REIT Worries: The Impact Of Oil's Slide On Real Estate

The well-documented plunge in oil prices has prompted many investors to scour their portfolios for any exposure to the stumbling commodity, but Jefferies says there’s another place they should be watching: real estate.

“We worry REIT managements might be too positive about the outlook in Texas,” Jefferies analysts Omatoyo Okusanya, Charles Croson and George Hoglund wrote in a report to clients Wednesday, reiterating the conventional wisdom that oil-centric economies like Texas are facing substantial problems from the steep price drop for their best product.

The analysts warn that the mid-1980s oil slump had a major impact on Texas, substantially affecting real estate prices and valuations. Citing a 1994 Dallas Fed report, Jefferies says vacancy rates, regardless of property type, “shot up astronomically…far outpacing trends in the broader market.” That was partly due to significant overbuilding during the boom years, less of a concern today with the real estate market still facing the lingering impact of the 2008 crash, but still telling and a potential danger sign for real estate companies with oil and gas tenants that could face financial failure if oil prices stay low for longer.

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