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

HOUSTON REAL ESTATE TRENDS EDITED BY PATRICK O’CONNOR, MAI

$199 PER YEAR

VOLUME 15 NUMBER 8

OCTOBER 2001

APARTMENTS The Greater Houston Apartment market continues to flourish. Occupancy levels have risen to their highest point since the early 1980s, as continued strong demand has outpaced construction. Overall multifamily occupancy is up to 93.47%, significantly above what many pundits had projected. Even more dramatically, Class A Occupancy, which was below 85% less than two years ago, is nearing 95% for the first time since early 1998. While Houston apartment occupancy continues to lag approximately one point behind the Metroplex, Houston remains nearly a full point above San Antonio and three points above Austin. The contrast is particularly acute for Class A apartments, as Houston leads San Antonio by six points and Austin by ten. According to the O’Connor & Associates September 2001 Greater Houston Apartment Data Program, average overall occupancy for Houston area multifamily projects is 93.47% (Class A = 94.63%; Class B = 94.08%; Class C = 92.86%; Class D = 87.92%). The overall multi-family rental rate is $0.73 per square-foot per month. •= Apartment complexes that are considering starting a RUBS (Ratio Utility Billing System) program should do so before January 1, 2003, due to increasing program costs. Starting January 1, 2003, water conservation devices must be installed before starting to bill for water according to 2001 legislation (HB 2404 by Rep. Ron Lewis). Properties that begin water billing for the first time after January 2003 would be required to perform water leak tests before starting to bill and must have water efficient shower heads, and aerators in place. There are no retrofitting requirements for properties that begin billing residents prior to January 1, 2003. In the bill’s original form, all properties would have had to be retrofitted with water conservation devices and all new construction would have had to be submetered. Currently only 42% of area apartment complexes have RUBS programs.

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•= Simmons Vedder & Company broke ground on a 252-unit, luxury high-rise at 3333 Allen Parkway (1205) between downtown and the Galleria (492M). The new tower will replace the 73year-old Gulf Publishing building, which has been demolished. Two local architecture firms, Steinberg Collaborative and Ambrose, McEnany and House Architects, will use a contemporary design with beige concrete and grayish glass. Each apartment will include amenities such as granite floors, crown molding, balconies, terraces, and 10-foot ceilings. Community amenities include a cocktail terrace, guest suites, courtyard, banquet room, game room and dining room. The complex is expected to open by the end of 2002, with average rents of $1.80 per square-foot. •= Pleasant Hill Community Development Corporation, based in a near northeast Fifth Ward neighborhood is seeking more than $89 million in public financing to revitalize and operate seven apartment complexes in distressed urban neighborhoods in Houston. It would be the largest property acquisition ever by a Houston community development corporation. The Houston project is a part of a larger project that involves the acquisition of 3,779 apartment units in several cities including apartments in Corpus Christi, Laredo, La Porte, and Houston. •= Trammell Crow Residential will break ground on The Park at Woodwind Lakes (0291D) located at 14333 Philipine (410J), a 144-unit townhome community in Windfern Forest. The Low Income Housing Tax Credit property will feature pitched roofs and standard amenities. •= Greystar plans to build a 331-unit apartment complex along the Katy Freeway in the Heights. Greystar purchased the 6.5-acre site for nearly $30 per square-foot and will build a 4-story multifamily complex facing the downtown skyline. The Victorian style apartments will average 1,000 square-feet and will feature 9-foot ceilings, hardwood floors, and two-inch blinds. Monthly rents will range from $1.25 to $1.30 per square-foot. Garcia & Associates is designing the project. The following chart illustrates historical apartment rental rates.

Apartment Rent ($/SF) $0.75

Rent

$0.70 $0.65 $0.60 $0.55

Se p9 D 6 ec -9 M 6 ar -9 Ju 7 n9 Se 7 p9 D 7 ec -9 M 7 ar -9 Ju 8 n9 Se 8 p9 D 8 ec -9 M 8 ar -9 Ju 9 n9 Se 9 p9 D 9 ec -9 M 9 ar -0 Ju 0 n0 Se 0 p0 D 0 ec -0 M 0 ar -0 Ju 1 n0 Se 1 p01

$0.50

Note: The multifamily projects listed below are followed by the O’Connor & Associates’ database identification number and are included for subscriber cross-referencing. The property information contained within the Houston Area Apartment Data Program is published on a quarterly basis.

Dallas-based Trivest Real Estate purchased Barclay Square Apts. (1820), located at 10070 Westpark (529D), from Dalcor Property Management. The Class B apartment complex is 85% occupied with average rents of $0.66 per square-foot. The 24-year-old complex features pitched roofs and is separately metered for electricity. Trivest plans to renovate the 324-unit complex. G. Craig LaFollette, J. Todd Stewart, and Todd Marix of CB Richard Ellis represented the seller in the transaction.

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Jeff Petrillo and Beth Estock purchased the William B. Travis Apartments (6045), located at 4818 Avenue R½ (774Y) in Galveston, from Paul Breglio, et al. The 16-year-old complex was once an elementary school, and still boasts the long windows and high ceilings found in old school houses. The complex has 36-units in the main building and 24-units equally split between two supplemental buildings. David Butler of Colliers International represented the seller in the transaction.

