If you're in office real estate in a place like Houston or Calgary, then you're also in the oil business, whether you like it or not.
Just how much damage the collapse in oil and gas prices has wreaked on regional energy capitals varies from city to city, according to a new report by real-estate services firm Cushman & Wakefield. While most cities around the world have seen strong growth in their office rental markets in the past few years, many cities tied to oil and gas have seen rents slow or vacancies increase:
When it comes to North America's energy cities -- defined as those that are home to listed or state-owned energy company headquarters -- Houston and, especially, Calgary are most affected by the oil slump.
Houston these days is much better able to withstand an oil crash than it was during the 1980s oil downturn, when two-thirds of the city’s jobs were in the oil industry, according to Cushman & Wakefield. Today about 17 percent of Houston’s workforce is in the energy business, so growth in other industries such as health care and education have actually resulted in a net absorption of office space, despite the oil crash.
Houston's office realtors can't rest easy yet, though. For one thing, despite OPEC's apparent helping hand, the chances of a rapid return to those halcyon days of triple-digit oil prices before late 2014 look slim indeed.
What's worse, real-estate markets don't shift gears as quickly as oil-futures prices on the Nymex. A spate of construction commissioned when oil commanded $100 a barrel continues to hit the market at a rapid pace. Falling oil prices have hurt demand for space just as a flood of offices have become available for lease, putting pressure on vacancy and rental rates, notes Cushman & Wakefield's Global Chief Economist Kevin Thorpe.
In other words, like the oil glut, there's also an oil-center office glut.
The situation may not be as bad for more-recent office completions -- new, high-end office space is a sought-after commodity -- as it is for older, lower-end real estate. Thanks to price declines and ample office availability, companies are likely to opt for better digs for their money, hurting demand for lower-grade real estate.
Both Houston and Calgary kept adding floor space after the oil crash began, near the end of 2014. So far this year, they have added a combined 3.8 million square feet. Perhaps more alarming, Cushman & Wakefield estimates the pipeline of projects due for completion between the second half of 2016 and the end of 2018 is 4.3 million square feet in Calgary and a whopping 9.1 million in Houston. Even if the oil glut begins to clear in the next year or so, that office glut will keep building.
Other energy cities have proven much more resilient to the oil-price decline. Denver, for example, has thriving tech and tourism industries as counterpoints to oil. Office rents there increased by 20 percent between the first quarter of 2014 and the second quarter of 2016 as vacancy rates declined. Like Calgary and Houston, Denver also has a lot of new office space arriving on the market: 1.4 million square feet from 2016 to 2018. Denver’s prospects for finding good uses for all that space, however, are much brighter.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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