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North Dakota Multifamily Housing Is Ground Zero for Energy Price Collapse

January 8, 2016
Once a hotbed of multifamily construction, North Dakota's energy sector has been hit by layoffs as shale drillers scale back in the wake of plunging oil prices.

A report issued by Morningstar Credit Ratings found that about 35% of $340 million in commercial mortgage-backed securities has some exposure to the state. While CMBS loans issued in 2010 and later have generally performed well, originated loans from 2013- and 2014-that financed a housing boom, have run into trouble as the slump in oil prices weighs on demand for commercial real estate in the oil and gas patch hubs.

Williston and nearby Watford City, near the core area of the Bakken formation, appear to be particularly hard hit by the fall in oil prices, according to Morningstar.

For example, the ratings agency noted the Strata Estate Suites loan (secured by a multifamily property in Williston and another in Watford City) reported an updated appraisal in November that is a 65% less than its 2013 at-issuance appraisal. The properties functioned more as hotels than as apartments. At issuance, lease rates were between $4,000 and $5,000 per month for furnished units, corresponding more to hotel rates on a nightly basis.

CMBS trusts holding such loans may attempt to wait it out until the price of oil recovers, bringing demand back to the area, Morningstar analysts speculated.

“However, we are concerned that the value could decrease further as the ongoing slump in oil prices results in additional layoffs, which have reduced demand for housing,” the rating agency said.

Since the discovery of a major oil field near Parshall, North Dakota, in 2006, energy companies invested heavily in the Bakken shale formation. The expansion of oil drilling led to a housing crunch in Williston and Watford City, as the combined population of those communities swelled to an estimated 29,000 as of July 2014 from about 16,000 in 2010, according to the U.S. Census Bureau.

By 2014, Williston had some of the highest multifamily rents in the country, at over $2,300 per month, leased to oilfield-services companies including Halliburton Co. and Nabors Industries Ltd, according to the Wall Street Journal.

The sky-high prices led to a housing construction boom. The city approved nearly 6,000 new housing units in 2013 worth nearly $72 million, more than double the permit activity in 2012, the Williston Wire reported.

Many of the properties that were built to house employees at the Bakken and Three Forks oil fields had to drastically cut rents as the drop in oil prices affected the number of workers needed to run fewer rigs.

Houston-based Halliburton, one of the world's largest oil and gas field service providers, laid off some of its workers in Williston in September 2015. This comes months after the company had said it planned to cut up to 6,400 jobs worldwide in response to falling oil prices. Halliburton has cut its global workforce by about 21% since the beginning of the year, according to an SEC filing in October. With the job losses, cash flow at many multifamily and hotel properties built during the employment boom suffered.

Morningstar said it did not expect a significant improvement in the North Dakota housing market until energy producers redeploy their rigs and begin hiring.

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