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TAPPING AN EXPANDING MARKET

To our friends, clients and colleagues:

We are pleased to provide you this thirteenth annual edition of TrendLines: Trends in Metro Houston Commercial Real Estate. This is a collaborative publication of Transwestern and its research affiliate, Delta Associates. Our purposes are to distill the trends of 2013 and to shed light on pivotal forces and issues that we believe will affect the region’s economy and commercial real estate in 2014 and beyond.

Through the 3rd quarter of 2013, the Metro Houston commercial real estate market’s performance ranked among the best in the nation, a reflection of the robust local economy, strong demand for all property types, and a controlled development pipeline. New demand for office space continues, supported by a growing energy industry. Meanwhile, Houston’s industrial market boasts the lowest vacancy rate in the nation, with further market growth likely when the Panama Canal expansion is completed in 2015 and Houston reaps the benefits of additional freight activity. The retail market is benefiting from a prospering and growing population while the apartment market is enjoying demographic and lifestyle shifts that favor this product type.

Employment gains in Metro Houston have been among the best in the nation in 2013, and as a result, the commercial real estate market likely will continue to improve in 2014. Of note, pricing for all types of assets is increasing; Houston’s strong market fundamentals are attracting renewed attention from investors. Values are expected to rise further in 2014.

We expect to find significant opportunities in our industry in the period ahead, notwithstanding the sluggish pace of the national economic recovery. In 2014, we expect:

� Strong job growth in Metro Houston. We expect to have seen a gain of approximately 100,000 payroll jobs during 2013, once the year is complete, followed by an increase of 80,000 to 90,000 jobs per annum in 2014 and 2015. These projections are supported by the sturdy performance of the energy and health sectors and likely growth in Houston’s distribution sector over the next two years. The pace of regional economic growth may decelerate following robust expansion in 2012 and 2013, but Houston is likely to remain a national leader in job creation during 2014.

� Stabilizing or declining vacancy and rising rents for office, industrial, and retail product. While the office pipeline of new supply is expanding more quickly than it was a year ago, demand remains strong enough to generate continued rent growth.

� Declining vacancy and rising rents for apartment product, as job creation and lifestyle changes drive demand. Apartment rents, already at record levels, will see more upside in this cycle.

� Houston’s commercial real estate assets to attract additional attention from investors, given the region’s strong economy; demand for high-quality assets will remain robust in 2014, with tenants focused on top-tier space.

� Commercial real estate prices to continue rising along with improving fundamentals and investor demand. As pricing for existing assets continues to rise and vacancy remains low, we expect groundbreakings to continue across all property types, including additional spec development.

We hope the following information provides insight into our collective opportunities. All the professionals at Transwestern and Delta Associates look forward to helping you interpret the material in this report, and to being your service partner in the successes we are confident you will achieve in the period ahead. We offer you our best wishes for a successful 2014.

TranswesTernKevin RobertsPresident, Southwest

DelTa associaTesGregory H. Leisch, CREChief Executive

NOVEMBER 2013FOREWORD

Locke Lord LLP

Locke Lord LLP is a full-service, international law firm with offices in Atlanta, Austin, Chicago, Dallas, Hong Kong, Houston, London, Los Angeles, New Orleans, New York, Sacramento, San Francisco and Washington, D.C. Our team of nearly 650 attorneys has earned a solid national reputation in complex litigation, regulatory and transactional work. We serve our clients’ interests first, and these clients range from Fortune 500 and middle market public and private companies to start-ups and emerging businesses.

Locke Lord’s team builds collaborative relationships and crafts creative solutions to solve problems - all designed and executed with long-term strategic goals in mind. Among Locke Lord’s many strong practice areas are appellate, aviation, bankruptcy/restructuring, business litigation, class action litigation, corporate, employee benefits, energy, environmental, financial services, health care, insurance and reinsurance, intellectual property, international, labor and employment, litigation, mergers and acquisitions, private equity, public law, real estate, regulatory, REIT, tax, technology, and white collar criminal defense and internal investigations.

Chicago Title Insurance Company — Commercial

Chicago Title offers customers the most comprehensive and accurate real estate related services in the nation. You can rely on Chicago Title, with its rich history of over 160 years, to provide assurance and security for all your real estate transactions and title insurance needs. In Houston, please contact Jimmy Erwin, Reno Hartfiel or Karen Highfield for property related transactions in Texas and the rest of the United States.

Harvey Builders

Since the formation of D.E. Harvey Builders 50 years ago, the company has rapidly grown to be a recognized leader in the Houston building industry. Currently, the company maintains offices in Houston, Austin, San Antonio and Washington, D.C. All facets of the commercial construction markets are being served. Our people and the projects they manage represent a culture, philosophy and history based on community service. From the very beginning, we have worked hard to become an integral part of the communities we have helped to build. Our philosophy is based on 3 words: Innovation, Quality, Integrity. Harvey takes pride in taking great care of their clients by treating them as partners. With a solid foundation of past accomplishments we continually strive to build trusting relationships with our clients and for excellence in our performance. Our work is visible evidence of our concern for the environment, for education, for healthcare, and for the economy. At Harvey, we care enough to exceed the needs of our clients and society in everything we do.

Kirksey

Specializing in sustainable architecture, interior design and master planning, Kirksey designs high-performance, healthy buildings for all of our clients. Our firm is organized into focused practice groups — Commercial, Community/Religious, Education, Healthcare, Hospitality, Interior Architecture, Residential, Retail, and Science & Technology — each supported by departments of Design, EcoServices, Information Technology and Marketing. We’ve been shaping the Houston skyline since 1971 and have designed over 70 office buildings in the past ten years alone. We create environments that encourage collaboration and innovation, promote corporate culture, and foster growth. Headquartered on our own corporate campus in Houston, Texas we are a group of designers and creatives committed to our clients, our community, and our earth.

J.P.Morgan

J.P. Morgan is a leader in financial services, offering solutions to clients in more than 100 countries with one of the most comprehensive global product platforms available. We have been helping our clients to do business and manage their wealth for more than 200 years. Our business has been built upon our core principle of putting our clients’ interests first. J.P. Morgan is part of JPMorgan Chase & Co. (NYSE: JPM), a global financial services firm with assets of $2.3 trillion.

TranswesTern woUlD liKe To THanK oUr 2013 sPonsors

sPecial THanK YoU To oUr KeYnoTe sPeaKer

william BennettFormer U.S. Secretary of Education William J. Bennett is one of America’s most important, influential and respected voices on cultural, political and education issues. Over the

course of his professional life, in education, government and the private sector, Bennett has succeeded in a trifecta of American institutions. He is an award-winning professor

in academia, having taught at Boston University, the University of Texas and Harvard. Further, he is a three-time confirmed executive in the Ronald Reagan and George W. Bush

administrations including holding two cabinet-level positions, Secretary of Education under Ronald Reagan and the Nation’s first Drug Czar under the first President Bush. Prior

to becoming Secretary of Education, he was also chairman of the National Endowment for the Humanities. Additionally, he is the author of more than 24 books, including two

that reached No. 1 on the New York Times Best Sellers list and two of the most successful books of the 1990s. He is the host of the No. 7 ranked nationally syndicated radio

show, “Morning in America.” Thanks to his government positions, his writings and speeches, and thousands of media appearances, Bennett has extraordinary influence on

America’s political and social landscape. In many surveys and publications, he has been named one of the most influential individuals in America. He is the recipient of more

than 30 honorary degrees.

acKnowleDGMenTsThe editor, Alexander (Sandy) Paul, CRE, wishes to acknowledge and thank this project’s research team at Delta Associates: Elizabeth Norton, National Research Director; David

Parham, Senior Vice President; and Joshua Cohen, Associate. Thanks also to the creative layout team at Transwestern, headed by Shannon Bedinger and Gregorio Barrera. We

would also like to thank Cyndi McNeill for her help with this project. Finally, thanks to Gregory Leisch, CRE, for his insights on the economy and commercial real estate markets.

rePresenTaTionsAlthough the information contained herein is based on sources that Delta Associates (DA) and Transwestern (TW) believe to be reliable, DA and TW make 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 DA or 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.

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naTional econoMY: recoverY enDUres as PrivaTe anD PUBlic secTors aDaPT

In the face of tax hikes, spending cuts and recent volatility in the stock market, the national economic expansion remains on track, even if its performance is slow and uneven from month to month. Consumers’ improved outlook is partly due to:

� Higher-income americans feeling wealthier due to a 22.3% gain in the stock market year-to-date (the s&P 500 as of mid-october);

� Middle-income americans feeling better due to a 12% gain in housing prices over the past 12 months; and

� lower- and middle-income earners benefiting from low inflation and declining gasoline prices since last year at this time.

Thus far in 2013 there has been little residual impact from sequestration. The private and public sectors are each learning to adapt, and national economic growth has continued, though at a level that is weak for a post-recession recovery. Households should remain upbeat due to increases in net worth from home prices and the stock market, though the Federal government shutdown and debt ceiling fights in October may have weakened consumer confidence. On balance, we look for this recovery to continue on its slow but steady course through 2017 or so, barring a catastrophic event.

specifically, we believe the economic outlook is as follows:

� real GDP growth: approximately 2.0% in 2013.

� Payroll jobs: approximately 2.3 million added in 2013.

� Housing: Price increases of approximately 12% from December 2012 to December 2013.

� Unemployment rate: Hovering around 7.3% throughout the remainder of 2013.

� Federal Funds rate: 0% to 0.25% through year-end 2015.

� long-term interest rates: edging higher during the rest of 2013.

� inflation rate: remaining around 2.0% during the balance of 2013; higher in 2014 as consumer demand strengthens.

TABLE OF CONTENTS

Foreword | Sponsors | Special Thanks, Acknowledgments & Representations | Contact

section one Summary 5

National Economy: Recovery Endures as Private and Public Sectors Adapt

Houston’s Economy Maintains Robust Expansion

Houston Metro Office Market: Expansion in 2013

Houston Metro Industrial Market Strong – and Improving

Investment Sales

Houston Metro Multifamily Market: Bolstered by Employment Growth

Houston Metro Retail Market: Supported by Hiring in Core Industries

section Two The National Economy 9

section Three The Houston Metro Economy 16

section Four The Houston Metro Office Market 19

section Five The Houston Metro Industrial Market 27

section six Office and Industrial Investment Trends 32

section seven The Houston Metro Multifamily Market 36

section eight The Houston Metro Retail Market 38

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Houston’s economic outlook is bright and it should remain strong for several years to come. Economic uncertainty and political instability in the Middle East does cause some concern, but Houston is in a strong position to withstand any slowdown in economic growth.

The energy sector has been a boon for Houston and not only because of its oil and gas production. Wind power is another source of production. Strength in the Energy, Trade/Transportation, and Education and Health Services sectors will drive expansion locally over the next several years. As a result, we expect metro Houston’s job growth to average approximately 91,700 per year for the 2013-2015 period, comparable to the growth during the 2005-2007 expansion period. Houston’s employment growth should be among the nation’s strongest.

energy (Mining/Logging)

6,200 jobs added over the 12 months ending august 2013 – a 6.0% increase.

Professional services12,000 jobs added over the 12 months ending august 2013 – a 2.9% increase.

construction8,200 jobs were added during the 12 months ending august 2013 – a 4.5% increase.

Manufacturing5,900 jobs were added over the 12 months ending in august 2013 – a 2.4% increase.

Trade/Transportation19,200 jobs added in the 12 months ending august 2013 – a 3.5% increase.

HoUsTon’s econoMY MainTains roBUsT exPansionThe Houston metro economy continued to improve during 2013. The 12-month employment growth of 80,700 jobs through August 2013 is fourth-most in the nation among large metro areas. Houston’s payroll employment rose by 3.0% during that period, above the national growth of 2.4%. The Energy, Construction, and Trade/Transportation Sectors are fueling growth, and Houston’s other core industries are continuing to expand, including the Leisure/Hospitality sector. TABLE OF CONTENTS







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Industrial asking rents edged down 0.3% through the 3rd quarter of 2013, after rising by 5.0% in 2012. The 3rd quarter 2013 average asking rent for all types of industrial space is $5.87/SF, triple net.

Steady demand should support healthy rent increases during the remainder of 2013 and into 2014, particularly in the warehouse/distribution sector, given the already-low vacancy rate in the Houston industrial market.

The Houston metro industrial market will likely experience continued growth for the remainder of 2013 and into 2014. Despite gains in the United States, global economic uncertainty persists and could potentially curtail national economic growth. However, the energy boom in Houston should be able to sustain the volatility of the broader economy, and industrial vacancies in Houston likely will continue to fall. Large-scale construction is underway all across the Houston market. If construction remains controlled, industrial rents will rise, and market conditions will turn further in favor of landlords. The current level of construction is limited enough to promote continuing strong market conditions, though the pipeline has been increasing. On balance, we expect strong performance from the Houston industrial market during the remainder of 2013 and into 2014.

invesTMenT salesSales have returned to peak levels in Houston faster than in many other major markets, even as national office investment volume has plateaued. Annualized national office volume for 2013 totals $77.5 billion, compared to $81.1 billion in 2012 and $64.7 billion in 2011. Improved market conditions, driven by one of the nation’s strongest local economies, continue to fuel investor interest in the Energy Capital. The shale revolution has given local energy companies the confidence and incentive to expand their workforces, which translates into greater interest in Houston office assets.

In the long term, real estate investments have either matched or outperformed stocks and bonds. While in the short term the stock market has been robust, investors continue to seek real estate as a hedge against inflation. After a precipitous fall following the housing bubble and recession, real estate has again proved to be a strong investment. In the last 10 years as of June 2013 the NAREIT Equity REIT Index saw a 10.96% increase. The NCREIF Property Index increased 8.6% during the same period, while stocks (as measured by the S&P 500) rose 7.3%. Direct investment in real estate remains attractive at this point in the cycle compared to the alternatives, particularly given the run-up in the bull market.

In Houston, there was $2.5 billion in total office sales recorded year-to-date in 2013. The $3.3 billion annualized total for the year is set to surpass marks of $2.5 billion in 2012 and $1.4 billion in 2011.

The average cap rate on a rolling three-month basis for core Houston office assets was 7.2% in June 2013. However, there is a wide range of cap rates depending on the locations and characteristics of the properties being traded. Trophy properties have recently traded at cap rates in the 6.0% range. We expect cap rates to edge down locally during the balance of 2013, as market fundamentals suggest increasing investor interest in Houston’s office assets. However, if long-term interest rates rise substantially in the period ahead cap rates likely will rise in turn.

Despite decelerating some from 2012 numbers, national industrial investment sales remain well above recessionary levels seen in 2008 through 2010. At the current pace, sales will total $36.3 billion in

HoUsTon MeTro oFFice MarKeT:

exPansion in 2013The Houston metro office market experienced growth in 2013, as the local economy expands at a healthy rate. Job creation, especially among energy-related firms, has driven office leasing activity, and tenants are seeking quality space in prime submarkets.

Net absorption totaled 1.3 million SF in the first three quarters of 2013 (1.7 million SF when annualized), compared to 4.2 million SF in all of 2012. The Class A market accounted for that entire total, absorbing 1.4 million SF, with Class B reporting negative absorption in the Houston market. Positive Class A absorption is occurring because of the strength of the local economy. Owners are looking for tenants to fill Class A space before new buildings currently under construction come online.

The overall office vacancy rate (including sublet space) in the Houston metro area was 10.9% at 3rd quarter 2013, unchanged from one year ago. The direct vacancy rate was 10.4%, down from 10.6% one year ago. The continued strength of the local economy is driving this rate down; direct vacancy is nearing its recent nadir of 10.2% in 2007.

Asking rents for all classes of office space have risen approximately 1.0% in metro Houston during the first three quarters of 2013, after rising 3.6% in 2012. Class A rents rose 2.4% through the 3rd quarter of 2013, and Class B rents increased 0.7% in the same period. Class A rents have been rising faster than Class B rents because of the flight to quality underway, with stronger demand for newer space.

The Houston metro office market will likely experience continued growth in the period ahead. However, given the growing pipeline, coupled with tenants vacating older space, we expect the vacancy rate to stabilize over the next two years – hovering in the low-11% range. Rents will likely continue rising modestly for the remainder of 2013 and into 2014, especially for Class A space, as office market conditions currently favor owners. However, with the development pipeline (including planned space expected to start construction soon) now at 5.3% of the standing inventory, rent increases are likely to remain modest.