SINGLE-FAMILY HOUSING Used home sales decreased slightly in September, as 4,288 homes were sold, down from the 5,741 homes sold in August, according to the Houston Association of Realtors. Sales for September 2001 were down 3.4% from the 4,440 homes sold in September 2000. The median price of a used single-family home sold in September was $123,000, up 2.8% from $119,600 a year ago. New home sales decreased in September, as 942 new homes were sold, down 31.0% from the 1,366 homes sold in August, according to CDS Market Research. The sales were a decrease of 17.4% over the 1,140 homes sold at this time one year ago. The CDS survey showed starts were down 19.5% in September, while closings were down 10.6%. Note: Figures on new home sales are reported as an indication of recent market conditions and are thought to be representative of overall market trends. Data represents approximately 60% of the total market. Stanford Development Corp., the construction arm of local investment and brokerage shop, Stanford Financial Group, broke ground on a six-story condominium building downtown at the corner of Texas Avenue and Bastrop (493R). The company is developing The Stanford, an upscale complex that will contain 40 units ranging in size from 1,555 square-feet to more than 2,500 square-feet. Most units will have balconies and will face Enron Field and the downtown skyline with prices starting in the $230,000s. Southern Legacy Custom Homes, Inc. is developing a gated community near the corner of Dowling and Polk (493R) called Legacy Hills. Each three-story townhome in Legacy Hills will contain more than 2,200 square-feet, its own 15-by-25-foot yard, a two-car garage, and two-car porte cochére. Units will start at $295,000. The project is designed in a warehouse style, to fit into the once heavy-industrial neighborhood. Southern Legacy has already broken ground on the first phase of the development, which will consist of 11 units on a 29,000-square-foot tract of land. Negotiations are under way to acquire two more blocks in the area for additional phases. Local developer Gordon Jumonville is spearheading the conversion of a 97-year-old warehouse at 2205 McKinney (2982) into condominiums. Sixty percent of the building has been pre-sold at prices ranging from $169,00 to $650,000. Jumonville has also worked with the team that converted downtown's 711 Main building into the Capitol Lofts. Avi Ron, a national real estate developer, will develop 35 artist lofts in downtown Houston's warehouse district, just east of Highway 59. Ron is laying the groundwork for a combination residential-and-studio project at 2410 Commerce St. (494N) by redeveloping two old warehouses totaling 44,000 square-feet. Ron also owns 6.5 acres of land at the site, allowing for another 60,000 square feet of studio space to be developed. Construction will begin within a month. Caldwell Watson Development Group is gearing up for the firm’s second residential project in two years. The 400-acre project will be located at the northeast corner of FM 2920 and Nichols Road (284R), north of the proposed Grand Parkway extension. The new subdivision, Spring Creek Ranch, is a follow up to the firm’s Rock Creek Community, a 215-acre community with 55 acres of reserve and lake area. Prices range from $300,000 to over a million dollars. Spring Creek Ranch will include eighty oversized homes, which will be built with lots ranging from 1 to 15 acres and larger tracts up to 30 acres will be used for mini ranches. The land is made up of a series of rolling hills, with Spring Creek running through its northern section.

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The following chart illustrates historical used-home sale activity.

Number of Homes Sold

Houston Used-Hom e Sales 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 Sep00

O ct00

Nov00

Dec00

Jan01

Feb01

M ar01

Apr01

M ay01

Jun- Jul-01 Aug01 01

Sep01

PERMIT ISSUANCE The City of Houston issued permits to build 334 houses and to demolish 122 houses (105 units) in September 2001. Permits were issued to build 33 multi-family buildings (476 units) and to demolish 2 multi-family buildings (2 units). Permits for privately owned new non-residential construction totaled $85,730,033. Public sector permits for new non-residential construction totaled $7,094,360. Additions, alterations and conversions totaled $51,175,238 for the private sector and $5,889,210 for the public sector.

Number of Single-Family Permits

Total Building Permits, City of Houston 1999 2000 $ September $ 297,322,281 $ Year-to-Date $ 2,089,594,971

325,672,252 2,812,280,620

2001 $ $

214,176,884 3,222,792,537

New Residential Units 450 400 350 300 250 p Se

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OFFICE BUILDINGS The local office market continues to feel the effects of the national economic slowdown, as both occupancy and rents levels retreated in the third quarter. The severity of this downturn may largely turn on the fate of the approximately three million square-feet currently occupied (or scheduled to be occupied upon completion) by beleaguered Enron, which is currently in bankruptcy proceedings. Overall occupancy remains up 2.29 points from this time last year, an increase fueled by significant increases in both Class C and Class D occupancies. Average rental rates fell $0.54 per square-foot this quarter, continuing a drop that began in July. All Classes decreased this quarter except Class C, which increased $0.03 per square-foot. The current average rental rate of $18.94 psf remains $0.02 per squarefoot higher than the level of one year ago. According to the O’Connor & Associates October 2001 Houston Area Office Data Program, overall occupancy for Houston area multi-tenant office buildings is 88.94% (Class A = 92.49%; Class B = 88.21%; Class C = 83.35%; and Class D = 81.50%). Overall occupancy is down 0.18 points over the previous quarter. Meanwhile, the overall multi-tenant office building rental rate is $19.17 per squarefoot per year, a drop of $0.54 psf from last quarter. •= Claude Wynn is redeveloping the old Statesman National Life Building (NWE 085) at 3815 Montrose (493S). Paul Martin of Urban Architects is designing the redevelopment project for the building, which is undergoing both internal and external renovations. When complete, the 27,500 square-foot urban-style office complex will feature average rents of $20 per square-foot. •= Century Development is under contract to purchase a full city block for a new high-rise office building. Central Parking currently owns the downtown block, which is bounded by Main, Polk, Fannin, and Dallas (493Q). The proposed tower will be a build-to-suit project for a major company. The building will be adjacent to the new three-block “Central Square”-the planned focal point and gateway light rail station for downtown. The building will be linked to the downtown tunnel system, which should be in place by the time the building is completed in 2006. •= Greg Baxter is scheduled to close a six-block parcel of mostly improved property near the intersection of Elgin and Louisiana (493T) in Midtown from United Insurance Co. of America. Baxter wants to redevelop the 6.5-acre site into a commercial and residential project reminiscent of the New Orleans French Quarter. Courtlandt Square includes five boutique office buildings, a 20,000 square-foot restaurant and some vacant land. The five boutique office buildings were built in the late 1960’s and early 1970’s and are located at 3303 Louisiana (NEW 070), 3220 Louisiana (NEW 069), 3401 Louisiana (NEW 071), and 3223 Smith (NEW 116). Negotiations with Greystar Development and Construction are underway to co-develop a residential and retail component in Courtlandt Square. The new apartments could range from six to eight stories and contain about 400 units that average 1,000 square-feet with rents starting around $1.35 per square-foot.

