TEXAS SNAPSHOT, MAY 2011

Houston Office Market

House

The Houston office market’s second quarter total net absorption crossed into positive territory (182,660 square feet) for the first time since fourth quarter of 2008. This led to vacancy easing back ten basis points from the previous quarter to 18.3 percent, the first quarterly decline in vacancy since late 2007. The slight improvement in occupancy was the result of pent up demand among firms who had postponed real estate decisions since late 2008; one other contributing factor was the minor positive economic momentum experienced earlier this year. As expected, the majority of notable leasing activity occurred in Class A buildings, as Class B tenants took advantage of the softening Class A market by upgrading to newer more efficient space. Significant examples of this trend included Money Management International Inc.’s announcement that they will move from Bellaire to Sugar Land, and Multiphase Solutions’ upgrade within the Katy Freeway submarket. Sublease vacancy actually dipped thanks to positive sublease net absorption of approximately 55,000 square feet — the first since fourth quarter 2007. Total office building sales activity in 2010 was up compared to 2009. In the first 3 months of 2010, the market saw six office sales transactions with a total volume of more than $112 million.

Class A Office

The Class A office market recorded net absorption of negative (509,301) square feet in the second quarter 2010, compared to positive 102,823 square feet in the first quarter 2010, and negative (120,270) in the fourth quarter 2009. Class A projects reported a vacancy rate of 15.6 percent at the end of the second quarter 2010, 15.1 percent at the end of the first quarter 2010, 15.2 percent at the end of the fourth quarter 2009, and 14.7 percent at the end of third quarter 2009. Class A projects reported vacant sublease space of 1,274,699 square feet at the end of second quarter 2010, up from the 1,269,173 square feet reported at the end of the first quarter 2010. There were 1,264,833 square feet of sublease space vacant at the end of the fourth quarter 2009, and 1,358,951 square feet at the end of the third quarter 2009.

CBD Overview

Sublease vacancy tapered off slightly, but the potential for sizeable increases remained, considering Continental, Chevron, Devon Energy and Dynegy are all downsize candidates. The majority of notable leasing activity in the overall Houston market occurred in Class A buildings, as Class B tenants took advantage of the softening Class A market by upgrading to newer more efficient space. A notable investment-sale transaction that occurred during the second quarter was Brookfield Real Estate Opportunity Fund’s purchase of the Chase Bank building (809,997 square feet, Class B) located at 712 Main Street; the acquisition was part of a portfolio from J.P. Morgan Chase & Co.

Both Class A and Class B rental rates have increased slightly from their 2009 lows. Although rates have yet to regain the ground loss from 2008, they are trending in a positive direction.

Recent Developments

Brookfield Office Properties has purchased the long-abandoned Sheraton Hotel building in downtown Houston with plans to demolish the structure. Located 711 Polk, the former hotel sits on a half block of land and has been vacant since 1986. The demolition will take about a year.

Horizon Wind at 808 Travis Class B — renewed 58,000 square feet instead of relocating to a Class A building.

J. Ray McDermott, Inc. renewed their lease of 190,000 square feet at 757 North Eldridge Parkway.

GDF Suez Energy North America, Inc. signed an extension for 127,673 square feet at 1990 Post Oak Boulevard.

Money Management International Inc. (MMI) signed a lease for 90,000 square feet at 12141 Southwest Freeway.

Bechtel extended their 57,549-square-foot sublease for another four years on floors 20 through 22 at 3040 Post Oak Boulevard.

Aon Corp. signed a lease for 46,797 square feet on floors 15 and 16 at 5555 San Felipe Street.

ENGlobal Corporate Services renewed a lease for 33,759 square feet at 654 North Sam Houston Parkway East.

Penn Virginia renewed their lease for 24,220 square feet at 840 Gessner.

Express Energy Services leased 22,023 square feet on the seventh floor at 9800 Richmond.

Ensco Offshore Co. leased 20,717 square feet on the third floor at 16300 Katy Freeway.

— Paul House is managing director of Jones Lang LaSalle’s Houston office.

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