harris county appraisal district · inventory update 2 sales volume update 3 sales price update 4...

Harris County

Appraisal District

2016

Market Trends Report

Harris County Appraisal District

2016 Market Trends Report

February 10, 2016 i

Residential Property ............................................................................. 1

Inventory Update 2

Sales Volume Update 3

Sales Price Update 4

Townhomes and Condominiums 4

Lease Property Update 5

New Construction 5

The Housing Market and Oil Prices 2016 5

Commercial Property ........................................................................... 7

Looking Forward 7

Jobs 7 Oil & Gas 7

Growth 9 Interest Rates 10 Other economic factors 11

Transportation 13 Real Estate Developments in Harris County 13

Projects outside of Harris County that will affect the greater Houston economy 14

Vacant Land 15 Central Business District 15

Uptown District / Galleria 17 Inner Loop 18

The Outer Loop 21 Baytown 22 The Grand Parkway 23

Highway 290 Expansion 24 Cypress Fairbanks ISD/Waller/Katy 25

Tomball ISD 26 LA Porte 27 Sales 28

Office 31 Inventory Analysis 31 Construction Activity and Deliveries 32

Net Absorption and Leasing Activity 35 Vacancy 36 Rental Rates 37 Sales Activity 37

Capitalization Rates 37 Summary 38

Apartments 38 Rental Rates 39



February 10, 2016 ii

Market Trends 40

New Construction 42 Summary 45

Retail 47

Net Absorption 47 Market Occupancy 47 Largest Lease Signings 48 Rental Rates 48 Inventory & Construction 48

Greater Houston Retail Market Areas 49 Sales Activity/Capitalization Rates 49

Detail by Property Type 50 Summary 51

Medical 52 The Texas Medical Center 52

Demographics: Driving Demand 55 Medical Office Buildings 55 Hospitals 57

Nursing Homes and Retirement Homes 59 Summary 61

Hotels and Motels 62

Texas Lodging 63 Houston Lodging 63

Developments 63

Summary 65

Warehouses 65

New Construction 65 Leasing Activity and Rents 67

Vacancy/Absorption 68 Sales and Capitalization Rates 69 Summary 70

Industrial Property ............................................................................. 71

Refineries 71

Chemicals 72

Utilities 73

Electric 73

Natural Gas 74 Telecommunications 74

Manufacturing 76

Commercial Personal Property 76



February 10, 2016 1

Residential Property

Houston’s economy and residential market have slowed from the hot markets of 2014. This is

due in no small part to the fact that for the fifth time in the last four decades the Houston

metropolitan area is facing uncertainty due to the collapse of oil prices. By some metrics the

current downturn is worse than previous downturns. The fall in the price of a barrel of WTI from

$105.79 to $28, a 74% tumble, is the largest percent decrease ever. Additionally, the reduction in

rig count to 1,187 rigs, a 61.5% decrease, is the second largest reduction ever.

By other metrics this downturn has been less severe than others. With the previous four

downturns, Houston experienced total job losses ranging from a relatively small 18,400 lost in

the early 1990s to 221,000 lost jobs in the 1980s (Figure 1). By comparison, although Houston

lost an estimated 10,200 energy-related jobs, overall Houston had a net gain of 23,200 jobs in

2015. Furthermore the Texas Workforce Commission is forecasting that Houston will add almost

22,000 jobs in 2016 (Figure 2). These statistics support the notion that although the oil industry

is still important to the overall economy of Houston, it is no longer the only game in town.

Figure 1 U.S. Energy Information Administration



February 10, 2016 2

Figure 2 Texas Workforce Commission Houston Job Growth1

Inventory Update

According to the Houston Association of Realtors (HAR), the inventory of available homes

which hit historic lows at 2.5 months in December 2014 is at 3.2 months as of December 2015.

The 3.2 months is still considerably below the national average inventory which stands at 5.1

months of supply as of December 2015. Typically, 6 months of inventory is considered

equilibrium. Inventory levels below 6 months indicate a seller’s market. The number of days it

took a home to sell (a.k.a. Days on Market) increased slightly from 56 days in December 2014 to

57 days in December 2015. Until the supply of homes moves closer to equilibrium we are likely

to continue experiencing a seller’s market and the corresponding increases in sales prices.

1 http://www.houston.org/pdf/research/quickview/Economy_at_a_Glance.pdf

http://www.houston.org/pdf/research/quickview/Economy_at_a_Glance.pdf



February 10, 2016 3

Sales Volume Update

According to HAR, sales volume for single family residential properties in 2015 totaled 73,724

units, which is a 2.4 percent decline versus the 75,535 units sold in 2014. There were 6 months in

2015 where sales volume declined versus the same month in 2014.

Categories Full-Year 2014 Full-Year 2015 Change

Single-family home sales 75,535 73,724 -2.4%

Total property sales 91,439 88,764 -2.9%

Total dollar volume $23,553,542,859 $23,559,111,514 +1.0%

Single-family average sales price $270,182 $280,290 +3.7%

Single-family median sales price $199,000 $212,000 +6.5% Courtesy HAR January 13, 2016

2

2 http://www.har.com/blog_49528_the-houston-real-estate-market-ends-2015-with-the-second-highest-sales-

volume-of-all-time

http://www.har.com/blog_49528_the-houston-real-estate-market-ends-2015-with-the-second-highest-sales-volume-of-all-time

http://www.har.com/blog_49528_the-houston-real-estate-market-ends-2015-with-the-second-highest-sales-volume-of-all-time



February 10, 2016 4

Sales Price Update

The chart below shows a five year trend line for both the average home sale price and the median

home sale price of single family homes. In a year-over-year comparison the median price for a

home in December increased to its highest level ever rising 2.9% to $216,000. In December the

average price fell 0.6% to $280,201. The median home sale price has gone from just under

$150,000 in 2010 to $216,000 during this period which represents a 44 percent increase.

Single Family Average Home Price & Single Family Median Home Price

Courtesy HAR January 13, 2016

Townhomes and Condominiums

Sales of townhouses and condominiums fell 2.9% in December versus one year earlier. A total of

536 units sold in December 2015 as compared to 552 properties in December 2014. The average

price fell 14.3% to $197,904 and the median price increased to $159,900. Inventory reached a

2.9 months supply, which is an increase from the 2.3 months supply a year earlier.



February 10, 2016 5

Lease Property Update

As the supply of properties for sale continues to remain below equilibrium the demand for lease

property naturally increases. As a result, single-family home rentals climbed 2.9 percent

compared to December 2014, while year-over-year townhouse/condominium rentals decreased

3.6 percent. The average rent for a single-family home was unchanged at $1,710 and the average

rent for a townhouse/condominium fell 3.1 percent to $1,459.

New Construction

The number of new starts climbed 8.8 percent to 17,459 during 2015 from 16,050 in 2014

despite the continued collapse of the price of oil. The new construction value associated with the

new starts increased almost 26 percent from $2.99 billion in 2014 to $3.76 billion in 2015. The

increase in new starts is due to a number of factors including low interest rates, a shortage of

available inventory, population growth, and relative strength in the non-oil patch segments of

Houston’s economy.

The Housing Market and Oil Prices 2016

It is clear that the price of oil will stay depressed while the glut of oil inventory works its way out

of the global market, but it is unclear how long that will take. Although the price of oil appears to

have come off the bottom, there are still too many national and international influences that

remain unresolved:

How much and how soon will Iranian oil hit the market?



February 10, 2016 6

How long will Saudi Arabia and other OPEC countries continue to produce oil at

unrestricted levels?

Will the demand for the world’s oil-supply continue to grow?

If demand for oil continues to grow, how quickly will the excess supply be absorbed by

the global economy?

Based on the outlook for oil and Harris County’s link to the oil patch, it is difficult to say what

will happen with the housing market in 2016. It is likely that the number of sales will continue to

slide as they did in November and December of 2015 and that the inventory of homes will move

closer to equilibrium. What is harder to predict is what will happen to prices. The longer oil

remains in the $30 range, the greater the likelihood that oil-related companies fail and a domino

effect may begin: jobs losses, foreclosures, inventory spikes, and a reduction in construction of

both residential and commercial property. Conversely, the price of oil could rise to a $40-45

level in 2016 which could stem the tide of job losses, reduce the fears of recession, and allow

Harris County’s economy and housing market to continue with its stability and growth.



February 10, 2016 7

Commercial Property

Looking Forward

The price of oil has fallen from its June 2014 high of over $107 per barrel (West Texas

Intermediate oil) to about $53/barrel at the start of 2015. By late August, it was $38 per barrel.

The price recovered moderately to around $48/barrel by November before ending the year at

around $37/barrel. This is causing a considerable amount of concern for the health of Houston’s

economy and the real estate market especially for those who recall the recessions of the 1980s

and 2008-2009. Although these concerns are historically well–founded, there are a number of

differences in Houston’s market today which will diminish the likelihood of a severe recession or

housing crash. The overall economy of Houston is expected to be generally stable or even see

moderate growth well into 2016, as population growth and other segments of the economy are

expected to offset the adjustments in the oil industry.

The Atlantic magazine stated “2014: The Best Year of Job Creation This Century.” In

comparison to the economic boom of that year, the economy since then may just seem like a

recession. In reality, 2015 declined in the first quarter to the “economic trough” of the second

and third quarter, and recovered moderately in the fourth quarter.

Jobs

The forecast in the fall of 2014 for job growth in Houston was expected to be between 50,000 to

60,000 for 2015. Although not meeting forecasts, the job market for Houston ended the year on a

resilient note. In 2015, the net job creation in Houston was 23,200, of which 8,500 were in

December. New jobs in healthcare, hospitality, and leisure somewhat offset the losses in

manufacturing and oil & gas extraction. Houston continues to add jobs and unemployment is

low. Job growth in Houston for 2014 was close to 4%, while in 2015 it was about 1.2%.

At the beginning of 2015, the national unemployment rate was 5.7%. The rate of unemployment

in Houston for November 2015 was 4.9%, and 4.6% for December, well below the national

average of 5.6%. Texas alone created 166,900 jobs in 2015, or 57% of all the jobs created last

year in the nation. “Nine sectors reported growth – construction, retail, administrative support,

educational services, health care; arts entertainment and recreation; accommodations and food

services, and government, collectively adding 64,000 jobs for the year.” Houston finished the

year with 3,015,800 payroll jobs. Forecasts from The Greater Houston Partnership estimate the

Houston area will create a net of 21,900 jobs in 2016.

During the Great Recession, Houston’s unemployment rate peaked at 8.8%, and during the oil

bust of the 1980s, unemployment hit 12.9%.

Oil & Gas

Texas employed 306,330 in the oil & gas industry at the start of 2015. Since then, upstream

(exploration) has laid off 60,000 in Texas, or 20% of its oil & gas workforce. Oil companies are



February 10, 2016 8

adjusting to new oil prices and reorganizing their operations accordingly. Many capital

improvement projects may have been put on hold until the market and price stabilizes, after

which some of this workforce may be recalled. The energy jobs lost in Houston for 2015 totaled

10,200. The total number of non-farm jobs in the greater Houston area is almost 3 million.

According to the February 2016 Greater Houston Partnership Economy at a Glance3, the North

American rig count opened 2015 at 1,811 and ended 2015 at 698, down from the September

2014 peak of 1,931 working rigs. In Texas last year, 19,503 oil and gas wells were drilled,

10,000 fewer than in 2014, the peak for the recent boom.

When fracking began in 2010, the average well produced 20 barrels of oil per day. By 2015,

technology increased efficiency to 700 barrels per day on average. In December 2015, the U.S.

government lifted the ban on oil exporting. Texas is the 5th largest producer of crude oil in the

world, and accounts for 50% of the production in the U.S. In 2015, Texas produced 1.267 billion

barrels of oil in 2015, passing the all-time production high in 1972. In 2010, no oil was being

shipped from Corpus Christi to Houston via the Intracoastal Waterway. Today, 700,000 barrels a

day are shipped to Houston refineries.

Natural gas prices dropped from $3.00 in January 2015 to $1.77 in mid-December. By year end,

the price rebounded to $2.34 (values quoted are price per million BTUs). After Southwestern

Energy announced they were laying off 1,100 employees, Ed Hirs, energy economist at the

University of Houston, said, “There is a lack of pipeline capacity out of the [northeast U.S.]

where Southwestern has the bulk of its operations. Southwestern can drill new wells, but they

don’t have any place to sell the gas. They don’t have access to get the gas out into the Northeast,

or even down to the Gulf Coast where the country is better situated to take the gas and process

it.”4

Schlumberger, the world’s largest supplier of technology and project management to the oil and

gas industry, announced in August 2015 that they are acquiring Cameron International for $14.8

billion. Haliburton and Baker-Hughes, two of the largest oil logistics and supply companies, are

in the process of merger, but running into government approval issues.

One casualty of the oil price decline is increased space for subletting, “which might be as

much as 8 million square feet.” in the greater Houston area. However, this is office space

that is leased, and provides income to the building owner. In a financial analysis, this

office space is leased/occupied and not technically vacant. The leasing tenants are

looking for sublease tenants, to defray the cost of holding the office space. It is estimated

another 2 million sf of sublease office space may come on the market for 2016. This will

affect office listings, vacancy rates and concessions.

BP (British Petroleum) had losses of $2.2 billion for the 4th

quarter of 2015, with the total

annual 2015 loss at $5.2 billion. “The negative figure for the final months of the year

were caused mainly by writedowns on the value of its oil fields and restructuring costs

3 http://www.houston.org/pdf/research/quickview/Economy_at_a_Glance.pdf

4 http://www.houstonpublicmedia.org/articles/news/2016/01/21/134992/southwestern-energy-to-slash-1100-jobs/

http://www.houston.org/pdf/research/quickview/Economy_at_a_Glance.pdf

http://www.houstonpublicmedia.org/articles/news/2016/01/21/134992/southwestern-energy-to-slash-1100-jobs/



February 10, 2016 9

that totaled $2.6 billion. Operating profits were $2.2 billion in 2014, and $196 million in

2015, “despite record profits in its refinery and marketing businesses.” Similarly, Royal

Dutch Shell earned $19 billion in 2014, but in 2015 earnings fell to $3.84 billion. This

included “earnings adjusted for inventory changes [for] $1.8 billion.”

Shell Oil’s acquisition of the British oil and gas producer BG Group for $70 billion is

expected to close by March 2016. The acquisition by Shell will “allow it to realize $3.5

billion in savings, shed $30 billion in uncompetitive assets, and expand its operations in

the fatst-growing liquefied natural gas industry.” BG Group invested “about a third of its

overall $200 billion in invested capital, including in a process called gas-to-liquids that

converts natural gas into fuels like diesel and jet fuel. Shell announced they were going to

cut 10,000 jobs worldwide, but this was mostly due to the elimination of competing jobs

within the two companies (redundancy).

Recently, the hydrocarbon industry in America has found a way to produce ethylene from

natural gas, at almost half the cost of doing so from crude oil.

Growth

Population Estimates/Projections for Harris County, Houston MSA, & Texas

Year

Population

Harris County Houston MSA Texas

1992 2,944,348 3,815,914 17,655,650

2001 3,461,662 4,828,082 21,325,018

2006 3,830,130 5,485,718 23,507,783

2011 4,176,764 6,057,425 25,674,681

2014 4,391,445 6,473,316 27,161,942

2015 4,471,427 6,622,047 27,695,284

2016 4,551,437 6,772,852 28,240,245

2017 4,633,511 6,928,233 28,797,290

2020 4,885,616 7,413,214 30,541,978 Source: Texas Department of State Health Services

5

5 https://www.dshs.state.tx.us/chs/popdat/

https://www.dshs.state.tx.us/chs/popdat/



February 10, 2016 10

From 2010 to 2015, on a net basis, an average of 1,500 people moved to Texas every day. While

Texas quickly recovered from the Great Recession, the rest of the country did not do so until

2014. Strong job and economic growth and affordable housing attracted residents, and continues

to do so.

Greater Houston Population Growth

Interest Rates

Inflation for 2016 was a negligible 0.1%. Three of the months in 2015 had deflation (negative

inflation), probably due to falling oil prices and associated purchase items. The Federal Reserve

tends to raise interest rates to cool off a hyperactive economy, and to fight inflation. With little or

no inflation, there is no need to raise interest rates to stabilize economic growth, and rates should

stay extremely low through 2016. Only once (2008 at 3.8%) since 1992 has inflation exceeded

3.4%.

Interest rates remain low which is good for lending-based economic activity, especially the

housing market. After an extended period of Federal lending at 0.25% interest, in December

2015 the target Fed Funds rate was increased to 0.50%. The 10 year U.S. Treasury bill is

normally considered as the “safe rate” portion of the capitalization rate for real estate

investments (i.e., in “built up” capitalization rates methods). The year 2015 started at a rate of

2.12%, and for 2016 it was 2.24%. However, by early February 2016, the 10 year T-bill rate was

1.75%. This is significantly lower than the beginning of 2011 when the rate was 3.36%, or 2000

at 6.58%. Lower interest rates increase property values, and compress capitalization/investment

rates.




Federal Funds Rate

Other economic factors

Lower oil and natural gas prices have translated into more disposable income for

residents of Harris County and the greater Houston area. This has fueled resurgence in

the retail, service and hospitality enterprises in the area.

The Panama Canal expansion project, doubling capacity with a wider and deeper channel

than the original canal, is slated to open in early 2016. This will significantly increase

shipping volume of the Port of Houston, as well as demand for docks and distribution

centers in Houston. In 2015, the volume of shipping from the Port of Houston increased

3.2% from the previous year.

Port of Houston Authority announced in October 2015 the completion of the deepening

and widening of Barbours Cut channel, making Barbours Cut Container Terminal the

Port Authority’s first 45-foot deep draft container facility. The project cost $68.9 million.

This will accommodate the large ships and supertankers that will travel through the soon

to be opened Panama Canal expansion.

According to an Associated General Contractors of America survey (taken in November

2015), 68% of “Texas building contractors plan to hire more workers in 2016. … Public

sector projects tied to higher education, K-12 education, and healthcare, will account for

much of the new work, both statewide and in Houston. The new projects are expected to

help offset the drop in construction tied to oil and natural gas. … [M]ost Texas




contractors say they’re still having trouble finding and keeping skilled workers. That’s

even after a year of raising pay and increasing benefits.”

According to Comerica Bank, “Oil exploration and production accounts for about 10

percent of the state’s economy.” The bank’s chief economist, Robert Dye, said, “What

happens to the other 90 percent of the state economy? Fortunately, that’s not withering up

and blowing away. Texas does have a a diverse economy. And other parts of the energy

sector, the downstream part [is] doing very well. … Houston [is] continuing to add

infrastructure and capacity in terms of refineries, petrochemicals, and things like that. So

that’s been a nice balance to this.”6

In October 2015, “Southwest Airlines launched international air service from Hobby

Airport” to Mexico, Belize, Costa Rica, and the Caribbean. Hobby is “expected to

eventually handle a million or more international passengers each year” according to the

Greater Houston Partnership’s 2015 Houston Economic Highlights.7

BBA Aviation (parent of Signature Flight Support) of Britain is acquiring Landmark

Aviation, which Houston’s operation supplies most of the jet fuel to George Bush

International Airport, for $2.065 billion.

Houston First booked more than 700,000 hotel room nights tied to meetings and

conventions last year, a record, up 29% from the year before. This was attributed in part

to the opening of the 1,000-room Marriott Marquis and the $175 million renovation of

the George R Brown Convention Center.8

The Lyndon B. Johnson Space Center in southeast Harris County is the headquarters for

NASA. In 2011, cuts were made to the nation’s space program, resulting in the

elimination of 3,000 jobs at the Space Center from a workforce of 14,000. This greatly

affected the real estate market in the Clear Lake area of Harris County. At that time, the

Space Shuttle program was cancelled, and astronauts are now flown to the International

Space Station by the Russians for $60 million per astronaut. President Obama proposed

“an additional $18.5 billion for NASA” for the 2016 budget, with the Orion project re-

commissioned for deep space travel to begin in 2017. “NASA is developing the

capabilities needed to send humans to an asteroid by 2025 and Mars in the 2030s.” This

will revitalize the southeast area of Harris County. In addition, it was announced in 2015

that Ellington Field Airport near the Johnson Space Center will be upgraded to

accommodate a private “space-port.”

