Drilling for natural gas at the Marcellus Shale in Pennsylvania is spiking demand for new apartment communities as employment soars in the booming area.
Ty Wright/Bloomberg via Getty Images Drilling for natural gas at the Marcellus Shale in Pennsylvania is spiking demand for new apartment communities as employment soars in the booming area.

If you lived anywhere in or around Pennsylvania in the past several years, it’s impossible not to have noticed the Marcellus Shale phenomenon.

The shale formation, which sits below northern Pennsylvania and stretches to West Virginia and parts of Ohio, is rich in natural gas, one of only seven major shale plays across the nation. And as more energy companies flock to tap the resource with gusto, these regions are undergoing a profound change.

Employment numbers have been driven up so high in some shale-rich areas that it’s regarded as a modern-day gold rush, pushing apartment demand to new heights in the process.

“If you’re a Pennsylvanian, you’ve heard, in some form or fashion, about ‘shallionaires,’?” says Steve ­Behrle, senior vice president of acquisitions with Newtown Square, Pa.–based GMH Capital Partners. “Given [that] we’re in the multifamily business, we assumed there’d be an opportunity to build in these communities that were experiencing rapid growth of employment.”

As the natural gas industry transforms regions across the shale formation, small towns are rapidly bulking up with related infrastructure, service, and retail industries, a multiplier effect of demand.

“We’re not just developing because of the drilling, or shale, but because of the business being created,” says Gary Holloway Jr., GMH’s president.

The birth of boomtowns also offers developers like GMH a chance to expand their geographic footprint. But the phenomenon isn’t confined to Pennsylvania: The energy gold rush under way along the Bakken Shale in North Dakota and the Eagle Ford Formation in Texas also provides tantalizing opportunities for apartment developers. But succeeding in these markets isn’t a one-size-fits-all proposition.

Southpointe in Cecil Township, Pa. is commanding high rents thanks to the demand spurred by local energy markets.
Courtesy GMH Capital Partners Southpointe in Cecil Township, Pa. is commanding high rents thanks to the demand spurred by local energy markets.

Prospecting and Exploration

GMH Capital Partners is no stranger to niche plays. The firm was once the nation’s largest owner of student housing, with more than 60,000 beds across 29 states. In early 2008, it sold the portfolio for $1.4 billion to Austin, Texas–based American Campus Communities. The company also built a sizable military housing portfolio, which it also sold in 2008, for $350.5 million to U.K.-based Balfour Beatty.

The second coming of GMH features an expansion into the energy sector. The company is back in student housing and is also pursuing high-end substance-abuse rehabilitation centers. And the Marcellus Shale line presented another opportunity right in the company’s backyard. But GMH wasn’t looking to stake its claim in rural communities that lacked infrastructure and a clear exit strategy.

“We decided it’s not going to be in one of these remote [drilling] locations,” Holloway says. “We were looking for different towns that will benefit from energy-related companies coming to the area. It had to be tied to a market that already exists.”

Prairie Vista Apartments in Williston, N.D. is commanding high rents thanks to the demand spurred by local energy markets.
Courtesy Tribeca Properties Development Prairie Vista Apartments in Williston, N.D. is commanding high rents thanks to the demand spurred by local energy markets.

After an extensive search, GMH found its entrance into the shale game in Southpointe, a 589-acre business park in Cecil Township, Pa. The master planner was looking for a multifamily developer and, after a request-for-proposal (RFP) process, chose GMH to build the residential portion of its mixed-use development.

GMH’s luxury, 376-unit residential community at Southpointe Town Center is currently under construction. The apartments cater to those working at Southpointe’s employment center, a sprawling commercial platform leased by dozens of corporate energy and medical entities. GMH projects rents to be in the $1,300 to $1,700 range.

The benefits of choosing Southpointe were apparent as soon as the company drew up plans for the community. The energy play led GMH into a market with strong demand from a white-collar demographic, helping the developer command higher rents and maintain a sound exit strategy.

It also served as a gateway into Pittsburgh, just a 20-minute drive away. The company’s presence in the nearby area helped bolster its expansion plans into the metro, as it is now working on acquiring communities in a city with higher market demand.

A Localized deep Dive

The boom in Western Pennsylvania, dubbed the energy capital of the East, resembles what’s going on in Williston, N.D. While GMH shied away from drilling sites, smaller developers in North Dakota are tied to the nuts and bolts of the operations, and reaping the rewards.

Williston is the nation’s fastest-growing “micropolitan.” Before the energy rush, the area had only modest infrastructure, but now, a record amount of housing is going up with thousands of units in the pipeline.

“Williston right now is like remodeling your kitchen: It’s pretty stressful,” says Shawn Wenko, assistant director for the Williston Economic Development Department. “You’re doing your dishes in the bathtub, and you’re cooking on a hot plate. It’s not the most ideal situation. But with the development happening, we’re going to have a pretty nice kitchen when it’s all said and done.”

And yet, this is nothing new to the denizens of Williston. The small town has had an oil industry presence since the 1950s and has lived through several boom-and-bust cycles. This latest boom, though, is bigger and seems like it has longer-term implications.

“What’s different this time around is this play is really technology driven,” Wenko says. “Oil and gas grew in 2013, but 10 other industries grew as well, even more than this industry. It shows that we’re starting to build sustainability here and some diversification.”

Energy companies have made large investments in long-term shale production in Williston, showing Wenko and local multifamily firms that the industry has staying power there. “One thing that’s been determined is that the shale play, it’s going to be a 20-year process to take the resource out of the ground,” says Gary Bethel, principal with San Antonio–based Beach Project Management. “They have to establish locations in a lot of these areas from scratch.”

