When oil prices began falling earlier this year, Ryan Epstein's phone wouldn't stop ringing.
Epstein, executive vice president at Los Angeles–based real estate services firm CBRE, was answering calls for two different groups of apartment owners: those looking to buy distressed properties and those who were worried about their portfolios.
"Everyone was very concerned because it was happening so fast," he says. "They wanted to know what would be the fallout from it and were there going to be mass layoffs—how was it all going to work?"
As oil dropped from $105 a barrel to $40 in about 60 days, the memories of the 1980s bust became very real again. Rick Graf, CEO at Pinnacle, remembers that time too. He was working in Dallas during the 1980s energy crisis as freefalling oil prices devastated the economy. Many of that era's apartments went back to their lending institutions.
Although the 1980s energy bust was devastating, the cities impacted the most have since evolved, with many cultivating other industries to complement the energy sector. Nowhere is that more evident than Houston—the poster child for the American oil business.
While slowing fundamentals haven't crashed in Texas' largest city, and some investors have dropped out of the running for deals there, enough bidders are left to keep cap rates low. Indeed, so far, the main casualty of energy prices in Houston have been starts. And it's tough to find a local apartment owner who thinks that's a bad thing.
Houston Investment
Falling oil prices over the past year have caused layoffs and employment in energy markets to cool down, with Houston one of the most affected markets. Chuck Ehmann, real estate economist for Axiometrics, says the local economy has cooled since the beginning of the year, when annual job gain was reported at more than 100,000 jobs.
Fast forward to May 2015, and annual job gains slowed to just 62,300, while annual growth dropped to 2.1% in May, down from 3.7% in January.
While the medical industry and service technology sectors were always part of the city's economic fabric, those businesses didn't play as large a role in Houston's economy as they did in the 1980s.
Jim Humphries, an associate at Colliers International, agrees that today's economy is drastically different and isn't as susceptible to a collapse based solely on the energy sector. Humphries, who works in Colliers' Houston office, specializes in investment and capital markets in the region.
"We're not so much of a one-trick pony anymore," he says. "We've broadened our employee base."
With growth slowing in Houston, it easy to see how apartment investors could get cold feet. But Epstein says that's not yet an issue.
Instead of seeing transaction volume stall with investors starting to redline the market, he says there has been more cautious money.
"The market may be a little thinner of buyers that want to come into these markets—definitely not half—but there's, maybe, a 20% reduction of capital pursuing Houston," Epstein says.
On his first-quarter earnings call for Houston-based REIT Camden Property Trust this year, CEO Ric Campo said some bidders were dropping out of the market but it wasn't impacting pricing. "Cap rates continue to be very, very sticky and low here in Houston," he said. "[But], there's been really no change in cap rates in Houston. What's happened is, instead of 15 to 20 aggressive bidders, now you have eight to 10 that say you have fewer but still enough liquidity and enough activity on the bid side to keep prices very high."
Some of those aggressive bids may be coming in from other countries. Colliers' Humphries says that despite the apprehension following falling oil prices, foreign investment remains strong, especially in Houston, because U.S. real estate is viewed as a generally safe bet.
"They're really coming from all over," he says. "There's a large amount of Asian capital that wants to be in Houston specifically. … Really what they're looking for are those core, trophy assets."
Fundamentals Slipping?
With rent growth figures totaling above 5% in April, Houston was due for some fall off regardless of oil.
Brian Dinerstein develops primarily in Texas markets. His company, The Dinerstein Cos., is headquartered in Houston and about 20% of his business is focused there. "Houston has had an incredible run," he says. "We've been very, very fortunate since 2009. We've had an incredible, secure run there."
While economic indicators show slowing in Houston and some investors have backed off, the on-the-ground fundamentals haven't been impacted … yet.
On his first-quarter earnings call in May, Campo said that while Houston was no longer in his top five markets for year-over-year revenue growth, it still posted a solid 3.9% mark from the first quarter of 2014 to the first quarter of 2015.
And, Campo felt like that growth would be achievable throughout the year. "We've not changed our forecast for the full year in terms of revenue growth for Houston," he said on the call. "We're still in the mid-3s. We still think that's achievable, and the one thing that could make that slide is if the zero [job growth] turns out to be the case and not something closer to the 50,000 to 60,000 jobs that we'd forecast last quarter. Then, obviously, that [would] come into play in the third and fourth quarters this year."
Looking forward, Graf believes concessions will begin appearing again in some areas, he says.
Additionally, while Houston has enjoyed accelerated rent growth over the last year, they'll begin to temper off too. "Instead of seeing 6% to 8% rent growth in that market, we will probably see 3% to 3.5%," Graf says.
And while there is apprehension, Graf says demand hasn't been affected.
"We haven't seen a slowdown in people walking through the door to lease apartments," he says. "We haven't had an increase in delinquencies. Will that change? Yeah, it certainly could change."
Cristina Sullivan, EVP of operations at Gables Residential, says that any issues with Houston and Texas in general in her portfolio haven't been a result of oil. "The Texas problem is because of pockets of supply and trying to work through those," she says. "We're not seeing job losses and occupancy issues due to energy prices."Sullivan isn't alone. Dinerstein has also been concerned about the aggressive development and began evaluating the entire market.
Silver Lining
From a supply perspective, there's a silver lining for the apartment industry in Texas: The cooling of the red-hot economy has forced developers there to tap the brakes on a number of construction projects, Graf says.
"There's a lot of concern in terms of new projects that are being built," he says. "A number of projects that were planned are on hold. I've heard everything from five to six up to 30. But that's a good thing overall because the amount of new stock coming into that market without an energy slowdown was kind of aggressive."
Epstein welcomes the pause because he says there were too many units flooding the market.
"We are going to have a chance to catch our breath and absorb, I was very worried," he says.
All of those new units coming online meant Houston's labor force was near capacity. "That's the cost that is most difficult to manage and control," Dinerstein says. "Hopefully that will soften up and labor will become more stable."
As the gas and oil markets began to really take off, labor was becoming harder and harder to secure sector because many construction workers have skills applicable to the rigs. That made it less likely to keep a project on track. Now with oil and gas slowing, labor might return.
"We were losing folks to oil field services and trucking," says Dinerstein. "We've started to see the beginning of at least a more normalized market."
