"Oil prices took a hit late in the year, due

in large part to shaky equity markets and

global uncertainty. Prices are forecasted

to stabilize at just under $60 per barrel in

2019. Meanwhile, other major industries

such as healthcare continue to expand."

Brad Hauser,

Research Director

Savills Studley Report Houston office sector Q4 2018

Savills Studley Research Houston

SUMMARYMarket HighlightsLEASING RISESTenants leased 3.6 million square feet (msf) in the fourth quarter, an increase from the 3.5 msf completed in the third quarter. Leasing during 2018 totaled 14.8 msf, well above the market’s long-term average.

AVAILABILITY STABILIZES The market’s overall availability rate dipped slightly from 26.82% to 26.52%. The Class A availability rate also decreased from 28.53% to 28.25%. Both rates are down slightly from a year ago.

ASKING RENT UP SLIGHTLYAverage asking rent for the Houston market increased by 1.2% to $28.80. The Class A rate rose by 1.8% to $33.27. SUBLEASE SUPPLY REMAINS ELEVATED Overall sublease supply remains substantial, totaling 8.2 msf as of early December, but is down from the high mark of 11 msf. The addition of Occidental's Greenway campus pushed sublet supply up by over 800,000 sf.

02

Savills Studley Report | Houston

Ample Options PrevailHouston’s economy and office market continued to push its way out of the sharp energy market correction that started in 2015. As is often true of commodity markets, this has not been a steady progression, though. Pricing lost some ground in the last few months. Oil dipped towards the end of the quarter to below $50 per barrel, giving many energy users added cause for hesitancy. This has checked the impulse of some companies to make moves into larger or newer space.

Even so the local economy seems to be on stronger footing in 2018. Area employment remains in positive territory with 117,800 jobs gained in the last 12 months, a 3.9% increase. Office-using employment spiked by 5.2% during the last 12 months, one of the biggest year-on-year gains nationally. This follows a year of tepid, below-average job growth in 2017 and two slightly negative years of job growth in 2015 and 2016.

Oil and gas firms remain cautiously optimistic heading into 2019. Leasing activity has been relatively steady. Seasoned oil and gas firms are accustomed to the fluctuations that frequently come with this sector. During corrections such as these Houston benefits in one fashion – many companies streamline and congregate back to Houston, the heart of the oil and gas industry.

A few independent producers are increasing drilling and exploration. Arena Energy announced plans to move its headquarters to Lake Front North in The Woodlands. Arena Energy will lease 87,231 sf at the building. The independent oil and gas producer focuses on low-risk drilling on the Gulf of Mexico shelf and cited the need “to accommodate growth” as one reason for the expansion.

Tenants Capitalize on Generous TermsOther tenants are also on the move, in some cases taking advantage of very generous lease terms at new buildings underway. Waste Management plans to relocate from 1001 Fannin and 1020 Main to 284,000 sf over nine floors at Capitol Tower. The company will move in 2020 once the building is completed. The lease was the largest transaction in downtown during 2018.

A few significant leases were completed in the final three months of the year, but for the most part companies continue to shuffle from one area to another, with only very

Source: Bureau of Labor Statistics^

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80Millions

Hou. Off. Emp. Hou - % Ann. Ch. Off. Emp. U.S. - % Ann. Ch. Off. Emp

Office-Using Employment Trends

$33.27$33.02

$21.13$19.61

$0

$5

$10

$15

$20

$25

$30

$35

$40

Q4 '18 Q4 '17 Q4 '16 Q4 '15 Q4 '14 Q4 '13

Rental Rate Trends ($/sf)

Class A Class B & C

Asking Rent Trends ($/sf)

28.2%

14.6%

24.0%22.2%

0%

5%

10%

15%

20%

25%

30%

35%

Q4 '18 Q4 '17 Q4 '16 Q4 '15 Q4 '14 Q4 '13

Availability Rate Trends

Class A Class B & C

Availability Rate Trends

savills-studley.com/research 03

Q4 2018

Tenant Sq Feet Address Market AreaHewlett Packard Enterprise 568,000 1700 & 1701 City Plaza Dr The Woodlands

