How Will Rising Energy Prices Impact Real Estate?

Sticker Shock... In March this year, my friend Jim Young, fresh from Realcomm's first Asia trip, asked me if any U.S. commentators were predicting $100-a-barrel oil? I said "no."

After counting almost one hundred cranes erecting high-rise buildings in Shanghai alone, Jim had concluded that the blazing pace of economic activity in China would definitely impact the price of gasoline to rise in the U.S. (Make your judgment; join Realcomm's Dubai or Asia trips this fall.)

A month later, a Goldman Sachs research report speculated that the oil market might be in the early stages of a "super spike" that could send prices to $105 a barrel. (BBC, Apr 1, 2005)

About the same time, Matt Simmons' book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, warned of the impending decline of worldwide energy reserves. Plus, demand would increase substantially with economic growth in the underdeveloped world.

Here's a fascinating statistic from a recent Simmons' speech. "Currently 15% of the world (the developed countries) uses 50 million barrels per day; 85% of the world (the rest) uses 35 million barrels per day." (Jul 25, 2005)

"Simmons has lately gone out on a limb to predict $200 oil by 2010." Oh-oh. But relax. In the same column, Walter Jenkins advises readers that the "price mechanism" (not government regulation) will solve our long term problem. (Wall Street Journal, Aug 31, 2005)

Hmm. So how will real estate adjust to rising energy costs? Will office rents increase significantly? Will tenants resist annual expense pass-throughs? Will retail traffic patterns change? Will urban growth forces shift? What do you think?