Skip Ribbon Commands
Skip to main content

News release

CHICAGO, IL

Oil & Gas Companies Find Financial Silver Lining in Commercial Real Estate

Well-capitalized organizations discover opportunities even as oil prices remain at historic lows


CHICAGO, Dec. 17, 2015 – As U.S. crude oil prices hover around $40 per barrel, challenging real estate decisions lie ahead for energy companies and property investors alike. However, opportunity remains for those companies who can afford to make strategic moves and know where to look, according to a new JLL report that examines the real estate market dynamics driven by the oil and natural gas sector.

“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,” said Bruce Rutherford, co-leader of JLL’s global Oil & 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. The key is for those in the industry to utilize their portfolios as a strategic resource to mange costs and liquidity needs.”

Seize the day for competitive advantage
No one can predict the future of crude oil prices, but energy companies can review and align their real estate portfolios with long-term business strategies, said Rutherford. For those companies financially strong enough to look beyond mere cost cutting, the report’s recommendations include:

  • Make strategic moves in tenant-friendly office markets: In some energy-intensive cities and submarkets, the drop in oil prices has led to a corresponding drop in real estate pricing. That means a window of opportunity to lock down long-term leases at favorable rates and terms—while accessing a high-quality talent pool of experienced engineers and well-trained entry-level professionals. 
  • Contain costs: Cost-savings opportunities can come in many forms, including identifying possible exit strategies buried in lease terms or exploring sale-leasebacks. If a leased location is in a flat real estate market, the landlord may be willing to offer aggressive rent discounts or restructuring to retain tenants. In other markets, subleasing can be a profitable option for offices in landlord-friendly markets, where other industries may covet valuable space controlled by energy firms.
  • Realign space after a merger or acquisition: Companies engaged in consolidation should evaluate the combined real estate footprint early to identify the best opportunities to reduce space obligations or secure room for expansion. If financially possible, think long-term about future location needs.
  • Combine real estate strategy with human resources: Almost 55 percent of the energy industry workforce may retire over the next decade, so companies need to recruit STEM-trained millennials and retain experienced professionals. Choosing a location within the right markets will help to fuel this strategy.

Opportunities and challenges inside oil-rich markets
The downturn in the oil and gas industry has brought to light vast differences in the real estate markets of energy-intensive cities.

JLL’s report examines real estate market conditions in the following markets:

  • Houston: Houston’s office market has experienced a jump in vacant space due to the combination of energy-sector job losses and continued energy industry M&A. However, the industrial market is likely to grow in the next 24 to 48 months, as new manufacturing plants come online. 
  • Calgary and Edmonton, Alberta, Canada: As the nerve center of the Canadian oil and gas industry, Alberta’s two primary office markets have experienced a growing amount of space offered for sublease. However, demand for industrial and production real estate remains strong. 
  • Denver: Despite depressed oil 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 percent has already been re-absorbed—mostly by other energy firms. Denver continues to be a strategic location for energy companies because of its strong base of STEM workers and appealing live-work-play setting. Additionally, the nearby shale fields represent low-cost production locations.
  • Dallas/Fort Worth: Dallas’s market has remained stable, while Fort Worth has felt the brunt of the energy industry slowdown because of its high concentration of energy tenants. Fort Worth is likely to see additional office vacancies as a result of the downturn.
  • Pittsburgh: The Pittsburgh industrial market has been particularly affected by energy industry volatility, and its tenants have typically signed short-term leases. Within the office market, demand from energy tenants has declined, but the Southpointe submarket in particular offers an opportune place—and time—for companies preparing for expansion now or in the future.

In response to increased vacancy and lack of demand for space from the energy industry, landlords and companies with significant space available for sublease are aggressively pursuing tenants from growth-oriented industries such as technology, insurance and healthcare. Some are finding replacement tenants among Canadian energy companies, as some are shifting operations to the United States in search of highly specialized engineering talent.

“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,” said Lindsay Brown, co-leader of JLL’s global Oil & Gas practice group. “Expansion into STEM-educated millennial talent-rich markets like Denver and Pittsburgh is being driven by Canadian and U.S. 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.”

About JLL’s Energy Outlook
The report offers detailed North American market intelligence, strategic recommendations to help energy companies make smart decisions and analysis of which oil-focused regions are thriving thanks to diversified economies.

About JLL
JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $4.7 billion and gross revenue of $5.4 billion, JLL has more than 230 corporate offices, operates in 80 countries and has a global workforce of approximately 58,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.4 billion square feet, or 316 million square meters, and completed $118 billion in sales, acquisitions and finance transactions in 2014. Its investment management business, LaSalle Investment Management, has $57.2 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.​