HoUsTon MeTro inDUsTrial MarKeT sTronG – anD iMProvinGThe fundamentals of the Houston industrial market improved in 2013, with vacancy being the lowest in the nation and continuing to decline. As consumer spending increases, demand for industrial space will continue to grow over the intermediate to long term. As the national economic recovery continues, we expect demand for Houston industrial space to remain strong for the remainder of 2013 and into 2014. The rising demand for goods and increased trade with Asia via the expanded Panama Canal suggest a strong future for the Houston industrial market.

Net absorption of industrial space in the Houston metro totaled 4.8 million SF through the first three quarters of 2013, compared to a total of 5.0 million SF in 2012. Local businesses are expanding as the regional economy strengthens and consumer spending and confidence increase. A growing retail segment benefits the warehouse/distribution market.

The overall Houston metro area industrial vacancy rate declined to 4.3% in September 2013 from 4.6% a year earlier. The direct industrial vacancy rate, 4.2% in September, is down from 4.5% a year earlier.

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2013, compared to $40.3 billion in 2012 and $34.9 billion in 2011. Additionally, the Houston market has seen strong returns over the past year and is poised to see an increase in demand with the completion of the Panama Canal expansion in 2015, allowing for a larger amount of cargo from the Pacific.

Returns on investments in industrial assets have shown continued strength in 2013. Like the office market, the Houston industrial market has performed the best relative to other markets across the country. Returns in Houston measured 15.97% over the 12 months ending in June 2013, compared to the national average of 10.82%. Among major industrial markets, only Denver performed nearly as well.

Investor demand for industrial properties in Houston will continue to strengthen with the abundance of capital (core and value-add funds) that is chasing industrial product based on the strength of the market and the Houston economy. This, coupled with the lack of quality product on the market, will continue to put downward pressure on cap rates (perhaps below 6% for premier assets) as long as interest rates remain low by historical standards. If long-term interest rates rise in 2014 cap rates for Houston industrial product may edge up, but the market’s strong fundamentals, including the lowest vacancy rate among major metro areas, will encourage investor interest.

HoUsTon MeTro MUlTiFaMilY MarKeT: BolsTereD BY eMPloYMenT GrowTHThe Houston metro multifamily market continues to expand due to population increases and one of the highest job growth rates in the country. This year has seen market fundamentals improve, with absorption and rents up and vacancy down.

Net absorption for all classes of apartments remained strong year-to-date in the Houston metro as of September 2013, surpassing the pace of absorption in 2012. Absorption was approximately 16,168 units year-to-date through September 2013, compared to 14,664 units during all of 2012. Houston’s population is increasing as the availability of employment attracts new residents from other parts of the country.

The delivery of new apartment units has not kept pace with demand in the past year, leading to a declining vacancy rate. Vacancy as of September 2013 stood at 8.9%, down from 10.6% at the end of 2012 and 12.3% at year-end 2011. The vacancy rate for all classes of Houston metro apartments has continued to decline following its spike in 2009 and is now at the lowest level in the past decade. With strong job creation and population growth expected to continue, we anticipate the vacancy rate will edge down further over the next 12 months.

Strong demand and declining vacancy have allowed property owners to push rents to record levels in 2013. The average rental rate for Houston apartments was $0.97/SF/month at the end of September, up 6.0% over the past 12 months. Rents will likely increase through the balance of 2013 and into 2014 as job creation continues and economic growth strengthens.

HoUsTon MeTro reTail MarKeT: sUPPorTeD BY HirinG in core inDUsTriesMetro Houston’s retail market experienced steady improvement in 2013, as the economy strengthened and job growth remained strong locally. This sector’s growth is supported by one of the nation’s best regional economies and its solid employment gains, reinforced by hiring in the core industries.

Houston’s retail vacancy rate, at 10.1% in the 3rd quarter of 2013, is down from 11.0% in the 3rd quarter of 2012. We expect that vacancy will remain steady or decline modestly for the remainder of 2013 and into early 2014, as Houston’s consumer sector remains strong and retailers open more stores.

Retail rents remained at $1.40/SF/month in the 3rd quarter of 2013 for all classes of retail space combined. Rents for superior product are rising; commodity product is reducing the overall average. While overall rents declined during the past year, they likely will experience modest growth during the balance of 2013 and into 2014, as consumer spending accelerates and market conditions continue to strengthen. The recent trends in vacancy have set the stage for rent growth.

The Houston retail market will likely see further expansion during the balance of 2013 and into 2014, as local job growth remains robust and the consumer sector is strengthening. Nationally, consumer confidence remains at its highest point in over five years. With regional economic growth, new consumers will arrive, increasing total consumption. A growth cycle in the retail market will likely occur over the next several years, making investment very attractive. We look for a focus on grocery-anchored and mixed-use development, as well as increasing urban infill projects, as these best address consumers’ needs and preferences.

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United States

Source: Bureau of Economic Analysis, Center for Regional Analysis, Delta Associates; October 2013.

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GDP RECOVERY PATTERNS AFTER THE PAST FOUR RECESSIONS

BASELINE BUDGET PROJECTIONSUnited States

Source: Congressional Budget Office, Delta Associates; October2013.

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recoverY enDUres as PrivaTe anD PUBlic secTors aDaPTIn the face of tax hikes, spending cuts and recent volatility in the stock market, the national economic expansion remains on track, even if its performance is slow and uneven from month to month. Consumers’ improved outlook is partly due to:

� Higher-income Americans feeling wealthier due to a 22.3% gain in the stock market year-to-date (the S&P 500 as of mid-October);

� Middle-income Americans feeling better due to a 12% gain in housing prices over the past 12 months; and

� Lower- and middle-income earners benefiting from low inflation and declining gasoline prices since last year at this time.

These factors have sent consumer sentiment to its highest level in nearly six years. The Thomson Reuters/University of Michigan index of consumer sentiment stood at 75.2 in October. While down in recent months, it remains high compared to values from the past several years. Consumers are becoming more confident in the economy as their net worth increases, driven by the strong performance of stocks (which supports the growth of workers’ 401(k) plans), and the housing market (with housing representing most workers’ single greatest asset). Rising household wealth has translated into spending, as retail sales are up 4.7% year-over-year as of August 2013.

While sequestration (the Federal government’s automatic budget cuts) is a reality, and a payroll tax holiday ended at the start of the year, neither has been able to derail U.S. economic growth. Each has likely acted as a drag on growth – GDP gains have been lackluster recently, and this is the weakest post-recession recovery since the Great Depression – but the economy does continue to expand, along with the job market. Look for tensions in the Middle East and rising interest rates to also act as a drag on growth in the near-term.

In sum, we look for this recovery to continue on its slow but steady course through 2017 or so, barring a catastrophic event.

PaYroll JoBsThe national economy added 2.2 million new jobs (not seasonally adjusted) during the 12 months ending August 2013, with the private sector adding close to 2.3 million new jobs while the public sector shed 83,000 positions. Month-to-month gains continue to be hit or miss, as the 169,000 jobs (seasonally adjusted) that were added to the economy during the month of August 2013 were slightly lower than consensus estimates. In general, job growth has been disappointing in this cycle compared to past economic recoveries. Because of population growth, about 125,000 jobs must be created each month just to keep a steady unemployment rate. Although the economy continues to move forward, it is doing so at a tepid pace, which has encouraged businesses and consumers to alter spending patterns and adjust to limited growth. Although we expect that job growth will continue to be sub-par during this expansion cycle, we project that 2013 will overall be somewhat better than 2012, with approximately 2.3 million jobs created.

One benefit of Federal austerity and an enduring economy is that they are reducing the deficit. The Congressional Budget Office (CBO) projects that in 2015, the Federal budget deficit will be just 39% of what it was in 2012. Of note, the U.S. will still be running a deficit – we are not paying down debt, just increasing it at a slower rate – but that is still substantial progress in three years. As long as GDP gradually accelerates along with job creation, the reduction in Federal spending will be of long-term benefit to the economy. While the deficit is expected to fall to 2.4% of GDP by 2015, the deficit is

projected to increase later in the coming decade due to rising health care costs and rising interest payments on government debt once the borrowing environment returns to more normal conditions. If this occurs, expect a few more battles on Capitol Hill to rein in spending or in pursuit of other deficit-reducing measures.

PAYROLL JOB GROWTHUnited States | Year‐Over‐Year

Source: Bureau of Labor Statistics, Delta Associates; October 2013.

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TABLE OF CONTENTS




Recovery Endures as Private and Public Sectors Adapt

Payroll Jobs

Payroll Jobs - Continued

Gross Domestic Product (GDP) and Consumption

Housing Market

Federal Intervention and Inflation

Federal Intervention and Inflation - Continued

Economic Outlook

National Payroll Job Growth Summary







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PAYROLL JOB GROWTHUnited States | 12 Months Ending August 2013

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State and Local Government

Information

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Other Services

Wholesale Trade

Financial Activities

Construction/Mining

Education/Health

Retail Trade

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Job Change

Note: Data are not seasonally adjusted.

We expect more jobs to be trimmed from the public sector during the balance of 2013, as governments continue to cut their workforces to make up for budget shortfalls. At the Federal level, these cuts will largely be achieved through attrition. However, the national economy will continue to see overall job growth as public sector losses will be more than offset by continued growth in the private sector. On a bright note, many government agencies such as the Departments of Defense, Education, Agriculture and Justice were able to reduce the length of expected employee furloughs from the lower budget caps that took effect March 1st through cost-cutting measures and internal reviews.

During the 12 months ending August 2013, the top three sectors in job gains were Professional/Business Services, Leisure/Hospitality, and Retail Trade – adding a total of 1.4 million new jobs. Retail employment is growing at a healthy rate, though retail jobs have less of a multiplier effect than many others due to their low wages. Retail employment is likely to get a boost from strong new-car sales, which are projected to experience a double-digit rise during 2013. Job losses were confined to the Federal government, State and Local government, and Information sectors over the past year, with a total net loss of 90,000 positions. Job losses in the public sphere are likely to continue, as governments have ongoing difficulties with financing and budgeting constraints. Most of those losses are likely to be in the Federal sector.

The Bureau of Labor Statistics projects that the economy will add 19.7 million nonfarm payroll jobs from 2010 through 2020, for an average annual growth rate of 1.4%. This growth rate compares to a 1.1% annual average over the past 20 years. Education/Health is projected to be the leader in job growth through 2020, adding 6.5 million jobs. Professional/Business Services follows, adding 3.8 million positions. Although the Construction sector ranks third for the number of jobs added, this sector suffered severe job loss during the 2008 downturn and in 2020 likely will remain below its pre-recession employment peak.

PROJECTED PAYROLL JOB GROWTHUnited States | December 2010 – December 2020

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Job Change (Thousands)Source: Bureau of Labor Statistics, Delta Associates; October 2013.

Initial unemployment claims were falling in 2013 until October’s Federal government shutdown began to have an effect on filings. In mid-October, initial claims stood at 336,500 based on a 4-week moving average. This compares to the 15-year average of 378,500. We expect claims to hover at or slightly below current levels through the end of 2013.

INITIAL UNEMPLOYMENT CLAIMSUnited States | Four‐Week Moving Average

Source: U.S. Department of Labor, Delta Associates; October 2013.

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Sep-11

Nov-11

Jan-1

2

Mar-1

2

May-1

2

Jul-1

2

Sep-12

Nov-12

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3

Mar-1

3

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3

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3

Sep-13

300,000

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Init

ial U

nem

plo

ymen

t C

laim

sNote: Data are seasonally adjusted.

15-Year Average=378,500

Peak in Initial Unemployment Claims(Week of 3/28/09) = 660,250

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TRENDLINES® 201311

The unemployment rate has declined to 7.3% as of August 2013, from 8.1% one year earlier. The 7.3% rate is the lowest level since the end of 2008. We anticipate that the unemployment rate will hover around 7.3% throughout the balance of 2013.

Source: Bureau of Labor Statistics, Delta Associates; October 2013.Note: Through August 2013; seasonally adjusted; shaded bars represent recessions.

UNEMPLOYMENT RATEUnited States

0%

2%

4%

6%

8%

10%

12%

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

U.S

. Un

emp

loym

ent

Rat

e

As of July 2013, for every job opening there are 3.1 potential applicants. This is well below the July 2009 peak of 6.7 applicants for every job and marginally less than the 10-year average of 3.2. The ratio has been 3:1 or greater since October 2008.

Drilling down to job sectors, there are still too many potential applicants for too few jobs within each sector. This gap is most apparent in the construction sector, where for every job opening, there are 10.1 potential applicants as of July 2013. This gap is forcing many unemployed construction workers to revamp their skill sets in order to be hirable in another sector. Of note, the job seeker ratio for the construction industry fell from 12.5 in March 2013, which corresponds to the rebound in homebuilding seen this year. In comparison, the Education and Health Services sector has just 1.8 applicants per job opening.

JOB- SEEKERS RATIOUnited States

0

1

2

3

4

5

6

7

Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13

Rat

io

Source: Bureau of Labor Statistics, Economic Policy Institute, Delta Associates; October 2013.

10-Year Average = 3.2

NUMBER OF UNEMPLOYED VS. JOB OPENINGS12‐Month Average Ending July 2013

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800

Leisure andhospitality

Wholesale andretail trade

Professional andbusiness services

Education and health services

Manufacturing

Construction

Government

Other services

Transportationand utilities

Financial activities

Information

Mining

Number of Job Openings

Number of Unemployed

Thousands of Jobs


Gross DoMesTic ProDUcT (GDP) anD consUMPTionGDP increased at a 2.5% annualized rate during the 2nd quarter of 2013, compared to a 1.1% revised growth rate during the 1st quarter of 2013. The 20-year annual average growth rate is 2.5%. The rise in GDP during the 2nd quarter represents the 9th consecutive quarter in which the economy has expanded. Although the economy continues to make gains, the growth rate remains sub-par. Momentum may be returning to the economy as business and consumer confidence strengthens and Europe emerges from its 18-month recession. The consensus view of economists is that GDP growth may decelerate slightly through 2013 and into 2014 as Federal budget cuts due to sequestration filter through the economy, businesses work off inventories, and uncertainty permeates the world’s financial markets regarding the tapering of the Federal Reserve’s bond-buying program.

20-Year Average = 2.5%

GDP PERCENT CHANGEUnited States

Source: Bureau of Economic Analysis, Delta Associates; October 2013.Note: Annualized.

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Q107

Q207

Q307

Q407

Q108

Q208

Q308

Q408

Q109

Q209

Q309

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Q411

Q112

Q212

Q312

Q412

Q113

Q213

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DP

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09

Co

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ant

Do

llars

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Housing Market



Economic Outlook








TRENDLINES® 201312

Due to uncertainty, public U.S. companies are hoarding cash, waiting for clear signals that the economy is on a consistent recovery curve. Uncertainty regarding the tapering of the Federal Reserve’s bond-buying program may further delay business investment. Corporate profits totaled $2.09 trillion during the 2nd quarter of 2013 on an annualized basis, just above the previous record of $2.01 trillion set in 2012. Companies have the resources to hire but remain wary about future demand for their products and services.

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

Co

rpo

rate

Pro

fits

in T

rilli

on

s

*Through Q2 2013; seasonally adjusted at annual rates.

U.S. CORPORATE PROFITS

Source: Bureau of Economic Analysis, Delta Associates; October 2013.

HoUsinG MarKeTHome prices in the 20 major metro areas increased 12.4% during the 12 months ending July 2013, the most recent data available, according to S&P/Case-Shiller. The housing market has performed well in 2013 after years of sub-par performance. Nationally, we expect home prices to rise around 12.0% from December 2012 to December 2013, as any further growth may be restrained due to rising mortgage rates and more sellers entering the market.

ANNUAL CHANGE IN EXISTING HOME SALE PRICESUnited States

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul

Per

cen

t C

han

ge

for

Med

ian

Pri

ce o

f Si

ng

le ‐

Fam

ily H

om

es

Source: S&P/Case ‐ Shiller, Delta Associates; October 2013.

2008 2009 2010 2011 2012 2013

Note: Data reflect 20‐city composite index.

The number of U.S. home sales increased to 5.5 million (on an annualized basis) during August 2013, which is 18% above the 4.7 million-unit pace for all of 2012. Existing home sales have remained above year-ago levels for 26 straight months. The average existing home sales price was $258,700 in August, which sits 15% above the year-end 2012 sales price and marks 18 consecutive months of year-over-year increases. If the inventory remains tight, prices could escalate further.

Source: National Association of Realtors, Delta Associates; October 2013.

