CRE Feels Pressure From Russian Invasion of Ukraine


Russian President Vladimir Putin‘s decision to invade Ukraine sent the financial markets into a tailspin Thursday, adding new uncertainty to commercial real estate investors already confronting supply chain and inflationary pressures.

The Dow Jones Industrial Average was down sharply for much of Thursday trading before recovering slightly late in the day, with many CRE stocks and public real estate investment trusts facing pressure along the way. CBRE (CBRE), which enjoyed a big 2021, was down 2.35 percent in late afternoon trading while Host Hotels and Resorts, the largest hotel REIT, was down 0.74 percent.

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REITs enjoyed a big 2021 with a 41.3 percent year-over-year increase before falling hard in January due largely to concerns about the Federal Reserve indicating plans for three interest rate hikes. 

Jonathan Morris, founder of the REIT Academy and a former executive at three REITs, said that the struggles in January could mean the sector won’t take a major hit from the escalating tensions in Eastern Europe. He noted that about 70 percent of REITs are owned by institutional investors, who often will take a longer-term view than individuals.

“I think there is a good chance that the air has been let out of the tire in the last month and a half and I think investors are going to see this as a big buying opportunity,” said Morris, a former director of acquisitions at Boston Properties and Charles E. Smith Residential Realty, before it merged with Archstone Communities. “If this was like December 2020 and this happened when everything was flying high, everything would go down 25 percent, but it’s already done that.” 

Morris said that while the crisis between Russia and Ukraine will likely add to already challenging supply chain conditions, the bigger concern for commercial real estate will be the impact on pricing. He stressed, however, that most companies pre-order supplies long in advance so rising prices resulting from inflation may be muted. 

The Fed’s interest rate moves will have a far bigger impact on CRE and Morris said the sector would get a boost if the Fed would give indications that it was considering scaling back the rate hike this year to avoid further economic damage. Public-owned REITs only use about 30 percent leverage while private REITs utilize around twice that amount, according to Morris.

Existing supply chain challenges were further fueled by Putin’s attacks on Ukraine with crude oil prices piercing the $100-a-barrel level for the first time since 2014 this week. Russia is one of the three major oil producers, along with Saudi Arabia and the U.S., which have both resisted calls to boost production amid rising prices during the past year.

Peter McNally, vice president global sector lead for industrial materials and energy at Third Bridge, noted in a Thursday morning commentary that the economic effects of rising gas prices are uncertain since air travel recovery has been “uneven” with volume still well off pre-pandemic levels. 

“With inventories low, volumes are needed in uncertain times whether they be from Russia or any other suppliers,” McNally wrote. “What is less certain going forward is demand.” 

Mark Russo, director and head of industrial research at Savills, said prior to the escalation in the Russia-Ukraine conflict, freight costs had already risen “exponentially” in the past year, and are getting passed onto consumers contributing to the highest inflation in 40 years. He noted that freight inflation is a headwind for the industrial property sector given that transportation can make up 50 percent of total costs for occupiers.

“In terms of implications for warehouse site selection, rising shipping costs are making proximity even more critical,” Russo said. “Not unlike the pandemic, geopolitical events can expose serious vulnerabilities in the supply chain and the just-in-time approach to inventory management.” 

Andrew Coen can be reached at