Hui-yong Yu (c) 2014, Bloomberg News. SEATTLE — The drop in oil prices to five-year lows, while helping consumers, is sparking concern that leasing and construction demand will be hurt in some of North America’s best-performing markets for commercial real estate.
Energy-driven markets such as Houston, Calgary and Williston, North Dakota, which have benefited from a surge in property values, may be poised for a slowdown after the 45 percent plunge in oil prices since June. Shares of real estate investment trusts with heavy concentrations of property in energy-related areas, such as office landlord Cousins Properties Inc. and apartment owner Camden Property Trust, are underperforming.
“Hiring definitely will be slowing down, particularly in Houston, where a lot of engineering jobs are sourced from,” said Sara Rutledge, director of Texas research and analysis for CBRE Group Inc., the largest commercial real estate services firm. That would cut demand for office space. “It does take some time” for the impact to materialize, she said in a telephone interview.
Companies including Houston-based ConocoPhillips and Marathon Oil Co. said this month they plan to cut capital spending by about 20 percent next year in response to the plunge in oil prices, which accelerated when the Organization of Petroleum Exporting Countries refused to cut production at a November meeting. The energy industry accounted for 64 percent of the office square footage leased in Houston last year, according to CBRE.
Energy and technology have been the main drivers of demand for U.S. office space in the four cities with the highest rent growth for the year ended Sept. 30 — San Jose, California; Dallas; San Francisco and Houston — according to property- research company Reis Inc. Office rents in Houston, the fourth- largest U.S. city, rose 4 percent in the third quarter from a year earlier, compared with a 0.4 percent increase for the U.S. as a whole.
Both office and apartment construction have been booming in Houston, as have residential and commercial developments in cities such as Williston, which have sprung up with shale oil production. Some apartment rents in Williston on a per-square- foot basis have rivaled cities such as New York as companies rushed to put up temporary housing, hotels and apartments to meet demand from the influx of workers in the past several years.
KKR & Co., Related Cos., Westport Capital Partners and Oaktree Capital Management are among the firms that have invested in housing in the Williston area. Related, based in New York, also paid about $300 million this year for 3,000 apartment units in Midland and Odessa, Texas, and is raising a fund to invest in multifamily housing in energy markets.
Joanna Rose, a spokeswoman for Related, said it was premature to comment. Kristi Huller, a KKR representative; Andrea Williams, a spokeswoman for Oaktree; and Caroline Luz, a Westport representative, declined to comment.
Williston was the fastest-growing micropolitan area, defined as those with 10,000 to 49,999 residents, in the U.S. for a third consecutive year, the Census Bureau said in March. The city has added about 1,000 hotel rooms since 2010 and doubled its housing stock as its population roughly tripled, said Shawn Wenko, executive director of the group Williston Economic Development.
“Our biggest challenge with the slowdown is the infrastructure development, and that’s everything from roads to a new airport relocation to a new wastewater treatment facility,” he said. “Over the next six years, we need $1 billion of infrastructure development to get us caught up. Those are big-dollar projects and probably stand the most risk of not being done.”
The city has estimated it will need about 3,000 new homes a year for the next five years to catch up with demand. New apartments are being built at the rate of about 1,200 units a year, and single-family construction has picked up since about mid-year, Wenko said.
“The mood is actually very positive throughout the community, even with the talk of where oil prices are going,” Wenko said. The prevailing view among community members is that oil prices will rebound, he said.
In Houston, Crescent Real Estate Holdings last year sold the 10-building Greenway Plaza office complex for about $1 billion. Oil was more than $100 a barrel at the time and the venture had completed renovations and leased up the multibuilding campus. The buyer was Atlanta-based Cousins Properties, which has been investing in Texas in a bet on growth in the state.
“In the near term, lenders and investors will factor in the possibility of prolonged depressed prices into their decision-making,” said John Goff, chairman and chief executive officer of Goff Capital Partners, a Fort Worth, Texas-based real estate private-equity firm that co-owns Crescent Real Estate. The Houston property market “is still quite vibrant,” he added. “I am not seeing any meaningful impact yet on demand.”
Concern about the impact of falling oil prices has caused Houston-centric real estate investment trusts to trail their peers, said Conor Wagner, an analyst at Green Street Advisors Inc., a real estate research firm. Cousins, which owns office properties mainly in the Southeast and Texas, gets more than 40 percent of its net operating income from Houston, according to Green Street.
Marli Quesinberry, a spokeswoman for Cousins Properties, said company officials weren’t available to comment because of the holidays.
In the apartment industry, Camden Property Trust has the greatest exposure to Houston, with 13 percent of net operating income derived from the city, Wagner said. Shares of the Houston-based landlord have risen about 7.5 percent since June 30 through yesterday, lagging behind the 14 percent gain in the Bloomberg Apartment REIT Index.
Kim Callahan, a Camden spokeswoman, didn’t return a telephone call and e-mail seeking comment.
Based on conversations with oil and gas company executives, Goff said he views the recent price drop as a “relatively short-term phenomenon,” given the continued growth in demand, the decline curve of U.S. production and the possibility of future supply disruptions. Modern shale production declines at a faster rate than the typical vertical wells of the past, he said.
“I don’t think oil is going back to $100 any time soon, but it could settle back to the $70 or $80 range,” Goff said. “I don’t see what’s really different today in the way of facts than the facts we had four months ago.”
The energy industry is poised for consolidation, and workforce cuts would reduce demand for office space, said Patrick Jankowski, senior vice president of research at the Greater Houston Partnership, a business and economic-development association. Halliburton Inc.’s pending $34.6 billion acquisition of Baker Hughes Inc., announced last month, was the beginning of what could be a series of mergers, Jankowski wrote in a Dec. 11 report on the Houston employment outlook for 2015.
“Companies burdened with debt will fold, providing others with opportunities to acquire assets at bargain prices,” Jankowski wrote. “Inevitably, layoffs will occur next year, the result of mergers, bankruptcies, weak demand and the need to cut costs.”
The energy industry, including exploration, oil-field services, equipment manufacturing and engineering, has added 93,400 jobs in the Houston area since January 2010, or one in every five created during the recovery from the recession, according to the Greater Houston Partnership. The 10-county metropolitan Houston area added more than 500,000 residents, driving home construction, apartment rentals and retail sales.
The local business group estimates job losses next year of 7,900 in oil-field services and 1,300 jobs in oil and gas exploration. Demand for industrial real estate also could fall with reduced manufacturing of oil-field equipment, Jankowski said.
The projected losses are smaller than what occurred in 2008 and 2009, when oil fell to $32 a barrel. Back then, oil-field service employment in Houston dropped by 9,700 jobs, or almost 24 percent, and oil and gas extraction jobs fell by 1,200 jobs, or 2.6 percent, according to the Greater Houston Partnership.
The potential impact isn’t all negative, said Rutledge of CBRE. The decline in oil prices reduces costs for companies such as refiners and chemical producers, the so-called downstream end of the industry, versus the upstream portion of exploration and production.
Crescent Real Estate has plans for a $250 million, 425,000- square-foot (39,500-square-meter) office tower called 6 Houston Center that may break ground within a month, Goff said. Houston’s economy, while reliant on energy, is diversified with health care and other industries, he said.
Oil prices probably would have to remain below the industry average break-even point for at least six months to affect real estate development, said Spencer Levy, head of research for the Americas at CBRE.
“The construction cycle is a long one, and we don’t expect any immediate slowdown,” he said. “With the possible exception of small pockets of multifamily, there has not been an overbuilding problem this time.”