Houston Real Estate Market and Oil

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Apparently, enough people are concerned about the price of oil that it has affected Houston’s ranking according to the Urban Land Institute. Realistically, as an investor, you always have to be cautious about what property markets are doing. However, the oil market is only one slice of Houston’s economy. Don’t forget that we still have one of the best medical centers in the world and companies are moving to Houston and Texas in general from all over the country, making our local unemployment rate one of the best in the nation. I started becoming concerned about oil last November. From what I’ve seen in the last year, our clients haven’t slowed down at all. They’re still making money with their flips and rentals. We’re still doing well with our rentals; our tenants are still working and making their monthly payments. 

The end of the world is not coming despite what a lot of talking heads in the media would have you believe. The Federal Reserve wants inflation. They want property prices as well as all other prices to go up. If we start seeing deflation, the Fed will step in to provide QE4 or whatever they’re going to call it next time. Over the long run, assets outpace the dollar. If you’re buying real estate at a discount as an investment, the price changes will not affect you the way it would a typical consumer that buys a house for his family at the top of the market and then watch as that value goes down and now they’re upside down with their mortgage. I’ve touched on this before in a previous post but your end goal is to get in and out of a flip project in 4-5 months. If you’re not comfortable with that time frame then you should steer clear of that risk. Also, consider that if you’re properly using asset allocation, you’re not going to drop your whole nest egg into one project. Real estate has a place in your portfolio but that shouldn’t be the only asset in your basket.

http://www.bizjournals.com/houston/news/2015/10/07...

Great post Tim and thank you for addressing this with facts and references. 

Also two weeks ago the Chronicle ran an extensive article in the Business section regarding the boom we are seeing in the natural gas industry and companies have made large investments and bought commercial property around town and other surrounding areas in regards to that industry as well. 

I never got so excited reading about plastic before!

@Tim LaBorde Thanks Tim. Are other Texas markets like Dallas, San Antonio more immune to oil and gas? 

Also  "If we start seeing deflation", I am not sure if Yellen is really in control and if FED can do anything now. Trillions of dollars in debt and still no sign of inflation. I remember 'economists/experts' warning in 2009-10 about inflation when QE started. How wrong they were. I also remember 'peak oil' theories being very popular until a few years ago. Wonder where those 'experts' have disappeared. Lots of people out there trying to scare us all. 

@Hersh M. The life of any central bank and any currency has a 100% failure rate so far.  No currency or central bank has ever survived in history.  Yes, Yellen may very well be out of control and central banks are making things up as they go along.  Hard assets like commodities and real estate serve as an insurance policy.  There are no right answers.  If you talk to a gold salesmen, you need gold.  If you talk to a real estate agent, you need real estate.  If you talk to a bond broker, you need TIPS.  None of these answers are right or wrong.  We're all making bets that one asset will outperform another and that we can beat cash as an investment.  I think cash beats everything else around 15%-20% of the time.  I don't remember the exact percentage.  I try to manage my real estate holdings and everything else from a portfolio standpoint.

Originally posted by @Hersh M. :

@Tim LaBorde @Gonz Trevino

Texas City would be even more dependent on oil/gas than Houston, right? 

I see some workable deals there. You guys investing over there? 

From my experience, suburbs can suffer a lot and sometimes even more when a major city crashes around them. Suburbs are even more dependent on the industry in the major city. A city like Houston would likely swing back around in due time because of its strong medical, education, labor, import / export shipping ports, technology, etc.

Hopefully someone with experience can chime in on this. :)

I have several hundred units in the Houston MSA and I've seen no impact to our occupancy, ability to lease, or ability to raise rents. So far.  

I have seen a noticeable reduction in competition to purchase large Multifamily properties (over $10 million) but there is still a fair amount of interest in most properties. I have yet to see the big crash that is talked about, but then again, I don't own in the energy corridor.  I'm keeping my eye on it, but not making any panic moves and still seeking to buy in the right neighborhoods.

In my opinion the real estate remain still a good investment/business because has the "SLOW" characteristic that means that do not react directly proportionally with the stock market and no matter is going to happen the people needs a roof...

Anyway, about the Houston market, I was just reading from the Houston Business Journal that the top 10 jobs are based on medical and/or import/export industries, no one was in the oil & gas area.

Another KPI is that Houston have still a shortage of houses respect to the request.

However, if you driving around downtown/uptown you can see a lot of new buildings/condo/town etc... that are ready to open...

In conclusion, I think there are a lot of opportunities in the Clutch city...

