Sub-market Report - CBD

The skies for Hines got much more blue when BG Group signed up for 164K SF (expanding to 354K SF)

Overview:

Absorption: While 2010 saw negative absorption of (-276K SF) the fourth quarter showed signs of life with only the second positive quarter of absorption in two years.

Availability: There is over 1.5 million SF of space becoming available in the submarket (BG Group Place and Devon Energy's sublease to name just a few).

Rent rates falling: The large amounts of space that will become available in 2011 should continue the downward pressure on rates.

New Development: BG Group Place and Hess Tower will arrive on the market.

Yesterday was the official opening celebration of the Hines BG Group Place. It was quite a party and Hines has had a reason celebrate as BG Group ended the year with the announcement of a relocation and expansion. The 164K SF initial lease will grow to 354K SF as BG will exercise the expansion right of the mid-rise block of the building. This will lessen the impact of the 972,474K SF delivery this month.

There appears to be a positive trend of absorption so far through February of 2011. In 4Q 2010, Black Stone Minerals Company they grew their HQ at First City Tower by 13,119 SF to 55K SF with a six-year renewal and expansion. Sublease space also decreased by 15% as the remainder of the 116K SF RRI sublease was removed from the market.

Continental Tower - Trouble brewing?

While this news gives the impression that CBD fundamental's are strong. there is an undercurrent that most people in the market is aware of. Not counting the BG Group arrival (which will bring 500K SF of vacancy), there is potentially 2.5 MM SF in play that could push vacancy up and rents down. This 2.5 MM SF is made up of the following:

• One Allen Center has Hess vacating for their new digs (338K SF is moving to Hess tower).
• Two Allen Center has Devon Energy's 281K SF sublease space (becoming available in April of 2011)
• Three Allen Center has the remainder of Devon's sublease space with 120K SF becoming available in April of 2011.
• Two Houston Center has the Shell trading space of 248K SF becoming available in Q3 of 2013
• 700 Milam has Shell's 554K SF which expires 12/2013
• And 1600 Smith Street has the 414K SF Continental Airlines expiring on 12/2014 and Chevron's 250K SF expiring on 3/2011

Forecast:

While all of these are potential threats to the CBD's stability we believe the trajectory of absorption and lack of new development (after the two big deliveries) should help the submarket weather the storm. The sale of Heritage Plaza to Brookfield for $321.5 million is further evidence of the growing confidence in the Houston CBD by investor. Hoping not to miss out on the action, MetLife has put a 50% stake of Wells Fargo Plaza on the market. With strong fundamentals, we are cautiously optimistic about the trajectory of the CBD market.