2016 Market Trends Report - Harris County Appraisal District

Harris County Appraisal District

2016 Market Trends Report

Harris County Appraisal District 2016 Market Trends Report Residential Property ............................................................................. 1 Inventory Update Sales Volume Update Sales Price Update Townhomes and Condominiums Lease Property Update New Construction The Housing Market and Oil Prices 2016

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Commercial Property ........................................................................... 7 Looking Forward Jobs Oil & Gas Growth Interest Rates Other economic factors Transportation Real Estate Developments in Harris County Projects outside of Harris County that will affect the greater Houston economy Vacant Land Central Business District Uptown District / Galleria Inner Loop The Outer Loop Baytown The Grand Parkway Highway 290 Expansion Cypress Fairbanks ISD/Waller/Katy Tomball ISD LA Porte Sales Office Inventory Analysis Construction Activity and Deliveries Net Absorption and Leasing Activity Vacancy Rental Rates Sales Activity Capitalization Rates Summary Apartments Rental Rates February 10, 2016

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Harris County Appraisal District 2016 Market Trends Report

Market Trends New Construction Summary Retail Net Absorption Market Occupancy Largest Lease Signings Rental Rates Inventory & Construction Greater Houston Retail Market Areas Sales Activity/Capitalization Rates Detail by Property Type Summary Medical The Texas Medical Center Demographics: Driving Demand Medical Office Buildings Hospitals Nursing Homes and Retirement Homes Summary Hotels and Motels Texas Lodging Houston Lodging Developments Summary Warehouses New Construction Leasing Activity and Rents Vacancy/Absorption Sales and Capitalization Rates Summary

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Industrial Property ............................................................................. 71 Refineries Chemicals Utilities Electric Natural Gas Telecommunications Manufacturing Commercial Personal Property

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Harris County Appraisal District 2016 Market Trends Report Residential Property Houston’s economy and residential market have slowed from the hot markets of 2014. This is due in no small part to the fact that for the fifth time in the last four decades the Houston metropolitan area is facing uncertainty due to the collapse of oil prices. By some metrics the current downturn is worse than previous downturns. The fall in the price of a barrel of WTI from $105.79 to $28, a 74% tumble, is the largest percent decrease ever. Additionally, the reduction in rig count to 1,187 rigs, a 61.5% decrease, is the second largest reduction ever. By other metrics this downturn has been less severe than others. With the previous four downturns, Houston experienced total job losses ranging from a relatively small 18,400 lost in the early 1990s to 221,000 lost jobs in the 1980s (Figure 1). By comparison, although Houston lost an estimated 10,200 energy-related jobs, overall Houston had a net gain of 23,200 jobs in 2015. Furthermore the Texas Workforce Commission is forecasting that Houston will add almost 22,000 jobs in 2016 (Figure 2). These statistics support the notion that although the oil industry is still important to the overall economy of Houston, it is no longer the only game in town.

Figure 1 U.S. Energy Information Administration

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Figure 2 Texas Workforce Commission Houston Job Growth1

Inventory Update According to the Houston Association of Realtors (HAR), the inventory of available homes which hit historic lows at 2.5 months in December 2014 is at 3.2 months as of December 2015. The 3.2 months is still considerably below the national average inventory which stands at 5.1 months of supply as of December 2015. Typically, 6 months of inventory is considered equilibrium. Inventory levels below 6 months indicate a seller’s market. The number of days it took a home to sell (a.k.a. Days on Market) increased slightly from 56 days in December 2014 to 57 days in December 2015. Until the supply of homes moves closer to equilibrium we are likely to continue experiencing a seller’s market and the corresponding increases in sales prices.

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http://www.houston.org/pdf/research/quickview/Economy_at_a_Glance.pdf

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Sales Volume Update According to HAR, sales volume for single family residential properties in 2015 totaled 73,724 units, which is a 2.4 percent decline versus the 75,535 units sold in 2014. There were 6 months in 2015 where sales volume declined versus the same month in 2014. Categories Single-family home sales Total property sales Total dollar volume Single-family average sales price Single-family median sales price

Full-Year 2014 75,535 91,439 $23,553,542,859 $270,182 $199,000

Full-Year 2015 73,724 88,764 $23,559,111,514 $280,290 $212,000

Change -2.4% -2.9% +1.0% +3.7% +6.5%

Courtesy HAR January 13, 20162

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http://www.har.com/blog_49528_the-houston-real-estate-market-ends-2015-with-the-second-highest-salesvolume-of-all-time

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Sales Price Update The chart below shows a five year trend line for both the average home sale price and the median home sale price of single family homes. In a year-over-year comparison the median price for a home in December increased to its highest level ever rising 2.9% to $216,000. In December the average price fell 0.6% to $280,201. The median home sale price has gone from just under $150,000 in 2010 to $216,000 during this period which represents a 44 percent increase. Single Family Average Home Price & Single Family Median Home Price

Courtesy HAR January 13, 2016

Townhomes and Condominiums Sales of townhouses and condominiums fell 2.9% in December versus one year earlier. A total of 536 units sold in December 2015 as compared to 552 properties in December 2014. The average price fell 14.3% to $197,904 and the median price increased to $159,900. Inventory reached a 2.9 months supply, which is an increase from the 2.3 months supply a year earlier.

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Lease Property Update As the supply of properties for sale continues to remain below equilibrium the demand for lease property naturally increases. As a result, single-family home rentals climbed 2.9 percent compared to December 2014, while year-over-year townhouse/condominium rentals decreased 3.6 percent. The average rent for a single-family home was unchanged at $1,710 and the average rent for a townhouse/condominium fell 3.1 percent to $1,459. New Construction The number of new starts climbed 8.8 percent to 17,459 during 2015 from 16,050 in 2014 despite the continued collapse of the price of oil. The new construction value associated with the new starts increased almost 26 percent from $2.99 billion in 2014 to $3.76 billion in 2015. The increase in new starts is due to a number of factors including low interest rates, a shortage of available inventory, population growth, and relative strength in the non-oil patch segments of Houston’s economy.

The Housing Market and Oil Prices 2016 It is clear that the price of oil will stay depressed while the glut of oil inventory works its way out of the global market, but it is unclear how long that will take. Although the price of oil appears to have come off the bottom, there are still too many national and international influences that remain unresolved: 

How much and how soon will Iranian oil hit the market?

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How long will Saudi Arabia and other OPEC countries continue to produce oil at unrestricted levels? Will the demand for the world’s oil-supply continue to grow? If demand for oil continues to grow, how quickly will the excess supply be absorbed by the global economy?

Based on the outlook for oil and Harris County’s link to the oil patch, it is difficult to say what will happen with the housing market in 2016. It is likely that the number of sales will continue to slide as they did in November and December of 2015 and that the inventory of homes will move closer to equilibrium. What is harder to predict is what will happen to prices. The longer oil remains in the $30 range, the greater the likelihood that oil-related companies fail and a domino effect may begin: jobs losses, foreclosures, inventory spikes, and a reduction in construction of both residential and commercial property. Conversely, the price of oil could rise to a $40-45 level in 2016 which could stem the tide of job losses, reduce the fears of recession, and allow Harris County’s economy and housing market to continue with its stability and growth.

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Commercial Property Looking Forward The price of oil has fallen from its June 2014 high of over $107 per barrel (West Texas Intermediate oil) to about $53/barrel at the start of 2015. By late August, it was $38 per barrel. The price recovered moderately to around $48/barrel by November before ending the year at around $37/barrel. This is causing a considerable amount of concern for the health of Houston’s economy and the real estate market especially for those who recall the recessions of the 1980s and 2008-2009. Although these concerns are historically well–founded, there are a number of differences in Houston’s market today which will diminish the likelihood of a severe recession or housing crash. The overall economy of Houston is expected to be generally stable or even see moderate growth well into 2016, as population growth and other segments of the economy are expected to offset the adjustments in the oil industry. The Atlantic magazine stated “2014: The Best Year of Job Creation This Century.” In comparison to the economic boom of that year, the economy since then may just seem like a recession. In reality, 2015 declined in the first quarter to the “economic trough” of the second and third quarter, and recovered moderately in the fourth quarter. Jobs The forecast in the fall of 2014 for job growth in Houston was expected to be between 50,000 to 60,000 for 2015. Although not meeting forecasts, the job market for Houston ended the year on a resilient note. In 2015, the net job creation in Houston was 23,200, of which 8,500 were in December. New jobs in healthcare, hospitality, and leisure somewhat offset the losses in manufacturing and oil & gas extraction. Houston continues to add jobs and unemployment is low. Job growth in Houston for 2014 was close to 4%, while in 2015 it was about 1.2%. At the beginning of 2015, the national unemployment rate was 5.7%. The rate of unemployment in Houston for November 2015 was 4.9%, and 4.6% for December, well below the national average of 5.6%. Texas alone created 166,900 jobs in 2015, or 57% of all the jobs created last year in the nation. “Nine sectors reported growth – construction, retail, administrative support, educational services, health care; arts entertainment and recreation; accommodations and food services, and government, collectively adding 64,000 jobs for the year.” Houston finished the year with 3,015,800 payroll jobs. Forecasts from The Greater Houston Partnership estimate the Houston area will create a net of 21,900 jobs in 2016. During the Great Recession, Houston’s unemployment rate peaked at 8.8%, and during the oil bust of the 1980s, unemployment hit 12.9%. Oil & Gas Texas employed 306,330 in the oil & gas industry at the start of 2015. Since then, upstream (exploration) has laid off 60,000 in Texas, or 20% of its oil & gas workforce. Oil companies are

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adjusting to new oil prices and reorganizing their operations accordingly. Many capital improvement projects may have been put on hold until the market and price stabilizes, after which some of this workforce may be recalled. The energy jobs lost in Houston for 2015 totaled 10,200. The total number of non-farm jobs in the greater Houston area is almost 3 million. According to the February 2016 Greater Houston Partnership Economy at a Glance3, the North American rig count opened 2015 at 1,811 and ended 2015 at 698, down from the September 2014 peak of 1,931 working rigs. In Texas last year, 19,503 oil and gas wells were drilled, 10,000 fewer than in 2014, the peak for the recent boom. When fracking began in 2010, the average well produced 20 barrels of oil per day. By 2015, technology increased efficiency to 700 barrels per day on average. In December 2015, the U.S. government lifted the ban on oil exporting. Texas is the 5th largest producer of crude oil in the world, and accounts for 50% of the production in the U.S. In 2015, Texas produced 1.267 billion barrels of oil in 2015, passing the all-time production high in 1972. In 2010, no oil was being shipped from Corpus Christi to Houston via the Intracoastal Waterway. Today, 700,000 barrels a day are shipped to Houston refineries. Natural gas prices dropped from $3.00 in January 2015 to $1.77 in mid-December. By year end, the price rebounded to $2.34 (values quoted are price per million BTUs). After Southwestern Energy announced they were laying off 1,100 employees, Ed Hirs, energy economist at the University of Houston, said, “There is a lack of pipeline capacity out of the [northeast U.S.] where Southwestern has the bulk of its operations. Southwestern can drill new wells, but they don’t have any place to sell the gas. They don’t have access to get the gas out into the Northeast, or even down to the Gulf Coast where the country is better situated to take the gas and process it.”4 Schlumberger, the world’s largest supplier of technology and project management to the oil and gas industry, announced in August 2015 that they are acquiring Cameron International for $14.8 billion. Haliburton and Baker-Hughes, two of the largest oil logistics and supply companies, are in the process of merger, but running into government approval issues. 

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One casualty of the oil price decline is increased space for subletting, “which might be as much as 8 million square feet.” in the greater Houston area. However, this is office space that is leased, and provides income to the building owner. In a financial analysis, this office space is leased/occupied and not technically vacant. The leasing tenants are looking for sublease tenants, to defray the cost of holding the office space. It is estimated another 2 million sf of sublease office space may come on the market for 2016. This will affect office listings, vacancy rates and concessions. BP (British Petroleum) had losses of $2.2 billion for the 4th quarter of 2015, with the total annual 2015 loss at $5.2 billion. “The negative figure for the final months of the year were caused mainly by writedowns on the value of its oil fields and restructuring costs

http://www.houston.org/pdf/research/quickview/Economy_at_a_Glance.pdf http://www.houstonpublicmedia.org/articles/news/2016/01/21/134992/southwestern-energy-to-slash-1100-jobs/

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that totaled $2.6 billion. Operating profits were $2.2 billion in 2014, and $196 million in 2015, “despite record profits in its refinery and marketing businesses.” Similarly, Royal Dutch Shell earned $19 billion in 2014, but in 2015 earnings fell to $3.84 billion. This included “earnings adjusted for inventory changes [for] $1.8 billion.” Shell Oil’s acquisition of the British oil and gas producer BG Group for $70 billion is expected to close by March 2016. The acquisition by Shell will “allow it to realize $3.5 billion in savings, shed $30 billion in uncompetitive assets, and expand its operations in the fatst-growing liquefied natural gas industry.” BG Group invested “about a third of its overall $200 billion in invested capital, including in a process called gas-to-liquids that converts natural gas into fuels like diesel and jet fuel. Shell announced they were going to cut 10,000 jobs worldwide, but this was mostly due to the elimination of competing jobs within the two companies (redundancy). Recently, the hydrocarbon industry in America has found a way to produce ethylene from natural gas, at almost half the cost of doing so from crude oil.

Growth Population Estimates/Projections for Harris County, Houston MSA, & Texas Population Year 1992 2001 2006 2011 2014 2015 2016 2017 2020

Harris County 2,944,348 3,461,662 3,830,130 4,176,764 4,391,445 4,471,427 4,551,437 4,633,511 4,885,616

Houston MSA 3,815,914 4,828,082 5,485,718 6,057,425 6,473,316 6,622,047 6,772,852 6,928,233 7,413,214

Texas 17,655,650 21,325,018 23,507,783 25,674,681 27,161,942 27,695,284 28,240,245 28,797,290 30,541,978

Source: Texas Department of State Health Services5

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https://www.dshs.state.tx.us/chs/popdat/

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From 2010 to 2015, on a net basis, an average of 1,500 people moved to Texas every day. While Texas quickly recovered from the Great Recession, the rest of the country did not do so until 2014. Strong job and economic growth and affordable housing attracted residents, and continues to do so.

Greater Houston Population Growth

Interest Rates Inflation for 2016 was a negligible 0.1%. Three of the months in 2015 had deflation (negative inflation), probably due to falling oil prices and associated purchase items. The Federal Reserve tends to raise interest rates to cool off a hyperactive economy, and to fight inflation. With little or no inflation, there is no need to raise interest rates to stabilize economic growth, and rates should stay extremely low through 2016. Only once (2008 at 3.8%) since 1992 has inflation exceeded 3.4%. Interest rates remain low which is good for lending-based economic activity, especially the housing market. After an extended period of Federal lending at 0.25% interest, in December 2015 the target Fed Funds rate was increased to 0.50%. The 10 year U.S. Treasury bill is normally considered as the “safe rate” portion of the capitalization rate for real estate investments (i.e., in “built up” capitalization rates methods). The year 2015 started at a rate of 2.12%, and for 2016 it was 2.24%. However, by early February 2016, the 10 year T-bill rate was 1.75%. This is significantly lower than the beginning of 2011 when the rate was 3.36%, or 2000 at 6.58%. Lower interest rates increase property values, and compress capitalization/investment rates.

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Federal Funds Rate

Other economic factors  

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Lower oil and natural gas prices have translated into more disposable income for residents of Harris County and the greater Houston area. This has fueled resurgence in the retail, service and hospitality enterprises in the area. The Panama Canal expansion project, doubling capacity with a wider and deeper channel than the original canal, is slated to open in early 2016. This will significantly increase shipping volume of the Port of Houston, as well as demand for docks and distribution centers in Houston. In 2015, the volume of shipping from the Port of Houston increased 3.2% from the previous year. Port of Houston Authority announced in October 2015 the completion of the deepening and widening of Barbours Cut channel, making Barbours Cut Container Terminal the Port Authority’s first 45-foot deep draft container facility. The project cost $68.9 million. This will accommodate the large ships and supertankers that will travel through the soon to be opened Panama Canal expansion. According to an Associated General Contractors of America survey (taken in November 2015), 68% of “Texas building contractors plan to hire more workers in 2016. … Public sector projects tied to higher education, K-12 education, and healthcare, will account for much of the new work, both statewide and in Houston. The new projects are expected to help offset the drop in construction tied to oil and natural gas. … [M]ost Texas

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contractors say they’re still having trouble finding and keeping skilled workers. That’s even after a year of raising pay and increasing benefits.” According to Comerica Bank, “Oil exploration and production accounts for about 10 percent of the state’s economy.” The bank’s chief economist, Robert Dye, said, “What happens to the other 90 percent of the state economy? Fortunately, that’s not withering up and blowing away. Texas does have a a diverse economy. And other parts of the energy sector, the downstream part [is] doing very well. … Houston [is] continuing to add infrastructure and capacity in terms of refineries, petrochemicals, and things like that. So that’s been a nice balance to this.”6 In October 2015, “Southwest Airlines launched international air service from Hobby Airport” to Mexico, Belize, Costa Rica, and the Caribbean. Hobby is “expected to eventually handle a million or more international passengers each year” according to the Greater Houston Partnership’s 2015 Houston Economic Highlights.7 BBA Aviation (parent of Signature Flight Support) of Britain is acquiring Landmark Aviation, which Houston’s operation supplies most of the jet fuel to George Bush International Airport, for $2.065 billion. Houston First booked more than 700,000 hotel room nights tied to meetings and conventions last year, a record, up 29% from the year before. This was attributed in part to the opening of the 1,000-room Marriott Marquis and the $175 million renovation of the George R Brown Convention Center.8 The Lyndon B. Johnson Space Center in southeast Harris County is the headquarters for NASA. In 2011, cuts were made to the nation’s space program, resulting in the elimination of 3,000 jobs at the Space Center from a workforce of 14,000. This greatly affected the real estate market in the Clear Lake area of Harris County. At that time, the Space Shuttle program was cancelled, and astronauts are now flown to the International Space Station by the Russians for $60 million per astronaut. President Obama proposed “an additional $18.5 billion for NASA” for the 2016 budget, with the Orion project recommissioned for deep space travel to begin in 2017. “NASA is developing the capabilities needed to send humans to an asteroid by 2025 and Mars in the 2030s.” This will revitalize the southeast area of Harris County. In addition, it was announced in 2015 that Ellington Field Airport near the Johnson Space Center will be upgraded to accommodate a private “space-port.”

