemployment rate held at 3.9% in August 2018, perpetuating

what seems to be a floor for the metric. With so few available workers left to

hire, it is unlikely that the pace of job growth can continue at the current pace

of ~200,000 a month.

After falling to a 17-year low of 4.3% in May 2017, the national unemployment

rate (seasonally adjusted) ticked back up 10 basis points in August to 4.4%.

We expect the unusually low level of unemployment to climb above 4.5%

before the end of the year. In spite of the ever-tightening labor market, wage

growth has failed to catch up. While there have been some gains in wages

over the past year, much of this has been lost in recent months. During the

12-month period ending August 2017, the national average hourly wage

increased by 2.5%. This is still lower than 3.0%+ annualized gains prior to the

recession.

There are several theories explaining the lagging wage growth, including

fundamental shifts in the labor market. Perhaps most apparent is an

increasingly younger workforce, created in part by the retirement of baby

boomers with considerably more seniority and who have been earning

higher compensation. Competition from less expensive foreign labor has also

been an issue, as it creates downward pressure on domestic wages. There

is also a mismatch between high-paying open positions and a lower-skilled

workforce. Existing wage growth is largely being driven by high demand for

skilled workers; there remains a shortage of workers with the technical skills

required for positions in many industries, including Healthcare, Life Sciences,

and Construction.

The gap between the size of the full-time and part-time workforces stabilized

somewhat during the third quarter after rapidly growing earlier in the year. As

of August 2018, there were 128.6 million persons employed in full-time jobs

in the U.S., and 26.9 million persons employed in part-time jobs. During the

12 months ending August 2018, the number of full-time jobs increased by

2.7 million, while the number of part-time jobs decreased by 616,000.

Initial Unemployment ClaimsUnited States | Four-Week Moving Average

Unemployment RateUnited States | 1980 - August 2018

Jan-

10A

pr-1

0Ju

l-10

Oct

-10

Jan-

11A

pr-1

1Ju

l-11

Oct

-11

Jan-

12A

pr-1

2Ju

l-12

Oct

-12

Jan-

13A

pr-1

3Ju

l-13

Oct

-13

Jan-

14A

pr-1

4Ju

l-14

Oct

-14

Jan-

15A

pr-1

5Ju

l-15

Oct

-15

Jan-

16A

pr-1

6Ju

l-16

Jan-

17A

pr-1

7Ju

l-17

Oct

-16

200000

300000

400000

500000

Initial Unemployment Claims

15-Year Average= 350,079

(Week of 9/15/2018) = 205,750

Oct

-17

Jan-

18A

pr-1

8Ju

l-18

0%

2%

4%

6%

8%

10%

12%U.S. Unemployment Rate

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Note: Data seasonally adjusted. Source: Federal Reserve Bank of St. Louis, Transwestern

Note: Data seasonally adjusted, shaded bars represent recessions. Source: Bureau of Labor Statistics, Transwesternh*Through August 2018


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Average Hourly Earnings12-Month Percentage Growth | 2007 Through August 2018

Employment Levels by Job StatusUnited States | 2010 Through August 2018

1%

2%

3%

4%

07* 08 09 10 11 12 13 14 15 1716

Average 2009-2016 = 2.2%Average 2007-2008 = 3.3%

18

-6000-5000-4000-3000-2000-1000

01000200030004000

Part-TimeFull-Time

10 11 12 13 14 15 16 17 18*

The national job availability ratio (not seasonally adjusted) remained at 0.9

in July 2018. The availability ratio measures the relationship between the

number of potential applicants and the number of jobs available.

Despite the overall equilibrium, there remains significant mismatches

between the number of jobs available and the number of qualified workers

for many positions in most industries. This is especially true for higher-

skilled technical positions where there remains a labor shortage across a

spectrum of industries from Construction to Information Technology. On

average, the fast-growing Education/Health Services, Professional/Business

Services, Financial Activities, and Leisure/Hospitality sectors had the highest

number of job openings relative to the number of unemployed, each with

job availability ratios less than 1.0.

Gross Domestic Product (GDP)Annualized real GDP growth surged to 4.2% in the second quarter, boosted

heavily by net exports. This was a big improvement from the comparatively

lackluster 2.2% growth in the first quarter, although similarly sluggish

performance in the first quarters of prior years strongly suggest a seasonality

issue not captured by the annualization adjustments made by the BLS.

Consumer expenditure growth rebounded from a five-year low of 0.5% in

Q1 to a more robust 3.8% in Q2, reclaiming the role of lead generator of

economic growth; however, other NIPA accounts had higher percentage

growth. Most notable was exports, which had a sharp uptick of 9.3% thanks

to a (temporary) flood of soybean exports to China in advance of recently

introduced tariffs. Domestic fixed investment also continued to grow

markedly in the second quarter at a rate of 6.2%, although this was weaker

than the 8.0% rate in the first quarter.

Corporate ProfitsCorporate profits totaled $2.25 trillion (annualized and seasonally adjusted)

during the second quarter of 2018. This was an increase of $72 million

from the first quarter of 2018. The sharp jump in profits can be attributed to

stronger economic growth and the recent corporate tax cuts. Taxes paid by

U.S. companies in the second quarter of 2018 were a whopping 33.3% lower

than a year prior ($237.1 million vs. $355.8 million). The increase in profits

should lead to strong growth in capital investments and more robust overall

GDP growth in the period ahead.

*Data available starting March 2007 Source: Bureau of Labor Statistics, Transwestern

Note: Data seasonally adjusted Source: Bureau of Labor Statistics, Transwestern

Number of Unemployed Vs. Job Openings12-Month Average Ending Aug 2018

Thousands of Jobs 0 200 400 600 800 1000 1200

Number of Job OpeningsNumber of Unemployed

Mining

Information

Other services

Financial activities

Transportation and utilities

Government

Construction

Manufacturing

Education and health services

Professional and business services

Leisure and hospitality

Wholesale and retail trade

Note: Based on 12-month trailing average, data not seasonally adjusted Source: Bureau of Labor Statistics, Transwestern


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GDP Percent ChangeUnited States | Annual GDP Change in 2009 Constant Dollars

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Q108

Q308

Q109

Q309

Q110

Q310

Q111

Q311

Q112

Q312

Q113

Q313

Q114

Q314

Q115

Q315

Q316

Q117

Q116

20-Year Average = 2.4%

Q318

Q118

Q317

Revolving CreditAs short-term interest rates have climbed, the growth of revolving consumer

credit has slowed considerably. Total consumer credit outstanding increased

just 1.5% over the 12 months ending July 2018. This is a marked decline from

the 6.1% rate of growth seen in 2017. As of July, total outstanding revolving

credit stood at $1.04 trillion, still accounting for 26% of all consumer credit.

Growth in non-revolving consumer credit has picked up this year, increasing

at an annual rate of 6.4% as of July. The slowdown in debt growth explains

the deceleration in consumer spending previously discussed. Nevertheless,

we expect personal consumption growth to continue to be propped up by

the increasingly tight labor market for the time being. In fact, the cooling

of debt growth suggests that shoppers are better capitalized and more

frequently reaching deeper into their own pockets for purchases and going

less into debt.

Housing MarketHome price growth has slowed slightly in recent months but remains robust.

Average home prices in the 20 major metro areas covered by the S&P/Case-

Shiller Home Price Index increased 6.3% in the 12 months ending June 2018.

The largest home price grains continued to be in the West. The cities of Las

Vegas, Seattle, and San Francisco again had the highest rates of appreciation

over the year at 13.0%, 12.8%, and 10.7%, respectively. One notable concern

in the escalation of prices is affordability. However, the combined effects of

the rebounding labor market and continued low mortgage rates have kept

demand high. Even with the acceleration of construction activity, supply has

struggled to keep pace. The number of homes on the market relative to the

number of households is still at its lowest level since the 1980s.

Since the end of 2017, home sales nationwide have slowly, but steadily

declined, and this trend continued into the third quarter. According to the

National Association of Realtors, the annualized pace of existing home sales

was 5.34 million in August 2018, down from 5.42 million in August 2017, and

5.5% off the post-recession peak of 5.72 million in November 2017. While

higher interest rates are certainly a factor in the slowdown, a pronounced lack

of supply seems to be the biggest culprit. This is confirmed by the opposite

trend of existing home prices which averaged $328,400 in August 2018,

3.0% higher than a year prior. Mortgage rates are back on the upswing after

holding steady through spring and early summer. As of September 20, the

average commitment rate for a 30-year, conventional, fixed-rate mortgage

stood at 4.65%.

U.S. Corporate Pretax Profits

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Corporate Profits

Co

rpo

rate

Pro

fits

In T

rilli

ons S&

P 5

00

12

-Mo

nth EP

S

0

24

48

72

96

120

S&P 500 12-Month EPS

2017201620152014201320122011201020092008 2018*

Note: Quarters are seasonally adjusted at annual rates. Source: Bureau of Economic Analysis, Transwestern * Through Q3 2018

*Through Q3 2018, seasonally adjusted at annual rates. Yearly data not seasonally adjusted. Source: Bureau of Economic Analysis, Standard and Poor’s, Transwestern


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The Federal BudgetThe Federal budget deficit for the 2017 fiscal year, which ended on

September 30, 2017, was $665 billion (or 3.5% of GDP), up from $587 billion

(3.2% of GDP) in FY2016. The budget shortfall marked the second federal

budget deficit increase since FY2009 (the first being in FY2016) and was a

sharp contrast to the Congressional Budget Office’s (CBO) projection of a

decline in FY2017.

As we expected, the CBO’s prior estimate of deficit decline in FY2018 was

reversed in their April 2018 projections. Not surprisingly, the increase stems

primarily from the major tax and spending legislation enacted since the

prior June 2017 projections including the Tax Cuts and Jobs Act of 2017, the

Bipartisan Budget Act of 2018, and the Consolidated Appropriations Act of

2018. The legislation is a “perfect storm” of corporate and income tax cuts

demanded by President Trump and federal spending growth demanded by

Congress.

The combined effects of this legislation have resulted in significantly reduced

government revenues alongside increased outlays. The CBO projects that

debt held by the public will approach 100 percent of GDP by 2028—far greater

than the debt in any year since just after World War II. There are a number

of potential serious consequences of such a high level of debt including:

far greater federal spending on debt service, probable federal bond rating

downgrades, and a significantly diminished ability to stimulate the economy

via tax or fiscal policy in the event of a recession.

Interest Rates and InflationAs expected, the Federal Open Market Committee (FOMC) voted to raise the

federal funds benchmark rate another quarter-percent at their June meeting,

pushing the target to 2.0%. The June rate increase followed an equivalent

hike in March. Although we previously anticipated just three interest rate

hikes in 2018, the Fed has recently indicated that a fourth increase is likely

in light of robust economic growth. However, an additional three increases

planned in 2019 has investors on edge, considering recent trade friction and

a flattening yield curve. As we predicted in prior quarters, the interest rate

increases to-date have now begun to slow consumer spending growth.

Consumer price inflation, which is usually inversely related to interest rates,

continued to climb during the third quarter of 2018. According to the CPI-U

index, average consumer prices in July 2018 were 2.9% higher than they

were a year prior—the largest 12-month increase since February 2009. The

personal consumption expenditure price index (PCEPI), which takes into

Annual Change in Existing Home Sale PricesUnited States

Baseline Budget ProjectionsUnited States

U.S. Existing Home Sales vs. Sales Prices

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Perc

ent C

hang

e Fo

r M

edia

n Pr

ice

of S

ing

le -

Fam

ily H

om

es

08 09 10 11 12 13 14 15 1716 18

Fed

eral

Defi

cit (

$ B

illio

ns)

Defi

cit A

s A

% o

f Rea

l GD

P

-1800

-1440

-1080

-720

-360

0Deficit

28272625242322212019181716-6%

-5%

-4%

-3%

-2%

-1%

0%% of GDP

28272625242322212019181716

Num

ber

of S

ales

– T

hous

and

s o

f Uni

ts

Ave

rag

e Sa

les

Pric

e

3000

3700

4400

5100

5800

6500Number of Existing Home Sales**

18*171615141312111009080706$200000

$220000

$240000

$260000

$280000

$300000Average Existing Home Sale Price

18*171615141312111009080706

Note: Data reflects 20-city composite index. Source: S&P/Case-Shiller, Delta Associates * Through August 2018

*At August 2018 **Seasonally adjusted annual sales rate Source: National Association of Realtors, Transwestern

Baseline budget projections as of June 2018. Source: Congressional Budget Office, Transwestern


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account changes in consumption habits as people substitute some goods

and services for others, increased 2.3% during the 12 months ending July

2018.

The upward trend of energy prices continued unabated in the third quarter.

Gasoline prices increased by 20.3% over the 12 months ending August 2018.

The substantial increase is a result of OPEC production cutbacks, which has

only been partially offset by an increase in U.S. production. Other factors

influencing overall price inflation include: transportation services (3.9%

increase) and housing costs (3.4% increase).

Prices of both new and used vehicles flattened in the third quarter of 2018

after a long decline. New vehicle price growth was 0.3% over the year ending

August 2018, while used vehicle prices increased 1.3% over the period. The

glut of vehicles on the market had forced automakers and dealers to slash

prices and offer generous incentives on vehicles to clear their lots. Total auto

sales in the United States totaled just 17.25 million in 2017, breaking a seven-

year streak of consecutive increases. Although demand for SUVs remains

very strong, demand for traditional sedans and sports cars has continued to

weaken.

Financial MarketsAfter a dip in the first quarter of the year, U.S. financial markets have steadily

regained their value since April. As of market close on September 20, the

Dow Jones Industrial Average stands at 26,657, and the S&P 500 index is

2,931—both new record highs.

The sharp dip in January was sparked by concerns over rising interest

rates and inflation. Those fears have since been quelled by solid economic

fundamentals, including strengthening GDP and job growth, as well as the

corporate tax cuts. The markets have still had to contend with the ongoing

trade feud between the U.S. and China, but to this point, investors have

mostly shrugged off those concerns.