6 http://www.houstonpublicmedia.org/articles/news/2016/01/05/132975/comerica-bank-falling-oil-prices-herald-

slower-texas-growth-in-2016/ 7 https://www.houston.org/assets/pdf/economy/Economic%20Highlights_web.pdf

8 http://www.houstonfirst.com/Newsroom/News/ArtMID/1702/ArticleID/1036/2015-a-Record-Year-for-Houston-in-

Convention-Sales-Web-and-Tourism

http://www.houstonpublicmedia.org/articles/news/2016/01/05/132975/comerica-bank-falling-oil-prices-herald-slower-texas-growth-in-2016/

http://www.houstonpublicmedia.org/articles/news/2016/01/05/132975/comerica-bank-falling-oil-prices-herald-slower-texas-growth-in-2016/

https://www.houston.org/assets/pdf/economy/Economic%20Highlights_web.pdf

http://www.houstonfirst.com/Newsroom/News/ArtMID/1702/ArticleID/1036/2015-a-Record-Year-for-Houston-in-Convention-Sales-Web-and-Tourism

http://www.houstonfirst.com/Newsroom/News/ArtMID/1702/ArticleID/1036/2015-a-Record-Year-for-Houston-in-Convention-Sales-Web-and-Tourism




Transportation

U.S. Highway 59 is being upgraded to become Interstate 69, and is often referred to as

the NAFTA Superhighway, as the major trucking corridor from Mexico to Montreal,

Canada. Most of Interstate 69 from the Kentucky-Tennessee border through Indianapolis

to Port Huron, Michigan (north of Detroit, Canadian border) is complete and in service.

Other segments are completed around Corpus Christi in Texas and northwest Mississippi.

In early February 2016, the Grand Parkway extension from Highway 290 to I-45 south of

The Woodlands was opened. The next segment, continuing to I-69 near Kingwood, is

schedule to open by late March 2016. This will divert traffic and trucking around the city.

METRORail continues to further expansion of their light rail public transport system in

greater Houston. The next two projects are the lines to southwest Houston (U.S.

90/Gessner) and the Green Line currently under construction east of downtown

(Navigation/Canal). For the month of December 2015 (one month only), 1.4 million

passengers used Houston’s light rail system, up 36% from December 2014.

The Federal Railroad Administration approved the rail corridor planned for a high speed

train to run from Houston to Dallas. Construction is expected to begin in 2017, with the

first 240-mile 90-minute rides planned for 2021.

Real Estate Developments in Harris County

Peck Station, a proposed $50 million upscale retail and multi-family development in

northwest Harris County, is on hold indefinitely until the oil market stabilizes. Keith

Jennings, president of a manufacturing company in the area, said, “After you have a

boom of three to six years, sooner or later everybody starts overproducing and overdoing

everything. Then the demand starts to lessen, and you end up with too much [supply].”9

Walmart is breaking ground for a 186,000 sf store at Kuykendahl Road and Augusta

Pines, across from Timber Creek Elementary School, which is scheduled to open in late

fall 2016.

The 63-acre Grand Parkway Town Center will be located on Highway 249 between

Grand Parkway and Bourdreaux Road, with “about 600,000 square feet of retail and

restaurant space across about 15 pad sites.”10 A 136,000 sf Sam’s Club is part of this

project, and set to open by early 2017. Kroger and Chick-fil-A are negotiating to become

part of the site. Other new retail developments are proposed along the newly opened

Grand Parkway segment.

The Texas Medical Center, the largest medical center in the world, sees 4.7 million

patients annually. CHI St. Luke’s will build a new hospital by the DeBakey VA Medical

9 http://communityimpact.com/houston/tomball-magnolia/commerce/2016/01/13/tomball-magnolia-experience-

effects-of-oil-decline/ 10

http://communityimpact.com/houston/development-construction/2016/02/10/grand-parkway-town-center-2/

http://communityimpact.com/houston/tomball-magnolia/commerce/2016/01/13/tomball-magnolia-experience-effects-of-oil-decline/

http://communityimpact.com/houston/tomball-magnolia/commerce/2016/01/13/tomball-magnolia-experience-effects-of-oil-decline/

http://communityimpact.com/houston/development-construction/2016/02/10/grand-parkway-town-center-2/




Center in the east Med Center area. Other construction and expansions are occurring in

the immediate area.

University of Texas is actively working to obtain 332 acres for an auxiliary campus and

“Engineering, Research and Education Institute.” Purchased already is a 100 acre parcel

“north of Willowbend Drive and west of Buffalo Speedway, south of NRG Park and the

Texas Medical Center.”11

“In April 2014, Chevron Phillips Chemical Co. broke ground on a $6 billion expansion

including an ethane cracker at its Baytown facility.” Construction is expected to be

complete in 2016.

Projects outside of Harris County that will affect the greater Houston economy

Johnson Development Corp. “has acquired 590 acres southwest of Houston for a master

planned community with 2,500 homes.” It is located near the north side of U.S. Highway

59, just west of Sugar Land’s Sweetgrass subdivision. Development is scheduled for mid-

2016.

The 192 acre Texas Instruments site at West Airport Blvd. and U.S. 59 was sold. Some of

the old office and lab buildings will be retrofitted. It will be developed with a 350,000 sf

Class A shopping center, Class A & B restaurants, two hotels, a pedestrian park, and a

Class A office building. Construction is expected to be complete in time for Super Bowl

51 in Houston in February 2017.

Schlumberger is moving their corporate headquarters from downtown Houston to its

Sugar Land campus. The cost of the move and capital improvements to be built in

southwest great Houston is estimated at $200 million.

Grand Central Park “is a 2,046-acre [3.2 sq.mi.] project under construction in Conroe

along Loop 336 and I-45. It will feature 500 homes, 112 acres of retail space, an urban

living center, a town center with shopping, dining and entertainment options and a

business center with office space.” Initial phases of this master-planned community are

projected to open in late 2016.

Dow Chemical started construction on a new ethylene production facility in June 2014 in

Freeport (Brazoria County, south of Houston), and it is slated for production in the first

half of 2017. Cost of the project was $4 billion. ExxonMobil started production of a

similar ethylene plant in 2014, creating 10,000 construction, 4,000 related, and 350

permanent jobs. Cost of the project was estimated at $6 billion. “It is expected to increase

regional economic activity by roughly $870 million per year and generate more than $90

million per year in additional tax revenues for local communities.”

In summary, the decline in oil prices have affected the oil & gas industry which has trickled

down to associated businesses and employment. Growth in other areas offset this factor,

especially in health, institutional, and service & hospitality segments of the market, through

11

http://www.bizjournals.com/houston/morning_call/2016/01/university-of-texas-takes-first-major-step-in.html

http://www.bizjournals.com/houston/morning_call/2016/01/university-of-texas-takes-first-major-step-in.html




Houston’s diverse economy. Retail saw growth with more disposable income for consumers due

to lower gasoline and energy costs. In general, 2015 saw an “economic trough” in the second and

third quarters of 2015, with a moderate recovery in the fourth quarter. As a result, the economy

in Houston is expected to fluctuate somewhat throughout the year, but over the course of 2016,

marginal to moderate economic growth is expected, as the oil industry and greater Houston area

adjust to more stabilized oil prices.

With the recessions in China, Europe, Russia, and Brazil and worldwide instability, foreign

markets have been looking for safe havens to store their capital. Most of these markets were

unprepared for the decrease in oil and gas prices experienced since June 2014. In uncertain

economic times, capital is attracted to quality. Since bonds have marginal yields, gold may have

topped out, and stock markets are too volatile, foreign markets have created a high demand for

investment-grade real estate. According to IRR, in 2015 in the northeast region United States real

estate market, Chinese real estate buyers invested $8 trillion, Canadian $3.2 trillion, Middle

Eastern and European $1.6 trillion each, and Japanese and Israeli buyers $0.5 trillion each. From

Canada, most of it was pension fund investment, and mostly cash, even though the Canadian

dollar dropped to about 1 per 70 cents U.S. The inflow of foreign capital into the U.S. market has

increased the demand for the U.S. dollar, making it strong in comparison to foreign currency.

Foreign buyers are in competition with American pension funds, REITs, insurance companies,

and large companies that “are so flush with cash that the market is chasing deals.”

Houston is not an exception to this phenomenon. Houston offers a more affordable option with

long term yield on than Los Angeles, New York, or Chicago. Foreign capital accounts for 15%

to 20% of the real estate investment market in the greater Houston area. Low interest rates

further compress rates due to demand for quality properties. Most investment grade properties,

like Class A & B apartment blocks and quality retail properties, were purchased from 2011 to

2014 when prices were recovering from a major recession and capitalization/investment rates

were higher, to the point where not much is for sale now. As a result, investors may be willing to

compromise and buy property at lower capitalization/investment rates in order to acquire what is

available.

Vacant Land

Central Business District

The Central Business District is seeing a drop-off in activity in some specific property types. The

office market is not showing the same demand for space as it has in the recent past. The

confidence in the market has dwindled with the downturn in the energy market. There are

currently two office buildings nearing completion. 609 Main, a 48-story Hines project, is a Class

A high-rise featuring one million-plus square feet of leasable office space and 1111 Travis, a

28-story high rise with 475,000 square feet. There are still four other office projects planned for

downtown Houston that are indefinitely on hold. The troubles and woes in the energy sector are

showing a direct impact on the construction of those planned offices. One of the projects affected

was to add an office tower to the downtown campus of oil giant, Chevron.




The focus downtown is now geared towards residential. Due to a downtown living initiative, a

number of abatements were offered to developers to develop apartments and condominiums.

Since the initiative began, there have been at least 18 projects proposed. Currently eight of the

projects are under construction and half of those are nearing completion. A number of those

projects are located near the Toyota Center and St Joseph’s hospital. This area has the most land

available for redevelopment. On average, investors and developers are paying $120 per square

foot for land to develop high density apartment complexes.

The other prominent property type being developed in the central business district is hotels. Four

of six proposed hotels are under construction and near completion. The hotels are conveniently

located near the convention center and the Shopping District. The hotels are being built to help

lure more conventions, major sporting events, and other events to the downtown Houston area.

Houston hosts the Offshore Technology Conference every year and will host Super Bowl LI (51)

in 2017. The Marriott Marquis, near completion, will round out the convention center properties

that overlook the Discovery Green park. Marquis will contribute 1000 hotel rooms to downtown.

Construction has started on Hotel Alessandra. The project formerly known as the Houston

Pavilions, now Greenstreet, will be home to Alessandra. Alessandra will add 225 luxury hotel

rooms to the downtown hotel inventory.

The sales activity in the CBD is less than in previous years. There were no recorded vacant land

sales in the Central Business District for 2015. The sales in the CBD are seldom disclosed.Still

striving to be a global city, the Central Business District is still an attractive location for outside

investors.

The 16.5 acre Downtown Post office site recently sold for $60 per square foot. Speculation on

what will replace the facility is a mixed-use development that leverages the Bayou, the Theatre

District, and the significant scale of the property.




The map below shows the activity in the central business district.

Downtown Houston Development map

Uptown District / Galleria

The Uptown District / Galleria area is the largest business district outside of the CBD. Similarly

to the CBD, there is a lack of quality land for development, much of the new development is

taking place on land that once held buildings that either have reached the end of their economic

life or are no longer the highest and best use of the property, and the area has high levels of

occupancy in most of the office space located there. Occupancy remains high even with the

addition of the Compass BBVA tower, the first office tower constructed in the Galleria area in

almost 30 years, and a Skanska-built tower, both located on Post Oak Boulevard.

Many projects are now under construction, nearing completion, or are up and running. A thirty-

story tower is well into construction at Four Oaks Place, located on a site that formerly held a

health club at 1550 Post Oak. The site is now meeting its highest best use, adding class A office

space to the second most attractive business district in Harris County.

1885 St James Place is being improved with a 15-story, 165,000 square foot office tower. The

tower replaces the iconic Courtyard on Saint James, a popular venue for weddings and business

meetings.




The headquarters for Amegy Bank is under construction at 1717 West Loop South. The former

site of Micro Center will be home to a 350,000 square foot office tower. The construction is

expected to be completed in the fourth quarter of 2016.

The Galleria Uptown area is not exempt from the issues the Central Business District is having

with the office market. Phase two of BBVA Compass Plaza is currently on hold. Located at 2100

Post Oak, it is proposed to include a 29-story, 343,000 square foot high-end office and retail

space. The current owners of the property, Masaveu Post Oak Houston Delaware, don’t feel the

current economic climate is right for new construction.12

Unlike the office market, the other property types are thriving in the Galleria Uptown District.

The retail market is constantly growing. The Galleria’s major redevelopment of the third section

is nearing completion. A number of new high-end shops have been added at River Oaks District

located at Westcreek and Westheimer. This mixed-use project is home to retail, office, and

apartments, as well as iPic Theaters, Houston’s first luxury movie experience.

The apartment market is constantly expanding with new construction taking place along the 610

Loop and on Westcreek Lane. 2031 Westcreek is home to SkyHouse River Oaks, the second of

three SkyHouse apartments in Houston. Two high-rise condominiums are planned on either side

of SkyHouse River Oaks.

Two hotels across the street from the Galleria are also nearing completion. Both of the hotels are

Hyatt-brand hotels. The corner of Sage and W. Alabama will be home to the Hyatt Regency with

325 rooms. Directly behind this site, Hyatt Place is almost complete. Hyatt Place will be very

similar in size but will not have the same amenities and will offer less expensive rooms than the

Regency.

Developer and entrepreneur Tilman Fertitta is also capitalizing on the need for hotels in the

Galleria Uptown area. Located at the corner of San Felipe and the West Loop South,

construction has started on The Post Oak.13

The project will be a hotel, conference center, and

parking garage sitting on nine acres already home to Post Oak Motor Cars Rolls-Royce and

Bentley dealership and to Landry’s corporate headquarters.

Inner Loop

The inner loop of Houston is constantly changing with redevelopment concentrated in the

Houston Heights, the Washington Avenue area, Upper Kirby District, Montrose, Weslayan and

Rice Village.

The Houston Heights is witnessing a constant change in the housing market. New dwellings are

under construction throughout the Houston Heights and Shady Acres neighborhoods. This has

12

http://www.bizjournals.com/houston/blog/breaking-ground/2015/11/after-galleria-area-tower-sells-phase-two-on-

hold.html 13

http://www.houstonchronicle.com/business/real-estate/article/Fertitta-s-new-tower-to-offer-a-wealth-of-luxury-

6218282.php

http://www.bizjournals.com/houston/blog/breaking-ground/2015/11/after-galleria-area-tower-sells-phase-two-on-hold.html

http://www.bizjournals.com/houston/blog/breaking-ground/2015/11/after-galleria-area-tower-sells-phase-two-on-hold.html

http://www.houstonchronicle.com/business/real-estate/article/Fertitta-s-new-tower-to-offer-a-wealth-of-luxury-6218282.php

http://www.houstonchronicle.com/business/real-estate/article/Fertitta-s-new-tower-to-offer-a-wealth-of-luxury-6218282.php




been taking place for quite some time and there is no end in sight for this activity. There is still a

strong mix of commercial which supports the area very well.

The northwestern quadrant inside Loop 610 may be “the next hot spot” in the inner loop

according to Andrew Hadley with Chodrow Realty Advisors.14

Houston-based Hines is

developing 46 acres of former industrial land into Somerset Green, a European-style luxury

neighborhood built around canals and a lake. Hines paid $40 million for the land and an extra $3

million to provide access from Old Katy Road. The property is located behind Star Motors.

Many other apartment complexes are under construction in the area both inside the loop and

along North Post Oak Road.

The Washington Avenue area is still budding with restaurants and nightlife. The area

surrounding is still seeing redevelopment with townhomes and a retail mix to support the area.

The newest development for this area will be Studemont Junction, located at the site of the

former Grocers Supply facility, which will be demolished and replaced with high-end apartments

and retail. The project has already signed its first major tenant, Memorial Hermann. The hospital

will set up a convenience care center to address the need for medical in this area.

The Montrose area has seen a number of high-priced land sales over the past few years and that

is not changing. Land is selling on average for $85 per square foot. Most sales are for

redevelopment of properties with new housing or apartments. The area will also undergo a

facelift with a recently approved beautification project. The project will add signage to the major

thoroughfares as well as landscaping on medians. The bridges that stretch across highway 59 will

get new lighting. This effort is to take place prior to the Super Bowl in 2017.

The Upper Kirby/ Greenway area is seeing a great deal of change. A number of new office

buildings have been added and more may be on the way. According to the Chronicle, “Exxon is

selling its former research complex in the Greenway Plaza area, a rare 17-acre site in the urban

core. The property, which includes a 384,000 square foot office building, a 98,000 square foot

training center, 13 auxiliary buildings, and a garage, could fetch $150 million. … The site at

3120 Buffalo Speedway between Richmond and West Alabama could be redeveloped to

accommodate up to 3 million square feet of office, residential, retail or hotel space.”15

Also per the Chronicle, “Three 1970s office and retail buildings around the northwest

intersection of Kirby Drive and the Southwest Freeway are being demolished to make way for

perhaps another major redevelopment project in Upper Kirby. The demolition of the buildings --

3910 Kirby, 3930 Kirby and 2600 Southwest Freeway -- is expected to be complete around April

2016 … The structure at 3910 Kirby once housed the popular Miyako Japanese restaurant and

Madras Pavilion, an Indian restaurant.”16

14

http://www.houstonchronicle.com/business/real-estate/article/Northwestern-quadrant-of-Loop-610-the-next-hot-

6582711.php 15

http://www.chron.com/business/real-estate/article/Exxon-Mobil-selling-urban-office-site-6788296.php 16

http://www.chron.com/business/real-estate/article/Kirby-buildings-meet-wrecking-mall-6725660.php

http://www.houstonchronicle.com/business/real-estate/article/Northwestern-quadrant-of-Loop-610-the-next-hot-6582711.php

http://www.houstonchronicle.com/business/real-estate/article/Northwestern-quadrant-of-Loop-610-the-next-hot-6582711.php

http://www.chron.com/business/real-estate/article/Exxon-Mobil-selling-urban-office-site-6788296.php

http://www.chron.com/business/real-estate/article/Kirby-buildings-meet-wrecking-mall-6725660.php




Midtown

Midtown has been a successful model of city planning. The area has a healthy mixture of

apartments and retail, with many apartments having retail on the ground floor. An apartment

complex will be built with a Whole Foods Store as the baseplate for the apartment complex. The

project is located on the 3100 block of Smith Street. This is the site of the now demolished

Social Security Administration building. The apartments will have more than 200 high-end

luxury units.

Adding to the mix in Midtown is something rare to this neighborhood. An office tower is

proposed for 3003 Louisiana Street. The plans are for a 16-story office tower. This is one of the

first office towers to be proposed for Midtown in several years.

Near Downtown

Just north of the CBD, development has started on a forty-five acre tract known as Hardy Yard.

This property was a rail yard at one time. The property’s development will start with a 350-unit

apartment complex. The complex will have 179 affordable units and 171 market-rate one and

two-bedroom apartments. The plans for the site will present “a diverse mix of Class A office

space, high-end retail, and upper scale residential developments. The addition of an open green

landscape with a pedestrian district meandering through the mixed-use development provides the

opportunity for Hardy Yard to be a unique urban destination for residents, business entities, and

visitors alike.”17

The area east of downtown (EaDo) is going to see additional redevelopment with a project

known as East Village, a 60,000 sf mixed-use project that, according to its website, “is the first

of its kind in EaDo and includes concepts from some of Houston and Dallas’ most talented and

respected operators.”18

It is “a 2-block mixed-use complex planned along St. Emanuel and

Hutchins St. between Polk and Lamar in East Downtown — a few blocks south of the Dynamo’s

BBVA Compass Stadium.”19

The property will be home to a comedy club, office space, retail

space, and a vodka distillery.

