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Midland Office Market Conditions

Overview
In July 2008, Capitol Market Research conducted a comprehensive inventory of the multi-tenant office
market in Midland, Texas. This inventory analysis revealed a total of 5,070,547 sq. ft. of multi-tenant
office space in 53 buildings. A majority of the buildings (31) and 63.9% of the office space (3,242,528
sq.ft.) are located in the CBD. Currently, the market is approximately 89.6% occupied. Average rents are
approximately $10.76 per square foot on a “gross” lease basis, and many of the buildings (particularly the
class “A” space) are quoting a “base year” expense stop. The class “A” space (2,253,615 sq.ft.) is
approximately 98.8% occupied and class “A” rates average $12.76.

New Construction
Unlike many other Texas Cities, Midland has not had a new office building boom since the early 1980’s.
The most recent building completion is Claydesta Center, which is a 440,000 sq.ft. class “A” suburban
building completed in 1985. The newest building completed in the CBD is Independence Plaza, which is a
153,400 sq.ft. building completed in 1983.

Currently in the market area, there are no new multi-tenant office buildings that have begun construction
or are planned to start in the near future. Potential sites for new office construction are located
throughout the market area, typically on or near major thoroughfares including Loop 250, Big Spring
Street, Illinois Avenue and West Wall Street. Currently, there are no new multi-tenant office buildings
planned.

Occupancy & Absorption
The current (July 2008) occupancy in the market area is 89.6%. In the CBD, the average occupancy rate
is 91.8% but among the suburban office buildings, the average occupancy rate is only 85.9%.

It is not possible to accurately measure absorption on an annual basis since this is the first attempt by
Capitol Market Research to conduct a city-wide inventory evaluation. It should be noted, however, that
many of the building owners and property managers report very strong tenant interest in the class “A”
buildings.

Average Rents
Average rents in the Midland Office market show a broad range from as low as $7.00 per square foot to
$13.50, based on the building location, quality of the construction, and the age of the property. Newer
class “A” buildings are leasing at substantially higher rates ($12.00-$13.50) when compared with the older
space at $7.00-$10.00 per square foot. The rent disparity between the class “A” properties and the older
space is a result of the willingness of certain tenants to pay a premium for high-quality construction,
“modern” design, and the prestige of being in a newer building. Because some tenants are willing to pay
for quality, location, and amenities, and because there is a shortage of supply in these buildings, the class
“A” building owners have begun to increase the quoted rental rates and add an expense stop to cover the
increasing cost of utilities.

Market Outlook
Currently, there are no new multi-tenant office buildings under construction in Midland. As indicated
above, however, the class “A” buildings are 98.8% occupied and there is virtually no space available. The
high occupancy rate and a slow increase in the “net” rents should (eventually) lead to new construction,
most likely in the downtown area.




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                          Midland Office Space by Location and Class

                           Suburban A: Suburban B:         CBD A:         CBD B & C: TOTAL:

Total Square Feet          565,790        1,262,229        1,687,825      1,554,703   5,070,547
Available Square Feet      12,000         245,914          14,250         253,202     525,366
Occupancy                  97.88%         76.00%           99.16%         85.87%      89.6%
Average Rent               $12.00         $9.90            $13.02         $8.54       $10.76
                                                                   Suburban A:
                                                                      11%
                                        CBD B & C:
                                          31%
                                                                    Suburban B:
                                                                       25%


                                                 CBD A:
                                                  33%




         1,800,000


         1,600,000


         1,400,000

          1,200,000
                                                                                                  Total 
                                                                                                  Square Feet
          1,000,000

            800,000                                                                               Available 
                                                                                                  Square Feet
            600,000

            400,000

            200,000

                      0

                          Suburban A:
                                        Suburban B:
                                                          CBD A:
                                                                        CBD B & C:




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Employment Growth
Employment growth in Midland has shown considerable volatility over the last eighteen years, primarily as
a result of national and international trends which have an effect on the local economy. Petroleum
products and services establish the economic base in Midland, but the city also has a vibrant and growing
base in the Health Care industry and regional retail.

Between 1990 and 1998 Midland experienced a period of sustained growth, but in 1998 the price of oil
slipped to $11.91 a barrel and a wave of oil industry consolidations and closures ensued, culminating with
the loss of Mobil Oil and 170 white collar jobs in 1998. With the exodus of the National Oil companies,
the petroleum industry in Midland has been taken over by independent oil exploration and production
companies, who operate more efficiently and can be profitable at lower margins. As the price of oil has
increased, the local economy has picked up, and employment growth has hovered around 5% over the
last three years.

Forecasted annual increases in the Midland MSA employment for 2008 through 2015 are expected to
average 1.97% as shown in Table (2). This forecast was obtained from Economy.com a national
econometric forecasting firm that tracks all large metropolitan areas in the U.S.




