CREJ - Office Properties Quarterly - January 2015
The energy industry is an important player in the Denver office property market in this post-recession cycle. Energy helped strengthen the overall office market by driving up lease rates and pushing vacancies lower, said Jessica Ostermick, CBRE director of research and analysis. The total occupied footprint in downtown Denver of oil and gas companies is 4.45 million square feet, which is 20 percent of the occupied downtown market, she said. The year-to-date net energy sector absorption through the third quarter is 313,000 sf. Additionally, energy companies accounted for 12 percent, about 1.7 million sf, of all leasing activity in Denver since 2012. In 2014, year-to-date third quarter, energy leasing activity was 878,000 sf. “The energy industry is well funded and includes all types of real estate,” said Lindsay Brown, JLL senior vice president. “There is no industry that has a greater financial impact on our state at the moment.” The majority of Colorado-based energy firms are located in the downtown area. Numbers range from 70-plus percent to 90-plus percent of these businesses. The rest are mainly located in the Denver Tech Center. According to CBRE’s Energy Sector Trends Report from October, the downtown multitenant buildings with the highest concentration of energy occupiers are Granite Tower, Republic Plaza, World Trade Center II, 1700 Broadway, World Trade Center I and 1001 17th St. The largest energy tenants in Denver are Encana, Anadarko, Newfield Exploration, and Whiting Oil and Gas. “If you look at other energy hubs, you’ll see that major oil and gas tenants like high-profile locations with nice urban environments,” said Ostermick. “They want the prestigious, premier property locations and buildings.” After experiencing a “lost generation” in the mid-1980s to early 2000s, when few young people went into the field, millennials are now joining the energy industry workforce in high numbers, Brown said. One reason for Denver’s popularity is its attractiveness to millennials. “When they’re trying to recruit a petroleum engineer coming out of college, Denver is a very attractive city,” said Brown. “It can be hard to compete with the big guys, so a lot of local companies are trying to do cool things with their company culture. You’ll typically still see private offices, but now they’re incorporating large open-area spaces, cafÚ-style break rooms, rooftop balconies or any outdoor space, and emphasizing their proximity to bars and restaurants.” Oil and gas companies are still predominantly private office environments, with the exception of some midstream companies, he said. “[It’s a] competitive job atmosphere so tenant-friendly amenities like quality restaurants and athletic clubs in close proximity are usually a plus,” said Anthony D. Albanese, vice president of CBRE’s energy facilities group. “They tend to have a bit of a herd mentality in locating near competitors/industry peers. Field service companies specifically like to be near their clients and exploration companies.” According to a December 2014 report, Research Rich Colorado, from the Colorado Energy Coalition, the state ranks ninth in fossil fuel employment concentration with 47,590 direct jobs, and ranks sixth in clean-tech employment concentration with 23,410 direct jobs. “In 2014, the fossil fuel sector directly employed 47,590 people, and the clean-tech sector directly employed 23,410 people,” the report said. “These 71,000 direct energy workers support an additional 179,540 indirect workers across the state, for a total of 250,540 energy industry employees statewide. The economic impact of these energy industry employees is $15.6 billion.” As Colorado’s unemployment numbers continue to decrease, cultivating talent within the state is important, said Scott Prestidge, Metro Denver EDC energy director. There are several higher-education schools – such as the Colorado School of Mines, Education Corporation of America’s Ecotech Institute and the Center for Revolutionary Solar Photoconversion – that have strong academic programs specializing in these fields. Having schools and potential jobs in the same area helps with recruiting, said Lisa Strunk, Development Research Partners senior economist. The jobs are competitive, which provides stability to the office market. Finding the right employee can require a lot of research, so the positions are fairly stable once a successful candidate is found. “You consistently hear, ‘It took us two years to find a top-notch engineer,’ so you know they’re not just going to let them go because the price of oil is down for a few months,” Brown said. Another major impact the energy industry has on Colorado’s office property market is referred to as a “halo effect.” This takes into account all the other businesses that crop up to support the energy industry. Many of these support services move close to major energy headquarters, 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, something 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 probably see some softening in energy demand for office space,” said Ostermick. 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 economy,” Brown said. “However, for Denver, that short-term gain might not be worth it because the oil and gas industry is a huge driver for employment.” This softening could eventually result in the office footprint not growing 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 market 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,” Ostermick 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 expansion 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 midyear, 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 correlation, 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.