Tired of wasting time fruitlessly searching for the results you want? O'Connor & Associates Data Programs contain the information you need, including owner, management, & leasing contacts; listings of available space; and market statistics. Hundreds of Brokers, Lenders, Property Owners, & Management Companies have benefited from the O'Connor advantage. Can you afford not to?

Houston Real Estate Trends

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The following chart illustrates historical office building rental rates.

$20 $19 $18 $17 $16 $15 $14 $13 O ct -9 Ja 6 n9 Ap 7 r-9 7 Ju l-9 O 7 ct -9 Ja 7 n9 Ap 8 r-9 8 Ju l-9 O 8 ct -9 Ja 8 n9 Ap 9 r-9 9 Ju l-9 O 9 ct -9 Ja 9 n0 Ap 0 r-0 0 Ju l-0 O 0 ct -0 Ja 0 n0 Ap 1 r-0 1 Ju l-0 O 1 ct -0 1

Rent

Office Building Rents ($/SF)

Note: The buildings listed below are followed by the O’Connor & Associates’ database identification number and are included for subscriber cross-referencing. The property information contained within the Houston Area Office Data Program is published on a quarterly basis. Houston Office Properties, LP purchased five-buildings totaling 230,612 square-feet of Class B office space from West Houston Office Portfolio, LP. The five buildings are identified as follows: Bank OneCopperfield (NOW 291), located at 15840 FM 529 (408N), is 92% occupied with average rents of $14.50 per square-foot; Timber Creek Atrium (NOW 222), located at 5870 Highway 6 North (408W), is 88% occupied with rents of $14.50 per square-foot; One Keystone Place (NOW 138), located at 10700 Northwest Freeway (451Q), which was sold again to Central United Life Insurance Co., is 51% occupied with average rents at $14.50 per square-foot; Comerica Bank (FAW 111), located at 810 S. Mason Road (445Z), is 95% occupied with average rents of $15.50 per square-foot; and the Grand Park Plaza Condos (PRO 232), located at 830 S. Mason (408W), which is fully leased with average rents of $10.25 per square-foot. Darrell Betts of Grubb & Ellis represented the seller, while Jim Roberts of First Texas Realty represented the buyer. Devon Energy leased 193,000 square-feet in Two Allen Center (DTN 086), located at 1200 Smith (493Q), from Trizec Corp., with an option to lease more. The 36-story, one-million-square-foot building will be renamed Devon Energy Tower as part of the deal. The building is 91% occupied with average rents of $18.50 per square-foot. Aon Corp. leased 137,000 square-feet in Central Tower (GAL 047), located at 1330 Post Oak Blvd. (491R), from the Four Oaks Place office project. The building was once named for Union Texas Petroleum. The 18-year-old building, now named Central Tower, is 88% occupied, with average rents of $24.00 per square-foot. Peter Alberg and Michael Caffey of Jones Lang LaSalle represented the tenant, while Patrick Hicks of Trammell Crow Co. represented the landlord. ABB Automation renewed a 52,678 square-foot lease and added another 42,035 square-feet at 12808 West Airport (FAW 433) in far southwest Houston (568C) from Koll Bren Scheiber. The three-story building totals 151,471 square-feet. Mike Boehler of Staubach Company represented the tenant, while Doug Little of PM Realty Group represented the landlord. ABB Lummus Global, Inc. leased 47,238 square-feet at 10011 Meadowglen (FAW 112) from CC Fortune. Built in 1982, the Class B property is 100% occupied with average rents of $15.00 per squarefoot. Steve Rocher and Mark Preston of Grubb & Ellis represented the tenant, while Mike Boehler of Staubach Company represented the landlord. Houston Real Estate Trends

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ABN Amro Bank, NV leased 35,341 square-feet in Five Post Oak Park (GAL 028), located at 4400 Post Oak Parkway (491R), from Metropolitan Life Insurance Company. The 19-year-old Class A building is 85% occupied with average rents of $23.50 per square-foot. Scott Wegmann and Matthew T. Trozzo of Cushman & Wakefield resented the tenant, while Charlie Giammalva of Lincoln Property Commercial represented the landlord. St. Joseph Hospital leased 30,000 square-feet at 9500 Hempstead Highway (451Z), from N.Y. Technology. 9500 Hempstead Highway is the old 184,000 square-foot, JC Penny’s building at Northwest Mall (NNW 098). In the same center, Firestone/Bridgestone leased 15,000 square-feet in a pad site at the mall from N.Y. Technology. Stephen B. Schneidau of Cushman & Wakefield represented the landlord in the negotiations. Hudson Products Corp. leased 26,145 square-feet building in First Colony at 1307 Soldiers Field (568S) from Griffin Juban Interests. The new building is currently under construction. Hudson’s current corporate offices are at 6464 Savoy Dr. (SOW 096). Drew Lewis and Brad Marnitz of NAI Partners Commercial represented the tenant. Hardy & Johns, leased 12,356 square-feet in the Tractebel Building (GAL 102) at 1177 W. Loop South (491V) from Massachusetts Mutual Life Insurance Co. Jim Pratt of NAI Partners Commercial represented the tenant, while Webb Wotkyns of PM Realty Group represented the landlord. Fluids Management renewed a 3,500 square-foot lease and added another 5,500 square-feet for its corporate offices at Kirkwood Atrium II (FAW 101) located at 11767 Katy Frwy (489A) from Koll Bren Schreiber Realty Advisors. Kirkwood Atrium II, located at 11767 Katy Freeway (489A), is 11 stories and totals 235,961 square-feet. Glenna Duke of PM Realty Group represented the landlord. T3 Energy Services, Inc. leased 7,217 square-feet at 13111 Northwest Freeway (NOW 150) from Northwest Building, Ltd. Michael J. Taetz, Charles H. Herder, and Parker Johnson of Colliers International represented the tenant, while Louis Rosenthal of Jones Lang LaSalle represented the landlord.

