A breakdown of how geopolitical risk impacts the US real estate market
Geopolitical risks can have a significant impact on the US real estate market, and understanding this impact can be challenging. These risks, both global and domestic, create volatility and uncertainty about future impacts on economies and financial markets.
The risks can materialize in different forms, such as conflicts like the war in Ukraine, additional production shutdowns due to elevated COVID infection rates in China, or local politics surrounding rent regulations and sustainable development and renovation requirements.
The current environment adds complexity to the impact of geopolitical risks. The economy faces challenges such as increasing interest rates and inflation levels at a 40-year high, supply chain stress, and the ongoing effects of the pandemic. These factors make it difficult to isolate and measure the impact of geopolitical risks on the real estate market.
The impact of geopolitical risks can affect commodities pricing, supply chain, and inflation, among other areas. For example, Russia and Ukraine export 30% of the world’s wheat, a key product in the world’s food supply, and their recent commodity price increases have raised concerns of a global food crisis.
Additionally, China’s zero-COVID policy and related lockdowns have driven production and port activity to levels not seen since the beginning of the pandemic, affecting sectors like the automobile industry and electronics manufacturing. Higher energy costs can also have a negative effect on real estate, as high gas prices can affect consumer sentiment and spending, hurting the already weakened retail and hospitality market.
Cyber risks have also increased, impacting global stability by targeting critical infrastructure. Cyberattacks increased significantly during the Russian invasion, disrupting Ukrainian military communications, power grids, and telecommunications. With increasing investments in smart buildings, granular building infrastructure becomes more susceptible to cyber risk.
All these challenges affect consumer spending, be it product cost, availability, or even how the products are purchased, online or in person. Higher-priced necessities could limit consumer spending, including retail, travel, and services. Central banks, looking to manage inflation with interest rates, have a narrow lane to land the planes on to avoid a recession, or worse, stagflation.
In conclusion, continued political uncertainty provides significant headwinds to the US real estate market. The ultimate impact on commercial real estate will be greater than if the political risk didn’t exist, and the longer it takes to moderate, the more negative implications the accretive impact can have on the industry. It is hoped that geopolitical risks will be resolved soon, so the real estate market can stabilize, leaving the pandemic and financial effects behind.