Nov. 15, 2016
By: Bruce Rutherford, International Director of JLL’s Global Energy Practice Group
How is the energy downturn affecting CRE decisions by companies in each energy sector? What are the implications for the future?
Upstream – streamlining to survive the downturn
The energy downturn has hit the upstream sector of the oil and gas industry the hardest. Exploration & Production (E&P) companies in the upstream sector hired talent, spent capital and leased office space from 2010 – 2014 based on the assumption of continued $100-a-barrel oil. Since the onset of the downturn, these companies have been streamlining operations to cut costs amid falling revenues. This has resulted in energy tenants downsizing significantly, exploring M&A options, and releasing record amounts of sublease space into property markets across North America. In Houston, this has manifested as an unprecedented 12.2 million square feet of office sublease space.
Upstream Outlook: As $100-a-barrel oil moves further toward a fond memory, upstream-related companies will seek to redefine their real estate needs in a low-price environment. It remains critical, however, they exit the downturn with enough infrastructure in place to capitalize on the recovery and grow long term.
Midstream – healthy despite upstream weakness and regulatory hurdles
While the shale boom led to growth in the midstream sector, a new lower-oil-price environment combined with increasing regulatory scrutiny and public opposition to new infrastructure has created some distress. Some midstream companies have been forced to make job cuts, but many have weathered the oil slump fairly well, posting consistent earnings gains. As additional North American pipeline development remains uncertain, midstream companies could continue to lose out on revenue due to a lack of infrastructure. For now, most companies are responding with a focus on gaining scale and synergies from mergers, acquisitions and asset sales. Since the start of the downturn, nearly every top midstream firm in North America has participated in or explored M&A options in what’s been called a “wave of consolidation.”
The net effect of midstream sector changes on commercial real estate has been relatively sedate, with some firms downsizing and others maintaining boom-period occupancy.
Midstream Outlook: Companies will continue to expand their networks through either purchase or M&A activity.
Downstream – cheap inputs spur expansion
The shale boom and subsequent decline in the price of oil have fueled increased activity and development in the petrochemical industry. Cheaper energy inputs have driven a massive increase in the manufacturing of intermediate chemicals and finished plastics products, creating demand for industrial space in key downstream markets. The American Chemistry Council reports 268 projects, with a total investment of $170 billion, currently planned or under way across the U.S. A staggering $50 billion worth of these projects are located near Houston.
Capital flowing into these developing areas is spurring demand for specialized industrial projects and increasing the need for neighboring manufacturing and warehouse space. This is resulting in extremely tight vacancy and upward pressure on rents.
Downstream Outlook: Real estate markets along the Gulf Coast and in western Pennsylvania will continue to receive the most benefit from the upswing in petrochemical investment. Burgeoning ethane and LNG export industries will help create opportunities in the future.
To download JLL’s complete 2016 Energy Outlook, click here.
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.