The Wall Street Journal
BY Eliot Brown
WATFORD CITY, N.D.â€”Shale oil turned this sleepy county seat surrounded by wheat fields into a boomtown, drawing developers to build housing for a population that has more than quadrupled in five years.
But with crude prices less than half of what they were nine months ago, land-rush euphoria is giving way to concerns that projects will stall and Manhattan-level apartment rents could plunge as drillers cut production and jobs.
â€śA person would have to be somewhat blind to not be worried,â€ť said Kent Roers, a Minneapolis-based investor who came to the area three years ago, and with his younger brother Brian has built 200 apartments in Watford City. The brothers were readying three more projects, but â€śas soon as oil pulled through $60 a barrel, we shelved those.â€ť
U.S. benchmark crude oil prices stood at just above $43 a barrel midday on Tuesday, down from around $100 in June.
For now, Watford City and other once-tiny towns in this region of western North Dakota are still humming with construction. Developers are building thousands of apartment units and homes, hoping to see the same demand that sent rents for two-bedroom apartments soaring to $2,800 a monthâ€”more than double what landlords got before a type of oil extraction known as hydraulic fracturing, or fracking, took off in the area starting around 2009.
City officials expect about 1,000 housing units to be completed this year, more than enough to house all the cityâ€™s residents before the oil boom. Thousands more are planned.
If the regional economy tumbles, the developers that could be hurt are mainly small and midsized investors. One exception: private-equity giant KKR & Co. The company is in the midst of building a $150 million cluster of apartments and homes about 50 miles away on a hillside in Williston called Prairie Pines. A KKR spokeswoman said the company is â€śmonitoring the situation.â€ť
Already, the oil industry has started cutting back. The count of drill rigs in the state has fallen to 110 from 191 a year ago, and state officials expect it to decline further. Employers are cutting hours, and while unemployment is still low, drilling companies have said they expect to slash expenses this year.
Banks already are beginning to pull back on financing for local development projects, fearful of how the oil plunge will play out.
First Bank of Baldwin is a small Wisconsin bank that holds more than $8 million in debt on four projects in Williston and in nearby Tioga and Dickinson. Shane Bauer, the bankâ€™s president, said rents on some projects are running lower than expectedâ€”about $2,600 a month for an apartment in one, down from a projected $3,200, although still high enough to make debt payments.
Given current oil prices, â€śI wouldnâ€™t, and weâ€™re not, investing additional dollars out there,â€ť Mr. Bauer said. â€śWe just want to see things level off.â€ť
A property bust isnâ€™t a certainty. Oil prices could rise, and many local officials believe the companies can still drill profitably at $50 a barrel or less. Even if prices remain low, there are now permanent jobs servicing all the wells that already have been built. In addition, surrounding towns have thousands of units of â€śman camps,â€ť no-frills temporary housing that could be vacated in favor of the new apartments.
Watford Cityâ€™s growth has been impressive even by oil-patch standards. Officials put its population between 7,000 and 10,000, compared with a census reading of 1,764 in 2010. While smaller than Willistonâ€”which has roughly 30,000 people, double its pre-oil populationâ€”Watford is growing at a faster rate and is surrounded by more oil rigs. Its low-slung Main Street, dotted with a pharmacy, a coffee kiosk and a local bank, is dominated by pickup truck-driving oil workers, and shops offering disposable covers for boots caked with mud.
Developers were so eager to build that they would â€ścome pull me off the combine at night,â€ť said Curt Moen, the part-time city planner and a full-time farmer, referring to his large wheat harvester.
Vedadi Corp., a Scottsdale, Ariz., company run by Jason Vedadi, is building hundreds of apartments in Watford City. Mr. Vedadi said he bought and flipped distressed properties in the Phoenix area before former colleagues suggested he take a look at North Dakota. Now he controls 400 acres with more than 750 more units planned or under construction.
â€śIt didnâ€™t take long to say, wow, â€™Iâ€™ve never seen anything like this,â€™â€ť said Mr. Vedadi, who added that he remains bullish about the regionâ€™s growth. â€śYouâ€™ve got little towns turning into cities … and returns that are crazy.â€ť
On the western edge of town, China-based Shangcheng Development LLC is working on a 237-acre project called Emerald Ridge where it has filed plans to build up to 1,500 units in apartments and townhomes. The company didnâ€™t respond to requests for comment.Â
Just north of Watford Cityâ€™s downtown, New York-based Coltown Properties LLC has finished 107 units and has plans for 200 more. Steven Neuman, co-owner of the firm, said aside from the North Dakota development, the company had no projects outside New York, where it largely owns apartments. Mr. Neuman, too, said he is watching oil closely, but is confident in the town.
Some developers have already cashed out. Beryl Thorson and her husband, Gary, owned two older, low-rent apartment buildings. In recent years, Ms. Thorson said she was able to raise rents to $900 a month for two-bedroom units, up from $350 around 2010, but still well below market because she didnâ€™t want to kick out longtime tenants. But she grew tired of maintaining the apartments, and values had soared, so the couple sold last year for a substantial profit, which they declined to disclose.
â€śWe got a very good price,â€ť she said.