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http://www.houstonpublicmedia.org/articles/news/2016/01/05/132975/comerica-bank-falling-oil-prices-heraldslower-texas-growth-in-2016/ 7 https://www.houston.org/assets/pdf/economy/Economic%20Highlights_web.pdf 8 http://www.houstonfirst.com/Newsroom/News/ArtMID/1702/ArticleID/1036/2015-a-Record-Year-for-Houston-inConvention-Sales-Web-and-Tourism

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Transportation 

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U.S. Highway 59 is being upgraded to become Interstate 69, and is often referred to as the NAFTA Superhighway, as the major trucking corridor from Mexico to Montreal, Canada. Most of Interstate 69 from the Kentucky-Tennessee border through Indianapolis to Port Huron, Michigan (north of Detroit, Canadian border) is complete and in service. Other segments are completed around Corpus Christi in Texas and northwest Mississippi. In early February 2016, the Grand Parkway extension from Highway 290 to I-45 south of The Woodlands was opened. The next segment, continuing to I-69 near Kingwood, is schedule to open by late March 2016. This will divert traffic and trucking around the city. METRORail continues to further expansion of their light rail public transport system in greater Houston. The next two projects are the lines to southwest Houston (U.S. 90/Gessner) and the Green Line currently under construction east of downtown (Navigation/Canal). For the month of December 2015 (one month only), 1.4 million passengers used Houston’s light rail system, up 36% from December 2014. The Federal Railroad Administration approved the rail corridor planned for a high speed train to run from Houston to Dallas. Construction is expected to begin in 2017, with the first 240-mile 90-minute rides planned for 2021.

Real Estate Developments in Harris County 

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Peck Station, a proposed $50 million upscale retail and multi-family development in northwest Harris County, is on hold indefinitely until the oil market stabilizes. Keith Jennings, president of a manufacturing company in the area, said, “After you have a boom of three to six years, sooner or later everybody starts overproducing and overdoing everything. Then the demand starts to lessen, and you end up with too much [supply].”9 Walmart is breaking ground for a 186,000 sf store at Kuykendahl Road and Augusta Pines, across from Timber Creek Elementary School, which is scheduled to open in late fall 2016. The 63-acre Grand Parkway Town Center will be located on Highway 249 between Grand Parkway and Bourdreaux Road, with “about 600,000 square feet of retail and restaurant space across about 15 pad sites.”10 A 136,000 sf Sam’s Club is part of this project, and set to open by early 2017. Kroger and Chick-fil-A are negotiating to become part of the site. Other new retail developments are proposed along the newly opened Grand Parkway segment. The Texas Medical Center, the largest medical center in the world, sees 4.7 million patients annually. CHI St. Luke’s will build a new hospital by the DeBakey VA Medical

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http://communityimpact.com/houston/tomball-magnolia/commerce/2016/01/13/tomball-magnolia-experienceeffects-of-oil-decline/ 10 http://communityimpact.com/houston/development-construction/2016/02/10/grand-parkway-town-center-2/

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Center in the east Med Center area. Other construction and expansions are occurring in the immediate area. University of Texas is actively working to obtain 332 acres for an auxiliary campus and “Engineering, Research and Education Institute.” Purchased already is a 100 acre parcel “north of Willowbend Drive and west of Buffalo Speedway, south of NRG Park and the Texas Medical Center.”11 “In April 2014, Chevron Phillips Chemical Co. broke ground on a $6 billion expansion including an ethane cracker at its Baytown facility.” Construction is expected to be complete in 2016.

Projects outside of Harris County that will affect the greater Houston economy 

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Johnson Development Corp. “has acquired 590 acres southwest of Houston for a master planned community with 2,500 homes.” It is located near the north side of U.S. Highway 59, just west of Sugar Land’s Sweetgrass subdivision. Development is scheduled for mid2016. The 192 acre Texas Instruments site at West Airport Blvd. and U.S. 59 was sold. Some of the old office and lab buildings will be retrofitted. It will be developed with a 350,000 sf Class A shopping center, Class A & B restaurants, two hotels, a pedestrian park, and a Class A office building. Construction is expected to be complete in time for Super Bowl 51 in Houston in February 2017. Schlumberger is moving their corporate headquarters from downtown Houston to its Sugar Land campus. The cost of the move and capital improvements to be built in southwest great Houston is estimated at $200 million. Grand Central Park “is a 2,046-acre [3.2 sq.mi.] project under construction in Conroe along Loop 336 and I-45. It will feature 500 homes, 112 acres of retail space, an urban living center, a town center with shopping, dining and entertainment options and a business center with office space.” Initial phases of this master-planned community are projected to open in late 2016. Dow Chemical started construction on a new ethylene production facility in June 2014 in Freeport (Brazoria County, south of Houston), and it is slated for production in the first half of 2017. Cost of the project was $4 billion. ExxonMobil started production of a similar ethylene plant in 2014, creating 10,000 construction, 4,000 related, and 350 permanent jobs. Cost of the project was estimated at $6 billion. “It is expected to increase regional economic activity by roughly $870 million per year and generate more than $90 million per year in additional tax revenues for local communities.”

In summary, the decline in oil prices have affected the oil & gas industry which has trickled down to associated businesses and employment. Growth in other areas offset this factor, especially in health, institutional, and service & hospitality segments of the market, through 11

http://www.bizjournals.com/houston/morning_call/2016/01/university-of-texas-takes-first-major-step-in.html

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Houston’s diverse economy. Retail saw growth with more disposable income for consumers due to lower gasoline and energy costs. In general, 2015 saw an “economic trough” in the second and third quarters of 2015, with a moderate recovery in the fourth quarter. As a result, the economy in Houston is expected to fluctuate somewhat throughout the year, but over the course of 2016, marginal to moderate economic growth is expected, as the oil industry and greater Houston area adjust to more stabilized oil prices. With the recessions in China, Europe, Russia, and Brazil and worldwide instability, foreign markets have been looking for safe havens to store their capital. Most of these markets were unprepared for the decrease in oil and gas prices experienced since June 2014. In uncertain economic times, capital is attracted to quality. Since bonds have marginal yields, gold may have topped out, and stock markets are too volatile, foreign markets have created a high demand for investment-grade real estate. According to IRR, in 2015 in the northeast region United States real estate market, Chinese real estate buyers invested $8 trillion, Canadian $3.2 trillion, Middle Eastern and European $1.6 trillion each, and Japanese and Israeli buyers $0.5 trillion each. From Canada, most of it was pension fund investment, and mostly cash, even though the Canadian dollar dropped to about 1 per 70 cents U.S. The inflow of foreign capital into the U.S. market has increased the demand for the U.S. dollar, making it strong in comparison to foreign currency. Foreign buyers are in competition with American pension funds, REITs, insurance companies, and large companies that “are so flush with cash that the market is chasing deals.” Houston is not an exception to this phenomenon. Houston offers a more affordable option with long term yield on than Los Angeles, New York, or Chicago. Foreign capital accounts for 15% to 20% of the real estate investment market in the greater Houston area. Low interest rates further compress rates due to demand for quality properties. Most investment grade properties, like Class A & B apartment blocks and quality retail properties, were purchased from 2011 to 2014 when prices were recovering from a major recession and capitalization/investment rates were higher, to the point where not much is for sale now. As a result, investors may be willing to compromise and buy property at lower capitalization/investment rates in order to acquire what is available. Vacant Land Central Business District The Central Business District is seeing a drop-off in activity in some specific property types. The office market is not showing the same demand for space as it has in the recent past. The confidence in the market has dwindled with the downturn in the energy market. There are currently two office buildings nearing completion. 609 Main, a 48-story Hines project, is a Class A high-rise featuring one million-plus square feet of leasable office space and 1111 Travis, a 28-story high rise with 475,000 square feet. There are still four other office projects planned for downtown Houston that are indefinitely on hold. The troubles and woes in the energy sector are showing a direct impact on the construction of those planned offices. One of the projects affected was to add an office tower to the downtown campus of oil giant, Chevron.

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The focus downtown is now geared towards residential. Due to a downtown living initiative, a number of abatements were offered to developers to develop apartments and condominiums. Since the initiative began, there have been at least 18 projects proposed. Currently eight of the projects are under construction and half of those are nearing completion. A number of those projects are located near the Toyota Center and St Joseph’s hospital. This area has the most land available for redevelopment. On average, investors and developers are paying $120 per square foot for land to develop high density apartment complexes. The other prominent property type being developed in the central business district is hotels. Four of six proposed hotels are under construction and near completion. The hotels are conveniently located near the convention center and the Shopping District. The hotels are being built to help lure more conventions, major sporting events, and other events to the downtown Houston area. Houston hosts the Offshore Technology Conference every year and will host Super Bowl LI (51) in 2017. The Marriott Marquis, near completion, will round out the convention center properties that overlook the Discovery Green park. Marquis will contribute 1000 hotel rooms to downtown. Construction has started on Hotel Alessandra. The project formerly known as the Houston Pavilions, now Greenstreet, will be home to Alessandra. Alessandra will add 225 luxury hotel rooms to the downtown hotel inventory. The sales activity in the CBD is less than in previous years. There were no recorded vacant land sales in the Central Business District for 2015. The sales in the CBD are seldom disclosed.Still striving to be a global city, the Central Business District is still an attractive location for outside investors. The 16.5 acre Downtown Post office site recently sold for $60 per square foot. Speculation on what will replace the facility is a mixed-use development that leverages the Bayou, the Theatre District, and the significant scale of the property.

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The map below shows the activity in the central business district. Downtown Houston Development map

Uptown District / Galleria The Uptown District / Galleria area is the largest business district outside of the CBD. Similarly to the CBD, there is a lack of quality land for development, much of the new development is taking place on land that once held buildings that either have reached the end of their economic life or are no longer the highest and best use of the property, and the area has high levels of occupancy in most of the office space located there. Occupancy remains high even with the addition of the Compass BBVA tower, the first office tower constructed in the Galleria area in almost 30 years, and a Skanska-built tower, both located on Post Oak Boulevard. Many projects are now under construction, nearing completion, or are up and running. A thirtystory tower is well into construction at Four Oaks Place, located on a site that formerly held a health club at 1550 Post Oak. The site is now meeting its highest best use, adding class A office space to the second most attractive business district in Harris County. 1885 St James Place is being improved with a 15-story, 165,000 square foot office tower. The tower replaces the iconic Courtyard on Saint James, a popular venue for weddings and business meetings.

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The headquarters for Amegy Bank is under construction at 1717 West Loop South. The former site of Micro Center will be home to a 350,000 square foot office tower. The construction is expected to be completed in the fourth quarter of 2016. The Galleria Uptown area is not exempt from the issues the Central Business District is having with the office market. Phase two of BBVA Compass Plaza is currently on hold. Located at 2100 Post Oak, it is proposed to include a 29-story, 343,000 square foot high-end office and retail space. The current owners of the property, Masaveu Post Oak Houston Delaware, don’t feel the current economic climate is right for new construction.12 Unlike the office market, the other property types are thriving in the Galleria Uptown District. The retail market is constantly growing. The Galleria’s major redevelopment of the third section is nearing completion. A number of new high-end shops have been added at River Oaks District located at Westcreek and Westheimer. This mixed-use project is home to retail, office, and apartments, as well as iPic Theaters, Houston’s first luxury movie experience. The apartment market is constantly expanding with new construction taking place along the 610 Loop and on Westcreek Lane. 2031 Westcreek is home to SkyHouse River Oaks, the second of three SkyHouse apartments in Houston. Two high-rise condominiums are planned on either side of SkyHouse River Oaks. Two hotels across the street from the Galleria are also nearing completion. Both of the hotels are Hyatt-brand hotels. The corner of Sage and W. Alabama will be home to the Hyatt Regency with 325 rooms. Directly behind this site, Hyatt Place is almost complete. Hyatt Place will be very similar in size but will not have the same amenities and will offer less expensive rooms than the Regency. Developer and entrepreneur Tilman Fertitta is also capitalizing on the need for hotels in the Galleria Uptown area. Located at the corner of San Felipe and the West Loop South, construction has started on The Post Oak.13 The project will be a hotel, conference center, and parking garage sitting on nine acres already home to Post Oak Motor Cars Rolls-Royce and Bentley dealership and to Landry’s corporate headquarters. Inner Loop The inner loop of Houston is constantly changing with redevelopment concentrated in the Houston Heights, the Washington Avenue area, Upper Kirby District, Montrose, Weslayan and Rice Village. The Houston Heights is witnessing a constant change in the housing market. New dwellings are under construction throughout the Houston Heights and Shady Acres neighborhoods. This has 12

http://www.bizjournals.com/houston/blog/breaking-ground/2015/11/after-galleria-area-tower-sells-phase-two-onhold.html 13 http://www.houstonchronicle.com/business/real-estate/article/Fertitta-s-new-tower-to-offer-a-wealth-of-luxury6218282.php

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been taking place for quite some time and there is no end in sight for this activity. There is still a strong mix of commercial which supports the area very well. The northwestern quadrant inside Loop 610 may be “the next hot spot” in the inner loop according to Andrew Hadley with Chodrow Realty Advisors.14 Houston-based Hines is developing 46 acres of former industrial land into Somerset Green, a European-style luxury neighborhood built around canals and a lake. Hines paid $40 million for the land and an extra $3 million to provide access from Old Katy Road. The property is located behind Star Motors. Many other apartment complexes are under construction in the area both inside the loop and along North Post Oak Road. The Washington Avenue area is still budding with restaurants and nightlife. The area surrounding is still seeing redevelopment with townhomes and a retail mix to support the area. The newest development for this area will be Studemont Junction, located at the site of the former Grocers Supply facility, which will be demolished and replaced with high-end apartments and retail. The project has already signed its first major tenant, Memorial Hermann. The hospital will set up a convenience care center to address the need for medical in this area. The Montrose area has seen a number of high-priced land sales over the past few years and that is not changing. Land is selling on average for $85 per square foot. Most sales are for redevelopment of properties with new housing or apartments. The area will also undergo a facelift with a recently approved beautification project. The project will add signage to the major thoroughfares as well as landscaping on medians. The bridges that stretch across highway 59 will get new lighting. This effort is to take place prior to the Super Bowl in 2017. The Upper Kirby/ Greenway area is seeing a great deal of change. A number of new office buildings have been added and more may be on the way. According to the Chronicle, “Exxon is selling its former research complex in the Greenway Plaza area, a rare 17-acre site in the urban core. The property, which includes a 384,000 square foot office building, a 98,000 square foot training center, 13 auxiliary buildings, and a garage, could fetch $150 million. … The site at 3120 Buffalo Speedway between Richmond and West Alabama could be redeveloped to accommodate up to 3 million square feet of office, residential, retail or hotel space.”15 Also per the Chronicle, “Three 1970s office and retail buildings around the northwest intersection of Kirby Drive and the Southwest Freeway are being demolished to make way for perhaps another major redevelopment project in Upper Kirby. The demolition of the buildings -3910 Kirby, 3930 Kirby and 2600 Southwest Freeway -- is expected to be complete around April 2016 … The structure at 3910 Kirby once housed the popular Miyako Japanese restaurant and Madras Pavilion, an Indian restaurant.”16

14

http://www.houstonchronicle.com/business/real-estate/article/Northwestern-quadrant-of-Loop-610-the-next-hot6582711.php 15 http://www.chron.com/business/real-estate/article/Exxon-Mobil-selling-urban-office-site-6788296.php 16 http://www.chron.com/business/real-estate/article/Kirby-buildings-meet-wrecking-mall-6725660.php

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Midtown

Midtown has been a successful model of city planning. The area has a healthy mixture of apartments and retail, with many apartments having retail on the ground floor. An apartment complex will be built with a Whole Foods Store as the baseplate for the apartment complex. The project is located on the 3100 block of Smith Street. This is the site of the now demolished Social Security Administration building. The apartments will have more than 200 high-end luxury units. Adding to the mix in Midtown is something rare to this neighborhood. An office tower is proposed for 3003 Louisiana Street. The plans are for a 16-story office tower. This is one of the first office towers to be proposed for Midtown in several years. Near Downtown

Just north of the CBD, development has started on a forty-five acre tract known as Hardy Yard. This property was a rail yard at one time. The property’s development will start with a 350-unit apartment complex. The complex will have 179 affordable units and 171 market-rate one and two-bedroom apartments. The plans for the site will present “a diverse mix of Class A office space, high-end retail, and upper scale residential developments. The addition of an open green landscape with a pedestrian district meandering through the mixed-use development provides the opportunity for Hardy Yard to be a unique urban destination for residents, business entities, and visitors alike.”17 The area east of downtown (EaDo) is going to see additional redevelopment with a project known as East Village, a 60,000 sf mixed-use project that, according to its website, “is the first of its kind in EaDo and includes concepts from some of Houston and Dallas’ most talented and respected operators.”18 It is “a 2-block mixed-use complex planned along St. Emanuel and Hutchins St. between Polk and Lamar in East Downtown — a few blocks south of the Dynamo’s BBVA Compass Stadium.”19 The property will be home to a comedy club, office space, retail space, and a vodka distillery. Also slated for construction in EaDo is Ivy Lofts. According to the Chronicle, “the 24-story, 500unit project will be on a 1.4-acre block on the southwest corner of Leeland and Live Oak” Also per the Chronicle, “the units in the proposed project would run between 300 and 750-square feet and start in the $100,000's. The first floor would be commercial retail.” The Chronicle article also says “The smaller units are part of trend in cities like Tokyo, New York and San Francisco.”20

17

http://s.lnimg.com/attachments/311CD638-4CE6-4251-8CB5-F7F58F37D288.pdf http://www.ancorian.com/project/east-village/ 19 http://swamplot.com/houstons-own-east-village-planned-next-to-8th-wonder-brewery-in-east-downtown/2016-0108/ 20 http://www.chron.com/about/article/East-Downtown-condo-project-would-offer-6601362.php 18

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The Outer Loop Within the Sam Houston Tollway a lot of activity is taking place. The activity, however, is shifting from the west to the south and to the east. The west is still viable and active in development but business is picking up in other areas based on industries besides oil & gas exploration. The west side is still seeing some office buildings under construction but they are also seeing apartments under construction as well. CityCentre remains a focal point in the Memorial City area. The goal is to have a truly livable area with all of the amenities possible. Trammel Crow is developing the Alexan CityCentre at 905 Town & Country Boulevard. The complex will be 340 units and is scheduled to open in 2017. Across from this site, the office park known as Town & Country Office Park was recently purchased with the intent to clear the site and redevelop the parcel as an expansion of CityCentre. The expansion will include more office space with the retail mix like the other buildings at CityCentre. The 6.39 acre tract sold for $151.89 per square foot. This is one of the highest sales outside of the Central Business District and Galleria/Uptown Area. Also in the area, MetroNational is building more office towers. The latest office building is under construction on the northwest corner of Interstate 10 and Gessner Road. The 240,000 office will sit on 18 acres of land that was previously a large retail strip center. On the south side of Houston, The University of Texas is looking to expand in a major way. The university “is acquiring 332 acres about one mile south of Loop 610 for a [new] campus with dozens of new buildings.”21 UT will pay $450 million over the next 30 years for the property. “The site is bisected by Buffalo Speedway and is south of West Bellfort Avenue, within walking distance of the Astrodome and only 3.5 miles from the Texas Medical Center.”21

21

http://realtynewsreport.com/2015/11/10/university-of-texas-just-lit-the-fuse-for-growth-explosion-one-mile-southof-loop-610-in-south-houston/

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Rendering of potential University of Texas campus

Baytown The east side is where business is picking up. The decline of oil & gas has created a shift toward the petrochemical and plastics plants on the east. Chevron Phillips Chemical is currently expanding its plant in Baytown. The larger plants will create more jobs and need for housing, retail and other services to support the area. An example of development is Kilgore Crossings. This is a two hundred acre master-planned project. The project will include a multi-family complex with 240 units, and 124 acres will be reserved for around 500 single-family homes. Commercial development will include retail, hotels, and offices. The property will be located at State Highway 146 and Kilgore Parkway.22

22

http://www.houstonchronicle.com/business/real-estate/article/Mixed-use-development-finds-Baytown-a-market6627894.php

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Kilgore Crossing

Photo: Hunington Properties

The Grand Parkway From http://communityimpact.com/houston/news/2016/01/20/regional-transportation-updates-cyf-2/: Motorists in north Houston who were expecting to use the city’s third outer loop by early 2016 on their daily commutes will have to wait a few more months. Contractor Zachry-Odebrecht Parkway Builders has announced segments F-1, F-2 and G of the Grand Parkway will open sometime in the first quarter of 2016. … Originally planned for completion by the end of 2015, segments F-1 and F-2 of the Grand Parkway will consist of tolled roadway from Hwy. 290 to I-45, while Segment G will connect I-45 and Hwy. 59 when completed. Construction of the $1 billion tollway has been funded and overseen by the Texas Department of Transportation. The Grand Parkway segments will provide additional roadway capacity to help alleviate the increased traffic demand, said officials with Zachry-Odebrecht. However, construction of the project has been hampered due to recent weather conditions. …

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Although the project has been delayed from its original expected completion date, Zachry-Odebrecht achieved a significant milestone in December by setting all of the beams and bridge decks for the project. A total of 121 bridge decks and 3,802 concrete beams were set for the toll road, the company said in a news release. A project conceived more than 50 years ago, the more than 200-mile tollway will become Houston’s third outer loop when completed. Segment E of the Grand Parkway, from I-10 to Hwy. 290, was completed in December 2013.

