Houston, TX TrendLines Publication - Transwestern

TAPPING AN EXPANDING MARKET

FOREWORDNOVEMBER 2013 

To our friends, clients and colleagues: 

We are pleased to provide you this thirteenth annual edition of TrendLines: Trends in Metro Houston Commercial Real Estate. This is a collaborative publication of Transwestern 

and its research affiliate, Delta Associates. Our purposes are to distill the trends of 2013 and to shed light on pivotal forces and issues that we believe will affect the region’s 

economy and commercial real estate in 2014 and beyond. 

Through the 3rd quarter of 2013, the Metro Houston commercial real estate market’s performance ranked among the best in the nation, a reflection of the robust local economy, 

strong demand for all property types, and a controlled development pipeline. New demand for office space continues, supported by a growing energy industry. Meanwhile, 

Houston’s industrial market boasts the lowest vacancy rate in the nation, with further market growth likely when the Panama Canal expansion is completed in 2015 and Houston 

reaps the benefits of additional freight activity. The retail market is benefiting from a prospering and growing population while the apartment market is enjoying demographic 

and lifestyle shifts that favor this product type. 

Employment gains in Metro Houston have been among the best in the nation in 2013, and as a result, the commercial real estate market likely will continue to improve in 2014. 

Of note, pricing for all types of assets is increasing; Houston’s strong market fundamentals are attracting renewed attention from investors. Values are expected to rise further 

in 2014. 

We expect to find significant opportunities in our industry in the period ahead, notwithstanding the sluggish pace of the national economic recovery. In 2014, we expect: 

• Strong job growth in Metro Houston. We expect to have seen a gain of approximately 100,000 payroll jobs during 2013, once the year is complete, followed by an increase 

of 80,000 to 90,000 jobs per annum in 2014 and 2015. These projections are supported by the sturdy performance of the energy and health sectors and likely growth in 

Houston’s distribution sector over the next two years. The pace of regional economic growth may decelerate following robust expansion in 2012 and 2013, but Houston is 

likely to remain a national leader in job creation during 2014. 

• Stabilizing or declining vacancy and rising rents for office, industrial, and retail product. While the office pipeline of new supply is expanding more quickly than it was a year 

ago, demand remains strong enough to generate continued rent growth. 

• Declining vacancy and rising rents for apartment product, as job creation and lifestyle changes drive demand. Apartment rents, already at record levels, will see more upside 

in this cycle. 

• Houston’s commercial real estate assets to attract additional attention from investors, given the region’s strong economy; demand for high-quality assets will remain robust 

in 2014, with tenants focused on top-tier space. 

• Commercial real estate prices to continue rising along with improving fundamentals and investor demand. As pricing for existing assets continues to rise and vacancy 

remains low, we expect groundbreakings to continue across all property types, including additional spec development. 

We hope the following information provides insight into our collective opportunities. All the professionals at Transwestern and Delta Associates look forward to helping you 

interpret the material in this report, and to being your service partner in the successes we are confident you will achieve in the period ahead. We offer you our best wishes for 

a successful 2014. 

Transwestern 

Kevin Roberts 

President, Southwest 

Delta Associates 

Gregory H. Leisch, CRE 

Chief Executive

TRANSWESTERN WOULD LIKE TO THANK OUR 2013 SPONSORS 

Locke Lord LLP 

Locke Lord LLP is a full-service, international law firm with offices in Atlanta, Austin, Chicago, Dallas, Hong Kong, Houston, London, Los Angeles, New Orleans, New York, 

Sacramento, San Francisco and Washington, D.C. Our team of nearly 650 attorneys has earned a solid national reputation in complex litigation, regulatory and transactional work. 

We serve our clients’ interests first, and these clients range from Fortune 500 and middle market public and private companies to start-ups and emerging businesses. 

Locke Lord’s team builds collaborative relationships and crafts creative solutions to solve problems - all designed and executed with long-term strategic goals in mind. Among 

Locke Lord’s many strong practice areas are appellate, aviation, bankruptcy/restructuring, business litigation, class action litigation, corporate, employee benefits, energy, 

environmental, financial services, health care, insurance and reinsurance, intellectual property, international, labor and employment, litigation, mergers and acquisitions, private 

equity, public law, real estate, regulatory, REIT, tax, technology, and white collar criminal defense and internal investigations. 

Chicago Title Insurance Company — Commercial 

Chicago Title offers customers the most comprehensive and accurate real estate related services in the nation. You can rely on Chicago Title, with its rich history of over 160 

years, to provide assurance and security for all your real estate transactions and title insurance needs. In Houston, please contact Jimmy Erwin, Reno Hartfiel or Karen Highfield 

for property related transactions in Texas and the rest of the United States. 

Harvey Builders 

Since the formation of D.E. Harvey Builders 50 years ago, the company has rapidly grown to be a recognized leader in the Houston building industry. Currently, the company 

maintains offices in Houston, Austin, San Antonio and Washington, D.C. All facets of the commercial construction markets are being served. Our people and the projects they 

manage represent a culture, philosophy and history based on community service. From the very beginning, we have worked hard to become an integral part of the communities 

we have helped to build. Our philosophy is based on 3 words: Innovation, Quality, Integrity. Harvey takes pride in taking great care of their clients by treating them as partners. 

With a solid foundation of past accomplishments we continually strive to build trusting relationships with our clients and for excellence in our performance. Our work is visible 

evidence of our concern for the environment, for education, for healthcare, and for the economy. At Harvey, we care enough to exceed the needs of our clients and society in 

everything we do. 

Kirksey 

Specializing in sustainable architecture, interior design and master planning, Kirksey designs high-performance, healthy buildings for all of our clients. Our firm is organized 

into focused practice groups — Commercial, Community/Religious, Education, Healthcare, Hospitality, Interior Architecture, Residential, Retail, and Science & Technology — each 

supported by departments of Design, EcoServices, Information Technology and Marketing. We’ve been shaping the Houston skyline since 1971 and have designed over 70 office 

buildings in the past ten years alone. We create environments that encourage collaboration and innovation, promote corporate culture, and foster growth. Headquartered on our 

own corporate campus in Houston, Texas we are a group of designers and creatives committed to our clients, our community, and our earth. 

J.P.Morgan 

J.P. Morgan is a leader in financial services, offering solutions to clients in more than 100 countries with one of the most comprehensive global product platforms available. 

We have been helping our clients to do business and manage their wealth for more than 200 years. Our business has been built upon our core principle of putting our clients’ 

interests first. J.P. Morgan is part of JPMorgan Chase & Co. (NYSE: JPM), a global financial services firm with assets of $2.3 trillion.

SPECIAL THANK YOU TO OUR KEYNOTE SPEAKER 

William Bennett 

Former U.S. Secretary of Education William J. Bennett is one of America’s most important, influential and respected voices on cultural, political and education issues. Over the 

course of his professional life, in education, government and the private sector, Bennett has succeeded in a trifecta of American institutions. He is an award-winning professor 

in academia, having taught at Boston University, the University of Texas and Harvard. Further, he is a three-time confirmed executive in the Ronald Reagan and George W. Bush 

administrations including holding two cabinet-level positions, Secretary of Education under Ronald Reagan and the Nation’s first Drug Czar under the first President Bush. Prior 

to becoming Secretary of Education, he was also chairman of the National Endowment for the Humanities. Additionally, he is the author of more than 24 books, including two 

that reached No. 1 on the New York Times Best Sellers list and two of the most successful books of the 1990s. He is the host of the No. 7 ranked nationally syndicated radio 

show, “Morning in America.” Thanks to his government positions, his writings and speeches, and thousands of media appearances, Bennett has extraordinary influence on 

America’s political and social landscape. In many surveys and publications, he has been named one of the most influential individuals in America. He is the recipient of more 

than 30 honorary degrees. 

ACKNOWLEDGMENTS 

The editor, Alexander (Sandy) Paul, CRE, wishes to acknowledge and thank this project’s research team at Delta Associates: Elizabeth Norton, National Research Director; David 

Parham, Senior Vice President; and Joshua Cohen, Associate. Thanks also to the creative layout team at Transwestern, headed by Shannon Bedinger and Gregorio Barrera. We 

would also like to thank Cyndi McNeill for her help with this project. Finally, thanks to Gregory Leisch, CRE, for his insights on the economy and commercial real estate markets. 

REPRESENTATIONS 

Although the information contained herein is based on sources that Delta Associates (DA) and Transwestern (TW) believe to be reliable, DA and TW make no representation 

or warranty that such information is accurate or complete. All prices, yields, analyses, computations, and opinions expressed are subject to change without notice. Under no 

circumstances should any such information be considered representations or warranties of DA or TW of any kind. Any such information may be based on assumptions that may 

or may not be accurate, and any such assumption may differ from actual results. This report should not be considered investment advice.

TABLE OF CONTENTS 

Section One Summary 5 

National Economy: Recovery Endures as Private and Public 

Sectors Adapt 

Houston’s Economy Maintains Robust Expansion 

Houston Metro Office Market: Expansion in 2013 

Houston Metro Industrial Market Strong – and Improving 

Investment Sales 

Houston Metro Multifamily Market: Bolstered by Employment 

Growth 

Houston Metro Retail Market: Supported by Hiring in Core 

Industries 

Section Two The National Economy 9 

Section Three The Houston Metro Economy 16 

Section Four The Houston Metro Office Market 19 

Section Five The Houston Metro Industrial Market 27 

Section Six Office and Industrial Investment Trends 32 

Section Seven The Houston Metro Multifamily Market 36 

Section Eight The Houston Metro Retail Market 38 

National Economy: Recovery Endures as Private and Public Sectors Adapt 

In the face of tax hikes, spending cuts and recent volatility in the stock market, the national economic expansion 

remains on track, even if its performance is slow and uneven from month to month. Consumers’ improved outlook 

is partly due to: 

• Higher-income Americans feeling wealthier due to a 22.3% gain in the stock market year-to-date (the S&P 

500 as of mid-October); 

• Middle-income Americans feeling better due to a 12% gain in housing prices over the past 12 months; and 

• Lower- and middle-income earners benefiting from low inflation and declining gasoline prices since last 

year at this time. 

Thus far in 2013 there has been little residual impact from sequestration. The private and public sectors are 

each learning to adapt, and national economic growth has continued, though at a level that is weak for a postrecession 

recovery. Households should remain upbeat due to increases in net worth from home prices and the 

stock market, though the Federal government shutdown and debt ceiling fights in October may have weakened 

consumer confidence. On balance, we look for this recovery to continue on its slow but steady course through 

2017 or so, barring a catastrophic event. 

Specifically, we believe the economic outlook is as follows: 

• Real GDP growth: Approximately 2.0% in 2013. 

• Payroll jobs: Approximately 2.3 million added in 2013. 

• Housing: Price increases of approximately 12% from December 2012 to December 2013. 

• Unemployment rate: Hovering around 7.3% throughout the remainder of 2013. 

• Federal Funds Rate: 0% to 0.25% through year-end 2015. 

• Long-term interest rates: Edging higher during the rest of 2013. 

• Inflation rate: Remaining around 2.0% during the balance of 2013; higher in 2014 as consumer demand 

strengthens. 

Foreword | Sponsors | Special Thanks, Acknowledgments & Representations | Contact 

5 

TRENDLINES® 2013




Sectors Adapt 






Growth 


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The Houston metro economy continued to improve during 2013. The 12-month employment growth of 80,700 jobs through August 

2013 is fourth-most in the nation among large metro areas. Houston’s payroll employment rose by 3.0% during that period, above 

the national growth of 2.4%. The Energy, Construction, and Trade/Transportation Sectors are fueling growth, and Houston’s other core 

industries are continuing to expand, including the Leisure/Hospitality sector. 

Energy (Mining/Logging) 

6,200 jobs added over the 12 months ending August 

2013 – a 6.0% increase. 

Professional Services 

12,000 jobs added over the 12 months ending August 

2013 – a 2.9% increase. 

Construction 

8,200 jobs were added during the 12 months ending 

August 2013 – a 4.5% increase. 

Manufacturing 

5,900 jobs were added over the 12 months ending in 

August 2013 – a 2.4% increase. 

Trade/Transportation 

19,200 jobs added in the 12 months ending August 

2013 – a 3.5% increase. 


Houston’s economic outlook is bright and it should remain strong for several years to come. Economic uncertainty and political instability 

in the Middle East does cause some concern, but Houston is in a strong position to withstand any slowdown in economic growth. 

The energy sector has been a boon for Houston and not only because of its oil and gas production. Wind power is another source of 

production. Strength in the Energy, Trade/Transportation, and Education and Health Services sectors will drive expansion locally over 

the next several years. As a result, we expect metro Houston’s job growth to average approximately 91,700 per year for the 2013-2015 

period, comparable to the growth during the 2005-2007 expansion period. Houston’s employment growth should be among the 

nation’s strongest. 

6 

TRENDLINES® 2013



7 


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Growth 


Industries 









TRENDLINES® 2013 

Houston Metro Office Market: 

Expansion in 2013 

The Houston metro office market experienced growth in 2013, as the 

local economy expands at a healthy rate. Job creation, especially 

among energy-related firms, has driven office leasing activity, and 

tenants are seeking quality space in prime submarkets. 

Net absorption totaled 1.3 million SF in the first three quarters of 2013 

(1.7 million SF when annualized), compared to 4.2 million SF in all of 

2012. The Class A market accounted for that entire total, absorbing 

1.4 million SF, with Class B reporting negative absorption in the 

Houston market. Positive Class A absorption is occurring because of 

the strength of the local economy. Owners are looking for tenants to 

fill Class A space before new buildings currently under construction 

come online. 

The overall office vacancy rate (including sublet space) in the Houston 

metro area was 10.9% at 3rd quarter 2013, unchanged from one year 

ago. The direct vacancy rate was 10.4%, down from 10.6% one year 

ago. The continued strength of the local economy is driving this rate 

down; direct vacancy is nearing its recent nadir of 10.2% in 2007. 

Asking rents for all classes of office space have risen approximately 

1.0% in metro Houston during the first three quarters of 2013, after 

rising 3.6% in 2012. Class A rents rose 2.4% through the 3rd quarter 

of 2013, and Class B rents increased 0.7% in the same period. Class 

A rents have been rising faster than Class B rents because of the flight 

to quality underway, with stronger demand for newer space. 

The Houston metro office market will likely experience continued 

growth in the period ahead. However, given the growing pipeline, 

coupled with tenants vacating older space, we expect the vacancy 

rate to stabilize over the next two years – hovering in the low-11% 

range. Rents will likely continue rising modestly for the remainder 

of 2013 and into 2014, especially for Class A space, as office market 

conditions currently favor owners. However, with the development 

pipeline (including planned space expected to start construction 

soon) now at 5.3% of the standing inventory, rent increases are likely 

to remain modest. 

Houston Metro Industrial Market Strong – 

and Improving 

The fundamentals of the Houston industrial market improved in 

2013, with vacancy being the lowest in the nation and continuing 

to decline. As consumer spending increases, demand for industrial 

space will continue to grow over the intermediate to long term. As 

the national economic recovery continues, we expect demand for 

Houston industrial space to remain strong for the remainder of 2013 

and into 2014. The rising demand for goods and increased trade with 

Asia via the expanded Panama Canal suggest a strong future for the 

Houston industrial market. 

Net absorption of industrial space in the Houston metro totaled 

4.8 million SF through the first three quarters of 2013, compared 

to a total of 5.0 million SF in 2012. Local businesses are expanding 

as the regional economy strengthens and consumer spending 

and confidence increase. A growing retail segment benefits the 

warehouse/distribution market. 

The overall Houston metro area industrial vacancy rate declined to 

4.3% in September 2013 from 4.6% a year earlier. The direct industrial 

vacancy rate, 4.2% in September, is down from 4.5% a year earlier. 

Industrial asking rents edged down 0.3% through the 3rd quarter of 

2013, after rising by 5.0% in 2012. The 3rd quarter 2013 average 

asking rent for all types of industrial space is $5.87/SF, triple net. 

Steady demand should support healthy rent increases during the 

remainder of 2013 and into 2014, particularly in the warehouse/ 

distribution sector, given the already-low vacancy rate in the Houston 

industrial market. 

The Houston metro industrial market will likely experience continued 

growth for the remainder of 2013 and into 2014. Despite gains in 

the United States, global economic uncertainty persists and could 

potentially curtail national economic growth. However, the energy 

boom in Houston should be able to sustain the volatility of the broader 

economy, and industrial vacancies in Houston likely will continue to fall. 

Large-scale construction is underway all across the Houston market. If 

construction remains controlled, industrial rents will rise, and market 

conditions will turn further in favor of landlords. The current level of 

construction is limited enough to promote continuing strong market 

conditions, though the pipeline has been increasing. On balance, 

we expect strong performance from the Houston industrial market 

during the remainder of 2013 and into 2014. 


Sales have returned to peak levels in Houston faster than in many 

other major markets, even as national office investment volume has 

plateaued. Annualized national office volume for 2013 totals $77.5 

billion, compared to $81.1 billion in 2012 and $64.7 billion in 2011. 

Improved market conditions, driven by one of the nation’s strongest 

local economies, continue to fuel investor interest in the Energy 

Capital. The shale revolution has given local energy companies the 

confidence and incentive to expand their workforces, which translates 

into greater interest in Houston office assets. 

In the long term, real estate investments have either matched or 

outperformed stocks and bonds. While in the short term the stock 

market has been robust, investors continue to seek real estate as a 

hedge against inflation. After a precipitous fall following the housing 

bubble and recession, real estate has again proved to be a strong 

investment. In the last 10 years as of June 2013 the NAREIT Equity REIT 

Index saw a 10.96% increase. The NCREIF Property Index increased 

8.6% during the same period, while stocks (as measured by the S&P 

500) rose 7.3%. Direct investment in real estate remains attractive at 

this point in the cycle compared to the alternatives, particularly given 

the run-up in the bull market. 

