For investors, North Dakota used to be known for its frigid temperatures and barren landscapes, and also for the isolation many residents prized. Now an oil boom is quickly turning this into the hottest economy and real estate market in the US, and an international sensation. Local populations are doubling within just a few years, and are made up at least initially of migrant workers, mostly men, attracted by high-paying jobs. And while booms are known to eventually bust, the oil reserves in the Bakken region of the state are not expected to run out for a long time. Technology and agriculture are also major sectors contributing to the improving economy.
The oilfield is one of the biggest energy players in American history, and it has helped bring the North Dakota unemployment rate down to 3.2%. In comparison, the national unemployment rate has remained close to 8% in the past year. The state, which has a billion-dollar surplus, is investing heavily in infrastructure but is still struggling to keep pace as workers continue to pile in.
But can this last? Some investors are unsure about taking on the risk that the boom may fade too quickly. Posters on the American investor forum, Bigger Pockets, recently cautioned others about the Bakken region. “Oil and gas boomtowns can empty as quickly as they filled up,” one wrote in response to an inquiry on investing in the Bakken. But even that commentator admitted it was probably worth renting out mobile homes to the surge of migrant oil workers who are often desperate to find housing.
Responding to the naysayers
However, those who are on the ground already working in the region don’t feel the need to go out of their way to convince doubters of North Dakota’s lasting power. Their phones are ringing off the hook with calls from investors, and many agents don’t even have time to answer their phones. You might have to fly in to meet them in person if you want to capture their limited availability, one investor noted.
“There are a lot of naysayers,” admits Bill Murphy, chief operating officer of Bakken Realty, located in Williston, ND. “I say if you don’t believe in it, you shouldn’t be here. There are no guarantees on anything. But I do know there’s going to be a lot of oil here for a while.”
Murphy posted a six-minute video on YouTube in 2010, documenting video footage of Williston’s unspectacular homes and vacant farmland for sale. It has since garnered 144,388 hits, and forced Murphy, who still has his phone number posted on the page, to screen all calls now since he gets so many from out-of-staters looking for jobs. It’s worth the hassle, he says, since he also gets plenty of calls from investors.
Murphy and his wife are among those who have moved to the state recently, spurred on by the economic opportunities. They used to run a successful real estate agency in Colorado, but hundreds of sales suddenly dropped to less than 10 once the recession hit and the US housing market crashed after years of unchecked growth.
It didn’t take long for Murphy to find better luck in North Dakota. He and his wife set up a motor home in a parking lot in Williston in the spring of 2011, living in their office as well. Within a year, they had done a million dollars worth of business and were able to add more agents and open a 600-square-foot brick and mortar office on Main Street. They plan to open other offices this year in Watford City and neighbouring Montana.
“At times it feels like there’s so much excitement. It feels like mayhem here,” says Murphy. “There’s gridlock all over the place. There’s so much activity that you can’t believe it.”
Williston, for example, had a steady population of about 12,000 until 2010. Now it could become a city of 100,000 within 20 years, Murphy believes. The US Census noted Williston’s population growth of 8.8% between 2010 and 2011 was the fastest of any small city in the country. Dickinson and Minot, two others ranked in the top 10, are up 4% and 3.6%, respectively, in population. Watford City is growing too, with two-lane highways quickly becoming four lanes to help ease traffic. Population estimates are challenging at the moment, however, due to the influx of temporary workers.
Others have come from much further afield to get a piece of the real estate action in the state. Jason Simpson, owner and CEO of Cash Flow Gold in New South Wales, has been making regular trips to the Bakken region and helping investors from all over the world find rental properties there. He also provides services for those looking to invest in other US regions, but has found that North Dakota has been attracting particular interest lately.
Net returns of 30%
Simpson, like Murphy, has little desire to convince heavy sceptics. “Look, every investment has risk,” he says. “At the end of the day, you need to feel comfortable you want to buy in America. We don’t put high pressure on people. We generally work with people already in the position to invest and that have interest.”
These investors have done their homework, he says, and recognise the longer-term advantages of a market like North Dakota. Those who have bought properties recently have had net returns of around 30%, he says.
As an example, Simpson notes an investor could find a motel room typically selling for $48,000. That room would rent for $77per night. With an occupancy rate of 90% expected, the gross return would be 58.5%, but management fees should be considered, due to the constant change of tenants. Single-room apartments are also an option offering especially good returns.
To understand this need for housing, one only has to visit a town like Williston and try to find lodging. Simpson says many motels have 80% of rooms pre-booked to oil companies looking to house workers with longer-term contracts. That leaves little room for other visitors to find a place to stay.
For some oil companies, which have billions of dollars in revenue, only a lack of workers is holding back even greater production. And housing is a big reason for that. Simpson says working directly with these oil companies is a good way to lock in regular tenants, but it is just as beneficial to work with new start-up technology businesses, for example, which tend to attract more long-term employees.
Wherever the rental tenants are coming from, they have high salaries to draw on. North Dakota made headlines because workers at McDonalds earn a minimum salary of US$15per hour. One McDonalds in Dickinson offered US$300 signing bonuses to new employees. “That’s unheard of elsewhere in America,” notes Simpson.
Entrepreneurs of all types are striking it rich, as long as they find the right niche. Simpson says that when he visits North Dakota he tries to eat at odd times, like 4pm, since it is otherwise impossible to get a table without a long wait – and pizza deliveries can cost much more than in neighbouring states.
