REAL ESTATE

2014 State of the Industry

Chairman’s Letter

To Our Readers,

As part of our commitment to knowing our real estate clients’

business, we collect insights from some of the best minds in

the industry. This understanding contributes to how we deliver

counsel that exceeds our clients’ expectations and our ability

to help them make strategic decisions about their business.

The information in this ebook has been invaluable to us and

to our clients, and we hope that it will benefit you as well.

Read some of the trends and best practices gathered from

industry-leading clients and our own real estate team. If you

find value in it and would like to hear more, join us for our next

BoyarMiller Breakfast Forum.

Sincerely,

Chris Hanslik

Firm Chairman

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TABLE OF CONTENTS

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THE RIGHT KIND OF JOB GROWTHHouston has recovered 230% of the jobs lost in the recession.

The city leads the nation as the most powerful job engine in

the country. But it’s the type of jobs being added that are

most important to the growth of our economy, not just the

number. Because Houston is generating jobs in the educa-

tion, healthcare, professional services, energy, information

technology and financial industries, the city is becoming

an even better environment for continued economic

growth. That varied job growth in vital industries leads

to more demand for residential, office, mixed-use, retail

and industrial real estate.

GREAT PLACE TO WORK AND LIVEHouston has always been known as a great place to work,

but now it has also become a great place to live. One of

the reasons publications like Forbes magazine and Business

Insider are calling it “America’s Coolest City” and the

“Best City in America” is that, in addition to contributing

to country-leading job growth rates, companies in Houston

are looking at ways to improve their employees’ quality

of life outside of working hours. Mixed-use buildings –

corporate campuses like those that originated in Silicon

Valley – are growing in popularity with Houston companies

that want to provide great amenities to employees.

GROWTH ON THE “THIRD COAST”Although the Atlantic and Pacific regions have traditionally

dominated trade in America, the recovery from the 2008

recession has proven to be the period for the rise of the

Gulf Coast. With six of the fastest-growing job markets in

the country in the Gulf region – Houston topping the list –

this is a place for growing economic vibrancy that’s

becoming very attractive to foreign investors.

HOUSTON

A PARAGON CITY

3

BEST CITY IN AMERICA

6OF THE FASTEST

GROWING JOB

MARKETS IN AMERICA

230%RECOVERED

OF JOBS LOST IN RECESSION

EXPERT INSIGHT

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Will Holder has worked in the homebuilding and residential land develop-ment industry for more than 30 years in Houston and in several other U.S. metro markets. He joined Trendmaker homes in 1993, and has led the company to become the leader in luxury production homebuilding and MPC development. Will was the 2012 president of The Greater Houston Homebuilders Association and a guest expert on Real Estate forecasts and homebuilding trends for local and national news, radio, TV, magazines and newspapers, including Fox Business Report and USA Today.

Land Development, Homebuilding & Multi-Family MarketsWHAT SETS HOUSTON APART?Houston’s residential real estate market leads the nation in home value, quality, complexity and finish. Relocating buyers are shocked by the value they can get for their money in this city.

2014 PREDICTIONSWill Holder, President, Trendmaker Homes

• INDUSTRY WILL CONTINUE TO CHANGE RAPIDLY: Fast-paced change in the real estate industry means quick adjustments for developers. As the leading master planned communities reach the end of their available lots, new leaders are evolving. The area west of Beltway 8 and north of I-10 will be experiencing a transformational change due to the opening of the Grand Parkway. This will shift school district perceptions, the key driver of home demand.

• VERY LOW EXISTING HOME SUPPLY: With only about 3.1 months of inventory, people have to make very quick decisions when it comes to buying and selling houses. Houses sell almost instantly, and as a result, sellers are pressuring developers to build homes faster.

• GENERATIONAL DEMOGRAPHIC BUBBLES DRIVE TRENDS: Developers are asking if Millennials will buy their first house and Baby Boomers will buy their last. Each group has about 75 million peo-ple, and they are driving the trends in homebuilding. For example, Trendmaker Homes is selling houses with two suites down for young families expecting older relatives to live with them.

• PREMIUM ON HUMAN TALENT IN HOMEBUILDING: A system-wide challenge to build homes will continue because vendors who were burned by the recession are in no hurry to expand. There are human talent shortages from the executive level to the level of employees, trades-men and craftsmen. Talent is in high demand right now.

