Senior CRE economist on the slow-moving ways elevated oil prices could reshape demand for commercial space
Military strikes on Iran earlier this year sent oil prices climbing, and inflation has followed. The Survey of Professional Forecasters now projects consumer price inflation hitting 6% in the second quarter of 2026, nearly double where it stood just three months ago. The 10-year Treasury yield has moved with it, and so have mortgage rates.
Residential mortgage brokers are already feeling that in their pipelines. The commercial market is a different story: not insulated, but slower to absorb the same pressures. Higher energy costs filter through shipping invoices, construction bids, and what consumers decide to stop buying.
That slow fuse is what concerns Xander Snyder (pictured top), senior commercial real estate economist at First American. The effects take longer to arrive in commercial data, he said, but that is not the same as saying they will not.
"I think there are a couple of different ways it could flow through to commercial real estate if energy prices remain persistently high," Snyder told Mortgage Professional America. "If this really goes on for a while."
Ripple effects of higher inflation
Higher gas prices eat into household budgets. If they stay elevated long enough, spending on other goods starts to fall. Retail sales weaken, demand for warehouse space softens, and even apartment occupancy can feel it.
"If it's so substantial that people need to start finding roommates, it could impact the demand for apartment space if energy prices remain elevated for a long time," Snyder said.
Even though core inflation excludes energy, Snyder said oil prices have a way of showing up there anyway.
"The thing with elevated gas prices is it kind of impacts so many different other goods in the economy," Snyder said. "Anything that needs to get moved from one place to another, the total out-the-door cost for that good can go up if energy prices remain high because it costs more to transport that thing."
All of that keeps the Fed in a difficult spot. Snyder does not expect dramatic action, but he does not rule out a 25 basis point hike.
"I don't see a future where the Federal Reserve raises interest rates by 100 basis points in a single meeting as they did back several years ago," he said. "I still think that at the margin, a 25-basis-point rate hike, which seems plausible, probably won't totally throw the commercial real estate market off its footing because prices have fallen so much that there's a greater margin of safety now."
Construction costs and NOI pressure
Snyder said energy prices hit the commercial market from another direction, too, through what it costs to build and maintain properties.
"The point about energy prices impacting transport costs is that it impacts the cost of construction material," Snyder said. "That can impact the supply of new space that's added to the market. And we've already seen a substantial correction in construction starts, and really all asset classes have fallen over the last couple of years."
The operating side is no different.
"Not just for construction goods, but the repair and maintenance line item when you're operating the building. After it's built and you buy it, it's roughly the same basket of goods to build it as it is to maintain it," Snyder said. "That could become more expensive. So that could pressure NOI margins just because everything is more expensive to get a hold of because it's harder to ship."
Snyder said none of this knocks the commercial market over on its own. Values have corrected enough over the past few years to give buyers more cushion, and transaction volumes are picking up.
"I think that the current state of things would need to persist for a while for that to translate through," Snyder said. "But whether or not that actually happens, I think, is kind of only in the heads of the few people in Washington."
Snyder had a pointed reaction to something else he had heard in the market. The idea that a recession would actually help commercial real estate by pushing the Fed toward cuts.
"There were people who said something along the lines of, 'Oh, what we really need is a good recession,’" he said. "The implication being the recession would lead to the Federal Reserve lowering interest rates, and that would be a relief for the commercial real estate market. And I think that that was just totally a wrong-headed thing to think."
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