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June 02, 2015

How Will Oil Prices Impact Multifamily Housing?

Steve Guggenmos
Article By
Steve Guggenmos, VP Research & Modeling

With summer vacation season upon us and gas prices $1 lower per gallon than a year ago, the benefits of lower oil prices to consumers are apparent. On the flip-side, there is a downside for the economies of some markets – markets where energy-related jobs are an important part of the local economy. Below is a list of markets with high exposure to the oil & gas industry. It is easy to see that smaller markets have high relative exposures.

Metro AreaOil & Gas
Smaller MSAs
Midland, TX 15.7% 0.08
Odessa, TX 12.3% 0.14
Casper, WY 11.0% 0.25
Lafayette, LA 9.8% 0.20
Greeley, CO 8.8% 0.37
Farmington, NM 7.9% 0.21
Houma, LA 6.7% 0.07
Grand Junction, CO 5.6% 0.48
United States 0.6% 1.00

As it relates to multifamily markets, smaller areas are more disposed to risk but have lower exposure. Houston is a larger market appearing to have causes for concern – including oil industry exposure, recent increases in new supply, and its poor performance during the oil price shock of the 1980s. We anticipate a slowdown in the Houston multifamily sector in the event of persistently depressed oil prices, as household demand reacts more quickly than supply. But Houston is different than it was in the past. How different is it? We applied a stress scenario in our market models to get an idea. In 1982, the Houston vacancy rate jumped to 15.4% from 9.5% and stayed in the double-digits for eight years! In our analysis and given Houston’s current position, employment would need to drop by 4% to produce a double-digit vacancy rate in the Houston market – and this also assumes supply continues to flow to the market unaffected by market conditions. This unlikely scenario looks more like the recession of 2008, which Houston weathered pretty well, than it does the 1980s. Further, consistent with our expectations the early evidence suggests employment will not drop nearly as much as the stress we’ve applied and developers are also showing some discipline as they wait to see how the stress plays out.

For more details, see our full paper here.

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