RETAIL CENTERS Slowing retail expansion, large-scale closings, and general skittishness over the slowing national economy (even before the tragic events of September 11) have taken a tremendous toll on local shopping centers. Weiner’s has closed its 25 Houston area stores (although Falles Paredes, a California-based valueoriented family clothing store with a similar concept to Weiner’s, has acquired the leases to 10 of the 25 area Weiner’s stores). Brea, California-based Krause’s Furniture closed all six of its Houston-area stores, while Houston-based SuperStand Magazines recently closed three of its five Houston locations. Two Gerland’s grocery stores turned out their lights in August, while a third has become a Fiesta grocery store. Boise-based grocer Albertson’s has announced that they are closing 165 stores in 25 states, leaving more empty boxes in Houston. Area malls have not avoided the hit either, as all seven area Montgomery Ward stores have closed, joining several former J.C. Penney locations as vacant anchors for many of the city’s malls. According to the O'Connor & Associates August 2001 Houston Area Retail Data Program, overall occupancy for Houston area multi-tenant retail centers is 86.02%, a drop of 1.16 points from last quarter. Meanwhile, the overall multi-tenant retail rental rate remained stable this quarter at $1.49 per squarefoot per month, but is up $0.02 over this time last year.

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•= A partnership of Trammell Crow Co. and Granite Properties has broken ground on Northwest Marketplace Shopping Center (NNW 214) on a 25-acre site at US 290 and Maxwell Road (450D). The 270,000 square-foot center will feature Old Navy, PetsMart, and Office Depot. Granite originally purchased the land about two years ago to develop as office space, but the growth of residential communities in the area, including Coles Crossing, Riata Ranch, and Longwood, influenced them to develop a retail center. The 185,000 square-foot first phase of the center will be complete in 2002. •= A portion of the 233-unit, Woodway on San Felipe (1048) apartment complex has been demolished to build a free-standing Walgreens on the site. The apartment owner, Mark I Properties, will develop the new Walgreen’s at the northeast corner of San Felipe and Winrock (491S). The 14,500 square-foot store will open by next spring. This is one of eight new Walgreens’ stores planned for Houston. •= Houston-based Hines has completed the demolition of three abandoned restaurants, Stake & Ale, The Mason Jar, and Drusilla’s located near the corner of Richmond at the West Loop (491) on roughly five acres of land. The restaurants were demolished because they were not consistant with the quality and class standard of the area. •= Foley’s broke ground on a 2.72-acre site on the west side of the Woodlands Mall Ring Road. The 20,000 square-foot free-standing building will house a furniture showcase to complement the Foley’s store, which is an anchor in the 1.2 million square-foot Woodlands Mall (FNO 034). Mall rents average $2.79 per square-foot. The new building is expected to open in March 2002. Duane Vaughan of the May Department Stores Co. represented the buyer, while Greg Jordan of the Woodlands Operating Co. LP represented the seller in the land sale negotiations. •= Coldwater Creek is planning to open two retail stores featuring in-store waterfalls in the Houston area. The company plans to open a 6,800 square-foot store at the Woodlands Mall (FNO 034) and a 8,000 square-foot store in the Highland Village (INL 047). These locations were selected because of the company’s existing customers in those areas. Coldwater Creek is a national catelog and e-commerce retailer of women’s apparel, jewelery, gifts, and home merchandise. •= Sam’s Wholesale Club (FWE 137) has broken ground on a 130,000 square-foot store at State Highway 6 and U.S. 90-A in Sugarland. The store is slated for completion in the spring of 2002. •= Kinghorn Driver Hough & Co. arranged $1.9 million in first mortgage financing for Centre @ Bunker Hill (NRW 218). Buddy Hopson, Jr., Senior Vice President of Kinghorn Driver Hough & Co., secured funds from ING Investment Management. The Centre @ Bunker Hill, developed by Levcor, Inc., is a nearly completed retail center that features Lowe’s, Costco, Best Buy, Mattress Firm, Pearl Vision, Hest Fitness Products, Sprint, Creative Blinds and Interstate Batteries. Retailers that are still under construction include Antoine’s, Warehouse Pool Supply, and Michaels. •= Kimco Realty Corp., of Hyde Park, NY, and GE Capital Real Estate, of Stamford, CT, have formed a joint venture called Kimco Retail Opportunity Portfolio to purchase shopping centers across North America. Equity funding of the Kimco Realty Opportunity Portfolio is an 80-20 split; the joint venture partnership could have an estimated total value of approximately $1 billion. The joint venture will be looking to acquire shopping centers that need to be rebuilt, redeveloped, or retenanted.

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The following chart illustrates historical retail center rental rates.

