Energy Firms Boosting Commercial Property Market

The ebb and flow of the commercial real estate market is largely dependent on geographical economic factors that drive the need for such spaces, which can then be …

The ebb and flow of the commercial real estate market is largely dependent on geographical economic factors that drive the need for such spaces, which can then be measured by industry. Cities that support a lot of tech business have been known to perform well in the recent past, but now it looks as if metropolitan areas with energy firms are seeing increased commercial property activity. The seven metros with the strongest activity based on their collocation with energy firms are all located in Oklahoma and Texas, and these areas are seeing significant performance in multifamily and office property transactions in particular. For more on this continue reading the following article from National Real Estate Investor.

Last month, we highlighted the positive effects of a local technology cluster on commercial real estate fundamentals. Data from metros with a large technology base indicated above-average rent growth and occupancy gains over the past several years.

However, technology is not alone in its preeminence among economic sectors. Energy firms are also performing well despite the economic gloom that pervades much of the country. An analysis of energy-centric metros confirms that, much like multifamily and office buildings in tech-oriented metros, property fundamentals are benefitting from the influence of local energy firms.

Seven metros were classified as having a strong energy cluster, all of which are found in Oklahoma and Texas. The group includes Austin, Dallas, Fort Worth, Houston, Oklahoma City, San Antonio and Tulsa. This analysis focuses solely on primary metropolitan areas. As a result, many smaller towns in Texas and North Dakota—think Odessa, Texas, or Bismarck, N.D.—that would fit this description are not included.

Although apartment fundamentals showed vast improvement across the country, metros with an energy tilt have outperformed. In the second quarter of 2012, energy metros exhibited asking and effective rent increases of 1.1 percent and 1.4 percent, respectively. Multifamily rent growth for all other metros was 1.0 percent and 1.3 percent for the period.

On a year-over-year basis, the spread in growth rates was even wider. Rents in energy-oriented metros grew 3.1 percent and 3.9 percent, respectively, versus 2.6 percent and 3.4 percent for all other markets. A longer timeframe reveals a similar distinction. Since the cyclical trough for rents, energy markets have shown asking and effective rent increases of 6.3 percent and 7.8 percent, well above the 5.3 percent and 7.0 percent of all other metros.

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The vacancy rate for multifamily properties in energy metros currently stands at 6.4 percent, 190 basis points higher than the 4.5 percent rate found amongst all other metros. However, vacancy in energy metros has historically been higher than all others. Given this fact, the spread between the vacancy rates of the two groups provides greater insight. This gap has been shrinking quickly since vacancies peaked around late 2009 and early 2010, when it reached its cyclical high of 380 basis points. In fact, the current spread is at its lowest point since mid-2002.

The differences between office fundamentals of energy and non-energy markets are even starker. Take rents, for example. Over the last 12 months, asking and effective rents in energy metros have jumped 2.5 percent and 3.0 percent, respectively. During the same timeframe, rents for all other markets were up 1.4 percent and 1.8 percent. After bottoming in the third quarter of 2010, rents are up a solid 4.2 percent and 5.0 percent, respectively. This compares to just 2.1 percent and 2.6 percent for all non-energy metros.

Changes in the vacancy rate provide further evidence of the strength of energy-focused office markets. Vacancy rates for both energy and non-energy metros peaked around 17.6 percent in the recent downturn. Since then, the vacancy rate for energy-centric markets fell 150 basis points relative to a slight 30 basis drop for all other markets.

The disparity in the data could be due to supply factors rather than demand. Perhaps energy metros experienced less supply build-up rather than a demand boost from a vibrant local energy cluster. For apartments, this could not be further from the truth. Energy markets have experienced much greater inventory growth, both recently and throughout the 2000s.

Since the beginning of 2009, energy market inventories grew by almost twice the rate for all other metros: 4.7 percent compared to a 2.4 percent rise. In the six years leading up to the end of 2008, inventories of energy-focused metros jumped 9.5 percent relative to a 2.7 percent. Additions to supply were rapid, but demand was even stronger, driving robust multifamily fundamentals.

The results are mixed for the office sector. Inventory grew at a slightly greater pace for energy markets since the start of 2009. However, supply growth from 2002 to 2008 was 3.6 percent for energy markets, slightly lower than the 4.2 percent growth seen in all other markets.

Although inventory growth was greater in the years leading up to 2008, the difference does not seem sizeable enough to explain the wide disparity in fundamental performance. Healthy demand remains a viable factor that explains the relative strength of office fundamentals in energy markets.

There are potentially confounding factors in the analysis: Austin, for example, is both a tech- and energy-heavy market, so it can be challenging to disentangle whether it’s energy or tech that’s driving the results.

Still, the general economic lesson is not difficult to glean: some sectors in commercial real estate—like multifamily—may seem to be defying lethargic GDP growth given strong fundamentals. But enabling other sectors to grow much like energy and tech, and therefore boosting overall GDP growth figures, is the only way that a broad based recovery in commercial real estate can be sustained over the long-term.

Victor Calanog is head of research and economics, and Brad Doremus is senior analyst, for New York-based research firm Reis.


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