Houston office market –

Sublease and activity overview September, 2016

What you need to know about the current state of the

Houston office sublease market

1.

2.

3.

11.9 million square feet of sublease space now available • Largest blocks of sublease space located in Energy Corridor, CBD, Galleria, and Greenspoint

• Over 5 million SF of sublease inventory here for the long term (5+ years of term remaining)

Velocity of subleases coming to market not slowing• Significant subleases added in 2016 include Shell, BHP Billiton, BG Group and Marathon Oil

bringing over 5 million SF to market

Subleases not being absorbed• Sublease space coming to market five times faster than it’s being leased

• Only a handful of spaces larger than 20,000 SF leased so far this year; 2015 activity similar

• Only two percent of current subleases will revert to direct basis in 2016

• Average sublease signed this year is tiny – smaller tenants taking advantage of options

2

Source: JLL Research

Sublease space inventory

overview

CBD and the Energy Corridor (Katy Freeway, Westchase)

lead in sublease space availability

CBD2,657,349 s.f.

Katy Fwy West3,043,193 s.f.

Katy Fwy East425,489 s.f.

Westchase1,496,446 s.f.

Galleria1,172,319 s.f.

Greenspoint970,562 s.f.

The Woodlands452,233 s.f.

Other1,717,495 s.f.

*This dataset reviews all sublease availabilities in office properties within the Houston market.

4

Source: JLL Research

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

10,000,000

11,000,000

2006

1Q

2006

2Q

2006

3Q

2006

4Q

2007

1Q

2007

2Q

2007

3Q

2007

4Q

2008

1Q

2008

2Q

2008

3Q

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4Q

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2Q

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2011

1Q

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2012

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2013

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2014

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2015

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2015

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2015

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2015

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2016

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2016

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2016

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SF

of S

uble

ase

Ava

ilabl

e

Greenspoint Sublet Total Avail SF

CBD Sublet Total Avail SF

Katy Fwy Sublet Total Avail SF

Greenway Sublet Total Avail SF

Woodlands Sublet Total Avail SF

Westchase Sublet Total Avail SF

Galleria Sublet Total Avail SF

5

Sublease space in Houston’s top submarkets more than double the average inventory

OPEC

Thanksgiving

Meeting

Source: JLL Research *This dataset reviews all sublease availabilities in Class A and B properties within the top seven office submarkets, regardless of size.

131,870

1,687,399

699,607

464,855

222,366

706,302

520,099

235,338 279,284

636,607

278,564 211,084

155,414

929,894

235,714

593,277 514,731

2,137,058

661,898

440,638

Janu

ary,

201

5

Feb

ruar

y, 2

015

Mar

ch, 2

015

Apr

il, 2

015

May

, 201

5

June

, 201

5

July

, 201

5

Aug

ust,

2015

Sep

tem

ber,

201

5

Oct

ober

, 201

5

Nov

embe

r, 2

015

Dec

embe

r, 2

015

Janu

ary

, 201

6

Feb

ruar

y, 2

016

Mar

ch, 2

016

Apr

il, 2

016

May

, 201

6

June

, 201

6

July

, 201

6

Aug

ust,

2016

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Key Ideas to remember in 2015 (and 2016)

6

Oil volatility sending shockwaves through market: on average,

587,000 SF of subleases coming online monthly

SF

of s

uble

ase

spac

e av

aila

ble

Source: JLL Research *This dataset reviews all sublease availabilities in Class A and B properties within office submarkets in Houston.

7

Sublease overhang will not remedy in the short term:

4.6 million SF of sublease options have 5+ years remainingLess than 6 months term

remaining586,344

5%6 months to 1 year term

remaining523,094

4%

1 year to 2 years term remaining2,022,877

17%

2 years to 5 years term remaining3,148,114

26%

5 years to 10 years term remaining3,165,257

27%

More than 10 years term remaining1,399,587

12%

Negotiable1,089,883

9%

Source: JLL Research *This dataset reviews all sublease availabilities in office properties within the Houston market.

8

Tenants did not flock to sublease opportunities in 2015; leasing activity among subleases was very light

Subleases signed in 2015 above 20,000 SF

Multi-floor subleases signed in 2015

Average deal size

Subleases signed in 2015

Total sublease space leased in 2015

16

Fewer than 10

8,378 SF

148

1.24 million SF

Top industry taking sublease space Energy

Source: JLL Research

9

Tenants currently taking advantage of sublease opportunities

are smaller in size; only twelve full floors leased YTD

Subleases signed in 2016 above 10,000 SF

Multi-floor subleases signed in 2016

Average deal size

Subleases signed in 2016

Total sublease space leased in 2016

35

3

6,213 SF

191

1,186,842 SF

Subleases signed in 2016 above 20,000 SF 12

Source: JLL Research

0

2,000,000

4,000,000

6,000,000

8,000,000

2010 2011 2012 2013 2014 2015 2016

10

Overall leasing activity consistently weak, will impact

absorption of sublease space and new construction

OPEC

Thanksgiving

Meeting

10-Yr

Average

Quarterly

Leasing

Activity

Source: JLL Research

Challenges arising in the market

12

M&A Activity leaves uncertainty in the market

• Impact will continue to be felt in the Houston office market via space contractions and consolidations

• Full M&A impact on market typically delayed by 6-12 months

• 2016-2017 could see additional major players involved, especially if oil prices continue to remain around $50/bbl

?

