Denver, CO – Cushman & Wakefield recently released its Occupier Research Report, “Oil: the Commodity We Love to Hate,” which assesses the impact of lower oil prices on each of the world’s major energy cities and provides insights into office sector fundamentals going forward.
According to Martin Woodrow, Cushman & Wakefield executive managing director of the Americas, “The impact of lower oil prices on economic growth and the office sector has been mixed throughout the region, which is home to many of the world’s major energy-centric cities.”
In the United States, which is poised to surpass Saudi Arabia as the top-producing country globally, oil-centric markets led by Houston and Oklahoma City register some of the highest vacancy rates in the nation.
Office markets in energy-centric metros with more diverse economies such as Denver and Dallas have held up much better, the report says.
Denver is an oil-centric city, but also has other thriving industries (tech, tourism, professional services) and has seen year-over-year rent growth accelerate to 7 percent in the second quarter of this year. Denver has seen its vacancy rate improve from 12.8% mid-2014 (when oil prices were booming) to 11.4% mid-2016 (post oil price correction). Since mid-2014, the Denver office market has absorbed 3.6 million square feet (msf) and has seen rents grown by 13%.
Robert Sammons, Cushman & Wakefield Regional Director, Northwest U.S. Research supports the global findings by confirming the Denver real estate market is booming – from office to industrial to retail to multi-family.
“The Denver market boasts one of the lowest unemployment rates in the country – just 3.6% according to Moody’s and the U.S. Bureau of Labor Statistics. Jobs are now at a historic high and are expanding across almost the entire spectrum – from leisure and hospitality to construction to professional and business services. Layoffs within the energy sector were prevalent for a few quarters but even that area has stabilized more recently,” Mr. Sammons said.
“Tech employment is growing but tech is not yet a disproportionate share of the job sector. In fact, according to Moody’s, 7.9% of the total jobs in Denver are in the core tech sector – comparable to the 9.6% figure in Austin but nowhere near the 15.5% figure in San Francisco or the 27.3% figure in San Jose.”
Mr. Sammons added that Denver has opened a direct train line from DEN to Union Station that will be a big feather in this market’s cap going forward connecting not only the airport with the CBD but with the massive light rail system in place (and expanding).
Nicholas J. Pavlakovich, Vice Chairman, Cushman & Wakefield, in Denver, said the oil and gas industry accounts for approximately 23% of the office market within the approximate 28 million SF of total office space in the Denver Central Business District (“CBD”).
“Oil and gas firms have put only approximately 900,000 SF of sublease space on the market. The oil and gas sublease space has been slow to move due to preferences for an open plan layout within the very active creative and tech user market that continues migrating to Denver’s Central Business District,” Mr. Pavlakovich said.
The Occupier Research report states that, barring a production freeze or unforeseen event, oil prices are expected to remain below $60 per barrel through 2017, and most experts forecast below $70 through 2020. The impact of a protracted low-oil-price scenario is mixed: energy-producing regions struggle while consumers and non-energy producing markets benefit.
“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,” said Kevin Thorpe, Cushman & Wakefield’s Global Chief Economist.
“Most energy-producing office markets have seen economic slowing and lower occupancy levels, while stronger consumer spending has boosted occupancy virtually everywhere else. For occupiers, the prolonged oil price rebalancing will create efficiency and cost-saving opportunities in some markets, but rental pressure in others.”
Overall, the plunge in oil prices has had a net negative effect on the world’s largest energy-producing markets. As a group, these markets are experiencing slower economic growth, slower job creation and weaker office sector fundamentals. However, while office markets such as Moscow, Aberdeen, Calgary and Houston have faced significant headwinds due to the oil shock, others are holding up well and even thriving.
Image courtesy of Cushman & Wakefield
