Oil Below $100: Construction and Logistics Costs

Oil prices fell hard on Wednesday. Brent, the global benchmark, fell 8.7% to settle at $94.62 a barrel, and U.S. crude dropped 8.3% to $88.12, CNBC reported. The trigger was politics: Vice President JD Vance said publicly that the war with Iran was why Republicans lost Tuesday's midterms, and traders read that as a sign a deal is getting closer. For commercial real estate, oil matters less on the trading screen than in the things it feeds: diesel, asphalt, steel, freight and the budget for every project now in pre-construction.

Why the drop happened

According to CNBC, oil futures have fallen more than 14% this week as U.S. and Iranian officials signaled openness to a diplomatic settlement of a conflict that has disrupted global energy supplies for eight months. The market had gained more than 10% in October on fears of escalation after the election. Andy Lipow of Lipow Oil Associates told CNBC the results are leading traders to conclude the president "might now be inclined to make a deal."

Not everyone agrees the move will last. CIBC's Rebecca Babin said the sell-off "could be getting a bit overdone," and Rapidan Energy's Bob McNally told CNBC the odds still favor military escalation. Owners making decisions on cheaper oil should treat it as a possibility, not a forecast.

Diesel is the number that matters, and it is still high

The U.S. Energy Information Administration's weekly survey put the average on-highway diesel price at $6.292 a gallon on Nov. 2, down from a peak of $6.529 in the week of Sept. 21 but well above the $5.348 recorded in early August. C.H. Robinson notes that September's peak set a national record, beating the $5.81 high of June 2022.

Diesel also has its own problem. C.H. Robinson says diesel has been rising faster than crude, because the global refining system is stretched and EIA expects U.S. distillate inventories to stay below five-year lows through much of 2027. Its advice to shippers building 2027 budgets is to plan for elevated fuel costs and surcharges even if crude moderates. In other words, a lower crude price does not automatically mean cheaper trucking.

Construction costs have been running hot

Associated Builders and Contractors reported that construction input prices rose 2.2% in September and 11.2% over 12 months. Chief economist Anirban Basu called that the largest year-over-year increase in nearly four years. Crude petroleum prices jumped 28.3% and unprocessed energy materials rose 22.2% that month alone. Basu said higher fuel prices tied to the conflict drove a substantial portion of the increase, but tariffed materials such as iron, copper and other metals "continue to rise rapidly." More than one in four ABC contractors expect their profit margins to shrink over the next six months.

That split matters. If peace holds, the energy-driven part of the increase could ease relatively quickly. The tariff-driven part of metals pricing is a separate problem that cheaper oil does not fix.

The freight backdrop for industrial owners

Trucking demand is starting to recover. Summar Financial, citing DAT, reported that national spot linehaul rates for the week ending Oct. 24 were more than 28% higher year over year, excluding fuel surcharges, and the Cass Freight Index showed September shipments up 1.9% from a year earlier. Fuel is a major cost for carriers, so a sustained drop in diesel would widen carrier margins and lower total logistics costs for tenants.

What it means for CRE investors and owners

Don't re-bid projects on one day's oil price. Developers in pre-construction should ask contractors to separate fuel-sensitive costs, such as sitework, paving, roofing and delivered materials, from tariff-sensitive metals. Escalation clauses tied to energy indices could start working in owners' favor if the decline holds.

Industrial and logistics tenants get some relief. Lower diesel improves the economics of distribution networks. In our view, that supports demand for well-located warehouse space, and it could revive interest in more distant, cheaper sites that only work when transport is affordable. Last-mile and cold-storage operators, whose refrigerated trailers also run on diesel, would benefit most.

Houston cuts the other way. Energy markets win when oil is high. Cushman & Wakefield put Houston office vacancy at 24.6% in the third quarter, with 290,000 square feet of negative net absorption. Leasing was still up 5.7% year to date and average asking rents reached $32.08 per square foot, the highest since 2021. We would watch whether a lower oil price slows energy-company expansion before it shows up in leasing.

Plan for whipsaw. With analysts split on whether a deal will hold, we think the prudent stance is to lock in favorable fuel and materials pricing when it appears, without building pro formas that need oil to stay below $100.