Waiting on Oil Markets:

Houstons Economy Seeks Direction

Robert W. Gilmer, Ph.D.

C.T. Bauer College of Business
November 2016

Could It Really Be Over?

Late 2015 and early 2016 may have been the worst period ever for
American oil, and we have now lost about 80,000 local oil-related
jobs since December 2014
The official employment data continue to show Houstons overall
labor market growing slowly, adding 26,300 jobs in the last 21
months But pending revisions to this data paint a bleaker picture of
job loss and possible mild recession
Unlike many other oil downturns, the U.S. economy continues to
grow strongly, helping Houstons many employers that sell into
national markets. A major expansion of petrochemical plants on the
ship channel also continues to bolster the economy
Optimism has crept into the drilling market, with some conviction
that we put the worst behind us. Oil prices have come off the
bottom, and the rig count has turned up steadily since finding a
bottom in May. Now OPEC adds momentum to oil markets with
proposed cuts?
Could the oil bust be over? U.S. growth? A definitive turn in drilling?
The end of petrochemical construction? Adverse data revisions? How
does it all add up?

For Houston, Its Problems

Have Been All About Oil
WTI $/bbl. Monthly

WTI $/bbl. Daily in 2016

110

60

83

51

55

43

28

34

25
-13 g-13 r-14 ct-14 y-15 c-15 ul-16
n
J
Ja
Ma O
Au
M a De

6
6 6
6
6
6 6
6
6
-1 b-1 r-1 r-1 y-1 l-1 g-1 t-1 t-1
n
Ja Fe Ma Ap Ma Ju Au Sep Oc

Current Slowdown Marked The End Of A Decade

Of Job Growth
6
4.5
3
1.5
0

4.0

0.5
0.
2

-1.5
-3
-4.5
-6
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Note: December to December changes, except 2016 which is year-todate, annualized, and seasonally adjusted. TWC estimates.

Slow But Still Positive: Houston Nets 26,300 Jobs In Last

21 Months
(3-month percent change at annual rates)

Houston

4
2
0
-2

U.S.

-4
-6
-8
Jan-07 Oct

Jul

Apr Jan-10 oct

jul

apr 13-Jan oct

Texas Workforce Commission and Bureau of Labor Statistics

july apr

jan

oct

Official Figures Point To Houston Job

Growth That Is Slow Or Slightly Negative

2012
2013
2014
2015
2016

December to December
Changes
Jobs
Change*
118,600
4.3%
89,800
3.2%
117,800
4.0%
20,700
0.7%
through Sept
5,600
0.2%

Texas Workforce Commission estimates at seasonally adjusted annual rates

Job Losses Are Driven By Energy

(Net Change in Jobs, seas. adj.)

Sector

In 2015
Dec 14 Dec 15

So far in 2016
Dec 15 - Sep 16

New Jobs Percent New Jobs

Percent

Total Payroll
Mining
Construction
Manufacturing
Machinery
Fab Metal

20,700
-17,600
12,100
-23,900
-11,600
-10,600

0.7%
-17.3%
5.6%
-9.6%
-19.6%
-17.5%

5,600
-6,200
-8,800
-6,000
-4,800
-1,800

0.2%
-9.1%
-5.6%
-3.4%
-13.9%
-4.4%

Wholesale Trade
Prof/Buss
Services

-1,200
-6,700

-0.7%
-1.4%

-3,600
-4,600

-2.8%
-1.3%

*2016 TWC estimates at seasonally adjusted annual percentage rates

Growth Of Selected Services

Remains Strong
Percent 3-month change
at annual rates, seas. Adj.
5

4.125

3.25

2.375

1.5
Jan-13 Aug-13 Mar-14 Oct-14 May-15Dec-15 Jul-16

Texas Workforce Commission

New Jobs Added Since Oil

Crisis Begins in Dec 2014

29,100 food service

25,500 health care
18,000 retail trade
10,500 public
education
3,500 entertainment
2,000 finance
1,400 accommodation

Where Did This Service

Sector Growth Come From?
Where did this services growth come from?

Strong national markets: United Airlines, Sysco, AIG, HP

Petrochemical construction boom in East Houston
Past momentum, built on Houstons 680,000 new jobs
from 2004-2014
In-migrations continues strongly for several quarters
after job growth slows
Most direct damage is confined to oil producers, oil
services, and manufacturing so far

BUT we are now 23 months into this slowdown.

The chemical boom is over, momentum has waned,
population growth is evaporating. Only the U.S.
economy left to help out until oil turns up.

