Download ““The U.S. will be energy self- sufficient by 2035 on shale. Energy

Energy boom
The impact of the North Dakota energy boom on commercial real estate
July 2014
“
The U.S. will
be energy selfsufficient by
2035 on shale.
“
Bloomberg.com
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DTZ | Financial Services Industry Brief – Fall 2013
www.dtz.com
“
Here, we will focus on
North Dakota, where
oil extraction from
the Bakken Shale
formation has made
the state the nation’s
No. 2 oil producer
“
WRITTEN BY:
Nick Rossini
Executive Vice President
Breakthrough discoveries
Explosive growth
Recent discoveries of vast shale gas and oil reserves
across the nation and improved extraction technologies
such as horizontal drilling and hydraulic fracturing or
“fracking” are giving rise to an energy boom that is
predicted to make the United States energy independent
within the next 25 years.
North Dakota’s economy is “on a tear.” (CNN Money)
Some compare the speed and magnitude of population
growth and economic development in North Dakota to
the California Gold Rush of the mid-1800s. Government
reports have the state leading the nation in population
growth, personal income growth and economic growth.
North Dakota’s tax revenues increased by 59 percent
in 2011-2013, including a 400-percent increase in oil
production tax revenues, according to the North Dakota
Office of Management and Budget.
It would be hard to exaggerate the huge, game-changing
impact of these new and revived energy markets.
Growth resulting from the energy boom is expected
to create more than 3.5 million American jobs by
2035, including 700,000 in the next two years alone,
according to Mark Heschmeyer (CoStar, 7/2013).
Some of the most important shale plays are the Barnett
shale in Texas, the Marcellus shale in New York State,
the Appalachian Basin, and the Bakken Shale in North
Dakota.
DTZ has specific experience in providing commercial real
estate services in energy markets and the oil industry.
But what we’re seeing today is almost unbelievable.
Here, we focus on North Dakota, where oil extraction
from the Bakken Shale formation has made the state
the nation’s No. 2 oil producer (behind Texas). We look
at places like Bismarck, the state capital in central North
Dakota, and top-producing oil boom counties and cities
further to the northwest, including Williston.
The Bakken shale formation, named for the farmer on
whose land it was first discovered, has become one
of the most important sources of oil in the U.S. At
approximately 200,000 square miles, it underlies parts
of North Dakota and Montana as well as Saskatchewan
and Manitoba in Canada. A “layer cake” of nine layers
total, of which five are oil-bearing, the Bakken Shale is
the largest continuous oil accumulation seen by the U.S.
Geological Survey.
Many North Dakota oil fields were exploited decades
ago, mainly by vertical wells before horizontal fracking
technology became available. Today the industry pushes
water and chemicals into low-grade shales to force the
oil up via hydraulic fracturing (“fracking”). Fracking has
raised crude oil production in North Dakota to a record
high of 313.5 million barrels in 2013, approximately 70
million more than the high a year earlier.
The Bakken Shale has transformed once-sleepy small
towns in North Dakota into the tightest real estate
markets in the country. In the capital, Bismarck, east
of the Bakken Shale, you might not find a place to
sleep unless you have booked a hotel room in advance.
The population of boomtown Williston has more than
doubled since the 2010 census, with estimates of
more than 30,000 and 14,000 new jobs produced
between 2010 and 2012 alone. The Bismarck/Mandan
Development Association predicts population in North
Dakota’s oil producing region to grow by 50 percent
over the next 20 years, and Williston to expand from its
former 12,000 residents to an estimated 90,000 within
five to seven years.
According to the U.S. Energy Information Administration
(EIA), North Dakota has seen significant gains in real
gross domestic product (GDP) per capita, coinciding with
development of the Bakken shale play. In 2001, North
Dakota’s GDP per capita was well below the U.S. average,
ranking 38th out of 50 states. It surpassed the U.S. average
in 2008, and, by 2012, its real GDP per capita was $55,250,
more than 29% above the national average.
Employment in the Bakken Shale accounts for North
Dakota’s enviable unemployment rate of 2.7 percent, the
lowest in the nation. By the end of 2013, employment
had risen by 3.1 percent compared to 2012. Mining,
Quarrying and Oil and Gas Extraction reported the
highest average weekly wage of any industry at $1,879.
And construction companies, for example, pay higher
wages to their employees in hopes of winning them back
when construction resumes after the long, cold North
Dakota winter. Fracking, too, is not cost effective in the
winter, and picks up in the spring.
Impact on infrastructure
Impact of the boom on commercial real estate
Tough competition for talent and personnel to work in the
oil fields has caused wage inflation and higher living costs
for North Dakota residents. Soaring real estate prices are a
challenge to people in traditionally moderate-income jobs
who don’t work in the energy industry. Wages of teachers
and municipal workers can’t keep up with soaring rents.
