Offshore Drilling: Impact on Commercial real estate

It appears that anyone that is asked has an opinion on whether we should drill off the coasts of California and Florida. The current administration feels that it would reduce the price of oil in the near term. Unfortunately this is not necessarily a true statement. Each location would take at a minimum 10 years to develop before the first drop of oil ever comes out of the ground. The price of gas might be reduced a very nominal amount if at all.

Regardless of one’s opinion on whether we should drill for oil offshore, it is important to look at the impacts to the communities near where the drilling would take place. For this analysis, I am going to strictly focus on Florida. According to the various sources, including recent articles in the Houston Chronicle and the Denver Post small oil spill have been relatively common in the last 30 years.

For the purpose of the analysis of offshore drilling’s impact on Florida commercial real estate, let’s assume that there is a minor spill and oil residue washes up on a number of beaches along the gulf coast. The media catches onto the spill and a photograph of a bird with oil on it is quickly all over the news. Regardless of the true magnitude of the spill, a majority of people will opt to not take the planned vacation at that beach (who wants their toddler playing in water contaminated with oil or building a sandcastle next to a dead bird or fish with oil on it). These images will impact both the current and future perceptions of various beaches in Florida.

According to the State of Florida, the tourist industry accounts for ~ $57billion/year in income. Let’s assume the spill shut down a number of beaches on the Western Coast of Florida, the likely impact would be 10 billion +/ year. This would certainly trickle down to the commercial real estate market.

How would an oil spill effect the commercial real estate market? Commercial Real Estate is primarily valued via two methods (income and sales approach). First, utilizing the income approach, gross rents would certainly decline. Retailers would not be able to pay the high rents that coastal cities typically dictate. Without the high rents, the properties net income is reduced which drives down the overall value of the property. A similar scenario would play out when analyzing the sales comparison approach. Without the high rents, investors would be less willing to pay a premium for a waterfront property.

Is offshore drilling really the right answer to our energy problem? If you are a resident or property owner in one of the proposed areas, the reward is likely not worth the risk to property values and tourism. These select few areas would bear the brunt of the risk to their economy with little to no incremental reward. Both presidential candidates need to look at the full impact of drilling on local economies before deciding the best method for energy independence.

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