Growth in the domestic energy industry is driving heated demand for prime real estate, predominantly in a handful of cities where the oil and gas industry is booming. That growth is expected to create more than 3.5 million American jobs by 2035, including 700,000 in the next two years alone.
While energy production is the direct growth driver, much of the commercial real estate
demand is coming from affiliated industries and thus driving growth in office, retail, industrial and multifamily demand.
New research from Jones Lang LaSalle (JLL) indicates that the majority of commercial real estate opportunities resulting from this job growth will be concentrated in Dallas, Denver, Houston, Philadelphia and Pittsburgh.
In the firm’s newly released Energy Outlook Report, these markets are benefitting from up to three quarters of the expected 3.5 million new jobs correlating with a rise in energy production activity. Notably, the remaining 875,000 jobs are anticipated in other regions, including financial centers such as New York City and Chicago not directly associated with oil and gas production.
"The rapid growth in domestic oil and gas production has made a large but uneven impact on the U.S. economy," said Bruce Rutherford, JLL international director and energy practice leader. "In the top energy cities, commercial real estate markets are booming, with growth creating scarcity, and thus a landlord-favorable market. This applies not only to offices, but also to retail, hotel, multifamily, industrial and distribution facilities and sites.”
Houston is a prime example. In May, ConocoPhillips committed to the biggest office lease signed in Houston so far this year, agreeing to occupy 850,000 square feet in a pair of new office buildings to be built in Houston's booming Energy Corridor by Trammell Crow Co. (TCC) and its financial partner, Principal Real Estate Investors. And a month earlier, Technip, which specializes in engineering, project management and construction, leased 428,831 square feet of office space at Energy Tower III, a Class A office building
currently under construction by Mac Haik Development. And Noble Energy Inc. signed a 456,000-square-foot lease at SH 249 & Louetta Road
Rising employment in the energy markets is also spurring growth in demand for multifamily and retail space
. For example, JLL estimates that the energy sector’s impact on U.S. apartment demand likely contributed to nearly 25% of total unit absorption since 2002, an overall demand of approximately 165,000 units.
On the retail sector front, employment growth in Houston, for example, totaled 4.4% over the last year -- almost triple the national growth rate. Even during the recession, retail vacancy in Houston dropped 1.6% since its 2008 peak.
The energy markets have also contributed disproportionately to the office recovery - representing 22% of recently-increased office space occupancy in these markets, according to JLL's analysis.
The Shale Oil Boom: a U.S. Phenomenon
The dramatic surge in U.S. shale oil production could more than triple the current American output of shale oil to 5 million barrels a day by 2017, which would likely make the U.S. the number one oil producer in the world, according to a new study by a researcher at Harvard Kennedy School.
Leonardo Maugeri, a former oil industry executive from Italy who is a fellow at the Kennedy School’s Belfer Center for Science and International Affairs, studied the performance of 4,000 American shale oil wells and the work of about 100 companies involved in shale oil production.
In a paper titled “The Shale Oil Boom: A U.S. Phenomenon,” Maugeri wrote that the unique characteristics of shale oil production are ideal for the U.S. and unlikely to be mirrored elsewhere in the world. These factors include the availability of drilling rigs, and the entrepreneurial nature of the American exploration and production industry, both critical for the thousands of wells required for shale oil exploitation.
Maugeri said the number of American shale oil wells in North Dakota and Texas could soar from the current 10,000 to more than 100,000 working wells by 2030. He said steady improvements in technology and cost would continue to drive industry growth in the shale oil fields in the Dakotas and Texas.
A key distinction between shale oil production and conventional oil wells is the intensity of drilling required to extract shale oil. Maugeri noted that the Bakken-Three Forks region in North Dakota required 90 new wells per month to maintain production of 770,000 barrels per day. Shale oil wells reach peak output almost immediately but quickly decline, so multiple new wells constantly need to be drilled. Maugeri believes only the U.S. oil industry is capable of such drilling intensity, he wrote.
Investors Real Estate Trust has significant real estate assets in its home market of North Dakota. With energy activity in the Bakken Shale region expected to continue to be robust, the company is planning to develop multifamily residential and commercial real estate in North Dakota.