@Hersh M. We see plenty of inventory go quickly in Texas City/surrounding areas.  People are still putting money to work in long term rental plays.  Honestly, yes we have industrial facilities around there that could be impacted but Houstonians (and out of towners) have no problem snapping up deals for the right price and managing those projects there.  We just had a deal that became available from Texas city this morning.  I haven't even sent out a marketing email on it yet as I've been tied up all day.  Think about how many people don't have any qualms about dropping $100k on shares of Apple in the "Grand Casino".  Now compare that to taking on the risk of a project where you can manage the rehab and 100 aspects of a piece of real estate where you have almost total control of the outcome based on your knowledge and experience.  Real estate does not scare me.  The Federal Reserve and mutual fund managers collecting their percentages whether you win or lose scares me.

"Three factors drive Houston's economy - the price of oil, the value of the dollar, and the health of the U.S. economy. Two of the three are currently struggling at the plate. 

Crude trades at least half of its June '14 peak. Exploration firms have slashed their budget 50 percent or more. The rig count has fallen nearly 60 percent. Drilling permits are down 40 percent. Layoff notices appear in the media almost daily. One week, analysts forecast crude will slip below $20 in the spring; the next week they predict crude will top $80 by the fall.

What's certain is that the industry is in transition, with more layoffs, bankruptcies, mergers, Ned acquisitions to come. Oil price, a catalyst for growth in recent years, are now a drag on Houston's economy". - Greater Houston Partnership, October 2015.

Houston may be more diversified today than it was 30 years ago, but don't kid yourself. Sure, Leisure and and Hospitality has added 21,900 jobs since December '14, but who do you think they are catering to? Business Services has added 8,800 jobs during the same stretch. Something tells me they are servicing a particular industry - O&E. 

I'm not predicting the end of the world, but I would caution against believing that we are out of the woods just yet.

First time lurker here looking to get into real estate investments

By way of introduction, I'm an energy analyst in Houston working for a research & consulting firm covering the Permian Basin in West Texas.  Several of my colleagues recently went on a research trip to Midland and there is major resurgence as oil markets begin to recover.  Oil companies are investing heavily in West Texas oil fields in 2017 and are showing lots of movement in relocating employees there. Some interesting tidbits from their trip:

Car rental: waited at Avis for 45 minutes. The woman who helped me was exasperated saying Avis can't keep up with the oilfield. People hold onto their cars longer than they're supposed to. It' s actually gotten better since last year when there were 1-2 hour waits. They have ordered three truckloads of rental cars since January to meet demand. 150 rentals on Thursday alone.

Hotels: I waited two and a half hours for my room at La Quinta. The woman at the front desk apologized for the wait, saying that they have consistently been sold out on Mondays, Tuesdays and Wednesdays. They can't hire/keep enough maids to have the rooms ready in time to keep up with the demand. 

I'm interested to see if anybody has any experience in Midland real estate.  Are they seeing a pickup in activity?  Would love to get some thoughts on how to best exploit this.  Thanks!

Greater Houston Partnership shows job growth in Houston for the last 3 years despite all the Oil & Gas jobs being shed from the market. How does that happen? The Houston (and Texas) economy has been diversifying for the last 25 years after the State Government made the decision back in the  90's. It is not an accident, it was very deliberate and it worked. 

We don't just have a big medical center in Houston, we have the World's largest Medical Center in Houston. The port of Houston is one of the fastest growing in our country (and the world) because of the Panama canal expansion. 

And if you caught the headline this week, Exxon Mobil just announced another $20B in expansion along the Gulf coast. Jobs, Jobs, Jobs

Low oil prices are bad for Exploration and Production but good for the other side of the O&G business like refining, petrochemical production, and plastics. The companies that are fully integrated (like EM) are poised to, and are, taking great advantage of these low prices to grow their business and invest in infrastructure throughout the market. Creating jobs...

Our economic expansion has been due to lower taxes that attracted diverse industries and created job growth. And people keep moving here to fill the jobs and there are simply not enough single family homes to meet the demand. We have abundant, cheap land not found in other big cites and metropolitan areas.

And although we are really bad at Mass and Rapid Transit (no passenger trains or subways) we are really good at building roads and highways that keep everyone moving and the area expanding. The opening of the Grand Parkway (the new outer loop) is a game changer that keeps feeding the growth engine. Look at all the commercial and residential growth popping up along the new road. You can see it with your own eyes.

Brookings institute recently showed Houston's economic growth was 2nd in the Nation (only San Jose was greater) and when you combine that with our low cost of living (we rank 6th from the bottom of major cities in the US) you can see why so many people are moving here year after year.

This isn't my opinion, it's well documented and it only takes  a quick google search to learn all this.