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CRE Finance World Summer 2015
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recession. The general consensus is that Houston’s job market
will slow from being one of the fastest-growing in the nation, to
one that achieves just national average growth rates. For example,
Moody’s Analytics is forecasting that Houston’s 2015 job growth
will be about half of what was previously expected, but still viable
enough to produce an estimated 63,000 new jobs in 2015.
Commercial real estate data provider Axiometrics has a slightly
more optimistic forecast: 73,000 new jobs in 2015, down from
93,000 prior to the oil price decline, or about 20 percent fewer
jobs than was previously expected.
Prior to the recent decline in oil prices, the apartment supply surge
was well on its way in Houston. After several years of apartment
market tightening, Houston was already expected to see some
easing in rent growth and occupancy levels this year, as new
supply hits the market. Now, with the anticipated slowing down
of job growth, there is likely to be a short-term oversupply of units
over the next 12 to 24 months.
Previous Undersupply Will Help Houston Now
There are about 18,000 new apartment units underway in
Houston, with expected completions occurring over the next two
years. With job growth anticipated at about 2 percent, that should
produce demand for about 13,000 units, which would appear to
create a supply/demand imbalance. Mitigating this condition,
however, is the fact that Houston has been undersupplied over
the past several years: Only 22,500 units were completed since
2011 but more than 250,000 jobs were added, creating estimated
demand for about 50,000 multifamily rental units.
Worthy of note is that there are sections of Houston that will actually
benefit from low oil prices. The metro’s east side submarket has
been seeing a surge in construction of chemical and manufacturing
plants that are taking advantage of low natural gas prices. This is
expected to continue, and possibly expand, if oil prices remain low.
North Dakota: A Slippery Slope
North Dakota has been one of the primary beneficiaries of the
North American fracking boom and Williston, in particular, has
been the center of that activity. Williston has grown tremendously
over the past few years, to nearly 30,000 people, and is the nation’s
fastest growing micropolitan area. It has seen its population
increase by an average 7.0 percent per year since 2010, compared
to just 0.7 percent growth at the national level. Needless to say,
all this extraordinary growth has occurred specifically because of
drilling activity in the area.
Now with an extended period of low oil prices, the metro area, and
the entire state, could fall into a recession. While extraction costs
are estimated to be lower here than in some areas, the combined
cost of construction of new wells and transportation of crude oil to
refineries located on the coasts of the Gulf of Mexico and the Mid-
Atlantic will likely make new investments in the area uneconomical.
As seen in the chart below, as the price of oil declines, the state’s
active rig count also declines. And as of February 2015, it has only
worsened. The state’s active rig count has declined to 121, down
from 190 a year ago, according to data from the North Dakota
Department of Mineral Resources. This means that the state is
now unable to produce its previous output level of about 1.2 million
barrels per day. In addition, of these active rigs, 115 are concentrated
in just four counties: Dunn, McKenzie, Mountrail and Williams — all of
which are located in the most prolific section of the Bakken formation.
Exhibit 4
Monthly North Dakota Rig Count & Bakken Shale Sweet Crude Oil Prices
Jan. 2014–Jan. 2015
Source: Compiled by NGI’s Shale Daily from North Dakota DMR reports
Williston’s Multifamily Sector Likely Impacted
Williston has a fairly large multifamily inventory considering its rural
setting and relatively small population size. The influx of workers
coming to the oil fields has resulted in a significant housing shortage
and a sizeable inventory of temporary housing. As of 2013, there
were about 6,000 multifamily housing units in Williston, according
to a recent City of Williston/NDHFA Housing Study. Multifamily,
which likely includes this sizable inventory of temporary dwellings,
represents 49 percent of all housing stock, with about 9 percent
consisting of mobile homes and another 40 percent consisting of
single-family homes.
Rents already appear to be declining and concessions commonplace.
A review of one rental apartment website reveals concessions
of $550 being offered on a $1,800 monthly rental, or about -2.5
percent, significantly above the national average of just -0.9 percent.
Lower Oil Prices and Multifamily — More Winners than Losers