Denver, Houston, and Edmonton are just 3 of many cities that are heavily dependent on oil and gas. A prolonged slowdown in these markets, as we are seeing now, creates a tremendous ripple effect, impacting office spaces, retail spaces, labor markets and more.
But where there are problems, there are also possibilities.
Tens of thousands of people are being laid off in the current gas and oil downturn. But even after the economy slows down, the human capital remains in these markets for some time, presenting a chance for other industries to acquire very talented managers, engineers or computer scientists who were previously working for the oil and gas industries, but who can repurpose themselves to a new industry.
The declining cost of office space presents another incentive for other industries to move into these areas. As we discussed in my last article, the real estate market drops more slowly than financial markets. Companies can take advantage of market downturns especially quickly, picking up talented human capital. Real estate markets “right-size” more slowly.
One city’s loss is another city’s opportunity.
Every city experiences cycles which can last for decades. The last 20 years have been phenomenally good for New York City. In the 1970s, factors such as high taxes, crime and drugs made New York a less desirable place. Now, it is a very fashionable place; everyone wants to come to New York. Almost anyone who bought real estate here in the 1970s and held on to it made out extremely well.
But if negative factors like crime, high taxes, etc., become a problem again, the value of living in New York may be negated. People vote with their feet by relocating to safer and lower tax environments. Then, prices here will go down and the cycle will start all over.
Trends occur all the time that end up determining which city succeeds while others fail. If the oil and gas industries in Houston and Denver experience a downturn, those cities might become more cost-friendly and have a large talent pool, making them attractive for other industries while New York remains stubbornly expensive.
The bottom line: Neither great problems nor great successes last forever. It is important to understand market cycles and embrace a holistic view in order to create an effective strategy and be able to leverage opportunities as they arise: here or elsewhere.
George E. Grace
Mohr Partners, Inc.
232 Madison Avenue
New York, NY 10016