Cheap oil, cheaper money and parties with big plans

AACI | Vice President, The Regional Group of Companies Inc.
  • Dec. 6, 2015

Who would have guessed 12 months ago we would finish the year still dealing with record-low oil prices, along with the prospect of negative interest rates and a majority Liberal government in Ottawa?

John ClarkBut here we are. For me, these tie into the top Canadian news trends of 2015. What impact do they have for real estate?

The fall in commodity prices …

It’s been roughly 15 months since the price on a barrel of oil began its slide. These days, it’s down about 70 per cent from its peak in September 2014. The pundits expect these price pressures to persist through 2016 due to a continued overabundance of global supply.

The affect on Canada’s oil sands has been in the news all year. Refining bitumen into something usable just isn’t economically feasible at these prices. But oil isn’t the only commodity facing falling market prices.

Over the past decade, commodities took off with a dizzying assortment of investments around the world to feed China’s seemingly insatiable demand for mineral and metals. The Asian nation appeared to cement its position as the world’s offshore factory.

But guess what? The Chinese juggernaut is satiable after all. Economic growth in China has slowed. After a decade of rampant resource exploration and development to feed the beast, the market is now faced with a loss of appetite.

In Canada, the first places to feel the pinch of lower demand are of course communities that rely on local resource exploration and development, like in northern Alberta with the oil sands, or northern Ontario with gold and other metals.

As local job opportunities dry up, people have less money to spend and are likely to move elsewhere. This depresses the local economy and the local real estate market.

Bigger urban centres feel the pinch, too. Calgary’s office market, for example, is suffering as resource companies scale back their head-office operations.

And its impact on labour

I’ve written before about the “fly in, fly out” lifestyle, in which people from economically depressed regions of the country, such as the Maritimes, flocked to new opportunities out West when the oil patch was riding the bull. Now, they have a reason to look for opportunities closer to home.

This can only be a good thing in the long run, with a Liberal government that has promised to reinvigorate local economies with new infrastructure investments. In the short term, however, cross-country commuters may be out of work for a while.

You might also think a pullback in the oil sector would be a bit of a boon for other industries in Western Canada, long-starved for human capital. But I had a conversation recently that suggested otherwise.

After years accustomed to high salaries in the oil patch, many people are reluctant to take lower-paying jobs in other sectors. They’d rather sit tight and live on their savings in the hope a recovery in oil prices will bring their old job back.

But people living off savings aren’t likely to spend too much. Reduced consumer spending again hits local businesses and the local housing market.

Near nominal interest rates

The effect of current interest rate policy through 2016 will be to maintain historically low mortgage rates. This will continue to attract investor attention to commercial real estate. It will likely also help to keep capitalization rates at relatively low levels, as alternative investments remain unattractive for many investors.

Low capitalization rates aren’t attractive to all investors. These historically low rates will keep many investors who are less risk-tolerant out of the commercial real estate market. Returns are too low to warrant their risk, versus the much more competitive marketplace from institutional investors.

The clean sweep away from conservative governments

Over the past year, we’ve seen more activist parties elected in many provinces, not just in Ottawa. But it’s the federal Liberal party that’s spearheading a new era of infrastructure spending, income tax policy and refugee resettlement.

The biggest impact on real estate will of course come from the infrastructure spending part of this activist equation. This will create manufacturing demand and construction employment.

In those areas where an infrastructure project takes place, there will also be increased demand for office and industrial space for the engineering and construction office staff.

And there you have it

Year 2015 was one of unexpected political change and economic rebalancing as global economies continued to struggle to find a stable, sustainable footing. With its fortunes wound so tightly with commodities markets, Canada is helplessly along for the ride.

We’ll see in 2016 if the spending plans of the new government make a positive difference, but it’s the macro-economic factors at play with global commodity prices that promise to have the greatest impact.

To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.

John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

Read more

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