?

While oil prices are still recovering… Why this matters…

• Deal velocity continues slowdown, contract rents will fall;

landlord concessions increase

• Spec construction will remain on hold due to weak demand,

lending tightening

• Job reductions continue as E&P/energy service companies

slash headcounts

• M&A activity expected to increase (combination of debt issues

for small and mid-size companies and oil prices around $50/bbl)

• Short term leases will be the focus in 2016

• More and more sublease space will arrive to market, may grow

to 13 million SF by 2017

• Market will continue to be tenant-favorable

Office market forecast - looking ahead into 2016 and 2017

13

Vacancy ConcessionsRents

Nearly 3 million SF of new

deliveries remains un-leased;

this combined with space

contractions and M&A activity

may push vacancy over 20%

market wide

Thanks to weak deal velocity

and cautious tenants in the

market, landlords will continue

to offer increased concessions

(flexible lease terms, free rent,

tenant improvements)

Published market rents flatten;

“street-level” deals will offer

significantly discounted market

rents with owners focusing on

maintaining occupancy rather

than high rates

Key takeaways

14

Top themes impacting the office CRE market

1.

2.

3.

Sublease space continues its mount• Over 11.9 million SF of sublease options now available across the Houston office market

• Sublease supply is currently double the ten-year historical average, while demand

continues to lag behind

New deliveries add pressure to vacancy• Over 1.0 million square feet has delivered without preleasing commitments in 2016

• As a result, total vacancy ticked up to 18.5 percent during Q2

Leasing demand unable to keep pace with supply• Failed to surpass 1.5 million square feet in total leasing activity for the first time in the last

15 years

• Availability is over 26.6 percent, meaning one in four floors is available marketwide

Source: JLL Research

Houston vs. major U.S. markets

Source: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston

Industry Sublease space (s.f.)

Energy 7,434,269

Technology 1,930,890

Professional business services 1,152,658

Insurance 1,003,866

Financial activities 963,145

Life sciences 880,741

Healthcare 876,666

Law firms 749,442

All other industries 3,744,972

Total sublease 18,736,649

Sublease by industry

16

Houston energy tenant give-back comprises overwhelming majority of sublease inventory

Energy Technology Professional business services

Insurance Financial activities Life sciences

Healthcare Law firms All other industries

Sublease by submarket

213,441

226,156

238,330

244,053

253,476

276,985

304,598

405,144

418,169

538,808

577,158

592,820

626,251

656,827

823,199

957,903

1,875,783

2,604,790

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000

Penn Plaza/Garment (New York)

Columbus Circle (New York)

Near North (Chicago)

Back Bay (Boston)

South Financial District (San Francisco)

Reston (Northern Virginia)

El Segundo (Los Angeles)

Rosslyn (Northern Virginia)

Financial District (New York)

Western East/West Corridor (Chicago)

Waltham/Watertown (Boston)

Central Loop (Chicago)

Shady Grove (Suburban Maryland)

Central North (Chicago)

West Loop (Chicago)

Westchase (Houston)

CBD (Houston)

Katy Freeway West (Houston)

Sublease space (s.f.)

17

Houston energy submarkets experiencing highest rates of sublease activity

Source: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston

Sublease space by industry and market

0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 9,000,000

Seattle

Boston

San Francisco

Los Angeles

Washington, DC

Chicago

New York

Houston

Sublease space (s.f.)

Energy Technology Professional services Insurance Financial activites Life sciences Healthcare Law firms All other industries

18

Houston far exceeds other gateway markets in subleases over 50,000 SF

Source: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston

Sublease by block size

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

Houston New York Chicago Washington,DC

Los Angeles San Francisco Boston Seattle

Sub

leas

e sp

ace

by b

lock

siz

e (s

.f.)

250,000+ s.f. 100,000-249,999 s.f. 75,000-99,999 s.f. 50,000-74,999 s.f. < 50,000 s.f.

19

Most sublease space found in 100,000-249,999 s.f. blocks as anchor tenants move to new supply in

gateway markets

Source: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston

Sublease by time on market

975,216

9,814,738

4,611,713

972,847 967,0701,284,993

0

1,000,000

2,000,000

3,000,000

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8,000,000

9,000,000

10,000,000

> 1 month 1-11 months 12-23 months 24-35 months 36-47 months 48+ months

Sub

leas

e sp

ace

(s.f.

)

20

15.4 m.s.f. has been listed for two years or less, coinciding within downturn in oil pricing

Source: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston