Energy Users Become Developers, Buyers in Midland Office Market
In early 2017, real estate professionals in West Texas began to see a noticeable boost in demand for industrial properties across the Permian Basin. In keeping with economic tradition, demand for space in the Midland office market is now catching up to the industrial sector after a 12- to 18-month lag period.
The beginning of 2018 is when Midland’s office market really began to gain steam, riding not only a surge in oil prices but also a 2.4 percent unemployment rate, which is more than a full percentage point below both the state and national averages. Several larger users entered the market at this time while some existing tenants, including Cimarex and Southwest Royalties, began looking for larger spaces.
As of May 2018, the office occupancy rate had reached approximately 92 percent after wavering between 80 and 85 percent for much of the oil downturn. Average rents for office space are currently standing at about $22 per square foot for Class A space and $19 per square foot for Class B space.
With approximately 6 million square feet of product, Midland’s office market is the unquestionable hub of the downstream side of the West Texas energy business. Any company with a sizable investment in energy production or distribution in the region should consider taking office space in Midland.
The reason we use the hypothetical tense is because most of Midland’s office space is confined to two areas. At roughly 3.3 million square feet, the downtown submarket accounts more than half the total inventory. An additional 2 million square feet is tied up in ClayDesta Business Park, located east of downtown.
Consequently, office users in Midland, energy or not, have limited options for taking space at stabilized properties with amenities and walkable retail. Yet with energy prices rising — West Texas intermediate crude traded at roughly $72 per barrel at the time of this writing — demand for office space in Midland is growing more rapidly than it has in several years.
Companies that need office space but wish to avoid immediate rent hikes are working around this problem by developing their own properties. We see this trend of more owner-occupied buildings growing by the week.
Energy Leads The Charge
It likely comes as no surprise that energy firms are the trendsetters behind owner-occupied office assets in Midland. Within the last few years alone, firms such as Chevron, Occidental Petroleum and Crownquest have built their own office buildings here.
The companies that have built their own buildings are occupying all the space themselves and have not offered to lease any space within. All of these properties are Class A buildings with modern amenities, including gyms, basketball courts and childcare centers. In addition, these properties are all located within walking distance of dining and retail, making them very attractive to younger workers.
Several other energy companies, including Anadarko, Apache and Natural Gas Services Group, have recently jumped on the bandwagon and begun developing their own office properties in Midland. Collectively, the footprints of these three companies alone have added about 665,000 square feet of new office product to the market.
Houston-based EOG Resources is perhaps the most epitomizing example of the trend, having recently begun construction on its second office building in the area. This project is expected to be complete by October 2018.
Other Users Expand
Despite depressed energy prices, Midland’s population continued to grow between 2014 and 2017, although the growth rate was strongest in 2014-2015 before oil prices hit rock bottom.
According to worldpopulationreview.com, approximately 136,000 people called Midland home in 2017, up from roughly 128,000 in 2014. The fact that the population continued to grow during a period when oil prices tanked by more than 60 percent suggests the city’s economy is beginning to diversify, albeit slowly, and always with energy at the epicenter.
Most of the other office users that are coming to Midland can be linked to the energy business. These include healthcare, accounting and insurance companies, just to name a few. However, the market is also beginning to see an influx of companies in the professional services sector, predominantly the legal and finance industries.
Having new users in Midland helps diversify portfolios for property owners who have always had around 80 to 90 percent of their tenants directly related to the oil industry. Not only is this beneficial for building owners, but it has also helped diversify the overall economy of Midland.
— By Brandon McClain, vice president, LMB Real Estate Group. This article first appeared in the July 2018 issue of Texas Real Estate Business magazine.