4 Reasons The CRE Industry Should Care About Oil Prices
The supply-demand imbalance in the oil industry has led to some of the lowest oil prices since the 2008 financial crisis—and that's impacting the commercial real estate industry.
Coming out of the recession, Brent Crude peaked at $115.19 a barrel in 2014. But then massive global oil output coupled with a lack of demand triggered a huge price correction that sent crude prices to lows of $26.01 earlier this year, according to Cushman & Wakefield’s latest oil report.
Global suppliers have been working to reach a deal to cut supply. OPEC agreed to cut production for the first time in eight years at the end of September, shocking investors. Members of the organization agreed to limit production to no more than 33 million barrels a day, except for Iran, which will be exempt. Since the announcement, crude prices have been on the rise—as of Oct. 20, crude prices have risen to $50.63 a barrel.
This news is important for the commercial real estate industry, Cushman & Wakefield chief economist Kevin Thorpe says.
“It’s interesting because most people, when they think of commercial real estate they think of job creation, interest rates and cap rates. Though they know oil is impactful, they’re not sure how impactful,” Kevin tells us. “Here are four good reasons why the commercial real estate industry should care about oil.”
1. Low Oil Prices Ultimately Boost Consumer Spending
For every one-cent drop in gas prices, US consumer spending increases by $1B throughout the course of the year, according to C&W stats. More consumer spending essentially leads to a rise in business profits, which boosts job creation and ultimately increases office demand.
2. Oil Price Shock Has Had A Huge Impact On Global Office Markets
As mentioned above, increased consumer spending can ultimately result in more job creation—which is the biggest driver behind office demand. Since oil prices began falling in mid-2014, global office demand has increased by 18% and the world economy has created roughly 32 million new jobs in addition to seeing vacancy rates fall by 50 to 100 basis points. Though other economic factors also impact employment and the office sector, low oil prices have been an added help to non-energy-focused companies.
3. Oil Prices Also Impact Construction Costs
Build-outs are less pricey when oil is down.
“Low oil prices make it cheaper to transport raw materials,” Kevin tells us. “Oil goes into the creation of roofing, and other construction materials—when oil prices go down, it typically means the hard costs goes down.”
4. One Negative—Oil-Dependent Markets
Energy-centric markets aren't celebrating, though. Those cities that account for most of the US’s oil production are getting hit hard by plunging prices, leading to slower economic growth and less job creation—though the level of impact varies greatly from city to city.