Oil Seeps Into Every Corner Of CRE. The Reckoning From Price Spikes Is Still To Come

For decades, oil prices have been treated by most of the real estate property sector as economic background noise.

But when roughly 20% of the world's oil supply stopped flowing through a single chokepoint in the Strait of Hormuz, that worldview collapsed.

Across the U.S. and UK, oil price volatility is now directly influencing whether projects are viable, how buildings are designed, and where capital flows in an increasingly unpredictable market.

Rising oil prices reach every square foot of property, impacting transportation costs, inflating construction material prices, pressuring labour markets, influencing central bank policy and reshaping occupier demand. 

The Iran war price spike has already chilled investment markets. And even if the conflict were to end tomorrow, a huge impact on every aspect of the sector is still coming down the tracks for real estate. 

“It’s not just an energy story. Depending on how long the crisis lasts, inflation could get very serious indeed,” Deloitte Chief Global Economist Ira Kalish warned.

“This could get ugly — but it really depends on how long the crisis lasts because the pipeline is empty now.”

The transmission mechanism from oil shock to property values is well-established because we’ve been here before. Energy prices spike — Brent crude is currently $25, or 30% higher than before the war, but has risen by as much as 60% at points — construction materials follow, broad inflation picks up, occupier costs rise, central banks hold rates higher for longer, mortgage costs stay elevated, transaction volumes slow and values compress.

“This isn't a forecast, it's a precedent that played out in granular detail across markets after 2022,” Switzerland-based residential project specialist and Projecti founder Luka Dosen said of the lessons learned from the last spike following Russia’s attack on Ukraine.

The 2022 data was stark, as steel rose 40%, glass 49% and bitumen climbed 15% to 25% for every $10-per-barrel increase in crude, Dosen said.

"That means that development teams still running cost assumptions from Q1 2026 are working with stale numbers. The full weight of this shock will hit contractor pricing in Q3 and Q4,” Dosen added of the current crisis.

The clearest and most immediate impact comes because of construction and development’s reliance on diesel power. Excavators, cranes, generators, haulage fleets and shipping networks all guzzle fuel, and logistics developers have been hit particularly hard because industrial projects often require large quantities of steel, concrete panels and imported equipment moved long distances by truck.

In U.S. markets such as Phoenix and Dallas, where sprawling development patterns rely on regional road networks, fuel costs can materially change project economics. More generally, the U.S. is better insulated from energy price inflation because it is a net exporter of natural gas. 

The UK market faces an even more complicated situation because of its dependence on imported materials.

Oil price increases also feed directly into material inflation because petrochemicals are embedded in modern construction. PVC piping, insulation foam, roofing membranes, adhesives, sealants, paints and synthetic flooring are just some of the building components that rely on petroleum derivatives. Even products not directly linked to oil often become more expensive because manufacturing itself is energy intensive.

“The problem is that it’s a moving feast, and assessing the impact accurately is very difficult. But our estimates from members show that if the price of a barrel of oil sits at $100, then material prices could go up 15% to 20% over the next year,” RICS Chief Economist Simon Rubinsohn said. Prices are currently about $95 a barrel.

On top of that, new steel tariffs in the UK from 1 July will increase steel prices, and Rubinsohn said financial constraints were now the No. 1 concern for members.

In the last quarter of 2025, RICS members forecast that building material costs would increase by 5% on average in the 12 months following, but in the more recent survey, that had increased to 7.5%.

"That is a significant uplift,” Rubinsohn said. “Clearly, this is not going to help with viability, and small- and medium-sized enterprises are particularly vulnerable.”

Even construction workers are affected by rising fuel costs, and in car-dependent U.S. metros, higher fuel prices have increased commuting costs for tradespeople, with contractors then facing pressure to raise wages or risk labour shortages. That dynamic has become particularly visible in the Sun Belt, where labour competition was already intense because of booming population growth, which is also biting the residential development sector.

“Higher material and financing costs are acting as major headwinds to single-family production," NAHB Chief Economist Robert Dietz said in a market update. "Meanwhile, multifamily markets have remained broadly resilient, but the same pressures weighing on the single-family sector could soon affect the multifamily market as well.” 

That is combining with a U.S. and European construction labour shortage to put continuous upward pressure on the cost of development, at the same time the end value of those developments is falling. The result: Very little is getting built. 

The UK construction industry has experienced similar issues, and subcontractors are being forced to check material prices and availability weekly, according to Southern Construction Framework’s latest market report for the first quarter of this year. It found that build costs jumped 5.8%, with steelwork up 13.3%, groundworks up 6.3% and concrete frames up 5.9%. Build costs are expected to rise by a further 8% by Q1 2027.

