Oil’s Impact on Commercial Real Estate
Oil prices have drastically dropped over the last 18 months due to a serious oversupply in the market. US shale production of 9 million barrels per day has exceeded the 5 million per day average that the US has historically produced. The growth is even more pronounced when you compare today against this past May. The US produces over 750,000 barrels more per day than they did nine months ago. Along with this serious growth in supply, OPEC has decided that they will not slow down their oil production and have been sticking to their guns. Oil production increases accounts for about half of the drop in Oil prices, the other dominated by outside factors including the strengthening US dollar. The drop is very comparable to the drop in oil prices in 1980. Over a number of years following the drop in 1984/1985, the prices remained low and the US had solid continuous growth. DTZ expects to see something very similar to happen following the recent drop in oil prices. With the drop in oil prices coupled with the strengthening US dollar, commercial real estate expects to see one of the strongest markets since 2005.
To explain a little further, with lower oil prices, there will be more money in each business and consumer’s pocket (DTZ expects nearly $130 billion to be “returned” to consumers). This in turn, will lead to more jobs in the market and overall faster growth in the economy. If oil prices stay at $50 per barrel, consumers save $130 billion, which in turn goes towards spending by businesses and consumers, leading to a 75 basis point boost in US GDP growth. The growth in GDP will be of net benefit to the commercial real estate markets and the US should expect to see nearly 23 million sf of new demand across the country. This net demand is expected to be one of the strongest years of demand since 2005.
By: Nathan Edwards
Director of Research, DTZ - Washington, D.C.
Email Nathan: Nathan.Edwards@dtz.com
Contributor: Joe Wood, Research Analyst, DTZ
Follow DTZ on Twitter: @DTZ