Also slated for construction in EaDo is Ivy Lofts. According to the Chronicle, “the 24-story, 500-

unit project will be on a 1.4-acre block on the southwest corner of Leeland and Live Oak” Also

per the Chronicle, “the units in the proposed project would run between 300 and 750-square feet

and start in the $100,000's. The first floor would be commercial retail.” The Chronicle article

also says “The smaller units are part of trend in cities like Tokyo, New York and San

Francisco.”20

17

http://s.lnimg.com/attachments/311CD638-4CE6-4251-8CB5-F7F58F37D288.pdf 18

http://www.ancorian.com/project/east-village/ 19

http://swamplot.com/houstons-own-east-village-planned-next-to-8th-wonder-brewery-in-east-downtown/2016-01-

08/ 20

http://www.chron.com/about/article/East-Downtown-condo-project-would-offer-6601362.php

http://s.lnimg.com/attachments/311CD638-4CE6-4251-8CB5-F7F58F37D288.pdf

http://www.ancorian.com/project/east-village/

http://swamplot.com/houstons-own-east-village-planned-next-to-8th-wonder-brewery-in-east-downtown/2016-01-08/

http://swamplot.com/houstons-own-east-village-planned-next-to-8th-wonder-brewery-in-east-downtown/2016-01-08/

http://www.chron.com/about/article/East-Downtown-condo-project-would-offer-6601362.php




The Outer Loop

Within the Sam Houston Tollway a lot of activity is taking place. The activity, however, is

shifting from the west to the south and to the east. The west is still viable and active in

development but business is picking up in other areas based on industries besides oil & gas

exploration.

The west side is still seeing some office buildings under construction but they are also seeing

apartments under construction as well.

CityCentre remains a focal point in the Memorial City area. The goal is to have a truly livable

area with all of the amenities possible. Trammel Crow is developing the Alexan CityCentre at

905 Town & Country Boulevard. The complex will be 340 units and is scheduled to open in

2017.

Across from this site, the office park known as Town & Country Office Park was recently

purchased with the intent to clear the site and redevelop the parcel as an expansion of

CityCentre. The expansion will include more office space with the retail mix like the other

buildings at CityCentre. The 6.39 acre tract sold for $151.89 per square foot. This is one of the

highest sales outside of the Central Business District and Galleria/Uptown Area.

Also in the area, MetroNational is building more office towers. The latest office building is

under construction on the northwest corner of Interstate 10 and Gessner Road. The 240,000

office will sit on 18 acres of land that was previously a large retail strip center.

On the south side of Houston, The University of Texas is looking to expand in a major way. The

university “is acquiring 332 acres about one mile south of Loop 610 for a [new] campus with

dozens of new buildings.”21

UT will pay $450 million over the next 30 years for the property.

“The site is bisected by Buffalo Speedway and is south of West Bellfort Avenue, within walking

distance of the Astrodome and only 3.5 miles from the Texas Medical Center.”21

21

http://realtynewsreport.com/2015/11/10/university-of-texas-just-lit-the-fuse-for-growth-explosion-one-mile-south-

of-loop-610-in-south-houston/

http://realtynewsreport.com/2015/11/10/university-of-texas-just-lit-the-fuse-for-growth-explosion-one-mile-south-of-loop-610-in-south-houston/

http://realtynewsreport.com/2015/11/10/university-of-texas-just-lit-the-fuse-for-growth-explosion-one-mile-south-of-loop-610-in-south-houston/




Rendering of potential University of Texas campus

Baytown

The east side is where business is picking up. The decline of oil & gas has created a shift toward

the petrochemical and plastics plants on the east. Chevron Phillips Chemical is currently

expanding its plant in Baytown. The larger plants will create more jobs and need for housing,

retail and other services to support the area.

An example of development is Kilgore Crossings. This is a two hundred acre master-planned

project. The project will include a multi-family complex with 240 units, and 124 acres will be

reserved for around 500 single-family homes. Commercial development will include retail,

hotels, and offices. The property will be located at State Highway 146 and Kilgore Parkway.22

22

http://www.houstonchronicle.com/business/real-estate/article/Mixed-use-development-finds-Baytown-a-market-

6627894.php

http://www.houstonchronicle.com/business/real-estate/article/Mixed-use-development-finds-Baytown-a-market-6627894.php

http://www.houstonchronicle.com/business/real-estate/article/Mixed-use-development-finds-Baytown-a-market-6627894.php




Kilgore Crossing

Photo: Hunington Properties

The Grand Parkway

From http://communityimpact.com/houston/news/2016/01/20/regional-transportation-updates-cyf-2/:

Motorists in north Houston who were expecting to use the city’s third outer loop

by early 2016 on their daily commutes will have to wait a few more months.

Contractor Zachry-Odebrecht Parkway Builders has announced segments F-1, F-2

and G of the Grand Parkway will open sometime in the first quarter of 2016. …

Originally planned for completion by the end of 2015, segments F-1 and F-2 of

the Grand Parkway will consist of tolled roadway from Hwy. 290 to I-45, while

Segment G will connect I-45 and Hwy. 59 when completed. Construction of the

$1 billion tollway has been funded and overseen by the Texas Department of

Transportation.

The Grand Parkway segments will provide additional roadway capacity to help

alleviate the increased traffic demand, said officials with Zachry-Odebrecht.

However, construction of the project has been hampered due to recent weather

conditions. …

http://communityimpact.com/houston/news/2016/01/20/regional-transportation-updates-cyf-2/




Although the project has been delayed from its original expected completion date,

Zachry-Odebrecht achieved a significant milestone in December by setting all of

the beams and bridge decks for the project. A total of 121 bridge decks and 3,802

concrete beams were set for the toll road, the company said in a news release.

A project conceived more than 50 years ago, the more than 200-mile tollway will

become Houston’s third outer loop when completed. Segment E of the Grand

Parkway, from I-10 to Hwy. 290, was completed in December 2013.

Source: Grand Parkway Association/Community Impact Newspaper

Still very few recent land sales have been reported along the Grand Parkway. As stated before

the investors and developers are waiting for a fully functional Parkway before development.

Highway 290 Expansion

The U.S. 290 freeway expansion has been a thorn in the side for many people, TxDOT and

commuters alike. It is now estimated completion will be late 2017. The first company that had

the contract to build the 4 mile ‘Project H’ segment from Pinemont to Little York, Grupo

Tradeco of Mexico, walked away from the project and that portion of the expansion project is

now spearheaded by W.W. Webber LLC, from The Woodlands. Land on both sides of the

freeway is still being taken for the road expansion.




Cypress Fairbanks ISD/Waller/Katy

Katy is making a big splash in the news with the construction of Typhoon Texas. “This $45

million waterpark is on scheduled to open in time for Houston's blistering summer heat. Typhoon

Texas Waterpark, located at 555 Katy Fort Bend Road adjacent to the Katy Mills Mall, will

officially open May 28 through Labor Day.”23

Katy will also see some new class A apartments. Oden Hughes acquired 18.7 acres of vacant

land near the intersection of Kingsland Blvd and Katy Gap Road, near the Katy Mills Mall and

the Grand Parkway.24

The garden-style complex will have 389 units.

In Waller, Daikin Industries Ltd. will build a new $417 million campus. The Japan-based

manufacturer of heating, cooling and refrigerant products acquired Houston-based Goodman

Global Group Inc., a manufacturer of HVAC products for residential and light commercial use,

in 2012. The 3 million- to 4 million-square-foot campus will be on a 90-acre parcel near U.S.

Highway 290, three miles west of Texas State Highway 99. When completed, the 4-million plus

square foot tilt-up concrete will be the largest in the world.25

23

http://www.bizjournals.com/houston/morning_call/2016/02/massive-katy-water-park-announces-opening-

date.html 24

http://www.bizjournals.com/houston/morning_call/2015/11/new-class-a-apartments-headed-to-katy.html 25

http://www.bizjournals.com/houston/news/2015/01/07/major-hvac-manufacturer-to-build-417m-houston.html

http://www.bizjournals.com/houston/morning_call/2016/02/massive-katy-water-park-announces-opening-date.html

http://www.bizjournals.com/houston/morning_call/2016/02/massive-katy-water-park-announces-opening-date.html

http://www.bizjournals.com/houston/morning_call/2015/11/new-class-a-apartments-headed-to-katy.html

http://www.bizjournals.com/houston/news/2015/01/07/major-hvac-manufacturer-to-build-417m-houston.html




In Cy- Fair, FedEx Corp will open a massive new ground facility in Cypress next summer. The

800,000-square-foot project will house the Memphis-based company's largest FedEx Ground

facility in Texas and will employ 400 people, according to a statement from the company. The

Cypress campus will be located off the Grand Parkway expansion. The facility will contribute to

northwest Houston's growing industrial presence, which is not softening quite like other markets

amid the oil slump.26

Tomball ISD

In the recent past, Tomball has seen growth along State Highway 249 with projects like Vintage

Park and the Noble Energy office tower. However, plans for more development have shifted into

a holding pattern. Baker Hughes announced it was laying off about 7,000 employees globally

and because Baker Hughes is the major player in Tomball, combined with the future Halliburton

merger, the area is showing caution in future developments.

For example, developers for the Peck Station mixed-use community, planned for the intersection

of Hufsmith-Kohrville Road and FM 2920 in Tomball, may be looking to make changes to some

sections of the 34 acre tract amid concerns about the ongoing Baker Hughes/Halliburton merger.

The original plan was to turn the site into a mixed-use development consisting of a name-brand

hotel, retail and restaurants, green space and walking trails, office space, and a multi-family

complex.

26

http://www.bizjournals.com/houston/morning_call/2016/01/fedex-plans-massive-facility-in-houston.html

http://www.bizjournals.com/houston/morning_call/2016/01/fedex-plans-massive-facility-in-houston.html




LA Porte

From the Houston Chronicle:

A proposed new Town Center in La Porte

would come with an official licensing

agreement from country music legend

Mickey Gilley to open a new Gilley's-

branded restaurant, bar, and music

venue.27

It’s not quite the expansive honky-tonk

that Gilley ran with Sherwood Cryer in

the ‘70s and ‘80s in Pasadena but it would

at least incorporate the singer-songwriter’s

name and include some of the [trappings]

that fans of the Gilley’s brand know and

love.

The site of this new venture is located off

Highway 146 (the future frontage as part of the

Grand Parkway) on a 20-acre tract just north of

Wharton Weems Boulevard. The location will provide high visibility and easy access for

enhanced traffic circulation. The proposed pedestrian friendly town center is also located

adjacent to the Bay Forest Golf Club and would be strategically convenient to downtown La

Porte, Sylvan Beach, and the Houston Yacht Club. The project is estimated to cost $55 million to

develop.28

The development includes the following concepts.

50,000 square foot entertainment complex

20,000 square foot conference, theatre, and museum

8 restaurants

50,000 square foot retail space

5,000 square foot office space

14 brownstone town homes

7 live I work spaces

114 room hotel

2 -acre park and water features

27

http://www.chron.com/neighborhood/bayarea/business/article/New-Gilley-s-dance-hall-included-in-proposed-La-

6668057.php 28

http://bayareaobserver.com/developer-seeks-approval-for-la-porte-town-center-entertainment-complex-p2159-

1.htm

http://www.chron.com/neighborhood/bayarea/business/article/New-Gilley-s-dance-hall-included-in-proposed-La-6668057.php

http://www.chron.com/neighborhood/bayarea/business/article/New-Gilley-s-dance-hall-included-in-proposed-La-6668057.php

http://bayareaobserver.com/developer-seeks-approval-for-la-porte-town-center-entertainment-complex-p2159-1.htm

http://bayareaobserver.com/developer-seeks-approval-for-la-porte-town-center-entertainment-complex-p2159-1.htm




Sales

The table below shows summarized land sales data with per square foot price ranges and sales

volume per submarket and school district. This table gives a clearer picture of hot spots for

activity. The sales dates range from January 1, 2015 to December 31,2015.

Tot. Sales in District Market Non Market Foreclosure Auction

Aldine 155 30 117 8 0 $0.26 - $6.50

Klein 51 16 32 1 2 $0.29 - $13.37

Spring 25 11 14 0 0 $0.52 - $10.19

Tomball 20 6 14 0 0 $0.92 - $4.57

Waller 5 2 3 0 0 $0.49 - $2.34

Total Sales 256 65 180 9 2


Alief 5 2 3 0 0 $0.49 - $2.34

Katy 32 10 21 1 0 $0.47 - $23.70

Spring Branch 13 3 10 0 0 $14.10 - $24.28

Total Sales 50 15 34 1 0


Crosby 14 6 7 1 0 $0.06 - $3.96

Huffman 7 0 7 0 0 $0.00 - $0.00

Humble 39 15 20 0 4 $0.23 - $12.50

Sheldon 13 3 9 0 1 $0.33 - $2.06



Channelview 7 4 3 0 0 $1.18 - $4.87

Clear Creek 22 5 17 0 0 $0.82 - $5.31

Deer Park 11 5 6 0 0 $3.25 - $13.98

Galena Park 4 2 2 0 0 $1.26 - $2.56

Goose Creek 24 6 14 1 3 $0.15 - $2.56

La Porte 25 11 14 0 0 $1.14 - $20.72

Pasadena 34 11 21 0 2 $1.14 - $11.55



Houston 301 72 188 4 37 $0.12 - $87.15

Total Sales 301 72 188 4 37


Cy-Fair 96 30 63 1 2 $0.91 - $22.30


Southeast

$ per SF Range

Houston

$ per SF Range

Cy-Fair

$ per SF Range

Northwest

$ per SF Range

Southwest

$ per SF Range

Northeast

$ per SF Range




The following chart shows the sales volume per submarket for 2014 versus 2015. Based on this

chart the 2015 sales activity was not as great as 2014. This shows the market cooling down

drastically in all submarkets.

2014 Sales Volume VS 2015 Sales Volume

This chart below shows sales volume for the whole county by quarter for 2015. Like most years

the fourth quarter shows the least amount of activity. Based on this chart the activity throughout

the county seems to drop off throughout the year.

2015 Sales by Quarter

0

50

100

150

200

250

300

350

400

450

500

Northwest Southwest Northeast Southeast Houston Cy-Fair

2014 Sales

2015 Sales

0

50

100

150

200

250

300

350

400

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter




This chart shows the land sales per quarter for each submarket for 2015:

2015 Land Sales by Quarter and Submarket

Summary

Although the energy sector is just a spoke in the wheel of industry in Harris County, the

downturn in that sector does impact the market activity in Harris County. Harris County is

entering the second year of the worst oil downturn in decades. Local economists say the

economy is bad but not awful. The focus is less and less about oil and gas and more about

development of petrochemical and plastic products, refineries and health care. The shift can be

seen from the west side of the county to the east side of the county. The west was geared more to

the white collar side as opposed to the east being the blue collar side. The inner city and central

business district still remain as attractive locations. Although the activity has slowed in the CBD,

the surrounding areas are seeing growth. Economists predict that 2016 will likely be a harsh year

for Harris County. Most analysts don’t expect meaningful improvement until 2017.

0

20

40

60

80

100

120

Houston Cy-Fair Northwest Southwest Southeast Northeast

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter




Office

Until 2015, Houston remained one of the steadiest and most productive growing cities in the

country. Houston had, for several years, continued its success as the national leader in office

development; primarily due to the strong oil and gas sector. However the downturn in oil prices

over the last year have affected the capital operations of large oil & gas companies headquartered

in the greater Houston area. Some restructured their development and operations plans and/or put

capital improvement projects on hold. Houston was able to adjust to the abrupt changes in the

supply and demand for oil refining and exploration. Houston survived through this period due to

its economic diversity in sectors including distribution, technology, and healthcare. However, the

oil & gas and energy sectors remain the most significant economic drivers. Large new office

buildings were delivered in 2014, but the number of new buildings and office space started in

2015 was less than 2014. These major sectors have led to the addition of office buildings in the

Energy Corridor/West Houston/Katy Freeway areas, adding over 12.1 million square feet over

that period, making up effectively 43.9% of all new competitive office properties added to the

overall Houston market over the ten-year period ending with the 3rd

quarter 2015. Additionally,

overall average asking rent for year-end 2015 was $27.24 psf which marked an approximate

increase of 2.2% from the year-end 2014. Over the last eighteen quarters, asking rents have

increased a total of 16.1%. Since the beginning of 2006, rents have increased on average 4.3%

annually.

Twenty-fifteen has been largely a year of adjustment, with a decrease in absorption and an

increase in vacancy and lease concessions. Leasing activity absorbed roughly 2,560,000 sf

during 2014. However, over the first three quarters of 2015, there was a net addition of 2.8

million square feet to the vacancy roster. New construction delivered in 2015 may have been in

competition for tenants otherwise negotiating for existing available space.

A total of 18 buildings were delivered to the market in 4th quarter 2015 totaling 3,606,137 sf,

with 8,613,186 sf still under construction. The additional square footage more than offsets the

absorption and is sending the vacancy rate up. This will be a continuing trend as vacancy and

absorption rates try to maintain a balance with supply.

Houston’s office market recorded growth in 2015 with the completion and delivery of new

construction that was started in 2014. Furthermore, Houston has consistently shown resilience to

the national recession in the past several years and has remained one of the nation’s best areas

for employment and economic growth.

Inventory Analysis

According to CoStar, the total office inventory in Houston at the end of 4th quarter 2015

consisted of 6,547 office buildings totaling 297,844,163 sf, up from 280,416,894 sf at the end of

2014. Of that space, 44.97% is Class A consisting of 449 buildings; 41.74% Class B consisting

of 2,874 buildings; and 13.29% Class C consisting of 3,587 buildings.




Office Inventory by Class

Existing Inventory in Select Submarkets

Data provided by CoStar

Construction Activity and Deliveries

Twenty-fifteen saw several newly constructed office properties, particularly Class A sector

development. Most of the office building space under construction is in downtown Houston,

Northeast Near market, Westchase, West Loop, Katy Freeway, and The Woodlands.

Per CoStar, 2015 had 85 new office buildings completed, totaling 12,218,875 sf. In comparison,

2014 saw delivery of 103 new buildings totaling 7,576,793 sf of new office space. There was

8,613,186 sf of office space under construction at the end of the 4th

Quarter 2015, about half that

of the end of 2014.

A breakdown of construction for 2015 includes:

30 buildings totaling 4,365,321 sf for the 1st Quarter;

24 buildings totaling 3,212,240 sf for the 2nd

Quarter;

44.97%

41.74%

13.29%

2015 Inventory

Class A

Class B

Class C

Downtown Greenway Plaza Katy Fwy West Loop Westchase

Class A 42 18 90 45 31

Class B 179 51 208 59 73

Class C 431 204 208 26 29

42 18

90 45 31

179

51

208

59 73

431

204 208

26 29

050

100150200250300350400450

# B

ldgs

Existing Inventory




13 buildings totaling 1,035,177 sf for the 3rd

Quarter; and

18 buildings totaling 3,606,137 sf for the 4th

Quarter.

Some notable deliveries/completions for 2015 include:

ExxonMobil Campus Phase II, a 1.5 million sf facility delivered in the 1st Quarter of

2015 and now 100% occupied

CyrusOne West Campus Expansion Phase 1, a 640,000 sf building delivered in the 1st

Quarter of 2015 and now 100% occupied

The largest projects under construction at the end of 2015 include:

FMC Technologies campus, a 1.7 million sf building 100% pre-leased

Phillips 66 Global Headquarters, a 1.1 million sf facility 100% pre-leased

REIS reported that nearly 9.0 million square feet in a combination of speculative and single-

tenant projects was under construction by the end of 2015.

Best and Worst Houston Market Areas Ranked by Vacancy Rate and Rental Rate

Vacancy Rate Quoted Rates per square foot

Rank Rate Area Rank Rate Area

1. 4.8% South Hwy 35 1. $38.71 CBD

2. 6.8% Bellaire 2. $32.59 Greenway Plaza

3. 8.3% Medical Ctr; Northeast Near 3. $30.91 Westchase

… … … … … …

22. 16.3% I-10 East 22. $16.38 South Hwy 35

23. 17.3% West Belt 23. $16.27 Southwest

24. 28.8% North Belt 24. $14.57 I-10 East

Source: CoStar Year End 2015 Houston Office Market Report

Note: The data provided by vendors can vary due to differences in classifying submarkets areas and their

locations, the individual breakdowns of said market areas, and the accuracy of each vendor’s gathered

market data.




Construction Activity

** CoStar stated two Class A offices are under construction: 609 Main at Texas (1,057,668 sf) and Hilcorp Energy

Tower (406,600 sf) in the CBD submarket.