Source: Grand Parkway Association/Community Impact Newspaper

Still very few recent land sales have been reported along the Grand Parkway. As stated before the investors and developers are waiting for a fully functional Parkway before development. Highway 290 Expansion The U.S. 290 freeway expansion has been a thorn in the side for many people, TxDOT and commuters alike. It is now estimated completion will be late 2017. The first company that had the contract to build the 4 mile ‘Project H’ segment from Pinemont to Little York, Grupo Tradeco of Mexico, walked away from the project and that portion of the expansion project is now spearheaded by W.W. Webber LLC, from The Woodlands. Land on both sides of the freeway is still being taken for the road expansion.

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Cypress Fairbanks ISD/Waller/Katy Katy is making a big splash in the news with the construction of Typhoon Texas. “This $45 million waterpark is on scheduled to open in time for Houston's blistering summer heat. Typhoon Texas Waterpark, located at 555 Katy Fort Bend Road adjacent to the Katy Mills Mall, will officially open May 28 through Labor Day.”23

Katy will also see some new class A apartments. Oden Hughes acquired 18.7 acres of vacant land near the intersection of Kingsland Blvd and Katy Gap Road, near the Katy Mills Mall and the Grand Parkway.24 The garden-style complex will have 389 units. In Waller, Daikin Industries Ltd. will build a new $417 million campus. The Japan-based manufacturer of heating, cooling and refrigerant products acquired Houston-based Goodman Global Group Inc., a manufacturer of HVAC products for residential and light commercial use, in 2012. The 3 million- to 4 million-square-foot campus will be on a 90-acre parcel near U.S. Highway 290, three miles west of Texas State Highway 99. When completed, the 4-million plus square foot tilt-up concrete will be the largest in the world.25

23

http://www.bizjournals.com/houston/morning_call/2016/02/massive-katy-water-park-announces-openingdate.html 24 http://www.bizjournals.com/houston/morning_call/2015/11/new-class-a-apartments-headed-to-katy.html 25 http://www.bizjournals.com/houston/news/2015/01/07/major-hvac-manufacturer-to-build-417m-houston.html

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In Cy- Fair, FedEx Corp will open a massive new ground facility in Cypress next summer. The 800,000-square-foot project will house the Memphis-based company's largest FedEx Ground facility in Texas and will employ 400 people, according to a statement from the company. The Cypress campus will be located off the Grand Parkway expansion. The facility will contribute to northwest Houston's growing industrial presence, which is not softening quite like other markets amid the oil slump.26 Tomball ISD In the recent past, Tomball has seen growth along State Highway 249 with projects like Vintage Park and the Noble Energy office tower. However, plans for more development have shifted into a holding pattern. Baker Hughes announced it was laying off about 7,000 employees globally and because Baker Hughes is the major player in Tomball, combined with the future Halliburton merger, the area is showing caution in future developments. For example, developers for the Peck Station mixed-use community, planned for the intersection of Hufsmith-Kohrville Road and FM 2920 in Tomball, may be looking to make changes to some sections of the 34 acre tract amid concerns about the ongoing Baker Hughes/Halliburton merger. The original plan was to turn the site into a mixed-use development consisting of a name-brand hotel, retail and restaurants, green space and walking trails, office space, and a multi-family complex.

26

http://www.bizjournals.com/houston/morning_call/2016/01/fedex-plans-massive-facility-in-houston.html

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LA Porte From the Houston Chronicle: A proposed new Town Center in La Porte would come with an official licensing agreement from country music legend Mickey Gilley to open a new Gilley'sbranded restaurant, bar, and music venue.27 It’s not quite the expansive honky-tonk that Gilley ran with Sherwood Cryer in the ‘70s and ‘80s in Pasadena but it would at least incorporate the singer-songwriter’s name and include some of the [trappings] that fans of the Gilley’s brand know and love. The site of this new venture is located off Highway 146 (the future frontage as part of the Grand Parkway) on a 20-acre tract just north of Wharton Weems Boulevard. The location will provide high visibility and easy access for enhanced traffic circulation. The proposed pedestrian friendly town center is also located adjacent to the Bay Forest Golf Club and would be strategically convenient to downtown La Porte, Sylvan Beach, and the Houston Yacht Club. The project is estimated to cost $55 million to develop.28 The development includes the following concepts.         

50,000 square foot entertainment complex 20,000 square foot conference, theatre, and museum 8 restaurants 50,000 square foot retail space 5,000 square foot office space 14 brownstone town homes 7 live I work spaces 114 room hotel 2 -acre park and water features

27

http://www.chron.com/neighborhood/bayarea/business/article/New-Gilley-s-dance-hall-included-in-proposed-La6668057.php 28 http://bayareaobserver.com/developer-seeks-approval-for-la-porte-town-center-entertainment-complex-p21591.htm

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Sales The table below shows summarized land sales data with per square foot price ranges and sales volume per submarket and school district. This table gives a clearer picture of hot spots for activity. The sales dates range from January 1, 2015 to December 31,2015. Northwest Tot. Sales in District Market Non Market Foreclosure

Aldine Klein Spring Tomball Waller

155

Total Sales

Auction $ per SF Range

5

30 16 11 6 2

117 32 14 14 3

8 1 0 0 0

0 2 0 0 0

256

65

180

9

2

51 25 20

$0.26 $0.29 $0.52 $0.92 $0.49

-

$6.50

- $13.37 - $10.19 -

$4.57

-

$2.34

Southwest Tot. Sales in District Market Non Market Foreclosure

Alief Katy Spring Branch

32 13

2 10 3

Total Sales

50

15

5


3 21 10

0 1 0

0 0 0

34

1

0

$0.49 - $2.34 $0.47 - $23.70 $14.10 - $24.28

Northeast Tot. Sales in District Market Non Market Foreclosure

Crosby Huffman Humble Sheldon

14

Total Sales


13

6 0 15 3

7 7 20 9

1 0 0 0

0 0 4 1

73

24

43

1

5

7 39

$0.06 $0.00 $0.23 $0.33

-

$3.96

-

$0.00

- $12.50 -

$2.06

Southeast Tot. Sales in District Market Non Market Foreclosure

Channelview Clear Creek Deer Park Galena Park Goose Creek La Porte Pasadena

34

3 17 6 2 14 14 21

0 0 0 0 1 0 0

0 0 0 0 3 0 2

127

44

77

1

5

22 11 4 24 25

Total Sales


4 5 5 2 6 11 11

7

$1.18 $0.82 $3.25 $1.26 $0.15 $1.14 $1.14

-

$4.87

-

$5.31

- $13.98 -

$2.56

-

$2.56

- $20.72 - $11.55

Houston Tot. Sales in District Market Non Market Foreclosure


Houston

301

72

188

4

37

Total Sales

301

72

188

4

37

$0.12 - $87.15

Cy-Fair Tot. Sales in District Market Non Market Foreclosure


Cy-Fair

96

30

63

1

2

Total Sales

96

30

63

1

2

February 10, 2016

$0.91 - $22.30

28


The following chart shows the sales volume per submarket for 2014 versus 2015. Based on this chart the 2015 sales activity was not as great as 2014. This shows the market cooling down drastically in all submarkets. 2014 Sales Volume VS 2015 Sales Volume 500 450 400 350 300 250

2014 Sales

200

2015 Sales

150 100 50 0 Northwest

Southwest

Northeast

Southeast

Houston

Cy-Fair

This chart below shows sales volume for the whole county by quarter for 2015. Like most years the fourth quarter shows the least amount of activity. Based on this chart the activity throughout the county seems to drop off throughout the year. 2015 Sales by Quarter 400 350 300 250 200 150 100 50 0 1st Quarter

February 10, 2016

2nd Quarter

3rd Quarter

4th Quarter

29


This chart shows the land sales per quarter for each submarket for 2015: 2015 Land Sales by Quarter and Submarket 120

100

80 1st Quarter 2nd Quarter

60

3rd Quarter 4th Quarter

40

20

0 Houston

Cy-Fair

Northwest

Southwest

Southeast

Northeast

Summary Although the energy sector is just a spoke in the wheel of industry in Harris County, the downturn in that sector does impact the market activity in Harris County. Harris County is entering the second year of the worst oil downturn in decades. Local economists say the economy is bad but not awful. The focus is less and less about oil and gas and more about development of petrochemical and plastic products, refineries and health care. The shift can be seen from the west side of the county to the east side of the county. The west was geared more to the white collar side as opposed to the east being the blue collar side. The inner city and central business district still remain as attractive locations. Although the activity has slowed in the CBD, the surrounding areas are seeing growth. Economists predict that 2016 will likely be a harsh year for Harris County. Most analysts don’t expect meaningful improvement until 2017.

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Office Until 2015, Houston remained one of the steadiest and most productive growing cities in the country. Houston had, for several years, continued its success as the national leader in office development; primarily due to the strong oil and gas sector. However the downturn in oil prices over the last year have affected the capital operations of large oil & gas companies headquartered in the greater Houston area. Some restructured their development and operations plans and/or put capital improvement projects on hold. Houston was able to adjust to the abrupt changes in the supply and demand for oil refining and exploration. Houston survived through this period due to its economic diversity in sectors including distribution, technology, and healthcare. However, the oil & gas and energy sectors remain the most significant economic drivers. Large new office buildings were delivered in 2014, but the number of new buildings and office space started in 2015 was less than 2014. These major sectors have led to the addition of office buildings in the Energy Corridor/West Houston/Katy Freeway areas, adding over 12.1 million square feet over that period, making up effectively 43.9% of all new competitive office properties added to the overall Houston market over the ten-year period ending with the 3rd quarter 2015. Additionally, overall average asking rent for year-end 2015 was $27.24 psf which marked an approximate increase of 2.2% from the year-end 2014. Over the last eighteen quarters, asking rents have increased a total of 16.1%. Since the beginning of 2006, rents have increased on average 4.3% annually. Twenty-fifteen has been largely a year of adjustment, with a decrease in absorption and an increase in vacancy and lease concessions. Leasing activity absorbed roughly 2,560,000 sf during 2014. However, over the first three quarters of 2015, there was a net addition of 2.8 million square feet to the vacancy roster. New construction delivered in 2015 may have been in competition for tenants otherwise negotiating for existing available space. A total of 18 buildings were delivered to the market in 4th quarter 2015 totaling 3,606,137 sf, with 8,613,186 sf still under construction. The additional square footage more than offsets the absorption and is sending the vacancy rate up. This will be a continuing trend as vacancy and absorption rates try to maintain a balance with supply. Houston’s office market recorded growth in 2015 with the completion and delivery of new construction that was started in 2014. Furthermore, Houston has consistently shown resilience to the national recession in the past several years and has remained one of the nation’s best areas for employment and economic growth. Inventory Analysis According to CoStar, the total office inventory in Houston at the end of 4th quarter 2015 consisted of 6,547 office buildings totaling 297,844,163 sf, up from 280,416,894 sf at the end of 2014. Of that space, 44.97% is Class A consisting of 449 buildings; 41.74% Class B consisting of 2,874 buildings; and 13.29% Class C consisting of 3,587 buildings.

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Office Inventory by Class

2015 Inventory 13.29% 44.97%

Class A Class B

41.74%

Class C

Existing Inventory in Select Submarkets

# Bldgs

Existing Inventory 450 400 350 300 250 200 150 100 50 0

431

42

208 208

204

179

18

51

90

45 59 26

31

73 29

Downtown

Greenway Plaza

Katy Fwy

West Loop

Westchase

Class A

42

18

90

45

31

Class B

179

51

208

59

73

Class C

431

204

208

26

29

Data provided by CoStar

Construction Activity and Deliveries Twenty-fifteen saw several newly constructed office properties, particularly Class A sector development. Most of the office building space under construction is in downtown Houston, Northeast Near market, Westchase, West Loop, Katy Freeway, and The Woodlands. Per CoStar, 2015 had 85 new office buildings completed, totaling 12,218,875 sf. In comparison, 2014 saw delivery of 103 new buildings totaling 7,576,793 sf of new office space. There was 8,613,186 sf of office space under construction at the end of the 4th Quarter 2015, about half that of the end of 2014. A breakdown of construction for 2015 includes:  

30 buildings totaling 4,365,321 sf for the 1st Quarter; 24 buildings totaling 3,212,240 sf for the 2nd Quarter;

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 

13 buildings totaling 1,035,177 sf for the 3rd Quarter; and 18 buildings totaling 3,606,137 sf for the 4th Quarter.

Some notable deliveries/completions for 2015 include:  

ExxonMobil Campus Phase II, a 1.5 million sf facility delivered in the 1st Quarter of 2015 and now 100% occupied CyrusOne West Campus Expansion Phase 1, a 640,000 sf building delivered in the 1st Quarter of 2015 and now 100% occupied

The largest projects under construction at the end of 2015 include:  

FMC Technologies campus, a 1.7 million sf building 100% pre-leased Phillips 66 Global Headquarters, a 1.1 million sf facility 100% pre-leased

REIS reported that nearly 9.0 million square feet in a combination of speculative and singletenant projects was under construction by the end of 2015. Best and Worst Houston Market Areas Ranked by Vacancy Rate and Rental Rate Vacancy Rate Rank 1.

Rate Area 4.8% South Hwy 35

Quoted Rates per square foot Rank 1.

Rate Area $38.71 CBD

2.

6.8% Bellaire

2.

$32.59 Greenway Plaza

3.

8.3% Medical Ctr; Northeast Near

3.

$30.91 Westchase

…

… …

…

… …

22.

16.3% I-10 East

22.

$16.38 South Hwy 35

23.

17.3% West Belt

23.

$16.27 Southwest

24.

28.8% North Belt

24.

$14.57 I-10 East

Source: CoStar Year End 2015 Houston Office Market Report Note: The data provided by vendors can vary due to differences in classifying submarkets areas and their locations, the individual breakdowns of said market areas, and the accuracy of each vendor’s gathered market data.

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Construction Activity Downtown 1,578,258 SF 18%

All Other 1,970,891 SF 23%

Katy Fwy 914,037 SF 11%

Westchase 1,545,000 SF 18% West Loop 905,000 SF 10%

NE Near 1,700,000 SF 20%

** CoStar stated two Class A offices are under construction: 609 Main at Texas (1,057,668 sf) and Hilcorp Energy Tower (406,600 sf) in the CBD submarket.

Notable Year-to-Date deliveries based on square footage Submarket Woodlands

Leasing Co. ExxonMobil Foundation

West Belt

CyrusOne Inc.

Katy Fwy Katy Fwy

CBRE CBRE ExxonMobil Foundation CBRE MetroNational Corp. Mac Haik Development PM Realty Group

Woodlands FM 1960 Katy Fwy Katy Fwy Greenway Plaza

Sty

NRA

% Leased

8

1,500,000

100%

1Q 2015

3

640,000

100%

1Q 2015

22 20

599,978 546,604

100% 100%

4Q 2015 2Q 2015

8

500,000

100%

2Q 2015

20

456,000

100%

2Q 2015

Air Liquide Center - South

20

452,370

59%

4Q 2015

Energy Tower IV

17

429,157

36%

1Q 2015

3737 Buffalo Speedway Ave

19

400,000

29%

4Q 2015

Property ExxonMobil Campus – Phase II CyrusOne West Campus Expansion Phase I Energy Center Four Energy Center Three ExxonMobil Campus – Phase III Noble Energy II

Delivery Date


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34


Notable Year-to-Date office buildings under construction based on square footage Submarket Northeast Near Westchase Downtown West Loop Katy Fwy

Leasing Co. Trammell Crow Houston Phillips 66 Colville Office Properties Transwestern CBRE

Sty 5

NRA 1,700,000

% PreLeased 100%

2101 Citywest Blvd – Phillips 66 609 Main at Texas

12

1,100,000

100%

2Q 2016

48

1,056,658

6%

2Q 2016

BHP Billiton Petroleum Energy Center Five

30 18

600,000 524,328

100% 0%

4Q 2016 2Q 2016

Property FMC Technologies Campus

Delivery Date 1Q 2016


Net Absorption and Leasing Activity Per CoStar, the net absorption of office properties in the overall Houston area for 2015 was positive at 2,653,459 sf, down from 7,783,390 sf for 2014. CoStar reported that Class A saw a positive net absorption in 2015 of 3,930,825 sf; the Class B market was (negative) -1,438,138 sf; the Class C market was 160,762 sf. Furthermore, the Central Business District absorption for 2015 was 28,264 sf, compared to 571,341 sf for 2014. The suburban market absorption was at 983,336 sf for 2015 down from 7,212,049 sf for 2014. Notable tenant arrivals for 2015 included:  

ConocoPhillips moving into 546,604 sf at Energy Center Three Air Liquid USA, Inc. moving into 234,510 sf at 9811 Katy Freeway

Notable tenant departures for 2015 included:    

ConocoPhillips moving out of 647,408 sf at ThreeWestLake Park Noble Energy, Inc. moving out of 456,000 sf at Energy Center II Phillips 66 moving out of 421,470 sf at Pinnacle Westchase ExxonMobil moving out of 189,853 sf at 396 W. Greens Road

According to REIS, the 2015 year-end net absorption total was 505,300 sf, a decrease from 2014’s net absorption total of 3,481,000 sf. Total Class A inventory was 101,516,000 sf with a net absorption of 3,983,000 sf, 13.4% vacancy rate, average asking rent of $32.88 psf, and Gross Revenue per square foot of $28.47. Total Class B and C inventory was 74,854,000 sf with a net negative absorption of -1,964,000 sf.

