With Russia waging war in Ukraine, devastating images emerging daily, and no end in sight, there are already global financial implications and there are bound to be more.
The U.S. and many world governments have issued heavy sanctions against Russia and a great number of international businesses — from fast-food restaurants to car companies and oil producers — are closing shop or leaving the country over the invasion of Ukraine. The actions have drastically weakened Russia’s economy, as its stock market and currency have plunged in value.
These policies, implemented to pressure Russia to change course, have also impacted the global economy by compounding inflation, preventing economic growth, and disrupting supply chains, according to The New York Times. In this article, we will explain how the war can impact U.S. commercial real estate, which is generally seen as a stable place for investments during times of uncertainty.
How the Ukraine-Russia Turmoil Can Impact U.S. Commercial Real Estate
The conflict abroad is expected to have little direct impacts on the U.S. commercial real estate market, as Russian capital outflows in global property markets averaged just $330 million per year in the last 5 years, according to Real Capital Analytics.
Additionally, Russian buyers comprise less than 1% of home purchases in the U.S., so a direct disruption in the American housing market is unlikely as well, the National Association of Realtors indicated in a recent report.
Finally, U.S. and other foreign investment companies have scarcely invested in Russian real estate prior to the invasion as foreign investors accounted for only 2.2% of Russian commercial real estate in Q3 2021, according to The Wall Street Journal via data from brokerage firm Knight Frank.
The impacts of the Ukraine-Russia conflict on U.S. commercial property are expected to be mostly indirect. Notably, the conflict is compounding a spike in inflation that began last year as Russia is one of the world’s largest oil producers. There has been a dramatic increase in prices at the pump and to heat up homes as crude oil exceeded $100 a barrel in late February 2022 for the first time since 2014.
As a result of rising inflation, the Federal Reserve has begun to raise interest rates for the first time since 2018 to promote steady economic growth. However, the new policy shift will impact mortgage rates. Mortgage rates initially fell when the invasion began as uncertainty surrounding the conflict caused investors to move into “safer” investments like bonds, dropping treasury yields. (The 10-year treasury yield is a benchmark for mortgage rates.) But experts anticipate the Fed will continue increasing rates amid elevated inflation levels and uncertainty from the geopolitical tensions, which will result in higher mortgage rates.
In addition to increasing mortgage rates, the war has impacted global supply chains, and prices for materials and transportation are growing. Ocean and airfreight transport costs are rising as fuel prices have increased, and since Russian airspace has been closed to dozens of countries, cargo planes have needed to shift their routes, increasing shipping costs.
Russia and Ukraine are also major exporters of aluminum and copper among other products, and prices for construction materials from those metals could be impacted, potentially affecting development, which is why it’s more important than ever to invest with experienced partners that understand how to plan for contingencies.
Why Investors Should Pay Attention to Commercial Real Estate
While high inflation and supply chain issues can be concerning, U.S. commercial real estate may still be a strong market for investments because property and other hard assets can be a hedge against inflation. Additionally, multifamily real estate has significant tailwinds supporting the asset class during this time, such as:
- An ongoing shortage of for-sale homes driving rental demand
- Higher interest rates will result in increased mortgage costs for homebuyers, which may further boost the rental market
- Consumer anxiety over current geopolitics may prevent them from making large financial transactions now, such as buying a home
- Investors typically desire resilient assets, such as U.S. multifamily real estate, during periods of uncertainty
Foreign and domestic investors with holdings in Europe may also focus on U.S. real estate as it is generally seen as a more “stable” market during international turmoil. Moreover, the Russian invasion is likely to “slow Europe’s economy significantly” compared with other markets, according to Barron’s, and the inherent uncertainty of war between two of Europe’s most populous countries, could influence institutional investors to look for strong markets outside the region. Foreign investors have already showed a strong appetite for U.S. real estate, having surpassed pre-COVID-19 pandemic transactions levels in 2021 with an estimated $57.7 billion worth in acquisitions, an increase of 49% from 2020. That high demand could see renewed strength in 2022 as the geopolitical turmoil in Europe ensues.