Weak Dollar, Only Short-Term Benefits?

[IMGCAP(1)]NEW YORK CITY-The weakening dollar has created many issues for US consumers, but it also has helped the local economy, and will continue to do so as foreign investment continues to pick up. Yes, in the short term, there are multiple benefits sources say, however some worry that the weak dollar is not a good thing for the US in the long term.

Robert Knakal, chairman of Massey Knakal, says there are short-term benefits for the hotel market, for example. Hoteliers gain from foreign travelers, who are expected to continue to come to the City in record numbers. Knakal also notes that domestic travelers are continually coming to Manhattan as overseas travel is cost prohibitive. The weak dollar has provided not only the boost to tourism, he says, but “the weak dollar has also stimulated massive amounts of foreign capital to be deployed into our real estate market. New York has benefited greatly from the globalization of real estate dynamics.”

[IMGCAP(3)]Hugh Finnegan, an attorney in the real estate group at Sullivan & Worcester LLP, agrees that there are “some” short-term benefits to the weak dollar. Certainly, New York City has continued to host many foreign visitors, he says. And, “the residential condominium market has benefited from the weak dollar. Between the increased value of the units, compared against the purchase price for those units that went to contract a few years ago, and compared against the weakening dollar, foreign buyers have helped protect the local market from the slide that is otherwise affecting the rest of the country.”

Finnegan adds that the commercial sector has also benefited, although perhaps not as much. He suspects that, as commercial properties continue to trade, foreign buyers will continue to play a significant role. He notes that their interest is “based somewhat on the exchange rate, on a desire to diversify out of their own countries, and based on the view that New York City continues to be the financial capital of the world.” Finnegan did say that even with the benefits, the weak dollar is not good for the local market in the long term.

Marc Francis, president and CEO of the Delphine Real Estate Advisory Group Ltd., tells GlobeSt.com that “the soft dollar provides short-term benefits, such as creating an inviting environment for foreign real estate investment and tourism.” He did note, however that “unfortunately, in the long run, the weak dollar combined with the threat of increased interest rates and demands by lenders for higher equity requirements makes it difficult for those holding US dollars to compete.”

[IMGCAP(2)]Knakal agrees that in the long run, the weak dollar will not be favorable to the US economy. “Low interest rates and immense budget deficits are keeping the dollar weak, which has driven investors to commodities exerting further upward pressure on oil prices,” he says. “Additionally, the weak dollar has caused the stock market to officially hit ‘bear’ status…the Fed will have to tighten monetary policy; it is just a question of when.”

Don Secunda, a local attorney with Weber Law Group, agrees with Knakal that “with the dollar weak, domestic tourists will stay closer to home because of the high costs of virtually everything bought with dollars; foreign tourists will come here for the obverse reason.” Along with benefiting the City’s hotel industry, he says, “foreign tourists also find our stores’ merchandise ‘on sale’ even at full price, which should keep retail vacancies low. In the same vein, as housing prices drop in tandem with the weak dollar, foreign investors see a double bargain–low prices and a currency play/money park in the most stable country in the world.” However, Secunda does not think that there will be negatives to having a weak dollar in the long term. “NYC is the strongest market around, and always rebounds and goes even higher when the dust settles,” he says.

[IMGCAP(4)]Daniel Marre, a partner at Perkins Coie LLP, tells GlobeSt.com that in the long run, the weak dollar is good for some reasons and bad for others. “In every market, there are winners and losers and in the long run things tend to even out,” he says. “One of the good things about the recent economy is that in most sectors–excluding the residential sectors–there was relatively little overbuilding. High oil prices, high commodity prices and fierce competition for construction equipment and material in other parts of the world–China, India, and the Middle East–tempered the market’s tendency to overbuild.” Marre says that the lack of overbuilding is even more remarkable given the amazing amount of liquidity in the recent market and the incredibly easy access to capital. “Overall, the lack of over-supply in the US commercial real estate market will help to support and speed along the recovery in that market.”

Marre says the main benefits of a weaker dollar are that US assets will be relatively inexpensive to those using stronger currencies. “Taking advantage of a weak dollar to purchase US real estate also means that earnings will be in US dollars. Unless a foreign buyer is willing to leave money in US dollars until the currency rebounds, or is counting on asset value appreciation over the long-term, investing in the US isn’t necessarily the bargain it may appear to be because the buyer has to repatriate earnings outside the US.”

Marre continues that “additionally, US real estate owners who have financing encumbering their assets denominated in a currency other than US dollars–such as Euros–will not be able to offer to buyers the relative discounts that can be offered by US real estate owners who have financing encumbering their assets denominated in US Dollars. Overall, there will be some trading of US real estate assets to overseas buyers.” He says that in the near term, that sort of activity is likely to be limited to trophy buildings in strong, coastal markets like New York City, he says, pointing to the Chrysler Building as an example. “Once overseas investors sense that the decline of the US dollar has stopped and the economic recovery is on solid footing, we can expect to see more money coming in from overseas as investors take advantage of relative bargains in a rising market.

Marre says that the increased demand in the New York City market will somewhat help to support prices, which is good news for owners who need to sell in the current market—those who have loans coming due or who find their product unable to support debt coverage ratios or debt service. However, he notes that the benefits are unlikely to be great enough to convince most sellers to let go of their assets in this market–particularly those who acquired their assets at the height of the most recent market.

Foreign investment has accounted for more than 48% of YTD investor dollar volume in Manhattan commercial properties, according to Cushman & Wakefield’s midyear report. Lack of supply and a weak dollar were cited as key factors in boosting foreign investor volume from the 12% to 15% levels seen in recent years.

Real estate attorney Marc Shapiro previously told GlobeSt.com that given the liquidity issues besetting the US economy at present, “we should be less concerned about the motivation of foreign interests to invest in the US, because without them, we would be unable to sustain some very important sectors of the economy.”

In the 2008 annual survey of the Association of Foreign Investors in Real Estate, the US was deemed the “most stable and secure” country for real estate investment and the country with the best opportunity for appreciation. AFIRE’s survey, conducted in Q4 ’07, also found that New York City had vaulted to the top of the worldwide list of cities for foreign investment, followed by Washington, DC.

Additionally, a report published by Partnership for New York City reveals that foreign direct investment in New York City in 2006 accounted for $58 billion, or more than 10 percent of the $570 billion gross city product. Recent headline-grabbing investments such as foreign funds and investors targeting the Chrysler Building and Flatiron Building reinforce the endurance of this trend, the report says.