February 10, 2016

35


Notable Year-to-Date office building leases based on square footage Submarket Westchase

Leasing Co. N/A

Galleria/ Uptown Greenway Plaza Greenway Plaza CBD Post Oak Park

Cousins Properties Inc. Cousins Properties Inc. Cousins Properties Inc. Cushman & Wakefield Inc. CBRE

Katy Fwy W

Savills Studley

Galleria/ Uptown Midtown

Cousins Properties Inc. Pollan Housman R.E. Services Accesso Partners, LLC Colvill Office Properties N/A

Bellaire Greenspoint/ N Belt West E Ft. Bend Co./ Sugar Land Katy Fwy West Westchase Katy Fwy East

Mac Haik Development PM Realty Group Cresa Houston

Property Western Geophysical Post Oak Central One Four Greenway Plaza Twelve Greeway Plaza Pennzoil Place – South Tower 2425 West Loop South West Memorial Place Phase II Post Oak Central Three HCC Building

Tenant WesternGeco

Qtr 3rd

NRA 554,385

Apache Corporation

4th

355,506

Transaction, Inc.

2nd

255,413

CPL Retail Energy LP Bracewell & Giuliani LLP Stage Stores, Inc.

1st

191,893

4th

189,061

2nd

168,901

IHI E&C

2nd

158,050

Apache Corporation

4th

150,020

4th

139,424

6330 West Loop South Five Greesnpoint Place Oasis Medical Office Building Energy Tower IV

St. Luke’s Episcopal Health System Texas Children’s Health Plan Swift Energy Company North American University N/A

3rd

138,599

1st

113,801

3rd

111,275

4th

106,555

Westchase Park II 10100 Katy Fwy

N/A CEMEX USA

1st 3rd

100,000 80,000


Vacancy According to CoStar, the vacancy rate for all classes of office buildings at the end of 4th quarter 2014 was 13.6%, up from 11.3% at the end of 2014. CoStar reported vacancy rates for the end of the year to be:   

14.5% for Class A buildings 14.3% for Class B buildings 8.1% for Class C buildings (down from 9.5% for the end of 2014)

The overall ending vacancy rate for the CBD in 2015 was 13.6%, up from the end of 2014 at 8.9%. Additionally, vacant sublease space in Houston ended 2015 with 3,816,078 sf, a little more than double that of the end of 2014. Per CoStar, Class A properties reported vacant sublease space of 2,773,601 sf, Class B properties reported vacant sublease space of 1,024,125 sf, and Class C properties reported vacant sublease space of 18,352 sf.

February 10, 2016

36


Per REIS, as of the 4th Quarter of 2015, in terms of vacancy Houston ranked 5th out of 9 metro markets in the Southwest United States and 25th out of 82 metro markets nationally. Adjustments to the recent changes in the economy should slow the aggressive construction activity experienced over the past few years. This will inevitably cause the market’s vacancy rate to float higher as the market tries to rally leasing and absorption activity to keep up with supply. REIS reported that vacancy ran in the vicinity of 15.6%, up from 14.4% for 2014 and 2013. The office vacancy rate at the end of 2015 for Southwest U.S. was 17.9% and for the nation 16.3%. Rental Rates CoStar reported that overall market rental rates were $28.04 psf for 4th quarter 2015, an increase of approximately 3.0% from the prior year. The average rental rate at the end of 2015 for Class A spaces was $34.31 psf, Class B $21.56 psf, and Class C $16.92 psf. According to REIS, the average asking rents saw a change from $27.20 to $27.83 per square foot, a 2.3% change from 2014. Asking rents for greater Houston in 2013 were $25.90 psf. REIS has projected asking rents of $28.95 psf for 2016, and $30.29 psf for 2017. Quoted Rental Rates $45.00

$43.19

$38.71

$40.00 $30.00 $25.00

$36.04

$35.73 $32.59

$35.00 $28.09

$25.77 $23.58

$20.37

$20.00

$35.59 $30.50

$33.48 $29.93

$35.29 $30.91

$25.84 $22.95 $19.93

Class A Class B

$19.90 $17.69

Class C Overall Office

$15.00 $10.00 Downtown

Greenway Plaza

Katy Fwy

West Loop

West Chase

Sales Activity According to CoStar, the first nine months of 2015 saw 26 office sales transactions with a total volume of $1.251 billion and an average of $237.39 psf. In 2014, there were 32 transactions totaling $1.363 B at a $214.84 psf average. And in 2013, Houston posted 41 office sales transactions with a total volume of $1,960 B and an average of $217.70 psf. Cap. rates on these sales average 6.93%, compared to 7.30% for 2014. Capitalization Rates CoStar reported that cap rates were lower in 2015, at 6.93% on average for office buildings, given the increase in property values, sales, and newly constructed office buildings. Per CoStar, cap rates in 2014 averaged 7.30% and 8.29% in 2013.

February 10, 2016

37


According to REIS, the overall average cap rate for 2015 was 7.0% , up from 6.5% a year earlier. The average capitalization rate was 9.2% for the 2nd quarter of 2015 and 4.7% for the 2nd quarter. Cap Rates based on Office Building Sales from October 2014 through September 2015 Bldg Size < 50,000 sf 50K-249K sf 250K-499K sf > 500K sf

# of Bldgs 35 30 5 2

NRA 385,297 4,223,979 1,929,421 2,114,117

$/sf 197.95 $151.27 $245.72 $312.42

Cap Rate 7.20% 8.05% 5.98% 5.60%

REIS projects that “Construction activity is expected to continue during each of the following two years, during which a total of 9.6 million square feet is projected to be introduced to the market. Office employment growth at the metro level over the same period is projected to average 1.7% annually, enough to facilitate an absorption rate averaging 2.8 million square feet per year. Because this amount does not exceed the forecasted new construction, the market vacancy rate will rise by 140 basis points to finish 2017 at 17.0%. On an annualized basis through 2016 and 2017, asking and effective rents are anticipated to advance by 4.5% and 4.7%, respectively, to finish 2017 at $30.39 and $25.56 [per square foot triple net].” Summary Houston’s office market rent growth is projected to continue to increase. At the same time, supply continues to grow and demand is beginning to decrease, so vacancy is expected to inch higher. However, the Houston market has experienced a significant increase in market activity and improving market conditions, strong trade sectors, and high population growth rate indicate a continuing upward trend in property values. Apartments Houston’s demand for apartments continues to be high due to constant significant population growth. According to the CBRE Houston Multifamly Q4 2015 Marketview, Houston “multifamily demand ended 2015 higher than expected, with 13,013 units absorbed, the majority being in newly built Class A product.” Net absorption is an indicator for multi-family demand. It measures the change in occupied apartment units over a period of time. Since 2009, Houston gained more than 390,000 jobs, more than double the number of jobs lost during the recession. Houston’s population boom and job growth are fueling this record demand for apartments. Last year, Houston saw the largest population increase, nationally, after nearly 150,000 new residents flocked to the city, up from the nearly 140,000 moving to the city in 2014. In five years, over 600,000 more people moved to Houston than moved out. The CBRE report noted “Rents expanded year-over-year another 5.0%.” Housing prices in greater Houston are creeping higher as well as a greater demand for rental units due to new industrial construction in the Port of Houston area in east Houston. The report continued:

February 10, 2016

38


“An imbalance of supply and demand is starting to creep into the analytics, specifically Class A Properties. Apartments are functionally full at 95% occupancy, although Houston’s overall occupancy isn’t quite there ending the year at 90.6%, due to corporate units and temporary, short-term leases making the difference. Conversely, Class B and C properties continue to gain renters at a steady pace, and can almost be classified as completely full at 93.6% and [that is] expected to be seen in the year ahead as affordable housing becomes more than a topic of conversation.” ADS indicated that by the end of 2015, 20,187 units were under construction, and the occupancy rate was 90.6%. In 2016, expected deliveries are expected to total 18,327 units, and for the two year period of 2016 and 2017, 29,716 units. According to the REIS Apartment – 4th Quarter 2015 Metro: Houston report, “Because [the absorption rate] does not exceed the forecasted new construction, the market vacancy rate will rise by 120 basis points to finish 2017 at 7.0%. On an annualized basis through 2016 and 2017, asking and effective rents are projected to increase by 3.7% and 3.5%, respectively.” According to the REIS report, the national vacancy rate ended the year at 4.4% (up from 4.2% the previous year), a potentially worrisome result for the near-term future of the apartment sector. REIS forecasts that rent growth will stabilize as well at or around 3%. With the expansion of the METRORail from downtown to the University of Houston, new construction for student housing is expected to continue in the university’s immediate area. With the population growth in the area, and associated growth in senior/retiree population, an increase in multifamily tax credit subsidized housing and assisted living apartment complexes is expected to continue as well. Rental Rates Over the past twelve months, apartments in the Greater Houston Area have registered a 5.0% increase in rental rates, this following an 8.1% increase for the year before. Total absorption for the twelve months ending in December 2015 was 13,262 units, according to ADS. With nearrecord numbers of units to be added to the market for 2016, newer multifamily product will be prone to offering concessions. With positive absorption and higher occupancies, Class B, C, and D apartment communities are now offering fewer concessions. Per ADS, as of January 2016, 22% of apartment communities are now offering concessions (all classes) in comparison to 20% in 2014. According to ADS, 22% of the multifamily properties, or roughly 1 in 5, in the Greater Houston Area are giving concessions to rental rates. For Class A properties, 41% of the Class A properties are offering concessions, averaging almost 1 month free rent. However, this includes new construction that has not stabilized occupancy as of the offering, as virtually all of new construction is Class A, except for newly constructed Class B subsidized and tax credit apartments. Twenty percent of Class B properties are offering concessions, Class C 17%, and Class D 12% (roughly 1 in 8). Concessions, when given, average ½ month for Class B to ⅔ month for Class D.

February 10, 2016

39


Of the 41 submarkets analyzed by ADS, 19 have had rental rate increases and 25 had decreases. A major change in 2015 is a trend toward increasing rent growth in suburban markets and decreasing rent growth in the urban core. Woodlake/Westheimer had the largest rental rate increase of 10.3% in 2015, followed by Baytown at 9.2%. The Baytown submarket had the largest rental rate change over the previous twelve months at 13.4%, followed by Alief at 9.4%. Throughout the metro area, ADS reports that overall vacancies increased from 8.9% in January 2015 to 9.4% at the end of 2015. During that time period, rents increased from an average of $1.054 psf per month ($12.65 psf per year) to $1.099 psf per month ($13.18 psf per year) for the overall market. The vacancy rate at the end of 2013 was 9.5% and average rent was $0.97 psf ($11.64 psf per year). Market Performance

Number of Properties 536 922 797 352 2,607

Class A B C D OVERALL

Average Rate (/ sf / mo) $1.510 $1.071 $0.879 $0.711 $1.099

Occupancy (%) 83.0% 93.6% 93.6% 89.9% 90.6%

ALL PROPERTIES % Effect of Concessions on Market Price * -3.8% -1.1% -1.1% -1.0% -2.0%

ONLY PROPERTIES W/CONCESSIONS % Effect of Concessions on Market Price * -7.9% -4.3% -4.8% -5.5% -6.4%

Note: One Month Free = -8.3% Class A properties include multifamily projects that may have been delivered within the last 2 years, and may not have stabilized or are out of their lease-up period * On Street Price (s): Based on only those properties with concessions Source: ADS – January 2016

Market Trends Transwestern reported a total of 252 sales represented 69,003 units (compared to 68,675 units in 2014, with average 7.1% cap. rate) that took place in a trailing 12 months with average cap rate, 7.0%, totaling a volume of $5,149,400; represents an average price per unit of $89.26 psf for all classes of property.

February 10, 2016

40


Apartments Recently Opened - January 2015 through February 2016 (ADS) AKA

Account #

Address

Units

Eco Area

Move In Date Jan 15

Sorrel Grand Parkway

135-236-001-0001

1660 Katy Gap Rd

380

28

Vue Kingsland

135-504-001-0001

18021 Kingsland Blvd

423

28

Jan 15

Aura Memorial

134-425-001-0001

14900 Memorial Dr

288

6

Feb 15

1615 Sawdust Rd

341

Broadstone Sierra Pines

Feb 15

Haven at Eldridge

134-446-001-0001

13115 Whittington Dr

246

6

Sunrise By The Park

133-755-001-0001

155 Birdsall St

180

3

Feb 15

21 Eleven

134-341-002-0001

2119 Westheimer Rd

215

3

Mar 15

2626 Fountain View

099-076-000-0002

2626 Fountain View Dr

281

4

Mar 15

Vargo's on the Lake

134-459-001-0001

2411 Fondren Rd

276

5

Mar 15

Villas at Colt Run *

135-567-001-0001

7600 E Houston Rd

138

17

Mar 15

Watercolor

045-144-002-0230

1700 Rollingbrook Dr

240

16

Mar 15

Parkside Place

127-028-001-0007

6220 FM 2920

384

25

Apr 15

Susanne, The

134-535-001-0001

3833 Dunlavy St

396

3

Apr 15

Vista Grand Crossing

134-616-007-0003

302 Cobia Dr

351

28

Apr 15

18100 West Rd

330

West Lake Park

Feb 15

Apr 15

Aldeia West

134-652-001-0001


305

28

May 15

Heights At Park Row, The

134-699-001-0001

13710 Park Row

342

27

May 15

La Mariposa

135-204-001-0001

2930 Plum Creek Ln

78

12

May 15

Lafayette Plaza (Senior) *

134-955-001-0001

7230 Clarewood Dr

122

8

May 15

Newport Village

740-281-000-0410

5925 FM 2100

80

17

May 15

Parkside At Memorial

132-965-001-0002

777 South Mayde Creek Dr

379

6

May 15

Rise, The

135-666-001-0001

7315 Spring Cypress Rd

288

24

May 15

1900 Yorktown

104-073-001-0001

1900 Yorktown St

262

4

Jun 15

Alexan Heights

133-883-001-0001

655 Yale St

352

2

Jul 15

Haven at Westgreen

131-494-001-0005

510 Westgreen Dr

225

28

Jul 15

Olympia at Willowick Park

116-432-001-0003

3939 W Alabama St

189

3

Jul 15

Pines At Woodcreek

043-209-001-0002

21021 Aldine Westfield

330

21

Jul 15

Commons At Hollyhock

046-005-000-0019

5751 Greenhouse Rd

624

27

Aug 15

Holden

135-954-001-0001

525 W 24th St

282

2

Aug 15

SkyHouse River Oaks Hi-Rise

134-929-002-0005

2031 Westcreek Ln

352

3

Aug 15

611 Dairy Ashford

333

Domain West

Sep 15

Modera Energy Corridor

133-080-001-0001

14520 Briar Forest Dr

278

6

Sep 15

Slate, The

135-108-001-0001

935 N Wilcrest Dr

414

6

Sep 15

Willow Creek

041-026-001-0637

9530 FM 2920

228

25

Sep 15

91 Fifty

131-801-001-0001

9150 Highway 6 N

210

27

Oct 15

Heights at Westchase

111-378-000-0010

3505 W Sam Houston Pkwy

265

29

Oct 15

Landmark Grand Champion

047-178-000-0048

11201 Boudreaux Rd

360

25

Oct 15

Mariposa At Pecan Park (Senior)*

136-144-000-0001

3535 Canada Rd

180

14

Oct 15

17802 Mound Rd

310

North Haven

Oct 15

Viridian Desigh Center

134-068-001-0001

7100 Old Katy Rd

394

22

Oct 15

Alexan Midtown

134-760-001-0001

2310 Main St

215

1

Nov 15

Hanover Southampton

134-340-001-0001

5122 Morningside Dr

206

3

Nov 15

High Point Uptown

133-975-001-0001

807 S Post Oak Ln

277

4

Nov 15

February 10, 2016

41


AKA

Account #

Address

Units

Eco Area

Move In Date

James River Oaks, The

134-266-001-0001

2303 Mid Lane

344

3

Nov 15

Modera Flats

134-752-001-0001

1755 Wyndale St

265

10

Nov 15

Pearl Woodlake

135-999-001-0001

2033 S Gessner Dr

376

5

Nov 15

District 28

128-687-001-0001

2828 Old Spanish Trail

299

10

Dec 15

H6

130-314-003-0001

410 Highway 6 S

293

6

Dec 15

Hampstead

025-024-054-0001

1508 Blodgett St

36

1

Dec 15

Alta West End

129-283-002-0001

4020 Koehler St

283

2

Jan 16

Domain Memorial

134-684-001-0001

14800 Memorial Dr

313

6

Jan 16

Towers of Seabrook

135-216-000-0005

3300 Bayport Blvd

416

13

Jan 16

5755 Hermann Park

134-395-001-0001

5755 Almeda Rd

193

10

Feb 16

Crenshaw Grand

046-164-000-0020

5400 Crenshaw/Beltway 8

264

14

Feb 16

District at Memorial

134-489-001-0001

10300 Katy Frwy

326

6

Feb 16

Tate Tanglewood

134-935-001-0002

5880 Inwood Dr

431

4

Feb 16

Pearl CityCentre TOTAL

102-571-000-0002

10402 Town & Country Way

311 16,119

6

Mar 16

* Tax Credit

New Construction New construction activity for apartments is expected to tighten somewhat for the next two years. Newly delivered apartment complexes (most or all as Class A) may see a decrease in demand and will offer concessions to support rental rates. This is expected to leave some excess supply in the market over the long term, saving Houston’s apartment market from any further meaningful tightening. Developers are able to build all of the new projects largely because investment grade buyers and large cash-rich institutions are looking for a safe haven for equity, while banks are willing to give them the money for construction and interest rates for the near term should stay low. The total number of units in the Greater Houston Area at the end of 2015 was 606,431. Currently, 16,208 units are under construction. Last year, 13,262 units were absorbed. Since 2004, between 10,000 and 15,000 new units have been added to the market annually, with 1,000 units a month being typical for stable economic years. The economic recession year of 2008 saw 21,862 units delivered. Between 3,900 to 5,900 new units per year were delivered during the economic recovery years of 2010 to 2012. In 2014, 17,697 units were delivered and 20,187 in 2015. That considered, it is understandable that the total number of new units expected to be delivered are roughly 18,000 for 2016 and 12,000 for 2017. Per ADS, 74 new complexes totaling 21,192 units were added to the Houston market during calendar year 2015. That is up from 54 new complexes totaling 14,559 units in 2014. In addition, there are 56 complexes, consisting of 16,208 units, under construction as of January 2016. There were 69 complexes with 19,286 units under construction at the end of 2014. Of the new apartment complexes recently delivered to the market, three are tax credit properties.

