BoyarMiller Breakfast Forum: The Houston Commercial Real Estate Markets - What's Ahead for 2012

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The 5th Annual Houston Commercial Real Estate Markets: What’s Ahead for 2012 Breakfast Forum December 9, 2011

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Office Market Brandi McDonald Newmark Knight Frank

Third Quarter 2011 183M SF, 8th Largest Office Market in the Nation

Source: Newmark Knight Frank, Research Group, Class A & B Buildings Source*: Represents all of Texas. The Texas Workforce Commission www.texasworkforce.com

Houston Office Market Trends

Vacancy 16.3%, down from 16.9% Q3 2010

Absorption 1,026,124 absorbed in Q3, 4th positive qtr

Lease Rates Rents stabilized, trending up in desired markets

New Construction

1.4M SF under construction

Job Growth 286,200 jobs added over the last year*

Source: Newmark Knight Frank Research, U.S. Bureau of Labor Statistics

Two years have passed since the end of the Great Recession, so the recession has now been over for a longer period than its duration. So far, the recession has taken a slower recovery path than any other the previous four U.S. recessions.

United States, Total Nonfarm Employment, % change from recession end

Recession End

Post-Recession Employment Growth

The Dow Jones Industrial Average, the Standard & Poor's 500 and corporate profits have each experienced around 40% growth since the end of the recession, with corporate profits setting new historical highs on a quarterly basis. Total nonfarm payroll employment has been essentially unchanged since the end of the recession, while average hourly earnings have managed a 4.6% improvement and personal income has increased 4.0%. In addition, productivity has increased almost 30% since the end of the recession.

United States, June 2009 to Current

Source: Newmark Knight Frank Research, U.S. Bureau of Labor Statistics, Bureau of Economic Analysis, Yahoo! Finance

Recovery of Major Economic Indicators

United States, Nonfarm Business, Output Per Hour


The BLS reported that nonfarm business sector labor productivity in the U.S. increased at a 3.1% annual rate in the third quarter of 2011, compared to a decreased of 0.1% in the second quarter and an increase of 2.1% in the third quarter of 2010. For the third quarter of 2011, output increased 3.8% and hours worked increased 0.6%. Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.

Productivity

United States, Profits From Current Production, Seasonally Adjusted at Annual Rates (billions)

Source: Newmark Knight Frank Research, Bureau of Economic Analysis

Corporate profits in the U.S. continue to break quarterly all-time highs. According to data from the BEA, from the end of the recession in June 2009 to August 2011 corporate profits increased 53.5%. The BEA reported that profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $61.2 billion in the second quarter, a 3.3% quarterly increase, compared with an increase of $19.0 billion in the first quarter. Over the last year, corporate profits have increased 8.5%, or $151.8 billion.

Corporate Profits

Business investment is gaining strength (non-defense capital goods orders increased 2.4% in the month of September)

Retail sales reached a historical high of $395.5 billion Consumer confidence is on the decline in the U.S. (Lower than any

level in the 40-year history of the index outside of the most recent recession)

Possible Factors:

- European Debt Crisis - Protests against Wall Street and the government - Negative tone of economic news reports

Consumer Confidence

Source: U.S. Bureau of Labor Statistics

United States, Total Nonfarm, Not Seasonally Adjusted

The BLS reported that the number of job openings in September was 3.4 million, up from 3.1 million in August. Although the number of job openings remained below the 4.4 million openings when the recession began in December 2007, the level in September was 1.2 million openings higher than the most recent trough in July 2009 and the highest level since August 2008. (There were 4.2 unemployed persons for every job opening in the U.S. in September 2011.)


Job Openings


United States, Not Seasonally Adjusted

The BLS reported that the average duration of unemployment in the U.S. was 39.8 weeks in October 2011, compared to 41.0 weeks in September and 34.9 weeks in October 2010. The historical high average, on records going back to 1948, was 41.4 weeks, reported in April 2011. Of the 13.9 million people unemployed in the U.S. in October 2011, 43.8% were unemployed 27 weeks and longer, a total of 5.7 million persons. 18.6% of unemployed persons had been unemployed less than 5 weeks, 22.8% of unemployed persons were unemployed 5 to 14 weeks, and 14.8% were unemployed 15 to 26 weeks.

