How the Middle East Conflict Is Shaping Europe’s Economy and Commercial Real Estate

Key takeaways

• The conflict in the Middle East has significantly disrupted energy flows through the Strait of Hormuz. Europe is less directly impacted, as only 10% of liquified natural gas (LNG) is sourced from Gulf states.
• Fuel prices have soared across the region, prompting varied government responses ranging from increased market monitoring to the implementation of significant relief measures.
• Financial markets are experiencing heightened volatility, though business confidence has proven relatively resilient. In contrast, consumer sentiment has weakened more quickly.
• Inflation risks are rising across Europe, complicating the outlook for central banks and increasing the likelihood that expected rate cuts are delayed or even potentially reversed.
• Commercial real estate (CRE) impacts will be uneven and largely macro-driven:
• Logistics & Industrial: fuel price increases and supply chain disruption will increase the cost of moving goods and could result in second order inflationary impacts.
• Retail: a greater proportion of household budgets is being diverted to non-discretionary expenditure, with discretionary expenditure likely to be curtailed.
• Office: Near-term impact through greater adoption of working from home, either by choice or government mandate.
• Capital Markets: deal activity has been strong over the first two months of the year. In light of potential interest rate hikes, we expect investors to re-evaluate their entry/exit assumptions.