The Impact of War on Commercial Real Estate

By Adam Gower Ph.D.

The Impact of War on CRE - COMPRESSED

There has been very little research conducted into the impact of war on commercial real estate—but that shouldn’t lead anyone to believe there is no correlation. Indeed, there are some very evident impacts of war on commercial real estate. We elaborate below.

Defining “War”

 

One of the reasons it is so difficult to find information about the impact of war on commercial real estate is that the popular definition of war has changed over time. Traditionally, the term war has conjured images of hand-to-hand combat and brute military force. As technology evolves, however, the spectrum of “war” has grown wider. Now, we have to be as equally concerned, if not more so, about cyber attacks than we do physical attacks.

 

The Impact of “Traditional” War on Commercial Real Estate

 

Let’s start by reflecting upon the impact of large-scale international war on commercial real estate. These conflicts include World War I, World War II, the Vietnam War and the like. Each of these conflicts had significant impacts on commercial real estate.

Historically, wars such as these required a shift in economic production. Rather than investing in traditional goods and services, the American economy ramped up production of wartime supplies. Resources were fundamentally and disproportionately redirected from normal economic activity into the war effort. As a result, there was less home building and this is reflected in new home starts during the World Wars I and II. There was also less institutional-grade investment into new office buildings, retail centers, hotels, etc.

 

Immediately following WWII, real estate demand surged as GIs returned home, eager to settle down and build their families. At the same time, there was a dramatic expansion in civilian employment that led to increased demand for commercial real estate. Across the board, real estate values rose.

Ready to get started?

Real estate syndication online is no longer optional

It's a minimum mandatory requirement

Build your own investor acquisition system by learning how industry leaders employ best practices so you can start raising capital for your projects now

 

The Impact Noteworthy Physical Attacks on Commercial Real Estate

 

Globally, military tactics have since evolved. There is less risk of large-scale, international combat. Instead, isolated but impactful physical attacks have become the norm. This would include attacks such as that experienced on 9/11 or the bombing of oil fields in the Middle East. Attacks such as these can send shock waves through the commercial real estate market.

 

Let’s consider the terrorist attack on the World Trade Center on 9/11. In the short term, this disrupted economic activity in Manhattan and had an impact on office vacancy rates. Longer-term, it caused some investors to pause before investing in trophy assets in major markets, as these were perceived as potential targets for future attacks. In some cases, it also caused insurance premiums to rise. Higher insurance premiums dragged down the pro forma, leading to some modest real estate devaluation from an owner/tenants’ perspective.

 

Now let’s consider how a physical impact on something like an oil field in the Middle East has an impact on commercial real estate.

 

Truth be told, a minor disruption in oil production will not have a significant impact on the U.S. economy, especially now that alternative energy has become more commonplace. That said, attacks such as these can otherwise create volatility in equity markets. Volatility in the equity markets can cause stock prices to fall, resulting in a downward adjustment in wealth. In other words, more economic volatility can mean less wealth, and less wealth means less investment to keep the commercial real estate wheels churning. During periods of instability, many investors pull their money out of commercial real estate in favor of “safer” investments such as bonds.

 

junction-984045_1920

The Impact of Cyber Attacks on Commercial Real Estate

 

A third type of “war” to consider is cyber warfare. We (thankfully) have not experienced cyber warfare to a degree (yet or that we’ve either noticed or acknowledged) that has impacted commercial real estate. Yet the threat of cyber attacks remains high and increasingly, very real.

 

A cyber attack could have crippling impacts on the economy. Think, for example, of how many people rely on the Internet, their cell phones and computers to operate their day-to-day business. Consider the impacts of an attack on the Social Security Administration, where people are no longer able to receive their monthly benefits. Likewise, an impact on banking institutions could halt any and all lending necessary to complete commercial real estate transactions. Full-fledged cyber warfare could be devastating to the economy.

 

This is why so many corporations are investing heavily in backup systems, cloud storage, generators and the like. Redundancies are being built into all major systems to ensure companies can continue with business as usual in the event of a cyber-attack – and this itself presents commercial real estate investment opportunities for facilities housing these kind of backup systems.

