The gist:
If the conflict ends quickly, prices will fluctuate as the market tightens liquidity, then settle back.
But if the conflict drags on, it may begin to reset CRE fundamentals.
- Borrowing costs may rise as lenders tighten credit and investors adjust cap rates
- Occupancy may weaken if tenants delay expanding their footprint
- Rent growth may slow or reverse
- Operating costs — energy, insurance, maintenance — may rise, which will directly compress margins
- And if the credit quality of otherwise stable tenants deteriorates, default or vacancy risk may increase
CRE investors will need access to creative funding solutions to get deals through this period of tighter credit and weaker cash flow.
The already strained US commercial real estate market has to contend with another potentially destabilizing external variable in the coming months: the ongoing conflict in Iran and the wider Middle East.
While the conflict itself does not directly affect CRE, the dislocation in oil prices and availability, along with the likelihood of elevated inflation and the instability of capital markets, will inevitably feed into commercial property valuations and credit conditions.
The threat of rising interest rates
Everything in CRE still comes back to interest rates, which determine the baseline assumptions on which every deal is underwritten, from whether loans can be refinanced to whether income can support the debt.
The problem is that the CRE market wasn’t in a strong position going into this period of geopolitical tension.
Retail is only starting to stabilize. The office is still struggling, and higher borrowing costs are still squeezing multifamily.
The conflict hasn’t changed rates around much — at least so far.
But if uncertainty continues, investors may start moving money into Treasuries, pulling capital out of real estate in general.
Macroeconomic transmission into CRE markets
If oil prices stay contained and credit markets don’t tighten, real estate pricing and deal flow stay relatively stable.
But if the conflict drags on, sustained higher oil prices will raise operating costs.
Consumers generally spend less/cut back on shopping and travel as gas becomes more expensive.
Businesses have to spend more on logistics and materials to operate
That feeds into inflation — and if inflation holds, borrowing costs will stay elevated or climb even further.
Lenders respond by reducing loan proceeds and widening spreads.
The winners: Industrial and hospitality?
Industrial demand could strengthen if geopolitical tensions escalate, mainly because domestic production and defense-related logistics require space.
But of course, there’s a countervailing effect.
Increased military spending and domestic production can drive demand for industrial space, but financing may get tighter as capital is infused into those sectors, making other CRE projects harder to fund and more expensive to build.
Hospitality could benefit from changes in travel patterns.
If fewer people travel internationally due to security concerns, domestic demand will absorb part of that volume.
Hotels in major metros and regional destinations may see more consistent occupancy as a result.
The losers: Data centers?
Some analysts believe that data centers and other energy-intensive CRE segments will feel the impact first because they rely on stable, high-load electricity.
Their operating expenses increase immediately when power prices rise.
Large industrial facilities that depend on energy for production and refrigeration may also see their operating costs rise quickly.
Insurance for these CRE segments will likely become more expensive as a result.
Geopolitical risk and higher replacement costs will inevitably push premiums up, especially for assets with high equipment value or exposure to supply chain disruption.
Short on time? Here’s everything you need to know:
Will borrowing costs go up?
Many analysts think they will. When there’s a lot of uncertainty, lenders and investors get more cautious.
They start pricing risk more aggressively and reinvest capital toward assets that feel safer.
CRE has to show a higher return to stay competitive, which in practice usually comes from pricing — property values need to come down relative to the income they generate.
That flows straight into development.
If the cost of capital goes up, something has to give: the project either has to raise more money or start eating into contingency reserves to keep moving.
Investors need to be prepared to wait. Delays could push income and exit further out.
Those that are already mid-construction won’t have much room to maneuver.
They may need to bring in additional capital or restructure the financing.
Projects that haven’t broken ground yet might be cancelled altogether when returns show they no longer clear the target IRR once higher costs and longer timelines are factored into the model.
Will investment activity slow down?
Pricing becomes harder to read as volatility increases, so investors might hesitate to commit capital, which would widen bid-ask spreads and slow down transaction activity.
Liquidity may tighten further if sovereign capital — capital managed by state-owned investment funds and usually built from national reserves such as oil revenues or trade surpluses — pulls back.
Gulf-based funds, for example, may be forced to redirect their capital toward domestic priorities as the conflicts intensify, defense spending rises, and supply chains are disrupted.
This could dramatically reduce cross-border investment into US assets.
What are your CRE financing options in uncertain markets?
If your deal still works financially, but you’re finding it much more difficult to get financing from banks because of internal lending caps.
It might be worth looking at private direct lenders who are also CRE insiders themselves.
Here at Private Capital Investors, we’re open to funding projects that are too complex or time-sensitive for banks.
Contact us to discuss CRE loans if you need financing to close, stabilize, or reposition assets.
