Nearly two months ago, in "Houston, You Have A Problem" - Texas Is Headed For A Recession Due To Oil Crash" we warned that, just as the title explained, the city that has been the biggest beneficiary of the US shale boom will, logically, be the biggest victim now that the shale boom turns to bust. The post had many numbers and charts, as well as lots of words, so it is understandable if if went right over the heads of many.
Then, one month ago, we followed up with "The Next Victim Of Crashing Oil Prices: Housing", which also had a bunch of charts, numbers and words but had the following observation:
... we look at the impact of plunging crude on non-residential construction and specifically physical structures, which is where roughly 90% of energy capex is. Spending there tracked an annualized rate of $140bn in the first three quarters of 2014, a sum that accounts for a whopping 30% of total non-residential private fixed investment in structures, or about a 1% of GDP.
Texas accounts for a significant share of US oil production. Using the early 1980s as a guide when oil prices collapsed, housing starts in Texas declined more than 75% over a five-year period. This is probably the worst-case for today given that starts were at much higher levels then and the regional economy was more dependent on energy production.
The point was simple: while everyone has been focusing - and if they haven't, they should be, right BLS? - on the adverse impact to oil-service (only) jobs from the shale bust, it was only a matter of time before the fallout spread to that all important for the US "recovery" segment of the economy: housing. Then again, judging by the Census Department's being just as much on top of "seasonally-adjusted" housing data as the BLS, it appears both of these warnings were ignored.
However, now that the WSJ has joined the fray, the time has come for US data reporting to finally catch up to reality.
This is what the WSJ had to say about the imminent collapse in not only the Texas housing industry, but soon - everywhere else.
The jagged skyline of this oil-rich city is poised to be the latest victim of falling crude prices. As the energy sector boomed in recent years, developers flocked to Houston, so much so that one-sixth of all the office space under construction in the entire U.S. is in the metropolitan area of the Texas city.
Many of those building are bracing for a sting in the short-term. It could be even more painful if oil prices stay low.
What happens next:
Demand for office space is “going to basically stop,” said Walter Page, director of office research at property data firm CoStar Group Inc. “It hurts a lot more when you have a lot of construction.”
By the end of 2014, construction had started on about 80 buildings with about 18 million square feet of office space in the greater Houston area, according to CoStar. Many of the buildings were planned or started when oil was above $100 a barrel. On Tuesday, oil futures traded around $50. The amount under construction is equal to Kansas City, Mo.’s entire downtown office market and is 16% of all U.S. office development under way.
And as a reminder, every high-paying oil service jobs acounts for up to 4 downstream just as well-paying jobs. Case in point:
The rush of building has created thousands of jobs—not only at building sites, but also at window manufacturers, concrete companies and restaurants that feed the workers.
But just as the wave of office-space supply approaches, energy companies, including Halliburton Co. , Baker Hughes Inc., Weatherford International and BP PLC, have collectively announced that more than 23,000 jobs would be cut, with many of them expected to be in Houston.
Fewer workers, of course, means less need for office space. Employers have rushed to sublease space in recent months, with 5.2 million square feet of space on the market as of last month, up about 1 million square feet from mid-2014, according to brokerage firm Savills Studley. BP, for example, is trying to sublet 240,000 square feet of space at its campus in the Westlake neighborhood, which represents about 11% of BP’s space at the campus, according to CoStar. A BP spokesman said the company is “consolidating” its footprint.
Some humor from the WSJ: "Developers are often victims of “herding and groupthink,” said Rachel Weber, an urban planning professor at the University of Illinois at Chicago who is writing a book about office overdevelopment in Chicago. “There is a sense that if everybody is moving in the same direction and acting the same way, that you do better to mimic that kind of behavior.”
Actually, make that economists, analysts and CFOs too. Oh, and workers for the US Department of Truth, who are in no danger of losing their jobs. They will be very busy for months and years to come to figure out a way to misremember and misrepresent the collapse in the oil industry that is about to take all shale states by storm.
To be sure, there is still much hope and faith: "Mr. Mair said he believes in the city’s economic strength in the mid- and long-term, giving him confidence to finish work on the second tower. “I’m not afraid of ’16 and ’17,” he said."
Coupled with a money-printing Fed, the strategy of "hopium" has worked well in the past 6 years. This time, however, at least all bets are off. And while the distant future may be rosy, Houston - and everyone else - has to get through the present. Which, as the following chart shows without any ambiguity, is why Houston suddenly has a huge problem.