Oil, Gas, and You

Did you know that commodity prices are the most reliable and earliest indicator of where office rents are going? The energy sector undoubtedly has an effect on commercial real estate, and that's why we're holding our Impact of Oil and Gas event April 16 (register here). Read on for the correlation and other ways it's affecting our market.

Forget waiting for the quarterly Jobs Report. Studley research guru Tim Wingfield says that today's oil prices strongly indicate where rents will be in three months (a statistically impressive .27 correlation, which we totally understand and are not confused by in the slightest). Based on Q1 2014’s average WTI, Tim projects a $0.20/SF rent increase across the metro in the next quarter. Employment also works into the relationship—asking office rents are a function of future changes in demand, which is based on employment, which is related to recent changes in oil prices (Tim says that oil price changes alone explain 20% of the variability in Houston’s employment growth).

Studley EVP/co-branch manager Steve Biegel (posing here with students while volunteering at WorkFaith Connection) tells us he always knew there’d be a correlation between the two, but he was blown away by how direct it is. A Studley report has compared 10 variables to model Houston-area Class-A and -B office rents, including the construction pipeline, active rotary rigs, net absorption, and available SF. While oil prices are the best predictor for short-term rents, changes in other variables affect rent growth changes six to seven quarters ahead.

So what do the stats also tell us? Steve is projecting a solid market for the rest of the year, but admits it won’t be as robust as the last few years. (That’s largely because 2012 and 2013’s strength came from companies getting ahead of their need curve.) The WTI bears out that confidence, with a closing spot price of $101.58 Monday after averaging $100.80 the rest of the month.