$1.55 $1.50 $1.45 $1.40 $1.35 $1.30 $1.25 $1.20 $1.15 Au g9 N 6 ov -9 Fe 6 b9 M 7 ay -9 Au 7 g9 N 7 ov -9 Fe 7 b9 M 8 ay -9 Au 8 g9 N 8 ov -9 Fe 8 b9 M 9 ay -9 Au 9 g9 N 9 ov -9 Fe 9 b0 M 0 ay -0 Au 0 g0 N 0 ov -0 Fe 0 b0 M 1 ay -0 Au 1 g01

Rent

Retail Center Rental Rates (per/SF)

Note: The retail centers listed below are followed by the O’Connor & Associates’ database identification number and are included for subscriber cross-referencing. The property information contained within the Houston Area Retail Data Program is published on a quarterly basis.

Ross Stores, Inc. leased 30,204 square-feet in the Northwest Shopping Center (NNW 214) on Tidwell at US Highway 290 (450D) from Granite Properties of Dallas. Other tenants in the center include Office Depot, Old Navy, Famous Footwear, and PetsMart. Dean Lane of Boyd Page & Associates represented the tenant, while Mark Davis of Trammell Crow Co. represented the landlord. Tractor Supply Co. leased 20,000 square-feet at 1547 Interstate 45 (493G) from Cypress/TSC Conroe One, LP. Staubach Cypress Equities developed the build-to-suit. Dan Watson of Staubach Co. represented the tenant. Borgart Golf, a Washington-based golf supplier, marked its entry into the Houston market. The retailer leased 2,500 square-feet at 2372 Rice Blvd. (532A) from DKGA/VSI, LP. Peggy Meredith of Colliers International represented the tenant, while Jim Reid represented the landlord.

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VACANT LAND Goodnight Trails Joint Venture, LP purchased 32 acres at the intersection of FM 2490 and Westbourne from Fred Caldwell. Michael J. Taetz and William J. Byrd of Colliers International represented the buyer, while Keith Grothaus of Caldwell Watson represented the seller. LaTour Partners, Ltd. purchased 23.3 acres located at the southeast corner of E. Beltway 8 and Spencer Highway from Frank T. Abraham. Marshall Clinkscales of MSC Properties, Inc. represented the buyer, while Blake Tartt III of New Regional Planning represented the seller. DeVry Institute purchased over 17 acres at Sam Houston Tollway and Clay Road from Wolff Companies. DeVry will build a DeVry Institute of Technology campus and a Keller Graduate School of Management. Bill Wolff of Equis Group represented the buyer, while David Hightower of Wolff Companies represented the seller. Invensys purchased 12 acres located on Equity Drive from Wolf Companies. Don Dennis of Simpkins Group will develop the land into a new 115,500 square-foot, two-story headquarter building. Steven Schneidau of Cushman & Wakefield represented the buyer, while David Hightower of Wolff Companies represented the seller. SouthTrust Bank purchased 6 acres at 12405 Fuqua from Louis Macey. International represented the buyer.

Randy Mason of Colliers

International Brotherhood of Teamsters purchased 4.5 acres at the World Houston Business Center on the north side of Sam Houston Parkway at Diplomatic Plaza Drive from Licha Family Trust. Clay Development will construct an 18,200 square-foot facility for Teamsters, which should be completed by next spring. Greystar plans to demolish Teamster’s old building and build a 331-unit apartment complex on the Katy Freeway site (Please see the Apartment section of this publication). Tony Patronella of Southwest Realty Advisors represented the International Brotherhood of Teamsters, while Marc Drumwright of Southwest Realty Advisors represented the Licha Family Trust. MLW Interest LLP purchased 2 acres at Brystone Drive from Michael Wade, James Robinson and Calvin Oestreich. Julie Tysor of Colliers International represented the buyer and was the only broker involved in the transaction. Yancy-Hausman Development Inc. purchased two acres in Atascocita, for retail development from Canyon Lands Partners I Ltd. The tract is at the northwest corner of Atascosita Road and Timber Forest Drive. Yancy-Housman expects to begin development by the end of 2001. Tom Condon, Jr. of Betz Commercial Brokerage Inc. represented the seller, while Bill Rowell of Yancy-Hausman represented the buyer. KAL Enterprises purchased 1.7 acres near the intersection of West Road and Beltway 8 from Abraham Interest LP. Jerry Turboff of Prime Capital Corp. represented the buyer, while Michael Wallace and William J. Byrd of Colliers International represented the seller.

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INDUSTRIAL FACILITIES The national economic slowdown continues to have a negative effect on the local industrial market. Industrial occupancy continues to slide, posting a decline for the fifth consecutive quarter. Overall occupancy slipped 1.12 points in the third quarter to 85.72. The decline in overall occupancy can primarily be attributed to a 5.88 point fall in the distribution center category, dropping from 81.59% to 75.71% in the third quarter. The overall occupancy level is now 2.88 points lower than it was at this time last year. While Service Center occupancy increased this quarter, its rental rates slipped $0.02 to $0.52 per squarefoot (psf). Still, overall industrial rental rates rose $0.02 this quarter to $0.39 , which is $0.03 higher than it was at this time last year. Warehouse rents increased $0.05 this quarter from $0.30 psf to $0.35 psf, while office/warehouse and manufacturing facility rents both increased $0.01 to $0.42 psf and $0.30 psf, respectively. Distribution center rents fell $0.01 this quarter to $0.42, although they are still $0.05 higher than they were at this time last year. According to the O’Connor & Associates October 2001 Houston Area Industrial Data Program, overall occupancy for Houston area operating industrial facilities is 85.72%. Occupancy in the Houston industrial market remained stable this quarter. Meanwhile, the overall multi-tenant industrial rental rate is $0.39 per square foot per month, up $0.02 from last quarter. •= EastGroup Properties plans to construct three industrial buildings totaling 186,700 square-feet in the World Houston International Business Center (0413H) near the main entrance to George Bush Intercontinental Airport. The project will cost about $9.3 million, and it is already 83% preleased. EastGroup’s goal is to cluster assets around major transportation hubs; the firm currently owns 949,000 square-feet in the industrial park. The following chart illustrates historical industrial facility rental rates.

