Podcast Episode 88 Transcript

Episode 88: How Will The War In Ukraine Affect The Real Estate Market In The U.S.

Welcome everyone to the PreReal Podcast. We're going to do something a little different this week. I'm going to be rolling solo, and here's why. We've received a lot of questions over the last week or so about the war and what type of impact does the war have on real estate. So we thought that if maybe I can come on for a few minutes, we'll be resuming next week. The normal format with guests. But I did want to address what we're seeing and talk about what we think may be some opportunities and things that perhaps we should hedge against as a result of what's happening in the Ukraine and Russia. So first of all, of course, our hearts are breaking for everyone that's been affected.

We wish absolutely for a quick resolution, and we hope that things can return sooner than later. Just seems like a senseless tragedy every time we see these types of conflicts, and we know how deeply people are affected by it, so we certainly hope for a quick resolution. That being said, this is a real estate podcast, so that's what we're going to talk about today. Overall, we think that there's two different types of impacts we're going to see macro impacts and micro impacts. On a macro level, approximately 1% of foreign buyers of US homes are Russian, so we don't see a significant impact there. There are some micro-markets where you will see an impact.

According to Real Capital Analytics, I think it's 330,000,000 in annual capital flows from Russia to global property markets. So these are markets like Manhattan, Miami, LA. So in the high-end apartment markets, you may see a bit of a hit there, but overall that equates to a really small percentage of the overall transactional real estate volume. But again at a micro level, we may see a little bit of an impact, but there are other factors we have to keep an eye on. Russia is the third-largest producer of oil in the world. Russia is also the second-largest producer of natural gas in the world. Clearly, we're all feeling this at the pump, and if we're being honest, we felt this long before the war, but this is just making a bad situation worse. It's compounding the impacts, and that translates into a lot of different areas. When you couple that with, I think it's a 7.5% headline CPI inflation number. You're starting to see impacts in a number of different sectors. Inflation, inflation, inflation. Everybody's hearing about it. Everybody's talking about it. But what exactly does it mean? And certainly, in the context of the war, inflation is at a 40 year high. This translates into a lot of factors that are not necessarily as easy to quantify. There are some indexes that point to them.

Consumer confidence is one of them. But there's a general hesitancy. There's a bit of uncertainty that seems to permeate the markets during times of high inflation. So this will impact the decisioning of where people feel their money is safe. During these times, we typically see shifts out of things like the stock market, and folks will shift that money to these safer places. Precious metals is one of them, and in some cases, it is real estate. But that is also subjective to what part of the cycle we're in. And that's a whole nother show. We could talk about high inflation will directly as it relates to real estate impact rents. We're going to see higher rents. You're going to see higher construction costs. It does, again, get complicated. We forecasted over the next two years or so. We believed, and we continue to believe, we're going to see a steady increase in interest rates because of inflation. But because of the war and that uncertainty and a shift to some bond markets, you're going to see a drop in interest rates, and you're starting to see it now. But we believe that is very short term. We think that there's an opportunity now to take advantage of inflation, driving prices higher. But because of the war an intermittent drop in interest rates, it's a great time to lock in, if you can. Of course, supply chain issues are going to continue to persist and likely worsen. We just lost actually not directly related to supply chain, but we just lost the lease that we were working on for several months here in Staten Island because the business had a call center, and the call center was located in Russia. That's who processed all the orders for this company. So they felt with the uncertainty, they weren't able to proceed at this point because we really don't know what's going to happen over the next weeks and months. It's a challenging situation in general. There are two different ways that you can look at how this plays out. So all assets are not created equal, right. And not all investors are created equal.

People see the same situation. It fascinates me in the investment world very differently. Let me give you an example. Some folks are now feeling that they want to place their money, as I noted before, in places of surety, in the real estate world, traditionally, you don't find a better bet if you will than a credit-rated single-tenant asset, a drugstore, a bank that is located in a single asset. There's not much subjectivity there. There's not much risk. There and it's a prescribed rental rate that typically is fixed for five years. Usually, you'll go every five years, and then you'll get a ten or 12% bump, and some are perceiving that as this is a safe place to go. Now we know what the numbers are going to be. We want our money to be in a safe place, and that's a safe place to put it on the retail side.

Then there are investors that look at that exact situation and say that it's technically losing money. You're guaranteeing yourself to lose money as inflation persists and you're fixed at a certain rental number. If you're not getting increases annually that keep pace with inflation, Then technically, your asset is devaluing over time, and they're running away from long-term real estate fixed-rate rentals. Conversely, there are the short-term rentals things like hotels; multifamily residential, multifamily self-storage is another example Where the rate can adjust very quickly. In multifamily, it's typically every year. Self-storage can literally change daily. Hotels can change daily, and they want the ability to as inflation continues to impact the market and there's a constant upward pressure on pricing. They want to be able to change their model to enjoy that upside. As you go through the run at the end of that upside, you have the risk of, of course, Numbers tumbling and coming back down on the other side of it. So again, with the war, we think that this puts a spotlight on these issues.

We think that overall, it's going to continue to drive inflation. And again, depending on what type of investor you are, what your appetite is, there are opportunities out there. Again, it's so interesting to us how folks can look at the exact same situation and have completely different investment strategies. At the end of the day, there are low-interest rates. Even with the increases, Interest rates are obscenely, historically low. Yet inflation has driven pricing up a bit.

So you have an opportunity now to enjoy the upside of the increased pricing but lock in at this intermittent short-term drop in rates. As I had mentioned earlier, we're going to get back to our normal format next week, but I did just want to spend a few minutes connecting with everybody today and talk a little bit about how the war and, in turn, inflation was impacting the market. If you have any questions or you want to be a guest on the show, please go ahead and reach out. We're having an absolute blast with this. We're loving what we're doing. We can't thank you guys enough for all the support, and yeah, we'll see you next week. As always, everybody stay safe.