How Geopolitics Could Affect US Commercial Real Estate

As we inch towards the close of 2024, geopolitical risks remain structurally elevated and rising. While US real estate markets are primarily driven by domestic conditions, they remain vulnerable to increasing global instability and the uncertainty that comes with it.

Detailed by Blackrock's most recent update to its Geopolitical Risk Dashboard, the paradigm shift is driven by further fragmentation between global economic blocks, an increasingly uncertain world order, and a recalibration of globalization norms. The dashboard's risk indicator, which monitors market attention to specific risks based on their mentions in brokerage reports and financial news, has remained consistently elevated relative to its level just before the October 7th attacks on Israel over one year ago.

The risks to commercial real estate primarily emanate from three channels: global technology decoupling, conflicts involving major oil exporters, and climate policy gridlock.

Global Technology Decoupling

 According to Blackrock, US-China strategic competition remains the largest and most present geopolitical risk. With both superpowers seeking stability on the military and diplomatic front, technology competition has emerged as the primary arena for competition between the two.

For now, the decoupling process targets advanced technologies such as AI, semiconductors, quantum computing, and various technologies with potential military applications. However, Blackrock believes that in either a Trump or Harris administration, the US will likely continue to up the ante on China through tools like tariffs and export controls.

A proliferation of decoupling measures could see restrictions on outbound US investments and limit domestic access to critical materials that Chinese producers dominate. A glimpse of this type of playbook is already observable in China's recent decision to restrict antimony exports — a strategic metal used in items such as flame retardants, batteries, and munitions.

Beyond a tighter market for restricted materials, the domestic impact from a global technology decoupling would be felt most directly in corporate debt markets. Blackrock predicts that the decoupling process would have a negative price impact on US investment-grade bonds, which could filter through to CRE in the form of higher financing costs and supply constraints on construction materials.

However, as Prologis CEO Hamid Moghadam points out in a recent commentary on the potential for new tariffs under a second Trump administration, its inflationary potential is the primary concern for US businesses. Tariff costs are ultimately passed on to the consumer, and higher consumer prices could incentivize the Federal Reserve to keep interest rates higher for longer. The Prologis CEO sees less risk from supply chain disruptions, pointing out that many suppliers have already begun to move into other markets as they themselves recalibrate risk.

Conflicts Involving Major Energy Exporters

 With the War in Gaza stretching into its second year and gradually spilling into the broader Middle East, the risk to global energy markets is palpable. Following Iran's barrage of ballistic missiles aimed at Israel on October 1st, Brent crude prices spiked by roughly 17% in a single week as markets braced for further escalation, reaching as high as $80.93 at the end of trading on October 7th.

As Russia's 2022 invasion of Ukraine proved, when a major energy exporter becomes embroiled in conflict, global consumers will inevitably feel the effects. A Federal Reserve study found that elevated geopolitical risks in 2022 were associated with declining consumer confidence and stock prices, while goods-producing industries appeared more concerned about the war's effects than service providers.

Intuitively, a regional war in the Middle East or an intensification of Russia's proxy conflict with NATO could send Brent crude oil prices higher. Further, while the risk dashboard projects that the Russian economy would feel the brunt of further escalation with NATO, the US would likely see demand for high-yield credit fall if a Middle East conflict heats up as investors fly to safer assets.

Climate Policy Gridlock

 As millions of Americans were reminded during the devastating impacts of Hurricanes Helene and Milton, the climate crisis is here, and US policymakers still lack a comprehensive strategy to address it.

Blackrock's dashboard considers climate policy gridlock as a medium-level risk in its latest tracking, citing the 2022-passed US Inflation Reduction Act as a critical step toward the domestic development of low-carbon technologies. However, with the US and other developed economies still behind in the amount of public investment needed to achieve existing emissions targets, the year's presidential election may be critical to the trajectory of this risk indicator, given the two candidates' divergence on climate policy.

Climate risk establishes the most direct link between the items tracked and commercial real estate markets due to its potential impact on the prices of US building products and construction materials. In the scenarios explored in the risk map, climate policy gridlock had the greatest impact on asset prices, directly affecting commercial real estate markets.