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Houston’s industrial market continues to expand - 11M SF currently under construction

Research & Forecast Report

HOUSTON | INDUSTRIALQ1 2016

Lisa Bridges Director of Market Research | Houston

During the first quarter of this year, 1.4M SF of Houston’s industrial inventory was absorbed, substantially more than the 0.3M SF absorbed in the previous quarter. Houston’s industrial market, however, shows signs of slowing due to the downturn in the local economy caused by falling oil prices. Industrial leasing activity dropped by almost 50% over the quarter to 3.6M SF from 7.1M SF in Q4 2015. The average vacancy rate increased by 30 basis points over the quarter to 5.4% from 5.1% in Q4 2015. Almost 65% of the 3.2M SF of new construction delivered in Q1 2016 was pre-leased and 63% of the 11.0M SF under construction is pre-leased. The space under construction is only 2% of the total industrial space existing in the Houston market today.

The average citywide quoted industrial rental rate decreased 2.4% between quarters to $6.88 per SF NNN from $7.05 per SF NNN in Q4 2015.

According to the U.S. Bureau of Labor Statistics, the Houston metropolitan area created only 9,000 jobs (not seasonally adjusted) between February 2015 and February 2016, about half of the annual long-term average. Most of the job growth occurred in the government sector, followed by construction and health care.

Summary Statistics Houston Industrial Market Q1 2015 Q4 2015 Q1 2016

Vacancy Rate 4.7% 5.1% 5.4%

Net Absorption (SF)(Million Square Feet) 4.4M 0.3M 1.4M

New Construction (SF)(Million Square Feet) 4.5M 2.1M 3.2M

Under Construction (SF)(Million Square Feet) 8.2M 8.8M 11.0M

Asking Rents Per Square Foot Per Year

Average $6.62 $7.05 $6.88

Warehouse/Distribution $6.24 $6.37 $6.38

Flex/Service $10.48 $12.44 $12.27

Tech/R&D $10.80 $12.82 $12.78

Market IndicatorsRelative to prior period

AnnualChange

Quarterly Change

Quarterly Forecast*

VACANCY

NET ABSORPTION

NEW CONSTRUCTION

UNDER CONSTRUCTION

*Projected

Sealy & Company purchased a 4-building portfolio in Northwest Point Business Park from EastGroup Properties, Inc. in February 2016 for $15.6M or $67 per SF. All four buildings are located in the 7100-7200 block of Brittmoore Rd.

7110 Brittmoore Rd

4221 Way Out West Blvd

Sales Transactions

Cabot Properties, Inc. purchased an 88,000-SF distribution warehouse located in the Northwest Inner Loop submarket from Southern-Hempstead, LP in January 2016 for $8.8M or $100 per SF.

2 Houston Research & Forecast Report | Q1 2016 | Industrial | Colliers International

Sales ActivitySource: Real Capital Analytics

Q1 2016

NO. OF PROPERTIES: 59

TOTAL SF: 3.8M

AVERAGE $/SF: $84

AVERAGE CAP RATE: 7.8%

Job Growth & Unemployment(not seasonally adjusted)

UNEMPLOYMENT 02/15 02/16

HOUSTON 4.4% 4.7%

TEXAS 4.4% 4.3%

U.S. 5.8% 5.2%

JOB GROWTHAnnual Change

# of Jobs Added

HOUSTON 0.3% 9.0K

TEXAS 1.5% 172.7K

U.S. 2.0% 2.9M

Vacancy & Availability

Houston’s average industrial vacancy rate increased 70 basis points over the year to 5.4% from 4.7% in Q1 2015. At the end of the fist quarter, Houston had 27.3M SF of vacant industrial space. Among the major industrial corridors, the Northeast Corridor has the lowest vacancy rate at 1.9%, followed by the South at 3.4%, and then the Southeast Corridor at 4.6%. The largest percentage of vacant space is located in the North Corridor which has an 8.0% vacancy rate.

Houston’s industrial construction pipeline had 11.0M SF of projects underway at the end of the first quarter, about half of which is spec development. The largest project under construction is the 4,000,000-SF build-to-suit engineering, manufacturing and logistics campus for Daikin Industries, an HVAC equipment manufacturer consolidating its operations at a site located on Kermier Rd and Hwy 290 in Waller County. A partial list of buildings currently under construction can be found on Page 3 of this report.