February 10, 2016

42


Apartments under Construction through January 2016 (ADS)

AKA

Account #

Address

Units

Eco Area

Move In Date Jun 15

3400 Montrose Hi-Rise

026-171-000-0001

3400 Montrose Blvd

325

1

1300 N Post Oak

135-130-001-0001

1300 N Post Oak Rd

247

26

Jan 16

1711 Caroline

002-083-000-0001

1711 Caroline St

220

11

Aug 16

2121 Ella

056-166-001-0001

2121 Ella Blvd

120

22

Jan 16

3800 Main II

135-094-001-0001

800 Alabama St

116

1

Nov 15

500 Crawford

134-992-001-0001

500 Crawford St

364

1

Jan 16

800 Crawford High Rise

001-098-000-0002

800 Crawford St

314

11

Jan 17

Alexan 5151

134-569-001-0001

5151 Hidalgo St

398

4

Mar 17

Alexan Ashford

040-224-000-0047

1200 N Dairy Ashford

312

6

May 16

Alexan City Centre

135-734-001-0001

Town & Country Blvd

354

6

Nov 16

Alexan Southside Place

009-026-000-0082

4139 Bellaire Blvd

269

10

Jan 18

Alexan Spring Crossing I

043-081-000-0005

21525 Spring Plaza Dr

307

24

Apr 16

Alexan Yale

021-024-000-0004

501 Yale St

380

2

Aug 16

Amber Oaks

002-102-000-0001

1811 San Jacinto

242

11

Aug 17

Ascension On the Bayou

133-903-001-0001

150 Sam Houston Pkwy

280

6

Mar 16

Avenue Grove

135-253-001-0003

3700 Wakeforest

270

3

Mar 16

Axis

134-019-001-0001

2400 W Dallas Ave

368

1

Jan 16

BBVA EaDo Station

134-698-001-0001

2417 Capital St

311

11

Dec 15

Beacon At Buffalo Pointe

135-233-001-0001

10301 Buffalo Speedway

281

10

Mar 16

Bella Terra at Katy

048-056-000-0018

Katy Landing @ Ernsters

227

28

Jan 16

Block 334

134-973-001-0001

1515 Main St

207

1

Jan 16

10

May 16

Block 384

1825 San Jacinto

242

130-066-001-0001

Frankway/Braeswood

284

Bridgeview

135-647-001-0001

4115 Louetta

324

Broadstone Energy Park

135-858-001-0001

880 Hwy 6 S

416

3515 Discovery Creek Blvd

273

Braeswood

Broadstone Harmony

Jul 17 Feb 16 6

Jun 16 Mar 16

Broadstone Skyline

135-732-001-0001

707 Saulnier St

269

1

Sep 16

Broadstone Tinsley Park

134-741-001-0002

919 Gillette/W Dallas

365

1

Dec 16

Catalyst Hi-Rise

135-563-001-0001

1423 Texas Ave

361

11

Mar 16

Carter, The

135-534-001-0001

4 Chelsea Blvd

305

1

Mar 16

City Centre At Midtown

044-267-000-0002

1920 W Alabama St

258

1

Jun 16

Crest at Fondren

135-612-001-0001

8816 Westheimer Rd

338

4

Jun 16

Dolce Living At Midtown (DLC)

134-947-002-0001

180 W Gray St

217

1

Jan 16

Domain at Northgate Crossing

135-617-001-0001

28476 Hardy Toll Rd

306

21

Feb 16

Eastfield Baybrook Site

124-058-008-0001

Gatebrook Dr/W Eldorado Blvd

347

13

Aug 16

Elan Heights

135-307-001-0001

2222 White Oak Dr

327

2

Feb 16

Elan Memorial Park l

134-687-001-0001

902 Westcott St

258

3

Mar 16

Eldorado Green (Senior) *

040-210-000-0076

240 W Eldorado Blvd

108

13

Mar 15

Eastpointe Blvd Site

115-337-001-0315

Eastpoint Blvd N of I-10

283

16

May 16

Estates at Ellington

133-511-001-0002

635 Genoa Red Bluff Rd

72

14

Everly, The

23902 Kuykendahl

332

Aug 16

Greenhouse

2040 Greenhouse Rd

400

Feb 16

February 10, 2016

43


Move In Date Jan 16

Units

Eco Area

Grey House, The

135-444-001-0001

4444 Westheimer Rd

279

3

Hanover Montrose Hi-Rise

135-485-001-0001

3400 Montrose Blvd

327

1

Jun 16

Haven At Augusta Woods Village

133-034-001-0001

Kuykendahl / Augusta Pines

246

25

Aug 16

Haven At Highland Knolls

135-064-001-0001

Highland Knolls/Westgreen

171

28

Jan 16

Haven At Lakes Of 610

115-517-000-0020

8900 Lakes At 610 Dr

276

10

Nov 16

Haven At Liberty Hills

130-959-003-0006

Hwy 90/Beltway 8

246

17

Oct 16

Haven At Main

135-702-001-0001

8700 S Main

256

10

Jan 16

Haven At Westheimer

136-155-001-0001

Rincon/Eldridge Pkwy

230

6

Sep 16

Haven on 11th

135-575-001-0001

2205 W 11th St

120

22

Jan 16

Ivy High Rise

134-969-001-0003

2307 Mid Lane

301

3

Feb 17

Jefferson Heights

127-890-001-0001

1520 N Memorial Way

198

1

Apr 16

Kirby Dr

199

AKA

Account #

Kirby Collection

Address

Oct 17

Landmark At Spring Cypress

061-076-000-0001

3223 Spring Cypress

408

24

Le Palais

133-041-001-0001

1916 W Gray St

165

1

Jan 16

Lofts at Mid Main

135-584-001-0001

3622 Main St

363

1

Feb 16

23153 Springwoods Plaza Dr

268

Market Square Tower Hi-Rise

001-035-000-0001

777 Preston St

463

11

Oct 16

Marquis At Greenway

041-017-002-0320

3131 Timmons Ln

425

3

Jul 16

McGowen Station

134-930-000-0001

2727 Travis St

315

1

Mar 17

Memorial

131-987-001-0001

2018 N Memorial Way

198

1

Sep 15

Millennium Kirby, The

134-962-001-0001

7600 Kirby Dr

378

10

Jan 16

Millennium Med Center Hi-Rise

135-881-001-0001

1911 Holcombe Blvd

375

10

Jun 16

One Hermann Place/Capella ?

134-749-001-0001

1701 Hermann Dr

224

10

Jun 16

One Market Square Hi-Rise

001-033-000-0006

900 Preston St

274

11

May 16

18515 Bridgeland Creek Pkwy

288

Mark at CityPlace

Parklane Cypress

Dec16

Jun 16

Pearl at the Mix

013-270-001-0001

2913 Louisiana St

196

1

Pearl Residences At CityCentre

102-570-000-0013

Town & Country @ Attingham

148

6

Washington/ T C Jester

322

Pearl Washington

Dec 15

Jun 16 Apr 16 Mar 16

Place Redevelopment

039-220-000-0008

1341 Castle Ct

250

1

Dec 16

Post Galleria

134-399-001-0001

3131 West Loop South

390

3

Mar 16

Preserve At Baywood II

041-003-000-0036

Genoa Red Bluff/Red Bluff

192

14

May 16

Residences at City West

115-172-000-0004

2520 Rogerdale Rd

266

29

Mar 16

Residences at Fannin Station

124-827-001-0001

9800 Fannin

301

9

Aug 16

SkyHouse Main Hi-Rise

002-068-000-0009

1625 Main St

336

11

Jan 17

Southmore Hi-Rise

033-254-001-0001

Caroline/Southmore

225

1

Dec 16

Sovereign Spring Cypress

061-077-000-0015

2539 Spring Cypress Rd

253

24

Sep 16

Streamsong

132-009-001-0001


290

28

Mar 16

Studemont

007-134-000-0011

1011 Studemont

30

3

Tanglewood, The

097-493-000-0001

Woodhollow Dr

246

4

Texaco Building Hi-Rise

001-079-000-0001

1111 Rusk St

309

11

13922 Woodson Park Dr

304

2001 S Voss Rd

150

21145 Spring Plaza Dr

340

Trails At Lake Houston Tuscany Walk Venue Spring Cypress

February 10, 2016

132-470-001-0001

Dec 16 Dec 15 May 16

4

Jan 16 Jul 16

44


Move In Date May 16

Units

Eco Area

Village At Palm Center

116-775-001-0002

5330 Griggs Rd

222

35

Watercrest At Katy (Senior) *

135-900-001-0001

200 Katy Ft Bend

210

28

7955 FM 2920

340 318

25

Apr 16

228

21

Mar 16

AKA

Account #

Waterford Trails

Address

Watermark At Spring Cypress

044-046-002-0182

22803 Tomball Pkwy

Willowbend

132-464-001-0002

FM 1960 Bypass Rd W

TOTAL

Apr 16 Aug 16

24,531

* Tax Credit

Summary According to the 2015 Kinder Institute Houston Area Survey conducted by Rice University, “more respondents in 2015 (38 percent) than at any time in the past 10 years assert that living conditions in the Houston area have been improving.” In Houston, apartment developers are going vertical to combat rising land prices. In 2015, four 20-plus-story high-rises were delivered and by year-end five were under construction. The Tomball/Spring submarket in north to northwest Harris County leads all Houston submarkets with 11 properties containing 5,847 units under construction. Completion of the ExxonMobil Campus to the north and upcoming Grand Parkway to Kingwood are factors driving apartment demand in the area. Other submarkets ranking behind Tomball/Spring for under construction projects are Montrose/Museum/Midtown (south of Downtown) with 3,623 units, Katy/Cinco Ranch (west Houston) with 2,729 units, CBD with 2,503 units. The Woodlands and Conroe combined submarket has 3,162 units under construction. The Downtown Living Initiative program offers $15,000 per unit in tax rebates to developers who create homes and multi-family projects. Currently, there are four projects under construction and eight additional projects planned for the future. Before the initiative program only 3,600 residents lived downtown; but within 5 years this number will triple. However, as of May 2015, the program is no longer accepting new applications. From the Chronicle, “Skilled workers are in short supply….The labor shortage has become so severe that construction companies have recently started putting guards on job sites to keep workers from being poached by competitors willing to pay more. The labor shortage is leading to scheduling delays and significant cost overruns. Rising land values, combined with higher construction and material costs, are compressing the returns investors can make on development.”29 An apartment complex that cost $130,000 per unit a few years ago to build now costs $190,000 per unit to build today.

29

http://www.houstonchronicle.com/business/real-estate/article/In-building-boom-construction-workers-gain-the5706440.php

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Marcus & Millichap’s 2016 US Multifamily Investment Forecast ranks Houston 22nd out of 46 market areas for its 2016 National Multifamily Index, down from 16th last year. Houston’s apartment market should stabilize its multifamily market with moderate growth, taking scheduled new construction deliveries into consideration. Investors will continue to target Houston apartments in 2016, encouraged by another year of moderate job creation but with continued population growth. At the same time, for-sale inventory will remain limited relative to buyer demand, maintaining a highly competitive climate and supporting elevated prices across the Houston area. Bidding will remain particularly intense for apartment properties inside the Loop, and for assets in the Galleria/Uptown and The Woodlands/Spring areas, where land costs have skyrocketed over the past few years. Gulfton/Westbury and Friendswood/Pearland have the lowest vacancy rate in metro Houston, at 3.4%, down 80 basis points from 2014. Vacancy rates are expected to remain near their lowest levels in the last decade, providing sufficient leverage for local apartment owners to achieve strong rent growth. In their Millenial Index, Marcus & Millchap ranking market growth occurring in the young-adult population (ages 20 to 34), Houston ranked 8th in the nation, just behind Dallas/Fort Worth. A lot of young people who are predominately renters and not homeowners will continue to provide significant demand, even as new supply grows. A change in the balance of supply and demand attending the supply of multifamily projects under construction will reverse the downward movement in the vacancy rate, particularly in the Class A sector where new product is leasing up and occupancy not stabilized yet.. While some submarkets will see greater increases in their vacancy rates than others, a condition of general significant oversupply is not expected. Vacancy, though, could rise to about 6.5% next year, according to Marcus & Millichap. Rent growth should remain strong. The fourth quarter indicated that the actual rents grew over the course of the year. The rate of development underway in north Houston and around the Port of Houston and petrochemical refineries in the east bears watching even as the energy-driven submarkets on the west side try to retain their development. According to Marcus & Millichap 4th Quarter 2015 Apartment Research Market Report – Houston Metro Area, “Despite increased buyer interest, a lack of inventory throughout the metro hinders transaction velocity as investors hold on to assets while options for reinvestment remain limited. As a result, buyer demand has intensified as investors scour the metro for deals. Those in search of upside potential will find properties in need of repositioning, whether through management improvements or additional capital to rehabilitate units, allowing owners to push rents.” The continued demand for quality investment grade properties should support increasing associated real estate values. Lastly, for their Houston Metro Area 2016 Outlook, Marcus & Millichap stated, “Hiring in Houston’s medical community and downstream oil and gas operations will support the apartment market this year as the energy industry awaits stabilization. Overall total employment growth will remain slow for a second consecutive year as energy firms continue to cut spending in 2016. In west Houston, where many of these companies are located, a building boom has brought thousands of new apartments online, and more will be added to inventory this year. Performance in this area has begun to soften and developers are ramping up efforts to lure tenants to recently constructed properties. Tempering in western suburbs will be short-term, however, as deliveries February 10, 2016

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taper amid shifting builder attitudes and several healthcare organizations boost demand as they expand nearby. Meanwhile, demand for housing is rising in the eastern portion of the metro and along the Gulf Coast where several petrochemical plants are underway or proposed, increasing the need for Class B/C housing. New construction in this area has been sparse, but the opening of portions of Grand Parkway will generate new opportunities for development.” Retail The sector of the Houston economy that appeared to be strongest over 2015 was retail real estate. Job creation in this area offset any negative changes resulting from oil & gas. As oil prices declined, the price of gasoline also fell, giving consumers more disposable income. With a lack of listings for investment grade apartment complexes, quality retail properties provided a viable investment alternative. By most accounts, 2015 was better than 2014, which was better than 2013. Houston auto dealers sold 376,481 vehicles in 2015, a record year for sales, up 1.4% from 2014, which itself was up 6% from the 2013 figure. REIS indicated the leading areas for retail this coming year will probably be the Southwest/Fort Bend County/Sugar Land submarket, followed by FM 1960/Far Northwest and Westwood/Bellaire. Consistent population growth in the greater Houston area is cited as a major factor in a positive and resurging real estate retail market. “During 2016 and 2017, developers are projected to deliver 1.5 million square feet.” Net Absorption Retail net absorption was positive in Houston in 2015, absorbing 4,148,587 square feet for the year, compared to 4,232,709 sf for 2014, bringing the total absorption for the greater Houston area over the last two years to 8,381,296 sf. Tenants moving into large blocks of space in 2015 include:   

Wal-Mart moving into 177,514 sf at The Shoppes at Uptown Crossing Kroger moving into 124,000 sf at Shops at Katy Reserve, and HEB moving into 100,000 sf at 97 Oyster Creek Drive

Market Occupancy Houston’s tetail vacancy rate went from 6.1% in the 1st Quarter 2014, to 5.6% in the 1st quarter of 2015. Over the past four quarters, the market has seen an overall decrease in the vacancy rate. It decreased in the 4th quarter 2015, ending at 5.2%. The amount of vacant sublease space in the Houston market has trended up over the past four quarters. At the end of 2014 there were 291,701 sf vacant retail space. Currently, there are 285,373 sf vacant in the market. The current vacant sublease area is still lower than any point of 2014.

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Largest Lease Signings The largest lease signings to take place in 2015 were: the 57,000 square foot lease signed by Showbiz Cinemas in the Lake Houston area at 8700 N Sam Houston Parkway East; the 52,346 sf signed lease by Ashley Furniture Home Store at Deerbrook Corner in the Kingwood area; and the 44,871 sf lease for Brookshire Brothers at Renaissance Center in Montgomery County. Rental Rates According to CoStar, the “average quoted asking rental rates in the Houston Retail Market are up over previous quarter levels, and up from their levels four quarters ago.” Quoted rents ended the 4th quarter at $15.90 psf, up from the end of 2014 at $15.17 psf. This represents a 4.81% increase in rental from four quarters ago. The previous year, rental rates increased 3.36% from 2013 year end. Inventory & Construction During the 4th Quarter 2015, thirty-three (33) buildings totaling 1,186,032 square feet were completed in the Houston Retail Market, compared to 18 buildings and 377,127 sf for the 4th quarter of 2014. Over the past four quarters, a total of 3,748,942 square feet of retail space in 137 buildings have been built in Houston. In 2014, there were 127 buildings with 2,323,829 sf of retail space constructed and delivered. There were 2,943,436 square feet of retail space under construction at the end of the 4th quarter 2015. That is in comparison to the 2,355,126 sf that was under construction at the end of 2014. Some of the notable completions in 2015 are:   

Wal-Mart Supercenter located in The Shoppes at Uptown Crossing A 177,514 sf facility that delivered in the second quarter of 2015 and is now 100% occupied A 125,000 sf building that was completed and delivered in the 1st quarter of 2015 and is now fully occupied.

The Retail inventory in the Houston market area totaled 360,647,992 square feet in 23,444 buildings and 3,981 centers as of the end of the 4th quarter 2015. That is an additional 101 shopping centers from the end of 2014.

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Greater Houston Retail Market Areas Considering the region as eight directional sections outside the Loop, Inner Loop (IL), and CBD, for the 10 market retail areas of greater Houston for 2015, or the end of 2015: Best and Worst Houston Retail Areas Ranked by Vacancy Rate, Rental Rate, Construction Rank 1. 2. 3. … 8. 9. 10.

Vacancy Rate Rate Area 3.6% Inner Loop 4.2% Northeast 4.7% West … … 5.9% Southeast 6.7% East 10.7% Central Business District

Bldgs Completed/Delivered in 2015 Rank Number Area 1. 10 North 2. 6 West 3. 5 Southeast … … … … … … T-7. 1 Inner Loop, East, Northeast 10. 0 Central Business District

Rank 1. 2. 3. … 8. 9. 10.

Quoted Rates per square foot Rate Area $22.91 Inner Loop $20.24 Central Business District $18.59 West … … $14.42 Southeast $14.05 South $13.14 East

Buildings Under Construction Rank Number Area 1. 15 Northwest 2. 13 Southeast 3. 10 West … … … T-7. 3 Northeast, South 9. 2 East 10. 1 Inner Loop

Sales Activity/Capitalization Rates Total Retail center sales activity in 2015 was down compared to 2014. In the first nine months of 2015, the market saw 25 transactions with a total volume of $295,917,203. The price per square foot averaged $152.52. In the first nine months of 2014, the market posted 52 transactions with a total volume of $442,087,083, during which the price per square foot averaged $162.43. This figure was $108.39 psf in 2013. Tallying retail building sales of 15,000 square feet or larger, Houston retail sales figures fell during the 3rd quarter 2015 in terms of dollar volume compared to the 2nd quarter 2015. This also happened for these quarters in 2014. In the 3rd Quarter 2015, 7 retail transactions closed with a total volume of $48,025,0000. These seven buildings totaled 456,240 square feet and the average was $105.26 per square foot. This compares to 11 transactions totaling $113,298,109 in the 2nd quarter 2015. The total square footage in the 2nd quarter was 737,478 sf for an average price per square foot of $153.63. Cap rates have been marginally lower in 2015, averaging 7.70%, compared to the same period in 2014 when they averaged 7.72%. The average rate was 8.47% for 2013. Specific information on key indicators measuring the strength of the retail market was obtained mostly from the Costar Retail Report – 4th quarter 2015, covering the Houston Retail Market.

