Oil-Intensive Tenants Land CRE on Shaky Floor

O’Donnell says as leases expire, most companies are downsizing and retaining less space.

HOUSTON—With slightly more than half of all Houston office space occupied by energy or engineering companies, the vitality of the energy market is always a primary concern for the office market’s health and occupancy. As evidenced by the negative cash flows of major publicly traded energy corporations, the plunge in oil prices that commenced in late 2014 cannot support or sustain the industry, says a report by Savills Studley. Although the price of oil may have finally found a floor–oil prices hovered between $35 and $40 per barrel for much of the quarter–there is no recovery in sight for the energy industry. The North American rig count sank to 450 by the end of the first quarter. According to Baker Hughes, this was the lowest count since tracking began in 1949 and marked an ominous drop of 56.2% from a count of 1,028 just one year prior.

Maintaining an oil price floor is pivotal in order to avoid continued weakening in the office market. However, the floor will likely be tested as equity markets remain turbulent and investors implement varying long- and short-term strategies that can spur fluctuation. The weakness in the energy market is a two-sided affair. Above and beyond the supply glut, the economic slowdown in China and other emerging markets continues to curb demand.