CBRE: Oil’s Mixed Results on CRE
After a year oil-price volatility, the commercial real estate fallout in energy markets remains mixed by property type and location, reported CBRE Group, Los Angeles.
“Fears about widespread adverse impacts have not been realized,” CBRE said in a new report, Energy 2015: What Low Oil Prices Mean for Commercial Real Estate in North America.
Even so, continued price volatility and uncertainty could impede market performance moving forward, the report said. The retail and hotel sectors have prospered in energy-dependent markets, while office fundamentals softened due to an increase in sublease space, particularly in Houston and Calgary, Alberta. Dallas/Ft. Worth, Denver and Pittsburgh fared better due to more diversified economic drivers that partially replace lost demand from oil and gas tenants. Meanwhile, multifamily markets in U.S. energy economies so far remain generally unaffected outside of minor effects in Houston and Pittsburgh.
“Adverse impacts in energy markets, particularly to the office sector, will be restricted to just a handful of key submarkets; they are not expected to manifest market-wide,” said CBRE Director of Research and Analysis Jessica Ostermick.
Real estate markets where exploration occurs, such as North Dakota, still show limited space availability, primarily due to the predominance of build-to-suit compared to the speculative construction that met oil and gas companies’ demand for office and industrial space early in the decade.
“The steep supply-demand imbalance that applied to all property sectors in exploration markets is relaxing after five years of rapid strengthening and tight or non-existent availability,” Ostermick said. “The slowdown in activity is also allowing some communities to catch up with needed infrastructure.
Robert Kramp, CBRE director of research and analysis, said low pricing on crude oil and gasoline remains a net positive for economic growth and for commercial real estate, particularly in non-energy markets. “Spending less on gasoline encourages consumers to spend more on other items, which may help retail and hotel market fundamentals,” he said. “Lower oil-related input costs will also reduce certain construction, manufacturing and logistics costs in support of business investment and expansion, boosting demand for warehouse and manufacturing space.”
Investors continue to show interest in office in more diversified energy markets like Dallas and Denver, but risk concerns have slowed deal flow in Houston, Calgary and Pittsburgh, the report said.
“Class A stabilized office cap rates are either higher or have remained flat over the past year in most energy markets, with the exception of modest compression in the Dallas and Denver central business district markets.”
CBRE noted in another recent report that it expects Houston and Dallas, which have lacked strong cap rate compression since 2010, to experience little cap rate adjustment–if any–should the Federal Reserve raise the Federal funds rate at some point in 2015 as expected.A detailed look at energy markets by sector:OfficeOffice space available for sublease increased by more than five million square feet in the five key largest energy markets over the past year; most of the oil-related sublease space is contained to a handful of submarkets. Second quarter occupancy fell by 100 to 380 basis points from a year earlier in Calgary, Houston and Pittsburgh, while occupancy increased in Denver and Dallas/Ft. Worth.
Retail
Low oil prices supported a tightening across U.S. retail markets, including most energy markets, CBRE said. U.S. retail availability declined 30 basis points from second quarter 2014 to second quarter 2015 and the firm forecasts it will decline another 150 basis points over the next year to just below 10 percent for the first time since 2008. All energy markets recorded lower retail availability rates from second quarter 2014 to second quarter 2015 with the exception of Pittsburgh. Houston led U.S. energy markets and outperformed the national decline with a 100 basis point year-over-year decline in retail availability. Looking ahead four quarters, CBRE predicts that Houston will again outperform the U.S. and all other energy markets except Dallas with a 190 basis point availability rate decline to eight percent.
Multifamily
Dallas, Denver and Houston have been three of the five most active markets for apartment completions in the past 12 months, accounting for 27,000 units. Houston apartment fundamentals retreated slightly, with a year-over-year vacancy increase of 10 basis points and positive but below-average rent growth. Outside of Denver and Dallas/Ft. Worth, annual apartment rent growth in energy markets was below average in the second quarter.
Industrial
CBRE expects that heightened demand from manufacturing, construction and logistics tenants will result in a net gain in (or at least sustained) occupancy levels for the industrial sector overall.
Hotel
In energy markets, effects of lower oil prices on the hotel sector will likely remain mixed, CBRE said. As business travel slows, so will occupancy and room rate appreciation in the full-service segment. But increased leisure travel and tourism will strengthen occupancy and room rates in the limited-service segment. “Hotel fundamentals in U.S. energy markets are generally healthy outside of Houston and Pittsburgh, which will record notable declines in occupancy levels,” the report said. CBRE expects Dallas, Denver and Ft. Worth will see occupancy either slip slightly or increase over the next year while Houston and Pittsburgh will record occupancy declines of 380 basis points and 130 basis points from 2015 to 2016, respectively.