In Houston, there was $2.5 billion in total office sales recorded yearto-date 

in 2013. The $3.3 billion annualized total for the year is set to 

surpass marks of $2.5 billion in 2012 and $1.4 billion in 2011. 

The average cap rate on a rolling three-month basis for core Houston 

office assets was 7.2% in June 2013. However, there is a wide range 

of cap rates depending on the locations and characteristics of the 

properties being traded. Trophy properties have recently traded 

at cap rates in the 6.0% range. We expect cap rates to edge down 

locally during the balance of 2013, as market fundamentals suggest 

increasing investor interest in Houston’s office assets. However, if 

long-term interest rates rise substantially in the period ahead cap 

rates likely will rise in turn. 

Despite decelerating some from 2012 numbers, national industrial 

investment sales remain well above recessionary levels seen in 2008 

through 2010. At the current pace, sales will total $36.3 billion in




Sectors Adapt 






Growth 


Industries 








2013, compared to $40.3 billion in 2012 and $34.9 billion in 2011. 

Additionally, the Houston market has seen strong returns over the past 

year and is poised to see an increase in demand with the completion 

of the Panama Canal expansion in 2015, allowing for a larger amount 

of cargo from the Pacific. 

Returns on investments in industrial assets have shown continued 

strength in 2013. Like the office market, the Houston industrial market 

has performed the best relative to other markets across the country. 

Returns in Houston measured 15.97% over the 12 months ending 

in June 2013, compared to the national average of 10.82%. Among 

major industrial markets, only Denver performed nearly as well. 

Investor demand for industrial properties in Houston will continue to 

strengthen with the abundance of capital (core and value-add funds) 

that is chasing industrial product based on the strength of the market 

and the Houston economy. This, coupled with the lack of quality 

product on the market, will continue to put downward pressure on 

cap rates (perhaps below 6% for premier assets) as long as interest 

rates remain low by historical standards. If long-term interest rates 

rise in 2014 cap rates for Houston industrial product may edge up, 

but the market’s strong fundamentals, including the lowest vacancy 

rate among major metro areas, will encourage investor interest. 

Houston Metro Multifamily Market: Bolstered 

by Employment Growth 

The Houston metro multifamily market continues to expand due 

to population increases and one of the highest job growth rates in 

the country. This year has seen market fundamentals improve, with 

absorption and rents up and vacancy down. 

Net absorption for all classes of apartments remained strong yearto-date 

in the Houston metro as of September 2013, surpassing the 

pace of absorption in 2012. Absorption was approximately 16,168 

units year-to-date through September 2013, compared to 14,664 

units during all of 2012. Houston’s population is increasing as the 

availability of employment attracts new residents from other parts of 

the country. 

The delivery of new apartment units has not kept pace with demand 

in the past year, leading to a declining vacancy rate. Vacancy as of 

September 2013 stood at 8.9%, down from 10.6% at the end of 

2012 and 12.3% at year-end 2011. The vacancy rate for all classes 

of Houston metro apartments has continued to decline following its 

spike in 2009 and is now at the lowest level in the past decade. With 

strong job creation and population growth expected to continue, we 

anticipate the vacancy rate will edge down further over the next 12 

months. 

Strong demand and declining vacancy have allowed property owners 

to push rents to record levels in 2013. The average rental rate for 

Houston apartments was $0.97/SF/month at the end of September, 

up 6.0% over the past 12 months. Rents will likely increase through 

the balance of 2013 and into 2014 as job creation continues and 

economic growth strengthens. 

Houston Metro Retail Market: Supported by 

Hiring in Core Industries 

Metro Houston’s retail market experienced steady improvement in 

2013, as the economy strengthened and job growth remained strong 

locally. This sector’s growth is supported by one of the nation’s best 

regional economies and its solid employment gains, reinforced by 

hiring in the core industries. 

Houston’s retail vacancy rate, at 10.1% in the 3rd quarter of 2013, is 

down from 11.0% in the 3rd quarter of 2012. We expect that vacancy 

will remain steady or decline modestly for the remainder of 2013 and 

into early 2014, as Houston’s consumer sector remains strong and 

retailers open more stores. 

Retail rents remained at $1.40/SF/month in the 3rd quarter of 2013 

for all classes of retail space combined. Rents for superior product 

are rising; commodity product is reducing the overall average. While 

overall rents declined during the past year, they likely will experience 

modest growth during the balance of 2013 and into 2014, as 

consumer spending accelerates and market conditions continue to 

strengthen. The recent trends in vacancy have set the stage for rent 

growth. 

The Houston retail market will likely see further expansion during the 

balance of 2013 and into 2014, as local job growth remains robust 

and the consumer sector is strengthening. Nationally, consumer 

confidence remains at its highest point in over five years. With 

regional economic growth, new consumers will arrive, increasing total 

consumption. A growth cycle in the retail market will likely occur over 

the next several years, making investment very attractive. We look 

for a focus on grocery-anchored and mixed-use development, as well 

as increasing urban infill projects, as these best address consumers’ 

needs and preferences. 


8 

TRENDLINES® 2013




Recovery Endures as Private and Public Sectors Adapt 

Payroll Jobs 

Payroll Jobs - Continued 

Gross Domestic Product (GDP) and Consumption 

Housing Market 

Federal Intervention and Inflation 

Federal Intervention and Inflation - Continued 

Economic Outlook 

National Payroll Job Growth Summary 








9 


RECOVERY ENDURES AS PRIVATE AND PUBLIC 

SECTORS ADAPT 

In the face of tax hikes, spending cuts and recent volatility in the stock 

market, the national economic expansion remains on track, even if its 

performance is slow and uneven from month to month. Consumers’ 

improved outlook is partly due to: 

• Higher-income Americans feeling wealthier due to a 22.3% gain 

in the stock market year-to-date (the S&P 500 as of mid-October); 

• Middle-income Americans feeling better due to a 12% gain in 

housing prices over the past 12 months; and 

• Lower- and middle-income earners benefiting from low inflation 

and declining gasoline prices since last year at this time. 

These factors have sent consumer sentiment to its highest level in 

nearly six years. The Thomson Reuters/University of Michigan index of 

consumer sentiment stood at 75.2 in October. While down in recent 

months, it remains high compared to values from the past several 

years. Consumers are becoming more confident in the economy as 

their net worth increases, driven by the strong performance of stocks 

(which supports the growth of workers’ 401(k) plans), and the housing 

market (with housing representing most workers’ single greatest 

asset). Rising household wealth has translated into spending, as retail 

sales are up 4.7% year-over-year as of August 2013. 

While sequestration (the Federal government’s automatic budget 

cuts) is a reality, and a payroll tax holiday ended at the start of the 

year, neither has been able to derail U.S. economic growth. Each has 

likely acted as a drag on growth – GDP gains have been lackluster 

recently, and this is the weakest post-recession recovery since the 

Great Depression – but the economy does continue to expand, along 

with the job market. Look for tensions in the Middle East and rising 

interest rates to also act as a drag on growth in the near-term. 

GDP RECOVERY PATTERNS AFTER THE PAST FOUR 

RECESSIONS 

United States 

Cumulative % Change in GDP 

25% 

20% 

15% 

10% 

5% 

0% 

1982-Q3 

1991-Q1 

2001-Q4 

2009-Q2 

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 

Quarters After Trough 

Note: Based on chained 2009 dollars. 

Source: Bureau of Economic Analysis, Center for Regional Analysis, Delta Associates; October 2013. 

One benefit of Federal austerity and an enduring economy is that 

they are reducing the deficit. The Congressional Budget Office 

(CBO) projects that in 2015, the Federal budget deficit will be just 

39% of what it was in 2012. Of note, the U.S. will still be running a 

deficit – we are not paying down debt, just increasing it at a slower 

rate – but that is still substantial progress in three years. As long as 

GDP gradually accelerates along with job creation, the reduction in 

Federal spending will be of long-term benefit to the economy. While 

the deficit is expected to fall to 2.4% of GDP by 2015, the deficit is 

projected to increase later in the coming decade due to rising health 

care costs and rising interest payments on government debt once 

the borrowing environment returns to more normal conditions. If this 

occurs, expect a few more battles on Capitol Hill to rein in spending 

or in pursuit of other deficit-reducing measures. 

BASELINE BUDGET PROJECTIONS 

United States 

Federal Deficit ($ Billions) 

0 

-200 

-400 

-600 

-800 

-1,000 

-1,200 2012 

Deficit % of GDP 

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 

Source: Congressional Budget Office, Delta Associates; October2013. 

In sum, we look for this recovery to continue on its slow but steady 

course through 2017 or so, barring a catastrophic event. 

PAYROLL JOBS 

The national economy added 2.2 million new jobs (not seasonally 

adjusted) during the 12 months ending August 2013, with the private 

sector adding close to 2.3 million new jobs while the public sector 

shed 83,000 positions. Month-to-month gains continue to be hit 

or miss, as the 169,000 jobs (seasonally adjusted) that were added 

to the economy during the month of August 2013 were slightly 

lower than consensus estimates. In general, job growth has been 

disappointing in this cycle compared to past economic recoveries. 

Because of population growth, about 125,000 jobs must be created 

each month just to keep a steady unemployment rate. Although the 

economy continues to move forward, it is doing so at a tepid pace, 

which has encouraged businesses and consumers to alter spending 

patterns and adjust to limited growth. Although we expect that job 

growth will continue to be sub-par during this expansion cycle, we 

project that 2013 will overall be somewhat better than 2012, with 

approximately 2.3 million jobs created. 

PAYROLL JOB GROWTH 

United States | Year‐Over‐Year 

Thousands of New Payroll Jobs 

4,000 

2,000 

0 

-2,000 

-4,000 

-6,000 

Private Sector 

Public Sector 

-8,000 

Aug. Oct. Dec. Feb. Apr. Jun. Aug. Oct. Dec. Feb. Apr. Jun. Aug. Oct. Dec. Feb. Apr. Jun. Aug. Oct. Dec. Feb. Apr. Jun. Aug 

09 09 09 10 10 10 10 10 10 11 11 11 11 11 11 12 12 12 12 12 12 13 13 13 13 

Note: Data are not seasonally adjusted. 

Source: Bureau of Labor Statistics, Delta Associates; October 2013. 

8% 

7% 

6% 

5% 

4% 

3% 

2% 

1% 

0% 

Deficit as a % of GDP





Payroll Jobs 










We expect more jobs to be trimmed from the public sector during 

the balance of 2013, as governments continue to cut their workforces 

to make up for budget shortfalls. At the Federal level, these cuts will 

largely be achieved through attrition. However, the national economy 

will continue to see overall job growth as public sector losses will 

be more than offset by continued growth in the private sector. On a 

bright note, many government agencies such as the Departments of 

Defense, Education, Agriculture and Justice were able to reduce the 

length of expected employee furloughs from the lower budget caps 

that took effect March 1st through cost-cutting measures and internal 

reviews. 

During the 12 months ending August 2013, the top three sectors in 

job gains were Professional/Business Services, Leisure/Hospitality, 

and Retail Trade – adding a total of 1.4 million new jobs. Retail 

employment is growing at a healthy rate, though retail jobs have 

less of a multiplier effect than many others due to their low wages. 

Retail employment is likely to get a boost from strong new-car sales, 

which are projected to experience a double-digit rise during 2013. 

Job losses were confined to the Federal government, State and Local 

government, and Information sectors over the past year, with a total 

net loss of 90,000 positions. Job losses in the public sphere are likely 

to continue, as governments have ongoing difficulties with financing 

and budgeting constraints. Most of those losses are likely to be in the 

Federal sector. 


United States | 12 Months Ending August 2013 

Professional/Business Services 

Leisure/Hospitality 

Retail Trade 

Education/Health 

Construction/Mining 

The Bureau of Labor Statistics projects that the economy will add 19.7 

million nonfarm payroll jobs from 2010 through 2020, for an average 

annual growth rate of 1.4%. This growth rate compares to a 1.1% 

annual average over the past 20 years. Education/Health is projected 

to be the leader in job growth through 2020, adding 6.5 million jobs. 

Professional/Business Services follows, adding 3.8 million positions. 

Although the Construction sector ranks third for the number of jobs 

added, this sector suffered severe job loss during the 2008 downturn 

and in 2020 likely will remain below its pre-recession employment 

peak. 

PROJECTED PAYROLL JOB GROWTH 

United States | December 2010 – December 2020 

Education/Health 

Professional/Business 

Construction/Mining 

Retail Trade 

State/Local Govt 

Leisure/Hospitality 

Other Services 

Transportation/Utilities 

Financial Activities 

Wholesale Trade 

Information 

Manufacturing 

Federal Govt 

-1,000 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 

Job Change (Thousands) 


Initial unemployment claims were falling in 2013 until October’s 

Federal government shutdown began to have an effect on filings. 

In mid-October, initial claims stood at 336,500 based on a 4-week 

moving average. This compares to the 15-year average of 378,500. 

We expect claims to hover at or slightly below current levels through 

the end of 2013. 






10 


Financial Activities 

Wholesale Trade 

Other Services 

Transportation/Utilities 

Manufacturing 

Information 

State and Local Government 

Federal Government 

-100,000 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 

Job Change 

Note: Data are not seasonally adjusted. 


INITIAL UNEMPLOYMENT CLAIMS 

United States | Four‐Week Moving Average 

Initial Unemployment Claims 

700,000 

650,000 

600,000 

550,000 

500,000 

450,000 

400,000 

350,000 

300,000 

250,000 

Peak in Initial Unemployment Claims 

(Week of 3/28/09) = 660,250 

Note: Data are seasonally adjusted. 

Source: U.S. Department of Labor, Delta Associates; October 2013. 

Jan-09 

Mar-09 

May-09 

Jul-09 

Sep-09 

Nov-09 

Jan-10 

Mar-10 

May-10 

Jul-10 

Sep-10 

Nov-10 

Jan-11 

Mar-11 

May-11 

Jul-11 

Sep-11 

Nov-11 

Jan-12 

Mar-12 

May-12 

Jul-12 

Sep-12 

Nov-12 

Jan-13 

Mar-13 

May-13 

15-Year Average=378,500 

Jul-13 

Sep-13

The unemployment rate has declined to 7.3% as of August 2013, from 

8.1% one year earlier. The 7.3% rate is the lowest level since the end 

of 2008. We anticipate that the unemployment rate will hover around 

7.3% throughout the balance of 2013. 

NUMBER OF UNEMPLOYED VS. JOB OPENINGS 

12‐Month Average Ending July 2013 

Mining 

Information 

Financial activities 

Number of Job Openings 


UNEMPLOYMENT RATE 

United States 

12% 

Transportation 

and utilities 

Other services 

Government 

Construction 

Number of Unemployed 




Payroll Jobs 















11 


U.S. Unemployment Rate 

10% 

8% 

6% 

4% 

2% 

0% 

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 

Note: Through August 2013; seasonally adjusted; shaded bars represent recessions. 


As of July 2013, for every job opening there are 3.1 potential 

applicants. This is well below the July 2009 peak of 6.7 applicants 

for every job and marginally less than the 10-year average of 3.2. The 

ratio has been 3:1 or greater since October 2008. 

JOB- SEEKERS RATIO 

United States 

Ratio 

7 

6 

5 

4 

3 

2 

1 

0 

10-Year Average = 3.2 

Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 

Source: Bureau of Labor Statistics, Economic Policy Institute, Delta Associates; October 2013. 

Drilling down to job sectors, there are still too many potential 

applicants for too few jobs within each sector. This gap is most 

apparent in the construction sector, where for every job opening, 

there are 10.1 potential applicants as of July 2013. This gap is forcing 

many unemployed construction workers to revamp their skill sets in 

order to be hirable in another sector. Of note, the job seeker ratio 

for the construction industry fell from 12.5 in March 2013, which 

corresponds to the rebound in homebuilding seen this year. In 

comparison, the Education and Health Services sector has just 1.8 

applicants per job opening. 

Manufacturing 

Education and 

health services 

Professional and 

business services 

Leisure and 

hospitality 

Wholesale and 

retail trade 

0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 

Thousands of Jobs 


GROSS DOMESTIC PRODUCT (GDP) AND 

CONSUMPTION 

GDP increased at a 2.5% annualized rate during the 2nd quarter of 

2013, compared to a 1.1% revised growth rate during the 1st quarter 

of 2013. The 20-year annual average growth rate is 2.5%. The rise in 

GDP during the 2nd quarter represents the 9th consecutive quarter in 

which the economy has expanded. Although the economy continues 

to make gains, the growth rate remains sub-par. Momentum may 

be returning to the economy as business and consumer confidence 

strengthens and Europe emerges from its 18-month recession. The 

consensus view of economists is that GDP growth may decelerate 

slightly through 2013 and into 2014 as Federal budget cuts due 

to sequestration filter through the economy, businesses work off 

inventories, and uncertainty permeates the world’s financial markets 

regarding the tapering of the Federal Reserve’s bond-buying program. 

GDP PERCENT CHANGE 

United States 

Annual GDP Change in 2009 Constant Dollars 

6% 

4% 

2% 

0% 

-2% 

-4% 

-6% 

-8% 

-10% 

20-Year Average = 2.5% 

Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2 

07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 12 13 13 

Note: Annualized. 

Source: Bureau of Economic Analysis, Delta Associates; October 2013.





Payroll Jobs 












Due to uncertainty, public U.S. companies are hoarding cash, waiting 

for clear signals that the economy is on a consistent recovery curve. 

Uncertainty regarding the tapering of the Federal Reserve’s bondbuying 

program may further delay business investment. Corporate 

profits totaled $2.09 trillion during the 2nd quarter of 2013 on an 

annualized basis, just above the previous record of $2.01 trillion set 

in 2012. Companies have the resources to hire but remain wary about 

future demand for their products and services. 

U.S. CORPORATE PROFITS 

Corporate Profits in Trillions 

$2.5 

$2.0 

$1.5 

$1.0 

$0.5 

$0.0 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 

*Through Q2 2013; seasonally adjusted at annual rates. 