Notable Year-to-Date deliveries based on square footage

Sub-

market Leasing Co. Property Sty NRA

%

Leased

Delivery

Date

Woodlands ExxonMobil

Foundation

ExxonMobil Campus –

Phase II 8 1,500,000 100% 1Q 2015

West Belt CyrusOne Inc. CyrusOne West Campus

Expansion Phase I 3 640,000 100% 1Q 2015

Katy Fwy CBRE Energy Center Four 22 599,978 100% 4Q 2015

Katy Fwy CBRE Energy Center Three 20 546,604 100% 2Q 2015

Woodlands ExxonMobil

Foundation

ExxonMobil Campus –

Phase III 8 500,000 100% 2Q 2015

FM 1960 CBRE Noble Energy II 20 456,000 100% 2Q 2015

Katy Fwy MetroNational

Corp. Air Liquide Center - South 20 452,370 59% 4Q 2015

Katy Fwy Mac Haik

Development Energy Tower IV 17 429,157 36% 1Q 2015

Greenway

Plaza

PM Realty

Group

3737 Buffalo Speedway

Ave 19 400,000 29% 4Q 2015

Data provided by CoStar

Downtown 1,578,258 SF

18%

Katy Fwy 914,037 SF

11%

NE Near 1,700,000 SF

20%

West Loop 905,000 SF

10%

Westchase 1,545,000 SF

18%

All Other 1,970,891 SF

23%




Notable Year-to-Date office buildings under construction based on square footage

Sub-

market Leasing Co. Property Sty NRA

% Pre-

Leased

Delivery

Date

Northeast

Near

Trammell

Crow Houston

FMC Technologies Campus 5 1,700,000 100% 1Q 2016

Westchase Phillips 66 2101 Citywest Blvd –

Phillips 66

12 1,100,000 100% 2Q 2016

Downtown Colville Office

Properties

609 Main at Texas 48 1,056,658 6% 2Q 2016

West Loop Transwestern BHP Billiton Petroleum 30 600,000 100% 4Q 2016

Katy Fwy CBRE Energy Center Five 18 524,328 0% 2Q 2016 Data provided by CoStar

Net Absorption and Leasing Activity

Per CoStar, the net absorption of office properties in the overall Houston area for 2015 was

positive at 2,653,459 sf, down from 7,783,390 sf for 2014. CoStar reported that Class A saw a

positive net absorption in 2015 of 3,930,825 sf; the Class B market was (negative) -1,438,138 sf;

the Class C market was 160,762 sf.

Furthermore, the Central Business District absorption for 2015 was 28,264 sf, compared to

571,341 sf for 2014. The suburban market absorption was at 983,336 sf for 2015 down from

7,212,049 sf for 2014. Notable tenant arrivals for 2015 included:

ConocoPhillips moving into 546,604 sf at Energy Center Three

Air Liquid USA, Inc. moving into 234,510 sf at 9811 Katy Freeway

Notable tenant departures for 2015 included:

ConocoPhillips moving out of 647,408 sf at ThreeWestLake Park

Noble Energy, Inc. moving out of 456,000 sf at Energy Center II

Phillips 66 moving out of 421,470 sf at Pinnacle Westchase

ExxonMobil moving out of 189,853 sf at 396 W. Greens Road

According to REIS, the 2015 year-end net absorption total was 505,300 sf, a decrease from

2014’s net absorption total of 3,481,000 sf. Total Class A inventory was 101,516,000 sf with a

net absorption of 3,983,000 sf, 13.4% vacancy rate, average asking rent of $32.88 psf, and Gross

Revenue per square foot of $28.47. Total Class B and C inventory was 74,854,000 sf with a net

negative absorption of -1,964,000 sf.




Notable Year-to-Date office building leases based on square footage

Submarket Leasing Co. Property Tenant Qtr NRA

Westchase N/A Western

Geophysical

WesternGeco 3rd 554,385

Galleria/

Uptown

Cousins Properties

Inc.

Post Oak Central

One

Apache Corporation 4th 355,506

Greenway

Plaza

Cousins Properties

Inc.

Four Greenway

Plaza

Transaction, Inc. 2nd 255,413

Greenway

Plaza

Cousins Properties

Inc.

Twelve Greeway

Plaza

CPL Retail Energy

LP

1st 191,893

CBD Cushman &

Wakefield Inc.

Pennzoil Place –

South Tower

Bracewell & Giuliani

LLP

4th 189,061

Post Oak Park CBRE 2425 West Loop

South

Stage Stores, Inc. 2nd 168,901

Katy Fwy W Savills Studley West Memorial

Place Phase II

IHI E&C 2nd 158,050

Galleria/

Uptown

Cousins Properties

Inc.

Post Oak Central

Three

Apache Corporation 4th 150,020

Midtown Pollan Housman

R.E. Services

HCC Building St. Luke’s Episcopal

Health System

4th 139,424

Bellaire Accesso Partners,

LLC

6330 West Loop

South

Texas Children’s

Health Plan

3rd 138,599

Greenspoint/ N

Belt West

Colvill Office

Properties

Five Greesnpoint

Place

Swift Energy

Company

1st 113,801

E Ft. Bend Co./

Sugar Land

N/A Oasis Medical

Office Building

North American

University

3rd 111,275

Katy Fwy West Mac Haik

Development

Energy Tower IV N/A 4th 106,555

Westchase PM Realty Group Westchase Park II N/A 1st 100,000

Katy Fwy East Cresa Houston 10100 Katy Fwy CEMEX USA 3rd 80,000 Data provided by CoStar

Vacancy

According to CoStar, the vacancy rate for all classes of office buildings at the end of 4th quarter

2014 was 13.6%, up from 11.3% at the end of 2014. CoStar reported vacancy rates for the end of

the year to be:

14.5% for Class A buildings

14.3% for Class B buildings

8.1% for Class C buildings (down from 9.5% for the end of 2014)

The overall ending vacancy rate for the CBD in 2015 was 13.6%, up from the end of 2014 at

8.9%. Additionally, vacant sublease space in Houston ended 2015 with 3,816,078 sf, a little more

than double that of the end of 2014. Per CoStar, Class A properties reported vacant sublease

space of 2,773,601 sf, Class B properties reported vacant sublease space of 1,024,125 sf, and

Class C properties reported vacant sublease space of 18,352 sf.




Per REIS, as of the 4th

Quarter of 2015, in terms of vacancy Houston ranked 5th

out of 9 metro

markets in the Southwest United States and 25th

out of 82 metro markets nationally. Adjustments

to the recent changes in the economy should slow the aggressive construction activity

experienced over the past few years. This will inevitably cause the market’s vacancy rate to float

higher as the market tries to rally leasing and absorption activity to keep up with supply. REIS

reported that vacancy ran in the vicinity of 15.6%, up from 14.4% for 2014 and 2013. The office

vacancy rate at the end of 2015 for Southwest U.S. was 17.9% and for the nation 16.3%.

Rental Rates

CoStar reported that overall market rental rates were $28.04 psf for 4th quarter 2015, an increase

of approximately 3.0% from the prior year. The average rental rate at the end of 2015 for Class A

spaces was $34.31 psf, Class B $21.56 psf, and Class C $16.92 psf.

According to REIS, the average asking rents saw a change from $27.20 to $27.83 per square

foot, a 2.3% change from 2014. Asking rents for greater Houston in 2013 were $25.90 psf.

REIS has projected asking rents of $28.95 psf for 2016, and $30.29 psf for 2017.

Quoted Rental Rates

Sales Activity

According to CoStar, the first nine months of 2015 saw 26 office sales transactions with a total

volume of $1.251 billion and an average of $237.39 psf. In 2014, there were 32 transactions

totaling $1.363 B at a $214.84 psf average. And in 2013, Houston posted 41 office sales

transactions with a total volume of $1,960 B and an average of $217.70 psf. Cap. rates on these

sales average 6.93%, compared to 7.30% for 2014.

Capitalization Rates

CoStar reported that cap rates were lower in 2015, at 6.93% on average for office buildings,

given the increase in property values, sales, and newly constructed office buildings. Per CoStar,

cap rates in 2014 averaged 7.30% and 8.29% in 2013.

$43.19

$35.73 $36.04 $35.59 $35.29

$28.09 $25.77

$22.95 $25.84

$19.90 $20.37

$23.58

$19.93

$29.93

$17.69

$38.71

$32.59 $30.50

$33.48 $30.91

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

Downtown GreenwayPlaza

Katy Fwy West Loop West Chase

Class A

Class B

Class C

Overall Office




According to REIS, the overall average cap rate for 2015 was 7.0% , up from 6.5% a year earlier.

The average capitalization rate was 9.2% for the 2nd quarter of 2015 and 4.7% for the 2nd

quarter.

Cap Rates based on Office Building Sales from October 2014 through September 2015

Bldg Size # of Bldgs NRA $/sf Cap Rate

< 50,000 sf 35 385,297 197.95 7.20%

50K-249K sf 30 4,223,979 $151.27 8.05%

250K-499K sf 5 1,929,421 $245.72 5.98%

> 500K sf 2 2,114,117 $312.42 5.60%

REIS projects that “Construction activity is expected to continue during each of the following

two years, during which a total of 9.6 million square feet is projected to be introduced to the

market. Office employment growth at the metro level over the same period is projected to

average 1.7% annually, enough to facilitate an absorption rate averaging 2.8 million square feet

per year. Because this amount does not exceed the forecasted new construction, the market

vacancy rate will rise by 140 basis points to finish 2017 at 17.0%. On an annualized basis

through 2016 and 2017, asking and effective rents are anticipated to advance by 4.5% and 4.7%,

respectively, to finish 2017 at $30.39 and $25.56 [per square foot triple net].”

Summary

Houston’s office market rent growth is projected to continue to increase. At the same time,

supply continues to grow and demand is beginning to decrease, so vacancy is expected to inch

higher. However, the Houston market has experienced a significant increase in market activity

and improving market conditions, strong trade sectors, and high population growth rate indicate

a continuing upward trend in property values.

Apartments

Houston’s demand for apartments continues to be high due to constant significant population

growth. According to the CBRE Houston Multifamly Q4 2015 Marketview, Houston

“multifamily demand ended 2015 higher than expected, with 13,013 units absorbed, the majority

being in newly built Class A product.” Net absorption is an indicator for multi-family demand. It

measures the change in occupied apartment units over a period of time. Since 2009, Houston

gained more than 390,000 jobs, more than double the number of jobs lost during the recession.

Houston’s population boom and job growth are fueling this record demand for apartments. Last

year, Houston saw the largest population increase, nationally, after nearly 150,000 new residents

flocked to the city, up from the nearly 140,000 moving to the city in 2014. In five years, over

600,000 more people moved to Houston than moved out.

The CBRE report noted “Rents expanded year-over-year another 5.0%.” Housing prices in

greater Houston are creeping higher as well as a greater demand for rental units due to new

industrial construction in the Port of Houston area in east Houston. The report continued:




“An imbalance of supply and demand is starting to creep into the analytics,

specifically Class A Properties. Apartments are functionally full at 95%

occupancy, although Houston’s overall occupancy isn’t quite there ending the

year at 90.6%, due to corporate units and temporary, short-term leases making the

difference.

Conversely, Class B and C properties continue to gain renters at a steady pace,

and can almost be classified as completely full at 93.6% and [that is] expected to

be seen in the year ahead as affordable housing becomes more than a topic of

conversation.”

ADS indicated that by the end of 2015, 20,187 units were under construction, and the occupancy

rate was 90.6%. In 2016, expected deliveries are expected to total 18,327 units, and for the two

year period of 2016 and 2017, 29,716 units. According to the REIS Apartment – 4th

Quarter 2015

Metro: Houston report, “Because [the absorption rate] does not exceed the forecasted new

construction, the market vacancy rate will rise by 120 basis points to finish 2017 at 7.0%. On an

annualized basis through 2016 and 2017, asking and effective rents are projected to increase by

3.7% and 3.5%, respectively.”

According to the REIS report, the national vacancy rate ended the year at 4.4% (up from 4.2%

the previous year), a potentially worrisome result for the near-term future of the apartment

sector. REIS forecasts that rent growth will stabilize as well at or around 3%.

With the expansion of the METRORail from downtown to the University of Houston, new

construction for student housing is expected to continue in the university’s immediate area. With

the population growth in the area, and associated growth in senior/retiree population, an increase

in multifamily tax credit subsidized housing and assisted living apartment complexes is expected

to continue as well.

Rental Rates

Over the past twelve months, apartments in the Greater Houston Area have registered a 5.0%

increase in rental rates, this following an 8.1% increase for the year before. Total absorption for

the twelve months ending in December 2015 was 13,262 units, according to ADS. With near-

record numbers of units to be added to the market for 2016, newer multifamily product will be

prone to offering concessions. With positive absorption and higher occupancies, Class B, C, and

D apartment communities are now offering fewer concessions. Per ADS, as of January 2016,

22% of apartment communities are now offering concessions (all classes) in comparison to 20%

in 2014. According to ADS, 22% of the multifamily properties, or roughly 1 in 5, in the Greater

Houston Area are giving concessions to rental rates. For Class A properties, 41% of the Class A

properties are offering concessions, averaging almost 1 month free rent. However, this includes

new construction that has not stabilized occupancy as of the offering, as virtually all of new

construction is Class A, except for newly constructed Class B subsidized and tax credit

apartments. Twenty percent of Class B properties are offering concessions, Class C 17%, and

Class D 12% (roughly 1 in 8). Concessions, when given, average ½ month for Class B to ⅔

month for Class D.




Of the 41 submarkets analyzed by ADS, 19 have had rental rate increases and 25 had decreases.

A major change in 2015 is a trend toward increasing rent growth in suburban markets and

decreasing rent growth in the urban core. Woodlake/Westheimer had the largest rental rate

increase of 10.3% in 2015, followed by Baytown at 9.2%. The Baytown submarket had the

largest rental rate change over the previous twelve months at 13.4%, followed by Alief at 9.4%.

Throughout the metro area, ADS reports that overall vacancies increased from 8.9% in January

2015 to 9.4% at the end of 2015. During that time period, rents increased from an average of

$1.054 psf per month ($12.65 psf per year) to $1.099 psf per month ($13.18 psf per year) for the

overall market. The vacancy rate at the end of 2013 was 9.5% and average rent was $0.97 psf

($11.64 psf per year).

Market Performance

Class

Number of

Properties

Average

Rate

(/ sf / mo)

Occupancy

(%)

ALL

PROPERTIES

% Effect of

Concessions on

Market Price *

ONLY

PROPERTIES

W/CONCESSIONS

% Effect of

Concessions on

Market Price *

A 536 $1.510 83.0% -3.8% -7.9%

B 922 $1.071 93.6% -1.1% -4.3%

C 797 $0.879 93.6% -1.1% -4.8%

D 352 $0.711 89.9% -1.0% -5.5%

OVERALL 2,607 $1.099 90.6% -2.0% -6.4% Note: One Month Free = -8.3%

Class A properties include multifamily projects that may have been delivered within the

last 2 years, and may not have stabilized or are out of their lease-up period

* On Street Price (s): Based on only those properties with concessions

Source: ADS – January 2016

Market Trends

Transwestern reported a total of 252 sales represented 69,003 units (compared to 68,675 units in

2014, with average 7.1% cap. rate) that took place in a trailing 12 months with average cap rate,

7.0%, totaling a volume of $5,149,400; represents an average price per unit of $89.26 psf for all

classes of property.




Apartments Recently Opened - January 2015 through February 2016 (ADS)

AKA Account # Address Units

Eco

Area

Move

In Date

Sorrel Grand Parkway 135-236-001-0001 1660 Katy Gap Rd 380 28 Jan 15

Vue Kingsland 135-504-001-0001 18021 Kingsland Blvd 423 28 Jan 15

Aura Memorial 134-425-001-0001 14900 Memorial Dr 288 6 Feb 15

Broadstone Sierra Pines 1615 Sawdust Rd 341 Feb 15

Haven at Eldridge 134-446-001-0001 13115 Whittington Dr 246 6 Feb 15

Sunrise By The Park 133-755-001-0001 155 Birdsall St 180 3 Feb 15

21 Eleven 134-341-002-0001 2119 Westheimer Rd 215 3 Mar 15

2626 Fountain View 099-076-000-0002 2626 Fountain View Dr 281 4 Mar 15

Vargo's on the Lake 134-459-001-0001 2411 Fondren Rd 276 5 Mar 15

Villas at Colt Run * 135-567-001-0001 7600 E Houston Rd 138 17 Mar 15

Watercolor 045-144-002-0230 1700 Rollingbrook Dr 240 16 Mar 15

Parkside Place 127-028-001-0007 6220 FM 2920 384 25 Apr 15

Susanne, The 134-535-001-0001 3833 Dunlavy St 396 3 Apr 15

Vista Grand Crossing 134-616-007-0003 302 Cobia Dr 351 28 Apr 15

West Lake Park 18100 West Rd 330 Apr 15

Aldeia West 134-652-001-0001 18325 Kingsland Blvd 305 28 May 15

Heights At Park Row, The 134-699-001-0001 13710 Park Row 342 27 May 15

La Mariposa 135-204-001-0001 2930 Plum Creek Ln 78 12 May 15

Lafayette Plaza (Senior) * 134-955-001-0001 7230 Clarewood Dr 122 8 May 15

Newport Village 740-281-000-0410 5925 FM 2100 80 17 May 15

Parkside At Memorial 132-965-001-0002 777 South Mayde Creek Dr 379 6 May 15

Rise, The 135-666-001-0001 7315 Spring Cypress Rd 288 24 May 15

1900 Yorktown 104-073-001-0001 1900 Yorktown St 262 4 Jun 15

Alexan Heights 133-883-001-0001 655 Yale St 352 2 Jul 15

Haven at Westgreen 131-494-001-0005 510 Westgreen Dr 225 28 Jul 15

Olympia at Willowick Park 116-432-001-0003 3939 W Alabama St 189 3 Jul 15

Pines At Woodcreek 043-209-001-0002 21021 Aldine Westfield 330 21 Jul 15

Commons At Hollyhock 046-005-000-0019 5751 Greenhouse Rd 624 27 Aug 15

Holden 135-954-001-0001 525 W 24th St 282 2 Aug 15

SkyHouse River Oaks Hi-Rise 134-929-002-0005 2031 Westcreek Ln 352 3 Aug 15

Domain West 611 Dairy Ashford 333 Sep 15

Modera Energy Corridor 133-080-001-0001 14520 Briar Forest Dr 278 6 Sep 15

Slate, The 135-108-001-0001 935 N Wilcrest Dr 414 6 Sep 15

Willow Creek 041-026-001-0637 9530 FM 2920 228 25 Sep 15

91 Fifty 131-801-001-0001 9150 Highway 6 N 210 27 Oct 15

Heights at Westchase 111-378-000-0010 3505 W Sam Houston Pkwy 265 29 Oct 15

Landmark Grand Champion 047-178-000-0048 11201 Boudreaux Rd 360 25 Oct 15

Mariposa At Pecan Park (Senior)* 136-144-000-0001 3535 Canada Rd 180 14 Oct 15

North Haven 17802 Mound Rd 310 Oct 15

Viridian Desigh Center 134-068-001-0001 7100 Old Katy Rd 394 22 Oct 15

Alexan Midtown 134-760-001-0001 2310 Main St 215 1 Nov 15

Hanover Southampton 134-340-001-0001 5122 Morningside Dr 206 3 Nov 15

High Point Uptown 133-975-001-0001 807 S Post Oak Ln 277 4 Nov 15





Eco

Area

Move

In Date

James River Oaks, The 134-266-001-0001 2303 Mid Lane 344 3 Nov 15

Modera Flats 134-752-001-0001 1755 Wyndale St 265 10 Nov 15

Pearl Woodlake 135-999-001-0001 2033 S Gessner Dr 376 5 Nov 15

District 28 128-687-001-0001 2828 Old Spanish Trail 299 10 Dec 15

H 6 130-314-003-0001 410 Highway 6 S 293 6 Dec 15

Hampstead 025-024-054-0001 1508 Blodgett St 36 1 Dec 15

Alta West End 129-283-002-0001 4020 Koehler St 283 2 Jan 16

Domain Memorial 134-684-001-0001 14800 Memorial Dr 313 6 Jan 16

Towers of Seabrook 135-216-000-0005 3300 Bayport Blvd 416 13 Jan 16

5755 Hermann Park 134-395-001-0001 5755 Almeda Rd 193 10 Feb 16

Crenshaw Grand 046-164-000-0020 5400 Crenshaw/Beltway 8 264 14 Feb 16

District at Memorial 134-489-001-0001 10300 Katy Frwy 326 6 Feb 16

Tate Tanglewood 134-935-001-0002 5880 Inwood Dr 431 4 Feb 16

Pearl CityCentre 102-571-000-0002 10402 Town & Country Way 311 6 Mar 16

TOTAL 16,119

* Tax Credit

New Construction

New construction activity for apartments is expected to tighten somewhat for the next two years.

