Tim Relyea: Cheap Capital Trumps Cheap Oil in Development

Cushman & Wakefield executive vice chairman Tim Relyea has three or four big developments (hundreds of thousands of SF apiece) in planning now for energy firms, and says they’ll definitely happen regardless of how oil behaves. Here’s why.

The cost of capital can be a bigger driver than the cost of oil when it comes to real estate decisions, Tim declared at Bisnow’s Impact of Oil and Gas Summit yesterday. Big, healthy energy firms realize that most office product available in Houston is obsolete, so they’ll have to build to get what they want. These firms are comfortable developing now to take advantage of cheap financing because of the lag time (it takes three years to get a major project built, plenty of time for the economy to rebound or at least settle) and lack of competing development. (Smaller companies will have to put real estate decisions on hold until oil prices improve, however.) We snapped Tim with Wolff Cos' David Hightower, NGKF's Lispah Hogan, M Kidd Properties' Mark Kidd Sr, CBRE's Debbie Wilson and Transwestern's Michelle Wogan.

But Tim didn’t abandon his trademark negativity—he’s expecting M&A activity to pick up, which could have massive impact on the real estate market. (If BP sold, he says “West Houston might as well be hit by a nuclear bomb,” and Anadarko trading would drop rents in The Woodlands by $10/SF in one day, he claims.) Tim says the number of energy firms has been increasing, and it’s about time in the cycle for consolidation again. He says it probably won’t begin until pricing increases a bit (no one wants to sell at the trough), but then we will see deals. JLL global energy practice leader Bruce Rutherford says anything larger than Weatherford is safe, but anything smaller is at risk for M&A.