$0.38 $0.36 $0.34 $0.32 $0.30 $0.28 $0.26 $0.24 $0.22 O ct -9 Ja 6 n9 Ap 7 r-9 Ju 7 l-9 O 7 ct -9 Ja 7 n9 Ap 8 r-9 Ju 8 l-9 O 8 ct -9 Ja 8 n9 Ap 9 r-9 Ju 9 l-9 O 9 ct -9 Ja 9 n0 Ap 0 r-0 Ju 0 l-0 O 0 ct -0 Ja 0 n0 Ap 1 r-0 Ju 1 l-0 O 1 ct -0 1

Rent

Industrial Rent ($/SF)

Note: The facilities listed below are followed by the O’Connor & Associates’ database identification number and are included for subscriber cross-referencing. The property information contained within the Houston Area Industrial Data Program is published on a quarterly basis. Granite Properties purchased Town & Country Business Center, a three-building development located at 1655 Townhurst (1129D), 1665 Townhurst (1129E) and 10607 Haddington (1129F). The Town & Country Business Center has 82,000 square-feet in flex and office/warehouse space. Rusty Tamlyn, Ralph Tullier, and Aaron Thielhorn of Trammell Crow Co. represented the seller, while Bill Brown and Ravi Bennett of Granite Properties represented the buyer.

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Phoenix Tel-Supply, Inc. purchased a 45,000 square-foot office/warehouse located at 420 Lockhaven (0109M), from Rural Building, LLC, an affiliate of Rural Metro ambulance service. The seller will remain in the building for six months after the sale. Tropical Storm Allison damaged Phoenix Tel-Supply’s old building, which was located near the intersection of the Hardy Toll Road and Beltway 8 (332Y). Logan Brown, Jr. of Grubb & Ellis represented the buyer, while Steve Adkisson of National Realty Group represented the seller. Bell & McCoy purchased a 53,839 square-foot warehouse at 7601 N. Loop East (2248) from Crown Pacific. The 16-year-old facility is situated on 5.5 acres with frontage on Loop 610 (455S). It is designed with 24-foot heights and dock-high doors. Joe MacDougall of Brown Butera and MacDougall Inc. represented the buyer, while Thad Hickman and Tyndall Yaap of Grubb & Ellis represented the seller. The Marion M. Griffin Family Trust purchased a 35,342 square-foot, 46-year-old semi-dock brick warehouse located at 5010 Terminal (2601) from Seda Felsman. The owner plans to build out 17,500 square-feet for the corporate offices of their various businesses. Jim Bryant of Keller Williams Realty represented the buyer, while John Ferruzo of NAI Partners Commercial represented the seller. Alpha Circuits leased 67,796 square-feet in the Southwest Techniplex Building A (4902C) distribution center, located at 4855 Alpine Drive (569J), from Prucrow Industrial Properties. Keith Lloyd of Grubb & Ellis represented the tenant, while Ross Mathews of Trammell Crow Co. represented the landlord. Vosper Thorncroft Controls leased 36,592 square-feet at the 4220 World Houston Parkway (0412G) distribution center, near the Hardy Toll Road and Bush Intercontinental Airport (374P), from EastGroup Properties LP. VT Controls will relocate from 14900 Woodham (0271) to the distribution center. Dr. Mark Lehman and Chris Kugle of Grubb & Ellis represented VT Controls, while Micheal A. Annino of Insite Commercial Real Estate represented the landlord. Metalade of Pennsylvania, Inc. leased 22,980 square-feet of warehouse space in the Clay Campbell Business Center (1289A) at 9516 Clay (450F) from Houston Industrial Partners, Ltd. Doug Nicholson of Grubb & Ellis represented the tenant, while Steve Carter of Granite Properties represented the landlord. Gulfstream Graphic, Inc. leased 16,602 square-feet of warehouse space in the Pine Forest Business Center (1825) at 331 Garden Oaks (452M) from ProLogis. Caleb Lawson of Caldwell Watson Real Estate Group represented the tenant, while Daryl Mechem of ProLogis represented the landlord. Advanced Family Support Program leased 13,390 square-feet of office/warehouse space at 4281 Dacoma (1681C) from Park Land Energy Group. L. Michael Wallace of Colliers International represented the tenant, while Faron Wiley of Trammell Crow Co. represented the landlord. Premier Products, Inc. leased 13,172 square-feet in the Pine Timbers Distribution Center (1305), located at 4660 Pine Timbers (450G), from ProLogis. Caleb Lawson of Caldwell Watson Real Estate Group represented the tenant, while Art Barkley of ProLogis represented the landlord. Koike Aronson, Inc. leased 11,720 square-feet in the Post Oak Business Center (1742M) warehouse at 1285 North Post Oak (451Z) from ProLogis. Caleb Lawson of Caldwell Watson Real Estate Group represented the tenant, while Art Barkley of ProLogis represented the landlord. Bren Enterprises, Inc. leased 5,448 square-feet in the Pine Forest Service Center (1830) at 505 Garden Oaks (452M) from Pine Forest Service Center Joint Venture. Ron Roberson of Caldwell Watson Real Estate Group represented the tenant, while David Hudson of Trammell Crow Co. represented the landlord. UOP, LLC leased 5,340 square-feet in the Northwest Technicial Center II (1336) office/warehouse, located at 5201 Langfiled Road (450H), from Macfarlan Real Estate Services. Mark Preston of Grubb & Ellis represented the tenant, while David Boyd of Boyd Page & Associates represented the landlord. Houston Real Estate Trends

