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Houston Is 2015’s Wild Card Apartment Market – Part One

Houston Is 2015’s Wild Card Apartment Market – Part One

There is typically at least one spot across the country where forecasting the apartment market performance is very tricky. Depending on assumptions made about the factors that should have the greatest influences on overall results, outcomes can vary drastically in these locales. During the past few years, these wild card markets have included Atlanta, reflecting questions about economic growth potential, and Washington, DC, reflecting questions focused on the volume of pent-up demand available to meet surging apartment completions.

Houston’s outlook now ranks as the toughest call to make. How much will a disruption in the energy sector cut into the metro’s job creation pace, household formation volume, and apartment demand level? At the same time, what impact will 2015 completions nearly doubling the 2014 tally place downward pressure on performance results?

Let’s explore the metro’s outlook in a three-part post. For those of you who don’t follow much about the oil industry beyond how much it costs to fill up your car’s gas tank, part one and two feature some Energy Sector 101 information. Part three follows with a discussion of the 2015 performance trends that appear most likely in metro Houston’s apartment market.

Just How Big a Deal Is This Shift in the Energy Industry?

While Houston’s economy has diversified over the past few decades, energy still plays a giant role in the metro’s overall health. According to local sources, close to half of Houston’s total employment is tied to the energy sector in some capacity. That includes lots of jobs that aren’t directly in the energy business, but that are found at companies that service energy firms or that depend on the incomes earned by energy industry workers. The energy-influenced share of the local economy has declined from more than 80% back in the 1980s.

Where Are We on Energy Prices?

U.S. oil prices are benchmarked on the price of the West Texas Intermediate (WTI) grade of oil. As of mid-December, the WTI price was running around $56 per barrel, down from a recent high of $107 per barrel in June 2014. Among the immediate impacts of this price drop has been a plunge in permits for new oil wells, down 40% month-over-month in November and pointing to lower production on down the line. Major cutbacks in drilling budgets for 2015 are beginning to be announced by key energy companies. Unprofitable existing wells could be shuttered in the near term, especially among firms where operations have been leveraged significantly. But large-scale production halts for existing wells have not been announced so far.

The U.S. currently produces about 9 million barrels of oil per day, up from 7.4 million in 2013 and 5 million in 2008’s most-recent low point.

How does this Relate to Production?

Growth in the Texas energy sector during recent years has been stimulated by introduction of the hydraulic fracturing, or fracking, drilling technique in the state’s two major oil fields – the West Texas Permian Basin field (centered around Midland and Odessa) and the South Texas Eagle Ford field (starting east Austin and San Antonio and extending to the southwest into the Rio Grande Valley around Laredo). The country’s other particularly notable cluster of hydraulic fracturing drilling is in the Bakken field in North Dakota. Opinions on the average price point where oil from these wells covers production costs are wide-ranging, from about $50 to about $80. Wells in Texas generally are perceived to have meaningfully lower breakeven price points than those in the North Dakota cluster, primarily because of the lower transportation costs required to get the Texas oil to market. Wells in the Eagle Ford field appear to have lower breakeven price points than those in the Permian Basin field, again reflecting the difference in location and associated transport costs. Breakeven calculations reflect the cost of extracting the crude oil, but don’t take into account debt service payments.

Several energy firms have reported that their wells where the fracking technique is used are just now hitting peak efficiency in production. Thus, with individual wells yielding more oil, total production in the U.S. could remain high in the short term, even if the number of operating wells stabilizes or declines somewhat. However, fracking wells tend to have a short lifespan, so even setting other factors aside, declining permits for new wells point toward falling production in a year or so: More wells will go out of service once their efficiency diminishes than will be added to begin production. We’ll explore the Houston energy sector even further in part two of our series.

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