June 1, 2018
By: Bruce Rutherford, International Director, JLL Global Energy Practice Group
Energy-related tenants have accounted for a significant portion of Houston’s office leasing activity over the past 12 months. In fact, one-third of tenants with active requirements in the market are energy-related. This activity, however, has brought with it very little in terms of occupancy growth. Traumatized by the oil downturn between 2014 and 2017, energy companies are looking to do more with less in a new culture of ultra-disciplined spending.
Despite 2.7 percent growth in energy employment year-over-year, Houston’s office market remains saddled with 9.5 million square feet of sublease space, 76 percent of which is from energy tenants. While concession packages within the Houston office market have plateaued, tenants are still benefiting from generous landlord concessions.
But Houston’s office market is not alone. Energy-centric office markets across North America are still in a weakened state, the result of “large and long” real estate strategies executed when oil prices were high and energy companies were less concerned with real estate exposure. Going forward, flexibility will be key to energy real estate strategies.
The oil downturn has spurred fundamental changes in the way oil and gas companies view real estate. Lease structures desired today are shorter, more flexible, and provide the ability to mitigate risk with options throughout the lease term. Shifts toward efficient, high-density office build-outs is slowing the recovery of energy-centric office markets as firms use less space overall.
In contrast to its office counterpart, energy-heavy industrial markets have remained steady over the course of the downturn with pockets of weakness far outweighed by increased downstream investment. Houston’s southeast industrial submarket has benefited greatly from the downstream boom along Houston’s ship channel. The southeast submarket currently contains 43 percent of Houston’s industrial construction pipeline.
For more about how the energy industry is impacting Houston’s office and industrial real estate markets download our 2018 Energy Outlook.
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.