Commercial property

Impact of rising fuel prices on commercial real estate

It is well known that the cumulative increase in fuel prices has contributed significantly to overall consumer price inflation, and this new increase continues that pressure.

For many consumers, spending on fuel is hard to avoid, which means many need to reprioritize and likely cut back on non-essential spending more, as well as delay low-frequency “carry-over” purchases.

We believe this impact could be felt more in larger super-regional and regional malls, which are more focused on such shopping, including entertainment, restaurants, and clothing and footwear retail. Small convenience and neighborhood centers focused more on essential foods and groceries are likely to feel this indirect impact of fuel inflation to a lesser extent.

We believe continued increases in fuel prices are negative for an already struggling office property market. The office market is challenged by many underutilized spaces due to much higher working from home compared to earlier Covid-19 lockdowns.

Now that fuel prices are skyrocketing, we expect many commuters, who can work from home to an even greater extent, to get their fuel bills under control.

This may be an additional source of encouragement for some employers to reduce their office space requirements, if the success of the lockdown work-from-home ‘experiment’ wasn’t encouraging enough already. It is therefore an additional potential source of pressure on the office market.

Commercial real estate is interest rate sensitive, so to the extent that fuel prices have driven overall inflation and therefore higher interest rates, they indirectly impact the containment of motivated real estate purchases by credit via their impact on interest rates.

We expect selling activity in the commercial real estate market to begin to slow in the second half of 2022, following a recent period of strengthening, with continued rising interest rates being a key driver of this. expected slowdown.

The “4th” commercial real estate sub-sector that has been hurt by high fuel costs lately must surely be the hotel industry. Already hurt by still low incomes and occupancy rates in the days before the lockdown, high oil prices are hurting holiday and business travel, and therefore the demand for overnight accommodation.

Source: John Loos