Last December, many experts predicted that 2026 would be a year of normalization for the U.S. commercial real estate (CRE) industry. After battling years of inflationary ghosts and fluctuating interest rates, the sector appeared to be on a path to stability. Then came the first air strikes on February 28, which sent shockwaves through many global industries.
Geopolitical conflict is rarely a local-only event. In today’s hyperconnected, intertwined landscape, a military operation in the Middle East can become a budget line item in the Midwest. It doesn’t matter if you’re managing a Dallas construction site or multiple MOBs in New York. The transmission channels of this war — energy, inflation, supply chain logistics — may have just become active variables in your daily operations.
Effect on interest rates
Standard economic theory suggests that during global conflict, investors embrace the safety of U.S. Treasuries, driving yields down. But inflationary fears and fiscal sustainability concerns can override the traditional flight-to-safety mechanism, leading to a flight to inflation protection, like Treasury inflation-protected securities (TIPS), commodities, and gold.
Consider the price of gold. Normally, when interest rates rise, gold prices typically fall. Current prices, however, have increased above $5,000 — just a few months after hitting the $4,000 ceiling. And here are a few other converging factors:
- Because the conflict is expected to keep inflation higher for longer, markets have priced out predicted Federal Reserve rate cuts, driving yields higher, not lower.
- With U.S. debt exceeding $3 trillion, skepticism is growing about the long-term safety of U.S. Treasuries, particularly if the conflict necessitates increased government spending, prompting some investors to demand a higher risk premium.
The biggest concern for investors isn’t the solvency of the U.S. government but the $120-per-barrel oil (up from $71 in January), which is fueling a new inflationary fire. During the 2008 financial crisis, crude oil topped $147 per barrel, which, adjusted in 2026 dollars, is $224. Is it possible that oil will reach $200? Some economists worry that the answer is “Yes.”
George Semieniuk, professor of public policy and economics at the University of Massachusetts Amherst, said, “How high oil prices rise will depend on how fast two countervailing tendencies — buyers chasing fewer barrels at any cost versus buyers exiting the market through demand destruction — play out against each other.”
| Factor | Impact on CRE | Strategic Pivot |
| Rising Yields | Lower property valuations | Focus on high-yield, distressed acquisitions |
| $120+ Oil | Higher OpEx/Construction costs | Invest in energy efficiency and green retrofits |
| Fiscal Skepticism | Capital flight from bonds to hard assets | Position assets as inflation hedges |
| Demand Destruction | Lower occupancy in discretionary sectors | Shift toward recession-proof (medical, grocery) |
A conflict surcharge and the end of just-in-time
Before this conflict, how many people recognized the “Strait of Hormuz,” let alone could find it on a map? This narrow chokepoint carries 20% of the world’s crude and, for the construction industry, equally vital industrial commodities like aluminum, cement, and steel components.
Major shipping lines have been diverting vessels around the Cape of Good Hope to avoid the Gulf, stretching lead times by up to 25%. Ocean freight rates are surging due to higher fuel costs and charter rates.
Just two days after the initial attack, the largest maritime insurers canceled war risk coverage. By March 5, commercial protection had vanished completely, but no vessel can sail without coverage. European banks also refused to issue letters of credit for Hormuz-dependent cargoes. To avoid forced liquidations, commodity traders had to line up $7 billion in emergency credit.
REITs have felt the impact in several ways:
- Properties near major ports face idling risk. If ships cannot sail, the demand for port-adjacent warehousing drops. Occupancy remains, but the flow of goods (the lifeblood of these assets) halts.
- A stop in commodity flow results in inventory stockouts. If retailers can’t get products, they can’t generate sales. This out-of-stock issue puts tremendous pressure on their ability to meet rent obligations, potentially leading to widespread tenant defaults.
- During a liquidity crisis, investors often dump REIT shares to raise cash. But once the dust settles, hard asset REITs like farmland or data centers often recover faster than paper assets. They act as a hedge against the inflation that can follow such a massive supply shock.
A quick construction breakdown
The war’s impact will depend largely on its duration. These numbers for the construction industry are the first data points that could reflect the start of the Iran conflict. While the total drop could technically stem from fewer energy projects, economists warn that the conflict is the primary driver of future numbers.
Total construction starts fell 13.2% in February, reaching a seasonally adjusted annual rate of $1.08 trillion. This reversal follows a strong January bolstered by energy megaprojects. Without those multibillion-dollar outliers, the overall market stabilized, resulting in a nearly 50% drop in the nonbuilding sector.
Despite this total decline, nonresidential building starts rebounded 17.8% — growth driven by a 48.5% surge in the commercial category. Large-scale tech infrastructure led the way, with Google and Polaris Forge breaking ground on data centers in Texas and North Dakota (at $3 billion each).
But other commercial sub-sectors are struggling with decreased activity. Manufacturing saw a sharp cooling period, dropping 54.1% in February as the initial momentum from the start of the year faded.
| Sector | Performance & Weaknesses |
| Nonresidential Starts | Grew 6.1% over 12 months ending February 2026 |
| Office & Data Centers | Surged 159.2% in February – the primary engine for commercial growth |
| Commercial Declines | Warehouse, hotel, retail, and parking construction all saw MOM decreases |
| Healthcare & Manufacturing | Faced drops of 46.6% and 54.1% respectively |
| Industrial Whiplash | Electric power and utility construction fell 90.1% after jumping almost 200% in January |
How has the war specifically impacted these statistics?
While nonresidential starts grew in February, the cost to build them is increasing. Construction prices rose at a 12.6% annualized rate in the first two months of 2026. Diesel prices are over $5 per gallon, disproportionately affecting projects reliant on heavy machinery. Aluminum and steel prices are up 39% and 21% YOY, respectively, as supply lines are disrupted.
ABC Chief Economist Anirban Basu said, “With the exception of data centers, there are few sources of momentum to offset the precipitous decline in manufacturing construction activity. This lackluster performance is especially concerning in light of the ongoing conflict in Iran, which will ignite material price escalation and heighten already elevated levels of economic uncertainty. It may be a difficult first half of 2026 for many contractors.”
Because the war has driven oil toward $120+ per barrel, the Federal Reserve has signaled it will keep interest rates higher to fight the new inflationary fire. This decision has effectively priced out the rate cuts developers were counting on in 2026.
What’s next?
The consensus among experts suggests that a brief war may act as a passing squall for the markets. Should a solution happen quickly, we can expect valuations for equity, debt, and bonds to return to their pre-conflict averages. But an extended crisis threatens to paralyze the current momentum in real estate. A prolonged standoff could derail the Fed’s efforts to curb inflation and drain energy from the wider economic recovery.
Are you a commercial real estate investor or seeking a specific property to meet your company’s needs? We invite you to talk to the professionals atCREA United, an organization ofCRE professionals from over 90 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