Absorption & Demand

Houston’s industrial market posted 1.4M SF of positive net absorption in the first quarter, with the Southwest Corridor submarket contributing the largest share at 656,369 SF, followed by the Northwest Corridor which posted 611,759 SF of absorption. The North Corridor posted 410,458 SF, and the Northeast Corridor contributed 348,893 SF of net absorption. Three submarkets posted negative net absorption including the Southeast Corridor with 304,895 SF, the Inner Loop Corridor with 185,018 SF, and the South Corridor with 149,521 SF of negative net absorption.

There were several major tenant move-ins contributing to net absorption gains in the first quarter including Aldi (650,000 SF) in the Sugar Land/Ft. Bend submarket, FloWorks International (420,000 SF) in the South Highway 35 submarket, and Foxconn (400,250 SF) in the Hwy 290/Tomball Pky submarket.

Rental Rates

According to CoStar, our data service provider, Houston’s citywide average quoted industrial rental rate for all product types decreased 2.4% to $6.88 per SF NNN from $7.05 per SF NNN in Q4 2015. According to Colliers’ internal data, actual lease transactions are in the $4.56 – $5.04 per SF NNN range for newer bulk industrial spaces, while flex rates range from $7.20 to $10.80 per SF depending on the allowance provided for tenant improvements and the location of the property.

By property type, the average quoted NNN rental rates are as follows: $6.38 per SF for Warehouse Distribution space; $4.90 per SF for Bulk Logistics space; $12.27 per SF for Flex/Service space; with Tech/R&D space averaging $12.78 per SF, according to CoStar.

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

$4.00

$5.00

$6.00

$7.00

$8.00

Industrial Rental Rate and Vacancy Percentage Houston, TX

Avg. Rent Avg. Vacancy

*Vacancy percentage includes direct and sublease space.

3 Houston Research & Forecast Report | Q1 2016 | Industrial | Colliers International33

Q1 2016 Industrial Lease Transactions over 50,000 SFBUILDING NAME/ADDRESS SUBMARKET SF TENANT LEASE DATE

Beltway Crossing Northwest Hwy 290/Tomball Pky 441,000 Advance Auto Parts Mar-16

6911 Fairbanks N Houston Rd Hwy 290/Tomball Pky 211,680 United Stationers Supply Co Feb-16

Beltway Southwest Business Park Southwest Far 209,000 Maintenance Supply Headquarters2 Feb-16

Underwood Business Park II East-Southeast Far 162,790 Pacorini Global Systems2 Feb-16

Underwood Business Park I East-Southeast Far 150,000 S.I. Warehousing Co, Inc Jan-16

404-900 N Wittner St East-Southeast Far 140,782 American Packing & Crafting Inc1,2 Mar-16

Beltway Crossing Business Park Hwy 59/Hwy 90 (Alt) 66,330 Velan Valves Jan-16

10225 Mula Rd Hwy 59/Hwy 90 (Alt) 55,770 Fiserv1 Feb-16

Leasing ActivityHouston’s industrial leasing activity slowed significantly over the quarter, dropping by almost 50% from 7.1M SF in Q4 2015 to 3.6M SF. The table below highlights some of the larger transactions that occurred in Q1 2016.

1 Renewal 2 Colliers International Transaction

Under Construction - 200,000 SF or greater

Q1 2016 Industrial Under Construction - 200,000 SF or greater

BUILDING ADDRESS SUBMARKET RBA % LEASED DEVELOPER/CONTRACTOR DELIVERY DATE BUILDING DESCRIPTION

19001 Kermier Northwest Hwy 6 4,000,000 100% Prologis Aug-16 BTS for Daikin Industries

FM 565 Rd - Bldgs 1-3 East-Southeast Far 481,000 100.0% A&F General Contractors Jul-16 & Dec-16

