Possible Impact Of Offshore Drillings On Commercial Real Estate Values

I’m often asked how commercial real estate has been impacted by the recent spike in oil prices. With the recent rises in gas, ripple effects can be felt throughout the commercial property sector. For this blog, I will focus on one group that has been impacted: the retail strip mall. During the last five years a plethora of small/midsize strip malls were constructed. Many of these strip malls were finance or purchased based on a very low cap rate (5-7%) and very high $/ft rental rates.

As gas prices have increased many of the smaller tenants are struggling and unable to afford the high initial rents. As a result many are moving to lower rent centers or renegotiating their current rents. This trend has accelerated as gas prices have continued to rise.

What does this mean for commercial strip mall values? Long and short, the values are declining. When looking at the property on the income approach, the gross rental income has decreased. There is a direct correlation between the decline in income and the value of the property.

The double whammy for this sector is that cap rates are also beginning to rise (as cap rates increase values decrease). As the gas prices continue to climb, inflation concerns are beginning to surface. The Federal Reserve will likely soon be forced to raise rates in order to slow down the inflationary pressures in the economy. As the federal reserve acts, cap rates will rise significantly above their current levels. With gross income declining and cap rates rising, the small/mid size strip malls could be in for a wild ride.

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