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EXPERT IN

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Retail MarketsWHAT SETS HOUSTON APART?Houston can be wonderful, but if the rest of the country looks bad for a retailer, they won’t

be expanding here either. Retail market is driven by job growth and consumer sentiment –

with Houston’s economy ramped up now, retail growth will continue. Houston is a landlord’s

market right now, with the lowest vacancy rate and default rate by tenants in decades.

2014 PREDICTIONSJay K. Sears, Managing Partner, NewQuest Properties

• ONLINE PRESENCE ACTUALLY MAKES BRICK-AND-MORTAR STORES BETTER: Online shopping

accounts for only about 6% of retail sales, but customers are using online presence for

more than just shopping. They use the web to research products, read what peers are

saying about products and gifts, leverage the buy-online-pickup-in-store options, and

use retailers’ apps and mobile websites. All of these things help and support the physical

stores – so companies that use their web presence well perform better in person as well.

• REAL ESTATE TEAMS NEED TO MIRROR THE MARKET: Growth in Hispanic and Asian populations

in Houston mean that more retailers are targeting those ethnic groups. Developers will be

looking to have more ethnically diverse teams that reflect the demographics of the market.

• THE GRAND PARKWAY WILL BE A GAME CHANGER: Lot delivery and home delivery stats

show that the real activity is occurring around the new Grand Parkway. Katy is the fast-

est-growing community in the United States.

• FUTURE PROJECTS WILL TRANSFORM UNDER-SERVED COMMUNITIES: People are looking for

safe neighborhoods, great schools and great amenities. NewQuest and many other part-

ners are taking an anchor-based approach to community development, working to bring

better schools to and increase the safety in under-served communities to transform them.

Jay Sears is a 27-year veteran of the retail/commercial brokerage and development industry. As a co-founder and managing partner of NewQuest Properties, Jay focuses on new development opportunities, on the leasing activities of NewQuest’s development pipeline and on managing key client relationships with retailers and clients. Jay is a member of the International Council of Shopping Centers (ICSC), a member of the Urban Land Institute, a member of the Rice Design Alliance, and is also involved extensively with KIPP-Houston, serving on their Board of Trustees.

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Office Market & Mixed-Use DevelopmentWHAT SETS HOUSTON APART?Houston economy continues to outperform the nation, but beyond being just a great

place to work, Houston is now also a great place to live. The city is also now perceived

as a core American investment area – a gateway market – as part of the “Third Coast.”

2014 PREDICTIONSJonathan Brinsden, President & CEO, Midway

• CHANGING EMPLOYEE TYPE IS CHANGING THE FACE OF OFFICE SPACE: As the demographics

of office workers shift toward more Millennials and fewer Baby Boomers, office environments

have to cater to that group’s different expectations. Their attitudes toward the environments

in which they work are different, so that new builds by corporations like ExxonMobil begin

to model their spaces on the campuses of younger companies like Google.

• ENERGY INDUSTRY IS CHANGING, BRINGING OFFICE CHANGE WITH IT: The energy industry

is no longer focused on how to find petroleum; it’s focused on how to extract those

resources as efficiently as possible. That’s a more technology-centered job, and

as energy jobs shift to becoming more technological, they start to bring a Silicon

Valley-like feel to the office environments.

• HOUSTON’S CORE OFFICE MARKETS ARE RISING OR PEAKING: The office markets in the

Woodlands, Katy Freeway, Overall Houston and Central Business District are peaking.

The markets in Westchase, Galleria/West Loop, Greenway Plaza and Northwest at

FM 1960 are rising. As the urban core matures, expect more office development

outside of the core markets.

• MASSIVE GROWTH WILL TAPER OFF: In 2012, Houston had 12% job growth in the energy

sector, and this year it saw just 6% growth. Other industries will follow energy in this area.

As the massive ramp-up begins to taper off, developers need to be careful not to see

the growth as permanent and over-commit.

Jonathan Brinsden, President and CEO of Midway, guides the company’s overall business strategy and operations. After joining Midway’s development team in 2001, he was named COO in 2008. Prior to joining Midway, he was President and COO of Hamm Corporation, a Houston-based development company. Jonathan is an Adjunct Professor in the graduate real estate programs at Texas A&M University and the University of Houston, and serves on the Executive Advisory Board for both programs. He is a member of the Urban Land Institute Board of Trustees, International Council of Shopping Centers and NAIQP.

