Falling Oil Prices Weigh On Boomtowns

Emerging from the recession, energy markets saw a robust real estate recovery as high oil prices ignited exploration and production investment in places like the Eagle Ford Shale in southern Texas and the Bakken in the Northern plains.

Now oil's price plunge threatens to cap the recovery, particularly in cities like Houston, Oklahoma City and Williston, N.D.

However, housing analysts such as the National Association of Realtors' Danielle Hale and Trulia's Jed Kolko expect potential slumps in home sales, prices and construction to be confined to energy markets.

Largely based on expectations that a strong job market will induce millennials to become first-time homebuyers, the NAR projects that existing-home sales will climb 8% in 2015 and home prices 4% to 5%. It predicts that single-family home starts will jump 21%, and new-home sales 25%.

"While uncertainty will have an effect on areas where the overall economy and jobs market are very tied to oil, there are enough areas that will benefit from lower oil prices," Hale said. "So we're expecting the effect to be a wash nationally.

Outplacement firm Challenger Gray & Christmas said Thursday that 38% of the nearly 104,000 U.S. job cuts in January and February were directly tied to oil, the price of which has dropped by about half since July. Halliburton (HAL), Schlumberger (SLB) and Weatherford International (WFT) alone have all announced layoffs totaling thousands of workers in the last several weeks.

The 1,267 drilling rigs operating nationwide at the end of February represented a 28% drop from a year earlier, according to oil service firm Baker Hughes (BHI), which is being acquired by Halliburton.

"I'm bullish about every sector of the national economy that's not in oil and gas," said Mark Dotzour, chief economist for the Real Estate Center at Texas A&M University. "I'm not bullish about the oil and gas impact on Houston, Oklahoma City and Williston.

Housing demand in energy markets has yet to crater, and weakness likely won't surface until late 2015 or in 2016, according to a recent report on energy markets by Trulia, recently acquired by Zillow (NASDAQ:Z).

In Oklahoma City, some 20,500 homes sold in 2014, a 6.7% rise over 2013, according to the Oklahoma City Area Association of Realtors, which lumps together single-family homes with half-duplexes, condos and patio homes. The median price at year-end was $150,000, about $6,000 higher than a year earlier. In Houston, single-family home sales increased 2.8% in 2014 and the median home price surged 10.6% to $199,000, according to the Houston Association of Realtors.

Waiting For The Wave

Still, executives at homebuilders Lennar (LEN), Beazer Homes USA (BZH) and D.R. Horton (DHI), which are active in Houston, anticipate some softness in the market, according to comments made during their respective earnings calls in January.

Houston-based apartment developer Camden Property Trust (CPT) also projects a slowdown, particularly with 20,000 new apartments slated to open in Houston this year.

Even so, its same-store annual revenue growth has averaged 8% over the past four years in the market, and executives expect it to fall only to the 20-year average of 3.4%, according to remarks on the company's earnings call in January. Unlike the oil bust in the 1980s, when Houston was more dependent on the energy industry, the area now boasts strong health care and port sectors, as well as significant refining and petrochemical industries, Dotzour says. He adds that potential homebuyers in careers that are tied to the energy industry, including attorneys and accountants, are in a "wait-and-see mode.

"I think the unknown right now is, how will the people outside the oil and gas industry respond to the uncertainty in the energy business?" Dotzour said. "Will a cardiologist choose to delay buying a home just because three or four oil executives own homes in the neighborhood?

Falling oil prices failed to keep Houston office landlords from lifting rents 3.6% to $27.35 a square foot in 2014, even with 16.6 million square feet under construction, according to commercial property brokerage Transwestern.

Between layoffs and firms looking to sublet unused office space, the area's average vacancy rate has likely ticked up 90 basis points from 10.2% at the end of 2014, says Kevin Roberts, president of Transwestern's Southwest operations.

Transwestern predicts that Houston's vacancy rate will climb above 12% over the next two years. Office tenants and buyers are already starting to push for better deals, he says, but landlords are hardly panicking.

"Everybody is looking for 2015 to be a little bouncy," he said. "The good news is that the real estate is not financially impaired — tenants are pretty healthy and paying rent, and occupancies are still high.

Building Homes In The Bakken

In northwest North Dakota, Williston is ground zero for the Bakken oil formation and is in the midst of a severe housing shortage. The number of residents more than doubled to 29,595 from 2010 to 2014, and a 2014 Williston Economic Development report projected the city's population to approach 40,000 in 2017. Observers remain upbeat, given the steady environment.

"Demand has tempered a bit, but for the most part it's still going strong," said Terry Metzler, operations manager for Casper, Wyo.-based Granite Peak Development, a land developer that entered the market in 2011.

He acknowledges that apartment rents started to decline in the area, but he attributes most of it to an increase in supply.

Developers applied for 422 single-family, multifamily and commercial property building permits valued at $435 million in 2014, up from 276 permits totaling $291 million in 2013, according to the Williston Area Home Builders Association.

Among other projects, private equity firm KKR & Co. (KKR) and Denver-based Continuum Partners are developing the Ridge, a community of 1,537 single-family homes, apartments and town houses.

Like real estate observers in other energy markets, Metzler hopes the oil price dip is temporary. He notes that as drilling has slowed, work at producing wells continues.

"I don't think you're going to see the amount of apartments being built slow down that much," he added. "If we see an extremely prolonged period of very low oil prices, we might see things change."