CREFW-Summer2015

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CRE Finance World Summer 2015
50
n late January 2015, crude oil prices hit a 52-week low
around $44.08 per barrel, capping off a staggering decline
from a 52-week high of about $108 in mid-2014. Prices
bounced back somewhat to above $50 in mid-February, fell
again, reaching a new 52-week low of $44.02 per barrel.
The massive decline in oil prices has already begun to reverberate
throughout the economy, with different effects for various firms,
industries, regions and, in the case of commercial real estate,
property types. Much of the coverage and analysis surrounding the
decline in oil prices has centered on Houston, the energy capital of
the U.S. and one of the hottest commercial real estate markets in
the country. But contrary to all of the doom and gloom underlying
much of that coverage, we expect the impact of low energy prices
on the multifamily sector in Houston to be minimal. On the other
hand, the Houston office market is likely to feel more pain and
indications are already pointing to that conclusion.
Not surprisingly, the decline in the price of oil will have a negative
impact on energy-oriented economies around the country. However,
at most this will slow growth in major metro areas, not drive them
into recession. Texas is the state that will be most directly impacted
by this. Other states that will be hit, but to a lesser extent, are
North Dakota, Oklahoma, Colorado, New Mexico, Wyoming and,
if oil prices remain depressed for a while, West Virginia (because
of the price substitution effect between natural gas and coal). The
areas in Texas that are under the most direct threat are smaller,
less diverse metro economies such as Midland and Odessa. And
yet even in the case of these two metros, any adverse effect
on employment has so far been unsubstantial. Year-over-year
employment growth in Midland was still 8.8% as of February and
down just 50 basis points from the peak last October. In Odessa,
year-over-year employment growth is down 130 basis points since
October, but still registered a 7.6% increase as of February.
Among larger metros, Houston and, to a lesser extent, Fort Worth
will be impacted because of the relatively high concentration of
exploration jobs in those metros. Even though the oil price decline
will mostly hit the exploration industry, there are also many professional
services firms in the area that rely on business from the energy
industry creating the potential for significant secondary employment
impacts. Job growth in the oil and gas extraction industry has certainly
slowed since mid-2014. As of February, oil and gas extraction
payrolls expanded by 1.9% year-over-year, compared with 3.1% as
of February 2014. Yet the rapid pace of job growth in this industry
was already in decline in Houston well before the downturn in oil
prices; after reaching a cyclical high of 12.6% in mid-2012, annual
increases in payrolls have gradually slowed through early 2014.
Since then, growth has been steady around 1%-2%. Overall, job
growth has still remained positive. Houston actually registered an
annual increase in payrolls of 3.4% as of February. This is down
from the 3.8% increase as of December, but in line with annual
job growth figures from late 2013 to early 2014. January did see
the first monthly job losses in the metro since 2011, but January
has been a weak month for job growth for several years. Moreover,
job growth has been muted across the country during the first few
months of the year.
Exhibit 1
Houston Nonfarm Payroll Employment
Source: Bureau of Labor Statistics
On the bright side, the larger Texas metros are not as dependent
on the energy sector as they once were, such as during the 1980s
oil price decline, so they are better positioned to weather the
downturn. In Houston, a greater presence from healthcare, research
and professional services firms will help keep the metro’s economy
growing. And in fact, payroll gains within Education and Health
Services and Professional and Business Services has bolstered
Houston’s recent job gains. Employment in the Leisure and
Hospitality industry has also been solid. The state also benefits
from very positive demographic trends. Houston’s population is
projected to grow 8.7% over the next five years, driving an 11.0%
increase in households. This compares to expectations of 5.3%
and 7.5% growth in each respective category for the nation as a
whole. This strong population growth should continue to support
household formation and the demand for apartments.
As such, low energy prices have had little effect on our multifamily
outlook for Houston. Let us be clear — we are not saying that the
metro’s market will continue to do incredibly well. We are already
calling for increasing vacancies and a moderation in rent growth
I
Ryan Severino, CFA
Senior Economist and
Director of Research
Reis
Bradley Doremus
Associate, Research
& Economics
Reis
Dr. Victor Calanog
Chief Economist and
Senior Vice President
Reis
Boomtowns: The Knock on Effects of Oil Prices