The Good and the Bad About Lower Oil Prices

CHICAGO--Don’t you just love the lower prices at the gas pumps? Believe it or not, such good news has a deleterious effect on certain office markets, as a newly released report from Commercial Property Executive points out.

Quoting a Cushman & Wakefield report, Oil: the Commodity We Love to Hate, writer Gail Kalinoski says that prices will continue to stay low, below the $60-per-barrel mark, through the end of 2017, and might not top $70 by 2020. However, she writes, while this is cause for celebration for consumers and non-energy-producing markets, “oil-producing markets around the globe are facing pressures, some more intense than others.”

“While the positives from lower oil prices outweigh the negatives in terms of impact on global economic growth, the effects on the office market are more of a mixed bag,” says Kevin Thorpe, Cushman & Wakefield’s global chief economist. “Most energy-producing office markets have seen economic slowing and lower occupancy levels, while stronger consumer spending has boosted occupancy virtually everywhere else. For occupiers, the prolonged oil price rebalancing will create efficiency and cost-saving opportunities in some markets, but rental pressure in others.”

The US provides 13.9% of global oil production and “is set to surpass Saudi Arabia as the top-producing country,” says Kalinoski. In Houston and Oklahoma City, the top oil-centric markets in the country, energy accounts for as much as 17% of the city economies. “Since the drop in oil prices in 2014, they have had some of the highest office vacancy rates in the US. Unfortunately, new product hit the market after oil prices dropped and demand had slowed. Cities like Dallas and Denver, which have more diverse economies, have seen their office markets hold up much better.”

Canada, the report notes, provides 4.8% percent of global oil production, and it too has been hit hard by energy-sector job losses and office-vacancy increases, “particularly in the Alberta province.” Latin America, which provides 11.2% of the world’s oil, “has had different impacts because of the varied political structures and economic conditions among the countries,” says Kalinoski. “Similar to the US, those cities that rely heavily on energy for their economies have been hit harder than those with more diverse economies. Caracas, Venezuela, has an office market that is highly influenced by the oil industry, compared to Mexico City and Bogota, Colombia, which have not seen as much impact on their markets.”

Continuing around the globe, the fortunes of cities from Europe to China will rise or fall by their reliance on energy. Ultimately, then, it becomes a waiting game.

“The window of opportunity will not remain open for occupiers forever,” notes Thorpe. “Many energy cities have strong long-term fundamentals and the energy sector will ultimately recover.”

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