Last year was Williston’s year of restaurants—about 13 new eateries came on line in the small town within the past 18 months. The town also expects several big-name retailers to open stores this year. Another indication the region is settling in for the long haul is a shift to single-family home production as more families settle into the area.

But back in 2010, Clint Wilson, president of locally based Tribeca Properties Development, wasn’t sure single-family housing would stick in the region, at least not right away.

“We intended to do single-family homes. That was part of our pro forma,” Wilson says. “But finding people that are qualified to purchase a home was difficult. So it [left] more demand for multifamily.”

Wilson was approached by an oil company to build apartments in North Dakota three years ago, and he jumped at the opportunity. The oil company eventually pulled out of the deal, but Wilson decided to stay in North Dakota and become an owner as well as a developer, which gave birth to Tribeca Properties. Now, the company is slated to unveil an 81-unit property this year and begin a second phase with 340 units. His group also opened a hotel in the area last year.

Still, Wilson has no designs on geographic expansion: The company will remain small, solely focused on the local market.

“We’re going to stick to the strategy,” Wilson says.

Tapping The Source

Ever since oil was discovered near Houston in 1901, the city has been the poster child for the boom-and-bust energy sector. And now, it also has the Eagle Ford Shale line to help fuel growth.

The Eagle Ford Shale, located about halfway between San Antonio and Brownsville, Texas, is more than 400 miles long. Three years ago, energy companies were shuttling drillers about two hours each way to small-town sites along the line. That’s when San Diego–based DWOLV started seeking opportunities outside of its hometown and zeroed in on the area, buying Class C, value-add properties to rehab.

“Around that time, the first of the shale plays in Texas really began to blossom,” Bethel says. “Now, you’ve got drilling, you’ve got pipelines, you’ve got big tanks that are showing up all over the place. You’ve got people doing all manner of things to establish an infrastructure and a network permanently for this 425-mile stretch of oil field.”

Most energy companies were renting out entire hotels for their staff. So DWOLV teamed up with Logistics International, a remote locations hospitality company, to match workers with apartments leased by their employers, the energy companies. This was a huge step up from the “man camps,” where workers were housed in makeshift tents.

DWOLV was able to increase rents for their units and lease beds out individually to residents. A two-bedroom apartment, which normally went for $700, quickly increased to at least $2,100 monthly, as the furnished bedrooms were leased on a weekly basis.

The best part, Bethel adds, is that, in many cases, the leases are purchased by the energy company itself. That means you don’t have to collect checks from each tenant or pull extensive background and credit ­reports. Instead, the lessee is considered a corporate entity, liable for the lease even after the employee changes, providing one check for multiple beds.

“It’s an entirely different dynamic, not only on your revenue stream, but how we go about prepping and maintaining property and doing property management,” Bethel says.

The model of employer-leased apartments is especially effective in these boomtowns, he adds, where you’re catering to a demographic that doesn’t need all of the bells and whistles of a full apartment. But that’s also where the risk in following the energy pipeline lies.

Perhaps that’s why it hasn’t been Houston-based Wolff Cos.’ strategy to focus on where energy is being capitally expanded—the master developer is, like GMH, focusing on the greater metropolitan market.

“I think [energy] has an obvious big impact, just as technology has on the San Francisco Bay area,” says David Hightower, Wolff’s chief development officer and executive vice president.

Over in the western part of Texas, the oil-rich Midland–Odessa region is also attracting a lot of attention from multifamily players. Kirkland, Wash.–based Weidner Apartment Homes long ago staked its claim there, paying just $10,000 to $15,000 per unit in the mid-1990s. The company also owns property in energy hotbeds such as Alaska (44 properties, with 4,758 units) and Canada (44 properties, with 6,472 units).

Weidner now has 26 properties in its Texas portfolio, 20 of which are in Midland–Odessa. It’s moving to develop new product with higher quality to answer the booming demand, with three new communities built there in the past five years, and one more under way.

And a well-heeled competitor moved into the market not long ago. New York–based Related Cos. recently purchased a 3,000-unit portfolio in the Midland–Odessa region, worth about $300 million, according to New York–based research firm Real Capital Analytics. The firm is reportedly in talks to develop in the Bakken Shale region, too.


It remains to be seen whether areas like Williston are long-term opportunities or classic boomtowns, featuring an overwhelming buildup of demand that ends just as suddenly as it began, leaving a ghost town in its wake.

“Everyone here drinks the Kool-Aid,” Wilson says. “Everyone thinks even if it’s not a boom, it will be a growing, stable environment.

As long as the price of crude oil stays at more than $55 a barrel in the Williston area, the market will still be stable, even without fracking, he adds. But with few barriers to entry, communities along the shale line can be predisposed to overbuilding if developers aren’t cautious.

In the past two years, land prices have doubled, or even more, in some areas of North Dakota. Parcels are going for $8 a square foot now, up from only $3 to $3.50 two years ago.

“Rents are still in the $2,200-a-month range, which is high, but as we continue to bring supply into the market, those are going to come down,” Wenko adds. “We have the highest rents in the nation right now, and it really boils down to supply and demand.”

The need for more housing is acute, and the lack of it is inhibiting Williston’s growth. Large firms, like Related, may soon establish a presence.

“When these large companies come in, if they’re going to do a project, they’re going to do 500 homes, or they’re going to do 1,000 apartment units,” Wenko says. “And that’s good for us, because that helps bring some large capacity on line fairly quickly. And that will help us get caught up with the demand we’re seeing here for housing.”