Duration of Unemployment

Length of Recession

Months from Peak Employment to Employment Uptick November 2011

*Excludes Detroit Source: GHP and U.S. Bureau of Labor Statics

*Excludes Detroit Source: GHP and U.S. Bureau of Labor Statics

Depth of Recession

% Jobs Lost During Recession November 2011

Source: GHP and U.S. Bureau of Labor Statics, November 2011

Total Jobs Lost

Listed by Population Size

Metro Area Jobs Lost* Metro Area Jobs Lost*

New York -389,600 Detroit -480,900

Los Angeles -549,300 Phoenix -246,900

Chicago -340,800 San Francisco -169,300

Dallas -155,900 Riverside -172,500

Philadelphia -144,700 Seattle -141,500

Houston -121,200 Minneapolis -115,900

Miami -245,900 San Diego -101,600

Atlanta -224,800 St. Louis -83,900

Washington -95,800 Tampa -138,900

Boston -104,600 Baltimore -70,400

*Seasonally adjusted

Percent of Recovered Jobs

Percent of Recovered Jobs through September 2011 Houston vs. Top 10 Metros

Source: GHP and U.S. Bureau of Labor Statics

Houston MAS Job Recovery

Through August 2011

Midway Point

* Transportation, Warehousing and Utilities

Source: GHP and Texas Workforce Commission

1990 Through March 2011

Annu

al A

vera

ge W

orki

ng R

igs

Source: Baker Hughes, Inc; Nov 2011

U.S. Rotary Rig Count

Dollars per Barrel

Source: Newmark Knight Frank Research, U.S. Department of Energy

• According to the U.S. Department of energy, the spot price of West Texas Intermediate (WTI) crude oil, a traditional benchmark for the U.S. market, fell to $85.32 in October from $85.52 in September, although remained higher than the $81.89 reported one year ago. The 10-year high for the WTI was $133.88 in June 2008.

• The spot price for Brent, a global benchmark, was $109.55 in October compared to $112.83 in September and $82.67 one year ago.

Crude Oil Prices

United States, October 2011


Unemployment Rate by State

U.S. Shale Plays

Bakken

Gammon

Niobrara- Mowry Hilliard Baxter

Mancos-Niobrara Niobrara

Niobrara FM

Mancos

Cane Creek Gothic

Mancos

Pierre- Niobrara

Barnett-Woodford

Avalon- Bone Spring

Eagle Ford

Barnett Haynesville- Bossier

Tuscaloosa

Woodford Woodford- Caney

Excello- Mulky

Fayetteville

Monterey- Temblor

Kreyenhagen

Monteray

Antrium

Collingwood

New Albany

Floyd-Neil Consauga

Marcellus &

Utica

United States, October 2011

Source: Newmark Knight Frank Research, U.S. Bureau of Labor Statistics EIA, July 2011

National Vacancy Rate: 16.4%

National Rates 3Q 2011

Source: Newmark Knight Frank Research Group; 3Q 2011

Office Vacancy Rates

Source: Newmark Knight Frank Research Group, Class A & B Buildings

Net Absorption (SF) Houston Metro Area Q3 2011

Historical Houston Absorption and Vacancy

Houston Metro Area Q3 2011

Average Asking Rent & Vacancy

Source: Newmark Knight Frank Research Group, Class A & B Buildings

Houston Metro Area Q3 2011

*Class A Office Only (Medical Excluded) Source: Newmark Knight Frank Research Group

Class A Office Under Construction

Submarket SF % Pre-Leased

West Loop 682,000 26%

Energy Corridor 452,000 51%

The Woodlands 302,000 33%

Total 1,436,000 36%

New Developments

3009 Post Oak SKANSKA 302K Delivery 1Q 2013

2200 Post Oak BBVA Compass 380K Delivery 2Q 2013

842 W Sam Houston CityCentre Three 120K Delivery 3Q 2012

West Loop Energy Corridor

945 Bunker Hill – Nexen Bldg Metro National 332K Delivery 3Q 2012

The Woodlands

Three Waterway The Woodlands Development Company 302K Delivery 1Q 2013

Source: Newmark Knight Frank Research Group; Class A and B

Submarket Comparison

Size (MSF) Vacancy % Vacancy (MSF) Rate (Class A)