Newly delivered apartment complexes (most or all as Class A) may see a decrease in demand

and will offer concessions to support rental rates. This is expected to leave some excess supply in

the market over the long term, saving Houston’s apartment market from any further meaningful

tightening. Developers are able to build all of the new projects largely because investment grade

buyers and large cash-rich institutions are looking for a safe haven for equity, while banks are

willing to give them the money for construction and interest rates for the near term should stay

low. The total number of units in the Greater Houston Area at the end of 2015 was 606,431.

Currently, 16,208 units are under construction. Last year, 13,262 units were absorbed. Since

2004, between 10,000 and 15,000 new units have been added to the market annually, with 1,000

units a month being typical for stable economic years. The economic recession year of 2008 saw

21,862 units delivered. Between 3,900 to 5,900 new units per year were delivered during the

economic recovery years of 2010 to 2012. In 2014, 17,697 units were delivered and 20,187 in

2015. That considered, it is understandable that the total number of new units expected to be

delivered are roughly 18,000 for 2016 and 12,000 for 2017.

Per ADS, 74 new complexes totaling 21,192 units were added to the Houston market during

calendar year 2015. That is up from 54 new complexes totaling 14,559 units in 2014. In addition,

there are 56 complexes, consisting of 16,208 units, under construction as of January 2016. There

were 69 complexes with 19,286 units under construction at the end of 2014. Of the new

apartment complexes recently delivered to the market, three are tax credit properties.




Apartments under Construction through January 2016 (ADS)


Eco

Area

Move

In

Date

3400 Montrose Hi-Rise 026-171-000-0001 3400 Montrose Blvd 325 1 Jun 15

1300 N Post Oak 135-130-001-0001 1300 N Post Oak Rd 247 26 Jan 16

1711 Caroline 002-083-000-0001 1711 Caroline St 220 11 Aug 16

2121 Ella 056-166-001-0001 2121 Ella Blvd 120 22 Jan 16

3800 Main II 135-094-001-0001 800 Alabama St 116 1 Nov 15

500 Crawford 134-992-001-0001 500 Crawford St 364 1 Jan 16

800 Crawford High Rise 001-098-000-0002 800 Crawford St 314 11 Jan 17

Alexan 5151 134-569-001-0001 5151 Hidalgo St 398 4 Mar 17

Alexan Ashford 040-224-000-0047 1200 N Dairy Ashford 312 6 May 16

Alexan City Centre 135-734-001-0001 Town & Country Blvd 354 6 Nov 16

Alexan Southside Place 009-026-000-0082 4139 Bellaire Blvd 269 10 Jan 18

Alexan Spring Crossing I 043-081-000-0005 21525 Spring Plaza Dr 307 24 Apr 16

Alexan Yale 021-024-000-0004 501 Yale St 380 2 Aug 16

Amber Oaks 002-102-000-0001 1811 San Jacinto 242 11 Aug 17

Ascension On the Bayou 133-903-001-0001 150 Sam Houston Pkwy 280 6 Mar 16

Avenue Grove 135-253-001-0003 3700 Wakeforest 270 3 Mar 16

Axis 134-019-001-0001 2400 W Dallas Ave 368 1 Jan 16

BBVA EaDo Station 134-698-001-0001 2417 Capital St 311 11 Dec 15

Beacon At Buffalo Pointe 135-233-001-0001 10301 Buffalo Speedway 281 10 Mar 16

Bella Terra at Katy 048-056-000-0018 Katy Landing @ Ernsters 227 28 Jan 16

Block 334 134-973-001-0001 1515 Main St 207 1 Jan 16

Block 384 1825 San Jacinto 242 Jul 17

Braeswood 130-066-001-0001 Frankway/Braeswood 284 10 May 16

Bridgeview 135-647-001-0001 4115 Louetta 324 Feb 16

Broadstone Energy Park 135-858-001-0001 880 Hwy 6 S 416 6 Jun 16

Broadstone Harmony 3515 Discovery Creek Blvd 273 Mar 16

Broadstone Skyline 135-732-001-0001 707 Saulnier St 269 1 Sep 16

Broadstone Tinsley Park 134-741-001-0002 919 Gillette/W Dallas 365 1 Dec 16

Catalyst Hi-Rise 135-563-001-0001 1423 Texas Ave 361 11 Mar 16

Carter, The 135-534-001-0001 4 Chelsea Blvd 305 1 Mar 16

City Centre At Midtown 044-267-000-0002 1920 W Alabama St 258 1 Jun 16

Crest at Fondren 135-612-001-0001 8816 Westheimer Rd 338 4 Jun 16

Dolce Living At Midtown (DLC) 134-947-002-0001 180 W Gray St 217 1 Jan 16

Domain at Northgate Crossing 135-617-001-0001 28476 Hardy Toll Rd 306 21 Feb 16

Eastfield Baybrook Site 124-058-008-0001 Gatebrook Dr/W Eldorado Blvd 347 13 Aug 16

Elan Heights 135-307-001-0001 2222 White Oak Dr 327 2 Feb 16

Elan Memorial Park l 134-687-001-0001 902 Westcott St 258 3 Mar 16

Eldorado Green (Senior) * 040-210-000-0076 240 W Eldorado Blvd 108 13 Mar 15

Eastpointe Blvd Site 115-337-001-0315 Eastpoint Blvd N of I-10 283 16 May 16

Estates at Ellington 133-511-001-0002 635 Genoa Red Bluff Rd 72 14

Everly, The 23902 Kuykendahl 332 Aug 16

Greenhouse 2040 Greenhouse Rd 400 Feb 16





Eco

Area

Move

In

Date

Grey House, The 135-444-001-0001 4444 Westheimer Rd 279 3 Jan 16

Hanover Montrose Hi-Rise 135-485-001-0001 3400 Montrose Blvd 327 1 Jun 16

Haven At Augusta Woods Village 133-034-001-0001 Kuykendahl / Augusta Pines 246 25 Aug 16

Haven At Highland Knolls 135-064-001-0001 Highland Knolls/Westgreen 171 28 Jan 16

Haven At Lakes Of 610 115-517-000-0020 8900 Lakes At 610 Dr 276 10 Nov 16

Haven At Liberty Hills 130-959-003-0006 Hwy 90/Beltway 8 246 17 Oct 16

Haven At Main 135-702-001-0001 8700 S Main 256 10 Jan 16

Haven At Westheimer 136-155-001-0001 Rincon/Eldridge Pkwy 230 6 Sep 16

Haven on 11th 135-575-001-0001 2205 W 11th St 120 22 Jan 16

Ivy High Rise 134-969-001-0003 2307 Mid Lane 301 3 Feb 17

Jefferson Heights 127-890-001-0001 1520 N Memorial Way 198 1 Apr 16

Kirby Collection Kirby Dr 199 Oct 17

Landmark At Spring Cypress 061-076-000-0001 3223 Spring Cypress 408 24 Dec 15

Le Palais 133-041-001-0001 1916 W Gray St 165 1 Jan 16

Lofts at Mid Main 135-584-001-0001 3622 Main St 363 1 Feb 16

Mark at CityPlace 23153 Springwoods Plaza Dr 268 Dec16

Market Square Tower Hi-Rise 001-035-000-0001 777 Preston St 463 11 Oct 16

Marquis At Greenway 041-017-002-0320 3131 Timmons Ln 425 3 Jul 16

McGowen Station 134-930-000-0001 2727 Travis St 315 1 Mar 17

Memorial 131-987-001-0001 2018 N Memorial Way 198 1 Sep 15

Millennium Kirby, The 134-962-001-0001 7600 Kirby Dr 378 10 Jan 16

Millennium Med Center Hi-Rise 135-881-001-0001 1911 Holcombe Blvd 375 10 Jun 16

One Hermann Place/Capella ? 134-749-001-0001 1701 Hermann Dr 224 10 Jun 16

One Market Square Hi-Rise 001-033-000-0006 900 Preston St 274 11 May 16

Parklane Cypress 18515 Bridgeland Creek Pkwy 288 Jun 16

Pearl at the Mix 013-270-001-0001 2913 Louisiana St 196 1 Jun 16

Pearl Residences At CityCentre 102-570-000-0013 Town & Country @ Attingham 148 6 Apr 16

Pearl Washington Washington/ T C Jester 322 Mar 16

Place Redevelopment 039-220-000-0008 1341 Castle Ct 250 1 Dec 16

Post Galleria 134-399-001-0001 3131 West Loop South 390 3 Mar 16

Preserve At Baywood II 041-003-000-0036 Genoa Red Bluff/Red Bluff 192 14 May 16

Residences at City West 115-172-000-0004 2520 Rogerdale Rd 266 29 Mar 16

Residences at Fannin Station 124-827-001-0001 9800 Fannin 301 9 Aug 16

SkyHouse Main Hi-Rise 002-068-000-0009 1625 Main St 336 11 Jan 17

Southmore Hi-Rise 033-254-001-0001 Caroline/Southmore 225 1 Dec 16

Sovereign Spring Cypress 061-077-000-0015 2539 Spring Cypress Rd 253 24 Sep 16

Streamsong 132-009-001-0001 21001 Kingsland Blvd 290 28 Mar 16

Studemont 007-134-000-0011 1011 Studemont 30 3

Tanglewood, The 097-493-000-0001 Woodhollow Dr 246 4 Dec 16

Texaco Building Hi-Rise 001-079-000-0001 1111 Rusk St 309 11 Dec 15

Trails At Lake Houston 13922 Woodson Park Dr 304 May 16

Tuscany Walk 132-470-001-0001 2001 S Voss Rd 150 4 Jan 16

Venue Spring Cypress 21145 Spring Plaza Dr 340 Jul 16





Eco

Area

Move

In

Date

Village At Palm Center 116-775-001-0002 5330 Griggs Rd 222 35 May 16

Watercrest At Katy (Senior) * 135-900-001-0001 200 Katy Ft Bend 210 28 Apr 16

Waterford Trails 7955 FM 2920 340 Aug 16

Watermark At Spring Cypress 044-046-002-0182 22803 Tomball Pkwy 318 25 Apr 16

Willowbend 132-464-001-0002 FM 1960 Bypass Rd W 228 21 Mar 16

TOTAL

24,531

* Tax Credit

Summary

According to the 2015 Kinder Institute Houston Area Survey conducted by Rice University,

“more respondents in 2015 (38 percent) than at any time in the past 10 years assert that living

conditions in the Houston area have been improving.”

In Houston, apartment developers are going vertical to combat rising land prices. In 2015, four

20-plus-story high-rises were delivered and by year-end five were under construction. The

Tomball/Spring submarket in north to northwest Harris County leads all Houston submarkets

with 11 properties containing 5,847 units under construction. Completion of the ExxonMobil

Campus to the north and upcoming Grand Parkway to Kingwood are factors driving apartment

demand in the area. Other submarkets ranking behind Tomball/Spring for under construction

projects are Montrose/Museum/Midtown (south of Downtown) with 3,623 units, Katy/Cinco

Ranch (west Houston) with 2,729 units, CBD with 2,503 units. The Woodlands and Conroe

combined submarket has 3,162 units under construction.

The Downtown Living Initiative program offers $15,000 per unit in tax rebates to developers

who create homes and multi-family projects. Currently, there are four projects under construction

and eight additional projects planned for the future. Before the initiative program only 3,600

residents lived downtown; but within 5 years this number will triple. However, as of May 2015,

the program is no longer accepting new applications.

From the Chronicle, “Skilled workers are in short supply….The labor shortage has become so

severe that construction companies have recently started putting guards on job sites to keep

workers from being poached by competitors willing to pay more. The labor shortage is leading to

scheduling delays and significant cost overruns. Rising land values, combined with higher

construction and material costs, are compressing the returns investors can make on

development.”29

An apartment complex that cost $130,000 per unit a few years ago to build now

costs $190,000 per unit to build today.

29

http://www.houstonchronicle.com/business/real-estate/article/In-building-boom-construction-workers-gain-the-

5706440.php

http://www.houstonchronicle.com/business/real-estate/article/In-building-boom-construction-workers-gain-the-5706440.php

http://www.houstonchronicle.com/business/real-estate/article/In-building-boom-construction-workers-gain-the-5706440.php




Marcus & Millichap’s 2016 US Multifamily Investment Forecast ranks Houston 22nd

out of 46

market areas for its 2016 National Multifamily Index, down from 16th

last year. Houston’s

apartment market should stabilize its multifamily market with moderate growth, taking

scheduled new construction deliveries into consideration. Investors will continue to target

Houston apartments in 2016, encouraged by another year of moderate job creation but with

continued population growth. At the same time, for-sale inventory will remain limited relative to

buyer demand, maintaining a highly competitive climate and supporting elevated prices across

the Houston area. Bidding will remain particularly intense for apartment properties inside the

Loop, and for assets in the Galleria/Uptown and The Woodlands/Spring areas, where land costs

have skyrocketed over the past few years. Gulfton/Westbury and Friendswood/Pearland have the

lowest vacancy rate in metro Houston, at 3.4%, down 80 basis points from 2014. Vacancy rates

are expected to remain near their lowest levels in the last decade, providing sufficient leverage

for local apartment owners to achieve strong rent growth.

In their Millenial Index, Marcus & Millchap ranking market growth occurring in the young-adult

population (ages 20 to 34), Houston ranked 8th

in the nation, just behind Dallas/Fort Worth. A lot

of young people who are predominately renters and not homeowners will continue to provide

significant demand, even as new supply grows.

A change in the balance of supply and demand attending the supply of multifamily projects

under construction will reverse the downward movement in the vacancy rate, particularly in the

Class A sector where new product is leasing up and occupancy not stabilized yet.. While some

submarkets will see greater increases in their vacancy rates than others, a condition of general

significant oversupply is not expected. Vacancy, though, could rise to about 6.5% next year,

according to Marcus & Millichap. Rent growth should remain strong. The fourth quarter

indicated that the actual rents grew over the course of the year. The rate of development

underway in north Houston and around the Port of Houston and petrochemical refineries in the

east bears watching even as the energy-driven submarkets on the west side try to retain their

development.

According to Marcus & Millichap 4th

Quarter 2015 Apartment Research Market Report –

Houston Metro Area, “Despite increased buyer interest, a lack of inventory throughout the metro

hinders transaction velocity as investors hold on to assets while options for reinvestment remain

limited. As a result, buyer demand has intensified as investors scour the metro for deals. Those

in search of upside potential will find properties in need of repositioning, whether through

management improvements or additional capital to rehabilitate units, allowing owners to push

rents.” The continued demand for quality investment grade properties should support increasing

associated real estate values.

Lastly, for their Houston Metro Area 2016 Outlook, Marcus & Millichap stated, “Hiring in

Houston’s medical community and downstream oil and gas operations will support the apartment

market this year as the energy industry awaits stabilization. Overall total employment growth

will remain slow for a second consecutive year as energy firms continue to cut spending in 2016.

In west Houston, where many of these companies are located, a building boom has brought

thousands of new apartments online, and more will be added to inventory this year. Performance

in this area has begun to soften and developers are ramping up efforts to lure tenants to recently

constructed properties. Tempering in western suburbs will be short-term, however, as deliveries




taper amid shifting builder attitudes and several healthcare organizations boost demand as they

expand nearby. Meanwhile, demand for housing is rising in the eastern portion of the metro and

along the Gulf Coast where several petrochemical plants are underway or proposed, increasing

the need for Class B/C housing. New construction in this area has been sparse, but the opening of

portions of Grand Parkway will generate new opportunities for development.”

Retail

The sector of the Houston economy that appeared to be strongest over 2015 was retail real estate.

Job creation in this area offset any negative changes resulting from oil & gas. As oil prices

declined, the price of gasoline also fell, giving consumers more disposable income. With a lack

of listings for investment grade apartment complexes, quality retail properties provided a viable

investment alternative. By most accounts, 2015 was better than 2014, which was better than

2013.

Houston auto dealers sold 376,481 vehicles in 2015, a record year for sales, up 1.4% from 2014,

which itself was up 6% from the 2013 figure.

REIS indicated the leading areas for retail this coming year will probably be the Southwest/Fort

Bend County/Sugar Land submarket, followed by FM 1960/Far Northwest and

Westwood/Bellaire. Consistent population growth in the greater Houston area is cited as a major

factor in a positive and resurging real estate retail market. “During 2016 and 2017, developers

are projected to deliver 1.5 million square feet.”

Net Absorption

Retail net absorption was positive in Houston in 2015, absorbing 4,148,587 square feet for the

year, compared to 4,232,709 sf for 2014, bringing the total absorption for the greater Houston

area over the last two years to 8,381,296 sf.

Tenants moving into large blocks of space in 2015 include:

Wal-Mart moving into 177,514 sf at The Shoppes at Uptown Crossing

Kroger moving into 124,000 sf at Shops at Katy Reserve, and

HEB moving into 100,000 sf at 97 Oyster Creek Drive

Market Occupancy

Houston’s tetail vacancy rate went from 6.1% in the 1st Quarter 2014, to 5.6% in the 1

st quarter

of 2015. Over the past four quarters, the market has seen an overall decrease in the vacancy rate.

It decreased in the 4th quarter 2015, ending at 5.2%. The amount of vacant sublease space in the

Houston market has trended up over the past four quarters. At the end of 2014 there were

291,701 sf vacant retail space. Currently, there are 285,373 sf vacant in the market. The current

vacant sublease area is still lower than any point of 2014.




Largest Lease Signings

The largest lease signings to take place in 2015 were: the 57,000 square foot lease signed by

Showbiz Cinemas in the Lake Houston area at 8700 N Sam Houston Parkway East; the 52,346 sf

signed lease by Ashley Furniture Home Store at Deerbrook Corner in the Kingwood area; and

the 44,871 sf lease for Brookshire Brothers at Renaissance Center in Montgomery County.

Rental Rates

According to CoStar, the “average quoted asking rental rates in the Houston Retail Market are up

over previous quarter levels, and up from their levels four quarters ago.” Quoted rents ended the

4th quarter at $15.90 psf, up from the end of 2014 at $15.17 psf. This represents a 4.81%

increase in rental from four quarters ago. The previous year, rental rates increased 3.36% from

2013 year end.

Inventory & Construction

During the 4th Quarter 2015, thirty-three (33) buildings totaling 1,186,032 square feet were

completed in the Houston Retail Market, compared to 18 buildings and 377,127 sf for the 4th

quarter of 2014. Over the past four quarters, a total of 3,748,942 square feet of retail space in 137

buildings have been built in Houston. In 2014, there were 127 buildings with 2,323,829 sf of

retail space constructed and delivered.

There were 2,943,436 square feet of retail space under construction at the end of the 4th quarter

2015. That is in comparison to the 2,355,126 sf that was under construction at the end of 2014.

Some of the notable completions in 2015 are:

Wal-Mart Supercenter located in The Shoppes at Uptown Crossing

A 177,514 sf facility that delivered in the second quarter of 2015 and is now 100%

occupied

A 125,000 sf building that was completed and delivered in the 1st quarter of 2015 and is

now fully occupied.

The Retail inventory in the Houston market area totaled 360,647,992 square feet in 23,444

buildings and 3,981 centers as of the end of the 4th quarter 2015. That is an additional 101

shopping centers from the end of 2014.




