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April 2015 — Office Properties Quarterly —
Page 5
Market Overview
Oil Prices
The wild card in 2015 and beyond
is the effect of plunging oil prices on
Denver’s CBD office market, which,
of course, will be dependent on how
long prices stay depressed. Drops in
production lag price decreases. Oper-
ating rigs are under lease, typically
for two to four years, so they would
not be shut down immediately, and
many companies have hedges that
lock-in above-market prices. Oil trad-
ing at lower prices is better than no
production at all, but new exploration
and production would be put on hold
in the face of sustained low prices.
This type of slowdown would be
felt acutely in the oil patches but
would have a more muted effect
on oil company tenants in the CBD.
Many CBD employees are petroleum
engineers who are in short supply
and would be retained except under
the direst of conditions. Large oil
companies, who are in turn the larg-
est occupiers of office space, have
the ability to hunker down and wait
out the cycle, but some smaller firms,
especially those burdened with debt,
may fold or be ripe for acquisition.
Finally, the CBD is not overbuilt
and, reportedly, tenants commit-
ting to or looking hard at new and
planned products are most exclu-
sively technology, law and financial
services firms – not oil and gas. Many
experts project that oil prices will
recover in the next 15 to 18 months
and, if this is accurate, the effects on
Denver’s CBD will be minimal. In any
case, the CBD’s diverse tenant mix
will prevent a reprise of the devasta-
tion wrought by the oil bust of the
1980s.
“Denver has reinvented its econ-
omy since the dark days of the late
1980s and early 1990s when massive
overbuilding, tax law changes and a
plunge in oil prices conspired to send
the local real estate market into the
tank for the better part of a decade,”
said Bob Bach, NGKF’s director of
research, Americas.
A recent study by the Brookings
Institution ranks Denver in the top
quartile of the nation’s largest 100
metropolitan areas for employment
in advanced industries that depend
on highly educated research and
development, and scientists, tech-
nology professionals, engineers and
mathematician workers, said Bach.
The study notes that these industries
will play an outsized role in power-
ing regional and national economic
success.
s
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