Need An Energy Boost? | Commercial Real Estate Finance

Recently, National Real Estate Investor published a couple great articles about industries that boost commercial real estate fundamentals. The first article looked at how technology is boosting demand and rents in key tech hubs such as San Francisco. A follow-up explored the ways in which another resilient U.S. industry, energy, is helping some real estate markets defy the effects of the financial downturn altogether. When it comes to the few markets where energy companies, and their offices and technology, are located, it seems as if there was never an economic downturn to begin with.

The conditions that brought about the Great Recession couldn?t dampen the nation?s demand for petroleum products. As a result, energy cities? multifamily, office, and other sectors have outperformed their counterparts in non-energy markets. Until we figure out how to make wind, solar, and soybean-based energy cheaper and more efficient than oil products, markets like Houston and Dallas will maintain their strong fundamentals.?

If you?re a CRE professional in a major Texas energy market, you?re benefiting nicely from the area?s proximity to the Gulf of Mexico, oil deposits in West Texas, and a great deal of history and infrastructure backing up the state?s energy dominance.

But how can other regions get a piece of this industry? Energy isn?t like technology, which over the years has slipped out of Silicon Valley to take root in such unlikely areas as North Carolina and Ohio. Energy production is a geographically specific enterprise.

Here?s the thing: energy can be produced in other parts of the country. Here in the Mid-Atlantic and Northeastern U.S, we have the Marcellus Shale Coalition, which was formed in 2008 as a way for a variety of interested parties (i.e., basically the same big energy companies that are down in Texas) to extract natural gas via so-called fracking from the abundant shale formation deep under New York, Pennsylvania, Ohio, etc.

According to its website, MCS

works with exploration and production, midstream, and supply chain partners in the Appalachian Basin and across the country to address issues regarding the production of clean, job-creating, American natural gas from the Marcellus and Utica Shale plays.

We provide in-depth information to policymakers, regulators, media, and other public stakeholders on the positive impacts responsible natural gas production is having on families, businesses, and communities across the region.

While the public hasn?t been entirely amenable to the idea of shooting jets of chemical-laced fluid miles down, nor to the idea of poisoned or flammable drinking water, this project has been going on for a while now: drilling, extraction, and pipeline construction are a reality in the Marcellus Shale region.

For the (largely rural) areas affected by the natural gas industry, this could indeed lead to improved real estate fundamentals (which, in much of rural PA, NY, and OH, are sorely needed). Of course, there?s a possibility of economic growth for larger cities in the region, as well (such as Pittsburgh) which may present opportunities for office, industrial, and even retail and residential growth.

But there may be a problem. Writing on SeekingAlpha, David White argues,

?US natural gas prices appear to be in for another very tough year next year. It is my opinion that the EIA [Energy Information Administration] has likely seriously underestimated US natural gas output for 2013. The extra production that I see coming is likely to hurt the largest natural gas producers, but it may be some of the smallest that are least able to weather the storm.

For one thing, Marcellus Shale?s output seems smaller than it is because of the large number of pipeline projects yet to come online. Add to that the fact that demand for natural gas was curbed by the unusual warmth of last winter and it?s clear that Marcellus is still a fledgling energy producer. Local economies and commercial real estate may see growth, but it will take years.

Source: http://llenrock.com/blog/need-an-energy-boost/

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