McDermott 524,316 915 N Eldridge Pky Katy Freeway/Energy Corridor

Total 305,780 1201 Louisiana St CBD

Transocean 300,906 1414 Enclave Pky Katy Freeway/Energy Corridor

Deloitte 204,000 1111 Bagby St CBD

Ernst & Young 120,827 1401 McKinney St CBD

Arena Energy 87,231 2103 Research Forest Dr The Woodlands

Winston & Strawn LLP 62,516 800 Capitol St CBD

New Tech Global 32,379 911 Regional Park Dr N.Belt/Greenspoint

Kirkland & Ellis LLP 28,445 609 Main St CBD

Sum of Leases 2,234,400

recent net positive absorption. Tenants in the region continue to enjoy one of the deepest pools of availability nationally. As of year-end 2018, the office vacancy rate in Houston, at 16%, ranked top among the top 54 U.S. metros. Dallas-Fort Worth, Washington, D.C., Northern New Jersey, and Phoenix round out the top five.

Slow Draw Down in AvailabilityWith leasing activity relatively sustained, and new development activity winding down availability rates have slowly started to fall. Houston ended 2018 with an overall availability rate ended 2018 with a rate of 26.9%, down by 40 basis points year-on-year. Suburban submarkets north of Houston, such as The Woodlands (with an availability rate of 16.4%), have lower availability rates. In contrast, the CBD holds closer to the market average at 29.2%.

Net absorption totaled -1.26 msf in the first three quarters of the year. This was almost entirely offset by 1.1 msf in positive absorption in the fourth quarter. As referenced above, there has nevertheless has been little drawdown in availability. Some areas are performing much better than others. Houston’s suburban submarkets have attracted the most activity. Among the hot Houston suburban submarkets, The Woodlands saw the lion’s share of net absorption. In addition to recent leases such as Arena Energy, the new ExxonMobil campus in Springwoods Village has been a significant boost to activity.

French energy firm Total S.A. renewed in place in its CBD namesake building, while McDermott is relocating within Energy Corridor from Two Eldridge Place to Energy Center V. This fills a long-standing block of space vacant since the downturn. Expanding from 250,000 sf to 524,000 sf, Transocean leased 300,000 sf in Energy Corridor at 1414 Enclave Parkway. This property had been vacant since the downturn. Marathon Oil is gearing up for a move to City Centre. This will leave a massive hole in the Galleria area, adding to the massive vacancy created due to BHP Billiton’s recent departure to join BP at its Energy Corridor campus. With the exception of a few areas such as The Woodlands the shifting of companies is opening up more space options rather than making much of a dent in overall supply.

Houston's CBD is another area seeing some recent positive net absorption. It continues to carry the highest rent in the city. The average Class A rent ended the year at $33.27. New construction has boosted

rent a bit. Development of Capitol Tower is close to completion. Hines new building is underway with Vinson & Elkins and Hines (relocating from Galleria) serving as anchor tenants.

Tenants seeking more than 200,000 sf have ample options to consider, particularly in the Downtown and Uptown submarkets. Rent the newest amenity laden buildings in the CBD has pushed into the mid $50-sf range. As of year-end 2018, Houston had 3.5 msf underway. Houston is the only metro in the entire U.S. that, on a net basis, has delivered more than 40 million sf this cycle.

The region is on the tail end of this development cycle, though. Houston had 3.5 msf under construction at the close of 2018, equal to about 1% of inventory. In comparison there was 20.5 msf under construction in mid-year 2014 (nearly 7% of construction) at the peak of the oil boom in mid-year 2014.

