Oil’s Plunge Hurts Houston Office Sales, Calgary Leases

Slumping oil prices are starting to reduce sales and office space rentals in North America’s biggest energy hubs.

In Houston, the center of the U.S. oil and gas industry, Shorenstein Properties last month took its 28-story Five Post Oak Park office tower off the market after receiving bids, said Olivia Hennessey, a spokeswoman for the broker, HFF Inc. In Calgary, Alberta, more companies are seeking to sublet space they no longer need as Canada’s energy capital loses jobs and projects get canceled, according to CBRE Group Inc.

These are early signs that demand is weakening for commercial properties in cities that depend on the energy industry after crude oil prices fell below $50 a barrel, the lowest in five-and-a-half years, from more than $100 in June. Oil companies looking to reduce costs are cutting jobs and choosing to stay put rather than buy or lease new space, said Ross Moore, director of Canada research for CBRE.

“Calgary and Houston would feel the impact of low oil most,” Moore said. “Tenants are looking at their premises and saying, ‘we were planning for expansion but that project has been put on ice so we don’t need that floor or that suite.’”

Houston was a favorite of property investors as oil prices were rising. As recently as October, a survey by PricewaterhouseCoopers and the Urban Land Institute named the city and Austin, Texas, the most attractive U.S. markets for buying and developing real estate in 2015. More than 50 office buildings with 17.1 million square feet (1.6 million square meters) are being built in Houston, more than twice the total of the second-busiest area, San Jose, California, according to CBRE Econometric Advisors.

Houston Sale

In Houston, Shorenstein had been marketing the 567,000 square foot (52,700-square-meter) Five Post Oak for about $185 million, said Hennessey, confirming a Jan. 14 report in Real Estate Alert. Andrew Neilly, a spokesman for San Francisco-based Shorenstein, declined to comment.

Also last month, Chicago-based LaSalle Investment Management scrapped plans to buy 1000 Main St. in Houston, prompting seller Invesco Real Estate to turn to the runner-up bidder, Metzler Real Estate of Seattle, Real Estate Alert reported on Jan. 14. LaSalle had agreed to pay about $450 million for the 837,000-square-foot building, according to the newsletter.

Market Assumptions

“It’s harder for people to underwrite a piece of commercial real estate today in a Houston metroplex, just not knowing what the future looks like for the price of oil,” said Darin Turner, a portfolio manager for Invesco Real Estate in Dallas. “People have been going back and re-looking at their assumptions for market rents and occupancy levels.”

Stefanie Murphy, a spokeswoman for LaSalle, declined to comment, as did Zeb Bradford, Metzler’s chief investment officer, and Bill Hensel, an Invesco spokesman.

It’s too early to assess the impact of cheaper oil on real estate markets, said Mitchell Roschelle, the U.S. head of PricewaterhouseCoopers’s real estate advisory practice. Oil prices could rebound if supply gets disrupted, he said. If prices stay low, the extra income for consumers by way of lower gasoline prices could stimulate the housing market, which tends to react more quickly than commercial property, he said.

Moving Freighter

“In commercial real estate, because of the length of the leases, the amount of time it takes to aggregate capital for an investment decision, the metaphor would be a big freighter in the open ocean,” Roschelle said. “It takes five miles to stop a freighter when it’s moving. I think you’ll see an impact in Houston, but it won’t be immediate.”

Houston was third in the U.S. for office-rent growth in the fourth quarter of 2014, with a 5.1 percent increase from a year earlier, according to Reis Inc. The technology hubs of San Jose and San Francisco were first and second. Office vacancies averaged 14.4 percent in Houston last quarter, compared with 16.7 percent for the country, according to Reis.

Houston submarkets such as Energy Corridor, Westchase and the Woodlands are most likely to be affected by a prolonged drop in oil prices, Invesco’s Turner said in a telephone interview. Energy-related companies account for between 60 percent and 80 percent of office leases in those areas, Turner said.

One Westchase tenant, Denmark’s A.P. Moeller-Maersk A/S, will cut costs in its oil unit and may scrap projects after crude prices tumbled, Chief Executive Officer Nils Smedegaard Andersen said in a Jan. 21 interview in Davos, Switzerland. The Copenhagen-based company since last August cut 54 jobs in Houston, or 26 percent of its work force there, as it scaled back exploration in the Gulf of Mexico, said Daniel Canty, a company spokesman.

‘What Rents?’

More than half of the total office square footage under construction in Houston already is pre-leased to energy-related tenants, said Invesco’s Turner.

“The market will try to understand what is the demand for the remaining square footage and at what market rents,” he said.

Exxon Mobil Corp., the world’s largest publicly traded oil producer, is scheduled to take occupancy this year of a new campus near the Woodlands that can house 10,000 employees. The company will remain headquartered in the Dallas suburb of Irving. A representative for Exxon Mobil didn’t respond to requests for comment.

In Calgary, lower oil prices are prompting energy companies to rent out office space they no longer use, said Moore, CBRE’s research director. In the first few weeks of this year, subleased office space increased by about 300,000 square feet, the same as in all of 2014, according to data compiled by CBRE.

Job Cuts

Calgary office vacancies, which rose 0.3 percentage point to 6.6 percent in the fourth quarter from a year earlier, are forecast to climb an additional three percentage points in 2015, according to Cushman & Wakefield Inc.

“The sharp decline of crude oil prices will most certainly contribute to a short-term reset of Calgary’s economy,” Bob MacDougall, senior managing director at the brokerage, said in a fourth-quarter report. “The office market will be affected as weakened tenant demand from the energy sector will drive up vacancy.”

Suncor Energy Inc., Canada’s largest oil company, said this month it will cut 1,000 jobs, reduce its 2015 capital budget by about 13 percent and delay projects to withstand collapsing oil prices. The company is the lead tenant of Suncor Energy Centre, the red-tinged two-tower complex with about 2 million square feet of office and retail space.

The west tower, clad in granite imported from Finland, is one of the tallest structures in western Canada, at 52 floors. Andrew Willis, a spokesman for the landlord’s parent company, Brookfield Asset Management Inc., declined to comment.

Sneh Seetal, a spokeswoman for Suncor in Calgary, said she hadn’t heard of any plans to reduce office space. The company is still working through its cost-cutting program, she said.

Cut Expenditures

“Energy companies are looking to cut their capital expenditure and they’re looking at their real estate,” Joe Binfet, a managing director at Colliers International, said by phone from Calgary. “It’s showing in the lack of activity on the investment front. There’s some caution from vendors and purchasers: purchasers are looking for a bottom to oil. And if you’re a seller, then you’re wondering whether or not to sell into a declining market.”

Commercial real estate tends to lag the broader economy by 12 to 18 months, so any potential slowdown would take time to materialize, Invesco’s Turner said. If the oil price stays below the threshold of marginal profitability for U.S. producers for a prolonged period of 18 months or longer, the impact could be severe. While estimates of that threshold vary, Invesco puts it between $70 and $75 a barrel.

“The buzz that we hear when we talk to market participants in Houston is there’s a lot of wait and see,” said Roschelle of PricewaterhouseCoopers. “The most likely thing to happen in the near term is a slowdown in anybody thinking of a new project.”