Selected U.S. Government Interest Rates

U.S. Inflation and Personal Consumption Expenditure Index

Inte

rest

Rat

es (%

)

0%

1%

2%

3%

4%

5%

6%

7%30-Year Treasury10-Year TreasuryEffective Federal Funds Rate

18171615141312111009080706050403020100

12

-Mo

nth

Perc

enta

ge

Cha

nge

-3%

0%

3%

6%

9%

12%

15%Real PCEInflation

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Data are non seasonally adjusted monthly averages, 30-Year Treasury not issued between March 2002-Dec. 2005. Source: Federal Reserve Economic Data (FRED), Transwestern

Source: Federal Reserve Economic Database (FRED), Transwestern *Through July 2018


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Economic OutlookThree-quarters of the way through the year, it appears that the

economy still has plenty of gas left in its tank. We are currently

in the midst of the longest expansion period since World War

II, but the risk of recession is relatively low at least through the

end of the year going into 2019 (notwithstanding any major

shocks). Nevertheless, many economists are growing wary of

an impending recession as some late-cycle indicators begin to

emerge, most notably the flattening yield curve.

Despite the optimistic outlook, a potential trade war remains a

major downside risk. The Trump administration has progressively

raised tariffs on both European and Chinese imported goods,

but the dispute with the latter has been particularly contentious.

In September, the Trump administration announced a further

$200 billion in tariffs on Chinese imports. In retaliation, China

ordered $60 billion in tariffs on U.S. goods. In more positive

trade news, it appears that the U.S. and Mexico have reached

an agreement on changes to NAFTA, but Canada continues to

balk at some of the revisions.

Consumer spending continues to be in the driver’s seat

of economic growth, although higher interest rates have

dampened growth somewhat. Fortunately, wage growth has

finally shown signs of accelerating after stagnating for years.

Higher wages should help offset higher borrowing costs and

further buoy economic growth.

Real GDP growth Housing

Unemployment Rate Federal Funds Rate

Inflation

Payroll jobs

2.8%In 2018

5.5 to 6.0%Price appreciation in 2018

4.0%Year-End 2018

2.3MAdded in 2018

Specifically, we believe the economic outlook is as follows:

One-to-Three 25 basis-point increases in 2019

4.0%Year-End 2018

National Payroll Job Growth Summary

year Job Change %Change

2018* 2,425,000 1.7%

2017 2,272,000 1.6%

2016 2,509,000 1.8%

2015 2,885,000 2.1%

2014 2,577,000 1.9%

2013 2,206,000 1.6%

2012 2,243,000 1.7%

2011 1,570,000 1.2%

2010 -951,000 -0.7%

2009 -5,928,000 -4.3%

2008 -758,000 -0.5%

* 12 months ending in August 2018; others are comparisons of annual averages. Note that Bureau of Labor Statistics has re-benchmarked figures since their initial publication. The figures presented above are the most recent estimates.

U.S. Payroll Job GrowthPayroll Jobs

25-year Annual Average

2.37MU.S. payroll jobs

gained

1.3MPayroll jobs

gained

1.4%Growth rate

1.1%Average

growth rate

*Over the 12 months ending August 2018


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Metro AreaJob Change

Metro AreaJob Change

# % # %

New York 143,000 1.5% Raleigh-Durham 50,800 2.0%

Dallas/Ft. Worth 118,200 3.3% Denver-Boulder 50,500 3.0%

LA Basin Minneaplois-St. Paul 44,100 2.2%

Los Angeles/Long Beach/Glendale 48,600 1.1% Las Vegas 37,600 3.9%

Orange County (Santa Ana/Anaheim/Irvine) 16,000 1.0% Charlotte 30,800 2.6%

Riverside/San Bernardino/Ontario 48,300 3.4% Austin 30,000 2.9%

Total LA Basin 112,900 1.4% Tampa-St.Petersburg 29,900 2.3%

Houston 101,800 3.4% Portland (OR) 29,900 2.5%

Washington, DC 77,100 2.3% Detroit (Detroit/Warren/Livonia) 28,000 1.4%

Seattle 76,200 3.8% Cleveland 27,100 2.5%

Boston (Metropolitan) 62,200 2.3% Salt Lake City 25,900 3.6%

San Francisco Bay Area Indianopolis 22,500 2.1%

San Jose/Sunnyvale/Santa Clara 31,000 2.8% Jacksonville 22,100 3.2%

San Francisco/San Mateo/Redwood City 18,600 1.7% Kansas City 21,500 2.0%

Oakland/Fremont/Hayward 19,300 1.7% San Diego 21,200 1.5%

Total Bay Area 68,900 2.0% Cincinnati 20,000 1.8%

Philadelphia 61,500 2.1% Nashville 19,300 2.0%

Phoenix 61,300 3.1% Oklahoma City 17,300 2.8%

Chicago 59,600 1.3% Baltimore 16,000 1.1%

Atlanta 57,000 2.1% Pittsburgh 14,600 2.2%

Orlando 53,500 4.3% Sacramento 14,600 1.5%

South Florida St. Louis 14,500 1.1%

West Palm Beach/Boca Raton 7,700 1.3% Memphis 14,300 2.2%

Fort Lauderdale 18,800 2.3% San Antonio 13,300 1.3%

Miami/Miami Beach/Kendall 24,300 2.1% Columbus (OH) 13,000 1.2%

Total South Florida 50,800 2.0% New Orleans 9,700 1.7%Note: Data not seasonally adjusted.Source: Bureau of Labor Statistics, Transwestern

12-Month Payroll Employment Change Through August 2018


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S 3 T H E H O U S T O N M E T R O

ECONOMYS1

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HOUSTON ECONOMYEconomy Adds 62,500 Jobs yTDThe Houston economy looks to be in expansionary mode once again as the metro has created 62,500 jobs year-to-date and energy prices have maintained stability in the high $60’s-to-low-$70s for the majority of 2018. In the 12 months ending in September, job growth totaled a record setting 128,700 jobs created; however, it should be noted that year end 2017 numbers were inflated due to temporary jobs aiding in Hurricane Harvey recovery efforts. Still, with over 60k jobs created over the first three quarters of the year, Houston is well positioned to create between 90 to 100k jobs for the year. The sectors posting the highest job growth throughout the metro are professional & business services (33.2k), construction (29.5k) and trade & transportation (17.8k). Houston’s healthcare sector has also seen a recovery in job growth after being impacted by rising operational costs and reduced reimbursement rates that resulted in a series of job cuts over 2017. To add to Houston's impressive lists, activity at the Port of Houston is on pace to exceed last year’s record breaking TEU total of 2.5 million. Thanks to recent expansion efforts, the Port is now able to accommodate larger vessels at a quicker pace than it was able to in the past. The industrial sector has benefited from increased activity at the Port with the construction pipeline at 12.2 million SF in the third quarter as demand for “last-mile” locations remains strong. The Houston housing market had a slight decline in the month of August, but the market is still on pace to exceed 2017’s banner year in terms of single-family home sales. The Houston economy is experiencing strong signs of improvement through the third quarter of the year with strong job growth, a stabilizing energy sector and growth at the Port.

UnemploymentThe Houston area unemployment rate was 4.3% in August, a decline of 0.5% since the beginning of the year and a 0.8% decline year-over-year. With job growth continuing to climb, it is anticipated that unemployment rates will decline further over the remain-der of 2018 and through 2019. The Texas unemployment rate is 3.9%, down from 4.0% year-over-year. National unemployment came in at 3.7% in August, down 0.5% year-over-

Core Industry Employment

Payroll Job GrowthHouston Metro Area

*12-month job growth through September 2018 Source: Bureau of Labor Statistics, Transwestern

-120-90-60-30

0306090

120

2018*201620142012201020082006200420022000

1997-2017 AverageJob Growth = 45,585/Year

Payroll Job GrowthLarge Metro Areas | 12 Months Ending September 2018

Source: Bureau of Labor Statistics, Transwestern

0

30

60

90

120

150

SFChiDenMiaLAAtlDCPhxNYDFWHou

Payroll Job Change In Percentage TermsLarge Metro Areas | 12 Months Ending September 2018


0%

1%

2%

3%

4%

5%

ChiLANYSFAtlDCDenDFWPhxHouMia

ENERGY

3,000 jobs added,a 3.8% increase

CONSTRUCTION

29,500 jobs added, a 13.8% increase

TR ADE & TR ANSPORTATION


MANUFACTURING

11,800 jobs added,a 5.3% increase

EDUCATION & HEALTH SERVICES


PROFESSIONAL &BUSINESS SERVICES


THE HOUSTON METRO ECONOMy

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year and down 0.4% since the beginning of 2018. Although the Houston unemployment rate remains higher than the Texas and National rates, the Houston rate remains in a healthy range.

EnergyThe energy sector continues to stabilize as oil prices for both WTI and Brent Crude closed the quarter above $70 per barrel. WTI oil closed the quarter at $73.25 per barrel an increase of 25.4% since the beginning of the year. Brent Crude was $82.73 per barrel, a 30.2% increase over the same period. At the close of the third quarter, rig count totaled 1,054 active rigs, a 12.1% increase year-over-year and a 14.1% increase since the beginning of the year. The energy market recorded 3,000 jobs in the 12 months ending in September and 3,100 jobs have been created year-to-date. Despite the improvements in rig counts and price per barrel, many energy companies are still battling the prolonged impacts of the energy downturn. Of note, Hess Energy put 154K SF of additional sublease space on the market at 1501 McKinney in the CBD bringing their total to 280K SF. As energy companies focus on improving efficiencies, energy related job growth will return, but it is not likely to return to historical levels.

ConstructionHouston area construction job growth remains elevated with 22,500 jobs created year-to-date and 29,500 created year-over-year. City of Houston construction permits totaled $543.4 million in August, bringing the year-to-date total to $4.1 billion, a 1.5% increase over the same period in 2017. While commercial development activity continues to decline after completion of the most recent delivery cycle, single family residential has begun to recover, resulting in the construction sector continuing to trend up. As large projects continued to deliver and Hurricane Harvey repairs are fully completed, construction values should begin to decline modestly. Commercial permit values are currently down 12.5% year-over-year. Over the quarter, Stonelake Capital Partners announced plans to break ground on a 200,000 SF office tower in a mixed-use development called Park Place River Oaks. The 15-story office tower is anticipated to break ground in January 2019 and be complete in Spring 2020. Also over the quarter, construction started on the redevelopment of former Texas Instruments campus in Stafford. The project, dubbed ‘The Grid’, has plans for 500k SF office, 350K SF of retail/restaurant space, 2,400 residential units and multiple hotel brands.

ManufacturingThe manufacturing sector has added 11,800 jobs in the 12 months ending in September, the majority of growth driven by the durable goods sector which created 10,000 jobs over the same period. The Houston Purchasing Managers Index (PMI), a short-term leading indicator of produc-tion, was 61.2 in August, down 0.8 points from 62.0 in July. Despite the modest decline, readings above 50 indicate economic expansion, which Houston has recorded readings above 50 for the past 10 months. In manufacturing news, Coca-Cola broke ground on a $250 million manufacturing and distribution facility in North Houston that will consolidate several locations throughout the metro. The 1.0 million-SF plant will include five production lines that will primarily serve the local market. This is the first facility Coca-Cola has built in the U.S. since 2006 and is expected to be up and running by 2020.

Unemployment RatesLarge Metro Areas

U.S. Rotary Rig Count

Houston Manufacturing OutlookPurchasing Managers Index


Source: Baker Hughes, Transwestern *As of 10/07/2018

Source: ISM-Houston *Through August 2018

August 2018 August 2017

0%

1%

2%

3%

4%

5%

6%

LAPhxHouNYChiMiaAtlDFWDCDenSF

MiscGasOil

0200400600800

100012001400160018002000

18 YTD1614121008060402009896

Exp

ansi

on

Co

ntra

ctio

n

303540455055606570

201820172016201520142013201220112010


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3.0MTEUs through Port of Houston in 2018, annualized

$1.1BMcNair Campus expansion and renovation at TMC campus

$1.5BNew 30-acre research campus called TMC3

$650MRenovation and expansion of TMC campus

$198MExpansion and renovation of TMC location

59.6 MPassengers through Houston Airport System in 2018 at current pace

35.5MPort of Houston total tonnage yeart-to-date 2018, through August

Trade and TransportationActivity through the Port of Houston continues to increase as expansion projects accommodate more tonnage through the system. Year-to-date total tonnage through the port totals 28 million, an 8% increase over last year. Currently, the Port of Houston ranks second amongst U.S. ports in total tonnage (2017) and is first in foreign waterborne tonnage with cargo valued at $131.5 billion. The increase in tonnage directly correlates to increases in TEU activity. In September, 230,331 TEUs passed through the port, bringing the year-to-date total to 2.0 million TEUs, a 10% increase year-over-year. At its current pace, the number of TEUs through the port would break last year’s record of 2.5 million. At the end of the quarter, the port had it’s largest container shipment ever, totaling 9,500 TEUs.

Education and Health ServicesThe education & healthcare services sector added 10,800 jobs in the 12 months ending in Septem-ber, of which 9,100 jobs were created in the healthcare sector alone. The healthcare sector has nearly recovered following a large amount of layoffs in 2017 as major providers looked to strengthen their books amidst lower reimbursement rates and climbing operational costs. In merger & acquisition news, Houston based Memorial Hermann Health System and Dallas-based Baylor Scott & White Health have announced plans to merge. The two systems combined would employ over 73,000 people, with 68 hospital campuses and more than 1,100 care delivery sites. This would make the combined entity the largest health system in Texas. The goal of the merger is to create a more cost-effective healthcare system both for patients and the providers. In education news, the University of Houston (UH) approved a $100 million budget to improve main campus facilities. The renovations will include updating interi-ors, technology infrastructure and the energy efficiency of six buildings on campus. The project will be funded through Higher Education Assistance Fund and construction is anticipated to be complete by the end of 2024. In addition to the main campus, UH also has ongoing projects at their Katy, Victoria and Sugar Land campuses.

