Effects of low oil prices in the office market a ‘mixed bag’, says report
According to the Occupier Research Report recently released by Cushman & Wakefield, titled “Oil: the Commodity We Love to Hate”, the prolonged scenario of low oil prices offers a mixed impact, with energy-producing regions struggling while consumers and non-energy producing markets are reaping the benefits.
The report 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.
“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.”
The report also states that, barring a production freeze or unforeseen event, oil prices are expected to remain below US$60 per barrel through 2017, and most experts forecast below US$70 through 2020.
The Americas
The United States is poised to surpass Saudi Arabia as the top-producing country globally. Oil-centric markets in the US, 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% in the second quarter of this year.
Canada ranks fifth in the world when it comes to oil production, and its resource sector accounts for about 1.8 million jobs. Of the 3.9 million bpd (barrels per day) the country produces, 97% 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 (Central Business District) office growth rate in the country, the availability rate in premium Class A CBD buildings is projected to reach around 27.5% by late 2017.
Due to the different political structures and economic conditions in Latin America, economic growth related to the oil industry has varied 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.
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 from this sector 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 of sustained low oil prices on the office market will be limited in cities like London, with its diverse occupier base.
Asia Pacific Region
The footprint of oil and gas companies in APAC’s office sector is relatively small – estimated at less than 10% 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 Kuala Lumpur, 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% since the correction, from 15.2% 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, with office occupiers leveraging their profitability to raise headcounts in an attempt to gain greater market traction.
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.
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.