Can You Feel the Energy in the Market?

This article originally appeared in the Colorado Real Estate Journal.


Efficiency, the ability to do something without wasting materials, time or energy.  To many, this describes the way that many businesses strive to operate on a day to day basis.  For the various oil and gas companies of the world, this is the new mantra for those that hope to still be in business over the next five years and beyond.  To the Denver commercial real estate community, oil and gas companies of all kinds account for roughly 10 percent of the downtown office market or just over four million square feet of office space.

Unstable commodity prices, weak oil demand growth, elections and energy policies as well as hesitancy from investors are a few of the major challenges that the oil and gas industry are facing currently.  Anadarko, Felix Energy, Jagged Peak and SRC Energy are just a few of the energy companies who were acquired in the last 12 months. They will all have office space that is already or is soon to be on the sublease market in downtown Denver.  QEP Resources, Encana, Occidental, Whiting Petroleum and Centennial Resources are a few more oil and gas companies who are still in business, but currently have or will soon be marketing unused office space on the sublease market. 


Commercial real estate brokers who have been practicing for the past 10 years may feel a sense of déjà vu when they look at these numbers.  In 2014 the downtown Denver market saw over 1,000,000 square feet of oil and gas office space on the sublease market. We currently have over 500,000 square feet of oil and gas space on the sublease market or coming soon in downtown.  Additionally, anti-oil and gas activists are on the move again in 2020 and additional setbacks or increased permitting policy could continue to push the smaller oil and gas companies to be acquired or file for bankruptcy which would further increase the sublease availability in downtown.  Only time will tell the magnitude that these activists will continue to have on the industry.
How will this impact office occupiers in downtown?
  1. Office Buildouts Needed – Oil and gas office spaces have historically consisted of private office intensive buildouts. These are not the ideal option for most of the office users who are now moving into Denver seeking high-end open-plan layouts.  As a sublessor, these oil and gas companies will have to either spend money to improve their office layout or significantly discount their rates to make the space more attractive to potential sublessee’s.
  2. Rental Rate Impact - The uptick in sublease availability will have little to no impact on the overall rental rates in downtown Denver largely because the problem rests with the tenant trying to shed space and the landlords are still collecting rent.  Additionally, there is plenty of demand for office space from the other industries, most notably tech companies coming from California and New York.
  3. Increased Choice of Sublease Space – Downtown currently has just over one million square feet of sublease space on available and with the additional of these oil and gas sublease efforts the market will effectively see a 50 percent increase in sublease availability.  Sublease rents are typically at a 20 percent discount to direct rent levels and with the increase in available subleased space, it is likely that tenants looking for space will now have more options with friendly economics for their office space. 
In Summary
One thing is certain, we are on the doorstep of seeing a large spike in sublease availability that will continue through 2020.  The majority of these oil and gas spaces will need improvements via capital expenses to be considered usable to most prospective subtenants. Considering the oil and gas industry preaching capital efficiency and minimal capital expenses in 2020, I predict we will see lower rental rates on these specific sublease spaces to make them more appealing to subtenants to come in and use their own money to build out the space to suit their needs.