Oil, Oil, Everywhere

by Patrick Flanagan

Commercial real estate markets in economies driven by energy exploration weathered the recession and are on the upswing.

Energy, in its many forms, is critical in modern society. In South Louisiana, we have known for decades that the energy industry is a powerful economic driver. We avoided a lot of the economic turbulence felt in other areas in 2009 and 2010 because of the energy industry. I believe that most areas in the rest of the country have dismissed the importance of the energy industry and the impact it has on local and regional economies. In spite of the popularity of "alternative" energy sources, oil and gas are still the lifeblood of the American economy, and I believe that the rest of the country is beginning to recognize what we have known for years: Exploration and production of oil and gas is a formidable economic driver.

Commercial real estate market health is a significant barometer of overall economic health, so let's look at general statistics for the past few years. Consistent with widespread sluggish economic news, commercial real estate transaction volume is also down nationally. According to Reis Inc., a New York-based national commercial real estate analytics firm that has tracked industry performance for more than 30 years, second quarter 2012 commercial transaction volume totaled about $22 billion (transactions greater than $2 million). This was below analysts' expectations and 3.5 percent down from second quarter 2011 results.

What is most significant is the disparity between current volume and 2007 volume. U.S. commercial trading volume is 68.6 percent down from a peak trading volume in the second quarter of 2007 of $72 billion. While the downturn is pretty staggering, there is some good news. In the first six months of 2012, we have exceeded total volume traded in 2009 (about $43 billion), and pricing has stabilized. Cap rates for income producing properties began trending downward in 2010 and seem to be stabilizing at aggressively low rates. This means prices have strengthened as investors accept more conservative returns in exchange for quality properties with predictable income streams. Additionally, all property types are seeing rents stabilize or increase. This data indicates that commercial real estate in America is recovering at a conservative pace.

In contrast to national trends in commercial real estate, areas dependent on the energy sector are recovering faster. Let's consider markets where energy is considered to be the primary, or a strong, economic driver. Reis Inc. conducted a study of seven "primary" metropolitan areas in Texas and Oklahoma and found some interesting trends. The focus was on apartment (workforce housing) and office (workspace) properties. Apartment inventories grew at twice the pace of non-energy markets, and rent growth slightly outpaced non-energy markets. Office inventories grew slightly more in energy markets, but rent growth almost doubled (5 percent vs. 2.6 percent) compared to non-energy metros. Because the commerce driving the growth is directly attributed to energy companies, it is safe to acknowledge that the energy industry has a significant impact on local economies and their real estate markets. The omissions of the study are even more staggering. Small markets like Lafayette and Bismarck, ND, were not studied, but present an even more compelling case. The markets serving the Bakken oil fields in North Dakota report very little vacancy across office, industrial and apartment properties. Markets in Ohio and Pennsylvania that have relied heavily on the automotive industry and suffered from union labor disadvantages are seeing a resurgence due to domestic energy exploration.

It is no surprise that Acadiana has fared well and the evidence is abundant. Halliburton's 195,000-square-foot, $65 million manufacturing facility on Pont des Mouton recently opened creating 150 direct jobs. Forum Energy Technologies is constructing a $19 million manufacturing facility adjacent to SMEDA Park in St. Martin Parish that will be 150,000 square feet and create 125 new direct jobs. Cetco has 29,000 square feet under construction in Iberia Parish, and its workforce has more than doubled in the past two years.

Weatherford has purchased 60 acres in Broussard behind one of its current facilities. Baker Hughes is expanding its Broussard campus again. The list goes on.

In addition to commercial real estate growth, many companies are hiring. Note the diversity of companies currently looking for qualified employees: Apache, Stone Energy, IberiaBank, Schumacher, UL Lafayette, MidSouth Bank, Lourdes, LHC Group. Our local economy is much more diverse today than it was during the crash of the '80s but remains heavily dependant on the energy industry.

The findings of the Reis study simply revealed what Lafayette has known for decades. Now the International Energy Agency is predicting that it could take less than five years for the U.S. to overtake Saudi Arabia and Russia as the world's top oil producer. IEA's annual long-term report, released in mid-November, suggests the U.S. will be a net exporter of energy by 2030 and nearly self-sufficient in energy by 2035.

If this is true, we may have a significant period of sustained growth. It is imperative that we not take this industry for granted or underestimate its impact on the economy. It is also critical that we fight interference and over regulation from Washington. Now more than ever, our country needs to support a domestic industry that hires local people and supports local economies.

Monty Warren is vice president and partner of Beau Box Commercial Real Estate, which has offices in Baton Rouge, Lafayette and New Orleans. Warren, based in the Lafayette office, has two decades of commercial real estate experience.