Will Oil Prices Just Affect Hospitality or Just Multifamily?

May 15, 2012
Globe Street Raines Feldman

LOS ANGELES-Oil/gasoline prices have risen sharply over the last several months, and with no end in sight to the political turmoil in the Middle East, the upward trend is likely to continue. So says the 2012 Casden Multifamily Forecast from the University of Southern California Lusk Center for Real Estate.

According to the report, California currently has the second-highest gas prices in the nation, at $4.33 per gallon-the national average stands at $3.83 per gallon, up 17% since the start of 2012. And economics believe that every 25 cents of increase in gas prices lead to a reduction in economic growth of roughly 0.2 percentage points, according to the report.

Andrew Kirsh, a partner at law firm Raines Feldman LLP, worries that higher oil prices can be a cause of higher prices for other goods, which in turn, could lead to inflation. “With rising rents and rising real estate prices, economists view real estate as a good hedge against inflation and; therefore, we are likely to experience more demand to purchase real estate,” he explains.

And while some industry sources I recently spoke with on the subject detail how oil/gasoline prices will generate higher demand for multifamily product closer to the economic centers and transit-oriented districts, (as further detailed in the upcoming June issue of Real Estate Forum) Kirsh says it will also have negative effects on the hospitality sector.

“People are less likely to get in their car and drive a couple hours for a vacation because the cost to fill up the tank has a dramatic impact on the total cost of their vacation,” explains Kirsh. “People are now choosing to stay home for their vacations.”

However, James Stockdale, senior vice president of Jones Lang LaSalle Hotels, tells GlobeSt.com that he hasn’t seen any correlation between high gas prices and reduced RevPAR. And although he has no confirmation, Stockdale believes that “the large amount of international business that Southern California and L.A. in particular, receive may balance any loss in drive-to business.”

Adam McGaughy, EVP of JLL Hotels, points out that “While gas prices may have had some direct impact on hotel occupancy during the downturn in 2008 and 2009, we believe the occupancy decline was more highly correlated to the overall downturn in economic conditions,” he says. “We believe that business and leisure travelers have factored in the price of gas into their current and future plans. I think this is even more apparent that despite high gas prices, airlines demand have increased as well.”

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