Subscribe
Share
Share
Embed
Welcome to the Commercial Real Estate Mastery podcast, where you'll learn the correct way to identify, negotiate, perform due diligence on, renegotiate, finance, turn around and operate real estate in today's market -- a market in which volatility creates opportunity, and sound principles defeat fads and bubbles. And your host is a 25-year commercial real estate veteran and co-owner of over $1 billion in real estate assets, Frank Rolfe.
The war in Iran is the big news story right now, and the ramifications are huge for America and the world in many directions. But there are some impacts from the war on the commercial real estate industry that need to be acknowledged, because all investors need to stay on top of these various developments to know what they should be buying, or considerations on valuation. So let's explore what the war in Iran may do in different areas of commercial real estate. This is Frank Rolfe with the Commercial Real Estate Mastery podcast. Let's talk about the war. And let me first tell you, being a baby boomer, I was there the last time that Iran was the big news story. That was in 1979 during the Iranian Revolution and the recession that came when the cost of oil more than doubled. It went from $13 a barrel back then to $34 a barrel, and America ended up in recession as a result. We also had the Iranian hostage crisis. So typically in America, when we hear the word Iran, we'd normally think, uh oh, it's gonna be a problem, because we have a long history of Iran having disruption to our economic market.
So who will be the winners and the losers in this engagement in the world of commercial real estate? Well, obviously, the first big winner from a war in Iran would be oil production states. Places like North Dakota, Louisiana, Texas, New Mexico, Alaska, Colorado, Oklahoma, California, Wyoming. These are your major US states when it comes to oil production. So clearly, with the price of oil going up, maybe going up for the long term, even if it goes up and then comes back down, the simple fact that people realize there's this risk to the market at any given moment of a spike will bring more attention to those states. And then you have the coal industry and the states that produce the coal, which are predominantly places like Illinois and West Virginia, because with the price of oil going up and the price of oil becoming unstable, it makes coal production in America again look more attractive. We went away from coal during the period where we were all concerned about the environment. Now returning to coal in many ways, because coal is very stable. It's strictly right here in the United States. It's very inexpensive. So I would look to say more commercial real estate activity probably in Illinois, West Virginia, and other states that produce coal.
Also, markets that have heavy defense industry employment should be doing exceedingly well during the Iran war and even after. Places like Huntsville, Alabama, Dallas-Fort Worth, Texas, Colorado Springs, Colorado, any market where there's lots of defense spending that goes on, they will definitely benefit as we try and build new weapons and recoup what we currently have. But who are the losers in all this? What commercial real estate impact will there be that'll be negatory from the war in Iran? Well, the first is of course all of America, because with higher oil prices, you have higher inflation. We all learned that during the first Iranian problems back in 1979. So any industry, any commercial real estate that's tied or has an impact from inflation could be damaged. Now, it's kind of a trick question, though, because real estate is one of the best performing groups during times of inflation because we're protected. We're backstopped by the hard asset, the real estate, the rarity of real estate. That scarcity creates value and that holds as inflation drives values up. In fact, some people would say that the best friend to American commercial real estate has been, historically, inflation.
But at the same time, it's gonna impact customers and it's gonna impact certain segments of commercial real estate, like shopping malls, where people are gonna be less likely to go and buy products. Also, major airline hubs are gonna have a problem because jet fuel is very, very costly. It's always been an industry that has extreme limitations on what happens when the price of energy goes up. So anything like Atlanta or Dallas-Fort Worth, anywhere that has a lot of airline activity, hubs of airlines, that'll probably be damaged. And then you have major tourism markets such as Las Vegas, and we're already seeing this even prior to the Iran war issues in Las Vegas. Las Vegas revenues from tourism are down right now roughly 10%. So what is that all about? Well, people just seem less likely in times of uncertainty and inflation to want to go out and go on a vacation, particularly in a place like Las Vegas, which is expensive and there's a lot of gambling involved and things like that. People, if they don't feel like they're rich right now, they don't want to spend the money on it.
So any of those markets where you have a focus on tourism is gonna probably take a tumble. Also, of course, you're gonna have issues with anything that services the financial industry because the stock market has been taking a beating. So markets like New York City, others will have a problem because people are gonna again be down in the dumps based on their stock performance. So here's some of the wild cards, though. The first one is interest rates, because if you're in commercial real estate today, your number one focus is probably where inflation and interest rates are going. We have a changeover at the Federal Reserve. In only roughly 30 days, Jerome Powell will be shown the door. He'll be out of his job as the head of the Federal Reserve, replaced by a guy named Kevin Warsh. Now, we don't know what Kevin Warsh will do on rates, but we have to imagine he has vowed to the Trump administration to try and get the rates down. And the Iran war could be exactly the example he needs to do it. That could well be serving as the catalyst to get those rates down. And lower rates are what everyone in commercial real estate wants to see.
We've suffered under Jerome Powell with 11 straight interest rate increases. We all knew rates would come up at some point, but we never dreamed they would go up so fast and so far, and we all need some relief. And hopefully the war in Iran might be the relief that we need on the interest rates. And additionally, if this all tumbles into more of a major recession, we would definitely see a lot of interest rate reduction because those world record low rates under the Obama administration came after the 2007, 2008 Great Recession, where the US economy started to use all kinds of additional tricks to get those rates down, things such as quantitative easing. So that's the big wild card from the war, will be what happens with interest rates. And we also will no doubt have an impact on this also on the midterms, because traditionally the party in power during the midterms loses at least one house of Congress. And with the Iran war and the greater inflation, that number might be even greater.
That will no doubt lead to more of a deadlocked Congress where not much more priorities of the Trump administration can be passed except by executive order. The bottom line is we've been on such a wild ride in commercial real estate for the last few years, all the way back to COVID. We've endured COVID, all the shutdowns, if you were in the housing industry, the evictions moratorium, we've survived the interest rate run-up, now this war in Iran. And more than ever, it's really, really important for any investor in the commercial real estate space to really have a strong sentiment of where things are going and what the right niches to be in are. So the war in Iran is the latest thing. It could go over, it could be gone within a couple weeks, we don't know. But at the same time, you need to be constantly focusing on the megatrends to stay in the right position regardless of what happens. This is Frank Rolfe with the Commercial Real Estate Mastery podcast. Hope you enjoyed this. Talk to you again soon.