May 27, 2024

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$100 oil unleashed a commercial real estate boom in Houston a decade ago. What’s different now?

The last time oil prices hit $100 a barrel nearly a decade ago, Houston’s commercial real estate market flourished.

Real estate investors poured money into Houston. Developers raced to build new office space. Oil and gas companies, flush with cash from the fracking boom, planned lavish new campuses and snapped up long-term office leases, often taking on more space than needed as they looked confidently to future growth.

This time around, $100-a-barrel oil is not stoking the same fervent optimism.

Even with oil prices expected to climb higher, energy companies — burned by two wrenching oil busts in five years — aren’t clamoring for more real estate. Under pressure from Wall Street to control costs, they’ve figured out how to do more with less – including fewer employees and fewer desks — while incorporating remote and flexible working arrangements that became popular with employees during the pandemic.

Throughout the pandemic many oil and gas companies delayed leasing decisions, opted out of big expansions or consolidated real estate holdings. It’s too soon to say if high oil prices will change that behavior, experts say, but no one is expecting a repeat of the shale-induced real estate boom of a decade ago.

All this could signal long-term changes in employment patterns and the role of oil and gas as the engine of Houston’s economy. Energy companies occupy about 20 percent of all office space in the Houston market, and absent a robust rebound in hiring and office leasing, the commercial real estate sector faces a long, difficult recovery from some of the highest vacancy rates in the country. Areas where oil and related companies have traditionally clustered, such as The Woodlands, the Energy Corridor and downtown, could be saddled with partially empty office buildings for years to come.

Energy industry executives are taking very much a ‘wait and see’ attitude. Their capital sources are demanding that they give money back and so people are really more concerned about being able to generate cash flow, to pay investors, to pay down loans,” said Bruce Rutherford, who leads the global energy services group at real estate giant JLL. “They are very, very reluctant to sign large, long-term leases now because of this so much uncertainty with the future.”

Jobs growth expected, but just how much is uncertain

Office demand is a bellwether for economic growth and job creation. Office leasing activity is often an indicator of a company’s expectations for hiring. Full offices can have a multiplying economic effect on the surrounding area, as employees eat lunch at local restaurants, fill up at nearby gas stations, drop off their dry cleaning or shop nearby. Nationally, the commercial real estate industry contributed about $1.2 trillion to the U.S. economy last year, according to the industry group NAIOP.

For Houston, one of the biggest questions about office space demand is how many jobs energy companies will create even in a high-price oil environment. Job growth is considered one of the biggest predictors of office space use.

“Energy companies will need to assess whether the jump in oil prices is short-term or long-term,” said Patrick Jankowski, economist at Greater Houston Partnership, the metro’s largest chamber of commerce. “If its short-term, they won’t hire additional staff, just work the staff they already have a lot harder. If they believe oil prices will remain higher for longer, they will adjust their operations and headcount accordingly.”

Industry group Texas Independent Producers & Royalty Owners Association estimates that Houston’s oil and gas sector employs about 61,300 after adding a net 1,600 jobs last year. The industry posted another 3,515 job openings in January.

But economists don’t expect oil and gas employment in Houston to again reach 111,000, as it did the last time oil prices topped $100 a barrel in 2014. Rig counts, a key indicator of oil and gas activity, are rising, but are still down about 130 from pre-pandemic levels.

“The price of oil has been up above $70 per barrel for the last eight months or so,” said Bill Gilmer, director of University of Houston’s Bauer Institute for Regional Forecasting. “So, these guys have had plenty of incentive to move forward and they really have not done so. They have been extremely cautious.”

Slower growth

That caution is translating to real estate.

During the shale boom from 2011 and 2014, real estate developers built 16 million square feet of new office space — the equivalent of adding 11 new Williams Towers, according to data firm CoStar. Much of the new construction, however, was completed just as the two-year oil bust began at the end of 2014, leaving Houston with a chronic office glut. Houston has the highest office vacancy rate in the country at about 28.1 percent, higher than Dallas (25.5 percent); Los Angeles (20.2) and New York (14.6 percent), according to commercial real estate firm JLL.

“The office [sector in Houston] is so heavily exposed to energy right now, so it’s going to take a real paradigm shift to fill up all those empty buildings,” said Justin Boyar, CoStar’s Director of Market Analytics in Houston.

Staff graphic

There are some signs of a tepid recovery. One key indicator of office demand, net absorption — or the difference between tenant move outs and tenant move ins — turned positive in the second half of 2021 for the first time in 18 months, according to CoStar. Mostly non-energy companies, such as health care and professional services firms, are leading the leasing activity, however.

Oil and oil field services companies accounted for just about 15 percent of new leases signed 2021 in Houston, according to CoStar, compared to 38 percent at the height of the shale boom about a decade ago.

Other oil and gas companies have been consolidating their office footprints too; here are some big examples:

Pipeline company Enbridge announced in March that is moving and downsizing from its 620,000 square-foot office in the Galleria to a 292,981-square-foot space in the Energy Corridor under a sublease struck with consturction and engineer firm McDermott International. McDermott will consolidate its office into 231,000 square feet in the buildling. The deal roughly halves both energy companies office footprint in Houston.