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Detail by Property Type The CoStar 4th quarter 2015 Report gives further detailed information on the five retail subcategories: Shopping Centers

The Shopping Center market in Houston currently consists of 3,873 projects (99 more than last year) with 157,119,461 square feet of retail space in 6,319 buildings. At the end of 2014, there were 152,610,978 square feet of retail space in 6,098 buildings. In this report, the Shopping Center market is comprised of all Community Centers, Neighborhood Centers, and Strip Centers. After absorbing 507,947 square feet and delivering 426.429 square feet in the current quarter, the Shopping Center sector saw the vacancy rate decrease from 8.5% at the end of 2014 to 7.9% for the end of 2015. For 2014, absorption was 102,392 sf and 32,835 sf was completed/delivered. Over the past four quarters, the Shopping Center vacancy has decreased from 8.4% to 8.2% to 8.0% and finally to 7.9% at the end of the 4th quarter of 2015. At the end of the first quarter of 2014, the vacancy rate was 9.1%. Rental rates ended the 4th quarter 2015 at $15.76 per square foot, up from the $15.09 psf one year ago, an increase of 4.4%. The end of 2014 saw rental rates of $14.47 psf. Net Absorption in the Shopping Center sector has totaled 2,041,427 sf over the past four quarters, a 43% increase from the previous year. Almost 3.5 million square feet has been absorbed over the last 2 years. Power Centers

The Power Center average vacancy rate was 3.8% in the 4th quarter 2015. A year ago, in the 4th quarter 2014, the vacancy rate was 3.5%, and 4.2% for the end of 2013. Over the past 4 quarters, Power Centers have absorbed 7,640 sf (188,300 sf last year) and delivered 5,500 sf (16,538 sf last year). Rental rates have decreased from $15.81 to $15.39 per square foot. The total stock of Power Center space in Houston is currently 26,448,138 sf in 58 centers comprised of 562 buildings. The was 1,121,386 sf of space under construction at the end of 2015, while there was none at the end of 2014. General Retail Properties

The General Retail sector of the market, which includes all freestanding retail buildings except those contained within a center, reported a vacancy rate of 2.5% at the end of 4th quarter 2015, down from 2.6% the previous year. Almost identical from the previous year, there was a total of 3,651,405 sf vacant at that time. The General Retail sector in Houston currently has average rental rates of $15.71 psf, up from $14.56 psf in 2014, an increase of 7.9%. There are 761,267 sf of space under construction in this sector (a little less than half of last year’s figure), with 222,603 sf having been completed in the 4th quarter. In all, there are a total of 16,249 buildings

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with 144,572,106 sf of general Retail space in Houston. For 2014, there were 15,031 buildings with 137,287,455 sf. Specialty Centers

There are currently 15 Specialty Centers in the Houston market, with approximately 2,899,417 square feet of retail space. In this report, the Specialty Center market is comprised of Outlet Centers, Airport Retail, and Theme/Festival Centers. Specialty Centers in the Houston market have experienced positive 25,285 sf of net absorption in 2015. The vacancy rate is currently 6.5% (down from 9.2% at the end of last year) and rental rates average $9.02 psf. Malls

Malls have recorded a net absorption of positive 389,623 square feet in the 4th quarter 2015 (negative 24,099 sf for 4th quarter 2014). This net absorption, combined with the 537,000 sf of new space added in the quarter (25 times that of 4Q2014), caused the vacancy rate to decrease from 5.5% at the end of 2014 to 3.9% at the end of 2015. Rental rates went from $24.42 psf to $20.34 psf during that time. In this report, the Mall market is comprised of 35 Lifestyle Centers, Regional Malls, and Super Regional Malls (two more than last year). Summary Wulfe & Co. projects 4.53 million square feet of new retail shopping center space will be built and opened in the greater Houston area in 2016. According to the locally based real estate firm’s 23rd Annual Retail Survey, this represents a 22% increase from the previous year of 3.7 million square feet. Supermarkets will dominate the retail new construction, as they did last year. Twenty-eight (28) new stores are planned. Kroger will open nine of their 123,000 sf stores, HEB will open five of their 100,000 sf prototype markets, Walmart will open four neighborhood supermarkets, Whole Foods will open one, and Aldi will add nine of their smaller 18,000 sf stores. From Wulfe: “Dick’s Sporting Goods is entering [the Houston] market with the addition of six new stores approximately 50-100,000 sf; Academy will add two new 63,000 sf stores and Cabella’s will open one 72,000 sf store. In addition Costco will open a new 150,000 sf store and Walmart will open another 180,000 sf Walmart Superstore. Also there will be six new theaters; three new 24 Hour Fitness centers and one LA Fitness facility. Altogether a total of 4.53 million square feet will be built and opened, which will be the highest amount since 2008. … With this high expansion of new retail space commitments, overall retail occupancy in Houston will continue to strengthen and achieve an all-time high occupancy rate in excess of 94%. Retail rental rates will also continue to increase driven by the limited availability of shopping center space and the higher land and development costs. With the area’s vigorous growth coupled with the expansion needs of established and new-to-market retailers, the competition for available February 10, 2016

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space in well located, well tenanted and highly desirable retail developments, is aggressive, even at ever-increasing higher rates.” Medical The medical segment in Harris County includes hospitals, surgery centers, medical office buildings, medical condominiums, retirement homes and nursing homes. Medical inventory is organized in 23 economic areas throughout the county, with the highest concentration of development being in the Texas Medical Center. The Texas Medical Center Located within Loop 610 southwest of the Central Business District, the Texas Medical Center (TMC) is one of Harris County’s leading economic contributors. It ranks as the 8th-largest downtown business district in the United States. Recognized as the largest medical complex in the world, it has continued to grow since it was founded in 1945, with the majority of the growth being within the previous decade. The center contains 54 member institutions, including twentyone hospitals, six nursing programs, and three public health organizations, as well as two universities and numerous medical, dental, and pharmacy schools. TMC is the largest employer in Houston. It directly employs 106,000 people and instructs 50,000 students. Currently, clinical research in the TMC generates an average of 15 new startup businesses per year. An estimated 7.2 million people visit the medical center each year. TMC is home to more than 290 professional buildings on over 1,300 acres of land.

Houston Chronicle photo

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Colliers International estimates the TMC current annual economic impact to be $15 billion. Since 2008 the TMC has spent an estimated $7.1 billion in building and infrastructure investments. Texas Medical Center’s recent growth increased the total campus size to 45.8 million gross square feet, up from 29.6 million gross square feet, representing an increase of almost 55% in a six-year period. There are also many new and proposed construction projects ongoing. Texas Children’s Hospital recently announced details for a $506 million expansion, adding six floors and 640,000 square feet to their Pavilion for Women. The University of Texas M.D. Anderson Cancer Center is spending $198 million on a hospital expansion and renovation project to add 185,000 square feet. M.D. Anderson is also adding nine floors atop the Alkek Hospital at a cost of $293 million. Baylor College of Medicine is building a $1 billion clinic and hospital in the TMC’s mid-campus. Houston Methodist will build a $300 million patient tower and $70 million adult outpatient clinic. St Luke’s is demolishing its original 50-year-old hospital to erect a new $200 million patient care center. Memorial Hermann is undergoing a $420 million expansion of all nine of its acute care hospitals. HCA has seven construction projects underway, including a $50 million project at the Women’s Hospital of Texas. Another large project is The University of Texas Research Park, located just south of the TMC. It will be a master-planned campus with laboratory and office space for both academic and commercial biomedical and biotechnology research facilities, encouraging collaboration between scientific and business. The M.D. Anderson portion of the Research Park is planned to provide parcels for as many as twelve buildings containing 1.5 million square feet of lab, office and support space. The Park is designed to be pedestrian-friendly with a multi-level underground parking garage. The most recent medical office to open in the TMC market area is Parc Binz, a 50,000 squarefoot five-story Class A building featuring high-end retail mix on the first floor and an ambulatory surgical center as well as pharmacy and private medical offices. Like many of the new construction office buildings in Harris County, Parc Binz was 50% pre-leased with asking rents of $30 per square foot.

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Parc Binz rendering

In October, the TMC and Harris County broke ground on the construction of its new forensic facility. The 200,000 square foot, nine-story tower is slated to be completed in early 2017 and will be equipped with state-of-the-art technology as well as integrated clinical, laboratory, administrative, public and teaching/training areas. The project includes a second phase four-story building for future expansion. Harris County Institute of Forensic Science rendering

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Demographics: Driving Demand Despite the uncertainties as a result of the 2014 Patient Protection and Affordable Health Care Act, the medical sector has not been deterred. The long-term effects of the act will require additional medical spaces as the hospital systems and physicians respond to the ongoing demand for medical care contributed by the county’s growing population, aging baby-boomers, and newly-insured. Medical Office Buildings The Medical Office Building (MOB) segment continues to outperform traditional office spaces in both stabilized occupancy and rental rates. Medical properties are considered to be safer investment vehicles than any other property type as a direct result of long-term leases, creditworthy tenants and stable income streams. Consequently, REITs and foreign investors consider medical properties to be prime investments for their portfolios. Medical office buildings located on or near hospital campuses and leased by physician groups and hospital systems (often referred to as “compounds”) are considered prime investment grade real estate. Examples include two projects being built near the site of the future St Luke’s Katy hospital at the intersection of Kingsland and Grand Parkway. In early 2015, Katy Medical Plaza completed the first of three proposed medical office buildings nearby and Vista Kingsland Equities will begin construction in July of an 8,000 sf building at a cost of $2.5 million. However, the latest trend is positioning small clinics and medical offices in retail centers that serve suburban neighborhoods, as the population demands the convenience of having medical services closer to home. Some of the major players of this type in the Houston market are the urgent care centers, emergency centers and dialysis centers. According to Colliers International, the high-end retail in the stronger submarkets is currently more expensive to lease than Class A office buildings. Additionally, off-campus locations are leasing up twice as fast as traditional oncampus buildings. An example of this trend in medical office buildings is the Spring Valley Medical Plaza. which is under construction. This is a 68,000 sf surgery center and medical office building on the Katy Freeway in Spring Branch and was 60% pre-leased before the start of construction. Emergency care centers are being built throughout the suburban markets in Harris County, with the majority of new construction in Cypress. North Cypress Medical Center began construction in Towne Lake and Houston Methodist broke ground in December 2014 on a new facility on Highway 290 in Fairfield. Fresenius Medical Care has 35 medical clinics in the greater Houston area with more on the way. The “medi-clinic” or emergency care clinic is an alternative to visiting the ER of a hospital, but is separate from a hospital campus. Usually, they are open 24/7 and are typically located in active retail areas or shopping centers. Their growth in servicing the Houston area has been exponential, especially in suburban areas with other new development. Memorial Hermann announced plans for a Convenient Care Center in Kingwood in northeast Harris County. The 45,000 sf medical center is expected to be completed in fall 2016.

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Memorial Hermann Convenient Care Center in Kingwood (conceptual rendering)

US 59/IH-69 southwest of the Beltway is fast becoming a branch of TMC of sorts, with a large number of medical offices and clinics constructed within the last 10 years. This area includes southwest Harris County, Sugar Land and its Sweetwater subdivision, and Richmond in Fort Bend County. Texas Children’s Hospital, St. Luke’s, Oak Bend Hospital, Methodist, and two Memorial Hermann hospitals are located along this corridor. Another important trend is the demand for a single destination for multiple types of medical care. Kelsey-Seybold, the Houston-based pioneer in this type of facility, built a new $10.8 million multi-specialty care center on North Sam Houston Parkway near Summer Creek which opened in October of 2014. Kelsey-Seybold also opened new locations in Clear Lake and The Woodlands in 2014. The Summer Creek clinic is their 20th location in the Houston area. Kelsey-Seybold also owns land adjacent to the future St Luke’s Katy hospital. According to Integra Realty Resources (IRR), “The medical office building (MOB) market is expected to be a breakout investment class in 2016. The asset class will continue to appeal to lenders and investors because of favorable demographic trends, driving increased demand. … By 2050, as many as one in five Americans will be more than 65 years old. … The average price for medical office assets in 2015 was $289 psf, a 21% increase from the previous year, as tracked by RCA through 3Q 2015. … The MOB investment class is currently benefiting from high occupancy and low Cap Rates.” According to IRR, Vacancy rates, as high as 10.5% in 2009, are estimated to be near 9.5% in 2015. The average medical office property averages a 7.0% capitalization/investment rate, with hospital campus MOB properties at 6.6%. IRR continues, “Newer facilities in urban primary market locations with leases extending 10 years or longer generally trade in the low-6.0% range, with top-tier assets contracting into the 5.0% range. [Properties] with shorter leases typically trade in the high-7.0% to low-8.0% range.”30

30

http://www.slideshare.net/JamesGoodard/irr2016annualviewpoint

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Hospitals Most hospitals in Harris County thrived throughout the economic downturn of 2008-2010. With the growing population, including seniors, and the anchor of the TMC, Houston is expected to outperform the national growth rate over the next decade. According to the Texas Hospital Association (THA), there are 83 hospitals in Harris County. On average in Texas, 28% of all hospitals are nonprofit, 21% are government-owned and 51% are investor-owned. The trend over the previous 10 years, according to THA, is a reduction in the number of government-owned hospitals and an increase in the number of investor-owned hospitals. Currently there are a total of 53 taxable full-service, acute care, specialty use, rehabilitation, and psychiatric care hospitals in Harris County. U.S. News & World Report’s Best Hospitals 2015-16 list included several nationally ranked hospitals in Harris County either overall or in various specialties, including Houston Methodist Hospital, St. Luke’s Episcopal Hospital, University of Texas MD Anderson Cancer Center, Menninger Clinic, TIRR Memorial Hermann, and Texas Children’s Hospital.31 As detailed previously, most of the major hospitals in the TMC have either expanded their facilities or are planning some major expansions in the near future in response to the increasing demand. The new construction is not only taking place in the TMC campus, but also suburban areas such as The Woodlands, Pearland, Katy, Cypress, and Kingwood. Much of the new suburban hospital construction is outside of Harris County. Along with expanding their TMC footprint, also in the works for Houston Methodist is a fullservice 470,000 sf, 193-bed inpatient hospital to be built near The Woodlands in Montgomery County. Construction is slated to begin in early 2015 with completion in 2017. The $328 million Woodlands project will also include a 135,000 sf medical building scheduled to open in late 2015. Methodist plans to invest more than $1 billion in expanding and replacing its facilities in the Houston area over the next three years.

31

http://health.usnews.com/best-hospitals

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Rendering of Houston Methodist’s new hospital near The Woodlands

Early in 2014, Houston Methodist purchased the CHRISTUS St John hospital in Clear Lake and the CHRISTUS St Catherine in Katy. The Katy location is being repurposed to a long-term acute care facility. Houston Methodist also has plans to build in the Cypress area, at the intersection of Hwy 290 and Fairfield Creek Drive. They begin construction on the new emergency care facility in the fall of 2014, and the upgraded facility opened in 2015. It will be modeled after several other free-standing emergency departments the hospital system owns throughout the area. Methodist is Houston’s third-largest hospital system with seven hospitals and 2,222 beds. The Memorial Hermann Health System is Houston’s largest health care system with twelve (12) area hospitals and 3,447 beds. It has several projects in the works. Beginning the summer of 2014 and scheduled for completion in 2018 is a $650 million expansion and renovation of its TMC campus, bringing it from the current 2.5 million square feet to 3.84 million square feet. The new 17-story tower will be dubbed Hermann Pavilion 2. This will add 160 beds, replace 71 beds, and add 24 new operating rooms, 16 additional emergency room bays, and 750 new parking spaces. Included in the plans are a six-story parking and infrastructure building, emergency generator systems, and a roof-top helipad. The plan also accounts for future growth to include six shelled floors and six shelled operating rooms with the potential of adding 264 additional beds, and space for expansion of the kitchen service and heating and cooling systems. Memorial Hermann is also in the process of constructing another patient tower at its Katy campus location. It is projected to cost an estimated $70 million; adding 58 patient beds. The expected 155,555 sf tower will increase its current emergency department and operating room capacity by almost double. The project is currently in phase two of its master plan, which originally began in 2007. The construction is expected to be completed by 2016. In addition to the Harris County properties, Memorial Hermann also has projects within the Houston metropolitan area in Brazoria and Fort Bend Counties. Memorial Hermann broke ground in early 2015 on a 40-acre medical campus in Pearland and will open a 64-bed acute care hospital there in December 2015 or early 2016. In addition, it is working on a $93 million expansion of its Sugar Land hospital. Memorial Hermann also recently announced the purchase of a 32-acre parcel of land at Hwy 290 and the Grand Parkway in Cypress, with plans to build a medical center with both inpatient and outpatient capabilities. The $168 million project will begin in June and is expected to be February 10, 2016

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completed by 2017. Phase 1 will include a medical office building for primary care and an emergency care center which will go online in early 2016. Phase 2 will include completion of the hospital, at which time the emergency care center will likely be converted to serve as an urgent care facility, although no definitive plans have been set. The 80-bed hospital tower will have eight operating rooms, a 16-bed intensive care unit, a neonatal intensive care unit and a cardiac catheterization lab. The site is large enough to accommodate future expansion, including a parking garage, additional office buildings, a helipad, and up to 275 patient beds. Hospital Corporation of America (HCA) is in process of two expansion projects in the TMC and recently opened Pearland’s first hospital. In the TMC, HCA is adding two additional floors and 112,500 square feet to its Texas Orthopedic Hospital. The expansion will allow for privatization of patient beds and creation of clinical, educational, and business office space on the fourth and fifth floors. The second TMC project is a $26.5 million 72,000-square-foot expansion of the Women’s Hospital of Texas that will add a pediatric floor and pediatric support area in the emergency department, as well as shell space on the hospital’s fourth floor to allow for future growth. The Pearland Medical Center, which opened in January 2015, is a $71 million facility with 33 beds. HCA is Houston’s second largest hospital system with ten local hospitals and 2,607 beds. Catholic Health Initiatives (CHI) St Luke’s Health will develop a $110 million facility in the new master-planned community of Springwoods south of The Woodlands, near the new Exxon Mobile campus. The 23-acre development will include a 55,000 sf ambulatory center and 100,000 sf medical office building. It is expected to be completed in late 2015 or early 2016. Long-term plans include a 300-bed hospital and 600,000 sf of medical offices at this location. St Luke’s also purchased nearly 30 acres of land in Katy at the intersection of Kingsland and Grand Parkway with plans for a new hospital development and said it will invest as much as $70 million more over the next five years in future development. CHI St Luke’s is the area’s fourthlargest hospital system with six hospitals and 1,331 beds. Medistar Corporation completed construction in July 2014 of phase one of its new Bay Area Regional Medical Center in Webster, with construction of the second phase underway. The nearly 400,000 sf nine-story building includes 104 patient suites and 22 intensive care unit rooms. It also has a full-service emergency room with 11 treatment rooms, five operating suites, three cardiac suites and one flex suite. The second phase will expand the facility and is slated for completion September 2015. When the facility is complete, it will have 275 rooms in 11 floors. Nursing Homes and Retirement Homes Positive trends are also apparent in the senior housing and skilled nursing markets. Many developers are constructing senior living facilities that consolidate multiple services into single centralized facilities. These facilities are providing more than one type of care and are becoming more common in the industry. The senior living facilities that incorporate independent living, assisted living, and nursing care are often referred to as “Continuing Care Retirement Community” (CCRC). Among the highest ranked CCRC’s in Harris County, according to U.S. News & World Report, are Emeritus at Kingwood, The Hampton at Post Oak, and University Place Nursing Center.