$200,000

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$220,000

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$240,000

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$260,000

$270,000

$280,000

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

2006 2007 2008 2009 2010 2011 2012 2013*

Number of Existing Home Sales

Average Existing Home Sales Price

Nu

mb

er o

f Sa

les ‐ T

ho

usa

nd

s o

f U

nit

s

U.S. EXISTING HOME SALES VS. SALES PRICE

Ave

rag

e Sa

les

Pri

ce

*Seasonally adjusted annual sales rate; data as of August 2013.

FeDeral inTervenTion anD inFlaTionNotwithstanding the stalemate in Congress over possibly amending sequestration, the Federal Reserve has remained active, vowing to do what it takes to keep U.S. economic growth on track.

Given the economy continues to grow at a slow pace, the Fed plans to keep short-term rates at their current range of 0% to 0.25% until the unemployment rate drops to 6.5% or inflation becomes problematic. However, market forces began to drive up longer-term rates – with 10-year U.S. Treasuries rising to 2.9% as of early September before declining to 2.6% in mid-October after the Fed announced it would continue its bond-buying program. In September, 30-year fixed-rate mortgages rose above 4.5% – their highest level in two years – before edging down again in October.

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TRENDLINES® 201313

How fast will rates rise?

How high will they go?

what effect will they have on economic growth?

For those in the commercial real estate industry, what impact will they have on cap rates and debt financing?

rising long-term interest rates? Time will tell, but this trend during an economic recovery is not new. The key to the speed with which this happens may be the temperament of our foreign bond holders and accelerating inflation – will U.s. debt continue to look attractive compared to alternatives? if so, then rates will remain lower longer. if not, then rates will rise faster sooner.

Most pundits believe we are at the beginning of a trend of rising long-term rates after a period of inflated asset prices due to the easy money policies of the Federal reserve. it is important to note that rates are expected to rise due to a reduction in buying by the Federal reserve at the long end of the curve, and not from an increase in the Federal Funds rate. The real questions are:

FEDERAL FUNDS RATE

0%

4%

8%

12%

16%

20%

78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08*

Inte

rest

Rat

e

Source: Federal Reserve Board, Delta Associates; October 2013.*Unchanged since December 16, 2008.

Regarding inflation, prices increased 1.5% during the 12 months ending August 2013, the most recent data available. Real personal consumption expenditure (PCE), which takes into account changes in consumption habits, rose 2.0% during the 12 months ending August 2013. We expect inflation to be contained in the near-term due to still-high unemployment rates and poor income growth, which may continue to inhibit significant gains in consumer spending. Given this, coupled with appropriate monetary measures, inflation looks soft and should remain around 2.0% during the balance of 2013. Many economists argue against tapering of the Federal Reserve’s asset-buying program if prices are not accelerating at a healthy rate.

U.S. INFLATION AND REAL PERSONAL CONSUMPTIONEXPENDITURES

Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Delta Associates; October 2013.

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13*

Per

cen

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e C

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ge

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PI ‐

U

Inflation

Real PCE

*12 ‐ month percentage change through August 2013. Note: data is seasonally adjusted.

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TRENDLINES® 201314

real GDP growthapproximately 2.0% in 2013.

Payroll jobsapproximately 2.3 million added in 2013.

HousingPrice increases of approximately 12% from December 2012 to December 2013.

Unemployment rateHovering around 7.3% throughout the remainder of 2013.

Federal Funds rate0% to 0.25% through year-end 2015.

long-term interest ratesedging higher during the rest of 2013.

inflation rateremaining around 2.0% during the balance of 2013; higher in 2014 as consumer demand strengthens.

specifically, we believe the economic outlook is as follows:

econoMic oUTlooKThus far in 2013 there has been little residual impact from sequestration. The private and public sectors are each learning to adapt, and national economic growth has continued, though at a level that is weak for a post-recession recovery. Households should remain upbeat due to increases in net worth from home prices and the stock market, though the Federal government shutdown and debt ceiling fights in October may have weakened consumer confidence. On balance, we look for this recovery to continue on its slow but steady course through 2017 or so, barring a catastrophic event.

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TRENDLINES® 201315

U.s. PaYroll JoB GrowTHYear 2013* 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002

JoB cHanGe 2,206,000 2,237,000 1,589,000 -948,000 -5,990,000 -793,000 1,513,000 2,391,000 2,245,000 1,396,000 -352,000 -1,473,000

%cHanGe 1.6% 1.7% 1.2% -0.7% -4.4% -0.6% 1.1% 1.8% 1.7% 1.1% -0.3% -1.1%

*Seasonally-adjusted change for 12 months ending in August 2013; others are comparisons of annual averages. Note that BLS has rebenchmarked figures since their initial publication; the figures presented above are the most recent estimates.

12-MonTH PaYroll eMPloYMenT cHanGe THroUGH aUGUsT 2013

12-MonTH PaYroll eMPloYMenT cHanGe THroUGH aUGUsT 2013 — conT’D

JoB cHanGe JoB cHanGe

MeTro area # % MeTro area # %

New York 172,800 2.0% Washington, DC 33,400 1.1%

Dallas/Ft. Worth 111,000 3.7% Nashville 26,300 3.3%

LA Basin Austin 23,800 2.9%

Los Angeles/Long Beach/Glendale 52,000 1.4% Charlotte 23,400 2.7%

Santa Ana/Anaheim/Irvine 32,500 2.3% Baltimore 23,100 1.8%

Riverside/San Bernardino/Ontario 8,100 0.7% Las Vegas 22,200 2.7%

Subtotal LA Basin 92,600 1.5% Salt Lake City 20,800 3.2%

Houston 80,700 3.0% Portland (OR) 19,500 1.9%

Boston (Metropolitan NECTA) 64,700 2.6% Orlando 19,400 1.9%

Atlanta 57,100 2.4% Columbus (OH) 17,000 1.8%

Minneapolis-St. Paul 57,000 3.2% Pittsburgh 15,300 1.3%

Chicago 53,700 1.2% San Diego 14,800 1.2%

San Francisco Bay Area Oklahoma City 13,800 2.3%

San Francisco/San Mateo/Redwood City 18,200 1.8% Indianapolis 12,200 1.3%

San Jose/Sunnyvale/Santa Clara 28,000 3.1% Cincinnati 11,500 1.1%

Oakland/Fremont/Hayward 3,800 0.4% St. Louis 11,000 0.8%

Subtotal Bay Area 50,000 1.7% Jacksonville 10,500 1.8%

Seattle 45,500 2.6% Kansas City 10,000 1.0%

Phoenix 42,200 2.4% Detroit (Detroit/Warren/Livonia) 9,000 0.5%

Tampa-St. Pete 41,700 3.6% San Antonio 7,800 0.9%

Denver-Boulder 41,900 3.7% New Orleans 6,500 1.2%

South Florida Memphis 4,700 0.8%

Fort Lauderdale 22,700 3.1% Raleigh-Durham 4,500 0.6%

Miami/Miami Beach/Kendall 2,900 0.3% Sacramento 2,600 0.3%

West Palm Beach/Boca Raton 9,500 1.8% Cleveland (7,900) -0.8%

Subtotal South Florida 35,100 1.5%

Philadelphia 33,600 1.2%


naTional PaYroll JoB GrowTH sUMMarY

The U.S. economy gained 2.2 million payroll jobs over the 12 months ending August 2013 (seasonally adjusted), representing an increase of 1.6%. This compares to the 25-year annual average of 1.3 million jobs at a 1.1% average growth rate.

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TRENDLINES® 201316

80.7

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NY DFW HOU BOS ATL CHI PHX DEN S.FLA WAS SF BAYLA BASIN

Pay

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PAYROLL JOB GROWTHLarge Metro Areas | 12 Months Ending August 2013


-80 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*

-60

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PAYROLL JOB GROWTHHouston Metro | 1991 – August 2013

Source: Bureau of Labor Statistics, Delta Associates; October 2013.*12-month job growth through August 2013.

22-Year AverageJob Growth =43,600/Year

NYDFW HOU BOS ATL CHIPHXDEN S.FLAWAS SF BAY LA BASIN0%

2%

4%

6%

8%

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12%

Un

emp

loym

ent

Rat

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August 2012

August 2013

UNEMPLOYMENT RATESLarge Metro Areas | August 2012 vs. August 2013


National Average7.3%7.3%

8.1%8.1%

local econoMY aMonG naTion’s sTronGesTThe Houston metro economy continued to improve during 2013. The 12-month employment growth of 80,700 jobs through August 2013 is fourth-most in the nation among large metro areas. Houston’s payroll employment rose by 3.0% during that period, above the national growth of 2.4%. The Energy, Construction, and Trade/Transportation Sectors are fueling growth, and Houston’s other core industries are continuing to expand, including the Leisure/Hospitality sector.

The Houston area unemployment rate dropped to 6.1% in August 2013, the most recent data available at this writing, from 6.9% in August 2012. The national unemployment rate was at 7.3% in August 2013, down from 8.1% one year prior.

Metro Houston’s core industries continue to lead growth:

energy (Mining/Logging)

6,200 jobs added over the 12 months ending august 2013 – a 6.0% increase.

Professional services12,000 jobs added over the 12 months ending august 2013 – a 2.9% increase.

construction8,200 jobs were added during the 12 months ending august 2013 – a 4.5% increase.

Manufacturing5,900 jobs were added over the 12 months ending in august 2013 – a 2.4% increase.

Trade/Transportation19,200 jobs added in the 12 months ending august 2013 – a 3.5% increase

core industriesHouston Metro | 2012

core industries $ (Bil) % GrP

energy $115 27%

Financial, Professional, Tech $56 13%

construction $39 9%

Federal & state Government $34 8%

Manufacturing $26 6%

Medical/educational $17 4%

Trade/Transportation $17 4%

Total core industries: $304 71%

other $124 29%

Total GrP: $428 100%Source: BEA, BLS, GMU Center for Regional Analysis, Delta Associates; October 2013. GRP = Gross Regional Product.

Employment in Houston’s Mining sector increased by 6,200 jobs, or 6.0%, in the 12-month period ending in August 2013. In addition, the U.S. rotary rig count was at 1,744 in late-September, down from late-August and from the average of 1,919 in 2012. Benchmark crude oil prices stood at $110 per barrel for Brent and $101 for WTI as of mid-October. The Brent price is considered a more accurate global indicator and is the only source used by the U.S. Energy Department for its price forecasts. Oil and gas shale plays are not only set to boost the Houston market but also the national market. As a result, there will be increased investments in energy companies, an estimated 3.3 million jobs created by 2020, and a reduction in electricity prices, according to a recent study by HIS, Inc. While the nation as a whole will benefit, Houston will enjoy substantial benefits from being at the hub of this activity.

TABLE OF CONTENTS





Local Economy Among Nation’s Strongest

Local Economy Among Nation’s Strongest - Continued

The Houston Metro Area Economic Outlook






TRENDLINES® 201317

U.S. ROTARY RIG COUNT1990 – 2013

Source: Baker Hughes, Delta Associates; October 2013. *Count as of 9/27/13.

0

200

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 1213*

400

600

800

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1,200

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igs

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02 03 04 05 06 07 08 09 10 11 12 13

HOUSTON MANUFACTURING OUTLOOKPurchasing Managers Index | 2002 – August 2013

Source: NAPM –Houston, Delta Associates; October 2013.

Exp

ansi

on

Co

ntr

acti

on

Ind

ex

The Construction sector added 8,200 jobs during the 12 months ending August 2013 – a 4.5% increase. As Houston’s economy gains strength, commercial and residential construction are increasing. Of note, office construction is picking up in the Katy Freeway/Energy Corridor and remains substantial in the Woodlands/Conroe submarkets. Part of the overall increase in Houston-area office construction is due to the 3.0 million SF ExxonMobil campus in The Woodlands. However, a number of additional projects are helping drive increased construction to these areas. Over 4.3 million SF is under construction in the Katy Freeway/Energy Corridor submarket and over 4.2 million SF in the Woodlands/Conroe submarket.

Houston’s Manufacturing sector employment increased by 5,900 jobs over the 12 months ending in August 2013, a gain of 2.4%. The Houston Purchasing Managers Index, a short-term leading indicator of production, measured 60.8 in September 2013 and has been in expansion every month since October 2009. (A score above 50 indicates expansion.) The outlook for the manufacturing sector is dependent on other sectors, such as energy and the state of consumer confidence. Both areas are doing well in Houston, which bodes well for manufacturing. Companies such as Cosentino North America are taking advantage of such prime conditions. The manufacturer, fabricator, and distributor of natural stone will be opening 12 additional showrooms across the nation by the end of 2014, with the largest one set to open in Houston. Approximately 250 of Cosentino’s 900 employees are located in Houston.

The Education and Health Services sector continues to grow, adding 13,400 jobs in the 12 months ending August 2013 – a 4.1% increase. As baby boomers age, many Houston healthcare businesses are starting to focus more on this demographic. Four of the five largest assisted living communities in the metro area either have plans to expand or have recently expanded. Companies such as the Laser Spine Institute are opening offices in the area to attend to the increasing needs of aging Houstonians. According to the Census Bureau, Houston’s population over 65 years old increased 17.7% from 2000 to 2010, and it will only increase more in this decade. In the Education sector, a professor at the University of Houston has developed a nanocoating business called C-Voltaics that started as a university research project. Based out of UH’s Energy Research Park, C-Voltaics plans on ramping up production to 2,000 to 3,000 gallons of the nanocoating by the end of the year. Businesses like this are advantageous for universities as they bring in money and attract more researchers to develop their own technologies. With Houston’s abundant resources, research and development is set to continue expanding.

Trade/Transportation added 19,200 jobs during the 12 months ending in July 2013 – a 3.5% increase. However, Houston’s airports are on track to have slightly less air freight than in 2012. The Metropolitan Transit Authority of Harris County is considering changes to its bus routes that could cut costs. Part of the plan would involve using smaller buses for shorter routes that also have fewer riders and also cutting some routes altogether. The changes would affect less than 1% of riders and would not impact low-income or minority neighborhoods as required by the Department of Transportation. New routes would target areas with the highest ridership rather than trying to accommodate as many areas as possible.

HOUSTON AIRPORT SYSTEMAir Freight | 1999 – August 2013

Source: Houston Airport System, Delta Associates; October 2013. *YTD annualized.

300,000

99 00 01 02 03 04 05 06 07 08 09 10 11 1213*

325,000

350,000

375,000

400,000

425,000

450,000

Air

Fre

igh

t (0

00

lbs)

Long-Term Average:364 metric tons/annum

In Housing, the Houston Association of Realtors reported a 16.2% increase in single-family home sales volume in August 2013, compared to August 2012. The average single-family home sale price was $260,607 in August 2013 which is 16.4% higher than the average price for August 2012. The median price was $186,200 in August 2013, up 12.8% from August 2012. These figures are the highest ever for the month of August in Houston. The number of active listings at the end of August 2013 fell 18.9% from August 2012, indicating there is more demand and less inventory available.

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TRENDLINES® 201318

THe HoUsTon MeTro area econoMic oUTlooKHouston’s economic outlook is bright and it should remain strong for several years to come. Economic uncertainty and political instability in the Middle East does cause some concern, but Houston is in a strong position to withstand any slowdown in economic growth. Forbes recently ranked Houston as third on its “Best Cities for Future Job Growth” list out of the 200 largest metro areas in the nation. Additionally, Houston ranked first in the nation for job growth in the engineering field by Monster.com, and Texas ranked fourth in the nation for job growth in technology by Dice.com, which was heavily attributed to healthcare technology jobs in Houston.

The energy sector has been a boon for Houston and not only because of its oil and gas production. Wind power is another source of production. Strength in the Energy, Trade/Transportation, and Education and Health Services sectors will drive expansion locally over the next several years. As a result, we expect metro Houston’s job growth to average approximately 91,700 per year for the 2013-2015 period, comparable to the growth during the 2005-2007 expansion period. Houston’s employment growth should be among the nation’s strongest.

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

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JOB FORECASTHouston Metro | 2013 – 2015


Avg. Annual Growth2005-07 =87,300/annum

Projected Avg.Annual Growth2013-15 =91,700/annum

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Net Absorption (Millions of SF)

OFFICE ABSORPTION AND EMPLOYMENTHouston Metro | 1980 – 3RD Quarter 2013

Source: Bureau of Labor Statistics, Delta Associates; October 2013.*12-month employment growth through August 2013. YTD 2013 net absorption annualized.

