From black gold to green renewables: The thriving North American energy clusters

 —  Article by JLL Staff Reporter

Once associated with the gushing wells of the Texas scrublands, the North American energy industry footprint has expanded far and wide.

Even as oil and gas production shrinks due to low prices, access to low-cost shale oil is creating new demand for industrial real estate in energy-rich North American locations, some far from traditional oil markets like Houston.

One growth driver is the increase of chemical and plastics manufacturing. As of mid-2016, these industries have triggered the launch of 268 new manufacturing projects worth more than $170 billion along the Gulf Coast and western Pennsylvania.

Real estate market growth is coming from financially stable oil and gas companies. From a real estate perspective, contraction in the energy sector has an upside for companies that can afford it. One company’s need to unload excess real estate is another’s opportunity to sublease affordable space in a prime neighborhood that appeals to in-demand Millennial workers. Others are renegotiating more flexible lease terms from landlords eager to keep their buildings occupied.

Renewable power generators are also thriving despite the downturn, while changing the landscape along the way. The U.S. renewable energy supply has spiked by 51.4 percent since 2006, according to the U.S. Energy Information Administration, and the United States leads the world in wind power generation. Solar panels and wind turbines are popping up across sunny plains and windswept fields in new alternative energy clusters in Arizona, Denver and California. Both office and industrial real estate demand is up in those clusters, driven by renewables equipment manufacturers.

“Today’s North American energy industry map includes many more locations than in the past,” notes Bruce Rutherford, Co-Lead of JLL’s Energy group. “Numerous commercial real estate markets in North America will reap the benefits from the growth of renewable energy. But I wouldn’t count out the shale markets or traditional energy cities—because prices will eventually rise again.”

View the slideshow to see where the traditional and renewable energy companies are shrinking, growing and making an impact in North America.

Denver, Colorado

Denver is a becoming a larger hub for energy, not only because of its access to major oil reserves, but also because the urban mountain lifestyle appeals to Millennials. Although oil and gas-related job losses have pushed Denver's office space sublease inventory to its highest level in at least a decade, the downsizing appears to be over. Real estate is cheaper now than before the downturn, allowing well-capitalized businesses to take up affordably priced premium sublease spaces. Meanwhile, the Denver/Fort Collins market now has the highest concentration of wind manufacturing jobs in North America, spurred by the growth of wind turbine manufacturer Vestas and other wind and solar parts manufacturers.

Dallas-Fort Worth, Texas

Despite their long reliance on the energy sector, both Dallas and Fort Worth are thriving amid low oil and gas prices. Dallas's now-diversified economy has continued unimpeded by the sluggish oil economy and is expected to continue thriving into 2018. Downtown office rents are growing annually by 7.6 percent. Nearby, Fort Worth has lost a number of downtown energy tenants, but occupancy levels have remained resilient despite more vacant space and lower rents on the market. Fort Worth is well positioned to survive the energy slowdown as other business sectors take up the slack space.

Houston, Texas

The shale boom and bust has made Houston the U.S. leader in sublease space. More than 11 million square feet of Class A sublease space is available, with few takers from companies outside the energy sector. However, the excess space creates attractive opportunities for well-capitalized energy tenants entering the market. Industrial leasing has remained strong despite slowing, with some companies postponing expansions and seeking shorter-term options to weather the downturn. Petrochemical manufacturers are driving construction activity along the Houston Ship Channel, including a 1.4 million-square-foot plastics packaging and distribution facility for Katoen Natie.

Pittsburgh, Pennsylvania

Pittsburgh, by virtue of its proximity to major natural gas reserves, has also become a new energy town with a plethora of lifestyle amenities, albeit one with a highly diversified economy. However, the decline in energy prices has triggered significant subleasing and relocations.

By early 2016, 137,000 square feet of sublease space was available in the Southpointe office submarket—Pittsburgh's energy epicenter—and direct vacancy had risen to nearly 25 percent. Most energy sector activity involved relocations although other industries are now keen to take up office space. Demand for new industrial real estate also is on the rise, particularly in the West submarket where a new Shell ethane “cracker” plant is under construction. Some industrial tenants may choose to locate in nearby Washington County, where more than 20 percent of industrial space is vacant.

Calgary, Alberta, Canada

Calgary continues to be plagued by layoffs, but oil and gas companies are adjusting to the new reality. Office space demand actually rose in recent months, although negative net absorption continues with ongoing layoffs and industry consolidation. Well-positioned, cash-rich energy companies are acquiring assets from smaller or distressed companies, including Suncor's $6.6 billion takeover of Canadian Oil Sands and Enbridge's acquisition of Spectra Energy, and consolidating facilities. Nearly 500,000 square feet of manufacturing space was available for sublease as of summer 2016, and more will emerge as some of the largest energy companies are looking to consolidate operations.

Edmonton, Alberta, Canada

Although Edmonton's economy is diversified, the oil and gas price slump has had significant impact on the real estate market. Unemployment jumped to 8 percent in August, up from 5.6 percent a year earlier. Office space absorption has been negative for several quarters, pushing vacancy up to 10.7 percent. Average office rents have declined by 12.5 percent in the past 12 months, down to $19.25 per square foot. A devastating wildfire in the Fort McMurray region caused an estimated $3.6 billion in property damage—with $1.4 billion in the energy sector alone, and the long-term effects of this remain unclear.

Mojave Desert, California

With operational capacity of 1,020 megawatts, Southern California's Alta Wind Energy Centre (AWEC) is currently the largest wind farm in the world. However, the wind energy industry itself is highly decentralized, with parts manufactured across the United States and overseas. More than 500 facilities in 43 U.S. states manufacture parts or assemble wind turbines, so the sector does not dominate any particular industrial real estate market—although wind energy manufacturing operations are more common in states with heavy concentrations of wind farms, such Texas, California and Iowa.

Arizona

Although the solar power industry is widely geographically dispersed, Arizona is becoming an industry cluster. More than 375 solar companies are based in Arizona and, with the ability to generate 2,453 megawatts of solar power, the state is second only to California in installed capacity. Over the next five years, Arizona is expected to install another 3,380 megawatts of solar electric capacity. The state generates enough power for 348,000 homes.

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