June 13, 2018
The drastic correction in oil prices between 2014 and 2017 left an indelible mark on energy companies and energy-centric real estate markets like Houston. The trauma of the downturn has generated a new culture of ultra-disciplined spending and doing more with less, even as oil prices have recovered in 2018.
Energy companies’ leasing strategies and space uses are evolving in response to industry cycles. When oil prices were high, energy companies were less concerned with real estate exposure. Many executed ‘large and long’ real estate strategies that secured massive amounts of space for an extended period of time. This over-commitment and inflexibility proved costly.
By and large, lease structures desired today are shorter, more flexible, and provide the ability to mitigate risk with options. Typically, this involves a core amount of space reserved for traditional occupancy with expansion options available for smaller amounts of space over the term. Rights to contract and/or terminate – also at various points throughout the lease term – are negotiated to provide the flexibility needed to manage operational fluctuations.
Additionally, energy firms are exploring flexible or co-working space now more than ever. Flexible space allows companies to quickly contract without the burden of subleasing their space and expand rapidly without getting locked into long-term commitments. As flex space providers grow and their focus evolves from startups to more traditional corporate users, expect more energy companies to include flexible space in their corporate real estate strategies going forward.
Cost pressures in today’s environment and new workplace strategies are bearing their weight on an industry that has tended toward more traditional, office-heavy designs. Looking ahead, the movement toward modern properties that support efficient buildouts will accelerate. A more even split between open workstations and private offices with more hoteling, collaboration and private space will become the norm.