The last time oil prices hit $100 a barrel nearly a decade ago, Houston’s commercial real estate market flourished. Unlike the shale boom a decade ago, oil prices over $100 a barrel are not spurring the commercial real estate market. What’s different now?
Back then, real estate investors poured money into Houston, developers raced to build new office space, and Oil & Gas companies planned fancy campuses after signing long-term office leases.
Today, with oil prices expected to climb higher, energy companies aren’t looking for more real estate. They’re trying to do more with less while incorporating remote and flexible working arrangements that became popular with employees during the pandemic. Also during the pandemic, many delayed leasing decisions, opted out of big expansions, or consolidated real estate holdings. It’s too soon to say if higher oil prices will change that behavior, but it looks like no one is expecting a repeat of the shale-induced real estate boom of a decade ago.
This signals long-term changes in employment patterns as well as the role of oil and gas as the spark for 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.
Right now energy companies are more concerned about being able to generate cash flow, to pay investors, and pay down loans. They are very reluctant to sign large, long-term leases because there is so much uncertainty even though job-growth is expected.
Consolidation of Office Footprints
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 with McDermott International. McDermott will consolidate its office into 231,000 square feet in the building. The deal halves both energy companies office footprint in Houston.
In a move that started before the pandemic, Marathon Oil shed about 175,000 square feet (28%) from its offices in Houston when it move into its new office tower at CityCentre last year.
After reducing its real estate footprint in Houston by 30% during the pandemic, Halliburton is benefiting financially.
Exxon Mobil put some 290,000 square feet of office space on the sublease market near the end of 2021 as it consolidated its office footprint when it moves to Houston’s City Place. Exxon is also trying to sell its 300-acre campus in Irving.
Other large blocks of sublease space that came online in the Houston area 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). TechnipFMC, BHP and Direct Energy also had large blocks of sublease space available.
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. 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, an Oil & Gas company formed by the merger of Houston’s Cabot Oil & Gas and Denver’s Cimarex Energy, 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.
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% when it sold and leased back a portion of its headquarters in the Energy Corridor during its bankruptcy proceedings in 2020.
Some Large Lease Renewals & Expansions
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.
In 2021 pipeline company Boardwalk Pipeline Partners renewed a lease for 98,000 square feet in Greenway Plaza.
Impact on Real Estate
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. Economists don’t expect oil and gas employment in Houston to reach 111,000, as it did the last time oil prices topped $100 a barrel in 2014.
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.
There are some signs of a recovery. Mostly non-energy companies, such as health care and professional services firms, are leading the leasing activity. 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.
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.
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.
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, they must offer them an office environment that is much more attractive than it was in the past.