Energy company consolidations expected to increase Houston office vacancies

As the financial sector weakens, mergers and acquisitions generally increase. This has office owners and brokers keeping their eyes on the energy capital of the world.

There were $207 billion in oil and gas company consolidations last year, the most since 2012. Another $55 billion has already occurred this year, according to JLL data. This will likely decrease demand for office space in the sector, at least temporarily, in a market that already had 25.8% vacancies in the first quarter.

Those in the know say there will be other downsides to this trend, such as layoffs that will likely come from ConocoPhillips’ $22.5 billion acquisition of Marathon Oil, both Houston-based companies.

Oil and gas M&A activity is not new, said Louis Rosenthal, JLL chief executive, adding that companies are becoming more efficient in terms of staffing and space utilization, with or without merger accumulation. and acquisitions.

“You can look at almost any large integrated energy company and see that over their current journey they have merged, acquired or been acquired by another company in the same industry,” Rosenthal said.

But last year’s hundreds of billions of dollars of M&A activity stand out, Rosenthal said, and he expects that activity to continue.

When the financial sector weakens, companies with strong balance sheets will acquire businesses that need capital, said Savills chief executive Alecia Schneider. That means more oil and gas companies will likely put sublease space on the market, increasing the number of sublease vacancies that had stabilized in recent quarters, she said.

Houston has 10 sublease blocks of at least 90,000 square feet available, and six are owned by energy and utility companies, according to a Savills report.

Exxon Mobil Corp. alone has 206,000 square feet subleased between the fourth and 10th floors of 1725 Hughes Landing Blvd. in the woods. Houston-based Exxon Mobil completed its $59.5 billion purchase of Irving-based Pioneer Resources in May.

Pioneer expects its Irving office to remain open for at least two years and its employees to be offered jobs at Exxon Mobil, which could attract more employees to the Houston area.

“Some of the biggest companies have made these billion-dollar acquisitions,” Schneider said. “This leads to consolidations, efficiencies, etc. »

ConocoPhillips expects to save $500 million a year after its tie-up with Marathon Oil this year, executives said on an investor call last month. Half of that will come from salaries, benefits and facilities.

Conoco is headquartered on North Eldridge Parkway in the Energy Corridor, near Marathon’s headquarters at CityCentre in West Houston. Marathon moved out of 5555 San Felipe two years ago, leaving 600,000 square feet available in that building, which was foreclosed on later that year.

In $53 billion deal, Chevron plans to buy Hess Corp. This year. The oil, gas and energy exploration company is headquartered in New York, but its exploration and production office is located at 1501 McKinney St. in downtown Houston.

While this spate of mergers and acquisitions may continue, new technologies and efficiencies have just as much, if not more, impact on how energy companies use office space, Rosenthal said.

Occupancy has declined on the exploration side of energy companies, for example, thanks to modern technology and software revealing where most of the world’s oil and natural gas is located, he said. declared.

“You don’t need the same type of staff that you did 10, 15, 20 years ago because of advances in technology,” Rosenthal said.

Many companies have already reduced their workforces to support a smaller employee base, but others have not, he said. Those who have not yet optimized their real estate often have office leases and superfluous buildings, which would be even more useless in the event of a merger with another company.

“I suspect these will be targets for companies that are in acquisition mode,” Rosenthal said.

Energy companies will, however, continue to lease significant office space in the city for the foreseeable future. The industry will need space to seek solutions to the expected increase in energy demand as well as elements of energy transition, including hydrogen, renewable natural gas, geothermal energy, solar energy, wind energy and carbon capture.

Houston will continue to be the epicenter of this research and activity and all forms of energy, Rosenthal said.

“I think we have the skills, we are developing the skills and the resources,” he said. “So I think in the long run it will be very beneficial for our office market.”