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ECONOMIC & FINANCIAL NEWS The number of wage and salary jobs in the 6-county Houston area increased by 13,200 jobs to 2,150,600 in September 2001 from 2,137,400 jobs in August 2001, according to the Texas Workforce Commission. The jump was primarily attributed to a seasonal increase in teaching jobs due to the beginning of the school year. The local government industry experienced the biggest increases, posting gains of 16,000. This month’s total is 48,900 jobs higher than the 2,101,700 jobs at this time last year. Houston's unemployment rate fell 0.1 points to 4.5% in September, while the statewide unemployment rate remained steady at 5.1%, which is 0.4 points higher than the national rate of 4.7%. Consumer prices edged up in September, pushed higher by the biggest jump in gas prices in 15 months. The Consumer Price Index, an inflation indicator, rose 0.4% since May. Food prices rose for the second month in a row by 0.2% in September, reflecting higher prices for fruits, vegetables, and pork, which made up for lower prices for other items. Natural gas and electricity fell in September by 5.5% and 0.6% respectively. Airline fares fell by 0.7% in September and new car prices were flat. Housing costs fell by 0.2%, the biggest drop since December 1982. Varitek Industries, Inc., a proprietary telematics and wireless telemetry solutions developer, is relocating from San Diego to Houston. With existing headquarters in Clay Hempstead Park (1324) located at 8748 Clay Road (450H), the firm will now move both its research and development division and its communications division. Varitek was drawn to Houston because of existing technical and financial resources that are available. The Harris County Sports Authority has delayed selling bonds to pay for construction of the downtown arena because of a turbulent bond market stemming in part from the September 11 terrorist attacks. The current bond market is volatile because investors are more pessimistic about the economy. To remedy the problem the authority is considering several options. The authority could increase the amount of interest they pay now, betting that when confidence in the market is restored rates will go down thus lowering the costs. This was previously done for Enron Field and the Reliant Stadium, which is still under construction. Sources of revenue include hotel occupancy taxes and car rental taxes, which should remain stable in Houston. Even if hotel and car rental taxes unexpectedly decline, bond insurance will make the debt payments until the debt is refinanced. The Chairman of the Sports Authority’s finance committee, Ric Campo, stated that the 775,000 square-foot arena will move forward on schedule and open in 2003-2004. The arena will be home to the Houston Rockets, Houston Comets, and a potential National Hockey League team. Waste Management, Inc., will convert six landfills into power plant sites. These plants, which will use the gasses produced from decaying garbage to produce electricity, will be the first large gas-to-electricity, or "biomass," energy projects in Texas. Clark Energy, a British energy company that Reliant has contracted with as operator for the new plants, plans to make its headquarters in Houston. Polaroid Corp. filed for Chapter 11 bankruptcy due to the economic slowdown. A few months before the September 11 attacks, the company tried to restructure $950 million in debt. The company continued to decline and laid off 2,950 employees and missed payments to bondholders. Under the supervision of a bankruptcy court Polaroid could be stripped for parts or sold. So far no one has offered to buy the 64-yearold instant camera company in its entirety. The Port of Houston Authority secured an AA+ rating from Fitch Inc. for the deepening and widening of the Houston Ship Channel. The Port is responsible for $130 million of the costs, while the Federal Government is responsible for $530 million. The Port intends to use bonds sales to pay for a portion of the channel construction. The project is expected to take 10 to 15 years to build out.

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The following chart illustrates total nonagricultural employment.

2200 2180 2160 2140 2120 2100 2080

Se p01

Au g01

Ju l-0 1

1 Ju n0

ay -0 1 M

Ap r-0 1

1 ar -0 M

Fe b01

1 Ja n0

D ec -0 0

N ov -0 0

O ct -0 0

2060 Se p00

Labor Force, in thousands

Total Nonagricultural Employment, Houston MSA

The following is reprinted from the O’Connor & Associates Houston Retail Performance Update:

Houston, Do We Have a Problem? In spite of an already slowing economy, retail sales surprisingly grew by 0.40% in August, according to the U.S. Commerce Department. Yet, that all changed after September 11th, as the attacks on the U.S. kept concerned and distracted Americans out of stores and, in turn crushed the national retail market. Sales tumbled by 2.4% in September, the worst month-on-month fall since the Commerce Department began compiling retail data in this way in February 1992. The sectors hit hardest, not surprisingly, have been the luxury (non-necessary) brackets. Not all stores, of course, have suffered equally. As a New York Times article expounds, since September 11th, “retailing is more than ever a tale of two types of stores: the discounters and everyone else.” September sales at specialty apparel stores declined 8.5%, but discounters’ sales increased 4.4%. Leading the way was Wal-Mart, the nation’s largest retailer, with a sales increase of 6.3% in September, while Kohl’s (which will soon have a major presence in Houston) posted a year-over-year increase of 4.0%. Dollar General and Family Dollar both exceeded their predicted sales gains for the month, with sales increasing 9.0% and 6.7%. In contrast, many upscale stores led the decline in specialty apparel store sales. Neiman Marcus was hit the hardest, suffering a 19.5% decline in sales in September. Abercrombie & Fitch was down 18.0%, while Gap Inc., parent to Banana Republic and Old Navy, fell 17.0%; Federated Department Stores, Inc., parent to Macy’s and Bloomingdale’s, saw its sales drop 12.9%. As the waves of negative economic numbers pile up like Astros’ postseason failures, what does it all mean for the local retail market? Scott MacDonald of CenterAmerica Property Trust recently spoke at an O'Connor & Associates Retail Forecast Luncheon on the current state of the Houston retail market. MacDonald conveyed that while Houston should expect ‘stormy clouds’ in the near future, the local retail market will be fine in the long run. Houston should continue to expect less development, less expansion by national companies, fewer tenants entering the market, and a slip in mall occupancy. Regional Mall expansion should slow due to the costs of running such large properties, while power center development should slow down, as well, as many of the Big Box retailers on which they rely remain vulnerable. Neighborhood centers will be less affected, as people still need groceries, pharmaceuticals, etc., but profit margins and expansion will likely decrease. However, in spite of all the foreboding news, MacDonald reports that long-term growth prospects are strong, with Houston’s economy better positioned than most major cities. Houston Real Estate Trends