Notable Healthcare Projects Under Construction

Energy

Trade/Transporation/Utilities*

Manufacturing

Professional/Business Services

Financial Activities

Government

Construction

Education/Health Services

Other

$490Billion Total

GDP10%

20%

17%

14%13%

8%

7%6%5%

Tota

l TE

Us

(Mill

ions

)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2018*20172016201520142013201220112010200920082007

300000

325000

350000

375000

400000

425000

450000

475000

500000

2018*20172016201520142013201220112010200920082007

Core IndustriesHouston Metro Area | 2017 Gross Domestic Product

Houston Port AuthorityContainer Traffic

Houston Airport SystemAir Freight

Source: Bureau of Economic Analysis, Transwestern *Number is estimate as actual data not available

Note: TEUs = 20-foot-equivalent container units. Source: Houston Port Authority, Transwestern *Through August 2018, annualized

Source: Houston Airport System, Transwestern *Through August 2018 annualized


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HousingSingle-family home sales totaled 6,548 in September, a 5.8% decline over the year as the boost to sales post Hurricane Harvey has run its course. Although sales transaction counts are lower year-over-year, 2018 sales volume (price) is pacing 5.6% higher than sales in 2017, as luxury sales and prices have begun to tick up. Average single-family home prices totaled $295,765, a 1.7% increase year-over-year. The months of inventory (indicates how long it would take to deplete active inventory based on the previous 12 months of sales) was 4.0 months, up slightly from 3.9 months last year. “With tight inventory, rising inter-est rates and families focused on back-to-school, it wasn’t a huge surprise to see market activity slow down at this time,” said HAR Chair Kenya Burrell-VanWormer with JPMorgan Chase. “The Houston economy is strong. As we head into the fall months, it will definitely take a healthy supply of homes and some pricing moderation to keep prospective buyers engaged in the market.”

Economic OutlookContinued Growth Into the New year The Houston economy has been nothing short of resilient over the past three years as it has weathered a downturn in the energy sector and the significant impacts of Hurricane Harvey while continuing to post positive job growth. Over the course of 2018, crude prices have seemingly turned the corner with oil trading in the high $60's to low $70's, which has allowed many in the sector to return to profitability. As such, we have seen hiring increase in typical Houston fashion, with over 100k jobs created year-over-year. Should energy prices remain in their current range we anticipate continued improvement across both unemployment rates and office using employment totals. Increased wages should also translate into higher retail sales through the holiday season, helping to close 2018 on a high note. Looking forward, 2019 should be a strong year for the Houston economy as each of the economic pillars (energy, healthcare, e-commerce, and petrochemical) are in various stages of growth. Moreover, Houston's focus on adding a technology pillar to further diversify its economic base is also leading to growth. Houston now ranks 13th nationally for the number of startups per 1,000 businesses. As such, we anticipate job growth to continue on its current trajectory adding between 90k to 100k over the course of the year. While overall job numbers will be up, job losses should occur in the construction industry as the most recent development wave has continued to decline. Still, growth in other sectors such as professional and business services and healthcare, should more than offset the losses.

Oil Prices & Job GrowthHouston Metro Area

Job ForecastHouston Metro Area | Annual Job Growth

SOURCE Bloomberg, Transwestern *Prices as of 10/18, job growth for 12 months ending in August 2018


-80

-60

-40

-20

0

20

40

60

80

100

120

Job Growth (in thousands)

18*17161514131211100908070620

40

60

80

100

120

Brent Price (in dollars)WTI Price (in dollars)

Avg. Annual Growth

2006-16 = 53,000/year

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

80,000

100,000

120,000

06 07 08 09 10 11 12 13 14 15 16 17 18* 19*


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OFFICE MARKETS1

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Office TrendLines®

10-Year Trend Q3 2018OFFICE MARKET OVERVIEWOffice Market Returning One Step at a TimeThe third quarter saw the Houston office market record positive absorption for the first time in 2018 and only the second time over the previous two years. Leasing activity increased significantly, fueled by strong job growth in the office-using sector. After struggling through several years following the energy downturn, office-using job growth is returning to form with 37,800 jobs created in the 12 months ending in August. Even more impressive, vacancy for the market declined for the first time since 2014, after marking increases in sixteen consecutive quarters. Overall, absorption for all classes of space totaled 190,081 SF over the quarter, resulting in vacancy decreasing by 10 basis points. Despite the positive news, headwinds remain as a quarter of the market is listed as available, new construction remains in demand, and companies continue to improve their operating efficiencies in headcount and office space. Sublease availability has also continued to challenge the office sector. At the close of the third quarter, 8.7 million SF of sublease space was listed on the market, down from 9.4 million at mid-year. While trending in the right direction, sublease supply could take another hit as the potential for an additional large block of space looms.

Total Available Sublease Space

(1.3) MSFYear-to-Date

$35.83 PSFClass A Full Service

2.9 MSF

46.3%Preleased

128,700Jobs gained 12 Months ending September 2018

Vacancy

Absorption

Rental Rate

Under Construction

Job Growth

Submarket Q3 2016 Q3 2017 Q1 2018 Q2 2018 Q3 2018

Energy Corridor 3,559,264 2,386,277 2,558,778 2,269,839 2,098,244

CBD 2,759,855 2,178,987 2,167,321 2,316,263 2,010,758

Westchase 1,485,336 1,543,705 1,353,204 1,365,546 1,300,834

Greenway Plaza 190,692 141,849 133,752 998,388 998,071

Galleria/Uptown 1,092,670 842,634 864,150 816,866 860,036

All Houston Metro 12,173,599 9,829,433 8,359,256 9,381,144 8,665,830

Notable 2018 Leases524,000 SFRenewal2000 Post Oak BlvdGalleria/Uptown submarket

212,000 SFRelocation/Right-Sizing (CBD)801 Texas AveCBD submarket

354,000 SFRenewalWilliams TowerGalleria/Uptown submarket

120,000 SFRenewal/Expansion5 Houston CenterCBD submarket

155,000 SFRelocation (Galleria/Uptown)801 Texas AveCBD submarket

301,000 SFRelocation (Greenway Plaza)Enclave PlaceKaty Fwy/Energy Corridor

226,000 SFRenewal/Expansion1430 Enclave Pky Katy Fwy/Energy Corridor

118,000 SFNew Lease500 JeffersonCBD submarket

16.4%Vacant Available

23.9%Total Available

$21.95 PSFClass B Full Service

THE HOUSTON METRO OFFICE MARKET

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VacancyTotal Availability Declines While Vacancy RisesThe third quarter saw direct vacancy decline for the first time since the second quarter of 2014, a welcomed sign for the beleaguered market after sixteen consecutive quarterly increases. Closing the period at 16.4%, direct vacancy for all classes of space declined by 10 basis points as Class A remained unchanged at 16.1%, while Class B decreased 10 basis points to 17.6%. In total, 19 of 33 submarkets registered decreases in vacancy with FM 1960/I-45 North and Bellaire leading the way declining 3.9% and 1.8%, respectively.

Contrastingly, total availability trended up over the quarter as a combination of new construction activity and additions to the sublease supply triggered a 40 basis point rise to 23.9%. Class A total availability drove the increase, rising by 40 basis points to 25.7%, while Class B availability increased by 20 basis points to 22.3%. Roughly half (16 of the 33) of the tracked submarkets showed declines in availability. The submarket with the highest availability rate was the Class A North District/N Belt West submarket at 64.9% available.

Net AbsorptionQuarterly Absorption Comes in PositiveAbsorption in the third quarter totaled positive 190,081 SF for all classes of space, bring-ing the year-to-date total to negative 1.3 million SF. Absorption for both classes of space was positive over the quarter. Class A absorption registered 90,671 SF (-486,856 SF year-to-date) and Class B recorded positive 87,730 SF (-841,583 SF year-to-date). Over half (17 of 33) of the submarkets in the metro recorded positive absorption in the third quarter with Katy Freeway West recording the highest absorption totaling 140,261 SF. Also of note, there were several new leases signed over the quarter that attributed to absorp-tion, including: Asurion (86K SF, Legacy at Fallbrook, West Belt), Texas Capital Bank (60K SF, Four Oaks Plaza, Galleria/Uptown) and Exterran Energy Solutions (59K SF, 1100 Equity, Westchase).

Rental RatesAsking Rates Continue to AscendOverall asking rates increased by 1.5% over the quarter and 2.0% over the year, finishing the period at $30.92 PSF full service. Despite the increase in asking rates, concessions remain elevated throughout the market with generous concession packages and tenant improvement allowances being offered in order to maintain the highest rent figures. Class A rates closed the quarter up 0.6% (+$0.20), ending at $35.83 PSF full service, while Class B asking rates declined by 1.2%, ending at $21.97 PSF full service. The submarkets with the highest asking rents are the Katy Fwy East ($45.00 PSF), the Central Business District ($44.35 PSF) and Galleria/Uptown ($38.83 PSF).

Office Vacancy RatesSelect Metro Areas | Q3 2018

Net Absorption of Office SpaceHouston Metro | 2001 Through Q3 2018

Contiguous Blocks of Available SpaceHouston Metro | Q3 2018

Source: CoStar, Transwestern

Note: Delivery of preleased space counts as positive net absorption. Source: CoStar, Transwestern *Through Q3 2018

Source: CoStar, Transwestern Note: Includes both existing and under construction buildings

National Vacancy Rate: 10.1%

0%

5%

10%

15%

20%

25%

Ove

rall

Vac

ancy

Rat

e

Bos NY Mia Den LA Atl Chi Was Phx DFW Hou

Direct Vacant Available Total Available

Net

Ab

sorp

tio

n in

Tho

usan

ds

of S

F

-2000

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2000

4000

6000

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10000

201820162014201220102008200620042002

Sublet Direct

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25,000 SF 50,000 SF 100,000 SF 200,000 SF

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30

285


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Supply and DevelopmentNew Projects Keep Breaking Ground Despite VacancyAt the close of the third quarter, the development pipeline totaled 2.9 million SF, increas-ing by over a million square feet with the groundbreaking of 801 Texas in the CBD. The 1.1 million SF, Class A building is being developed by Hines and anticipated to deliver by the end of 2021. The project currently sits at 67% available on preleasing activity to Vinson & Elkins and Hines. With a strong tenant desire for new construction and lending costs still relatively favorable, additional construction is anticipated throughout the metro area, specifically in core submarkets including the CBD, West Loop, Energy Corridor and the Woodlands.

The largest developments under construction are 801 Texas (CBD, 1.1 million SF), Capitol Tower (CBD, 778,000 SF - 36% leased to Bank of America and Quantum Energy) and CityPlace 2 (The Woodlands, 326,000 SF - 100% Leased to ABS). In the third quarter, Stonelake Capital Partners announced plans to break ground on a 15-story, 200,000 SF office tower near the River Oaks District. Stonelake stated they are currently in negoti-ations with two tenants to occupy the space. Additionally, McNair Interests is slated to move forward with a 1.2 million SF mixed-use project that will contain a 350,000 SF office component. The project is expected to break ground in 2019 and deliver to the market in 2023.

Office DeliveriesHouston Metro | 2007 Through Q3 2018

Office Space Under ConstructionSelected Metro Areas | Q3 2018 (SF in Thousands)

Chasewood Crossing III156,000 SF0% preleasedQ3 2019 delivery

CityPlace 1 149,000 SF5.2% preleasedQ2 2019 delivery

CityPlace 2 326,000 SF94% preleasedQ4 2018 delivery

Source: CoStar, Transwestern *Through Q3 2018


Largest Projects Under Construction

07 08 09 10 11 12 13 14 15 16 17

SF Leased at Delivery SF Available at Delivery

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

47% 46% 55% 51%43% 56%68% 73% 52% 70% 69% 46%

18*

0

5,000

10,000

15,000

20,000

MiaAtlHouPhxDenSFLABosDC MetroChiDFWNY

HP Campus378,000 SF (2 bldgs.)100.0% preleasedQ1 2019 delivery

801 Texas Ave1,106,581 SF32.8% preleasedQ4 2021 Delivery

Capitol Tower778,344 SF34.5% preleasedQ2 2019 Delivery


25

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Investment Market OverviewInvestment Activity Declines but Interest Remains High While sales volume is down from a banner year in 2017, which saw multiple major portfolios change hands, investor interest in the Houston metro remains elevated based on strong economic fundamentals, and a recovering energy sector. Third quarter sales activity totaled $485.1 million, an increase from $298.8 million in the second quarter and bringing the year-to-date sales activity to $1.1 billion for the Houston metro. Sales activity of note this quarter included Westway Plaza trading hands as the Aztec Fund purchased the 313,000 SF property from the Transwestern Development Company. The purchase is the first for the Aztec Fund in Houston as they are looking to expand their presence in the metro. Also of note, The Woodlands submarket gained two new multi-tenant facilities as The Howard Hughes Company acquired CB&I’s former campus from McDermott for $53.0 million ($206/SF).

Office Market OutlookLight at the End of the Tunnel?The Houston office sector is beginning to show its first signs of recovery as job growth continues to make strides and the energy industry finds its long-term footing. While headwinds remain prevalent for the sector with over 25% of the market listed as avail-able and strong demand for new construction prompting additions to supply in the face of business trends such as rightsizing, telecommuting and hoteling; leasing activity is expected to continue to gain momentum. A full recovery is still down the road and will be measured and submarket driven; however, Houston has shown the ability to absorb large blocks of space in a very short time. It is anticipated that well located Class A properties will recover first followed by the backfilling of value play submarkets. Over the near term, absorption should begin to trend in a positive direction with 2019 anticipated to create net positive absorption annually and Q4 2018 remaining in the black.