Basic Jobs Still In Reverse, Non-Basic Jobs Running Out Of

Momentum
(3-mo percent change at annual rate)

15
7.5
0
-7.5
-15
-22.5
-30

Basic
Non-Basic

About Four Non-basic Jobs In

Houston Supported By Each Base Job
5.2
Too many Non-Basic Jobs?
Base Shrinks and Services
Just Keep Growing

4.9
4.5
4.2

De

cSe 03
pt
Ju 04
nMa 05
r-0
De 6
cSe 06
pt
Ju 07
nMa 08
r-0
De 9
cSe 09
pt
Ju 10
nMa 11
r-1
De 2
cSe 12
pt
Ju 13
nMa 14
r-1
De 5
cSe 15
pt
-1
6

3.8

All That Said And Done The Jobs

Numbers Are Subject To Revision
(Change in Payroll Jobs)
Dallas Fed Sees TWC

estimates 20,000 too high

3010

(000 jobs)

Year

Period

TWC
Dallas
Official
Fed
Number Revised

2015

Dec - Dec 20,700

6,000

2016

Dec - Sep

-800

5,600

2998

2985

2973

Preliminary
Revisions

2960
De

c-1

Ma

Unrevised

5
6
5
6
5
5
6
r-1 un-1 pt-1 ec-1 ar-1 un-1 pt-1
e
e
J
J
M
D
S
S

Dallas Fed

TWC

Notable Sectors Where TWC Job

Estimates Were High Or Low By June
Total Over-Estimate = 19,700
Sectors Over-Estimated

Manufacturing = 10,400
Leisure and Hospitality = 7,100
Wholesale Trade = 6,500
Education and Health = 2,200
Retail = 2,000

Sectors Under-Estimated

Professional and Business Services = 5,300

Transportation = 1,800
Information = 1,800
Construction and Mining = 1,400

Note: TWC estimate minus Dallas Fed preliminary re-benchmark

Plenty Of Other Signs Of A Big

Slowdown Or Mild Reversal
Houston unemployment rate
moves above U.S. to 5.4%
10.0

Quarterly Sales and Use Tax

Collections Down 8% for City &
METRO MTA

190000000
METRO MTA

U.S.

167500000
Millions

8.3
6.5

City of

145000000

Houston

Houston

4.8

122500000

3.0

Q1
08
Q
20 1
09
Q
20 1
10
Q
20 1
11
Q
20 1
12
Q
20 1
13
Q
20 1
14
Q
20 1
15
Q
20 1
16
Q1

07

20

Bureau of Labor Statistics

20

14
20

20

09

100000000

Texas Comptroller, seasonally

adjusted

Purchasing Managers Index

U.S. And Houston Compared (S.A.)
Houston

75.0

63.8

52.5

41.3

Index > 50 means expansion

Index < 50 contraction

U.S

30.0

-03 n-04 n-05 n-06 n-07 n-08 n-09 n-10 n-11 n-12 n-13 n-14 n-15 n-16
n
a Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja
Ja JAssociation
National
of Purchasing Management - Houston

Recession? Ask The Dallas

Fed Business Cycle Index
Tracks local business cycle
with four variables

Now on brink of recession,

if not in It
400.0

400.0

345.0

2000 to 2016

365.0

2013 - 2016
330.0
290.0

295.0
235.0

180.0
Dec-00 Jun-03 Dec-05 Jun-08 Dec-10 Jun-13 Dec-15

260.0
Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16

What Drove The Big Upturn In The

Third Quarter?
(Change in Payroll Jobs)
Dallas Fed Sees TWC

estimates 20,000 too high

3010

(000 jobs)

Year

Period

TWC
Dallas
Official
Fed
Number Revised

2015

Dec - Dec 20,700

6,000

2016

Dec - Sep

-800

5,600

2998

2985

2973

Preliminary
Revisions

2960
De

c-1

Ma

Unrevised

5
6
5
6
5
5
6
r-1 un-1 pt-1 ec-1 ar-1 un-1 pt-1
e
e
J
J
M
D
S
S

Dallas Fed

TWC

Oil Markets and Oil Price

Over The Long-term The Worlds Demand

For Oil Has Grown Steadily
(million bbl./d)

100

Fracking Bust
90

Commodity Boom
80

70

Great Recession
Asian Financial Crisis/
Tech Bust

60
Jan-97 Apr-98 Jul-99 Oct-00 Jan-02 Apr-03 Jul-04 Oct-05 Jan-07 Apr-08 Jul-09 Oct-10 Jan-12 Apr-13 Jul-14 Oct-15 Jan-17

Long-Run Marginal Cost of Global Oil Production

80 $/bbl.
11
10
9

60
5

40

20
1

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

This is chart is stylized and illustrative

Production (million bbl./d)

Price Of WTI Oil As Implied By

Valuation Of The Stock Of 40 Producers
$/bbl.
$70

66
64

$65

62

62

62

60

$60

56

56

Oct '15

Jan '16

$55

$50

Jan '15

Apr '15

Jul '15

Apr '16

Goldman Sachs Research, at first week of each quarter

Jul '16

Oct '16

The Commodity Super-Cycle Is Over

(price index: Jan 2001 = 100)

500

375

250

125

0
-01 ct-02 ul-04 pr-06 n-08 ct-09 ul-11 pr-13 n-15 ct-16
n
J
J
A Fund
A
Ja
Ja
Ja
O
O
O
International
Monetary

Food
Ag Raw Materia
Metals
Crude Oil

Growth In The Demand For Oil Comes

From Emerging Markets
(million b/d)

17.4

18
13.5
9

8.0

Global
OECD
Non-OECD

4.5
0
-4.5

1996-2003
International Energy Agency

2003-2015

Global Growth Runs Below

Long-Run Averages Through 2018
(percent change in GDP)