Development projects currently scheduled for completion in fiscal years 2014 and 2015 in this region include the company’s 146-unit River Ridge apartment project in Bismarck, ND; the 108-unit Landing at Southgate and 233-unit Commons at Southgate apartment projects in Minot, in which the company has a 51% interest; and the 288-unit Renaissance Heights Phase I apartment project in Williston, in which the company has a 70% interest.
Last April, another real estate firm, CBL & Associates Properties acquired the remaining 51% interest in Kirkwood Mall in Bismarck, ND. The aggregate purchase price for Kirkwood Mall is $121.5 million. Mall sales were up double digits in 2012 to over $400 per square foot. Occupancy costs are low at around 9%, providing an opportunity to improve NOI through higher rents on rollover leasing. CBL said it was looking for additional acquisition opportunities, both on and off-market.
Other Potential Shale Oil Plays
Utica-Point Pleasant Shale is a huge shale rock formation that lies below the Marcellus shale. The epicenter of its development is now in Ohio, but the whole formation stretches under eight states, from Tennessee to New York and across the border into Quebec.
According to UMH Properties, a REIT specializing in manufactured home communities, activity surrounding the development of this shale region including Pennsylvania, Ohio, West Virginia and New York is expected to accelerate over the next few years. The firm reported it is already seeing increased demand for residential units in the region as a result of shale-related activity.
Forestar Group Inc. in Austin also said housing markets in the energy regions of the U.S. continue to show solid signs of a sustainable recovery. Forestar's three business segments include real estate, oil and gas and other natural resources. At the end of first quarter 2013, its real estate segment owned directly or through ventures almost 135,000 acres of real estate located in 10 states and 14 markets in the U.S.
The real estate segment has 14 real estate projects representing approximately 25,980 acres currently in the entitlement process, and 72 entitled, developed and under development projects in eight states encompassing almost 23,600 planned residential lots and almost 2,400 commercial acres. It operates principally in Texas, Louisiana, Alabama, Georgia, Nebraska, Kansas, Oklahoma, North Dakota and Texas. These leasehold interests include almost 6,000 net mineral acres in the core of the
"We continue to build a solid pipeline of multifamily development opportunities, with construction at our multifamily ventures in Austin and Denver on target to begin delivering units in 2013, and our sites in Dallas, Nashville and Charlotte should be under construction by year-end," said Jim DeCosmo, president and CEO of Forestar Group, who added the firm plans to acquire additional multifamily sites.
Besides Houston and North Dakota, JLL’s research identified other top energy-driven commercial real estate markets:
The Dallas metropolitan area experienced a significant 1.3% drop in retail vacancy since 2010, and it is also logging record growth in the office, industrial, multifamily and hotel sectors. Several new hotels are under construction in the market and the number is expected to rise as industry growth in 2013 continues and developers seek to add real estate projects that cater to business travellers in its emerging economic sectors.
Located near significant new opportunities for natural gas production, Denver is becoming a center of activity for energy companies, which are leasing space at a rapid pace. According to JLL's analysis of energy leasing transactions, energy tenants in Denver’s central business district paid an average of 9.7% above landlords’ initial asking office space rental rates.
The city’s office and retail sectors are becoming landlord-favorable as a result of the influx of employment opportunities in the energy sector and with affiliated companies. With such rising interest from the energy sector, real estate investment volumes are poised to pick up in 2013 and 2014.
Demand for new energy production components has driven an uptick in manufacturing activity in the Pittsburgh area. This growth has resulted in strong conditions for the industrial real estate sector in particular - but also across other commercial real estate sectors. Leasing demand from natural gas and other energy-related companies is helping to bolster the Pittsburgh office market, where rents are at their highest level in more than a decade. In fact, the Pittsburgh market is outpacing national growth in rents and occupancy, in large part due to the energy sector according to JLL.
The boom in domestic energy production is not having a beneficial impact across all markets. In the “not so hot” category, Harvard’s Maugeri said Alaska, California, Montana, and Louisiana have faced an apparently irreversible decline of their crude production.
In California, however, shale activity could be boosted in the future by the massive shale resource of the huge Monterey shale, whose potential still needs to be properly assessed, according to Maugeri's analysis. The same is true for Montana, which holds the less productive part of the Bakken formation, he said.
Tranzon: Pristine Waterfront Land.