Thursday, March 12, 2015

The Impact of Cheaper Fuel

Will lower fuel prices cause a spike in visitation to Vegas this summer? More importantly, will lower fuel prices give a boost to commercial real estate?

Generally speaking, when prices fall, people buy more, and when they rise, they buy less. Nothing ground-breaking in that statement, and suggestive that lower fuel prices will mean more people driving and flying to Las Vegas in 2015. But let's take a closer look before we commence dancing in the streets.

According to AAA, Las Vegas’s average gas prices have fallen by from $3.44/gallon one year ago to $2.896/gallon today, a drop of $0.544. Los Angelino’s have seen a $0.52 drop in gas prices, year-over-year. Let's assume a $0.53/gallon drop in fuel prices. The trip from Los Angeles to Las Vegas is about 270 miles. The average car in the United States gets about 21 miles to the gallon, so with the current savings in gasoline prices, you can now make the round trip with a whopping savings of ... $14! I cannot imagine that many road trips to Vegas have been derailed for the lack of $14. Some have, I'm sure, but probably not many. I also wouldn't bet on airfares dropping too much either. Airlines do not seem too generally not inclined to pass savings on to their passengers these days unless they absolutely have to. I don't think lower gas prices will have a major impact on visitation to Southern Nevada.

The effect of lower fuel prices on local consumers is where the potential for a benefit lies. Less money spent on gasoline means more money available for other things, the likely beneficiary being non-gas station retail stores.

In 2014, gas stations took in an average of $23.8 million per month. In of 2013, gas stations took in an average of $23.6 million per month. So, Las Vegans spent an additional $0.2 million per month at gas stations, year-over-year, while fuel prices dropped an average of $0.11 per gallon. Not suggestive of money flowing away from the gas stations, and lower prices at the pump may stimulated non-fuel spending at the convenience stores connected to gas stations, keeping that money "in the family".

Other retail stores took in $1.436 billion per month in 2014, versus $1.348 billion per month in 2013. So, Las Vegans spent $88 million more per month in other retail stores in 2014 than 2013. Perhaps this represents more spending on retail because of lower fuel prices, but then perhaps not.

The big retail boost in Las Vegas was in nonstore retail (i.e. online and, presumably, mail order sales). Now, these numbers are for such businesses paying taxes in Las Vegas, so the money spent does not necessarily come from Las Vegans. Still, taxable sales in nonstore retail climbed from a monthly average of $30.7 million in 2013 to $48.3 million in 2014, an increase of $17.6 million per month.

Many interesting figures, but nothing solid to indicate the impact these lower fuel prices might have on non-fuel related businesses in Southern Nevada. Let's take a different tack. Imagine if the percent reduction in fuel prices from March 2014 to March 2015 (16.3 percent) translated in a 16 percent reduction in spending at gas stations. That would free up $45.7 million dollars, annually, to be spent in other sectors of the economy. That represents just one-tenth of one percent of the total taxable sales in Southern Nevada in 2014 ... and it's probably significantly more money that will actually move from gas stations to other retail.

My prognosis: Don't expect any major impact on commercial real estate from the lower fuel prices we are not experiencing. Fortunately, commercial real estate is in a recovery, and it now appears to be a solid, sustained recovery. A boost from lower fuel prices would be welcome, but at this point it is not necessary to keep commercial real estate growing.


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