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Real estate trends for the senior housing industry will focus on building flexible spaces that allow for customization to accommodate the demands of an aging population. The county’s steady population growth has played a contributing factor to the increase in demand for new development. The demand for senior care is particularly strong, given the aging population among the post-war baby boomers. More than 390,000 (9%) of the 4,471,000 Harris County residents are persons 65-years of age and older. The percentage is expected to climb to 15.6% by 2030, still below the national average which is expected to be closer to 18%. Brazos Towers at Bayou Manor

Brazos Towers at Bayou Manor is a $70 million project currently underway that will transform the historic campus of Bayou Manor in Bellaire to include a new 14-story residential tower with 84 new residents and 25 assisted living residences. The new East Tower is scheduled for completion in 2015. Included in the project is a complete renovation of the original West Tower. Similarly, The Buckingham in the Memorial area is expanding its facilities along Buffalo Bayou. Currently a 323-unit community that opened its door in 2005 and has been operating at capacity since 2008, it will purchase the adjacent apartment complex to demo and construct a $56 million expansion that will add 187 additional residences including 104 independent living apartments, 33 assisted living suites, 18 memory care residences and 32 private skilled-nursing rooms. It is slated to open in 2017. Under construction in the Heights market is the four-story, 3500 unit, senior living project The Village of the Heights opened in 2015. It is an assisted living center and will feature specialty memory care suites. Belmont Village Senior Living expanded from its West University location to include an additional development in Hunters Creek in the Galleria market area. It opened in November of 2014 and features 106,000 sf on six stories. It also emphasizes memory care services and includes upscale features such as a gym, therapy pool and bistro. The community has 149 residences, including 31 memory suites. With the goal of encouraging socialization, common areas will make up 40% of the gross building area.

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Legacy at Falcon Point is a luxury assisted living and memory care center that opened in the Katy market area in October of 2014. It is located in close proximity to the campus of the future CHI St Luke’s and Methodist hospitals near the Grand Parkway. In the Cypress market area, construction was completed in 2014 on Villages at Cypress, a 162unit affordable care independent senior living center developed by Caddis Partners. Caddis is also developing another assisted living community in the Cypress area with an innovative “Main Street” concept featuring such amenities as storefronts, movie theater, ice cream parlor, art studio, auto repair garage and plant nursery. Construction began on the luxury Heartis Cypress development in March of 2014 and it is scheduled to open in the spring of 2016. The Heartis facility was launched after Caddis realized the strong market demand, with over 800 people putting their names on the waiting list for the Villages at Cypress center. Wood Glen Court Senior Living in Cypress is an “age in place” community featuring upscale finishes and kitchenettes in the rooms which opened in late 2014. Avanti built its $15 million, 90-unit senior living project at Towne Lake in Spring, which opened in mid-2015. The Spring market area also has a new $10.7 million facility Magnolia Heights Assisted Living that opened in November of 2013 and, like most of the newer facilities, features special memory care suites as well as assisted living units. There are plans underway to convert the Old San Jacinto Hospital in Baytown to a luxury retirement center featuring a restaurant on the top floor with skyline views and utilizing the full campus to create green space. The developer spent over $1 million on selective demolition to stabilize the property and is currently waiting on a zoning variance to be approved. Summary The future looks bright for all property types in the medical segment for 2016. The Texas Medical Center continues to expand to meet the demands of a growing population and places a new emphasis on promoting the creation of startup companies. Medical office buildings are experiencing lower vacancy rates and increasing rental rates, particularly for Class B buildings. Retail centers should benefit from the trend toward locating medical clinics and services in suburban markets. Many of the area health care systems are building new hospital campuses in the suburban market, most of which are located outside of Harris County. The aging population is driving demand for senior housing with trends toward multi-service facilities, flexible spaces and more upscale choices. Construction costs could rise dramatically with increased demand for material and shortages of skilled labor. The availability of financing remains healthy, particularly for senior housing and small medical office buildings, as more private investors, pension funds, REITs, and foreign investors enter the market. Hospitals are also benefiting from a trend toward investor-owned facilities. As indicated previously, the greater Houston area is experiencing consistent tremendous growth in population, yet the unemployment rate continues to fall. Due to the projected growth in the industry driven by demographics and abundance of willing investors driving competition and making financing readily available, capitalization rates are expected to remain steady and values increase as supply struggles to keep up with the rising demand. February 10, 2016

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Hotels and Motels Even with the downturn in oil & gas prices and activity, the Houston hotel market will remain one of the strongest in the country into 2016. Houston is preparing to host the 2017 Super Bowl, which is sparking an expansion of hotel stock. Additional rooms are being built to capture convention business and new properties are rising to service the recently built ExxonMobil campus. Integra Realty Resources Houston in their 2016 Annual Viewpoint reports the hospitality transaction volume for the greater Houston area was $889,658,006 for 4Q 2014 to 3Q 2015. This was the fourth highest in the nation, behind only Orlando, Miami, and Boston. This was over four times the amount for Las Vegas and over twice that of Denver. Houston was 9 th out of 54 metro market areas in increase in hospitality transaction volume based on year-over-year change at 12.37%. Hotel convention bookings were up more than 30% in 2015, according to the Greater Houston Partnership. For the South Region of the U.S. for 2015, full-service hotel average daily rate was $147.65 per room, occupancy rate was 72.81%, and cap rate was 8.07% (down from 8.34% the previous year). For limited-service hotels, the hotel average daily rate was $87.18/room, occupancy 66.26%, and cap rate 8.85% (down from 9.21% for 2014), according to IRR. They also noted, “The U.S. lodging industry is in the midst of a six-year period of continuous double-digit bottom-line gains. Based on the revenue forecasts, unit-level net operating income will increase 14.6% in 2015, and is forecast to rise by 12.9% in 2016.” Capitalization rates are expected to remain constant over the next 12 months. The strong U.S. dollar may limit the amount of travel foreign tourists can afford while the downturn of oil & gas prices has increased disposable income to the tune of roughly $4,000 per adult consumer in 2015. This has fueled an increase in domestic tourist travel over the past year, and increased revenues for affordable and suburban road-side hotels and motels and American tourist destinations. Full-service class A hotels may have seen an effect from the downturn of oil as the large oil companies are adjusting to the new economics and potentially cutting expenditures for executive travel, meetings, and lodging. PKF Hospitality Research in their November 2015 Edition of Hotel Horizons, forecasted that occupancy will decrease to 66.8% for 2016, there will be little or no change to the ADR (Average Daily Rate), and RevPAR is estimated to decline 5.3%. A total of thirty-seven hotels will be built over the next two years, most of which will be major brand-name hotels. A big push of boutique hotels is predicted. The Galleria, Downtown, Energy Corridor, and The Woodlands are saturated so boutique hotels will have to fill the gap. Boutique hotels are slower and riskier projects to build that require experienced developers but are typically more successful in appealing to the younger generation. There appears to be strong demand for nightly accommodations in the Texas Medical Center area.

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Texas Lodging Revenue Growth

Texas lodging room revenues gained 2.9% in the third quarter of 2015, compared to 8.3% for 1st Quarter 2014, 9.7% for all of 2014, and 8.7% for 2013. Total revenue for the Houston area was 570.9 million for 3Q 2014 and 569.5 million for 3Q 2015, according to Source Strategies, Inc. For Texas, the gain “was a combination of a 5.1% decline in Oil & Gas areas (39% of Texas rooms) with a 7.9% gain in the balance. Room-Nights sold

Room-nights sold are the measure of real demand and the most important driver of industry health. Third quarter room-nights sold increased by 0.8% state-wide, after a 2% gain in the first half and 5.0% gain for 2014. Revenue per Available Room (RevPAR)

Third quarter RevPAR was basically flat (down 0.2%), based on a 2.3% decrease in occupancy and a price increase of 2.1% (Average Daily Rate). RevPAR indicated that although there was a decrease due to oil & gas downtown, other sectors of the economy balanced it out. Occupancy

Third quarter occupancy reached 65.3% in the Houston metro. 66.4%. Annual occupancy was 66.4% in 2014, 63.6% in 2013 and 62.5% in 2012. The long term Texas average is 60%. Supply Below Demand Growth

Supply grew by 3.1% for the 2Q 2015, the highest since 2010. For all of 2014, net supply gained 2.2%. With low demand growth, RevPAR levels are expected to continue to decline moderately. Houston Lodging Texas room-nights sold gained 3.8% in the 3rd quarter. Average daily rate increased from $106.92 to $108.78 for metro Houston, and RevPAR (Revenue per available room) from $73.45 to $$71.03. Developments Marriott Marquis - Houston First Corporation has selected RIDA Development Corporation to build a convention hotel downtown. The 1,000-room hotel will developed on the block immediately north of Discovery Green and will connect to the George R. Brown Convention Center via a skywalk. The hotel broke ground in 2014, and will be open in 2016. JW Marriott Houston Downtown - Downtown’s 102-year old Samuel F. Carter Building was transformed into the 328-room JW Marriott Houston Downtown in summer 2014. Pearl Hospitality developed the new $81 million, luxury hotel at the corner of Rusk and Main Street. February 10, 2016

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Holiday Inn Downtown - A development group will turn the former Savoy Hotel that straddles Downtown and Midtown into a Holiday Inn. The 17-story property on Main Street has been closed since the late 1980’s. Springhill Suites - Just a few blocks west of the George R. Brown convention center, the historic Humble Oil Building complex at Main Street and Dallas is now a new 166-room Springhill Suites hotel. The complex is already home to a 191-room Courtyard and 171-room Residence Inn. The property’s owner, RLJ Lodging, spent $80 million to convert an existing 82unit apartment tower into the new hotel. Courtyard by Marriott/Hampton Inn Suites by Hilton – Energy Corridor - Western International constructed new Courtyard and Hampton hotels. They are side by side at BarkerCypress Road, just off I-10, each with approximately 135 rooms. It was completed in 2015. Hampton Inn/Homewood Suites - Houston based American Liberty Hospitality is building a pair of hotels under one roof at Crawford and Capitol streets Downtown. A 168-room Hampton and a 132-room Homewood Suites will comprise the $50 million project. The developer is aiming to open in summer 2016. Hyatt Regency & Hyatt Place – Galleria - A 325-room Hyatt Regency and a 157-room Hyatt Place are at Sage Road and West Alabama near the Galleria. The dual-concept project was opened in 2015. Aloft Houston – Downtown - Aloft delivered its second Houston property Downtown at Fannin and Walker streets in 2015. The hotel with 515 rooms was a redevelopment of the historic, 10story Stowers Building, now known as the Aloft Houston by the Galleria. Hotel ZaZa – Memorial City - Z Resorts, in partnership with MetroNational, has broken ground on the boutique hotel’s third location (second in Houston) in the Memorial City area near I-10 and Bunker Hill Road. Construction began in late 2015 with an opening date of summer 2017. Hotel Alessandra - One much anticipated new hotel project will help anchor the mixed-use GreenStreet development Downtown. Hotel Alessandra will be a tall, narrow tower at Fannin and Polk streets with 225 rooms. Completion is slated for 3rd quarter 2016. Hotel Alessandra (conceptual renderings)

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Unnamed Medical Center Project - TRC Capital Partners and Medistar Corp are planning a 250-room hotel in the Texas Medical Center. The 17-story hotel will be located at 6750 Main Street. Groundbreaking is slated for some time in 2016 but no completion date is set. Summary Houston’s hotel market appears to be stable, due to the overall diversity of its economy. Losses in the oil and gas industry are offset by the other sectors of the economy in Houston. Room-nights sold and revenue should stay flat or grow marginally, but with the Super Bowl and continued convention growth, the outlook is still relatively good. Warehouses According to Colliers International Q4 2015 Houston Industrial Research & Forecast Report, “Although Houston’s industrial market showed signs of slowing due to the downturn in the local economy caused by falling oil prices, 2015 still ended on a positive note, with year-end net absorption totaling a positive 9.5 million square feet.” The Houston industrial market is still experiencing moderate signs of advancement, development, and growth during the expansion portion of this economic cycle, however its velocity may wane due to recent pricing pressures from the oil sector. Colliers noted last year that “Houston’s industrial investment sales market is benefiting from the foreign capital that is pouring into the U.S.” That trend continued into 2015, as it did with multifamily and retail investment grade property sales, independent of oil prices. Houston’s industrial sector is ranked second after only Los Angeles, per Marcus & Millichap: “Major markets proximate to busy ports and those with links to multi-modal transportation and distribution networks again occupy the top ranks of this year’s Index.” Positive factors in the city include an increase in jobs, low unemployment, stable rental rates, low vacancy, low-to-no concessions, positive net absorption, active leasing, sales velocity, and new construction. New Construction Houston’s industrial construction “had 8.8 million square feet of projects underway” at the end of the 2015, and about 4 million square feet of it was speculative development. According to Colliers, “The largest project under construction is a 4,000,000-SF build-to-suit engineering, manufacturing and logistics campus for Daikin Industries an HVAC equipment manufacturer consolidating its operations” at a site located northwest of Houston. Aldi grocery stores is constructing a 650,000 sf distribution center west of Rosenberg, southwest of Houston, to be delivered in 2016. Some noted deliveries include: 3507 Pasadena Blvd., a 600,000 sf 100% occupied facility, delivered in the first quarter 2015 and Beltway Crossing Northwest Building 7, a 441,000 square foot building delivered in the second quarter 2015, which is now vacant. Currently, much of the warehouse construction is concentrated in three areas of the county: the Far North, the Northwest and the Southeast. These areas are perceived as being most desirable to February 10, 2016

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tenants and investors of build-to-suit and speculative buildings based on their proximity to major highways, airports, and the Port of Houston. According to CoStar, during the 4th Quarter 2015 there were 39 buildings totaling 2,149,969 sf that were delivered in the Houston area market. This compares to the 53 buildings totaling 3,057,209 sf delivered in the 3rd quarter of 2014, 50 buildings totaling 2,109,055 sf completed in the 2nd quarter, and 4,483,283 sf completed in the 1st quarter of 2015. New construction deliveries in 2015 totaled 11,799,515 sf, compared to 8,951,383 sf in 2014, and 8,687,406 sf in 2013. Developers and investors have fueled this current surge of supply and currently have 9,713,178 square feet under construction at the end of fourth quarter 2015, reports CoStar, compared to 9.1 million square feet at the end of 2014. According to Transwestern, for end-of-year 2015, 9,792,162 sf of industrial product was under construction, of which 47% was in the Northwest Far sector of the Houston market, and 24% in the East-Southeast Far sector (near the Port of Houston). More new construction can be expected with the Panama Canal expansion project currently set to be complete by May 2016. Other driving influences include continued expansion in the chemical industry, progression of e-commerce and manufacturing and medical center job growth. Also, newer properties are viewed very favorably since some older industrial products involve obsolescence, being incompatible with modern requirements of users such as greater wall heights, larger contiguous blocks of space, more overhead doors, and floors that can support heavier loads of equipment and goods.

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New construction projects of note (from CoStar and Colliers):

Address 19001 Kermier 777 Highway 90A 600 Fallbrook Dr 3013 Highway 225 9431 Bay Area Blvd 14151 E Hillcroft, Phase 1 Bldg 1 Beltway 8 & Hwy 90A, Bldg 2 1300 Greens Parkway 9531 Bay Area Blvd 3009 Highway 225 252 Fallbrook Dr Volta Dr & Kenswick Dr 3011 Highway 225 9631 Bay Area Blvd

Estimated Completion Date Aug-16 Feb-16 May-16

Square Feet 4,000,000 650,000 500,400

Preleased 100% 100% 0%

394,489 353,600 240,000

100% 100% 0%

Hwy 59 & 90A

217,440

0%

Jan-16 Spec WH

North Fwy/ Tomball Pkwy E-SE Far Ind E-SE Far Ind North Fwy/ Tomball Pkwy North Hardy Toll Rd E-SE Far Ind E-SE Far Ind

213,218

0%

Feb-16

212,160 205,015 193,000

100% 50% 0%

168,425

0%

Jan-16 Spec Distrib

154,360 153,655

0% 0%

Jun-16 Sep-16

Sub Market NW, Hwy 6 Sugar Land North Fwy/ Tomball Pkwy E-SE Far E-SE Far Ind SW Far

BTS = Built to suit

Ind = Industrial

Building Description BTS for Daikin BTS for Aldi Spec Distrib

Mar-16 Spec WH Sep-16 Spec WH Feb-16 Spec Distrib

Spec Distrib

Sep-16 Spec WH Mar-16 Spec WH May-16 Spec WH

Spec WH Spec WH

WH = Warehouse

Leasing Activity and Rents According to Colliers, industrial leasing activity increased 8.8% on a quarterly basis, but decreased 47.0% on an annual basis, recording 4.2 million square feet, which included renewals. Also for 4Q 2015, the city-wide average industrial rental rate increased to $7.05 psf triple net (NNN), which reflects a four (10.2%) percent increase compared to 4Q 2014 ($6.40 NNN). The average industrial rental rate at the end of 2013 was $6.15 psf NNN. This figure is higher than the Cushman & Wakefield report, which reflects an increase in rental rates of 4.7% percent from 4th quarter 2014 ($5.79 psf) to 4th quarter 2015 ($6.06 psf). The yearend 2014 asking average rental rate was 7% higher than year-end 2013. Per CoStar the average quoted rate within the Flex sector was $10.05 psf NNN at the end of Q4 2015, while the average quoted rate for the Q4 2014 Flex sector was $8.96 psf NNN, reflecting a 12.2% increase. The graph below reflects a four-year trend of positive rental rates and a four-year trend of predominantly steady vacancy rates per Transwestern. CoStar average quoted NNN (triple net) rate per square foot at the end of 2015 by property type are as follows: Warehouse Distribution $6.34, Bulk Logistics $4.56, Flex/Service $12.53, Tech/R&D $13.10.

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Industrial Lease Statistics

Notable 2015 Leases Tenant Exel Michelin N.Amer. Inc. Dunavant McKesson Corp. GE Oil Jacobson Warehouse Co. Valassis Communications, Inc. Forward Air FTD

Property City Park East 8800 Citypark Loop Bay Area Bus. Park 20710 Hempstead Rd 16240 Port NW 11503 Highway 225 801 Seaco Court 14810 North Freeway 16727 Park Row

Square Feet 905,000 663,821 565,760 357,887 261,990 210,000 135,231 109,386 65,000

Submarket E-SE Far NE Hwy 90 E-SE Far NW Hwy 6 West Outer Loop E-SE Far E-SE Far N Hardy Toll Rd NW Outlier

Note:All leased in 4th quarter of 2015

Vacancy/Absorption CoStar Q4 2015 reports indicate vacancy for Houston’s industrial market went up twenty basis points year-over-year to 5.0% (4.8% at end of 2014). Flex projects reported to CoStar that vacancy was 6.8% at the end of the 4th quarter 2015 versus 7.3% at the end of the 4th quarter of 2014 and 8.3% at the end of 2013. Warehouse projects vacancy rate was reported to be 4.8% at the end of the 2015.

