Oil Hits $35 and Won't Rise Soon, But We'll Survive

Oil dropped to $35/barrel this week, but Houston’s commercial real estate market is not in an all-out Kamikaze death spiral. Although we're looking at a few more hard years, experts are optimistic that the downturn in oil prices won’t last forever and life in the US energy capital will, in fact, continue apace.

It's been a year since the Thanksgiving 2014 policy change by OPEC sent oil prices tumbling 50% in a single day. This week, oil prices are hovering around $36 a barrel. US crude output increased for the 10th straight week,while efficiencies in fracking continue to bolster that supply. Zero Hedge reports there is a two-mile long queue of tankers full of crude heading from Iraq to the US, and China has run out of oil storage space.

“Gas prices are low, and they’re gonna stay low,” Tradition Energy VP of Market Research Derek Savino tells us. He predicts marginally higher prices for oil in Q4 of next year. But if you’re hoping to see $80 per barrel? “Years away,” says Derek. He says that oil might rise to $60 per barrel next year, but that won’t be an average.

With all this oil, and prices staying depressed, why do big oil developments continue getting the green light for their projects, which will only contribute to the glut? Derek explains that oil and gas producers already had development projects in the pipeline when OPEC’s announcement stomped the gas price. Those companies took out debt to drill, and “when you take money from the bank, you gotta spend the money from the bank.” Those sunk costs spur on supply, even as demand wavers.

The massive layoffs in exploration companies have been the talk of the town, and they're just the tip of the iceberg: ApartmentData.com president Bruce McClenny says that for every job loss at the oil well, four other support positions go with it. “There’s a multiplier effect to these job losses,” he says.

Despite the headwinds, low prices haven’t choked investment completely. New business complexes and upscale residence towers seem to go up every week. Transwestern recorded a 6.1% rise in office rents year-over-year. Developments are still breaking ground, especially on the multifamily side. Just this week, Atlanta-based Cortland Partners told the Houston Business Journal it plans to acquire apartment properties and develop its first multifamily project in Houston next year. They won't be alone—Transwestern’s Trendlines report says new multifamily construction activity increased by more than 6,000 units year-over-year in Q3. 96 complexes are being erected this year and 64 are proposed.

This may be a problem, however. Greater Houston Partnership SVP of research Patrick Jankowski tells us that with 28,000 units under construction today, Houston is definitely overbuilding. He says multifamily owners will have to offer concessions like free rent, waiver of security deposits and additional amenities to attract tenants. "The positive side is that anyone who wants to live in the core neighborhoods will find it much more affordable," he says. 

Patrick (pictured) does think long-term Houston players will be smart and make it through the downturn. He tells us “a lot of people in Houston remember the '80s, a decade when oil went from $39.50 to $11.50 over the course of three years. Those investors with long memories didn’t overextend themselves during the recent boom and are doing OK." Newbies to Houston may not fare as well: "Those who developed their investment strategies based on $100 oil being here to stay are the ones hurting right now,” Patrick says.

Derek offers a sliver of optimism for the future of oil. He points out that the US has tightened supply by about half a million barrels per day. Continued winnowing of the supply will help keep prices strong. And once the current crop of big oil and gas projects are completed, the growth of production will slow because banks, gun-shy over the low prices, won’t invest right away. That means future prices will rise and Houston’s economy will stabilize.