Impact of the Dollar on Real Estate Value

In a 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. Joe Berko, founder and CEO of Astor Realty Capital, writes on the impact the US dollar can have

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

Today more than ever before, we must understand the macro global environment and its potential impacts on the local economy and 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-capitalised, 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 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.

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As a result, the value of existing properties may also rise to keep up with the increasing costs. We have seen it accords 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 to build 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% factoring in additional time, and reserves for interest rate. To set that, rents have gone hip by 34%, and the value of the asset increased from $105m to $140m in a short period while we expense cap rate projection at the exit by 20% bases 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% 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 stabilise 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, the vast majority 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% interest rate loan while we bought a 5.75% rate lock to protect our asset 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 since has gone up by 400bps 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 investor in top 12 MSA’s 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.