JLL’s Outgoing And Incoming Energy Leaders On Nation's 'Most Violently Cyclical' Industry And Houston CRE

Many things have changed over International Director Bruce Rutherford’s 40-year tenure at JLL, but one truth remains the same: The energy industry is integral to the city of Houston and its commercial real estate fortunes.

This past year has been a bit of a reset for Houston office as a hybrid work future solidified and tenants began downsizing their requirements. Houston's energy industry was not spared, with giant Exxon Mobil looking to dramatically trim its footprint and firms like gas exploration and production company Apache Corp. making moves likely to halve its square footage.

But cycles, both good and bad, have always been part of the industry and its corresponding commercial real estate footprint.

And if history is a guide, Houston is likely to ride this one out like all the others, according to Rutherford, who will retire from his position at the helm of JLL's Global Energy Practice Group at the end of the year, and his successor, JLL Executive Vice President and Regional Director Louis Rosenthal, in a joint interview with Bisnow.

“The industry remains very cyclical. It's not the only American industry that is cyclical, but probably the one that is most violently cyclical,” Rutherford said.

“One of the things … that we have taught, and that I’m sure Louis will continue to teach to JLL professionals serving the energy industry, is that we must take into account its cyclicality in our real estate strategies.”

It was actually Rosenthal who first introduced Rutherford to the energy sector when the latter was transferred from Singapore to Houston in 2004.

“When you came into a new market, you immediately looked for someone who knew the market extremely well and knew what was going on,” Rutherford said. “And I latched onto Louis Rosenthal like a sea urchin to the hull of a ship.” 

That was a good game plan for them both.

“Nobody could have asked for a better partner for 18 years,” Rutherford said.

Rutherford and Rosenthal, who has worked for landlords and tenants in Houston’s oil and gas industry since the 1980s, have learned not to worry when downturns happen. Experience has taught them it's important to keep a straight head in both good times and bad.

The oil price crash of 1987, which saw the price of oil quickly drop from $40 a barrel to $8 and brought a flurry of mergers and acquisitions among major oil and gas companies, served up one such lesson.

In the early '80s, “I would say 60, maybe even as much as 70% of the [Houston real estate] space demand back then was among the energy sector,” Rosenthal said, adding the crash "resulted in very significant increases in the amount of sublease space, much like we have seen recently.”

That prepared Rosenthal and, later, Rutherford for downturns — or so they thought. Some things, like what happened in April 2020, remained unpredictable.

“We literally saw a negative price for oil a few years ago,” Rutherford said. “Literally, you know, which no one ever would have guessed.” 

Violent as the swings may be, both men have learned energy is a tumultuous business that will always lurch the other way eventually, shaping and reshaping the city's geography. 

“If you look at the landscape and the skyline downtown, most of those buildings and especially the architecturally significant ones … were driven by the good times in the energy industry, when the price of oil was high, when they were aggressively exploring and hiring people,” Rosenthal said.

The partners have always kept the volatility of the industry in mind when formulating strategies for clients and negotiating and structuring transactions.

“The best advice Louis and I gave to clients over the years was ... not to do transactions. To hold off or not do something. To say, ‘Look, just don't do this. I know you think you need to, but don't,’” Rutherford said. “Of course, we never made any money doing that. But we did, over time, make some friends and develop some great trust. In our business, relationships, friendships and trust are paramount.”

The energy industry no longer makes up a quarter or more of Houston’s economy as it did when the men started working together, but the core energy industry still accounts for just under 16% of the city’s economy.

As the industry advances and evolves – and both men agree that oil and natural gas, in particular, will be used for many years to come – real estate will always follow behind.

“Most recently, the biggest change we have is that a lot of intellectual jobs don't have to be done in the office,” Rutherford said. “In the 1980s, the energy industry was the largest consumer of office space per employee in the world. And today, it's one of the smallest consumers of office space per employee because so many of the employees never ever come into the office.”

Now and in the near future, the partners said growth in the energy industry will focus on carbon offsets and carbon capture, which will allow fossil fuels to be consumed while mitigating impacts to the environment. A shift to renewable energy, with natural gas bridging the gap, is in the cards, and recent advances in fusion also give them great hope for the energy industry in two or three decades.

Houston has a large concentration of people with advanced degrees, and that intellectual capital will lead to the future investment in the industry and its real estate, Rutherford said.

“A lot of people just think, ‘Oh, it's a bunch of dirty oil, you know, roughnecks.’ It's not that at all. It is scientifically based,” he said.

“I view this as the reason that Houston will remain the energy capital of the planet. And I view this as one of the main drivers for future use and growth … And it's starting to attract significant venture capital, because people say, ‘Hey, there are an awful lot of smart people in Houston, and some of them are doing some brilliant things.’”