1. www.poconnor.com O’Connor & Associates 713-686-9955 Presented By RICHARD ZIGLER Director of Research rzigler@poconnor.com Commercial Real Estate Trends www.poconnor.com O’Connor & Associates 713-686-9955

2. OUTLINE  Industry Overview  Major Events and Developments  Occupancy Changes Across the Markets  Rental Rates Across the Markets  Key Trends  Economic Factors  Mobility Improvements  Current Construction and Expansions  Where are the Markets Going?

3. www.poconnor.com O’Connor & Associates 713-686-9955 Industry Overview  Retail Market - closing of Kmart, Albertson’s, Service Merchandise - entrance of Kohl’s; expansions of HEB, Wal-Mart, the Galleria, Memorial City Mall and drugstores  Office Market - Enron bankruptcy, Dynegy and Reliant turmoil, Arthur Andersen scandal, Compaq merger, etc.  Multifamily Market – home ownership is an attractive alternative. Still… high level of new construction  Industrial Market – softer than in previous years, very low demand

4. www.poconnor.com O’Connor & Associates 713-686-9955  Office & Industrial sectors posted the sharpest decline in occupancy rate  Multifamily Market was the most robust sector with a 92.6% occupancy  Retail Market also experienced a decline in occupancy rate from 86.5% to 85.1%  Real Estate was not an exception in the 2002 economic slow-down Industry Overview

5. www.poconnor.com O’Connor & Associates 713-686-9955  Office and Retail sectors posted a slight decline in rental rates, less than $0.01  Apartment Market was the only sector to post somewhat higher rents, from $0.74 to $0.76 per square foot  Industrial Market was rather soft and rental rates were flat  2002 rental rates remained relatively flat across all markets Industry Overview

6. www.poconnor.com O’Connor & Associates 713-686-9955  US economy is still posting slow growth figures  Headlines are screaming about increasing unemployment  Interest Rates are at a record low  The specter of war adding more pressure Key Trends Better Times on the Horizon?  Economic Recovery is expected in the second half of 2003 BUT… the War is now the biggest determinant!

7. www.poconnor.com O’Connor & Associates 713-686-9955 Key Trends Local mobility improvements include  West Loop (610) & I-10 expansions  Westpark Tollway construction  Fort Bend Toll Road & Grand Parkway planned expansion  $235 mill. local street improvements Despite the hard times, Houston continues to grow and expand

8. www.poconnor.com O’Connor & Associates 713-686-9955 The suburban markets are developing at a rapid rate Key Trends Major markets include: Silverlake/Pearland The Woodlands Fort Bend Katy

9. www.poconnor.com O’Connor & Associates 713-686-9955 Key Trends  For Retail some submarkets are more promising than others  Powered by new home construction, retail expansion is at its peak, especially in the suburban markets  Suburbs offer great opportunities for retail Empty retail boxes in the city! High Construction in the suburbs! VS Silverlake Houston

10. www.poconnor.com O’Connor & Associates 713-686-9955 Key Trends Due to low mortgage rates, tenants are choosing home ownership! But why is Apartment construction so aggressive?  11,632 units are under construction! Will they be absorbed? We are building high-rises too! 1200 Post Oak The Greenbriar

11. www.poconnor.com O’Connor & Associates 713-686-9955 Key Trends  The Office Market is perhaps the weakest one  High level of construction in CBD  Businesses are shrinking, no job growth  These trends result in negative absorption figures The Industrial Market is in imbalance  Bankruptcies and heavy construction have added plenty of empty space  Due to business failures, demand is very low  But thankfully… construction has slowed 16516 Air Center Blvd 5 Houston Center

12. www.poconnor.com O’Connor & Associates 713-686-9955  Office Market occupancy will continue to decline by 2 - 2.5 points Inventory will increase by 1.7 million after the construction of the Reliant Resource Plaza (844,000 SF) and Calpine Center (689,028 SF) Where are the Markets Going?  Retail Market will remain healthy due to residential expansions In 2003, 4.5 million SF of retail space will be opened, occupied mainly by discount stores (27%) and supermarkets (19%)  Multifamily construction remains high but demand is flat Vacancy is expected to rise by 1.5 points. Class A vacancy may rise by 8 points!  Industrial sector will not reach equilibrium until mid 2005

13. www.poconnor.com O’Connor & Associates 713-686-9955 Thank You Questions ? ? ? ? ? ? ? ?

14. www.poconnor.com O’Connor & Associates 713-686-9955 RICHARD ZIGLER Director of Research rzigler@poconnor.com Real Estate Valuation, Research & Consulting O’Connor & Associates www.poconnor.com 713-686-9955 O’Connor & Associates 2000 N Loop W, # 110 Houston, TX 77018 713-686-9955