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News release

HOUSTON

Drilling for equilibrium in the oil and gas industry

Downturn spurs systemic changes in real estate strategies


HOUSTON, May 30, 2018 – The drastic correction in oil prices between 2014 and 2017 left an indelible mark on energy companies and their real estate. Though oil prices have recovered in 2018, the trauma of the downturn has generated a new culture of ultra-disciplined spending and doing more with less. JLL's 2018 North America Energy Outlook says new workplace strategies and technological advances are contributing to a systemic change in the way oil and gas companies view and leverage real estate.

Leasing strategies, space uses evolve in response to industry cycles

A laser-focus on cost control and the new normal of 'doing more with less' 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.

Today, they 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 coworking 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 their space per employee, in some cases by more than 40 percent, since the oil downturn.

Infrastructure limitations constrain energy industry as technology propels it forward

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. 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 cutting-edge technology to improve operations and generate efficiencies. In the field, artificial intelligence, IoT connectivity and machine learning are outfitting drillers with the tools they need 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 they evaluate their office footprints.

"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.

Office, industrial sectors diverge in energy-centric markets

Late 2017 marked an inflection point when the price of West Texas Intermediate (WTI), a grade of crude oil used as a benchmark in oil pricing, crossed the $50-per-barrel threshold.

While price stabilization has allowed for capital budgets to increase and firms are starting to eye 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 Bruce Rutherford, co-lead of JLL's Energy Practice Group. "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. Increased downstream investment, particularly along the Gulf Coast and portions of the Ohio River Valley, has far outweighed any pockets of weakness within the industrial sectors of energy-centric markets.

About JLL
JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. Our vision is to reimagine the world of real estate, creating rewarding opportunities and amazing spaces where people can achieve their ambitions. In doing so, we will build a better tomorrow for our clients, our people and our communities. JLL is a Fortune 500 company with nearly 300 corporate offices, operations in over 80 countries and a global workforce of 83,500 as of March 31, 2018. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.