Williston, North Dakota Industrial Market – April 2016

Photo is overlooking Williston, ND, taken by Mitchell Simonson, MAI

Historically, the Williston Micropolitan Area industrial market has not been formally recorded by an organization or institution because of its location and market size. The Williston market area, located in the center of the Bakken Oil Reserve has experienced tremendous growth over the past seven years in terms of industrial development to accommodate the expanding oil well drilling, rigging and production process.

The local industrial market has expanded with several new industrial parks annexed into the city and land on the fringe that has seen substantial industrial development. Major industrial parks include Bennett Industrial Park, Bakken Industrial Park, Missouri Ridge Commercial Park, and Owan Industrial Park. From about 2010 to 2014, the Williston MSA absorbed nearly all speculative industrial projects and vacancy in the area was very limited. It is estimated that fewer than 10 to 20 buildings had vacancy at any given time.

With rapidly declining oil prices commencing in late 2014, the market has shifted and vacancy rates have increased. This is attributable to oil related companies closing down, pulling out of the market and speculative development that was underway prior to the slowdown not being leased or sold.

Due to the rapid growth rate in new development through early 2015, identifying the actual vacancy rate was difficult to accurately assess. The pace of development has slowed since late 2014, with speculative development at a near standstill. Currently, more building vacancies exist in Williston than seen over the past few years.

In April 2016, the inaugural Simonson Report conducted an extensive search throughout Williston and the immediate surrounding area to establish a current vacancy rate for the industrial market. The surveyed area is for the Williston area market only and does not include Watford City and surrounding cities such as Tioga, Stanley, New Town, etc.

A visual drive-by of all Williston area industrial parks was performed to observe vacant or available buildings, obtain broker listings and gauge current development trends. In addition to field observations, sources include public records and listings found online. Several market participants in the Williston industrial market were surveyed and interviewed including the following real estate brokerage firms and brokers.

The first step was to identify the total amount of industrial inventory in Williston. According to data compiled from the Williams County Assessing Department, the total Industrial/Shop Building Inventory is 980 buildings with 8,291,464 square feet of gross building area. This works out to an average building size of 8,461 square feet.

Based on the available building inventory for lease or vacant for sale buildings, the Simonson Report estimates 47 buildings are vacant or available with total vacancy of 568,741 square feet. Based on the total building area inventory of 8.3 million square feet, market wide vacancy for the Williston MSA is approximately 6.86%. This is for the Williston area market only and does not include Watford City and surrounding cities such as Tioga, Stanley, New Town, etc.

With market vacancy at 6.86%, this allows for more options for tenants needing to reduce or increase their space needs. In addition to the indicated vacancy, there appears to be some shadow vacancy. This would include buildings that are not currently listed for lease or sale, but appear to be vacant at present time.

The Bakken region is currently down to 29 active drilling rigs (as of April 15, 2016), but there are still significant servicing needs for the 13,000 +/- producing oil rigs.

Industrial Property Asking Price Index – Loopnet™ Listing Trends

The following table depicts asking sale prices in the Williston area according to LoopNet™.

SOURCE: LoopNet™

According to LoopNet™, current Williston market trends data indicates a decrease of -2.0% in the median asking price per square foot for Industrial properties compared to the prior 3 months and a decrease of -12.3% compared to last year’s prices. County-wide, asking prices for Industrial properties are -2.0% lower at $139 per square foot compared to the current median price of $140 per square foot for Industrial properties in Williston, ND.

Sales of industrial buildings over the past six to 12 months in western North Dakota have been very limited. As oil companies look to keep a tight lid on expenses and preserve cash to maintain adequate balance sheets, the trend is towards leasing versus owner occupancy. Furthermore, financing is extremely difficult to obtain and this also impacts the “for-sale” market. One broker opined that although it is difficult to project capitalization rates given the lack of recent sales, rates within the 10.0% to 12.5% range are likely reasonable for most industrial product in the local market.

Industrial Property Asking Rent – Lease Trends

The following table depicts asking rental rate prices in the Williston area according to LoopNet™.

SOURCE: LoopNet™

According to LoopNet™, the average asking rental rate per square foot/year for Industrial properties in Williston, ND as of Feb 16 was $18.55. This represents a decrease of -7.2% compared to the prior three months and a decrease of -8.3% year-over-year. County-wide, average rental rates in Williston are -4.5% lower at $18.14 per square foot/year for Industrial properties currently for lease.

The general consensus among all interviewees is that the outlook for 2016 appears to be uncertain. Industrial rental rates have started to trend downward, but most participants do not expect rates to lower significantly. This is attributable to the difficulty in getting financing even during the initial oil boom from 2010 through 2014. It was reported a significant portion of the industrial development was financed with low leverage. There has been a relatively steady stream of leasing activity as more options exist for tenants to choose from. Thus, the expectation is rental rates will hold steadier.

Over the past several years, rental rates were in the general range of $15.00 to $20.00 and higher, depending on the level of build-out and land requirements. More recently, rates have been reported in the range of $14.00 to $18.00 per square foot, NNN for newer product. Additionally, lease terms have been shortening over the past year. Previously, a five to seven year term was more typical. However, more recently tenants are signing leases in the three-year range, and at times, one to two year terms.

Overall, market conditions are uncertain, and caution is advised given the occurrences in the oil market over the past 12-18 months. Commercial real estate values tend to lag behind other economic cycles, particularly in an area heavily influenced by a sector such as oil and gas. Pain is already occurring in the hotel and multi-family space types as new development greatly exceeds demand. This has led to declining building occupancies and falling market rents.

Please note the opinions expressed in this report are based on estimates and forecasts that are prospective in nature, and subject to considerable risk and uncertainty. Events may occur that could cause the performance of a specific property to differ materially from our estimates, such as changes in the economy (especially in relation to the oil market), interest rates, capitalization rates, financial strength of tenants, and behavior of investors, lenders and consumers. Additionally, our opinions and forecasts are based partly on data obtained from interviews with third party sources, which are not always completely reliable. Although we are of the opinion that our findings are reasonable based on available evidence, we are not responsible for the effects of future occurrences that cannot reasonably be foreseen at this time.

This article was written by Joshua Simonson, MAI and Mitchell Simonson, MAI. They have been providing commercial real estate appraisal and valuation consulting services throughout the western North Dakota Bakken Region since 2012. For any commercial real estate valuation questions, please contact Mitchell at 612-618-3726 or email Mitchell at [email protected].