Does Oil Pricing Have Office Over a Barrel?

Thorpe: “Most energy-producing office markets have seen economic slowing and lower occupancy levels.”

CHICAGO—Already the world’s leading consumer of oil, the US is poised to surpass Saudi Arabia as the world’s largest producer. However, depressed energy prices have produced varied outcomes for oil-centric office markets both domestically and around the world, says Cushman & Wakefield in a new report.

“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,” says Kevin Thorpe, global chief economist with Cushman & Wakefield. “Most energy-producing office markets have seen economic slowing and lower occupancy levels, while stronger consumer spending has boosted occupancy virtually everywhere else. For occupiers, the prolonged oil price rebalancing will create efficiency and cost-saving opportunities in some markets, but rental pressure in others.”

During the production surge of 2009 to 2014, “US oil centers were among the best-performing office markets in the nation,” according to Cushman & Wakefield’s report, titled “Oil: The Commodity We Love to Hate.” Energy played a major role in five of the nation’s top 10 job growth cities during those years, with resulting “strong absorption of space, declining vacancy rates, and rising rents”

These markets also saw development booms to go along with the production boom. By the middle of ’14, buildings under construction in those US oil centers accounted for 2.8% of inventory, or double the 1.4% national average.

“In Houston, new construction accounted for more than 5% of US inventory,” according to the Cushman & Wakefield report. “But as oil prices began to fall, these markets felt the impact as that new, ‘production-surge’ construction was delivered and demand slowed. Today, oil-centric markets in the US register some of the highest vacancy rates in the nation.” Conversely, the report says, energy hubs with more diverse economies, such as Dallas and Denver, have fared much better.

That being said, by comparison to some of its counterparts in other regions of the world, Houston is actually faring pretty well. “Thus far, markets hardest hit by the oil shock include Moscow, Aberdeen, Calgary, and Houston,” the report states. “But even within these four markets are significant differences with respect to each one’s health.”

Moscow, for instance, has fallen into a deep recession, with 117,500 jobs lost and office rents one-third lower since oil prices began their descent. “In comparison, Houston’s economy has slowed, but is also proving to be far more resilient,” according to the Cushman & Wakefield report. 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 weathering the storm reasonably well is that the local economy has diversified greatly over the years, with more economic contributions coming from non-energy sectors, such as education, healthcare, retail and professional business services. “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),” the report states. “As the oil price correction hit this time around, that number was closer to 17%.”

More recently, the report notes, oil prices have begun to stabilize. However, we won’t be seeing pricing at north of $100 per barrel anytime soon. “Although oil price forecasts vary, in general they are expected to remain below $60 per barrel through 2017, and most forecast below $70 through 2020.”