Professional Documents
Culture Documents
In this paper, we explore the risks the oil and gas (O&G) downturn poses
for the commercial real estate (CRE) sector. The goal of our research is
to identify which US markets and asset classes are at the greatest risk for
value decline. To measure the impact, we first explore why this O&G
downturn is different from past volatility in the O&G markets. We then
identify the real estate markets that are at greatest risk and investigate
the performance of certain asset classes.
A few takeaways from our research:
The duration of the O&G downturn has surprised many and debunked
most dependent on the O&G industry, although some asset classes are
demonstrating resilience more than others.
100
2
The lag effect seen in the market response to the O&G downturn
90
1
2
Page 2 | The O&G downturn and its impact on commercial real estate
70
0
60
(1)
40
30
2012
2013
2014
Surplus (shortage)
Entering the 1980s, the worlds oil production had grown by 107% in
the prior decade, and the members of the Organization of the
Petroleum Exporting Countries (OPEC) had become sophisticated
producers, providing for 25% of the worlds crude production by
1979.
The events that followed the peak price of oil at $117 1 per barrel in
1980 in the US demonstrate the non-comparable nature of each
crisis. The US average rig count declined by 78% between 1981 and
1988, resulting in significant declines in US production 2 and
impacted US oil production for 28 years. 3 The US average annual rig
count remained stable at an average of 864 active rigs from 1989 to
2003. As a result, US production fell from 8.97 million barrels per
day in 1985 to 5.00 million in 2008, representing a 44% decrease. 4
80
50
110
Introduction
2015
2016
2017
(2)
3
4
Starting in 1981
US O&G Information Administration (EIA) US production report
0
2014
2015
Rig count
Oil production
Liquid fuels production
2016
100
2010
2011
2012
2013
2014
100
95
90
85
80
Petroleum manufacturing
Petroleum manufacturing
O&G extraction
Page 3 | The O&G downturn and its impact on commercial real estate
2016*
Production
Consumption
Rig count
EIA
EIA
7 EIA
2015
10
200
200
Note - *As of August 2016 Source: U.S. Bureau of Labor Statistics (BLS); U.S. Bureau
of Economic Analysis (BEA)
300
300
100
400
400
500
500
600
GDP in billions
% of State GDP
State
2014
State
2014 2015*
2015*
Alaska
30.8
17.8
Oklahoma
19.7
11.1
Wyoming
19.2
22.6
Texas
16.3
8.5
Louisiana
17.3
4.6
North Dakota 17.4
12.5
New Mexico
11.9
9.2
Montana
6.6
5.0
West Virginia
7.3
13.1
Colorado
6.1
3.8
Kansas
4.3
1.1
Utah
3.2
2.2
Arkansas
3.8
1.9
Mississippi
3.0
0.9
Ohio
3.3
1.0
Pennsylvania
3.3
2.2
California
1.7
0.4
Selected Total
US Total
% of US
State O&G
% of
O&G
labor growth
State
labor
(000's)
labor
State rig counts
2014
10-14
%
2014 Jun-14
Jun-14 Aug-16
Aug-16 Change
Change
2014 10-14
%
2014
3.1
2
16.2
3.5
10
4
(6)
6.6
42
39.2
6.5
208
62
(146)
1.4
5
20.3
6.8
51
8
(43)
46.1
176
41.7
3.7
889
238
(651)
7.5
11
13.1
3.7
107
43
(64)
1.8
21 174.8
5.5
171
27
(144)
2.0
12
49.2
3.2
90
30
(60)
0.5
3
38.6
1.6
7
0
(7)
1.0
6
26.2
3.0
25
8
(17)
3.3
19
43.1
1.8
69
21
(48)
1.1
13
35.8
2.7
30
0
(30)
0.8
3
31.4
0.8
27
3
(24)
0.8
2
10.4
1.1
11
0
(11)
0.5
4
23.5
1.3
14
3
(11)
10
34.1
0.6
41
14
(27)
3.4
3.9
16
46.9
0.7
59
17
(42)
7.1
9
12.6
0.4
48
5
(43)
354
1,857
483 (1,374)
400
1,873
491 (1,382)
*2015 GDP contribution numbers are generated from the North American Industry Classification
System (NAICS) code for mining, do not include pipeline transportation and may include sectors
non-specific to O&G.