NCREIF Return Index for Office Properties

Office Investment Sales VolumeSelect Metro Areas | January Through Q3 2018

Source: Real Capital Analytics, Transwestern

Metro Area2018 yTD Return (through Q3)

12-Month Total Return at 3rd Quarter 2018

Atlanta 7.17% 8.95%

Boston 5.65% 6.35%

Chicago 4.41% 5.79%

Dallas 7.88% 11.49%

Denver 1.39% 4.03%

Houston 4.60% 4.98%

Los Angeles 6.06% 8.33%

National Average 5.12% 6.85%

New York 2.48% 3.71%

Phoenix 3.47% 5.44%

San Francisco 7.49% 9.50%

Washington 3.06% 4.24%

Note: NCREIF Index includes both current income and capital appreciation returns. Source: NCREIF, Transwestern

0

$5

$10

$15

$20

DenPhxMiaHouAtlDFWBosChiDC MetroLASFNY


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Projections for 2019Since the early 2000's, leasing activity in the Houston office market has outpaced demand resulting in an overhang of sublease supply averaging 3.2 MSF per year. As energy peaked in 2013 and 2014, energy related firms were forced to become defensive in strategy and look to secure space that they would potentially need in subsequent years. Given the large requirements that were generated by this strategy, a new construction wave was delivered to market. When oil prices subsequently crashed in late 2014, Houston's energy related firms were faced with significantly more space than they truly required thus the sublease supply vaulted from approximately 3.5 million square feet to over 12.0 million at its peak. An additional layer of shadow space also developed that hasn't been placed on the sublease market. The result has been a flight to quality as tenants are able to select from a plethora of alternatives. The relatively low cost of capital and overall efficiencies of new construction has also resulted in buildings continuing to break ground, regardless of overall availability. Former trophy buildings that are now competing with new construction have had to turn to significant capital improvements focusing on the tenant experience in order to capture market share. The result is one of the most challenging leasing environments in Houston's history.

Looking forward, we need to account for multiple factors when projecting where the market will go, including: energy prices and their impact on hiring, existing lease roll and the right sizing trends of tenants, as well as sublease supply and expiring subleases. Given the credit quality nature and extended term of many of the subleases available, determining impacts of forecast absorption on direct vacancy is highly subjective as requirements could utilize either direct or sublease space. Therefore, the projection of gross absorption, as defined as the overall increase in occupied space, and how it projects going forward is the primary goal of this analysis.

Given Houston's increase in office hiring as energy has stabilized in the high $60's-to-low $70's and a short term EIA forecast expecting energy to remain within the current range, we anticipate continued job growth at or above current levels for the balance of 2018 and into 2019. Overall job growth in 2019 is projected to produce 80k-100k new payslips. Moving forward we anticipate overall expansion in occupied space to turn positive for the market in the fourth quarter of 2018 and through 2019. When considering jobs added to absorption, the market has paced at 250 SF per office job added since 2010. Given, current space trends we have projected on a more conservative pace of 200 SF per office job added. As such, we predict positive net absorption to close 2018 ranging from 100k to 450k SF. For 2019, overall absorption is anticipated to range between 1.5 million and 2.4 million square feet and increasing further in 2020.

Office Using Employment vs Absorption & SubleaseHouston Metro Area - Class A Office

*12-month TW Office using job growth through September 2018, net absorption through Q3 2018. Source: Bureau of Labor Statistics, Transwestern

*12-month TW Office using job growth through September 2018, net absorption through Q3 2018. Source: Bureau of Labor Statistics, Transwestern

-60,000

-30,000

0

30,000

60,000

90,000

120,000

150,000

180,000

-2,000,000-1,000,000

01,000,0002,000,0003,000,0004,000,0005,000,0006,000,0007,000,0008,000,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

P20

20P

Class A Absoprtion Sublease Supply TW Office Using Employment

-60,000

-30,000

0

30,000

60,000

90,000

120,000

150,000

180,000

-2,000,000-1,000,000

01,000,0002,000,0003,000,0004,000,0005,000,0006,000,0007,000,0008,000,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Class A Absoprtion Sublease Supply TW Office Using Employment

Office Projections - Gross AbsorptionHouston Metro Area - Class A Office


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Submarket Total Bldgs InventorySF Available Immediately

Direct Vacancy Q3

2017

Total Availabilty

Q3 2017

Direct Vacancy Q3

2018

Q3 2018 Total

Availability

Net Absorption

Q3 2017

Net Absorption

Q3 2018

Net Absorption

yTD 2018

Under Construction

Conroe 13 923,053 62,275 5.4% 9.8% 6.7% 8.7% 116 11,471 5,993 -

CBD 61 42,915,742 7,896,465 16.1% 25.8% 18.4% 29.6% (62,154) -20,209 -616,368 1,884,925

Midtown 31 5,620,415 540,245 11.3% 17.3% 9.6% 14.1% (32,479) 10,448 88,957 -

Downtown 92 48,536,157 8,436,710 15.5% 24.8% 17.4% 27.9% (94,633) -9,761 -527,411 1,884,925

FM 1960/Champions 23 1,912,044 300,232 17.7% 21.5% 15.7% 18.6% (26,340) -5,566 8,494 -

FM 1960/Hwy 249 35 5,029,196 600,062 9.4% 15.9% 11.9% 17.5% (9,937) 12,764 -50,377 156,000

FM 1960/I-45 North 15 1,324,887 381,941 27.3% 34.2% 28.8% 30.1% (48,238) 51,289 -22,614 -

FM 1960 73 8,266,127 1,282,235 14.1% 20.0% 15.5% 19.7% (84,515) 58,487 -64,497 156,000

Greenway Plaza 48 11,137,164 1,745,610 12.7% 19.4% 15.7% 26.1% 4,920 66,605 86,746 -

Gulf Freeway/Pasadena 34 2,729,236 309,454 11.2% 17.4% 11.3% 12.1% 2,042 -4,364 -17,231 -

Katy Far West 26 2,770,222 328,257 12.2% 16.7% 11.8% 13.9% 15,234 35,673 75,995 -

Katy Freeway East 58 9,550,957 764,919 9.7% 16.4% 8.0% 13.1% (81,816) 40,545 114,310 -

Katy Freeway West 141 26,654,824 4,590,767 16.8% 28.5% 17.2% 30.1% (95,822) 140,261 -158,676 -

Katy Fwy / Energy Corridor 199 36,205,781 5,355,686 14.9% 25.3% 14.8% 25.7% (177,638) 180,806 -44,366 -

Kingwood/Humble 9 1,078,389 45,792 2.4% 2.6% 4.2% 4.2% 6,497 -12,846 -14,263 -

NASA/Clear Lake 52 5,492,311 1,003,788 17.9% 22.6% 18.3% 19.5% 25,788 10,878 -59,299 -

North District / IAH 20 2,761,372 754,309 27.8% 30.6% 27.3% 29.9% (16,346) -20,563 5,601 -

North District / N Belt West 75 10,356,982 4,784,123 42.1% 53.7% 46.2% 50.7% (155,687) 50,309 -414,597 -

North District / North Belt 95 13,118,354 5,538,432 39.1% 48.8% 42.2% 46.3% (172,033) 29,746 -408,996 -

Northeast 11 1,372,336 67,460 6.2% 10.0% 4.9% 8.6% (32,465) 537 778 -

North Loop West 29 3,946,341 830,227 17.0% 20.9% 21.0% 22.6% 3,436 -72,261 -193,730 -

Northwest Far 30 3,339,715 794,234 22.2% 27.9% 23.8% 27.3% 30,761 4,742 -9,327 -

Northwest Near 9 803,866 55,391 2.2% 3.4% 6.9% 7.2% 1,153 -12,235 -17,408 -

Northwest 68 8,089,922 1,679,852 16.8% 21.0% 20.8% 23.0% 35,350 -79,754 -220,465 -

South Main/Medical Center 46 10,101,160 359,819 6.0% 7.9% 3.6% 5.6% 19,648 -3,363 -11,950 -

E Fort Bend Co/Sugar Land 45 6,087,396 483,733 7.3% 15.9% 7.9% 15.6% (46,534) -14,607 -17,501 -

Southwest Beltway 8 39 5,381,959 987,795 14.7% 22.9% 18.4% 26.7% 16,526 11,151 -69,811 -

Southwest/Hillcroft 34 4,203,738 863,156 14.2% 23.7% 20.5% 25.0% 5,889 -27,522 74,418 -

Southwest Fwy / Sugar Land 118 15,673,093 2,334,684 11.7% 20.4% 14.9% 21.9% (24,119) -30,978 -12,894 -

The Woodlands 104 17,053,374 1,500,875 9.8% 12.4% 8.8% 11.3% 23,886 -95,253 -66,444 854,800

West Belt 36 5,356,608 779,632 14.6% 36.7% 14.6% 31.8% 26,910 67,801 63,306 -

Bellaire 29 4,324,094 300,794 10.1% 14.9% 7.0% 10.8% (75,343) 80,535 21,378 -

Galleria/Uptown 58 16,779,427 2,072,060 13.5% 21.3% 12.3% 18.4% (128,316) 121,946 250,111 -

Post Oak Park 27 4,529,531 1,250,065 22.4% 28.5% 27.6% 33.4% (76,997) -56,031 -113,158 -

Richmond/Fountainview 11 829,982 60,263 18.9% 10.7% 7.3% 7.7% 12,883 2,423 -2,339 -

Riverway 16 2,868,522 541,482 20.7% 24.4% 18.9% 24.2% (20,378) -17,852 45,207 -

San Felipe/Voss 33 5,055,008 1,053,358 18.1% 24.5% 20.8% 26.8% (74,428) -25,138 -95,737 -

West Loop 174 34,386,564 5,278,022 15.7% 21.9% 15.3% 20.9% (362,579) 105,883 105,462 -

Westchase 89 17,772,254 3,265,638 16.3% 29.0% 18.4% 29.4% 55,368 -141,487 -222,911 -

TOTAL - Houston 1,287 240,062,105 39,374,221 15.4% 23.3% 16.4% 23.9% -732,223 190,081 -1,332,447 2,895,225

SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE: Includes buildings 50,000 SF RBA and greater; does not include buildings under construction or owned by the government

Office Market Indicators - All SpaceHouston Metro Area


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Submarket Total Bldgs InventorySF Available Immediately

Direct Vacancy

Q3 2017

Total Availabilty

Q3 2017

Direct Vacancy

Q3 2018

Q3 2018 Total

Availability

Net Absorption

Q3 2017

Net Absorption

Q3 2018

Net Absorption

yTD 2018

Rental Rates Q3

2017

Rental Rates Q3

2018

Under Construction

Conroe 2 128,832 18,422 10.1% 14.3% 14.3% 14.3% (3,763) - - $31.05 $29.09 -

CBD 36 33,237,146 4,991,207 12.8% 23.3% 15.0% 27.6% (99,593) -36,649 -469,107 $44.94 $44.88 1,884,925

Midtown 8 2,486,094 263,272 15.9% 25.0% 10.6% 15.9% (20,358) 15,570 110,847 $34.49 $34.62 -

Downtown 44 35,723,240 5,254,479 13.0% 23.4% 14.7% 26.8% (119,951) -21,079 -358,260 $44.08 $44.38 1,884,925

FM 1960/Champions 1 150,000 - 0.0% 0.0% 0.0% 8.1% - - - - - -

FM 1960/Hwy 249 17 3,729,412 395,441 7.9% 10.5% 10.6% 15.9% 19,013 5,499 -46,855 $27.94 $27.84 156,000

FM 1960/I-45 North 2 206,705 64,936 26.4% 26.4% 31.4% 32.0% 1,914 -10,424 $25.00 $25.00 -

FM 1960 20 4,086,117 460,377 8.6% 10.9% 11.3% 16.4% 19,013 7,413 -57,279 $27.44 $27.37 156,000

Greenway Plaza 20 7,394,756 1,320,394 13.5% 22.4% 17.9% 32.8% 25,460 28,102 117,201 $38.29 $37.48 -

Gulf Freeway/Pasadena - - - - - - - - - - - - -

Katy Far West 15 1,604,772 327,635 22.9% 31.1% 20.4% 23.5% 15,234 29,337 74,394 $28.73 $29.03 -

Katy Freeway East 24 5,774,299 558,998 11.3% 18.4% 9.7% 14.3% (56,676) 31,243 107,206 $41.55 $40.17 -

Katy Freeway West 72 18,773,006 2,757,359 15.2% 28.1% 14.7% 30.2% (10,403) 108,569 61,526 $36.26 $35.35 -

Katy Fwy / Energy Corridor 96 24,547,305 3,316,357 14.2% 25.8% 13.5% 26.4% (67,079) 139,812 168,732 $37.25 $35.95 -

Kingwood/Humble 2 144,312 7,466 5.2% 6.5% 5.2% 5.2% 1,927 - 1,927 $31.94 $31.82 -

NASA/Clear Lake 15 2,034,406 205,535 5.1% 13.6% 10.1% 10.6% 12,699 19,357 -73,307 $24.50 $24.22 -

North District / IAH 8 1,215,189 547,949 46.4% 48.6% 45.1% 46.9% (12,657) -21,047 13,792 $22.47 $22.22 -

North District / N Belt West 17 4,361,686 2,661,748 51.1% 66.5% 61.0% 64.9% 14,091 20,449 -374,024 $25.05 $22.81 -

North District / North Belt 25 5,576,875 3,209,697 50.0% 62.6% 57.6% 60.9% 1,434 -598 -360,232 $24.56 $22.70 -

Northeast 3 642,223 21,702 5.1% 5.1% 3.4% 3.4% (32,465) - -3,422 - - -

North Loop West 6 1,240,544 459,966 28.6% 30.2% 37.1% 38.1% 10,736 -91,959 -178,000 $26.84 $26.31 -

Northwest Far 4 797,237 365,279 40.9% 42.7% 45.8% 55.3% (10,157) -18,896 -38,446 $19.48 $19.31 -

Northwest Near - - - 0.0% 0.0% - - - - - - - -

Northwest 10 2,037,781 825,245 30.0% 31.4% 40.5% 44.8% 579 -110,855 -216,446 $23.34 $22.95 -

South Main/Medical Center 15 4,551,313 171,946 3.7% 6.3% 3.8% 6.6% 18,818 4,330 15,215 $34.27 $32.99 -

E Fort Bend Co/Sugar Land 20 3,774,860 239,696 7.2% 14.8% 6.3% 17.4% (44,458) -3,225 4,496 $32.05 $32.71 -