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Industrial MarketWHAT SETS HOUSTON APART?With our advantages in location, affordable housing and people, Houston is without ques-

tion the leading metropolitan area for growth. Houston’s industrial market totals more than

521 million square feet and we have another 5 million square feet in construction. Supply

continues to trail demand, leading to an industrial vacancy rate of 5% in Houston, signifi-

cantly lower than the national average of 8%.

2014 PREDICTIONSWelcome W. Wilson, Jr., President & CEO, Welcome Group

• VACANCY RATES WILL CONTINUE TO DECLINE THROUGHOUT 2013

With the oil services sector booming, there is huge demand for crane-ready buildings. The

energy industry as a whole is very active, and a lot of buildings have gone up as a result of

energy companies relocating to Houston or expanding their operations here. This high

demand will mean continued low vacancy rates.

• MANUFACTURING WILL RELOCATE BACK TO THE U.S.: Companies are seeing that the costs to

have their products produced in China or other international markets and shipped back

to America for distribution are break-even with the costs to produce goods here. Expect

to see many companies begin to bring manufacturing back to the U.S.

• PANAMA CANAL WILL BE A GAME CHANGER FOR THE PORT OF HOUSTON: The Panama Canal

expansion will open in 2015, which will mean a boost for the petrochemical companies

located on the Gulf Coast, as the canal will be able to support bigger LNG tankers with

more cargo. The deal between ExxonMobil and Qatar Petroleum International for an

LNG export facility in Sabine Pass will mark more growth in the ship channel.

• RUSH TOWARD SPEC BUILDING: As supply continues to trail demand in the industrial real

estate market, developers have rushed to market with spec building to fill the gap.

Demand can be expected to grow in 2014, spurring more build to suit and spec projects.

As President & CEO of Welcome Group, Welcome Wilson Jr. oversees the development, leasing, construction and purchase of single tenant office, lab, manufacturing and industrial facilities in Texas. A real estate developer for more than 35 years, he has extensive experience in industrial development, residential subdividing, retail centers and office buildings. He also serves as principal of Kingham • Dalton • Wilson Ltd., a Design/Build affiliate of Welcome and is Director of River Oaks Financial Group, Inc.

REAL ESTATE TRENDS

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Houston Real Estate Trends from BoyarMiller Annual Forum

GRAND PARKWAY

INDUSTRIAL

OFFICE INDUSTRIAL

LAND

A GAME CHANGER

PORT OF HOUSTON GROWING

VACANCY LOWER THAN NATIONAL AVERAGE

11.5M

2X

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THAT OF U.S.

ENERGY JOB =

MORE JOBS

JOB GROWTH

RETAIL EQUALS

HOMES OWNED

40%

78%of Millennials

of Baby Boomers

10K ACRES

20K ACRESof builder land

owned by developers

SQ FT UNDER

CONSTRUCTION

U.S. JOBS

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REAL ESTA

TE TREND

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Houston’s Holistic Approach to Mixed-Use DevelopmentBy BoyarMiller’s Cassie Stinson

An increasingly large percentage of Houston’s workforce is comprised of

Gen Y and Gen X, the groups that tend to see all aspects of their lives as

being of equal importance. As a result, real estate developers are bringing

to the market projects that address the increased demand for “live/work/

play” environments. These projects reflect a more holistic approach to real

estate development. “Holistic” is defined as something that is “characterized

by comprehension of the parts of something as intimately interconnected

and explicable only by reference to the whole.”

The fundamental investment philosophy

for successful mixed-use is a holistic

understanding and balancing of the

interrelationship of the component parts

of the project itself, as well as the relation-

ship of the project with its surrounding

community. When all components are

taken into account, the developer gets

the satisfaction of a successful project

and also the gratification of making a

positive impact on the community and

the lives of the people who walk into

and alongside the project every day.

In addition to live/work units, which are successful in smaller projects, horizontal or “side

by side” mixed-use projects are more successful than vertical. Early projects with vertical

stacking, with one use on top of a different use, have experienced issues with incompati-

bility. Multi-family spaces above food and beverage establishments can be tricky due

to noise, odors, traffic and conflicting hours. Retail establishments have learned the hard

way that they can’t capture 100% of the multi-family occupants’ business and won’t be

successful if their retail space lacks visibility and access from outside the project. Rents

and vacancy rates for upper floor commercial tenants in vertically stacked mixed use

are also not as favorable.