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TRENDLINES® 201319

oFFice MarKeT exPanDinGThe Houston metro office market experienced growth in 2013, as the local economy expands at a healthy rate. Job creation, especially among energy-related firms, has driven office leasing activity, and tenants are seeking quality space in prime submarkets.

consisTenT DeManD For oFFice sPaceNet absorption totaled 1.3 million SF in the first three quarters of 2013 (1.7 million SF when annualized), compared to 4.2 million SF in all of 2012. The Class A market accounted for that entire total, absorbing 1.4 million SF, with Class B reporting negative absorption in the Houston market. Positive Class A absorption is occurring because of the strength of the local economy. Owners are looking for tenants to fill Class A space before new buildings currently under construction come online.

neT aBsorPTion BY class (sF):

2012 YTD 2013

Class A 2,969,000 1,415,000

Class B 1,183,000 (146,000)

Class C 70,000 (8,000)

neT aBsorPTion (sF) in selecTeD sUBMarKeTs:

2012 YTD 2013

Woodlands/Conroe 640,000 483,000

Katy Freeway/Energy Corridor 1,211,000 429,000

Southwest Freeway/Sugarland 280,000 356,000

West Loop (337,000) 513,000

How THe MUlTi-TenanT MarKeT coMPares To oUr MarKeT coveraGeVacancy and absorption in the Houston metro area often are reported by brokerage firms on multi-tenant buildings only. We include owner-occupied and single-tenant buildings as well, on the basis of immediate availability, to capture more market activity. We exclude government-owned space. As a point of comparison, below is data for the Houston multi-tenant office market at Q3 2013:

Available sublease space in the Houston metro currently stands at 1.3 million SF – just 0.5% of the standing inventory.

Multi-Tenant Entire Market

Inventory: 204.3 MSF 253.3 MSF

Overall vac. (incl. sublet): 13.3% 10.9%

YTD net absorption: 689,000 SF 1.3 MSF

noTaBle 2013 leases inclUDe: � ConocoPhillips pre-leased

846,604 SF at 935 N. Eldridge Parkway and 925 N. Eldridge Parkway in Katy Freeway West.

� WesternGeco leased 554,385 SF at 10001 Richmond Avenue in the Westchase submarket.

� Technip pre-leased 428,831 SF at 11740 Katy Freeway in Katy Freeway West.

� Swift Energy Company pre-leased 236,880 SF at Five Chasewood Drive in the FM 1960/Highway 249 submarket.

� Huntsman International LLC renewed 158,598 SF at 10003 Woodloch Forest Drive in The Woodlands submarket.

� TETRA Technologies, Inc. renewed 152,999 SF at 24955 I-45 North in The Woodlands submarket.

� Subsea 7 pre-leased 96,292 SF at 17220 Katy Freeway in Katy Freeway West.





Office Market Expanding

Consistent Demand for Office Space

Vacancy Remains Low

Development Pipeline Growing

Office Asking Rents Rising

The Houston Metro Area Office Market Outlook

Summary Of Office Market Indicators - All Space

Summary Of Office Market Indicators - Class A Space

Summary Of Office Market Indicators - Class B Space

Asking Rental Rate Analysis Of Class A & B Office Buildings





TABLE OF CONTENTS


TRENDLINES® 201320

wHY THis MeTHoDoloGY is THe BesT inDicaTor oF cUrrenT MarKeT conDiTions

We include owner-occupied and single-tenant buildings in our inventory, vacancy, and absorption statistics. Doing so allows us to capture more market activity than many of our competitors, and to better correlate changes in the market with changes in employment. As single-tenant space does compete with multi-tenant space, we believe it is critical to understand all components of the market. We also offer wider geographic coverage than some of our competitors. The result is that the inclusion of single-tenant and owner-occupied space tends to yield lower vacancy rates and higher absorption totals than our competitors’ results, but our coverage of the market is more comprehensive.

Strong job creation and the continued strength of the energy sector have put Houston on pace to absorb 1.7 million SF during 2013. New York and the San Francisco Bay Area lead the nation in office space absorbed this year, while Houston ranks eighth.

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Net Absorption in Thousands of SF

NET ABSORPTION OF OFFICE SPACE AND VACANCY RATE TRENDS

Houston Metro | 1998 – 3RD Quarter 2013

Source: CoStar, Delta Associates; October 2013.Note: Delivery of pre-leased space counts as positive net absorption.

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NET ABSORPTION OF OFFICE SPACESELECT METRO AREASJanuary Through September 2013

Source: CoStar, Delta Associates; October 2013.

vacancY reMains low

The overall office vacancy rate (including sublet space) in the Houston metro area was 10.9% at 3rd quarter 2013, unchanged from one year ago. The direct vacancy rate was 10.4%, down from 10.6% one year ago. The continued strength of the local economy is driving this rate down; direct vacancy is nearing its recent nadir of 10.2% in 2007.

The overall Class A vacancy rate is 8.2%, compared to 8.6% a year ago. Overall 3rd quarter 2013 vacancy rates for all classes in selected submarkets:

� Katy Fwy/Energy Corridor 5.8%

� Woodlands/Conroe 6.2%

� Downtown 9.9%

� West Loop 11.0%

� Southwest Freeway/Sugar Land 16.4%







Vacancy Remains Low












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TRENDLINES® 201321M

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NY SF BAY DFW LA/OC ATLBOS PHXHOU S. FLADENWAS CHI

Selected Metro Areas | 3RD Quarter 2013

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OFFICE SPACE UNDER CONSTRUCTION


U/C Nationally= 71.8 Million SF

Selected Metro Areas | 3RD Quarter 2013

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ancy

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eOFFICE VACANCY RATES


9.9%10.3%10.9%10.9% 11.2%

12.1%12.7%13.4%13.5%13.7%

15.5% 15.8%

19.4%

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National Vacancy Rate: 13.3%

DeveloPMenT PiPeline GrowinGThere is 11.8 million SF of office space under construction or renovation in the Houston metro area as of September, compared to 3.6 million SF one year ago. Space under construction is 76% pre-leased, compared to 46% a year ago.

The largest projects under construction include Exxon’s new 3.0 million SF campus and Anadarko Petroleum’s 550,000 SF corporate office, both of which are in the Woodlands/Conroe submarket. Also significant is Energy Center Three, a 547,000 SF project underway in Katy Freeway West.

oFFice sPace UnDer consTrUcTion or renovaTion in THe HoUsTon MeTro area

Submarket SF%

Pre-leased

Downtown 736,000 47.6%

FM 1960 220,915 100.0%

Katy Fwy/Energy Corridor 4,305,809 74.7%

Northwest 417,897 50.2%

S Main/Medical Center 50,000 44.4%

SW Fwy/Sugar Land 451,259 54.3%

West Loop 513,454 61.9%

Westchase 822,355 44.5%

Woodlands/Conroe 4,257,133 93.9%

Total 11,774,822 75.9%

Source: Delta Associates’ analysis of CoStar data; October 2013

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OFFICE VACANCY RATEHouston Metro | 1983 – 3RD Quarter 2013

Source: CoStar, Delta Associates; October 2013. *As of Q3 2013.

The overall office vacancy rate (including sublet space) in the Houston metro will likely stabilize over the next two years, as the increased demand for new space in select submarkets is nearly balanced by an increased pipeline and rising vacancy in aged buildings. Given this, we expect an overall vacancy rate in the low-11% range in two years. Still, without a major disruption in the regional economy, a period of consistent rent growth is on the horizon. However, the pipeline of new construction is rising along with potential increased demand.







Vacancy Remains Low












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TRENDLINES® 201322

The amount of office space under construction nationally is edging up, with market conditions gradually improving and financing becoming more available. Nationally, 71.8 million SF of office space is under construction today, compared to 64.8 million SF one year ago. Houston has the second-most office space under construction, and at 11.8 million SF, it represents approximately 4.6% of the current metro inventory.

Deliveries totaled 1.4 million SF through the 3rd quarter of 2013, after totaling 1.0 million SF for all of 2012.

oFFice asKinG renTs risinG

Asking rents for all classes of office space have risen approximately 1.0% in metro Houston during the first three quarters of 2013, after rising 3.6% in 2012. Class A rents rose 2.4% through the 3rd quarter of 2013, and Class B rents increased 0.7% in the same period. Class A rents have been rising faster than Class B rents because of the flight to quality underway, with stronger demand for newer space.

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$19.18

$24.93$23.78

AVERAGE OFFICE RENTSHouston Metro | 1982 –3RD Quarter 2013

Source: CoStar, Delta Associates; October 2013. Note: All Classes of Office Space.

Houston’s asking rent growth looks average when compared to asking rent changes in other major markets. Rent growth in Houston is sixth in the country and nearly the same as comparable markets, such as Dallas /Fort Worth and Phoenix.

Asking rents average $28.08/SF, full service, for Class A buildings and $19.44/SF, full service, for Class B buildings. These are metro-wide averages; newer buildings in more desirable submarkets are outperforming these market-wide averages.

Metro-wide asking rents will likely increase during the balance of 2013 and into 2014, as demand for space remains consistent. At the submarket level, asking rents will likely continue fluctuating, with landlords reacting quickly to changes in the market. Given the relatively strong demand for Class A space, rents for that product type should outperform in the period ahead.

THe HoUsTon MeTro area oFFice MarKeT oUTlooK

The Houston metro office market will likely experience continued growth in the period ahead. However, given the growing pipeline, coupled with tenants vacating older space, we expect the vacancy rate to stabilize over the next two years – hovering in the low-11% range. Rents will likely continue rising modestly for the remainder of 2013 and into 2014, especially for Class A space, as office market conditions currently favor owners. However, with the development pipeline (including planned space expected to start construction soon) now at 5.3% of the standing inventory, rent increases are likely to remain modest. Of note, excluding Exxon’s build-to-suit campus, the development pipeline equals just 4.1% of the standing inventory.

Office submarkets likely to outperform in the months ahead, with declining vacancy and rising rents, include:

� Katy Freeway/Energy Corridor

� Westchase

� West Loop

� Woodlands/Conroe

The Katy Freeway/Energy Corridor in particular is a candidate for improved performance during the balance of 2013. However, competition for tenants is limiting rent growth, and more supply is due to come on the market soon, with 4.3 million SF under construction there. Therefore, investors should carefully balance strong demand forecasts against evolving market fundamentals.

NYSF BAY DFWLA/OC ATL BOSPHX HOU S. FLADEN WASCHI

Select Metro Areas | January - September 2013

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AVERAGE CHANGE IN ASKING RENT








Vacancy Remains Low












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sUMMarY oF oFFice MarKeT inDicaTors - all sPaceHouston Metro Area | 2010 Through Third Quarter 2013

submarket

Q3 2013 Direct vacancy rate at the end of: Q3 2013 net absorption (sF) 2/

Total BldgsTotal

rentable sFall Bldgs. 1/

sF available immediatelyall Bldgs. 2/

2010 2011 2012 Q3 2013vacancy rate w/ sublet

sF Under constr. or

renovation2010 2011 2012 Q3 2013 YTD 2013

Central Business District 112 48,072,971 4,470,786 9.3% 9.5% 8.7% 9.3% 10.1% 330,000 (166,000) 1,552,000 385,000 (144,000) (288,000)

Midtown 106 7,212,574 620,281 14.7% 13.2% 13.4% 8.6% 8.7% 406,000 22,000 108,000 (14,000) (7,000) 346,000

Downtown 218 55,285,545 5,091,068 10.0% 10.0% 9.3% 9.2% 9.9% 736,000 (144,000) 1,660,000 371,000 (151,000) 58,000

I-45 North 42 2,270,142 301,929 17.9% 16.3% 14.6% 13.3% 13.4% - (35,000) 36,000 38,000 14,000 30,000

FM 1960 / Champions 68 2,958,692 683,458 18.6% 20.2% 23.4% 23.1% 23.8% - 77,000 (47,000) (95,000) 21,000 9,000

FM 1960 / Highway 249 129 6,908,809 1,063,957 30.4% 26.2% 16.0% 15.4% 15.5% 220,915 120,000 134,000 752,000 28,000 54,000

FM 1960 239 12,137,643 2,049,343 25.5% 22.9% 17.5% 16.9% 17.1% 220,915 162,000 123,000 695,000 63,000 93,000

North Belt West/Greenspoint 90 10,688,423 1,688,771 13.3% 13.8% 13.0% 15.8% 16.4% - 42,000 (28,000) 85,000 (139,000) (299,000)

Greenspoint / IAH 36 3,154,574 356,467 11.1% 12.6% 12.7% 11.3% 11.3% (47,000) (42,000) 11,000 135,000 132,000

Greenspoint / North Belt 126 13,842,997 2,045,238 12.9% 13.6% 12.9% 14.8% 15.2% - (5,000) (70,000) 96,000 (4,000) (167,000)

Greenway Plaza 99 12,166,960 1,131,527 11.5% 9.8% 9.7% 9.3% 9.7% - (12,000) 232,000 12,000 (49,000) 121,000

Gulf Freeway/Pasadena 109 4,572,000 525,780 11.7% 12.6% 10.2% 11.5% 11.5% - 106,000 (41,000) 109,000 46,000 (59,000)

Katy Freeway East 114 9,510,671 798,896 8.5% 7.3% 7.9% 8.4% 8.8% 538,052 331,000 105,000 364,000 57,000 146,000

Katy Freeway West 171 21,734,098 956,300 14.2% 9.6% 5.7% 4.4% 4.5% 3,767,757 108,000 1,144,000 847,000 22,000 283,000

Katy Fwy / Energy Corridor 285 31,244,769 1,755,197 12.4% 8.9% 6.4% 5.6% 5.8% 4,305,809 439,000 1,249,000 1,211,000 79,000 429,000

Kingwood / Humble 46 1,822,176 118,441 8.4% 7.3% 6.4% 6.5% 7.2% - 17,000 47,000 20,000 5,000 39,000

NASA / Clear Lake 171 9,643,387 1,552,585 7.5% 10.6% 12.8% 16.1% 16.2% - 104,000 (140,000) (212,000) 58,000 (318,000)

Northeast 47 2,097,508 287,359 10.6% 12.3% 12.6% 13.7% 13.8% - 82,000 (35,000) (6,000) (6,000) 3,000

North Loop West 71 5,497,896 951,136 21.7% 24.9% 18.4% 17.3% 19.8% 126,000 (178,000) (175,000) 358,000 16,000 (44,000)

Northwest Near 27 1,986,836 286,104 9.8% 10.4% 8.5% 14.4% 14.4% - 87,000 (10,000) 30,000 (72,000) (108,000)

Northwest Far 96 7,828,050 782,805 19.1% 12.2% 10.3% 10.0% 10.3% 291,897 110,000 540,000 149,000 (55,000) 23,000

Northwest 194 15,312,782 2,020,045 19.1% 16.7% 13.1% 13.2% 14.2% 417,897 19,000 355,000 537,000 (111,000) (129,000)

South Main / Medical Center 88 11,135,712 835,178 7.0% 6.9% 5.9% 7.5% 7.5% 50,000 (71,000) 12,000 112,000 (33,000) (177,000)

Southwest / Hillcroft 59 4,743,707 716,300 19.2% 16.0% 14.9% 15.1% 15.1% - 65,000 152,000 52,000 14,000 (10,000)

Southwest Beltway 8 98 7,354,337 1,610,600 16.6% 19.2% 21.1% 21.9% 22.0% - (190,000) (433,000) 112,000 15,000 (58,000)

East Ft Bend Co. / Sugar Land 152 8,965,820 1,022,103 18.9% 16.6% 15.3% 11.4% 12.6% 451,259 (432,000) 227,000 116,000 193,000 424,000

Southwest Fwy / Sugar Land 309 21,063,864 3,349,003 18.1% 17.4% 17.2% 15.9% 16.4% 451,259 (557,000) (54,000) 280,000 222,000 356,000

Bellaire 42 4,748,537 379,883 7.0% 10.3% 10.2% 8.0% 8.4% - (4,000) (156,000) 5,000 0 104,000

Post Oak Park 34 4,771,860 854,163 11.2% 9.9% 17.1% 17.9% 18.1% - 47,000 62,000 (344,000) 14,000 (38,000)

Galleria 56 15,571,819 1,214,602 8.8% 9.0% 8.3% 7.8% 9.0% 513,454 321,000 (31,000) 31,000 31,000 365,000

Riverway 22 3,086,415 274,691 9.5% 10.4% 10.3% 8.9% 8.9% - 12,000 (28,000) 4,000 (28,000) 43,000

Richmond / Fountainview 44 1,783,906 372,836 6.7% 9.9% 19.4% 20.9% 20.9% - 76,000 (58,000) 12,000 (32,000) (27,000)

San Felipe / Voss 43 5,489,762 559,956 11.2% 10.6% 11.4% 10.2% 10.5% - (71,000) 33,000 (45,000) 126,000 66,000

West Loop 241 35,452,299 3,656,131 9.2% 9.7% 11.0% 10.3% 11.0% 513,454 381,000 (178,000) (337,000) 111,000 513,000

Westchase 109 15,558,952 1,104,686 12.7% 11.4% 7.2% 7.1% 7.9% 822,355 (62,000) 203,000 694,000 16,000 16,000

The Woodlands 142 10,307,344 494,753 9.9% 6.7% 3.9% 4.8% 5.1% 4,257,133 258,000 420,000 439,000 511,000 530,000

Conroe 41 1,612,431 204,779 7.1% 7.1% 9.9% 12.7% 13.1% - (2,000) (27,000) 201,000 (34,000) (47,000)

Woodlands / Conroe 183 11,919,775 699,531 9.5% 6.8% 4.9% 5.9% 6.2% 4,257,133 256,000 393,000 640,000 477,000 483,000

TOTAL - Houston 2,464 253,256,369 26,221,112 12.3% 11.5% 10.3% 10.4% 10.9% 11,774,822 715,000 3,756,000 4,222,000 723,000 1,261,000

Vacancy Rate with Sublet Space 12.9% 12.0% 10.7% 10.9%

1/ Includes buildings 15,000 SF RBA and greater. Does not include buildings under construction or buildings owned by the government. Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: 703-836-5700; DeltaAssociates.com

2/ Does not include sublet space. Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; October 2013.

