Six Economists Debate Oil Prices and Texas Real Estate
How will oil prices, which have continued to plummet beyond original expectations, impact Texas? Six economists weighed in.
Trepp senior director of research Susan Persin
Lower oil prices haven’t yet had a notable negative effect on Houston’s employment, and we remain one of the strongest US markets for job growth, Susan tells us. The apartment sector is the most risky—we’ve got a large pipeline of new construction, and a slowdown in hiring could leave us with oversupply. But if energy prices don’t stay low for too long, she thinks there may be no long-term impact on commercial real estate. (How long is too long? Hard to say, Susan tells us, but considering how low prices have gone, it could take less than a year of sustained cheap oil to make a big mark on our industry--already, she's seeing job cuts and idling plants from oil companies and suppliers.)
Susan’s watching REITs with significant Houston/Texas portfolios closely (especially AmREIT, Cousins, Whitestone, Parkway, Eastgroup, Weingarten and Camden)—they’ve benefited from our profitability for the last few years, but those properties could become a liability. Both Cousins and Eastgroup were downgraded recently for their Houston exposure, but AmREIT and Weingarten stocks are doing really well.
Stewart Title chief economist Ted Jones
Unless the restrictions in place on exporting crude are changed, he wouldn’t be surprised if oil drops to the $30 range. But Ted (here with Stewart Title's Kate Alpert Cavanaugh and Kelly Ansley) says pricing doesn’t have to be as high as people think--80% of US shale production in 2015 would still be viable in the $50 to $69 per barrel range, Ted wrote on his blog. On top of that, he says a softening in Texas’ booming economy is countered by the reduced feed stock cost for the US petrochemical industry. (The US is quickly moving from being the largest importer of plastic in the world to the biggest exporter.)
Texas A&M real estate center chief economist Mark Dotzour
Oil dropping below $50 doesn’t worry Mark…yet. (We’re at $47.54 this morning.) As he told San Antonio’s News Radio 1200 WAOI, "If oil stays under $50 for the next six years, yes, Texas could have a problem."
CBRE director of research Sara Rutledge
Sara says oil prices definitely correlate to the success of Houston’s real estate (our office boom started with oil in the mid-$70s per barrel), but the downturn in pricing will have a slower impact. Energy employers are loath to lay off highly skilled workers, so, while low prices are curtailing further expansion, downsizing of space requirements could be limited. M&A activity would really impact us though, like the recent announcement of Halliburton acquiring Baker Hughes (those two occupy 4.7M SF of office and industrial space in Houston). Pictured: Sara with her family and Madagascar’s Gloria at the Gaylord Texan this holiday season.
CBRE COO Mike Lafitte and Americas head of research Spencer Levy
Spencer says 80% of Houston’s office expansions and relocations between 2010 and Q2 ’14 were from energy companies. Dallas is much more diversified—only 5% of its expansions/relocations were energy-related. But Houston’s got a lot of diversity of industry, Spencer tells us, despite that concentration. Regardless, Mike says high oil prices are just one part of a good Texas economy. And the US is seeing a lot of positive from falling oil prices, especially in the retail sector (consumers benefit) and industrial real estate (a stronger US dollar leads to more imports).
Perryman Group president Ray Perryman
This isn't an all-out death of the energy industry, Ray says--exploration may drop, but pumping will continue. Long-term demand is solid as emerging companies increase consumption, the Dallas Morning News reports. He says it will take more than a dip to markedly slow production, and he's still forecasting 4.3% compounded annual growth in the Texas economy through 2019.