What the Falling Euro Means For the U.S. Commercial Real Estate Market
We often focus on the role that domestic investors play in the commercial real estate markets. Should you also care what foreign buyers are doing in U.S real estate? Yes, we think you should.
In recent years—and more specifically the past six months—the U.S. commercial real estate market has seen a boost in capital spending from international investors, particularly those from the European Union. Propelled in part by Russia’s ongoing invasion of Ukraine, Europeans are seeking to hedge their investments by putting their money in what is perceived as a more stable environment: the U.S. commercial real estate market. This phenomenon follows an already steady flow of investor dollars from Asia.
Historically, when the euro loses value, Europeans tend to put approximately 15% more capital into U.S. commercial real estate. Due to the continent’s current rocky economic environment, some experts are predicting this investment percentage will increase significantly over the next several months. 1
Since February 2022, the value of the euro has dropped 15% compared to the U.S. dollar, which is a 20- year low. Continued disruptions in Europe due to war have caused a cascade of negative effects, including high energy prices, increasing costs of goods, and rising inflation rates. Moreover, a general sense of malaise due to threats of nuclear attack has cast a gloomy outlook across the region.2
Europe relies heavily on Russia for oil and gas, and these energy exports have become physically and politically out of reach since the former Soviet nation launched its military attacks on Ukraine. With limited access to oil pipelines and restrictions on Russian oil and gas exports to show Ukrainian solidarity, the European Union is feeling the energy pinch and having to raise prices as a result.3
Despite its aim to import resources from elsewhere in Europe and the Middle East, immediate concerns of insufficient fuel reserves for winter (heating of homes) are causing an elevated level of concern.
Worry of stagnation, the occurrence of long periods of little to no economic growth and high unemployment rates, is palpable.
Though the U.S. is facing its own hurdles—high inflation rates and lingering supply chain slowdowns due to the reliance on Chinese imports—we continue to be viewed by much of the world as a good place to put money. With no military conflict at our borders and general stability within them, the U.S. is seen as a safe haven for international investors.4
Commercial real estate and other “hard assets” can be a wise move during times of inflation. Both rental income and underlying property values have the potential to maintain (or even increase) during inflationary periods.
1 What the Falling Euro Means for U.S. CRE, Marcus & Millichap and Institutional Property Advisors, October 17, 2022
2 How Can Europe Get Gas If Russia’s Supply Is Disrupted, reuters.com, May 11, 2022, https://www.reuters.com/business/energy/how-can-europe-get-gas-if-russias-supply-is-disrupted-2022-05-11/
3 European Union Imposes Partial Ban on Russian Oil, Center for Strategy and International Studies, June 8, 2022
4 Foreign Investors Seek Stability in US real estate, WealthManagement.com, Sep 19, 2022
While inflation in the U.S. is hovering at around 8%, inflation in Europe is at about 12% and is seen as increasing due largely to the energy crisis. The European Central Bank reluctantly raised interest rates by 0.75% in an attempt to contend with economic troubles, yet it remains to be seen if this move will have a significant impact.5
Finally, there may be opportunities in the other direction. With the euro and pound dropping so abruptly against the dollar, there will be attractive deals in places like the UK, Germany and BeNeLux countries. Global real estate strategies should be given a fresh look.
For more information about tax-advantaged securitized real estate investments that can allow you to retire from being a landlord, please call 1031 Capital Solutions at 1-800-445-5908 or visit our website, 1031capitalsolutions.com.
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