September 2, 2020

Slowdown in Foreign Investment in CRE Over Weak Dollar

As the U.S. dollar continues to weaken to its lowest point since 2018, it’s unclear where the value will go from here. Since the decline began in May 2020, foreign investments in U.S. commercial real estate (CRE) have also started declining. Is this a trend that will continue or a temporary setback for CRE markets?

Currency Fluctuations Are Cyclical

Often currency value increases or decreases happen in a cycle. Historically speaking, currencies tend to go up and down consistently for years at a time. Growth in U.S. Dollar (USD) value compared to other foreign currencies cannot continue indefinitely. At some point, the trend will reverse, and the dollar will begin to lose value.

The beginning and end of each cycle are not necessarily predictable. However, beginning in early 2020, there were signs of a decline in value. Those signs have continued into mid-2020 with more economic changes pointing to a weakening dollar.

Market Changes Affecting the Dollar

Many different market factors are affecting the U.S. dollar in 2020. These are the most notable:

Coronavirus Affects & Response

The U.S. economy has greatly suffered from the Coronavirus pandemic. From March of 2020, the virus has continued gaining momentum, and the U.S. has had trouble containing it. Due to economic slowdowns – or shutdowns in some cases – and fears of inflation following economic stimulus measures, the dollar has weakened.

At the very beginning of the global crisis, USD gained value. However, this was likely a temporary gain as people sought a haven for money in anticipation of a financial crisis. As other world economies resume somewhat normal operations, the U.S. economy is lagging and failing to recover fully. The dollar will continue to weaken as long as there are fears of a slow economic recovery in the U.S.

US-China Trade War

Particularly in the CRE sector, the US-China trade war has had a significant impact on U.S. foreign investments and the dollar’s strength. As it drags on, fewer Chinese people are investing in the U.S. real estate market, in both residential and commercial real estate.

Strengthening Foreign Economies

Over the past decade or longer, the U.S. has been viewed as a haven for investment where money is unlikely to lose value. As other foreign economies begin to strengthen, investors may be looking closer to home for safety rather than U.S. investments.

Impacts on CRE Markets

Typically, a weaker U.S. dollar leads to more foreign investment in real estate. A weaker U.S. dollar means that certain foreign currencies are worth more in the U.S., allowing for investment in more valuable properties. However, the unique market conditions in 2020 that are causing the dollar to weaken are also making some foreign investors wary of investing in US CRE.

Out of all CRE sectors in the U.S., multi-family properties, self-storage properties, and industrial properties are performing the best. In contrast, office buildings, retail properties, medical real estate, temporary lodging, hospitality, and student facilities have been hit the hardest.

Previously, CRE held a high degree of liquidity, making it attractive to foreign investors. The rapid decline in use and demand for certain types of CRE assets may play a part in frightening foreign investors as these assets become increasingly illiquid.