More pain lies ahead for oil reliant US states

The impacts of the oil downturn will continue to negatively impact CMBS loan performance as its effects ripple through the local economies of oil reliant US states.

The impacts of the oil downturn on local US economies could continue to negatively impact CMBS loan performance. 

In Houston, Texas, for example, many of the largest employers have recently announced layoffs, and the city lost around 40,000 jobs due to the oil downturn, according to some estimates.

West_Texas_Pumpjack“There have been recently completed buildings leased to energy related entities that are having trouble leasing,” Brian Corrigan, a managing director of the Capital Markets team at Colliers International, told Real Estate Capital.

Interestingly, the broader ‘Houston-Baytown-Sugar Land, Texas’ Metropolitan Statistical Area (MSA) recorded a low vacancy rate in June at just 1.36 percent, according to Trepp data. 

But, “Houston is so heavily concentrated with an energy component that you will see that 1.36 [percent] number go higher,” said Talia Regev, a senior associate with Colliers.

A Trepp newsletter today pointed to one struggling loan, the $17.6 million Eagle Ford note, which according to August remittance data has received an $8.4 million appraisal reduction. Slated to mature in September 2025, the loan makes up 1.44 percent of COMM 2014-LC17.

The loan is backed by three Texas hotels in Cotulla, Pleasanton, and Pearsall totalling over 200,000 sq ft and 202 rooms. It was transferred to special servicing for payment default in February and the borrower has requested a loan modification and reduction in monthly payments, Trepp analysts wrote.

Some economic experts believe the worst is yet to come as the oil crisis unravels around the globe. 

“We are now approaching what will be a very dark part of the global commodity price crash,” Carl Weinberg, chief economist with American economic research consultancy High Frequency Economics, wrote today in a memo.   

“Regardless of whether the drop in oil prices has been good or bad for the global economy on balance, what happens next is sure to be bad,” he said.

Low oil prices have been very painful for economies that rely on oil revenue, like Texas, Yahoo noted when citing Weinberg’s comments; though they have been rallying, they would still have to more than double reach levels from two years ago.