The Azucena Take: The Ukrainian War and the Commercial Real Estate Market

The Russian invasion of Ukraine has horrified the world while most aspects of life and the markets have been affected. This is a conflict that will have short and long-term ramifications for the world. Be it the humanitarian crisis, the economic impact, or the political ramifications.

For those involved in the commercial real estate market, they are wondering how will war affect them. While no aspect of life or the economy could escape the impact, the commercial real estate market will not be too impacted.

#1 Inflation: It's expected that the war will contribute to the ongoing inflation problem. This will especially be true regarding the energy market. Russia is one of the largest producers of oil and natural gas in the world. Thus the economic sanctions are going to result in rising energy costs. The cost of food could also jump as Russia and Ukraine are among the largest producers of grain. 

As of March 2022, inflation is at 7.5% while the war is expected to increase it. By how much is yet to be seen. This may present an economic problem, properties with inflation escalator in the lease will not be too impacted.

#2 Heightened Uncertainty: This is a war involving a world power with a nuclear arsenal. Thus there are a lot of uncertainties about how this will play out. Investors don't like uncertainties and this will do two things:

The first is that the war will put downward pressure on interest rates. This is because investors will more likely move capital into safer investments like bonds and real estate. 

The second is a slow down of transactions. This will be due to investors being hesitant because of how the war is affecting the markets. As a result, they may put off making major investments until the war has ended.   

There is also the fear of the war escalating by spilling over into other countries or Russia launching cyberattacks. While unlikely at the moment, the chance it could happen is enough to worry investors. 

The war has caused a humanitarian crisis and put the free world on edge. One could only hope a diplomatic solution could end this before it escalates. While the economic impact is limited for now, investors should also be prepared if there are major disruptions.

The Azucena Take provides an inside look into the investment real estate market using the research done and data collected by Marcus & Millichap.