Reuters has reported that oil reached a record high of $107 per barrel on Monday. The main drivers behind this surge were a rush by financial funds into commodities and political tensions. While all U.S. industries will be affected by this latest turn of events, the commercial real estate market will be noticeably altered in the equations used to value a property for real estate investment.
The main ingredients produced from a barrel of oil affect both the business community and the consumer. Some of the company types affected in the business community are those that involve airlines, trucking, automobiles and all the cottage industries that support their activities. Although the impact on these businesses is significant, from a real estate investment perspective the primary interest is the affect that crude oil prices will have on consumers. It is consumers that account for 70% of our Gross Domestic Product (GDP), and it is consumers who live, work and shop at the core types of commercial real estate: Residential, office and retail.
The record price per barrel will affect consumers two ways. First, more money will be spent to heat and/or air condition homes. Second, consumers will spend less time in their cars. The first means they will have less money to spend. The second means they will change how they spend their money. In other words, the American consumer has less money to spend and is changing their buying habits.
Those changes will have the most dramatic impact on retail properties. The consumer will still shop, but will have an alternative: The Internet. The most recent data from the Census Bureau of the Department of Commerce shows that the growth rate of e-commerce far outpaces that of traditional brick and mortar retail stores.
The financial impact on commercial real estate from the record prices at the pump is not coming tomorrow — changes are already taking place. The International Council of Shopping Centers’ U.S. chain store sales index was up just 1.6% in October, the weakest result since 1995. What’s more, according to Thomson Financial, two-thirds of the nation’s largest retailers missed sales estimates for the month. In the end, comprehensive due diligence will make or break a commercial real estate investment. Future markets will not bail out poorly located income properties purchased with inadequate due diligence.
Daniel Fineren, “Oil hits record $107, U.S. dollar in focus”, Reuters
“Quarterly Retail E-Commerce Sales”, U.S. Census Bureau
“October chain store sales increase 1.6 percent”, ICSC: International Council of Shopping Centers