Houston Feels The Oil Price Pinch As Office Space Vacancies Grow

The almost pitifully low price of oil isn’t affecting just rig counts in North America. Cities whose economies rely heavily on the energy industry also are hurting, and the pain is echoing in increasingly empty office space.

Take Calgary. The oil capital of Canada has been hit hard by the 19-month-old plunge in oil prices, from over $110 per barrel in June 2014 to the $30 range today. Hundreds of thousands of square feet of office space are now empty, exceeding the 15 percent vacancy rate reported just two months ago.

The latest oil city to be hit is Houston, Calgary’s U.S. twin. Savills Studley, the real-estate services company, reports that companies are eager to sublet space they’ve leased because of the severe drop in business recently. Sublease space available in the city reached 7.6 million square feet in the fourth quarter of 2015, up from 4.5 million square feet in the same period in 2014.

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Overall, the company says, 23.2 percent of the offices in Houston needed occupancy in the period, a rise from 17.8 percent in the fourth quarter of 2014 and far higher than the 16.2 percent vacancy rate nationwide.

As a result, plans for new office buildings are on hold and will stay that way even if oil prices begin to rally because new office space isn’t created until builders know they can fill it. As a result, “there is a great deal of concern about the Houston economy right now,” Drew Morris, a senior managing director at Savills Studley’s Houston office, told The Wall Street Journal.

A recent report by Goldman Sachs compares Texas’ economy under today’s oil crash to that of the mid-1980s, when the average global price of oil fell from $31 per barrel to around $10 per barrel between 1984 and 1986. At that time, the state’s unemployment rate rose to a record high of 9.2 percent in 1986, and the number of bankruptcy filings doubled in the same period.

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The Goldman report – issued last week and titled “How Bad Can Texas Get?” – says the state’s economy isn’t as bad off now as it was three decades ago. For one thing, it notes, Texas’ economy is less dependent on energy today than it was in the 1980s. The report notes that oil and gas accounted for 19 percent of the state’s gross domestic product in 1981, compared with 12 percent in 2013.

But that’s not stopping some real estate companies from looking for bargains. One is Brookfield Property Partners LP, which is hoping to capitalize on the oil slump by seeking out affordable buildings in North America that lately are selling at fire-sale prices.

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Two cities in Brookfield’s crosshairs are Calgary and Houston, according to the company’s chairman, Ric Clark.

“Canada is in good shape overall, but there are some pockets of opportunity and we may well do some investing in those markets." Clark told Bloomberg. “We’ve done little investing over the last five, maybe even 10 years [in Canada], but are starting to see some opportunities.”

The Los Angeles-based commercial real estate company CBRE Group Inc. says the vacancy rate in Calgary is now 18 percent, making the capital of the Canadian province of Alberta ripe for bargains. And now, Clark says, he’s setting his sights on Houston. With its higher vacancy rate, it’s bound to be an even better investment.

By Andy Tully of Oilprice.com

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