Developed world grows below

global average
6

Emerging markets have slowed,

but well above world average
14

4.5

10.5

3
7

1.5
0

3.5

-1.5

-3
-3.5

-4.5
-6

1995 1998 2001 2004 2007 2010 2013 2016 2019

us
World

euro

-7

1996 1999 2002 2005 2008 2011 2014 2017 2020

japan

IMF World Economic Outlook, October 2016

Brazil

China

India

World

On Supply Side? U.S. Shale Reversed

40 Years Of Declining Oil Production
(million barrels/day)

11

Peak: Sept 2015

Down 752,000 bbl./d

6
4

68 972 976 980 984 988 992 996 000 004 008 012 016
9
1
-1 n-1 n-1 n-1 n-1 n-1 n-1 n-2 n-2 n-2 n-2 n-2
n
n
Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja
DOE/EIA, Seasonally adjusted by IRF

Global Crude Surplus Was

Never Large, Gap Now
Growth ofClosing?
Demand Holds
While Supply Shrinks
(4-Q Percent Change)

Supply Minus Global Demand

(million b/d)
3

4.0%

2.25

3.0%

1.5

Supply

2.0%
0.75
1.0%
0.0%

International Energy Agency, Oil Market Report, October 2016

Q3

16
20

20

15

-1.0%
Q3

2013Q1 Q3 2014Q1 Q3 2015Q1 Q3 2016Q1 Q3

20

-1.5

Demand

14

-0.75

Q3

As Oil Prices Rose This Spring, Mild

Optimism Returned To The
S&P Oil Oil
Service Market
And
The big three oil service
companies all declared a bottom
was in place for drilling in Q2/
Q3 earnings reports
Oil service and machinery stocks
quickly rose 30% in February and
March as oil prices moved off
$30/bbl., and are up 10% since
then
The rig count has steadily added
back over 150 rigs from the
March low
But ahead: a long, slow grind
ahead, no V-shaped recovery
in sight, and land recovering,
but not yet international and
offshore

Machinery
Stock Price Index
3000

2550

2100

1650

1200
Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16

Now A Lifeline From OPEC?

Agreement perhaps in place to cut 0.5-1.0 million bbl./d of
production from current production estimates. Would cut OPEC
production from 33.8 million daily barrels to perhaps 32.5
Devil is in the details. Who cuts how much? Incendiary
possibilities with Saudis vs. Iran or Saudis vs. Russia and
Libya. Basket cases like Libya, Nigeria, and Venezuela want
opportunity to build their production back up
Technical meetings on implementing cuts in late October did
not go well. Iran moved from willing to freeze to not
willing to consider. Regional politics? Bargaining strategy? Oil
price promptly slipped back to mid-40s.
Higher near-term prices? History says these agreements can
work for a while but only if the Saudis really want it. Best to
think of this as the Saudis stepping in to help Texas and North
Dakota get this oil marketing rebalancing complete. They
wont get much help from the rest of OPEC.

What The Futures Market Thinks

About
WTI
Price
WTI,
PriceOil
$/Barrel
$70

$63

$55

$48

$45

$55
$54
$53
$52
$52
$51
$50
$49

$40

Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Jun-20 Dec-20

Futures
As of November 2, 2016

$60

Definitive Turn In Drilling?

Or Just A Dead Cat Bounce?

Drilling Has Turned Up from Historic Lows

Weekly Count of Working Rigs
2200
1725

2008-200
9

1250
775

488 Rig Count was

2014-2016

previous all-time low

300
1 7 13 19 25 31 37 43 49 55 61 67 73 79 86 92 98 104

Weeks after peak in drilling activity

The Greatest Oil Boom And Bust

Is Now Coming To An End ?

15
20

13

300
20

11

775

20

100

09

1250

20

200

07

1725

20

300

05

2200

Ja
nJa 73
nJa 77
nJa 81
nJa 85
nJa 89
nJa 93
nJa 97
nJa 01
nJa 05
nJa 09
n13

400

20

($2015 billion at annual rates)

20

Drilling capital expenditures

03

Baker Hughes rig count

(working rigs)

Capital expenditures for E&P from Oil and Gas Journal, calculations of IRF

Thinking About Recovery

In the Oil Patch

Recovery In Rig Count After Oil Prices

Definitively Move Up
(working rigs by quarter after oil prices begin to rise, s.a.)

2,200

1,650

2008-09
2001-03

1,100

1982-87
550

1997-98
Quarters after recovery !
0

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47

Baker Hughes, calculations of IRF

Building Scenarios For

Recovery In Oil
When will oil prices hit bottom?
When will the rig count turn up?
When do energy jobs begin to come
back?
How high will the rig count go in this
recovery?
How long before the rig count reaches
these highs?

Drilling Recovery After The

Price Of
Oil Hits A Low
Past Recoveries
Quarters Until:

Forecast

1982-8
2001-0
7
1997-98
3
2008-09 High Medium

Low

Rig Count Begins

Definitive Turn Up

Energy Jobs Make a

Low

11

never

11

10

12

16

High Rig Count

Note: For the high, medium and low forecasts, it is assumed that the rig count
returns to 1650, 1500, and 1300, respectively. Given the complexity of modern
and future rigs, think of this as future activity based on current equivalent

Other Key Assumptions

For Houston Recovery
Rig Count Accelerates?

