There may not be a direct connection, but oil impacts office real estate and the office sector in most of North America’s energy markets continues to feel the effects of the oil downturn of 2014-2017. However, change is afoot at various levels, according to JLL’s new 2019 energy outlook report.
Full turnaround of the office sector will come at differing points in the North American energy markets: Dallas, Denver, Fort Worth, Houston and Pittsburgh in the U.S., and Calgary in Canada. And it is the energy industry itself that is spurring a great deal of the change as it evolves. “Energy set the foundation for much of the office leasing activity we saw for quite some time. With that comes the potential for volatility. Now, as these companies mature, they are also becoming more diverse in their offerings and how they operate,” Greg Biggs, managing director with JLL, told Commercial Property Executive. “They are creating more stability, allowing for greater long-term growth and returns, while also cultivating an equally beneficial, enriching work environment for their employees. This trend has sparked the next generation of energy companies as smaller firms and start-ups grow or gain their footing.”
As noted in the report, the office sectors in the top energy markets in North America—Houston in the U.S. and Calgary in Canada—bore the brunt of the oil downturn and have been the slowest to move toward recovery. Office properties in both cities continue to suffer from tepid demand and high inventories of unleased space. The total office vacancy rate in Houston and downtown Calgary was a respective 23.1 and 23.5 percent in the first quarter of 2019. However, 2019 has brought signs of improvement. In Houston, the vacancy rate marks a 140 basis-point decline from the mid-2018 peak figure, the market has recorded positive absorption and new construction is leasing quickly. In Calgary, a new government promising to decrease energy production constraints bodes well for the industry and, thusly, the office sector. JLL anticipates that these two hardest-hit cities will be the last of the energy markets to reach recovery. Per the report, the Houston and Calgary office markets won’t move from “tenant favorable” to “neutral” until 2022.
On the opposite end of the spectrum, Denver and Dallas are leading the energy market recovery. The Mile High City and Big D are the only two of the six North American energy markets where the office sector has returned to the “landlord favorable” designation. In Denver, the energy industry is going through a rightsizing phase in the office sector, but robust energy startup growth is acting as a counter, bolstering demand for square footage. Dallas’ energy market is stable, buoyed by its diversity along with the presence of large national and regional headquarters such as Exxon and Pioneer, in addition to companies serving the industry, including Flowserve and Energy Transfer Partners, as well as smaller related businesses and start-ups.
In Fort Worth, the positive outlook for the office sector can be attributed to the fact that energy no longer serves as the economic driver for office real estate. In Pittsburgh, leading employers Halliburton and Williams have furthered their commitment to the city, and non-energy tenants are claiming vacant sublease space in some areas. On JLL’s energy market recovery outlook spectrum, Fort Worth will reach neutral in 2021, while Pittsburgh is already at neutral this year.
The energy industry’s effect on the office sector extends beyond the issue of demand, it is impacting the office environment as well. As JLL notes in the report, energy companies are particularly focused on the office environment, given their use of precise technologies and skilled labor to increase efficiencies and output. They compete with the tech industry for the high-value science, technology, engineering and mathematics talent.
“Space design is a key factor in creating an engaging office environment, especially in the energy sector. Companies want to have something that’s going to evolve as their employees’ needs evolve,” Biggs said. “There’s also a certain level of expectation to provide more amenities to encourage innovation and productivity in today’s office solutions. Location is still a driving in real estate decisions. Recruitment and retainment are an absolute must for sustained, long-term success.” Overall, as it pertains to the office sector, Biggs noted, “There’s a lot of energy in energy.”