Oil Downturn Spurs Strategy Changes

HOUSTON—The drastic correction in oil prices between 2014 and 2017 left an indelible mark on energy companies and the real estate owned by those companies. Though oil prices have largely recovered, the trauma of the downturn has generated a new culture of ultra-disciplined spending and doing more with less.

New workplace strategies and technological advances are contributing to a systemic change in the way oil and gas companies view and leverage real estate, according to JLL’s 2018 North America Energy Outlook. This laser focus on costs is influencing energy tenants’ lease structures and space use.

When oil prices exceeded $100 per barrel, 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.

“Given the costly consequences of ‘large and long’ real estate strategies, energy companies today want to reduce real estate exposure through boom and bust cycles,” Bruce Rutherford, co-lead of JLL’s energy practice group, tells GlobeSt.com. “The most ubiquitous difference in real estate strategies of energy companies today versus 2014 is that energy companies are seeking to minimize the amount of real estate that does not directly support their operations, shed excess space and optimize the space they need, all under the banner of doing more with less.”

Moreover, today’s companies want lease structures that are shorter, more flexible and provide the ability to mitigate risk with options. Typically, this involves a core amount of space for traditional occupancy, expansion and termination options throughout the lease term and access to flexible or co-working space.

While one of the last sectors to implement modern occupancy strategies, the energy industry has finally begun to evolve to meet the needs of today’s workers and also react to the cost pressures of today’s environment. Recent benchmarking data shows energy firms have reduced space per employee in some cases by more than 40% since the oil downturn, says the JLL report.

In addition to real estate strategies, other systemic changes are afoot in the energy industry. The need for more robust delivery infrastructure and the adoption of the latest technologies are presenting challenges to and opportunities for further expansion.

Essential to the oil and gas industry is the pipeline network that supports it. Where some regions benefit from a vast network of pipelines, areas such as Alberta and west Texas are facing a capacity shortage given growing production and overburdened infrastructure, JLL observes. Proposed pipeline projects in Canada and west Texas present opportunities to those in the industrial manufacturing sectors and could create increased demand for office space if approved.

Where limited infrastructure is holding back the potential of the North American energy market, technology is advancing it. Energy firms have made enormous investments in technology to improve operations and generate efficiencies. In the field, artificial intelligence, IoT connectivity and machine learning are outfitting drillers with the tools needed to optimize production. In the office, big data, cloud computing and new mapping capabilities have grown increasingly sophisticated. Technology has unlocked efficiencies in the daily operations of energy firms and has altered the way office footprints are evaluated.

“Technology is not only advancing the industry but requiring best-in-class digitally connected real estate to support it,” said Lindsay Brown, co-lead of JLL’s energy practice group.

Late 2017 marked an inflection point when the price of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, crossed the $50-per-barrel threshold. While price stabilization has allowed for budgets to increase and new rounds of hiring, this activity has yet to translate into new real estate demand.

Most energy office markets remain in a weakened state, grappling with outsized sublease volumes and rising vacancy. Despite slight upticks in leasing activity, energy office markets, with the exception of Denver, are projecting no growth in overall energy occupancy through 2020.

“Fundamental changes in the way oil and gas companies do business is impacting real estate markets in energy-centric cities,” said Rutherford. “Shifts toward efficient, high-density office build-outs will mitigate the demand for office space in energy-centric office markets as firms use less space overall.”

In contrast, energy-heavy industrial markets have remained steady over the course of the downturn, with office and industrial sectors diverging in energy-centric markets. Increased downstream investment particularly along the Gulf Coast has far outweighed any pockets of weakness within the industrial sectors of energy-centric markets.

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