Real Estate

The Dollar’s Depreciation And Real Estate Impact

Joe Berko 8 May 2023

The Dollar’s Depreciation And Real Estate Impact

The author of this article argues that the depreciation in the dollar exchange rate is a double-edged sword in terms of how it affects US real estate and the considerations for investors.

Anyone who has changed money or compared forex rates recently will have noticed that the dollar has depreciated. As the world’s reserve currency, the state of the dollar affects the global economy and, bearing in mind the $31.5 trillion of public debt, any likely trouble for the dollar could be a major domestic issue also. More specifically, the dollar’s level has implications for the real estate market. In the following commentary, Joe Berko, chief executive of Astor Realty Capital, examines the territory. 

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On my recent investors call, a question was raised about the downward shift in the demand for the US dollar, especially the petrodollar, and the potential effects on real estate values.

While the US currency is the most reliable globally and represents 90 per cent of the world transaction volume, by comparison, the Chinese yuan currency represents nearly 1 per cent of global transactions, and the British pound, the euro, and Japan combined represent the remaining 9 per cent. Yet, the facts are that the US dollar dropped by as much as 15 per cent compared with foreign currencies and precious metals, namely gold has jumped to $22,000 per pound representing a 20 per cent increase. 

Today more than ever before, we must understand the macro global environment and its potential effects on the local economy. While I can argue that a drop in dollar value can have both positive and damaging impacts on real estate, the proper answer requires a more careful examination of the asset class, it’s underlying mortgage and the market fundamentals that the asset is located.

To say it differently, a well-capitalized, well-positioned asset in major gateway cities will hold and even see an increase in value because foreign demand is incentivized by the discount arbitrage caused by the low currency exchange rate. 

However, it’s never clear cut and properties will suffer from the expansion of cap rates and the higher cost of capital. Let’s look at a few examples. 

When the dollar loses value, inflation often rises because the prices of goods and services increase. Historically, real estate has served as a hedge against inflation, as property values tend to increase with or even outpace inflation. This is because the cost of construction materials and labor goes up, making it more expensive to build new properties. As a result, the value of existing properties may also rise to keep up with the increasing costs. We have seen it across the board mainly in multi-family properties that we are developing in multiple markets. 

The rise in inflation has increased rents and, in turn, the value of our assets. Of course, the cost of building and the carry interest rates have increased as well but the positive impact we’re experiencing far exceeds the negative (increase in cost vs. increase in property value). A good example is our 600 Dania Beach Boulevard project; we have seen construction cost rise by as much as 17 per cent factoring in additional time, and reserves for interest rate. To set that, rents have gone up by 34 per cent, and the value of the asset increased from $105 million to $140 million in a short period while we expense cap rate projection at the exit by 20 basis points to account for the higher cost of capital for a potential buyer.

Another factor we are evaluating is the growing demand for foreign capital. Nearly 80 per cent of the funds Astor Realty Capital deploys are foreign and currency fluctuations are always on our minds. A weaker dollar makes US real estate more attractive to foreign investors as their purchasing power increases. anticipating increased demand that may result in higher real estate prices, particularly in prime locations and popular markets. 

A falling dollar may lead to higher interest rates to counteract inflation as central banks try to stabilize the economy. Higher interest rates can, in turn, lead to higher mortgage rates. This might decrease the demand for real estate, lead to a slowdown in the growth of real estate values, or, in some cases, a decrease in property values depending on the supply and demand dynamics at play. Long-term, fixed-rate mortgages are a safe hedge; however, most of our projects are financed with short-term debt that’s exposed to fluctuations.

To reduce the risk, we pay additional sums to cap rates at reasonable levels. In Dallas, Texas we locked in a 3.6 per cent interest rate loan while we bought a 5.75 per cent rate lock to protect our assets from wild interest rate hikes. It was in Q1 of 2022, had we not bought the rate cap, the asset would have been negatively affected as the increase of SOFR has since gone up by 400 bps and our ability to service the debt would have been impaired. 

Ultimately, the impact of a falling dollar on real estate values depends significantly on local market conditions and the overall economic situation. Astor invests in top 12 MSAs with a heavy concentration in Miami and South Florida, Dallas and greater Texas, Brooklyn, and suburban New York City. These locations are fundamentally strong due to factors such as employment, local industries, and population growth that will have a more substantial impact on real estate values than currency fluctuations.

In conclusion, a drop in the value of the dollar can have both positive and negative effects on real estate values. While it may lead to increased demand from foreign investors and serve as a hedge against inflation, it can also result in higher interest rates affecting affordability and demand. Local market conditions and economic factors will ultimately be critical determinants of how your real estate value is affected by fluctuations in the dollar's value.

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