Monday, October 10, 2005

From A Texas Realtor's Perspective: Energy Tsunami On the Way

NOTE: I think he misquotes Simmons on saying to expect $10 barrel oil...I think he means $100 barrel oil. Maybe I'm wrong. Read everything in context at the website.

CORRECTION: I reread it and he's saying Simmons said $10 agallon of gas not a barrel of oil! Duh! My bad.

...Okay, so what does all of this mean to you as someone in real estate? Well keep in mind we're really in uncharted waters here. It's not like we can look to the past and learn from all the times something similar to this has happened to us. This is a very unique and unprecedented event in our lifetimes, and in world history, too. But here are my thoughts on what this could mean to all of us who are in real estate:

1. The values of homes and residential rental properties in and closer to major cities will probably do better in the long run versus those located farther away in the suburbs. Especially when compared with those suburbs that have a high percentage of their population who commute a great distance to major cities for their jobs. This is because the cost of commuting could become so expensive that people will do whatever it takes to live closer to the city rather than spend so much money on gas and sit in traffic.

2. Office buildings will experience a major increase in heating and air conditioning costs, especially those located in areas with severe winters or very hot summers. Landlords of these buildings could experience a substantial loss in their profits if their leases don't call for their tenants to pay for any increases in heating and air conditioning expenses. And conversely tenants who will be paying for these increased expenses themselves will find this solidly biting into their own profits.

3. Commercial and industrial properties closer to the major cities will do much better than those in the suburbs. With more people living closer to the major cities, commercial space in these areas will command even more of a premium in the future when compared with commercial space in the suburbs.

4. There will be a need for a much greater amount of housing near the central business districts of major cities. People will want to live closer to where they work and they'll also want to be within walking distance to both shopping and entertainment. This will create a demand for revitalizing central business districts and creating a more neighborhood-friendly environment with shopping, entertainment, and restaurants all nearby.

5. Industrial businesses will transition away from shipping and receiving their goods by truck and towards shipping and receiving them by rail which will be more economical for them. And as a result we'll see a surge in demand for rail-served manufacturing and warehouse buildings, and those buildings without rail will sit vacant for longer periods of time and command less rent when they're finally leased.
So while in recent years owning a rail-served building may not have meant much to your prospective tenants, you may very well have a functionally obsolete building on your hands years down the road no matter what kind of condition it's in and how high the ceilings are if your prospective tenants can't ship by rail.

6. Manufacturing businesses that already have substantial energy costs right now will be hit very hard with the coming increases in these costs and will find it increasingly difficult to remain profitable. In addition, I'm hearing from agents all over the country that their markets are cooling down now and listings aren't moving as fast as they were months ago. In looking over the past 25 years in our industry, through three economic up cycles and two down ones, this is exactly the way the down cycles have begun in the past.
In both situations there was a gradual cooling off period where buyers were no longer willing to pay the higher prices, but sellers still wanted to get the higher prices anyway. And when you're talking about selling commercial or investment properties with owners who don't need to sell them if they don't want to, this can become very frustrating when you're an agent. But if you study Peak Oil and become very knowledgeable about it, you may be able to persuade your owners that they may be far better off selling their property now at the best price they can get for it, rather than waiting and taking their chances one or more years down the road.

And in saying this to you, the real estate world was full of owners during the last two recessions who really wished they had sold their property 2-3 years earlier while times were still good. Remind your owners of this, show them the underlying warning signs of where your market could be headed, including the potential problems with Peak Oil, and you just might convince them that they could turn out to be market timing geniuses if they move forward and sell right now....

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