Texas Two-Step: How Falling Oil Prices Could Impact Texas Rental Markets

By Aaron Terrazas on 18 Mar 2015

• Texas rental markets have benefitted in recent years from the inflow of well-educated, well-paid oil and gas industry workers from out of state.
• Newly arrived oil and gas industry workers were more likely than other renters to live in apartment buildings with higher monthly rents.
• But the U.S. oil and gas industry is at a crossroads, as low prices challenge profitability and lead to growing layoffs. There is substantial uncertainty over if and when the decline in energy prices will spill over into the Texas rental market.

In recent years, new technology has transformed U.S. energy markets, making huge American oil and gas deposits accessible for the first time. New drilling activity has helped create an abundance of new jobs in many areas, providing new opportunities for local residents but also attracting new workers from elsewhere. Texas has been at the forefront of these changes.

The number of oil and gas industry workers in Texas – including those in support roles – grew more than 50 percent between 2007 and the end of 2014, from around 70,000 to roughly 104,000.[1] The employment gains were likely even larger after accounting for secondary employment effects, including additional demand for local goods and services created by these new workers.

From 2011 to 2013 – perhaps the most important growth years for oil and gas exploration, extraction, processing and distribution in Texas – between 10,000 and 20,000 workers moved to Texas each year specifically for an energy-related job. Houston, Midland-Odessa, San Antonio and Dallas-Fort Worth were the largest metro areas attracting energy industry workers, but rural areas also attracted large numbers of out-of-state workers in the energy industry.

The influx of these workers has had an undeniable impact on the Texas housing market, particularly in smaller communities where changes in a single industry can have very visible consequences. But the U.S. energy industry is now confronting a new crossroads. Oil prices fell dramatically in late 2014 and have remained near historic lows through the first quarter of 2015, forcing some energy sector employers to reconsider the economics of their business – and their staffing needs.

Falling oil prices were responsible for about 40,000 layoffs nationwide in January and February, about a third of all layoffs in the country over that time, according to the outplacement firm Challenger, Gray and Christmas, Inc. Layoffs in Texas account for a large part of this total.

Of course, it will take some time for the full effects of these recent layoffs to spill over into the housing market. It is not clear how long oil prices will remain at their current lows, or how current prices will affect employment at active drilling sites versus proposed or exploratory sites.

But understanding how oil and gas workers in Texas live can provide insight into how they may react if they’re laid off or if prices stay low over the longer-term.[2]

Energy sector workers are more likely than other workers to be homeowners…

Among all Texas workers, the homeownership rate in 2013 was 65 percent – slightly below the homeownership rate of 66.7 percent among all workers nationwide. Oil and gas workers have a higher homeownership rate than the general population, in part because jobs in the industry tend to be relatively well paid. Among all oil and gas industry workers in Texas, the homeownership rate was 71.7 percent (figure 1).

…But more recent oil industry arrivals to Texas are much more likely to rent.

However, a large fraction of oil and gas workers recently moved to the state. From the five individual industries that create the larger “oil and gas” grouping, roughly one in every 25 workers had moved to the state in the past year. In the more narrowly defined “oil and gas extraction” industry, about one in 20 workers had moved to Texas in the past year. At 33 percent, the homeownership rate among these recent arrivals was less than half the homeownership rate among all workers in the industry. In other words, a large majority (67 percent) of newly arrived oil and gas workers in Texas are renters.

Recently arrived renters are better educated and have higher incomes than other renters…

Compared to other Texas renters, recently arrived oil and gas workers are more likely to be well-educated and have higher incomes. Among all renters in Texas, about one-quarter (23 percent) have a bachelor’s degree or higher, and only about 7 percent have a graduate degree. Among recently arrived oil and gas industry workers, almost half (49 percent) have a bachelor’s degree or higher, and roughly one quarter (23 percent) have a graduate degree. Similarly, the median income among all working Texas renters was $24,000 in 2013. But among recently arrived renters in the oil and gas industries, the median income was roughly double that of all working renters, at $50,000.[3]

…And are more likely to live in larger, pricier apartment buildings.

Slightly more than 40 percent of all Texas renters live in apartment buildings with five or more units – but more than 60 percent of recently arrived oil and gas renters in Texas live in these kinds of apartment communities. About 9 percent of all Texas renters live in larger apartment buildings with 50 or more units, compared to roughly 20 percent of recently arrived oil and gas workers.

Recently arrived energy sector workers also tend to pay more in rent. The median monthly rent reported by all Texas renters in 2013 was $730, compared to $1,000 among recently arrived oil and gas renters.[4]

What it means

Though it remains uncertain how lower energy prices will impact the broader labor market in Texas, and how that may spill over into the rental markets, fewer new workers moving into energy-producing regions should eventually translate into lower rents and slower rent appreciation. This is particularly true in the upper-end market that has recently catered to the influx of well-heeled energy sector migrants.

The most recently arrived renters, the better educated and the younger – those most likely to retain ties elsewhere in the country or be able to move easily into other industries – are also those most likely to move if the oil and gas industry continues to shrink.

[1] Bureau of Labor Statistics, Current Employment Statistics, State and Metro Area Database. Data not seasonally adjusted; includes “oil and gas extraction” and “support activities for mining” industries.

[2] The following section relies on Zillow analysis of data from a pooled sample of 2012 and 2013 American Community Survey (ACS) data made available by the University of Minnesota, IPUMS-USA. We include workers in five industries: Oil and gas extraction (0370), support activities for mining (0490), petroleum refining (2070), miscellaneous petroleum and coal product manufacturing (2090) and construction and mining and oil and gas field machinery manufacturing (3080). This is only a very narrow subset of workers supporting the oil and gas industries.

[3] Includes only employment income. 2012 incomes are updated to 2013 dollars using the growth rate of the Consumer Price Index.

[4] 2012 rent inflation adjusted using the average 2013 annual change in Texas metro area Zillow Rent Index (ZRI).