This week, we’re shifting away from New York City and moving Southwest to Houston, and the oil industry. As we go into 2016, the energy industry’s impact on commercial real estate is more acute than some would think. Because energy, specifically crude oil, is cheaper than it has been in a decade, the oil industry has seen an increase in layoffs and a lull in commercial real estate demand. The Bureau of Labor Statistics reported recently that energy prices are down more than 20 percent from 2014. JLL’s published report showed that office markets are in trouble, especially in Houston.
The JLL report findings quoted the following:
- About half of the Houston economy is tied to the energy industry, and around 32 percent of its office space is taken by energy-related companies. Engineering specialty companies that cluster in Houston’s Energy Corridor have cut the most jobs lately. Those cuts, along with new space coming online in the Energy Corridor, the CBD, and other submarkets—started pre-2014, when the industry was flush—have led to a jump in vacancies.
- In response, Houston landlords and energy companies wanting to sublease space are vying for tenants from other industries, such as tech, insurance and health care.
- Other major U.S. office markets with significant exposure to the energy sector include metro Pittsburgh, Denver, and DFW, whose office inventory is 10.7 percent, 8.8 percent, and 9.4 percent occupied by energy concerns. These markets have fared better, partly because of the smaller exposure, partly because other industries (such as tech) are growing in those places.
- Smaller energy-focused markets, such as Williston, N.D., and Hobbs, N.M., “have been devastated,” noted the report. Companies in those places are contracting or going out of business, though because of their size, the impact is strictly local.
- This state of affairs probably won’t last. The report posited that as energy production continues to slow, lower prices (especially for oil) will eventually stimulate the demand for energy, and prices will rise again, perhaps as soon as next year. That will offer some relief to the office markets hit the hardest.
Though JLL’s report shows an insignificant impact to CRE in cities like New York, those steeped in energy (especially crude oil) will need to hope the price of oil per barrel rises before their CRE markets do.
For more news on real estate trends, visit JLL’s site