Economy Watch: How Do Oil and Office Markets Mix?

By Dees Stribling

Office markets in economically diversified energy markets like Denver (above) have performed better than less diversified energy-centric cities, according to Cushman & Wakefield. (Photo courtesy of Flickr Creative Commons user Keeranat Kolatat)

The energy downturn has been a fact of life for energy-producing areas and their office markets for more than two years now, but according to a new report by Cushman & Wakefield, not all energy-producing markets are created equal.

While certain office markets, such as Moscow, Aberdeen, Calgary and Houston, have faced significant headwinds due to the oil shock, others are holding up well, and some are even thriving. For tenants in those markets, the prolonged oil price rebalancing will create lease negotiation leverage and cost-saving opportunities in some markets, but rental pressure in others, the report noted. The window of opportunity will not remain open for tenants forever, however. Many energy cities have strong long-term fundamentals, and the energy sector will ultimately recover.

The U.S. oil industry is concentrated in the Southwest, along the Gulf of Mexico coast from Louisiana to Texas, and north from Texas into Oklahoma. Cities in the region, led by Houston and Oklahoma City, are the nation’s major oil centers. The energy sector accounts for 13 percent to 17 percent of all economic activity in each of these markets, Cushman & Wakefield reported. In addition, shale oil generated oil booms in areas near large shale deposits, such as Denver, North Dakota and Pittsburgh.

By mid-2014, buildings under construction in those U.S. oil centers accounted for 2.8 percent of inventory, double the 1.4 percent national average. In Houston, new construction accounted for more than 5 percent of U.S. inventory. But as oil prices began to fall, these markets felt the impact as that new, “production-surge” construction was delivered while demand slowed.

Now, oil-centric markets in the U.S. register some of the highest vacancy rates in the nation. Absorption in Houston in 2015 actually went negative, and has barely become positive this year, even as space came on line that was under construction before the energy slump. On the other hand, office markets in energy-centric metros with more diverse economies—such as Dallas and Denver—have held up much better, Cushman & Wakefield noted.