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Cushman & Wakefield Oil & Gas Report: Impact of Lower Prices on Global Office Sector

The full report

The report predicts that, 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. 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 efficient and cost saving opportunities in some markets, but rental pressure in others.”
Overall, the plunge in oil prices has been a net negative 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.

Europe, Middle East and Africa

“Energy employment has fallen across many EMEA cities and this trend is likely to continue,” noted James Taylor, partner, Leasing Tenant Representation. ”Moscow and Abu Dhabi employ the largest number of energy workers, and energy-centric cities like Aberdeen and Stavanger, Norway are also vulnerable to oil price fluctuations and associated pressures.”
Cities with broader business sector employment, including London, Oslo, and Rotterdam, are likely to benefit from lower oil prices as other industries are buoyed by lower costs of production.
As oil companies become increasingly conscious of real estate and staff costs, demand for office space across EMEA is likely to fall. The Moscow office market has seen rents fall by almost a third year-over-year, and office take-up and rental growth are expected to be below trend next year. The high number of energy employees in Abu Dhabi and in Aberdeen leaves both cities exposed to the risk of increased vacancy and flat-to-negative rental growth. However, the effect on the office market will be limited in cities like London, with its diverse occupier base.

The Americas

According to Martin Woodrow, 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 country producer 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 have held up much better. These include Dallas and Denver, the latter of which has seen year-over-year rent growth accelerate to 7 percent in the second quarter of this year.
Canada ranks fifth in the world in oil production, and its resource sector accounts for about 1.8 million jobs. Of the 3.9 million bpd the country produces, 97 percent is from Alberta, Manitoba, and Newfoundland and Labrador. Not surprisingly, sustained low prices have weighed heavily on the most exposed office markets of Calgary, Edmonton, and St. John’s. In Calgary, which once boasted the highest 15-year CBD office growth rate in the country, the availability rate in premium class A CBD buildings is projected to reach around 27.5 percent by late 2017.
Economic growth related to the oil industry has varied across Latin America due to the different political structures and economic conditions in the region’s countries. Of the major oil-centric metro markets, Caracas has an office market that is highly influenced by the oil industry while markets in Mexico City and Bogotá are impacted to a lesser degree. São Paulo, a business powerhouse in Brazil, is home to a number of oil-related companies, but the lion’s share of oil firms are based in Rio de Janeiro.

Asia Pacific Region

“Generally, markets in the Asia Pacific region have benefited from the weakness in oil prices,” said David Jones, international director of Global Occupier Services. “The filtering down of lower oil prices to lower food and fuel prices has subdued inflationary pressures, boosted consumer spending, and given Asian central banks greater scope for monetary easing.”
The footprint of oil and gas companies in APAC’s office sector is relatively small – estimated at less than 10 percent of total occupancy. As such, the impact of the slump in oil prices on office space has been relatively muted in cities like Singapore and Malaysia, where the proportion of space that energy companies occupy is not large.
In Perth, the Australian city most influenced by commodities (inclusive of oil and gas), the office vacancy rate has increased to 17.2 percent since the correction from 15.2 percent during the oil price boom. While the rise is not all oil-related, oil has played a significant role.
Job growth in China’s energy sector – dominated by markets such as Dalian and Tianjin – slowed sharply when oil prices declined in 2014, but remained positive. Conversely, non-energy centric cities such as Shanghai saw significant job growth over that same period, using their profitability to raise headcounts in an attempt to gain greater market traction. In the next two and a half years, office supply is expected to increase across a number of oil-centric markets in China, leading to an increase in space availability.
With economic growth in the region poised to improve in 2017, leasing demand across the 30 major cities tracked by Cushman & Wakefield is expected to reach new highs through next year. In some markets, that increased demand will coincide with a wave of new supply, which could lead to higher vacancies and greater opportunities for tenants.
“With oil prices remaining low, occupiers in many markets will benefit from lower office build-out costs and lower space energy costs,” said Thorpe. “The window of opportunity will not remain open for occupiers forever, however. Many energy cities have strong long-term fundamentals, and the energy sector will ultimately recover.”