High Scenario: 2016 Q4

Medium Scenario: 2017 Q1/Q2
Low Scenario 2017 Q3/Q4

Rig Count Max After

Recovery?

High Scenario: 1650

Medium Scenario: 1500
Low Scenario: 1300

Return of Energy Jobs

Follow the rig count

Allow for complexity of
fracking, productivity trends
Never returns to previous
highs in any scenario

Note: Rig count accelerates refers to point where long slow grind ends and norma
pace of recovery in drilling sets in.

Rig Count Scenarios And The Return Of Oil

Employment In Houston
Rig Count
2200

Oil-Related Jobs in
Houston (000)
310

1650

281.25

1100

252.5

550

223.75

0
Jan-12 Jul-13 Jan-15 Jul-16 Jan-18 Jul-19

High
Low

Medium

195
Oct-07 Jan-10 Apr-12 Jul-14 Oct-16 Jan-19

High
Low

Medium

U.S. Economy Continues to Work

for Houston

U.S. Economy Continues To

Grow Strongly And Create Jobs
Assume in all scenarios that the U.S. economy
has put the Great Recession behind it
Consumer has deleveraged; state and local
governments are collecting revenues at a
healthy rate and spending; the housing market
has returned to close to normal
U.S. job growth is at 1.7 percent or about
200,000 jobs per month throughout the forecast
horizon
We see the export sector, especially
manufacturing struggling with the strong dollar,
but domestic growth is robust

Current Split Between Growth

In Production And Jobs
GDP Growth Has Slowed
Sharply in Recent Quarters
% Change at Annual Rates

While U.S. Job Growth

Remains Quite Strong

000 New Jobs Per Quarter

800.0

3.8

675.0

2.5
550.0

1.3
425.0

0
-1.3

Oct-12

Jul-13

Apr-14

Jan-15

Oct-15

Jul-16

300.0

Oct-12

Jul-13

Apr-14

Jan-15

Oct-15

Jul-16

Results Are Consistent With Robust

Domestic Growth And Weak Exports
Productivity Growth Is
Slow % Change in Productivity

Weak Export Sector

12 Quarter Average

% Change Annual Rates

4
3

3.5

2
1

1
0

-1.5
-1
-4

Jan-00 Jul-02 Jan-05 Jul-07 Jan-10 Jul-12 Jan-15

-2

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Smoothed U.S. Recession Probabilities

(percent chance of recession)

Percent

100

US Financial Crisis

75
50
25

2001 Recession

Subprime Blows Up

Currently less than 5%

1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1-0 -04-0 -07-0 -10-0 -01-0 -04-0 -07-0 -10-0 -01-0 -04-0 -07-0 -10-0 -01-0 -04-0 -07-0 -10-0
0
7
8
9
0
2
3
4
5
7
8
9
0
2
3
4
5
199 199 199 200 200 200 200 200 200 200 200 201 201 201 201 201

Source: Chauvet and Piger smoothed recession probabilities, FRED, St. Louis
Fed

Probability of Federal Funds Rate By Date

of Future Meetings: CME Futures Market
Probability of Change (%)
70
Probability of One Rate

52.5
35

Increase By Meeting Date

Probability Current Fed Funds Rate Stays in Effect

17.5
Two Rate increases
0

Dec

Feb

Mar

More than two

May

No Change
75-100 b.p.

Jun

Jul

Sep

50 - 75 b.p.
100 -125 b.p.

Nov

NY Fed Surveys Point to 10-Year Treasury Near

2.0-2.5 percent by End of 2017
(percent of respondents expecting rate)

40

35

30

27
19

20

10

26

29
18

17

15

10

4
0

< 1.0 %

1.0% - 1.5%

1.5% - 2.0%

2.0% - 2.5%

> 2.5%

% of Market Respondent
% of was
Primary
Dealers
Note: Yield on 10-year treasury
1.82% on
November 4, year-to-date
average was 1.74 percent.

Downstream Boom Offsets

Upstream Bust

Low Oil Prices Keep Gulf Coast

Refining Margins Strong
30

($/bbl)

22.5

15

7.5

Pace refining margins, Oil and Gas Journal

margin
Six-mo avg

Natural Gas Shares Oils

Hockey Stick Surge In Production
Marketed production, Tcf/mo, seasonal adj
2.50
2.19
1.88
1.56
1.25
973 -1978 -1983 -1988 -1993 -1998 -2003 -2008 -2013
1
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan
Jan

DOE/EIA

Natural Gas Prices Collapsed

In Late 2011
($/mcf)

14

10.5

3.5

0
9 7 9 9 8 999 0 0 1 0 0 2 0 0 4 0 0 5 0 0 6 0 0 8 0 0 9 0 1 1 0 1 2 0 1 4 - 1 5 -16
9
1 -1 -1 r-2 t-2 -2 l-2
-DOE/EIA
-2 y-2 t-2 r-2 g-2 n-2 Jun Nov
v
c
n
n
b
Ja Ju No Ap Sep Fe Ju De Ma Oc Ma Au Ja

