The Real Deal New York

The Long View: Giving a buck: Breaking down the impact of a strong $ on NYC’s real estate market

Exchange-rate fluctuations could alter property investments in unpredictable ways
By Konrad Putzier | December 07, 2016 08:00AM

A U.S. dollar climbing the Empire State Building (illustration by Lexi Pilgrim for The Real Deal).

A U.S. dollar climbing the Empire State Building (illustration by Lexi Pilgrim for The Real Deal)

Talk to European tourists these days, and you might hear some grumbling that the pre-Christmas Fifth Avenue shopping spree was pricier than expected. Blame Donald Trump.

Since election night, the dollar’s exchange rate against a basket of currencies has been on a tear. This has made designer jeans and jewelry in Manhattan’s retail boutiques more expensive for those earning their incomes in Euros, Yuan, or Yen. Could it also have an impact on New York’s real estate market?

Foreign investment accounts for a larger share of New York’s real estate market than ever before. This means any change in the dollar’s exchange rate will likely have a bigger impact today than it would have a decade ago. But it’s tricky to predict what exactly that impact will be.

Push and pull

The dollar is rising in large part because investors are betting that Trump’s planned fiscal stimulus will add inflationary pressure and boost the economy, making it more likely the Federal Reserve will raise interest rates. Higher interest rates in the U.S. should cause more money to flood into the country, which pushes the dollar up.

A rise in the dollar’s value against other currencies makes New York properties more expensive for foreign investors. On the face of it, that should discourage investment. Say you’re a Finnish pension fund with 200 million Euros to spend on an office building. Two years ago, that would have bought you $280 million worth of prime New York real estate. Today, it will buy you around $215 million worth. With their purses suddenly a little lighter in dollar terms, foreign investors can no longer bid as aggressively on properties as before, which should put downward pressure on prices.

So far so good. But there is also a countervailing force at play: even if Manhattan real estate is now more expensive, foreigners may still be inclined to invest if they believe the dollar will continue to strengthen. Say you exchange 200 million Euros for $215 million to buy that Manhattan office building. And say the Dollar’s exchange rate continues to rise against the Euro to the point where two years from now one dollar will suddenly get you 1.5 Euros. If you sell the office building for the same $215 million you bought it for, you will get 323 million Euros back (on on initial investment of 200 million Euros) – a profit of more than 50 percent purely through the exchange rate. That’s why an appreciating dollar can also make foreign investment more appealing.

“Any time you have those currency movements there’s both a push and a pull involved,” said Jim Costello of Real Capital Analytics. But does the pull of appreciation outweigh the push of higher nominal prices?

The town of Point Roberts, Wash., may help provide an answer. The town is a U.S. enclave on the Canadian mainland, and as a result Canadian buyers dominate its local housing market. This makes it an unusually clear-cut case study for how exchange-rate fluctuations can impact foreign real estate investment. In a 1997 paper, four economists from Western Washington University and the University of Florida analyzed the market between 1983 and 1993 and found that a 10-percent decrease in the U.S. dollar relative to the Canadian dollar increased home prices by an average of 14 percent. In other words: a weakening dollar encouraged foreign investment.

Emerging market pain

The Point Roberts example doesn’t bode well for New York’s real estate market in late 2016. But we shouldn’t read too much into it: the types of properties and foreign investors found in a small, far-flung town are completely different from their Manhattan counterparts, and the way the dollar impacts New York City are much more complex.

After all, a stronger dollar doesn’t just make New York real estate more expensive. It also impacts the economies where foreign investment is coming from. Historically, a strengthening dollar has spelled trouble for emerging economies with a lot of dollar debt. As it happens, many countries have been stocking up on dollar loans and bonds over the past years, when low interest rates in the U.S. encouraged investors to look abroad. Now, a rising dollar makes those debts more expensive to service, which could be a pain point for several countries. In a Dec. 1 cover story, The Economist declared the strong dollar “bad for the world economy.”

Once again, both push and pull forces are at play. Economic malaise in emerging economies like India, South Africa or Russia may mean there is simply less money to invest in New York real estate. But economic turmoil abroad may encourage savers there to seek the relative stability of New York’s real estate market. Which will prove to be the greater force?

It’s worth taking a look at Brazil, which is already experiencing the kind of economic doldrums that may await other developing countries in years to come. Between December 2010 and December 2013, when Brazil’s economy was roaring, Brazilian firms were involved in $4.34 billion worth of commercial real estate acquisitions in New York City, Real Capital data show. In early 2014, Brazil’s economy fell into recession and has stayed in a funk ever since, amid low commodity prices. Between January 2014 and December 2016, Brazilian firms accounted for $265.8 million in acquisitions – just 6 percent of the total achieved in the three years prior. Brazil’s example suggests that an economic crisis in a developing economy doesn’t necessarily lead to a massive capital influx to stable New York. But every country and every crisis is different.

The Dollar giveth and the dollar taketh

In the end, it is impossible to predict for sure whether a strengthening dollar will have a net positive impact on New York’s real estate market. But we can point to some likely winners and losers.

If a rising dollar makes investing in New York more attractive for foreigners looking to benefit from currency appreciation, but also means they have less spending power in real terms, that should make assets at lower price points more attractive. Which could mean that developers of moderately-priced condos have reason to be chuffed about the rising dollar because buyers still want to invest in New York but are less likely to be able to afford pricier apartments. Sellers of ultra-luxury properties, on the other hand, should be concerned.

And clear losers of a rising dollar are assets that depend on overseas tourism: hotels and prime retail. The hotel market is already slowing amid oversupply and a dip in corporate travel, and the dollar’s climb could add to the malaise. Meanwhile, retail rents have been falling in core markets like the Flatiron District and Soho. If the dollar’s surge continues, retail landlords will soon have reason to join their tourist customers in grumbling about it.