Looking ForwardOil and gas prices rebounded in 2017 and the first half of 2018, but have suffered at the hands of volatility in global supply market. Bank of America Merrill Lynch issued its energy outlook for 2019, projecting WTI to average $59/bbl next year. This would be an improvement from the current $50 per barrel. An expected cut in OPEC production should permit U.S. producers to add to their growing market share. Global demand for oil is expected to be quite strong in 2019, with global demand of 1.3 mm b/d. Some recent concerns about global growth could spur modest downward revisions to the forecast.

As recently as a few months ago, Houston’s office vacancy rate appeared to be setting up for improvement. Renewed leasing activity and a bottoming supply pipeline suggested better days ahead. The recent hiccoughs in energy pricing and volatility in equity markets could impede the turnaround, but it will keep conditions favorable to most tenants.

Availability Rate Comparison Rental Rate Comparison ($/sf)

Major Transactions

$37.92

$34.69

$33.50

$32.48

$32.44

$31.36

$29.09

$28.80

$27.72

$25.45

$24.78

$22.92

$21.19

$19.59

$18.99

$18.66

$18.53

$17.16

$15.34

$0 $15 $30 $45

CBD

US Index

Greenway Plaza

Midtown

West Loop/Galleria

The Woodlands

Katy Freeway/Energy Corridor

Houston Region

Westchase

Bellaire

North Loop W/290 Near

Northwest/290 Far

Pasadena/Baytown

Nasa/Clear Lake

I-10/Northeast/Kingwood

N.Belt/Greenspoint

Southwest/Sugarland

Medical Center/South

FM 1960

7.1%

12.3%

14.8%

15.2%

16.9%

17.6%

17.9%

18.0%

20.4%

21.4%

22.6%

23.5%

25.4%

26.5%

27.3%

28.6%

31.3%

32.0%

52.7%

0% 10% 20% 30% 40% 50% 60%

Medical Center/South

Bellaire

The Woodlands

Pasadena/Baytown

Midtown

I-10/Northeast/Kingwood

US Index

Greenway Plaza

North Loop W/290 Near

Southwest/Sugarland

West Loop/Galleria

Nasa/Clear Lake

FM 1960

Houston Region

Northwest/290 Far

CBD

Katy Freeway/Energy Corridor

Westchase

N.Belt/Greenspoint

Savills Studley Report | Houston

04 @SavillsStudleywww.savills-studley.com

Please contact us for further information

(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded. ^Unless otherwise noted, source for data is Savills Studley.The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2019 Savills Studley

Savills Studley333 Clay Street, Suite 3700 Houston, TX 77002(713) 522-5300

Co-Branch ManagersMark W. O'Donnell - Vice Chairman, Region Leader, modonnell@savills-studley.comW. Derrell Curry - EVP, dcurry@savills-studley.comKyle Kelley - EVP, kkelley@savills-studley.comDrew Morris - EVP, dmorris@savills-studley.com

Brad Hauser - Regional Director, Research, bhauser@savills-studley.com

Map Submarket Total

SF(1000's)

Last 12 Months

ThisQuarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

YearAgo

ThisQuarter

%Change

fromLast Qtr.