SECTION 4: THE HOUSTON METRO OFFICE MARKET

sUMMarY oF oFFice MarKeT inDicaTors - class a sPace 1/

Houston Metro Area | 2010 Through Third Quarter 2013

submarket

Q3 2013 net absorption (sF) 2/

Total BldgsTotal rentable

sFall Bldgs. 1/


vacancy rate 2/ vacancy rate w/ sublet

sF Under constr. or

renovation2010 2011 2012 Q3 2013 YTD 2013

Central Business District 31 30,200,614 2,053,642 6.8% 8.1% - (198,000) 1,406,000 212,000 (60,000) (151,000)

Midtown 4 1,829,725 93,316 5.1% 5.1% - 2,000 9,000 82,000 11,000 16,000

Downtown 35 32,030,339 2,146,958 6.7% 7.9% - (196,000) 1,415,000 294,000 (49,000) (135,000)

I-45 North 2 204,821 - 0.0% 0.0% - (15,000) 21,000 28,000 0 0

FM 1960 / Champions 1 150,000 - 0.0% 0.0% - 0 0 0 0 0

FM 1960 / Highway 249 17 2,725,914 545,183 20.0% 20.1% - 102,000 22,000 702,000 41,000 82,000

FM 1960 20 3,080,735 545,183 17.7% 17.8% - 87,000 43,000 730,000 41,000 82,000

North Belt West/Greenspoint 15 3,709,849 341,306 9.2% 10.4% - (18,000) (70,000) (38,000) (93,000) (119,000)

Greenspoint / IAH 7 1,085,573 121,584 11.2% 11.2% 67,000 (22,000) 8,000 91,000 88,000

Greenspoint / North Belt 22 4,795,422 462,890 9.7% 10.6% - 49,000 (92,000) (30,000) (2,000) (31,000)

Greenway Plaza 15 6,168,363 450,290 7.3% 8.2% - 44,000 104,000 179,000 (111,000) 74,000

Gulf Freeway/Pasadena 1 52,362 8,273 15.8% 15.8% - 8,000 2,000 5,000 0 0

Katy Freeway East 16 4,027,953 132,922 3.3% 4.2% 440,052 357,000 32,000 442,000 48,000 145,000

Katy Freeway West 48 11,524,605 103,721 0.9% 0.9% 3,483,579 77,000 1,095,000 484,000 81,000 162,000

Katy Fwy / Energy Corridor 64 15,552,558 236,644 1.5% 1.8% 3,923,631 434,000 1,127,000 926,000 129,000 307,000

Kingwood / Humble 1 90,000 28,170 31.3% 31.3% - 0 (70,000) 0 0 13,000

NASA / Clear Lake 13 1,914,706 160,835 8.4% 8.4% - (43,000) (27,000) 71,000 (21,000) 33,000

Northeast - - - - - - 0 0 0 0 0

North Loop West 5 1,054,498 287,878 27.3% 29.3% - 1,000 21,000 (6,000) 3,000 (21,000)

Northwest Near 1 237,384 - 0.0% 0.0% - 0 0 0 0 0

Northwest Far 15 2,520,121 143,647 5.7% 6.2% 159,056 37,000 268,000 182,000 (33,000) (2,000)

Northwest 21 3,812,003 431,525 11.3% 12.2% 159,056 38,000 289,000 176,000 (30,000) (23,000)

South Main / Medical Center 14 4,474,422 246,093 5.5% 5.6% 50,000 39,000 96,000 124,000 4,000 (1,000)

Southwest / Hillcroft 6 1,485,352 190,125 12.8% 12.8% - (78,000) 67,000 66,000 4,000 35,000

Southwest Beltway 8 3 573,152 126,093 22.0% 22.6% - 42,000 19,000 (5,000) (36,000) (34,000)

East Ft Bend Co. / Sugar Land 23 3,737,972 512,102 13.7% 14.2% 328,764 (372,000) 52,000 159,000 117,000 343,000

Southwest Fwy / Sugar Land 32 5,796,476 828,321 14.3% 14.7% 328,764 (408,000) 138,000 220,000 85,000 344,000

Bellaire 7 1,186,294 200,484 16.9% 18.0% - (3,000) (14,000) (199,000) 4,000 85,000

Post Oak Park 6 1,909,919 343,785 18.0% 18.4% - (10,000) (53,000) (50,000) 31,000 36,000

Galleria 26 11,293,758 858,326 7.6% 9.3% 513,454 229,000 (19,000) (44,000) 23,000 147,000

Riverway 8 2,038,628 142,704 7.0% 7.0% - 27,000 10,000 (23,000) (35,000) 42,000

Richmond / Fountainview - - - - - - 0 0 0 0 0

San Felipe / Voss 3 1,714,029 251,962 14.7% 14.7% - (46,000) 7,000 (57,000) 34,000 55,000

West Loop 50 18,142,628 1,797,261 9.9% 11.1% 513,454 197,000 (69,000) (373,000) 57,000 365,000

Westchase 22 6,681,105 387,504 5.8% 7.3% 634,204 (111,000) 363,000 473,000 (27,000) (47,000)

The Woodlands 22 4,346,471 178,205 4.1% 4.1% 4,145,438 248,000 303,000 178,000 403,000 437,000

Conroe 2 128,832 10,564 8.2% 8.2% - 0 (4,000) (4,000) (4,000) (3,000)

Woodlands / Conroe 24 4,475,303 188,770 4.2% 4.2% 4,145,438 248,000 299,000 174,000 399,000 434,000

TOTAL - Houston 334 107,066,422 7,918,717 7.4% 8.2% 9,754,547 388,000 3,618,000 2,969,000 475,000 1,415,000 1/ Class A buildings per CoStar that are greater than 50,000 SF. Does not include buildings under construction or owned by the government. Delta Associates, the research affiliate of Transwestern, is headquartered at:2/ Does not include sublet space. 500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: 703-836-5700; DeltaAssociates.com

Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; October 2013.


sUMMarY oF oFFice MarKeT inDicaTors - class B sPace 1/

Houston Metro Area | 2010 Through Third Quarter 2013

submarket

Q3 2013 net absorption (sF) 2/

Total BldgsTotal rentable

sFall Bldgs. 1/


vacancy rate 2/ vacancy rate w/ sublet

sF Under constr. or

renovation2010 2011 2012 Q3 2013 YTD 2013

Central Business District 41 13,812,760 1,436,527 10.4% 10.5% 330,000 (9,000) 194,000 194,000 55,000 (97,000)

Midtown 50 3,908,556 297,050 7.6% 7.8% 406,000 (23,000) 28,000 (86,000) 23,000 81,000

Downtown 91 17,721,316 1,733,577 9.8% 9.9% 736,000 (32,000) 222,000 108,000 78,000 (16,000)

I-45 North 30 1,606,441 208,837 13.0% 13.1% - (36,000) 20,000 27,000 11,000 31,000

FM 1960 / Champions 47 2,424,240 693,333 28.6% 28.7% - 56,000 (51,000) (92,000) 19,000 4,000

FM 1960 / Highway 249 92 3,762,871 492,936 13.1% 13.5% 220,915 24,000 141,000 34,000 (30,000) (21,000)

FM 1960 169 7,793,552 1,395,106 17.9% 18.1% 220,915 44,000 110,000 (31,000) 0 14,000

North Belt West/Greenspoint 49 4,630,321 935,325 20.2% 20.6% - 1,000 112,000 44,000 (14,000) (168,000)

Greenspoint / IAH 21 1,966,352 243,828 12.4% 12.4% - (111,000) (52,000) 4,000 41,000 36,000

Greenspoint / North Belt 70 6,596,673 1,179,152 17.9% 18.2% - (110,000) 60,000 48,000 27,000 (132,000)

Greenway Plaza 40 3,988,808 315,116 7.9% 7.9% - (21,000) 17,000 (109,000) 20,000 (28,000)

Gulf Freeway/Pasadena 58 2,883,887 331,647 11.5% 11.5% - 24,000 (20,000) 100,000 52,000 (3,000)

Katy Freeway East 40 2,970,248 540,585 18.2% 18.3% 98,000 (20,000) 25,000 (86,000) (9,000) (62,000)

Katy Freeway West 102 9,622,766 837,181 8.7% 8.8% 284,178 61,000 (4,000) 355,000 (77,000) 86,000

Katy Fwy / Energy Corridor 142 12,593,014 1,377,766 10.9% 11.0% 382,178 41,000 21,000 269,000 (86,000) 24,000

Kingwood / Humble 29 1,366,534 80,626 5.9% 6.6% - 16,000 56,000 18,000 1,000 27,000

NASA / Clear Lake 105 6,811,810 1,341,927 19.7% 19.7% - 123,000 27,000 (225,000) 20,000 (416,000)

Northeast 28 1,306,209 269,079 20.6% 20.9% - 19,000 (45,000) 2,000 (14,000) (2,000)

North Loop West 34 3,178,080 530,739 16.7% 20.2% 126,000 (197,000) (5,000) 320,000 111,000 79,000

Northwest Near 13 1,191,123 203,682 17.1% 17.1% - 62,000 (1,000) 23,000 (77,000) (78,000)

Northwest Far 46 3,963,188 515,214 13.0% 13.2% 132,841 29,000 (13,000) (26,000) (4,000) 36,000

Northwest 93 8,332,391 1,249,636 15.0% 16.4% 258,841 (106,000) (19,000) 317,000 30,000 37,000

South Main / Medical Center 39 4,239,998 491,840 11.6% 11.6% - (117,000) 69,000 (39,000) (25,000) (178,000)

Southwest / Hillcroft 21 1,698,185 366,808 21.6% 21.6% - 49,000 9,000 (10,000) 3,000 (10,000)

Southwest Beltway 8 60 5,268,629 1,338,232 25.4% 25.5% - (230,000) (367,000) 90,000 16,000 (53,000)

East Ft Bend Co. / Sugar Land 112 4,834,445 507,617 10.5% 12.6% 122,495 141,000 174,000 (62,000) 73,000 92,000

Southwest Fwy / Sugar Land 193 11,801,259 2,212,656 18.7% 19.7% 122,495 (40,000) (184,000) 18,000 92,000 29,000

Bellaire 22 2,884,038 155,738 5.4% 5.5% - 9,000 (164,000) 121,000 6,000 12,000

Post Oak Park 24 2,653,133 504,095 19.0% 19.2% - (6,000) 31,000 (289,000) (19,000) 146,000

Galleria 25 4,083,486 343,013 8.4% 8.4% - 113,000 (8,000) 91,000 16,000 200,000

Riverway 14 1,039,510 137,215 13.2% 13.2% - (20,000) (38,000) 26,000 5,000 6,000

Richmond / Fountainview 17 870,347 217,587 25.0% 25.0% - 1,000 (24,000) 16,000 17,000 28,000

San Felipe / Voss 36 3,569,141 242,702 6.8% 7.2% - (28,000) 36,000 22,000 89,000 21,000

West Loop 138 15,099,655 1,600,350 10.6% 10.7% - 69,000 (167,000) (13,000) 114,000 413,000

Westchase 67 7,861,837 652,532 8.3% 8.5% 188,151 44,000 (166,000) 267,000 16,000 9,000

The Woodlands 113 6,043,504 350,523 5.8% 6.2% 111,695 29,000 82,000 249,000 88,000 86,000

Conroe 20 934,494 135,502 14.5% 15.2% - (4,000) (22,000) 204,000 (7,000) (10,000)

Woodlands / Conroe 133 6,977,998 486,025 7.0% 7.4% 111,695 25,000 60,000 453,000 81,000 76,000

TOTAL - Houston 1,395 115,374,941 14,717,035 12.8% 13.1% 2,020,275 (21,000) 41,000 1,183,000 406,000 (146,000)1/ Class B per CoStar, and buildings under 50,000 SF even if CoStar classified them as Class A. Does not include buildings under construction. Delta Associates, the research affiliate of Transwestern, is headquartered at:2/ Does not include sublet space. 500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: 703-836-5700; DeltaAssociates.comSource: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; October 2013.


asKinG renTal raTe analYsis oF class a & B oFFice BUilDinGsHouston Metro Area | 2010 Through Third Quarter 2013

submarket

average asking rent ($’s/sF) at end of:

2010 2011 2012 Q3 2013 % change 12/12 - 9/13

class a class B class a class B class a class B class a class B class a class B

Central Business District $29.95 $24.97 $30.59 $25.13 $32.30 $26.60 $32.34 $26.27 0.1% -1.2%

Midtown $23.54 $22.36 $25.85 $21.85 $26.81 $22.62 $24.16 $23.06 -9.9% 1.9%

Downtown $29.23 $23.73 $30.04 $23.77 $31.69 $25.04 $31.57 $24.87 -0.4% -0.7%

I-45 North $20.22 $15.18 $16.97 $16.20 - $17.26 N/A $17.43 -- 1.0%

FM 1960 / Champions - $13.40 - $12.85 - $13.55 N/A $13.95 -- 3.0%

FM 1960 / Highway 249 $27.38 $20.21 $25.57 $19.67 $24.54 $19.60 $25.61 $20.67 4.4% 5.4%

FM 1960 $26.96 $16.65 $25.11 $16.42 $24.10 $17.03 $25.15 $17.62 4.4% 3.5%

North Belt West / Greenspoint $20.07 $15.80 $20.51 $16.17 $24.02 $17.35 $28.05 $16.83 16.8% -3.0%

Greenspoint / IAH $23.23 $15.24 $22.86 $16.91 $22.06 $15.89 $23.46 $16.23 6.4% 2.1%

Greenspoint / North Belt $20.49 $15.72 $20.68 $16.36 $22.95 $17.09 $26.05 $16.76 13.5% -1.9%

Greenway Plaza $23.61 $21.50 $24.49 $20.52 $25.85 $20.80 $27.46 $21.52 6.2% 3.5%

Gulf Freeway/Pasadena $24.25 $19.95 $24.25 $20.72 $25.69 $20.55 $27.84 $21.05 8.4% 2.5%

Katy Freeway East $25.35 $17.87 $25.98 $17.99 $26.34 $20.17 $25.83 $19.96 -1.9% -1.0%

Katy Freeway West $24.46 $18.76 $25.32 $19.18 $23.51 $19.99 $24.26 $20.15 3.2% 0.8%

Katy Freeway / Energy Corridor $25.31 $18.36 $26.14 $18.72 $25.41 $19.90 $25.57 $19.90 0.6% 0.0%

Kingwood / Humble $29.50 $16.49 $30.10 $16.44 $30.10 $16.72 $30.10 $17.11 0.0% 2.3%

NASA / Clear Lake $21.29 $20.46 $23.93 $20.82 $23.25 $20.01 $22.97 $19.74 -1.2% -1.4%

Northeast - $13.67 - $13.55 - $14.32 N/A $14.24 -- -0.6%

North Loop West $20.96 $15.62 $19.98 $15.94 $21.77 $15.62 $21.60 $16.35 -0.8% 4.7%

Northwest Near - $14.84 - $14.39 - $14.84 N/A $15.30 -- 3.1%

Northwest Far $26.79 $14.29 $25.04 $14.17 $22.12 $15.95 $22.56 $15.79 2.0% -1.0%

Northwest $25.41 $15.07 $23.96 $15.17 $24.39 $15.90 $24.39 $16.25 0.0% 2.2%

South Main / Medical Center $27.65 $21.88 $28.09 $25.85 $28.07 $25.50 $26.28 $25.18 -6.4% -1.3%

