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country. Year-over-year figures (excluding autos and gas) are still
in line with the latter half of 2014, indicating spending may not be
suffering like headline monthly figures suggest.
The regions of the country poised to benefit most from the decline
in oil prices are those that have underperformed since the beginning
of the recovery, namely the Northeast and Midwest. Both regions
have very little exposure to the oil industry compared to the South
and West and stand to reap the benefits of falling oil prices without
bearing the brunt of negative effects. Since energy costs are
generally higher in the Northeast and Midwest, declining oil prices
will have a greater positive effect than elsewhere. Moreover, the
reliance on industrial production in the Midwest leaves the region
susceptible to fluctuations of oil prices given their use as an input
in the manufacturing process. Auto manufacturers, stalwarts of the
Midwestern manufacturing industry, should gain two-fold from a
decline in oil prices. Input costs decrease and boost profits while
lower gasoline prices make buying a car more attractive.
Exhibit 3
West Texas Intermediate Crude Oil — Price per Barrel
Source: Federal Reserve Bank of St. Louis
We must be careful not to overstate the effect a decline in oil
prices may have on the commercial real estate market. As we
have noted, the major energy metro, Houston, has diversified its
economic base significantly over the past couple of decades. The
demographic trends in the metro are very favorable. Also, it is not
a given that prices will remain at current depressed levels for an
extended period. We are more than 9 months into the current
downturn in oil prices. A recent analysis by the Federal Reserve
Bank of St. Louis took a look at all major episodes of oil price
declines in non-recessionary environments since 1983. They
calculated the average duration of each of these declines to be
8.6 months, a figure that was heavily influenced by a 23 month-
long episode in the late 1990s, with a median of just 6 months.
While this by no means indicates we are at the end of the current
decline, it is telling that we are already past the average duration
of such episodes and well past the median. As of the writing of
this article, the WTI spot price is in the low $50 range. At present,
most forecasts call for oil prices in the $50 per barrel range by late
2015 and into the $60 range in 2016. This is still quite low, but
remains comfortably above the $35 to $45 per barrel breakeven
point for the larger oil companies.
The consequences of lower energy prices will mostly be felt by
office and industrial properties. Any effect on the multifamily and
retail sectors will be felt indirectly, but we believe neither will suffer
any significant downward pressure on fundamentals. As such, our
forecasts in Houston for these two property types have not changed
much due to the decline in oil prices. Overall we are not saying that
real estate fundamentals will continue to improve indefinitely for
Houston multifamily: for a variety of reasons unrelated to low energy
prices, we have already been forecasting a rise in vacancies and
a moderation in rent growth over the next five years. However, to
claim that the impact of low energy prices will be substantive, or
changing our current view of the trajectory of fundamentals in a
significant way, is an overreaction.
Low Energy Prices’ Impact Mixed, Multifamily May Be Least Pronounced