CMBS conduit loan originators are concerned about lower oil prices negatively affecting room demand for hotel properties in markets where demand is highly dependent on robust oil exploration and production activities. While the impact of declining oil prices should affect markets differently, right now, all markets are being painted with a broad-brush level of apprehension.
Estimates vary, but North American shale oil breakevens are around $65 per barrel. With North American oil trading below $60, some drilling projects are likely to be shut down until prices improve. Workers and support personnel from those projects will be sent home, reducing hotel room demand.
As the biggest U.S. oil producer, Texas has the most jobs directly tied to production. But those jobs comprise a smaller share of overall employment than oil payrolls in second-place North Dakota, according to the Bureau of Labor Statistics. Wyoming has the highest concentration of overall employment tied to oil. With less-diversified employment bases, hotels located in Wyoming, North Dakota and third-place Oklahoma may experience a disproportionate decline in hotel demand. Although Texas is well diversified and impact on its major cities of Houston, San Antonio, Dallas and Austin will likely be muted, smaller communities closer to the oil-rich Eagle Ford and Permian basins may see a noticeable decline in hotel demand.
“The impact of lower oil prices on hotel demand is somewhat hard to predict; less-populated areas with mostly exploration and production oil activities are likely to be hit the hardest. Diversified cities and areas with high “midstream” and “downstream” oil activities such as refining, oil storage and oil pipelines could actually fare quite well as demand rises from lower-priced gasoline,” commented Michael D. Sneden, Executive Vice President at ValueXpress.