CREFW-Summer2015

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CRE Finance World Summer 2015
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he recent drop in oil prices has been an unanticipated
shock — or a happy welcome — to both local and national
economies. The rise in North American oil production and
a continued high level of output from traditional overseas
oil producers, coupled with an expected lull in international
oil demand this year, has resulted in a worldwide supply glut. This
glut has resulted in oil prices dropping to around $50 per barrel as
of February 2015, down significantly from around $90-$100 per
barrel during most of 2014. While prices have recently inched up
from their nadir, market forecasters expect that prices should rise
and settle at around $65 a barrel for the remainder of 2015.
Unfortunately, at $65 per barrel many North American drilling
locations become uneconomical. In fact, a number are already
being shuttered, most notably in North Dakota. At first glance, this
might appear to potentially be alarming for multifamily investors
as recent economic growth, and in turn, household growth, in
several metros has been fueled by oil exploration and production
via hydraulic fracturing, or “fracking.” In reality, these low oil prices
will probably have more of an immediate and negative impact on
the more volatile office and industrial sectors, since those property
types will endure the brunt of rig closures and production slowdowns
first, before the multifamily sector begins suffering from adverse
demographic trends.
Fracking Created an Oil Boom in Certain Areas
The vast majority of recent U.S. oil production has come out of
two states: North Dakota and Texas. The Bakken formation in
the region surrounding Williston and Minot, North Dakota has
been producing an estimated 1.2 million barrels of oil per day
for the past several years, although that is expected to decline
considerably this year. In Texas, the Permian, Eagle Ford, and
Barnett formations have been producing around 3.4 million barrels
per day. In comparison, the Marcellus and Utica formations in the
greater Pittsburgh region, combined with the Niobrara formation
in the greater Denver area, together produce fewer than 350,000
barrels per day, relying instead on primarily producing natural gas.
Exhibit 1
U.S. Oil Producing Regions and Well Breakeven Costs
Source: CBRE Research, December 2014
Lower Energy Prices = Good News for the National Economy
Lower oil prices are actually a net stimulus to the national economy,
particularly for energy-importing metros. Because lower fuel prices
allow consumers to enjoy more immediate disposable income,
Moody’s Analytics estimates that the recent oil price decline will
add anywhere from 0.25 percent to 0.75 percent to this year’s
Gross Domestic Product, meaning that an impressive $165 billion
is now available for consumers to spend in other ways than filling
up the tank.
Potential Winners from Low Oil Prices
As seen in the chart below, the metro areas that are expected
to benefit from lower oil prices are a diverse set. Some metros,
including Atlanta, Philadelphia, and Boston should benefit because
it will be less expensive to heat and/or cool buildings and homes.
Other metros should benefit because consumers will now have
more disposable income, allowing for a stimulus in tourism, in
places like Phoenix, Tampa, and Orlando.
T
Tim Komosa
Economist Manager
Fannie Mae,
Multifamily Economics
and Market Research
Kim Betancourt
Director of Economics
Fannie Mae,
Multifamily Economics
and Market Research
Boomtowns: The Knock on Effects of Oil Prices