Source: Bureau of Economic Analysis, Delta Associates; October 2013. 

HOUSING MARKET 

Home prices in the 20 major metro areas increased 12.4% during 

the 12 months ending July 2013, the most recent data available, 

according to S&P/Case-Shiller. The housing market has performed 

well in 2013 after years of sub-par performance. Nationally, we expect 

home prices to rise around 12.0% from December 2012 to December 

2013, as any further growth may be restrained due to rising mortgage 

rates and more sellers entering the market. 

ANNUAL CHANGE IN EXISTING HOME SALE PRICES 

United States 

15% 

The number of U.S. home sales increased to 5.5 million (on an 

annualized basis) during August 2013, which is 18% above the 4.7 

million-unit pace for all of 2012. Existing home sales have remained 

above year-ago levels for 26 straight months. The average existing 

home sales price was $258,700 in August, which sits 15% above 

the year-end 2012 sales price and marks 18 consecutive months of 

year-over-year increases. If the inventory remains tight, prices could 

escalate further. 

U.S. EXISTING HOME SALES VS. SALES PRICE 

Number of Sales ‐ Thousands of Units 

6,500 

6,000 

5,500 

5,000 

4,500 

4,000 

3,500 

3,000 

Number of Existing Home Sales 

Average Existing Home Sales Price 

2006 2007 2008 2009 2010 2011 2012 2013* 

*Seasonally adjusted annual sales rate; data as of August 2013. 

Source: National Association of Realtors, Delta Associates; October 2013. 

FEDERAL INTERVENTION AND INFLATION 

$280,000 

$270,000 

$260,000 

$250,000 

$240,000 

$230,000 

$220,000 

$210,000 

$200,000 

Notwithstanding the stalemate in Congress over possibly amending 

sequestration, the Federal Reserve has remained active, vowing to do 

what it takes to keep U.S. economic growth on track. 

Given the economy continues to grow at a slow pace, the Fed plans to 

keep short-term rates at their current range of 0% to 0.25% until the 

unemployment rate drops to 6.5% or inflation becomes problematic. 

However, market forces began to drive up longer-term rates – with 

10-year U.S. Treasuries rising to 2.9% as of early September before 

declining to 2.6% in mid-October after the Fed announced it would 

continue its bond-buying program. In September, 30-year fixed-rate 

mortgages rose above 4.5% – their highest level in two years – before 

edging down again in October. 

Average Sales Price 



Percent Change for Median Price of 

Single ‐ Family Homes 

10% 

5% 

0% 

-5% 

-10% 

-15% 

-20% 


-25% 

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul 

2008 2009 2010 2011 2012 2013 

Note: Data reflect 20‐city composite index. 

Source: S&P/Case ‐ Shiller, Delta Associates; October 2013. 

12 

TRENDLINES® 2013





Payroll Jobs 














Most pundits believe we are at the 

beginning of a trend of rising long-term 

rates after a period of inflated asset prices 

due to the easy money policies of the 

Federal Reserve. It is important to note that 

rates are expected to rise due to a reduction 

in buying by the Federal Reserve at the long 

end of the curve, and not from an increase 

in the Federal Funds rate. The real questions 

are: 

How fast will rates rise? 

How high will they go? 

What effect will they have on 

economic growth? 

For those in the commercial real 

estate industry, what impact will 

they have on cap rates and debt 

financing? 

Rising long-term interest rates? Time will tell, 

but this trend during an economic recovery 

is not new. The key to the speed with which 

this happens may be the temperament of 

our foreign bond holders and accelerating 

inflation – will U.S. debt continue to look 

attractive compared to alternatives? If so, 

then rates will remain lower longer. If not, 

then rates will rise faster sooner. 

FEDERAL FUNDS RATE 

Interest Rate 

20% 

16% 

12% 

8% 

4% 

0% 

78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08* 

*Unchanged since December 16, 2008. 

Source: Federal Reserve Board, Delta Associates; October 2013. 

Regarding inflation, prices increased 1.5% during the 12 months 

ending August 2013, the most recent data available. Real personal 

consumption expenditure (PCE), which takes into account changes in 

consumption habits, rose 2.0% during the 12 months ending August 

2013. We expect inflation to be contained in the near-term due to 

still-high unemployment rates and poor income growth, which may 

continue to inhibit significant gains in consumer spending. Given 

this, coupled with appropriate monetary measures, inflation looks 

soft and should remain around 2.0% during the balance of 2013. 

Many economists argue against tapering of the Federal Reserve’s 

asset-buying program if prices are not accelerating at a healthy rate. 

U.S. INFLATION AND REAL PERSONAL CONSUMPTION 

EXPENDITURES 

Percentage Change in CPI ‐ U 

16% 

14% 

12% 

10% 

8% 

6% 

4% 

2% 

0% 

-2% 

Inflation 

Real PCE 

-4% 

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13* 

*12 ‐ month percentage change through August 2013. Note: data is seasonally adjusted. 

Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Delta Associates; October 2013. 


13 

TRENDLINES® 2013





Payroll Jobs 














ECONOMIC OUTLOOK 

Thus far in 2013 there has been little residual impact from sequestration. The private and public sectors 

are each learning to adapt, and national economic growth has continued, though at a level that is weak 

for a post-recession recovery. Households should remain upbeat due to increases in net worth from home 

prices and the stock market, though the Federal government shutdown and debt ceiling fights in October 

may have weakened consumer confidence. On balance, we look for this recovery to continue on its slow 

but steady course through 2017 or so, barring a catastrophic event. 

Specifically, we believe the economic outlook is as follows: 

Real GDP growth 

Approximately 2.0% in 2013. 

Payroll jobs 

Approximately 2.3 million added in 2013. 

Housing 

Price increases of approximately 12% from December 2012 to December 2013. 

Unemployment rate 

Hovering around 7.3% throughout the remainder of 2013. 

Federal Funds Rate 

0% to 0.25% through year-end 2015. 

Long-term interest rates 

Edging higher during the rest of 2013. 

Inflation rate 

Remaining around 2.0% during the balance of 2013; higher in 2014 as consumer demand strengthens. 


14 

TRENDLINES® 2013

NATIONAL PAYROLL JOB GROWTH SUMMARY 

The U.S. economy gained 2.2 million payroll jobs over the 12 months ending August 2013 (seasonally adjusted), representing an increase 

of 1.6%. This compares to the 25-year annual average of 1.3 million jobs at a 1.1% average growth rate. 





Payroll Jobs 














U.S. PAYROLL JOB GROWTH 

YEAR 2013* 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 

JOB CHANGE 2,206,000 2,237,000 1,589,000 -948,000 -5,990,000 -793,000 1,513,000 2,391,000 2,245,000 1,396,000 -352,000 -1,473,000 

%CHANGE 1.6% 1.7% 1.2% -0.7% -4.4% -0.6% 1.1% 1.8% 1.7% 1.1% -0.3% -1.1% 

*Seasonally-adjusted change for 12 months ending in August 2013; others are comparisons of annual averages. Note that BLS has rebenchmarked figures since their initial 

publication; the figures presented above are the most recent estimates. 

12-MONTH PAYROLL EMPLOYMENT CHANGE 

THROUGH AUGUST 2013 

JOB CHANGE 

12-MONTH PAYROLL EMPLOYMENT CHANGE 

THROUGH AUGUST 2013 — CONT’D 

JOB CHANGE 

METRO AREA # % METRO AREA # % 

New York 172,800 2.0% Washington, DC 33,400 1.1% 

Dallas/Ft. Worth 111,000 3.7% Nashville 26,300 3.3% 

LA Basin Austin 23,800 2.9% 

Los Angeles/Long Beach/Glendale 52,000 1.4% Charlotte 23,400 2.7% 

Santa Ana/Anaheim/Irvine 32,500 2.3% Baltimore 23,100 1.8% 

Riverside/San Bernardino/Ontario 8,100 0.7% Las Vegas 22,200 2.7% 

Subtotal LA Basin 92,600 1.5% Salt Lake City 20,800 3.2% 

Houston 80,700 3.0% Portland (OR) 19,500 1.9% 

Boston (Metropolitan NECTA) 64,700 2.6% Orlando 19,400 1.9% 

Atlanta 57,100 2.4% Columbus (OH) 17,000 1.8% 

Minneapolis-St. Paul 57,000 3.2% Pittsburgh 15,300 1.3% 

Chicago 53,700 1.2% San Diego 14,800 1.2% 

San Francisco Bay Area Oklahoma City 13,800 2.3% 

San Francisco/San Mateo/Redwood City 18,200 1.8% Indianapolis 12,200 1.3% 

San Jose/Sunnyvale/Santa Clara 28,000 3.1% Cincinnati 11,500 1.1% 

Oakland/Fremont/Hayward 3,800 0.4% St. Louis 11,000 0.8% 

Subtotal Bay Area 50,000 1.7% Jacksonville 10,500 1.8% 

Seattle 45,500 2.6% Kansas City 10,000 1.0% 

Phoenix 42,200 2.4% Detroit (Detroit/Warren/Livonia) 9,000 0.5% 

Tampa-St. Pete 41,700 3.6% San Antonio 7,800 0.9% 

Denver-Boulder 41,900 3.7% New Orleans 6,500 1.2% 

South Florida Memphis 4,700 0.8% 

Fort Lauderdale 22,700 3.1% Raleigh-Durham 4,500 0.6% 

Miami/Miami Beach/Kendall 2,900 0.3% Sacramento 2,600 0.3% 


West Palm Beach/Boca Raton 9,500 1.8% Cleveland (7,900) -0.8% 

15 


Subtotal South Florida 35,100 1.5% 

Philadelphia 33,600 1.2% 

Source: Bureau of Labor Statistics, Delta Associates; October 2013.





Local Economy Among Nation’s Strongest 

Local Economy Among Nation’s Strongest - Continued 

The Houston Metro Area Economic Outlook 







16 



The Houston metro economy continued to improve during 2013. The 

12-month employment growth of 80,700 jobs through August 2013 is 

fourth-most in the nation among large metro areas. Houston’s payroll 

employment rose by 3.0% during that period, above the national 

growth of 2.4%. The Energy, Construction, and Trade/Transportation 

Sectors are fueling growth, and Houston’s other core industries are 

continuing to expand, including the Leisure/Hospitality sector. 


Large Metro Areas | 12 Months Ending August 2013 

Payroll Jobs in Thousands 

180 

160 

140 

120 

100 

80 

60 

40 

20 

0 

80.7 

NY DFW LA BASIN HOU BOS ATL CHI PHX DEN S.FLA WAS SF BAY 


Unemployment Rate 


Houston Metro | 1991 – August 2013 

Annual Job Growth (in Thousands) 

120 

100 

80 

60 

40 

20 

0 

-20 

-40 

-60 

-80 

08 

07 

06 

05 

04 

03 

02 

01 

00 

99 

98 

97 

96 

95 

94 

93 

92 

91 

22-Year Average 

Job Growth = 

43,600/Year 

*12-month job growth through August 2013. 


UNEMPLOYMENT RATES 

Large Metro Areas | August 2012 vs. August 2013 

12% 

10% 

8% 

6% 

4% 

2% 

0% 

August 2012 

August 2013 

National Average 

8.1% 

7.3% 

13* 

12 

11 

10 

09 

The Houston area unemployment rate dropped to 6.1% in August 

2013, the most recent data available at this writing, from 6.9% in 

August 2012. The national unemployment rate was at 7.3% in August 

2013, down from 8.1% one year prior. 

WAS DFW HOU BOS DEN SF BAY S.FLA PHX NY ATL CHI LA BASIN 


Metro Houston’s core industries continue to 

lead growth: 

Energy (Mining/Logging) 

6,200 jobs added over the 12 months ending August 2013 – a 6.0% 

increase. 

Professional Services 

12,000 jobs added over the 12 months ending August 2013 – a 2.9% 

increase. 

Construction 

8,200 jobs were added during the 12 months ending August 2013 – a 

4.5% increase. 

Manufacturing 

5,900 jobs were added over the 12 months ending in August 2013 – a 

2.4% increase. 

Trade/Transportation 

19,200 jobs added in the 12 months ending August 2013 – a 3.5% 

increase 

Core Industries 

Houston Metro | 2012 

Core Industries $ (Bil) % GRP 

Energy $115 27% 

Financial, Professional, Tech $56 13% 

Construction $39 9% 

Federal & State Government $34 8% 

Manufacturing $26 6% 

Medical/Educational $17 4% 

Trade/Transportation $17 4% 

Total Core Industries: $304 71% 

Other $124 29% 

Total GRP: $428 100% 

Source: BEA, BLS, GMU Center for Regional Analysis, Delta Associates; October 2013. GRP = Gross Regional 

Product. 

Employment in Houston’s Mining sector increased by 6,200 jobs, or 

6.0%, in the 12-month period ending in August 2013. In addition, the 

U.S. rotary rig count was at 1,744 in late-September, down from late- 

August and from the average of 1,919 in 2012. Benchmark crude 

oil prices stood at $110 per barrel for Brent and $101 for WTI as of 

mid-October. The Brent price is considered a more accurate global 

indicator and is the only source used by the U.S. Energy Department 

for its price forecasts. Oil and gas shale plays are not only set to boost 

the Houston market but also the national market. As a result, there 

will be increased investments in energy companies, an estimated 3.3 

million jobs created by 2020, and a reduction in electricity prices, 

according to a recent study by HIS, Inc. While the nation as a whole 

will benefit, Houston will enjoy substantial benefits from being at the 

hub of this activity.













U.S. ROTARY RIG COUNT 

1990 – 2013 

Annual Average Working Rigs 

2,000 

1,800 

1,600 

1,400 

1,200 

1,000 

800 

600 

400 

200 

0 

90 

91 

92 

93 

94 

95 

96 

97 

98 

99 

00 

01 

02 

03 

04 

05 

06 

07 

08 

09 

10 

11 

12 

Source: Baker Hughes, Delta Associates; October 2013. *Count as of 9/27/13. 

The Construction sector added 8,200 jobs during the 12 months 

ending August 2013 – a 4.5% increase. As Houston’s economy gains 

strength, commercial and residential construction are increasing. 

Of note, office construction is picking up in the Katy Freeway/ 

Energy Corridor and remains substantial in the Woodlands/Conroe 

submarkets. Part of the overall increase in Houston-area office 

construction is due to the 3.0 million SF ExxonMobil campus in The 

Woodlands. However, a number of additional projects are helping 

drive increased construction to these areas. Over 4.3 million SF is 

under construction in the Katy Freeway/Energy Corridor submarket 

and over 4.2 million SF in the Woodlands/Conroe submarket. 

Houston’s Manufacturing sector employment increased by 5,900 

jobs over the 12 months ending in August 2013, a gain of 2.4%. The 

Houston Purchasing Managers Index, a short-term leading indicator 

of production, measured 60.8 in September 2013 and has been in 

expansion every month since October 2009. (A score above 50 

indicates expansion.) The outlook for the manufacturing sector is 

dependent on other sectors, such as energy and the state of consumer 

confidence. Both areas are doing well in Houston, which bodes well 

for manufacturing. Companies such as Cosentino North America 

are taking advantage of such prime conditions. The manufacturer, 

fabricator, and distributor of natural stone will be opening 12 

additional showrooms across the nation by the end of 2014, with the 

largest one set to open in Houston. Approximately 250 of Cosentino’s 

900 employees are located in Houston. 

13* 

The Education and Health Services sector continues to grow, adding 

13,400 jobs in the 12 months ending August 2013 – a 4.1% increase. As 

baby boomers age, many Houston healthcare businesses are starting 

to focus more on this demographic. Four of the five largest assisted 

living communities in the metro area either have plans to expand or 

have recently expanded. Companies such as the Laser Spine Institute 

are opening offices in the area to attend to the increasing needs 

of aging Houstonians. According to the Census Bureau, Houston’s 

population over 65 years old increased 17.7% from 2000 to 2010, 

and it will only increase more in this decade. In the Education sector, 

a professor at the University of Houston has developed a nanocoating 

business called C-Voltaics that started as a university research project. 

Based out of UH’s Energy Research Park, C-Voltaics plans on ramping 

up production to 2,000 to 3,000 gallons of the nanocoating by the 

end of the year. Businesses like this are advantageous for universities 

as they bring in money and attract more researchers to develop their 

own technologies. With Houston’s abundant resources, research and 

development is set to continue expanding. 

Trade/Transportation added 19,200 jobs during the 12 months 

ending in July 2013 – a 3.5% increase. However, Houston’s airports are 

on track to have slightly less air freight than in 2012. The Metropolitan 

Transit Authority of Harris County is considering changes to its bus 

routes that could cut costs. Part of the plan would involve using 

smaller buses for shorter routes that also have fewer riders and 

also cutting some routes altogether. The changes would affect less 

than 1% of riders and would not impact low-income or minority 

neighborhoods as required by the Department of Transportation. 

New routes would target areas with the highest ridership rather than 

trying to accommodate as many areas as possible. 

HOUSTON AIRPORT SYSTEM 

Air Freight | 1999 – August 2013 

Air Freight (000 lbs) 

450,000 

425,000 

400,000 

375,000 

350,000 

325,000 

Long-Term Average: 

364 metric tons/annum 

HOUSTON MANUFACTURING OUTLOOK 

Purchasing Managers Index | 2002 – August 2013 

300,000 

99 

00 

01 

Source: Houston Airport System, Delta Associates; October 2013. 

02 

03 

04 

05 

06 

07 

08 

09 

10 

11 

12 

13* 

*YTD annualized. 


17 


Index 

70 

65 

60 

55 

50 

45 

40 

35 

30 

02 03 04 05 06 07 08 09 10 11 12 13 

Source: NAPM –Houston, Delta Associates; October 2013. 

