Retail Gains, Office Loses in Key Energy Markets

LOS ANGELES—A year of low oil prices has undoubtedly made an impact on commercial real estate fundamentals in energy markets, although the impact is neither uniformly negative nor positive in every sector. What a report from CBRE Group calls “the coming boost from low fuel prices” is already evident in declining retail vacancies; conversely, the office sector in leading energy markets has taken a hit, although not in all metrics.

“As the US enters the second half of the current economic cycle with interest rates anticipated to rise, low-cost oil's boost to consumer spending and business activity would be welcome,” according to the CBRE  report, titled “Energy 2015: What Low Oil Prices Mean for Commercial Real Estate in North America.” The 3.7% expansion in domestic GDP “implies continued economic momentum on the back of solid growth during the second half of 2014.”

That momentum has manifested itself in a tightening of retail availability across the US, including most energy markets with the exception of Pittsburgh. Overall, retail availability declined 30 basis points between the second quarter of '14 and Q2 of this year, and is forecast to decline another 150 bps over the next four quarters to dip below 10.0% for the first time since Q2 2008.

Among energy markets, Houston led the way with improvement in retail tenancy; availability there declined 100 bps  year over year. Looking ahead four quarters, CBRE says Houston is forecast to again outperform the US and other energy markets except Dallas, with a 190 bps decline in availability to 8.0%.

It's a different story for Houston and other North American energy hubs when it comes to the office sector. In the five key energy markets, office space available for sublease has increased by more than five million square feet over the past year, says CBRE, noting that most of the oil-related sublease space is contained to a handful of submarkets. Q2 occupancy was down by 100 to 380 bps Y-O-Y in Calgary, Houston and Pittsburgh, while occupancy was up in Denver and Dallas/Fort Worth.

Calgary was the only energy headquarters market with negative absorption in the first half of 2015, although all but D/FW recorded negative Y-O-Y absorption in Q2. That being said, CBRE notes that “weaker oil and gas tenant demand has yet to stymie rent growth across energy markets” with the exception of Calgary's downtown market, which saw an 18.3% Y-O-Y decline in asking rents during Q2.

Three of the major US energy markets—Dallas, Denver and Houston—are also among the top five most active markets for apartment development. Over the past 12 months, the three markets have seen a combined 27,000 units delivered. While apartment fundamentals have retreated slightly in Houston, Denver and D/FW have kept pace with the US average for multifamily rent growth over the past 12 months.

“Low pricing on crude oil and gasoline is largely positive for economic growth and for commercial real estate, particularly in non-energy markets,” according to CBRE's report.. “Spending less on gasoline encourages consumers to spend more on other items, which may solidify retail and hotel market fundamentals. Lower oil-related input costs will also reduce certain construction, manufacturing and logistics costs in support of business investment and expansion—thereby boosting demand for warehouse and manufacturing space.”