Geopolitical conflicts always have far reaching consequences for the financial markets and this stands true especially for commercial real estate. With the US being currently involved in war tensions with a strategically vital region like the Middle East, the impact could be significant across the CRE universe. The escalating US-Israel-Iran conflict is among the most consequential geopolitical risks that the American economy is facing. Therefore, it is important for CRE underwriters and investment professionals to understand the impact of these tensions on real estate fundamentals.

In this blog, we discuss how a US-Israel-Iran war could reshape the macroeconomic environment, and how the impact could trickle down to CRE.

How Does a US–Israel–Iran War Affect the US Economy?

To understand the downstream effects on commercial real estate, we must first see how such the war impacts the broader US economy:

1. Oil Price Shock: Iran produces approximately 3–3.5 million barrels of oil per day (as of January 2026) and sits close to the Strait of Hormuz, through which roughly 20% (BBC) of global oil trade passes. The latest attacks including the closure of Strait of Hormuz triggers oil price spikes. Historically too, the 1973 Arab oil embargo sent oil prices up over 300%. The fuel prices have already started rising and could trigger domestic inflation across energy, transportation, and manufacturing raising operating costs economy-wide and compressing consumer spending power.
   
   
2. Inflation and Monetary Policy Response: Increased energy prices directly add to the CPI, PPI, and ultimately into the Federal Reserve’s policy calculus. If oil-driven inflation persists, the Fed may delay rate cuts or even maintain higher interest rates for longer. For CRE, this is particularly damaging, because the sector relies heavily on debt financing. Higher borrowing costs raise debt service obligations while pushing cap rates upward, decreasing property valuations and putting pressure on leveraged owners.
   
   
3. Supply Chain Disruption: The Middle East sits along some of the world’s most critical shipping corridors, including the Strait of Hormuz and routes connecting Asia to Europe. Escalation in the region risks disrupting shipping traffic, delaying construction materials, and increasing logistics costs globally. From steel and glass to semiconductor components used in data centers, supply constraints can drive cost inflation across development pipelines and operational expenses in commercial real estate.
   
   
4. Shift to Safer Capital Flows: Geopolitical crises typically trigger capital shifts toward traditional safe-haven assets such as the U.S. Treasury securities, the USD, and Gold. These flows can temporarily push Treasury yields lower as investors seek safety. However, if the conflict simultaneously fuels inflation, yields may eventually rise again as markets price in prolonged monetary tightening. For real estate investors, this creates a complex environment where short-term financing conditions may improve briefly before longer-term risk premiums increase.
   
   
5. Reduced Consumer and Business Confidence: War-driven uncertainty tends to weaken economic sentiment indicators such as the Consumer Confidence Index tracked by the Conference Board. Households typically cut discretionary spending while companies delay expansion and hiring decisions. This slowdown directly impacts commercial real estate demand; for example: retail and hospitality suffer from reduced consumer activity, while office and industrial absorption weakens as businesses postpone investment and expansion plans.
   
   

How Does the War Specifically Impact US Commercial Real Estate?

Now that we have understood how macroeconomic disruptions seem unavoidable, let us examine how they might impact the CRE industry, linearly or indirectly:

1. Interest Rate and Debt Market Channel: CRE is fundamentally a leveraged asset class. When geopolitical conflict triggers inflation and the Federal Reserve responds by maintaining or tightening interest rates, the cost of capital rises. Mortgage rates climb, SOFR-linked floating-rate debt becomes more expensive, and lenders become more selective with credit. In prolonged conflict scenarios, credit spreads on CRE loans widen as lenders price in macroeconomic uncertainty, reducing loan availability, along with simultaneously increasing borrowing costs.
   
   
2. Cap Rate Expansion: Rising interest rates force cap rate expansion as investors demand higher yields relative to the risk-free benchmark, typically the U.S. Treasury securities. Even modest changes can have significant valuation impacts. A 50-bps cap rate expansion can erase roughly 8–12% of asset value depending on the initial yield. For properties acquired or refinanced during the ultra-low-rate period, this creates substantial refinancing risk and raises the probability of technical defaults.
   
   
3. NOI Compression: Conflict-driven inflation increases operating costs across multiple categories such as energy, insurance, labor, and maintenance, and the increase often faster than lease structures allow rents to adjust. This puts a downward pressure on NOI, particularly for triple-net assets with fixed expense recoveries, rent-regulated multifamily properties, and retail centers with heavy utility usage. The result is a dual valuation squeeze: NOI compresses from rising costs while cap rates expand due to higher required returns.
   
   
4. Demand Disruption: Each CRE sector experiences demand shocks differently. Office leasing activity weakens as companies delay expansion and hiring decisions. Retail foot traffic declines as household spending slows. Hospitality assets see occupancy soften when both corporate and leisure travel reduce. Industrial and logistics properties may partially offset these effects if geopolitical tensions accelerate nearshoring, defense manufacturing, and domestic supply chain reconfiguration.
   
