As a result of Russia being the world’s second-largest producer of natural gas and one of the world’s largest oil-producing nations, their recent invasion into Ukraine could signal chaos within the Commerical Real Estate sector globally. 

Increasing Interest Rates

According to Fairview Lending, the Ukraine invasion could directly increase interest rates in the United States. 

“So far, we haven’t seen a slow down in real estate yet, but look for this to occur in the 4th quarter of this year as rates impact purchasing power,” said Fairview Commerical Lending on February 25th. “The wildcard is commodity prices such as oil, if they spike further, the federal reserve will act quickly to tamp down inflation which would cause rates to rise faster and higher than the market is anticipating.”

Building Prices

In addition to the issues of inflation, the instability of oil prices will likely also lead to an increase in building materials, such as cement. 

“Experts said that in the event of a full-blown conflict, the cost of transportation will likely go up, and its effect would cascade through the supply chain,” said Vandana Ramnani, Associate Editor of Real Estate for Money Control. “That may push up prices of raw materials further, increasing the cost of construction.”

Future Gas Prices

Additionally, outside of American concerns, the issue is much more dire for Europe. Without Russian gas supplies, which supplies 38% of the European Union’s gas imports, Europe does not have the adequate infrastructure to support itself without additional help. 

“[Europe] would have to pull every lever in the energy system to keep the lights on” said Kateryna Filippenko, principal analyst for Europe gas research at Wood Mackenzie said. “In the event of prolonged disruption [from Russian gas], gas inventory couldn’t be rebuilt through the summer. We’d be facing a catastrophic situation of gas storage being close to zero for next winter. Prices would be sky high. Industries would need to shut down. Inflation would spiral. The European energy crisis could very well trigger a global recession.”

Overview

However, ultimately, outside of a general economic impact, there is unlikely to be any direct impacts on the commercial real estate sector. 

“The impact on commercial real estate will likely be indirect, as the effects of the conflict feed through into commodity prices, inflation, bond yields and ultimately perhaps economic growth,” said Tom Leahy, Head of EMEA Real Estate Research at Real Capital Analytics,. “The main mechanism is likely to be through higher energy prices, which add to the inflationary forces already being felt across most European economies.”