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Boom Towns: Energy Industry Triggers Heated Competition For Prime Real Estate

Stocks in this article: JLL

HOUSTON, June 19, 2013 /PRNewswire/ -- Growth in the domestic energy industry is expected to create more than 3.5 million American jobs by 2035, including 700,000 in the next two years alone*.  The same industry growth creating jobs is also driving heated competition for prime real estate – predominantly in a handful of cities where the oil and gas industry is booming. New research from Jones Lang LaSalle (JLL) indicates that the majority of commercial real estate opportunities resulting from this job growth will be concentrated in the following North American cities: Calgary, Dallas, Denver, Houston, Philadelphia and Pittsburgh.

In the firm's inaugural Energy Outlook Report, these cities are characterized as benefitting from up to three quarters of the anticipated 3.5 million new energy jobs directly correlating with nearby rural areas experiencing a rise in energy activity. Notably, the remaining 875,000 jobs are anticipated in other regions, including financial centers such as New York City and Chicago not directly associated with oil and gas production. 

"The rapid growth in domestic oil and gas production has made a large but uneven impact on the U.S. economy," said Bruce Rutherford, JLL International Director and Energy Practice Leader. "In the top energy cities, commercial real estate markets are booming, with growth creating scarcity – and thus a landlord-favorable market. This applies not only to offices, but also to retail, hotel, multifamily, industrial and distribution facilities and sites."

Beyond Production: Job Growth Resulting in Office, Retail and Industrial Demand

While energy production is the direct growth driver, much of the commercial real estate demand is coming from affiliated industries, such as manufacturers serving the energy sector. Steel pipe makers, for instance, are stepping up production to meet demand. Similarly, chemical companies are prospering from low natural gas prices, with some companies shutting down plants overseas and diverting billions in capital expenditures to U.S. sites. According to the Texas Chemical Council, chemical plants in Texas have already announced roughly $15 billion in expansions as a result of natural gas growth, which is expected to net 25,000 jobs in the state. 

Rising employment in these regions is also spurring growth in demand for multifamily and retail space.  For example, JLL estimates that the energy sector's impact on U.S. apartment demand likely contributed to nearly 25 percent of total unit absorption since 2002, an overall demand of approximately 165,000 units.  On the retail sector front, employment growth in Houston, for example, totalled 4.4 percent over the last year – almost triple the growth rate of the nation.  Even during the recession, retail vacancy in the market dropped 1.6 percent since its 2008 peak.

The energy markets have also contributed disproportionately to the office recovery – representing 22 percent of recently-increased office space occupancy in these markets.

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