What War and Economic Turmoil Could Mean For US Real Estate
First, it was the Coronavirus that hampered productivity, causing domestic manufacturing plants to shut down and lumber and sheetrock prices to surge. Then, the supply chain was hit as China and American factories tried to play catch up. A triple whammy struck as inflation struck and gas prices skyrocketed, increasing costs yet further. Now Russia’s war with Ukraine is hitting the supply of nickel aluminum and copper, which it produces in large amounts, and is causing further woes for the fragile US construction industry.
According to an analysis by the U.S. Bureau of Labor Statistics, non-residential construction costs rose over 24% over the past year.
"It's as bad as any time during COVID," Ernst & Young's global construction and engineering practice lead Erin Roberts told trade publication Construction Dive. "You've got all this demand after a brief pause shutting down the supply chain, and it's just causing havoc.”
John Robbins, who heads U.S. real estate for construction consultancy, concurred with Robbins, telling The Real Deal, “There’s no sign that those prices are coming down. We are going to see a very, very rocky supply chain to come.”
In addition to the cost of raw materials, suppliers are adding fees for increased fuel costs. For developers on strict time schedules, the increase in costs will inevitably be passed on to the home or CRE buyers. During the pandemic, buyers had the cushion of low-interest rates to lean on as bidding wars broke out across the nation with low inventory. However, the Fed’s signal that they plan to increase rates could be an extra hurdle to jump. The cumulative effect is causing many to wonder if housing prices could finally be in for a fall and possibly a drop in demand.
“There’s a little bit of fluctuation from week to week, but overall we are seeing demand hold up,” Taylor Marr, an economist at Redfin, told the Real Deal. “The global conflict has not disrupted that.”
For New Yorkers underlying everything is the insatiable demand for housing. As suburban areas still deal with minimal inventory, Manhattan and Brooklyn’s construction boom in recent years, partly due to the expiring 421-A tax break, resulted in a surplus of inventory which has yet to fully be exhausted. Coupled with this is the fact that even below 4%, interest rates are still low and until recently, the stock market had enjoyed an extensive winning streak. The job market is also buoyant. However, the effects of inflation remain largely unknown. If wages don’t increase along with the costs of housing then it will be harder to qualify for mortgages.
Ironically, wars often see high net worth investors — buyers who do not need to rely on mortgages — sink their money into safe havens, and traditionally, US real estate, especially high-end homes in New York are one of the safest havens money can buy. As if to prove the point, the ICE U.S. Dollar index, which tracks the currency against many others finished the week of March 6th with a 2.1% jump, one of the largest in the past five years, according to the Wall Street Journal, an indication of the safety of US investments. A strong dollar means greater yields and better investments for those parking their cash in US-based assets.
“There’s so much uncertainty that I struggle to see risk appetite improving in the near term, and that should play into the dollar’s hand,” Craig Erlam, senior market analyst at Oanda, told the Journal. His sentiments were echoed by Keith Lerner, co-chief investment officer for Truist Advisory Services who told the Journal, “The strong dollar is going to result in…somewhat of a hit to profits of U.S. companies, but that will be offset by the greater demand for the higher-quality companies that people will pay a premium for relative to international markets.”
In other words, despite setbacks in construction, fuel, and supply chain costs caused by the war in Ukraine and inflation, higher-end US real estate could still come out ahead in a very unpleasant and volatile world.