High Energy Prices and Commercial Real Estate

American Realty Advisors recently published an interesting piece about rising energy prices and their effect on commercial real estate.  The key points to consider are:

  • The current high price of oil is expected to be more cyclical than permanent, and prices should peak in 2009. High prices eventually slow demand and justify increased exploration and production. However, it may take several years before these factors result in the price of oil falling to premium support levels.
  • With respect to usage, real estate's industrial sector is generally the most energy intensive. However, the multi-family and retail sectors are likely to be the most impacted by higher oil prices due to higher operating costs, increased tenant turnover costs, and reduced demand from a slowing economy.
  • Rising energy costs suggest that location is more important than ever. Office buildings located in public-transit-dominant central business districts should see more demand growth than suburban office markets lacking public transit access. Multi-family developments located near major employment centers should see increased demand. Warehouse distribution centers in locations that minimize transportation, labor and rent costs should also see increased demand.
  • Pricing for older, less efficient buildings is most at risk, as higher operating costs are likely to cut into their net rents more than at newer, more efficient buildings.

Please click on this link to read the entire article.