Southwest / Hillcroft $14.58 $13.76 $14.98 $13.76 $15.39 $13.91 $15.09 $13.66 -1.9% -1.8%

Southwest Beltway 8 $16.87 $16.45 $19.33 $17.29 $19.08 $17.34 $17.69 $16.78 -7.3% -3.2%

East Fort Bend County / Sugar Land $29.21 $18.47 $27.04 $18.18 $27.03 $19.09 $26.66 $19.32 -1.4% 1.2%

Southwest Freeway / Sugar Land $22.48 $15.93 $21.58 $16.33 $21.67 $16.60 $21.21 $16.28 -2.1% -2.0%

Bellaire $23.13 $14.77 $24.21 $14.78 $24.85 $14.78 $25.08 $15.54 0.9% 5.1%

Post Oak Park $30.91 $15.77 $31.47 $16.83 $33.02 $19.10 $34.39 $18.10 4.1% -5.2%

Galleria $28.01 $20.32 $28.01 $20.40 $29.17 $21.44 $29.53 $22.52 1.2% 5.0%

Riverway $25.47 $20.19 $27.42 $19.90 $30.74 $22.22 $33.09 $23.17 7.7% 4.3%

Richmond / Fountainview - $16.69 - $16.95 - $17.43 N/A $17.68 -- 1.5%

San Felipe / Voss $29.94 $19.45 $32.37 $19.57 $33.51 $20.50 $33.28 $21.11 -0.7% 2.9%

West Loop $27.81 $18.78 $28.53 $19.08 $29.86 $20.54 $30.42 $20.79 1.9% 1.2%

Westchase $26.72 $18.89 $23.95 $17.50 $30.35 $17.90 $30.22 $18.67 -0.4% 4.3%

The Woodlands $22.76 $20.11 $22.06 $21.16 $23.39 $22.70 $24.42 $22.95 4.4% 1.1%

Conroe - $14.91 $30.67 $18.54 $29.54 $22.31 $28.42 $23.01 -3.8% 3.2%

Woodlands / Conroe $22.76 $19.34 $22.24 $21.11 $23.41 $23.54 $24.21 $23.94 3.4% 1.7%

Houston Total: $25.86 $18.30 $26.08 $18.48 $27.42 $19.30 $28.08 $19.44 2.4% 0.7%

Note: Rents for properties using triple net terms have been grossed up to full service by applying operating expense data. Rents reflect full service equivalent. Note: Due to small submarket sample sizes in some cases, particularly in Class A, rent increases and decreases may be magnified relative to other submarkets

Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: 703-836-5700; DeltaAssociates.com

Source: Delta Associates analysis of CoStar data; October 2013.


TRENDLINES® 201327

MarKeT FUnDaMenTals reMain sTUrDY, sHoUlD Gain FUrTHer MoMenTUMThe fundamentals of the Houston industrial market improved in 2013, with vacancy being the lowest in the nation and continuing to decline. As consumer spending increases, demand for industrial space will continue to grow over the intermediate to long-term. As the national economic recovery continues, we expect demand for Houston industrial space to remain strong for the remainder of 2013 and into 2014. The rising demand for goods and increased trade with Asia via the expanded Panama Canal suggest a strong future for the Houston industrial market.

LARGEST U.S. INDUSTRIAL MARKETS2013

0

400

800

1,200

1,600

2,000

Mill

ion

s o

f SF

LA BASIN NY/ NNJ CHI PHI DFW ATL SF BAY HOU

Source: CoStar; Delta Associates; October 2013.

why This Methodology is the Best indicator of current Market conditionsWe include owner-occupied and single-tenant buildings in our inventory, vacancy, and absorption statistics. Doing so allows us to capture more market activity than many of our competitors, and to better correlate changes in the market with changes in employment. As single-tenant space does compete with multi-tenant space, we believe it is critical to understand all components of the market. We also include flex space in our industrial market analysis, and offer wider geographic coverage than some of our competitors. The result of these differences is that the inclusion of single-tenant and owner-occupied space, as well as flex space, tends to yield lower vacancy rates and higher absorption totals than our competitors’ results, but our coverage of the market is more comprehensive.

aBsorPTion HealTHY in 2013Net absorption of industrial space in the Houston metro totaled 4.8 million SF through the first three quarters of 2013, compared to a total of 5.0 million SF in 2012. Local businesses are expanding as the regional economy strengthens and consumer spending and confidence increase. A growing retail segment benefits the warehouse/distribution market.

2%

3%

4%

5%

6%

7%

8%

9%

10%

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Dir

ect

Vac

ancy

Rat

e

Net

Ab

sorp

tio

n in

00

0s

of

SF

Net AbsorptionVacancy Rate

Source: Vacancy –Delta Associates analysis of CoStar data;Net Absorption –Delta Associates; October 2013.

NET ABSORPTION OF INDUSTRIAL SPACE AND DIRECT VACANCY RATE TRENDSHouston Metro | 1998 –3RD Quarter 2013

201398 99 00 01 02 03 04 05 06 07 08 09 10 11 12 YTD

How the Multi-Tenant Market compares to our Market coverageVacancy and absorption in the Houston metro area often are reported by brokerage firms on multi-tenant buildings only. We include owner-occupied and single-tenant buildings as well, on the basis of immediate availability, to capture more market activity. We exclude government-owned space. As a point of comparison, below is data for the Houston multi-tenant industrial market at Q3 2013:

Multi-Tenant Entire Market

inventory: 198.2 MsF 565.0 MsF

overall vac.(incl. sublet):

9.2% 4.3%

YTD net absorption: 1,608,000 sF 4,828,000 sF






Market Fundamentals Remain Sturdy, Should Gain Further Momentum

Absorption Healthy in 2013

Industrial Vacancy Ticks Down; Lowest in U.S.

Construction Activity Increasing

Industrial Asking Rents: Edge Down

Metro Houston Industrial Market Outlook

Summary of Industrial Market Indicators - All Space

Summary of Industrial Market Indicators - All Space - Continued




TABLE OF CONTENTS


TRENDLINES® 201328

In terms of net absorption in 2013, Houston has normally been a steady performer among major markets. However, in 2013 Houston trails the LA Basin, Dallas/Ft. Worth, NY/Northern NJ, and Chicago markets. Houston’s absorption may be artificially low relative to its economic performance because there is so little available industrial space to be leased. This would explain the large increase in its pipeline.

Mill

ion

s o

f SF

LA BASIN NY/ NNJ CHIDFW WAS/BALHOU-2-10123456789

1011121314

NET ABSORPTION OF INDUSTRIAL SPACESelect Metro Areas | January – September 2013


The Houston industrial market is on pace to absorb about 6.4 million SF of space in 2013. The Warehouse/Distribution sector makes up the largest portion of the market, having accounted for 77% of the space absorbed thus far in 2013.

2012 (SF) YTD (SF)

� Warehouse/Dist.: 4,411,000 3,730,000

� Manufacturing: 440,000 231,000

� Flex/R&D: 99,000 867,000

noTaBle leases DUrinG 2013 inclUDe:

� DB Schenker, Inc. leased 267,201 SF at 10650 Okanella Lane in the Northwest submarket.

� Exel renewed 254,765 SF at 8833 Citypark Loop in the East submarket.

� Amazon leased 240,000 SF at 8120 Humble Road in the North submarket.

� Frontier Logistics leased 300,000 SF at 3041 Highway 225 (Port 225) in the Southeast submarket.

� HD Supply leased 500,000 SF for a build-to-suit at Pinto Business Park in the North submarket.

� Goodman Global Group, Inc leased 299,840 SF at 7310 Langfield Road in the Northwest submarket.

inDUsTrial vacancY TicKs Down; lowesT in U.s.The overall Houston metro area industrial vacancy rate declined to 4.3% in September 2013 from 4.6% a year earlier. The direct industrial vacancy rate, 4.2% in September, is down from 4.5% a year earlier.

Ove

rall

Vac

ancy

Rat

e

LA BASIN NY/ NNJ CHIDFW WAS/BALHOU0%

2%

4%

6%

8%

10%

12%

INDUSTRIAL VACANCY RATESSelect Metro Areas | 3RD Quarter 2013


cUrrenT vacancY raTes BY ProDUcT TYPe:DIRECT OVERALL

Warehouse/Dist.: 4.1% 4.2%

Manufacturing: 2.0% 2.2%

Flex/R&D: 8.6% 8.8%

Houston’s industrial vacancy rate will likely decline to approximately 4.1% over the next 12 months, as steady demand continues to outpace the pipeline of new supply. Vacancy will continue to decline until the development of new product escalates and catches up to demand. However, the pipeline is growing, and we do expect groundbreakings to increase further during the remainder of 2013 and into 2014.

consTrUcTion acTiviTY increasinGThere is currently 4.8 million SF of industrial space under construction in metro Houston, well above the 2.3 million SF under construction a year ago. Warehouse/Distribution product comprises 96% of space under construction. Space under construction today is 38% preleased, compared to 43% one year ago. With the pipeline (including planned space likely to start construction soon) only at 1.0% of standing inventory, more developers are breaking ground on new projects, especially warehouse/distribution buildings. Build-to-suit projects also are moving forward for companies expanding along with the energy industry.

Mill

ion

s o

f SF

LA BASIN NY/ NNJ CHIDFW WAS/BALHOU

0

1

2

3

4

5

6

7

8

9

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11

INDUSTRIAL SPACE UNDER CONSTRUCTIONSelect Metro Areas | 3RD Quarter 2013


National Total= 61.2 Million SF

















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TRENDLINES® 201329

Deliveries in Houston have totaled 4.1 million SF thus far in 2013, compared to 3.0 million SF at the same point last year. Even with these deliveries, the market has been underserved from a development standpoint in 2013.

Mill

ion

s o

f SF

Del

iver

ed

4.9

6.6

5.44.8

4.4

3.1 3.4

7.7

5.6

12.1

10.1

7.1

2.4 2.3

3.0 4.1

0123456789

10111213

YTD98 99 00 01 02 03 04 05 06 07 08 09 10 11 122013

INDUSTRIAL SPACE DELIVEREDHouston Metro | 1998 - 3RD Quarter 2013


inDUsTrial asKinG renTs: eDGe Down

Industrial asking rents edged down 0.3% through the 3rd quarter of 2013, after rising by 5.0% in 2012. The 3rd quarter 2013 average asking rent for all types of industrial space is $5.87/SF, triple net.

Steady demand should support healthy rent increases during the remainder of 2013 and into 2014, particularly in the warehouse/distribution sector, given the already-low vacancy rate in the Houston industrial market. While some concern remains about macroeconomic factors that could impact the distribution needs of retailers, the Houston industrial market is among the best-positioned in the country for future rent growth.

Ask

ing

Ren

t, ($

/SF,

NN

N)

LA BASINNY/ NNJ CHI DFWWAS/BAL HOU

$0

$1

$2

$3

$4

$5

$6

$7

$8

AVERAGE INDUSTRIAL RENTSelect Metro Areas | 3RD Quarter 2013


METRO HOUSTON INDUSTRIAL MARKET OUTLOOKThe Houston metro industrial market will likely experience continued growth for the remainder of 2013 and into 2014. Despite gains in the United States, global economic uncertainty persists and could potentially curtail national economic growth. However, the energy boom in Houston should be able to sustain the volatility of the broader economy, and industrial vacancies in Houston likely will continue to fall. Large-scale construction is underway all across the Houston market. If construction remains controlled, industrial rents will rise, and market conditions will turn further in favor of landlords. The current level of construction is limited enough to promote continuing strong market conditions, though the pipeline has been increasing. On balance, we expect strong performance from the Houston industrial market during the remainder of 2013 and into 2014.

Industrial submarkets likely to outperform in the period ahead, with declining vacancy and rising rents, include:� East-Southeast Far

� North Far

� Northwest Near

















TABLE OF CONTENTS


sUMMarY oF inDUsTrial MarKeT inDicaTors - all sPaceHouston Metro Area | 2010 Through Third Quarter 2013

submarket


Total rentable sF

all Bldgs. 1/


2010 2011 2012 Q3 2013vacancy rate

w/ sublet

sF Under constr. or

renovation2010 2011 2012 Q3 2013 YTD 2013

CENTRAL BuSINESS DISTRICT

Flex/R & D 704,587 69,754 7.8% 8.4% 8.0% 9.9% 9.9% - 45,000 (5,000) 4,000 (4,000) (14,000)

Manufacturing 5,883,053 47,064 5.6% 4.3% 1.4% 0.8% 0.8% - (184,000) 64,000 166,000 (6,000) 35,000

Warehouse/Distribution 26,527,175 1,697,739 5.2% 4.8% 6.4% 6.4% 6.4% - (209,000) 120,000 (477,000) 80,000 36,000

Total - Central Business District 33,114,815 1,814,558 5.3% 4.8% 5.6% 5.5% 5.5% - (348,000) 179,000 (307,000) 70,000 57,000

EAST-SOuTHEAST FAR

Flex/R & D 2,937,496 252,625 12.0% 9.5% 12.2% 8.6% 8.6% - 80,000 54,000 (72,000) 132,000 105,000

Manufacturing 5,947,936 279,553 2.7% 0.5% 6.4% 4.7% 4.7% - 61,000 202,000 (279,000) 54,000 102,000

Warehouse/Distribution 54,546,207 4,090,966 11.4% 8.2% 8.3% 7.5% 7.5% 25,050 (120,000) 965,000 695,000 (87,000) 353,000

Total - East-Southeast Far 63,431,639 4,623,143 10.6% 7.5% 8.3% 7.3% 7.3% 25,050 21,000 1,221,000 344,000 99,000 560,000

NORTH FAR

Flex/R & D 8,548,136 726,592 10.9% 9.3% 8.9% 8.5% 8.5% - (197,000) 214,000 90,000 (59,000) 118,000

Manufacturing 7,278,777 196,527 2.4% 2.7% 2.1% 2.7% 2.7% - (86,000) (17,000) 15,000 148,000 (11,000)

Warehouse/Distribution 48,770,428 2,340,981 6.0% 4.3% 4.3% 4.8% 4.8% 1,711,081 1,163,000 1,021,000 828,000 154,000 1,161,000

Total - North Far 64,597,341 3,264,099 6.3% 4.8% 4.6% 5.1% 5.1% 1,711,081 880,000 1,218,000 933,000 243,000 1,268,000

NORTH NEAR

Flex/R & D 1,309,501 161,069 15.2% 22.9% 18.9% 12.3% 12.3% - (32,000) (92,000) 48,000 115,000 185,000

Manufacturing 2,626,374 120,813 3.1% 0.9% 0.3% 4.6% 4.6% - (19,000) 58,000 16,000 (11,000) (113,000)

Warehouse/Distribution 15,668,423 783,421 4.1% 4.8% 3.6% 5.0% 5.0% 351,250 21,000 298,000 456,000 102,000 (94,000)

Total - North Near 19,604,298 1,065,303 4.7% 5.4% 4.1% 5.4% 5.4% 351,250 (30,000) 264,000 520,000 206,000 (22,000)

NORTHEAST FAR

Flex/R & D 96,952 - 2.7% 2.7% 0.0% 0.0% 0.0% - - - 3,000 - -

Manufacturing 196,600 - 0.0% 0.0% 0.0% 0.0% 0.0% - - - - - -

Warehouse/Distribution 1,465,187 36,630 0.3% 0.7% 1.2% 2.5% 2.5% - 4,000 (5,000) (5,000) 7,000 (19,000)

Total - Northeast Far 1,758,739 36,630 0.4% 0.7% 1.0% 2.1% 2.1% - 4,000 (5,000) (2,000) 7,000 (19,000)

NORTHEAST NEAR

Flex/R & D 771,671 50,159 11.8% 8.3% 10.5% 6.5% 6.5% - (78,000) 2,000 (18,000) (9,000) 35,000

Manufacturing 5,937,172 23,749 4.9% 0.8% 0.4% 0.4% 2.5% - (141,000) 244,000 23,000 (6,000) 0

Warehouse/Distribution 26,943,756 862,200 3.7% 3.5% 3.4% 3.2% 3.2% 20,000 (173,000) 113,000 65,000 (54,000) 94,000

Total - Northeast Near 33,652,599 936,107 4.1% 3.1% 3.1% 2.8% 3.2% 20,000 (392,000) 359,000 70,000 (69,000) 129,000

NORTHWEST FAR

Flex/R & D 5,435,616 239,167 5.6% 5.4% 5.3% 4.4% 4.5% - 566,000 38,000 75,000 (65,000) 49,000

Manufacturing 7,563,586 242,035 4.2% 3.7% 2.9% 3.2% 3.2% - 299,000 31,000 51,000 322,000 293,000

Warehouse/Distribution 51,379,301 1,130,345 5.1% 3.4% 2.6% 2.2% 2.3% 2,229,291 821,000 1,203,000 801,000 168,000 839,000

Total - Northwest Far 64,378,503 1,611,546 5.0% 3.6% 2.9% 2.5% 2.6% 2,229,291 1,686,000 1,272,000 927,000 425,000 1,181,000

NORTHWEST NEAR

Flex/R & D 11,614,223 987,209 10.5% 9.7% 8.9% 8.5% 9.4% - 297,000 93,000 92,000 101,000 147,000

Manufacturing 10,690,280 85,522 1.7% 3.3% 0.6% 0.8% 1.0% - (27,000) (144,000) 256,000 - (21,000)

Warehouse/Distribution 80,971,394 2,995,942 4.9% 4.3% 3.9% 3.7% 3.8% - 320,000 530,000 871,000 (81,000) 687,000

Total - Northwest Near 103,275,897 4,068,673 5.3% 4.8% 4.1% 3.9% 4.1% - 590,000 479,000 1,219,000 20,000 813,000

1/ Includes buildings 15,000 SF RBA and greater. Does not include buildings under construction or buildings owned by the government. 2/ Does not include sublet space.

Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; October 2013.Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: 703-836-5700; DeltaAssociates.com

Section 5: The Houston Metro Industrial Market

sUMMarY oF inDUsTrial MarKeT inDicaTors - all sPaceHouston Metro Area | 2010 Through Third Quarter 2013

submarket


Total rentable sF

all Bldgs. 1/


2010 2011 2012 Q3 2013vacancy rate

w/ sublet

sF Under constr. or

renovation2010 2011 2012 Q3 2013 YTD 2013

SOuTH FAR

Flex/R & D 1,709,126 54,692 11.0% 10.5% 9.3% 3.2% 3.2% - 7,000 8,000 21,000 77,000 105,000

Manufacturing 6,010,516 114,200 2.9% 1.8% 1.8% 1.9% 1.9% 150,000 (33,000) 61,000 - (30,000) (6,000)

Warehouse/Distribution 30,789,178 1,046,832 4.3% 2.9% 3.6% 3.4% 3.5% 55,000 33,000 521,000 17,000 142,000 103,000

Total - South Far 38,508,820 1,215,724 4.4% 3.1% 3.6% 3.2% 3.2% 205,000 7,000 590,000 38,000 189,000 202,000

SOuTH NEAR

Flex/R & D 803,477 135,788 10.3% 18.1% 21.2% 16.9% 16.9% - (25,000) (12,000) (25,000) 28,000 35,000

Manufacturing 1,696,371 137,406 3.8% 3.6% 3.8% 8.1% 8.1% - (2,000) 3,000 (2,000) 10,000 (73,000)

Warehouse/Distribution 12,169,760 608,488 1.8% 2.5% 3.4% 5.0% 5.0% - 244,000 (86,000) (109,000) (97,000) (195,000)

Total - South Near 14,669,608 881,682 2.5% 3.5% 4.4% 6.0% 6.0% - 217,000 (95,000) (136,000) (59,000) (233,000)

SOuTHEAST NEAR

Flex/R & D 461,763 55,873 21.3% 20.2% 15.3% 12.1% 12.1% - (16,000) 6,000 25,000 (7,000) 15,000

Manufacturing 7,673,620 - 0.2% 0.0% 0.0% 0.0% 0.0% - - 14,000 - - -

Warehouse/Distribution 29,507,769 649,171 2.7% 2.3% 1.6% 2.2% 2.2% - (59,000) 118,000 207,000 98,000 (176,000)

Total - Southeast Near 37,643,152 705,044 2.5% 2.1% 1.4% 1.9% 1.9% - (75,000) 138,000 232,000 91,000 (161,000)

SOuTHWEST FAR

Flex/R & D 1,821,901 473,694 7.9% 24.1% 25.6% 26.0% 26.0% 26,250 (33,000) (26,000) (23,000) 24,000 (7,000)

Manufacturing 1,732,823 71,046 3.8% 4.4% 5.5% 4.1% 4.1% 26,809 35,000 64,000 (15,000) 21,000 24,000

Warehouse/Distribution 9,556,086 305,795 4.3% 4.8% 4.2% 3.2% 3.3% - 117,000 81,000 100,000 (11,000) 119,000

Total - Southwest Far 13,110,810 850,535 4.8% 7.7% 7.4% 6.5% 6.6% 53,059 119,000 119,000 62,000 34,000 136,000

SOuTHWEST NEAR

Flex/R & D 8,108,347 672,993 7.0% 6.4% 8.7% 8.3% 8.4% - 45,000 5,000 (186,000) 24,000 32,000

Manufacturing 4,603,792 101,283 3.6% 2.7% 2.1% 2.2% 2.2% - 53,000 35,000 113,000 5,000 1,000

Warehouse/Distribution 41,960,273 1,049,007 5.0% 4.2% 3.1% 2.5% 2.7% 208,800 675,000 385,000 795,000 483,000 716,000

Total - Southwest Near 54,672,412 1,823,283 5.2% 4.4% 3.9% 3.3% 3.5% 208,800 773,000 425,000 722,000 512,000 749,000

SuGAR LAND

Flex/R & D 3,319,898 212,473 11.9% 9.6% 7.4% 6.4% 6.4% 12,208 47,000 64,000 65,000 29,000 62,000

Manufacturing 2,424,996 - 0.7% 0.0% 0.0% 0.0% 0.0% - (13,000) 12,000 96,000 - -

Warehouse/Distribution 16,873,136 793,037 5.9% 6.1% 5.1% 4.7% 4.8% 15,180 842,000 65,000 167,000 36,000 106,000

Total - Sugar Land 22,618,030 1,005,511 6.3% 5.9% 4.9% 4.4% 4.5% 27,388 876,000 141,000 328,000 65,000 168,000

TOTAL HOuSTON

Flex/R & D 47,642,694 4,092,087 10.0% 9.7% 9.7% 8.6% 8.8% 38,458 706,000 349,000 99,000 386,000 867,000

Manufacturing 70,265,896 1,419,198 2.9% 2.1% 1.8% 2.0% 2.2% 176,809 (57,000) 627,000 440,000 507,000 231,000

Warehouse/Distribution 447,148,073 18,390,552 5.3% 4.4% 4.2% 4.1% 4.2% 4,615,652 3,679,000 5,329,000 4,411,000 940,000 3,730,000

Total - Houston 565,036,663 23,901,838 5.4% 4.6% 4.3% 4.2% 4.3% 4,830,919 4,328,000 6,305,000 4,950,000 1,833,000 4,828,000

Vacancy Rate with Sublet Space 5.6% 4.7% 4.4% 4.3%

1/ Includes buildings 15,000 SF RBA and greater. Does not include buildings under construction or buildings owned by the government. 2/ Does not include sublet space.

Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; October 2013.Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: 703-836-5700; DeltaAssociates.com

- conTinUeD

Section 5: The Houston Metro Industrial Market

TRENDLINES® 201332

oFFice invesTMenT salesSales have returned to peak levels in Houston faster than in many other major markets, even as national office investment volume has plateaued. Annualized national office volume for 2013 totals $77.5 billion, compared to $81.1 billion in 2012 and $64.7 billion in 2011. Improved market conditions, driven by one of the nation’s strongest local economies, continue to fuel investor interest in the Energy Capital. The shale revolution has given local energy companies the confidence and incentive to expand their workforces, which translates into greater interest in Houston office assets.

In the long term, real estate investments have either matched or outperformed stocks and bonds. While in the short term the stock market has been robust, investors continue to seek real estate as a hedge against inflation. After a precipitous fall following the housing bubble and recession, real estate has again proved to be a strong investment. In the last 10 years as of June 2013 the NAREIT Equity REIT Index saw a 10.96% increase. The NCREIF Property Index increased 8.6% during the same period, while stocks (as measured by the S&P 500) rose 7.3%. Direct investment in real estate remains attractive at this point in the cycle compared to the alternatives, particularly given the run-up in the bull market. While real threats face office market investors – notably concerns about continued economic growth and job creation – returns have been solid. Loan balances coming due in 2014 remain a concern in some asset types and geographies. Nationally, on balance, asset performance has improved gradually, with vacancy trending lower.

After peaking in 2009, U.S. office cap rates began their decline and have trended lower since, though they have plateaued in 2013. The mean cap rate in the U.S. in 2013 is 7.0% for core office assets, the same as in 2012 and down from 7.4% in 2011, according to Real Capital Analytics. We believe cap rates will remain fairly stable through the remainder of 2013 as market conditions continue to firm. Given the sluggish pace of economic recovery, we expect interest rates to remain relatively low into 2015 – though perhaps edging up slightly as we saw earlier this year – helping to keep cap rates fairly stable. However, modest job growth is likely to translate into middling demand for office space in many markets in 2014, which may reduce investors’ appetite for office product and cause cap rates to edge up.

Looking at the NCREIF Property Index, total returns have edged down marginally in 2013 compared to the year prior, although Houston has seen an increase in returns compared to 2012. Houston’s office asset returns are 15.92% over the 12 months ending June 2013 after a return of 13.59% for the 12 months ending June 2012. The returns in Houston led all other major metro areas and well surpassed the national average of 9.57%. This robust performance can be attributed largely to demand for office space by the energy sector, Houston’s most important core industry.

NCREIF RETuRN INDEX1 FOR OFFICE PROPERTIES

Metro Area 12-Month Total Return at Mid-Year 2013

Houston 15.92%

San Francisco 14.47%

New York 12.79%

Denver 12.08%

Dallas 9.68%

National Average 9.57%

Atlanta 8.99%

Boston 8.36%

Los Angeles 8.27%

Chicago 7.16%

Washington 5.18%1 NCREIF index includes both current income and capital appreciation returns.Source: NCREIF, Delta Associates; October 2013.

INVESTMENT SALES OF OFFICE BUILDINGSUnited States | 2002 Through 2013

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$160

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$220

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

Bill

ion

s o

f $

Sources: Real Capital Analytics, graphic by Delta Associates; October 2013.*Sales through August 2013 annualized.

-5%

0%

5%

10%

15%

20%

25%

1 YR. 3 YR. 5 YR. 10 YR.

REAL ESTATE RETURNS VS.OTHER INVESTMENT OPTIONSMid-Year 2013

Sources: NCREIF, Delta Associates; October 2013.

Tota

l Ret

urn

/Yea

r

Real EstateNAREIT Equity REIT IndexNCREIF Property Index

AlternativesStocks (S&P 500)Bonds (Barclays Capital Government)

AVERAGE CORE OFFICE ASSET CAP RATEUnited States | 2004 Through August 2013

4%

5%

6%

7%

8%

9%

10%

11%

12%

2013*2004 2005 2006 2007 2008 2009 2010 2011 2012

Ave

rag

e C

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ate

Sources: Real Capital Analytics, graphic by Delta Associates; October 2013. *Through August 2013.







Office Investment Sales

Office Investment Sales - Continued

Industrial Investment Sales

Office Investment Prospects

Industrial Investment Prospects



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Recent activity in Houston’s office investment market was highlighted by the sale of the Men’s Wearhouse headquarters, which closed for $51.3 million, or $248/SF. There was $2.5 billion in total sales recorded year-to-date in 2013. The $3.3 billion annualized total for the year is set to surpass marks of $2.5 billion in 2012 and $1.4 billion in 2011.

Houston’s office sales volume, on pace for $3.3 billion in 2013, puts it on par with Chicago, San Francisco Bay, and Boston.

Nationally, sales prices have edged down in 2013 to $205/SF in the first eight months of the year, compared to $216 for all of 2012. Sales returned to peak levels in Houston faster than in many other major markets in the country. Improved market conditions, driven by one of the strongest local economies in the nation, continue to fuel investor interest in the Energy Capital of the World. Hydraulic fracturing, shale, and alternative fuel activities are giving local energy companies the confidence and incentive to expand their workforces, which is translating into greater investor interest in Houston office assets.

The average office sales price in Houston through the third quarter of 2013 is $199/SF, compared to $194/SF during all of 2012. With the exception of 2009 – the low point of the downturn – values in Houston have generally been on an upward trajectory. Values will likely increase in the period ahead, as market conditions continue to strengthen, rents rise, and competition increases for Houston’s assets.

Houston’s office investment sales market likely will continue to improve gradually through the remainder of 2013 and into 2014. While uncertainty within the Federal government (as exemplified by October’s shutdown) and the larger national economy is hampering potential growth, Houston has remained fairly well insulated. The Houston market has the capacity to outperform the national average in the period ahead, in terms of percentage increases in both pricing and volume, due to the strength of the energy industry, its largest core sector.

The average cap rate on a rolling three-month basis for core Houston office assets was 7.2% in June 2013. However, there is a wide range of cap rates depending on the locations and characteristics of the properties being traded. Trophy properties have recently traded at cap rates in the 6.0% range. We expect cap rates to edge down locally during the balance of 2013, as market fundamentals suggest increasing investor interest in Houston’s office assets. However, if long-term interest rates rise substantially in the period ahead cap rates likely will rise in turn.

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

2009 2010 2011 2012 2013*

Bill

ion

s o

f $

HOU

DEN

DFW

COMPARATIVE INVESTMENT SALES VOLUMEOffice Buildings | 2009 –3RD Quarter 2013

Source: Real Capital Analytics, graphic by Delta Associates; October 2013. *Annualized.

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

Mill

ion

s o

f $

NY LA WAS CHI SF BAY BOS HOU DFWATL DEN

OFFICE INVESTMENT SALES VOLUMESelect Metro Areas | January Through August 2013

Sources: Real Capital Analytics, graphic by Delta Associates; October 2013.

AVERAGE CORE OFFICE ASSET SALES PRICEUnited States | 2004 Through August 2013

$100

$125

$150

$175

$200

$225

$250

$275

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$ p

er S

F


$97 $87

$128

$141 $138 $148

$168

$50

$180

$214

$194 $199

$25

$50

$75

$100

$125

$150

$175

$200

$225

Ave

rag

e Sa

le P

rice

Per

SF

AVERAGE OFFICE SALE PRICEHouston Metro | 2002 –3RD Quarter 2013

*As of Q3 2013.Source: Real Capital Analytics, graphic by Delta Associates; October 2013.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*














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TRENDLINES® 201334

As of June 2013, Houston office cap rates were still elevated compared with larger coastal markets such as Manhattan, Washington, and San Francisco. Buyers who focus on quality Houston assets can achieve a higher initial return on their investment.

ToP BUYers oF oFFice BUilDinGs

Top investors in office assets nationally in the 12 months ending in August 2013, according to Real Capital Analytics, include:

� Vornado Realty Trust

� Related Companies

� RXR Realty

� OMERS

� Zhang Xin

� M. Safra & Co.

� Norges Bank Investment Management

The Houston industrial market achieved total sales volume of $558 million through the first eight months of 2013. Despite the Houston industrial market’s low vacancy rate and robust performance, it remains overshadowed as an investment alternative by larger, coastal industrial markets such as the LA Basin and New York/Northern New Jersey.

5%

6%

7%

8%

9%

10%

11%

12%

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 12 13*

Ave

rag

e C

ap R

ate

CAP RATES – CORE OFFICE ASSETSHouston Metro | 2001 – 2013

*Quarterly average through June 2013.Source: Real Capital Analytics, graphic by Delta Associates; October 2013.

MANHATTANLA

WAS

CHI

SF BAY

BOSHOU

DFWDEN

AVERAGE OFFICE CAP RATESSelect Metro Areas | Second Quarter 2013

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

Wei

gh

ted

Ave

rag

e C

ap R

ate

Sources: Real Capital Analytics, graphic by Delta Associates; October 2013.Note: Three-month rolling average.

INVESTMENT SALES OF INDUSTRIAL BUILDINGSUnited States | 2002 Through 2013

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

$55

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

Bill

ion

s o

f $

*Sales through August 2013 annualized.


NY/NNJLA BASIN WAS/BALCHISF BAY HOUDFW ATL DEN

INDUSTRIAL INVESTMENT SALES VOLUMESelect Metro Areas | January Through August 2013

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f $


inDUsTrial invesTMenT sales

Despite decelerating some from 2012 numbers, national industrial investment sales remain well above recessionary levels seen in 2008 through 2010. At the current pace, sales will total $36.3 billion in 2013, compared to $40.3 billion in 2012 and $34.9 billion in 2011. Additionally, the Houston market has seen strong returns over the past year and is poised to see an increase in demand with the completion of the Panama Canal expansion in 2015, allowing for a larger amount of cargo from the Pacific.

