Bloomberg – Fracking in Ohio Sparks Real Estate Rebound
Fracking in Ohio Sparks Real Estate Rebound: Mortgages
Jun 11, 2012
By Brian Louis
The clamor of bulldozers on a patch of former farmland in rural Carroll County, Ohio makes Glenn Enslen, the county’s economic development director, feel “like an eight-year-old kid on Christmas morning,” he said.
The 330-acre tract of Appalachian property is being transformed into an industrial park. The first tenant will be MRC Global Inc. (MRC), a Houston-based pipe and valve supplier that will serve Ohio’s emerging oil and natural-gas industry.
Hydraulic fracturing, or fracking, is bringing new development to the Midwest, creating demand for commercial real estate in the region even as landlords struggle to pay off earlier property loans. Chesapeake Energy Corp. (CHK), the second- largest U.S. natural-gas supplier, has acquired $2 billion in land leases comprising 1.35 million acres in Ohio and contributing to the beginnings of an economic recovery in the state. The company has leased or bought real estate in towns including Canton and St. Clairsville, according to Pete Kenworthy, a company spokesman.
“Thank God for the oil and gas business,” said Tim Putnam, president of Putnam Properties Inc., a commercial real estate company based in Canton, about 60 miles south of Cleveland. “It’s created a lot of optimism among people that live here.”
Ohio, which had the seventh-highest commercial property delinquency rate in the country in December, according to Moody’s Investors Service, is already showing signs of improvement. The delinquency rate on commercial mortgages packaged and sold as bonds in Ohio dropped to 8.74 percent in June from 11.28 percent a year earlier, according to data compiled by Bloomberg.
Late payments for commercial loans in Youngstown, about halfway between Cleveland and Pittsburgh, declined to 5.69 percent in June from 7.75 percent a year earlier.
The effect of the new investment isn’t yet evident in the Midwest more broadly. For the region that includes Ohio, Wisconsin, Illinois, Michigan and Indiana, debt at least 30 days delinquent jumped to a record 11.26 percent as of June 1 from 10.44 percent a year earlier, according to Trepp LLC. The rate was 9.68 percent in June 2010. The U.S. rate in May was a record 10 percent, the New York-based mortgage data firm said.
Ohio stands to benefit from the Utica Shale, a geological formation that may hold as much as 5.5 billion barrels of oil and 15.7 trillion cubic feet of natural gas. Since December 2009, 236 drilling permits have been issued in the Shale, with 72 wells drilled as of the week of May 27, according to Ohio Department of Natural Resources data. About 35 percent of those permits were in Carroll County.
Energy production in the state may add $4.9 billion to Ohio’s economy in 2014, according to a study by researchers from Cleveland State University, Ohio State University and Marietta College. The study was sponsored by the Ohio Shale Coalition, a group of businesses and chambers of commerce that support energy industry growth in the state.
Horizontal drilling and fracking, the techniques being applied to the Utica Shale, reversed decades-long declines in U.S. oil and gas production, according to the Energy Department in Washington. Crude oil output last year was 15 percent higher than 2008, when production touched a 62-year low. Last year’s gas production was a record 28.6 trillion cubic feet, up 17 percent in a decade.
Estimates for how many Ohio jobs will come from the industry’s growth vary widely. More than 204,000 jobs will be created directly or indirectly by the oil and gas business by 2015 in the state, according to a study last year by Kleinhenz & Associates for the Ohio Oil and Gas Energy Education Program, an industry-funded group. A December report by Ohio State University put the estimate at 20,000 jobs over a four-year period.
The economic benefits of oil and gas drilling are spreading from places such as Carroll County northwest to Canton and northeast to Youngstown as hotels increase occupancy and energy companies set up operations.
“We are getting a recovery and that’s the bright side,” said George Zeller, an independent economic research analyst in Cleveland, said of Ohio’s economy. “The downside is the recovery is way too slow.”
Youngstown was once a booming city at the center of the steel industry.
Almost everyone in the area had a link to steel, said Anthony Cafaro Jr., 37, co-president of Cafaro Co., a closely held owner and manager of 30 million square feet of commercial real estate in 11 states.
“There wasn’t anyone that wasn’t impacted by the downfall of the steel industry here,” Cafaro said in an interview. “My generation, unfortunately, a large percentage has left the area and may never come back.”
Youngstown has lost more than half the population of 168,330 it had in 1950, culminating in Youngstown Sheet & Tube’s announced shutdowns in 1977. The city had 66,982 residents in 2010, according to the Census Bureau. Over the past 22 years, the Youngstown area’s unemployment rate rose as high as 13.5 percent in 2009. It was 7.8 percent as of April, the latest data available from the Bureau of Labor Statistics.
