The humanitarian, social and political crisis unfolding in Ukraine has begun to deliver some economic fallout in both global and United States markets. Oil prices have surged, the stock market moved into correction territory and a flight-to-safety pushed interest rates lower. As the war plays out over the coming days, weeks or perhaps months, a wide range of economic consequences could emerge. Setting aside worst-case scenarios, the war in Ukraine likely holds little direct risk to U.S. commercial real estate. Although some ripples will likely be felt by investors, hard assets have historically demonstrated durable results in times of turbulence and uncertainty.

Inflation Risks Intensify as Oil Prices Surge

War having clear and immediate impact on energy costs. Russia is one of the world’s top oil producers, delivering about 12 percent of the global supply, and oil is the country’s most valuable export. The financial sanctions already placed on Russia in the wake of their invasion of Ukraine, together with the U.S. oil boycott and rising global public pressure to shun Russian products, will weigh on the country’s ability to export oil. This is placing new strains on global oil supplies, sparking a surge in energy prices. Oil prices were already on the rise, prior to the invasion. At the start of 2022, oil was in the $75 per barrel range, but rose by 20 percent through Feb. 23 — the day before the invasion started. Since the war began, oil prices have jumped. Prices reached the $120-$130 per barrel range following the announcement of the U.S. oil boycott on March 8, more than 60 percent higher than at the start of the year. The dramatic surge has already impacted gasoline prices, pushing the U.S. average to a new record high above the $4 per gallon threshold. Beyond the gas pump, rising oil prices will drive increased inflation, as costs of manufacturing, transportation, plastics and other products are pulled higher. The magnitude and duration of this inflationary increase will largely depend on how the war and sanctions play out, but U.S. inflation could be boosted by 1-2 percent this year, according to some estimates. With U.S. headline inflation already at a 40-year high of 7.9 percent before the war started, rapid oil price escalations could place significant additional pressure on the American economy.

Increasing fuel production comes with host of hurdles. If oil shortages amplify, international strategic reserves will be tapped to cover the short-term needs. Over the longer term, U.S. energy companies could ramp up production by an estimated 600,000 barrels per day, on top of the 11-12 million barrels the U.S. currently produces. Other countries that could potentially increase production include Iran, Iraq, Saudi Arabia, the United Arab Emirates and Venezuela, but increasing output would likely face significant political or infrastructural headwinds. Even in the U.S., ramping up production will face logistical hurdles, including labor and equipment shortages, that reiterate the challenges faced by the sector. Higher extraction costs mean the newly added oil only makes sense to sell when prices are elevated.

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*The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guaranty, express or implied, may be made as to the accuracy or reliability of the information contained herein. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered as investment advice. Sources: Marcus & Millichap Research Services; Federal Reserve; CoStar Group, Inc.; Moody’s Analytics; MNet; NICMap; Real Capital Analytics; RealPage, Inc.; Yardi Matrix; Radius+; U.S. Census Bureau; U.S. Bureau of Labor Statistics; U.S. Energy Information Administration