Greater Houston Retail Market Areas

Considering the region as eight directional sections outside the Loop, Inner Loop (IL), and CBD,

for the 10 market retail areas of greater Houston for 2015, or the end of 2015:

Best and Worst Houston Retail Areas Ranked by Vacancy Rate, Rental Rate, Construction

Vacancy Rate Quoted Rates per square foot

Rank Rate Area Rank Rate Area

1. 3.6% Inner Loop 1. $22.91 Inner Loop

2. 4.2% Northeast 2. $20.24 Central Business District

3. 4.7% West 3. $18.59 West

… … … … … …

8. 5.9% Southeast 8. $14.42 Southeast

9. 6.7% East 9. $14.05 South

10. 10.7% Central Business District 10. $13.14 East

Bldgs Completed/Delivered in 2015 Buildings Under Construction

Rank Number Area Rank Number Area

1. 10 North 1. 15 Northwest

2. 6 West 2. 13 Southeast

3. 5 Southeast 3. 10 West

… … … … … …

… … … T-7. 3 Northeast, South

T-7. 1 Inner Loop, East, Northeast 9. 2 East

10. 0 Central Business District 10. 1 Inner Loop

Sales Activity/Capitalization Rates

Total Retail center sales activity in 2015 was down compared to 2014. In the first nine months of

2015, the market saw 25 transactions with a total volume of $295,917,203. The price per square

foot averaged $152.52. In the first nine months of 2014, the market posted 52 transactions with a

total volume of $442,087,083, during which the price per square foot averaged $162.43. This

figure was $108.39 psf in 2013.

Tallying retail building sales of 15,000 square feet or larger, Houston retail sales figures fell

during the 3rd quarter 2015 in terms of dollar volume compared to the 2nd quarter 2015. This

also happened for these quarters in 2014.

In the 3rd Quarter 2015, 7 retail transactions closed with a total volume of $48,025,0000. These

seven buildings totaled 456,240 square feet and the average was $105.26 per square foot. This

compares to 11 transactions totaling $113,298,109 in the 2nd quarter 2015. The total square

footage in the 2nd quarter was 737,478 sf for an average price per square foot of $153.63.

Cap rates have been marginally lower in 2015, averaging 7.70%, compared to the same period in

2014 when they averaged 7.72%. The average rate was 8.47% for 2013.

Specific information on key indicators measuring the strength of the retail market was obtained

mostly from the Costar Retail Report – 4th quarter 2015, covering the Houston Retail Market.




Detail by Property Type

The CoStar 4th quarter 2015 Report gives further detailed information on the five retail

subcategories:

Shopping Centers

The Shopping Center market in Houston currently consists of 3,873 projects (99 more than last

year) with 157,119,461 square feet of retail space in 6,319 buildings. At the end of 2014, there

were 152,610,978 square feet of retail space in 6,098 buildings. In this report, the Shopping

Center market is comprised of all Community Centers, Neighborhood Centers, and Strip Centers.

After absorbing 507,947 square feet and delivering 426.429 square feet in the current quarter, the

Shopping Center sector saw the vacancy rate decrease from 8.5% at the end of 2014 to 7.9% for

the end of 2015. For 2014, absorption was 102,392 sf and 32,835 sf was completed/delivered.

Over the past four quarters, the Shopping Center vacancy has decreased from 8.4% to 8.2% to

8.0% and finally to 7.9% at the end of the 4th

quarter of 2015. At the end of the first quarter of

2014, the vacancy rate was 9.1%.

Rental rates ended the 4th quarter 2015 at $15.76 per square foot, up from the $15.09 psf one

year ago, an increase of 4.4%. The end of 2014 saw rental rates of $14.47 psf.

Net Absorption in the Shopping Center sector has totaled 2,041,427 sf over the past four

quarters, a 43% increase from the previous year. Almost 3.5 million square feet has been

absorbed over the last 2 years.

Power Centers

The Power Center average vacancy rate was 3.8% in the 4th quarter 2015. A year ago, in the 4th

quarter 2014, the vacancy rate was 3.5%, and 4.2% for the end of 2013. Over the past 4 quarters,

Power Centers have absorbed 7,640 sf (188,300 sf last year) and delivered 5,500 sf (16,538 sf

last year). Rental rates have decreased from $15.81 to $15.39 per square foot.

The total stock of Power Center space in Houston is currently 26,448,138 sf in 58 centers

comprised of 562 buildings.

The was 1,121,386 sf of space under construction at the end of 2015, while there was none at the

end of 2014.

General Retail Properties

The General Retail sector of the market, which includes all freestanding retail buildings except

those contained within a center, reported a vacancy rate of 2.5% at the end of 4th quarter 2015,

down from 2.6% the previous year. Almost identical from the previous year, there was a total of

3,651,405 sf vacant at that time. The General Retail sector in Houston currently has average

rental rates of $15.71 psf, up from $14.56 psf in 2014, an increase of 7.9%. There are 761,267 sf

of space under construction in this sector (a little less than half of last year’s figure), with

222,603 sf having been completed in the 4th quarter. In all, there are a total of 16,249 buildings




with 144,572,106 sf of general Retail space in Houston. For 2014, there were 15,031 buildings

with 137,287,455 sf.

Specialty Centers

There are currently 15 Specialty Centers in the Houston market, with approximately 2,899,417

square feet of retail space. In this report, the Specialty Center market is comprised of Outlet

Centers, Airport Retail, and Theme/Festival Centers. Specialty Centers in the Houston market

have experienced positive 25,285 sf of net absorption in 2015. The vacancy rate is currently

6.5% (down from 9.2% at the end of last year) and rental rates average $9.02 psf.

Malls

Malls have recorded a net absorption of positive 389,623 square feet in the 4th

quarter 2015

(negative 24,099 sf for 4th

quarter 2014). This net absorption, combined with the 537,000 sf of

new space added in the quarter (25 times that of 4Q2014), caused the vacancy rate to decrease

from 5.5% at the end of 2014 to 3.9% at the end of 2015. Rental rates went from $24.42 psf to

$20.34 psf during that time. In this report, the Mall market is comprised of 35 Lifestyle Centers,

Regional Malls, and Super Regional Malls (two more than last year).

Summary

Wulfe & Co. projects 4.53 million square feet of new retail shopping center space will be built

and opened in the greater Houston area in 2016. According to the locally based real estate firm’s

23rd Annual Retail Survey, this represents a 22% increase from the previous year of 3.7 million

square feet.

Supermarkets will dominate the retail new construction, as they did last year. Twenty-eight (28)

new stores are planned. Kroger will open nine of their 123,000 sf stores, HEB will open five of

their 100,000 sf prototype markets, Walmart will open four neighborhood supermarkets, Whole

Foods will open one, and Aldi will add nine of their smaller 18,000 sf stores.

From Wulfe:

“Dick’s Sporting Goods is entering [the Houston] market with the addition of six

new stores approximately 50-100,000 sf; Academy will add two new 63,000 sf

stores and Cabella’s will open one 72,000 sf store. In addition Costco will open a

new 150,000 sf store and Walmart will open another 180,000 sf Walmart

Superstore. Also there will be six new theaters; three new 24 Hour Fitness centers

and one LA Fitness facility. Altogether a total of 4.53 million square feet will be

built and opened, which will be the highest amount since 2008. …

With this high expansion of new retail space commitments, overall retail

occupancy in Houston will continue to strengthen and achieve an all-time high

occupancy rate in excess of 94%. Retail rental rates will also continue to increase

driven by the limited availability of shopping center space and the higher land and

development costs. With the area’s vigorous growth coupled with the expansion

needs of established and new-to-market retailers, the competition for available




space in well located, well tenanted and highly desirable retail developments, is

aggressive, even at ever-increasing higher rates.”

Medical

The medical segment in Harris County includes hospitals, surgery centers, medical office

buildings, medical condominiums, retirement homes and nursing homes. Medical inventory is

organized in 23 economic areas throughout the county, with the highest concentration of

development being in the Texas Medical Center.

The Texas Medical Center

Located within Loop 610 southwest of the Central Business District, the Texas Medical Center

(TMC) is one of Harris County’s leading economic contributors. It ranks as the 8th

-largest

downtown business district in the United States. Recognized as the largest medical complex in

the world, it has continued to grow since it was founded in 1945, with the majority of the growth

being within the previous decade. The center contains 54 member institutions, including twenty-

one hospitals, six nursing programs, and three public health organizations, as well as two

universities and numerous medical, dental, and pharmacy schools. TMC is the largest employer

in Houston. It directly employs 106,000 people and instructs 50,000 students. Currently, clinical

research in the TMC generates an average of 15 new startup businesses per year. An estimated

7.2 million people visit the medical center each year. TMC is home to more than 290

professional buildings on over 1,300 acres of land.

Houston Chronicle photo




Colliers International estimates the TMC current annual economic impact to be $15 billion.

Since 2008 the TMC has spent an estimated $7.1 billion in building and infrastructure

investments. Texas Medical Center’s recent growth increased the total campus size to 45.8

million gross square feet, up from 29.6 million gross square feet, representing an increase of

almost 55% in a six-year period. There are also many new and proposed construction projects

ongoing.

Texas Children’s Hospital recently announced details for a $506 million expansion, adding six

floors and 640,000 square feet to their Pavilion for Women. The University of Texas M.D.

Anderson Cancer Center is spending $198 million on a hospital expansion and renovation project

to add 185,000 square feet. M.D. Anderson is also adding nine floors atop the Alkek Hospital at

a cost of $293 million. Baylor College of Medicine is building a $1 billion clinic and hospital in

the TMC’s mid-campus.

Houston Methodist will build a $300 million patient tower and $70 million adult outpatient

clinic. St Luke’s is demolishing its original 50-year-old hospital to erect a new $200 million

patient care center. Memorial Hermann is undergoing a $420 million expansion of all nine of its

acute care hospitals. HCA has seven construction projects underway, including a $50 million

project at the Women’s Hospital of Texas.

Another large project is The University of Texas Research Park, located just south of the TMC.

It will be a master-planned campus with laboratory and office space for both academic and

commercial biomedical and biotechnology research facilities, encouraging collaboration between

scientific and business. The M.D. Anderson portion of the Research Park is planned to provide

parcels for as many as twelve buildings containing 1.5 million square feet of lab, office and

support space. The Park is designed to be pedestrian-friendly with a multi-level underground

parking garage.

The most recent medical office to open in the TMC market area is Parc Binz, a 50,000 square-

foot five-story Class A building featuring high-end retail mix on the first floor and an ambulatory

surgical center as well as pharmacy and private medical offices. Like many of the new

construction office buildings in Harris County, Parc Binz was 50% pre-leased with asking rents

of $30 per square foot.




Parc Binz rendering

In October, the TMC and Harris County broke ground on the construction of its new forensic

facility. The 200,000 square foot, nine-story tower is slated to be completed in early 2017 and

will be equipped with state-of-the-art technology as well as integrated clinical, laboratory,

administrative, public and teaching/training areas. The project includes a second phase four-story

building for future expansion.

Harris County Institute of Forensic Science rendering




Demographics: Driving Demand

Despite the uncertainties as a result of the 2014 Patient Protection and Affordable Health Care

Act, the medical sector has not been deterred. The long-term effects of the act will require

additional medical spaces as the hospital systems and physicians respond to the ongoing demand

for medical care contributed by the county’s growing population, aging baby-boomers, and

newly-insured.

Medical Office Buildings

The Medical Office Building (MOB) segment continues to outperform traditional office spaces

in both stabilized occupancy and rental rates. Medical properties are considered to be safer

investment vehicles than any other property type as a direct result of long-term leases, credit-

worthy tenants and stable income streams. Consequently, REITs and foreign investors consider

medical properties to be prime investments for their portfolios. Medical office buildings located

on or near hospital campuses and leased by physician groups and hospital systems (often referred

to as “compounds”) are considered prime investment grade real estate.

Examples include two projects being built near the site of the future St Luke’s Katy hospital at

the intersection of Kingsland and Grand Parkway. In early 2015, Katy Medical Plaza completed

the first of three proposed medical office buildings nearby and Vista Kingsland Equities will

begin construction in July of an 8,000 sf building at a cost of $2.5 million.

However, the latest trend is positioning small clinics and medical offices in retail centers that

serve suburban neighborhoods, as the population demands the convenience of having medical

services closer to home. Some of the major players of this type in the Houston market are the

urgent care centers, emergency centers and dialysis centers. According to Colliers International,

the high-end retail in the stronger submarkets is currently more expensive to lease than Class A

office buildings. Additionally, off-campus locations are leasing up twice as fast as traditional on-

campus buildings.

An example of this trend in medical office buildings is the Spring Valley Medical Plaza. which is

under construction. This is a 68,000 sf surgery center and medical office building on the Katy

Freeway in Spring Branch and was 60% pre-leased before the start of construction.

Emergency care centers are being built throughout the suburban markets in Harris County, with

the majority of new construction in Cypress. North Cypress Medical Center began construction

in Towne Lake and Houston Methodist broke ground in December 2014 on a new facility on

Highway 290 in Fairfield. Fresenius Medical Care has 35 medical clinics in the greater Houston

area with more on the way. The “medi-clinic” or emergency care clinic is an alternative to

visiting the ER of a hospital, but is separate from a hospital campus. Usually, they are open 24/7

and are typically located in active retail areas or shopping centers. Their growth in servicing the

Houston area has been exponential, especially in suburban areas with other new development.

Memorial Hermann announced plans for a Convenient Care Center in Kingwood in northeast

Harris County. The 45,000 sf medical center is expected to be completed in fall 2016.




Memorial Hermann Convenient Care Center in Kingwood (conceptual rendering)

US 59/IH-69 southwest of the Beltway is fast becoming a branch of TMC of sorts, with a large

number of medical offices and clinics constructed within the last 10 years. This area includes

southwest Harris County, Sugar Land and its Sweetwater subdivision, and Richmond in Fort

Bend County. Texas Children’s Hospital, St. Luke’s, Oak Bend Hospital, Methodist, and two

Memorial Hermann hospitals are located along this corridor.

Another important trend is the demand for a single destination for multiple types of medical care.

Kelsey-Seybold, the Houston-based pioneer in this type of facility, built a new $10.8 million

multi-specialty care center on North Sam Houston Parkway near Summer Creek which opened in

October of 2014. Kelsey-Seybold also opened new locations in Clear Lake and The Woodlands

in 2014. The Summer Creek clinic is their 20th

location in the Houston area. Kelsey-Seybold also

owns land adjacent to the future St Luke’s Katy hospital.

According to Integra Realty Resources (IRR), “The medical office building (MOB) market is

expected to be a breakout investment class in 2016. The asset class will continue to appeal to

lenders and investors because of favorable demographic trends, driving increased demand. … By

2050, as many as one in five Americans will be more than 65 years old. … The average price for

medical office assets in 2015 was $289 psf, a 21% increase from the previous year, as tracked by

RCA through 3Q 2015. … The MOB investment class is currently benefiting from high

occupancy and low Cap Rates.”

According to IRR, Vacancy rates, as high as 10.5% in 2009, are estimated to be near 9.5% in

2015. The average medical office property averages a 7.0% capitalization/investment rate, with

hospital campus MOB properties at 6.6%. IRR continues, “Newer facilities in urban primary

market locations with leases extending 10 years or longer generally trade in the low-6.0% range,

with top-tier assets contracting into the 5.0% range. [Properties] with shorter leases typically

trade in the high-7.0% to low-8.0% range.”30

30

http://www.slideshare.net/JamesGoodard/irr2016annualviewpoint

http://www.slideshare.net/JamesGoodard/irr2016annualviewpoint




Hospitals

Most hospitals in Harris County thrived throughout the economic downturn of 2008-2010. With

the growing population, including seniors, and the anchor of the TMC, Houston is expected to

outperform the national growth rate over the next decade.

According to the Texas Hospital Association (THA), there are 83 hospitals in Harris County. On

average in Texas, 28% of all hospitals are nonprofit, 21% are government-owned and 51% are

investor-owned. The trend over the previous 10 years, according to THA, is a reduction in the

number of government-owned hospitals and an increase in the number of investor-owned

hospitals. Currently there are a total of 53 taxable full-service, acute care, specialty use,

rehabilitation, and psychiatric care hospitals in Harris County. U.S. News & World Report’s Best

Hospitals 2015-16 list included several nationally ranked hospitals in Harris County either

overall or in various specialties, including Houston Methodist Hospital, St. Luke’s Episcopal

Hospital, University of Texas MD Anderson Cancer Center, Menninger Clinic, TIRR Memorial

Hermann, and Texas Children’s Hospital.31

As detailed previously, most of the major hospitals in the TMC have either expanded their

facilities or are planning some major expansions in the near future in response to the increasing

demand. The new construction is not only taking place in the TMC campus, but also suburban

areas such as The Woodlands, Pearland, Katy, Cypress, and Kingwood. Much of the new

suburban hospital construction is outside of Harris County.

Along with expanding their TMC footprint, also in the works for Houston Methodist is a full-

service 470,000 sf, 193-bed inpatient hospital to be built near The Woodlands in Montgomery

County. Construction is slated to begin in early 2015 with completion in 2017. The $328 million

Woodlands project will also include a 135,000 sf medical building scheduled to open in late

2015. Methodist plans to invest more than $1 billion in expanding and replacing its facilities in

the Houston area over the next three years.

31

http://health.usnews.com/best-hospitals

http://health.usnews.com/best-hospitals




Rendering of Houston Methodist’s new hospital near The Woodlands

Early in 2014, Houston Methodist purchased the CHRISTUS St John hospital in Clear Lake and

the CHRISTUS St Catherine in Katy. The Katy location is being repurposed to a long-term acute

care facility. Houston Methodist also has plans to build in the Cypress area, at the intersection of

Hwy 290 and Fairfield Creek Drive. They begin construction on the new emergency care facility

in the fall of 2014, and the upgraded facility opened in 2015. It will be modeled after several

other free-standing emergency departments the hospital system owns throughout the area.

Methodist is Houston’s third-largest hospital system with seven hospitals and 2,222 beds.

The Memorial Hermann Health System is Houston’s largest health care system with twelve

(12) area hospitals and 3,447 beds. It has several projects in the works. Beginning the summer of

2014 and scheduled for completion in 2018 is a $650 million expansion and renovation of its

TMC campus, bringing it from the current 2.5 million square feet to 3.84 million square feet. The

new 17-story tower will be dubbed Hermann Pavilion 2. This will add 160 beds, replace 71 beds,

and add 24 new operating rooms, 16 additional emergency room bays, and 750 new parking

spaces. Included in the plans are a six-story parking and infrastructure building, emergency

generator systems, and a roof-top helipad. The plan also accounts for future growth to include six

shelled floors and six shelled operating rooms with the potential of adding 264 additional beds,

and space for expansion of the kitchen service and heating and cooling systems.

Memorial Hermann is also in the process of constructing another patient tower at its Katy

campus location. It is projected to cost an estimated $70 million; adding 58 patient beds. The

expected 155,555 sf tower will increase its current emergency department and operating room

capacity by almost double. The project is currently in phase two of its master plan, which

originally began in 2007. The construction is expected to be completed by 2016.

In addition to the Harris County properties, Memorial Hermann also has projects within the

Houston metropolitan area in Brazoria and Fort Bend Counties. Memorial Hermann broke

ground in early 2015 on a 40-acre medical campus in Pearland and will open a 64-bed acute care

hospital there in December 2015 or early 2016. In addition, it is working on a $93 million

expansion of its Sugar Land hospital.

Memorial Hermann also recently announced the purchase of a 32-acre parcel of land at Hwy 290

and the Grand Parkway in Cypress, with plans to build a medical center with both inpatient and

outpatient capabilities. The $168 million project will begin in June and is expected to be




completed by 2017. Phase 1 will include a medical office building for primary care and an

emergency care center which will go online in early 2016. Phase 2 will include completion of the

hospital, at which time the emergency care center will likely be converted to serve as an urgent

care facility, although no definitive plans have been set. The 80-bed hospital tower will have

eight operating rooms, a 16-bed intensive care unit, a neonatal intensive care unit and a cardiac

catheterization lab. The site is large enough to accommodate future expansion, including a

parking garage, additional office buildings, a helipad, and up to 275 patient beds.

Hospital Corporation of America (HCA) is in process of two expansion projects in the TMC

and recently opened Pearland’s first hospital. In the TMC, HCA is adding two additional floors

and 112,500 square feet to its Texas Orthopedic Hospital. The expansion will allow for

privatization of patient beds and creation of clinical, educational, and business office space on

the fourth and fifth floors. The second TMC project is a $26.5 million 72,000-square-foot

expansion of the Women’s Hospital of Texas that will add a pediatric floor and pediatric support

area in the emergency department, as well as shell space on the hospital’s fourth floor to allow

for future growth. The Pearland Medical Center, which opened in January 2015, is a $71 million

facility with 33 beds. HCA is Houston’s second largest hospital system with ten local hospitals

and 2,607 beds.

