The Shale-fueled Property Boom

Private real estate investors are also taking advantage of the North American oil and gas boom by ramping up their exposure to the regions benefiting from a surge in economic activity.

Demand for property is being fueled by the oil and gas companies themselves, but also by housing needs for the sector’s workers, and by companies from related fields, like transportation, manufacturing and financial services.

According to Jones Lang LaSalle’s North American Energy Outlook for 2014, Houston and Calgary are noted as key global energy markets, where a high concentration of North American oil and gas companies are based.

But the report notes that second-tier or “surge” cities like Denver, Pittsburgh, Pa., Anchorage, Alaska, Williston, N.D., and Midlands, Texas are also benefiting from the huge increase in shale production.

“We expect this oil boom to go on in the United States for decades,” says JLL’s Global Energy Practice leader Bruce Rutherford. “Therefore real estate investment in these surge cities is very well justified.”

Rutherford cites new technology—allowing oil and gas wells to last far beyond their predecessors’ lifespans—as the reason for his confidence in the current boom’s longevity.

All of the major markets with exposure to the energy sector are likely to benefit from the growth in production and investment, but not in the same way or at the same time, he says.

For example, because of Pittsburgh’s legacy as a manufacturing center, there is already a strong supply of industrial and warehouse property, so there is not much demand for new stock.  However, in areas around the Permian Basin in Texas and New Mexico, new industrial and warehouse assets are quickly being snapped up by tenants.

The multifamily and retail property sectors are benefiting from the huge spike in energy-sector wages. The average salary of a worker in the energy sector is, on average, 58.6 percent higher than the U.S. average.

“They are hiring a lot of workers and paying them a lot of money, creating demand for housing and retail,” Rutherford says.

In Houston, despite strong development activity, multifamily residential vacancy has dropped from 12.9 percent in 2010 to 5.5 percent today, while in the Dallas-Fort Worth area, it has fallen from 10.3 percent to 4.6 percent in the same period, according to JLL’s report.

And though the energy boom is already well entrenched, there are some property markets that have yet to take off.

Rutherford says St Louis “could become a surge city in the next 10 years”, if there is increased activity in either the Mississippi Basin below southern Indiana and southern Illinois or the oil sources below Kansas and northern Missouri

He also notes that if government policy in California or New York is changed to allow fracking, a number of markets in those states could experience a spike in pricing and demand for property.

“The energy sector could provide investors and developers with interesting opportunities outside of the typical primary and secondary metros as available jobs drive the population growth into the quickly growing ‘fracking boom towns’ across the country,” the report notes.