Southwest Beltway 8 3 566,699 95,248 14.6% 16.3% 16.8% 18.0% (34,000) -9,941 -11,961 $21.15 $20.91 -

Southwest/Hillcroft 6 1,489,093 351,010 15.2% 35.2% 23.6% 34.7% (1,392) -1,980 16,153 $19.58 $20.45 -

Southwest Fwy / Sugar Land 29 5,830,652 685,954 9.9% 20.1% 11.8% 21.9% (79,850) -15,146 8,688 $24.26 $25.18 -

The Woodlands 52 12,335,078 1,081,246 10.4% 12.3% 8.8% 11.2% (15,665) -150,988 -45,728 $35.19 $32.94 854,800

West Belt 23 4,095,634 537,491 15.5% 34.8% 13.1% 30.8% 26,910 63,784 51,842 $34.01 $34.22 -

Bellaire 8 1,475,481 135,088 11.4% 21.3% 9.2% 15.7% (1,882) 60,279 36,396 $27.67 $28.40 -

Galleria/Uptown 35 13,431,925 1,674,261 14.1% 22.8% 12.5% 18.5% (106,168) 117,997 289,764 $39.47 $39.06 -

Post Oak Park 9 2,617,868 866,243 31.0% 37.9% 33.1% 41.2% (37,037) -21,802 -52,926 $38.72 $36.31 -

Richmond/Fountainview - - - - - - - - - - - - -

Riverway 5 1,885,813 386,182 21.7% 25.6% 20.5% 26.3% (19,644) -22,214 36,189 $33.10 $33.10 -

San Felipe/Voss 3 1,720,793 446,735 23.1% 31.7% 26.0% 30.9% (39,729) -11,985 -8,231 $36.50 $36.21 -

West Loop 60 21,131,880 3,508,509 17.4% 25.5% 16.6% 22.8% (204,460) 122,275 301,192 $37.78 $36.98 -

Westchase 33 9,957,462 1,890,509 16.4% 32.4% 19.0% 34.1% 40,941 -25,073 -111,373 $36.79 $35.10 -

TOTAL - Houston 464 141,822,638 22,842,964 15.1% 24.5% 16.1% 25.7% (360,218) 90,671 -486,856 $36.27 $35.83 2,895,225


Office Market Indicators - Class A SpaceHouston Metro Area


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Q3 2017

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Q3 2017

Direct Vacancy

Q3 2018

Q3 2018 Total

Availability

Net Absorption

Q3 2017

Net Absorption

Q3 2018

Net Absorption

yTD 2018

Rental Rates Q3

2017

Rental Rates Q3

2018

Under Construction

Conroe 10 691,631 43,853 5.4% 10.4% 6.3% 8.9% 3,879 3,879 53,214 $23.29 $26.65 -

CBD 23 9,458,542 2,882,101 27.9% 35.1% 30.5% 37.6% 37,439 37,439 (304,898) $29.51 $30.53 -

Midtown 20 2,963,554 218,981 6.4% 10.3% 7.4% 11.4% (12,121) (12,121) 82,461 $33.65 $29.86 -

Downtown 43 12,422,096 3,101,082 22.8% 29.2% 25.0% 31.3% 25,318 25,318 (222,437) $30.11 $30.42 -

FM 1960/Champions 20 1,641,848 300,232 20.0% 24.4% 18.3% 20.9% (16,400) (16,400) 4,939 $14.33 $15.05 -

FM 1960/Hwy 249 17 1,246,295 204,621 13.8% 31.3% 16.4% 23.2% (29,458) (29,458) (34,032) $19.60 $18.24 -

FM 1960/I-45 North 11 968,165 250,211 26.5% 35.9% 25.8% 27.5% (48,238) (48,238) (14,923) $18.07 $16.49 -

FM 1960 48 3,856,308 755,064 19.5% 29.6% 19.6% 23.3% (94,096) (94,096) (44,016) $16.99 $16.36 -

Greenway Plaza 26 3,602,111 386,032 10.3% 12.6% 10.7% 12.4% (20,540) (20,540) (87,063) $26.62 $27.70 -

Gulf Freeway/Pasadena 28 2,265,967 228,824 9.4% 16.9% 10.1% 11.0% 3,951 3,951 17,539 $21.82 $21.84 -

Katy Far West 10 1,046,188 622 0.2% 0.7% 0.1% 0.7% - - 17,033 - $27.50 -

Katy Freeway East 26 2,910,243 182,333 9.9% 17.4% 6.3% 14.0% (26,811) (26,811) (33,943) $28.10 $25.09 -

Katy Freeway West 66 7,640,304 1,789,326 21.4% 30.1% 23.4% 30.3% (85,419) (85,419) (249,302) $23.24 $22.63 -

Katy Fwy / Energy Corridor 92 10,550,547 1,971,659 18.2% 26.6% 18.7% 25.8% (112,230) (112,230) (283,245) $23.92 $22.83 -

Kingwood/Humble 7 934,077 38,326 2.1% 2.1% 4.1% 4.1% 4,570 4,570 1,247 $20.25 $20.00 -

NASA/Clear Lake 36 3,404,887 798,253 25.6% 28.1% 23.4% 25.1% 13,089 13,089 (12,375) $18.43 $19.66 -

North District / IAH 11 1,493,858 206,360 38.4% 47.4% 13.8% 17.2% (3,689) (3,689) (10,972) $15.27 $14.21 -

North District / N Belt West 46 4,809,464 1,932,470 15.2% 18.9% 40.2% 46.0% (193,747) (193,747) (279,975) $16.41 $16.19 -

North District / North Belt 57 6,303,322 2,138,830 33.3% 41.2% 33.9% 39.2% (197,436) (197,436) (290,947) $16.29 $15.96 -

Northeast 6 554,309 40,696 8.6% 12.2% 7.3% 10.9% - - 14,404 $22.71 $22.71 -

North Loop West 21 2,587,676 364,333 12.2% 16.8% 14.1% 15.3% (8,437) (8,437) (11,009) $22.44 $23.67 -

Northwest Far 23 2,295,051 428,955 18.0% 25.8% 18.7% 20.5% 40,918 40,918 46,658 $15.25 $15.44 -

Northwest Near 7 623,533 55,391 3.3% 5.1% 8.9% 9.3% 1,153 1,153 (10,968) $19.71 $19.44 -

Northwest 51 5,506,260 848,679 13.2% 18.6% 15.4% 16.8% 33,634 33,634 24,681 $18.05 $19.07 -

South Main/Medical Center 19 4,020,231 142,792 10.2% 11.5% 3.6% 5.4% 830 830 25,493 $23.15 $25.11 -

E Fort Bend Co/Sugar Land 24 2,238,536 244,037 7.7% 18.3% 10.9% 13.0% (2,076) (2,076) 21,337 $22.40 $24.63 -

Southwest Beltway 8 31 4,457,376 855,224 15.4% 24.7% 19.2% 29.0% 53,262 53,262 18,312 $19.07 $19.21 -

Southwest/Hillcroft 17 1,674,827 309,997 17.6% 20.9% 18.5% 18.4% 7,281 7,281 (21,376) $17.26 $16.71 -

Southwest Fwy / Sugar Land 72 8,370,739 1,409,258 13.8% 22.2% 16.8% 22.6% 58,467 58,467 18,273 $19.11 $19.35 -

The Woodlands 50 4,437,611 419,629 8.7% 13.3% 9.5% 12.2% 39,551 39,551 (11,901) $25.18 $26.47 -

West Belt 13 1,260,974 242,141 11.6% 42.4% 19.2% 35.0% - - 45,279 $21.86 $24.46 -

Bellaire 17 2,465,107 131,188 9.3% 11.9% 5.3% 8.1% (73,461) (73,461) (68,127) $22.63 $24.04 -

Galleria/Uptown 22 3,271,710 397,799 11.3% 15.7% 12.2% 18.7% (22,148) (22,148) (7,603) $28.35 $27.82 -

Post Oak Park 16 1,751,621 383,822 11.9% 17.3% 21.9% 24.7% (39,960) (39,960) (30,931) $26.33 $26.56 -

Richmond/Fountainview 7 570,270 55,013 25.9% 12.9% 9.6% 10.3% (969) (969) 14,608 $19.70 $20.44 -

Riverway 9 870,153 152,357 21.0% 24.6% 17.5% 22.1% (534) (534) (31,725) $25.30 $25.42 -

San Felipe/Voss 30 3,334,215 606,623 15.6% 20.8% 18.2% 24.6% (34,699) (34,699) (83,588) $25.22 $25.83 -

West Loop 101 12,263,076 1,726,802 13.5% 17.0% 14.1% 18.9% (171,771) (171,771) (207,366) $25.60 $26.14 -

Westchase 52 7,320,939 1,342,321 16.9% 25.7% 18.3% 24.4% 14,427 14,427 (15,299) $18.13 $18.37 -

TOTAL - Houston 721 88,811,273 15,634,863 16.7% 23.0% 17.6% 22.3% (398,357) (398,357) (957,486) $21.56 $21.95 -


Office Market Indicators - Class B SpaceHouston Metro Area


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INDUSTRIAL MARKETS1

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250,000 SFNew LeaseGateway Southwest IndustrialSouthwest Near submarket

Industrial TrendLines®

10-Year Trend Q3 2018

Direct Vacant Space

5.4 MSFYear-to-Date

$7.09 PSFNNN

12.5 MSF

128,700Jobs gained 12 Months ending September 2018

Vacancy

Absorption

Rental Rate

Under Construction

Job GrowthSubmarket Q3 2016 Q3 2017 Q1 2018 Q2 2018 Q3 2018

North Far 6,137,568 5,593,403 4,857,771 5,255,526 4,963,312

Northwest Far 4,643,064 3,791,241 3,567,823 4,187,223 5,079,437

Northwest Near 2,870,903 3,767,124 4,164,962 4,308,207 4,507,502

Southwest Near 1,385,054 1,945,875 2,291,028 2,101,062 1,982,783

South Far 690,233 790,617 1,084,957 1,039,876 956,741

All Houston Metro 23,399,338 24,702,627 24,062,409 25,104,055 27,491,489

Notable 2018 Leases

INDUSTRIAL MARKET OVERVIEWWarehouse/Distribution Continues to Drive DemandThe Houston industrial market remains one of the strongest commercial real estate sectors as activity at the Port of Houston increases, vacancy rates remain low and e-commerce transforms both the retail and industrial sectors. Direct vacancy levels for the industrial market stood at 5.0%, up slightly from 4.7% at mid-year, but still well below frictional levels (frictional vacancy is considered to be the amount of available square feet required for organic market growth and tenant movement without requiring construction). Absorption for the quarter was driven by preleased deliveries (2.5 million SF) as the market recorded 2.2 million SF of absorption, bringing the year-to-date absorption totals to 5.4 million SF. Of note, buildings constructed before 1980 saw negative absorption in the third quarter totaling negative 609,165 SF as tenants exercise a flight-to-quality strategy throughout the market. The construction pipeline remains elevated as 12.2 million SF of new construction is underway, up from 11.8 million SF at mid-year as several large projects broke ground over the quarter. Even with 4.5 million SF of new product delivering to the market in the third quarter, additional speculative construction will be required to keep pace with tenant demand. With land prices increasing due to a scarcity of well-located supply as well as increased speculative construction delivering to the market, rental rates should continue to increase; however, the price sensitive nature of the sector should keep growth rates in a moderate range.

727,600 SFBuild-to-Suit14803 WoodhamNorth Far submarket

656,658 SFBuild-to-Suit1401 RankinNorth Far submarket

411,442 SFNew LeaseNorthwest Logistics CenterNorthwest Near submarket

289,000 SFNew Lease18727 Kenswick DrNorth Far submarket

284,000 SFExpansionInterstate Commerce CenterNorth Far submarket

257,835 SFNew Lease2333 Clinton DrSoutheast Near submarket

232,875 SFNew LeaseBayport North Industrial ParkEast Southeast Far submarket

5.0% Direct Vacant Available

THE HOUSTON METRO INDUSTRIAL MARKET

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VacancyVacancy Increases Modestly due to Spec ConstructionDirect vacancy rates for the industrial market closed the quarter at 5.0% and overall vacancy (including sublet) rates closed the quarter at 5.3%, both up from mid-year which recorded 4.7% and 5.0%, respectively. Vacancy rates saw a slight uptick due to the number of speculative projects coming online throughout the metro. The manufacturing sector has the lowest direct vacancy rate recording 2.8% at the close of the quarter, a marginal increase from 2.7% in the second quarter. Warehouse/Distribution space recorded 5.0% for direct vacancy and 5.2% for overall vacancy in the third quarter, up from 4.6% and 4.8% for direct and overall, respectively. The Flex market continues to record the highest vacancy rates of all industrial property types ending the quarter at 9.1% direct vacancy, down from 9.7% quarter-over-quarter.

Net AbsorptionPrelease Deliveries Help Drive Absorption Absorption in the third quarter totaled 2.2 million SF for all property types, bringing the year-to-date total to an impressive 5.4 million SF. Preleased deliveries were the main driver of absorption as over 4.5 million SF delivered to the market at 55% preleased (2.5 million SF). Warehouse/Distribution space recorded the highest absorption amongst the major property types with 2.0 million SF of absorption recorded in Q3, for a year-to date total of 4.8 million SF. The flex market recorded 299,000 SF of absorption over the quarter, a positive sign as flex space has been challenged by an office market with nearly 25% availability. Manufacturing was the only property type in the red recording negative 106,000 SF of absorption. The East-Southeast Far Warehouse/Distribution sector had the strongest absorption of any submarket recording 990,000 SF, driven by the delivery of Vinmar International’s 500,000 SF build-to-suit project.

In the third quarter, a flight-to-quality was underscored in the warehouse/distribution and manufacturing sector as 2.1 million SF was absorbed in buildings built from 2000 to current. Contrastingly, buildings constructed before 2000 recorded negative absorption of 366,153 SF.

