We would like to introduce you to two cows.
One cow, we’ll call Tex, is the cool cow in the field. If you can picture a cow wearing sunglasses, that would Tex. On a simple diet of grass and a few words of encouragement, Tex is a milk-producing powerhouse. Everyone loves Tex.
The other cow, Slappy, is not nearly as popular. Slappy is high maintenance, often requiring considerably more work and effort to feed. No simple pasture-grazing for this cow. And even with how much more expensive Slappy is to feed, the milk Slappy produces is of a lower grade than Tex. More expensive to feed and poorer quality of milk. Some people hate Slappy.
And the buyers of the whole milk that Tex and Slappy produce pay close attention to the differences between the two. These buyers still have to take the harvested milk and pasteurize / process it before it can eventually be sold to the end consumer. You can almost look at the whole milk as a raw product that needs to be upgraded.
Because of these differences, people are willing to pay $5 per jug of Tex’s milk, but only pay $1 per jug for Slappy’s milk. It doesn’t take a degree from Bovine University to see that a farmer would rather own Tex than Slappy.
This makes Slappy sad, but what’s a cow to do?
This story really isn’t about cows
A similar story unfolded in Alberta during the latter part of 2018 (and yes, we just spent that much time setting up a metaphor). In November, the price of Western Canadian Select dipped to roughly $10 / barrel (USD). West Texas Intermediate, conversely, was still at $50 / barrel (USD).
But something remarkable has happened in a short period of time. After bottoming out in the fall, Western Canadian Select prices have since risen nearly 500% over the past few months. Even West Texas Intermediate prices have increased.
Going back to our metaphor, it would be the equivalent of Tex’s milk now fetching $6 per jug, and Slappy now getting $5 per jug. Tex had a 20% lift in value, while Slappy had a 500% increase.
So what do cows and oil have to do with a commercial real estate blog?
As we have written about extensively, Edmonton’s commercial real estate market is directly, unequivocally and undeniably correlated to the underlying price of oil. We are steadfast in our conviction that there is no other singular metric that has the same influence on rental rates, sales prices and vacancy as does oil prices. And while prices are still well below what they were in 2014, we are encouraged by the recent gains, particularly relating to Western Canadian Select prices. Indeed, there is a bit of optimism is in the air.
This makes slappy happy 🙂
Chad GriffithsPartner, SIOR, CCIM
Chad is a partner with NAI Commercial Real Estate and focuses on the Greater Edmonton area. Chad entered the industry in 2004 and has completed over 400 commercial transactions with clients ranging from small, local companies to large institutional owners. Chad has been a top 15 producer with NAI Canada-wide since 2013.
Ryan BrownPartner, BCom, SIOR
Ryan is a partner with NAI Commercial Real Estate in Edmonton and is currently ranked nationally as one of NAI's top advisors. Having executed in excess of $100 Million worth of sales transactions and over 2 Million square feet of lease transactions, Ryan has developed a firm understanding of asset evaluation and an aptitude for building design, functionality, and long-term practicality.
Darcie is a licensed Commercial Real Estate Agent in the Province of Alberta with a focus on the Edmonton market and its surrounding areas. Darcie accomplishes custom solutions for her clients through her personable nature and results driven attitude. Darcie can help if you are looking to invest in commercial real estate or are looking for representation for a sale or lease transactions.
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