The Challenges & Opportunities From Falling Energy Prices March 2015 page 1
Agenda Oil Market: Macro Overview Deep Dive: Houston Economy & CRE Markets Beneficiaries: Who Stands To Gain From Cheap Oil? page 2
The Oil Market: Macro Overview page 3
Where We Stand Today Long-Term Oil Prices WTI Spot Price ($ Per Barrel) 140 120 79% Decline 100 58% Decline 80 60 40 20 0 76 78 80 Nominal 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 Real 56% Decline 53% Decline 60% Decline Sources: St. Louis Federal Reserve; EIA; CoStar Portfolio Strategy As of Jan 2015 page 4
Global Oil Demand Slowing Along With GDP 5% Global GDP Growth Oil Demand Growth (Million Barrels Per Day) 5 4% 3% 2% 1% 0% (1%) (2%) 4 3 2 1 0 (1) (2) (3%) 09 10 11 12 13 14 (3) Global Oil Demand Growth Y/Y Global GDP Growth Y/Y Sources: IEA; Oxford Economics; CoStar Portfolio Strategy As of 14Q3 page 5
Europe, Japan, U.S., China All Benefit From Cheap Oil Oil Production/Demand Shortfall By Country 12 10 8 6 4 2 0 (2) (4) (6) (8) (10) Oil Demand Less Oil Production Million Barrels Per Day Europe OECD United States Net Importers China Japan India Sources: IEA; CIA; CoStar Portfolio Strategy Brazil UK Mexico Iran Net Exporters Canada Saudi Arabia Russia As of 14Q2 page 6
Cheap Oil Helping To Restart Growth In Trouble Spots Leading Economic Indices In Euro Area And Japan 113 112 111 110 109 Conference Board Leading Economic Index (Euro Area) Decline in Oil Prices Surpasses 20% 107 106 105 104 103 102 101 Conference Board Leading Economic Index (Japan) Released Feb 8th Sources: The Conference Board, CoStar Portfolio Strategy page 7
What s Not Normal? Current Levels Of U.S. Production 45 Oil Production (Million Barrels Per Day) 40 35 30 25 20 15 10 59% Increase In U.S. Production 5 0 93Q3 96Q3 99Q3 03Q3 06Q3 14Q3 U.S. Saudi Arabia Iraq Russia Canada China Sources: IEA; CoStar Portfolio Strategy As of 14Q3 page 8
Supply Is Sticky 4,000 3,500 3,000 2,500 2,000 1,500 International Oil Rig Counts (SA) Quarterly Global Oil Production (Million Barrels Per Day) 100 95 90 85 80 75 70 65 10% Decline 1,000 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Global Production International Rig Count Sources: Baker Hughes, IEA, CoStar Portfolio Strategy As of 14Q3 60 page 9
U.S. Cannot Increase Production At Current Oil Prices Break-Even Oil Production Cost By Location $120 Break-Even Production Cost WTI Oil Price/Barrel Required $100 $80 WTI Spot Price 6 Months Ago = $97 $60 $40 $20 WTI Spot Price Jan. 2015 = $47 $0 Eagle Ford, TX Bakken, ND Canada Oil Sands - Existing Proj. Niobrara, CO Permian, TX Canada Oil Sands - New/Upgraded Proj. Sources: EIA; Scotiabank Equity Research; Scotiabank Economics; CoStar Portfolio Strategy Note: Break-even costs based on price of WTI benchmarked for given project to yield a 9% after-tax return on full-cycle costs. page 10
Most Forecasts Peg Oil Price At $60 By Year End 120 Quarterly WTI Spot Price $ Per Barrel 110 100 90 80 70 60 50 40 10 11 12 13 14 15 16 17 18 19 Moody's Base Case U.S. Energy Information Administration Moody's Low Oil Price Scenario Futures Market Implied Forecast Sources: EIA; IEA; Moody's Analytics; CoStar Portfolio Strategy As of Jan - 2015 page 11
Pink Slips Are Coming Select Energy Firm Layoff Announcements In 2015 Company Operations Layoffs Announced Location Schlumberger Oilfield Services 9,000 Global Baker Hughes Oilfield Services 7,000 Global Halliburton Oilfield Services 1,000 Global Suncor E&P (Canada) 1,000 Global ConocoPhillips E&P 230 Global BP E&P 300 Global Apache Corp. E&P 250 U.S. Enbridge Energy Partners Pipelines 100 U.S. Hercules Offshore Drilling Services 324 U.S. U.S. Steel Manufacturing 756 U.S. Sources: Houston Business Journal; Company websites; CoStar Portfolio Strategy As of January, 2015 page 12
Houston Oklahoma City New Orleans Pittsburgh Dallas FW Denver San Antonio Salt Lake City Austin Phoenix Saint Louis Richmond Los Angeles Houston & OKC Are Most Exposed To Energy Energy Employment Location Quotients Over 1 Have Above-Average Exposure 7 Energy Employment Location Quotient* 6 5 4 3 2 1 0 South East West Midwest *Share Of Natural Resources & Mining Employment Relative To U.S. Average Sources: Moody's Analytics; BLS; CoStar Portfolio Strategy As of 14Q3 page 13