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                                                     Table (2)
                                   Historical Employment Growth
                                                  Midland MSA

                                   Total Wage &                                     Percent
                         Year                            Annual Change
                                    Salary Emp.                                     Change

                         1990           46,873                      …                   …
                         1991           48,350                   1,477               3.15%
                         1992           48,811                     461               0.95%
                         1993           49,319                     507               1.04%
                         1994           50,536                   1,217               2.47%
                         1995           52,209                   1,673               3.31%
                         1996           53,144                     935               1.79%
                         1997           56,590                   3,446               6.48%
                         1998           57,847                   1,258               2.22%
                         1999           54,196                   -3,651              -6.31%
                         2000           55,258                   1,061               1.96%
                         2001           56,733                   1,475               2.67%
                         2002           56,184                    -549               -0.97%
                         2003           56,815                     631               1.12%
                         2004           57,884                   1,069               1.88%
                         2005           60,688                   2,804               4.84%
                         2006           64,397                   3,709               6.11%
                         2007           67,080                   2,683               4.17%
                         2008           68,809                   1,729               2.58%
                         2009           69,763                     954               1.39%
                         2010           71,659                   1,896               2.72%
                         2011           73,387                   1,728               2.41%
                         2012           74,766                   1,379               1.88%
                         2013           75,942                   1,176               1.57%
                         2014           77,098                   1,156               1.52%
                         2015           78,382                   1,284               1.66%


                      Source:   Texas Workforce Commission, Annual Average Wage &
                                Salary Employment, Adjusted Annual Average, 1990-2007
                                Forecast from Economy.com, August 20, 2008
                                                                                  emp_grow.xls
                                           Employment Growth

              5,000                                                                              8.00%
              4,000                                                                              6.00%
              3,000
                                                                                                 4.00%
              2,000
                                                                                                          Percent Change
Employment




              1,000                                                                              2.00%
                  0                                                                              0.00%
             -1,000                                                                              -2.00%
             -2,000
                                                                                                 -4.00%
             -3,000
             -4,000                                                                              -6.00%
             -5,000                                                                              -8.00%


                                                          Year
                                         Annual Change                    Percent Change




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Office Space Demand
Total employment in the Midland area is expected to grow by almost 14% by 2015 with mining and
professional services employment accounting for a substantial amount of the increase. Due to the
evolving nature of the industry mix, in order to accurately reflect the number of office jobs created over
this time period, it is important to examine the types of jobs being created by occupational category.
Office type occupations are broadly defined as all white-collar occupations minus the category of sales
workers. Included in this classification are most professional, managerial and clerical categories as
defined by the US Bureau of Census. There are, however, a number of occupations that do not occupy
office space and must therefore be deleted to accurately reflect the demand for office space. Among the
deleted categories are artists, musicians, pharmacists and elementary school teachers. Other categories
may be partially deleted based on empirical evidence and judgment based on local market knowledge.

Once the number of office jobs by industry group has been determined, it is then necessary to estimate
the number of jobs that are located in office buildings rather than in industrial warehouse space or in an
office attached to a manufacturing facility. This is accomplished by developing a matrix of office
occupations by major industry group and including only those jobs that are likely to be located in
freestanding office buildings.

As a part of this market evaluation, Capitol Market Research obtained from the Texas Workforce
Commission an occupational breakdown of workers for each major industry group. CMR staff then
reviewed each occupational category and assigned it an office percentage based on the likely location of
the worker within each industry class. The results of this classification analysis indicated that
approximately 41% of all workers in the Midland area are located in office space, however, the estimates
by industry group range from a low of 3.4% in hospitality to 76.5% in Finance, Insurance and Real Estate.

By using the employment forecast shown in Table (2) and calculating office employment based on the
evaluation of occupations discussed above office employment is expected to increase by approximately
3,357 workers between 2008 and 2015. Assuming an average ratio of 250 sq. ft. per employee, this
employment increase should result in a demand for 840,000 sq. ft. of office space or approximately
105,000 square feet annually from 2008 to 2015. After the existing space is absorbed, (by 2010) the new
office space built will be a mix of private and public, single tenant buildings and multi-tenant lease space,
with the multi-tenant space accounting for approximately 67% of the total (see Table 3).




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                                                             Table (2)
                                             Office Employment Growth
                                                          Midland MSA

              Total Wage &         Percent Office             Office                Annual            Office Space
    Year
               Salary Emp.          Employment              Employment              Change            Absorption


    2008           68,809                40.9%                  28,136                 480              120,110
    2009           69,763                40.6%                  28,358                 222              55,593
    2010           71,659                40.4%                  28,940                 582              145,598
    2011           73,387                40.1%                  29,462                 522              130,492
    2012           74,766                40.0%                  29,872                 410              102,382
    2013           75,942                39.8%                  30,239                 367              91,799
    2014           77,098                39.7%                  30,608                 369              92,150
    2015           78,382                39.6%                  31,012                 405              101,164

    Total                                                                              3,357            839,289

    Source:   Office Employment is estimated to range from 40.9% to 39.6% of Total Employment
              based on occupation survey conducted by Capitol Market Research
              Employment to space ratio estimated to be 250 sq. ft. per person
              Multi-tenant space estimated to be 67% of the total demand
 

                                                    Table (3)
                                   Absorption and Occupancy Forecast
                                             Midland MSA


                      Total Sq.Ft.          Sq.Ft          Sq. Ft.         Occupancy            Net         Occupied
         Year         Net Rentable         Added         Available           Rate         Absorption           SF


         2008          5,070,547             0            525,366           89.6%            120,110          4,545,181
         2009          5,070,547             0            469,773           90.7%             55,593          4,600,774
         2010          5,070,547             0            324,175           93.6%            145,598          4,746,372
         2011          5,070,547             0            193,682           96.2%            130,492          4,876,865
         2012          5,170,547          100,000         191,300           96.3%            102,382          4,979,247
         2013          5,270,547          100,000         199,501           96.2%             91,799          5,071,046
         2014          5,370,547          100,000         207,351           96.1%             92,150          5,163,196
         2015          5,470,547          100,000         206,187           96.2%            101,164          5,264,360



         Source:   Capitol Market Research, September 2008
                   Employment forecast from Economy.com August 20, 2008
                   Absorption forecast based on employment growth and office worker estimates
                   Future development is assumed to roughly match demand after 2011
                   when the market acheives 95% occupancy
 

				
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