TEXAS SNAPSHOT, MAY 2010

Midland Industrial Market

In the Midland industrial market, no activity seems like relatively good news. As landlords around the country have been struggling to retain tenants and brokers have been scraping to find clients on the market, companies in the Midland market have stood still. Deal velocity is low, and it’s still difficult to obtain any kind of financing, but certainly, things could be worse.

“Overall uncertainty for the last year has affected our market as well. We didn’t see much increase in vacancy, however; everyone just kind of held still,” says John Elphick, president of Midland-based Southwest Commercial Investments. But a turnaround, he thinks, is right around the corner. “Over the last few months, evidence is gathering that we’re going to have a pretty decent 2010 in that the oil business seems to be returning to the field, which will trickle down over the next few months. We’re looking for an increase in activity in the second half of this year.”

The oil market will fuel some of this activity. Midland is on the Wolf Berry trend, so once the economy picks up, there is plenty of prospecting to do for local businesses. Profit margins for oil at $70 a barrel are much better than they were even in the days when oil went for $150, Elphick says. In addition, the low cost of services and materials has made drilling in the current economy more financially possible, which is echoed by the fact that operator-service companies have started putting people back to work.

“They’ve sat on the sidelines all they can stand, they’ve got a lot of leases that they need to hold by drilling, so they’re going back to work. There are thousands of locations in the pipeline right now to be drilled up,” he says. “We should do a little better here maybe than some other parts of the state.”

While drilling will help the industrial sector, there’s still a lot of uncertainty when it comes to buying and selling properties. Acquisition funding is hard to find because nobody can nail down a real-time definition of a cap rate and the underwriting standards keep changing with every shift in the economic outlook. Investors are left sitting out in the cold and aren’t even looking at properties to buy because debt isn’t available. Elphick thinks, however, that once the economy turns a corner, buyers and sellers will come back into the market with a vengeance.

“We’ve seen some low-equity offerings do pretty well recently, so I know there’s a lot of money on the sidelines looking for the right deal,” he says. When they come along, they seem to be favorable to the prospects, so I’m expecting to see some more maybe user than investor-type development.”

One big development on the horizon is Summit Energy’s clean coal plant. The deal is still in the pipeline, but it’s being funded by a $350 million Clean Coal Power Initiative grant from the United States government. According to the Odessa Chamber of Commerce, construction of the facility will utilize more than 1,000 workers and about 150 employees would staff the property once it is completed. Deliverey of the project is tentatively slated for 2014. The city had been in the running for a similar type of power plant 2 years ago, but lost out to a city in Illinois.

“There’ll be some vendors and suppliers and that kind of stuff that will come with that,” Elphick says of the regional impact of the power plant, which will likley spur more industrial growth in the area. “That will help [the market], but I don’t know how to judge that,” he continues. “We haven’t had that kind of project here before.”

Even in the tough market, not a lot of product is available. Developers didn’t flock to Midland to build countless speculative warehouses, so there’s no a rash of vacancies in the area. Massive company meltdowns haven’t hit Midland, either, so the dwindling occupancies seen in many places throughout the country brought on by downsizing have been kept to a minimum in the city.

 “Very little product became available from people going out of business or defaulting. Everybody just took a time out, went to the sidelines,” he says. “Rates have held, for the most part, a little bit of softening, maybe some incentives a little bit, but pretty much it’s just held steady for the past 15 months or so.”

— Jon Ross

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