Houston, Energy Sector’s Peak Nowhere in Sight

Houston, Energy Sector’s Peak Nowhere in Sight

Recent strides taken in the United States toward independence from using foreign energy sources are also benefiting the nation’s office market, boosting occupancy at a time of caution for most of the professional business sectors.

More than half of the top performing office markets in the country today are primarily technology- or energy-driven, with Houston leading the latter. Unemployment is at less than 6 percent in Houston. Also, though the city’s 195 million sq. ft. of office space makes up just 4 percent of the U.S. total, the city accounted for almost 13 percent of the country’s total office absorption in the past year, according to a Jones Lang LaSalle fourth quarter report.

Jobs are a big part of the answer for the Houston office market’s growth. Of the top 12 largest metropolitan areas, Houston had the only rate of job growth to surpass 3 percent from October 2011 to September 2012. In contrast to Silicon Valley, the other current office powerhouse, there’s no lack of employees for the energy sector, says Rudy Hubbard, a managing director with JLL’s Houston market. “Anyone with a petroleum degree coming out of college today doesn’t have any problem getting a job in Houston,” he says.

Houston was once known for wild highs and lows in office occupancy rates, but Hubbard says he believes those days are over for now. “Back in the 1980s, the wildcat days, executives bought jets, and in bad times went under. Now the energy industry is run by very smart people who think strategically,” he says.

The energy sector as a whole is working and thinking smarter today, using new technologies and scientific advancements to pull oil and gas out of U.S. soil rather than from overseas. The untapped Marcellus Formation that spreads from the East Coast to the Midwest, for example, could provide more than a decade of natural gas reserves, and the energy companies are flocking from the Southwest to cities such as Pittsburgh to lease satellite offices.

The commercial real estate market is also delving deeper into this promising sector. The CBRE Group Inc. is hiring someone this month to concentrate solely on companies and markets that focus on energy, according to Asieh Mansour, head of Americas research and senior managing director of global research and consulting at the Los Angeles-based firm. She says the energy sector is clearly going to be a strong driver of office space for at least the next five years.

“The big elephant user is China, they are going to have an insatiable demand for energy,” she says. “Plus, the energy sector drives other industries such as automotive, chemical and steel production. The auto industry in Detroit and the Southern right-to-work states are coming back, as are chemical and steel firms, all involved in production and products that need energy resources.”

Houston will still remain the U.S. energy capital for 2013, and likely beyond. The city’s office market is getting tighter, with large tenants likely to renew leases because of the lack of affordable big blocks in the city, as concessions are dropped and rents increase. More than 50 percent of the 4.2 million sq. ft. of office space now under construction has been pre-leased. Also, investors are circling the city, with large transactions always on the table, such as Hines’ $420 million sale of 99-percent-occupied Williams Tower reportedly closing this week.

“Developers just can’t keep up with demand in Houston,” Hubbard says. “On the investment side, we’re a little frustrated, there’s not enough product to deliver, there’s far more demand for people to own office buildings than supply. Unless there’s some international crisis, I don’t think the energy sector will fall off the cliff anytime soon.”

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