Catholic Health Initiatives (CHI) St Luke’s Health will develop a $110 million facility in the

new master-planned community of Springwoods south of The Woodlands, near the new Exxon

Mobile campus. The 23-acre development will include a 55,000 sf ambulatory center and

100,000 sf medical office building. It is expected to be completed in late 2015 or early 2016.

Long-term plans include a 300-bed hospital and 600,000 sf of medical offices at this location.

St Luke’s also purchased nearly 30 acres of land in Katy at the intersection of Kingsland and

Grand Parkway with plans for a new hospital development and said it will invest as much as $70

million more over the next five years in future development. CHI St Luke’s is the area’s fourth-

largest hospital system with six hospitals and 1,331 beds.

Medistar Corporation completed construction in July 2014 of phase one of its new Bay Area

Regional Medical Center in Webster, with construction of the second phase underway. The

nearly 400,000 sf nine-story building includes 104 patient suites and 22 intensive care unit

rooms. It also has a full-service emergency room with 11 treatment rooms, five operating suites,

three cardiac suites and one flex suite. The second phase will expand the facility and is slated for

completion September 2015. When the facility is complete, it will have 275 rooms in 11 floors.

Nursing Homes and Retirement Homes

Positive trends are also apparent in the senior housing and skilled nursing markets. Many

developers are constructing senior living facilities that consolidate multiple services into single

centralized facilities. These facilities are providing more than one type of care and are becoming

more common in the industry. The senior living facilities that incorporate independent living,

assisted living, and nursing care are often referred to as “Continuing Care Retirement

Community” (CCRC). Among the highest ranked CCRC’s in Harris County, according to U.S.

News & World Report, are Emeritus at Kingwood, The Hampton at Post Oak, and University

Place Nursing Center.




Real estate trends for the senior housing industry will focus on building flexible spaces that

allow for customization to accommodate the demands of an aging population.

The county’s steady population growth has played a contributing factor to the increase in

demand for new development. The demand for senior care is particularly strong, given the aging

population among the post-war baby boomers. More than 390,000 (9%) of the 4,471,000 Harris

County residents are persons 65-years of age and older. The percentage is expected to climb to

15.6% by 2030, still below the national average which is expected to be closer to 18%.

Brazos Towers at Bayou Manor

Brazos Towers at Bayou Manor is a $70 million project currently underway that will transform

the historic campus of Bayou Manor in Bellaire to include a new 14-story residential tower with

84 new residents and 25 assisted living residences. The new East Tower is scheduled for

completion in 2015. Included in the project is a complete renovation of the original West Tower.

Similarly, The Buckingham in the Memorial area is expanding its facilities along Buffalo

Bayou. Currently a 323-unit community that opened its door in 2005 and has been operating at

capacity since 2008, it will purchase the adjacent apartment complex to demo and construct a

$56 million expansion that will add 187 additional residences including 104 independent living

apartments, 33 assisted living suites, 18 memory care residences and 32 private skilled-nursing

rooms. It is slated to open in 2017.

Under construction in the Heights market is the four-story, 3500 unit, senior living project The

Village of the Heights opened in 2015. It is an assisted living center and will feature specialty

memory care suites.

Belmont Village Senior Living expanded from its West University location to include an

additional development in Hunters Creek in the Galleria market area. It opened in November of

2014 and features 106,000 sf on six stories. It also emphasizes memory care services and

includes upscale features such as a gym, therapy pool and bistro. The community has 149

residences, including 31 memory suites. With the goal of encouraging socialization, common

areas will make up 40% of the gross building area.




Legacy at Falcon Point is a luxury assisted living and memory care center that opened in the

Katy market area in October of 2014. It is located in close proximity to the campus of the future

CHI St Luke’s and Methodist hospitals near the Grand Parkway.

In the Cypress market area, construction was completed in 2014 on Villages at Cypress, a 162-

unit affordable care independent senior living center developed by Caddis Partners. Caddis is

also developing another assisted living community in the Cypress area with an innovative “Main

Street” concept featuring such amenities as storefronts, movie theater, ice cream parlor, art

studio, auto repair garage and plant nursery. Construction began on the luxury Heartis Cypress

development in March of 2014 and it is scheduled to open in the spring of 2016. The Heartis

facility was launched after Caddis realized the strong market demand, with over 800 people

putting their names on the waiting list for the Villages at Cypress center.

Wood Glen Court Senior Living in Cypress is an “age in place” community featuring upscale

finishes and kitchenettes in the rooms which opened in late 2014. Avanti built its $15 million,

90-unit senior living project at Towne Lake in Spring, which opened in mid-2015. The Spring

market area also has a new $10.7 million facility Magnolia Heights Assisted Living that opened

in November of 2013 and, like most of the newer facilities, features special memory care suites

as well as assisted living units.

There are plans underway to convert the Old San Jacinto Hospital in Baytown to a luxury

retirement center featuring a restaurant on the top floor with skyline views and utilizing the full

campus to create green space. The developer spent over $1 million on selective demolition to

stabilize the property and is currently waiting on a zoning variance to be approved.

Summary

The future looks bright for all property types in the medical segment for 2016. The Texas

Medical Center continues to expand to meet the demands of a growing population and places a

new emphasis on promoting the creation of startup companies. Medical office buildings are

experiencing lower vacancy rates and increasing rental rates, particularly for Class B buildings.

Retail centers should benefit from the trend toward locating medical clinics and services in

suburban markets. Many of the area health care systems are building new hospital campuses in

the suburban market, most of which are located outside of Harris County. The aging population

is driving demand for senior housing with trends toward multi-service facilities, flexible spaces

and more upscale choices.

Construction costs could rise dramatically with increased demand for material and shortages of

skilled labor. The availability of financing remains healthy, particularly for senior housing and

small medical office buildings, as more private investors, pension funds, REITs, and foreign

investors enter the market. Hospitals are also benefiting from a trend toward investor-owned

facilities. As indicated previously, the greater Houston area is experiencing consistent

tremendous growth in population, yet the unemployment rate continues to fall.

Due to the projected growth in the industry driven by demographics and abundance of willing

investors driving competition and making financing readily available, capitalization rates are

expected to remain steady and values increase as supply struggles to keep up with the rising

demand.




Hotels and Motels

Even with the downturn in oil & gas prices and activity, the Houston hotel market will remain

one of the strongest in the country into 2016. Houston is preparing to host the 2017 Super Bowl,

which is sparking an expansion of hotel stock. Additional rooms are being built to capture

convention business and new properties are rising to service the recently built ExxonMobil

campus.

Integra Realty Resources Houston in their 2016 Annual Viewpoint reports the hospitality

transaction volume for the greater Houston area was $889,658,006 for 4Q 2014 to 3Q 2015.

This was the fourth highest in the nation, behind only Orlando, Miami, and Boston. This was

over four times the amount for Las Vegas and over twice that of Denver. Houston was 9th

out of

54 metro market areas in increase in hospitality transaction volume based on year-over-year

change at 12.37%. Hotel convention bookings were up more than 30% in 2015, according to the

Greater Houston Partnership.

For the South Region of the U.S. for 2015, full-service hotel average daily rate was $147.65 per

room, occupancy rate was 72.81%, and cap rate was 8.07% (down from 8.34% the previous

year). For limited-service hotels, the hotel average daily rate was $87.18/room, occupancy

66.26%, and cap rate 8.85% (down from 9.21% for 2014), according to IRR. They also noted,

“The U.S. lodging industry is in the midst of a six-year period of continuous double-digit

bottom-line gains. Based on the revenue forecasts, unit-level net operating income will increase

14.6% in 2015, and is forecast to rise by 12.9% in 2016.” Capitalization rates are expected to

remain constant over the next 12 months. The strong U.S. dollar may limit the amount of travel

foreign tourists can afford while the downturn of oil & gas prices has increased disposable

income to the tune of roughly $4,000 per adult consumer in 2015. This has fueled an increase in

domestic tourist travel over the past year, and increased revenues for affordable and suburban

road-side hotels and motels and American tourist destinations.

Full-service class A hotels may have seen an effect from the downturn of oil as the large oil

companies are adjusting to the new economics and potentially cutting expenditures for executive

travel, meetings, and lodging.

PKF Hospitality Research in their November 2015 Edition of Hotel Horizons, forecasted that

occupancy will decrease to 66.8% for 2016, there will be little or no change to the ADR

(Average Daily Rate), and RevPAR is estimated to decline 5.3%.

A total of thirty-seven hotels will be built over the next two years, most of which will be major

brand-name hotels. A big push of boutique hotels is predicted. The Galleria, Downtown, Energy

Corridor, and The Woodlands are saturated so boutique hotels will have to fill the gap. Boutique

hotels are slower and riskier projects to build that require experienced developers but are

typically more successful in appealing to the younger generation. There appears to be strong

demand for nightly accommodations in the Texas Medical Center area.




Texas Lodging

Revenue Growth

Texas lodging room revenues gained 2.9% in the third quarter of 2015, compared to 8.3% for 1st

Quarter 2014, 9.7% for all of 2014, and 8.7% for 2013. Total revenue for the Houston area was

570.9 million for 3Q 2014 and 569.5 million for 3Q 2015, according to Source Strategies, Inc.

For Texas, the gain “was a combination of a 5.1% decline in Oil & Gas areas (39% of Texas

rooms) with a 7.9% gain in the balance.

Room-Nights sold

Room-nights sold are the measure of real demand and the most important driver of industry

health. Third quarter room-nights sold increased by 0.8% state-wide, after a 2% gain in the first

half and 5.0% gain for 2014.

Revenue per Available Room (RevPAR)

Third quarter RevPAR was basically flat (down 0.2%), based on a 2.3% decrease in occupancy

and a price increase of 2.1% (Average Daily Rate). RevPAR indicated that although there was a

decrease due to oil & gas downtown, other sectors of the economy balanced it out.

Occupancy

Third quarter occupancy reached 65.3% in the Houston metro. 66.4%. Annual occupancy was

66.4% in 2014, 63.6% in 2013 and 62.5% in 2012. The long term Texas average is 60%.

Supply Below Demand Growth

Supply grew by 3.1% for the 2Q 2015, the highest since 2010. For all of 2014, net supply gained

2.2%. With low demand growth, RevPAR levels are expected to continue to decline moderately.

Houston Lodging

Texas room-nights sold gained 3.8% in the 3rd

quarter. Average daily rate increased from

$106.92 to $108.78 for metro Houston, and RevPAR (Revenue per available room) from $73.45

to $$71.03.

Developments

Marriott Marquis - Houston First Corporation has selected RIDA Development Corporation to

build a convention hotel downtown. The 1,000-room hotel will developed on the block

immediately north of Discovery Green and will connect to the George R. Brown Convention

Center via a skywalk. The hotel broke ground in 2014, and will be open in 2016.

JW Marriott Houston Downtown - Downtown’s 102-year old Samuel F. Carter Building was

transformed into the 328-room JW Marriott Houston Downtown in summer 2014. Pearl

Hospitality developed the new $81 million, luxury hotel at the corner of Rusk and Main Street.




Holiday Inn Downtown - A development group will turn the former Savoy Hotel that straddles

Downtown and Midtown into a Holiday Inn. The 17-story property on Main Street has been

closed since the late 1980’s.

Springhill Suites - Just a few blocks west of the George R. Brown convention center, the

historic Humble Oil Building complex at Main Street and Dallas is now a new 166-room

Springhill Suites hotel. The complex is already home to a 191-room Courtyard and 171-room

Residence Inn. The property’s owner, RLJ Lodging, spent $80 million to convert an existing 82-

unit apartment tower into the new hotel.

Courtyard by Marriott/Hampton Inn Suites by Hilton – Energy Corridor - Western

International constructed new Courtyard and Hampton hotels. They are side by side at Barker-

Cypress Road, just off I-10, each with approximately 135 rooms. It was completed in 2015.

Hampton Inn/Homewood Suites - Houston based American Liberty Hospitality is building a

pair of hotels under one roof at Crawford and Capitol streets Downtown. A 168-room Hampton

and a 132-room Homewood Suites will comprise the $50 million project. The developer is

aiming to open in summer 2016.

Hyatt Regency & Hyatt Place – Galleria - A 325-room Hyatt Regency and a 157-room Hyatt

Place are at Sage Road and West Alabama near the Galleria. The dual-concept project was

opened in 2015.

Aloft Houston – Downtown - Aloft delivered its second Houston property Downtown at Fannin

and Walker streets in 2015. The hotel with 515 rooms was a redevelopment of the historic, 10-

story Stowers Building, now known as the Aloft Houston by the Galleria.

Hotel ZaZa – Memorial City - Z Resorts, in partnership with MetroNational, has broken

ground on the boutique hotel’s third location (second in Houston) in the Memorial City area near

I-10 and Bunker Hill Road. Construction began in late 2015 with an opening date of summer

2017.

Hotel Alessandra - One much anticipated new hotel project will help anchor the mixed-use

GreenStreet development Downtown. Hotel Alessandra will be a tall, narrow tower at Fannin

and Polk streets with 225 rooms. Completion is slated for 3rd

quarter 2016.

Hotel Alessandra (conceptual renderings)




Unnamed Medical Center Project - TRC Capital Partners and Medistar Corp are planning a

250-room hotel in the Texas Medical Center. The 17-story hotel will be located at 6750 Main

Street. Groundbreaking is slated for some time in 2016 but no completion date is set.

Summary

Houston’s hotel market appears to be stable, due to the overall diversity of its economy. Losses

in the oil and gas industry are offset by the other sectors of the economy in Houston.

Room-nights sold and revenue should stay flat or grow marginally, but with the Super Bowl and

continued convention growth, the outlook is still relatively good.

Warehouses

According to Colliers International Q4 2015 Houston Industrial Research & Forecast Report,

“Although Houston’s industrial market showed signs of slowing due to the downturn in the local

economy caused by falling oil prices, 2015 still ended on a positive note, with year-end net

absorption totaling a positive 9.5 million square feet.”

The Houston industrial market is still experiencing moderate signs of advancement,

development, and growth during the expansion portion of this economic cycle, however its

velocity may wane due to recent pricing pressures from the oil sector.

Colliers noted last year that “Houston’s industrial investment sales market is benefiting from the

foreign capital that is pouring into the U.S.” That trend continued into 2015, as it did with multi-

family and retail investment grade property sales, independent of oil prices. Houston’s industrial

sector is ranked second after only Los Angeles, per Marcus & Millichap: “Major markets

proximate to busy ports and those with links to multi-modal transportation and distribution

networks again occupy the top ranks of this year’s Index.” Positive factors in the city include an

increase in jobs, low unemployment, stable rental rates, low vacancy, low-to-no concessions,

positive net absorption, active leasing, sales velocity, and new construction.

New Construction

Houston’s industrial construction “had 8.8 million square feet of projects underway” at the end

of the 2015, and about 4 million square feet of it was speculative development. According to

Colliers, “The largest project under construction is a 4,000,000-SF build-to-suit engineering,

manufacturing and logistics campus for Daikin Industries an HVAC equipment manufacturer

consolidating its operations” at a site located northwest of Houston. Aldi grocery stores is

constructing a 650,000 sf distribution center west of Rosenberg, southwest of Houston, to be

delivered in 2016.

Some noted deliveries include: 3507 Pasadena Blvd., a 600,000 sf 100% occupied facility,

delivered in the first quarter 2015 and Beltway Crossing Northwest Building 7, a 441,000 square

foot building delivered in the second quarter 2015, which is now vacant.

Currently, much of the warehouse construction is concentrated in three areas of the county: the

Far North, the Northwest and the Southeast. These areas are perceived as being most desirable to




tenants and investors of build-to-suit and speculative buildings based on their proximity to major

highways, airports, and the Port of Houston.

According to CoStar, during the 4th

Quarter 2015 there were 39 buildings totaling 2,149,969 sf

that were delivered in the Houston area market. This compares to the 53 buildings totaling

3,057,209 sf delivered in the 3rd

quarter of 2014, 50 buildings totaling 2,109,055 sf completed in

the 2nd

quarter, and 4,483,283 sf completed in the 1st quarter of 2015. New construction

deliveries in 2015 totaled 11,799,515 sf, compared to 8,951,383 sf in 2014, and 8,687,406 sf in

2013.

Developers and investors have fueled this current surge of supply and currently have 9,713,178

square feet under construction at the end of fourth quarter 2015, reports CoStar, compared to 9.1

million square feet at the end of 2014.

According to Transwestern, for end-of-year 2015, 9,792,162 sf of industrial product was under

construction, of which 47% was in the Northwest Far sector of the Houston market, and 24% in

the East-Southeast Far sector (near the Port of Houston).

More new construction can be expected with the Panama Canal expansion project currently set to

be complete by May 2016. Other driving influences include continued expansion in the chemical

industry, progression of e-commerce and manufacturing and medical center job growth. Also,

newer properties are viewed very favorably since some older industrial products involve

obsolescence, being incompatible with modern requirements of users such as greater wall

heights, larger contiguous blocks of space, more overhead doors, and floors that can support

heavier loads of equipment and goods.




New construction projects of note (from CoStar and Colliers):

Address Sub Market

Square

Feet

Pre-

leased

Estimated

Completion

Date

Building

Description

19001 Kermier NW, Hwy 6 4,000,000 100% Aug-16 BTS for Daikin

777 Highway 90A Sugar Land 650,000 100% Feb-16 BTS for Aldi

600 Fallbrook Dr North Fwy/

Tomball Pkwy

500,400 0% May-16 Spec Distrib

3013 Highway 225 E-SE Far 394,489 100% Mar-16 Spec WH

9431 Bay Area Blvd E-SE Far Ind 353,600 100% Sep-16 Spec WH

14151 E Hillcroft,

Phase 1 Bldg 1

SW Far 240,000 0% Feb-16 Spec Distrib

Beltway 8 & Hwy 90A,

Bldg 2

Hwy 59 & 90A 217,440 0% Jan-16 Spec WH

1300 Greens Parkway North Fwy/

Tomball Pkwy

213,218 0% Feb-16 Spec Distrib


3009 Highway 225 E-SE Far Ind 205,015 50% Mar-16 Spec WH

252 Fallbrook Dr North Fwy/

Tomball Pkwy

193,000 0% May-16 Spec WH

Volta Dr & Kenswick Dr North Hardy Toll

Rd

168,425 0% Jan-16 Spec Distrib

3011 Highway 225 E-SE Far Ind 154,360 0% Jun-16 Spec WH


BTS = Built to suit Ind = Industrial WH = Warehouse

Leasing Activity and Rents

According to Colliers, industrial leasing activity increased 8.8% on a quarterly basis, but

decreased 47.0% on an annual basis, recording 4.2 million square feet, which included renewals.

Also for 4Q 2015, the city-wide average industrial rental rate increased to $7.05 psf triple net

(NNN), which reflects a four (10.2%) percent increase compared to 4Q 2014 ($6.40 NNN). The

average industrial rental rate at the end of 2013 was $6.15 psf NNN.

This figure is higher than the Cushman & Wakefield report, which reflects an increase in rental

rates of 4.7% percent from 4th

quarter 2014 ($5.79 psf) to 4th

quarter 2015 ($6.06 psf). The year-

end 2014 asking average rental rate was 7% higher than year-end 2013. Per CoStar the average

quoted rate within the Flex sector was $10.05 psf NNN at the end of Q4 2015, while the average

quoted rate for the Q4 2014 Flex sector was $8.96 psf NNN, reflecting a 12.2% increase. The

graph below reflects a four-year trend of positive rental rates and a four-year trend of

predominantly steady vacancy rates per Transwestern.

CoStar average quoted NNN (triple net) rate per square foot at the end of 2015 by property type

are as follows: Warehouse Distribution $6.34, Bulk Logistics $4.56, Flex/Service $12.53,

Tech/R&D $13.10.




Industrial Lease Statistics

Notable 2015 Leases

Tenant Property Square Feet Submarket

Exel City Park East 905,000 E-SE Far

Michelin N.Amer. Inc. 8800 Citypark Loop 663,821 NE Hwy 90

Dunavant Bay Area Bus. Park 565,760 E-SE Far

McKesson Corp. 20710 Hempstead Rd 357,887 NW Hwy 6

GE Oil 16240 Port NW 261,990 West Outer Loop

Jacobson Warehouse Co. 11503 Highway 225 210,000 E-SE Far

Valassis Communications, Inc. 801 Seaco Court 135,231 E-SE Far

Forward Air 14810 North Freeway 109,386 N Hardy Toll Rd

FTD 16727 Park Row 65,000 NW Outlier Note:All leased in 4

th quarter of 2015

Vacancy/Absorption

CoStar Q4 2015 reports indicate vacancy for Houston’s industrial market went up twenty basis

points year-over-year to 5.0% (4.8% at end of 2014). Flex projects reported to CoStar that

vacancy was 6.8% at the end of the 4th quarter 2015 versus 7.3% at the end of the 4th quarter of

2014 and 8.3% at the end of 2013. Warehouse projects vacancy rate was reported to be 4.8% at

the end of the 2015.




