Optimizing Economic Growth in Shale Zone Communities
The ability to access oil and natural gas reserves found in the nation’s shale regions has presented new opportunities for economic growth along with a host of infrastructure and real estate challenges.
Bruce Rutherford, International Director, Global Energy Practice Leader, JLL (Q1 2014)

{{RELATEDLINKS}}Vast oil and gas reservoirs found in domestic shale plays have created rapid economic growth in communities from small towns to major cities in North Dakota, Texas, Pennsylvania, Ohio, West Virginia, Montana, and Colorado. These communities face skyrocketing growth — a welcome challenge, especially as the country as a whole continues to grow at a tepid rate.

That said, to reap the benefits of this economic opportunity, real challenges in infrastructure and real estate must be addressed. The good news: there are solutions to community growth pains manifested by “man camps” and lack of roads, and municipalities now have the benefit of looking beyond their own experience and learning from recent experience of other cities and communities.

The Economic Opportunity
The opportunity posed by our new ability to access oil and natural gas reserves through horizontal drilling is enormous. According to industry reports from I.H.S. Global Insight, the domestic energy industry is expected to create more than 3.5 million American jobs by 2035, including 700,000 in the next two years.

Energy companies are likely to invest more than $100 billion in the next few years in Texas alone — home to the Eagle Ford and Permian Basin shales. In 2011, the boom created more than 38,000 jobs in South Texas and poured more than $500 million into local and state coffers, according to a report by the University of Texas at San Antonio, as published in the USA Today article, “Oil! New Texas Boom Spawns Riches, Headaches.

Source: JLL 2013 Energy Outlook report
U.S. Energy Employment Growth in Hub Markets, 2013 vs 2013; Source: JLL 2013 Energy Outlook report
The Challenges and Solutions
Despite a seemingly “win-win” situation for energy companies and local economies, the domestic oil boom has created major infrastructure challenges for these states. The shale’s epicenters are often located in small communities that have undergone population surges from the hundreds to the thousands in a few short years. As a result, there is a significant lack of infrastructure, from buildings that house employees to roads and utilities that support operations.

When it comes to real estate, the demand for both commercial and residential buildings has driven energy companies to improvise with temporary solutions such as “man-camps” (explained below) and trailer offices that are not conducive to long-term productivity. As a result, local municipalities are looking for more optimal real estate solutions to support energy companies’ supply chains by developing infrastructure and working with developers in these communities to build additional housing, retail and office space, and industrial facilities. For example, take Williston, North Dakota — the community at the epicenter of the Bakken Shale. Currently, there are more than 20,000 individuals housed in temporary man camps. While hotels and apartments are under construction, the current rents are $3,000 per month for a two-bedroom apartment, and can only be afforded by the highly paid energy employees, leaving other residents, including fire fighters and police officers, without affordable housing.

For a big picture perspective, JLL estimates that the energy sector’s impact on U.S. apartment demand likely contributed to nearly 25 percent of total unit absorption since 2002, an overall demand of approximately 165,000 units. The housing shortage is also creating demand for the limited number of hotel rooms available near production sites. Therefore, for visiting energy company executives or managers onsite for limited periods of time, the expense of visiting production sites has risen significantly. According to the JLL 2013 Energy Outlook report, U.S. energy markets have contributed disproportionately to the office recovery — representing 22 percent of recently increased office space occupancy in these markets. The lack of supply has resulted in skyrocketing hotel room rates. On a recent stay, for instance, a hotel room near Epping, North Dakota (permanent population: 109), required a three-day minimum stay at $267 per night. Oil and gas companies are turning to real estate service providers to help address the problem, bringing in real estate developers to build the apartments, houses, stores, restaurants, and schools.

These emerging projects are expected to reduce the amount of temporary housing and bring women and children into the communities. According to the JLL 2013 Energy Outlook report, U.S. energy markets have contributed disproportionately to the office recovery — representing 22 percent of recently increased office space occupancy in these markets. For example, an analysis of energy leasing transactions revealed that energy tenants in Denver’s central business district — a large city close to the Bakken Shale — paid an average of 9.7 percent above landlords’ initial office space rental rates.

Energy companies have also driven a revival in the real estate market in the Pittsburgh area. One new office campus hosts the regional headquarters for Shell, CNX Gas, and Exxon. Several million square feet of additional space has been leased since 2009 and is directly attributable to the energy industry, including a significant expansion by support services such as law firms.

Energy companies have also driven a revival in the real estate market in the Pittsburgh area. One new office campus hosts the regional headquarters for Shell, CNX Gas, and Exxon. Reaping Rewards Through Collaboration
There has to be a collaborative effort between energy companies, local municipalities, and real estate developers to optimize economic growth in shale zones. Energy companies are beginning to work with third-party consultants specializing in public/private partnerships to address not only infrastructure challenges, such as roads and utilities, but also broader community issues, such as schools and other services to support employees’ families.

While real estate investors and developers have oftentimes been hesitant in building permanent housing due to uncertainty in the production cycle and a viable exit strategy, energy companies are committing to significant real estate developments by pre-leasing apartments, offices, and industrial space, which takes the leasing risk out of developments and facilitates financing. Developers are also building properties flexible enough to adjust with the economy so investors are given multiple options for potential revenue generation. For example, a new full-service hotel under construction currently in Williston is incorporating a relatively easy way to convert the hotel into apartments if hotel demand dips. Similarly, an industrial warehouse can be built for multitenant use.

With shale zones developing solutions in “real time,” economic development agencies in neighboring states are now becoming proactive in managing expected real estate and infrastructure issues once production expands. Areas exhibiting this proactive approach include those in the Bakken Shale in eastern Montana and other locations west of the current drilling zones. This proactive planning will result in a net-positive situation for stakeholders as municipalities pre-plan real estate and infrastructure needs to facilitate production.