Expansion 

Contraction 

In Housing, the Houston Association of Realtors reported a 16.2% 

increase in single-family home sales volume in August 2013, 

compared to August 2012. The average single-family home sale price 

was $260,607 in August 2013 which is 16.4% higher than the average 

price for August 2012. The median price was $186,200 in August 

2013, up 12.8% from August 2012. These figures are the highest ever 

for the month of August in Houston. The number of active listings at 

the end of August 2013 fell 18.9% from August 2012, indicating there 

is more demand and less inventory available.










Houston’s economic outlook is bright and it should remain strong for several years to come. Economic 

uncertainty and political instability in the Middle East does cause some concern, but Houston is in a strong 

position to withstand any slowdown in economic growth. Forbes recently ranked Houston as third on its “Best 

Cities for Future Job Growth” list out of the 200 largest metro areas in the nation. Additionally, Houston ranked 

first in the nation for job growth in the engineering field by Monster.com, and Texas ranked fourth in the 

nation for job growth in technology by Dice.com, which was heavily attributed to healthcare technology jobs 

in Houston. 

The energy sector has been a boon for Houston and not only because of its oil and gas production. Wind 

power is another source of production. Strength in the Energy, Trade/Transportation, and Education and 

Health Services sectors will drive expansion locally over the next several years. As a result, we expect metro 

Houston’s job growth to average approximately 91,700 per year for the 2013-2015 period, comparable to the 

growth during the 2005-2007 expansion period. Houston’s employment growth should be among the nation’s 

strongest. 



JOB FORECAST 

Houston Metro | 2013 – 2015 

OFFICE ABSORPTION AND EMPLOYMENT 

Houston Metro | 1980 – 3 RD Quarter 2013 



Annual Job Growth 

120,000 

100,000 

80,000 

60,000 

40,000 

20,000 

0 

Avg. Annual Growth 

2005-07 = 

87,300/annum 

Projected Avg. 

Annual Growth 

2013-15 = 

91,700/annum 

Net Absorption (Millions of SF) 

14 

12 

10 

8 

6 

4 

2 

0 

-2 

-4 

Change in Employment (000’s) 

Net Absorption (Millions of SF) 

150 

100 

50 

0 

-50 

-100 

Change in Employment (000’s) 

-20,000 

*12-month employment growth through August 2013. YTD 2013 net absorption annualized. 


-40,000 

-60,000 

-80,000 

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 



18 

TRENDLINES® 2013






19 

Office Market Expanding 

Consistent Demand for Office Space 

Vacancy Remains Low 

Development Pipeline Growing 

Office Asking Rents Rising 

The Houston Metro Area Office Market Outlook 

Summary Of Office Market Indicators - All Space 

Summary Of Office Market Indicators - Class A Space 

Summary Of Office Market Indicators - Class B Space 

Asking Rental Rate Analysis Of Class A & B Office Buildings 








The Houston metro office market experienced growth in 2013, as the 

local economy expands at a healthy rate. Job creation, especially 

among energy-related firms, has driven office leasing activity, and 

tenants are seeking quality space in prime submarkets. 

CONSISTENT Demand for Office Space 

Net absorption totaled 1.3 million SF in the first three quarters of 2013 

(1.7 million SF when annualized), compared to 4.2 million SF in all of 

2012. The Class A market accounted for that entire total, absorbing 

1.4 million SF, with Class B reporting negative absorption in the 

Houston market. Positive Class A absorption is occurring because of 

the strength of the local economy. Owners are looking for tenants to 

fill Class A space before new buildings currently under construction 

come online. 

Net absorption by class (SF): 

2012 YTD 2013 

Class A 2,969,000 1,415,000 

Class B 1,183,000 (146,000) 

Class C 70,000 (8,000) 

How the Multi-Tenant Market Compares to 

Our Market Coverage 

Vacancy and absorption in the Houston metro area often are 

reported by brokerage firms on multi-tenant buildings only. We 

include owner-occupied and single-tenant buildings as well, 

on the basis of immediate availability, to capture more market 

activity. We exclude government-owned space. As a point of 

comparison, below is data for the Houston multi-tenant office 

market at Q3 2013: 

Multi-Tenant Entire Market 

Inventory: 204.3 MSF 253.3 MSF 

Overall vac. (incl. sublet): 13.3% 10.9% 

YTD net absorption: 689,000 SF 1.3 MSF 

Net Absorption (SF) in Selected Submarkets: 

2012 YTD 2013 

Woodlands/Conroe 640,000 483,000 

Katy Freeway/Energy Corridor 1,211,000 429,000 

Southwest Freeway/Sugarland 280,000 356,000 

West Loop (337,000) 513,000 

Available sublease space in the Houston metro currently stands at 1.3 

million SF – just 0.5% of the standing inventory. 

Notable 2013 leases 

include: 

• ConocoPhillips pre-leased 

846,604 SF at 935 N. Eldridge 

Parkway and 925 N. Eldridge 

Parkway in Katy Freeway West. 

• WesternGeco leased 554,385 SF 

at 10001 Richmond Avenue in the 

Westchase submarket. 

• Technip pre-leased 428,831 SF 

at 11740 Katy Freeway in Katy 

Freeway West. 

• Swift Energy Company pre-leased 

236,880 SF at Five Chasewood 

Drive in the FM 1960/Highway 

249 submarket. 

• Huntsman International LLC 

renewed 158,598 SF at 10003 

Woodloch Forest Drive in The 

Woodlands submarket. 

• TETRA Technologies, Inc. renewed 

152,999 SF at 24955 I-45 North in 

The Woodlands submarket. 

• Subsea 7 pre-leased 96,292 SF 

at 17220 Katy Freeway in Katy 

Freeway West.

NET ABSORPTION OF OFFICE SPACE 

SELECT METRO AREAS 

January Through September 2013 









Why This Methodology Is the Best 

Indicator Of Current Market Conditions 

We include owner-occupied and single-tenant buildings in 

our inventory, vacancy, and absorption statistics. Doing so 

allows us to capture more market activity than many of our 

competitors, and to better correlate changes in the market with 

changes in employment. As single-tenant space does compete 

with multi-tenant space, we believe it is critical to understand 

all components of the market. We also offer wider geographic 

coverage than some of our competitors. The result is that the 

inclusion of single-tenant and owner-occupied space tends to 

yield lower vacancy rates and higher absorption totals than our 

competitors’ results, but our coverage of the market is more 

comprehensive. 

Millions of SF 

7 

6 

5 

4 

3 

2 

1 


0 



Strong job creation and the continued strength of the energy sector 

have put Houston on pace to absorb 1.7 million SF during 2013. New 

York and the San Francisco Bay Area lead the nation in office space 

absorbed this year, while Houston ranks eighth. 

-1 

NY SF BAY DFW LA/OC ATL BOS PHX HOU S. FLA DEN WAS CHI 

Source: CoStar, Delta Associates; October 2013. 









NET ABSORPTION OF OFFICE SPACE AND 

VACANCY RATE TRENDS 


Net Absorption in Thousands of SF 

8,000 

7,000 

6,000 

5,000 

4,000 

3,000 

2,000 

1,000 

0 

-1,000 

-2,000 

Net Absorption in Thousands of SF 

Direct Vacancy Rate 

16% 

14% 

12% 

10% 

8% 

6% 

4% 

2% 




metro area was 10.9% at 3rd quarter 2013, unchanged from one year 

ago. The direct vacancy rate was 10.4%, down from 10.6% one year 

ago. The continued strength of the local economy is driving this rate 

down; direct vacancy is nearing its recent nadir of 10.2% in 2007. 

The overall Class A vacancy rate is 8.2%, compared to 8.6% a year 

ago. Overall 3rd quarter 2013 vacancy rates for all classes in selected 

submarkets: 

• Katy Fwy/Energy Corridor 5.8% 

• Woodlands/Conroe 6.2% 

• Downtown 9.9% 

• West Loop 11.0% 


-3,000 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 

0% 

• Southwest Freeway/Sugar Land 16.4% 

20 



Note: Delivery of pre-leased space counts as positive net absorption.

















metro will likely stabilize over the next two years, as the increased 

demand for new space in select submarkets is nearly balanced by an 

increased pipeline and rising vacancy in aged buildings. Given this, 

we expect an overall vacancy rate in the low-11% range in two years. 

Still, without a major disruption in the regional economy, a period of 

consistent rent growth is on the horizon. However, the pipeline of new 

construction is rising along with potential increased demand. 

OFFICE VACANCY RATE 



OFFICE VACANCY RATES 

Selected Metro Areas | 3 RD Quarter 2013 

Overall Vacancy Rate 

30% 

25% 

20% 

15% 

10% 

5% 

0% 

20% 

15% 

10% 

National Vacancy 

Rate: 13.3% 

12.1% 

9.9% 10.3%10.9%10.9% 11.2% 

12.7%13.4%13.5% 13.7% 15.5% 15.8% 

10.4% 

Source: CoStar, Delta Associates; October 2013. *As of Q3 2013. 

19.4% 

Office Space Under Construction or 

Renovation IN THE Houston Metro Area 

Submarket 

OFFICE SPACE UNDER CONSTRUCTION 

Selected Metro Areas | 3 RD Quarter 2013 

14 

12 

SF 

% 

Pre-leased 

Downtown 736,000 47.6% 

FM 1960 220,915 100.0% 

Katy Fwy/Energy Corridor 4,305,809 74.7% 

Northwest 417,897 50.2% 

S Main/Medical Center 50,000 44.4% 

SW Fwy/Sugar Land 451,259 54.3% 

West Loop 513,454 61.9% 

Westchase 822,355 44.5% 

Woodlands/Conroe 4,257,133 93.9% 

Total 11,774,822 75.9% 

Source: Delta Associates’ analysis of CoStar data; October 2013 




5% 

0% 

BOS SF BAY HOU NY OC DEN LA WAS S. FLA CHI ATL DFW PHX 



10 

8 

6 

4 

U/C Nationally 

= 71.8 Million SF 



21 



There is 11.8 million SF of office space under construction or 

renovation in the Houston metro area as of September, compared to 

3.6 million SF one year ago. Space under construction is 76% preleased, 

compared to 46% a year ago. 

The largest projects under construction include Exxon’s new 3.0 

million SF campus and Anadarko Petroleum’s 550,000 SF corporate 

office, both of which are in the Woodlands/Conroe submarket. Also 

significant is Energy Center Three, a 547,000 SF project underway in 

Katy Freeway West. 

2 

0 

NY HOU BOS WAS SF BAY DFW CHI DEN LA/OC ATL 


S. FLA PHX

AVERAGE CHANGE IN ASKING RENT 

Select Metro Areas | January - September 2013 

5.0% 

4.0% 






22 

















The amount of office space under construction nationally is 

edging up, with market conditions gradually improving and 

financing becoming more available. Nationally, 71.8 million 

SF of office space is under construction today, compared 

to 64.8 million SF one year ago. Houston has the secondmost 

office space under construction, and at 11.8 million 

SF, it represents approximately 4.6% of the current metro 

inventory. 

Deliveries totaled 1.4 million SF through the 3rd quarter of 

2013, after totaling 1.0 million SF for all of 2012. 


Asking rents for all classes of office space have risen 

approximately 1.0% in metro Houston during the first three 

quarters of 2013, after rising 3.6% in 2012. Class A rents 

rose 2.4% through the 3rd quarter of 2013, and Class B rents 

increased 0.7% in the same period. Class A rents have been 

rising faster than Class B rents because of the flight to quality 

underway, with stronger demand for newer space. 

AVERAGE OFFICE RENTS 

Houston Metro | 1982 –3 RD Quarter 2013 

Asking Rents ($’s/SF, FS) 

$26 

$24 

$22 

$20 

$18 

$16 

$14 

$12 

$10 

$8 

$18.11 

$14.80 

$11.70 

$11.92 

$19.18 

$23.78 

$24.93 

83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 


Note: All Classes of Office Space. 

Houston’s asking rent growth looks average when compared 

to asking rent changes in other major markets. Rent growth 

in Houston is sixth in the country and nearly the same as 

comparable markets, such as Dallas /Fort Worth and Phoenix. 

Asking Rents, $/SF, FS 

3.0% 

2.0% 

1.0% 

0.0% 

-1.0% 

-2.0% 

-3.0% 

SF BAY DEN 

Asking rents average $28.08/SF, full service, for Class A buildings 

and $19.44/SF, full service, for Class B buildings. These are metrowide 

averages; newer buildings in more desirable submarkets are 

outperforming these market-wide averages. 

Metro-wide asking rents will likely increase during the balance of 

2013 and into 2014, as demand for space remains consistent. At 

the submarket level, asking rents will likely continue fluctuating, 

with landlords reacting quickly to changes in the market. Given the 

relatively strong demand for Class A space, rents for that product type 

should outperform in the period ahead. 

The Houston Metro Area 

Office Market Outlook 

The Houston metro office market will likely experience continued 

growth in the period ahead. However, given the growing pipeline, 

coupled with tenants vacating older space, we expect the vacancy 

rate to stabilize over the next two years – hovering in the low-11% 

range. Rents will likely continue rising modestly for the remainder 

of 2013 and into 2014, especially for Class A space, as office market 

conditions currently favor owners. However, with the development 

pipeline (including planned space expected to start construction 

soon) now at 5.3% of the standing inventory, rent increases are likely 

to remain modest. Of note, excluding Exxon’s build-to-suit campus, 

the development pipeline equals just 4.1% of the standing inventory. 

Office submarkets likely to outperform in the months ahead, with 

declining vacancy and rising rents, include: 

• Katy Freeway/Energy Corridor 

• Westchase 

• West Loop 

NY 


• Woodlands/Conroe 

LA/OC PHX HOU DFW ATL CHI S. FLA BOS 

The Katy Freeway/Energy Corridor in particular is a candidate for 

improved performance during the balance of 2013. However, 

competition for tenants is limiting rent growth, and more supply is due 

to come on the market soon, with 4.3 million SF under construction 

there. Therefore, investors should carefully balance strong demand 

forecasts against evolving market fundamentals. 

WAS

SUMMARY OF OFFICE MARKET INDICATORS - ALL SPACE 

Houston Metro Area | 2010 Through Third Quarter 2013 

Q3 2013 Direct Vacancy Rate at the End of: Q3 2013 Net Absorption (SF) 2/ 

Submarket 

Total Bldgs 

Total 

Rentable SF 

All Bldgs. 1/ 

SF Available 

Immediately 2010 2011 2012 Q3 2013 

All Bldgs. 2/ 

Vacancy 

Rate w/ 

Sublet 

SF Under 

Constr. or 

Renovation 

2010 2011 2012 Q3 2013 YTD 2013 

Central Business District 112 48,072,971 4,470,786 9.3% 9.5% 8.7% 9.3% 10.1% 330,000 (166,000) 1,552,000 385,000 (144,000) (288,000) 

Midtown 106 7,212,574 620,281 14.7% 13.2% 13.4% 8.6% 8.7% 406,000 22,000 108,000 (14,000) (7,000) 346,000 

Downtown 218 55,285,545 5,091,068 10.0% 10.0% 9.3% 9.2% 9.9% 736,000 (144,000) 1,660,000 371,000 (151,000) 58,000 

I-45 North 42 2,270,142 301,929 17.9% 16.3% 14.6% 13.3% 13.4% - (35,000) 36,000 38,000 14,000 30,000 

FM 1960 / Champions 68 2,958,692 683,458 18.6% 20.2% 23.4% 23.1% 23.8% - 77,000 (47,000) (95,000) 21,000 9,000 

FM 1960 / Highway 249 129 6,908,809 1,063,957 30.4% 26.2% 16.0% 15.4% 15.5% 220,915 120,000 134,000 752,000 28,000 54,000 

FM 1960 239 12,137,643 2,049,343 25.5% 22.9% 17.5% 16.9% 17.1% 220,915 162,000 123,000 695,000 63,000 93,000 

North Belt West/Greenspoint 90 10,688,423 1,688,771 13.3% 13.8% 13.0% 15.8% 16.4% - 42,000 (28,000) 85,000 (139,000) (299,000) 

Greenspoint / IAH 36 3,154,574 356,467 11.1% 12.6% 12.7% 11.3% 11.3% (47,000) (42,000) 11,000 135,000 132,000 

Greenspoint / North Belt 126 13,842,997 2,045,238 12.9% 13.6% 12.9% 14.8% 15.2% - (5,000) (70,000) 96,000 (4,000) (167,000) 

Greenway Plaza 99 12,166,960 1,131,527 11.5% 9.8% 9.7% 9.3% 9.7% - (12,000) 232,000 12,000 (49,000) 121,000 

Gulf Freeway/Pasadena 109 4,572,000 525,780 11.7% 12.6% 10.2% 11.5% 11.5% - 106,000 (41,000) 109,000 46,000 (59,000) 

Katy Freeway East 114 9,510,671 798,896 8.5% 7.3% 7.9% 8.4% 8.8% 538,052 331,000 105,000 364,000 57,000 146,000 

Katy Freeway West 171 21,734,098 956,300 14.2% 9.6% 5.7% 4.4% 4.5% 3,767,757 108,000 1,144,000 847,000 22,000 283,000 

Katy Fwy / Energy Corridor 285 31,244,769 1,755,197 12.4% 8.9% 6.4% 5.6% 5.8% 4,305,809 439,000 1,249,000 1,211,000 79,000 429,000 

Kingwood / Humble 46 1,822,176 118,441 8.4% 7.3% 6.4% 6.5% 7.2% - 17,000 47,000 20,000 5,000 39,000 

NASA / Clear Lake 171 9,643,387 1,552,585 7.5% 10.6% 12.8% 16.1% 16.2% - 104,000 (140,000) (212,000) 58,000 (318,000) 

Northeast 47 2,097,508 287,359 10.6% 12.3% 12.6% 13.7% 13.8% - 82,000 (35,000) (6,000) (6,000) 3,000 

North Loop West 71 5,497,896 951,136 21.7% 24.9% 18.4% 17.3% 19.8% 126,000 (178,000) (175,000) 358,000 16,000 (44,000) 

