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Energy-Dependent Metros Struggle as Oil Prices Remain Low

Energy-Dependent Metros Struggle as Oil Prices Remain Low

Motorists may be enjoying low prices at the pump, but apartment operators in several markets certainly are not.

As oil prices remain low after 2014’s mid-summer drop, several energy-dependent metropolitan areas have struggled with substantial job loss and a general softness in their local economies. Those struggles have appeared in apartment performance metrics.

The largest metro affected by the energy slump is Houston, where the relationship between the oil-and-gas economy and the local apartment market is clear. Houston apartment performance soared as the energy market was thriving and the local economy boomed. The bounce was led by submarkets in the urban core and the Energy Corridor, areas where energy-related jobs are concentrated. However, as oil prices fell and companies cut back, those submarkets suffered most, driving down the metro’s overall performances. In the year-ending 3rd quarter 2016, Houston was among a handful of U.S. markets to see apartment rents fall.

Apartment Performances Fall Short Across Energy Metros

Other metros seeing annual price cuts include Tulsa and Oklahoma City, where several energy companies have large operations. El Paso was also among the seven U.S. markets to see annual rent cuts in 3rd quarter 2016.

Corpus Christi, whose port ships much of South Texas’ oil and gas, was among the five metros that saw annual rent growth of 0.5% or less. New Orleans also landed among those bottom performances, as did Harrisburg, which borders the Marcellus Shale in Pennsylvania.

Likewise, across the nation, only six of the top 100 metros posted occupancy rates of 94% or lower. The two lowest were Tulsa and Oklahoma City, recording rates of 92.9% and 93.2%, respectively. Houston and Corpus Christi also made the list with occupancy at 93.5% and 94.0%.

oil prices market research

Meanwhile, Tulsa, Corpus Christi and Houston were among the bottom 10 performing metros for occupancy change. The three metros posted year-over-year occupancy shifts between -1.3 points and -1.7 points in 3rd quarter 2016.

Only 11 metros reported concession ratios of 10% or greater. Of those, five are historically energy-heavy markets: Tulsa, Corpus Christi, San Antonio, Oklahoma City and Houston.

Other Areas of Interest

While the Denver metro’s apartment market has remained strong as a whole, propelled by a well-diversified economy, the Downtown/Highlands/Lincoln Park submarket is more heavily invested in the energy sector and subsequently experienced a significant slowdown during the energy bust. Like areas of Houston, downtown Denver hosted several energy companies. Continued layoffs in the downtown area’s energy-heavy environment has impacted apartment demand and submarket performance. However, the energy sector’s direct impact isn’t as clear as in other energy-dependent metros. The submarket has become increasingly diversified, fueled by prosperous industries, including biopharmaceuticals and technology. This has attracted many companies to the area and has hedged some of the effect of the downturn.

That cannot be said for the Midland/Odessa market in Texas. While most energy-heavy areas saw a delayed effect of the downturn on the apartment market, Midland/Odessa saw an almost instantaneous effect. This is primarily due to the metro’s dependence on the energy sector, with nearly a quarter of the employment base centered in the Mining/Logging/Construction sector. Very little economic diversity has left the metro particularly susceptible to volatility in the energy market.

In Midland/Odessa, occupancy remains around 91%, well below the peak of nearly 98% in 2014. Rents plummeted from an average of $1,300 in 4th quarter 2014 to $871 in 3rd quarter 2016. Rents have decreased at an average annual rate of 18.1%.

Is the Oil Industry on the Mend?

While a full rebound is still far off, the energy sector has made positive strides over the past quarter. The price of a barrel of West Texas Crude rose above $50 in December. That’s above the sub-$30 floor in late 2015 and early 2016, but roughly half the recent peaks from 2011 through 2013.

Increasing prices have created optimism among analysts. Several energy forecasts by the Energy Information Administration have been upgraded in the short term. Increased drilling activity also suggests increased confidence. In the week of Dec. 2, 2016, active rig counts in the Texas Permian Basin hit 235, the highest since October 2015, according to Baker Hughes data. Meanwhile, the Eagle Ford Shale in South Texas reached 40 active rigs in December 2016. That is the first time since April 2016 that rig counts have pushed into the 40s. However, that figure is still well below the nearly 240 active rigs in Eagle Ford, four years prior. The total U.S. rig count for the week of Dec. 2, 2016 stood at 597, a significant jump from the 404 active rigs in May 2016. However, the count pales in comparison to the more than 2,000 active rigs four years ago.

rig count data

Still, many questions about the energy market’s future remain. Though the Organization of the Petroleum Exporting Countries (OPEC) has agreed to cut production, domestic production could increase in a more favorable environment expected with the incoming U.S. presidential administration. Increased production will likely continue to limit prices.

In the short run, energy-dependent apartment markets will likely continue to track the energy market to some extent. Continued recovery in the industry, and subsequent hiring, would help to generate traction in the rental market. However, it may take time for any of these markets to see a significant uptick.

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