Houston Office Market – Sublease And Activity Overview

Houston office market –Sublease and activity overviewSeptember, 2016

What you need to know about the current state of theHouston office sublease market1.2.3.11.9 million square feet of sublease space now available Largest blocks of sublease space located in Energy Corridor, CBD, Galleria, and Greenspoint Over 5 million SF of sublease inventory here for the long term (5 years of term remaining)Velocity of subleases coming to market not slowing Significant subleases added in 2016 include Shell, BHP Billiton, BG Group and Marathon Oilbringing over 5 million SF to marketSubleases not being absorbed Sublease space coming to market five times faster than it’s being leasedOnly a handful of spaces larger than 20,000 SF leased so far this year; 2015 activity similarOnly two percent of current subleases will revert to direct basis in 2016Average sublease signed this year is tiny – smaller tenants taking advantage of optionsSource: JLL Research2

Sublease space inventoryoverview

CBD and the Energy Corridor (Katy Freeway, Westchase)lead in sublease space availabilityOther1,717,495 s.f.CBD2,657,349 s.f.The Woodlands452,233 s.f.Greenspoint970,562 s.f.Galleria1,172,319 s.f.Katy Fwy West3,043,193 s.f.Westchase1,496,446 s.f.Source: JLL ResearchKaty Fwy East425,489 s.f.*This dataset reviews all sublease availabilities in office properties within the Houston market.4

Sublease space in Houston’s top submarkets more thandouble the average inventory11,000,00010,000,000SF of Sublease spoint Sublet Total Avail SFCBD Sublet Total Avail SFKaty Fwy Sublet Total Avail SFGreenway Sublet Total Avail SFWoodlands Sublet Total Avail SFWestchase Sublet Total Avail SFOPECThanksgivingMeetingGalleria Sublet Total Avail SF5,000,0004,000,0003,000,0002,000,0000Source: JLL Research2006 1Q2006 2Q2006 3Q2006 4Q2007 1Q2007 2Q2007 3Q2007 4Q2008 1Q2008 2Q2008 3Q2008 4Q2009 1Q2009 2Q2009 3Q2009 4Q2010 1Q2010 2Q2010 3Q2010 4Q2011 1Q2011 2Q2011 3Q2011 4Q2012 1Q2012 2Q2012 3Q2012 4Q2013 1Q2013 2Q2013 3Q2013 4Q2014 1Q2014 2Q2014 3Q2014 4Q2015 1Q2015 2Q2015 3Q2015 4Q2016 1Q2016 2Q2016 3Q1,000,000*This dataset reviews all sublease availabilities in Class A and B properties within the top seven office submarkets, regardless of size.5

Oilshockwavesmarket: on average,KeyvolatilityIdeas tosendingrememberin 2015 through(and 2016)587,000 SF of subleases coming online Source: JLL Research440,638August, 2016June, 2016May, 2016March, 2016235,714February, 2016January , 2016December, 2015November, 2015278,564211,084155,414October, 2015September, 2015August, 2015July, 2015June, 2015April, 2015March, 2015February, 2015January, ,731520,099464,855500,000636,607April, 2016706,302699,607July, 20161,000,000May, 2015SF of sublease space available2,000,000*This dataset reviews all sublease availabilities in Class A and B properties within office submarkets in Houston.6

Sublease overhang will not remedy in the short term:4.6 million SF of sublease options have 5 years remainingNegotiable1,089,8839%More than 10 years termremaining1,399,58712%5 years to 10 years termremaining3,165,25727%Source: JLL ResearchLess than 6 months termremaining586,344 6 months to 1 year term5%remaining523,0944%1 year to 2 years termremaining2,022,87717%2 years to 5 years termremaining3,148,11426%*This dataset reviews all sublease availabilities in office properties within the Houston market.7

Tenants did not flock to sublease opportunities in 2015;leasing activity among subleases was very lightSubleases signed in 2015148Subleases signed in 2015 above 20,000 SF16Multi-floor subleases signed in 2015Fewer than 10Total sublease space leased in 20151.24 million SFAverage deal size8,378 SFTop industry taking sublease spaceEnergySource: JLL Research8

Tenants currently taking advantage of sublease opportunitiesare smaller in size; only twelve full floors leased YTDSubleases signed in 2016191Subleases signed in 2016 above 20,000 SF12Subleases signed in 2016 above 10,000 SF35Multi-floor subleases signed in 20163Total sublease space leased in 20161,186,842 SFAverage deal size6,213 SFSource: JLL Research9

