Exploration and drilling are in full swing these days in the oil fields of the Permian Basin of West Texas and the Eagle Ford Shale of South Texas. With that come the outrageous stories of skyrocketing housing costs, hotel rental rates, and wages offered by restaurants. Limited service hotels, if you can find an available room, are commanding upwards of $200 per night. Apartment rental rates rival those found in multifamily properties in Uptown Dallas. Restaurants are offering signing bonuses and hourly wages twice that of normal stores.
The oil boom has created tremendous opportunities in commercial real estate, led first to address the housing shortage by providing workforce housing in the form of hotels, man camps, and apartments. As the population grows in these towns, demand increases for more restaurants, retailers, and other service providers. On paper, these opportunities provide returns on investment typically not seen in commercial real estate, leaving developers and investors salivating. Despite this phenomenon, capital providers (both debt and equity) have been reluctant to get into the game and for good reason. What happens to these boomtowns when the price of oil drops and the oil companies stop drilling?
Most industry experts believe that activity in the Eagle Ford and the Permian Basin could last fifteen to twenty years or maybe longer. The Eagle Ford Shale is now the largest oil and gas development in the world, and the Cline Shale in the Permian is estimated to contain three times more recoverable oil than the Eagle Ford. Despite this positive outlook, capital providers remain skeptical of the shelf life in these plays. Do these boom towns become ghost towns? Many of these towns impacted by the oil boom are “one stoplight” towns heavily dependent on the oil and gas industry. Underwriting these opportunities has been challenging for capital providers to balance abnormally high returns vs. what happens when and if these markets “normalize.” At some point many of these markets will become saturated with hotels, workforce housing, and apartments, and supply will outpace demand, resulting in lower rental rates and occupancy. How will this affect a lender’s ability to be repaid or an equity investor to hit anticipated returns?
There is obviously risk in any deal, but with these opportunities almost 100% dependent on the volatile oil and gas market, capital providers are taking extra caution. Over the past twelve months, Metropolitan Capital Advisors has been actively involved in arranging debt and equity financing for acquisition and development opportunities in the Eagle Ford and the Permian Basin as well as the Bakken in North Dakota. Over that period of time, more and more debt and equity providers have gained a better understanding of these shale plays and have a willingness to provide capital for deals. With proper underwriting and structuring, MCA has been successful in arranging debt and equity for a variety of acquisitions and ground-up developments in the oil patch.
If you are seeking capital for the acquisition or development of property in the Eagle Ford Shale or West Texas, please contact me (Brandon Miller at email@example.com) to discuss your opportunity and how we may assist you in securing the capital you need.