Source: BLS; BEA; Baker Hughes and RigData
Page 4 | The O&G downturn and its impact on commercial real estate
Est. O&G as %
of GDP
Primary markets
labor (000's)
Key Metropolitan
2014 2015*
2015* Jun-14
Jun-14 Jun-16
Jun-16 %
Change Jun-14
Jun-14 Jun-16
Key
Metropolitan State
State 2014
% Change
Jun-16 %% Change
Change
A
B
C
D
E
F
G
H
Houston
TX
24.2
20.0
109.3
86.7
San Antonio
TX
7.0
Pittsburgh
PA
9.9
Oklahoma City OK
New Orleans
6.0
8.7
6.0
11.9
20.8
15.0
20.6
15.2
(26.2)
618
635
2.8
LA
21.0
17.0
8.1
6.3
(22.2)
568
577
1.6
Tulsa
OK
18.7
15.0
7.7
6.2
(19.5)
440
446
1.2
Bakersfield
CA
19.4
14.0
12.4
8.8
(29.0)
256
263
2.7
Baton Rouge
LA
12.8
11.0
1.2
0.9
(25.0)
394
415
5.3
180
140
(22.0) 7,336
7,522
2.5
Selected total
(20.7) 2,932
2,999
2.3
6.8
(21.8)
955
1,009
5.6
9.5
(20.2) 1,173
1,180
0.5
Secondary markets
Key Metropolitan
2014 2015*
2015* Jun-14
Jun-14 Jun-16
Jun-16 %
Change Jun-14
Jun-14 Jun-16
Key
Metropolitan State
State 2014
% Change
Jun-16 %% Change
Change
I
J
K
L
MV
N
O
P
Q
R
S
T
U
MV
W
X
Y
Lafayette
LA
21.9
16.0
23.4
15.8
Corpus Christi TX
(32.5)
222
208
(6.5)
*17.0
14.0
24.4
23.1
(5.3)
193
198
2.4
Shreveport
LA
14.3
9.0
5.3
3.7
(30.2)
185
183
(1.0)
Anchorage
AK
19.6
12.0
3.8
3.1
(18.4)
185
188
Odessa
TX
26.6
20.0
19.2
15.8
(17.7)
78
73
Greeley
CO
14.9
12.0
18.6
17.0
(8.6)
97
102
4.8
Fort Smith
AR
7.6
5.0
6.6
5.8
(12.1)
113
114
1.2
Laredo
TX
12.3
7.0
4.8
4.2
(12.5)
98
104
5.6
Tyler
TX
24.0
14.0
6.6
6.3
(4.5)
99
104
5.2
Charleston
WV
7.6
6.0
9.9
7.9
(20.2)
127
124
(2.3)
Longview
TX
23.3
17.0
18.5
15.5
(16.2)
104
100
(3.0)
Lake Charles
LA
32.1
30.0
0.8
0.4
(50.0)
98
105
8.0
Billings
MT
17.1
15.0
5.3
3.7
(30.2)
83
87
4.3
Midland
TX
67.0
60.0
28.5
24.3
(14.7)
95
91
(4.1)
Bismarck
ND
NA
NA
6.4
5.9
(7.8)
75
76
1.2
Farmington
NM
46.6
34.0
NA
NA
NA
51
51
0.0
Casper
WY
28.7
20.0
4.3
2.6
43
40
(7.6)
186.4
155.1
(16.8) 1,945
1,946
Selected total
(39.5)
1.6
(7.0)
0.1
Certain CRE asset classes and markets have recently begun to exhibit
signs of stress due to the O&G downturn. The cancellation of large
projects, increased bankruptcies and continued layoffs will impact the
demand for existing and newly constructed space. The impact on real
estate has had a lagging response to the O&G downturn as CRE key
performance metrics have just recently started to show signs of
distress. This indicates we may only be at the beginning of a
flattening or declining cycle. To navigate the minefield of hidden
risks, we have identified key trends resulting from the current and
future O&G climate.
*The metropolitan 2015 GDP and Corpus Christi 2014 GDP are estimated from the NAICS mining
code or trends from prior years.
Labor employment is an estimated number based on BLS-provided data and does not include
manufacturing or pipeline transportation. Some fields include NAICS code for mining, logging and
construction or the code for mining and logging.
Identified at-risk profiles were a result of considering broad economic trends and factors and are
not exclusive nor inclusive of every possible variable affecting the identified markets.
