What impact does a weak dollar have on the U.S. multifamily market? For starters, 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 opportunity for holders of once 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?
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 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 interconnectivity within the international banking community lays that argument bare; we are all in this together. Trade tiffs occur, unfairness diminished, and the cable news flow highlights the financial tragedy of the day via AP and Reuters. Money is flowing at varying speeds and directions to meet the need if currency traders with a bend on making the most spectacular trade of day one nanosecond faster than the next trading house. Enter the monolith, real estate investing.
For investors searching for yield, the multifamily asset class provides a steady and predictable income stream. For proof, note that every pension fund of size has significant real estate holdings- from 5% to 15% of total holdings. Institutional holdings in the multifamily asset class are second only to office buildings. How might that change in the wake of COVID-19?
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 www.Investorwords.com:
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’s 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, 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 as 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 a current 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.
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. These 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.
Weakness in the dollar (even cyclically) brings foreign investors into the United States’ multifamily marketplace. For all the talk of China 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.
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.
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.
John Wilhoit is the author of the best-selling book on rent roll analysis: How to Read and Rent Roll. See also the companion guide to measuring the quality of rental income: Rent Roll Triangle. Find JW’s Podcast here.