Much of the real estate market is similarly crowded and as hard to get into as the restaurants. The price of land is already up considerably as developers pounce on prime parcels rezoned for multi unit development. Simpson says a parcel in Watford City was selling for $13,000 a few years ago but was rezoned for multi-family housing recently. It is now selling for $1.1m.
But he also cautions investors to do their homework before making any purchase from abroad. A first step can be as simple as Googling a property to find past sales prices. “Don’t go throwing your money around,” he says. “Do your research first. People need to be very careful wherever they invest.”
Some locations are more attractive to families, for example, and more likely to attract long-term investors. Others, such as Williston, are hotbeds of growth but can be intimidating for investors not familiar with such terrain.
More rigs coming
Investors should also focus on the Bakken region, rather than North Dakota itself. Its area is the size of West Virginia, covering one third of the state, but it also spills into Montana.
There are more than 200 drilling rigs in North Dakota punching holes in the earth, more than anywhere else in the US, other than Texas. More rigs are expected to come in as exploration below ground has yielded strong results.
Ron Ness, president of the North Dakota Petroleum Council, told the Wall Street Journalthis year that he predicted the oil industry would drill 2,500 wells a year for the next 10 to 15 years.
Murphy, for one, is betting on this market lasting for a long time. Seeing the billions of dollars spent on infrastructure by companies is convincing.
“I know one thing – this is a whole lot better place than the rest of the US,” he says. “That’s why we’re here. I’m very happy we’re here, and don’t intend to leave. I’m not going back to Colorado.”
Why Invest in North Dakota?
Excellent ROI (36%), with long-term passive income
Motel development offers expected rental rates of $120pn
Families, oil workers and associated professionals need housing
Very high yields from long-term investment
Long-term capital growth with land and property prices rapidly increasing
Purchase price just $61,000 (all inclusive)
Source: Cash Flow Gold
Bakken Oil Towns
The following is a guide to some of the top investment locations in the Bakkan region.
2011 population: 16,006
The eighth largest city in North Dakota, Williston is expected to continue to see heavy population growth as oil money brings in workers and helps support new infrastructure projects.
A drawback is that the growth has brought in a large share of male workers, and not as many families yet. These workers have sprouted up in what is known locally as ‘man camps’.
“You wouldn’t want to go there if you were a single lady,” says Simpson, noting the attention would be overwhelming from the migrant oil workers. “The need for more women, and particularly kids, makes Williston in my opinion a bit of a rough town, only because it has expanded so fast. I think they’re coming to terms with that growth now, but it’s not personally where I’d like to take my wife and kids.”
However, Murphy – who has a new home in Williston – sees more positive signs ahead. Many of the young workers will stay, he says, and he notes that there were 800 births at the local hospital last year. Building permits doubled between 2011 and 2012, and this year is expected to see more growth. Five new restaurants are opening in the summer, and department stores are opening as well.
Apartment rooms generally rent for about $960per bedroom. Investors have also found lately that there is an interest in larger homes, some with as many as five or six bedrooms. Investors can rent these for $5,800–$8,200 per month under three-year contracts. The average three-bedroom home rents for $3,800–$4,800 per month. Three-bedroom homes are being listed for $193,000–$289,000, but in some cases larger homes can go for more than twice that.
The trend going forward is that developers will try to add more higher-quality units, especially in multi-family buildings. As more units come on, rental prices will eventually start to slip, Murphy says, and those with better amenities will hold their value best. With oil workers making around $87,000, better units are also fitting for the new money flowing in.
2011 population: 1,923
Located about an hour’s drive south of Williston, Watford City boosted its own growth potential last year when its city council approved rezoning, affecting more than 725 acres. The population is expected to swell to as high as 20,000 over the next few years, despite being only just over 1,000 three years ago.
The economic growth has not always been welcome, however. Residents have recently been pushing for a bypass of US Route 85, which has a steady flow of trucks passing through, and plans for that are expected to start next year. An estimated 12,000 cars a day also pass through Watford City’s Main Street. Some of the best-producing oil wells are right outside the city. The city is planning for longer-term growth, with a developer pitching for a new, expanded high school.
As in Williston, new retail developments are trying to keep pace. The mayor has also promised nearly $193m in infrastructure projects over the next few years, especially in expanded sewer and water connections, to help drive more residential growth.
2011 population: 18,499
Located even further south of Watford City is Dickinson, another of North Dakota’s major growth centres within the Bakken-Lodgepole TPS (Total Petroleum System) boundary. Dickinson’s town officials are planning to create a more vibrant downtown area, with greater residential housing density to attract retailers.
But this city has a head start on Williston, in that infrastructure was already in place before the oil boom. Employers include Dickinson State University, Baker Boy, and cabinet manufacturer TMI.
2000 Population: 42,485
Already known for its Air Force Base, Minot is the largest of the North Dakota cities within the Bakken-Lodgepole TPS boundary. It has seen its share of growth, serving as a trading centre for the entire region, and offers a wider range of housing options than other Bakken prime locations.
It has the attraction of a more family-friendly environment, with a strong school system and university, a zoo, gardens and nearby wineries. The median list price recently jumped from about $145,000 in 2008 to as high as $241,000, according to Zillow. But with expectations of a strong future in oil revenue for the region, there could be more growth ahead. And with a vacancy rate of under 1%, investors will find tenants easy to come by.