The highest rents in the U.S. aren’t in New York; they’re in
Williston, ND, where the average rent for an apartment was
$2,394 a month in February 2014, according to the Weekly
Standard. Many of the oil workers who have arrived in the
Bismarck and Williston areas have no choice but to live in
“man camps” that range from modular home, RV and trailer
courts with water and sewer hookups, to organized crew
camps, to tent cities that lack even water and electricity.
Rapid growth has produced a boom in commercial real
estate in North Dakota. A property crunch and the stress
on existing inventory have led to hyper-inflated property
values. Many different industries are arriving in the oil
patch to serve the needs of the growing commercial and
consumer populations. “As more and more employers move
in to the Bismarck market, it has become more and more
difficult to find commercial space there,” said Mike Ilse, a
commercial real estate business broker with Aspen Group
in the growing markets of Bismarck, Mandan and central
North Dakota. In December 2013, Fox News reported that
nearly $350 million in building permits were issued in 2013
in Williston, on everything from businesses to apartment
buildings to single-family homes.
The increasing number of wells and oil extraction activity
and the consequent population growth have had a continual
impact on infrastructure, community services and school
enrollment in towns and rurally. Water and sewer systems
are overtaxed. Needs are growing for more railroads, power
lines, highways and roads—with the current insufficient
pipeline capacity, most of the oil is being transported by
truck, congesting the highways. Public safety also suffers,
as it becomes hard for police departments, unable to
compete with the salaries offered in private, oil-industry
business to hire and keep personnel. At the same time, law
enforcement problems, many stemming from drunkenness
and drug crimes, have intensified. “The police department
in Watford City received 41 service calls in 2006; in 2011 it
received 3,938. ... Ninety percent of calls involve someone
under the influence.” (Mike Riggs,” Why Energy Boomtowns
Are a Nightmare for Law Enforcement,” Oct. 18, 2013,
theatlanticcities.com)
In Bismarck, retail space is at a premium, and several
commercial centers will open in the next year, some with
big box stores lined up as tenants. Where retail properties
once stood vacant, shops are snapping up space in mixeduse buildings, with active backfill wherever space can be
found. Aspen Group’s Scott Ritter told the Bismarck Tribune
(February 25, 2014) that it was hard to find locations to
show to clients; he came up with only two locations for one
retailer to choose from. “Whether it’s a retailer of 1,000
square feet or 5,000 square feet, the options are extremely
limited,” he said.
Companies are looking for larger and higher end office
space, and warehouses are also in great demand. In
Bismarck today, much of the commercial real estate
market is new construction. Space is at a premium; rents
are rising almost daily in a landlord’s market. Space has
become a bidding war. Real estate brokers are so busy and
in demand that some are considering setting retainer fees
to discourage non-serious tenants or purchasers—“tire
kickers” attracted by the boom.
North Dakota’s commercial property tax valuations have
more than doubled between 2002 and 2012.
The Bakkan oil boom
2.7%
$1.0B
29%
135%
400%
Lowest unemployment
rate in the U.S. at 2.7%
$1 billion budget surplus
GDP 29% above the
national average
135% increase in tax
revenues 2007-2013
400% increase in oil
production tax revenues
North Dakota Office of Management and Budget
Mike Ilse
Aspen Group
Comparison of commercial property taxable valuations in
core Bakken Shale boom counties in 2002 and 2012
COUNTY/County Seat 20022012
Burleigh County (Bismarck)
$ 39.332 million
$85.7 million
Dunn (Manning)$ 402,000$1.16 million
McKenzie (Watford City)$1.29 million$7.8 million
Mountrail (Stanley)$1.03 million$10.8 million
Ward County (Minot)$ 28.3 million$69.4 million
Williams County (Williston)$7.31 million$34.9 million
ND State Total$309 million$624.6 million
Source: State
North
Dakota Office
of State
Tax Commissioner,
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| Financial
Services
Industry
Brief – Fall Property
2013 Tax Statistical Reports
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A case study
Stepped-up development
While the impact of the oil boom is felt in all commercial real
estate categories, including multifamily, hospitality and retail,
DTZ’s focus recently has been on assisting clients with their
industrial and office needs.
Accelerated construction is transforming cities in North
Dakota. The Bakken Construction News (March/April 2014)
reports that “projects under construction and planned for
Main Street in Watford City in McKenzie County [No. 1 in oil
production in the state] will double the length and completely
reshape the heart of Watford City.” Williston has almost
completed a $70 million recreational facility with funding
from a 1 percent sales tax on petroleum products. Also in the
works, according to American City and Country (December
17, 2013) are multi-million dollar additions to the area hospital
and a state-of-the-art computer and field training facility for
new workers.
Today, supply is the main concern. For example, one client
had a contract with the state of North Dakota and needed
both warehouse and office space. The facilities had to be in
Bismarck, and had to be arranged in a timely way to comply
with the contract.
