August 19, 2022

Energy is getting more expensive and more complicated.

So much of what fuels our economy is cheap, reliable energy… and that has recently become more expensive and in much of the world, less reliable.

Right now, the situation is most disruptive in Europe, where an overreliance on Russian natural gas has backfired… now prices are sky high and they may even need to start rationing for next winter.

And the thing about energy is that it affects so much else in the economy, besides energy companies. A significant degree of the inflation we are facing today comes from higher manufacturing and transportation costs… in addition to the higher prices at the gas pump.

At Alliance, we think about long term trends as part of our investment strategy… and less stable energy markets absolutely factors in. We focus primarily on medical office buildings (MOBs). Our portfolio did fantastic during the Covid lockdown because the medical specialties we focus on are largely recession-proof. As I think forward, I am starting to think about the implications for real estate from less stable energy markets.

As a society, I do think it’s a good thing that we’re making bigger and bigger moves to transition to new sources of energy. And it’s important for policy-makers to think big. But we can’t ignore the real costs.  And the energy transition will not happen in some computer simulation… but in the real world, and will affect real people.

I know from my decades of business experience that big plans rarely come off without a hitch. Our energy systems are so huge and complex, with so many different stakeholders and so much invested capital, that there’s no way to do this smoothly. To move us from fossil fuels to green energy will be one of the biggest things people have ever done.

Maybe this is all necessary, but I don’t know if people are ready. I have not seen much of the needed expectations-setting. Many people are going to experience real financial distress if energy prices continue rising, and this could provoke a major backlash.

Our leaders need to think very carefully about what they can control, and what expectations to set. We will probably see more energy crises in the coming years. The situation calls for smart planning and a lot more honesty from politicians… and for real estate investors like Alliance, strategic thinking around how this may impact real estate valuations.

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