Economy Watch: What Do Low Energy Prices Mean for CRE?

As 2015 comes to a close, energy is cheaper than it's been in years.

As 2015 comes to a close, energy is cheaper than it’s been in years. According to the Bureau of Labor Statistics, overall energy prices are down more than 20 percent from their most recent high in mid-2014. Recently JLL published a report about the impact of low energy prices on commercial real estate, particularly the office sector. The conclusion: overall, no significant impact, since only 0.6 percent of U.S. jobs are in “mining,” the BLS category that includes oil and gas production, a sector that has lost 108,000 jobs since last year.

But certain office markets are being hit hard. The report noted:

  • About half of the Houston economy is tied to the energy industry, and around 32 percent of its office space is taken by energy-related companies. Engineering specialty companies that cluster in Houston’s Energy Corridor have cut the most jobs lately. Those cuts, along with new space coming online in the Energy Corridor, the CBD, and other submarkets—started pre-2014, when the industry was flush—have led to a jump in vacancies.
  • In response, Houston landlords and energy companies wanting to sublease space are vying for tenants from other industries, such as tech, insurance and health care.
  • Other major U.S. office markets with significant exposure to the energy sector include metro Pittsburgh, Denver, and DFW, whose office inventory is 10.7 percent, 8.8 percent, and 9.4 percent occupied by energy concerns. These markets have fared better, partly because of the smaller exposure, partly because other industries (such as tech) are growing in those places.
  • Smaller energy-focused markets, such as Williston, N.D., and Hobbs, N.M., “have been devastated,” noted the report. Companies in those places are contracting or going out of business, though because of their size, the impact is strictly local.
  • This state of affairs probably won’t last. The report posited that as energy production continues to slow, lower prices (especially for oil) will eventually stimulate the demand for energy, and prices will rise again, perhaps as soon as next year. That will offer some relief to the office markets hit the hardest.