A man walks back to his temporary housing unit outside of Willisburg, N.D. With what many are calling the largest oil boom in recent North American history, temporary housing for the huge influx of workers, known as man camps, now dot the sparse North Dakota landscape. (AP Photo/Gregory Bull)

The oil glut is threatening to expose cracks in the commercial-mortgage bond market.

Nomura Holdings Inc. estimates that $16 billion in property debt that has been sold to investors as securities is vulnerable to default after crude prices plunged, posing risks for the economies of U.S. cities and towns built around the boom.

Wall Street analysts are poring over commercial-mortgage backed securities for signs of distress as the oil crash weighs on demand for real estate in energy hubs. Properties that house workers such as apartment complexes, mobile-home parks and hotels are likely to be the first to see vacancy rates rise as oil rigs idle and jobs vanish, according to Nomura debt analysts Lea Overby and Steven Romasko.

“If this oil story persists, oil workers are going to go someplace else they’re transient,” Overby, a New York-based analyst at the bank, said in a phone interview. “Demand is going to go from very high to zero overnight, and that’s a problem.”

Small cities far from major metropolitan areas like those on North Dakota’s Bakken shale formation pose the biggest risk to CMBS investors, the Nomura analysts said in a Jan. 29 report. Their economies rely heavily on the energy business and grew exponentially as shale drillers arrived, the analysts wrote.

Williston Risks

One such community is Williston, North Dakota. Wall Street banks bundled debt on a dozen properties in Williston with other commercial mortgages into bond offerings sold in 2013 and 2014, according to Morgan Stanley. The majority of the loans are secured by apartment complexes and hotels built during the last five years as more than 200 oilfield-service firms moved into the town, according to Richard Hill, a real estate debt analyst at Morgan Stanley.

“There is increased risk that vacancies rise at these properties, bringing into question their long-term viability,” Hill said in an e-mail.

The risk of being on the wrong end of a boom-and-bust cycle is easy to spot in a recent prospectus for commercial-mortgage bond buyers. At Sand Creek Estates, a mobile-home park in Williston, about 179 of 225 pads are leased to corporate tenants, with the two largest being oil-service providers, according to documents provided to potential investors in a $1 billion CMBS offering issued in December.

While loans in small, energy-dependent cities make up a fraction of the roughly $600 billion commercial-mortgage bond market, some CMBS deals issued in the past five years have a relatively high exposure to such debt, the Nomura analysts said.

The boom in oil production coincided with the resurgence of the commercial-mortgage backed securities market, where property owners can finance just about any building that produces rental income. Bond sales linked to everything from skyscrapers to strip malls are surging amid a recovery in real estate values after issuance froze for more than a year in the wake of the financial crisis.

Concern among investors is mounting that lenders are lowering their standards amid the rush to sell new bonds, making it easier for borrowers to fund potentially unstable projects. Looser underwriting standards in the CMBS market are enabling landlords with subpar properties to pile on large amounts of debt, Moody’s Investors Service said in a January report.

Apartment Complex

A $20 million loan linked to two apartment complexes in Williston ran into trouble even as oil was surging, before reaching more than $100 a barrel in June. The owner of the Strata Estate Suites stopped making monthly payments in December 2013, just five months after the mortgage was packaged with real estate debt from across the U.S. and sold to investors in a $1 billion commercial-mortgage bond offering, according to data compiled by Bloomberg.

The complexes were being run like extended-stay hotels, with no leases in place, according to loan-servicer documents. LNR Property, the firm negotiating with the borrower on behalf of bondholders, is still trying to resolve the issue and may end up foreclosing on the property, the documents show. Hayley Cook, a spokeswoman for LNR, declined to comment on the loan.

The Strata Estate highlights the kind of makeshift operations that spring to life to accommodate a ballooning population. Lenders may encounter similar issues should more loans start to sour in areas that have been propped up by oil production, according to Nomura’s Overby.

Inflated Rents

Moody’s flagged the potential dangers of inflated apartment rents in North Dakota to commercial-mortgage bond buyers in a March 2014 report.

“Valuations could implicitly assume that rents are sustainable or neglect to address the high level of volatility associated with rapid growth in small towns,” Moody’s analysts led by Tad Philipp wrote in the report.

Even in big cities with diverse economies, the 45 percent drop in oil prices during the past eight months is sapping demand for real estate. In Houston, Shorenstein Properties took a 28-story office tower off the market in December after receiving bids.

The pullback may signal a shift in fortunes for U.S. oil and gas centers such as Houston and Austin, Texas. As recently as October they were named the most attractive markets for buying and developing real estate in 2015 in a survey by PricewaterhouseCoopers and the Urban Land Institute.

“Right now, people have hit the pause button a little bit,” Kevin Roberts, the president of the Southwest region at commercial real estate services firm Transwestern, said by phone. “There is a disconnect between buyers and sellers and between landlords and tenants.”