Houston Office Anxiety Intensifies As Biden Energy Policy Crystallizes

The future of U.S. energy policy under President-elect Joe Biden is being closely watched by Houston’s commercial real estate industry, where the fate of the nation's energy sector and the industries in its orbit could have a powerful impact on its future.

In Houston, energy companies and related service firms account for more than a third of office tenants. Biden's anticipated approach to onshore hydraulic fracturing and offshore drilling — both are likely to face a tougher regulatory environment over the next four years — is now ramping up anxiety in an already-stressed sector. 

“There are two ways they can [enact change]. One is with the carrot, and the other is with the stick,” Greater Houston Partnership Senior Vice President of Research Patrick Jankowski said. “I hope they do it with the carrot and offer more incentives, and incentives are structured in such a way that even the oil companies can benefit from it. But the stick will be ... more difficult permitting on federal land, more difficult to get pipelines built, more stringent regulations on emissions and so forth.”

As that affects energy companies, including a wave of bankruptcies that has already begun, Houston office will likely feel the pain.

Biden’s campaign rhetoric and post-election announcements have all indicated he is focused on accelerating the shift from fossil fuels to renewable energy.

On the other hand, incentives for carbon capture and storage, as well as investment in renewable technologies, could provide opportunities for many of Houston’s big energy firms that have already started working on the energy transition away from fossil fuels. But for Houston’s small to midsized firms, the future is less sunny.

“I think it could be very, very impactful, and probably not in a positive way,” Lee & Associates Managing Principal Mike Spears told Bisnow. “Even talk about eliminating fracking, it makes people nervous. And when they're nervous, they're not going to expand, they're going to contract.”

Campaign promises and post-election actions are two different things, but many economists and energy experts agree that Biden will pursue tougher emissions regulations, reduce access to federal lands and waters, and encourage innovation in renewable technologies.

Biden is also expected to try and halt new offshore lease sale activity in the Gulf of Mexico and other federal waters. That could be a more difficult task, as federal law requires offshore lease sales four times a year, and it would have to pass what could still be a divided Congress.

University of Houston Chief Energy Officer Ramanan Krishnamoorti said Biden’s energy strategy will probably include banning fracking on federal lands. While the federal government only owns about 1.9% of total land in the state, many Houston-based energy firms have fracking operations in other states like New Mexico and Colorado, where federal land ownership is much more widespread.

“We clearly see that there is going to be a short-term emphasis on definitely cleaning up the emission side of fossil energy,” Krishnamoorti said.

Tough regulations on methane releases are likely to be reintroduced early in Biden’s term, as well as incentives for carbon capture and utilization. There will also likely be additional incentives for investment in battery storage for energy generated by renewables, like wind and solar technologies.

Large energy firms in Houston have been actively pursuing that shift from fossil fuels to renewables alongside their traditional operations. But only firms that actually survive to see the new administration would eventually be affected by sweeping policy changes. The sector has been battling a severe energy downturn that began to take shape in late 2019 but rapidly intensified at the onset of the coronavirus pandemic.

A total of 43 North American oil and gas producers have filed for bankruptcy between Jan. 1 and Oct. 31, according to law firm Haynes and Boone’s latest oil patch bankruptcy monitor report. The firm said it expects more filings before the end of the year. That has potential to hit Houston office hard. 

Houston’s office sector never fully recovered from the 2014 to 2016 crude oil downturn, when the energy industry shed more than 90,000 jobs and millions of square feet were returned to the market, either for sublease or direct lease. Since then, energy companies have been highly disciplined when it comes to both their hiring and real estate practices.

Houston’s office sector had a total vacancy rate of 23% at the end of Q3 2020, and the total availability rate was 27.1%, according to NAI Partners’ latest market report.

Jankowski performs economic analysis for the Greater Houston Partnership and said it will be very difficult in the future for Houston landlords to find tenants who are able to lease very large office floor plates. In the past, energy companies have been likely candidates for leases of 100K SF and more, but those instances will be fewer moving forward.

“The absorption of office space isn't going to come from oil and gas, it's going to have to come from finance and insurance and professional services and health care. Those sectors are going to grow, but they're not going to grow as fast as we need them to grow,” Jankowski said.

As a senior broker at Lee & Associates, Spears said more than half of his clients are related to the energy sector. Many are users of industrial real estate and are involved with the equipment side of fracking operations.

Spears said the possibility of Biden banning fracking has already affected the business confidence of some of his clients, with many opting to sign shorter lease terms and place projects on hold.

“I think that they're planning for stricter regulations that will increase their costs,” Spears said. “They're preparing for what they feel will make their business more difficult and could very well put several people out of business.”

Though Biden’s energy policies will have an impact on how surviving oil and gas companies operate, global economic forces are more likely to determine the short-term financial health of energy-related commercial real estate users in Houston.

Crude oil prices are expected to increase as COVID-19 vaccines become widely available. When travel becomes safe and accessible again, the demand for transportation fuel will also rise.

Krishnamoorti said he anticipates the worst of the energy downturn to be done by summer 2021 and that upstream oil and gas companies will begin to recover at that stage. Offshore technologies and small to midsized businesses will bear the biggest hit, but opportunities in other areas could help drive more innovation and business activity in Houston.

“Where I suspect there will be huge incentives to grow are going to be in cases such as carbon mitigation, renewables and energy storage. And those are places where Houston is really well-positioned to start growing,” Krishnamoorti said.

Patrick Duffy, the president of Colliers International’s Houston office, told Bisnow that thus far, most of the firm’s energy clients have been primarily affected by low oil prices.

“We haven't had any conversations really about any energy company that's expanding at this point. It's all been contraction,” Duffy said. “That's an indifferent position to the election. Frankly, I haven't heard any of our energy company clients saying that the election concerns them one way or the other. I think right now they're so focused on the fact that oil being in the low 40s [dollars per barrel] just doesn't get it done.”

Still, Duffy said he doesn’t view Biden’s energy policies as necessarily having a radical impact on the use of space in the Houston market. The exception could be if offshore drilling comes to a halt, as that would eliminate many engineering jobs in Houston. When it comes to the state of Houston’s office market, Duffy doesn’t expect a great deal to change.

“I don't see anything that drives [the office market] any weaker, frankly, but I also don't see any major push for expansion. I think it's going to be very flat for the next four years. It's going to be status quo,” Duffy said.