Economists Weigh In: What Will Oil's Rally Mean For Real Estate
Oil has been on the rebound over recent months, so—though some think the rally is temporary—Bisnow polled top economists to find out: What does the oil price recovery mean for real estate?
Here's what they said.
Jack Kern, Yardi Director of Research and Publications
"Oil prices are rebounding because of an increase in the downstream drawdown of summer stocks but also because of some reduced output in newer, more expensive fields. My forecasts ultimately call for the price of oil to hit over $60/barrel by midyear next year. Since the rise in prices has been very gradual, it is unlikely to have a significant impact on consumer and business spending at the mid-level of the economy. Commercial real estate will retain its current level of cash flow and valuation albeit at a slower pace as expenses rise in transportation, logistics and utilities. If the economy were to see oil prices rise closer to the industry preferred rate of $80/barrel, then commercial real estate would see a major impact. Any forecast calling for caution at this point is unfounded."
Ken McCarthy, Cushman & Wakefield Chief Economist
"This is an interesting question and one that I think might be a bit premature. It’s true that the price of oil has increased to over $50/barrel in recent weeks, but the price is still below last year’s level. In fact, we saw a very similar pattern last year. Oil climbed to over $60/barrel in spring and early summer only to fall back to $30 in fall and winter. So I’m not sure prices will stay this high, especially since nothing fundamental has changed in oil markets. The OPEC nations have not reduced their production targets. There have been some temporary supply disruptions that have contributed to this run-up, but if those end, we could easily see prices fall again.
If the price of oil does stay above $50, the impact is likely to be minimal. At this price it is hard to see a significant impact on consumers since spending on energy as a percent of after tax income is near an all-time low. A slight blip up in oil costs will not have a material impact on household budgets. Higher oil prices might help some domestic shale producers, but here too, it is unlikely that this price would prompt a significant shift in supply/demand dynamics. It may help some producers who are now under pressure, which might have a marginally positive impact on oil center metros.
Both producers and consumers are not likely to change behavior unless they are convinced that a $50 price is likely to persist. Oil prices have been so volatile over the past two years that it will take a sustained period above $50 before anyone makes any changes."
Robert Bach, NGKF Americas Director of Research
"Oil prices in the $60 to $80 range would be considered equilibrium—tolerable for consumers and businesses, yet enough for well-run energy companies to make a profit. The recent rebound to the $50 range should help accelerate the transfer of failed assets (land and equipment) to more stable ownership, and signal to lenders that the worst could be over. This is hopeful news for the regions that host oil exploration companies, especially states like Oklahoma, Kansas and North Dakota, where the economies are less diversified than Texas. The recent increase will likely have an impact on hospitality properties, retailers and auto sales, but $50 for a barrel of West Texas Intermediate is still quite low compared with prices before the collapse in mid-2014. It’s a necessary step toward the recovery of the energy industry."
Lawrence Yun, NAR Chief Economist
“Higher oil prices are never good for CRE, with exceptions for office building occupancies among tenants of oil companies. Consumers could hold back spending growth and further slow GDP growth. The operation costs of running commercial buildings will rise from higher energy costs. And finally, higher oil prices will nudge up broad consumer prices and thereby force lenders to raise interest rates and be more stringent about commercial real estate loans.”
Ray Torto, Harvard lecturer, retired global chief economist at CBRE
"I think the price of oil at around $50/barrel, is a non-issue for consumers, but a stabilizing price of oil will settle a lot of macro nerves and stabilize revenue and business plans for a major industry in the US and worldwide. This is only good news for the macro-economy and for CRE which is the 'economy in a box.'"