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The effect of falling oil prices on commercial real estate

On Behalf of | Feb 23, 2017 | Commercial Real Estate |

In February 2016, the price of oil reached a 12-year low of $26 per barrel. About a year later, the prices at the oil pump dropped to a low of $2.05. California investors and developers may be interested to know how falling oil prices have affected the commercial real estate market.

Although the low oil prices are favorable for consumers, it has been devastating to employment in the energy industry. Worldwide, 350,000 workers were laid off. According to a study from the University of Houston, 217,000 of those workers were in the United States. The Canadian Association of Petroleum Producers has also stated that 44,000 of Canadian energy workers were terminated within the last two years.

Coupled with the resulting loss of jobs, the fall of energy prices has had a significant impact on hotel reservations and the financial sectors related to oil in the cities that were affected by the massive layoffs. The industrial occupancy in some of the states that depend heavily on oil has also been affected.

In Houston, there is nearly 11 million square feet of empty office space. In Edmonton, Canada, another city where the office sector took a hit, there is currently 6 million square feet of unoccupied office buildings. The excess of office space in the two cities is of particular note as new office constructions are being delivered as the demand for the office space has dropped. Many of the office construction projects had been started before 2015, when the demand was high due to the oil boom.

Developers of office buildings and other commercial properties that have projects on the drawing boards may want to meet with their attorneys to see what impact this downturn might have. Although the price has started to rebound, there still might be some uncertainty on the part of traditional lenders, and that might make obtaining financing commitments more difficult.