Logistics hub for Katoen Natie

8787 W Grand Pky N Northwest Outlier 800,000 100% Unknown Aug-17 BTS for FedEx

600 Fallbrook Dr North Fwy/Tomball Pky 500,400 0.0% Hines May-16 Spec Distribution

Port Crossing Commerce Center Bldg B4

East-Southeast Far 415,272 0.0% Liberty Property Trust Dec-16 Spec Distribution

3013 Highway 225 East-Southeast Far 394,489 100% Transwestern Mar-16 Spec Warehouse

9431 Bay Area Blvd East-Southeast Far 353,600 100% Stream Realty Partners Sep-16 Spec Warehouse

233 S Cravens Rd Hwy 59/Hwy 90 (Alt) 303,335 100% Unknown May-16 BTS for FedEx

14151 E Hillcroft St - Phase I -Bldg 1

Southwest Far 240,000 0.0% Hines Real Estate Investment Trust, Inc.

Aug-16 Spec Distribution

1256 Greens Pky North Fwy/Tomball Pky 213,218 0.0% Prologis Jun-16 Spec Distribution

9531 Bay Area Blvd East-Southeast Far 212,160 100% Stream Realty Partners Sep-16 Spec Warehouse

3730 S Main St South Hwy 35 210,000 100% American Commercial Contractors

Mar-17 FloWorks International

Park 8Ninety Phase 1 - B3 Southwest Far 208,907 0.0% Trammell Crow Company Dec-16 Spec Warehouse

4 Houston Research & Forecast Report | Q1 2016 | Industrial | Colliers International

Q1 2016 Houston Industrial Market Statistical Summary

MARKET RENTABLE AREA

DIRECT VACANT SF

DIRECT VACANCY

RATE

SUBLET VACANT

SF

SUBLET VACANCY

RATE

TOTAL VACANT SF

TOTAL VACANCY

RATE

1Q16 NET ABSORP-

TION

4Q15 NET ABSORP-

TION

1Q16 COMPLE-

TIONS

4Q15 COMPLE-

TIONS

SF UNDER CONSTRUC-

TION

HOUSTON TOTAL 519,515,727 27,340,736 5.3% 940,733 0.2% 28,281,469 5.4% 1,388,045 333,971 3,239,279 2,091,462 10,946,665

CBD-NW Inner Loop 11,493,341 611,314 5.3% 65,464 0.6% 676,778 5.9% (121,511) (61,062) - - -

Downtown 31,542,635 1,702,085 5.4% 81,063 0.3% 1,783,148 5.7% (89,441) 9,937 - - - North Inner Loop 4,922,755 416,576 8.5% - 0.0% 416,576 8.5% 16,861 (60,623) - - - Southwest Inner Loop 7,481,547 36,926 0.5% - 0.0% 36,926 0.5% 9,073 (20,499) - - -

INNER LOOP CORRIDOR TOTAL

55,440,278 2,766,901 5.0% 146,527 0.3% 2,913,428 5.3% (185,018) (132,247) - - -

North Fwy/Tomball Pky

20,723,505 1,994,335 9.6% 51,914 0.3% 2,046,249 9.9% (67,262) 225,754 - 188,300 1,052,993

North Hardy Toll Rd 31,956,807 3,018,363 9.4% 76,730 0.2% 3,095,093 9.7% 252,558 277,427 197,275 272,146 111,153 North Outer Loop 19,574,870 1,057,863 5.4% 51,163 0.3% 1,109,026 5.7% 54,928 117,368 - 259,600 65,000 The Woodlands/Conroe

16,386,057 823,564 5.0% 17,645 0.1% 841,209 5.1% 170,234 133,454 244,325 - 319,229

NORTH CORRIDOR TOTAL

88,641,239 6,894,125 7.8% 197,452 0.2% 7,091,577 8.0% 410,458 754,003 441,600 720,046 1,548,375

Northeast Hwy 321 1,258,573 - 0.0% - 0.0% - 0.0% 0 0 - - - Northeast Hwy 90 17,178,468 198,150 1.2% - 0.0% 198,150 1.2% 369,800 (8,700) 398,650 11,200 - Northeast I-10 3,850,085 110,948 2.9% 12,500 0.3% 123,448 3.2% (47,968) (11,518) - - - Northeast Inner Loop 11,373,839 257,160 2.3% 75,192 0.7% 332,352 2.9% 27,061 (267,370) - - - NORTHEAST CORRIDOR TOTAL

