Published by: 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 WHY O’CONNOR & ASSOCIATES? Accurate Data… Local Expertise… RETAIL OFFICE INDUSTRIAL MULTIFAMILY Search our comprehensive property inventory to get the information you need! Stay up-to-date with customized analysis that will help you better identify market trends! Rely on our expertise to help you improve performance at your properties! 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