Russian-Ukraine conflict affects real estate

By: J. David Chapman/March 10, 2022

As I remind my students, it is rarely as bad you think it is, and it is rarely as good as you think it is. Frankly, it is simply never as you think it is going to be. I think the Russian-Ukraine conflict’s effect on real estate probably fits in this category. The invasion of Ukraine by Russia will have consequences to the U.S. economy, and issues with the U.S. economy will have consequences to real estate investments around the world.

I think we have to take inventory of where we were before the Russian-Ukraine Conflict. Despite concerns over a prolonged downturn in the U.S. commercial real estate market in 2021, the opposite was true. Demand for space increased, with the sole exception being the office sector. International investors sat up and took notice, increasing their capital flow into U.S. properties.

In the large commercial real estate space (at least $2.5 million or higher), international inflows increased by 44% from 36.6 billion in 2020 to $52.9 billion in 2021, accounting for 8% of the $638.2 billion in U.S. commercial real estate acquisitions.

Canada led the way as the top international investor, followed by Asia and Saudi Arabia. And those funds ended up buying multifamily, office, and industrial properties in Seattle, Atlanta, and Dallas. The usual investment targets were down on the list, such as Manhattan (which fell to No. 8) and Los Angeles (at No. 11).

Meanwhile, foreign investor acquisitions in the small commercial market (transactions less than $2.5 million) more than doubled from $2 billion in 2020 to $4.8 billion in 2021, with Florida, Texas, and California making up the top destinations. Latin America and Canada topped the list of international buyers, with multifamily assets and raw land being the preferred property types.

I think it is important to recognize the connections between world economies. This war likely will drive inflation higher, while putting downward pressure on economic growth and financial markets. The two sectors that likely will feel the pressure are energy and commodities.

So, while the actual battles are taking place in Eastern Europe, the consequences could be felt in countries far from the fighting. Less globalization is a natural result of a new cold war and especially challenging for Europe, which has become increasingly reliant upon Russia for natural gas.

J. David Chapman is professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).