In a move that started before the pandemic, Marathon Oil shed about 175,000 square feet (or about 28 percent) of its office footprint in Houston when it move into its new office tower at CityCentre at the end of last year from 5555 San Felipe.

Halliburton is benefiting financially after having successfully reduced its real estate footprint in Houston by about 30 percent over the course of the pandemic across various undisclosed office and lab spaces, said Emily Mir, a Halliburton spokeswoman in an email.

Exxon Mobil putabout 290,000 square feet of office space on the sublease market at the end of 2021 as part of a broader shift to consolidate its Texas office footprint as it moves its headquarters to Houston’s City Place. Exxon is also trying to sell its roughly 300-acre campus in Irving.

Other large new blocks of sublease space came online in the fourth quarter in the Houston metro include Schlumberger (170,000 square feet in the Galleria), EP Energy (125,000 square feet downtown), Petroleum Geo Services (95,000 square foot in the Energy Corridor) and NRG Energy (104,000 square feet downtown), according to research from research from commercial real estate brokerage Cushman & Wakefield. TechnipFMC, BHP and Direct Energy also had large blocks of sublease space available at the end of last year, according to Cushman.

Chevron has held onto to roughly 1 million square feet of space in two large mostly vacant towers in northwest it picked up when it bought Noble Energy in 2020. Noble Energy at one point had put about 430,00 square feet of space on the sublease market, which was later removed from the market late in 2021, according to CBRE, which was marketing the building. Chevron also put an adjacent office tower previously occupied by Noble Energy on the market for sale in 2020 and later moved all of the former Noble Energy employees Chevron’s downtown hub.

Coterra Energy – a new oil & gas company formed by the merger of Houston’s Cabot Oil & Gas and Denver’s Cimarex Energy – actually expanded when it renewed its leasing in Memorial City, adding two floors space at its offices. While this 122,000 square-foot deal is a net positive for Houston, it still represents a consolidation of their overall office footprint as former Cimarex employees are expected to move from Denver once the company closes its offices there by the end of year, a spokesman confirmed.

Meanwhile, one of Anadarko Petroleum’s former office tower still remains mostly vacant about two years after Occidental Petroleum sold the building to Howard Hughes and consolidated its footprint in The Woodlands in the wake of the Anadarko-Occidental merger.

Diamond Offshore reduced its Houston office footprint by about 18 percent when it sold and leased back a portion of its headquarters in the Energy Corridor during its bankruptcy proceedings in 2020.

Notable large lease renewals or expansions from oil and gas firms in the pandemic:

Shell Oil signed the biggest office lease in Houston last year when it renewed a lease for 259,000 square feet at 1000 Main downtown.

TC Energy signed a 10-year lease renewal for 320,000 square-feet of space at its namesake tower downtown at the end of 2020.

Pipeline company Buckeye Partners expanded its office footprint when it leased 76,000 square-foot office in at 4200 Westheimer in Stonelake’s 200 Park Place, a Class A new office building near River Oaks, according to JLL Research.

In 2021 pipeline company Boardwalk Pipeline Partners renewed a lease for 98,000 square feet in Greenway Plaza, according to JLL Research.

“During the shale boom, things happened fast and furious,” said Chris Oliver, vice chairman at the real estate brokerage Cushman & Wakefield, who works with energy companies. “Now there’s a lot more scrutiny and examination of all the possibilities, so the transaction timeline is extended.”

A handful oil and gas companies have signed large office leases. The pipeline company TC Energy signed a 320,000 lease at its namesake tower downtown in late 2020. And in fall 2021, Shell Oil signed a 259,000 square feet lease at 1000 Main downtown — biggest office in Houston in 2021. But these deals were renewals, meaning companies are staying put without expanding much.

Will remote work change real estate use?

Another reason energy companies are cautious about signing new office deals is they’re unsure what their space needs will look like once workers return to the office.

Many major energy companies are allowing hybrid work schedules, asking employees to work in the office two to three days a week while working remotely the rest. Oil companies Chevron, BP, Marathon Oil, ConocoPhillips energy services provider Halliburton and TC Energy have introduced hybrid work policies, the companies said.

Shell, which reopened its offices in November, is allowing managers to work out remote schedules with their teams. Exxon Mobil’s Houston employees are working in the office as “in-person collaboration remains an important part of our work environment,” although employees have the option of working remotely with supervisor approval, a spokeswoman said.

“Bringing people back to work and adding office space isn’t going to happen overnight,” said Jon Lee, executive vice president with the commercial real estate firm CBRE. “everyone is still wrestling with, ‘What’s the right mix of space to have for employees as they come back from COVID and what amount of hybrid are we going to do?’”

Rutherford, the energy services leader at JLL, said most companies will have a work-from-home component as they bring employees back. Despite the prospect of fewer people in the office, some companies are maintaining the same space to allow for social distancing, expanded collaboration and meeting areas, and better amenities, including food and beverage offerings, he said.

“The energy industry and almost all industries are going to come to the realization that in order to motivate employees to come back to the office,” Rutherford said, “they’re going to have to supply them with an office environment that is much more attractive than it was in the past.”

Reporter Amanda Drane contributed.

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