(By Dale King) Not all energy-producing markets are created equal – particularly those sent reeling by the double whammy of low fuel prices and decreased demand for office space.
A report just released by global real estate services research firm Cushman & Wakefield plunks Houston firmly into that category along with such other highly oil-influenced cities as Moscow, Aberdeen and Calgary – communities that have faced significant headwinds due to the drastic drop in oil prices since mid-2014.
In addition to slowing economic growth in cities where oil and gas are still major contributors to financial health, “the oil price shock has had a profound impact on global office markets,” says the report with the seemingly apt title, “Oil: The Commodity We Love to Hate.”
“While the positives from lower oil prices outweigh the negatives in terms of impact on global economic growth, the effects on the office market are more of a mixed bag,” said Kevin Thorpe, Cushman & Wakefield’s global chief economist.
“Most energy-producing office markets have seen economic slowing and lower occupancy levels, while stronger consumer spending has boosted occupancy virtually everywhere else,” he noted. “Thus, for occupiers, the prolonged oil price rebalancing will create cost-saving opportunities in some markets, but rental pressure in others.”
The aforementioned oil-dependent markets present significant differences with respect to each one’s financial stability. Moscow, for example, has fallen into a deep recession, with 117,500 jobs lost and office rents a third lower since oil prices began to fall.
By comparison, the report says, Houston’s economy has slowed, but it is also proving to be far more resilient. Midway through 2016, Houston was still creating jobs and actually absorbing office space (337,000 square feet, year-to-date).
“Part of the reason Houston is holding up reasonably well is that the local economy has diversified greatly over the years, with more economic contributions coming from non-energy sectors (i.e., education, healthcare, retail, professional business services),” the report explains. During the last major oil downturn, in the 1980s, the oil and gas sector employed nearly two-thirds of all the people who worked in Houston (including upstream- and downstream-related industries). When the oil price correction hit this time, that number was closer to 17%.
The report predicts that, barring a production freeze or unforeseen event, oil prices should remain below $60 per barrel through 2017. Most prognosticators forecast prices won’t exceed $70 a barrel through 2020.
“The impact of a protracted low oil price scenario is mixed,” says the report. “Energy-producing regions struggle while consumers and non-energy producing markets benefit.”
For much of the past 35 years, the United States has been dependent on foreign oil to fuel industries, automobiles and petroleum-based products. Despite occasional “fuel crises” – such as the oil glut of the 1980s and the period after the Gulf War when a “supply-demand imbalance occurred,” prices – and drivers’ tempers – have risen and fallen at the whim of OPEC.
That all changed after 2008 with advances in oil and gas production – mainly from horizontal drilling and hydraulic fracturing – bringing about a “shale revolution.” Armed with these new technologies, the US nearly doubled its production of crude oil from five million barrels a day in 2008 to 9.4 million bpd in 2015.
With oil prices sitting comfortably at more than $100 a barrel from 2011 to 2013, profits soared 27.9% during that short timeframe, says the report. A global oil glut ultimately triggered a massive price correction, with Brent Crude dropping from its second quarter 2014 peak of $115.19 a barrel to $26.01 in the first quarter of 2016.
The handwriting was on the wall in places like Houston. By the end of 2015, the outright largest global oil production company was Saudi Aramco, followed by Gazprom and National Iranian Oil. Of the top 100 global energy companies, 39 firms are headquartered in the US. And of these, 10 are in Houston, including Phillips 66, ConocoPhillips and Enterprise Products Partners.
In the United States, which is poised to surpass Saudi Arabia as the top oil producer globally, oil-centric markets led by Houston and Oklahoma City are registering some of the highest office vacancy rates in the nation, says the report.
Office markets in energy-centric metros with more diverse economies have held up fairly well. These include Dallas and Denver, the latter of which has seen year-over-year rent growth accelerate to 7% in the second quarter of 2016.
Houston’s office availability rate has reached 21 percent and the Energy Corridor district in West Houston is awash in vacant space. JLL has identified the Energy Corridor as the nation’s leading submarket in the supply of sublease space.
The Cushman & Wakefield report notes that with oil prices remaining low, occupiers in many markets will benefit from lower office build-out and space energy costs. But the document warns that “the window of opportunity will not remain open for occupiers forever. Many energy cities have strong, long-term fundamentals, and the energy sector will ultimately recover.”
Nov. 26, 2016 Realty News Report Copyright 2016