Feb. 13, 2017
By: Bruce Rutherford, International Director of JLL’s Global Energy Practice Group
Surviving the downturn has been the name of the game with layoffs, bankruptcies, and mergers and acquisitions dominating energy headlines in recent years. Subleasing excess space has been the primary option for reducing CRE costs, but additional coping strategies exist.
As the down cycle creates a newer, leaner oil and gas industry, companies post-recovery are likely to look very different. Extreme measures taken to stay financially sound in the short term will undoubtedly impact real estate footprints long into the future. Based on pricing fluctuations seen in the market over the last two years, this will likely mean modeling business metrics predicated on the “new normal” of oil hovering around half the price of that seen during the 2011-2014 boom.
From a CRE standpoint, this means utilizing more diverse occupancy strategies. Key to this will be thoroughly vetting expansion plans while simultaneously moving toward more efficient space layouts for employees. Both strategies will result in a smaller office footprint. In addition, consolidation into single, enormous campuses or leases – a trend that defined the last decade of oil and gas company movement – may have run its course, as tenants look to be more agile by taking less space with more flexible terms. The product of this strategy has been energy tenants opting to move into sublease options. A trend seen in Houston where energy companies make up the majority of full-floor subleases signed in 2016.
Co-working has also emerged as an option for the industry, as locations multiply in major cities across the country. Some specific locations like “Start” in Houston have already added energy firms to their roster. While most co-working tenants today are smaller in size and focused on renewable energy, expect more traditional energy firms to follow in years to come.
Another emerging space utilization and cost-cutting technique in energy markets is called “chalk-lining.” Chalk-lining is a flexible sublease arrangement where a tenant carves out a block of space on a floor for another tenant. This allows companies to cohabitate in a mutually beneficial relationship according to specific space needs. Firms with excess space are able to minimize the cost and disruption of building out walls while simultaneously reducing their rent obligation.
As these trends take root, they will have substantial implications for both existing and future office space needs in energy-centric markets given the move toward a slimmer and more flexible industry footprint.
To learn more about the various real estate strategies available to reduce costs and improve operations, stop by booth #3015 at NAPE.
About the Author
Bruce Rutherford is an International Director within JLL Houston’s Office Tenant Representation group and is also the global leader for JLL’s Energy Practice group. With more than 33 years of experience, he has applied his expertise in tenant representation and commercial real estate consulting to numerous industries including insurance, banking, law, energy, energy services, and telecom.