Bruce Rutherford: Booming Domestic Energy Industry Triggers Heated Competition for Prime Real Estate

Growth in the domestic energy industry is expected...

Growth in the domestic energy industry is expected to create more than 3.5 million American jobs by 2035, including 700,000 in the next two years alone, according to industry reports from I.H.S. Global Insight. The same industry growth creating jobs is also driving heated competition for prime real estate – predominantly in a handful of cities where the oil and gas industry is booming. New research from Jones Lang LaSalle (JLL) indicates that the majority of commercial real estate opportunities resulting from this job growth will be concentrated in the following North American cities: Calgary, Dallas, Denver, Houston, Philadelphia and Pittsburgh.

In JLL’s inaugural Energy Outlook Report, these cities are characterized as benefitting from up to three-quarters of the anticipated 3.5 million new energy jobs — directly correlating with nearby rural areas experiencing a rise in energy activity. The remaining 875,000 jobs are anticipated in other regions, including financial centers such as New York City and Chicago not directly associated with oil and gas production. JLL’s research identified the following top energy-driven commercial real estate markets:

Calgary. For more than two years, the office market in Calgary, Alberta, Canada has demonstrated increasing occupancy, as energy companies are elbowing one another to find the office space they need to support Canadian oil exploration, production and transport operations. The retail sector is reflecting Calgary’s ‘Boom Town’ status, as shown in Alberta’s strong month-over-month retail sales growth during February 2013, growing at 2.2 percent, more than double the 0.8 percent growth rate for Canada overall.

Dallas. Not only has the Dallas metropolitan area experienced a significant 1.3 percent drop in retail vacancy since 2010, it is also logging record growth in the office, industrial, multifamily and hotel sectors. Several new hotels are under construction in the market and the number is expected to rise as industry growth in 2013 continues and developers seek to add real estate projects that cater to business travelers in its emerging economic sectors.

Denver. Located near significant new opportunities for natural gas production, Denver is becoming a center of activity for energy companies, which are leasing space at a rapid pace. An analysis of energy leasing transactions revealed that energy tenants in Denver’s central business district paid an average of 9.7 percent above landlords’ initial asking office space rental rates.

Houston. Commercial real estate fundamentals in Houston are becoming more landlord-favorable every quarter. For example, retail vacancy in the Houston market has dropped 1.6 percent since its highest vacancy levels in 2008. In Houston’s suburban energy corridor, 81 percent of nearly 3 million square feet of new construction is pre-leased.

Philadelphia. Proximity to new energy production sites is driving demand for both industrial/manufacturing facilities and office space in Philadelphia. The city’s office and retail sectors are becoming highly landlord-favorable as a result of the influx of employment opportunities in the energy sector and with affiliated companies. With such rising interest from the energy sector, real estate investment volumes are poised to pick up in 2013 and 2014.

Pittsburgh. Demand for new energy production components has driven an uptick in manufacturing activity in the Pittsburgh area. This growth has resulted in strong conditions for industrial real estate in particular, but also across other commercial property types. Leasing demand from natural gas and other energy-related companies is helping to bolster the Pittsburgh office market, where rents are at their highest level in more than a decade. In fact, the Pittsburgh market is outpacing national growth in rents and occupancy, largely due to the energy sector.

Bruce Rutherford is an International Director and Energy Practice Leader for Jones Lang LaSalle.