While the global energy market faces uncertainty, there are a number of rising trends hitting North America’s major energy markets. JLL’s newly released 2016 North American Energy Outlook takes a deep dive into the trends impacting the industry, and how they’re ultimately changing commercial real estate.
Each of the top seven markets featured in the report—including key U.S. cities like Denver, Dallas, Fort Worth, Houston and Pittsburgh, and Canadian territories like Calgary and Edmonton—face unique opportunities and challenges as a result of a volatile market. We’ve narrowed down the top three most impactful trends affecting a market closer to home: Pittsburgh.
1. Office Demand from Alternative Industries
The energy office market remains in a rut, with demand from energy tenants dropping nearly 2.5% along with slowing leasing activity. However, research shows that the Pittsburgh office market is actually seeing rises in demand from other industries.
Professional and scientific services, among others, are seeing higher energy employment growth recently, giving Pittsburgh’s overall employment growth a 0.5% year-over-year boost. On the other hand, these new gains have made it increasingly more difficult for companies to find availability in urban submarkets. As a result of the limited availability and increased rental costs, Pittsburgh’s energy market is expected to maintain landlord-favorable conditions through 2019.
Energy companies who are willing to look in alternative submarkets, like Southpointe, may have better luck finding available office space in a central location. Southpointe is located along major connection points into Ohio, Pennsylvania and West Virginia—ideal for many companies looking for convenient entryways. By the end of the second quarter of 2016, Southpointe saw vacancy rates of 24.7% due to falling commodity prices.
2. Increased Industrial Demand and Construction on the Horizon
More activity is underway in Pittsburgh’s industrial market with the construction of Shell’s new plant in Beaver and increased demand for industrial space in the region. The average tenant lease size has increased to 68,000 square feet, while supply rates like market and manufacturing inventories are also seeing growth.
Pittsburgh’s West submarket is responsible for much of the upcoming construction. More than half of the 1.1 million square feet of industrial construction—770,000 square feet, to be exact—is found in the West. Neighboring this community is Shell’s $6 billion cracker plant and its projected 94-mile rail transportation system. These developments are the first of its kind to be built off of the Gulf coast, and are expected to increase the need for more warehouse space.
Similar to Pittsburgh’s energy office market, landlords will hold onto their leverage through 2019 due to spikes in demand, incoming construction and rising rental rates.
3. Energy Companies Look to Be More Efficient in Occupancy Planning
As a result of downturns in the oil and gas industry, many energy companies are taking part in staff reductions and downsizing their office spaces to cut down on costs. Following this national trend, more of Pittsburgh’s energy companies are opting to sublease.
By the middle of 2016, there was 22.6 million square feet of sublease space available across some of North America’s top energy markets, including Denver, Dallas, Fort Worth, Houston, Pittsburgh and Canada’s Calgary and Edmonton. Of that 22.6 million, nearly 2 million square feet is found in Pittsburgh.
The city is seeing high marks in subleasing across the board with a 10.6% increase in available subleasing space. In addition, the average 10-year sublease space and average term length have also seen significant increases. Markets like Southpointe are gaining leverage for their available sublease space and convenient location.
As more submarkets follow the trend, energy tenants will need to develop more efficient workplace strategies to make up for the lost space. Another option to consider when planning for evolving occupancy rates is co-working. Co-working allows companies to grow at their pace with flexible leases to accommodate staff fluctuations.
With variations in oil and gas, many companies in some of North America’s top markets will rethink their current office space utilization and revert to subleasing to cut down on costs. As the industry continues to evolve, energy companies are acting quickly to make the most of opportunities in their commercial space.
Image Credit: Mariano Mantel
About the Authors
Andrew Batson is a Director of Research in the Great Lakes region of JLL. Andrew is responsible for building and continuing to elevate a best-in-class research program that differentiates JLL and drives a competitive advantage in the marketplace through market expertise, analysis and insight. Connect with Andrew on LinkedIn.
Tobiah Bilski is a Research Analyst in the Great Lakes region of JLL. Tobiah is responsible for analyzing trends in multiple industries, including office, industrial and retail properties, and developing best-in- class research reports. Connect with Tobiah on LinkedIn.