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Oil: The Commodity We Love to Hate
OIL—WHY DO OCCUPIERS EVEN CARE?
Low oil prices — Some positives, but also some negatives
Low oil prices impact office occupiers in a number of ways. The most significant impact is through the channel of
increased consumer spending. In the U.S., for example, every one penny decline in gas prices typically boosts
aggregated consumer spending by $1 billion over the course of the year. This boost from the consumer typically
leads to stronger business profits, which creates jobs and ultimately to increased demand for office space. Since
oil prices began falling in the middle of 2014, the world economy has created 32 million net new jobs, seen
demand for office space increase by 18%, and watched vacancy rates decline 50-100 basis points, depending
on the region. Many other factors impact employment and the office sector, but the decline in costs
attributable to lower oil prices certainly has not hurt non-energy companies. This, of course, is a double-
edged sword for occupiers. Most occupiers benefit from the increases in business profits related to lower
oil prices, but they also face higher real estate costs related to tighter office markets.
Oil also plays a major role in office space construction costs: oil both fuels the transportation of raw
materials (steel, concrete, lumbar, glass, etc.) used in new construction and is a direct ingredient in
construction products, such as roofing and carpets. Thus, when oil prices go down, the hard costs
needed to build a building or fit-out space also decrease, or at least are kept lower. Likewise,
energy is also one of the greatest costs in operating a building. According to the Building
Owners and Managers Association (BOMA), on average, building owners spend 22% of their
operating costs on energy and water. Thus, when oil prices go down, lighting and HVAC costs
go down. Depending on the structure of the lease, some occupiers could benefit from these
cost savings.
Some occupiers also work in local markets where economic growth is driven primarily
by the production of oil. In these oil-centric markets, when oil prices boom, oil
company profits soar, city-level economies thrive, incomes rise, and job growth and
office absorption increase. When oil prices fall, these markets typically struggle —
which translates to opportunities for occupiers.
Oil-centric cities—Some hit hard, others show resilience
Overall, the plunge in oil prices has been a net negative on the world’s largest
energy-producing markets. As a group, these markets are experiencing
slower economic growth, slower job creation, and weaker office sector
fundamentals. However, the impact varies greatly from one city to the
next. Thus far, markets hardest hit by the oil shock include Moscow,
Aberdeen, Calgary, and Houston. But even within these four markets
are significant differences with respect to each one’s health. Moscow,
for example, has fallen into a deep recession, with 117,500 jobs lost
and office rents a third lower since oil prices began to descend. In
comparison, Houston’s economy has slowed, but is also proving
to be far more resilient. Midway through 2016, Houston was still
creating jobs and actually absorbing office space (337,000
square feet (sq ft) year-to-date). Part of the reason Houston
is holding up reasonably well is that the local economy has
diversified greatly over the years, with more economic
contributions coming from non-energy sectors (e.g.
education, healthcare, retail, professional business
services). During the last major oil downturn, in the
1980s, the oil and gas sector employed nearly two-
thirds of all the people who worked in Houston
(including upstream and downstream related
industries). As the oil price correction hit this
time around, that number was closer to 17%.
GLOBAL OVERVIEW