Crude Awakening: How rising oil prices affect real estate
Soaring prices at the gasoline pump have me in a perpetual state of sticker shock. As recently as 1998, I was paying 68 cents for a gallon of unleaded gas. On my most recent visit to QuikTrip, I paid $2.58 per gallon, considered a bargain by today's standards.
There can be no overstating how much of a wildcard oil prices are in the American economic recovery. The negative impact of rising gas prices on the consumer led the Hawaii Legislature to cap wholesale gasoline prices, but the issue has been muted nationally because auto dealers are offering heavy price concessions on new vehicles.
"The consumer says, 'I can buy the SUV I want for $4,500 less than it's ever been, and I'm not going to use $4,500 worth of fuel in the whole life of the SUV.' That's a correct assessment," says Donald Ratajczak, a consulting economist based in Atlanta. It is a correct assessment in the short run.
Incredibly, consumers haven't yet taken enough abuse at the gas pump to change their consumption habits, adds Ratajczak, who previously headed up the Economic Forecasting Center at Georgia State University for 27 years. Of the 84 million barrels of oil produced daily, the U.S. consumes 20 million barrels, nearly one-quarter of all supply.
So, what does the price of oil have to do with commercial real estate? Ultimately, rising energy prices are going to affect not only how we drive, but also where we build and how we consume energy in our businesses. "What hurts your tenant, hurts you," cautions Ratajczak.
In other words, those pass-through costs from tenant to landlord for utilities will undoubtedly come under greater scrutiny in the years ahead. Already we are seeing stepped-up efforts to provide more energy-efficient office buildings. On that front, the U.S. Green Building Council is taking the lead with its Leadership in Energy and Environmental Design standards.
Up until now, the issues surrounding urban sprawl have focused primarily on an inadequate infrastructure and quality-of-life. In the future, energy costs will have a greater impact on real estate decisions. "Our development is going to have to become much more transportation-oriented," Ratajczak predicts. BellSouth, for example, has strategically placed some of its office buildings atop Metropolitan Atlanta Rapid Transit Authority (MARTA) lines in Atlanta so that workers can get to work on foot rather than in a single-occupied SUV. But that model project is the exception, not the norm.
Economic wisdom in the first half of 2005 called for oil prices to stabilize or drop, but neither happened. Ratajczak believes that we may be reaching the point of maximum production, perhaps 100 million barrels a day, and that it will be insufficient to meet world demand, particularly in light of the growing economies of India and China. "If that's the all-time peak of supply, then the world has got to change," he urges. "We can't have 110-pound people driving around in two-ton vehicles like all these SUVs."