Rising Crude Oil Prices Bode Well for Energy-Dependent Apartment Markets

  in   Houston

Crude oil prices have recovered from the early COVID-19 plunge and are steadily rising again, which bodes well for Houston and other apartment markets with energy-dependent economies.

West Texas Intermediate crude oil was trading for over $65 per barrel as of March 1, which was nearly $12 above the commodity’s five-year norm. That’s a significant turnaround from the early days of the pandemic, when crude oil prices fell into negative territory for the first time in history following the initial U.S. outbreak as demand dried up under a global halt in travel.

Prices returned to the five-year average by January 2021 and have been rising since. The recent peak in oil prices came in June 2018, when the price reached over $77 per barrel.

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Fluctuations in oil prices tend to affect apartment performances in markets like Houston, Midland/Odessa, Oklahoma City and Tulsa, where the energy sector plays an outsized role in the local economies.

Houston, the largest of these energy-dependent economies, has been working to diversify its economic base and minimize its reliance on the ebb and flow nature of the energy sector in the past decade. Despite those strides, however, there are still a sizable number of Houston jobs reliant upon this industry, a factor that contributes to the market’s often erratic employment numbers.

When the nation overall recorded historic job losses in March and April of 2020, Houston followed that trend. About 360,000 jobs were eliminated during those two months, downsizing the employment base by 11.3%. Though Houston started to regain lost jobs in May and has continued to do so nearly every month since, the market was still in a hole of about 244,000 jobs as of January 2021, leaving the job count 7.7% under its pre-pandemic level.

The Houston job recovery has been much slower than what was seen across the other major Texas markets less reliant on energy. Dallas has recovered the best, but is still behind by about 3%, while Austin, Fort Worth and San Antonio are about 4% under pre-pandemic levels.

In comparison, the U.S. overall is 7.4% away from its February 2020 job numbers.

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Like most markets nationally, leasing activity in the Houston apartment market stalled during the typically active spring and summer months of 2020, but demand proved unusually strong in 4th quarter, making up for the previous delays. Despite a solid demand performance in the past year, however, occupancy and rent performances are still struggling alongside the economy in Houston.

As of February, apartment occupancy in Houston was at 92.3%, tying the rate in San Francisco as the worst showing among the nation’s largest 50 apartment markets. When oil prices fell into negative territory in April, occupancy faltered, going from 93.2% in March 2020 to 92.8% in May. Since then, occupancy as faded even further, despite the recent bounce back in oil prices.

Rent positioning has also faltered. Houston went from year-over-year effective asking rent growth of 0.6% in March to cuts of 0.4% in April. Since then, rent cuts have gotten deeper, hitting as low as 3% in September. As of February 2021, annual price declines were a little better, but still pretty deep at 2.4%.

Like Houston, the nation’s smaller energy-dependent markets are also seeing slow job recovery. Midland/Odessa is the worst in the nation, in fact, with a job base that is still 17.8% away from full recovery. Tulsa and Oklahoma City are doing better, with employment bases that are still down about 6% from pre-pandemic totals.

The good news is that economists believe this recent strengthening of oil prices to be sustainable and, in fact, expect prices to nudge upward even further before the end of 2021, as the world reemerges from the pandemic and starts to embrace a pent-up demand for travel.

Given that outlook, the stressed economy in Houston – and some of the other energy-reliant markets – could see the recovery process speed up in the near term.