How Energy Prices Are Affecting CRE

Domestic energy prices seem to have stabilized for now, but that still leaves a question: what will low energy prices do to (and for) commercial real estate over the longer run?

Domestic energy prices seem to have stabilized for now, even seen a dead-cat bounce in recent weeks, but that still leaves a question: what will low energy prices do to (and for) commercial real estate over the longer run? And it does seem like low prices will be around for a while, and maybe even drop again—that’s the usual behavior of the energy business—until the next shortage or international crisis. The full impact of energy prices on real estate isn’t fully clear yet, but some patterns are emerging. Low energy costs will generally be beneficial for property owners, but for different reasons for different property types.

The main upfront beneficiary of lower energy prices among property types is retail. The cost of gasoline in particular represents a windfall for American families, and typically when faced with a choice of saving a windfall or spending it, Americans hit the stores. For lower-income demographics, that’s not a frivolous activity, and spending less on gas means an upgrade in quality of life. Retailers who serve lower-income individuals and families—the dollar stores of the world, for instance, or Walmart and other discounters—certainly stand to benefit as long as energy prices remain relatively low. Middle- and upper-income households benefit as well, and they’re just as likely to spend the difference, but the impact is more muted for retailers that serve those demographics.

Demand for warehouse and distribution space will probably experience a small upward bump as consumers spend more on goods. Consumers will be able to spend more on both e-commerce sites (whose fulfillment is very distribution-intense) and standard brick-and-mortar operations. Apartment landlords will benefit from lower energy prices in two ways, one direct, one more hypothetical. The direct way is lower property maintenance costs. The less direct way would be spurred by renters who are feeling a little more flush and who decide to upgrade their living arrangements, and thus move to more expensive dwellings. It would take a long period of low energy prices for that to come into play.

Perhaps the most indirect impact will be on the office market. Unless you’re a landlord in Houston or Tulsa or Williston, ND, a prolonged energy-price bust is going to add jobs to the economy as economic activity enjoys a stimulus from lower spending on energy and higher spending on other things. The next jobs numbers will be out at the end of this week, and there might be some indication whether job growth is now being spurred by low energy prices, at least enough to offset the localized impacts on employment in the aforementioned (and other) oil patch office markets. Lower energy prices are also good for landlords in a more direct way: less spending on energy utilities. Like Americans at the gas pump, that’s an immediate benefit to the bottom line.