Friday, February 06, 2015

Oil price plunge could change attitudes about real estate lending and investing in North Texas

Back during the 1980s Oil Patch bust, a few East Coast bankers plastered “Don’t Mess With Texas” bumper stickers on the front of their desks.
With the current oil price plunge, will lenders and property equity players take the time to understand the differences between the real estate markets of Houston and Dallas?
Or will it just be easier to draw a red line around the Lone Star State and pull back from doing real estate deals here?
It will take months to figure out the total impact of the energy slowdown on North Texas’ booming economy.
But some financial players are probably already reworking their playbook when it comes to Dallas-Fort Worth transactions.
“There is a knee-jerk reactions to do that,” said Stuart Wernick, senior vice president of Dallas-based Berkadia Commercial Mortgage LLC. “I was in Miami last week at a conference, and two guys came up to me telling me, ‘You are in Texas, right? It’s going to be tough.’
“They said they are going to be more stringent in their underwriting.”
Wernick is hopeful that savvy investors and lenders will understand the difference between Houston, where energy sector leasing has accounted for about 80 percent of office growth the last four years, and Dallas, where it’s only about 5 percent.
“Once we educate them, I think the wise investors of equity as well as debt will continue to do business here,” he said.
Anne Raymond, managing director of Crow Holdings, said investors will be discerning in their evaluation of the nuances of Texas’ real estate markets.
“Of course, it is very early to understand the implications of the falling oil prices,” she said. “To date, however, we have experienced no concern from lenders and equity partners for deals in Austin or Dallas.
“There is clearly pullback and a wait-and-see response already underway in Houston.”
Financial analysts at JPMorgan Chase and Fitch Ratings have been playing a dirge over the Texas economy the last few months as oil prices have slid almost 60 percent.
During the mid-1980s Oil Patch recession, the cost of crude went down about 75 percent.
The lights went out overnight in Houston’s real estate market. But up in Big D, things buzzed along for almost a year before a slowdown.
Of course, back then the real estate market in North Texas was seriously overbuilt, overfinanced and overhyped.
This time around, the property markets are tight and most real estate deals have been done with conservative debt leverage and underwriting.
Some financial firms may still take a broad brush approach.
“People lump the whole state together in terms of energy,” said Mark Dotzour, chief economist at the Real Estate Center at Texas A&M Univeristy. “Some underwriters may scrutinize loans in Texas more.
“There are a lot of people who only read the headlines, and if they do, they will think Texas is in trouble.”
Dotzour said some scrutiny of real estate deals won’t hurt. “All that will mean is we limit the likelihood we overbuild commercial real estate in Texas markets, which is a good thing.”
Longtime Dallas commercial property financier Charles Mohrle says there will be changes.
“There has to be an impact that will trickle through to real estate,” Mohrle said.
He expects it to show up first at big banks that have made substantial loans to the state’s energy companies.
“The federal regulators are going to be looking at all the banks that have exposure to the energy businesses,” Mohrle said. “Some real estate people will get calls from their banker suggesting they move some loans.
“I don’t think we are going to be affected the same way a Houston is, but our financial institutions will be affected,” he said. “Our real estate market is in a heck of a lot better shape than it was before in previous cycles.”
But that doesn’t mean that some out-of-state financial guys who have been hearing Texas politicians and chamber of commerce types brag about our state’s business boom won’t have some smirks.
“The Texas haters have ammunition they can use to punish us for being successful, and they will do it,” Mohrle said. “There are some people who will absolutely leap tall buildings for any opportunity to put Texas in its place.”

Steve Brown, The Dallas Morning News