Colorado Real Estate Journal - May 6, 2015
Northern Colorado’s apartment and industrial markets are tight as can be, but that could change – particularly in Weld County – if oil prices continue to drop or stagnate. Both sectors seem to be holding their own as companies already involved in oil and gas exploration – and companies that service those firms – continue to operate, albeit at a significantly slower pace. “Existing companies seem to be trying to hold their positions and await the recovery of oil prices,” said Steve Kawulok, managing director of Sperry Van Ness/The Group Commercial in Fort Collins. Kawulok said in a few cases it is “fairly eye-opening” that trucks and equipment are sitting in yards during the day, when normally they would be out in the fields. Energy activity throughout the 10th Federal Reserve District, a seven-state region that includes Colorado, fell sharply in the first quarter, according to the Federal Reserve Bank of Kansas City. Most of the large energy exploration and production companies own their real estate, while the companies that service the industry normally lease their properties, typically 5,000- to 20,000-square-foot buildings with yards for outside storage. “That’s really where we had the big push in the last few years in lease-up of industrial space,” said Kawulok. “We have seen that calm way down,” said Kawulok. “In many cases their head offices are telling the local division managers to postpone any changes,” he said, adding a couple of buildto-suit deals also have been put on the back burner. Yet existing properties have not come back to the market. There has been a noticeable decrease in new energy services companies coming into the market, however, according to Kawulok, and that is not likely to change as long as oil prices continue on their current path. Even when they do recover, it will take several months for real estate activity to ramp back up, he said. For the remainder of the year, “I would say it’s going to be quiet in that industry in terms of real estate,” Kawulok said Realtec Commercial Real Estate Services concurred that the slowing energy industry had minimal impact on the commercial real estate market through the first quarter. The vacancy rate for developed industrial properties with more than an acre of land is an exceedingly low 1 percent. “Oil and gas companies may be reducing workforces and idling equipment, but are maintaining their ownership of real estate,” the company said in its quarterly Realtec Report newsletter. “The largest shift seen so far has been that companies are seeking shorter-term leases and focusing more on existing properties to lease rather than exploring purchase and buildto-suit options. As leases begin to expire, renewal decisions by tenants will be very telling,” the company said. The region’s overall industrial vacancy rate at the end of the first quarter was 4.9 percent, with Greeley sitting at 3.2 percent vacancy, according to Xceligent. Xceligent reports an increased number of “yard seekers” in the market with oil and gas companies anticipating the need for space to store equipment. Northern Colorado’s apartment market posted a firstquarter vacancy rate of 2.12 percent, with Greeley’s rate decreasing from 1.8 percent to a miniscule 1.52 percent during the quarter, according to Apartment Insights’ Statistics/ Trends Summary. The region’s average monthly rent for properties with 50 or more units jumped $23 during the quarter to a record $1,131 per unit.
“Although the falling price of oil has reduced the rig count in Colorado by approximately half since November, many of which are located in Weld County, there has been no apparent softness yet in the local apartment market,” the report said. “In fact, Weld County just posted its largest quarterly rent increase of $65, and it had the second-highest annual growth rate.” According to Apartment Insights, although there have been reports of tenants who work in the oil business giving notice to vacate their apartments, so far those units have been successfully re-leased. “It may take time for the full impact of the slowdown in the oil industry to be felt, and softening still could occur in the quarters ahead,” AI said. “I think everybody’s still hopeful that there is latent demand that is not just energy related,” said Kawulok, noting millennials tend to start off as renters. Also, “The construction industry has maintained its vibrancy so far, even in the energy industry’s downsizing … The energy industry is not the only employer,” he said. The Federal Reserve Bank of Kansas City’s recently released first-quarter Energy Survey says oil and gas extraction and pipeline companies in its district expect employment to be down about 12 percent this year, while support firms expect to be down by 19 percent. A third of firms said they were reducing hours, mainly by eliminating overtime, and others cited slight cuts in wages and bonuses for the year, as well as layoffs. The district includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico and the western third of Missouri. “Firms have sharply cut capital expenditures and many are also reducing employment and hours. However, firms’ breakeven oil prices have also fallen considerably the past six months, to an average $62 per barrel, down from $79 per barrel six months ago,” said Chad Wilkerson, vice president, economist and Oklahoma City Branch executive.