How Low Oil Prices Could Benefit CRE

GlobeSt.com: What is the other side to the gloom-and-doom story of lower oil prices?

Peter Muoio: Over the long term, lower energy prices have a net benefit to the US economy. This goes well beyond the obvious impact of lower prices at the pump. The tailwind brought on by lower gas and heating costs will reduce input costs for manufacturers, distributors and transportation companies. While oil-producing companies and regions will feel the negative impact of lower prices sooner, low prices will affect different property segments in a variety of ways over time. Over the long-term, I expect a positive macroeconomic impact on the nation's growth.

GlobeSt.com: How will the lower prices affect regions of the market that deal directly with the energy industry vs. those that don't?

Muoio: We are already seeing a negative impact on real estate demand and the overall economies in energy-exposed areas. While energy companies and energy-related firms have instituted layoffs and cutbacks on investments, we are beginning to see positive ripples at the macro level and anticipate that these ripples will soon be seen on the regional level. Though they will begin slowly, the positive ripples will strengthen as consumers and businesses enjoy significant energy-cost savings. The multiplier effect will ultimately increase spending and investment and will boost the commercial sector in non-energy markets.

GlobeSt.com: How will the various CRE property segments be affected by lower oil prices?

Muoio: There will certainly be winners and losers. For example, the apartment sector in energy-exposed markets is now caught in a standard supply-demand mismatch. Multifamily projects that broke ground in these markets during more robust times will be completed over the next couple of years. As job growth slows, so will in-migration and demand for apartments. We estimate that vacancies will increase from the current 5 percent to around 6 percent, depending on how tied a market is to the oil industry. On the other hand, non-energy apartment markets will remain in close supply-demand balance through the next four years. As strong local economies generate housing formations and higher population growth, vacancies will hold at around 4 percent.

In the office sector, Houston will see a major impact as a very large energy market. As the fourth largest office market, Houston—and to a lesser extent, other energy exposed markets—will experience a significant deceleration in office demand. Keep in mind that many of these markets have robust development pipelines. As a result, vacancies in the aggregate in these markets will increase from just over 17 percent to a peak of nearly 19 percent. They will begin to stabilize again by 2018, when demand begins to increase and the completion rate decreases. On the other hand, stronger economies owing to the macros boost from low oil in non-energy markets will cause vacancies to fall faster than we previously expected, dropping from their current level of around 17 percent to nearly 14 percent by 2018. However, this substantial improvement will be abetted by the relative lack of current office development.

For the industrial sector, cutbacks in drilling and investment, as well as a general downshift in energy velocity, will directly impair demand for industrial space in energy markets. While demand should remain positive over the next two years, it will be far more subdued than previously anticipated. With many new developments already underway, a supply-demand mismatch will bump industrial vacancies in these markets from around 10 percent to 11 percent in 2016. Though demand will increase and vacancies will begin to decrease in the years that follow, vacancies will remain above their current level in 2018. By contrast, low oil prices will drive industrial demand in non-energy markets even stronger than previously anticipated and push vacancies in aggregate below 7 percent.

For hospitality, the prospect of cheaper gasoline and possibly lower airfares will increase tourism and reduce costs for businesses, thereby presenting a natural boost for the travel industry. However, energy-intense markets will likely feel a rapid deceleration, or even a downturn, in travel. This will result in a reduction in business and personal travel in those markets, where hotel operators will feel the sting of reduced demand as, in some case, new supply is accelerating. This will reduce occupancy and pricing.

The impact of low oil on energy-exposed and non-energy markets will have a unique impact in retail. While the other sectors will see vacancies moving in opposite directions, retail vacancies will continue to decline in both energy and non-energy markets.  The big difference will be in rate of recovery with retail in energy markets recovering at a much slower pace than non-energy markets, which will experience an increase in consumer spending brought on by cheaper fuel costs.