The war in Ukraine may seem distant, but consumers are reminded not only of its devastating toll on Ukrainians, but of far-reaching effects on a global scale every time they pull over to fill up a gas station.
The price of oil has nearly doubled since the war began a month ago and is expected to climb even higher. For example, on March 23, 2021, the West Texas Intermediate price was $61.48 per barrel. That same day in 2022 it jumped to $111.75, noted Bruce Rutherford, international director of office tenant representation with commercial real estate services firm JLL.
The question for commercial real estate owners and developers is whether this change will affect the performance of office buildings in markets dependent on the energy industry.
At the start of the year, Houston’s office market was still grappling with the effects of the pandemic. According to JLL data, the office vacancy in the city reached 28.1 percent during the fourth quarter of 2021. The net absorption was negative 2.46 million square metres. Foot and both direct asking fares and sublease asking fares were running down. In Denver, another market with a high concentration of energy firms, total office vacancy averaged 20.6 percent during the same time period, with net absorption about 2.6 percent and rents remaining flat. With far-reaching constraints on Russian oil and gas exports, will these markets see stronger job growth and office expansion?
Rutherford says that until now, the rapid increase in prices at the pump has yet to work its way through the overall economy. But history tells us that the inflationary effect of higher oil prices will disrupt the US and world economies, the note.
The US imported about 8.5 million barrels of crude oil and petroleum products per day in 2021, but only 8 percent of those petroleum products came from Russia, of which only three percent, or about 500,000 barrels per day, were used to refine gasoline crude. There was oil. According to the US Energy Administration.
So why the sharp rise in gas prices at the pump?
“Any geopolitical disruption has an impact on oil prices,” Rutherford says, noting that the world consumes between 97 and 101 million barrels of oil per day, and any shortfall in supply will drive prices up worldwide. pushes. The price of oil moves so aggressively because oil traders, rather than refineries, generate 80 percent of all contracts to buy and sell oil.
“In theory, the proposed sanctions on Russia would impact its ability to produce and distribute what was as recently as 10 million barrels per day, and sanctions would certainly further damage that supply,” says Rutherford. The EU will feel that deficit the most.
The US energy industry is using the war in Ukraine and the Biden administration to issue more permits to drill on federal lands to increase oil production, reports the new York Times, But these energy companies are neither increasing production nor planning to do so, according to Rutherford, because there is uncertainty about how long the high prices will last.
“Industry must invest more capital and attract qualified workers to increase production. But uncertainty is the enemy of new investment, which is especially true in the oil and gas business.”
What this means for office markets linked to oil companies
While energy companies have recalled some of the workers they laid off during the depth of the COVID-19 pandemic, many other workers have retired or moved on to new careers. In addition, the industry is not attracting enough new workers due to its cyclicality, which young professionals do not like. “As a result, we do not expect any increased demand for office space from energy companies,” Rutherford says.
According to Richard Barkham, office leasing brokers in markets associated with the energy industry are reporting a similar trend among oil and gas tenants, with some companies reducing the amount of space they use and others similar. Quantity of square footage is occupied. , Global Chief Economist and Head of Global Research with real estate services firm CBRE. “We don’t see many companies expanding their office portfolios, but there may be more activity ahead,” he says.
Barham expects increased job growth in energy markets to drive demand for office space, but he noted that the industry is more cautious and efficient than previously thought. “Investors have made it clear to oil producers in recent years that they should not pour money into additional drilling in pursuit of the next oil boom. Instead, they want companies to pay off debt and often pay investors through dividends. Pay from there,” he says.
While many industries, including finance, transportation and retail, are suffering from the high price of oil, it is having a positive effect on others that can increase office occupancy across the street. For example, according to Rutherford, companies that supply the basic components of oil production are doing better. He noted that international oil engineering firms are benefiting as oil producers around the world try to capitalize on today’s high prices.
Additionally, companies that produce drilling equipment and pipes, valves and other products used in energy infrastructure are benefiting to some extent, though not as much as would be expected. Rutherford points out that the uncertainty has dented demand for the oil field’s services and products.
“It’s said in the oil business, ‘the surest cure for high oil prices is high oil prices,'” he says.