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Amazon has begun to explore physical shopping spaces in combination with its wildly successful online model by opening its first physical store in Seattle this past fall (ironically, in a former Barnes & Noble location). It would not be a surprise to find physical retailers pushing similar formats in the other direction—including more “showroom”-styled storefronts (Tesla) with digital spaces offering fulfillment. As we said earlier this year, some retailers should probably seek out hospice care. In its 130th year, Sears could finally succumb in 2016, with some of its brands, like Craftsman and Kenmore, already being spun off to other outlets, while JCPenney is in recovery and taking up some of Sears’s traditional
strengths (Penney’s is now competing in the appliance space). Macy’s is losing ground in the middle market, and has a short horizon to regain competitive advantage with lower-end discounters.
Volatile energy markets.
As a colleague of ours remarks, “Whenever a key commodity demonstrates instability, it threatens global economic security.” Energy market volatility has already affected certain regional U.S. economies (e.g., Houston and North Dakota) and producer nations (e.g., Saudi Arabia and Venezuela). Last year saw a dramatic drop in oil prices, and the drop continued into early 2016, followed by substantial volatility through midyear. Increased production and
reduced demand due to slowing global growth led to the decline that saw oil prices fall from $110 per barrel to a 13-year low of $27 per barrel in early 2016, with recovery to just $43 per barrel in July. The world is oversupplied, and major oil-producing countries have barely reduced production. This has had a profound economic impact and carries with it implications for property market fundamentals and commercial real estate pricing.
The impacts vary considerably by region and sector. Negative effects are largely concentrated in a few metropolitan areas with high economic exposure to the energy industries (including Houston and the oil shale region in North Dakota). For most metro areas and property types, lower oil prices have been a net positive. Spending less on gasoline encourages consumers to spend more on other items, which helps retail and hotel market fundamentals. Lower oil and energy costs will also reduce certain construction, manufacturing, and logistics costs. This aids business investment and expansion, which, in turn, increases demand for industrial and manufacturing space. Property markets will see a short-term lift due to a combination of improving tenant fundamentals and lower operating costs. However, for major energy-producing metro areas, the short-term benefits of low prices will be discounted by the negative impacts on energy-related firms. The long-term health of the property markets in these metro areas will greatly depend on the speed in which oil prices rebound to sustainable levels for U.S. producers. The national economy overall is better off in the near term. The United States is still a net importer of oil at about $190 billion per year, and the decline in prices positively influences the nation’s trade balance. Lower prices directly translate into an increase in household disposable income. Americans could see $50 billion to $75 billion ($400 to $650 per household) in gasoline savings this year alone.
The impact on property market fundamentals varies by sector:
Office. Office demand is not likely to see an immediate impact from lower energy costs, but lower operational expenses do make office occupancy less expensive and contribute to higher corporate operating profits, which should, in turn, continue to fuel hiring and absorption of additional space.
Retail. Households typically spend windfalls. Retailers reported above-average, and better-than-expected, holiday sales at the end of 2015. Shopping centers and neighborhood shopping centers should benefit further should energy prices remain low to provide a windfall to consumer pocketbooks.
Industrial. The reduction of energy costs helps boost industrial production and lowers distribution costs. Petroleum-based products will benefit from lower input costs, which, in turn, can positively influence manufacturers’ decisions to increase production and occupancy. Demand for warehouse and distribution space should see an increase due to higher consumer spending. E-commerce operations will expand as well, likely resulting in more distribution and storage space.
Hospitality. Hotels benefit as leisure travelers find travel more affordable. And, lower oil prices should result in lower business travel costs, encouraging more business travel and lodging.
Apartments. Increased disposable income means that households will have more to spend on housing, including upgrading to higher-quality apartments. Furthermore, apartments in the suburbs will benefit with the lower costs of commuting.
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