   
5. Insurance and Reinsurance Repricing: Geopolitical conflict also influences global insurance markets. Property and casualty insurers reassess exposures tied to war risk, terrorism risk, and supply chain interruption. Reinsurance markets tighten and premiums rise, especially for assets located in coastal markets, energy corridors, or dense urban environments. Higher insurance costs contribute directly to added operating expenses, adding further pressure on property-level cash flows.
   
   
6. Foreign Capital Withdrawal: US commercial real estate has historically attracted significant global capital, including investments from sovereign wealth funds in the Gulf Cooperation Council region. A Middle East conflict could disrupt these flows if Gulf investors face liquidity pressures, domestic fiscal demands, or simply increase risk aversion. Gateway markets where foreign ownership is the most significant might feel the impact most strongly.

What Macroeconomic Indicators Should CRE Underwriters Check During the US-Israel & Iran War?

Effective underwriting during periods of geopolitical uncertainty requires tracking indicators beyond traditional real estate metrics. The following help identify stress transmission from global conflict into CRE:

1. Energy & Inflation Indicators: Oil prices are often the first macro signal of conflict escalation. Benchmarks such as WTI and Brent Crude should be monitored daily alongside inflation indicators like the CPI and PPI. US retail gasoline prices also act as a proxy for consumer sentiment because fuel costs quickly influence household spending behavior. Additionally, the Personal Consumption Expenditures Price Index plays a key role in affecting interest-rate decisions that then directly impact CRE financing costs.
   
   
2. Interest Rate & Credit Indicators: The Federal Funds Rate and guidance from the FOMC effectively set the baseline for borrowing costs across the economy. CRE investors should closely track the U.S. 10‑Year Treasury Yield and the overall yield curve structure, as curve inversions have historically preceded economic slowdowns. Floating-rate debt exposure also makes SOFR a critical metric to monitor. In credit markets, CMBS spreads and broader investment-grade credit spreads indicate changes in risk appetite. Meanwhile, the Senior Loan Officer Opinion Survey frequently provides an early signal when banks begin tightening lending standards.
   
   
3. Economic Activity Indicators: Broader economic momentum shapes demand across every CRE sector. The GDP growth rate and subsequent revisions provide a macro view of economic health, while faster-moving indicators such as the ISM Manufacturing PMI and ISM Services PMI offer monthly insight into business activity. Labor market indicators like the U.S. Unemployment Rate and Initial Jobless Claims help gauge household stability. Consumer sentiment and spending are reflected through the Consumer Confidence Index and monthly retail sales data, and both of these critical demand drivers for retail, hospitality, and mixed-use assets.
   
   
4. CRE-Specific Indicators: Real estate-focused metrics provide direct insight into property market performance. Institutional returns tracked through the NCREIF Property Index, leasing velocity reports from major brokerages, and delinquency trends in the Commercial Mortgage‑Backed Securities market help assess sector-level stress. Cap rate surveys from advisory firms, along with vacancy and net absorption data reveal changes in property valuations and demand conditions at the submarket level.
   
   
5. Geopolitical Risk Gauges: Dedicated geopolitical indicators can offer an early signal of macro stress before it fully reaches real estate markets. The Caldara‑Iacoviello Geopolitical Risk Index quantifies global geopolitical tensions using media analysis. Market volatility is captured by the CBOE VIX, while rising Gold prices typically signal safe-haven demand during periods of uncertainty. The U.S. Dollar Index (DXY) also serves as a risk-off barometer, because a strengthening dollar often reflects global capital moving toward safety, which can precede reduced cross-border investment into commercial real estate.

Impact of US-Israel & Iran on Real Estate Sectors

Geopolitical shocks rarely impact all property sectors equally. Sensitivity depends on the underlying demand drivers, lease structures, and cost profiles within each asset class. Underwriters therefore need to stress-test assumptions sector-by-sector rather than applying a uniform risk adjustment. This is how different sectors might get impacted by the ongoing war:

1. Office: Office remains one of the most exposed sectors. Even before geopolitical risks intensified, the sector was struggling with structural disruption from hybrid work. A recessionary environment triggered by geopolitical conflict accelerates tenant downsizing, lease non-renewals, and the release of additional sublease space. National vacancy rates could rise further as companies defer expansion decisions. In such scenarios, rent growth and absorption assumptions require significant downward adjustment.
   
   
2. Retail: Consumer-facing retail reacts quickly to confidence shocks. Energy price spikes reduce discretionary income, and fears of economic deterioration force households to cut spending. Power centers, regional malls, and F&B heavy mixed-use developments are especially sensitive to declining foot traffic. Grocery-anchored neighborhood centers and necessity retail formats tend to perform better, but rising operating costs and slower sales growth can still pressure property-level cash flows.
   
   
3. Hospitality: Hotels and hospitality assets are typically the first real estate segment to experience demand contraction during geopolitical crises. Companies cut non-essential travel, while consumers postpone leisure trips amid uncertainty. Revenue metrics such as RevPAR can decline sharply during major disruptions. Airport hotels, convention-oriented properties, and internationally exposed resort markets often experience the highest occupancy declines in the early phases of economic stress.
   
