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TMCNet:  KBRA Releases CMBS Research:

[January 10, 2019]

KBRA Releases CMBS Research: "Houston's Office Market Walks the Oil Volatility Tightrope"

Kroll Bond Rating Agency (KBRA) released a research report summarizing its views on the CMBS Houston Office Market.

While recent years have seen Houston's economy become increasingly diversified, the region still remains highly dependent upon the oil and gas industry. Of the region's total employees, 2.6% are engaged in the mining and logging industry, more than five times the national average. West Texas Intermediate (WTI), which priced at $76.40 per barrel in October 2018, slipped to its recent low of $42.26 on December 24, 2018. Continuing its steady flow of volatility, oil has spurted with the start of the new year to reach the $50 mark.

Oversupply and slowing global economic growth have been cited as reasons for WTI's recent fall. In an effort to bolster prices, the Organization of the Petroleum Exporting Countries (OPEC) and its oil-producing allies have agreed to cut oil production. The anticipated effects of increased global production and oversupply coupled with WTI's fourth-quarter decline have dampened the overall energy sector outlook for 2019. According to a Goldman Sachs research note as reported by Bloomberg (News - Alert) on January 6, 2019, the bank slashed its WTI 2019 forecast by 14% from an average of $64.50 per barrel to $55.50.

At price levels below $50 per barrel, the University of Houston's Institute for Regional Forecasting estimates that the region could lose anywhere from 10,000 to 20,000 energy-related jobs. Adding fuel to the fire are the results from the Federal Reserve Bank of Dallas' Q1 2018 Energy Survey of 200 oil and gas firms, which noted that companies need oil prices at or above $52 per barrel to profitably drill new wells.

With WTI prices currently hovering around the $50 level, energy industry employers could be hesitant to add new workers until there is some price stability. This may not bode well for Houston's office sector, which, after experiencing increasing vacancies for 14 consecutive quarters, saw a vacancy rate decline in Q3 2018 to 16.9% from 17.2% in the prior quarter. So, while the next few months could see oil prices bounce above and below $0-52, the current year may nevertheless prove challenging for the Houston economy and office sector.

To access the report, click here.

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About KBRA and KBRA Europe

KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus, is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.

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