CHICAGO—The steep decline in US crude oil prices may have helped the economy as a whole, but for energy firms it presents a stiff challenge. But companies that can afford to make strategic moves may find opportunities in this new environment, according to a new JLL report.
"There's a unique combination of capital market, industry and real estate forces that provide credit worthy tenants with attractive options to reduce cost or monetize their real estate portfolios," says Bruce Rutherford, co-leader of Chicago-based JLL's global oil and gas practice group. "Energy companies with strong credit, for example, have the opportunity to negotiate purchase contracts for real estate they currently lease, assign those contracts to synthetic lease sources and in that process convert conventional leases into dramatically less expensive synthetic leases."
"Owned assets can also be sold to financing sources and converted to credit tenant leases retaining the features of ownership," he adds. "The key is for those in the industry to utilize their portfolios as a strategic resource to mange costs and liquidity needs."
JLL advises energy companies to review their real estate portfolios and make sure they are aligned with long-term business strategies. And financially strong companies can do more than short-term cost cutting.
First, the drop in oil prices has depressed real estate pricing in many energy-intensive markets. That means tenants can lock in long-term leases with aggressive rent discounts or other favorable terms—while getting access to high-quality talent pools with experienced engineers and other well-trained professionals. And if an energy firm has offices in a landlord-friendly market not affected by the drop in oil prices, subleasing can be a profitable option if other industries covet these spaces.
Furthermore, according to JLL the downturn in energy prices has highlighted the vast differences between the real estate markets of energy-intensive cities. And companies need specific strategies for each of these metro areas.
For example, despite depressed prices, energy remains one of Denver's primary economic drivers. Of the 636,000 square feet of sublease space released by energy companies since January 2015, nearly 20% has already been re-absorbed—mostly by other energy firms, JLL finds. And Denver remains strategically important for energy companies, especially for those committed to recruiting from the millennial generation, because of its strong base of STEM workers and many live-work-play amenities.
Houston's office market has definitely suffered from both energy-sector job losses and mergers among energy firms. However, JLL expects its industrial market to grow for at least several years as new manufacturing plants come online.
Dallas has remained stable, but with its high concentration of energy tenants, Fort Worth has felt the brunt of the industry slowdown and is likely to see additional office vacancies.
The Pittsburgh industrial market has been hit hard by energy industry volatility, and its tenants have typically signed short-term leases. And within the office market, even though demand from energy tenants has declined, JLL officials say it is a great time to look for opportunities to expand in the Southpointe submarket.
"Bold real estate moves are well-timed at this point in the oil and gas industry economic cycle; business doesn't stop because revenues are down," says Lindsay Brown, co-leader of JLL's oil and gas group. "Expansion into STEM-educated millennial talent-rich markets like Denver and Pittsburgh is being driven by Canadian and US companies alike. This is a great time to tackle the industry's pending talent shortfall as the current generation of senior executives begin to look towards retirement."
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
