Oil And Gas Downturn Effecting Real Estate

Oil and gas downturn
Oil and gas downturn is effecting the Texas office market

Saudi Arabia has taken the Texas fracking industry to the woodshed. Because of their decision to over supply their oil the price of oil is now hovering between $45 and $50 per barrel. Their actions are making it more difficult to acquire financing for drilling and this will have a dramatic impact on the oil industry. Additionally in order for the average fracked Texas well to be profitable the price of oil must be above $50 per barrel.

Two Facts on the Texas oil patch:

  • Ending the month of March 2015 there is more oil available than storage facilities so much production online. Some of the wells are going to be shut down.
  • Every rig that is idle represents 150 employees

Oil patch is imploding in Midland.  Tens of thousands of multifamily units , thousands of single family homes  construction and office buildings are under construction. These projects were build in anticipation of an expanding oil industry in west Texas. The market was booming and now is completely upside down.

When the oil field was ripping all the construction costs increased. People were being hired away from their jobs a truck drivers and making 100,000 in construction. Because of the downturn in the market the price increases in salaries is going to start to swing the opposite direction.

An example of the extraordinarily high salaries. A friend of mine was talking with his dental hygienist and she said that her husband just left his position at Lowes as a manager and was going to welding school. When he graduated from school he would be able to make $10 less than an anesthesiologist.

As the demand for workers is reduced and trained people leave the oil patch I have visions of the mid 1980 oil crash. Once people left the industry for other careers they didn’t return and a new group of employees had to be retrained. An oil producer told be that if the demand comes back there his biggest fear is that there will be nobody to process it because the experienced people will be gone.

Oil And Gas Downturn Effecting Office Space

All of this turmoil has a direct impact upon demand for office space. Recently in Houston a landlord had a 25,000 square foot lease with a drilling company that was signed prior to the collapse of the oil market. When the market dropped the tenant approached the landlord prior to the commencement of the lease and offered the landlord $1,000,000 to tear the lease up. The landlord refused the offer and choose to enforce the lease and complete the construction. There is a definite impact of the oil and gas slide on real estate.

I don’t know if this is a wise decision on behalf of the landlord but obviously he must assume that the office market is going to be soft and it is better to go with a high risk tenant than to take the money.

Based on the recent downturn in the price of oil I think it is safe to say it is having an effect upon the economy of Texas. The demand for office space is also being negatively impacted in markets like Midland and Houston that have a significant oil and gas service industry. Dallas is being impacted too but not to the extent of other areas of Texas.

Hopefully this will not be a long protracted market shift. I recently read that a large oil company  thinks that oil will recover to $70 -$75 a barrel  within the next 12 months. If this is the case all will not be lost. A sense of reality may return to the marketplace and unrealistic salaries will be adjusted. This should reduce the price of drilling and hopefully keep the Texas economy on track, the oil and gas downturn reversing,  and the landlord in my example will be glad he didn’t accept the million dollar offer.

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