Rental RatesRental Rates Continue Growth TrajectoryOverall industrial asking rates (including flex) increased by 1.1% over the quarter, closing the period at $7.09 per SF NNN, up from $7.01 NNN at mid-year and are up from $6.61 per SF NNN year-over-year. The Flex market recorded $9.34 per SF NNN in the third quarter, a slight decline from $9.36 per SF NNN at mid-year, but are up from $8.93 per SF NNN over the year. The industrial market (warehouse/distribution and manufacturing) recorded $6.80 per SF NNN, a 1.3% increase over the quarter and a 7.1% increase over the year.

Industrial Vacancy RatesSelect Metro Areas | Q3 2018

Net Absorption of Industrial SpaceHouston Metro | 2005 Through Q3 2018

Industrial Space Under ConstructionSelect Metro Areas | Q3 2018


Note: Delivery of preleased space counts as positive net absorption. Source: CoStar, Transwestern *Through Q3 2018


Ove

rall

Vac

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Rat

e

0%

2%

4%

6%

8%

10%

12%Total AvailableDirect Vacant Available

Was/BalChiAtlDFWHouNJSF Bay LA Basin

National Vacancy Rate: 4.6%

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Under Construction Nationally = 223.8 Million SF

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Supply and DevelopmentPipeline Continues to Grow as Demand Outpaces SupplyAt the close of the third quarter the industrial pipeline was 12.2 million SF, up 3.4% from the previous quarter. Tenant demand for space continues to rise in the industrial market, causing a flurry of new speculative activity. Several large speculative projects broke ground in the third quarter including Park Air 59 (685K SF, Northeast Near), Underwood Logistics Park (404K SF, East-Southeast Far) and Thompson 10 Logistics Center (2 buildings, 390K SF total, East-Southeast Far). Also of note, two large build-to-suit projects broke ground including Coca-Cola’s distribution and manufacturing facility (1.0 million SF, North Far submarket) and Conn’s HomePlus (657K SF, North Far submarket). Deliveries in the third quarter totaled 4.5 million SF, of which 55% was preleased, up significantly from the 1.5 million SF of deliveries at mid-year. The largest projects that delivered this quarter were 525 Cane Island Pky (673K SF, 0% leased, Northwest Far), Port Crossing Commerce Center (600K SF, 0% leased, East-Southeast Far) and Vinmar International (500K SF, 100% leased, East-Southeast Far).

Industrial DeliveriesHouston Metro | 2005 Through Q3 2018

Investment Market OverviewPrologis Acquires DCT Industrial The metro recorded $805.5 million of investment sales activity during the third quarter, bringing the year-to date total to $1.6 billion. Investment sales activity jumped this quarter as a result of Prologis acquiring DCT Industrial Trust portfolio for $8.4 billion. Following the acquisition, Prologis will add 71.0 million SF to their operating portfolio, of which 3.4 million SF is located in the Houston market. Also of note, Alamo Crossing Commerce Center traded hands this quarter. The 1,047,797 square-foot project located in the Northwest Near submarket was purchased by ASB Real Estate Investments from Barings.

With respect to sales activity for the quarter, cap rates for the industrial sector averaged 6.2% with rates covering a wide range dependent upon the type and class of product. Investment sales, demand for value-add or core product and cap rates in Houston are at record levels based on increased capital allocations for the industrial sector and the positive long term outlook for the Houston market. We anticipate this strong appetite for industrial product will continue as investors seek to either obtain a position in this market or aggregate and expand existing portfolios through acquisition.

NCREIF Return Index for Industrial Properties

Metro Area2018 yTD Return (through Q3)

12-Month Total Return at Q3 2018

Atlanta 9.04% 11.54%

Boston N/A N/A

Chicago 7.98% 11.86%

Dallas 8.97% 11.60%

Denver 10.36% 17.03%

Houston 8.80% 11.02%

Los Angeles 11.86% 16.82%

National Average 10.54% 14.17%

New York 13.32% 17.38%

Phoenix 8.01% 10.82%

San Francisco 13.07% 16.07%

Washington 9.89% 12.11%

Note: NCREIF Index includes both current income and capital appreciation returns. Source: NCREIF, Transwestern


0

5000000

10000000

15000000

20000000SF Available at Delivery SF Leased at Delivery

18*17161514131211100908070605

Largest Projects Under Construction

Grocers Supply727,600 SFBuild-to-SuitWarehouse/distributionNorth Far

Conn's Home Plus656,658 SFBuild-to-SuitWarehouse/distributionNorth Far

Best Buy DC550,000 SFBuild-to-SuitWarehouse/distributionSouthwest Near

Park Air 59685,400 SF0% preleasedWarehouse/distributionNortheast Near

Coca Cola 1,000,000 SFBuild-to-SuitManufacturingNorth Far


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Industrial Market OutlookIndustrial Outlook Remains BullishThe industrial sector looks to continue its hot streak as market fundamentals remain strong, activity at the Port continues to rise and the evolution of the retail market is increasing demand for warehouse/distribution space. A robust pipeline should only continue to expand over the near term as developers look to satisfy the needs of the market. The rise of new product in conjunction with escalating land costs will continue to push rates; however, price sensitivity of users will contain growth rates. Investment activity will remain heated as investors look to capitalize on the growth of the industrial sector and to expand their portfolios with long-term investment plays. Additionally, vacancy rates will increase modestly as new space comes online, but will remain well below frictional vacancy levels. Absorption will primarily occur in new construction resulting in softness in older product. Looking to 2019, we anticipate another strong year for the industrial sector with absorption slightly higher than 10 year averages, ranging from 7-10 million SF. A wave of spec construction should result in modest increases to vacancy rates though they will still stay near all time lows, ranging from 5.1% to 5.4%.

Industrial Investment SalesHouston Metro | 2002 Through Q3 2018


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Submarket InventorySF Available Immediately

Direct Vacancy

Q3 2017

Direct Vacancy

Q3 2018

Overall Vacancy

Q3 2017

Overall Vacancy

Q3 2018

Under Construction

Net Absorption 2017

Net Absorption Q3 2018

Net Absorption yTD 2018

Central Business District

Flex/R & D 490,229 49,513 10.1% 10.1% 10.1% 10.1% - 40,000 0 0

Manufacturing 6,132,900 6,133 0.5% 0.1% 0.5% 0.1% - 221,000 0 25,000

Warehouse/Distribution 23,142,169 902,545 5.5% 3.9% 5.5% 4.0% - (45,000) (46,000) 371,000

Total - Central Business District 29,765,298 958,191 4.5% 3.2% 4.5% 3.3% - 216,000 (46,000) 396,000

East-Southeast Far

Flex/R & D 1,941,918 209,727 8.7% 10.8% 8.7% 10.8% - 214,000 (6,000) (41,000)

Manufacturing 6,999,078 0 0.4% 0.0% 5.7% 4.0% 15,000 195,000 0 738,000

Warehouse/Distribution 53,935,298 3,883,341 3.4% 7.2% 3.5% 7.4% 3,107,434 5,374,000 990,000 1,004,000

Total - East-Southeast Far 62,876,294 4,093,069 3.3% 6.5% 3.9% 7.1% 3,122,434 5,783,000 984,000 1,701,000

East-Southeast Near

Flex/R & D 286,410 10,884 2.8% 3.8% 2.8% 3.8% - (108,000) 0 (3,000)

Manufacturing 9,271,784 46,359 0.0% 0.5% 0.0% 0.5% - 74,000 0 (46,000)

Warehouse/Distribution 19,855,381 615,517 2.9% 3.1% 2.9% 3.1% 402,630 (113,000) 278,000 (40,000)

Total - East-Southeast Near 29,413,575 672,759 2.0% 2.3% 2.0% 2.3% 402,630 (147,000) 278,000 (89,000)

North Far

Flex/R & D 8,663,523 1,074,277 10.9% 12.4% 11.3% 12.9% 200,000 (77,000) 25,000 (17,000)

Manufacturing 9,304,687 353,578 3.6% 3.8% 3.9% 4.8% 500,000 135,000 0 (18,000)


Total - North Far 72,834,636 4,774,707 7.3% 6.6% 7.8% 7.0% 3,502,228 1,817,000 564,000 1,715,000

North Near

Flex/R & D 1,201,894 128,603 12.2% 10.7% 12.2% 10.7% - (37,000) 13,000 18,000

Manufacturing 3,408,032 98,833 2.9% 2.9% 2.9% 2.9% - (31,000) 0 0

Warehouse/Distribution 15,452,822 247,245 3.1% 1.6% 3.1% 2.0% 351,400 394,000 (15,000) 232,000

Total - North Near 20,062,748 474,681 3.6% 2.4% 3.6% 2.7% 351,400 326,000 (2,000) 250,000

Northeast Far

Flex/R & D 137,000 0 0.0% 0.0% 0.0% 0.0% - 115,000 0 0

Manufacturing 215,720 0 15.3% 0.0% 15.3% 0.0% - 0 0 33,000

Warehouse/Distribution 952,637 0 1.9% 0.0% 1.9% 0.0% - (18,000) 0 18,000

Total - Northeast Far 1,305,357 0 3.9% 0.0% 3.9% 0.0% - 97,000 0 51,000

Northeast Near

Flex/R & D 331,939 70,371 16.3% 21.2% 16.3% 21.2% - (13,000) 0 (15,000)

Manufacturing 6,621,697 59,595 1.4% 0.9% 1.4% 0.9% - (89,000) (13,000) 34,000

Warehouse/Distribution 25,990,770 909,677 2.4% 3.5% 2.5% 3.6% 997,040 (122,000) (364,000) (106,000)

Total - Northeast Near 32,944,406 1,039,643 2.3% 3.2% 2.4% 3.2% 997,040 (224,000) (377,000) (87,000)

Northwest Far

Flex/R & D 5,368,380 520,733 10.3% 9.7% 10.3% 9.7% - (403,000) 32,000 32,000

Manufacturing 15,145,313 651,248 2.5% 4.3% 4.1% 4.5% 320,000 19,000 76,000 (220,000)


Total - Northwest Far 79,496,745 5,359,778 4.7% 6.7% 5.3% 6.9% 3,151,731 2,614,000 467,000 1,231,000

SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Includes buildings 15,000 SF RBA and greater; does not include buildings under construction or owned by the government

Summary of Industrial Market Indicators - All SpaceHouston Metro Area


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Direct Vacancy

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Overall Vacancy

Q3 2017

Overall Vacancy

Q3 2018

Under Construction

Net Absorption 2017

Net Absorption Q3 2018

Net Absorption yTD 2018

Northwest Near

Flex/R & D 11,868,354 1,103,757 8.9% 9.3% 8.9% 10.1% - 15,000 (71,000) (178,000)

Manufacturing 10,324,472 547,197 1.9% 5.3% 1.9% 5.7% - (195,000) (93,000) (147,000)

Warehouse/Distribution 67,132,626 3,020,968 3.9% 4.5% 3.9% 4.6% 42,166 (849,000) 67,000 99,000

Total - Northwest Near 89,325,452 4,671,922 4.3% 5.2% 4.3% 5.5% 42,166 (1,029,000) (97,000) (226,000)

South Far

Flex/R & D 1,352,213 41,919 1.9% 3.1% 2.9% 3.1% - 16,000 22,000 20,000

Manufacturing 7,165,005 93,145 1.0% 1.3% 2.0% 1.3% - 148,000 (14,000) (64,000)

Warehouse/Distribution 23,653,153 827,860 3.5% 2.7% 3.8% 87,765 592,000 118,000 (54,000)

Total - South Far 32,170,371 962,924 2.4% 3.0% 2.5% 3.2% 87,765 756,000 126,000 (98,000)

South Near

Flex/R & D 674,918 170,079 20.0% 25.2% 40.5% 25.2% - (223,000) 3,000 106,000

Manufacturing 1,687,149 0 1.1% 0.0% 1.1% 0.0% - 0 17,000 19,000

Warehouse/Distribution 9,552,626 315,237 2.4% 3.3% 2.3% 3.5% - 372,000 (57,000) (85,000)

Total - South Near 11,914,693 485,316 3.2% 4.1% 4.4% 4.2% - 149,000 (37,000) 40,000

Southwest Far

Flex/R & D 2,117,056 141,843 8.4% 6.7% 15.5% 6.8% - 183,000 125,000 178,000

Manufacturing 1,715,791 58,337 1.1% 3.4% 0.3% 3.4% - (57,000) 3,000 3,000

Warehouse/Distribution 7,977,471 414,828 7.5% 5.2% 8.6% 5.3% 429,625 477,000 32,000 272,000

Total - Southwest Far 11,810,318 615,008 6.6% 5.2% 8.5% 5.3% 429,625 603,000 160,000 453,000

Southwest Near

Flex/R & D 6,673,615 373,722 6.1% 5.6% 9.6% 5.8% - (584,000) 207,000 234,000

Manufacturing 4,065,814 369,989 3.3% 9.1% 6.8% 9.1% - (35,000) (77,000) (126,000)

Warehouse/Distribution 29,063,106 1,249,714 4.0% 4.3% 4.1% 4.5% 550,000 476,000 0 (117,000)

Total - Southwest Near 39,802,535 1,993,425 4.3% 5.0% 5.3% 5.2% 550,000 (143,000) 130,000 (9,000)

Sugar Land

Flex/R & D 3,407,902 170,395 4.0% 5.0% 6.1% 5.3% - 12,000 (51,000) 31,000

Manufacturing 2,492,167 64,796 0.7% 2.6% 3.1% 2.6% - 0 (5,000) 12,000

Warehouse/Distribution 14,644,035 395,389 7.0% 2.7% 3.5% 2.8% - (31,000) 117,000 29,000

Total - Sugar Land 20,544,104 630,580 5.6% 3.1% 3.9% 3.2% - (19,000) 61,000 72,000

Total Houston

Flex/R & D 44,515,351 4,065,822 6.8% 9.1% 10.1% 9.5% - 200,000 299,000 365,000

Manufacturing 84,549,609 2,349,211 1.6% 2.8% 2.0% 3.3% 72,720 835,000 (106,000) 243,000

Warehouse/Distribution 405,201,572 20,316,970 5.7% 5.0% 4.8% 5.2% 4,780,616 11,199,389 2,018,000 4,792,000

Total - Houston 534,266,532 26,732,003 5.2% 5.0% 4.8% 5.3% 4,853,336 12,234,389 2,211,000 5,400,000

SOURCE Inventory and vacancy from analysis of CoStar data, net absorption computed by Transwestern NOTE Includes buildings 15,000 SF RBA and greater; does not include buildings under construction or owned by the government

Summary of Industrial Market Indicators - All Space (continued)Houston Metro Area


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MULTIFAMILY MARKETS 6 T H E H O U S T O N M E T R O

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MULTIFAMILY MARKET OVERVIEWMultifamily Shifts Into High GearThe Houston multifamily market has continued to display significant increases to occupancy and rental rates post Hurricane Harvey. At the close of the third quarter, market occupancy reached 90%, the traditional threshold indicating a stabilized market. This has been driven by solid absorption year-to-date, totaling 9,199 units. Rental rates have also continued to trend upwards year-over-year, but growth slowed over the quarter with average per SF rates holding at $1.17. Since Hurricane Harvey, occupancy has increased 2.3% and rental rates have increased by 4.5%. Given the markets rapid improvements and strong underlying fundamentals, investors and developers have a sharp focus on the metro area.

