Future of Midland / Odessa, TX Real Estate Market

[Nate Culkin]

Hi Everyone,

I am looking at a deal (self-storage) in Midland, TX.  With the current state of the oil market, I was hoping to get some insight from people here that know this market and what happens when there is a significant decline in oil:

- Everyone says that oil always comes back, but with the uncertainty of COVID-19, is it possible for there to be a decline that is more severe, and longer, than the 2015-2017 oil crisis?

- If so, what does this decline mean for the real estate market/economy in Midland?  Some people will leave, but are we talking a leveling off in population? 3% decline? 10% decline?

- In past oil crises, have you seen significant vacancies?

Any insight would be much appreciated

[Dave Martin]

Hi Nate,

I'd agree with what Bill said and expand it a little - if COVID, a long lasting recession, insane money printing, whatever, were to slow down oil and gas activity in the Permian Basin for any substantial period of time (years not months or weeks), then the economy has some much larger problems than one market's strength.  The reason is simple - the US economy is a force of nature even during downturns and for the time being (decades not years) our economy will depend heavily on oil and gas. If we see drilling in the Permian Basin halted or severely contracted for extended period, then we'll most likely be in a depression and have plenty of other things to worry about! Let's assume for this discussion that we aren't facing that dire of a future.  Then what can we say about the area's recovery?

The USGS announced in late 2018 that their surveys estimate the Permian Basin contains 46.3 billion barrels of oil and 281 trillion cubic feet of natural gas.  That finding effectively doubled our current untapped reserves of both energy sources. This oil and gas will come out of the ground sooner rather than later and any downturn will be followed by a recovery due to our insatiable demand for energy.  The obvious caveats go with this: O&G can be a wild roller coaster ride, so make sure whatever property you look at can be cash-flow positive during the downturns. If you can negotiate seller financing for the deal and the seller is motivated enough to move the property, then you can build in loan terms to protect you and your investors from the dreaded capital calls because the property is in the red.

As to the property you are looking at, self-storage is often considered as close to 'recession proof' as you can get. This is especially true for Midland/Odessa where so much of the workforce is transient. During good times, they move from site to site and need a place to keep their stuff. They often leave the area after working for months (just to take a break or to wait out a market downturn) but are fairly sure they'll be back and need a place to keep their stuff.  I have been looking at RV parks in the area since last year and have found that those workers, a surprising number with their families there with them, need a place to... you get the idea. 

Have you analyzed the SS market saturation in Midland/Odessa?  Unless it is insanely high, you may have a good opportunity in front of you. Especially since in this downturn, you can find great deals from people just wanting to get out of the market. As Buffett says, buy when others are fearful. Make it clear to the seller that in order to close the deal, they'll need to provide you with P&L's going back to 2014 if they've owned the property that long.  That way, you can see how the property performed during the last major downturn. Don't budge on this requirement. To answer your question on the market in 2015-2017 decline (really late 2015 to mid-2016 based on operating rigs), there was indeed a sharp decline in rents and occupancy (a potential positive for SS when people move into smaller places and need storage space).  It ended up being a check-mark recovery with rents recapturing their 2015 levels and then rising even further.

One last observation about the market:  during that late 2015 to mid-2016 downturn, ~76% of the rigs in the Basin where shuttered.  The Midland sub-basin has the least costly O&G extraction price of the entire Permian (as per Dallas Fed energy surveys), so you often see activity there while the rest of the PB is shut in. We were actually in a slow contraction starting in late 2018 to February of this year with ~20% of PB rigs being shuttered due to low oil prices. The RV park I'm focused on was still cash flowing like an ATM. Then the Saudis and Russians got into a supply tantrum followed by COVID collapsing global energy demand resulting in our current market. Things look solid at the campground even with the expected reduction in revenue so I'll probably be moving on the property in the next month or two.

Hope that long-winded reply helps some! Oh, to clarify - I live in New Mexico, next door to Texas. I've been tracking Midland/Odessa for almost a year and have gotten to know the seller and other people in the area pretty well.  I've been down there more than once and visited over two dozen other RV parks while doing our three days of due diligence at the target park. I don't mean to say I'm a market expert or a local, but I have done several deep dives into the area.  Interesting market for sure, though the oil and gas industry is subject to substantial swings and isn't for everyone.  Also, the RV park purchase will be listed as a SEC 506(c) exemption allowing free and open discussions about its returns and the investment.

Good luck, let us know what you decide to do!

Dave