How High Will Oil Go? - Real Estate Owners Need to Pay Attention!

In September of last year we wrote an Advisory on oil prices and the potential impact on property operations. In that article, we asked the question; If oil were to ever hit $100 a barrel, what impact would it have to the value of Commercial Real Estate? As we sit here in Asia on our Realcomm NextGen Commercial Real Estate tour the topic has been elevated to a new level.

Last Friday the Realcomm team set out on the NextGen Asia tour and on Wednesday finds itself in the Jin Mao Tower in Shanghai, one of the tallest buildings in the world, the tallest hotel in the world. (http://www.emporis.com/en/wm/bu/?id=103803) It is ironic as we make our way back to Asia in search of NextGen projects that we find ourselves in the middle of an ever growing debate on the rising price of oil. Everywhere we look; Asia newspapers, CNN, Asia MSNBC, the debate rages and some Asia newspapers have speculated that $70-$80 per barrel in 2005 is not an impossibility. If this, in fact, could happen, it is happening much faster than we would have anticipated.

Our ideas on this topic were formulated after our first trip to Asia last February. It was here that we saw the massive economic expansion taking place, an industrial revolution possibly 4 times the size of the United States, which was producing Commercial Real Estate projects at a scale and pace never before seen. The logic was actually quite simple…massive construction, hordes of new tenants that drove to work in new cars, living in new homes that needed to be heated and cooled, working in offices that needed electricity for lighting and oil for HVAC. Major countries such as China and India, developing at unprecedented rates were about to make requests of the world oil supply never before seen.

If these new demands could impact oil prices to the extent mentioned, what impact would this have to Commercial Property owners and operators? Would an increase in energy prices put new demands on budgets and make it more difficult to operate projects at a profit? This is a topic that can no longer be dismissed and needs to be brought to the forefront. Over the years we have seen fluctuation in oil prices due to tactical pressures but nothing like we are experiencing today. Due to the relatively low impact, Commercial Property owners have never really taken a proactive approach to energy management. It is not unusual to visit a major city in the middle of the night and see the building lights on to accommodate a very small cleaning crew.

Over the last 12 months there have been some building owners in the United States who have begun to take a very aggressive look at this topic and have implemented some very aggressive energy management programs. A major REIT in Southern California has retrofitted their entire portfolio with energy management systems and is leading the way in proactive energy management strategies. Regulating and managing energy at the suite level as well as monitoring the overall energy consumption of the building is now becoming a very detailed science.

This year at Realcomm we are going to devote a great deal of time and energy, no pun intended, to the topic of energy and Commercial Real Estate. We are going to examine not only the business issues but the technologies and strategies that will allow for building owners and operators to proactively prepare for any changes in the oil industry. We believe that it is critical to address these issues immediately and not wait for prices to reach new highs. Even after an owner/operator makes a decision to make energy management a strategic focus, it takes some time to implement these polices and solutions. Even if we do not see the dramatic increase that some are anticipating, a proactive energy management strategy will still lead to better operating performance, something every building owner is always interested in.

Finally, as we sit in Shanghai on our NextGen trip there are a number of ironies that are very appropriate in respect to this topic. From the window, 80 stories in the air, you can physically see the massive development that is taking place in this region. With every other story on the television, CNBC is talking about rising oil prices and in many of these reports China's consumption is mentioned. The other interesting observation from our birds eye view is that in the evening hours most of the building lights are not on and this major city is not as illuminated as one might expect, suggesting aggressive energy management polices and technologies in place.

In even the smallest ways, energy management is evident. When some of the tour checked into their rooms they could not figure out how to turn on the lights. As it turns out, none of the lights work until you place your room key in a small cradle near the front door. In other words, the lights, tv and other electronic devices cannot be left on when someone leaves the room and takes their key. Simple, subtle, smart, easy, inexpensive technology which is ultimately capable of saving an enormous amount of precious energy. From the largest ideas to the smallest, the topic of energy management will continue to be important to building owners and operators around the world and Realcomm will continue the pursuit of the innovative ideas and technologies which will bring solutions to this growing problem.

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Realcomm 2007 Conference
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