Russia’s invasion of Ukraine in late February and the ongoing conflict will have ramifications for both the United States’ and global economies. However, we believe it is not likely to have a major negative impact on the U.S. commercial real estate market despite damaging economic sanctions placed on Russia as the U.S. economy is not closely tied to the Russian economy. Instead, it may result in increased capital flows into commercial real estate and potentially benefit owners of buildings leased to the government and government contractors due to expected increases in funding for defense, intelligence, and cybersecurity related agencies and contractors.
The U.S. economy is not expected to be heavily impacted by the Russian-Ukrainian conflict as its economy is not closely intertwined with Russia. Unlike Europe, the U.S. is not reliant on Russia for its energy with only 7% of its 2020 petroleum imports, including crude oil, coming from Russia[1]. While the U.S. economy may not be reliant on Russia, there have been intensifying sanctions on Russian oil which will likely lead to much higher energy prices, and subsequently, higher inflation. Higher inflation can lead to higher interest rates and potentially a slowing of the economy. Slower growth and higher interest rates are generally detrimental to commercial real estate but don’t necessarily undermine real estate fundamentals. With real estate considered an inflation hedge, there may be more capital flowing into U.S. real estate, seeing it as a safe haven during a period of volatility, and pricing could actually increase in this scenario.
Further lessening the impact of Russian sanctions, foreign investment by Russians in U.S. commercial real estate is fairly insignificant, so we would not expect prices for commercial real estate to be impacted by less capital flowing into the space. According to Real Capital Analytics, Russia accounted for only $330 million in average annual commercial real estate investment activity over the past five years, a negligible amount compared to the $809 billion in total transaction activity. Foreign investment in the Russian commercial real estate market from the U.S. is not widespread, but there are a few players with sizable investments who may be forced to exit that market. Those issues should not infect those organizations or their U.S. holdings enough to have any effect on the broader U.S. market.
One area anticipated to experience growth due to the conflict will be the government sector as it relates to defense spending, intelligence, and cybersecurity, much of which benefits government contractors. The heightened tensions with Russia and a bipartisan stance in support of Ukraine will almost certainly lead to increased funding for these areas as well as military contractors who work with both the U.S. and foreign governments. With the U.S. likely to supply Ukraine (and possibly other vulnerable allies) with increased aid and weapons, there is likely to be considerable growth among these functions, which will likely benefit the owners of properties leased to the federal government and government contractors related to these areas. These tenants are likely to increase their headcounts and increasingly need additional real estate to meet these increased demands for their services.
[1] Source: US Energy Information Agency (EIA)
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.

Executive Vice President, Co-Deputy Chief Investment Officer, Real Estate
Boyd Watterson Asset Management, LLC