“There is often misalignment between design ambition and budget reality," SCF Assistant Framework Manager Janara Singh said of the findings. "This disconnect is driving repeated value engineering exercises, redesign cycles and extended preconstruction periods. As a result, the volume of enquiries continues to grow, while the proportion of projects converting to site remains constrained." 

Occupiers Feel The Heat

Operational energy costs have become another defining issue, and this has accelerated demand for high-performance buildings with strong environmental credentials. Tenants are prioritising offices with advanced HVAC systems, renewable power integration, modern insulation and smart building technologies. Landlords unable to provide energy-efficient space face growing obsolescence risks.

"Our occupier clients are worried about rising energy costs and are increasingly looking for ways to both reduce their energy demands and improve energy efficiency," JLL Head of Sustainability Services, Americas Josephine Tucker said in a recent update. "They are also seeking more creative solutions, such as on-site solar or battery storage, demand management, or microgrid solutions." 

And the size of the prize when it comes to reducing energy costs can be significant. Interstate Gas Supply, an independent retail natural gas and electric supplier based in Dublin, Ohio, estimated that an energy-efficient large corporate headquarters building could save its tenant around 30% of its energy costs compared with an older building, or over $40,000 annually.

Not all real estate sectors are impacted equally. Data centres and life sciences are typically energy hungry, as are hotels and restaurants, with the former also at the mercy of tenants over in-room energy usage, making building management control especially difficult. At the other end of the scale, offices provide tenants and landlords with the greatest potential central control.

There are some small upsides. In the near term, geopolitical uncertainty is more likely to drive defensive occupier behaviour in some sectors. There will be an increased demand for space from industrial and logistics users looking to secure additional warehouse capacity to buffer inventory and maintain service levels as shipping reliability declines, according to Colliers Senior Director, National Research Steig Seaward.

“Slower turnover and higher safety stock can therefore support distribution space demand even as overall trade volumes soften," he said.

Retailers are responding with similar caution, he added, encouraging more conservative import planning and inventory management. That could also include diversifying sourcing and accelerating nearshoring, supporting demand but increasing tenant cost and favouring efficient, well-located assets.

Finance Markets Respond In Kind

Oil spikes also affect development through financing markets. Historically, major oil shocks have contributed to broader inflationary surges, and central banks typically respond by raising interest rates.

An analysis from CBRE suggested that any sharp rise in oil prices has a strong impact on real estate pricing, with continental Europe facing a steeper adjustment than the U.S. because of its status as an energy importer.

Under the firm's base case scenario of a 20% increase in prices based on Brent crude oil futures for September 2026, European office, logistics and retail cap rates would rise by roughly 10 to 20 basis points at their peak, while residential would see an increase of around 5 basis points.

Under a more severe scenario involving a 40% oil price jump, cap rate expansion could reach 20 to 40 basis points across most commercial sectors, with housing again proving the most defensive asset class.

In the U.S., CBRE found that equivalent oil price shocks would generally lead to smaller cap rate movements, with most sectors seeing cap rates rise by only around 5 to 15 basis points under the 20% scenario and 10 to 25 basis points under the 40% scenario. Residential assets would again experience the least volatility.

The report also noted that any increase in U.S. cap rates would peak earlier and unwind faster than in Europe, reflecting the country's stronger domestic energy position and lower reliance on imported oil.

However, even in Europe, stronger fundamentals than during some of the previous energy cost spikes give some room for optimism.

“Real estate is a function of demand and supply. The narrative in the press has largely focused on a slowdown in demand, but CBRE's data has not shown a slowdown in either leasing or investment activity,” CBRE Global Head of Research Henry Chin said.

“The lack of new supply will become an issue in 2027/2028. Given higher construction costs and a thin supply pipeline, we could face a demand-supply imbalance when volatility begins to ease, particularly since new supply cannot be brought online within a matter of months.”

At the same time, real estate is less exposed to risk and less leveraged than in previous fuel crises, according to Aberdeen Investments Global Head of Real Estate Anne Breen.

“The current conflict in the Middle East has fundamentally changed the near-term risk profile for markets," Breen said.

"For real estate investors, this is not about avoiding risk entirely but about understanding where resilience really lies. Real estate today is better positioned than in previous cycles, with stronger income foundations, lower leverage and clearer sector differentiation.” 

Regardless, this is the third major energy shock in four years, and Rubinsohn added that volatility and uncertainty have made tendering and development costs hugely hard to forecast.

“If we look at the post-Covid period then prices stabilised but they didn’t go down quickly, and I think that’s a precedent we have to keep in mind. And even if there is a settlement over the Strait of Hormuz, how stable is that? How does the industry build risk in?”