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January 2015 — Office Properties Quarterly —
Page 13
Market Driver
move close to major energy head-
quarters, said Strunk. These positions
include accounting, administrative,
legal, engineering, consulting and
financial services. A lot of growth in
the CBD is related to these types of
services, she said.
With the price of oil falling, some-
thing that has been happening since
summer 2014, there may be a bit
of slowing in the Colorado energy
market. “If prices continue to fall or
we don’t see a rebound, we will prob-
ably see some softening in energy
demand for office space,” said Oster-
mick.
If prices fall below the break-even
point for production, it will not be
economical to keep producing at that
level, she said.
“It’s a double-edged sword,
because, theoretically, when oil and
gas is cheaper, it means energy rates
are cheaper, which helps the econo-
my,” Brown said. “However, for Den-
ver, that short-term gain might not
be worth it because the oil and gas
industry is a huge driver for employ-
ment.”
This softening could eventually
result in the office footprint not grow-
ing at the same pace or slipping
slightly, but it would not disappear,
Ostermick said. “It’s been a great
driver, and it’s important to not be
pessimistic regarding the office mar-
ket environment. Denver has many
other strong industries, including
technology, health care and finance,
that would absorb any freed space.”
Sources agree that major changes
in operation won’t be seen anytime
soon. “It’s too early to tell, but the
price can be low for months before
anything happens,” Brown said.
“We’re probably going to see slowing,
but no major consequences too soon.”
Additionally, oil and gas executives
have been fairly conservative with
their leases, build-outs and employee
numbers, so major changes are not
expected, said Brown.
“The Denver office market is strong
because we have a lot of engines
running at the same time,” Oster-
mick said. “Energy prices and tenant
demand trend together in Houston.
But Denver is so diverse that we
have other players that will offset
any slowdown in the energy office
demand.”
Very few oil and gas companies
own office properties. Most lease
properties to meet their needs, Brown
said. With all the oil and gas expan-
sion this past cycle, leasing rates in
downtown Denver have hit record
highs. Now that the energy industry
seems to be slowing, there may be
more opportunities for others looking
to lease office property downtown.
“We’re at the top of the arc now, but
everything corrects itself eventually,”
he said.
According to a report from Cresa on
oil prices and Denver rents, oil prices
have dropped 43 percent since mid-
year, from $114 to $65 a barrel. This
type of drop has happened four times
in the last 30 years, but only twice
have rents dropped. In both cases, in
1985-1986 and 2008, rents dropped
for three years in the 10 percent to 15
percent range. The other two times,
in 1990-1993 and 1996-1997, rents
went up.
The report states that while the cost
of oil and rents do have some cor-
relation, Cresa forecasts that major
cuts wouldn’t be seen in 2015, and
most building owners are 90 percent
leased without severe rollover issues
in 2016 and 2017.
s
Oil prices and downtown Denver rental rates