Any economic activity in areas like Youngstown and Steubenville, which were hit hard during the recession, will be welcome.
“They tended to suffer a great deal more than the rest of the state,” said Jim Newton, chief economic adviser to Columbus-based Commerce National Bank. “There, even a modest amount of activity over a period of years will seem like a godsend.”
France’s Vallourec SA (VK), which makes products used for a number of industries, including energy, will produce steel tubes in Youngstown this year at its new $650 million mill and create 350 jobs, according to Vallourec. The tubes will be used for fracking, which injects water, sand and chemicals underground to free trapped gas.
A unit of Weatherford International Ltd. (WFT), a Geneva-based oilfield services company, bought a 153,708-square-foot building and more than 20 acres of land in Youngstown in April for $3.4 million, according to commercial property broker NAI Spring of Canton.
“The business has been phenomenal over the last six months,” said Dan Spring, principal of NAI Spring. “The market doesn’t have any product left.”
Risks abound for the new industry, which has grown as the price of crude oil make it worthwhile to undertake more expensive fracking.
A significant amount of oil assets across North America become uneconomic when West Texas intermediate crude falls below $65 a barrel, said Manuj Nikhanj, head of energy research at Investment Technology Group Inc. in Calgary.
Chesapeake has the most rigs running in Ohio of any energy company, Nikhanj said. The company has a joint venture with France’s Total SA (FP) in the Utica Shale under which Total has committed to pay $1.4 billion of Chesapeake’s drilling costs.
“There’s still questions over what the economics are going to look like,” Nikhanj said. “That would relate to anyone active in the region.”
Chesapeake agreed to sell pipeline assets in three transactions of more than $4 billion and had two directors tender their resignations after shareholders rejected their re- election on June 8. The company has come under criticism as gas prices plunged to a 10-year low and revelations that Chairman and Chief Executive Officer Aubrey McClendon had intertwined his personal business with that of the company’s key financiers.
The company has 337,481 net acres for sale in Ohio. That acreage is “outside its core focus area” and “higher risk,” Nikhanj said. Chesapeake will remain active in the region because of the venture with Total (TOT), Nikhanj said.
Downtown Youngstown is starting to change. New businesses are opening, including Joe Maxx Coffee Co., a coffee bar run by Mike Avey, 50, who grew up in nearby Warren. Avey said 20 percent to 30 percent of his customers are affiliated with companies in the energy industry.
“None of these people were here a year, a year-and-a-half ago,” Avey said.
Hotel revenue rose 24 percent and occupancy gained 19.6 percent in the Youngstown area in April compared with a year earlier, according to data from Smith Travel Research Inc., based in Hendersonville, Tennessee.
“The shale is just part of the puzzle,” said Michael Moliterno, the general manager of the Holiday Inn in Boardman, which is about five miles from Youngstown. “Overall we’re doing well.”
South of Youngstown, business is surging at Michal Naffah’s Days Inn in Lisbon. Naffah, who bought the hotel more than three years ago, said business is 10 times what it was when he acquired it. Occupancy is 80 percent, he said.
When he acquired the property he also bought an adjacent restaurant and kept it shuttered. He reopened the restaurant at the end of last year. His wife came up with the new name: Shale Tavern & Grille.
“When everything started to hit with the shale boom, that’s when we opened,” Naffah said.
Cafaro Co. announced plans in May to build a 103-room Residence Inn by Marriott at its Eastwood Mall Complex in Niles, about 12 miles from Youngstown. The project in Trumbull County had already been planned before the rise of the energy industry in the area.
“Things just seem to have come out well in terms of timing,” Cafaro said. “The economy, after literally decades of stagnation and some period of decline, we’re now seeing an upswing.”
Trumbull County’s economy likely will get a boost from landowners leasing property. BP Plc (BP), Europe’s second-biggest oil company, agreed to lease 84,000 acres in Trumbull in March.
“For the first time in my lifetime — people are starting, and they’re just starting — they’re focusing on the positive,” Cafaro said. “There is a growing percentage of people who are seeing the glass is half full.”
MRC Global, which will occupy the first parcel in the 330- acre site in Carroll County, plans to lease a 15,000-square-foot warehouse and have a 13-acre pipe yard there, according to Will James, the company’s vice president of corporate development and investor relations.
These developments are transforming the area, said Enslen, the county’s economic development chief.
“It’s exciting,” he said. “It’s going to change the entire face of this community.”
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