Bisnow Exclusive: 5 Economists On How The Oil Slump Will Impact Commercial Real Estate
The recent oil slump and stock slide have even the most confident investors hedging their bets. But just what will be the impact of this volatility on commercial real estate? Bisnow checked in with five of the country's top economists to find out.
Victor Calanog, Chief Economist, REIS
"The most immediate effect of low oil prices is to wreak havoc on oil, gas and mining company profits; any geographic area dependent on these sectors will be hard hit. But it also depends on specific property types—Houston office fundamentals have suffered, apartment fundamentals have yet to evince as much pain. At the end of the day, though, where jobs are being lost because of the oil crisis, that’s where commercial real estate fundamentals will tend to falter."
Jeffrey Havsy, Chief Economist, Americas, CBRE
“The drop in oil prices offers mixed blessing to US commercial real estate, but the positives outweigh the negatives. Lower prices will eventually help the consumer and the US economy, which will benefit commercial real estate. We haven’t seen a large uptick in retail spending, but that added change in consumers’ pockets continues to grow. At some point that will lead to increased retail sales. Lower prices adversely impact sovereign wealth funds whose revenue streams are derived from energy extraction. Many of those funds have been relatively large buyers of commercial real estate and have signaled a slower pace of purchases going forward. The withdrawal of that liquidity from the market will be a drag on pricing.”
Ray Torto, Harvard Lecturer, Retired Global Chief Economist at CBRE
"Low oil prices usually is a good factor for the US economy. But in 2016, I think the fall in oil prices has raised concerns about credit quality, which is reflected in the increasing spreads in the fixed income market. Folks are concerned that the 'old' industries of commodities and oil, which make up a large portion of the US manufacturing, might not be able to repay their debt. This could spread to the financial sector, which as of today has fallen the greatest in the S&P for 2016. So it is a crisis of concern for company earnings and the economy.
"For commercial real estate, a good economy is wind at the back and a contracting economy is headwind. As of now, there is only concern about the latter happening, and if it does, the good news is that the supply-demand balance in commercial real estate is about equal at the moment. All this raises concerns and leads investors to try and avoid risks. This may pass and this may not pass, so caution is the approach of the day."
Christopher Thornberg, Principal, Beacon Economics
"Oil and the subsequent panic in the markets will be a dampening influence on commercial real estate as wary investors seek safety from anything perceived as risky. But ultimately it will end up being a positive influence—low oil prices mean weak inflation, and this in turn means ongoing low interest rates. So, it's only a matter of waiting for the market to realize that commodities will not drive a general downturn in the US economy."
Robert Bach, Director of Research – Americas, Newmark Grubb Knight Frank
"Lower oil prices function like a big tax cut for consumers, so in theory they should boost retail sales and the outlook for shopping centers and retail-oriented distribution facilities such as fulfillment centers. It should also help the leisure and hospitality sector to the extent consumers use their windfall to travel. They are having a negative impact on office and industrial leasing activity in energy-dependent cities and regions, such as Houston, Midland-Odessa, Oklahoma, North Dakota."