$164 Billion U.S. Construction

Boom Is Based On Cheap Energy
This $164 billion total
includes many industries
and all of the U.S.
New ethylene crackers,
more ethylene-related
expansion in PE, PVC and
other derivative plants
LNG export terminals to
sell surplus natural gas
into global markets
Refiners have joined in
with additional
expansions
Note: The $164 billion figure is based on all U.S. shale-related expansion,
estimated
by the American Chemistry Council in April, 2016

Natural Gas Energy Content Equivalent To $15 -$30 Per Barrel

For Oil
140.00

105.00

70.00

35.00

0.00
Jan-01 Apr-03 Jul-05 Oct-07 Jan-10 Apr-12 Jul-14 Oct-16
DOE/EIA and calculations of the author

oil $/b
nat gas $

Ethylene Margins
(cents per pound)

60.00

45.00

30.00

15.00

0.00

-15.00
'97

'00

03

06

09

'12

'15

Large Projects Headline Over $50

Billion In East Houston Construction
Company

Location

Project

Completion

Value ($ mil)

Exxon

Baytown

Ethylene

2017

$5,000

Chevron

Freeport

Ethylene

2017

$4,000

Dow

Baytown

Ethylene

2017

$3,500

BASF

Freeport

Ethylene

2017

$3,000

Freeport
LNG

Freeport

LNG Export

2019

$3,000

Freeport
LNG

Freeport

LNG Export

2020

$3,000

Bayer

Baytown

PUR Facility

2021

$2,000

Freeport

Gas to
Polypropylene

2017

$1,500

Freeport

Methane to
Propylene

2018

$1,400

CPV
Freeport
LNG

Projects Begin To Wind Down

Rapidly After 2017
(Value of Projects Completed, $ million)

$30,000
$22,706

$22,500
$15,000
$7,500

$0

$8,319
$4,980

2016

2017

2018

$4,000

2019

$3,000

$2,000

2020

2021

Put It All Together

Three oil scenarios: high,
medium, or low. High sees solid
recovery now underway in
drilling; medium sees strength
delayed until early 2017; low
until late 2017
Continued U.S. expansion at
moderate rates
The end of most of the
petrochemical construction on
the East Side. Some new
construction, but nothing to
replace the boom-time
construction that finishes
Data revisions that point to
possible mild local recession in
in early 2016.

Data Revisions? Trade An Expected Recession

In 2017 With Real One In Early 2016
000 Workers
4000

3700

3400

3100

Mostly Impact of
Revisions/Recession

2800

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20

July Forecast

This Forecast

Series 3

Forecast Job Growth

In Houston
2013-2020
(000 New Jobs, Q4/Q4)

Scenario
Year

High

Medium

Low

30/60/10

2013

90.3

90.3

90.3

90.3

2014
2015

112.3
117.1

112.3
10.4

112.3
10.4

112.3
10.4

2016

-18.2

-23.0

-27.1

-22.0

2017

27.0

-2.8

-19.2

4.5

2018

95.7

71.2

33.8

74.8

2019

91.3

87.3

53.4

85.1

2020

87.1

81.7

69.9

81.1

Calculations of IRF, based on drilling scenarios above

Compared To What We Were Saying

Before?
Flip Forecast 2017 Recession Into
2016
(Thousands of Jobs)
Current

May 2016

November 2015

30/60/10

30/50/20

40/40/20

112.1

103.6

2015

112.3
17.1

23.4

14.0

2016

-22.0

-10.8

20.1

2017

4.5

-30.0

74.4

2018

74.8

62.9

86.8

2014

85.1of Institute for Regional

2019 Calculations
97.1 Forecasting

73.6

In-Migration Follows Job Growth:

Forecast In-Migration for
Houston
Annual Increase:
When population grows,
in-migration gives
biggest economic
stimulus
As job growth rises, inmigration begins to rise
a year later
In recovery, in-migration
falls a year behind
Data at right matches
30/60/10 weighted
employment forecast,
sees a 2018 bottom for
in-migration

New Jobs vs. In-Migration

2014 = 100.0
100

75

50

In-Migration

25

New Jobs

-25

-50

2014 2015 2016 2017 2018 2019 2020

Existing Home Sales:

Beware the Averages

Existing Home Sales Flat In

Houston Since 2012
(sales, s.a.)

