By Tom Bradley, Executive Vice President, Energy Real Estate Solutions
Through conversations with clients, energy companies, landlords, developers and investors with business interests in the Bakken, Niobrara, Eagle Ford, Permian Basin, and other key energy markets, one thing seems to be on everyone’s mind: How will the dropping oil prices impact my real estate portfolio?
Based on the industry outlook and my experience in the field, here are a few observations that may help guide you and your organization through this time of uncertainty:
How will this impact real estate supply?
The good news is that there is still not enough supply to meet the demand in many markets.
With E&P companies slashing drilling budgets, the domino effect is beginning to impact service and midstream companies, among others. However, unless oil prices continue to drop significantly, there is still considerable drilling activity taking place in most markets. From an industrial real estate perspective, energy companies are still expanding into multiple markets and seeking warehouse space to support operations. A prime example is the Bakken, which has still has not caught up to the significant demand in places like Williston and Watford City. With only a handful of vacant buildings on the market in these areas, the supply vs. demand challenge still favors owners and landlords. As companies try to mitigate risk amongst their field service employees, many seek to provide their workforce with a short commute, thus increasing demand surrounding smaller facilities.
This leads to my next observation: The impact on real estate pricing.
How will this impact real estate pricing?
Our firm engages in both landlord and tenant representation. We have seen both sides impacted by the falling oil prices. When it comes to lease rate, tenants are seeking price reductions citing similar activity amongst their client base. Unfortunately, tenants have very little negotiating power to re-trade their lease rates which, in many cases, has led to tenants looking for loopholes in their lease contracts. Landlords that locked in long term agreements are not panicking… yet. The rapid decline in oil prices has many companies watching and waiting — empty buildings that are still on the market may stay there for the foreseeable future as companies wait for prices to stabilize. Who benefits in this scenario? Users who are still on the hunt for available space. Real estate prices will inevitably come down as supply increases or demand decreases, or both.
But won’t capital dry up?
From our firm’s perspective, this component is the most concerning: How will lenders react to the instability in the industry? If developers or end-users can’t find the capital to finance their real estate needs, activity will be crippled in the energy markets. For those flush with cash, this poses an outstanding opportunity to negotiate. However, this factor will negatively impact the number of properties that trade on a daily basis, pushing return rates upward and resulting in higher lease rates to cover potential risk.
Which energy markets are the most at risk?
Each E&P company has a different strategy. ConocoPhillips has cut its drilling budget by 20% for 2015. Activity in their core markets including the Eagle Ford and the Bakken are unlikely to be impacted, but drilling in emerging markets like the Niobrara will see a decline. That said, the Niobrara is an interesting market to consider. The cost to drill is significantly cheaper than other markets — roughly $4 million to establish a well versus approximately $10 million to perform the same activity in the Bakken. As a result of this cost effectiveness, some rigs have already left the Bakken to establish a foothold in the Niobrara. The best way to stay in front of these trends is to review the break even prices for each shale market. I have some great slides that compare each shale play from a drilling ROI standpoint — feel free to email me at tom.bradley@energyreco.com if you’d like to take a look.
My real estate portfolio hasn’t yet felt the heat. When will it?
Real estate tied to the energy sector will generally take longer to be impacted by the dip in oil prices. The real estate market hasn’t had enough time to react, however if prices continue to dip or remain in the $50 dollar per barrel range for an extended period of time, 2016 may bring a year of little to no real estate growth. If oil prices can make a steady climb in 2015, impact on real estate in these markets will likely be minimal and offer opportunities for outstanding investments as prices come down from their 4 year premium.
Although no one has a crystal ball to predict the next 24 months, one thing is certain: In the current state of technology and industry, the world needs oil to operate and the demand will not subside anytime soon. Good luck to all those impacted!
About Tom Bradley
Tom Bradley is Executive Vice President with Energy Real Estate Solutions specializing in the energy industry with specific expertise in helping clients navigate the complexities of rural energy markets. His knowledge of key shale plays and client-oriented approach have enabled numerous energy companies, investors, and developers to establish, grow, and manage their real estate portfolios.
Tom Bradley — tom.bradley@energyreco.com — (303) 386-7210
About Energy Real Estate Solutions
As shale markets continue to become a larger and more meaningful part of the global energy outlook, real estate development has become increasingly difficult and time consuming to navigate. Energy Real Estate Solutions is a full service commercial real estate firm focused on helping energy companies and investors to maximize their real estate portfolio, while allowing their focus to remain on other key operational concerns.
We provide brokerage, development, property management, investment, joint venture and other real estate advisory services to organizations seeking specialized, knowledgeable support in and around the world’s most active energy sites.