Vacancy Data

The local industrial market has recently showed signs of its positive net absorption losing some

momentum. But, it is important to remember that this is within the context of the sector having

rapidly grown in recent years. CoStar stated net absorption for the overall Houston industrial

market was positive, at 847,661 sf in the 4th quarter 2015 compared with 1,691,806 sf in 3rd

quarter, 2,607,160 sf in 2nd quarter, and 4,296,464 sf in the 1st quarter of 2015. Net absorption

reported for 2015 was 9,467,091 sf, compared to 10,350,088 sf for 2014. Colliers International,

in agreement with figures from other prominent sources, reports Houston posted approximately

700,000 sf of positive net absorption in the 4th quarter, bringing the year-to-date figure to 9.5

million square feet.

Examples of major tenant move-ins (including Exel, Michelin, and Dunavant) are listed in the

chart of notable 2015 leases above.

Sales and Capitalization Rates

Currently, interest rates are still low, and there are institutional investors vying for the newer,

well-positioned, higher occupancy properties.

Per CoStar, “Total year-to-date industrial building sales activity in 2015 is down compared to the

previous year. In the first nine months of 2015, the market saw 31 industrial sales transactions

with a total volume of $288,257,250 [up from $243,799,698 the first three quarters of 2014].

The sales price per square foot has averaged $75.29 this year [from $61.63 the previous year].

Cap rates have higher in 2015, averaging 7.26%, compared to the first nine months of last year

when they average 6.83%.” In the first nine months of 2013, cap. rates averaged 7.56%.

Capitalization/investment rates will vary, depending on the type and class of product sold. Class

A properties are expected to sell with rates in the 5-6% range for 2016, while Class B product is

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

4thquarter

2013

1stquarter

2014

2ndquarter

2014

3rdquarter

2014

4thquarter

2014

1stquarter

2015

2ndquarter

2015

3rdquarter

2015

4thquarter

2015

Vacancy Rates

Vacancy per Flex projects reported to Costar

Vacancy per Colliers and CoStar




expected to trade in the 7-9% range. However, well-located Class A distribution projects are

currently trading in the low-5% range.

Summary

With some changes and adjustments in the Houston warehouse sector due to lower oil prices, it

was a moderately positive year in 2015 due to increased rental rates, lower vacancy, and a

resulting increase in sales price per square foot. The major oil players and service providers

began reducing staff and budgets, and some proposed projects were placed on hold. Now the

new employment forecast for Houston in 2016 is approximately 20,000 new jobs which equates

to a 1% increase. Houston has diversified since the recession of the 1980s, as illustrated by the

medical industry, with the Texas Medical Center now being the largest in the world. Also, it is

important to remember the $35 billion of construction in the port area, including the world’s

largest ethane export terminal, which is coming to the Houston Ship Channel. There is also the

expected completion of the Panama Canal expansion project by May 2016.

The general consensus is that growth in Houston will continue, just at a slower pace. Cushman &

Wakefield, in their US Industrial Snapshot Q4 2015, their 12-month forecast is for overall

vacancy to decrease, net absorption to stay level, and construction and rental rates to increase.

Looking forward to 2016 from an annualized basis year over year, the Houston industrial

warehouse income sector should anticipate approximately a moderate increase in value based on

preliminary figures.




Industrial Property

Refineries

The price of crude oil has, once again, taken a nose-dive. On the first trading day of 2015 the

price of West Texas Intermediate (WTI) was about $53 per barrel having been priced between

$80 and $100 for the previous 3 years. It now stands around $37 (NYMEX; first trading day

2016). All other benchmark crudes have experienced similar price declines. Continued strong

production from countries in the Middle East along with concern over China’s weakening

economy has the global economy awash in relatively cheap oil at the moment. The lower crude

prices served to reduce the cost of gasoline at the pump and opportunistic Americans took to the

road last summer. Some refiners scaled back outages in order to fill demand and capture a strong

margin.

Year-over-year crude runs at refineries were strong. The Texas Gulf Coast refinery average

annual capacity utilization, as defined by the Department of Energy, for 2015 (data through

October) was 91.7 percent compared to 90.6 percent for the same period in 2014. Texas Gulf

Coast refineries produced 13 percent more barrels of finished motor gasoline in 2015 as

compared to a year earlier. Distillate fuel oil production, including ULS diesel, was up more than

2 percent.

The PACE (Pace Consultants Inc.) Gulf Coast composite refining margin for 2015 is, so far,

about 10 percent higher than 2014. Through the first three quarters of 2015, Baker & O’Brien

Inc.’s PRISM cash margins for the Gulf Coast averaged $2.70 per barrel higher than the same

period of the prior year.

Gulf Coast refining margins are mixed depending on refinery configurations, the types of crudes

processed, and the degree of the distillate production compared to gasoline. However, the robust

margin environment of the summer’s driving season probably lifted everyone’s cash margin over

that of the previous year. A healthy gasoline crack appears to have buoyed revenue not offset by

falling crude prices.

In November, the Chalmette-based joint venture of ExxonMobil and Petroleos de Venezuala SA

(PDVSA) sold their Louisiana refinery to PBF Energy for $322 million. The deal included

interests in associated pipelines and marine and truck terminals. PBF, in September, also agreed

to purchase ExxonMobil’s Torrance, California refinery for more than $500 million. Due to an

explosion and fire earlier in 2015 at the site, this deal has yet to close. Also last summer, French

refiner Total SA announced that it was seeking a 50 percent partnership in its Port Arthur, Texas

refinery. No additional public statements have been released since that announcement.

The Chalmette refinery, while not a small operation, appears to have the configuration of a

gasoline producer. In general, unless it’s very efficient and has a low cost structure, its margin

potential is probably limited. The Torrance refinery sale seems a part of a major integrated oil

company’s asset divestiture plan, and because California can be a difficult market, a completed

sale will most likely end up at a below-average market multiple when compared to other

transactions, especially those with a market location advantage.




Chemicals

The chemicals industry is heavily dependent on auto manufacturing and home building and, as

the economy goes, so goes the chemical industry. According to Car and Driver Magazine, retail

sales for vehicles have increased by 6 percent in 2015 when compared to 2014. Housing is still

lagging nationwide, but up about 14 percent over last year with the latest figures from the census

bureau, with most of the sales being in the south and western parts of the country.

Texas has been blessed with oil and natural gas fields that have either been recently discovered

or, through newer technologies, have been newly developed. The glut of natural gas that has hit

the market recently has caused a tremendous amount of new construction to process the gas.

Around the state there have been many other projects for building facilities to use the natural gas

found in south Texas and along the East Coast. Cheap natural gas means lower raw material

costs for many chemicals and possibly greater profit margins for their products.

Oil prices began cratering in the 4th quarter of 2014 and have yet to rebound. While this has

made an impact on what is being paid at the pump, it may have a positive impact on the

chemicals market that is dependent on oil-based feedstock. The real question is whether this

drop in price for oil is just temporary or if it will hold and only time will tell. With the drop in oil

prices, there have not been any announcements for new construction as the market is still waiting

to see if this change will last. The plants that will benefit from the drop in oil are the facilities

that are flexible enough to take advantage of whichever feed is the cheapest. And while oil has

dropped significantly, natural gas is likely to continue as the preferred feed product for the near

future.

In Harris County, there have been several announcements of increased capacity or new unit

construction. LyondellBassell has increased capacity at their La Porte and Channelview

facilities. ExxonMobil and ChevronPhillips are building a new olefins plant at their facilities

near Baytown that should be operational by 2017. Last year ChevronPhillips completed a major

process unit at the Cedar Bayou site, a 1-Hexene unit. However, with the drop in oil prices, some

of these projects may slow down. After the economic crisis and oil prices soaring in 2009 we

saw refinery projects that had been planned or in construction slow down tremendously. We may

get the same result on chemicals projects as a result of these changes and we have already seen

ChevronPhillips adjust their Chapter 313 agreement with the school district to recognize current

delays.

Operation rates specifically for olefins units have been steady and hovered just above 90 percent

on average through 2015, about 5 percent higher than last year. Oil prices appear to not have any

effect on olefin unit run rates at this point, but the impact of oil is impacting the overall economy

of Texas and the US, which does impact profitability. It appears that 2015 may end up a better

production year, but with less revenue than 2014. All together this industry appears to have

peaked for the 5 to 15-year cycle we are on and values will likely decline over the next few years

especially with the impact of the massive new plants coming online in the next few years.

Chemical-related inventory volumes should be near the levels they were on January 1, 2015 and

prices are up or down depending on the chemical. Value changes for most chemical facilities




look to be down for commodity chemicals going into 2016, but may be down more for specialty

chemicals that depend on oil-based feedstocks.

Utilities

Electric

The electric power generation sector (power plants and cogeneration facilities) has been through

a great deal of turbulence over the past few years and it doesn’t look like it’s going to get any

better soon. Historically, the price of electricity has followed the dominant fuel used to generate

the power for peaking plants. In Texas, that fuel is primarily natural gas, although the addition

of wind projects and transmission lines from West Texas in connection with these projects is

affecting power prices. Combining this with very mild weather for the past year and it’s no

wonder why power prices have been so soft.

There are several initiatives competing to impact generation within the Electric Reliability

Council of Texas (ERCOT). The first is the Competitive Renewable Energy Zones (CREZ)

initiative adopted by the Public Utility Commission of Texas (PUCT). In April 2008, the PUCT

adopted a $5 billion scenario to add transmission infrastructure to move electricity from wind

farms in the ERCOT West zone to markets in the North, South, and Houston zones. Wind

energy has zero fuel cost and is a clean alternative to burning hydrocarbons, but many of the

wind farms in Texas began production between 2004 and 2007 and will be losing their 10-year

federal tax incentives. This will impact the electric prices as these incentives go away because

wind power with incentives is able to sell power at negative prices (loss of ~20 cents per

Megawatt) and the government makes up that difference. When the government incentives go

away, the wind power producers will have to bid in at positive costs making the average price for

electricity higher. So far we have not seen a dramatic impact in the power prices.

The next initiative is the Public Utility Commission of Texas increasing the ceiling for power

price in ERCOT. The PUCT makes the rules for the Texas power market and they have been

looking at increasing the cap for power price per megawatt during peak hours. Their concern is

that Texas is still growing in power consumption, but there is not enough new power

construction in the market to maintain a reasonable reserve. The PUCT has typically enjoyed a

12 percent reserve on the ERCOT grid, but projections show that without new construction,

Texas could fall well below 10 percent. To encourage new power plant construction the PUCT

has increased the cap from $3,000 per MW to $4,500 per MW and there are still discussions to

raise the cap further to $9,000 per MW. While this may seem significant, the industry is

doubtful that this will be enough incentive to bring in new construction. The industry likens the

cap increase to high stakes gambling, where the owner has to bet on whether there will be

enough peak days in a year to make it worth the risk. So far there has been very little proposed

new construction and only two grass roots facilities being built by the same company.

Electricity producers have been testing the waters in different areas of the state looking for

options to build new capacity only for the summer and winter months where the price gets high

enough to justify running. These units are significantly cheaper than a combined cycle natural




gas plant or a coal fired plant though they are not as efficient, but when you are running less than

10 percent utilization, efficiency is not a concern.

It appears to be official, older power plants will begin to be permanently shut down and

abandoned. In 2010, we saw at least 4 units in Harris County taken offline, put back online for

the summer, only to be taken offline again. Unfortunately, that appears to no longer be the case

and the old stationary boilers may be near their true end of life.

The net effects on value within Harris County reflect a reduction in values as plants depreciate.

Calpine did complete their two new units in 2014, one at their Channelview location and the

other at Deer Park and these went on the roll at their full value for 2015. The majority of the

power in Harris County is from cogeneration facilities that produce both steam for an adjacent

facility as well as power. If the power prices are affected up or down, it will impact the value of

the facility, but the steam will help offset the impact. Steam prices typically track with the price

of natural gas, and as long as natural gas is stable, the value of these facilities will not be

significantly impacted up or down.

Natural Gas

Natural Gas Distribution utility companies are always requesting that regulators allow them

higher returns (through the rates they are allowed to charge their customers) in order to pay for

the cost of expansion when needed, repair storm damage at times, and maintain reliable service

overall. However, the main goal of regulators is to make sure gas distribution companies remain

operational while keeping service costs as low as possible, in return for the monopoly power

given to these companies over designated service areas. Because both revenues and expenses

tend to be held in line with this process, the values of property owned by these natural gas

distribution businesses tend to be rather stable. Other factors that indicate continued healthy

future demand for utility services are: a) the nation’s population appears to be on a steady

upward growth course; b) limited practical alternatives exist for consumers seeking a steady

supply of natural gas; and c) natural gas supplies in this country are abundant thanks to proficient

drilling and extraction technologies. Unseasonably warm or cold weather can always cause

substantial volatility in quarterly operating results; however, companies strive to counteract this

exposure through long-term oriented temperature-adjusted rate mechanisms. For 2016, the

values of businesses in this sector are expected to reflect confidence in the continued

improvement in the nation’s economic outlook. An improving job market and housing sales also

underpin solid revenue growth and earnings potential.

Telecommunications

Most Telephone companies in addition to the traditional land lines have a thriving cell phone

business which currently is the most profitably portion of the communications sector. For the

traditional portion of Telephone Utilities, the number of phone lines in the United States

continues to decrease. Many people are dropping traditional phone lines for internet phone

services or have chosen to carry just cellular phones. In 2013 (latest available data) 42 percent of

adults in the South live in homes without a traditional wired telephone which is down 2.5 percent

from 2003. AT&T still plans to end its traditional wire service by 2020 which would require

approval by the FCC. That approval is widely expected, although the timeframe for the transition




remains unknown. The continued competition from customers relying solely on cell phones and

Voice over Internet Protocol (VoIP) offered by cable companies will continue to keep the values

down. AT&T has lost approximately 80 percent of its Plain Old Telephone Service (POTS) due

to the move to cell phones and VoIP. Bundling packages that include voice, internet, and

television programming over some phone systems still cost more to provide than the revenue it

generates. Traditional telephone property across the state is expected to continue declining over

the next few years.

The cable companies and telephone companies are in competition for the same market. The

ability for these industries to provide phone, television, and internet has reduced the ability for

both industries to earn a profit. Telecommunications will continue to get less expensive as

technology advances. With that said, revenues for Comcast and Time Warner have been good for

2015. If this trend continues, then the value of these companies should change little.

Wireless communications carriers’ expenditures on infrastructure will decrease as the major

cellular carriers have already deployed the next generation of wireless technology referred to as

LTE (Long Term Evolution). However, to meet increased demand for mobile data and internet

traffic, the carriers will have to add equipment to keep up with the demand which is growing

exponentially. The new equipment includes the Hetnet concept of small cells, DAS (distributed

antenna system) and WIFI equipment working in conjunction with the cellular towers to increase

capacity.

Replacement costs for voice and data equipment will continue to decrease with design and

manufacturing improvements. Overall, value in 2015 increased 7.73 percent over 2014. The

value increase represents heavy investment on part of Verizon and T-Mobile in deploying LTE

and associated equipment to meet its data demand. AT&T acquired Cricket Communications in

2014 and Sprint finish removal of its old iDen network. The older generation equipment 2G, 3G

& 4G (2nd, 3rd & 4th Generation) will experience expedited obsolescence due to the efficiencies

of the current LTE devices. Depreciation on existing plant assets will continue to outweigh new

construction and this trend should continue for the foreseeable future.

The Data Centers business has really developed in Harris County within the past few years. This

business has seen continuous growth and the trend seems to continue. There are two new data

centers that were completed in 2015 and are on line currently. Many companies are choosing to

host in data centers as compared to building their own because of the high cost of infrastructure

and equipment associated with this business.

Fiber Optic long distance transmission carriers’ will see only continued depreciation for 2016.

The increase in data demand has been a positive for the communication industry as older cable is

getting better utilized. The only trend being seen is that larger entities are purchasing smaller

companies to reduce competition. There have been new cable deployments happening in major

metro cities. Google has also become a major player. However, they are in limited cities in the

US.

Broadcast television capital expenditures should be minimal in 2016. The improvement in

technology has resulted in a decrease in equipment cost and investment. Other communication

and internet companies’ asset values will decrease due to further depreciation of their assets and

lower investment cost associated with newer technologies.




Manufacturing

According to the Dallas Fed, Texas factory activity increased again in December, according to

business executives responding to the Texas Manufacturing Outlook Survey, which polls

businesses on whether key indicators of activity have increased, remained the same, or decreased

from the previous month. Survey responses are used to calculate an index for each indicator.

The production index, a key measure of state manufacturing conditions, ended the year at 13.4,

after Texas factory activity increased for the third month in a row in December. This index was

at 16.4 at the end of 2014, and was at 13.4 at the close of 2015. This indicates a slower end to

the year though not as drastic as many would have you believe.

Commercial Personal Property

Dubai’s Gulf News suggests that “the wide variety of global uncertainties are forcing many

companies to think short term and hold back on investments that are needed to both build their

prosperity in the future but also break the current mood of growing pessimism.”32

According to

About News, however, “the U.S. economic outlook is healthy. The GDP growth rate will remain

within the 2-3% ideal range. Unemployment will continue at the natural rate. There isn't too

much inflation or deflation. … There's little risk of the irrational exuberance that creates

damaging booms and busts.”33

The Texas State Comptrollers’ office reports that over the past year, Texas added jobs in 9 of the

11 major industries. Pre-recession Texas employment peaked at 10,639,900 in August 2008, a

level that was surpassed in November 2011, and by November 2015 Texas added an additional

1,242,700 jobs. In calendar 2014, Texas real gross domestic product grew by 5.2 percent. Also,

the Texas region's consumer confidence index was 117.9 in January 2016, up 1.11 percent from

one year ago. However, consumer spending showed that Texas state sales tax receipts for

December 2015 were 1.03 percent lower than for December 2014.

In Houston, office leasing is down, but retail construction is up. City of Houston sales tax

collections have slipped, but vehicle sales set a new record. Airport and port traffic continues to

grow and employers continue to add enough jobs to offset job losses in energy. The Texas

Workforce Commission reports that the Houston metro area added 4,800 jobs in November,

which was the third weakest November in the past 25 years. The region typically adds 10,000 to

12,000 jobs in the month.

The Harris County commercial personal property tax base increased approximately 6.29 percent

for tax year 2015, including a 6.09 percent increase of the general personal property value base.

32

http://gulfnews.com/business/economy/why-economic-outlook-for-2016-is-poor-1.1658357 33

http://useconomy.about.com/od/criticalssues/a/US-Economic-Outlook.htm

http://gulfnews.com/business/economy/why-economic-outlook-for-2016-is-poor-1.1658357

http://useconomy.about.com/od/criticalssues/a/US-Economic-Outlook.htm




It is anticipated that this sector will show a minimal change for 2016 as the Houston economy

continues its sluggish growth.

The total value of the leased asset component of commercial personal property increased 1.93

percent in tax year 2015. The value for this sector may increase slightly for 2016 as office market

vacancy rates are expected to decline over the next few years and the majority of leased assets

are generally business office machinery and equipment.

TexAuto Facts reports that Houston-area auto dealers sold 376,481 vehicles in 2015, up 0.7

percent from 2014 and a record for the industry. The average retail sales price per vehicle,

$36,112, reflects a record for the month of December. TexAuto Facts expects sales to slip only

slightly in 2016. Since the dealer inventory component is tied to prior year vehicle sales, this

indicates an increase in value for this sector in 2016. The tax base for dealer inventory in tax year

2015 increased by 13.54 percent from 2014.

The tax base for business vehicles for tax year 2015 increased by 10.68 percent from 2014. The

value for this sector, however, is expected to show less growth for 2016.

harris county appraisal district · inventory update 2 sales volume update 3 sales price update 4...

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