Companies

Shale boom strains local real estate market

Industrial real estate is tight for companies looking to move in




After opening a temporary office last summer in Gulf Tower, Downtown, industrial contractor Ref-Chem is seeking new digs to capitalize on pipeline work in the Marcellus and Utica shale plays.

But Ref-Chem is hardly alone in searching for a site for its Appalachian operations. As shale drilling booms, the industrial real estate market has tightened as more companies move into the area to follow the work.

“We’re a construction company. We belong in an industrial-type facility,” said Bruce Stewart, northeast manager of the Odessa, Texas-based company that specializes in building compressor stations and production facilities for the pipeline industry. “Because of the Marcellus, these types of facilities are in high demand.”

For Ref-Chem, the ideal location would be about three acres of land with about 5,000 square feet of shop space and 24,500 square feet of office space.

“It’s a similar space that all of the companies are looking for,” Mr. Stewart said. “And everyone wants to be in the Washington area and toward Southpointe. That’s the hot spot.”

Ref-Chem has three permanent employees in Pittsburgh and construction projects throughout the Marcellus and Utica. It plans to hire eight to 10 additional people if it finds a new location. “We would like to staff those positions as much as possible with local people,” Mr. Stewart said.

The company had revenues of about $250 million in 2013. That figure is projected to climb to $300 million this year, according to Billy Hinton, manager of business development for Ref-Chem. 

Jeffrey Ackerman, managing director for real estate firm CBRE, said there's high demand for such real estate.

“We get numerous inquiries almost weekly from companies looking for industrial space — usually small warehouse space, including yard space for pipe and equipment,” Mr. Ackerman said. “Pipeline companies have definitely been expanding, mostly south and west of Pittsburgh and moving into West Virginia and eastern Ohio, as well as northeastern Pennsylvania.”

The trend has been strong for the last few years, but CBRE saw a significant increase starting last summer, according to Mr. Ackerman.

The burgeoning Utica play, which lies beneath the Marcellus, is driving a lot of the interest, he said.

During the past three years, major corporations were the ones moving into the Appalachian Basin, the vast geological formation that includes both shale plays. Now, smaller niche players are looking to set up shop.

But there are very few existing sites — ready to build on with utilities in place — and rental rates for such locations are climbing.

Mr. Ackerman said rates can range $10 to $15 per square foot for ready-to-occupy space. That’s double from about four years ago.

Vacancy rates for industrial sites have fallen to “what some of us consider dangerous levels” at about 5 percent, said Joel Kreider, director at real estate firm Newmark Grubb Knight Frank.

The decline in available space is due to two factors, Mr. Kreider said. One is the economic downturn in 2008 that caused lenders to crack down on loans to developers that wanted to build speculative sites. Then, the oil and gas market boomed, which filled vacant space with companies seeking fortunes in shale.

“If lenders aren’t lending the developers the money to build and the available space is absorbed, you get where we are today,”  he said.

"We’re starting to see lenders ease up on speculative development, but we still have a ways to go," he said. "A developer has to have a pretty strong balance sheet to do a speculative building, even with the vacancy rate where it is."

Meanwhile, the pipeline and processing industry, or midstream sector, is expected to grow.

The oil and gas industry is typically divided into three sectors: The upstream sector that deals with exploration and production. The midstream sector handles the transportation, processing and storage of oil and gas. The downstream sector that handles the refining and distribution of oil and gas to the retail level.

Natural gas production has boomed in the region — the Marcellus alone is expected to produce about 14.52 billion cubic feet per day (Bcf/d) in April, according to the U.S. Energy Information Administration. But production is limited by the ability to transport the gas, said Anne Swedberg, senior energy analyst for Denver-based Bentek Energy.

“We’re forecasting that the regional prices are going to be fairly depressed over the next two years because there’s not enough pipeline to take that gas to the Midwest and Gulf of Mexico," Ms. Swedberg said. “The production can’t be absorbed regionally. It has to leave the area to other markets."

The major pipeline companies working the Appalachian Basin have announced projects to expand pipeline capacity or to reverse pipelines that once took natural gas from the Gulf of Mexico to the Northeast. Gas from the Gulf is no longer in demand with the Marcellus in play.

Bentek forecasts that there will be about 2.5 Bcf/d of gas flowing out of the region by the end of 2015. In 2016, that figure is expected to inch up to 3.5 to 4 Bcf/d as more pipelines come into service.

"Demand for midstream services will be huge," Ms. Swedberg said. "Pipeline companies can bring their projects on faster if they have the equipment and people to work. That’s part of what’s slowing things down."

Stephanie Ritenbaugh: sritenbaugh@post-gazette.com or 412-263-4910.

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