What the Evolving War in Ukraine May Mean for US CRE Investors

The evolving situation in Ukraine has many commercial real estate investors wondering what the impact of the Russian invasion may have on markets as oil and natural gas prices surge. 

“The situation is very fluid, so the prospective impact on real estate investments could continue to evolve each week,” says John Chang, senior vice president and director of research services at Marcus & Millichap, in a new video analysis.  He notes that the US imports less than 10 percent of its oil from Russia, and that US oil companies are already putting plans in motion to boost production and drilling operations in Texas and other parts of the country to backfill that deficit.  However, Chang says it will take about a year.

In the interim, the US will tap into strategic oil reserves, and announced plans to unlock about 30 million barrels, or 5% of the total US strategic reserve.

“That will help keep things stable until other solutions can be put in place,” Chang said “But it’s basically like taking money out of your savings account to cover your daily expenses.”

Chang says the rising price of oil could boost inflation by 1-2% this year.  And “that means the Fed’s job of containing inflation just got harder,” Chang says. “Carrying that forward, it means interest rates will face increased upward pressure, and economic growth in 2022 and 2023 could be slowed.”

Despite that, Chang says most economists still predict economic growth in 2022 will be above 3%—but he noted that he’s seeing more economists increasing their probability of a recession and the risk of stagflation, where economic growth stalls while inflation remains high.

From an investment perspective, there’s a few ways to address this, he says.

“For a more defensive strategy, single tenant net lease retail makes a lot of sense.  Average cap rates have been running in the 5% to 7% range,” he notes. “Another defensive asset with some upside potential that capitalizes on aging baby boomers is medical office with off-campus average cap rates in the 5 to 8% range.”

Another option is self-storage, according to Chang: it performed well through the last two recessions and gained ground during the growth cycle. Multifamily and industrial also remain good investment options, he said.  And real estate in Texas, particularly in Houston, typically gets a boost from rising oil prices.