Fundamental shifts in the oil and gas industry are redefining where the energy business takes place, particularly in North America.
These changes, triggered by low oil prices, are not only redrawing the energy industry corporate location map, but they’re also having a profound impact on commercial real estate markets in many U.S. cities.
Major energy hubs such as Houston and Calgary are facing a glut of vacant office space following waves of layoffs, bankruptcies and mergers that have rocked the oil and gas industry over the past two years. But as the industry modernizes, other opportunities are being created.
“A booming downstream sector, coupled with glimmers of potential from renewables, are fostering the development of new energy corporate location clusters rich in both natural resources and the other resource of premium value to this industry: professional talent,” observes Eli Gilbert, Vice President of Research at JLL and leader of the energy research group.
Here are four key ways that energy companies are adjusting their real estate strategies to adapt to oil and gas real estate market conditions, and reflect the changing face of today’s workforce.
1. Traditional energy hubs prepare for long recovery
In the low oil price environment of the past two years, the downsizing of white collar positions in oil and gas companies has caused an unprecedented flood of office space to hit the market. And while signs point to oil prices stabilizing, it could take two to three years for the real estate market to recover in cities like Houston.
For the recovery to take hold, crude oil prices will need to stabilize. Energy companies will then expand capital budgets, grow headcount and work through excess office space before returning to expansion mode.
2. Oil and gas companies shed sprawling campuses for smaller, flexible spaces
Oil and gas companies are at a critical juncture to move toward slimmer, more flexible real estate portfolios that address the reality of tighter budgets and a more modern workforce which embraces flexible working and collaboration.
“A newer, leaner oil and gas industry will emerge from the down cycle, and it’s only natural that real estate strategies will follow that trend,” says Bruce Rutherford, International Director and Energy Practice Co-Lead for JLL. “For energy companies that need to cut costs and reduce excess space, subleasing remains the primary option.”
Today’s market conditions are ripe for opportunistic companies to move to new space with more efficient layouts and flexible lease terms. Co-working has also emerged as an option for energy companies, with locations like “Coalition” in Chicago and “Start” in Houston adding energy firms to their rosters.
3. New renewable energy hubs emerge
While it still accounts for a small proportion of the total U.S. energy portfolio, the renewable energy sector is picking up steam. Renewable energy supply spiked by 51.4 percent since 2006, according to the Energy Information Administration.
Gilbert expects further expansion in the renewable and clean tech industry, as wind and solar become increasingly cost competitive. Demand for both office and industrial real estate in new locations will follow, according to Gilbert.
“While the market is currently decentralized, California, Colorado and Arizona may become the next renewable energy hubs as they contain the highest concentration of solar and wind companies in North America,” he adds.
4. Real estate demand picks up in key downstream markets
Low oil prices have benefited the downstream sector of the industry, fueling a petrochemical revolution. As cheaper energy inputs drive a massive increase in the manufacturing of intermediate chemicals and finished plastic products, demand is booming for industrial manufacturing, warehouse and refinery space in key downstream markets such as the Gulf Coast and western Pennsylvania.
This real estate demand, coupled with a disposable income windfall for households due to lower gasoline, natural gas, and energy costs, is also spilling into the retail and multifamily sectors in those markets.
Road to recovery
In the immediate future, the energy sector’s road to recovery is paved with challenges, creating both headwinds and opportunities as commercial real estate markets adapt to volatile conditions.
As new markets continue to emerge and recovering clusters are nursed back to health, the industry’s footprint will continue to evolve and meet the changing needs of tomorrow’s energy companies.