C&W: Oil Prices Office-Sector Effect

Oil prices fell from $115 per barrel in 2014 to $26 per barrel in early 2016, leading to a ripple effect on office markets, reported Cushman & Wakefield, New York.  

“While the positives from lower oil prices outweigh the negatives in terms of impact on global economic growth, the effects on the office market are more of a mixed bag,” C&W Chief Economist Kevin Thorpe said in a special report, Oil: The Commodity We Love to Hate. “Most energy-producing office markets have seen economic slowing and lower occupancy levels, while stronger consumer spending has boosted occupancy virtually everywhere else. Thus, for occupiers, the prolonged oil price rebalancing will create cost saving opportunities in some markets, but rental pressure in others.”

Thorpe noted that the oil supply has partially adjusted to the lower price but said the general consensus remains that oil prices will remain low for years: “Barring a production freeze or unforeseen event, oil prices are expected to remain below $60 per barrel through 2017 and most forecast below $70 through 2020,” he said.

Some office markets including Calgary, Alberta and Houston face significant headwinds due to low oil prices while others are thriving, the report said. “For [office] occupiers, the prolonged oil price rebalancing will create lease negotiation leverage and cost saving opportunities in some markets, but rental pressure in others. With oil prices remaining low, occupiers in many markets will benefit from lower office build-out costs and lower space energy costs.”

But C&W noted that the current window of opportunity will not remain open for occupiers forever. “Many energy cities have strong long-term fundamentals and the energy sector will ultimately recover,” the report said. 

Low oil prices affect office occupiers in several ways, C&W said. Most significantly, through increased consumer spending, which creates jobs and ultimately increased demand for office space. Since oil prices began falling in 2014, the world economy has created 32 million net new jobs and seen demand for office space increase 18 percent, the report said.

Oil also affects office space construction costs, the report noted: “When oil prices go down, the hard costs needed to build a building or fit-out space also decrease, or at least are kept lower.” And because energy represents one of the greatest costs in operating a building, when oil prices go down, lighting and HVAC costs go down. Office occupiers can benefit from these cost savings if their lease allows it.

Some oil-centric cities have suffered more than others. In the U.S., Houston has experienced slower economic growth, slower job creation and weaker office sector fundamentals. But C&W said Denver, Colo., another oil-focused city, has a more diverse economy with other thriving industries including technology, tourism and professional services. As a result, Denver’s office vacancy rate improved from 12.8 percent in mid- 2014 when oil prices were booming to 11.4 percent in mid-2016. Denver’s office rents grew 13 percent during that time, the report said.