Houston is now being viewed as the “third coast” gateway capital market. According to Jonathan Brinsden at Midway, this is a major shift in the capital fueling Houston real estate development.

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One challenge for mixed-use development is that developers who historically have

focused on a single product type may not fully understand the complexities of the

“other” product types in their mixed-use projects. In cases where the master developer

has brought in expertise with “other” product types through joint development, when

the project is hit with challenges like a sagging economy, each developer tends to look

after his own component in the mixed-use project and has blinders on when it comes to

the other components of the overall project.

In the past, lenders have focused on single

product types, making financing a mixed-use

project more difficult. Houston is now being

viewed as the “third coast” gateway capital

market. According to Jonathan Brinsden at

Midway, this is a major shift in the capital

fueling Houston real estate development.

Sources of capital such as Canyon Capital

Realty Advisors have more of a developer

mentality and understand how to underwrite

projects with multiple uses. With this new

source of “smart money,” we are likely to see

more, better-planned and better-executed

mixed-used projects in Houston.

The magic number for successful mixed use seems to be at least three types of activity

generators, as long as they all interrelate. Most frequently, mixed-use projects combine

retail, residential and office. Recreational and hospitality uses are also valuable compo-

nents in the right context.

The location of the project must be selected carefully. Hotels within walking distance and

nearby residential space help support a mixed-use project. In inner-city locations, existing

parking spaces are scarce and renting a parking lot is sometimes more expensive than

renting the restaurant space that uses the lot. Locating a new mixed-use project in a

walkable environment, with well-lit, well-maintained sidewalks, bike racks and proximity to

public transit is critical. Also, providing for metered on-street parking generates revenue for

the local municipality, and positive revenue generates positive support for the project with

local governments.

Integration of the mixed-use project into its surrounding environment is important to success.

For example, providing wider sidewalks and outdoor terraces for retail and hospitality uses

and allowing for private use of such spaces helps to bring the project activity generators

to the exterior of the project in a way that engages the general public and pulls it in. The

Houston’s Holistic Approach to Mixed-Use Development, continued

We can expect to start seeing development outside the core Inner Loop markets soon. Areas like Montrose, Midtown and East End are looking very interesting as poten-tial development markets.

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second floor terrace for the State Bar at Houston’s Rice Hotel is an example of using out-

door café space effectively. Another great example near the Austin Convention Center

is a ground floor tenant that will feature sculptural displays by local artists.

An exciting new mixed-use project by Midway Companies that is now coming out of the

ground is Kirby Grove, located adjacent to Levy Park near Richmond Avenue and Eastside.

In this project, Midway is the sole developer of all components in the project. Midway

collaborated with the Upper Kirby Management District for the redevelopment of Levy

Park, and the mixed-use project is located adjacent to the park. In the same vein as

Discovery Green downtown, Kirby Grove is an example of how a good public park can

stimulate good private development.

We can expect to start seeing development outside the core Inner Loop markets soon.

Areas like Montrose, Midtown and East End are looking very interesting as potential devel-

opment markets. Not coincidentally, all of these alternative markets are located within

the boundaries of established management districts. In Houston’s no-zoning environment,

these districts provide helpful tools to address issues like traffic, parking, safety and

enhanced public spaces in our inner city markets, like land-use regulation “lite”. These

districts can also be effective advocates for the developer’s project in the planning

and permitting process.

Houston’s Holistic Approach to Real Estate, continued

Houston’s strong economy and relatively light burden with regard to the entitlement process, coupled with improved capital sources, all work to make Houston a great place for development of mixed-use projects.

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2014 Trends in Real Estate LawIn this Q&A, BoyarMiller attorneys

Stephen Johnson and Cassie Stinson

weigh in on what Houstonians can

expect in the coming year in regards

to real estate law and the real estate

industry as a whole.

WHAT TRENDS DO YOU EXPECT TO EMERGE IN 2014 FOR THE REAL ESTATE INDUSTRY?JOHNSON: We expect to see new office building development start to slow down.

There are quite a few projects underway and, at some point, supply will satisfy demand.

The energy market is a significant driver in the demand for Houston real estate, but the

unknown is how much longer this energy boom cycle will last. When it slows, the demand

for office space will likely slow as well.