YearAgo

Bellaire 2,599 135 319 3.9% 488 12.3% 0.5% 18.8% $25.45 0.4% $25.08Bellaire - Class A 1,169 68 173 -6.9% 242 14.8% -1.1% 20.7% $28.24 2.3% $26.07Central Business District 38,346 3,182 10,969 3.4% 10,382 28.6% 1.0% 27.6% $37.92 1.8% $37.63Central Business District - Class A 28,732 2,911 7,766 6.5% 7,114 27.0% 1.6% 25.5% $41.58 1.0% $41.70FM 1960 2,837 201 721 -3.7% 781 25.4% -1.0% 27.5% $15.34 -1.7% $16.14FM 1960 - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AGreenway Plaza 9,927 477 1,786 -11.7% 2,009 18.0% -2.4% 20.2% $33.50 1.2% $34.02Greenway Plaza - Class A 7,264 328 1,428 -9.2% 1,591 19.7% -2.0% 21.9% $35.15 0.1% $35.84I-10/NE/Kingwood 1,187 59 208 -2.3% 213 17.6% -0.4% 17.9% $17.96 -1.2% $18.22I-10/Northeast/Kingwood - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AKaty Freeway 27,062 2,952 8,457 -7.4% 8,693 31.3% -2.5% 32.1% $29.09 0.7% $28.11Katy Freeway - Class A 18,542 2,234 6,072 -8.8% 6,399 32.7% -3.2% 34.5% $32.08 1.3% $30.12Medical Center/South 1,815 85 129 -2.7% 140 7.1% -0.2% 7.7% $17.16 2.5% $20.50Medical Center/South - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AMidtown 4,602 340 776 9.0% 749 16.9% 1.4% 16.3% $32.48 1.5% $33.26Midtown - Class A 1,773 217 428 22.0% 495 24.2% 4.4% 27.9% $34.08 0.0% $33.77North Belt/Greenspoint 10,905 833 5,749 2.1% 6,953 52.7% 1.1% 63.8% $18.66 -3.1% $20.55North Belt/Greenspoint - Class A 5,124 392 3,346 0.0% 4,071 65.3% 0.0% 79.5% $22.35 -0.7% $23.57NASA/Clear Lake 4,309 141 1,011 -3.5% 1,146 23.5% -0.8% 26.6% $19.59 4.1% $19.57NASA/Clear Lake - Class A 1,625 24 171 -4.2% 218 10.5% -0.5% 13.4% $25.02 2.7% $23.99North Loop W/290 Near 4,635 331 945 -4.4% 979 20.4% -0.9% 19.1% $24.78 -9.9% $24.90North Loop W/290 Near - Class A 1,189 102 465 -7.4% 543 39.2% -3.1% 38.1% $28.47 0.9% $27.10Northwest/290 Far 11,242 953 3,073 -8.8% 3,323 27.3% -2.6% 29.6% $22.92 0.4% $23.70Northwest/290 Far - Class A 6,607 590 1,950 -7.9% 1,985 29.5% -2.5% 30.0% $25.91 1.7% $27.13Pasadena/Baytown 2,509 95 381 4.5% 388 15.2% 0.7% 15.5% $21.19 9.0% $21.74Pasadena/Baytown - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

$20 12Southwest/Sugar Land 13,935 656 2,984 2.0% 2,566 21.4% 0.4% 18.4% $18.53 -1.0% $20.19Southwest/Sugar Land - Class A 5,284 230 1,102 2.6% 792 20.9% 0.5% 15.0% $22.49 -0.1% $25.12West Loop/Galleria 30,363 2,473 6,868 3.3% 6,393 22.6% 0.7% 21.1% $32.44 0.9% $33.25West Loop/Galleria - Class A 19,934 2,010 4,728 3.9% 4,640 23.7% 0.9% 23.3% $35.57 -0.1% $36.39Westchase 14,735 638 4,710 -1.4% 4,559 32.0% -0.6% 31.0% $27.72 3.1% $28.69Westchase - Class A 8,736 302 3,293 -2.3% 3,158 37.7% -0.9% 36.1% $31.99 4.3% $32.43Woodlands 9,490 1,238 1,402 -3.3% 1,706 14.8% -2.9% 20.8% $31.36 1.8% $31.04Woodlands - Class A 6,374 1,022 883 -6.0% 1,064 13.9% -1.1% 18.0% $34.80 4.0% $35.01Greater Houston Total 190,498 14,790 50,488 -1.1% 51,469 26.5% -0.3% 27.1% $28.80 1.1% $28.85Greater Houston Total - Class A 113,064 10,458 31,911 -1.0% 32,384 28.2% -0.3% 28.9% $33.27 1.7% $33.01

1

LeasingActivity

AvailableSF

AvailabilityRate

Asking Rents Per SF

2

9

10

3

4

7

8

5

6

16

1-17

11

12

13

14

17

15