9000

7625

6250

4875

3500

01 M10 M07 M04 M01 M10 M07

M
06 07 09 11 13 14 16
20 20 20 20 20 20 20
Source: Texas A&M Real Estate
Center

Flat since 2012? First,

due to lack of existing
and new home supply,
now due to mix
Median home prices
rose rapidly after
2011, at 9.4 percent
annually from
2012-2014
2016 saw continued
high level of sales,
relief on inventories,
prices rising but more
slowly

Strong Growth And Lot Shortages

Distorted Single-Family Housing Market
Months Supply
Median Price

9
230000
7.25
Thousands

5.5

207500
185000

3.75

162500

140000

Jan-08 Oct-09 Jul-11 Apr-13 Jan-15

Jan-08 Jul-09 Jan-11 Jul-12 Jan-14 Jul-15

Source: Texas A&M Real Estate Center, seasonal adjustment by IRF

Ship Channel Cities

Baytown, Channelview, Pasadena

Sales and Home Prices

Rising
280

Inventory only 2.2 months

140000
2.8
125000
2.475

215

1100002.15

182.5

1.825
95000

150

Thousands

247.5

1
4
1
4
2 3
5 6
-1 c-1 t-1 n-1 r-1 c-1 t-1 n-1
r
Ma De Sep Ju Ma De Sep Ju

80000

1.5

Jan-15

Jun-15

Sales
Price

Source: Texas A&M Real Estate Center, calculations of IRF

Nov-15

Apr-16

Inventory

South Houston

South Belt, Clear Lake, League City

Sales flat, prices
rising
400

Not much left to sell with

two months inventory

210000
2.4
182500 2.15

300

155000 1.9

250

127500

Thousands

350

1.65
1.4

200

1 1
2 3 4 4
5 6
-1 c-1 t-1 n-1 r-1 c-1 t-1 n-1
r
Ma De Sep Ju Ma De Sep Ju

Sales

Price

100000

Jan-15 Jun-15 Nov-15 Apr-16

Inventory

Source: Texas A&M Real Estate Center, calculations of IRF

Close-In

Rice Military, Heights,Inventory

Galleria
now at 6
Sales and Prices Sag in
2015

months,
as prices soften
420000

247.5

335000

215

250000

182.5

165000

150

80000

1 1 2 3 3 4 5 5 6
-1 c-1 g-1 r-1 c-1 g-1 r-1 c-1 g-1
r
Ap De Au Ap De Au Ap De Au

Sales

Thousands

280

Price

Source: Texas A&M Real Estate Center, calculations of IRF

Jan-15 Jun-15 Nov-15 Apr-16

Inventory

South Of I-10 West

now at 5
Memorial and EnergyInventory
Corridor

Prices hold up despite

sagging sales

months, growing
pressure on price

420

140

315

4.875

120

210

100

105

80

1 2 2 3 4 5 5 6
-1 n-1 t-1 l-1 r-1 n-1 t-1 l-1
r
Ap Ja Oc Ju Sales
Ap Ja Oc Ju

Price

Thousands

160

3.75
2.625
1.5

Jan-15 Jun-15 Nov-15 Apr-16

Inventory

Source: Texas A&M Real Estate Center, calculations of IRF

The Woodlands Cools Off

Sales bouncing
back,
Price is down

Inventories on the rise

250

400

225

363

200

325

175

288

3.375

150

250

2.5

1 2 2 3 4 5 5 6
-1 n-1 t-1 l-1 r-1 n-1 t-1 l-1
r
Ap Ja Oc Ju Ap Ja Oc Ju

Sales
Price

Thousands

5.125
4.25

nJa

15

6
5
6
5
5
6
-1 n-1 r-1 l-1
-1 l-1
r
t
Ju
Ju
Ap
Ap
Ja
Oc

Source: Texas A&M Real Estate Center, calculations of IRF

Inventory

Katy

Katy North and South

Inventories rising,
But still low

Sales and price

holding on

4.2
280

512.5

248

425

215

337.5

183

250

150

1 1
2 3 4 4
5 6
-1 c-1 t-1 n-1 r-1 c-1 t-1 n-1
r
Ma De Sep Ju Ma De Sep Ju

Sales

3.525
Thousands

600

2.85
2.175
1.5

Jan-15 Jun-15 Nov-15 Apr-16

Price

Source: Texas A&M Real Estate Center, calculations of IRF

Inventory

Other Distant Suburbs

Pearland, Sugar Land, Kingwood

Sales & price still

strong

Inventories remain very

low

380

2.6

525

335

2.2

450

290

375

245

300

1 2 - 1 3 - 1 4 - 1 4 -1 5 - 1 6
r c
r c
t n
t n
Ma De Sep Ju Ma De Sep Ju
11

11

Sales

Price

200

Thousands

600

1.8
1.4
1

Jan-15 Jun-15 Nov-15 Apr-16

Inventory

Source: Texas A&M Real Estate Center, calculations of IRF

New Home Sales Also Shift Down

to Smaller Lots and Houses

Rising Land Prices Drove Cost Of

New
Homes
Spike in Land Prices Added
Land Drives Cost of Houstons
$40,000 To Typical New
Home After 2012

New Home Construction Since

2012
(Index: 2000Q1 = 1.00)

$250

3.0
$188

Thousands

2.3

1.5

$125

0.8
$63
0.0

4
3
2
1
4
3
2
1
4
3
2
1
4Q 87Q 90Q 93Q 95Q 98Q 01Q 04Q 06Q 09Q 12Q 15Q
8
19 19 19 19 19 19 20 20 20 20 20 20
$0

Home Price
Land Price
Structure Cost
Source: Lincoln Institute of Land Policy

4 3 2 1 4 3 2 1 4 3 2 1
4Q 87Q 90Q 93Q 95Q 98Q 01Q 04Q 06Q 09Q 12Q 15Q
8
19 19 19 19 19 19 20 20 20 20 20 20

Structure
Column2

Land
Column3

Top-end Buyers Lost To Oil Bust,

Bottom Of The Market Wants
In
Affordability Back
Index:
High-end market for executives
and professionals is gone for the
next couple of years
There are 2.3 million households
in Houston. Every time
affordability ticks up one
percent, it locks 23,000 families
out of the market.
Affordability down 4-5 percent
means over 100,000 families
were pushed out since 2013
They have household incomes of
$65-$75,000 and can qualify for
$250,000 product. Can we
deliver near this price point?