350
300
80,000
250
60,000
200
40,000
150
100
20,000
50
0
Multifamily
Industrial
10
Page 5 | The O&G downturn and its impact on commercial real estate
Office
Retail
5.4 11,815
5.6
5,107
6.5
831
(6,708)
San Antonio
6.5
4,442
6.0
6,512
6.7
600
2,070
Tulsa
6.6
1,860
6.1
404
7.3
(297)
(1,456)
Oklahoma City
6.3
1,119
7.2
263
8.1
(74)
(856)
Metropolitan
Metropolitan
Class A office
7.6
8.1
12.3
4.2
6.6
6.8
6.3
13.2
16.1
2.9
10.8
12.7
14.1
8.1
4.1
6.4
2.3
8.1
7.4
8.0
14.8
14.3
15.8
1.5
10.9
10.6
10.1
Oklahoma City
San Antonio
10.1
(0.5)
1.4
0.6
(0.5)
New Orleans
8.1
7.9
8.9
1.0
10.1
9.4
8.6
(0.8)
Pittsburgh
7.8
7.7
8.7
1.0
8.0
8.2
7.7
(0.5)
13.5
9.8
10.7
0.9
10.8
10.9
11.4
0.5
8.2
8.6
0.4
Tulsa
8.3
* As of 2Q2016
Multifamily rental rates % change
Primary
M-to-M
YOY Secondary
Secondary
M-to-M
Primary
M-to-M YOY
M-to-M
11.2
10.8
10.2
(0.6)
Nationally
Houston
San Antonio
0.1
(0.2)
0.1
2.3 Lafayette
(1.3) Corpus Christi
(3.6)
0.0
1.9
2.3 Shreveport
(0.4)
(1.1)
(0.5) Anchorage
(1.3)
(6.9)
Pittsburgh
(0.7)
Oklahoma City
(0.1)
1.8 Odessa
0.0
(0.7) Greeley
New Orleans
YOY
YOY
(1.0)
4.4
Tulsa
(0.9)
0.5
(0.9)
Bakersfield
Baton Rouge
State
State
(0.1)
0.2
(1.5) Laredo
1.7 Tyler
Charleston
0.7
0.0
1.1
(0.4)
-
Alaska
(0.4) (4.2) Longview
0.1
1.2
Oklahoma
0.0
0.6 Lake Charles
(0.3) (1.1)
Wyoming
(0.9) (3.0) Billings
North Dakota
0.4
(5.4) Midland
(0.2) (19.4)
Louisiana
(0.2) (0.1) Bismarck
(0.1) (1.4)
Texas
0.0
2.4 Farmington
New Mexico
0.1
1.8 Casper
* As of August 2016
"-" signifies data was unavailable. Colored "gray" markets are
negative in both month-to-month (M-to-M) and YOY periods
Absorption data is net absorption square footage per year
11
Page 6 | The O&G downturn and its impact on commercial real estate
Flattening/Volatility
San Antonio
TX
Increasing
Pittsburgh
PA
N/A
New Orleans
LA
Tulsa
OK
Bakersfield
CA
Baton Rouge
LA
As the shale boom took hold in 2009 and O&G production expanded
in the US, new room supply quickly followed the growth in the related
O&G markets. Since 2010, the O&G regions accounted for 20% of the
total of new hotel rooms developed in the US with approximately
7,500 rooms being delivered annually, according to Smith Travel
Research (STR). However, the O&G downturn is now having a direct
impact on hotel demand.
The reported revenue per available room (RevPAR) for the heavily
concentrated O&G markets declined 18.4% in the first quarter of
2016 and 14.2% over the trailing 12-month period, according to
STR. 11 The poor performance is expected to continue as new supply
previously committed to is delivered in 2016. While developers are
no longer committing to new projects, the market will require
significant time to absorb all of the recently delivered space and for
jobs to return in a meaningful way.
120
15
(1.7) (21.1)
(0.2)
TX
Baton Rouge
Houston
Key
2Q2014
2Q2014 2Q2015
2Q2015 2Q2016
2Q2016 2015-16
2Q2014 2Q2015
2Q2015 2Q2016
2Q2016 2015-16 2Q2014
Bakersfield
Houston
Decreasing
100
10
80
60
0
-5
40
-10
20
-15
-20
2011
2012
2013
2014
As of 1Q2016
Source: EIA; Hotelnewsnow; STR
2015
2016
* As of 2Q2016
Vacancy rates (%)
US
As of 2Q2016
Source: REIS; RCA
Net Absorp.
2014
2015
2016*
% Absorp.
Vac.%
% Absorp.
Vac.
Absorp. Vac.
Vac. %%Absorp.
Absorp. Vac.
Vac.%
Absorp. 2014-15
Houston
St. Office
Multifamily Industrial
Industrial Retail
Retail
St.
Office Multifamily
National
Oklahoma City OK
Multifamily (000's)
Metropolitan
Metropolitan
Metropolitan
Metropolitan
Steve Rado
Principal
+1 214 754 3443
steve.rado@ey.com
Cally Miltenberger
Senior Manager
+1 214 754 3443
cally.miltenberger@ey.com
Krista Reed
Manager
+1 713 750 1468
krista.reed@ey.com
David Trigg
Analyst
+1 214 665 5712
david.trigg@ey.com
12
Page 7 | The O&G downturn and its impact on commercial real estate
Data and sources: USA, state and metropolitan area statistical data was
sourced from the Bureau of Labor Statistics (BLS) and the Bureau of
Economic Analysis (BEA), the NAICS coding index for sector determination.
State and metropolitan data considered was dependent on the availability
of NAICS index coding data. All data should be treated as best estimates
for each region due to the included or excluded economic components as
a result of available NAICS coding.
Identified at-risk markets were a result of data availability, market activity
and corresponding O&G market performance indicators. Some areas were
excluded due to data availability. This is not a comprehensive nor an allinclusive list but a hypothesis on the potential affect the O&G economy
can have on real estate assets.
Real estate metrics and analytics are aggregates of available data. For the
secondary markets and low population counties, transaction metrics were
often sparse and difficult to obtain. Data provided is our best result from
using a variety of sources to create an illustrative image of what could or is
happening in the market.