05:41 am
28 August 2017

The Impact of Lowering Energy Prices on Commercial Real Estate

The Impact of Lowering Energy Prices on Commercial Real Estate

With a dramatic decrease in oil prices in 2015 and continuing into this year, commercial real estate (CRE) in the United States has been impacted significantly.  With the exception of a few metropolitan areas (Houston, Dallas, Oklahoma City, North Dakota’s Minot , Williston and Watford City as examples) that are both energy-centric and energy revenue exposed, most leading urban markets have seen increased demand (and increased prices) for commercial real estate.

Why is this?  Falling energy prices have spiked a boom in consumer spending and investment activity.  Funds previously committed to energy-related needs are now finding their way into new CRE ventures – including redevelopment and project launches.  Demand for office space and for retail has been growing exponentially and yields from a variety of commercial property types are on track to show double-digit gains this year.

Among the sectors that have benefited the strongest from the drop in oil prices are retail, hotel and restaurant.  Consumers with more money in their pocket are shopping, traveling and seeking entertainment and dining experiences at a much increased pace.  The expansion of luxury retail in hot travel pockets such as Miami (Wynnwood District), Naples (Mercato), Seattle (Pacific Place) and Los Angeles (expansion and redesign of Beverly Center) reflect retailers’ confidence in expanding demand.

Aside from retail, lowering energy costs are also having an effect on construction, logistics and manufacturing.  Since the United States imports most of its oil, falling prices have helped companies direct newly-available funds into investment and expansion – activities that lead to increased demand for both industrial and manufacturing space.  Lower operating costs for buildings (with savings passed on to tenants) is leading to increased demand for new or additional space.  Lower cost transport with cheaper gasoline available has also fueled hiring in a number of logistics and transportation based industries.

The fall in oil prices and its associated effect on commercial real estate has also led to increasing demand for a broad array of professional services connected to commercial real estate.  Architects and designers have seen newly heightened demand for their expertise, lawyers and accountants with proficiency in real estate are seeing growth in their discipline area and construction, development and management experts are also being sought at a near record pace.  With the economy stabilizing, energy prices declining and unemployment diminishing, it would seem reasonable to view the rest of the year as a solidly consistent growth opportunity for commercial real estate investors and stakeholders.