Fears of widespread fallout in commercial real estate from oil price plumet prove largely unrealized: CBRE
After a year of sliding and volatile oil prices, the commercial real estate fallout in energy markets is mixed across North America and by property type, but fears about widespread adverse impacts have not been realized, according to a new report from CBRE Group, Inc. Even so, continued price volatility and uncertainty could impede market performance moving forward, the report says.
“The precipitous drop in oil prices has had a mitigating effect on Calgary’s commercial real estate market. Downtown office has been hit the hardest, with a large increase in the amount of sublease space. However, we have not yet seen a substantial drop in head lease rates,” said Greg Kwong, CBRE’s Regional Managing Director for Alberta.
“Calgary’s industrial sector seems more resilient, the retail sector remains healthy and large capital pools remain interested in investing in all sectors in Calgary,” said Kwong.
The retail and hotel sectors have prospered in energy-dependent markets, while office fundamentals have softened due to an increase in sublease space, particularly in Houston and Calgary. Dallas/Ft. Worth, Denver and Pittsburgh have fared better due to more diversified economic drivers that are helping to replace lost demand from oil and gas tenants. “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 Jessica Ostermick, director of research and analysis at CBRE.
OFFICE In the five key energy markets, office space available for sublease has increased by more than 5.0 million sq. ft. over the past year; most of the oil-related sublease space is contained to a handful of submarkets. Second quarter occupancy was down by 100 to 380 basis points (bps) from a year earlier in Calgary, Houston and Pittsburgh, while occupancy was up in Denver and Dallas/Ft. Worth. Calgary was the only energy headquarters market with negative absorption in H1 2015. Weaker oil and gas tenant demand has yet to stymie rent growth across energy markets—with the exception of Calgary’s downtown market, which in Q2 2015 reported an 18.3 percent year-over-year decline in net asking rents.
RETAIL Low oil prices have supported a tightening across U.S. retail markets, including most energy markets. The availability rate for U.S. retail declined 30 bps from Q2 2014 to Q2 2015 and availability is forecast to decline another 150 bps over the next four quarters to just below 10.0 percent for the first time since Q2 2008. All energy markets recorded lower retail availability rates from Q2 2014 to Q2 2015 with the exception of Pittsburgh. Houston led U.S. energy markets and outperformed the national decline with a 100 bps year-over-year decline in retail availability. Looking ahead four quarters, Houston is forecast to again outperform the U.S., and other energy markets except Dallas, with a 190 bps decline in availability to 8.0 percent.
MULTIFAMILY Dallas, Denver and Houston are three of the five most active markets for apartment completions in the past 12 months—together accounting for 27,000 units. Apartment fundamentals in Houston have retreated slightly, with a year-over-year vacancy increase of 10 bps and still-positive but below-average rent growth. Outside of Denver and Dallas/Ft. Worth, annual apartment rent growth in energy markets was below average in Q2 2015.
INDUSTRIAL Industrial properties will see weaker demand from upstream E&P and field services tenants but increased demand from downstream tenants that benefit from cheaper input costs. 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, impacts of lower oil prices to the hotel sector are expected to be mixed. As business travel slows, so will occupancy and room rate appreciation in the luxury, full-service segment. Meanwhile, 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. 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 bps and 130 bps from 2015 to 2016, respectively.
CAPITAL MARKETS Investors continue to exhibit interest in office in more diversified energy markets like Dallas and Denver but risk concerns have slowed deal flow (12-month trailing) in Houston, Calgary and Pittsburgh. 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 (CBD) markets. CBRE Research 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.