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Rents can only go so low without foreclosure

 

Posted 12/22/15 (Tue)

Rents can only go so low without foreclosure

By Kevin Killough
While vacancy rates in Tioga soar, rents stubbornly sit well above rates normal for a rural community with a sparse population.
The changes in the oil industry have driven off a large chunk of the jobs that brought so many people to western North Dakota.
John Phillips, real estate development director for Lutheran Social Services, said the changing economy is leaving a greater portion of the population unserved by the current housing market.
Falling incomes
Since the slowdown in the industry, the layoffs have largely clustered around high-paying drilling and production jobs. Auxiliary industries and essential service workers are not facing layoffs. 
“Those are not the people leaving the area,” Phillips said. 
Yet rents have not come down far enough to be within the affordable range of people in these industries. 
Dennis Lindahl, owner of Dakota Public Relations, said the oil industry is moving more towards mid-stream activities, which are outside drilling, exploration, and production.
The mid-stream industry deals a lot more with production, storage, and processing of the commodity rather than its extraction. These jobs are not the six-figured positions that fueled the state’s exponential increase in per-capita income and made the area’s sky-high rents tenable. 
For a $1000 per month rent or mortgage to be affordable, Lindahl said, a person needs to make $40,000 to $50,000 a year.
“I don’t think our leaders realize that,” he said.
Recruitment effects
The rents, even at the lower levels they sit at now, could hamper recruitment for low-end essential-service workers.
Tioga Medical Center CEO Randall Pederson said it could impact entry-level recruitment at the hospital.
“It’s always a concern when rents are too high,” he said. 
Phillips warns this could have lasting impacts on the ability of Tioga and surrounding communities to develop any businesses outside the oil industry. 
“It’s difficult to create anything if you don’t have the infrastructure to support recruitment,” he said.
Phillips said when the boom hit Tioga, the city didn’t pursue development of affordable housing as aggressively as other communities, such as Stanley and Watford City. 
Instead, the city commission at the time put much of its energy into supporting Annabelle Homes. He said it wasn’t the wisest choice to go with the developers who were trying to make a quick buck.
“We were there for the long run,” he said. 
The problem is also compounded Phillips said, by the lack of accommodation from Washington for the “anomaly that is the Bakken.” 
Income limits that fit a typical small farming community don’t play out well in the rural Bakken in the midst of a gold rush. 
“Federal government doesn’t think that quickly out of the box,” Phillips explained. 
Rental collapse? 
With nearly half of rental units empty, a lot of people are wondering why rents haven’t fallen to meet the affordable range. 
Those knowledgeable about the rental market have different takes on how the future of rents in the Bakken may unfold.  
Dean Dovolis, an architect who worked on the Annabelle Homes and Cenex station projects, said a collapse could be just around the corner. 
While it may mean affordable rents, he said the situation could be “brutal.” 
Dovolis, who has a master’s degree from Harvard, said when the boom hit, developers rushed to get financing for their projects and capitalize on $3000 per month apartments. 
They were willing to accept risky terms, such as five-year paybacks and high interest rates.
“Most were greedy and ran for the roses….They built a lot of pro forma on $100 per barrel oil,” he said. 
This leaves them locked into loan terms that cannot be satisfied without high rents. It may explain why housing owners have been unwilling to lower rents to normal levels and have aggressively lobbied to shut down man camps.
Corbin Graham of Graham Construction, owner of the Mainstay Suites, said amortization is about one-third here what it is in your typical American housing market and construction costs are very high. 
He said the high rents have little to do with greed and everything to do with what an owner needs to charge to make any profit at all. 
“With the low amortization they are running bone thin,” Graham said.  
Even if oil commodity prices rise again, Dovolis said the state may not ever see a demand for labor as it did in the days of the boom.
Since those prices fell, companies have weathered the storm by making drilling and production operations much leaner and more efficient. They do far more with fewer people. 
“Employment will never go back to what it was,” Dovolis predicted. 
If rentals continue to see vacancy rates climb, the result could be widespread foreclosures. Apartments, townhomes, and other rental properties will then be sold at auction. New owners will be in a much better position to lower rents. 
Graham said developers will probably pursue other options before reaching foreclosure, and these options are preferred by lenders and developers. 
Renegotiating loan terms is one option.
So, the “apartcalypse” is not certain to unfold soon or at all. Graham said the rental market will eventually normalize but there are a lot of ways that could play out. 
He also points out there’s still a lot of business going on and the situation doesn’t reflect the bust of the 1980s. The demand for housing hasn’t vanished altogether. 
“There is no easy answer,” Graham said.