Percentage of Houston
households that can afford
median priced home

90
77.5
65
52.5
40
q4_

Wells Fargo Housing Opportunity Index

91 4_95 4_99 2 _ 0 5 2 _ 0 9 2 _ 1 3
q
q
Q
Q
Q

Market Shifts To Moderate

Priced Homes On Smaller Lots
Q3 closings at annual rate by
Price range $000

Current lot supply

in months & by lot size

7000
6029

50

5441
5250

40.2

4661

37.5

4296

34.6
30.1

3500

3206 3258

12.5

1750

355
0

25

0
<100

150-199

MetroStudy

250-299

400-499

21.7

20

22.6
19.3

13.6

< 50 50-54 55-59 60-64 65-69 70-79 80-89 > 90

Frontage in feet

Single-Family Permits Softer

Expect 30,000 Total In 2016
(monthly permits at annual rates, s.a.)

6000

Thousands

4500

3000

1500

n
Ja

-91 n-93 n-95 n-97 n-99 n-01 n-03 n-05 n-07 n-09 n-11 n-13 n-15
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja
Ja

Texas A&M Real Estate Center

Apartment Market Rolls Over

Apartment Construction Finally

Peaks In 2016
Number of Percent of
Units
2018 Units

Pre-2014

119,176

62.9%

2014

14,514

7.7%

2015

19,276

10.2%

2016
To
Sept

27,497

14.5%

17,827

9.4%

9,670

5.1%

2017

7,946

4.2%

2018

1,189

0.6%

To Dec

total

189,598

100.0%

New Units (000)

30

23

15

0
20

00

20

03

20

06

20

09

20

12

20

15

20

18

Vacancy Rate For Class A and B

Climb From Low Levels
13.0%

Class A

10.8%

8.5%

Class B

6.3%

4.0%

2000

2002

2004

2006

Class A
Source: CoStar

2008

2010

2012

Class B

2014

Oct-16

Have Now Peaked

$1,400

$1,175

Class A
$950

Class B
$725

$500
200

200

200

200

Class A
Source: CoStar, IRF forecast

200

201

201

Class B

201

-16
Oct

Class A Apartment Market Suffering

From Self-inflicted Wounds
Class A Rents and Occupancy Under
Growing Pressure
Stable

In Lease Up All Class A

No. of
Units

121,571

25,071

146,642

Monthly
Rent

$1,427

$1,513

$1,442

Occupancy

91.3%

26.9%

80.3%

Apartment Data Services through August

Damage is felt first in

the rest of Class A, in
similar product
Class A is struggling with
rent under pressure
from widespread
concessions and falling
occupancy rates
There are 25,000 units
in lease-up with only
26.9% occupancy,
another 18,000 units
still in the construction
pipeline

New Product Puts Class A Under

Pressure, But Damage Spreading
Occupancy high in Class B and C, but now falling

Class A Rents and Occupancy Under Pressure

95
1,500

85

94

1,475

83.25

1,450

81.5

1,425

79.75

92

78

91

1,400

Apr-14 Oct-14 Apr-15 Oct-15 Apr-16

Mo. Rent $
Occupancy
Apartment Data Services

93

Class B vacancy rate is up,

rents just turned down

Apr-14 Sept-14 Feb-15 Jul-15 Dec-15 May-16

Class B

Class C

Damage Also Spreads Geographically

From Complex To Complex
Look at all Class A
apartment complexes in
metro area at end of 2016
Look at all the other Class
A complexes in circle of
radius of 2 miles
Compute the resulting
vacancy rate in its market
area
Each dot an A apartment,
the darker the spot, the
higher the vacancy rate in
its market area
CoStar, IRF

Where Vacancy Rates Are Above

10 Percent By Year End

Where Vacancy Rates Are Above

20 Percent By Year End

More Deliveries To Come In

2017

Multifamily Permits Finally Turn

Down In Houston
Monthly permits, 6-month average
3,000

2,250

1,500

750

0
01 M01 M01 M01 M01 M01 M01 M01 M01 M01 M01 M01 M01 M01 M01 M01 M01
M
00 001 002 003 004 005 006 007 008 009 010 011 012 013 014 015 016
0
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2

These Multi-Family Vacancy

Rates Have Been Seen Before
Percent Vacancy All Classes By Forecast
12.0%
10.0%
8.0%
6.0%
4.0%

