Russian Invasion of Ukraine
What’s Going On and What It Might Mean for Real Estate in 2022
By Carole VanSickle Ellis
On February 24, 2022, Russia invaded Ukraine. The invasion was a continuation and escalation of conflict initiated in 2014 when Russia invaded and ultimately annexed Crimea, a peninsular country bordered by the Black Sea, the Sea of Azov, and Ukraine. Russian marine access has been a point of contention in this region since the time of Peter the Great, the Russian tsar who ruled Russia from 1682 to 1725. Considered one of the country’s greatest statemen and reformers, Peter the Great took the first steps toward transforming Russia from a landlocked state into a significant power in the Baltic and Black Sea regions during his reign.
Serhii Plokhy, Harvard professor of Ukrainian and Eastern European history, described the situation earlier this year in an interview with the New Yorker, as “a return to a pre-revolutionary understanding of what Russians are. It is a very imperial idea of the Russian nation, consisting of Russians, Ukrainians, and Belarusians. The last two groups [according to this ideology] do not have the right to exist as separate nations.”
In response to the invasion, Ukrainian president Volodymyr Zelenskyy enacted martial law, mobilized the Ukrainian military and all Ukrainian men between the ages of 18 and 60, and publicly declared he would remain in Ukraine despite multiple assassination attempts.
The United States and other countries have imposed a variety of economic sanctions on Russia, including banning Russian imports, crude oil, petroleum products, natural gas, and coal. Western companies across the spectrum from McDonalds to Goldman Sachs have closed Russian locations. The results have been far-reaching both in Russia and abroad.
Understanding this history and background is essential. It sets the stage for how long this conflict might continue, why it was initiated in the first place, what types of weapons and strategies might come into play, and how the economic fallout might ultimately shape the next decade (or longer) of the American economy and the U.S. real estate sector.
What does it all mean for real estate?
In 2020, COVID-19 acted as an accelerant for trends that had been taking shape over the previous decade. The Russia-Ukraine conflict has already begun to have similar effects, albeit on different facets of the national and global economy. The conflict will likely accelerate (and exacerbate) issues with inflation, supply chains, stock market volatility, and renewable energy/oil and gas. Issue by issue, we will break down how this will affect real estate and real estate investors in this report.
Inflation
Historically, inflation has affected real estate in relatively predictable ways:
» Housing costs rise
» Rents rise
» Mortgage payments become relatively lower compared to “going rates”
» Real property assets are increasingly attractive as a “hedge” against inflation
What We Hear from the Experts
“About 88 percent of investors surveyed [in the Winter 2021 RealtyTrac Investor Sentiment Survey] were concerned about inflation having an impact on their business, whether due to higher material and labor costs, higher interest rates, or rising consumer prices that might weaken demand from potential home buyers and renters.”
- Rick Sharga, executive vice president, RealtyTrac
“I think it is fair to say that this war has changed the risk profile a little bit with respect to inflation…. There is already a lot of upward inflation pressure.”
- Jerome Powell, Chairman, Federal Reserve
“I’ve been trying to tell fellow investors, ‘Be cautious. Invest in something you can afford to hold through whatever type of cycle comes next.’ Some of the traditional fundamentals you usually see in front of a recession are not there right now, but we are hitting inflation numbers we have not seen in 40 years [and] the inflation numbers are now even more out of control because of the Russia-Ukraine conflict.”
- Dennis Cisterna, co-founder & CIO, Sentinel Net Lease
Supply Chain
In 2021, the National Association of Home Builders (NAHB) reported more than 90 percent of builders were reporting delays and materials shortages. The Russian invasion of Ukraine further complicates these matters by driving up gas prices in the midst of historically low employment numbers for truck drivers, new tariffs on Canadian soft lumber producers, and ongoing issues getting ships into port and products into distribution.
What We Hear from the Experts
“With building material pricing, the challenge for builders in 2022 will be to deal with higher input costs while making sure home prices remain within reach for American home buyers.”
- Danushka Nanyakkara-Skillington, assistant vice president of forecasting and analysis, NAHB
“The Russian invasion of Ukraine poses a new threat to commodity supplies and pricing and will have a ripple effect across global manufacturing and supply chains in 2022…. Supply disruptions will trigger price increases for manufacturers and will impact various sectors…. Operators also face labor market constraints and upward pressures on wages.”
- Claire Williams, Knight Frank Global Headquarters
Stock Market Volatility
Although the Russian invasion of Ukraine did briefly send the market into a tailspin, by the start of March investors seemed to think the outlook might be a little brighter than they had originally thought. The market solidified and the massive sell-offs pessimists predicted in early 2022 did not happen.
Historically, real estate tends to see acceleration in price appreciation when the S&P 500 corrects by between 10 and 15 percent and does not lose that acceleration until the S&P 500 loses more than 20 percent. Because real estate is considered a “safe haven asset,” when stocks start to fall or volatility affects investor confidence, investors tend to veer into physical property assets. However, 2022 is unusual because the housing market is already white-hot and investors face fierce competition in nearly all markets.
What We Hear from the Experts
“Given real estate is a hard asset that provides utility and produces income, real estate generally outperforms [the stock market] during times of uncertainty. The issue today is that real estate demand is high and stocks are at all-time highs.”
- Sam Dogen, Financial Samurai
“Given what was potentially at stake – nuclear war – the market’s response has been amazingly orderly. It is conducive for a better outlook than we had a month ago.”
- Marc Chandler, chief market strategist Bannockburn Global Forex
Renewable Energy/Gas & Oil
The effects of Russian oil bans and other economic sanctions could bring the more practical elements of the environmental movement into play for real estate investors. The most immediate impact will come from the astronomical rise in gas prices, which have risen 17 percent since the start of the invasion (and 23 percent since the beginning of the year). That has a direct impact on residents’ decision-making when it comes to where to live and could make walkability, bike-ability, and mass/public transit options more important to a wider swath of the population than has historically prioritized these factors.
Chief U.S. economist for Capital Economics Paul Ashworth predicted on March 10, 2022 that even if the price of oil does not rise any higher, average retail gas prices will reach $4.50/gallon by the end of April. Oil and gas prices affect American real estate both in terms of the costs associated with transportation of materials and in terms of buyer and renter preferences in terms of location. Should the cost of natural gas rise, this may affect homeowners’ and investors’ willingness to install renewable energy options in homes such as solar panels. However, it is too soon to see clearly if and how these potential shifts will play out.
What We Hear from the Experts
“If [gas pricing] is sustained for a period of time, then I think people will look for alternatives…. It may be a year or more before things settle down and a new normal is established.”
- John Goodwin, Public Information Officer Metropolitan Transportation Commission
“Property values near high-frequency public transportation traditionally perform 42 percent better than in other areas. While that percentage might vary in individual markets, proximity to transit is a top concern for buyers…”
- Valerie Kalfrin, contributor, Homelight.com
The data, analysis, and information about current events referenced in this article were the most recent available at time of writing. Because the situation in Ukraine is constantly changing, we will continue to update and adjust our reporting and predictions on an as-needed basis.
