Cheaper Gas: Good for Consumers, Trouble for CRE?

By Stuart Eisenberg, Partner & RE Practice Leader, BDO USA, L.L.P.

Today a barrel of oil is under $55, which is a substantial decline from the $112 per barrel of last summer. Even with consumers cheering for cheaper prices at the pump, the steep decrease causes concern at both a macro and micro level. If prices remain at a 5-year-low they could affect the global economy, as well as individual industries, such as real estate, and local markets that historically benefit from oil booms.

Exactly how plummeting oil prices will impact real estate and commercial real estate financing is hard to pinpoint because for real damage to be done the price per barrel would have to stay below the average break-even point for six months. However, the most likely casualties would include sovereign wealth funds, real estate-backed loans (including CMBS) and energy-driven markets.

• Sovereign Wealth Funds: Energy-exporting countries that have stashed billions in windfalls in sovereign investment funds could be forced to draw down on them as oil revenues shrink, rattling the stock, bond and property markets throughout the globe. As countries would tap into these assets, the funds could be forced to cut back their extensive real estate holdings. This could impact the $45 billion worth of U.S. commercial real estate purchased by foreign investors in 2014, according to research firm Real Capital Analytics.

• CMBS Loans: When refineries slow production to reverse the devaluation of oil, the need for a large workforce could decrease. Boomtowns could then become ghost towns, and highly leveraged assets – from hotels to multi-family complexes – funded by construction and permanent financing (including CMBS loans) could struggle to find tenants willing to pay a premium, or even tenants at all. The decrease in demand could potentially place these assets in delinquency.

For example, in Williston, North Dakota in 2013 and 2014, 14 CMBS conduit loans with a principal balance of $144 million were initiated: eight apartment complexes, four hotels, and two manufactured-housing communities. These asset classes depend heavily on a stable population, which could be significantly reduced and impacted if Williston-based energy companies cut employees in response to slowed production. A similar situation could also occur in other energy-driven markets, including Houston, Denver and Dallas that are home to large energy companies.

• Demand in Energy-Driven States: As oil production is cut and consolidations occur to reverse the price drop, it could lead to more than just unemployment. These markets could also experience increased vacancy in all asset categories that had been flourishing prior to the steep decline. For example, in Texas, where 2.5 percent of the state’s jobs in 2013 and 8.7 percent of its inflation-adjusted economic output in 2012 were tied to oil and gas, a slowdown could be especially damaging to both the local real estate market as well as the industry as a whole since Texas has often led the way in new, single-family home sales.

How do you think the collapse in oil prices will affect commercial real estate and financing? Share your thoughts in the comments section below.

Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.