Northwest Near 27 1,986,836 286,104 9.8% 10.4% 8.5% 14.4% 14.4% - 87,000 (10,000) 30,000 (72,000) (108,000) 

Northwest Far 96 7,828,050 782,805 19.1% 12.2% 10.3% 10.0% 10.3% 291,897 110,000 540,000 149,000 (55,000) 23,000 

Northwest 194 15,312,782 2,020,045 19.1% 16.7% 13.1% 13.2% 14.2% 417,897 19,000 355,000 537,000 (111,000) (129,000) 

South Main / Medical Center 88 11,135,712 835,178 7.0% 6.9% 5.9% 7.5% 7.5% 50,000 (71,000) 12,000 112,000 (33,000) (177,000) 

Southwest / Hillcroft 59 4,743,707 716,300 19.2% 16.0% 14.9% 15.1% 15.1% - 65,000 152,000 52,000 14,000 (10,000) 

Southwest Beltway 8 98 7,354,337 1,610,600 16.6% 19.2% 21.1% 21.9% 22.0% - (190,000) (433,000) 112,000 15,000 (58,000) 

East Ft Bend Co. / Sugar Land 152 8,965,820 1,022,103 18.9% 16.6% 15.3% 11.4% 12.6% 451,259 (432,000) 227,000 116,000 193,000 424,000 

Southwest Fwy / Sugar Land 309 21,063,864 3,349,003 18.1% 17.4% 17.2% 15.9% 16.4% 451,259 (557,000) (54,000) 280,000 222,000 356,000 

Bellaire 42 4,748,537 379,883 7.0% 10.3% 10.2% 8.0% 8.4% - (4,000) (156,000) 5,000 0 104,000 

Post Oak Park 34 4,771,860 854,163 11.2% 9.9% 17.1% 17.9% 18.1% - 47,000 62,000 (344,000) 14,000 (38,000) 

Galleria 56 15,571,819 1,214,602 8.8% 9.0% 8.3% 7.8% 9.0% 513,454 321,000 (31,000) 31,000 31,000 365,000 

Riverway 22 3,086,415 274,691 9.5% 10.4% 10.3% 8.9% 8.9% - 12,000 (28,000) 4,000 (28,000) 43,000 

Richmond / Fountainview 44 1,783,906 372,836 6.7% 9.9% 19.4% 20.9% 20.9% - 76,000 (58,000) 12,000 (32,000) (27,000) 

San Felipe / Voss 43 5,489,762 559,956 11.2% 10.6% 11.4% 10.2% 10.5% - (71,000) 33,000 (45,000) 126,000 66,000 

West Loop 241 35,452,299 3,656,131 9.2% 9.7% 11.0% 10.3% 11.0% 513,454 381,000 (178,000) (337,000) 111,000 513,000 

Westchase 109 15,558,952 1,104,686 12.7% 11.4% 7.2% 7.1% 7.9% 822,355 (62,000) 203,000 694,000 16,000 16,000 

The Woodlands 142 10,307,344 494,753 9.9% 6.7% 3.9% 4.8% 5.1% 4,257,133 258,000 420,000 439,000 511,000 530,000 

Conroe 41 1,612,431 204,779 7.1% 7.1% 9.9% 12.7% 13.1% - (2,000) (27,000) 201,000 (34,000) (47,000) 

Woodlands / Conroe 183 11,919,775 699,531 9.5% 6.8% 4.9% 5.9% 6.2% 4,257,133 256,000 393,000 640,000 477,000 483,000 

TOTAL - Houston 2,464 253,256,369 26,221,112 12.3% 11.5% 10.3% 10.4% 10.9% 11,774,822 715,000 3,756,000 4,222,000 723,000 1,261,000 

Vacancy Rate with Sublet Space 12.9% 12.0% 10.7% 10.9% 

1/ Includes buildings 15,000 SF RBA and greater. Does not include buildings under construction or buildings owned by the government. Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: 703-836-5700; DeltaAssociates.com 

2/ Does not include sublet space. Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; October 2013. 

SECTION 4: THE HOUSTON METRO OFFICE MARKET

SUMMARY OF OFFICE MARKET INDICATORS - CLASS A SPACE 1/ 


Q3 2013 Net Absorption (SF) 2/ 

Submarket 

Total Bldgs 

Total Rentable 

SF 

All Bldgs. 1/ 

SF Available 

Vacancy Rate 

Immediately Vacancy Rate 2/ w/ Sublet 

All Bldgs. 2/ 

SF Under 

Constr. or 

Renovation 

2010 2011 2012 Q3 2013 YTD 2013 

Central Business District 31 30,200,614 2,053,642 6.8% 8.1% - (198,000) 1,406,000 212,000 (60,000) (151,000) 

Midtown 4 1,829,725 93,316 5.1% 5.1% - 2,000 9,000 82,000 11,000 16,000 

Downtown 35 32,030,339 2,146,958 6.7% 7.9% - (196,000) 1,415,000 294,000 (49,000) (135,000) 

I-45 North 2 204,821 - 0.0% 0.0% - (15,000) 21,000 28,000 0 0 

FM 1960 / Champions 1 150,000 - 0.0% 0.0% - 0 0 0 0 0 

FM 1960 / Highway 249 17 2,725,914 545,183 20.0% 20.1% - 102,000 22,000 702,000 41,000 82,000 

FM 1960 20 3,080,735 545,183 17.7% 17.8% - 87,000 43,000 730,000 41,000 82,000 

North Belt West/Greenspoint 15 3,709,849 341,306 9.2% 10.4% - (18,000) (70,000) (38,000) (93,000) (119,000) 

Greenspoint / IAH 7 1,085,573 121,584 11.2% 11.2% 67,000 (22,000) 8,000 91,000 88,000 

Greenspoint / North Belt 22 4,795,422 462,890 9.7% 10.6% - 49,000 (92,000) (30,000) (2,000) (31,000) 

Greenway Plaza 15 6,168,363 450,290 7.3% 8.2% - 44,000 104,000 179,000 (111,000) 74,000 

Gulf Freeway/Pasadena 1 52,362 8,273 15.8% 15.8% - 8,000 2,000 5,000 0 0 

Katy Freeway East 16 4,027,953 132,922 3.3% 4.2% 440,052 357,000 32,000 442,000 48,000 145,000 

Katy Freeway West 48 11,524,605 103,721 0.9% 0.9% 3,483,579 77,000 1,095,000 484,000 81,000 162,000 

Katy Fwy / Energy Corridor 64 15,552,558 236,644 1.5% 1.8% 3,923,631 434,000 1,127,000 926,000 129,000 307,000 

Kingwood / Humble 1 90,000 28,170 31.3% 31.3% - 0 (70,000) 0 0 13,000 

NASA / Clear Lake 13 1,914,706 160,835 8.4% 8.4% - (43,000) (27,000) 71,000 (21,000) 33,000 

Northeast - - - - - - 0 0 0 0 0 

North Loop West 5 1,054,498 287,878 27.3% 29.3% - 1,000 21,000 (6,000) 3,000 (21,000) 

Northwest Near 1 237,384 - 0.0% 0.0% - 0 0 0 0 0 

Northwest Far 15 2,520,121 143,647 5.7% 6.2% 159,056 37,000 268,000 182,000 (33,000) (2,000) 

Northwest 21 3,812,003 431,525 11.3% 12.2% 159,056 38,000 289,000 176,000 (30,000) (23,000) 

South Main / Medical Center 14 4,474,422 246,093 5.5% 5.6% 50,000 39,000 96,000 124,000 4,000 (1,000) 

Southwest / Hillcroft 6 1,485,352 190,125 12.8% 12.8% - (78,000) 67,000 66,000 4,000 35,000 

Southwest Beltway 8 3 573,152 126,093 22.0% 22.6% - 42,000 19,000 (5,000) (36,000) (34,000) 

East Ft Bend Co. / Sugar Land 23 3,737,972 512,102 13.7% 14.2% 328,764 (372,000) 52,000 159,000 117,000 343,000 

Southwest Fwy / Sugar Land 32 5,796,476 828,321 14.3% 14.7% 328,764 (408,000) 138,000 220,000 85,000 344,000 

Bellaire 7 1,186,294 200,484 16.9% 18.0% - (3,000) (14,000) (199,000) 4,000 85,000 

Post Oak Park 6 1,909,919 343,785 18.0% 18.4% - (10,000) (53,000) (50,000) 31,000 36,000 

Galleria 26 11,293,758 858,326 7.6% 9.3% 513,454 229,000 (19,000) (44,000) 23,000 147,000 

Riverway 8 2,038,628 142,704 7.0% 7.0% - 27,000 10,000 (23,000) (35,000) 42,000 

Richmond / Fountainview - - - - - - 0 0 0 0 0 

San Felipe / Voss 3 1,714,029 251,962 14.7% 14.7% - (46,000) 7,000 (57,000) 34,000 55,000 

West Loop 50 18,142,628 1,797,261 9.9% 11.1% 513,454 197,000 (69,000) (373,000) 57,000 365,000 

Westchase 22 6,681,105 387,504 5.8% 7.3% 634,204 (111,000) 363,000 473,000 (27,000) (47,000) 

The Woodlands 22 4,346,471 178,205 4.1% 4.1% 4,145,438 248,000 303,000 178,000 403,000 437,000 

Conroe 2 128,832 10,564 8.2% 8.2% - 0 (4,000) (4,000) (4,000) (3,000) 

Woodlands / Conroe 24 4,475,303 188,770 4.2% 4.2% 4,145,438 248,000 299,000 174,000 399,000 434,000 

TOTAL - Houston 334 107,066,422 7,918,717 7.4% 8.2% 9,754,547 388,000 3,618,000 2,969,000 475,000 1,415,000 

1/ 

Class A buildings per CoStar that are greater than 50,000 SF. Does not include buildings under construction or owned by the government. Delta Associates, the research affiliate of Transwestern, is headquartered at: 

2/ 

Does not include sublet space. 500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: 703-836-5700; DeltaAssociates.com 

Source: Inventory and Vacancy from analysis of CoStar data, Net Absorption computed by Delta Associates; October 2013. 


SUMMARY OF OFFICE MARKET INDICATORS - CLASS B SPACE 1/ 


Q3 2013 Net Absorption (SF) 2/ 

Submarket 

Total Bldgs 


SF 

All Bldgs. 1/ 

SF Available 

Vacancy Rate 

Immediately Vacancy Rate 2/ w/ Sublet 

All Bldgs. 2/ 

SF Under 

Constr. or 

Renovation 

2010 2011 2012 Q3 2013 YTD 2013 

Central Business District 41 13,812,760 1,436,527 10.4% 10.5% 330,000 (9,000) 194,000 194,000 55,000 (97,000) 

Midtown 50 3,908,556 297,050 7.6% 7.8% 406,000 (23,000) 28,000 (86,000) 23,000 81,000 

Downtown 91 17,721,316 1,733,577 9.8% 9.9% 736,000 (32,000) 222,000 108,000 78,000 (16,000) 

I-45 North 30 1,606,441 208,837 13.0% 13.1% - (36,000) 20,000 27,000 11,000 31,000 

FM 1960 / Champions 47 2,424,240 693,333 28.6% 28.7% - 56,000 (51,000) (92,000) 19,000 4,000 

FM 1960 / Highway 249 92 3,762,871 492,936 13.1% 13.5% 220,915 24,000 141,000 34,000 (30,000) (21,000) 

FM 1960 169 7,793,552 1,395,106 17.9% 18.1% 220,915 44,000 110,000 (31,000) 0 14,000 

North Belt West/Greenspoint 49 4,630,321 935,325 20.2% 20.6% - 1,000 112,000 44,000 (14,000) (168,000) 

Greenspoint / IAH 21 1,966,352 243,828 12.4% 12.4% - (111,000) (52,000) 4,000 41,000 36,000 

Greenspoint / North Belt 70 6,596,673 1,179,152 17.9% 18.2% - (110,000) 60,000 48,000 27,000 (132,000) 

Greenway Plaza 40 3,988,808 315,116 7.9% 7.9% - (21,000) 17,000 (109,000) 20,000 (28,000) 

Gulf Freeway/Pasadena 58 2,883,887 331,647 11.5% 11.5% - 24,000 (20,000) 100,000 52,000 (3,000) 

Katy Freeway East 40 2,970,248 540,585 18.2% 18.3% 98,000 (20,000) 25,000 (86,000) (9,000) (62,000) 

Katy Freeway West 102 9,622,766 837,181 8.7% 8.8% 284,178 61,000 (4,000) 355,000 (77,000) 86,000 

Katy Fwy / Energy Corridor 142 12,593,014 1,377,766 10.9% 11.0% 382,178 41,000 21,000 269,000 (86,000) 24,000 

Kingwood / Humble 29 1,366,534 80,626 5.9% 6.6% - 16,000 56,000 18,000 1,000 27,000 

NASA / Clear Lake 105 6,811,810 1,341,927 19.7% 19.7% - 123,000 27,000 (225,000) 20,000 (416,000) 

Northeast 28 1,306,209 269,079 20.6% 20.9% - 19,000 (45,000) 2,000 (14,000) (2,000) 

North Loop West 34 3,178,080 530,739 16.7% 20.2% 126,000 (197,000) (5,000) 320,000 111,000 79,000 

Northwest Near 13 1,191,123 203,682 17.1% 17.1% - 62,000 (1,000) 23,000 (77,000) (78,000) 

Northwest Far 46 3,963,188 515,214 13.0% 13.2% 132,841 29,000 (13,000) (26,000) (4,000) 36,000 

Northwest 93 8,332,391 1,249,636 15.0% 16.4% 258,841 (106,000) (19,000) 317,000 30,000 37,000 

South Main / Medical Center 39 4,239,998 491,840 11.6% 11.6% - (117,000) 69,000 (39,000) (25,000) (178,000) 

Southwest / Hillcroft 21 1,698,185 366,808 21.6% 21.6% - 49,000 9,000 (10,000) 3,000 (10,000) 

Southwest Beltway 8 60 5,268,629 1,338,232 25.4% 25.5% - (230,000) (367,000) 90,000 16,000 (53,000) 

East Ft Bend Co. / Sugar Land 112 4,834,445 507,617 10.5% 12.6% 122,495 141,000 174,000 (62,000) 73,000 92,000 

Southwest Fwy / Sugar Land 193 11,801,259 2,212,656 18.7% 19.7% 122,495 (40,000) (184,000) 18,000 92,000 29,000 

Bellaire 22 2,884,038 155,738 5.4% 5.5% - 9,000 (164,000) 121,000 6,000 12,000 

Post Oak Park 24 2,653,133 504,095 19.0% 19.2% - (6,000) 31,000 (289,000) (19,000) 146,000 

Galleria 25 4,083,486 343,013 8.4% 8.4% - 113,000 (8,000) 91,000 16,000 200,000 

Riverway 14 1,039,510 137,215 13.2% 13.2% - (20,000) (38,000) 26,000 5,000 6,000 

Richmond / Fountainview 17 870,347 217,587 25.0% 25.0% - 1,000 (24,000) 16,000 17,000 28,000 

San Felipe / Voss 36 3,569,141 242,702 6.8% 7.2% - (28,000) 36,000 22,000 89,000 21,000 

West Loop 138 15,099,655 1,600,350 10.6% 10.7% - 69,000 (167,000) (13,000) 114,000 413,000 

Westchase 67 7,861,837 652,532 8.3% 8.5% 188,151 44,000 (166,000) 267,000 16,000 9,000 

The Woodlands 113 6,043,504 350,523 5.8% 6.2% 111,695 29,000 82,000 249,000 88,000 86,000 

Conroe 20 934,494 135,502 14.5% 15.2% - (4,000) (22,000) 204,000 (7,000) (10,000) 

Woodlands / Conroe 133 6,977,998 486,025 7.0% 7.4% 111,695 25,000 60,000 453,000 81,000 76,000 

TOTAL - Houston 1,395 115,374,941 14,717,035 12.8% 13.1% 2,020,275 (21,000) 41,000 1,183,000 406,000 (146,000) 

1/ 

Class B per CoStar, and buildings under 50,000 SF even if CoStar classified them as Class A. Does not include buildings under construction. Delta Associates, the research affiliate of Transwestern, is headquartered at: 

2/ 

Does not include sublet space. 500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: 703-836-5700; DeltaAssociates.com 



ASKING RENTAL RATE ANALYSIS OF CLASS A & B OFFICE BUILDINGS 


Average Asking Rent ($’s/SF) At End of: 

Submarket 

2010 2011 2012 Q3 2013 % Change 12/12 - 9/13 

Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B 

Central Business District $29.95 $24.97 $30.59 $25.13 $32.30 $26.60 $32.34 $26.27 0.1% -1.2% 

Midtown $23.54 $22.36 $25.85 $21.85 $26.81 $22.62 $24.16 $23.06 -9.9% 1.9% 

Downtown $29.23 $23.73 $30.04 $23.77 $31.69 $25.04 $31.57 $24.87 -0.4% -0.7% 

I-45 North $20.22 $15.18 $16.97 $16.20 - $17.26 N/A $17.43 -- 1.0% 

FM 1960 / Champions - $13.40 - $12.85 - $13.55 N/A $13.95 -- 3.0% 

FM 1960 / Highway 249 $27.38 $20.21 $25.57 $19.67 $24.54 $19.60 $25.61 $20.67 4.4% 5.4% 

FM 1960 $26.96 $16.65 $25.11 $16.42 $24.10 $17.03 $25.15 $17.62 4.4% 3.5% 

North Belt West / Greenspoint $20.07 $15.80 $20.51 $16.17 $24.02 $17.35 $28.05 $16.83 16.8% -3.0% 

Greenspoint / IAH $23.23 $15.24 $22.86 $16.91 $22.06 $15.89 $23.46 $16.23 6.4% 2.1% 

Greenspoint / North Belt $20.49 $15.72 $20.68 $16.36 $22.95 $17.09 $26.05 $16.76 13.5% -1.9% 