CBD 41.0

Far Northwest 24.0%

CBD 6.3

CBD $36.21

West Loop 33.7

Greenspoint 15.6%

West Loop 4.7

West Loop $30.74

Energy Corr. 21.7

Westchase 15.3%

Energy Corr. 3.1

Energy Corr. $29.86

Westchase 12.9

CBD 15.3%

Northwest 2.5

Westchase $28.53

Far Northwest 10.5

Energy Corr. 14.4%

Westchase 2.0

Greenway $28.47

Greenspoint 10.3

Westloop 13.8%

Greenspoint 1.7

Far Northwest $26.05

Greenway 8.7

Greenway 12.5%

Greenway 1.1

Greenspoint $20.95

2012 Forecast

Vacancy

Absorption

Lease Rates

New Construction

Job Growth

www.boyarmiller.com

Land Development, Homebuildng & Multi-Family Markets Joel Marshall Trendmaker Development Company

17,100 16,500

55,700

66,300

11,100

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Austin Fort Worth Dallas Houston San Antonio

Texas Economy MSA – Annual Job Growth September 2011

Source: Texas Workforce

Commission

Houston's Historical and Projected Population

5,000,000

5,500,000

6,000,000

6,500,000

7,000,000

7,500,000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Peop

le

IRF Forecast

TSDC - Scenario 1

TSDC - Scenario 2

Population

Source: Census, Metrostudy, Institute for Regional Forecasting and Texas State Data Center

Houston's Historical Population Growth

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

Peop

le

Population Growth

Source: Census, Metrostudy, Institute for Regional Forecasting and Texas State Data Center

Houston Apartments – Supply v. Demand

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Multi-Fam

ily Units

New Units Completed

Apartment Absorption

Source: Apartment Data

Services

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

Sep-02

Mar-03

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

Occupancy R

ateHouston

Apartment Occupancy


Services

$0.55

$0.60

$0.65

$0.70

$0.75

$0.80

$0.85

$0.90

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Sep-08

Mar-09

Sep-09

Mar-10

Sep-10

Mar-11

Sep-11

Ren

tal R

ate

Houston Apartment Rental Rates


Services

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

100.0%

Class A Class B Class C Class D Total

Houston Apartment Occupancy - Class


Services

National Economic Overview 30 Year Mortgage Rate

3.50%

5.50%

7.50%

9.50%

11.50%

13.50%

15.50%

17.50%

19.50%

Sep-73

Sep-75

Sep-77

Sep-79

Sep-81

Sep-83

Sep-85

Sep -87

Sep-89

Sep-91

Sep-93

Sep-95

Sep -97

Sep-99

Sep-01

Sep-03

Sep-05

Sep-07

Sep-09

Sep-11

Source: Freddie Mac

20-yr Average = 7.00%

3Q11 © Copyright Metrostudy 2011 3Q11 © Copyright Metrostudy 2011

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

4Q00

2Q01

4Q01

2Q02

4Q02

2Q03

4Q03

2Q04

4Q04

2Q05

4Q05

2Q06

4Q06

2Q07

4Q07

2Q08

4Q08

2Q09

4Q09

2Q10

4Q10

2Q11

Annual Starts - Fort Bend County (Black) & Katy ISD (Red)

3Q11 © Copyright Metrostudy 2011 3Q11 3Q11 © Copyright Metrostudy 2011

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

Months of Supply

Houston MLS Months of Supply

Source: MLS

National Average = 8.5 months

-3.89%

-2.27%

-2.04%

0.24%

-3.43%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Houston Austin Dallas San Antonio Fort Worth

Houston Home Appreciation – 2Q11

Data Source: FHFA

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Sep-06N

ov-06Jan-07M

ar-07M

ay-07Jul-07Sep-07N

ov-07Jan-08M

ar-08M

ay-08Jul-08Sep-08N

ov- 08Jan-09M

ar-09M

ay-09Jul-09Sep-09N

ov-09Jan-10M

ar-10M

ay-10Jul-10Sep-10N

ov-10Jan-11M

ar-11M

ay-11Jul-11Sep-11

Postings Foreclosures

Houston Harris County Foreclosures

Source: Foreclosure Information & Listings

Service

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

3Q99

1Q00

3Q00

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

Annual Closings Annual Starts

3Q11 YTD = 13,838 New Home Starts

Houston Annual Starts and Closings Trends


0

200

400

600

800

1,000

1,200

<$100k $100k-$125k

$125k-$150k

$150k-$175k

$175k-$225k

$225k-$300k

$300k-$500k

>$500k

Fini

shed

Vac

ant

Uni

tsHouston

Finished New Home Inv - Price

3Q-10 to 3Q-11


0

10,000

20,000

30,000

40,000

50,000

60,000

3Q92

3Q93

3Q94

3Q95

3Q96

3Q97

3Q98

3Q99

3Q00

3Q01

3Q02

3Q03

3Q04

3Q05

3Q06

3Q07

3Q08

3Q09

3Q10

3Q11

Annual Lot Delivery &

Absorption

Annual Lot Absorption

Annual Lot Delivery

Houston Lot Delivery vs. Absorption


National Comparison Vacant Developed Lot, Months of Supply


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

0

2,000

4,000

6,000

8,000

10,000

12,000

0-$99 $100-$124

$125-$149

$150-$174

$175-$224

$225-$299

$300-$499

$500-$999

VDL M

oSA

nnua

l Sta

rts

& V

DL

Houston VDL Supply and Annual Starts by Price Range


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

0

5,000

10,000

15,000

20,000

25,000

0 to 5 6 to 11 12 to 23 24 to 47 48 to 71 72+

VD

L MoS

Star

ts &

VD

L

Annual Starts

Ann Starts VDL VDL MoS

Houston VDL Supply by Annual Starts Rate

Subs with 24+ Annual Starts:

9,604 Annual Starts

13,012 VDL – 16.3 MoS

178 MoS

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

National Economic Overview Single Family Starts – NAHB Projections

Source: NAHB


$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

$550,000

2Q00 2Q01 2Q02 2Q03 2Q04 2Q05 2Q06 2Q07 2Q08 2Q09 2Q10 2Q11

CA FL TX NV AZ

$200K Home Buying Scenario National Markets$200,000 Home Scenario National Markets

Data Source: FHFA, Metrostudy


$150,000

$250,000

$350,000

$450,000

$550,000

$650,000

$750,000

2Q00 2Q01 2Q02 2Q03 2Q04 2Q05 2Q06 2Q07 2Q08 2Q09 2Q10 2Q11

CA FL TX NV AZ China

$200K Home Buying Scenario National Markets + China

Data Source: FHFA, Metrostudy

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Retail Market Ewing King Ewing King Commercial Real Estate

State of Local Economy

Houston, Texas: Population Growth

Houston continues to improve employment and outpace the rest of the country despite the continued, unprecedented population growth.

• Among the nation’s 20 most populous Metropolitan areas, Houston has recovered the highest percentage of jobs lost in the recession. At current pace, Houston will return to peak employment by the end of the year.

• While the National Unemployment

Average is 9.1%, Houston maintains an unemployment rate of 8.1%.

• 2011 job growth was 79,500.

• 2012 and 2013 projected job growth 80,000-100,000 per annum.

Unemployment Rate - Houston vs. U.S

Houston employment

rose 2.6% over the

past year compared to

the rest of the nation

where employment

only rose 0.9% in 2011.

A Corporate Center for Business

Energy Capital

The Port of Houston

Houston Airport System (HAS)

The Texas Medical Center

• Energy Capital: Home to more than 5,000 energy related firms, Houston is considered the Energy Capital of the world.

• The Port of Houston: The Port of Houston ranks #1 in the United States in volume of foreign tonnage and has an $118 billion statewide economic impact.

• Houston Airport System (HAS): HAS, the fourth largest multi-airport system nationally & the sixth largest worldwide, has a regional economic impact of $24.2 billion.

• The Texas Medical Center: The Texas Medical Center is the largest medical complex in the world & has an economic impact of $14 Billion.

