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A Mixed Barrel: Oil, the Commodity We Love to Hate

By Kevin Thorpe, Chief Economist


Over the past 40 years, the other shoe always dropped. Oil prices spiked, and new office development sprung up in Houston, Abu Dhabi, Calgary and Moscow. Oil prices dropped, and consumers enjoyed the benefit, which boosted overall consumer spending and office markets in cities and regions less dependent on this viscous commodity. This mixed bag – or mixed barrel – is detailed in Cushman & Wakefield’s latest Occupier Research Report, “Oil: The Commodity We Love to Hate,” which assesses the impact of lower oil prices on each of the world’s major energy cities and provides insights into office fundamentals going forward.

Advances in oil and gas production technology – primarily the “shale revolution” in the U.S. – have dramatically altered supply dynamics. U.S. oil production nearly doubled from 2008 to 2015, and OPEC and other oil producers responded by sustaining or even increasing production in a battle for market share. As a result, the price of Brent Crude fell from a peak of $115.19 per barrel in the second quarter of 2014 to $26.01 in the first quarter of 2016. Although oil supply and prices have adjusted, we expect prices to remain below $60 per barrel in 2017, and industry expectations forecast below-$70 per barrel through 2020, barring a production freeze or other unforeseen event.

In terms of global economic growth, the positive aspects of lower oil prices outweigh the negatives. But for the world’s largest energy-producing markets, overall, the plunge in oil prices has been a net negative resulting in economic slowing and lower office occupancy levels.

As a group, these markets are experiencing slower growth, slower job creation, and weaker office sector fundamentals. However, while office markets such as Moscow, Aberdeen, Abu Dhabi, Calgary and Houston have faced significant headwinds due to the oil shock, others are holding up well and even thriving. Dallas and Denver are clearly in the thriving category in the U.S., with Denver posting 7 percent rent growth year-over-year. Likewise in EMEA, Oslo, Rotterdam and London’s more diverse economies are likely to benefit from lower oil prices as other industries are buoyed by lower production costs.

In the Asia-Pacific region, economic growth is poised to improve in 2017, and leasing demand across the 30 major cities tracked by Cushman & Wakefield is expected to reach new highs through next year. In some markets, that increased demand will coincide with a wave of new supply, which could lead to higher vacancies and greater opportunities for tenants. Across the region, oil’s price decline has had little impact on cities like Kuala Lampur and Singapore, while Shanghai, a non-energy-centric city, has experienced significant job growth in the past two years, with occupiers using enhanced profitability to raise headcount in order to gain market traction. For China’s oil-centric markets like Dalian and Tianjin, office supply is expected to increase of the next two and a half years, leading to an increase in space availability.

With oil prices remaining low, occupiers in many markets will benefit from lower office build-out, space-energy and transportation costs. The window of opportunity will not remain open for occupiers forever, however. Many energy cities have strong long-term fundamentals, and the energy sector will ultimately recover. With the mixed barrel, the other shoe always drops.

kevin-thorpe_white-backgroundKevin is Cushman & Wakefield’s Global Chief Economist, focusing on global economic trends and forecasts.  He and the firm’s worldwide research team produce studies and statistics on topics affecting the global and U.S. economy, capital markets, finance, leasing fundamentals, property and project management and factors that affect supply-demand fundamentals in commercial real estate. Kevin has developed several econometric models to predict market trends, is a member of the National Association for Business Economics (NABE), and has authored numerous studies and survey reports. In 2014, he was recognized as the nation’s most accurate economic forecaster with the NABE’s Outlook Award.

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