Overall leasing activity consistently weak, will impactabsorption of sublease space and new 000,00002010201120122013201420152016Source: JLL Research10

Challenges arising in the market

M&A Activity leaves uncertainty in the market? Impact will continue to be felt in the Houston office market via space contractions and consolidations Full M&A impact on market typically delayed by 6-12 months 2016-2017 could see additional major players involved, especially if oil prices continue to remain around 50/bbl12

Office market forecast - looking ahead into 2016 and 2017VacancyNearly 3 million SF of newdeliveries remains un-leased;this combined with spacecontractions and M&A activitymay push vacancy over 20%market wideRentsPublished market rents flatten;“street-level” deals will offersignificantly discounted marketrents with owners focusing onmaintaining occupancy ratherthan high ratesConcessionsThanks to weak deal velocityand cautious tenants in themarket, landlords will continueto offer increased concessions(flexible lease terms, free rent,tenant improvements)Key takeawaysWhile oil prices are still recovering Why this matters Deal velocity continues slowdown, contract rents will fall;landlord concessions increase Spec construction will remain on hold due to weak demand,lending tightening Job reductions continue as E&P/energy service companiesslash headcounts M&A activity expected to increase (combination of debt issuesfor small and mid-size companies and oil prices around 50/bbl) Short term leases will be the focus in 2016 More and more sublease space will arrive to market, may growto 13 million SF by 2017 Market will continue to be tenant-favorable13

Top themes impacting the office CRE market1.Sublease space continues its mount2.New deliveries add pressure to vacancy3.Leasing demand unable to keep pace with supply Over 11.9 million SF of sublease options now available across the Houston office market Sublease supply is currently double the ten-year historical average, while demandcontinues to lag behind Over 1.0 million square feet has delivered without preleasing commitments in 2016 As a result, total vacancy ticked up to 18.5 percent during Q2 Failed to surpass 1.5 million square feet in total leasing activity for the first time in the last15 years Availability is over 26.6 percent, meaning one in four floors is available marketwideSource: JLL Research14

Houston vs. major U.S. markets

Sublease by industryHouston energy tenant give-back comprises overwhelming majority of sublease inventoryEnergyTechnologyProfessional business servicesInsuranceFinancial activitiesLife sciencesHealthcareLaw firmsAll other industriesIndustrySublease space al business services1,152,658Insurance1,003,866Financial activities963,145Life sciences880,741Healthcare876,666Law firms749,442All other industriesTotal sublease3,744,97218,736,649Source: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston16

Sublease by submarketHouston energy submarkets experiencing highest rates of sublease activityKaty Freeway West (Houston)CBD (Houston)Westchase (Houston)West Loop (Chicago)Central North (Chicago)Shady Grove (Suburban Maryland)Central Loop (Chicago)Waltham/Watertown (Boston)Western East/West Corridor (Chicago)Financial District (New York)Rosslyn (Northern Virginia)El Segundo (Los Angeles)Reston (Northern Virginia)South Financial District (San Francisco)Back Bay (Boston)Near North (Chicago)Columbus Circle (New York)Penn Plaza/Garment (New 001,500,0002,000,0002,500,0003,000,000Sublease space (s.f.)Source: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston17

Sublease space by industry and marketHouston far exceeds other gateway markets in subleases over 50,000 SFEnergyTechnologyProfessional servicesInsuranceFinancial activitesLife sciencesHealthcareLaw firmsAll other industriesHoustonNew YorkChicagoWashington, DCLos AngelesSan ,000Sublease space (s.f.)Source: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston18

Sublease by block sizeMost sublease space found in 100,000-249,999 s.f. blocks as anchor tenants move to new supply ingateway markets250,000 s.f.100,000-249,999 s.f.75,000-99,999 s.f.50,000-74,999 s.f. 50,000 s.f.9,000,000Sublease space by block size 03,000,0002,000,0001,000,0000HoustonNew YorkChicagoWashington,DCLos AngelesSan FranciscoBostonSeattleSource: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston19

Sublease by time on market15.4 m.s.f. has been listed for two years or less, coinciding within downturn in oil se space 4-35 months36-47 months1,284,9930 1 month1-11 months12-23 months48 monthsSource: JLL Research - Data reflects all subleases greater than 50,000 square feet in Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Washington, DC & Houston20

, 2015 015 015 , 2015 15 15 015 15 2015 r, 2015 2015 2015 6 016 016 , 2016 16 16 016 16 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 Key Ideas to remember in 2015 (and 2016) 6 Oil volatility sending shockwaves through market: on