WHAT SURPRISED YOU ABOUT 2013 IN THE INDUSTRY?JOHNSON: The amount of transactions involving homebuilders and development of master

planned residential communities. Lot supply is dwindling and homebuilders are trying to

purchase (or contract for purchase) their lot supply for the foreseeable future. In addition,

residential developers are purchasing any available tracts of land in new development

areas (i.e. west and northwest of Houston with close access to the new Grand Parkway,

and on the north side of town near the new Exxon campus). Some homebuilders are

obtaining lot supply by purchasing developers or other builders with strong lot inventory

and lot pipelines. Lot supply will continue to be an issue over the coming years.

Represented Midway in the redevelopment of Levy Park into the Kirby Grove project

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WHAT HAS CHANGED IN REAL ESTATE LAW RECENTLY?STINSON: The 2013 Legislative Session was comparatively quiet regarding legislation

affecting real estate. One interesting change is a statute that now allows home-rule cities

like Houston to sell real property by MLS listings with real estate brokers. Unfortunately, this

streamlined procedure is not available to other types of governmental entities, which must

still use the public auction process of the local government code.

WERE THERE ANY SIGNIFICANT PROJECT YOU OR BOYARMILLER UNDERTOOK IN THE PAST YEAR?JOHNSON: BoyarMiller represents Midway in the redevelopment of Levy Park into the Kirby

Grove project. Kirby Grove, as part of a joint venture with institutional investors, will have a

248,000 square foot office building, anchored by Vitol Inc., and a 300-unit multi-family

development, each surrounding a park that will be redeveloped by Midway in conjunction

with the Upper Kirby Redevelopment Authority. Amegy Bank is providing the financing for

the office construction and Cadence Bank is financing the multi-family.

STINSON: Another significant project at BoyarMiller relates to our public-private practice.

We represented the non-profit developer, Houston Parks Board, in the Bayou Greenways

2020 project. This $205 million project contemplates the acquisition and development of

more than 150 miles of hike and bike trails and related greenbelts to form linear parks

along the nine major bayou systems that flow through the city limits of Houston. Long-term

funding for maintenance was approved only as recently as mid-October and reports are

that developers are already contacting local land planners for sites along the bayous,

including sites in previously overlooked but near-in areas on the east side of the central

business district.

From the Houston Business Journal BizBlog: http://www.bizjournals.com/houston/blog/2013/12/residential-developers-hunting-for-new.html

2014 Trends in Real Estate Law, continued

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Bill Boyar Founding Shareholder, Business Group

My practice focuses on representing the various parties involved in

the acquisition, disposition, capitalization and financing of assets

and businesses on a national and international level. I have served

as lead counsel on numerous complex, multi-party acquisitions

and project financings, with significant experience in real estate,

hospitality, corporate finance, healthcare, and private equity

mergers and acquisitions.

Cassie B. Stinson Counsel, Business Group

My practice is focused on commercial real estate and finance,

public/private projects, business transactions and public law,

with a particular emphasis on complex projects and multi-party

transactions. I have significant experience with office, heavy

industrial and manufacturing, multi-family, hospitality and

restaurants, institutional facilities and governmental infrastructure.

REAL ESTATE

PRACTICE LEADERS

Stephen Johnson Shareholder, Business Group

My practice is devoted to commercial real estate law, transactional

law, commercial transactions and general corporate representation.

My real estate practice includes the financing, acquisition,

development and disposition of commercial real estate, with

an emphasis on master-planned communities, commercial

office and retail, land and hospitality.

PRAC

TICE LEA

DERS

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Timothy J. Heinrich Shareholder, Business Group

My real estate practice is devoted primarily to the acquisition,

development, financing and disposition of all product types

of commercial real estate. In addition to various land, office,

multi-family and retail projects, in the past 12 years, I’ve managed

the acquisition and financing of over 75 light industrial facilities.

Lee A. Collins Shareholder, Litigation Group

A significant focus of my practice relates to the representation

of developers, owners and managers of commercial real estate

in state and federal court, including tenant disputes, easement

and restrictive covenant enforcement, condemnation, adverse

possession, construction litigation, lien enforcement and creditor

bankruptcy representation.

Real Estate Practice Leaders, continued

boyarmiller.com

BoyarMiller4265 San Felipe, Suite 1200 Houston, Texas 77027

TEL 713.850.7766 FAX 713.552.1758