Denver Is More Diversified Denver Submarket RBA Occupied By Energy Tenants 2.5 Million SF % Submarket SF 10% 2 8% 1.5 6% 1 4% 0.5 2% 0 CBD LoDo Greenwood Village North Denver West Denver Meridian Highlands Ranch 0% Total Energy RBA % Submarket Energy Source: CoStar Portfolio Strategy As of 14Q3 page 14
Houston Economy page 15
How Bad Could It Get In Houston? Prior Periods Of Major Declines In Oil Rigs/Oil Prices World U.S. Houston page 16
How Bad Could It Get In Houston? Prior Periods Of Major Declines In Oil Rigs/Oil Prices Saudi Arabia Aggressively Ramped Up Production In the Face of An Already Glutted Oil Market Worst Global Recession Since 1930s: Bottom Dropped Out From Under Oil Demand World U.S. Houston page 17
How Bad Could It Get In Houston? Prior Periods Of Major Declines In Oil Rigs/Oil Prices U.S. Recession But Global Economy Remains In Slow Growth Russian & Asian Financial Crises Slows Oil Demand But U.S. Economy Continues Growing Minor U.S. Recession But Global Economy Remains In Slow Growth World U.S. Houston page 18
How Bad Could It Get In Houston? Prior Periods Of Major Declines In Oil Rigs/Oil Prices World U.S. Houston page 19
Houston: Cross-Property Type Comparisons page 20
More Supply Risk This Go-Around Houston Construction Underway During Market Stress 7% % of Inventory Under Construction 6% 5% 4% 3% 2% 1% 0% Office Apartment Logistics Retail Tech Wreck 01Q2 Great Recession 08Q3 Oil Bust 14Q4 Source: CoStar Portfolio Strategy As of 14Q4 page 21
Energy-Driven Submarkets Seeing Heavy Construction Available Square Feet Under Construction & Percent Of Inventory 2 Available Under Construction (Millions) Percent Of Inventory 8.0% 1.8 1.6 1.4 1.2 7.0% 6.0% 5.0% 1 4.0% 0.8 0.6 0.4 0.2 3.0% 2.0% 1.0% 0 0.0% Available U/C % of Inventory Source: CoStar Portfolio Strategy As of 14Q4 page 22
Larger Vacancy Increases Mean Greater Rent Declines Houston Office & Apartment Trends During Market Stress Office Trends Apartment Trends 15% 15.3% 15% 10% 10% 10.4% 5% 4.5% 5% 3.8% 0% (4.6%) 0% (5%) Vacancy Increase Ending Vacancy (5%) Rent Change Vacancy Increase Ending Vacancy (3.6%) Rent Change Tech Wreck 01Q2 to 02Q4 Oil Bust 14Q4 to 16Q4 Source: CoStar Portfolio Strategy Great Recession 08Q3 to 10Q1 As of 14Q4 page 23
San Francisco Tampa Boston Portland New York Washington, D.C. San Diego Chicago Denver Los Angeles Atlanta Seattle Dallas - FW Houston Austin Slowing Sales In Texas Metros Office Sales Volume In 2013 Vs. 2014 In Top Metros 30 Sales Volume (Billions) Percent Change Y/Y 180% 25 20 Texas Markets 150% 120% 90% 15 60% 10 5 30% 0% (30%) 0 (60%) 2014 2013 Percent Change Y/Y Source: CoStar Portfolio Strategy As of 14Q4 page 24
Beneficiaries page 25
Retail Sales Growth Dips On Lower Oil Prices Retail Sales And Retail Sales, Ex Gas 9% Y/Y Change 8% 7% 6% 5% 2000-07 Average 4% 3% 2% 1% 0% Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Retail Sales, Ex Auto Retail Sales, Ex Auto and Ex Gas Sources: U.S. Census Bureau; CoStar Portfolio Strategy As of Dec-14 page 26
Potential Consumer Savings - And Retail Sales Lift Estimated Savings From Sustained Depression In Oil Prices $250 Expected Savings on Gasoline (Billions $)* Potential Boost to Retail Sales 7% $200 6.3% 5.7% 5.0% 6% 5% $150 4.3% 3.8% 4% $100 $50 3.2% 2.4% 1.9% 1.3% 3% 2% 1% $0 $2.00 $2.50 $3.00 2012 2013 2014 Gas Price ($ Per Gallon) 0% Sources: U.S. EIA; CoStar Group * Based on Sustained Gas Price and Historical Consumption Patterns As Of 14Q4 page 27
Extreme Climates Benefit Most From Cheap Energy Metro GMP Sensitivity To Oil Prices 0.50 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 Metro GMP Sensitivity To Oil Prices (Regression Coefficient) Greater Benefit From Low Oil Prices Less Benefit From Low Oil Prices Hot Climate Cold Climate Average/Temperate Climate Source: CoStar Portfolio Strategy Hot climate equates to average annual high tempuratures over 72 degrees. Cold climate equates to average annual low tempuratures below 42 degreres. All other metros classified as average/temperate climate. As of 14Q4 page 28
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