Bruce Rutherford
JLL
Houston
The birthplace of the shale revolution-the Barnett shale in North Texas-may well hold the key to enduring economic success for communities experiencing the newfound growth associated with unconventional resource development across the US.
The Dallas-Fort Worth (DFW) area, which lies atop the Barnett shale, has long been a center of activity for the US oil industry. In more recent history, it has become a testament to how the economic benefits of unconventional oil and gas production can be leveraged into diversified economic growth for an entire region.
This conversion is a challenge weighing on rapidly expanding communities that lie atop the Bakken tight oil formation in North Dakota, the Permian basin in West Texas, and other production areas facing the good-problems-to-have of accommodating an influx of production activity and workers.
In fact, even as a reduced rig count indicates the Barnett shale's heyday may be waning, the DFW area remains an active production zone and, more importantly, an economic hub that supports the growth of other energy communities nationwide. This diversification is both replicable and enduring.
Shale, an economic driver
The numbers tell the story. The Barnett shale has had a profound effect on North Texas. In fact, the DFW region is leading the nation in job growth, according to the US Bureau of Labor Statistics.
North Texas added 113,100 jobs in the 12 months through May and is seeing an influx of people and companies. Indicative of the promising growth opportunities in the region, investment firms Kohlberg Kravis Roberts & Co. and Riverstone Holdings LLC announced in July that they would merge oil and gas assets to form Trinity River Energy, a Fort Worth-based company that is poised to become one of the largest operators in the Barnett shale.
Energy industry growth, in turn, is fueling the real estate market in North Texas. Investment in real estate infrastructure continues to help companies attract and retain talent in the DFW area, according to the North America Energy Outlook - 2014 report by JLL.
A look into different areas of the real estate market offers a glimpse into how the region is handling growth and where challenges and opportunities exist. Other areas of unconventional oil and gas development should take note.
Residential real estate
A population explosion typically yields housing shortages. In the case of North Texas, or DFW, developers are struggling to keep up with the rising housing demand generated by job creation in the energy sector. DFW is a mature, developed region and has apartments to offer, but they are filling up quickly. The JLL report notes that DFW's metro areas saw the nation's second highest number of apartment rentals over the last year, with demand outpacing availability.
In the last year, more new apartment units came onto the market in DFW than any other metropolitan area in the US. Furthermore, vacancy rates are just above the national average at 4.6%, a substantial drop from 10.3% just 4 years ago. The Federal Reserve Bank of Dallas forecasts more regional population growth, and nonfarm employment is expected to increase by 2.5% to 3.5% this year. As such, demand for apartments and their associated rents is expected to rise.
Prices are also on the upswing in the lodging market, which is typically one of the first real estate sectors to see a rise from increased economic activity. Several new hotels are under construction and expected to open in the second half of 2014. One newcomer to the market is the recently-opened, 229-room Hilton Dallas Plano Granite Park. Demand for hotel lodging will continue to grow as the region remains a magnet for energy companies and their staff.
Commercial real estate
The Barnett shale is a key economic driver of growth in North Texas, and more directly to the entire DFW area. It contributed $1 billion to local and state government coffers in the area in its heyday. While lower natural gas prices have caused some companies to pull back on Barnett shale exploration, North Texas remains a force in the energy industry because of the critical mass of both energy companies and companies that serve the industry, such as law firms, accounting firms, and investment banks.
The benefits from activity in other Texas oil and gas plays, including the Permian basin and Eagle Ford shale, trickle into the DFW area too, indicating that it is an established energy hub.
Currently, energy tenants occupy 28% of the prime real estate in Fort Worth's central business district, and 9% percent in Dallas. The numbers would be even higher if ancillary service providers were included in the figure, such as technology, investment, and law firms serving the industry.
The persistent weakness of US gas prices in recent years has reduced the number of rigs and active drillsites in the DFW area, however the region remains a prime location for the corporate offices of energy companies, signifying a new phase in regional shale-related economic growth.
That being said, laydown yards-popular for temporarily storage of pipeline, tubing, heavy equipment, and other large goods-are clustered around Fort Worth, especially in the industrial areas west and south of the city. The DFW area also offers excellent transportation logistics for both rail and truck, along with warehouses where frac sand can be cleaned and stored for transport.
Additionally, the long-established retail sector in the DFW metropolitan area benefits from the business of highly paid oil and gas industry workers residing in the area, many of whom are paid up to twice as much as employees in other industries. This is true across the country but even more so in the DFW region because so many energy companies are headquartered there, and that includes their high-earning senior executives.
Lessons learned in Barnett
Even though real estate construction is more measured now that the Barnett shale has passed its production peak, the DFW metropolitan area has achieved enduring economic activity by investing in infrastructure to support energy company operations-both on and off the drillsite. As a result, a number of large energy companies continue to call the region home even as they cast their eyes toward unconventional plays that are rich in more lucrative oil, NGL, and condensate elsewhere. As the Bakken and other unconventional plays across the US grapple with attracting workers, it will serve them well to look to DFW's experience creating an energy hub.
For unconventional plays in rural areas, such as the Bakken and Eagle Ford, investment in residential and commercial real estate development can lure workers away from dorm-style housing complexes and into homes with room for their families-strengthening communities and creating a base to sustain regional economic activity long after production has passed its peak.
For more information on real estate market dynamics in shale zones across the country, download JLL's North America Energy Outlook - 2014. The report offers analysis of current and future real estate development in North American shale markets and nearby cities. It is available at: www.us.jll.com/united-states/en-us/research/4771/North-America-Energy-Outlook-2014-JLL.
The author
Bruce Rutherford ([email protected]) is an international director based in the Houston office of Chicago-headquartered JLL. He is also the global energy practice leader for the firm, working with energy sector companies to create real estate solutions to complex business problems. With 29 years of experience, Rutherford has managed city and regional master plans totaling more than 20 million sq ft of corporate and regional headquarters transactions. He has extensive experience across North America and Asia Pacific, and manages many of JLL's international client relationships. Rutherford holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from the Stanford University Graduate School of Business.
