Understanding the Shale Play Real Estate Portfolio

Oil price impact and trends present in the modern day shale play property landscape explained from a portfolio expert that travels weekly to Houston, Denver, Calgary or Williston.

Mike Elliott is fully aware that he could be in a different shale city every week, talking to commercial real estate clients looking to buy, sell, build or move. In 2014, Elliott founded Energy Real Estate Solutions, a unique, shale-play focused firm with headquarters in Denver. “We knew from Denver we were only a flight away from every major energy city,” he says. In only one year, Elliott’s team has established four divisions: commercial brokerage, property management, facility management and project (construction) management. “We are really the only company that focuses on the energy sector like this,” he says. In the Bakken, ERES already holds roughly 85 percent share of the industrial market.

To understand what he has learned through his travels from Calgary to Williston to Houston, we spoke with Elliott for perspective on commercial construction and real estate in the Bakken and beyond. Elliott has insight on how oil prices will or have impacted the markets he serves, along with future opportunities, elements of the market that may surprise and how the life cycle of the modern-day shale play has evolved.

Founded On Shale For 25 years, Elliott has worked in the institutional real estate industry, creating lease packages, negotiating property management plans and building commercial offerings. When he started ERES after leading other major institutional real estate brands, he knew what he wanted for his approach and for his team. “People in our

company have a background in real estate and the energy markets. It is hard to find people in both markets,” he says.

Shale-Chart

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Before helping to start ERES, Elliott and his other founding members knew that markets like that of the Bakken or the Eagle Ford were new and for major companies it would be hard to entrench themselves there. In most cases, they didn’t have a back office to manage the area properly. “There are a lot of companies that will fly in once in a while for a specific tenant or client but they don’t have boots on the ground. We have that, we have boots on the ground in the Bakken,” he said. ERES’ physical presence in the Bakken—they have a Williston office—isn’t the only strong point that links the team to energy service clients, banks and investors looking to do business.

ERES has created and now offers investors and potential clients an understanding, or timeline, explaining the lifecycle of a shale play. “Ever since the beginning of this recent surge in the Bakken and other markets, we have always got people who are investors or users that are asking us how one market compares to another,” he says. “We started doing some research to look at what it looked like.”

The team developed a timeline that outlines the stages of a shale play, like that of the Bakken or Eagle Ford. Recently, ERES updated its timeline, explaining to where each major U.S. shale play has arrived at. The timeline consists of six different stages, and, according to the ERES research team, each of the seven major plays in the U.S. are in different time period stages. The Bakken has just surpassed stage 4, and begun to meet the needs of those interested in multifamily housing. The play has already gone through stage one: campers, cars and mancamps; past stage two: mobile homes and hotels; through stage 3: hotels and industrial buildings, and now into stage 4.

“It has been pretty helpful to get people to understand how one shale play compares to another,” Elliott says. The updated timeline shows where the Bakken stands in relation to other plays developed status. For investors in particular, it helps to show them how one play compares to another, especially if they understand a certain play. “If you can show investors opportunities and how they compare to something they are familiar with,” he says, “they get pretty excited.”

How Oil Prices Impact Shale Real Estate Armed with the timeline tool and the data on housing vacancies, commercial lease rate averages and more, Elliott has much to share about the Bakken’s current state in the context of low oil. “What we notice in the Bakken, or any of these shale plays, is that real estate is a lagging indicator to oil and gas prices. A lot of energy companies expect a big decrease in real estate, but the fact of the matter is there haven’t been.”

According to ERES, the lack of price decline stems from simple supply and demand. In the Bakken, vacancy rate for commercial industrial real estate is still below 2 percent. And, because other primary or secondary real estate markets are starting to pick back up, speculative developers once focused on the Bakken are moving back to traditional markets. “That is keeping the leasing rates the highest in the country,” he says. Also, as mergers and acquisitions happen, many think real estate space will be freed up. But, the ERES team says they see a surge in real estate activity when M&A activity heats up because expanded entities need expanded space.

Some elements of the industrial real estate scene have changed because of oil prices and activity slow down. Many energy companies are now outsourcing their energy real estate work. “They don’t want to play in the real estate role,” he says. They no longer want to manage, work to develop or sell existing assets. “It’s not their core business.”

Low oil prices have decreased the demand for land as developers have left for other markets, Elliott says. Leasing terms have also decreased. Up until six months ago, lease terms were typically for 10 years. Now, they are for five years. Land prices for commercial and residential sectors have decreased in the Bakken and the supply of zoned property is now out pacing demand, ERES data shows. Elliott believes it could be a good time for longer-term investors to buy land, but believes there is no current incentive to overpay.

On the residential real estate side, ERES believes that man camps and large scale employee housing demand is diminishing due to a shift to multi-family offerings. There could be a good buying opportunity for investors looking to purchase existing product as overbuilding may occur while vacancy may increase if oil prices continue to keep new well drilling activity stalled.

Through its client meetings and shale play life cycle updates, Elliott says his team is trying to get people to understand that much of the mayhem once linked to the Bakken has passed. He also wants people to know that good or bad, much of the activity in the Bakken and the resulting real estate needs, is tied to oil prices. However, Elliott’s team has confidence in itself. With offices planned or under construction in Calgary and Houston, the life cycle of ERES is in need of update. “We are pretty bullish on the future,” Elliott says. “Our whole entire business is based on the energy market so we wouldn’t be doing this if we weren’t.”

By Luke Geiver | September 18, 2015