33,660,965 566,258 1.7% 87,692 0.3% 653,950 1.9% 348,893 (287,588) 398,650 11,200 -

Hwy 290/Tomball Pky 19,967,253 3,236,486 16.2% - 0.0% 3,236,486 16.2% 255,173 (156,341) 383,750 23,600 56,641

Northwest Hwy 6 5,086,897 205,846 4.0% - 0.0% 205,846 4.0% 104,780 80,729 101,500 61,970 4,036,240 Northwest Inner Loop 59,664,016 2,001,971 3.4% 213,679 0.4% 2,215,650 3.7% (13,775) (329,055) - 204,070 - Northwest Near 17,862,162 742,971 4.2% 91,279 0.5% 834,250 4.7% 11,817 (83,438) 42,000 - -

Northwest Outlier 19,209,607 1,577,411 8.2% 20,976 0.1% 1,598,387 8.3% 156,307 106,155 62,757 466,296 874,490 West Outer Loop 24,667,729 763,648 3.1% 48,711 0.2% 812,359 3.3% 97,457 (112,313) - - 15,000 NORTHWEST CORRIDOR TOTAL

146,457,664 8,528,333 5.8% 374,645 0.3% 8,902,978 6.1% 611,759 (494,263) 590,007 755,936 4,982,371

South Highway 35 32,975,551 972,085 2.9% 45,032 0.1% 1,017,117 3.1% (107,018) 144,302 20,000 - 210,000 South Inner Loop 12,266,729 508,977 4.1% - 0.0% 508,977 4.1% (42,503) (15,416) - - - SOUTH CORRIDOR TOTAL

45,242,280 1,481,062 3.3% 45,032 0.1% 1,526,094 3.4% (149,521) 128,886 20,000 - 210,000

East I-10 Outer Loop 13,229,856 5,000 0.0% - 0.0% 5,000 0.0% - - - - - East-Southeast Far 53,084,934 3,450,248 6.5% 41,783 0.1% 3,492,031 6.6% (161,139) 41,844 678,765 483,234 2,761,467 Southeast Outer Loop 17,087,821 368,167 2.2% - 0.0% 368,167 2.2% (143,756) 143,629 - - - SOUTHEAST CORRIDOR TOTAL

83,402,611 3,823,415 4.6% 41,783 0.1% 3,865,198 4.6% (304,895) 185,473 678,765 483,234 2,761,467

Highway 59/Highway 90

22,481,793 1,342,518 6.0% 15,534 0.1% 1,358,052 6.0% 26,077 (16,331) 349,000 74,796 730,295

Southwest Far 10,891,680 708,049 6.5% 16,000 0.1% 724,049 6.6% 72,114 12,976 91,257 11,250 701,407 Southwest Outer Loop

12,792,871 533,175 4.2% 2,500 0.0% 535,675 4.2% (40,089) 41,057 - - 12,750

Sugar Land/Ft Bend Co

20,504,346 696,900 3.4% 13,568 0.1% 710,468 3.5% 598,267 142,005 670,000 35,000 -

SOUTHWEST CORRIDOR TOTAL

66,670,690 3,280,642 4.9% 47,602 0.1% 3,328,244 5.0% 656,369 179,707 1,110,257 121,046 1,444,452

Market Summary

Houston led the nation in population growth in 2015, adding more than 159,000 residents, according to the U.S. Census Bureau.

5 North American Research & Forecast Report | Q4 2014 | Office Market Outlook | Colliers International

Copyright © 2015 Colliers International.The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

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5 North American Research & Forecast Report | Q4 2014 | Office Market Outlook | Colliers International

Copyright © 2015 Colliers International.The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

Colliers International | Houston1233 West Loop South, Suite 900 Houston, Texas 77027+1 713 222 2111colliers.com/texas/houston

FOR MORE INFORMATIONLisa BridgesDirector of Market Research | Houston+1 713 830 2125lisa.bridges@colliers.com

Q1 2016 Highlights