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New York, NY—War has a very far reaching cycle of influence over the economy, on top of the obvious dangers and costs it brings on the battlefield. One impact is consumer confidence. People tend to spend less on leisure as there is a sense that one shouldn’t be spending, but instead saving more. This has a trickle down effect on the entire economy. While some markets benefit from the proximity to industries that boom in times of conflict, the overall housing market tends to stay stable while investments in long term commercial projects may be delayed.
The issue to remember when forecasting REIT performance is the high correlation to the equities market. Focused investments, as a result, may be a better option during this time.
“When political climates change and war in the Middle East scares the retail investor and slows the institutional players, REITs will suffer from the same fate,” explains Jeff Holzmann, CEO of real estate asset management firm IRM. “Fed rates and quantitative policy also affect REITs and other real estate stocks. An investment not affected by these options thus becomes more attractive in times like this,” he tells GlobeSt.com.
The only way to hedge against that kind of market volatility is to take a more focused approach on a specific submarket, or even single property, as those investments are less, or not at all, correlated to macro-economic factors.
One strong example can be found in the second-tier multifamily sectors and hospitality properties catering to middle America and the blue collar workforce. A strategically located property next to a military industrial complex that benefits from increased defense spending can see strong demand during times that would otherwise be considered a downturn.
“I recommend people stay away from ultra-luxury, hi-beta markets,” says Holzmann.
Nobody wants a war, and most would like to even avoid the tension of war, but it is a reality that there are business opportunities in any large scale political event. If you are in a solid real estate market in an area that is benefiting from more mobility, military spending, prolonged rents and other side effects of military action, it is not impossible to come out ahead from an otherwise undesired conflict in the Middle East, Holzmann continues.
“Industries such as automotive, aviation and of course, weapons, grow during times of conflict and see huge increases in sales and exports,” Holzmann further explains.
These investments will also still be viable even if the threat of war goes away, especially in the case of second tier multifamily sectors and hospitality properties.
“Throughout this year, threat of conflict or not, I expect to see Class A markets such as San Francisco, NYC, and Boston, continue to decline while smaller markets in the middle of the country will boom,” concludes Holzmann.