Boom Towns: Energy Industry Triggers Heated Competition for Prime Real Estate

HOUSTON, June 19, 2013 /PRNewswire/ -- Growth in the domestic energy industry is expected to create more than 3.5 million American jobs by 2035, including 700,000 in the next two years alone*.  The same industry growth creating jobs is also driving heated competition for prime real estate – predominantly in a handful of cities where the oil and gas industry is booming. New research from Jones Lang LaSalle (JLL) indicates that the majority of commercial real estate opportunities resulting from this job growth will be concentrated in the following North American cities: Calgary, Dallas, Denver, Houston, Philadelphia and Pittsburgh.

In the firm's inaugural Energy Outlook Report, these cities are characterized as benefitting from up to three quarters of the anticipated 3.5 million new energy jobs directly correlating with nearby rural areas experiencing a rise in energy activity. Notably, the remaining 875,000 jobs are anticipated in other regions, including financial centers such as New York City and Chicago not directly associated with oil and gas production. 

"The rapid growth in domestic oil and gas production has made a large but uneven impact on the U.S. economy," said Bruce Rutherford, JLL International Director and Energy Practice Leader. "In the top energy cities, commercial real estate markets are booming, with growth creating scarcity – and thus a landlord-favorable market. This applies not only to offices, but also to retail, hotel, multifamily, industrial and distribution facilities and sites."

Beyond Production: Job Growth Resulting in Office, Retail and Industrial Demand

While energy production is the direct growth driver, much of the commercial real estate demand is coming from affiliated industries, such as manufacturers serving the energy sector. Steel pipe makers, for instance, are stepping up production to meet demand. Similarly, chemical companies are prospering from low natural gas prices, with some companies shutting down plants overseas and diverting billions in capital expenditures to U.S. sites. According to the Texas Chemical Council, chemical plants in Texas have already announced roughly $15 billion in expansions as a result of natural gas growth, which is expected to net 25,000 jobs in the state. 

Rising employment in these regions is also spurring growth in demand for multifamily and retail space.  For example, JLL estimates that the energy sector's impact on U.S. apartment demand likely contributed to nearly 25 percent of total unit absorption since 2002, an overall demand of approximately 165,000 units.  On the retail sector front, employment growth in Houston, for example, totalled 4.4 percent over the last year – almost triple the growth rate of the nation.  Even during the recession, retail vacancy in the market dropped 1.6 percent since its 2008 peak.

The energy markets have also contributed disproportionately to the office recovery – representing 22 percent of recently-increased office space occupancy in these markets.

JLL's research identified the following top energy-driven commercial real estate markets:

• Calgary. For more than two years, the office market in Calgary, Alberta, Canada has demonstrated increasing occupancy, as energy companies are elbowing one another to find the office space they need to support Canadian oil exploration, production and transport operations. The retail sector is reflecting Calgary's 'Boom Town' status as shown in Alberta's strong month-over-month retail sales growth during February 2013, growing at 2.2 percent, more than double the 0.8 percent growth rate for Canada overall.
• Dallas. Not only has the Dallas metropolitan area experienced a significant 1.3 percent drop in retail vacancy since 2010, it is also logging record growth in the office, industrial, multifamily and hotel sectors. Several new hotels are under construction in the market and the number is expected to rise as industry growth in 2013 continues and developers seek to add real estate projects that cater to business travellers in its emerging economic sectors.
• Denver. Located near significant new opportunities for natural gas production, Denver is becoming a center of activity for energy companies, which are leasing space at a rapid pace.  An analysis of energy leasing transactions revealed that energy tenants in Denver's central business district paid an average of 9.7 percent above landlords' initial asking office space rental rates.
• Houston. Commercial real estate fundamentals in Houston are becoming more landlord-favorable every quarter. For example, retail vacancy in the Houston market has dropped 1.6 percent since its highest vacancy levels in 2008. In Houston's suburban energy corridor, 81 percent of nearly three million square feet of new construction is pre-leased.
• Philadelphia. Proximity to new energy production sites is driving demand for both industrial/manufacturing facilities and office space in Philadelphia. The city's office and retail sectors are becoming highly landlord-favorable as a result of the influx of employment opportunities in the energy sector and with affiliated companies.  With such rising interest from the energy sector, real estate investment volumes are poised to pick up in 2013 and 2014.
• Pittsburgh. Demand for new energy production components has driven an uptick in manufacturing activity in the Pittsburgh area. This growth has resulted in strong conditions for the industrial real estate sector in particular – but also across other commercial real estate sectors. Leasing demand from natural gas and other energy-related companies is helping to bolster the Pittsburgh office market, where rents are at their highest level in more than a decade. In fact, the Pittsburgh market is outpacing national growth in rents and occupancy, in large part due to the energy sector.

For specific information on how the energy boom is impacting North American cities and energy industry commercial real estate needs, please download the JLL Energy Outlook Report.

*according to industry reports from I.H.S. Global Insight

About Jones Lang LaSalle

Jones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 2.6 billion square feet and completed $63 billion in sales, acquisitions and finance transactions in 2012. Its investment management business, LaSalle Investment Management, has $47.7 billion of real estate assets under management. For further information, visit www.jll.com.

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SOURCE Jones Lang LaSalle