Working with the Aspen Group, DTZ found the property and
made the deal—a good one, in a rare, newly constructed
property—but it was soon lost to a higher bidder. We were
fortunate to arrange a second deal, but the same thing
happened again. In this extraordinary market environment,
brokers may lose a property within days if they aren’t
standing there with a pen and a checkbook, ready to go. It
wasn’t until DTZ found and made a third deal that the client
was able to move in.
“Before the boom, warehouse rents used to be approximately
$9 per square foot triple net. Today, they can go as high as
$25. Higher end office space is up to $20 sq ft + CAM. Land
prices in a busy area have risen to $13-$18 sq ft,” said Aspen
Group’s Ilse.
“
Before the boom,
warehouse rents used
to be approximately
$9 per square foot
triple net. Today, they
can go as high as $25.
“In the past, very little speculative development took place
in North Dakota, other than in the biggest cities, Fargo and
Bismarck. When someone wanted a facility, they would
build it,” said Paul Lucy, Director of the Economic & Finance
Division for the Dept. of Commerce in North Dakota. “Unlike
before, today we see a lot of developers coming in to build
spec housing projects and commercial developments.” As
soon as developers bring a project to the city’s planning and
zoning department, he said, their phones start ringing with
prospective tenants trying to nail down a space.
“
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There is a time lag between the needs arising fast and the
ability to deliver. It takes at least 9-12 months to develop a
property to completion. Williston issued nearly $350 million
in residential and commercial building permits in 2013.
According to the Bismarck Tribune (February 17, 2014), in
2011, 25 multi-family building permits were issued for a total
of 1,017 units in Williston. The value of those units totaled
$124,090,369. The following year, 24 permits were issued for
1,377 units valued at $177,712,090. Last year the number was
49 permits for 1,501 units valued at $200,525,259. Before
that, in 2010, only 12 permits were issued by the city of
Williston for 246 units.
DTZ | Financial Services Industry Brief – Fall 2013
www.dtz.com
Sustainability and the future
Some members of the economic development community,
along with residents of North Dakota, environmental
protection groups, and concerned citizens nationwide
are sounding the alarm about the impact of oil and gas
exploitation on sustainability and the environment. “The
prairie is being industrialized,” wrote Edwin Dobb in National
Geographic (March 2013). “Can the inestimable values of the
prairie—silence, solitude, serenity—be preserved in the face of
full-throttle, region-wide development, of extracting as much
oil as possible as fast as possible?”
No one can say for sure how long the Bakken oil boom will
last—estimates range wildly, from two years to 100 years.
Just how much oil is in the Bakken is still unknown. The flow
out of a typical Bakken horizontal oil well tends to decline
quickly, producing little more than half as much oil in its
the second year of production as in the first. The energy
companies try to get as much oil as they can, as fast as they
can, and then everyone leaves when the play is exhausted.
“When the industry goes south, and it will go south,” Dan
Kalil, chairman of the Williston region’s Williams County
Board of Commissioners, told National Geographic, “They
just walk away.” Then what happens?
It helps that North Dakota has already experienced two
boom/bust cycles in the oil fields. “Culturally, we have seen
this before. Suddenly, the floor fell out from underneath us,”
said Census director Iverson. “In Williston, after the 1980s
boom, it took the city 30 years to pay off its debts, and it
finished just before the current boom.” North Dakota is
setting aside funds to manage growth. In 2011, the permanent
North Dakota Legacy Fund was established, which receives
30 percent of tax revenues from oil and gas production. The
interest on the fund, which currently tops $1.3 billion, is to
be invested in long-range social programs and sustainable
economic development, and cannot be touched until 2017.
To help manage the influx of new residents, in 2013 the state
changed its tax distribution formula, giving oil and natural
gas production area more money to cope with population
growth. The state government also awarded more than $6
million in grants to schools to help them meet the critical
needs arising from rapid growth. Roads overburdened with
traffic and damaged by huge semis are being repaired,
upgraded, and widened.
Moreover, North Dakota’s economy is so highly diversified
it can manage a decline in energy activity. In the 1980s, the
state’s economy was dependent on agriculture and energy,
but in the early 1990s, “we started trying diligently to
diversify the economy, and we are still working aggressively
to attract entrepreneurial development and become more
innovative,” said Paul Lucy, director of the North Dakota
Economic & Finance Division of the U.S. Department of
Commerce. The diversification effort has been successful.
“Although many people might say that North Dakota would
collapse if oil takes a nose dive, the fact is that some energy
production will continue, and we also have a much broader
economic base today,” Lucy added.
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DTZ | Financial Services Industry Brief – Fall 2013
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Contacts
FOR FURTHER INFORMATION PLEASE CONTACT:
NICK ROSSINI
Executive Vice President
+1 972 763 4111
[email protected]
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continuous success far into the future.
DTZ has 24,200 employees operating
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