10.14.14: Will Declining Oil Prices Affect CMBS Conduit Loans in North Dakota?

After declining gradually for three months, oil prices suddenly tumbled almost $4 on October 14. It was the largest single-day decline in more than a year, and it brought the price of Brent crude, an international benchmark, to $85 per barrel. At its peak in June, a barrel cost $115. Oil professionals estimate an $80 level where the economics of drilling and fracking in the United States provide only a modest return on investment and only break even in the $70 area.

Should the price of oil continue to slide, producers may begin to slow and possibly reverse employment gains in oil producing areas. A work force reduction in locations primarily dependent on oil employment could have a negative impact on CMBS loans in those areas.

How much CMBS exposure is there in oil-related areas and how much is directly dependent on oil employment? Let’s take a close look at an example: Williston, North Dakota, located in the south central portion of the state. According to the 2000 census, the population of Williston approximated 12,500 versus an estimated 20,000-plus today. Williston sits atop the oil-rich Bakken formation and oil production has fueled the city’s growth.

In 2013 and 2014, 14 CMBS conduit loans with a principal balance of $144 million were originated in Williston, no small sum. Of the loans, 8 were secured by apartment complexes, 4 were secured by hotels and 2 were secured by manufactured housing communities. All of the assets classes depend heavily on a stable population. Based on this one small sample, it’s pretty easy to see that if oil-related employment was reduced in any significant way, these loans would likely to struggle to perform.

 

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This entry was posted in CMBS Conduit Loans, Commercial Real Estate Loans, Michael D. Sneden, News & Recent Closings, The Banker's Mortgage Conduit, Valuexpress and tagged , , , , , , , , , , . Bookmark the permalink.

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