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Office Energy Markets Softening

Wells Fargo Economics Group Special Commentary

3 March 2016

The protracted drop in oil prices has raised concerns about commercial real estate (CRE) fundamentals in energy-intensive areas of the country. Largely reflecting a glut in oil supply and slower global demand, Brent crude, which is the international oil benchmark, tumbled to its lowest level in more than a decade in January. CRE fundamentals in markets where energy-related jobs account for a large share of overall employment are beginning to show signs of strain. Although smaller markets show the largest share of energy-related employment in the nation, the total stock of CRE in areas such as Midland and Odessa, Texas, is relatively low. However, larger markets like Oklahoma City, Tulsa and Houston bear watching.

Houston Do We Have CRE Problem?

Between 2012 and 2014, employment conditions in the Houston-Sugarland-Baytown metropolitan area advanced at a healthy clip, with the service sector seeing the largest job gains. On average, the metropolitan area created about 100,000 new jobs per year over the period; however, the increase has slowed markedly with the continued decline in energy prices weighing on the region’s economy. In 2015, the Houston MSA added 57,600 jobs, which is the lowest annual gain in seven years. Most of the slowdown is due to Houston’s direct exposure to the energy industry, which is well above that of other large markets at 3.7 percent of total employment.

Oklahoma City, Oklahoma

Labor market conditions in Oklahoma City have proven to be resilient in the face of falling oil prices, finishing the year with 11,800 net new jobs added in 2015, which is consistent with the annual average of 12,800 jobs since 2011. One reason the market has continued to notch annual employment gains is that oil production in the Oklahoma Field continues to increase; however, the pace is slowing.

Tulsa, Oklahoma

Total nonfarm payrolls in Tulsa eked out just 3,300 jobs in 2015, which is a bit of a pullback from the average 8,000 jobs posted between 2012 and 2014. The unemployment rate ended the year at 4.3 percent, which is among the lowest in the country.

The pronounced drop in oil prices is causing angst amongst CRE investors and raising questions about whether operating fundamentals in energy-intensive markets can continue to withstand the hit. We are already beginning to see signs of strain in these markets, especially in the office space. In this paper, we focused on Houston, Oklahoma City and Tulsa, which are among the markets with the largest share of energy-related jobs and CRE stock. Houston, the largest metropolitan area among the three areas, has seen the office vacancy rate slowly drift higher in recent quarters finishing the year at its highest level in more than five years. The pace of asking rent growth is also slowing from its cycle peak, but will likely revert to its long-run mean. In Oklahoma City and Tulsa, the office vacancy rate has increased in each of the past two quarters.

Read the complete commentary here:  energy-related-cre-20160301

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