Affordable Oil: the Winners and Losers – A Guest Post from Llenrock Group
Dec 30, 2014
This post from Eric Hawthorn is part of our Llenrock Group guest post series and originally appeared on the Llenrock Group blog.
In the business world, there are very few black-and-white issues. Sure, there are plenty of overzealous bloggers and TV pundits who will quickly reduce the world into the simplest possible terms, explaining away the world’s gray areas in the simplest sound bytes possible. Few things are clear-cut in the business world, though, and it takes some time to really understand the economy’s largest issues.
Take, for instance, the price of oil. Oil is, of course, one of those economic drivers that has an enormous influence on markets and sectors outside the enormous energy industry. So when something significant happens–like, I don’t know, the price of oil drops precipitously–we must be careful not to reduce this news to such simple terms that we lose the bigger picture. It’s easy to say Low oil prices are good for the economy or Low oil prices are bad for the economy. Well, as with so many other things, the truth is probably somewhere in between–a little bit of both. Sure, we may see some instability on an international level–especially when it comes to OPEC’s ability to control oil prices and exports, or tensions between oil-producing countries–but here in the States we’re certainly seeing some benefit from the drop in oil and gas prices–particularly when U.S. consumers go to the pump and are pleasantly surprised to discover that it doesn’t cost $60 to fill up their tank. Far from it, these days..
Naturally, I want to talk about the connection between oil prices and commercial real estate activity and demand. CoStar Group’s Randyl Drummer explains,
The price of a barrel of oil has fallen to its lowest level in five and a half years and analysts are crediting a big bump in November retail sales as less expensive gasoline and heating oil leave extra dollars in the pockets of U.S. consumers available for holiday shopping.
The new numbers confirm the speculation of economists about the impact of the recent oil price collapse on commuters, shoppers and businesses. Consumer price inflation fell by 0.3% in November, its largest drop in six years, as gasoline prices plummeted.
This has been great news for the retail sector and retail real estate, with consumer spending at its highest point in years. Part of this is simply the holiday shopping season–the days of traditional and online retail activity leading up to today. But part of this is the fact that consumers feel more comfortable spending more money and accumulating more mileage on their car (analysts tell us) thanks to the decreasing financial hit at the pump. But while affordability is a boon for consumers and B2C industries like retail and hospitality, low prices are not always a good thing for a market or economy as a whole (just ask Japan, were price growth has remained stagnant for many, many years).
Okay, hotels are looking very strong going into 2015 thanks to increased numbers of travelers (which equals higher ADR, leading to a significantly increased RevPAR next year), and we know that low energy costs have benefited traditional retail, but which areas are being hurt by the oil price decline?
U.S. energy hub Houston, Texas, naturally, is being affected by the decreased energy cost. One of the most recession-resilient of American cities, and one of the top destinations for investment capital in the CRE sector, Houston has seen tremendous growth in recent years as Houston-based energy companies have expanded their office real estate footprint and peripheral real estate like residential and retail assets saw increased demand. But with the rather unexpected drop in energy prices, energy companies are slowing their growth strategies. Texas, of course, is most affected by this, but lower-tier northern energy markets like Denver and Pittsburgh are seeing diminished growth, too, though these latter cities are much less affected because of their general focus on natural gas over petroleum.
It seems that we can’t single out any particular asset class as either a beneficiary or victim of the decline in oil prices. It seems the impact is largely confined to particular energy-focused cities, particularly in the Sunbelt, but fortunately, these markets will most likely experience only minor hiccups in their overall growth.