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Houston Office Rental

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                                                                 O’Connor & Associates
                                                                             2000 N. Loop West, Suite 110
                                                                                       Houston, TX 77018
                                                                                            713.686.9955




                   HOUSTON OFFICE
                 PERFORMANCE UPDATE
EDITED BY RICHARD ZIGLER            $499 PER YEAR      VOLUME 8 NUMBER 4     FOURTH QUARTER 2004

                                        We landed Citgo, saw what was to be Enron’s shiny new
Absorption Patterns                     digs sell again, and impressed the NFL so much that they
                                        already want to come back.              What did corporate
  ↑     195,712 SF absorbed             relocations, high profile office sales, and national attention
        in 4Q-04                        from sporting events do for Houston in 2004? Well, not as
                                        much as we’d hoped, but just about everything is in the
  ↑     1,019,345 SF                    black for a change. Well everything but rents, that is. Job
        absorbed over                   growth and absorption are rising, fueling hopes that next
        past 12 months                  year’s growth will outpace this year.

 Occupancy Levels                       Recent quarterly gains hint that demand may be
                                        accelerating for high-end office space, although demand
  ↑     82.61 % overall in              for some of Houston’s most prized Class A buildings
        4Q-04                           lagged over the last year. Overall, Houston recorded
                                        positive annual absorption as well as increased occupancy
 Rent Growth                            in 2004. These increases are somewhat hollow for owners
                                        as rental rates have not yet followed an upward path, but
  ↓     Rents down $0.09                are next in line to increase.
        to $17.92 overall
                                        As the Central Business District and Galleria continue to
 Employment Growth1                     dominate market statistics, all eyes will be watching their
                                        performance in the upcoming year, particularly since the
  ↑     6,700 jobs gained
                                        rest of the city pulled its weight, absorbing more than 1.5
        in December 2004
                                        million square feet, increasing occupancy 0.97 points, and
  ↑     Annual Job Growth               edging up rents $0.01 psf.
        up 1.7%
                                        And now that light rail wrecks have calmed down, hopefully
                                        people will make it safely to work. That is, unless they are
1. Texas Workforce Commission,          towed.
12/04 Total non-agricultural jobs
                             Houston Office Performance Update



ABSORPTION
The Houston office market made notable progress over the last year, overcoming heavy
losses in 2002 and 2003 with more the 1 million SF absorbed in 2004. Class B is largely to
thank for the positive demand, accounting for more than 85% of the square feet absorbed in
2004.
Greater Houston Office Market Absorption (12-month Period)
  Year Ending         Class A              Class B               Class C              Class D          Overall
   4Q/02             -1,030,060           -1,282,136            -1,118,734            -159,444       -3,590,374
   4Q/03             -1,899,588           -1,301,748              -54,640               37,923       -3,707,053
   4Q/04              -180,964             868,140               160,336               171,833       1,019,345

After a strong second quarter, Class A demand over the third quarter was more moderate
absorbing 59,476 SF. The annual total for 2004 remained negative at -180,964 SF despite
three straight quarters of positive demand. The strongest annual demand was found in the
Midtown/Allen Parkway sector with 146,154 SF absorbed, but was not strong enough to
overcome weak annual demand recorded in the Central Business District and Galleria,
totaling -761,129 SF.

Class B was robust over the last quarter, absorbing 377,300 SF and bringing the annual total
to 868,140 SF. Quarterly absorption was fueled by large gains in the Midtown/Allen
Parkway and Westchase sectors, absorbing 112,190 SF and 128,662 SF respectively.
Annually, the Clear Lake sector was the strongest absorbing 252,401 SF, followed by the
Central Business District with 211,927 SF.

Despite posting its weakest demand in over a year with -224,502 SF, Class C annual
absorption remained positive with 160,336 SF absorbed. Suburban markets were the culprit
of weak quarterly absorption with -253,002 SF absorbed, as the Central Business District
recorded 28,500 SF.

Class D absorption posted the weakest absorption in six quarters, with -16,562 SF absorbed,
though annual demand remained healthy at 171,833 SF.
                        Greater Houston Office Absorption (in thousands)
 600
 400
 200
   0
-200
-400
-600
                   4Q 2003                               3Q 2004                                 4Q 2004
         Class A                       Class B                            Class C                     Class D



                        O’Connor & Associates, 2000 N Loop W, Suite 110, Houston, TX 77018
                                      Tel: 713-686-9955; Fax: 713-686-3377
                       Edited by Richard Zigler, Director of Research, RZigler@poconnor.com
                       Reproduction or other unauthorized use is prohibited without permission
                                                                                                                  2
OCCUPANCY
Greater Houston overall occupancy picked up 0.06 points over the quarter for a gain of 0.22
points over the last year. The Central Business District and Galleria continue to have the
largest influence on the Class A occupancy levels, both of which recorded Class A losses
over the last year. Class B recorded gains strong enough to offset the losses in all other
classes over the quarter and annually bringing overall occupancy up.

