How oil prices affect commercial real estate

I’m penning this column from America’s heartland, Oklahoma City.

According to the Oklahoma Historical Society, OKC has been a major hub for the oil industry since the late 1920s. The Oklahoma City Oil Field, which was discovered in 1928 and still produces oil, extends into the city limits and historically included areas around the Oklahoma Capitol.

My thoughts went toward what’s happening in the Strait of Hormuz and oil’s impact on the United States economy and, more specifically, commercial real estate.

What follows is how a rise in oil prices affects us.

Oil is one of the most important inputs in the global economy. When the price of oil rises sharply, the effects ripple outward through transportation, manufacturing, consumer spending and ultimately the real estate that houses those activities.

Consider transportation first.

Oil fuels the movement of goods across the country. Trucks, trains, ships and airplanes all rely heavily on petroleum-based fuels. When oil prices climb, the cost of moving products increases. Higher freight costs work their way into supply chains, increasing the cost of everything from raw materials to finished goods.

For industrial real estate, this dynamic can create both pressure and opportunity. Companies facing higher transportation costs often seek greater efficiency in their logistics networks. That can increase demand for well-located distribution facilities closer to major population centers and transportation corridors.

A rise in oil prices also contributes to inflation.

Oil is not only a consumer product but a key industrial input. When energy costs rise, businesses typically pass at least a portion of those increases on to consumers. Over time, higher energy costs can lead to broader inflation across the economy.

Inflation, in turn, influences interest rates.

When inflation rises, central banks often respond by tightening monetary policy. Higher interest rates increase borrowing costs for businesses and investors. In commercial real estate, that can affect everything from property values to the feasibility of new development.

Not every region reacts the same way to higher oil prices. Areas tied closely to the energy industry often benefit when oil prices rise. Increased drilling activity, expanded energy services and job growth can stimulate local economies.

Cities like Houston, Midland and Oklahoma City have historically seen economic tailwinds when oil prices strengthen. Increased activity in the energy sector often leads to additional demand for office space, industrial facilities and housing.

At the same time, regions heavily dependent on transportation, tourism or energy-intensive manufacturing may feel the negative side of rising oil prices more directly.

There is also the factor of uncertainty.

Oil price spikes frequently coincide with geopolitical tensions, such as those surrounding the Strait of Hormuz and Iran. When businesses perceive risk in the global economy, they tend to slow expansion decisions. Leasing activity may pause, capital investment can be delayed, and corporate occupiers often adopt a more cautious stance.

Yet higher energy prices can also accelerate structural changes in the economy.

Companies may shorten supply chains, bring production closer to home or invest in more efficient logistics systems. Each of these shifts has implications for commercial real estate, particularly in the industrial sector.

Oil has always been more than a commodity. It is a signal about the health and direction of the global economy. When oil prices rise, the effects eventually reach the buildings where we work, manufacture, store and distribute goods.

From the vantage point of Oklahoma City, where oil has been part of the economic fabric for nearly a century, the connection between energy and real estate is clear. The price of oil may be determined in global markets, but its impact is felt locally, often in the commercial buildings that support our economy.

Source: The Press Enterprise