Returns on investments in industrial assets have shown continued strength in 2013. Like the office market, the Houston industrial market has performed the best relative to other markets across the country. Returns in Houston measured 15.97% over the 12 months ending in June 2013, compared to the national average of 10.82%. Among major industrial markets, only Denver performed nearly as well.














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NCREIF RETuRN INDEX1 FOR INDuSTRIAL PROPERTIES

Metro area12-Month Total return at Mid-

Year 2013Houston 15.97%

Denver 15.67%

New York 12.77%

San Francisco 12.39%

Los Angeles 11.73%

National Average 10.82%

Dallas 9.96%

Chicago 8.42%

Atlanta 7.68%

Washington* 7.32%1 NCREIF index includes both current income and capital appreciation returns. *Baltimore, MD.Source: NCREIF, Delta Associates; October 2013.

Recorded Houston industrial sales volume, at $558 million through August, is on pace to reach $837 million in 2013. The average sales price is $55/SF thus far in 2013, up just slightly from $54/SF for all of 2012.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

INDUSTRIAL INVESTMENT SALES Houston Metro | 2002 Through 2013

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$1,200M

illio

ns

of

$

*YTD through August, annualized.Sources: Real Capital Analytics, graphic by Delta Associates; October 2013.

NY/NNJ LA BASIN BOSCHI SF BAYHOUDFWATL DEN

AVERAGE INDUSTRIAL SALES PRICESSelect Metro Areas | January Through August 2013

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Cap rates for recorded sales of Houston industrial product in 2013 have been concentrated in the 6.0% to 7.0% range. There continues to be a large spread between Class A and Class B product, reflecting a flight to quality in the market.

inDUsTrial invesTMenT ProsPecTsInvestor demand for industrial properties in Houston will continue to strengthen with the abundance of capital (core and value-add funds) that is chasing industrial product based on the strength of the market and the Houston economy. This, coupled with the lack of quality product on the market, will continue to put downward pressure on cap rates (perhaps below 6% for premier assets) as long as interest rates remain low by historical standards. If long-term interest rates rise in 2014 cap rates for Houston industrial product may edge up, but the market’s strong fundamentals, including the lowest vacancy rate among major metro areas, will encourage investor interest.

oFFice invesTMenT ProsPecTsWith the exception of 2009 – the low point of the downturn – values in Houston have risen nearly every year since 2003 and will likely grow in the period ahead, as market conditions continue to strengthen, rents rise, and competition increases for Houston’s assets. The Houston office market will continue to attract additional interest from investors so long as the energy industry continues its strong performance. Houston office assets remain a bargain compared to gateway markets, potentially allowing for further price appreciation in 2014.














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MUlTiFaMilY: sTronG PerForManceThe Houston metro multifamily market continues to expand due to population increases and one of the highest job growth rates in the country. This year has seen market fundamentals improve, with absorption and rents up and vacancy down. The Houston apartment market, at over 511,000 units, ranks sixth in the nation in terms of total market size (New York is not included in the accompanying graph to conserve scale).

neT aBsorPTion ranKs seconD in THe U.s.Net absorption for all classes of apartments remained strong year-to-date in the Houston metro as of September 2013, surpassing the pace of absorption in 2012. Absorption was approximately 16,168 units year-to-date through September 2013, compared to 14,664 units during all of 2012. Houston’s population is increasing as the availability of employment attracts new residents from other parts of the country.

Houston has the second highest net absorption of units compared to other U.S. metro areas for the 12 months ending June 2013. Demand for apartments has remained strong nationwide as tight lending requirements are limiting the potential pool of homebuyers and in turn funneling a growing cohort of young adults into apartments.

vacancY: new cYclical lowThe delivery of new apartment units has not kept pace with demand in the past year, leading to a declining vacancy rate. Vacancy as of September 2013 stood at 8.9%, down from 10.6% at the end of 2012 and 12.3% at year-end 2011. The vacancy rate for all classes of Houston metro apartments has continued to decline following its spike in 2009 and is now at the lowest level in the past decade. With strong job creation and population growth expected to continue, we anticipate the vacancy rate will edge down further over the next 12 months.

renTs: HiGHesT level on recorDStrong demand and declining vacancy have allowed property owners to push rents to record levels in 2013. The average rental rate for Houston apartments was $0.97/SF/month at the end of September, up 6.0% over the past 12 months. Rents will likely increase through the balance of 2013 and into 2014 as job creation continues and economic growth strengthens.

Source: REIS, Delta Associates; October 2013.

0

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LA CHI DFW WAS HOU ATL PHX

Tho

usa

nd

s o

f A

par

tmen

t U

nit

s

LARGEST MULTIFAMILY MARKETSUnited States | 2013

Note: Excludes NYC and includes only those units in projectsof 40 or more units (20+ units in California and Arizona).

-10

0

10

20

30

40

2005 2006 2007 2008 2009 2010 2011 2012 2013*

NET ABSORPTION - ALL CLASSESHouston Metro | 2005 Through September 2013

Source: ADS, Delta Associates; October 2013.

Tho

usa

nd

s o

f U

nit

s

*January through September 2013.

DFW HOU WASLA CHI ATL PHX NY

Un

its

Source: REIS, Delta Associates; October 2013.

0

2,000

4,000

6,000

8,000

10,000

12,000

NET ABSORPTION – ALL CLASSESSelect Metro Areas | 2013*

*12 months ending 6/13.

2005 2006 2007 2008 2009 2010 2011 2012 2013*


9.4%

16.1%

8.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Vac

ancy

Rat

e

APARTMENT VACANCY RATE – ALL CLASSESHouston Metro | 2005 Through September 2013

*As of September 2013.


Ren

t ($

/SF/

mo

nth

)

AVERAGE APARTMENT RENTAL RATE

$0.85

$0.87

$0.89

$0.91

$0.93

$0.95

$0.97

$0.99

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Houston Metro | October 2011 Through September 2013

20122011 2013

$0.97

6.0% increase in the last 12 months








Multifamily: Strong Performance

Net Absorption Ranks Second in the U.S.

Vacancy: New Cyclical Low

Rents: Highest Level on Record

Houston Metro Multifamily Market Outlook


TABLE OF CONTENTS


TRENDLINES® 201337

HoUsTon MeTro MUlTiFaMilY MarKeT oUTlooKThe Houston metro multifamily market likely will continue the steady growth it has experienced during the last four years as the regional economy adds jobs and population growth persists. Houston’s local economic strength has benefited the apartment market, with job seekers attracted to Houston and taking rental units off the market. Rents likely will rise during the balance of 2013 and into 2014. With long-term interest rates rising (and likely to dampen demand for for-sale housing) and with continuing robust job growth in Houston, we expect the local multifamily market to remain strong next year.








Multifamily: Strong Performance

Net Absorption Ranks Second in the U.S.

Vacancy: New Cyclical Low

Rents: Highest Level on Record

Houston Metro Multifamily Market Outlook


TABLE OF CONTENTS


TRENDLINES® 201338

reTail secTor GrowinGMetro Houston’s retail market experienced steady improvement in 2013, as the economy strengthened and job growth remained strong locally. This sector’s growth is supported by one of the nation’s best regional economies and its solid employment gains, reinforced by hiring in the core industries.

reTail invenTorY: GeTTinG larGerThe Houston metro area has approximately 340 million square feet of retail inventory. Approximately two-thirds of Houston’s retail inventory consists of neighborhood and community center product types, including power, lifestyle, outlet, and theme/festival centers.

Source: Delta Associates' analysis of CoStar data; October 2013.

StripCenters

CommunityCenters*

NeighborhoodCenters

RegionalMalls**

RETAIL MARKET SCALEHouston Metro – October 2013

*Includes power, lifestyle, outlet, and theme/festival centers.** Includes regional and super regional centers.

Total =340.1 Million SF

reTail eMPloYMenT risinGThe Retail sector in metro Houston added 9,100 jobs over the 12-month period ending August 2013 in metro Houston, a 3.3% gain and a firm indicator of strength in this sector. On a trailing 12-month basis, retail employment in the Houston metro area increased for the 34th consecutive month. Retail employment will likely continue to increase as consumer spending increases in 2014.

-8

-6

-4

-2

0

2

4

6

8

10

12

14

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

Job

s in

Th

ou

san

ds

RETAIL JOB GROWTHHouston Metro | 1997 – August 2013

Source: U.S. Bureau of Labor Statistics, Delta Associates; October 2013.

*12 months ending in August.

reTail vacancY Down Year-over-YearHouston’s retail vacancy rate, at 10.1% in the 3rd quarter of 2013, is down from 11.0% in the 3rd quarter of 2012. We expect that vacancy will remain steady or decline modestly for the remainder of 2013 and into early 2014, as Houston’s consumer sector remains strong and retailers open more stores.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Vac

ancy

Rat

e

VACANCY RATE TRENDSHouston Metro Retail Market | 2000 – Q3 2013

Source: O’Connor & Associates, Delta Associates; October 2013.Note: Data source has adjusted its inventory and restated its vacancy rates.

9%

10%

11%

12%

13%

14%

15%

16%

17%

10.1%

reTail renTs TicK Down For all classes oF sPace coMBineDRetail rents remained at $1.40/SF/month in the 3rd quarter of 2013 for all classes of retail space combined. Rents for superior product are rising; commodity product is reducing the overall average. While overall rents declined during the past year, they likely will experience modest growth during the balance of 2013 and into 2014, as consumer spending accelerates and market conditions continue to strengthen. The recent trends in vacancy have set the stage for rent growth.

reTail sPenDinG conTinUes recoverYThe most recent data from the Texas Comptroller’s Office show that gross retail sales in the Houston metro area totaled $107.5 billion during all of 2012. Figures for the 1st quarter of 2013 suggest an annualized total of $115.6 billion during all of 2013, which would be a new high. We expect that retail sales will continue to grow in metro Houston in 2014, in part due to Houston’s growing population and employment base, and in part due to the greater aggregated discretionary income that a growing labor force generates.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Ave

rag

e R

enta

l Rat

e(P

er S

F, P

er M

on

th)

AVERAGE RENTAL RATEHouston Metro Retail Market | 2000 – Q3 2013

Source: O’Connor & Associates, Delta Associates; October 2013.

Note: Data source has adjusted its inventory and restated its rental rates.

$1.30

$1.40

$1.50

$1.60

$1.70

$1.40

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

Tota

l Gro

ss R

etai

l Sal

es

(in

Bill

ion

s o

f D

olla

rs)

GROSS RETAIL SALESHouston Metro | 2002 – 2013

Source: Texas Comptroller’s Office, Delta Associates; October 2013. *Estimate.

$50

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$80

$90

$100

$110

$120 $115.6

$101.4

$87.9

$55.3









Retail Sector Growing

Retail Inventory: Getting Larger

Retail Employment Rising

Retail Vacancy Down Year-over-Year

Retail Rents Tick Down for All Classes of Space Combined

Retail Spending Continues Recovery

Retail Market Likely to Expand in 2014

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TRENDLINES® 201339

reTail MarKeT liKelY To exPanD in 2014The Houston retail market will likely see further expansion during the balance of 2013 and into 2014, as local job growth remains robust and the consumer sector is strengthening. Nationally, consumer confidence remains at its highest point in over five years. With regional economic growth, new consumers will arrive, increasing total consumption. A growth cycle in the retail market will likely occur over the next several years, making investment very attractive. As an example, Dunkin’ Donuts plans on opening 60 new stores in Houston over the next five years, creating many new jobs in the process. Additionally, Costco, Fresh Market, and Sprouts Farmers Market all have plans to expand in Houston or recently have. We look for a focus on such grocery-anchored and mixed-use development, as well as increasing urban infill projects, as these best address consumers’ needs and preferences.









Retail Sector Growing

Retail Inventory: Getting Larger

Retail Employment Rising

Retail Vacancy Down Year-over-Year

Retail Rents Tick Down for All Classes of Space Combined

Retail Spending Continues Recovery

Retail Market Likely to Expand in 2014

TABLE OF CONTENTS


atlanta3340 Peachtree RdSuite 1000Atlanta, Georgia 30326PHONE: 404.842.6600

austin901 MoPac Expressway South Bldg. 4, Suite 250Austin, Texas 78746PHONE: 512.328.5600

Baltimore7160 Columbia Gateway DrSuite 210Columbia, Maryland 21046PHONE: 443.285.0770

Bethesda6700 Rockledge DrSuite 400-ABethesda, Maryland 20817PHONE: 301.571.0900

Boston75 State StreetBoston, MassachusettsPHONE: 617.439.6000

chicago200 West Madison StSuite 3300Chicago, Illinois 60606PHONE: 312.881.7000

Dallas5001 Spring Valley RdSuite 400WDallas, Texas 75244PHONE: 972.774.2500

Denver4643 S. Ulster StSuite 300Denver, Colorado 80237PHONE: 303.639.3000

Detroit32255 Northwestern Highway, Suite 206Farmington Hills, Michigan 48334PHONE: 248.932.2840

Fort lauderdale110 Tower110 Southeast 6th StreetFort Lauderdale, Florida 33301PHONE: 954.607.1083

Fort worth100 Throckmorton StreetSuite 700Fort Worth, Texas 76102PHONE: 817.877.4433

Greenwich1 Fawcett Place4th FloorGreenwich, Connecticut 06830PHONE: 203.637.9300

Houston1900 West Loop SouthSuite 1300Houston, Texas 77027PHONE: 713.270.7700

los angeles601 South Figueroa StreetSuite 2750Los Angeles, California 90017PHONE: 213.624.5700

MenaPrince Turki Bin Abdullah Al-Saud St., Sulaimania Area , P.O. Box 2600Riyadh, KSA 11461PHONE: +966 (1) 292.24.22

Miami100 SE 2nd StreetSuite 3100Miami, Florida 33131PHONE: 305.808.7310

Milwaukee234 W. Florida StreetSuite 310Milwaukee, Wisconsin 53204PHONE: 414.937.5030

Minneapolis706 Second Avenue South100 Baker BuildingMinneapolis, Minnesota 55402PHONE: 612.343.4200

new Jersey300 Kimball Drive1st FloorParsippany, New Jersey 07054PHONE: 973.947.9200

new orleans935 Gravier StreetSuite 600New Orleans, Louisiana 70112PHONE: 504.528.9910

new York400 Park Avenue16th FloorNew York, New York 10022PHONE: 212.537.0370

northern virginia8614 Westwood Center DriveSuite 800Vienna, Virginia 22182PHONE: 703.821.0040

oklahoma city235 North MacArthurSuite 500Oklahoma City, Oklahoma 73127PHONE: 405.789.0900

orange county2211 Michelson DriveSuite 650Irvine, California 92612PHONE: 949.751.5700

orlando158 Tuskawilla RoadSuite 2324Winter Springs, Florida 32708PHONE: 407.253.3140

Phoenix2415 E. Camelback RoadSuite 900Phoenix, Arizona 85016PHONE: 602.956.5000

salt lake city11781 S. Lone Peak PkwySuite 250Draper, Utah 84020PHONE: 801.972.5200

san antonio8200 IH-10 WestSuite 800San Antonio, Texas 78230PHONE: 210.341.1344

san Diego5935 Cornerstone Court WestSuite 200San Diego, California 92121PHONE: 858.452.8668

san FranciscoFour Embarcadero CenterSuite 1400San Francisco, California 94111PHONE: 415.489.1821

seattle1420 Fifth AvenueSuite 2204Seattle, Washington 98101PHONE: 206.737.4300

silicon valley2025 Gateway PlaceSuite 328San Jose, California 95110PHONE: 408.843.4100

st. louis1001 Highlands Plaza Drive WestSuite 150St. Louis, Missouri 63110PHONE: 314.621.1414

walnut creek500 Ygnacio Valley RoadSuite 100Walnut Creek, California 94596PHONE: 925.357.2000

washington, D.c.1700 K Street, NWSuite 660Washington, DC 20006PHONE: 202.775.7000

TranswesTern HoUsTon1900 WEST LOOP SOUTH, SUITE 1300HOUSTON, TX 77027PHONE: 713.270.7700 | FAX: 713.270.6285WWW.TRANSWESTERN.NET/HOUSTON

DelTa associaTes500 MONTGOMERY ST, SUITE 600 ALEXANDRIA, VA 22314PHONE: 703.836.5700 | FAX: 703.836.5765 WWW.DELTAASSOCIATES.COM

tapping an expanding market - delta associateschicago title insurance company — commercial chicago...

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