BP Oil Spill & Its Adverse Effect on Commercial Real Estate

The effects of BP Plc’s oil well explosion in the Gulf of Mexico have reached beyond the worry of ecological devastation, and infiltrated local markets, commercial real estate being one of them. Leaking an estimated 70,000 barrels of oil a day compared to initial estimates of 5,000 barrels, the accident looks to be worse than the Exxon Valdez incident of 1989, where the inhabitants of the Prince William Sound are still feeling the effects. While the United States government and oil companies around the world are desperately searching for a solution to the leak, the overwhelming effects of this catastrophic event are reaching the local inhabitants whose livelihood depend on the Gulf’s pristine waters. Normally a tourist hot spot, the Gulf has become taboo. Many people are backing out of their vacation plans, which is having and will continue to have its own demoralizing affects on, what is looked to be, a rebounding local economy after the hurt of Katrina and the credit crisis.

GNO, Inc. conducted a survey and 54% of businesses said they are expecting to be hurt by the by the spill, and 53% said they will need outside assistance to regain their losses. With fewer tourists flocking to the Gulf, commercial real estate owners will be among those taking a hit. The already hurting hotel market will continue its struggle and retail spaces will face vacancies if business owners are unable to pay the rent. To combat the deterioration of local businesses, low interest SBA loans will be extended to those who need help, but I can’t imagine anyone is excited to take on additional debt coming out of the credit crisis.

As if there weren’t enough risk associated with commercial real estate these days, worrying about a property’s proximity to potential ecological disasters is one more thing investors will be sure to consider in the future. Prior to the condo market’s collapse, we already saw how hurricanes could affect Florida property owner’s whose building insurance costs have skyrocketed do to the damage they have inflicted. For now the government has put a hold on all new offshore drilling, but that’s not to say these problems can’t occur in the future. Not to sound like a tree-hugging liberal, but hopefully this will spur more of an interest and emphasis on the need for participation in renewable energy programs. For commercial real estate owners there are great opportunities and incentives for solar and wind farms. In many cases, these opportunities not only drive down the cost of energy, but leasing rooftop space to renewable energy providers allows property owners to maximize profits. Perhaps some silver lining, and not just black lining, can be taken from this catastrophe.