Tuesday, May 13, 2014

Another appraisal in the Bakken area of North Dakota/Canada


Bakken is a subsurface shale formation underneath North Dakota, Montana, South Dakota, Saskatchewan and Manitoba and has become the biggest oil find in North America in the last 40 years (not since Alaska). North Dakota has the most favorable location over the Bakken foundation and has undergone boomtown economic conditions similar to the Alberta Oil Sands near Fort McMurray, Alberta.


In my latest appraisal assignment, I appraised a massive RV (Recreational Vehicle) Park which provides temporary housing for hundreds of new workers in the oil and oil service industries as well as a motel with fully occupied RV spaces behind it.

Being a boomtown economy, there is an extreme shortage of housing for incoming workers. This is a real worry for oil firms and oil service firms desperately in need of manpower; in the last measurement of unemployment in Williams County, home to the largest Bakken-area city of Williston, the last measured unemployment rate was 0.9%, and other Bakken-area counties were at around 1.5%.

RV Parks have been the quickest solution in providing new housing, and the 765 space RV Park I appraised was actually in the business of wholesaling its spaces to housing contractors who then erected temporary housing, either in the form of manufactured housing (as seen in left of above photo) or else recreational vehicles themselves (as seen on right of above photo).

In this case of such an enormous RV park, the gross income multiplier seemed to be the most reliable method of valuing, as the collected rent per pad was much lower than for much smaller RV parks in which the landlord needed no intermediaries to lease RV pads.  Using “price per pad” established by much smaller parks would have overvalued the subject park.

The motel averaged occupancy of about 90% last year, while for the first third of this year it has been close to 100% and is budgeted to average 93.5% for the year.  Despite the high occupancy, room revenue multipliers in this region were not found to be higher than motels in other states; only the incomes were high.

Numerous motels are also being erected and designed to be extended stay lodging.  At the new Telluride Lodge where I was staying, which advertises itself as "executive housing" to distinguish itself from the other more blue collar housing choices available, I checked in to find no soap or shampoo in the bathroom.  In my trip to the front office to explain these missing items, the incredulous front desk clerk offered me a bottle of dishwashing liquid instead.
"Executive housing" offered at Telluride Lodge south of Watford City

Room revenue multipliers at motels listed for sale started at a remarkably low 2 x revenues.

What accounts for the pessimism of investors?  Perhaps the most obvious reason is the slowdown in employment growth, which was close to 50% per year prior to 2012 but only 6.5% in the last year, which is still good, but is temporary housing and lodging being built too fast to cope with a coming slowdown?

The most labor intensive phase of an oil boom is the exploratory phase.  Extraction requires less personnel and is also a declining number.  Based on these realities the North Dakota state government's Oil and Gas Division and North Dakota State University are both predicting that Bakken-area employment will begin to decline starting in 2020. Maybe this why so many investors want their returns upfront in the form of current returns.  As the need for exploration personnel lessens, too, will the need for temporary housing lessen.



2 comments:

Anthony Alderman said...

I haven't appraised in this kind of market before. In such a situation, how do you account for the inevitable and precipitous drop in values as soon as the boom ends? Do these booms have a standard life-cycle? I would assume it's tied directly to the length of time natural gas is being harvested, so perhaps those estimates would work?

As always, thanks for sharing your wild assignments.

Vernon Martin, MSRE, CFE said...

That's a good question, Anthony.
Most states, including North Dakota, have labor departments which provide employment forecasts. ND State University also forecasts employment growth.
The most labor-intensive part of an oil boom is exploration and drilling. Extraction and oil field services that take place later require less labor. Both the ND Labor Dept and NDSU forecast that Bakken-area employment will peak in year 2020.
This expectation seems to be showing up in gross rent multipliers, which were actually lower than comps from Michigan, Ohio and Texas used by the other appraiser.