Greenway Plaza $23.61 $21.50 $24.49 $20.52 $25.85 $20.80 $27.46 $21.52 6.2% 3.5% 

Gulf Freeway/Pasadena $24.25 $19.95 $24.25 $20.72 $25.69 $20.55 $27.84 $21.05 8.4% 2.5% 

Katy Freeway East $25.35 $17.87 $25.98 $17.99 $26.34 $20.17 $25.83 $19.96 -1.9% -1.0% 

Katy Freeway West $24.46 $18.76 $25.32 $19.18 $23.51 $19.99 $24.26 $20.15 3.2% 0.8% 

Katy Freeway / Energy Corridor $25.31 $18.36 $26.14 $18.72 $25.41 $19.90 $25.57 $19.90 0.6% 0.0% 

Kingwood / Humble $29.50 $16.49 $30.10 $16.44 $30.10 $16.72 $30.10 $17.11 0.0% 2.3% 

NASA / Clear Lake $21.29 $20.46 $23.93 $20.82 $23.25 $20.01 $22.97 $19.74 -1.2% -1.4% 

Northeast - $13.67 - $13.55 - $14.32 N/A $14.24 -- -0.6% 

North Loop West $20.96 $15.62 $19.98 $15.94 $21.77 $15.62 $21.60 $16.35 -0.8% 4.7% 

Northwest Near - $14.84 - $14.39 - $14.84 N/A $15.30 -- 3.1% 

Northwest Far $26.79 $14.29 $25.04 $14.17 $22.12 $15.95 $22.56 $15.79 2.0% -1.0% 

Northwest $25.41 $15.07 $23.96 $15.17 $24.39 $15.90 $24.39 $16.25 0.0% 2.2% 

South Main / Medical Center $27.65 $21.88 $28.09 $25.85 $28.07 $25.50 $26.28 $25.18 -6.4% -1.3% 

Southwest / Hillcroft $14.58 $13.76 $14.98 $13.76 $15.39 $13.91 $15.09 $13.66 -1.9% -1.8% 

Southwest Beltway 8 $16.87 $16.45 $19.33 $17.29 $19.08 $17.34 $17.69 $16.78 -7.3% -3.2% 

East Fort Bend County / Sugar Land $29.21 $18.47 $27.04 $18.18 $27.03 $19.09 $26.66 $19.32 -1.4% 1.2% 

Southwest Freeway / Sugar Land $22.48 $15.93 $21.58 $16.33 $21.67 $16.60 $21.21 $16.28 -2.1% -2.0% 

Bellaire $23.13 $14.77 $24.21 $14.78 $24.85 $14.78 $25.08 $15.54 0.9% 5.1% 

Post Oak Park $30.91 $15.77 $31.47 $16.83 $33.02 $19.10 $34.39 $18.10 4.1% -5.2% 

Galleria $28.01 $20.32 $28.01 $20.40 $29.17 $21.44 $29.53 $22.52 1.2% 5.0% 

Riverway $25.47 $20.19 $27.42 $19.90 $30.74 $22.22 $33.09 $23.17 7.7% 4.3% 

Richmond / Fountainview - $16.69 - $16.95 - $17.43 N/A $17.68 -- 1.5% 

San Felipe / Voss $29.94 $19.45 $32.37 $19.57 $33.51 $20.50 $33.28 $21.11 -0.7% 2.9% 

West Loop $27.81 $18.78 $28.53 $19.08 $29.86 $20.54 $30.42 $20.79 1.9% 1.2% 

Westchase $26.72 $18.89 $23.95 $17.50 $30.35 $17.90 $30.22 $18.67 -0.4% 4.3% 

The Woodlands $22.76 $20.11 $22.06 $21.16 $23.39 $22.70 $24.42 $22.95 4.4% 1.1% 

Conroe - $14.91 $30.67 $18.54 $29.54 $22.31 $28.42 $23.01 -3.8% 3.2% 

Woodlands / Conroe $22.76 $19.34 $22.24 $21.11 $23.41 $23.54 $24.21 $23.94 3.4% 1.7% 

Houston Total: $25.86 $18.30 $26.08 $18.48 $27.42 $19.30 $28.08 $19.44 2.4% 0.7% 

Note: Rents for properties using triple net terms have been grossed up to full service by applying operating expense data. Rents reflect full service equivalent. 

Note: Due to small submarket sample sizes in some cases, particularly in Class A, rent increases and decreases may be magnified relative to other submarkets 

Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: 703-836-5700; 

DeltaAssociates.com 

Source: Delta Associates analysis of CoStar data; October 2013. 








Market Fundamentals Remain Sturdy, Should Gain Further 

Momentum 

Absorption Healthy in 2013 

Industrial Vacancy Ticks Down; Lowest in U.S. 

Construction Activity Increasing 

Market Fundamentals Remain Sturdy, Should 

Gain Further Momentum 

The fundamentals of the Houston industrial market improved in 

2013, with vacancy being the lowest in the nation and continuing 

to decline. As consumer spending increases, demand for industrial 

space will continue to grow over the intermediate to long-term. As 

the national economic recovery continues, we expect demand for 

Houston industrial space to remain strong for the remainder of 2013 

and into 2014. The rising demand for goods and increased trade with 

Asia via the expanded Panama Canal suggest a strong future for the 

Houston industrial market. 

LARGEST U.S. INDUSTRIAL MARKETS 

2013 


2,000 

1,600 

1,200 

800 

400 

0 

LA BASIN NY/ NNJ CHI PHI DFW ATL SF BAY HOU 

Source: CoStar; Delta Associates; October 2013. 


Net absorption of industrial space in the Houston metro totaled 

4.8 million SF through the first three quarters of 2013, compared 

to a total of 5.0 million SF in 2012. Local businesses are expanding 

as the regional economy strengthens and consumer spending 

and confidence increase. A growing retail segment benefits the 

warehouse/distribution market. 

NET ABSORPTION OF INDUSTRIAL SPACE AND 

DIRECT VACANCY RATE TRENDS 


Net Absorption in 000s of SF 

14,000 

12,000 

10,000 

8,000 

6,000 

4,000 

2,000 

0 

-2,000 

-4,000 

Source: Vacancy –Delta Associates analysis of CoStar data; 

Net Absorption –Delta Associates; October 2013. 

Net Absorption 

Vacancy Rate 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 YTD 

2013 

10% 

9% 

8% 

7% 

6% 

5% 

4% 

3% 

2% 


Industrial Asking Rents: Edge Down 

Metro Houston Industrial Market Outlook 

Summary of Industrial Market Indicators - All Space 

Summary of Industrial Market Indicators - All Space - Continued 





Why This Methodology is the Best 

Indicator of Current Market Conditions 

We include owner-occupied and single-tenant 

buildings in our inventory, vacancy, and absorption 

statistics. Doing so allows us to capture more market 

activity than many of our competitors, and to better 

correlate changes in the market with changes in 

employment. As single-tenant space does compete 

with multi-tenant space, we believe it is critical to 

understand all components of the market. We also 

include flex space in our industrial market analysis, 

and offer wider geographic coverage than some 

of our competitors. The result of these differences 

is that the inclusion of single-tenant and owneroccupied 

space, as well as flex space, tends to yield 

lower vacancy rates and higher absorption totals 

than our competitors’ results, but our coverage of 

the market is more comprehensive. 

How the Multi-Tenant Market 

Compares to Our Market Coverage 

Vacancy and absorption in the Houston metro area 

often are reported by brokerage firms on multitenant 

buildings only. We include owner-occupied 

and single-tenant buildings as well, on the basis 

of immediate availability, to capture more market 

activity. We exclude government-owned space. As 

a point of comparison, below is data for the Houston 

multi-tenant industrial market at Q3 2013: 

Multi-Tenant Entire Market 

Inventory: 198.2 MSF 565.0 MSF 

Overall vac. 

(incl. sublet): 

YTD net absorption: 

9.2% 4.3% 

1,608,000 SF 4,828,000 SF 

27 

TRENDLINES® 2013







28 


Momentum 













In terms of net absorption in 2013, Houston has normally been a steady 

performer among major markets. However, in 2013 Houston trails the 

LA Basin, Dallas/Ft. Worth, NY/Northern NJ, and Chicago markets. 

Houston’s absorption may be artificially low relative to its economic 

performance because there is so little available industrial space to be 

leased. This would explain the large increase in its pipeline. 

NET ABSORPTION OF INDUSTRIAL SPACE 

Select Metro Areas | January – September 2013 


14 

13 

12 

11 

10 

9 

8 

7 

6 

5 

4 

3 

2 

1 

0 

-1 

-2 

LA BASIN DFW NY/ NNJ CHI 


HOU 

WAS/BAL 

The Houston industrial market is on pace to absorb about 6.4 million 

SF of space in 2013. The Warehouse/Distribution sector makes up the 

largest portion of the market, having accounted for 77% of the space 

absorbed thus far in 2013. 

2012 (SF) YTD (SF) 

• Warehouse/Dist.: 4,411,000 3,730,000 

• Manufacturing: 440,000 231,000 

• Flex/R&D: 99,000 867,000 

Notable leases during 2013 include: 

• DB Schenker, Inc. leased 267,201 SF at 10650 Okanella Lane in 

the Northwest submarket. 

• Exel renewed 254,765 SF at 8833 Citypark Loop in the East 

submarket. 

• Amazon leased 240,000 SF at 8120 Humble Road in the North 

submarket. 

• Frontier Logistics leased 300,000 SF at 3041 Highway 225 (Port 

225) in the Southeast submarket. 

• HD Supply leased 500,000 SF for a build-to-suit at Pinto 

Business Park in the North submarket. 

• Goodman Global Group, Inc leased 299,840 SF at 7310 

Langfield Road in the Northwest submarket. 


The overall Houston metro area industrial vacancy rate declined to 

4.3% in September 2013 from 4.6% a year earlier. The direct industrial 

vacancy rate, 4.2% in September, is down from 4.5% a year earlier. 

INDUSTRIAL VACANCY RATES 

Select Metro Areas | 3 RD Quarter 2013 

Overall Vacancy Rate 

12% 

10% 

8% 

6% 

4% 

2% 

0% 

HOU 


LA BASIN NY/ NNJ DFW 

CHI 

Current vacancy rates by product type: 

DIRECT 

WAS/BAL 

OVERALL 

Warehouse/Dist.: 4.1% 4.2% 

Manufacturing: 2.0% 2.2% 

Flex/R&D: 8.6% 8.8% 

Houston’s industrial vacancy rate will likely decline to approximately 

4.1% over the next 12 months, as steady demand continues to outpace 

the pipeline of new supply. Vacancy will continue to decline until the 

development of new product escalates and catches up to demand. 

However, the pipeline is growing, and we do expect groundbreakings 

to increase further during the remainder of 2013 and into 2014. 


There is currently 4.8 million SF of industrial space under construction 

in metro Houston, well above the 2.3 million SF under construction 

a year ago. Warehouse/Distribution product comprises 96% of 

space under construction. Space under construction today is 38% 

preleased, compared to 43% one year ago. With the pipeline 

(including planned space likely to start construction soon) only at 

1.0% of standing inventory, more developers are breaking ground on 

new projects, especially warehouse/distribution buildings. Build-tosuit 

projects also are moving forward for companies expanding along 

with the energy industry. 

INDUSTRIAL SPACE UNDER CONSTRUCTION 



11 

10 

9 

8 

7 

6 

5 

4 

3 

2 

1 

0 

DFW 


National Total 

= 61.2 Million SF 

LA BASIN HOU NY/ NNJ CHI 

WAS/BAL

Deliveries in Houston have totaled 4.1 million SF thus far in 2013, 

compared to 3.0 million SF at the same point last year. Even with these 

deliveries, the market has been underserved from a development 

standpoint in 2013. 








Momentum 











INDUSTRIAL SPACE DELIVERED 

Houston Metro | 1998 - 3 RD Quarter 2013 

Millions of SF Delivered 

13 

12 

11 

10 

9 

8 

7 

6 

5 

4 

3 

2 

1 

0 

4.9 

6.6 

5.4 

4.8 

4.4 

3.1 3.4 7.7 

5.6 

12.1 

10.1 

7.1 

2.4 2.3 

3.0 4.1 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 YTD 

2013 



Industrial asking rents edged down 0.3% through the 3rd quarter of 

2013, after rising by 5.0% in 2012. The 3rd quarter 2013 average 

asking rent for all types of industrial space is $5.87/SF, triple net. 

Steady demand should support healthy rent increases during the 

remainder of 2013 and into 2014, particularly in the warehouse/ 

distribution sector, given the already-low vacancy rate in the 

Houston industrial market. While some concern remains about 

macroeconomic factors that could impact the distribution needs of 

retailers, the Houston industrial market is among the best-positioned 

in the country for future rent growth. 

AVERAGE INDUSTRIAL RENT 


Asking Rent, ($/SF, NNN) 

$8 

$7 

$6 

$5 

$4 

$3 

$2 

$1 

Metro Houston 

Industrial Market 

Outlook 

The Houston metro industrial market will likely 

experience continued growth for the remainder of 

2013 and into 2014. Despite gains in the United 

States, global economic uncertainty persists and could 

potentially curtail national economic growth. However, 

the energy boom in Houston should be able to sustain 

the volatility of the broader economy, and industrial 

vacancies in Houston likely will continue to fall. Largescale 

construction is underway all across the Houston 

market. If construction remains controlled, industrial 

rents will rise, and market conditions will turn further in 

favor of landlords. The current level of construction is 

limited enough to promote continuing strong market 

conditions, though the pipeline has been increasing. 

On balance, we expect strong performance from the 

Houston industrial market during the remainder of 

2013 and into 2014. 

Industrial submarkets 

likely to outperform in 

the period ahead, with 

declining vacancy and 

rising rents, include: 

• East-Southeast Far 

• North Far 

$0 

WAS/BAL 

NY/ NNJ LA BASIN HOU 

CHI DFW 

• Northwest Near 



29 

TRENDLINES® 2013

SUMMARY OF INDUSTRIAL MARKET INDICATORS - ALL SPACE 


Submarket 

Central Business District 


SF 

All Bldgs. 1/ 


SF Available 

Immediately 2010 2011 2012 Q3 2013 

All Bldgs. 2/ 

Vacancy Rate 

w/ Sublet 

SF Under 

Constr. or 

Renovation 

2010 2011 2012 Q3 2013 YTD 2013 

Flex/R & D 704,587 69,754 7.8% 8.4% 8.0% 9.9% 9.9% - 45,000 (5,000) 4,000 (4,000) (14,000) 

Manufacturing 5,883,053 47,064 5.6% 4.3% 1.4% 0.8% 0.8% - (184,000) 64,000 166,000 (6,000) 35,000 

Warehouse/Distribution 26,527,175 1,697,739 5.2% 4.8% 6.4% 6.4% 6.4% - (209,000) 120,000 (477,000) 80,000 36,000 

Total - Central Business District 33,114,815 1,814,558 5.3% 4.8% 5.6% 5.5% 5.5% - (348,000) 179,000 (307,000) 70,000 57,000 

East-Southeast Far 

Flex/R & D 2,937,496 252,625 12.0% 9.5% 12.2% 8.6% 8.6% - 80,000 54,000 (72,000) 132,000 105,000 

Manufacturing 5,947,936 279,553 2.7% 0.5% 6.4% 4.7% 4.7% - 61,000 202,000 (279,000) 54,000 102,000 

Warehouse/Distribution 54,546,207 4,090,966 11.4% 8.2% 8.3% 7.5% 7.5% 25,050 (120,000) 965,000 695,000 (87,000) 353,000 

Total - East-Southeast Far 63,431,639 4,623,143 10.6% 7.5% 8.3% 7.3% 7.3% 25,050 21,000 1,221,000 344,000 99,000 560,000 

North Far 

Flex/R & D 8,548,136 726,592 10.9% 9.3% 8.9% 8.5% 8.5% - (197,000) 214,000 90,000 (59,000) 118,000 

Manufacturing 7,278,777 196,527 2.4% 2.7% 2.1% 2.7% 2.7% - (86,000) (17,000) 15,000 148,000 (11,000) 

Warehouse/Distribution 48,770,428 2,340,981 6.0% 4.3% 4.3% 4.8% 4.8% 1,711,081 1,163,000 1,021,000 828,000 154,000 1,161,000 

Total - North Far 64,597,341 3,264,099 6.3% 4.8% 4.6% 5.1% 5.1% 1,711,081 880,000 1,218,000 933,000 243,000 1,268,000 

NORTH NEAR 

Flex/R & D 1,309,501 161,069 15.2% 22.9% 18.9% 12.3% 12.3% - (32,000) (92,000) 48,000 115,000 185,000 

Manufacturing 2,626,374 120,813 3.1% 0.9% 0.3% 4.6% 4.6% - (19,000) 58,000 16,000 (11,000) (113,000) 

Warehouse/Distribution 15,668,423 783,421 4.1% 4.8% 3.6% 5.0% 5.0% 351,250 21,000 298,000 456,000 102,000 (94,000) 

Total - North Near 19,604,298 1,065,303 4.7% 5.4% 4.1% 5.4% 5.4% 351,250 (30,000) 264,000 520,000 206,000 (22,000) 

NORTHEAST FAR 

Flex/R & D 96,952 - 2.7% 2.7% 0.0% 0.0% 0.0% - - - 3,000 - - 

Manufacturing 196,600 - 0.0% 0.0% 0.0% 0.0% 0.0% - - - - - - 

Warehouse/Distribution 1,465,187 36,630 0.3% 0.7% 1.2% 2.5% 2.5% - 4,000 (5,000) (5,000) 7,000 (19,000) 

Total - Northeast Far 1,758,739 36,630 0.4% 0.7% 1.0% 2.1% 2.1% - 4,000 (5,000) (2,000) 7,000 (19,000) 

Northeast Near 

Flex/R & D 771,671 50,159 11.8% 8.3% 10.5% 6.5% 6.5% - (78,000) 2,000 (18,000) (9,000) 35,000 

Manufacturing 5,937,172 23,749 4.9% 0.8% 0.4% 0.4% 2.5% - (141,000) 244,000 23,000 (6,000) 0 

Warehouse/Distribution 26,943,756 862,200 3.7% 3.5% 3.4% 3.2% 3.2% 20,000 (173,000) 113,000 65,000 (54,000) 94,000 

Total - Northeast Near 33,652,599 936,107 4.1% 3.1% 3.1% 2.8% 3.2% 20,000 (392,000) 359,000 70,000 (69,000) 129,000 

Northwest Far 

Flex/R & D 5,435,616 239,167 5.6% 5.4% 5.3% 4.4% 4.5% - 566,000 38,000 75,000 (65,000) 49,000 

Manufacturing 7,563,586 242,035 4.2% 3.7% 2.9% 3.2% 3.2% - 299,000 31,000 51,000 322,000 293,000 

Warehouse/Distribution 51,379,301 1,130,345 5.1% 3.4% 2.6% 2.2% 2.3% 2,229,291 821,000 1,203,000 801,000 168,000 839,000 

Total - Northwest Far 64,378,503 1,611,546 5.0% 3.6% 2.9% 2.5% 2.6% 2,229,291 1,686,000 1,272,000 927,000 425,000 1,181,000 

Northwest Near 

Flex/R & D 11,614,223 987,209 10.5% 9.7% 8.9% 8.5% 9.4% - 297,000 93,000 92,000 101,000 147,000 

Manufacturing 10,690,280 85,522 1.7% 3.3% 0.6% 0.8% 1.0% - (27,000) (144,000) 256,000 - (21,000) 

Warehouse/Distribution 80,971,394 2,995,942 4.9% 4.3% 3.9% 3.7% 3.8% - 320,000 530,000 871,000 (81,000) 687,000 

Total - Northwest Near 103,275,897 4,068,673 5.3% 4.8% 4.1% 3.9% 4.1% - 590,000 479,000 1,219,000 20,000 813,000 

1/ Includes buildings 15,000 SF RBA and greater. Does not include buildings under construction or buildings owned by the 

government. 2/ Does not include sublet space. 


Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: 703-836-5700; DeltaAssociates.com 

Section 5: The Houston Metro Industrial Market

SUMMARY OF INDUSTRIAL MARKET INDICATORS - ALL SPACE 


Submarket 

South Far 


SF 

All Bldgs. 1/ 

- CONTINUED 


SF Available 

Immediately 2010 2011 2012 Q3 2013 

All Bldgs. 2/ 

Vacancy Rate 

w/ Sublet 

SF Under 

Constr. or 

Renovation 

2010 2011 2012 Q3 2013 YTD 2013 

Flex/R & D 1,709,126 54,692 11.0% 10.5% 9.3% 3.2% 3.2% - 7,000 8,000 21,000 77,000 105,000 

Manufacturing 6,010,516 114,200 2.9% 1.8% 1.8% 1.9% 1.9% 150,000 (33,000) 61,000 - (30,000) (6,000) 

Warehouse/Distribution 30,789,178 1,046,832 4.3% 2.9% 3.6% 3.4% 3.5% 55,000 33,000 521,000 17,000 142,000 103,000 

Total - South Far 38,508,820 1,215,724 4.4% 3.1% 3.6% 3.2% 3.2% 205,000 7,000 590,000 38,000 189,000 202,000 

SOUTH NEAR 

Flex/R & D 803,477 135,788 10.3% 18.1% 21.2% 16.9% 16.9% - (25,000) (12,000) (25,000) 28,000 35,000 

Manufacturing 1,696,371 137,406 3.8% 3.6% 3.8% 8.1% 8.1% - (2,000) 3,000 (2,000) 10,000 (73,000) 

Warehouse/Distribution 12,169,760 608,488 1.8% 2.5% 3.4% 5.0% 5.0% - 244,000 (86,000) (109,000) (97,000) (195,000) 

Total - South Near 14,669,608 881,682 2.5% 3.5% 4.4% 6.0% 6.0% - 217,000 (95,000) (136,000) (59,000) (233,000) 

Southeast Near 

Flex/R & D 461,763 55,873 21.3% 20.2% 15.3% 12.1% 12.1% - (16,000) 6,000 25,000 (7,000) 15,000 

Manufacturing 7,673,620 - 0.2% 0.0% 0.0% 0.0% 0.0% - - 14,000 - - - 

Warehouse/Distribution 29,507,769 649,171 2.7% 2.3% 1.6% 2.2% 2.2% - (59,000) 118,000 207,000 98,000 (176,000) 

Total - Southeast Near 37,643,152 705,044 2.5% 2.1% 1.4% 1.9% 1.9% - (75,000) 138,000 232,000 91,000 (161,000) 

Southwest Far 

Flex/R & D 1,821,901 473,694 7.9% 24.1% 25.6% 26.0% 26.0% 26,250 (33,000) (26,000) (23,000) 24,000 (7,000) 

Manufacturing 1,732,823 71,046 3.8% 4.4% 5.5% 4.1% 4.1% 26,809 35,000 64,000 (15,000) 21,000 24,000 

Warehouse/Distribution 9,556,086 305,795 4.3% 4.8% 4.2% 3.2% 3.3% - 117,000 81,000 100,000 (11,000) 119,000 

Total - Southwest Far 13,110,810 850,535 4.8% 7.7% 7.4% 6.5% 6.6% 53,059 119,000 119,000 62,000 34,000 136,000 

SOUTHWEST NEAR 

Flex/R & D 8,108,347 672,993 7.0% 6.4% 8.7% 8.3% 8.4% - 45,000 5,000 (186,000) 24,000 32,000 

Manufacturing 4,603,792 101,283 3.6% 2.7% 2.1% 2.2% 2.2% - 53,000 35,000 113,000 5,000 1,000 

Warehouse/Distribution 41,960,273 1,049,007 5.0% 4.2% 3.1% 2.5% 2.7% 208,800 675,000 385,000 795,000 483,000 716,000 

Total - Southwest Near 54,672,412 1,823,283 5.2% 4.4% 3.9% 3.3% 3.5% 208,800 773,000 425,000 722,000 512,000 749,000 

SUGAR LAND 

Flex/R & D 3,319,898 212,473 11.9% 9.6% 7.4% 6.4% 6.4% 12,208 47,000 64,000 65,000 29,000 62,000 

Manufacturing 2,424,996 - 0.7% 0.0% 0.0% 0.0% 0.0% - (13,000) 12,000 96,000 - - 

Warehouse/Distribution 16,873,136 793,037 5.9% 6.1% 5.1% 4.7% 4.8% 15,180 842,000 65,000 167,000 36,000 106,000 

Total - Sugar Land 22,618,030 1,005,511 6.3% 5.9% 4.9% 4.4% 4.5% 27,388 876,000 141,000 328,000 65,000 168,000 

TOTAL HOUSTON 

Flex/R & D 47,642,694 4,092,087 10.0% 9.7% 9.7% 8.6% 8.8% 38,458 706,000 349,000 99,000 386,000 867,000 

Manufacturing 70,265,896 1,419,198 2.9% 2.1% 1.8% 2.0% 2.2% 176,809 (57,000) 627,000 440,000 507,000 231,000 

Warehouse/Distribution 447,148,073 18,390,552 5.3% 4.4% 4.2% 4.1% 4.2% 4,615,652 3,679,000 5,329,000 4,411,000 940,000 3,730,000 

Total - Houston 565,036,663 23,901,838 5.4% 4.6% 4.3% 4.2% 4.3% 4,830,919 4,328,000 6,305,000 4,950,000 1,833,000 4,828,000 

Vacancy Rate with Sublet Space 5.6% 4.7% 4.4% 4.3% 

1/ Includes buildings 15,000 SF RBA and greater. Does not include buildings under construction or buildings owned by the 

government. 2/ Does not include sublet space. 


Delta Associates, the research affiliate of Transwestern, is headquartered at: 500 Montgomery Street, Suite 600, Alexandria, VA 22314; Phone: 703-836-5700; DeltaAssociates.com 

Section 5: The Houston Metro Industrial Market








32 

Office Investment Sales 

Office Investment Sales - Continued 

Industrial Investment Sales 

Office Investment Prospects 

Industrial Investment Prospects 






Sales have returned to peak levels in Houston faster than in many 

other major markets, even as national office investment volume has 

plateaued. Annualized national office volume for 2013 totals $77.5 

billion, compared to $81.1 billion in 2012 and $64.7 billion in 2011. 

Improved market conditions, driven by one of the nation’s strongest 

local economies, continue to fuel investor interest in the Energy 

Capital. The shale revolution has given local energy companies the 

confidence and incentive to expand their workforces, which translates 

into greater interest in Houston office assets. 

INVESTMENT SALES OF OFFICE BUILDINGS 

United States | 2002 Through 2013 

Billions of $ 

$220 

$200 

$180 

$160 

$140 

$120 

$100 

$80 

$60 

$40 

$20 

$0 

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 

*Sales through August 2013 annualized. 

Sources: Real Capital Analytics, graphic by Delta Associates; October 2013. 

In the long term, real estate investments have either matched or 

outperformed stocks and bonds. While in the short term the stock 

market has been robust, investors continue to seek real estate as a 

hedge against inflation. After a precipitous fall following the housing 

bubble and recession, real estate has again proved to be a strong 

investment. In the last 10 years as of June 2013 the NAREIT Equity REIT 

Index saw a 10.96% increase. The NCREIF Property Index increased 

8.6% during the same period, while stocks (as measured by the S&P 

500) rose 7.3%. Direct investment in real estate remains attractive at 

this point in the cycle compared to the alternatives, particularly given 

the run-up in the bull market. While real threats face office market 

investors – notably concerns about continued economic growth and 

job creation – returns have been solid. Loan balances coming due 

in 2014 remain a concern in some asset types and geographies. 

Nationally, on balance, asset performance has improved gradually, 

with vacancy trending lower. 

REAL ESTATE RETURNS VS. 

OTHER INVESTMENT OPTIONS 

Mid-Year 2013 

Total Return/Year 

25% 

20% 

15% 

10% 

5% 

0% 

-5% 

1 YR. 3 YR. 5 YR. 10 YR. 

Sources: NCREIF, Delta Associates; October 2013. 

Real Estate 

NAREIT Equity REIT Index 

NCREIF Property Index 

Alternatives 

Stocks (S&P 500) 

Bonds (Barclays Capital Government) 

After peaking in 2009, U.S. office cap rates began their decline and 

have trended lower since, though they have plateaued in 2013. The 

mean cap rate in the U.S. in 2013 is 7.0% for core office assets, the 

same as in 2012 and down from 7.4% in 2011, according to Real 

Capital Analytics. We believe cap rates will remain fairly stable 

through the remainder of 2013 as market conditions continue to firm. 

Given the sluggish pace of economic recovery, we expect interest 

rates to remain relatively low into 2015 – though perhaps edging up 

slightly as we saw earlier this year – helping to keep cap rates fairly 

stable. However, modest job growth is likely to translate into middling 

demand for office space in many markets in 2014, which may reduce 

investors’ appetite for office product and cause cap rates to edge up. 

AVERAGE CORE OFFICE ASSET CAP RATE 

United States | 2004 Through August 2013 

Average Cap Rate 

12% 

11% 

10% 

9% 

8% 

7% 

6% 

5% 

4% 

2004 2005 2006 2007 2008 2009 2010 2011 2012 

Sources: Real Capital Analytics, graphic by Delta Associates; October 2013. *Through August 2013. 

Looking at the NCREIF Property Index, total returns have edged down 

marginally in 2013 compared to the year prior, although Houston has 

seen an increase in returns compared to 2012. Houston’s office asset 

returns are 15.92% over the 12 months ending June 2013 after a 

return of 13.59% for the 12 months ending June 2012. The returns 

in Houston led all other major metro areas and well surpassed the 

national average of 9.57%. This robust performance can be attributed 

largely to demand for office space by the energy sector, Houston’s 

most important core industry. 

NCREIF Return Index 1 for Office Properties 

Metro Area 

12-Month Total Return 

at Mid-Year 2013 

Houston 15.92% 

San Francisco 14.47% 

New York 12.79% 

Denver 12.08% 

Dallas 9.68% 

National Average 9.57% 

Atlanta 8.99% 

Boston 8.36% 

Los Angeles 8.27% 

Chicago 7.16% 

Washington 5.18% 

1 

NCREIF index includes both current income and capital appreciation returns. 

Source: NCREIF, Delta Associates; October 2013. 

2013*








33 










Recent activity in Houston’s office investment market was highlighted 

by the sale of the Men’s Wearhouse headquarters, which closed 

for $51.3 million, or $248/SF. There was $2.5 billion in total sales 

recorded year-to-date in 2013. The $3.3 billion annualized total for 

the year is set to surpass marks of $2.5 billion in 2012 and $1.4 billion 

in 2011. 

COMPARATIVE INVESTMENT SALES VOLUME 

Office Buildings | 2009 –3 RD Quarter 2013 

Billions of $ 

$3.5 

$3.0 

$2.5 

$2.0 

$1.5 

$1.0 

$0.5 

$0.0 

HOU 

DEN 

DFW 

2009 2010 2011 2012 2013* 

Source: Real Capital Analytics, graphic by Delta Associates; October 2013. 

*Annualized. 

Houston’s office sales volume, on pace for $3.3 billion in 2013, puts it 

on par with Chicago, San Francisco Bay, and Boston. 

OFFICE INVESTMENT SALES VOLUME 

Select Metro Areas | January Through August 2013 

Millions of $ 

$14,000 

$12,000 

$10,000 

$8,000 

$6,000 

$4,000 

$2,000 

$0 

NY LA WAS CHI SF BAY BOS HOU ATL DFW 


Nationally, sales prices have edged down in 2013 to $205/SF in 

the first eight months of the year, compared to $216 for all of 2012. 

Sales returned to peak levels in Houston faster than in many other 

major markets in the country. Improved market conditions, driven 

by one of the strongest local economies in the nation, continue to 

fuel investor interest in the Energy Capital of the World. Hydraulic 

fracturing, shale, and alternative fuel activities are giving local energy 

companies the confidence and incentive to expand their workforces, 

which is translating into greater investor interest in Houston office 

assets. 

DEN 

AVERAGE CORE OFFICE ASSET SALES PRICE 

United States | 2004 Through August 2013 

$ per SF 

$275 

$250 

$225 

$200 

$175 

$150 

$125 

$100 

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 


The average office sales price in Houston through the third quarter 

of 2013 is $199/SF, compared to $194/SF during all of 2012. With 

the exception of 2009 – the low point of the downturn – values in 

Houston have generally been on an upward trajectory. Values will 

likely increase in the period ahead, as market conditions continue to 

strengthen, rents rise, and competition increases for Houston’s assets. 

AVERAGE OFFICE SALE PRICE 


Average Sale Price Per SF 

$225 

$200 

$175 

$150 

$125 

$100 

$75 

$50 

$25 

$97 

$87 

$128 

$141 $138 

$148 

Houston’s office investment sales market likely will continue to 

improve gradually through the remainder of 2013 and into 2014. 

While uncertainty within the Federal government (as exemplified by 

October’s shutdown) and the larger national economy is hampering 

potential growth, Houston has remained fairly well insulated. The 

Houston market has the capacity to outperform the national average 

in the period ahead, in terms of percentage increases in both pricing 

and volume, due to the strength of the energy industry, its largest 

core sector. 

The average cap rate on a rolling three-month basis for core Houston 

office assets was 7.2% in June 2013. However, there is a wide range 

of cap rates depending on the locations and characteristics of the 

properties being traded. Trophy properties have recently traded 

at cap rates in the 6.0% range. We expect cap rates to edge down 

locally during the balance of 2013, as market fundamentals suggest 

increasing investor interest in Houston’s office assets. However, if 

long-term interest rates rise substantially in the period ahead cap 

rates likely will rise in turn. 

$168 

$50 


$180 

$214 

$194 

$199 

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 

*As of Q3 2013.








34 










CAP RATES – CORE OFFICE ASSETS 


Average Cap Rate 

12% 

11% 

10% 

9% 

8% 

7% 

6% 

5% 

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 12 13* 

*Quarterly average through June 2013. 


As of June 2013, Houston office cap rates were still elevated compared 

with larger coastal markets such as Manhattan, Washington, and San 

Francisco. Buyers who focus on quality Houston assets can achieve a 

higher initial return on their investment. 

AVERAGE OFFICE CAP RATES 

Select Metro Areas | Second Quarter 2013 

Weighted Average Cap Rate 

9.0% 

8.5% 

8.0% 

7.5% 

7.0% 

6.5% 

6.0% 

5.5% 

5.0% 

4.5% 

4.0% 

3.5% 

3.0% 

HOU 

Top Buyers of Office Buildings 

Top investors in office assets nationally in the 12 months ending in 

August 2013, according to Real Capital Analytics, include: 

• Vornado Realty Trust 

• Related Companies 

• RXR Realty 

• OMERS 

CHI 

• Zhang Xin 

DEN 

Note: Three-month rolling average. 


• M. Safra & Co. 

• Norges Bank Investment Management 

DFW 

LA 

BOS 

SF BAY 

WAS 

MANHATTAN 


Despite decelerating some from 2012 numbers, national industrial 

investment sales remain well above recessionary levels seen in 2008 

through 2010. At the current pace, sales will total $36.3 billion in 

2013, compared to $40.3 billion in 2012 and $34.9 billion in 2011. 

Additionally, the Houston market has seen strong returns over the past 

year and is poised to see an increase in demand with the completion 

of the Panama Canal expansion in 2015, allowing for a larger amount 

of cargo from the Pacific. 

INVESTMENT SALES OF INDUSTRIAL BUILDINGS 

United States | 2002 Through 2013 

Billions of $ 

$55 

$50 

$45 

$40 

$35 

$30 

$25 

$20 

$15 

$10 

$5 

$0 

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 

*Sales through August 2013 annualized. 


