Energy Company Consolidations Likely To Ramp Up Houston’s Office Vacancy

As the financial sector weakens, mergers and acquisitions typically spike. That has office landlords and brokers keeping their eyes on the Energy Capital of the World.

There were $207B worth of oil and gas company consolidations last year, the most since 2012. Another $55B have occurred already this year, according to JLL data. This will likely decrease the sector’s office demand, at least temporarily, in a market that already had 25.8% vacancy in the first quarter.

Those in the know say there will be other downsides to this trend, like the layoffs that are likely to come from ConocoPhillips’ $22.5B acquisition of Marathon Oil, both Houston-based companies.

Oil and gas M&A activity is nothing new, JLL Executive Managing Director Louis Rosenthal said, adding that companies were becoming more efficient with their staffing and space usage, with or without an M&A pileup.

“You can look at almost every major integrated energy company and see that along the way to where they are now, they have merged, acquired or been acquired by another company in the same industry,” Rosenthal said.

But last year’s hundreds of billions of dollars worth of M&A activity stands out, Rosenthal said, and he expects the activity to continue.

When the financial sector weakens, companies with strong balance sheets will acquire companies that need capital, Savills Managing Director Alecia Schneider said. This means more oil and gas companies will likely put sublease space on the market, ticking up the sublease vacancy that had stabilized in recent quarters, she said.

Houston has 10 sublease blocks of at least 90K SF available, and six belong to energy and utility companies, according to a Savills report.

Exxon Mobil Corp. alone has 206K SF listed for sublease on the fourth through 10th floors of 1725 Hughes Landing Blvd. in The Woodlands. Houston-based Exxon Mobil in May finalized its $59.5B purchase of Irving-based Pioneer Resources. 

Pioneer expects its Irving office to stay open for at least two years and its employees to be offered jobs with Exxon Mobil, which could bring more employees to the Houston area.

“Some of the largest firms have completed these billion-dollar acquisitions,” Schneider said. “With that comes consolidations, efficiencies, etc.”

ConocoPhillips expects to save $500M annually after it combines with Marathon Oil this year, executives said during an investor call last month. Half of that will come from salaries, benefits and facilities. 

Conoco is headquartered on North Eldridge Parkway in the Energy Corridor, near Marathon’s headquarters at CityCentre in West Houston. Marathon moved from 5555 San Felipe two years ago, leaving 600K SF available in that building, which was foreclosed upon later that year.

In a $53B deal, Chevron plans to buy Hess Corp. this year. The oil, gas and energy exploration company is headquartered in New York, but its exploration and production office sits at 1501 McKinney St. in Downtown Houston. 

While this string of mergers and acquisitions may continue, new technology and efficiencies have just as much, if not more, power to impact how energy companies use office space, Rosenthal said.

Occupancy has dropped on the exploration side of energy companies, for instance, with modern technology and software revealing where most of the world’s oil and natural gas is located, he said. 

“You don’t need the same kind of staffing anymore that you needed 10, 15, 20 years ago because of the advances that have been made in technology,” Rosenthal said. 

Many companies have already downsized to support a smaller employee base, but others haven't, he said. Those that haven't already optimized their real estate often have redundant office leases and buildings, which would be even more dispensable if they merge with another company. 

“I suspect that those are going to be targets for the companies who are in acquisition mode,” Rosenthal said. 

Energy companies will continue to lease significant office space in the city for the foreseeable future, though. The industry will need space to research solutions to the expected increase in energy demand as well as energy transition components, including hydrogen, renewable natural gas, geothermal energy, solar power, wind power and carbon capture.

Houston will continue to be the epicenter of this research and activity and of all forms of energy, Rosenthal said. 

“I think we have the skill sets, we're developing the skill sets, and the resources,” he said. “So I think in the long run, this is going to be very good for our office market.”