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Vacancy Data

Vacancy Rates 10.00% 9.00% 8.00% 7.00%

6.00% 5.00% 4.00% 3.00% 2.00%

Vacancy per Flex projects reported to Costar

1.00%

Vacancy per Colliers and CoStar

0.00% 4th quarter 2013

1st quarter 2014

2nd quarter 2014

3rd quarter 2014

4th quarter 2014

1st quarter 2015

2nd quarter 2015

3rd quarter 2015

4th quarter 2015

The local industrial market has recently showed signs of its positive net absorption losing some momentum. But, it is important to remember that this is within the context of the sector having rapidly grown in recent years. CoStar stated net absorption for the overall Houston industrial market was positive, at 847,661 sf in the 4th quarter 2015 compared with 1,691,806 sf in 3rd quarter, 2,607,160 sf in 2nd quarter, and 4,296,464 sf in the 1st quarter of 2015. Net absorption reported for 2015 was 9,467,091 sf, compared to 10,350,088 sf for 2014. Colliers International, in agreement with figures from other prominent sources, reports Houston posted approximately 700,000 sf of positive net absorption in the 4th quarter, bringing the year-to-date figure to 9.5 million square feet. Examples of major tenant move-ins (including Exel, Michelin, and Dunavant) are listed in the chart of notable 2015 leases above. Sales and Capitalization Rates Currently, interest rates are still low, and there are institutional investors vying for the newer, well-positioned, higher occupancy properties. Per CoStar, “Total year-to-date industrial building sales activity in 2015 is down compared to the previous year. In the first nine months of 2015, the market saw 31 industrial sales transactions with a total volume of $288,257,250 [up from $243,799,698 the first three quarters of 2014]. The sales price per square foot has averaged $75.29 this year [from $61.63 the previous year]. Cap rates have higher in 2015, averaging 7.26%, compared to the first nine months of last year when they average 6.83%.” In the first nine months of 2013, cap. rates averaged 7.56%. Capitalization/investment rates will vary, depending on the type and class of product sold. Class A properties are expected to sell with rates in the 5-6% range for 2016, while Class B product is February 10, 2016

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expected to trade in the 7-9% range. However, well-located Class A distribution projects are currently trading in the low-5% range. Summary With some changes and adjustments in the Houston warehouse sector due to lower oil prices, it was a moderately positive year in 2015 due to increased rental rates, lower vacancy, and a resulting increase in sales price per square foot. The major oil players and service providers began reducing staff and budgets, and some proposed projects were placed on hold. Now the new employment forecast for Houston in 2016 is approximately 20,000 new jobs which equates to a 1% increase. Houston has diversified since the recession of the 1980s, as illustrated by the medical industry, with the Texas Medical Center now being the largest in the world. Also, it is important to remember the $35 billion of construction in the port area, including the world’s largest ethane export terminal, which is coming to the Houston Ship Channel. There is also the expected completion of the Panama Canal expansion project by May 2016. The general consensus is that growth in Houston will continue, just at a slower pace. Cushman & Wakefield, in their US Industrial Snapshot Q4 2015, their 12-month forecast is for overall vacancy to decrease, net absorption to stay level, and construction and rental rates to increase. Looking forward to 2016 from an annualized basis year over year, the Houston industrial warehouse income sector should anticipate approximately a moderate increase in value based on preliminary figures.

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Industrial Property Refineries The price of crude oil has, once again, taken a nose-dive. On the first trading day of 2015 the price of West Texas Intermediate (WTI) was about $53 per barrel having been priced between $80 and $100 for the previous 3 years. It now stands around $37 (NYMEX; first trading day 2016). All other benchmark crudes have experienced similar price declines. Continued strong production from countries in the Middle East along with concern over China’s weakening economy has the global economy awash in relatively cheap oil at the moment. The lower crude prices served to reduce the cost of gasoline at the pump and opportunistic Americans took to the road last summer. Some refiners scaled back outages in order to fill demand and capture a strong margin. Year-over-year crude runs at refineries were strong. The Texas Gulf Coast refinery average annual capacity utilization, as defined by the Department of Energy, for 2015 (data through October) was 91.7 percent compared to 90.6 percent for the same period in 2014. Texas Gulf Coast refineries produced 13 percent more barrels of finished motor gasoline in 2015 as compared to a year earlier. Distillate fuel oil production, including ULS diesel, was up more than 2 percent. The PACE (Pace Consultants Inc.) Gulf Coast composite refining margin for 2015 is, so far, about 10 percent higher than 2014. Through the first three quarters of 2015, Baker & O’Brien Inc.’s PRISM cash margins for the Gulf Coast averaged $2.70 per barrel higher than the same period of the prior year. Gulf Coast refining margins are mixed depending on refinery configurations, the types of crudes processed, and the degree of the distillate production compared to gasoline. However, the robust margin environment of the summer’s driving season probably lifted everyone’s cash margin over that of the previous year. A healthy gasoline crack appears to have buoyed revenue not offset by falling crude prices. In November, the Chalmette-based joint venture of ExxonMobil and Petroleos de Venezuala SA (PDVSA) sold their Louisiana refinery to PBF Energy for $322 million. The deal included interests in associated pipelines and marine and truck terminals. PBF, in September, also agreed to purchase ExxonMobil’s Torrance, California refinery for more than $500 million. Due to an explosion and fire earlier in 2015 at the site, this deal has yet to close. Also last summer, French refiner Total SA announced that it was seeking a 50 percent partnership in its Port Arthur, Texas refinery. No additional public statements have been released since that announcement. The Chalmette refinery, while not a small operation, appears to have the configuration of a gasoline producer. In general, unless it’s very efficient and has a low cost structure, its margin potential is probably limited. The Torrance refinery sale seems a part of a major integrated oil company’s asset divestiture plan, and because California can be a difficult market, a completed sale will most likely end up at a below-average market multiple when compared to other transactions, especially those with a market location advantage. February 10, 2016

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Chemicals The chemicals industry is heavily dependent on auto manufacturing and home building and, as the economy goes, so goes the chemical industry. According to Car and Driver Magazine, retail sales for vehicles have increased by 6 percent in 2015 when compared to 2014. Housing is still lagging nationwide, but up about 14 percent over last year with the latest figures from the census bureau, with most of the sales being in the south and western parts of the country. Texas has been blessed with oil and natural gas fields that have either been recently discovered or, through newer technologies, have been newly developed. The glut of natural gas that has hit the market recently has caused a tremendous amount of new construction to process the gas. Around the state there have been many other projects for building facilities to use the natural gas found in south Texas and along the East Coast. Cheap natural gas means lower raw material costs for many chemicals and possibly greater profit margins for their products. Oil prices began cratering in the 4th quarter of 2014 and have yet to rebound. While this has made an impact on what is being paid at the pump, it may have a positive impact on the chemicals market that is dependent on oil-based feedstock. The real question is whether this drop in price for oil is just temporary or if it will hold and only time will tell. With the drop in oil prices, there have not been any announcements for new construction as the market is still waiting to see if this change will last. The plants that will benefit from the drop in oil are the facilities that are flexible enough to take advantage of whichever feed is the cheapest. And while oil has dropped significantly, natural gas is likely to continue as the preferred feed product for the near future. In Harris County, there have been several announcements of increased capacity or new unit construction. LyondellBassell has increased capacity at their La Porte and Channelview facilities. ExxonMobil and ChevronPhillips are building a new olefins plant at their facilities near Baytown that should be operational by 2017. Last year ChevronPhillips completed a major process unit at the Cedar Bayou site, a 1-Hexene unit. However, with the drop in oil prices, some of these projects may slow down. After the economic crisis and oil prices soaring in 2009 we saw refinery projects that had been planned or in construction slow down tremendously. We may get the same result on chemicals projects as a result of these changes and we have already seen ChevronPhillips adjust their Chapter 313 agreement with the school district to recognize current delays. Operation rates specifically for olefins units have been steady and hovered just above 90 percent on average through 2015, about 5 percent higher than last year. Oil prices appear to not have any effect on olefin unit run rates at this point, but the impact of oil is impacting the overall economy of Texas and the US, which does impact profitability. It appears that 2015 may end up a better production year, but with less revenue than 2014. All together this industry appears to have peaked for the 5 to 15-year cycle we are on and values will likely decline over the next few years especially with the impact of the massive new plants coming online in the next few years. Chemical-related inventory volumes should be near the levels they were on January 1, 2015 and prices are up or down depending on the chemical. Value changes for most chemical facilities

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look to be down for commodity chemicals going into 2016, but may be down more for specialty chemicals that depend on oil-based feedstocks. Utilities Electric The electric power generation sector (power plants and cogeneration facilities) has been through a great deal of turbulence over the past few years and it doesn’t look like it’s going to get any better soon. Historically, the price of electricity has followed the dominant fuel used to generate the power for peaking plants. In Texas, that fuel is primarily natural gas, although the addition of wind projects and transmission lines from West Texas in connection with these projects is affecting power prices. Combining this with very mild weather for the past year and it’s no wonder why power prices have been so soft. There are several initiatives competing to impact generation within the Electric Reliability Council of Texas (ERCOT). The first is the Competitive Renewable Energy Zones (CREZ) initiative adopted by the Public Utility Commission of Texas (PUCT). In April 2008, the PUCT adopted a $5 billion scenario to add transmission infrastructure to move electricity from wind farms in the ERCOT West zone to markets in the North, South, and Houston zones. Wind energy has zero fuel cost and is a clean alternative to burning hydrocarbons, but many of the wind farms in Texas began production between 2004 and 2007 and will be losing their 10-year federal tax incentives. This will impact the electric prices as these incentives go away because wind power with incentives is able to sell power at negative prices (loss of ~20 cents per Megawatt) and the government makes up that difference. When the government incentives go away, the wind power producers will have to bid in at positive costs making the average price for electricity higher. So far we have not seen a dramatic impact in the power prices. The next initiative is the Public Utility Commission of Texas increasing the ceiling for power price in ERCOT. The PUCT makes the rules for the Texas power market and they have been looking at increasing the cap for power price per megawatt during peak hours. Their concern is that Texas is still growing in power consumption, but there is not enough new power construction in the market to maintain a reasonable reserve. The PUCT has typically enjoyed a 12 percent reserve on the ERCOT grid, but projections show that without new construction, Texas could fall well below 10 percent. To encourage new power plant construction the PUCT has increased the cap from $3,000 per MW to $4,500 per MW and there are still discussions to raise the cap further to $9,000 per MW. While this may seem significant, the industry is doubtful that this will be enough incentive to bring in new construction. The industry likens the cap increase to high stakes gambling, where the owner has to bet on whether there will be enough peak days in a year to make it worth the risk. So far there has been very little proposed new construction and only two grass roots facilities being built by the same company. Electricity producers have been testing the waters in different areas of the state looking for options to build new capacity only for the summer and winter months where the price gets high enough to justify running. These units are significantly cheaper than a combined cycle natural

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gas plant or a coal fired plant though they are not as efficient, but when you are running less than 10 percent utilization, efficiency is not a concern. It appears to be official, older power plants will begin to be permanently shut down and abandoned. In 2010, we saw at least 4 units in Harris County taken offline, put back online for the summer, only to be taken offline again. Unfortunately, that appears to no longer be the case and the old stationary boilers may be near their true end of life. The net effects on value within Harris County reflect a reduction in values as plants depreciate. Calpine did complete their two new units in 2014, one at their Channelview location and the other at Deer Park and these went on the roll at their full value for 2015. The majority of the power in Harris County is from cogeneration facilities that produce both steam for an adjacent facility as well as power. If the power prices are affected up or down, it will impact the value of the facility, but the steam will help offset the impact. Steam prices typically track with the price of natural gas, and as long as natural gas is stable, the value of these facilities will not be significantly impacted up or down. Natural Gas Natural Gas Distribution utility companies are always requesting that regulators allow them higher returns (through the rates they are allowed to charge their customers) in order to pay for the cost of expansion when needed, repair storm damage at times, and maintain reliable service overall. However, the main goal of regulators is to make sure gas distribution companies remain operational while keeping service costs as low as possible, in return for the monopoly power given to these companies over designated service areas. Because both revenues and expenses tend to be held in line with this process, the values of property owned by these natural gas distribution businesses tend to be rather stable. Other factors that indicate continued healthy future demand for utility services are: a) the nation’s population appears to be on a steady upward growth course; b) limited practical alternatives exist for consumers seeking a steady supply of natural gas; and c) natural gas supplies in this country are abundant thanks to proficient drilling and extraction technologies. Unseasonably warm or cold weather can always cause substantial volatility in quarterly operating results; however, companies strive to counteract this exposure through long-term oriented temperature-adjusted rate mechanisms. For 2016, the values of businesses in this sector are expected to reflect confidence in the continued improvement in the nation’s economic outlook. An improving job market and housing sales also underpin solid revenue growth and earnings potential. Telecommunications Most Telephone companies in addition to the traditional land lines have a thriving cell phone business which currently is the most profitably portion of the communications sector. For the traditional portion of Telephone Utilities, the number of phone lines in the United States continues to decrease. Many people are dropping traditional phone lines for internet phone services or have chosen to carry just cellular phones. In 2013 (latest available data) 42 percent of adults in the South live in homes without a traditional wired telephone which is down 2.5 percent from 2003. AT&T still plans to end its traditional wire service by 2020 which would require approval by the FCC. That approval is widely expected, although the timeframe for the transition February 10, 2016

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remains unknown. The continued competition from customers relying solely on cell phones and Voice over Internet Protocol (VoIP) offered by cable companies will continue to keep the values down. AT&T has lost approximately 80 percent of its Plain Old Telephone Service (POTS) due to the move to cell phones and VoIP. Bundling packages that include voice, internet, and television programming over some phone systems still cost more to provide than the revenue it generates. Traditional telephone property across the state is expected to continue declining over the next few years. The cable companies and telephone companies are in competition for the same market. The ability for these industries to provide phone, television, and internet has reduced the ability for both industries to earn a profit. Telecommunications will continue to get less expensive as technology advances. With that said, revenues for Comcast and Time Warner have been good for 2015. If this trend continues, then the value of these companies should change little. Wireless communications carriers’ expenditures on infrastructure will decrease as the major cellular carriers have already deployed the next generation of wireless technology referred to as LTE (Long Term Evolution). However, to meet increased demand for mobile data and internet traffic, the carriers will have to add equipment to keep up with the demand which is growing exponentially. The new equipment includes the Hetnet concept of small cells, DAS (distributed antenna system) and WIFI equipment working in conjunction with the cellular towers to increase capacity. Replacement costs for voice and data equipment will continue to decrease with design and manufacturing improvements. Overall, value in 2015 increased 7.73 percent over 2014. The value increase represents heavy investment on part of Verizon and T-Mobile in deploying LTE and associated equipment to meet its data demand. AT&T acquired Cricket Communications in 2014 and Sprint finish removal of its old iDen network. The older generation equipment 2G, 3G & 4G (2nd, 3rd & 4th Generation) will experience expedited obsolescence due to the efficiencies of the current LTE devices. Depreciation on existing plant assets will continue to outweigh new construction and this trend should continue for the foreseeable future. The Data Centers business has really developed in Harris County within the past few years. This business has seen continuous growth and the trend seems to continue. There are two new data centers that were completed in 2015 and are on line currently. Many companies are choosing to host in data centers as compared to building their own because of the high cost of infrastructure and equipment associated with this business. Fiber Optic long distance transmission carriers’ will see only continued depreciation for 2016. The increase in data demand has been a positive for the communication industry as older cable is getting better utilized. The only trend being seen is that larger entities are purchasing smaller companies to reduce competition. There have been new cable deployments happening in major metro cities. Google has also become a major player. However, they are in limited cities in the US. Broadcast television capital expenditures should be minimal in 2016. The improvement in technology has resulted in a decrease in equipment cost and investment. Other communication and internet companies’ asset values will decrease due to further depreciation of their assets and lower investment cost associated with newer technologies. February 10, 2016

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Manufacturing According to the Dallas Fed, Texas factory activity increased again in December, according to business executives responding to the Texas Manufacturing Outlook Survey, which polls businesses on whether key indicators of activity have increased, remained the same, or decreased from the previous month. Survey responses are used to calculate an index for each indicator. The production index, a key measure of state manufacturing conditions, ended the year at 13.4, after Texas factory activity increased for the third month in a row in December. This index was at 16.4 at the end of 2014, and was at 13.4 at the close of 2015. This indicates a slower end to the year though not as drastic as many would have you believe. Commercial Personal Property Dubai’s Gulf News suggests that “the wide variety of global uncertainties are forcing many companies to think short term and hold back on investments that are needed to both build their prosperity in the future but also break the current mood of growing pessimism.”32 According to About News, however, “the U.S. economic outlook is healthy. The GDP growth rate will remain within the 2-3% ideal range. Unemployment will continue at the natural rate. There isn't too much inflation or deflation. … There's little risk of the irrational exuberance that creates damaging booms and busts.”33 The Texas State Comptrollers’ office reports that over the past year, Texas added jobs in 9 of the 11 major industries. Pre-recession Texas employment peaked at 10,639,900 in August 2008, a level that was surpassed in November 2011, and by November 2015 Texas added an additional 1,242,700 jobs. In calendar 2014, Texas real gross domestic product grew by 5.2 percent. Also, the Texas region's consumer confidence index was 117.9 in January 2016, up 1.11 percent from one year ago. However, consumer spending showed that Texas state sales tax receipts for December 2015 were 1.03 percent lower than for December 2014. In Houston, office leasing is down, but retail construction is up. City of Houston sales tax collections have slipped, but vehicle sales set a new record. Airport and port traffic continues to grow and employers continue to add enough jobs to offset job losses in energy. The Texas Workforce Commission reports that the Houston metro area added 4,800 jobs in November, which was the third weakest November in the past 25 years. The region typically adds 10,000 to 12,000 jobs in the month. The Harris County commercial personal property tax base increased approximately 6.29 percent for tax year 2015, including a 6.09 percent increase of the general personal property value base.

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http://gulfnews.com/business/economy/why-economic-outlook-for-2016-is-poor-1.1658357 http://useconomy.about.com/od/criticalssues/a/US-Economic-Outlook.htm

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It is anticipated that this sector will show a minimal change for 2016 as the Houston economy continues its sluggish growth. The total value of the leased asset component of commercial personal property increased 1.93 percent in tax year 2015. The value for this sector may increase slightly for 2016 as office market vacancy rates are expected to decline over the next few years and the majority of leased assets are generally business office machinery and equipment. TexAuto Facts reports that Houston-area auto dealers sold 376,481 vehicles in 2015, up 0.7 percent from 2014 and a record for the industry. The average retail sales price per vehicle, $36,112, reflects a record for the month of December. TexAuto Facts expects sales to slip only slightly in 2016. Since the dealer inventory component is tied to prior year vehicle sales, this indicates an increase in value for this sector in 2016. The tax base for dealer inventory in tax year 2015 increased by 13.54 percent from 2014. The tax base for business vehicles for tax year 2015 increased by 10.68 percent from 2014. The value for this sector, however, is expected to show less growth for 2016.

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