   
4. Multifamily: Multifamily housing shows higher resilience because demand is need-driven. However, inflationary pressure from higher energy and transportation costs can strain household budgets, particularly in workforce housing segments. Delinquencies may rise in Class B and C properties, while luxury Class A buildings in gateway markets could see softer occupancy if white-collar employment weakens. Rent growth projections and lease-up timelines for new developments should therefore be stress-tested carefully.
   
   
5. Industrial & Logistics: Industrial real estate presents a more complex outlook. E-commerce demand continues to support last-mile logistics facilities and urban distribution hubs. At the same time, warehouses tied to global supply chains may face disruptions from shipping volatility and trade friction. However, geopolitical tensions can accelerate reshoring and domestic manufacturing initiatives, thereby potentially benefiting logistics corridors and manufacturing hubs across the American Midwest and Southeast.
   
   
6. Data Centers: Demand for data centers is driven by long-term technology trends such as cloud computing, artificial intelligence, and digital infrastructure expansion. However, data centers are also critical national infrastructure. The assumption that data centers are geopolitically insulated has been forcefully challenged by the current tensions, as coordinated attacks on AWS data centers have demonstrated that this real estate sector carries significant physical and operational vulnerability that standard underwriting models have historically underpriced. This calls for data centers to be reclassified from a yield-stable sector to a conditionally vulnerable one.
   
   
7. Healthcare & Life Sciences: Healthcare real estate tends to perform defensively during economic and geopolitical downturns. Assets such as medical office buildings, senior housing, and research laboratories benefit from demand that is largely need-based and often supported by government or institutional funding. Life sciences clusters, especially those linked to biomedical research and national security priorities, can even receive increased funding during conflict periods, strengthening occupancy stability and long-term demand.
   
   
8. Housing: Rental demand remains strong, if the economy experiences a stagflation; because renting becomes easier than buying. Construction costs are rising and hence the current home deficit is bound to get worse in stagflation. However, this provides an opportunity for disciplined builders who were building for the long term, because speculative builders will clear out .Since oil prices are on the rise, and labor market remains uncertain (the February jobs report were at negative 92,000), it imposes a double pressure on construction budgets.

What Does This Mean for CRE Underwriters?

1. Stress-Test Beyond Standard Scenarios: During geopolitical conflict, it is necessary to go beyond the usual testing routines. Scenario testing should be performed across a broad spectrum of possible market conditions, ranging from moderate disruption to severe stress environments. Evaluating how an investment performs under multiple potential outcomes helps ensure that underwriting assumptions remain resilient even if market conditions deteriorate unexpectedly.
   
   
2. Prioritize Cash Flow Quality: In volatile environments, durable cash flow becomes more important than projected appreciation. Underwriters should closely evaluate tenant credit quality, remaining lease term, and lease structures that allow operating cost pass-throughs. Long-term leases with investment-grade tenants or government-backed occupiers offer more stability, particularly when compared with assets dependent on short-term leasing cycles.
   
   
3. Reassess Debt Assumptions: Debt structures become a primary risk vector when geopolitical conflict pushes inflation higher and interest rates remain elevated. Floating-rate exposure tied to benchmarks like the SOFR should be stress-tested under worst-case scenarios. Underwriters should evaluate the adequacy of interest rate caps, carefully review loan maturity timelines, and ensure that DSCR assumptions remain resilient under stressed operating conditions.
   
   
4. Build Geographic and Sector Diversification: Portfolio concentration significantly amplifies geopolitical risk. Diversifying across multiple regions and property sectors can reduce local demand shocks. Sector diversification toward industrial, healthcare, and other defensive property types can also improve portfolio resilience.
   
   
5. Factor Insurance and Operating Cost Inflation: Insurance costs have already been rising in many US markets due to climate-related risk, and geopolitical instability can push premiums higher as insurers reassess global exposures. Properties with heavy utility consumption or specialized infrastructure require particularly careful cost modeling.
   
   
6. Conservative Exit Assumptions: Exit valuation remains the most sensitive assumption in most CRE models. During geopolitical conflict, investor liquidity and transaction activity may decline significantly by the time an asset is sold. Conservative exit assumptions often determine whether an investment remains viable under adverse macro conditions.

The commercial real estate market has survived wars, financial crises, and pandemics before. Capital eventually returns. However, informed underwriting is not about assuming and hoping for recovery, but about pricing risk correctly today.

The US-Israel & Iran conflict represents a serious tail risk for the US economy, and therefore, geopolitical risk cannot be eliminated. But, it can be understood and accounted for.

Is your underwriting built for geopolitical uncertainty? At RealVal, our team delivers deft CRE underwriting, stress-tested models, and sector-specific risk analysis. Schedule your consultation at info@therealval.com to navigate the crisis in an informed manner.