While the dollar won’t get you as much in the US these days, in most other places around the world a dollar can buy more than ever. Due to the Federal Reserve’s hawkish stance on interest rates due to continued inflation, boiling foreign markets due to the war in Ukraine and the energy crisis in Europe, the US dollar is stronger than it has been in decades against many other world currencies. This can mean a lot for the commercial real estate market, perhaps especially when it comes to foreign investment. But while the strong dollar bodes well for U.S. investors watching global markets, there are also downsides. The major push to bring more manufacturing back to the U.S. could come under pressure, rising cap rates could lead to lower property values, and U.S. investors who profit from overseas investments could see their incomes fall as the dollar rises in value. “It’s definitely a double-edged sword in today’s environment,” said NYU clinical assistant professor Tim Savage, who teaches at the Schack Institute of Real Estate.
The value of the US dollar has risen sharply since May 2021 and rose 17.1% this year to mid-October, its highest level in 20 years. Meanwhile, foreign currencies like the Euro, British Pound and Japanese Yen have fallen in value over the past year. Savage pointed to two independent effects due to the rise in value: the direct impact of the stronger dollar and 10-year interest rates, which are also rising. Both have an effect on cap rates because as the dollar goes up, cap rates go up. There’s a lot of pressure on cap rates right now, which is generally something the commercial real estate community doesn’t like as it implies that the value of a property has dropped. Given the environment, it is imperative that owners and investors focus on growing the NOI, which primarily means finding ways to reduce expenses.
In his previous role as an economist and data scientist at CBRE, Savage worked on a study that looked at environmental effects on cap rates. He found that for every 100 basis point increase in the US Treasury, cap rates increase by about 50 basis points. It saw a 350 basis point move in the Treasury over 30 years from the depths of the pandemic. This factor, combined with the value of the dollar and the Fed’s announcement that it will no longer be making asset purchases, suggests that there is upward pressure on cap rates, which, according to him, will continue for at least a year, if not more. “Without a very quick resolution in Ukraine, I don’t see anything changing over the next year,” Savage said.
The strong dollar could have a negative impact on foreign investment in US cities, especially secondary cities. Hub cities like New York, San Francisco and Chicago tend to fare better in times of economic uncertainty, as they are considered less sensitive to movements in interest rates and the value of the dollar than markets like Miami, Austin and Nashville, which are considered secondary markets for foreign investors. “Overall, we might see a slight drop in overall investment, but that would disproportionately affect secondary U.S. commercial real estate markets in a way that won’t affect places like New York,” Savage said.
Another potential impact of the current dollar strength is the effect it will have on one of the nation’s biggest initiatives: bringing manufacturing back. So far so good, with the White House making big investments in the sector, including in biomanufacturing and biotechnology, where it will allocate $1 billion over the next five years to help grow the sector. But the strength of the US dollar against foreign currencies means that international goods are cheaper to import. While Savage thinks the strong dollar could help accelerate the country’s manufacturing rebound, some domestic manufacturers have reported lower sales due to the strong dollar. “This is having a debilitating effect on American businesses,” Reshoring Initiative chairman Harry Moser told The Wall Street Journal.
On the upside, the underlying macro economy is putting upward pressure on the dollar. Foreign investors want to invest in the United States because of the perception that they will earn higher returns than in their own home markets. That, combined with the Federal Reserve tightening monetary policy faster than central banks in Europe and Japan, is putting additional upward pressure. Basically, the value of the dollar increases because people want to invest in the United States. “The joke is we’re the least dirty shirt in the basket,” Savage told me. “By that I mean a lot of Europe is in recession, and if I had to hazard a guess, Japan is in recession. But we’re not, so there’s an interest in investing in the States. -United “
Despite the potential drop in income, favorable exchange rates in Europe and Japan at the moment make it an ideal time to invest in real estate, and this advantage doesn’t seem to be going away anytime soon. The relatively strong performance of the US economy, the tightening of monetary policy by the Fed and the continued view of the US as a safe haven for real estate will keep the dollar strong for the foreseeable future. “American capital has a lot of firepower in global markets,” said CBRE’s chief global economist, Richard Barkham.
US real estate investors and companies are increasingly playing in Europe and Asia, particularly in logistics and multifamily, two of the hottest real estate sectors in recent years. London has attracted the bulk of European investment from North American commercial real estate companies, according to a recent CBRE report on global real estate capital flows. In the first half of 2022, nearly $4 billion was injected into the major European city, almost double the amount invested compared to the same period last year. Additionally, the German cities of Hamburg, Berlin, Düsseldorf and Frankfurt received one-fifth of North American investment in Europe during the same period. Asia also attracted North American investors, particularly Singapore, where investment soared 817% year-on-year to $978 million.
Internet giant Google led the way earlier this year when it acquired an office building in London for $1 billion, adding to its already planned $1 billion office development project dollars nearby. Greystar, the largest multi-family property management company in the United States, has continued to invest in Europe so far this year. The company announced the final closing of its fund focused on European residential assets in July, with $1.55 billion raised. Greystar is using the fund to acquire and develop high-quality, multi-family assets in major cities across Europe, including student housing and workforce housing. Greystar’s Wes Fuller said in a statement that the fund follows the model of the company’s value-added strategy in the US multifamily market. Houston-based Hines has recently made significant investments in Asia through its flagship core-plus fund, Hines Asia Property Partners (HAPP). Chris Hughes of Hines, who heads the firm’s capital markets group, said Asian markets are seeing “tremendous growth”, with great future potential for office development.
While the strength of the dollar is expected to continue at least into next year, many predictions regarding a recession, interest rates and house prices could affect the timing of its resistance. Geopolitical tensions could also have an impact. “It’s a very complex macro environment. If Putin deploys a nuclear weapon, who knows,” NYU’s Savage said. The strong dollar is also putting pressure on emerging markets, and if one ends up going bankrupt, no one knows what will happen. Economists also worry about the debt burden in developing countries, where debt is borrowed in dollars but repaid in local currency, so that when the dollar rises, the debt burden also rises.
Despite the drawbacks, it is still a very good time to invest in foreign markets, especially in Europe and Asia. Major US-based commercial real estate companies continued to raise funds and expand their portfolios overseas. With the strong dollar expected to continue for some time, it looks like investors won’t be changing those plans any time soon.