This blog takes an objective look at what’s happening, what the data shows, and what a prolonged conflict could mean for the commercial real estate market in the months ahead.
The Immediate Financial Market Response
When geopolitical conflict breaks out, financial markets typically react before the real economy does — and this time is no different.
The 10-Year Treasury Index and Moody’s BAA Corporate Bond Index have both moved upward since the conflict began. The 10-Year Treasury, a benchmark used to price many commercial real estate loans, climbed from roughly 3.97% to nearly 4.2% in just a matter of weeks. That spread widening is significant: it signals rising risk aversion among investors and, according to analysts, is typically a leading indicator of increasing cap rates.
The yield on the 10-year Treasury has now risen by roughly half a point over the course of the conflict to 4.4%, reflecting concerns about inflation and the prospect that the Federal Reserve may not cut interest rates as previously anticipated.
For commercial property owners with variable-rate debt or upcoming refinancing needs, this environment deserves attention.
The Energy Price Effect: More Than Just Gas
At the center of this conflict’s economic footprint is energy. Brent crude oil prices jumped roughly 15% in the opening days of the conflict, then surged toward $120 a barrel as it deepened and markets began pricing in the risk of sustained disruption.
U.S. oil prices surged from roughly $65 to over $100 since the start of the conflict, impacting gas prices and the broader cost of goods that rely on global shipping.
The implications for commercial real estate are multi-layered:
Construction costs: Building materials, transportation, and energy-intensive manufacturing all become more expensive when oil prices spike. Development pipelines that were already strained by post-pandemic supply chain challenges now face additional pressure on project budgets and timelines.
Operating expenses: Energy costs are a direct line item for most commercial properties. Industrial, warehouse, and large office assets with high utility consumption could see meaningful increases in operating expenses, potentially affecting NOI calculations.
Tenant health: Higher energy prices act as a tax on consumers because they ripple across so many goods and services. If tenants; whether retailers, manufacturers, or service businesses; face margin compression from rising input costs, that can affect their ability to absorb rent increases or commit to long-term leases.
The Real Economy: A Slower Clock
Analysts draw an important distinction between financial market responses, which are immediate, and real economy impacts, which take longer to materialize. The impact on the real economy; higher energy rates, rising inflation, increased costs, an economic slowdown, and corporate tenants leasing less space; will take much longer to percolate. Analysts recommend monitoring second-quarter brokerage reports as a meaningful data point for where the market is heading.
Goldman Sachs has raised the risk of a U.S. economic downturn over the next 12 months to 30%, driven by the surge in oil prices, with the unemployment rate expected to edge upward as hiring slows. Several economists now forecast inflation running closer to 3% rather than the Federal Reserve’s 2% target.
That combination (higher inflation, rising rates, and softer consumer spending) is one that commercial property owners have navigated before. It doesn’t spell collapse, but it does compress margins and slow transaction velocity.
What a Prolonged Conflict Could Mean
Duration is the key variable. Most market analysts currently expect a relatively contained conflict, but the economic consequences diverge sharply depending on how long it lasts.
If tensions resolve relatively quickly, the long-term economic impact on U.S. real estate will likely be minimal, with stabilization in energy prices, improved global investor confidence, and continued demand for U.S. property.
However, if geopolitical tensions persist for an extended period, several longer-term trends could emerge: energy disruptions may increase inflation globally, higher material and transportation costs may reduce new supply, and investors seeking stability may increase their allocations to U.S. assets, often including commercial real estate.
That last point is not without historical precedent. U.S. commercial real estate has long been viewed as a relative safe haven during periods of global instability. Whether from Australian superannuation pools, Middle Eastern sovereign wealth funds, or European pension systems, international capital continues to be drawn to U.S. commercial real estate, with investors noting that the U.S. represents roughly 50% of all institutional-quality commercial real estate globally.
If the war and its disruptions are short, consumers and businesses will likely absorb higher costs. But a longer-duration conflict could slow growth and hit spending, and would do so quite quickly.
Sector-Level Considerations
Not all commercial property types face the same risk profile in this environment:
Industrial and Logistics: Demand for warehouse and distribution space remains structurally strong, though rising diesel and transportation costs could affect tenant economics. Reshoring trends that predate this conflict may actually accelerate, supporting long-term industrial demand.
Office: Already navigating a challenging post-pandemic environment, the office sector is most sensitive to corporate tenant uncertainty. A pullback in hiring or expansion plans would further delay the leasing recovery many markets have been waiting for.
Retail: Consumer spending is the largest driver of the U.S. economy. Discretionary spending is typically where consumers pull back first when energy costs rise, which warrants attention for retail assets dependent on foot traffic and consumer confidence.
Hospitality: Rising jet fuel costs and consumer belt-tightening could suppress business and leisure travel in the near term, creating headwinds for hotel and hospitality properties.
Multifamily: Residential demand tends to be resilient in inflationary environments, though affordability strain on tenants could limit rent growth potential.
What This Means for Tax Strategy
In a market environment defined by narrowing margins and uncertainty, the ability to accelerate deductions, recover cash, and improve after-tax returns becomes increasingly valuable. This is precisely where strategies like cost segregation, R&D tax credits, and Section 179D energy-efficient building deductions can play a meaningful role.
When NOI is under pressure and capital is more expensive to access, unlocking tax-deferred cash from existing assets is one of the most practical levers available to commercial property owners. These aren’t speculative strategies, they’re IRS-compliant mechanisms that have helped property owners and investors generate liquidity across multiple economic cycles, including past periods of geopolitical and inflationary uncertainty.
If you haven’t recently evaluated whether your portfolio is fully optimized from a tax perspective, now is a reasonable time to do so.
The Bottom Line
The situation in the Middle East is evolving, and its full economic impact on U.S. commercial real estate will take time to be fully understood. What the current data does make clear is that rising interest rates, inflationary pressure from energy prices, and softening consumer confidence are already creating headwinds that property owners should be monitoring.
The degree to which those headwinds intensify depends largely on conflict duration, a variable no one can predict with certainty. What experienced property owners can do is ensure their financial position is as strong as possible, and that includes making sure they aren’t leaving legitimate tax savings on the table.
Curious how much your portfolio could recover through cost segregation or other tax strategies?