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CMBS UPDATE According to Lend Lease Hyperion, while there has been a lack of new issuance since September 11th, secondary market trading has been steadily improving. Although spreads have slipped wider over the pastfew weeks, they actually began tightening over the past week. The highlight of the secondary market has been the trading in classes other than AAA. A $25 million BB bid list of seasoned bonds traded in 5 days last week with a wide level of investor interest. Spread levels indicated a widening of between 30 and 50 basis points from pre-September 11th levels. Riding the coat tails of that trade is a list out this week that includes two BB rated bonds and one unrated bond. Even though domestic new issuance has recently ground to a halt, Lend Lease Hyperion found that new issuance for the month of September still came in at a respectable $16.1 billion, bringing year-to-date issuance to $48.7 billion, a 46% increase over the same period last year. There is currently $23.7 billion of deals in the pipeline that were scheduled to close before the end of the year. While it seems unlikely that all of the deals will get priced before year-end, if they did, total domestic volume for 2001 would be $72.4 billion, a 48% increase over last year, and only $5 billion below 1998's record year. Lend Lease Hyperion discovered two new deals in the market provide an interesting contrast in both pricing and quality. The first is the Morgan Stanley "IQ" deal. The "IQ" stands for insurance quality, as the contributors to the deal include 6 insurance companies. Some investors and most rating agencies view these deals very favorably as evidenced by the low subordination levels and tight spreads. AAA and BBB subordination is at 14% and 5.5%, compared to the average for the last 12 months of 21% and 9% respectively and the BBB bond was priced at swaps plus 150 basis points, which is at least 10 to 15 basis points lower than the current market. It also didn't hurt that the class sizes for the BBB bonds were relatively small. The BBB+, BBB and BBB- bonds only totaled $5.3, $8.9 and $5.3 million respectively. The second deal is a JP Morgan issue that includes 25 fixed rate loans from various contributors that were kicked out of deals over the years by the buyers of the most subordinate bonds. Subordination at the AAA and BBB levels for the JP Morgan deal are 49.3% and 27.0% respectively. Both deals are examples of the benefits of securitzation to the commercial mortgage market. The insurance companies were able to sell loans portfolio loans to improve diversification or lower credit risk. While the JP Morgan deal has not closed yet, the issuer is able to carve out different risk levels so that investors with various risk tolerances are able to participate in the performance of the same pool of mortgages. Due to the "flight-to-quality" trade during September, Lehman's US corporate bond index underperformed treasury securities by -222 basis points. On the other hand, securitized assets held up much better, particularly CMBS, which underperformed treasuries by only -37 basis points. The high yield corporate bond index lost -6.72% during September and high yield CMBS was the only sector in Lehman's global high yield index to post a positive nominal return (0.08%). High yield CMBS has outperformed high yield corporate bonds by 10.8% so far this year. The severity of the current downturn, according to Lend Lease Hyperion caught most investors off guard and is changing the way lenders, appraisers, investors and the rating agencies underwrite credit risk. For example, real estate values will incorporate revised expectations for rent and vacancy levels, and lenders will underwrite less leverage on top of the more conservative values. According to Lend Lease Hyperion, the implication for investors is that credit risk for loans and deals underwritten over the next 12 months will have a much different credit profile than those that were underwritten over the past 12 months, which all things being equal, could lead to underperformance of the most recently issued deals relative to previous and future cohorts.

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W H Y O ’C O N N O R & A S S O C IA T E S ? O'Connor & Associates has become the largest real estate research and support services firm in the city of Houston, growing from a three-person to 65-person firm during the last ten years. Our prosperity and expansion is the result of increased consumer demand created by our emphasis on excellent customer service, producing quality technical work, and assembling of a team of experienced, trustworthy professionals. More of the information you need O'Connor & Associates has been tracking trends in the Houston commercial real estate market for over a decade, and now you can access this information through our Data Programs. We collect information on more commercial properties in Houston than anyone, including the key ownership and rental information that you need. Whether you are looking for information of Apartment, Office, Industrial, or Retail properties, you can trust that O’Connor & Associates is the place to find it. O'Connor & Associates can help you reach your real estate goals through our comprehensive market knowledge based on years of experience, backed by immediately available accurate data. A Price that Fits Your Budget Whether you are an international firm with thousands of employees or a one-person shop, we have a pricing plan that makes sense for you. User-friendly O'Connor & Associates places a primary emphasis on dedicating personal attention to every task-- we're large enough to have the expertise necessary to handle complex assignments, yet small enough to provide personal attention to your specific needs. This philosophy manifests itself in our Data Programs. The software is easy to use and we provide the training at no additional charge. Start saving time as soon as you sign up! Presentation Quality Reports and the Freedom to Customize Search by any of over 100 criteria, allowing you to narrow your search to just the properties you care about. We offer dozens of included reports with each Data Program, but if that is not enough you can export the data to virtually any third-party software. We are confident that O'Connor & Associates can become a key part of your organization's future success. With our combination of outstanding products, focus on excellent customer service, and unparalleled depth of experience, we can give you optimal results and help you reach your real estate goals. To find out more about how O’Connor & Associates Data Programs can help you spend less time on research and more on selling, please call 713-686-9955 today and ask for Richard!

WE HOLD THE KEY TO SUCCESS Houston Real Estate Trends

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