The Houston industrial market achieved total sales volume of $558 

million through the first eight months of 2013. Despite the Houston 

industrial market’s low vacancy rate and robust performance, it 

remains overshadowed as an investment alternative by larger, coastal 

industrial markets such as the LA Basin and New York/Northern New 

Jersey. 

INDUSTRIAL INVESTMENT SALES VOLUME 


Millions of $ 

$4,000 

$3,500 

$3,000 

$2,500 

$2,000 

$1,500 

$1,000 

$500 

$0 

LA BASIN NY/NNJ SF BAY 

DFW CHI WAS/BAL HOU ATL DEN 


Returns on investments in industrial assets have shown continued 

strength in 2013. Like the office market, the Houston industrial market 

has performed the best relative to other markets across the country. 

Returns in Houston measured 15.97% over the 12 months ending 

in June 2013, compared to the national average of 10.82%. Among 

major industrial markets, only Denver performed nearly as well.















NCREIF Return Index 1 FOR Industrial 

Properties 

Metro Area 

12-Month Total Return At Mid- 

Year 2013 

Houston 15.97% 

Denver 15.67% 

New York 12.77% 

San Francisco 12.39% 

Los Angeles 11.73% 

National Average 10.82% 

Dallas 9.96% 

Chicago 8.42% 

Atlanta 7.68% 

Washington* 7.32% 

1 

NCREIF index includes both current income and capital appreciation returns. *Baltimore, MD. 

Source: NCREIF, Delta Associates; October 2013. 

Recorded Houston industrial sales volume, at $558 million through 

August, is on pace to reach $837 million in 2013. The average sales 

price is $55/SF thus far in 2013, up just slightly from $54/SF for all of 

2012. 

INDUSTRIAL INVESTMENT SALES 

Houston Metro | 2002 Through 2013 

Millions of $ 

$1,200 

$1,000 

$800 

$600 

$400 

$200 

$0 

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 

*YTD through August, annualized. 


AVERAGE INDUSTRIAL SALES PRICES 


$ per SF 

$180 

$160 

$140 

$120 

$100 

$80 

$60 

$40 

$20 

$0 

CHI 

ATL 

DFW 

HOU 

DEN 

NY/NNJ LA BASIN 


BOS 

SF BAY 

Office Investment 

Prospects 

With the exception of 2009 – the low point of the 

downturn – values in Houston have risen nearly every 

year since 2003 and will likely grow in the period ahead, 

as market conditions continue to strengthen, rents rise, 

and competition increases for Houston’s assets. The 

Houston office market will continue to attract additional 

interest from investors so long as the energy industry 

continues its strong performance. Houston office 

assets remain a bargain compared to gateway markets, 

potentially allowing for further price appreciation in 

2014. 

Industrial Investment 

Prospects 

Investor demand for industrial properties in Houston will 

continue to strengthen with the abundance of capital 

(core and value-add funds) that is chasing industrial 

product based on the strength of the market and the 

Houston economy. This, coupled with the lack of quality 

product on the market, will continue to put downward 

pressure on cap rates (perhaps below 6% for premier 

assets) as long as interest rates remain low by historical 

standards. If long-term interest rates rise in 2014 cap 

rates for Houston industrial product may edge up, but 

the market’s strong fundamentals, including the lowest 

vacancy rate among major metro areas, will encourage 

investor interest. 


35 


Cap rates for recorded sales of Houston industrial product in 2013 

have been concentrated in the 6.0% to 7.0% range. There continues 

to be a large spread between Class A and Class B product, reflecting 

a flight to quality in the market.









36 

Multifamily: Strong Performance 

Net Absorption Ranks Second in the U.S. 

Vacancy: New Cyclical Low 

Rents: Highest Level on Record 

Houston Metro Multifamily Market Outlook 





The Houston metro multifamily market continues to expand due 

to population increases and one of the highest job growth rates in 

the country. This year has seen market fundamentals improve, with 

absorption and rents up and vacancy down. The Houston apartment 

market, at over 511,000 units, ranks sixth in the nation in terms of total 

market size (New York is not included in the accompanying graph to 

conserve scale). 

LARGEST MULTIFAMILY MARKETS 

United States | 2013 

Thousands of Apartment Units 

900 

800 

700 

600 

500 

400 

300 

200 

100 

0 

LA CHI DFW WAS HOU ATL PHX 

Source: REIS, Delta Associates; October 2013. 

Note: Excludes NYC and includes only those units in projects 

of 40 or more units (20+ units in California and Arizona). 


Net absorption for all classes of apartments remained strong yearto-date 

in the Houston metro as of September 2013, surpassing the 

pace of absorption in 2012. Absorption was approximately 16,168 

units year-to-date through September 2013, compared to 14,664 

units during all of 2012. Houston’s population is increasing as the 

availability of employment attracts new residents from other parts of 

the country. 

NET ABSORPTION - ALL CLASSES 

Houston Metro | 2005 Through September 2013 

Thousands of Units 

40 

30 

20 

10 

0 

-10 

2005 2006 2007 2008 2009 2010 2011 2012 2013* 

Source: ADS, Delta Associates; October 2013. 

*January through September 2013. 

Houston has the second highest net absorption of units compared to 

other U.S. metro areas for the 12 months ending June 2013. Demand 

for apartments has remained strong nationwide as tight lending 

requirements are limiting the potential pool of homebuyers and in 

turn funneling a growing cohort of young adults into apartments. 

NET ABSORPTION – ALL CLASSES 

Select Metro Areas | 2013* 

Units 

12,000 

10,000 

8,000 

6,000 

4,000 

2,000 

0 

DFW HOU LA WAS CHI ATL PHX NY 

Source: REIS, Delta Associates; October 2013. 

*12 months ending 6/13. 


The delivery of new apartment units has not kept pace with demand 

in the past year, leading to a declining vacancy rate. Vacancy as of 

September 2013 stood at 8.9%, down from 10.6% at the end of 2012 

and 12.3% at year-end 2011. The vacancy rate for all classes of Houston 

metro apartments has continued to decline following its spike in 2009 

and is now at the lowest level in the past decade. With strong job 

creation and population growth expected to continue, we anticipate 

the vacancy rate will edge down further over the next 12 months. 

APARTMENT VACANCY RATE – ALL CLASSES 

Houston Metro | 2005 Through September 2013 

Vacancy Rate 

18% 

16% 

14% 

12% 

10% 

8% 

6% 

4% 

2% 

0% 

9.4% 

2005 2006 2007 2008 2009 2010 2011 2012 2013* 


16.1% 


Strong demand and declining vacancy have allowed property owners 

to push rents to record levels in 2013. The average rental rate for 

Houston apartments was $0.97/SF/month at the end of September, 

up 6.0% over the past 12 months. Rents will likely increase through 

the balance of 2013 and into 2014 as job creation continues and 

economic growth strengthens. 

AVERAGE APARTMENT RENTAL RATE 

Houston Metro | October 2011 Through September 2013 

Rent ($/SF/month) 

$0.99 

$0.97 

$0.95 

$0.93 

$0.91 

$0.89 

$0.87 

$0.85 


8.9% 

*As of September 2013. 

6.0% increase in the 

last 12 months 

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep 

2011 2012 

2013 

$0.97













Houston Metro Multifamily Market Outlook 


Houston Metro Multifamily Market 

Outlook 

The Houston metro multifamily market likely will continue the steady growth it has experienced 

during the last four years as the regional economy adds jobs and population growth persists. 

Houston’s local economic strength has benefited the apartment market, with job seekers attracted 

to Houston and taking rental units off the market. Rents likely will rise during the balance of 2013 

and into 2014. With long-term interest rates rising (and likely to dampen demand for for-sale 

housing) and with continuing robust job growth in Houston, we expect the local multifamily market 

to remain strong next year. 


37 

TRENDLINES® 2013










Retail Sector Growing 

Retail Inventory: Getting Larger 

Retail Employment Rising 

Retail Vacancy Down Year-over-Year 

Retail Rents Tick Down for All Classes of Space Combined 

Retail Spending Continues Recovery 

Retail Market Likely to Expand in 2014 


38 



Metro Houston’s retail market experienced steady improvement in 

2013, as the economy strengthened and job growth remained strong 

locally. This sector’s growth is supported by one of the nation’s best 

regional economies and its solid employment gains, reinforced by 

hiring in the core industries. 


The Houston metro area has approximately 340 million square feet 

of retail inventory. Approximately two-thirds of Houston’s retail 

inventory consists of neighborhood and community center product 

types, including power, lifestyle, outlet, and theme/festival centers. 

RETAIL MARKET SCALE 

Houston Metro – October 2013 

Regional 

Malls** 

Community 

Centers* 

Strip 

Centers 

Total = 

340.1 Million SF 

Source: Delta Associates' analysis of CoStar data; October 2013. 

*Includes power, lifestyle, outlet, and theme/festival centers. 

** Includes regional and super regional centers. 

Neighborhood 

Centers 


The Retail sector in metro Houston added 9,100 jobs over the 

12-month period ending August 2013 in metro Houston, a 3.3% gain 

and a firm indicator of strength in this sector. On a trailing 12-month 

basis, retail employment in the Houston metro area increased for the 

34th consecutive month. Retail employment will likely continue to 

increase as consumer spending increases in 2014. 

RETAIL JOB GROWTH 

Houston Metro | 1997 – August 2013 

Jobs in Thousands 

14 

12 

10 

8 

6 

4 

2 

0 

-2 

-4 

-6 

-8 

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 

*12 months ending in August. 

Source: U.S. Bureau of Labor Statistics, Delta Associates; October 2013. 


Houston’s retail vacancy rate, at 10.1% in the 3rd quarter of 2013, is 

down from 11.0% in the 3rd quarter of 2012. We expect that vacancy 

will remain steady or decline modestly for the remainder of 2013 and 

into early 2014, as Houston’s consumer sector remains strong and 

retailers open more stores. 

VACANCY RATE TRENDS 

Houston Metro Retail Market | 2000 – Q3 2013 

17% 

16% 

15% 

14% 

13% 

12% 

11% 

10.1% 

10% 

9% 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 

Source: O’Connor & Associates, Delta Associates; October 2013. 

Note: Data source has adjusted its inventory and restated its vacancy rates. 

Vacancy Rate 

Retail Rents Tick Down for All Classes of 

Space Combined 

Retail rents remained at $1.40/SF/month in the 3rd quarter of 2013 

for all classes of retail space combined. Rents for superior product 

are rising; commodity product is reducing the overall average. While 

overall rents declined during the past year, they likely will experience 

modest growth during the balance of 2013 and into 2014, as 

consumer spending accelerates and market conditions continue to 

strengthen. The recent trends in vacancy have set the stage for rent 

growth. 

AVERAGE RENTAL RATE 

Houston Metro Retail Market | 2000 – Q3 2013 

Average Rental Rate 

(Per SF, Per Month) 

$1.70 

$1.60 

$1.50 

$1.40 

$1.30 

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 

Source: O’Connor & Associates, Delta Associates; October 2013. 

Note: Data source has adjusted its inventory and restated its rental rates. 

$1.40 


The most recent data from the Texas Comptroller’s Office show that 

gross retail sales in the Houston metro area totaled $107.5 billion 

during all of 2012. Figures for the 1st quarter of 2013 suggest an 

annualized total of $115.6 billion during all of 2013, which would 

be a new high. We expect that retail sales will continue to grow in 

metro Houston in 2014, in part due to Houston’s growing population 

and employment base, and in part due to the greater aggregated 

discretionary income that a growing labor force generates. 

GROSS RETAIL SALES 


Total Gross Retail Sales 

(in Billions of Dollars) 

$120 $115.6 

$110 

$100 

$90 

$80 

$70 

$60 

$50 

$55.3 

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 

Source: Texas Comptroller’s Office, Delta Associates; October 2013. 

$101.4 

$87.9 

*Estimate.














Retail Rents Tick Down for All Classes of Space Combined 


The Houston retail market will likely see further expansion during the balance of 2013 and into 

2014, as local job growth remains robust and the consumer sector is strengthening. Nationally, 

consumer confidence remains at its highest point in over five years. With regional economic 

growth, new consumers will arrive, increasing total consumption. A growth cycle in the retail 

market will likely occur over the next several years, making investment very attractive. As 

an example, Dunkin’ Donuts plans on opening 60 new stores in Houston over the next five 

years, creating many new jobs in the process. Additionally, Costco, Fresh Market, and Sprouts 

Farmers Market all have plans to expand in Houston or recently have. We look for a focus on 

such grocery-anchored and mixed-use development, as well as increasing urban infill projects, 

as these best address consumers’ needs and preferences. 




39 

TRENDLINES® 2013

Atlanta 

3340 Peachtree Rd 

Suite 1000 

Atlanta, Georgia 30326 

PHONE: 404.842.6600 

Fort Lauderdale 

110 Tower 

110 Southeast 6th Street 

Fort Lauderdale, Florida 33301 

PHONE: 954.607.1083 

New Jersey 

300 Kimball Drive 

1st Floor 

Parsippany, New Jersey 07054 

PHONE: 973.947.9200 

San Antonio 

8200 IH-10 West 

Suite 800 

San Antonio, Texas 78230 

PHONE: 210.341.1344 

Austin 

901 MoPac Expressway 

South Bldg. 4, Suite 250 

Austin, Texas 78746 

PHONE: 512.328.5600 

Fort Worth 

100 Throckmorton Street 

Suite 700 

Fort Worth, Texas 76102 

PHONE: 817.877.4433 

New Orleans 

935 Gravier Street 

Suite 600 

New Orleans, Louisiana 70112 

PHONE: 504.528.9910 

San Diego 

5935 Cornerstone Court West 

Suite 200 

San Diego, California 92121 

PHONE: 858.452.8668 

Baltimore 

7160 Columbia Gateway Dr 

Suite 210 

Columbia, Maryland 21046 

PHONE: 443.285.0770 

Greenwich 

1 Fawcett Place 

4th Floor 

Greenwich, Connecticut 06830 

PHONE: 203.637.9300 

New York 

400 Park Avenue 

16th Floor 

New York, New York 10022 

PHONE: 212.537.0370 

San Francisco 

Four Embarcadero Center 

Suite 1400 

San Francisco, California 94111 

PHONE: 415.489.1821 

Bethesda 

6700 Rockledge Dr 

Suite 400-A 

Bethesda, Maryland 20817 

PHONE: 301.571.0900 

Houston 

1900 West Loop South 

Suite 1300 

Houston, Texas 77027 

PHONE: 713.270.7700 

Northern Virginia 

8614 Westwood Center Drive 

Suite 800 

Vienna, Virginia 22182 

PHONE: 703.821.0040 

Seattle 

1420 Fifth Avenue 

Suite 2204 

Seattle, Washington 98101 

PHONE: 206.737.4300 

Boston 

75 State Street 

Boston, Massachusetts 

PHONE: 617.439.6000 

Chicago 

200 West Madison St 

Suite 3300 

Chicago, Illinois 60606 

PHONE: 312.881.7000 

Dallas 

5001 Spring Valley Rd 

Suite 400W 

Dallas, Texas 75244 

PHONE: 972.774.2500 

Denver 

4643 S. Ulster St 

Suite 300 

Denver, Colorado 80237 

PHONE: 303.639.3000 

Detroit 

32255 Northwestern Highway, 

Suite 206 

Farmington Hills, Michigan 48334 

PHONE: 248.932.2840 

Los Angeles 

601 South Figueroa Street 

Suite 2750 

Los Angeles, California 90017 

PHONE: 213.624.5700 

MENA 

Prince Turki Bin Abdullah Al- 

Saud St., 

Sulaimania Area , P.O. Box 2600 

Riyadh, KSA 11461 

PHONE: +966 (1) 292.24.22 

Miami 

100 SE 2nd Street 

Suite 3100 

Miami, Florida 33131 

PHONE: 305.808.7310 

Milwaukee 

234 W. Florida Street 

Suite 310 

Milwaukee, Wisconsin 53204 

PHONE: 414.937.5030 

Minneapolis 

706 Second Avenue South 

100 Baker Building 

Minneapolis, Minnesota 55402 

PHONE: 612.343.4200 

Oklahoma City 

235 North MacArthur 

Suite 500 

Oklahoma City, Oklahoma 73127 

PHONE: 405.789.0900 

Orange County 

2211 Michelson Drive 

Suite 650 

Irvine, California 92612 

PHONE: 949.751.5700 

Orlando 

158 Tuskawilla Road 

Suite 2324 

Winter Springs, Florida 32708 

PHONE: 407.253.3140 

Phoenix 

2415 E. Camelback Road 

Suite 900 

Phoenix, Arizona 85016 

PHONE: 602.956.5000 

Salt Lake City 

11781 S. Lone Peak Pkwy 

Suite 250 

Draper, Utah 84020 

PHONE: 801.972.5200 

Silicon Valley 

2025 Gateway Place 

Suite 328 

San Jose, California 95110 

PHONE: 408.843.4100 

St. Louis 

1001 Highlands Plaza Drive West 

Suite 150 

St. Louis, Missouri 63110 

PHONE: 314.621.1414 

Walnut Creek 

500 Ygnacio Valley Road 

Suite 100 

Walnut Creek, California 94596 

PHONE: 925.357.2000 

Washington, D.C. 

1700 K Street, NW 

Suite 660 

Washington, DC 20006 

PHONE: 202.775.7000 

TRANSWESTERN HOUSTON 

1900 WEST LOOP SOUTH, SUITE 1300 

HOUSTON, TX 77027 

PHONE: 713.270.7700 | FAX: 713.270.6285 

WWW.TRANSWESTERN.NET/HOUSTON 

DELTA ASSOCIATES 

500 MONTGOMERY ST, SUITE 600 

ALEXANDRIA, VA 22314 

PHONE: 703.836.5700 | FAX: 703.836.5765 

WWW.DELTAASSOCIATES.COM

Houston, TX TrendLines Publication - Transwestern

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