Real Estate about to get hit in the energy cities

A new report has found that Prime office real estate in some of the world’s leading cities is about to take a hit from the falling price of oil.

The report, released this month by property specialists DTZ, has identified 18 key “energy cities” around the world where unemployment will rise and office rental prices will fall as energy companies downsize and cut costs. The 18 cities are either dependent on the oil and gas sector for employment and property rentals, or are corporate hubs which attract company headquarters and other key office related activities.

The 18 “energy cities” are as seen below as the report splits the cities into two categories:

Energy-centric (cities which are highly dependent on the energy sector):

• Aberdeen
• Abu Dhabi
• Calgary
• Dallas
• Houston
• Lagos
• Perth
• Stavanger

Corporate hubs which attract company headquarters and other key office related activities.

• Beijing
• Denver
• Jakarta
• Kuala Lumpur
• London
• Moscow
• Mumbai
• Pittsburgh
• Riyadh
• Singapore

Report author Richard Yorke told CNBC: “As the oil prices started to decline, we are seeing an impact in terms of reduced investment, job attrition and mergers and acquisitions in the oil sector.

According to the report, Cities which are most susceptible to job losses are energy-dependent Houston in the US, Moscow in Russia, Aberdeen in Scotland and Stavanger in Norway.

Meanwhile, the report argued that cities throughout Asia that have enjoyed rapid employment growth in recent years will see a slowdown. In particular, employment growth in Perth was likely to halve and Kuala Lumpur will be affected by U.S. firms locating elsewhere.

Investment is already being reined back in Houston, which employs around a quarter of a million people in the energy sector, according to Yorke.

“A number of local employers have said they are going to look to cut down on jobs through mergers and acquisitions,” he said. “I think that will mean weaker demand and we’ll see an impact on absorption rates as well.”

In 2014, rental prices grew by an average of 7.3 percent in the US energy cities, compared to 4.2 percent in non-energy dependent cities. However, the collapse in oil prices is likely to limit future cost increases and rents are likely to turn negative in the near future.

Similar trends will affect other “energy cities”. The report expects rents and occupier costs to fall in Perth, Kuala Lumpur, Stavanger, Aberdeen and Moscow, because new supplies of office space are becoming available just when demand from oil companies is softening.

However, real estate in some “energy cities” may actually benefit from the reduced oil price. According to the report, “corporate hubs such as London and Mumbai, which have a greater diversity of occupiers, are likely to benefit from lower oil prices as other industries are buoyed by lower costs of production.

“This will indirectly lead to stronger overall demand for office space.”

Source – CBNC