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  • Writer's pictureKerwin Donis

How War Impacts The Real Estate Industry

The wars of the past have always seemed like two-dimensional bullet points on a timeline found in a textbook. But lately, the dangers of war have been crowding headlines and spilling from the lips of reporters. It’s not just one or two countries, either. So as a real estate investor living in this chaotic world, you’d be rational to ask: how do wars impact the real estate sector? We asked - and went down a rabbit hole. Below, we’ll try to concisely recap what we found.

Revisiting AP World History

We learned about the world’s biggest -and deadliest- wars back in History classes. These include World War I and II, and The Vietnam War. Historically, the impact of a “physical” war (the kind you see in the movies) has been consistent. These past wars resulted in “economy-wide shifts” as the nation united under a common goal: to win the war. In lieu of traditional goods and services, the country focused on producing “wartime supplies.”

The Shrapnel Of Economic Changes

This shift resulted in a decline in home construction, and less investment in real estate, including office spaces, retail properties, and hotels. But this trend didn’t last forever. Once soldiers came home from war, demand for real estate in the U.S. skyrocketed as men came back and sought to buy homes and start a family. The rise in employment among Americans also led to more disposable income, pushing demand for commercial real estate higher, and overall, real estate prices increased.

The Enemy Of Tomorrow Doesn’t Use Guns…

The threat of cyber warfare remains to be fully realized, but it’s a possibility that isn’t being ignored. Fear of cyber attacks has led many businesses to invest in “backup systems, cloud storage, [and] generators.” The threat of this kind of war has also resulted in an explosion in demand for data centers, a new type of commercial real estate. These data centers and warehouses are used to store essential backup equipment that are only rising in demand.

Looks Like I’m Biking To Work…

In recent global events, we’ve seen firsthand the impact war can have on the price of oil. One of the top producers of oil and gas in the world is Russia, who is currently embroiled in heated conflict with Ukraine. As a result, the price of oil and gas has skyrocketed around the world, including in the U.S.. The U.S. “banned the import of Russian oil to our shores” back in March. Before this, 8% of the oil in the U.S. came from Russia. So the resulting decrease in supply of oil has caused prices to increase in America.

As a result of these geopolitical factors, Americans are experiencing higher costs of gas. When choosing between gas to get to work, and making their monthly rental payment, some renters may choose to pay for gas over rent, or many may struggle to cover the full rental payment.

Builders, Beware!

This higher cost of oil also pushes the cost of construction higher. Real estate construction requires a lot of energy, which comes from gas. Think of all the gas used by the trucks that transport the materials needed for buildings and apartments from point A to point B. As energy prices across the globe rise, it’s almost certain that the cost of construction will also increase. This makes real estate development more costly, and resultantly more risky. But, it also places more demand on the existing supply of real estate, as the new build rate declines.

Wartime Worries Means Sidelined Investors

In recent years, American citizens have grown accustomed to breaking news and global crises. But still, news of war and geopolitical conflicts can result in more uncertainty and fear among investors. This may keep lots of investors - and capital - on the sidelines, waiting out the volatile ripple effects these events may have on the real estate market and the economy as a whole. American consumers may have a similar reaction, spending less money and cutting back on expenses. This not only means Americans will be spending less in retail centers, but Class A multifamily may see some decline in demand as consumers look to cut costs and downsize.

Other consequences of war-related conflicts occuring in other parts of the world for the U.S. include declines in tourism and travel, which can have a complex impact on the affected areas.

“We’re All In This Together” - The Fed Quoting High School Musical

During a war, the government obviously increases spending in order to pay for it. We’ve been seeing the Federal Reserve push interest rates higher in their ongoing battle against inflation. But during a war, they tend to do the opposite. That’s right - to support the nation’s interests in the war, the Federal Reserve usually pushes interest rates down to encourage lower borrowing costs and to support the overall economy.

During World War I, this helped promote the sale of war bonds.

During World War II, the Fed also kept interest rates low to support the nation’s war efforts to help finance the war-related expenses and keep inflation low as a result of the increase in government spending.

The chart below shows how in 1945, the Fed dropped rates to pay for War World II.

During the Korean War, Vietnam War, and more recent conflicts such as the Gulf War and Afghanistan and Iraq, the Fed’s policies maintained or kept interest rates low to promote economic growth to accommodate for these conflicts.

When interest rates are low, real estate becomes more affordable, and investments in real estate tend to increase. Since the Great Recession of 2008 ended, the Fed has kept interest rates low. At least, they did until the start of 2022.

Keep Calm And Carry On (And Invest)

As tensions overseas rise, the U.S. expects to receive up to 100,000 Ukrainian refugees, according to NBC News. These refugees will need housing - meaning demand for real estate (especially multifamily) isn’t likely to go anywhere.

So by now, it’s clear that there are multiple factors at play during a war that each have a complicated impact on the real estate sector. Although this impact is usually not direct (unless the war is happening domestically), the consequences of a war can cause widespread uncertainty. The ripple effects can be seen in the instability of the economy at large, and the resulting shifts in investor sentiment and government response. All of these have an impact on the real estate sector, though not always significant. But, like the threat of cyber attacks, they should not be ignored.

And with the headlines mentioning wars and conflicts seeing an uptick, it’s a wise decision to be in the know.

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