By Tom Bradley | President, ERES
What a start to the “Roaring” 20’s! With oil plummeting by more than 30%, the Coronavirus (COVID-19) impacting all facets of the economy and looming uncertainty around November election outcomes, it has truly been a tumultuous time. As companies/investors consider their real estate portfolio planning in response to the dwindling market conditions, and for the balance of 2020, there are lessons learned from 2014 that may be valuable to the current state of affairs. Here are things to consider:
- Consolidation – Expect Impact to the Fringe Markets: In 2014 we saw energy companies really focus and consolidate on the core markets (i.e. Williams/McKenzie Counties in ND and Midland/Odessa in TX, etc.) Real estate locations in fringe markets really suffered with limited demand for property in “satellite locations”. Expect this to happen again. If you are a landlord in a market not considered core to the energy activity, be sure to engage your tenants sooner rather than later. Rent concessions can go a long way to keep cash flow coming in.
- Debt and Equity: New debt and equity will be challenging to obtain in the near term for new projects (i.e. new development, new investment, etc.) In reviewing industrial investment deals, term and credit will be even more important. Those with cash and the belief that the market WILL come back will be poised to pick up investments at even more attractive caps rates.
- Impact on Multifamily/Housing: This is the most heavily impacted product type from the last downturn and one of the first product types to be impacted. As layoffs occur and rig counts drop, owners of apartments/housing need to be prepared for rent reductions and occupancy drops. Many properties on the multifamily side were sold from 2014-present at a lower basis, so owners should be much better prepared to weather this storm. Efficient management and leasing is now more important than ever. Getting creative to retain and attract new tenants is essential.
- Continued Demand for Industrial – Shift Back to Leasing Focus: Terms will be shortened, rates will go down, but there will be demand in the core markets for industrial. Energy related companies will still need office/warehouse/yard to keep operations on track, while it may be with less headcount, the real estate is still a requirement.
Now more than ever it’s essential for those groups (investors, energy companies, etc.) with a stake in real estate to consolidate, become efficient and get out in front of the forthcoming 12 months which will be challenging. Many energy companies have already done a great job disposing excess property over the last 5 years and are much better prepared to manage a smaller and leaner portfolio.
For additional insights and market advice, reach out to Tom Bradley at tom.bradley@energyreco.com or +1 303.880.0108.