Greater Houston Office Market Occupancy (Quarterly)
     Quarter             Class A                Class B              Class C            Class D         Overall
      4Q/03              84.66%                 81.00%               79.85%             78.93%          82.39%
      3Q/04              84.25%                 81.55%               80.95%             78.43%          82.55%
      4Q/04              84.24%                 82.16%               79.97%             78.12%          82.61%

After recording its first gain in two years, Class A occupancy fell 0.01 points to 84.24% over
the last quarter with occupancy levels 0.42 points below this time last year. At 72.70% and
74.27%, respectively, low occupancies in The Woodlands/Conroe and North
Loop/Northwest Freeway weigh heavily on the overall Class A average.

Class B posted its second consecutive increase, recording the strongest occupancy increase
since this time three years ago. A 0.61-point increase over the quarter brings the annual
increase to 1.16 points. The Clear Lake sector posted an impressive gain of 1.10 points over
the quarter.

Class C occupancy slid 0.08 points over the last quarter to 79.97%, but is up 0.10 points
above occupancy levels at this time last year. The depressed overall occupancy is a result of
three large sectors, the Central Business District, Katy Freeway West, and
Greenspoint/North Belt, posting occupancies below 70%.

Class D occupancy decreased at 0.31 points over the quarter and is down 0.81 points over
the last year, though it is actually about its level of earlier this year. In the first quarter 2004,
Class D occupancy fell to 76.74% and has since climbed 1.38 points.

                                Greater Houston Office Occupancy
 90%

 85%

 80%

 75%

 70%
                   4Q 2003                                3Q 2004                                 4Q 2004
         Class A               Class B                     Class C                      Class D             Overall




                                  O’Connor & Associates, 2000 N Loop W, Suite 110
                             Houston, TX 77018 Tel: 713-686-9955; Fax: 713-686-3377
                        Edited by Richard Zigler, Director of Research, RZigler@poconnor.com
                        Reproduction or other unauthorized use is prohibited without permission
                                                                                                                      3
RENTAL RATES
Average rents continued to decrease over the last quarter, reaching levels not seen since the
late 1990s. Overall rents are down $0.38 psf over the last year, with the largest year over
year decrease in Class A at $0.59 psf. It may come as some relief that recent quarterly
decreases are not as great as we’ve seen over much of the last two years when we saw
decreases in excess of $0.20 to $0.30 psf.

Greater Houston Office Market Rental Rates (Quarterly)*
    Quarter                       Class A                Class B              Class C                Class D                Overall
    4Q/03                         $21.22                 $16.82               $13.73                 $11.15                 $18.30
    3Q/04                         $20.77                 $16.70               $13.59                 $11.33                 $18.01
    4Q/04                         $20.63                 $16.63               $13.56                 $11.35                 $17.92

Another quarterly decrease brings Class A rents to $20.63 psf, a $0.59 drop over the last
year. Most sectors report rents above $20 psf, but negative rent growth in key areas such as
the Central Business District causes the overall rental rate to fall.

Class B rents decreased $0.07 to $16.63 psf over the last quarter, down $0.19 over the last
year. The largest sector, with 76 operating Class B buildings, the Galleria, recorded its fifth
consecutive decline, losing $0.10 psf over the last quarter and $0.42 psf over the last year.

Class C recorded a modest quarterly decline, down $0.03 psf. Rents are down $0.17 psf
over the last year. Rents are currently at the lowest level in more than four years.

Class D was the only class to post an increase over the last quarter, with rents up $0.02 psf.
Over the last year Class D rents have climbed $0.20 psf. Rents average as high as $14 psf
in the Midtown/Allen Parkway sector, but are less than $10 psf in the Southwest 1 and The
Woodlands/Conroe sectors.



                                    Greater Houston Office Rental Rate (per SF)
 $24.00

 $20.00

 $16.00

 $12.00
                            4Q 2003                                   3Q 2004                                   4Q 2004
                 Class A                              Class B                              Class C                              Overall

*For statistical purposes, Class A rents in the Central Business District were adjusted to gross, though many landlords quoted net rent.




                                            O’Connor & Associates, 2000 N Loop W, Suite 110
                                       Houston, TX 77018 Tel: 713-686-9955; Fax: 713-686-3377
                                  Edited by Richard Zigler, Director of Research, RZigler@poconnor.com
                                  Reproduction or other unauthorized use is prohibited without permission
                                                                                                                                           4
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