Medium Peaks at
9.9% Vacancy in 2018
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

history

High

Medium

Low

What Drives Quarter-to-Quarter Changes

In Office-Using Employment In Houston?
Just over half the change is purely cyclical, driven by
all the key factors that drive the local business cycle
oil, U.S. growth, etc.
About 15 percent is oil headquarters and campus
activity that is related to energy employment
growth, but independent of the business cycle
About 10 percent is health care, driven by
demographics and health-care policy. It has some
ties to energy employment, but is not particularly
cyclical
Another 10 percent is driven by non-energy national
or regional headquartering activity or general
secondary activity like banking

See All Of This At Work In

2016
The worst damage was done with 14.5 million square
feet entering construction just before the bust begins,
from 2013Q2 to 2014Q1
Much of the space was for corporate headquarters,
campuses, and otherwise preleased. But substantial
parts of it would come back as sublet space even if
economic growth had continued
Oil bust arrives, and a total of 12 million square feet
sublet space returns. Add the cyclical loss of 80,000
jobs in oil-related activity, and 40 million square feet
(18.4%) is quickly available
Leasing activity is dead in the water, and recent net
absorption in past 12 months is near zero. The
vacancy rate is already above 15 percent

Ugly As The Office Market Is,

This Is Not TheCumulative
1980s
square footage
Total Office Space in Houston:
1977 = 1.0 or 2009 = 1.0
4

added after 1977 or after

2009
96.5

100.0
3.5
75.0

2.8

49.6

50.0

2.2

70.7

33.6

1.8

11

1.2
1

1.1

1.1

13.9

1.1

6.6
0.0

1977 = 1.0

21.6

25.0

1.4

2009 = 1.0

-25.0

0.1

0.2

2.9

20.1

23.2

8.3

-0.6

1980s

2010s

Office Vacancy Rate Nearing A

Peak For All Classes Of Building
17.0%

Medium = 16.4%
15.8%

14.8%

13.7%

12.5%

Average = 13.2%

10.3%

Historic
Source: CoStar,30/50/20
IRF Forecast

High

22

20

20

20

18

20

16

20

15

20

13

20

11

20

09

20

07

20

05

20

03

20

01

20

19

99

8.0%

Medium

Low
August 2016

Still Vacancies Rise Mainly Due To

Past Decisions & Continued Deliveries

CoStar, IRF

Damage Spreads Geographically

From Building To Building
Look at all buildings in
metro area at end of
2016
Look at all the other
buildings in circle of
radius of 2 miles
Compute the resulting
vacancy rate in its
market area with new
deliveries
Each dot a building. The
darker the spot, the
higher the vacancy rate
in its market area
CoStar, IRF

Local Office Markets With Vacancy

Rate Already Above 15 Percent

CoStar, IRF

Industrial and Retail?

No Real Excitement Here!

Industrial Projects Delivered

Since 2010: East versus West

East Side Boom Fading?

10.0%

8.0%

6.0%

West
4.0%

East

2.0%

199

200

200

200

West Vacancy

200

200

201

201

East Vacancy

201

Industrial East And West Rent

$7.00

$6.00

West
$5.00

East
$4.00

$3.00

19

99

20

01

20

03

20

05

West NNN Rent

20

07

20

09

20

11

20

13

East NNN Rent

20

15

Industrial Construction Slows In

East And West Houston
(million square feet)

8.0

West

Millions

6.0

East

4.0

2.0

0.0

1999

2001

2003

12/31/05

West

12/31/07

12/31/09

12/31/11

East

12/31/13

12/31/15

Retail: Waiting For A Rebound

Retail missed the boom of recent years after
delivering 16 million square feet in 2006-07, leaving
a glut of space in the Great Recession
Retail has been relegated in recent years to
following the grocery store anchored shopping
centers, chasing new home construction around the
Grand Parkway
Local growth caught up with retail space needs in
2013-14, and vacancy rates turned healthy and rents
began to rise just in time for the current oil bust
The current construction pipeline is no threat to the
market, growing more slowly than population. But
be careful real retail sales have been flat for two
years

Retail Rent And Vacancy

Tightened Up In 2014

.0%

.3%

$16

Vacancy Rate (%)

$15

.5%

$15

Rent $/ft^2

.8%

$14

.0%

$13

2006 2008 2010 2012

2014
26-Oct Direct
2017 2019 2021 2023
2025 Overall
2027 2029
Vacant
Percent
NNN Rent

Source: CoStar

Retail Pipeline Is Okay Despite

A No-growth Retail Market
Growth Rate of Population and
Retail Space: In-Line So Far
4.00%

Real Retail Sales Now Flat

in Metro Area for Two Years

11000000000

Population

3.00%

10000000000

2.00%
9000000000
1.00%

0.00%

8000000000

Retail Space
2006 2008 2010 2012 2014 26-Oct 2017
Population

Square Feet

7000000000
2008Q1 2009Q3 2011Q1 2012Q3 2014Q1 2015Q3

Retail Construction Is Still Mostly Chasing

Rooftops In The Far Suburbs

Thank You for Attending

Our next symposium dates are to be determined

May 2017 and November 2017
Please give us your email address to be notified of the
finalized dates