It’s safe to say the US energy industry has undergone a dramatic transformation in recent years, thanks to new technologies that have allowed for extraordinary levels of domestic oil and gas production. As energy exploration and production activity in the country has soared, exploration markets such as North Dakota’s Bakken Shale and Texas’ Permian Basin and Eagle Ford Shale have experienced some of the lowest unemployment rates, strongest GDP growth, fastest population growth and highest income levels in the country.
But with growth comes growing pains for these markets, such as truck traffic and congestion, social resistance and inadequate government staffing, according to a May report from commercial real estate services firm CBRE. Arguably the biggest challenge, however, is a labor shortage. And that has a strong tie to housing.
Despite offering high-paying jobs, the oil fields in North Dakota and Texas – which previously had been sparsely-populated farmland – aren’t attracting workers in droves partly because of the lack of existing housing stock. In fact, the shortage is so great that North Dakota State University has projected a need for an additional 45,000 housing units in the state over the next 20 years, with total housing demand not expected to peak until around 2020.
Yet it’s not just the supply of housing that’s a problem; it’s also the cost. Multifamily rents in US exploration markets are among the costliest in the country. For example, the average one-bedroom monthly rent in Williston, North Dakota, in the heart of the Bakken market, is $2,000, compared with a national average of $998, according to research from Axiometrics and THK Associates. And let’s keep in mind that it’s not just the oil field workers who require housing, but all of the other types of workers – government, medical, retail or otherwise – that are needed to support this influx of new residents.
Private equity real estate firms may be able to offer a remedy to the situation. Some such firms already think so, as testified by early movers such as Related Companies and KKR which are raising and investing capital to buy and build multifamily real estate in US exploration markets. Related has taken things one step further. As PERE reported last week, the firm has launched one of the first energy-focused real estate funds, with the intention of developing or acquiring up to 6,000 apartments in North Dakota and Texas.
Such investment from the private equity sector should go some way to addressing the energy-related housing crisis, as new supply will help to reduce both the shortage of residential stock and the upward pressure on rents and for-sale housing prices. Without private equity capital, after all, financing for real estate acquisitions and developments typically would be limited to local banks, since most other lending institutions are not yet comfortable with underwriting property deals in these markets.
The US energy boom presents an interesting supply-demand dynamic: while the energy industry has helped to drive real estate demand, new real estate supply will help to drive the energy industry’s continued growth. With its large-scale development plans, private equity real estate is poised to have a role, and stake, in the future of the energy sector that is not to be overlooked.