The Meaning of a Weak Dollar for Real Estate Investors

What impact does a weak dollar have on the U.S. multifamily market?  A weak dollar brings added foreign equity capital to the asset class in the United States.

The multifamily property asset class is an established and well-known investment with a worldwide following.  Changes in currency valuations, namely, in the U.S. dollar, unleash opportunities for holders of weaker currencies to convert their holdings into hard assets in the U.S.  Often, in the real estate asset class, multifamily is the investment vehicle of choice.  Why?

weak dollar, crumpled dollar on table

Apartments are Stable Investments

Apartments are a very stable investment for many reasons. Namely, they have a broad investor following, creating an active marketplace compared to other property types such as office or warehouse.  For multifamily buyers, when prices decline for reasons unrelated to operations, this signals a buying opportunity.

Multifamily owners know the asset class has legs, so any short-term price dip represents cause to look for the reason why.  If the reasoning has no direct long-term effect on the multifamily asset class specifically, then a drop in pricing represents a buying opportunity.

Nationalists that believe people outside of the U.S. should stay on their side of the ocean, that ship has sailed.  That rule has never applied to the flow of money (legal or illegal).  A closer look at the international banking community's interconnectivity lays that argument bare; we are all in this together.

Trade tiffs occur, unfairness diminishes, and cable news highlights the day's financial tragedy via AP and Reuters.  No matter.  Money flows at varying speeds and directions to meet the need of currency traders with a bend on making the most spectacular trade of the day one nanosecond faster than the next trading house.  Enter the monolith, real estate investing.

Multifamily Delivers Stable Income

For investors searching for yield, the multifamily asset class provides a steady and predictable income stream.  For proof, note that pension funds of size have significant real estate holdings- from 5% to 15% of total Assets Under Management (AUM).  Institutional holdings in the multifamily asset class are second only to office buildings.

How might that change in the wake of COVID-19? The K-economy (assets and businesses that depict severe winners and losers) needs no predicting, no polling; we can see this clearly in every hamlet and 24-hour city across the U.S.  There are stark differences for businesses that have seen their fortunes forever changed, from precipitous drops in occupancy (office) and rocket-like rises in revenue and occupancy (warehouse).

Multifamily SBL (small balance loans) default rates are indeed skyrocketing.  Owners of small multifamily assets will have difficulty weathering the Covid storm if over-leverage meets substantially reduced rental collections.  This contortion brings havoc to some and presents opportunities for others.  Banks are not in the property ownership business, and they will want these assets off of their books expeditiously.

A Weak Dollar Creates a Buying Opportunity in Multifamily Assets

Buying opportunities occur for investors holding foreign currencies when the U.S. dollar decreases versus other currencies.  People, real estate investors, see a chance to purchase real estate assets in the U.S. at a discount compared to when the opposite currency position occurs; when there is a strong dollar, and foreign currencies lose buying power against the U.S. dollar.

Here is the definition of a weak dollar from

A dollar that can be exchanged for only a small or decreasing amount of foreign currency.  A weak dollar means that the U.S. dollar cannot buy very much of another currency...  A weak dollar usually leads to higher exports and lower imports, the opposite of a strong dollar.

In the broadest definition, a weak dollar means U.S. goods are less expensive for foreign buyers.  The U.S. dollar denomination weakness presents an opportunity to purchase multifamily assets.  When the U.S. dollar is weak, international buyers can buy more U.S. multifamily assets with their currency. Conversely, when the dollar drops exponentially, say more than five percentage points, this event brings a significant number of foreign investors into the multifamily asset class marketplace and acts as a counter-weight to any downside pricing pressure.

"Often, the price of the dollar and the exchange rate against other currencies has a significant impact on real estate in major markets like New York. A strong dollar means that relative prices have become more expensive than prices in other countries, and a weaker dollar means that relative prices have dropped. "-Watson International

Even traders need some stability in their lives. While currency bounce from place to place daily, property values are cyclical.  Multifamily property values fluctuate but not daily.  Furthermore, while multifamily assets are illiquid, they represent a stable, long-term investment- a haven compared to currency swings- a counter-weight against the uncertainty that comes with being in the currency market.

Recently, the U.S. dollar hit a low against the Japanese Yen.  Around the time of the Greek debt crisis, the Euro dropped from $1.48 to $1.29.  The British Pound has skated from a high of 1.50 to 1.25 against the dollar, a 16% change in value.  Currencies are a bouncing ball best left to those that trade professionally.  There is no such thing as a "passive" currency trader.

apartments multifamily asset class

The Multifamily Asset Class is Semi-liquid

However, there are thousands of passive multifamily real estate investors.  This high level of interest is what makes the multifamily asset class semi-liquid.  Passive investors select from a range of multifamily asset investment opportunities that include Real Estate Investment Trust (REIT"s) to local owners with a small share in a Limited Liability Company that owns apartment units.

To a currency trader, direct ownership of multifamily assets seems like a slow-moving business; and that it is undoubtedly.  After all, currency traders can execute a buy trade in nanoseconds, whereas it can take three to six months to close on a single apartment property.   Currency traders can sell with the click of a mouse, whereas an apartment building can take six months to two years to sell.  Multifamily, literally, represents the other side of the world to a currency trader holding positions that can change by the minute.  Weakness in the dollar (even cyclically) brings foreign investors into the United States' multifamily marketplace for this reason.

For all China's talk becoming a rising economic power, the United States economy continues to dominate world trade, world politics, and naval authority.  With that dominance comes the power of having the world's most sought-after reserve currency - the dollar.

Whichever way one takes on the desirability of a falling dollar, one thing is clear as related to the dollar's impact on real estate. U.S. real estate is cheap, from the perspective of a foreign buyer, which may mean more international purchases... National Association of Realtors

Our view is that multifamily assets represent a cornerstone investment, an investment class to be kept in the family for generations.  A quality multifamily asset purchase has value beyond the obvious.  When properly managed, multifamily has quality staying-power.  Ask the ruling families in the Nordic countries and Scotland, where the same families have held onto real estate assets of varying types for 500 years.

The multifamily asset class is the opposite of currency trading. When purchased correctly, multifamily represents a hard asset with a known income stream that is hard to knock off its steady course. The key to success is procuring professional property management from the beginning.

Buying apartments in dollars represents a stable long-term investment. There are alternatives, of course.  But few with the ability to simultaneously act as a stable income producer, hedge against inflation, and store of value all at the same time.

John Wilhoit is the author of the best-selling book on rent roll analysis: How to Read and Rent Roll. See also his companion guide to measuring the quality of rental income: Rent Roll Triangle.  Find JW's Podcast here.

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