OccupancyOccupancy Reaches Stabilization ThresholdOverall occupancy increased by 10 basis points over the quarter, closing at 90.0%. Although the market has reached the threshold of stabilization, 18 of the 42 submarkets are still below the suggested level of 90% or higher. Class A occupancy has continued to increase steadily, recording 87.8% in the third quarter, up 150 basis points over the quarter. Class B remained relatively stable decreasing by 20 basis points to 91.0%.

Rental Rates Rental Growth SlowsAsking rental rates increased significantly over the period, ticking up by 1.7% to $999 per unit, from $982 per unit at the close of the second quarter. Extrapolated over a full year, this growth rate equates to just under 7.0%. Submarkets with the highest rental rate growth quarter-over-quarter were Katy/Cinco Ranch/Waterside – 5.5%, Highland Village/Upper Kirby/West U – 5.3%, and Galleria/Uptown – 4.3%. Additionally, concessions were reported in 41% of the market with the average special provided at 8.4% of total rent. Capitalizing on the sudden surge of demand generated by Harvey, rental rates should continue to increase as pressure mounts on concessions.

AbsorptionAbsorption Continues Postitive Trend Absorption for the multifamily market was 2,241 units in the third quarter, bringing the year-to-date total to 9,199 units absorbed. Class A properties drove activity as they posted 3,296 units absorbed in the third quarter. Conversely, Class B posted negative 272 units for the quarter. Submarkets posting the highest levels of net absorption include: Energy Corridor/City Centre/Briar Forest – 372 units, Katy/Cinco Ranch/ Waterside – 364 units and Med Center/ Braes Bayou – 326 units.

Apartment Occupancy Houston Metro | 2006 Through Q3 2018

Net Absorption - All ClassesHouston Metro | 2006 Through Q3 2018

Source: Apartment Data Services, Transwestern *Through Q3 2018

Source: Apartment Data Services, Transwestern *Through Q3 2018

S TA B I L I Z E D M A R K E T

78%

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Class AOverall

18*171615141312111009080706

-5000

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THE HOUSTON METRO MULTIFAMILy MARKET

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Supply and Development Development Pipeline Increases SlightlyFor the 12 months ending in September, 8,969 units in 41 communities delivered across the Houston metro. Currently, there are 10,955 units in 40 communities under construction and 25,432 units in 85 communities proposed. Submarkets with the highest level of construction activity include Montrose/Museum/Midtown – 2,199 infill units, Heights/Washington Ave – 1,799 infill units and Lake Houston/Kingwood – 1,280 suburban units. Construction activity has continually picked up over the past few quarters, and as oil prices remain stable and job growth continues to grow throughout the metro, the construction pipeline is likely to increase further.

Investment Market Multifamily Sales Continue to Trend UpAs the multifamily market has stabilized, investment interest in the sector has continued to grow with year-to-date volume currently up 36% year-over-year, at 4.4 billion. Sales activity increased 89.1% over the quarter finishing the third quarter at an astounding $2.5 billion. 78 communities comprised of 21,371 units sold, as compared to 58 communities comprised of 12,831 units in the second quarter. Cap rates have continue to trend downward as investment activity has risen. For the year, cap rates are averaging 6.0%, down 20 basis points from 2017. Of note, Plantation at the Woodlands in the Woodlands/ Conroe South submarket traded hands. Waterton Associates acquired the Class A, 94% occupied, 432 unit complex at an allocated $50.9 million or $117,852 per unit in a portfolio transaction from CBRE Global Investors.

Multifamily Market Outlook Back to Business As Usual For Multifamily Although a tragic event that impacted millions, Hurricane Harvey provided the Houston multifamily market a much needed boost. With high population and job growth in the metro area, market funda-mentals will continue to set the stage for the sector to perform well for the balance of the year. As Houston continues to see signs of economic recovery from the energy downturn, the multifamily sector will continue to see growth in effective rents and construction activity.

Average Apartment Rents/SFHouston Metro | Q1 2012 Through Q3 2018

MultiFamily Investment ActivitySelect Metro Areas | '07 Through Q3 2018

Source: Apartment Data Services, Transwestern


10 -Ye a r A n n u a l Ave r a g e = $0 .9 9/S F

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Submarket# Apartment

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# Apartment Units 2017

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Construction Q3 2018

Montrose/Museum/Midtown 13,392 12,501 86.7% 88.50% 926 922 $1,685 $1,695 $1.82 $1.82 559 139 2,199

Highland Village/Upper Kirby/West U 16,617 16,619 89.2% 91.90% 970 969 $1,700 $1,729 $1.75 $1.75 520 94 370

Med Center/Braes Bayou 23,507 23,361 85.7% 89.50% 880 881 $1,265 $1,303 $1.44 $1.44 119 326 462

Heights/Washington Ave 10,937 10,625 89.0% 90.00% 895 887 $1,541 $1,553 $1.72 $1.72 -146 102 1,799

Downtown 5,952 5,951 62.3% 83.90% 967 968 $1,960 $2,032 $2.03 $2.03 266 314 271

I-10 East/Woodforest/Channelview 11,735 11,353 82.5% 87.10% 833 834 $829 $867 $1.00 $1.00 -857 210 246

I-69 North 3,955 3,605 93.6% 83.50% 851 842 $760 $825 $0.89 $0.89 -2 -39 -

Northline 6,523 6,294 91.8% 91.60% 840 843 $754 $777 $0.90 $0.90 -98 -11 -

Greenspoint/Northborough/Aldine 17,187 17,120 80.5% 88.10% 796 794 $699 $727 $0.88 $0.88 -1,081 67 -

FM 1960 East/IAH Airport 8,778 8,778 93.8% 92.80% 897 897 $858 $889 $0.96 $0.96 -42 -92 -

Lake Houston/Kingwood 12,674 12,356 86.2% 86.50% 939 940 $1,071 $1,099 $1.14 $1.14 -288 195 1,280

Northeast Houston/Crosby 3,278 3,278 83.3% 82.30% 884 889 $778 $821 $0.88 $0.88 -312 -4 -

Brookhollow/Northwest Crossing 19,510 19,712 90.0% 92.20% 826 822 $823 $850 $1.00 $1.00 -206 3 293

Memorial/Spring Branch 22,085 21,642 92.5% 90.70% 916 917 $922 $971 $1.01 $1.01 205 -109 -

Inwood/Hwy 249 5,828 5,828 94.5% 92.80% 882 882 $750 $788 $0.85 $0.85 -31 -120 -

Willowbrook/Champions/Ella 39,093 39,001 89.3% 89.70% 885 884 $886 $912 $1.00 $1.00 -368 -483 135

Jersey Village/Cypress 15,281 15,131 91.4% 92.30% 908 907 $958 $1,003 $1.06 $1.06 -227 -74 -

Bear Creek/Copperfield/Fairfield 16,622 16,240 88.1% 93.00% 902 901 $1,008 $1,060 $1.12 $1.12 -8 156 312

Katy/Cinco Ranch/Waterside 24,782 24,753 86.2% 89.50% 955 953 $1,176 $1,182 $1.23 $1.23 -222 364 869

Tomball/Spring 13,497 12,566 82.5% 89.60% 929 927 $1,113 $1,137 $1.20 $1.20 478 309 682

Woodlands/South Conroe 19,702 18,983 90.1% 92.10% 942 942 $1,103 $1,187 $1.17 $1.17 20 190 386

Conroe North/ Montgomery 8,649 8,649 84.6% 93.40% 896 896 $898 $929 $1.00 $1.00 255 203 -

Hwy 288/Pearland West 12,167 11,599 86.6% 84.40% 966 970 $1,112 $1,144 $1.15 $1.15 -61 -66 -

U of H/I-45 South 17,794 17,257 88.4% 90.90% 797 798 $711 $754 $0.89 $0.89 -316 51 160

Beltway 8/I-45 South 13,204 13,204 89.6% 90.80% 861 861 $861 $869 $1.00 $1.00 -149 269 324

Pasadena/Deer Park/La Porte 23,361 23,205 89.6% 90.10% 849 849 $821 $852 $0.97 $0.97 -395 -201 135

Friendswood/Pearland East 5,458 5,458 93.3% 93.70% 857 856 $987 $1,012 $1.15 $1.15 -10 3 108

Clear Lake/Webster/League City 24,288 24,032 90.8% 91.60% 885 885 $1,040 $1,070 $1.18 $1.18 -90 186 351

Baytown 10,196 9,678 88.6% 88.20% 852 855 $851 $860 $1.00 $1.00 -227 -6 -

Dickinson/Galveston 11,245 11,330 91.3% 90.50% 840 840 $861 $915 $1.03 $1.03 88 -81 -

Alvin/Angleton/Lake Jackson 10,672 10,525 84.8% 86.40% 825 825 $887 $883 $1.08 $1.08 36 -27 -

Galleria/Uptown 24,148 24,306 86.1% 89.60% 896 897 $1,270 $1,280 $1.42 $1.42 179 57 281

Woodlake/Westheimer 12,233 12,233 88.0% 92.00% 889 889 $1,031 $1,019 $1.16 $1.16 39 -4 -

Energy Corridor/CityCentre/Briar Forest 33,156 31,175 87.4% 84.50% 944 949 $1,132 $1,158 $1.20 $1.20 -1,120 372 -

Westchase 14,922 14,922 88.7% 91.30% 840 840 $951 $986 $1.13 $1.13 115 -37 -

Alief 26,978 26,897 91.4% 91.60% 872 872 $837 $872 $0.96 $0.96 -20 -55 -

Sharpstown/Westwood 25,538 25,538 90.9% 92.20% 790 790 $689 $719 $0.87 $0.87 -44 -71 -

Westpark/Bissonnet 16,897 16,900 92.9% 92.00% 810 811 $735 $761 $0.91 $0.91 -72 101 -

Braeswood/Fondren SW 21,786 21,786 87.8% 88.10% 838 838 $761 $783 $0.91 $0.91 -625 44 -

Almeda/South Main 4,770 4,646 86.7% 88.30% 838 843 $829 $855 $0.99 $0.99 -183 -41 -

Sugar Land/Stafford/Sienna 12,896 12,896 88.9% 92.50% 958 957 $1,189 $1,215 $1.24 $1.24 162 47 292

Richmond/Rosenberg 4,766 4,766 92.3% 93.10% 875 875 $955 $996 $1.09 $1.09 -11 -40 -

Total - Houston 646,059 636,699 88.3% 90.00% 882 882 $999 $1,030 $1.13 $1.13 -4,170 2,241 10,955

Houston Multifamily Market Indicators



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RETAIL MARKET OVERVIEWGrocery Anchored and Mixed-Use Keep the Market Moving Third quarter activity saw the retail sector continue to thrive as vacancy rates remained below 6% for the 18th consecutive quarter. Despite the shock waves e-commerce has sent through retailers globally, the Houston retail sector has maintained favorable market conditions while growing rapidly. The market’s stability can be attributed to a combination of strong population growth, the phasing of large developments and the utilization of prelease commitments prior to construction. As population growth pushes market bound-aries further, retail will continue to follow rooftops, particularly with Grocery-Anchored and selectively located Mixed-Use/Lifestyle centers. Recently, McNair announced plans to break ground on a 1.2 million SF mixed-use project in the Galleria in early 2019. The project will include 350,000 SF of office space, 30,000 SF of luxury retail, green space and a 150-room hotel. While market metrics remain strong for core property types, non-core property types such as big box retailers and regional malls continue to navigate headwinds due to the evolving retail sector. Of note, Houston-based Mattress Firm announced they are filing for Chapter 11 bankruptcy impacting more than 700 of their 3,300 stores nation-wide. Initially, 200 stores are closing, including 18 storefronts in Houston.

Year-to-date, the retail sector has lost 7,200 jobs through August as seasonal jobs and temporary jobs gained following Hurricane Harvey were shed at the beginning of the year. Retail job growth year-over-year totaled 8,300, bolstered by seasonal workers gained at the end of 2017. Retail job growth is expected to pick up in the fourth quarter as retailers ramp up hiring efforts for the holiday season.

In retail sales data, the sector recorded the highest first quarter of sales on record with $29.3 billion, an 8.0% increase over the first quarter of 2017. Sales activity is slated to remain strong through the balance of the year as holiday shopping data is recorded and oil prices stabilize in the low-$70s per barrel.

Vacancy Vacancy Remains Below 6% for 18th Consecutive Quarter In the third quarter, the retail sector saw a slight uptick in direct vacancy recording 5.4%, up from 5.3% at both mid-year and year-over-year. Vacancy rates for core retail holdings (Mixed-Use/Lifestyle, Grocery- Anchored and Power Centers) continue to perform well as non-core holdings struggle to find their footing in an evolving market. Vacancy for Mixed-Use/Lifestyle centers was 4.6% at the end of the quarter, an increase of 10 basis points quarter-over-quarter and an increase of 120 basis points over the year. Grocery-An-chored direct vacancy remained unchanged over the quarter at 3.6% and is up from 3.3% year-over-year. Power Center vacancy increased 40 basis points over the quarter and 120 basis points over the year to 4.9%.