 

The threat of cyber warfare has essentially created an entirely new commercial real estate product type: data centers. Purpose-built data centers and large warehouses that can house critical backup equipment are in increasingly high demand.

 

Broader Implications: How Economic Instability Impacts Commercial Real Estate

 

One of the reasons it is so hard to quantify the impacts of war on commercial real estate is because commercial real estate is a highly illiquid asset class. Therefore, aside from full-fledged and prolonged wars, momentary fears or threats of war typically have little impact on the sector. Now, that said, a looming threat of war can bring down the overall U.S. economy, which in turn, can have significant impacts on the commercial real estate industry. This can manifest itself in different ways, such as:

 

• Those who were once considering buying real estate might put their plans to do so on hold until the economy improves.
 
• Travel and tourism slow when people have less discretionary income to spend.
 
• Travel and tourism will typically slow in regions where there is ongoing conflict (e.g., Turkey or the Middle East).
 
• People do less shopping, thereby compressing retail center returns.
 
• Rising oil prices (think: oil shock of 1973 where prices doubled, even tripled) may influence someone’s decision about where to work or live, particularly if it results less dependence on a personal automobile.
 
• Corporations put expansion plans on hold until, thereby weakening demand for commercial real estate until the economy improves.

 

Conversely, when economic conditions become particularly dire, the Federal Reserve Bank will typically lower interest rates. A low interest rate environment can make owning real estate more affordable, and therefore, can cause an uptick in CRE investment activity. The U.S. has been in a low interest rate environment since the end of the 2008-2010 Great Recession, leading some to wonder how much lower interest rates could maneuver. In any event, it is important to understand how monetary policy during a time of war can impact commercial real estate.

 

***

CONCLUSION

 

As you can see, there are many factors to consider when evaluating the impacts of war on commercial real estate. It is fair to say that war, unto itself, rarely has a direct impact on commercial real estate. Instead, wartime activities can cause instability in the marketplace, drumming up economic fear (perceived and real) that can have follow-on effects as it pertains to commercial real estate.

 

RELATED ARTICLES

How to Connect to Investors Through Instagram

How to Connect to Investors through Instagram By Adam Gower Ph.D. For most of us in the real estate industry, Instagram is a brave new world that we’re completely unfamiliar with in a business context. Not many in the real estate development and investment marketplace are making a big impact on Instagram so far, but…

READ MORE >

5 Ways to Embrace Social Media in Real Estate Crowdfunding

5 Ways to Embrace Social Media in Real Estate Crowdfunding By Adam Gower Ph.D. It’s impossible to know what you’re missing out on when you don’t know what you’re missing out on, and if you think that using social media isn’t relevant to raising capital for your real estate project then, well, you’re missing out!…

READ MORE >

LinkedIn as Resource Not Resume

LinkedIn as Resource Not Resume By Adam Gower Ph.D. You can never get a second chance at a first impression. If you’re looking for high net worth investors, or even non-accredited investors, use your LinkedIn profile to give a great first impression – and not as a resume (unless you’re looking for a job!)  …

READ MORE >

Copyright 2019 - ADAM GOWER PH.D. - All Rights Reserved

Website Disclaimer:  All Content contained on this website is intended for informational purposes only and does not purport to be complete or accurate. No recommendations are made or intended to be made regarding investment in real estate of any kind. For further information on any investment opportunity contained in any content of this website, you should visit the respective crowdfunding portal or site where such investment opportunity is published. None of the content presented on this website has been prepared with any reference to any particular user’s investment requirements or financial situation, and you are encouraged to consult with professional tax, legal and financial advisors before making any investment decisions or including the decision to invest at all. GowerCrowd makes no representations or warranties as to the accuracy of any information and accepts no liability or fiduciary responsibility whatsoever. Offers to sell, or the solicitations of offers to buy, any security can only be made through official offering documents through registered portals outside of this website. Investors should conduct their own due diligence, not rely on the financial assumptions or estimates displayed on this website, and are encouraged to consult with a financial advisor, attorney, accountant, and any other professional that can help you to understand and assess the risks associated with any investment opportunity. Neither Adam Gower nor GowerCrowd or any related entities are a registered broker-dealer, funding portal, or investment advisor and does not conduct any activity that would require any registration as such.