“The Houston market continues to face fewer market obstacles than most U.S. markets...Texas’s pro-growth policies and business friendly environment will continue to benefit local housing markets and allow for 2011 to show...growth.” Metrostudy

Houston Retail Markets at a Glance

Retail Breakdown Houston continues to be among the top cities in the country for new retail development. As retailers seek to expand market share and increase sales, Houston is more attractive than ever due to the strong employment and population growth. Neighborhood and Community Centers make up the vast majority of Houston Retail Shopping Centers.

Houston Retail Statistics Market Occupancy

Retail occupancy rates are the highest they’ve been since 2005 at 92.9% led by inner loop properties.

Average Market Rents, currently at $14.41 psf, appear to have bottomed out and are gradually climbing again. Despite the recent downturn, current retail rents are still above the 8 year historical average.

Market Rents

Houston continues to experience positive absorption as development continues to be on an as needed basis with speculative building almost non-existent. Financing requirements and prudent growth plans for developers have created a market place where Class A demand is higher than supply which continues to assist in positive increases of market rents.

Absorption Completions and Net Absorption

eHoliday & Holiday Sales

Changing Market Conditions

Retailers have exhibited a “Flight to

Quality” mentality with the past three

years providing opportunity for those

typical Class B tenants to get into

Class A space at relatively same

rental rates.

Retail Trends

• Continued effort of retailers to reduce the size of stores.

• Retailers and Service Users are focusing on Low Income & Hispanic Markets.

• Retailers are creating their own, discounted product lines to reach a wider audience and compete with the online retailers like Amazon.

• Retailers are offering No-Interest Financing options to attract consumers back into their stores.

• Internet Sales currently make up approximately 11% of total sales and are increasing annually at a rate of 10% - 15%.

Challenges Still Facing Us

• National consumer confidence continues to be dampened by the fear of a double dip in the economy.

• Economic strain in the EU continues to take its toll on U.S. Markets.

• Pre-recession 2007 leases are expiring, leaving landlord’s unsure about their ability to re-lease the space at equivalent rents.

• 1,200 CMBS mortgages with a balance of $17.3 B are set to mature in 2012. Borrowers will likely need to contribute addition equity to secure five year financing.

• Tenant Rep Brokers and small in-line retailers are challenged in securing good locations due to the limited supply.

• Difficult to secure construction financing due to higher pre-leasing and equity requirements.

• Reduced number of active Anchor Tenants (not including grocers).

Challenges Ahead

What’s Ahead

Grocery Anchored Developments 2011 Openings

Houston-area Market Leaders Wal-Mart Supercenter 27.4% market share Kroger 26.2% market share H-E-B 17.7% market share Randalls <6.0% market share

Future Grocery Anchored Developments 2012 & Beyond

Houston-area Market Leaders Wal-Mart Supercenter 27.4% market share Kroger 26.2% market share H-E-B 17.7% market share Randalls <6.0% market share

Urban Mixed Use Projects

Last Year’s Projections Increase in number of tenants actively

seeking locations. Continued pressure on public retailers to

grow externally through new store expansion. Legacy assets begin developing junior

anchor boxes and complementary inline space adjacent to existing anchored developments.

Few if any full price retail centers from ground up.

Outlet center will be announced either in the League City/Texas City submarket.

Class A, small retail space will be in tight supply and high demand.

Rental Rates gradually increasing in the second half of the year.

Continued obsolescence of older and poorly positioned retail centers - candidates for adaptive reuses.

Outlook 2012

• New concepts will be drawn to the Houston markets due to economic and population growth.

• Increase in non-retail uses in traditional retail locations.

• Shift to a Landlord market in Class A space. • The arrival of Specialty Grocers. • Gradual Increase in construction cost due to

increased demand for materials. • Wholesale Clubs will announce a few new

locations. • Plans for expansion of existing traditional

malls.

• Multiple construction starts for Mixed-Use developments both inside and outside the Loop.

• Increase in Foreign Capital being invested in Houston.

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Industrial Market Welcome W. Wilson, Jr. GSL Welcome Group

2010 2011 499 million SF

219,000 SF under

construction

507.9 million SF

1.977 million SF

under construction

U.S. vs

Houston

Population Growth

Questions & Answers

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