Multi-Tenant Retail Space Under ConstructionSelect Metro Areas | Q3 2018

Retail Job GrowthHouston Metro | 2007 Through September 2018

Source: Bureau of Labor Statistics, Transwestern, *12-month job growth through September 2018


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Gross Retail SalesHouston Metro | 2005 Through Q1 2018

Source: Texas Comptroller’s Office, Transwestern *Through Q1 2018, annualized

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Rental Rates Asking rents steady Rental rates for the Houston market closed the third quarter at $16.91 per SF NNN, an increase of 120 basis points over the quarter and up 640 basis points year-over-year. Overall retail rates continue to see increases as a result of new product delivering to the market. Grocery-Anchored rents were $15.34 per SF NNN at the end of the quarter, up from $14.90 per SF NNN at mid-year. Mixed-Use/Lifestyle centers closed the quarter at $31.68 per SF NNN and Power Centers were $15.59 per SF NNN.

Investment MarketInvestment activity ticks up in Q3 Investment sales activity increased drastically this quarter totaling $1.4 billion, bringing the year-to-date total to $2.1 billion. Sales activity was highlighted by Brookfield’s acquisition of GGP Inc., the second largest mall owner in the U.S., for $15 billion. Brookfield already owned a third of GGP Inc., but the transaction included the remaining two-thirds of the company, making this the 3rd largest REIT acquisition in history. Five malls in the Houston market were involved in this transaction including: Willowbrook Mall, Deerbrook Mall, The Woodlands Mall, Baybrook Mall and First Colony Mall. Brookfield is looking at redevelop-ment opportunities for the regional mall spaces.

Retail Market Outlook Retail Sector Looks to Continue Up-CycleThe Houston retail sector will continue to perform well in the period ahead as popula-tion growth remains strong, vacancy rates remains low and rental rates are anticipated to increase. Vacancy rates will remain low as retailers are competing to lease up well-lo-cated storefronts in both the urban core and suburban markets. Additionally, retail rents will rise as new developments push rates and a limited amount of quality space is avail-able throughout the metro. The construction pipeline has declined slightly, but with the proven success of strategically placed Mixed-Use centers, developers will try to capitalize on available land parcels or redevelopment opportunities, especially in the urban core where space is scarce.

Although the evolving retail sector is benefiting consumers, retailers are struggling to navigate the headwinds presented by the growing e-commerce sector. Retailers are having to reevaluate the need for more brick and mortar locations and are electing to utilize a multi-channel retailing approach through online sales. As Amazon continues to increase their variety of services, the online juggernaut is going to influence the way retailers do business. This trend will continue to have large impacts on big box retailers and regional malls as they find ways to reposition their spaces to remain relevant to consumers.

Vacancy Rate TrendsHouston Metro | 2005 Through Q3 2018

Average Rental RateHouston Metro | 2005 Through Q3 2018

Retail Investment SalesHouston Metro | 2007 Through Q3 2018

Source: Real Capital Analytics, Transwestern



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HEALTHCARE MARKETT H E H O U S T O N M E T R O

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HEALTHCARE MARKET OVERVIEWHealthcare Market Continues to Strengthen Over the third quarter, Houston medical office metrics strengthened across the board with an increase in asking rents, decreases in both vacancy and total availability, and positive absorption. Year-over-year direct vacancy decreased 50 basis points to 11.4%, and total availability decreased 60 basis points to 14.6% over the same period. As both vacancy and availability have declined, asking rental rates have increased, recording $27.46 per SF gross, up 460 basis points from $26.26 in Q3 2017. Absorption for the quarter recorded positive 50,400 SF with the Bellaire submarket leading the way at 21,806 SF. Of note, Texas Children’s signed a 42,198 SF renewal in the Sugar Land submarket. With strong medical demand due to population growth on both the younger and older ends of the popula-tion bell curve, developer activity is high with several proposed medical office buildings announced this quarter. Investor activity in Houston remains consistent as four medical office buildings traded hands over the quarter.

Due to rising operational and technology costs, organizations will continue to seek efficiencies of scale through mergers and acquisitions. As such, Houston-based Memorial Hermann Health System and Dallas-based Baylor Scott & White Health have announced plans to merge. The two systems combined would employ over 73,000 people, with 68 hospital campuses and more than 1,100 care delivery sites in Texas. This merger will provide more consumer-centric care, while growing the capabilities of these systems to manage the health of populations and lower costs.

Job GrowthHealthcare Job Growth Returns after Down 2017The Houston healthcare sector continued to post solid job growth in the third quarter, with 6,700 jobs created. Although muted, year-over-year job growth ending in August also grew to 6,000 jobs. The sector is nearly fully recovered from a slew of layoffs in 2017 as major providers looked to strengthen their books amidst lower reimbursement rates and climbing costs. Given the strong underlying demographics and notable population growth throughout the region, continued job growth in the sector is anticipated in the period ahead.

Vacancy and AvailabilityOverall Metrics Continues to Tighten Vacancy rates for MOB’s in Houston declined over the third quarter, down 30 basis points to 11.4% at the end of the period. The TMC continues to record the lowest direct vacancy at 4.7%, Bellaire and the Near West follow at 8.8% in both submarkets. Although down

Direct VacancyHouston Metro

Deliveries vs AbsorptionHouston Metro

5%

8%

11%

14%

17%

20%

Total AvailabilityDirect Vacancy

Q3 2018Q1 2018Q3 2017Q1 2017Q3 2016

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

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Overall DeliveriesOverall Net Abs

Q3 2018Q1 2018Q3 2017Q1 2017Q3 2016

Healthcare Job GrowthHouston Metro

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over the quarter, the Near North continues to record the highest vacancy at 26.1%. Pasadena follows with 23.5%, and the Far West has 17.6% direct vacancy. Direct vacancy for off campus MOB’s declined by 70 basis points to 13.8%, direct vacancy remained unchanged for on campus MOB’s, remaining at 8.4%. Total availability also decreased over the quarter, down 30 basis points to 14.6%. The Near North has the largest amount of space available at 34.8%, followed by Pasadena at 24.2% and the Near Southwest market at 21.9%. On campus total availability increased marginally, up 10 basis points to 9.8%, while off campus declined by 60 basis points to 18.5%.

Supply and Development Construction Pipeline Remains Active The development pipeline remains robust with over 500,000 SF of medical office space and 3.4M SF of hospital space under construction. Over the quarter, the Paula and “Rusty” Walter III Tower at Houston Methodist Hospital delivered in the TMC. The state-of-the-art, $700.0 million, 960,000 SF tower includes neurosurgery and cardiovascular surgical suites, two intensive care floors, and six acute care floors. The tower also includes the latest image-guided, robotic-assisted technology to assist during surgery allowing for smaller incisions, and less invasive surgery. Several Class A medical office projects were announced over the quarter, including a 67,200 SF two-phase development The Howard Hughes Corporation will bring to Creekside Park Village in The Woodlands, Transwestern will handle the leasing. Also announced was Wile Interests’ Medical Plaza West, a proposed 70,000 SF Class A building within its 16-acre Katy Green development, in the Far West submarket.

Healthcare Market Outlook Healthcare Won't Skip a Beat in 2019With Houston's economy heating up, the underlying fundamentals of high population growth, low cost of living and urban sprawl place healthcare real estate as a top tier investment over the near term. Baby boomers transitioning into the later stages of life is anticipated to increase demand for services exponentially and this, amongst many other factors, has the industry undergoing transformation. This transformation encompasses the entirety of operations, from data collection and analysis, to where services take place with the priority being placed on proximity to the consumer. When also taking into consid-eration Houston's strong population growth, it would seem intuitive that the healthcare development pipeline will continue to growth over the near term. With several buildings set to break ground in the near term, availability may see a slight rise, but all other core metrics should remain stable.

Largest Healthcare SystemsHouston Metro Area | 2017

HEALTHCARE SYSTEM BEDS LOCAL HOSPITALS

HCA Gulf Coast Division 4,110 15

Memorial Hermann 3,750 15

Houston Methodist 2,765 8

CHI St. Luke's Health 1,563 7

St. Joseph Medical Center 790 2

Harris Health System 770 3

Kindred Healthcare Inc. 736 9

Texas Children's Hospital 713 4

UT MD Anderson Cancer Center 674 1

UT Medical Branch 666 4

Total 16,537 68

Source: Bureau of Labor Statistics, Transwestern *12-month job growth through September 2017

Medical Office Building Stats

MOB COUNTTOTAL

MOB SF

All MOBs 401 29,935,870

Construction 9 519,925

Off Campus 307 16,427,684

On Campus 94 13,508,186

Sold Past 12 Mos 26 1,700,951

Source: Revista, Transwestern Research

THE HOUSTON METRO HEALTHCARE MARKET

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Atlanta 3340 Peachtree Road NE Suite 1000 Atlanta, Georgia 30326 PHONE: 404.842.6600 FAX: 404.842.6601

Austin 901 S. MoPac Expressway Building 4, Suite 250 Austin, Texas 78746 PHONE: 512.328.5600 FAX: 512.328.9309

Baltimore 7160 Columbia Gateway Drive Suite 210 Columbia, Maryland 21046 PHONE: 443.285.0770 FAX: 443.285.0660

Bethesda 6700 Rockledge Drive Suite 500-A Bethesda, Maryland 20817 PHONE: 301.571.0900 FAX: 301.571.0903

Chicago 200 W. Madison St. Suite 1200 Chicago, Illinois 60606 PHONE: 312.881.7000 FAX: 312.881.7085

Dallas 5001 Spring Valley Road Suite 400W Dallas, Texas 75244 PHONE: 972.774.2500 FAX: 972.991.4247

Denver 4643 S. Ulster St. Suite 300 Denver, Colorado 80237 PHONE: 303.639.3000 FAX: 303.407.1453

Detroit 3000 Town Center Suite 2500 Southfield, Michigan 48075 PHONE: 248.350.2222

Fort Lauderdale 110 Tower 110 SE 6th St. Fort Lauderdale, Florida 33301 PHONE: 305.808.7310 FAX: 305.357.3837

Fort Worth 777 Main St. Suite 1100 Fort Worth, Texas 76102 PHONE: 817.877.4433 FAX: 817.870.2826

Houston (Corporate) 1900 West Loop South Suite 1300 Houston, Texas 77027 PHONE: 713.270.7700 FAX: 713.270.6285

Los Angeles 601 S. Figueroa St. Suite 2750 Los Angeles, California 90017 PHONE: 213.624.5700 FAX: 213.624.9203

Miami 100 SE 2nd St. Suite 3100 Miami, Florida 33131 PHONE: 305.808.7310 FAX: 305.808.7309

Milwaukee 234 W. Florida St. Suite 310 Milwaukee, Wisconsin 53204 PHONE: 414.937.5030 FAX: 414.224.7780

Minneapolis 706 Second Ave. S. Suite 100 Minneapolis, Minnesota 55402 PHONE: 612.343.4200 FAX: 612.343.4201

New Jersey 300 Kimball Drive First Floor Parsippany, New Jersey 07054 PHONE: 973.947.9200 FAX: 973.947.9199

New Orleans 127 West Ruelle Drive Suite 1300 Mandeville, Louisiana 70471 PHONE: 504.782.0100

New York 600 Lexington Ave. 10th Floor New York, New York 10022 PHONE: 212.537.7700 FAX: 212.537.0380

Northern Virginia 7900 Tysons One Place Suite 600 McLean, Virginia 22102 PHONE: 703.821.0040 FAX: 703.734.2837

Oakland 38 Webster St. 2nd Floor Oakland, California 94607 PHONE: 510.625.1500

Oklahoma City 235 N. MacArthur Suite 500 Oklahoma City, Oklahoma 73127 PHONE: 405.789.0900 FAX: 405.789.0905

Orange County 2211 Michelson Drive Suite 650 Irvine, California 92612 PHONE: 949.751.5700 FAX: 949.751.5701

Orlando 3063 Mercy Drive Suite G Orlando, Florida 32808 PHONE: 407.293.6090 FAX: 407.893.7099

Phoenix 2415 E. Camelback Road Suite 900 Phoenix, Arizona 85016 PHONE: 602.956.5000 FAX: 602.956.5333

Rosemont 5600 N. River Road Suite 150 Rosemont, Illinois 60018 PHONE: 847.588.5700 FAX: 847.588.0034

San Antonio 8200 IH-10 W. Suite 800 San Antonio, Texas 78230 PHONE: 210.341.1344 FAX: 210.377.2797

San Diego 6815 Flanders Drive Suite 100 San Diego, California 92121 PHONE: 858.452.8668 FAX: 858.452.2585

San Francisco 101 Second St. Suite 300 San Francisco, California 94105 PHONE: 415.489.1820 FAX: 415.489.1840

San Jose/Silicon Valley 2025 Gateway Place Suite 328 San Jose, California 95110 PHONE: 408.843.4100 FAX: 415-489-1899

Seattle 10800 NE Eighth St. Suite 150 Bellevue, Washington 98004 PHONE: 206.737.4300 FAX: 206.737.4301

St. Louis 1001 Highlands Plaza Drive W. Suite 150 St. Louis, Missouri 63110 PHONE: 314.621.1414 FAX: 314.802.0802

Walnut Creek 500 Ygnacio Valley Road Suite 100 Walnut Creek, California 94596 PHONE: 925.357.2000 FAX: 925.357.2001

Washington, D.C. 1717 K Street, NW Suite 1000 Washington, D.C. 20006 PHONE: 202.775.7000 FAX: 202.775.7009

TRANSWESTERN HOUSTON1900 West Loop South | Suite 1300 | Houston, TX 77027P: 713.270.7700 | F: 713.270.6285 | www.transwestern.com/Houston

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caitaiing on a transforming...current q3 18 2019p* direct vacancy 16.4% 16.2% - 16.9% rental rates...

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