The new oil boom in North Dakota and Texas is fueling rapid growth in other areas of the economy—attracting new residents, creating jobs, and generating demand for commercial real estate. Brought to you by Auction.com.
The new oil boom in North Dakota and Texas is fueling rapid growth in other areas of the economy—attracting new residents, creating jobs, and generating demand for commercial real estate. From North Dakota’s Bakken-Three Forks Shale to Texas’ Permian Basin and Eagle Ford Shale, economic expansion is evident. And the energy capital of the world, Houston, is basking in the glow, too.
“There’s a clear and obvious correlation between oil rig counts and job growth,” says Matthew Schreck, research analyst with Auction.com.
Auction.com’s research department found that though growth in rig counts has leveled in the past year, rigs and “gigs” are still very highly correlated. The correlation coefficient—which measures the relationship between two variables, the strongest relationship being 1.0—measures .896 for North Dakota and .854 for Texas.
“Even as rig count growth has slowed, job growth is cruising right along,” Schreck notes. “The economies of both states are humming, attracting new residents in droves and bolstering the local housing markets.”
North Dakota’s on the map
Three of the five fastest-growing states in the United States (from an income and population standpoint) are “energy” states, according to a report published last month by CBRE Group. At the top of the list is North Dakota.
What differentiates North Dakota’s oil boom from previous expansions is that it’s being driven by hydraulic fracturing or “fracking,” a method of extracting oil and gas from hard-to-reach deposits of shale rock.
Fracking is ongoing across North Dakota’s Bakken-Three Forks Shale, which is part of the Williston Basin, a huge sedimentary basin that stretches about 300,000 square miles across North Dakota, South Dakota, and Montana, as well as Saskatchewan and parts of Manitoba in Canada.
The Bakken Shale currently has approximately 8,000 operating wells, and is adding about 2,100 per year. Industry experts estimate that there are 140,000 more wells that could be drilled. Each well can produce for upwards of 40 years, according to Tom Rolfstad, executive director of Williston Economic.
Williston and its surrounding communities are at the epicenter of North Dakota’s oil boom. Over the past five years, the civilian labor force in Williams County—of which Williston is the county seat and primary population center— has shot up from under 15,000 to almost 50,000.
“People tend to think this is something that happens quickly and is over, but Williston is an example of a new technology changing the way things are done forever,” Rolfstad explains. “Think of what offshore drilling has done, and continues to do, for Norway, starting only in the 1970s. Now, apply that model to recent innovations in extraction technologies, and you have the North Dakota story. This is an industry, not a boom, and it’s going to last a long time.”
Last year, North Dakota produced 1 million barrels of oil per day, overtaking Alaska and making it the second-largest oil-producing state after Texas. This represents a big shift in oil production: In 2006, the state was the ninth-highest oil-producing U.S. state.
It’s no surprise, then, that North Dakota’s total employment growth is up 5.2 percent as of April, according to the U.S. Bureau of Labor Statistics, far outpacing total U.S. employment growth rate of 1.7 percent year-over-year. Meanwhile, the seasonally adjusted state unemployment rate has dropped to 2.6 percent—far below the overall U.S. unemployment rate of 6.3 percent.
North Dakota’s population growth has accelerated in each of the last six years, hitting 3.1 percent in 2013, Schreck points out. The state’s population shrunk during the late 1990s and early 2000s; as recently as 2008, it was less than 1 percent. In comparison, the U.S. average has been floating around 0.7 to 0.8 percent the past four years.
“For North Dakota, the ramp-up in energy extraction and transportation activity is causing a huge boom in jobs and population growth, though it is stressing the local economies that aren't really big enough to handle the influx,” Schreck notes. “A new campaign is basically begging people to come fill 20,000 jobs, ranging from oil jobs to unrelated jobs that are now needed just because there are so many more people. This has obvious and positive implications for commercial real estate sectors like office, retail, industrial, and apartment.”
In fact, North Dakota has the most expensive apartment rates in the entire nation, even higher than New York City or Los Angeles. A recent analysis by Apartmentguide.com found that a 700-sq.-ft., one-bedroom, one-bath apartment in Williston easily could cost more than $2,000 per month. A three-bedroom, three-bath apartment could cost as much as $4,500 per month.
International real estate company Stropiq is betting big on the future of Williston with a bold vision designed to bridge the region’s resource gap. Williston Crossing, a $500 million mixed-use development project, will contain approximately 1 million sq. ft. of retail, entertainment and hotel space, as well as a mix of office and multifamily options. Projected groundbreaking on the 219-acre site is scheduled for March 2015, with completion scheduled as early as April 2017.
This isn’t Stropiq’s first venture in the area. Since September 2013, Stropiq has invested $20 million in Williston projects, according to Stropiq co-founder Terry Olin, who also happens to be alumni of North Dakota State University.
Lots of oil in Texas
In Texas, meanwhile, drilling activity continues to attract new residents and create jobs across the state. The state’s population growth has averaged 1.7 percent annually over the past three years, less pronounced than North Dakota, but still very strong and more than double the U.S. average. However, total state employment has shot up 3.2 percent from a year ago—more specifically, mining sector employment was up 7.9 percent year-over-year. Unemployment stood at 5.1 percent in April, still below the U.S. rate.Texas contains two big oil regions: the Eagle Ford Shale, which extends 300 miles from the Mexican border south of San Antonio to northeast of Austin, and the Permian Basin, which stretches northwest of the Eagle Ford Shale between West Texas and southeastern New Mexico. The Permian Basin, which is anchored by Midland and Odessa, has several shale plays that will likely produce more than 1.3 million barrels of oil per day by 2017, according to oil industry experts.
Midland-Odessa leads the nation’s metropolitan statistical areas (MSAs) in several categories, according to Axiometrics. Annual effective-rent growth in the metro was 6.3 percent during the first quarter of this year, a slight deceleration from 7.3 percent in the first quarter of 2013, but still healthy. The area’s 97.5 percent occupancy rate is one of the highest in the country, while first-quarter 2014 revenue growth of 5.4 percent also topped the .
Although Houston isn’t part of the recent oil shale plays, the city is home to 3,700 energy-related businesses and houses the headquarters or major operations of 20 of the 25 publicly traded U.S. oil and gas exploration and production companies. More than 40 percent of total U.S. energy-related employment is centered in Houston, according to the Greater Houston Partnership, and that employment has a direct effect on Houston’s office and multifamily markets.
In response, some of the biggest oil companies are expanding their Houston footprints. ExxonMobil is developing a 3 million-sq.-ft. corporate campus in the city. Likewise, Phillips 66 is building a 1.2 million-sq.-ft. headquarters. Shell has leased 620,000 sq. ft. in two new buildings.
“In these regions where oil drilling is occurring, there are definitely gains to be made in commercial real estate,” Auction.com’s Schreck notes. “However, investors should still be mindful of the fact that it’s an energy boom, which creates volatility. And when the boom comes to an end, there could be a sharp backlash that could erode values.”