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JLL (NYSE: $JLL) Downstream opportunities, clean energy power real estate demand in energy sector

Upstream oil and gas continues consolidation while alternative energy footprint grows


October 31, 2017 ( Newswire) While the oil and gas industry bounces along the bottom, energy sector players from one end of the pipeline to the other are finding new opportunities for growth. And that's translating to opportunities within commercial real estate. Downstream occupants, those responsible for the refining and processing of energy products, and those within the clean energy sector are both growing and increasing their demands for space. JLL's 2017 North America Energy Outlook says that's why markets such as Houston, Pittsburgh and Denver are primed for growth in the years ahead.

"Energy markets more closely associated with downstream activity are seeing more landlord-favorable conditions than their counterparts because of demand for space in the sector," said Lindsay Brown, co-lead of JLL's Energy Practice group. "Markets engaged in clean energy are more insulated from fluctuations within the oil and gas industry, and we expect them to grow considerably over the next few years."

Downstream outperforms the pack

According to the American Chemistry Council, downstream activity is driving more than 300 projects that are currently under construction or planned. As of October 2017, U.S. petrochemical investment sits at $185 billion. Because of ties to the downstream sector, Houston and Pittsburgh have been direct benefactors of this investment. While construction activity on the whole has been decreasing, the submarkets most closely aligned with the downstream sector in each of these markets are bucking this trend, particularly with regards to industrial development.

A new petrochemical facility near Pittsburgh has already spawned 400,000 square feet of completed speculative industrial development and is expected to help fill office vacancies as that sector develops further.

Industrial property in energy-centric cities is broadly faring better than the office sector. With the exception of Edmonton, warehouse and distribution inventory far outweighs manufacturing space in energy-centric markets, which has shielded the industrial sector so far.

Greater economic diversity is driving demand for space in Denver and Dallas/Fort Worth, despite impacts from givebacks from companies involved in the exploration and production of oil and gas and the fact that both are far from most of the downstream investment.

"The impact of the prolonged downturn in the oil and gas industry has not been uniform across major energy markets," said Bruce Rutherford, co-lead of JLL's Energy Practice group. "Those that weather this cycle and even prosper in the future must capture top talent today, while driving efficiencies in a leaner but more diverse energy marketplace."

Clean energy a growing bright spot on the horizon

Clean energy standards and pressure to reduce carbon footprints is driving increased adoption of greener technologies and renewable energy sources across North America. In 2016, clean energy represented a nearly $60 billion market in the U.S. and in Canada two-thirds of total electricity supply came from renewable sources.

According to the EIA, the supply of renewable energy in the U.S. has spiked by 51.4 percent over the last ten years. Today's clean energy sector now extends beyond well-known industries like wind and solar and is venturing into power storage and utilities.

Commercial real estate occupiers, owners and operators are seeking new and emerging technologies to reduce energy consumption and in turn boost profit margins. Commercial property owners are increasingly more aware of their carbon footprints. Office developers now see LEED certification as the norm in new construction, and industrial owners are beginning to retrofit property rooftops with solar panels.

"The continued evolution of renewable energy is creating new ways to leverage the sector in the commercial real estate arena and is forging opportunities for owners, investors and tenants," said JLL's Director of Energy Research Eli Gilbert. "Staying ahead of the energy industry will be more critical than ever, and companies must determine how best to capitalize on the growing renewables sector."

Upstream continues to consolidate

Upstream companies, those focused on the exploration and drilling of crude oil and natural gas, are restructuring lease agreements and putting space on the sublease market in an effort to right size and streamline their operations. As a result, North American energy hubs are currently working through record sublease inventories. While those are declining from record levels seen in 2016, they remain well-above their respective long-term averages, particularly in energy-heavy metros like Houston and Calgary.

On the industrial side, weakness in the manufacturing sector of North American energy hubs can be linked to upstream oilfield services companies that utilized manufacturing space to produce durable goods for the industry.

Small-town America feels the pain from upstream consolidation

Many small towns that grew in lockstep with the expansion of exploration and drilling during the Shale Boom of the 2000s are now left wondering what's next.

JLL research shows the majority of small towns that lost five or more percent of their population post-boom were in top oil and gas producing states. The ratio of down markets to up is 3-to-1, with tenant favorable towns, or those with decreasing occupancy and activity, representing 101 out of the 133 small towns examined.

When comparing small towns by shale formation, such as the Bakken in North Dakota, the Eagle Ford in Texas, or the Marcellus, none contain real estate markets that are faring much better than their peer formations. Based on JLL data, virtually all are suffering equally with one exception: Small towns in North Dakota are struggling at higher rates than others.

With oil and natural gas prices low and technology consistently making the entire production and transportation endeavor more efficient, new employment growth and increased demand for property in the North American oil patch is unlikely in the near-term.

Minimal disruption to midstream leaves sector prime for growth

The midstream sector, responsible for the transportation and storage of oil and gas, has been largely unaffected by the prolonged downturn. In fact, the sector is experiencing growth due to rising global demand for American oil and gas. In Houston, midstream, oilfield services and utility companies are capitalizing on sublease opportunities brought to the market by upstream and integrated energy firms.

The sector is well-positioned for additional growth to serve expanding liquefied natural gas and petrochemical markets. Formations such as the Powder River Basin in Wyoming and the Marcellus Shale Play in Pennsylvania present increasing opportunities for midstream companies to provide supporting infrastructure.

About the report

JLL's annual Energy Outlook provides in-depth and actionable content sourced from JLL's deep bench of research and brokerage professionals. This year's Energy Outlook analyzes the state of energy markets, impact to subsectors, the status of small-town America and the future of renewable energy. The complete findings of the Energy Outlook are available here. investing ideas in oil and gas stocks

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