In this paper, we explore the risks the oil and gas (O&G) downturn poses for the commercial real estate (CRE) sector. The goal of our research is to identify which US markets and asset classes are at the greatest risk for value decline. To measure the impact, we first explore why this O&G downturn is different from past volatility in the O&G markets. We then identify the real estate markets that are at greatest risk and investigate the performance of certain asset classes.
A few takeaways from our research:
- The duration of the O&G downturn has surprised many and debunked predictions from top industry analysts. Changes in technology, the geopolitical landscape and the supply/demand market are creating a new industry paradigm.
- The negative impact on CRE is primarily concentrated in 25 markets most dependent on the O&G industry, although some asset classes aredemonstrating resilience more than others.
- The “lag effect” seen in the market response to the O&G downturn could indicate that asset performance may worsen as the O&G downturn progresses.
Given the lag effect, we suspect this may be just the beginning of a period of poor performance for our identified at-risk markets and asset classes. Asset managers, investors, professionals and both equity and debt investors in the real estate sector need to be on alert until we come out of this period of uncertainty.