Declining Oil Prices and Real Estate

Oil prices continue to fall – months (a year, anyone?) after most observers thought they had already reached a bottom.  Many consumers are benefiting, and the energy expenses of businesses are declining.  What’s not to like?

Surprisingly, a lot.  In many regions of the country, and particularly across business sectors that thrive on the capital expenditures that the oil and gas business can provide, Big Oil’s decline has had a bigger effect on the economy than perhaps many initially foresaw.  This may concern investors in real estate crowdfunding sites.

Oil prices and real estate

The Obvious Effects

Oil service giants like Schlumberger, Halliburton and Baker Hughes have, collectively, announced 51,000 layoffs since the oil crash began.  In the U.K., BP is cutting 1 in 5 jobs North Sea jobs.  Together with numerous independent oil and gas producers, estimates are that worldwide job losses may now have reached 200,000 people.  And, of course, oil exploration company profits will be down.  In October, analysts at Oppenheimer expected only 2 of the 15 exploration and production companies it covers to post positive earnings per share for 2016.

Oil refineries are reaping the benefits of low prices and relatively stable demand, with strong recent profit data. Refineries are highly mechanized facilities, though, and there doesn’t seem to be much talk of huge employment gains being driven by the refineries’ good fortune.

And Some Less Obvious…

Some less considered effects of the price decline, however, are the number of related service companies that have felt the pinch.  Far from the oil fields of Texas or North Dakota, several companies in Southern California, for example, have felt the pinch in a serious way.  Jacobs Engineering, Tetra Tech, Parsons, and Aecom have all been affected.

Travis Hoium, a contributor to Motley Fool,  noted that “[A] decline in oil prices doesn’t just impact energy companies.  There are companies that supply fracking material, housing for workers, insurance, and other goods consumed by energy companies…  Energy is one of the largest consumers of commodities like steel and aluminum, which are used to produce everything from drilling rigs to pipelines.  Companies like U.S. Steel (“X”, on the NYSE) have seen demand drop like a rock since oil prices started to decline.”

In addition, the benefits of lower gasoline prices seem to be more limited than originally expected.  “While great for gasoline consumers, the reduction in pricing seems to be limited to gasoline for our autos, and hasn’t been reflected in other transportation sensitive sectors like grocery items, which have catapulted in price, said Gary London with the London Group Realty Advisors.

What does this mean for real estate?

Big job losses are never a great thing.  Real estate markets in Texas, Oklahoma, and Louisiana will all likely feel the effect of the decline in oil prices.  Some observers claim that housing price declines in those markets tend to lag job losses by 6-12 months; but the sector’s job losses began a while back, so the real estate downturn there has already started, and is unlikely to turn anytime soon.

The significant drop in capital expenditures from the major exploration companies will have an adverse effect on many regional economies with construction and engineering firms that counted those companies as major customers.  But few places are as dependent on the oil and gas market as is Houston; of the 25 Fortune 500 companies based in Houston, only three are not energy-related.

It’s conceivable that apartment complexes in the Houston area might have benefitted from this downturn there, with reluctant homebuyers instead turning to high-end apartments.  The market seems to suffer from too much supply, though, and some have fretted about Houston’s recent abundance of luxury, upscale apartment complexes.  “I’m very concerned about the overbuilding in apartments,” said Patrick Jankowski, senior vice president of research at the Greater Houston Partnership.

In some regions, however, some analysts argue that home prices and energy costs move in the opposite direction.  These observers believe that, in the Northeast and Midwest especially, home prices tend to rise after oil prices fall.

Despite the troubles in the oil and gas industry, the nation as a whole finished 2015 with strong employment growth figures.  The year ended particularly strong, with December figures showing that employers hired an additional 292,000 people, and upward revisions for October and November.  Employment grew most vigorously in professional and business services, which added 73,000 workers, while the construction industry added an unexpectedly strong 45,000 jobs last month.

Looking ahead, the biggest question nationwide is whether overall growth will remain strong enough to keep employment growth healthy, or whether turmoil in China and elsewhere around the globe will weigh down the U.S. economy.  For now, though, Texas certainly seems less attractive than it was 18 months ago.

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